In: Accounting
PLEASE EXPLAIN HOW THESE ANSWERS WERE REACHED
2) P Company purchased land from its 80% owned subsidiary at a cost of $400,000 on January 1, 2014. Three years later, on December 31, 2016, P sold the land to an outside entity for $450,000. The subsidiary originally purchased the land at $300,000 on January 1, 2011 from an external entity.
Required:
A. Prepare all the elimination entries necessary at December 31, 2014 to account for this land.
B. Prepare all the elimination entries necessary at December 31, 2015 to account for this land.
C. Prepare all the elimination entries necessary at December 31, 2016 to account for this land.
A. Gain on Sale of Land $100,000
Land $100,000
B. Retained Earnings - P (80% * 100,000) $ 80,000
NCI (20% * 100,000) $ 20,000
Land $100,000
C. Retained Earnings - P (80% * 100,000) $ 80,000
NCI (20% * 100,000) $ 20,000
Gain on Sale of Land $100,000
PLEASE EXPLAIN HOW ANSWER WAS REACHED!!!
A.
Land is non-depreciable asset. So, Book Value of Land in the books of Subsidiary on 01.04.2014 ie date of sale=> 300000 $ (Given)
Proceeds from Sale of land to P | 400000 |
Less: Book Value (as above) | 300000 |
Profit | 100000 |
Of total profit realised, 80% goes to P (100000*80% ie based on proportionate holding) |
80000 |
20% held by Non controlling interest (100000*20/100) (ie Balance 100-80) |
20000 |
While consolidating we eliminate the internal transaction profit and record the land at the value it would appear as though the sale did not take place, So, we have to reverse the effect of profit from sale present in retained earnings and NCI and record land at its original cost. The entry is:
31.12.2014 | Retained earnings Dr | 80000 | |
NCI a/c Dr | 20000 | ||
To Land a/c | 100000 |
B. Land is non-depreciable asset. So no depreciation needed to be recorded.
C. The land is sold on 31.12.2016 to an outside party. The entry will be like how normally a sale of asset is recorded:
31.12.2016 | Cash a/c dr | 450000 | |
To Gain on Sale of Land | 150000 | ||
To Land a/c (@ book value) | 300000 |
Hope this helps. Please comment in case of any doubt regarding the solution.