Question

In: Accounting

PLEASE EXPLAIN HOW THESE ANSWERS WERE REACHED 2) P Company purchased land from its 80% owned...

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!!!

Solutions

Expert Solution

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.


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