ExpertHard1 markMultiple Choice
CPA · Question 27 · Area I: Financial Reporting
On January 1, Year 1, Parent Co. sold land to its subsidiary, Sub Co., for $150,000. The land originally cost Parent $100,000. Sub Co. still holds the land at December 31, Year 2. <br/><br/>What is the required elimination entry regarding this land for the Year 2 consolidated financial statements?
On January 1, Year 1, Parent Co. sold land to its subsidiary, Sub Co., for $150,000. The land originally cost Parent $100,000. Sub Co. still holds the land at December 31, Year 2. <br/><br/>What is the required elimination entry regarding this land for the Year 2 consolidated financial statements?
Answer options:
A.
Debit Retained Earnings $50,000; Credit Gain on Sale $50,000
B.
Debit Retained Earnings $50,000; Credit Land $50,000
C.
Debit Gain on Sale $50,000; Credit Land $50,000
D.
Debit Land $50,000; Credit Retained Earnings $50,000
How to approach this question
Intercompany sale of non-depreciable asset (Land). <br/>Year of Sale: Eliminate Gain, reduce Land. <br/>Subsequent Years: Eliminate the Gain from Retained Earnings (since it was closed out), reduce Land.
Full Answer
B.Debit Retained Earnings $50,000; Credit Land $50,000✓ Correct
B
The gain of $50,000 was recognized by Parent in Year 1. In Year 2, this gain is in Parent's beginning Retained Earnings. The Land is on Sub's books at $150,000 (overstated by $50,000 vs original cost). <br/>Entry: Debit Retained Earnings (Parent) $50,000; Credit Land $50,000.
Common mistakes
Using the 'Gain' account in a subsequent year; failing to adjust RE.
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