Question 1

Parent Co. and Sub Co. file a consolidated return. In Year 1, Parent sells land to Sub for $500,000 (Parent's basis $300,000). In Year 3, Sub sells the land to an unrelated party for $600,000. What is the consolidated gain reported in Year 3?

Accepted Answer

Intercompany gains are deferred until the asset leaves the group. Year 1: Parent defers $200k gain. Year 3: Sub realizes $100k gain ($600k - $500k). Total Consolidated Gain = Deferred ($200k) + Current ($100k) = $300k.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Thinking the gain is taxed in Year 1 or only the Year 3 portion is taxed.

Parent Co. and Sub Co. file a consolidated return. In Year 1, Parent sells land to Sub for $500,000 (Parent's basis $300,000). In Year 3, Sub sells the land to an unrelated party for $600,000. What is the consolidated gain reported in Year 3?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA TCP Practice Exam 3

More questions from this exam