Question

When dividing up the consolidated net income between the Parent and the Sub using the T-accounts,...

When dividing up the consolidated net income between the Parent and the Sub using the T-accounts, which of the following is true:

a.

No adjustments are needed in the income distribution schedule as a result of operating and direct-financing leases
b.

No adjustments are needed in the income distribution schedule as a result of operating and sales-type leases
c.

No adjustments are needed in the income distribution schedule as a result of operating, direct-financing and sales-type leases.
d.

No adjustments are needed in the income distribution schedule as a result of direct-financing and sales-type leases
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Answer #1

Ans - No adjustments are needed in the income distributing schedule as a result of operating and direct-financing leases. (OPTION 'a')

When it comes to Operating and Direct financing leases, then no adjustments have to be made in the income distributing schedule when consolidated net income is distributed between parent company as well as it's subsidiary because elimination of these transactions do not have any effect on the consolidated net income. However same is not the case for Sales type lease , because it does have an impact on income distributing schedule. Profit or loss from a sales type lease is deferred on a consolidated basis during the period of sale and through a depreciation adjustment, it is recognized in subsequent periods.

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