Question

Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1,...

Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting.

Which of the following will be included in a consolidation entry for 2021?

A. Debit RE for 5,000

B. Credit RE for 5,000

C. Debit Investment in Subsidiary for 5,000

D. Credit Investment in Subsidiary for 5,000

E. Credit Land for 5,000

Business   Accounting   
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Answer #1

The amount that will be included in the consolidation entry will be the difference of Sale and original cost of land from Stark Company to Parker Inc. The difference will be credited to Retained Earnings.

Cost of Land                                       85,000

Sale Price of Land                             80,000

Credit to Retained Earnings 5,000

Option B Credit RE for 5,000 is the correct option

Note: Sale of Land in 2022 not to be considered in the consolidation entry in 2021.

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