Question

Company P holds 70 percent of the voting shares of Company S. During 20X8, Company S...

Company P holds 70 percent of the voting shares of Company S. During 20X8, Company S sold land with a book value of $125,000 to Company P for $150,000. Company P continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company P uses the fully adjusted equity method in accounting for its investment in Company S.

Use the information given, but also assume that Company P holds the land at the end of 20X9. The consolidating entry relating to the intercorporate sale of land to be entered in the consolidation worksheet prepared at the end of 20X9 will include:

Multiple Choice

  • a debit to Investment in Company S for $7,500.

  • a debit to Noncontrolling Interest for $4,500.

  • a credit to Land for $150,000.

  • a credit to Land for $15,000.

(WHICH ONE?)

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Answer #1

In consolidated financial statements we have eliminate profits within the group and also recognise the deferred tax asset .

So here unrealised profit to group and company S is equal to 25000(150000-125000) and deferred tax asset is equal to 10000(25000×40%) since subsidiary has made profit we have to eliminate profit from subsidiary profit and add deferred tax to subsidiary profit then net affect on profit of subsidiary ( company s ) is reduction of 15000( 25000-10000) and it has to apportioned to non controlling intrest and parent ( company p) in ratio of investment ie 30:70

Non controlling interest debit = 15000×30%= 4500

And debit to parent share of profit = 15000×30%=10500.

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