Question

Alpha Corporation owns 100% of Beta Corporation. The following represents data regarding an intercompany sale between Alpha and Beta

- On March 31, 2016, Alpha sold a plot of land to Beta for $8 million. This land had originally cost Alpha $3 million.

- Beta held the land through June 20, 2019. On June 20, 2019, Beta sold this land to an independent third party for $9 million

Required – write out the consolidation entry required to correct the impact of this transaction in the 2019 consolidation of Alpha and Beta:

Answer 1

I will be explaining entries for 2016 also for better understanding. As you might know Land is a non depriciable asset, so its treatment will be same as treatment of inventory. That is unrealized gains should be eliminated on consolidation.

Alpha will record sale at $8M during 2016 in its standalone financial statemnets. Beta will also record purchase at $8M during 2016 in its standalone financial statemnets. However in consolidated statements, gain on sale will be eliminated by:

Gain on Sale of Land $5M

To Land $5M

Further Alpha will defer the revenue by:

Income from Beta $5M

Investment in Beta $5M

On subsequent sale during 2019 in consolidated statement:-

Investment in Beta $5M

Gain on Sale of Land $5M