Question

In 2011, Parla Corporation sold land to its subsidiary, Sidd Corporation, for $38,000. It had a...

In 2011, Parla Corporation sold land to its subsidiary, Sidd Corporation, for $38,000. It had a book value of $24,000. In the next year (2012), Sidd sold the land for $41,000 to an unaffiliated firm. The adjusting/ eliminating entry for recognition of gain in the 2012 consolidated income statement is: a. Gain on land $3,000 Land $3,000 b. As the land is sold in 2012, no adjusting entry is necessary c. Investment in Sidd corporation $3,000 Gain on Land $3,000 d. Investment in Sidd corporation $14,000 Gain on Land $14,000 e. Investment in Sidd corporation $17,000 Gain on Land $17,000

is the answer D?

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Answer #1

The sale to unaffiliated firm is not relevant as no adjusting or eliminating entry is to be made for such transaction. However, it triggers the removal of consolidated net income done by inter company transfer.

Parla sold to Sidd at $ 38,000. It was recorded at book value $ 24,000.

Unrealized gain = 38000 – 24000 = $ 14,000

The unrealized gain from the intercompany sale should be eliminated from consolidated net income by a working paper entry that credits land for $14,000.

Hence the correct journal entry as option is c.  Investment in Sidd corporation $14,000 Gain on Land $14,000

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