Question

A parent sells land to its 80%-owned subsidiary at a gain of $100,000. The following year,...

A parent sells land to its 80%-owned subsidiary at a gain of $100,000. The following year, the subsidiary sells the land to an outside entity for a gain of $10,000.

How is the noncontrolling interest in net income affected in the year the subsidiary sells the land?

Select one:

A. Increase of $20,000

B. Decrease of $22,000

C. Decrease of $2,000

D. No effect

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Answer #1

Answer:

The answer is B)

Decrease of $22,000

Explanation:

Parents and subsidiary may sell non-current asset s to each other, resulting i n a profit being recorded in the selling ent ity's financial statements.

If these non- current assets are still held by the purchasing entity at the y ear-end, the profit is unrealised from the gr oup’s perspective and should be removed.

The NCI calculation would include an adjustment to reduce the subsidiary's profit by $100,000 to eliminate the profit on disposal of the intra-group transfer.

The NCI would be decreased by $100,000*20% = $20,000 and the gain on disposal $10,000*20% = $2,000

The NCI would be decreased by = $20,000 + $2,000 = $22,000

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