On January 1, Year 1, Parent Co. sold land to its subsidiary, Sub Co., for $150,000. The land originally cost Parent $100,000. Sub Co. still holds the land at December 31, Year 2. What is the required elimination entry regarding this land for the Year 2 consolidated financial statements?

Answer options:

Debit Retained Earnings $50,000; Credit Gain on Sale $50,000

Debit Retained Earnings $50,000; Credit Land $50,000

Debit Gain on Sale $50,000; Credit Land $50,000

Debit Land $50,000; Credit Retained Earnings $50,000

How to approach this question

Intercompany sale of non-depreciable asset (Land). Year of Sale: Eliminate Gain, reduce Land. Subsequent Years: Eliminate the Gain from Retained Earnings (since it was closed out), reduce Land.

Full Answer

B.Debit Retained Earnings $50,000; Credit Land $50,000✓ Correct

The gain of $50,000 was recognized by Parent in Year 1. In Year 2, this gain is in Parent's beginning Retained Earnings. The Land is on Sub's books at $150,000 (overstated by $50,000 vs original cost). Entry: Debit Retained Earnings (Parent) $50,000; Credit Land $50,000.

Common mistakes

Using the 'Gain' account in a subsequent year; failing to adjust RE.

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On January 1, Year 1, Parent Co. sold land to its subsidiary, Sub Co., for $150,000. The land originally cost Parent $100,000. Sub Co. still holds the land at December 31, Year 2. <br/><br/>What is the required elimination entry regarding this land for the Year 2 consolidated financial statements?

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 5

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