Using the fully adjusted equity method,an intercompany gain on an upstream sale of land is:
A)recognized by the parent and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary.
B)recognized by the subsidiary and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary.
C)deferred by the subsidiary until the land is sold to an entity outside the consolidated group.
D)recognized by the subsidiary and the deferral is completely allocated to the controlling stockholders of the subsidiary.

Question

Quizplus · Accepted Answer

Under the fully adjusted equity method, intercompany gains on sales of assets between a parent and its subsidiary are deferred until the asset is sold to outside parties. In this case, since it is an upstream sale (from subsidiary to parent), the subsidiary would recognize the gain and defer the amount until the land is sold to an entity outside the consolidated group. The deferral is then shared between the controlling and noncontrolling stockholders of the subsidiary in proportion to their ownership percentages. Therefore, choice B is the correct answer.

Using the Fully Adjusted Equity Method,an Intercompany Gain on an Upstream