Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2020, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2020 and 2021, respectively. Leo uses the equity method to account for its investment.Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stiller on Leo's books for 2021.
A) $140,000.
B) $97,000.
C) $125,000.
D) $100,000.
E) $112,000.

Question

Quizplus · Accepted Answer

The unrealized gain on the land sale ($75,000 - $60,000 = $15,000) must be deferred. Leo's share of Stiller's income is 80% of $140,000, which is $112,000. The deferred gain from 2020 does not affect 2021 income.

Stiller Company, an 80% Owned Subsidiary of Leo Company, Purchased