Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting.Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker's books for 2020.
A) $205,000.
B) $200,000.
C) $180,000.
D) $175,500.
E) $184,500.

Question

Quizplus · Accepted Answer

Parker must defer the unrealized loss on the land sale ($85,000 - $80,000 = $5,000) until the land is sold to an outside party. Therefore, Parker's share of Stark's income for 2020 is $200,000 - $5,000 = $195,000. Parker owns 90% of Stark, so the income reported is 90% of $195,000, which is $175,500.

Stark Company, a 90% Owned Subsidiary of Parker, Inc