Chandler Ltd. owns 65% of Stork Co. and accounts for its investment using the cost method. During 20X3, Chandler sold its only land holding to Stork for a $25,000 profit. At the end of 20X4, Stork showed the land on its single-entity financial statement at a value of $100,000. What balance should Chandler show on its consolidated statement of financial position for the land?
A)$0
B)$75,000
C)$100,000
D)$125,000

Question

Quizplus · Accepted Answer

Since Chandler accounts for its investment using the cost method, it does not recognize any profit or loss on intercompany transactions. Therefore, Chandler should eliminate the profit from the land sale when consolidating with Stork. This means that Chandler's investment in Stork should be reduced by the portion related to Stork's holding of the land.

The land was sold for a $25,000 profit, of which 65% belongs to Chandler ($16,250). Therefore, Chandler should reduce its investment in Stork by $16,250.

The carrying amount of the land on Stork's financial statement is irrelevant for consolidation purposes, as it reflects Stork's own accounting policies and not the economic reality of the transaction.

Thus, Chandler should report its investment in Stork on its consolidated statement of financial position at its original cost less its share of profits or losses of Stork since acquisition, adjusted for any impairment losses. In this case, Chandler's investment should be reduced by $16,250 to account for the intercompany land sale. Therefore, the correct balance for Chandler to show on its consolidated statement of financial position is $75,000 ($91,250 - $16,250).