In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting:
A) Retained Earnings - P Company
B) Retained Earnings - S Company
C) Gain on Sale of Land
D) both Retained Earnings - P Company and Retained Earnings - S Company

Question

Quizplus · Accepted Answer

In consolidating financial statements, intercompany gains on transactions like the sale of land from a subsidiary to its parent company must be eliminated to avoid overstating profits. The gain recognized by the subsidiary on the sale is not realized from the perspective of the consolidated entity until the asset is sold to an external party. Therefore, the workpaper entry to eliminate this intercompany gain involves debiting the Gain on Sale of Land account to reverse the gain recorded by the subsidiary.

In the Year a Subsidiary Sells Land to Its Parent