In 2017, P Company sells land to its 80% owned subsidiary, S Company, at a gain of $50,000. What is the effect of this sale of land on consolidated net income assuming S Company still owns the land at the end of the year?
A) consolidated net income will be the same as if the sale had not occurred.
B) consolidated net income will be $50,000 less than it would had the sale not occurred.
C) consolidated net income will be $40,000 less than it would had the sale not occurred.
D) consolidated net income will be $50,000 greater than it would had the sale not occurred.

Question

Quizplus · Accepted Answer

In consolidated financial statements, intercompany transactions, such as the sale of land from a parent company to its subsidiary, are eliminated. Therefore, the gain of $50,000 recognized on the sale of the land by the parent company to its subsidiary would be eliminated in consolidation, making the consolidated net income the same as if the sale had not occurred.

In 2017, P Company Sells Land to Its 80% Owned