Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2010, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2010 and 2011, respectively. Leo uses the equity method to account for its investment.
-Compute the gain or loss on the intra-entity sale of land.
A) $15,000 loss.
B) $15,000 gain.
C) $50,000 loss.
D) $50,000 gain.
E) $65,000 gain.

Question

Quizplus · Accepted Answer

To compute the gain or loss on the intra-entity sale of land, we need to compare the cost of the land to the selling price. In this case, Leo sold the land to its subsidiary Stiller for $75,000, which is greater than Leo's original cost of $60,000. Therefore, there is a gain on the sale of land.

The amount of the gain is the difference between the selling price and the selling company's basis (cost), which is $75,000 - $60,000 = $15,000. As Leo uses the equity method to account for its investment, it should recognize 80% of the gain as its own, which is $15,000 x 80% = $12,000.

However, note that the net income amounts of Stiller are not relevant to the computation of the gain or loss on the sale of land.

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