Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land it purchased from Stark in 2010 for $92,000 in 2012.
-Which of the following will be included in a consolidation entry for 2011?
A) Debit retained earnings for $5,000.
B) Credit retained earnings for $5,000.
C) Debit investment in subsidiary for $5,000.
D) Credit investment in subsidiary for $5,000.
E) Credit land for $5,000.

Question

Quizplus · Accepted Answer

Since the land sale occurred in 2010, it will not have any effect on the 2011 consolidation entry. However, since Stark reported net income of $180,000 in 2011, 90% of that amount ($162,000) will be included in the consolidation entry as a credit to the investment in subsidiary account and a debit to the non-controlling interest account. To eliminate the intercompany sale of land, an adjusting entry will be made to credit the investment in subsidiary account and debit the land account for the difference between the original cost ($85,000) and the selling price ($92,000), which is $7,000. Therefore, retained earnings will be credited for the difference between the $162,000 income and the $7,000 adjustment, which is $155,000. This will result in a credit entry to retained earnings for $5,000.

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