Question

Thomson Corporation owns 70 percent of the outstanding stock of Stayer, Incorporated. On January 1, 2016, Thomson acquired a building with a 10-year life for $460,000. Thomson depreciated the building on the straight-line basis assuming no salvage value. On January 1, 2018, Thomson sold this building to Stayer for $430,400. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2018, how does this transfer affect the computation of consolidated net income? What is the total of consolidated revenues?

a. $500,000
b. $460,000
c. $420,000
d. $400,000

Answer 1

In preparing consolidated financial statements, the profit from the sale of the building by Thomson to Stayer, its subsidiary, must be eliminated from consolidated net income. The total of consolidated revenues will also need adjustments to exclude intercompany transactions.

Step-by-step explanation:

Accounting Method for Intercompany Transactions

When Thomson Corporation sells a building to its subsidiary Stayer, Incorporated, the transaction affects the computation of consolidated net income and consolidated revenues. Since Thomson owns 70 percent of Stayer, this is an intercompany transaction and must be eliminated during consolidation.

For the building, which originally cost $460,000 with a 10-year life, Thomson would have recorded two years of depreciation ($46,000 per year) reducing the book value to $368,000 by January 1, 2018. When Stayer purchases the building for $430,400, a profit of $62,400 (sale price - book value) is recognized. However, for consolidation purposes, this intra-group profit must be eliminated since the asset is still within the economic entity made up of Thomson and Stayer.

Computation of Consolidated Net Income: Consolidated net income requires eliminating any intra-group profit. Therefore, the $62,400 profit from the sale of the building would be subtracted from Stayer's reported income. This elimination is necessary to present a true picture of the economic entity's results.

Regarding the total of consolidated revenues, it will not include intercompany sales. Thus, the consolidation process will adjust the reported individual revenues of Thomson and Stayer to arrive at the appropriate consolidated figure, which can be determined using other relevant information not provided in this question.