Question

Sub sold Parent land in a prior year for a Gain of $40,000. The land is still held by Parent. Parent owns 80% of Sub. The elimination entry necessary for this intercompany transaction on the current year's working paper includes_____________.

Answer 1

The elimination entry for the intercompany land sale where a subsidiary sold land to its parent company for a gain of $40,000 involves debiting Land and crediting Gain on Sale of Land by the amount of the intercompany profit to remove it from the consolidated financial statements.

Step-by-step explanation:

The question pertains to the preparation of consolidation working papers in accounting, specifically related to an intercompany transaction where a subsidiary (Sub) sold land to its parent company (Parent) and realized a gain. When Sub sold land to Parent for a gain of $40,000, and Parent still holds the land, an elimination entry is required in the consolidation process to remove the effects of the intercompany sale and the unrealized gain from the consolidated financial statements.

The elimination entry would typically debit Land (to reduce the asset by the overstated amount due to the intercompany profit) and credit Gain on Sale of Land (to eliminate the gain reported by Sub) by the amount of the intercompany profit, which is $40,000 in this case. Since Parent owns 80% of Sub, this intercompany profit must be eliminated in full, regardless of the percentage ownership, to accurately present the consolidated financial statements.

Answer 2

Sub sold Parent land in a prior year for a Gain of $40,000. The land is still held by Parent. Parent owns 80% of Sub. The elimination entry necessary for this intercompany transaction on the current year's working paper includes eliminating the intercompany gain on the sale of land.

Step-by-step explanation:

Intercompany transactions, such as the sale of land between a parent and its subsidiary, require elimination entries in consolidated financial statements to avoid double counting and present a true picture of the group's financial position. In this case, where Sub sold Parent land for a gain of $40,000, the elimination entry involves removing this intercompany gain.

The consolidation process aims to eliminate any gains or losses recognized on transactions between the parent and its subsidiary to prevent overstatement of income. By eliminating the intercompany gain, the consolidated financial statements reflect the economic reality of the transaction without the impact of internal dealings.

It's important to note that the elimination entry adjusts the individual financial statements of the parent and subsidiary to reflect the consolidated financial position accurately. This ensures that the financial statements represent the economic substance of the group's activities rather than just the intercompany transactions.

In summary, the necessary elimination entry involves removing the intercompany gain on the sale of land between Sub and Parent, aligning the consolidated financial statements with the economic reality of the group's financial position.