Question

A parent sold a building to its subsidiary at a gain at the beginning of 2013. Which statement is false concerning this transaction?

1) The parent company recognized a gain on the sale
2) The subsidiary company recognized a gain on the purchase
3) The transaction increased the parent company's assets
4) The transaction decreased the subsidiary company's liabilities

Answer 1

The false statement regarding a parent selling a building to its subsidiary is that the subsidiary company recognized a gain on the purchase, which does not happen in such transactions.

Step-by-step explanation:

The statement that is false concerning the transaction where a parent sold a building to its subsidiary at the beginning of 2013 is: 2) The subsidiary company recognized a gain on the purchase. In such transactions between parent and subsidiary companies, the following typically occurs:

• The parent company does recognize a gain on the sale if the selling price exceeds the book value of the asset.
• The subsidiary does not recognize a gain on the purchase. Instead, the asset is recorded at the acquisition cost on the subsidiary's balance sheet.
• As per consolidation rules, any gain recognized by the parent on the sale to the subsidiary needs to be eliminated in consolidation since intra-group transactions do not constitute real earnings for the economic entity as a whole.
• The transaction may increase the assets on the parent company's balance sheet if they receive cash or other assets in exchange.
• Conversely, the transaction would typically increase liabilities on the subsidiary's balance sheet since they would likely incur a liability to pay for the building.