Question

Parent owns 80% of Sub. Two years ago, Sub sold land to Parent and recorded a gain of $50,000. During this year, Parent sold the land to an outside company and recognized a gain of $30,000. How do these events affect consolidated net income for the current year?

1) 80 dollars
2) 80 cars
3) 80 houses
4) 80 books

Answer 1

The events described in the question affect consolidated net income through the elimination of intercompany transactions. 80% of the gains from the land sale are eliminated in consolidation, resulting in a lower amount included in consolidated net income. The actual amount included in consolidated net income is $10,000 for the year the land was sold to Parent, and $6,000 for the current year when Parent sold the land to an outside company. Hence, the correct answer is option (1) 80 dollars.

Step-by-step explanation:

The events described in the question can affect consolidated net income for the current year through the process of eliminating intercompany transactions. When Sub sold land to Parent two years ago, it recorded a gain of $50,000. However, since Parent owns 80% of Sub, 80% of this gain is eliminated in consolidation. This means that only $10,000 (20% of $50,000) of the gain is included in consolidated net income for that year.

During the current year, Parent sold the land to an outside company and recognized a gain of $30,000. Again, since Parent owns 80% of Sub, 80% of this gain is eliminated in consolidation. This means that only $6,000 (20% of $30,000) of the gain is included in consolidated net income for the current year.

Therefore, the correct answer is: 1) 80 dollars.