Question

Minor company sold land to major company on November 15, 20x4, and recorded a gain of $30,000 on the sale. Major owns 80 percent of Minor's common shares. Which of the following statements is correct?

1) The gain on the sale should be allocated to the noncontrolling interest
2) The gain on the sale should be allocated entirely to the controlling interest
3) The gain on the sale should be allocated based on the proportion of ownership
4) The gain on the sale should be allocated based on the fair value of the land

Answer 1

The gain on the sale should be allocated based on the proportion of ownership.

Step-by-step explanation:

The correct statement is 3) The gain on the sale should be allocated based on the proportion of ownership.

When a company sells an asset and records a gain, it needs to allocate that gain among its shareholders. In this case, Major owns 80% of Minor's common shares, so the gain should be allocated based on this ownership percentage.

For example, if the gain on the sale is $30,000, 80% of that amount ($24,000) would be allocated to Major and 20% of that amount ($6,000) would be allocated to the noncontrolling interest.