Question

Assume that a parent company owns a 100% controlling interest in its long-held subsidiary. On January 1, 2018, a parent company sold land to the subsidiary for $650,000. The land originally cost the parent $520,000 when it was purchased on January 1, 2009. The parent company uses the equity method to account for its pre-consolidation investment in the subsidiary. Related to the transferred land, which of the following items is true regarding the preparation of the consolidated financial statements for the year ending December 31, 2019?

A. The consolidation entries will include a $26,000 debit to "Equipment (gross)".
B. The consolidation entries will include a $26,000 credit to "Loss on Sale of Equipment".
C. The consolidation entries will include a $26,000 debit to "Gain on Sale of Equipment".
D. The consolidation entries will include a $26,000 credit to "Accumulated depreciatio".

Answer 1

A. The consolidation entries will include a $130,000 debit to "Equity Investment (gross)".

Step-by-step explanation:

Parent Company owns 100% of the shares of its subsidiary which means there is no non controlling interest. The equipment has a value of $520,000 to the parent when it acquired the interest. The land has sold to its subsidiary at a price of $650,000. The differential is $130,000 which is accounted for using the equity method. The parent will report $130,000 debit to the equity investment account.