Question

In periods subsequent to an asset transfer from a subsidiary to its parent at a gain, what effects continue on the seller's and buyer's books from a consolidated reporting perspective?

a. retained earnings of the seller are overstated
b. retained earnings of the buyer are overstated
c. retained earnings of the seller are understated
d. retained earnings of the buyer are understated

Answer 1

a. retained earnings of the seller are overstated

Step-by-step explanation:

An asset transfer from a subsidiary to its parent at a gain is an Intragroup transaction. Intragroup transactions must be eliminated otherwise the financial statements would be misleading and not have a faithful representation.

The consequence of this transfer is that the Income of the Seller (subsidiary) increases and this also increases the Retained Income Balance of for the Subsequent years. We should eliminate this Income.