Belzer Co. owns 70% of Sabo Ltd. At the beginning of 20X7, Sabo sold a piece of equipment to Belzer for a gain of $35,000. At that time, the equipment had an estimated useful life of seven years.
-Which of the following statements is true about calculating the NCI for the consolidated SFP?
A)The unrealized profit at the end of 20X7 must be deducted from the subsidiary's net carrying value before calculating the NCI.
B)The unrealized profit at the end of 20X7 must be added to the subsidiary's net carrying value before calculating the NCI.
C)The unrealized profit does not affect the NCI calculation because this is an upstream sale.
D)There is no unrealized profit in the transaction.

Question

Belzer Co. owns 70% of Sabo Ltd. At the beginning of 20X7, Sabo sold a piece of equipment to Belzer for a gain of $35,000. At that time, the equipment had an estimated useful life of seven years. 
-Which of the following statements is true about calculating the NCI for the consolidated SFP?
A)The unrealized profit at the end of 20X7 must be deducted from the subsidiary's net carrying value before calculating the NCI.
B)The unrealized profit at the end of 20X7 must be added to the subsidiary's net carrying value before calculating the NCI.
C)The unrealized profit does not affect the NCI calculation because this is an upstream sale.
D)There is no unrealized profit in the transaction.

Quizplus · Accepted Answer

When there is a gain on an intra-group sale and the sale involves an asset with a limited useful life, the unrealized profit needs to be eliminated from both the subsidiary's net carrying value and the consolidated entity's equity. The NCI calculation uses the subsidiary's net carrying value, which has been adjusted for the unrealized profit, so the unrealized profit at the end of 20X7 must be deducted from the subsidiary's net carrying value before calculating the NCI. Therefore, choice A is correct. Choices B and C are incorrect because they do not reflect the proper accounting treatment for intra-group sales with unrealized profit, and choice D is incorrect because there is indeed an unrealized profit in the transaction as mentioned in the question.

Belzer Co Owns 70% of Sabo Ltd