Company A holds 70 percent of the voting shares of Company B. During 20X8, Company B sold land with a book value of $125,000 to Company A for $150,000. Company A continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company A uses the fully adjusted equity method in accounting for its investment in Company B.
-Based on the information given,which consolidating entry relating to the intercorporate sale of land is to be entered in the consolidation worksheet prepared at the end of 20X8?

A) Option A
B) Option B
C) Option C
D) Option D

Question

Company A holds 70 percent of the voting shares of Company B. During 20X8, Company B sold land with a book value of $125,000 to Company A for $150,000. Company A continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company A uses the fully adjusted equity method in accounting for its investment in Company B.
-Based on the information given,which consolidating entry relating to the intercorporate sale of land is to be entered in the consolidation worksheet prepared at the end of 20X8?

A) Option A 
B) Option B 
C) Option C 
D) Option D

Quizplus · Accepted Answer

Under the fully adjusted equity method, intercorporate sales are eliminated in the consolidation process. Therefore, the consolidating entry should reverse the effects of the intercorporate sale made during the year. Option A correctly eliminates the intercorporate sale by debiting Company A's investment in Company B and crediting noncontrolling interest, as Company A holds 70 percent of Company B's voting shares. The elimination entry also includes recognizing the tax effects of the intercorporate sale by debiting income tax expense and crediting income tax payable, based on the 40 percent tax rate. Therefore, Option A is the correct consolidating entry. Options B, C, and D do not eliminate the intercorporate sale and/or do not adjust for the tax effects of the transaction.

Company a Holds 70 Percent of the Voting Shares of Company