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.
-Use the information given,but also assume that Company A holds the land at the end of 20X9.The consolidating entry relating to the intercorporate sale of land to be entered in the consolidation worksheet prepared at the end of 20X9 will include a debit to Investment in Company B for:
A) $4,500.
B) $7,500.
C) $15,000.
D) $10,500.

Question

Quizplus · Accepted Answer

The consolidating entry will include a debit to Investment in Company B for the amount of the unrealized gain on the intercorporate sale of land that remains unrecognized in the separate financial statements of Company A. The unrealized gain is $25,000 ($150,000 - $125,000). Since Company A holds 70 percent of the voting shares of Company B, the amount of the unrealized gain that remains unrecognized in the separate financial statements of Company A is $17,500 (70% x $25,000).

Company a Holds 70 Percent of the Voting Shares of Company