Sky Corporation owns 75 percent of Earth Company's stock.On July 1,2008,Sky sold a building to Earth for $33,000.Sky had purchased this building on January 1,2006,for $36,000.The building's original eight-year estimated total economic life remains unchanged.Both companies use straight-line depreciation.The equipment's residual value is considered negligible.
-Based on the information provided,in the preparation of a consolidated balance sheet at January 1,2009,retained earnings will be:

Question

Quizplus · Accepted Answer

Since Sky Corporation owns 75% of Earth Company's stock, the transaction between the two is considered an intercompany transaction. Therefore, the sale of the building from Sky to Earth must be eliminated in the consolidation process.

To do this, we need to eliminate the original cost of the building from Sky's books and the accumulated depreciation of the building from Earth's books.

Sky's original cost of the building was $36,000, and it was sold to Earth for $33,000. Therefore, Sky will have a loss of $3,000 on this transaction.

Since Sky owns 75% of Earth's stock, the consolidated loss on the sale of the building will be $2,250 (75% of $3,000).

This loss will be allocated between the two companies in the elimination entries. Sky's share of the loss will be debited to its retained earnings account, while Earth's share of the loss will be credited to its accumulated depreciation account.

Therefore, the answer is D) debited for $7,500 in the eliminating entries, since Sky's share of the loss on the intercompany sale of the building will be debited to its retained earnings account.

Sky Corporation Owns 75 Percent of Earth Company's Stock