Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2010, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2010 and 2011, respectively. Leo uses the equity method to account for its investment. On a consolidation worksheet, what adjustment would be made for 2010 regarding the land transfer?
A) Debit gain for $50,000.
B) Credit gain for $50,000.
C) Debit land for $15,000.
D) Credit land for $15,000.
E) Credit gain for $15,000.

Question

Quizplus · Accepted Answer

The adjustment to be made for 2010 regarding the land transfer is to credit the land for $15,000. This is because the land originally cost Leo $60,000, but was sold to Stiller for $75,000, resulting in a gain of $15,000 for Leo. Since Leo owns 80% of Stiller, it should record its share of the gain as a reduction to the carrying value of land on the consolidation worksheet. Therefore, the land account should be credited for $15,000.

Stiller Company, an 80% Owned Subsidiary of Leo Company, Purchased