Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land purchased from Stark in 2010 for $92,000 in 2012. Which of the following will be included in a consolidation entry for 2011?
A) Debit retained earnings for $5,000.
B) Credit retained earnings for $5,000.
C) Debit investment in subsidiary for $5,000.
D) Credit investment in subsidiary for $5,000.
E) Credit land for $5,000.

Question

Quizplus · Accepted Answer

When a subsidiary sells land to its parent company, the gain or loss on the sale is eliminated in consolidation. In this case, Stark sold land to Parker for $80,000, which is less than its cost of $85,000, resulting in a loss of $5,000. This loss needs to be eliminated in consolidation by decreasing Stark's retained earnings by $5,000 and decreasing Parker's investment in Stark by the same amount. Since this transaction occurred in 2010, it does not impact the consolidation entry for 2011. Therefore, the correct answer is to credit retained earnings for $5,000 in the consolidation entry for 2010, but not for 2011.

Stark Company, a 90% Owned Subsidiary of Parker, Inc