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 it purchased from Stark in 2010 for $92,000 in 2012.
-Compute Stark's reported gain or loss relating to the land for 2012.
A) $5,000 loss.
B) $5,000 gain.
C) $7,000 loss.
D) $7,000 gain.
E) $0.

Question

Quizplus · Accepted Answer

Stark's reported gain or loss for 2012 is $0 because the gain or loss on the sale of land is recognized by Parker, the parent company, when it sells the land to an outside party. Stark's intercompany sale does not affect its reported income once the land is sold to an external party.

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