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

When Stiller Company purchased land from Leo on March 1, 2010, for $75,000, it was an intercompany transaction. Therefore, on the consolidation worksheet, an adjustment needs to be made to remove the intercompany transaction and any resulting unrealized gain on the transfer of the land.

Since Leo's original cost for the land was $60,000, the adjustment would be to debit land for $15,000 (to eliminate the intercompany transfer) and credit Leo's equity account for the same amount. No gain or loss needs to be recognized since the transfer is between the parent and its subsidiary. Therefore, the answer is (D) Debit land for $15,000.

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