Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, 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, the gain on sale of the building eliminated in the consolidated financial statements for 20X8 is:

Question

Quizplus · Accepted Answer

The gain on sale of the building is $3,000 ($33,000 - $36,000). Since Sky owns 75% of Earth, the gain on sale is eliminated in the consolidated financial statements by 75%, or $2,250 ($3,000 x 75%). The remaining gain of $750 ($3,000 - $2,250) is recognized in the consolidated financial statements.

Sky Corporation Owns 75 Percent of Earth Company's Stock