On June 30, 2012, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2014, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What effect will the elimination of the unrealized intercompany gain (in the preparation of the consolidated income statement) have on consolidated income tax expense for 2012?

Question

Quizplus · Accepted Answer

The unrealized intercompany gain of $120,000 ($240,000 - $120,000) is eliminated, reducing taxable income by $120,000. The tax effect is $120,000 * 20% = $24,000, reducing income tax expense.

On June 30, 2012, Parent Company Sold Some Land to Its