A parent has a 90% interest in its subsidiary. The subsidiary sold land at a gain to the parent in the current year. The parent still holds the land. How does this transaction affect equity in net income and noncontrolling interest in net income for the current year, assuming the parent uses the complete equity method to report its investment on its own books?

Question

Quizplus · Accepted Answer

Under the complete equity method, intercompany transactions, such as the sale of land at a gain from the subsidiary to the parent, are eliminated in consolidation. However, since the parent still holds the land, the unrealized gain on the sale must be eliminated from the parent's equity in net income to avoid overstating consolidated income. This adjustment also affects the noncontrolling interest's share of net income because the noncontrolling interest is calculated based on the subsidiary's net income, which includes the gain from the sale of the land to the parent. Therefore, both equity in net income and noncontrolling interest in net income are affected by the transaction.

A Parent Has a 90% Interest in Its Subsidiary