In 2010, Yorkshire Inc., which owns 100% of Blake Company, sold land to Blake Company at $50,000 greater than its cost. The land is still owned by Blake Company. The tax rate is 30%. What is the required consolidated financial statement adjustment in 2013?

Question

Quizplus · Accepted Answer

The adjustment needed is to recognize the deferred tax liability (or asset) resulting from the temporary difference between the book and tax basis of the land. The book basis is $50,000 higher than the tax basis due to the sale from Yorkshire Inc. to Blake Company. This creates a taxable gain that will only be recognized for tax purposes when the land is sold again in the future. The adjustment required would be:
- Decrease Beginning Retained Earnings: $35,000 (the after-tax impact of the sale at a tax rate of 30%)
- Decrease Land: $50,000 (adjusting the book value to the tax value)
- Increase Deferred Tax Asset: $15,000 (recognition of the tax benefit that will be realized in the future)