Sky Corporation owns 75 percent of Earth Company's stock.On July 1,2008,Sky sold a building to Earth for $33,000.Sky had purchased this building on January 1,2006,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,in the preparation of the 2008 consolidated financial statements,building will be _____ in the eliminating entries.

Question

Quizplus · Accepted Answer

When preparing consolidated financial statements, any intercompany transactions need to be eliminated. In this case, Sky sold a building to Earth for $33,000, which means that Sky needs to remove the building from its books. Since the building was purchased for $36,000 and has not changed in economic life or residual value, Sky would record a loss of $3,000 ($36,000 - $33,000) on the sale of the building. Therefore, in the eliminating entries, building will be debited for $3,000, not $33,000 or $36,000.

Sky Corporation Owns 75 Percent of Earth Company's Stock