Assume that Big owns 80% of Little. On 4/1/05 Little sells land to Big for $90,0

Question

Assume that Big owns 80% of Little. On 4/1/05 Little sells land to Big for $90,000. The land had originally cost Little $60,000 several years earlier. On 3/2/07 Big sells the land to a third party for $85,000. Assume that in each year Little reports earnings of $50,000. Big uses the “full” equity method.

a. Prepare the equity method entries arising from this transaction for 2005 through 2007.

b. Prepare the elimination entries arising from this transaction for 2005 through 2007.

c. Determine the "Income to the Non-controlling interest" for 2005 through 2007.

Explanation / Answer

Little record gain of $30000. From this parent share of unrealized gain is 80% i.e $24000

Year of intercomapny sale

4/1/05 (Big books) Equity in Littlle Income a/c Dr $24000

Investment in Little a/c $24000

(To exclude the parent’s share of the unrealized gain from equity insubsidiary income)

In books of little

4/1/05 Gain on sale of land a/c Dr $30000

Land a/c 30000

(To exclude the unrealized gain from consolidated net income and reduce the land to its historical cost)

In 2006 Year after inter comapny sale

Investment in Little a/c Dr $24000

Begnning Retained Earnings of Little a/c $6000

Land a/c $30000

(To reduce the land to its historical cost paid by the selling affiliate by parent and non controlling share)

In 2007 Year of sale to out

Investment in Little company a/c Dr $24000

Retained Earnings of Little company a/c Dr $6000

To gain on sale of land $25000

(To record intercompany gain on sale of land, which is realized in the current year as the land is sold at $85000)

Income of non controlling in 2005 was $6000 unrealized.

Income of non controlling in 2007 was $5000 realized after the sale of land to

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