Parent Company owns all of the outstanding shares of Son Company. On January 1,
ID: 2511745 • Letter: P
Question
Parent Company owns all of the outstanding shares of Son Company. On January 1, Year One, Parent transfers a building to Son for its fair value of $400,000. At that date, Parent was reporting this building at a net book value of $320,000 with no residual value and a remaining life of ten years. In taking the individual records of these two companies at the end of Year One and turning them into consolidated statements, what is the impact on net income created by this transfer?
A) There is no impact when consolidated net income is computed.
B) A reduction of $80,000 is made to arrive at consolidated net income.
C) A reduction of $72,000 is made to arrive at consolidated net income.
D) A reduction of $48,000 is made to arrive at consolidated net income.
Explanation / Answer
Impact on net income is a reduction of $80,000 is made to arrive at consolidated net income as per consolidation standards the unrealised gain should be eliminated and the difference between the netbook value and the transfer price is an unrealised gain which is eliminated in the net income so in this case the income is reduced by $80000 in its consolidated statement
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