When S disposes of an asset prematurely and records a gain, how does that affect

Question

When S disposes of an asset prematurely and records a gain, how does that affect the consolidated financial statements?

S cannot record a gain on the sale of the asset.

The workpaper must include an entry to eliminate S's gain against P's reported income.

P records on its books the gain on the sale.

The workpaper must include an entry to adjust S's gain or loss to reflect the gain or loss to the consolidated entity.

S cannot record a gain on the sale of the asset.

The workpaper must include an entry to eliminate S's gain against P's reported income.

P records on its books the gain on the sale.

The workpaper must include an entry to adjust S's gain or loss to reflect the gain or loss to the consolidated entity.

Explanation / Answer

Answer is option (D). The workpaper must include an entry to adjust S's gain or loss to reflect the gain or loss to the consolidated entity.

Explanation;

In case when S disposes of an asset prematurely and records a gain then in consolidated financial statements, worksheet must include an entry to adjust S’s gain or loss because it will help in determining correct gain or loss to the consolidated entity. Thus option (D) is correct answer.

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