Patterson Company owns 80% of the outstanding common stock of Stevens Company. O
ID: 2494408 • Letter: P
Question
Patterson Company owns 80% of the outstanding common stock of Stevens Company. On June 30, 2013, land costing $500,000 is sold by one affiliate to the other for $800,000. Required: Prepare in general journal form the workpaper entries necessary because of the intercompany sale of land in the consolidated financial statements workpaper for the year ended December 31, 2014, assuming that: A. Patterson Company purchased the land from Stevens Company. B. Stevens Company purchased the land from Patterson Company.
Explanation / Answer
Consolidation of financial statements can be done by adding line item to line item. In the sense, adding cash balances of all group companies, fixed assets of all group companies and all the trial balance amounts of the group companies will be added together.
Land of one affiliate is sold to another affiliate at a profit of $300,000 ($800,000 - $ 500,000). The affiliate which has sold will reduce the cost of the land in its books by $500,000 and the affiliate that has purchased the land will record the cost of the land as $800,000. The profit of $300,000 will be recorded in the books of affiliate which has sold the land.
If Patterson Company purchased the land from Stevens Company, Stevens Company would have earned $300,000 as profit. As Patterson Company owns 80% of common stock of Stevens Company, $240,000 ($300,000 * 80%) will be included in the consolidated financial statements.
If Stevens Company purchased land from Patterson Company, then Patterson Company would have earned the profit of $ 300,000. This will be taken in full in the consolidated financial statements.
Now the Sale transaction has been taken place on 06/30/2013. The necessary journal entries would have been entered while preparing consolidated financial statements. Hence there will not be any further journal entries required to be posted for working papers of consolidated financial statements for the year ending 12/31/2014.