PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent owned subsidiary, on January 1, 20X7. The cost of the land was $75,000, when it was purchased in 20X6. In 20X9, Seven Star sells the land to Hot Properties Inc., an unrelated entity, for $120,000. How is the land reported in the consolidated financial statements for 20X7, 20X8 and 20X9?
What will be an ideal response?
PeopleMag cannot report a gain on the sale of land for 20X8 or 20X9 in the consolidated financial statements. The land must be reported on the consolidated balance sheet at its original cost of $75,000. The intercompany gain is unrealized and is eliminated. In 20X0, the entire gain of $45,000 ($120,000 - $75,000) is realized and recognized when the land is sold to an outside party.
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