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When a parent company sells land to a subsidiary at more than book value, the consolidation entries at the end of the period include a debit to the gain on the sale of land. When a parent purchases the bonds of a subsidiary from a nonaffiliate at less than book value, the consolidation entries at the end of the period contain a credit to a gain on bond retirement. Why are these two situations not handled in the same manner on the consolidation worksheet

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anthougo

Answer:

The reasons for these two situations not handled similarly are:

1. The first case involving the sale of land is a transaction between a parent and its subsidiary.  Their accounts are consolidated with gains from intercompany transactions eliminated because a parent company cannot recognize gains from sales to itself (group).  This implies that all intercompany gains can only be recognized when the sales involve external or non-affiliated entities.

2. In the second case, there is no parent-subsidiary relationship since one organization is described as a non-affiliate.  Therefore, there is no need to eliminate the intercompany profit arising from the transaction.  Instead, the gain is recognized.

Explanation:

The accounts of companies that are under common control are consolidated by the parent entity.  Therefore, during the consolidation process, it becomes necessary to eliminate all intercompany transactions that have not been externally affected.