Faizal Company sells land with a book value of $6,000 to Azmi Company for $8,000 in 2016. Azmi is a wholly owned subsidiary of Faizal. Azmi Company holds the land during 2017. Azmi Company sells the land for $10,000 to an outside entity in 2018.
1. In 2016 the unrealized gain:
a To be eliminated is affected by the noncontrolling interest percentage
b Is initially included in the subsidiary’s accounts and must be eliminated from Faizal Company’s income from Azmi Company under the equity method
c Is eliminated from consolidated net income by a workpaper entry that includes a credit to the land account for $2,000
d Is eliminated from consolidated net income by a workpaper entry that includes a credit to the land account for $8,000
2. Which of the following statements is true?
a Under the equity method, Faizal Company’s Investment in Azmi account will be $2,000 less than its underlying equity in Azmi throughout 2017.
b No workpaper adjustments for the land are required in 2017 if Faizal Company has applied the equity method correctly.
c A workpaper entry debiting gain on sale of land and crediting land will be required each year until the land is sold outside the consolidated entity.
d In 2018, the year of Azmi’s sale to an outside entity, the workpaper adjustment for the land will include a debit to gain on sale of land for $2,000.