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We appreciate your visit to Patch Corporation purchased land from Sub1 Corporation for 240 000 on December 3 20X5 This purchase followed a series of transactions between Patch controlled subsidiaries. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!

Patch Corporation purchased land from Sub1 Corporation for $240,000 on December 3, 20X5. This purchase followed a series of transactions between Patch-controlled subsidiaries. On January 23, 20X5, Sub3 Corporation purchased the land from a nonaffiliate for $350,000. It sold the land to Sub2 Company for $220,000 on July 15, 20X5, and Sub2 sold the land to Sub1 for $305,000 on September 5, 20X5.

Patch has control of the following companies:

- Subsidiary: Sub3
- Level of Ownership: 60 percent
- 20X5 Net Income: $60,000

- Subsidiary: Sub2
- Level of Ownership: 90 percent
- 20X5 Net Income: $140,000

- Subsidiary: Sub1
- Level of Ownership: 70 percent
- 20X5 Net Income: $90,000

Patch reported income from its separate operations of $345,000 for 20X5.

Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 20X5?

A. $220,000
B. $305,000
C. $240,000
D. $350,000

Answer :

In addressing how much the land should be reported on Patch Corporation’s consolidated balance sheet, it’s important to consider the accounting principle of historical cost, as well as the effects of transactions within entities under common control.

When Patch Corporation, which has control over the subsidiaries involved (Sub1, Sub2, and Sub3), consolidates financial statements, it essentially treats the operations of all controlled subsidiaries as one economic entity. Consequently, intra-group transactions do not result in profit or loss for the group. Hence, the land should be recorded at the cost it had when it was initially acquired by the economic entity from an external party.

Step-by-Step Explanation:

  1. Initial Purchase by Sub3: On January 23, 20X5, Sub3 purchased the land from a non-affiliated company for $350,000. This is the historical cost of the land for the consolidated entity, as Sub3 is part of the controlled group.

  2. Subsequent Transactions: Any sales or purchases of the land between subsidiaries (Sub3 to Sub2, Sub2 to Sub1) do not change the value of the land for reporting purposes on the consolidated financial statements. Such transfers are considered internal transactions.

  3. Final Purchase by Patch: Although Patch Corporation purchased the land from Sub1 for $240,000 on December 3, 20X5, the historical cost remains $350,000 as it reflects the cost to the group when it first entered from an external party.

In conclusion, for the consolidated balance sheet dated December 31, 20X5, the land should be reported at its historical cost when originally acquired from the external entity, which is $350,000.

Therefore, the correct amount for reporting the land on the consolidated balance sheet is $350,000.

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