Question

On a worksheet prepared to consolidate the financial statements of a parent and subsidiary, elimination entries made to remove intercompany Gains on downstream sales of land sold in prior years will affect which account?

Answer 1

Elimination entries made to remove intercompany Gains on downstream sales of land sold in prior years will affect the Retained Earnings account.

Step-by-step explanation:

Elimination entries made to remove intercompany Gains on downstream sales of land sold in prior years will affect the Retained Earnings account.

When a parent and subsidiary have intercompany transactions, consolidation is required to combine their financial statements into a single report for presentation. Intercompany Gains on previous land sales occur when the parent sells land to the subsidiary at a gain. These gains are eliminated to avoid double counting and to accurately reflect the economic reality. As a result, the Retained Earnings account is adjusted to remove the impact of these gains.