Water Company owns 80 percent of Fire Company’s outstanding common stock. On December 31, 20X9, Fire sold equipment to Water at a price in excess of Fire’s carrying amount but less than its original cost. On a consolidated balance sheet at December 31, 20X9, the carrying amount of the equipment should be reported at

The general rule before consolidating the accounts of a parent and its subsidiaries is that all the gains arising from transactions between the parent and its subsidiaries must be eliminated. The idea is that they are the same company and a company cannot not make profit from itself.

As regards this question, Water and Fire would record sales of the equipment in their individual books to make it appear that they were independen companies. That is, Fire would remove the sold and record the profit made from it, while Water record the asset bought in its book at the cost paid to Fire.

Since there is no real sales because Water and Fire are not different companies in reality, the gain recorded Fire must be eliminated from the consolidated accounts.

Therefore, the equipment will appear in consolidated account at original cost of the equipment paid by Water to Fire minus the gain recorded by Fire.

chilljain33 chilljain33 · Answer 2 · 2022-01-08T07:27:45+01:00

The correct way to record the sale of such equipment in the consolidated balance sheet of the company will be by reporting it at the original cost less the losses/gains realized.

The Water Company can report such sale of equipment at the original price and the losses or gains realized over such sale should be subtracted from the amount.

A consolidated statement is a statement made by the holding company when it holds a significant stake in at least one more company. Such statements show a joint positions of such company as on that date.

A holding company on the other hand refers to a company which owns more than half of the entire stake of such subsidiary company. A separate consolidated balance sheet has to be prepared.

Accounting standards makes it mandatory for the holding company to report any such sales to its subsidiaries at the original cost less the gain or losses made over it.

Hence, the correct statement will be that the consolidated balance sheet will require the company to record sale of equipment at the original cost less the gains made over it.

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