Parent Corporation Sells Land (A Capital Asset)to Subsidiary Corporation in an Intercompany

question 33

Multiple Choice

Parent Corporation sells land (a capital asset) to Subsidiary Corporation in an intercompany transaction, recognizing a $25,000 gain. Subsidiary holds the land as an investment for five years before selling the land to a nonmember of the group on an installment basis in a sale in which a $50,000 gain is realized. The sales proceeds are collectible in four equal installments with an appropriate interest amount being charged to the purchaser. Which statement is correct?

• A)A $25,000 capital gain is included in consolidated taxable income when Parent sells the land to Subsidiary Corporation. A $50,000 capital gain is included in consolidated taxable income when Subsidiary sells the land.
• B)A $25,000 capital gain from Parent and a $50,000 capital gain from Subsidiary are included in consolidated taxable income when Subsidiary sells the land.
• C)The $25,000 capital gain from Parent and $50,000 capital gain from Subsidiary are included ratably in consolidated taxable income, commencing in the year the first installment is received.
• D)None of the above are correct.

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Definitions:

Invest

Putting money into ventures with the expectation of receiving a financial return or profit.

Investment Project

A project involving the allocation of capital or resources towards an initiative expected to generate future income or profit over a certain period of time.

Interest

The charge for borrowing money, typically expressed as an annual percentage of the loan amount, or the return earned on investment capital.

Inventory

The complete quantity of products and supplies kept in inventory by a company, aimed for either sale or manufacturing activities.