hard · Financial Accounting accounting-cycle-financial-statements

A Parent owns 40% of a Subsidiary. The Subsidiary sells equipment to the Parent for a gain. In the Year 2 'Equity in Earnings' calculation, the Parent 'realizes' a portion of the previously eliminated gain. This realization is recorded as:

1. A debit to the Investment account and a credit to Equity in Earnings.
2. A debit to Retained Earnings and a credit to the Investment account.
3. A memo entry only, as the gain was already recorded in Year 1.
4. A credit to the Equipment account and a debit to Depreciation Expense.

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