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Explain the accounting for this transaction in future years

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Question - Sweets and Treats Inc. has chosen your firm to be the auditor of a company which was formed on October 15, 2016. Mrs. Cadbury owns 70% of the voting shares of Sweets and Treats Inc. and her husband owns the remaining 30%. On October 31, 2016, Sweets and Treats Inc. acquired all of the voting shares of Hershey Inc., a company which was founded by Mrs. Cadbury's husband four years ago. Hershey Inc. will sell chocolate molding equipment supplies to Sweets and Treats Inc. at a gross profit of 25%. In a meeting with Mrs. Cadbury, she asks your audit partner the following questions.

An intercompany gain on the sale of land is eliminated in the preparation of the consolidated statements in the year that the gain was recorded. Will the gain be eliminated in the preparation of subsequent consolidated statements? Explain the accounting for this transaction in future years.

Reference no: EM132773680

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