Sun, Inc. is a wholly owned subsidiary of Patton, Inc. On
June 1, year 1, Patton declared and paid a $1 per share cash dividend
to stockholders of record on May 15, year 1. On May 1,
year 1, Sun bought 10,000 shares of Patton’s common stock for $700,000 on the open market, when the book value per share was
$30. What amount of gain should Patton report from this transaction
in its consolidated income statement for the year ended
December 31, year 1?

(a) The requirement is to determine the amount of gain
to be reported on the consolidated income statement when a
wholly owned subsidiary purchases parent company stock. A
parent company reports no gain or loss when a wholly owned
subsidiary purchases its common stock. In effect, the consolidated
entity is purchasing treasury stock when the purchase is
made, and gains are not recognized on treasury stock transactions.
The dividends paid by the parent to the subsidiary also do
not affect income because such intercompany transactions are
eliminated when consolidated financial statements are prepared.
Therefore, $0 gain should be reported by the consolidated entity.