Advanced Accounting Joe Ben Hoyle 13e - Test Bank

Advanced Accounting Joe Ben Hoyle 13e – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

File: Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions

Multiple Choice:

[QUESTION]

On November 8, 2018, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. For consolidated financial statement reporting purposes, when must the gain on the sale of the land be recognized?
A) Proportionately over a designated period of years.
B) When Wood Co. sells the land to a third party.
C) No gain may be recognized.
D) As Wood uses the land.
E) When Wood Co. begins using the land productively.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

REFERENCE: 05-01

Edgar Co. acquired 60% of Stendall Co. on January 1, 2018. During 2018, Edgar made several sales of inventory to Stendall. The cost and sales price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2018. Consolidated cost of goods sold for 2018 was $2,140,000 due to a consolidating adjustment for intra-entity transfers less intra-entity gross profit in Stendall’s ending inventory.

[QUESTION]

REFER TO: 05-01

How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Stendall to Edgar?
A) Consolidated cost of goods sold would have remained $2,140,000.
B) Consolidated cost of goods sold would have been more than $2,140,000 because of the controlling interest in the subsidiary.
C) Consolidated cost of goods sold would have been less than $2,140,000 because of the noncontrolling interest in the subsidiary.
D) Consolidated cost of goods sold would have been more than $2,140,000 because of the noncontrolling interest in the subsidiary.
E) The effect on consolidated cost of goods sold cannot be predicted from the information provided.

Answer: A

Learning Objective: 05-02

Learning Objective: 05-05

Topic: Eliminate intra-entity sales and purchases

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $2,140,000 COGS is unaffected by intra-entity gross profits in Consolidated Ending Inventory value

[QUESTION]

REFER TO: 05-01

How would net income attributable to the noncontrolling interest be different if the transfers had been for the same amount and cost, but from Stendall to Edgar?
A) Net income attributable to the noncontrolling interest would have decreased by $6,000.
B) Net income attributable to the noncontrolling interest would have increased by $24,000.
C) Net income attributable to the noncontrolling interest would have increased by $20,000.
D) Net income attributable to the noncontrolling interest would have decreased by $18,000.
E) Net income attributable to the noncontrolling interest would have decreased by $56,000.

Answer: A

Learning Objective: 05-05

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $200,000 Revenue – $140,000 COGS = $60,000 Gross Profit on Intra-Entity Transfer × 25% (Amount in Ending Inventory) = $15,000 Reduction in consolidated net income.

Consolidation Adjustment to Net Income × 40% for Noncontrolling Interest = $6,000 Reduction in Net Income Attributable to the Noncontrolling Interest

[QUESTION]

On January 1, 2018, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods that cost $330,000. At year-end, Gallow owned 15% of the goods transferred. Gallow reported net income of $204,000, and Race’s net income was $806,000. Race decided to use the equity method to account for this investment. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest?
A) $ 3,600.
B) $22,800.
C) $30,900.
D) $32,900.
E) $40,800.

Answer: E

Learning Objective: 05-05

Topic: Noncontrolling interest―Downstream gross profit

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s Net Income $204,000 × .20 (Noncontrolling Interest) = $40,800

[QUESTION]

Webb Co. acquired 100% of Rand Inc. on January 5, 2018. During 2018, Webb sold goods to Rand for $2,400,000 that cost Webb $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of goods sold?
A) $17,200,000.
B) $15,040,000.
C) $14,800,000.
D) $15,400,000.
E) $14,560,000.

Answer: B

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Intra-Entity Gross Profit ($2,400,000 – $1,800,000) $600,000 × Intra-Entity Gross Profit Remaining in Ending Inventory (40%) = $240,000

Consolidated COGS = Parent’s COGS ($10,800,000) + Subsidiary’s COGS ($6,400,000) – COGS in Intra-Entity Transfer ($2,400,000) + Intra-Entity Gross Profit Deferred ($240,000) = $15,040,000

[QUESTION]

Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2017. During 2017, Gentry sold Gaspard Farms $625,000 of goods, which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2018, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000, and Gaspard Farms still owned 10% of the goods at year-end. For 2018, the cost of goods sold totaled $5,400,000 for Gentry, and $1,200,000 for Gaspard Farms. What was consolidated cost of goods sold for 2018?
A) $6,600,000.
B) $6,604,000.
C) $5,620,000.
D) $5,596,000.
E) $5,625,000.

Answer: D

Learning Objective: 05-02

Learning Objective: 05-04

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity inventory―Beginning and ending

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Intra-Entity Gross Profit ($1,000,000 – $800,000) $200,000 × Intra-Entity Gross Profit Remaining in Ending Inventory (10%) = $20,000.

Consolidated COGS = Parent’s COGS ($5,400,000) + Subsidiary’s COGS ($1,200,000) – Total COGS in Intra-Entity Transfer ($1,000,000) – Intra-Entity Gross Profit Deferred from 2017 ($24,000) + Intra-Entity Gross Profit Deferred from 2018 ($20,000) = $5,596,000

[QUESTION]

X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2018, Kent made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams’ inventory. Kent’s reported net income was $300,000. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest in Kent?
A) $90,000.
B) $85,200.
C) $54,000.
D) $94,800.
E) $86,640.

Answer: B

Learning Objective: 05-05

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s Net Income ($300,000) – Intra-Entity Gross Profit Deferred ($16,000) = $284,000 × Noncontrolling Interest (30%) = $85,200 Net Income Attributable to the Noncontrolling Interest

[QUESTION]

Justings Co. owned 80% of Evana Corp. During 2018, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. For purposes of the December 31, 2018 consolidated financial statements, at what amount should the land be reported?
A) $17,600.
B) $22,000.
C) $48,000.
D) $56,000.
E) $70,000.

Answer: C

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $48,000, the original book value of the Land. Any intra-entity profit from the transfer is eliminated.

[QUESTION]

Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2017, Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000. Thelma’s reported net income for 2017 was $119,000. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what is net income attributable to the noncontrolling interest?
A) $35,700.
B) $31,800.
C) $39,600.
D) $22,200.
E) $26,100.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Sales Price $45,000 – BV $32,000 = Intra-Entity Gain on Transfer That Is Deferred ($13,000)

Subsidiary’s Net Income ($ 119,000) – Deferred Intra-Entity Gain on Transfer ($13,000) = Adjusted Subsidiary Net Income ($106,000)

Noncontrolling Interest in Net Income = $106,000 × 30% Ownership Interest in Subsidiary = $31,800

REFERENCE: 05-02

Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2017, Clemente sold equipment to Snider for $125,000. The equipment cost Clemente $140,000. At the time of the transfer, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Both entities use the straight-line method of depreciation.

[QUESTION]

REFER TO: 05-02

At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2017?
A) $105,000.
B) $100,000.
C) $ 95,000.
D) $ 80,000.
E) $ 85,000.

Answer: D

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Sales Price $125,000 – BV $140, 000 = Loss on Transfer of $15,000, which is ignored.

Equipment is transferred at BV (Cost $140,000 – Accumulated Depreciation of $40,000) = $100,000 on transfer

Depreciation for 2017: $100,000 ÷ 5 = $20,000

Equipment Total Net of Depreciation: $100,000 − $20,000 = $80,000 BV at 12/31/2017.

[QUESTION]

REFER TO: 05-02

At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2018?
A) $110,000.
B) $105,000.
C) $100,000.
D) $ 90,000.
E) $ 60,000.

Answer: E

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Sales Price $125,000 – BV $140, 000 = Loss on Transfer of $15,000, which is ignored.

Equipment is transferred at BV (Cost $140,000 – Accumulated Depreciation $40,000) $100,000 – Depreciation for 2017 & 2018 ($100,000 / 5) $40,000 = $60,000 BV at 12/31/2018

[QUESTION]

During 2017, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. For consolidation reporting purposes, when is the $14,000 intra-entity gross profit recognized?
A) When goods are transferred to a third party by Lord.
B) When Lord pays Von for the goods.
C) When Von sold the goods to Lord.
D) When Lord receives the goods.
E) No gain can be recognized since the transfer was between related parties.

Answer: A

Learning Objective: 05-01

Topic: Why eliminate intra-entity transfers

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2017, Devin made frequent sales of inventory to Bauerly. There was deferred intra-entity gross profit of $40,000 in the beginning inventory and $25,000 of intra-entity gross profit at the end of the year. Devin reported net income of $137,000 for 2017. Bauerly decided to use the equity method to account for the investment. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what is the net income attributable to the noncontrolling interest for 2017?
A) $41,100.
B) $33,600.
C) $21,600.
D) $45,600.
E) $36,600.

Answer: D

Learning Objective: 05-04

Learning Objective: 05-05

Topic: Intra-entity inventory―Beginning and ending

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s Net Income $137,000 + Recognition of prior year Deferred Recognized Gross profit $40,000 – Deferred gross profit at end of the year $25,000 = $152,000 X Noncontrolling Interest 30% = $45,600 Net Income Attributable to the Noncontrolling Interest

[QUESTION]

Chain Co. owned all of the voting common stock of Shannon Corp. The corporations’ balance sheets dated December 31, 2017, include the following balances for land: for Chain–$416,000, and for Shannon–$256,000. On the original date of acquisition, the book value of Shannon’s land was equal to its fair value. On April 4, 2018, Chain sold to Shannon a parcel of land with a book value of $65,000. The selling price was $83,000. There were no other transfers, which affected the companies’ land accounts during 2017. What is the consolidated balance for land on the 2018 balance sheet?
A) $672,000.
B) $690,000.
C) $755,000.
D) $737,000.
E) $654,000.

Answer: A

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Land $416,000 + Subsidiary’s Land $256,000 = $672,000 – Any gain on the transfer is deferred until the parcel is sold outside the entity in the future.

[QUESTION]

Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in 2017 and $500,000 in 2018. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2018. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest for 2018?
A) $84,300.
B) $85,680.
C) $90,720.
D) $91,680.
E) $96,720.

Answer: C

Learning Objective: 05-04

Learning Objective: 05-05

Topic: Intra-entity inventory―Beginning and ending

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback:

Gross Profit Rate = Gross Profit ÷ COGS = GPR ÷ (1 – GPR) = 25% ÷ (1 + 25%) = .2

Intra-Entity Gross Profit = Transfer Price × GPR (.2)

Gross Profit 2017: 84,000 × 30% = $25,200

Gross Profit 2018: 100,000 × 30% = $30,000

Subsidiary’s Net Income ($912,000) + Intra-Entity Gross Profit in Ending Inventory for 2017 ($25,200) – Intra-Entity Gross Profit in 2018 Inventory Deferred ($30,000) = $907,200 × Noncontrolling Interest 10% = $90,720 Net Income Attributable to the Noncontrolling Interest

[QUESTION]

On January 1, 2018, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000, and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2018 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2018 would have been:
A) $144,000.
B) $148,375.
C) $109,000.
D) $134,000.
E) $139,625.

Answer: E

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Sales Price $115,000 – BV $80,000 = $35,000 Gain on Sale / 8yrs = $4,375 Annual Amortization of Unrealized Gain over Expected Useful Life of the Asset

Parent’s Depreciation $84,000 + Subsidiary’s Depreciation $60,000 – Annual amortization $4,375 = $139,625

[QUESTION]

Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2018. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario held $60,000 of the goods in its inventory at the end of the year. The amount of intra-entity gross profit for which recognition is deferred, and should therefore be eliminated in the consolidation process at the end of 2018, is:
A) $15,000.
B) $20,000.
C) $32,500.
D) $30,000.
E) $110,000.

Answer: B

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Intra-Entity Gross Profit ($390,000 – $260,000) $130,000 X Intra-Entity Gross Profit Remaining In Ending Inventory ($60,000 / $390,000) = $20,000

[QUESTION]

Prince Co. owned 80% of Kile Corp.’s common stock. During October 2018, Kile sold merchandise to Prince for $140,000. At December 31, 2018, 50% of this merchandise remained in Prince’s inventory. For 2018, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of intra-entity gross profit remaining in ending inventory at December 31, 2018 that should be eliminated in the consolidation process is:
A) $28,000.
B) $56,000.
C) $22,400.
D) $21,000.
E) $42,000.

Answer: A

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Intra-Entity Gross Profit ($140,000 X .40 (Kile GP Percentage)) $56,000 X Intra-Entity transfers Remaining In Ending Inventory (50%) = $28,000

REFERENCE: 05-03

Pot Co. holds 90% of the common stock of Skillet Co. During 2018, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000.

[QUESTION]

REFER TO: 05-03

Included in the amounts for Pot’s sales were Pot’s sales of merchandise to Skillet for $140,000. There were no intra-entity transfers from Skillet to Pot. Intra-entity transfers had the same markup as sales to outsiders. Skillet still held 40% of the intra-entity gross profit remaining in ending inventory at the end of 2018. What are consolidated sales and cost of goods sold, respectively for 2018?
A) $1,400,000 and $ 952,000.
B) $1,400,000 and $ 966,000.
C) $1,540,000 and $1,078,000.
D) $1,400,000 and $1,022,000.
E) $1,540,000 and $1,092,000.

Answer: B

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Sales = Parent’s Sales ($1,120,000) + Subsidiary’s Sales ($420,000) = $1,540,000 – Intra-Entity Transfers ($140,000) = $1,400,000

Consolidated COGS = Parent’s COGS ($840,000) + Subsidiary’s COGS ($252,000) – Total Intra-Entity Inventory transfers ($140,000) + Deferred Unrecognized Gross Profit ($14,000) = $966,000

[QUESTION]

REFER TO: 05-03

Included in the amounts for Skillet’s sales were intra-entity gross profits related to Skillet’s intra-entity transfer of merchandise to Pot for $140,000. There were no intra-entity transfers from Pot to Skillet. Intra-entity transfers had the same markup as sales to outsiders. Pot still had 40% of the intra-entity gross profit remaining in ending inventory at the end of 2018. What are consolidated sales and cost of goods sold for 2018?
A) $1,400,000 and $ 952,000.
B) $1,400,000 and $ 966,000.
C) $1,540,000 and $1,078,000.
D) $1,400,000 and $ 974,400.
E) $1,540,000 and $1,092,000.

Answer: D

Learning Objective: 05-02

Learning Objective: 05-05

Topic: Eliminate intra-entity sales and purchases

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Sales = Parent’s Sales ($1,120,000) + Subsidiary’s Sales ($420,000) = $1,540,000 – Intra-Entity Transfers ($140,000) = $1,400,000

Consolidated COGS = Parent’s COGS ($840,000) + Subsidiary’s COGS ($252,000) – Total Intra-Entity Gross Profit Remaining in Ending Inventory ($140,000) + Intra-Entity Gross Profit Deferred ($22,400) = $974,400

[QUESTION]

REFER TO: 05-03

Included in the amounts for Pot’s sales were Pot’s sales for merchandise to Skillet for $140,000. There were no sales from Skillet to Pot. Intra-entity transfers had the same markup as sales to outsiders. Skillet had resold all of the intra-entity transfers (purchases) from Pot to outside parties during 2018. What are consolidated sales and cost of goods sold for 2018?
A) $1,400,000 and $952,000.
B) $1,400,000 and $1,092,000.
C) $1,540,000 and $952,000.
D) $1,400,000 and $1,232,000.
E) $1,540,000 and $1,092,000.

Answer: A

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Feedback: Consolidated Sales = Parent’s Sales $1,120,000 + Subsidiary’s sales $420,000 = $1,540,000 – Intra-Entity Transfers $140,000 = $1,400,000

Consolidated COGS = Parent’s COGS $840,000 + Subsidiary’s COGS $252,000 – Total Intra-Entity Transfers $140,000 = $952,000

[QUESTION]

Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2016, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2018, Dalton sold this building to Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected salvage value. For consolidation purposes, what is the Excess Depreciation (ED entry) for this building for 2018?
A) Accumulated Depreciation 7,000

Depreciation expense 7,000

B) Accumulated Depreciation 4,900

Depreciation Expense 4,900

C) Depreciation Expense 7,000

Accumulated Depreciation 7,000

D) Depreciation Expense 4,900

Accumulated Depreciation 4,900

E) Accumulated Depreciation 42,000

Depreciation Expense 42,000

Answer: A

Difficulty: 2 Medium

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Blooms: Apply

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Transfer Cost $392,000 / 8yrs. = $49,000 Annual Depreciation by Shrugs

Dalton: Book Value of Cost ($420,000) less accumulated depreciation ($420,000 ÷ 10 years = $42,000

Depreciation expense should be decreased by $7,000.

REFERENCE: 05-04

On January 1, 2018, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong’s stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong’s books by $35,000. Any remaining excess was attributable to goodwill, which has not been impaired.

As of December 31, 2018, before preparing the consolidated worksheet, the financial statements appeared as follows:

	Pride, Inc.	Strong Corp.
Revenues	$ 420,000	$280,000
Cost of goods sold	(196,000)	(112,000)
Operating expenses	(28,000)	(14,000)
Net income	$ 196,000	$154,000

Retained earnings, 1/1/18	$ 420,000	$210,000
Net income (above)	196,000	154,000
Dividends paid	0	0
Retained earnings, 12/31/18	$ 616,000	$364,000

Cash and receivables	$ 294,000	$126,000
Inventory	210,000	154,000
Investment in Strong Corp	364,000	0
Equipment (net)	616,000	420,000
Total assets	$1,484,000	$700,000

Liabilities	$ 588,000	$196,000
Common stock	280,000	140,000
Retained earnings, 12/31/18 (above)	616,000	364,000
Total liabilities and stockholders’ equity	$1,484,000	$700,000

During 2018, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of the inventory purchase price had been remitted to Pride by Strong at year-end. As of December 31, 2018, 60% of these goods remained in the company’s possession.

[QUESTION]

REFER TO: 05-04

What is the total of consolidated revenues?
A) $700,000.
B) $644,000.
C) $588,000.
D) $560,000.
E) $840,000.

Answer: D

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Revenue ($420,000) + Subsidiary’s Revenue ($280,000) – Intra-Entity Transfers ($140,000) = $560,000

[QUESTION]

REFER TO: 05-04

What is the total of consolidated operating expenses?
A) $42,000.
B) $47,600.
C) $53,200.
D) $49,000.
E) $35,000.

Answer: D

Learning Objective: 05-01

Topic: Coverage of prior chapters

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Operating Expenses ($28,000) + Subsidiary’s Operating Expenses ($14,000) + Excess Amortization on Equipment (($35,000 / 5) $7,000) = $49,000

[QUESTION]

REFER TO: 05-04

What is the total of consolidated cost of goods sold?
A) $196,000.
B) $212,800.
C) $184,800.
D) $203,000.
E) $168,000.

Answer: C

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated COGS = Parent’s COGS ($196,000) + Subsidiary’s COGS ($112,000) – Total Intra-Entity Transfer ($140,000) + Intra-Entity Transfer Goods Remaining in Ending Inventory ($28,000 X .60 = $16,800) = $184,800

[QUESTION]

REFER TO: 05-04

What is the consolidated total of noncontrolling interest appearing in the balance sheet?
A) $100,800.
B) $ 97,440.
C) $ 93,800.
D) $120,400.
E) $117,040.

Answer: D

Learning Objective: 05-01

Learning Objective: 05-05

Difficulty: 2 Medium

Topic: Coverage of prior chapters

Topic: Noncontrolling interest―Downstream gross profit

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: [$364,000 / 80% = $455,000 + Net Income ($154,000 – $7,000) $147,000] $602,000 X .20 = $120,400

[QUESTION]

REFER TO: 05-04

What is the consolidated total for equipment (net) at December 31, 2018?
A) $ 952,000.
B) $1,058,400.
C) $1,069,600.
D) $1,064,000.
E) $1,066,800.

Answer: D

Learning Objective: 05-07

Topic: Coverage of prior chapters

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: BV Parent’s Equipment $616,000 + BV Subsidiary’s Equipment $420,000 + FV Equipment Increase at Acquisition $35,000 – First Year Excess Amortization of FV ($35,000 /5) $7,000 = $1,064,000

[QUESTION]

REFER TO: 05-04

What is the consolidated total for inventory at December 31, 2018?
A) $336,000.
B) $280,000.
C) $364,000.
D) $347,200.
E) $349,300.

Answer: D

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: BV Parent’s Inventory $210,000 + BV Subsidiary’s Inventory $154,000 – Deferred Recognition of Intra-Entity Gross Profit on Inventory Transfer ($28,000 X .60) $16,800 = $347,200

REFERENCE: 05-05

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2017. Carter sells one-third of the inventory in 2017.

[QUESTION]

REFER TO: 05-05

In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate the intra-entity transfer of inventory?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Strickland Company.
E)

Answer: E

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-05

In the consolidation worksheet for 2017, which of the following accounts would be credited to eliminate the intra-entity transfer of inventory?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Strickland Company.
E) Sales.

Answer: B

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-05

In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Strickland Company.
E) Sales.

Answer: B

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-05

In the consolidation worksheet for 2017, which of the following accounts would be credited to defer unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Strickland Company.
E) Sales.

Answer: C

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-05

In the consolidation worksheet for 2018, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following accounts would be debited to defer unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Strickland Company.
E) Sales.

Answer: A

Learning Objective: 05-04

Topic: Intra-entity transfer using initial value method

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-05

In the consolidation worksheet for 2018, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following accounts would be credited to defer recognition of intra-entity gross profit with regard to the 2017 intra-entity transfers?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Strickland Company.
E) Sales.

Answer: B

Learning Objective: 05-04

Topic: Intra-entity transfer using initial value method

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

REFERENCE: 05-06

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2017. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting..

[QUESTION]

REFER TO: 05-06

In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate the intra-entity transfer of inventory?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.

Answer: E

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-06

In the consolidation worksheet for 2017, which of the following accounts would be credited to eliminate the intra-entity transfer of inventory?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.

Answer: B

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-06

In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.

Answer: B

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-06

In the consolidation worksheet for 2017, which of the following accounts would be credited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.

Answer: C

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-06

In the consolidation worksheet for 2018, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.

Answer: D

Learning Objective: 05-04

Topic: Intra-entity gross profit―Year after transfer

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-06

In the consolidation worksheet for 2018, which of the following accounts would be credited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.

Answer: B

Learning Objective: 05-04

Topic: Intra-entity gross profit―Year after transfer

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Which of the following statements is true regarding an intra-entity transfer of land?
A) A loss is always recognized but a gain is deferred in a consolidated income statement.
B) A loss and a gain are deferred until the land is sold to an outside party.
C) A loss and a gain are always recognized in a consolidated income statement.
D) A gain is always recognized but a loss is deferred in a consolidated income statement.
E) Recognition of a gain or loss is deferred by adjusting stockholders’ equity through comprehensive income.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Parent sold land to its subsidiary resulting in a gain in 2016, the year of transfer. The subsidiary sold the land to an unrelated third party for a gain in 2019. Which of the following statements is true?
A) A gain will be recognized in the consolidated income statement in 2016.
B) A gain will be recognized in the consolidated income statement in 2019.
C) No gain will be recognized in the 2019 consolidated income statement.
D) Only the parent company will recognize a gain in 2019.
E) The subsidiary will recognize a gain in 2016.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

An intra-entity transfer of a depreciable asset took place whereby the transfer price exceeded the book value of the asset. Which statement is true with respect to the year following the year in which the transfer occurred?
A) A worksheet entry is made with a debit to gain for a downstream transfer.
B) A worksheet entry is made with a debit to gain for an upstream transfer.
C) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method.
D) A worksheet entry is made with a debit to retained earnings for a downstream transfer, regardless of the method used account for the investment.
E) No worksheet entry is necessary.

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

An intra-entity transfer took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year after the year of transfer?
A) A worksheet entry is made with a debit to retained earnings for an upstream transfer.
B) A worksheet entry is made with a credit to retained earnings for an upstream transfer.
C) A worksheet entry is made with a debit to retained earnings for a downstream transfer.
D) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer.
E) No worksheet entry is necessary.

Answer: B

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

An intra-entity transfer took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year subsequent to the year of transfer?
A) A worksheet entry is made with a debit to investment in subsidiary for an upstream transfer.
B) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer.
C) A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity method.
D) A worksheet entry is made with a debit to retained earnings for an upstream transfer, regardless of the method used to account for the investment.
E) No worksheet entry is necessary.

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 3 Hard

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Which of the following statements is true concerning an intra-entity transfer of a depreciable asset?
A) Net income attributable to the noncontrolling interest is never affected by a gain on the transfer.
B) Net income attributable to the noncontrolling interest is always affected by a gain on the transfer.
C) Net income attributable to the noncontrolling interest is affected by a downstream gain only.
D) Net income attributable to the noncontrolling interest is affected only when the transfer is upstream.
E) Net income attributable to the noncontrolling interest is increased by an upstream gain in the year of transfer.

Answer: D

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

REFERENCE: 05-07

Gargiulo Company, a 90% owned subsidiary of Posito Corporation, transfers inventory to Posito at a 25% gross profit rate. The following data are available pertaining specifically to Posito’s intra-entity purchases from Gargiulo. Gargiulo was acquired on January 1, 2017.

	2017	2018	2019
Purchases by Posito	$8,000	$12,000	$15,000
Ending inventory on Posito’s books	1,200	4,000	3,000

Assume the equity method is used. The following data are available pertaining to Gargiulo’s income and dividends.

	2017	2018	2019
Gargiulo’s net income	$70,000	$85,000	$94,000
Dividends paid by Gargiulo	10,000	10,000	15,000

[QUESTION]

REFER TO: 05-07

Compute the equity in earnings of Gargiulo reported on Posito’s books for 2017.
A) $63,000.
B) $62,730.
C) $63,270.
D) $70,000.
E) $62,700.

Answer: B

Learning Objective: 05-03

Learning Objective: 05-05

Topic: Intra-entity ending inventory―Year of transfer

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Part of Net Income for 2017 ($70,000 X .90) $63,000 – Earnings Adjustment for Intra-Entity Gross profit on Which Recognition is Deferred for Subsidiary for 2017 ($1,200 X .25 X .90) $270 = $62,730

[QUESTION]

REFER TO: 05-07

Compute the equity in earnings of Gargiulo reported on Posito’s books for 2018.
A) $76,500.
B) $77,130.
C) $75,870.
D) $75,600.
E) $75,800.

Answer: C

Learning Objective: 05-04

Learning Objective: 05-05

Topic: Intra-entity inventory―Beginning and ending

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Part of Net Income for 2018 (($85,000 X .90) $76,500) – Earnings Adjustment for Intra-Entity Gross Profit Remaining in Ending Inventory of Subsidiary for 2018 ($4,000 X .25 X .90 = $900) + Recognition of Intra-Entity Gross Profit of Subsidiary for 2017 ($270) = $75,870

[QUESTION]

REFER TO: 05-07

Compute the equity in earnings of Gargiulo reported on Posito’s books for 2019.
A) $84,600.
B) $84,375.
C) $83,925.
D) $84,825.
E) $84,850.

Answer: D

Learning Objective: 05-04

Learning Objective: 05-05

Topic: Intra-entity inventory―Beginning and ending

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Part of Net Income 2019 ($94,000 X .90 = $84,600) – Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2019 ($3,000 X .25 X .90 = $675) + Gross Profit Recognized with respect to Subsidiary for 2018 ($900) = $84,825

[QUESTION]

REFER TO: 05-07

Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute the net income attributable to the noncontrolling interest of Gargiulo for 2017.
A) $6,970.
B) $7,000.
C) $7,030.
D) $6,270.
E) $6,230.

Answer: A

Learning Objective: 05-05

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Part of Net Income for 2017 ($70,000 X .10 = $7,000) – Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2017 ($1,200 X .25 X .10 = $30) = $6,970

[QUESTION]

REFER TO: 05-07

Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute the net income attributable to the noncontrolling interest of Gargiulo for 2018.
A) $8,500.
B) $8,570.
C) $8,430.
D) $8,400.
E) $7,580.

Answer: C

Learning Objective: 05-05

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Part of Net Income for 2018 ($85,000 X .10 = $8,500) – Earnings Adjustment for Unrecognized gross profit of Subsidiary for 2018 ($4,000 X .25 X .10 = $100) + Recognized Gross profit of Subsidiary for 2017 ($30) = $8,430

[QUESTION]

REFER TO: 05-07

Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute the net income attributable to the noncontrolling interest of Gargiulo for 2019.
A) $9,400.
B) $9,375.
C) $9,425.
D) $9,325.
E) $8,485.

Answer: C

Learning Objective: 05-05

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Part of Net Income for 2019 ($94,000 X .10 = $9,400) – Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2019 ($3,000 X .25 X .10 = $75) + Recognized Gross profit of Subsidiary for 2018 ($100) = $9,425

[QUESTION]

REFER TO: 05-07

For consolidation purposes, what amount would be debited to cost of goods sold for the 2017 consolidation worksheet with regard to unrecognized intra-entity gross profit remaining in ending inventory with respect to the transfer of merchandise?
A) $
B) $
C) $2,000.
D) $1,600.
E) $

Answer: A

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Analyze

Blooms: Apply

AACSB: Analytical Thinking

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2017 ($1,200 X .25 = $300)

[QUESTION]

REFER TO: 05-07

For consolidation purposes, what amount would be debited to cost of goods sold for the 2018 consolidation worksheet with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2018 transfer of merchandise?
A) $1,000.
B) $
C) $3,000.
D) $2,400.
E) $

Answer: A

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Analyze

Blooms: Apply

AACSB: Analytical Thinking

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2018 ($4,000 X .25 = $1,000)

[QUESTION]

REFER TO: 05-07

For consolidation purposes, what amount would be debited to cost of goods sold for the 2019 consolidation worksheet with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2019 intra-entity transfer of merchandise?
A) $
B) $
C) $3,760.
D) $3,000.
E) $

Answer: B

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Analyze

Blooms: Apply

AACSB: Analytical Thinking

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2019 ($3,000 X .25 = $750)

[QUESTION]

REFER TO: 05-07

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2017 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2017 intra-entity transfer of merchandise?
A) $
B) $1,600.
C) $
D) $
E) $

Answer: A

Learning Objective: 05-04

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 1 Easy

Blooms: Apply

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Zero — No Earnings Adjustment would be necessary in January 2017

[QUESTION]

REFER TO: 05-07

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2018 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2017 intra-entity transfer of merchandise?
A) $
B) $
C) $2,000.
D) $1,600.
E) $

Answer: B

Learning Objective: 05-04

Topic: Intra-entity gross profit―Year after transfer

Difficulty: 2 Medium

Blooms: Analyze

Blooms: Apply

AACSB: Analytical Thinking

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Realized Gross profit of Subsidiary 2017 ($1,200 X .25 = $300)

[QUESTION]

REFER TO: 05-07

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2019 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2018 intra-entity transfer of merchandise?
A) $3,000.
B) $2,400.
C) $1,000.
D) $
E) $

Answer: C

Learning Objective: 05-04

Topic: Intra-entity gross profit―Year after transfer

Difficulty: 2 Medium

Blooms: Analyze

Blooms: Apply

AACSB: Analytical Thinking

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Recognized Gross profit of Subsidiary with respect to 2018 ($4,000 X .25 = $1,000)

REFERENCE: 05-08

Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory.

[QUESTION]

REFER TO: 05-08

Compute consolidated sales.
A) $10,000,000.
B) $10,126,000.
C) $10,140,000.
D) $10,200,000.
E) $10,260,000.

Answer: C

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Sales = Parent’s Sales $10,000,000 + Subsidiary’s sales $200,000 = $10,200,000 – Intra-Entity Transfers $60,000 = $10,140,000

[QUESTION]

REFER TO: 05-08

Compute consolidated cost of goods sold.
A) $7,500,000.
B) $7,600,000.
C) $7,615,000.
D) $7,604,500.
E) $7,660,000.

Answer: D

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated COGS = Parent’s COGS $7,500,000 + Subsidiary’s COGS $160,000 – Total Intra-Entity Transfer $60,000 + Deferred Unrecognized Intra-Entity Gross Profit ($15,000 X .30) $4,500 = $7,604,500

[QUESTION]

REFER TO: 05-08

Assume the same information, except Shannon sold inventory to Patti. Compute consolidated sales.
A) $10,000,000.
B) $10,126,000.
C) $10,140,000.
D) $10,200,000.
E) $10,260,000.

Answer: C

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Sales = Parent’s Sales $10,000,000 + Subsidiary’s sales $200,000 = $10,200,000 – Intra-Entity Transfers $60,000 = $10,140,000

REFERENCE: 05-09

Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2017. On January 1, 2017, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years.

On April 1, 2017 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon’s income and dividends declared:

	2017	2018	2019
Net income	$100,000	$120,000	$130,000
Dividends declared	40,000	50,000	60,000

[QUESTION]

REFER TO: 05-09

What amount should be recorded on Wilson’s books as gain on the transfer of equipment, prior to preparing consolidating entries?
A) $19,500.
B) $18,250.
C) $11,750.
D) $38,250.
E) $37,500.

Answer: A

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: January 1, 2017 BV $50,000 / 10yrs Expected Useful Life = $5,000 per year Depreciation Expense. Sale on April 1, 2017 required Three Months Depreciation Expense leaving a BV on Sale of $48,750. Sale Price of $68,250 – BV on Sale of $48,750 = $19,500 Gain on Sale

[QUESTION]

REFER TO: 05-09

Compute the amortization of gain through a depreciation adjustment for 2017 for consolidation purposes.
A) $1,950.
B) $1,825.
C) $1,500.
D) $2,000.
E) $5,250.

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Amortization of Gain on Transfer of Equipment = $19,500 Gain / 9yrs 9 mos. Remaining Useful Life = $2,000 per year X 9 mos. of 2017 = $1,500 Depreciation Adjustment for 2017

[QUESTION]

REFER TO: 05-09

Compute the amortization of gain through a depreciation adjustment for 2018 for consolidation purposes.
A) $1,950.
B) $1,825.
C) $2,000.
D) $1,500.
E) $7,000.

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Amortization of Gain on Transfer of Equipment = $19,500 Gain / 9yrs 9 mos. Remaining Useful Life = $2,000 per year X 12 mos. of 2018 = $2,000 Depreciation Adjustment for 2018

[QUESTION]

REFER TO: 05-09

Compute the amortization of gain through a depreciation adjustment for 2019 for consolidation purposes.
A) $1,925.
B) $1,825.
C) $2,000.
D) $1,500.
E) $7,000.

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Amortization of Gain on Transfer of Equipment = $19,500 Gain / 9yrs 9 mos. Remaining Useful Life = $2,000 per year X 12 mos. of 2019 = $2,000 Depreciation Adjustment for 2019

[QUESTION]

REFER TO: 05-09

Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute Wilson’s share of income from Simon for consolidation for 2017.
A) $72,000.
B) $90,000.
C) $73,575.
D) $73,800.
E) $72,500.

Answer: B

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Share of Subsidiary Net Income 2017 ($100,000 X .90) = $90,000

[QUESTION]

REFER TO: 05-09

Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute Wilson’s share of income from Simon for consolidation for 2018.
A) $108,000
B) $110,000.
C) $106,000.
D) $109,825.
E) $109,800.

Answer: A

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Share of Subsidiary Net Income 2018 ($120,000 X .90) = $108,000

[QUESTION]

REFER TO: 05-09

Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute Wilson’s share of income from Simon for consolidation for 2019.
A) $118,825.
B) $115,000.
C) $117,000.
D) $119,000.
E) $118,800.

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Share of Subsidiary Net Income 2019 ($130,000 X .90) = $117,000

REFERENCE: 05-10

On January 1, 2017, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder’s records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2017 and 2018, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes.

[QUESTION]

REFER TO: 05-10

What amount of gain should be reported by Smeder Company relating to the equipment for 2017 prior to making consolidating entries?
A) $36,000.
B) $34,000.
C) $12,000.
D) $10,000.
E) $

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: January 1, 2017 Sale Price on Transfer $84,000 – BV $72,000 = $12,000 Gain on Sale

[QUESTION]

REFER TO: 05-10

Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what amount of this gain should be recognized for consolidation purposes for 2017?
A) $12,000.
B) $9,600.
C) $8,400.
D) $2,000.
E) $1,200.

Answer: D

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Deferred Gain on Transfer $12,000 divided by 6 years remaining equals $2,000 Amortization of Gain per year.

[QUESTION]

REFER TO: 05-10

For consolidation purposes, what net debit or credit will be made for the year 2017 relating to the accumulated depreciation for the equipment transfer?
A) Debit accumulated depreciation, $46,000.
B) Debit accumulated depreciation, $48,000.
C) Credit accumulated depreciation, $48,000.
D) Credit accumulated depreciation, $46,000.
E) Debit accumulated depreciation, $2,000.

Answer: D

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Accumulated Depreciation $48,000 – Amortization of Gain for First Year $2,000 = $46,000 Credit to Accumulated Depreciation for 2017

[QUESTION]

REFER TO: 05-10

What is the net effect on net income as a result of consolidating adjustments made in 2017 with respect to the equipment transfer?
A) Increase net income by $2,000.
B) Decrease net income by $12,000.
C) Decrease net income by $10,000.
D) Decrease net income by $14,000.
E) Increase net income by $10,000.

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Deferred Recognition of Gain on Transfer $12,000 – Amortization of Gain for First Year $2,000 = $10,000 Decrease in Net Income for 2017

REFERENCE: 05-11

Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2017, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2017 and 2018, respectively. Leo uses the equity method to account for its investment.

[QUESTION]

REFER TO: 05-11

Compute the gain or loss on the intra-entity transfer of land that should be reported on the books of Stiller prior to consolidation.
A) $15,000 loss.
B) $15,000 gain.
C) $50,000 loss.
D) $50,000 gain.
E) $65,000 gain.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s Land Transfer Value $75,000 – Subsidiary’s Land BV $60,000 = $15,000 Gain on Intra-Entity Sale of Land

[QUESTION]

REFER TO: 05-11

On a consolidation worksheet, what adjustment would be made for 2017 regarding the land transfer?
A) Debit gain for $50,000.
B) Credit gain for $50,000.
C) Debit land for $15,000.
D) Credit land for $15,000.
E) Credit gain for $15,000.

Answer: D

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Credit the Land account for the Gain of $15,000, with any realized gain on the transfer deferred until the parcel is sold outside the entity in the future

[QUESTION]

REFER TO: 05-11

On a consolidation worksheet, having used the equity method, what adjustment would be made for 2018 regarding the land transfer?
A) Debit retained earnings for $15,000.
B) Credit retained earnings for $15,000.
C) Debit retained earnings for $50,000.
D) Credit retained earnings for $50,000.
E) Debit investment in Stiller for $15,000.

Answer: E

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Debit the Investment account for the Gain of $15,000, with any recognition of intra-entity gain on the transfer deferred until the parcel is sold outside the entity in the future.

[QUESTION]

REFER TO: 05-11

Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stiller on Leo’s books for 2017.
A) $110,000
B) $100,000.
C) $125,000.
D) $ 85,000.
E) $ 88,000.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Share of Subsidiary Net Income 2017 ($125,000 X .80) = $100,000

[QUESTION]

REFER TO: 05-11

Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stiller on Leo’s books for 2018.
A) $140,000.
B) $ 97,000.
C) $125,000.
D) $100,000.
E) $112,000.

Answer: E

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Share of Subsidiary Net Income 2018 ($140,000 X .80) = $112,000

REFERENCE: 05-12

Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2017, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2017, 2018, and 2019, respectively. Parker sold the land purchased from Stark in 2017 for $92,000 in 2019. Both companies use the equity method of accounting.

[QUESTION]

REFER TO: 05-12

Compute the gain or loss reported on Stark’s books prior to consolidation from the intra-entity transfer of land in 2017.
A) $80,000 gain.
B) $80,000 loss.
C) $ 5,000 gain.
D) $ 5,000 loss.
E) $85,000 loss.

Answer: D

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s Land Transfer Value $80,000 – Parent’s Land BV $85,000 = $5,000 Loss on Intra-Entity Transfer of Land

[QUESTION]

REFER TO: 05-12

Which of the following will be included in a consolidation entry for 2017?
A) Debit loss for $5,000.
B) Credit loss for $5,000.
C) Credit land for $5,000.
D) Debit gain for $5,000.
E) Credit gain for $5,000.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-12

Which of the following will be included in a consolidation entry for 2018?
A) Debit retained earnings for $5,000.
B) Credit retained earnings for $5,000.
C) Debit investment in subsidiary for $5,000.
D) Credit investment in subsidiary for $5,000.
E) Credit land for $5,000.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-12

Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker’s books for 2017.
A) $205,000.
B) $200,000.
C) $180,000.
D) $175,500.
E) $184,500.

Answer: E

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Share of Subsidiary Net Income for 2017 ($200,000 X .90) = $180,000 + (Adjusted Loss on Land $5,000 X .90) $4,500 = $184,500

[QUESTION]

REFER TO: 05-12

Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker’s books for 2018.
A) $185,000.
B) $157,500.
C) $166,500.
D) $162,000.
E) $180,000.

Answer: D

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Share of Subsidiary Net Income for 2018 ($180,000 X .90) = $162,000

[QUESTION]

REFER TO: 05-12

Compute Parker’s reported gain or loss on its internal accounting records prior to consolidation relating to the land for 2019.
A) $12,000 gain.
B) $ 5,000 loss.
C) $12,000 loss.
D) $ 7,000 gain.
E) $ 7,000 loss.

Answer: A

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s Sale Price $92,000 – BV of Land $80,000 = $12,000

[QUESTION]

REFER TO: 05-12

Compute Stark’s reported gain or loss relating to the land for 2019.
A) $5,000 loss.
B) $5,000 gain.
C) $7,000 loss.
D) $7,000 gain.
E) $

Answer: E

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Stark recognizes no Gain or Loss at the time of Sale by Parker

[QUESTION]

REFER TO: 05-12

Compute the gain or loss relating to the land that will be reported in consolidated net income for 2019.
A) $ 5,000 loss.
B) $ 7,000 gain.
C) $12,000 gain.
D) $ 7,000 loss.
E) $12,000 loss.

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: The recognized gain of $12,000 created by the intra-entity transfer is offset by the recognition of a Deferred Loss on the Original Transfer (of $5,000) resulting in a net $7,000 Gain recognized and reported in Consolidated Net Income

[QUESTION]

REFER TO: 05-12

Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker’s books for 2019.
A) $204,300.
B) $202,500.
C) $193,500.
D) $191,700.
E) $198,000.

Answer: C

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Share of Subsidiary Net Income 2019 $220,000 – Loss Adjustment of ($5,000) on Disposal of Land = $215,000 X .90 = $193,500

REFERENCE: 05-13

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2017. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2017 and 2018, respectively. Pepe uses the equity method to account for its investment in Devin.

[QUESTION]

REFER TO: 05-13

What is the gain or loss on equipment recognized by Devin on its internal accounting records for 2017?
A) $54,000 gain.
B) $21,000 loss.
C) $21,000 gain.
D) $ 9,000 loss.
E) $ 9,000 gain.

Answer: D

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s Equipment Transfer Value $45,000 – Parent’s Equipment BV $54,000 = $9,000 Loss on Intra-Entity Transfer of Equipment

[QUESTION]

REFER TO: 05-13

What is the consolidated gain or loss on equipment for 2017?
A) $
B) $ 9,000 gain.
C) $ 9,000 loss.
D) $21,000 gain.
E) $21,000 loss.

Answer: A

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: There is No Consolidated Gain/Loss Recognized on the Transfer in 2017

[QUESTION]

REFER TO: 05-13

Assuming there are no excess amortizations or other intra-entity transactions, Compute the income from Devin reported on Pepe’s books for 2017.
A) $174,600.
B) $184,800.
C) $172,000.
D) $171,000.
E) $180,000.

Answer: B

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s 2017 Income ($300,000) + Unrecognized Loss on Transferred Equipment ($9,000) – First Annual Recognition of Loss ($1,000) = $308,000 X .60 = $184,800 Subsidiary’s Net Income Recognized by Parent in Consolidated Financial Statements

[QUESTION]

REFER TO: 05-13

Assuming there are no excess amortizations or other intra-entity transactions, Compute the income from Devin reported on Pepe’s books for 2018.
A) $190,200.
B) $196,000.
C) $194,400.
D) $187,000.
E) $195,000.

Answer: C

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s 2018 Income ($325,000) – Second Year Recognition of Loss ($1,000) = $324,000 X .60 = $194,400 Subsidiary’s Net Income Reported by Parent

[QUESTION]

REFER TO: 05-13

Assuming there are no excess amortizations or other intra-entity transactions, Compute the net income attributable to the noncontrolling interest of Devin for 2017.
A) $116,400.
B) $120,400.
C) $120,000.
D) $123,200.
E) $112,000.

Answer: D

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s 2017 Income ($300,000) + Unrecognized Loss on Transferred Equipment ($9,000) – First Annual Recognition of Loss ($1,000) = $308,000 X .40 = $123,200 Net Income Attributable to the Noncontrolling Interest

[QUESTION]

REFER TO: 05-13

Assuming there are no excess amortizations or other intra-entity transactions, compute the net income attributable to the noncontrolling interest of Devin for 2018.
A) $126,800.
B) $130,000.
C) $122,000.
D) $130,800.
E) $129,600.

Answer: E

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Subsidiary’s 2018 Income ($325,000) – Second Year Recognition of Loss ($1,000) = $324,000 X .40 = $129,600 Net Income Attributable to the Noncontrolling Interest

Essay:

[QUESTION]

For each of the following situations (1 – 10), select the correct entry (A – E) that would be required on a consolidation worksheet.

(A) Debit retained earnings.

(B) Credit retained earnings.

(D) Credit investment in subsidiary.

(E) None of these answer choices are correct.

___ 1. Upstream beginning intra-entity gross profit on inventory, using the initial value method of accounting.

___ 2. Downstream beginning intra-entity gross profit on inventory, using the initial value method of accounting.

___ 3. Upstream ending intra-entity gross profit on inventory, using the initial value method of accounting.

___ 4. Downstream ending intra-entity gross profit on inventory, using the initial value method of accounting.

___ 5. Upstream transfer of depreciable assets, in the period after transfer, where subsidiary recognizes a gain, using the initial value method of accounting.

___ 6. Downstream transfer of depreciable assets, in the period after transfer, where parent recognizes a gain, using the initial value method of accounting.

___ 7. Upstream transfer of land, in the period after transfer, where subsidiary recognizes a loss, using the initial value method of accounting.

___ 8. Downstream transfer of land, in the period after transfer, where parent recognizes a loss, using the initial value method of accounting.

___ 9. Eliminate income from subsidiary, recorded under the equity method of accounting.

___ 10. Eliminate recorded amortization of acquisition-date fair value over book value, recorded under the equity method of accounting.

Answer: (1.) A; (2.) A; (3.) E; (4.) E; (5.) A; (6.) A; (7.) B; (8.) B; (9.) D; (10.) C.

Learning Objective: 05-03

Learning Objective: 05-04

Learning Objective: 05-06

Learning Objective: 05-07

Topic: Intra-entity ending inventory―Year of transfer

Topic: Intra-entity gross profit―Year after transfer

Topic: Coverage of prior chapters

Topic: Intra-entity transfer using initial value method

Topic: Intra-entity transfer of land

Topic: Intra-entity transfer of depreciable asset

Difficulty: 3 Hard

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

On April 7, 2018, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated financial statement point of view, when will the gain on this transfer actually be recognized?

Answer: The gain is recognized when Shannahan sells the land to a third party.

Learning Objective: 05-01

Topic: Why eliminate intra-entity transfers

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Throughout 2018, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated financial statement point of view, when will the gross profit on this transfer be recognized?

Answer: The gross profit is recognized when Leeward uses the goods or sells them to a third party.

Learning Objective: 05-01

Topic: Why eliminate intra-entity transfers

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2018. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transfer be accounted for by the consolidated entity?

Answer: Caleb and Varton are in substance one entity; although in legal form they are separate. The “sale” of land by Varton should be regarded as intra-entity transfer. No gain on the transfer should be recognized in the consolidated financial statements since the intra-entity transferis merely the internal movement of asset, an event that creates no net change in the financial position of the business combination taken as a whole.. Because Caleb recognized a gain in its income statement, the consolidation process must eliminate the gain. Also, Caleb’s separate balance sheet showed the land at an amount greater than its cost to the combined entity. The consolidation entry must reduce land to its cost.

Learning Objective: 05-01

Learning Objective: 05-06

Topic: Why eliminate intra-entity transfers

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

During 2018, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned the entire amount of inventory purchased at the end of 2018. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2018?

Answer: A sale of inventory by a subsidiary to its parent is more accurately understood as a transfer within the entity. Since Forsyth still owned the inventory at the end of the year, the intra-entity transferis merely the internal movement of asset, an event that creates no net change in the financial position of the business combination taken as a whole. If recognition of the gross profit on the transfer was allowed, the parent would be able to manipulate consolidated net income and consolidated net assets by transferring inventory between parent and subsidiary.

Learning Objective: 05-01

Learning Objective: 05-03

Topic: Why eliminate intra-entity transfers

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

How does a gain on an intra-entity transfer of equipment affect the calculation of a noncontrolling interest?

Answer: If the equipment is sold by the parent to the subsidiary, the transfer of the equipment does not affect the calculation of the noncontrolling interest’s share of the subsidiary’s net income. When the sale of equipment is upstream, the gain on the sale must be subtracted from the subsidiary’s income, and this elimination may be allocated between the controlling interest and noncontrolling interest share of the subsidiary’s earnings.

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

How do upstream and downstream inventory transfers differ in their effect in a year-end consolidation?

Answer: If the sale of inventory is downstream (from parent to subsidiary), any unrecognized gross profit on the transfer does not affect the calculation of noncontrolling interest. When the transfer is upstream (from the subsidiary to the parent), the gross profit on the transfer is associated with the subsidiary. The gross profit on goods that the parent still owns should be deducted from the subsidiary’s income which may be allocated between the controlling interest and the noncontrolling interest’s share of the subsidiary’s earnings.

Learning Objective: 05-03

Learning Objective: 05-05

Topic: Intra-entity ending inventory―Year of transfer

Topic: Noncontrolling interest―Upstream gross profit

Topic: Noncontrolling interest―Downstream gross profit

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

How is the gain on an intra-entity transfer of a depreciable asset recognized?

Answer: The gain on an intra-entity transfer of a depreciable asset may be recognized in one of two ways: (i) through the use of the asset in operations; or (ii) through the sale of the asset to an independent third party.

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2018. During 2018, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2018. What errors will this omission cause in the consolidated financial statements?

Answer: Consolidation Entry for 2018

Gain on Sale of Land XXX

Land XXX

This omission causes both the amounts for Land and Gain on Sale of Land to be overstated in the consolidated financial statements, and ultimately, Total Assets and Ending Retained Earnings may be overstated as well. Also, the correction for gain may be allocated to the noncontrolling interest share of subsidiary earnings and the noncontrolling interest balance on the consolidated balance sheet.

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Why do intra-entity transfers between the component companies of a business combination occur so frequently?

Answer: One reason for the significant volume and frequency of intra-entity transfers is that many business combinations are specifically organized so that the companies can provide products for each other. This design is intended to benefit the business combination as a whole due to the economies provided by such vertical integration. In effect, more profit can be generated by the combination if one member is able to buy from another, as opposed to an outside party.

Learning Objective: 05-01

Topic: Why eliminate intra-entity transfers

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards’ inventory in 2018. The transfer profit was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

Answer: Regardless of the ownership percentage or the markup, the $200,000 was simply an intra-entity asset transfer for consolidation purposes. Thus, within the consolidation process, the entire $200,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts.

Learning Objective: 05-02

Topic: Eliminate intra-entity sales and purchases

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

What is an intra-entity gross profit on a transfer of inventory, and how is it treated on a consolidation worksheet?

Answer: In intra-entity transfers, a transfer price often exceeds the underlying cost of the inventory. Hence, the seller recognizes gross profit on its books that, with respect to the entire controlled group, is deferred until the asset is consumed or sold to an outside party. Any unrecognized intra-entity gross profit on merchandise still held by the buyer must be eliminated for consolidated financial statement purposes. With respect to the year of transfer, this consolidation procedure requires unrecognized intra-entity gross profit be deducted from the inventory account on the balance sheet, and from the ending inventory balance within cost of goods sold. In the year following the transfer (if the goods are resold or consumed), the unrecognized intra-entity gross profit must again be deducted for purposes of the consolidated financial statements. This second reduction is recorded on the worksheet as a reduction to the beginning inventory component of cost of goods sold, as well as to the beginning retained earnings balance of the original seller. This functions to defer the recognition of gross profit from the year of transfer to the year the underlying asset is consumed or sold to an unrelated third party. If the transfer was made on a downstream basis, and the parent company applied the equity method of accounting, a subsequent year adjustment must be recorded in the subsidiary investment account as opposed to the retained earnings account.

Learning Objective: 05-03

Learning Objective: 05-04

Topic: Intra-entity ending inventory―Year of transfer

Topic: Intra-entity gross profit―Year after transfer

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

What is the impact on the noncontrolling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

Answer: None.

Learning Objective: 05-05

Topic: Noncontrolling interest―Downstream gross profit

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

When is the gain on an intra-entity transfer of land recognized in consolidated net income?

Answer: The gain created on an intra-entity transfer of land is recognized when the asset is sold to an independent third party. Gain recognition is deferred until the date of such third-party sale.

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intra-entity transfer of a depreciable asset?

Answer: Depreciable assets are often transferred between the members of a controlled group for amounts in excess of book value. The buyer in turn calculates depreciation expense based on this inflated transfer price as opposed to a price based on historical cost. For purposes of consolidated financial statement reporting, depreciation should be calculated based solely on historical cost figures. As a result, for consolidated financial statement reporting purposes, for each period an adjustment to the depreciation amounts recorded by the buyer are required to reduce the expense reported on the consolidated financial statements to a cost based figure.

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA: BB Critical Thinking

AICPA: FN Measurement

Problems:

[QUESTION]

Tara Company owns 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer intra-entity gross profit.

Answer:

Cost of Goods Sold	1,600
Inventory		1,600

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

King Corp. owns 85% of James Co. King uses the equity method to account for its investments. During 2018, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/2018, 25% of the goods were still in James’ inventory.

Required:

Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.

Answer:

Consolidation Entry TI

Sales	500,000
Cost of Goods Sold		500,000

Consolidation Entry G

Cost of Goods Sold	20,000
Inventory		20,000

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Flintstone Inc. acquired all of Rubble Co. on January 1, 2018. Flintstone decided to use the initial value method to account for this investment. During 2018, Flintstone sold to Rubble for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were still in Rubble’s inventory.

Required:

Prepare Consolidation Entry TI for the intra-entity transfer and Consolidation Entry G for the ending inventory adjustment necessary for the consolidation worksheet at 12/31/20.

Answer:

Consolidation Entry TI

Sales	600,000
Cost of Goods Sold		600,000

Consolidation Entry G

Cost of Goods Sold	30,000
Inventory		30,000

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Topic: Intra-entity transfer using initial value method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2018. The goods had cost Yoderly $105,000 and the selling price was $140,000. Nelson had not sold any of the goods by the end of the year.

Required:

Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2018.

Answer:

Consolidation Entry TI

Sales	140,000
Cost of Goods Sold		140,000

Consolidation Entry G

Cost of Goods Sold	35,000
Inventory		35,000

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2018, Strayten sold Quint goods, which had cost $48,000. The selling price was $64,000. Quint still had one-eighth of the goods purchased from Strayten on hand at the end of 2018.

Required:

Prepare Consolidation Entry *G, which would have to be recorded at the end of 2019.

Answer:

Retained Earnings (($64,000 – $48,000) x 1/8)	2,000
Cost of Goods Sold		2,000

Learning Objective: 05-05

Topic: Intra-entity transfer using initial value method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2018, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban’s reported net income for 2018 was $119,000. Required:

Assuming there are no other intra-entity transactions nor excess amortizations, What was the net income attributable to the noncontrolling interest of Stroban?

Answer:

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2018, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000, and they were sold to Lawler for $100,000. At the end of 2018, Lawler still held 30% of the inventory.

Required:

How should the sale between Lawler and Ritter be accounted for in a 2018 consolidation worksheet? Show worksheet entries to support your answer.

Answer:

Lawler and Ritter are related parties since they are both part of a combined entity. The following consolidation entries should be prepared:

Sales	100,000
Cost of Goods Sold		100,000

Cost of Goods Sold	10,500
Inventory		10,500

These entries: (i) eliminate the sale from the consolidated income statement; (ii) decrease cost of goods sold; and (iii) reduce consolidated inventory to its cost to the combined entity.

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

REFERENCE: 05-14

Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2017, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2017, Stateside had sold 75% of the goods to outside parties for $420,000 cash.

[QUESTION]

REFER TO: 05-14

Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2017.

Answer:

On the books of Virginia:

Cash	400,000
Sales		400,000

Cost of Goods Sold ($400,000 x 70%)	280,000
Inventory		280,000

On the books of Stateside:

Inventory	400,000
Cash		400,000

Cash	420,000
Sales		420,000

Cost of Goods Sold	300,000
Inventory		300,000

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-14

Prepare the consolidation entries that should be made at the end of 2017.

Answer:

Consolidation Entry TI

Sales	400,000
Cost of Goods Sold		400,000

Consolidation Entry G

Cost of Goods Sold	30,000
Inventory		30,000

Learning Objective: 05-02

Learning Objective: 05-03

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-14

Prepare any 2018 consolidation worksheet entries that would be required regarding the 2017 inventory transfer.

Answer:

Retained Earnings	30,000
Cost of Goods Sold		30,000

Learning Objective: 05-04

Topic: Intra-entity gross profit―Year after transfer

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

REFERENCE: 05-15

Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap’s asset and liability accounts at that time were considered to be equal to their fair values. Polar’s acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transfer.

The following selected account balances were from the individual financial records of these two companies as of December 31, 2018:

[QUESTION]

REFER TO: 05-15

Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2017 and $165,000 in 2018. Of this inventory, $39,000 of the 2017 transfers were retained and then sold by Icecap in 2018, while $55,000 of the 2018 transfers was held until 2019.

Required:

For the consolidated financial statements for 2018, determine the balances that would appear for the following accounts: (i) Cost of Goods Sold; (ii) Inventory; and (iii) Net income attributable to the noncontrolling interest.

Answer:

Consolidated Cost of Goods Sold – 2018
Poplar Inc.’s cost of goods sold	$406,000
Icecap Co.’s cost of goods sold	276,000
Elimination of 2018 intra-entity transfer of inventory	(165,000)
Reduction of beginning inventory because of 2017 unrecognized gain
($39,000 transfer price/125% = $31,200 cost; $39,000 less $31,200 = $7,800 unrecognized gain)	( 7,800)
Reduction of ending inventory because of 2018 unrecognized gain
($55,000 transfer price/125% = $44,000 cost; $55,000 less $44,000 = $11,000 unrecognized gain	11,000
Consolidated cost of goods sold	$520,200

Consolidated Inventory
Polar Inc.’s inventory	$484,000
Icecap’s inventory	154,000
Eliminate ending inventory unrecognized gain (from above)	( 11,000)
Consolidated inventory	$627,000

Net income attributable to the noncontrolling interest
Icecap’s reported net income ($504,000 – $276,000 – $147,000)	$81,000
Noncontrolling interest percentage	x 20%
Net income attributable to the noncontrolling interest	$16,200

Learning Objective: 05-02

Learning Objective: 05-03

Learning Objective: 05-04

Learning Objective: 05-05

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Topic: Intra-entity inventory―Beginning and ending

Topic: Noncontrolling interest―Downstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-15

Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity transfers were $70,000 in 2017 and $112,000 in 2018. Of this inventory, $29,000 of the 2017 transfers were retained and then sold by Polar in 2018, whereas $49,000 of the 2018 transfers was held until 2019.

Required:

Answer:

Consolidated Cost of Goods Sold
Poplar Inc.’s cost of goods sold	$406,000
Icecap Co.’s cost of goods sold	276,000
Elimination of 2018 intra-entity transfer of inventory	(112,000)
Reduction of beginning inventory because of 2017 unrecognized gain
($29,000 / 125% = $23,200 cost; transfer price $29,000 less $23,200 cost = $5,800 unrecognized gain)	( 5,800)
Reduction of ending inventory because of 2018 unrecognized gain
($49,000 / 125% = $39,200 cost; transfer price $49,000 less $39,200 cost = $9,800 unrecognized gain	9,800
Consolidated cost of goods sold	$574,000

Consolidated Inventory
Polar Inc.’s inventory	$484,000
Icecap’s inventory	154,000
Eliminate ending inventory unrecognized gain (from above)	( 9,800)
Consolidated inventory	$628,200

Net income attributable to the noncontrolling interest
Icecap’s reported net income	$81,000
2017 unrecognized gain realized in 2018 (from above)	5,800
2018 unrecognized gain to be realized in 2018 (from above)	( 9,800)
	$77,000
Noncontrolling interest percentage	x 20%
Net income attributable to the noncontrolling interest	$15,400

Learning Objective: 05-02

Learning Objective: 05-03

Learning Objective: 05-04

Learning Objective: 05-05

Topic: Eliminate intra-entity sales and purchases

Topic: Intra-entity ending inventory―Year of transfer

Topic: Intra-entity inventory―Beginning and ending

Topic: Noncontrolling interest―Upstream gross profit

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-15

Polar sold a building to Icecap on January 1, 2017 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value.

Required:

For the consolidated financial statements for 2018, determine the balances that would appear for the following accounts: (i) Buildings (net); (ii) Operating expenses; and (iii) Net income attributable to the noncontrolling interest.

Answer:

Consolidated Buildings (Net)
Poplar Inc.’s book value		$501,000
Icecap Co.’s book value		220,000
Removal of gain created by transfer
(112,000 – $70,000)	$(42,000)
Removal of excess depreciation created by transfer
($42,000 unrecognized gain ÷ 5 year life x 2 years)	16,800	(25,200)
Consolidated buildings (net)		$695,800

Consolidated Operating expenses
Polar Inc.’s book value		$210,000
Icecap’s book value		147,000
Removal of excess depreciation on transferred building
($42,000 unrecognized gain ÷ 5 year life)		(8,400)
Consolidated operating expenses		$348,600

Net income attributable to the noncontrolling interest
Icecap’s reported net income		$81,000
Noncontrolling interest percentage		x 20%
Net income attributable to the noncontrolling interest		$16,200

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

REFERENCE: 05-16

On January 1, 2018, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method.

Musial earned $308,000 in net income in 2018 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment.

[QUESTION]

REFER TO: 05-16

What is consolidated net income for 2018?

Answer:

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-16

Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2018, assuming that Musial owned only 90% of Matin and the equipment transfer had been downstream.

Answer:

Consolidated net income	$378,000
To noncontrolling interest ($126,000 x 10%)	( 12,600)
To controlling interest	$365,400

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-16

Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2018, assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream

Answer:

Musial Corp.’s income	$308,000
Matin Inc.’s income	126,000
Deferral of intra-entity gain recognition on equipment	( 70,000)
Removal of excess depreciation created by intra-entity transfer ($70,000/5years)	14,000
Consolidated net income	$378,000
To noncontrolling interest [.10($126,000 – 70,000 + 14,000)]	( 7,000)
To controlling interest	$371,000

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 2 Medium
Blooms: Apply

AACSB: Knowledge Application

Advanced Accounting Joe Ben Hoyle 13e - Test Bank

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Advanced Accounting Joe Ben Hoyle 13e - Test Bank

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