Chapter_04_Intercompany_Transactions_Merchandise_Plant_Assets_and_Notes
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Chapter_04_Intercompany_Transactions_Merchandise_Plant_Assets_and_Notes

Advanced Accounting 12e Paul M Fischer William J Taylor Rita H Cheng

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Chapter_04_Intercompany_Transactions_Merchandise_Plant_Assets_and_Notes

 

Complete Chapter Questions With Answers

 

Sample Questions Are Posted Below

 

 

1. Which of the following should appear in consolidated financial statements?

  a. ​All intercompany transactions properly recorded on each affiliate’s books.
  b. ​Transactions between the consolidated company and outside parties.
  c. ​Transactions not accounted for by the simple equity method.
  d. ​Lease transactions between a parent and subsidiary.

 

ANSWER:   b
RATIONALE:   Only the effects of transactions between the consolidated companies and outside entities should appear on the consolidated financial statements.
DIFFICULTY:   E
LEARNING OBJECTIVES:   Introduction

 

2. Which of the following intercompany transactions would not require a worksheet elimination in the consolidation process?

  a. ​The subsidiary’s payment of rent to its parent.
  b. ​The sale of merchandise by a parent to its subsidiary.
  c. ​The amount of a loan to the subsidiary made by its parent.
  d. ​None of the above.

 

ANSWER:   d
RATIONALE:   Only the effects of transactions between the consolidated companies and outside entities should appear on the consolidated financial statements.
DIFFICULTY:   E
LEARNING OBJECTIVES:   Introduction

 

3. Schiff Company owns 100% of the outstanding common stock of the Viel Company. During 2016, Schiff sold merchandise to Viel that Viel, in turn, sold to unrelated firms. There were no such goods in Viel’s ending inventory. However, some of the intercompany purchases from Schiff had not yet been paid. Which of the following amounts will be incorrect in the consolidated statements if no adjustments are made?​

  a. ​inventory, accounts payable, net income
  b. ​inventory, sales, cost of goods sold, accounts receivable
  c. ​sales, cost of goods sold, accounts receivable, accounts payable.
  d. ​accounts receivable, accounts payable

 

ANSWER:   c
RATIONALE:   When consolidating affiliates are engaged in intercompany merchandise sales, the following procedures must be taken:

1.         Intercompany sales must be eliminated to avoid double counting.

DR       Sales

CR                   Cost of goods sold

​

2.         Internal debt must be eliminated.

DR       Accounts payable

CR                   Accounts receivable

​

3.         No profit on intercompany sales may be recognized until the profit is realized by a sale

to a third party. This is not applicable in this case since all of the inventory has been sold.

 
DIFFICULTY:   M
LEARNING OBJECTIVES:   ADAC.FISC.4-1
ADAC.FISC.4-2

 

4. The sale of inventory items by a parent company to an affiliated company​

  a. ​enters the consolidated revenue computation only if the transfer was the result of arm’s length bargaining.
  b. ​affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
  c. ​does not result in consolidated income until the merchandise is sold to outside entities.
  d. ​does not require a working paper adjustment if the merchandise was transferred at cost.

 

ANSWER:   c
RATIONALE:   No profit may be recognized on intercompany sales until the profit is realized by a sale to an outside party.
DIFFICULTY:   E
LEARNING OBJECTIVES:   ADAC.FISC.4-1
ADAC.FISC.4-2

 

5. This year, Rose Company acquired all of the common stock of Hayley Company. At the end of the current year, balances of selected accounts and other information for each of the companies were as follows:

​ Rose Hayley
Sales $2,582,000 $1,734,000
Accounts receivable 580,000 235,000
​ ​ ​
Sales to Hayley during year 80,000 ​
Sales to Rose during year ​ 20,000
Gross profit on all sales 25% 30%
​ ​ ​

At the end of the year, 50% of the inventory that Rose sold to Hayley remained in Hayley’s inventory, and $30,000 of the amount of the sales was unpaid. Rose still owes half of the amount of its purchases to Hayley, but had sold all of the inventory it had acquired from Hayley by the end of the year.

​

What is the amount of consolidated sales at the end of the year?

​

  a. ​$4,216,000
  b. ​$4,316,000
  c. ​$4,276,000
  d. ​$4,246,000

 

ANSWER:   a
RATIONALE:  
Sales: ​
   Rose $2,582,000
   Hayley 1,734,000
Combined sales 4,316,000
Adjustment to eliminate amounts Rose sold to Hayley (80,000)
Adjustment to eliminate amounts Hayley sold to Rose (20,000)
Consolidated sales $4,216,000
DIFFICULTY:   D
LEARNING OBJECTIVES:   ADAC.FISC.4-1
ADAC.FISC.4-2

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