ACG4803 - Chapter 5

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

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Chapter 05 Consolidated Financial Statements - Intra-Entity Asset Transactions

Multiple Choice Questions

1. On November 8, 2011, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized? A. Proportionately over a designated period of years. B. When Wood Co. sells the land to a third party. C. No gain can be recognized. D. As Wood uses the land. E. When Wood Co. begins using the land productively.

Edgar Co. acquired 60% of Stendall Co. on January 1, 2011. During 2011, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2011. Consolidated cost of goods sold for 2011 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory.

2. 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.


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

4. On January 1, 2011, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the noncontrolling interest's share of consolidated net income? A. $3,600. B. $22,800. C. $30,900. D. $32,900. E. $40,800.

5. Webb Co. acquired 100% of Rand Inc. on January 5, 20011. During 2011, 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. $16,960,000. E. $14,560,000.


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6. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2010. During 2010, Gentry sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2011, 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 2011, cost of goods sold was $5,400,000 for Gentry and $1,200,000 for Gaspard Farms. What was consolidated cost of goods sold for 2011? A. $6,600,000. B. $6,604,000. C. $5,620,000. D. $5,596,000. E. $5,625,000.

7. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2011, 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. What was the noncontrolling interest in Kent's net income? A. $90,000. B. $85,200. C. $54,000. D. $94,800. E. $86,640.

8. Justings Co. owned 80% of Evana Corp. During 2011, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings should A. not recognize a gain on the sale of the land since it was made to a related party. B. recognize a gain of $17,600. C. defer recognition of the gain until Evana sells the land to a third party. D. recognize a gain of $8,000. E. recognize a gain of $22,000.


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9. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2010, 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 2010 was $119,000. What is the noncontrolling interest's share of Thelma's net income? A. $35,700. B. $31,800. C. $39,600. D. $22,200. E. $26,100.

Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2010, Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider.

10. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2010? A. $105,000. B. $100,000. C. $95,000. D. $80,000. E. $85,000.



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12. During 2010, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized? A. When the goods are sold to a third party by Lord. B. When Lord pays Von for the goods. C. When Von sold the goods to Lord. D. When the goods are used by Lord. E. No gain can be recognized since the transaction was between related parties.

13. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2010, Devin made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the beginning inventory, and $25,000 at the end of the year. Devin reported net income of $137,000 for 2010. Bauerly decided to use the equity method to account for the investment. What is the noncontrolling interest's share of Devin's net income for 2010? A. $41,100. B. $33,600. C. $21,600. D. $45,600. E. $36,600.

14. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2010, 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, 2011, 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 transactions which affected the companies' land accounts during 2010. What is the consolidated balance for land on the 2011 balance sheet? A. $672,000. B. $690,000. C. $755,000. D. $737,000. E. $654,000.


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15. 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 2010 and $500,000 in 2011. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2011. What was the noncontrolling interest's share of Sparis' net income for 2011? A. $85,680. B. $90,600. C. $90,720. D. $91,680. E. $91,800.

16. On January 1, 2011, 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 2011 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 2011 would have been A. $144,000. B. $148,375. C. $109,000. D. $134,000. E. $139,625.

17. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2011. 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 still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intercompany profit that should be eliminated in the consolidation process at the end of 2011 is A. $15,000. B. $20,000. C. $32,500. D. $30,000. E. $110,000.


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18. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2011, Kile sold merchandise to Prince for $140,000. At December 31, 2011, 50% of this merchandise remained in Prince's inventory. For 2011, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2011 that should be eliminated in the consolidation process is A. $28,000. B. $56,000. C. $22,400. D. $21,000. E. $42,000.

Pot Co. holds 90% of the common stock of Skillet Co. During 2011, 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.

19. Included in the amounts for Pot's sales were Pot's sales of merchandise to Skillet for $140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders. Skillet still had 40% of the intra-entity sales as inventory at the end of 2011. What are consolidated sales and cost of goods sold for 2011? 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.

20. Included in the amounts for Skillet's sales were Skillet's sales of merchandise to Pot for $140,000. There were no sales from Pot to Skillet. Intra-entity sales had the same markup as sales to outsiders. Pot still had 40% of the intra-entity sales as inventory at the end of 2011. What are consolidated sales and cost of goods sold for 2011? 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.


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21. The reported sales did not include any intra-entity sales. In addition to the reported amounts, there were intra-entity sales from Pot to Skillet in the amount of $140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders. Skillet still had 40% of the intra-entity sales as inventory at the end of 2011. What are consolidated sales and cost of goods sold for 2011? A. $1,400,000 and $1,071,000. 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.

22. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2009, 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, 2011, 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. In preparing financial statements for 2011, how does this transfer affect the calculation of Dalton's share of consolidated net income? A. Consolidated net income must be reduced by $44,800. B. Consolidated net income must be reduced by $50,400. C. Consolidated net income must be reduced by $49,000. D. Consolidated net income must be reduced by $56,000. E. Consolidated net income must be reduced by $34,300.


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On January 1, 2011, 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, 2011, before preparing the consolidated worksheet, the financial statements appeared as follows:

During 2011, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31.

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


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

25. 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.

26. 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.

27. What is the consolidated total for equipment (net) at December 31, 2011? A. $952,000. B. $1,058,400. C. $1,069,600. D. $1,064,000. E. $1,066,800.

28. What is the consolidated total for inventory at December 31, 2011? A. $336,000. B. $280,000. C. $364,000. D. $347,200. E. $349,300.


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Strickland Company sells inventory to its parent, Carter Company, at a profit during 2010. One-third of the inventory is sold by Carter in 2010.

29. In the consolidation worksheet for 2010, which of the following choices would be a debit entry 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.

30. In the consolidation worksheet for 2010, which of the following choices would be a credit entry 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.

31. In the consolidation worksheet for 2010, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.


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32. In the consolidation worksheet for 2010, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

33. In the consolidation worksheet for 2011, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

34. In the consolidation worksheet for 2011, assuming Carter uses the initial value methd of accounting for its investment in Strickland, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2010. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher.


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35. In the consolidation worksheet for 2010, which of the following choices would be a debit entry 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.

36. In the consolidation worksheet for 2010, which of the following choices would be a credit entry 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.

37. In the consolidation worksheet for 2010, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

38. In the consolidation worksheet for 2010, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.


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41. When comparing the difference between an upstream and downstream transfer of inventory, and using the initial value method, which of the following statements is true when there is a noncontrolling interest? A. Income from subsidiary will be lower by the amount of the ending inventory profit multiplied by the noncontrolling interest percentage for downstream transfers. B. Income from subsidiary will be higher by the amount of the ending inventory profit multiplied by the noncontrolling interest percentage for downstream transfers. C. Income from subsidiary will be reduced for downstream ending inventory profit but not for upstream profit, before the effect of the noncontrolling interest. D. Income from subsidiary will be reduced for upstream ending inventory profit but not for downstream profit, before the effect of the noncontrolling interest. E. Income from subsidiary will be the same for upstream and downstream profit.


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42. When comparing the difference between an upstream and downstream transfer of inventory, and using the initial value method, which of the following statements is true when there is a noncontrolling interest? A. Income from subsidiary will be lower by the amount of the beginning inventory profits multiplied by the noncontrolling interest percentage for upstream transfers. B. Income from subsidiary will be higher by the amount of the beginning inventory profits multiplied by the noncontrolling interest percentage for upstream transfers. C. Income from subsidiary will be reduced for downstream ending inventory profits but not for upstream profits, before the noncontrolling interest. D. Income from subsidiary will be reduced for upstream ending inventory profits but not for downstream profits, before the noncontrolling interest. E. Income from subsidiary will be the same for upstream and downstream profits.

43. Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method? A. The sale of merchandise between a parent and its subsidiary represents an arm's-length transaction and thus provides the basis for the recognition of profit on such transfers. B. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intra-entity transactions unsold at year-end may not be sold in the next year. C. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intra-entity transactions unsold at year-end may not be sold in the next year. D. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer price. E. Noncontrolling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits.


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44. Which of the following statements is true regarding an intra-entity sale of land? A. A loss is always recognized but a gain is eliminated in a consolidated income statement. B. A loss and a gain are always eliminated in a consolidated income statement. C. A loss and a gain are always recognized in a consolidated income statement. D. A gain is always recognized but a loss is eliminated in a consolidated income statement. E. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive income.

45. Parent sold land to its subsidiary for a gain in 2008. The subsidiary sold the land externally for a gain in 2011. Which of the following statements is true? A. A gain will be reported in the consolidated income statement in 2008. B. A gain will be reported in the consolidated income statement in 2011. C. No gain will be reported in the 2011 consolidated income statement. D. Only the parent company will report a gain in 2011. E. The subsidiary will report a gain in 2008.

46. An intra-entity sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale? 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.

47. An intra-entity sale took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year following the sale? 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.


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48. An intra-entity sale took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year following the sale? 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.

49. Which of the following statements is true concerning an intra-entity transfer of a depreciable asset? A. Noncontrolling interest in subsidiary's net income is never affected by a gain on the transfer. B. Noncontrolling interest in subsidiary's net income is always affected by a gain on the transfer. C. Noncontrolling interest in subsidiary's net income is affected by a downstream gain only. D. Noncontrolling interest in subsidiary's net income is affected only when the transfer is upstream. E. Noncontrolling interest in subsidiary's net income is increased by an upstream gain in the year of transfer.

Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2010.

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


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50. Compute the equity in earnings of Gargiulo reported on Posito's books for 2010. A. $63,000. B. $62,730. C. $63,270. D. $70,000. E. $62,700.



53. Compute the noncontrolling interest in Gargiulo's net income for 2010. A. $6,970. B. $7,000. C. $7,030. D. $6,270. E. $6,230.



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56. For consolidation purposes, what amount would be debited to cost of goods sold for the 2010 consolidation worksheet with regard to unrealized gross profit of the intra-entity transfer of merchandise? A. $300. B. $240. C. $2,000. D. $1,600. E. $270.

57. For consolidation purposes, what amount would be debited to cost of goods sold for the 2011 consolidation worksheet with regard to the unrealized gross profit of the 2011 intra-entity transfer of merchandise? A. $1,000. B. $800. C. $3,000. D. $2,400. E. $900.

58. For consolidation purposes, what amount would be debited to cost of goods sold for the 2012 consolidation worksheet with regard to the unrealized gross profit of the 2012 intra-entity transfer of merchandise? A. $600. B. $750. C. $3,760. D. $3,000. E. $675.


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59. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2010 consolidation worksheet entry with regard to the unrealized gross profit of the 2010 intra-entity transfer of merchandise? A. $0. B. $1,600. C. $300. D. $240. E. $270.

60. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2011 consolidation worksheet entry with regard to the unrealized gross profit of the 2010 intra-entity transfer of merchandise? A. $240. B. $300. C. $2,000. D. $1,600. E. $270.

61. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2012 consolidation worksheet entry with regard to the unrealized gross profit of the 2011 intra-entity transfer of merchandise? A. $3,000. B. $2,400. C. $1,000. D. $800. E. $900.

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.


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

63. 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.

64. 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.

Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2010. On January 1, 2010, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2010 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:


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65. Compute the gain on transfer of equipment reported by Wilson for 2010. A. $19,500. B. $18,250. C. $11,750. D. $38,250. E. $37,500.

66. Compute the amortization of gain through a depreciation adjustment for 2010 for consolidation purposes. A. $1,950. B. $1,825. C. $1,500. D. $2,000. E. $5,250.




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69. Compute Wilson's share of income from Simon for consolidation for 2010. A. $72,000. B. $90,000. C. $73,575. D. $73,800. E. $72,500.



On January 1, 2010, 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 2010 and 2011, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes.


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72. Compute the gain recognized by Smeder Company relating to the equipment for 2010. A. $36,000. B. $34,000. C. $12,000. D. $10,000. E. $0.

73. Compute Collins' share of Smeder's net income for 2010. A. $12,400. B. $14,400. C. $11,200. D. $12,800. E. $18,000.


75. For consolidation purposes, what net debit or credit will be made for the year 2010 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.


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76. What is the net effect on consolidated net income in 2010 due to the equipment transfer? A. Increase $2,000. B. Decrease $12,000. C. Decrease $10,000. D. Decrease $14,000. E. Increase $10,000.

Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2010, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2010 and 2011, respectively. Leo uses the equity method to account for its investment.

77. Compute the gain or loss on the intra-entity sale of land. A. $15,000 loss. B. $15,000 gain. C. $50,000 loss. D. $50,000 gain. E. $65,000 gain.

78. On a consolidation worksheet, what adjustment would be made for 2010 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.

79. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2011 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.


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80. Compute income from Stiller on Leo's books for 2010. A. $110,000. B. $100,000. C. $125,000. D. $85,000. E. $88,000.


Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land it purchased from Stark in 2010 for $92,000 in 2012.

82. Compute the gain or loss on the intra-entity sale of land. A. $80,000 gain. B. $80,000 loss. C. $5,000 gain. D. $5,000 loss. E. $85,000 loss.

83. Which of the following will be included in a consolidation entry for 2010? 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.


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84. Which of the following will be included in a consolidation entry for 2011? 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.

85. Compute income from Stark reported on Parker's books for 2010. A. $205,000. B. $200,000. C. $180,000. D. $175,500. E. $184,500.


87. Compute Parker's reported gain or loss relating to the land for 2012. A. $12,000 gain. B. $5,000 loss. C. $12,000 loss. D. $7,000 gain. E. $7,000 loss.

88. Compute Stark's reported gain or loss relating to the land for 2012. A. $5,000 loss. B. $5,000 gain. C. $7,000 loss. D. $7,000 gain. E. $0.


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89. Compute the gain or loss relating to the land that will be reported in consolidated net income for 2012. A. $5,000 loss. B. $7,000 gain. C. $12,000 gain. D. $7,000 loss. E. $12,000 loss.


Pepe, Incorporated acquired 60% of Devin Company on January 1, 2010. 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 2010 and 2011, respectively. Pepe uses the equity method to account for its investment in Devin.

91. What is the gain or loss on equipment reported by Devin for 2010? A. $54,000 gain. B. $21,000 loss. C. $21,000 gain. D. $9,000 loss. E. $9,000 gain.

92. What is the consolidated gain or loss on equipment for 2010? A. $0. B. $9,000 gain. C. $9,000 loss. D. $21,000 gain. E. $21,000 loss.


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93. Compute the income from Devin reported on Pepe's books for 2010. A. $174,600. B. $184,800. C. $172,000. D. $171,000. E. $180,000.


95. Compute the noncontrolling interest in the net income of Devin for 2010. A. $116,400. B. $120,400. C. $120,000. D. $123,200. E. $112,000.



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Matching Questions

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

1. None of the above

Upstream beginning inventory profit, using the initial value method. ____

2. Debit retained earnings

Downstream beginning inventory profit, using the initial value method. ____


Upstream ending inventory profit, using the initial value method. ____

4. Credit retained earnings

Downstream ending inventory profit, using the initial value method. ____


Upstream transfer of depreciable assets, in the period after transfer, where subsidiary recognizes a gain, using

the initial value method. ____


Downstream transfer of depreciable assets, in the period after transfer, where parent recognizes a gain,

using the initial value method. ____


Upstream transfer of land, in the period after transfer, where subsidiary recognizes a loss, using the initial

value method. ____ 8. Credit investment in subsidiary

Downstream transfer of land, in the period after transfer, where parent recognizes a loss, using the initial

value method. ____ 9. None of the above

Eliminate income from subsidiary, recorded under the equity method. ____

10. Debit investment in subsidiary

Eliminate recorded amortization of acquisition fair value over book value, recorded under the equity

method. ____ Essay Questions

98. On April 7, 2011, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer actually be earned?


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99. Throughout 2011, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?

100. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2011. 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 transaction be accounted for by the consolidated entity?

101. During 2011, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned all of the inventory at the end of 2011. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2011?

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


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

104. How is the gain on an intra-entity transfer of a depreciable asset realized?

105. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2011. During 2011, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2011. What errors will this omission cause in the consolidated financial statements?

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


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107. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2011. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

108. What is meant by unrealized inventory gains, and how are they treated on a consolidation worksheet?

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

110. When is the gain on an intra-entity transfer of land realized?


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111. 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?

112. 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 the unrealized gain.

113. King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2011, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/11, 25% of the goods were still in James' inventory. Required: Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.


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114. Flintstone Inc. acquired all of Rubble Co. on January 1, 2011. Flintstone decided to use the initial value method to account for this investment. During 2011, 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 12/31/11.

115. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2011. 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 2011.

116. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2010, Strayten sold Quint goods which had cost $48,000. The selling price was $64,000. Quint still had one-eighth of the goods on hand at the end of the year. Required: Prepare Consolidation Entry *G, which would have to be recorded at the end of 2011.


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117. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2011, 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 2011 was $119,000. Required: What was the noncontrolling interest's share of Stroban Co.'s net income?

118. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2011, 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 2011, Lawler still held 30% of the inventory. Required: How should the sale between Lawler and Ritter be accounted for in a consolidation worksheet? Show worksheet entries to support your answer.

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 2010, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2010, Stateside had sold 75% of the goods to outside parties for $420,000 cash.


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119. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2010.

120. Prepare the consolidation entries that should be made at the end of 2010.

121. Prepare any 2011 consolidation worksheet entries that would be required regarding the 2010 inventory transfer.


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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 transaction. The following selected account balances were from the individual financial records of these two companies as of December 31, 2011:

122. Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2010 and $165,000 in 2011. Of this inventory, $39,000 of the 2010 transfers were retained and then sold by Icecap in 2011 while $55,000 of the 2011 transfers were held until 2012. Required: For the consolidated financial statements for 2011, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory, and (3) Noncontrolling Interest in Subsidiary's Net Income.


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123. Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity transfers were $70,000 in 2010 and $112,000 in 2011. Of this inventory, $29,000 of the 2010 transfers were retained and then sold by Polar in 2011 whereas $49,000 of the 2011 transfers were held until 2012. Required: For the consolidated financial statements for 2011, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory, and (3) Noncontrolling Interest in Subsidiary's Net Income.

124. Polar sold a building to Icecap on January 1, 2010 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 2011, determine the balances that would appear for the following accounts: (1) Buildings (net), (2) Operating expenses, and (3) Noncontrolling Interest in Subsidiary's Net Income.

On January 1, 2011, 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 2011 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment.


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125. What is consolidated net income for 2011?

126. Assuming that Musial owned only 90% of Matin, what is consolidated net income for 2009?

127. Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2011, assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream.


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Chapter 05 Consolidated Financial Statements - Intra-Entity Asset Transactions Answer Key

Multiple Choice Questions

1. On November 8, 2011, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized? A. Proportionately over a designated period of years. B. When Wood Co. sells the land to a third party. C. No gain can be recognized. D. As Wood uses the land. E. When Wood Co. begins using the land productively.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

Edgar Co. acquired 60% of Stendall Co. on January 1, 2011. During 2011, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2011. Consolidated cost of goods sold for 2011 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory.


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2. 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Difficulty: Medium Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.


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

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period. Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

4. On January 1, 2011, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the noncontrolling interest's share of consolidated net income? A. $3,600. B. $22,800. C. $30,900. D. $32,900. E. $40,800.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period. Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.


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5. Webb Co. acquired 100% of Rand Inc. on January 5, 20011. During 2011, 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. $16,960,000. E. $14,560,000.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory. Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period.

6. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2010. During 2010, Gentry sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2011, 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 2011, cost of goods sold was $5,400,000 for Gentry and $1,200,000 for Gaspard Farms. What was consolidated cost of goods sold for 2011? A. $6,600,000. B. $6,604,000. C. $5,620,000. D. $5,596,000. E. $5,625,000.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Hard Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.


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7. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2011, 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. What was the noncontrolling interest in Kent's net income? A. $90,000. B. $85,200. C. $54,000. D. $94,800. E. $86,640.


8. Justings Co. owned 80% of Evana Corp. During 2011, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings should A. not recognize a gain on the sale of the land since it was made to a related party. B. recognize a gain of $17,600. C. defer recognition of the gain until Evana sells the land to a third party. D. recognize a gain of $8,000. E. recognize a gain of $22,000.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.


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9. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2010, 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 2010 was $119,000. What is the noncontrolling interest's share of Thelma's net income? A. $35,700. B. $31,800. C. $39,600. D. $22,200. E. $26,100.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances. Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2010, Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider.


AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.


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AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Hard Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.

12. During 2010, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized? A. When the goods are sold to a third party by Lord. B. When Lord pays Von for the goods. C. When Von sold the goods to Lord. D. When the goods are used by Lord. E. No gain can be recognized since the transaction was between related parties.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Easy Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.


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13. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2010, Devin made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the beginning inventory, and $25,000 at the end of the year. Devin reported net income of $137,000 for 2010. Bauerly decided to use the equity method to account for the investment. What is the noncontrolling interest's share of Devin's net income for 2010? A. $41,100. B. $33,600. C. $21,600. D. $45,600. E. $36,600.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

14. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2010, 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, 2011, 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 transactions which affected the companies' land accounts during 2010. What is the consolidated balance for land on the 2011 balance sheet? A. $672,000. B. $690,000. C. $755,000. D. $737,000. E. $654,000.



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15. 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 2010 and $500,000 in 2011. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2011. What was the noncontrolling interest's share of Sparis' net income for 2011? A. $85,680. B. $90,600. C. $90,720. D. $91,680. E. $91,800.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Hard Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

16. On January 1, 2011, 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 2011 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 2011 would have been A. $144,000. B. $148,375. C. $109,000. D. $134,000. E. $139,625.



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17. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2011. 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 still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intercompany profit that should be eliminated in the consolidation process at the end of 2011 is A. $15,000. B. $20,000. C. $32,500. D. $30,000. E. $110,000.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period.

18. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2011, Kile sold merchandise to Prince for $140,000. At December 31, 2011, 50% of this merchandise remained in Prince's inventory. For 2011, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2011 that should be eliminated in the consolidation process is A. $28,000. B. $56,000. C. $22,400. D. $21,000. E. $42,000.


Pot Co. holds 90% of the common stock of Skillet Co. During 2011, 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.


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19. Included in the amounts for Pot's sales were Pot's sales of merchandise to Skillet for $140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders. Skillet still had 40% of the intra-entity sales as inventory at the end of 2011. What are consolidated sales and cost of goods sold for 2011? 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.


20. Included in the amounts for Skillet's sales were Skillet's sales of merchandise to Pot for $140,000. There were no sales from Pot to Skillet. Intra-entity sales had the same markup as sales to outsiders. Pot still had 40% of the intra-entity sales as inventory at the end of 2011. What are consolidated sales and cost of goods sold for 2011? 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Hard Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory. Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period. Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.


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21. The reported sales did not include any intra-entity sales. In addition to the reported amounts, there were intra-entity sales from Pot to Skillet in the amount of $140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders. Skillet still had 40% of the intra-entity sales as inventory at the end of 2011. What are consolidated sales and cost of goods sold for 2011? A. $1,400,000 and $1,071,000. 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.


22. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2009, 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, 2011, 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. In preparing financial statements for 2011, how does this transfer affect the calculation of Dalton's share of consolidated net income? A. Consolidated net income must be reduced by $44,800. B. Consolidated net income must be reduced by $50,400. C. Consolidated net income must be reduced by $49,000. D. Consolidated net income must be reduced by $56,000. E. Consolidated net income must be reduced by $34,300.



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On January 1, 2011, 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, 2011, before preparing the consolidated worksheet, the financial statements appeared as follows:

During 2011, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31.


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

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory.

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

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.

25. 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.



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26. 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

27. What is the consolidated total for equipment (net) at December 31, 2011? A. $952,000. B. $1,058,400. C. $1,069,600. D. $1,064,000. E. $1,066,800.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.

28. What is the consolidated total for inventory at December 31, 2011? A. $336,000. B. $280,000. C. $364,000. D. $347,200. E. $349,300.



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Strickland Company sells inventory to its parent, Carter Company, at a profit during 2010. One-third of the inventory is sold by Carter in 2010.

29. In the consolidation worksheet for 2010, which of the following choices would be a debit entry 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Difficulty: Easy Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory.

30. In the consolidation worksheet for 2010, which of the following choices would be a credit entry 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.



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31. In the consolidation worksheet for 2010, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Difficulty: Medium Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period.

32. In the consolidation worksheet for 2010, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.



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33. In the consolidation worksheet for 2011, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Difficulty: Medium Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.

34. In the consolidation worksheet for 2011, assuming Carter uses the initial value methd of accounting for its investment in Strickland, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales? A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.


Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2010. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher.


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35. In the consolidation worksheet for 2010, which of the following choices would be a debit entry 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.


36. In the consolidation worksheet for 2010, which of the following choices would be a credit entry 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.



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41. When comparing the difference between an upstream and downstream transfer of inventory, and using the initial value method, which of the following statements is true when there is a noncontrolling interest? A. Income from subsidiary will be lower by the amount of the ending inventory profit multiplied by the noncontrolling interest percentage for downstream transfers. B. Income from subsidiary will be higher by the amount of the ending inventory profit multiplied by the noncontrolling interest percentage for downstream transfers. C. Income from subsidiary will be reduced for downstream ending inventory profit but not for upstream profit, before the effect of the noncontrolling interest. D. Income from subsidiary will be reduced for upstream ending inventory profit but not for downstream profit, before the effect of the noncontrolling interest. E. Income from subsidiary will be the same for upstream and downstream profit.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Hard Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

42. When comparing the difference between an upstream and downstream transfer of inventory, and using the initial value method, which of the following statements is true when there is a noncontrolling interest? A. Income from subsidiary will be lower by the amount of the beginning inventory profits multiplied by the noncontrolling interest percentage for upstream transfers. B. Income from subsidiary will be higher by the amount of the beginning inventory profits multiplied by the noncontrolling interest percentage for upstream transfers. C. Income from subsidiary will be reduced for downstream ending inventory profits but not for upstream profits, before the noncontrolling interest. D. Income from subsidiary will be reduced for upstream ending inventory profits but not for downstream profits, before the noncontrolling interest. E. Income from subsidiary will be the same for upstream and downstream profits.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Hard Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.


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43. Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method? A. The sale of merchandise between a parent and its subsidiary represents an arm's-length transaction and thus provides the basis for the recognition of profit on such transfers. B. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intra-entity transactions unsold at year-end may not be sold in the next year. C. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intra-entity transactions unsold at year-end may not be sold in the next year. D. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer price. E. Noncontrolling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Medium Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements. Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period.

44. Which of the following statements is true regarding an intra-entity sale of land? A. A loss is always recognized but a gain is eliminated in a consolidated income statement. B. A loss and a gain are always eliminated in a consolidated income statement. C. A loss and a gain are always recognized in a consolidated income statement. D. A gain is always recognized but a loss is eliminated in a consolidated income statement. E. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive income.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Knowledge Difficulty: Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.


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45. Parent sold land to its subsidiary for a gain in 2008. The subsidiary sold the land externally for a gain in 2011. Which of the following statements is true? A. A gain will be reported in the consolidated income statement in 2008. B. A gain will be reported in the consolidated income statement in 2011. C. No gain will be reported in the 2011 consolidated income statement. D. Only the parent company will report a gain in 2011. E. The subsidiary will report a gain in 2008.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

46. An intra-entity sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale? 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Difficulty: Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.


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47. An intra-entity sale took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year following the sale? 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Difficulty: Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.

48. An intra-entity sale took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year following the sale? 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Difficulty: Hard Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.


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49. Which of the following statements is true concerning an intra-entity transfer of a depreciable asset? A. Noncontrolling interest in subsidiary's net income is never affected by a gain on the transfer. B. Noncontrolling interest in subsidiary's net income is always affected by a gain on the transfer. C. Noncontrolling interest in subsidiary's net income is affected by a downstream gain only. D. Noncontrolling interest in subsidiary's net income is affected only when the transfer is upstream. E. Noncontrolling interest in subsidiary's net income is increased by an upstream gain in the year of transfer.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Knowledge Difficulty: Easy Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances. Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.

Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2010.

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


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56. For consolidation purposes, what amount would be debited to cost of goods sold for the 2010 consolidation worksheet with regard to unrealized gross profit of the intra-entity transfer of merchandise? A. $300. B. $240. C. $2,000. D. $1,600. E. $270.


57. For consolidation purposes, what amount would be debited to cost of goods sold for the 2011 consolidation worksheet with regard to the unrealized gross profit of the 2011 intra-entity transfer of merchandise? A. $1,000. B. $800. C. $3,000. D. $2,400. E. $900.



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58. For consolidation purposes, what amount would be debited to cost of goods sold for the 2012 consolidation worksheet with regard to the unrealized gross profit of the 2012 intra-entity transfer of merchandise? A. $600. B. $750. C. $3,760. D. $3,000. E. $675.


59. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2010 consolidation worksheet entry with regard to the unrealized gross profit of the 2010 intra-entity transfer of merchandise? A. $0. B. $1,600. C. $300. D. $240. E. $270.



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60. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2011 consolidation worksheet entry with regard to the unrealized gross profit of the 2010 intra-entity transfer of merchandise? A. $240. B. $300. C. $2,000. D. $1,600. E. $270.


61. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2012 consolidation worksheet entry with regard to the unrealized gross profit of the 2011 intra-entity transfer of merchandise? A. $3,000. B. $2,400. C. $1,000. D. $800. E. $900.


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.


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


63. 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.


64. 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.



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Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2010. On January 1, 2010, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2010 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:

65. Compute the gain on transfer of equipment reported by Wilson for 2010. A. $19,500. B. $18,250. C. $11,750. D. $38,250. E. $37,500.





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On January 1, 2010, 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 2010 and 2011, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes.


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72. Compute the gain recognized by Smeder Company relating to the equipment for 2010. A. $36,000. B. $34,000. C. $12,000. D. $10,000. E. $0.







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75. For consolidation purposes, what net debit or credit will be made for the year 2010 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Bloom's: Application Difficulty: Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.

76. What is the net effect on consolidated net income in 2010 due to the equipment transfer? A. Increase $2,000. B. Decrease $12,000. C. Decrease $10,000. D. Decrease $14,000. E. Increase $10,000.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Bloom's: Application Difficulty: Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.

Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2010, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2010 and 2011, respectively. Leo uses the equity method to account for its investment.


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77. Compute the gain or loss on the intra-entity sale of land. A. $15,000 loss. B. $15,000 gain. C. $50,000 loss. D. $50,000 gain. E. $65,000 gain.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

78. On a consolidation worksheet, what adjustment would be made for 2010 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Bloom's: Application Difficulty: Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.


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79. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2011 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.







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Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land it purchased from Stark in 2010 for $92,000 in 2012.

82. Compute the gain or loss on the intra-entity sale of land. A. $80,000 gain. B. $80,000 loss. C. $5,000 gain. D. $5,000 loss. E. $85,000 loss.


83. Which of the following will be included in a consolidation entry for 2010? 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.



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84. Which of the following will be included in a consolidation entry for 2011? 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.







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87. Compute Parker's reported gain or loss relating to the land for 2012. A. $12,000 gain. B. $5,000 loss. C. $12,000 loss. D. $7,000 gain. E. $7,000 loss.


88. Compute Stark's reported gain or loss relating to the land for 2012. A. $5,000 loss. B. $5,000 gain. C. $7,000 loss. D. $7,000 gain. E. $0.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Hard Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

89. Compute the gain or loss relating to the land that will be reported in consolidated net income for 2012. A. $5,000 loss. B. $7,000 gain. C. $12,000 gain. D. $7,000 loss. E. $12,000 loss.



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AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Hard Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2010. 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 2010 and 2011, respectively. Pepe uses the equity method to account for its investment in Devin.

91. What is the gain or loss on equipment reported by Devin for 2010? A. $54,000 gain. B. $21,000 loss. C. $21,000 gain. D. $9,000 loss. E. $9,000 gain.



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92. What is the consolidated gain or loss on equipment for 2010? A. $0. B. $9,000 gain. C. $9,000 loss. D. $21,000 gain. E. $21,000 loss.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.






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Matching Questions

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

1. None of the above

Upstream beginning inventory profit, using the initial value method. 2


Downstream beginning inventory profit, using the initial value method. 2


Upstream ending inventory profit, using the initial value method. 1


Downstream ending inventory profit, using the initial value method. 1


Upstream transfer of depreciable assets, in the period after transfer, where subsidiary recognizes a gain, using

the initial value method. 2


Downstream transfer of depreciable assets, in the period after transfer, where parent recognizes a gain, using

the initial value method. 2


Upstream transfer of land, in the period after transfer, where subsidiary recognizes a loss, using the initial value

method. 4 8. Credit investment in subsidiary

Downstream transfer of land, in the period after transfer, where parent recognizes a loss, using the initial

value method. 4 9. None of the above

Eliminate income from subsidiary, recorded under the equity method. 8

10. Debit investment in subsidiary

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

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Hard Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years. Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.


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Essay Questions

98. On April 7, 2011, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer actually be earned?

The gain is earned when Shannahan sells the land to a third party.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Knowledge Difficulty: Easy Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.

99. Throughout 2011, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?

The gain is earned when Leeward uses the goods or sells them to a third party.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Easy Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.


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100. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2011. 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 transaction be accounted for by the consolidated entity?

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 a transfer of assets within the entity. No gain on the transfer should be recognized in the consolidated financial statements since the earnings process is not complete. 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.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Easy Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements. Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

101. During 2011, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned all of the inventory at the end of 2011. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2011?

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 earnings process was not yet complete. 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.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Medium Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements. Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period.


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

If the equipment is sold by the parent to the subsidiary, the sale 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.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Knowledge Difficulty: Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.

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

If the sale of inventory is downstream (from parent to subsidiary), any unrealized gain on the sale does not affect the calculation of noncontrolling interest. When the sale is upstream (from the subsidiary to the parent), the gain on the sale is associated with the subsidiary. The gain on goods that the parent still owns should be deducted from the subsidiary's income and this elimination may be allocated between the controlling interest and the noncontrolling interest's share of the subsidiary's earnings.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Medium Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period. Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.


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104. How is the gain on an intra-entity transfer of a depreciable asset realized?

The gain on an intra-entity transfer of a depreciable asset may be realized in one of two ways: (1) through the use of the asset in operations or (2) through the sale of the asset to an independent third party.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Easy Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.

105. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2011. During 2011, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2011. What errors will this omission cause in the consolidated financial statements?

Consolidation Entry for 2011 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 to 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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Analysis Difficulty: Medium Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.


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

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 because of the economies provided by vertical integration. In effect, more profit can often be generated by the combination if one member is able to buy from another rather than from an outside party.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Medium Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.

107. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2011. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

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.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory.


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108. What is meant by unrealized inventory gains, and how are they treated on a consolidation worksheet?

In intra-entity transactions, a transfer price is often established that exceeds the cost of the inventory. Hence, the seller is recording a gain on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset is consumed or sold to an outside party. Any unrealized gain on merchandise still being held by the buyer must be eliminated whenever consolidated financial statements are produced. For the year of transfer, this consolidation procedure is carried out by removing the unrealized gain 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 unrealized gain must again be eliminated within the consolidation process. This second reduction is made on the worksheet to the beginning inventory component of cost of goods sold as well as to the beginning retained earnings balance of the original seller. The gain is being moved into the year of realization. If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year must be made to the equity in subsidiary earnings account rather than to retained earnings.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Medium Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.

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

None.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Knowledge Difficulty: Easy Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.


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110. When is the gain on an intra-entity transfer of land realized?

The gain on an intra-entity transfer of land is realized when the asset is sold to an independent third party. The gain on the intra-entity transfer is deferred until the time of that third-party sale.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Knowledge Difficulty: Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

111. 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?

Depreciable assets are often transferred between the members of a business combination at amounts in excess of book value. The buyer will then compute depreciation expense based on this inflated transfer price rather than on an historical cost basis. From the perspective of the business combination, depreciation should be calculated solely on historical cost figures. Thus, within the consolidation process for each period, adjustment of the depreciation (recorded by the buyer) is necessary to reduce the expense to a cost based figure.

AACSB: Reflective thinking AICPA FN: Measurement Bloom's: Comprehension Difficulty: Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset transfers across affiliated entities.


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112. 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 the unrealized gain.


113. King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2011, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/11, 25% of the goods were still in James' inventory. Required: Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.



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114. Flintstone Inc. acquired all of Rubble Co. on January 1, 2011. Flintstone decided to use the initial value method to account for this investment. During 2011, 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 12/31/11.



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115. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2011. 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 2011.


116. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2010, Strayten sold Quint goods which had cost $48,000. The selling price was $64,000. Quint still had one-eighth of the goods on hand at the end of the year. Required: Prepare Consolidation Entry *G, which would have to be recorded at the end of 2011.



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117. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2011, 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 2011 was $119,000. Required: What was the noncontrolling interest's share of Stroban Co.'s net income?



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118. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2011, 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 2011, Lawler still held 30% of the inventory. Required: How should the sale between Lawler and Ritter be accounted for in a consolidation worksheet? Show worksheet entries to support your answer.

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

These entries (1) eliminate the sale from the consolidated income statement, (2) decrease cost of goods sold, and (3) reduce consolidated inventory to its cost to the combined entity.


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 2010, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2010, Stateside had sold 75% of the goods to outside parties for $420,000 cash.


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119. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2010.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Easy Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory. Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period.


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120. Prepare the consolidation entries that should be made at the end of 2010.


121. Prepare any 2011 consolidation worksheet entries that would be required regarding the 2010 inventory transfer.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.


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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 transaction. The following selected account balances were from the individual financial records of these two companies as of December 31, 2011:


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122. Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2010 and $165,000 in 2011. Of this inventory, $39,000 of the 2010 transfers were retained and then sold by Icecap in 2011 while $55,000 of the 2011 transfers were held until 2012. Required: For the consolidated financial statements for 2011, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory, and (3) Noncontrolling Interest in Subsidiary's Net Income.

AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory. Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.


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123. Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity transfers were $70,000 in 2010 and $112,000 in 2011. Of this inventory, $29,000 of the 2010 transfers were retained and then sold by Polar in 2011 whereas $49,000 of the 2011 transfers were held until 2012. Required: For the consolidated financial statements for 2011, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory, and (3) Noncontrolling Interest in Subsidiary's Net Income.


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AACSB: Analytic AICPA FN: Measurement Bloom's: Application Difficulty: Medium Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity transfer of inventory. Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a) the end of the year of transfer and (b) the beginning of the subsequent period. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.


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124. Polar sold a building to Icecap on January 1, 2010 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 2011, determine the balances that would appear for the following accounts: (1) Buildings (net), (2) Operating expenses, and (3) Noncontrolling Interest in Subsidiary's Net Income.



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On January 1, 2011, 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 2011 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment.

125. What is consolidated net income for 2011?



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126. Assuming that Musial owned only 90% of Matin, what is consolidated net income for 2009?


127. Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2011, assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream.


Documents

ACG4803 - Chapter 5