Aa2e Hal Testbank Ch04

Chapter 4 Consolidated Financial Statements and Intercompany Transactions Learning Objectives – Coverage by question

LO1 – Describe the accounting for

intercompany sales of inventory between the parent and subsidiary.

Multiple Choice

Exercises

Problems

1, 4, 5, 9, 15-17, 21, 23, 25, 26-30

5, 6

1, 2

3, 7, 8, 10, 11, 18, 36-40

1, 3

3

2, 6, 12-14, 19, 20, 22, 24, 31-35

2, 4

4

LO2 – Describe the accounting for

intercompany sales of non-depreciable Noncurrent assets between the parent and subsidiary. LO3 – Describe the accounting for

intercompany sales of depreciable assets between the parent and subsidiary.

Test Bank, Chapter 4

©Cambridge Business Publishers, 2014 4-1

Chapter 4: Consolidated Financial Statements and Intercompany Transactions

Multiple Choice Multiple Choice – Theory Topic: Intercompany Inventory Sales LO: 1 1. During 2015, Major Company sold merchandise to its 100%-owned subsidiary, Minor Company.

During that year, all of the merchandise was was resold to outside outside customers. If no consolidation consolidation entries are made, which of the following will be incorrect in consolidated statements? a. Inventory, net income b. Inventory, sales, cost of goods sold c. Sales, cost of goods sold d. All accounts will be correct because the goods were quickly resold to customers. Answer: c

Topic: Intercompany Sales of Depreciable Assets LO: 3 2. If Cloggins Co. sold equipment with a six-year life at a gain of $12,000 to Prosey Enterprises, its

subsidiary, in the consolidated statements, the gain will: a. Never be recognized b. Be recognized over the six-year period c. Be recognized immediately d. Be recognized when the asset is resold to outsiders outsiders Answer: b

Topic: Intercompany Sale of Land LO: 2 3. What is a purpose of the consolidation entry regarding the inter-company sale of land?

a. b. c. d.

To To To To

make consolidated consolidated net income the same as it would have been been had the sale not occurred make consolidated net income less than it would have been had the sale not occurred make consolidated net income greater that it would have have been had the sale not occurred adjust the Land account with no effect on consolidated consolidated net income

Answer: a

Topic: Intercompany Inventory Sales LO: 1 4. If unrealized inter-company profits in ending inventory exceed unrealized inter-company profits in

beginning inventory, what will be the effect of the consolidation entries to eliminate unrealized inter-company inventory profits? a. Equity income will be increased b. Consolidated Sales will be decreased c. Consolidated ending inventory will be increased d. Consolidated cost of goods sold will be increased Answer: d ©Cambridge Business Publishers, 2014 4-2

Advanced Accounting, 2nd Edition

Topic: Intercompany Inventory Sales LO: 1 5. Whether inter-company inventory sales are upstream or downstream has no effect on

consolidation procedures when: a. A perpetual inventory system is used b. The goods are immediately resold to outsiders c. The subsidiary is 100% owned d. The goods are sold at cost Answer: c

Topic: Intercompany Sales of Depreciable Assets LO: 3 6. Roxanne, Inc., sells a machine to Granite Company, its subsidiary at a $10,000 gain.

The machine was classified as property, plant and equipment on Roxanne's books and also will be classified as such on Granite's books. The consolidation entry(s) to eliminate the inter-company transaction at year-end will not include: a. A debit to Gain on Sale of Equipment b. A credit to Gain on Sale of Equipment c. A debit to Equipment d. A credit to Depreciation Expense

Answer: b

Topic: Intercompany Sale of Land LO: 2 7. In the case of an intercompany sale of land, a consolidation entry is prepared in the period or

periods: a. Of the sale of the land only b. Of both the sale of the land and the following periods c. After the sale of the land only d. Neither the period of the sale nor the following periods Answer: b

Topic: Intercompany Sale of Land LO: 2 8. In the case of an intercompany sale of land, which of the following is not a true statement?

a. b. c. d.

A gain or loss on sale should not be recorded on the seller's books. In the consolidation worksheet, the Land account is reduced by the amount of a gain GAAP requires the deferral of any gain or loss. The gain or loss on sale will be realized when the land is re-sold to an outside entity.

Answer: a



Topic: Intercompany Inventory Sales LO: 1 9. One of the effects of eliminating intercompany profit from ending inventory is to:

a. b. c. d.

Reduce cost of goods sold Increase cost of goods sold Reduce sales revenue Increase gross profit

Answer: b

Topic: Intercompany Sale of Land LO: 2 10. Intercompany gains on sale of land are deferred:

a. b. c. d.

Until the consolidated entity is sold Over the period that the land produces revenue In perpetuity Until the land is sold

Answer: d

Topic: Intercompany Sale of Land LO: 2 11. When an inter-company gain on sale of land is finally realized by sale of the land to an outsider,

the consolidated gain on sale will equal: a. The sum of the recorded gain on sale to the outsider and the deferred gain b. The difference between the recorded gain on sale to the outsider and the deferred gain c. The deferred gain d. The gain recorded by the affiliate that resold the asset to the outsider Answer: a

Topic: Intercompany Sale of Depreciable Assets LO: 3 12. The consolidation entry to realize a loss from an intercompany sale of a building would include:

a. b. c. d.

A debit to Accumulated Depreciation A credit to Depreciation Expense A debit to Building A debit to Depreciation Expense

Answer: d

Topic: Intercompany Sale of Depreciable Assets LO: 3 13. If a seller makes an intercompany sale of equipment at a gain, retained earnings is reduced in the

consolidation entries. Why does the amount of the adjustment change from year to year? a. Because the Equipment account balance is reduced with passage of time b. Because a portion of the gain is realized each year c. Because Accumulated Depreciation and Equipment are reduced by different amounts each year d. Because the gain is not realized until the asset is sold Answer: b ©Cambridge Business Publishers, 2014 4-4


Topic: Intercompany Sale of Depreciable Assets LO: 3 14. Why does the intercompany sale of a building require subsequent adjustments to depreciation

expense? a. Because the buyer is using a different depreciation method b. Because the buyer has changed the estimated useful life c. Because immediately after the sale, the balance in accumulated depreciation on the buyer's books is ZERO d. Because the book value of the building is the same for the seller and the buyer Answer: c

Topic: Intercompany Inventory Sales LO: 1 15. How much intercompany inventory profit should be eliminated from ending inventory in the

consolidation process? a. Net profit on total inter-company sales during the year b. Gross profit on total inter-company sales during the year c. Gross profit on goods sold to outside parties during the year d. Gross profit on goods remaining in buyer's inventory at year-end Answer: d

Multiple Choice – Computational Topic: Intercompany Inventory Sales LO: 1 16. Raylord Co. acquired 100% of Gand Inc. on January 5, 2013. During 2013, Raylord sold goods

to Gand for $150,000 that cost Raylord $112,500. Gand still owned 40% of the goods at the end of the year. Cost of goods sold was $675,000 for Raylord and $400,000 for Gand. What was consolidated cost of goods sold ? a. $ 940,000 b. $ 687,500 c. $ 675,000 d. $1,075,000 Answer: a

Topic: Intercompany Inventory Sales LO: 1 17. Kane, Inc. acquired 100% of Toews Enterprises on January 5, 2014. During 2014, Kane sold

Toews for $375,000 goods which had cost $255,000. Toews still owned 10% of the goods at the end of the year. In 2015, Kane sold goods with a cost of $480,000 to Toews for $600,000, and the buyer still owned 15% of the goods at year-end. For 2015, cost of goods sold was $3,240,000 for Kane and $720,000 for Toews. What was consolidated cost of goods sold for 2015? a. $3,960,000 b. $3,366,000 c. $3,360,000 d. $3,966,000 Answer: b



Topic: Intercompany Sale of Land LO: 2 18. During 2015, Jerome sold to its subsidiary, Rascal, land with a book value of $144,000. The

selling price was $210,000. In its accounting records, Jerome should: a. Recognize a gain of $66,000 b. Defer recognition of the gain until Rascal sells the land to a third party c. Recognize the gain over the asset's life d. Not recognize a gain Answer: a

The following information applies to Questions 19 & 20.

Riley Co. owned all of the voting common stock of Parker. On January 2, 2013 Riley sold equipment to Parker for $125,000. The equipment had cost Riley $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 no salvage value. Topic: Intercompany Sale of Depreciable Assets LO: 3 19. For the consolidated balance sheet at December 31, 2013, at would amount would the equipment

(net) be included? a. $ 80,000 b. $100,000 c. $125,000 d. $-0 Answer: a

Topic: Intercompany Sale of Depreciable Assets LO: 3 20. For the consolidated balance sheet at December 31, 2014, at would amount would the equipment

(net) be included? a. $100,000 b. $ 75,000 c. $ 60,000 d. $-0 Answer: c



The following information applies to Questions 21 - 25.

On January 1, 2013, Sheldon, Inc. acquired the outstanding voting common stock of Steffen Corp. for $472,500. Of this payment, $35,000 was allocated to undervalued equipment (with a five-year life). Any remaining excess was attributable to goodwill. During 2013, Sheldon bought inventory for $70,000 and sold it to Steffen for $87,500. 40% of these goods were still in the company's possession on December 31. The financial statements of the two companies as of December 31, 2013 are presented below.

Sales revenue Cost of goods sold Gross profit Operating expenses Equity income Net Income

Sheldon $ 525,000 (245,000) 280,000 (35,000) 171,500 $ 416,500

Steffen $175,000 (70,000) 105,000 (8,750) _______ $ 96,250

Retained Earnings, 1/1/13 Net income Dividends Retained Earnings, 12/31/13

$ 525,000 416,500 -0$ 941,500

$131,250 96,250 -0$227,500

Cash and receivables Inventory Equity investment Property, plant & equipment (Net) Total Assets

$ 350,000 262,500 644,000 770,000 $2,026,500

$78,750 96,250 262,500 $437,500

Accounts payable Accrued liabilities Common stock Additional paid-in capital Retained Earnings, 12/31/13 Total Liabilities and Equities

$ 435,000 300,000 70,000 280,000 941,500 $2,026,500

$73,500 49,000 17,500 70,000 227,500 $437,500

Topic: Intercompany Inventory Sales LO: 1 21. What is consolidated revenues?

a. $787,500 b. $612,500 c. $525,000 d $175,000 Answer: b



Topic: Undervalued Depreciable Assets LO: 3 22. What is consolidated operating expenses?

a. b. c. d.

$50,750 $43,750 $42,000 $45,000

Answer: a

Topic: Intercompany Inventory Sales LO: 1 23. What is consolidated cost of goods sold?

a. b. c. d.

$315,000 $210,000 $322,000 $234,500

Answer: d

Topic: Undervalued Depreciable Assets LO: 3 24. What is the consolidated book value of property, plant and equipment on the December 31, 2013

balance sheet? a. $1,032,500 b. $1,067,500 c. $1,060,500 d. $1,005,000 Answer: c

Topic: Intercompany Inventory Sales LO: 1 25. What is consolidated inventory on the December 31, 2013 balance sheet?

a. b. c. d.

$358,750 $351,750 $365,750 $262,500

Answer: b




Akers Company, a 100% owned subsidiary of Muhs Corporation, sells inventory to Muhs at a 30% profit on selling price. The following data are available pertaining to inter-company purchases by Muhs: Inter-company 2014: 2015: 2016:

sales: $ 9,600 $14,400 $18,000

Unsold at year end based on selling price: 2014: $ 1,440 2015: $4,800 2016: $3,600

Akers’ profit

numbers were $84,000, $102,000 and $112,800 for 2014, 2015, and 2016, respectively. Muhs received dividends from Akers of $12,000 for 2014 and 2015, and $18,000 for 2016. Topic: Intercompany Inventory Sales LO: 1 26. What is the balance in Equity Income for 2014?

a. b. c. d.

$84,000 $82,560 $83,568 $74,400

Answer: c

Topic: Intercompany Inventory Sales LO: 1 27. What is the balance in Equity Income for 2015?

a. b. c. d.

$100,992 $102,000 $102,432 $100,560

Answer: a

Topic: Intercompany Inventory Sales LO: 1 28. What is the balance in Equity Income for 2016?

a. b. c. d.

$102,000 $114,240 $112,800 $113,160

Answer: d

Topic: Intercompany Inventory Sales LO: 1 29. What would be the net debit or credit to cost of goods sold on the 2015 consolidation worksheet?

a. b. c. d.

$14,400 credit $13,392 credit $12,960 credit $ 1,440 debit

Answer: b



Topic: Intercompany Inventory Sales LO: 1 30. What would be the debit to retained earnings regarding the 2014 consolidation entry related to

the a. b. c. d.

unrealized inventory profit? $-0$2,880 $1,440 $ 432

Answer: a


On April 1, 2014, Narrow Company sold equipment to its wholly owned subsidiary, Thatch Corporation. At the time of the transfer, the asset had a cost of $240,000 and accumulated depreciation of $90,000. The selling price was $204,000. The two companies agreed on a ten-year estimated remaining life. Thatch's profit numbers were $300,000, $360,000 and $390,000 for 2014, 2015, and 2016, respectively. Narrow received dividends from Thatch of $120,000, $150,000 and 180,000 for 2014, 2015, and 2016, respectively. Topic: Intercompany Sale of Depreciable Assets LO: 3 31. What was the amount of the gain or loss on the sale of equipment reported by Narrow in 2014?

a. b. c. d.

$-0$ 54,000 gain $ 36,000 loss $204,000 gain

Answer: b

Topic: Intercompany Sale of Depreciable Assets LO: 3 32. What was the amount of the credit to depreciation expense on the 2014 consolidation worksheet?

a. b. c. d.

$4,050 $-0$5,400 $2,700

Answer: a

Topic: Intercompany Sale of Depreciable Assets LO: 3 33. What was the amount of the credit to depreciation expense on the 2015 consolidation worksheet?

a. b. c. d.

$-0$4,050 $5,400 $2,700

Answer: c



Topic: Intercompany Sale of Depreciable Assets LO: 3 34. What was the balance in Equity Income for 2014?

a. b. c. d.

$250,050 $246,000 $251,400 $300,000

Answer: a

Topic: Intercompany Sale of Depreciable Assets LO: 3 35. What was the balance in Equity Income for 2015?

a. b. c. d.

$250,050 $365,400 $294,600 $300,000

Answer: b


On January 1, 2013, Nienaber Corporation sold a tract of land to its 100% owned subsidiary, Prebil, Inc., for $270,000. The land originally cost Nienaber $216,000. Prebil reported net income of $450,000 and $504,000 for 2013 and 2014, respectively.

Topic: Intercompany Sale of Land LO: 2 36. What is the recorded gain or loss on sale of the land on Nienaber's books in 2013?

a. b. c. d.

$-0$ 54,000 loss $270,000 gain $ 54,000 gain

Answer: d

Topic: Intercompany Sale of Land LO: 2 37. On the consolidation worksheet for 2013, what adjustment would be made to the Land account?

a. b. c. d.

$ 54,000 debit $ 54,000 credit $270,000 credit $216,000 credit

Answer: b



Topic: Intercompany Sale of Land LO: 2 38. Compute the balance in Equity Income for 2014.

a. b. c. d.

$504,000 $450,000 $558,000 $774,000

Answer: a


Millonzi Company sold land to Mueller Enterprises, its parent, on June 1, 2014. The sale price was $44,000. The land originally cost Millonzi $46,750. Millonzi reported net income of $99,000 and $121,000 for 2014 and 2015, respectively. Mueller sold the land it purchased from Millonzi in 2014 for $92,000 in 2016.

Topic: Intercompany Sale of Land LO: 2 39. Compute the balance in Equity Income for 2014.

a. b. c. d.

$ 99,000 $ 96,250 $101,750 $143,000

Answer: c

Topic: Intercompany Sale of Land LO: 2 40. What is the consolidated figure for gain or loss on sale of land for 2016?

a. b. c. d.

$2,000 gain $2,000 loss $2,750 loss $ 750 loss

Answer: d



Exercises Topic: Intercompany Sale of Land LO: 2 1. During 2013, Subsidiary sells land to Parent for $84,500. The land had a book value of $65,000.

The land is then sold to a third party for $123,500 in 2017. Parent uses the equity method for the 100% investment. Required:

a. b. c. d.

Prepare the consolidation entry related to the land sale for 2013. Prepare the consolidation entry related to the land sale for 2014. Prepare the consolidation entry related to the land for 2017. What will be the gain on sale on the 2017 consolidated income statement?

Answer:

a. [Igain] Gain on Sale of Land 19,500 Land 19,500 To eliminate gain and restore land to its original book value. b. [Igain] Retained Earnings 19,500 Land 19,500 To eliminate unrealized gain from beginning retained earnings and restore land to its original book value. c.

[Igain] Retained Earnings 19,500 Gain on Sale of Land To recognize realization of gain on sale.

19,500

d. 2017 consolidated gain on sale = $39,000 + ($123,500 - 84,500) = $58,500

Topic: Intercompany Sale of Depreciable Assets LO: 3 2. On Jan 2, 2014, Parent sells to its wholly owned investee equipment that had cost $50,000. The

selling price was $43,750 and accumulated depreciation on that date was $15,000. subsidiary depreciates the equipment over its remaining life of 7 years.

The

Required:

a. Compute the difference between the annual depreciation expense when Parent owned the equipment and depreciation expense recorded by the subsidiary. b. Compute the gain on sale recorded by the parent. c. Prepare the consolidation entries for 2014 related to the equipment sale. d. Prepare the consolidation entries for 2016 related to the equipment sale.

continued next page



Answer:

a. Depreciation expense on Parent's books: Depreciation expense on Subsidiary's books: Difference

($50,000-15,000)/7 = $43,750/7 =

$5,000 6,250 $1,250

b. $43,750 - ($50,000 - 15,000) = 8,750 Gain on Sale recorded by Parent c.

Gain on Sale 8,750 Equipment 6,250 Accumulated Depreciation 15,000 To eliminate gain on sale and restore equipment to original book value. Accumulated Depreciation 1,250 Depreciation Expense 1,250 To adjust depreciation expense to its consolidated balance

d. Retained Earnings 6,250 Equipment 6,250 Accumulated Depreciation 12,500 To adjust beginning retained earnings and equipment (net) to consolidated balances. Accumulated depreciation 1,250 Depreciation expense 1,250 To adjust depreciation expense to its consolidated balance. Topic: Intercompany Sale of Land LO: 2 3. During 2015, Parent sells land to Subsidiary for $92,950. The land had a book value of $71,500.

The land is then sold to a third party for $135,850 in 2019. Required:

a. b. c. d.

Prepare the consolidation entry related to the land sale for 2015. Prepare the consolidation entry related to the land sale for 2016. Prepare the consolidation entry related to the land for 2019. What will be the gain on sale on the 2019 consolidated income statement?

Answer:

a. Gain on Sale of Land 21,450 Land 21,450 To eliminate gain and restore land to its original book value. b. Retained Earnings 21,450 Land To restore land to its original book value. c.

Retained Earnings Gain on Sale of Land To recognize deferred gain.

21,450

21,450 21,450

d. Consolidated gain = $21,450 + ($135,850 - 92,950) = $64,350



Topic: Intercompany Sale of Depreciable Assets LO: 3 4. On Jan 2, 2014, a subsidiary sells to its parent equipment that had cost $10,000. The selling

price was $8,750 and accumulated depreciation on that date was $3,000. The subsidiary and the parent agree that the equipment should be depreciated over its remaining life of 7 years. Required:

a. Compute the difference between the annual depreciation expense when the subsidiary owned the equipment and depreciation expense recorded by the parent. b. Compute the gain on sale recorded by the subsidiary. c. Prepare the consolidation entries for 2014 related to the equipment sale. d. Prepare the consolidation entries for 2016 related to the equipment sale. Answer:

a. Depreciation expense on Parent's books: ($8,750)/7 = $ 1,250 Depreciation expense on Subsidiary's books: ($10,000-3,000)/7 = 1,000 Difference $ 250 b. $8,750 - ($10,000 - 3,000) = $1,750 Gain on Sale c.

Gain on Sale of Equipment $1,750 Equipment 1,250 Accumulated Depreciation 3,000 To eliminate gain on sale and adjust beginning equipment (net) to consolidated value. Accumulated Depreciation 250 Depreciation Expense 250 To adjust depreciation expense to consolidated value.

d. Equity Investment 1,250 Equipment 1,250 Accumulated Depreciation To adjust equipment (net) to consolidated value.

2,500

Accumulated Depreciation 250 Depreciation Expense 250 To adjust depreciation expense to consolidated value.



Topic: Intercompany Inventory Sales LO: 1 5. Parent Co. acquired 100% of Sub, Inc. on January 1, 2014. During 2014, Parent sold goods to

Sub for $240,000 that cost Parent $180,000. Sub still owned 40% of the goods at the end of the year. Cost of goods sold was $1,080,000 for Parent and $640,000 for Sub. Required:

a. Prepare all consolidation entries related to inventory and cost of goods sold for 2014. b. Compute consolidated cost of goods sold for 2014. c. Assuming that the remainder of the inventory was sold to third parties during 2015, prepare the 2015 consolidation entry to recognize the previously deferred profit. Answer:

a. Sales

240,000 Cost of Goods Sold To eliminate 2014 inter-company sales.

240,000

Cost of Goods Sold 24,000* Merchandise Inventory 24,000 To eliminate unrealized gross profit from ending inventory. *($240,000 - 180,000) x 0.40 b. Consolidated cost of goods sold: $1,080,000 + 640,000 + 24,000 - 240,000 = $1,504,000 c.

Retained Earnings 24,000 Cost of Goods Sold To recognize previously deferred gross profit.

24,000

Topic: Intercompany Inventory Sales LO: 1 6. The separate income statements Ziccarelli Corporation and its subsidiary, Herstowski Co., for

2013 are presented below:

Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Freeman's net income Emrick's net income from its own operations

Ziccarelli $990,000 440,000 550,000 275,000

Herstowski $192,500 137,500 55,000 27,500 $ 27,500

$275,000

During 2013, Ziccarelli sold merchandise costing $24,000 to Herstowski for $48,000. At the end of 2013, half of the merchandise remained unsold by Herstowski. Required: Prepare a consolidated income statement for 2013. Answer:

Consolidated Income Statement: Sales Revenue: $990,000 + 192,500 - 48,000 = Cost of Goods Sold: $440,000 + 137,500 - 48,000 + 12,000* = Gross Profit Operating Expenses: $275,000 + 27,500 = Consolidated Net Income

$1,134,500 541,500 593,000 302,500 $ 290,500

*($48,000 - 24,000) x 1/2



Problems Topic: Intercompany Inventory Sales LO: 1 1. Parent purchased Subsidiary on January 1, 2013.

The excess of investment cost over book

value was allocated as follows: Equipment (20-year life) Customer list (10-year life) Patent (10-year life) Goodwill Total

$110,000 192,500 137,500 110,000 $550,000

Parent regularly sells merchandise to Subsidiary. In 2015, inter-company sales amounted to $48,070, with $14,253 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $14,560. In 2016, inter-company sales amounted to $74,800 with $21,318 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $29,920. Financial statements of Parent and Subsidiary for the year ended December 31, 2016 are presented below.


Parent $4,807,000 (3,364,900) 1,442,100 (913,030) 195,599 $ 724,669

Subsidiary $ 1,722,600 (1,033,560) 689,040 (447,876) _ $ 241,164


$2,415,037 724,669 (138,780) $3,000,926

$ 890,010 241,164 (31,352) $ 1,099,822


$1,345,251 932,558 1,732,894 4,485,892 $8,496,595

$ 956,434 513,334

Accounts payable Accrued liabilities Notes payable Common stock Additional paid-in capital Retained Earnings, 12/31/16 Total Liabilities and Equities

$ 639,306 722,813 2,750,000 785,945 597,605 3,000,926 $8,496,595

$ 205,608 281,476 574,200 114,840 143,550 1,099,822 $2,419,496

949,728 $2,419,496

Required:

a. Prepare the 2016 journal entries, required by the equity method, on Parent's books. b. Prepare the consolidation entries for 2016.

continued next page Test Bank, Chapter 4


Answer:

Compute annual amortization: Equipment $110,000/20 = Customer list 192,500/10 = Patent 137,500/10 = Goodwill No amortization Total annual amortization

$ 5,500 $19,250 $13,750 _ ____ $38,500

Deferred inventory profit, December 31, 2016: Deferred inventory profit, January 1, 2016:

$21,318 $14,253

Unamortized excess at December 31, 2016: Goodwill Equipment ($5,500 x 16 years) Customer list ($19,250 x 6 years) Patent ($13,750 x 6 years) Total

$110,000 88,000 115,500 82,500 $396,000

a. Equity method entries: Equity Investment 241,164 Equity Income 241,164 To recognize equity in Subsidiary's reported net income. Equity Income Equity Investment To recognize amortization.

38,500 38,500

Equity Investment 14,253 Equity Income To recognize deferred profit in beginning inventory.

14,253

Equity Income Equity Investment To defer profit in ending inventory.

21,318 21,318

Cash

31,352

Equity Investment To recognize Subsidiary's dividends.

31,352

continued next page



b. Consolidation entries: [C] Equity Income 195,599 Dividends Equity Investment To eliminate Equity Income and dividends. [E] Common Stock 114,840 Retained Earnings 890,010 Additional Paid-In Capital 143,550 Equity Investment To eliminate Subsidiary's stockholders' equity. [A] Goodwill 110,000 PPE, net 93,500 Customer List 134,750 Patent 96,250 Equity Investment To allocate excess to Subsidiary's assets. [D] Operating Expenses Equipment Customer List Patent To record amortization.

38,000

[Isales] Sales Revenue Cost of Goods Sold To eliminate intercompany sales

74,800

31,352 164,247

1,148,400

434,500

5,500 19,250 13,750

74,800

[Icogs] Cost of Goods Sold 21,318 Merchandise Inventory To eliminate deferred profit in ending inventory.

21,318

[Icogs] Equity Investment 14,253 Cost of Goods Sold To eliminate deferred profit in beginning inventory.

14,253

[Ipay] Accounts Payable 29,920 Accounts Receivable To eliminate intercompany receivable and payable.

29,920



Topic: Intercompany Inventory Sales LO: 1 2. Parent purchased Subsidiary on January 1, 2014. The excess of investment cost over book

value of $210,000 was allocated entirely to a 10-year royalty agreement. Subsidiary regularly sells merchandise to Parent. In 2015, inter-company sales amounted to $123,960, with $27,558 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $40,300. In 2016, inter-company sales amounted to $123,960 with $35,330 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $49,584. Financial statements of Parent and Subsidiary for the year ended December 31, 2016 are presented below.

Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Equity Income Net Income

Parent $ 9,864,000 (6,904,800) 2,959,200 (1,874,160) 491,860 $ 1,576,900

Subsidiary $3,718,800 (2,231,280) 1,487,520 (966,888) _ $ 520,632


$ 4,955,674 1,316,584 (301,758) $ 6,230,816

$1,921,380 520,632 (67,682) $2,374,330

Cash and receivables Inventory Equity Investment Property, Plant & Equipment (Net) Total Assets

$ 2,557,242 1,913,616 3,043,826 9,205,085 $16,719,769

$2,064,790 1,108,202


$ 1,341,706 1,513,051 4,200,000 1,612,764 1,821,432 6,230,816 $16,719,769

$ 443,876 607,660 1,239,600 125,280 432,546 2,374,330 $5,223,292

2,050,300 $5,223,292

Required:

a. Prepare a schedule showing the computation of Equity Income on Parent's books for 2016. b. Prepare a schedule showing the computation of Equity Investment on Parent's books at December 31, 2016. c. Prepare the consolidation entries for 2016.

continued next page



Answer:

a. Computation of Equity Income for 2016: Equity in Subsidiary Reported Income Amortization Realized inventory profit-beginning inventory Unrealized inventory profit

$520,632 (21,000) 27,558 (35,330) $491,860

b. Computation of Equity Investment at December 31, 2016: Common Stock $ 125,280 Retained Earnings 2,374,330 Additional paid-in capital 432,546 Unamortized Excess ($210,000/10 x 7 years) 147,000 Unrealized inventory profit (35,330) $3,043,826 c. 2016 Consolidation Entries: [C] Equity Income 491,860 Dividends 67,682 Equity Investment 424,178 To eliminate Equity Income and dividends. [E] Common Stock 125,280 Retained Earnings 1,921,380 Additional Paid-In Capital 432,546 Equity Investment To eliminate Subsidiary's stockholders' equity. [A] Royalty Agreement Equity Investment To allocate excess to Subsidiary's assets. [D] Amortization Expense Royalty Agreement To record amortization. [Isales] Sales Revenue Cost of Goods Sold To eliminate intercompany sales.

2,479,206

168,000 168,000 21,000 21,000 123,960 123,960

[Icogs] Cost of Goods Sold 35,330 Merchandise Inventory To eliminate deferred profit in ending inventory.

35,330

[Icogs] Equity Investment 27,558 Cost of Goods Sold To eliminate deferred profit in ending inventory.

27,558

[Ipay] Accounts Payable 49,584 Accounts Receivable To eliminate intercompany receivable and payable.

49,584



Topic: Intercompany Sale of Land LO: 2 3. Parent acquired Subsidiary on January 1, 2013 at a price $150,000 in excess of book value. Of

that excess, $100,000 was allocated to an unrecorded patent with a 10-year life, with the remainder to goodwill. In 2014, Subsidiary sold to Parent land having a book value of $70,000 for a total price of $100,000. Financial statements of the two companies for the year ended December 31, 2015 are presented below.


Parent $1,500,000 (1,050,000) 450,000 (285,000) 42,500 $ 207,500

Subsidiary $375,000 (225,000) 150,000 (97,500) _ $ 52,500


$ 753,600 207,500 ( 41,688) $ 919,412

$193,750 52,500 (6,824) $239,426


$ 342,783 291,000 385,676 1,399,800 $2,419,259

$208,212 111,750


$ 173,144 199,202 750,000 245,250 132,251 919,412 $2,419,259

$ 44,760 61,276 125,000 25,000 31,250 239,426 $526,712

206,750 $526,712

Required:

a. Prepare a schedule showing the computation of Equity Income on Parent's books for 2015. b. Prepare a schedule showing the computation of Equity Investment on Parent's books at December 31, 2015. c. Prepare the consolidation entries for 2015.

continued next page



Answer:

a. Computation of 2015 Equity Income: Subsidiary Reported Net Income Amortization Equity Income

$52,500 (10,000) $42,500

b. Computation of Equity Investment at December 31, 2015: Common Stock $ 25,000 Additional paid-in capital 31,250 Retained Earnings 239,426 Unamortized Excess 120,000 Unrealized Land Gain (30,000) Equity Investment, December 31, 2015 $385,676 c.

2015 Consolidation Entries: [C] Equity Income Dividends Equity Investment To eliminate Equity Income and dividends.

42,500 6,824 35,676

[E] Common Stock 25,000 Retained Earnings 193,750 Additional Paid-In Capital 31,250 Equity Investment To eliminate Subsidiary's stockholders' equity. [A] Patent Goodwill Equity Investment To allocate excess to Subsidiary's assets.

80,000 50,000

[D] Amortization Expense Patent To record amortization.

10,000

[Igain] Equity Investment Land To eliminate gain on land sale.

30,000


250,000

130,000

10,000

30,000


Topic: Intercompany Sale of Depreciable Assets LO: 3 4. Parent acquired Subsidiary on January 1, 2014 at a price $150,000 in excess of book value. Of

that excess, $100,000 was allocated to an unrecorded Customer List with a 10-year life, with the remainder to Goodwill. On January 2017, Subsidiary sold equipment to Parent for $60,000. The equipment had a cost of $70,000 and accumulated depreciation of $28,000. The remaining life of the equipment was estimated at 6 years. Financial statements for the two companies for the year ended December 31, 2018 are presented below.


Parent $5,000,000 (3,600,000) 1,400,000 (750,000) 133,000 $ 783,000

Subsidiary $ 1,000,000 (600,000) 400,000 (260,000) _ $ 140,000


$2,922,150 783,000 (142,000) $3,563,150

$ 225,000 140,000 (20,000) $ 345,000


$1,404,650 1,300,000 712,000 5,030,000 $8,446,650

$ 752,000 550,000


$ 676,000 716,000 1,250,000 211,500 2,030,000 3,563,150 $8,446,650

1,030,000 $2,332,000 $

178,000 230,000 1,300,000 124,000 155,000 345,000 $2,332,000

Required:

a. Prepare the journal entries on the books of Parent and Subsidiary to record the equipment sale. b. Compute the amount of unrealized gain at January 1, 2018. c. Prepare entries required under the equity method on Parent's books for 2018. d. Prepare the consolidation entries for 2018.

continued next page



Answer:

a. Cash 60,000 Accumulated Depreciation 28,000 Equipment 70,000 Gain on Sale 18,000 To record sale of equipment on Subsidiary books. Equipment 60,000 Cash To record equipment purchase by Parent. b. Unrealized gain at January 1, 2018: Total gain Less: Realized Gain ($18,000/6) Unrealized Gain c.

60,000

$18,000 3,000 $15,000

2018 Equity method entries: Equity Investment 140,000 Equity Income 140,000 To recognize equity in Subsidiary's reported net income. Equity Income 10,000 Equity Investment To recognize amortization.

10,000

Equity Investment 3,000 Equity Income 3,000 To recognize realization of gain on equipment sale. Cash

20,000

Equity Investment To recognize Subsidiary's dividends.

20,000

continued next page



d. Consolidation entries for 2018: [C] Equity Income 133,000 Dividends Equity Investment To eliminate Equity Income and dividends. [E] Common Stock 124,000 Retained Earnings 225,000 Additional Paid-In Capital 155,000 Equity Investment To eliminate Subsidiary's stockholders' equity. [A] Patent 60,000 Goodwill 50,000 Equity Investment To allocate excess to Subsidiary's assets. [D] Amortization Expense Patent To record amortization.

20,000 113,000

504,000

110,000

10,000 10,000

[Igain] Equity Investment 15,000 PPE, net To adjust Equipment (net) to consolidated value.

15,000

[Idepr ] PPE,net 3,000 Depreciation expense To record realization of gain on equipment sale.

3,000



Aa2e Hal Testbank Ch04

Recommend Documents