Chap006-Intercompany Transfers of Services and Non Current Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 Intercompany Transfers of Services and Noncurrent Assets Multiple Choice Questions

1. Blue Company owns 70 percent of Black Company's outstanding common stock. On December 31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 2008, the carrying amount of the equipment should be reported at: A. Blue's original cost. B. Black's original cost. C. Blue's original cost less Black's recorded gain. D. Blue's original cost less 70 percent of Black's recorded gain.

2. A parent and its 80 percent owned subsidiary have made several intercompany sales of noncurrent assets during the past two years. The amount of income assigned to the noncontrolling interest for the second year should include the noncontrolling interest's share of gains: A. unrealized in the second year from upstream sales made in the second year. B. realized in the second year from downstream sales made in both years. C. realized in the second year from upstream sales made in both years. D. both realized and unrealized from upstream sales made in the second year.

3. A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal: A. the parent's separate operating income, plus the subsidiary's net income. B. the parent's separate operating income, plus the subsidiary's net income, minus the intercompany gain. C. the parent's separate operating income, plus the subsidiary's net income, plus the intercompany gain. D. the parent's net income, plus the subsidiary's net income, minus the intercompany gain.

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Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 2008, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 2006, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible.

4. Based on the information provided, in the preparation of the 2008 consolidated financial statements, building will be _____ in the eliminating entries. A. debited for $33,000 B. debited for $36,000 C. credited for $36,000 D. debited for $3,000

5. Based on the information provided, the gain on sale of the building eliminated in the consolidated financial statements for 2008 is: A. $8,250. B. $10,500. C. $6,000. D. $11,250.

6. Based on the information provided, while preparing the 2008 consolidated income statement, depreciation expense will be: A. debited for $750 in the eliminating entries. B. credited for $750 in the eliminating entries. C. credited for $1500 in the eliminating entries. D. debited for $1500 in the eliminating entries.

7. Based on the information provided, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A. debited for $750 in the eliminating entries. B. credited for $750 the eliminating entries. C. credited for $1500 in the eliminating entries. D. debited for $1500 in the eliminating entries.

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8. Based on the information provided, in the preparation of a consolidated balance sheet at January 1, 2009, retained earnings will be: A. debited for $6,750 in the eliminating entries. B. credited for $6,750 in the eliminating entries. C. credited for $7,500 in the eliminating entries. D. debited for $7,500 in the eliminating entries.

9. Phobos Company holds 80 percent of Deimos Company's voting shares. During the preparation of consolidated financial statements for 2009, the following eliminating entry was made:

Which of the following statements is correct? A. Phobos Company purchased land from Deimos Company during 2009. B. Phobos Company purchased land from Deimos Company before January 1, 2009. C. Deimos Company purchased land from Phobos Company during 2009. D. Deimos Company purchased land from Phobos Company before January 1, 2009.

ABC Corporation purchased land on January 1, 2006, for $50,000. On July 15, 2008, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares.

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10. Based on the preceding information, what will be the workpaper eliminating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 2008?

A. Option A B. Option B C. Option C D. Option D

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12. Which workpaper eliminating entry will be made on December 31, 2009, if XYZ Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15, 2008, for $70,000?


Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 2007. On December 31, 2008, Mortar received $390,000 from Granite for a equipment Mortar had purchased on January 1, 2005, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis.

13. Based on the preceding information, in the preparation of the 2008 consolidated financial statements, equipment will be: A. debited for $1,000. B. debited for $10,000. C. credited for $15,000. D. debited for $25,000.

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14. Based on the preceding information, the gain on sale of the equipment recorded by Mortar for 2008 is: A. $150,000 B. $65,000 C. $110,000 D. $40,000


16. Based on the preceding information, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A. debited for $25,000 in the eliminating entries. B. credited for $15,000 in the eliminating entries. C. debited for $15,000 in the eliminating entries. D. credited for $25,000 in the eliminating entries.

17. Based on the preceding information, in the preparation of the 2009 consolidated balance sheet, accumulated depreciation will be: A. debited for $160,000 in the eliminating entries. B. credited for $160,000 in the eliminating entries. C. credited for $135,000 in the eliminating entries. D. debited for $135,000 in the eliminating entries.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 2007. On January 1, 2008, Mortar received $350,000 from Granite for a equipment Mortar had purchased on January 1, 2005, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straightline basis.

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19. Based on the preceding information, the gain on sale of equipment recorded by Mortar for 2008 is: A. $70,000. B. $65,000. C. $50,000. D. $40,000.


21. Based on the preceding information, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A. Debited for $40,000 in the eliminating entries. B. Credited for $10,000 in the eliminating entries. C. Debited for $10,000 in the eliminating entries. D. Credited for $40,000 in the eliminating entries.


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On January 1, 2007, Servant Company purchased a machine with an expected economic life of five years. On January 1, 2009, Servant sold the machine to Master Corporation and recorded the following entry:

Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 2009. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer.


24. Based on the preceding information, in the preparation of the 2009 consolidated balance sheet, machine will be: A. debited for $1,000. B. debited for $15,000. C. credited for $45,000. D. debited for $25,000.

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25. Based on the preceding information, income assigned to the noncontrolling interest in the 2009 consolidated income statement will be: A. $12,000. B. $14,000. C. $12,500. D. $48,000.

26. Based on the preceding information, consolidated net income for 2009 will be: A. $150,000. B. $100,000. C. $148,000. D. $130,000.

27. On January 1, 2009, Light Corporation sold equipment for $400,000 to Star Corporation, its wholly owned subsidiary. Light had paid $900,000 for this equipment, which had accumulated depreciation of $170,000. Light estimated a $50,000 salvage value and depreciated the tractor using the straight-line method over 10 years, a policy that Star continued. In Light's December 31, 2009, consolidated balance sheet, this tractor should be included in fixed-asset cost and accumulated depreciation as:


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Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 2003, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 2008, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 2008 and 2009, respectively. Black reported net income of $30,000 and $45,000 for 2008 and 2009, respectively.

28. Based on the preceding information, the amount to be reported as consolidated net income for 2008 will be: A. $190,000. B. $170,000. C. $175,000. D. $150,000.

29. Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 2008 will be: A. $190,000. B. $170,000. C. $175,000. D. $150,000.



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32. Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements? I. Security holdings II. Interest and dividends III. Sales and purchases A. I, II B. I, III C. I, II, III D. II

Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 2008. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 2008, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 2008, and S2 sold the land to S1 for $197,000 on November 27, 2008. Parent has control of the following companies:

Parent reported income from its separate operations of $200,000 for 2008.

33. Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 2008? A. $145,000 B. $220,000 C. $197,000 D. $160,000

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34. Based on the preceding information, what amount of gain or loss on sale of land should be reported in the consolidated income statement for 2008? A. $60,000 B. $0 C. $75,000 D. $23,000

35. Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 2008? A. $369,400 B. $405,000 C. $465,000 D. $60,000

Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 2007, Big paid Small $125,432 for its services. For the year 2008, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 2007 and $121,000 in 2008. Big reported $2,567,000 of income from its own separate operations for 2008, and Small reported net income of $695,000.

36. Based on the preceding information, what amount of consolidated net income should be reported in 2008? A. $3,262,000 B. $4,050,000 C. $3,254,100 D. $3,122,000

37. Based on the preceding information, what amount of income should be assigned to the noncontrolling shareholders in the consolidated income statement for 2008? A. $47,700 B. $44,400 C. $55,600 D. $60,000

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38. Based on the preceding information, what amount of receivable/payable should be eliminated in the 2008 consolidated financial statements? A. $125,432 B. $7,900 C. $5,560 D. $140,000

39. A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal: A. the parent's separate operating income, plus the intercompany loss. B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net income. C. the parent's separate operating income, minus the intercompany loss. D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's net income.

40. Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I. in the year of the downstream sale. II. over the period of time the subsidiary uses the land. III. in the year the subsidiary sells the land to an unrelated party. A. I B. II C. III D. I or II

Essay Questions

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41. Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 2005, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Winner Company. The companies' permanent accounts on December 31, 2008, contained the following balances:

On January 1, 2004, Fred paid $150,000 for equipment with a 10-year expected total economic life. The equipment was depreciated on a straight-line basis with no residual value. Winner purchased the equipment from Fred on December 31, 2006, for $140,000. Winner sold land it had purchased for $75,000 on February 18, 2004, to Fred for $60,000 on October 10, 2007. Required: Prepare a consolidated balance sheet workpaper in good form as of December 31, 2008.

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42. New Company acquired 75 percent of Old Company's stock at underlying book value on January 1, 2008. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Old Company. Old Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 2008, Old Company reported net income of $60,000 and paid dividends of $3,000. In 2009, Old Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between New Company and Old Company in 2008 and 2009: Old Co. sold computer equipment to New Co. for a $42,000 profit on December 26, 2008. The equipment had a five-year estimated economic life remaining at the time of intercompany transfer and is depreciated on a straight-line basis. New sold land costing $90,000 to Old Company on June 28, 2009, for $110,000. Required: 1) Give all eliminating entries needed to prepare a consolidation workpaper for 2009 assuming that New Co. uses the fully adjusted equity method to account for its investment in Old Company. 2) Give all eliminating entries needed to prepare a consolidation workpaper for 2009 assuming that New Co. uses the cost method to account for its investment in Old Company.

43. Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course of 2008 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility, which will open January 4, 2009, and has a 5 year useful life. Explain the impact providing this service has on Peter Architectural Services' 2008 and 2009 consolidated financial statements.

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44. PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent owned subsidiary, on January 1, 2008. The cost of the land was $75,000, when it was purchased in 2007. In 2010, Seven Star sells the land to Hot Properties Inc., an unrelated entity, for $120,000. How is the land reported in the consolidated financial statements for 2008, 2009 and 2010?

Chapter 06 Intercompany Transfers of Services and Noncurrent Assets Answer Key

Multiple Choice Questions

1. Blue Company owns 70 percent of Black Company's outstanding common stock. On December 31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 2008, the carrying amount of the equipment should be reported at: A. Blue's original cost. B. Black's original cost. C. Blue's original cost less Black's recorded gain. D. Blue's original cost less 70 percent of Black's recorded gain.

AACSB: Analytic AICPA: Reporting

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2. A parent and its 80 percent owned subsidiary have made several intercompany sales of noncurrent assets during the past two years. The amount of income assigned to the noncontrolling interest for the second year should include the noncontrolling interest's share of gains: A. unrealized in the second year from upstream sales made in the second year. B. realized in the second year from downstream sales made in both years. C. realized in the second year from upstream sales made in both years. D. both realized and unrealized from upstream sales made in the second year.


3. A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal: A. the parent's separate operating income, plus the subsidiary's net income. B. the parent's separate operating income, plus the subsidiary's net income, minus the intercompany gain. C. the parent's separate operating income, plus the subsidiary's net income, plus the intercompany gain. D. the parent's net income, plus the subsidiary's net income, minus the intercompany gain.

AACSB: Analytic AICPA: Decision Making

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 2008, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 2006, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible.

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4. Based on the information provided, in the preparation of the 2008 consolidated financial statements, building will be _____ in the eliminating entries. A. debited for $33,000 B. debited for $36,000 C. credited for $36,000 D. debited for $3,000

AACSB: Analytic AICPA: Measurement

5. Based on the information provided, the gain on sale of the building eliminated in the consolidated financial statements for 2008 is: A. $8,250. B. $10,500. C. $6,000. D. $11,250.


6. Based on the information provided, while preparing the 2008 consolidated income statement, depreciation expense will be: A. debited for $750 in the eliminating entries. B. credited for $750 in the eliminating entries. C. credited for $1500 in the eliminating entries. D. debited for $1500 in the eliminating entries.


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7. Based on the information provided, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A. debited for $750 in the eliminating entries. B. credited for $750 the eliminating entries. C. credited for $1500 in the eliminating entries. D. debited for $1500 in the eliminating entries.


8. Based on the information provided, in the preparation of a consolidated balance sheet at January 1, 2009, retained earnings will be: A. debited for $6,750 in the eliminating entries. B. credited for $6,750 in the eliminating entries. C. credited for $7,500 in the eliminating entries. D. debited for $7,500 in the eliminating entries.


9. Phobos Company holds 80 percent of Deimos Company's voting shares. During the preparation of consolidated financial statements for 2009, the following eliminating entry was made:

Which of the following statements is correct? A. Phobos Company purchased land from Deimos Company during 2009. B. Phobos Company purchased land from Deimos Company before January 1, 2009. C. Deimos Company purchased land from Phobos Company during 2009. D. Deimos Company purchased land from Phobos Company before January 1, 2009.


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ABC Corporation purchased land on January 1, 2006, for $50,000. On July 15, 2008, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares.




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12. Which workpaper eliminating entry will be made on December 31, 2009, if XYZ Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15, 2008, for $70,000?



Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 2007. On December 31, 2008, Mortar received $390,000 from Granite for a equipment Mortar had purchased on January 1, 2005, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis.

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14. Based on the preceding information, the gain on sale of the equipment recorded by Mortar for 2008 is: A. $150,000 B. $65,000 C. $110,000 D. $40,000




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16. Based on the preceding information, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A. debited for $25,000 in the eliminating entries. B. credited for $15,000 in the eliminating entries. C. debited for $15,000 in the eliminating entries. D. credited for $25,000 in the eliminating entries.




Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 2007. On January 1, 2008, Mortar received $350,000 from Granite for a equipment Mortar had purchased on January 1, 2005, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straightline basis.



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19. Based on the preceding information, the gain on sale of equipment recorded by Mortar for 2008 is: A. $70,000. B. $65,000. C. $50,000. D. $40,000.






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On January 1, 2007, Servant Company purchased a machine with an expected economic life of five years. On January 1, 2009, Servant sold the machine to Master Corporation and recorded the following entry:

Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 2009. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer.



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24. Based on the preceding information, in the preparation of the 2009 consolidated balance sheet, machine will be: A. debited for $1,000. B. debited for $15,000. C. credited for $45,000. D. debited for $25,000.


25. Based on the preceding information, income assigned to the noncontrolling interest in the 2009 consolidated income statement will be: A. $12,000. B. $14,000. C. $12,500. D. $48,000.


26. Based on the preceding information, consolidated net income for 2009 will be: A. $150,000. B. $100,000. C. $148,000. D. $130,000.


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27. On January 1, 2009, Light Corporation sold equipment for $400,000 to Star Corporation, its wholly owned subsidiary. Light had paid $900,000 for this equipment, which had accumulated depreciation of $170,000. Light estimated a $50,000 salvage value and depreciated the tractor using the straight-line method over 10 years, a policy that Star continued. In Light's December 31, 2009, consolidated balance sheet, this tractor should be included in fixed-asset cost and accumulated depreciation as:



Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 2003, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 2008, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 2008 and 2009, respectively. Black reported net income of $30,000 and $45,000 for 2008 and 2009, respectively.



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32. Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements? I. Security holdings II. Interest and dividends III. Sales and purchases A. I, II B. I, III C. I, II, III D. II


Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 2008. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 2008, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 2008, and S2 sold the land to S1 for $197,000 on November 27, 2008. Parent has control of the following companies:

Parent reported income from its separate operations of $200,000 for 2008.

33. Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 2008? A. $145,000 B. $220,000 C. $197,000 D. $160,000


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34. Based on the preceding information, what amount of gain or loss on sale of land should be reported in the consolidated income statement for 2008? A. $60,000 B. $0 C. $75,000 D. $23,000


35. Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 2008? A. $369,400 B. $405,000 C. $465,000 D. $60,000


Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 2007, Big paid Small $125,432 for its services. For the year 2008, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 2007 and $121,000 in 2008. Big reported $2,567,000 of income from its own separate operations for 2008, and Small reported net income of $695,000.

36. Based on the preceding information, what amount of consolidated net income should be reported in 2008? A. $3,262,000 B. $4,050,000 C. $3,254,100 D. $3,122,000


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37. Based on the preceding information, what amount of income should be assigned to the noncontrolling shareholders in the consolidated income statement for 2008? A. $47,700 B. $44,400 C. $55,600 D. $60,000


38. Based on the preceding information, what amount of receivable/payable should be eliminated in the 2008 consolidated financial statements? A. $125,432 B. $7,900 C. $5,560 D. $140,000


39. A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal: A. the parent's separate operating income, plus the intercompany loss. B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net income. C. the parent's separate operating income, minus the intercompany loss. D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's net income.


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40. Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I. in the year of the downstream sale. II. over the period of time the subsidiary uses the land. III. in the year the subsidiary sells the land to an unrelated party. A. I B. II C. III D. I or II


Essay Questions

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41. Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 2005, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Winner Company. The companies' permanent accounts on December 31, 2008, contained the following balances:

On January 1, 2004, Fred paid $150,000 for equipment with a 10-year expected total economic life. The equipment was depreciated on a straight-line basis with no residual value. Winner purchased the equipment from Fred on December 31, 2006, for $140,000. Winner sold land it had purchased for $75,000 on February 18, 2004, to Fred for $60,000 on October 10, 2007. Required: Prepare a consolidated balance sheet workpaper in good form as of December 31, 2008.

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Eliminating entries:

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42. New Company acquired 75 percent of Old Company's stock at underlying book value on January 1, 2008. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Old Company. Old Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 2008, Old Company reported net income of $60,000 and paid dividends of $3,000. In 2009, Old Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between New Company and Old Company in 2008 and 2009: Old Co. sold computer equipment to New Co. for a $42,000 profit on December 26, 2008. The equipment had a five-year estimated economic life remaining at the time of intercompany transfer and is depreciated on a straight-line basis. New sold land costing $90,000 to Old Company on June 28, 2009, for $110,000. Required: 1) Give all eliminating entries needed to prepare a consolidation workpaper for 2009 assuming that New Co. uses the fully adjusted equity method to account for its investment in Old Company. 2) Give all eliminating entries needed to prepare a consolidation workpaper for 2009 assuming that New Co. uses the cost method to account for its investment in Old Company.

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1) Fully Adjusted Equity Method Eliminating Entries, December 31, 2009:

2) Cost Method Eliminating Entries, December 31, 2009:

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43. Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course of 2008 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility, which will open January 4, 2009, and has a 5 year useful life. Explain the impact providing this service has on Peter Architectural Services' 2008 and 2009 consolidated financial statements. Peter has provided a service to the subsidiary Smith. During 2008 the cost of the architectural services will be capitalized by Smith as part of the cost of the manufacturing facility. The profit earned on the consulting services must be eliminated in 2008 against the cost of the building. In this manner consolidated net income is not overstated. Beginning in 2009 the intercompany profit would be realized over a 5 year period. In each of the years, depreciation expense is decreased and consolidated net income is increased; as income to the controlling interests.

AACSB: Communication AICPA: Decision Making

44. PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent owned subsidiary, on January 1, 2008. The cost of the land was $75,000, when it was purchased in 2007. In 2010, Seven Star sells the land to Hot Properties Inc., an unrelated entity, for $120,000. How is the land reported in the consolidated financial statements for 2008, 2009 and 2010? PeopleMag cannot report a gain on the sale of land for 2008 or 2009 in the consolidated financial statements. The land must be reported on the consolidated balance sheet at its original cost of $75,000. The intercompany gain is unrealized and is eliminated. In 2010, the entire gain of $45,000 ($120,000 - $75,000) is realized and recognized when the land is sold to an outside party.

AACSB: Communication AICPA: Reporting

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Chap006-Intercompany Transfers of Services and Non Current Assets

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