Ch 07 - Intercompany Inventory Transactions

Chapter 07 - Intercompany Inventory Transactions Transactions

Chapter 07 Intercompany Intercompany Inventory Transactions Transactions Answer Answer Key Key

Multiple Choice Questions

1. When there are intercompany sales of inventory durin the year and a three-part consolidation wor!paper is prepared" elimination entries related to the intercompany sales# I. Always are needed. II. Are Are not needed if all the inventory is resold to unrelated parties prior to the end of the year. A. I $. II $. II C. $oth C. $oth I and II %. &ither %. &ither I or II

AACSB: Analytic AICPA: AICPA: Decision Making

&arth Company owns 100 percent of the capital stoc! of 'oth (ars Corporation Co rporation and )enus )enus Corporation. (ars purchases merchandise inventory from )enus )enus at 1*+ percent of )enus,s )enus,s cost. %urin *00" )enus )enus sold inventory to (ars that it had purchased for *+"000. (ars sold all of this merchandise to unrelated customers for +/"* durin *00. In preparin com'ined financial statements for *00" &arth,s 'oo!!eeper disrearded the common ownership of (ars and )enus.

*. $ased on the information iven a'ove" what amount should 'e eliminated from cost of oods sold in the com'ined income statement for *00 A. 21"*+0 $. *+"000 $. *+"000 C. +/"* C. +/"* %. /"*+0 %. /"*+0

AACSB: Analytic AICPA: AICPA: Measurement

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Chapter 07 - Intercompany Inventory Transactions Transactions

2. $ased on the information iven a'ove" 'y what amount was unad3usted revenue overstated in the com'ined income statement for *00 A. *+"000 A. *+"000 $. +/"* $. +/"* C. 21"*+0 %. /"*+0 %. /"*+0

AACSB: Analytic AICPA: AICPA: Measurement

4. 5lo'al Corporation ac6uired + percent of ocal Company,s votin shares of stoc! in *007. %urin *00" 5lo'al purchased +0"000 picture tu'es for 1+ each and sold *"000 of them to ocal for *0 each. ocal oca l sold all of the units to unrelated entities en tities prior to %ecem'er 21" *00" for 20 each. $oth companies use perpetual inventory systems. Which wor!paper eliminatin entry is needed in preparin consolidated financial statements for *00 to remove all effects of the intercompany sale

A. 8ption A $. 8ption $. 8ption $ C. 8ption C. 8ption C %. 8ption %. 8ption %

AACSB: Analytic AICPA: AICPA: Reporting

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Chapter 07 - Intercompany Inventory Transactions

+. When a parent and its su'sidiary use a periodic inventory system rather than a perpetual system" the income and asset 'alances reported in the consolidated financial statements are# I. affected only if there are upstream intercompany sales of inventory. II. affected only if there are downstream intercompany sales of inventory. A. I $. II C. $oth I and II D. 9either I nor II

AACSB: Analytic AICPA: Decision Making

8n :anuary 1" *00" ;arent Company ac6uired 0 percent ownership of
/. $ased on the information iven a'ove" what amount of sales will 'e reported in the *00 consolidated income statement A. /*"000 B. 1*0"000 C. 0"000 %. +"000

AACSB: Analytic AICPA: Measurement

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7. $ased on the information iven a'ove" what amount of cost of oods sold will 'e reported in the *00 consolidated income statement A. /*"000 $. 1*0"000 C. 0"000 %. +"000


. $ased on the information iven a'ove" what amount of consolidated net income will 'e assined to the controllin shareholders for *00 A. +"000 $. +"000 C. ++"000 %. +*"*00


;ilfer Company ac6uired 0 percent ownership of
. $ased on the information iven a'ove" what amount of sales will 'e reported in the *00 consolidated income statement A. 0"000 $. 1*0"000 C. 100"000 %. /7"000


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10. $ased on the information iven a'ove" what amount of cost of oods sold will 'e reported in the *00 consolidated income statement A. /0"00 $. 0"000 C. 4/"00 %. /7"000


11. $ased on the information iven a'ove" what amount of consolidated net income will 'e assined to the controllin interest for *00 A. +1"40 $. +2"100 C. 27"000 %. *0"100


1*. $ased on the information iven a'ove" what inventory 'alance will 'e reported 'y the consolidated entity on %ecem'er 21" *00 A. +1"40 $. +2"100 C. 27"000 D. *0"100


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12.
AACSB: Analytic AICPA: Reporting

;arent Corporation owns 0 percent of
14. $ased on the information iven a'ove" what amount should 'e reported in the *00 consolidated income statement as cost of oods sold A. 2/"000 $. 1*"000 C. 4"000 %. 4+"000


1+. $ased on the information iven a'ove" what amount should 'e reported in the %ecem'er 21" *00" consolidated 'alance sheet as inventory A. 2/"000 B. 1*"000 C. 1+"000 %. *"000


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1/. $ased on the information iven a'ove" what amount of cost of oods sold must 'e eliminated from the consolidated income statement for *00 A. 117"000 $. 1*0"000 C. 1+0"000 %. 1*"000


17. $ased on the information iven a'ove" what amount of sales must 'e eliminated from the consolidated income statement for *00 A. 117"000 B. 1*0"000 C. 1+0"000 %. 1*"000


1. $ased on the information iven a'ove" what amount of inventory must 'e eliminated from the consolidated 'alance sheet for *00 A. *"400 $. "000 C. 1*"000 D. 2"000


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1. $ased on the information iven a'ove" what will 'e the consolidated net income for *00/ A. 2+7"+00 $. 27+"000 C. 40"000 %. 217"7+0


*0. $ased on the information iven a'ove" what will 'e the consolidated net income for *007 A. 4+"000 $. 217"7+0 C. 4/"*+0 %. /0"000


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*1. $ased on the information iven a'ove" what will 'e the income assined to controllin interest for *007 A. 44"27+ $. 4+"000 C. 4/"*+0 %. /1+"27+


**. $ased on the information iven a'ove" what will 'e the income to noncontrollin interest for *00 A. 2"7+0 $. 27"7+ C. 71"*7+ D. 70"7+


*2. $ased on the information iven a'ove" what will 'e the income to controllin interest for *00 A. /1+"27+ $. //"*+0 C. /0"000 %. /4"000


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*4. %urin the year a parent ma!es sales of inventory at a profit to its 7+ percent owned su'sidiary. The su'sidiary also ma!es sales of inventory at a profit to its parent d urin the same year. $oth the parent and the su'sidiary have on hand at the end of the year *0 percent of the inventory ac6uired from one another. Consolidated revenues for the year should e>clude# A. 0 percent of the total revenues from intercompany sales. B. total revenues from intercompany sales. C. only the revenues from the su'sidiary,s intercompany sales. %. only the revenues from the parent,s intercompany sales.

AACSB: Reflective Thinking AICPA: Reporting

*+. Consolidated net income may include the parent,s separate operatin income plus the parent,s share of the su'sidiary,s reported net income# A. plus the unreali?ed profit on upstream intercompany sales of inventory made durin the current year. B. plus the profit reali?ed this year from upstream intercompany sales of inventory made last year. C. plus unreali?ed profit on downstream intercompany sales of inventory made durin the current year. %. minus the parent,s share of profit reali?ed this year from u pstream intercompany sales of inventory made last year.


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;erth Corporation owns 0 percent of %undee Company,s stoc!. At the end of *00" ;erth and %undee reported the followin partial operatin results and inventory 'alances#

;erth reularly prices its products at cost plus a 20 percent mar!up for profit. %undee prices its sales at cost plus a 10 percent mar!up. The total sales reported 'y ;erth and %undee include 'oth intercompany sales and sales to nonaffiliates.

*/. $ased on the information iven a'ove" what amount of sales will 'e reported in the consolidated income statement for *00 A. +00"000 $. +0"000 C. /00"000 %. 00"000


*7. $ased on the information iven a'ove" what 'alance will 'e reported for inventory in the consolidated 'alance sheet for %ecem'er 21" *00 A. +/"+72 $. *2"4/ C. 2*"7*7 %. /7"000


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*. The consolidation treatment of profits on inventory transfers that occurred 'efore the 'usiness com'ination depends on whether# I. the companies were independent at that time. II. the sale transaction was the result of arm,s-lenth 'arainin. A. I $. II C. $oth I and II %. 9either I nor II

AACSB: Analytic AICPA: Decision Making

&lvis Company purchases inventory for 70"000 on (ar 1" *00 and sells it to 5raceland Corporation for +"000 on (ay 14" *00. 5raceland still holds the inventory on %ecem'er 21" *00" and determines that its mar!et value @replacement cost is *"000 at that time. 5raceland writes the inventory down from +"000 to its lower mar!et value of *"000 at the end of the year. &lvis owns 7+ percent of 5raceland.

*. $ased on the information iven a'ove" what amount of cost of oods sold should 'e eliminated in the consolidation wor!paper for *00 A. *"000 B. 70"000 C. +"000 %. /0"000


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20. $ased on the information iven a'ove" what amount of inventory should 'e eliminated in the consolidation wor!paper for *00 A. 1+"000 $. 14"000 C. 1*"000 %. 12"000


21. $ased on the information iven a'ove" 'y what amount should 5raceland write down inventory in its 'oo!s A. 14"000 $. 1+"000 C. 12"000 %. 1/"000


A$C Corporation owns 7+ percent of BD Company,s votin shares. %urin *00" A$C produced +0"000 chairs at a cost of 7 each and sold 2+"000 chairs to BD for 0 each. BD sold 1"000 of the chairs to unaffiliated companies for 117 each prior to %ecem'er 21" *00" and sold the remainder in early *00 for 120 each. $oth companies use perpetual inventory systems.

2*. $ased on the information iven a'ove" what amount of cost of oods sold did A$C record in *00 A. *"7/+"000 $. 1"/*0"000 C. 1"4**"000 %. *"/2"000


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22. $ased on the information iven a'ove" what amount of cost of oods sold did BD record in *00 A. *"7/+"000 B. 1"/*0"000 C. 1"4**"000 %. *"/2"000


24. $ased on the information iven a'ove" what amount of cost of oods sold must 'e reported in the consolidated income statement for *00 A. *"7/+"000 $. 1"/*0"000 C. 1"4**"000 %. *"/2"000


2+. $ased on the information iven a'ove" what amount of cost of oods sold must 'e eliminated from the consolidated income statement for *00 A. *"7/+"000 $. 1"/*0"000 C. 1"4**"000 D. *"/2"000


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2/. $ased on the information iven a'ove" what amount of cost of oods sold must 'e eliminated from the consolidated income statement for *00 A. 17"000 $. **1"000 C. 1"4**"000 %. *"/2"000


27. A su'sidiary made sales of inventory to its parent at a profit this year. The parent" in turn" sold all 'ut *0 percent of the inventory to unaffiliated companies" reconi?in a profit. The amount that should 'e reported as cost of oods sold in the consolidated income statement prepared for the year should 'e# A. the amount reported as intercompany sales 'y the su'sidiary. B. the amount reported as intercompany sales 'y the su'sidiary minus unreali?ed profit in the endin inventory of the parent. C. the amount reported as cost of oods sold 'y the parent minus unreali?ed profit in the endin inventory of the parent. %. the amount reported as cost of oods sold 'y the parent.

AACSB: Reflective Thinking AICPA: Reporting

2. Consolidated net income for a parent and its 0 percent owned su'sidiary should 'e computed 'y eliminatin# A. all unreali?ed profit in downstream intercompany inventory sales" and unreali?ed profit in upstream intercompany inventory sales made durin the current year. $. all unreali?ed profit in downstream intercompany inventory sales" and the noncontrollin interest,s share of unreali?ed profit in upstream inventory sales made durin the current year. C. the controllin interest,s share of unreali?ed profit in downstream intercompany sales" and the controllin interest,s share of unreali?ed profit in upstream sales made durin the current year. %. all unreali?ed profit in downstream intercompany sales" and the noncontrollin interest,s share of unreali?ed profit in upstream sales made durin the current year.


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Essay Questions

2. Colton Company ac6uired 0 percent ownership of (ota Company,s votin shares on :anuary 1" *00" at underlyin 'oo! value. The fair value of the noncontrollin interest on that date was e6ual to *0 percent of the 'oo! value of (ota Company. %urin *00" Colton purchased inventory for 20"000 and sold the full amount to (ota Company for +0"000. 8n %ecem'er 21" *00" (ota,s endin inventory included 10"000 of items purchased from Colton. Also in *00" (ota purchased inventory for 0"000 and sold the units to Colton for 100"000. Colton included 20"000 of its purchase from (ota in endin inventory on %ecem'er 21" *00.
Ee6uired# a. Compute the amount to 'e reported as sales in the *00 consolidated income statement. '. Compute the amount to 'e reported as cost of oods sold in the *00 consolidated income statement. c. What amount of income will 'e assined to the noncontrollin shareholders in the *00 consolidated income statement d. What amount of income will 'e assined to the controllin interest in the *00 consolidated income statement

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Alternative solution# d

Information on consolidated sales was computed in part @aF consolidated cost of oods sold was computed in part @' and income assined to the noncontrollin interest was computed in part @c.


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40. =unter Company and (oss Company 'oth produce and purchase fa'ric for resale each period and fre6uently sell to each other.
Ee6uired# a. 5ive the eliminatin entries re6uired at %ecem'er 21" *00" to eliminate the effects of the inventory transfers in preparin a full set of consolidated financial statements. '. Compute the amount of cost of oods sold to 'e reported in the consolidated income statement for *00.

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41. 8n :anuary 1" *007" :ones Company ac6uired 0 percent of the outstandin common stoc! of
Ee6uired# a. ;resent the wor!paper elimination entries necessary to prepare consolidated financial statements for *007 assumin :ones accounts for its investment in
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a. *007 &ntries under Gully Ad3usted &6uity (ethod

'. *00 &ntries under Cost (ethod

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Ch 07 - Intercompany Inventory Transactions

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