CH 07

Package Title: Test Bank Questions
Course Title: Advanced Accounting, 6e

Chapter Number: 7
Question Type: Multiple Choice
1) In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting:
a) Retained Earnings - P Company

b) Retained Earnings - S Company
c) Gain on Sale of Land
d) both Retained Earnings - P Company and Retained Earnings - S Company
Answer: c
Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy
Learning Objective: 1 Understand the financial reporting objectives in accounting for intercompany sales
of nondepreciable assets on the consolidated financial statements.
Section Reference: 7.1
2) In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a
gain, the noncontrolling interest in consolidated income is computed by multiplying the noncontrolling
interest percentage by the subsidiary’s reported net income:
a) minus the net amount of unrealized gain on the intercompany sale.

b) plus the net amount of unrealized gain on the intercompany sale.
c) minus intercompany gain considered realized in the current period.
d) plus intercompany gain considered realized in the current period.
Answer: d

Difficulty: Medium
Learning Objective: 7 Compute the noncontrolling interest in consolidated net income when the selling
affiliate is a subsidiary.
3) Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of the
intercompany sale, a workpaper entry is made under the cost method debiting:
a) Retained Earnings - P.
b) Noncontrolling interest.
c) Equipment.
d) all of these.
Answer: d
Difficulty: Medium
Learning Objective: 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than
wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling
interest in consolidated net income when the selling affiliate is a subsidiary.
4) P Corp. owns 90% of the outstanding common stock of S Company. On December 31, 2017, S sold
equipment to P for an amount greater than the equipment’s book value but less than its original cost. The
equipment should be reported on the December 31, 2017 consolidated balance sheet at:
a) P’s original cost less 90% of S’s recorded gain.

b) P’s original cost less S’s recorded gain.
c) S’s original cost.
d) P’s original cost.
Answer: b

Difficulty: Medium
Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany
sales of depreciable assets on the consolidated financial statements.
5) Petunia Company owns 100% of Sage Corporation. On January 1, 2017 Petunia sold equipment to
Sage at a gain. Petunia had owned the equipment for four years and used a ten-year straight-line rate with
no residual value. Sage is using an eight-year straight-line rate with no residual value. In the consolidated
income statement, Sage’s recorded depreciation expense on the equipment for 2017 will be reduced by:
a) 10% of the gain on sale.

b) 12 1/2% of the gain on sale.
c) 80% of the gain on sale.
d) 100% of the gain on sale.
Answer: b

Difficulty: Medium
sales of depreciable assets on the consolidated financial statements., 4 Explain the term “realized through
usage.”
6) Petunia Corporation owns 100% of Stone Company’s common stock. On January 1, 2017, Petunia
sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the
equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and
2018 consolidated income would be an increase (decrease) of:
a) 2017, ($90,000); 2018, $0
b) 2017, ($90,000); 2018, $9,000
c) 2017, ($81,000); 2018, $0
d) 2017, ($81,000); 2018, $9,000
Answer: d

Difficulty: Medium
sales of depreciable assets on the consolidated financial statements., 4 Explain the term “realized through
usage.”
Section Reference: 7.2, 7.3
7) In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the
noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling interest
percentage by the subsidiary’s reported net income:
a) plus the intercompany gain considered realized in the current period.

b) plus the net amount of unrealized gain on the intercompany sale.
c) minus the net amount of unrealized gain on the intercompany sale.
d) minus the intercompany gain considered realized in the current period.
Answer: c

Difficulty: Medium
8) The amount of the adjustment to the noncontrolling interest in consolidated net assets is equal to the
noncontrolling interest’s percentage of the:
a) unrealized intercompany gain at the beginning of the period.

b) unrealized intercompany gain at the end of the period.
c) realized intercompany gain at the beginning of the period.
d) realized intercompany gain at the end of the period.
Answer: a

Difficulty: Medium
9) In January 2013, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company
for $1,980,000. S Company’s original cost for this equipment was $2,000,000 and had accumulated
depreciation of $200,000. P Company continued to depreciate the equipment over its 9 year remaining
life using the straight-line method. This equipment was sold to a third party on January 1, 2017 for
$1,440,000. What amount of gain should P Company record on its books in 2017?
a) $60,000.
b) $120,000.
c) $240,000.
d) $360,000.
Answer: b

Difficulty: Medium
sales of depreciable assets on the consolidated financial statements., 3 Explain when gains or losses on
intercompany sales of depreciable assets should be recognized on a consolidated basis., 4 Explain the
term “realized through usage.”
10) In years subsequent to the upstream intercompany sale of nondepreciable assets, the necessary
consolidated workpaper entry under the cost method is to debit the:
a) Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable asset.
b) Retained Earnings (Parent) account and credit the nondepreciable asset.
c) Nondepreciable asset, and credit the Noncontrolling interest and Investment in Subsidiary accounts.
d) No entries are necessary.
Answer: a

Difficulty: Medium
11) When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a
result of equipment or inventory sales by affiliates, are allocated proportionately by percent of ownership
between parent and subsidiary only when the selling affiliate is:
a) the parent and the subsidiary is less than wholly owned.

b) a wholly owned subsidiary.
c) the subsidiary and the subsidiary is less than wholly owned.
d) the parent of a wholly owned subsidiary.
Answer: c

Difficulty: Medium
sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries
when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the
parent company.
12) Gain or loss resulting from an intercompany sale of equipment between a parent and a subsidiary is:
a) recognized in the consolidated statements in the year of the sale.

b) considered to be realized over the remaining useful life of the equipment as an adjustment to
depreciation in the consolidated statements.
c) considered to be unrealized in the consolidated statements until the equipment is sold to a third party.
d) amortized over a period not less than 2 years and not greater than 40 years.
Answer: b

Difficulty: Easy
13) In 2017, P Company sells land to its 80% owned subsidiary, S Company, at a gain of $50,000. What
is the effect of this sale of land on consolidated net income assuming S Company still owns the land at the
end of the year?
a) consolidated net income will be the same as if the sale had not occurred.
b) consolidated net income will be $50,000 less than it would had the sale not occurred.
c) consolidated net income will be $40,000 less than it would had the sale not occurred.
d) consolidated net income will be $50,000 greater than it would had the sale not occurred.
Answer: a

Difficulty: Easy
14) Several years ago, P Company bought land from S Company, its 80% owned subsidiary, at a gain of
$50,000 to S Company. The land is still owned by P Company. The consolidated working papers for this
year will require:
a) no entry because the gain happened prior to this year.

b) a credit to land for $50,000.
c) a debit to P’s retained earnings for $50,000.
d) a debit to Noncontrolling interest for $50,000.
Answer: b

Difficulty: Easy
15) On January 1, 2016 S Corporation sold equipment that cost $120,000 and had a book value of
$48,000 to P Corporation for $60,000. P Corporation owns 100% of S Corporation and the equipment
has a 4-year remaining life. What is the effect of the sale on P Corporation’s Equity from Subsidiary
Income account for 2017?
a) no effect
b) increase of $12,000.
c) decrease of $12,000.
d) increase of $3,000.
Answer: d

Difficulty: Medium
16) P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to
the book value of S. On January 2, 2017, S sold equipment with a five-year remaining life to P for a gain
of $120,000. S reports net income of $600,000 for 2017 and pays dividends of $200,000. P’s Equity
from Subsidiary Income for 2017 is:
a) $480,000.
b) $384,000.
c) $403,200.
d) $576,000
Answer: c

Difficulty: Medium
17) P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than it
subsidiary’s book value. Two years later P sold the land to an outside entity for $50,000 more than P’s
cost. In its current year consolidated income statement P and its subsidiary should report a gain on the
sale of land of:
a) $50,000.
b) $120,000.
c) $130,000.
d) $150,000.
Answer: d

Difficulty: Easy
18) On January 1, 2016, P Corporation sold equipment with a 3-year remaining life and a book value of
$40,000 to its 70% owned subsidiary for a price of $46,000. In the consolidated workpapers for the year
ended December 31, 2017, an elimination entry for this transaction will include a:
a) debit to Equipment for $6,000.

b) debit to Gain on Sale of Equipment for $6,000.
c) credit to Depreciation Expense for $6,000.
d) debit to Accumulated Depreciation for $4,000.
Answer: d

Difficulty: Medium
19) Patriot Corporation owns 100% of Simon Company’s common stock. On January 1, 2017, Patriot
sold equipment with a book value of $350,000 to Simon for $500,000. Simon is depreciating the
equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and
2018 consolidated income would be an increase (decrease) of:
a) 2017, ($150,000); 2018, $0

b) 2017, ($150,000); 2018, $15,000
c) 2017, ($135,000); 2018, $0
d) 2017, ($135,000); 2018, $15,000
Answer: d

Difficulty: Medium
20) In January 2014, S Company, an 80% owned subsidiary of P Company, sold equipment to P
Company for $990,000. S Company’s original cost for this equipment was $1,000,000 and had
accumulated depreciation of $100,000. P Company continued to depreciate the equipment over its 9 year
remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2017
for $720,000. What amount of gain should P Company record on its books in 2017?
a) $30,000.
b) $60,000.
c) $120,000.
d) $180,000.
Answer: b

Difficulty: Medium
sales of depreciable assets on the consolidated financial statements., 9 Describe the eliminating entry
needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable
asset that was acquired from another affiliate.
21) P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to
the book value of S. On January 2, 2017, S sold equipment with a five-year remaining life to P for a gain
of $180,000. S reports net income of $900,000 for 2017 and pays dividends of $300,000. P’s Equity
from Subsidiary Income for 2017 is:
a) $720,000.
b) $576,000.
c) $604,800.
d) $864,000
Answer: c

Difficulty: Medium
22) P Company purchased land from its 80% owned subsidiary at a cost of $30,000 greater than it
subsidiary’s book value. Two years later P sold the land to an outside entity for $15,000 more than P’s
cost. In its current year consolidated income statement P and its subsidiary should report a gain on the
sale of land of:
a) $15,000.
b) $36,000.
c) $39,000.
d) $45,000.
Answer: d

Difficulty: Easy
sales of depreciable assets on the consolidated financial statements., 3 Explain when gains or losses on
intercompany sales of depreciable assets should be recognized on a consolidated basis., 8 Compute
consolidated net income considering the effects of intercompany sales of depreciable assets.
Section Reference: 7.2, 7.4, 7.6
23) On January 1, 2016, P Corporation sold equipment with a 3-year remaining life and a book value of
$100,000 to its 70% owned subsidiary for a price of $115,000. In the consolidated workpapers for the
year ended December 31, 2017, an elimination entry for this transaction will include a:
a) debit to Equipment for $15,000.

b) debit to Gain on Sale of Equipment for $15,000.
c) credit to Depreciation Expense for $15,000.
d) debit to Accumulated Depreciation for $10,000.
Answer: d

Difficulty: Medium
parent company.
Question Type: Essay
24) When there have been intercompany sales of depreciable property, workpaper entries are necessary to
accomplish several financial reporting objectives. Identify three of these financial reporting objectives
for depreciable property.
Answer: Workpaper entries are necessary to accomplish the following financial reporting objectives:
 To report as gains or losses in the consolidated income statement only those that result from the
sale of depreciable property to parties outside the affiliated group.
 To present property in the consolidated balance sheet at its cost to the affiliated group.
 To present accumulated depreciation in the consolidated balance sheet and depreciation expense
in the consolidated income statement based on the cost to the affiliated group of the related assets.
Question Title: Test Bank (Essay) Question 24

Difficulty: Medium
25) An eliminating entry is needed to adjust the consolidated financial statements when the purchasing
affiliate sells a depreciable asset that was acquired from another affiliate. Describe the necessary
eliminating entry.
Answer: The eliminating entry adjusts the gain or loss reported by the purchasing affiliate from the
amount it recorded to the correct amount from the perspective of the consolidated entity, and adjusts the
controlling and noncontrolling interests for the unrealized intercompany profit associated with the
equipment on the date of its premature disposal.
Question Title: Test Bank (Essay) Question 2

Difficulty: Medium
parent company.
26) Pine Company, a computer manufacturer, owns 90% of the outstanding stock of Slider Company. On
January 1, 2017, Pine sold computers to Slider for $500,000. The computers, which are inventory to
Pine, had a cost to Pine of $350,000. Slider Company estimated that the computers had a useful life of
six years from the date of purchase.
Slider Company reported net income of $310,000, and Pine Company reported net income of $870,000
from its independent operations (including sales to affiliates) for the year ended December 31, 2017.
Required:
A. Prepare in general journal form the workpaper entries necessary because of the intercompany sales in
the consolidated statements workpaper for both 2017 and 2018.
B. Calculate controlling interest in consolidated net income for 2017.
Answer:
A. 2017
Sales 500,000
Cost of Sales 350,000
Equipment 150,000
Accumulated Depreciation 25,000
Depreciation Expense (150,000/6) 25,000
2018
Beginning R/E – Pine 150,000
Equipment 150,000

Depreciation Expense 25,000
Beginning R/E – Pine 25,000
B. Pine’s net income from independent operations $870,000
- Unrealized profit on 2017 sales to Slider (150,000)
+ Profit on sales to Slider realized through
2017 depreciation 25,000
Pine’s income from independent operations that
has been realized from third party transactions 745,000
Income of Slider that has been realized in
transactions with third parties $310,000
Pine’s share thereof (.9 × $310,000) 279,000
Controlling Interest in Consolidated Net Income – 2017 $1,024,000
Question Title: Test Bank (Problem) Question 7-1

Difficulty: Hard
27) On January 1, 2008, Perry Company purchased a 90% interest in Sludge Company for $800,000, the
same as the book value on that date. On January 1, 2017, Sludge sold new equipment to Perry for
$16,000. The equipment cost $11,000 and had a five year estimated life as of January 1, 2017.
During 2018, Perry sold merchandise to Sludge at 20% above cost in the amount (selling price) of
$126,000. At the end of the year, Sludge had $42,000 of this merchandise in its ending inventory. At the
beginning of 2018, Sludge had $48,000 of inventory purchased in 2017 from Perry.
Required:
A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the
consolidated financial statements for 2018.
B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the
consolidated income statement for 2018. Sludge Company reported $40,000 of net income in 2018.
Answer:
A. Sales 126,000
Cost of Sales 7,000
Inventory [42,000 – (42,000/1.20) 7,000
Beginning R/E – Perry 8,000
Cost of Sales [48,000 – (48,000/1.20)] 8,000
Beginning R/E – Perry ($5,000 × .9) 4,500
Noncontrolling interest ($5,000 × .1) 500
Equipment (16,000 – 11,000) 5,000
Depreciation Expense (5,000/5) 1,000
Beginning R/E – Perry ($1,000 × .9) 900
Noncontrolling interest ($1,000 × .1) 100
B. Noncontrolling Interest in Consolidated net Income:

.1 × (40,000 + 1,000) = $4,100

Difficulty: Hard
parent company., 7 Compute the noncontrolling interest in consolidated net income when the selling
28) Prince Company owns 104,000 of the 130,000 shares outstanding of Serf Corporation. Serf
Corporation sold equipment to Prince Company on January 1, 2017 for $740,000. The equipment was
originally purchased by Serf Corporation on January 1, 2016 for $1,280,000 and at that time its estimated
depreciable life was 8 years. The equipment is estimated to have a remaining useful life of four years on
January 1, 2017. Both companies use the straight-line method to depreciate equipment. In 2018 Prince
Company reported net income from its independent operations of $3,270,000, and Serf Corporation
reported net income of $820,000 and declared dividends of $60,000. Prince Company uses the cost
method to record the investment in Serf Company.
Required:
A. Prepare, in general journal form, the workpaper entries relating to the intercompany sale of equipment
that are necessary in the December 31, 2018 consolidated financial statements workpapers.
B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the
consolidated income statement for 2018.
C. Calculate controlling interest in consolidated net income for 2018.
Answer:
A. Equipment 540,000
Beginning R/E – Prince ($100,000 × .80) 80,000
Noncontrolling Interest ($100,000 × .20) 20,000
Accumulated Depreciation ($100,000/4) × 2 50,000
Beginning R/E – Prince ($25,000 × .80) 20,000
B. Noncontrolling Interest Calculation:

Reported income of Serf Company $820,000
Plus: Intercompany profit considered realized
in the current period 25,000
$845,000
Noncontrolling interest in Serf Company
(.20 × 845,000) $169,000
C. Controlling Interest in Consolidated Net Income:
Prince Company’s income from its
independent operations $3,270,000
Reported net income of Serf Company $820,000
Plus profit on intercompany sale of
equipment considered to be realized
through depreciation in 2017 25,000
Reported subsidiary income that has been
realized in transactions with third
parties 845,000
× .8
Prince Company’s share thereof 676,000
Controlling Interest in Consolidated net income $3,946,000

Difficulty: Hard
29) P Company bought 60% of the common stock of S Company on January 1, 2017. On January 1, 2017
there was an intercompany sale of equipment at a gain of $63,000. The equipment had an estimated
remaining life of six years. Net incomes of the two companies from their own operations (including sales
to affiliates) were as follows:
2017 2018
P Company $280,000 $210,000
S Company 70,000 105,000
A. If S Company sold the equipment to P Company, fill in the following matrix:

2017 2018
Noncontrolling interest in consolidated net income
Controlling Interest in Consolidated net income
B. If P Company sold the equipment to S Company, fill in the following matrix:

2017 2018
Noncontrolling interest in consolidated net income
Controlling interest in consolidated net income

Answer:
2017 2018
A.
Noncontrolling interest in $ 7,000 (1) $ 46,200 (2)
Consolidated net income
Controlling interest in 290,500 (3) 279,300 (4)

(1) .4($70,000 – $63,000 + $10,500) = $7,000

(2) .4($105,000 + $10,500) = $46,200
(3) $280,000 + .6($70,000 – $63,000 + $10,500) = $290,500
(4) $210,000 + .6($105,000 + $10,500) = $279,300
2017 2018
B.
Noncontrolling interest in $ 28,000 (5) $ 42,000 (6)
Consolidated income
Controlling interest in 269,500 (7) 283,500 (8)
(5) .4($70,000) = $28,000
(6) .4($105,000) = $42,000
(7) ($280,000 – $63,000 + $10,500) + .6($70,000) = $269,500
(8) ($210,000 + $10,500) + .6($105,000) = $283,500

Difficulty: Hard
Learning Objective: 5 Describe the differences between upstream and downstream sales in determining
consolidated net income and the controlling and noncontrolling interests in consolidated income., 7
Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary.,
8 Compute consolidated net income considering the effects of intercompany sales of depreciable assets.
30) On January 1, 2017, Pharma Company purchased equipment from its 80%-owned subsidiary for
$2,400,000. On the date of the sale, the carrying value of the equipment on the books of the subsidiary
company was $1,800,000. The equipment had a remaining useful life of six years on January 2017. On
January 1, 2018, Pharma Company sold the equipment to an outside party for $2,200,000.
Required:
A. Prepare, in general journal form, the entries necessary in 2017 and 2018 on the books of Pharma
Company to account for the purchase and sale of the equipment.
B. Determine the consolidated gain or loss on the sale of the equipment and prepare, in general journal
form, the entry necessary on the December 31, 2018 consolidated statements workpaper to properly
reflect this gain or loss.
Answer:
A. 2017
(1) Equipment 2,400,000
Cash 2,400,000
(2) Depreciation Expense (1/6 × $2,400,000) 400,000

2018
(3) Cash 2,200,000
Equipment 2,400,000
Gain on Sale of Equipment 200,000
B. Pharma Company Consolidated

Cost $2,400,000
Accumulated Depreciation (400,000)
1/1/12 Book Value 2,000,000 $1,500,000*
Proceeds from Sale 2,200,000 2,200,000
Gain on Sale $ 200,000 $700,000
*$1,800,000 – 1/6($1,800,000) = $1,500,000
1/1 Retained Earnings - Pharma

[.8 × ($600,000 – $100,000)] 400,000
1/1 Noncontrolling interest [.2 × ($600,000 – $100,000)] 100,000
$2,400,000 – $1,800,000 = $600,000

$600,000/6 = $100,000
Unrealized intercompany gain on date of sale to outsiders = $600,000 – $100,000 = $500,000

Difficulty: Hard
31) P Corporation acquired 80% of the outstanding voting stock of S Corporation when the fair values
equaled the book values.
On July 1, 2016, P sold land to S for $300,000. The land originally cost P $200,000. S recently resold
the land on October 30, 2017 for $350,000.
On October 1, 2017, S Corporation sold equipment to P Corporation for $80,000. S originally paid
$100,000 for this equipment and had accumulated depreciation of $40,000 thus far. The equipment has a
five-year remaining life.
Required:
A. Complete the consolidated income statement for P Corporation and subsidiary for the year ended
December 31, 2017.
P S Elimination Entries Noncontrolling Consolidated

Dr. Cr. Interest Balances
Sales 1,200,000 600,000
Dividend Income from S 80,000
Gain on Sale of
Equipment 20,000
Gain on Sale of Land 50,000
Cost of Sales (800,000) (300,000)
Depreciation Expense (160,000) (80,000)
Other Expenses (200,000) (160,000)
Noncontrolling Interest
in Income
Net Income 120,000 130,000
Answer:
P S Elimination Entries Noncontrolling Consolidating

Dr. Cr. Interest Balances
Sales $1,200,000 $600,000 $1,800,000
Dividend Income
from S 80,000 (a)80,000
Gain on Sale of
Equipment 20,000 (b)20,000
Gain on Sale of
Land 50,000 (d)100,000 150,000
Cost of Sales (800,000) (300,000) (1,100,000)
Depreciation
Expense (160,000) (80,000) (c) 1,000 (239,000)
Other Expenses
(200,000) (160,000) (360,000)
Noncontrolling
Interest in Income
($130,000 –
$20,000 + 1,000) ×
.20 22,200 (22,200)
Net Income $120,000 $130,000 22,200 $228,800
a. Dividend Income from S 80,000

Dividends Declared 80,000
b. Gain on Sale of Equipment 20,000

Equipment 20,000
c. Accumulated Depreciation 1,000*
d. Retained Earnings – P 100,000

Gain on Sale of Land 100,000
* ($20,000/5) × 3/12

Difficulty: Hard
of nondepreciable assets on the consolidated financial statements., 2 State the additional financial
reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated
financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than
wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling
interest in consolidated net income when the selling affiliate is a subsidiary., 8 Compute consolidated net
income considering the effects of intercompany sales of depreciable assets.
Section Reference: 7.1, 7.2, 7.4, 7.7
32) Pale Company owns 90% of the outstanding common stock of Shale Company. On January 1, 2017,
Shale Company sold equipment to Pale Company for $300,000. Shale Company had purchased the
equipment for $450,000 on January 1, 2006 and has been depreciating it over a 10 year life by the
straight-line method. The management of Pale Company estimated that the equipment had a remaining
life of 5 years on January 1, 2017. In 2017, Pale Company reported $225,000 and Shale Company
reported $150,000 in net income from their independent operations.
Required:
A. Prepare in general journal form the workpaper entries relating to the intercompany sale of equipment
that are necessary in the December 31, 2017 and 2018 consolidated statements workpapers. Pale
Company uses the cost method to record its investment in Shale Company.
B. Calculate equity in subsidiary income for 2017 and noncontrolling interest in net income for 2017
Answer:
A. 2017
Equipment 150,000

2018
Retained Earnings – Pale 67,500
Noncontrolling Interest 7,500
Equipment 150,000

Beginning Retained Earnings – Pale 13,500
Noncontrolling Interest 1,500
B. Equity in Noncontrolling
Sub. Income Interest
Shale Company net income $135,000 $15,000
Unrealized gain-equipment
($75,000) upstream (67,500) (7,500)
Confirmed gain 13,500 1,500
$81,000 $ 9,000

Difficulty: Hard
affiliate is a subsidiary., 8 Compute consolidated net income considering the effects of intercompany
sales of depreciable assets.
33) On January 1, 2016, Pound Company acquired an 80% interest in the common stock of Sound
Company on the open market for $3,000,000, the book value at that date.
On January 1, 2017, Pound Company purchased new equipment for $58,000 from Sound Company. The
equipment cost $36,000 and had an estimated life of five years as of January 1, 2017.
During 2018, Pound Company had merchandise sales to Sound Company of $400,000; the merchandise
was priced at 25% above Pound Company’s cost. Sound Company still owes Pound Company $70,000
on open account and has 20% of this merchandise in inventory at December 31, 2018. At the beginning
of 2018, Sound Company had in inventory $100,000 of merchandise purchased in the previous period
from Pound Company.
Required:
A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the
consolidated financial statements for the year ended December 31, 2018.
B. Assume that Sound Company reports net income of $160,000 for the year ended December 31, 2018.
Calculate the amount of noncontrolling interest to be deducted from consolidated income in the
consolidated income statement for the year ended December 31, 2018.
Answer:
A. (1) Sales 400,000
(2) Accounts Payable 70,000

Accounts Receivable 70,000
(3) Cost of Sales (beginning inventory – income statement) 16,000
Inventory ($80,000 – ($80,000/1.25)) 16,000
(4) Beginning Retained Earnings – Pound ($100,000 – ($100,000/1.25)) 20,000

Cost of Sales (beginning inventory – income statement) 20,000
(5) Beginning Retained Earnings – Pound ($22,000 × .8) 17,600

Property, Plant and Equipment 22,000
(6) Accumulated Depreciation 8,800

Depreciation Expense ($22,000/5) 4,400
Beginning Retained Earnings – Pound ($4,400 × .8) 3,520
Noncontrolling Interest ($4,400 × .2) 880
B. Noncontrolling Interest in Consolidated Income .2 × ($160,000 + $4,400) = $32,880

Difficulty: Hard
affiliate is a subsidiary., 8 Compute consolidated net income considering the effects of intercompany
sales of depreciable assets.

CH 07

Uploaded by

Copyright:

Available Formats

You might also like

CH 07

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 07

Uploaded by

Copyright:

Available Formats

Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Question Type: Multiple Choice

a) Retained Earnings - P Company

Question Title: Test Bank (Multiple Choice) Question 01

a) minus the net amount of unrealized gain on the intercompany sale.

Question Title: Test Bank (Multiple Choice) Question 02

a) P’s original cost less 90% of S’s recorded gain.

Question Title: Test Bank (Multiple Choice) Question 04

a) 10% of the gain on sale.

Question Title: Test Bank (Multiple Choice) Question 05

Question Title: Test Bank (Multiple Choice) Question 06

a) plus the intercompany gain considered realized in the current period.

Question Title: Test Bank (Multiple Choice) Question 07

a) unrealized intercompany gain at the beginning of the period.

Question Title: Test Bank (Multiple Choice) Question 08

Question Title: Test Bank (Multiple Choice) Question 09

Question Title: Test Bank (Multiple Choice) Question 10

a) the parent and the subsidiary is less than wholly owned.

Question Title: Test Bank (Multiple Choice) Question 11

a) recognized in the consolidated statements in the year of the sale.

Question Title: Test Bank (Multiple Choice) Question 12

Question Title: Test Bank (Multiple Choice) Question 13

a) no entry because the gain happened prior to this year.

Question Title: Test Bank (Multiple Choice) Question 14

Question Title: Test Bank (Multiple Choice) Question 15

Question Title: Test Bank (Multiple Choice) Question 16

Question Title: Test Bank (Multiple Choice) Question 17

a) debit to Equipment for $6,000.

Question Title: Test Bank (Multiple Choice) Question 18

a) 2017, ($150,000); 2018, $0

Question Title: Test Bank (Multiple Choice) Question 19

Question Title: Test Bank (Multiple Choice) Question 20

Question Title: Test Bank (Multiple Choice) Question 21

Question Title: Test Bank (Multiple Choice) Question 22

a) debit to Equipment for $15,000.

Question Title: Test Bank (Multiple Choice) Question 23

Question Type: Essay

Question Title: Test Bank (Essay) Question 24

Question Title: Test Bank (Essay) Question 2

B. Calculate controlling interest in consolidated net income for 2017.

Accumulated Depreciation 50,000

Question Title: Test Bank (Problem) Question 7-1

B. Noncontrolling Interest in Consolidated net Income:

Question Title: Test Bank (Problem) Question 7-2

C. Calculate controlling interest in consolidated net income for 2018.

B. Noncontrolling Interest Calculation:

Question Title: Test Bank (Problem) Question 7-3

A. If S Company sold the equipment to P Company, fill in the following matrix:

Controlling Interest in Consolidated net income

B. If P Company sold the equipment to S Company, fill in the following matrix:

Controlling interest in consolidated net income

Controlling interest in 290,500 (3) 279,300 (4)

(1) .4($70,000 – $63,000 + $10,500) = $7,000

Question Title: Test Bank (Problem) Question 7-4

(2) Depreciation Expense (1/6 × $2,400,000) 400,000

B. Pharma Company Consolidated