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

Exercises

Problems

LO1 – Describe the accounting for intercompany sales of inventory between the parent and subsidiary using the equity method of preconsolidation investment bookkeeping.

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

5, 6

1, 2

LO2 – Describe the accounting for intercompany sales of inventory between the parent and subsidiary using the cost method of preconsolidation investment bookkeeping.

31-35

LO3 – Describe the accounting for intercompany sales of non-depreciable noncurrent assets between the parent and subsidiary when a parent uses the equity method of preconsolidation investment bookkeeping.

3, 7, 8, 10, 11, 18, 44-46, 49, 50

1, 3

3

LO4 – Describe the accounting for intercompany sales of depreciable noncurrent assets between the parent and subsidiary when a parent uses the equity method of pre-consolidation investment bookkeeping.

2, 6, 12-14, 19, 20, 22, 24, 36-40

2, 4

4

LO5 – Describe the accounting for intercompany sales of non-depreciable noncurrent assets between the parent and subsidiary when a parent uses the cost method of preconsolidation investment bookkeeping.

47, 48

6

LO6 – Describe the accounting for intercompany sales of depreciable noncurrent assets between the parent and subsidiary when a parent uses the cost method of pre-consolidation investment bookkeeping.

41-43

7

5

©Cambridge Business Publishers, 2020 Test Bank, Chapter 4

4-1

Chapter 4: Consolidated Financial Statements and Intercompany Transactions

Multiple Choice Multiple Choice – Theory Topic: Intercompany Inventory Sales LO: 1 1. During 2021, Christie Company sold merchandise to its 100%-owned subsidiary, Finn Company. During that year, all of the merchandise was resold by Finn to outside customers. If no 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: 4 2. If Razor Co. sold equipment with a six-year remaining useful life at a gain of $24,000 to Soprano Industries, 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 Answer: b

Topic: Intercompany Sale of Land LO: 3 3. What is a purpose of the consolidation entry regarding the inter-company sale of land? a. To make consolidated net income the same as it would have been had the sale not occurred b. To make consolidated net income less than it would have been had the sale not occurred c. To make consolidated net income greater that it would have been had the sale not occurred d. To adjust the Land account with no effect on consolidated net income Answer: a

©Cambridge Business Publishers, 2020 4-2

Advanced Accounting, 4th Edition

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

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: 4 6. Halsey, Inc., sells a machine to its subsidiary, Kiesto Company, at a $20,000 gain. The machine was classified as property, plant and equipment on Halsey's books and also will be classified as such on Kiesto' 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: 3 7. In the case of an intercompany sale of land, a consolidation entry is prepared a. Only in the period of the intercompany sale of the land b. In the period of the intercompany sale of the land and in the following periods that the land is held by one of the affiliated companies. c. Only in the periods following the sale and during which the land is held by one of the affiliated companies d. In neither the period of the sale nor the following periods Answer: b

©Cambridge Business Publishers, 2020 Test Bank, Chapter 4

4-3

Topic: Intercompany Sale of Land LO: 3 8. In the case of an intercompany sale of land, which of the following is not a true statement? a. A gain or loss on sale should not be recorded on the seller's pre-consolidation books. b. In the consolidation worksheet, the Land account is reduced by the amount of a gain c. GAAP requires the deferral of any gain or loss. d. The gain or loss on sale will be realized in the consolidated financial statements 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. Reduce cost of goods sold b. Increase cost of goods sold c. Reduce sales revenue d. Increase gross profit Answer: b

Topic: Intercompany Sale of Land LO: 3 10. Intercompany gains on sale of land are deferred: a. Until the consolidated entity is sold b. Over the period that the land produces revenue c. In perpetuity d. Until the land is sold Answer: d

Topic: Intercompany Sale of Land LO: 3 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: 4 12. The consolidation entry to realize a loss from an intercompany sale of a building would include: a. A debit to Accumulated Depreciation b. A credit to Depreciation Expense c. A debit to Building d. A debit to Depreciation Expense Answer: d

©Cambridge Business Publishers, 2020 4-4

Advanced Accounting, 4th Edition

Topic: Intercompany Sale of Depreciable Assets LO: 4 13. In the years after a seller makes an intercompany sale of equipment at a gain, Equity investment is increased in the consolidation entries. Why does the amount of the Equity investment 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 in the consolidated financial statements 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

Topic: Intercompany Sale of Depreciable Assets LO: 4 14. Why does the intercompany sale of a building require subsequent adjustments to accumulated depreciation? 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

©Cambridge Business Publishers, 2020 Test Bank, Chapter 4

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Multiple Choice – Computational Topic: Intercompany Inventory Sales LO: 1 16. Nautilus Co. acquired 100% of XYZ Corp. on January 2, 2020. During 2020, Nautilus sold goods to XYZ Corp for $700,000 that cost Nautilus $500,000. XYZ Corp still owned 40% of the goods at the end of the year. Cost of goods sold was $1,000,000 for Nautilus and $990,000 for Aeillo. What was consolidated cost of goods sold? a. $1,370,000 b. $1,000,000 c. $1,790,000 d. $2,770,000 Answer: a

Topic: Intercompany Inventory Sales LO: 1 17. Brendon, Inc. acquired 100% of Weston Enterprises on January 2, 2020. During 2020, Brendon sold Weston for $700,000 goods which had cost $500,000. Weston still owned 40% of the goods at the end of the year. In 2021, Brendon sold goods with a cost of $500,000 to Weston for $700,000, and the buyer still owned 40% of the goods at year-end. For 2021, cost of goods sold was $1,000,000 for Brendon and $990,000 for Weston. What was consolidated cost of goods sold for 2021? a. $1,370,000 b. $1,290,000 c. $1,870,000 d. $1,990,000 Answer: b

Topic: Intercompany Sale of Land LO: 3 18. During 2019, Brooke sold to its subsidiary, Cabana, land with a book value of $507,000. The selling price was $700,000. In its pre-consolidation accounting records, Brooke should: a. Recognize a “Gain on Sale of Land” of $193,000 b. Defer recognition of a “Gain on Sale of Land” entry until Cabana sells the land to a third party c. Recognize the gain over the asset's life d. Not recognize a gain Answer: a

©Cambridge Business Publishers, 2020 4-6

Advanced Accounting, 4th Edition

The following information applies to Questions 19 & 20. Clearwater Co. owned all of the voting common stock of Kelley, Inc. On January 2, 2020 Clearwater sold equipment to Kelley for $350,000. The equipment had cost Clearwater $425,000. At the time of the sale, the balance in accumulated depreciation was $125,000. The equipment had a remaining useful life of eight years and no salvage value.

Topic: Intercompany Sale of Depreciable Assets LO: 4 19. For the consolidated balance sheet at December 31, 2020, at what amount would the equipment (net) be included? a. $262,500 b. $300,000 c. $350,000 d. $-0Answer: a

Topic: Intercompany Sale of Depreciable Assets LO: 4 20. For the consolidated balance sheet at December 31, 2021, at would amount would the equipment (net) be included? a. $225,000 b. $262,500 c. $306,250 d. $-0Answer: a

©Cambridge Business Publishers, 2020 Test Bank, Chapter 4

4-7

The following information applies to Questions 21-25. On January 1, 2020, Adamson, Inc. acquired the outstanding voting common stock of Skyview Corp. for $600,000. Of this payment, $85,000 was allocated to undervalued equipment (with a five-year life). Any remaining excess was attributable to goodwill. During 2020, Adamson bought inventory for $44,000 and sold it to Skyview for $98,500. 60% of these goods were still in the company's possession on December 31. The financial statements of the two companies as of December 31, 2020 are presented below. Adamson Sales revenue Cost of goods sold Gross profit Operating expenses Income (loss) from subsidiary Net Income Retained Earnings, 1/1/20 Net income Dividends Retained Earnings, 12/31/20 Cash and receivables Inventory Equity investment Property, plant & equipment (Net) Total Assets Accounts payable Accrued liabilities Common stock Additional paid-in capital Retained Earnings, 12/31/20 Total Liabilities and Equities

Skyview

$750,000 -414,975 335,025 -65,000 246,300

$440,000 -69,000 371,000 -75,000 0

$516,325

$296,000

$670,000

$258,000

516,325 -15000

296,000 -12000

$1,171,325

$542,000

$325,000

$90,000

440,000 834,300

126,000

1,273,025 $2,872,325

635,000 $851,000

$652,000 245,000

$75,000 56,000

152,000 652,000 1,171,325

34,000 144,000 542,000

$2,872,325

$851,000

Topic: Intercompany Inventory Sales LO: 1 21. What is consolidated revenues? a. $ 440,000 b. $1,091,500 c. $1,190,000 d $1,146,000 Answer: b

©Cambridge Business Publishers, 2020 4-8

Advanced Accounting, 4th Edition

Topic: Undervalued Depreciable Assets LO: 4 22. What is consolidated operating expenses? a. $ 65,000 b. $ 82,000 c. $140,000 d. $157,000 Answer: d

Topic: Intercompany Inventory Sales LO: 1 23. What is consolidated cost of goods sold? a. $418,175 b. $451,275 c. $560,675 d. $516,675 Answer: a

Topic: Undervalued Depreciable Assets LO: 4 24. What is the consolidated balance for property, plant and equipment (net) on the December 31, 2020 balance sheet? a. $1,908,025 b. $1,976,025 c. $1,987,025 d. $1,993,025 Answer: b

Topic: Intercompany Inventory Sales LO: 1 25. What is consolidated inventory on the December 31, 2020 balance sheet? a. $467,500 b. $533,300 c. $566,000 d. $598,700 Answer: b

©Cambridge Business Publishers, 2020 Test Bank, Chapter 4

4-9

The following information applies to Questions 26-35. Weisman Company, a 100% owned subsidiary of Martindale Corporation, sells inventory to Martindale at a 20% profit on selling price. The following data are available pertaining to inter-company purchases by Martindale: Unsold at year end Inter-company sales

(based on selling price)

2020:

$18,000

2020:

$4,000

2021:

$19,400

2021:

$6,000

2022:

$21,500

2022:

$8,000

Weisman’s profit numbers were $125,000, $142,000 and $265,000 for 2020, 2021, and 2022, respectively. Martindale received dividends from Weisman of $25,000 for 2020 and 2021, and $30,000 for 2022.

Topic: Intercompany Inventory Sales – Equity Method LO: 1 26. Assume Weisman uses the equity method to account for its investment in Martindale. What is the balance in the pre-consolidation Income (loss) from subsidiary account for 2020? a. $100,000 b. $124,200 c. $125,000 d. $129,000 Answer: b

Topic: Intercompany Inventory Sales – Equity Method LO: 1 27. Assume Weisman uses the equity method to account for its investment in Martindale. What is the balance in the pre-consolidation Income (loss) from subsidiary account for 2021? a. $136,000 b. $140,800 c. $141,600 d. $142,800 Answer: c

Topic: Intercompany Inventory Sales – Equity Method LO: 1 28. Assume Weisman uses the equity method to account for its investment in Martindale. What is the balance in pre-consolidation Income (loss) from subsidiary for 2022? a. $235,000 b. $264,600 c. $265,400 d. $268,600 Answer: b ©Cambridge Business Publishers, 2020 4-10

Advanced Accounting, 4th Edition

©Cambridge Business Publishers, 2020 Test Bank, Chapter 4

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Topic: Intercompany Inventory Sales LO: 1 29. What would be the net debit or credit to cost of goods sold on the 2021 consolidation worksheet? a. $19,000 credit b. $19,800 credit c. $21,400 credit d. $ 400 debit Answer: a

Topic: Intercompany Inventory Sales – Equity Method LO: 1 30. Assume Weisman uses the equity method to account for its investment in Martindale. What would be the debit to retained earnings regarding the 2020 consolidation entry related to the unrealized inventory profit? a. $-0b. $4,000 c. $1,200 d. $ 800 Answer: a

Topic: Intercompany Inventory Sales – Cost Method LO: 2 31. Assume Weisman uses the cost method to account for its investment in Martindale. What is the balance in the pre-consolidation Income (loss) from subsidiary account for 2020? a. $ 24,200 b. $ 25,000 c. $124,200 d. $125,000 Answer: b

Topic: Intercompany Inventory Sales – Cost Method LO: 2 32. Assume Weisman uses the cost method to account for its investment in Martindale. What is the balance in the pre-consolidation Income (loss) from subsidiary account for 2021? a. $ 24,200 b. $ 25,000 c. $117,000 d. $142,000 Answer: b

©Cambridge Business Publishers, 2020 4-12

Advanced Accounting, 4th Edition

Topic: Intercompany Inventory Sales – Cost Method LO: 2 33. Assume Weisman uses the cost method to account for its investment in Martindale. What is the balance in the pre-consolidation Income (loss) from subsidiary account for 2022? a. $ 31,600 b. $265,000 c. $ 30,000 d. $264,600 Answer: c

Topic: Intercompany Inventory Sales – Cost Method LO: 2 34. Assume the acquisition was on January 1, 2020 and that Weisman uses the cost method to account for its investment in Martindale. Compute the amount of beginning of year [ADJ] adjustment necessary for consolidation for the year ended December 31, 2021. a. $100,000 b. $125,000 c. $124,200 d. $ 99,200 Answer: d

Topic: Intercompany Inventory Sales – Cost Method LO: 2 35. Assume the acquisition was on January 1, 2020 and that Weisman uses the cost method to account for its investment in Martindale. Compute the amount of beginning of year [ADJ] adjustment necessary for consolidation for the year ended December 31, 2022. a. $215,800 b. $450,400 c. $265,800 d. $240,800 Answer: a

©Cambridge Business Publishers, 2020 Test Bank, Chapter 4

4-13

The following information applies to Questions 36-43. On April 1, 2020, Republic Company sold equipment to its wholly owned subsidiary, Barre Corporation, for $40,000. At the time of the transfer, the asset had an original cost (to Republic) of $60,000 and accumulated depreciation of $25,000. The equipment has a five year estimated remaining life. Barre reported net income of $250,000, $270,000 and $310,000 in 2020, 2021, and 2022, respectively. Republic received dividends from Barre of $90,000, $105,000 and $120,000 for 2020, 2021, and 2022, respectively.

Topic: Intercompany Sale of Depreciable Assets LO: 4 36. What was the amount of the gain or loss on the sale of equipment reported by Republic on its pre-consolidation income statement in 2020? a. $-0b. $ 5,000 gain c. $20,000 loss d. $35,000 gain Answer: b

Topic: Intercompany Sale of Depreciable Assets LO: 4 37. What was the amount of the credit to depreciation expense on the 2020 consolidation worksheet? a. $ 750 b. $-0c. $1,000 d. $1,600 Answer: a

Topic: Intercompany Sale of Depreciable Assets LO: 4 38. What was the amount of the credit to depreciation expense on the 2021 consolidation worksheet? a. $ 750 b. $-0c. $1,000 d. $1,600 Answer: c

Topic: Intercompany Sale of Depreciable Assets – Equity Method LO: 4 39. Assume Republic uses the equity method to account for its investment in Barre. What is the balance in the pre-consolidation Income (loss) from Subsidiary account for 2020? a. $245,750 b. $246,000 c. $249,250 d. $250,000 Answer: a

©Cambridge Business Publishers, 2020 4-14

Advanced Accounting, 4th Edition

Topic: Intercompany Sale of Depreciable Assets – Equity Method LO: 4 40. Assume that Republic uses th...