Test Bank Advanced Accounting 3E by Jeter 06 chapter PDF

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Chapter 6Elimination of Unrealized Profit on Intercompany Sales of InventoryMultiple Choice Sales from one subsidiary to another are called a. downstream sales. b. upstream sales. c. intersubsidiary sales. d. horizontal sales. Noncontrolling interest in consolidated income is never affected by a. up...

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Chapter 6 Elimination of Unrealized Profit on Intercompany Sales of Inventory Multiple Choice 1.

Sales from one subsidiary to another are called a. downstream sales. b. upstream sales. c. intersubsidiary sales. d. horizontal sales.

2.

Noncontrolling interest in consolidated income is never affected by a. upstream sales. b. downstream sales. c. horizontal sales. d. Noncontrolling interest is affected by all sales.

3.

Failure to eliminate intercompany sales would result in an overstatement of consolidated a. net income. b. gross profit. c. cost of sales. d. all of these.

4.

Pratt Company owns 80% of Storey Company’s common stock. During 2011, Storey sold $400,000 of merchandise to Pratt. At December 31, 2011, one-fourth of the merchandise remained in Pratt’s inventory. In 2011, gross profit percentages were 25% for Pratt and 30% for Storey. The amount of unrealized intercompany profit that should be eliminated in the consolidated statements is a. $80,000. b. $24,000. c. $30,000. d. $25,000.

5.

The noncontrolling interest’s share of the selling affiliate’s profit on intercompany sales is considered to be realized under a. partial elimination. b. total elimination. c. 100% elimination. d. both total and 100% elimination.

6.

The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory includes a a. credit to Ending Inventory (Cost of Sales). b. credit to Sales. c. debit to Ending Inventory (Cost of Sales). d. debit to Inventory - Balance Sheet.

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Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

7.

Perez Company acquired an 80% interest in Seaman Company in 2010. In 2011 and 2012, Sutton reported net income of $400,000 and $480,000, respectively. During 2011, Seaman sold $80,000 of merchandise to Perez for a $20,000 profit. Perez sold the merchandise to outsiders during 2012 for $140,000. For consolidation purposes, what is the noncontrolling interest’s share of Seaman's 2011 and 2012 net income? a. $90,000 and $96,000. b. $100,000 and $76,000. c. $84,000 and $92,000. d. $76,000 and $100,000.

8.

A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2010. Under the partial equity method, the workpaper entry in 2011 to recognize the intercompany profit in beginning inventory realized during 2011 includes a debit to a. Retained Earnings - P. b. Noncontrolling interest. c. Cost of Sales. d. both Retained Earnings - P and Noncontrolling Interest.

9.

The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the noncontrolling minority ownership percentage by the subsidiary’s reported net income a. plus unrealized profit in ending inventory less unrealized profit in beginning inventory. b. plus realized profit in ending inventory less realized profit in beginning inventory. c. less unrealized profit in ending inventory plus realized profit in beginning inventory. d. less realized profit in ending inventory plus realized profit in beginning inventory.

10.

In determining controlling interest in consolidated income in the consolidated financial statements, unrealized intercompany profit on inventory acquired by a parent from its subsidiary should: a. not be eliminated. b. be eliminated in full. c. be eliminated to the extent of the parent company’s controlling interest in the subsidiary. d. be eliminated to the extent of the noncontrolling interest in the subsidiary.

11.

P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000. At the end of the current year, one-third of the merchandise remains in S Company’s inventory. Applying the lower-of- cost-or-market rule, S Company wrote this inventory down to $92,000. What amount of intercompany profit should be eliminated on the consolidated statements workpaper? a. $20,000. b. $18,000. c. $12,000. d. $10,800.

12.

The material sale of inventory items by a parent company to an affiliated company: a. enters the consolidated revenue computation only if the transfer was the result of arm’s length bargaining. b. affects consolidated net income under a periodic inventory system but not under a perpetual inventory system. c. does not result in consolidated income until the merchandise is sold to outside parties. d. does not require a working paper adjustment if the merchandise was transferred at cost.

Chapter 6 Elimination of Unrealized Profit on Intercompany Sales of Inventory

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13.

A parent company regularly sells merchandise to its 80%-owned subsidiary. Which of the following statements describes the computation of noncontrolling interest income? a. the subsidiary’s net income times 20%. b. (the subsidiary’s net income x 20%) + unrealized profits in the beginning inventory – unrealized profits in the ending inventory. c. (the subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits in the ending inventory) × 20%. d. (the subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in the beginning inventory) × 20%.

14.

P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value. During 2011, P sold merchandise that cost $135,000 to S for $189,000. One-third of this merchandise remained in S’s inventory at December 31, 2011. S reported net income of $120,000 for 2011. P’s income from S for 2011 is: a. $36,000. b. $50,400. c. $54,000. d. $61,200.

Use the following information for Questions 15 & 16: P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S’s December 31, 2010 inventory. During 2011, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of this merchandise inventory remained in S’s December 31, 2011 inventory. Selected income statement information for the two affiliates for the year 2011 is as follows: Sales Revenue Cost of Goods Sold Gross profit

P _ $2,250,000 1,800,000 $450,000

S _ $1,125,000 937,500 $187,500

15.

Consolidated sales revenue for P and Subsidiary for 2011 are: a. $2,907,000. b. $3,000,000. c. $3,205,500. d. $3,375,000.

16.

Consolidated cost of goods sold for P Company and Subsidiary for 2011 are: a. $2,260,500. b. $2,268,000. c. $2,276,700. d. $2,737,500.

6-4

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

Use the following information for Questions 17 & 18: P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $200,000 at a profit of $40,000. On December 31, 2011, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below: Sales Cost of Sales Operating Expenses Net Income (2011)

P __ $1,200,000 (600,000) (300,000) $300,000

S __ $600,000 (400,000) ( 80,000) $120,000

17.

Controlling interest in consolidated net income for 2011 is: a. $300,000. b. $380,000. c. $396,000. d. $420,000.

18.

Noncontrolling interest in income for 2011 is: a. $4,000. b. $19,200. c. $20,000. d. $24,000.

19.

The amount of intercompany profit eliminated is the same under total elimination and partial elimination in the case of 1. upstream sales where the selling affiliate is a less than wholly owned subsidiary. 2. all downstream sales. 3. horizontal sales where the selling affiliate is a wholly owned subsidiary. a. 1. b. 2. c. 3. d. both 2 and 3.

20.

Paige, Inc. owns 80% of Sigler, Inc. During 2011, Paige sold goods with a 40% gross profit to Sigler. Sigler sold all of these goods in 2011. For 2011 consolidated financial statements, how should the summation of Paige and Sigler income statement items be adjusted? a. Sales and cost of goods sold should be reduced by the intercompany sales. b. Sales and cost of goods sold should be reduced by 80% of the intercompany sales. c. Net income should be reduced by 80% of the gross profit on intercompany sales. d. No adjustment is necessary.

21.

P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value. During 2011, P sold merchandise that cost $225,000 to S for $315,000. One-third of this merchandise remained in S’s inventory at December 31, 2011. S reported net income of $200,000 for 2011. P’s income from S for 2011 is: a. $60,000. b. $90,000. c. $120,000. d. $102,000.

Chapter 6 Elimination of Unrealized Profit on Intercompany Sales of Inventory

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Use the following information for Questions 22 & 23: P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold merchandise that cost $192,000 to S for $240,000. Half of this merchandise remained in S’s December 31, 2010 inventory. During 2011, P sold merchandise that cost $300,000 to S for $375,000. Forty percent of this merchandise inventory remained in S’s December 31, 2011 inventory. Selected income statement information for the two affiliates for the year 2011 is as follows: Sales Revenue Cost of Goods Sold Gross profit

P _ $1,800,000 1,440,000 $ 360,000

S _ $900,000 750,000 $150,000

22.

Consolidated sales revenue for P and Subsidiary for 2011 are: a. $2,325,000. b. $2,400,000. c. $2,565,000. d. $2,700,000.

23.

Consolidated cost of goods sold for P Company and Subsidiary for 2011 are: a. $1,809,000. b. $1,815,000. c. $1,821,000. d. $2,190,000.

Use the following information for Questions 24 & 25: P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $150,000 at a profit of $30,000. On December 31, 2011, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below: Sales Cost of Sales Operating Expenses Net Income (2011)

P __ $900,000 (450,000) (225,000) $225,000

24.

Controlling interest in consolidated net income for 2011 is: a. $225,000. b. $285,000. c. $297,000. d. $315,000.

25.

Noncontrolling interest in income for 2011 is: a. $3,000. b. $14,400. c. $15,000. d. $18,000.

S __ $450,000 (300,000) ( 60,000) $ 90,000

6-6

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

Problems 6-1

On January 1, 2011, Palmer Company purchased a 90% interest in Sauder Company for $2,800,000. At that time, Sauder had $1,840,000 of common stock and $360,000 of retained earnings. The difference between implied and book value was allocated to the following assets of Sauder Company: Inventory Plant and equipment (net) Goodwill

$ 80,000 240,000 591,111

The plant and equipment had a 10-year remaining useful life on January 1, 2011. During 2011, Palmer sold merchandise to Sauder at a 20% markup above cost. At December 31, 2011, Sauder still had $180,000 of merchandise in its inventory that it had purchased from Palmer. In 2011, Palmer reported net income from independent operations of $1,600,000, while Sauder reported net income of $600,000. Required: A. Prepare the workpaper entry to allocate, amortize, and depreciate the difference between implied and book value for 2011. B. Calculate controlling interest in consolidated net income for 2011. 6-2

Percy Company owns 80% of the common stock of Smyth Company. Percy sells merchandise to Smyth at 20% above cost. During 2011 and 2012, intercompany sales amounted to $1,080,000 and $1,200,000 respectively. At the end of 2011, Smyth had one-fifth of the goods purchased that year from Percy in its ending inventory. Smyth’s 2012 ending inventory contained one-fourth of that year’s purchases from Percy. There were no intercompany sales prior to 2011. Percy reported net income from its own operations of $720,000 in 2011 and $760,000 in 2012. Smyth reported net income of $400,000 in 2011 and $460,000 in 2012. Neither company declared dividends in either year. Required: A. Prepare in general journal form all entries necessary on the consolidated statements workpapers to eliminate the effects of the intercompany sales for both 2011 and 2012. B. Calculate controlling interest in consolidated net income for 2012.

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Payton Company owns 90% of the common stock of Sanders Company. Sanders Company sells merchandise to Payton Company at 25% above cost. During 2010 and 2011 such sales amounted to $800,000 and $1,020,000, respectively. At the end of each year, Payton Company had in its inventory one-fourth of the amount of goods purchased from Sanders Company during that year. Payton Company reported income of $1,500,000 from its independent operations in 2010 and $1,720,000 in 2011. Sanders Company reported net income of $600,000 in each year and did not declare any dividends in either year. There were no intercompany sales prior to 2010.

Chapter 6 Elimination of Unrealized Profit on Intercompany Sales of Inventory

6-7

Required: A. Prepare, in general journal form, all entries necessary on the 2011 consolidated statements workpaper to eliminate the effects of intercompany sales. B. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2011. C. Calculate controlling interest in consolidated net income for 2011. 6-4

Powers Company owns an 80% interest in Smiley Company and a 90% interest in Toro Company. During 2010 and 2011, intercompany sales of merchandise were made by all three companies. Total sales amounted to $2,400,000 in 2010, and $2,700,000 in 2011. The companies sold their merchandise at the following percentages above cost. Powers 15% Smiley 20% Toro 25% The amount of merchandise remaining in the 2011 beginning and ending inventories of the companies from these intercompany sales is shown below. Merchandise Remaining in Beginning Inventory Powers Smiley Toro Total Sold by Powers Smiley Toro

$225,000 $180,000 180,000

$189,000 216,000

135,000

$414,000 396,000 315,000

Merchandise Remaining in Ending Inventory Powers Smiley Toro Total Sold by Powers Smiley Toro

$207,000 $144,000 195,000

150,000

$138,000 198,000

$345,000 342,000 345,000

Reported net incomes (from independent operations including sales to affiliates) of Powers, Smiley, and Toro for 2011 were $3,600,000, $1,500,000, and $2,400,000, respectively. Required: A. Calculate the amount noncontrolling interest to be deducted from consolidated income in the consolidated income statement for 2011. B. Calculate the controlling interest in consolidated net income for 2011.

6-8 6-5

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition The following balances were taken from the records of S Company: Common stock $2,500,000 Retained earnings, 1/1/11 $1,450,000 Net income for 2011 3,000,000 Dividends declared in 2011 (1,550,000) Retained earnings, 12/31/11 2,900,000 Total stockholders’ equity, 12/31/11 $5,400,000 P Company owns 80% of the common stock of S Company. During 2011, P Company purchased merchandise from S Company for $4,000,000. S Company sells merchandise to P Company at cost plus 25% of cost. On December 31, 2011, merchandise purchased from S Company for $1,250,000 remains in the inventory of P Company. On January 1, 2011, P Company’s inventory contained merchandise purchased from S Company for $525,000. The affiliated companies file a consolidated income tax return. There was no difference between the implied value and the book value of net assets acquired. Required: A. Prepare all workpaper entries necessitated by the intercompany sales of merchandise. B. Compute noncontrolling interest in consolidated income for 2011. C. Compute noncontrolling interest in consolidated net assets on December 31, 2011.

6-6 P Corporation acquired 80% of S Corporation on January 1, 2011 for $240,000 cash when S’s stockholders’ equity consisted of $100,000 of Common Stock and $30,000 of Retained Earnings. The difference between the price paid by P and the underlying equity acquired in S was allocated solely to a patent amortized over 10 years. P sold merchandise to S during the year in the amount of $30,000. $10,000 worth of inventory is still on hand at the end of the year with an unrealized profit of $4,000. The separate company statements for P and S appear in the first two columns of the partially completed consolidated workpaper. Required: Complete the consolidated workpaper for P and S for the year 2011.

Chapter 6 Elimination of Unrealized Profit on Intercompany Sales of Inventory

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P Corporation and Subsidiary Consolidated Statements Workpaper at December 31, 2011

Income Statement Sales Dividend Income Cost of Sales Other Expenses Noncontrolling Interest in Income Net Income Retained Earnings Statement Retained Earnings 1/1 Add: Net Income Less: Dividends Retained Earnings 12/31 Balance Sheet Cash Accounts Receivable-net Inventories Patent Land Equipment and Buildings-net Investment in S Corporation Total Assets Equities Accounts Payable Common Stock Retained Earnings 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Equities

P Corp.

S Corp.

200,000 16,000 (92,000) (23,000)

150,000 (47,000) (40,000)

101,000

63,000

110,000 101,000 ( 30,000) 181,000

30,000 63,000 (20,000) 73,000

20,000 120,000 140,000

19,000 55,000 80,000

270,000 600,000 240,000 695,000

420,000 430,000 1,004,000

909,000 300,000 181,000

831,000 100,000 73,000

1,390,000

1,004,000

Eliminations Noncontrolling Consolidated Dr. Cr. Interest Balances

6-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 6-7

On January 1, 2011, Porter Company purchased an 80% interest in the capital stock of Shilo Company for $3,400,000. At that time, Shilo Company had common stock of $2,200,000 and retained earnings of $620,000. Porter Company uses the cost method to record its investment in Shilo Company. Differences between the fair value and the book value of the identifiable assets of Shilo Company were as follows: Fair Value in Excess of Book Value Equipment Land Inventory

$400,000 200,000 80,000

The book values of all other assets and liabilities of Shilo Company were equal to their fair values on January 1, 2011. The equipment had a remaining life of five years on January 1, 2011; the inventory was sold in 2011. Shilo Company’s net income and dividends declared in 2011 were as follows: Year 2011 Net Income of $400,000; Dividends Declared of $100,000 Required: Prepare a consolidated statements workpaper for the year ended December 31, 2012 using the partially completed worksheet.

Chapter 6 Elimination of Unrealized Profit on Intercompany Sales of Inventory

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PORTER COMPANY AND SUBSIDIARY Consolidated Statements Workpaper For the Year Ended December 31, 20 12

Porter Shilo Eliminations Noncontrolling Consolidated Company Company Dr. Cr. Interest Balances Income Statement Sales Dividend Income Total Revenue Cost of Goods Sold Depreciation Expense Other Expenses Total Cost & Expenses Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings R...