Theories Chapter 4 PDF

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CHAPTER 4 TRUE OR FALSE True 1. Inventory Sales from a parent to one of its subsidiaries are referred to as downstream sales. False 2. Under current GAAP, intercompany transactions are to be recorded in separate general ledger accounts. False 3. Under current GAAP, elimination by rearrangement is mandatory. True 4. For the income statement, reciprocal account balances do not exist for all types of intercompany transactions. False 5. The Intercompany Sales account is an example of an account that would always have a reciprocal balance. True 6. All intercompany transactions generally are related-party transactions. False 7. All related-party transactions are intercompany transactions. False 8. Intercompany transactions can occur between an investor company and a company in which the investor owns 25% of the investee's outstanding common stock. True 9. The term intercompany transaction generally is restricted to control situations. False 10. Intercompany transactions are eliminated in consolidation because they are relatedparty transactions. True 11. Because all intercompany transactions are eliminated in consolidation, the use of improper or unfair transfer prices has no consequences for consolidated reporting purposes. False 12. lntercompany inventory transfers at cost need not be eliminated in consolidation. False 13. Downstream intercompany inventory transfers at cost to a 100%-owned subsidiary need not be eliminated in consolidation. True 14. The concept of profit on intercompany transactions to be deferred for consolidated reporting purposes is gross profit. True 15. If intercompany profit is deferred for consolidated reporting purposes, then any income taxes recorded on that profit must also be deferred for consolidated reporting purposes. False 16. When a noncontrolling interest exists, intercompany sales on downstream intercompany inventory transfers need not be eliminated for consolidated reporting purposes. False 17. When a noncontrolling interest exists, intercompany sales on downstream intercompany inventory transfers need be eliminated only to the extent of the noncontrolling interest ownership percentage— not 100%. True 18. Fractional elimination is not allowed under current GAAP. True 19. Under current CAAP, the amount of intercompany profit or loss to be deferred for consolidated reporting purposes is not affected by the existence of a noncontrolling interest. False 20. If an intercompany inventory transfer occurs in 20x5 and all this inventory is not resold to an outside, third party until 20x6, the intercompany sale is eliminated in consolidation in 20x5. True 21. If an intercompany inventory transfer occurs in late 20x5 and all this inventory is not resold to an outside, third party until 20x6, the intercompany sale is eliminated in consolidation in 20x5—not 20x6. False 22. If an intercompany inventory transfer occurs in late 20x5 and all this inventory is not resold to an outside, third party until 20x6, the intercompany sale is eliminated in consolidation in 20x5 and 20x6.

MULTIPLE CHOICE 23. Intercompany inventory transfers cannot be a. Bonafide transactions. b. Arm's-length transactions. c. Related-party transactions. d. Related-party transactions. e. None of the above. 24. Which of the following statements is the correct reason for eliminating intercompany transactions for consolidated reporting purposes? a. Intercompany transactions are related-party transactions. b. From the perspective of either of the individual companies, intercompany transactions are not bonafide transactions. c. It is often impractical and in many cases impossible to determine whether the transfer prices approximate prices that could have been obtained with outside independent parties. d. The parent company could manipulate the intercompany transfer prices in a manner that is not equitable to the subsidiary. e. None of the above. 25. Which of the following statements is true? a. All intercompany transactions are related-party transactions. b. All related-party transactions are intercompany transactions. c. An unsupportable, artificially high or low intercompany transfer price with an overseas unit cannot have any impact on the consolidated financial statements because all intercompany transactions are eliminated in consolidation. d. For income tax-reporting purposes; transfer prices need not be comparable to sales to outside, third parties. e. None of the above. 26. In consolidation, which of the following intercompany transactions need not be undone? a. Intercompany management charges. b. Intercompany lease income and expense. c. Intercompany dividend income (when the parent uses the cost method). d. Intercompany equipment transfers involving a gain or loss. e. None of the above. 27. Which of the following accounts need not be eliminated in consolidation? a. Intercompany Sales. b. Intercompany Cost of Sales. c. Intercompany Interest Expense. d. Long-term Intercompany Receivables. e. None of the above. 28. Which of the following accounts would not require reconciliation or adjustment to a reciprocal balance prior to beginning the consolidation process? a. Intercompany Receivables. b. Intercompany Interest Income. c. Intercompany Sales. d. Intercompany Management Fee Income. 29. Which of the following accounts would require reconciliation or adjustment to a reciprocal balance prior to beginning the consolidation process? a. Intercompany Dividend Income (when the parent uses the cost method). b. Intercompany Sales. c. Intercompany Cost of Sales. d. Long-term Intercompany Payable. e. None of the above.

30. Intercompany accounts that are to have reciprocal balances but are not currently in agreement are adjusted a. Before the consolidation process. b. During the consolidation process. c. After the consolidation process. d. Not before, during, or after the consolidation process. 31. In consolidation, the most efficient way to eliminate intercompany accounts that are to have reciprocal balances is to use a. Elimination by proxy. b. Elimination by rearrangement. c. Elimination by default. d. Elimination by reciprocity. e. None of the above. 32. Which of the following statements is true? a. Elimination by rearrangement is mandatory under current GAAP. b. Intercompany inventory transfers at cost do not have to be eliminated. c. If an intercompany inventory transfer is made in late 20x4 but the inventory is not resold to an outside, third party until the intercompany inventory sale must also be eliminated in 20x5. d. Downstream intercompany inventory sales do not have to be eliminated if the subsidiary is 100% owned. e. None of the above. 33. For which of the following accounts would it be inappropriate to use elimination by rearrangement? a. Intercompany Operating Lease Income. b. Intercompany Cost of Sales. c. Intercompany Interest Income. d. Intercompany Notes Payable. e. None of the above. 34. An intercompany inventory transfer above cost occurred in 20x5. At 12/31 /x5 a portion of the transferred inventory remained unsold. Which of the following accounts would not require adjustment or elimination in consolidation at the end of 20x5? a. Intercompany Cost of Sales. b. Intercompany Sales. c. Inventory. d. Sales. e. none of the above 35. In 20x5, an intercompany inventory transfer above cost occurred. In 20x6, all this inventory was resold to an outside patty. Which of the following accounts would require adjustment or consolidation at 12/31/x6? a. Cost of Sales. b. Intercompany Cost of Sales. c. Intercompany Sales. d. Inventory. e. none of the above 36. In 20x5, Palex sold inventory costing P45,000 to its 100%-owned subsidiary, Salex, for 12/31/x5. Salex had resold all this inventory for P100,000. Which of the following accounts would have to be eliminated in consolidation at 12/31/x5? Intercompany Sales Intercompany Cost of Sales a. Yes Yes b. No No c. Yes No d. No Yes

37. In 20x5, Palco sold inventory costing P70,000 to its 100%-owned subsidiary, Salco, for P100,000. At 12/31/x5, P33,000 of this inventory was reported in Salco’s balance sheet. In 20x6, Salco resold this inventory for P55,000. Which of the following accounts is eliminated in consolidation at 12/31/x6 as a result of the above transactions? Intercompany Sales Intercompany Cost of Sales a. Yes Yes b. No No c. Yes No d. No Yes 38. In 20x6, Puzco resold for P70,000 inventory that it had acquired from its 100%-owned subsidiary, Suzco, in 20x5 for P50,000. Suzco's cost was P36,000. In consolidation at the end of 20x6, which of the following accounts is credited on the worksheet? a. Intercompany Cost of Sales. b. Equity in Net Income of Subsidiary. c. Intercompany Sales. d. Inventory. e. None of the above. 39. At 12/31/x6, Pozak reported of intercompany-acquired inventory in its balance sheet. This inventory was acquired in 20x5—not 20x6—from its 100%-owned subsidiary, Sozak. Sozak's cost was P60,000. Which of the following accounts is credited in consolidation at 12/31/x6? a. Cost of Sales. b. Intercompany cost of sales. c. Intercompany Sales. d. Inventory. e. None of the above 40. Sales from one subsidiary to another are called a. downstream sales b. upstream sales c. inter subsidiary sales d. horizontal sales 41. Non-controlling interest in consolidated income is never affected by a. upstream sales b. downstream sales c. Non-controlling interest is affected by all sales. d. None of the above 42. 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 43. The non-controlling 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.

44. The work paper 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. 45. A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of profit 2013. Under the partial equity method, the work paper entry in 2014 to recognize the intercompany profit in beginning inventory realized during 2014 includes a debit to a. Retained Earnings - P. b. Non-controlling interest. c. Cost of Sales. d. both Retained Earnings P and Non-controlling Interest. 46. The non-controlling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the non-controlling minority delete 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. 47. 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 non-controlling interest in the subsidiary. 48. The material sale of inventory items by q 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 working paper adjustment if the merchandise was transferred at cost. 49. A parent company regularly sells merchandise to its 80%-owned subsidiary. Which of the following statements describes the computation of non-controlling 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) x 20%. d. the subsidiary's net income + unrealized profits in the ending inventory - unrealized profits in the beginning inventory) x 20%. 50. 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

51. Polly, Inc. owns 80% of Saffron, Inc. During 20x4, Polly sold goods with a 40% gross profit to Saffron. Saffron sold all of these goods in 20x4. For 20x4 consolidated financial statements, how should the summation of Polly and Saffron 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. 52. Schiff Company owns 100% of the outstanding common stock of the Viel Company. During 20xl, Schiff sold merchandise to Viel that Viel, in turn, sold to unrelated firms. There were no such goods in Viel’s ending inventory. However, some of the intercompany purchases from Schiff had not yet been paid. Which of the following amounts will be incorrect in the consolidated statements if no adjustments are made? a. inventory, accounts payable, net income. b. inventory, sales, cost of goods sold, accounts receivable. c. sales, cost of goods sold, accounts receivable, accounts payable. d. accounts receivable, accounts payable. 53. 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 entities. d. does not require d working paper adjustment if the merchandise was transferred at cost. 54. Willard Corporation regularly sells inventory items to its subsidiary, Petty, Inc. If unrealized profits in Petty's 20Xl year-end inventory exceed the unrealized profits in its 20x2 year-end inventory, 20x2 combined a. cost of sales will be less than consolidated cost of sales in 20x2. b. gross profit will be greater than consolidated gross profit in 20x2. c. sales will be less than consolidated sales in 20x2. d. cost of sales will be greater than consolidated cost of sales in 20x2. 55. Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds. The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers. In preparing consolidated statements for Reynolds Company and Subsidiary Sally Corporation, a. the intercompany transactions can be ignored because the transfer price represents length bargaining. b. any unrealized profit from intercompany sales remaining in Reynolds' ending inventory must be offset against the unrealized profit in Reynolds' beginning inventory. c. any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated in its entirety. d. eighty percent of any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated. 56. 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. 57. Honeyeater Corporation owns a 40% interest in Nectar Company, acquired several years ago at a cost equal to book value and fair value. Nectar sells merchandise to Honeyeater for the first time in 20x5. In computing income from the investee for 20x5 under the equity method, Honeyeater uses which equation? a. 40% of Nectar's income less 100% of the unrealized profit in Honeyeater's ending inventory. b. 40% of Nectar's income plus 100% of the unrealized profit in Honeyeater's ending inventory. c. 40% of Nectar's income less 40% of the unrealized profit in Honeyeater's ending inventory. d. 40% of Nectar's income plus 40% of the unrealized profit in Honeyeater's ending inventory.

58. In situations where there are routine inventory sales between parent companies and subsidiaries, when preparing the consolidation statements, which of the following line items is indifferent to the sales being either upstream or downstream? a. Consolidated retained earnings. b. Consolidated gross profit. c. Non-controlling interest expense. d. Consolidated net income. 59. The consolidation procedures for intercompany sales are similar for upstream and downstream sales a. if the merchandise is transferred at cost. b. under a periodic inventory system but not under a perpetual inventory system. c. if the merchandise is immediately sold to outside parties. d. when the subsidiary is 100% owned. 60. Which of the following describes the impact on consolidated financial statements of upstream and downstream transfers? a. No difference exists in consolidated financial statements between upstream and downstream transfers. b. Downstream transfers affect the computation of the non-controlling interest's share of the subsidiary's income but upstream transfers do not. c. Upstream transfers affect the computation of the non-controlling interest's share of the subsidiary's income but downstream transfers do not. d. Downstream transfers can be ignored because the parent company makes them. 61. Subsidiary's income be adjusted for intercompany transfers? a. The subsidiary's reported income is adjusted for the impacts of upstream transfers prior to computing the non-controlling interest's allocation. b. The subsidiary's reported income is adjusted for the -impact of all transfers prior computing the noncontrolling interest's allocation. c. The subsidiary's reported income is not adjusted for the impact of transfers prior to computing the noncontrolling interest is allocation. d. The subsidiary's reported income is adjusted for the impact of downstream transfers prior to computing the non-controlling interest's allocation. 62. A parent company regularly sells merchandise to its 70%-owned subsidiary. Which of the following statements describes the computation of minority interest income? a. The subsidiary's net income times 30%. b. The subsidiary's net income x 30%) + 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) x 30%. d. (The subsidiary's net income + unrealized profits in the ending inventory – unrealized profits in the beginning inventory) x 30%. Use the following information for questions 63 to 66: Strickland Company sells inventory to its parent, Carter Company, at a profit during 20x4. 63. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 20x4? a. Retained earnings b. Cost of goods sold c. Inventory d. Investment Strickland Company e. Additional paid-in capital

64. With regard to the intercompany sale, which of the following choices would be a credit entry in the consolidated worksheet for 20x4? a. Retained earnings b. Cost of goods sold c. Inventory d. Investment Strickland Comp...