Unrealized Gains On Sales Test Bank Answers Ch.7

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

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.

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Medium

Learning Objective: 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 03

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.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 4 Explain the term “realized through usage.”

Section Reference: 7.2

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

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany 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.

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Medium

Learning Objective: 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Medium

Learning Objective: 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany 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.”

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Medium

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

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.

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Medium

Learning Objective: 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.

Section Reference: 7.3

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.

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 13

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

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.

Question Title: Test Bank (Multiple Choice) Question 14

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

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.

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2

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

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 17

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

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.

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2

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

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany 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.

Section Reference: 7.2

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

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2

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.

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Easy

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany 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.

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Medium

Learning Objective: 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.

Section Reference: 7.2

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.

• 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

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2

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.

Question Title: Test Bank (Essay) Question 2

Difficulty: Medium

Learning Objective: 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.

Section Reference: 7.2

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.

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

Accumulated Depreciation 50,000

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

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.

Section Reference: 7.2, 7.7

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.

A. Sales 126,000

Cost of 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

Accumulated Depreciation 2,000

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

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

Difficulty: Hard

Learning Objective: 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.

Section Reference: 7.2, 7.7

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.

A. Equipment 540,000

Beginning R/E – Prince ($100,000 × .80) 80,000

Noncontrolling Interest ($100,000 × .20) 20,000

Accumulated Depreciation 640,000

Accumulated Depreciation ($100,000/4) × 2 50,000

Depreciation Expense 25,000

Beginning R/E – Prince ($25,000 × .80) 20,000

Noncontrolling Interest ($25,000 × .20) 5,000

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

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

Difficulty: Hard

Learning Objective: 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.

Section Reference: 7.2, 7.4, 7.7

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

2017 2018

A.

Noncontrolling interest in $ 7,000 (1) $ 46,200 (2)

Consolidated net income

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

Consolidated net income

(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)

Consolidated net income

(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

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

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.

Section Reference: 7.2, 7.4, 7.7

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.

A. 2017

(1) Equipment 2,400,000

Cash 2,400,000

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

Accumulated Depreciation 400,000

2018

(3) Cash 2,200,000

Accumulated Depreciation 400,000

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

Gain on Sale of Equipment 500,000

$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

Question Title: Test Bank (Problem) Question 7-5

Difficulty: Hard

Learning Objective: 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.

Section Reference: 7.2, 7.4, 7.7

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.

a. Dividend Income from S 80,000

Dividends Declared 80,000

b. Gain on Sale of Equipment 20,000

Equipment 20,000

Accumulated Depreciation 40,000

c. Accumulated Depreciation 1,000*

Depreciation Expense 1,000

d. Retained Earnings – P 100,000

Gain on Sale of Land 100,000

* ($20,000/5) × 3/12

Question Title: Test Bank (Problem) Question 7-6

Difficulty: Hard

Learning Objective: 1 Understand the financial reporting objectives in accounting for intercompany sales 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

A. 2017

Gain on Sale of Equipment 75,000

Equipment 150,000

Accumulated Depreciation 225,000

Accumulated Depreciation 15,000

Depreciation Expense 15,000

2018

Retained Earnings – Pale 67,500

Noncontrolling Interest 7,500

Equipment 150,000

Accumulated Depreciation 225,000

Accumulated Depreciation 30,000

Depreciation Expense 15,000

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

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

Difficulty: Hard

Learning Objective: 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: 7.2, 7.4, 7.7

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.

A. (1) Sales 400,000

Cost of 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

Noncontrolling Interest ($22,000 × .2) 4,400

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

Question Title: Test Bank (Problem) Question 7-8

Difficulty: Hard

Learning Objective: 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: 7.2, 7.4, 7.7