978-1259444951 Test Bank Chapter 5 Part 1

File: Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions

Multiple Choice:

1. On November 8, 2018, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land

cost $61,500 and was sold to Wood for $89,000. For consolidated financial statement reporting purposes,

when must the gain on the sale of the land be recognized?

A) Proportionately over a designated period of years.

B) When Wood Co. sells the land to a third party.

C) No gain may be recognized.

D) As Wood uses the land.

E) When Wood Co. begins using the land productively.

2. How would consolidated cost of goods sold have differed if the inventory transfers had been for the

same amount and cost, but from Stendall to Edgar?

A) Consolidated cost of goods sold would have remained $2,140,000.

B) Consolidated cost of goods sold would have been more than $2,140,000 because of the controlling

interest in the subsidiary.

C) Consolidated cost of goods sold would have been less than $2,140,000 because of the noncontrolling

interest in the subsidiary.

D) Consolidated cost of goods sold would have been more than $2,140,000 because of the noncontrolling

interest in the subsidiary.

E) The effect on consolidated cost of goods sold cannot be predicted from the information provided.

Education.

Page 5-2

Feedback: $2,140,000 COGS is unaffected by intra-entity gross profits in Consolidated Ending Inventory

value

[QUESTION]

REFER TO: 05-01

3. How would net income attributable to the noncontrolling interest be different if the transfers had been

for the same amount and cost, but from Stendall to Edgar?

A) Net income attributable to the noncontrolling interest would have decreased by $6,000.

B) Net income attributable to the noncontrolling interest would have increased by $24,000.

C) Net income attributable to the noncontrolling interest would have increased by $20,000.

D) Net income attributable to the noncontrolling interest would have decreased by $18,000.

E) Net income attributable to the noncontrolling interest would have decreased by $56,000.

4. On January 1, 2018, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the

year, Race sold to Gallow for $450,000 goods that cost $330,000. At year-end, Gallow owned 15% of the

goods transferred. Gallow reported net income of $204,000, and Race’s net income was $806,000. Race

decided to use the equity method to account for this investment. Assuming there are no excess

amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net

income attributable to the noncontrolling interest?

A) $ 3,600.

B) $22,800.

C) $30,900.

D) $32,900.

E) $40,800.

5. Webb Co. acquired 100% of Rand Inc. on January 5, 2018. During 2018, Webb sold goods to Rand

for $2,400,000 that cost Webb $1,800,000. Rand still owned 40% of the goods at the end of the year.

Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of

goods sold?

A) $17,200,000.

B) $15,040,000.

C) $14,800,000.

D) $15,400,000.

E) $14,560,000.

6. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2017. During 2017, Gentry sold Gaspard

Farms $625,000 of goods, which had cost $425,000. Gaspard Farms still owned 12% of the goods at the

end of the year. In 2018, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000,

and Gaspard Farms still owned 10% of the goods at year-end. For 2018, the cost of goods sold totaled

$5,400,000 for Gentry, and $1,200,000 for Gaspard Farms. What was consolidated cost of goods sold for

2018?

A) $6,600,000.

B) $6,604,000.

C) $5,620,000.

D) $5,596,000.

E) $5,625,000.

7. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2018, Kent made

several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000.

At the end of the year, 20% of the goods were still in X-Beams’ inventory. Kent’s reported net income was

$300,000. Assuming there are no excess amortizations associated with the consolidation, and no other

intra-entity asset transfers, what was the net income attributable to the noncontrolling interest in Kent?

A) $90,000.

B) $85,200.

C) $54,000.

D) $94,800.

E) $86,640.

8. Justings Co. owned 80% of Evana Corp. During 2018, Justings sold to Evana land with a book value

of $48,000. The selling price was $70,000. For purposes of the December 31, 2018 consolidated

financial statements, at what amount should the land be reported?

A) $17,600.

B) $22,000.

C) $48,000.

D) $56,000.

E) $70,000.

9. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2017, Thelma

sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000.

Thelma’s reported net income for 2017 was $119,000. Assuming there are no excess amortizations

associated with the consolidation, and no other intra-entity asset transfers, what is net income attributable

to the noncontrolling interest?

A) $35,700.

B) $31,800.

C) $39,600.

D) $22,200.

E) $26,100.

Education.

Page 5-5

Answer: B

Learning Objective: 05-06

Topic: Intra-entity transfer of land

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Sales Price $45,000 – BV $32,000 = Intra-Entity Gain on Transfer That Is Deferred ($13,000)

Subsidiary’s Net Income ($ 119,000) – Deferred Intra-Entity Gain on Transfer ($13,000) = Adjusted

Subsidiary Net Income ($106,000)

Noncontrolling Interest in Net Income = $106,000 × 30% Ownership Interest in Subsidiary = $31,800

REFERENCE: 05-02

Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2017, Clemente sold

equipment to Snider for $125,000. The equipment cost Clemente $140,000. At the time of the transfer,

the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five

years and a $0 salvage value. Both entities use the straight-line method of depreciation.

[QUESTION]

REFER TO: 05-02

10. At what amount should the equipment (net of depreciation) be included in the consolidated balance

sheet dated December 31, 2017?

A) $105,000.

B) $100,000.

C) $ 95,000.

D) $ 80,000.

E) $ 85,000.

11. At what amount should the equipment (net of depreciation) be included in the consolidated balance

sheet dated December 31, 2018?

A) $110,000.

B) $105,000.

C) $100,000.

D) $ 90,000.

E) $ 60,000.

Education.

Page 5-6

Answer: E

Learning Objective: 05-07

Topic: Intra-entity transfer of depreciable asset

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Sales Price $125,000 – BV $140, 000 = Loss on Transfer of $15,000, which is ignored.

Equipment is transferred at BV (Cost $140,000 – Accumulated Depreciation $40,000) $100,000 –

Depreciation for 2017 & 2018 ($100,000 / 5) $40,000 = $60,000 BV at 12/31/2018

[QUESTION]

12. During 2017, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost

$30,000 and was sold to Lord for $44,000. For consolidation reporting purposes, when is the $14,000

intra-entity gross profit recognized?

A) When goods are transferred to a third party by Lord.

B) When Lord pays Von for the goods.

C) When Von sold the goods to Lord.

D) When Lord receives the goods.

E) No gain can be recognized since the transfer was between related parties.

13. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2017, Devin made

frequent sales of inventory to Bauerly. There was deferred intra-entity gross profit of $40,000 in the

beginning inventory and $25,000 of intra-entity gross profit at the end of the year. Devin reported net

income of $137,000 for 2017. Bauerly decided to use the equity method to account for the investment.

Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity

asset transfers, what is the net income attributable to the noncontrolling interest for 2017?

A) $41,100.

B) $33,600.

C) $21,600.

D) $45,600.

E) $36,600.

Education.

Page 5-7

AICPA: FN Measurement

Feedback: Subsidiary’s Net Income $137,000 + Recognition of prior year Deferred Recognized Gross

profit $40,000 – Deferred gross profit at end of the year $25,000 = $152,000 X Noncontrolling Interest

30% = $45,600 Net Income Attributable to the Noncontrolling Interest

[QUESTION]

14. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations’ balance sheets

dated December 31, 2017, include the following balances for land: for Chain—$416,000, and for

Shannon—$256,000. On the original date of acquisition, the book value of Shannon’s land was equal to its

fair value. On April 4, 2018, Chain sold to Shannon a parcel of land with a book value of $65,000. The

selling price was $83,000. There were no other transfers, which affected the companies’ land accounts

during 2017. What is the consolidated balance for land on the 2018 balance sheet?

A) $672,000.

B) $690,000.

C) $755,000.

D) $737,000.

E) $654,000.

15. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to

2018. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000

during 2018. Assuming there are no excess amortizations associated with the consolidation, and no other

intra-entity asset transfers, what was the net income attributable to the noncontrolling interest for 2018?

A) $84,300.

B) $85,680.

C) $90,720.

D) $91,680.

E) $96,720.

Education.

Page 5-8

Intra-Entity Gross Profit = Transfer Price × GPR (.2)

Gross Profit 2017: 84,000 × 30% = $25,200

Gross Profit 2018: 100,000 × 30% = $30,000

Subsidiary’s Net Income ($912,000) + Intra-Entity Gross Profit in Ending Inventory for 2017 ($25,200) –

Intra-Entity Gross Profit in 2018 Inventory Deferred ($30,000) = $907,200 × Noncontrolling Interest 10%

= $90,720 Net Income Attributable to the Noncontrolling Interest

[QUESTION]

16. On January 1, 2018, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The

equipment had cost $125,000, and the balance in accumulated depreciation was $45,000. The equipment

had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-

line depreciation. On their separate 2018 income statements, Payton and Starker reported depreciation

expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated

income statement for 2018 would have been:

A) $144,000.

B) $148,375.

C) $109,000.

D) $134,000.

E) $139,625.

17. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2018.

During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was

sold to Ontario for $390,000. Ontario held $60,000 of the goods in its inventory at the end of the year.

The amount of intra-entity gross profit for which recognition is deferred, and should therefore be

eliminated in the consolidation process at the end of 2018, is:

A) $15,000.

B) $20,000.

C) $32,500.

D) $30,000.

E) $110,000.

Education.

Page 5-9

AICPA: FN Measurement

Feedback: Intra-Entity Gross Profit ($390,000 – $260,000) $130,000 X Intra-Entity Gross Profit

Remaining In Ending Inventory ($60,000 / $390,000) = $20,000

[QUESTION]

18. Prince Co. owned 80% of Kile Corp.’s common stock. During October 2018, Kile sold merchandise

to Prince for $140,000. At December 31, 2018, 50% of this merchandise remained in Prince’s inventory.

For 2018, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of

intra-entity gross profit remaining in ending inventory at December 31, 2018 that should be eliminated in

the consolidation process is:

A) $28,000.

B) $56,000.

C) $22,400.

D) $21,000.

E) $42,000.

19. Included in the amounts for Pot’s sales were Pot’s sales of merchandise to Skillet for $140,000. There

were no intra-entity transfers from Skillet to Pot. Intra-entity transfers had the same markup as sales to

2018. What are consolidated sales and cost of goods sold, respectively for 2018?

A) $1,400,000 and $ 952,000.

B) $1,400,000 and $ 966,000.

C) $1,540,000 and $1,078,000.

D) $1,400,000 and $1,022,000.

E) $1,540,000 and $1,092,000.

Education.

Page 5-10

AICPA: FN Measurement

Feedback: Consolidated Sales = Parent’s Sales ($1,120,000) + Subsidiary’s Sales ($420,000) =

$1,540,000 – Intra-Entity Transfers ($140,000) = $1,400,000

Consolidated COGS = Parent’s COGS ($840,000) + Subsidiary’s COGS ($252,000) – Total Intra-Entity

Inventory transfers ($140,000) + Deferred Unrecognized Gross Profit ($14,000) = $966,000

[QUESTION]

REFER TO: 05-03

20. Included in the amounts for Skillet’s sales were intra-entity gross profits related to Skillet’s intra-

entity transfer of merchandise to Pot for $140,000. There were no intra-entity transfers from Pot to

Skillet. Intra-entity transfers had the same markup as sales to outsiders. Pot still had 40% of the intra-

entity gross profit remaining in ending inventory at the end of 2018. What are consolidated sales and cost

of goods sold for 2018?

A) $1,400,000 and $ 952,000.

B) $1,400,000 and $ 966,000.

C) $1,540,000 and $1,078,000.

D) $1,400,000 and $ 974,400.

E) $1,540,000 and $1,092,000.

21. Included in the amounts for Pot’s sales were Pot’s sales for merchandise to Skillet for $140,000.

There were no sales from Skillet to Pot. Intra-entity transfers had the same markup as sales to outsiders.

Skillet had resold all of the intra-entity transfers (purchases) from Pot to outside parties during 2018.

What are consolidated sales and cost of goods sold for 2018?

A) $1,400,000 and $952,000.

B) $1,400,000 and $1,092,000.

C) $1,540,000 and $952,000.

D) $1,400,000 and $1,232,000.

E) $1,540,000 and $1,092,000.

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Feedback: Consolidated Sales = Parent’s Sales $1,120,000 + Subsidiary’s sales $420,000 =

$1,540,000 – Intra-Entity Transfers $140,000 = $1,400,000

Consolidated COGS = Parent’s COGS $840,000 + Subsidiary’s COGS $252,000 – Total Intra-Entity

Transfers $140,000 = $952,000

[QUESTION]

22. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2016,

Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the

building was to be depreciated on the straight-line basis. On January 1, 2018, Dalton sold this building to

Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected

salvage value. For consolidation purposes, what is the Excess Depreciation (ED entry) for this building

for 2018?

A) Accumulated Depreciation 7,000

Depreciation expense 7,000

B) Accumulated Depreciation 4,900

Depreciation Expense 4,900

C) Depreciation Expense 7,000

Accumulated Depreciation 7,000

D) Depreciation Expense 4,900

Accumulated Depreciation 4,900

E) Accumulated Depreciation 42,000

Depreciation Expense 42,000

Education.

Page 5-12

Net income

$ 196,000

$154,000

Retained earnings, 1/1/18

$ 420,000

$210,000

Net income (above)

196,000

154,000

Dividends paid

0

Retained earnings, 12/31/18

$ 616,000

$364,000

Cash and receivables

$ 294,000

$126,000

Inventory

210,000

154,000

Investment in Strong Corp

364,000

0

Equipment (net)

616,000

420,000

Total assets

$1,484,000

$700,000

Liabilities

$ 588,000

$196,000

Common stock

280,000

140,000

Retained earnings, 12/31/18 (above)

616,000

364,000

Total liabilities and stockholders’ equity

$1,484,000

$700,000

During 2018, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of the

inventory purchase price had been remitted to Pride by Strong at year-end. As of December 31, 2018,

60% of these goods remained in the company’s possession.

[QUESTION]

REFER TO: 05-04

23. What is the total of consolidated revenues?

A) $700,000.

B) $644,000.

C) $588,000.

D) $560,000.

E) $840,000.

24. What is the total of consolidated operating expenses?

A) $42,000.

B) $47,600.

C) $53,200.

D) $49,000.

E) $35,000.

Education.

Page 5-13

Learning Objective: 05-01

Topic: Coverage of prior chapters

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Parent’s Operating Expenses ($28,000) + Subsidiary’s Operating Expenses ($14,000) + Excess

Amortization on Equipment (($35,000 / 5) $7,000) = $49,000

[QUESTION]

REFER TO: 05-04

25. What is the total of consolidated cost of goods sold?

A) $196,000.

B) $212,800.

C) $184,800.

D) $203,000.

E) $168,000.

26. What is the consolidated total of noncontrolling interest appearing in the balance sheet?

A) $100,800.

B) $ 97,440.

C) $ 93,800.

D) $120,400.

E) $117,040.

Education.

Page 5-14

$120,400

[QUESTION]

REFER TO: 05-04

27. What is the consolidated total for equipment (net) at December 31, 2018?

A) $ 952,000.

B) $1,058,400.

C) $1,069,600.

D) $1,064,000.

E) $1,066,800.

28. What is the consolidated total for inventory at December 31, 2018?

A) $336,000.

B) $280,000.

C) $364,000.

D) $347,200.

E) $349,300.

29. In the consolidation worksheet for 2017, which of the following accounts would be debited to

eliminate the intra-entity transfer of inventory?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Strickland Company.

E) Sales.

30. In the consolidation worksheet for 2017, which of the following accounts would be credited to

eliminate the intra-entity transfer of inventory?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Strickland Company.

E) Sales.

31. In the consolidation worksheet for 2017, which of the following accounts would be debited to

eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Strickland Company.

E) Sales.

32. In the consolidation worksheet for 2017, which of the following accounts would be credited to defer

unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Strickland Company.

E) Sales.

33. In the consolidation worksheet for 2018, assuming Carter uses the initial value method of accounting

for its investment in Strickland, which of the following accounts would be debited to defer unrecognized

intra-entity gross profit with regard to the 2017 intra-entity transfers?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Strickland Company.

E) Sales.

34. In the consolidation worksheet for 2018, assuming Carter uses the initial value method of accounting

for its investment in Strickland, which of the following accounts would be credited to defer recognition of

intra-entity gross profit with regard to the 2017 intra-entity transfers?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Strickland Company.

E) Sales.

Education.

Page 5-17

AICPA: FN Measurement

REFERENCE: 05-06

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2017. With respect

to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting..

[QUESTION]

REFER TO: 05-06

35. In the consolidation worksheet for 2017, which of the following accounts would be debited to

eliminate the intra-entity transfer of inventory?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Fisher Company.

E) Sales.

36. In the consolidation worksheet for 2017, which of the following accounts would be credited to

eliminate the intra-entity transfer of inventory?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Fisher Company.

E) Sales.

37. In the consolidation worksheet for 2017, which of the following accounts would be debited to

eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Fisher Company.

E) Sales.

Education.

Page 5-18

Answer: B

Learning Objective: 05-03

Topic: Intra-entity ending inventory―Year of transfer

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

[QUESTION]

REFER TO: 05-06

38. In the consolidation worksheet for 2017, which of the following accounts would be credited to

eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Fisher Company.

E) Sales.

39. In the consolidation worksheet for 2018, which of the following accounts would be debited to

eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Fisher Company.

E) Sales.

40. In the consolidation worksheet for 2018, which of the following accounts would be credited to

eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?

A) Retained earnings.

B) Cost of goods sold.

C) Inventory.

D) Investment in Fisher Company.

E) Sales.

41. Which of the following statements is true regarding an intra-entity transfer of land?

A) A loss is always recognized but a gain is deferred in a consolidated income statement.

B) A loss and a gain are deferred until the land is sold to an outside party.

C) A loss and a gain are always recognized in a consolidated income statement.

D) A gain is always recognized but a loss is deferred in a consolidated income statement.

E) Recognition of a gain or loss is deferred by adjusting stockholders’ equity through comprehensive

income.

42. Parent sold land to its subsidiary resulting in a gain in 2016, the year of transfer. The subsidiary sold

the land to an unrelated third party for a gain in 2019. Which of the following statements is true?

A) A gain will be recognized in the consolidated income statement in 2016.

B) A gain will be recognized in the consolidated income statement in 2019.

C) No gain will be recognized in the 2019 consolidated income statement.

D) Only the parent company will recognize a gain in 2019.

E) The subsidiary will recognize a gain in 2016.

43. An intra-entity transfer of a depreciable asset took place whereby the transfer price exceeded the

book value of the asset. Which statement is true with respect to the year following the year in which the

transfer occurred?

A) A worksheet entry is made with a debit to gain for a downstream transfer.

B) A worksheet entry is made with a debit to gain for an upstream transfer.

C) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the

parent uses the equity method.

D) A worksheet entry is made with a debit to retained earnings for a downstream transfer, regardless of

the method used account for the investment.

E) No worksheet entry is necessary.

44. An intra-entity transfer took place whereby the book value exceeded the transfer price of a

depreciable asset. Which statement is true for the year after the year of transfer?

A) A worksheet entry is made with a debit to retained earnings for an upstream transfer.

B) A worksheet entry is made with a credit to retained earnings for an upstream transfer.

C) A worksheet entry is made with a debit to retained earnings for a downstream transfer.

D) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer.

E) No worksheet entry is necessary.

45. An intra-entity transfer took place whereby the transfer price was less than the book value of a

depreciable asset. Which statement is true for the year subsequent to the year of transfer?

A) A worksheet entry is made with a debit to investment in subsidiary for an upstream transfer.

B) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer.

C) A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when

the parent uses the equity method.

D) A worksheet entry is made with a debit to retained earnings for an upstream transfer, regardless of the

method used to account for the investment.

E) No worksheet entry is necessary.