Chapter 4—Intercompany Transactions: Merchandise, Plant Assets,
and Notes Key
1. Which of the following should appear in consolidated financial statements?
2. Which of the following intercompany transactions would not require a worksheet elimination in the
consolidation process?
3. Schiff Company owns 100% of the outstanding common stock of the Viel Company. During 20X1, 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?
4. The sale of inventory items by a parent company to an affiliated company
5. This year, Rose Company acquired all of the common stock of Hayley Company. At the end of the current
year, balances of selected accounts and other information for each of the companies were as follows:
Rose
Hayley
Sales
$2,582,000
$1,734,000
Accounts receivable
580,000
235,000
Sales to Hayley during year
80,000
Sales to Rose during year
20,000
Gross profit on all sales
25%
30%
At the end of the year, 50% of the inventory that Rose sold to Hayley remained in Hayley’s inventory, and $30,000 of the amount of the sales was
unpaid. Rose still owes half of the amount of its purchases to Hayley, but had sold all of the inventory it had acquired from Hayley by the end of the
year.
What is the amount of consolidated sales at the end of the year?
6. This year, Rose Company acquired all of the common stock of Hayley Company. At the end of the current
year, balances of selected accounts and other information for each of the companies were as follows:
Rose
Hayley
Sales
$2,582,000
$1,734,000
Accounts receivable
580,000
235,000
Sales to Hayley during year
80,000
Sales to Rose during year
20,000
Gross profit on all sales
25%
30%
At the end of the year, 50% of the inventory that Rose sold to Hayley remained in Hayley’s inventory, and $30,000 of the amount of the sales was
unpaid. Rose still owes half of the amount of its purchases to Hayley, but had sold all of the inventory it had acquired from Hayley by the end of the
year.
What is the consolidated Accounts receivable balance at the end of the year?
7. Diller owns 80% of Lake Company common stock. During October 20X7, Lake sold merchandise to Diller
for $300,000. On December 31, 20X7, one-half of this merchandise remained in Diller’s inventory. For 20X7,
gross profit percentages were 30% for Diller and 40% for Lake. The amount of unrealized profit in the ending
inventory on December 31, 20X7 that should be eliminated in consolidation is ____.
8. Cattle Company sold inventory with a cost of $40,000 to its 90%-owned subsidiary, Range Corp., for
$100,000 in 20X1. Range resold $75,000 of this inventory for $100,000 in 20X1. Based on this information, the
amount of inventory reported on the consolidated financial statements at the end of 20X1 is:
9. This year, Rose Company acquired all of the common stock of Hayley Company. At the end of the current
year, balances of selected accounts and other information for each of the companies were as follows:
Rose
Hayley
Sales
$2,582,000
$1,734,000
Accounts receivable
580,000
235,000
Sales to Hayley during year
80,000
Sales to Rose during year
20,000
Gross profit on all sales
25%
30%
At the end of the year, 50% of the inventory that Rose sold to Hayley remained in Hayley’s inventory, and $30,000 of the amount of the sales was
unpaid. Rose still owes half of the amount of its purchases to Hayley, but had sold all of the inventory it had acquired from Hayley by the end of the
year.
What is the amount of consolidated cost of goods sold at the end of the year?
10. Perry, Inc. owns a 90% interest in Brown Corp. During 20X6, Brown sold $100,000 in merchandise to Perry
at a 30% gross profit. Ten percent of the goods are unsold by Perry at year end. The noncontrolling interest will
receive what gross profit as a result of these sales?
11. 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,
12. Williard Corporation regularly sells inventory items to its subsidiary, Petty, Inc. If unrealized profits in
Petty’s 20X1 year-end inventory exceed the unrealized profits in its 20X2 year-end inventory, 20X2 combined
13. On January 1, 20X1 Bullock, Inc. sells land to its 80%-owned subsidiary, Humphrey Corporation, at a
$20,000 gain. The land is sold by Humphrey to an outside party in 20X3. What is the effect of the intercompany
sale of land on 20X1 consolidated net income?
14. On January 1, 20X1 Bullock, Inc. sells land to its 80%-owned subsidiary, Humphrey Corporation, at a
$20,000 gain. The land is sold by Humphrey to an outside party in 20X3. What is the effect of the intercompany
sale of land on 20X3 consolidated net income?
15. Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On
January 1, 20X2, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to
an unrelated party for $100,000 on September 26, 20X3. The gain from sale of land that will appear in the
consolidated income statements for 20X2 and 20X3, respectively, is ____.
16. Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On
January 1, 20X2, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to
an unrelated party for $100,000 on September 26, 20X3. The land will be included in the December 31, 20X2
consolidated balance sheet of Pennie, Inc. and Subsidiary at ____.
17. Emron Company owns a 100% interest in the common stock of the Dietz Company. On January 1, 20X2,
Emron sold Dietz a fixed asset that Dietz will use over a 5-year period. The asset was sold at a $5,000 profit. In
the consolidated statements, this profit will
18. Pease Corporation owns 100% of Sade Corporation common stock. On January 2, 20X6, Pease sold
machinery with a carrying amount of $30,000 to Sade for $50,000. Sade is depreciating the acquired machinery
over a 5-year life using the straight-line method. The related net adjustments to compute the 20X6 and 20X7
consolidated income before income tax would be an increase (decrease) of
20X6 20X7
19. On January 1, 20X1, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly-owned subsidiary.
Poe paid $1,100,000 for this machine. On the sale date, accumulated depreciation was $250,000. Poe estimated
a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy that
Saxe continued. In Poe’s December 31, 20X1, consolidated balance sheet, this machine should be included in
cost and accumulated depreciation as
Cost Accumulated Depreciation
20. Porch Company owns a 90% interest in the Screen Company. Porch sold Screen a milling machine on
January 1, 20X1, for $50,000 when the book value of the machine on Porch’s books was $40,000. Porch
financed the sale with Screen signing a 3-year, 8% interest, note for the entire $50,000. The machine will be
used for 10 years and depreciated using the straight-line method. The following amounts related to this
transaction were located on the companies trial balances:
Interest Revenue
$4,000
Interest Expense
$4,000
Depreciation Expense
$5,000
Based upon the information related to this transaction what will be the amounts eliminated in preparing the 20X1 consolidated financial statements?
Interest Revenue Interest Expense Depreciation Expense
D. 3,600 3,600 4,500
21. On 1/1/X1 Peck sells a machine with a $20,000 book value to its subsidiary Shea for $30,000. Shea intends
to use the machine for 4 years, which was the remaining life that Peck had at the time of the sale. Neither
company had assigned a salvage value to the machine. On 12/31/X2 Shea sells the machine to an outside party
for $14,000. What amount of gain or (loss) for the sale of assets is reported on the consolidated financial
statements in 20X2?
22. Company P owns 100% of the common stock of Company S. Company P is constructing an asset for
Company S that will be used in Company S’s manufacturing operations over a 5-year period. The asset was
50% complete at the end of 20X1 and was completed on December 31, 20X2. Company P is recording the
construction under the percentage of completion method. The asset was put into use by Company S on January
1, 20X3. The profit on the asset was estimated to be $50,000. Actual results complied to the estimate. On the
consolidated statements, the profit recognized will be
20X1 20X2 20X3 20X4 – 20X7
23. The following accounts were noted in reviewing the trial balance for Parent Co. and Subsidiary Corp.:
Assets under Construction
Contracts Receivable
Billings on Construction in Progress
Earned Income on Long-Term Contracts
Contracts Payable
If these accounts pertain to a contract where Subsidiary Corp. is building an asset for Parent Co., which of these accounts do you expect to eliminate
when producing Parent Co. consolidated financial statements?
24. On January 1, 20X1, a parent loaned $30,000 to its 100%-owned subsidiary on a 5-year, 8% note. The note
requires a principal payment at the end of each year of $6,000 plus payment of interest accrued to date. The
following accounts require adjustment in the consolidation process:
Controlling
Assets Debt Retained Earnings
25. Patti Corp. has several subsidiaries (Aeta, Beta, and Gaeta) that are included in its consolidated financial
statements. In its 12/31/X1 separate balance sheet, Patti had the following intercompany balances before
eliminations:
Debit
Credit
Current Receivable due from Aeta
$ 40,000
Noncurrent Receivable due from Beta
100,000
Cash Advance to Beta
26,000
Cash Advance from Gaeta
$75,000
Intercompany Payable to Gaeta
40,000
In its 12/31/X1 consolidated balance sheet, what amount should Patti report as intercompany receivables?
26. During 20X3, a parent company billed its 100%-owned subsidiary for computer services at the rate of
$1,000 per month. At year end, one month’s bill remained unpaid. As a part of the consolidation process, net
income
27. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore
Corp. At the time of the acquisition, the fair values of the net asset required approximated their book
values. Based upon the following information, what is consolidated net income?
Phelps internally generated income:
$250,000
Shore internally generated income:
$ 50,000
Intercompany profit on Shore beginning inventory:
$ 10,000
Intercompany profit on Shore ending inventory:
$ 15,000
28. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore
Corp. At the time of the acquisition, the fair values of the net asset required approximated their book
values. Based upon the following information, what amount does Phelps Co. record as subsidiary income?
Phelps internally generated income:
$250,000
Shore internally generated income:
$ 50,000
Intercompany profit on Shore beginning inventory:
$ 10,000
Intercompany profit on Shore ending inventory:
$ 15,000
29. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore
Corp. At the time of the acquisition, the fair values of the net asset required approximated their book
values. Based upon the following information, what amount of income is attributable to the noncontrolling
interest?
Phelps internally generated income:
$250,000
Shore internally generated income:
$ 50,000
Intercompany profit on Shore beginning inventory:
$ 10,000
Intercompany profit on Shore ending inventory:
$ 15,000
30. Account balances are as of December 31, 20X3 except where noted.
Pipe
Match
Selected Income Statement Amounts:
Sales
$710,000
$530,000
Cost of Goods Sold
490,000
370,000
Gain on Sale of Equipment
21,000
Earnings from Investment in Subsidiary
61,000
Interest Revenue
2,880
Interest Expense
2,880
Depreciation
25,000
20,000
Selected Balance Sheet Amounts {Debits/(Credits)}:
Cash
$ 50,000
$ 15,000
Notes Receivable
36,000
Inventories
229,000
150,000
Equipment
440,000
360,000
Accumulated Depreciation
(200,000)
(120,000)
Investment in Shaw
189,000
Notes Payable
(36,000)
Common Stock
(100,000)
(10,000)
Additional Paid-In-Capital
(250,000)
(40,000)
Retained Earnings
(402,000)
(140,000)
Selected Statement of Retained Earnings Amounts:
Beginning Balance, January 1, 20X3
$272,000
$100,000
Net Income
210,000
70,000
Dividends Paid
80,000
30,000
Additional Information:
On January 2, 20X3 Pipe purchased 90% of Match for $155,000. On that date Match’s shareholders’ equity equaled $150,000 and the fair values of
Match’s assets and liabilities equaled their carrying amounts. Excess, if any, is attributed to patents and is amortized over 10 years.
On September 4, 20X3 Match paid cash dividends of $30,000.
On January 3, 20X3 Match sold equipment with an original cost of $30,000 and a carrying value of $15,000 to Pipe for $36,000. The equipment had
a remaining useful life of 3 years. Straight-line depreciation is used.
On January 4, 20X3 Match signed an 8% Note Payable. All interest payments were made as of December 31, 20X3.
During the year Match sold merchandise to Pipe for $60,000, which included a profit of $20,000. At year end 50% of the merchandise remained in
Pipe’s inventory.
Required:
1.
Which method is Pipe using to account for the investment in Match? How do you know?
2.
What elimination entry(ies) are associated with the elimination of intercompany profits due to the sale of merchandise?
3.
What elimination entry(ies) are necessary with the sale of equipment by Match to Pipe?
4.
What elimination entry(ies) are associated with the note to Match? Why are the entry(ies) made?
31. On January 1, 20X1, Prange Company acquired 100% of the common stock of Seaman Company for
$600,000. On this date Seaman had total owners’ equity of $400,000. Any excess of cost over book value is
attributable to a patent, which is to be amortized over 10 years.
During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple
equity method.
On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold
merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seaman’s
gross profit on all sales is 40%.
On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December.
Required:
Complete the Figure 4-1 worksheet for consolidated financial statements for the year ended December 31,
20X2.
Figure 4-1
Trial Balance
Eliminations and
Prange
Seaman
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
100,000
105,000
Other Current Assets
207,000
325,000
Investment in Sub. Company
710,000
Land
140,000
80,000
Buildings and Equipment
315,000
340,000
Accumulated Depreciation
(220,000)
(130,000)
Patent
20,000
Current Liabilities
(150,000)
(70,000)
Bonds Payable
(100,000)
Other Long-Term Liabilities
(200,000)
(40,000)
Common Stock—P Co.
(200,000)
Other Paid in Capital—P Co.
(100,000)
Retained Earnings—P Co.
(492,000)
Common Stock—S Co.
(150,000)
Other Paid in Capital—S Co.
(100,000)
Retained Earnings—S Co.
(200,000)
Net Sales
(600,000)
(380,000)
Cost of Goods Sold
360,000
228,000
Operating Expenses
140,000
62,000
Subsidiary Income
(90,000)
Dividends Declared—P Co.
60,000
Dividends Declared—S Co.
30,000
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Patent
Current Liabilities
Bonds Payable
Other Long-Term Liabilities
Common Stock—P Co.
Other Paid in Capital—P Co.
Retained Earnings—P Co.
Common Stock—S Co.
Other Paid in Capital—S Co.
Retained Earnings—S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
Dividends Declared—P Co.
Dividends Declared—S Co.
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
For the worksheet solution, please refer to Answer 4-1.
32. On January 1, 20X1, Prange Company acquired 80% of the common stock of Seaman Company for
$500,000. On this date Seaman had total owners’ equity of $400,000. Any excess of cost over book value is
attributable to patent, which is to be amortized over 20 years.
During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple
equity method.
On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold
merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seaman’s
gross profit on all sales is 40%.
On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December.
Required:
Complete the Figure 4-2 worksheet for consolidated financial statements for the year ended December 31,
20X2.
Figure 4-2
Trial Balance
Eliminations and
Prange
Seaman
Adjustment
s
Account Titles
Company
Company
Debit
Debit
Credit
Inventory, December 31
100,000
105,000
Other Current Assets
285,000
325,000
Investment in Sub. Company
588,000
Land
140,000
80,000
Buildings and Equipment
315,000
340,000
Accumulated Depreciation
(252,000)
(130,000)
Patent
60,000
Current Liabilities
(150,000)
(70,000)
Bonds Payable
(100,000)
Other Long-Term Liabilities
(200,000)
(40,000)
Common Stock—P Co.
(200,000)
Other Paid in Capital—P Co.
(100,000)
Retained Earnings—P Co.
(474,000)
Common Stock—S Co.
(150,000)
Other Paid in Capital—S Co.
(100,000)
Retained Earnings—S Co.
(200,000)
Net Sales
(600,000)
(380,000)
Cost of Goods Sold
360,000
228,000
Operating Expenses
140,000
62,000
Subsidiary Income
(72,000)
Dividends Declared—P Co.
60,000
Dividends Declared—S Co.
30,000
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Patent
Current Liabilities
Bonds Payable
Other Long-Term Liabilities
Common Stock—P Co.
Other Paid in Capital—P Co.
Retained Earnings—P Co.
Common Stock—S Co.
Other Paid in Capital—S Co.
Retained Earnings—S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
Dividends Declared—P Co.
Dividends Declared—S Co.
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
For the worksheet solution, please refer to Answer 4-2.