Test bank with answers for advanced accounting 3e by jeter chapter 07

To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment Multiple Choice In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting Retained Earnings - P Company Retained Earnings - S Company Gain on Sale of Land a b c d both and 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 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 Pinick Corp owns 90% of the outstanding common stock of Shell Company On December 31, 2011, Shell sold equipment to Pinick 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, 2011 consolidated balance sheet at a Pinick‟s original cost less 90% of Shell‟s recorded gain b Pinick‟s original cost less Shell‟s recorded gain c Shell‟s original cost d Pinick‟s original cost Pratt Company owns 100% of Sage Corporation On January 1, 2011 Pratt sold equipment to Sage at a gain Pratt 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 2011 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Pratt Corporation owns 100% of Stone Company‟s common stock On January 1, 2011, Pratt 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 2011 and 2012 consolidated income would be an increase (decrease) of 2011 2012 a ($90,000) $0 b ($90,000) $9,000 c ($81,000) $0 d ($81,000) $9,000 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 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 In January 2008, 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 year remaining life using the straight-line method This equipment was sold to a third party on January 1, 2011 for $1,440,000 What amount of gain should P Company record on its books in 2011? a $60,000 b $120,000 c $240,000 d $360,000 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment 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 years and not greater than 40 years 13 In 2011, 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 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 15 On January 1, 2010 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 2011? a no effect b increase of $12,000 c decrease of $12,000 d increase of $3,000 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, 2011, 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 2011 and pays dividends of $200,000 P‟s Equity from Subsidiary Income for 2011 is: a $480,000 b $384,000 c $403,200 d $576,000 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 it‟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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 18 On January 1, 2010, 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, 2011, 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 19 Parks Corporation owns 100% of Starr Company‟s common stock On January 1, 2011, Parks sold equipment with a book value of $350,000 to Starr for $500,000 Starr is depreciating the equipment over a ten-year life by the straight-line method The net adjustments to compute 2011 and 2012 consolidated income would be an increase (decrease) of 2011 2012 a ($150,000) $0 b ($150,000) $15,000 c ($135,000) $0 d ($135,000) $15,000 20 In January 2008, 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 year remaining life using the straight-line method This equipment was sold to a third party on January 1, 2011 for $720,000 What amount of gain should P Company record on its books in 2011? a $30,000 b $60,000 c $120,000 d $180,000 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, 2011, 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 2011 and pays dividends of $300,000 P‟s Equity from Subsidiary Income for 2011 is: a $720,000 b $576,000 c $604,800 d $864,000 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 it‟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 23 On January 1, 2010, 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, 2011, 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment 7-5 d debit to Accumulated Depreciation for $10,000 Problems 7-1 Parker Company, a computer manufacturer, owns 90% of the outstanding stock of Santo Company On January 1, 2011, Parker sold computers to Santo for $500,000 The computers, which are inventory to Parker, had a cost to Parker of $350,000 Santo Company estimated that the computers had a useful life of six years from the date of purchase Santo Company reported net income of $310,000, and Parker Company reported net income of $870,000 from its independent operations (including sales to affiliates) for the year ended December 31, 2011 Required: A Prepare in general journal form the workpaper entries necessary because of the intercompany sales in the consolidated statements workpaper for both 2011 and 2012 B Calculate controlling interest in consolidated net income for 2011 7-2 On January 1, 2008, Penny Company purchased a 90% interest in Stein Company for $800,000, the same as the book value on that date On January 1, 2011, Stein sold new equipment to Penny for $16,000 The equipment cost $11,000 and had a five year estimated life as of January 1, 2011 During 2012, Penny sold merchandise to Stein at 20% above cost in the amount (selling price) of $126,000 At the end of the year, Stein had one-third of this merchandise in its ending inventory At the beginning of 2012, Stein had $48,000 of inventory purchased in 2011 from Penny Required: A Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for 2012 B Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2012 Stein Company reported $40,000 of net income in 2012 7-3 Pringle Company owns 104,000 of the 130,000 shares outstanding of Seely Corporation Seely Corporation sold equipment to Pringle Company on January 1, 2011 for $740,000 The equipment was originally purchased by Seely Corporation on January 1, 2010 for $1,280,000 and at that time its estimated depreciable life was years The equipment is estimated to have a remaining useful life of four years on January 1, 2011 Both companies use the straight-line method to depreciate equipment In 2012 Pringle Company reported net income from its independent operations of $3,270,000, and Seely Corporation reported net income of $820,000 and declared dividends of $60,000 Pringle Company uses the cost method to record the investment in Seely 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, 2012 consolidated financial statements workpapers B Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2012 C Calculate controlling interest in consolidated net income for 2012 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-6 7-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition P Company bought 60% of the common stock of S Company on January 1, 2011 On January 1, 2011 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: 2011 2012 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: 2011 2012 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: 2011 2012 Noncontrolling interest in consolidated net income Controlling interest in consolidated net income 7-5 On January 1, 2011, Pinkel 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 2011 On January 1, 2012, Pinkel Company sold the equipment to an outside party for $2,200,000 Required: A Prepare, in general journal form, the entries necessary in 2011 and 2012 on the books of Pinkel 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, 2012 consolidated statements workpaper to properly reflect this gain or loss http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment 7-6 7-7 P Corporation acquired 80% of the outstanding voting stock of S Corporation when the fair values equaled the book values On July 1, 2010, P sold land to S for $300,000 The land originally cost P $200,000 S recently resold the land on October 30, 2011 for $350,000 On October 1, 2011, 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, 2011 Sales Dividend Income from S P S 1,200,000 600,000 7-7 Noncontrolling Interest Consolidated Balances 80,000 Gain on Sale of Equipment Gain on Sale of Land 20,000 50,000 Cost of Sales (800,000) (300,000) Depreciation Expense (160,000) (80,000) Other Expenses (200,000) (160,000) 120,000 130,000 Noncontrolling Interest in Income Net Income Elimination Entries Dr Cr Pike Company owns 90% of the outstanding common stock of Sanka Company On January 1, 2011, Sanka Company sold equipment to Pike Company for $300,000 Sanka 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 Pike Company estimated that the equipment had a remaining life of years on January 1, 2011 In 2011, Pike Company reported $225,000 and Sanka 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, 2011 and 2012 consolidated statements workpapers Pike Company uses the cost method to record its investment in Sanka Company B Calculate equity in subsidiary income for 2011 and noncontrolling interest in net income for 2011 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-8 7-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition On January 1, 2010, Peine Company acquired an 80% interest in the common stock of Stine Company on the open market for $3,000,000, the book value at that date On January 1, 2011, Peine Company purchased new equipment for $58,000 from Stine Company The equipment cost $36,000 and had an estimated life of five years as of January 1, 2011 During 2012, Peine Company had merchandise sales to Stine Company of $400,000; the merchandise was priced at 25% above Peine Company‟s cost Stine Company still owes Peine Company $70,000 on open account and has 20% of this merchandise in inventory at December 31, 2012 At the beginning of 2012, Stine Company had in inventory $100,000 of merchandise purchased in the previous period from Peine 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, 2012 B Assume that Stine Company reports net income of $160,000 for the year ended December 31, 2012 Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement for the year ended December 31, 2012 Short Answer 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 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 Short Answer Questions from the Textbook From a consolidated point of view, when should profit be recognized on intercompany sales of depreciable assets? Nondepreciable assets? In what circumstances might a consolidated gain be recognized on the sale of assets to a nonaffiliate when the selling affiliate recognizes a loss? What is the essential procedural difference between workpaper eliminating entries for un-realized intercompany profit when the selling affiliate is a less than wholly owned subsidiary and such entries when the selling affiliate is the parent company or a wholly owned subsidiary? Define the controlling interest in consolidated net income using the t-account approach Why is it important to distinguish between up-stream and downstream sales in the analysis of intercompany profit eliminations? In what period and in what manner should profits relating to the intercompany sale of depreciable property and equipment be recognized in the consolidated financial statements? Define consolidated retained earnings using the analytical approach http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment Business Ethics Question from the Textbook Some people believe that the use of executive stock options is directly related to the increased number of earnings restatements For each of the following items, discuss the potential ethical issues that might be related to earnings management within the firm Should stock options be expensed on the Income Statement? Should the CEO or CFO be a past employee of the firm‟s audit firm? Should the firm‟s audit committee be com-posed entirely of outside members and be solely responsible for hiring the firm‟s auditors? http://downloadslide.blogspot.com 7-9 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition ANSWER KEY Multiple Choice c d d b b d 10 11 12 c a b a c b 13 14 15 16 17 18 a b d c d d 19 20 21 22 23 d b c d d Problems 7-1 A 2011 Sales 500,000 Cost of Sales Equipment 350,000 150,000 Accumulated Depreciation Depreciation Expense (150,000/6) 2012 Beginning R/E – Parker Equipment 25,000 25,000 150,000 150,000 Accumulated Depreciation Depreciation Expense Beginning R/E – Parker 50,000 B Parker‟s net income from independent operations - Unrealized profit on 2011 sales to Santo + Profit on sales to Santo realized through 2011 depreciation Parker‟s income from independent operations that has been realized from third party transactions Income of Santo that has been realized in transactions with third parties $310,000 Parker‟s share thereof (.9 × $310,000) Controlling Interest in Consolidated Net Income – 2011 25,000 25,000 $870,000 (150,000) 25,000 745,000 279,000 $1,024,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment 7-2 A Sales 126,000 Cost of Sales 126,000 Cost of Sales Inventory [42,000 – (42,000/1.20) 7,000 Beginning R/E – Penny Cost of Sales [48,000 – (48,000/1.20)] 8,000 Beginning R/E – Penny ($5,000 × 9) Noncontrolling interest ($5,000 × 1) Equipment (16,000 – 11,000) 4,500 500 Accumulated Depreciation Depreciation Expense (5,000/5) Beginning R/E – Penny ($1,000 × 9) Noncontrolling interest ($1,000 × 1) 2,000 7,000 8,000 5,000 1,000 900 100 B Noncontrolling Interest in Consolidated net Income: × (40,000 + 1,000) = $4,100 7-3 A Equipment Beginning R/E – Pringle ($100,000 × 80) Noncontrolling Interest ($100,000 × 20) Accumulated Depreciation Accumulated Depreciation ($100,000/4) × Depreciation Expense Beginning R/E – Pringle ($25,000 × 80) Noncontrolling Interest ($25,000 × 20) B Noncontrolling Interest Calculation: Reported income of Seely Company Plus: Intercompany profit considered realized in the current period Noncontrolling interest in Seely Company (.20 × 845,000) C Controlling Interest in Consolidated Net Income: Pringle Company‟s income from its independent operations Reported net income of Seely Company Plus profit on intercompany sale of equipment considered to be realized through depreciation in 2011 Reported subsidiary income that has been realized in transactions with third parties Pringle Company‟s share thereof Controlling Interest in Consolidated net income 540,000 80,000 20,000 640,000 50,000 25,000 20,000 5,000 $820,000 25,000 $845,000 $169,000 $3,270,000 $820,000 25,000 845,000 × 676,000 $3,946,000 http://downloadslide.blogspot.com 7-11 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 7-4 2011 2012 Noncontrolling interest in Consolidated net income $ 7,000 (1) $ 46,200 (2) Controlling interest in Consolidated net income 290,500 (3) 279,300 (4) A (1) (2) (3) (4) 4($70,000 – $63,000 + $10,500) = $7,000 4($105,000 + $10,500) = $46,200 $280,000 + 6($70,000 – $63,000 + $10,500) = $290,500 $210,000 + 6($105,000 + $10,500) = $279,300 2011 2012 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 7-5 A 2011 (1) Equipment Cash 2,400,000 2,400,000 (2) Depreciation Expense (1/6 × $2,400,000) Accumulated Depreciation 2012 (3) Cash Accumulated Depreciation Equipment Gain on Sale of Equipment B Cost Accumulated Depreciation 1/1/12 Book Value Proceeds from Sale Gain on Sale 400,000 400,000 2,200,000 400,000 2,400,000 200,000 Pinkel Company Consolidated $2,400,000 (400,000) 2,000,000 $1,500,000* 2,200,000 2,200,000 $ 200,000 $700,000 *$1,800,000 – 1/6($1,800,000) = $1,500,000 1/1 Retained Earnings - Pinkel [.8 × ($600,000 – $100,000)] 1/1 Noncontrolling interest [.2 × ($600,000 – $100,000)] Gain on Sale of Equipment 400,000 100,000 http://downloadslide.blogspot.com 500,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment 7-13 $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 7-6 Sales Dividend Income from S P S $1,200,000 $600,000 80,000 Elimination Entries Dr Cr Noncontrolling Interest Consolidating Balances $1,800,000 (a)80,000 Gain on Sale of Equipment 20,000 Gain on Sale of Land 50,000 Cost of Sales (800,000) (300,000) Depreciation Expense (160,000) Other Expenses (200,000) (160,000) (b)20,000 (80,000) (d)100,000 150,000 (1,100,000) (c) 1,000 (239,000) (360,000) Noncontrolling Interest in Income ($130,000 – $20,000 + 1,000) × 20 Net Income a b c d $120,000 22,200 22,200 $130,000 Dividend Income from S Dividends Declared 80,000 Gain on Sale of Equipment Equipment Accumulated Depreciation 20,000 20,000 Accumulated Depreciation Depreciation Expense 1,000* Retained Earnings – P Gain on Sale of Land 100,000 80,000 40,000 1,000 100,000 * ($20,000/5) × 3/12 http://downloadslide.blogspot.com (22,200) $228,800 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 7-7 A 2011 Gain on Sale of Equipment Equipment Accumulated Depreciation Accumulated Depreciation Depreciation Expense 2012 Retained Earnings – Pike Noncontrolling Interest Equipment Accumulated Depreciation 75,000 150,000 225,000 15,000 15,000 67,500 7,500 150,000 225,000 Accumulated Depreciation 30,000 Depreciation Expense Beginning Retained Earnings – Pike Noncontrolling Interest B Sanka Company net income Unrealized gain-equipment ($75,000) upstream Confirmed gain 7-8 Equity in Sub Income $135,000 15,000 13,500 1,500 Noncontrolling Interest $15,000 (67,500) 13,500 $81,000 (7,500) 1,500 $ 9,000 A (1) Sales 400,000 Cost of Sales 400,000 (2) Accounts Payable Accounts Receivable 70,000 (3) Cost of Sales (beginning inventory – income statement) Inventory ($80,000 – ($80,000/1.25)) 16,000 (4) Beginning Retained Earnings – Peine ($100,000 – ($100,000/1.25)) Cost of Sales (beginning inventory – income statement) 20,000 (5) Beginning Retained Earnings – Peine ($22,000 × 8) Noncontrolling Interest ($22,000 × 2) Property, Plant and Equipment 17,600 4,400 (6) Accumulated Depreciation Depreciation Expense ($22,000/5) Beginning Retained Earnings – Peine ($4,400 × 8) Noncontrolling Interest ($4,400 × 2) 70,000 16,000 20,000 22,000 8,800 B Noncontrolling Interest in Consolidated Income × ($160,000 + $4,400) = $32,880 http://downloadslide.blogspot.com 4,400 3,520 880 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment 7-15 Short Answer Workpaper entries are necessary to accomplish the following financial reporting objectives: a 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 b To present property in the consolidated balance sheet at its cost to the affiliated group c 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 The eliminating entry adjusts the gain or loss reported by the purchasing affiliate from the amount it recorded to the correct amount from the perspective of the consolidated entity, and adjusts the controlling and noncontrolling interests for the unrealized intercompany profit associated with the equipment on the date of its premature disposal Solutions to Short Answer Questions from the Textbook Intercompany profit in depreciable asset transfers is realized as a result of the utilization of the asset in the generation of revenue Such utilization is measured by depreciation and, accordingly, the recognition of the realization of intercompany profit is accomplished through depreciation adjustments in the periods following the intercompany transfers When intercompany sales involve nondepreciable assets, any profit recognized by the selling affiliate will remain unrealized from the consolidated entity‟s point of view for all subsequent periods or until the asset is disposed of Intercompany profit may be included in the selling affiliate‟s carrying value of an asset that is sold to third parties If the sales price in the sale to the third party is less that the inflated carrying value, the selling affiliate will recognize a loss on the sale From the point of view of the consolidated entity, however, the carrying value of the asset is its cost to the affiliated group (selling affiliate‟s cost less unrealized intercompany profit) and if this value is less than the selling price to the third party, the consolidated group will recognize a gain In effect, previously unrecognized intercompany profit is realized upon the sale of the asset to a third party The only procedural difference in the workpaper entries relating to the elimination of unrealized intercompany profit in depreciable or nondepreciable assets when the selling affiliate is a less than wholly owned subsidiary is that the noncontrolling interest in the unrealized intercompany profit at the beginning of the year must be recognized by debiting or crediting the noncontrolling shareholders‟ percentage interest in such adjustments to the beginning retained earnings of the subsidiary http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-16 Test Bank to accompany Jeter and Chaney Advanced Accounting Consolidated income is equal to the parent company‟s income from its independent operations that has been realized in transactions with third parties plus subsidiary income that has been realized in transactions with third parties and adjusted for the amortization, depreciation, or impairment of the differences between implied and book values (this total is then allocated to the controlling and noncontrolling interests) The controlling interest in consolidated income is equal to the parent company‟s income from its independent operations that has been realized in transactions with third parties plus its share of subsidiary income that has been realized in transactions with third parties and adjusted for the amortization, depreciation, or impairment of the differences between implied and book values Controlling Interest in Consolidated Income Unrealized gain on intercompany sale (downstream sales) Net income internally generated by P Company Gain realized through usage (depreciation adjustment) Unrealized profit on downstream sales to S Company (ending Inventory) Realized profit (downstream sales) from beginning inventory P Company's percentage of S Company's adjusted income realized from third parties Controlling interest in Consolidated Income It is important to distinguish between upstream and downstream sales of property and equipment because calculation of the noncontrolling interest in the consolidated financial statements differs depending on whether the sale giving rise to the intercompany profit is upstream or downstream Profit relating to the intercompany sale of property and equipment is recognized in the consolidated financial statements over the useful life of the equipment It is recognized in the consolidated financial statements by reducing depreciation expense (thus increasing consolidated income) Consolidated retained earnings may be defined as the parent company‟s cost basis retained earnings that has been realized in transactions with third parties plus (minus) the parent company‟s share of the increase (decrease) in subsidiary retained earnings that has been realized in transactions with third parties from the date of acquisition to the current date and adjusted for the cumulative effect of amortization of the difference between implied and book values http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment 7-17 ANSWERS TO BUSINESS ETHICS CASE The arguments against expensing options include the following: Valuation is subjective, involves assumptions that may be unrealistic, and may yield numbers that time will prove to be of limited usefulness Disclosure is a reasonable substitute Companies may alter their reward systems with the result that lower level employees are most affected Options are not a “real” expense and may never be exercised Option valuation opens the door for manipulation as managers can alter their assumptions Diluted earnings per share are already disclosed, and expensing options amounts to double counting Expensing may destroy any advantage held by the U.S as a world leader in technology, and distract corporate America from more important issues related to executive compensation and governance in general The arguments in favor of expensing options include the following: Difficulty or subjectivity in valuation is not a reason for avoidance of recording other relevant financial statement items, such as deferred taxes, pension liabilities, etc Transparency is a major objective of financial reporting, and without proper expensing of executive compensation, transparency is lacking Not expensing options generates costs of misinformation If employees are over-compensated, the users need to be aware of that fact When options qualify as a “real” expense, as defined in the conceptual framework, based on the best available information at the balance sheet date, they should be reflected as such in the financial statements Ideally the CEO or CFO should not be a past employee of the company‟s audit firm, as such a relationship could jeopardize his or her independence However, it is not unusual for a company to hire a former auditor, who might later be promoted to CEO or CFO, or might even be hired to such a position If this happens, the company might want to consider switching auditors or taking other measures to make sure that the audit firm is viewed as sufficiently independent Under the Sarbanes-Oxley Act of 2002 mandates that the audit firm‟s independence is impaired if a former member of the audit engagement team accepts a supervisory accounting position, unless the individual observes a one-year „cooling off‟ period The Sarbanes-Oxley Act of 2002 mandates that each member of the audit committee be a outside member of the board of directors of the issuer and to be independent Independent means not receiving any consulting, advisory, or other compensatory fee from the issuer At least one member must be a financial expert The audit committee is responsible for appointment, compensation, retention, and oversight of the independent auditors http://downloadslide.blogspot.com ... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 7-6 7-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition