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
Trang 1Chapter 7 Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment
Multiple Choice
1 In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting
1 Retained Earnings - P Company
2 Retained Earnings - S Company
3 Gain on Sale of Land
a 1
b 2
c 3
d both 1 and 2
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
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
4 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
5 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
Trang 26 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
a ($90,000) $0
b ($90,000) $9,000
c ($81,000) $0
d ($81,000) $9,000
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
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
9 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 9 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
Trang 312 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
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
Trang 418 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
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 9 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
Trang 5d 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 8 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
Trang 67-4 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:
P Company $280,000 $210,000
A If S Company sold the equipment to P Company, fill in the following matrix:
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:
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
Trang 77-6 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
7-7 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 5 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
P S Elimination Entries
Dr Cr
Noncontrolling Interest
Consolidated Balances
Dividend Income from S 80,000
Gain on Sale of
Cost of Sales (800,000) (300,000)
Depreciation Expense (160,000) (80,000)
Other Expenses (200,000) (160,000)
Noncontrolling Interest
in Income
Net Income 120,000 130,000
Trang 87-8 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
1 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
2 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
1 From a consolidated point of view, when should profit be recognized on intercompany sales of depreciable assets?
Nondepreciable assets?
2 In what circumstances might a consolidated gain be recognized on the sale of assets to a nonaffiliate when the
selling affiliate recognizes a loss?
3 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?
4 Define the controlling interest in consolidated net income using the t-account approach
5 Why is it important to distinguish between up-stream and downstream sales in the analysis of intercompany profit
eliminations?
6 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?
7 Define consolidated retained earnings using the analytical approach
Trang 9Business 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
1 Should stock options be expensed on the Income Statement?
2 Should the CEO or CFO be a past employee of the firm‟s audit firm?
3 Should the firm‟s audit committee be com-posed entirely of outside members and be
solely responsible for hiring the firm‟s auditors?
Trang 10ANSWER KEY
Multiple Choice
Problems
7-1 A 2011
2012
B Parker‟s net income from independent operations $870,000
- Unrealized profit on 2011 sales to Santo (150,000)
+ Profit on sales to Santo realized through
Parker‟s income from independent operations that
has been realized from third party transactions 745,000 Income of Santo that has been realized in
transactions with third parties $310,000 Parker‟s share thereof (.9 × $310,000) 279,000
Controlling Interest in Consolidated Net Income – 2011 $1,024,000