Test bank advanced accounting 10e by beams chapter 06

On January 1, 2005, Eagle Corporation sold equipment with a book value of $40,000 and a 20-year remaining useful life to its wholly-owned subsidiary, Rabbit Corporation, for $60,000.. On

Chapter 6 Test Bank INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS

Multiple Choice Questions

Use the following information for questions 1 and 2

In 2004, Parrot Company sold land to its subsidiary, Tree Corporation, for $12,000 It had a book value of $10,000 In the next year, Tree sold the land for $18,000 to an unaffiliated firm

LO1

1 Which of the following is correct?

a No consolidation working paper entry was necessary in 2004

b A consolidation working paper entry was required only if the subsidiary was less than 100% owned in 2004

c A consolidation working paper entry is required each year until the land is sold outside the related parties

d A consolidated working paper entry was required only if the land was held for resale in 2004

LO1

2 The 2004 unrealized gain

a was deferred until 2006

b was eliminated from consolidated net income by a working paper entry that credited land $2,000

c made consolidated net income $2,000 less than it would have been had the sale not occurred

d made consolidated net income $2,000 greater than it would have been had the sale not occurred

LO1

3 On January 1, 2005, Eagle Corporation sold equipment with a

book value of $40,000 and a 20-year remaining useful life to its wholly-owned subsidiary, Rabbit Corporation, for $60,000 Both Eagle and Rabbit use the straight-line depreciation method, assuming no salvage value On December 31, 2005, the separate company financial statements held the following balances associated with the equipment:

A working paper entry to consolidate the financial statements

of Eagle and Rabbit on December 31, 2005 included a

a debit to gain on sale of equipment for $19,000

b credit to gain on sale of equipment for $20,000

c debit to accumulated depreciation for $1,000

d credit to depreciation expense for $3,000

Use the following information for questions 4 and 5

On December 31, 2005, Corella Corporation sold equipment with a three-year remaining useful life and a book value of $21,000 to its 70%-owned subsidiary Hollow Company for a price of $27,000 Corella bought the equipment four years ago for $49,000

LO1

4 What was the intercompany sale impact on the consolidated

financial statements for the year ended December 31, 2005?

5 What was the intercompany sale impact on the consolidated

financial statements for the year ended December 31, 2005?

LO1

6 On January 2, 2005 Kakapo Company sold a truck with book value

of $45,000 to Flightless Corporation, its completely owned subsidiary, for $60,000 The truck had a remaining useful life

of three years with zero salvage value Both firms use the straight-line depreciation method, and assume no salvage value

If Kakapo failed to make year-end equity adjustments, Kakapo’s investment in Flightless at December 31, 2005 was

Avocet holds 60% of Shrimp Shrimp reported net income of

$55,000 in 2005 and Avocet's separate net income (excludes interest in Shrimp) for 2005 was $98,000

LO1

7 In preparing the consolidated financial statements for 2005,

the elimination entry for depreciation expense was a

a debit for $5,000

b credit for $5,000

c debit for $15,000

11 Ground Parrot Company completely owns Heathlands Inc On

January 2, 2005 Ground Parrot sold Heathlands machinery at its book value of $30,000 Ground Parrot had the machinery two years before selling it and used a five-year straight-line depreciation method, with zero salvage value Heathlands will use a three-year straight-line method In the 2005 consolidated income statement, the depreciation expense

12 In reference to the downstream or upstream sale of

depreciable assets, which of the following statements is correct?

a Upstream sales from the subsidiary to the parent company

always result in unrealized gains or losses

b The initial effect of unrealized gains and losses from downstream sales of depreciable assets is different from the sale of nondepreciable assets

c Gains, but not losses, appear in the parent-company accounts

in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting

d Gains and losses appear in the parent-company accounts in the

year of sale and must be eliminated by the parent company in determining its investment income under the equity method of

LO2

13 Falcon Corporation sold equipment to its 80%-owned subsidiary,

Rodent Corp., on January 1, 2005 Falcon sold the equipment for $110,000 when its book value was $85,000 and it had a 5-year remaining useful life with no expected salvage value Separate balance sheets for Falcon and Rodent included the following equipment and accumulated depreciation amounts onDecember 31, 2005:

Equipment $ 750,000 $ 300,000 Less: Accumulated depreciation ( 200,000) ( 50,000) Equipment-net $ 550,000 $ 250,000

Consolidated amounts for equipment and accumulated depreciation

at December 31, 2005 were respectively

14 Peregrine Corporation acquired a 90% interest in Cliff

Corporation in 2004 at a time when Cliff’s book values and fair values were equal to one another On January 1, 2005, Cliff sold a truck with a $45,000 book value to Peregrine for

$90,000 Peregrine is depreciating the truck over 10 years using the straight-line method Separate incomes for Peregrineand Cliff for 2005 were as follows:

Sales $ 1,800,000 $ 1,050,000 Gain on sale of truck 45,000 Cost of Goods Sold ( 750,000) ( 285,000) Depreciation expense ( 450,000) ( 135,000) Other expenses ( 180,000) ( 450,000) Separate incomes $ 420,000 $ 225,000

Peregrine’s investment income from Cliff for 2005 was

LO2

15 Kestrel Company acquired an 80% interest in Reptile Corporation

on January 1, 2004 On January 1, 2005, Reptile sold a building with a book value of $50,000 to Kestrel for $80,000 The building had a remaining useful life of ten years and no salvage value The separate balance sheets of Kestrel and Reptile on December 31, 2005 included the following balances:

Buildings $ 400,000 $ 250,000 Accumulated Depreciation -

16 Pigeon Corporation purchased land from its 60%-owned

subsidiary, Seed Inc., in 2003 at a cost $30,000 greater than Seed’s book value In 2005, Pigeon sold the land to an outside entity for $40,000 more than Pigeon’s book value The 2005consolidated income statement reported a gain on the sale of land of

17 Pied Imperial-Pigeon Corporation acquired a 90% interest in

Offshore Corporation in 2003 when Offshore’ book values were equivalent to fair values Offshore sold equipment with a book value of $80,000 to Pied Imperial-Pigeon for $130,000 on January 1, 2005 Pied Imperial-Pigeon is fully depreciating the equipment over a 4-year period by using the straight-line method Offshore’ reported net income for 2005 was $320,000 Pied Imperial-Pigeon’s 2005 net income from Offshore was

LO3

18 Lorikeet Corporation acquired a 80% interest in Nectar

Corporation on January 1, 2000 at a cost equal to book value and fair value In the same year Nectar sold land costing

$30,000 to Lorikeet for $50,000 On July 1, 2005, Lorikeet sold the land to an unrelated party for $110,000 What was the gain

on the consolidated income statement?

19 On January 1, 2005 Rainforest Co recorded a $30,000 profit on

the upstream sale of some equipment that had a remaining year life under the straight-line depreciation method The effect of this transaction on the amount recorded in 2005 by the parent company Wompoo as its investment income in the Rainforest was

a a decrease of $18,000 if the Rainforest was 80% owned

b a decrease of $27,000 if the Rainforest was 90% owned

c an increase of $22,500 if the Rainforest was wholly owned

d an increase of $30,000 if the Rainforest was wholly owned

LO4

20 Swift Parrot Corporation acquired a 60% interest in Berries

Corp on January 1, 2005, when Berries’s book values and fair values were equivalent On January 1, 2005, Berries sold a building with a book value of $600,000 to Swift Parrot for

$700,000 The building had a remaining life of 10 years, no salvage value, and was depreciated by the straight-line method Berries reported net income of $2,000,000 for 2005 What wasthe noncontrolling interest for 2005?

LO1&2

Exercise 2

Stork Corporation paid $15,700 for a 90% interest in SwampCorporation on January 1, 2004, when Swamp stockholders’ equity consisted of $10,000 Capital Stock and $3,000 of Retained Earnings The excess cost over book value was attributable to goodwill

Additional information:

1 Stork sells merchandise to Swamp at 120% of Stork’s cost During

2004, Stork’s sales to Swamp were $4,800, of which half of the merchandise remained in Swamp’s inventory at December 31, 2004 During 2005, Stork’s sales to Swamp were $6,000 of which 60% remained in Swamp’s inventory at December 31, 2005 At year-end

2005 Swamp owed Stork $1,500 for the inventory purchased during

2005

2 Stork Corporation sold equipment with a book value of $2,000 and

a remaining useful life of four years and no salvage value to Swamp Corporation on January 1, 2005 for $2,800

3 Separate company financial statements for Stork Corporation and Subsidiary at December 31, 2005 are summarized in the first two columns of the consolidation working papers

Equity in Swamp’s income for 2004 3,600

Less: Unrealized inventory profit ( 400)

Less: Dividends received from Swamp ( 1,800)

Investment in Swamp, December 31, 2004 $ 17,100

Required:

Complete the working papers to consolidate the financial statements

of Stork Corporation and subsidiary for the year ended December 31,

2005

Stork Corporation and Subsidiary Consolidation Working Papers

LO1&2

Exercise 3

Dove Corporation acquired all of the outstanding voting common stock

of the Squab Corporation several years ago when the book values and

fair values of Squab’s net assets were equal

On April 1, 2003, Dove sold land that cost $25,000 to Squab for

$40,000 Squab resold the land for $45,000 on December 1, 2005

On July 1, 2005, Dove sold equipment with a book value of $10,000 to

Squab for $26,000 Squab is depreciating the equipment over a

four-year period using the straight-line method

Required:

The first two columns in the working papers presented below summarize

income statement information from the separate company financial

statements of Dove and Squab for the year ended December 31, 2005

Fill in the consolidated working paper columns to show how each of

the items from the separate company reports will appear in the

consolidated income statement

Sales 450,000 200,000

Income from Squab 46,000

Gain on sale of equipment 16,000

Gain on sale of land 5,000

Cost of sales ( 211,500) ( 91,500)

Depreciation expense ( 45,500) ( 23,500)

Other expenses ( 120,000) ( 34,000)

Net income 135,000 56,000

LO1&2

Exercise 4

Brolga Corporation paid $26,800 cash for a 70% interest in DanceCompany on January 1, 2004, when Dance’s stockholders’ equity consisted of $15,000 Capital Stock and $9,000 of Retained Earnings Additional information:

1 The cost-book value differential was allocated to a patent with

a 20-year amortization period

2 Brolga Corporation sold inventory items that cost $4,000 to Dance for $4,800 during 2004 and one-half of these inventory items remained unsold by Dance on December 31, 2004

3 During 2005 Brolga Corporation sold inventory items that cost

$5,000 to Dance for $6,000 and 30% of these inventory items remained unsold by Dance on December 31, 2005 Dance Corporation owed Brolga $700 on account at year-end 2005

Brolga Corporation and Subsidiary Consolidation Working Papers

$80,000 The equipment cost Barn Owl $72,000 The equipment had a remaining useful life of 8 years on the sale date and is depreciated under the straight-line method

Exercise 6

Separate income statements of Nightjar Corporation and its 90%-owned subsidiary, Branch Inc., for 2005 were as follows:

Nightjar Branch Sales Revenue $ 2,000,000 $ 1,200,000

1 Nightjar acquired its 90% interest in Branch Inc when the book values were equal to the fair values

2 The gain on equipment relates to equipment with a book value of

$120,000 and a 4-year remaining useful life that Branch sold to Nightjar for $200,000 on January 2, 2005 The straight-line depreciation method is used

2004 2005

Intercompany sales $ 300,000 200,000

Cost of intercompany sales 180,000 120,000

Percentage unsold at year-end 40 50

Required:

Prepare a consolidated income statement for Nightjar Corporation and

Subsidiary for the year ended December 31, 2005

LO2&3

Exercise 7

Osprey Corporation created a wholly owned subsidiary, Branch

Corporation, on January 1, 2003, at which time Osprey sold land with

a book value of $90,000 to Branch at its fair market value of

$140,000 Also, on January 1, 2003, Osprey sold to Branch equipment

with a book value of $130,000 and a fair value of $165,000 The

equipment had a remaining useful life of 4 years and is being

depreciated under the straight-line method On January 1, 2005,

Branch resold the land to an outside entity for $150,000 Branch

continues to use the equipment purchased from Osprey

Income statements for Osprey and Branch for the year ended December

31, 2005 are summarized below:

Income from Branch 55,000

At what amounts did the following items appear on a consolidated

income statement for Osprey Corporation and Subsidiary for the year

ended December 31, 2005?

1 Quail acquired its 80% interest in Savannah Corporation when the book values were equal to the fair values

2 The gain on equipment relates to equipment with a book value of

$85,000 and a 7-year remaining useful life that Quail sold to Savannah for $120,000 on January 2, 2005 The straight-line depreciation method was used

3 In 2005, Savannah sold land to an outside entity for $80,000 The land was acquired from Quail in 2003 for $60,000 The original cost of the land to Quail was $35,000

LO3

Exercise 9

Cassowary Corporation acquired a 70% interest in Fruit Corporation in

1999 at a time when Fruit’s book values and fair values were equal

In 2003, Fruit sold land to Cassowary for $82,000 that cost $72,000

The land remained in Cassowary’s possession until 2005 when Cassowary

sold it outside the combined entity for $102,000

After the books were closed in 2005, it was discovered that Cassowary

had not considered the unrealized gain from its intercompany purchase

of land in preparing the consolidated financial statements The only

entry on Cassowary’s books was a debit to Land and a credit to Cash

in 2003 for $82,000, and, in 2005, a debit to Cash for $102,000 and

credits to Land for $82,000 and Gain on sale of land for $20,000

Before the discovery of the error, the consolidated financial

statements disclosed the following amounts:

2003 2004 2005 Consolidated net income $ 750,000 $ 600,000 $ 910,000

Required:

3 Calculate the amount at which the gain on the sale of land

should have been reported in 2005