246121673 Chapter Five Hoyle

ch5

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1. On November 8, 2009, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized?A. Proportionately over a designated period of yearsB. When Wood Co. sells the land to a third partyC. No gain can be recognizedD. As Wood uses the landE. When Wood Co. begins using the land productively

2. Edgar Co. acquired 60% of Kindall Co. on January 1, 2009. During 2009, Edgar made several sales of inventory to Kindall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Kindall still owned one-fourth of the goods at the end of 2009. Consolidated cost of goods sold for 2009 was $2,140,000. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Kindall to Edgar?A. Consolidated cost of goods sold would have been $2,140,000B. Consolidated cost of goods sold would have been $2,175,000C. The effect on consolidated cost of goods sold cannot be predicted from the information providedD. Consolidated cost of goods sold would have been reduced because of the non-controlling interest in the subsidiaryE. Consolidated cost of goods sold would have been higher because of the non-controlling interest in the subsidiary

3. On January 1, 2009, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000 and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the non-controlling interest's share of

consolidated net income?A. $37,200B. $22,800C. $30,900D. $32,900E. $40,800

4. Webb Co. acquired 100% of Rand Inc. on January 5, 2009. During 2009, Webb sold Rand for $2,400,000 goods that cost $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of goods sold?A. $17,200,000B. $15,040,000C. $14,800,000D. $16,960,000E. $14,560,000

5. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2009. During 2009, Gentry sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2010, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000 and Gaspard Farms still owned 10% of the goods at year-end. For 2010, cost of goods sold was $1,200,000 for Gaspard Farms and $5,400,000 for Gentry. What was consolidated cost of goods sold for 2010?A. $6,600,000B. $6,596,000C. $5,620,000D. $5,596,000E. $5,625,000

6. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2009, Kent made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was $300,000. What was the non-controlling interest in Kent's net income?A. $90,000B. $85,200C. $54,000D. $94,800E. $86,640

7. Justings Co. owned 80% of Evana Corp. During 2009, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings shouldA. Not recognize a gain on the sale of the land since it was made to a related partyB. Recognize a gain of $17,600C. Defer recognition of the gain until Evana sells the land to a third partyD. Recognize a gain of $8,000E. Recognize a gain of $22,000

8. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2009, Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000. Thelma's reported net income for 2009 was $119,000. What is the non-controlling interest's share of Thelma's net

income?A. $35,700B. $31,800C. $39,600D. $22,200E. $26,100

9. Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2009, Clemente sold some equipment to Snider for $125,000. The equipment had cost $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included on the consolidated balance sheet dated December 31, 2009?A. $100,000B. $95,000C. $75,000D. $80,000E. $85,000

10. During 2009, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized?A. When the goods are sold to a third party by LordB. When Lord pays Von for the goodsC. When Von sold the goods to LordD. When the goods are used by LordE. No gain can be recognized since the transaction was between related parties

11. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2009, Devin made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the beginning inventory and $25,000 at the end of the year. Devin reported net income of $137,000 for 2009. Bauerly decided to use the equity method to account for the investment. What is the non-controlling interest's share of Devin's net income for 2009?A. $41,100B. $33,600C. $21,600D. $45,600E. $36,600

12. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2009, include the following balances for land: for Chain-$416,000 and for Shannon-$256,000.On the original date of acquisition, the book value of Shannon's land was equal to its fair value. On April 4, 2010, Chain sold to Shannon a parcel of land with a book value of $65,000. The selling price was $83,000. There were no other transactions which affected the companies' land accounts during 2010. What is the consolidated balance for land on the 2010 balance sheet?A. $672,000B. $690,000C. $755,000D. $737,000E. $654,000

13. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in 2009 and $500,000 in 2010. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2010. What was the non-controlling interest's share of Sparis' net income for 2010?A. $85,680B. $90,600C. $90,720D. $91,680E. $91,800

14. On January 1, 2009, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000 and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2009 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2009 would have beenA. $144,000B. $148,375C. $109,000D. $134,000E. $139,625

15. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2009. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intercompany profit that should be eliminated in the consolidation process at the end of 2009 isA. $15,000B. $20,000C. $32,500D. $30,000E. $110,000

16. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2009, Kile sold merchandise to Prince for $140,000. At December 31, 2009, 50% of this merchandise remained in Prince's inventory. For 2009, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2009 that should be eliminated in the consolidation process isA. $28,000B. $56,000C. $22,400D. $21,000E. $42,000

Pot Co. holds 90% of the common stock of Skillet Co. During 2009, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Also during 2009, Pot sold merchandise to Skillet for $140,000. The subsidiary still possesses 40% of this inventory at the end of 2009. Pot had established the transfer price based on its normal markup.

17. What are consolidated sales and cost of goods sold?A. $1,400,000 and $952,000B. $1,400,000 and $966,000C. $1,540,000 and $1,078,000D. $1,400,000 and $1,022,000E. $1,540,000 and $1,092,000

18. Assuming that the transfers were from Skillet Co. to Pot Co., what are consolidated sales and cost of goods

sold?A. $1,400,000 and $952,000B. $1,400,000 and $966,000C. $1,540,000 and $1,078,000D. $1,400,000 and $974,400E. $1,540,000 and $1,092,000

19. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2007, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2009, Dalton sold this building to Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2009, how does this transfer affect the calculation of Dalton's share of consolidated net income?A. Consolidated net income must be reduced by $44,800B. Consolidated net income must be reduced by $50,400C. Consolidated net income must be reduced by $49,000D. Consolidated net income must be reduced by $56,000E. Consolidated net income must be reduced by $53,200

On January 1, 2009, Pride, Inc. bought 80% of the outstanding voting common stock of Strong Corp. for $364,000. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired.As of December 31, 2009, before preparing the consolidated worksheet, the financial statements appeared as follows:

During 2009, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31.

20. What is the total of consolidated revenues?A. $700,000B. $644,000C. $588,000D. $560,000E. $840,000

21. What is the total of consolidated operating expenses?A. $42,000B. $47,600C. $53,200D. $48,000E. $36,400

22. What is the total of consolidated cost of goods sold?A. $196,000B. $212,800C. $184,800D. $203,000E. $168,000

23. What is the consolidated total of non-controlling interest appearing on the balance sheet?A. $100,800B. $97,440C. $93,800D. $98,840E. $101,900

24. What is the consolidated total for equipment (net) at December 31, 2009?A. $952,000B. $1,058,400C. $1,069,600D. $1,064,000E. $1,066,800

25. What is the consolidated total for inventory at December 31, 2009?A. $336,000B. $280,000C. $364,000D. $347,200E. $349,300

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2009. Select the correct answer.

26. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2009?A. Retained earningsB. Cost of goods soldC. InventoryD. Investment Strickland CompanyE. Additional paid-in capital

27. With regard to the intercompany sale, which of the following choices would be a credit entry in the consolidated worksheet for 2009?A. Retained earningsB. Cost of goods soldC. InventoryD. Investment Strickland CompanyE. Additional paid-in capital



Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2009. Walsh uses the equity method to account for its investment in Fisher.

30. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2009?A. Retained earningsB. Cost of goods soldC. InventoryD. Investment Fisher CompanyE. Additional paid-in capital

31. With regard to the intercompany sale, which of the following choices would be a credit entry in the consolidated worksheet for 2009?A. Retained earningsB. Cost of goods soldC. InventoryD. Investment Fisher CompanyE. Additional paid-in capital

32. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2010?A. Retained earningsB. Cost of goods soldC. InventoryD. Investment in Fisher CompanyE. Additional paid-in capital


34. When comparing the difference between an upstream and downstream transfer of inventory and using the initial value method, which of the following statements is true?A. Income from subsidiary will be lower by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfersB. Income from subsidiary will be higher by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfersC. Income from subsidiary will be reduced for downstream ending inventory profit but not for upstream profit, before the effect of the non-controlling interestD. Income from subsidiary will be reduced for upstream ending inventory profit but not for downstream profit, before the effect of the non-controlling interestE. Income from subsidiary will be the same for upstream and downstream profit

35. When comparing the difference between an upstream and downstream transfer of inventory and using the initial value method, which of the following statements is true?A. Income from subsidiary will be lower by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfersB. Income from subsidiary will be higher by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfersC. Income from subsidiary will be reduced for downstream ending inventory profits but not for upstream profits, before the non-controlling interestD. Income from subsidiary will be reduced for upstream ending inventory profits but not for downstream profits, before the non-controlling interestE. Income from subsidiary will be the same for upstream and downstream profits

36. Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method?A. The sale of merchandise between a parent and its subsidiary represents an arm's-length transaction and thus provides the basis for the recognition of profit on such transfersB. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intercompany transactions unsold at year-end may not be sold in the next yearC. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intercompany transactions unsold at year-end may not be sold in the next yearD. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer priceE. Non-controlling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits

37. Which of the following statements is true regarding an intercompany sale of land?A. A loss is always recognized but a gain is eliminated on a consolidated income statementB. A loss and a gain are always eliminated on a consolidated income statementC. A loss and a gain are always recognized on a consolidated income statementD. A gain is always recognized but a loss is eliminated on a consolidated income statementE. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive income

38. Parent sold land to its subsidiary for a gain in 2007. The subsidiary sold the land externally for a gain in 2010. Which of the following statements is true?A. A gain will be reported on the consolidated income statement in 2007B. A gain will be reported on the consolidated income statement in 2010C. No gain will be reported on the 2010 consolidated income statementD. Only the parent company will report a gain in 2010E. The subsidiary will report a gain in 2007

39. An intercompany sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale?A. A worksheet entry is made with a debit to gain for a downstream transferB. A worksheet entry is made with a debit to gain for an upstream transferC. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity methodD. A worksheet entry is made with a debit to retained earnings for a downstream transferE. No worksheet entry is necessary

40. An intercompany sale took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year following the sale?A. A worksheet entry is made with a debit to retained earnings for an upstream transferB. A worksheet entry is made with a credit to retained earnings for an upstream transferC. A worksheet entry is made with a debit to retained earnings for a downstream transferD. A worksheet entry is made with a debit to investment in subsidiary for a downstream transferE. No worksheet entry is necessary

41. An intercompany sale took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year following the sale?A. A worksheet entry is made with a debit to investment in subsidiary for an upstream transferB. A worksheet entry is made with a debit to investment in subsidiary for a downstream transferC. A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity methodD. A worksheet entry is made with a debit to retained earnings for an upstream transferE. No worksheet entry is necessary

42. Which of the following statements is true concerning an intercompany transfer of a depreciable asset?A. Non-controlling interest in subsidiary's net income is never affected by a gain on the transferB. Non-controlling interest in subsidiary's net income is always affected by a gain on the transferC. Non-controlling interest in subsidiary's net income is affected by a downstream gain onlyD. Non-controlling interest in subsidiary's net income is affected only when the transfer is upstreamE. Non-controlling interest in subsidiary's net income is increased by an upstream gain in the year of transfer

Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intercompany purchases. Gargiulo was acquired on January 1, 2009.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

43. Compute the income from Gargiulo reported on Posito's books for 2009.A. $63,000B. $62,730C. $63,270D. $70,000E. $62,700



46. Compute the non-controlling interest in Gargiulo's net income for 2009.A. $6,970B. $7,000C. $7,030D. $6,270E. $6,230



49. For consolidation purposes, what amount would be debited to cost of goods sold for consolidation (worksheet entry G) in 2009?A. $300B. $240C. $2,000D. $1,600E. $270

50. For consolidation purposes, what amount would be debited to cost of goods sold for consolidation (worksheet entry G) in 2010?A. $1,000B. $800C. $3,000D. $2,400E. $900


52. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2009?A. $0B. $1,600C. $300D. $240E. $270

53. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2010?A. $240B. $300C. $2,000D. $1,600E. $270

54. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2011?A. $3,000B. $2,400C. $1,000D. $800E. $900

Patti Company holds 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory.

55. Compute consolidated sales.A. $10,000,000B. $10,126,000C. $10,140,000D. $10,200,000E. $10,260,000

56. Compute consolidated cost of goods sold.A. $7,500,000B. $7,600,000C. $7,615,000D. $7,604,500E. $7,660,000

57. Assume the same information, except Shannon sold inventory to Patti. Compute consolidated sales.A. $10,000,000B. $10,126,000C. $10,140,000D. $10,200,000E. $10,260,000

On April 1, 2009 Wilson Company, a 90% owned subsidiary of Simon Company, bought equipment from Simon for $68,250. On January 1, 2009, Simon realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. The equipment had an original cost to Simon of $80,000 and a book value of $50,000 with a 10-year remaining life as of January 1, 2009.The following data are available pertaining to Wilson's income and dividends:

58. Compute the gain on transfer of equipment reported by Simon for 2009.A. $19,500B. $18,250C. $11,750D. $38,250E. $37,500

59. Compute the amortization of gain for 2009 for consolidation purposes.A. $1,950B. $1,825C. $1,500D. $2,000E. $5,250



62. Compute Simon's share of income from Wilson for consolidation for 2009.A. $72,000B. $90,000C. $73,575D. $73,800E. $72,500



On January 1, 2009, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2009 and 2010, respectively.

65. Compute the gain recognized by Smeder Company relating to the equipment for 2009.A. $36,000B. $34,000C. $12,000D. $10,000E. $0

66. Compute Collins' share of Smeder's net income for 2009.A. $12,400B. $14,400C. $11,200D. $12,800E. $18,000


68. For consolidation purposes, what net debit or credit will be made in 2009 relating to the equipment transfer?A. Debit accumulated depreciation, $46,000B. Debit accumulated depreciation, $48,000C. Credit accumulated depreciation, $48,000D. Credit accumulated depreciation, $46,000E. Debit accumulated depreciation, $2,000

69. What is the net effect on consolidated net income in 2009, before allocation to controlling and non-controlling interests, due to the equipment transfer?A. Increase $2,000B. Decrease $12,000C. Decrease $10,000D. Decrease $14,000E. Increase $10,000

Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2009, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2009 and 2010, respectively. Leo uses the equity method to account for its investment.

70. Compute the gain or loss on the intercompany sale of land.A. $15,000 lossB. $15,000 gainC. $50,000 lossD. $50,000 gainE. $65,000 gain

71. On a consolidation worksheet, what adjustment would be made for 2009 regarding the land transfer?A. Debit gain for $50,000B. Credit gain for $50,000C. Debit land for $15,000D. Credit land for $15,000E. Credit gain for $15,000

72. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2010 regarding the land transfer?A. Debit retained earnings for $15,000B. Credit retained earnings for $15,000C. Debit retained earnings for $50,000D. Credit retained earnings for $50,000E. Debit investment in Stiller for $15,000

73. Compute income from Stiller on Leo's books for 2009.A. $110,000B. $100,000C. $125,000D. $85,000E. $88,000


Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2009, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000 and $220,000 for 2009, 2010 and 2011, respectively. Parker sold the land it purchased from Stark in 2009 for $92,000 in 2011.

75. Compute the gain or loss on the intercompany sale of land.A. $80,000 gainB. $80,000 lossC. $5,000 gainD. $5,000 lossE. $85,000 loss

76. Which of the following will be included in a consolidation entry for 2009?A. Debit loss for $5,000B. Credit loss for $5,000C. Credit land for $5,000D. Debit gain for $5,000E. Credit gain for $5,000

77. Which of the following will be included in a consolidation entry for 2010?A. Debit retained earnings for $5,000B. Credit retained earnings for $5,000C. Debit investment in subsidiary for $5,000D. Credit investment in subsidiary for $5,000E. Credit land for $5,000

78. Compute income from Stark reported on Parker's books for 2009.A. $205,000B. $200,000C. $180,000D. $175,500E. $184,500


80. Compute the consolidated gain or loss relating to the land for 2011.A. $5,000 lossB. $7,000 gainC. $12,000 gainD. $7,000 lossE. $12,000 loss

81. Compute Parker's reported gain or loss relating to the land for 2011.A. $12,000 gainB. $5,000 lossC. $12,000 lossD. $7,000 gainE. $7,000 loss

82. Compute Stark's reported gain or loss relating to the land for 2011.A. $5,000 lossB. $5,000 gainC. $7,000 lossD. $7,000 gainE. $0


Pepe, Incorporated acquired 60% of Devin Company on January 1, 2009. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2009 and 2010, respectively. Pepe uses the equity method to account for its investment in Devin.

84. What is the gain or loss on equipment reported by Devin for 2009?A. $54,000 gainB. $21,000 lossC. $21,000 gainD. $9,000 lossE. $9,000 gain

85. What is the consolidated gain or loss on equipment for 2009?A. $0B. $9,000 gainC. $9,000 lossD. $21,000 gainE. $21,000 loss

86. Compute the income from Devin reported on Pepe's books for 2009.A. $174,600B. $184,800C. $172,000D. $171,000E. $180,600


88. Compute the non-controlling interest in the net income of Devin for 2009.A. $116,400B. $120,400C. $120,000D. $123,200E. $112,000


90. For each of the following situations (1 - 10), select the correct entry (a - e) that would be required on a consolidated worksheet.(A.) Debit retained earnings.(B.) Credit retained earnings.(C.) Debit investment in subsidiary.(D.) Credit investment in subsidiary.(E.) None of the above.___ 1. Upstream beginning inventory profit, using the initial value method.___ 2. Downstream beginning inventory profit, using the initial value method.___ 3. Upstream ending inventory profit, using the initial value method.___ 4. Downstream ending inventory profit, using the initial value method.___ 5. Upstream transfer of depreciable assets in the period after transfer where subsidiary recognizes a gain, using the initial value method.___ 6. Downstream transfer of depreciable assets in the period after transfer where parent recognizes a gain, using the initial value method.___ 7. Upstream transfer of land in the period after transfer where subsidiary recognizes a loss, using the initial value method.___ 8. Downstream transfer of land in the period after transfer where parent recognizes a loss, using the initial value method.___ 9. Income from subsidiary, using the equity method.___ 10. Amortization of cost over book value, using the equity method.

91. On April 7, 2009, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer actually be earned?

92. Throughout 2009, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?

93. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2009. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transaction be accounted for by the consolidated entity?

94. During 2009, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned all of the inventory at the end of 2009. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2009?

95. How does a gain on an intercompany sale of equipment affect the calculation of a non-controlling interest?

96. How do upstream and downstream inventory transfers differ in their effect on a year-end consolidation?

97. How is the gain on an intercompany transfer of a depreciable asset realized?

98. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2009. During 2009, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2009. What errors will this omission cause in the consolidated financial statements?

99. Why do intercompany transfers between the component companies of a business combination occur so frequently?

100. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2009. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

101. What is meant by unrealized inventory gains and how are they treated on a consolidation worksheet?

102. What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

103. How is the gain on an intercompany transfer of land realized?

104. What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intercompany transfer of a depreciable asset?

105. Tara Company holds 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain.

106. King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2009, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/09, 25% of the goods were still in James' inventory. Required:

Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.

107. Flintstone Inc. acquired all of Rubble Co. on January 1, 2009. Flintstone decided to use the initial value

method to account for this investment. During 2009, Flintstone sold to Rubble for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were still in Rubble's inventory. Required:

Prepare Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet at 12/31/09.

108. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2008. The goods had cost Yoderly $105,000 and the selling price was $140,000. Nelson had not sold any of the goods by the end of the year. Required:

Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2009.

109. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2009, Strayten sold Quint goods which had cost $48,000. The selling price was $64,000. Quint still had one-fourth of the goods on hand at the end of the year. Required:

Prepare Consolidation Entry *G, which would have to be recorded at the end of 2010.

110. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2009, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2009 was $119,000. Required:

What was the non-controlling interest's share of Stroban Co.'s net income?

111. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2009, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000 and they were sold to Lawler for $100,000. At the end of 2009, Lawler still held 30% of the inventory. Required:

How should the sale between Lawler and Ritter be accounted for by the consolidated entity?

Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual

inventory method and Virginia decided to use the partial equity method to account for this investment. During 2009, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of the year, Stateside had used 75% of the goods.

112. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2009.

113. Prepare the consolidation entries that should be made at the end of 2009.

114. Prepare any 2010 consolidation worksheet entries that would be required for this inventory transfer.

Several years ago Polar Inc. purchased an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar paid an amount corresponding to the underlying book value of Icecap so that no allocations or goodwill resulted from the purchase price.The following selected account balances were from the individual financial records of these two companies as of December 31, 2009:

115. Assume that Polar sold inventory to Icecap at a markup equal to 40% of cost. Intercompany transfers were $126,000 in 2008 and $154,000 in 2009. Of this inventory, $39,200 of the 2008 transfers were retained and then sold by Icecap in 2009 while $58,800 of the 2009 transfers were held until 2010.Required:

On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory and (3) Non-controlling Interest in Subsidiary's Net Income. (If you use a gross profit percentage, do not round the calculation.)

116. Assume that Icecap sold inventory to Polar at a markup equal to 40% of cost. Intercompany transfers were $70,000 in 2008 and $112,000 in 2009. Of this inventory, $29,400 of the 2008 transfers were retained and then sold by Polar in 2009 whereas $49,000 of the 2009 transfers were held until 2010. Required:


117. Polar sold a building to Icecap on January 1, 2008 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value.Required:

On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Buildings (net), (2) Operating expenses and (3) Non-controlling Interest in Subsidiary's Net Income.

On January 1, 2009, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment had originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method.Musial earned $308,000 in net income in 2009 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment.

118. What is consolidated net income for 2009?

119. Assuming that Musial owned only 90% of Matin, what is consolidated net income for 2009?

120. Assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream, what is consolidated net income for 2009?

ch5 Key

1. On November 8, 2009, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized?A. Proportionately over a designated period of yearsB. When Wood Co. sells the land to a third partyC. No gain can be recognizedD. As Wood uses the landE. When Wood Co. begins using the land productively

Difficulty: Easy

Hoyle - Chapter 05 #1

2. Edgar Co. acquired 60% of Kindall Co. on January 1, 2009. During 2009, Edgar made several sales of inventory to Kindall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Kindall still owned one-fourth of the goods at the end of 2009. Consolidated cost of goods sold for 2009 was $2,140,000. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Kindall to Edgar?A. Consolidated cost of goods sold would have been $2,140,000B. Consolidated cost of goods sold would have been $2,175,000C. The effect on consolidated cost of goods sold cannot be predicted from the information providedD. Consolidated cost of goods sold would have been reduced because of the non-controlling interest in the subsidiaryE. Consolidated cost of goods sold would have been higher because of the non-controlling interest in the subsidiary

Difficulty: Medium


3. On January 1, 2009, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000 and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the non-controlling interest's share of

consolidated net income?A. $37,200B. $22,800C. $30,900D. $32,900E. $40,800

Difficulty: Easy


4. Webb Co. acquired 100% of Rand Inc. on January 5, 2009. During 2009, Webb sold Rand for $2,400,000 goods that cost $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of goods sold?A. $17,200,000B. $15,040,000C. $14,800,000D. $16,960,000E. $14,560,000

Difficulty: HardHoyle - Chapter 05 #4

5. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2009. During 2009, Gentry sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2010, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000 and Gaspard Farms still owned 10% of the goods at year-end. For 2010, cost of goods sold was $1,200,000 for Gaspard Farms and $5,400,000 for Gentry. What was consolidated cost of goods sold for 2010?A. $6,600,000B. $6,596,000C. $5,620,000D. $5,596,000E. $5,625,000


6. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2009, Kent made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was $300,000. What was the non-controlling interest in Kent's net income?A. $90,000B. $85,200C. $54,000D. $94,800E. $86,640

Difficulty: Medium


7. Justings Co. owned 80% of Evana Corp. During 2009, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings shouldA. Not recognize a gain on the sale of the land since it was made to a related partyB. Recognize a gain of $17,600C. Defer recognition of the gain until Evana sells the land to a third partyD. Recognize a gain of $8,000E. Recognize a gain of $22,000

Difficulty: MediumHoyle - Chapter 05 #7

8. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2009, Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000. Thelma's reported net income for 2009 was $119,000. What is the non-controlling interest's share of Thelma's net

income?A. $35,700B. $31,800C. $39,600D. $22,200E. $26,100


9. Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2009, Clemente sold some equipment to Snider for $125,000. The equipment had cost $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included on the consolidated balance sheet dated December 31, 2009?A. $100,000B. $95,000C. $75,000D. $80,000E. $85,000

Difficulty: Medium


10. During 2009, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized?A. When the goods are sold to a third party by LordB. When Lord pays Von for the goodsC. When Von sold the goods to LordD. When the goods are used by LordE. No gain can be recognized since the transaction was between related parties

Difficulty: EasyHoyle - Chapter 05 #10

11. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2009, Devin made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the beginning inventory and $25,000 at the end of the year. Devin reported net income of $137,000 for 2009. Bauerly decided to use the equity method to account for the investment. What is the non-controlling interest's share of Devin's net income for 2009?A. $41,100B. $33,600C. $21,600D. $45,600E. $36,600


12. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2009, include the following balances for land: for Chain-$416,000 and for Shannon-$256,000.On the original date of acquisition, the book value of Shannon's land was equal to its fair value. On April 4, 2010, Chain sold to Shannon a parcel of land with a book value of $65,000. The selling price was $83,000. There were no other transactions which affected the companies' land accounts during 2010. What is the consolidated balance for land on the 2010 balance sheet?A. $672,000B. $690,000C. $755,000D. $737,000E. $654,000

Difficulty: Medium


13. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in 2009 and $500,000 in 2010. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2010. What was the non-controlling interest's share of Sparis' net income for 2010?A. $85,680B. $90,600C. $90,720D. $91,680E. $91,800


14. On January 1, 2009, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000 and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2009 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2009 would have beenA. $144,000B. $148,375C. $109,000D. $134,000E. $139,625


15. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2009. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intercompany profit that should be eliminated in the consolidation process at the end of 2009 isA. $15,000B. $20,000C. $32,500D. $30,000E. $110,000

Difficulty: Medium


16. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2009, Kile sold merchandise to Prince for $140,000. At December 31, 2009, 50% of this merchandise remained in Prince's inventory. For 2009, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2009 that should be eliminated in the consolidation process isA. $28,000B. $56,000C. $22,400D. $21,000E. $42,000


Pot Co. holds 90% of the common stock of Skillet Co. During 2009, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Also during 2009, Pot sold merchandise to Skillet for $140,000. The subsidiary still possesses 40% of this inventory at the end of 2009. Pot had established the transfer price based on its normal markup.

Hoyle - Chapter 05

17. What are consolidated sales and cost of goods sold?A. $1,400,000 and $952,000B. $1,400,000 and $966,000C. $1,540,000 and $1,078,000D. $1,400,000 and $1,022,000E. $1,540,000 and $1,092,000

Difficulty: Hard


18. Assuming that the transfers were from Skillet Co. to Pot Co., what are consolidated sales and cost of goods

sold?A. $1,400,000 and $952,000B. $1,400,000 and $966,000C. $1,540,000 and $1,078,000D. $1,400,000 and $974,400E. $1,540,000 and $1,092,000

Difficulty: Hard


19. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2007, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2009, Dalton sold this building to Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2009, how does this transfer affect the calculation of Dalton's share of consolidated net income?A. Consolidated net income must be reduced by $44,800B. Consolidated net income must be reduced by $50,400C. Consolidated net income must be reduced by $49,000D. Consolidated net income must be reduced by $56,000E. Consolidated net income must be reduced by $53,200


On January 1, 2009, Pride, Inc. bought 80% of the outstanding voting common stock of Strong Corp. for $364,000. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired.As of December 31, 2009, before preparing the consolidated worksheet, the financial statements appeared as follows:

During 2009, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31.

Hoyle - Chapter 05

20. What is the total of consolidated revenues?A. $700,000B. $644,000C. $588,000D. $560,000E. $840,000


21. What is the total of consolidated operating expenses?A. $42,000B. $47,600C. $53,200D. $48,000E. $36,400

Difficulty: Medium


22. What is the total of consolidated cost of goods sold?A. $196,000B. $212,800C. $184,800D. $203,000E. $168,000


23. What is the consolidated total of non-controlling interest appearing on the balance sheet?A. $100,800B. $97,440C. $93,800D. $98,840E. $101,900


24. What is the consolidated total for equipment (net) at December 31, 2009?A. $952,000B. $1,058,400C. $1,069,600D. $1,064,000E. $1,066,800

Difficulty: Medium


25. What is the consolidated total for inventory at December 31, 2009?A. $336,000B. $280,000C. $364,000D. $347,200E. $349,300

Difficulty: Medium


Strickland Company sells inventory to its parent, Carter Company, at a profit during 2009. Select the correct answer.

Hoyle - Chapter 05


Difficulty: Easy



Difficulty: Easy



Difficulty: Medium




Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2009. Walsh uses the equity method to account for its investment in Fisher.

Hoyle - Chapter 05

30. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2009?A. Retained earningsB. Cost of goods soldC. InventoryD. Investment Fisher CompanyE. Additional paid-in capital

Difficulty: Easy



Difficulty: Easy


32. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2010?A. Retained earningsB. Cost of goods soldC. InventoryD. Investment in Fisher CompanyE. Additional paid-in capital




34. When comparing the difference between an upstream and downstream transfer of inventory and using the initial value method, which of the following statements is true?A. Income from subsidiary will be lower by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfersB. Income from subsidiary will be higher by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfersC. Income from subsidiary will be reduced for downstream ending inventory profit but not for upstream profit, before the effect of the non-controlling interestD. Income from subsidiary will be reduced for upstream ending inventory profit but not for downstream profit, before the effect of the non-controlling interestE. Income from subsidiary will be the same for upstream and downstream profit

Difficulty: Hard


35. When comparing the difference between an upstream and downstream transfer of inventory and using the initial value method, which of the following statements is true?A. Income from subsidiary will be lower by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfersB. Income from subsidiary will be higher by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfersC. Income from subsidiary will be reduced for downstream ending inventory profits but not for upstream profits, before the non-controlling interestD. Income from subsidiary will be reduced for upstream ending inventory profits but not for downstream profits, before the non-controlling interestE. Income from subsidiary will be the same for upstream and downstream profits

Difficulty: Hard


36. Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method?A. The sale of merchandise between a parent and its subsidiary represents an arm's-length transaction and thus provides the basis for the recognition of profit on such transfersB. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intercompany transactions unsold at year-end may not be sold in the next yearC. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intercompany transactions unsold at year-end may not be sold in the next yearD. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer priceE. Non-controlling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits

Difficulty: Medium


37. Which of the following statements is true regarding an intercompany sale of land?A. A loss is always recognized but a gain is eliminated on a consolidated income statementB. A loss and a gain are always eliminated on a consolidated income statementC. A loss and a gain are always recognized on a consolidated income statementD. A gain is always recognized but a loss is eliminated on a consolidated income statementE. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive income

Difficulty: Easy


38. Parent sold land to its subsidiary for a gain in 2007. The subsidiary sold the land externally for a gain in 2010. Which of the following statements is true?A. A gain will be reported on the consolidated income statement in 2007B. A gain will be reported on the consolidated income statement in 2010C. No gain will be reported on the 2010 consolidated income statementD. Only the parent company will report a gain in 2010E. The subsidiary will report a gain in 2007


39. An intercompany sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale?A. A worksheet entry is made with a debit to gain for a downstream transferB. A worksheet entry is made with a debit to gain for an upstream transferC. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity methodD. A worksheet entry is made with a debit to retained earnings for a downstream transferE. No worksheet entry is necessary

Difficulty: Medium


40. An intercompany sale took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year following the sale?A. A worksheet entry is made with a debit to retained earnings for an upstream transferB. A worksheet entry is made with a credit to retained earnings for an upstream transferC. A worksheet entry is made with a debit to retained earnings for a downstream transferD. A worksheet entry is made with a debit to investment in subsidiary for a downstream transferE. No worksheet entry is necessary


41. An intercompany sale took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year following the sale?A. A worksheet entry is made with a debit to investment in subsidiary for an upstream transferB. A worksheet entry is made with a debit to investment in subsidiary for a downstream transferC. A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity methodD. A worksheet entry is made with a debit to retained earnings for an upstream transferE. No worksheet entry is necessary


42. Which of the following statements is true concerning an intercompany transfer of a depreciable asset?A. Non-controlling interest in subsidiary's net income is never affected by a gain on the transferB. Non-controlling interest in subsidiary's net income is always affected by a gain on the transferC. Non-controlling interest in subsidiary's net income is affected by a downstream gain onlyD. Non-controlling interest in subsidiary's net income is affected only when the transfer is upstreamE. Non-controlling interest in subsidiary's net income is increased by an upstream gain in the year of transfer

Difficulty: Medium


Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intercompany purchases. Gargiulo was acquired on January 1, 2009.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Hoyle - Chapter 05


Difficulty: Medium



Difficulty: Medium





Difficulty: Medium







Difficulty: Medium


50. For consolidation purposes, what amount would be debited to cost of goods sold for consolidation (worksheet entry G) in 2010?A. $1,000B. $800C. $3,000D. $2,400E. $900

Difficulty: Medium




52. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2009?A. $0B. $1,600C. $300D. $240E. $270


53. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2010?A. $240B. $300C. $2,000D. $1,600E. $270

Difficulty: Medium


54. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2011?A. $3,000B. $2,400C. $1,000D. $800E. $900

Difficulty: Medium


Patti Company holds 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory.

Hoyle - Chapter 05

55. Compute consolidated sales.A. $10,000,000B. $10,126,000C. $10,140,000D. $10,200,000E. $10,260,000

Difficulty: Medium


56. Compute consolidated cost of goods sold.A. $7,500,000B. $7,600,000C. $7,615,000D. $7,604,500E. $7,660,000

Difficulty: Medium


57. Assume the same information, except Shannon sold inventory to Patti. Compute consolidated sales.A. $10,000,000B. $10,126,000C. $10,140,000D. $10,200,000E. $10,260,000

Difficulty: Medium


On April 1, 2009 Wilson Company, a 90% owned subsidiary of Simon Company, bought equipment from Simon for $68,250. On January 1, 2009, Simon realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. The equipment had an original cost to Simon of $80,000 and a book value of $50,000 with a 10-year remaining life as of January 1, 2009.The following data are available pertaining to Wilson's income and dividends:

Hoyle - Chapter 05

58. Compute the gain on transfer of equipment reported by Simon for 2009.A. $19,500B. $18,250C. $11,750D. $38,250E. $37,500

Difficulty: Hard



Difficulty: Hard



Difficulty: Medium







Difficulty: Hard



Difficulty: Hard


On January 1, 2009, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2009 and 2010, respectively.

Hoyle - Chapter 05

65. Compute the gain recognized by Smeder Company relating to the equipment for 2009.A. $36,000B. $34,000C. $12,000D. $10,000E. $0

Difficulty: Medium



Difficulty: Medium



Difficulty: Medium


68. For consolidation purposes, what net debit or credit will be made in 2009 relating to the equipment transfer?A. Debit accumulated depreciation, $46,000B. Debit accumulated depreciation, $48,000C. Credit accumulated depreciation, $48,000D. Credit accumulated depreciation, $46,000E. Debit accumulated depreciation, $2,000


69. What is the net effect on consolidated net income in 2009, before allocation to controlling and non-controlling interests, due to the equipment transfer?A. Increase $2,000B. Decrease $12,000C. Decrease $10,000D. Decrease $14,000E. Increase $10,000


Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2009, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2009 and 2010, respectively. Leo uses the equity method to account for its investment.

Hoyle - Chapter 05

70. Compute the gain or loss on the intercompany sale of land.A. $15,000 lossB. $15,000 gainC. $50,000 lossD. $50,000 gainE. $65,000 gain

Difficulty: Easy


71. On a consolidation worksheet, what adjustment would be made for 2009 regarding the land transfer?A. Debit gain for $50,000B. Credit gain for $50,000C. Debit land for $15,000D. Credit land for $15,000E. Credit gain for $15,000


72. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2010 regarding the land transfer?A. Debit retained earnings for $15,000B. Credit retained earnings for $15,000C. Debit retained earnings for $50,000D. Credit retained earnings for $50,000E. Debit investment in Stiller for $15,000



Difficulty: Medium



Difficulty: Easy


Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2009, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000 and $220,000 for 2009, 2010 and 2011, respectively. Parker sold the land it purchased from Stark in 2009 for $92,000 in 2011.

Hoyle - Chapter 05

75. Compute the gain or loss on the intercompany sale of land.A. $80,000 gainB. $80,000 lossC. $5,000 gainD. $5,000 lossE. $85,000 loss

Difficulty: Easy


76. Which of the following will be included in a consolidation entry for 2009?A. Debit loss for $5,000B. Credit loss for $5,000C. Credit land for $5,000D. Debit gain for $5,000E. Credit gain for $5,000

Difficulty: Easy


77. Which of the following will be included in a consolidation entry for 2010?A. Debit retained earnings for $5,000B. Credit retained earnings for $5,000C. Debit investment in subsidiary for $5,000D. Credit investment in subsidiary for $5,000E. Credit land for $5,000

Difficulty: Easy






80. Compute the consolidated gain or loss relating to the land for 2011.A. $5,000 lossB. $7,000 gainC. $12,000 gainD. $7,000 lossE. $12,000 loss

Difficulty: Hard


81. Compute Parker's reported gain or loss relating to the land for 2011.A. $12,000 gainB. $5,000 lossC. $12,000 lossD. $7,000 gainE. $7,000 loss

Difficulty: Medium


82. Compute Stark's reported gain or loss relating to the land for 2011.A. $5,000 lossB. $5,000 gainC. $7,000 lossD. $7,000 gainE. $0




Pepe, Incorporated acquired 60% of Devin Company on January 1, 2009. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2009 and 2010, respectively. Pepe uses the equity method to account for its investment in Devin.

Hoyle - Chapter 05

84. What is the gain or loss on equipment reported by Devin for 2009?A. $54,000 gainB. $21,000 lossC. $21,000 gainD. $9,000 lossE. $9,000 gain

Difficulty: Medium


85. What is the consolidated gain or loss on equipment for 2009?A. $0B. $9,000 gainC. $9,000 lossD. $21,000 gainE. $21,000 loss





Difficulty: Medium



Difficulty: Medium




90. For each of the following situations (1 - 10), select the correct entry (a - e) that would be required on a consolidated worksheet.(A.) Debit retained earnings.(B.) Credit retained earnings.(C.) Debit investment in subsidiary.(D.) Credit investment in subsidiary.(E.) None of the above.___ 1. Upstream beginning inventory profit, using the initial value method.___ 2. Downstream beginning inventory profit, using the initial value method.___ 3. Upstream ending inventory profit, using the initial value method.___ 4. Downstream ending inventory profit, using the initial value method.___ 5. Upstream transfer of depreciable assets in the period after transfer where subsidiary recognizes a gain, using the initial value method.___ 6. Downstream transfer of depreciable assets in the period after transfer where parent recognizes a gain, using the initial value method.___ 7. Upstream transfer of land in the period after transfer where subsidiary recognizes a loss, using the initial value method.___ 8. Downstream transfer of land in the period after transfer where parent recognizes a loss, using the initial value method.___ 9. Income from subsidiary, using the equity method.___ 10. Amortization of cost over book value, using the equity method.

(1) A; (2) A; (3) E; (4) E; (5) A; (6) A; (7) B; (8) B; (9) D; (10) C


91. On April 7, 2009, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer actually be earned?

The gain is earned when Shannahan sells the land to a third party.

Difficulty: Easy


92. Throughout 2009, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?

The gain is earned when Leeward uses the goods or sells them to a third party.

Difficulty: Easy


93. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2009. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transaction be accounted for by the consolidated entity?

Caleb and Varton are in substance one entity, although in legal form they are separate. The "sale" of land by Varton should be regarded as a transfer of assets within the entity. No gain on the transfer should be recognized on the consolidated financial statements since the earnings process is not complete. Because Caleb recognized a gain on its income statement, the consolidation process must eliminate the gain. Also, Caleb's separate balance sheet showed the land at an amount greater than its cost to the combined entity. The consolidation entry must reduce land to its cost.


94. During 2009, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned all of the inventory at the end of 2009. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2009?

A sale of inventory by a subsidiary to its parent is more accurately understood as a transfer within the entity.Since Forsyth still owned the inventory at the end of the year, the earnings process was not yet complete. If recognition of the gross profit on the transfer was allowed, the parent would be able to manipulate consolidated

net income and consolidated net assets by transferring inventory between parent and subsidiary.


95. How does a gain on an intercompany sale of equipment affect the calculation of a non-controlling interest?

If the equipment is sold by the parent to the subsidiary, the sale of the equipment does not affect the calculation of the non-controlling interest's share of the subsidiary's net income. When the sale of equipment is upstream, the gain on the sale must be subtracted from the subsidiary's income and according to SFAS 160, this elimination may be allocated between the controlling interest and non-controlling interest share of the subsidiary's earnings.

Difficulty: Medium


96. How do upstream and downstream inventory transfers differ in their effect on a year-end consolidation?

If the sale of inventory is downstream (from parent to subsidiary), any unrealized gain on the sale does not affect the calculation of non-controlling interest. When the sale is upstream (from the subsidiary to the parent), the gain on the sale is associated with the subsidiary. The gain on goods that the parent still owns should be deducted from the subsidiary's income and according to SFAS 160, this elimination may be allocated between the controlling interest and the non-controlling interest's share of the subsidiary's earnings.

Difficulty: Medium


97. How is the gain on an intercompany transfer of a depreciable asset realized?

The gain on an intercompany transfer of a depreciable asset may be realized in one of two ways: (1) through the use of the asset in operations or (2) through the sale of the asset to an independent third party.


98. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2009. During 2009, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2009. What errors will this omission cause in the consolidated financial statements?

Consolidation Entry for 2009

This omission causes both the amounts for Land and Gain on Sale of Land to be overstated in the consolidated financial statements and ultimately, Total Assets and Ending Retained Earnings to be overstated as well. Also, according to SFAS 160, the correction for gain may be allocated to the non-controlling interest share ofsubsidiary earnings and the non-controlling interest balance on the consolidated balance sheet.


99. Why do intercompany transfers between the component companies of a business combination occur so frequently?

"One reason for the significant volume and frequency of intercompany transfers is that many business combinations are specifically organized so that the companies can provide products for each other. This design is intended to benefit the business combination as a whole because of the economies provided by vertical integration. In effect, more profit can often be generated by the combination if one member is able to buy from another rather than from an outside party".


100. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2009. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

Regardless of the ownership percentage or the markup, the $200,000 was simply an intercompany asset transfer for consolidation purposes. Thus, within the consolidation process, the entire $200,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts.


101. What is meant by unrealized inventory gains and how are they treated on a consolidation worksheet?

"In intercompany transactions, a transfer price is often established that exceeds the cost of the inventory. Hence, the seller is recording a gain on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset is consumed or sold to an outside party. Any unrealized gain on merchandise still being held by the buyer must be eliminated whenever consolidated financial statements are produced. For the year of transfer, this consolidation procedure is carried out by removing the unrealized gain from the inventory account on the balance sheet and from the ending inventory balance within cost of goods sold. In the year following the transfer (if the goods are resold or consumed), the unrealized gain must again be eliminated within the consolidation process. This second reduction is made on the worksheet to the beginning inventory component of cost of goods sold as well as to the beginning retained earnings balance of the original seller. The gain is being moved into the year of realization. If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year must be made to the equity in subsidiary earnings account rather than to retained earnings".

Difficulty: Medium


102. What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

None.

Difficulty: Easy


103. How is the gain on an intercompany transfer of land realized?

The gain on an intercompany transfer of land is realized through the sale of the asset to an independent third party. The gain is deferred until that time.


104. What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intercompany transfer of a depreciable asset?

"Depreciable assets are often transferred between the members of a business combination at amounts in excess of book value. The buyer will then compute depreciation expense based on this inflated transfer price rather than on an historical cost basis. From the perspective of the business combination, depreciation should be calculated solely on historical cost figures. Thus, within the consolidation process for each period, adjustment of the depreciation (being recorded by the buyer) is necessary to reduce the expense to a cost based figure".

Difficulty: Medium


105. Tara Company holds 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain.


106. King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2009, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/09, 25% of the goods were still in James' inventory.Required:

Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.


107. Flintstone Inc. acquired all of Rubble Co. on January 1, 2009. Flintstone decided to use the initial value

method to account for this investment. During 2009, Flintstone sold to Rubble for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were still in Rubble's inventory. Required:

Prepare Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet at 12/31/09.

Difficulty: Medium


108. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2008. The goods had cost Yoderly $105,000 and the selling price was $140,000. Nelson had not sold any of the goods by the end of the year. Required:

Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2009.


109. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2009, Strayten sold Quint goods which had cost $48,000. The selling price was $64,000. Quint still had one-fourth of the goods on hand at the end of the year. Required:

Prepare Consolidation Entry *G, which would have to be recorded at the end of 2010.

Difficulty: Medium


110. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2009, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2009 was $119,000. Required:

What was the non-controlling interest's share of Stroban Co.'s net income?

Difficulty: Medium


111. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2009, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000 and they were sold to Lawler for $100,000. At the end of 2009, Lawler still held 30% of the inventory. Required:

How should the sale between Lawler and Ritter be accounted for by the consolidated entity?

Lawler and Ritter are related parties since they are both part of a combined entity. The following Consolidation Entries should be prepared:

These entries (1) eliminate the sale from the consolidated income statement, (2) decrease cost of goods sold and (3) reduce consolidated inventory to its cost to the combined entity.


Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual

inventory method and Virginia decided to use the partial equity method to account for this investment. During 2009, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of the year, Stateside had used 75% of the goods.

Hoyle - Chapter 05

112. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2009.

Difficulty: Easy


113. Prepare the consolidation entries that should be made at the end of 2009.

Difficulty: Medium


114. Prepare any 2010 consolidation worksheet entries that would be required for this inventory transfer.

Difficulty: Medium


Several years ago Polar Inc. purchased an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar paid an amount corresponding to the underlying book value of Icecap so that no allocations or goodwill resulted from the purchase price.The following selected account balances were from the individual financial records of these two companies as of December 31, 2009:

Hoyle - Chapter 05

115. Assume that Polar sold inventory to Icecap at a markup equal to 40% of cost. Intercompany transfers were $126,000 in 2008 and $154,000 in 2009. Of this inventory, $39,200 of the 2008 transfers were retained and then sold by Icecap in 2009 while $58,800 of the 2009 transfers were held until 2010. Required:


Difficulty: Medium


116. Assume that Icecap sold inventory to Polar at a markup equal to 40% of cost. Intercompany transfers were $70,000 in 2008 and $112,000 in 2009. Of this inventory, $29,400 of the 2008 transfers were retained and then sold by Polar in 2009 whereas $49,000 of the 2009 transfers were held until 2010. Required:



117. Polar sold a building to Icecap on January 1, 2008 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value.Required:

On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Buildings (net), (2) Operating expenses and (3) Non-controlling Interest in Subsidiary's Net Income.

Difficulty: Medium


On January 1, 2009, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment had originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method.Musial earned $308,000 in net income in 2009 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment.

Hoyle - Chapter 05

118. What is consolidated net income for 2009?

Difficulty: Medium


119. Assuming that Musial owned only 90% of Matin, what is consolidated net income for 2009?

Difficulty: Medium


120. Assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream, what is consolidated net income for 2009?

Difficulty: Medium


ch5 Summary

Category # of Questions

Difficulty: Easy 25

Difficulty: Hard 16

Difficulty: Medium 79

Hoyle - Chapter 05 134

246121673 Chapter Five Hoyle

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