Exam 5: Consolidated Financial Statements Intra-Entity Asset Transactions

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2020. 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 2020 and 2021, respectively. Pepe uses the equity method to account for its investment in Devin.Assuming there are no excess amortizations or other intra-entity transactions, compute the net income attributable to the noncontrolling interest of Devin for 2021.

Clark Corp. owned 75% of the voting common stock of Andrew Co. On January 3, 2020, Andrew sold a parcel of land to Clark. The land had a book value of $36,000 and was sold to Clark for $52,000. Andrew's reported net income for 2020 was $123,000. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what is net income attributable to the noncontrolling interest?

Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin's intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020. Assume the equity method is used. The following data are available pertaining to Anderson's income and dividends. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2021 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2020 intra-entity transfer of merchandise?

Macklin Co. owned 70% of Holland Corp. During 2021, Macklin sold to Holland land with a book value of $51,000. The selling price was $75,000. For purposes of the December 31, 2021 consolidated financial statements, at what amount should the land be reported?

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020.In the consolidation worksheet for 2021, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following accounts would be debited to defer unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers?

Which of the following statements is true regarding an intra-entity transfer of land?

Pot Co. holds 90% of the common stock of Skillet Co. During 2021, 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.Included in the amounts for Pot's sales were Pot's sales of merchandise to Skillet for $140,000. There were no intra-entity transfers from Skillet to Pot. Intra-entity transfers had the same markup as sales to outsiders. Skillet still held 40% of the intra-entity gross profit remaining in ending inventory at the end of 2021. What are consolidated sales and cost of goods sold, respectively for 2021?

Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2020. On January 1, 2020, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years.On April 1, 2020 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute Wilson's share of income from Simon for consolidation for 2022.

On January 1, 2020, 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 2020 and 2021, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes.What amount of gain should be reported by Smeder Company relating to the equipment for 2020 prior to making consolidating entries?

Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting.Compute Parker's reported gain or loss on its internal accounting records prior to consolidation relating to the land for 2022.

Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting.Compute the gain or loss reported on Stark's books prior to consolidation from the intra-entity transfer of land in 2020.

On January 1, 2020, 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 2020 and 2021, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes.What is the net effect on net income as a result of consolidating adjustments made in 2020 with respect to the equipment transfer?

On January 1, 2021, Musical Corp. sold equipment to Martin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment 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.Musical earned $308,000 in net income in 2021 (not including any investment income) while Martin reported $126,000. Assume there is no amortization related to the original investment.Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2021, assuming that Musical owned only 90% of Martin and the equipment transfer had been upstream

Throughout 2021, Flenderson Co. sold inventory to Bertram Co., its subsidiary. From a consolidated financial statement point of view, when will the gross profit on this transfer be recognized?

King Corp. owns 85% of James Co. King uses the equity method to account for its investments. During 2021, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At December 31, 2021, 25% of the goods were still in James' inventory.Required:Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020.In the consolidation worksheet for 2020, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers?

Charleston Inc. acquired 75% of Savannah Manufacturing on January 4, 2020. During 2020, Charleston sold Savannah $460,000 of goods, which had cost $380,000. Savannah still owned 20% of the goods at the end of the year. In 2021, Charleston sold goods with a cost of $520,000 to Savannah for $700,000, and Savannah still owned 15% of the goods at year-end. What amount of intra-entity gross profit should be recognized through the consolidation process in 2021?

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2020. 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 2020 and 2021, respectively. Pepe uses the equity method to account for its investment in Devin.What is the consolidated gain or loss on equipment for 2020?

Several years ago, Polar Inc. acquired 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's acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transfer.The following selected account balances were from the individual financial records of these two companies as of December 31, 2021: Polar sold a building to Icecap on January 1, 2020 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:For the consolidated financial statements for 2021, determine the balances that would appear for the following accounts: (i) Buildings (net); (ii) Operating expenses; and (iii) Net income attributable to the noncontrolling interest.

Parent sold land to its subsidiary resulting in a gain in 2019, the year of transfer. The subsidiary sold the land to an unrelated third party for a gain in 2022. Which of the following statements is true?