Exam 7: Intercompany Transfers of Services and Noncurrent Assets

PeopleMag sells a plot of land for $100,000 to Seven Star Company,its 100 percent owned subsidiary,on January 1,20X7.The cost of the land was $75,000,when it was purchased in 20X6.In 20X9,Seven Star sells the land to Hot Properties Inc.,an unrelated entity,for $120,000.How is the land reported in the consolidated financial statements for 20X7,20X8 and 20X9?

Neptune Corporation owns 70 percent of Pluto Company's stock. On July 1, 20X4, Neptune sold a piece of equipment to Pluto for $56,350. Neptune had purchased this equipment on January 1, 20X1, for $63,000. The equipment's original 15-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. -Based on the information provided,in the preparation of the 20X4 consolidated financial statements,equipment will be ______ in the consolidation entries.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. -Based on the preceding information,in the preparation of the 20X9 consolidated financial statements,equipment will be:

On January 1, 20X7, Servant Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Servant sold the machine to Master Corporation and recorded the following entry: Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 20X9. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer. -Based on the preceding information,in the preparation of the 20X9 consolidated income statement,depreciation expense will be:

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. -Based on the preceding information,the gain on sale of the equipment recorded by Mortar for 20X8 is:

Neptune Corporation owns 70 percent of Pluto Company's stock. On July 1, 20X4, Neptune sold a piece of equipment to Pluto for $56,350. Neptune had purchased this equipment on January 1, 20X1, for $63,000. The equipment's original 15-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. -Based on the information provided,the gain on the sale of the equipment eliminated in the consolidated financial statements for 20X4 is

Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I.in the year of the downstream sale. II.over the period of time the subsidiary uses the land. III.in the year the subsidiary sells the land to an unrelated party.

On January 1, 20X7, Servant Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Servant sold the machine to Master Corporation and recorded the following entry: Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 20X9. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer. -Based on the preceding information,in the preparation of the 20X9 consolidated balance sheet,machine will be:

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. -Based on the preceding information,in the preparation of consolidation entries related to the equipment transfer for the 20X9 consolidated financial statements,net effect on accumulated depreciation will be:

On January 1, 20X7, Servant Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Servant sold the machine to Master Corporation and recorded the following entry: Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 20X9. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer. -Based on the preceding information,income assigned to the noncontrolling interest in the 20X9 consolidated income statement will be:

Fred Corporation owns 75 percent of Winner Company's voting shares,acquired on March 21,20X5,at book value.At that date,the fair value of the noncontrolling interest was equal to 25 percent of the book value of Winner Company. On January 1,20X4,Fred paid $150,000 for equipment with a 10-year expected total economic life.The equipment was depreciated on a straight-line basis with no residual value.Winner purchased the equipment from Fred on December 31,20X6,for $140,000.Winner sold land it had purchased for $75,000 on February 18,20X4,to Fred for $60,000 on October 10,20X7. Required: Prepare the consolidation entries for 20X8 related to the sale of depreciable assets and land if Fred uses the fully adjusted equity method to account for its investment in Winner. Problem 54 (continued):

Patch Corporation purchased land from Sub1 Corporation for $350,000 on December 3, 20X5. This purchase followed a series of transactions between Patch-controlled subsidiaries. On January 23, 20X5, Sub3 Corporation purchased the land from a nonaffiliate for $240,000. It sold the land to Sub2 Company for $220,000 on July 15, 20X5, and Sub2 sold the land to Sub1 for $305,000 on September 5, 20X5. Patch has control of the following companies: Patch reported income from its separate operations of $345,000 for 20X5. -Based on the preceding information,what amount of gain or loss on the sale of land should be reported in the consolidated income statement for 20X5?

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. -Based on the preceding information,in the preparation of the 20X9 consolidated income statement,depreciation expense will be:

Patch Corporation purchased land from Sub1 Corporation for $350,000 on December 3, 20X5. This purchase followed a series of transactions between Patch-controlled subsidiaries. On January 23, 20X5, Sub3 Corporation purchased the land from a nonaffiliate for $240,000. It sold the land to Sub2 Company for $220,000 on July 15, 20X5, and Sub2 sold the land to Sub1 for $305,000 on September 5, 20X5. Patch has control of the following companies: Patch reported income from its separate operations of $345,000 for 20X5. -Based on the preceding information,at what amount should the land be reported in the consolidated balance sheet as of December 31,20X5?

ABC Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares. -Based on the preceding information,what will be the worksheet consolidating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X9?

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. -Based on the preceding information,in the preparation of consolidation entries related to the equipment transfer for the 20X9 consolidated financial statements,the net effect on accumulated depreciation will be:

Big Company acquired 75 percent of Little Company's stock at underlying book value on January 1,20X8.At that date,the fair value of the noncontrolling interest was equal to 25 percent of the book value of Little Company.Little Company reported shares outstanding of $350,000 and retained earnings of $100,000.During 20X8,Little Company reported net income of $60,000 and paid dividends of $3,000.In 20X9,Little Company reported net income of $90,000 and paid dividends of $15,000.The following transactions occurred between Big Company and Little Company in 20X8 and 20X9: Little Co.sold equipment to Big Co.for a $42,000 gain on December 31,20X8.Little Co.had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31,20X8.At the time of the purchase,Big Co.estimated that the equipment still had a seven-year remaining useful life. Big sold land costing $90,000 to Old Company on June 28,20X9,for $110,000. Required: Give all consolidating entries needed to prepare a consolidation worksheet for 20X9 assuming that Big Co.uses the modified equity method to account for its investment in Old Company. Problem 56 (continued):

Blue Company owns 70 percent of Black Company's outstanding common stock.On December 31,20X8,Black sold equipment to Blue at a price in excess of Black's carrying amount,but less than its original cost.On a consolidated balance sheet at December 31,20X8,the carrying amount of the equipment should be reported at:

On January 1,20X1,Poe Corp.sold a machine for $900,000 to Saxe Corp.,its wholly-owned subsidiary.Poe paid $1,100,000 for this machine,which had accumulated depreciation of $250,000.Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years,a policy which Saxe continued.In Poe's December 31,20X1,consolidated balance sheet,this machine should be included in cost and accumulated depreciation as:

Peter Architectural Services owns 100 percent of Smith Manufacturing.During the course of 20X8 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility,which will open January 4,20X9,and has a 5 year useful life.Explain the impact providing this service has on Peter Architectural Services' 20X8 and 20X9 consolidated financial statements.