Exam 7: Intercompany Transfers of Services and Noncurrent Assets

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-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 sale of the building eliminated in the consolidated financial statements for 20X8 is:

Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. -Based on the preceding information, what amount of income should be assigned to the noncontrolling shareholders in the consolidated income statement for 20X8?

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-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 20X8 consolidated financial statements, building will be _____ in the eliminating 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 equipments on a straight-line basis. -Based on the preceding information, in the preparation of elimination 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 eliminating 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.

Phobos Company holds 80 percent of Deimos Company's voting shares. During the preparation of consolidated financial statements for 20X9, the following eliminating entry was made: Which of the following statements is correct?

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 elimination entries related to the equipment transfer for the 20X9 consolidated financial statements, net effect on accumulated depreciation 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 equipments on a straight-line basis. -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 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, the gain on sale of equipment recorded by Mortar for 20X8 is:

Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. -Based on the preceding information, what amount of consolidated net income should be reported in 20X8?

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:

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.

Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 20X8. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 20X8, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 20X8, and S2 sold the land to S1 for $197,000 on November 27, 20X8. Parent has control of the following companies: Parent reported income from its separate operations of $200,000 for 20X8. -Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 20X8?

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-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, while preparing the 20X8 consolidated income statement, depreciation expense will be:

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.

Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 20X3, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Black reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively. -Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X9 will be:

A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal:

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 the 20X8 consolidated financial statements, equipment will be:

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-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 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 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 elimination entries related to the equipment transfer for the 20X8 consolidated financial statements, net effect on accumulated depreciation will be: