Deck 6: Intercompany Inventory and Land Profits

Question 1

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2011. On that date, Lan's commons stock and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2021. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended December 31, 2012 are shown below: Other Information: A goodwill impairment test conducted during August 2012 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2011, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2012, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2011, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2012, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. What is the amount of goodwill arising from this business combination?

A) ($180,000).
B) $120,000.
C) $168,000.
D) $186,667.

Answer 1

D

Question 2

Under which of the following Theories is the elimination of ALL intercompany profits called for?

A) The Ownership Theory.
B) The Entity Theory.
C) The Proprietary Theory.
D) The Parent Company Theory.

Answer 2

B

Question 3

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2011. On that date, Lan's commons stock and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2021. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended December 31, 2012 are shown below: Other Information: A goodwill impairment test conducted during August 2012 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2011, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2012, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2011, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2012, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. Ignoring taxes, what is the total amount of unrealized profits in inventory at the end of 2012?

A) Nil.
B) $6,000.
C) $7,800.
D) $8,000.

Answer 3

D

Question 4

X Inc. owns 80% of Y Inc. During 2012, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc. What would be the journal entry to eliminate any unrealized profits from the Consolidated Financial Statements during the year?

A)
B)
C)
D)

Question 5

Under which of the following Consolidation Theories would the elimination of only the Parent's share of any intercompany profits be required for the preparation of Consolidated Financial Statements?

A) The Ownership Theory.
B) The Entity Theory.
C) The Proprietary Theory.
D) The Parent Company Theory.

Question 6

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2011. On that date, Lan's commons stock and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2021. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended December 31, 2012 are shown below: Other Information: A goodwill impairment test conducted during August 2012 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2011, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2012, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2011, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2012, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. What would be the amount of other revenue appearing on Kho Inc.'s Consolidated Income Statement for the Year ended December 31, 2012?

A) $410,000.
B) $415,000.
C) $444,000.
D) $460,000.

Question 7

How would any management fees charged by a Parent Company to its Subsidiary be accounted for during the Consolidation process?

A) The Parent Company would only record its pro rata share of any management revenues.
B) The Parent Company's profit on the rendering of management services would be charged to retained earnings.
C) Both the Parent's management fees and the subsidiary's related expense would be eliminated when preparing Consolidated Financial Statements.
D) No special accounting treatment is required, since this would have no effect on
Consolidated Net Income.

Question 8

Intercompany profits on sales of inventory are only realized:

A) once the seller receives payment for the sale.
B) once the inventory has been sold to outsiders.
C) when the inventory has been received by the purchaser.
D) when the inventory has been shipped to the purchaser.

Question 9

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2011. On that date, Lan's commons stock and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2021. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended December 31, 2012 are shown below: Other Information: A goodwill impairment test conducted during August 2012 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2011, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2012, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2011, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2012, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. What amount of sales revenue would appear on Kho Inc.'s Consolidated Income Statement for the year ended December 31, 2012?

A) $1,210,000.
B) $1,276,000.
C) $1,340,000.
D) $1,400,000.

Question 10

X Inc. owns 80% of Y Inc. During 2012, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc. What is the after-tax dollar value of X's unrealized profits during the year on its sales to Y?

A) $2,000.
B) $1,000.
C) $600.
D) $400.

Question 11

If a parent company borrows money from its subsidiary, what effect (if any) will this have on the non-controlling interest?

A) This would have no effect on the non-controlling interest.
B) The subsidiary would book its pro-rata share of any interest revenue.
C) The non-controlling interest balance would be reduced by the amount of the loan.
D) The subsidiary would record any interest revenue as an extraordinary gain.

Question 12

Which of the following statements best describes the required accounting treatment with respect to income taxes on unrealized intercompany profits?

A) These taxes can be ignored since an increase in income tax expense for one company is offset by an equivalent reduction in Income Tax expense for the other.
B) They would be recognized as assets for the purchasing entity and liabilities for the selling entity.
C) They would be recognized as assets for the selling entity.
D) They would be charged to retained earnings during the preparation of Financial
Statements.

Question 13

X Inc. owns 80% of Y Inc. During 2012, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc. What is the after-tax dollar value of Y's unrealized profits during the year on its sales to X?

A) $240.
B) $360.
C) $400.
D) $500.

Question 14

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2011. On that date, Lan's commons stock and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2021. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended December 31, 2012 are shown below: Other Information: A goodwill impairment test conducted during August 2012 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2011, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2012, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2011, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2012, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. What would be the journal entry to record the dividends received by Kho Inc. during the year?

A)
B)
C)
D)

Question 15

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2011. On that date, Lan's commons stock and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2021. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended December 31, 2012 are shown below: Other Information: A goodwill impairment test conducted during August 2012 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2011, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2012, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2011, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2012, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. Ignoring taxes, what is the total amount of unrealized profits in inventory at the start of 2012?

A) Nil.
B) $5,000.
C) $6,000.
D) $6,200.

Question 16

X Inc. owns 80% of Y Inc. During 2012, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc. Assuming that X Inc. used the equity method, what adjustment would have to be made to the investment in Y account to adjust for any unrealized profits on Y's sales to X?

A) No adjustment would be required.
B) The account would have to be reduced by $240.
C) The account would have to be reduced by $192.
D) The account would have to be reduced by $48.

Question 17

X Inc. owns 80% of Y Inc. During 2012, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc. Assume that Y Inc. reported an after-tax net income of $20,000 in 2012, what would be Y's adjusted net income for the year?

A) $202,400.
B) $20,000.
C) $19,840.
D) $19,760.

Question 18

Which of the following theories does NOT acknowledge the existence of a non-controlling interest in the Consolidated Financial Statements?

A) The Ownership Theory.
B) The Entity Theory.
C) The Proprietary Theory.
D) The Parent Company Theory.

Question 19

When are profits from intercompany land sales realized?

A) They are realized only when sold to outsiders.
B) They are realized once legal ownership of the land has been transferred.
C) They are realized when consideration has been received for the land.
D) They are realized when an agreement is signed with respect to ownership of the land.

Question 20

X Inc. owns 80% of Y Inc. During 2012, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc. What effect (if any) would Y's unrealized profits on its sales to X have on the non-controlling interest account on the consolidated balance sheet?

A) There would be no effect.
B) There would be an increase to the non-controlling interest account for the amount of $30.
C) There would be a decrease to the non-controlling interest account for the amount of $48.
D) There would be a decrease to the non-controlling interest account in the amount of $48.

Question 21

On June 30, 2012, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2014, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What effect will the elimination of the unrealized intercompany gain (in the preparation of the consolidated income statement) have on consolidated income tax expense for 2012?

A) It will have no effect.
B) It will reduce income tax expense by $24,000.
C) It will reduce income tax expense by $18,000.
D) It will increase income tax expense by $24,000.

Question 22

On June 30, 2012, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2014, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What amount will appear on the "gain on sale of land" line in Parent' Company's consolidated income statement for the year ended December 31, 2014?

A) $0.
B) $93,000.
C) $124,000.
D) $155,000.

Question 23

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2011. On that date, Lan's commons stock and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2021. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended December 31, 2012 are shown below: Other Information: A goodwill impairment test conducted during August 2012 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2011, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2012, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2011, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2012, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. Where would be the amortization of the acquisition differential reflected on Kho's Consolidated Income Statement?

A) It would be reflected through non-controlling interest in earnings.
B) It would be reflected through other expenses.
C) It would be reflected through cost of sales.
D) It would be reflected as a reduction of sales.

Question 24

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. Consolidated Net Income attributable to the shareholders of the parent for 2013 would be:

A) $58,000.
B) $56,000.
C) $65,550.
D) $69,150.

Question 25

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. The amount of goodwill arising from this combination would be:

A) $120,000.
B) $130,000.
C) $200,000.
D) $296,667.

Question 26

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. What would be the amount of the acquisition differential amortized during 2013?

A) $2,000.
B) $40,000.
C) $78,000.
D) $82,000.

Question 27

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. Consolidated Net Income attributable to the shareholders of the parent for 2012 would be:

A) $12,500.
B) $33,300.
C) $36,300.
D) $53,200.

Question 28

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. What would be the amount of the acquisition differential amortized during 2012?

A) $78,000.
B) $80,000.
C) $82,000.
D) $120,000.

Question 29

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. What would be the change in the non-controlling interest account for 2012?

A) Non-controlling interest would decrease by $27,800.
B) Non-controlling interest would decrease by $18,000.
C) Non-controlling interest would increase by $18,000.
D) Non-controlling interest would increase by $27,800.

Question 30

On June 30, 2012, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2014, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What effect will the adjustment for the realization of the intercompany gain (in the preparation of the consolidated income statement) have on consolidated income tax expense for 2014?

A) It will have no effect.
B) It will reduce income tax expense by $24,000.
C) It will reduce income tax expense by $18,000.
D) It will increase income tax expense by $24,000.

Question 31

Kho Inc. purchased 90% of the voting shares of Lan Inc. for $600,000 on January 1, 2011. On that date, Lan's commons stock and retained earnings were valued at $200,000 and $250,000 respectively. Unless otherwise stated, assume that Kho uses the cost method to account for its investment in Lan Inc. Lan's fair values approximated its carrying values with the following exceptions: Lan's trademark had a fair value which was $50,000 higher than its carrying value. Lan's bonds payable had a fair value which was $20,000 higher than their carrying value. The trademark had a useful life of exactly ten years remaining from the date of acquisition. The bonds payable mature on January 1, 2021. Both companies use straight line amortization exclusively. The Financial Statements of both companies for the Year ended December 31, 2012 are shown below: Other Information: A goodwill impairment test conducted during August 2012 revealed that the Lan's Goodwill amount on the date of acquisition had been impaired by $10,000. During 2011, Kho sold $50,000 worth of inventory to Lan, half of which was sold to outsiders during the year. During 2012, Kho sold inventory to Lan for $90,000. Two-thirds of this inventory was resold by Lan to outside parties. During 2011, Lan sold $30,000 worth of inventory to Kho, 80% of which was sold to outsiders during the year. During 2012, Lan sold inventory to Kho for $40,000. 75% of this inventory was resold by Kho to outside parties. All intercompany sales as well as sales to outsiders are priced 25% above cost. The effective tax rate for both companies is 20%. What would be the non-controlling interest amount appearing on Kho's Consolidated Statement of Financial Position at the end of 2012?

A) $29,936.
B) $55,840.
C) $57,400.
D) $74,907.

Question 32

On June 30, 2012, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2014, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What effect will the adjustment for the realization of the intercompany gain (in the preparation of the consolidated income statement) have on the non-controlling interest in income for 2014?

A) It will have no effect on the non-controlling interest in income.
B) It will decrease the non-controlling interest in income by $24,000.
C) It will increase the non-controlling interest in income by $24,000.
D) It will increase the non-controlling interest in income by $30,000.

Question 33

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. Assuming that LEO uses the equity method to account for its investment in MARS, what would be the NET increase/decrease to the investment in MARS account during 2012?

A) ($49,200).
B) ($41, .
C) $12,000.
D) $43,200.

Question 34

What effect (if any) would the unrealized profits in ending inventory have on income tax expense for 2012?

A) They would cause a $1,600 reduction in income tax expense.
B) They would cause a $1,200 reduction in income tax expense.
C) They would cause a $1,200 increase in income tax expense.
D) They would cause a $1,600 increase in income tax expense.

Question 35

On June 30, 2012, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2014, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. What amount will appear on the "gain on sale of land" line in Parent' Company's consolidated income statement for the year ended December 31, 2012?

A) $0.
B) $96,000.
C) $120,000.
D) $240,000.

Question 36

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. What would be the balance in the non-controlling interest account on the date of acquisition?

A) $266,667.
B) $397,000.
C) $400,000.
D) $403,000.

Question 37

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. What would be the change in the non-controlling interest account for 2013?

A) Non-controlling interest would increase by $14,200.
B) Non-controlling interest would increase by $16,800.
C) Non-controlling interest would decrease by $45,000.
D) Non-controlling interest would increase by $48,000.

Question 38

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. What would be the balance in the investment in MARS account at December 31, 2012?

A) $318,000.
B) $330,000.
C) $358,300.
D) $400,000.

Question 39

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. What would be the balance in the investment in MARS account at December 31, 2013?

A) $348,000.
B) $330,000.
C) $375,850.
D) $400,000.

Question 40

LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. Assuming once again that LEO uses the equity method to account for its investment in MARS, what would be the NET increase to the investment in MARS account during 2013?

A) $16,000.
B) $16,800.
C) $17,550.
D) $20,000.

Question 41

On June 30, 2012, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2014, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. On December 31, 2012, the land account balance in the books of Parent Company is $300,000 and in the books of the subsidiary is $300,000. No acquisition differential was allocated to land. What will be the amount of land in the consolidated balance sheet at December 31, 2012?

A) $480,000.
B) $504,000.
C) $510,000.
D) $600,000.

Question 42

On June 30, 2012, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2014, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. On December 31, 2013, the land account balance in the books of Parent Company is $300,000 and in the books of the subsidiary is $340,000. No acquisition differential was allocated to land. What will be the amount of land in the consolidated balance sheet at December 31, 2013?

A) $520,000.
B) $544,000.
C) $550,000.
D) $640,000.