Deck 4: Consolidations: Intragroup Transactions

Question 1

The parent company of subsidiaries that are owned less than 100% but more than 50% have the option of adjusting intragroup transactions and would make a statement to this effect only in the notes to the financial statements.

Answer 1

False

Question 2

Interest payments on bonds within a group of companies do not require adjustments to revenues and expenses in the respective entities.

Answer 2

False

Question 3

Dividends from subsidiary equity are recognized as revenue by the subsidiary.

Answer 3

False

Question 4

When the transferred assets are depreciable, subsequent adjustments are made to depreciation accounts.

Question 5

It is possible for an entity to acquire the bonds of another entity in the group on the open market.

Question 6

Adjustments for current period inventory transfers during intragroup consolidations do not affect current period profit accounts such as sales and cost of sales.

Question 7

Opening intragroup inventory transfers of an acquired subsidiary require that prior period profits remaining in the opening inventory be adjusted to beginning retained earnings.

Question 8

If a subsidiary declares a dividend and the dividend is unpaid at the end of the period, the adjustment on the consolidated financial statements will include an increase to dividend revenue.

Question 9

In some intragroup transactions where there is management fee paid by one entity to another within the group there is no effect on the carrying amounts of assets and liabilities.

Question 10

The gain/loss on the sale of a depreciable asset is realized by the subsidiary as the asset is used up by the group.

Question 11

In the consolidation of intragroup transactions in the current period consideration should be given to the effects of transactions in previous periods.

Question 12

Adjustments for intragroup dividends affect both the dividends declared by the subsidiary and those declared by the parent.

Question 13

Adjustments for the gain/loss on sale of property, plant and equipment are made in all periods in which the assets are within the group.

Question 14

In the transferring of assets such as property, plant, and equipment within a group there is no need to eliminate profit in an asset such as land because land is a non-depreciable asset.

Question 15

Consolidated financial statements show only the effects of dividends paid or payable to entities outside the group.

Question 16

A Canadian company that has wholly owned subsidiaries in countries that do not follow GAAP/IFRS accounting principles is not required to make adjustments for intragroup transactions.

Question 17

Consolidation adjustments are needed in relation to intragroup borrowings and interest thereon.

Question 18

Interest payments result in revenues in one member of the group and expenses in another.

Question 19

Rent for office space paid by a parent to a fully-owned subsidiary within the group does not affect the group's profit in the consolidation adjustment process.

Question 20

Generally dividends paid and received between entities within a group do not require tax-effect adjustments upon consolidation.

Question 21

A parent issues one thousand $100 bonds at an interest rate of 5% and its wholly owned subsidiary acquires half of the bond issue. These transactions result in:

A)Intragroup borrowings result in transactions being recorded as assets of one member of the group and a recording as liabilities of the other member only.
B)Intragroup interest payments require entries in revenues of one member of the group and expenses in the other member of the group only.
C)Intragroup borrowing and intragroup interest payments result in both assets and revenues being recorded in one member of the group and liabilities and expenses being recorded in the other member's books.
D)These transactions need only be noted in the notes to the financial statements.

Question 22

On February 1, 2013 Smith Company sold inventory to its wholly owned subsidiary Orchid Ltd. for $10,000. These goods had previously cost $7,500. All of these goods were then sold by Orchid Ltd. for $25,000 by the February 28, 2013 year-end. What adjustments are required for the preparation of the consolidated financial statements? Ignore the effects of income taxes.

A)Decrease sales $10,000 and decrease cost of goods sold $10,000.
B)Increase sales $10,000 and increase cost of goods sold $10,000.
C)Decrease sales $10,000 and decrease cost of goods sold $7,500 and decrease ending inventory $2,500.
D)None of the above

Question 23

The requirement for the full adjustment relating to the effects of intragroup transactions is stated in IFRS consolidated financial statements as follows:

A)State in a note to the financial statements a quantification of which intragroup transactions have been eliminated.
B)Intragroup transactions need only be accounted for in the accounts of the parent group.
C)Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions
D)Eliminate only current transactions affecting sales, and inventories in the acquired intragroup entities.

Question 24

Assets in the consolidated statement of financial position must be shown as follows:

A)Cost to the group
B)Cost to the parent.
C)Market value to the group.
D)Market value to the subsidiary.

Question 25

In consolidated financial statements of a parent and subsidiaries, an income tax adjustment is necessary:

A)For advising Canada Revenues Agency only.
B)Whenever unrealized profit causes a difference between the carrying amount of an asset and the carrying amount shown in the consolidated financial statements.
C)Where unrealized profit causes a difference between the carrying amount of an asset or a liability in the records of the legal entity only.
D)All of the above.

Question 26

On September 30, 2013 a parent company sold a piece of machinery to its wholly-owned subsidiary for $10,000 which was $5,000 above its carrying amount at that date. The machinery has a remaining useful life of 5 years. What is the pre-tax adjustment required to prepare the December 31, 2013 consolidated financial statements?

A)Increase machinery-net $5,000,
B)Decrease machinery - net $5,000.
C)Record a loss of $5.000 on the income statement
D)None of the above.

Question 27

In an acquisition of land by a parent from a subsidiary, the realization of profit acquired on the land acquisition is recorded in the consolidated financial statements?

A)In the first year that the group's consolidated financial statements are prepared.
B)When the asset is subsequently sold to a party outside of the group.
C)As it is amortized over the period of the life of the other assets.
D)No profit will be realized because land is not amortized.

Question 28

The use of the services of a specialist from a parent to a subsidiary for a short period of time within a year requires the following treatment in the consolidated statements:

A)Realized profit need to be calculated in the consolidation process.
B)The consolidation adjustments do not affect the group's accounts
C)Adjustments are required to adjust the specialist's salary
D)Special income tax adjustments are required in accordance with policies of Canada Revenue Agency.

Question 29

Which of the following is NOT a requirement for intragroup transactions under IFRS?

A)Whenever related entities transact with each other, the separate legal entities disclose the effects of these transactions in the revenues and expenses reported as well as assets and liabilities as required.
B)Deferred tax accounts must be created where there are temporary differences between the carrying amount of an asset or a liability and its tax base.
C)The process of consolidation involves adding together the financial statements of a parent and its subsidiaries to reflect an overall view that includes the results of the group transactions with external entities and also within the group.
D)Adjustments must be made to eliminate intragroup balances and the effects of transactions whereby profits or losses are made by different members of the group through trading with each other.

Question 30

A basic approach in determining the adjustments needed for the consolidation of intragroup transactions is:

A)Analyze the transfer events in the records of the legal entities and determine whether these transactions are for the current period.
B)Analyze the position from the group's perspective and adjust the consolidated statements of the group.
C)Consider the income tax effects of the adjustments.
D)All of the above.

Question 31

Dividends received by a parent from a subsidiary are accounted for:

A)As revenue to the parent since the parent has been recording the investment in the subsidiary using the cost method on its own non-consolidated financial statements.
B)As a transfer to cash since no intragroup realized profit transactions are required to be recorded.
C)As a reduction of cost of sales on the parent's income statement.
D)None of the above

Question 32

According to IFRS principles, revenues and expenses resulting from intragroup transactions that require consolidation adjustments are to be made as follows:

A)In the current period only.
B)In the prior period.
C)Recognized in assets only.
D)None of the above.

Question 33

Where inventory is transferred in the current period and some or all of that inventory is still on hand at the end of the period, the general form of financial statement adjustment is:

A)The inventory adjustment is based upon the total inventory transferred among groups.
B)The inventory adjustment is based on the profit remaining in ending inventory on hand.
C)The adjustment to inventory is made only when all inventory is sold to external groups.
D)None of the above.

Question 34

On March 31, 2013 a parent received $20,000 in inventory for cash from its subsidiary. The subsidiary made a profit of $5,000 on the sale. At year end, the parent had sold $15,000 of this inventory to third parties for $28,000. The closing balance of this inventory is $5,000. What is the combined adjustment to sales and cost of sales before tax?

A)$1,000
B)$1,250
C)$1,500
D)$2,000

Question 35

On January 1, 2013 a parent purchased the plant of a subsidiary for $ 6,000, which was $1,000 below the carrying cost for the subsidiary as at the date it was sold. The plant had a remaining life of ten years and the income tax rate was 30%. What amounts should be shown as a loss on sale of plant and the income tax expense respectively on the consolidated financial statements for the year ended December 31, 2013?

A)$ 1,000 and $300
B)$1,000 and $210
C)$ 500 and $ 150
D)None of the above.

Question 36

On February 1, 2013 Smith Company sold inventory to its wholly owned subsidiary Orchid Ltd. for $10,000. These goods had previously cost $7,500. 75% of these goods were then sold by Orchid Ltd. for $15,000 by the February 28, 2013 year-end. What adjustments are required for the preparation of the consolidated financial statements? Ignore the effects of income taxes.

A)Decrease sales $10,000, decrease cost of goods sold $9,375 and decrease ending inventory $625.
B)Increase sales $10,000, increase cost of goods sold $9,375 and increase ending inventory $625.
C)Decrease sales $10,000, decrease cost of goods sold $7,500 and decrease ending inventory $2,500.
D)Increase sales $10,000, increase cost of goods sold $7,500 and increase ending inventory $2,500.

Question 37

A subsidiary sold a depreciable asset to the parent at a profit of $100 and the parent depreciates the assets on a straight-line basis over ten years. In year one after the sale, the realized profit is:

A)$100
B)$ 90
C)$ 110
D)$50

Question 38

A parent owns 100% of a subsidiary company. One month before its year-end date of March 31, 2031, the parent loaned the subsidiary $120,000. The subsidiary paid back $20,000 in January 2014. In the preparation of the consolidated balance sheet for March 31, 2014, What amount of this loan should be eliminated in the consolidated financial statements?

A)$0
B)$20,000
C)$ 100,000
D)$120,000

Question 39

Dither Co. owns 100% of the common shares of Franklin Ltd. Dither records its investment in Franklin using the cost method. Dither and Franklin have transactions with each other. In preparing Dither's consolidated financial statements, which of the following should be done?

A)Dividends received by Dither from Franklin should be deducted from Dither's dividend income.
B)Franklin's retained earnings should be deducted from Dither's retained earnings.
C)Dither's receivable from Franklin should be netted with Dither's accounts receivable.
D)Franklin's share capital should be added to Dither's share capital.

Question 40

When property, plant, and equipment is transferred within a group, it is not necessary to distinguish between a sale of land and the sale of a depreciable asset.

Question 41

Bilson Ltd. is the wholly-owned subsidiary of Lawson Ltd. Bilson purchased all of Lawson's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. How should the gain be shown?

A)It will appear on both Lawson's separate-entity and consolidated statements of comprehensive income.
B)It will appear on Lawson's consolidated statement of comprehensive income only.
C)It will be added to the value of the bonds payable on Lawson's statement of financial position.
D)It will appear on Lawson's separate-entity statement of comprehensive income only.

Question 42

DEF Company acquired in 2012 a 100% interest in MNO Company by acquiring shares that cost $50,000. In 2012, MNO Company reported income of $10,000 and $8,000 in 2013. MNO Company also paid dividends to DEF Company of $2,000 in 2012 and $ 8,000 in 2013. The balance of DEF Company's investment in MNO Company in its own books if it reflects the investment at cost at December 31, 2012 was:

A)$ 22,000
B)$ 42,000
C)$ 50,000
D)$ 78,000

Question 43

On June 30, 2013 Tulip Ltd. issued one hundred $1,000 bonds with an interest rate of 7% p.a. payable semi-annually on December 31 and June 30 of each year. Crockus Inc., a wholly-owned subsidiary of Tulip Ltd., acquired 75% of the bonds issued. What are some of the December 31, 2013 adjustments required in preparation for the consolidated financial statements?

A)Decrease Bonds Payable: $100,000, decrease Bond Investment: $100,000, decrease Interest Payable: $7,000, and decrease Interest Receivable: $7,000.
B)Increase Bonds Payable: $100,000, increase Bond Investment: $100,000, increase Interest Payable: $7,000, and increase Interest Receivable: $7,000.
C)Decrease Bonds Payable: $75,000, decrease Bond Investment: $75,000, decrease Interest Payable: $2,625, and decrease Interest Receivable: $2,625.
D)Decrease Bonds Payable: $75,000, decrease Bond Investment: $75,000, decrease Interest Payable: $5,250, and decrease Interest Receivable: $5,250.

Question 44

Consolidated financial statements are prepared for:

A)Management of the consolidated company.
B)Shareholders of the parent.
C)Creditors of the consolidated company.
D)All of the above.

Question 45

Why are intragroup transactions eliminated?

Question 46

If a dividend is declared and paid by a subsidiary in the current period after its acquisition by the parent, from the outlook of the group:

A)No dividend has been paid.
B)A dividend has been paid.
C)A liability increases.
D)Revenue has been received.

Question 47

Why are adjustments made for intragroup transactions involving profits and losses in beginning and ending inventory?

Question 48

On January 1, 2012, Oliver Ltd. formed Solo Co., a 100% owned subsidiary. During 2014, Oliver sold Solo $200,000 in goods. The unrealized profit in Solo's inventories was $40,000 at December 31, 2013 and $50,000 at December 31, 2014. Ignoring income taxes, what adjustment should be made to the consolidated financial statements for the year ended December 31, 2014 to reflect the unrealized profit in Solo's beginning inventory?

A)Inventory at December 31, 2014 should be decreased by $40,000.
B)Retained earnings at the end of 2014 should be increased by $40,000.
C)Retained earnings at the end of 2014 should be decreased by $40,000.
D)Cost of goods sold for 2014 should be decreased by $40,000.

Question 49

ABC Company owns 75% of XYZ Company. During 2012, XYZ Company declared and paid $5,000 in dividends. What impact did this transaction have on the separate financial statements of ABC Company?

A)Total assets were increased
B)Net income was decreased.
C)Investment account for XYZ Company was decreased.
D)All of the above.

Question 50

Dividends from subsidiary equity are recognized in equity by the:

A)Subsidiary.
B)Parent.
C)Subsidiary and parent.
D)Neither the subsidiary nor the parent.

Question 51

Intragroup borrowings result in:

A)Assets in one member of the group and liabilities in another.
B)Revenues in one member of the group and expenses in another.
C)Assets in one member of the group and revenues in another.
D)Expenses in one member of the group and liabilities in another.

Question 52

Quick Company owns all of the outstanding shares of Peanut Ltd. During the year, Peanut Ltd. declared and paid a dividend of $10,000. The tax rate is 30% for both entities. In preparation for the year-end consolidated financial statements, what are the consolidated financial statement adjustments required?

A)Decrease Dividend Revenue: $10,000, decrease Dividend Declared and Paid: $10,000, decrease Income Tax Expense: $3,000, and decrease Income Tax Payable: $3,000.
B)Increase Dividend Revenue: $10,000, increase Dividend Declared and Paid: $10,000, increase Income Tax Expense: $3,000, and increase Income Tax Payable: $3,000.
C)Decrease Dividend Revenue: $10,000, decrease Dividend Declared and Paid: $10,000.
D)Increase Dividend Revenue: $10,000, increase Dividend Declared and Paid: $10,000.

Question 53

A subsidiary sold goods to its parent company. At its year-end, the parent company still had some of the goods in inventory. Included in the value of these inventories is $30,000 of unrealized profits. What consolidation adjustments should be made to eliminate these unrealized profits?
a)
$\begin{array} { l c } \text { Decrease Sales } & 30,000 \\\text { Decrease Inventory } & 30,000 \\\end{array}$

b)
$\begin{array} { l c } \text { Increase Selling expenses } & { 30,000 } \\\text { Decrease Inventory } & 30,000 \\\end{array}$

c)
$\begin{array} { l c } \text { Increase Cost of Sales } & { 30,000 } \\\text { Decrease Inventory } & 30,000 \\\end{array}$

d)
$\begin{array} { l c } \text { Increase Inventory } & 30,000 \\\text { Increase Sales } & 30,000 \end{array}$

Question 54

Which of the following is true with respect to performing consolidation adjustments for intragroup borrowings and the corresponding interest?

A)It is not necessary to perform consolidation adjustments with respect to intragroup borrowings and the corresponding interest.
B)From the group's perspective, these transactions create assets and liabilities and revenues and expenses that do not exist in terms of the group's relationship with external entities
C)The adjustment to the asset and liability is only necessary in the year the intragroup loan is issued.
D)Only a tax adjustment is necessary.

Question 55

Teckel Enterprises owns 100% of Dachsund Limited. At the beginning of the fiscal year, there was a profit in Teckel Enterprises inventory of $15,000 on goods acquired from Dachsund Limited in the previous period. The tax rate is 40%. What is the required consolidated financial statement adjustments?

A)Decrease Beginning Retained Earnings: $9,000, decrease Cost of Goods Sold: $15,000, and increase Income Tax Expense: $6,000.
B)Increase Beginning Retained Earnings: $9,000, increase Cost of Goods Sold: $6,000, and decrease Income Tax Expense: $6,000.
C)Decrease Beginning Retained Earnings: $15,000 and decrease Cost of Goods Sold: $15,000.
D)Decrease Beginning Retained Earnings: $9,000 and decrease Cost of Goods Sold: $9,000.

Question 56

In 2011, a parent company sold a tract of land to its subsidiary for $200,000, resulting in a $60,000 loss. The subsidiary's plans for the land did not materialize and it still owned the land at the end of 2014. At the end of 2014, what consolidation adjustments should be made with respect to the loss associated with the sale of land? a)
$\begin{array}{lll} \text { Decrease Retained earnings } & 60,000 \\ \text { Decrease Land } & 60,000 & \\\end{array}$

b)
$\begin{array}{lll} \text { Decrease Loss on the sale of land } & 60,000 \\\text { Decrease Land } & 60,000 & \\\end{array}$

c)
$\begin{array}{lll} \text { Increase Land } & 60,000 & \\\text { Increase Loss on the sale of land } & 60,000 \\\end{array}$

d)
$\begin{array}{lll}\text { Increase Land } & 60,000 & \\ \text { Increase Retained earnings } & 60,000 \end{array}$

Question 57

Which of the following is not true with respect to intercompany transfers that occurred during the year?

A)Comprehensive income will decrease for the amount of the unrealized profit.
B)Comprehensive income will increase for the tax on the unrealized profit.
C)The statement of financial position will include a decrease to the asset for the amount of the unrealized profit that still remains.
D)The deferred tax asset will decrease for the amount of unrealized profit that still remains.

Question 58

If a dividend is declared by a subsidiary in the current period after its acquisition by the parent but is not paid, from the outlook of the group:

A)Equity does not decrease.
B)Liabilities increase.
C)Receivables increase.
D)Revenue increases.

Question 59

On January 1, 2011, Rocker Ltd. formed Smith Co., a 100% owned subsidiary. During 2014, Rocker sold Smith $100,000 in goods. The unrealized profit in Smith's inventories was $20,000 at December 31, 2013 and $25,000 at December 31, 2014. Ignoring income taxes, what adjustment should be made to the consolidated financial statements for the year ended December 31, 2014 to reflect the unrealized profit in Smith's ending inventory?

A)Retained earnings at the end of 2014 will be decreased by $25,000.
B)Inventory at December 31, 2014 will be increased by $25,000.
C)Cost of goods sold for 2014 will be decreased by $25,000.
D)Retained earnings at the end of 2014 will be decreased by $5,000.

Question 60

In 2010, Yorkshire Inc., which owns 100% of Blake Company, sold land to Blake Company at $50,000 greater than its cost. The land is still owned by Blake Company. The tax rate is 30%. What is the required consolidated financial statement adjustment in 2013?

A)Decrease Beginning Retained Earnings: $35,000, decrease Land: $35,000.
B)Decrease Beginning Retained Earnings: $35,000, decrease Land: $50,000, and increase Deferred Tax Asset: $15,000.
C)Decrease Beginning Retained Earnings: $50,000, decrease Land: $35,000, and decrease Deferred Tax Asset: $15,000.
D)Decrease Beginning Retained Earnings: $50,000, decrease Land: $50,000.

Question 61

Why are adjustments made for intragroup borrowings on consolidation?

Question 62

Why are adjustments required for intragroup services such as management fees?

Question 63

On December 31, 2009, Cawthra Ltd. purchased 100% of the outstanding common shares of Lawlor Ltd. for $9.5 million in cash. On that date, the shareholders' equity of Lawlor totaled $8 million and consisted of $1 million in common shares and $7 million in retained earnings. Both companies use the straight-line method to calculate depreciation. Goodwill, if any arises as a result of this business combination, is written down when there is an impairment. Both Cawthra and Lawlor report under accounting standards for private enterprises and pay tax at the rate of 40%.
For the year ending December 31, 2014, the statements of earnings for Cawthra and Lawlor were as follows:
$\begin{array}{lrr} & \text { Cawthra } & \text { Lawlor } \\\text { Sales and other revenue } & \$ 22,500,000 & \$ 9,800,000 \\\text { Cost of goods sold } & 16,000,000 & 5,000,000 \\\text { Depreciation expense } & 2,500,000 & 2,000,000 \\\text { Other expenses } & \underline{1,800,000} & \underline{1,200,000} \\\text { Net income } & \$ 2,200,000 & \$ 1,600,000\end{array}$ As at December 31, 2014, the condensed statements of financial position for the two companies were as follows:
$\begin{array}{lrr}&{\text { Cawthra }}&{\text { Lawlor }} & \\\text { Total assets } & \$ 31,000,000 & \$ 13,500,000 \\& & \\\text { Liabilities } & \$ 5,000,000 & \$ 1,200,000 \\\text { No par common shares } & 12,100,000 & 1,000,000 \\\text { Retained earnings } & 13,900,000 & 11,300,000 \\\text { Total } & \$ 31,000,000 & \$ 13,500,000\end{array}$ Other Information:
-On December 31, 2009, Lawlor had a building with a fair value that was $300,000 greater than its carrying value. The building had an estimated remaining useful life of 20 years.
-On December 31, 2009, Lawlor had inventory with a fair value that was $200,000 less than its carrying value. This inventory was sold in 2011.
-During 2014, Cawthra sold merchandise to Lawlor for $100,000, a price that includes a gross profit of $40,000. During 2014, 40% of this merchandise was resold by Lawlor to third parties and the other 60% remains in its December 31, 2014 inventories. On December 31, 2013, the inventories of Lawlor contained merchandise purchased from Cawthra on which Cawthra had recognized a gross profit in the amount of $20,000.
-During 2014, Cawthra declared and paid dividends of $300,000 while Lawlor declared and paid dividends of $100,000.
-Cawthra accounts for its investment in Lawlor using the cost method.
-The retained earnings of Cawthra as at December 31, 2013 was $12,000,000. On that date, Lawlor had retained earnings of $9,800,000. Lawlor has not issued any common shares since its acquisition by Cawthra.
-There were no specific events or circumstances between 2010 and 2014 to indicate any impairment of goodwill.
Required: Calculate consolidated net income for the year ending December 31, 2014.

Question 64

On December 31, 2011 PDI Ltd acquired 100% of the company ABC for $100,000. At the day of acquisition fair values equalled book values. The tax rate for both entities is 30%.
On December 31, 2013 the following are the individual financial statements for both companies:
Additional information:
1. PDI Ltd. loaned ABC Company $30,000 at an interest rate of 7% on January 1, 2013, payable annually on December 31.
2. PDI Ltd. has included both quarterly and final dividends from ABC Company in revenue.
3. On June 30, 2013 PDI Ltd. sold inventory costing $25,000 to ABC Company for $40,000. All of this inventory was sold to external entities for $60,000 before December 31, 2013.
4. In 2012, PDI Ltd. Sold land to ABC Company for $15,000 above its original recorded cost. The land is still held by ABC Company as at December 31, 2013.
Required: Prepared the consolidated financial statements at December 31, 2013for PDI Ltd and its subsidiary.

Question 65

Why are adjustments required for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods?

Question 66

How are adjustments for intragroup dividends made in the consolidated financial statements?