Deck 6: Elimination of Unrealized Profit on Intercompany Sales of Inventory

Question 1

P Company regularly sells merchandise to its 80%-owned subsidiary,S Corporation.In 2016,P sold merchandise that cost $240,000 to S for $300,000.Half of this merchandise remained in S's December 31,2016 inventory.During 2017,P sold merchandise that cost $375,000 to S for $468,000.Forty percent of this merchandise inventory remained in S's December 31,2017 inventory.Selected income statement information for the two affiliates for the year 2017 is as follows: Consolidated sales revenue for P and Subsidiary for 2017 are:

A)$2,907,000.
B)$3,000,000.
C)$3,205,500.
D)$3,375,000.

Answer 1

A

Question 2

Petunia Company acquired an 80% interest in Shaman Company in 2016.In 2017 and 2018,Shaman reported net income of $400,000 and $480,000,respectively.During 2017,Shaman sold $80,000 of merchandise to Petunia for a $20,000 profit.Petunia sold the merchandise to outsiders during 2018 for $140,000.For consolidation purposes,what is the noncontrolling interest's share of Shaman's 2017 and 2018 net income?

A)$90,000 and $96,000.
B)$100,000 and $76,000.
C)$84,000 and $92,000.
D)$76,000 and $100,000.

Answer 2

D

Question 3

In determining controlling interest in consolidated income in the consolidated financial statements,unrealized intercompany profit on inventory acquired by a parent from its subsidiary should:

A)not be eliminated.
B)be eliminated in full.
C)be eliminated to the extent of the parent company's controlling interest in the subsidiary.
D)be eliminated to the extent of the noncontrolling interest in the subsidiary.

Answer 3

B

Question 4

P Company sold merchandise costing $240,000 to S Company (90% owned)for $300,000.At the end of the current year,one-third of the merchandise remains in S Company's inventory.Applying the lower-of- cost-or-market rule,S Company wrote this inventory down to $92,000.What amount of intercompany profit should be eliminated on the consolidated statements workpaper?

A)$20,000.
B)$18,000.
C)$12,000.
D)$10,800.

Question 5

Pruitt Company owns 80% of Stoney Company's common stock.During 2017,Stoney sold $400,000 of merchandise to Pruitt.At December 31,2017,one-fourth of the merchandise remained in Pruitt's inventory.In 2017,gross profit percentages were 25% for Pruitt and 30% for Stoney.The amount of unrealized intercompany profit that should be eliminated in the consolidated statements is:

A)$80,000.
B)$24,000.
C)$30,000.
D)$25,000.

Question 6

The noncontrolling interest's share of the selling affiliate's profit on intercompany sales is considered to be realized under:

A)partial elimination.
B)total elimination.
C)100% elimination.
D)both total and 100% elimination.

Question 7

Noncontrolling interest in consolidated income is never affected by:

A)upstream sales.
B)downstream sales.
C)horizontal sales.
D)Noncontrolling interest is affected by all sales.

Question 8

P Company regularly sells merchandise to its 80%-owned subsidiary,S Corporation.In 2016,P sold merchandise that cost $240,000 to S for $300,000.Half of this merchandise remained in S's December 31,2016 inventory.During 2017,P sold merchandise that cost $375,000 to S for $468,000.Forty percent of this merchandise inventory remained in S's December 31,2017 inventory.Selected income statement information for the two affiliates for the year 2017 is as follows: Consolidated cost of goods sold for P Company and Subsidiary for 2017 are:

A)$2,260,500.
B)$2,268,000.
C)$2,276,700.
D)$2,737,500.

Question 9

Polly,Inc.owns 80% of Saffron,Inc.During 2017,Polly sold goods with a 40% gross profit to Saffron.Saffron sold all of these goods in 2017.For 2017 consolidated financial statements,how should the summation of Polly and Saffron income statement items be adjusted?

A)Sales and cost of goods sold should be reduced by the intercompany sales.
B)Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
C)Net income should be reduced by 80% of the gross profit on intercompany sales.
D)No adjustment is necessary.

Question 10

Failure to eliminate intercompany sales would result in an overstatement of consolidated:

A)net income.
B)gross profit.
C)cost of sales.
D)all of these.

Question 11

Sales from one subsidiary to another are called:

A)downstream sales.
B)upstream sales.
C)intersubsidiary sales.
D)horizontal sales.

Question 12

A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2016.Under the partial equity method,the workpaper entry in 2017 to recognize the intercompany profit in beginning inventory realized during 2017 includes a debit to:

A)Retained Earnings - P.
B)Noncontrolling interest.
C)Cost of Sales.
D)both Retained Earnings - P and Noncontrolling Interest.

Question 13

P Corporation acquired a 60% interest in S Corporation on January 1,2017,at book value equal to fair value.During 2017,P sold merchandise that cost $135,000 to S for $189,000.One-third of this merchandise remained in S's inventory at December 31,2017.S reported net income of $120,000 for 2017.P's income from S for 2017 is:

A)$36,000.
B)$50,400.
C)$54,000.
D)$61,200.

Question 14

The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the noncontrolling minority ownership percentage by the subsidiary's reported net income:

A)plus unrealized profit in ending inventory less unrealized profit in beginning inventory.
B)plus realized profit in ending inventory less realized profit in beginning inventory.
C)less unrealized profit in ending inventory plus realized profit in beginning inventory.
D)less realized profit in ending inventory plus realized profit in beginning inventory.

Question 15

A parent company regularly sells merchandise to its 80%-owned subsidiary.Which of the following statements describes the computation of noncontrolling interest income?

A)the subsidiary's net income times 20%.
B)(the subsidiary's net income x 20%)+ unrealized profits in the beginning inventory - unrealized profits in the ending inventory.
C)(the subsidiary's net income + unrealized profits in the beginning inventory - unrealized profits in the ending inventory)× 20%.
D)(the subsidiary's net income + unrealized profits in the ending inventory - unrealized profits in the beginning inventory)× 20%.

Question 16

The material sale of inventory items by a parent company to an affiliated company:

A)enters the consolidated revenue computation only if the transfer was the result of arm's length bargaining.
B)affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
C)does not result in consolidated income until the merchandise is sold to outside parties.
D)does not require a working paper adjustment if the merchandise was transferred at cost.

Question 17

P Company owns an 80% interest in S Company.During 2017,S sells merchandise to P for $200,000 at a profit of $40,000.On December 31,2017,50% of this merchandise is included in P's inventory.Income statements for P and S are summarized below: Controlling interest in consolidated net income for 2017 is:

A)$300,000.
B)$380,000.
C)$396,000.
D)$420,000.

Question 18

The amount of intercompany profit eliminated is the same under total elimination and partial elimination in the case of:

A)upstream sales where the selling affiliate is a less than wholly owned subsidiary.
B)all downstream sales.
C)horizontal sales where the selling affiliate is a wholly owned subsidiary.
D)all downstream sales and horizontal sales where the selling affiliate is a wholly owned subsidiary.

Question 19

The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory includes a:

A)credit to Ending Inventory (Cost of Sales).
B)credit to Sales.
C)debit to Ending Inventory (Cost of Sales).
D)debit to Inventory - Balance Sheet.

Question 20

P Company owns an 80% interest in S Company.During 2017,S sells merchandise to P for $200,000 at a profit of $40,000.On December 31,2017,50% of this merchandise is included in P's inventory.Income statements for P and S are summarized below: Noncontrolling interest in income for 2017 is:

A)$4,000.
B)$19,200.
C)$20,000.
D)$24,000.

Question 21

P Company owns an 80% interest in S Company.During 2017,S sells merchandise to P for $150,000 at a profit of $30,000.On December 31,2017,50% of this merchandise is included in P's inventory.Income statements for P and S are summarized below: Noncontrolling interest in income for 2017 is:

A)$3,000.
B)$14,400.
C)$15,000.
D)$18,000.

Question 22

Determination of the noncontrolling interest in consolidated net income differs depending on whether intercompany sales are downstream or upstream.Explain the difference in calculating noncontrolling interest for downstream and upstream sales.

Question 23

P Corporation acquired a 60% interest in S Corporation on January 1,2017,at book value equal to fair value.During 2017,P sold merchandise that cost $225,000 to S for $315,000.One-third of this merchandise remained in S's inventory at December 31,2017.S reported net income of $200,000 for 2017.P's income from S for 2017 is:

A)$60,000.
B)$90,000.
C)$120,000.
D)$102,000.

Question 24

On January 1,2017,Perch Company purchased an 80% interest in the capital stock of Salmon Company for $3,400,000.At that time,Salmon Company had common stock of $2,200,000 and retained earnings of $620,000.Perch Company uses the cost method to record its investment in Salmon Company.Differences between the fair value and the book value of the identifiable assets of Salmon Company were as follows:
The book values of all other assets and liabilities of Salmon Company were equal to their fair values on January 1,2017.The equipment had a remaining life of five years on January 1,2017; the inventory was sold in 2017.
Salmon Company's net income and dividends declared in 2017 were as follows:
Year 2017 Net Income of $400,000; Dividends Declared of $100,000
Required:
Prepare a consolidated statements workpaper for the year ended December 31,2018 using the partially completed worksheet.

Question 25

P Company regularly sells merchandise to its 80%-owned subsidiary,S Corporation.In 2016,P sold merchandise that cost $192,000 to S for $240,000.Half of this merchandise remained in S's December 31,2016 inventory.During 2017,P sold merchandise that cost $300,000 to S for $375,000.Forty percent of this merchandise inventory remained in S's December 31,2017 inventory.Selected income statement information for the two affiliates for the year 2017 is as follows: Consolidated sales revenue for P and Subsidiary for 2017 are:

A)$2,325,000.
B)$2,400,000.
C)$2,565,000.
D)$2,700,000.

Question 26

Past and proposed GAAP agree that unrealized intercompany profit should not be included in consolidated net income or assets.Briefly explain the preferred approach of eliminating intercompany profit.

Question 27

On January 1,2017,Pharma Company purchased a 90% interest in Sandy Company for $2,800,000.At that time,Sandy had $1,840,000 of common stock and $360,000 of retained earnings.The difference between implied and book value was allocated to the following assets of Sandy Company:
The plant and equipment had a 10-year remaining useful life on January 1,2017.
During 2017,Pharma sold merchandise to Sandy at a 20% markup above cost.At December 31,2017,Sandy still had $180,000 of merchandise in its inventory that it had purchased from Pharma.In 2017,Pharma reported net income from independent operations of $1,600,000,while Sandy reported net income of $600,000.
Required:
A.Prepare the workpaper entry to allocate,amortize,and depreciate the difference between implied and book value for 2017.
B.Calculate controlling interest in consolidated net income for 2017.

Question 28

P Company owns an 80% interest in S Company.During 2017,S sells merchandise to P for $150,000 at a profit of $30,000.On December 31,2017,50% of this merchandise is included in P's inventory.Income statements for P and S are summarized below: Controlling interest in consolidated net income for 2017 is:

A)$225,000.
B)$285,000.
C)$297,000.
D)$315,000.

Question 29

Pine Company owns an 80% interest in Salad Company and a 90% interest in Tuna Company.During 2016 and 2017,intercompany sales of merchandise were made by all three companies.Total sales amounted to $2,400,000 in 2016,and $2,700,000 in 2017.The companies sold their merchandise at the following percentages above cost.
The amount of merchandise remaining in the 2017 beginning and ending inventories of the companies from these intercompany sales is shown below.
Reported net incomes (from independent operations including sales to affiliates)of Pine,Salad,and Tuna for 2017 were $3,600,000,$1,500,000,and $2,400,000,respectively.
Required:
A.Calculate the amount noncontrolling interest to be deducted from consolidated income in the consolidated income statement for 2017.
B.Calculate the controlling interest in consolidated net income for 2017.

Question 30

P Company regularly sells merchandise to its 80%-owned subsidiary,S Corporation.In 2016,P sold merchandise that cost $192,000 to S for $240,000.Half of this merchandise remained in S's December 31,2016 inventory.During 2017,P sold merchandise that cost $300,000 to S for $375,000.Forty percent of this merchandise inventory remained in S's December 31,2017 inventory.Selected income statement information for the two affiliates for the year 2017 is as follows: Consolidated cost of goods sold for P Company and Subsidiary for 2017 are:

A)$1,809,000.
B)$1,815,000.
C)$1,821,000.
D)$2,190,000.

Question 31

Puma Company owns 80% of the common stock of Smarte Company.Puma sells merchandise to Smarte at 20% above cost.During 2017 and 2018,intercompany sales amounted to $1,080,000 and $1,200,000 respectively.At the end of 2017,Smarte had one-fifth of the goods purchased that year from Puma in its ending inventory.Smarte's 2018 ending inventory contained one-fourth of that year's purchases from Puma.There were no intercompany sales prior to 2017.
Puma reported net income from its own operations of $720,000 in 2017 and $760,000 in 2018.Smarte reported net income of $400,000 in 2017 and $460,000 in 2018.Neither company declared dividends in either year.
Required:
A.Prepare in general journal form all entries necessary on the consolidated statements workpapers to eliminate the effects of the intercompany sales for both 2017 and 2018.
B.Calculate controlling interest in consolidated net income for 2018.

Question 32

Poole Company owns a 90% interest in Solumbra Company.The consolidated income statement drafted by the controller of Poole Company appeared as follows:
During your audit you discover that intercompany sales transactions were not reflected in the controller's draft of the consolidated income statement.Information relating to intercompany sales and unrealized intercompany profit is as follows:
Required:
Prepare a corrected consolidated income statement for Poole Company and Solumbra Company for the year ended December 31,2017.

Question 33

The following balances were taken from the records of S Company:
P Company owns 80% of the common stock of S Company.During 2017,P Company purchased merchandise from S Company for $4,000,000.S Company sells merchandise to P Company at cost plus 25% of cost.On December 31,2017,merchandise purchased from S Company for $1,250,000 remains in the inventory of P Company.On January 1,2017,P Company's inventory contained merchandise purchased from S Company for $525,000.The affiliated companies file a consolidated income tax return.There was no difference between the implied value and the book value of net assets acquired.
Required:
A.Prepare all workpaper entries necessitated by the intercompany sales of merchandise.
B.Compute noncontrolling interest in consolidated income for 2017.
C.Compute noncontrolling interest in consolidated net assets on December 31,2017.

Question 34

P Corporation acquired 80% of S Corporation on January 1,2017 for $240,000 cash when S's stockholders' equity consisted of $100,000 of Common Stock and $30,000 of Retained Earnings.The difference between the price paid by P and the underlying equity acquired in S was allocated solely to a patent amortized over 10 years.
P sold merchandise to S during the year in the amount of $30,000.$10,000 worth of inventory is still on hand at the end of the year with an unrealized profit of $4,000.The separate company statements for P and S appear in the first two columns of the partially completed consolidated workpaper.
Required:
Complete the consolidated workpaper for P and S for the year 2017.
P Corporation and Subsidiary
Consolidated Statements Workpaper
December 31,2017

Question 35

Pinta Company owns 90% of the common stock of Simplex Company.Simplex Company sells merchandise to Pinta Company at 25% above cost.During 2016 and 2017 such sales amounted to $800,000 and $1,020,000,respectively.At the end of each year,Pinta Company had in its inventory one-fourth of the amount of goods purchased from Simplex Company during that year.Pinta Company reported income of $1,500,000 from its independent operations in 2016 and $1,720,000 in 2017.Simplex Company reported net income of $600,000 in each year and did not declare any dividends in either year.There were no intercompany sales prior to 2016.
Required:
A.Prepare,in general journal form,all entries necessary on the 2017 consolidated statements workpaper to eliminate the effects of intercompany sales.
B.Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2017.
C.Calculate controlling interest in consolidated net income for 2017.