Question 1

Why is it important to distinguish between up-stream and downstream sales in the analysis of intercompany profit eliminations?

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Question 2

On January 1, 2013, P Corporation sold equipment with a 3-year remaining life and a book value of $100,000 to its 70% owned subsidiary for a price of $115,000.In the consolidated workpapers for the year ended December 31, 2014, an elimination entry for this transaction will include a:

Accepted Answer

A) debit to Equipment for $15,000. 
B) debit to Gain on Sale of Equipment for $15,000. 
C) credit to Depreciation Expense for $15,000. 
D) debit to Accumulated Depreciation for $10,000.

Question 3

Pale Company owns 90% of the outstanding common stock of Shale Company.On January 1, 2014, Shale Company sold equipment to Pale Company for $300,000.Shale Company had purchased the equipment for $450,000 on January 1, 2006 and has been depreciating it over a 10 year life by the straight-line method.The management of Pale Company estimated that the equipment had a remaining life of 5 years on January 1, 2014.In 2014, Pale Company reported $225,000 and Shale Company reported $150,000 in net income from their independent operations.
Required:
A.Prepare in general journal form the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2014 and 2015 consolidated statements workpapers.Pale Company uses the cost method to record its investment in Shale Company.
B.Calculate equity in subsidiary income for 2014 and noncontrolling interest in net income for 2014.

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Question 4

In January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $990,000.S Company's original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000.P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method.This equipment was sold to a third party on January 1, 2014 for $720,000.What amount of gain should P Company record on its books in 2014?

Accepted Answer

A) $30,000. 
B) $60,000. 
C) $120,000. 
D) $180,000.

Question 5

In what circumstances might a consolidated gain be recognized on the sale of assets to a nonaffiliate when the selling affiliate recognizes a loss?

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Question 6

Define the controlling interest in consolidated net income using the t-account approach.

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Question 7

On January 1, 2013 S Corporation sold equipment that cost $120,000 and had a book value of $48,000 to P Corporation for $60,000.P Corporation owns 100% of S Corporation and the equipment has a 4-year remaining life.What is the effect of the sale on P Corporation's Equity from Subsidiary Income account for 2014?

Accepted Answer

A) no effect 
B) increase of $12,000. 
C) decrease of $12,000. 
D) increase of $3,000.

Question 8

Should the firm's audit committee be composed entirely of outside members and be solely responsible for hiring the firm's auditors?

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Question 9

An eliminating entry is needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable asset that was acquired from another affiliate.Describe the necessary eliminating entry.
 Questions from the Textbook

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Question 10

In years subsequent to the upstream intercompany sale of nondepreciable assets, the necessary consolidated workpaper entry under the cost method is to debit the

Accepted Answer

A) Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable asset. 
B) Retained Earnings (Parent) account and credit the nondepreciable asset. 
C) Nondepreciable asset, and credit the Noncontrolling interest and Investment in Subsidiary accounts. 
D) No entries are necessary.

Question 11

Define consolidated retained earnings using the analytical approach.
Business Ethics Question from the Textbook
Some people believe that the use of executive stock options is directly related to the increased number of earnings restatements.For each of the following items, discuss the potential ethical issues that might be related to earnings management within the firm.

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Question 12

In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is computed by multiplying the noncontrolling interest percentage by the subsidiary's reported net income

Accepted Answer

A) minus the net amount of unrealized gain on the intercompany sale. 
B) plus the net amount of unrealized gain on the intercompany sale. 
C) minus intercompany gain considered realized in the current period. 
D) plus intercompany gain considered realized in the current period.

Question 13

Petunia Company owns 100% of Sage Corporation.On January 1, 2014 Petunia sold equipment to Sage at a gain.Petunia had owned the equipment for four years and used a ten-year straight-line rate with no residual value.Sage is using an eight-year straight-line rate with no residual value.In the consolidated income statement, Sage's recorded depreciation expense on the equipment for 2014 will be reduced by

Accepted Answer

A) 10% of the gain on sale. 
B) 12 1/2% of the gain on sale. 
C) 80% of the gain on sale. 
D) 100% of the gain on sale.

Question 14

On January 1, 2013, Pound Company acquired an 80% interest in the common stock of Sound Company on the open market for $3,000,000, the book value at that date.
On January 1, 2014, Pound Company purchased new equipment for $58,000 from Sound Company.The equipment cost $36,000 and had an estimated life of five years as of January 1, 2014.
During 2015, Pound Company had merchandise sales to Sound Company of $400,000; the merchandise was priced at 25% above Pound Company's cost.Sound Company still owes Pound Company $70,000 on open account and has 20% of this merchandise in inventory at December 31, 2015.At the beginning of 2015, Sound Company had in inventory $100,000 of merchandise purchased in the previous period from Pound Company.
Required:
A.Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for the year ended December 31, 2015.
B.Assume that Sound Company reports net income of $160,000 for the year ended December 31, 2015.Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement for the year ended December 31, 2015.

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Question 15

P Corporation acquired 80% of the outstanding voting stock of S Corporation when the fair values equaled the book values.
On July 1, 2013, P sold land to S for $300,000.The land originally cost P $200,000.S recently resold the land on October 30, 2014 for $350,000.
On October 1, 2014, S Corporation sold equipment to P Corporation for $80,000.S originally paid $100,000 for this equipment and had accumulated depreciation of $40,000 thus far.The equipment has a five-year remaining life.
Required:
A.Complete the consolidated income statement for P Corporation and subsidiary for the year ended December 31, 2014.

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Question 16

P Company bought 60% of the common stock of S Company on January 1, 2014.On January 1, 2014 there was an intercompany sale of equipment at a gain of $63,000.The equipment had an estimated remaining life of six years.Net incomes of the two companies from their own operations (including sales to affiliates) were as follows: $\begin{array}{lrr} 
& 2014 & 2015 \
\text { P Company } & \$ 280,000 & \$ 210,000 \
\text { S Company } & 70,000 & 105,000
\end{array}$

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Question 17

What is the essential procedural difference between workpaper eliminating entries for un-realized intercompany profit when the selling affiliate is a less than wholly owned subsidiary and such entries when the selling affiliate is the parent company or a wholly owned subsidiary?

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Question 18

Several years ago, P Company bought land from S Company, its 80% owned subsidiary, at a gain of $50,000 to S Company.The land is still owned by P Company.The consolidated working papers for this year will require:

Accepted Answer

A) no entry because the gain happened prior to this year. 
B) a credit to land for $50,000. 
C) a debit to P's retained earnings for $50,000. 
D) a debit to Noncontrolling interest for $50,000.

Question 19

Pine Company, a computer manufacturer, owns 90% of the outstanding stock of Slider Company.On January 1, 2014, Pine sold computers to Slider for $500,000.The computers, which are inventory to Pine, had a cost to Pine of $350,000.Slider Company estimated that the computers had a useful life of six years from the date of purchase.
Slider Company reported net income of $310,000, and Pine Company reported net income of $870,000 from its independent operations (including sales to affiliates) for the year ended December 31, 2014.
Required:
A.Prepare in general journal form the workpaper entries necessary because of the intercompany sales in the consolidated statements workpaper for both 2014 and 2015.
B.Calculate controlling interest in consolidated net income for 2014.

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Question 20

Should stock options be expensed on the Income Statement?

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Exam 7: Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment