Ch 5 AA Consolidated Financial Statements—Intra-Entity Asset Transactions: Problems

LO 5-1 1. What is the primary reason we defer financial statement recognition of gross profits on intra-entity sales for goods that remain within the consolidated entity at year-end? a. Revenues and COGS must be recognized for all intra-entity sales regardless of whether the sales are upstream or downstream. b. Intra-entity sales result in gross profit overstatements regardless of amounts remaining in ending inventory. c. Gross profits must be deferred indefinitely because sales among affiliates always remain in the consolidated group. d. When intra-entity sales remain in ending inventory, control of the goods has not changed.

1. D

Q2 Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate the intra-entity transfer of inventory? Retained earnings. Cost of goods sold. Inventory. Investment in Fisher Company. Sales.

2

LO 5-2, 5-3, 5-5 6. Use the same information as in problem (5) except assume that the transfers were from Bottom Company to Top Company. What are the consolidated sales and cost of goods sold? a. $1,000,000 and $720,000. b. $1,000,000 and $755,000. c. $1,000,000 and $696,000. d. $970,000 and $712,000.

6. C The only change here from Problem 5 is the gross profit rate which would now be 40 percent ($120,000 gross profit / $300,000 sales). Thus, the unrealized gross profit to be deferred is $16,000 ($40,000 × 40%). Consequently, consolidated cost of goods sold is $696,000 ($600,000 + $180,000 - $100,000 + $16,000).

LO 5-3, 5-4, 5-5 7. Angela, Inc., holds a 90 percent interest in Corby Company. During 2014, Corby sold inventory costing $77,000 to Angela for $110,000. Of this inventory, $40,000 worth was not sold to outsiders until 2015. During 2015, Corby sold inventory costing $72,000 to Angela for $120,000. A total of $50,000 of this inventory was not sold to outsiders until 2016. In 2015, Angela reported net income of $150,000 while Corby earned $90,000 after excess amortizations. What is the noncontrolling interest in the 2015 income of the subsidiary? a. $8,000. b. $8,200. c. $9,000. d. $9,800.

7. B UNREALIZED GROSS PROFIT, 12/31/14 Ending inventory $40,000 Gross profit rate ($33,000 ÷ $110,000) 30% Unrealized intra-entity gross profit, 12/31/14 $12,000 UNREALIZED GROSS PROFIT, 12/31/15 Ending inventory $50,000 Gross profit rate ($48,000 ÷ $120,000) 40% Unrealized intra-entity gross profit, 12/31/15 $20,000 NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST Reported net income for 2015 $90,000 Realized gross profit deferred in 2014 12,000 Deferral of 2015 unrealized gross profit (20,000) = Realized net income of subsidiary $82,000 * Outside ownership 10% = Noncontrolling interest $ 8,200

Intra-Entity Beginning Inventory Profit Adjustment—Downstream Sales When Parent Uses Equity Method The worksheet eliminations for intra-entity sales/purchases (Entry TI) and unrealized ending inventory gross profit (Entry G) are both standard, regardless of the circumstances of the consolidation. In contrast, for one specific situation, the consolidation entry to recognize intra-entity beginning inventory gross profit differs from the Entry *G just presented. If (1) the original transfer is downstream (intra-entity sales made by the parent), and (2) the parent applies the equity method for internal accounting purposes, then the Investment in Subsidiary account replaces the parent's beginning Retained Earnings in Consolidation Entry *G as follows: What entry will be made?

Consolidation Entry *G—Year Following Transfer (Year 2) (replaces previous Entry *G for downstream transfers when the equity method is used) Investment in Subsidiary..... 7,500 Cost of Goods Sold (beginning inventory component)..... 7,500 To recognize previously deferred unrealized downstream inventory gross profit as part of current year income when the parent uses the equity method

Q3 Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. What is the consolidated gain or loss on equipment for 2012? $0. $9,000 gain. $9,000 loss. $21,000 gain. $21,000 loss.

1 There is No Consolidated Gain/Loss Recognized on the Transfer in 2012

Q14 On December 31 of the current year, ABC Corp sells $100,000 inventory to its 70% owned subsidiary Sun, Co. for $120,000. At the end of the year, all of the inventory is still on hand with Sun, Co. The consolidated working paper entry to eliminate the effect of this intercompany sale will include a debit to sales for: A) $120,000 B) $84,000 C) $100,000 D) $14,000 E) 0 because this is a downstream transaction. Feedback: Learning Objective: 05-02 Difficulty: Easy Bloom's: Apply AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

a Revenue reduced by ENTIRE amount of "SALE" because transferred items are still in the entity's inventory at year's end.

Q6 Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute the gain or loss on the intra-entity sale of land. $80,000 gain. $80,000 loss. $5,000 gain. $5,000 loss. $85,000 loss.

4 Sub's Land Transfer Value $80,000 - Parent's Land BV $85,000 = $5,000 Loss on Intra-Entity Sale of Land

Q9 Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends: 2012.....2013.....2014 Net income $100,000.....$120,000.....$130,000 Dividends 40,000.....50,000.....60,000 Compute Wilson's share of income from Simon for consolidation for 2013. $108,000. $110,000. $106,000. $109,825. $109,800.

1 Parent's Part of Net Income 2013 ($120,000 × .90) = $108,000

LO 5-5 3. In computing the noncontrolling interest's share of consolidated net income, how should the subsidiary's net income be adjusted for intra-entity transfers? a. The subsidiary's reported net income is adjusted for the impact of upstream transfers prior to computing the noncontrolling interest's allocation. b. The subsidiary's reported net income is adjusted for the impact of all transfers prior to computing the noncontrolling interest's allocation. c. The subsidiary's reported net income is not adjusted for the impact of transfers prior to computing the noncontrolling interest's allocation. d. The subsidiary's reported net income is adjusted for the impact of downstream transfers prior to computing the noncontrolling interest's allocation.

3. A

Q4 Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Which of the following will be included in a consolidation entry for 2013? Debit retained earnings for $5,000. Credit retained earnings for $5,000. Debit investment in subsidiary for $5,000. Credit investment in subsidiary for $5,000. Credit land for $5,000.

2

Q7 Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Which of the following will be included in a consolidation entry for 2012? Debit loss for $5,000. Credit loss for $5,000. Credit land for $5,000. Debit gain for $5,000. Credit gain for $5,000.

2

LO 5-7 8. Dunn Corporation owns 100 percent of Grey Corporation's common stock. On January 2, 2014, Dunn sold to Grey $40,000 of machinery with a carrying amount of $30,000. Grey is depreciating the acquired machinery over a 5-year remaining life by the straight-line method. The net adjustments to compute 2014 and 2015 consolidated net income would be an increase (decrease) of 2014 2015 a. $(8,000) $2,000 b. $(8,000) -0- c. $(10,000)$2,000 d. $(10,000) -0-

8. A Individual records after transfer: 12/31/14 Machinery = $40,000 Gain = $10,000 Depreciation expense $8,000 ($40,000 ÷ 5 years) Net effect on income = $2,000 ($10,000 - $8,000) 12/31/15 Depreciation expense = $8,000 Consolidated figures—historical cost: 12/31/14 Machinery = $30,000 Depreciation expense = $6,000 ($30,000 ÷ 5 years) 12/31/15 Depreciation expense = $6,000 Adjustments for consolidation purposes: 2014: $2,000 income is reduced to a $6,000 expense (net income is reduced by $8,000) 2015: $8,000 expense is reduced to a $6,000 expense (net income is increased by $2,000)

All Inventory Remains at Year-End If all of the transferred inventory is retained by the business combination at the end of the year, the following worksheet entry also must be included to eliminate the effects of the seller's gross profit that remains unrealized within the buyer's ending inventory:

Consolidation Entry G—Year of Transfer (Year 1) All Inventory Remains Cost of Goods Sold (ending inventory component).....30,000 .....Inventory (balance sheet account)..................................................30,000 To remove unrealized gross profit created by intra-entity sale.

Q11 Entities can have both upstream and downstream transactions. How would these transfers affect the consolidation process? A) Downstream have no effect because these transactions are made by the parent company. B) Upstream transactions affect the computation of the Noncontrolling Interest in Subsidiary's Income. C) Downstream transactions affect the computation of the Noncontrolling Interest in Subsidiary's Income. D) No difference exists in the consolidation process for either downstream or upstream transactions. E) Upstream and downstream transfers have no effect on the consolidation process. Feedback: Learning Objective: 05-05 Difficulty: Easy Bloom's: Apply AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

b

Q13 An intercompany transaction exists due to the sale of depreciable assets between affiliates. How does this transfer affect the financial statements? A) The transfer price of the asset is reported on the consolidated balance sheet B) Depreciation expense in the consolidated income statement is based on the transfer price of the selling affiliate. C) The original cost is reported on the consolidated balance sheet. D) Depreciation expense on the buying affiliate's income statement is based on the original cost. E) The seller will not recognize any gain or loss from the sale of the depreciable asset. Feedback: Learning Objective: 05-07 Difficulty: Easy Bloom's: Analyze AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

c

Q12 B. Atman Co. owns 90% of R. Iddler Co. During the current year R. Iddler sells to B. Atman land with a book value of $80,000 and a fair value of $100,000. The selling price is $110,000. In its accounting records, R. Iddler will A) Record a $20,000 gain on the sale of land. B) Record a $18,000 gain on the sale of land. C) Record a $30,000 gain on the sale of land. D) Defer the recognition of the gain until the land is sold to an unrelated party. E) Not recognize a gain on the sale of land since it was made to a related part. Feedback: Learning Objective: 05-06 Difficulty: Easy Bloom's: Analyze AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

c Gain is recorded on the books and is equal to $30,000—selling price of $110,000 less the book value of $80,000. This will require an elimination entry within the consolidation process.

Q15 How does the accounting treatment for downstream and upstream sales of inventory vary? A) No difference exists and both are treated the same. B) The gross profit on goods that the parent still owns is added to the subsidiary's income in calculating the noncontrolling interest's share of subsidiary's earnings. C) For upstream transfers, the income from the subsidiary will decrease by the beginning inventory profits multiplied by the noncontrolling interest percentage. D) For upstream profits, income from the subsidiary is reduced, and for downstream profits, income from the subsidiary is not affected, in calculating the noncontrolling interest's share of the subsidiary's earnings. E) For downstream transfers, the income from subsidiary will increase by the beginning inventory profits multiplied by the noncontrolling interest percentage. Feedback: Learning Objective: 05-05 Difficulty: Easy Bloom's: Apply AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

d

Q5 Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute Parker's reported gain or loss relating to the land for 2014. $12,000 gain. $5,000 loss. $12,000 loss. $7,000 gain. $7,000 loss.

1 Sub's Sale Price $92,000 - BV of Land $80,000 = $12,000

On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year remaining life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez's financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows: Jarel Suarez Revenues..... $ (300,000) $(200,000) Cost of goods sold..... 140,000 80,000 Expenses..... 20,000 10,000 Net income..... $ (140,000) $(110,000) Retained earnings, 1/1..... $ (300,000) $(150,000) Net income..... (140,000) (110,000) Dividends declared..... -0- -0- Retained earnings, 12/31..... $ (440,000) $(260,000) Cash and receivables..... $ 210,000 $ 90,000 Inventory..... 150,000 110,000 Investment in Suarez..... 260,000 -0- Equipment (net)..... 440,000 300,000 Total assets..... $ 1,060,000 $ 500,000 Liabilities..... $ (420,000) $(140,000) Common stock..... (200,000) (100,000) Retained earnings, 12/31..... (440,000) (260,000) Total liabilities and equities..... $(1,060,000) $(500,000) During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. LO 5-3 15. What is the consolidated total for inventory at December 31? a. $240,000. b. $248,000. c. $250,000. d. $260,000.

15. B Add the two book values less the ending unrealized gross profit of $12,000. Combined pre-consolidation inventory balances $260,000 Intra-entity gross profit ($100,000 - $80,000) $20,000 Inventory remaining at year's end 60% Unrealized intra-entity gross profit, 12/31 12,000 Consolidated total for inventory $248,000

Q1 Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends: 2012.....2013.....2014 Net income $100,000.....$120,000.....$130,000 Dividends 40,000.....50,000.....60,000 Compute Wilson's share of income from Simon for consolidation for 2012. $72,000. $90,000. $73,575. $73,800. $72,500.

2 Parent's Part of Net Income 2012 ($100,000 × .90) = $90,000

LO 5-3 2. James Corporation owns 80 percent of Carl Corporation's common stock. During October, Carl sold merchandise to James for $250,000. At December 31, 40 percent of this merchandise remains in James's inventory. Gross profit percentages were 20 percent for James and 30 percent for Carl. The amount of unrealized intra-entity profit in ending inventory at December 31 that should be eliminated in the consolidation process is a. $24,000. b. $30,000. c. $20,000. d. $75,000.

2. B Merchandise remaining in James's inventory $250,000 × 40% = $100,000. Unrealized gross profit (based on subsidiary's gross profit rate as the seller) $100,000 × 30% = $30,000. James's ownership percentage of Carl has no impact on this computation.

The Sales and Purchases Accounts To account for related companies as a single economic entity requires eliminating all intra-entity sales/purchases balances. For example, if Arlington Company makes an $80,000 inventory sale to Zirkin Company, an affiliated party within a business combination, both parties record the transfer in their internal records as a normal sale/purchase. The following consolidation worksheet entry is then necessary to remove the resulting balances from the externally reported figures. Cost of Goods Sold is reduced here under the assumption that the Purchases account usually is closed out prior to the consolidation process. In the preparation of consolidated financial statements, the preceding elimination must be made for all intra-entity inventory transfers. What is the entry?

Consolidation Entry TI Sales.....80,000 .....Cost of Goods Sold (purchases component)....80,000 To eliminate effects of intra-entity transfer of inventory. (Labeled "TI" in reference to the transferred inventory.)

On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year remaining life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez's financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows: Jarel Suarez Revenues..... $ (300,000)$(200,000) Cost of goods sold..... 140,000 80,000 Expenses..... 20,000 10,000 = Net income..... $ (140,000) $(110,000) Retained earnings, 1/1..... $ (300,000)$(150,000) Net income..... (140,000) (110,000) Dividends declared..... -0- -0- = Retained earnings, 12/31..... $ (440,000)$(260,000) Cash and receivables..... $ 210,000 $ 90,000 Investment in Suarez..... 260,000 -0- Equipment (net)..... 440,000 300,000 = Total assets..... $ 1,060,000 $ 500,000 Liabilities..... $ (420,000)$(140,000) Common stock..... (200,000) (100,000) Retained earnings, 12/31..... (440,000) (260,000) = Total liabilities and equities..... $(1,060,000)$(500,000) During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. LO 5-5 13. What is the consolidated total of noncontrolling interest appearing on the balance sheet? a. $85,500. b. $83,100. c. $87,000. d. $70,500.

13. A 20% of the beginning book value $50,000 Excess fair value allocation (20%× $75,000) 15,000 20% share of Suarez net income adjusted for amortization (20% × [110,000 - 7,500]) 20,500 Ending noncontrolling interest balance $85,500 BV=Revenue-expenses 25,000+50,000=75,000

Which of the following statements is true regarding an intra-entity sale of land? A loss is always recognized but a gain is eliminated in a consolidated income statement. A loss and a gain are always eliminated in a consolidated income statement. A loss and a gain are always recognized in a consolidated income statement. A gain is always recognized but a loss is eliminated in a consolidated income statement. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive income.

2

LO 5-2, 5-3 5. Top Company holds 90 percent of Bottom Company's common stock. In the current year, Top reports sales of $800,000 and cost of goods sold of $600,000. For this same period, Bottom has sales of $300,000 and cost of goods sold of $180,000. During the current year, Top sold merchandise to Bottom for $100,000. The subsidiary still possesses 40 percent of this inventory at the current year-end. Top had established the transfer price based on its normal gross profit rate. What are the consolidated sales and cost of goods sold? a. $1,000,000 and $690,000. b. $1,000,000 and $705,000. c. $1,000,000 and $740,000. d. $970,000 and $696,000.

5. A Intra-entity sales and purchases of $100,000 must be eliminated. Additionally, an unrealized gross profit of $10,000 must be removed from ending inventory based on a gross profit rate of 25 percent ($200,000 gross profit ÷ $800,000 sales) which is multiplied by the $40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for consolidation purposes is $690,000 ($600,000 + $180,000 - $100,000 + $10,000).

Q2 Maust Inc. owns 80% of Light Co.'s common stock. On January 2 of the current year, Maust sold Light some equipment for $200,000. The equipment had a carrying amount of $180,000. Light is depreciating the acquired equipment over a twenty-year remaining useful life by the straight-line method. The net adjustments to calculate consolidated net income for the current year and the following year would be an increase (decrease) of Current Year.....Following Year A. $(19,000).....$1,000 B. $1,000.....$0 C. $(20,000).....$0 D. $(10,000).....$10,000 E. $(56,000).....$4,000 A) A B) B C) C D) D E) E Feedback: Learning Objective: 05-07 Difficulty: Hard Bloom's: Apply AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

a Individual records after transfer: First year: Equipment — $200,000 Gain — $20,000 Depreciation expense — $10,000 ($200,000 ÷ 20 years) Income effect (net) — $10,000 ($20,000 gain - $10,000 depreciation expense) 2nd Year Depreciation expense — $10,000 Consolidated figures — based on historical cost: First Year Equipment at Jan. 2 — $180,000 Depreciation expense — $9,000 ($180,000 ÷ 20 years) 2nd Year Depreciation expense — $9,000 Adjustment for consolidation purposes: 1st Year — $10,000 income is reduced to a $9,000 expense. Thus, income is reduced by $19,000 ($10,000 + $9,000). 2nd Year — $10,000 expense is reduced to a $9,000 expense. Thus, income is increased by $1,000 ($10,000 - $9,000).

Q4 Presented below are several figures reported for Post Inc. and Mitchell Co. as of December 31 of the current year which was the second year of owning Mitchell. Post Inc......Mitchell Co. Inventory $200,000.....$100,000 Sales 450,000.....250,000 COGS 250,000.....190,000 Expenses 90,000.....50,000 Two years ago, Post Inc. acquired 80% of Mitchell Co.'s outstanding common stock on January 1. The entire difference between the amount paid and the fair value of Mitchell's net assets is attributed to a previously unrecorded patent with a fair value of $112,500. The patent is being amortized over 20 years. During the first year, Mitchell sold Post inventory costing $60,000 for $70,000. 30% of this inventory was not sold to external parties until the following year. During the second year, Mitchell sold inventory costing $90,000 to Post for $115,000. Of this inventory, 25% remained unsold on December 31 of the second year. What is the amount of consolidated cost of goods sold for the second year? A) $440,000 B) $331,250 C) $328,250 D) $321,750 E) $443,250

c Cost of goods sold-Post Inc......250,000 Cost of goods sold-Mitchell Co......190,000 Elimination of current year intercompany purchases ($25,00x25%).....(115,000) Deferral of current year unrealized gross profit ($10,000x30%).....(3,000) = Consolidated cost of goods sold for current year.....$328,250 250,000+190,000-115,000+6,250-3000=328,250

Q1 Red Inc. owns 80% of White Company's outstanding common stock. Red reports cost of goods sold in the current year of $425,000 while White Co. reports $260,000. During the current year, Red Inc. sells inventory costing $125,000 to White Co. for $187,500. 60% of these goods are not resold by White Company until the following year. What is consolidated cost of goods sold? A) $685,000 B) $497,500 C) $460,000 D) $535,000 E) $910,000 Feedback: Learning Objective: 05-04 Difficulty: Medium Bloom's: Apply AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

d Intercompany gross profit ($187,500-$125,000).....$62,500 Inventory remaining at year-end.....60% = Unrealized untercompany gross profit at December 31.....$37,500 Cost of goods sold-Red, Inc......$425,000 Cost of goods sold-Green Co......260,00 Remove intercompany transfer......(187,500) Defer unrealized gross profit.....37,500 = Consolidated cost of goods sold.....535,000

Q5 Presented below are several figures reported for Post Inc. and Mitchell Co. as of December 31 of the current year which was the second year of owning Mitchell. Post Inc......Mitchell Co. Inventory $200,000.....$100,000 Sales 450,000.....250,000 COGS 250,000.....190,000 Expenses 90,000.....50,000 Two years ago, Post Inc. acquired 80% of Mitchell Co.'s outstanding common stock on January 1. The entire difference between the amount paid and the fair value of Mitchell's net assets is attributed to a previously unrecorded patent with a fair value of $112,500. The patent is being amortized over 20 years. During the first year, Mitchell sold Post inventory costing $60,000 for $70,000. 30% of this inventory was not sold to external parties until the following year. During the second year, Mitchell sold inventory costing $90,000 to Post for $115,000. Of this inventory, 25% remained unsold on December 31 of the second year. What is the consolidated inventory on December 31 of the second year? A) $301,750 B) $246,750 C) $309,750 D) $293,750 E) $273,250

d Inventory-Post inc......$200,000 Inventory-Mitchell Co......100,000 Current year unrealized gross profit.....(6,250) = Consolidated inventory.....$293,750

On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year remaining life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez's financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows: Jarel Suarez Revenues..... $ (300,000) $(200,000) Cost of goods sold..... 140,000 80,000 Expenses..... 20,000 10,000 Net income..... $ (140,000) $(110,000) Retained earnings, 1/1..... $ (300,000) $(150,000) Net income..... (140,000) (110,000) Dividends declared..... -0- -0- Retained earnings, 12/31..... $ (440,000) $(260,000) Cash and receivables..... $ 210,000 $ 90,000 Inventory..... 150,000 110,000 Investment in Suarez..... 260,000 -0- Equipment (net)..... 440,000 300,000 Total assets..... $ 1,060,000 $ 500,000 Liabilities..... $ (420,000) $(140,000) Common stock..... (200,000) (100,000) Retained earnings, 12/31..... (440,000) (260,000) Total liabilities and equities..... $(1,060,000) $(500,000) During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. 14. What is the consolidated total for equipment (net) at December 31? a. $740,000. b. $756,000. c. $760,000. d. $765,000.

14. C Add the two book values plus the $25,000 original allocation less one year of excess amortization expense ($5,000).

Q8 Which of the following statements is true concerning an intra-entity transfer of a depreciable asset? 1. Non-controlling interest in subsidiary's net income is never affected by a gain on the transfer. 2. Non-controlling interest in subsidiary's net income is always affected by a gain on the transfer. 3. Non-controlling interest in subsidiary's net income is affected by a downstream gain only. 4. Non-controlling interest in subsidiary's net income is affected only when the transfer is upstream. 5. Non-controlling interest in subsidiary's net income is increased by an upstream gain in the year of transfer.

4

LO 5-7 9. Thomson Corporation owns 70 percent of the outstanding stock of Stayer, Incorporated. On January 1, 2013, Thomson acquired a building with a 10-year life for $460,000. Thomson depreciated the building on the straight-line basis assuming no salvage value. On January 1, 2015, Thomson sold this building to Stayer for $430,400. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2015, how does this transfer affect the computation of consolidated net income? a. Net income is reduced by $62,400. b. Net income is reduced by $59,440. c. Net income is reduced by $70,200. d. Net income is reduced by $54,600.

9. D UNREALIZED GAIN Transfer price $430,400 Book value (original cost less two years depreciation) 368,000 Unrealized gain $ 62,400 EXCESS DEPRECIATION Annual depreciation based on cost ($460,000 ÷ 10 years) $46,000 Annual depreciation based on transfer price ($430,400 ÷ 8 years) 53,800 Excess depreciation $ 7,800 ADJUSTMENTS TO CONSOLIDATED NET INCOME Defer unrealized gain $(62,400) Remove excess depreciation 7,800 Net reduction in consolidated net income $(54,600)

LO 5-2, 5-3 4. Parkette, Inc., acquired a 60 percent interest in Skybox Company several years ago. During 2014, Skybox sold inventory costing $160,000 to Parkette for $200,000. A total of 18 percent of this inventory was not sold to outsiders until 2015. During 2015, Skybox sold inventory costing $297,500 to Parkette for $350,000. A total of 30 percent of this inventory was not sold to outsiders until 2016. In 2015, Parkette reported cost of goods sold of $607,500 while Skybox reported $450,000. What is the consolidated cost of goods sold in 2015? a. $698,950. b. $720,000. c. $1,066,050. d. $716,050.

4. D UNREALIZED GROSS PROFIT, 12/31/14 Intra-entity gross profit ($200,000 - $160,000) $40,000 Inventory remaining at year's end 18% Unrealized intra-entity gross profit, 12/31/14 $ 7,200 UNREALIZED GROSS PROFIT, 12/31/15 Intra-entity gross profit ($350,000 - $297,500) $52,500 Inventory remaining at year's end 30% Unrealized intra-entity gross profit, 12/31/15 $15,750 CONSOLIDATED COST OF GOODS SOLD Parent balance $607,500 Subsidiary balance 450,000 Remove intra-entity transfer (350,000) Recognize 2014 deferred gross profit (7,200) Defer 2015 unrealized gross profit 15,750 Cost of goods sold $716,050

On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year remaining life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez's financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows: Jarel Suarez Revenues..... $ (300,000) $(200,000) Cost of goods sold..... 140,000 80,000 Expenses..... 20,000 10,000 Net income..... $ (140,000) $(110,000) Retained earnings, 1/1..... $ (300,000) $(150,000) Net income..... (140,000) (110,000) Dividends declared..... -0- -0- Retained earnings, 12/31..... $ (440,000) $(260,000) Cash and receivables..... $ 210,000 $ 90,000 Inventory..... 150,000 110,000 Investment in Suarez..... 260,000 -0- Equipment (net)..... 440,000 300,000 Total assets..... $ 1,060,000 $ 500,000 Liabilities..... $ (420,000) $(140,000) Common stock..... (200,000) (100,000) Retained earnings, 12/31..... (440,000) (260,000) Total liabilities and equities..... $(1,060,000) $(500,000) During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. 12. What is the total of consolidated expenses? 1. $30,000. 2. $36,000. 3. $37,500. 4. $39,000.

12. C Consideration transferred $260,000 Noncontrolling interest fair value 65,000 Suarez total fair value $325,000 Book value of net assets (250,000) Excess fair over book value $ 75,000 Remaining Annual Excess Excess fair value to undervalued assets: Life Amortizations Equipment $25,000 5 years $5,000 Secret Formulas 50,000 20 years 2,500 Total -0- $7,500 Consolidated expenses = $37,500 (add the two book values and include current year amortization expense)

On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year remaining life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez's financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows: Jarel Suarez Revenues..... $ (300,000) $(200,000) Cost of goods sold..... 140,000 80,000 Expenses..... 20,000 10,000 Net income..... $ (140,000) $(110,000) Retained earnings, 1/1..... $ (300,000) $(150,000) Net income..... (140,000) (110,000) Dividends declared..... -0- -0- Retained earnings, 12/31..... $ (440,000) $(260,000) Cash and receivables..... $ 210,000 $ 90,000 Inventory..... 150,000 110,000 Investment in Suarez..... 260,000 -0- Equipment (net)..... 440,000 300,000 Total assets..... $ 1,060,000 $ 500,000 Liabilities..... $ (420,000) $(140,000) Common stock..... (200,000) (100,000) Retained earnings, 12/31..... (440,000) (260,000) Total liabilities and equities..... $(1,060,000) $(500,000) During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. LO 5-2, 5-3 11. What is the total of consolidated cost of goods sold? comp:marginal text LO 5-2, 5-3 a. $140,000. b. $152,000. c. $132,000. d. $145,000.

11. C Intra-entity gross profit ($100,000 - $80,000) $20,000 Inventory remaining at year's end 60% Unrealized intra-entity gross profit $12,000 CONSOLIDATED COST OF GOODS SOLD Parent balance $140,000 Subsidiary balance 80,000 Remove intra-entity transfer (100,000) Defer unrealized gross profit (above) 12,000 Cost of goods sold $132,000

Unrealized Gross Profit—Year Following Transfer (Year 2) Referring again to Arlington's sale of inventory to Zirkin, the $7,500 unrealized gross profit is still in Zirkin's Inventory account at the start of the subsequent year. Once again, the overstatement is removed within the consolidation process but this time from the beginning inventory balance (which appears in the financial statements only as a positive component of cost of goods sold). This elimination is termed Entry *G. The asterisk indicates that a previous year transfer created the intra-entity gross profits. What entry will be made?

Consolidation Entry *G—Year Following Transfer (Year 2) Retained Earnings (beginning balance of seller)..... 7,500 Cost of Goods Sold (beginning inventory component)..... 7,500 To remove unrealized gross profit from beginning figures so that it is recognized currently in the period in which the earning process is completed.

Q10 Marco Towers Inc. owns 80% of Flatbush Condos Co. Five years ago on January 1, Marco Towers acquired equipment with a twenty-year life for $1,800,000. No salvage value was anticipated and the equipment was to be depreciated on the straight-line basis. Five years later on January 1, Marco Towers sold the equipment to Flatbush Condos for $1,500,000. At that time, the equipment had a remaining useful life of fifteen years, but still had no expected salvage value. In preparing financial statements for the current year when the sale was made to Flatbush, how does this transfer affect the calculation of consolidated net income? A) Consolidated net income must be decreased by $140,000. B) Consolidated net income must be decreased by $10,000. C) Consolidated net income must be increased by $140,000. D) Consolidated net income must be increased by $10,000. E) Consolidated net income must be decreased by $150,000. Feedback: Learning Objective: 05-07 Difficulty: Hard Bloom's: Analyze AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

a The equipment was not sold to an unrelated third party. Thus, from the point of view of the consolidated entity, the gain recognized on the parent's books must be eliminated in consolidation, and depreciation expense must be based on the original historical cost of the equipment. Since the parent sold the equipment to the subsidiary at a gain, the subsidiary will record excess depreciation expense that must be eliminated in consolidation. The elimination of the gain will decrease consolidated net income, while the excess depreciation has the effect of increasing consolidated net income. -150,000+100,000-90,000=-140,000

Q6 Presented below are several figures reported for Post Inc. and Mitchell Co. as of December 31 of the current year which was the second year of owning Mitchell. Post Inc......Mitchell Co. Inventory $200,000.....$100,000 Sales 450,000.....250,000 COGS 250,000.....190,000 Expenses 90,000.....50,000 Two years ago, Post Inc. acquired 80% of Mitchell Co.'s outstanding common stock on January 1. The entire difference between the amount paid and the fair value of Mitchell's net assets is attributed to a previously unrecorded patent with a fair value of $112,500. The patent is being amortized over 20 years. During the first year, Mitchell sold Post inventory costing $60,000 for $70,000. 30% of this inventory was not sold to external parties until the following year. During the second year, Mitchell sold inventory costing $90,000 to Post for $115,000. Of this inventory, 25% remained unsold on December 31 of the second year. What is the amount of consolidated expenses for the second year? A) $140,000 B) $134,375 C) $132,964 D) $90,000 E) $145,625

e Expenses-Post inc......$90,000 Expenses-Mitchell Co......50,000 Amortization of patent ($112,500/20 years).....5,625 = Consolidated Expenses.....$145,625

Q7 Presented below are several figures reported for Post Inc. and Mitchell Co. as of December 31 of the current year which was the second year of owning Mitchell. Post Inc......Mitchell Co. Inventory $200,000.....$100,000 Sales 450,000.....250,000 COGS 250,000.....190,000 Expenses 90,000.....50,000 Two years ago, Post Inc. acquired 80% of Mitchell Co.'s outstanding common stock on January 1. The entire difference between the amount paid and the fair value of Mitchell's net assets is attributed to a previously unrecorded patent with a fair value of $112,500. The patent is being amortized over 20 years. During the first year, Mitchell sold Post inventory costing $60,000 for $70,000. 30% of this inventory was not sold to external parties until the following year. During the second year, Mitchell sold inventory costing $90,000 to Post for $115,000. Of this inventory, 25% remained unsold on December 31 of the second year. A) $2,000 B) $1,125 C) $225 D) $2,650 E) $750

c 10,000-5,625+3,000-6,250=1,125 1,125*20%= $225

Q9 Three years ago, Ennis Inc. purchased land from its 70%-owned subsidiary, Jones Inc., for $250,000. The subsidiary originally paid $160,000 for the land several years earlier. In the current year, Ennis Inc. needed to raise some cash and sold the land to an unrelated third party for $230,000. What amount of gain or loss on the sale of the land should be reported in the consolidated income statement in the original year of the intercompany sale and three years later when the land was sold to an unrelated third party? Sale.....Sale A. $90,000 gain.....$70,000 gain B. $0.....$20,000 loss C. $90,000 gain.....$20,000 loss D. $0.....$70,000 gain E. $ 0.....$90,000 gain A) A B) B C) C D) D E) E Feedback: Learning Objective: 05-06 Difficulty: Medium Bloom's: Analyze AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

d In the first transaction, no sale to an unrelated third party occurred. Thus, no gain is recognized in that year's consolidated income statement. In the second transaction, a sale to an unrelated third party occurred. For the Consolidated entity, the historical cost of the land is $160,000. Since Jones Inc. sold the land for $230,000, a $70,000 gain ($230,000 - $160,000) is reported on the consolidated income statement for the current year.

Q3 Presented below are several figures reported for Post Inc. and Mitchell Co. as of December 31 of the current year which was the second year of owning Mitchell. Post Inc......Mitchell Co. Inventory $200,000.....$100,000 Sales 450,000.....250,000 COGS 250,000.....190,000 Expenses 90,000.....50,000 Two years ago, Post Inc. acquired 80% of Mitchell Co.'s outstanding common stock on January 1. The entire difference between the amount paid and the fair value of Mitchell's net assets is attributed to a previously unrecorded patent with a fair value of $112,500. The patent is being amortized over 20 years. During the first year, Mitchell sold Post inventory costing $60,000 for $70,000. 30% of this inventory was not sold to external parties until the following year. During the second year, Mitchell sold inventory costing $90,000 to Post for $115,000. Of this inventory, 25% remained unsold on December 31 of the second year. What is the amount of consolidated sales for the second year? A) $700,000 B) $815,000 C) $608,000 D) $585,000 E) $535,000 Feedback: Learning Objective: 05-02 Difficulty: Easy Bloom's: Apply AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

d Post Inc's reported sales.....$450,000 Mitchell Co's reported sales.....250,000 Elimination of intercompany sales.....(115,000) = Consolidation sales......$585,000

On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year remaining life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez's financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows: Jarel Suarez Revenues..... $ (300,000) $(200,000) Cost of goods sold..... 140,000 80,000 Expenses..... 20,000 10,000 Net income..... $ (140,000) $(110,000) Retained earnings, 1/1..... $ (300,000) $(150,000) Net income..... (140,000) (110,000) Dividends declared..... -0- -0- Retained earnings, 12/31..... $ (440,000) $(260,000) Cash and receivables..... $ 210,000 $ 90,000 Inventory..... 150,000 110,000 Investment in Suarez..... 260,000 -0- Equipment (net)..... 440,000 300,000 Total assets..... $ 1,060,000 $ 500,000 Liabilities..... $ (420,000) $(140,000) Common stock..... (200,000) (100,000) Retained earnings, 12/31..... (440,000) (260,000) Total liabilities and equities..... $(1,060,000) $(500,000) During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. LO 5-2 10. What is the total of consolidated revenues? a. $500,000. b. $460,000. c. $420,000. d. $400,000.

10. D Add the two book values and remove $100,000 intra-entity transfers.

Only a Portion of Inventory Remains To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties but retains the other $20,000 (for resale in the following year). From the viewpoint of the consolidated company, it has now earned the profit on the $60,000 portion of the intra-entity sale and need not make an adjustment for consolidation purposes. Conversely, any gross profit recorded in connection with the $20,000 in merchandise that remains is still a component within Zirkin's Inventory account. Because the gross profit rate was 37½ percent ($30,000 gross profit/$80,000 transfer price), this retained inventory is stated at a value $7,500 more than its original cost ($20,000 × 37½%). The required reduction (Entry G) is not the entire $30,000 shown previously but only the $7,500 unrealized gross profit that remains in ending inventory. What entry needs to be made?

Consolidation Entry G—Year of Transfer (Year 1) 25% of Inventory Remains (replaces previous entry) Cost of Goods Sold (ending inventory component)..... 7,500 Inventory..... 7,500 To remove unrealized portion of intra-entity gross profit in year of transfer.

Q8 On January 1 of the current year, Rogers Inc. sold equipment costing $1,400,000 with accumulated depreciation of $840,000 to Cooper Corp., a wholly owned subsidiary, for $750,000. Rogers had owned the equipment for six years and was depreciating the equipment using the straight-line method over ten years with no salvage value. Cooper will continue to use the straight-line method over the remaining four years of the equipment's economic life. In consolidated statements at December 31 of the current year, the cost and accumulated depreciation, respectively, should be. A) $1,400,000 and $840,000 B) $1,400,000 and $1,027,500 C) $750,000 and $187,500 D) $1,400,000 and $980,000 E) $750,000 and $840,000 Feedback: Learning Objective: 05-07 Difficulty: Easy Bloom's: Analyze AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

d Historical cost of the equipment $1,400,000 Accumulated depreciation at 12/31 of current year ($840,000 + $140,000) = $980,000