Chapter 5 - Consolidated Financial Statements - Intra-Entity Asset Transactions

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G credits Inventory because Multiple choice question. The goods have been sold to outsiders and no longer are in the consolidated entity's possession. From a consolidated perspective, the account is overstated by the amount of the intra-entity gross profit remaining in ending inventory. From a consolidated perspective, the account is understated by the amount of the intra-entity gross profit remaining in ending inventory.

From a consolidated perspective, the account is overstated by the amount of the intra-entity gross profit remaining in ending inventory.

Which of the following Consolidation Entries has the net effect of decreasing the current period's consolidated net income? Multiple choice question. TI G *G

G

When land is sold at a gain across members of a consolidated group, in years subsequent to the land sale, where does the gain reside? Multiple choice question. The gain is eliminated in the first year consolidation and thus removed from the individual member's accounts. In the seller gain on sale account and the buyer's land account. In the buyer's retained earnings account and the seller's land account. In the seller's retained earnings account and the buyer's land account.

In the seller's retained earnings account and the buyer's land account.

A parent uses the initial value method, sells inventory to the subsidiary, and intra-entity gross profits exist in beginning inventory. What is the effect of Consolidation Entry *G on the consolidated financial statements? Multiple choice question. There is no effect of Consolidation Entry *G on the consolidated financial statements. Net income is reassigned from the current year to the previous year. Net income is reassigned from the previous year to the current year. Ending inventory is decreased.

Net income is reassigned from the previous year to the current year.

When a parent sells land to its subsidiary at a profit, what is the effect on the noncontrolling interest. Multiple choice question. The noncontrolling interest's share of consolidated net income decreases in the year of the transfer. The noncontrolling interest's share of consolidated net income increases in the year of the transfer. No effect

No effect

Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4, how are the final consolidated totals affected by the investment accounting method choice? Multiple choice question. The choice of the equity method results in larger consolidated net income and noncontrolling interest. The choice of the initial value method results in larger consolidated net income and noncontrolling interest. No effect.

No effect.

Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income? Multiple choice question. TI G *G

*G

Compared to the equity method, when the parent uses the initial value method, which consolidation entries for intra-entity transfers may differ or additionally be included? Multiple select question. - The Consolidation Entry (*G) to recognize the intra-entity profit in beginning inventory. - The Conversion Entry (*C). - The Consolidation Entry (G) to defer the intra-entity profit in ending inventory.

1 & 2

In the consolidated income statement, the net income attributable to the noncontrolling interest is affected by Multiple select question. - excess acquisition-date fair value amortizations. - intra-entity gross profits from upstream inventory transfers. - intra-entity gross profits from downstream inventory transfers. - the parent company's separate net income.

1 & 2

How do gross profits resulting from upstream inventory transfers affect the computation of consolidated net income attributable to the noncontrolling interest? Multiple select question. - Ending inventory gross profits decrease the noncontrolling interest's share of consolidated net income. - Ending inventory gross profits increase the noncontrolling interest's share of consolidated net income. - Beginning inventory gross profits decrease the noncontrolling interest's share of consolidated net income. - Beginning inventory gross profits increase the noncontrolling interest's share of consolidated net income.

1 & 4

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with an adjustment to the Investment in Subsidiary account because Blank______. Multiple select question. - the debit to the Investment in Subsidiary account is needed to bring that account to zero in consolidation. - the equity method adjusts for any excess accumulated depreciation. - the equity method ignores intra-entity gains on transfers of depreciable assets. - the equity method has already reduced the parent's retained earnings for the intra-equity gain.

1 & 4

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry ED Multiple select question - continues to reduce accumulated depreciation for the current year depreciation expense overstatement. - continues to increase accumulated depreciation for the current year depreciation expense overstatement. - continues to increase depreciation expense for the current year overstatement caused by the inflated transferred asset value. - continues to reduce depreciation expense for the current year overstatement caused by the inflated transferred asset value.

1 & 4

Inventory transfers among affiliates within a consolidated entity Multiple select question. - produce accounting effects that are eliminated in the preparation of consolidated financial statements. - are always recorded at original cost to the consolidated entity. - are included in the computation of consolidated net income. - create neither profits nor losses to the consolidated entity.

1 & 4

In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following individual affiliate accounts continue to be misstated from a consolidated perspective? Multiple select question. - Retained earnings of the selling affiliate. - Depreciation expense. - Accumulated depreciation. - Gain on sale from the intra-entity transfer.

1, 2, & 3

In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry TA Multiple select question. - restores the historical cost balance for the transferred asset. - restores the amount of accumulated depreciation removed when the sale was recorded on the selling entity's books. - ensures the exclusion of the intra-entity gain in the consolidated income statement. - increases accumulated depreciation for the amount of the intra-entity gain.

1, 2, & 3

In the year of an intra-entity depreciable asset transfer at a price in excess of the asset's carrying amount, consolidation entries are needed to Multiple select question. - remove the effect of the intra-entity gain on depreciation expense - return the asset to its historical cost to the consolidated entity. - remove the gain on sale from the intra-entity asset transfer. - remove the asset from the consolidated balance sheet.

1, 2, & 3

The accounting effects of inventory sales across companies within a consolidated entity are removed when preparing consolidated financial statements because Multiple select question. - from a consolidated perspective, neither a sale nor a purchase has occurred. - neither the seller nor the buyer records the intra-entity inventory transfer on their separate accounting systems. - intra-entity inventory transfers create no net change in the financial position of the consolidated reporting entity. - consolidated statements reflect only transactions with outside parties.

1, 3, & 4

When intra-entity transfers of depreciable assets occur, what are the financial reporting objectives in preparing consolidated financial statements? Multiple select question. - Recognize appropriate income effects from the sale and use of intra-entity transferred assets. - Value depreciable assets at their intra-entity transfer prices in the consolidated balance sheet. - Re-establish historical cost balances for the transferred assets. - Defer intra-entity gains from intra-entity depreciable asset sales

1, 3, & 4

When the parent applies the equity method and routinely transfers inventory downstream, which of the following consolidation entries are sometimes needed to bring the Investment in Subsidiary account to a zero balance? Multiple select question. - (D) for the parent's share of subsidiary dividends declared. - (*G) for intra-entity gross profits in ending inventory. - (*G) for intra-entity gross profits in beginning inventory. - (I) for the equity in subsidiary earnings recognized by the parent.

1, 3, & 4

In the presence of a 10% noncontrolling interest, how much intra-entity gross profit remaining in ending inventory should be eliminated in consolidation? Multiple choice question. 90% 0% 10% 100%

100%

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in ending inventories from downstream sales to an 80% owned affiliate? Multiple choice question. 100% of the intra-entity gross profits in ending inventory are deferred. 20% of the intra-entity gross profits in ending inventory are deferred. 80% of the intra-entity gross profits in ending inventory are deferred. None of the intra-entity gross profits in ending inventory are deferred.

100% of the intra-entity gross profits in ending inventory are deferred.

B Company sells land to its parent A Company and records a gain on the sale. In the year of the sale, what accounts must be adjusted in preparing a consolidation worksheet? Multiple select question. - The land must be written up by the intra-entity gain on sale. - No adjustments are required in the year of the intra-entity transfer. - The gain on sale must be removed. - The land must be written down to its original cost to the consolidated entity.

3 & 4

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G debits COGS because: Multiple select question. - COGS is overstated by the amount of the gross profit on intra-entity inventory transfers remaining at year-end - it increases the gross profit recognized on the sales to outsiders. - the debit to COGS reduces consolidated net income by the amount of the intra-entity gross profit. - the ending inventory component of COGS is overstated by the intra-entity gross profit remaining at year-end.

3 & 4

In preparing consolidated financial statements, the gross profit or loss recorded by individual affiliates for intra-entity asset transfers is Multiple select question. - included in inventory in the consolidated balance sheet. - included as part of net income. - excluded from net income. - excluded from inventory in the consolidated balance sheet.

3 & 4

In the year of an intra-entity land transfer resulting in the recording of a gain, a consolidation entry is needed to Multiple select question. - ensure the land is reported at an amount that includes the intra-entity gain. - include the gain in the consolidated income statement. - ensure the gain is not reported in the consolidated income statement. - write-down the value of the land by the amount of the intra-entity gain.

3 & 4

What is the reason Consolidation Entry *G credits COGS for the intra-entity gross profit present in beginning inventory? Multiple select question. - To decrease net income of the consolidated entity in the amount of the intra-entity gross profit. - To increase COGS for the intra-entity gross profit in beginning inventory. - Because the credit to COGS increases the net income of the consolidated entity in the year the inventory is sold to outsiders. - To correct for the overstatement of the beginning inventory component of COGS.

3 & 4

Why do upstream intra-entity beginning inventory gross profits affect the Consolidation Entry *C when the parent employs the initial value method? Multiple choice question. Intra-entity upstream beginning inventory gross profits have no effect on the Consolidation Entry *C worksheet adjustment. Because the change in subsidiary's retained earnings (and book value) includes the unrealized gross profit as of the beginning of the year. Because intra-entity upstream inventory gross profits will always increase the amount of the Consolidation Entry *C worksheet adjustment.

Because the change in subsidiary's retained earnings (and book value) includes the unrealized gross profit as of the beginning of the year.

A parent uses the initial value method, sells inventory to the subsidiary, and intra-entity gross profits exist in beginning inventory. What is the effect of the intra-entity gross profits in beginning inventory on Consolidation Entry *G? Multiple choice question. COGS is increased and the parent's RE are decreased. Both COGS and the parent's RE are decreased. COGS is decreased and the parent's RE are increased. Both COGS and the parent's RE are increased.

Both COGS and the parent's RE are decreased.

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in ending inventory from upstream sales to an 80% owned affiliate? Multiple choice question. 20% of the intra-entity gross profits in ending inventory are deferred. None of the intra-entity gross profits in ending inventory are deferred. 80% of the intra-entity gross profits in ending inventory are deferred. 100% of the intra-entity gross profits in ending inventory are deferred.

80% of the intra-entity gross profits in ending inventory are deferred.

How does the ASC describe the effect of intra-entity gross profit remaining in ending inventory on the noncontrolling interest? Multiple choice question. Any intra-entity income or loss may be allocated between the parent and noncontrolling interest. Any intra-entity income or loss must be allocated between the parent and noncontrolling interest. Any intra-entity income or loss may not be allocated between the parent and noncontrolling interest.

Any intra-entity income or loss may be allocated between the parent and noncontrolling interest.

What is the effect of upstream intra-entity beginning inventory gross profits on the consolidation conversion entry (*C) when the parent employs the initial value method? Multiple choice question. Any intra-entity upstream inventory gross profits serves to increase the amount of the Consolidation Entry *C worksheet adjustment. Any intra-entity upstream inventory gross profit serves to decrease the amount of the Consolidation Entry *C worksheet adjustment. The presence of intra-entity upstream inventory gross profits has no effect on the amount of the Consolidation Entry *C worksheet adjustment.

Any intra-entity upstream inventory gross profit serves to decrease the amount of the Consolidation Entry *C worksheet adjustment.

After combining the individually recorded revenues of a parent and subsidiary, what is the effect on consolidated revenues of intra-entity inventory transfers? Multiple choice question. Consolidated revenues are increased by the entire price of the intra-entity transferred inventory. Consolidated revenues are decreased by intra-entity gross profits in beginning and ending inventories. Revenues from intra-entity transfers are not included in consolidated revenues.

Revenues from intra-entity transfers are not included in consolidated revenues.

How does Consolidation Entry *GL differ when an intra-entity gain resulted from downstream land transfers and the parent uses the equity method for its investment in its subsidiary? Multiple choice question. The Investment in Subsidiary account is debited instead of the parent's Retained Earnings account. There is no difference to Consolidation Entry*GL The adjustment to the land account is debited instead of credited.

The Investment in Subsidiary account is debited instead of the parent's Retained Earnings account.

In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following *TA adjustments remains constant over the remaining life of the asset? Multiple choice question. The asset account Retained earnings of the seller Accumulated depreciation.

The asset account

As part of Consolidation Entry S, the debit to the subsidiary's RE is reduced due to intra-entity gross profits in beginning inventory. What effect does this reduction have on the beginning-of-the-year balance of the noncontrolling interest? Multiple choice question. There is no effect on the beginning balance of the noncontrolling interest. The beginning balance of the noncontrolling interest is entered as a larger amount. The beginning balance of the noncontrolling interest is entered as a smaller amount.

The beginning balance of the noncontrolling interest is entered as a smaller amount.

How does the direction of intra-entity transfers (resulting in intra-entity gross profit in inventories) affect the computation of the noncontrolling interest's share of consolidated net income Multiple choice question. Both upstream and downstream inventory transfers affect the computation. Upstream inventory transfers affect the computation. Neither upstream nor downstream inventory transfers affect the computation. Downstream inventory transfers affect the computation.

Upstream inventory transfers affect the computation.

How does the direction of intra-entity land transfers (resulting in intra-entity gain on sale) affect the computation of the noncontrolling interest's share of consolidated net income? Multiple choice question. Both upstream nor downstream land transfers affect the computation. Upstream land transfers affect the computation. Neither upstream nor downstream inventory land affect the computation. Downstream land transfers affect the computation.

Upstream land transfers affect the computation.

When the parent applies the equity method and routinely transfers inventory downstream to its 80% owned subsidiary, any intra-entity gross profits remaining in the consolidated entity's ending inventory, Multiple choice question. are allocated 80% to the parent company's share of consolidated net income. are allocated 100% to the parent company's share of consolidated net income. are not allocated to the parent company's share of consolidated net income. are allocated 20% to the parent company's share of consolidated net income.

are allocated 100% to the parent company's share of consolidated net income.

By decreasing COGS, Consolidation Entry *G (blank) consolidated net income.

increases

Because the individual companies comprising a consolidated entity frequently maintain separate accounting records, the effects of intra-entity inventory transfers Multiple choice question. are appropriately included in the consolidated financial statements. do not trigger the independent accounting systems of either affiliate within the consolidated entity. require adjustments only when inventory is transferred to outside parties. must be identified and removed as part of the process of preparing consolidated financial statements.

must be identified and removed as part of the process of preparing consolidated financial statements.

Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4 shows (blank) difference in consolidated totals resulting from the investment accounting (equity vs. initial value) method choice.

no

Fill in the blank question. When the parent transfers inventory downstream, none of the intra-entity gross profits from the transfer remaining in the subsidiary's ending inventory is allocated to the (blank) interest in computing consolidated net income.

noncontrolling

Consolidation Entry G credits COGS in the year following transfer because the beginning inventory component of COGS is Multiple choice question. absent due to the intra-entity gross profit. understated by the intra-entity gross profit. overstated by the intra-entity gross profit.

overstated by the intra-entity gross profit.

Intra-entity gross profits in beginning inventory require adjustment in the current consolidation worksheet because the previous year's consolidation entries are never (blank) to the individual affiliates' books.

posted

Because consolidation worksheet entries are not posted to any affiliate's individual accounting records, intra-entity ending inventory gross profits from the previous year appear in the subsequent year's beginning inventory of the affiliate who now possesses the inventory. To correct for the presence of intra-entity gross profits in beginning inventory, Consolidation Entry *G Multiple choice question. increases COGS. reduces COGS. decreases the inventory account. increases the inventory account.

reduces COGS.

If the parent uses the initial value method for its internal investment accounting, in consolidation adjustments are needed to Blank______. Multiple choice question. reflect the cash basis of accounting in the consolidated financial statements. adjust the investment account for subsidiary dividends. reflect a full accrual basis in the consolidated financial statements.

reflect a full accrual basis in the consolidated financial statements.

The purpose of consolidation entry TI is to Multiple choice question. remove the effects of intra-entity sales and purchases for the consolidated reporting entity. increase the sales account for an intra-entity inventory transfer. increase cost of goods sold for the purchases component of an intra-entity inventory transfer. include intra-entity transfers as normal sales/purchases.

remove the effects of intra-entity sales and purchases for the consolidated reporting entity.

In the year of an intra-entity depreciable asset transfer at a price in excess of the asset's carrying amount, consolidation entries are needed to Multiple choice question. remove the asset from the consolidated balance sheet. increase depreciation expense for the amount of the intra-entity gain. remove the gain on sale from the intra-entity asset transfer. increase the asset value to reflect the intra-entity asset transfer price.

remove the gain on sale from the intra-entity asset transfer.

When intra-entity gross profits exist in a parent company's beginning inventory, the current year consolidated worksheet should contain an entry to Multiple choice question. remove the intra-entity sale and related COGS. eliminate the intra-entity beginning inventory in its entirety. remove the intra-entity gross profit from the seller's beginning retained earnings. increase consolidated COGS for the amount of the intra-entity gross profit.

remove the intra-entity gross profit from the seller's beginning retained earnings.

When an intra-entity sale has occurred, consolidation worksheet entry TI removes both the related purchase (through a credit to COGS) and a debit to the related (blank) account.

revenue

The accounting effects of intra-entity depreciable asset sales are removed in consolidation because no (blank) of the asset occurred with an outside entity.

sale

Consistent with the textbook treatment of intra-entity inventory profits, all income effects of intra-entity depreciable asset profits are assigned to the original (blank) of the asset.

seller

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with Blank______. Multiple choice question. the subsidiary's Retained Earnings account. the Depreciation Expense account. the Investment in Subsidiary account. the Gain on Sale account.

the Investment in Subsidiary account.

When the parent applies the equity method and routinely transfers inventory downstream, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to Multiple choice question. the Inventory account. the Investment in Subsidiary account. the parent's Retained Earnings account. the noncontrolling interest.

the Investment in Subsidiary account.

When the parent applies the equity method and routinely receives upstream inventory transfers from a subsidiary, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to Multiple choice question. the parent's retained earnings. the inventory. the investment in subsidiary. the subsidiary's retained earnings.

the subsidiary's retained earnings.

Consolidation Entry TL removes the gain on sale from an intra-entity land sale because the land remains under the control of the consolidated entity. True false question.TrueFalse

true

True or false: In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry ED debits Accumulated Depreciation and credits Depreciation Expense for the current year's portion of the intra-entity gain on sale. True false question.TrueFalse

true

True or false: Intra-entity inventory profits resulting from upstream transfers affect the consolidated net income allocation to both the controlling and noncontrolling interests. True false question.TrueFalse

true

True or false: The parent's accounting method choice (e.g., equity vs. initial value method) has no effect on the ultimate totals reported in consolidated financial statements. True false question.TrueFalse

true

Similar to gross profits from intra-entity inventory transfers, the income effect of Consolidation Entries is allocated to the noncontrolling interest for Multiple choice question. downstream transfers. both upstream and downstream transfers. neither upstream nor downstream transfers. upstream transfers.

upstream transfers.

When a parent applies the equity method and upstream intra-entity gross profits exist in the beginning inventory, the debit to the subsidiary's Retained Earnings account in Consolidated Entry S Blank______ Consolidation Entry *G. Multiple choice question. will decrease by the debit to the subsidiary's Retained Earnings account in is unaffected by will increase by the debit to the subsidiary's Retained Earnings account in

will decrease by the debit to the subsidiary's Retained Earnings account in

When intra-entity gross profits from upstream sales are present in beginning inventory, which of the following describes the effect on consolidated statements? Multiple select question. - The net income effect of the intra-entity inventory gross profit is transferred from the current period to the prior period. - Consolidation Entry *G credits COGS which increases current period's consolidated net income. - The net income effect of the intra-entity inventory gross profit is transferred from the prior period to the current period. - There is no effect on consolidated net income as a result of intra-entity gross profits in beginning inventory.

2 & 3

Consolidation worksheet entries are not posted to the books of the members of the consolidated group. Therefore, in years subsequent to an upstream intra-entity land sale that records a gain, a consolidation worksheet entry is needed to adjust Multiple select question. - the retained earnings beginning balance for the company that acquired the land in the intra-entity transfer. - the retained earnings beginning balance for the company that originally recorded the gain on sale of the land. - the gain on sale account. - the land account.

2 & 4

When the parent employs the equity method of accounting for its Investment in Subsidiary account, in consolidated financial reports the parent's Retained Earnings account will equal (blank) retained earnings.

consolidated

In years subsequent to an intra-entity depreciable asset transfer from a subsidiary to its parent (at a gain), Consolidation Entry *TA restores the accumulated depreciation of the transferred asset. In each successive year, the amount of the Consolidation Entry *TA credit to Accumulated Depreciation Blank______. Multiple choice question. increases. decreases. remains the same.

decreases.

Intra-entity gross profits in ending inventory are recognized in consolidated net income though a credit to COGS when the inventory is sold to outsiders. As a intra-entity transferred asset is used in the production process, the intra-entity gain is recognized in consolidated net income by consolidation entries that credit (blank) (blank).

depreciation expense

When the parent applies the equity method and routinely transfers inventory downstream, any intra-entity gross profits remaining in the consolidated entity's ending inventory Multiple choice question. does not affect the noncontrolling interest. decreases the noncontrolling interest. increases the noncontrolling interest.

does not affect the noncontrolling interest.