Chapter 5 Smartbook

Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income?

*G

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?

- (G) for intra-entity gross profits in beginning inventory. - (D) for the parent's share of subsidiary dividends declared. - (I) for the equity in subsidiary earnings recognized by the parent.

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?

- Depreciation expense - Accumulated depreciation - Retained earnings of the selling affiliate.

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?

- The Consolidation Entry (*G) to recognize the intra-entity profit in beginning inventory. - The Conversion Entry (*C).

In the year of an intra-entity land transfer resulting in the recording of a gain, a consolidation entry is needed to

- write-down the value of the land by the amount of the intra-entity gain. - ensure the gain is not reported in the consolidated income statement.

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?

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

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?

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

In the presence of upstream intra-entity inventory transfers, from a consolidated view which of the following accounts becomes overstated in the year following the transfer?

The subsidiary's retained earnings.

By decreasing COGS, Consolidation Entry *G _____ consolidated net income.

increases

Consolidation Entry *G credits COGS because the beginning inventory component of COGS is

overstated by the intra-entity gross profit.

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.

reduces COGS.

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

the subsidiary's retained earnings.

Similar to gross profits from intra-entity inventory transfers, the income effect of Consolidation Entries is allocated to the noncontrolling interest for

upstream transfers.

How does the ASC describe the effect of intra-entity gross profit remaining in ending inventory on the noncontrolling interest?

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

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?

Both COGS and the parent's RE are decreased.

What is the effect on consolidated COGS of intra-entity gross profits in beginning and ending inventories?

Consolidated COGS is increased by intra-entity gross profits in ending inventory and decreased by intra-entity gross profits in beginning inventory.

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G credits Inventory because

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?

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?

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

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 upstream sales. Comparing Exhibits 5.8 and 5.6, how are the final consolidated totals affected by the investment accounting method choice?

No effect

When a parent sells land to its subsidiary at a profit, what is the effect on the noncontrolling interest.

No effect

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?

The asset account

n 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?

The asset account

True or false: 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

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

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

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

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,

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

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 _____ _____.

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

does not affect the noncontrolling interest.

Because the individual companies comprising a consolidated entity frequently maintain separate accounting records, the effects of intra-entity inventory transfers

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

If the parent uses the initial value method for its internal investment accounting, in consolidation adjustments are needed to _________.

reflect a full accrual basis in the consolidated financial statements.

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 _____ account.

revenue

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

sale

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 _________.

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

the Investment in Subsidiary account.

In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry TA

- restores the amount of accumulated depreciation removed when the sale was recorded on the selling entity's books. - restores the historical cost balance for the transferred asset. - ensures the exclusion of the intra-entity gain in the consolidated income statement.

In the presence of a 10% noncontrolling interest, how much intra-entity gross profit remaining in ending inventory should be eliminated in consolidation?

100%

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?

No effect.

The purpose of consolidation entry TI is to

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

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

seller

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 _____ difference in consolidated totals resulting from the investment accounting (equity vs. initial value) method choice.

zero

In preparing consolidated financial statements, the gross profit or loss recorded by individual affiliates for intra-entity asset transfers is

- excluded from inventory in the consolidated balance sheet. - excluded from net income.

In the consolidated income statement, the net income attributable to the noncontrolling interest is affected by

- intra-entity gross profits from upstream inventory transfers. - excess acquisition-date fair value amortizations.

In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry ED

- removes the overstatement of expense resulting from depreciating the inflated transfer price of the transferred asset. - reduced accumulated depreciation for the current year's overstatement of depreciation expense.

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry ED

- continues to reduce depreciation expense for the current year overstatement caused by the inflated transferred asset value. - continues to reduce accumulated depreciation for the current year depreciation expense overstatement.

Inventory transfers among affiliates within a consolidated entity

- create neither profits nor losses to the consolidated entity. - produce accounting effects that are eliminated in the preparation of consolidated financial statements.

How do gross profits resulting from upstream inventory transfers affect the computation of consolidated net income attributable to the noncontrolling interest?

- Ending 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.

When intra-entity transfers of depreciable assets occur, what are the financial reporting objectives in preparing consolidated financial statements?

- Re-establish historical cost balances for the transferred assets. - Defer intra-entity gains from intra-entity depreciable asset sales - Recognize appropriate income effects from the sale and use of intra-entity transferred assets.

When an intra-entity sale of a depreciable asset occurs at a price in excess of the asset's carrying amount, which of the following result from a consolidated entity perspective?

- The carrying amount of the asset becomes overstated by the amount of the intra-entity gain. - Depreciation expense becomes overstated. - Retained earnings of the selling affiliate become overstated.

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?

- The land must be written down to its original cost to the consolidated entity. - The gain on sale must be removed.

What is the reason Consolidation Entry *G credits COGS for the intra-entity gross profit present in beginning inventory?

- To correct for the overstatement of the beginning inventory component of COGS. - Because the credit to COGS increases the net income of the consolidated entity in the year the inventory is sold to outsiders.

Compared to intra-entity gross profits in inventory, intra-entity gross profits from land transfers

- can require consolidation entries to RE indefinitely until the land is sold to outsiders. - can require consolidation entries to land indefinitely until the land is sold to outsiders.

The accounting effects of inventory sales across companies within a consolidated entity are removed when preparing consolidated financial statements because

- consolidated statements reflect only transactions with outside parties. - intra-entity inventory transfers create no net change in the financial position of the consolidated reporting entity. - from a consolidated perspective, neither a sale nor a purchase has occurred.

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in beginning inventories from upstream sales to an 80% owned affiliate?

80% of the intra-entity gross profits in beginning inventory are recognized.

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 ______ Consolidation Entry *G.

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

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G debits COGS because

- 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.

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 ________.

- the debit to the Investment in Subsidiary account is needed to bring that account to zero in consolidation. - the equity method has already reduced the parent's retained earnings for the intra-equity gain.

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

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?

Upstream land transfers affect the computation.