Chapter 5

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.

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

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

*G

After combining the individually recorded revenues of a parent and subsidiary, what is the effect on consolidated revenues of intra-entity inventory transfers?

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

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

the ending inventory component of COGS is overstated by the intra-entity gross profit remaining at year-end. the debit to COGS reduces consolidated net income by the amount of the intra-entity gross profit.

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.

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

Select all that apply 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.

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.

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

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

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.

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.

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.

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.

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

overstated by the intra-entity gross profit.

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.

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.

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.

Select all that apply 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.

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

Select all that apply 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.

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.

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 (1) retained earnings.

1. consolidated

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

1. no

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 (1) account.

1. sales

Select all that apply 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?

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

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

100%

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.

The purpose of consolidation entry TI is to

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

Select all that apply 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.

Select all that apply 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?

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

Select all that apply When intra-entity gross profits from upstream sales are present in beginning inventory, which of the following describes the effect on consolidated statements?

The net income effect of the intra-entity inventory gross profit is transferred from the prior period to the current period. Consolidation Entry *G credits COGS which increases current period's consolidated net income.

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

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 ______ Consolidation Entry *G.

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

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.

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?

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

Select all that apply 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.

Consistent with the textbook treatment of intra-entity inventory profits, all income effects of intra-entity depreciable asset profits are assigned to the original (1) of the asset.

1. Seller

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

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 (1) (2).

1. depreciation 2. expense

The accounting effects of intra-entity depreciable asset sales are removed in consolidation because no (1) of the asset occurred with an outside entity.

1. sale

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.

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

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

Select all that apply 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.

Select all that apply 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.

Select all that apply Compared to intra-entity gross profits in inventory, intra-entity gross profits from land transfers

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

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.

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.

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

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.

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.

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

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

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.