Advanced Chapter 5

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

b

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

a

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. include the gain in the consolidated income statement. ensure the land is reported at an amount that includes the intra-entity gain. ensure the gain is not reported in the consolidated income statement.

a, d

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? a) There is no effect on the beginning balance of the noncontrolling interest. b) The beginning balance of the noncontrolling interest is entered as a larger amount. c) The beginning balance of the noncontrolling interest is entered as a smaller amount.

c

A parent transfers inventory with a cost of $25,000 to its subsidiary at a transfer price of $40,000. The subsidiary resold 50% of this transferred inventory to outsiders before year-end. For the current year consolidated financial statement, how much gross profit should be deferred by Consolidation Entry G? a) 0 b) 20000 c) 12,500 d) 7,500

d

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

a

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). The Consolidation Entry (G) to defer the intra-entity profit in ending inventory.

a, b

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. 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.

a, b

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 a) the investment in subsidiary. b) the subsidiary's retained earnings. c) the inventory. d) the parent's retained earnings.

b

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, a) are allocated 20% to the parent company's share of consolidated net income. b) are allocated 100% to the parent company's share of consolidated net income. c) are not allocated to the parent company's share of consolidated net income. d)are allocated 80% to the parent company's share of consolidated net income.

b

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 up by the intra-entity gain on sale. The gain on sale must be removed. The land must be written down to its original cost to the consolidated entity. No adjustments are required in the year of the intra-entity transfer.

b, c

The accounting effects of inventory sales across companies within a consolidated entity are removed when preparing consolidated financial statements because 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. from a consolidated perspective, neither a sale nor a purchase has occurred.

b, c, d

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

c

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

a, c

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

a

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? a) There is no effect of Consolidation Entry *G on the consolidated financial statements. b) Net income is reassigned from the previous year to the current year. c) Ending inventory is decreased. d) Net income is reassigned from the current year to the previous year.

b

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? a) Both COGS and the parent's RE are increased. b) Both COGS and the parent's RE are decreased. c) COGS is decreased and the parent's RE are increased. d) COGS is increased and the parent's RE are decreased.

b

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

b

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 increase the noncontrolling interest's share of consolidated net income. Beginning 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. Ending inventory gross profits decrease the noncontrolling interest's share of consolidated net income.

b, d

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

a, c, d

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? a) There is no difference to Consolidation Entry *GL b) The Investment in Subsidiary account is debited instead of the parent's Retained Earnings account. c) The adjustment to the land account is debited instead of credited.

b

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

entered

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 a) the parent's Retained Earnings account. b) the noncontrolling interest. c) the Investment in Subsidiary account. d) the Inventory account.

c

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

c

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. it increases the gross profit recognized on the sales to outsiders. the ending inventory component of COGS is overstated by the intra-entity gross profit remaining at year-end. COGS is overstated by the amount of the gross profit on intra-entity inventory transfers remaining at year-end

a, c

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. included as part of net income. excluded from net income. included in inventory in the consolidated balance sheet.

a, c

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

a, d

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. a) increases the inventory account. b) increases COGS. c) decreases the inventory account. d) reduces COGS.

d

When does the intra-entity gross profit in ending inventory transferred across affiliates affect the consolidated net income attributable to the noncontrolling interest? a) For downstream intra-entity inventory transfers. b) For no intra-entity inventory transfers. c) For all intra-entity inventory transfers. d) For upstream intra-entity inventory transfers.

d

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. a) will increase by the debit to the subsidiary's Retained Earnings account in b) is unaffected by c) will decrease by the debit to the subsidiary's Retained Earnings account in

c

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 the retained earnings beginning balance for the company that originally recorded the gain on sale of the land. the retained earnings beginning balance for the company that acquired the land in the intra-entity transfer. the gain on sale account. the land account.

a, d

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

c

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. a) is unaffected by b) will increase by the debit to the subsidiary's Retained Earnings account in c) will decrease by the debit to the subsidiary's Retained Earnings account in

c

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

a, d

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? a) The beginning balance of the noncontrolling interest is entered as a larger amount. b) There is no effect on the beginning balance of the noncontrolling interest. c) The beginning balance of the noncontrolling interest is entered as a smaller amount.

c

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? a) 80% of the intra-entity gross profits in beginning inventory are recognized. b) 20% of the intra-entity gross profits in beginning inventory are recognized. c) 100% of the intra-entity gross profits in beginning inventory are recognized. d) None of the intra-entity gross profits in beginning inventory are recognized.

a

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

a, c

Companies within a consolidated entity often sell inventory to each other. The sale price of the intra-entity transfer is sometimes based on an agreement between the affected entities. the elimination of the sale/purchase . the normal sales price of the inventory. a predetermined markup above cost.

a, c, d

In applying the equity method, why does the parent defer 100% of intra-entity inventory gross profits from downstream transfers even when owning a controlling, but less-than-100% ownership in the subsidiary. a) Because the ending inventory on the parent's books is overstated by the amount of the intra-entity gross profit. b) The 100% deferral ensures that none of the intra-entity gross profit will be attributable to the noncontrolling interest. c) Because the equity method requires 100% deferral of intra-entity gross profits in ending inventory regardless of the investor's percentage ownership.

b

Which of the following Consolidation Entries has the net effect of decreasing the current period's consolidated net income? a) TI b) G c) *G

b

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

b, c

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 ______ interest in computing consolidated net income.

noncontrolling

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

An 80% owned subsidiary transfers inventory to its parent. How much of the intra-entity gross profit in the transferred ending inventory serves to reduce the consolidated net income attributable to the noncontrolling interest? a) 0% b) 100% c) 80% d) 20%

20%

A parent company transfers inventory to its 80% owned subsidiary. How much of the intra-entity gross profit in the transferred ending inventory serves to reduce the consolidated net income attributable to the noncontrolling interest? a) 0% b) 20% c) 100% d) 80%

a

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. a) reduces COGS. b) increases the inventory account. c) increases COGS. d) decreases the inventory account.

a

How does Consolidation Entry *G differ when the intra-entity gross profit resulted from downstream transfers and the parent uses the equity method for its investment in its subsidiary? a) The Investment in Subsidiary account is debited instead of the parent's Retained Earnings account. b) Cost of goods sold of the parent company is debited instead of credited. c) There is no difference to Consolidation Entry *G.

a

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 a) remove the gain on sale from the intra-entity asset transfer. b) increase depreciation expense for the amount of the intra-entity gain. c) remove the asset from the consolidated balance sheet. d) increase the asset value to reflect the intra-entity asset transfer price.

a

Consolidation Entry *G involves a debit to the Investment in Subsidiary account for when a) the parent has applied the initial method and the intra-entity sale was upstream. b) the parent has applied the initial method and the intra-entity sale was downstream. c) the parent has applied the equity method and the intra-entity sale was downstream. d) the parent has applied the equity method and the intra-entity sale was upstream.

c

By decreasing COGS, Consolidation Entry G ______ consolidated net income.

increases

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.

no

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? The choice of the initial value method results in larger consolidated net income and noncontrolling interest. The choice of the equity method results in larger consolidated net income and noncontrolling interest. 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 upstream sales. Comparing Exhibits 5.8 and 5.6, how are the final consolidated totals affected by the investment accounting method choice? a) The choice of the initial value method results in larger consolidated net income and noncontrolling interest. b) No effect. c) The choice of the equity method results in larger consolidated net income and noncontrolling interest.

no effect

Gross profits frequently exist in ending inventory resulting from intra-entity inventory transfers. These gross profits are _____ in the preparation of consolidated financial statements.

removed

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

sale

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.

sales

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 direction of intra-entity sales (upstream or downstream) does not affect the final balance of reported consolidated net income.

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

True or false: To measure appropriately the effect of intra-entity inventory profits on the noncontrolling interest, the direction of the intra-entity transfer (upstream or downstream) should be considered.

true

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) Gross profits must be deferred indefinitely because sales among affiliates always remain in the consolidated group. b) Revenues and COGS must be recognized for all intra-entity sales regardless of whether the sales are upstream or downstream. c) When intra-entity sales remain in ending inventory, control of the goods has not changed d) Intra-entity sales result in gross profit overstatements regardless of amounts remaining in ending inventory.

C

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 a) increases the noncontrolling interest. b) does not affect the noncontrolling interest. c) decreases the noncontrolling interest.

b

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 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.

b, c

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

a

Consolidation Entry G credits COGS because the beginning inventory component of COGS is a) overstated by the intra-entity gross profit. b) absent due to the intra-entity gross profit. c) understated by the intra-entity gross profit.

a

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

a

What is the effect on consolidated COGS of intra-entity gross profits in beginning and ending inventories? a) COGS is unaffected by intra-entity gross profits in ending inventory and beginning inventory. b) COGS is decreased by intra-entity gross profits in ending inventory and increased by intra-entity gross profits in beginning inventory. c) Consolidated COGS is increased by intra-entity gross profits in ending inventory and decreased by intra-entity gross profits in beginning inventory.

c

When the parent employs the equity method, Consolidation Entry *G debits the Investment in Subsidiary account for intra-entity gross profits in beginning inventory that resulted from a) either upstream or downstream inventory transfers. b) upstream inventory transfers. c) neither upstream or downstream inventory transfers. d) downstream inventory transfers.

d

A parent transfers inventory with a cost of $25,000 to its subsidiary at a transfer price of $40,000. The subsidiary resold the entire purchase to outsiders before year-end. For the current year consolidated financial statement, how much gross profit should be deferred by Consolidation Entry G? a) $25,000 b) zero c) $40,000 d) $15,000

zero

Alpha Company owns 80 percent of the voting stock of Beta Company. Alpha and Beta reported the following account information from their year-end separate financial records: Alpha Beta Inventory $95,000 $88,000 Sales Revenue 800,000 300,000 Cost of Goods Sold 600,000 180,000 During the current year, Alpha sold inventory to Beta for $100,000. As of year end, Beta had resold only 60 percent of these intra-entity purchases. Alpha sells inventory to Beta at the same markup it uses for all of its customers. What is the total for consolidated sales revenue? a) 800,000 b) 970,000 c) 1,000,000 d) 1,100,000

1,000,000 Alpha sales $800,000 Beta sales 300,000 Intra-entity sales (100,000) Consolidated sales $1,000,000

In the presence of a 10% noncontrolling interest, how much intra-entity gross profit remaining in ending inventory should be eliminated in consolidation? a) 10% b) 100% c) 0% d) 90%

100%

Alpha Company owns 80 percent of the voting stock of Beta Company. Alpha and Beta reported the following account information from their year-end separate financial records: Alpha Beta Inventory $95,000 $88,000 Sales Revenue 800,000 300,000 Cost of Goods Sold 600,000 180,000 During the current year, Alpha sold inventory to Beta for $100,000. As of year end, Beta had resold only 60 percent of these intra-entity purchases. Alpha sells inventory to Beta at the same markup it uses for all of its customers. What is the total for consolidated inventory? a) 143,000 b) 173,000 c) 175,000 d) 183,000

173,000 Alpha inventory $95,000 Beta inventory 88,000 Gross profit in intra-entity inventory (10,000) (25% gross profit rate × $100,000 × 40%) Consolidated inventory $173,000

Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income? a) G b) G* c) TI

G*

Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income? a) TI b) G c) G*

G*

Which of the following consolidated balances remain the same regardless of whether intra-entity gross profit in inventory results from upstream or downstream transfers? Noncontrolling interest. Net income attributable to the controlling interest. Inventory. Consolidated net income.

c, d

True or false: When intra-entity transferred land is subsequently sold to an outside entity, any remaining deferred gain is recognized in the period of the sale.

true

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

c

Why does Consolidation Entry *G debit the parent's Investment in Subsidiary account instead of its Retained Earnings account for downstream intra-entity gross profits in beginning inventory when the parent employs the equity method? The equity method removes intra-entity gross profits from the parent's books causing its RE to properly reflect the consolidated balance. The Investment in Subsidiary account is overstated by the amount of the intra-entity beginning inventory gross profit. The debit to the Investment account is needed to bring the account to a zero balance in consolidation.

a, c

When the parent employs the initial value method to account internally for its Investment in Subsidiary account, a consolidation conversion entry is typically needed. Consolidation Entry *C converts the parent's beginning retained earnings balance to a full accrual basis. If the subsidiary purchases inventory from the parent and intra-entity gross profits exist in its beginning inventory, what is the effect on the consolidation conversion entry (*C)? a) Intra-entity downstream inventory gross profits will decrease the amount of the Consolidation Entry *C worksheet adjustment. b) Intra-entity downstream inventory gross profits will increase the amount of the Consolidation Entry *C worksheet adjustment. c) Downstream intra-entity beginning inventory gross profits has no effect on Consolidation Entry asterisk C.

c

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 (five-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 ) Included in the preceding statements, Jarel sold inventory costing $80,000 to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. What is the consolidated total for inventory at December 31? a) 248,000 b) 260,000 c) 250,000 d) 240,000

248,000 Add the two book values less the ending intra-entity 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 % Intra-entity gross profit in ending inventory, 12/31 (12,000) Consolidated total for inventory $ 248,000

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

c

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in beginning inventories from downstream sales to an 80% owned affiliate? a) 80% of the intra-entity gross profits in beginning inventory are recognized. b) 20% of the intra-entity gross profits in beginning inventory are recognized. c) None of the intra-entity gross profits in beginning inventory are recognized. d) 100% of the intra-entity gross profits in beginning inventory are recognized.

d

Alpha Company owns 80 percent of the voting stock of Beta Company. Alpha and Beta reported the following account information from their year-end separate financial records: Alpha Beta Inventory $95,000 $88,000 Sales Revenue 800,000 300,000 Cost of Goods Sold 600,000 180,000 During the current year, Alpha sold inventory to Beta for $100,000. As of year end, Beta had resold only 60 percent of these intra-entity purchases. Alpha sells inventory to Beta at the same markup it uses for all of its customers. What is the total for consolidated cost of goods sold? a) 670,000 b) 690,000 c) 788,000 d) 790,000

690,000 Alpha COGS $600,000 Beta COGS 180,000 Intra-entity sales elimination (100,000) Gross profit in intra-entity inventory deferral 10,000 (25% gross profit rate × $100,000 × 40%) Consolidated COGS $690,000

James Corporation owns 80 percent of Carl Corporation's common stock. During October, Carl sold merchandise to James for $342,500. At December 31, 60 percent of this merchandise remains in James's inventory. Gross profit percentages were 25 percent for James and 35 percent for Carl. The amount of intra-entity gross profit in inventory at December 31 that should be eliminated in the consolidation process is a) 51,375 b) 57,540 c) 71,925 d) 119,875

71,925 Merchandise remaining in James's inventory $342,500 × 60% = $205,500. Intra-entity gross profit (based on subsidiary's gross profit rate as the seller) $205,500 × 35% = $71,925. James's ownership percentage of Carl has no impact on this computation.

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 (five-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 ) Included in the preceding statements, Jarel sold inventory costing $80,000 to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. What is the consolidated total for equipment (net) at December 31? a) 760,000 b) 735,000 c) 765,000 d) 740,000

760,000 Add the two book values plus the $25,000 original allocation less one year of excess amortization expense ($5,000).

Angela, Inc., holds a 90 percent interest in Corby Company. During 2020, Corby sold inventory costing $126,750 to Angela for $169,000. Of this inventory, $44,200 worth was not sold to outsiders until 2021. During 2021, Corby sold inventory costing $117,000 to Angela for $180,000. A total of $51,000 of this inventory was not sold to outsiders until 2022. In 2021, Angela reported separate net income of $215,000 while Corby's net income was $106,500 after excess amortizations. What is the noncontrolling interest in the 2021 income of the subsidiary? a) 10,650 b) 11,330 c) 9,970 d) 10,480

9,970 Intra-entity gross profit, 12/31/20 Ending inventory $ 44,200 Gross profit rate ($42,250 ÷ $169,000) 25 % Intra-entity gross profit in ending inventory, 12/31/20 $ 11,050 Intra-entity gross profit, 12/31/21 Ending inventory $ 51,000 Gross profit rate ($63,000 ÷ $180,000) 35 % Intra-entity gross profit in ending inventory, 12/31/21 $ 17,850 Net Income Attributable To Noncontrolling Interest Reported net income for 2021 after excess amortization $ 106,500 Intra-entity gross profit deferred in 2020 11,050 Deferral of 2021 intra-entity gross profit (17,850 ) Adjusted net income of subsidiary $ 99,700 Outside ownership 10 % Noncontrolling interest $ 9,970

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 downstream 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 all transfers prior to computing the noncontrolling interest's allocation.

A

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 (five-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 ) Included in the preceding statements, Jarel sold inventory costing $80,000 to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. What is the consolidated total of noncontrolling interest appearing on the balance sheet? a) 87,000 b) 85,500 c) 70,500 d) 83,100

B 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

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 a) Upstream inventory transfers affect the computation. b) Downstream inventory transfers affect the computation. c) Neither upstream nor downstream inventory transfers affect the computation. d) Both upstream and downstream inventory transfers affect the computation.

a

Thomson Corporation owns 70 percent of the outstanding stock of Stayer, Incorporated. On January 1, 2019, Thomson acquired a building with a 10-year life for $490,000. Thomson depreciated the building on the straight-line basis assuming no salvage value. On January 1, 2021, Thomson sold this building to Stayer for $422,400. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2021, how does this transfer affect the computation of consolidated net income? a) Net income is reduced by $34,200 b) Net Income is reduced by $30,400 c) Net income is reduced by $26,600 d) Net income is reduced by $23,640

C Intra-entity gain Transfer price $ 422,400 Book value (original cost less two years depreciation) 392,000 Intra-entity gain $ 30,400 Excess depreciation Annual depreciation based on carrying amount of intra-entity transfer ($392,000 ÷ 8 years) $ 49,000 Annual depreciation based on transfer price ($422,400 ÷ 8 years) 52,800 Excess depreciation $ 3,800 Adjustments to consolidated net income Defer intra-entity gain $ (30,400) Remove excess depreciation 3,800 Net reduction in consolidated net income $ (26,600)

Dunn Corporation owns 100 percent of Grey Corporation's common stock. On January 2, 2020, Dunn sold to Grey $50,050 of machinery with a carrying amount of $37,750. Grey is depreciating the acquired machinery over a five-year remaining life by the straight-line method. The net adjustments to compute 2020 and 2021 consolidated net income would be an increase (decrease) of a) 2020 $(12,300) 2021 $2,460 b) 2020 (9,840) 2021 0 c) 2020 (12,300) 2021 0 d) 2020 (9,840) 2021 2,460

D 12/31/20 Machinery = $50,050 Gain = $12,300 Depreciation expense $10,010 ($50,050 ÷ 5 years) Net effect on income = $2,290 ($12,300 − $10,010) 12/31/21 Depreciation expense = $10,010 Consolidated figures—historical cost: 12/31/20 Machinery = $37,750 Depreciation expense = $7,550 ($37,750 ÷ 5 years) 12/31/21 Depreciation expense = $7,550 Adjustments for consolidation purposes: 2020: $2,290 income is reduced to a $7,550 expense (net income is reduced by $9,840) 2021: $10,010 expense is reduced to a $7,550 expense (net income is increased by $2,460)

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 (five-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 ) Included in the preceding statements, Jarel sold inventory costing $80,000 to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. What is the total of consolidated expenses? a) 39,000 b) 36,000 c) 37,500 d) 30,000

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 S ecret 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)

When intra-entity transferred land is subsequently sold to an outside entity, how is the originally deferred intra-entity gain on sale reported in consolidated financial statements? a) The intra-entity gain is simply ignored in the period that the land is sold to the outside entity. b) The intra-entity gain is recognized as part of consolidated net income in the period that the land is sold to the outside entity. c) The intra-entity gain is removed from consolidated net income in the period that the land is sold to the outside entity. d) The intra-entity gain continues to be deferred indefinitely.

b

For a 40% investment that provides the investor significant influence, 40% of intra-entity gross profits in ending inventory from downstream transfers are deferred from the investor's equity earnings when the equity method is applied. If, instead, the investor owns a 70% controlling interest in a subsidiary a) 30% of the intra-entity gross profits in ending inventory from downstream transfers are deferred from the investor's equity earnings. b) 70% of the intra-entity gross profits in ending inventory from downstream transfers are deferred from the investor's equity earnings. c) 100% of the intra-entity gross profits in ending inventory from downstream transfers are deferred from the investor's equity earnings. d) None of the intra-entity gross profits in ending inventory from downstream transfers are deferred from the investor's equity earnings.

c

Parkette, Inc., acquired a 60 percent interest in Skybox Company several years ago. During 2020, Skybox sold inventory costing $197,750 to Parkette for $282,500. A total of 20 percent of this inventory was not sold to outsiders until 2021. During 2021, Skybox sold inventory costing $146,250 to Parkette for $195,000. A total of 32 percent of this inventory was not sold to outsiders until 2022. In 2021, Parkette reported cost of goods sold of $575,000 while Skybox reported $320,000. What is the consolidated cost of goods sold in 2021? a) 701,350 b) 698,650 c) 664,000 d) 893,650

698,650 Intra-Entity Gross Profit, 12/31/20 Intra-entity gross profit ($282,500 − $197,750) $ 84,750 Inventory remaining at year's end 20 % Intra-entity gross profit in inventory, 12/31/20 $ 16,950 Intra-Entity Gross Profit, 12/31/21 Intra-entity gross profit ($195,000 − $146,250) $ 48,750 Inventory remaining at year's end 32 % Intra-entity gross profit in inventory, 12/31/21 $ 15,600 Consolidated cost of goods sold Parent balance $ 575,000 Subsidiary balance 320,000 Remove intra-entity transfer (195,000) Recognize 2020 deferred gross profit (16,950) Defer 2021 intra-entity gross profit 15,600 Cost of goods sold $ 698,650

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 (five-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 ) Included in the preceding statements, Jarel sold inventory costing $80,000 to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. What is the total of consolidated revenues? a) 460,000 b) 500,000 c) 420,000 d) 400,000

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

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, a) are allocated 80% to the parent company's share of consolidated net income. b) are allocated 20% to the parent company's share of consolidated net income. c) are allocated 100% to the parent company's share of consolidated net income. d) are not allocated to the parent company's share of consolidated net income.

c

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

d

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? a) In the buyer's retained earnings account and the seller's land account. b) In the seller gain on sale account and the buyer's land account. c) The gain is eliminated in the first year consolidation and thus removed from the individual member's accounts. d) In the seller's retained earnings account and the buyer's land account.

d

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 (five-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 ) Included in the preceding statements, Jarel sold inventory costing $80,000 to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31. What is the total of consolidated cost of goods sold? a) 140,000 b) 152,000 c) 132,000 d) 145,000

c Intra−entity gross profit ($100,000 − $80,000) $ 20,000 Inventory remaining at year's end 60 % Intra−entity gross profit in ending inventory $ 12,000 Consolidated cost of goods sold Parent balance $ 140,000 Subsidiary balance 80,000 Remove intra−entity transfer (100,000) Defer intra−entity gross profit (above) 12,000 Cost of goods sold $ 132,000