Ch. 5 SmartBook

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?

0%

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

100%

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

100% 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 intro-entity gross profits in ending balance inventories from downstream sales to an 80% owned affiliate?

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

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 ________.

100% of the intra-entity gross profits in ending inventory from downstream transfers are deferred from the investor's equity earnings.

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?

20%

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.

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

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

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

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.

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.

When the parent employs the equity method, Consolidation Entry *G debits the Investment in Subsidiary account for the intra-entity gross profits in beginning inventory that resulted from ________.

Downstream inventory transfers

When the parent employs the equity method, Consolidation Entry *GL debits the Investment in Subsidiary account for intra-entity gains that resulted from ________.

Downstream land transfers

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

Eliminated

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

Eliminated

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

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.

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.

When does the intro-entity gross profits in ending inventory transferred across affiliates affect the consolidated net income attributable to the noncontrolling interest?

For upstream intro-entity inventory transfers.

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

From a consolidated perspective, neither a sale nor a purchase has occurred; 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.

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

One of the two major objectives accomplished in the consolidation process for land transfers is that it reports ________ cost for the transferred land for as long as it remains within the business combination.

Historical

BY decreasing COGS, Consolidation Entry *G _______ consolidated net income.

Increases

Which of the following consolidated balances remain the same regardless of whether intra-entity gross profit in inventory results from upstream or downstream transfers?

Inventory; Consolidated net income.

Which of the following is not one of the tow major objectives accomplished in the consolidation process for land transfers?

It immediately recognizes the income to accelerate the tax implications.

Which of the following is not one of the two major objectives accomplished in the consolidation process for land transfers?

It immediately recognizes the income to accelerate the tax implications.

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.

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

No effect

Consolidation Entry S credits COGS in the year following transfer because the beginning inventory component of COGS is ________.

Overstated by the intra-entity gross profit

Inventory transfers among affiliates within a consolidated entity _________.

Produce accounting effects that are eliminated in the preparation of consolidated financial statements; Create neither profits nor losses to the consolidated entity.

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

Recorded

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

The purpose of consolidation entry TI is to __________.

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 ______.

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

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 ________.

Remove the gain on sale from the intra-entity asset transfer; Remove the effect of the intra-entity gain on depreciation expense; Return the asset to its historical cost to the consolidated 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 ________.

Remove the gain on sale from the intra-entity asset transfer; Remove the effect of the intra-entity gain on depreciation expense; Return the asset to its historical cost to the consolidation entity.

When intra-entity gross profits exist in a parent company's beginning inventory, the current year consolidated worksheet should contain an entry to ___________.

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

In periods subsequent to an asset transfer from a subsidiary to its parent at a gain, what effects continue on the seller's and buyer's books from a consolidated reporting perspective?

Retained earnings of the buyer are understated; Retained earnings of the seller are overstated.

In periods subsequent to an asset transfer from a subsidiary to its parent at a gain, both the previously recorded gain on sale and the excess deprecation expense have been closed to the respective affiliate's ___________ _________ accounts.

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 ________ account.

Revenue

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

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.

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

Sale

The accounting effects of intra-entity depreciable asset sales are removed in consolidation because no _________ 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 _________ of the asset.

Seller

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.

The 100% deferral ensures that none of the intra-entity gross profit will be attributable to the noncontrolling interest.

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 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?

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

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?

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

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.

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 affect 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.

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.

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

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 aren't 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 debit to the Investment account is needed to bring the account to a zero balance in consolidation.

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

When infra-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?

The intra-entity gain is recognized as part of consolidated net income in the period that land is sold to the outside entity.

Consolidation Entry *G involves a debit to the Investment in Subsidiary account for when _________.

The parent has applied the equity method and the intra-entity sale was downstream.

Consolidation Entry *G involves a debit to the Investment in Subsidiary account for when __________.

The parent has applied the equity method and the intra-entity sale was downstream.

When the parent applies the equity method and routinely 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.

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.

Consolidation Entry TL removes the gain on sale form an intra-entity land sale because the land remains under the control of the consolidated entity.

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

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

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

How does the direction of infra-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 computaton

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.

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

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

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?

Zero

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?

$7,500

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; (*G) for intra-entity gross profits in beginning inventory; (I) for the equity in subsidiary earnings recognized by the parent.

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

*G

How does the equity method adjust the parent's Equity in Earnings account for intro-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.

Companies within a consolidated entity often sell inventory to each other. The sale price of the intra-entity transfer is sometimes based on ___________.

A predetermined markup above cost; An agreement between the affected entities; The normal sales price of the inventory.

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 normal sales price of the inventory; A predetermined markup above cost.

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.

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.

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.

When the parent applies the equity method and routinely transfers inventory downstream, any intra-entity gross profits remaining in the consolidation entity's ending inventory ________.

Does not affect the noncontrolling interest