Chapter 5 M+A SmartBook

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.

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).

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 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.

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.

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

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

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.

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

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

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.

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 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

-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.

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 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 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.

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 land account. -the retained earnings beginning balance for the company that originally recorded the gain on sale of the land.

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

-the normal sales price of the inventory. -a predetermined markup above cost. -an agreement between the affected entities.

In the year of an intra-entity depreciable asset transfer at a gain, the accounts and amounts in Consolidation Entries TA and ED will not be affected by

-the parent's choice of investment accounting (initial value, equity or partial equity method). -whether the intra-entity transfer was upstream or downstream.

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 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 intra-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 intra-entity gross profits in ending 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%

What is the effect of upstream intra-entity beginning inventory gross profits on the consolidation conversion entry (*C) when the parent employs the initial value method?

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

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.

Why do upstream intra-entity beginning inventory gross profits affect the Consolidation Entry *C when the parent employs the initial value method?

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

A parent uses the initial value method, sells inventory to the subsidiary, and intra-entity gross profits exist in beginning inventory. What is the effect of the intra-entity gross profits in beginning inventory on Consolidation Entry *G?

Both COGS and the parent's RE are decreased.

A parent uses the initial value method, acquires inventory from its 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 subsidiary's RE are decreased.

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)?

Downstream intra-entity beginning inventory gross profits has no effect on Consolidation Entry *C.

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

For upstream intra-entity inventory transfers.

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.

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 _____.

Investment in Subsidiary account.

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.

__________ on cost equals gross profit divided by cost of goods sold.

Markup

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.

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

No effect

Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4, how are the final consolidated totals affected by the investment accounting method choice?

No effect.

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.

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.

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.

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

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.

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?

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

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.

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 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: Upstream and downstream intra-entity depreciable asset transfers require the same TA and ED consolidation entries in the year of the transfer.

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 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.

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

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?

-(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.

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

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

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.

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?

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

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

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.

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

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

The purpose of consolidation entry TI is to

remove the effects of intra-entity sales and purchases for the consolidated reporting 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, both the previously recorded gain on sale and the excess depreciation expense have been closed to the respective affiliate's _______ _______ accounts.

retained earnings

The gross profit rate equals gross profit divided by ___________.

sales

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

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.

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.

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

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

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 _________ retained earnings.

consolidated

Which of the following is the formula for markup on cost?

gross profit/COGS

Which of the following is the formula for the gross profit rate?

gross profit/sales

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

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.

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

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

Consolidation Entry G credits COGS in the year following transfer because the beginning inventory component of COGS is

overstated by the intra-entity gross profit.

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

posted

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

reduces COGS.

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.

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 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.

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.

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 years subsequent to an intra-entity depreciable asset transfer from a subsidiary to its parent (at a gain), Consolidation Entry *TA removes the gain from the Retained Earnings account of the seller. In each successive year, the amount of the Consolidation Entry *TA debit to Retained Earnings _____.

decreases

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

decreases

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

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.

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

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.