ATCG 413 Chapter 5

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

G

When land is sold at a gain across members of a consolidated group, in years subsequent to the land sale, where does the gain reside?

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

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

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

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

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.

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

reflect a full accrual basis in the consolidated financial statements.

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

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

Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from upstream sales. Comparing Exhibits 5.8 and 5.6, how are the final consolidated totals affected by the investment accounting method choice?

No effect.

When 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.

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

consolidated statements reflect only transactions with outside parties. 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.

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 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.

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

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

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

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

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.

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.

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.

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

sale or transfer

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 or revenue

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

When the parent applies the equity method and routinely transfers inventory downstream, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to

the Investment in Subsidiary account.

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with an adjustment to the Investment in Subsidiary account because ________.

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

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.

When the parent applies the equity method and routinely receives upstream inventory transfers from a subsidiary, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to

the subsidiary's retained earnings.

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

upstream transfers.

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 Blank______ Consolidation Entry *G.

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

Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4 shows difference in consolidated totals resulting from the investment accounting (equity vs. initial value) method choice.

zero

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.

When the parent applies the equity method and routinely transfers inventory downstream, which of the following consolidation entries are sometimes needed to bring the Investment in Subsidiary account to a zero balance?

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

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

*G

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 upstream sales to an 80% owned affiliate?

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

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

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

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

No effect

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.

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.

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.

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

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

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.

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

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

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?

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

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.

Compared to the equity method, when the parent uses the initial value method, which consolidation entries for intra-entity transfers may differ or additionally be included?

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

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.

B Company sells land to its parent A Company and records a gain on the sale. In the year of the sale, what accounts must be adjusted in preparing a consolidation worksheet?

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

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: Intra-entity inventory profits resulting from upstream transfers affect the consolidated net income allocation to both the controlling and noncontrolling interests.

True

True or false: The parent's accounting method choice (e.g., equity vs. initial value method) has no effect on the ultimate totals reported in consolidated financial statements.

True

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.

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.