Chapter 7

On January 1, 2016, P Corporation sold equipment with a 3-year remaining life and a book value of $100,000 to its 70% owned subsidiary for a price of $115,000. In the consolidated workpapers for the year ended December 31, 2017, an elimination entry for this transaction will include a: a) debit to Equipment for $15,000. b) debit to Gain on Sale of Equipment for $15,000. c) credit to Depreciation Expense for $15,000. d) debit to Accumulated Depreciation for $10,000.

d) debit to Accumulated Depreciation for $10,000.

In years subsequent to the upstream intercompany sale of nondepreciable assets, the necessary consolidated workpaper entry under the cost method is to debit the: a) Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable asset. b) Retained Earnings (Parent) account and credit the nondepreciable asset. c) Nondepreciable asset, and credit the Noncontrolling interest and Investment in Subsidiary accounts. d) No entries are necessary.

a) Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable asset.

In January 2013, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $1,980,000. S Company's original cost for this equipment was $2,000,000 and had accumulated depreciation of $200,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2017 for $1,440,000. What amount of gain should P Company record on its books in 2017? a) $60,000. b) $120,000. c) $240,000. d) $360,000.

b) $120,000.

In January 2014, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $990,000. S Company's original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2017 for $720,000. What amount of gain should P Company record on its books in 2017? a) $30,000. b) $60,000. c) $120,000. d) $180,000.

b) $60,000.

Petunia Company owns 100% of Sage Corporation. On January 1, 2017 Petunia sold equipment to Sage at a gain. Petunia had owned the equipment for four years and used a ten-year straight-line rate with no residual value. Sage is using an eight-year straight-line rate with no residual value. In the consolidated income statement, Sage's recorded depreciation expense on the equipment for 2017 will be reduced by: a) 10% of the gain on sale. b) 12 1/2% of the gain on sale. c) 80% of the gain on sale. d) 100% of the gain on sale.

b) 12 1/2% of the gain on sale.

P Corp. owns 90% of the outstanding common stock of S Company. On December 31, 2017, S sold equipment to P for an amount greater than the equipment's book value but less than its original cost. The equipment should be reported on the December 31, 2017 consolidated balance sheet at: a) P's original cost less 90% of S's recorded gain. b) P's original cost less S's recorded gain. c) S's original cost. d) P's original cost.

b) P's original cost less S's recorded gain.

Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of the intercompany sale, a workpaper entry is made under the cost method debiting: a) Retained Earnings - P. b) Noncontrolling interest. c) Equipment. d) all of these.

d) all of these.

P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 2017, S sold equipment with a five-year remaining life to P for a gain of $120,000. S reports net income of $600,000 for 2017 and pays dividends of $200,000. P's Equity from Subsidiary Income for 2017 is: a) $480,000. b) $384,000. c) $403,200. d) $576,000

c) $403,200.

P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 2017, S sold equipment with a five-year remaining life to P for a gain of $180,000. S reports net income of $900,000 for 2017 and pays dividends of $300,000. P's Equity from Subsidiary Income for 2017 is: a) $720,000. b) $576,000. c) $604,800. d) $864,000

c) $604,800.

In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting: a) Retained Earnings - P Company b) Retained Earnings - S Company c) Gain on Sale of Land d) both Retained Earnings - P Company and Retained Earnings - S Company

c) Gain on Sale of Land

In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling interest percentage by the subsidiary's reported net income: a) plus the intercompany gain considered realized in the current period. b) plus the net amount of unrealized gain on the intercompany sale. c) minus the net amount of unrealized gain on the intercompany sale. d) minus the intercompany gain considered realized in the current period.

c) minus the net amount of unrealized gain on the intercompany sale.

When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent of ownership between parent and subsidiary only when the selling affiliate is: a) the parent and the subsidiary is less than wholly owned. b) a wholly owned subsidiary. c) the subsidiary and the subsidiary is less than wholly owned. d) the parent of a wholly owned subsidiary.

c) the subsidiary and the subsidiary is less than wholly owned.

P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than it subsidiary's book value. Two years later P sold the land to an outside entity for $50,000 more than P's cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of: a) $50,000. b) $120,000. c) $130,000. d) $150,000.

d) $150,000.

On January 1, 2016 S Corporation sold equipment that cost $120,000 and had a book value of $48,000 to P Corporation for $60,000. P Corporation owns 100% of S Corporation and the equipment has a 4-year remaining life. What is the effect of the sale on P Corporation's Equity from Subsidiary Income account for 2017? a) no effect b) increase of $12,000. c) decrease of $12,000. d) increase of $3,000.

d) increase of $3,000.

In 2017, P Company sells land to its 80% owned subsidiary, S Company, at a gain of $50,000. What is the effect of this sale of land on consolidated net income assuming S Company still owns the land at the end of the year? a) consolidated net income will be the same as if the sale had not occurred. b) consolidated net income will be $50,000 less than it would had the sale not occurred. c) consolidated net income will be $40,000 less than it would had the sale not occurred. d) consolidated net income will be $50,000 greater than it would had the sale not occurred.

a) consolidated net income will be the same as if the sale had not occurred.

The amount of the adjustment to the noncontrolling interest in consolidated net assets is equal to the noncontrolling interest's percentage of the: a) unrealized intercompany gain at the beginning of the period. b) unrealized intercompany gain at the end of the period. c) realized intercompany gain at the beginning of the period. d) realized intercompany gain at the end of the period.

a) unrealized intercompany gain at the beginning of the period.

Several years ago, P Company bought land from S Company, its 80% owned subsidiary, at a gain of $50,000 to S Company. The land is still owned by P Company. The consolidated working papers for this year will require: a) no entry because the gain happened prior to this year. b) a credit to land for $50,000. c) a debit to P's retained earnings for $50,000. d) a debit to Noncontrolling interest for $50,000.

b) a credit to land for $50,000.

Gain or loss resulting from an intercompany sale of equipment between a parent and a subsidiary is: a) recognized in the consolidated statements in the year of the sale. b) considered to be realized over the remaining useful life of the equipment as an adjustment to depreciation in the consolidated statements. c) considered to be unrealized in the consolidated statements until the equipment is sold to a third party. d) amortized over a period not less than 2 years and not greater than 40 years.

b) considered to be realized over the remaining useful life of the equipment as an adjustment to depreciation in the consolidated statements.

P Company purchased land from its 80% owned subsidiary at a cost of $30,000 greater than it subsidiary's book value. Two years later P sold the land to an outside entity for $15,000 more than P's cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of: a) $15,000. b) $36,000. c) $39,000. d) $45,000.

d) $45,000.

Patriot Corporation owns 100% of Simon Company's common stock. On January 1, 2017, Patriot sold equipment with a book value of $350,000 to Simon for $500,000. Simon is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and 2018 consolidated income would be an increase (decrease) of: a) 2017, ($150,000); 2018, $0 b) 2017, ($150,000); 2018, $15,000 c) 2017, ($135,000); 2018, $0 d) 2017, ($135,000); 2018, $15,000

d) 2017, ($135,000); 2018, $15,000

Petunia Corporation owns 100% of Stone Company's common stock. On January 1, 2017, Petunia sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and 2018 consolidated income would be an increase (decrease) of: a) 2017, ($90,000); 2018, $0 b) 2017, ($90,000); 2018, $9,000 c) 2017, ($81,000); 2018, $0 d) 2017, ($81,000); 2018, $9,000

d) 2017, ($81,000); 2018, $9,000

On January 1, 2016, P Corporation sold equipment with a 3-year remaining life and a book value of $40,000 to its 70% owned subsidiary for a price of $46,000. In the consolidated workpapers for the year ended December 31, 2017, an elimination entry for this transaction will include a: a) debit to Equipment for $6,000. b) debit to Gain on Sale of Equipment for $6,000. c) credit to Depreciation Expense for $6,000. d) debit to Accumulated Depreciation for $4,000.

d) debit to Accumulated Depreciation for $4,000.

In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is computed by multiplying the noncontrolling interest percentage by the subsidiary's reported net income: a) minus the net amount of unrealized gain on the intercompany sale. b) plus the net amount of unrealized gain on the intercompany sale. c) minus intercompany gain considered realized in the current period. d) plus intercompany gain considered realized in the current period.

d) plus intercompany gain considered realized in the current period.