Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets Chapter 06 Intercompany Transfers of Services and Noncurrent Assets Multiple Choice Questions Blue Company owns 70 percent of Black Company's outstanding common stock On December 31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying amount, but less than its original cost On a consolidated balance sheet at December 31, 2008, the carrying amount of the equipment should be reported at: A Blue's original cost B Black's original cost C Blue's original cost less Black's recorded gain D Blue's original cost less 70 percent of Black's recorded gain A parent and its 80 percent owned subsidiary have made several intercompany sales of noncurrent assets during the past two years The amount of income assigned to the noncontrolling interest for the second year should include the noncontrolling interest's share of gains: A unrealized in the second year from upstream sales made in the second year B realized in the second year from downstream sales made in both years C realized in the second year from upstream sales made in both years D both realized and unrealized from upstream sales made in the second year A wholly owned subsidiary sold land to its parent during the year at a gain The parent continues to hold the land at the end of the year The amount to be reported as consolidated net income for the year should equal: A the parent's separate operating income, plus the subsidiary's net income B the parent's separate operating income, plus the subsidiary's net income, minus the intercompany gain C the parent's separate operating income, plus the subsidiary's net income, plus the intercompany gain D the parent's net income, plus the subsidiary's net income, minus the intercompany gain 6-1 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets Sky Corporation owns 75 percent of Earth Company's stock On July 1, 2008, Sky sold a building to Earth for $33,000 Sky had purchased this building on January 1, 2006, for $36,000 The building's original eight-year estimated total economic life remains unchanged Both companies use straight-line depreciation The equipment's residual value is considered negligible Based on the information provided, in the preparation of the 2008 consolidated financial statements, building will be _ in the eliminating entries A debited for $33,000 B debited for $36,000 C credited for $36,000 D debited for $3,000 Based on the information provided, the gain on sale of the building eliminated in the consolidated financial statements for 2008 is: A $8,250 B $10,500 C $6,000 D $11,250 Based on the information provided, while preparing the 2008 consolidated income statement, depreciation expense will be: A debited for $750 in the eliminating entries B credited for $750 in the eliminating entries C credited for $1500 in the eliminating entries D debited for $1500 in the eliminating entries Based on the information provided, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A debited for $750 in the eliminating entries B credited for $750 the eliminating entries C credited for $1500 in the eliminating entries D debited for $1500 in the eliminating entries 6-2 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets Based on the information provided, in the preparation of a consolidated balance sheet at January 1, 2009, retained earnings will be: A debited for $6,750 in the eliminating entries B credited for $6,750 in the eliminating entries C credited for $7,500 in the eliminating entries D debited for $7,500 in the eliminating entries Phobos Company holds 80 percent of Deimos Company's voting shares During the preparation of consolidated financial statements for 2009, the following eliminating entry was made: Which of the following statements is correct? A Phobos Company purchased land from Deimos Company during 2009 B Phobos Company purchased land from Deimos Company before January 1, 2009 C Deimos Company purchased land from Phobos Company during 2009 D Deimos Company purchased land from Phobos Company before January 1, 2009 ABC Corporation purchased land on January 1, 2006, for $50,000 On July 15, 2008, it sold the land to its subsidiary, XYZ Corporation, for $70,000 ABC owns 80 percent of XYZ's voting shares 6-3 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 10 Based on the preceding information, what will be the workpaper eliminating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 2008? A Option A B Option B C Option C D Option D 6-4 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 11 Based on the preceding information, what will be the workpaper eliminating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 2009? A Option A B Option B C Option C D Option D 6-5 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 12 Which workpaper eliminating entry will be made on December 31, 2009, if XYZ Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15, 2008, for $70,000? A Option A B Option B C Option C D Option D Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 2007 On December 31, 2008, Mortar received $390,000 from Granite for a equipment Mortar had purchased on January 1, 2005, for $400,000 The equipment is expected to have a 10-year useful life and no salvage value Both companies depreciate equipments on a straight-line basis 13 Based on the preceding information, in the preparation of the 2008 consolidated financial statements, equipment will be: A debited for $1,000 B debited for $10,000 C credited for $15,000 D debited for $25,000 6-6 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 14 Based on the preceding information, the gain on sale of the equipment recorded by Mortar for 2008 is: A $150,000 B $65,000 C $110,000 D $40,000 15 Based on the preceding information, in the preparation of the 2009 consolidated financial statements, equipment will be: A debited for $1,000 B debited for $10,000 C credited for $15,000 D debited for $25,000 16 Based on the preceding information, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A debited for $25,000 in the eliminating entries B credited for $15,000 in the eliminating entries C debited for $15,000 in the eliminating entries D credited for $25,000 in the eliminating entries 17 Based on the preceding information, in the preparation of the 2009 consolidated balance sheet, accumulated depreciation will be: A debited for $160,000 in the eliminating entries B credited for $160,000 in the eliminating entries C credited for $135,000 in the eliminating entries D debited for $135,000 in the eliminating entries Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 2007 On January 1, 2008, Mortar received $350,000 from Granite for a equipment Mortar had purchased on January 1, 2005, for $400,000 The equipment is expected to have a 10-year useful life and no salvage value Both companies depreciate equipments on a straightline basis 6-7 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 18 Based on the preceding information, in the preparation of the 2008 consolidated financial statements, equipment will be: A debited for $50,000 B debited for $40,000 C credited for $70,000 D debited for $25,000 19 Based on the preceding information, the gain on sale of equipment recorded by Mortar for 2008 is: A $70,000 B $65,000 C $50,000 D $40,000 20 Based on the preceding information, in the preparation of the 2008 consolidated balance sheet, accumulated depreciation will be: A debited for $50,000 in the eliminating entries B credited for $110,000 in the eliminating entries C credited for $120,000 in the eliminating entries D debited for $160,000 in the eliminating entries 21 Based on the preceding information, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A Debited for $40,000 in the eliminating entries B Credited for $10,000 in the eliminating entries C Debited for $10,000 in the eliminating entries D Credited for $40,000 in the eliminating entries 22 Based on the preceding information, in the preparation of the 2009 consolidated balance sheet, accumulated depreciation will be: A debited for $110,000 in the eliminating entries B credited for $110,000 in the eliminating entries C credited for $100,000 in the eliminating entries D debited for $100,000 in the eliminating entries 6-8 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets On January 1, 2007, Servant Company purchased a machine with an expected economic life of five years On January 1, 2009, Servant sold the machine to Master Corporation and recorded the following entry: Master Corporation holds 75 percent of Servant's voting shares Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 2009 There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer 23 Based on the preceding information, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A Debited for $1,000 in the eliminating entries B Credited for $1,000 in the eliminating entries C Debited for $15,000 in the eliminating entries D Credited for $15,000 in the eliminating entries 24 Based on the preceding information, in the preparation of the 2009 consolidated balance sheet, machine will be: A debited for $1,000 B debited for $15,000 C credited for $45,000 D debited for $25,000 6-9 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 25 Based on the preceding information, income assigned to the noncontrolling interest in the 2009 consolidated income statement will be: A $12,000 B $14,000 C $12,500 D $48,000 26 Based on the preceding information, consolidated net income for 2009 will be: A $150,000 B $100,000 C $148,000 D $130,000 27 On January 1, 2009, Light Corporation sold equipment for $400,000 to Star Corporation, its wholly owned subsidiary Light had paid $900,000 for this equipment, which had accumulated depreciation of $170,000 Light estimated a $50,000 salvage value and depreciated the tractor using the straight-line method over 10 years, a policy that Star continued In Light's December 31, 2009, consolidated balance sheet, this tractor should be included in fixed-asset cost and accumulated depreciation as: A Option A B Option B C Option C D Option D 6-10 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 22 Based on the preceding information, in the preparation of the 2009 consolidated balance sheet, accumulated depreciation will be: A debited for $110,000 in the eliminating entries B credited for $110,000 in the eliminating entries C credited for $100,000 in the eliminating entries D debited for $100,000 in the eliminating entries AACSB: Analytic AICPA: Measurement On January 1, 2007, Servant Company purchased a machine with an expected economic life of five years On January 1, 2009, Servant sold the machine to Master Corporation and recorded the following entry: Master Corporation holds 75 percent of Servant's voting shares Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 2009 There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer 23 Based on the preceding information, in the preparation of the 2009 consolidated income statement, depreciation expense will be: A Debited for $1,000 in the eliminating entries B Credited for $1,000 in the eliminating entries C Debited for $15,000 in the eliminating entries D Credited for $15,000 in the eliminating entries AACSB: Analytic AICPA: Measurement 6-27 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 24 Based on the preceding information, in the preparation of the 2009 consolidated balance sheet, machine will be: A debited for $1,000 B debited for $15,000 C credited for $45,000 D debited for $25,000 AACSB: Analytic AICPA: Measurement 25 Based on the preceding information, income assigned to the noncontrolling interest in the 2009 consolidated income statement will be: A $12,000 B $14,000 C $12,500 D $48,000 AACSB: Analytic AICPA: Measurement 26 Based on the preceding information, consolidated net income for 2009 will be: A $150,000 B $100,000 C $148,000 D $130,000 AACSB: Analytic AICPA: Measurement 6-28 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 27 On January 1, 2009, Light Corporation sold equipment for $400,000 to Star Corporation, its wholly owned subsidiary Light had paid $900,000 for this equipment, which had accumulated depreciation of $170,000 Light estimated a $50,000 salvage value and depreciated the tractor using the straight-line method over 10 years, a policy that Star continued In Light's December 31, 2009, consolidated balance sheet, this tractor should be included in fixed-asset cost and accumulated depreciation as: A Option A B Option B C Option C D Option D AACSB: Analytic AICPA: Measurement Blue Corporation holds 70 percent of Black Company's voting common stock On January 1, 2003, Black paid $500,000 to acquire a building with a 10-year expected economic life Black uses straight-line depreciation for all depreciable assets On December 31, 2008, Blue purchased the building from Black for $180,000 Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 2008 and 2009, respectively Black reported net income of $30,000 and $45,000 for 2008 and 2009, respectively 28 Based on the preceding information, the amount to be reported as consolidated net income for 2008 will be: A $190,000 B $170,000 C $175,000 D $150,000 AACSB: Analytic AICPA: Measurement 6-29 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 29 Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 2008 will be: A $190,000 B $170,000 C $175,000 D $150,000 AACSB: Analytic AICPA: Measurement 30 Based on the preceding information, the amount to be reported as consolidated net income for 2009 will be: A $207,000 B $202,000 C $212,000 D $190,000 AACSB: Analytic AICPA: Measurement 31 Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 2009 will be: A $207,000 B $202,000 C $212,000 D $190,000 AACSB: Analytic AICPA: Measurement 6-30 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 32 Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements? I Security holdings II Interest and dividends III Sales and purchases A I, II B I, III C I, II, III D II AACSB: Analytic AICPA: Reporting Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 2008 This purchase followed a series of transactions between P-controlled subsidiaries On February 15, 2008, S3 Corporation purchased the land from a nonaffiliate for $160,000 It sold the land to S2 Company for $145,000 on October 19, 2008, and S2 sold the land to S1 for $197,000 on November 27, 2008 Parent has control of the following companies: Parent reported income from its separate operations of $200,000 for 2008 33 Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 2008? A $145,000 B $220,000 C $197,000 D $160,000 AACSB: Analytic AICPA: Measurement 6-31 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 34 Based on the preceding information, what amount of gain or loss on sale of land should be reported in the consolidated income statement for 2008? A $60,000 B $0 C $75,000 D $23,000 AACSB: Analytic AICPA: Measurement 35 Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 2008? A $369,400 B $405,000 C $465,000 D $60,000 AACSB: Analytic AICPA: Measurement Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc During 2007, Big paid Small $125,432 for its services For the year 2008, Small billed Big $140,000 for such services and collected all but $7,900 by year-end Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 2007 and $121,000 in 2008 Big reported $2,567,000 of income from its own separate operations for 2008, and Small reported net income of $695,000 36 Based on the preceding information, what amount of consolidated net income should be reported in 2008? A $3,262,000 B $4,050,000 C $3,254,100 D $3,122,000 AACSB: Analytic AICPA: Measurement 6-32 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 37 Based on the preceding information, what amount of income should be assigned to the noncontrolling shareholders in the consolidated income statement for 2008? A $47,700 B $44,400 C $55,600 D $60,000 AACSB: Analytic AICPA: Measurement 38 Based on the preceding information, what amount of receivable/payable should be eliminated in the 2008 consolidated financial statements? A $125,432 B $7,900 C $5,560 D $140,000 AACSB: Analytic AICPA: Measurement 39 A parent sold land to its partially owned subsidiary during the year at a loss The subsidiary continues to hold the land at the end of the year The amount to be reported as consolidated net income for the year should equal: A the parent's separate operating income, plus the intercompany loss B the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net income C the parent's separate operating income, minus the intercompany loss D the parent's separate operating income, minus the intercompany loss, plus the subsidiary's net income AACSB: Analytic AICPA: Reporting 6-33 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 40 Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I in the year of the downstream sale II over the period of time the subsidiary uses the land III in the year the subsidiary sells the land to an unrelated party A I B II C III D I or II AACSB: Analytic AICPA: Reporting Essay Questions 6-34 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 41 Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 2005, at book value At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Winner Company The companies' permanent accounts on December 31, 2008, contained the following balances: On January 1, 2004, Fred paid $150,000 for equipment with a 10-year expected total economic life The equipment was depreciated on a straight-line basis with no residual value Winner purchased the equipment from Fred on December 31, 2006, for $140,000 Winner sold land it had purchased for $75,000 on February 18, 2004, to Fred for $60,000 on October 10, 2007 Required: Prepare a consolidated balance sheet workpaper in good form as of December 31, 2008 6-35 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets Eliminating entries: 6-36 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets AACSB: Analytic AICPA: Measurement 6-37 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 42 New Company acquired 75 percent of Old Company's stock at underlying book value on January 1, 2008 At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Old Company Old Company reported shares outstanding of $350,000 and retained earnings of $100,000 During 2008, Old Company reported net income of $60,000 and paid dividends of $3,000 In 2009, Old Company reported net income of $90,000 and paid dividends of $15,000 The following transactions occurred between New Company and Old Company in 2008 and 2009: Old Co sold computer equipment to New Co for a $42,000 profit on December 26, 2008 The equipment had a five-year estimated economic life remaining at the time of intercompany transfer and is depreciated on a straight-line basis New sold land costing $90,000 to Old Company on June 28, 2009, for $110,000 Required: 1) Give all eliminating entries needed to prepare a consolidation workpaper for 2009 assuming that New Co uses the fully adjusted equity method to account for its investment in Old Company 2) Give all eliminating entries needed to prepare a consolidation workpaper for 2009 assuming that New Co uses the cost method to account for its investment in Old Company 6-38 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 1) Fully Adjusted Equity Method Eliminating Entries, December 31, 2009: 2) Cost Method Eliminating Entries, December 31, 2009: 6-39 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets AACSB: Analytic AICPA: Measurement 6-40 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 43 Peter Architectural Services owns 100 percent of Smith Manufacturing During the course of 2008 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility, which will open January 4, 2009, and has a year useful life Explain the impact providing this service has on Peter Architectural Services' 2008 and 2009 consolidated financial statements Peter has provided a service to the subsidiary Smith During 2008 the cost of the architectural services will be capitalized by Smith as part of the cost of the manufacturing facility The profit earned on the consulting services must be eliminated in 2008 against the cost of the building In this manner consolidated net income is not overstated Beginning in 2009 the intercompany profit would be realized over a year period In each of the years, depreciation expense is decreased and consolidated net income is increased; as income to the controlling interests AACSB: Communication AICPA: Decision Making 44 PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent owned subsidiary, on January 1, 2008 The cost of the land was $75,000, when it was purchased in 2007 In 2010, Seven Star sells the land to Hot Properties Inc., an unrelated entity, for $120,000 How is the land reported in the consolidated financial statements for 2008, 2009 and 2010? PeopleMag cannot report a gain on the sale of land for 2008 or 2009 in the consolidated financial statements The land must be reported on the consolidated balance sheet at its original cost of $75,000 The intercompany gain is unrealized and is eliminated In 2010, the entire gain of $45,000 ($120,000 - $75,000) is realized and recognized when the land is sold to an outside party AACSB: Communication AICPA: Reporting 6-41 [...]... 6-20 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets ABC Corporation purchased land on January 1, 2 006, for $50,000 On July 15, 2008, it sold the land to its subsidiary, XYZ Corporation, for $70,000 ABC owns 80 percent of XYZ's voting shares 10 Based on the preceding information, what will be the workpaper eliminating entry to remove the effects of the intercompany sale of land... Architectural Services owns 100 percent of Smith Manufacturing During the course of 2008 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility, which will open January 4, 2009, and has a 5 year useful life Explain the impact providing this service has on Peter Architectural Services' 2008 and 2009 consolidated financial statements 6-16 Chapter 06 - Intercompany. .. percent of Black's recorded gain AACSB: Analytic AICPA: Reporting 6-17 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 2 A parent and its 80 percent owned subsidiary have made several intercompany sales of noncurrent assets during the past two years The amount of income assigned to the noncontrolling interest for the second year should include the noncontrolling interest's share of. .. information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 2009 will be: A $207,000 B $202,000 C $212,000 D $190,000 6-11 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 32 Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements? I... amount of income assigned to the controlling shareholders in the consolidated income statement for 2009 will be: A $207,000 B $202,000 C $212,000 D $190,000 AACSB: Analytic AICPA: Measurement 6-30 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 32 Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial. .. Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I in the year of the downstream sale II over the period of time the subsidiary uses the land III in the year the subsidiary sells the land to an unrelated party A I B II C III D I or II AACSB: Analytic AICPA: Reporting Essay Questions 6-34 Chapter 06 - Intercompany Transfers of Services and Noncurrent. .. net income: I in the year of the downstream sale II over the period of time the subsidiary uses the land III in the year the subsidiary sells the land to an unrelated party A I B II C III D I or II Essay Questions 6-14 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 41 Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 2005, at book value... preparing the consolidated financial statements for 2008? A Option A B Option B C Option C D Option D AACSB: Analytic AICPA: Measurement 6-21 Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets 11 Based on the preceding information, what will be the workpaper eliminating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for... from Black, of $140,000 and $162,000 for 2008 and 2009, respectively Black reported net income of $30,000 and $45,000 for 2008 and 2009, respectively 28 Based on the preceding information, the amount to be reported as consolidated net income for 2008 will be: A $190,000 B $170,000 C $175,000 D $150,000 AACSB: Analytic AICPA: Measurement 6-29 Chapter 06 - Intercompany Transfers of Services and Noncurrent. .. 2009 and 2010? Chapter 06 Intercompany Transfers of Services and Noncurrent Assets Answer Key Multiple Choice Questions 1 Blue Company owns 70 percent of Black Company's outstanding common stock On December 31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying amount, but less than its original cost On a consolidated balance sheet at December 31, 2008, the carrying amount of