Test bank advanced financial accounting ch 07 intercompany inventory transactions

Based on the information given above, what amount should be eliminated from cost ofgoods sold in the combined income statement for 2008?. Based on the information given above, what amoun

Chapter 07 Intercompany Inventory TransactionsMultiple Choice Questions

1 When there are intercompany sales of inventory during the year and a three-part

consolidation workpaper is prepared, elimination entries related to the intercompany sales:

I Always are needed

II Are not needed if all the inventory is resold to unrelated parties prior to the end of theyear

combined financial statements for 2008, Earth's bookkeeper disregarded the common

ownership of Mars and Venus

2 Based on the information given above, what amount should be eliminated from cost ofgoods sold in the combined income statement for 2008?

A $31,250

B $25,000

C $56,892

D $6,250

3 Based on the information given above, by what amount was unadjusted revenue overstated

in the combined income statement for 2008?

A $25,000

B $56,892

C $31,250

4 Global Corporation acquired 85 percent of Local Company's voting shares of stock in 2007.During 2008, Global purchased 50,000 picture tubes for $15 each and sold 28,000 of them toLocal for $20 each Local sold all of the units to unrelated entities prior to December 31,

2008, for $30 each Both companies use perpetual inventory systems

Which workpaper eliminating entry is needed in preparing consolidated financial statementsfor 2008 to remove all effects of the intercompany sale?

I affected only if there are upstream intercompany sales of inventory

II affected only if there are downstream intercompany sales of inventory

A I

B II

C Both I and II

D Neither I nor II

On January 1, 2008, Parent Company acquired 90 percent ownership of Subsidiary

Corporation, at underlying book value The fair value of the noncontrolling interest at the date

of acquisition was equal to 10 percent of the book value of Subsidiary Corporation On Mar

17, 2008, Subsidiary purchased inventory from Parent for $90,000 Subsidiary sold the entireinventory to an unaffiliated company for $120,000 on November 21, 2008 Parent had

produced the inventory sold to Subsidiary for $62,000 The companies had no other

7 Based on the information given above, what amount of cost of goods sold will be reported

in the 2008 consolidated income statement?

Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 2007, at

underlying book value On that date, the fair value of noncontrolling interest was equal to 10percent of the book value of Scrooge Corporation Pilfer purchased inventory from Scroogefor $90,000 on August 20, 2008, and resold 70 percent of the inventory to unaffiliated

companies on December 1, 2008, for $100,000 Scrooge produced the inventory sold to Pilferfor $67,000 The companies had no other transactions during 2008

9 Based on the information given above, what amount of sales will be reported in the 2008consolidated income statement?

A $90,000

B $120,000

C $100,000

D $67,000

10 Based on the information given above, what amount of cost of goods sold will be reported

in the 2008 consolidated income statement?

13 Senior Inc owns 85 percent of Junior Inc During 2008, Senior sold goods with a 25percent gross profit to Junior Junior sold all of these goods in 2008 How should 2008consolidated income statement items be adjusted?

A No adjustment is necessary

B Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales

C Net income should be reduced by 85 percent of the gross profit on intercompany sales

D Sales and cost of goods sold should be reduced by the intercompany sales

Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent ofSubsidiary 2 Company's stock During 2008, Parent sold inventory purchased in 2007 for

$48,000 to Subsidiary 1 for $60,000 Subsidiary 1 then sold the inventory at its cost of

$60,000 to Subsidiary 2 Prior to December 31, 2008, Subsidiary 2 sold $45,000 of inventory

to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 2008

14 Based on the information given above, what amount should be reported in the 2008consolidated income statement as cost of goods sold?

A $36,000

B $12,000

C $48,000

D $45,000

15 Based on the information given above, what amount should be reported in the December

31, 2008, consolidated balance sheet as inventory?

A $36,000

B $12,000

C $15,000

D $28,000

16 Based on the information given above, what amount of cost of goods sold must be

eliminated from the consolidated income statement for 2008?

A $117,000

B $120,000

C $150,000

17 Based on the information given above, what amount of sales must be eliminated from theconsolidated income statement for 2008?

Sub Company sold inventory for $300,000, $262,500 and $337,500 in the years 2006, 2007,and 2008 respectively Par Company reported ending inventory of $105,000, $157,500 and

$180,000 for 2006, 2007, and 2008 respectively Par acquired 70 percent of the ownership ofSub on January 1, 2006, at underlying book value The fair value of the noncontrolling

interest at the date of acquisition was equal to 30 percent of the book value of Sub Company

19 Based on the information given above, what will be the consolidated net income for2006?

24 During the year a parent makes sales of inventory at a profit to its 75 percent ownedsubsidiary The subsidiary also makes sales of inventory at a profit to its parent during thesame year Both the parent and the subsidiary have on hand at the end of the year 20 percent

of the inventory acquired from one another Consolidated revenues for the year shouldexclude:

A 80 percent of the total revenues from intercompany sales

B total revenues from intercompany sales

C only the revenues from the subsidiary's intercompany sales

D only the revenues from the parent's intercompany sales

25 Consolidated net income may include the parent's separate operating income plus theparent's share of the subsidiary's reported net income:

A plus the unrealized profit on upstream intercompany sales of inventory made during thecurrent year

B plus the profit realized this year from upstream intercompany sales of inventory made lastyear

C plus unrealized profit on downstream intercompany sales of inventory made during thecurrent year

D minus the parent's share of profit realized this year from upstream intercompany sales ofinventory made last year

Perth Corporation owns 90 percent of Dundee Company's stock At the end of 2008, Perthand Dundee reported the following partial operating results and inventory balances:

Perth regularly prices its products at cost plus a 30 percent markup for profit Dundee pricesits sales at cost plus a 10 percent markup The total sales reported by Perth and Dundeeinclude both intercompany sales and sales to nonaffiliates

26 Based on the information given above, what amount of sales will be reported in theconsolidated income statement for 2008?

28 The consolidation treatment of profits on inventory transfers that occurred before thebusiness combination depends on whether:

I the companies were independent at that time

II the sale transaction was the result of arm's-length bargaining

29 Based on the information given above, what amount of cost of goods sold should beeliminated in the consolidation workpaper for 2008?

31 Based on the information given above, by what amount should Graceland write downinventory in its books?

2008, and sold the remainder in early 2009 for $130 each Both companies use perpetualinventory systems

32 Based on the information given above, what amount of cost of goods sold did ABC record

34 Based on the information given above, what amount of cost of goods sold must be

reported in the consolidated income statement for 2008?

A $2,765,000

B $1,620,000

C $1,422,000

D $2,963,000

35 Based on the information given above, what amount of cost of goods sold must be

eliminated from the consolidated income statement for 2008?

A $2,765,000

B $1,620,000

C $1,422,000

D $2,963,000

36 Based on the information given above, what amount of cost of goods sold must be

eliminated from the consolidated income statement for 2009?

A the amount reported as intercompany sales by the subsidiary

B the amount reported as intercompany sales by the subsidiary minus unrealized profit in theending inventory of the parent

C the amount reported as cost of goods sold by the parent minus unrealized profit in theending inventory of the parent

D the amount reported as cost of goods sold by the parent

38 Consolidated net income for a parent and its 80 percent owned subsidiary should becomputed by eliminating:

A all unrealized profit in downstream intercompany inventory sales, and unrealized profit inupstream intercompany inventory sales made during the current year

B all unrealized profit in downstream intercompany inventory sales, and the noncontrollinginterest's share of unrealized profit in upstream inventory sales made during the current year

C the controlling interest's share of unrealized profit in downstream intercompany sales, andthe controlling interest's share of unrealized profit in upstream sales made during the currentyear

D all unrealized profit in downstream intercompany sales, and the noncontrolling interest'sshare of unrealized profit in upstream sales made during the current year

Essay Questions

39 Colton Company acquired 80 percent ownership of Mota Company's voting shares onJanuary 1, 2008, at underlying book value The fair value of the noncontrolling interest onthat date was equal to 20 percent of the book value of Mota Company During 2008, Coltonpurchased inventory for $30,000 and sold the full amount to Mota Company for $50,000 OnDecember 31, 2008, Mota's ending inventory included $10,000 of items purchased fromColton Also in 2008, Mota purchased inventory for $80,000 and sold the units to Colton for

$100,000 Colton included $30,000 of its purchase from Mota in ending inventory on

December 31, 2008 Summary income statement data for the two companies revealed thefollowing:

Required:

a Compute the amount to be reported as sales in the 2008 consolidated income statement

b Compute the amount to be reported as cost of goods sold in the 2008 consolidated incomestatement

c What amount of income will be assigned to the noncontrolling shareholders in the 2008consolidated income statement?

d What amount of income will be assigned to the controlling interest in the 2008 consolidatedincome statement?

40 Hunter Company and Moss Company both produce and purchase fabric for resale eachperiod and frequently sell to each other Since Hunter Company holds 80 percent ownership

of Moss Company, Hunter's controller compiled the following information with regard tointercompany transactions between the two companies in 2007 and 2008:

41 On January 1, 2007, Jones Company acquired 90 percent of the outstanding commonstock of Smith Corporation for $1,242,000 On that date, the fair value of noncontrollinginterest was equal to $138,000 The entire differential was related to land held by Smith Atthe date of acquisition, Smith had common stock outstanding of $520,000, additional paid-incapital of $200,000, and retained earnings of $540,000 During 2007, Smith sold inventory toJones for $440,000 The inventory originally cost Smith $360,000 By year-end, 30 percentwas still in Jones' ending inventory During 2008, the remaining inventory was resold to anunrelated customer Both Jones and Smith use perpetual inventory systems.

Income and dividend information for both Jones and Smith for 2007 and 2008 are as follows:

Required:

a Present the workpaper elimination entries necessary to prepare consolidated financialstatements for 2007 assuming Jones accounts for its investment in Smith stock using the fullyadjusted equity method

b Present the workpaper elimination entries necessary to prepare consolidated financialstatements for 2008, assuming Jones accounts for its investment in Smith stock using the costmethod

Chapter 07 Intercompany Inventory Transactions Answer Key

Multiple Choice Questions

1 When there are intercompany sales of inventory during the year and a three-part

consolidation workpaper is prepared, elimination entries related to the intercompany sales:

I Always are needed

II Are not needed if all the inventory is resold to unrelated parties prior to the end of theyear

AICPA: Decision Making

Earth Company owns 100 percent of the capital stock of both Mars Corporation and VenusCorporation Mars purchases merchandise inventory from Venus at 125 percent of Venus'scost During 2008, Venus sold inventory to Mars that it had purchased for $25,000 Mars soldall of this merchandise to unrelated customers for $56,892 during 2008 In preparing

combined financial statements for 2008, Earth's bookkeeper disregarded the common

ownership of Mars and Venus

2 Based on the information given above, what amount should be eliminated from cost ofgoods sold in the combined income statement for 2008?

3 Based on the information given above, by what amount was unadjusted revenue overstated

in the combined income statement for 2008?

2008, for $30 each Both companies use perpetual inventory systems

Which workpaper eliminating entry is needed in preparing consolidated financial statementsfor 2008 to remove all effects of the intercompany sale?

5 When a parent and its subsidiary use a periodic inventory system rather than a perpetualsystem, the income and asset balances reported in the consolidated financial statements are:

I affected only if there are upstream intercompany sales of inventory

II affected only if there are downstream intercompany sales of inventory

AICPA: Decision Making

On January 1, 2008, Parent Company acquired 90 percent ownership of Subsidiary

Corporation, at underlying book value The fair value of the noncontrolling interest at the date

of acquisition was equal to 10 percent of the book value of Subsidiary Corporation On Mar

17, 2008, Subsidiary purchased inventory from Parent for $90,000 Subsidiary sold the entireinventory to an unaffiliated company for $120,000 on November 21, 2008 Parent had

produced the inventory sold to Subsidiary for $62,000 The companies had no other

7 Based on the information given above, what amount of cost of goods sold will be reported

in the 2008 consolidated income statement?

Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 2007, at

underlying book value On that date, the fair value of noncontrolling interest was equal to 10percent of the book value of Scrooge Corporation Pilfer purchased inventory from Scroogefor $90,000 on August 20, 2008, and resold 70 percent of the inventory to unaffiliated

companies on December 1, 2008, for $100,000 Scrooge produced the inventory sold to Pilferfor $67,000 The companies had no other transactions during 2008

9 Based on the information given above, what amount of sales will be reported in the 2008consolidated income statement?

A.$90,000

B.$120,000

C $100,000

D.$67,000

10 Based on the information given above, what amount of cost of goods sold will be reported

in the 2008 consolidated income statement?