Test bank advanced accounting 10e by beams chapter 05

The consolidated income statement for Duck Corporation and subsidiary for the year ended December 31, 2005 will show consolidated cost of sales of?.?. A working paper entry to eliminate

Chapter 5 Test Bank INTERCOMPANY PROFIT TRANSACTIONS – INVENTORIES

Multiple Choice Questions

c does not result in consolidated income until the

merchandise is sold to outside parties

d does not require a working paper adjustment if the

merchandise was transferred at cost

LO1

2 Honeyeater Corporation owns a 40% interest in Nectar Company,

acquired several years ago at a cost equal to book value and fair value Nectar sells merchandise to Honeyeater for the first time in 2005 In computing income from the investee for

2005 under the equity method, Honeyeater uses which equation?

a 40% of Nectar’s income less 100% of the unrealized profit

in Honeyeater's ending inventory

b 40% of Nectar’s income plus 100% of the unrealized profit

in Honeyeater's ending inventory

c 40% of Nectar’s income less 40% of the unrealized profit in Honeyeater’s ending inventory

d 40% of Nectar’s income plus 40% of the unrealized profit in Honeyeater’s ending inventory

LO1

3 In situations where there are routine inventory sales between

parent companies and subsidiaries, when preparing the consolidation statements, which of the following line items isindifferent to the sales being either upstream or downstream?

a Consolidated retained earnings

b Consolidated gross profit

c Noncontrolling interest expense

d Consolidated net income

LO2

4 The consolidation procedures for intercompany sales are

similar for upstream and downstream sales

a if the merchandise is transferred at cost

b under a periodic inventory system but not under a perpetual inventory system

c if the merchandise is immediately sold to outside parties

d when the subsidiary is 100% owned

Use the following information to answer questions 5 through 9

Eagle Corporation owns 80% of Flyway Inc.’s common stock that was purchased at its underlying book value The two companies report the following information for 2004 and 2005

During 2004, one company sold inventory to the other company for $50,000 which cost the transferor $40,000 As of the end of

2004, 30% of the inventory was unsold In 2005, the remaining inventory was resold outside the consolidated entity

Cost of Goods Sold 320,000 155,000

5 If the sale referred to above was a downstream sale, the total

sales revenue reported in the consolidated income statement for

LO2

6 If the sale referred to above was a downstream sale, by what

amount must Inventory be reduced to reflect the correct balance

7 For 2004, consolidated net income will be what amount if the

intercompany sale was downstream?

8 If the intercompany sale mentioned above was an upstream sale,

what will be the reported amount of total sales revenue for 2005?

9 If the intercompany sale was an upstream sale, the total amount

of consolidated cost of goods sold for 2005 will be?

Use the following information to answer questions 9 and 10

Duck Corporation acquired a 70% interest in Whistle Corporation

on January 1, 2005, when Whistle’s book values were equal to their fair values During 2005, Duck sold merchandise that cost

$75,000 to Whistle for $110,000 On December 31, 2005, fourths of the merchandise acquired from Duck remained in Whistle’s inventory Separate incomes (investment income not included) of Duck and Whistle are as follows:

10 The consolidated income statement for Duck Corporation and

subsidiary for the year ended December 31, 2005 will show consolidated cost of sales of?

LO3

12 Pond Co a 55%-owned subsidiary of Goose Inc made the

following entry to record a sale of merchandise to Goose:

Accounts Receivable 60,000

Sales Revenue 60,000

All Pond sales are at 125% of cost One-third of this merchandise remained in the Goose’s inventory at year-end A working paper entry to eliminate unrealized profits from consolidated inventory would include a credit to Inventory in the amount of

Wren Corporation acquired 80% ownership of Arid Incorporated,

at a time when Wren’s investment (using the equity method) and Arid’s book values were equal During 2005, Wren sold goods to Arid for $200,000 making a gross profit percentage of 20% Half of these goods remained unsold in Arid’s inventory at the end of the year Income statement information for Wren and Arid for 2005 were as follows:

Cost of Goods Sold 500,000 400,000

16 On January 1, 2004, Darter Industries acquired an 80% interest

in Thermal Company to insure a steady supply of Thermal’s inventory that Darter uses in its own manufacturing businesses Thermal sold 100% of its output to Darter during 2004 and 2005

at a markup of 120% of Thermal’s cost Darter had $9,600 of these items remaining in its January 1, 2005 inventory and no items on December 31, 2005 If Darter neglected to eliminate unrealized profits from all intercompany sales from Thermal, consolidated net income for 2005 was

a overstated by $320

b understated by $400

c overstated by $2,400

d unaffected because Darter buys 100% of Thermal’s output

Use the following information for questions 17 and 18:

Grebe Company routinely receives goods from its 80%-owned subsidiary, Swamp Corporation In 2004, Swamp sold merchandise that cost $80,000

to Grebe for $100,000 Half of this merchandise remained in Grebe’s December 31, 2004 inventory During 2005, Swamp sold merchandise that cost $160,000 to Grebe for $200,000 $62,500 of the 2005 merchandise inventory remained in Grebe’s December 31, 2005 inventory Selected income statement information for the two affiliates for the year 2005was as follows:

A parent company regularly sells merchandise to its 70%-owned

subsidiary Which of the following statements describes the

computation of minority interest income?

a The subsidiary’s net income times 30%

b (The subsidiary’s net income x 30%) + unrealized profits in

the beginning inventory – unrealized profits in the ending inventory

c (The subsidiary’s net income + unrealized profits in the

beginning inventory – unrealized profits in the ending inventory) x 30%

d (The subsidiary’s net income + unrealized profits in the

ending inventory – unrealized profits in the beginning inventory) x 30%

LO5

20 Squid Corporation, a 90%-owned subsidiary of Penguin

Corporation, sold inventory items to its parent at a $24,000

profit in 2005 Penguin resold one-third of this inventory to

outside entities Squid reported net income of $100,000 for

2005 Minority interest income that will appear in the

consolidated income statement for 2005 is

LO3

Exercise 1

Petrel Corporation acquired a 60% interest in Salt Corporation on January 1, 2005, at a cost equal to book value and fair value Saltreports net income of $880,000 for 2005 Petrel regularly sells merchandise to Salt at 120% of Petrel’s cost The intercompany salesinformation for 2004 is as follows:

Intercompany sales at selling price $ 672,000

Value of merchandise remaining

Required:

1 Determine Frigatebird’s income from Cliff for 2005

2 In General Journal format, prepare consolidation working paper entries to eliminate the effects of the intercompany inventory sales assuming the perpetual inventory method is used

LO3&4

Exercise 3

Tern Corporation acquired an 80% interest in Harbor Corporation

several years ago when Harbor’s book values and fair values were

equal Separate company income statements for Tern and Harbor for the

year ended December 31, 2005 are summarized as follows:

During 2004 Tern sold merchandise that cost $120,000 to Harbor for

$180,000 Half of this merchandise remained in Harbor’s inventory at

December 31, 2004 During 2005, Tern sold merchandise that cost

$150,000 to Harbor for $225,000 One-third of this merchandise

remained in Harbor’s December 31, 2005 inventory

Egret Corporation acquired an 80% interest in Tick Corporation at

book value in 2004 During 2005, Egret sold $148,000 of merchandise

to Tick at 160% of Egret’s cost Tick’s beginning and ending

inventories for 2005 were $38,000 and $44,000, respectively Income

statement information for both companies for 2005 is as follows:

Required:

Prepare a consolidated income statement for Egret Corporation and

Subsidiary for 2005

LO4

Exercise 5

Ibis Corporation acquired 100% of Lake Co common stock on January 1,

2003, for $550,000 when the book values of Lake’s assets and

liabilities were equal to their fair values and Lake’s stockholders’

equity consisted of $280,000 of Capital Stock and $270,000 of

Retained Earnings

Ibis’ separate income (excluding Lake) was $900,000, 850,000 and

950,000 in 2003, 2004 and 2005 respectively Ibis sold inventory to

Lake during 2003 at a gross profit of $40,000 and 30 percent remained

at Lake at the end of the year The remaining 30 percent was sold in

2004 At the end of 2004, Ibis has $25,000 of inventory received

from Lake from a sale of $200,000 which cost Lake $160,000 There are

no unrealized profits in the inventory of Ibis or Lake at the end of

2005 Ibis uses the equity method in its separate books Select

financial information for Lake follows:

LO3&4

Exercise 6

Bittern Corporation acquired a 70% interest in Reed Corporation at

book value several years ago Reed purchases its entire inventory

from Bittern at 140% of Bittern’s cost During 2005, Bittern sold

$160,000 of merchandise to Reed Reed’s beginning and ending

inventories for 2005 were $49,000 and $33,600, respectively Income

statement information for both companies for 2005 is as follows:

Required:

Prepare a consolidated income statement for Bittern Corporation and

Subsidiary for 2005

LO 3&4

Exercise 7

Egret Corporation paid $24,800 for an 80% interest in Plume

Corporation on January 1, 2004, at which time Plume’s stockholders’

equity consisted of $15,000 of Common Stock and $6,000 of Retained

Earnings The fair values of Plume Corporation’s assets and

liabilities were identical to recorded book values when Egret

acquired its 80% interest

Plume Corporation reported net income of $4,000 and paid dividends of

$2,000 during 2004

Egret Corporation sold inventory items to Plume during 2004 and 2005

as follows:

Egret’s sales to Plume $ 5,000 $ 6,000

Egret’s cost of sales to Plume 3,000 3,500

Unrealized profit at year-end 1,000 1,500

The accounts payable of Plume include $1,500 owed to Egret for

inventory purchases

The following conversion to equity schedule provides information that

may be helpful in completing the consolidation working papers for the

year ended December 31, 2005

Retained

Earnings

Investment

in Plume

Income from Plume Prior years:

Inventory profit $ ( 1,000 ) $( 1,000 )

Current year:

Financial statements of Egret and Plume appear in the first two

columns of the partially completed working papers Complete the

consolidation working papers for Egret Corporation and Subsidiary for

the year ended December 31, 2005

Egret Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2005 Egret Plume

Eliminations Balance

Sheet Debit Credit

INCOME STATEMENT

43,000 $20,000

LO4

Exercise 8

Cardinal Corporation acquired a 90% interest in Robin Corporation at

book value in 2004 During 2005, Cardinal sold $220,000 of

merchandise to Robin at a gross profit rate of 30% Robin’s beginning

and ending inventories for 2005 were $30,000 and $40,000,

respectively Income statement information for both companies for

2005 is as follows:

Required:

Prepare a consolidated income statement for Cardinal Corporation and

Subsidiary for 2005

LO5

Exercise 9

Plover Corporation acquired 80% of Artic Inc equity on January 1,

2003, when the book values of Artic’s assets and liabilities were

equal to their fair values

Plover separate income (excluding Artic) was $1,800,000, 1,700,000

and 1,900,000 in 2003, 2004 and 2005 respectively Plover sold

inventory to Artic during 2003 at a gross profit of $48,000 and one

quarter remained at Artic at the end of the year The remaining 25

percent was sold in 2004 At the end of 2004, Plover has $25,000 of

inventory received from Artic from a sale of $100,000 which cost

Artic $80,000 There are no unrealized profits in the inventory of

Plover or Artic at the end of 2005 Plover a uses the equity method

in its separate books Select financial information for Artic

At the end of 2004, Lapwing and Forage had unrealized inventory profits from intercompany sales of $6,000 and $8,000, respectively These year-end profit amounts were realized in 2005 At the end of

2005 Lapwing held inventory acquired from Forage with a $10,000 unrealized profit Lapwing reported separate income of $100,000 for

2005 and paid dividends of $30,000 Forage reported separate income

of $70,000 for 2005 and paid dividends of $20,000

Required:

Compute the amount of consolidated net income for 2005

Less: Cost of sales 40,000

the 2005 beginning tory from 2004

( 3,000 ) Plus: Unrealized profit in

2005 ending inventory

0Consolidated cost of sales $ 477,000

10 b Combined cost of sales $ 160,000

Less: Intercompany sales revenue ( 110,000 ) Plus: Unrealized profit taken out

of inventory (75%)x(35,000) = 26,250 Consolidated cost of sales $ 76,250

16 a It will be overstated by the

amount of the minority interests’

share of the $1,600 of profit margin in the $9,600 of materials carried over to 2005 = (20% x

18 b

19 a

Squid’s reported income $ 100,000 Less: Unrealized profits in the

Income from Salt for 2005:

Share of Salt’s income ($880,000 x 60%) $ 528,000

Less: Unrealized profit in ending inventory ( 22,000 )

Exercise 2

Requirement 1

Income from Cliff:

Share of Cliff’s reported net income

$900,000 x 75% =

$ 675,000 Add: Unrealized profit in beginning inventory 27,000

Less: Unrealized profit in ending inventory ( 38,000 )

Requirement 2

To eliminate intercompany sales and purchases

To recognize previously deferred unrealized profits from the

beginning inventory

To eliminate intercompany profit in the ending inventory from cost of

goods sold and inventory

Exercise 3

Tern Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2005 Sales (combined $1,600,000 - $225,000 intercompany $ 1,375,000

Consolidated cost of goods sold computation:

Combined cost of sales ($600,000 + $300,000) $ 900,000

Less: Unrealized profit in beginning inventory

Consolidated cost of goods sold computation:

Combined cost of sales ($190,000 + $112,000) $ 302,000

Less: Unrealized profit in beginning inventory

Exercise 5

Ibis’s separate income $ 900,000 $ 850,000 $ 950,000

Add: Lake’s reported net income 80,000 90,000 70,000

Unrealized profit in 2003 income ( 12,000 ) 12,000

Unrealized profit in 2004 income ( 5,000 ) 5,000

Consolidated net income $ 968,000 $ 947,000 $ 1,025,000

Exercise 6

Preliminary computations: Unrealized profit in beginning inventory equals:

Unrealized profit in ending inventory:

Consolidated net income:

Sales (combined $620,000 - $160,000 intercompany $ 460,000

Consolidated cost of goods sold computation:

Combined cost of sales ($210,000 + $72,000) $ 282,000

Less: Unrealized profit in beginning inventory ( 14,000)

Add: Unrealized profit in ending inventory 9,600