10.02 Flashcards
Bell, Inc. owns 60% of Dart Corporation's common stock. On December 31, 20X6, Dart is indebted to Bell for a $200,000 cash advance. In preparing the consolidated balance sheet on that date, what amount of the advance should be eliminated? $-0- $80,000 $120,000 $200,000
$200,000
**The amount to be eliminated is $200,000, which is the full amount of the intercompany receivable-payable resulting from the cash advance.
Which one of the following will occur on consolidated financial statements if an intercompany inventory transaction is not eliminated?
- An understatement of sales.
- An overstatement of sales.
- An understatement of purchases.
- An overstatement of accounts receivable.
An overstatement of sales.
**If an intercompany inventory transaction is not eliminated in the consolidating process, consolidated financial statements would show an overstatement of sales. Sales would be overstated by the amount of the intercompany sales reported by the selling affiliate. All intercompany sales and related purchases must be eliminated, even if they do not result in a profit or loss.
For consolidated purposes, what effect will the intercompany sale of a fixed asset at a profit or at a loss have on depreciation expense recognized by the buying affiliate?
- At a Profit
- At a Loss
- At a Profit-OVERSTATE
- At a Loss-UNDERSTATE
**An intercompany sale of a fixed asset at a profit will result in the buying affiliate overstating depreciation expense by the amount of depreciation taken on the intercompany profit, and an intercompany sale at a loss will result in an understatement of depreciation expense taken by the buying affiliate. When an intercompany sale of a fixed asset results in a loss, the carrying value of the asset will be understated by the amount of the loss. As a result, depreciation expense taken by the buying affiliate will be understated by the amount of depreciation that would have been taken on the intercompany loss.
Zest Co. owns 100% of Cinn, Inc. On January 2, 1999, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a five-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over three years with no residual value. In Zest's December 31, 1999, consolidating worksheet, by what amount should depreciation expense be decreased? $0 $8,000 $16,000 $24,000
$8,000
**There are two ways to approach this solution. First, take the difference in carrying values 72,000-48,000 = 24,000. The 24,000 is the incremental amount Cinn carries the equipment over the carrying amount of Zest. The 24,000/3 = 8,000
OR, compute the depreciation for each company:
Cinn is 72,000/3 = 24,000
Zest is 80,000/5 = 16,000
Since Cinn is 100% owned by Zest, the equipment cannot be depreciated by a greater amount through an intracompany sale. The difference is 24,000 − 16,000 = 8,000.
Which one of the following is not a characteristic of intercompany bonds?
- Intercompany bonds may occur on the date of a business combination or subsequent to a business combination.
- When bonds become intercompany, it is as though the bonds have been retired for consolidated purposes.
- Intercompany bonds can result in the recognition of a gain or a loss for consolidating purposes.
- When bonds become intercompany, they are written off of the books of the issuing affiliate and the investing affiliate.
When bonds become intercompany, they are written off of the books of the issuing affiliate and the investing affiliate.
**The liability and investment related to intercompany bonds are eliminated only on the consolidating worksheet. They are not written off the books of either the issuing or the investing affiliate. From the perspective of the separate companies, the liability and investment related to the bonds continue to exist, but for consolidated purposes, they have been constructively retired.
Under IFRS the asset goodwill may be recognized
- When it is acquired by purchase.
- When it is internally generated or acquired by purchase.
- When it is clear that it exists and has value.
- When it has future economic benefits.
When it is acquired by purchase.
**Goodwill can only be recognized if it is acquired by purchase.
Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases merchandise inventory from Webb at 140% of Webb’s cost. During 2007, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 2007. In preparing combined financial statements for 2007, Nolan’s bookkeeper disregarded the common ownership of Twill and Webb.
What amount should be eliminated from cost of goods sold in the combined income statement for 2007?
$56,000
$40,000
$24,000
$16,000
$56,000
**The amount at which Webb sold the inventory to Twill ($40,000 × 1.40 = $56,000) will be the amount of cost of goods sold to Twill and should be eliminated in combining the financial statements of Webb and Twill. The cost of goods to Webb ($40,000) is the cost from an unrelated entity and should be the cost of goods sold for the combined entity. Since both the $40,000 cost of goods to Webb and the $56,000 cost of goods to Twill will be on the combining worksheet, the cost of goods to Twill (from Webb) must be eliminated, leaving only the $40,000 cost from a nonaffiliate.
Parco has the following three subsidiaries: Finco, Serco, and Euroco. Finco is a 100% owned finance subsidiary. Serco is an 80% owned service company. Euroco is a 100% owned foreign subsidiary that conducts operations in Western Europe. Which one of the following is the most likely number of entities, including Parco, to be included in Parco's consolidated financial statements? One. Two. Three. Four.
Four.
**The consolidated statements would include not only Parco, but also all three of its subsidiaries, for a total of four.
