10.04 Flashcards
During 200X, Papa Company sold inventory, which cost it $18,000, to its subsidiary, Sonnyco, for $27,000. At the end of 200X, Sonnyco had $9,000 of the intercompany goods still on its books. The balance had been resold to unaffiliated customers for $24,000. Which one of the following is the amount of intercompany sales that should be eliminated for 200X consolidated statements? $27,000 $24,000 $18,000 $12,000
$27,000
**Since only the transaction between Papa and Sonnyco is an intercompany transaction, only the amount of that transaction, $27,000, will be eliminated. The purchase of inventory by Papa and the sale by Sonnyco are both with non-affiliates. Therefore, those transaction amounts would not be eliminated.
During 200X, Papa Company sold inventory, which cost it $18,000, to its subsidiary, Sonnyco, for $27,000. At the end of 200X, Sonnyco had $9,000 of the intercompany goods still on its books. The balance had been resold to unaffiliated customers for $24,000. Which one of the following is the amount of ending inventory that should be eliminated for consolidated statements? $3,000 $6,000 $9,000 $15,000
$3,000
**With a cost from non-affiliates of $18,000 and an intercompany selling price of $27,000, there is a $9,000 intercompany profit on the inventory transaction. Therefore, $9,000 profit/$27,000 cost to the buying affiliate results in a one third profit in ending inventory. Since the ending inventory at the buying affiliate’s cost is $9,000, 1/3 × $9,000 = $3,000 is the intercompany profit in ending inventory and the amount that would have to be eliminated.
An intercompany depreciable fixed asset transaction resulted in an intercompany gain. Which one of the following is least likely to be reflected in the consolidated financial statements prepared at the end of the period in which the intercompany transaction occurred?
- Consolidated income will be less than the sum of the incomes of the separate companies being combined.
- Consolidated assets will be less than the sum of the assets of the separate companies being combined.
- Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined.
- Consolidated accumulated depreciation will be more than the sum of accumulated depreciation of the separate companies being combined.
Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined.
**Consolidated depreciation expense will be less, not more, than the sum of depreciation expense of the separate companies being combined. Because the intercompany transaction resulted in a gain, the buying affiliate will have the asset on its books with the intercompany gain included in its carrying value and will depreciate that value on its books. For consolidated purposes, that depreciation on the intercompany gain will be eliminated, resulting in less depreciation expense than the sum of the depreciation expense of the separate companies.
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.
Water Co. owns 80% of the outstanding common stock of Fire Co. On December 31, 2005, Fire sold equipment to Water at a price in excess of Fire’s carrying amount but less than its original cost. On a consolidated balance sheet on December 31, 2005, the carrying amount of the equipment should be reported at:
- Water’s original cost.
- Fire’s original cost.
- Water’s original cost less Fire’s recorded gain.
- Water’s original cost less 80% of Fire’s recorded gain.
Water’s original cost less Fire’s recorded gain.
**The individual books of Water and Fire would record this transaction as if they were independent companies. Fire would remove the asset and record a gain. Water would put the asset on its books at cost.
The problem is that they are not independent companies, and therefore, no real sale took place. The gain that was recorded must therefore be eliminated on the consolidated books. The net result is that the asset will be on the books at Water’s original cost less Fire’s recorded gain.
Assume that on January 2, Company P recognized a $3,000 gain on the sale of a depreciable fixed asset to its subsidiary, Company S. Company S will depreciate the asset using straight-line depreciation over the remaining three-year life of the asset. What amount of intercompany gain will be eliminated from P's retained earnings at the end of the year following the year of the intercompany fixed asset transactions? $- 0 - $1,000 $2,000 $3,000
$2,000
**The amount of intercompany gain to be eliminated at the end of the year following the year of the intercompany fixed asset sale is $2,000. At the end of the year of the intercompany sale, depreciation taken by the buying affiliate on the $3,000 inter-company gain will be $1,000 ($3,000/3 years). As a consequence, $1,000 of the $3,000 intercompany gain will have been properly recognized, leaving only $2,000 to eliminate at the end of the second year. Depreciation expense taken on the intercompany gain for the second year will confirm another $1,000 of the intercompany gain, and depreciation expense taken on the intercompany gain for the third year will confirm the last $1,000 of the intercompany gain.
On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.
Which one of the following is the amount of premium or discount on Pico’s investment in Sico’s bonds?
$250,000 premium
$100,000 premium
$50,000 premium
$50,000 discount
$50,000 discount
**The premium or discount on a bond investment is the difference between the par value of the bonds and the price paid for the bonds in the market. If the price paid is more than par value, there is a premium on the bond investment. If the price paid is less than par value, there is a discount on the bond investment. In this case, the price paid for the investment ($200,000) is less than the par value of the bonds ($250,000) by $50,000. Therefore, there is a $50,000 discount on Pico’s investment.
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.
Which of the following statements about the differences between U.S. GAAP and IFRS in determining whether or not to consolidate an entity is/are correct?
I. IFRS guidelines for determining the eligibility of an entity to be consolidated are more principles-based than are U.S. GAAP guidelines.
II. In assessing an investor’s level of ownership of an investee, both U.S. GAAP and IFRS consider outstanding securities that are exercisable or convertible into voting shares.
III. Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated.
I and III only.
**Statement I and Statement III are correct; Statement II is not correct. Under IFRS, the guidelines for determining whether or not to consolidate an entity are more principles-based than are U.S. GAAP (Statement I). Under IFRS, the basic guideline is that an entity must be consolidated when another entity has the ability to govern the financial and operating policies of the entity to obtain benefits from it. U.S. GAAP has a specific two-tiered assessment process that must be followed to determine whether or not an entity should be consolidated. Under both U.S. GAAP and IFRS, there are circumstances under which a majority-owned subsidiary does not have to be consolidated (Statement III). U.S. GAAP does not require consolidation of a majority-owned subsidiary when the investor cannot exercise control of the subsidiary. IFRS does not require consolidation of a majority-owned subsidiary under certain conditions when the parent will be consolidated with a higher-level parent.
Combined statements may be used to present the results of operation of:
Companies under common management
Commonly controlled companies
Companies under common management-YES
Commonly controlled companies-YES
**Combined financial statements are used (when consolidated statements are not appropriate) to show the aggregate results both for companies under common management and for companies under common control (and for unconsolidated subsidiaries).
The following information pertains to shipments of merchandise from Home Office to Branch during 2007:
Home Office’s cost of merchandise $160,000
Intracompany billing 200,000
Sales by Branch 250,000
Unsold merchandise at Branch on December 31, 2007 20,000
In the combined income statement of Home Office and Branch for the year ended December 31, 2007, what amount of the above transactions should be included in sales?
$250,000
$230,000
$200,000
$180,000
$250,000
**The amount that should be included in sales is the amount of sales with unrelated parties. In this case, that is the $250,000 sales by Branch to unaffiliated entities.
In the preparation of combined financial statements, would the following issues be treated in the same way as when preparing consolidated financial statements or in a different way?
Minority Interest
Foreign Operations
Different Fiscal Periods
Minority Interest-SAME
Foreign Operations-SAME
Different Fiscal Periods-SAME
**According to ASC 810, if problems associated with minority interest, foreign operations, different fiscal periods, or income taxes occur in the preparation of combined financial statements, they should be treated in the same manner as in the preparation of consolidated financial statements. Therefore, all three items should be treated in the same manner as in consolidated statements.
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.
Which of the following legal forms of business combination will result in the need to prepare consolidated financial statements?
Merger
Acquisition
Consolidation
Merger-NO
Acquisition-YES
Consolidation-NO
**Only an acquisition form of business combination will require the preparation of consolidated financial statements. In the merger and consolidation forms of business combination, only one firm will remain after the combination. Therefore, there will not be two (or more) sets of financial statements to consolidate.
