Intercompany Fixed Asset/Inventory/Bond Trnx Flashcards
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?
A Consolidated income will be less than the sum of the incomes of the separate companies being combined.
B Consolidated assets will be less than the sum of the assets of the separate companies being combined.
C Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined.
D Consolidated accumulated depreciation will be more than the sum of accumulated depreciation of the separate companies being combined
C. 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.
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?
A $0
B $8,000
C $16,000
D $24,000
B $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:
A Water’s original cost.
B Fire’s original cost.
C Water’s original cost less Fire’s recorded gain.
D Water’s original cost less 80% of Fire’s recorded gain.
C 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?
A $‐ 0 ‐
B $1,000
C $2,000
D $3,000
C $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.
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.
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
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.
Tulip Co. owns 100% of Daisy Co.’s outstanding common stock. Tulip’s cost of goods sold for the year totals $600,000, and Daisy’s cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income?
$900,000
$940,000
$960,000
$1,000,000
$900,000
CORRECT! The total amount of cost of goods sold (COGS) should equal the cost to parties outside of the consolidated entity. Tulip reported $600,000 and Daisy reported $400,000 of COGS, a total of $1,000,000. However, $100,000 of Daisy’s COGS is the amount paid to Tulip and should be eliminated from the consolidated financial statements. Therefore, $900,000 should be reported on the consolidated statement of income.
In which of the following ownership arrangements would intercompany bonds exist?
Parent Owns Subsidiary Bonds
Subsidiary Owns Parent Bonds
Parent Owns Subsidiary Bonds-Yes
Subsidiary Owns Parent Bonds -Yes
Intercompany bonds exist when one affiliate to be consolidated owns the bonds of another affiliate to be consolidated. Thus, intercompany bonds would exist when a parent owns a subsidiary’s bonds, when a subsidiary owns a parent’s bonds, or when one subsidiary owns the bonds of another subsidiary that will be consolidated.
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 constructive retired.
