Intercompany Transactions

Question 1

Dividends payable by a subsidiary to its parent are not eliminated in the consolidating process

Answer 1

False

Question 2

Consolidated statements include only the results of transactions with entities not being consolidated. True or false

Answer 2

True

Question 3

Intercompany transactions can result in gains or losses on the books of the affiliates. True or false?

Answer 3

True

Question 4

If a fixed asset is sold from one affiliate to another affiliate at an amount equal to book value, the asset will be overstated or understated on the books of the buying affiliate.
True
False

Answer 4

False

Question 5

Following an intercompany fixed asset transaction, the accumulated depreciation related to the transferred asset will be understated.
True
False

Answer 5

True

Question 6

For consolidated reporting purposes, a fixed asset must be shown at its original cost from a non-affiliate.
True
False

Answer 6

True

Question 7

The entry to eliminate a gain or loss on an intercompany fixed asset transaction is recorded only on the consolidating worksheet, not in the separate books.
True
False

Answer 7

True

Question 8

In years subsequent to the year in which an intercompany gain or loss on a fixed asset transaction occurs, no consolidating eliminating entries will be necessary.
True
False

Answer 8

False

Question 9

If the elimination of a gain or loss resulting from an intercompany fixed asset transaction is to be recorded on a balance sheet only (no income statement is provided), the elimination of the gain or loss will be recorded to retained earnings.
True
False

Answer 9

True

Question 10

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?

Answer 10

If at a profit it will overstate and at a loss it will understate

Question 11

How do you determine what amount depreciation expense should be decreased in an intercompany sale?

Answer 11

compute depreciation for each company. In an intercompany sale equipment cannot be depreciated by a greater amount than the largest depreciation amount.

Question 12

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:

Answer 12

Water’s original cost less Fire’s recorded gain.

Question 13

For consolidated purposes, what accounts can be affected by intercompany bonds?

Answer 13

• Bonds payable
• Premium or discount on bonds payable
• Investment in bonds
• Premium or discount on investment in bonds
• Interest income/interest expense
• Interest payable/interest receivable

Question 14

How does the gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies?

Answer 14

The gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies through the amortization on their separate books of the premium(s) and/or discount(s) on the bond investment and/or the bonds payable.

Question 15

When do intercompany bonds exist?

Answer 15

When one affiliate owns (as an investment) the bonds issued by another affiliate (a liability)

Question 16

What determines the amount of any net gain or loss resulting from bonds becoming intercompany?

Answer 16

The sum or difference between the premium or discount on the bond investment (of the buying affiliate) and the premium or discount on the bonds payable (of the issuing affiliate).

Gain would result from eliminating:

• –Premium on bond payable or
• –Discount on investment

Loss would result from eliminating:

• –Discount on bond payable or
• –Premium on investment

Question 17

What eliminating entry would be required for consolidating purposes immediately following an intercompany bond purchase that involved a discount on bonds payable and a premium on bond investment?

Answer 17

DR: Bonds Payable at face amount

Loss on Constructive Retirement

– sum of Premium on B/I + Discount on B/P

CR: Investment in I/C Bonds at face amount

CR: Premium on I/C Bond Investment - for full amount

CR: Discount on I/C Bonds Payable - for I/C amount

Question 18

How do you figure the premium or discount on a bond investment?

Answer 18

it’s the difference between the par value of the bonds and the price paid for the bonds in the market.

Question 19

Define the premium on a bond and the discount on a bond

Answer 19

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

Question 20

Which one of the following is not a characteristic of consolidated financial statements prepared following an operating period that occurred after the date of a business combination?
A. A full set of consolidated financial statements will be required.
B. The method used by the parent to carry on its books its investment in the subsidiary will affect the consolidating process.
C. Intercompany transactions may have occurred since the business combination.
D. The method used by the parent to carry on its books its investment in the subsidiary will affect the final consolidated financial statements.

Answer 20

D. The method used by the parent to carry on its books its investment in the subsidiary will affect the final consolidated financial statements.

Question 21

IF the carrying value of a builiding is greater than its fair value on the date of combination, for consolidated purposes, would the building be depreciated based on it’s lower fair value?

Answer 21

Yes

Question 22

Which one of the following will occur on consolidated financial statements if an intercompany inventory transaction is not eliminated?
A. An understatement of sales.
B. An overstatement of sales.
C. An understatement of purchases.
d. An overstatement of accounts receivable.

Answer 22

B. An overstatement of sales. because 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.