[Topic 5] Chapter 5

Question 1

In reference to the downstream or upstream sale of depreciable assets, which of the following statements is correct?

a. Upstream sales from the subsidiary to the parent company always result in unrealized gains and losses.
b. The initial effect of unrealized gains and losses from downstream sales of depreciable assets is different from the sale of non-depreciable assets
c. Gains, but not losses, appear in the parent-company accounts in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting
d. Gains and losses appear in the parent company accounts in the year of sale and must be eliminated by the parent company determining its investment income under the equity method of accounting

Answer 1

Gains and losses appear in the parent company accounts in the year of sale and must be eliminated by the parent company determining its investment income under the equity method of accounting

Question 2

In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting

a. Retained earnings-P Co.
b. Retained earnings-S Co.
c. Gain on sale of land
d. Both Retained earnings-P Co. and Retained earnings-S Co.

Answer 2

Gain on sale of land

Question 3

In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain, the non-controlling interest in consolidated income is computed by multiplying the NCI percentage by the subsidiary’s reported net income

a. minus the net amount of unrealized gain on intercompany sale
b. plus the net amount of unrealized gain on the intercompany sale
c. minus intercompany gain considered realized inthe current period
d. plus intercompany gain considered realized in the current period

Answer 3

plus intercompany gain considered realized in the current period

Question 4

Company S sells equipment to its parent company at a gain. In years subsequent to the year of the intercompany sale, a workpaper entry is made under the cost method debiting

a. Retained earnings-P
b. Non-controlling interest
c. Equipment
d. All of these

Answer 4

All of these:

a. Retained earnings-P
b. Non-controlling interest
c. Equipment

Question 5

P Corp. owns 90% of the outstanding common stock of S Company. On December 31, 20x4, S sold equipment to P for an amount greater than the equipment’s book value but less than its original cost. The equipment should be reported on the December 31, 20x4 consolidated balance sheet

a. P’s original cost less 90% of S’s recorded gain
b. P’s original cost less S’s recorded gain
c. S’s original cost
d. P’s original cost

Answer 5

P’s original cost less S’s recorded gain

Question 6

In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the non-controlling interest in consolidated income is calculated by multiplying the NCI percentage by the subsidiary’s reported net income

a. plus the intercompany gain considered realized in the current period
b. plus the net amount of unrealized gain on the intercompany sale
c. minus the net amount of unrealized gain on the intercompany sale
d. minus the intercompany gain considered realized in the current periiod

Answer 6

minus the net amount of unrealized gain on the intercompany sale

Question 7

The amount of the adjustment to the NCI in consolidated net assets is equal to the NCI percentage of the

a. unrealized intercompany gain at the beginning of the period
b. unrealized intercompany gain at the end of the period
c. realized intercompany gain at the beginning of the perod
d. realized intercompany gain at the end of the period

Answer 7

realized intercompany gain at the beginning of the perod

Question 8

In years subsequent to the upstream intercompany sale of non-depreciable assets, the necessary consolidated workpaper entry under the cost method is to debit the

a. NCI and Retained Earnings (Parent) accounts, and credit the depreciable asset
b. Retained Earnings (Parent) account and credit the non-depreciable asset
c. Non-depreciable asset, and credit the NCI and Investment in Subsidiary accounts
d. No entries are necessary

Answer 8

NCI and Retained Earnings (Parent) accounts, and credit the depreciable asset

Question 9

When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent of ownership between the parent and subsidiary only when the selling affiliate is

a. the parent and the subsidiary is less than wholly owned
b. a wholly owned subsidiary
c. the subsidiary and the subsidiary is less than wholly owned
d. the parent of a wholly owned subsidiary

Answer 9

the parent and the subsidiary is less than wholly owned

Question 10

Gain or loss resulting from an intercompany sale of equipment between a parent and a subsidiary is

a. recognized in the consolidated statements in the year of sale
b. considered to be realized over the remaining useful life of the equipment as an adjustment to depreciation in hte consolidated statements
c. considered to be unrealized in the consolidated statements until the equipment is sold to a third party

Answer 10

considered to be unrealized in the consolidated statements until the equipment is sold to a third party

Question 11

WW Company owns 80% of FF Company’s outstanding common stock. On December 31, 20x9, FF sold equipment to WW at a price in excess of FF’s carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 20x9, the carrying amount of the equipment should be reported at:

a. WW’s original cost
b. FF’s original cost
c. WW’s original cost less FF’s recorded gain
d. WW’s original cost less 80% of FF’s recorded gain

Answer 11

WW’s original cost less FF’s recorded gain

Question 12

J Company acquired all of K Company’s outstanding common stock in exchange for cash. The acquisition price exceeds the fair value of net assets acquired. How should J Company determine the amounts to be reported for plant and equipment and long-term debt acquired from K Company?

Plant and equipment?
Long-term debt?

Answer 12

Plant and equipment? FV
Long-term debt? K’s carrying amount

Question 13

PP Inc. owns 100% of SS Inc. On January 1, 20x2, PP sold delivery equipment to SS at a gain. PP had owned the equipment for two years and used a five-year straight-line depreciation rate with the no residual value for the equipment. In the consolidated income statement, SS’s recorded depreciation expense on the equipment for 20x2 will be decreased by:

a. 20% of the gain on sale
b. 33 1/3 % of the gain on sale
c. 50% of the gain on sale
d. 100% of the gain on sale

Answer 13

100% of the gain on sale

Question 14

Included in a working paper elimination for intercompany sales of merchandise was a debit to NCI in Net Assets of Subsidiary. This debit indicates that:

a. The parent company sold merchandise to a partially-owned subsidiary
b. A wholly owned subsidiary sold merchandise to a partially-owned subsidiary
c. A partially-owned subsidiary sold merchandise to a partially-owned subsidiary
d. Either a or b took place

Answer 14

A partially-owned subsidiary sold merchandise to a partially-owned subsidiary

Question 15

From a consolidation point of view, the intercompany gain on a parent company’s sale of a depreciable plant asset to the subsidiary is realized when:

a. The parent company sells the plant asset to the subsidiary
b. The subsidiary abandons the plant asset
c. The subsidiary resells the plant asset to the parent company
d. Some other transaction or event takes place

Answer 15

Some other transaction or event takes place

Question 16

In the measurement of NCI in net income of a partially owned subsidiary, the credit for Depreciation Expense-Parent in the working paper elimination for intercompany gain in a depreciable plant asset is attributed to net income of:

a. The parent company
b. The subsidiary
c. The consolidated entity
d. None of the foregoing

Answer 16

The subsidiary

Question 17

The working paper elimination for a second year of intercompany sales made at a markup over subsidiary cost by a partially owned subsidiary to the parent company includes:

a. A debit to Retained Earnings-Subsidiary
b. A credit to Minority Interest in Net Assets of Subsidiary
c. A credit to COGS-Subsidiary
d. None of the foregoing

Answer 17

A debit to Retained Earnings-Subsidiary

Question 18

Which of the following is not an effect of a working paper elimination for intercompany sales of merchandise by a parent company to a subsidiary?

a. It eliminates the overstatement of the subsidiary’s Sales ledger account balance
b. The intercompany profit portion of the subsidiary’s COGS ledger account balance
c. It reduces consolidated inventories to the cost incurred by the consolidated entity
d. It eliminates the parent’s Intercompany Sales and Intercompany COGS ledger account balances
e. None of the foregoing

Answer 18

It eliminates the overstatement of the subsidiary’s Sales ledger account balance

Question 19

If a gain on an intercompany transaction is attributable to a partially owned subsidiary, working paper eliminations for accounting periods subsequent to the period of the intercompany transaction will include a debit to Minority Interest in Net Assets of Subsidiary unless the gain arose from:

a. A sale of plant assets
b. A sale of merchandise
c. An acquisition of outstanding bonds in the open market
d. A sale of intangible assets
e. None of the foregoing

Answer 19

An acquisition of outstanding bonds in the open market

Question 20

The gross profit on an intercompany sale of merchandise costing P500,000 at a gross margin rate of 16 2/3% based on selling price is:

a. P100,000
b. P120,000
c. P200,000
d. P240,000
e. Some other amount

Answer 20

Some other amount

Question 21

Is the NCI in net income of a partially owned subsidiary affected by:

Elimination of depreciation attributable to intercompany gain on machinery acquired by parent from subsidiary?
Elimination of intercompany gain on land sold by parent to subsidiary?

Answer 21

Elimination of depreciation attributable to intercompany gain on machinery acquired by parent from subsidiary? YES
Elimination of intercompany gain on land sold by parent to subsidiary? NO

Question 22

A working paper elimination to remove an intercompany profit or gain is not relevant for an intercompany:

a. Sale of merchandise
b. Sale of plant asset or intangible asset
c. Sales-type or capital lease
d. Acquisition of an affiliate’s outstanding bonds payable in the open market

Answer 22

Acquisition of an affiliate’s outstanding bonds payable in the open market

Question 23

Blue Company owns 70% of Black Company’s outstanding common stock. On December 31, 20x4, Black sold equipment to Blue at a price in excess of Black’s carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 20x4, the carrying amount of the equipment should be reported at:

a. Blue’s original cost
b Black’s original cost
c. Blue’s original cost less Black’s recorded gain
d. Blue’s original cost less 70% of Black’s recorded gain

Answer 23

Blue’s original cost less Black’s recorded gain

Question 24

A parent and its 80% owned subsidiary have made several intercompany sales of noncurrent assets during the past two years. The amount of income assigned to the NCI for the second year should include the NCI’s share of gains:

a. unrealized in the second year from upstream sales made in the second year
b. realized in the second year from downstream sales made in both years
c. realized in the second year from upstream sales made in both years
d. both realized and unrealized from upstream sales made in th second year

Answer 24

realized in the second year from upstream sales made in both years

Question 25

A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal:

a. the parent’s separate operating income, plus the subsidiary’s net income
b. the parent’s separate operating income, plus the subsidiary’s net income, plus the intercompany gain
c. the parent’s separate operating income, plus the subsidiary’s net income, minus the intercompany gain
d. the parent’s net income, plus the subsidiary’s net income, minus the intercompany gain

Answer 25

the parent’s separate operating income, plus the subsidiary’s net income, plus the intercompany gain

Question 26

A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal:

a. the parent’s separate operating income, plus the intercompany loss
b. the parent’s separate operating income, plus the intercompany loss, plus the subsidiary’s net income
c. the parent’s separate operating income, minus the intercompany loss
d. the parent’s separate operating income, minus the intercompany loss, plus the subsidiary’s net icnome

Answer 26

the parent’s separate operating income, plus the intercompany loss, plus the subsidiary’s net income

Question 27

Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income:

a. in the year of the downstream sale
b. over the period of time the subsidiary uses the land
c. in the year the subsidiary sells the land to an unrelated party
d. in the year of the downstream sale or over the period of time the subsidiary uses the land

Answer 27

in the year the subsidiary sells the land to an unrelated party

Question 28

On November 8, 20x4, Power Corp sold land to Wood Co, its wholly owned subsidiary. The land cost P61,500 and was sold to Wood for P89,000. From the perspective of the combination, when is the gain on the sale of the land realized?

a. Proportionately over a designated period of years
b. When Wood Co. sells the land to a third party
c. No gain can be recognized
e. When Wood Co. begins using the land productively

Answer 28

When Wood Co. sells the land to a third party

Question 29

Parent sold land to its subsidiary for a gain in 20x4. The subsidiary sold the land externally for a gain in 20x7. Which of the following statements is true?

a. A gain will be reported on the consolidated income statement in 20x4
b. A gain will be reported on the consolidated income statement in 20x7
c. No gain will be reported on the 20x7 consolidated income statement
d. Only the parent company will report a gain in 20x7

Answer 29

No gain will be reported on the 20x7 consolidated income statement

Question 30

An intercompany sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale?

a. A worksheet entry is made with a debit to gain for a downstream transfer
b. A worksheet entry is made with a debit to gain for an upstream transfer
c. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method
d. A worksheet is made with a debit to retained earnings for a downstream transfer
e. No worksheet entry is necessary

Answer 30

A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method

Question 31

Which of the following statements is true concerning an intercompany transfer of a depreciable asset.

a. NCI in subsidiary’s net income is never affected by a gain on the transfer
b. NCI in subsidiary’s net income is always affected by a gain on the transfer
c. NCI in subsidiary’s net income is affected by a downstream gain only
d. NCI in subsidiary’s net income is affected only when the transfer is upstream
e. NCI in subsidiary’s net income is increased by an upstream gain in the year of transfer

Answer 31

NCI in subsidiary’s net income is affected only when the transfer is upstream