Question 1

A parent has a 60% interest in its subsidiary. Ending inventory profits on upstream merchandise sales:

Accepted Answer

Ending inventory profits on upstream merchandise sales (from the subsidiary to the parent) require adjustments because the profit recognized by the subsidiary has not been realized from the group's perspective. This unrealized profit must be eliminated in consolidation. The elimination reduces both the parent's share of equity in net income (because the parent's income includes its share of the subsidiary's profits) and the noncontrolling interest's share of net income (because it reflects the total net income of the subsidiary, part of which includes the unrealized profit).

Question 2

A wholly-owned subsidiary sells merchandise to its parent at a markup of 25% on cost. During the current year, the parent paid $725,000 for merchandise received from the subsidiary. By year-end, the parent has sold $600,000 of the merchandise to outside customers for $900,000, but still holds the other $125,000 in its ending inventory. The parent uses the complete equity method to record its investment in subsidiary on its own books. What is the impact of the above information on the parent's equity in net income of subsidiary for the year, as reported on the parent's books?

Accepted Answer

Unconfirmed profit on ending inventory is $125,000 - ($125,000/1.25) = $25,000

Question 3

An 80%-owned subsidiary sells merchandise to its parent at a markup of 25% on cost. During the current year, the parent paid $725,000 for merchandise received from the subsidiary. By year-end, the parent has sold $600,000 of the merchandise to outside customers for $900,000, but still holds the other $125,000 in its ending inventory. What is the impact of the above information on noncontrolling interest in net income, reported on the consolidated income statement for the year?

Accepted Answer

Unconfirmed profit on ending inventory is $125,000 - ($125,000/1.25) = $25,000; this is an upstream sale so ($25,000 x 20%) = $5,000 is subtracted from noncontrolling interest in net income.

Question 4

A 90%-owned subsidiary sells merchandise to its parent at a markup of 20% on cost. The parent's beginning inventory includes $120,000 purchased from the subsidiary. The parent's ending inventory includes $156,000 purchased from the subsidiary. What is the impact of the above information on noncontrolling interest in net income, reported on the consolidated income statement for the year?

Accepted Answer

Confirmed profit on beginning inventory is $120,000 - ($120,000/1.2) = $20,000; unconfirmed profit on ending inventory is $156,000 - ($156,000/1.2) = $26,000. This is an upstream sale so ($26,000 - $20,000) x 10% = $600 is subtracted from noncontrolling interest in net income.

Question 5

A parent sells merchandise to its 90%-owned subsidiary at a markup of 20% on cost. The parent's beginning inventory includes $120,000 purchased from the subsidiary. The parent's ending inventory includes $156,000 purchased from the subsidiary. What is the impact of the above information on noncontrolling interest in net income, reported on the consolidated income statement for the year?

Accepted Answer

This is a downstream sale so the noncontrolling interest is not affected.

Question 6

A parent sells merchandise to its 90%-owned subsidiary at a markup of 20% on cost. The parent's beginning inventory includes $120,000 purchased from the subsidiary. The parent's ending inventory includes $156,000 purchased from the subsidiary. What is the impact of the above information on equity in net income, reported on the parent's books, assuming the parent uses the complete equity method?

Accepted Answer

Confirmed profit on beginning inventory is $120,000 - ($120,000/1.2) = $20,000; unconfirmed profit on ending inventory is $156,000 - ($156,000/1.2) = $26,000. This is a downstream sale so ($26,000 - $20,000) = $6,000 is subtracted from equity in net income.

Question 7

A parent has a wholly-owned subsidiary. At the end of the year, the subsidiary's ending inventory includes $50,000 in unconfirmed profit on merchandise purchased from the parent. The subsidiary's beginning inventory included unconfirmed profit of $45,000 on merchandise purchased from the parent. The parent's ending inventory includes $80,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent's beginning inventory included $110,000 in unconfirmed profit on merchandise purchased from the subsidiary. What is the effect of the above information on the parent's equity in net income of the subsidiary for the year, assuming the parent uses the complete equity method?

Accepted Answer

$45,000 + $110,000 - $50,000 - $80,000 = $25,000 increase

Question 8

A parent owns 80% of its subsidiary's voting stock. At the end of the year, the subsidiary's ending inventory includes $20,000 in unconfirmed profit on merchandise purchased from the parent. The subsidiary's beginning inventory included unconfirmed profit of $14,000 on merchandise purchased from the parent. The parent's ending inventory includes $50,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent's beginning inventory included $30,000 in unconfirmed profit on merchandise purchased from the subsidiary. What is the effect of the above information on noncontrolling interest in net income for the year, reported on the consolidated income statement?

Accepted Answer

($30,000 - $50,000) x 20% = $4,000 decrease

Question 9

A parent owns 80% of its subsidiary's voting stock. At the end of the year, the subsidiary's ending inventory includes $20,000 in unconfirmed profit on merchandise purchased from the parent. The subsidiary's beginning inventory included unconfirmed profit of $14,000 on merchandise purchased from the parent. The parent's ending inventory includes $50,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent's beginning inventory included $30,000 in unconfirmed profit on merchandise purchased from the subsidiary. What is the effect of the above information on equity in net income for the year, reported on the parent's books, assuming the parent uses the complete equity method to account for its investment?

Accepted Answer

($14,000 - $20,000) + [($30,000 - $50,000) x 80%] = $22,000 decrease

Question 10

A parent owns 80% of its subsidiary's voting stock. At the end of the year, the parent's ending inventory includes $20,000 in unconfirmed profit on merchandise purchased from the subsidiary. The parent's beginning inventory included unconfirmed profit of $14,000 on merchandise purchased from the subsidiary. The subsidiary's ending inventory includes $50,000 in unconfirmed profit on merchandise purchased from the parent. The subsidiary's beginning inventory included $30,000 in unconfirmed profit on merchandise purchased from the parent. What is the effect of the above information on noncontrolling interest in net income for the year, reported on the consolidated income statement?

Accepted Answer

[($14,000 - $20,000)] x 20% = $1,200 decrease

Question 11

A parent owns 80% of its subsidiary and sells merchandise to its subsidiary at a 25% markup on cost. The subsidiary's ending inventory includes $825,000 purchased from the parent. The subsidiary's beginning inventory includes $750,000 purchased from the parent. What is the effect of the above on the parent's equity in net income of the subsidiary for the current year?

Accepted Answer

Ending inventory profit = $825,000 - ($825,000/1.25) = $165,000 unconfirmed
Beginning inventory profit = $750,000 - ($750,000/1.25) = $150,000 confirmed
$150,000 - $165,000 = $15,000 decrease.

Question 12

A parent owns 80% of its subsidiary. The subsidiary sells merchandise to its parent at a 25% markup on cost. The parent's ending inventory includes $825,000 purchased from the subsidiary. The parent's beginning inventory includes $750,000 purchased from the subsidiary. What is the effect of the above on the noncontrolling interest in net income for the current year?

Accepted Answer

Ending inventory profit = $825,000 - ($825,000/1.25) = $165,000 unconfirmed
Beginning inventory profit = $750,000 - ($750,000/1.25) = $150,000 confirmed
($150,000 - $165,000) x 20% = $3,000 decrease.

Question 13

A parent owns 80% of its subsidiary. At the beginning of the current year, the subsidiary sells equipment carried on its books at $100,000 to its parent for $120,000. The equipment has a 10-year remaining life, straight-line. What is the effect of the above on the noncontrolling interest in net income for the current year?

Accepted Answer

Unconfirmed gain = $120,000 - $100,000 = $20,000
Gain confirmed during the year = $20,000/10 = $2,000
($2,000 - $20,000) x 20% = $3,600 decrease

Question 14

A parent owns 80% of its subsidiary. At the beginning of the current year, the parent sells equipment carried on its books at $40,000 to its subsidiary for $50,000. The equipment has a 2-year remaining life, straight-line. What is the effect of the above on equity in net income for the current year, reported on the parent's books, assuming the parent uses the complete equity method?

Accepted Answer

Unconfirmed gain = $50,000 - $40,000 = $10,000
Gain confirmed during the year = $10,000/2 = $5,000
($5,000 - $10,000) = $5,000 decrease

Question 15

A parent owns 80% of its subsidiary. At the beginning of 2019, the subsidiary sells equipment carried on its books at $40,000 to its parent for $50,000. The equipment has a 5-year remaining life, straight-line. What is the effect of the above on the noncontrolling interest in net income, reported on the consolidated income statement for 2020?

Accepted Answer

Gain confirmed during the year = ($50,000 - $40,000)/5 = $2,000
$2,000 x 20% = $400 increase

Question 16

A parent sells land costing $40,000 to a subsidiary in 2018 for $55,000. The subsidiary sells the land in 2020 to a third party for $65,000. On the consolidated income statement for 2020, the gain on sale of land is:

Accepted Answer

$65,000 - $40,000 = $25,000

Question 17

A parent sells land to its subsidiary for $40,000 and reports a gain of $5,000. At what amount should the land be shown on the consolidated balance sheet?

Accepted Answer

In a consolidated balance sheet, intercompany transactions are eliminated. The land should be shown at the parent's original cost, which is $40,000 - $5,000 gain = $35,000.

Question 18

When completing a consolidation working paper, the eliminating entry for a prior year intercompany transfer of land includes a debit to the subsidiary's retained earnings when the transfer is:

Accepted Answer

In an upstream sale (subsidiary to parent) where the transfer was made at a gain, the gain recognized by the subsidiary increases its retained earnings. However, for consolidation purposes, this intra-group gain must be eliminated to present the financial statements as if the group is a single entity. Therefore, the eliminating entry includes a debit to the subsidiary's retained earnings to reverse the effect of the gain recognized on the sale of land to the parent.

Question 19

A parent sold land costing $400,000 to its subsidiary for $450,000 in 2017. The subsidiary still holds the land at the end of 2019. On a working paper prepared to consolidate the financial statements of the parent and subsidiary in 2019, the eliminating entry connected with this land includes a $50,000 credit to:

Accepted Answer

The answer of A parent sold land costing $400,000 to...

Question 20

A subsidiary sold its parent some land at a profit of $10,000 in 2019. The parent still holds the land. On a working paper prepared to consolidate the accounts of the parent and its subsidiary in 2021, the eliminating entry connected with this land includes a $10,000 debit to:

Accepted Answer

The profit from the intercompany sale of land is unrealized as long as the land is still held by the parent. Therefore, the profit must be eliminated from the consolidated financial statements by debiting beginning retained earnings to reverse the effect of the profit recognized in prior years.

Quiz 6: Consolidated Financial Statements: Intercompany Transactions

A parent has a 60% interest in its subsidiary. Ending inventory profits on upstream merchandise sales:

A parent sells land costing $40,000 to a subsidiary in 2018 for $55,000. The subsidiary sells the land in 2020 to a third party for $65,000. On the consolidated income statement for 2020, the gain on sale of land is:

A parent sells land to its subsidiary for $40,000 and reports a gain of $5,000. At what amount should the land be shown on the consolidated balance sheet?

When completing a consolidation working paper, the eliminating entry for a prior year intercompany transfer of land includes a debit to the subsidiary's retained earnings when the transfer is:

A subsidiary sold its parent some land at a profit of $10,000 in 2019. The parent still holds the land. On a working paper prepared to consolidate the accounts of the parent and its subsidiary in 2021, the eliminating entry connected with this land includes a $10,000 debit to: