Question 1

Consolidated net income may include the parent's separate operating income plus the parent's share of the subsidiary's reported net income:

Accepted Answer

In consolidated financial statements, unrealized profits from intercompany transactions must be eliminated to avoid overstating revenues and profits. Therefore, the profit realized in the current year from upstream intercompany sales of inventory made in the previous year is included in the consolidated net income, as it is no longer unrealized.

Question 2

On January 1, 20X1, Picture Company acquired 70 percent ownership of Seven Corporation at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Seven Corporation. On April 25, 20X1, Seven purchased inventory from Picture for $45,000. Seven sold the entire inventory to an unaffiliated company for $58,000 on October 12, 20X1. Picture had produced the inventory sold to Seven for $38,000. The companies had no other transactions during 20X1.
-Based on the information given above,what amount of cost of goods sold will be reported in the 20X1 consolidated income statement?

Accepted Answer

The cost of goods sold for Seven Corporation will be the cost at which they purchased the inventory from Picture, which is $45,000. Since Picture owns 70% of Seven Corporation, their share of the cost of goods sold will be 70% of $45,000, which is $31,500. Therefore, the consolidated cost of goods sold will be $31,500 (Picture's share) plus $6,500 (30% of $21,000 profit realized by Seven on the sale of inventory), which is equal to $38,000.

Question 3

Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 20X8, Perth and Dundee reported the following partial operating results and inventory balances:
Perth regularly prices its products at cost plus a 30 percent markup for profit. Dundee prices its sales at cost plus a 10 percent markup. The total sales reported by Perth and Dundee include both intercompany sales and sales to nonaffiliates.
 
-Based on the information given above,what balance will be reported for inventory in the consolidated balance sheet for December 31,20X8?

Accepted Answer

A

Question 4

During the year a parent makes sales of inventory at a profit to its 75 percent owned subsidiary.The subsidiary also makes sales of inventory at a profit to its parent during the same year.Both the parent and the subsidiary have on hand at the end of the year 20 percent of the inventory acquired from one another.Consolidated revenues for the year should exclude:

Accepted Answer

Since both the parent and subsidiary have made intercompany sales, the consolidated revenues for the year should exclude the total revenues from intercompany sales. This is because such revenues represent transfers between entities within the same group and do not reflect external market transactions. Excluding these revenues helps to avoid double-counting of transactions within the consolidated financial statements.

Question 5

On January 1, 20X1, Picture Company acquired 70 percent ownership of Seven Corporation at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Seven Corporation. On April 25, 20X1, Seven purchased inventory from Picture for $45,000. Seven sold the entire inventory to an unaffiliated company for $58,000 on October 12, 20X1. Picture had produced the inventory sold to Seven for $38,000. The companies had no other transactions during 20X1.
-Based on the information given above,what amount of sales will be reported in the 20X1 consolidated income statement?

Accepted Answer

The total sales revenue reported in the consolidated income statement would include Seven's sales revenue of $58,000, as the inventory purchased from Picture for $45,000 was sold to an unaffiliated company for $58,000. Therefore, the correct option is D ($58,000).

Question 6

On January 1, 20X1, Picture Company acquired 70 percent ownership of Seven Corporation at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Seven Corporation. On April 25, 20X1, Seven purchased inventory from Picture for $45,000. Seven sold the entire inventory to an unaffiliated company for $58,000 on October 12, 20X1. Picture had produced the inventory sold to Seven for $38,000. The companies had no other transactions during 20X1.
-Based on the information given above,what amount of consolidated net income will be assigned to the controlling shareholders for 20X1?

Accepted Answer

To calculate consolidated net income, we need to first determine the separate net incomes of Picture Company and Seven Corporation.

Picture Company's separate net income:
Picture Company did not have any transactions with Seven Corporation during the year. Therefore, the separate net income of Picture Company would be $0.

Seven Corporation's separate net income:
Revenue from sale of inventory to unaffiliated company: $58,000
Cost of goods sold (from Picture Company): $38,000
Gross profit: $20,000

Since Picture Company owns 70 percent of Seven Corporation, we need to take 70 percent of Seven Corporation's separate net income to arrive at the amount of consolidated net income assigned to the controlling shareholders (Picture Company).

0.7 x $20,000 = $14,000

Therefore, the answer is B) $16,100.

Question 7

Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 20X8, Perth and Dundee reported the following partial operating results and inventory balances:
Perth regularly prices its products at cost plus a 30 percent markup for profit. Dundee prices its sales at cost plus a 10 percent markup. The total sales reported by Perth and Dundee include both intercompany sales and sales to nonaffiliates.
 
-Based on the information given above,what amount of sales will be reported in the consolidated income statement for 20X8?

Accepted Answer

Without specific information provided in the question, it's impossible to accurately determine the correct answer. However, if this was a test or quiz scenario, and "C" was selected based on an unseen passage or data, it would imply that the correct sales figure to be reported in the consolidated income statement for 20X8 is $600,000. This would typically involve adding together the sales figures from multiple entities within a consolidated group, adjusting for intercompany transactions.

Question 8

Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's cost. During 20X8, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold all of this merchandise to unrelated customers for $56,892 during 20X8. In preparing combined financial statements for 20X8, Earth's bookkeeper disregarded the common ownership of Mars and Venus.
-Based on the information given above,what amount should be eliminated from cost of goods sold in the combined income statement for 20X8?

Accepted Answer

The amount to be eliminated from the cost of goods sold in the combined income statement is $31,250. This is because Sol sold the inventory to Saturn at 125% of its cost ($25,000), which equals $31,250 ($25,000 * 125%). This intercompany sale should be eliminated in the consolidation process to avoid overstating revenues and cost of goods sold.

Question 9

On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8.
-Based on the information given above,what amount of sales will be reported in the 20X8 consolidated income statement?

Accepted Answer

The inventory sold by Subsidiary to the unaffiliated company was purchased from Parent for $90,000. Therefore, the cost of goods sold for Subsidiary is $90,000 and the revenue is $120,000. This means that the consolidated income statement will report sales of $120,000. The cost of goods sold of $90,000 will be eliminated in the consolidation process because it represents a transaction between Parent and Subsidiary.

Question 10

ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each. XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems.
-Based on the information given above,what amount of cost of goods sold did ABC record in 20X8?

Accepted Answer

Since ABC produced 50,000 chairs at a cost of $79 each, the total cost of production for ABC is 50,000 x $79 = $3,950,000.
ABC sold 35,000 chairs to XYZ for $90 each, so ABC recognized revenue of 35,000 x $90 = $3,150,000.
The cost of goods sold for ABC would be the cost of chairs sold to XYZ, which is 35,000 x $79 = $2,765,000.

Question 11

On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8.
-Based on the information given above,what amount of cost of goods sold will be reported in the 20X8 consolidated income statement?

Accepted Answer

The cost of goods sold in the consolidated income statement will reflect the original cost of the inventory to the parent company, which is $62,000. This is because intercompany transactions, such as the sale of inventory from Parent to Subsidiary, are eliminated in consolidation. The sale to the unaffiliated company is the only transaction that affects the consolidated financial statements, and the cost associated with that sale is the original production cost of $62,000.

Question 12

On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8.
-Based on the information given above,what amount of consolidated net income will be assigned to the controlling shareholders for 20X8?

Accepted Answer

The answer of On January 1, 20X8, Parent Company acquired...

Question 13

When a parent and its subsidiary use a periodic inventory system rather than a perpetual system,the income and asset balances reported in the consolidated financial statements are:
I.affected only if there are upstream intercompany sales of inventory.
II.affected only if there are downstream intercompany sales of inventory.

Accepted Answer

The answer of When a parent and its subsidiary use...

Question 14

Senior Inc.owns 85 percent of Junior Inc.During 20X8,Senior sold goods with a 25 percent gross profit to Junior.Junior sold all of these goods in 20X8.How should 20X8 consolidated income statement items be adjusted?

Accepted Answer

When a parent company sells goods to a subsidiary, the intercompany sales are eliminated in the consolidation process because they have not yet been sold to an external party. Therefore, in the consolidated income statement, the sales and cost of goods sold should be reduced by the intercompany sales amount to avoid double-counting revenues and expenses. In this case, since Senior sold goods with a 25 percent gross profit to Junior, the cost of goods sold should be reduced by the full amount of the intercompany sales, while the sales should only be reduced by the intercompany price (the actual amount paid by Junior). Since none of the other answer options reflect this treatment, the best choice is D.

Question 15

Salmon Corporation owns 65 percent of Trout Company's stock. At the end of 20X3, Salmon and Trout reported the following partial operating results and inventory balances:
  Salmon regularly prices its products at cost plus a 40 percent markup for profit. Trout prices its sales at cost plus a 25 percent markup. The total sales reported by Salmon and Trout include both intercompany sales and sales to nonaffiliates.
-Based on the information given above,what amount of sales will be reported in the consolidated income statement for 20X3?

Accepted Answer

The answer of Salmon Corporation owns 65 percent of Trout...

Question 16

Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's cost. During 20X8, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold all of this merchandise to unrelated customers for $56,892 during 20X8. In preparing combined financial statements for 20X8, Earth's bookkeeper disregarded the common ownership of Mars and Venus.
-Based on the information given above,by what amount was unadjusted revenue overstated in the combined income statement for 20X8?

Accepted Answer

Since Venus sold the inventory to Mars at a cost of $25,000, Mars would have paid $31,250 (125% of $25,000). However, in the combined financial statement, the revenue recognized by Mars would have been the full sales price of $56,892. Therefore, the unadjusted revenue was overstated by $56,892 - $31,250 = $25,642.

Question 17

Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements?
I.Security holdings
II.Interest and dividends
III.Sales and purchases

Accepted Answer

Intercompany balances and transactions, including security holdings, interest and dividends, and sales and purchases, must be eliminated in preparing consolidated financial statements to avoid double counting and to present the financial position and results of operations of the consolidated entity as if it were a single entity.

Question 18

Global Corporation acquired 85 percent of Local Company's voting shares of stock in 20X7.During 20X8,Global purchased 50,000 picture tubes for $15 each and sold 28,000 of them to Local for $20 each.Local sold all of the units to unrelated entities prior to December 31,20X8,for $30 each.Both companies use perpetual inventory systems.
Which worksheet consolidating entry is needed in preparing consolidated financial statements for 20X8 to remove all effects of the intercompany sale?

Accepted Answer

Option A represents the proper consolidation entry to eliminate the intercompany sale of picture tubes between Global and Local. This entry adjusts Global's Sales and Cost of Goods Sold by reducing the intercompany sale and recognizing the profit that Local made on its external sale of the same products. It also adjusts Local's inventory and retained earnings to remove the intercompany profit and record the cost of the goods sold by Local. Option B and C are incorrect because they do not eliminate the intercompany sale or recognize the profit/loss associated with it. Option D is incorrect because it overstates Local's retained earnings by not reversing the intercompany profit that resulted from the initial purchase of the picture tubes from Global.

Question 19

Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating:

Accepted Answer

The answer of Consolidated net income for a parent and...

Question 20

Salmon Corporation owns 65 percent of Trout Company's stock. At the end of 20X3, Salmon and Trout reported the following partial operating results and inventory balances:
  Salmon regularly prices its products at cost plus a 40 percent markup for profit. Trout prices its sales at cost plus a 25 percent markup. The total sales reported by Salmon and Trout include both intercompany sales and sales to nonaffiliates.
-Based on the information given above,what balance will be reported for inventory in the consolidated balance sheet for December 31,20X3?

Accepted Answer

To find the consolidated inventory balance, we need to eliminate the intercompany inventory in the beginning balances. The intercompany inventory is the inventory that one affiliate sells to the other affiliate. In this case, Salmon sold $38,000 of inventory to Trout, and Trout sold $25,000 of inventory to Salmon. So, we need to eliminate these intercompany sales to arrive at the consolidated inventory balance.

Salmon's cost of goods sold (COGS) is $315,000, and its markup is 40%, so its sales revenue is $441,000 ($315,000 x 1.4). Trout's COGS is $220,000, and its markup is 25%, so its sales revenue is $275,000 ($220,000 x 1.25).

To find the consolidated COGS, we need to eliminate the intercompany sales in the COGS. Salmon sold $38,000 of inventory to Trout, so we need to subtract this amount from Salmon's COGS. Trout sold $25,000 of inventory to Salmon, so we need to subtract this amount from Trout's COGS.

Consolidated COGS = ($315,000 - $38,000) + ($220,000 - $25,000) = $472,000

To find the consolidated inventory balance, we need to subtract Consolidated COGS from the sum of beginning inventory and purchases.

Consolidated inventory balance = $75,000 + $342,000 - $472,000 = $53,086

Therefore, the answer is C ($53,086).

Quiz 6: Intercompany Inventory Transactions

Consolidated net income may include the parent's separate operating income plus the parent's share of the subsidiary's reported net income:

Senior Inc.owns 85 percent of Junior Inc.During 20X8,Senior sold goods with a 25 percent gross profit to Junior.Junior sold all of these goods in 20X8.How should 20X8 consolidated income statement items be adjusted?

Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements? I.Security holdings II.Interest and dividends III.Sales and purchases

Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating: