Question 1

On January 1, 2016 S Corporation sold equipment that cost $120,000 and had a book value of $48,000 to P Corporation for $60,000. P Corporation owns 100% of S Corporation and the equipment has a 4-year remaining life. What is the effect of the sale on P Corporation's Equity from Subsidiary Income account for 2017?

Accepted Answer

The sale of the equipment from S Corporation to P Corporation (where P owns 100% of S) at a gain (since it was sold for $60,000 but had a book value of $48,000, resulting in a $12,000 gain) would lead to an adjustment in the consolidation process. Since the equipment has a 4-year remaining life, this gain would be amortized over the 4 years, resulting in a $3,000 increase ($12,000 gain / 4 years) in P Corporation's Equity from Subsidiary Income account for each of those years, including 2017.

Question 2

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

Accepted Answer

B

Question 3

The amount of the adjustment to the noncontrolling interest in consolidated net assets is equal to the noncontrolling interest's percentage of the:

Accepted Answer

A

Question 4

P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than it subsidiary's book value. Two years later P sold the land to an outside entity for $50,000 more than P's cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of:

Accepted Answer

The answer of P Company purchased land from its 80%...

Question 5

In 2017, P Company sells land to its 80% owned subsidiary, S Company, at a gain of $50,000. What is the effect of this sale of land on consolidated net income assuming S Company still owns the land at the end of the year?

Accepted Answer

In consolidated financial statements, intercompany transactions, such as the sale of land from a parent company to its subsidiary, are eliminated. Therefore, the gain of $50,000 recognized on the sale of the land by the parent company to its subsidiary would be eliminated in consolidation, making the consolidated net income the same as if the sale had not occurred.

Question 6

P Corp. owns 90% of the outstanding common stock of S Company. On December 31, 2017, 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, 2017 consolidated balance sheet at:

Accepted Answer

The equipment should be reported at P's original cost less S's recorded gain to eliminate the intercompany profit from the consolidated financial statements.

Question 7

In January 2013, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $1,980,000. S Company's original cost for this equipment was $2,000,000 and had accumulated depreciation of $200,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2017 for $1,440,000. What amount of gain should P Company record on its books in 2017?

Accepted Answer

P Company should record a gain of $120,000. The equipment's book value at the time of sale to the third party was $1,320,000 ($1,980,000 - ($1,980,000/9 * 4)). The sale price was $1,440,000, resulting in a gain of $120,000 ($1,440,000 - $1,320,000).

Question 8

On January 1, 2016, P Corporation sold equipment with a 3-year remaining life and a book value of $40,000 to its 70% owned subsidiary for a price of $46,000. In the consolidated workpapers for the year ended December 31, 2017, an elimination entry for this transaction will include a:

Accepted Answer

The answer of On January 1, 2016, P Corporation sold...

Question 9

Petunia Company owns 100% of Sage Corporation. On January 1, 2017 Petunia sold equipment to Sage at a gain. Petunia had owned the equipment for four years and used a ten-year straight-line rate with no residual value. Sage is using an eight-year straight-line rate with no residual value. In the consolidated income statement, Sage's recorded depreciation expense on the equipment for 2017 will be reduced by:

Accepted Answer

Since Petunia sold the equipment to Sage, a wholly-owned subsidiary, any gain on sale must be eliminated in consolidation. The depreciation expense recorded by Sage needs to be adjusted to reflect the original cost basis of the equipment as if the sale had not occurred. Given that Petunia used a ten-year straight-line depreciation method and sold the equipment after four years, it had depreciated 40% of the equipment's cost. Sage is using an eight-year straight-line method, which implies an annual depreciation rate of 12.5%. To align Sage's depreciation expense with the consolidated view that ignores the intra-entity sale, the depreciation expense for 2017 must be adjusted by 12.5% of the gain on sale, reflecting the difference in depreciation expense as if the equipment were still being depreciated by Petunia over its original useful life.

Question 10

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 parent and subsidiary only when the selling affiliate is:

Accepted Answer

When the subsidiary (which is less than wholly owned) sells to the parent, unrealized intercompany gains are allocated proportionately by percent of ownership between parent and subsidiary. This is because the non-controlling interest (outside shareholders of the subsidiary) also has a share in the subsidiary's profits, including those unrealized gains on sales to the parent.

Question 11

In January 2014, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $990,000. S Company's original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2017 for $720,000. What amount of gain should P Company record on its books in 2017?

Accepted Answer

The original cost of the equipment to S Company was $1,000,000 with accumulated depreciation of $100,000, making the book value $900,000 at the time of sale to P Company. P Company purchased it for $990,000, which means there was an intra-group profit of $90,000. Since P Company owns 80% of S Company, the unrealized profit to be eliminated is 80% of $90,000 = $72,000. The cost to P Company after eliminating unrealized profit is $990,000 - $72,000 = $918,000. Over 9 years, the depreciation per year is $918,000 / 9 = $102,000. By January 1, 2017, three years of depreciation would have been recorded, totaling $306,000. The book value on January 1, 2017, is $918,000 - $306,000 = $612,000. The equipment was sold for $720,000, resulting in a gain of $720,000 - $612,000 = $108,000. However, since the question asks for the gain recorded by P Company, and considering the initial calculation error in unrealized profit adjustment, the correct approach without considering the need to adjust for unrealized profit (as it would have been eliminated over the years through depreciation) directly calculates the gain based on P Company's purchase price and depreciation. The equipment was sold for $720,000, and with the depreciation taken into account, the gain calculation simplifies to the difference between the sale price and the book value at the time of sale. Given the error in the initial explanation regarding unrealized profit adjustment, the correct gain calculation should focus on the sale transaction's specifics in 2017, leading to a reevaluation of the choices provided.

Question 12

Petunia Corporation owns 100% of Stone Company's common stock. On January 1, 2017, Petunia sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and 2018 consolidated income would be an increase (decrease) of:

Accepted Answer

The correct answer is D because when Petunia sold the equipment to Stone, it recognized a gain of $90,000 ($300,000 - $210,000). For consolidation purposes, this intra-group gain must be eliminated in 2017, resulting in a decrease of $90,000. However, since Stone is depreciating the equipment over ten years, the excess depreciation due to the markup ($90,000 / 10 years = $9,000 per year) must be added back in subsequent years, including 2018, to correct the overstated depreciation expense. Thus, the net adjustments are a decrease of $81,000 in 2017 (after considering the excess depreciation of $9,000) and an increase of $9,000 in 2018.

Question 13

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

Accepted Answer

In consolidating financial statements, intercompany gains on transactions like the sale of land from a subsidiary to its parent company must be eliminated to avoid overstating profits. The gain recognized by the subsidiary on the sale is not realized from the perspective of the consolidated entity until the asset is sold to an external party. Therefore, the workpaper entry to eliminate this intercompany gain involves debiting the Gain on Sale of Land account to reverse the gain recorded by the subsidiary.

Question 14

In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is computed by multiplying the noncontrolling interest percentage by the subsidiary's reported net income:

Accepted Answer

The answer of In years subsequent to the year a...

Question 15

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

Accepted Answer

In the years subsequent to the year of the intercompany sale, a workpaper entry under the cost method would involve debiting all of these options: Retained Earnings - P (to eliminate any recognized intercompany profit that inflated P's retained earnings), Noncontrolling interest (to adjust for the impact of the intercompany sale on the noncontrolling interest's share of net assets), and Equipment (to adjust the carrying amount of the equipment to its original cost, eliminating the effect of the intercompany gain).

Question 16

In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling interest percentage by the subsidiary's reported net income:

Accepted Answer

C) minus the net amount of unrealized gain on the intercompany sale. This is because the gain on the sale of equipment from the subsidiary to the parent is not realized from a consolidated perspective until the equipment is sold to an external party. Therefore, the noncontrolling interest's share of consolidated net income should be calculated after subtracting the unrealized gain, as this gain inflates the subsidiary's reported net income from a consolidated viewpoint.

Question 17

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

Accepted Answer

The answer of In years subsequent to the upstream intercompany...

Question 18

P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 2017, S sold equipment with a five-year remaining life to P for a gain of $120,000. S reports net income of $600,000 for 2017 and pays dividends of $200,000. P's Equity from Subsidiary Income for 2017 is:

Accepted Answer

P's Equity from Subsidiary Income for 2017 is calculated by adjusting S's reported net income for the intercompany gain on the sale of equipment and then applying P's ownership percentage. The gain of $120,000 on the equipment sale needs to be eliminated because it is an unrealized intercompany profit. The equipment has a five-year remaining life, so the gain is amortized over five years, resulting in an annual amortization of $24,000 ($120,000 / 5 years). S's adjusted net income is $576,000 ($600,000 - $24,000). P's share of S's adjusted net income is 80%, which equals $460,800 ($576,000 * 80%). However, the correct calculation involves recognizing that the gain should not be subtracted from S's net income but rather the amortization expense should be added back to calculate P's equity in S's income correctly. Therefore, the correct calculation is $600,000 net income - $24,000 amortization = $576,000 adjusted net income for S. P's share at 80% is $460,800, which is not one of the options provided, indicating a mistake in the explanation process. The correct approach to find P's Equity from Subsidiary Income involves directly applying P's ownership percentage to S's reported net income and adjusting for the intercompany transactions correctly. Given the options and the error in the initial explanation, the correct calculation should consider the impact of the intercompany sale and the amortization of the gain, which was not properly accounted for in the provided options and explanation.

Question 19

Several years ago, P Company bought land from S Company, its 80% owned subsidiary, at a gain of $50,000 to S Company. The land is still owned by P Company. The consolidated working papers for this year will require:

Accepted Answer

A credit to land for $50,000 is required in the consolidated working papers to eliminate the gain recognized on the intercompany transaction. This adjustment ensures that the consolidated financial statements reflect the historical cost of the land to the consolidated entity, not the inflated price paid by P Company to S Company.

Question 20

Patriot Corporation owns 100% of Simon Company's common stock. On January 1, 2017, Patriot sold equipment with a book value of $350,000 to Simon for $500,000. Simon is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and 2018 consolidated income would be an increase (decrease) of:

Accepted Answer

The initial sale from Patriot to Simon resulted in a $150,000 profit ($500,000 sale price - $350,000 book value). For consolidation purposes, this intra-group profit must be eliminated in the year of sale (2017). Additionally, since Simon is depreciating the equipment over ten years, the excess profit of $150,000 would be amortized at $15,000 per year ($150,000 / 10 years). Thus, for 2017, the net adjustment is a decrease of $135,000 ($150,000 profit - $15,000 depreciation) and for 2018, an increase of $15,000 to reverse the excess depreciation charged against consolidated income.

Quiz 7: Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment