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Problems
LO 5-1
LO 5-3
LO 5-5
LO 5-2, 5-3
Use the following information for Problems 4–6:
Alpha Company owns 80 percent of the voting stock of Beta Company. Alpha and Beta reported
the following account information from their year-end separate financial records:
During the current year, Alpha sold inventory to Beta for $100,000. As of year-end, Beta had
resold only 60 percent of these intra-entity purchases. Alpha sells inventory to Beta at the same
1. What is the primary reason we defer financial statement recognition of gross profits on intra-
entity sales for goods that remain within the consolidated entity at year-end?
a. Revenues and COGS must be recognized for all intra-entity sales regardless of whether the
sales are upstream or downstream.
b. Intra-entity sales result in gross profit overstatements regardless of amounts remaining in
ending inventory.
c. Gross profits must be deferred indefinitely because sales among affiliates always remain in
the consolidated group.
d. When intra-entity sales remain in ending inventory, control of the goods has not changed.
2. James Corporation owns 80 percent of Carl Corporation’s common stock. During October,
Carl sold merchandise to James for $250,000. At December 31, 40 percent of this
merchandise remains in James’s inventory. Gross profit percentages were 20 percent for
James and 30 percent for Carl. The amount of intra-entity gross profit in inventory at
December 31 that should be eliminated in the consolidation process is
a. $24,000.
b. $30,000.
c. $20,000.
d. $75,000.
Page 249
3. In computing the noncontrolling interest’s share of consolidated net income, how should the
subsidiary’s net income be adjusted for intra-entity transfers?
a. The subsidiary’s reported net income is adjusted for the impact of upstream transfers prior
to computing the noncontrolling interest’s allocation.
b. The subsidiary’s reported net income is adjusted for the impact of all transfers prior to
computing the noncontrolling interest’s allocation.
c. The subsidiary’s reported net income is not adjusted for the impact of transfers prior to
computing the noncontrolling interest’s allocation.
d. The subsidiary’s reported net income is adjusted for the impact of downstream transfers
prior to computing the noncontrolling interest’s allocation.
Alpha
Inventory
$ 95,000
Sales Revenue
800,000
Cost of Goods Sold
600,000
markup it uses for all of its customers.
LO 5-2, 5-3
LO 5-3, 5-4, 5-5
LO 5-7
4. What is the total for consolidated sales revenue?
a. $800,000
b. $970,000
c. $1,000,000
d. $1,100,000
5. What is the total for consolidated inventory?
a. $143,000
b. $173,000
c. $175,000
d. $183,000
6. What is the total for consolidated cost of goods sold?
a. $670,000
b. $690,000
c. $788,000
d. $790,000
7. Parkette, Inc., acquired a 60 percent interest in Skybox Company several years ago. During
2023, Skybox sold inventory costing $160,000 to Parkette for $200,000. A total of 18 percent
of this inventory was not sold to outsiders until 2024. During 2024, Skybox sold inventory
costing $297,500 to Parkette for $350,000. A total of 30 percent of this inventory was not
sold to outsiders until 2025. In 2024, Parkette reported cost of goods sold of $607,500 while
Skybox reported $450,000. What is the consolidated cost of goods sold in 2024?
a. $698,950
b. $720,000
c. $1,066,050
d. $716,050
8. Angela, Inc., holds a 90 percent interest in Corby Company. During 2023, Corby sold
inventory costing $77,000 to Angela for $110,000. Of this inventory, $40,000 worth was not
sold to outsiders until 2024. During 2024, Corby sold inventory costing $72,000 to Angela
for $120,000. A total of $50,000 of this inventory was not sold to outsiders until 2025. In
2024, Angela reported separate net income of $150,000 while Corby’s net income was
$90,000 after excess amortizations. What is the noncontrolling interest in the 2024 income
of the subsidiary?
a. $8,000
b. $8,200
c. $9,000
d. $9,800
LO 5-7
LO 5-2, 5-3, 5-5, 5-7
Page 250
9. Dunn Corporation owns 100 percent of Grey Corporation’s common stock. On
January 2, 2023, Dunn sold to Grey for $40,000 machinery with a carrying amount
of $30,000. Grey is depreciating the acquired machinery over a five-year remaining life by
the straight-line method. The net adjustments to compute 2023 and 2024 consolidated net
income would be an increase (decrease) of
(AICPA adapted)
2023
2024
a.
$(8,000)
$2,000
b.
$(8,000)
–0–
c.
$(10,000)
$2,000
d.
$(10,000)
–0–
10. Thomson Corporation owns 70 percent of the outstanding stock of Stayer, Inc. On January 1,
2022, Thomson acquired a building with a 10-year life for $460,000. Thomson depreciated
the building on the straight-line basis assuming no salvage value. On January 1, 2024,
Thomson sold this building to Stayer for $430,400. At that time, the building had a
remaining life of 8 years but still no expected salvage value. In preparing financial statements
for 2024, how does this transfer affect the computation of consolidated net income?
a. Net income is reduced by $62,400.
b. Net income is reduced by $59,440.
c. Net income is reduced by $70,200.
d. Net income is reduced by $54,600.
11. On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for
$260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date
fair value of $65,000. On January 1, Suarez possessed equipment (5-year remaining life) that
was undervalued on its books by $25,000. Suarez also had developed several secret formulas
that Jarel assessed at $50,000. These formulas, although not recorded on Suarez’s financial
records, were estimated to have a 20-year future life.
As of December 31, the financial statements appeared as follows:
Jarel
Revenues
$
(300,000)
Cost of goods sold
140,000
Expenses
20,000
Net income
)
Retained earnings, 1/1
$
(300,000)
Net income
(140,000)
Dividends declared
–0–
Retained earnings, 12/31
)
Cash and receivables
$
210,000
Inventory
150,000
Investment in Suarez
260,000
Equipment (net)
440,000
Total assets
$
(140,000
$
(440,000
$ 1,060,000
LO 5-3, 5-4, 5-5
Page 251
Included in the preceding statements, Jarel sold inventory costing $80,000 to
Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31.
Compute the following amounts for the December 31 consolidated financial statements for
Jarel and Suarez.
a.
Revenues
b.
Cost of goods sold
c.
Expenses
d.
Noncontrolling interest appearing on the balance sheet
e.
Equipment (net)
f.
Inventory
LO 5-2, 5-3, 5-5
Jarel
Liabilities
$
(420,000)
Common stock
(200,000)
Retained earnings, 12/31
(440,000)
Total liabilities and equities
)
$(1,060,000
12. The following are several figures reported for Poyer and Sutter as of December 31, 2024:
Poyer acquired 90 percent of Sutter in January 2023. In allocating the newly acquired
subsidiary’s fair value at the acquisition date, Poyer noted that Sutter had developed a
unpatented technology worth $78,000 that was unrecorded on its accounting records and
had a 4-year remaining life. Any remaining excess fair value over Sutter’s book value was
attributed to an indefinite-lived trademark. During 2024, Sutter sells inventory costing
$130,000 to Poyer for $180,000. Of this amount, 10 percent remains unsold in Poyer’s
warehouse at year-end.
Determine balances for the following items that would appear on Poyer’s consolidated
financial statements for 2024:
Poyer
Inventory
$ 500,000
Sales
1,000,000
Investment income
not given
Cost of goods sold
500,000
Operating expenses
230,000
a.
Inventory
b.
Sales
c.
Cost of Goods Sold
d.
Operating Expenses
e.
Net Income Attributable to Noncontrolling Interest
13. On January 1, 2023, Corgan Company acquired 80 percent of the outstanding voting stock of
Smashing, Inc., for a total of $980,000 in cash and other consideration. At the acquisition
date, Smashing had common stock of $700,000, retained earnings of $250,000, and a
noncontrolling interest fair value of $245,000. Corgan attributed the excess of fair value over
Smashing’s book value to various covenants with a 20-year remaining life. Corgan uses the
equity method to account for its investment in Smashing.
LO 5-1, 5-3, 5-4, 5-5, 5-6, 5-7
Page 251
During the next two years, Smashing reported the following:
Corgan sells inventory to Smashing using a 60 percent markup on cost. At the end of 2023
and 2024, 40 percent of the current year purchases remain in Smashing’s inventory.
Net Income
Dividends Declared
Inventory Purchas
2023
$150,000
$35,000
$100,0
2024
130,000
45,000
120,0
a. Compute the equity method balance in Corgan’s Investment in Smashing, Inc., account as
of December 31, 2024.
b. Prepare the worksheet adjustments for the December 31, 2024, consolidation of Corgan
and Smashing.
Page 252
14. Placid Lake Corporation acquired 80 percent of the outstanding voting stock of Scenic, Inc.,
on January 1, 2023, when Scenic had a net book value of $400,000. Any excess fair value was
assigned to intangible assets and amortized at a rate of $5,000 per year.
Placid Lake’s 2024 net income before consideration of its relationship with Scenic (and before
adjustments for intra-entity sales) was $300,000. Scenic reported net income of $110,000.
Placid Lake declared $100,000 in dividends during this period; Scenic paid $40,000. At the
end of 2024, selected figures from the two companies’ balance sheets were as follows:
During 2023, intra-entity sales of $90,000 (original cost of $54,000) were made.
Only 20 percent of this inventory was still held within the consolidated entity at the
end of 2023. In 2024, $120,000 in intra-entity sales were made with an original cost of
$66,000. Of this merchandise, 30 percent had not been resold to outside parties by the end of
the year.
Each of the following questions should be considered as an independent situation for the
year 2024.
Placid Lake
Inventory
$140,000
Land
600,000
Equipment (net)
400,000
a. What is consolidated net income for Placid Lake and its subsidiary?
b. If the intra-entity sales were upstream, how would consolidated net income be allocated to
the controlling and noncontrolling interest?
c. If the intra-entity sales were downstream, how would consolidated net income be allocated
to the controlling and noncontrolling interest?
d. What is the consolidated balance in the ending Inventory account?
e. Assume that no intra-entity inventory sales occurred between Placid Lake and Scenic.
Instead, in 2023, Scenic sold land costing $30,000 to Placid Lake for $50,000. On the
2024 consolidated balance sheet, what value should be reported for land?
f. Assume that no intra-entity inventory or land sales occurred between Placid Lake and
Scenic. Instead, on January 1, 2023, Scenic sold equipment (that originally cost $100,000
but had a $60,000 book value on that date) to Placid Lake for $80,000. At the time of sale,
the equipment had a remaining useful life of five years. What worksheet entries are made
for a December 31, 2024, consolidation of these two companies to eliminate the impact of
the intra-entity transfer? For 2024, what is the noncontrolling interest’s share of Scenic’s
net income?
LO 5-2, 5-3, 5-4, 5-5
LO 5-3, 5-4, -5, 5-7
15. On January 1, 2023, Doone Corporation acquired 60 percent of the outstanding voting stock
of Rockne Company for $300,000 consideration. At the acquisition date, the fair value of the
40 percent noncontrolling interest was $200,000, and Rockne’s assets and liabilities had a
collective net fair value of $500,000. Doone uses the equity method in its internal records to
account for its investment in Rockne and there is no excess acquisition-date fair value
amortization. Rockne reports net income of $160,000 in 2024. Since being acquired, Rockne
has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone
amounted to $250,000 in 2023 and $300,000 in 2024. Approximately 30 percent of the
inventory purchased during any one year is not used until the following year.
a. What is the noncontrolling interest’s share of Rockne’s 2024 income?
b. Prepare Doone’s 2024 consolidation entries required by the intra-entity inventory
transfers.
16. Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft
Company on January 1, 2023, for $612,000 in cash and other consideration. At the
acquisition date, Protrade assessed Seacraft’s identifiable assets and liabilities at a collective
net fair value of $765,000, and the fair value of the 20 percent noncontrolling interest was
$153,000. No excess fair value over book value amortization accompanied the acquisition.
The following selected account balances are from the individual financial records of these two
companies as of December 31, 2024:
Each of the following problems is an independent situation:
Protrade
Sales
$880,000
Cost of goods sold
410,000
Operating expenses
174,000
Retained earnings, 1/1/24
980,000
Inventory
370,000
Buildings (net)
382,000
Investment income
Not given
Page 253
a. Assume that Protrade sells Seacraft inventory at a markup equal to 60 percent of cost.
Intra-entity transfers were $114,000 in 2023 and $134,000 in 2024. Of this inventory,
Seacraft retained and then sold $52,000 of the 2023 transfers in 2024 and held $66,000 of
the 2023 transfers until 2024.
Determine balances for the following items that would appear on consolidated
financial statements for 2024:
Cost of Goods Sold
Inventory
Net Income Attributable to Noncontrolling Interest
b. Assume that Seacraft sells inventory to Protrade at a markup equal to 60 percent of cost.
Intra-entity transfers were $74,000 in 2023 and $104,000 in 2024. Of this inventory,
$45,000 of the 2023 transfers were retained and then sold by Protrade in 2024, whereas
$59,000 of the 2024 transfers were held until 2025.
Determine balances for the following items that would appear on consolidated financial
statements for 2024:
Cost of Goods Sold
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- ces Mc Graw H Problem 7-20 (Algo) (LO 7-5, 7-6) Martin has a controlling interest in Rowen's outstanding stock. At the current year-end, the following information has been accumulated for these two companies Martin Roven Separate Operating Income $555,000 (includes a $131,000 net gross profit in intra-entity ending inventory) 400,000 Martin uses the initial value method to account for the investment in Rowen. The separate operating income figures just presented include neither dividend nor other investment income. The effective tax rate for both companies is 21 percent. a. Assume that Martin owns 100 percent of Rowen's voting stock and is filing a consolidated tax return. What income tax amount does this affiliated group pay for the current period? a b le b. Assume that Martin owns 92 percent of Rowen's voting stock and is filing a consolidated tax return. What amount of income taxes does this affiliated group pay for the current period? d ● c. Assume that Martin owns 65 percent of…arrow_forwardProblem 7-22 (Algo) (LO 7-6) Lake acquired a controlling interest in Boxwood several years ago. During the current fiscal period, the two companies individually reported the following income (exclusive of any investment income): Lake Boxwood Lake paid a $75,000 cash dividend during the current year, and Boxwood distributed $15,000. Boxwood sells Inventory to Lake each period. Intra-entity gross profits of $20,400 were present in Lake's beginning inventory for the current year, and its ending inventory carried $35,900 in intra-entity gross profits. View each of the following questions as an independent situation. The effective tax rate for both companies is 21 percent. $ 329,000 110,000 a. If Lake owns a 60 percent interest in Boxwood, what total income tax expense must be reported on a consolidated income statement for this period? (Round the Intermediate calculations and final answers to the nearest dollar amount.) b. If Lake owns a 60 percent interest in Boxwood, what total amount of…arrow_forward4 Peanut Company acquired 80 percent of Snoopy Company's outstanding common stock for $300,000 on January 1, 20X8, when the book value of Snoopy's net assets was equal to $375,000. Peanut uses the eguity method to account for Investments. The following trial balance summarizes the financial position and operations for Peanut and Snoopy as of December 31, 20X9: Peanut Company Snoopy Company Credit Debit Credit Debit $ 272,000 $ 77,000 82, 000 Cash Accounts Receivable 200, eee Inventory 193,e00 319,800 216,e00 706,000 118,000 Investment in Snoopy Company Land 81,000 Buildings and Equipment 199, 000 155,000 13,000 54, 250 34,000 Cost of Goods Sold 375,000 Depreciation Expense Selling & Administrative Expense Dividends Declared 47,000 221,000 224,e00 $ 487,000 $ 39,e00 Accumulated Depreciation Accounts Payable Bonds Payable 55,000 39,e00 137,000 79,250 Common Stock Retained Earnings 491,000 682,400 187,e00 158,eee 319, e00 Sales 844,000 Income from Snoopy Company 77,400 Total $2,773,800…arrow_forward
- Fromage purchased 80% of the equity shares in Frais on 1 January 20X1. During the year ended 31 December 20X1, Fromage sold inventory to Frais at a sales price of £50,000. None of the goods remained in Frais' inventory. Fromage applied a margin of 20%. Extracts from the statement of profit or loss for the two entities are shown below: Fromage Frais £000 £000 Revenue 1,000 750 Cost of sales (650) (250) What would be the revenue and cost of sales figures reported in the consolidated statement of profit or loss for the year ended 31 December 20X1? Answer to the nearest £000 a. Revenue 1700 Cost of sales 850 O b. Revenue 1750 Cost of sales 910 O c. Revenue 1700 Cost of sales 860 d. None of these options are correct Revenue 1550 Cost of sales 800arrow_forward4. Pate Corp. owns 80% of Strange Inc.’s common stock. During 20X1, Pate sold inventory to Strange for $600,000 on the same terms as sales made to outside customers. Strange sold the entire inventory purchased from Pate by the end of 20X1. Pate and Strange report the following for 20X1. Pate Strange Sales $ 2,700,000 $ 1,600,000 Cost of sales 1,800,000 900,000 Gross profit $ 900,000 $ 700,000 Required: What amount should Pate report as sales revenue in its 20X1 consolidated income statement? What amount should Pate report as cost of sales in its 20X1 consolidated income statement? Amount a. Sales Revenue Amount $ b. Cost of sales amount $arrow_forwardQuestion Three P Co has owned 75% of the 100,000 shares of S Co since the incorporation of that company. During the year to 31 December 20X2, S Co sold goods costing GHS16,000 to P Co at a price of GHS20,000 and these goods were still unsold by P Co at the end of the year. Draft statements of financial position of each company at 31 December 20X2 were: Required: Prepare the consolidated statement of financial position of P Co at 31 December 20X2. The fair value of the non-controlling interest at acquisition was GHS25,000.arrow_forward
- Alpha Company owns 80 percent of the voting stock of Beta Company. Alpha and Beta reported the following account information from their year-end separate financial records: Alpha Beta $95,000 $88,000 800,000 300,000 Cost of Goods Sold 600,000 180,000 Inventory Sales Revenue During the current year, Alpha sold inventory to Beta for $100,000. As of year end, Beta had resold only 60 percent of these intra-entity purchases. Alpha sells inventory to Beta at the same markup it uses for all of its customers. What is the total for consolidated cost of goods sold?arrow_forwardSubject: Corporate Accounting Q) Jessica Ltd sold inventory during the current period to its wholly owned subsidiary, Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie Ltd subsequently sold half the items to Ningbo Ltd for $8000. The tax rate is 30%. The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate consolidation adjustment entries are as follows: (i) Sales.....Dr 15,000 Cost of Sales...Cr 13,000 Inventory..........Cr 2,000 (ii) Deferred Tax Asset...Dr 300 Income Tax Expense...Cr 300Required(i) Discuss whether the entries suggested by Li Chen are correct, explaining on a line-by-line basis the correct adjustment entry. (ii) Determine the consolidation worksheet entries in the following year, assuming the inventory has been –sold, and explain the adjustments on a line-by-line basis.arrow_forwardThe following are select records from Kat and Dog as of Dec. 31st. All revenues, expenses, and dividends are assumed to occur evenly over the year. Kat acquired 70% of Dog earlier this year on July 1st. At the date of acquisition the only excess FMV item is a Trademark that is undervalued by $100 with a 5-year remaining life. KAT DOG REVENUES $ 800 $ 400 COGS 200 80 OTHER EXPENSES 400 100 DIVIDENDS 50 10 On the 12/31 Consolidated Financial Statements, what amounts will be reported for: 1. Revenues: 2. COGS: 3. Other expenses: 4. Dividends: 5. NCI in Net Income:arrow_forward
- Question 4: Jessica Ltd sold inventory during the current period to its wholly owned subsidiary, Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie Ltd subsequently sold half the items to Ningbo Ltd for $8000. The tax rate is 30%. The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate consolidation adjustment entries are as follows: Sales Dr 15 000 Cost of Sales Cr 13 000 Inventory Cr 2 000 Deferred Tax Asset Dr 300 Income Tax Expense Cr 300 Required (i) Discuss whether the entries suggested by Li Chen are correct, explaining on a line by line basis the correct adjustment entries. (ii) Determine the consolidation worksheet entries in the following year, assuming the inventory has been-sold, and explain the adjustments on a line by line basis. ->arrow_forwardPROBLEM ABOUT INTERCOMPANY TRANSACTIONS On January 2, 2004, KRABBY PATTY acquired 90% of the outstanding shares of CORAL BITS Co. at book value. During 2004 and 2005, intercompany sales amounted to $200,000 and 400,000, respectively. CORAL BITS Co. consistently recognized 25% mark-up based on sales while KRABBY PATTY had a 25% gross profit on cost. The inventories of the buying affiliate, which all came from inter-company transactions are as follows: Year Ended 2004 Year Ended 2005 KRABBY PATTY $24,000 $16,000 CORAL BITS $10,000 $4,000 On October 1, 2004, KRABBY PATTY purchased a piece of land costing $100,000 from CORAL BITS for $150,000. On December 31, 2005, KRABBY PATTY sold this land to an unrelated party for $150,000. On the other hand, on July 1, 2005, KRABBY PATTY sold a used machine with a carrying value of $6,000 and remaining life of 3 years to CORAL BITS CO. for $4,200. Below are the Statement of Comprehensive Income for the two companies in 2005.…arrow_forward4. Jackson company owns 80% of Canton corporation's common stock during October canceled merchandise to Jackson for $250,000 at December 31, 40% of the merchandise remains in Jackson's inventory gross profit percentage is 120% for Jackson and 30% for Canon the amount of intra- entity gross profit in inventory at December 31 That should be eliminated in the consolidation process is a. Zero b. $24,000, c. $75,000 d. $30,000arrow_forward
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