Chapter 07 - Intercompany Inventory Transactions

Chapter 07 Intercompany Inventory Transactions Answer Key

Multiple Choice Questions

1. When there are intercompany sales of inventory during the year and a three-part
consolidation workpaper is prepared, elimination entries related to the intercompany sales:
I. Always are needed.
II. Are not needed if all the inventory is resold to unrelated parties prior to the end of the year.
A. I
B. II
C. Both I and II
D. Either I or II

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AICPA: Decision Making

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 2008, 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 2008. In preparing
combined financial statements for 2008, Earth's bookkeeper disregarded the common
ownership of Mars and Venus.

2. Based on the information given above, what amount should be eliminated from cost of
goods sold in the combined income statement for 2008?
A. $31,250
B. $25,000
C. $56,892
D. $6,250

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AICPA: Measurement

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3. Based on the information given above, by what amount was unadjusted revenue overstated
in the combined income statement for 2008?
A. $25,000
B. $56,892
C. $31,250
D. $6,250

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AICPA: Measurement

4. Global Corporation acquired 85 percent of Local Company's voting shares of stock in 2007.
During 2008, 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,
2008, for $30 each. Both companies use perpetual inventory systems.
Which workpaper eliminating entry is needed in preparing consolidated financial statements
for 2008 to remove all effects of the intercompany sale?

A. Option A
B. Option B
C. Option C
D. Option D

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5. 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.
A. I
B. II
C. Both I and II
D. Neither I nor II

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On January 1, 2008, 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, 2008, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire
inventory to an unaffiliated company for $120,000 on November 21, 2008. Parent had
produced the inventory sold to Subsidiary for $62,000. The companies had no other
transactions during 2008.

6. Based on the information given above, what amount of sales will be reported in the 2008
consolidated income statement?
A. $62,000
B. $120,000
C. $90,000
D. $58,000

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AICPA: Measurement

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7. Based on the information given above, what amount of cost of goods sold will be reported
in the 2008 consolidated income statement?
A. $62,000
B. $120,000
C. $90,000
D. $58,000

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AICPA: Measurement

8. Based on the information given above, what amount of consolidated net income will be
assigned to the controlling shareholders for 2008?
A. $58,000
B. $59,000
C. $55,000
D. $52,200

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AICPA: Measurement

Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 2007, at

underlying book value. On that date, the fair value of noncontrolling interest was equal to 10
percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge
for $90,000 on August 20, 2008, and resold 70 percent of the inventory to unaffiliated
companies on December 1, 2008, for $100,000. Scrooge produced the inventory sold to Pilfer
for $67,000. The companies had no other transactions during 2008.

9. Based on the information given above, what amount of sales will be reported in the 2008
consolidated income statement?
A. $90,000
B. $120,000
C. $100,000
D. $67,000

AACSB: Analytic
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10. Based on the information given above, what amount of cost of goods sold will be reported
in the 2008 consolidated income statement?
A. $60,900
B. $90,000
C. $46,900
D. $67,000

AACSB: Analytic
AICPA: Measurement

11. Based on the information given above, what amount of consolidated net income will be
assigned to the controlling interest for 2008?
A. $51,490
B. $53,100
C. $37,000
D. $20,100

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AICPA: Measurement

12. Based on the information given above, what inventory balance will be reported by the
consolidated entity on December 31, 2008?
A. $51,490
B. $53,100
C. $37,000
D. $20,100

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AICPA: Measurement

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13. Senior Inc. owns 85 percent of Junior Inc. During 2008, Senior sold goods with a 25
percent gross profit to Junior. Junior sold all of these goods in 2008. How should 2008
consolidated income statement items be adjusted?
A. No adjustment is necessary.
B. Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales.
C. Net income should be reduced by 85 percent of the gross profit on intercompany sales.
D. Sales and cost of goods sold should be reduced by the intercompany sales.

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Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of

Subsidiary 2 Company's stock. During 2008, Parent sold inventory purchased in 2007 for
$48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of
$60,000 to Subsidiary 2. Prior to December 31, 2008, Subsidiary 2 sold $45,000 of inventory
to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 2008.

14. Based on the information given above, what amount should be reported in the 2008
consolidated income statement as cost of goods sold?
A. $36,000
B. $12,000
C. $48,000
D. $45,000

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AICPA: Measurement

15. Based on the information given above, what amount should be reported in the December
31, 2008, consolidated balance sheet as inventory?
A. $36,000
B. $12,000
C. $15,000
D. $28,000

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AICPA: Measurement

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16. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2008?
A. $117,000
B. $120,000
C. $150,000
D. $128,000

AACSB: Analytic
AICPA: Measurement

17. Based on the information given above, what amount of sales must be eliminated from the
consolidated income statement for 2008?
A. $117,000
B. $120,000
C. $150,000
D. $128,000

AACSB: Analytic
AICPA: Measurement

18. Based on the information given above, what amount of inventory must be eliminated from
the consolidated balance sheet for 2008?
A. $2,400
B. $9,000
C. $12,000
D. $3,000

AACSB: Analytic
AICPA: Measurement

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Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases
all its inventory from Sub. The incomes reported by the companies over the past three years
are as follows:

Sub Company sold inventory for $300,000, $262,500 and $337,500 in the years 2006, 2007,
and 2008 respectively. Par Company reported ending inventory of $105,000, $157,500 and
$180,000 for 2006, 2007, and 2008 respectively. Par acquired 70 percent of the ownership of
Sub on January 1, 2006, 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 Sub Company.

19. Based on the information given above, what will be the consolidated net income for
2006?
A. $357,500
B. $375,000
C. $490,000
D. $317,750

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20. Based on the information given above, what will be the consolidated net income for
2007?
A. $495,000
B. $317,750
C. $486,250
D. $690,000

AACSB: Analytic
AICPA: Measurement

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21. Based on the information given above, what will be the income assigned to controlling
interest for 2007?
A. $448,375
B. $495,000
C. $486,250
D. $615,375

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22. Based on the information given above, what will be the income to noncontrolling interest
for 2008?
A. $39,750
B. $37,875
C. $71,275
D. $70,875

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23. Based on the information given above, what will be the income to controlling interest for
2008?
A. $615,375
B. $686,250
C. $690,000
D. $694,000

AACSB: Analytic
AICPA: Measurement

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24. 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:
A. 80 percent of the total revenues from intercompany sales.
B. total revenues from intercompany sales.
C. only the revenues from the subsidiary's intercompany sales.
D. only the revenues from the parent's intercompany sales.

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AICPA: Reporting

25. Consolidated net income may include the parent's separate operating income plus the
parent's share of the subsidiary's reported net income:
A. plus the unrealized profit on upstream intercompany sales of inventory made during the
current year.
B. plus the profit realized this year from upstream intercompany sales of inventory made last
year.
C. plus unrealized profit on downstream intercompany sales of inventory made during the
current year.
D. minus the parent's share of profit realized this year from upstream intercompany sales of
inventory made last year.

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AICPA: Reporting

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Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 2008, 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.

26. Based on the information given above, what amount of sales will be reported in the
consolidated income statement for 2008?
A. $500,000
B. $850,000
C. $600,000
D. $800,000

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27. Based on the information given above, what balance will be reported for inventory in the
consolidated balance sheet for December 31, 2008?
A. $56,573
B. $23,846
C. $32,727
D. $67,000

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28. The consolidation treatment of profits on inventory transfers that occurred before the
business combination depends on whether:
I. the companies were independent at that time.
II. the sale transaction was the result of arm's-length bargaining.
A. I
B. II
C. Both I and II
D. Neither I nor II

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Elvis Company purchases inventory for $70,000 on Mar 19, 2008 and sells it to Graceland
Corporation for $95,000 on May 14, 2008. Graceland still holds the inventory on December
31, 2008, and determines that its market value (replacement cost) is $82,000 at that time.
Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the
end of the year. Elvis owns 75 percent of Graceland.

29. Based on the information given above, what amount of cost of goods sold should be
eliminated in the consolidation workpaper for 2008?
A. $82,000
B. $70,000
C. $95,000
D. $60,000

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30. Based on the information given above, what amount of inventory should be eliminated in
the consolidation workpaper for 2008?
A. $15,000
B. $14,000
C. $12,000
D. $13,000

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AICPA: Measurement

31. Based on the information given above, by what amount should Graceland write down
inventory in its books?
A. $14,000
B. $15,000
C. $13,000
D. $16,000

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AICPA: Measurement

ABC Corporation owns 75 percent of XYZ Company's voting shares. During 2008, 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,
2008, and sold the remainder in early 2009 for $130 each. Both companies use perpetual
inventory systems.

32. Based on the information given above, what amount of cost of goods sold did ABC record
in 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000

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33. Based on the information given above, what amount of cost of goods sold did XYZ record
in 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000

AACSB: Analytic
AICPA: Measurement

34. Based on the information given above, what amount of cost of goods sold must be
reported in the consolidated income statement for 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000

AACSB: Analytic
AICPA: Measurement

35. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000

AACSB: Analytic
AICPA: Measurement

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36. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2009?
A. $187,000
B. $221,000
C. $1,422,000
D. $2,963,000

AACSB: Analytic
AICPA: Measurement

37. A subsidiary made sales of inventory to its parent at a profit this year. The parent, in turn,
sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The
amount that should be reported as cost of goods sold in the consolidated income statement
prepared for the year should be:
A. the amount reported as intercompany sales by the subsidiary.
B. the amount reported as intercompany sales by the subsidiary minus unrealized profit in the
ending inventory of the parent.
C. the amount reported as cost of goods sold by the parent minus unrealized profit in the
ending inventory of the parent.
D. the amount reported as cost of goods sold by the parent.

AACSB: Reflective Thinking

AICPA: Reporting

38. Consolidated net income for a parent and its 80 percent owned subsidiary should be
computed by eliminating:
A. all unrealized profit in downstream intercompany inventory sales, and unrealized profit in
upstream intercompany inventory sales made during the current year.
B. all unrealized profit in downstream intercompany inventory sales, and the noncontrolling
interest's share of unrealized profit in upstream inventory sales made during the current year.
C. the controlling interest's share of unrealized profit in downstream intercompany sales, and
the controlling interest's share of unrealized profit in upstream sales made during the current
year.
D. all unrealized profit in downstream intercompany sales, and the noncontrolling interest's
share of unrealized profit in upstream sales made during the current year.

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Essay Questions

39. Colton Company acquired 80 percent ownership of Mota Company's voting shares on
January 1, 2008, at underlying book value. The fair value of the noncontrolling interest on
that date was equal to 20 percent of the book value of Mota Company. During 2008, Colton
purchased inventory for $30,000 and sold the full amount to Mota Company for $50,000. On
December 31, 2008, Mota's ending inventory included $10,000 of items purchased from
Colton. Also in 2008, Mota purchased inventory for $80,000 and sold the units to Colton for
$100,000. Colton included $30,000 of its purchase from Mota in ending inventory on
December 31, 2008. Summary income statement data for the two companies revealed the
following:

Required:
a. Compute the amount to be reported as sales in the 2008 consolidated income statement.
b. Compute the amount to be reported as cost of goods sold in the 2008 consolidated income
statement.
c. What amount of income will be assigned to the noncontrolling shareholders in the 2008
consolidated income statement?
d. What amount of income will be assigned to the controlling interest in the 2008 consolidated
income statement?

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Alternative solution: d

Information on consolidated sales was computed in part (a); consolidated cost of goods sold
was computed in part (b) and income assigned to the noncontrolling interest was computed in
part (c).

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40. Hunter Company and Moss Company both produce and purchase fabric for resale each
period and frequently sell to each other. Since Hunter Company holds 80 percent ownership
of Moss Company, Hunter's controller compiled the following information with regard to
intercompany transactions between the two companies in 2007 and 2008:

Required:
a. Give the eliminating entries required at December 31, 2008, to eliminate the effects of the
inventory transfers in preparing a full set of consolidated financial statements.
b. Compute the amount of cost of goods sold to be reported in the consolidated income
statement for 2008.

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41. On January 1, 2007, Jones Company acquired 90 percent of the outstanding common
stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling
interest was equal to $138,000. The entire differential was related to land held by Smith. At
the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in
capital of $200,000, and retained earnings of $540,000. During 2007, Smith sold inventory to
Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent
was still in Jones' ending inventory. During 2008, the remaining inventory was resold to an
unrelated customer. Both Jones and Smith use perpetual inventory systems.
Income and dividend information for both Jones and Smith for 2007 and 2008 are as follows:

Required:
a. Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2007 assuming Jones accounts for its investment in Smith stock using the fully
adjusted equity method.
b. Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2008, assuming Jones accounts for its investment in Smith stock using the cost
method.

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a. 2007 Entries under Fully Adjusted Equity Method

b. 2008 Entries under Cost Method

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