Chapter 6 Test Bank

INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS

Multiple Choice Questions
Use the following information for questions 1 and 2.
In 2004, Parrot Company sold land to its subsidiary, Tree Corporation, for
$12,000. It had a book value of $10,000. In the next year, Tree sold the land
for $18,000 to an unaffiliated firm.
1.

Which of the following is correct?

a.
b.
c.
d.

2.

The 2004 unrealized gain

a.
b.
c.
d.

3.

No consolidation working paper entry was necessary in 2004.

A consolidation working paper entry was required only if the subsidiary
was less than 100% owned in 2004.
A consolidation working paper entry is required each year until the land is
sold outside the related parties.
A consolidated working paper entry was required only if the land was
held for resale in 2004.

was deferred until 2006.

was eliminated from consolidated net income by a working paper entry
that credited land $2,000.
made consolidated net income $2,000 less than it would have been had
the sale not occurred.
made consolidated net income $2,000 greater than it would have been
had the sale not occurred.

On January 1, 2005, Eagle Corporation sold equipment with a book value of

$40,000 and a 20-year remaining useful life to its wholly-owned subsidiary,
Rabbit Corporation, for $60,000. Both Eagle and Rabbit use the straight-line
depreciation method, assuming no salvage value. On December 31, 2005, the
separate company financial statements held the following balances associated
with the equipment:
Eagle
Rabbit
Gain on sale of equipment
$ 20,000
Depreciation expense
$ 3,000
Equipment
60,000
Accumulated depreciation
3,000
A working paper entry to consolidate the financial statements of Eagle and
Rabbit on December 31, 2005 included a
a.
b.
c.
d.

debit to gain on sale of equipment for $19,000.

credit to gain on sale of equipment for $20,000.
debit to accumulated depreciation for $1,000.
credit to depreciation expense for $3,000.

Use the following information for questions 4 and 5.

On December 31, 2005, Corella Corporation sold equipment with a three-year
remaining useful life and a book value of $21,000 to its 70%-owned subsidiary
Hollow Company for a price of $27,000. Corella bought the equipment four
years ago for $49,000.
4.

What was the intercompany sale impact on the consolidated financial

statements for the year ended December 31, 2005?

a.
b.

Corellas Net Income

Corellas Income
from Hollow

No effect.
No effect.

No effect.
Decreased.

c.
d.
5.

No effect.
Decreased.

What was the intercompany sale impact on the consolidated financial

statements for the year ended December 31, 2005?

a.
b.
c.
d.
6.

Decreased.
Increased.

Consolidated Net Income

Consolidated Net
Assets

No effect.
No effect.
Decreased.
Decreased.

No effect.
Increased.
Decreased.
No effect.

On January 2, 2005 Kakapo Company sold a truck with book value of $45,000
to Flightless Corporation, its completely owned subsidiary, for $60,000. The
truck had a remaining useful life of three years with zero salvage value. Both
firms use the straight-line depreciation method, and assume no salvage value.
If Kakapo failed to make year-end equity adjustments, Kakapos investment in
Flightless at December 31, 2005 was
a.
b.
c.
d.

$5,000 too high.

$10,000 too low.
$10,000 too high.
$15,000 too high.

Use the following information to answer questions 7 through 10.

On January 1, 2003, Shrimp Corporation purchased a delivery truck with an
expected useful life of five years. On January 1, 2005, Shrimp sold the truck to
Avocet Corporation and recorded the following journal entry:

Cash
Accumulated depreciation
Truck
Gain on Sale of Truck

Debit
50,000
18,000

Credit
53,000
15,000

Avocet holds 60% of Shrimp. Shrimp reported net income of $55,000 in 2005
and Avocet's separate net income (excludes interest in Shrimp) for 2005 was
$98,000.
7.

In preparing the consolidated financial statements for 2005, the elimination

entry for depreciation expense was a
a.
b.
c.
d.

8.

In the consolidation working papers, the Truck account was

a.
b.
c.
d.

9.

debited for $3,000.

credited for $3,000.
debited for $15,000.
credited for $15,000.

Consolidated net income for 2005 was

a.
b.
c.
d.

10.

debit for $5,000.

credit for $5,000.
debit for $15,000.
credit for $15,000.

$121,000.
$125,000.
$131,000.
$143,000.

The minority interest income for 2005 was

a.
b.
c.
d.
11.

Ground Parrot Company completely owns Heathlands Inc. On January 2,

2005 Ground Parrot sold Heathlands machinery at its book value of $30,000.
Ground Parrot had the machinery two years before selling it and used a fiveyear straight-line depreciation method, with zero salvage value. Heathlands
will use a three-year straight-line method. In the 2005 consolidated income
statement, the depreciation expense
a.
b.
c.
d.

12.

required no adjustment.
decreased by $4,000.
increased by $4,000
increased by $30,000.
In reference to the downstream or upstream sale of depreciable assets,
which of the following statements is correct?

a.

Upstream sales from the subsidiary to the parent company always result in
unrealized gains or losses.
The initial effect of unrealized gains and losses from downstream sales of
depreciable assets is different from the sale of nondepreciable assets.
Gains, but not losses, appear in the parent-company accounts in the year of
sale and must be eliminated by the parent company in determining its
investment income under the equity method of accounting.
Gains and losses appear in the parent-company accounts in the year of
sale and must be eliminated by the parent company in determining its
investment income under the equity method of accounting.

b.
c.
d.

13.

$18,000.
$22,000.
$23,000.
$27,000.

Falcon Corporation sold equipment to its 80%-owned subsidiary, Rodent

Corp., on January 1, 2005. Falcon sold the equipment for $110,000 when its
book value was $85,000 and it had a 5-year remaining useful life with no
expected salvage value. Separate balance sheets for Falcon and Rodent
included the following equipment and accumulated depreciation amounts on
December 31, 2005:
Equipment
Less: Accumulated depreciation
Equipment-net

Falcon
750,000
( 200,000)
$
550,000
$

Rodent
300,000
( 50,000)
$ 250,000
$

Consolidated amounts for equipment and accumulated depreciation at

December 31, 2005 were respectively
a.
b.
c.
d.
14.

$1,025,000 and $245,000.

$1,025,000 and $250,000.
$1,025,000 and $245,000.
$1,050,000 and $250,000.

Peregrine Corporation acquired a 90% interest in Cliff Corporation in 2004 at a

time when Cliffs book values and fair values were equal to one another. On
January 1, 2005, Cliff sold a truck with a $45,000 book value to Peregrine for
$90,000. Peregrine is depreciating the truck over 10 years using the straightline method. Separate incomes for Peregrine and Cliff for 2005 were as
follows:
Sales
Gain on sale of truck
Cost of Goods Sold
Depreciation expense
Other expenses
Separate incomes

Peregrine
$ 1,800,000
( 750,000)
( 450,000)
( 180,000)
$
420,000

Peregrines investment income from Cliff for 2005 was

Cliff
$ 1,050,000
45,000
( 285,000)
( 135,000)
( 450,000)
$ 225,000

a.
b.
c.
d.
15.

$161,550.
$162,000.
$166,050.
$202,500.

Kestrel Company acquired an 80% interest in Reptile Corporation on January

1, 2004. On January 1, 2005, Reptile sold a building with a book value of
$50,000 to Kestrel for $80,000. The building had a remaining useful life of ten
years and no salvage value. The separate balance sheets of Kestrel and
Reptile on December 31, 2005 included the following balances:
Buildings
Accumulated Depreciation Buildings

Kestrel
$
400,000
120,000

Reptile
$ 250,000
75,000

The consolidated amounts for Buildings and Accumulated Depreciation Buildings that appeared, respectively, on the balance sheet at December 31,
2005, were
a.
b.
c.
d.
16.

Pigeon Corporation purchased land from its 60%-owned subsidiary, Seed Inc.,
in 2003 at a cost $30,000 greater than Seeds book value. In 2005, Pigeon
sold the land to an outside entity for $40,000 more than Pigeons book value.
The 2005 consolidated income statement reported a gain on the sale of land
of
a.
b.
c.
d.

17.

$249,250.
$250,500.
$254,250.
$288,000.

Lorikeet Corporation acquired a 80% interest in Nectar Corporation on

January 1, 2000 at a cost equal to book value and fair value. In the same year
Nectar sold land costing $30,000 to Lorikeet for $50,000 On July 1, 2005,
Lorikeet sold the land to an unrelated party for $110,000. What was the gain
on the consolidated income statement?
a.
b.
c.
d.

19.

$40,000.
$42,000.
$58,000.
$70,000.

Pied Imperial-Pigeon Corporation acquired a 90% interest in Offshore

Corporation in 2003 when Offshore book values were equivalent to fair
values. Offshore sold equipment with a book value of $80,000 to Pied
Imperial-Pigeon for $130,000 on January 1, 2005. Pied Imperial-Pigeon is fully
depreciating the equipment over a 4-year period by using the straight-line
method. Offshore reported net income for 2005 was $320,000. Pied ImperialPigeons 2005 net income from Offshore was
a.
b.
c.
d.

18.

$620,000 and $192,000.

$620,000 and $195,000.
$650,000 and $192,000.
$650,000 and $195,000.

$48,000.
$60,000.
$64,000.
$80,000.

On January 1, 2005 Rainforest Co. recorded a $30,000 profit on the upstream

sale of some equipment that had a remaining four-year life under the straightline depreciation method. The effect of this transaction on the amount
recorded in 2005 by the parent company Wompoo as its investment income in
the Rainforest was

a.
b.
c.
d.
20.

a decrease of $18,000 if the Rainforest was 80% owned.

a decrease of $27,000 if the Rainforest was 90% owned.
an increase of $22,500 if the Rainforest was wholly owned.
an increase of $30,000 if the Rainforest was wholly owned.

Swift Parrot Corporation acquired a 60% interest in Berries Corp. on January

1, 2005, when Berriess book values and fair values were equivalent. On
January 1, 2005, Berries sold a building with a book value of $600,000 to Swift
Parrot for $700,000. The building had a remaining life of 10 years, no salvage
value, and was depreciated by the straight-line method. Berries reported net
income of $2,000,000 for 2005. What was the noncontrolling interest for 2005?
a.
b.
c.
d.

$710,000.
$764,000.
$800,000.
$900,000.

SOLUTIONS
Multiple Choice Questions
1

($15,000 gain/ 3 years)

($53,000 - $50,000)

$98,000 + [($55,000 - $15,000 +

$5,000) x 60%] =

125,000

10

($55,000 - $15,000 + $5,000) x

40%=

18,000

Combined equipment amounts

Less: gain on sale
Consolidated equipment balance

$ 1,050,000
(
25,000 )
$ 1,025,000

Combined Accumulated Depreciation

Less: Depreciation on gain
Consolidated Accumulated
Depreciation

$
(

250,000
5,000 )

245,000

Cliff reported income

Less: Intercompany gain on
truck
Plus: Piecemeal recognition of
gain = $45,000/10 years
Cliffs adjusted income
Majority percentage
Income from Cliff

225,000

4,500
184,500
90%
166,050

Combined building amounts

Less: Intercompany gain
Consolidated building amounts

$
(
$

650,000
30,000 )
620,000

11

12

13

14

15

45,000 )

Combined Accumulated Depreciation

Less: Piecemeal recognition of
gain
Consolidated accumulated
depreciation
16

17

18

19

20

Pied Imperial-Pigeons share of

Rogers income = ($320,000 x 90%)
=
Less: Profit on intercompany sale
($130,000 - $80,000) x 90% =
Add: Piecemeal recognition of
deferred profit ($50,000/4 years)
x 90% =
Income from Offshore

$30,000 - (1/4 x $30,000) =

$
(

195,000
3,000 )

192,000

288,000

45,000 )
11,250
254,250

22,500