5.1 Multiple Choice Questions: Chapter 5 Intercompany Profit Transactions - Inventories

Advanced Accounting, 13e (Beams et al.
)
Chapter 5 Intercompany Profit Transactions - Inventories
5.1 Multiple Choice Questions
1) The material sale of inventory items by a parent company to an affiliated company

A) enters the consolidated revenue computation only if the transfer was the result of arm's length
bargaining.
B) affects consolidated net income under a periodic inventory system but not under a perpetual inventory
system.
C) does not result in consolidated income until the merchandise is sold to outside parties.
D) does not require a working paper adjustment if the merchandise was transferred at cost.
Answer: C
Objective: LO5.1 Understand the impact of intercompany inventory profit on consolidation workpapers.
Difficulty: Easy
AACSB: Analytical thinking
2) Phast Corporation owns a 80% interest in Stechno Company, acquired several years ago at a cost equal
to book value and fair value. Stechno sells merchandise to Phast for the first time in 2014, and some is
unsold at December 31, 2014. In computing income from the investee for 2014 under the equity method,
Phast uses which equation?
A) 80% of Stechno's income less 100% of the unrealized profit in Phast's ending inventory
B) 80% of Stechno's income plus 100% of the unrealized profit in Phast's ending inventory
C) 80% of Stechno's income less 80% of the unrealized profit in Phast's ending inventory
D) 80% of Stechno's income plus 80% of the unrealized profit in Phast's ending inventory
Answer: C
Difficulty: Moderate
3) Assume there are routine inventory sales between parent companies and subsidiaries. When preparing
the consolidated financial statements, which of the following line items is indifferent to the sales being
either upstream or downstream?
A) Consolidated retained earnings
B) Consolidated gross profit
C) Noncontrolling interest share
D) Controlling interest share of consolidated net income
Answer: B
Difficulty: Easy
1
Copyright © 2018 Pearson Education, Inc.
4) A(n) ________ sale is a sale by a parent company to a subsidiary. A(n) ________ sale is a sale by a
subsidiary to a parent company.
A) deferred; realized
B) realized; deferred
C) upstream; downstream
D) downstream; upstream
Answer: D
Objective: LO5.2 Apply the concepts of upstream versus downstream inventory transfers.
Difficulty: Easy
Use the following information to answer the question(s) below.
Paggle Corporation owns 80% of Spillway Inc.'s common stock that was purchased at its underlying book
value. At the time of purchase, the book value and fair value of Spillway's net assets were equal. The two
companies report the following information for 2014 and 2015.
During 2014, one company sold inventory to the other company for $50,000 which cost the transferor
$40,000. As of the end of 2014, 30% of the inventory was unsold. In 2015, the remaining inventory was
resold outside the consolidated entity.
2014 Selected Data: Paggle Spillway

Sales Revenue $600,000 $320,000
Cost of Goods Sold 320,000 155,000
Other Expenses 100,000 89,000
Net Income $180,000 $76,000
Dividends Paid 19,000 0
2015 Selected Data: Paggle Spillway

Sales Revenue $580,000 $445,000
Other Expenses 130,000 171,000
Net Income $150,000 $94,000
Dividends Paid 16,000 5,000
5) If the sale referred to above was a downstream sale, the total sales revenue reported in the consolidated
income statement for 2014 would be
A) $870,000.
B) $880,000.
C) $920,000.
D) $970,000.
Answer: A
Explanation: A)
2014 combined sales $920,000
Less: 2014 intercompany sales (50,000)
Consolidated sales $870,000
AACSB: Application of knowledge
2
6) If the sale referred to above was a downstream sale, by what amount must Inventory on the
consolidated balance sheet be reduced to reflect the correct balance as of the end of 2014?
A) $3,000
B) $10,000
C) $14,000
D) $20,000
Answer: A
Explanation: A)
Selling price $50,000
Less: Cost of sales 40,000
Original unrealized profit 10,000
Unsold percentage 30%
Unrealized profit $3,000
7) For 2014, consolidated net income will be what amount if the intercompany sale was downstream?
A) $180,000
B) $253,000
C) $256,000
D) $259,000
Answer: B
Explanation: B)
2014 Combined Net Income $256,000
Less: Unrealized Profit (above) (3,000)
2014 Consolidated Net Income $253,000
AACSB: Reflective thinking
8) If the intercompany sale mentioned above was an upstream sale, what will be the reported amount of
total consolidated sales revenue for 2015?
A) $1,025,000
B) $1,900,000
C) $1,950,000
D) $2,000,000
Answer: A
Explanation: A) Paggle $580,000 + Spillway $445,000. There were no intercompany sales in 2015 to
eliminate.
3
9) If the intercompany sale was an upstream sale, the total amount of consolidated cost of goods sold for
2015 will be
A) $300,000.
B) $430,000.
C) $470,000.
D) $477,000.
Answer: D
Explanation: D)
Combined cost of goods sold $480,000
Less: Unrealized profit in the
2015 beginning inventory (3,000)
Consolidated cost of sales $477,000
Pouch Corporation acquired an 80% interest in Shenley Corporation on January 1, 2014, when the book
values of Shenley's assets and liabilities were equal to their fair values. The cost of the 80% interest was
equal to 80% of the book value of Shenley's net assets. During 2014, Pouch sold merchandise that cost
$70,000 to Shenley for $86,000. On December 31, 2014, three-fourths of the merchandise acquired from
Pouch remained in Shenley's inventory. Separate incomes (investment income not included) of the two
companies are as follows:
Pouch Shenley
Sales Revenue $180,000 $160,000
Operating Expenses 17,000 21,000
Separate incomes $ 43,000 $ 49,000
10) The consolidated income statement for Pouch Corporation and subsidiary for the year ended
December 31, 2014 will show consolidated cost of sales of
A) $120,000.
B) $136,000.
C) $148,000.
D) $210,000.
Answer: B
Explanation: B)
Combined cost of sales $210,000
Less: Intercompany cost of sales (86,000)
Plus: Unrealized profit (16,000 × 75%) 12,000
Consolidated cost of sales $136,000
Objective: LO5.3 Defer unrealized inventory profits remaining in the ending inventory.
4
11) What is Pouch's income from Shenley for 2014?
A) $27,200
B) $29,600
C) $39,200
D) $49,000
Answer: A
Explanation: A) ($49,000 × 80%)- $12,000 (unrealized profit) = $27,200
12) Swamp Co., a 55%-owned subsidiary of Pond Inc., made the following entry to record a sale of
merchandise to Pond:
Accounts Receivable 40,000

Sales Revenue 40,000
All Swamp sales are at 125% of cost. One-fourth of this merchandise remained in the Pond's inventory at
year-end. A working paper entry to eliminate unrealized profits from consolidated inventory would
include a credit to Inventory in the amount of
A) $2,000.
B) $2,500.
C) $8,000.
D) $10,000.
Answer: A
Explanation: A)
Selling price $40,000
Less: Cost of sales ($40,000 / 125%) 32,000
Intercompany profit 8,000
× Unsold Portion (1/4) = $2,000
5
Pew Corporation acquired 80% ownership of Sordid Incorporated, at a time when Pew's investment cost
was equal to 80% of Sordid's book value. At the time of acquisition, the book values and fair values of
Sordid's assets and liabilities were equal. Pew uses the equity method. During 2014, Pew sold goods to
Sordid for $160,000 making a gross profit percentage of 20%. Half of these goods remained unsold in
Sordid's inventory at the end of the year. Income statement information for Pew and Sordid for 2014 were
as follows:
Pew Sordid
Sales Revenue $800,000 $300,000
Operating Expenses 200,000 80,000
Separate incomes $100,000 $60,000
13) The 2014 consolidated income statement showed cost of goods sold of
A) $500,000.
B) $516,000.
C) $532,000.
D) $660,000.
Answer: B
Explanation: B)
Combined Cost of Goods Sold $660,000
Less: Intercompany Sales (160,000)
Plus: Profit in ending inventory 16,000
Consolidated Cost of Goods Sold $516,000
14) What is Pew's income from Sordid for 2014?

A) $32,000
B) $48,000
C) $60,000
D) $75,000
Answer: A
Explanation: A)
Equity in Sordid net income ($60,000 × 80%) $48,000
Less: Unrealized Profit (16,000)
Pew's income from Sordid $32,000
6
15) The 2014 consolidated income statement showed noncontrolling interest share of
A) $3,200.
B) $6,400.
C) $8,800.
D) $12,000.
Answer: D
Explanation: D) Downstream sale has no effect on noncontrolling interest share; $60,000 × .2 = $12,000
16) On January 1, 2014, Plastam Industries acquired an 80% interest in Sparta Company to assure a steady
supply of Sparta's inventory that Plastam uses in its own manufacturing businesses. Sparta sold 100% of
its output to Plastam during 2014 and 2015 at a markup of 125% of Sparta's cost. Plastam had $12,000 of
these items remaining in its inventory at December 31, 2015. If Plastam neglected to eliminate unrealized
profits from all intercompany sales from Sparta, the inventory on the consolidated balance sheet at
December 31, 2015 was
A) overstated by $1,920.
B) understated by $1,920.
C) overstated by $2,400.
D) understated by $2,400.
Answer: C
Explanation: C) $12,000 - ($12,000 / 1.250) = $2,400
7
Use the following information to answer the question(s) below..
Pelga Company routinely receives goods from its 80%-owned subsidiary, Swede Corporation. In 2014,
Swede sold merchandise that cost $80,000 to Pelga for $100,000. Half of this merchandise remained in
Pelga's December 31, 2014 inventory. This inventory was sold in 2015. During 2015, Swede sold
merchandise that cost $160,000 to Pelga for $200,000. $62,500 of the 2015 merchandise inventory remained
in Pelga's December 31, 2015 inventory. Selected income statement information for the two affiliates for
the year 2015 was as follows:
Pelga Swede
Sales Revenue $500,000 $400,000
Gross profit $100,000 $80,000
17) Consolidated cost of goods sold for Pelga and Subsidiary for 2015 were
A) $512,000.
B) $526,000.
C) $522,500.
D) $528,000.
Answer: C
Explanation: C)
Combined Cost of Goods Sold $720,000
Less: Intercompany sales (200,000)
Adjust: Profit - 10,000 + 12,500 2,500
18) What amount of unrealized profit did Pelga Company have at the end of 2015?
A) $10,000
B) $12,500
C) $50,000
D) $62,500
Answer: B
Explanation: B) $62,500 remaining × 20% profit margin
Objective: LO5.4 Recognize realized, previously deferred inventory profits in the beginning inventory.
8
19) A parent company regularly sells merchandise to its 70%-owned subsidiary. Which of the following
statements describes the computation of noncontrolling interest share?
A) The subsidiary's net income times 30%
B) (The subsidiary's net income × 30%) + unrealized profits in the beginning inventory - unrealized profits
in the ending inventory
C) (The subsidiary's net income + unrealized profits in the beginning inventory - unrealized profits in the
ending inventory) × 30%
D) (The subsidiary's net income + unrealized profits in the ending inventory - unrealized profits in the
beginning inventory) × 30%
Answer: A
Objective: LO5.5 Adjust noncontrolling interest amounts in the presence of intercompany inventory profits.
20) Shalles Corporation, an 80%-owned subsidiary of Pani Corporation, sold inventory items to its parent
at a $48,000 profit in 2014. Pani resold one-third of this inventory to outside entities. Shalles reported net
income of $200,000 for 2014. Noncontrolling interest share of consolidated net income that will appear in
the income statement for 2014 is
A) $30,400.
B) $32,000.
C) $33,600.
D) $40,000.
Answer: C
Explanation: C)
Shalles' reported income $200,000
Less: Unrealized profits in ending inventory ($48,000 × 2/3) (32,000)
Shalles' adjusted income 168,000
Noncontrolling interest percentage 20%
Noncontrolling interest share $33,600
9
5.2 Exercises
1) Penguin Corporation acquired a 60% interest in Squid Corporation on January 1, 2014, at a cost equal
to 60% of the book value of Squid's net assets. At the time of the acquisition, the book values of Squid's
assets and liabilities were equal to the fair values. Squid reports net income of $880,000 for 2014. Penguin
regularly sells merchandise to Squid at 120% of Penguin's cost. The intercompany sales information for
2014 is as follows:
Intercompany sales at selling price $672,000

Sales value of merchandise unsold by Squid $132,000
Required:
1. Determine the unrealized profit in Squid's inventory at December 31, 2014.
2 Compute Penquin's income from Squid for 2014.
Answer:
Requirement 1
$132,000 - ($132,000/1.2) = $22,000
Requirement 2
Penquin's income from Squid:
Penquin's share of Squid income ($880,000 × 60%) $528,000
Less: Unrealized profit in ending inventory (22,000)
Penquin's income from Squid $506,000
2) Salli Corporation regularly purchases merchandise from their 90% owner, Playtime Corporation.
Playtime purchased the 90% interest at a cost equal to 90% of the book value of Salli's net assets. At the
time of acquisition, the book values and fair values of Salli's assets and liabilities were equal. Playtime
makes their sales to Salli at 120% of cost. In 2014, Salli reported net income of $460,000, and made
purchases totaling $172,000 from Playtime. Although Salli had no inventory on hand at the beginning of
2014 that they had purchased from Playtime, at year end, they had $51,600 of this merchandise in
inventory.
Required:
1. Determine the unrealized profit in Salli's inventory at December 31, 2014.
2. Compute Playtime's income from Salli for 2014.
Answer:
Requirement 1
$51,600 - ($51,600 /1.2) = $ 8,600
Requirement 2
Playtime's share of Salli's income ($460,000 × 90%) $414,000
Less: Unrealized profit in ending inventory $8,600
Income from Salli $405,400
10
3) Pirate Transport bought 80% of the outstanding voting stock of Seaways Shipping at book value
several years ago. (At the time of purchase, the fair value and book value of Seaways' net assets were
equal.) Pirate sells merchandise to Seaways at 120% above Pirate's cost. Intercompany sales from Pirate to
Seaways for 2014 were $450,000. Unrealized profits in Seaways' December 31, 2013 inventory and
December 31, 2014 inventory were $17,000 and $15,000, respectively. Seaways reported net income of
$750,000 for 2014.
Required:
1. Determine Pirate's income from Seaways for 2014.
2. In General Journal format, prepare consolidation working paper entries at December 31, 2014 to
eliminate the effects of the intercompany inventory sales assuming the perpetual inventory method is
used.
Answer:
Requirement 1
Pirate's Share of Seaways Income ($750,000 × 80%) $600,000
Less: Profit in Ending Inventory (15,000)
Add: Profit in Beginning Inventory 17,000
Pirate's Income from Seaways $602,000
Requirement 2
Debit Credit
Cost of Goods Sold 450,000
To eliminate intercompany sales and cost of goods sold
Investment in Seaway 17,000

To recognize previously deferred unrealized profits from the beginning inventory

Inventory 15,000
To eliminate intercompany profit in the ending inventory from cost of goods sold and inventory
11
4) Psalm Enterprises owns 90% of the outstanding voting stock of Solomon Siding, which was purchased
at a cost equal to 90% of the book value of Solomon's net assets many years ago. (At the time of purchase,
the fair value and book value of Solomon's net assets were equal.) Psalm purchases merchandise from
Solomon at 110% above Solomon's cost. In 2014, intercompany sales from Solomon to Psalm amounted to
$362,000. Unrealized profits in Psalm's December 31, 2013 inventory and December 31, 2014 inventory
were $82,000 and $26,000, respectively. Solomon reported net income of $980,000 for 2014.
Required:
1. Determine Psalm's income from Solomon for 2014.
2. In General Journal format, prepare consolidation working paper entries at December 31, 2014 to
eliminate the effects of the intercompany inventory sales assuming the perpetual inventory method is
used.
Answer:
Requirement 1
Psalm's income from Solomon:
Solomon's separate net income $ 980,000
Add: Unrealized profit in beginning inventory 82,000
Less: Unrealized profit in ending inventory (26,000)
Solomon adjusted income 1,036,000
Percentage 90%
Income from Solomon $ 932,400
Requirement 2
Debit Credit
Investment in Solomon 73,800

Noncontrolling interest 8,200

Inventory 26,000
12
5) Pfeifer Corporation acquired an 80% interest in Stern Corporation several years ago when the book
values and fair values of Stern's assets and liabilities were equal. At the time of acquisition, the cost of the
80% interest was equal to 80% of the book value of Stern's net assets. Separate company income
statements for Pfeifer and Stern for the year ended December 31, 2014 are summarized as follows:
Pfeifer Stern
Sales Revenue $1,000,000 $600,000
Investment income from Stern 85,000
Cost of Goods Sold (600,000) (300,000)
Expenses (200,000) (200,000)
Net Income $285,000 $100,000
During 2013, Pfeifer sold merchandise that cost $120,000 to Stern for $180,000. Half of this merchandise
remained in Stern's inventory at December 31, 2013. During 2014, Pfeifer sold merchandise that cost
$150,000 to Stern for $225,000. One-third of this merchandise remained in Stern's December 31, 2014
inventory.
Required:
Prepare a consolidated income statement for Pfeifer Corporation and Subsidiary for 2014.
Answer: Pfeifer Corporation and Subsidiary

Consolidated Income Statement
For the year ended December 31, 2014
Sales (combined $1,600,000 - $225,000 intercompany) $1,375,000

Cost of Goods Sold (see below) (670,000)
Expenses (400,000)
Consolidated net income 305,000
Noncontrolling interest share (20,000)
Controlling interest share $ 285,000
Consolidated cost of goods sold computation:

Combined cost of sales ($600,000 + $300,000) $900,000
Less: Unrealized profit in beginning inventory
($180,000 - $120,000) × 1/2 (30,000)
Add: Unrealized profit in ending inventory
($225,000 - $150,000) × 1/3 25,000
Consolidated Cost of Goods Sold $ 670,000
13
6) Perry Instruments International purchased 75% of the outstanding common stock of Standard Systems
in 1997 when the book values and fair values of Standard's assets and liabilities were equal. The cost of
Perry's investment was equal to 75% of the book value of Standard's net assets. Separate company income
statements for Perry and Standard for the year ended December 31, 2014 are summarized as follows:
Perry Standard
Sales Revenue $2,400,000 $800,000
Investment income from Standard 142,000
Cost of Goods Sold (1,600,000) (400,000)
Expenses (450,000) (200,000)
Net Income $492,000 $200,000
During 2014, the companies began to manage their inventory differently, and worked together to keep
their inventories low at each location. In doing so, they agreed to sell inventory to each other as needed at
a markup of 10% of cost. Perry sold merchandise that cost $100,000 to Standard for $110,000, and
Standard sold inventory that cost $80,000 to Perry for $88,000. Half of this merchandise remained in each
company's inventory at December 31, 2014.
Required:
Prepare a consolidated income statement for Perry Corporation and Subsidiary for 2014.
14
Answer: Perry Corporation and Subsidiary
Sales (combined $3,200,000 - $198,000 intercompany) $3,002,000

Cost of Goods Sold (see below) (1,811,000)
Expenses (650,000)
Noncontrolling interest share (see below) (49,000)
Controlling interest share $492,000

Combined cost of sales ($1,600,000 + $400,000) $2,000,000
Less: Intercompany sales ($110,000 + $88,000) (198,000)
($110,000 - $100,000) × 1/2 5,000
($88,000 - $80,000) × 1/2 4,000
Consolidated Cost of Goods Sold $1,811,000
Noncontrolling interest share calculation:

Standard separate net income $200,000
Less: Unrealized profit in ending inventory
from upstream sale ($88,000 - $80,000) × 1/2 (4,000)
Standard's adjusted net income $196,000
Noncontrolling interest share (25%) $49,000
15
7) Preen Corporation acquired a 60% interest in Shino Corporation at a cost equal to 60% of the book
value of Shino's net assets in 2014. At the time of acquisition, the book value and fair value of Shino's
assets and liabilities were equal. During 2015, Preen sold $120,000 of merchandise to Shino. All
intercompany sales are made at 150% of Preen's cost. Shino's beginning and ending inventories resulting
from intercompany sales for 2015 were $60,000 and $36,000, respectively. Income statement information
for both companies for 2015 is as follows:
Preen Shino
Sales Revenue $730,000 $262,000
Investment income from Shino 38,000
Expenses (165,000) (40,000)
Net Income $284,000 $50,000
Required:
Prepare a consolidated income statement for Preen Corporation and Subsidiary for 2015.
Answer: Preen Corporation and Subsidiary
Sales (combined $730,000 + $262,000 - $120,000) $872,000

Expenses (205,000)
Noncontrolling interest share ($50,000 × 40%) (20,000)

($60,000 - ($60,000/1.5)) (20,000)
($36,000 - ($36,000/1.5)) 12,000
16
8) Pexo Industries purchases the majority of their raw materials from a wholly-owned subsidiary,
Springmade Chemicals. Pexo purchased Springmade to assure supply availability at a time when the
materials were being rationed in the industry due to supply issues overseas. Pexo was able to purchase
Springmade at the book value of Springmade's net assets. At the time of purchase, the book value and fair
value of Springmade's net assets were equal. Pexo purchased $2,890,000 of materials from Springmade in
2014 alone. All intercompany sales are made at 120% of cost, although Springmade is able to mark up
their products 80% to other outside buyers. Pexo carried inventory on their books at the beginning and
end of the year in the amount of $450,000 and $480,000, respectively, all of which had been purchased
from Springmade. Income statement information for both companies for 2014 is as follows:
Pexo Springmade
Sales Revenue $3,793,000 $4,441,000
Investment income from Springmade 245,000
Cost of Goods Sold (3,139,000) (3,270,000)
Expenses (257,000) (921,000)
Net Income $642,000 $250,000
Required:
Prepare a consolidated income statement for Pexo Corporation and Subsidiary for 2014.
Answer: Pexo Corporation and Subsidiary
for the year ended December 31, 2014
Sales (combined $3,793,000 + $4,441,000 - $2,890,000) $ 5,344,000

Expenses (1,178,000)
Consolidated net income $ 642,000
Consolidated Cost of Goods Sold Computation:

Combined cost of sales ($3,139,000 + $3,270,000) $ 6,409,000
Less: Intercompany sales (2,890,000)
($450,000 - ($450,000/1.2)) (75,000)
($480,000 - ($480,000/1.2)) 80,000
Consolidated Cost of Goods Sold $3,524,000
17
9) PreBuild Manufacturing acquired 100% of Shoding Industries common stock on January 1, 2014, for
$670,000 when the book values of Shoding's assets and liabilities were equal to their fair values and
Shoding's stockholders' equity consisted of $380,000 of Capital Stock and $290,000 of Retained Earnings.
PreBuild's separate income (excluding investment income from Shoding) was $870,000, $830,000 and
$960,000 in 2014, 2015 and 2016, respectively. PreBuild sold inventory to Shoding during 2014 at a gross
profit of $50,000 and 50% remained at Shoding at the end of the year. The remaining 50% was sold in
2015. At the end of 2015, PreBuild has $54,000 of inventory received from Shoding from a sale of $180,000
which cost Shoding $150,000. There are no unrealized profits in the inventory of PreBuild or Shoding at
the end of 2016. PreBuild uses the equity method in its separate books. Select financial information for
Shoding follows:
2014 2015 2016

Sales $890,000 $995,000 $1,020,000
Cost of Sales (420,000) (475,000) (505,000)
Gross Profit 470,000 520,000 515,000
Operating Expenses (350,000) (380,000) (390,000)
Net Income $120,000 $140,000 $125,000
Required:
Prepare a schedule to determine PreBuild Manufacturing's Consolidated net income for 2014, 2015, and
2016.
Answer: 2014 2015 2016
PreBuild's separate income $870,000 $830,000 $960,000
Add: Shoding's reported net income 120,000 140,000 125,000
Unrealized profit in 2014 income (25,000) 25,000
Unrealized profit in 2015 income (9,000) 9,000
Consolidated net income $965,000 $986,000 $1,094,000
18
10) Peel Corporation acquired an 80% interest in Sitt Corporation at a cost equal to 80% of the book value
of Sitt several years ago. At the time of purchase, the fair value and book value of Sitt's assets and
liabilities were equal. Sitt purchases its entire inventory from Peel at 150% of Peel's cost. During 2014, Peel
sold $190,000 of merchandise to Sitt. Sitt's beginning and ending inventories for 2014 were $72,000 and
$66,000, respectively. Income statement information for both companies for 2014 is as follows:
Peel Sitt
Sales Revenue $820,000 $440,000
Investment income from Sitt 146,000
Expenses (120,000) (95,000)
Net Income $386,000 $180,000
Required:
Prepare a consolidated income statement for Peel Corporation and Subsidiary for 2014.
Answer:
Preliminary computations:
Unrealized profit in beginning inventory equals:
$72,000 - ($72,000/1.5) = $24,000
Unrealized profit in ending inventory:

$66,000 - ($66,000/1.5) = $22,000
Consolidated Net Income Statement:

Sales (combined $1,260,000 - $190,000 intercompany $1,070,000
Expenses (215,000)

Less: Unrealized profit in beginning inventory (24,000)
Add: Unrealized profit in ending inventory 22,000
19
11) Pittle Corporation acquired an 80% interest in Seel Corporation at a cost equal to 80% of the book
value of Seel's net assets several years ago. At the time of purchase, the fair value and book value of Seel's
assets and liabilities were equal. Pittle purchases its entire inventory from Seel at 150% of Seel's cost.
During 2014, Seel sold $490,000 of merchandise to Pittle. Pittle's beginning and ending inventories for
2014 were $72,000 and $66,000, respectively. Income statement information for both companies for 2014 is
as follows:
Pittle Seel
Sales Revenue $ 820,000 $440,000
Investment income from Sitt 145,600
Expenses (120,000) (95,000)
Net Income $ 385,600 $ 180,000
Required:
Prepare a consolidated income statement for Pittle Corporation and Subsidiary for 2014.
20
Answer:
Preliminary computations:
Unrealized profit in beginning inventory equals:
$72,000 - ($72,000/1.5) = $ 24,000
Unrealized profit in ending inventory:

$66,000 - ($66,000/1.5) = $ 22,000
Consolidated net income:

Sales (combined $1,260,000 - $490,000 intercompany) $770,000
Expenses (215,000)

Less: Unrealized profit in beginning inventory (24,000)
Add: Unrealized profit in ending inventory 22,000
Noncontrolling interest share calculation:

Seel separate net income $180,000
Add: Unrealized profit in beginning inventory
from upstream sale 24,000
from upstream sale (22,000)
Seel's adjusted net income $182,000
21
12) Paulee Corporation paid $24,800 for an 80% interest in Sergio Corporation on January 1, 2013, at
which time Sergio's stockholders' equity consisted of $15,000 of Common Stock and $6,000 of Retained
Earnings. The fair values of Sergio Corporation's assets and liabilities were identical to recorded book
values when Paulee acquired its 80% interest.
Sergio Corporation reported net income of $4,000 and paid dividends of $2,000 during 2013.
Paulee Corporation sold inventory items to Sergio during 2013 and 2014 as follows:
2013 2014
Paulee's sales to Sergio $5,000 $6,000
Paulee's cost of sales to Sergio 3,000 3,500
Unrealized profit at year-end 1,000 1,500
At December 31, 2014, the accounts payable of Sergio include $1,500 owed to Paulee for inventory
purchases.
Required:
Financial statements of Paulee and Sergio appear in the first two columns of the partially completed
working papers. Complete the consolidation working papers for Paulee Corporation and Subsidiary for
the year ended December 31, 2014.
22
Paulee Corporation and Subsidiary
Consolidation Working Papers
23
Answer:
Paulee Corporation and Subsidiary
Difficulty: Difficult
24
13) On January 1, 2014, Paar Incorporated paid $38,500 for a 70% interest in Siba Enterprises, at a time
when Siba's stockholder's equity consisted of $20,000 in Capital stock and $30,000 in Retained Earnings.
The fair values of Siba's assets and liabilities equaled their recorded book values at that time, so any
additional amount paid was attributed to goodwill.
In 2014, Siba purchased merchandise from Paar at a price of $6,000. The products originally cost Paar
$4,000, and 75% of this merchandise remained in inventory at December 31, 2014. This inventory was sold
in 2015. Siba reported net income of $9,000 and paid dividends of $3,000 during 2014.
In 2015, Siba purchased merchandise from Paar at a price of $8,000. The products had a cost to Paar of
$7,000, and 50% of this merchandise remained in inventory at December 31, 2015. Siba still owed Paar
$1,800 for these purchases at December 31, 2015.
Required:
Financial statements of Paar and Siba appear in the first two columns of the partially completed working
papers. Complete the consolidation working papers for Paar Corporation and Subsidiary for the year
ended December 31, 2015.
25
Paar Corporation and Subsidiary
26
Answer: Paar Corporation and Subsidiary
Difficulty: Difficult
27
14) Papal Corporation acquired an 80% interest in Sandman Corporation at a cost equal to 80% of the
book value of Sandman's net assets in 2013. At the time of the acquisition, the book values and fair values
of Sandman's assets and liabilities were equal. During 2014, Papal recorded sales of $440,000 of
merchandise to Sandman at a gross profit rate of 30%. Sandman's beginning and ending inventories for
2014 were $60,000 and $80,000, respectively. Income statement information for both companies for 2014 is
as follows:
Papal Sandman
Sales Revenue $1,660,000 $580,000
Invest.income from Sandman 59,600
Cost of Goods Sold (1,060,000) (394,000)
Expenses (358,000) (104,000)
Net Income $301,600 $82,000
Required:
Prepare a consolidated income statement for Papal Corporation and Subsidiary for 2014.
Answer: Papal Corporation and Subsidiary
Sales (combined $1,660,000 + $580,000 - $440,000) $1,800,000

Expenses (462,000)

Combined cost of sales ($1,060,000 + $394,000) $1,454,000
($60,000 × .30) (18,000)
($80,000 × .30) 24,000
Consolidated Cost of Goods Sold $ 1,020,000
28
15) Plover Corporation acquired 80% of Sink Inc. equity on January 1, 2013, when the book values of
Sink's assets and liabilities were equal to their fair values. The cost of the investment was equal to 80% of
the book value of Sink's net assets.
Plover separate income (excluding Sink) was $1,800,000, $1,700,000 and $1,900,000 in 2013, 2014 and 2015
respectively. Plover sold inventory to Sink during 2013 at a gross profit of $48,000 and one quarter
remained at Sink at the end of the year. The remaining 25% was sold in 2014. At the end of 2014, Plover
has $25,000 of inventory received from Sink from a sale of $100,000 which cost Sink $80,000. There are no
unrealized profits in the inventory of Plover or Sink at the end of 2015. Plover uses the equity method in
its separate books. Select financial information for Sink follows:
2013 2014 2015

Sales $790,000 $840,000 $940,000
Cost of Sales (420,000) (440,000) (500,000)
Gross Profit 370,000 400,000 440,000
Operating Expenses (300,000) (320,000) (350,000)
Net Income $ 70,000 $ 80,000 $ 90,000
Required:
Prepare a schedule to determine the controlling interest share of the consolidated net income for 2013,
2014, and 2015.
Answer: 2013 2014 2015
Plover's separate income $1,800,000 $1,700,000 $1,900,000
Add: Sink's net income 70,000 80,000 90,000
Unrealized profit in 2010 (12,000) 12,000
Unrealized profit in 2011 (5,000) 5,000
Less:Noncont.interest share (14,000) (15,000) (19,000)
Controlling interest share $1,844,000 $1,772,000 $1,976,000
2013 Noncontrolling interest share = (80,000 - 5,000) × 20%

2014 Noncontrolling interest share = (90,000 + 5,000) × 20%
29
16) On January 1, 2014, Palling Corporation purchased 70% of the common stock of Sam's Storage
Systems for $320,000 when Sam's had Common Stock outstanding of $100,000 and Retained Earnings of
$200,000. Any excess differential was attributed to goodwill.
At the end of 2014, Palling and Sam's had unrealized inventory profits from intercompany sales of $6,000
and $8,000, respectively. These year-end profit amounts were realized in 2015. At the end of 2015, Palling
held inventory acquired from Sam's with a $10,000 unrealized profit. Palling reported separate income of
$100,000 for 2015 and paid dividends of $30,000. Sam's reported separate income of $70,000 for 2015 and
paid dividends of $20,000.
Required:
Compute the controlling interest share of consolidated net income for 2015.
Answer:
Sam's separate income:
Separate income as reported $ 70,000
Add: Realized beginning inventory profit 8,000
Equals: Sam's adjusted income 78,000
70%
54,600
Less: Ending inventory profit (10,000)
Add: Beginning inventory profit 6,000
Palling's income from Sam $50,600
Palling's separate income $100,000

Palling's income from Sam 50,600
Controlling interest share of consolidated net income $150,600
30
17) Proman Manufacturing owns a 90% interest in Sipp Company, purchased at a time when the book
values of Sipp's recorded assets and liabilities were equal to fair values. During 2014, Sipp sold
merchandise to Proman for $80,000 at a 20% gross profit. At December 31, 2014, 25% of this merchandise
is still in Proman's inventory. Separate incomes for Proman and Sipp are summarized as follows:
Proman Sipp
Sales $900,000 $200,000
Cost of sales 400,000 100,000
Gross profit 500,000 100,000
Operating expenses 200,000 80,000
Separate income $300,000 $ 20,000
Required: Prepare a consolidated income statement for 2014 for Proman and subsidiary.
Answer: Proman Corporation and Subsidiary
Sales (combined $900,000 + $200,000 - $80,000) $1,020,000

Expenses (280,000)
Noncontrolling interest (see below) (1,600)

($80,000 × .20) × 25% 4,000
Noncontrolling interest calculation:

Sipp separate income $20,000
from upstream sale ($80,000 × .20) × 25% (4,000)
Sipp's adjusted net income $16,000
Noncontrolling interest share (10%) $ 1,600
31
18) Pastern Industries has an 80% ownership stake in Sascon Incorporated. At the time of purchase, the
book value of Sascon's assets and liabilities were equal to the fair value. The cost of the 80% investment
was equal to 80% of the book value of Sascon's net assets. At the end of 2014, they issued the following
consolidated income statement:
Sales $930,000
Cost of sales (470,000)
Operating expenses (202,000)
Shortly after the statements were issued, Pastern discovered that the 2014 intercompany sales
transactions had not been properly eliminated in consolidation. In fact, Pastern had sold inventory that
cost $80,000 to Sascon for $90,000, and Sascon had sold inventory that cost $50,000 to Pastern for $65,000.
Half of the products from both transactions still remained in inventory at December 31, 2014.
Required: Prepare a corrected income statement for Pastern and Subsidiary for 2014.
Answer: Pastern Corporation and Subsidiary
Sales (combined $930,000 - 90,000 - 65,000) $775,000

Expenses (202,000)

Combined cost of sales $470,000
Less: Intercompany sales (90,000 + 65,000) (155,000)
($10,000 + 15,000) 1/2 12,500
Noncontrolling interest calculation:

Calculated original Sascon Income
($23,000 / 20%) $115,000
from upstream sale ($15,000 × 1/2) (7,500)
Sascon adjusted separate net income 107,500
Noncontrolling interest share (20%) 21,500
32
19) Presented below are several figures reported for Plate Corporation and Saucer Industries as of
December 31, 2014. Plate has owned 70% of Saucer for the past five years, and at the time of purchase, the
book value of Saucer's assets and liabilities equaled the fair value. The cost of the 70% investment was
equal to 70% of the book value of Saucer's net assets. At the time of purchase, the fair values and book
values of Saucer's assets and liabilities were equal.
Plate Saucer
Inventory $120,000 $60,000
Sales 200,000 140,000
Expenses 40,000 30,000
In 2013, Saucer sold inventory to Plate which had cost $40,000 for $60,000. 25% of this inventory
remained on hand at December 31, 2013, but was sold in 2014. In 2014, Saucer sold inventory to Plate
which had cost $30,000 for $45,000. 40% of this inventory remained unsold at December 31, 2014.
Required: Calculate following balances at December 31, 2014.

a. Consolidated Sales
b. Consolidated Cost of goods sold
c. Consolidated Expenses
d. Noncontrolling interest share of Saucer's net income
e. Consolidated Inventory
33
Answer:
a. Consolidated Sales
Combined sales (200,000 + 140,000) $340,000
$295,000
b. Consolidated Cost of goods sold

Combined COGS (130,000 + 80,000) $210,000
Less: Profit deferred from prior year
($20,000 × 25%) (5,000)
Plus: Profit deferred to next year
($15,000 × 40%) 6,000
Consolidated Cost of goods sold $166,000
c. Consolidated Expenses
Combined Expenses ($40,000 + $30,000) $70,000
d. Noncontrolling interest share of Saucer's net income

Saucer reported net income
($140,000 - $80,000 - $30,000) $30,000
Plus: Unrealized profit in beginning
Inventory ($20,000 × 25%) 5,000
Less: Unrealized profit in ending
Inventory ($15,000 × 40%) (6,000)
Saucer adjusted separate net income $29,000
e. Consolidated Inventory
Combined Inventory ($120,000 + $60,000) $180,000
Less: Unrealized profit in ending
Inventory ($15,000 × 40%) (6,000)
Consolidated Inventory $174,000
34
20) Plateau Incorporated bought 60% of the common stock of Sachet Company several years ago. At the
time of purchase, the fair value and book value of Sachet's net assets were equal. The cost of the 60%
investment was equal to 60% of the book value of Sachet's net assets. Plateau sells merchandise to Sachet
at 125% above Plateau's cost. Intercompany sales from Plateau to Sachet for 2014 were $60,000.
Unrealized profits in Sachet's December 31, 2013 inventory and December 31, 2014 inventory were $6,000
and $4,500, respectively. Sachet reported net income of $120,000 for 2014.
Required: In General Journal format, prepare consolidation working paper entries at December 31, 2014
to eliminate the effects of the intercompany inventory sales.
Answer:
Debit Credit
Investment in Sachet 6,000

Inventory 4,500
5.3 True/False
1) Revenue is recognized when it is earned; therefore revenue earned for a consolidated entity occurs
when there is a sale to outside entities.
Answer: TRUE
Difficulty: Easy
2) The elimination entry under the perpetual inventory system for intercompany sales and purchases is a
debit to sales and a credit to purchases.
Answer: FALSE
3) A downstream sale is a sale by a parent to a subsidiary.

Answer: TRUE
Difficulty: Easy
35
4) A subsidiary's realized income is its reported net income adjusted for intercompany profits from
upstream sales.
Answer: TRUE
5) Parent sales to its subsidiary increase parent sales, COGS and gross profit.
Answer: TRUE
Difficulty: Easy
6) Sales by a subsidiary to its parent affects the operating income of the parent when the merchandise is
resold.
Answer: TRUE
Difficulty: Easy
7) If a subsidiary is a 100 percent-owned affiliate and sells to the parent, the parent defers 100 percent of
any unrealized profit in the year of the intercompany sale.
Answer: TRUE
8) The elimination entry for unrealized profit is a debit to purchases and a credit to ending inventory.
Answer: FALSE
9) The ending inventory of the purchasing affiliate reflects the intercompany transfer price.
Answer: TRUE
Difficulty: Easy
10) Consolidated financial statements eliminate unrealized gross profit by increasing consolidated cost of
goods sold and reducing merchandise inventory to its cost basis to the consolidated entity.
Answer: TRUE
AACSB: Information technology
36

5.1 Multiple Choice Questions: Chapter 5 Intercompany Profit Transactions - Inventories

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

5.1 Multiple Choice Questions: Chapter 5 Intercompany Profit Transactions - Inventories

Hochgeladen von

Copyright:

Verfügbare Formate

Advanced Accounting, 13e (Beams et al.

5.1 Multiple Choice Questions

1) The material sale of inventory items by a parent company to an affiliated company

Use the following information to answer the question(s) below.

2014 Selected Data: Paggle Spillway

2015 Selected Data: Paggle Spillway

Use the following information to answer the question(s) below.

Accounts Receivable 40,000

14) What is Pew's income from Sordid for 2014?

Intercompany sales at selling price $672,000

Investment in Seaway 17,000

Cost of Goods Sold 15,000

Investment in Solomon 73,800

Cost of Goods Sold 26,000

Answer: Pfeifer Corporation and Subsidiary

Sales (combined $1,600,000 - $225,000 intercompany) $1,375,000

Consolidated cost of goods sold computation:

Sales (combined $3,200,000 - $198,000 intercompany) $3,002,000

Consolidated cost of goods sold computation:

Noncontrolling interest share calculation:

Sales (combined $730,000 + $262,000 - $120,000) $872,000

Consolidated cost of goods sold computation:

Sales (combined $3,793,000 + $4,441,000 - $2,890,000) $ 5,344,000

Consolidated Cost of Goods Sold Computation:

2014 2015 2016

Unrealized profit in ending inventory:

Consolidated Net Income Statement:

Consolidated cost of goods sold computation:

Unrealized profit in ending inventory:

Consolidated net income:

Consolidated cost of goods sold computation:

Noncontrolling interest share calculation:

Sales (combined $1,660,000 + $580,000 - $440,000) $1,800,000

Consolidated cost of goods sold computation:

2013 2014 2015

2013 Noncontrolling interest share = (80,000 - 5,000) × 20%

Palling's separate income $100,000

Sales (combined $900,000 + $200,000 - $80,000) $1,020,000

Consolidated cost of goods sold computation:

Noncontrolling interest calculation:

Sales (combined $930,000 - 90,000 - 65,000) $775,000

Consolidated cost of goods sold computation:

Noncontrolling interest calculation:

Required: Calculate following balances at December 31, 2014.

b. Consolidated Cost of goods sold

d. Noncontrolling interest share of Saucer's net income

Investment in Sachet 6,000

3) A downstream sale is a sale by a parent to a subsidiary.

Das könnte Ihnen auch gefallen