Question 1

A material realized gain on a subsidiary's open-market acquisition of its parent company's outstanding bonds at a discount is displayed in the consolidated income statement as:

Accepted Answer

The gain is considered an ordinary item and is reported gross of income tax effects in the consolidated income statement.

Question 2

Included in a working paper elimination (in journal entry format) for intercompany sales of merchandise was a debit to Minority Interest in Net Assets of Subsidiary. This debit indicates that:

Accepted Answer

A debit to Minority Interest in Net Assets of Subsidiary in the context of intercompany sales of merchandise indicates that a partially owned subsidiary sold merchandise to the parent company or to another subsidiary. This is because the minority interest needs to be adjusted to reflect the elimination of profits from the intercompany sale that were previously recorded.

Question 3

From a consolidated point of view, the intercompany gain on a parent company's sale of a depreciable plant asset to the subsidiary is realized when:

Accepted Answer

Rationale: (the subsidiary depreciates the plant asset)

Question 4

On December 1, 2006, Passey Corporation sold a machine with a carrying amount of $150,000 to its 80%-owned subsidiary, Scully Company, for $200,000. Scully adopted a four-year economic life, no residual value, and the sum-of-the-years'-digits method of depreciation for the machine. If correct working paper eliminations are prepared for Passey Corporation and subsidiary on November 30, 2007, the end of the fiscal year, Passey's net income to be included in consolidated net income is (disregarding income taxes):

Accepted Answer

Rationale: [$50,000 - [($50,000 x 4/10) = $30,000]

Question 5

Stubbs Company, the 80%-owned subsidiary of Petrill Corporation, sells merchandise to Petrill at a gross margin rate of 25%. Intercompany sales during the fiscal year ended June 30, 2006, were $100,000. Petrill's ending inventory of merchandise obtained from Stubbs was $60,000 at billed prices, an amount $20,000 larger than the beginning inventory. The June 30, 2006, working paper elimination (in journal entry format) for Petrill Corporation and subsidiary includes a:

Accepted Answer

Rationale: [($40,000 x 0.25) x 0.20 = $2,000]

Question 6

In APB No. 51 "Consolidated Financial Statements," the requirement for complete elimination of intercompany profit (gains) or losses is consistent with the:

Accepted Answer

The requirement for complete elimination of intercompany profit (gains) or losses is consistent with the economic unit concept of consolidated financial statements, as this concept views the parent and its subsidiaries as a single economic entity, necessitating the elimination of all intercompany transactions to avoid double counting.

Question 7

In the measurement of minority interest in net income of a partially owned subsidiary, the credit for Depreciation Expense-Parent in the working paper elimination (in journal entry format) for intercompany gain in a depreciable plant asset is attributed to net income of:

Accepted Answer

The answer of In the measurement of minority interest in...

Question 8

The working paper elimination (in journal entry format) for a second year of intercompany sales made at a markup over subsidiary cost by a partially owned subsidiary to the parent company includes:

Accepted Answer

In the second year, the unrealized profit from intercompany sales in the previous year is realized, requiring an adjustment to Retained Earnings of the subsidiary to eliminate the effect of the intercompany profit that was deferred in the first year.

Question 9

Which of the following is not an effect of a working paper elimination for intercompany sales of merchandise by a parent company to a subsidiary?

Accepted Answer

Eliminating working papers for intercompany sales does not affect the subsidiary's Sales ledger account balance directly. It primarily affects consolidated financial statements by eliminating intercompany transactions to prevent overstatement of revenues, expenses, and profits.

Question 10

If a gain on an intercompany transaction is attributable to a partially owned subsidiary, working paper eliminations (in journal entry format) for accounting periods subsequent to the period of the intercompany transaction will include a debit to Minority Interest in Net Assets of Subsidiary unless the gain arose from:

Accepted Answer

The answer of If a gain on an intercompany transaction...

Question 11

The gross profit on an intercompany sale of merchandise costing $500,000 at a gross margin rate of 16 2/3% based on selling price is:

Accepted Answer

Rationale: ($500,000 x 0.20 = $100,000)

Question 12

In the working paper elimination (in journal entry format) prepared on the date a parent company acquires outstanding bonds of its wholly owned subsidiary in the open market at a cost less than the subsidiary's carrying amount for the bonds, the difference between the subsidiary's carrying amount and the parent company's cost is:

Accepted Answer

When a parent company acquires its subsidiary's bonds at a cost less than the subsidiary's carrying amount, the difference is credited to Gain on Extinguishment of Bonds-Subsidiary, reflecting the gain from acquiring the debt at a lower price.

Question 13

During the fiscal year ended March 31, 2006, Sol Company, the 90%-owned subsidiary of Pal Corporation, sold merchandise for the first time to Pal at a billed price of $160,000, representing a 25% markup on Sol's cost. On March 31, 2006, $40,000 of the merchandise remained unsold. There were no other intercompany transactions during the year ended March 31, 2006, and Sol had a net income of $80,000 for that year. In the working paper elimination (in journal entry format) of Pal Corporation and subsidiary for the year ended March 31, 2006, Minority Interest in Net Income of Subsidiary is debited for:

Accepted Answer

Rationale: [($80,000 - $8,000) x 0.10 = $7,200]

Question 14

Is the minority interest in net income of a partially owned subsidiary affected by:

Accepted Answer

The answer of Is the minority interest in net income...

Question 15

A working paper elimination to remove an intercompany profit or gain is not relevant for an intercompany:

Accepted Answer

Intercompany profits or gains need to be eliminated to prevent overstatement of revenues and assets when consolidated financial statements are prepared. This is relevant for intercompany sales of merchandise, plant assets, intangible assets, and sales-type/capital leases because they involve transactions that could affect the income statement and balance sheet. However, the acquisition of an affiliate's outstanding bonds payable in the open market does not involve a sale or transfer of goods or services between the companies, but rather a financial transaction affecting the debt structure, which does not require the same type of elimination of profit or gain.

Question 16

On October 23, 2006, Pastore Corporation loaned $100,000 to its subsidiary, Selma Company, on a 60-day, 12% promissory note. On November 4, 2006, Pastore discounted the Selma note at Second State Bank at a discount rate of 15%. The cash proceeds of the discounting is computed as:

Accepted Answer

The note's maturity value is $102,000 ($100,000 principal + $2,000 interest for 60 days at 12%). The discount period is 48 days (from November 4 to December 23), so the bank discount is calculated on the maturity value for 48 days.

Question 17

Refer to the facts in 36. In its journal entry to record the discounting of the note, Selma:

Accepted Answer

The answer of Refer to the facts in 36. In...

Question 18

On March 1, 2006, Picadilly Corporation loaned $12,000 to its subsidiary, Soho Company, on a 90-day, 12% promissory note. On March 3l, 2006, Picadilly discounted the Soho note at National Bank at a 15% discount rate. In its journal entry to record the discounting, Picadilly credits Intercompany Interest Revenue in the amount of:

Accepted Answer

Rationale: ($12,000 x 0.12 x 30/360 = $120)

Question 19

Intercompany loans, operating leases of property, and rendering of services do not include an element of intercompany profit gain or loss for the consolidated entity because:

Accepted Answer

The revenue of one affiliate exactly offsets the expense of the other affiliate

Question 20

A working paper elimination (in journal entry format) for Pigot Corporation and its wholly owned subsidiary, Soper Company, on December 31, 2005, was as follows:
  Prepare a comparable working paper elimination (in journal entry format) for Pigot Corporation and subsidiary on December 31, 2006. Omit explanation and disregard income taxes.

Accepted Answer

The answer of A working paper elimination (in journal entry...

Quiz 8: Consolidated Financial Statements: Intercompany Transactions