Chapter 07 - Intercompany Inventory Transactions

Chapter 07
Intercompany Inventory Transactions

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. "lways are needed.
II. "re not needed if all the inventory is resold to unrelated parties prior to the end of the year.
". I
#. II
C. #oth I and II
$. %ither I or II

%arth Company owns 100 percent of the capital stock of &oth 'ars Corporation and (enus
Corporation. 'ars purchases merchandise inventory from (enus at 1)* percent of (enus+s
cost. $uring )00, (enus sold inventory to 'ars that it had purchased for -)*000. 'ars sold
all of this merchandise to unrelated customers for -*.,/) during )00,. In preparing
com&ined financial statements for )00, %arth+s &ookkeeper disregarded the common
ownership of 'ars and (enus.

). #ased on the information given a&ove what amount should &e eliminated from cost of
goods sold in the com&ined income statement for )00,0
". -11)*0
#. -)*000
C. -*.,/)
$. -.)*0

1. #ased on the information given a&ove &y what amount was unad2usted revenue overstated
in the com&ined income statement for )00,0
". -)*000
#. -*.,/)
C. -11)*0
$. -.)*0

7-1
Chapter 07 - Intercompany Inventory Transactions
3. 4lo&al Corporation ac5uired ,* percent of 6ocal Company+s voting shares of stock in )007.
$uring )00, 4lo&al purchased *0000 picture tu&es for -1* each and sold ),000 of them to
6ocal for -)0 each. 6ocal sold all of the units to unrelated entities prior to $ecem&er 11
)00, for -10 each. #oth companies use perpetual inventory systems.

Which workpaper eliminating entry is needed in preparing consolidated financial statements
for )00, to remove all effects of the intercompany sale0

". 7ption "
#. 7ption #
C. 7ption C
$. 7ption $

*. When a parent and its su&sidiary use a periodic inventory system rather than a perpetual
system the income and asset &alances 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.
". I
#. II
C. #oth I and II
$. 8either I nor II

7-)
Chapter 07 - Intercompany Inventory Transactions
7n 9anuary 1 )00, :arent Company ac5uired /0 percent ownership of ;u&sidiary
Corporation at underlying &ook value. The fair value of the noncontrolling interest at the date
of ac5uisition was e5ual to 10 percent of the &ook value of ;u&sidiary Corporation. 7n 'ar
17 )00, ;u&sidiary purchased inventory from :arent for -/0000. ;u&sidiary sold the entire
inventory to an unaffiliated company for -1)0000 on 8ovem&er )1 )00,. :arent had
produced the inventory sold to ;u&sidiary for -.)000. The companies had no other
transactions during )00,.

.. #ased on the information given a&ove what amount of sales will &e reported in the )00,
consolidated income statement0
". -.)000
#. -1)0000
C. -/0000
$. -*,000

7. #ased on the information given a&ove what amount of cost of goods sold will &e reported
in the )00, consolidated income statement0
". -.)000
#. -1)0000
C. -/0000
$. -*,000

,. #ased on the information given a&ove what amount of consolidated net income will &e
assigned to the controlling shareholders for )00,0
". -*,000
#. -*/000
C. -**000
$. -*))00

7-1
Chapter 07 - Intercompany Inventory Transactions
:ilfer Company ac5uired /0 percent ownership of ;crooge Corporation in )007 at
underlying &ook value. 7n that date the fair value of noncontrolling interest was e5ual to 10
percent of the &ook value of ;crooge Corporation. :ilfer purchased inventory from ;crooge
for -/0000 on "ugust )0 )00, and resold 70 percent of the inventory to unaffiliated
companies on $ecem&er 1 )00, for -100000. ;crooge produced the inventory sold to :ilfer
for -.7000. The companies had no other transactions during )00,.

/. #ased on the information given a&ove what amount of sales will &e reported in the )00,
consolidated income statement0
". -/0000
#. -1)0000
C. -100000
$. -.7000

10. #ased on the information given a&ove what amount of cost of goods sold will &e reported
in the )00, consolidated income statement0
". -.0/00
#. -/0000
C. -3./00
$. -.7000

11. #ased on the information given a&ove what amount of consolidated net income will &e
assigned to the controlling interest for )00,0
". -*13/0
#. -*1100
C. -17000
$. -)0100

1). #ased on the information given a&ove what inventory &alance will &e reported &y the
consolidated entity on $ecem&er 11 )00,0
". -*13/0
#. -*1100
C. -17000
$. -)0100

7-3
Chapter 07 - Intercompany Inventory Transactions
11. ;enior Inc. owns ,* percent of 9unior Inc. $uring )00, ;enior sold goods with a )*
percent gross profit to 9unior. 9unior sold all of these goods in )00,. <ow should )00,
consolidated income statement items &e ad2usted0
". 8o ad2ustment is necessary.
#. ;ales and cost of goods sold should &e reduced &y ,* percent of the intercompany sales.
C. 8et income should &e reduced &y ,* percent of the gross profit on intercompany sales.
$. ;ales and cost of goods sold should &e reduced &y the intercompany sales.

:arent Corporation owns /0 percent of ;u&sidiary 1 Company+s stock and 7* percent of
;u&sidiary ) Company+s stock. $uring )00, :arent sold inventory purchased in )007 for
-3,000 to ;u&sidiary 1 for -.0000. ;u&sidiary 1 then sold the inventory at its cost of
-.0000 to ;u&sidiary ). :rior to $ecem&er 11 )00, ;u&sidiary ) sold -3*000 of inventory
to a nonaffiliate for -.7000 and held -1*000 in inventory at $ecem&er 11 )00,.

13. #ased on the information given a&ove what amount should &e reported in the )00,
consolidated income statement as cost of goods sold0
". -1.000
#. -1)000
C. -3,000
$. -3*000

1*. #ased on the information given a&ove what amount should &e reported in the $ecem&er
11 )00, consolidated &alance sheet as inventory0
". -1.000
#. -1)000
C. -1*000
$. -),000

1.. #ased on the information given a&ove what amount of cost of goods sold must &e
eliminated from the consolidated income statement for )00,0
". -117000
#. -1)0000
C. -1*0000
$. -1),000

7-*
Chapter 07 - Intercompany Inventory Transactions
17. #ased on the information given a&ove what amount of sales must &e eliminated from the
consolidated income statement for )00,0
". -117000
#. -1)0000
C. -1*0000
$. -1),000

1,. #ased on the information given a&ove what amount of inventory must &e eliminated from
the consolidated &alance sheet for )00,0
". -)300
#. -/000
C. -1)000
$. -1000

;u& Company sells all its output at )0 percent a&ove cost to :ar Corporation. :ar purchases
all its inventory from ;u&. The incomes reported &y the companies over the past three years
are as follows!

;u& Company sold inventory for -100000 -).)*00 and -117*00 in the years )00. )007
and )00, respectively. :ar Company reported ending inventory of -10*000 -1*7*00 and
-1,0000 for )00. )007 and )00, respectively. :ar ac5uired 70 percent of the ownership of
;u& on 9anuary 1 )00. at underlying &ook value. The fair value of the noncontrolling
interest at the date of ac5uisition was e5ual to 10 percent of the &ook value of ;u& Company.

7-.
Chapter 07 - Intercompany Inventory Transactions
1/. #ased on the information given a&ove what will &e the consolidated net income for
)00.0
". -1*7*00
#. -17*000
C. -3/0000
$. -1177*0

)0. #ased on the information given a&ove what will &e the consolidated net income for
)0070
". -3/*000
#. -1177*0
C. -3,.)*0
$. -./0000

)1. #ased on the information given a&ove what will &e the income assigned to controlling
interest for )0070
". -33,17*
#. -3/*000
C. -3,.)*0
$. -.1*17*

)). #ased on the information given a&ove what will &e the income to noncontrolling interest
for )00,0
". -1/7*0
#. -17,7*
C. -71)7*
$. -70,7*

)1. #ased on the information given a&ove what will &e the income to controlling interest for
)00,0
". -.1*17*
#. -.,.)*0
C. -./0000
$. -./3000

7-7
Chapter 07 - Intercompany Inventory Transactions
)3. $uring the year a parent makes sales of inventory at a profit to its 7* percent owned
su&sidiary. The su&sidiary also makes sales of inventory at a profit to its parent during the
same year. #oth the parent and the su&sidiary have on hand at the end of the year )0 percent
of the inventory ac5uired from one another. Consolidated revenues for the year should
e=clude!
". ,0 percent of the total revenues from intercompany sales.
#. total revenues from intercompany sales.
C. only the revenues from the su&sidiary+s intercompany sales.
$. only the revenues from the parent+s intercompany sales.

)*. Consolidated net income may include the parent+s separate operating income plus the
parent+s share of the su&sidiary+s reported net income!
". plus the unreali>ed profit on upstream intercompany sales of inventory made during the
current year.
#. plus the profit reali>ed this year from upstream intercompany sales of inventory made last
year.
C. plus unreali>ed profit on downstream intercompany sales of inventory made during the
current year.
$. minus the parent+s share of profit reali>ed this year from upstream intercompany sales of
inventory made last year.

7-,
Chapter 07 - Intercompany Inventory Transactions
:erth Corporation owns /0 percent of $undee Company+s stock. "t the end of )00, :erth
and $undee reported the following partial operating results and inventory &alances!

:erth regularly prices its products at cost plus a 10 percent markup for profit. $undee prices
its sales at cost plus a 10 percent markup. The total sales reported &y :erth and $undee
include &oth intercompany sales and sales to nonaffiliates.

).. #ased on the information given a&ove what amount of sales will &e reported in the
consolidated income statement for )00,0
". -*00000
#. -,*0000
C. -.00000
$. -,00000

)7. #ased on the information given a&ove what &alance will &e reported for inventory in the
consolidated &alance sheet for $ecem&er 11 )00,0
". -*.*71
#. -)1,3.
C. -1)7)7
$. -.7000

7-/
Chapter 07 - Intercompany Inventory Transactions
),. The consolidation treatment of profits on inventory transfers that occurred &efore the
&usiness com&ination depends on whether!

I. the companies were independent at that time.
II. the sale transaction was the result of arm+s-length &argaining.
". I
#. II
C. #oth I and II
$. 8either I nor II

%lvis Company purchases inventory for -70000 on 'ar 1/ )00, and sells it to 4raceland
Corporation for -/*000 on 'ay 13 )00,. 4raceland still holds the inventory on $ecem&er
11 )00, and determines that its market value ?replacement cost@ is -,)000 at that time.
4raceland writes the inventory down from -/*000 to its lower market value of -,)000 at the
end of the year. %lvis owns 7* percent of 4raceland.

)/. #ased on the information given a&ove what amount of cost of goods sold should &e
eliminated in the consolidation workpaper for )00,0
". -,)000
#. -70000
C. -/*000
$. -.0000

10. #ased on the information given a&ove what amount of inventory should &e eliminated in
the consolidation workpaper for )00,0
". -1*000
#. -13000
C. -1)000
$. -11000

7-10
Chapter 07 - Intercompany Inventory Transactions
11. #ased on the information given a&ove &y what amount should 4raceland write down
inventory in its &ooks0
". -13000
#. -1*000
C. -11000
$. -1.000

"#C Corporation owns 7* percent of ABC Company+s voting shares. $uring )00, "#C
produced *0000 chairs at a cost of -7/ each and sold 1*000 chairs to ABC for -/0 each.
ABC sold 1,000 of the chairs to unaffiliated companies for -117 each prior to $ecem&er 11
)00, and sold the remainder in early )00/ for -110 each. #oth companies use perpetual
inventory systems.

1). #ased on the information given a&ove what amount of cost of goods sold did "#C record
in )00,0
". -)7.*000
#. -1.)0000
C. -13))000
$. -)/.1000

11. #ased on the information given a&ove what amount of cost of goods sold did ABC record
in )00,0
". -)7.*000
#. -1.)0000
C. -13))000
$. -)/.1000

13. #ased on the information given a&ove what amount of cost of goods sold must &e
reported in the consolidated income statement for )00,0
". -)7.*000
#. -1.)0000
C. -13))000
$. -)/.1000

7-11
Chapter 07 - Intercompany Inventory Transactions
1*. #ased on the information given a&ove what amount of cost of goods sold must &e
eliminated from the consolidated income statement for )00,0
". -)7.*000
#. -1.)0000
C. -13))000
$. -)/.1000

1.. #ased on the information given a&ove what amount of cost of goods sold must &e
eliminated from the consolidated income statement for )00/0
". -1,7000
#. -))1000
C. -13))000
$. -)/.1000

17. " su&sidiary made sales of inventory to its parent at a profit this year. The parent in turn
sold all &ut )0 percent of the inventory to unaffiliated companies recogni>ing a profit. The
amount that should &e reported as cost of goods sold in the consolidated income statement
prepared for the year should &e!
". the amount reported as intercompany sales &y the su&sidiary.
#. the amount reported as intercompany sales &y the su&sidiary minus unreali>ed profit in the
ending inventory of the parent.
C. the amount reported as cost of goods sold &y the parent minus unreali>ed profit in the
ending inventory of the parent.
$. the amount reported as cost of goods sold &y the parent.

1,. Consolidated net income for a parent and its ,0 percent owned su&sidiary should &e
computed &y eliminating!
". all unreali>ed profit in downstream intercompany inventory sales and unreali>ed profit in
upstream intercompany inventory sales made during the current year.
#. all unreali>ed profit in downstream intercompany inventory sales and the noncontrolling
interest+s share of unreali>ed profit in upstream inventory sales made during the current year.
C. the controlling interest+s share of unreali>ed profit in downstream intercompany sales and
the controlling interest+s share of unreali>ed profit in upstream sales made during the current
year.
$. all unreali>ed profit in downstream intercompany sales and the noncontrolling interest+s
share of unreali>ed profit in upstream sales made during the current year.


7-1)
Chapter 07 - Intercompany Inventory Transactions
Essay Questions

1/. Colton Company ac5uired ,0 percent ownership of 'ota Company+s voting shares on
9anuary 1 )00, at underlying &ook value. The fair value of the noncontrolling interest on
that date was e5ual to )0 percent of the &ook value of 'ota Company. $uring )00, Colton
purchased inventory for -10000 and sold the full amount to 'ota Company for -*0000. 7n
$ecem&er 11 )00, 'ota+s ending inventory included -10000 of items purchased from
Colton. "lso in )00, 'ota purchased inventory for -,0000 and sold the units to Colton for
-100000. Colton included -10000 of its purchase from 'ota in ending inventory on
$ecem&er 11 )00,. ;ummary income statement data for the two companies revealed the
following!

De5uired!
a. Compute the amount to &e reported as sales in the )00, consolidated income statement.
&. Compute the amount to &e reported as cost of goods sold in the )00, consolidated income
statement.
c. What amount of income will &e assigned to the noncontrolling shareholders in the )00,
consolidated income statement0
d. What amount of income will &e assigned to the controlling interest in the )00, consolidated
income statement0




7-11
Chapter 07 - Intercompany Inventory Transactions
30. <unter Company and 'oss Company &oth produce and purchase fa&ric for resale each
period and fre5uently sell to each other. ;ince <unter Company holds ,0 percent ownership
of 'oss Company <unter+s controller compiled the following information with regard to
intercompany transactions &etween the two companies in )007 and )00,!

De5uired!
a. 4ive the eliminating entries re5uired at $ecem&er 11 )00, to eliminate the effects of the
inventory transfers in preparing a full set of consolidated financial statements.
&. Compute the amount of cost of goods sold to &e reported in the consolidated income
statement for )00,.




7-13
Chapter 07 - Intercompany Inventory Transactions
31. 7n 9anuary 1 )007 9ones Company ac5uired /0 percent of the outstanding common
stock of ;mith Corporation for -1)3)000. 7n that date the fair value of noncontrolling
interest was e5ual to -11,000. The entire differential was related to land held &y ;mith. "t
the date of ac5uisition ;mith had common stock outstanding of -*)0000 additional paid-in
capital of -)00000 and retained earnings of -*30000. $uring )007 ;mith sold inventory to
9ones for -330000. The inventory originally cost ;mith -1.0000. #y year-end 10 percent
was still in 9ones+ ending inventory. $uring )00, the remaining inventory was resold to an
unrelated customer. #oth 9ones and ;mith use perpetual inventory systems.

Income and dividend information for &oth 9ones and ;mith for )007 and )00, are as follows!

De5uired!
a. :resent the workpaper elimination entries necessary to prepare consolidated financial
statements for )007 assuming 9ones accounts for its investment in ;mith stock using the fully
ad2usted e5uity method.
&. :resent the workpaper elimination entries necessary to prepare consolidated financial
statements for )00, assuming 9ones accounts for its investment in ;mith stock using the cost
method.




Chapter 07 Intercompany Inventory Transactions "nswer Eey


Multiple Choice Questions

7-1*
Chapter 07 - Intercompany Inventory Transactions
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. "lways are needed.
II. "re not needed if all the inventory is resold to unrelated parties prior to the end of the year.
A. I
#. II
C. #oth I and II
$. %ither I or II

AACSB: Analytic
AICPA: Decision Making

%arth Company owns 100 percent of the capital stock of &oth 'ars Corporation and (enus
Corporation. 'ars purchases merchandise inventory from (enus at 1)* percent of (enus+s
cost. $uring )00, (enus sold inventory to 'ars that it had purchased for -)*000. 'ars sold
all of this merchandise to unrelated customers for -*.,/) during )00,. In preparing
com&ined financial statements for )00, %arth+s &ookkeeper disregarded the common
ownership of 'ars and (enus.

). #ased on the information given a&ove what amount should &e eliminated from cost of
goods sold in the com&ined income statement for )00,0
A. -11)*0
#. -)*000
C. -*.,/)
$. -.)*0

AACSB: Analytic
AICPA: Measurement

7-1.
Chapter 07 - Intercompany Inventory Transactions
1. #ased on the information given a&ove &y what amount was unad2usted revenue overstated
in the com&ined income statement for )00,0
". -)*000
#. -*.,/)
C. -11)*0
$. -.)*0

AACSB: Analytic
AICPA: Measurement

3. 4lo&al Corporation ac5uired ,* percent of 6ocal Company+s voting shares of stock in )007.
$uring )00, 4lo&al purchased *0000 picture tu&es for -1* each and sold ),000 of them to
6ocal for -)0 each. 6ocal sold all of the units to unrelated entities prior to $ecem&er 11
)00, for -10 each. #oth companies use perpetual inventory systems.

Which workpaper eliminating entry is needed in preparing consolidated financial statements
for )00, to remove all effects of the intercompany sale0

A. 7ption "
#. 7ption #
C. 7ption C
$. 7ption $

AACSB: Analytic
AICPA: Reporting

7-17
Chapter 07 - Intercompany Inventory Transactions
*. When a parent and its su&sidiary use a periodic inventory system rather than a perpetual
system the income and asset &alances 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.
". I
#. II
C. #oth I and II
D. 8either I nor II

AACSB: Analytic
AICPA: Decision Making

7n 9anuary 1 )00, :arent Company ac5uired /0 percent ownership of ;u&sidiary
Corporation at underlying &ook value. The fair value of the noncontrolling interest at the date
of ac5uisition was e5ual to 10 percent of the &ook value of ;u&sidiary Corporation. 7n 'ar
17 )00, ;u&sidiary purchased inventory from :arent for -/0000. ;u&sidiary sold the entire
inventory to an unaffiliated company for -1)0000 on 8ovem&er )1 )00,. :arent had
produced the inventory sold to ;u&sidiary for -.)000. The companies had no other
transactions during )00,.

.. #ased on the information given a&ove what amount of sales will &e reported in the )00,
consolidated income statement0
". -.)000
B. -1)0000
C. -/0000
$. -*,000

AACSB: Analytic
AICPA: Measurement

7-1,
Chapter 07 - Intercompany Inventory Transactions
7. #ased on the information given a&ove what amount of cost of goods sold will &e reported
in the )00, consolidated income statement0
A. -.)000
#. -1)0000
C. -/0000
$. -*,000

AACSB: Analytic
AICPA: Measurement

,. #ased on the information given a&ove what amount of consolidated net income will &e
assigned to the controlling shareholders for )00,0
". -*,000
#. -*/000
C. -**000
$. -*))00

AACSB: Analytic
AICPA: Measurement

:ilfer Company ac5uired /0 percent ownership of ;crooge Corporation in )007 at
underlying &ook value. 7n that date the fair value of noncontrolling interest was e5ual to 10
percent of the &ook value of ;crooge Corporation. :ilfer purchased inventory from ;crooge
for -/0000 on "ugust )0 )00, and resold 70 percent of the inventory to unaffiliated
companies on $ecem&er 1 )00, for -100000. ;crooge produced the inventory sold to :ilfer
for -.7000. The companies had no other transactions during )00,.

/. #ased on the information given a&ove what amount of sales will &e reported in the )00,
consolidated income statement0
". -/0000
#. -1)0000
C. -100000
$. -.7000

AACSB: Analytic
AICPA: Measurement

7-1/
Chapter 07 - Intercompany Inventory Transactions
10. #ased on the information given a&ove what amount of cost of goods sold will &e reported
in the )00, consolidated income statement0
". -.0/00
#. -/0000
C. -3./00
$. -.7000

AACSB: Analytic
AICPA: Measurement

11. #ased on the information given a&ove what amount of consolidated net income will &e
assigned to the controlling interest for )00,0
A. -*13/0
#. -*1100
C. -17000
$. -)0100

AACSB: Analytic
AICPA: Measurement

1). #ased on the information given a&ove what inventory &alance will &e reported &y the
consolidated entity on $ecem&er 11 )00,0
". -*13/0
#. -*1100
C. -17000
D. -)0100

AACSB: Analytic
AICPA: Measurement

7-)0
Chapter 07 - Intercompany Inventory Transactions
11. ;enior Inc. owns ,* percent of 9unior Inc. $uring )00, ;enior sold goods with a )*
percent gross profit to 9unior. 9unior sold all of these goods in )00,. <ow should )00,
consolidated income statement items &e ad2usted0
". 8o ad2ustment is necessary.
#. ;ales and cost of goods sold should &e reduced &y ,* percent of the intercompany sales.
C. 8et income should &e reduced &y ,* percent of the gross profit on intercompany sales.
D. ;ales and cost of goods sold should &e reduced &y the intercompany sales.

AACSB: Analytic
AICPA: Reporting

:arent Corporation owns /0 percent of ;u&sidiary 1 Company+s stock and 7* percent of
;u&sidiary ) Company+s stock. $uring )00, :arent sold inventory purchased in )007 for
-3,000 to ;u&sidiary 1 for -.0000. ;u&sidiary 1 then sold the inventory at its cost of
-.0000 to ;u&sidiary ). :rior to $ecem&er 11 )00, ;u&sidiary ) sold -3*000 of inventory
to a nonaffiliate for -.7000 and held -1*000 in inventory at $ecem&er 11 )00,.

13. #ased on the information given a&ove what amount should &e reported in the )00,
consolidated income statement as cost of goods sold0
A. -1.000
#. -1)000
C. -3,000
$. -3*000

AACSB: Analytic
AICPA: Measurement

1*. #ased on the information given a&ove what amount should &e reported in the $ecem&er
11 )00, consolidated &alance sheet as inventory0
". -1.000
B. -1)000
C. -1*000
$. -),000

AACSB: Analytic
AICPA: Measurement

7-)1
Chapter 07 - Intercompany Inventory Transactions
1.. #ased on the information given a&ove what amount of cost of goods sold must &e
eliminated from the consolidated income statement for )00,0
A. -117000
#. -1)0000
C. -1*0000
$. -1),000

AACSB: Analytic
AICPA: Measurement

17. #ased on the information given a&ove what amount of sales must &e eliminated from the
consolidated income statement for )00,0
". -117000
B. -1)0000
C. -1*0000
$. -1),000

AACSB: Analytic
AICPA: Measurement

1,. #ased on the information given a&ove what amount of inventory must &e eliminated from
the consolidated &alance sheet for )00,0
". -)300
#. -/000
C. -1)000
D. -1000

AACSB: Analytic
AICPA: Measurement

7-))
Chapter 07 - Intercompany Inventory Transactions
;u& Company sells all its output at )0 percent a&ove cost to :ar Corporation. :ar purchases
all its inventory from ;u&. The incomes reported &y the companies over the past three years
are as follows!

;u& Company sold inventory for -100000 -).)*00 and -117*00 in the years )00. )007
and )00, respectively. :ar Company reported ending inventory of -10*000 -1*7*00 and
-1,0000 for )00. )007 and )00, respectively. :ar ac5uired 70 percent of the ownership of
;u& on 9anuary 1 )00. at underlying &ook value. The fair value of the noncontrolling
interest at the date of ac5uisition was e5ual to 10 percent of the &ook value of ;u& Company.

1/. #ased on the information given a&ove what will &e the consolidated net income for
)00.0
A. -1*7*00
#. -17*000
C. -3/0000
$. -1177*0

AACSB: Analytic
AICPA: Measurement

)0. #ased on the information given a&ove what will &e the consolidated net income for
)0070
". -3/*000
#. -1177*0
C. -3,.)*0
$. -./0000

AACSB: Analytic
AICPA: Measurement

7-)1
Chapter 07 - Intercompany Inventory Transactions
)1. #ased on the information given a&ove what will &e the income assigned to controlling
interest for )0070
A. -33,17*
#. -3/*000
C. -3,.)*0
$. -.1*17*

AACSB: Analytic
AICPA: Measurement

)). #ased on the information given a&ove what will &e the income to noncontrolling interest
for )00,0
". -1/7*0
#. -17,7*
C. -71)7*
D. -70,7*

AACSB: Analytic
AICPA: Measurement

)1. #ased on the information given a&ove what will &e the income to controlling interest for
)00,0
A. -.1*17*
#. -.,.)*0
C. -./0000
$. -./3000

AACSB: Analytic
AICPA: Measurement

7-)3
Chapter 07 - Intercompany Inventory Transactions
)3. $uring the year a parent makes sales of inventory at a profit to its 7* percent owned
su&sidiary. The su&sidiary also makes sales of inventory at a profit to its parent during the
same year. #oth the parent and the su&sidiary have on hand at the end of the year )0 percent
of the inventory ac5uired from one another. Consolidated revenues for the year should
e=clude!
". ,0 percent of the total revenues from intercompany sales.
B. total revenues from intercompany sales.
C. only the revenues from the su&sidiary+s intercompany sales.
$. only the revenues from the parent+s intercompany sales.

AACSB: Reflective Thinking
AICPA: Reporting

)*. Consolidated net income may include the parent+s separate operating income plus the
parent+s share of the su&sidiary+s reported net income!
". plus the unreali>ed profit on upstream intercompany sales of inventory made during the
current year.
B. plus the profit reali>ed this year from upstream intercompany sales of inventory made last
year.
C. plus unreali>ed profit on downstream intercompany sales of inventory made during the
current year.
$. minus the parent+s share of profit reali>ed this year from upstream intercompany sales of
inventory made last year.

AACSB: Analytic
AICPA: Reporting

7-)*
Chapter 07 - Intercompany Inventory Transactions
:erth Corporation owns /0 percent of $undee Company+s stock. "t the end of )00, :erth
and $undee reported the following partial operating results and inventory &alances!

:erth regularly prices its products at cost plus a 10 percent markup for profit. $undee prices
its sales at cost plus a 10 percent markup. The total sales reported &y :erth and $undee
include &oth intercompany sales and sales to nonaffiliates.

).. #ased on the information given a&ove what amount of sales will &e reported in the
consolidated income statement for )00,0
". -*00000
#. -,*0000
C. -.00000
$. -,00000

AACSB: Analytic
AICPA: Measurement

)7. #ased on the information given a&ove what &alance will &e reported for inventory in the
consolidated &alance sheet for $ecem&er 11 )00,0
A. -*.*71
#. -)1,3.
C. -1)7)7
$. -.7000

AACSB: Analytic
AICPA: Measurement

7-).
Chapter 07 - Intercompany Inventory Transactions
),. The consolidation treatment of profits on inventory transfers that occurred &efore the
&usiness com&ination depends on whether!

I. the companies were independent at that time.
II. the sale transaction was the result of arm+s-length &argaining.
". I
#. II
C. #oth I and II
$. 8either I nor II

AACSB: Analytic
AICPA: Decision Making

%lvis Company purchases inventory for -70000 on 'ar 1/ )00, and sells it to 4raceland
Corporation for -/*000 on 'ay 13 )00,. 4raceland still holds the inventory on $ecem&er
11 )00, and determines that its market value ?replacement cost@ is -,)000 at that time.
4raceland writes the inventory down from -/*000 to its lower market value of -,)000 at the
end of the year. %lvis owns 7* percent of 4raceland.

)/. #ased on the information given a&ove what amount of cost of goods sold should &e
eliminated in the consolidation workpaper for )00,0
". -,)000
B. -70000
C. -/*000
$. -.0000

AACSB: Analytic
AICPA: Measurement

7-)7
Chapter 07 - Intercompany Inventory Transactions
10. #ased on the information given a&ove what amount of inventory should &e eliminated in
the consolidation workpaper for )00,0
". -1*000
#. -13000
C. -1)000
$. -11000

AACSB: Analytic
AICPA: Measurement

11. #ased on the information given a&ove &y what amount should 4raceland write down
inventory in its &ooks0
". -13000
#. -1*000
C. -11000
$. -1.000

AACSB: Analytic
AICPA: Measurement

"#C Corporation owns 7* percent of ABC Company+s voting shares. $uring )00, "#C
produced *0000 chairs at a cost of -7/ each and sold 1*000 chairs to ABC for -/0 each.
ABC sold 1,000 of the chairs to unaffiliated companies for -117 each prior to $ecem&er 11
)00, and sold the remainder in early )00/ for -110 each. #oth companies use perpetual
inventory systems.

1). #ased on the information given a&ove what amount of cost of goods sold did "#C record
in )00,0
A. -)7.*000
#. -1.)0000
C. -13))000
$. -)/.1000

AACSB: Analytic
AICPA: Measurement

7-),
Chapter 07 - Intercompany Inventory Transactions
11. #ased on the information given a&ove what amount of cost of goods sold did ABC record
in )00,0
". -)7.*000
B. -1.)0000
C. -13))000
$. -)/.1000

AACSB: Analytic
AICPA: Measurement

13. #ased on the information given a&ove what amount of cost of goods sold must &e
reported in the consolidated income statement for )00,0
". -)7.*000
#. -1.)0000
C. -13))000
$. -)/.1000

AACSB: Analytic
AICPA: Measurement

1*. #ased on the information given a&ove what amount of cost of goods sold must &e
eliminated from the consolidated income statement for )00,0
". -)7.*000
#. -1.)0000
C. -13))000
D. -)/.1000

AACSB: Analytic
AICPA: Measurement

7-)/
Chapter 07 - Intercompany Inventory Transactions
1.. #ased on the information given a&ove what amount of cost of goods sold must &e
eliminated from the consolidated income statement for )00/0
A. -1,7000
#. -))1000
C. -13))000
$. -)/.1000

AACSB: Analytic
AICPA: Measurement

17. " su&sidiary made sales of inventory to its parent at a profit this year. The parent in turn
sold all &ut )0 percent of the inventory to unaffiliated companies recogni>ing a profit. The
amount that should &e reported as cost of goods sold in the consolidated income statement
prepared for the year should &e!
". the amount reported as intercompany sales &y the su&sidiary.
B. the amount reported as intercompany sales &y the su&sidiary minus unreali>ed profit in the
ending inventory of the parent.
C. the amount reported as cost of goods sold &y the parent minus unreali>ed profit in the
ending inventory of the parent.
$. the amount reported as cost of goods sold &y the parent.

AACSB: Reflective Thinking
AICPA: Reporting

1,. Consolidated net income for a parent and its ,0 percent owned su&sidiary should &e
computed &y eliminating!
A. all unreali>ed profit in downstream intercompany inventory sales and unreali>ed profit in
upstream intercompany inventory sales made during the current year.
#. all unreali>ed profit in downstream intercompany inventory sales and the noncontrolling
interest+s share of unreali>ed profit in upstream inventory sales made during the current year.
C. the controlling interest+s share of unreali>ed profit in downstream intercompany sales and
the controlling interest+s share of unreali>ed profit in upstream sales made during the current
year.
$. all unreali>ed profit in downstream intercompany sales and the noncontrolling interest+s
share of unreali>ed profit in upstream sales made during the current year.

AACSB: Analytic
AICPA: Reporting


7-10
Chapter 07 - Intercompany Inventory Transactions
Essay Questions
1/. Colton Company ac5uired ,0 percent ownership of 'ota Company+s voting shares on
9anuary 1 )00, at underlying &ook value. The fair value of the noncontrolling interest on
that date was e5ual to )0 percent of the &ook value of 'ota Company. $uring )00, Colton
purchased inventory for -10000 and sold the full amount to 'ota Company for -*0000. 7n
$ecem&er 11 )00, 'ota+s ending inventory included -10000 of items purchased from
Colton. "lso in )00, 'ota purchased inventory for -,0000 and sold the units to Colton for
-100000. Colton included -10000 of its purchase from 'ota in ending inventory on
$ecem&er 11 )00,. ;ummary income statement data for the two companies revealed the
following!

De5uired!
a. Compute the amount to &e reported as sales in the )00, consolidated income statement.
&. Compute the amount to &e reported as cost of goods sold in the )00, consolidated income
statement.
c. What amount of income will &e assigned to the noncontrolling shareholders in the )00,
consolidated income statement0
d. What amount of income will &e assigned to the controlling interest in the )00, consolidated
income statement0
7-11
Chapter 07 - Intercompany Inventory Transactions


7-1)
Chapter 07 - Intercompany Inventory Transactions

"lternative solution! d

Information on consolidated sales was computed in part ?a@F consolidated cost of goods sold
was computed in part ?&@ and income assigned to the noncontrolling interest was computed in
part ?c@.

AACSB: Analytic
AICPA: Measurement

7-11
Chapter 07 - Intercompany Inventory Transactions
30. <unter Company and 'oss Company &oth produce and purchase fa&ric for resale each
period and fre5uently sell to each other. ;ince <unter Company holds ,0 percent ownership
of 'oss Company <unter+s controller compiled the following information with regard to
intercompany transactions &etween the two companies in )007 and )00,!

De5uired!
a. 4ive the eliminating entries re5uired at $ecem&er 11 )00, to eliminate the effects of the
inventory transfers in preparing a full set of consolidated financial statements.
&. Compute the amount of cost of goods sold to &e reported in the consolidated income
statement for )00,.
7-13
Chapter 07 - Intercompany Inventory Transactions



AACSB: Analytic
AICPA: Measurement

7-1*
Chapter 07 - Intercompany Inventory Transactions
31. 7n 9anuary 1 )007 9ones Company ac5uired /0 percent of the outstanding common
stock of ;mith Corporation for -1)3)000. 7n that date the fair value of noncontrolling
interest was e5ual to -11,000. The entire differential was related to land held &y ;mith. "t
the date of ac5uisition ;mith had common stock outstanding of -*)0000 additional paid-in
capital of -)00000 and retained earnings of -*30000. $uring )007 ;mith sold inventory to
9ones for -330000. The inventory originally cost ;mith -1.0000. #y year-end 10 percent
was still in 9ones+ ending inventory. $uring )00, the remaining inventory was resold to an
unrelated customer. #oth 9ones and ;mith use perpetual inventory systems.

Income and dividend information for &oth 9ones and ;mith for )007 and )00, are as follows!

De5uired!
a. :resent the workpaper elimination entries necessary to prepare consolidated financial
statements for )007 assuming 9ones accounts for its investment in ;mith stock using the fully
ad2usted e5uity method.
&. :resent the workpaper elimination entries necessary to prepare consolidated financial
statements for )00, assuming 9ones accounts for its investment in ;mith stock using the cost
method.
7-1.
Chapter 07 - Intercompany Inventory Transactions
a. )007 %ntries under Gully "d2usted %5uity 'ethod

&. )00, %ntries under Cost 'ethod

7-17
Chapter 07 - Intercompany Inventory Transactions

AACSB: Analytic
AICPA: Measurement

7-1,