CH 06 Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
Chapter 06
Intercompany Transfers of Services and Noncurrent Assets

Multiple Choice Questions

1. Blue Company ons !0 percent of Blac" Company#s outstandin$ common stoc". %n
&ecem'er (1) *00+) Blac" sold e,uipment to Blue at a price in e-cess of Blac"#s carryin$
amount) 'ut less than its ori$inal cost. %n a consolidated 'alance sheet at &ecem'er (1) *00+)
the carryin$ amount of the e,uipment should 'e reported at.
A. Blue#s ori$inal cost.
B. Blac"#s ori$inal cost.
C. Blue#s ori$inal cost less Blac"#s recorded $ain.
&. Blue#s ori$inal cost less !0 percent of Blac"#s recorded $ain.

*. A parent and its +0 percent oned su'sidiary have made several intercompany sales of
noncurrent assets durin$ the past to years. The amount of income assi$ned to the
noncontrollin$ interest for the second year should include the noncontrollin$ interest#s share
of $ains.
A. unreali/ed in the second year from upstream sales made in the second year.
B. reali/ed in the second year from donstream sales made in 'oth years.
C. reali/ed in the second year from upstream sales made in 'oth years.
&. 'oth reali/ed and unreali/ed from upstream sales made in the second year.

(. A holly oned su'sidiary sold land to its parent durin$ the year at a $ain. The parent
continues to hold the land at the end of the year. The amount to 'e reported as consolidated
net income for the year should e,ual.
A. the parent#s separate operatin$ income) plus the su'sidiary#s net income.
B. the parent#s separate operatin$ income) plus the su'sidiary#s net income) minus the
intercompany $ain.
C. the parent#s separate operatin$ income) plus the su'sidiary#s net income) plus the
intercompany $ain.
&. the parent#s net income) plus the su'sidiary#s net income) minus the intercompany $ain.

6-1
S"y Corporation ons !0 percent of 1arth Company#s stoc". %n 2uly 1) *00+) S"y sold a
'uildin$ to 1arth for 3(()000. S"y had purchased this 'uildin$ on 2anuary 1) *006) for
3(6)000. The 'uildin$#s ori$inal ei$ht-year estimated total economic life remains unchan$ed.
Both companies use strai$ht-line depreciation. The e,uipment#s residual value is considered
ne$li$i'le.

4. Based on the information provided) in the preparation of the *00+ consolidated financial
statements) 'uildin$ ill 'e 55555 in the eliminatin$ entries.
A. de'ited for 3(()000
B. de'ited for 3(6)000
C. credited for 3(6)000
&. de'ited for 3()000

0. Based on the information provided) the $ain on sale of the 'uildin$ eliminated in the
consolidated financial statements for *00+ is.
A. 3+)*00.
B. 310)000.
C. 36)000.
&. 311)*00.

6. Based on the information provided) hile preparin$ the *00+ consolidated income
statement) depreciation e-pense ill 'e.
A. de'ited for 3!00 in the eliminatin$ entries.
B. credited for 3!00 in the eliminatin$ entries.
C. credited for 31000 in the eliminatin$ entries.
&. de'ited for 31000 in the eliminatin$ entries.

!. Based on the information provided) in the preparation of the *006 consolidated income
B. credited for 3!00 the eliminatin$ entries.

6-*
+. Based on the information provided) in the preparation of a consolidated 'alance sheet at
2anuary 1) *006) retained earnin$s ill 'e.
A. de'ited for 36)!00 in the eliminatin$ entries.
B. credited for 36)!00 in the eliminatin$ entries.
C. credited for 3!)000 in the eliminatin$ entries.
&. de'ited for 3!)000 in the eliminatin$ entries.

6. 7ho'os Company holds +0 percent of &eimos Company#s votin$ shares. &urin$ the
preparation of consolidated financial statements for *006) the folloin$ eliminatin$ entry as
made.

8hich of the folloin$ statements is correct9
A. 7ho'os Company purchased land from &eimos Company durin$ *006.
B. 7ho'os Company purchased land from &eimos Company 'efore 2anuary 1) *006.
C. &eimos Company purchased land from 7ho'os Company durin$ *006.
&. &eimos Company purchased land from 7ho'os Company 'efore 2anuary 1) *006.

ABC Corporation purchased land on 2anuary 1) *006) for 300)000. %n 2uly 10) *00+) it sold
the land to its su'sidiary) :;< Corporation) for 3!0)000. ABC ons +0 percent of :;<#s
votin$ shares.

6-(
10. Based on the precedin$ information) hat ill 'e the or"paper eliminatin$ entry to
remove the effects of the intercompany sale of land in preparin$ the consolidated financial
statements for *00+9

A. %ption A
B. %ption B
C. %ption C
&. %ption &

6-4
statements for *0069

A. %ption A
B. %ption B
C. %ption C
&. %ption &

6-0
1*. 8hich or"paper eliminatin$ entry ill 'e made on &ecem'er (1) *006) if :;<
Corporation had initially purchased the land for 300)000 and then sold it to ABC on 2uly 10)
*00+) for 3!0)0009

A. %ption A
B. %ption B
C. %ption C
&. %ption &

=ortar Corporation ac,uired +0 percent of >ranite Corporation#s votin$ common stoc" on
2anuary 1) *00!. %n &ecem'er (1) *00+) =ortar received 3(60)000 from >ranite for a
e,uipment =ortar had purchased on 2anuary 1) *000) for 3400)000. The e,uipment is
e-pected to have a 10-year useful life and no salva$e value. Both companies depreciate
e,uipments on a strai$ht-line 'asis.

1(. Based on the precedin$ information) in the preparation of the *00+ consolidated financial
statements) e,uipment ill 'e.
A. de'ited for 31)000.
B. de'ited for 310)000.
C. credited for 310)000.
&. de'ited for 3*0)000.

6-6
14. Based on the precedin$ information) the $ain on sale of the e,uipment recorded 'y =ortar
for *00+ is.
A. 3100)000
B. 360)000
C. 3110)000
&. 340)000

10. Based on the precedin$ information) in the preparation of the *006 consolidated financial
&. de'ited for 3*0)000.

16. Based on the precedin$ information) in the preparation of the *006 consolidated income
A. de'ited for 3*0)000 in the eliminatin$ entries.
B. credited for 310)000 in the eliminatin$ entries.
C. de'ited for 310)000 in the eliminatin$ entries.
&. credited for 3*0)000 in the eliminatin$ entries.

1!. Based on the precedin$ information) in the preparation of the *006 consolidated 'alance
sheet) accumulated depreciation ill 'e.
A. de'ited for 3160)000 in the eliminatin$ entries.
C. credited for 31(0)000 in the eliminatin$ entries.
&. de'ited for 31(0)000 in the eliminatin$ entries.

2anuary 1) *00!. %n 2anuary 1) *00+) =ortar received 3(00)000 from >ranite for a e,uipment
=ortar had purchased on 2anuary 1) *000) for 3400)000. The e,uipment is e-pected to have a
10-year useful life and no salva$e value. Both companies depreciate e,uipments on a strai$ht-
line 'asis.

6-!
1+. Based on the precedin$ information) in the preparation of the *00+ consolidated financial
C. credited for 3!0)000.
&. de'ited for 3*0)000.

16. Based on the precedin$ information) the $ain on sale of e,uipment recorded 'y =ortar for
*00+ is.
A. 3!0)000.
B. 360)000.
C. 300)000.
&. 340)000.

*0. Based on the precedin$ information) in the preparation of the *00+ consolidated 'alance
C. credited for 31*0)000 in the eliminatin$ entries.
&. de'ited for 3160)000 in the eliminatin$ entries.

*1. Based on the precedin$ information) in the preparation of the *006 consolidated income
A. &e'ited for 340)000 in the eliminatin$ entries.
B. Credited for 310)000 in the eliminatin$ entries.
C. &e'ited for 310)000 in the eliminatin$ entries.
&. Credited for 340)000 in the eliminatin$ entries.

**. Based on the precedin$ information) in the preparation of the *006 consolidated 'alance
C. credited for 3100)000 in the eliminatin$ entries.

6-+
%n 2anuary 1) *00!) Servant Company purchased a machine ith an e-pected economic life
of five years. %n 2anuary 1) *006) Servant sold the machine to =aster Corporation and
recorded the folloin$ entry.

=aster Corporation holds !0 percent of Servant#s votin$ shares. Servant reported net income
of 300)000) and =aster reported income from its on operations of 3100)000 for *006. There
is no chan$e in the estimated economic life of the e,uipment as a result of the intercorporate
transfer.

*(. Based on the precedin$ information) in the preparation of the *006 consolidated income
B. Credited for 31)000 in the eliminatin$ entries.

*4. Based on the precedin$ information) in the preparation of the *006 consolidated 'alance
sheet) machine ill 'e.
&. de'ited for 3*0)000.

6-6
*0. Based on the precedin$ information) income assi$ned to the noncontrollin$ interest in the
*006 consolidated income statement ill 'e.
A. 31*)000.
B. 314)000.
C. 31*)000.
&. 34+)000.

*6. Based on the precedin$ information) consolidated net income for *006 ill 'e.
A. 3100)000.
B. 3100)000.
C. 314+)000.
&. 31(0)000.

*!. %n 2anuary 1) *006) ?i$ht Corporation sold e,uipment for 3400)000 to Star Corporation)
its holly oned su'sidiary. ?i$ht had paid 3600)000 for this e,uipment) hich had
accumulated depreciation of 31!0)000. ?i$ht estimated a 300)000 salva$e value and
depreciated the tractor usin$ the strai$ht-line method over 10 years) a policy that Star
continued. In ?i$ht#s &ecem'er (1) *006) consolidated 'alance sheet) this tractor should 'e
included in fi-ed-asset cost and accumulated depreciation as.

A. %ption A
B. %ption B
C. %ption C
&. %ption &

6-10
Blue Corporation holds !0 percent of Blac" Company#s votin$ common stoc". %n 2anuary 1)
*00() Blac" paid 3000)000 to ac,uire a 'uildin$ ith a 10-year e-pected economic life. Blac"
uses strai$ht-line depreciation for all deprecia'le assets. %n &ecem'er (1) *00+) Blue
purchased the 'uildin$ from Blac" for 31+0)000. Blue reported income) e-cludin$ investment
income from Blac") of 3140)000 and 316*)000 for *00+ and *006) respectively. Blac"
reported net income of 3(0)000 and 340)000 for *00+ and *006) respectively.

*+. Based on the precedin$ information) the amount to 'e reported as consolidated net income
for *00+ ill 'e.
A. 3160)000.
B. 31!0)000.
C. 31!0)000.
&. 3100)000.

*6. Based on the precedin$ information) the amount of income assi$ned to the controllin$
shareholders in the consolidated income statement for *00+ ill 'e.
A. 3160)000.
B. 31!0)000.
C. 31!0)000.
&. 3100)000.

(0. Based on the precedin$ information) the amount to 'e reported as consolidated net income
for *006 ill 'e.
A. 3*0!)000.
B. 3*0*)000.
C. 3*1*)000.
&. 3160)000.

(1. Based on the precedin$ information) the amount of income assi$ned to the controllin$
shareholders in the consolidated income statement for *006 ill 'e.
A. 3*0!)000.
B. 3*0*)000.
C. 3*1*)000.
&. 3160)000.

6-11
(*. 8hich of the folloin$ are e-amples of intercompany 'alances and transactions that must
'e eliminated in preparin$ consolidated financial statements9

I. Security holdin$s
II. Interest and dividends
III. Sales and purchases
A. I) II
B. I) III
C. I) II) III
&. II

7arent Corporation purchased land from S1 Corporation for 3**0)000 on &ecem'er *6) *00+.
This purchase folloed a series of transactions 'eteen 7-controlled su'sidiaries. %n
@e'ruary 10) *00+) S( Corporation purchased the land from a nonaffiliate for 3160)000. It
sold the land to S* Company for 3140)000 on %cto'er 16) *00+) and S* sold the land to S1
for 316!)000 on Novem'er *!) *00+. 7arent has control of the folloin$ companies.

7arent reported income from its separate operations of 3*00)000 for *00+.

((. Based on the precedin$ information) at hat amount should the land 'e reported in the
consolidated 'alance sheet as of &ecem'er (1) *00+9
A. 3140)000
B. 3**0)000
C. 316!)000
&. 3160)000

6-1*
(4. Based on the precedin$ information) hat amount of $ain or loss on sale of land should 'e
reported in the consolidated income statement for *00+9
A. 360)000
B. 30
C. 3!0)000
&. 3*()000

(0. Based on the precedin$ information) hat should 'e the amount of income assi$ned to the
controllin$ shareholders in the consolidated income statement for *00+9
A. 3(66)400
B. 3400)000
C. 3460)000
&. 360)000

Bi$ Corporation receives mana$ement consultin$ services from its 6* percent oned
su'sidiary) Small Inc. &urin$ *00!) Bi$ paid Small 31*0)4(* for its services. @or the year
*00+) Small 'illed Bi$ 3140)000 for such services and collected all 'ut 3!)600 'y year-end.
Small#s la'or cost and other associated costs for the employees providin$ services to Bi$
totaled 3+6)000 in *00! and 31*1)000 in *00+. Bi$ reported 3*)06!)000 of income from its
on separate operations for *00+) and Small reported net income of 3660)000.

(6. Based on the precedin$ information) hat amount of consolidated net income should 'e
reported in *00+9
A. 3()*6*)000
B. 34)000)000
C. 3()*04)100
&. 3()1**)000

(!. Based on the precedin$ information) hat amount of income should 'e assi$ned to the
noncontrollin$ shareholders in the consolidated income statement for *00+9
A. 34!)!00
B. 344)400
C. 300)600
&. 360)000

6-1(
(+. Based on the precedin$ information) hat amount of receiva'leApaya'le should 'e
eliminated in the *00+ consolidated financial statements9
A. 31*0)4(*
B. 3!)600
C. 30)060
&. 3140)000

(6. A parent sold land to its partially oned su'sidiary durin$ the year at a loss. The
su'sidiary continues to hold the land at the end of the year. The amount to 'e reported as
consolidated net income for the year should e,ual.
A. the parent#s separate operatin$ income) plus the intercompany loss.
B. the parent#s separate operatin$ income) plus the intercompany loss) plus the su'sidiary#s net
income.
C. the parent#s separate operatin$ income) minus the intercompany loss.
&. the parent#s separate operatin$ income) minus the intercompany loss) plus the su'sidiary#s
net income.

40. Any intercompany $ain or loss on a donstream sale of land should 'e reco$ni/ed in
consolidated net income.

I. in the year of the donstream sale.
II. over the period of time the su'sidiary uses the land.
III. in the year the su'sidiary sells the land to an unrelated party.
A. I
B. II
C. III
&. I or II

Essay Questions

6-14
41. @red Corporation ons !0 percent of 8inner Company#s votin$ shares) ac,uired on
=arch *1) *000) at 'oo" value. At that date) the fair value of the noncontrollin$ interest as
e,ual to *0 percent of the 'oo" value of 8inner Company. The companies# permanent
accounts on &ecem'er (1) *00+) contained the folloin$ 'alances.

%n 2anuary 1) *004) @red paid 3100)000 for e,uipment ith a 10-year e-pected total
economic life. The e,uipment as depreciated on a strai$ht-line 'asis ith no residual value.
8inner purchased the e,uipment from @red on &ecem'er (1) *006) for 3140)000. 8inner
sold land it had purchased for 3!0)000 on @e'ruary 1+) *004) to @red for 360)000 on %cto'er
10) *00!.
Be,uired. 7repare a consolidated 'alance sheet or"paper in $ood form as of &ecem'er (1)
*00+.

6-10
4*. Ne Company ac,uired !0 percent of %ld Company#s stoc" at underlyin$ 'oo" value on
2anuary 1) *00+. At that date) the fair value of the noncontrollin$ interest as e,ual to *0
percent of the 'oo" value of %ld Company. %ld Company reported shares outstandin$ of
3(00)000 and retained earnin$s of 3100)000. &urin$ *00+) %ld Company reported net income
of 360)000 and paid dividends of 3()000. In *006) %ld Company reported net income of
360)000 and paid dividends of 310)000. The folloin$ transactions occurred 'eteen Ne
Company and %ld Company in *00+ and *006.

%ld Co. sold computer e,uipment to Ne Co. for a 34*)000 profit on &ecem'er *6) *00+.
The e,uipment had a five-year estimated economic life remainin$ at the time of intercompany
transfer and is depreciated on a strai$ht-line 'asis.

Ne sold land costin$ 360)000 to %ld Company on 2une *+) *006) for 3110)000.

Be,uired.
1C >ive all eliminatin$ entries needed to prepare a consolidation or"paper for *006
assumin$ that Ne Co. uses the fully adDusted e,uity method to account for its investment in
%ld Company.
*C >ive all eliminatin$ entries needed to prepare a consolidation or"paper for *006
assumin$ that Ne Co. uses the cost method to account for its investment in %ld Company.

4(. 7eter Architectural Services ons 100 percent of Smith =anufacturin$. &urin$ the course
of *00+ 7eter provides 3100)000 of architectural services associated ith Smith#s ne
manufacturin$ facility) hich ill open 2anuary 4) *006) and has a 0 year useful life. 1-plain
the impact providin$ this service has on 7eter Architectural Services# *00+ and *006
consolidated financial statements.

6-16
44. 7eople=a$ sells a plot of land for 3100)000 to Seven Star Company) its 100 percent
oned su'sidiary) on 2anuary 1) *00+. The cost of the land as 3!0)000) hen it as
purchased in *00!. In *010) Seven Star sells the land to Eot 7roperties Inc.) an unrelated
entity) for 31*0)000. Eo is the land reported in the consolidated financial statements for
*00+) *006 and *0109

Chapter 06 Intercompany Transfers of Services and Noncurrent Assets Anser
Fey

Multiple Choice Questions

1. Blue Company ons !0 percent of Blac" Company#s outstandin$ common stoc". %n
&ecem'er (1) *00+) Blac" sold e,uipment to Blue at a price in e-cess of Blac"#s carryin$
amount) 'ut less than its ori$inal cost. %n a consolidated 'alance sheet at &ecem'er (1) *00+)
the carryin$ amount of the e,uipment should 'e reported at.
A. Blue#s ori$inal cost.
B. Blac"#s ori$inal cost.
C. Blue#s ori$inal cost less Blac"#s recorded $ain.
&. Blue#s ori$inal cost less !0 percent of Blac"#s recorded $ain.

AACSB: Analytic
AICPA: Reporting

6-1!
*. A parent and its +0 percent oned su'sidiary have made several intercompany sales of
noncurrent assets durin$ the past to years. The amount of income assi$ned to the
noncontrollin$ interest for the second year should include the noncontrollin$ interest#s share
of $ains.
A. unreali/ed in the second year from upstream sales made in the second year.
B. reali/ed in the second year from donstream sales made in 'oth years.
C. reali/ed in the second year from upstream sales made in 'oth years.
&. 'oth reali/ed and unreali/ed from upstream sales made in the second year.

AACSB: Analytic
AICPA: Reporting

(. A holly oned su'sidiary sold land to its parent durin$ the year at a $ain. The parent
continues to hold the land at the end of the year. The amount to 'e reported as consolidated
net income for the year should e,ual.
A. the parent#s separate operatin$ income) plus the su'sidiary#s net income.
. the parent#s separate operatin$ income) plus the su'sidiary#s net income) minus the
intercompany $ain.
C. the parent#s separate operatin$ income) plus the su'sidiary#s net income) plus the
intercompany $ain.
&. the parent#s net income) plus the su'sidiary#s net income) minus the intercompany $ain.

AACSB: Analytic
AICPA: Decision Making

S"y Corporation ons !0 percent of 1arth Company#s stoc". %n 2uly 1) *00+) S"y sold a
'uildin$ to 1arth for 3(()000. S"y had purchased this 'uildin$ on 2anuary 1) *006) for
3(6)000. The 'uildin$#s ori$inal ei$ht-year estimated total economic life remains unchan$ed.
Both companies use strai$ht-line depreciation. The e,uipment#s residual value is considered
ne$li$i'le.

6-1+
4. Based on the information provided) in the preparation of the *00+ consolidated financial
statements) 'uildin$ ill 'e 55555 in the eliminatin$ entries.
A. de'ited for 3(()000
B. de'ited for 3(6)000
C. credited for 3(6)000
!. de'ited for 3()000

AACSB: Analytic
AICPA: Measurement

0. Based on the information provided) the $ain on sale of the 'uildin$ eliminated in the
consolidated financial statements for *00+ is.
A. 3+)*00.
B. 310)000.
C. 36)000.
&. 311)*00.

AACSB: Analytic
AICPA: Measurement

6. Based on the information provided) hile preparin$ the *00+ consolidated income
. credited for 3!00 in the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

6-16
!. Based on the information provided) in the preparation of the *006 consolidated income
B. credited for 3!00 the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

+. Based on the information provided) in the preparation of a consolidated 'alance sheet at
2anuary 1) *006) retained earnin$s ill 'e.
A. de'ited for 36)!00 in the eliminatin$ entries.
B. credited for 36)!00 in the eliminatin$ entries.
C. credited for 3!)000 in the eliminatin$ entries.
!. de'ited for 3!)000 in the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

6. 7ho'os Company holds +0 percent of &eimos Company#s votin$ shares. &urin$ the
preparation of consolidated financial statements for *006) the folloin$ eliminatin$ entry as
made.

8hich of the folloin$ statements is correct9
A. 7ho'os Company purchased land from &eimos Company durin$ *006.
B. 7ho'os Company purchased land from &eimos Company 'efore 2anuary 1) *006.
C. &eimos Company purchased land from 7ho'os Company durin$ *006.
!. &eimos Company purchased land from 7ho'os Company 'efore 2anuary 1) *006.

AACSB: Analytic
AICPA: Measurement

6-*0
ABC Corporation purchased land on 2anuary 1) *006) for 300)000. %n 2uly 10) *00+) it sold
the land to its su'sidiary) :;< Corporation) for 3!0)000. ABC ons +0 percent of :;<#s
votin$ shares.

statements for *00+9

A. %ption A
B. %ption B
C. %ption C
&. %ption &

AACSB: Analytic
AICPA: Measurement

6-*1
statements for *0069

A. %ption A
B. %ption B
C. %ption C
&. %ption &

AACSB: Analytic
AICPA: Measurement

6-**
1*. 8hich or"paper eliminatin$ entry ill 'e made on &ecem'er (1) *006) if :;<
Corporation had initially purchased the land for 300)000 and then sold it to ABC on 2uly 10)
*00+) for 3!0)0009

A. %ption A
. %ption B
C. %ption C
&. %ption &

AACSB: Analytic
AICPA: Measurement

2anuary 1) *00!. %n &ecem'er (1) *00+) =ortar received 3(60)000 from >ranite for a
e,uipment =ortar had purchased on 2anuary 1) *000) for 3400)000. The e,uipment is
e-pected to have a 10-year useful life and no salva$e value. Both companies depreciate
e,uipments on a strai$ht-line 'asis.

6-*(
1(. Based on the precedin$ information) in the preparation of the *00+ consolidated financial
. de'ited for 310)000.
&. de'ited for 3*0)000.

AACSB: Analytic
AICPA: Measurement

14. Based on the precedin$ information) the $ain on sale of the e,uipment recorded 'y =ortar
for *00+ is.
A. 3100)000
B. 360)000
C. 3110)000
&. 340)000

AACSB: Analytic
AICPA: Measurement

10. Based on the precedin$ information) in the preparation of the *006 consolidated financial
. de'ited for 310)000.
&. de'ited for 3*0)000.

AACSB: Analytic
AICPA: Measurement

6-*4
16. Based on the precedin$ information) in the preparation of the *006 consolidated income
A. de'ited for 3*0)000 in the eliminatin$ entries.
C. de'ited for 310)000 in the eliminatin$ entries.
!. credited for 3*0)000 in the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

1!. Based on the precedin$ information) in the preparation of the *006 consolidated 'alance
C. credited for 31(0)000 in the eliminatin$ entries.
&. de'ited for 31(0)000 in the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

2anuary 1) *00!. %n 2anuary 1) *00+) =ortar received 3(00)000 from >ranite for a e,uipment
=ortar had purchased on 2anuary 1) *000) for 3400)000. The e,uipment is e-pected to have a
10-year useful life and no salva$e value. Both companies depreciate e,uipments on a strai$ht-
line 'asis.

1+. Based on the precedin$ information) in the preparation of the *00+ consolidated financial
C. credited for 3!0)000.
&. de'ited for 3*0)000.

AACSB: Analytic
AICPA: Measurement

6-*0
16. Based on the precedin$ information) the $ain on sale of e,uipment recorded 'y =ortar for
*00+ is.
A. 3!0)000.
B. 360)000.
C. 300)000.
&. 340)000.

AACSB: Analytic
AICPA: Measurement

*0. Based on the precedin$ information) in the preparation of the *00+ consolidated 'alance
. credited for 3110)000 in the eliminatin$ entries.
C. credited for 31*0)000 in the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

*1. Based on the precedin$ information) in the preparation of the *006 consolidated income
. Credited for 310)000 in the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

6-*6
**. Based on the precedin$ information) in the preparation of the *006 consolidated 'alance
C. credited for 3100)000 in the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

%n 2anuary 1) *00!) Servant Company purchased a machine ith an e-pected economic life
of five years. %n 2anuary 1) *006) Servant sold the machine to =aster Corporation and
recorded the folloin$ entry.

=aster Corporation holds !0 percent of Servant#s votin$ shares. Servant reported net income
of 300)000) and =aster reported income from its on operations of 3100)000 for *006. There
is no chan$e in the estimated economic life of the e,uipment as a result of the intercorporate
transfer.

*(. Based on the precedin$ information) in the preparation of the *006 consolidated income
. Credited for 31)000 in the eliminatin$ entries.

AACSB: Analytic
AICPA: Measurement

6-*!
*4. Based on the precedin$ information) in the preparation of the *006 consolidated 'alance
sheet) machine ill 'e.
!. de'ited for 3*0)000.

AACSB: Analytic
AICPA: Measurement

*0. Based on the precedin$ information) income assi$ned to the noncontrollin$ interest in the
*006 consolidated income statement ill 'e.
A. 31*)000.
B. 314)000.
C. 31*)000.
&. 34+)000.

AACSB: Analytic
AICPA: Measurement

*6. Based on the precedin$ information) consolidated net income for *006 ill 'e.
A. 3100)000.
B. 3100)000.
C. 314+)000.
&. 31(0)000.

AACSB: Analytic
AICPA: Measurement

6-*+
*!. %n 2anuary 1) *006) ?i$ht Corporation sold e,uipment for 3400)000 to Star Corporation)
its holly oned su'sidiary. ?i$ht had paid 3600)000 for this e,uipment) hich had
accumulated depreciation of 31!0)000. ?i$ht estimated a 300)000 salva$e value and
depreciated the tractor usin$ the strai$ht-line method over 10 years) a policy that Star
continued. In ?i$ht#s &ecem'er (1) *006) consolidated 'alance sheet) this tractor should 'e
included in fi-ed-asset cost and accumulated depreciation as.

A. %ption A
B. %ption B
C. %ption C
&. %ption &

AACSB: Analytic
AICPA: Measurement

Blue Corporation holds !0 percent of Blac" Company#s votin$ common stoc". %n 2anuary 1)
*00() Blac" paid 3000)000 to ac,uire a 'uildin$ ith a 10-year e-pected economic life. Blac"
uses strai$ht-line depreciation for all deprecia'le assets. %n &ecem'er (1) *00+) Blue
purchased the 'uildin$ from Blac" for 31+0)000. Blue reported income) e-cludin$ investment
income from Blac") of 3140)000 and 316*)000 for *00+ and *006) respectively. Blac"
reported net income of 3(0)000 and 340)000 for *00+ and *006) respectively.

*+. Based on the precedin$ information) the amount to 'e reported as consolidated net income
for *00+ ill 'e.
A. 3160)000.
B. 31!0)000.
C. 31!0)000.
&. 3100)000.

AACSB: Analytic
AICPA: Measurement

6-*6
*6. Based on the precedin$ information) the amount of income assi$ned to the controllin$
shareholders in the consolidated income statement for *00+ ill 'e.
A. 3160)000.
B. 31!0)000.
C. 31!0)000.
&. 3100)000.

AACSB: Analytic
AICPA: Measurement

(0. Based on the precedin$ information) the amount to 'e reported as consolidated net income
for *006 ill 'e.
A. 3*0!)000.
. 3*0*)000.
C. 3*1*)000.
&. 3160)000.

AACSB: Analytic
AICPA: Measurement

(1. Based on the precedin$ information) the amount of income assi$ned to the controllin$
shareholders in the consolidated income statement for *006 ill 'e.
A. 3*0!)000.
B. 3*0*)000.
C. 3*1*)000.
!. 3160)000.

AACSB: Analytic
AICPA: Measurement

6-(0
(*. 8hich of the folloin$ are e-amples of intercompany 'alances and transactions that must
'e eliminated in preparin$ consolidated financial statements9

I. Security holdin$s
II. Interest and dividends
III. Sales and purchases
A. I) II
B. I) III
C. I) II) III
&. II

AACSB: Analytic
AICPA: Reporting

7arent Corporation purchased land from S1 Corporation for 3**0)000 on &ecem'er *6) *00+.
This purchase folloed a series of transactions 'eteen 7-controlled su'sidiaries. %n
@e'ruary 10) *00+) S( Corporation purchased the land from a nonaffiliate for 3160)000. It
sold the land to S* Company for 3140)000 on %cto'er 16) *00+) and S* sold the land to S1
for 316!)000 on Novem'er *!) *00+. 7arent has control of the folloin$ companies.

7arent reported income from its separate operations of 3*00)000 for *00+.

((. Based on the precedin$ information) at hat amount should the land 'e reported in the
consolidated 'alance sheet as of &ecem'er (1) *00+9
A. 3140)000
B. 3**0)000
C. 316!)000
!. 3160)000

AACSB: Analytic
AICPA: Measurement

6-(1
(4. Based on the precedin$ information) hat amount of $ain or loss on sale of land should 'e
reported in the consolidated income statement for *00+9
A. 360)000
. 30
C. 3!0)000
&. 3*()000

AACSB: Analytic
AICPA: Measurement

(0. Based on the precedin$ information) hat should 'e the amount of income assi$ned to the
controllin$ shareholders in the consolidated income statement for *00+9
A. 3(66)400
B. 3400)000
C. 3460)000
&. 360)000

AACSB: Analytic
AICPA: Measurement

Bi$ Corporation receives mana$ement consultin$ services from its 6* percent oned
su'sidiary) Small Inc. &urin$ *00!) Bi$ paid Small 31*0)4(* for its services. @or the year
*00+) Small 'illed Bi$ 3140)000 for such services and collected all 'ut 3!)600 'y year-end.
Small#s la'or cost and other associated costs for the employees providin$ services to Bi$
totaled 3+6)000 in *00! and 31*1)000 in *00+. Bi$ reported 3*)06!)000 of income from its
on separate operations for *00+) and Small reported net income of 3660)000.

(6. Based on the precedin$ information) hat amount of consolidated net income should 'e
reported in *00+9
A. 3()*6*)000
B. 34)000)000
C. 3()*04)100
&. 3()1**)000

AACSB: Analytic
AICPA: Measurement

6-(*
(!. Based on the precedin$ information) hat amount of income should 'e assi$ned to the
noncontrollin$ shareholders in the consolidated income statement for *00+9
A. 34!)!00
B. 344)400
C. 300)600
&. 360)000

AACSB: Analytic
AICPA: Measurement

(+. Based on the precedin$ information) hat amount of receiva'leApaya'le should 'e
eliminated in the *00+ consolidated financial statements9
A. 31*0)4(*
. 3!)600
C. 30)060
&. 3140)000

AACSB: Analytic
AICPA: Measurement

(6. A parent sold land to its partially oned su'sidiary durin$ the year at a loss. The
su'sidiary continues to hold the land at the end of the year. The amount to 'e reported as
consolidated net income for the year should e,ual.
A. the parent#s separate operatin$ income) plus the intercompany loss.
. the parent#s separate operatin$ income) plus the intercompany loss) plus the su'sidiary#s net
income.
C. the parent#s separate operatin$ income) minus the intercompany loss.
&. the parent#s separate operatin$ income) minus the intercompany loss) plus the su'sidiary#s
net income.

AACSB: Analytic
AICPA: Reporting

6-((
40. Any intercompany $ain or loss on a donstream sale of land should 'e reco$ni/ed in
consolidated net income.

I. in the year of the donstream sale.
II. over the period of time the su'sidiary uses the land.
III. in the year the su'sidiary sells the land to an unrelated party.
A. I
B. II
C. III
&. I or II

AACSB: Analytic
AICPA: Reporting

Essay Questions

6-(4
41. @red Corporation ons !0 percent of 8inner Company#s votin$ shares) ac,uired on
=arch *1) *000) at 'oo" value. At that date) the fair value of the noncontrollin$ interest as
e,ual to *0 percent of the 'oo" value of 8inner Company. The companies# permanent
accounts on &ecem'er (1) *00+) contained the folloin$ 'alances.

%n 2anuary 1) *004) @red paid 3100)000 for e,uipment ith a 10-year e-pected total
economic life. The e,uipment as depreciated on a strai$ht-line 'asis ith no residual value.
8inner purchased the e,uipment from @red on &ecem'er (1) *006) for 3140)000. 8inner
sold land it had purchased for 3!0)000 on @e'ruary 1+) *004) to @red for 360)000 on %cto'er
10) *00!.
Be,uired. 7repare a consolidated 'alance sheet or"paper in $ood form as of &ecem'er (1)
*00+.
6-(0

1liminatin$ entries.
6-(6

AACSB: Analytic
AICPA: Measurement

6-(!
4*. Ne Company ac,uired !0 percent of %ld Company#s stoc" at underlyin$ 'oo" value on
2anuary 1) *00+. At that date) the fair value of the noncontrollin$ interest as e,ual to *0
percent of the 'oo" value of %ld Company. %ld Company reported shares outstandin$ of
3(00)000 and retained earnin$s of 3100)000. &urin$ *00+) %ld Company reported net income
of 360)000 and paid dividends of 3()000. In *006) %ld Company reported net income of
360)000 and paid dividends of 310)000. The folloin$ transactions occurred 'eteen Ne
Company and %ld Company in *00+ and *006.

%ld Co. sold computer e,uipment to Ne Co. for a 34*)000 profit on &ecem'er *6) *00+.
The e,uipment had a five-year estimated economic life remainin$ at the time of intercompany
transfer and is depreciated on a strai$ht-line 'asis.

Ne sold land costin$ 360)000 to %ld Company on 2une *+) *006) for 3110)000.

Be,uired.
1C >ive all eliminatin$ entries needed to prepare a consolidation or"paper for *006
assumin$ that Ne Co. uses the fully adDusted e,uity method to account for its investment in
%ld Company.
*C >ive all eliminatin$ entries needed to prepare a consolidation or"paper for *006
assumin$ that Ne Co. uses the cost method to account for its investment in %ld Company.
6-(+
1C @ully AdDusted 1,uity =ethod 1liminatin$ 1ntries) &ecem'er (1) *006.

*C Cost =ethod 1liminatin$ 1ntries) &ecem'er (1) *006.
6-(6

AACSB: Analytic
AICPA: Measurement

6-40
4(. 7eter Architectural Services ons 100 percent of Smith =anufacturin$. &urin$ the course
of *00+ 7eter provides 3100)000 of architectural services associated ith Smith#s ne
manufacturin$ facility) hich ill open 2anuary 4) *006) and has a 0 year useful life. 1-plain
the impact providin$ this service has on 7eter Architectural Services# *00+ and *006
consolidated financial statements.
7eter has provided a service to the su'sidiary Smith. &urin$ *00+ the cost of the architectural
services ill 'e capitali/ed 'y Smith as part of the cost of the manufacturin$ facility. The
profit earned on the consultin$ services must 'e eliminated in *00+ a$ainst the cost of the
'uildin$. In this manner consolidated net income is not overstated.
Be$innin$ in *006 the intercompany profit ould 'e reali/ed over a 0 year period. In each of
the years) depreciation e-pense is decreased and consolidated net income is increasedG as
income to the controllin$ interests.

AACSB: Communication
AICPA: Decision Making

44. 7eople=a$ sells a plot of land for 3100)000 to Seven Star Company) its 100 percent
oned su'sidiary) on 2anuary 1) *00+. The cost of the land as 3!0)000) hen it as
purchased in *00!. In *010) Seven Star sells the land to Eot 7roperties Inc.) an unrelated
entity) for 31*0)000. Eo is the land reported in the consolidated financial statements for
*00+) *006 and *0109
7eople=a$ cannot report a $ain on the sale of land for *00+ or *006 in the consolidated
financial statements. The land must 'e reported on the consolidated 'alance sheet at its
ori$inal cost of 3!0)000. The intercompany $ain is unreali/ed and is eliminated. In *010) the
entire $ain of 340)000 H31*0)000 - 3!0)000C is reali/ed and reco$ni/ed hen the land is sold
to an outside party.

AACSB: Communication
AICPA: Reporting

6-41

CH 06 Intercompany Transfers of Services and Noncurrent Assets

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 06 Intercompany Transfers of Services and Noncurrent Assets

Uploaded by

Copyright:

Available Formats

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

You might also like