Chapter 5

True-False Statements
1. When an intercompany plant asset transaction occurs, the historical cost of the asset on
the consolidated balance sheet will be the cost of the asset to the original owner.

2. In the period of an intercompany plant asset transaction, the gain or loss on the sale of
the plant asset will be completely eliminated from the consolidated income statement.

3. In the period of an intercompany plant asset transaction, the accumulated depreciation

account will be completely eliminated.

4. If the intercompany sale of plant assets occurs at the end of the accounting period, there
will not be an adjustment to depreciation expense when the consolidation worksheet
eliminations are prepared.

5. If the intercompany sale of plant assets occurs at the end of the accounting period, there
will not be an adjustment to accumulated depreciation when the consolidation worksheet
eliminations are prepared.

6. The worksheet elimination to a plant asset account resulting from an intercompany

transaction is the same regardless of when the intercompany transaction occurs.

7. When an intercompany plant transaction occurs during the period, there will likely be two
income statement accounts in the worksheet elimination.

8. When there is an intercompany sale of plant assets, the purchaser of the plant assets
must keep the same remaining economic life as the seller.

9. Consolidated depreciation expense on an asset sold internally is based on the original

owner’s cost and estimated life before the intercompany transaction date and the new
owner’s cost and estimated life after the intercompany transaction date.

10. When there is an intercompany sale of plant assets during the period, the depreciation
expense recognized prior to the sale has no impact on the worksheet elimination to
remove the intercompany sale from the consolidated financial statements.

11. The worksheet elimination to the accumulated depreciation account will get smaller
every period until it reaches zero at the date the machine is fully depreciated.

12. The worksheet elimination to the plant asset account in periods subsequent to a
downstream sale of a plant asset will be the same dollar amount as the worksheet
elimination to the plant asset account at the date of the sale.

13. The retained earnings worksheet elimination is created at the peso amount of the gain or
loss on the sale of plant assets in the preceding period and the worksheet elimination
will remain at the same peso amount until the asset is sold to an unrelated party or
discarded.

14. In the preparation of consolidated financial statements subsequent to the year in which a
subsidiary sold land to the parent company, the unrealized gain on the sale is removed
 by a working paper elimination (in journal entry format) that debits Intercompany Gain on

15. In working paper eliminations (in journal entry format) for the intercompany gain in a
depreciable plant asset subsequent to the year in which the asset was sold, the credits
to the acquirer's Plant Assets and Depreciation Expense ledger accounts always are the
same for each year.

16. Working paper eliminations are not required after the end of the economic life of a
depreciable plant asset sold by a subsidiary to the parent company at a gain, although
the asset is continued in use.

17. Intercompany gains or losses on depreciable plant assets are realized through the
annual depreciation expense of the acquiring affiliate.

Conceptual Multiple Choice Questions

1. The sale of equipment from the subsidiary to the parent is called what type of
transaction?
a. Downstream intercompany transaction
b. Upstream intercompany transaction
c. Lateral intercompany transaction
d. Realized intercompany transaction

2. The purchase of a subsidiary’s bond payable from an independent investor by another

subsidiary is called what type of transaction?
a. Downstream intercompany transaction
b. Upstream intercompany transaction
c. Lateral intercompany transaction
d. Realized intercompany transaction

3. When there is an intercompany transaction, how much of any profit or loss created as a
result of the transaction is eliminated during the consolidation process?
a. None of the profit or loss is eliminated
b. All of the profit or loss is eliminated
c. The parent’s ownership interest in the profit or loss is eliminated
d. It is not possible to determine how much of the profit or loss is eliminated without
knowing whether the transaction is upstream or downstream

4. In the period of an intercompany asset transaction, the consolidated balance sheet will
present what amount in the asset account?
a. The purchase price by the new owner
b. The purchase price by the original owner
c. The purchase price by the original owner plus the parent’s ownership percentage
of the gain or loss on the sale recognized at the time of the intercompany
transaction
d. The purchase price by the original owner plus the noncontrolling interests’
percentage of the gain or loss on the sale recognized at the time of the
intercompany transaction

5. What amount of gain or loss from the intercompany sale of plant assets is included in the
consolidated income statement?
 a. The entire gain or loss is recognized
b. The parent’s ownership interest in the gain or loss is recognized
c. The seller’s portion of the gain or loss is recognized
d. There is no gain or loss recognized

6. Sampson Company is having a cash flow problem. Sampson borrows P500,000 from its
parent, Nelson Group. What is this type of transaction called?
a. Lateral debt transaction
b. Indirect intercompany debt transaction
c. Direct intercompany debt transaction
d. Negotiated transfer

7. What is the transaction called when the parent acquires a subsidiary’s debt instrument
from an unrelated party?
a. Direct intercompany debt transaction
b. Indirect intercompany debt transaction
c. Negotiated transfer
d. Lateral debt transaction

8. On the date when a subsidiary acquires some of the parent’s outstanding debt from an
unrelated party, which entity records a journal entry with respect to the long-term debt?
a. Subsidiary
b. Parent
c. Parent and subsidiary
d. Neither party records a journal entry

9. At the date when the parent acquires some of the subsidiary’s outstanding debt from an
unrelated party, how is the debt instrument viewed by the parties?
a. The parent views the debt instrument as an investment
b. The consolidated entity views the transaction as retired
c. The subsidiary views the debt instrument as an outstanding liability
d. All of the above are correct

10. Over time, what will happen to the peso amount of the discount or premium included in a
worksheet elimination of an indirect intercompany debt transaction?
a. The discount or premium worksheet elimination amount will not change in value
over time
b. The discount or premium worksheet elimination amount will get larger in value
over time
c. The discount or premium worksheet elimination amount will get smaller over time
d. It is not possible to determine what will happen to the dollar amount of the
discount or premium worksheet elimination amount

11. A parent sold land costing P1 million to its subsidiary for P1.2 million in 20x2. The
subsidiary still holds the land at the end of 20x4. On a working paper prepared to consolidate
the financial statements of the parent and subsidiary in 20x4, the eliminating entry connected
with this land includes a credit to
a. Investment in subsidiary, because the gain reduced the Investment account in 20x2.
b. Beginning retained earnings of the subsidiary, because prior year gains are included in
retained earnings.
c. Gain on sale of land, to eliminate the gain recorded on the parent’s books.
 d. Land, to restore the land to its original cost.

12. A subsidiary sold its parent some land at a profit in 20x2. The parent still holds the land. On a
working paper prepared to consolidate the financial statements of the parent and its subsidiary
in 20x4, the eliminating entry connected with this land affects which account?
a. Investment in subsidiary
b. Beginning retained earnings
c. Gains on sales of land
d. No effect – elimination entry is not required

13. A parent owns 80% of its subsidiary. In 20x1, the subsidiary sold land costing P1,000,000 to its
parent for P1,500,000. In 20x5, the parent sold the land to an outside company for P1,800,000.
How do these events affect consolidated net income for 20x5?
a. increase of P300,000
b. increase of P500,000
c. increase of P640,000
d. increase of P800,000

14. A parent sold land costing P1,000,000 to its subsidiary in 20x2 for P,800,000. The land is still
held by the subsidiary. The parent owns 80% of its subsidiary. The eliminating entry necessary
for this intercompany transaction on the 20x4 consolidation working paper includes:
a. a debit to the Investment account for P640,000.
b. a debit to the Investment account for P800,000.
c. a debit to retained earnings for P640,000.
d. a debit to retained earnings for P800,000.

15. A parent provides administrative services to its subsidiary during 20x4, which the subsidiary
records as an expense. The services cost the parent P100,000 and the parent charged the
subsidiary P125,000. On the consolidation working paper, what elimination entry is necessary?
a. none, since there is no ending inventory of services.
b. debit service revenue P125,000, credit service expense P125,000.
c. debit service revenue P125,000, credit service expense P100,000, credit Investment in
Subsidiary P25,000.
d. debit service revenue P100,000, credit service expense P100,000.

16. A parent company sells land to its subsidiary in 20x1 at an amount above its original cost.
In 20x4, three years later, the subsidiary sells the land to an outside developer. In the 20x4
consolidation working paper, the elimination of this transaction will result in a(n)
a. decrease in land.
b. increase in retained earnings.
c. increase in gain on sale of land.
d. decrease in gain on sale of land.
17. On a worksheet prepared to consolidate the financial statements of a parent and subsidiary,
eliminating entries made to remove intercompany gains on upstream sales of land sold in
prior years will affect which account?
a. Investment in subsidiary
b. Beginning retained earnings
c. Equity in net income of the subsidiary
d. Gain on sales of land
18. Which of the following are examples of intercompany balances and transactions that must
be eliminated in preparing consolidated financial statements?
I. Security holdings II. Interest and dividends III. Sales and purchases
a. I, I c. I, II, III
b. I, III d. II

19.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:
a. The parent company sells the plant asset to the subsidiary
b. The subsidiary abandons the plant asset
c. The subsidiary resells the plant asset to the parent company
d. Some other transaction or event takes place

20. In "Consolidated Financial Statements," the requirement for complete elimination of

intercompany profit (gains) or losses is consistent with the:
a. Parent company concept of consolidated financial statements
b. Equity method of accounting
c. Entity/economic unit concept of consolidated financial statements
d. Cost method of accounting

21. In the measurement of minority interest in net income of a partially owned subsidiary, the

format) for intercompany gain in a depreciable plant asset is attributed to net income of:
a. The parent company
b. The subsidiary
c. The consolidated entity
d. None of the foregoing

22. 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?
a. It eliminates the overstatement of the subsidiary's Sales ledger account balance.
B. It removes the intercompany profit portion of the subsidiary's Cost of Goods Sold
ledger account balance.
c. It reduces consolidated inventories to the cost incurred by the consolidated entity.
d. It eliminates the parent's Intercompany Sales and Intercompany Cost of Goods Sold
ledger accounts balances.
e. None of the foregoing

23. 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:
a. A sale of plant assets
b. A sale of merchandise
c. An acquisition of outstanding bonds in the open market
d. A sale of intangible assets
e. None of the foregoing
 Problems
1. DD Corporation Owns 100 percent of GG Corporation’s common stock. On January 2, 20x4,
DD sold to GG for P40,000 machinery with a carrying amount of P30,000. GG is
depreciating the acquired machinery over a five-year life by the straight-line method. The net
adjustments to compute 20x4 and 20x5 consolidated net income would be an increase
(decrease) of

Use the following information for questions 2 to 3:

On 1/2/x6, Palex sold equipment costing P100,000 to its 100%-owned subsidiary, Salex, for
P75,000. At the time of the sale, the equipment had been 60% depreciated (using the straight-
line method and an assigned life of 10 years). Salex continued depreciating the equipment by
using the straight-line method but assigned a remaining life of 5 years.

2. What are the cost and accumulated depreciation, respectively, of this equipment in the
12/31/x6 consolidated balance sheet?

3. What is the amount of the adjustment to Depreciation Expense (debit or credit) in preparing
the consolidation worksheet at 12/31/x6?

Use the following information for questions 4 to 5:

The parent sells its 80 percent subsidiary equipment for P25,000 on December 31, 20x5. At
that date, the equipment has a cost and accumulated depreciation on the parent’s financial
records of P40,000 and P10,000, respectively.

4. What is the worksheet elimination to the gain or loss on sale of equipment account if
consolidated financial statements are prepared on December 31, 20x5?

5. What is the worksheet elimination to the retained earnings account (debit or credit) if
consolidated financial statements are prepared on December 31, 20x6?

Use the following information for questions 6 to 7:

The 70 percent subsidiary acquires equipment from its parent on December 31, 20x5 for
P160,000. At that date, the equipment has a cost and accumulated depreciation on the parent’s
books of P130,000 and P60,000, respectively.

6. What is the worksheet elimination to the gain or loss on sale of equipment account (debit or
credit) if consolidated financial statements are prepared on December 31, 20x5?

7. What is the worksheet elimination to the retained earnings account (debit or credit) if
consolidated financial statements are prepared on December 31, 20x6?

The parent sells its 60 percent subsidiary a machine for P60,000 on December 31, 20x5. At
that date, the machine has a cost and accumulated depreciation on the parent’s financial
records of P80,000 and P30,000, respectively.
What is the worksheet elimination to the machine account (debit or credit) if consolidated
financial statements are prepared on December 31, 20x5?
8. What is the worksheet elimination to the accumulated depreciation account (debit or credit)
if consolidated financial statements are prepared on December 31, 20x5?

Use the following information for questions 9 to10:

The 80 percent subsidiary (Scottsdale) acquires a building from its parent (Phoenix) on October
1, 20x5 for P640,000. At that date, the building has a cost and accumulated depreciation on
Phoenix’s books of P500,000 andP350,000, respectively. The building had a remaining life of
six years on Phoenix’s books and was assigned a life of ten years by Scottsdale.
9. What is the worksheet elimination to the building account (debit or credit) if consolidated
financial statements are prepared on December 31, 20x5?

10. What is the worksheet elimination to the depreciation expense account (debit or credit) if
consolidated financial statements are prepared December 31, 20x5?

Multiple Choice Problem

Question 1 - 5
Mortar Corporation acquired 80 percent of Granite Corporation’s voting common stock on
January 1, 20x4. On December 31, 20x5, Mortar received P390,000 from Granite for a
equipment Mortar had purchased on January 1, 20x2, for P400,000. The equipment is expected
to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a
straight- line basis.

1. In the preparation of the 20x5 consolidated financial statements, equipment will be:
a. debited for P1,000
b. debited for P10,000
c. credited for P15,000
d. debited for P25,000

2. The gain on sale of the equipment recorded by Mortar for 20x5 is:
a. P150,000
b. P65,000
c. P110,000
d. P40,000

3. In the preparation of the 20x6 consolidated financial statements, equipment will be :

a. debited for P1,000
b. debited for P10,000
c. credited for P15,000
d. debited for P25,000

4. In the preparation of the 20x6 consolidated income statement, depreciation expense will
be:
a. debited for P25,000 in the eliminating entries.
b. credited for P15,000 in the eliminating entries.
 c. debited for P15,000 in the eliminating entries.
d. credited for P25,000 in the eliminating entries

5. In the preparation of the 20x6 consolidated balance sheet, accumulated depreciation will
be:
a. debited for P160,000 in the eliminating entries.
b. credited for P160,000 in the eliminating entries.
c. debited for P135,000 in the eliminating entries.
d. credited for P135,000 in the eliminating entries.

Question 6 – 10
Sky Corporation owns 75 percent of Earth Company’s stock. On July 1, 20x4, Sky sold a
building to Earth for P33,000. Sky had purchased this building on January 1, 20x2, for P36,000.
The building’s original eight-year estimated total economic life remains unchanged. Both
companies use straight-line depreciation. The equipment’s residual value is considered
negligible.

6. In the preparation of the 20x4 consolidated financial statements, building will be _____ in
the eliminating entries.
a. debited for P33,000
b. debited for P36,000
c. credited for P36,000
d. debited for P3,000

7. The gain on sale of the building eliminated in the consolidated financial statements for
20x4 is:
a. P8,250
b. P10,500
c. P6,000
d. P11,250

8. While preparing the 20x4 consolidated income statement. depreciation expense will be:
a. debited for P750 in the eliminating entries.
b. credited for P750 in the eliminating entries.
c. credited for P1,500 in the eliminating entries.
d. debited for P1,500 in the eliminating entries.

9. In the preparation of the 20x5 consolidated income statement, depreciation expense will
be:
a. debited for P750 in the eliminating entries.
b. credited for P750 in the eliminating entries.
c. credited for P1,500 in the eliminating entries.
d. debited for P1,500 in the eliminating entries.
 10. In the preparation of a consolidated balance sheet at January 1, 20x5, retained earnings
will be;
a. debited for P6,750 in the eliminating entries.
b. credited for P6,750 in the eliminating entries.
c. credited for P7,500 in the eliminating entries.
d. debited for P7,500 in the eliminating entries.

Question 11 - 15
Aztec, the parent, sell its 90 percent subsidiary, Navajo, equipment for P36,000 on May 1, 20x5.
At the date, the equipment has a cost and accumulated depreciation on Aztec’s financial
records of P60,000 and P31,200, respectively. The equipment had a remaining life of four years
on Aztec’s books and was assigned a life of six years by Navajo.

11. What is the worksheet elimination to the equipment account if consolidated financial
statements are prepared on December 31, 20x5?
a. 21,600 credit
b. 21,600 debit
c. 24,000 credit
d. 24,000 debit

12. What is the worksheet elimination to the gain or loss on sale of equipment account if
consolidated financial statements are prepared on December 31, 20x5?
a. P7,200 credit
b. P7,200 debit
c. P6,480 credit
d. P6,480 debit

13. What is the worksheet elimination to the depreciation expense account if consolidated
financial statements are prepared on December 31, 20x5?
a. P1,200 credit
b. P1,200 debit
c. P800 credit
d. P800 debit

14. What is the worksheet elimination to the accumulated depreciation account if

consolidated financial statements are prepared on December 31, 20x5?
a. P30,400 credit
b. P30,400 debit
c. P31,200 credit
d. P31,200 debit

15. What is the worksheet elimination to the retained earnings account if consolidated
financial statements are prepared on December 31, 20x6?
a. P6,000 debit
b. P6,000 credit
 c. P6,400 debit
d. P6,400 credit

Question 16 – 26
On January 1, 20x4, P Company purchased 80 percent of the outstanding shares of S
Company by paying P700,000. On that date, S Company had P300,000 capital stock and
P500,000 of retained earnings. An undervalued asset attributable to building amounting to
P75,000 with a remaining life of 25 years. All other assets and liabilities of S Company had book
value approximated their fair market value.

On January 1, 20x5, P’s common stock and retained earnings amounted to P1,000,000 and
P800,000, respectively, while S Company’s retained earnings is P600,000.
The 20x5 net income ad dividends using cost (or initial value) method was as follows:

Net Income Dividends

P Company P340,000 P100,000
S Company P150,000 P50,000
On April 1, 20x5, S Company sold equipment with a book value of P30,000 to P Company for
P60,000. The gain on the sale is included in the net income of S Company indicated above. The
equipment is expected to have a remaining useful life of five years from the date of the sale.

On September 30, 20x5, P Company sold machinery with a book value of P40,000 to S
Company for P75,000. The gain on the sale is also included in the net income of P Company
indicated above. The Machinery is expected to last for ten (10) years from the date of sale.

16. The investment in Subsidiary account on December 31, 20x5:

a. P748,500
b. P725,000
c. P721,600
d. P700,000

17. The dividend income/ investment income for 20x5:

a. P88,500
b. P65,000
c. P61,600
d. P40,000

18. The non-controlling interest in net income for 20x5:

a. P30,000
b. P25,500
c. P24,900
d. P24,300

19. The Profit attributable to equity holders of parent (Parent’s Interest/ Controlling Interest
in Profit) for 20x5:
a. P356,500
b. P362,200
c. P363,075
d. P386,500

20. The Consolidated/ Group Net Income for 20x5:

a. P356,500
b. P362,200
c. P363,075
d. P387,375

21. The non-controlling interest on December 31, 20x5:

a. P208,700
b. P189,300
c. P174,900
d. P173,100

22. The non-controlling interest (in net assets) on December 31, 20x6, assuming that the
net income and dividends of subsidiary amounted to P200,000 and P70,000,
respectively:
a. P208,000
b. P209,200
c. P235,300
d. P222,400

23. Using the same information in Nos. 21 and 22, compute the stockholders’ equity of
subsidiary on December 31:
20x5 20x6
a. P1,000,000 P1,000,000
b. P1,000,000 P1,130,000
c. P1,069,000 P1,196,000
d. P1,043,500 P1,176,500

24. The controlling (parent’s) interest – retained earnings or the consolidated retained
earnings on December 31, 20x5.
a. P1,040,000
b. P1,063,075
c. P1,123,075
d. P1,140,675

25. The consolidated stockholders’ equity on December 31, 20x5:

a. P2,040,000
b. P2,349,375
c. P2,358,375
d. P2,375,975