2/21/22, 8:39 PM Assignment Print View

Score: 45/45 Points 100 %

 
 1. Award: 4.50 out of 4.50 points  

James Corporation owns 80 percent of Carl Corporation's common stock. During October, Carl sold merchandise
to James for $250,000. At December 31, 40 percent of this merchandise remains in James's inventory. Gross
profit percentages were 20 percent for James and 30 percent for Carl. The amount of intra-entity gross profit in
inventory at December 31 that should be eliminated in the consolidation process is

 $20,000.

 $75,000.

 $24,000.

✓  $30,000.

Merchandise remaining in James’s inventory $250,000 × 40% = $100,000.

Intra-entity gross profit (based on subsidiary's gross profit rate as the seller) $100,000 × 30% = $30,000. James’s
ownership percentage of Carl has no impact on this computation.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-03 Explain why

consolidated entities defer intra-entity gross
profit in ending inventory and the consolidation
procedures required to subsequently recognize
profits.

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2/21/22, 8:39 PM Assignment Print View
 
 2. Award: 4.50 out of 4.50 points
 

Mittelstaedt Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns a piece of land that cost
$212,000 but had a fair value of $549,000 at the acquisition date. What value should be attributed to this land in a
consolidated balance sheet at the date of takeover?

 $127,200.

 $337,000.

✓  $549,000.

 $421,800.

At the date control is obtained, the parent consolidates subsidiary assets at fair value ($549,000 in this case)
regardless of the parent’s percentage ownership.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 04-02 Describe the

concepts and valuation principles underlying
the acquisition method of accounting for the
noncontrolling interest.

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2/21/22, 8:39 PM Assignment Print View
 
 3. Award: 4.50 out of 4.50 points
 

What is a basic premise of the acquisition method regarding accounting for a noncontrolling interest?

 Consolidated financial statements should not report a noncontrolling interest balance because these
outside owners do not hold stock in the parent company.

✓  A subsidiary is an indivisible part of a business combination and should be included in its entirety
regardless of the degree of ownership.

 Consolidated financial statements should be primarily for the benefit of the parent company’s
stockholders.

 Consolidated financial statements should be produced only if both the parent and the subsidiary are in
the same basic industry.

No further explanation details are available for this problem.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 04-01 Understand that

business combinations can occur with less than
complete ownership.

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2/21/22, 8:39 PM Assignment Print View
 
 4. Award: 4.50 out of 4.50 points
 

Parkette, Inc., acquired a 60 percent interest in Skybox Company several years ago. During 2017, Skybox sold
inventory costing $160,000 to Parkette for $200,000. A total of 18 percent of this inventory was not sold to
outsiders until 2018. During 2018, Skybox sold inventory costing $297,500 to Parkette for $350,000. A total of 30
percent of this inventory was not sold to outsiders until 2019. In 2018, Parkette reported cost of goods sold of
$607,500 while Skybox reported $450,000. What is the consolidated cost of goods sold in 2018?

 $720,000.

 $1,066,050.

 $698,950.

✓  $716,050.

Intra-Entity Gross Profit, 12/31/17

 
Intra-entity gross profit ($200,000 – $160,000) $ 40,000 
Inventory remaining at year's end   18%
Intra-entity gross profit, 12/31/17 $ 7,200 

 
Intra-Entity Gross Profit, 12/31/18
 
Intra-entity gross profit ($350,000 – $297,500) $ 52,500 
Inventory remaining at year's end   30%
Intra-entity gross profit in inventory, 12/31/18 $ 15,750 

 
Consolidated cost of goods sold
 
Parent balance $ 607,500
Subsidiary balance   450,000
Remove intra-entity transfer   (350,000)
Recognize 2017 deferred gross profit   (7,200)
Defer 2018 intra-entity gross profit   15,750
Cost of goods sold $ 716,050

References

Multiple Choice Learning Objective: 05-

02 Demonstrate the
consolidation
procedures to eliminate
intra-entity sales and
purchases balances.

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2/21/22, 8:39 PM Assignment Print View

Difficulty: 1 Easy Learning Objective: 05-

03 Explain why
consolidated entities
defer intra-entity gross
profit in ending
inventory and the
consolidation
procedures required to
subsequently recognize
profits.

 
 5. Award: 4.50 out of 4.50 points
 

Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top reports sales of
$800,000 and cost of goods sold of $600,000. For this same period, Bottom has sales of $300,000 and cost of
goods sold of $180,000. During the current year, Top sold merchandise to Bottom for $100,000. The subsidiary
still possesses 40 percent of this inventory at the current year-end. Top had established the transfer price based
on its normal gross profit rate. What are the consolidated sales and cost of goods sold?

 $970,000 and $696,000.

 $1,000,000 and $705,000.

 $1,000,000 and $740,000.

✓  $1,000,000 and $690,000.

Intra-entity sales and purchases of $100,000 must be eliminated. Additionally, an intra-entity gross profit of
$10,000 must be removed from ending inventory based on a gross profit rate of 25 percent ($200,000 gross
profit ÷ $800,000 sales) which is multiplied by the $40,000 ending balance. This deferral increases cost of goods
sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for
consolidation purposes is $690,000 ($600,000 + $180,000 – $100,000 + $10,000).

References

Multiple Choice Learning Objective: 05-

02 Demonstrate the
consolidation
procedures to eliminate
intra-entity sales and
purchases balances.

Difficulty: 1 Easy Learning Objective: 05-

03 Explain why
consolidated entities
defer intra-entity gross
profit in ending
inventory and the
consolidation
procedures required to
subsequently recognize
profits.

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2/21/22, 8:39 PM Assignment Print View
 
 6. Award: 4.50 out of 4.50 points
 

In computing the noncontrolling interest’s share of consolidated net income, how should the subsidiary's net
income be adjusted for intra-entity transfers?

 The subsidiary’s reported net income is adjusted for the impact of downstream transfers prior to
computing the noncontrolling interest’s allocation.

 The subsidiary’s reported net income is adjusted for the impact of all transfers prior to computing the
noncontrolling interest’s allocation.

 The subsidiary’s reported net income is not adjusted for the impact of transfers prior to computing the
noncontrolling interest’s allocation.

✓  The subsidiary’s reported net income is adjusted for the impact of upstream transfers prior to computing
the noncontrolling interest’s allocation.

No further explanation details are available for this problem.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-05 Explain the

difference between upstream and downstream
intra-entity transfers and how each affects the
computation of noncontrolling interest
balances.

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2/21/22, 8:39 PM Assignment Print View
 
 7. Award: 4.50 out of 4.50 points  

What is the primary reason we defer financial statement recognition of gross profits on intra-entity sales for goods
that remain within the consolidated entity at year-end?

✓  When intra-entity sales remain in ending inventory, control of the goods has not changed.

 Revenues and COGS must be recognized for all intra-entity sales regardless of whether the sales are
upstream or downstream.

 Gross profits must be deferred indefinitely because sales among affiliates always remain in the
consolidated group.

 Intra-entity sales result in gross profit overstatements regardless of amounts remaining in ending
inventory.

No further explanation details are available for this problem.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 05-01 Understand why

intra-entity asset transfers create accounting
effects within the financial records of affiliated
companies that must be eliminated or adjusted
in preparing consolidated financial statements.

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2/21/22, 8:39 PM Assignment Print View
 
 8. Award: 4.50 out of 4.50 points  

Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes Jordan
$400,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what
amount of this debt should be eliminated?

 $300,000.

 $100,000.

✓  $400,000.

 0

In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for external
reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 04-02 Describe the

concepts and valuation principles underlying
the acquisition method of accounting for the
noncontrolling interest.

 
 9. Award: 4.50 out of 4.50 points  

The noncontrolling interest represents an outside ownership in a subsidiary that is not attributable to the parent
company. Where in the consolidated balance sheet is this outside ownership interest recognized?

 In a mezzanine section between liabilities and owners’ equity.

✓  In the owners’ equity section.

 In the liability section.

 The noncontrolling interest is not recognized in the consolidated balance sheet.

No further explanation details are available for this problem.

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 04-06 Identify appropriate

placements for the components of the
noncontrolling interest in consolidated financial
statements.

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2/21/22, 8:39 PM Assignment Print View
 
 10. Award: 4.50 out of 4.50 points  

On January 1, 2017, Grand Haven, Inc., reports net assets of $760,000 although equipment (with a four-year
remaining life) having a book value of $440,000 is worth $500,000 and an unrecorded patent is valued at
$45,000. Van Buren Corporation pays $692,000 on that date to acquire an 80 percent equity ownership in Grand
Haven. If the patent has a remaining life of nine years, at what amount should the patent be reported on Van
Buren's consolidated balance sheet at December 31, 2018?

 $28,000.

 $40,000.

 $36,000.

✓  $35,000.

An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and
subsequently amortized its useful life.
 
      
Patent fair value at January 1, 2017 $ 45,000 
Amortization for 2 years (9 year remaining life)   (10,000)
Patent reported amount December 31, 2018 $ 35,000 

References

Multiple Choice Difficulty: 1 Easy Learning Objective: 04-02 Describe the

concepts and valuation principles underlying
the acquisition method of accounting for the
noncontrolling interest.

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