ACG4803 - Chapter 5

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions
Chapter 05
Consolidated Financial Statements - Intra-Entity Asset Transactions
Multiple Choice Questions
1. On November 8, 2011, Power Corp. sold land to Wood Co., its wholly owned subsidiary.
The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the
combination, when is the gain on the sale of the land realized?
A. Proportionately over a designated period of years.
B. When Wood Co. sells the land to a third party.
C. No gain can be recognized.
D. As Wood uses the land.
E. When Wood Co. begins using the land productively.
Edgar Co. acquired 60% of Stendall Co. on January 1, 2011. During 2011, Edgar made
several sales of inventory to Stendall. The cost and selling price of the goods were $140,000
and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2011.
Consolidated cost of goods sold for 2011 was $2,140,000 because of a consolidating
adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory.
2. How would consolidated cost of goods sold have differed if the inventory transfers had
been for the same amount and cost, but from Stendall to Edgar?
A. Consolidated cost of goods sold would have remained $2,140,000.
B. Consolidated cost of goods sold would have been more than $2,140,000 because of the
controlling interest in the subsidiary.
C. Consolidated cost of goods sold would have been less than $2,140,000 because of the
noncontrolling interest in the subsidiary.
D. Consolidated cost of goods sold would have been more than $2,140,000 because of the
E. The effect on consolidated cost of goods sold cannot be predicted from the information
provided.
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3. How would noncontrolling interest in net income have differed if the transfers had been for
the same amount and cost, but from Stendall to Edgar?
A. Noncontrolling interest in net income would have decreased by $6,000.
B. Noncontrolling interest in net income would have increased by $24,000.
C. Noncontrolling interest in net income would have increased by $20,000.
D. Noncontrolling interest in net income would have decreased by $18,000.
E. Noncontrolling interest in net income would have decreased by $56,000.
4. On January 1, 2011, Race Corp. acquired 80% of the voting common stock of Gallow Inc.
During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still
owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's
net income was $806,000. Race decided to use the equity method to account for this
investment. What was the noncontrolling interest's share of consolidated net income?
A. $3,600.
B. $22,800.
C. $30,900.
D. $32,900.
E. $40,800.
5. Webb Co. acquired 100% of Rand Inc. on January 5, 20011. During 2011, Webb sold
goods to Rand for $2,400,000 that cost Webb $1,800,000. Rand still owned 40% of the goods
at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for
Rand. What was consolidated cost of goods sold?
A. $17,200,000.
B. $15,040,000.
C. $14,800,000.
D. $16,960,000.
E. $14,560,000.
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6. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2010. During 2010, Gentry
sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned
12% of the goods at the end of the year. In 2011, Gentry sold goods with a cost of $800,000 to
Gaspard Farms for $1,000,000, and Gaspard Farms still owned 10% of the goods at year-end.
For 2011, cost of goods sold was $5,400,000 for Gentry and $1,200,000 for Gaspard Farms.
What was consolidated cost of goods sold for 2011?
A. $6,600,000.
B. $6,604,000.
C. $5,620,000.
D. $5,596,000.
E. $5,625,000.
7. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2011, Kent
made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost
was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory.
Kent's reported net income was $300,000. What was the noncontrolling interest in Kent's net
income?
A. $90,000.
B. $85,200.
C. $54,000.
D. $94,800.
E. $86,640.
8. Justings Co. owned 80% of Evana Corp. During 2011, Justings sold to Evana land with a
book value of $48,000. The selling price was $70,000. In its accounting records, Justings
should
A. not recognize a gain on the sale of the land since it was made to a related party.
B. recognize a gain of $17,600.
C. defer recognition of the gain until Evana sells the land to a third party.
D. recognize a gain of $8,000.
E. recognize a gain of $22,000.
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9. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2010,
Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to
Norek for $45,000. Thelma's reported net income for 2010 was $119,000. What is the
noncontrolling interest's share of Thelma's net income?
A. $35,700.
B. $31,800.
C. $39,600.
D. $22,200.
E. $26,100.
Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2010,
Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente
$140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The
equipment had a remaining useful life of five years and a $0 salvage value. Straight-line
depreciation is used by both Clemente and Snider.
10. At what amount should the equipment (net of depreciation) be included in the
consolidated balance sheet dated December 31, 2010?
A. $105,000.
B. $100,000.
C. $95,000.
D. $80,000.
E. $85,000.
A. $110,000.
B. $105,000.
C. $100,000.
D. $90,000.
E. $60,000.
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12. During 2010, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The
inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the
combination, when is the $14,000 gain realized?
A. When the goods are sold to a third party by Lord.
B. When Lord pays Von for the goods.
C. When Von sold the goods to Lord.
D. When the goods are used by Lord.
E. No gain can be recognized since the transaction was between related parties.
13. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2010, Devin
made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the
beginning inventory, and $25,000 at the end of the year. Devin reported net income of
$137,000 for 2010. Bauerly decided to use the equity method to account for the investment.
What is the noncontrolling interest's share of Devin's net income for 2010?
A. $41,100.
B. $33,600.
C. $21,600.
D. $45,600.
E. $36,600.
14. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations'
balance sheets dated December 31, 2010, include the following balances for land: for Chain-$416,000, and for Shannon--$256,000. On the original date of acquisition, the book value of
Shannon's land was equal to its fair value. On April 4, 2011, Chain sold to Shannon a parcel
of land with a book value of $65,000. The selling price was $83,000. There were no other
transactions which affected the companies' land accounts during 2010. What is the
consolidated balance for land on the 2011 balance sheet?
A. $672,000.
B. $690,000.
C. $755,000.
D. $737,000.
E. $654,000.
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15. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of
inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in
2010 and $500,000 in 2011. At the end of each year, Gibson still owned 30% of the goods.
Net income for Sparis was $912,000 during 2011. What was the noncontrolling interest's
share of Sparis' net income for 2011?
A. $85,680.
B. $90,600.
C. $90,720.
D. $91,680.
E. $91,800.
16. On January 1, 2011, Payton Co. sold equipment to its subsidiary, Starker Corp., for
$115,000. The equipment had cost $125,000, and the balance in accumulated depreciation
was $45,000. The equipment had an estimated remaining useful life of eight years and $0
salvage value. Both companies use straight-line depreciation. On their separate 2011 income
statements, Payton and Starker reported depreciation expense of $84,000 and $60,000,
respectively. The amount of depreciation expense on the consolidated income statement for
2011 would have been
A. $144,000.
B. $148,375.
C. $109,000.
D. $134,000.
E. $139,625.
17. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on
January 1, 2011. During the year, Yukon made sales of inventory to Ontario. The inventory
cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the
goods in its inventory at the end of the year. The amount of unrealized intercompany profit
that should be eliminated in the consolidation process at the end of 2011 is
A. $15,000.
B. $20,000.
C. $32,500.
D. $30,000.
E. $110,000.
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18. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2011, Kile sold
merchandise to Prince for $140,000. At December 31, 2011, 50% of this merchandise
remained in Prince's inventory. For 2011, gross profit percentages were 30% of sales for
Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending
inventory at December 31, 2011 that should be eliminated in the consolidation process is
A. $28,000.
B. $56,000.
C. $22,400.
D. $21,000.
E. $42,000.
Pot Co. holds 90% of the common stock of Skillet Co. During 2011, Pot reported sales of
$1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of
$420,000 and cost of goods sold of $252,000.
19. Included in the amounts for Pot's sales were Pot's sales of merchandise to Skillet for
$140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as
sales to outsiders. Skillet still had 40% of the intra-entity sales as inventory at the end of 2011.
What are consolidated sales and cost of goods sold for 2011?
A. $1,400,000 and $952,000.
B. $1,400,000 and $966,000.
C. $1,540,000 and $1,078,000.
D. $1,400,000 and $1,022,000.
E. $1,540,000 and $1,092,000.
20. Included in the amounts for Skillet's sales were Skillet's sales of merchandise to Pot for
$140,000. There were no sales from Pot to Skillet. Intra-entity sales had the same markup as
sales to outsiders. Pot still had 40% of the intra-entity sales as inventory at the end of 2011.
A. $1,400,000 and $952,000.
B. $1,400,000 and $966,000.
C. $1,540,000 and $1,078,000.
D. $1,400,000 and $974,400.
E. $1,540,000 and $1,092,000.
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21. The reported sales did not include any intra-entity sales. In addition to the reported
amounts, there were intra-entity sales from Pot to Skillet in the amount of $140,000. There
were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders.
Skillet still had 40% of the intra-entity sales as inventory at the end of 2011. What are
consolidated sales and cost of goods sold for 2011?
A. $1,400,000 and $1,071,000.
B. $1,400,000 and $966,000.
C. $1,540,000 and $1,078,000.
D. $1,400,000 and $1,022,000.
E. $1,540,000 and $1,092,000.
22. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1,
2009, Dalton acquired a building with a ten-year life for $420,000. No salvage value was
anticipated and the building was to be depreciated on the straight-line basis. On January 1,
2011, Dalton sold this building to Shrugs for $392,000. At that time, the building had a
remaining life of eight years but still no expected salvage value. In preparing financial
statements for 2011, how does this transfer affect the calculation of Dalton's share of
consolidated net income?
A. Consolidated net income must be reduced by $44,800.
B. Consolidated net income must be reduced by $50,400.
C. Consolidated net income must be reduced by $49,000.
D. Consolidated net income must be reduced by $56,000.
E. Consolidated net income must be reduced by $34,300.
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On January 1, 2011, Pride, Inc. acquired 80% of the outstanding voting common stock of
Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment,
$28,000 was allocated to equipment (with a five-year life) that had been undervalued on
Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not
been impaired.
As of December 31, 2011, before preparing the consolidated worksheet, the financial
statements appeared as follows:
During 2011, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only
half of this purchase had been paid for by Strong by the end of the year. 60% of these goods
were still in the company's possession on December 31.
23. What is the total of consolidated revenues?

A. $700,000.
B. $644,000.
C. $588,000.
D. $560,000.
E. $840,000.
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24. What is the total of consolidated operating expenses?

A. $42,000.
B. $47,600.
C. $53,200.
D. $49,000.
E. $35,000.
25. What is the total of consolidated cost of goods sold?

A. $196,000.
B. $212,800.
C. $184,800.
D. $203,000.
E. $168,000.
26. What is the consolidated total of noncontrolling interest appearing in the balance sheet?
A. $100,800.
B. $97,440.
C. $93,800.
D. $120,400.
E. $117,040.
27. What is the consolidated total for equipment (net) at December 31, 2011?
A. $952,000.
B. $1,058,400.
C. $1,069,600.
D. $1,064,000.
E. $1,066,800.
28. What is the consolidated total for inventory at December 31, 2011?
A. $336,000.
B. $280,000.
C. $364,000.
D. $347,200.
E. $349,300.
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Strickland Company sells inventory to its parent, Carter Company, at a profit during 2010.
One-third of the inventory is sold by Carter in 2010.
29. In the consolidation worksheet for 2010, which of the following choices would be a debit
entry to eliminate the intra-entity transfer of inventory?
A. Retained earnings.
B. Cost of goods sold.
C. Inventory.
D. Investment in Strickland Company.
E. Sales.
30. In the consolidation worksheet for 2010, which of the following choices would be a credit
C. Inventory.
E. Sales.
entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity
sales?
C. Inventory.
E. Sales.
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sales?
C. Inventory.
E. Sales.
33. In the consolidation worksheet for 2011, assuming Carter uses the initial value method of
accounting for its investment in Strickland, which of the following choices would be a debit
sales?
C. Inventory.
E. Sales.
34. In the consolidation worksheet for 2011, assuming Carter uses the initial value methd of
accounting for its investment in Strickland, which of the following choices would be a credit
sales?
C. Inventory.
E. Sales.
Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2010.
One-third of the inventory is sold by Walsh uses the equity method to account for its
investment in Fisher.
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C. Inventory.
D. Investment in Fisher Company.
E. Sales.
C. Inventory.
E. Sales.
sales?
C. Inventory.
E. Sales.
sales?
C. Inventory.
E. Sales.
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sales?
C. Inventory.
E. Sales.
sales?
C. Inventory.
E. Sales.
41. When comparing the difference between an upstream and downstream transfer of
inventory, and using the initial value method, which of the following statements is true when
there is a noncontrolling interest?
A. Income from subsidiary will be lower by the amount of the ending inventory profit
multiplied by the noncontrolling interest percentage for downstream transfers.
B. Income from subsidiary will be higher by the amount of the ending inventory profit
C. Income from subsidiary will be reduced for downstream ending inventory profit but not for
upstream profit, before the effect of the noncontrolling interest.
D. Income from subsidiary will be reduced for upstream ending inventory profit but not for
downstream profit, before the effect of the noncontrolling interest.
E. Income from subsidiary will be the same for upstream and downstream profit.
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A. Income from subsidiary will be lower by the amount of the beginning inventory profits
multiplied by the noncontrolling interest percentage for upstream transfers.
B. Income from subsidiary will be higher by the amount of the beginning inventory profits
C. Income from subsidiary will be reduced for downstream ending inventory profits but not
for upstream profits, before the noncontrolling interest.
D. Income from subsidiary will be reduced for upstream ending inventory profits but not for
downstream profits, before the noncontrolling interest.
E. Income from subsidiary will be the same for upstream and downstream profits.
43. Which of the following statements is true regarding inventory transfers between a parent
and its subsidiary, using the initial value method?
A. The sale of merchandise between a parent and its subsidiary represents an arm's-length
transaction and thus provides the basis for the recognition of profit on such transfers.
B. Profits on upstream transfers associated with the parent's ending inventory are subtracted
from subsidiary net income for the current year in the calculation of parent's income from
subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the
calculation of parent's income from subsidiary. This procedure is inappropriate because all the
intra-entity transactions unsold at year-end may not be sold in the next year.
C. Profits on upstream transfers associated with the parent's ending inventory are subtracted
calculation of parent's income from subsidiary. This procedure is appropriate even if all the
D. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated
parties should be included in consolidated inventory at their transfer price.
E. Noncontrolling interest in subsidiary's net income should not be reduced for upstream or
downstream ending inventory profits.
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44. Which of the following statements is true regarding an intra-entity sale of land?
A. A loss is always recognized but a gain is eliminated in a consolidated income statement.
B. A loss and a gain are always eliminated in a consolidated income statement.
C. A loss and a gain are always recognized in a consolidated income statement.
D. A gain is always recognized but a loss is eliminated in a consolidated income statement.
E. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive
income.
45. Parent sold land to its subsidiary for a gain in 2008. The subsidiary sold the land
externally for a gain in 2011. Which of the following statements is true?
A. A gain will be reported in the consolidated income statement in 2008.
B. A gain will be reported in the consolidated income statement in 2011.
C. No gain will be reported in the 2011 consolidated income statement.
D. Only the parent company will report a gain in 2011.
E. The subsidiary will report a gain in 2008.
46. An intra-entity sale took place whereby the transfer price exceeded the book value of a
depreciable asset. Which statement is true for the year following the sale?
A. A worksheet entry is made with a debit to gain for a downstream transfer.
B. A worksheet entry is made with a debit to gain for an upstream transfer.
C. A worksheet entry is made with a debit to investment in subsidiary for a downstream
transfer when the parent uses the equity method.
D. A worksheet entry is made with a debit to retained earnings for a downstream transfer,
regardless of the method used account for the investment.
E. No worksheet entry is necessary.
47. An intra-entity sale took place whereby the book value exceeded the transfer price of a
A. A worksheet entry is made with a debit to retained earnings for an upstream transfer.
B. A worksheet entry is made with a credit to retained earnings for an upstream transfer.
C. A worksheet entry is made with a debit to retained earnings for a downstream transfer.
D. A worksheet entry is made with a debit to investment in subsidiary for a downstream
transfer.
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48. An intra-entity sale took place whereby the transfer price was less than the book value of a
A. A worksheet entry is made with a debit to investment in subsidiary for an upstream
transfer.
B. A worksheet entry is made with a debit to investment in subsidiary for a downstream
transfer.
C. A worksheet entry is made with a credit to investment in subsidiary for a downstream
D. A worksheet entry is made with a debit to retained earnings for an upstream transfer,
regardless of the method used to account for the investment.
49. Which of the following statements is true concerning an intra-entity transfer of a

depreciable asset?
A. Noncontrolling interest in subsidiary's net income is never affected by a gain on the
transfer.
B. Noncontrolling interest in subsidiary's net income is always affected by a gain on the
transfer.
C. Noncontrolling interest in subsidiary's net income is affected by a downstream gain only.
D. Noncontrolling interest in subsidiary's net income is affected only when the transfer is
upstream.
E. Noncontrolling interest in subsidiary's net income is increased by an upstream gain in the
year of transfer.
Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito
at a 25% profit on selling price. The following data are available pertaining to intra-entity
purchases. Gargiulo was acquired on January 1, 2010.
Assume the equity method is used. The following data are available pertaining to Gargiulo's
income and dividends.
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50. Compute the equity in earnings of Gargiulo reported on Posito's books for 2010.
A. $63,000.
B. $62,730.
C. $63,270.
D. $70,000.
E. $62,700.
A. $76,500.
B. $77,130.
C. $75,870.
D. $75,600.
E. $75,800.
A. $84,600.
B. $84,375.
C. $83,925.
D. $84,825.
E. $84,850.
53. Compute the noncontrolling interest in Gargiulo's net income for 2010.
A. $6,970.
B. $7,000.
C. $7,030.
D. $6,270.
E. $6,230.
A. $8,500.
B. $8,570.
C. $8,430.
D. $8,400.
E. $7,580.
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A. $9,400.
B. $9,375.
C. $9,425.
D. $9,325.
E. $8,485.
56. For consolidation purposes, what amount would be debited to cost of goods sold for the
2010 consolidation worksheet with regard to unrealized gross profit of the intra-entity transfer
of merchandise?
A. $300.
B. $240.
C. $2,000.
D. $1,600.
E. $270.
2011 consolidation worksheet with regard to the unrealized gross profit of the 2011 intraentity transfer of merchandise?
A. $1,000.
B. $800.
C. $3,000.
D. $2,400.
E. $900.
A. $600.
B. $750.
C. $3,760.
D. $3,000.
E. $675.
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59. For consolidation purposes, what amount would be debited to January 1 retained earnings
for the 2010 consolidation worksheet entry with regard to the unrealized gross profit of the
2010 intra-entity transfer of merchandise?
A. $0.
B. $1,600.
C. $300.
D. $240.
E. $270.
A. $240.
B. $300.
C. $2,000.
D. $1,600.
E. $270.
A. $3,000.
B. $2,400.
C. $1,000.
D. $800.
E. $900.
Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti
reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period,
Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold
merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the
year, Shannon still possesses 30 percent of this inventory.
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62. Compute consolidated sales.

A. $10,000,000.
B. $10,126,000.
C. $10,140,000.
D. $10,200,000.
E. $10,260,000.
63. Compute consolidated cost of goods sold.

A. $7,500,000.
B. $7,600,000.
C. $7,615,000.
D. $7,604,500.
E. $7,660,000.
64. Assume the same information, except Shannon sold inventory to Patti. Compute
consolidated sales.
A. $10,000,000.
B. $10,126,000.
C. $10,140,000.
D. $10,200,000.
E. $10,260,000.
Wilson owned equipment with an estimated life of 10 years when it was acquired for an
original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2010. On
January 1, 2010, Wilson realized that the useful life of the equipment was longer than
originally anticipated, at ten remaining years.
On April 1, 2010 Simon Company, a 90% owned subsidiary of Wilson Company, bought the
equipment from Wilson for $68,250 and for depreciation purposes used the estimated
remaining life as of that date. The following data are available pertaining to Simon's income
and dividends:
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65. Compute the gain on transfer of equipment reported by Wilson for 2010.
A. $19,500.
B. $18,250.
C. $11,750.
D. $38,250.
E. $37,500.
66. Compute the amortization of gain through a depreciation adjustment for 2010 for
consolidation purposes.
A. $1,950.
B. $1,825.
C. $1,500.
D. $2,000.
E. $5,250.
A. $1,950.
B. $1,825.
C. $2,000.
D. $1,500.
E. $7,000.
A. $1,925.
B. $1,825.
C. $2,000.
D. $1,500.
E. $7,000.
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69. Compute Wilson's share of income from Simon for consolidation for 2010.
A. $72,000.
B. $90,000.
C. $73,575.
D. $73,800.
E. $72,500.
A. $108,000.
B. $110,000.
C. $106,000.
D. $109,825.
E. $109,800.
A. $118,825.
B. $115,000.
C. $117,000.
D. $119,000.
E. $118,800.
On January 1, 2010, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred
equipment with a 10-year life (six of which remain with no salvage value) to Collins in
exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at
a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is
used. Smeder reported net income of $28,000 and $32,000 for 2010 and 2011, respectively.
All net income effects of the intra-entity transfer are attributed to the seller for consolidation
purposes.
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72. Compute the gain recognized by Smeder Company relating to the equipment for 2010.
A. $36,000.
B. $34,000.
C. $12,000.
D. $10,000.
E. $0.
73. Compute Collins' share of Smeder's net income for 2010.

A. $12,400.
B. $14,400.
C. $11,200.
D. $12,800.
E. $18,000.

A. $27,600.
B. $23,600.
C. $27,200.
D. $24,000.
E. $34,000.
75. For consolidation purposes, what net debit or credit will be made for the year 2010
relating to the accumulated depreciation for the equipment transfer?
A. Debit accumulated depreciation, $46,000.
B. Debit accumulated depreciation, $48,000.
C. Credit accumulated depreciation, $48,000.
D. Credit accumulated depreciation, $46,000.
E. Debit accumulated depreciation, $2,000.
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76. What is the net effect on consolidated net income in 2010 due to the equipment transfer?
A. Increase $2,000.
B. Decrease $12,000.
C. Decrease $10,000.
D. Decrease $14,000.
E. Increase $10,000.
Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on
March 1, 2010, for $75,000. The land originally cost Leo $60,000. Stiller reported net income
of $125,000 and $140,000 for 2010 and 2011, respectively. Leo uses the equity method to
account for its investment.
77. Compute the gain or loss on the intra-entity sale of land.

A. $15,000 loss.
B. $15,000 gain.
C. $50,000 loss.
D. $50,000 gain.
E. $65,000 gain.
78. On a consolidation worksheet, what adjustment would be made for 2010 regarding the
land transfer?
A. Debit gain for $50,000.
B. Credit gain for $50,000.
C. Debit land for $15,000.
D. Credit land for $15,000.
E. Credit gain for $15,000.
79. On a consolidation worksheet, having used the equity method, what adjustment would be
made for 2011 regarding the land transfer?
A. Debit retained earnings for $15,000.
B. Credit retained earnings for $15,000.
C. Debit retained earnings for $50,000.
D. Credit retained earnings for $50,000.
E. Debit investment in Stiller for $15,000.
5-25
80. Compute income from Stiller on Leo's books for 2010.

A. $110,000.
B. $100,000.
C. $125,000.
D. $85,000.
E. $88,000.

A. $140,000.
B. $97,000.
C. $125,000.
D. $100,000.
E. $112,000.
Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010,
for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000,
$180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land it
purchased from Stark in 2010 for $92,000 in 2012.

A. $80,000 gain.
B. $80,000 loss.
C. $5,000 gain.
D. $5,000 loss.
E. $85,000 loss.
83. Which of the following will be included in a consolidation entry for 2010?
A. Debit loss for $5,000.
B. Credit loss for $5,000.
C. Credit land for $5,000.
D. Debit gain for $5,000.
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C. Debit investment in subsidiary for $5,000.
D. Credit investment in subsidiary for $5,000.
E. Credit land for $5,000.
85. Compute income from Stark reported on Parker's books for 2010.
A. $205,000.
B. $200,000.
C. $180,000.
D. $175,500.
E. $184,500.
A. $185,000.
B. $157,500.
C. $166,500.
D. $162,000.
E. $180,000.
87. Compute Parker's reported gain or loss relating to the land for 2012.
A. $12,000 gain.
B. $5,000 loss.
C. $12,000 loss.
D. $7,000 gain.
E. $7,000 loss.
88. Compute Stark's reported gain or loss relating to the land for 2012.
A. $5,000 loss.
B. $5,000 gain.
C. $7,000 loss.
D. $7,000 gain.
E. $0.
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89. Compute the gain or loss relating to the land that will be reported in consolidated net
income for 2012.
A. $5,000 loss.
B. $7,000 gain.
C. $12,000 gain.
D. $7,000 loss.
E. $12,000 loss.
A. $204,300.
B. $202,500.
C. $193,500.
D. $191,700.
E. $198,000.
Pepe, Incorporated acquired 60% of Devin Company on January 1, 2010. On that date Devin
sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated
depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of
$300,000 and $325,000 for 2010 and 2011, respectively. Pepe uses the equity method to
account for its investment in Devin.
91. What is the gain or loss on equipment reported by Devin for 2010?
A. $54,000 gain.
B. $21,000 loss.
C. $21,000 gain.
D. $9,000 loss.
E. $9,000 gain.
92. What is the consolidated gain or loss on equipment for 2010?

A. $0.
B. $9,000 gain.
C. $9,000 loss.
D. $21,000 gain.
E. $21,000 loss.
5-28
93. Compute the income from Devin reported on Pepe's books for 2010.
A. $174,600.
B. $184,800.
C. $172,000.
D. $171,000.
E. $180,000.
A. $190,200.
B. $196,000.
C. $194,400.
D. $187,000.
E. $195,000.
95. Compute the noncontrolling interest in the net income of Devin for 2010.
A. $116,400.
B. $120,400.
C. $120,000.
D. $123,200.
E. $112,000.
A. $126,800.
B. $132,000.
C. $122,000.
D. $130,000.
E. $129,600.
5-29

Matching Questions
97. For each of the following situations (1 - 10), select the correct entry (A - E) that would be
required on a consolidation worksheet.
1. None of the
above
2. Debit retained
earnings
3. Debit retained
earnings
4. Credit retained
earnings
5. Debit retained
earnings
6. Debit retained
earnings
7. Credit retained
earnings
8. Credit
investment in
subsidiary
9. None of the
above
10. Debit
investment in
subsidiary
Upstream beginning inventory profit, using the initial

value method.
Downstream beginning inventory profit, using the
initial value method.
Upstream ending inventory profit, using the initial
value method.
Downstream ending inventory profit, using the initial
value method.
Upstream transfer of depreciable assets, in the period
after transfer, where subsidiary recognizes a gain, using
the initial value method.
Downstream transfer of depreciable assets, in the
period after transfer, where parent recognizes a gain,
using the initial value method.
Upstream transfer of land, in the period after transfer,
where subsidiary recognizes a loss, using the initial
value method.
Downstream transfer of land, in the period after
transfer, where parent recognizes a loss, using the initial
value method.
Eliminate income from subsidiary, recorded under
the equity method.
Eliminate recorded amortization of acquisition fair
value over book value, recorded under the equity
method.
____
____
____
____
____
____
____
____
____
____
Essay Questions
98. On April 7, 2011, Pate Corp. sold land to Shannahan Co., its subsidiary. From a
consolidated point of view, when will the gain on this transfer actually be earned?
5-30
99. Throughout 2011, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a
consolidated point of view, when will the gain on this transfer be earned?
100. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2011.
Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value
of $120,000. How should this transaction be accounted for by the consolidated entity?
101. During 2011, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth
still owned all of the inventory at the end of 2011. Why must the gross profit on the sale be
deferred when consolidated financial statements are prepared at the end of 2011?
102. How does a gain on an intra-entity sale of equipment affect the calculation of a
noncontrolling interest?
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103. How do upstream and downstream inventory transfers differ in their effect in a year-end
consolidation?
104. How is the gain on an intra-entity transfer of a depreciable asset realized?
105. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2011.
During 2011, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of
the land was made at the end of 2011. What errors will this omission cause in the
consolidated financial statements?
106. Why do intra-entity transfers between the component companies of a business

combination occur so frequently?
5-32
107. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards'
inventory in 2011. The transfer price was equal to 30 percent of the sales price. When
preparing consolidated financial statements, what amount of these sales is eliminated?
108. What is meant by unrealized inventory gains, and how are they treated on a
consolidation worksheet?
109. What is the impact on the noncontrolling interest of a subsidiary when there are
downstream transfers of inventory between the parent and subsidiary companies?
110. When is the gain on an intra-entity transfer of land realized?
5-33
111. What is the purpose of the adjustments to depreciation expense within the consolidation
process when there has been an intra-entity transfer of a depreciable asset?
112. Tara Company owns 80 percent of the common stock of Stodd Inc. In the current year,
Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period,
Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold
merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the
year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer
the unrealized gain.
113. King Corp. owns 85% of James Co. King uses the equity method to account for this
investment. During 2011, King sells inventory to James for $500,000. The inventory
originally cost King $420,000. At 12/31/11, 25% of the goods were still in James' inventory.
Required:
Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation
worksheet.
5-34
114. Flintstone Inc. acquired all of Rubble Co. on January 1, 2011. Flintstone decided to use
the initial value method to account for this investment. During 2011, Flintstone sold to Rubble
for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were
still in Rubble's inventory.
Required:
Prepare Consolidation Entry TI for the intra-entity transfer and Consolidation Entry G for the
ending inventory adjustment necessary for the consolidation worksheet at 12/31/11.
115. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the
end of 2011. The goods had cost Yoderly $105,000 and the selling price was $140,000.
Nelson had not sold any of the goods by the end of the year.
Required:
Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2011.
116. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial
value method to account for this investment. During 2010, Strayten sold Quint goods which
had cost $48,000. The selling price was $64,000. Quint still had one-eighth of the goods on
hand at the end of the year.
Required:
Prepare Consolidation Entry *G, which would have to be recorded at the end of 2011.
5-35
117. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2011,
Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold
to Hambly for $145,000. Stroban's reported net income for 2011 was $119,000.
Required:
What was the noncontrolling interest's share of Stroban Co.'s net income?
118. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co.
During 2011, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000, and they
were sold to Lawler for $100,000. At the end of 2011, Lawler still held 30% of the inventory.
Required:
How should the sale between Lawler and Ritter be accounted for in a consolidation
worksheet? Show worksheet entries to support your answer.
Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use
the perpetual inventory method, and Virginia decided to use the partial equity method to
account for this investment. During 2010, Virginia made cash sales of $400,000 to Stateside.
The gross profit rate was 30% of the selling price. By the end of 2010, Stateside had sold 75%
of the goods to outside parties for $420,000 cash.
5-36
119. Prepare journal entries for Virginia and Stateside to record the sales/purchases during
2010.
120. Prepare the consolidation entries that should be made at the end of 2010.
121. Prepare any 2011 consolidation worksheet entries that would be required regarding the
2010 inventory transfer.
5-37
Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of
Icecap's asset and liability accounts at that time were considered to be equal to their fair
values. Polar's acquisition value corresponded to the underlying book value of Icecap so that
no allocations or goodwill resulted from the transaction.
The following selected account balances were from the individual financial records of these
two companies as of December 31, 2011:
122. Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity
transfers were $130,000 in 2010 and $165,000 in 2011. Of this inventory, $39,000 of the 2010
transfers were retained and then sold by Icecap in 2011 while $55,000 of the 2011 transfers
were held until 2012.
Required:
For the consolidated financial statements for 2011, determine the balances that would appear
for the following accounts: (1) Cost of Goods Sold, (2) Inventory, and (3) Noncontrolling
Interest in Subsidiary's Net Income.
5-38
123. Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity
transfers were retained and then sold by Polar in 2011 whereas $49,000 of the 2011 transfers
Required:
124. Polar sold a building to Icecap on January 1, 2010 for $112,000, although the book value
of this asset was only $70,000 on that date. The building had a five-year remaining useful life
and was to be depreciated using the straight-line method with no salvage value.
Required:
for the following accounts: (1) Buildings (net), (2) Operating expenses, and (3)
Noncontrolling Interest in Subsidiary's Net Income.
On January 1, 2011, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary)
for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only
$98,000 when transferred. On that date, the equipment had a five-year remaining life.
Depreciation expense was calculated using the straight-line method.
Musial earned $308,000 in net income in 2011 (not including any investment income) while
Matin reported $126,000. Assume there is no amortization related to the original investment.
5-39
125. What is consolidated net income for 2011?
126. Assuming that Musial owned only 90% of Matin, what is consolidated net income for
2009?
127. Prepare a schedule of consolidated net income and the share to controlling and
noncontrolling interests for 2011, assuming that Musial owned only 90% of Matin and the
equipment transfer had been upstream.
5-40
Chapter 05 Consolidated Financial Statements - Intra-Entity Asset Transactions

Answer Key
Multiple Choice Questions
1. On November 8, 2011, Power Corp. sold land to Wood Co., its wholly owned subsidiary.
The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the
combination, when is the gain on the sale of the land realized?
A. Proportionately over a designated period of years.
B. When Wood Co. sells the land to a third party.
C. No gain can be recognized.
D. As Wood uses the land.
E. When Wood Co. begins using the land productively.
AACSB: Reflective thinking

AICPA FN: Measurement
Bloom's: Comprehension
Difficulty: Easy
Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from
the accounting records of the year of transfer and subsequent years.
Edgar Co. acquired 60% of Stendall Co. on January 1, 2011. During 2011, Edgar made
several sales of inventory to Stendall. The cost and selling price of the goods were $140,000
and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2011.
Consolidated cost of goods sold for 2011 was $2,140,000 because of a consolidating
adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory.
5-41
2. How would consolidated cost of goods sold have differed if the inventory transfers had
been for the same amount and cost, but from Stendall to Edgar?
A. Consolidated cost of goods sold would have remained $2,140,000.
B. Consolidated cost of goods sold would have been more than $2,140,000 because of the
controlling interest in the subsidiary.
C. Consolidated cost of goods sold would have been less than $2,140,000 because of the
D. Consolidated cost of goods sold would have been more than $2,140,000 because of the
E. The effect on consolidated cost of goods sold cannot be predicted from the information
provided.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Learning Objective: 05-05 Understand the difference between upstream and downstream intra-entity transfers and how each affects the
computation of noncontrolling interest balances.
5-42
3. How would noncontrolling interest in net income have differed if the transfers had been for
the same amount and cost, but from Stendall to Edgar?
A. Noncontrolling interest in net income would have decreased by $6,000.
B. Noncontrolling interest in net income would have increased by $24,000.
C. Noncontrolling interest in net income would have increased by $20,000.
D. Noncontrolling interest in net income would have decreased by $18,000.
E. Noncontrolling interest in net income would have decreased by $56,000.
AACSB: Analytic
Bloom's: Application
Difficulty: Medium
Learning Objective: 05-03 Prepare the consolidation entry to eliminate any intraentity inventory gross profit that remains unrealized at (a)
the end of the year of transfer and (b) the beginning of the subsequent period.
4. On January 1, 2011, Race Corp. acquired 80% of the voting common stock of Gallow Inc.
During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still
owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's
net income was $806,000. Race decided to use the equity method to account for this
investment. What was the noncontrolling interest's share of consolidated net income?
A. $3,600.
B. $22,800.
C. $30,900.
D. $32,900.
E. $40,800.
AACSB: Analytic
Difficulty: Easy
5-43
5. Webb Co. acquired 100% of Rand Inc. on January 5, 20011. During 2011, Webb sold
goods to Rand for $2,400,000 that cost Webb $1,800,000. Rand still owned 40% of the goods
at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for
Rand. What was consolidated cost of goods sold?
A. $17,200,000.
B. $15,040,000.
C. $14,800,000.
D. $16,960,000.
E. $14,560,000.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 05-02 Prepare the consolidation entry to eliminate the sales and purchases balances that are created by the intraentity
transfer of inventory.
6. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2010. During 2010, Gentry
sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned
12% of the goods at the end of the year. In 2011, Gentry sold goods with a cost of $800,000 to
Gaspard Farms for $1,000,000, and Gaspard Farms still owned 10% of the goods at year-end.
For 2011, cost of goods sold was $5,400,000 for Gentry and $1,200,000 for Gaspard Farms.
What was consolidated cost of goods sold for 2011?
A. $6,600,000.
B. $6,604,000.
C. $5,620,000.
D. $5,596,000.
E. $5,625,000.
AACSB: Analytic
Difficulty: Hard
Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an
intra-entity gross profit from the year of transfer into the year of disposal or consumption.
5-44
7. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2011, Kent
made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost
was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory.
Kent's reported net income was $300,000. What was the noncontrolling interest in Kent's net
income?
A. $90,000.
B. $85,200.
C. $54,000.
D. $94,800.
E. $86,640.
AACSB: Analytic
Difficulty: Medium
8. Justings Co. owned 80% of Evana Corp. During 2011, Justings sold to Evana land with a
book value of $48,000. The selling price was $70,000. In its accounting records, Justings
should
A. not recognize a gain on the sale of the land since it was made to a related party.
B. recognize a gain of $17,600.
C. defer recognition of the gain until Evana sells the land to a third party.
D. recognize a gain of $8,000.
E. recognize a gain of $22,000.
AACSB: Analytic
Difficulty: Medium
5-45
9. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2010,
Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to
Norek for $45,000. Thelma's reported net income for 2010 was $119,000. What is the
noncontrolling interest's share of Thelma's net income?
A. $35,700.
B. $31,800.
C. $39,600.
D. $22,200.
E. $26,100.
AACSB: Analytic
Difficulty: Medium
Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2010,
Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente
$140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The
equipment had a remaining useful life of five years and a $0 salvage value. Straight-line
depreciation is used by both Clemente and Snider.
A. $105,000.
B. $100,000.
C. $95,000.
D. $80,000.
E. $85,000.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intra-entity fixed asset
transfers across affiliated entities.
5-46
A. $110,000.
B. $105,000.
C. $100,000.
D. $90,000.
E. $60,000.
AACSB: Analytic
Difficulty: Hard
12. During 2010, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The
inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the
combination, when is the $14,000 gain realized?
A. When the goods are sold to a third party by Lord.
B. When Lord pays Von for the goods.
C. When Von sold the goods to Lord.
D. When the goods are used by Lord.
E. No gain can be recognized since the transaction was between related parties.

Difficulty: Easy
Learning Objective: 05-01 Understand that intra-entity asset transfers often create accounting effects within the financial records of
affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.
5-47
13. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2010, Devin
made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the
beginning inventory, and $25,000 at the end of the year. Devin reported net income of
$137,000 for 2010. Bauerly decided to use the equity method to account for the investment.
What is the noncontrolling interest's share of Devin's net income for 2010?
A. $41,100.
B. $33,600.
C. $21,600.
D. $45,600.
E. $36,600.
AACSB: Analytic
Difficulty: Medium
14. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations'
balance sheets dated December 31, 2010, include the following balances for land: for Chain-$416,000, and for Shannon--$256,000. On the original date of acquisition, the book value of
Shannon's land was equal to its fair value. On April 4, 2011, Chain sold to Shannon a parcel
of land with a book value of $65,000. The selling price was $83,000. There were no other
transactions which affected the companies' land accounts during 2010. What is the
consolidated balance for land on the 2011 balance sheet?
A. $672,000.
B. $690,000.
C. $755,000.
D. $737,000.
E. $654,000.
AACSB: Analytic
Difficulty: Medium
5-48
15. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of
inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in
2010 and $500,000 in 2011. At the end of each year, Gibson still owned 30% of the goods.
Net income for Sparis was $912,000 during 2011. What was the noncontrolling interest's
share of Sparis' net income for 2011?
A. $85,680.
B. $90,600.
C. $90,720.
D. $91,680.
E. $91,800.
AACSB: Analytic
Difficulty: Hard
16. On January 1, 2011, Payton Co. sold equipment to its subsidiary, Starker Corp., for
$115,000. The equipment had cost $125,000, and the balance in accumulated depreciation
was $45,000. The equipment had an estimated remaining useful life of eight years and $0
salvage value. Both companies use straight-line depreciation. On their separate 2011 income
statements, Payton and Starker reported depreciation expense of $84,000 and $60,000,
respectively. The amount of depreciation expense on the consolidated income statement for
2011 would have been
A. $144,000.
B. $148,375.
C. $109,000.
D. $134,000.
E. $139,625.
AACSB: Analytic
Difficulty: Medium
5-49
17. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on
January 1, 2011. During the year, Yukon made sales of inventory to Ontario. The inventory
cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the
goods in its inventory at the end of the year. The amount of unrealized intercompany profit
that should be eliminated in the consolidation process at the end of 2011 is
A. $15,000.
B. $20,000.
C. $32,500.
D. $30,000.
E. $110,000.
AACSB: Analytic
Difficulty: Medium
18. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2011, Kile sold
merchandise to Prince for $140,000. At December 31, 2011, 50% of this merchandise
remained in Prince's inventory. For 2011, gross profit percentages were 30% of sales for
Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending
inventory at December 31, 2011 that should be eliminated in the consolidation process is
A. $28,000.
B. $56,000.
C. $22,400.
D. $21,000.
E. $42,000.
AACSB: Analytic
Difficulty: Medium
Pot Co. holds 90% of the common stock of Skillet Co. During 2011, Pot reported sales of
$1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of
$420,000 and cost of goods sold of $252,000.
5-50
19. Included in the amounts for Pot's sales were Pot's sales of merchandise to Skillet for
$140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as
sales to outsiders. Skillet still had 40% of the intra-entity sales as inventory at the end of 2011.
A. $1,400,000 and $952,000.
B. $1,400,000 and $966,000.
C. $1,540,000 and $1,078,000.
D. $1,400,000 and $1,022,000.
E. $1,540,000 and $1,092,000.
AACSB: Analytic
Difficulty: Medium
20. Included in the amounts for Skillet's sales were Skillet's sales of merchandise to Pot for
$140,000. There were no sales from Pot to Skillet. Intra-entity sales had the same markup as
sales to outsiders. Pot still had 40% of the intra-entity sales as inventory at the end of 2011.
A. $1,400,000 and $952,000.
B. $1,400,000 and $966,000.
C. $1,540,000 and $1,078,000.
D. $1,400,000 and $974,400.
E. $1,540,000 and $1,092,000.
AACSB: Analytic
Difficulty: Hard
5-51
21. The reported sales did not include any intra-entity sales. In addition to the reported
amounts, there were intra-entity sales from Pot to Skillet in the amount of $140,000. There
were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders.
Skillet still had 40% of the intra-entity sales as inventory at the end of 2011. What are
consolidated sales and cost of goods sold for 2011?
A. $1,400,000 and $1,071,000.
B. $1,400,000 and $966,000.
C. $1,540,000 and $1,078,000.
D. $1,400,000 and $1,022,000.
E. $1,540,000 and $1,092,000.
AACSB: Analytic
Difficulty: Medium
22. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1,
2009, Dalton acquired a building with a ten-year life for $420,000. No salvage value was
anticipated and the building was to be depreciated on the straight-line basis. On January 1,
2011, Dalton sold this building to Shrugs for $392,000. At that time, the building had a
remaining life of eight years but still no expected salvage value. In preparing financial
statements for 2011, how does this transfer affect the calculation of Dalton's share of
consolidated net income?
A. Consolidated net income must be reduced by $44,800.
B. Consolidated net income must be reduced by $50,400.
C. Consolidated net income must be reduced by $49,000.
D. Consolidated net income must be reduced by $56,000.
E. Consolidated net income must be reduced by $34,300.
AACSB: Analytic
Difficulty: Medium
5-52
On January 1, 2011, Pride, Inc. acquired 80% of the outstanding voting common stock of
Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment,
$28,000 was allocated to equipment (with a five-year life) that had been undervalued on
Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not
been impaired.
As of December 31, 2011, before preparing the consolidated worksheet, the financial
statements appeared as follows:
During 2011, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only
half of this purchase had been paid for by Strong by the end of the year. 60% of these goods
were still in the company's possession on December 31.
5-53
23. What is the total of consolidated revenues?

A. $700,000.
B. $644,000.
C. $588,000.
D. $560,000.
E. $840,000.
AACSB: Analytic
Difficulty: Medium
24. What is the total of consolidated operating expenses?

A. $42,000.
B. $47,600.
C. $53,200.
D. $49,000.
E. $35,000.
AACSB: Analytic
Difficulty: Medium
25. What is the total of consolidated cost of goods sold?

A. $196,000.
B. $212,800.
C. $184,800.
D. $203,000.
E. $168,000.
AACSB: Analytic
Difficulty: Medium
5-54
26. What is the consolidated total of noncontrolling interest appearing in the balance sheet?
A. $100,800.
B. $97,440.
C. $93,800.
D. $120,400.
E. $117,040.
AACSB: Analytic
Difficulty: Medium
27. What is the consolidated total for equipment (net) at December 31, 2011?
A. $952,000.
B. $1,058,400.
C. $1,069,600.
D. $1,064,000.
E. $1,066,800.
AACSB: Analytic
Difficulty: Medium
28. What is the consolidated total for inventory at December 31, 2011?
A. $336,000.
B. $280,000.
C. $364,000.
D. $347,200.
E. $349,300.
AACSB: Analytic
Difficulty: Medium
5-55
Strickland Company sells inventory to its parent, Carter Company, at a profit during 2010.
One-third of the inventory is sold by Carter in 2010.
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
5-56
sales?
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
sales?
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
5-57
33. In the consolidation worksheet for 2011, assuming Carter uses the initial value method of
accounting for its investment in Strickland, which of the following choices would be a debit
sales?
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
34. In the consolidation worksheet for 2011, assuming Carter uses the initial value methd of
accounting for its investment in Strickland, which of the following choices would be a credit
sales?
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2010.
One-third of the inventory is sold by Walsh uses the equity method to account for its
investment in Fisher.
5-58
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
5-59
sales?
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
sales?
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
5-60
sales?
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
sales?
C. Inventory.
E. Sales.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
5-61
A. Income from subsidiary will be lower by the amount of the ending inventory profit
B. Income from subsidiary will be higher by the amount of the ending inventory profit
C. Income from subsidiary will be reduced for downstream ending inventory profit but not for
upstream profit, before the effect of the noncontrolling interest.
D. Income from subsidiary will be reduced for upstream ending inventory profit but not for
downstream profit, before the effect of the noncontrolling interest.
E. Income from subsidiary will be the same for upstream and downstream profit.

Difficulty: Hard
A. Income from subsidiary will be lower by the amount of the beginning inventory profits
B. Income from subsidiary will be higher by the amount of the beginning inventory profits
C. Income from subsidiary will be reduced for downstream ending inventory profits but not
for upstream profits, before the noncontrolling interest.
D. Income from subsidiary will be reduced for upstream ending inventory profits but not for
downstream profits, before the noncontrolling interest.
E. Income from subsidiary will be the same for upstream and downstream profits.

Difficulty: Hard
5-62
43. Which of the following statements is true regarding inventory transfers between a parent
and its subsidiary, using the initial value method?
A. The sale of merchandise between a parent and its subsidiary represents an arm's-length
transaction and thus provides the basis for the recognition of profit on such transfers.
B. Profits on upstream transfers associated with the parent's ending inventory are subtracted
calculation of parent's income from subsidiary. This procedure is inappropriate because all the
C. Profits on upstream transfers associated with the parent's ending inventory are subtracted
calculation of parent's income from subsidiary. This procedure is appropriate even if all the
D. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated
parties should be included in consolidated inventory at their transfer price.
E. Noncontrolling interest in subsidiary's net income should not be reduced for upstream or
downstream ending inventory profits.

Difficulty: Medium
44. Which of the following statements is true regarding an intra-entity sale of land?
A. A loss is always recognized but a gain is eliminated in a consolidated income statement.
B. A loss and a gain are always eliminated in a consolidated income statement.
C. A loss and a gain are always recognized in a consolidated income statement.
D. A gain is always recognized but a loss is eliminated in a consolidated income statement.
E. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive
income.

Bloom's: Knowledge
Difficulty: Easy
5-63
45. Parent sold land to its subsidiary for a gain in 2008. The subsidiary sold the land
externally for a gain in 2011. Which of the following statements is true?
A. A gain will be reported in the consolidated income statement in 2008.
B. A gain will be reported in the consolidated income statement in 2011.
C. No gain will be reported in the 2011 consolidated income statement.
D. Only the parent company will report a gain in 2011.
E. The subsidiary will report a gain in 2008.

Difficulty: Easy
46. An intra-entity sale took place whereby the transfer price exceeded the book value of a
A. A worksheet entry is made with a debit to gain for a downstream transfer.
B. A worksheet entry is made with a debit to gain for an upstream transfer.
C. A worksheet entry is made with a debit to investment in subsidiary for a downstream
D. A worksheet entry is made with a debit to retained earnings for a downstream transfer,
regardless of the method used account for the investment.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
5-64
47. An intra-entity sale took place whereby the book value exceeded the transfer price of a
A. A worksheet entry is made with a debit to retained earnings for an upstream transfer.
B. A worksheet entry is made with a credit to retained earnings for an upstream transfer.
C. A worksheet entry is made with a debit to retained earnings for a downstream transfer.
D. A worksheet entry is made with a debit to investment in subsidiary for a downstream
transfer.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
48. An intra-entity sale took place whereby the transfer price was less than the book value of a
A. A worksheet entry is made with a debit to investment in subsidiary for an upstream
transfer.
B. A worksheet entry is made with a debit to investment in subsidiary for a downstream
transfer.
C. A worksheet entry is made with a credit to investment in subsidiary for a downstream
D. A worksheet entry is made with a debit to retained earnings for an upstream transfer,
regardless of the method used to account for the investment.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
5-65
49. Which of the following statements is true concerning an intra-entity transfer of a

depreciable asset?
A. Noncontrolling interest in subsidiary's net income is never affected by a gain on the
transfer.
B. Noncontrolling interest in subsidiary's net income is always affected by a gain on the
transfer.
C. Noncontrolling interest in subsidiary's net income is affected by a downstream gain only.
D. Noncontrolling interest in subsidiary's net income is affected only when the transfer is
upstream.
E. Noncontrolling interest in subsidiary's net income is increased by an upstream gain in the
year of transfer.

Bloom's: Knowledge
Difficulty: Easy
Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito
at a 25% profit on selling price. The following data are available pertaining to intra-entity
purchases. Gargiulo was acquired on January 1, 2010.
Assume the equity method is used. The following data are available pertaining to Gargiulo's
income and dividends.
5-66
A. $63,000.
B. $62,730.
C. $63,270.
D. $70,000.
E. $62,700.
AACSB: Analytic
Difficulty: Medium
A. $76,500.
B. $77,130.
C. $75,870.
D. $75,600.
E. $75,800.
AACSB: Analytic
Difficulty: Medium
5-67
A. $84,600.
B. $84,375.
C. $83,925.
D. $84,825.
E. $84,850.
AACSB: Analytic
Difficulty: Medium
A. $6,970.
B. $7,000.
C. $7,030.
D. $6,270.
E. $6,230.
AACSB: Analytic
Difficulty: Medium
5-68
A. $8,500.
B. $8,570.
C. $8,430.
D. $8,400.
E. $7,580.
AACSB: Analytic
Difficulty: Medium
A. $9,400.
B. $9,375.
C. $9,425.
D. $9,325.
E. $8,485.
AACSB: Analytic
Difficulty: Medium
5-69
2010 consolidation worksheet with regard to unrealized gross profit of the intra-entity transfer
of merchandise?
A. $300.
B. $240.
C. $2,000.
D. $1,600.
E. $270.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
A. $1,000.
B. $800.
C. $3,000.
D. $2,400.
E. $900.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
5-70
A. $600.
B. $750.
C. $3,760.
D. $3,000.
E. $675.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
A. $0.
B. $1,600.
C. $300.
D. $240.
E. $270.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
5-71
A. $240.
B. $300.
C. $2,000.
D. $1,600.
E. $270.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
A. $3,000.
B. $2,400.
C. $1,000.
D. $800.
E. $900.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti
reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period,
Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold
merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the
year, Shannon still possesses 30 percent of this inventory.
5-72
62. Compute consolidated sales.

A. $10,000,000.
B. $10,126,000.
C. $10,140,000.
D. $10,200,000.
E. $10,260,000.
AACSB: Analytic
Difficulty: Medium
63. Compute consolidated cost of goods sold.

A. $7,500,000.
B. $7,600,000.
C. $7,615,000.
D. $7,604,500.
E. $7,660,000.
AACSB: Analytic
Difficulty: Medium
64. Assume the same information, except Shannon sold inventory to Patti. Compute
consolidated sales.
A. $10,000,000.
B. $10,126,000.
C. $10,140,000.
D. $10,200,000.
E. $10,260,000.
AACSB: Analytic
Difficulty: Medium
5-73
Wilson owned equipment with an estimated life of 10 years when it was acquired for an
original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2010. On
January 1, 2010, Wilson realized that the useful life of the equipment was longer than
originally anticipated, at ten remaining years.
On April 1, 2010 Simon Company, a 90% owned subsidiary of Wilson Company, bought the
equipment from Wilson for $68,250 and for depreciation purposes used the estimated
remaining life as of that date. The following data are available pertaining to Simon's income
and dividends:
65. Compute the gain on transfer of equipment reported by Wilson for 2010.
A. $19,500.
B. $18,250.
C. $11,750.
D. $38,250.
E. $37,500.
AACSB: Analytic
Difficulty: Hard
A. $1,950.
B. $1,825.
C. $1,500.
D. $2,000.
E. $5,250.
AACSB: Analytic
Difficulty: Hard
5-74
A. $1,950.
B. $1,825.
C. $2,000.
D. $1,500.
E. $7,000.
AACSB: Analytic
Difficulty: Medium
A. $1,925.
B. $1,825.
C. $2,000.
D. $1,500.
E. $7,000.
AACSB: Analytic
Difficulty: Medium
A. $72,000.
B. $90,000.
C. $73,575.
D. $73,800.
E. $72,500.
AACSB: Analytic
Difficulty: Medium
5-75
A. $108,000.
B. $110,000.
C. $106,000.
D. $109,825.
E. $109,800.
AACSB: Analytic
Difficulty: Medium
A. $118,825.
B. $115,000.
C. $117,000.
D. $119,000.
E. $118,800.
AACSB: Analytic
Difficulty: Medium
On January 1, 2010, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred
equipment with a 10-year life (six of which remain with no salvage value) to Collins in
exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at
a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is
used. Smeder reported net income of $28,000 and $32,000 for 2010 and 2011, respectively.
All net income effects of the intra-entity transfer are attributed to the seller for consolidation
purposes.
5-76
72. Compute the gain recognized by Smeder Company relating to the equipment for 2010.
A. $36,000.
B. $34,000.
C. $12,000.
D. $10,000.
E. $0.
AACSB: Analytic
Difficulty: Medium

A. $12,400.
B. $14,400.
C. $11,200.
D. $12,800.
E. $18,000.
AACSB: Analytic
Difficulty: Medium

A. $27,600.
B. $23,600.
C. $27,200.
D. $24,000.
E. $34,000.
AACSB: Analytic
Difficulty: Medium
5-77
75. For consolidation purposes, what net debit or credit will be made for the year 2010
relating to the accumulated depreciation for the equipment transfer?
A. Debit accumulated depreciation, $46,000.
B. Debit accumulated depreciation, $48,000.
C. Credit accumulated depreciation, $48,000.
D. Credit accumulated depreciation, $46,000.
E. Debit accumulated depreciation, $2,000.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
76. What is the net effect on consolidated net income in 2010 due to the equipment transfer?
A. Increase $2,000.
B. Decrease $12,000.
C. Decrease $10,000.
D. Decrease $14,000.
E. Increase $10,000.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on
March 1, 2010, for $75,000. The land originally cost Leo $60,000. Stiller reported net income
of $125,000 and $140,000 for 2010 and 2011, respectively. Leo uses the equity method to
account for its investment.
5-78

A. $15,000 loss.
B. $15,000 gain.
C. $50,000 loss.
D. $50,000 gain.
E. $65,000 gain.
AACSB: Analytic
Difficulty: Easy
78. On a consolidation worksheet, what adjustment would be made for 2010 regarding the
land transfer?
A. Debit gain for $50,000.
B. Credit gain for $50,000.
C. Debit land for $15,000.
D. Credit land for $15,000.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
5-79
79. On a consolidation worksheet, having used the equity method, what adjustment would be
made for 2011 regarding the land transfer?
C. Debit retained earnings for $50,000.
D. Credit retained earnings for $50,000.
E. Debit investment in Stiller for $15,000.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy

A. $110,000.
B. $100,000.
C. $125,000.
D. $85,000.
E. $88,000.
AACSB: Analytic
Difficulty: Medium

A. $140,000.
B. $97,000.
C. $125,000.
D. $100,000.
E. $112,000.
AACSB: Analytic
Difficulty: Easy
5-80
Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010,
for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000,
$180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land it
purchased from Stark in 2010 for $92,000 in 2012.

A. $80,000 gain.
B. $80,000 loss.
C. $5,000 gain.
D. $5,000 loss.
E. $85,000 loss.
AACSB: Analytic
Difficulty: Easy
A. Debit loss for $5,000.
B. Credit loss for $5,000.
C. Credit land for $5,000.
D. Debit gain for $5,000.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
5-81
C. Debit investment in subsidiary for $5,000.
D. Credit investment in subsidiary for $5,000.
E. Credit land for $5,000.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
A. $205,000.
B. $200,000.
C. $180,000.
D. $175,500.
E. $184,500.
AACSB: Analytic
Difficulty: Medium
A. $185,000.
B. $157,500.
C. $166,500.
D. $162,000.
E. $180,000.
AACSB: Analytic
Difficulty: Medium
5-82
87. Compute Parker's reported gain or loss relating to the land for 2012.
A. $12,000 gain.
B. $5,000 loss.
C. $12,000 loss.
D. $7,000 gain.
E. $7,000 loss.
AACSB: Analytic
Difficulty: Easy
88. Compute Stark's reported gain or loss relating to the land for 2012.
A. $5,000 loss.
B. $5,000 gain.
C. $7,000 loss.
D. $7,000 gain.
E. $0.
AACSB: Analytic
Difficulty: Hard
89. Compute the gain or loss relating to the land that will be reported in consolidated net
income for 2012.
A. $5,000 loss.
B. $7,000 gain.
C. $12,000 gain.
D. $7,000 loss.
E. $12,000 loss.
AACSB: Analytic
Difficulty: Medium
5-83
A. $204,300.
B. $202,500.
C. $193,500.
D. $191,700.
E. $198,000.
AACSB: Analytic
Difficulty: Hard
Pepe, Incorporated acquired 60% of Devin Company on January 1, 2010. On that date Devin
sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated
depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of
$300,000 and $325,000 for 2010 and 2011, respectively. Pepe uses the equity method to
account for its investment in Devin.
91. What is the gain or loss on equipment reported by Devin for 2010?
A. $54,000 gain.
B. $21,000 loss.
C. $21,000 gain.
D. $9,000 loss.
E. $9,000 gain.
AACSB: Analytic
Difficulty: Medium
5-84
92. What is the consolidated gain or loss on equipment for 2010?

A. $0.
B. $9,000 gain.
C. $9,000 loss.
D. $21,000 gain.
E. $21,000 loss.
AACSB: Analytic
Difficulty: Easy
A. $174,600.
B. $184,800.
C. $172,000.
D. $171,000.
E. $180,000.
AACSB: Analytic
Difficulty: Medium
A. $190,200.
B. $196,000.
C. $194,400.
D. $187,000.
E. $195,000.
AACSB: Analytic
Difficulty: Medium
5-85
A. $116,400.
B. $120,400.
C. $120,000.
D. $123,200.
E. $112,000.
AACSB: Analytic
Difficulty: Medium
A. $126,800.
B. $130,000.
C. $122,000.
D. $130,000.
E. $129,600.
AACSB: Analytic
Difficulty: Medium
5-86

Matching Questions
97. For each of the following situations (1 - 10), select the correct entry (A - E) that would be
required on a consolidation worksheet.
1. None of the
above
2. Debit retained
earnings
3. Debit retained
earnings
4. Credit retained
earnings
5. Debit retained
earnings
6. Debit retained
earnings
7. Credit retained
earnings
8. Credit
investment in
subsidiary
9. None of the
above
10. Debit
investment in
subsidiary
Upstream beginning inventory profit, using the initial

value method.
Downstream beginning inventory profit, using the
initial value method.
Upstream ending inventory profit, using the initial
value method.
Downstream ending inventory profit, using the initial
value method.
Upstream transfer of depreciable assets, in the period
after transfer, where subsidiary recognizes a gain, using
Downstream transfer of depreciable assets, in the
period after transfer, where parent recognizes a gain, using
Upstream transfer of land, in the period after transfer,
where subsidiary recognizes a loss, using the initial value
method.
Downstream transfer of land, in the period after
transfer, where parent recognizes a loss, using the initial
value method.
Eliminate income from subsidiary, recorded under the
equity method.
2
2
1
1
4
8
Eliminate recorded amortization of acquisition fair

value over book value, recorded under the equity method. 10

Difficulty: Hard
5-87

Essay Questions
98. On April 7, 2011, Pate Corp. sold land to Shannahan Co., its subsidiary. From a
consolidated point of view, when will the gain on this transfer actually be earned?
The gain is earned when Shannahan sells the land to a third party.

Bloom's: Knowledge
Difficulty: Easy
99. Throughout 2011, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a
consolidated point of view, when will the gain on this transfer be earned?
The gain is earned when Leeward uses the goods or sells them to a third party.

Difficulty: Easy
5-88
100. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2011.
Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value
of $120,000. How should this transaction be accounted for by the consolidated entity?
Caleb and Varton are in substance one entity, although in legal form they are separate. The
"sale" of land by Varton should be regarded as a transfer of assets within the entity. No gain
on the transfer should be recognized in the consolidated financial statements since the
earnings process is not complete. Because Caleb recognized a gain in its income statement,
the consolidation process must eliminate the gain. Also, Caleb's separate balance sheet
showed the land at an amount greater than its cost to the combined entity. The consolidation
entry must reduce land to its cost.

Difficulty: Easy
101. During 2011, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth
still owned all of the inventory at the end of 2011. Why must the gross profit on the sale be
deferred when consolidated financial statements are prepared at the end of 2011?
A sale of inventory by a subsidiary to its parent is more accurately understood as a transfer
within the entity. Since Forsyth still owned the inventory at the end of the year, the earnings
process was not yet complete. If recognition of the gross profit on the transfer was allowed,
the parent would be able to manipulate consolidated net income and consolidated net assets
by transferring inventory between parent and subsidiary.

Difficulty: Medium
5-89
102. How does a gain on an intra-entity sale of equipment affect the calculation of a
noncontrolling interest?
If the equipment is sold by the parent to the subsidiary, the sale of the equipment does not
affect the calculation of the noncontrolling interest's share of the subsidiary's net income.
When the sale of equipment is upstream, the gain on the sale must be subtracted from the
subsidiary's income, and this elimination may be allocated between the controlling interest
and noncontrolling interest share of the subsidiary's earnings.

Bloom's: Knowledge
Difficulty: Medium
103. How do upstream and downstream inventory transfers differ in their effect in a year-end
consolidation?
If the sale of inventory is downstream (from parent to subsidiary), any unrealized gain on the
sale does not affect the calculation of noncontrolling interest. When the sale is upstream (from
the subsidiary to the parent), the gain on the sale is associated with the subsidiary. The gain on
goods that the parent still owns should be deducted from the subsidiary's income and this
elimination may be allocated between the controlling interest and the noncontrolling interest's
share of the subsidiary's earnings.

Difficulty: Medium
5-90
104. How is the gain on an intra-entity transfer of a depreciable asset realized?

The gain on an intra-entity transfer of a depreciable asset may be realized in one of two ways:
(1) through the use of the asset in operations or (2) through the sale of the asset to an
independent third party.

Difficulty: Easy
105. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2011.
During 2011, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of
the land was made at the end of 2011. What errors will this omission cause in the
consolidated financial statements?
Consolidation Entry for 2011
Gain on Sale of Land XXX
Land XXX
This omission causes both the amounts for Land and Gain on Sale of Land to be overstated in
the consolidated financial statements, and ultimately, Total Assets and Ending Retained
Earnings to be overstated as well. Also, the correction for gain may be allocated to the
noncontrolling interest share of subsidiary earnings and the noncontrolling interest balance on
the consolidated balance sheet.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
5-91
106. Why do intra-entity transfers between the component companies of a business

combination occur so frequently?
One reason for the significant volume and frequency of intra-entity transfers is that many
business combinations are specifically organized so that the companies can provide products
for each other. This design is intended to benefit the business combination as a whole because
of the economies provided by vertical integration. In effect, more profit can often be
generated by the combination if one member is able to buy from another rather than from an
outside party.

Difficulty: Medium
107. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards'
inventory in 2011. The transfer price was equal to 30 percent of the sales price. When
preparing consolidated financial statements, what amount of these sales is eliminated?
Regardless of the ownership percentage or the markup, the $200,000 was simply an intraentity asset transfer for consolidation purposes. Thus, within the consolidation process, the
entire $200,000 should be eliminated from both the Sales and the Purchases (Inventory)
accounts.
AACSB: Analytic
Difficulty: Easy
5-92
108. What is meant by unrealized inventory gains, and how are they treated on a
consolidation worksheet?
In intra-entity transactions, a transfer price is often established that exceeds the cost of the
inventory. Hence, the seller is recording a gain on its books that, from the perspective of the
business combination as a whole, remains unrealized until the asset is consumed or sold to an
outside party. Any unrealized gain on merchandise still being held by the buyer must be
eliminated whenever consolidated financial statements are produced. For the year of transfer,
this consolidation procedure is carried out by removing the unrealized gain from the inventory
account on the balance sheet and from the ending inventory balance within cost of goods sold.
In the year following the transfer (if the goods are resold or consumed), the unrealized gain
must again be eliminated within the consolidation process. This second reduction is made on
the worksheet to the beginning inventory component of cost of goods sold as well as to the
beginning retained earnings balance of the original seller. The gain is being moved into the
year of realization. If the transfer was downstream in direction and the parent company has
applied the equity method, the adjustment in the subsequent year must be made to the equity
in subsidiary earnings account rather than to retained earnings.

Difficulty: Medium
109. What is the impact on the noncontrolling interest of a subsidiary when there are
downstream transfers of inventory between the parent and subsidiary companies?
None.

Bloom's: Knowledge
Difficulty: Easy
5-93
110. When is the gain on an intra-entity transfer of land realized?

The gain on an intra-entity transfer of land is realized when the asset is sold to an independent
third party. The gain on the intra-entity transfer is deferred until the time of that third-party
sale.

Bloom's: Knowledge
Difficulty: Easy
111. What is the purpose of the adjustments to depreciation expense within the consolidation
process when there has been an intra-entity transfer of a depreciable asset?
Depreciable assets are often transferred between the members of a business combination at
amounts in excess of book value. The buyer will then compute depreciation expense based on
this inflated transfer price rather than on an historical cost basis. From the perspective of the
business combination, depreciation should be calculated solely on historical cost figures.
Thus, within the consolidation process for each period, adjustment of the depreciation
(recorded by the buyer) is necessary to reduce the expense to a cost based figure.

Difficulty: Medium
5-94
112. Tara Company owns 80 percent of the common stock of Stodd Inc. In the current year,
Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period,
Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold
merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the
year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer
the unrealized gain.
AACSB: Analytic
Difficulty: Medium
113. King Corp. owns 85% of James Co. King uses the equity method to account for this
investment. During 2011, King sells inventory to James for $500,000. The inventory
originally cost King $420,000. At 12/31/11, 25% of the goods were still in James' inventory.
Required:
Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation
worksheet.
AACSB: Analytic
Difficulty: Medium
5-95
114. Flintstone Inc. acquired all of Rubble Co. on January 1, 2011. Flintstone decided to use
the initial value method to account for this investment. During 2011, Flintstone sold to Rubble
for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were
still in Rubble's inventory.
Required:
Prepare Consolidation Entry TI for the intra-entity transfer and Consolidation Entry G for the
ending inventory adjustment necessary for the consolidation worksheet at 12/31/11.
AACSB: Analytic
Difficulty: Medium
5-96
115. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the
end of 2011. The goods had cost Yoderly $105,000 and the selling price was $140,000.
Nelson had not sold any of the goods by the end of the year.
Required:
Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2011.
AACSB: Analytic
Difficulty: Medium
116. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial
value method to account for this investment. During 2010, Strayten sold Quint goods which
had cost $48,000. The selling price was $64,000. Quint still had one-eighth of the goods on
hand at the end of the year.
Required:
Prepare Consolidation Entry *G, which would have to be recorded at the end of 2011.
AACSB: Analytic
Difficulty: Medium
5-97
117. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2011,
Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold
to Hambly for $145,000. Stroban's reported net income for 2011 was $119,000.
Required:
What was the noncontrolling interest's share of Stroban Co.'s net income?
AACSB: Analytic
Difficulty: Medium
5-98
118. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co.
During 2011, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000, and they
were sold to Lawler for $100,000. At the end of 2011, Lawler still held 30% of the inventory.
Required:
How should the sale between Lawler and Ritter be accounted for in a consolidation
worksheet? Show worksheet entries to support your answer.
Lawler and Ritter are related parties since they are both part of a combined entity. The
following consolidation entries should be prepared:
These entries (1) eliminate the sale from the consolidated income statement, (2) decrease cost
of goods sold, and (3) reduce consolidated inventory to its cost to the combined entity.
AACSB: Analytic
Difficulty: Medium
Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use
the perpetual inventory method, and Virginia decided to use the partial equity method to
account for this investment. During 2010, Virginia made cash sales of $400,000 to Stateside.
The gross profit rate was 30% of the selling price. By the end of 2010, Stateside had sold 75%
of the goods to outside parties for $420,000 cash.
5-99
119. Prepare journal entries for Virginia and Stateside to record the sales/purchases during
2010.
AACSB: Analytic
Difficulty: Easy
5-100
120. Prepare the consolidation entries that should be made at the end of 2010.
AACSB: Analytic
Difficulty: Medium
121. Prepare any 2011 consolidation worksheet entries that would be required regarding the
2010 inventory transfer.
AACSB: Analytic
Difficulty: Medium
5-101
Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of
Icecap's asset and liability accounts at that time were considered to be equal to their fair
values. Polar's acquisition value corresponded to the underlying book value of Icecap so that
no allocations or goodwill resulted from the transaction.
The following selected account balances were from the individual financial records of these
two companies as of December 31, 2011:
5-102
122. Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity
transfers were retained and then sold by Icecap in 2011 while $55,000 of the 2011 transfers
Required:
AACSB: Analytic
Difficulty: Medium
5-103
123. Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity
transfers were retained and then sold by Polar in 2011 whereas $49,000 of the 2011 transfers
Required:
5-104
AACSB: Analytic
Difficulty: Medium
5-105
124. Polar sold a building to Icecap on January 1, 2010 for $112,000, although the book value
of this asset was only $70,000 on that date. The building had a five-year remaining useful life
and was to be depreciated using the straight-line method with no salvage value.
Required:
for the following accounts: (1) Buildings (net), (2) Operating expenses, and (3)
Noncontrolling Interest in Subsidiary's Net Income.
AACSB: Analytic
Difficulty: Medium
5-106
On January 1, 2011, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary)
for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only
$98,000 when transferred. On that date, the equipment had a five-year remaining life.
Depreciation expense was calculated using the straight-line method.
Musial earned $308,000 in net income in 2011 (not including any investment income) while
Matin reported $126,000. Assume there is no amortization related to the original investment.
125. What is consolidated net income for 2011?
AACSB: Analytic
Difficulty: Medium
5-107
126. Assuming that Musial owned only 90% of Matin, what is consolidated net income for
2009?
AACSB: Analytic
Difficulty: Medium
127. Prepare a schedule of consolidated net income and the share to controlling and
noncontrolling interests for 2011, assuming that Musial owned only 90% of Matin and the
equipment transfer had been upstream.
AACSB: Analytic
Difficulty: Medium
5-108

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Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

23. What is the total of consolidated revenues?

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

24. What is the total of consolidated operating expenses?

25. What is the total of consolidated cost of goods sold?

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

49. Which of the following statements is true concerning an intra-entity transfer of a

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

62. Compute consolidated sales.

63. Compute consolidated cost of goods sold.

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

73. Compute Collins' share of Smeder's net income for 2010.

74. Compute Collins' share of Smeder's net income for 2011.

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

77. Compute the gain or loss on the intra-entity sale of land.

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

80. Compute income from Stiller on Leo's books for 2010.

81. Compute income from Stiller on Leo's books for 2011.

82. Compute the gain or loss on the intra-entity sale of land.

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

92. What is the consolidated gain or loss on equipment for 2010?

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Upstream beginning inventory profit, using the initial

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

104. How is the gain on an intra-entity transfer of a depreciable asset realized?

106. Why do intra-entity transfers between the component companies of a business

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

110. When is the gain on an intra-entity transfer of land realized?

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

125. What is consolidated net income for 2011?

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 Consolidated Financial Statements - Intra-Entity Asset Transactions

Multiple Choice Questions

AACSB: Reflective thinking

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions