Chapter 5 Exam 2

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Chapter 5 Exam 2 - Quiz

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Questions and Answers
  • 1. 

    1.  On November 8, 2018, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land      cost $61,500 and was sold to Wood for $89,000.  For consolidated financial statement reporting      purposes, when must the gain on the sale of the land be recognized?

    • A.

      A) Proportionately over a designated period of years.                        

    • B.

      B) When Wood Co. sells the land to a third party.

    • C.

      C) No gain may be recognized.

    • D.

      E) When Wood Co. begins using the land productively.

    Correct Answer
    B. B) When Wood Co. sells the land to a third party.
    Explanation
    The gain on the sale of the land must be recognized when Wood Co. sells the land to a third party. This is because, for consolidated financial statement reporting purposes, the gain is not recognized until there is a transaction with an external party. In this case, the sale to Wood Co., as a wholly owned subsidiary of Power Corp., is an internal transaction and does not trigger the recognition of the gain. It is only when Wood Co. sells the land to a third party that the gain will be recognized.

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  • 2. 

    2- Edgar Co. acquired 60% of Stendall Co. on January 1, 2018. During 2018, Edgar made several sales of     inventory to Stendall.  The cost and sales price of the goods were $140,000 and $200,000, respectively.      Stendall still owned one-fourth of the goods at the end of 2018.  Consolidated cost of goods sold for     2018 was $2,140,000 due to a consolidating adjustment for intra-entity transfers less intra-entity gross      profit in Stendall’s ending inventory.     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.

      A) Consolidated cost of goods sold would have remained $2,140,000.

    • B.

      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.

      The effect on consolidated cost of goods sold cannot be predicted from the information provided.

    Correct Answer
    A. A) Consolidated cost of goods sold would have remained $2,140,000.
    Explanation
    $2,140,000 COGS is unaffected by intra-entity gross profits in Consolidated Ending Inventory value

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  • 3. 

    3.  On January 1, 2018, Race Corp. acquired 80% of the voting common stock of Gallow Inc.  During the           year, Race sold to Gallow for $450,000 goods that cost $330,000. At year-end, Gallow owned 15% of         the goods transferred.  Gallow reported net income of $204,000, and Race's net income was $806,000.      Race decided to use the equity method to account for this investment.  Assuming there are no excess      amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the      net income attributable to the noncontrolling interest?

    • A.

      A) $  3,600.

    • B.

      B) $22,800.

    • C.

      C) $30,900.

    • D.

      D) $32,900.

    • E.

      E) $40,800.

    Correct Answer
    E. E) $40,800.
    Explanation
    Subsidiary’s Net Income $204,000 × .20 (Noncontrolling Interest) = $40,800

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  • 4. 

    4.  Webb Co. acquired 100% of Rand Inc. on January 5, 2018.  During 2018, 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.

      A) $17,200,000.

    • B.

      B) $15,040,000.

    • C.

      C) $14,800,000.

    • D.

      D) $15,400,000.

    • E.

      E) $14,560,000.

    Correct Answer
    B. B) $15,040,000.
    Explanation
    Feedback: Intra-Entity Gross Profit ($2,400,000 - $1,800,000) $600,000 × Intra-Entity Gross Profit
    Remaining in Ending Inventory (40%) = $240,000
    Consolidated COGS = Parent’s COGS ($10,800,000) + Subsidiary’s COGS ($6,400,000) – COGS in
    Intra-Entity Transfer ($2,400,000) + Intra-Entity Gross Profit Deferred ($240,000) = $15,040,000

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  • 5. 

    5.  Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2017.  During 2017, Gentry sold Gaspard      Farms $625,000 of goods, which had cost $425,000. Gaspard Farms still owned 12% of the goods at      the end of the year.  In 2018, 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 2018, the cost of goods          sold totaled $5,400,000 for Gentry, and $1,200,000 for Gaspard Farms.  What was consolidated cost of      goods sold for 2018?

    • A.

      A)  $6,600,000.

    • B.

      B)  $6,604,000.

    • C.

      C)  $5,620,000.

    • D.

      D)  $5,596,000.

    • E.

      E)  $5,625,000.

    Correct Answer
    D. D)  $5,596,000.
    Explanation
    Feedback: Intra-Entity Gross Profit ($1,000,000 - $800,000) $200,000 × Intra-Entity Gross Profit Remaining in Ending Inventory (10%) = $20,000.
    Consolidated COGS = Parent’s COGS ($5,400,000) + Subsidiary’s COGS ($1,200,000) – Total COGS in Intra-Entity Transfer ($1,000,000) – Intra-Entity Gross Profit Deferred from 2017 ($24,000) + Intra-Entity Gross Profit Deferred from 2018 ($20,000) = $5,596,000

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  • 6. 

    6.  Justings Co. owned 80% of Evana Corp. During 2018, Justings sold to Evana land with a book value          of $48,000.  The selling price was $70,000.  For purposes of the December 31, 2018 consolidated          financial statements, at what amount should the land be reported?

    • A.

      A) $17,600.

    • B.

      B) $22,000.

    • C.

      C) $48,000.

    • D.

      D) $56,000.

    • E.

      E) $70,000.

    Correct Answer
    C. C) $48,000.
    Explanation
    $48,000, the original book value of the Land. Any intra-entity profit from the transfer is
    eliminated.

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  • 7. 

    7-   During 2017, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost       $30,000 and was sold to Lord for $44,000. For consolidation reporting purposes, when is the $14,000        intra-entity gross profit recognized?

    • A.

      A) When goods are transferred to a third party by Lord.

    • B.

      B) When Lord pays Von for the goods.

    • C.

      C) When Von sold the goods to Lord.

    • D.

      D) When Lord receives the goods.

    • E.

      E) No gain can be recognized since the transfer was between related parties.

    Correct Answer
    A. A) When goods are transferred to a third party by Lord.
    Explanation
    The $14,000 intra-entity gross profit is recognized when the goods are transferred to a third party by Lord. This is because for consolidation reporting purposes, the gross profit is recognized when the transaction with the external party occurs, as it represents the realization of the profit. The fact that the sale was made between related parties does not affect the recognition of the gross profit.

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  • 8. 

    8-   Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets           dated December 31, 2017, 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, 2018, 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 transfers, which affected the companies'        land accounts during 2017.  What is the consolidated balance for land on the 2018 balance sheet?

    • A.

      A)  $672,000.

    • B.

      B)  $690,000.

    • C.

      C)  $755,000.

    • D.

      D)  $737,000.

    • E.

      E)  $654,000.

    Correct Answer
    A. A)  $672,000.
    Explanation
    Parent’s Land $416,000 + Subsidiary’s Land $256,000 = $672,000 – Any gain on the transfer is
    deferred until the parcel is sold outside the entity in the future.

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  • 9. 

    9- .  Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2018.         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 held $60,000 of the goods in its inventory at the end of the         year. The amount of intra-entity gross profit for which recognition is deferred, and should therefore         be eliminated in the consolidation process at the end of 2018, is:

    • A.

      A)  $15,000.

    • B.

      B)  $20,000.

    • C.

      C)  $32,500.

    • D.

      D)  $30,000.

    • E.

      E)  $110,000.

    Correct Answer
    B. B)  $20,000.
    Explanation
    Intra-Entity Gross Profit ($390,000 - $260,000) $130,000 X Intra-Entity Gross Profit Remaining
    In Ending Inventory ($60,000 / $390,000) = $20,000

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  • 10. 

    10-  Prince Co. owned 80% of Kile Corp.'s common stock. During October 2018, Kile sold merchandise        to Prince for $140,000. At December 31, 2018, 50% of this merchandise remained in Prince's        inventory.  For 2018, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile.        The amount of intra-entity gross profit remaining in ending inventory at December 31, 2018 that        should be eliminated in the consolidation process is:

    • A.

      A)  $28,000.

    • B.

      B)  $56,000.

    • C.

      C)  $22,400.

    • D.

      D)  $21,000.

    • E.

      E)  $42,000.

    Correct Answer
    A. A)  $28,000.
    Explanation
    Feedback: Intra-Entity Gross Profit ($140,000 X .40 (Kile GP Percentage)) $56,000 X Intra-Entity transfers Remaining In Ending Inventory (50%) = $28,000

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  • 11. 

    11-  Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2016,        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, 2018, 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. For consolidation purposes, what is the Excess Depreciation (ED entry)        for this building for 2018?

    • A.

      A) Accumulated Depreciation   7,000             Depreciation expense                7,000

    • B.

      B) Accumulated Depreciation   4,900             Depreciation Expense               4,900

    • C.

      C) Depreciation Expense          7,000             Accumulated Depreciation        7,000

    • D.

      D) Depreciation Expense          4,900             Accumulated Depreciation        4,900

    • E.

      E) Accumulated Depreciation    42,000             Depreciation Expense               42,000

    Correct Answer
    A. A) Accumulated Depreciation   7,000             Depreciation expense                7,000
    Explanation
    Feedback: Transfer Cost $392,000 / 8yrs. = $49,000 Annual Depreciation by Shrugs
    Dalton: Book Value of Cost ($420,000) less accumulated depreciation ($420,000 ÷ 10 years = $42,000 Depreciation expense should be decreased by $7,000.

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  • 12. 

    12-  On January 1, 2018, 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, 2018, before preparing the consolidated worksheet, the financial statements         appeared as follows: Pride, Inc.    Strong Corp. Revenues $    420,000 $280,000 Cost of goods sold     (196,000)   (112,000) Operating expenses       (28,000)    (14,000) Net income $    196,000 $154,000 Retained earnings, 1/1/18 $    420,000 $210,000 Net income (above)      196,000   154,000 Dividends paid                0            0 Retained earnings, 12/31/18 $    616,000 $364,000 Cash and receivables $   294,000 $126,000 Inventory      210,000   154,000 Investment in Strong Corp      364,000            0 Equipment (net)      616,000   420,000 Total assets $1,484,000 $700,000 Liabilities $   588,000 $196,000 Common stock      280,000   140,000 Retained earnings, 12/31/18 (above)      616,000   364,000 Total liabilities and stockholders’ equity $1,484,000 $700,000 13- During 2018, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of the       inventory purchase price had been remitted to Pride by Strong at year-end. As of December 31, 2018,       60% of these goods remained in the company's possession.       What is the total of consolidated revenues?

    • A.

      A)  $700,000.

    • B.

      B)  $644,000.

    • C.

      C)  $588,000.

    • D.

      D)  $560,000.

    • E.

      E)  $840,000.

    Correct Answer
    D. D)  $560,000.
    Explanation
    Parent’s Revenue ($420,000) + Subsidiary’s Revenue ($280,000) – Intra-Entity Transfers
    ($140,000) = $560,000

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  • 13. 

    14- Strickland Company sells inventory to its parent, Carter Company, at a profit during 2017.  Carter       sells one-third of the inventory in 2017  In the consolidation worksheet for 2017, which of the       following accounts would be debited  to eliminate the intra-entity transfer of inventory?

    • A.

      A) Retained earnings.

    • B.

      B) Cost of goods sold.

    • C.

      C) Inventory.

    • D.

      D) Investment in Strickland Company.

    • E.

      E)  Sales.

    Correct Answer
    E. E)  Sales.
    Explanation
    The correct answer is E) Sales. When inventory is sold from one entity to another within the same consolidated group, the intercompany profit is eliminated in the consolidation process. This is done by debiting the Sales account, which reduces the revenue recognized from the intra-entity transfer of inventory. By eliminating the intercompany profit, the consolidated financial statements reflect the true economic activity of the group as if the inventory was sold to an external party. Therefore, debiting the Sales account helps to eliminate the impact of the intra-entity transfer of inventory on the consolidated financial statements.

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  • 14. 

    15-  In the consolidation worksheet for 2018, assuming Carter uses the initial value method of accounting        for its investment in Strickland, which of the following accounts would be debited  to defer        unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?

    • A.

      A) Retained earnings.

    • B.

      B) Cost of goods sold.

    • C.

      C) Inventory.

    • D.

      D) Investment in Strickland Company.

    • E.

      E) Sales.

    Correct Answer
    A. A) Retained earnings.
    Explanation
    In the consolidation worksheet for 2018, when using the initial value method of accounting for its investment in Strickland, the unrecognized intra-entity gross profit from the 2017 intra-entity transfers would be deferred by debiting the Retained Earnings account. This is because the initial value method recognizes the investment at its original cost and defers the recognition of any unrealized profit until the asset is sold. By debiting Retained Earnings, the unrealized profit is effectively deferred and will be recognized in future periods when the asset is sold.

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  • 15. 

    16- Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2017.  With       respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of       accounting. In the consolidation worksheet for 2017, which of the following accounts would be           debited to eliminate the intra-entity transfer of inventory?

    • A.

      A) Retained earnings.

    • B.

      B) Cost of goods sold.

    • C.

      C) Inventory.

    • D.

      D) Investment in Fisher Company.

    • E.

      E) Sales.

    Correct Answer
    E. E) Sales.
    Explanation
    In order to eliminate the intra-entity transfer of inventory, the sales account needs to be debited. This is because the sale of inventory from Walsh Company to Fisher Company is an internal transaction and does not represent an actual sale to an external party. By debiting the sales account, the consolidation process removes the impact of this internal transaction on the financial statements.

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  • 16. 

    17-   Which of the following statements is true regarding an intra-entity transfer of land?

    • A.

      A) A loss is always recognized but a gain is deferred in a consolidated income statement.

    • B.

      B) A loss and a gain are deferred until the land is sold to an outside party.

    • C.

      C) A loss and a gain are always recognized in a consolidated income statement.

    • D.

      D) A gain is always recognized but a loss is deferred in a consolidated income statement.

    • E.

      E) Recognition of a gain or loss is deferred by adjusting stockholders' equity through      comprehensive income.

    Correct Answer
    B. B) A loss and a gain are deferred until the land is sold to an outside party.
    Explanation
    In an intra-entity transfer of land, a gain or loss is deferred until the land is sold to an outside party. This means that the gain or loss is not recognized in the consolidated income statement until the land is sold to someone outside of the entity. This is because the transaction is considered to be an internal transfer within the same entity, and the gain or loss is not considered to be realized until the land is sold to an outside party.

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  • 17. 

    18-  Parent sold land to its subsidiary resulting in a gain in 2016, the year of transfer. The subsidiary sold        the land to an unrelated third party for a gain in 2019.  Which of the following statements is true?

    • A.

      A) A gain will be recognized in the consolidated income statement in 2016.

    • B.

      B) A gain will be recognized in the consolidated income statement in 2019.

    • C.

      C) No gain will be recognized in the 2019 consolidated income statement.

    • D.

      D) Only the parent company will recognize a gain in 2019.

    • E.

      E) The subsidiary will recognize a gain in 2016.

    Correct Answer
    B. B) A gain will be recognized in the consolidated income statement in 2019.
    Explanation
    The gain from the sale of the land by the subsidiary to an unrelated third party will be recognized in the consolidated income statement in 2019 because it is the year in which the transaction took place. The gain from the sale of the land by the parent to the subsidiary in 2016 is not relevant to the question as it is a separate transaction.

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  • 18. 

    19-  An intra-entity transfer of a depreciable asset took place whereby the transfer price exceeded the        book value of the asset. Which statement is true with respect to the year following the year in which        the transfer occurred?

    • A.

      A) A worksheet entry is made with a debit to gain for a downstream transfer.

    • B.

      B) A worksheet entry is made with a debit to gain for an upstream transfer.

    • C.

      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.

      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.

      E) No worksheet entry is necessary.

    Correct Answer
    C. C) A worksheet entry is made with a debit to investment in subsidiary for a downstream      transfer when the parent uses the equity method.
    Explanation
    When an intra-entity transfer of a depreciable asset occurs and the transfer price exceeds the book value of the asset, the parent company records a worksheet entry with a debit to investment in subsidiary for a downstream transfer when using the equity method. This is because the equity method requires the parent company to recognize its share of the subsidiary's net income or loss, and any gain or loss from the transfer would be included in the subsidiary's net income. Therefore, the parent company would need to adjust its investment in the subsidiary to reflect the impact of the transfer.

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  • 19. 

    20-  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. Compute consolidated sales.

    • A.

      A)  $10,000,000.

    • B.

      B)  $10,126,000.

    • C.

      C)  $10,140,000.

    • D.

      D)  $10,200,000.

    • E.

      E)  $10,260,000.

    Correct Answer
    C. C)  $10,140,000.
    Explanation
    Feedback: Consolidated Sales = Parent’s Sales $10,000,000 + Subsidiary’s sales $200,000 =
    $10,200,000 – Intra-Entity Transfers $60,000 = $10,140,000

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  • 20. 

    21- Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an        original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2017. On January        1, 2017, Wilson realized that the useful life of the equipment was longer than originally anticipated,        at ten remaining years.        On April 1, 2017 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 declared: 2017 2018 2019               Net income $100,000 $120,000 $130,000               Dividends declared     40,000     50,000     60,000        What amount should be recorded on Wilson’s books as gain on the transfer of equipment, prior to        preparing consolidating entries?

    • A.

      A)  $19,500.

    • B.

      B)  $18,250.

    • C.

      C)  $11,750.

    • D.

      D)  $38,250.

    • E.

      E)  $37,500.

    Correct Answer
    A. A)  $19,500.
    Explanation
    Feedback: January 1, 2017 BV $50,000 / 10yrs Expected Useful Life = $5,000 per year Depreciation Expense. Sale on April 1, 2017 required Three Months Depreciation Expense leaving a BV on Sale of $48,750. Sale Price of $68,250 – BV on Sale of $48,750 = $19,500 Gain on Sale

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  • 21. 

    22-  On January 1, 2017, 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 2017 and 2018, respectively. All net income effects of the intra-         entity transfer are attributed to the seller for consolidation purposes.         What amount of gain should be reported by Smeder Company relating to the equipment for 2017         prior to making consolidating entries?

    • A.

      A)  $36,000.

    • B.

      B)  $34,000.

    • C.

      C)  $12,000.

    • D.

      D)  $10,000.

    • E.

      E)  $          0.

    Correct Answer
    C. C)  $12,000.
    Explanation
    Feedback: January 1, 2017 Sale Price on Transfer $84,000 - BV $72,000 = $12,000 Gain on Sale

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  • 22. 

    23-  Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1,        2017, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and        $140,000 for 2017 and 2018, respectively. Leo uses the equity method to account for its investment.        Compute the gain or loss on the intra-entity transfer of land that should be reported on the books of         Stiller prior to consolidation.

    • A.

      A)  $15,000 loss.

    • B.

      B)  $15,000 gain.

    • C.

      C)  $50,000 loss.

    • D.

      D)  $50,000 gain.

    • E.

      E)  $65,000 gain.

    Correct Answer
    B. B)  $15,000 gain.
    Explanation
    Feedback: Subsidiary’s Land Transfer Value $75,000 - Subsidiary’s Land BV $60,000 = $15,000
    Gain on Intra-Entity Sale of Land

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  • 23. 

    Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 2009. Balance sheet data for the two companies immediately following the acquisition follow: At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. 24.          Based on the preceding information, at what amount should total land be reported in the consolidated balance sheet prepared immediately after the business combination?

    • A.

      A. $130,000  

    • B.

      B. $105,000  

    • C.

      C. $115,000             

    • D.

      D. $120,000

    Correct Answer
    C. C. $115,000             
    Explanation
    The total land should be reported at $115,000 in the consolidated balance sheet. This is because the fair value of land for Spin Company was $50,000, and the fair value of land for Pace Corporation was $80,000. Since Pace Corporation acquired 100% of Spin Company's common stock, the fair value of land for the consolidated entity would be the sum of the fair values of land for both companies, which is $50,000 + $80,000 = $130,000. However, since the book value of land for Spin Company was $50,000, the excess fair value over the book value should be eliminated. Therefore, the total land should be reported at $130,000 - $15,000 (excess fair value over book value) = $115,000.

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  • 24. 

    25.          Based on the preceding information, what amount of total assets will appear in the consolidated balance sheet prepared immediately after the business combination?   

    • A.

      A. $756,000    

    • B.

      B. $735,000                           

    • C.

      C. $750,000  

    • D.

      D. $642,000

    • E.

      Option 5

    Correct Answer
    A. A. $756,000    
    Explanation
    (BV of Assets 270,000 – BV of liabilities 141,000) = 129000
    285000 Fair value - 129000 = 156000 + 615,000 – 15000 = 756,000

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  • 25. 

    27-  On January 1, 2018, 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 2018 (not including any investment income) while Matin         reported $126,000. Assume there is no amortization related to the original investment.

    • A.

      378,000

    • B.

      Option 2

    • C.

      Option 3

    • D.

      Option 4

    Correct Answer
    A. 378,000
    Explanation
    308000(musical income) + 126000(matin income) - 70000(removal of unrealized gain of equipment 168000-98000 + 14000(removal of excess depreciation created by inflated transfer price 70000/5.

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  • 26. 

                Enya Corporation acquired 100 percent of Celtic Corporation's common stock on January 1, 2009.                                       Summarized balance sheet information for the two companies immediately after the combination              is provided: 28.  Based on the preceding information, the amount of differential associated with the acquisition is:   

    • A.

               A. $0.  

    • B.

               B. $58,000.           

    • C.

              C. $22,000.  

    • D.

              D. $36,000.

    Correct Answer
    B.          B. $58,000.           
    Explanation
                  150,000 – (137,000 -45,000)

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  • 27. 

    29. Based on the information provided, the consolidated balance sheet of Enya and Celtic will reflect goodwill in the amount of:  

    • A.

      A. $0.  

    • B.

      B. $58,000.  

    • C.

      C. $22,000.          

    • D.

      D. $36,000.

    Correct Answer
    C. C. $22,000.          
    Explanation
            150,000 – (15,000 + 38,000 + 120,000 – 5,000 -40,000)

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  • 28. 

    On December 31, 2008, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000. 30.          Based on the preceding information, what amount of differential will appear in the eliminating entries required to prepare a consolidated balance sheet immediately after the business combination, if the acquisition price was $240,000?

    • A.

      A. $0  

    • B.

      B. $40,000           

    • C.

      C. $25,000  

    • D.

      D. $5,000

    Correct Answer
    B. B. $40,000           
    Explanation
              240,000 – (C0 Stock 50,000 + RE 150,000)

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  • 29. 

    On December 31, 2008, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000. 31. Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $240,000? 

    • A.

      A. $0  

    • B.

      B. $40,000  

    • C.

      C. $15,000  

    • D.

      D. $35,000     

    Correct Answer
    D. D. $35,000     
    Explanation
                 240,000 – (300,000 – 100,000 + 10,000 – 5,000)

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  • 30. 

    31. Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $240,000?   

    • A.

      Seldom reported because it is too difficult to measure.

    • B.

             b- Reported when more than book value is paid in purchasing another company.

    • C.

             c- Reported when the fair value of the acquire is greater than the fair value of the net identifiable             assets acquired.    

    • D.

             d- Generally smaller  for small companies and increase in amount as the companies acquired             increase in size

    Correct Answer
    C.        c- Reported when the fair value of the acquire is greater than the fair value of the net identifiable             assets acquired.    
    Explanation
    Goodwill is reported when the fair value of the acquired company is greater than the fair value of the net identifiable assets acquired. In this case, if the acquisition price is $240,000, the amount of goodwill will be reported if the fair value of the acquired company is greater than the fair value of the net identifiable assets acquired.

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  • 31. 

    33.Wright Corporation includes several subsidiaries in its consolidated financial statement. In its         December 31, 20X2, trial balance, Wright had the following intercompany balances before       eliminations:        intercompany receivables?       In its December 31, 20X2, consolidated balance sheet, what amount should Wright report as

    • A.

      $152,000

    • B.

      $146,000             

    • C.

      ​​​​​​$  36,000

    • D.

      ​​​​​​$  0

    Correct Answer
    B. $146,000             
    Explanation
           32000 + 114000

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Jun 22, 2019
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