Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 6

Question Type: Multiple Choice

1) Sales from one subsidiary to another are called:

a) downstream sales.
b) upstream sales.
c) intersubsidiary sales.
d) horizontal sales.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy
Learning Objective: 4 Distinguish between upstream and downstream sales of inventory.
Section Reference: 6.0

2) Noncontrolling interest in consolidated income is never affected by:

a) upstream sales.
b) downstream sales.
c) horizontal sales.
d) Noncontrolling interest is affected by all sales.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Easy
Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and
downstream sales, when not all the inventory has been sold to outsiders., 6 Prepare consolidated workpapers
for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods.
Section Reference: 6.1

3) Failure to eliminate intercompany sales would result in an overstatement of consolidated:

a) net income.
b) gross profit.
c) cost of sales.
d) all of these.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Medium
Learning Objective: 1 Describe the financial reporting objectives for intercompany sales of inventory., 2
Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 3
Understand the concept of eliminating 100% of intercompany profit not realized in transactions with
outsiders, and know the authoritative position.
Section Reference: 6.1

4) Pruitt Company owns 80% of Stoney Company’s common stock. During 2017, Stoney sold $400,000 of
merchandise to Pruitt. At December 31, 2017, one-fourth of the merchandise remained in Pruitt’s inventory.
In 2017, gross profit percentages were 25% for Pruitt and 30% for Stoney. The amount of unrealized
intercompany profit that should be eliminated in the consolidated statements is:

a) $80,000.
b) $24,000.
c) $30,000.
d) $25,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Easy
Learning Objective: 1 Describe the financial reporting objectives for intercompany sales of inventory., 2
Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 3
Understand the concept of eliminating 100% of intercompany profit not realized in transactions with
outsiders, and know the authoritative position.
Section Reference: 6.1

5) The noncontrolling interest’s share of the selling affiliate’s profit on intercompany sales is considered to
be realized under:

a) partial elimination.
b) total elimination.
c) 100% elimination.
d) both total and 100% elimination.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Medium
Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in
transactions with outsiders, and know the authoritative position., 5 Compute the noncontrolling interest in
consolidated net income for upstream and downstream sales, when not all the inventory has been sold to
outsiders.
Section Reference: 6.1

6) The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory
includes a:

a) credit to Ending Inventory (Cost of Sales).

b) credit to Sales.
c) debit to Ending Inventory (Cost of Sales).
d) debit to Inventory - Balance Sheet.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Medium
Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in
transactions with outsiders, and know the authoritative position.
Section Reference: 6.1

7) Petunia Company acquired an 80% interest in Shaman Company in 2016. In 2017 and 2018, Shaman
reported net income of $400,000 and $480,000, respectively. During 2017, Shaman sold $80,000 of
merchandise to Petunia for a $20,000 profit. Petunia sold the merchandise to outsiders during 2018 for
$140,000. For consolidation purposes, what is the noncontrolling interest’s share of Shaman's 2017 and
2018 net income?

a) $90,000 and $96,000.

b) $100,000 and $76,000.
c) $84,000 and $92,000.
d) $76,000 and $100,000.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Medium
Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and
downstream sales, when not all the inventory has been sold to outsiders.
Section Reference: 6.2

8) A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2016. Under
the partial equity method, the workpaper entry in 2017 to recognize the intercompany profit in beginning
inventory realized during 2017 includes a debit to:

a) Retained Earnings - P.
b) Noncontrolling interest.
c) Cost of Sales.
d) both Retained Earnings - P and Noncontrolling Interest.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Medium
Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using
the cost, partial equity, and complete equity methods.
Section Reference: 6.4
9) The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary
is calculated by multiplying the noncontrolling minority ownership percentage by the subsidiary’s reported
net income:

a) plus unrealized profit in ending inventory less unrealized profit in beginning inventory.
b) plus realized profit in ending inventory less realized profit in beginning inventory.
c) less unrealized profit in ending inventory plus realized profit in beginning inventory.
d) less realized profit in ending inventory plus realized profit in beginning inventory.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Medium
Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and
downstream sales, when not all the inventory has been sold to outsiders.
Section Reference: 6.1

10) In determining controlling interest in consolidated income in the consolidated financial statements,
unrealized intercompany profit on inventory acquired by a parent from its subsidiary should:

a) not be eliminated.
b) be eliminated in full.
c) be eliminated to the extent of the parent company’s controlling interest in the subsidiary.
d) be eliminated to the extent of the noncontrolling interest in the subsidiary.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Easy
Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in
transactions with outsiders, and know the authoritative position.
Section Reference: 6.1

11) P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000. At the end of
the current year, one-third of the merchandise remains in S Company’s inventory. Applying the lower-of-
cost-or-market rule, S Company wrote this inventory down to $92,000. What amount of intercompany
profit should be eliminated on the consolidated statements workpaper?

a) $20,000.
b) $18,000.
c) $12,000.
d) $10,800.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Hard
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements.
Section Reference: 6.1

12) The material sale of inventory items by a parent company to an affiliated company:

a) enters the consolidated revenue computation only if the transfer was the result of arm’s length bargaining.
b) affects consolidated net income under a periodic inventory system but not under a perpetual inventory
system.
c) does not result in consolidated income until the merchandise is sold to outside parties.
d) does not require a working paper adjustment if the merchandise was transferred at cost.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy
Learning Objective: 1 Describe the financial reporting objectives for intercompany sales of inventory.
Section Reference: 6.1

13) A parent company regularly sells merchandise to its 80%-owned subsidiary. Which of the following
statements describes the computation of noncontrolling interest income?

a) the subsidiary’s net income times 20%.

b) (the subsidiary’s net income x 20%) + unrealized profits in the beginning inventory – unrealized profits
in the ending inventory.
c) (the subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits in the
ending inventory) × 20%.
d) (the subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in the
beginning inventory) × 20%.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Medium
Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and
downstream sales, when not all the inventory has been sold to outsiders.
Section Reference: 6.1, 6.3

14) P Corporation acquired a 60% interest in S Corporation on January 1, 2017, at book value equal to fair
value. During 2017, P sold merchandise that cost $135,000 to S for $189,000. One-third of this
merchandise remained in S’s inventory at December 31, 2017. S reported net income of $120,000 for 2017.
P’s income from S for 2017 is:

a) $36,000.
b) $50,400.
c) $54,000.
d) $61,200.

Answer: c
Question Title: Test Bank (Multiple Choice) Question 14
Difficulty: Medium
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements.
Section Reference: 6.1

15) P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2016, P sold
merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S’s December 31,
2016 inventory. During 2017, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of
this merchandise inventory remained in S’s December 31, 2017 inventory. Selected income statement
information for the two affiliates for the year 2017 is as follows:

P S
Sales Revenue $2,250,000 $1,125,00
0
Cost of Goods Sold 1,800,000 937,500
Gross profit $450,000 $187,500

Consolidated sales revenue for P and Subsidiary for 2017 are:

a) $2,907,000.
b) $3,000,000.
c) $3,205,500.
d) $3,375,000.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Easy
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements.
Section Reference: 6.1

16) P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2016, P sold
merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S’s December 31,
2016 inventory. During 2017, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of
this merchandise inventory remained in S’s December 31, 2017 inventory. Selected income statement
information for the two affiliates for the year 2017 is as follows:

P S
Sales Revenue $2,250,000 $1,125,00
0
Cost of Goods Sold 1,800,000 937,500
Gross profit $450,000 $187,500

Consolidated cost of goods sold for P Company and Subsidiary for 2017 are:

a) $2,260,500.
b) $2,268,000.
c) $2,276,700.
d) $2,737,500.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Medium
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements., 6 Prepare consolidated workpapers for firms with upstream and downstream sales
using the cost, partial equity, and complete equity methods.
Section Reference: 6.1

17) P Company owns an 80% interest in S Company. During 2017, S sells merchandise to P for $200,000 at
a profit of $40,000. On December 31, 2017, 50% of this merchandise is included in P’s inventory. Income
statements for P and S are summarized below:
P S
Sales $1,200,000 $600,000
Cost of Sales (600,000) (400,000)
Operating Expenses (300,000) (80,000)
Net Income (2017) $300,000 $120,000

Controlling interest in consolidated net income for 2017 is:

a) $300,000.
b) $380,000.
c) $396,000.
d) $420,000.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Medium
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements.
Section Reference: 6.1

18) P Company owns an 80% interest in S Company. During 2017, S sells merchandise to P for $200,000 at
a profit of $40,000. On December 31, 2017, 50% of this merchandise is included in P’s inventory. Income
statements for P and S are summarized below:
P S
Sales $1,200,000 $600,000
Cost of Sales (600,000) (400,000)
Operating Expenses (300,000) (80,000)
Net Income (2017) $300,000 $120,000

Noncontrolling interest in income for 2017 is:

a) $4,000.
b) $19,200.
c) $20,000.
d) $24,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Medium
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements., 5 Compute the noncontrolling interest in consolidated net income for upstream and
downstream sales, when not all the inventory has been sold to outsiders.
Section Reference: 6.1

19) The amount of intercompany profit eliminated is the same under total elimination and partial elimination
in the case of:

a) upstream sales where the selling affiliate is a less than wholly owned subsidiary.
b) all downstream sales.
c) horizontal sales where the selling affiliate is a wholly owned subsidiary.
d) all downstream sales and horizontal sales where the selling affiliate is a wholly owned subsidiary.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Hard
Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in
transactions with outsiders, and know the authoritative position.
Section Reference: 6.1

20) Polly, Inc. owns 80% of Saffron, Inc. During 2017, Polly sold goods with a 40% gross profit to Saffron.
Saffron sold all of these goods in 2017. For 2017 consolidated financial statements, how should the
summation of Polly and Saffron income statement items be adjusted?

a) Sales and cost of goods sold should be reduced by the intercompany sales.
b) Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
c) Net income should be reduced by 80% of the gross profit on intercompany sales.
d) No adjustment is necessary.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Easy
Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in
transactions with outsiders, and know the authoritative position.
Section Reference: 6.1

21) P Corporation acquired a 60% interest in S Corporation on January 1, 2017, at book value equal to fair
value. During 2017, P sold merchandise that cost $225,000 to S for $315,000. One-third of this
merchandise remained in S’s inventory at December 31, 2017. S reported net income of $200,000 for 2017.
P’s income from S for 2017 is:
a) $60,000.
b) $90,000.
c) $120,000.
d) $102,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Medium
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements., 6 Prepare consolidated workpapers for firms with upstream and downstream sales
using the cost, partial equity, and complete equity methods.
Section Reference: 6.1

22) P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2016, P sold
merchandise that cost $192,000 to S for $240,000. Half of this merchandise remained in S’s December 31,
2016 inventory. During 2017, P sold merchandise that cost $300,000 to S for $375,000. Forty percent of
this merchandise inventory remained in S’s December 31, 2017 inventory. Selected income statement
information for the two affiliates for the year 2017 is as follows:

P S
Sales Revenue $1,800,000 $900,000
Cost of Goods Sold 1,440,000 750,000
Gross profit $ 360,000 $150,000

Consolidated sales revenue for P and Subsidiary for 2017 are:

a) $2,325,000.
b) $2,400,000.
c) $2,565,000.
d) $2,700,000.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Easy
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements.
Section Reference: 6.1

23) P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2016, P sold
merchandise that cost $192,000 to S for $240,000. Half of this merchandise remained in S’s December 31,
2016 inventory. During 2017, P sold merchandise that cost $300,000 to S for $375,000. Forty percent of
this merchandise inventory remained in S’s December 31, 2017 inventory. Selected income statement
information for the two affiliates for the year 2017 is as follows:

P S
Sales Revenue $1,800,000 $900,000
 Cost of Goods Sold 1,440,000 750,000
Gross profit $ 360,000 $150,000

Consolidated cost of goods sold for P Company and Subsidiary for 2017 are:

a) $1,809,000.
b) $1,815,000.
c) $1,821,000.
d) $2,190,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Medium
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements., 6 Prepare consolidated workpapers for firms with upstream and downstream sales
using the cost, partial equity, and complete equity methods.
Section Reference: 6.1

24) P Company owns an 80% interest in S Company. During 2017, S sells merchandise to P for $150,000 at
a profit of $30,000. On December 31, 2017, 50% of this merchandise is included in P’s inventory. Income
statements for P and S are summarized below:

P S
Sales $900,000 $450,000
Cost of Sales (450,000) (300,000)
Operating Expenses (225,000) ( 60,000)
Net Income (2017) $225,000 $ 90,000

Controlling interest in consolidated net income for 2017 is:

a) $225,000.
b) $285,000.
c) $297,000.
d) $315,000.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 24

Difficulty: Hard
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements.
Section Reference: 6.1

25) P Company owns an 80% interest in S Company. During 2017, S sells merchandise to P for $150,000 at
a profit of $30,000. On December 31, 2017, 50% of this merchandise is included in P’s inventory. Income
statements for P and S are summarized below:

P S
 Sales $900,000 $450,000
Cost of Sales (450,000) (300,000)
Operating Expenses (225,000) ( 60,000)
Net Income (2017) $225,000 $ 90,000

Noncontrolling interest in income for 2017 is:

a) $3,000.
b) $14,400.
c) $15,000.
d) $18,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 25

Difficulty: Hard
Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the
consolidated statements.
Section Reference: 6.1

Question Type: Essay

26) Past and proposed GAAP agree that unrealized intercompany profit should not be included in
consolidated net income or assets. Briefly explain the preferred approach of eliminating intercompany
profit.

Answer: Both current and proposed GAAP require 100% elimination of intercompany profit in the
preparation of consolidated financial statements. Under 100% elimination, the entire amount of
unconfirmed intercompany profit is eliminated from consolidated net income and the related asset balance.
This approach is logical under the proposed view of consolidated financial statements, based on the entity
concept.

Question Title: Test Bank (Essay) Question 26

Difficulty: Easy
Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in
transactions with outsiders, and know the authoritative position.
Section Reference: 6.1

27) Determination of the noncontrolling interest in consolidated net income differs depending on whether
intercompany sales are downstream or upstream. Explain the difference in calculating noncontrolling
interest for downstream and upstream sales.

Answer: For downstream sales, no modification to the noncontrolling interest in consolidated income is
needed. For upstream sales, the noncontrolling interest must be adjusted. The reported income of the
subsidiary is reduced by the amount of gross profit remaining in ending inventory of the purchasing affiliate
before multiplying by the noncontrolling percentage interest; it is increased for gross profit realized from
beginning inventory.

Question Title: Test Bank (Essay) Question 27

Difficulty: Medium
Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and
downstream sales, when not all the inventory has been sold to outsiders.
Section Reference: 6.1

28) On January 1, 2017, Pharma Company purchased a 90% interest in Sandy Company for $2,800,000. At
that time, Sandy had $1,840,000 of common stock and $360,000 of retained earnings. The difference
between implied and book value was allocated to the following assets of Sandy Company:

Inventory $ 80,000
Plant and equipment (net) 240,000
Goodwill 591,111

The plant and equipment had a 10-year remaining useful life on January 1, 2017.

During 2017, Pharma sold merchandise to Sandy at a 20% markup above cost. At December 31, 2017,
Sandy still had $180,000 of merchandise in its inventory that it had purchased from Pharma. In 2017,
Pharma reported net income from independent operations of $1,600,000, while Sandy reported net income
of $600,000.

Required:
A. Prepare the workpaper entry to allocate, amortize, and depreciate the difference between implied and
book value for 2017.
B. Calculate controlling interest in consolidated net income for 2017.

Answer:
A. Depreciation Expense (240,000/10) 24,000
Plant and Equipment (net) (240,000 – 24,000) 216,000
1/1 Inventory 80,000
Goodwill 591,111
Difference Between Implied and Book Value 911,111

B. Pharma’s net income from independent operations $1,600,000

Less: unrealized profit on sales to Sandy
[180,000 – (180,000/1.20)] (30,000)
Pharma’s income from independent operations that has
been realized in transactions with third parties 1,570,000
Pharma’s share of Sandy’s income (600,000 × .90) 540,000
Less: amortization of difference between implied
and book value (104,000)*
Controlling Interest in Consolidated Net Income for 2017 $2,006,000

* 80,000 + (240,000/10)

Question Title: Test Bank (Problem) Question 6-1

Difficulty: Hard
Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using
the cost, partial equity, and complete equity methods.
Section Reference: 6.1, 6.2, 6.4
29) Puma Company owns 80% of the common stock of Smarte Company. Puma sells merchandise to
Smarte at 20% above cost. During 2017 and 2018, intercompany sales amounted to $1,080,000 and
$1,200,000 respectively. At the end of 2017, Smarte had one-fifth of the goods purchased that year from
Puma in its ending inventory. Smarte’s 2018 ending inventory contained one-fourth of that year’s purchases
from Puma. There were no intercompany sales prior to 2017.

Puma reported net income from its own operations of $720,000 in 2017 and $760,000 in 2018. Smarte
reported net income of $400,000 in 2017 and $460,000 in 2018. Neither company declared dividends in
either year.

Required:

A. Prepare in general journal form all entries necessary on the consolidated statements workpapers to
eliminate the effects of the intercompany sales for both 2017 and 2018.

B. Calculate controlling interest in consolidated net income for 2018.

Answer:
A. 2017
Sales 1,080,000
Purchases (Cost of Goods Sold) 1,080,000

12/31 Inventory (Income Statement)

[216,000 – (216,000/1.20)] 36,000
12/31 Inventory(Balance Sheet) 36,000

2018
Sales 1,200,000
Purchases (Cost of Goods Sold) 1,200,000

12/31 Inventory (Income Statement)

[300,000 – (300,000/1.20)] 50,000
12/31 Inventory (Balance Sheet) 50,000

Beginning R/E – Puma 36,000

1/1 Inventory (Income Statement) 36,000
 B. Puma’s Income from independent operations $760,000
Less: Unrealized profit in ending inventory (50,000)
Add: Unrealized profit in beginning inventory 36,000
Puma’s Income Realized in Transactions with
third parties 746,000
Puma’s Share of Subsidiary Income $368,000
Controlling Interest in Consolidated Net Income $1,114,000

Question Title: Test Bank (Problem) Question 6-2

Difficulty: Hard
Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the
cost, partial equity, and complete equity methods.
Section Reference: 6.1, 6.2, 6.4

30) Pinta Company owns 90% of the common stock of Simplex Company. Simplex Company sells
merchandise to Pinta Company at 25% above cost. During 2016 and 2017 such sales amounted to $800,000
and $1,020,000, respectively. At the end of each year, Pinta Company had in its inventory one-fourth of the
amount of goods purchased from Simplex Company during that year. Pinta Company reported income of
$1,500,000 from its independent operations in 2016 and $1,720,000 in 2017. Simplex Company reported
net income of $600,000 in each year and did not declare any dividends in either year. There were no
intercompany sales prior to 2016.

Required:
A. Prepare, in general journal form, all entries necessary on the 2017 consolidated statements workpaper to
eliminate the effects of intercompany sales.

B. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the
consolidated income statement in 2017.

C. Calculate controlling interest in consolidated net income for 2017.

Answer:
A. Sales 1,020,000
Purchases (Cost of Sales) 1,020,000
To eliminate intercompany sales.

12/31 Inventory (Income Statement) 51,000

Inventory (Balance Sheet) 51,000
To eliminate unrealized intercompany profit in ending inventory.

Beginning Retained Earnings – Pinta

(.90 × $40,000) 36,000
Noncontrolling interest 4,000
1/1 Inventory (Balance Sheet) 40,000
To recognize unrealized profit in beginning inventory realized during the year.

B. Noncontrolling Interest Calculation:

Simplex Company reported net income $600,000
Less: Unrealized profit in ending inventory (51,000)
 Add: Realized profit in beginning inventory 40,000
Subsidiary income included in consolidated income
Noncontrolling interest ownership percentage 589,000
× .1
Noncontrolling interest in consolidated income $ 58,900

C. Controlling Interest in Consolidated Net Income:

Pinta Company’s net income from
independent operations $1,720,000
Reported net income of Simplex Company $600,000
Less: Unrealized profit on sales of 2017 (51,000)
Add: Profit on intercompany sales to Pinta
realized in transactions with third parties 40,000
Subsidiary income realized in
transactions with third parties $589,000
Pinta Company’s share of subsidiary income
(589,000 × .9) 530,100
Controlling interest in consolidated net income $2,250,100

Question Title: Test Bank (Problem) Question 6-3

Difficulty: Hard
Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the
cost, partial equity, and complete equity methods.
Section Reference: 6.1, 6.2, 6.4

31) Pine Company owns an 80% interest in Salad Company and a 90% interest in Tuna Company. During
2016 and 2017, intercompany sales of merchandise were made by all three companies. Total sales
amounted to $2,400,000 in 2016, and $2,700,000 in 2017. The companies sold their merchandise at the
following percentages above cost.
Pine 15%
Salad 20%
Tuna 25%

The amount of merchandise remaining in the 2017 beginning and ending inventories of the companies from
these intercompany sales is shown below.

Merchandise Remaining in Beginning Inventory

Pine Salad Tuna Total
Sold by
Pine $225,000 $189,000 $414,000
Salad $180,000 216,000 396,000
Tuna 180,000 135,000 315,000

Merchandise Remaining in Ending Inventory

Pine Salad Tuna Total
Sold by
Pine $207,000 $138,000 $345,000
Salad $144,000 198,000 342,000
Tuna 195,000 150,000 345,000
Reported net incomes (from independent operations including sales to affiliates) of Pine, Salad, and Tuna
for 2017 were $3,600,000, $1,500,000, and $2,400,000, respectively.

Required:
A. Calculate the amount noncontrolling interest to be deducted from consolidated income in the
consolidated income statement for 2017.

B. Calculate the controlling interest in consolidated net income for 2017.

Answer:
Salad Tuna
A. Reported subsidiary income $1,500,000 $2,400,000
Add: Unrealized profit in beginning inventory 66,000 63,000
Less: Unrealized profit in ending inventory (57,000) (69,000)
Subsidiary income included in consolidated income 1,509,000 2,394,000
Noncontrolling interest ownership percentage × .2 × .1
Noncontrolling interest in consolidated income $301,800 $239,400

Total noncontrolling interest:$301,800 + $239,400 = $541,200

B. Pine Company’s income independent operations $3,600,000

Add: Unrealized profit considered realized in 2017
($414,000 – $414,000/1.15) 54,000
Less: Unrealized profit in 2017 income
($345,000 – $345,000/1.15) (45,000)
Pine's income realized in transactions with third parties $3,609,000

Salad Company’s Reported Net Income $1,500,000

Add: Unrealized profit considered realized
in 2017 ($396,000 – $396,000/1.2) 66,000
Less: Unrealized profit in 2017 income
($342,000 – $342,000/1.20) (57,000)
Subsidiary income realized in transactions
with third parties 1,509,000

Pine's share of subsidiary income (.8 × 1,509,000) 1,207,200

Tuna Company’s reported net income $2,400,000
Add: Unrealized profit considered realized
in 2017 ($315,000 – $315,000/1.25) 63,000
Less: Unrealized profit in 2017 income
($345,000 – $345,000/1.25) (69,000)
Subsidiary income realized in transactions
with third parties $2,394,000
Pine's share of subsidiary income (.9 × 2,394,000) 2,154,600
Controlling Interest in Consolidated Net Income $6,970,800

Question Title: Test Bank (Problem) Question 6-4

Difficulty: Hard
Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the
cost, partial equity, and complete equity methods.
Section Reference: 6.1, 6.2, 6.4

32) The following balances were taken from the records of S Company:
Common stock $2,500,000
Retained earnings, 1/1/11 $1,450,000
Net income for 2017 3,000,000
Dividends declared in 2017 (1,550,000)
Retained earnings, 12/31/11 2,900,000
Total stockholders’ equity, 12/31/11 $5,400,000

P Company owns 80% of the common stock of S Company. During 2017, P Company purchased
merchandise from S Company for $4,000,000. S Company sells merchandise to P Company at cost plus
25% of cost. On December 31, 2017, merchandise purchased from S Company for $1,250,000 remains in
the inventory of P Company. On January 1, 2017, P Company’s inventory contained merchandise
purchased from S Company for $525,000. The affiliated companies file a consolidated income tax return.
There was no difference between the implied value and the book value of net assets acquired.

Required:
A. Prepare all workpaper entries necessitated by the intercompany sales of merchandise.

B. Compute noncontrolling interest in consolidated income for 2017.

C. Compute noncontrolling interest in consolidated net assets on December 31, 2017.

Answer:
A. Sales 4,000,000
Cost of Goods Sold 4,000,000

Cost of Goods Sold 250,000

Ending Inventory (Balance Sheet) 250,000
[$1,250,000 - ($1,250,000/1.25)]

1/1 Retained Earnings – P Company (1) 84,000

Noncontrolling interest (2) 21,000
Cost of Goods Sold (Beginning Inventory) 105,000
[$525,000 – ($525,000/1.25)] = $105,000

(1) .8($105,000)
(2) .2($105,000)

B. $3,000,000 × .20 = $600,000 noncontrolling interest in consolidated income.

C. [(.20 × $5,400,000) -.20($1,250,000 – $1,250,000/1.25)] = $1,030,000 noncontrolling interest in

consolidated net assets on December 31, 2017.

Question Title: Test Bank (Problem) Question 6-5

Difficulty: Hard
Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the
cost, partial equity, and complete equity methods.
Section Reference: 6.1, 6.2, 6.4

33) P Corporation acquired 80% of S Corporation on January 1, 2017 for $240,000 cash when S’s
stockholders’ equity consisted of $100,000 of Common Stock and $30,000 of Retained Earnings. The
difference between the price paid by P and the underlying equity acquired in S was allocated solely to a
patent amortized over 10 years.

P sold merchandise to S during the year in the amount of $30,000. $10,000 worth of inventory is still on
hand at the end of the year with an unrealized profit of $4,000. The separate company statements for P and
S appear in the first two columns of the partially completed consolidated workpaper.

Required:
Complete the consolidated workpaper for P and S for the year 2017.

P Corporation and Subsidiary

Consolidated Statements Workpaper
P S Eliminations Noncontrolling Consolidated
Corp. Corp. Dr. Cr. Interest Balances
Income Statement
Sales 200,000 150,000
Dividend Income 16,000
Cost of Sales (92,000) (47,000)
Other Expenses (23,000) (40,000)
Noncontrolling Interest in Income
Net Income 101,000 63,000
Retained Earnings Statement
Retained Earnings 1/1 110,000 30,000
Add: Net Income 101,000 63,000
Less: Dividends ( 30,000) (20,000)
Retained Earnings 12/31 181,000 73,000
Balance Sheet
Cash 20,000 19,000
Accounts Receivable-net 120,000 55,000
Inventories 140,000 80,000
Patent
Land 270,000 420,000
Equipment and Buildings-net 600,000 430,000
Investment in S Corporation 240,000
Total Assets 695,000 1,004,000
Equities
Accounts Payable 909,000 831,000
Common Stock 300,000 100,000
Retained Earnings 181,000 73,000
1/1 Noncontrolling Interest in Net
Assets
12/31 Noncontrolling Interest in
Net Assets
Total Equities 1,390,000 1,004,000
December 31, 2017
 Answer:

6-6 P Corporation and Subsidiary

Consolidated Statements Workpaper
at December 31, 2017

Eliminations
P S Dr Cr Noncontrolling Consolidated
Corp. Corp. Interest Balances
Income Statement
Sales $200,000 $ 150,000 (a) 30,000 320,000
Dividend Income 16,000 (c) 16,000
Cost of Sales (92,000) (47,000) (b) 4,000 (a) 30,000 (113,000)
Other Expenses (23,000) (40,000) (e) 17,000 (80,000)
Noncontrolling Interest in
Income 9,200 (9,200)
Net income 101,000 63,000 67,000 30,000 9,200 117,800
Retained Earnings
Statement
Retained Earnings 1/1 110,000 30,000 (d) 30,000 110,000
Add: Net Income 101,000 63,000 67,000 30,000 9,200 117,800
Less: Dividends ( 30,000) (20,000) (c) 16,000 (4,000) (30,000)
Retained Earnings 12/31 181,000 73,000 97,000 46,000 5,200 197,800
Balance Sheet
Cash 20,000 19,000 39,000
Accounts Receivable-net 120,000 55,000 175,000
Inventories 140,000 80,000 (b) 4,000 216,000
Patent (d)170,000 (e) 17,000 153,000
Land 270,000 420,000 690,000
Equipment and Buildings-net 600,000 430,000 1,030,000
Investment in S Corporation 240,000 (d)240,000
Total Assets 1,390,000 1,004,000 2,303,000
Equities
Accounts Payable 909,000 831,000 1,740,000
Common Stock 300,000 100,000 (d)100,000 300,000
Retained Earnings from above 181,000 73,000 97,000 46,000 5,200 197,800
1/1 Noncontrolling Interest in
Net Assets (d)60,000 60,000
12/31 Noncontrolling Interest
in Net Assets 65,200 65,200
Total Equities 1,390,000 1,004,000 367,000 367,000 2,303,000

Question Title: Test Bank (Problem) Question 6-6

Difficulty: Hard
Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using
the cost, partial equity, and complete equity methods.
Section Reference: 6.1, 6.2, 6.4
34) On January 1, 2017, Perch Company purchased an 80% interest in the capital stock of Salmon Company
for $3,400,000. At that time, Salmon Company had common stock of $2,200,000 and retained earnings of
$620,000. Perch Company uses the cost method to record its investment in Salmon Company. Differences
between the fair value and the book value of the identifiable assets of Salmon Company were as follows:

Fair Value in Excess of Book Value

Equipment $400,000
Land 200,000
Inventory 80,000

The book values of all other assets and liabilities of Salmon Company were equal to their fair values on
January 1, 2017. The equipment had a remaining life of five years on January 1, 2017; the inventory was
sold in 2017.

Salmon Company’s net income and dividends declared in 2017 were as follows:

Year 2017 Net Income of $400,000; Dividends Declared of $100,000

Required:

Prepare a consolidated statements workpaper for the year ended December 31, 2018 using the partially
completed worksheet.
PERCH COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper
For the Year Ended December 31, 2018
  Perch Salmon Eliminations Noncontrolling Consolidated
  Company Company Dr. Cr. Interest Balances
Income Statement            
Sales 4,400,000  1,800,000         
Dividend Income 192,000         
Total Revenue 4,592,000  1,800,000         
Cost of Goods Sold 3,600,000  800,000         
Depreciation Expense 160,000  120,000         
Other Expenses 240,000  200,000         
Total Cost & Expenses 4,000,000  1,120,000         
Net/Consolidated Income 592,000  680,000         
Noncontrolling Interest in Income           
Net Income to Retained Earnings 592,000  680,000         
Retained Earnings Statement           
1/1 Retained Earnings           
Perch Company 2,000,000          
Salmon Company   920,000         
Net Income from above 592,000  680,000         
Dividends Declared           
Perch Company (360,000)          
Salmon Company   (240,000)         
12/31 Retained Earnings to           
 Balance Sheet 2,232,000  1,360,000         
  Perch Salmon Eliminations Noncontrolling Consolidated
  Company Company Dr. Cr. Interest Balances
Balance Sheet            
Cash 280,000  260,000         
Accounts Receivable 1,040,000  760,000         
Inventory 960,000  700,000         
Investment in Salmon Company 3,400,000          
Difference between Implied and Book
Value           
Land   1,280,000         
Plant and Equipment 1,440,000  1,120,000         
Total Assets 7,120,000  4,120,000         
Accounts Payable 528,000  440,000         
Notes Payable 360,000  120,000         
Common Stock:           
Perch Company 4,000,000          
Salmon Company   2,200,000         
Retained Earnings from above 2,232,000  1,360,000         
1/1 Noncontrolling Interest in Net Assets           
12/31 Noncontrolling Interest in Net
Assets
Total Liabilities & Equity 7,120,000  4,120,000         

Answer:
PERCH COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper
For the Year Ended December 31, 2018
  Perch Salmon Eliminations Noncontrolling Consolidated
  Company Company Dr. Cr. Interest Balances
Income Statement            
Sales 4,400,000  1,800,000        6,200,000 
Dividend Income 192,000  (a) 192,000      ---- 
Total Revenue 4,592,000  1,800,000        6,200,000 
Cost of Goods Sold 3,600,000  800,000        4,400,000 
Depreciation Expense 160,000  120,000  (d) 80,000      360,000 
Other expense 240,000  20,0000        440,000 
Total Cost & Expenses 4,000,000  1,120,000        5,200,000 
Net/Consolidated Income 592,000  680,000        1,000,000 
Noncontrolling Interest in Income         120,000  120,000 
Net Income to Retained Earnings 592,000  680,000  272,000    120,000  880,000 
Statement of Retained Earnings          
1/1 Retained Earnings            
(c) 64,000 
Perch Company 2,000,000    (d) 64,000  (e) 240,000    2,112,000 
Salmon Company   920,000  (b) 920,000   
Net Income from above 592,000  680,000  272,000    120,000  880,000 
Dividends Declared            
Perch Company (360,000)          (360,00
 0) 
Salmon Company   (240,000)    (a) 192,000  (48,000)   
12/31 Retained Earnings to            
Balance Sheet 2,232,000  1,360,000  1,320,000  432,000  72,000  2,632,000 
Balance Sheet            
Cash 280,000  260,000        540,000 
Accounts Receivable 1,040,000  760,000        1,800,000 
Inventory 960,000  700,000        1,660,000 
Investment in Salmon Company 3,400,000    (e) 240,000  (b)3,640,000   --- 
Difference between Implied and
Book Value     (b) 1,430,000  (c)1,430,000     
Land   1,280,000  (c) 200,000      1,480,000 
Plant and Equipment 1,440,000  1,120,000  (c) 400,000  (d) 160,000    2,800,000 
Goodwill (c) 750,000  750,000 
Total Assets 7,120,000  4,120,000        9,030,000 
Accounts Payable 528,000  440,000        968,000 
Notes Payable 360,000  120,000        480,000 
Common Stock:            
Perch Company 4,000,000          4,000,000 
Salmon Company   2,200,000  (b) 2,200,000     
Retained Earnings from above 2,232,000  1,360,000 1,320,000  432,000  72,000  2,632,000 

1/1 Noncontrolling Interest in Net

Assets      (c) 16,000 (b) 910,000  878,000
(d) 16,000
12/31 Noncontrolling Interest in
Net Assets 950,000  950,000
Total Liabilities & Equity 7,120,000  4,120,000    6,572,000    6,572,000   712,000  9,030,000 

Question Title: Test Bank (Problem) Question 6-7

Difficulty: Hard
Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using
the cost, partial equity, and complete equity methods.
Section Reference: 6.1, 6.2, 6.4

35) Poole Company owns a 90% interest in Solumbra Company. The consolidated income statement
drafted by the controller of Poole Company appeared as follows:

Poole Company and Subsidiary

Consolidated Income Statement
For theYear Ended December 31, 2017

Sales $13,800,000
Cost of Sales $9,000,000
Operating Expenses 1,800,000 10,800,000
Consolidated Income 3,000,000
Less Noncontrolling Interest in Consolidated Income 190,000
Controlling Interest in Consolidated Net Income $2,810,000
During your audit you discover that intercompany sales transactions were not reflected in the controller’s
draft of the consolidated income statement. Information relating to intercompany sales and unrealized
intercompany profit is as follows:

Selling Unsold at
Cost Price Year-End
2016 Sales—Solumbra to Poole $1,500,000 $1,800,000 1/4
2017 Sales—Poole to Solumbra 900,000 1,350,000 2/5

Required:
Prepare a corrected consolidated income statement for Poole Company and Solumbra Company for the year
ended December 31, 2017.

Answer:
POOLE COMPANY AND SUBSIDIARY
Consolidated Income Statement
For the Year Ended December 31, 2017

Sales ($13,800,000 – $1,350,000) $12,450,000

Cost of Goods Sold (a) $7,755,000
Operating Expenses 1,800,000 9,555,000
Consolidated Income 2,895,000
Less Noncontrolling Interest in Consolidated Income (b) 197,500
Controlling Interest in Consolidated Net Income $2,697,500

(a) Reported Cost of Goods Sold $9,000,000

Less intercompany sales in 2017 (1,350,000)
Plus unrealized profit in ending inventory (2/5 x ($1,350,000 - $900,000)) 180,000
Less realized profit in beginning inventory (1/4 x ($1,800,000 - $1,500,000)) (75,000)
Corrected cost of goods sold $7,755,000

(b) Reported net income of subsidiary $190,000 $1,900,000

0.1
Plus unrealized profit on subsidiary sales in 2016 that is considered realized in 2017
(1/4 x ($1,800,000 - $1,500,000)) 75,000
Less unrealized profit on subsidiary sales in 2017 (there were no upstream sales in 2017) 0
Income realized in transactions with third parties 1,975,000
× 0.10
Noncontrolling interest in consolidated income $197,500

Question Title: Test Bank (Problem) Question 6-8

Difficulty: Hard
Learning Objective: 1 Describe the financial reporting objectives for intercompany sales of inventory., 2
Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 5
Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when
not all the inventory has been sold to outsiders.
Section Reference: 6.1, 6.2