1. Intercompany profit elimination entries in consolidation workpapers are prepared in order to:
a. Nullify the effect of intercompany transactions on consolidated statements
b. Defer intercompany profit until realized
c. Allocate unrealized profits between controlling and noncontrolling interests
d. Reduce consolidated income
2. The direction of intercompany sales (upstream or downstream) does not affect consolidation workpaper procedures when the intercompany sales between affiliates are made:
a. At fair value
b. Above market value
c. At book value
d. To a 100 percent-owned subsidiary
3. Pet Corporation sells inventory items for $500,000 to Sen Corporation, its 80 percent-owned subsidiary. The consolidated workpaper entry to eliminate the effect of this intercompany sale will include a debit to sales for:
a. $500,000
b. $400,000
c. The amount remaining in Sen’s ending inventory
d. 80 percent of the amount remaining in Sen’s ending inventory
4. Sar Corporation, a 90 percent-owned subsidiary of Pan Corporation, buys half of its raw materials from Pan. The transfer price is exactly the same price as Sar pays to buy identical raw materials from outside suppliers and the same price as Pan sells the materials to unrelated customers. In preparing consolidated statements for Pan Corporation and Subsidiary:
a. The intercompany transactions can be ignored because the transfer price represents arm’s-length bargaining
b. Any unrealized profit from intercompany sales remaining in Pan’s ending inventory must be offset against the unrealized profit in Pan’s beginning inventory
c. Any unrealized profit on the intercompany transactions in Sar’s ending inventory is eliminated in its entirety
d. Only 90 percent of any unrealized profit on the intercompany transactions in Sar’s ending inventory is eliminated
5. Pit Corporation sells an inventory item to its subsidiary, Sin Company, to be used as a plant asset by Sin. The workpaper entry to eliminate intercompany profits in the year of sale will not include:
a. A debit to sales
b. A credit to cost of sales
c. A credit to inventories
d. A credit to plant assets
6. Sel Corporation regularly sells inventory items to its parent, Pul Corporation. In preparing the consolidated income statement, which of the following items would not be affected by the direction (upstream or downstream) of these intercompany sales?
a. Consolidated gross profit
b. Noncontrolling interest share
c. Controlling interest share of consolidated net income
d. Consolidated retained earnings
7. Pen Corporation regularly sells inventory items to its subsidiary, Shu Corporation. If unrealized profits in Shu’s 2011 year-end inventory exceed the unrealized profits in its 2012 year-end inventory:
a. Combined cost of sales will be greater than consolidated cost of sales in 2011
b. Combined cost of sales will be less than consolidated cost of sales in 2011
c. Combined gross profit will be greater than consolidated gross profit in 2011
d. Combined sales will be less than consolidated sales in 2011
8. Spa Corporation is a 90 percent-owned subsidiary of Ply Corporation, acquired on January 1, 2011, at a price equal to book value and fair value. Ply accounts for its investment in Spa using the equity method of accounting.
The only intercompany transactions between the two affiliates in 2011 and 2012 are as follows:
2011 Ply sold inventory items that cost $400,000 to Spa for $500,000.
One-fourth of this merchandise remains unsold at December 31, 2011
2012 Ply sold inventory items that cost $600,000 to Spa for $750,000.
One-third of this merchandise remains unsold at December 31, 2012
At December 31, 2012, Ply’s Investment in Spa account:
a. Will equal its underlying equity in Spa
b. Will be $25,000 greater than its underlying equity in Spa
c. Will be $50,000 less than its underlying equity in Spa
d. Will be $25,000 less than its underlying equity in Spa