1. What is the primary reason we defer financial statement recognition of gross profits on intra-entity sales for goods that remain within the consolidated entity at year end?
a. Revenues and COGS must be recognized for all intra-entity sales regardless of whether the sales are upstream or downstream.
b. Intra-entity sales result in gross profit overstatements regardless of amounts remaining in ending inventory.
c. Gross profits must be deferred indefinitely because sales among affiliates always remain in the consolidated group.
d. When intra-entity sales remain in ending inventory, ownership of the goods has not changed.

2. King Corporation owns 80 percent of Lee Corporation’s common stock. During October, Lee sold merchandise to King for $100,000. At December 31, 50 percent of this merchandise remains in King’s inventory. Gross profit percentages were 30 percent for King and 40 percent for Lee. The amount of unrealized intra-entity profit in ending inventory at December 31 that should be eliminated in the consolidation process is
a. $40,000.
b. $20,000.
c. $16,000.
d. $15,000.

3. In computing the noncontrolling interest’s share of consolidated net income, how should the subsidiary’s income be adjusted for intra-entity transfers?
a. The subsidiary’s reported income is adjusted for the impact of upstream transfers prior to computing the noncontrolling interest’s allocation.
b. The subsidiary’s reported income is adjusted for the impact of all transfers prior to computing the noncontrolling interest’s allocation.
c. The subsidiary’s reported income is not adjusted for the impact of transfers prior to computing the noncontrolling interest’s allocation.
d. The subsidiary’s reported income is adjusted for the impact of downstream transfers prior to computing the noncontrolling interest’s allocation.


4. Use the same information as in problem 5 except assume that the transfers were from Bottom Company to Top Company. What are the consolidated sales and cost of goods sold?
a. $1,000,000 and $720,000.
b. $1,000,000 and $755,000.
c. $1,000,000 and $696,000.
d. $970,000 and $712,000.

Use the following data for problems 5–6:
On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez’s financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows:


.:.
During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31.

5. What is the total of consolidated revenues?
a. $500,000.
b. $460,000.
c. $420,000.
d. $400,000.

6. What is the consolidated total for equipment (net) at December 31?
a. $740,000.
b. $756,000.
c. $760,000.
d. $765,000.