Faizal Company sells land with a book value of $6,000 to Azmi Company for $8,000 in 2016. Azmi is a wholly owned subsidiary of Faizal. Azmi Company holds the land during 2017. Azmi Company sells the land for $10,000 to an outside entity in 2018.

1. In 2016 the unrealized gain:

a) To be eliminated is affected by the noncontrolling interest percentage

b) Is initially included in the subsidiary's accounts and must be eliminated from Azmi Company under the equity method

c) Is eliminated from consolidated net income by a workpaper entry that includes a credit to the land account for $2,000

d) Is eliminated from consolidated net income by a workpaper entry that includes a credit to the land account for $8,000

2. Which of the following statements is true?

a) Under the equity method, Faizal Company's Investment in Azmi account will be $2,000 less than its underlying equity in Azmi throughout 2017.

b) No workpaper adjustments for the land are required in 2017 if Faizal Company has applied the equity method correctly.

c) A workpaper entry debiting gain on sale of land and crediting land will be required each year until the land is sold outside the consolidated entity.

d) In 2018, the year of Azmi's sale to an outside entity, the workpaper adjustment for the land will include a debit to gain on sale of land for $2,000.

Use the following information to answer questions 3 and 4:

Pop Corporation sold an office building to its 90 percent-owned subsidiary, Son Corporation, for $120,000 on December 31, 2016. The cost of the building to Pop was $100,000, the book value at the time of sale was $80,000, and the building had a remaining useful life of four years.

3. How will the intercompany sale affect Pop’s income from Son and Pop's net income for 2016?

a) Pop's income from Son will decrease, and its net income will not be affected.

b) Neither Pop's income from Son nor its net income will be affected.

c) Pop's income from Son will increase, and its net income will not be affected.

d) Pop's income from Son will not be affected, but its net income will decrease.

4. How will the consolidated assets and consolidated net income for 2016 be affected by the intercompany sale?

a) Consolidated net assets will decrease, and consolidated net income will increase.

b) Neither consolidated net assets nor consolidated net income will be affected.

c) Consolidated net assets will not be affected, but consolidated net income will increase.

d) Consolidated net assets will increase, and consolidated net income will decrease

Answer rating: 100% (QA)

1 In 2016 the unrealized gain b Is initially included in the subsi... View the full answer