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 net income be adjusted for intra-entity transfers?
a. The subsidiary's reported net 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. Wallton Corporation owns 70 percent of the outstanding stock of Hastings, Incorporated. On January 1, 2011, Wallton acquired a building with a 10-year life for $300,000. Wallton anticipated no salvage value, and the building was to be depreciated on the straight-line basis. On January 1, 2013, Wallton sold this building to Hastings for $280,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2013, how does this transfer affect the computation of consolidated net income?
a. Income must be reduced by $32,000.
b. Income must be reduced by $35,000.
c. Income must be reduced by $36,000.
d. Income must be reduced by $40,000.
5. Following are several figures reported for Preston and Sanchez as of December 31, 2013:
|
|
Preston
|
Sanchez
|
|
Inventory
|
$400,000
|
$200,000
|
|
Sales
|
800,000
|
600,000
|
|
Investment income
|
not given
|
|
|
Cost of goods sold
|
400,000
|
300,000
|
|
Operating expenses
|
180,000
|
250,000
|
Preston acquired 70 percent of Sanchez in January 2012. In allocating the newly acquired subsidiary's fair value at the acquisition date, Preston noted that Sanchez had developed a customer list worth $65,000 that was unrecorded on its accounting records and had a five-year remaining life. Any remaining excess fair value over Sanchez's book value was attributed to goodwill. During 2013, Sanchez sells inventory costing $120,000 to Preston for $160,000. Of this amount, 20 percent remains unsold in Preston's warehouse at year-end. For Preston's consolidated reports, determine the following amounts to be reported for the current year.
Inventory
Sales
Cost of Goods Sold
Operating Expenses
Noncontrolling Interest in the Subsidiary's Net Income