Select the correct answer for each of the following questions.

1. In the preparation of a consolidated income statement:

a. Income assigned to noncontrolling shareholders always is computed as a pro rata portion of the reported net income of the consolidated entity.

\(b\). Income assigned to noncontrolling shareholders always is computed as a pro rata portion of the reported net income of the subsidiary.

c. Income assigned to noncontrolling shareholders in the current period is likely to be less than a pro rata portion of the reported net income of the subsidiary in the current period if the subsidiary had an unrealized gain on an intercorporate sale of depreciable assets in the preceding period.

d. Income assigned to noncontrolling shareholders in the current period is likely to be more than a pro rata portion of the reported net income of the subsidiary in the current period if the subsidiary had an unrealized gain on an intercorporate sale of depreciable assets in the preceding period.

2. When a 90 percent owned subsidiary records a gain on a sale of land to an affiliate during the current period and the land is not resold before the end of the period:

a. The full amount of the gain will be excluded from consolidated net income.

b. Consolidated net income will be increased by the full amount of the gain.

c. A proportionate share of the unrealized gain will be excluded from income assigned to noncontrolling interest.

d. The full amount of the unrealized gain will be excluded from income assigned to noncontrolling interest.

3. During 20X5, Subsidiary Corporation sells land to Parent Corporation and records a gain of \(\$ 15,000\) on the sale. Subsidiary Corporation reports \(20 \times 5\) net income of \(\$ 55,000\). Parent Corporation holds 60 percent of the voting shares of Subsidiary Corporation. Parent Corporation plans to build a new general headquarters on the land in \(20 \times 7\). If there is no adjustment made for unrealized profits in preparing the consolidated financial statements as of December 31, 20X5:

a. Consolidated net income will be overstated by \(\$ 15,000\).

b. Consolidated retained earnings will be overstated by \(\$ 15,000\).

c. Income assigned to the noncontrolling interest in the consolidated income statement will be overstated by \(\$ 9.000\).

d. Consolidated net income will be overstated by \(\$ 9,000\).
\(e\). Both \(a\) and \(b\) are correct.
4. Minor Company sold land to Major Company on November 15, 20X4, and recorded a gain of \(\$ 30,000\) on the sale. Major Company owns 80 percent of the common shares of Minor Company. Which of the following statements is correct?

a. A proportionate share of the \(\$ 30,000\) must be treated as a reduction of income assigned to the noncontrolling interest in the consolidated income statement unless the land is resold to a nonaffiliate in \(20 \times 4\).

b. The \(\$ 30,000\) will not be treated as an adjustment in computing income assigned to the noncontrolling interest in the consolidated income statement in \(20 \mathrm{X} 4\) unless the land is resold to a nonaffiliate in \(20 \times 4\).

c. In computing consolidated net income it does not matter whether the land is or is not resold to a nonaffiliate before the end of the period; the \(\$ 30,000\) will not affect the computation of consolidated net income in \(20 \mathrm{X} 4\) because the profits are on the subsidiary's books.

d. The trial balance of Minor Company as of December 31, 20X4, should be adjusted to remove the \(\$ 30,000\) gain since the gain is not yet realized.
5. Lewis Company owns 80 percent of the stock of Tomassini Corporation. You are told that Tomassini Corporation has sold equipment to Lewis Company and that the following journal entry is needed to prepare consolidated statements for 20X9:

Which of the following is incorrect?

a. The parent paid \(\$ 40,000\) in excess of the subsidiary's carrying amount to acquire the asset.

b. From a consolidated viewpoint, depreciation expense as recorded by Lewis is overstated.

c. The asset transfer occurred in \(20 \mathrm{X} 9\) before the end of the year.

d. Consolidated net income will be reduced by \(\$ 40,000\) when this entry is used as an eliminating entry.

Transcribed Image Text:

Equipment 20.000 Gain on Sale of Equipment 40,000 Depreciation Expense 5,000 Accumulated Depreciation 55,000