1. Schiff Company owns 100% of the outstanding common stock of the Viel Company. During 20X1, Schiff sold merchandise to Viel that Viel, in turn, sold to unrelated firms. There were no such goods in Viel's ending inventory. However, some of the intercompany purchases from Schiff had not yet been paid. Which of the following amounts will be incorrect in the consolidated statements if no adjustments are made? a. inventory, accounts payable, net income b. inventory, sales, cost of goods sold, accounts receivable c. sales, cost of goods sold, accounts receivable, accounts payable. d. accounts receivable, accounts payable 2. The material sale of inventory items by a parent company to an affiliated company a. enters the consolidated revenue computation only if the transfer was the result of arm's length bargaining. b. affects consolidated net income under a periodic inventory system but not under a perpetual inventory system. c. does not result in consolidated income until the merchandise is sold to outside entities. d. does not require a working paper adjustment if the merchandise was transferred at cost. 3. Williard Corporation regularly sells inventory items to its subsidiary, Petty, Inc. If unrealized profits in Petty's 20X1 year-end inventory exceed the unrealized profits in its 20X2 year-end inventory, 20X2 combined a. cost of sales will be less than consolidated cost of sales in 20X2. b. gross profit will be greater than consolidated gross profit in 20X2. c. sales will be less than consolidated sales in 20X2. d. cost of sales will be greater than consolidated cost of sales in 20X2. 4. Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds. The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers. In preparing consolidated statements for Reynolds Company and Subsidiary Sally Corporation, 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 Reynolds' ending inventory must be offset against the unrealized profit in Reynolds' beginning inventory. c. any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated in its entirety. d. eighty percent of any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated. 5. Cattle Company sold inventory with a cost of $40,000 to its 90%-owned subsidiary, Range Corp., for $100,000 in 20X1. Range resold $75,000 of this inventory for $100,000 in 20X1. Based on this information, the amount of inventory reported on the consolidated financial statements at the end of 20X1 is ____. a. $10,000 b. $18,000 c. $21,000 d. $30,000 6. Diller owns 80% of Lake Company common stock. During October 20X7, Lake sold merchandise to Diller for $300,000. On December 31, 20X7, one-half of this merchandise remained in Diller's inventory. For 20X7, gross profit percentages were 30% for Diller and 40% for Lake. The amount of unrealized profit in the ending inventory on December 31, 20X7 that should be eliminated in consolidation is ____. a. $80,000 b. $60,000 c. $32,000 d. $30,000 7. Perry, Inc. owns a 90% interest in Brown Corp. During 20X6, Brown sold $100,000 in merchandise to Perry at a 30% gross profit. Ten percent of the goods are unsold by Perry at year end. The noncontrolling interest will receive what gross profit as a result of these sales? a. $0 b. $2,700 c. $3,000 d. $27,000 8. On January 1, 20X1 Bullock, Inc. sells land to its 80%-owned subsidiary, Humphrey Corporation, at a $20,000 gain. The land is still held by Humphrey on December 31, 20X3. What is the effect of the intercompany sale of land on 20X3 consolidated net income? a. Consolidated net income will be the same as it would have been had the sale not occurred. b. Consolidated net income will be $20,000 less than it would have been had the sale not occurred. c. Consolidated net income will be $16,000 less than it would have been had the sale not occurred. d. Consolidated net income will be $20,000 greater than it would have been had the sale not occurred. 9. Emron Company owns a 100% interest in the common stock of the Dietz Company. On January 1, 20X2, Emron sold Dietz a fixed asset that Dietz will use over a 5-year period. The asset was sold at a $5,000 profit. In the consolidated statements, this profit will a. not be recorded. b. be recognized over 5 years. c. be recognized in the year of sale. d. be recognized when the asset is resold to outside parties at the end of its period of use. 10. Pease Corporation owns 100% of Sade Corporation common stock. On January 2, 20X6, Pease sold machinery with a carrying amount of $30,000 to Sade for $50,000. Sade is depreciating the acquired machinery over a 5-year life using the straight-line method. The related net adjustments to compute the 20X6 and 20X7 consolidated income before income tax would be an increase (decrease) of 20X6 20X7 a. $(16,000) $4,000 b. $(16,000) $0 c. $(20,000) $4,000 d. $(20,000) $0 11. On January 1, 20X1, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly-owned subsidiary. Poe paid $1,100,000 for this machine. On the sale date, accumulated depreciation was $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy that Saxe continued. In Poe's December 31, 20X1, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as Cost Accumulated Depreciation a. $1,100,000 $300,000 b. $1,100,000 $290,000 c. $ 900,000 $ 40,000 d. $ 850,000 $ 42,500 12. Porch Company owns a 90% interest in the Screen Company. Porch sold Screen a milling machine on January 1, 20X1, for $50,000 when the book value of the machine on Porch's books was $40,000. Porch financed the sale with Screen signing a 3-year, 8% interest, note for the entire $50,000. The machine will be used for 10 years and depreciated using the straight-line method. The following amounts related to this transaction were located on the companies trial balances: Interest Revenue $4,000 Interest Expense $4,000 Depreciation Expense $5,000 Based upon the information related to this transaction what will be the amounts eliminated in preparing the 20X1 consolidated financial statements? Interest Revenue Interest Expense Depreciation Expense a. 4,000 4,000 5,000 b. 4,000 4,000 1,000 c. 3,600 3,600 900 d. 3,600 3,600 4,500 13. On 1/1/X1 Peck sells a machine with a $20,000 book value to its subsidiary Shea for $30,000. Shea intends to use the machine for 4 years. On 12/31/X2 Shea sells the machine to an outside party for $14,000. What amount of gain or (loss) for the sale of assets is reported on the consolidated financial statements? a. loss of $6,000 b. loss of $1,000 c. gain of $4,000 d. gain of $14,000 Scenario 4-1 Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On January 1, 20X2, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated party for $100,000 on September 26, 20X3. 14. Refer to Scenario 4-1. The land will be included in the December 31, 20X2 consolidated balance sheet of Pennie, Inc. and Subsidiary at ____. a. $48,000 b. $60,000 c. $72,000 d. $90,000 15. Refer to Scenario 4-1. The gain from sale of land that will appear in the consolidated income statements for 20X2 and 20X3, respectively, is ____. a. $0 and $10,000 b. $0 and $40,000 c. $30,000 and $10,000 d. $30,000 and $40,000 16. Company P owns 100% of the common stock of Company S. Company P is constructing an asset for Company S that will be used in Company S's manufacturing operations over a 5-year period. The asset was 50% complete at the end of 20X1 and was completed on December 31, 20X2. Company P is recording the construction under the percentage of completion method. The asset was put into use by Company S on January 1, 20X3. The profit on the asset was estimated to be $50,000. Actual results complied to the estimate. On the consolidated statements, the profit recognized will be 20X1 20X2 20X3 20X4 - 20X7 a. 0 50,000 0 0 b. 25,000 25,000 0 0 c. 0 0 10,000 10,000/year d. 0 0 50,000 0 17. The following accounts were noted in reviewing the trial balance for Parent Co. and Subsidiary Corp.: Assets under Construction Contracts Receivable Billings on Construction in Progress Earned Income on Long-Term Contracts Contracts Payable Which of these accounts do you expect to eliminate when producing Parent Co. consolidated financial statements? a. Assets under Construction; Billings on Construction in Progress; Earned Income on Long-Term Contracts b. Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts c. Assets under Construction; Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable d. Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable 18. During 20X3, a parent company billed its 100%-owned subsidiary for computer services at the rate of $1,000 per month. At year end, one month's bill remained unpaid. As a part of the consolidation process, net income a. should be reduced $12,000. b. should be reduced $1,000. c. needs no adjustment. d. needs an adjustment, but the amount is not provided by this information. 19. On January 1, 20X1, a parent loaned $30,000 to its 100%-owned subsidiary on a 5-year, 8% note. The note requires a principal payment at the end of each year of $6,000 plus payment of interest accrued to date. The following accounts require adjustment in the consolidation process: Controlling Assets Debt Retained Earnings a. Yes Yes Yes b. No No Yes c. Yes Yes No d. No No No 20. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp. Based upon the following information what amount does Phelps Co. record as subsidiary income? Phelps internally generated income: $250,000 Shore internally generated income: $ 50,000 Intercompany profit on Shore beginning inventory: $ 10,000 Intercompany profit on Shore ending inventory: $ 15,000 a. $50,000 b. $44,000 c. $40,000 d. $36,000