The problem below is an example of a question of the CPA ‘‘Other Objective Format’’ type as it was applied to the consolidations area. A mark-sensing answer sheet was used on the exam. You may just supply the answer, which should be accompanied by calculations where appropriate. Presented below are selected amounts from the separate unconsolidated financial statements of Pero Corporation and its 90%-owned subsidiary Sean Company at December 31, 2016. Additional information follows:

Additional information is as follows:
1. On January 2, 2016, Pero purchased 90% of Sean’s 100,000 outstanding common stock for cash of $175,000. On that date, Sean’s stockholders’ equity equaled $150,000, and the fair values of Sean’s assets and liabilities equaled their carrying amounts. Any remaining excess is considered to be goodwill.
2. On September 4, 2016, Sean paid cash dividends of $30,000.
3. On December 31, 2016, Pero recorded its equity in Sean’s earnings.

1. Items (a) through (c) below represent transactions between Pero and Sean during 2016. Determine the dollar amount effect of the consolidating adjustment on 2016 consolidated net income. Ignore income tax considerations.

Items to be answered:
a. On January 3, 2016, Sean sold equipment with an original cost of $30,000 and a carrying value of $21,000 to Pero for $36,000. The equipment had a remaining life of three years and was depreciated using the straight-line method by both companies.
b. During 2016, Sean sold merchandise to Pero for $60,000, which included a profit of $20,000. At December 31, 2016, half of this merchandise remained in Pero’s inventory.
c. On December 31, 2016, Pero paid $94,000 to purchase 50% of the outstanding bonds issued by Sean. The bonds mature on December 31, 2022, and were originally issued at a discount. The bonds pay interest annually on December 31, and the interest was paid to the prior investor immediately before Pero’s purchase of the bonds.
2. Items (a) through (l) below refer to accounts that may or may not be included in Pero’s consolidated financial statements. The list on the right refers to the various possibilities of those amounts to be reported in Pero’s consolidated financial statements for the year ended December 31, 2016. Consider all transactions stated above in determining your answer. Ignore income tax considerations.

Items to be answered:

Responses to be selected:

a. Cash b. Equipment c. Investment in subsidiary d. Bonds payable e. NCI f. Common stock g. Beginning retained earnings h. Dividends paid i. Gain on retirement of bonds j. Cost of goods sold k. Interest expense l. Depreciation expense

1. Sum of amounts on Pero’s and Sean’s separate  unconsolidated financial statements. 2. Less than the sum of amounts on Pero’s and  Sean’s separate unconsolidated financial  statements, but not the same as the amount  on either. 3. Same as amount for Pero only. 4. Same as amount for Sean only. 5. Eliminated entirely in consolidation. 6. Shown in consolidated financial statements but not in separate unconsolidated financial  statements. 7. Neither in consolidated nor in separate  unconsolidated financial statements.