Use the following information for questions 1, 2, 3, 4 and 5: Sally Company (a 70%-owned subsidiary) owned a machine with an original cost of $210,000. It had been depreciated in the last 2 years on the straight-line method with 7 years of life and no salvage value. On January 1, 2015, Sally sold this machine to Patty Corporation (the parent) for a price of $170,000 in cash. Patty uses the machine in its operation.

How are Pattys 2015 equity in net income of Sally and 2015 noncontrolling interest in net income affected by the intercompany sale of machine?

Equity in net income Noncontrolling interest in net income

$16,000 decrease $0

$4,000 increase $0

$11,200 decrease $4,800 decrease

$2,800 increase $1,200 increase

The working paper entries for the year ended December 31, 2015 would include

A credit of $20,000 to Intercompany Gain on Sale of Machine

A credit of $4,000 to Depreciation Expense

A credit of $20,000 to Retained Earnings

A debit of $54,000 to Machine

The working paper entries for the year ended December 31, 2016 would include

A debit of $12,000 to Accumulated Depreciation

A debit of $16,000 to Retained Earnings

A credit for $12,000 toInvestment in Sally

A debit of $16,000 to Investment in Sally

As of December 31, 2016, the unconfirmed intercompany gain was

$8,000

$12,000

$16,000

$20,000

The working paper entries for the year ended December 31, 2016 would

Increase accumulated depreciated by $52,000

Decrease machine by $40,000

Decrease depreciation expense by $8,000

Decrease Intercompany Gain on Sale of Machine by $20,000

Use the following information for questions 6 and 7:

On Janury 1, 2015, Parent company sold to Subsidiary company for $60,000, a parcel of land that had cost the Parent $57,000. On March 2, 2019, Subsidiary company sold the land to an outside company for $62,000.

Working paper entries for the year ended December 31, 2017 would include a. a debit of $3,000 to Land

b. a credit of $7,000 to Land

c. a debit of $3,000 to Investment in Subsidiary

d. a debit of $3,000 to Retained Earnings

Working paper entries for the year ended December 31, 2019 would include

A credit of $3,000 to Gain on Sale of Land

A credit of $5,000 to Retained Earnings

A debit of $3,000 to Intercompany Gain on Sale of Land

A credit of $5,000 to Gain on Sale of Land

Pete Corporation acquired 70% of Sand Company on January 1, 2015. During 2015, Pete sold merchandise costing $5,120 to Sand for a price of $8,000. Sand sold $3,700 of the merchandise purchased from Pete to outside customers for $7,000 during 2015. The unconfirmed intercompany profit as of December 31, 2015 is

$1,548

$1,188

$1,332

$1,926

Parson Company acquired 80% of Scott Corporations common stock on January 2, 2014. No revaluation was reported for this acquisition. Scott reported an income of $7,000 in 2015. Scott purchased from Parson for $25,000 a parcel of land that had cost Parson $23,000 on March 2, 2015. Parson uses the complete equity method. Scott still holds the land. Based on the above information, Parsons equity in income of Scott for 2015 was

$4,000

$3,200

$5,600

$3,600

Parent company sold merchandise to its subsidiary. The subsidiary sold the merchandise to outside customers. Which of the following is NOT an effect of the working paper entries for the intercompany sales of merchandise by the parent company to its subsidiary?

They eliminate the subsidiarys cost of intercompany purchases.

They eliminate the overstatement of the subsidiarys sales

They reduce inventories to the cost incurred by the consolidated entity.

They eliminate the parents intercompany sales.

Qualitative evidence that an entity is NOT a variable interest entity includes which one of the following?

The entitys equity level is greater than that of similar entities that do not require their debt to be guaranteed by another party.

The entity has a debt to equity ratio that is higher than that of its competitors.

The entitys business is not focused on just a few customers.

The entity has issued preferred and common stock, and the shareholders are guaranteed a certain return on their investment.

Included in the working paper entry for intercompany sales of equipment was a decrease to Investment in Subsidiary. This decrease indicates

A downstream sale made at a gain

An upstream sale made at a loss

A downstream sale mad at a loss

An upstream sale made at a gain

Problem 1 Part A Davis Company is formed with $5,000 in equity and is expected to generate the following cash flows (all occurring at the end of one year):

Cash Flows Probability $63,000 0.3 39,000 0.5 28,000 0.2

Determine if the equity is high enough to absorb the expected losses assuming the appropriate discount rate of 6%

Part B Paul Corporation paid $205,000 to buy 25% of Slide Companys common stock on Jan 1, 2015 and paid $459,000 to buy 60% of Slides stock on December 31, 2015. There is no control premium. On December 31, 2015, Slides stockholders equity was Common Stock at $50,000 and Retained Earnings at $657,000. Differences between book value and fair value of the net identifiable assets of Slide Company on December 31, 2015, were limited to the following:

Book Value Fair Value Copyrights $ 32,000 $ 30,200 Long-term debt 26,000 23,700

How much, if any, gain or loss did Paul Corporation recognize on December 31, 2015? Prepare working paper entry R (in journal entry format) for Paul Corporation and subsidiary on December 31, 2015.

Problem 2 Sue Company (an 80%-owned subsidiary) sells merchandise to its parent Pony Corporation at a 15% markup on cost. During the year ended December 31,2015 Pony sold $75,330 of the intercompany merchandise acquired from Sue to outside customers. Pony paid $71,820 to acquire merchandise from Sue in 2015. Included in Ponys December 31, 2015, inventories were goods acquired from Sue at a billed price of $19,980

Prepare the working paper entry (in journal entry format) for the intercompany sale of merchandise for Pony Corporation and subsidiary for the year ended December 31, 2015. Based on the above information, what are the amounts of consolidated cost of goods sold and consolidated ending inventory reported on the 2015 consolidated financial statements? How (increase or decrease and the amount) is Ponys 2015 equity in income of Sue affected by the intercompany sale of merchandise?

Problem 3 On January 1, 2015, Pack Corporation (the parent) issued $300,000 of 8%, 3-year bonds for $285,080 to yield 10%. The bonds pay interest annually on December 31. On January 1, 2016, Snyder Company (a 65%-owned subsidiary) acquired in the open market Packs bond for $294,723 to yield 9%.

Prepare the working paper entry (in journal entry format) for the intercompany acquisition of bonds for Pack Corporation and subsidiary for the year ended December 31, 2016. How (increase or decrease and the amount) will the consolidated working paper entry affected consolidated income for 2016?