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26 Cards in this Set
- Front
- Back
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How should Intercompany transactions be treated? |
Eliminate 100% of intercompany transactions (even when noncontrolling interest exists). They must be eliminated because they lack the criteria of being "arm's length."
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How should intercompany transactions be eliminated from the balance sheet and the income statement? |
Balance Sheet -- Eliminate 100% of all intercompany payables & receivables
Income Statement -- Eliminate 100% 1. Interest expense/ Interest income (bonds) 2. Gain on sale/ Depreciation expense (intercompany fixed asset sales) 3. Sales/ COGS (intercompany inventory transactions). |
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Are intercompany transaction eliminated if a company does NOT consolidate? |
Do not eliminate intercompany accounts if you do NOT consolidate. 1. Separate report in financial statement 2. Footnote disclosure |
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Intercompany Inventory/Merchandise Transactions |
100% of intercompany sale & COGS should be eliminated prior to preparing CFS (even if parent's ownshership < 100%). Profit must be eliminated from ending inventory & COGS of the purchasing affiliate. Intercompany profit in beginning inventory, recognized by the selling affiliate in the previous year, must be eliminated by an adjustment (debit) to retained earnings. |
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Pass Key - When inventory has been sold intercompany & the exam requires you to correct the accounts: |
Reverse the original intercompany transaction (sale & COGS, internally), and:
Inventory sold to outsiders --> Correct COGS
Inventory still on hand --> Correct ending inventory |
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Intercompany Bond Transactions |
The debt from this transaction is considered retired & a gain/loss is recognized on the consolidated I/S. This gain/loss on extinguishment of debt is calculated as the difference between price paid to acquire debt & BV of debt. This gain/loss is not reported on either company's books, but through an elimination entry. All intercompany acccount balances are also eliminated. |
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Intercompany Bond Transactions: Intercompany Interest |
Eliminate intercompany accounts such as interest expense, interest income, interest payable, and interest receivable. |
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Intercompany Bond Transactions: Amortization of Discount or Premium |
Eliminate amortization of the discount or premium, which serves as an increase, or decrease in the amount of interest expense/revenue that is recorded. The unamortized discount or premium on the intercompany bond is eliminated. |
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Intercompany Bond Transactions: Subsequent Years |
The elimination for realized but unrecorded gain/loss on extinguishment of bonds in subsequent years would be adjusted to retained earnings. Noncontrolling interest would be adjusted if the bonds were originally issued by the subsidiary. |
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Intercompany Sale of Land |
Gain/loss on sale of land remains unrealized until land is sold to outsider. Workpaper elimination entry in period of sale eliminates intercompany gain/loss & adjusts land to its original cost. In the subsequent yr & every yr thereafter until land is sold to 3rd party, retained earnings is debited & land is credited to eliminate intercompany profit. RE is debited in subsequent yrs because the gain would have been closed to this account. |
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Intercompany profit on sale of depreciable fixed assets |
The gain or loss on the intercompany sale of a depreciable asset is unrealized from a CSF perspective until the asset is sold to an outsider. A workpaper elimination entry in the period of sale eliminates the intercompany gain/loss and adjusts the asset & accumulated depreciation to their original balance on the date of sale. |
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Patton owns 100% of Sun. June 1, Year 1, Patton declared & paid $1 per share cash dividend to stockholders on May 15, Yr 1. May 1, Yr 1, Sun bought 10,000 shares of Patton's common stock for $700,000 on the open market, when book value per share was $30. What gain should Patton report from this transaction in its consolidated I/S on December 31, Year 1? |
$0 gain from the purchase of Patton's (parent) stock by Sun (subsidiary). The purchase by the member of a consolidated group of stock of another member of the consolidated group is treated as a treasury stock transaction. This follows the theory of consolidated financial statements presenting one economic entity. (You cannot make money selling stock to yourself.) |
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In its financial statements, Pare, Inc. accounts for its 15% ownership of Sabe Co. as an available-for-sale security. At December 31, Year 1, Pare has a receivable from Sabe. How should the receivable be reported in Pare's December 31, Year 1, balance sheet? |
The total receivable should be reported separately. Rule: When a company owns < 50% of the common stock of an investee, the investment account can be reported under the cost or equity method, depending on whether significant influence is exercised. Receivables and payables to the investee are reported separately on the balance sheet. |
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Perez, Inc. owns 80% of Senior, Inc. During Year 1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in Year 1. For Year 1 consolidated financial statements, how should the summation of Perez and Senior's income statement items be adjusted?
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Sales and cost of goods sold should be reduced by the intercompany sales. Perez's sales price is Senior's purchase price. When Senior sells to an outside party, this amount becomes Senior's cost of sales. The sales price to the outsider is okay and the original cost of sales on Perez's books is okay, but the sales and cost of sales are overstated, for a like amount, by the intercompany transaction. |
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Wagner, holder of a $1,000,000 Palmer bond, collected interest due on March 31, Year 1, & sold the bond to Seal for $975,000. That day, Palmer, a 75% owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal's purchase of Palmer's bond on retained earnings and NCI amounts reported in Palmer's March 31, Yr 1, consolidated B/S? |
$100,000 increase in consolidated earnings. $0 effect on NCI. Purchase of the parent co. bond by the sub is treated as if the bond were retired when the FSs are consolidated. Because the bond had a book value of $1,075,000, but was "retired" for $975,000, a gain is recorded upon consolidation. NCI is only adjusted if the bonds were originally issued by the subsidiary. |
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In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, Year 1, Pulham has a receivable from Angles. How should the receivable be reported in Pulham's Year 1 financial statements? |
The total receivable should be disclosed separately. |
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Jan 1, Yr 10, Poe sold a machine for $900,000 to Saxe, its wholly-owned subsidiary. Poe paid $1,100,000 for this machine, which had acc. deprec. of $250,000. Poe estimated a $100,000 salvage value & depreciated on straight-line method over 20 years, a policy Saxe continued. In Poe's Dec 31, Yr 10, consolidated B/S, this machine should be included in cost and accumulated depreciation as: |
The effect of the intercompany sale should be eliminated. The machine should be shown on the consolidated statements at Poe's cost of $1,100,000. Depreciation should continue as if the sale had not occurred. Depreciation for the current year is $50,000 [(1,100,000 - 100,000) / 20]. Accumulated depreciation at 12/31/Y10 is $300,000 (250,000 + 50,000). |
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Water owns 80% of outstanding common stock of Fire. On Dec 31, Yr 1, Fire sold equipment to Water @ a price in excess of Fire's carrying amount, but less than its original cost. On a consolidated B/S @ Dec 31, Yr 1, the carrying amount of the (cost less acc. depreciation) equipment should be reported at:
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Equipment should be reported at Water's original cost less Fire's recorded gain (which equals Fire's carrying value prior to sale). |
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P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be: |
The difference between the bond carrying amounts would be included as a decrease to retained earnings because a premium was paid to "retire" the bonds. Rule: For intercompany bond holdings, bonds are eliminated in consolidation & the difference (gain or loss) between discounted issue price & premium on reacquisition is included in retained earnings. |
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At December 31, Year 1, Grey, Inc. owned 90% of Winn Corp., a consolidated subsidiary, and 20% of Carr Corp., an investee in which Grey cannot exercise significant influence. On the same date, Grey had receivables of $300,000 from Winn and $200,000 from Carr. In its December 31, Year 1 consolidated balance sheet, Grey should report accounts receivable from affiliates of: |
$200,000. The receivable from Winn will be eliminated in the consolidation. The receivable from Carr will not be eliminated (Carr is not a subsidiary). Grey reports accounts receivable from affiliates (Carr) of $200,000 in its consolidated balance sheet. |
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Zest owns 100% of Cinn. Jan. 2, Yr 1, Zest sold equipment w/ an orig. cost of $80,000 & a carrying amount of $48,000 to Cinn for $72,000. Zest had been deprec. the equipment over a 5-yr period using straight-line deprec. w/ no residual value. Cinn is using straight-line deprec. over 3 yrs w/ no residual value. In Dec 31, Yr 1, consolidating wksht, by what amount should deprec. expense be decreased? |
$8,000. Depreciation expense should be decreased by the difference between the depreciation expense calculated by Cinn and the depreciation that would have been calculated by Zest had Zest not sold the asset in an intercompany transaction. |
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Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech? |
$10,000. Since Jane owns 90% of Dun and 100% of Beech, when they declare and pay dividends, the only amounts that should appear in their year-end consolidated financial statements are the dividends paid to outsiders or external parties. Intercompany dividends should be eliminated upon consolidation. |
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Rowe Inc. owns 80% of Cowan Co.'s outstanding capital stock. On November 1, Rowe advanced $100,000 in cash to Cowan. What amount should be reported related to the advance in Rowe's consolidated balance sheet as of December 31? |
Zero. All intercompany transactions, including loans and advance, should be eliminated upon consolidation. Therefore, none of the $100,000 advance should appear in the consolidated balance sheet. The percentage ownership here is irrelevant. |
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Yr 1, Abaco, the 100% owned sub of Walker, sold merchandise to Walker at a 25% markup. Intercompany sales to Walker totaled $800,000 during Yr 1. On Dec 31, Yr 1, Walker held $200,000 of inventory purchased from Abaco in its ending inventory. In Walker's Dec 31, Yr 1 elimination of intercompany sales transaction, the intercompany profit that must be eliminated from ending inventory is: |
$40,000. Cost × 1.25 = $800,000 Cost = $640,000 $160,000 × 25% = $40,000 eliminated from ending inventory $160,000 × 75% = $120,000 eliminated from COGS |
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King Inc. owns 70% of Simmon Co.'s outstanding common stock. King's liabilities total $450,000, and Simmon's liabilities total $200,000. Included in Simmon's financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements? |
$550,000. King is regarded as having a controllable interest in Simmon Co. Total liabilities reported in the CSF would be King's total liabilities of $450,000 and $100,000 of Simmon's liabilities. Simmon's $100,000 note payable to King is eliminated because the transaction would lack the criteria of being at arm's length. |
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Nolan owns 100% of both Twill & Webb. Twill purchases merchandise inventory from Webb at 140% of cost. Yr 1, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 in Yr 1. In preparing combined FSs for Yr 1, Nolan's bookkeeper disregarded common ownership of Twill & Webb. By what amount was unadjusted revenue overstated in the combined I/S for Yr 1? |
$56,000. Merchandise that cost Webb $40,000 was sold to Twill at 140% of Webb's cost ($56,000) and must be eliminated |
