When are profits on intercompany sales considered to be realized? Explain.
> Lever Corporation acquired 75 percent of the ownership of Tropic Company on January 1, 20X1. The fair value of the noncontrolling interest at acquisition was equal to its proportionate share of the fair value of the net assets of Tropic. The full amount
> Master Corporation acquired 80 percent ownership of Stanley Wood Products Company on January 1, 20X1, for $160,000. On that date, the fair value of the noncontrolling interest was $40,000, and Stanley reported retained earnings of $50,000 and had $100,00
> Amber Corporation acquired 60 percent ownership of Sparta Company on January 1, 20X8, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 40 percent of the book value of Sparta Company. Accumulated depreciat
> Amber Corporation acquired 60 percent ownership of Sparta Company on January 1, 20X8, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 40 percent of the book value of Sparta Company. Accumulated depreciat
> This problem is a continuation of P5-35. Mortar Corporation acquired 80 percent ownership of Granite Company on January 1, 20X7, for $173,000. At that date, the fair value of the noncontrolling interest was $43,250. The trial balances for the two compani
> Mortar Corporation acquired 80 percent ownership of Granite Company on January 1, 20X7, for $173,000. At that date, the fair value of the noncontrolling interest was $43,250. The trial balances for the two companies on December 31, 20X7, included the fol
> This problem is a continuation of P5-33. Power Corporation acquired 75 percent of Best Company’s ownership on January 1, 20X8, for $96,000. At that date, the fair value of the noncontrolling interest was $32,000. The book value of Best&
> Power Corporation acquired 75 percent of Best Company’s ownership on January 1, 20X8, for $96,000. At that date, the fair value of the noncontrolling interest was $32,000. The book value of Best’s net assets at acquisi
> Quill Corporation acquired 70 percent of North Company’s stock on January 1, 20X9, for $105,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of North Company. The companies repor
> Blue Corporation acquired controlling ownership of Skyler Corporation on December 31, 20X3, and a consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow: Du
> On January 2, 20X8, Total Corporation acquired 75 percent of Ticken Tie Company’s outstanding common stock. In exchange for Ticken Tie’s stock, Total issued bonds payable with a par value of $500,000 and fair value of
> Porter Corporation acquired 70 percent of Darla Corporation’s common stock on December 31, 20X4, for $102,200. At that date, the fair value of the noncontrolling interest was $43,800. Data from the balance sheets of the two companies in
> Hill Company paid $164,000 to acquire 40 percent ownership of Dale Company on January 1, 20X2. Net book value of Dale’s assets on that date was $300,000. Book values and fair values of net assets held by Dale were the same except for eq
> Balance sheet, income, and dividend data for Amber Corporation, Blair Corporation, and Carmen Corporation at January 1, 20X3, were as follows: On January 1, 20X3, Amber Corporation purchased 40 percent of the voting common stock of Blair Corporation by
> Ennis Corporation acquired 35 percent of Jackson Corporation’s stock on January 1, 20X8, by issuing 25,000 shares of its $2 par value common stock. Jackson Corporation’s balance sheet immediately before the acquisition
> On January 1, 20X0, Hunter Corporation issued 6,000 of its $10 par value shares to acquire 45 percent of the shares of Arrow Manufacturing. Arrow Manufacturing’s balance sheet immediately before the acquisition contained the following i
> Essex Company issued common shares with a par value of $50,000 and a market value of $165,000 in exchange for 30 percent ownership of Tolliver Corporation on January 1, 20X2. Tolliver reported the following balances on that date: The estimated economic
> Easy Chair Company purchased 40 percent ownership of Stuffy Sofa Corporation on January 1, 20X1, for $150,000. Stuffy Sofa’s balance sheet at the time of acquisition was as follows: During 20X1 Stuffy Sofa Corporation reported net inc
> Ball Corporation purchased 30 percent of Krown Company’s common stock on January 1, 20X5, by issuing preferred stock with a par value of $50,000 and a market price of $120,000. The following amounts relate to Krown’s b
> Select the correct answer for each of the following questions. 1. On July 1, 20X3, Barker Company purchased 20 percent of Acme Company’s outstanding common stock for $400,000 when the fair value of Acme’s net assets wa
> In preparing the consolidation worksheet for Bolger Corporation and its 60 percent–owned subsidiary, Feldman Company, the following consolidation entries were proposed by Bolger’s bookkeeper: Bolger’
> Master Corporation acquired 70 percent of Crown Corporation’s voting stock on January 1, 20X2, for $416,500. The fair value of the noncontrolling interest was $178,500 at the date of acquisition. Crown reported common stock outstanding of $200,000 and re
> Carroll Company sells all its output at 25 percent above cost. Pacific Corporation purchases all its inventory from Carroll. Selected information on the operations of the companies over the past three years is as follows: Pacific acquired 60 percent of
> Sweeny Corporation owns 60 percent of Bitner Company’s shares. Partial 20X2 financial data for the companies and consolidated entity were as follows: On January 1, 20X2, Sweeny’s inventory contained items purchased f
> How is the effect of unrealized intercompany profits on consolidated net income different between an upstream and a downstream sale?
> How are unrealized profits treated in the consolidated income statement if the intercompany sale occurred in a prior period and the transferred item is sold to a nonaffiliate in the current period?
> What dollar amounts in the consolidated financial statements will be incorrect if intercompany services are not eliminated?
> A parent company may use on its books one of several different methods of accounting for its ownership of a subsidiary: (a) cost method, (b) modified equity method, or (c) fully adjusted equity method. How will the choice of method affect the reported
> When is unrealized profit on an intercompany sale of land considered realized? When is profit on an intercompany sale of equipment considered realized? Why do the treatments differ?
> In the period in which an intercompany sale occurs, how do the consolidation entries differ when unrealized profits pertain to an intangible asset rather than a tangible asset?
> If the sale in the preceding question occurs on January 1, 20X3, what additional account will require adjustment in preparing the consolidated income statement?
> If a company sells a depreciable asset to its subsidiary at a profit on December 31, 20X3, what account balances must be eliminated or adjusted in preparing the consolidated income statement for 20X3?
> A subsidiary sold a depreciable asset to the parent company at a profit of $1,000 in the current period. Will the income assigned to the noncontrolling interest in the consolidated income statement for the current period be more if the intercompany sale
> A subsidiary sold a depreciable asset to the parent company at a gain in the current period. Will the income assigned to the noncontrolling interest in the consolidated income statement for the current period be more than, less than, or equal to a propor
> What consolidation entry is needed when inventory is sold to an affiliate at a profit and is resold to an unaffiliated party before the end of the reporting period? (Assume both affiliates use perpetual inventory systems.)
> Is an inventory sale from one subsidiary to another treated in the same manner as an upstream sale or a downstream sale? Why?
> What type of adjustment must be made in the consolidation worksheet if a differential is assigned to land and the subsidiary disposes of the land in the current period?
> How will the elimination of unrealized intercompany inventory profits recorded on the subsidiary’s books affect consolidated retained earnings?
> How will the elimination of unrealized intercompany inventory profits recorded on the parent’s books affect consolidated retained earnings?
> How do unrealized intercompany inventory profits from a prior period affect the computation of consolidated net income when the inventory is resold in the current period? Is it important to know whether the sale was upstream or downstream? Why, or why no
> Under what circumstances would a parent company cease consolidation of a subsidiary? Explain.
> How is the amount to be reported as consolidated retained earnings determined when there have been intercorporate sales during the period?
> How is the amount to be reported as cost of goods sold by the consolidated entity determined when there have been intercorporate sales during the period?
> What consolidation entry is needed when inventory is sold to an affiliate at a profit and is not resold before the end of the period? (Assume both affiliates use perpetual inventory systems.)
> When majority ownership is acquired, what portion of the goodwill reported in the consolidated balance sheet is assigned to the noncontrolling interest?
> Will the consolidation of unrealized intercompany profits on an upstream sale or on a downstream sale in the current period have a greater effect on income assigned to the noncontrolling interest? Why?
> How do unrealized intercompany profits on an upstream sale of inventory made during the current period affect the computation of consolidated net income and income to the controlling interest?
> How do unrealized intercompany profits on a downstream sale of inventory made during the current period affect the computation of consolidated net income and income to the controlling interest?
> How does the introduction of noncontrolling shareholders change the consolidation worksheet?
> On December 31, 20X4, Worth Corporation acquired 90 percent of Brinker Inc.’s common stock for $864,000. At that date, the fair value of the noncontrolling interest was $96,000. Of the $240,000 differential, $5,000 related to the increased value of Brink
> General Corporation acquired 80 percent of Strap Company’s voting common stock on January 1, 20X4, for $138,000. At that date, the fair value of the noncontrolling interest was $34,500. Strap’s balance sheet at the dat
> Palmer Corporation acquired 70 percent of Krown Corporation’s ownership on January 1, 20X8, for $140,000. At that date, Krown reported capital stock outstanding of $120,000 and retained earnings of $80,000, and the fair value of the noncontrolling intere
> Broadmore Corporation acquired 75 percent of Stem Corporation’s common stock on January 1, 20X8, for $435,000. At that date, Stem reported common stock outstanding of $300,000 and retained earnings of $200,000, and the fair value of the
> This exercise is a continuation of E5-13. Proud Corporation acquired 80 percent of Stergis C ompany’s voting stock on January 1, 20X3, at underlying book value. The fair value of the noncontrolling interest was equal to 20 percent of th
> Proud Corporation acquired 80 percent of Stergis Company’s voting stock on January 1, 20X3, at underlying book value. The fair value of the noncontrolling interest was equal to 20 percent of the book value of Stergis at that date. Assum
> Knox Corporation purchased 60 percent of Conway Company ownership on January 1, 20X7, for $277,500. Conway reported the following net income and dividend payments: On January 1, 20X7, Conway had $250,000 of $5 par value common stock outstanding and ret
> Pioneer Corporation purchased 80 percent of Lowe Corporation’s stock on January 1, 20X2. At that date, Lowe reported retained earnings of $80,000 and had $120,000 of stock outstanding. The fair value of its buildings was $32,000 more than the book value.
> Major Corporation acquired 90 percent of Lancaster Company’s voting common stock on January 1, 20X1, for $486,000. At the time of the combination, Lancaster reported common stock outstanding of $120,000 and retained earnings of $380,000, and the fair val
> Canton Corporation is a majority-owned subsidiary of West Corporation. West acquired 75 percent ownership on January 1, 20X3, for $133,500. At that date, Canton reported common stock outstanding of $60,000 and retained earnings of $90,000, and the fair v
> Power Corporation acquired 70 percent of Silk Corporation’s common stock on December 31, 20X2. Balance sheet data for the two companies immediately following the acquisition follow: At the date of the business combination, the book va
> Temple Corporation acquired 75 percent of Dynamic Corporation’s voting common stock on December 31, 20X4, for $390,000. At the date of combination, Dynamic reported the following: At December 31, 20X4, the book values of Dynamicâ
> Zenith Corporation acquired 70 percent of Down Corporation’s common stock on December 31, 20X4, for $102,200. The fair value of the noncontrolling interest at that date was determined to be $43,800. Data from the balance sheets of the t
> Power Company owns 90 percent of Pleasantdale Dairy’s stock. The balance sheets of the two companies immediately after the Pleasantdale acquisition showed the following amounts: The fair value of the noncontrolling interest at the dat
> Slim Corporation’s balance sheet at January 1, 20X7, reflected the following balances: Ford Corporation entered into an active acquisition program and acquired 80 percent of Slim’s common stock on January 2, 20X7, fo
> On June 10, 20X8, Game Corporation acquired 60 percent of Amber Company’s common stock. The fair value of the noncontrolling interest was $32,800 on that date. Summarized balance sheet data for the two companies immediately after the st
> Select the correct answer for each of the following questions. A 70 percent owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest balances in the parent compan
> Select the most appropriate answer for each of the following questions. 1. If A Company acquires 80 percent of the stock of B Company on January 1, 20X2, immediately after the acquisition, which of the following is correct? a. Consolidated retained earn
> During 20X4, Plate Company paid its employees $80,000 for work done in helping its wholly owned subsidiary build a new office building that was completed on December 31, 20X4. Plate recorded the $110,000 payment from the subsidiary for the work done as s
> What portion of the unrealized intercompany profit is eliminated in a downstream sale? In an upstream sale?
> What is a downstream sale? Which company may have unrealized profits on its books in a downstream sale?
> How are unrealized intercompany profits treated in the consolidated statements if the intercompany sale occurred in a prior period and the profits have not been realized by the end of the current period?
> How are unrealized profits on current-period intercompany sales treated in preparing the income statement for (a) the selling company and (b) the consolidated entity?
> Darwin Company holds assets with a fair value of $120,000 and a book value of $90,000 and liabilities with a book value and fair value of $25,000. Required Compute the following amounts if Brad Corporation acquires 60 percent ownership of Darwin: a.
> Roof Corporation acquired 80 percent of the stock of Gable Company by issuing shares of its common stock with a fair value of $192,000. At that time, the fair value of the noncontrolling interest was estimated to be $48,000, and the fair values of Gable’
> What is an upstream sale? Which company may have unrealized profits on its books in an upstream sale?
> In the consolidation of a prior-period unrealized intercompany gain on depreciable assets, why does the debit to the Investment account decrease over time?
> Par Company regularly purchases inventory from Eagle Company. Recently, Par Company purchased a majority of the voting shares of Eagle Company. How should Par Company treat inventory profits recorded by Eagle Company before the day of acquisition? Follow
> Unrealized profits from a prior-year upstream sale were realized in the current period. What effect will this event have on income assigned to the noncontrolling interest in the consolidated income statement for the current period?
> What effect does a negative retained earnings balance on the subsidiary’s books have on consolidation procedures?
> What portion of other comprehensive income reported by a subsidiary is included in the consolidated statement of comprehensive income as accruing to parent company shareholders?
> How do other comprehensive income elements reported by a subsidiary affect the consolidated financial statements?
> How is the amount of consolidated retained earnings assigned to the noncontrolling interest affected by unrealized inventory profits at the end of the year?
> How are dividends paid by a subsidiary to noncontrolling shareholders treated in the consolidation worksheet?
> How is income assigned to the noncontrolling interest shown in the consolidation worksheet?
> How is the income assigned to the noncontrolling interest normally computed?
> Why is there a need for a consolidation entry when an intercompany inventory transfer is made at cost?
> When majority ownership is acquired, what portion of the fair value of assets held by the subsidiary at acquisition is reported in the consolidated balance sheet?
> On January 1, 20X5, Block Corporation started using a wholly owned subsidiary to deliver all its sales overnight to its customers. During 20X5, Block recorded delivery service expense of $76,000 and made payments of $58,000 to the subsidiary. Require
> The newest clerk in the accounting office recently entered trial balance data for the parent company and its subsidiaries in the company’s consolidation program. After a few minutes of additional work needed to eliminate the intercompany investment accou
> You buy a stock for $20. After a year the price rises to $25 but falls back to $20 at the end of the second year. What was the average percentage return and what was the true annualized return?
> On January 31, 2001, you bought 100 shares of AVAYA (AV) for $17.50 a share. Subsequent prices of AV were January 1, 2002……..$8.60 January 1, 2003……….2.50 January 1, 2004………17.50 You owned the stock for three years (2001 to January 2004). What were your
> What is the difference between the following? a) Cross-sectional and time-series analysis b) The current ratio and the quick ratio c) Receivables turnover, inventory turnover, and fixed asset turnover d) The gross profit margin, the operating profit marg
> If a preferred stock is in arrearage, what does that imply about the dividend payment?
> How does preferred stock differ from common stock?
> What are the tax implications of the following? a) Dividend reinvestment plans b) Stock dividends c) Stock splits d) Corporate stock repurchases
> How do stock dividends differ from cash dividends? How do stock dividends differ from stock splits?
> What are the advantages associated with dividend reinvestment plans?
> What are the differences among the ex-dividend date, the date of record, and the distribution date?
> Why may a dividend increment lag after an increase in earnings? Why may a firm distribute dividends even though earnings decline?
> Even though bonds are debt obligations, investing in them involves risk. What are the sources of risk? What role do rating services play in managing risk?
