Chapter 06 - Intercompany Profit Transactions - Plant Assets

Chapter 6 Test Bank INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS Multiple Choice Questions

Use the following information for questions 1 and 2. In 2004 2004, , Parr Parrot ot Comp Compan any y sold sold land land to its its subs subsid idia iary ry, , Tree Tree Corporatio Corporation, n, for $12,000 $12,000. . It had a book book value of of $10,000. $10,000. In the next year, Tree sold the land for $18,000 to an unaffiliated firm. LO1 1.

Whic Which h of of the the fol follow lowing ing is is cor corr rect? ect? a. No consolida consolidation tion working working paper paper entry entry was necessary necessary in 2004. 2004. b. A consolid consolidati ation on working working paper paper entry entry was requir required ed only if the subsidiary was less than 100% owned in 2004. c. A consol consolida idatio tion n workin working g paper paper entry entry is require required d each each year year until the land is sold outside the related parties. d. A consolidat consolidated ed working working paper entry entry was required required only only if the land was held for resale in 2004.

LO1 2.

The 20 2004 unrealized gain a. was deferr deferred ed unti until l 2006. 2006. b. was elimin eliminate ated d from from consol consolida idated ted net income income by a workin working g paper entry that credited land $2,000. c. made consoli consolidated dated net net income $2,000 $2,000 less less than it would would have been had the sale not occurred. d. made made consol consolida idated ted net income income $2,000 $2,000 greater greater than it would would have been had the sale not occurred.

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LO1 3.

On Janu Januar ary y 1, 200 2005, Eagl Eagle e Corpo orpor rati ation sold sold equi equipm pme ent with with a book value of $40,000 and a 20-year remaining useful life to its wholly-own wholly-owned ed subsidiar subsidiary, y, Rabbit Rabbit Corporati Corporation, on, for $60,000. $60,000. Both Both Eagl Eagle e and and Rabb Rabbit it use use the the stra straig ight ht-l -lin ine e depr deprec ecia iati tion on method, assuming no salvage value. On December 31, 2005, the sepa separa rate te comp compan any y fina financ ncia ial l stat statem emen ents ts held held the the foll follow owin ing g balances associated with the equipment: Eagle Rabbit Gain on sale of equipment $ 20,000 Depreciation expense $ 3,000 Equipment 60,000 Accumulated depreciation 3,000 A working paper entry to consolidate the financial statements of Eagle and Rabbit on December 31, 2005 included a a. b. c. d.

debit to gain gain on sale sale of equipm equipment ent for for $19,000. $19,000. credit credit to gain gain on sale sale of equipme equipment nt for $20,00 $20,000. 0. debit to to accumulate accumulated d depreciat depreciation ion for $1,000 $1,000. . credit credit to depreci depreciation ation expense expense for $3,000 $3,000. .

Use the following information for questions 4 and 5. On December 31, 2005, Corella Corporation sold equipment with a three-year remaining useful life and a book value of $21,000 to its 70%-owned subsidiary Hollow Company for a price of $27,000. Corella bought the equipment four years ago for $49,000. LO1 4.

What was the intercompany sale impact on the consolidated financial statements for the year ended December 31, 2005?

a. b. c. d. LO1 5.

Corella’s Net Income

Corella’s Income from Hollow

No N o effect. No N o effect. De D ecreased. Increased.

No effect. Decreased. No effect. Decreased.

What was the intercompany sale impact on the consolidated financial statements for the year ended December 31, 2005? Consolidated Net

Consolidated Net













LO1 6.

On Jan Janua uary ry 2, 2, 2005 2005 Kak Kakap apo o Comp Compan any y sold sold a truc truck k with with boo book k valu value e of $45,00 $45,000 0 to Flight Flightles less s Corpor Corporati ation, on, its comple completel tely y owned owned subsidiary, for $60,000. $60,000. The truck had a remaining useful life life of three three years years with with zero zero salvag salvage e value. value. Both firms firms use the straight-line depreciation method, and assume no salvage value. If Kakapo failed to make year-end equity adjustments, Kakapo’s investment in Flightless at December 31, 2005 was a. b. c. d.

$5,0 $5,000 00 too too hig high. h. $10, $10,00 000 0 too too low. low. $10, $10,00 000 0 too too high high. . $15, $15,00 000 0 too too high high. .

LO1, 2 & 4 Use the following information to answer questions 7 through 10. On Januar January y 1, 2003, 2003, Shrimp Shrimp Corpor Corporati ation on purcha purchased sed a delive delivery ry truck with an expected useful life of five years. On January 1, 2005, Shrimp sold the truck to Avocet Corporation and recorded the following journal entry:

Cash Accumulated depreciation Truck Gain on Sale of Truck

Debit 50,000 18,000

Credit

53,000 15,000

Avoc Avocet et hold holds s 60% 60% of Shri Shrimp mp. . Shri Shrimp mp repo report rted ed net net inco income me of $55,00 $55,000 0 in 2005 2005 and Avocet Avocet's 's separa separate te net income income (exclu (excludes des interest in Shrimp) for 2005 was $98,000. LO1 7.

In prep prepar arin ing g the the cons consol olid idat ated ed fina financ ncia ial l stat statem emen ents ts for for the elimination entry for depreciation expense was a a. b. c. d.

LO1 8.

debi debit t for for $5,0 $5,000 00. . cred credit it for for $5, $5,00 000. 0. debi debit t for for $15, $15,00 000. 0. cred credit it for for $15, $15,00 000. 0.

In the the con conso soli lida dati tion on work workin ing g pap paper ers, s, the the a. debi debite ted d for $3, $3,00 000. 0. b. dited dited for $3,000 $3,000

Truck

account was

2005 2005, ,













LO2 9.

Cons Conso olid lidated ated net net in income come for for 20 2005 was was a. b. c. d.

LO4 10. 10.

$121 121,000 ,000. . $125 125,000 ,000. . $131 131,000 ,000. . $143 143,000 ,000. .

The The min minor orit ity y int inter eres est t inc incom ome e for for 2005 2005 was was a. b. c. d.

LO2 11.

$18, 18,000. 000. $22, 22,000. 000. $23, 23,000. 000. $27, 27,000. 000.

Grou Groun nd Par Parr rot Comp ompany any co compl mplete etely owns wns He Heath athlan lands Inc. nc. On January 2, 2005 Ground Parrot sold Heathlands machinery at its book book value value of $30,000 $30,000. . Ground Ground Parro Parrot t had the machi machiner nery y two years years before before sellin selling g it and used used a five-y five-year ear straig straightht-lin line e depreciation method, with zero salvage value. Heathlands will use a three-year straight-line method. In the 2005 consolidated income statement, the depreciation expense a. b. c. d.

LO2 12.

requir required ed no no adjus adjustme tment. nt. decrea decreased sed by $4,000 $4,000. . incr increa ease sed d by $4,0 $4,000 00 increa increased sed by $30,00 $30,000. 0.

In reference to the downstream or upstream sale deprec depreciab iable le assets assets, , which which of the follow following ing statem statement ents s correct? a. b.

c.

d.

of is

Upst Upstr ream eam sale sales s from rom the sub subsid sidiary iary to the the pare arent comp compa any always result in unrealized gains or losses. The initial effect of unrealized gains and losses from downstream sales of depreciable assets is different from the sale of nondepreciable assets. Gains, Gains, but but not not losses losses, , appear appear in in the pare parentnt-com compan pany y accoun accounts ts in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting. Gains Gains and and losses losses appe appear ar in the the paren parent-c t-comp ompany any acco account unts s in the the year of sale and must be eliminated by the parent company in













LO2 13. 13.

Falc Falcon on Corp Corpor orat atio ion n sold sold equip equipme ment nt to its its 80%80%-ow owne ned d subsi subsidi diar ary, y, Rodent Rodent Corp., Corp., on Januar January y 1, 2005. 2005. Falcon Falcon sold sold the equip equipment ment for $110,000 when its book value was $85,000 and it had a 5year year remain remaining ing useful useful life life with with no expect expected ed salvag salvage e value. value. Separa Separate te balanc balance e sheets sheets for Falcon Falcon and Rodent Rodent includ included ed the follow following ing equipm equipment ent and accumu accumulat lated ed deprec depreciat iation ion amount amounts s on December 31, 2005:

Equipment Less: Accumulated depreciation Equipment-net

$ ( $

Falcon 750,000 $ 20 200,000) ( 550,000 $

Rodent 300,000 50,000) 250,000

Consolidated amounts for equipment and accumulated depreciation at December 31, 2005 were respectively a. b. c. d. LO2 14.

$1,025 $1,025,00 ,000 0 $1,025 $1,025,00 ,000 0 $1,025 $1,025,00 ,000 0 $1,050 $1,050,00 ,000 0

and and and and

$245,0 $245,000. 00. $250,0 $250,000. 00. $245,0 $245,000. 00. $250,0 $250,000. 00.

Peregrine Corporation acquired a 90% interest in Cliff Corporation in 2004 at a time when Cliff’s book values and fair values values were equal equal to one another. another. On January January 1, 2005, Cliff Cliff sold sold a truc truck k with with a $45, $45,00 000 0 book book valu value e to Pere Peregr grin ine e for for $90,00 $90,000. 0. Peregr Peregrine ine is deprec depreciat iating ing the truck truck over over 10 years years using the straight-line method. Separate incomes for Peregrine and Cliff for 2005 were as follows:

Sales Gain on sale of truck Cost of Goods Sold Depreciation expense Other expenses Separate incomes

$

Peregrine 1, 1,800,000 ( ( (

$

Cliff $ 1,050,000 45,000 75 750,000) ( 28 285,000) 450,000) ( 135,000) 180,000) ( 450,000) 420,000 $ 225,000

Peregrine’s investment income from Cliff for 2005 was a. b. c. d.

$16 $161,55 1,550 0. $16 $162,00 2,000 0. $16 $166,05 6,050 0. $20 $202,50 2,500 0.













LO2 15. 15.

Kest Kestre rel l Compa Company ny acqu acquir ired ed an 80% 80% inte intere rest st in Rep Repti tile le Corp Corpor orat atio ion n on January 1, 2004. On January 1, 2005, Reptile sold a building with with a book book valu value e of $50, $50,00 000 0 to Kest Kestre rel l for for $80, $80,00 000. 0. The The buil buildi ding ng had had a rema remain inin ing g usef useful ul life life of ten ten year years s and and no salv salvag age e valu value. e. The The sepa separa rate te bala balanc nce e shee sheets ts of Kest Kestre rel l and and Reptile on December 31, 2005 included the following balances:

Buildings Accumulated Depreciation Buildings

$

Kestrel 400,000 120,000

$

Reptile 250,000 75,000

The The cons consol olid idat ated ed amou amount nts s for for Buil Buildi ding ngs s and and Accu Accumu mula late ted d Depreciati Depreciation on - Buildings Buildings that appeared, appeared, respectively respectively, , on the balance sheet at December 31, 2005, were a. b. c. d. LO2 16.

and and and and

$192,0 $192,000. 00. $195,0 $195,000. 00. $192,0 $192,000. 00. $195,0 $195,000. 00.

Pigeon Corporation purchased land from its 60%-owned subsidiary, Seed Inc., in 2003 at a cost $30,000 greater than Seed’s book value. In 2005, Pigeon sold the land to an outside entity entity for $40,00 $40,000 0 more more than than Pigeon Pigeon’s ’s book book value. value. The 2005 2005 consolidated income statement reported a gain on the sale of land of a. b. c. d.

LO2 17. 17.

$620,0 $620,000 00 $620,0 $620,000 00 $650,0 $650,000 00 $650,0 $650,000 00

$40 $40,000 ,000. . $42 $42,000 ,000. . $58 $58,000 ,000. . $70 $70,000 ,000. .

Pied Pied Impe Imperi rial al-P -Pig igeo eon n Corp Corpor orat atio ion n acqu acquir ired ed a 90% 90% inte intere rest st in Offshore Corporation in 2003 when Offshore’ book values were equivalent to fair values. Offshore sold equipment with a book valu value e of $80, $80,00 000 0 to Pied Pied Impe Imperi rial al-P -Pig igeo eon n for for $130 $130,0 ,000 00 on January 1, 2005. Pied Imperial-Pigeon is fully depreciating the equi equipm pmen ent t over over a 4-ye 4-year ar peri period od by usin using g the the stra straig ight ht-l -lin ine e method. Offshore’ reported net income for 2005 was $320,000. Pied Imperial-Pigeon’s 2005 net income from Offshore was a. b. c. d

$24 $249,25 9,250 0. $25 $250,50 0,500 0. $25 $254,25 4,250 0. $28 $288,00 8,000 0















LO3 18.

Lorikeet Corporation acquired a 80% interest in Nectar Corporation on January 1, 2000 at a cost equal to book value and fair fair value value. . In the the same same year Nect Nectar ar sold sold land land costin costing g $30,000 to Lorikeet for $50,000 On July 1, 2005, Lorikeet sold the land to an unrelated party party for $110,000. What was the gain on the consolidated income statement? a. b. c. d.

LO4 19. 19.

On Jan Janua uary ry 1, 1, 2005 2005 Rai Rainf nfor ores est t Co. Co. reco record rded ed a $30, $30,00 000 0 prof profit it on on the upstream sale of some equipment that had a remaining fouryear year life life under under the straig straightht-lin line e deprec depreciat iation ion method method. . The effect of this transaction on the amount recorded in 2005 by the the pare parent nt comp compan any y Womp Wompoo oo as its its inve invest stme ment nt inco income me in the the Rainforest was a. b. c. d.

LO4 20.

$48 $48,000 ,000. . $60 $60,000 ,000. . $64 $64,000 ,000. . $80 $80,000 ,000. .

a decrease decrease of $18,00 $18,000 0 if the Rainfor Rainforest est was was 80% owned. owned. a decrease decrease of $27,00 $27,000 0 if the Rainfor Rainforest est was was 90% owned. owned. an increase increase of $22,500 $22,500 if the the Rainforest Rainforest was was wholly wholly owned. owned. an increase increase of $30,000 $30,000 if the the Rainforest Rainforest was was wholly wholly owned. owned.

Swif Swift t Parr arrot Corp Corpo orat ration ion acqui cquir red a 60% 60% inte nteres rest in Berr Berri ies Corp. on January 1, 2005, when Berries’s book values and fair values values were were equiva equivalen lent. t. On Januar January y 1, 2005, 2005, Berrie Berries s sold sold a buildi building ng with with a book book value value of $600,0 $600,000 00 to Swift Swift Parrot Parrot for $700,000. The building had a remaining life of 10 years, no salvage value, and was depreciated by the straight-line method. Berries reported net income of $2,000,000 for 2005. What was the noncontrolling interest for 2005? a. $71 $710,00 0,000 0.













LO1 Exercise 1 Spin Spinif ifle lex x Pige Pigeon on Comp Compan any y owns owns 90% 90% of the the outs outsta tand ndin ing g stoc stock k of Waterh Waterhole ole Corpor Corporati ation. on. This This intere interest st was purcha purchased sed on Januar January y 1, 1999, when Waterhole’s book values were equal to its fair values. The amount paid by Spiniflex Pigeon included $10,000 for goodwill. On January 1, 2000, Spiniflex Pigeon purchased equipment for $100,000 whic which h had had no salv salvag age e valu value e with with a usef useful ul life life of 8 year years. s. on a straight-line basis. On January 1, 2005, Spiniflex Pigeon sold the truc truck k to Wate Waterh rhol ole e Corp Corpor orat atio ion n for for $40, $40,00 000. 0. The The equi equipm pmen ent t was was esti estima mate ted d to have have a four four-y -yea ear r rema remain inin ing g life on this this date date. . All All affiliates use the straight-line depreciation method. Required: Prepare all relevant entries with respect to the truck. 1. Record Record the journal journal entries entries on Spinifl Spiniflex ex Pigeon’s Pigeon’s books for 2005. 2005. 2. Record Record the journal journal entries entries on Waterhole’ Waterhole’s s books for 2005. 2005.













LO1&2 Exercise 2 Stork Corporation paid $15,700 Corp Corpor orat atio ion n on Janu Januar ary y 1, 2004 2004, , consisted of $10,000 Capital Stock The excess cost over book value was

for a 90% interest in Swamp when when Swam Swamp p stoc stockh khol olde ders rs’ ’ equi equity ty and $3,000 of Retained Earnings. attributable to goodwill.

Additional information: 1. Stork sells sells merchand merchandise ise to Swamp Swamp at 120% of Stork’s Stork’s cost. cost. During 2004, Stork’s sales to Swamp were $4,800, of which half of the merchandise remained in Swamp’s inventory at December 31, 2004. During 2005, Stork’s sales to Swamp were $6,000 of which 60% remained in Swamp’s inventory at December 31, 2005. At year-end 2005 Swamp owed Stork $1,500 for the inventory purchased during 2005. 2. Stork Corpor Corporation ation sold sold equipment equipment with with a book value of $2,000 $2,000 and a remaining useful life of four years and no salvage value to Swamp Corporation on January 1, 2005 for $2,800. 3. Separate Separate company company financial financial statemen statements ts for Stork Corporat Corporation ion and Subsidiary at December 31, 2005 are summarized in the first two columns of the consolidation working papers. 4. Help Helpfu ful l hint hint: : Stor Stork' k's s inve invest stme ment nt in Swam Swamp p acco accoun unt t December 31, 2004 consisted of the following:

Required:

bala balanc nce e

Investment cost Equity in Swamp’s income for 2004 Less: Unrealized inventory profit

$

15,700 3,600 ( 400)

Less: Dividends received from Swamp Investment in Swamp, December 31, 2004

( 1,800) $ 17,100

at













Stork Corporation and Subsidiary Consolidation Working Papers at December 31, 2005 Eliminations Stork Swamp Debit Credit INCOME STATEMENT Sales Income from Swamp Gain on equipment sale

$

Cost of Sales ( Other Expenses ( Net income Retained Earnings 1/1 Add: Net income Dividends ( Retained Earnings 12/31 $ BALANCE SHEET Cash Receivables Inventories Equipment-net Land Investment in Swamp Goodwill TOTAL ASSETS $ LIAB. & EQUITY Accounts payable Capital k

60,000

$14,000

4,500 800 26,000) ( 28,000) ( 11,300

4,400) 3,600) 6,000

9,500 11,300 7,000) (

5,000 6,000 2,000)

13,800

$ 9,000

6,000 7,000 10,000 24,000 4,000

3,000 4,000 4,500 9,000 3,500

19,800 70,800

$24,000

7,000

5,000

50 000

10 000

NonBalance Cntrl. Sheet













Exercise 3 Dove Corporation acquired all of the outstanding voting common stock of the Squab Corporation several years ago when the book values and fair values of Squab’s net assets were equal. On Apri April l 1, 2003 2003, , Dove Dove sold sold land land that that cost cost $25, $25,00 000 0 to Squa Squab b $40,000. Squab resold the land for $45,000 on December 1, 2005.

for for

On July 1, 2005, Dove sold equipment equipment with a book value of $10,000 to Squab for $26,000. Squab is depreciating the equipment over a fouryear period using the straight-line method. Required: The first two columns in the working papers presented below summarize income income statem statement ent inform informati ation on from from the separa separate te compan company y financ financial ial statements of Dove and Squab for the year ended December 31, 2005. Fill in the consolidated working paper columns to show how each of the the item items s from from the the sepa separa rate te comp compan any y repo report rts s will will appe appear ar in the the consolidated income statement.

Sales Income from Squab Gain on sale of equipment Gain on sale of land Cost of sales Depreciation expense Other expenses Net income

Dove 450,000 46,000 16,000 ( 211,500) ( 45 45,500) ( 120,000) 135,000

Squab 200,000

( ( (

5,000 91 91,500) 23 23,500) 34 3 4,000) 56,000

Consolidated















LO1&2 Exercise 4 Brolga Brolga Corporat Corporation ion paid paid $26,80 $26,800 0 cash cash for a 70% intere interest st in Dance Dance Comp Compan any y on Janu Januar ary y 1, 2004 2004, , when when Danc Dance’ e’s s stoc stockh khol olde ders rs’ ’ equi equity ty consisted of $15,000 Capital Stock and $9,000 of Retained Earnings. Additional information: 1. The cost-book cost-book value value different differential ial was allocate allocated d to a patent with with a 20-year amortization period. 2. Brol Brolga ga Corp Corpor orat atio ion n sold sold inve invent ntor ory y item items s that that cost cost $4,0 $4,000 00 to Dance Dance for $4,800 $4,800 during during 2004 2004 and one-ha one-half lf of these these invent inventory ory items remained unsold by Dance on December 31, 2004. 3. During During 2005 Brolga Brolga Corporat Corporation ion sold invento inventory ry items that cost $5,000 $5,000 to Dance Dance for $6,000 $6,000 and 30% of these these invent inventory ory items remained unsold by Dance on December 31, 2005. Dance Corporation owed Brolga $700 on account at year-end 2005. 4. Brolga Brolga Corpora Corporatio tion n sold sold equipm equipment ent with a 5-year 5-year remaini remaining ng life and a book value of $4,000 to Dance for $5,000 on January 1, 2005. Straight-line depreciation is used. 5. Brol Brolga ga and and Danc Dance e respectively.

pay pay

annu annual al divi divide dend nds s

of $10, $10,00 000 0

and and

$3,0 $3,000 00, ,













Brolga Corporation and Subsidiary Consolidation Working Papers at December 31, 2005 Eliminations Brolga Dance Debit Credit INCOME STATEMENT Sales Income from Dance Gain on equipment sale Cost of sales Depr epreci eciatio ation n exp exp Other Expenses Net income Retained Earnings 1/1 Add: Net income Dividends Retained Earnings 12/31 BALANCE SHEET Cash Receivables Dividends Rec

$

90,000

$35,000

2,300 1,000 ( 40,000) ( 20,000) ( 6,00 ,000) ( 2,00 2,000 0) ( 24,500) ( 8,000) 22,800 5,000 25,000 12,000 22,800 5,000 ( 10,000) ( 3,000) $

37,800

$14,000

10,350 1,500 1 050

1,500 2,700

NonConsolCntrl. idated













LO2 Exercise 5 Barn Owl Corporation acquired 70% of the outstanding voting stock of Cave Inc. on January 1, 2003 for $60,000 less than book value. The $60,000 $60,000 reduction reduction was was all assigne assigned d to a tractor. tractor. The tractor tractor had had a remaining life life of 15 years. On April 1, 2003, Cave sold land to Barn Owl for a gain of $40,000 and originally originally cost $35,000. Barn Owl sold the property for $85,000 on October 1, 2005. Barn Owl sold equipment for $96,000 to Cave on January 1, 2004 which had a book value of $80,000. $80,000. The equipment equipment cost Barn Owl $72,000. $72,000. The equipment equipment had a remaining useful life of 8 years on the sale date and is depreciated under the straight-line method. Required: Prepare a schedule for the calculation of consolidated net income for Barn Owl and subsidiary for 2003, 2004 and 2005.

Barn Owl’s separate income Cave’s net income

LO2

2003 300,000 90,000

2004 225,000 110,000

2005 60,000 120,000













Intercompany sales Cost of intercompany sales Percentage unsold at year-end

$

2004 300,000 180,000 40

2005 200,000 120,000 50

Required: Prepare a consolidated income statement for Nightjar Corporation and Subsidiary for the year ended December 31, 2005. LO2&3 Exercise 7 Ospr Osprey ey Corp Corpor orat atio ion n crea create ted d a whol wholly ly owne owned d subs subsid idia iary ry, , Bran Branch ch Corporation, on January 1, 2003, at which time Osprey sold land with a book book valu value e of $90, $90,00 000 0 to Bran Branch ch at its its fair fair mark market et valu value e of $140,000. Also, on January 1, 2003, Osprey sold to Branch equipment with with a book book valu value e of $130 $130,0 ,000 00 and and a fair fair valu value e of $165 $165,0 ,000 00. . The The equi equipm pmen ent t had had a rema remain inin ing g usef useful ul life life of 4 year years s and and is bein being g depr deprec ecia iate ted d unde under r the the stra straig ight ht-l -lin ine e meth method od. . On Janu Januar ary y 1, 2005 2005, , Branch Branch resold resold the land to an outsid outside e entity entity for $150,0 $150,000. 00. Branch Branch continues to use the equipment purchased from Osprey. Income statements for Osprey and Branch for the year ended December 31, 2005 are summarized below: Osprey

Branch













LO3 Exercise 8 Separa Separate te income income statem statement ents s of Quail Quail Corpor Corporati ation on and its subsidiary, Savannah Corporation, Corporation, for 2005 are as follows: Quail Sales Revenue Gain on equipment Gain on land Cost of sales Other expenses Separate incomes

$

( ( $

800,000 35,000 400,000 ) 265,000 ) 170,000

80%-ow 80%-owned ned

Savannah $

300,000

( ( $

20,000 160,000 ) 60,000 ) 100,000

Additional information: 1. Quail acquire acquired d its 80% interest interest in Savannah Savannah Corporatio Corporation n when the book values were equal to the fair values. 2. The gain gain on equipment equipment relates relates to equipme equipment nt with a book book value of $85,000 and a 7-year remaining useful life that Quail sold to Savann Savannah ah for $120,0 $120,000 00 on Januar January y 2, 2005. 2005. The straig straightht-lin line e depreciation method was used. 3. In 2005, 2005, Savannah Savannah sold sold land land to an outsid outside e entity entity for $80,00 $80,000. 0. The The land land was was acqu acquir ired ed from from Quai Quail l in 2003 2003 for for $60, $60,00 000. 0. The The original cost of the land to Quail was $35,000.















LO3 Exercise 9 Cassowary Corporation acquired a 70% interest in Fruit Corporation in 1999 at a time when Fruit’s book values and fair values were equal. In 2003, Fruit sold land to Cassowary for $82,000 that cost $72,000. The land remained in Cassowary’s possession until 2005 when Cassowary sold it outside the combined entity for $102,000. After the books were closed in 2005, it was discovered that Cassowary had not considered the unrealized gain from its intercompany purchase of land in preparing the consolidated financial statements. The only entry on Cassowary’s books was a debit to Land and a credit to Cash in 2003 for $82,000, and, in 2005, a debit to Cash for $102,000 and credits to Land for $82,000 and Gain on sale of land for $20,000. Befo Before re

the the

disc discov over ery y

of

the the

erro error, r,

the the

cons consol olid idat ated ed

fina financ ncia ial l













LO2&4 Exercise 10 Buzzar Buzzard d Corpor Corporati ation on acquir acquired ed 70% of the outsta outstandi nding ng voting voting common common stock of Tool Inc. in 1998. On January 1, 1999, Tool Inc. purchased a depreciable machine for $120,000 cash with an estimated useful life of 10 years that was depreciated on a straight-line basis. Tool used the machine machine until the end of 2004. 2004. On January January 2, 2005, 2005, Tool sold the machine to Buzzard who continued to use the same estimated life and depreciation method that was used by Tool. At the end of 2005, Buzzard made the following elimination entry in the consolidation working papers. Machine Gain on Sale of Machine Depreciation Expense

22,000 14,000 2,000













SOLUTIONS Multiple Choice Questions 1

c

2

b

3

c

4

a

5

a

6

d













15

a

16

d

17

c

Combined building amounts Less: Intercompany gain Consolidated building amounts

$ ( $

650,000 30,000 ) 620,000

Combined Accumulated Depreciation Less: Piecemeal recognition of gain Consolidated accumulated depreciation

$

195,000

Pied Imperial-Pigeon’s share of Roger’s income = ($320,000 x 90%) = Less: Profit on intercompany sale ($130 000 $80 000) x 90% =

(

3,000 )

$

192,000

$

288,000

(

45 000 )













Exercise 1 Requirement 1: Spiniflex Pigeon’s books 01/01/05

Cash Accumulated Depreciation Equipment Gain on Sale

40,000 62,500 100,000 2,500

Requirement 2: Waterhole’s books 01/01/05

12/31/05

Equipment Cash Depreciation Expense Accumulated Depreciation

40,000 40,000 7,500 7,500















Goodwill TOTAL ASSETS $ LIAB. & EQUITY Accounts payable Capital Stock

f

4,000 g

4,000 $76,300

70 70,800

$24,000

7,000

5,000

g

1,500

10,500

50,000

10,000

f

10,000

50,000













Add: Net income Dividends Retained Earnings 12/31 BALANCE SHEET Cash

22,800 ( 10,000) ( $

5,000 3,000)

f

2,100(

22,800 900) ( 10,000)

37,800

$14,000

$37,800

10,350

1, 1 ,500

11,850













Exercise 5

Barn Owl’s separate income Cave’s net income

2003 300,000 90,000

2004 225,000 110,000

2005 60,000 120,000













Exercise 6

Nightjar Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2005













Exercise 7 Requirement 1 The gain on the sale of the land in 2005 was equal to the sales price minus the original cost of the land when it was first acquired by the



























Chapter 06 - Intercompany Profit Transactions - Plant Assets

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