Chapter 1 Test Bank - CPA Diary



Chapter 6 Test Bank

INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS

|Multiple Choice Questions |

| |

| |

| | |Use the following information for questions 1 and 2. |

| | |In 2004, Parrot Company sold land to its subsidiary, Tree Corporation, for $12,000. It had a book value of $10,000. In the |

| | |next year, Tree sold the land for $18,000 to an unaffiliated firm. |

LO1

|1. | |Which of the following is correct? |

| | | | |

| | |a. |No consolidation working paper entry was necessary in 2004. |

| | |b. |A consolidation working paper entry was required only if the subsidiary was less than 100% owned in 2004. |

| | |c. |A consolidation working paper entry is required each year until the land is sold outside the related parties. |

| | |d. |A consolidated working paper entry was required only if the land was held for resale in 2004. |

LO1

|2. | |The 2004 unrealized gain |

| | | | |

| | |a. |was deferred until 2006. |

| | |b. |was eliminated from consolidated net income by a working paper entry that credited land $2,000. |

| | |c. |made consolidated net income $2,000 less than it would have been had the sale not occurred. |

| | |d. |made consolidated net income $2,000 greater than it would have been had the sale not occurred. |

| | | | |

LO1

|3. | |On January 1, 2005, Eagle Corporation sold equipment with a book value of $40,000 and a 20-year remaining useful life to its |

| | |wholly-owned subsidiary, Rabbit Corporation, for $60,000. Both Eagle and Rabbit use the straight-line depreciation method, |

| | |assuming no salvage value. On December 31, 2005, the separate company financial statements held the following 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. |debit to gain on sale of equipment for $19,000. |

| | |b. |credit to gain on sale of equipment for $20,000. |

| | |c. |debit to accumulated depreciation for $1,000. |

| | |d. |credit to depreciation expense for $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. |$5,000 too high. |

| | |b. |$10,000 too low. |

| | |c. |$10,000 too high. |

| | |d. |$15,000 too high. |

LO1, 2 & 4

| | |Use the following information to answer questions 7 through 10. |

| | | |

| | |On January 1, 2003, Shrimp Corporation purchased a delivery 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: |

| | | | | | | | | | |

| | | |Accumulated depreciation |18,000 | | | | | |

| | | | Truck | | | |53,000 | | |

| | | | Gain on Sale of Truck | | | |15,000 | | |

| | | | |

| | |Avocet holds 60% of Shrimp. Shrimp reported net income of $55,000 in 2005 and Avocet's separate net income (excludes interest |

| | |in Shrimp) for 2005 was $98,000. |

| | | |

LO1

|7. | |In preparing the consolidated financial statements for 2005, the elimination entry for depreciation expense was a |

| | | | |

| | |b. |credit for $5,000. |

| | |c. |debit for $15,000. |

| | |d. |credit for $15,000. |

LO1

|8. | |In the consolidation working papers, the Truck account was |

| | | | |

| | |a. |debited for $3,000. |

| | |b. |credited for $3,000. |

| | |c. |debited for $15,000. |

| | |d. |credited for $15,000. |

LO2

|9. | |Consolidated net income for 2005 was |

| | | | |

| | |a. |$121,000. |

| | |b. |$125,000. |

| | |c. |$131,000. |

| | |d. |$143,000. |

LO4

|10. | |The minority interest income for 2005 was |

| | | | |

| | |a. |$18,000. |

| | |b. |$22,000. |

| | |c. |$23,000. |

| | |d. |$27,000. |

LO2

|11. | |Ground Parrot Company completely owns Heathlands Inc. On January 2, 2005 Ground Parrot sold Heathlands machinery at its book |

| | |value of $30,000. Ground Parrot had the machinery two years before selling it and used a five-year straight-line 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. |required no adjustment. |

| | |b. |decreased by $4,000. |

| | |c. |increased by $4,000 |

| | |d. |increased by $30,000. |

LO2

|12. | |In reference to the downstream or upstream sale of depreciable assets, which of the following statements is correct? |

| | | |

| |a. |Upstream sales from the subsidiary to the parent company always result in unrealized gains or losses. |

| |b. |The initial effect of unrealized gains and losses from downstream sales of depreciable assets is different from the sale |

| | |of nondepreciable assets. |

| |c. |Gains, but not losses, appear in the parent-company accounts in the year of sale and must be eliminated by the parent |

| | |company in determining its investment income under the equity method of accounting. |

| |d. |Gains and losses appear in the parent-company accounts in the year of sale and must be eliminated by the parent company |

| | |in determining its investment income under the equity method of accounting. |

LO2

|13. | |Falcon Corporation sold equipment to its 80%-owned subsidiary, Rodent Corp., on January 1, 2005. Falcon sold the equipment |

| | |for $110,000 when its book value was $85,000 and it had a 5-year remaining useful life with no expected salvage value. |

| | |Separate balance sheets for Falcon and Rodent included the following equipment and accumulated depreciation amounts on |

| | |December 31, 2005: |

| | | | |Falcon | |Rodent | |

| | |Equipment |$ | 750,000 |$ | 300,000 | |

| | |Less: Accumulated depreciation | |( 200,000) | |( 50,000) | |

| | |Equipment-net |$ | 550,000 |$ | 250,000 | |

| | | | | | | | |

| | |Consolidated amounts for equipment and accumulated depreciation at December 31, 2005 were respectively |

| | | | | | | | |

| | |a. |$1,025,000 and $245,000. |

| | |b. |$1,025,000 and $250,000. |

| | |c. |$1,025,000 and $245,000. |

| | |d. |$1,050,000 and $250,000. |

LO2

|14. | |Peregrine Corporation acquired a 90% interest in Cliff Corporation in 2004 at a time when Cliff’s book values and fair values |

| | |were equal to one another. On January 1, 2005, Cliff sold a truck with a $45,000 book value to Peregrine for $90,000. |

| | |Peregrine is depreciating the truck over 10 years using the straight-line method. Separate incomes for Peregrine and Cliff for|

| | |2005 were as follows: |

| | | | |Peregrine | |Cliff | |

| | |Sales |$ | 1,800,000 |$ | 1,050,000 | |

| | |Gain on sale of truck | | | | 45,000 | |

| | |Cost of Goods Sold | |( 750,000) | |( 285,000) | |

| | |Depreciation expense | |( 450,000) | |( 135,000) | |

| | |Other expenses | |( 180,000) | |( 450,000) | |

| | |Separate incomes |$ | 420,000 |$ | 225,000 | |

| | | | | | | | |

| | |Peregrine’s investment income from Cliff for 2005 was |

| | | | | | | | |

| | |a. |$161,550. |

| | |b. |$162,000. |

| | |c. |$166,050. |

| | |d. |$202,500. |

LO2

|15. | |Kestrel Company acquired an 80% interest in Reptile Corporation on January 1, 2004. On January 1, 2005, Reptile sold a |

| | |building with a book value of $50,000 to Kestrel for $80,000. The building had a remaining useful life of ten years and no |

| | |salvage value. The separate balance sheets of Kestrel and Reptile on December 31, 2005 included the following balances: |

| | | | |Kestrel | |Reptile | |

| | |Buildings |$ | 400,000 |$ | 250,000 | |

| | |Accumulated Depreciation - | | 120,000 | | 75,000 | |

| | |Buildings | | | | | |

| | | | | | | | |

| | |The consolidated amounts for Buildings and Accumulated Depreciation - Buildings that appeared, respectively, on the balance |

| | |sheet at December 31, 2005, were |

| | | | | | | | |

| | |a. |$620,000 and $192,000. |

| | |b. |$620,000 and $195,000. |

| | |c. |$650,000 and $192,000. |

| | |d. |$650,000 and $195,000. |

LO2

|16. | |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 for $40,000 more than Pigeon’s book value. The 2005 consolidated |

| | |income statement reported a gain on the sale of land of |

| | | | |

| | |b. |$42,000. |

| | |c. |$58,000. |

| | |d. |$70,000. |

LO2

|17. | |Pied Imperial-Pigeon Corporation acquired a 90% interest in Offshore Corporation in 2003 when Offshore’ book values were |

| | |equivalent to fair values. Offshore sold equipment with a book value of $80,000 to Pied Imperial-Pigeon for $130,000 on |

| | |January 1, 2005. Pied Imperial-Pigeon is fully depreciating the equipment over a 4-year period by using the straight-line |

| | |method. Offshore’ reported net income for 2005 was $320,000. Pied Imperial-Pigeon’s 2005 net income from Offshore was |

| | | | |

| | |b. |$250,500. |

| | |c. |$254,250. |

| | |d. |$288,000. |

LO3

|18. | |Lorikeet Corporation acquired a 80% interest in Nectar Corporation on January 1, 2000 at a cost equal to book value and fair |

| | |value. In the same year Nectar sold land costing $30,000 to Lorikeet for $50,000 On July 1, 2005, Lorikeet sold the land to |

| | |an unrelated party for $110,000. What was the gain on the consolidated income statement? |

| | | | |

| | |b. |$60,000. |

| | |c. |$64,000. |

| | |d. |$80,000. |

LO4

|19. | |On January 1, 2005 Rainforest Co. recorded a $30,000 profit on the upstream sale of some equipment that had a remaining |

| | |four-year life under the straight-line depreciation method. The effect of this transaction on the amount recorded in 2005 by |

| | |the parent company Wompoo as its investment income in the Rainforest was |

| | | | |

| | |a. |a decrease of $18,000 if the Rainforest was 80% owned. |

| | |b. |a decrease of $27,000 if the Rainforest was 90% owned. |

| | |c. |an increase of $22,500 if the Rainforest was wholly owned. |

| | |d. |an increase of $30,000 if the Rainforest was wholly owned. |

LO4

|20. | |Swift Parrot Corporation acquired a 60% interest in Berries Corp. on January 1, 2005, when Berries’s book values and fair |

| | |values were equivalent. On January 1, 2005, Berries sold a building with a book value of $600,000 to Swift 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? |

| | | | |

| | |b. |$764,000. |

| | |c. |$800,000. |

| | |d. |$900,000. |

LO1

Exercise 1

|Spiniflex Pigeon Company owns 90% of the outstanding stock of Waterhole Corporation. This interest was purchased on January 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 which had no salvage value with a useful life of 8 years. on a |

|straight-line basis. On January 1, 2005, Spiniflex Pigeon sold the truck to Waterhole Corporation for $40,000. The equipment was estimated |

|to have a four-year remaining life on this date. All affiliates use the straight-line depreciation method. |

|Required: |

| |

|Prepare all relevant entries with respect to the truck. |

| | |

| 1. |Record the journal entries on Spiniflex Pigeon’s books for 2005. |

| | |

|2. |Record the journal entries on Waterhole’s books for 2005. |

| | |

LO1&2

Exercise 2

|Stork Corporation paid $15,700 for a 90% interest in Swamp Corporation on January 1, 2004, when Swamp stockholders’ equity consisted of |

|$10,000 Capital Stock and $3,000 of Retained Earnings. The excess cost over book value was attributable to goodwill. |

|Additional information: |

| | |

|1. |Stork sells merchandise to Swamp at 120% of Stork’s 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 Corporation sold equipment with a book value of $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 company financial statements for Stork Corporation and Subsidiary at December 31, 2005 are summarized in the first two |

| |columns of the consolidation working papers. |

| | |

|4. |Helpful hint: Stork's investment in Swamp account balance at December 31, 2004 consisted of the following: |

| | |

| | Investment cost $ 15,700 |

| | Equity in Swamp’s income for 2004 3,600 |

| | Less: Unrealized inventory profit ( 400) |

| | |

| | Less: Dividends received from Swamp ( 1,800) |

| | Investment in Swamp, December 31, 2004 $ 17,100 |

| | |

|Required: |

| | |

|Complete the working papers to consolidate the financial statements of Stork Corporation and subsidiary for the year ended December 31, |

|2005. |

|Stork Corporation and Subsidiary |

|Consolidation Working Papers |

|at December 31, 2005 |

| | | | |Eliminations |Non- |Balance |

| | |Stork |Swamp | |Cntrl. |Sheet |

| | | | | |Debit | |Credit | | |

|INCOME STATEMENT | | | | | | | | | |

|Sales |$ |60,000 |$14,000 | | | | | | |

|Income from | | | | | | | | | |

|Swamp | |4,500 | | | | | | | |

|Gain on | | | | | | | | | |

|equipment sale | |800 | | | | | | | |

| | | | | | | | | | |

|Cost of Sales | |( 26,000) |( 4,400) | | | | | | |

|Other Expenses | |( 28,000) |( 3,600) | | | | | | |

|Net income | | 11,300 | 6,000 | | | | | | |

|Retained | | | | | | | | | |

|Earnings 1/1 | |9,500 |5,000 | | | | | | |

|Add: Net income | | 11,300 | 6,000 | | | | | | |

|Dividends | |( 7,000) |( 2,000) | | | | | | |

|Retained | | | | | | | | | |

|Earnings 12/31 |$ |13,800 |$ 9,000 | | | | | | |

|BALANCE SHEET | | | | | | | | | |

|Cash | |6,000 |3,000 | | | | | | |

|Receivables | | 7,000 | 4,000 | | | | | | |

|Inventories | | 10,000 | 4,500 | | | | | | |

|Equipment-net | | 24,000 | 9,000 | | | | | | |

|Land | | 4,000 | 3,500 | | | | | | |

|Investment in | | | | | | | | | |

|Swamp | |19,800 | | | | | | | |

|Goodwill | | | | | | | | | |

|TOTAL ASSETS |$ | 70,800 | $24,000 | | | | | | |

|LIAB. & EQUITY | | | | | | | | | |

|Accounts payable | |7,000 |5,000 | | | | | | |

|Capital | | | | | | | | | |

|Stock | |50,000 |10,000 | | | | | | |

|Retained | | | | | | | | | |

|Earnings | |13,800 |9,000 | | | | | | |

|1/1 Noncontrl. | | | | | | | | | |

|Interest | | | | | | | | | |

|12/31 Noncontrl. | | | | | | | | | |

|Interest | | | | | | | | | |

|TOTAL LIAB. & EQUITY | | 70,800 | $24,000 | | | | | | |

| |$ | | | | | | | | |

LO1&2

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 April 1, 2003, Dove sold land that cost $25,000 to Squab for $40,000. Squab resold the land for $45,000 on December 1, 2005. |

| |

|On July 1, 2005, Dove sold equipment with a book value of $10,000 to Squab for $26,000. Squab is depreciating the equipment over a |

|four-year period using the straight-line method. |

| |

|Required: |

|The first two columns in the working papers presented below summarize income statement information from the separate company financial |

|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 |

|items from the separate company reports will appear in the consolidated income statement. |

| |Dove |Squab |Consolidated |

|Sales | 450,000 | 200,000 | |

|Income from Squab | 46,000 | | |

|Gain on sale of equipment | 16,000 | | |

|Gain on sale of land | | 5,000 | |

|Cost of sales |( 211,500) |( 91,500) | |

|Depreciation expense |( 45,500) |( 23,500) | |

|Other expenses |( 120,000) |( 34,000) | |

|Net income | 135,000 | 56,000 | |

| | | | |

LO1&2

Exercise 4

|Brolga Corporation paid $26,800 cash for a 70% interest in Dance Company on January 1, 2004, when Dance’s stockholders’ equity consisted of|

|$15,000 Capital Stock and $9,000 of Retained Earnings. |

|Additional information: |

| | |

|1. |The cost-book value differential was allocated to a patent with a 20-year amortization period. |

| | |

|2. |Brolga Corporation sold inventory items that cost $4,000 to Dance for $4,800 during 2004 and one-half of these inventory items |

| |remained unsold by Dance on December 31, 2004. |

| | |

|3. |During 2005 Brolga Corporation sold inventory items that cost $5,000 to Dance for $6,000 and 30% of these inventory items |

| |remained unsold by Dance on December 31, 2005. Dance Corporation owed Brolga $700 on account at year-end 2005. |

| | |

|4. |Brolga Corporation sold equipment with a 5-year remaining life and a book value of $4,000 to Dance for $5,000 on January 1, |

| |2005. Straight-line depreciation is used. |

| | |

|5. |Brolga and Dance pay annual dividends of $10,000 and $3,000, respectively. |

| | |

|6. |Separate financial statements for Brolga and Dance Corporations appear on partially completed consolidation working papers. |

| | |

|Required: |

| | |

|Complete the working papers to consolidate the financial statements for 2005. |

|Brolga Corporation and Subsidiary |

|Consolidation Working Papers |

|at December 31, 2005 |

| | | | |Eliminations |Non- |Consol- |

| | |Brolga |Dance | |Cntrl. |idated |

| | | | | |Debit | |Credit | | |

|INCOME STATEMENT | | | | | | | | | |

|Sales |$ |90,000 |$35,000 | | | | | | |

|Income from | | | | | | | | | |

|Dance | |2,300 | | | | | | | |

|Gain on | | | | | | | | | |

|equipment sale | |1,000 | | | | | | | |

|Cost of sales | |( 40,000) |( 20,000) | | | | | | |

|Depreciation exp | |( 6,000) |( 2,000) | | | | | | |

|Other Expenses | |( 24,500) |( 8,000) | | | | | | |

|Net income | | 22,800 | 5,000 | | | | | | |

|Retained | | | | | | | | | |

|Earnings 1/1 | |25,000 |12,000 | | | | | | |

|Add: Net income | | 22,800 | 5,000 | | | | | | |

|Dividends | |( 10,000) |( 3,000) | | | | | | |

|Retained | | | | | | | | | |

|Earnings 12/31 |$ |37,800 |$14,000 | | | | | | |

|BALANCE SHEET | | | | | | | | | |

|Cash | |10,350 |1,500 | | | | | | |

|Receivables | | 1,500 | 2,700 | | | | | | |

|Dividends Rec | | 1,050 | | | | | | | |

|Inventories | | 12,000 | 6,000 | | | | | | |

|Equipment-net | | 41,000 | 23,500 | | | | | | |

|Investment in | | | | | | | | | |

|Dance | |28,200 | | | | | | | |

|Patent | | | | | | | | | |

|TOTAL ASSETS |$ | 94,100 | $33,700 | | | | | | |

|LIAB. & EQUITY | | | | | | | | | |

|Accounts payable | |6,300 |2,200 | | | | | | |

|Dividend payable | | | 1,500 | | | | | | |

|Other Debt | | 10,000 | 1,000 | | | | | | |

|Capital stock | | 40,000 | 15,000 | | | | | | |

|Retained | | | | | | | | | |

|Earnings | |37,800 |14,000 | | | | | | |

|1/1 Noncontrl. | | | | | | | | | |

|Interest | | | | | | | | | |

|12/31 Noncontrl. | | | | | | | | | |

|Interest | | | | | | | | | |

|TOTAL LIAB. & EQUITY |$ | 94,100 | $33,700 | | | | | | |

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 reduction was all assigned to a tractor. The tractor had a remaining life of 15 years. On April 1, 2003, Cave sold land to Barn |

|Owl for a gain of $40,000 and 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. The equipment cost Barn Owl $72,000. The 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. |

| |2003 | |2004 | |2005 | |

|Barn Owl’s separate income |300,000 | |225,000 | |60,000 | |

|Cave’s net income |90,000 | |110,000 | |120,000 | |

| | | | | | | |

LO2

Exercise 6

|Separate income statements of Nightjar Corporation and its 90%-owned subsidiary, Branch Inc., for 2005 were as follows: |

| | |Nightjar | | |Branch | | |

|Sales Revenue |$ |2,000,000 | |$ |1,200,000 | | |

|Cost of sales |( |1,200,000 |) |( |800,000 |) | |

|Other expenses |( |400,000 |) |( |200,000 |) | |

|Gain on equipment | |80,000 | | | | | |

|Income from Branch | |180,000 | | | | | |

|Net income |$ |660,000 | |$ |200,000 | | |

| | | | | | | | |

|Additional information: |

|1. |Nightjar acquired its 90% interest in Branch Inc. when the book values were equal to the fair values. |

| | |

|2. |The gain on equipment relates to equipment with a book value of $120,000 and a 4-year remaining useful life that Branch sold to |

| |Nightjar for $200,000 on January 2, 2005. The straight-line depreciation method is used. |

| | |

| 3. |In 2004 Nightjar sold inventory to Branch of which the remainder was sold in 2005. |

| | |2004 | | |2005 | | |

|Intercompany sales |$ |300,000 | | |200,000 | | |

|Cost of intercompany sales | |180,000 | | |120,000 | | |

|Percentage unsold at year-end | |40 | | |50 | | |

| |

|Required: |

| |

|Prepare a consolidated income statement for Nightjar Corporation and Subsidiary for the year ended December 31, 2005. |

LO2&3

Exercise 7

|Osprey Corporation created a wholly owned subsidiary, Branch Corporation, on January 1, 2003, at which time Osprey sold land with a book |

|value of $90,000 to Branch at its fair market value of $140,000. Also, on January 1, 2003, Osprey sold to Branch equipment with a book |

|value of $130,000 and a fair value of $165,000. The equipment had a remaining useful life of 4 years and is being depreciated under the |

|straight-line method. On January 1, 2005, Branch resold the land to an outside entity for $150,000. 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 | | |

|Sales | |$ |450,000 | |$ |100,000 | | |

|Gain on sale of land | | | | | |10,000 | | |

|Income from Branch | | |55,000 | | | | | |

|Cost of sales | |( |220,000 |) |( |50,000 |) | |

|Depreciation expense | |( |95,000 |) |( |32,000 |) | |

|Other expenses | |( |37,000 |) |( |8,000 |) | |

|Net income | |$ |153,000 | |$ |20,000 | | |

| | | | | | | | | |

|Required: |

| |

|At what amounts did the following items appear on a consolidated income statement for Osprey Corporation and Subsidiary for the year ended |

|December 31, 2005? |

| | |

|1. |Gain on Sale of Land |

|2. |Depreciation Expense |

|3. |Consolidated net income |

LO3

Exercise 8

|Separate income statements of Quail Corporation and its 80%-owned subsidiary, Savannah Corporation, for 2005 are as follows: |

| | |Quail | | |Savannah | | |

|Sales Revenue |$ |800,000 | |$ |300,000 | | |

|Gain on equipment | |35,000 | | | | | |

|Gain on land | | | | |20,000 | | |

|Cost of sales |( |400,000 |) |( |160,000 |) | |

|Other expenses |( |265,000 |) |( |60,000 |) | |

|Separate incomes |$ |170,000 | |$ |100,000 | | |

| | | | | | | | |

|Additional information: |

|1. |Quail acquired its 80% interest in Savannah Corporation when the book values were equal to the fair values. |

| | |

|2. |The gain on equipment relates to equipment with a book value of $85,000 and a 7-year remaining useful life that Quail sold to |

| |Savannah for $120,000 on January 2, 2005. The straight-line depreciation method was used. |

| | |

|3. |In 2005, Savannah sold land to an outside entity for $80,000. The land was acquired from Quail in 2003 for $60,000. The |

| |original cost of the land to Quail was $35,000. |

| | |

|Required: |

| | |

|Prepare a consolidated income statement for Quail Corporation and Subsidiary for the year 2005. |

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. |

| |

|Before the discovery of the error, the consolidated financial statements disclosed the following amounts: |

| | | |2003 | |2004 | |2005 |

|Consolidated net income | |$ |750,000 |$ |600,000 |$ |910,000 |

|Land | | |200,000 | |240,000 | |300,000 |

| | | | | | | | |

|Required: |

| | |

|1. |Determine the correct amounts of consolidated net income for 2003, 2004, and 2005. |

| | |

|2. |Determine the correct amounts for Land in 2003, 2004, and 2005. |

| | |

|3. |Calculate the amount at which the gain on the sale of land should have been reported in 2005. |

LO2&4

Exercise 10

|Buzzard Corporation acquired 70% of the outstanding voting 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 until the end of 2004. On January 2, 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 22,000 |

|Gain on Sale of Machine 14,000 |

|Depreciation Expense 2,000 |

|Accumulated Depreciation 34,000 |

|Required: |

| |

|Answer the following questions concerning Buzzard and Tool. |

| | |

|1. |How much depreciation expense did Buzzard record in 2005? |

| | |

| 2. |What amounts were reported for the Machine and the Accumulated Depreciation in the consolidated balance sheet on December 31, |

| |2005? |

| | |

|3. |If Tool reported $60,000 of net income for 2005, what amount was assigned to the non-controlling interest? |

SOLUTIONS

Multiple Choice Questions

|1 |c | |

| | | | | | | | |

|2 |b | | | | | | |

| | | | | | | | |

|3 |c | |

| | | | | | | | |

|4 |a | | | | |

| | | | | | |

|5 |a | | | | |

| | | | | | |

|6 |d | | | | |

| | | | | | |

|7 |b |($15,000 gain/ 3 years) | | | |

| | | | | | |

|8 |a |($53,000 - $50,000) | | | |

| | | | | | |

|9 |b |$98,000 + [($55,000 - $15,000 + | | | |

| | |$5,000) x 60%] = |$ |125,000 | |

| | | | | | |

|10 |a |($55,000 - $15,000 + $5,000) x 40%= | | | |

| | | |$ |18,000 | |

| | | | | | |

|11 |a | | | | |

| | | | | | |

|12 |d | | | | |

| | | | | | |

| | | | | | |

|13 |a |Combined equipment amounts |$ |1,050,000 | |

| | |Less: gain on sale |( |25,000 |) |

| | |Consolidated equipment balance |$ |1,025,000 | |

| | | | | | |

| | |Combined Accumulated Depreciation |$ |250,000 | |

| | |Less: Depreciation on gain |( |5,000 |) |

| | |Consolidated Accumulated Depreciation | | | |

| | | |$ |245,000 | |

| | | | | | |

| | | | | | |

| | | | | | |

|14 |c |Cliff reported income |$ |225,000 | |

| | |Less: Intercompany gain on | | | |

| | |truck |( |45,000 |) |

| | |Plus: Piecemeal recognition of gain = $45,000/10 years | | | |

| | | | |4,500 | |

| | |Cliff’s adjusted income | |184,500 | |

| | |Majority percentage | |90% | |

| | |Income from Cliff |$ |166,050 | |

| | | | | | |

|15 |a |Combined building amounts |$ |650,000 | |

| | |Less: Intercompany gain |( |30,000 |) |

| | |Consolidated building amounts |$ |620,000 | |

| | | | | | |

| | |Combined Accumulated Depreciation |$ |195,000 | |

| | |Less: Piecemeal recognition of gain | | | |

| | | |( |3,000 |) |

| | |Consolidated accumulated depreciation | | | |

| | | |$ |192,000 | |

| | | | | | |

|16 |d | | | | |

| | | | | | |

|17 |c |Pied Imperial-Pigeon’s share of Roger’s income = ($320,000 x 90%) = | | | |

| | | |$ |288,000 | |

| | |Less: Profit on intercompany sale ($130,000 - $80,000) x 90% = | | | |

| | | |( |45,000 |) |

| | |Add: Piecemeal recognition of deferred profit ($50,000/4 years) x | | | |

| | |90% = | | | |

| | | | |11,250 | |

| | |Income from Offshore |$ |254,250 | |

| | | | | | |

|18 |d | | | | |

| | | | | | |

| | | | | | |

|19 |c |$30,000 - (1/4 x $30,000) = | $ | 22,500 | |

| | | | | | |

|20 |b | | | | |

| | | | | | |

| | | | | | |

Exercise 1

|Requirement 1: Spiniflex Pigeon’s books | | | | |

| | | | | | |

|01/01/05 |Cash | |40,000 | | |

| |Accumulated Depreciation | |62,500 | | |

| | Equipment | | | |100,000 |

| | Gain on Sale | | | |2,500 |

| | | | | | |

|Requirement 2: Waterhole’s books | | | | |

| | | | | | |

|01/01/05 |Equipment | |40,000 | | |

| | Cash | | | |40,000 |

| | | | | | |

|12/31/05 |Depreciation Expense | |7,500 | | |

| | Accumulated Depreciation | | | |7,500 |

| | | | | | |

Exercise 2

|Stork Corporation and Subsidiary |

|Consolidation Working Papers |

|at December 31, 2005 |

| | | | |Eliminations |Non-contl. |Consol- |

| | |Stork |Swamp | | |idated |

| | | | | |Debit | |Credit | | |

|INCOME STATEMENT | | | | | | | | | |

|Sales |$ |60,000 |$14,000 |a |$ 6,000 | | | |$68,000 |

|Income from | | | | | | | | | |

|Swamp | |4,500 | |e |4,500 | | | | |

|Gain on | | | | | | | | | |

|equipment sale | |800 | |d |800 | | | | |

| | | | |b |600 |a |$ 6,000 | | |

|Cost of Sales | |( 26,000) |( 4,400) | | |c |400 | |(24,600) |

|Other Expenses | |( 28,000) |( 3,600) | | |d |200 | |(31,400) |

|Minority income | | | | | | | |600 |( 600) |

|Net income | | 11,300 | 6,000 | | | | | | 11,400 |

|Retained | | | | | | | | | |

|Earnings 1/1 | |9,500 |5,000 |f |5,000 | | | |9,500 |

|Add: Net income | | 11,300 | 6,000 | | | | | | 11,400 |

|Dividends | |( 7,000) |( 2,000) | | |e |1,800 |( 200) |( 7,000) |

|Retained | | | | | | | | | |

|Earnings 12/31 |$ |13,800 |$ 9,000 | | | | | |$13,900 |

|BALANCE SHEET | | | | | | | | | |

|Cash | |6,000 |3,000 | | | | | |9,000 |

|Receivables | | 7,000 | 4,000 | | |g |1,500 | | 9,500 |

|Inventories | | 10,000 | 4,500 | | |b |600 | | 13,900 |

|Equipment-net | | 24,000 | 9,000 | | |d |600 | | 32,400 |

|Land | | 4,000 | 3,500 | | | | | | 7,500 |

|Investment in | | | |c |400 |e |2,700 | | |

|Swamp | |19,800 | | | |f |17,500 | | |

|Goodwill | | | |f |4,000 |g | | | 4,000 |

|TOTAL ASSETS |$ | 70,800 | $24,000 | | | | | |$76,300 |

|LIAB. & EQUITY | | | | | | | | | |

|Accounts payable | |7,000 |5,000 |g |1,500 | | | |10,500 |

|Capital | | | | | | | | | |

|Stock | |50,000 |10,000 |f |10,000 | | | |50,000 |

|Retained | | | | | | | | | |

|Earnings | |13,800 |9,000 | | | | | |13,900 |

|1/1 Noncntrl. | | | | | | | | | |

|Interest | | | | | |f |1,500 |1,500 | |

|12/31 Noncntrl. | | | | | | | | | |

|Interest | | | | | | | |1,900 |1,900 |

|TOTAL LIAB. & EQUITIES |$ | 70,800 | $24,000 | | | | | | |

| | | | | | | | | |$76,300 |

Exercise 3

| |Dove |Squab |Consolidated |

|Sales | 450,000 | 200,000 | 650,000 |

|Income from Squab | 46,000 | | 0 |

|Gain on sale of equipment | 16,000 | | 0 |

|Gain on sale of land | | 5,000 | 20,000 |

|Cost of sales |( 211,500) |( 91,500) | ( 303,000) |

|Depreciation expense |( 45,500) |( 23,500) | ( 67,000) |

|Other expenses |( 120,000) |( 34,000) | ( 154,000) |

|Net income | 135,000 | 56,000 | 146,000 |

| | | | |

Exercise 4

|Brolga Corporation and Subsidiary |

|Consolidation Working Papers |

|at December 31, 2005 |

| | | | |Eliminations |Non- |Consol- |

| | |Brolga |Dance | |Contrl. |idated |

| | | | | |Debit | |Credit | | |

|INCOME STATEMENT | | | | | | | | | |

|Sales |$ |90,000 |$35,000 |a |$ 6,000 | | | |$ 119,000 |

|Income from Dance | | 2,300 | |f |2,300 | | | | |

|Gain on | | | | | | | | | |

|equipment sale | |1,000 | |d |1,000 | | | | |

|Cost of sales | |( 40,000) |( 20,000) |c |300 |a |$ 6,000 | | |

| | | | | | |b |400 | |( 53,900) |

|Depreciation exp | |( 6,000) |( 2,000) | | |e |200 | |( 7,800) |

|Minority income | | | | | | | |$ 1,500 |( 1,500) |

|Other Expenses | |( 24,500) |( 8,000) |h |500 | | | |( 33,000) |

|Net income | | 22,800 | 5,000 | | | | | | 22,800 |

|Retained | | | | | | | | | |

|Earnings 1/1 | |25,000 |12,000 |g |12,000 | | | |25,000 |

|Add: Net income | | 22,800 | 5,000 | | | | | | 22,800 |

|Dividends | |( 10,000) |( 3,000) | | |f |2,100 |( 900) |( 10,000) |

|Retained | | | | | | | | | |

|Earnings 12/31 |$ |37,800 |$14,000 | | | | | |$37,800 |

|BALANCE SHEET | | | | | | | | | |

|Cash | |10,350 |1,500 | | | | | |11,850 |

|Receivables | | 1,500 | 2,700 | | |i |700 | | 3,500 |

|Dividends Rec | | 1,050 | | | |j |1,050 | | |

|Inventories | | 12,000 | 6,000 | | |c |300 | | 17,700 |

|Equipment-net | | 41,000 | 23,500 |e |200 |d |1,000 | | 63,700 |

|Investment in | | | |b |400 |g |28,400 | | |

|Dance | |28,200 | | | |f |200 | | |

|Patent | | | |g |9,500 |h |500 | | 9,000 |

|TOTAL ASSETS |$ | 94,100 | $33,700 | | | | | |$105,750 |

|LIAB. & EQUITY | | | | | | | | | |

|Accounts payable | |6,300 |2,200 |i |700 | | | |7,800 |

|Dividend payable | | | 1,500 |j |1,050 | | | | 450 |

|Other Debt | | 10,000 | 1,000 | | | | | | 11,000 |

|Capital stock | | 40,000 | 15,000 |g |15,000 | | | | 40,000 |

|Retained | | | | | | | | | |

|Earnings | |37,800 |14,000 | | | | | |37,800 |

|1/1 Noncontrl. | | | | | | | | | |

|Interest | | | | | |g |8,100 |8,100 | |

|12/31 Noncontrl. | | | | | | | | | |

|Interest | | | | | | | |8,700 |8,700 |

|TOTAL LIAB. & EQUITY |$ | 94,100 | $33,700 | | | | | | |

| | | | | | | | | |$105,750 |

Exercise 5

| |2003 | |2004 | |2005 | |

|Barn Owl’s separate income |300,000 | |225,000 | |60,000 | |

|Cave’s net income |90,000 | |110,000 | |120,000 | |

|Tractor Adjustment |4,000 | |4,000 | |4,000 | |

|Land gain |(40,000) | | | |38,000 | |

|Equipment gain |(16,000) | | | | | |

|Depreciation Expense |(2,000) | |(2,000) | |(2,000) | |

|Minority Interest Expense |(15,000) | |(33,000) | |(39,000) | |

|Net Income |321,000 | |304,000 | |181,000 | |

| | | | | | | |

|Tractor Adjustment 60,000/15 |4,000 | |4,000 | |4,000 | |

|Land gain (40,000) |(40,000) | | | | | |

|Land gain 28,000+10,000 | | | | |38,000 | |

|Equipment |(16,000) | | | | | |

|Depreciation expense (96,000-80,000)/8 |(2,000) | |(2,000) | |(2,000) | |

|Minority Interest Expense |(15,000) | | | | | |

|[90,000-40,000]*.3=15,000 | | | | | | |

|Minority Interest Expense | | |(33,000) | | | |

|110,000*.3 | | | | | | |

|Minority Interest Expense | | | | |(39,000) | |

|(85,000-75,000)*.3=3,000 + | | | | | | |

|120,000*.3 | | | | | | |

Exercise 6

| |

|Nightjar Corporation and Subsidiary |

|Consolidated Income Statement |

|for the year ended December 31, 2005 |

| |

|Sales (see below) | | | | |$ | |3,000,000 | |

|Cost of sales (see below) | | | | | |( |1,792,000 |) |

|Other expenses (see below) | | | | | |( |580,000 |) |

|Minority interest (see below) | | | | | |( |20,000 |) |

|Consolidated net income | | | | |$ | |608,000 | |

| | | | | | | | | |

| | | | | | | | | |

|Sales: | | | | | | | | |

|$2,000,000 + 1,200,000 - 200,000 | |$ |3,000,000 | |

| | | | | |

|Cost of Sales | | | | |

|$1,200,000 + 800,000 - 200,000 - 48,000 + 40,000 | |$ |1,792,000 | |

|Other expenses: | | | | | | | | |

|$400,000 + 200,000 - 20,000 | |$ | 580,000 | |

| | | | | |

|Minority income | | | | |

|Net income from Branch x 10%: ($200,000 x 10%) = | |$ |20,000 | |

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|

|combined entity. In this case the gain was $150,000 - $90,000, or $60,000. |

| |

|Requirement 2 |

| |

|The consolidated amount of depreciation expense was the combined amounts of depreciation expense showing on the separate income statements |

|minus the piecemeal recognition of the gain on the sale of the equipment. Thus, the consolidated amount of depreciation expense was $95,000|

|+ $32,000 – ($35,000/4 years) = $118,250. |

| |

|Requirement 3 |

| |

|Consolidated net income: |

|Osprey separate income (not including Income | | | | | |

|from Branch)= $153,000 - $55,000 = | | |$ 98,000 | | |

|Income from Branch | | |20,000 | | |

|Plus: Deferred gain on land | | |50,000 | | |

|Plus: Piecemeal recognition of gain on equip- | | | | | |

|ment sale: $35,000 gain/4 years = | | |8,750 | | |

|Consolidated net income | | | $176,750 | | |

| | | | | | |

| | | | | | |

Exercise 8

|Quail Corporation and Subsidiary |

|Consolidated Income Statement |

|for the year ended December 31, 2005 |

| |

|Sales | | | | |$ | |1,100,000 | |

|Gain on land ($20,000 + $25,000) | | | | | | |45,000 | |

|Cost of sales | | | | | |( |560,000 |) |

|Other expenses (see below) | | | | | |( |320,000 |) |

|Minority interest (see below) | | | | | |( |20,000 |) |

|Consolidated net income | | | | |$ | |245,000 | |

| | | | | | | | | |

| | | | | | | | | |

|Other expenses: | | | | | | | | |

|$265,000 + $60,000 - $5,000 piecemeal recognition of gain on equipment | | | | |

| | |$ |320,000 | |

| | | | | |

|Minority income | | | | |

|Net income from Savannah x 20%: ($100,000 x 20%) = | |$ |20,000 | |

| | | | | |

Exercise 9

|Requirement 1 | | |2003 | |2004 | |2005 |

|Consolidated net income as reported | | | | | | | |

| | | |$ 750,000 | |$ 600,000 | |$ 910,000 |

|Less: $10,000 deferred gain | | |-10,000 | | | | |

|Plus: Minority interest portion of the gain | | | | | | | |

| | | |3,000 | | | | |

|Plus: Deferred gain | | | | | | |7,000 |

|Corrected consolidated net income | | | | | | | |

| | | |$ 743,000 | |$ 600,000 | |$ 917,000 |

| | | | | | | | |

| | | | | | | | |

|Requirement 2 | | |2003 | |2004 | |2005 |

|Land account as reported | | |$ 200,000 | |$ 240,000 | |$ 300,000 |

|Less: Intercompany profit | | |-10,000 | |-10,000 | | |

|Restated land account | | |$ 190,000 | |$ 230,000 | |$ 300,000 |

| | | | | | | | |

| | | | | | | | |

|Requirement 3 | | | | | | | |

|Final sales price outside the entity minus the original cost to the combined entity equals $102,000 minus $72,000 = $30,000 |

Exercise 10

Requirement 1

|On the consolidated balance sheet, the machine must be reported at its original cost when Tool purchased it on January 1, 1999, which is |

|$120,000. Since the elimination entry debited the machine account for $22,000 which must be the amount needed to bring the machine account |

|up to $120,000, Buzzard must have recorded the machine at $98,000. Since the remaining useful life is seven years, Buzzard will record |

|$14,000 of depreciation expense each year. |

Requirement 2

|The correct balances on the consolidated balance sheet for the Machine and Accumulated Depreciation accounts are the balances that would be|

|in the accounts if there had been no sale. The balance in the machine account would be the original purchase price to Tool or $120,000. The|

|balance in the Accumulated Depreciation account will be the original amount of annual depreciation, ($12,000) times the number of years the|

|machine has been depreciated (4), or $48,000. |

Requirement 3

|The minority interest income will be 30% of Tool’ adjusted net income. Tool’ reported net income of $60,000 is reduced by the $14,000 |

|unrealized gain on the sale of the machine and is increased by the piecemeal recognition of the gain, which is $2,000. The net result of |

|$48,000 is then multiplied by 30% to calculate a $14,400 income for the non-controlling interest. |

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