AFAR Simulation

ADVANCED FINANCIAL ACCOUNTING AND REPORTING REVIEW
CONSOLIDATED FINANCIAL STATEMENTS AFTER ACQUISITION
1. An investor adjusts the investment account for the amortization of any difference between cost and
book value under the
a. cost method.
b. complete equity method.
c. partial equity method.
d. complete and partial equity methods.
2. Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a
debit to
a. Dividend Income.
b. Dividends Declared - S Company.
c. Equity in Subsidiary Income.
d. Retained Earnings - S Company.
3. On the consolidated statement of cash flows, the parent‟s acquisition of additional shares of the
subsidiary‟s stock directly from the subsidiary is reported as
a. an investing activity.
b. a financing activity.
c. an operating activity.
d. none of these.
4. Under the cost method, the workpaper entry to establish reciprocity

a. debits Retained Earnings - S Company.
b. credits Retained Earnings - S Company.
c. debits Retained Earnings - P Company.
d. credits Retained Earnings - P Company.
5. Under the cost method, the investment account is reduced when

a. there is a liquidating dividend.
b. the subsidiary declares a cash dividend.
c. the subsidiary incurs a net loss.
d. none of these.
6. The parent company records its share of a subsidiary‟s income by

a. crediting Investment in S Company under the partial equity method.
b. crediting Equity in Subsidiary Income under both the cost and partial equity methods.
c. debiting Equity in Subsidiary Income under the cost method.
d. none of these.
7. In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the
a. complete equity method.
b. cost method.
c. partial equity method.
d. complete and partial equity methods.
8. A parent company received dividends in excess of the parent company‟s share of the subsidiary‟s
earnings subsequent to the date of the investment. How will the parent company‟s investment
account be affected by those dividends under each of the following accounting methods?
Cost Method Partial Equity Method

a. No effect No effect
b. Decrease No effect
c. No effect Decrease
d. Decrease Decrease
9. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a
cash payment of $1,272,000. S Company‟s December 31, 2010 balance sheet reported common
stock of $800,000 and retained earnings of $540,000. During the calendar year 2011, S Company
earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1.
What is the amount needed to establish reciprocity under the cost method in the preparation of a
consolidated workpaper on December 31, 2011?
a. $208,000
b. $260,000
c. $248,000
d. $432,000
10. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S
Company‟s stockholders‟ equity at various dates was:
1/1/97 1/1/11 12/31/11
Common stock $400,000 $400,000 $400,000
Retained earnings 120,000 380,000 460,000
Total $520,000 $780,000 $860,000
The workpaper entry to establish reciprocity under the cost method in the preparation of a
consolidated statements workpaper on December 31, 2011 should include a credit to P Company‟s
retained earnings of
a. $80,000.
b. $234,000.
c. $260,000.
d. $306,000.
11. Consolidated net income for a parent company and its partially owned subsidiary is best defined as
the parent company‟s
a. recorded net income.
b. recorded net income plus the subsidiary‟s recorded net income.
c. recorded net income plus the its share of the subsidiary‟s recorded net income.
d. income from independent operations plus subsidiary‟s income resulting from transactions with
outside parties.
12. In the preparation of a consolidated statements workpaper, dividend income recognized by a parent
company for dividends distributed by its subsidiary is
a. included with parent company income from other sources to constitute consolidated net income.
b. assigned as a component of the noncontrolling interest.
c. allocated proportionately to consolidated net income and the noncontrolling interest.
d. eliminated.
13. In the preparation of a consolidated statement of cash flows using the indirect method of presenting
cash flows from operating activities, the amount of the noncontrolling interest in consolidated
income is
a. combined with the controlling interest in consolidated net income.
b. deducted from the controlling interest in consolidated net income.
c. reported as a significant noncash investing and financing activity in the notes.
d. reported as a component of cash flows from financing activities.
14. On October 1, 2011, Parr Company acquired for cash all of the voting common stock of Stein
Company. The purchase price of Stein‟s stock equaled the book value and fair value of Stein‟s net
assets. The separate net income for each company, excluding Parr‟s share of income from Stein was
as follows:
Parr Stein
Twelve months ended 12/31/11 $4,500,000 $2,700,000
Three months ended 12/31/11 495,000 450,000
During September, Stein paid $150,000 in dividends to its stockholders. For the year ended
December 31, 2011, Parr issued parent company only financial statements. These statements are not
considered those of the primary reporting entity. Under the partial equity method, what is the
amount of net income reported in Parr‟s income statement?
a. $7,200,000.
b. $4,650,000.
c. $4,950,000.
d. $1,800,000.
15. A parent company uses the partial equity method to account for an investment in common stock of
its subsidiary. A portion of the dividends received this year were in excess of the parent company‟s
share of the subsidiary‟s earnings subsequent to the date of the investment. The amount of dividend
income that should be reported in the parent company‟s separate income statement should be
a. zero.
b. the total amount of dividends received this year.
c. the portion of the dividends received this year that were in excess of the parent‟s share of
subsidiary‟s earnings subsequent to the date of investment.
d. the portion of the dividends received this year that were NOT in excess of the parent‟s share of
subsidiary‟s earnings subsequent to the date of investment.
16. Masters, Inc. owns 40% of Fields Corporation. During the year, Fields had net earnings of $200,000
and paid dividends of $50,000. Masters used the cost method of accounting. What effect would this
have on the investment account, net earnings, and retained earnings, respectively?
a. understate, overstate, overstate.
b. overstate, understate, understate
c. overstate, overstate, overstate
d. understate, understate, understate
Use the following information in answering questions 17 and 18.
17. Prior Industries acquired a 70 percent interest in Stevenson Company by purchasing 14,000 of its
20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2010.
Stevenson reported net income in 2010 of $90,000 and in 2011 of $120,000 earned evenly
throughout the respective years. Prior received $24,000 dividends from Stevenson in 2010 and
$36,000 in 2011. Prior uses the equity method to record its investment.
Prior should record investment income from Stevenson during 2011 of:
a. $36,000
b. $120,000
c. $84,000
d. $48,000
18. The balance of Prior‟s Investment in Stevenson account at December 31, 2011 is:
a. $210,000
b. $285,000
c. $297,000
d. $315,000
19. Parkview Company acquired a 90% interest in Sutherland Company on December 31, 2010, for
$320,000. During 2011 Sutherland had a net income of $22,000 and paid a cash dividend of $7,000.
Applying the cost method would give a debit balance in the Investment in Stock of Sutherland
Company account at the end of 2011 of:
a. $335,000
b. $333,500
c. $313,700
d. $320,000
20. Hall, Inc., owns 40% of the outstanding stock of Gloom Company. During 2011, Hall received a
$4,000 cash dividend from Gloom. What effect did this dividend have on Hall‟s 2011 financial
statements?
a. Increased total assets.
b. Decreased total assets.
c. Increased income.
d. Decreased investment account.
21. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a
cash payment of $318,000. S Company‟s December 31, 2010 balance sheet reported common stock
of $200,000 and retained earnings of $180,000. During the calendar year 2011, S Company earned
$210,000 evenly throughout the year and declared a dividend of $75,000 on November 1. What is
the amount needed to establish reciprocity under the cost method in the preparation of a
consolidated workpaper on December 31, 2011?
a. $52,000
b. $65,000
c. $62,000
d. $108,000
22. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S
Company‟s stockholders‟ equity at various dates was:
1/1/97 1/1/11 12/31/11
Common stock $200,000 $200,000 $200,000
Retained earnings 60,000 190,000 230,000
Total $260,000 $390,000 $430,000
The workpaper entry to establish reciprocity under the cost method in the preparation of a
consolidated statements workpaper on December 31, 2011 should include a credit to P Company‟s
retained earnings of
a. $40,000.
b. $117,000.
c. $130,000.
d. $153,000.
Use the following information in answering questions 23 and 24.
23. Prior Industries acquired an 80 percent interest in Sanderson Company by purchasing 24,000 of its
30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2010.
Sanderson reported net income in 2010 of $45,000 and in 2011 of $60,000 earned evenly
throughout the respective years. Prior received $12,000 dividends from Sanderson in 2010 and
$18,000 in 2011. Prior uses the equity method to record its investment.
Prior should record investment income from Sanderson during 2011 of:
a. $18,000.
b. $60,000.
c. $48,000.
d. $33,600.
24. The balance of Prior‟s Investment in Sanderson account at December 31, 2011 is:
a. $105,000.
b. $138,600.
c. $159,000.
d. $165,000.
25. Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2010, for
$380,000. During 2011 Sunflower had a net income of $30,000 and paid a cash dividend of
$10,000. Applying the cost method would give a debit balance in the Investment in Stock of
Sunflower Company account at the end of 2011 of:
a. $400,000.
b. $394,000.
c. $373,000.
d. $380,000.
Use the following information to answer questions 26 and 27
On January 1, 2011, Rotor Corporation acquired 30 percent of Stator Company's stock for $150,000. On
the acquisition date, Stator reported net assets of $450,000 valued at historical cost and $500,000 stated at
fair value. The difference was due to the increased value of buildings with a remaining life of 10 years.
During 2011 Stator reported net income of $25,000 and paid dividends of $10,000. Rotor uses the equity
method.
26. What will be the balance in the Investment account as of Dec 31, 2011?
a. $150,000
b. $157,500
c. $154,500
d. $153,000
27. What amount of investment income will be reported by Rotor for the year 2011?
a. $7,500
b. $6,000
c. $4,500
d. $25,000
28. On January 1, 2011, Potter Company purchased 25 % of Smith Company‟s common stock; no
goodwill resulted from the acquisition. Potter Company appropriately carries the investment using the
equity method of accounting and the balance in Potter‟s investment account was $190,000 on
December 31, 2011. Smith reported net income of $120,000 for the year ended December 31, 2011
and paid dividends on its common stock totaling $48,000 during 2011. How much did Potter pay for
its 25% interest in Smith?
a. $172,000
b. $202,000
c. $208,000
d. $232,000
Use the following information to answer questions 29 and 30.
29. On January 1, 2011, Paterson Company purchased 40% of Stratton Company‟s 30,000 shares of
voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton
Company was $1,740,000. The payment in excess of the net book value was attributed to depreciable
assets with a remaining useful life of six years. As a result of this transaction Paterson has the ability
to exercise significant influence over Stratton Company‟s operating and financial policies. Stratton‟s
net income for the ended December 31, 2011 was $600,000. During 2011, Stratton paid $325,000 in
dividends to its shareholders. The income reported by Paterson for its investment in Stratton should
be:
a. $120,000
b. $130,000
c. $230,000
d. $240,000
30. What is the ending balance in Paterson‟s investment account as of December 31, 2011?
a. $1,800,000
b. $1,900,000
c. $1,910,000
d. $2,030,000
Problems
4-1 On January 1, 2011, Price Company purchased an 80% interest in the common stock of Stahl
Company for $1,040,000, which was $60,000 greater than the book value of equity acquired. The
difference between implied and book value relates to the subsidiary‟s land.
The following information is from the consolidated retained earnings section of the consolidated
statements workpaper for the year ended December 31, 2011:
STAHL CONSOLIDATED
COMPANY BALANCES
1/01/11 retained earnings $300,000 $1,400,000
Net income 220,000 680,000
Dividends declared (80,000) (140,000)
12/31/11 retained earnings $440,000 $1,940,000
Stahl‟s stockholders‟ equity includes only common stock and retained earnings.
Required:
A. Prepare the workpaper eliminating entries for a consolidated statements workpaper on

December 31, 2011. Price uses the cost method.
B. Compute the total noncontrolling interest to be reported on the consolidated balance sheet on
December 31, 2011.
4-2 On October 1, 2011, Packer Company purchased 90% of the common stock of Shipley Company
for $290,000. Additional information for both companies for 2011 follows:
PACKER SHIPLEY
Common stock $300,000 $90,000
Other contributed capital 120,000 40,000
Retained Earnings, 1/1 240,000 50,000
Net Income 260,000 160,000
Dividends declared (10/31) 40,000 8,000
Any difference between implied and book value relates to Shipley‟s land. Packer uses the cost
method to record its investment in Shipley. Shipley Company‟s income was earned evenly
throughout the year.
Required:
A. Prepare the workpaper entries that would be made on a consolidated statements workpaper on
December 31, 2011. Use the full year reporting alternative.
B. Calculate the controlling interest in consolidated net income for 2011.

4-3 On January 1, 2011, Pierce Company purchased 80% of the common stock of Stanley Company for
$600,000. At that time, Stanley‟s stockholders‟ equity consisted of the following:
Common stock $220,000

Other contributed capital 90,000
Retained earnings 320,000
During 2011, Stanley distributed a dividend in the amount of $120,000 and at year-end reported a
$320,000 net income. Any difference between implied and book value relates to subsidiary
goodwill. Pierce Company uses the equity method to record its investment. No impairment of
goodwill is observed in the first year.
Required:
A. Prepare on Pierce Company‟s books journal entries to record the investment related activities
for 2011.
B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2011.
4-4 Pratt Company purchased 80% of the outstanding common stock of Selby Company on January 2,
2004, for $680,000. The composition of Selby Company‟s stockholders‟ equity on January 2, 2004,
and December 31, 2011, was:
1/2/04 12/31/11
Common stock $540,000 $540,000
Other contributed capital 325,000 325,000
Retained earnings (deficit) (60,000) 295,000
Total stockholders‟ equity $805,000 $1,160,000
During 2011, Selby Company earned $210,000 net income and declared a $60,000 dividend. Any
difference between implied and book value relates to land. Pratt Company uses the cost method to
record its investment in Selby Company.
Required:
A. Prepare any journal entries that Pratt Company would make on its books during 2011 to record
the effects of its investment in Selby Company.
B. Prepare, in general journal form, all workpaper entries needed for the preparation of a
consolidated statements workpaper on December 31, 2011.
4-5 P Company purchased 90% of the common stock of S Company on January 2, 2011 for $900,000.
On that date, S Company‟s stockholders‟ equity was as follows:
Common stock, $20 par value $400,000

Other contributed capital 100,000
Retained earnings 450,000
During 2011, S Company earned $200,000 and declared a $100,000 dividend. P Company uses the
partial equity method to record its investment in S Company. The difference between implied and
book value relates to land.
Required:
Prepared, in general journal form, all eliminating entries for the preparation of a consolidated
statements workpaper on December 31, 2011.
4-6 Pair Company acquired 80% of the outstanding common stock of Sax Company on January 2, 2010
for $675,000. At that time, Sax‟s total stockholders‟ equity amounted to $1,000,000. Sax Company
reported net income and dividends for the last two years as follows:
2010 2011
Reported net income $45,000 $60,000
Dividends distributed 35,000 75,000
Required:
Prepare journal entries for Pair Company for 2010 and 2011 assuming Pair uses:
A. The cost method to record its investment
B. The complete equity method to record its investment. The difference between implied value and
the book value of equity acquired was attributed solely to a building, with a 20-year expected
life.
4-7 Pell Company purchased 90% of the stock of Silk Company on January 1, 2007, for $1,860,000, an
amount equal to $60,000 in excess of the book value of equity acquired. All book values were equal
to fair values at the time of purchase (i.e., any excess payment relates to subsidiary goodwill). On
the date of purchase, Silk Company‟s retained earnings balance was $200,000. The remainder of the
stockholders‟ equity consists of no-par common stock. During 2011, Silk Company declared
dividends in the amount of $40,000, and reported net income of $160,000. The retained earnings
balance of Silk Company on December 31, 2010 was $640,000. Pell Company uses the cost method
to record its investment. No impairment of goodwill was recognized between the date of
acquisition and December 31, 2011.
Required:
Prepare in general journal form the workpaper entries that would be made in the preparation of a
consolidated statements workpaper on December 31, 2011.
4-8 On January 1, 2011, Pitt Company purchased 85% of the outstanding common stock of Small
Company for $525,000. On that date, Small Company‟s stockholders‟ equity consisted of common
stock, $150,000; other contributed capital, $60,000; and retained earnings, $210,000. Pitt Company
paid more than the book value of net assets acquired because the recorded cost of Small Company‟s
land was significantly less than its fair value.
During 2011 Small Company earned $222,000 and declared and paid a $75,000 dividend. Pitt
Company used the partial equity method to record its investment in Small Company.
Required:
A. Prepare the investment related entries on Pitt Company‟s books for 2011.
B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2011.
4-9 Picture Company purchased 40% of Stuffy Corporation on January 1, 2011 for $150,000. Stuffy
Corporation‟s balance sheet at the time of acquisition was as follows:
Cash $30,000 Current Liabilities $40,000

Accounts Receivable 120,000 Bonds Payable 200,000
Inventory 80,000 Common Stock 200,000
Land 150,000 Additional Paid in Capital 40,000
Buildings & Equipment 300,000 Retained Earnings 80,000
Less: Acc. Depreciation (120,000)
Total Assets $560,000 Total Liabilities and Equities $560,000

During 2011, Stuffy Corporation reported net income of $30,000 and paid dividends of $9,000. The
fair values of Stuffy‟s assets and liabilities were equal to their book values at the date of acquisition,
with the exception of Building and Equipment, which had a fair value of $35,000 above book value.
All buildings and equipment had a remaining useful life of five years at the time of the acquisition.
The amount attributed to goodwill as a result of the acquisition in not impaired.
Required:
A. What amount of investment income will Picture record during 2011 under the equity method of
accounting?
B. What amount of income will Picture record during 2011 under the cost method of accounting?
C. What will be the balance in the investment account on December 31, 2011 under the cost and
equity method of accounting?
ANSWER KEY
Multiple Choice
1. b 8. d 15. a 22. b 29. c

2. c 9. a 16. d 23. c 30. b
3. d 10. b 17. c 24. c
4. d 11. d 18. c 25. d
5. a 12. d 19. d 26. d
6. d 13. a 20. d 27. b
7. b 14. c 21. a 28. a
Problems
4-1 A. Dividend Income (80,000 × .80) 64,000

Dividends Declared – Stahl 64,000
Common Stock – Stahl 925,000*

Retained Earnings, 1/1 – Stahl 300,000
Difference Between Implied and Book Value 75,000**
Investment in Stahl Company 1,040,000
Noncontrolling Interest in Equity 260,000
*[(1,040,000 – 60,000)/.8] – 300,000

**60,000/.8 = 75,000
Land 75,000
Difference Between Implied and Book Value 75,000
B. Noncontrolling Interest:
In 1/1/11 retained earnings 300,000 × .20 $60,000
In 2011 net income 220,000 × .20 44,000
In dividends declared 80,000 × .20 (16,000)
In common stock of Stahl 925,000 × .20 185,000
In difference between implied and book value 75,000 x .20 15,000
Total noncontrolling interest $288,000
4-2 A. Dividend Income (8,000 × .90) 7,200

Dividends Declared – Shipley 7,200
Common Stock - Shipley 90,000

Other Contributed Capital – Shipley 40,000
Retained Earnings 1/1 – Shipley 50,000
Difference between Implied# and Book Value
(290,000/.9 – 300,000*) 22,222
Subsidiary Income Purchased
(160,000 × 9/12) 120,000
Investment in Shipley Company 290,000
Noncontrolling Interest in Equity (.10 x $322,222) 32,222
*BV=[90,000 + 40,000 + 50,000 + (160,000 × 9/12)] = $300,000

#Implied Value = Purchase Price/90% = $322,222
Land 22,222
B. Controlling interest in Consolidated Net Income

Packer‟s reported net income $260,000
– dividend income from Shipley 7,200
Packer‟s income from independent operations 252,800
+ Packer‟s share of Shipley‟s net income in 2011
since acquisition (.90 × 40,000) 36,000
Controlling Interest in Consolidated Net Income $288,800
4-3 A. Investment in Stanley Company 600,000

Cash 600,000
Investment in Stanley Company

(.80 × 320,000) 256,000
Equity in Subsidiary Income 256,000
Cash (.80 × 120,000) 96,000

Investment in Stanley Company 96,000
B. Equity in Subsidiary Income 216,000

Dividends Declared – Stanley 96,000
Common Stock – Stanley 220,000

Other Contributed Capital – Stanley 90,000
Retained Earnings 1/1 – Stanley 320,000
Goodwill 120,000
4-4 A. Cash 48,000

Dividend Income (.8 × $60,000) 48,000
B. To Establish Reciprocity
Investment in Selby Company 164,000
1/1 Retained Earnings - Pratt Company 164,000
$295,000 – $210,000 + $60,000 = $145,000 Retained Earnings on 1/1/11

$145,000 + $60,000 (deficit on date of acquisition) = $205,000 increase in retained earnings
from date of acquisition to 1/1/11
Pratt Company‟s share of increase = (.8 × $205,000) = $164,000
Eliminating Entries
Dividend Income 48,000
Dividends Declared – Selby Company 48,000
Common Stock – Selby 540,000

Other Contributed Capital – Selby 325,000
1/1 Retained Earnings – Selby 145,000
Difference Between Implied and Book Value45,000*
Investment in Selby Company 844,000
Implied Value = $680,000/.80 = $850,000. Diff = $850,000 – $805,000BV.
Land 45,000
4-5 Equity in Subsidiary Income 270,000

Dividends Declared - S Company 90,000
Investment in S Company 180,000
Common Stock – S 400,000

Other Contributed Capital – S 100,000
1/1 Retained Earnings – S 450,000
Investment in S Company 900,000
Land 50,000
4-6 A. 2010
Investment in Sax Company 675,000
Cash 675,000
Cash 28,000
Dividend Income (.8 × $35,000) 28,000
2011
Cash (.8 × $75,000) 60,000
Investment in Sax Company (.8 × $5,000) 4,000
B. 2010
Cash 675,000
Cash 28,000

Equity in Subsidiary Income (.8 × $45,000) 36,000
Equity in Subsidiary Income ($75,000*/20) 3,750

* $675,000/.8 – $750,000 = $93,750 write-up of PPE; Parent‟s share = 80%, or $75,000
2011
Cash 60,000

Equity in Subsidiary Income (.8 × $60,000) 48,000

4-7 Workpaper entries 12/31/11

Investment in Silk Company 396,000
Retained Earnings 1/1 - Pell company 396,000
To establish reciprocity (.90 × ($640,000 – $200,000))

Dividends Declared - Silk Company 36,000
Common Stock - Silk Company# 1,800,000

Retained Earnings 1/1/11 - Silk Company 640,000
Difference between Implied and Book Values 66,667
Investment in Silk Company ($1,860,000 + $396,000) 2,256,000
Noncontrolling Interest in Equity ($206,667 + $44,000##) 250,667
#$2,000,000– $200,000
##NCI share of change in R/E = .10($640,000 - $200,000)
Goodwill* 66,667
Difference between Implied and Book Values 66,667
*See computation of difference between implied and book values on following page.
Computation and Allocation of Difference between Implied and Book Value
Parent Non- Entire

Share Controlling Value
Share
Purchase price and implied value $1,860,000 206,667 2,066,667
Equity at book value 1,800,000* 200,000 2,000,000**
Difference between Implied value and bv 60,000 6,667 66,667
Allocated to undervalued land (60,000) (6,667) (66,667)
Balance -0- -0- -0-
* $1,860,000 – $60,000
** $1,800,000/.9
4-8 A. Investment in Small 525,000

Cash 525,000
Investment in Small ($222,000)(.85) 188,700

Cash ($75,000)(.85) 63,750

Investment in Small 63,750
B. Equity in Subsidiary Income 188,700

Dividends Declared - Small 63,750
Common Stock - Small 150,000

Other Contributed Capital - Small 60,000
Retained Earnings 1/1 - Small 210,000
Difference between Implied and Book Value 197,647
Land 197,647
Computation and Allocation of Difference between Implied and Book Value

Parent Non- Entire
Share controlling value
share
Purchase price and implied value $ 525,000 92,647 617,647
Book Value of Equity Acquired 357,000 63,000 420,000
Difference between Implied and Book Value 168,000 29,647 197,647
Adjust Land Upward (168,000) (29,647) (197,647)
Balance -0- -0- -0-
4-9
Solution:
A. Picture Company 2011 equity-method income:
Proportionate share of reported income ($30,000 x .40) $ 12,000

Amortization of differential assigned to:
Buildings and equipment [($35,000 x .40) / 5 years] (2,800)
Goodwill ($8,000: not impaired) -0-
Investment Income $ 9,200
Assignment of differential
Purchase price $150,000

Proportionate share of book value of
net assets ($320,000 x .40) (128,000)
Proportionate share of fair value increase in buildings
and equipment ($35,000 x .40) (14,000)
Goodwill $ 8,000
B. Dividend income, 2011 ($9,000 x .40) $ 3,600
C. Cost-method account balance (unchanged): $150,000
Equity-method account balance:

Balance, January 1, 2011 $150,000
Investment income 9,200
Dividends received (3,600)
Balance, December 31, 2011 $155,600
Allocation and Depreciation of Differences Between Implied and Book Value

Multiple Choice
1. When the implied value exceeds the aggregate fair values of identifiable net assets, the residual
difference is accounted for as
a. excess of implied over fair value.
b. a deferred credit.
c. difference between implied and fair value.
d. goodwill.
2. Long-term debt and other obligations of an acquired company should be valued for consolidation
purposes at their
a. book value.
b. carrying value.
c. fair value.
d. face value.
3. On January 1, 2010, Lester Company purchased 70% of Stork Corporation's $5 par common stock
for $600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork's
identifiable net assets were the same as their book value except for equipment that was $40,000 in
excess of the book value. In the January 1, 2010, consolidated balance sheet, goodwill would be
reported at
a. $152,000.
b. $177,143.
c. $80,000.
d. $0.
4. When the value implied by the purchase price of a subsidiary is in excess of the fair value of
identifiable net assets, the workpaper entry to allocate the difference between implied and book
value includes a
1. debit to Difference Between Implied and Book Value.
2. credit to Excess of Implied over Fair Value.
3. credit to Difference Between Implied and Book Value.
a. 1
b. 2
c. 3
d. Both 1 and 2
5. If the fair value of the subsidiary's identifiable net assets exceeds both the book value and the value
implied by the purchase price, the workpaper entry to eliminate the investment account
a. debits Excess of Fair Value over Implied Value.
b. debits Difference Between Implied and Fair Value.
c. debits Difference Between Implied and Book Value.
d. credits Difference Between Implied and Book Value.
6. The entry to amortize the amount of difference between implied and book value allocated to an
unspecified intangible is recorded
1. on the subsidiary's books.
2. on the parent's books.
3. on the consolidated statements workpaper.
a. 1
b. 2
c. 3
d. Both 2 and 3
7. The excess of fair value over implied value must be allocated to reduce proportionally the fair
values initially assigned to
a. current assets.
b. noncurrent assets.
c. both current and noncurrent assets.
d. none of the above.
8. The SEC requires the use of push down accounting when the ownership change is greater than
a. 50%
b. 80%
c. 90%
d. 95%
9. Under push down accounting, the workpaper entry to eliminate the investment account includes a
a. debit to Goodwill.
b. debit to Revaluation Capital.
c. credit to Revaluation Capital.
d. debit to Revaluation Assets.
10. In a business combination accounted for as an acquisition, how should the excess of fair value of
identifiable net assets acquired over implied value be treated?
a. Amortized as a credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty years.
d. Recognized as an ordinary gain in the year of acquisition.
11. On November 30, 2010, Pulse Incorporated purchased for cash of $25 per share all 400,000 shares of
the outstanding common stock of Surge Company. Surge 's balance sheet at November 30, 2010,
showed a book value of $8,000,000. Additionally, the fair value of Surge's property, plant, and
equipment on November 30, 2010, was $1,200,000 in excess of its book value. What amount, if any,
will be shown in the balance sheet caption "Goodwill" in the November 30, 2010, consolidated
balance sheet of Pulse Incorporated, and its wholly owned subsidiary, Surge Company?
a. $0.
b. $800,000.
c. $1,200,000.
d. $2,000,000.
12. Goodwill represents the excess of the implied value of an acquired company over the
a. aggregate fair values of identifiable assets less liabilities assumed.
b. aggregate fair values of tangible assets less liabilities assumed.
c. aggregate fair values of intangible assets less liabilities assumed.
d. book value of an acquired company.
13. Scooter Company, a 70%-owned subsidiary of Pusher Corporation, reported net income of $240,000
and paid dividends totaling $90,000 during Year 3. Year 3 amortization of differences between
current fair values and carrying amounts of Scooter's identifiable net assets at the date of the
business combination was $45,000. The noncontrolling interest in net income of Scooter for Year 3
was
a. $58,500.
b. $13,500.
c. $27,000.
d. $72,000.
14. Porter Company acquired an 80% interest in Strumble Company on January 1, 2010, for $270,000
cash when Strumble Company had common stock of $150,000 and retained earnings of $150,000.
All excess was attributable to plant assets with a 10-year life. Strumble Company made $30,000 in
2010 and paid no dividends. Porter Company’s separate income in 2010 was $375,000. Controlling
interest in consolidated net income for 2010 is:
a. $405,000.
b. $399,000.
c. $396,000.
d. $375,000.
15. In preparing consolidated working papers, beginning retained earnings of the parent company will
be adjusted in years subsequent to acquisition with an elimination entry whenever:
a. a noncontrolling interest exists.
b. it does not reflect the equity method.
c. the cost method has been used only. d.
the complete equity method is in use.
16. Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent
under the
a. partial equity method.
b. equity method.
c. cost method.
d. equity and partial equity methods.
Use the following information to answer questions 17 through 20.
On January 1, 2010, Pandora Company purchased 75% of the common stock of Saturn Company. Separate
balance sheet data for the companies at the combination date are given below:
Saturn Co. Saturn Co.

Pandora Co. Book Values Fair Values
Cash $ 18,000 $155,000 $155,000

Accounts receivable 108,000 20,000 20,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Acc. depreciation (180,000) (45,000)
Investment in Saturn Co. 330,000
Total assets $960,000 $405,000 $565,000
Accounts payable $156,000 $105,000 $105,000

Capital stock 600,000 225,000
Retained earnings 204,000 75,000
Total liabilities & equities $960,000 $405,000
Determine below what the consolidated balance would be for each of the requested accounts on January 2,
2010.
17. What amount of inventory will be reported?

a. $125,000
b. $132,750
c. $139,250
d. $144,000
18. What amount of goodwill will be reported?

a. ($20,000)
b. ($25,000)
c. $25,000
d. $0
19. What is the amount of consolidated retained earnings?

a. $204,000
b. $209,250
c. $260,250
d. $279,000
20. What is the amount of total assets?

a. $921,000
b. $1,185,000
c. $1,525,000
d. $1,195,000
21. Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported net income of
$600,000 and paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences
between current fair values and carrying amounts of Sensible's identifiable net assets at the date of
the business combination was $112,500. The noncontrolling interest in consolidated net income of
Sensible for Year 3 was
a. $146,250.
b. $33,750.
c. $67,500.
d. $180,000.
22. Primer Company acquired an 80% interest in SealCoat Company on January 1, 2010, for $450,000
cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000.
All excess was attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in
2010 and paid no dividends. Primer Company’s separate income in 2010 was $625,000. The
controlling interest in consolidated net income for 2010 is:
a. $675,000.
b. $665,000.
c. $660,000.
d. $625,000.
Use the following information to answer questions 23 through 25.
On January 1, 2010, Poole Company purchased 75% of the common stock of Swimmer Company. Separate
balance sheet data for the companies at the combination date are given below:
Swimmer Co. Swimmer Co.

Poole Co. Book Values Fair Values
Cash $ 24,000 $206,000 $206,000
Accounts receivable 144,000 26,000 26,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Acc. depreciation (240,000) (60,000)
Investment in Swimmer Co. 440,000
Total assets $1,278,000 $542,000 $702,000
Accounts payable $206,000 $142,000 $142,000

Capital stock 800,000 300,000
Retained earnings 272,000 100,000
Total liabilities & equities $1,278,000 $542,000
Determine below what the consolidated balance would be for each of the requested accounts on January 2,
2010.
23. What amount of inventory will be reported?

a. $170,000.
b. $177,000.
c. $186,500.
d. $192,000.
24. What amount of goodwill will be reported?

a. $26,667.
b. $20,000.
c. $42,000.
d. $86,667.
25. What is the amount of total assets?

a. $1,626,667.
b. $1,566,667
c. $1,980,000.
d. $2,006,667.
Problems
5-1 Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1,
2010. Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings
on that date.
The following values were determined for Standards Corporation on the date of purchase:
Book Value Fair Value

Inventory $240,000 $300,000
Land 2,400,000 2,700,000
Equipment 1,620,000 1,800,000
Required:
A. Prepare a computation and allocation schedule for the difference between the implied and book
value in the consolidated statements workpaper.
B. Prepare the January 1, 2010, workpaper entries to eliminate the investment account and allocate
the difference between implied and book value.
5-2 Pullman Corporation acquired a 90% interest in Sleeper Company for $6,500,000 on January 1
2010. At that time Sleeper Company had common stock of $4,500,000 and retained earnings of
$1,800,000. The balance sheet information available for Sleeper Company on January 1, 2010,
showed the following:

Inventory (FIFO) $1,300,000 $1,500,000
Equipment (net) 1,500,000 1,900,000
Land 3,000,000 3,000,000
The equipment had a remaining useful life of ten years. Sleeper Company reported $240,000 of net
income in 2010 and declared $60,000 of dividends during the year.
Required:
Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate
the investment account, and to allocate and depreciate the difference between implied and book
value for 2010.
5-3 On January 1, 2010, Preston Corporation acquired an 80% interest in Spiegel Company for
$2,400,000. At that time Spiegel Company had common stock of $1,800,000 and retained earnings
of $800,000. The book values of Spiegel Company's assets and liabilities were equal to their fair
values except for land and bonds payable. The land's fair value was $120,000 and its book value was
$100,000. The outstanding bonds were issued on January 1, 2005, at 9% and mature on January 1,
2015. The bond principal is $600,000 and the current yield rate on similar bonds is 8%.
Required:
Prepare the workpaper entries necessary on December 31, 2010, to allocate, amortize, and
depreciate the difference between implied and book value.
Present Value
Present value of 1 of Annuity of 1
9%, 5 periods .64993 3.88965
8%, 5 periods .68058 3.99271
5-4 Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for
$3,200,000 cash on January 1, 2010. On this date the book values and fair values of Stafford
Corporation's assets and liabilities were as follows:
Cash $ 70,000 $ 70,000
Receivables 240,000 240,000
Inventories 600,000 700,000
Other Current Assets 340,000 405,000
Land 600,000 720,000
Buildings – net 1,050,000 1,920,000
Equipment – net 850,000 750,000
$3,750,000 $4,805,000
Accounts Payable $ 250,000 $250,000

Other Liabilities 740,000 670,000
Capital Stock 2,400,000
Retained Earnings 360,000
$3,750,000
Required:
Prepare a schedule showing how the difference between Stafford Corporation's implied value and
the book value of the net assets acquired should be allocated.
5-5 Perez Corporation acquired a 75% interest in Schmidt Company on January 1, 2010, for $2,000,000.
The book value and fair value of the assets and liabilities of Schmidt Company on that date were as
follows:
Current Assets $ 600,000 $ 600,000
Property & Equipment (net) 1,400,000 1,800,000
Land 700,000 900,000
Deferred Charge 300,000 300,000
Total Assets $3,000,000 $3,600,000
Less Liabilities 600,000 600,000
Net Assets $2,400,000 $3,000,000
The property and equipment had a remaining life of 6 years on January 1, 2010, and the deferred
charge was being amortized over a period of 5 years from that date. Common stock was $1,500,000
and retained earnings was $900,000 on January 1, 2010. Perez Company records its investment in
Schmidt Company using the cost method.
Required:
Prepare, in general journal form, the December 31, 2010, workpaper entries necessary to:
A. Eliminate the investment account.
B. Allocate and amortize the difference between implied and book value.
5-6 On January 1, 2010, Page Company acquired an 80% interest in Schell Company for $3,600,000.
On that date, Schell Company had retained earnings of $800,000 and common stock of $2,800,000.
The book values of assets and liabilities were equal to fair values except for the following:

Inventory $ 50,000 $ 85,000
Equipment (net) 540,000 720,000
Land 300,000 660,000
The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold
in 2010 and the remaining half was sold in 2011. Schell Company reported net income of $240,000
in 2010 and $300,000 in 2011. No dividends were declared or paid in either year. Page Company
uses the cost method to record its investment in Schell Company.
Required:
Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated
statements workpaper for the year ending December 31, 2011.
5-7 Paddock Company acquired 90% of the stock of Spector Company for $6,300,000 on January 1,
2010. On this date, the fair value of the assets and liabilities of Spector Company was equal to their
book value except for the inventory and equipment accounts. The inventory had a fair value of
$2,300,000 and a book value of $1,900,000. The equipment had a fair value of $3,300,000 and a
book value of $2,800,000.
The balances in Spector Company's capital stock and retained earnings accounts on the date of
acquisition were $3,700,000 and $1,900,000, respectively.
Required:
In general journal form, prepare the entries on Spector Company's books to record the effect of the
pushed down values implied by the acquisition of its stock by Paddock Company assuming that:
A values are allocated on the basis of the fair value of Spector Company as a whole imputed from
the transaction.
B values are allocated on the basis of the proportional interest acquired by Paddock Company.
5-8 Pruitt Corporation acquired all of the voting stock of Soto Corporation on January 1, 2010, for
$210,000 when Soto had common stock of $150,000 and retained earnings of $24,000. The excess of
implied over book value was allocated $9,000 to inventories that were sold in 2010, $12,000 to
equipment with a 4-year remaining useful life under the straight-line method, and the remainder to
goodwill.
Financial statements for Pruitt and Soto Corporations at the end of the fiscal year ended December
31, 2011 (two years after acquisition), appear in the first two columns of the partially completed
consolidated statements workpaper. Pruitt Corp. has accounted for its investment in Soto using the
partial equity method of accounting.
Required:
Complete the consolidated statements workpaper for Pruitt Corporation and Soto Corporation for
December 31, 2011.
Pruitt Corporation and Soto Corporation
Consolidated Statements Workpaper
at December 31, 2011
Eliminations
Pruitt Soto Consolidated
Debit Credit
Corp. Corp. Balances
INCOME STATEMENT
Sales 618,000 180,000
Equity from Subsidiary
Income 36,000
Cost of Sales
(450,000) (90,000)
Other Expenses
(114,000) (54,000)
Net Income to Ret. Earn.
90,000 36,000
Pruitt Retained Earnings
1/1
72,000
Soto Retained Earnings
1/1
3,000
Add: Net Income
90,000 36,000
Less: Dividends
(60,000) (12,000)
Retained Earnings 12/31
102,000 54,000
BALANCE SHEET
Cash
42,000 21,000
Inventories
63,000 45,000
Land
33,000 18,000
Equipment and
Buildings-net 192,000 165,000
Investment in Soto Corp. 240,000
Total Assets
570,000 249,000
LIA & EQUITIES
Liabilities
168,000 45,000
Common Stock
300,000 150,000
Retained Earnings
102,000 54,000
Total Equities
570,000 249,000
5-9 On January 1, 2010, Prescott Company acquired 80% of the outstanding capital stock of Sherlock
Company for $570,000. On that date, the capital stock of Sherlock Company was $150,000 and its
retained earnings were $450,000.
On the date of acquisition, the assets of Sherlock Company had the following values:
Fair Market
Book Value Value
Inventories........................................................................ $ 90,000 $165,000
Plant and equipment............................................................. 150,000 180,000
All other assets and liabilities had book values approximately equal to their respective fair market
values. The plant and equipment had a remaining useful life of 10 years from January 1, 2010, and
Sherlock Company uses the FIFO inventory cost flow assumption.
Sherlock Company earned $180,000 in 2010 and paid dividends in that year of $90,000.
Prescott Company uses the complete equity method to account for its investment in S Company.
Required:
A. Prepare a computation and allocation schedule.

B. Prepare the balance sheet elimination entries as of December 31, 2010.
C. Compute the amount of equity in subsidiary income recorded on the books of Prescott Company
on December 31, 2010.
D. Compute the balance in the investment account on December 31, 2010.
ANSWER KEY
Multiple Choice
1. d 6. c 11. b 16. c 21. a

2. c 7. d 12. a 17. d 22. c
3. b 8. d 13. a 18. d 23. d
4. c 9. b 14. c 19. a 24. a
5. c 10. d 15. b 20. d 25. b
Problems
5-1 A. Allocation of Difference Between Implied and Book Value
Non-
Parent Controlling Entire
Share Share Value
Less: Book value of equity acquired 2,430,000 270,000 2,700,000
Difference between implied and book value (90,000) (10,000) (100,000)
Inventory (54,000) (6,000) (60,000)
Land (270,000) (30,000) (300,000)
Equipment (162,000) (18,000) (180,000)
Balance (excess of FV over implied value) (576,000) (64,000) (640,000)
Gain 576,000
Increase Noncontrolling interest to fair value of assets 64,000
Total allocated bargain 640,000
Balance -0- -0- -0-
B. Common Stock – Standard 1,650,000

Beginning R/E – Standard 1,050,000
Investment in Standard Corp. 2,340,000

Inventory 60,000
Land 300,000
Equipment 180,000
Gain on Acquisition 576,000
Noncontrolling Interest 64,000
5-2 Dividend Income (.90 × 60,000) 54,000

Dividends Declared 54,000
Beginning R/E – Sleeper 1,800,000

Common Stock – Sleeper 4,500,000
Difference Between Implied and Book Value 922,222*
Investment in Sleeper Company 6,500,000
*$6,500,000/.9 - $1,800,000 - $4,500,000 = $922,222
Allocated to: $922,222
Inventory (200,000)
Equipment (400,000)
Goodwill $ 322,222
Cost of Goods Sold 200,000

Depreciation Expense 400,000/10 40,000
Equipment 400,000– 40,000 360,000
Goodwill 322,222
5-3
Non-
Share Share Value
Difference between implied and book value 320,000 80,000 400,000
Land ($120,000 – $100,000) (16,000) (4,000) (20,000)
Premium on Bonds Payable (623,954*– 600,000) 19,163 4,791 23,954
Balance 323,163 80,791 403,954
Goodwill (323,163) (80,791) (403,954)
Balance -0- -0- -0-
Present Value of 9% Bonds Payable discounted at 8% for 5 periods:

$600,000 × .68058 = $408,348
54,000 × 3.99271 = 215,606
$623,954*
Land 20,000
Goodwill 403,954
Interest Expense 4,084**
Unamortized Premium on Bonds Payable 19,870
(23,954 – 4,084)
**[54,000 – (623,954 × .08)]

Alternative Entries
Land 20,000
Goodwill 403,954
Premium on Bonds Payable 23,954
Premium on Bonds Payable 4,084

Interest Expense 4,084
5-4 Non-
Share Share Value
Difference between implied and book value 992,000 248,000 1,240,000
Inventories (80,000) (20,000) (100,000)
Other Current assets (52,000) (13,000) (65,000)
Land (96,000) (24,000) (120,000)
Buildings (net) (696,000) (174,000) (870,000)
Other liabilities (56,000) (14,000) (70,000) *
Equipment (net) 80,000 20,000 100,000
Balance 92,000 23,000 115,000
Goodwill (92,000) (23,000) (115,000)
Balance -0- -0- -0-
*A debit to Other Liabilities is a reduction of their carrying value.
5-5 A. Beginning Retained Earnings (Schmidt) 900,000

Capital Stock (Schmidt) 1,500,000
Investment in Schmidt 2,000,000
B. Depreciation Expense ($400,000/6) 66,667

Equipment (net) ($400,000 – $66,667) 333,333
Land ($900,000 - $700,000) 200,000
Gain on Acquisition ($200,000+$400,000-$266,667) × 0.75 250,000
Noncontrolling Interest ($200,000+$400,000-$266,667) × 0.25 83,333
5-6 Calculations
Cost of Investment and Implied Value ($3,600,000/0.8) $4,500,000
Book Value of Equity Acquired 3,600,000
Difference between Implied and Book Value $ 900,000
Annual Adjustment in
Determining Consolidated
Net Income
Difference Between
Implied and Book Value 2010 2011

Land $360,000 --- ---
Equipment (net) 180,000 $22,500 $22,500
Inventory 35,000 17,500 17,500
Goodwill 325,000 --- ---
$900,000 $40,000 $40,000
(1) Investment in Schell 192,000

Beginning Retained Earnings (Page) 192,000
(2) Beginning Retained Earnings (Schell) 1,040,000

Common Stock (Schell) 2,800,000
Investment in Schell ($3,600,000 +
$192,000) 3,792,000
(3) Beginning Retained Earnings – Page 32,000

Depreciation Expense 22,500
Cost of Goods Sold (Beginning Inventory) 17,500
Goodwill 325,000
Land 360,000
Equipment (net)
($180,000 – $22,500 – $22,500) 135,000
5-7 A Net Assets

Imputed Value ($6,300,000/.9) $7,000,000
Recorded Value ($1,900,000 + $3,700,000) 5,600,000
Unrecorded Values $1,400,000
Allocate to identifiable assets
Inventory ($2,300,000 – $1,900,000) $400,000
Equipment ($3,300,000 – $2,800,000) 500,000 900,000
Goodwill $ 500,000
Inventory 400,000
Equipment 500,000
Goodwill 500,000
Revaluation Capital 1,400,000
B
Unrecorded Value Imputed by Paddock Company's
Proportionate Interest (.9 × $1,400,000) $1,260,000
Allocate to
Inventory ($2,300,000 – $1,900,000) × .9 $360,000
Equipment ($3,300,000 – $2,800,000) × .9 450,000 810,000
Goodwill $ 450,000
Inventory 360,000
Equipment 450,000
Goodwill 450,000
Revaluation Capital 1,260,000
5-8
Pruitt Corporation and Soto Corporation

Eliminations
Pruitt Soto Consolidated
Debit Credit
Corp. Corp. Balances
INCOME STATEMENT
Sales 618,000 180,000 798,000
Equity from Subsidiary
36,000 (a) 36,000
Income
Cost of Sales (450,000) (90,000)
(540,000)
Other Expenses (114,000) (54,000) (c) 3,000
(171,000)
Net Income to Ret. Earn. 90,000 36,000 39,000
87,000
Pruitt Retained Earnings (b) 9,000
1/1 72,000 (c) 3,000 60,000
Soto Retained Earnings
1/1 30,000 (b) 30,000
Add: Net Income 90,000 36,000 39,000 87,000
Less: Dividends (60,000) (12,000) (a) 12,000 (60,000)
Retained Earnings 12/31 102,000 54,000 81,000 12,000 87,000
BALANCE SHEET
Cash 42,000 21,000 63,000
Inventories 63,000 45,000 108,000
Land 33,000 18,000 51,000
Equipment and
Buildings-net 192,000 165,000 (b) 12,000 (c) 6,000 363,000
(a) 24,000
Investment in Soto Corp. 240,000 (b) 216,000
Goodwill (b) 15,000 15,000
Total Assets 570,000 249,000 600,000
LIA & EQUITIES
Liabilities 168,000 45,000 213,000
Common Stock 300,000 150,000 (b) 150,000 300,000
Retained Earnings 102,000 54,000 81,000 12,000 87,000
Total Equities 570,000 249,000 258,000 258,000 600,000
5-9
A.
Prescott Non- Entire
Share Controlling Value
Share
Purchase price and implied value $570,000 142,500 712,500
Less: Book value of equity acquired 480,000 120,000 600,000
Difference between implied and book value 90,000 22,500 112,500
Inventories (60,000) (15,000) (75,000)
Equipment (net) (24,000) (6,000) (30,000)
Balance 6,000 1,500 7,500
Goodwill (6,000) (1,500) (7,500)
Balance -0- -0- -0-
B. Common Stock – Sherlock 150,000

Retained Earnings – Sherlock 450,000
Investment in Sherlock Company 570,000

Depreciation Expense ($30,000/10 years) 3,000
Plant and Equipment ($30,000 – $3,000) 27,000
Goodwill 7,500
C. Sherlock Company net income $180,000 × 80% = $144,000

Less: Inventory sold (60,000)
Plant & equipment depreciation ( 2,400)
Equity in subsidiary income $81,600
D. Investment balance 1/1/10 $570,000

+ Equity in subsidiary income 81,600
– Dividends ($90,000 × 80%) (72,000)
Investment balance 12/31/10 $579,600
Elimination of Unrealized Profit on Intercompany Sales of Inventory

Multiple Choice
1. Sales from one subsidiary to another are called

a. downstream sales.
b. upstream sales.
c. intersubsidiary sales.
d. horizontal sales.
2. Noncontrolling interest in consolidated income is never affected by

a. upstream sales.
b. downstream sales.
c. horizontal sales.
d. Noncontrolling interest is affected by all sales.
3. Failure to eliminate intercompany sales would result in an overstatement of consolidated

a. net income.
b. gross profit.
c. cost of sales.
d. all of these.
4. Pratt Company owns 80% of Storey Company’s common stock. During 2011, Storey sold $400,000
of merchandise to Pratt. At December 31, 2011, one-fourth of the merchandise remained in Pratt’s
inventory. In 2011, gross profit percentages were 25% for Pratt and 30% for Storey. The amount of
unrealized intercompany profit that should be eliminated in the consolidated statements is
a. $80,000.
b. $24,000.
c. $30,000.
d. $25,000.
5. The noncontrolling interest’s share of the selling affiliate’s profit on intercompany sales is
considered to be realized under
a. partial elimination.
b. total elimination.
c. 100% elimination.
d. both total and 100% elimination.
6. The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending
inventory includes a
a. credit to Ending Inventory (Cost of Sales).
b. credit to Sales.
c. debit to Ending Inventory (Cost of Sales).
d. debit to Inventory - Balance Sheet.
7. Perez Company acquired an 80% interest in Seaman Company in 2010. In 2011 and 2012, Sutton
reported net income of $400,000 and $480,000, respectively. During 2011, Seaman sold $80,000 of
merchandise to Perez for a $20,000 profit. Perez sold the merchandise to outsiders during 2012 for
$140,000. For consolidation purposes, what is the noncontrolling interest’s share of Seaman's 2011
and 2012 net income?
a. $90,000 and $96,000.
b. $100,000 and $76,000.
c. $84,000 and $92,000.
d. $76,000 and $100,000.
8. A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2010.
Under the partial equity method, the workpaper entry in 2011 to recognize the intercompany profit
in beginning inventory realized during 2011 includes a debit to
a. Retained Earnings - P.
b. Noncontrolling interest.
c. Cost of Sales.
d. both Retained Earnings - P and Noncontrolling Interest.
9. The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned
subsidiary is calculated by multiplying the noncontrolling minority ownership percentage by the
subsidiary’s reported net income
a. plus unrealized profit in ending inventory less unrealized profit in beginning inventory.
b. plus realized profit in ending inventory less realized profit in beginning inventory.
c. less unrealized profit in ending inventory plus realized profit in beginning inventory.
d. less realized profit in ending inventory plus realized profit in beginning inventory.
10. In determining controlling interest in consolidated income in the consolidated financial statements,
unrealized intercompany profit on inventory acquired by a parent from its subsidiary should:
a. not be eliminated.
b. be eliminated in full.
c. be eliminated to the extent of the parent company’s controlling interest in the subsidiary.
d. be eliminated to the extent of the noncontrolling interest in the subsidiary.
11. P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000. At the
end of the current year, one-third of the merchandise remains in S Company’s inventory. Applying
the lower-of- cost-or-market rule, S Company wrote this inventory down to $92,000. What amount
of intercompany profit should be eliminated on the consolidated statements workpaper?
a. $20,000.
b. $18,000.
c. $12,000.
d. $10,800.
12. The material sale of inventory items by a parent company to an affiliated company:
a. enters the consolidated revenue computation only if the transfer was the result of arm’s length
bargaining.
b. affects consolidated net income under a periodic inventory system but not under a perpetual
inventory system.
c. does not result in consolidated income until the merchandise is sold to outside parties.
d. does not require a working paper adjustment if the merchandise was transferred at cost.
13. A parent company regularly sells merchandise to its 80%-owned subsidiary. Which of the
following statements describes the computation of noncontrolling interest income?
a. the subsidiary’s net income times 20%.
b. (the subsidiary’s net income x 20%) + unrealized profits in the beginning inventory –
unrealized profits in the ending inventory.
c. (the subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits
in the ending inventory) × 20%.
d. (the subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in
the beginning inventory) × 20%.
14. P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to
fair value. During 2011, P sold merchandise that cost $135,000 to S for $189,000. One-third of this
merchandise remained in S’s inventory at December 31, 2011. S reported net income of $120,000
for 2011. P’s income from S for 2011 is:
a. $36,000.
b. $50,400.
c. $54,000.
d. $61,200.
Use the following information for Questions 15 & 16:
P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold
merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S’s December 31,
2010 inventory. During 2011, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of
this merchandise inventory remained in S’s December 31, 2011 inventory. Selected income statement
information for the two affiliates for the year 2011 is as follows:
P _ S _
Sales Revenue $2,250,000 $1,125,000
Cost of Goods Sold 1,800,000 937,500
Gross profit $450,000 $187,500
15. Consolidated sales revenue for P and Subsidiary for 2011 are:
a. $2,907,000.
b. $3,000,000.
c. $3,205,500.
d. $3,375,000.
16. Consolidated cost of goods sold for P Company and Subsidiary for 2011 are:
a. $2,260,500.
b. $2,268,000.
c. $2,276,700.
d. $2,737,500.
P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $200,000 at a
profit of $40,000. On December 31, 2011, 50% of this merchandise is included in P’s inventory. Income
statements for P and S are summarized below:
P S
Sales $1,200,000 $600,000
Cost of Sales (600,000) (400,000)
Operating Expenses (300,000) ( 80,000)
Net Income (2011) $300,000 $120,000
17. Controlling interest in consolidated net income for 2011 is:

a. $300,000.
b. $380,000.
c. $396,000.
d. $420,000.
18. Noncontrolling interest in income for 2011 is:

a. $4,000.
b. $19,200.
c. $20,000.
d. $24,000.
19. The amount of intercompany profit eliminated is the same under total elimination and partial
elimination in the case of
1. upstream sales where the selling affiliate is a less than wholly owned subsidiary.
2. all downstream sales.
3. horizontal sales where the selling affiliate is a wholly owned subsidiary.
a. 1.
b. 2.
c. 3.
d. both 2 and 3.
20. Paige, Inc. owns 80% of Sigler, Inc. During 2011, Paige sold goods with a 40% gross profit to
Sigler. Sigler sold all of these goods in 2011. For 2011 consolidated financial statements, how
should the summation of Paige and Sigler income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales.
b. Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
c. Net income should be reduced by 80% of the gross profit on intercompany sales.
d. No adjustment is necessary.
21. P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to
fair value. During 2011, P sold merchandise that cost $225,000 to S for $315,000. One-third of this
merchandise remained in S’s inventory at December 31, 2011. S reported net income of $200,000
for 2011. P’s income from S for 2011 is:
a. $60,000.
b. $90,000.
c. $120,000.
d. $102,000.
P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold
merchandise that cost $192,000 to S for $240,000. Half of this merchandise remained in S’s December 31,
2010 inventory. During 2011, P sold merchandise that cost $300,000 to S for $375,000. Forty percent of
this merchandise inventory remained in S’s December 31, 2011 inventory. Selected income statement
information for the two affiliates for the year 2011 is as follows:
P _ S _
Sales Revenue $1,800,000 $900,000
Gross profit $ 360,000 $150,000
22. Consolidated sales revenue for P and Subsidiary for 2011 are:
a. $2,325,000.
b. $2,400,000.
c. $2,565,000.
d. $2,700,000.
23. Consolidated cost of goods sold for P Company and Subsidiary for 2011 are:
a. $1,809,000.
b. $1,815,000.
c. $1,821,000.
d. $2,190,000.
P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $150,000 at a
profit of $30,000. On December 31, 2011, 50% of this merchandise is included in P’s inventory. Income
statements for P and S are summarized below:
P S
Sales $900,000 $450,000
Cost of Sales (450,000) (300,000)
Operating Expenses (225,000) ( 60,000)
Net Income (2011) $225,000 $ 90,000
24. Controlling interest in consolidated net income for 2011 is:

a. $225,000.
b. $285,000.
c. $297,000.
d. $315,000.
25. Noncontrolling interest in income for 2011 is:

a. $3,000.
b. $14,400.
c. $15,000.
d. $18,000.
Problems
6-1 On January 1, 2011, Palmer Company purchased a 90% interest in Sauder Company for $2,800,000.
At that time, Sauder had $1,840,000 of common stock and $360,000 of retained earnings. The
difference between implied and book value was allocated to the following assets of Sauder
Company:
Inventory $ 80,000
Plant and equipment (net) 240,000
Goodwill 591,111
The plant and equipment had a 10-year remaining useful life on January 1, 2011.
During 2011, Palmer sold merchandise to Sauder at a 20% markup above cost. At December 31,
2011, Sauder still had $180,000 of merchandise in its inventory that it had purchased from Palmer.
In 2011, Palmer reported net income from independent operations of $1,600,000, while Sauder
reported net income of $600,000.
Required:
A. Prepare the workpaper entry to allocate, amortize, and depreciate the difference between
implied and book value for 2011.
B. Calculate controlling interest in consolidated net income for 2011.
6-2 Percy Company owns 80% of the common stock of Smyth Company. Percy sells merchandise to
Smyth at 20% above cost. During 2011 and 2012, intercompany sales amounted to $1,080,000 and
$1,200,000 respectively. At the end of 2011, Smyth had one-fifth of the goods purchased that year
from Percy in its ending inventory. Smyth’s 2012 ending inventory contained one-fourth of that
year’s purchases from Percy. There were no intercompany sales prior to 2011.
Percy reported net income from its own operations of $720,000 in 2011 and $760,000 in 2012.
Smyth reported net income of $400,000 in 2011 and $460,000 in 2012. Neither company declared
dividends in either year.
Required:
A. Prepare in general journal form all entries necessary on the consolidated statements workpapers
to eliminate the effects of the intercompany sales for both 2011 and 2012.
6-3 Payton Company owns 90% of the common stock of Sanders Company. Sanders Company sells
merchandise to Payton Company at 25% above cost. During 2010 and 2011 such sales amounted to
$800,000 and $1,020,000, respectively. At the end of each year, Payton Company had in its
inventory one-fourth of the amount of goods purchased from Sanders Company during that year.
Payton Company reported income of $1,500,000 from its independent operations in 2010 and
$1,720,000 in 2011. Sanders Company reported net income of $600,000 in each year and did not
declare any dividends in either year. There were no intercompany sales prior to 2010.
Required:
A. Prepare, in general journal form, all entries necessary on the 2011 consolidated statements
workpaper to eliminate the effects of intercompany sales.
B. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the
consolidated income statement in 2011.
C. Calculate controlling interest in consolidated net income for 2011.
6-4 Powers Company owns an 80% interest in Smiley Company and a 90% interest in Toro Company.
During 2010 and 2011, intercompany sales of merchandise were made by all three companies.
Total sales amounted to $2,400,000 in 2010, and $2,700,000 in 2011. The companies sold their
merchandise at the following percentages above cost.
Powers 15%
Smiley 20%
Toro 25%
The amount of merchandise remaining in the 2011 beginning and ending inventories of the
companies from these intercompany sales is shown below.
Merchandise Remaining in Beginning Inventory

Powers Smiley Toro Total
Sold by
Powers $225,000 $189,000 $414,000

Smiley $180,000 216,000 396,000
Toro 180,000 135,000 315,000
Merchandise Remaining in Ending Inventory

Powers Smiley Toro Total
Sold by
Powers $207,000 $138,000 $345,000

Smiley $144,000 198,000 342,000
Toro 195,000 150,000 345,000
Reported net incomes (from independent operations including sales to affiliates) of Powers, Smiley,
and Toro for 2011 were $3,600,000, $1,500,000, and $2,400,000, respectively.
Required:
A. Calculate the amount noncontrolling interest to be deducted from consolidated income in the
consolidated income statement for 2011.
B. Calculate the controlling interest in consolidated net income for 2011.

6-5 The following balances were taken from the records of S Company:
Common stock $2,500,000
Retained earnings, 1/1/11 $1,450,000
Net income for 2011 3,000,000
Dividends declared in 2011 (1,550,000)
Retained earnings, 12/31/11 2,900,000
Total stockholders’ equity, 12/31/11 $5,400,000
P Company owns 80% of the common stock of S Company. During 2011, P Company purchased
merchandise from S Company for $4,000,000. S Company sells merchandise to P Company at cost
plus 25% of cost. On December 31, 2011, merchandise purchased from S Company for $1,250,000
remains in the inventory of P Company. On January 1, 2011, P Company’s inventory contained
merchandise purchased from S Company for $525,000. The affiliated companies file a consolidated
income tax return. There was no difference between the implied value and the book value of net
assets acquired.
Required:
A. Prepare all workpaper entries necessitated by the intercompany sales of merchandise.
B. Compute noncontrolling interest in consolidated income for 2011.
C. Compute noncontrolling interest in consolidated net assets on December 31, 2011.
6-6
P Corporation acquired 80% of S Corporation on January 1, 2011 for $240,000 cash when S’s
stockholders’ equity consisted of $100,000 of Common Stock and $30,000 of Retained Earnings.
The difference between the price paid by P and the underlying equity acquired in S was allocated
solely to a patent amortized over 10 years.
P sold merchandise to S during the year in the amount of $30,000. $10,000 worth of
inventory is still on hand at the end of the year with an unrealized profit of $4,000. The separate
company statements for P and S appear in the first two columns of the partially completed
consolidated workpaper.
Required:
Complete the consolidated workpaper for P and S for the year 2011.
P Corporation and Subsidiary

P S Eliminations Noncontrolling Consolidated

Corp. Corp. Dr. Cr. Interest Balances
Income Statement
Sales 200,000 150,000
Cost of Sales (92,000) (47,000)
Other Expenses (23,000) (40,000)
Noncontrolling Interest in Income
Net Income 101,000 63,000
Retained Earnings Statement
Retained Earnings 1/1 110,000 30,000
Add: Net Income 101,000 63,000
Less: Dividends ( 30,000) (20,000)
Retained Earnings 12/31 181,000 73,000
Balance Sheet
Cash 20,000 19,000
Accounts Receivable-net 120,000 55,000
Inventories 140,000 80,000
Patent
Land 270,000 420,000
Equipment and Buildings-net 600,000 430,000
Investment in S Corporation 240,000
Total Assets 695,000 1,004,000
Equities
Accounts Payable 909,000 831,000
Common Stock 300,000 100,000
Retained Earnings 181,000 73,000
1/1 Noncontrolling Interest in Net
Assets
12/31 Noncontrolling Interest in
Net Assets
Total Equities 1,390,000 1,004,000
6-7 On January 1, 2011, Porter Company purchased an 80% interest in the capital stock of Shilo
Company for $3,400,000. At that time, Shilo Company had common stock of $2,200,000 and
retained earnings of $620,000. Porter Company uses the cost method to record its investment in
Shilo Company. Differences between the fair value and the book value of the identifiable assets of
Shilo Company were as follows:
Fair Value in Excess of Book Value
Equipment $400,000
Land 200,000
Inventory 80,000
The book values of all other assets and liabilities of Shilo Company were equal to their fair values
on January 1, 2011. The equipment had a remaining life of five years on January 1, 2011; the
inventory was sold in 2011.
Shilo Company’s net income and dividends declared in 2011 were as follows:
Year 2011 Net Income of $400,000; Dividends Declared of $100,000
Required:
Prepare a consolidated statements workpaper for the year ended December 31, 2012 using the
partially completed worksheet.
PORTER COMPANY AND SUBSIDIARY

For the Year Ended December 31, 2012
Porter Shilo Eliminations Noncontrolling Consolidated

Company Company Dr. Cr. Interest Balances
Income Statement
Sales 4,400,000 1,800,000
Total Revenue 4,592,000 1,800,000
Depreciation Expense 160,000 120,000
Other Expenses 240,000 200,000
Total Cost & Expenses 4,000,000 1,120,000
Net/Consolidated Income 592,000 680,000
Net Income to Retained Earnings 592,000 680,000
1/1 Retained Earnings
Porter Company 2,000,000
Shilo Company 920,000
Net Income from above 592,000 680,000
Dividends Declared
Porter Company (360,000)
Shilo Company (240,000)
12/31 Retained Earnings to
Balance Sheet 2,232,000 1,360,000
Balance Sheet
Cash 280,000 260,000
Accounts Receivable 1,040,000 760,000
Inventory 960,000 700,000
Investment in Shilo Company 3,400,000
Difference between Implied and Book Value
Land 1,280,000
Plant and Equipment 1,440,000 1,120,000
Total Assets 7,120,000 4,120,000
Accounts Payable 528,000 440,000
Notes Payable 360,000 120,000
Common Stock:
Porter Company 4,000,000
Shilo Company 2,200,000
Retained Earnings from above 2,232,000 1,360,000
1/1 Noncontrolling Interest in Net Assets
12/31 Noncontrolling Interest in Net Assets
Total Liabilities & Equity 7,120,000 4,120,000
6-8 Pool Company owns a 90% interest in Slater Company. The consolidated income statement
drafted by the controller of Pool Company appeared as follows:
Pool Company and

Subsidiary
Consolidated Income Statement
for Year Ended December 31,
2011
Sales $13,800,000
Cost of Sales $9,000,000
Operating Expenses 1,800,000 10,800,000
Consolidated Income 3,000,000
Less Noncontrolling Interest in Consolidated Income 190,000
Controlling Interest in Consolidated Net Income $2,810,000
During your audit you discover that intercompany sales transactions were not reflected in the
controller’s draft of the consolidated income statement. Information relating to intercompany
sales and unrealized intercompany profit is as follows:
Selling Unsold at
Cost Price Year-End
2010 Sales—Slater to Pool $1,500,000 $1,800,000 1/4
2011 Sales—Pool to Slater 900,000 1,350,000 2/5
Required:
Prepare a corrected consolidated income statement for Pool Company and Slocum Company for
the
year ended December 31, 2011.
ANSWER KEY
Multiple Choice
1. d 5. a 9. c 13. a 17. b 21. c 25. c

2. b 6. c 10. b 14. c 18. c 22. a
3. c 7. d 11. c 15. a 19. d 23. c
4. c 8. d 12. c 16. c 20. a 24. b
Problems
6-1 A. Depreciation Expense (240,000/10) 24,000

Plant and Equipment (net) (240,000 – 24,000) 216,000
1/1 Inventory 80,000
Goodwill 591,111
B. Palmer’s net income from independent operations $1,600,000

Less: unrealized profit on sales to Sauder
[180,000 – (180,000/1.20)] (30,000)
Palmer’s income from independent operations that has
been realized in transactions with third parties 1,570,000
Palmer’s share of Sauder’s income (600,000 × .90) 540,000
Less: amortization of difference between implied
and book value (104,000)*
Controlling Interest in Consolidated Net Income for 2011 $2,006,000
* 80,000 + (240,000/10)
6-2 A. 2011
Sales 1,080,000
Purchases (Cost of Goods Sold) 1,080,000
12/31 Inventory (Income Statement)

[216,000 – (216,000/1.20)] 36,000
12/31 Inventory(Balance Sheet) 36,000
2012
Sales 1,200,000
Purchases (Cost of Goods Sold) 1,200,000
12/31 Inventory (Income Statement)

[300,000 – (300,000/1.20)] 50,000
12/31 Inventory (Balance Sheet) 50,000
Beginning R/E – Percy 36,000

1/1 Inventory (Income Statement) 36,000
B. Percy’s Income from independent operations $760,000

Less: Unrealized profit in ending inventory (50,000)
Add: Unrealized profit in beginning inventory 36,000
Percy’s Income Realized in Transactions with
third parties 746,000
Percy’s Share of Subsidiary Income $368,000
6-3 A. Sales 1,020,000

Purchases (Cost of Sales) 1,020,000
To eliminate intercompany sales.
12/31 Inventory (Income Statement) 51,000

Inventory (Balance Sheet) 51,000
To eliminate unrealized intercompany profit in ending inventory.
Beginning Retained Earnings – Payton

(.90 × $40,000) 36,000
Noncontrolling interest 4,000
1/1 Inventory (Balance Sheet) 40,000
To recognize unrealized profit in beginning inventory realized during the year.
B. Noncontrolling Interest Calculation:

Sanders Company reported net income $600,000
Less: Unrealized profit in ending inventory (51,000)
Add: Realized profit in beginning inventory 40,000
Subsidiary income included in consolidated income
Noncontrolling interest ownership percentage 589,000
× .1
Noncontrolling interest in consolidated income $ 58,900
C. Controlling Interest in Consolidated Net Income:

Payton Company’s net income from
independent operations $1,720,000
Reported net income of Sanders Company $600,000
Less: Unrealized profit on sales of 2011 (51,000)
Add: Profit on intercompany sales to Payton
realized in transactions with third parties 40,000
Subsidiary income realized in
transactions with third parties $589,000
Payton Company’s share of subsidiary income
(589,000 × .9) 530,100
Controlling interest in consolidated net income $2,250,100
6-4 Smiley Toro

A. Reported subsidiary income $1,500,000 $2,400,000
Add: Unrealized profit in beginning inventory 66,000 63,000
Less: Unrealized profit in ending inventory (57,000) (69,000)
Subsidiary income included in consolidated income 1,509,000 2,394,000
Noncontrolling interest ownership percentage × .2 × .1
Noncontrolling interest in consolidated income $301,800 $239,400
Total noncontrolling interest:$301,800 + $239,400 = $541,200
B. Power’s Company’s income independent operations $3,600,000

Add: Unrealized profit considered realized in 2011
($414,000 – $414,000/1.15) 54,000
Less: Unrealized profit in 2011 income
($345,000 – $345,000/1.15) (45,000)
Power’s income realized in transactions with third parties $3,609,000
Smiley Company’s Reported Net Income $1,500,000

Add: Unrealized profit considered realized
in 2011 ($396,000 – $396,000/1.2) 66,000
($342,000 – $342,000/1.20) (57,000)
Subsidiary income realized in transactions
with third parties 1,509,000
Power’s share of subsidiary income (.8 × 1,509,000) 1,207,200

Toro Company’s reported net income $2,400,000
Add: Unrealized profit considered realized
in 2011 ($315,000 – $315,000/1.25) 63,000
($345,000 – $345,000/1.25) (69,000)
Subsidiary income realized in transactions
with third parties $2,394,000
Power’s share of subsidiary income (.9 × 2,394,000) 2,154,600
6-5
A. Sales 4,000,000
Cost of Goods Sold 4,000,000

Ending Inventory (Balance Sheet) 250,000
[$1,250,000 - ($1,250,000/1.25)]
1/1 Retained Earnings – P Company (1) 84,000

Noncontrolling intrest (2) 21,000
Cost of Goods Sold (Beginning Inventory) 105,000
[$525,000 – ($525,000/1.25)] = $105,000
(1) .8($105,000)
(2) .2($105,000)
B. $3,000,000 × .20 = $600,000 noncontrolling interest in consolidated income.
C. [(.20 × $5,400,000) -.20($1,250,000 – $1,250,000/1.25)] = $1,030,000 noncontrolling interest in

consolidated net assets on December 31, 2011.
6-6 P Corporation and Subsidiary

Eliminations
P S Dr Cr Noncontrolli Consolidated
ng
Corp. Corp. Interest Balances
Income Statement
Sales $200,000 $ 150,000 (a) 30,000 320,000
Dividend Income 16,000 (c) 16,000
Cost of Sales (92,000) (47,000) (b) 4,000 (a) 30,000 (113,000)
Other Expenses (23,000) (40,000) (e) 17,000 (80,000)
Noncontrolling Interest in Income 9,200 (9,200)
Net income 101,000 63,000 67,000 30,000 9,200 117,800
Retained Earnings 1/1 110,000 30,000 (d) 30,000 110,000
Add: Net Income 101,000 63,000 67,000 30,000 9,200 117,800
Less: Dividends ( 30,000) (20,000) (c) 16,000 (4,000) (30,000)
Retained Earnings 12/31 181,000 73,000 97,000 46,000 5,200 197,800
Balance Sheet
Cash 20,000 19,000 39,000
Accounts Receivable-net 120,000 55,000 175,000
Inventories 140,000 80,000 (b) 4,000 216,000
Patent (d)170,000 (e) 17,000 153,000
Land 270,000 420,000 690,000
Equipment and Buildings-net 600,000 430,000 1,030,000
Investment in S Corporation 240,000 (d)240,000
Total Assets 1,390,000 1,004,000 2,303,000
Equities
Accounts Payable 909,000 831,000 1,740,000
Common Stock 300,000 100,000 (d)100,000 300,000
Retained Earnings from above 181,000 73,000 97,000 46,000 5,200 197,800
Assets (d)60,000 60,000
Assets 65,200 65,200
Total Equities 1,390,000 1,004,000 367,000 367,000 2,303,000
6-7 PORTER COMPANY AND SUBSIDIARY

Income Statement
Sales 4,400,000 1,800,000 6,200,000
Dividend Income 192,000 (a) 192,000 ----
Total Revenue 4,592,000 1,800,000 6,200,000
Cost of Goods Sold 3,600,000 800,000 4,400,000
Depreciation Expense 160,000 120,000 (d) 80,000 360,000
Other expense 240,000 20,000 440,000
Total Cost & Expenses 4,000,000 1,120,000 5,200,000
Net/Consolidated Income 592,000 680,000 1,000,000
Noncontrolling Interest in Income 120,000 120,000
Net Income to Retained Earnings 592,000 680,000 272,000 120,000 880,000
Statement of Retained Earnings
1/1 Retained Earnings
(c) 64,000
Porter Company 2,000,000 (d) 64,000 (e) 240,000 2,112,000
Shilo Company 920,000 (b) 920,000
Net Income from above 592,000 680,000 272,000 120,000 880,000
Dividends Declared
Porter Company (360,000) (360,000)

Shilo Company (240,000) (a) 192,000 (48,000)
12/31 Retained Earnings to
Balance Sheet 2,232,000 1,360,000 1,320,000 432,000 72,000 2,632,000
Balance Sheet
Cash 280,000 260,000 540,000
Accounts Receivable 1,040,000 760,000 1,800,000
Inventory 960,000 700,000 1,660,000
Investment in Shilo Company 3,400,000 (e) 240,000 (b)3,640,000 ---
Difference between Implied and
Book Value (b) 1,430,000 (c)1,430,000
Land 1,280,000 (c) 200,000 1,480,000
Plant and Equipment 1,440,000 1,120,000 (c) 400,000 (d) 160,000 2,800,000
Goodwill (c) 750,000 750,000
Total Assets 7,120,000 4,120,000 9,030,000
Accounts Payable 528,000 440,000 968,000
Notes Payable 360,000 120,000 480,000
Common Stock:
Porter Company 4,000,000 4,000,000
Shilo Company 2,200,000 (b) 2,200,000
Retained Earnings from above 2,232,000 1,360,000 1,320,000 432,000 72,000 2,632,000

Assets (c) 16,000 (b) 910,000 878,000
(d) 16,000
Assets 950,000 950,000
Total Liabilities & Equity 7,120,000 4,120,000 6,572,000 6,572,000 712,000 9,030,000
6-8 POOL COMPANY AND SUBSIDIARY

Consolidated Income Statement
Sales ($13,800,000 – $1,350,000) $12,450,000

Cost of Goods Sold (a) $7,755,000
Operating Expenses 1,800,000 9,555,000
Consolidated Income 2,895,000
Less Noncontrolling Interest in Consolidated Income (b) 197,500
(a) Reported Cost of Goods Sold $9,000,000

Less intercompany sales in 2011 (1,350,000)
Plus unrealized profit in ending inventory (2/5 x ($1,350,000 - $900,000)) 180,000
Less realized profit in beginning inventory (1/4 x ($1,800,000 - $1,500,000)) (75,000)
Corrected cost of goods sold $7,755,000
(b) Reported net income of subsidiary $190,000 $1,900,000

0.1
Plus unrealized profit on subsidiary sales in 2010 that is considered realized in 2011
(1/4 x ($1,800,000 - $1,500,000)) 75,000
Less unrealized profit on subsidiary sales in 2011 (there were no upstream sales in 2011) 0
Income realized in transactions with third parties 1,975,000
× 0.10
Noncontrolling interest in consolidated income $197,500
Intercompany Transfers of Services and Noncurrent Assets
1. Blue Company owns 70 percent of Black Company's outstanding common stock. On December
31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying amount, but less
than its original cost. On a consolidated balance sheet at December 31, 2008, the carrying amount of
the equipment should be reported at:
A. Blue's original cost.
B. Black's original cost.
C. Blue's original cost less Black's recorded gain.
D. Blue's original cost less 70 percent of Black's recorded gain.
2. A parent and its 80 percent owned subsidiary have made several intercompany sales of
noncurrent assets during the past two years. The amount of income assigned to the noncontrolling
interest for the second year should include the noncontrolling interest's share of gains:
A. unrealized in the second year from upstream sales made in the second year.
B. realized in the second year from downstream sales made in both years.
C. realized in the second year from upstream sales made in both years.
D. both realized and unrealized from upstream sales made in the second year.
3. A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues
to hold the land at the end of the year. The amount to be reported as consolidated net income for
the year should equal:
A. the parent's separate operating income, plus the subsidiary's net income.
B. the parent's separate operating income, plus the subsidiary's net income, minus the
intercompany gain.
C. the parent's separate operating income, plus the subsidiary's net income, plus the
intercompany gain.
D. the parent's net income, plus the subsidiary's net income, minus the intercompany gain.
Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 2008, Sky sold a building
to Earth for $33,000. Sky had purchased this building on January 1, 2006, for
$36,000. The building's original eight-year estimated total economic life remains unchanged. Both
companies use straight-line depreciation. The equipment's residual value is considered negligible.
4. Based on the information provided, in the preparation of the 2008 consolidated financial
statements, building will be in the eliminating entries.
A. debited for $33,000
B. debited for $36,000
C. credited for $36,000
D. debited for $3,000
5. Based on the information provided, the gain on sale of the building eliminated in the
consolidated financial statements for 2008 is:
A. $8,250. B. $10,500. C. $6,000. D. $11,250.
6. Based on the information provided, while preparing the 2008 consolidated income statement,
depreciation expense will be:
A. debited for $750 in the eliminating entries.
B. credited for $750 in the eliminating entries.
C. credited for $1500 in the eliminating entries.
D. debited for $1500 in the eliminating entries.
7. Based on the information provided, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. debited for $750 in the eliminating entries.
B. credited for $750 the eliminating entries.
C. credited for $1500 in the eliminating entries.
D. debited for $1500 in the eliminating entries.
8. Based on the information provided, in the preparation of a consolidated balance sheet at

January 1, 2009, retained earnings will be:
A. debited for $6,750 in the eliminating entries.
B. credited for $6,750 in the eliminating entries.
C. credited for $7,500 in the eliminating entries.
D. debited for $7,500 in the eliminating entries.
9. Phobos Company holds 80 percent of Deimos Company's voting shares. During the preparation
of consolidated financial statements for 2009, the following eliminating entry was made:
Which of the following statements is correct?

A. Phobos Company purchased land from Deimos Company during 2009.
B. Phobos Company purchased land from Deimos Company before January 1, 2009. C.
Deimos Company purchased land from Phobos Company during 2009.
D. Deimos Company purchased land from Phobos Company before January 1, 2009.
ABC Corporation purchased land on January 1, 2006, for $50,000. On July 15, 2008, it sold the
land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting
shares.
10. Based on the preceding information, what will be the workpaper eliminating entry to remove
the effects of the intercompany sale of land in preparing the consolidated financial statements for
2008?
11. Based on the preceding information, what will be the workpaper eliminating entry to remove
the effects of the intercompany sale of land in preparing the consolidated financial statements for
2009?
12. Which workpaper eliminating entry will be made on December 31, 2009, if XYZ Corporation
had initially purchased the land for $50,000 and then sold it to ABC on July 15,
2008, for $70,000?
Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January
1, 2007. On December 31, 2008, Mortar received $390,000 from Granite for a equipment Mortar
had purchased on January 1, 2005, for $400,000. The equipment is expected to have a 10-year
useful life and no salvage value. Both companies depreciate equipments on a straight-line basis.
13. Based on the preceding information, in the preparation of the 2008 consolidated financial
statements, equipment will be:
A. debited for $1,000.
B. debited for $10,000.
C. credited for $15,000.
D. debited for $25,000.
14. Based on the preceding information, the gain on sale of the equipment recorded by Mortar for
2008 is:
A. $150,000 B. $65,000 C. $110,000 D. $40,000
16. Based on the preceding information, in the preparation of the 2009 consolidated income
C. debited for $15,000 in the eliminating entries.
D. credited for $25,000 in the eliminating entries.
17. Based on the preceding information, in the preparation of the 2009 consolidated balance sheet,
accumulated depreciation will be:
Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January
1, 2007. On January 1, 2008, Mortar received $350,000 from Granite for a equipment Mortar had
purchased on January 1, 2005, for $400,000. The equipment is expected to have a 10-year useful
life and no salvage value. Both companies depreciate equipments on a straight- line basis.
A. debited for $50,000. B. debited for $40,000. C. credited for $70,000. D. debited for $25,000.
19. Based on the preceding information, the gain on sale of equipment recorded by Mortar for
2008 is:
A. $70,000. B. $65,000. C. $50,000. D. $40,000.
A. Debited for $40,000 in the eliminating entries.
B. Credited for $10,000 in the eliminating entries.
C. Debited for $10,000 in the eliminating entries. \
D. Credited for $40,000 in the eliminating entries.
On January 1, 2007, Servant Company purchased a machine with an expected economic life of five
years. On January 1, 2009, Servant sold the machine to Master Corporation and recorded the
following entry:
Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of
$50,000, and Master reported income from its own operations of $100,000 for 2009. There is no
change in the estimated economic life of the equipment as a result of the intercorporate transfer.
A. Debited for $1,000 in the eliminating entries.
B. Credited for $1,000 in the eliminating entries.
C. Debited for $15,000 in the eliminating entries.
D. Credited for $15,000 in the eliminating entries.
machine will be:
25. Based on the preceding information, income assigned to the noncontrolling interest in the
2009 consolidated income statement will be:
A. $12,000. B. $14,000. C. $12,500. D. $48,000.
26. Based on the preceding information, consolidated net income for 2009 will be:
A. $150,000. B. $100,000. C. $148,000. D. $130,000.
27. On January 1, 2009, Light Corporation sold equipment for $400,000 to Star Corporation, its
wholly owned subsidiary. Light had paid $900,000 for this equipment, which had accumulated
depreciation of $170,000. Light estimated a $50,000 salvage value and depreciated the tractor using
the straight-line method over 10 years, a policy that Star continued. In Light's December 31, 2009,
consolidated balance sheet, this tractor should be included in fixed-asset cost and accumulated
depreciation as:
Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1,
2003, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses
straight-line depreciation for all depreciable assets. On December 31, 2008, Blue purchased the
building from Black for $180,000. Blue reported income, excluding investment income from
Black, of $140,000 and $162,000 for 2008 and 2009, respectively. Black
reported net income of $30,000 and $45,000 for 2008 and 2009, respectively.
28. Based on the preceding information, the amount to be reported as consolidated net income for
2008 will be:
A. $190,000. B. $170,000. C. $175,000. D. $150,000.
29. Based on the preceding information, the amount of income assigned to the controlling
shareholders in the consolidated income statement for 2008 will be:
A. $190,000. B. $170,000. C. $175,000. D. $150,000.
30. Based on the preceding information, the amount to be reported as consolidated net income for
2009 will be:
A. $207,000. B. $202,000. C. $212,000. D. $190,000.
31. Based on the preceding information, the amount of income assigned to the controlling
shareholders in the consolidated income statement for 2009 will be:
A. $207,000. B. $202,000. C. $212,000. D. $190,000.
32. Which of the following are examples of intercompany balances and transactions that must be
eliminated in preparing consolidated financial statements?
I. Security holdings II. Interest and dividends III. Sales and purchases
A. I, II B. I, III C. I, II, III D. II
Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 2008. This
purchase followed a series of transactions between P-controlled subsidiaries. On
February 15, 2008, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the
land to S2 Company for $145,000 on October 19, 2008, and S2 sold the land to S1 for $197,000 on
November 27, 2008. Parent has control of the following companies:
Parent reported income from its separate operations of $200,000 for 2008.
33. Based on the preceding information, at what amount should the land be reported in the
consolidated balance sheet as of December 31, 2008?
A. $145,000
B. $220,000
C. $197,000
D. $160,000
34. Based on the preceding information, what amount of gain or loss on sale of land should be
reported in the consolidated income statement for 2008?
A. $60,000
B. $0
C. $75,000
D. $23,000
35. Based on the preceding information, what should be the amount of income assigned to the
controlling shareholders in the consolidated income statement for 2008?
A. $369,400
B. $405,000
C. $465,000
D. $60,000
Big Corporation receives management consulting services from its 92 percent owned subsidiary,
Small Inc. During 2007, Big paid Small $125,432 for its services. For the year
2008, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's
labor cost and other associated costs for the employees providing services to Big totaled $86,000 in
2007 and $121,000 in 2008. Big reported $2,567,000 of income from its own separate operations
for 2008, and Small reported net income of $695,000.
36. Based on the preceding information, what amount of consolidated net income should be
reported in 2008?
A. $3,262,000
B. $4,050,000
C. $3,254,100
D. $3,122,000
37. Based on the preceding information, what amount of income should be assigned to the
noncontrolling shareholders in the consolidated income statement for 2008?
A. $47,700
B. $44,400
C. $55,600
D. $60,000
38. Based on the preceding information, what amount of receivable/payable should be eliminated in
the 2008 consolidated financial statements?
A. $125,432
B. $7,900
C. $5,560
D. $140,000
39. A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary
continues to hold the land at the end of the year. The amount to be reported as consolidated net
income for the year should equal:
A. the parent's separate operating income, plus the intercompany loss.
B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's
net income.
C. the parent's separate operating income, minus the intercompany loss.
D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's
net income.
40. Any intercompany gain or loss on a downstream sale of land should be recognized in
consolidated net income:
I. in the year of the downstream sale. II. over the period of time the subsidiary uses the land.
III. in the year the subsidiary sells the land to an unrelated party.
A. I B. II C. III D. I or II
41. Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21,
2005, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent
of the book value of Winner Company. The companies' permanent accounts on December 31, 2008,
contained the following balances:
On January 1, 2004, Fred paid $150,000 for equipment with a 10-year expected total economic
life. The equipment was depreciated on a straight-line basis with no residual value. Winner
purchased the equipment from Fred on December 31, 2006, for $140,000. Winner sold land it had
purchased for $75,000 on February 18, 2004, to Fred for $60,000 on October
10, 2007.
Required: Prepare a consolidated balance sheet workpaper in good form as of December 31,
2008.
42. New Company acquired 75 percent of Old Company's stock at underlying book value on
January 1, 2008. At that date, the fair value of the noncontrolling interest was equal to 25 percent
of the book value of Old Company. Old Company reported shares outstanding of
$350,000 and retained earnings of $100,000. During 2008, Old Company reported net income of
$60,000 and paid dividends of $3,000. In 2009, Old Company reported net income of
$90,000 and paid dividends of $15,000. The following transactions occurred between New
Company and Old Company in 2008 and 2009:
Old Co. sold computer equipment to New Co. for a $42,000 profit on December 26, 2008.
The equipment had a five-year estimated economic life remaining at the time of intercompany
transfer and is depreciated on a straight-line basis.
New sold land costing $90,000 to Old Company on June 28, 2009, for $110,000.
Required:
1) Give all eliminating entries needed to prepare a consolidation workpaper for 2009 assuming
that New Co. uses the fully adjusted equity method to account for its investment in Old Company.
2) Give all eliminating entries needed to prepare a consolidation workpaper for 2009 assuming
that New Co. uses the cost method to account for its investment in Old Company.
43. Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course of
2008 Peter provides $100,000 of architectural services associated with Smith's new
manufacturing facility, which will open January 4, 2009, and has a 5-year useful life. Explain the
impact providing this service has on Peter Architectural Services' 2008 and 2009 consolidated
financial statements.
44. PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent owned
subsidiary, on January 1, 2008. The cost of the land was $75,000, when it was purchased in 2007.
In 2010, Seven Star sells the land to Hot Properties Inc., an unrelated entity, for $120,000. How is
the land reported in the consolidated financial statements for 2008, 2009 and 2010?
Elimination of Unrealized Gains or Losses on Intercompany Sales of Property

and Equipment
Multiple Choice
1. In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made
debiting
1. Retained Earnings - P Company.
2. Retained Earnings - S Company.
3. Gain on Sale of Land.
a. 1 b. 2 c. 3 d. both 1 and 2.
2. In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a
gain, the noncontrolling interest in consolidated income is computed by multiplying the
noncontrolling interest percentage by the subsidiary‟s reported net income
a. minus the net amount of unrealized gain on the intercompany sale.
b. plus the net amount of unrealized gain on the intercompany sale.
c. minus intercompany gain considered realized in the current period.
d. plus intercompany gain considered realized in the current period.
3. Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of
the intercompany sale, a workpaper entry is made under the cost method debiting
a. Retained Earnings - P.
b. Noncontrolling interest.
c. Equipment.
d. all of these.
4. Pinick Corp. owns 90% of the outstanding common stock of Shell Company. On December 31,
2011, Shell sold equipment to Pinick for an amount greater than the equipment‟s book value but
less than its original cost. The equipment should be reported on the December 31, 2011
consolidated balance sheet at
a. Pinick‟s original cost less 90% of Shell‟s recorded gain.
b. Pinick‟s original cost less Shell‟s recorded gain.
c. Shell‟s original cost.
d. Pinick‟s original cost.
5. Pratt Company owns 100% of Sage Corporation. On January 1, 2011 Pratt sold equipment to Sage
at a gain. Pratt had owned the equipment for four years and used a ten-year straight-line rate with
no residual value. Sage is using an eight-year straight-line rate with no residual value. In the
consolidated income statement, Sage recorded depreciation expense on the equipment for 2011
will be reduced by
a. 10% of the gain on sale.
b. 12 1/2% of the gain on sale.
c. 80% of the gain on sale.
d. 100% of the gain on sale.
6. Pratt Corporation owns 100% of Stone Company‟s common stock. On January 1, 2011, Pratt sold
equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the
equipment over a ten-year life by the straight-line method. The net adjustments to compute 2011
and 2012 consolidated income would be an increase (decrease) of
2011 2012
a. ($90,000) $0
b. ($90,000) $9,000
c. ($81,000) $0
d. ($81,000) $9,000
7. In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the
noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling
interest percentage by the subsidiary‟s reported net income
a. plus the intercompany gain considered realized in the current period.
b. plus the net amount of unrealized gain on the intercompany sale.
c. minus the net amount of unrealized gain on the intercompany sale.
d. minus the intercompany gain considered realized in the current period.
8. The amount of the adjustment to the noncontrolling interest in consolidated net assets is equal to
the noncontrolling interest‟s percentage of the
a. unrealized intercompany gain at the beginning of the period.
b. unrealized intercompany gain at the end of the period.
c. realized intercompany gain at the beginning of the period.
d. realized intercompany gain at the end of the period.
9. In January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P

Company for
$1,980,000. S Company‟s original cost for this equipment was $2,000,000 and had accumulated
depreciation of
$200,000. P Company continued to depreciate the equipment over its 9 year remaining life using
the straight-line method. This equipment was sold to a third party on January 1, 2011 for
$1,440,000. What amount of gain should
P Company record on its books in 2011?
a. $60,000.
b. $120,000.
c. $240,000.
d. $360,000.
10. In years subsequent to the upstream intercompany sale of nondepreciable assets, the necessary
consolidated workpaper entry under the cost method is to debit the
a. Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable
asset. b. Retained Earnings (Parent) account and credit the nondepreciable asset.
c. Nondepreciable asset, and credit the Noncontrolling interest and Investment in Subsidiary
accounts.
d. No entries are necessary.
11. When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a
result of equipment or inventory sales by affiliates, are allocated proportionately by percent of
ownership between parent and subsidiary only when the selling affiliate is
a. the parent and the subsidiary is less than wholly owned.
b. a wholly owned subsidiary.
c. the subsidiary and the subsidiary is less than wholly owned.
d. the parent of a wholly owned subsidiary.
12. Gain or loss resulting from an intercompany sale of equipment between a parent and a subsidiary is
a. recognized in the consolidated statements in the year of the sale.
b. considered to be realized over the remaining useful life of the equipment as an adjustment to
depreciation in the consolidated statements.
c. considered to be unrealized in the consolidated statements until the equipment is sold to a third
party. d. amortized over a period not less than 2 years and not greater than 40 years.
13. In 2011, P Company sells land to its 80% owned subsidiary, S Company, at a gain of $50,000.
What is the effect of this sale of land on consolidated net income assuming S Company still owns
the land at the end of the year?
a. consolidated net income will be the same as if the sale had not occurred.
b. consolidated net income will be $50,000 less than it would had the sale not occurred. c.
consolidated net income will be $40,000 less than it would had the sale not occurred.
d. consolidated net income will be $50,000 greater than it would had the sale not occurred.
14. Several years ago, P Company bought land from S Company, its 80% owned subsidiary, at a gain
of $50,000 to S Company. The land is still owned by P Company. The consolidated working
papers for this year will require:
a. no entry because the gain happened prior to this year. b. a credit to land for $50,000.
c. a debit to P‟s retained earnings for $50,000.
d. a debit to Non-controlling interest for $50,000.
15. On January 1, 2010 S Corporation sold equipment that cost $120,000 and had a book value of
$48,000 to P Corporation for $60,000. P Corporation owns 100% of S Corporation and the
equipment has a 4-year remaining life. What is the effect of the sale on P Corporation’s Equity
from Subsidiary Income account for 2011?
a. no effect
b. increase of $12,000. c. decrease of $12,000.
d. increase of $3,000.
16. P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to
the book value of S. On January 2, 2011, S sold equipment with a five-year remaining life to P for
a gain of $120,000. S reports net income of $600,000 for 2011 and pays dividends of $200,000.
P‟s Equity from Subsidiary Income for
2011 is:
a. $480,000.
b. $384,000.
c. $403,200.
d. $576,000
17. P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than it
subsidiary’s book value. Two years later P sold the land to an outside entity for $50,000 more than
it‟s cost. In its current year consolidated income statement P and its subsidiary should report a gain
on the sale of land of:
a. $50,000.
b. $120,000.
c. $130,000.
d. $150,000.
18. On January 1, 2010, P Corporation sold equipment with a 3-year remaining life and a book value
of $40,000 to its
70% owned subsidiary for a price of $46,000. In the consolidated workpapers for the year ended
December 31,
2011, an elimination entry for this transaction will include a:
a. debit to Equipment for $6,000.
b. debit to Gain on Sale of Equipment for $6,000. c. credit to Depreciation Expense for $6,000.
d. debit to Accumulated Depreciation for $4,000.
19. Parks Corporation owns 100% of Starr Company’s common stock. On January 1, 2011, Parks sold
equipment with a book value of $350,000 to Starr for $500,000. Starr is depreciating the
equipment over a ten-year life by the straight-line method. The net adjustments to compute 2011
and 2012 consolidated income would be an increase (decrease) of
2011 2012
a. ($150,000) $0
b. ($150,000) $15,000
c. ($135,000) $0
d. ($135,000) $15,000
20. In January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P
Company for
$990,000. S Company’s original cost for this equipment was $1,000,000 and had accumulated
depreciation of $100,000. P Company continued to depreciate the equipment over its 9 year
remaining life using the straight-line method. This equipment was sold to a third party on January
1, 2011 for $720,000. What amount of gain should P Company record on its books in 2011?
a. $30,000.
b. $60,000.
c. $120,000.
d. $180,000.
21. P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to
the book value of S. On January 2, 2011, S sold equipment with a five-year remaining life to P for
a gain of $180,000. S reports net income of $900,000 for 2011 and pays dividends of $300,000.
P‟s Equity from Subsidiary Income for 2011 is:
a. $720,000.
b. $576,000.
c. $604,800.
d. $864,000
22. P Company purchased land from its 80% owned subsidiary at a cost of $30,000 greater than it
subsidiary’s book value. Two years later P sold the land to an outside entity for $15,000 more than
its cost. In its current year consolidated income statement P and its subsidiary should report a gain
on the sale of land of:
a. $15,000.
b. $36,000.
c. $39,000.
d. $45,000.
23. On January 1, 2010, P Corporation sold equipment with a 3-year remaining life and a book value
of $100,000 to its 70% owned subsidiary for a price of $115,000. In the consolidated workpapers
for the year ended December
31, 2011, an elimination entry for this transaction will include a:
a. debit to Equipment for $15,000.
b. debit to Gain on Sale of Equipment for $15,000.
c. credit to Depreciation Expense for $15,000.
d. debit to Accumulated Depreciation for $10,000.
Problems
7-1 Parker Company, a computer manufacturer, owns 90% of the outstanding stock of Santo
Company. On January 1, 2011, Parker sold computers to Santo for $500,000. The computers,
which are inventory to Parker, had a cost
to Parker of $350,000. Santo Company estimated that the computers had a useful life of six years
from the date of purchase.
Santo Company reported net income of $310,000, and Parker Company reported net income of
$870,000 from its independent operations (including sales to affiliates) for the year ended
December 31, 2011.
Required:
A. Prepare in general journal form the workpaper entries necessary because of the intercompany
sales in the consolidated statements workpaper for both 2011 and 2012.
7-2 On January 1, 2008, Penny Company purchased a 90% interest in Stein Company for $800,000, the
same as the book value on that date. On January 1, 2011, Stein sold new equipment to Penny for
$16,000. The equipment cost $11,000 and had a five year estimated life as of January 1, 2011.
During 2012, Penny sold merchandise to Stein at 20% above cost in the amount (selling price) of
$126,000. At the end of the year, Stein had one-third of this merchandise in its ending inventory.
At the beginning of 2012, Stein had $48,000 of inventory purchased in 2011 from Penny
Required:
A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on
the consolidated financial statements for 2012.
B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in
the consolidated income statement for 2012. Stein Company reported $40,000 of net income in
2012.
7-3 Pringle Company owns 104,000 of the 130,000 shares outstanding of Seely Corporation. Seely
Corporation sold equipment to Pringle Company on January 1, 2011 for $740,000. The equipment
was originally purchased by Seely Corporation on January 1, 2010 for $1,280,000 and at that time
its estimated depreciable life was 8 years. The equipment is estimated to have a remaining useful
life of four years on January 1, 2011. Both companies use the straight-line method to depreciate
equipment. In 2012 Pringle Company reported net income from its independent operations of
$3,270,000, and Seely Corporation reported net income of $820,000 and declared dividends of
$60,000. Pringle Company uses the cost method to record the investment in Seely Company.
Required:
A. Prepare, in general journal form, the workpaper entries relating to the intercompany sale of
equipment that are necessary in the December 31, 2012 consolidated financial statements
workpapers.
B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in
the consolidated income statement for 2012.
C. Calculate controlling interest in consolidated net income for 2012.
7-4 P Company bought 60% of the common stock of S Company on January 1, 2011. On
January 1, 2011 there was an intercompany sale of equipment at a gain of $63,000. The
equipment had an estimated remaining life of six years. Net incomes of the two
companies from their own operations (including sales to affiliates) were as follows:
2011 2012
P Company $280,000 $210,000
S Company 70,000 105,000
A. If S Company sold the equipment to P Company, fill in the following matrix:

2011 2012
Noncontrolling interest in consolidated net income
Controlling Interest in Consolidated net income
B. If P Company sold the equipment to S Company, fill in the following matrix:

2011 2012
Noncontrolling interest in consolidated net income
Controlling interest in consolidated net income
7-5 On January 1, 2011, Pinkel Company purchased equipment from its 80%-owned
subsidiary for $2,400,000. On the date of the sale, the carrying value of the equipment
on the books of the subsidiary company was $1,800,000. The equipment had a remaining
useful life of six years on January 2011. On January 1, 2012, Pinkel Company sold the
equipment to an outside party for $2,200,000.
Required:
A. Prepare, in general journal form, the entries necessary in 2011 and 2012 on the books of
Pinkel Company to account for the purchase and sale of the equipment.
B. Determine the consolidated gain or loss on the sale of the equipment and prepare, in
general journal form, the entry necessary on the December 31, 2012 consolidated
statements workpaper to properly reflect this gain or loss.
7-6 P Corporation acquired 80% of the outstanding voting stock of S Corporation when the
fair values equaled the book values.
On July 1, 2010, P sold land to S for $300,000. The land originally cost P $200,000. S
recently resold the land on October 30, 2011 for $350,000.
On October 1, 2011, S Corporation sold equipment to P Corporation for $80,000. S

originally paid $100,000 for this equipment and had accumulated depreciation of
$40,000 thus far. The equipment has a five-year remaining life.
Required:
A. Complete the consolidated income statement for P Corporation and subsidiary for the year
ended December
31, 2011.
P S Elimination Entries Noncontrolling Consolidated
Dr. Cr. Interest Balances
Sales 1,200,000 600,000
Dividend Income from S 80,000
Gain on Sale of Equipment 20,000
Gain on Sale of Land 50,000
Cost of Sales (800,000) (300,000
Depreciation Expense (160,000) ) (80,000
Other Expenses (200,000) )

(160,000
Noncontrolling Interest in Income )
Net Income 120,000 130,000
7-7 Pike Company owns 90% of the outstanding common stock of Sanka Company. On
January 1, 2011, Sanka Company sold equipment to Pike Company for $300,000.
Sanka Company had purchased the equipment for $450,000 on January 1, 2006 and has
been depreciating it over a 10-year-life by the straight-line method. The management of
Pike Company estimated that the equipment had a remaining life of 5 years on January 1,
2011. In 2011, Pike Company reported $225,000 and Sanka Company reported
$150,000 in net income from their independent operations.
Required:
A. Prepare in general journal form the workpaper entries relating to the intercompany
sale of equipment that are necessary in the December 31, 2011 and 2012
consolidated statements workpapers. Pike Company uses the cost method to record
its investment in Sanka Company.
B. Calculate equity in subsidiary income for 2011 and noncontrolling interest in net
income for 2011.
7-8 On January 1, 2010, Peine Company acquired an 80% interest in the common stock of
Stine Company on the open market for $3,000,000, the book value at that date. On
January 1, 2011, Peine Company purchased new equipment for $58,000 from Stine
Company. The equipment cost $36,000 and had an estimated life of five years as of
January 1, 2011.During 2012, Peine Company had merchandise sales to Stine Company
of $400,000; the merchandise was priced at 25% above Peine Company‟s cost. Stine
Company still owes Peine Company $70,000 on open account and has 20% of this
merchandise in inventory at December 31, 2012. At the beginning of 2012, Stine
Company had in inventory $100,000 of merchandise purchased in the previous period
from Peine Company.
Required:
A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany
sales on the consolidated financial statements for the year ended December 31, 2012.
B. Assume that Stine Company reports net income of $160,000 for the year ended
December 31, 2012.
Calculate the amount of noncontrolling interest to be deducted from consolidated
income in the consolidated income statement for the year ended December 31, 2012.
ANSWER KEY
Multiple Choice
1. c 7. c 13. a 19. d
2. d 8. a 14. b 20. b
3. d 9. b 15. d 21. c
4. b 10. a 16. c 22. d
5. b 11. c 17. d 23. d
6. d 12. b 18. d
Problems
7-1 A. 2011
Sales 500,000
Cost of Sales 350,000
Equipment 150,000
Accumulated Depreciation 25,000

Depreciation Expense (150,000/6) 25,000
2012
Beginning R/E – Parker 150,000
Equipment 150,000

Beginning R/E – Parker 25,000
B. Parker‟s net income from independent operations $870,000

- Unrealized profit on 2011 sales to Santo (150,000)
+ Profit on sales to Santo realized through
2011 depreciation 25,000
Parker‟s income from independent operations that

has been realized from third party transactions 745,000
Income of Santo that has been realized in
transactions with third parties $310,000
Parker‟s share thereof (.9 × $310,000) 279,000
Controlling Interest in Consolidated Net Income – 2011 $1,024,000
7-2 A. Sales 126,000

Cost of Sales 126,000
Cost of Sales 7,000
Inventory [42,000 – (42,000/1.20) 7,000
Beginning R/E – Penny 8,000
Cost of Sales [48,000 – (48,000/1.20)] 8,000
Beginning R/E – Penny ($5,000 × .9) 4,500
Noncontrolling interest ($5,000 × .1) 500
Equipment (16,000 – 11,000) 5,000
Depreciation Expense (5,000/5) 1,000
Beginning R/E – Penny ($1,000 × .9) 900
Noncontrolling interest ($1,000 × .1) 100
B. Noncontrolling Interest in Consolidated net Income:

.1 × (40,000 + 1,000) = $4,100
7-3 A. Equipment 540,000

Beginning R/E – Pringle ($100,000 × .80) 80,000
Noncontrolling Interest ($100,000 × .20) 20,000
Accumulated Depreciation ($100,000/4) × 2 50,000
Beginning R/E – Pringle ($25,000 × .80) 20,000
B. Noncontrolling Interest Calculation:

Reported income of Seely Company $820,000
Plus: Intercompany profit considered realized
in the current period 25,000
$845,000
Noncontrolling interest in Seely Company
(.20 × 845,000) $169,000
C. Controlling Interest in Consolidated Net Income: Pringle Company‟s income from its
independent operations $3,270,000
Reported net income of Seely Company $820,000
Plus profit on intercompany sale of equipment considered to be realized
through depreciation in 2011 25,000
Reported subsidiary income that has been realized in transactions with third
parties 845,000
× .8
Pringle Company‟s share thereof 676,000
Controlling Interest in Consolidated net income $3,946,000
7-4 2011 2012

A.
Noncontrolling interest in $ 7,000 (1) $ 46,200 (2) Consolidated net income
Controlling interest in 290,500 (3) 279,300 (4) Consolidated net income
(1) .4($70,000 – $63,000 + $10,500) = $7,000 (2) .4($105,000 + $10,500) = $46,200

(3) $280,000 + .6($70,000 – $63,000 + $10,500) = $290,500 (4) $210,000 + .6($105,000
+ $10,500) = $279,300
2011 2012
B.
Noncontrolling interest in $ 28,000 (5) $ 42,000 (6) Consolidated income
Controlling interest in 269,500 (7) 283,500 (8)
Consolidated net income
(5) .4($70,000) = $28,000 (6) .4($105,000) = $42,000
(7) ($280,000 – $63,000 + $10,500) + .6($70,000) = $269,500 (8) ($210,000 + $10,500)
+ .6($105,000) = $283,500
7-5 A. 2011
(1) Equipment 2,400,000
Cash 2,400,000
(2) Depreciation Expense (1/6 × $2,400,000) 400,000

2012
(3) Cash 2,200,000
Equipment 2,400,000
B. Pinkel Company Consolidated

Cost $2,400,000
Accumulated Depreciation (400,000)
1/1/12 Book Value 2,000,000 $1,500,000* Proceeds
from Sale 2,200,000 2,200,000
Gain on Sale $ 200,000 $700,000
*$1,800,000 – 1/6($1,800,000) = $1,500,000
1/1 Retained Earnings - Pinkel

[.8 × ($600,000 – $100,000)] 400,000
1/1 Noncontrolling interest [.2 × ($600,000 – $100,000)] 100,000
$2,400,000 – $1,800,000 = $600,000

$600,000/6 = $100,000
Unrealized intercompany gain on date of sale to outsiders = $600,000 – $100,000 = $500,000
7-6
P S Elimination Entries Noncontrolling Consolidating

Dr. Cr. Interest Balances
Sales $1,200,000 $600,000
$1,800,000
Dividend Income from S 80,000
(a)80,000
(b)20,000
(d)100,000 150,000
Cost of Sales (800,000) (300,000)
(1,100,000)
Depreciation Expense (160,000) (80,000)
(c) 1,000 (239,000)
Other Expenses (200,000) (160,000)
(360,000)
($130,000 – $20,000 + 1,000) × .20
22,200 (22,200)
Net Income $120,000 $130,000 22,200 $228,800
a. Dividend Income from S 80,000

Dividends Declared 80,000
b. Gain on Sale of Equipment 20,000

Equipment 20,000
c. Accumulated Depreciation 1,000*

d. Retained Earnings – P 100,000

* ($20,000/5) × 3/12
7-7 A. 2011
Equipment 150,000

2012
Retained Earnings – Pike 67,500
Equipment 150,000


Beginning Retained Earnings – Pike 13,500
B. Equity in Noncontrolling
Sub. Income Interest
Sanka Company net income $135,000 $15,000
Unrealized gain-equipment
($75,000) upstream (67,500) (7,500)
Confirmed gain 13,500 1,500
$81,000 $ 9,000
7-8 A. (1) Sales 400,000

Cost of Sales
400,000
(2) Accounts Payable 70,000

Accounts Receivable
70,000
(3) Cost of Sales (beginning inventory – income statement) 16,000

Inventory ($80,000 – ($80,000/1.25))
16,000
(4) Beginning Retained Earnings – Peine ($100,000 – ($100,000/1.25)) 20,000

Cost of Sales (beginning inventory – income statement)
20,000
(5) Beginning Retained Earnings – Peine ($22,000 × .8) 17,600

Property, Plant and Equipment 22,000
(6) Accumulated Depreciation 8,800

Depreciation Expense ($22,000/5) 4,400
Beginning Retained Earnings – Peine ($4,400 × .8) 3,520
Noncontrolling Interest ($4,400 × .2) 880
B. Noncontrolling Interest in Consolidated Income .2 × ($160,000 + $4,400) = $32,880

Consolidation Ownership Issues
1. Windsor Corporation owns 75 percent of Elven Corporation's outstanding common stock.

Elven, in turn, owns 15 percent of Windsor's outstanding common stock. What percent of the
dividends paid by Windsor is reported as dividends declared in the consolidated retained
earnings statement?
A. None B. 100 percent C. 85 percent D. 75 percent
On January 1, 2009, Company A acquired 80 percent of the common stock and 60 percent of
the preferred stock of Company B, for $400,000 and $60,000, respectively. At the time of
acquisition, the fair value of the common shares of Company B held by the noncontrolling
interest was $100,000. Company B's balance sheet contained the following balances:
For the year ended December 31, 2009, Company B reported net income of $100,000 and paid
dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of 10
percent.
2. Based on the preceding information, what will be the equity method income reported by
Company A from its investment in Company B during 2009?
A. $32,000
B. $30,000
C. $72,000
D. $48,000
3. Based on the preceding information, the eliminating entry to assign income to
noncontrolling interest to prepare the consolidated financial statements for Company A as of
December 31, 2009, will include:
A. a debit to Income to Noncontrolling Interest for $24,000.
B. a credit to Dividends Declared — Preferred Stock for $10,000.
C. a credit to Dividends Declared — Common Stock for $8,000.
D. a credit to Noncontrolling Interest for $12,000.
4. Based on the preceding information, the entry to eliminate subsidiary preferred stock to
prepare the consolidated financial statements for Company A as of December 31, 2009, will
include:
A. a debit to Preferred Stock for $60,000.
B. a credit to Investment in Company B Preferred Stock for $40,000.
C. a debit to Retained Earnings for $40,000.
D. a credit to Noncontrolling Interest for $40,000.
Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred
shares of First Corporation at underlying book value on January 1, 2009. At that date, the fair
value of the noncontrolling interest in First's common stock was equal to 20 percent of the
book value of its common stock. First's balance sheet at the time of acquisition contained the
following balances:
The preferred shares are cumulative and have a 10 percent annual dividend rate and are four
years in arrears on January 1, 2009. All of the $5 par value preferred shares are callable at $6
per share. During 2009, First reported net income of $100,000 and paid no dividends.
5. Based on the preceding information, what is First's contribution to consolidated net income
for 2009?
A. $80,000 B. $100,000 C. $90,000 D. $50,000
6. Based on the preceding information, what will be the amount of income to be assigned to the
noncontrolling interest in the 2009 consolidated income statement?
A. $21,000 B. $18,000 C. $23,000 D. $15,000
7. Based on the preceding information, the amount assigned to noncontrolling stockholders'

share of preferred stock interest in the preparation of a consolidated balance sheet on January
1, 2009, is:
A. $40,000 B. $42,000 C. $36,000 D. $48,000
8. Based on the preceding information, what is the portion of First's retained earnings
assignable to its preferred shareholders on January 1, 2009?
A. $40,000 B. $50,000 C. $60,000 D. $70,000
9. Based on the information provided, what is the book value of the common stock on January
1, 2009?
A. $410,000 B. $360,000 C. $390,000 D. $350,000
10. Based on the information provided, what amount will be reported as the noncontrolling
interest in the consolidated balance sheet on January 1, 2009?
A. $70,000 B. $130,000 C. $118,000 D. $142,000
On January 1, 2009, A Company acquired 85 percent of B Company's voting common

stock for $425,000. At that date, the fair value of the noncontrolling interest of B Company
was
$75,000. Immediately after A Company acquired its ownership, B Company acquired 75
percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of
C Company was $50,000 at that date. At January 1, 2009, the stockholders' equity sections
of the balance sheets of the companies were as follows:
During 2009, A Company reported operating income of $175,000 and paid dividends of
$50,000. B Company reported operating income of $125,000 and paid dividends of
$40,000. C Company reported net income of $100,000 and paid dividends of $25,000.
11. Based on the information provided, what amount of consolidated net income will A
Company report for 2009?
A. $175,000 B. $285,000 C. $356,250 D. $400,000
12. Based on the information provided, the equity-method income recorded by A Company
is:
A. $125,000 B. $200,000 C. $170,000 D. $181,250
13. Based on the information provided, what amount of income will be assigned to the
noncontrolling interest in the consolidated income statement for 2009?
A. $55,000 B. $25,000 C. $30,000 D. $43,750
controlling interest in the consolidated income statement for 2009?
A. $400,000 B. $345,000 C. $285,000 D. $175,000
X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z
Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z
Corporation's common stock. The acquisitions were made at book values. The following
information is available for 2008:
15. Based on the information provided, what amount of consolidated net income will X
Corporation report for 2008?
A. $148,750 B. $175,000 C. $150,000 D. $158,750
noncontrolling interest in the 2008 consolidated income statement?
A. $23,750 B. $25,000 C. $18,000 D. $33,750
controlling interest in the 2008 consolidated income statement?
A. $130,750 B. $150,000 C. $141,250 D. $157,000
18. Based on the information provided, what amount will be reported as dividends declared
in
X Corporation's 2008 consolidated retained earnings statement?
A. $30,000 B. $50,000 C. $60,000 D. $0
Janet Corporation holds 75 percent of Slider Corporation's voting common stock, acquired
at book value. The fair value of the noncontrolling interest at the date of acquisition was
equal to
25 percent of the book value of Slider Corporation. On December 31, 2008, Slider
Corporation acquired 25 percent of Janet Corporation's stock. Slider records dividends
received from Janet as nonoperating income. In 2009, Janet reported operating income of
$100,000 and paid dividends of $40,000. During the same year, Slider reported operating
income of $75,000 and paid $20,000 in dividends.
19. Based on the information provided, what amount will be reported as consolidated net
income for 2009 under the treasury stock method?
A. $150,000 B. $100,000 C. $75,000 D. $175,000
20. Based on the information provided, what amount will be reported as income assigned
to the controlling interest for 2009 under the treasury stock method?
A. $18,750 B. $156,250 C. $175,000 D. $100,000
Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 2007,
for $225,000. At that date, the fair value of the noncontrolling interest was $75,000. Meta's
balance sheet contained the following amounts at the time of the combination:
During each of the next three years, Meta reported net income of $30,000 and paid
dividends of $10,000. On January 1, 2009, Vision sold 1,500 shares of Meta's $10 par
value shares for
$60,000 in cash. Vision used the basic equity method in accounting for its ownership of
Meta
Company.
21. Based on the preceding information, what was the balance in the investment account
reported by Vision on January 1, 2009, before its sale of shares?
A. $225,000 B. $285,000 C. $245,000 D. $255,000
22. Based on the preceding information, in the journal entry recorded by Vision for sale of
shares:
A. Cash will be credited for $60,000.
B. Investment in Meta Stock will be credited for $51,000.
C. Investment in Meta Stock will be credited for $60,000.
D. Additional Paid-in Capital will be credited for $45,000.
23. Based on the preceding information, in the journal entry recorded by Vision for sale of
shares, Additional Paid-in Capital will be credited for:
A. $0 B. $15,000 C. $9,000 D. $45,000
24. Based on the preceding information, in the elimination entries to complete a full
consolidation workpaper for 2009, Income to Noncontrolling Interest will be credited for:
A. $12,000. B. $7,500. C. $8,000. D. $2,500.
25. Based on the preceding information, in the eliminating entries to complete a full
consolidation workpaper, Investment in Meta Stock at January 1, 2009, will be credited
for:
A. $255,000. B. $240,000. C. $204,000. D. $136,000.
Perfect Corporation acquired 70 percent of Trevor Company's shares on December 31,

2008, for $140,000. At that date, the fair value of the noncontrolling interest was $60,000.
On January 1, 2010, Perfect acquired an additional 10 percent of Trevor's common stock
for
$32,500. Summarized balance sheets for Trevor on the dates indicated are as follows:
Trevor paid dividends of $10,000 in each of the three years. Perfect uses the basic equity
method in accounting for its investment in Trevor and amortizes all differentials over 5
years against the related investment income. All differentials are assigned to patents in the
consolidated financial statements.
26. Based on the preceding information, Trevor Company's net income for 2009 and 2010
are:
A. $10,000 and $20,000 respectively.
B. $25,000 and $35,000 respectively.
C. $35,000 and $45,000 respectively.
D. $25,000 and $45,000 respectively.
27. Based on the preceding information, what was the balance in Perfect's Investment in
Trevor Company Stock account on December 31, 2009?
A. $164,500 B. $157,500 C. $165,000 D. $168,000
28. Based on the preceding information, what was the balance in Perfect's Investment in
Trevor Company Stock account on December 31, 2010?
A. $211,500 B. $218,000 C. $173,000 D. $216,000
29. Based on the preceding information, in the eliminating entry to assign differential and
amortize patents for the year:
A. Differential will be credited for $10,000.
B. Amortization Expense will be credited for $2,000.
C. Amortization Expense will be debited for $1,000.
D. Patents will be debited for $10,000.
Cinema Company acquired 70 percent of Movie Corporation's shares on December 31,

2005, at underlying book value of $98,000. At that date, the fair value of the noncontrolling
interest was equal to 30 percent of the book value of Movie Corporation. Movie's balance
sheet on January 1, 2008, contained the following balances:
On January 1, 2008, Movie acquired 5,000 of its own $2 par value common shares from
Nonaffiliated Corporation for $6 per share.
30. Based on the preceding information, what is the increase in the book value of the equity
attributable to the parent as a result of the repurchase of shares by Movie Corporation?
A. $19,375 B. $6,125 C. $2,625 D. $9,000
31. Based on the preceding information, what will be the journal entry to be recorded on
Cinema Company's books to recognize the change in the book value of the shares it holds?
A. Option A B. Option B C. Option C D. Option D
32. Based on the preceding information, the eliminating entry needed in preparing a
consolidated balance sheet immediately following the acquisition of shares will include:
A. a credit to Noncontrolling Interest for $19,375.
B. a credit to Additional Paid-In Capital for $75,000.
C. a debit to Treasury Shares for $30,000.
D. a credit to Investment in Movie stock for $6,125.
33. Based on the preceding information, in the eliminating entry needed in preparing a
consolidated balance sheet immediately following the acquisition of shares, Investment in
Movie stock will be credited for:
A. $165,625. B. $135,625. C. $185,000. D. $155,000.
Lemon Corporation acquired 80 percent of Bricks Corporation's common shares on January

1, 2007, at underlying book value. At that date, the fair value of the noncontrolling interest
was equal to 20 percent of the book value of Bricks Corporation. Bricks prepared the
following balance sheet as of December 31, 2008:
On January 1, 2009, Bricks declares a stock dividend of 9,000 shares on its $5 par value
common stock. The current market price per share of Bricks stock on January 1, 2009, is $20.
34. Based on the preceding information, the investment elimination entry required to prepare a
consolidated balance sheet immediately after the stock dividend is issued will include a debit
to Additional Paid-In Capital for:
A. $50,000. B. $95,000. C. $230,000. D. $185,500.
35. Based on the preceding information, the investment elimination entry required to prepare a
consolidated balance sheet immediately after the stock dividend is issued will include a debit
to Retained Earnings for:
A. $200,000 B. $65,000 C. $155,000 D. $20,000
36. Assume instead that Bricks declared a stock dividend of 3,000 shares on its $5 par value
common stock. The investment elimination entry required to prepare a consolidated balance
sheet immediately after the stock dividend is issued will include a debit to Additional Paid-In
Capital for:
A. $65,000. B. $95,000. C. $50,000. D. $110,000.
37. Assume that Bricks declared a stock dividend of 3,000 shares on its $5 par value common
stock. The investment elimination entry required to prepare a consolidated balance sheet
immediately after the stock dividend is issued will include a debit to Retained Earnings for:
A. $185,000. B. $65,000. C. $155,000. D. $140,000.
Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred
shares of Stanley Company, all acquired at underlying book value on January 1, 2008. At that
date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25
percent of the book value of its common stock. The balance sheets of Micron and Stanley
immediately after the acquisition contained these balances:
Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 2008, Stanley
reports net income of $40,000 and pays no dividends. Micron reports income from its separate
operations of $75,000 and pays dividends of $30,000 during 2008.
38. Based on the preceding information, what is the total noncontrolling interest reported in
the consolidated balance sheet as of January 1, 2008?
A. $80,000 B. $40,000 C. $50,000 D. $60,000
39. Based on the preceding information, what is the income assigned to the noncontrolling
interest in the 2008 consolidated income statement?
A. $10,000 B. $7,000 C. $11,800 D. $4,800
40. Based on the preceding information, what amount of income is attributable to the
controlling interest in the consolidated income statement for 2008?
A. $75,000 B. $105,000 C. $96,000 D. $103,200
41. Based on the preceding information, what is the total stockholders' equity reported in the
consolidated balance sheet as of January 1, 2008?
A. $450,000 B. $530,000 C. $490,000 D. $370,000
42. Based on the preceding information, what amount is reported as preferred stock
outstanding reported in the consolidated balance sheet as of January 1, 2008?
A. $0 B. $40,000 C. $50,000 D. $44,000
43. Windsor Corporation acquired 90 percent of Agro Corporation's common shares on

January 1, 2006, at underlying book value. At that date, the fair value of the noncontrolling
interest was equal to 10 percent of the book value of Agro. Agro Corporation prepared the
following balance sheet as of January 1, 2009:
The company is considering a 3-for-1 stock split, a stock dividend of 7,000 shares, or a stock
dividend of 2,000 shares on its $5 par value common stock. The current market price per share
of Agro stock on January 1, 2009, is $15.
Required:
Give the investment elimination entry required to prepare a consolidated balance sheet at the
close of business on January 1, 2009, for each of the alternative transactions under
consideration by Agro Corporation.
44. On January 1, 2007, Infinity Corporation acquired 90 percent of Trader Corporation's

common stock for $315,000. At the date of acquisition, the fair value of the noncontrolling
interest was $35,000, and Trader reported common stock outstanding of $150,000 and retained
earnings of $180,000. The differential is assigned to a patent with a remaining life of eight
years. Each year since acquisition, Trader has reported income from operations of
$50,000 and paid dividends of $30,000.
Trader acquired 75 percent ownership of Minnow Company on January 1, 2009, for

$187,500. At that date, the fair value of the noncontrolling interest was $62,500, and Minnow
reported common stock outstanding of $100,000 and retained earnings of $130,000. In 2009,
Minnow reported net income of $20,000 and paid dividends of $8,000. The differential is
assigned to buildings and equipment with an economic life of 10 years at the date of
acquisition.
Required:
1) Prepare the journal entries recorded by Trader for its investment in Minnow during 2009.
2) Prepare the journal entries recorded by Infinity for its investment in Trader during 2009.
3) Prepare the eliminating entries related to Trader's investment in Minnow and Infinity's
investment in Trader needed to prepare consolidated financial statements for Infinity and its
subsidiaries at December 31, 2009.
45. On January 1, 2008, Orion Company acquired 70 percent of Simplex Company's stock at
underlying book value. At that date, the fair value of the noncontrolling interest was equal to
30 percent of the book value of Simplex Company. On December 31, 2009, Simplex acquired
15 percent of Orion's stock. Balance sheets for the two companies on December 31, 2009, are
as follows:
Required:
Assuming that the treasury stock method is used in reporting Orion's shares held by Simplex,
prepare a consolidated balance sheet workpaper and consolidated balance sheet for December
31, 2009.
46. Portfolio Corporation acquired 70 percent ownership of Index Company on January 1,

2006, at underlying book value. At that date, the fair value of the noncontrolling interest was
equal to 30 percent of the book value of Index. On January 1, 2008, Portfolio sold 1,000 shares
of Index Company for $20,000 to Adventure Corporation and recorded a $5,000 gain. Trial
balances for the companies on December 31, 2008, contain the following data:
Index Company's net income was earned evenly throughout the year. Both companies declared
and paid their dividends on December 31, 2008. Portfolio uses the basic equity method in
accounting for its investment in Index.
Required:
1) Prepare the elimination entries needed to complete a full consolidation workpaper for 2008.
2) Prepare a consolidation workpaper for 2008.
Multinational Accounting: Foreign Currency Transactions and Financial

Instruments
1. If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be
used to compute the indirect quotation of the exchange rate expressed in British pounds?
A. 1/180 B. 1/.56 C. 1.8/1 D. 1/1.8
Suppose the direct foreign exchange rates in U.S. dollars are:
1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132
2. Based on the information given above, the indirect exchange rates for the Singapore dollar
and the Cyprus Pound are:
A. 1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively.
B. 0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively.
C. 2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively.
D. 1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.
3. Based on the information given above, how many U.S. dollars must be paid for a purchase of
citrus fruits costing 10,000 Cyprus pounds?
A. $25,132 B. $15,132 C. $3,979 D. $35,775
4. Based on the information given above, how many Singapore dollars are required to purchase
goods costing 10,000 US dollars?
A. 7,025 B. 14,235 C. 17,655 D. 2,975
5. Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 4,80,000 Chilean
Pesos. While returning after her two month visit, she exchanged her remaining 50,000 Pesos
into $100 of U.S. currency. What amount of gain or a loss did Karen experience on the 50,000
pesos she held during her visit and converted to U.S. dollars at the departure date?
A. Loss of $4. B. Gain of $4. C. Loss of $6. D. No gain or loss.
6. Chicago based Corporation X has a number of importing transactions with companies based
in UK. Importing activities result in payables. If the settlement currency is the British Pound,
which of the following will happen by changes in the direct or indirect exchange rates?

7. Chicago based Corporation X has a number of exporting transactions with companies based
in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish
Krona, which of the following will happen by changes in the direct or indirect exchange
rates?

8. Corporation X has a number of exporting transactions with companies based in Vietnam.
Exporting activities result in receivables. If the settlement currency is the US dollar, which of
the following will happen by changes in the direct or indirect exchange rates?
9. Mint Corporation has several transactions with foreign entities. Each transaction is
denominated in the local currency unit of the country in which the foreign entity is located.
On October 1, 2008, Mint purchased confectionary items from a foreign company at a price of
LCU 5,000 when the direct exchange rate was 1 LCU = $1.20. The account has not been settled
as of December 31, 2008, when the exchange rate has decreased to 1 LCU = $1.10.
The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:
A. $500 loss B. $500 gain C. $378 gain D. $5,500 loss
10. Mint Corporation has several transactions with foreign entities. Each transaction is
denominated in the local currency unit of the country in which the foreign entity is located.
On November 2, 2008, Mint sold confectionary items to a foreign company at a price of LCU
23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as
of December 31, 2008, when the exchange rate has increased to 1 LCU = $1.10. The foreign
exchange gain or loss on Mint's records at year-end for this transaction will be:
A. $460 loss B. $387 loss C. $387 gain D. $460 gain
11. On September 3, 2008, Jackson Corporation purchases goods for a U.S. dollar equivalent of
$17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The
payment is made on October 10. The exchange rates were:
What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on
October 10?
12. On March 1, 2008, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000 to
a Thai company. The transaction is denominated in Thai bahts. The payment is received on May
10. The exchange rates were:
What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on
May 10?
On December 5, 2008, Texas based Imperial Corporation purchased goods from a Saudi Arabian
firm for 100,000 riyals (SAR), to be paid on January 10, 2009. The transaction is denominated
in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S.
dollar. The exchange rates are:
13. Based on the preceding information, what journal entry would Imperial make on December
31, 2008, to revalue foreign currency payable to equivalent U.S. dollar value?
14. Based on the preceding information, what journal entry would Imperial make on January
10, 2009, to revalue foreign currency payable to equivalent U.S. dollar value?
15. Based on the preceding information, what was the overall foreign currency gain or loss on
the accounts payable transaction?
A. $300 loss B. $200 loss C. $100 gain D. $200 gain
Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian
pounds on September 5, 2008, with payment due on December 2, 2008. Additionally, on
September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds
of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position
in Egyptian pounds, but it was not designated as a hedge. The spot rates were:
16. Based on the preceding information, in the entry made on December 2nd to revalue foreign
currency receivable to current equivalent U.S. dollar value,
A. Accounts Payable will be debited for $18,350.
B. Foreign Currency Units will be debited for $18,500.
C. Foreign Currency Transaction Gain will be credited for $150.
D. Other Comprehensive Income will be credited for $300.
17. Based on the preceding information, what is the entry required to settle foreign currency
payable on December 2?
18. Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December
1, 2008, for 1,000,000 Yen, when the spot rate for Yen was $.0095. On December 31, 2008,
the spot rate stood at $.0096. On January 10, 2009 Auto paid 1,000,000 Yen acquired at a rate
of $.0094. Auto's income statements should report a foreign exchange gain or loss for the
years ended December 31, 2008 and 2009 of:
19. On November 1, 2008, Denver Company borrowed 500,000 local currency units (LCU)
from a foreign lender evidenced by an interest-bearing note due on November 1, 2009, which
is denominated in the currency of the lender. The U.S. dollar equivalent of the note principal
was as follows:
In its income statement for 2009, what amount should Denver include as a foreign exchange
gain or loss on the note principal?
A. 15,000 gain B. 25,000 gain C. 15,000 loss D. 40,000 loss
20. Company X denominated a December 1, 2009, purchase of goods in a currency other than
its functional currency. The transaction resulted in a payable fixed in terms of the amount of
foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates
moved unfavourably at December 31, 2009, resulting in a loss that should:
A. be included as a separate component of stockholders' equity at Dec. 31, 2009.
B. be included as a component of income from continuing operations for 2009.
C. be included as a deferred charge at December 31, 2009.
D. not be reported until January 10, 2010, the settlement date.
Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on
December 1, 2008, with payment due on January 20, 2009. The exchange rates were:
21. Based on the preceding information, which of the following is true of dollar's movement
vis-à-vis Brazilian real during the period?
22. Based on the preceding information, what is the Heavy's overall net gain or net loss from
its foreign currency exposure related to this transaction?
A. $4,860 loss B. $2,600 loss C. $7,120 gain D. $2,260 gain
Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$)
on January 1, 2009 with settlement to be in 60 days. On the same date, Alman entered into a
60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in
order to manage its exposed foreign currency receivable. The forward contract is not
designated as a hedge. The spot rates were:
23. Based on the preceding information, the entry to revalue foreign currency payable to
current U.S. dollar value on March 1 will have:
A. a credit to Foreign Currency Transaction Gain for $1,500.
B. a debit to Foreign Currency Transaction Loss for $2,500.
C. a debit to Foreign Currency Transaction Loss for $1,500.
D. a credit to Foreign Currency Transaction Gain for $1,000.
24. Based on the preceding information, what is the overall effect on net income of Myway's
use of the forward exchange contract?
A. Net loss of $1,000
B. Net gain of $1,500
C. Net loss of $500
D. No effect
25. Based on the preceding information, had Myway not used the forward exchange contract,
net income for the year would have:
A. increased by $1,000. B. increased by $500.
C. decreased by $1,000. D. decreased by $1,500.
26. Levin company entered into a forward contract to speculate in the foreign currency. It sold
100,000 foreign currency units under a contract dated November 1, 2008, for delivery on
January 31, 2009:
In its income statement for the year ended December 31, 2008, what amount of loss should
Levin report from this forward contract?
A. $0 B. $300 C. $200 D. $100
Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on
December 1, 2008. Payment is due on January 30, 2009. On December 1, 2008, the company
also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward
contract is not designated as a hedge. The rates were as follows:
27. Based on the preceding information, the entries on December 31, 2008, include a:
A. Credit to Foreign Currency Payable to Exchange Broker, $4,000.
B. Debit to Foreign Currency Receivable from Exchange Broker, $6,000.
C. Debit to Foreign Currency Receivable from Exchange Broker, $186,000.
D. Debit to Foreign Currency Transaction Gain, $4,000.
28. Based on the preceding information, the entries on January 30, 2009, include a:
A. Debit to Dollars Payable to Exchange Broker, $180,000.
B. Credit to Cash, $184,000.
C. Credit to Premium on Forward Contract, $4,000.
D. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.
A. Credit to Foreign Currency Units (SFr), $184,000.
B. Credit to Cash, $180,000.
C. Debit to Foreign Currency Transaction Loss, $4,000.
D. Debit to Dollars Payable to Exchange Broker, $184,000.
A. Debit to Dollars Payable to Exchange Broker, $184,000.
B. Credit to Foreign Currency Transaction Gain, $4,000.
C. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.
D. Debit to Foreign Currency Units (SFr), $184,000.
On December 1, 2008, Hedge Company entered into a 60-day speculative forward contract to
sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased
a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 =
$1.42.
The rates are as follows:
Hedge had no other speculation transactions in 2008 and 2009. Ignore taxes.
31. Based on the preceding information, what is the effect of the British pound speculative
contract on 2008 net income?
A. $10,000 gain B. $6,000 gain C. $8,000 gain D. $2,000 loss
32. Based on the preceding information, what is the overall effect of speculation on 2008 net
income?
A. $4,000 gain B. $6,000 gain C. $8,000 loss D. $8,000 gain
33. Based on the preceding information, what is the effect of the euro speculative contract on
2009 net income?
A. $4,000 loss B. $1,000 gain C. $8,000 gain D. $2,000 loss
34. Based on the preceding information, what is the overall effect of speculation on 2009 net
income?
A. $1,000 loss B. $6,000 gain C. $3,000 loss D. $8,000 gain
35. Based on the preceding information, what is the net gain or loss on the British pound
speculative contract?
A. $8,000 gain B. $6,000 gain C. $3,000 loss D. $10,000 gain
36. Based on the preceding information, what is the net gain or loss on the euro speculative
contract?
A. $8,000 gain B. $6,000 gain C. $3,000 loss D. $1,000 loss
The fair market value of a near-month call option with a strike price of $45 is $5, when the
stock is trading at $48.
37. Based on the preceding information, which of the following is true of the intrinsic and
time values associated with this option.
38. Based on the preceding information, the call option:

A. has no intrinsic value currently.
B. is at the money.
C. is out of the money.
D. is in the money.
39. An investor purchases a put option with a strike price of $100 for $3. This option is
considered "in the money" if the underlying is trading:
A. below $100. B. at $100. C. above $100. D. above $103.
40. Which of the following observations is true of futures contracts?

A. Contracted through a dealer, usually a bank.
B. Customized to meet contracting company's terms and needs.
C. Typically no margin deposit required.
D. Traded on an exchange and acquired through an exchange broker
41. Which of the following observations is true of forwards contracts?

A. Substantial margin is required to initiate a contract.
B. Must be completed either with the underlying's future delivery or net
C. cash settlement.
D. Cannot be customized; for a specific amount at a specific date. E. Usually settled
with a net cash amount prior to maturity date.
42. Company X issues variable-rate debt but wishes to fix its interest rates because it
believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for
a variable- rate interest because it assumes the interest rates may decrease. The two
companies agree to exchange cash flows. Such an arrangement is called:
A. a futures contract. B. a forward contract. C. a swap. D. an option.
Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a
price-risk-hedging device to hedge the expected increase in prices on an anticipated
purchase of oil. On November 30, 2008, AMAR purchases call options for 20,000 barrels of
oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 2009, call date. The
following is the pricing information for the term of the call:
The information for the change in the fair value of the options follows:
On February 1, 2009, AMAR sells the options at their value on that date and acquires
20,000 barrels of oil at the spot price. On April 1, 2009, AMAR sells the oil for $112 per
barrel.
43. Based on the preceding information, which of the following adjusting entries would be
required on December 31, 2008?
44. Based on the preceding information, in the entry to record the increase in the intrinsic
value of the options on December 31, 2008,
A. Purchased Call Options will be credited for $100,000. B. Purchased Call Options will be
debited for $130,000. C. Retained Earnings will be credited for $100,000.
D. Other Comprehensive Income will be credited for $100,000.
45. Based on the preceding information, which of the following entries will be required on
February 1, 2009?
46. Based on the preceding information, the entries made on April 1, 2009 will include:
A. a debit to Other Comprehensive Income for $200,000.
B. a debit to Cost of Goods Sold for $2,240,000.
C. a credit to Oil Inventory for $2,240,000.
D. a credit to Cost of Goods Sold for $100,000.
On December 1, 2008, Winston Corporation acquired 100 shares of Linked Corporation at a cost of
$40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides
to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an
at-the-money put option to sell the 100 shares at $40 per share. The
option expires on February 20, 2009. Selected information concerning the fair values of the
investment and the options follow:
Assume that Winston exercises the put option and sells Linked shares on February 20, 2009.
47. Based on the preceding information, what is the market price of Linked Corporation stock on
December 31, 2008?
A. $40 B. $37 C. $36 D. $38
48. Based on the preceding information, what is the market price of Linked Corporation stock on
February 20, 2009?

A. $35 B. $37 C. $36 D. $40
49. Based on the preceding information, the journal entry made on December 31, 2008 to record
decrease in the time value of the options will include:
A. a debit to Loss on Hedge Activity for $150. B. a credit to Put Option for $300.
C. a debit to Loss on Hedge Activity for $300. D. a credit to Put Option for $100.
50. Based on the preceding information, which of the following journal entries will be made on
February 20, 2009?
ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS AND

HEDGING FOREIGN EXCHANGE RISK
Multiple Choice
1. A discount or premium on a forward contract is deferred and included in the measurement of the
related foreign currency transaction if the contract is classified as a:
a. hedge of a net investment in a foreign entity.
b. hedge of an exposed asset or liability position.
c. hedge of an identifiable foreign currency commitment.
d. contract acquired to speculate in the movement of exchange rates.
2. The discount or premium on a forward contract entered into as a hedge of an exposed asset or
liability position should be:
a. included as a separate component of stockholders‟ equity.
b. amortized over the life of the forward contract.
c. deferred and included in the measurement of related foreign currency transaction.
d. none of these.
3. An indirect exchange rate quotation is one in which the exchange rate is quoted:
a. in terms of how many units of the domestic currency can be converted into one unit of foreign
currency.
b. for the immediate delivery of currencies exchanged.
c. in terms of how many units of the foreign currency can be converted into one unit of domestic
currency.
d. for the future delivery of currencies exchanged.
4. A transaction gain is recorded when there is an:

a. importing transaction and the exchange rate increases.
b. exporting transaction and the exchange rate increases.
c. exporting transaction and the exchange rate decreases.
d. none of these.
5. During 2011, a U.S. company purchased inventory from a foreign supplier. The transaction was
denominated in the local currency of the seller. The direct exchange rate increased from the date of
the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to
the settlement date in 2012. For the years 2011 and 2012, transaction gains or losses should be
recognized as:
2011 2012
a. gain gain
b. gain loss
c. loss loss
d. loss gain
6. A transaction gain or loss is reported currently in the determination of income if the purpose of the
forward contract is to:
a. hedge a net investment in a foreign entity.
b. hedge an identifiable foreign currency commitment.
c. speculate in foreign currency.
d. none of these.
7. On November 1, 2011, American Company sold inventory to a foreign customer. The account will
be settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1,
American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70
per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant
dates were:
Per Unit of
Date Foreign Currency
November 1 $0.73
December 31 0.71
March 1 0.74
The entry to record the forward contract is

a. FCU Receivable 350,000
Premium on Forward Contract 15,000
Dollars Payable 365,000
b. Dollars Receivable 365,000

Discount on Forward Contract 15,000
FCU Payable 350,000
c. FCU Receivable 365,000

d. Dollars Receivable 350,000

FCU Payable 365,000
8. On November 1, 2011, American Company sold inventory to a foreign customer. The account will
be settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1,
American also entered into a forward contract to hedge the exposed asset. The forward rate is
$0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on
relevant dates were:
Per Unit
of
November 1 $0.73
December 31 0.71
March 1 0.74
What will be the adjusted balance in the Accounts Receivable account on December 31, and
how much gain or loss was recorded as a result of the adjustment?
Receivable Balance Gain/Loss Recorded

a. $319,500 $9,000 gain
b. $319,500 $9,000 loss
c. $333,000 $4,500 gain
d. $333,000 $18,000 gain
9. A transaction gain or loss at the settlement date is:

a. a change in the exchange rate quoted by a foreign exchange trader.
b. synonymous with the translation of foreign currency financial statements into dollars.
c. the difference between the recorded dollar amount of an account receivable denominated in
a foreign currency and the amount of dollars received.
d. the difference between the buying and selling rate quoted by a foreign exchange trader at
the settlement date.
10. From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:
a. measured in a foreign currency.
b. denominated in a foreign
currency. c. measured in U.S.
currency.
d. denominated in U.S. currency.
11. The exchange rate quoted for future delivery of foreign currency is the definition of a(n):
a. direct exchange rate.
b. indirect exchange
rate. c. spot rate.
d. forward exchange rate.
12. A transaction loss would result from:

a. an increase in the exchange rate applicable to an asset denominated in a foreign currency.
b. a decrease in the exchange rate applicable to a liability denominated in a foreign
currency.
c. the import of merchandise when the transaction is denominated in a foreign currency.
d. a decrease in the exchange rate applicable to an asset denominated in a foreign currency.
13. The forward exchange rate quoted for the remaining term of a forward contract is used to account
for the contract when the forward contract:
a. extends beyond one year or the current operating cycle.
b. is a hedge of an identifiable foreign currency commitment.
c. is a hedge of an exposed net liability position.
d. was acquired to speculate in foreign currency.
14. A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign
currency commitment may be:
a. included as a separate item in the stockholders‟ equity section of the balance sheet.
b. recognized currently in the determination of net income.
c. deferred and included in the measurement of the related foreign currency transaction.
d. none of these.
15. Craiger, Inc. a U.S. corporation, bought machine parts from Reinsch Company of Germany on
March 1, 2011, for 70,000 marks, when the spot rate for marks was $0.5395. Craiger‟s year-end was
March 31, 2011, when the spot rate for marks was $0.5445. Craiger bought 70,000 marks and paid
the invoice on April 20, 2011, when the spot rate was $0.5495. How much should be shown in
Craiger‟s income statements as foreign exchange (transaction) gain or loss for the years ended
March 31, 2011 and 2012?
2011 2012
a. $0 $0
b. $0 $350 loss
c. $350 loss $0
d. $350 loss $350 loss
16. A forward exchange contract is transacted at a discount if the current forward rate is:
a. less than the expected spot rate.
b. more than the expected spot rate.
c. less than the current spot rate.
d. more than the current spot rate.
17. Stuart Corporation a U.S. company, contracted to purchase foreign goods. Payment in foreign
currency was due one month after delivery. Between the delivery date and the time of payment, the
exchange rate changed in Stuart‟s favor. The resulting gain should be reported in the financial
statements as a(n):
a. component of other comprehensive income.
b. component of income from continuing operations.
c. extraordinary income.
d. deferred income.
18. Jackson Paving Company purchased equipment for 350,000 British pounds from a supplier in
London on July 7, 2011. Payment in British pounds is due on Sept. 7, 2011. The exchange rates to
purchase one pound is as follows:
July 7 August 31, (year end) September 7
Spot-rate 2.08 2.05 2.04
30-day rate 2.07 2.03 --
60-day rate 2.06 1.99 --
On its August 31, 2011 income statement, what amount should Jackson Paving report as a foreign
exchange transaction gain:
a. $14,000.
b. $7,000.
c. $10,500.
d. $0.
19. On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to
purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:
Forward Rate
Spot rate For Dec. 1, 2011
September 1, 2011 1.46 1.47
September 30, 2011 (year-end) 1.50 1.48
The first forward contract was to hedge a purchase of inventory on September 1, payable on
December 1. On September 30, what amount of foreign currency transaction loss should Swash
Plating report in income?
a. $0.
b. $2,500.
c. $5,000.
d. $10,000.
20. On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to
purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:
Forward Rate
Spot rate For Dec. 1, 2011
September 1, 2011 1.46 1.47
September 30, 2011 (year-end) 1.50 1.48
The second forward contract was strictly for speculation. On September 30, 2011, what amount of
foreign currency transaction gain should Swash Plating report in income?
a. $0.
b. $2,500.
c. $5,000.
d. $10,000.
21. On November 1, 2011, Prism Company sold inventory to a foreign customer. The account will be
settled on March 1 with the receipt of 250,000 foreign currency units (FCU). On November 1, Prism
also entered into a forward contract to hedge the exposed asset. The forward rate is $0.90 per unit of
foreign currency. Prism has a December 31 fiscal year-end. Spot rates on relevant dates were:
Per Unit of
November 1 $0.93
December 31 0.91
March 1 0.94
The entry to record the forward contract is

a. FCU Receivable 225,000
b. Dollars Receivable 232,500

FCU Payable 225,000
c. FCU Receivable 232,500

d. Dollars Receivable 225,000

FCU Payable 232,500
22. On November 1, 2011, National Company sold inventory to a foreign customer. The account will be
settled on March 1 with the receipt of 200,000 foreign currency units (FCU). On November 1,
National also entered into a forward contract to hedge the exposed asset. The forward rate is $0.80
per unit of foreign currency. National has a December 31 fiscal year-end. Spot rates on relevant
dates were:
Per Unit of
November 1 $0.83
December 31 0.81
March 1 0.84
What will be the adjusted balance in the Accounts Receivable account on December 31, and how
much gain or loss was recorded as a result of the adjustment?
Receivable Balance Gain/Loss Recorded

a. $170,000 $4,000 gain
b. $162,000 $4,000 loss
c. $168,000 $2,000 gain
d. $164,000 $2,000 loss

23. Caldron Company purchased equipment for 375,000 British pounds from a supplier in London on
July 3, 2011. Payment in British pounds is due on Sept. 3, 2011. The exchange rates to purchase one
pound is as follows:
July 3 August 31, (year end) September 3
Spot-rate 1.58 1.55 1.54
30-day rate 1.57 1.53 --
60-day rate 1.56 1.49 --
On its August 31, 2011, income statement, what amount should Caldron report as a foreign
exchange transaction gain:
a. $18,750.
b. $3,750.
c. $11,250.
d. $0.
24. On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000
euros each in 90 days. The relevant exchange rates are as follows:
Forward Rate
Spot rate For Aug. 1, 2011
April 1, 2011 1.16 1.17
April 30, 2011 (year-end) 1.20 1.18
The first forward contract was to hedge a purchase of inventory on April 1, payable on December 1.
On April 30, what amount of foreign currency transaction loss should Trent report in income?
a. $0.
b. $3,000.
c. $9,000.
d. $12,000.
25. On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000
euros each in 90 days. The relevant exchange rates are as follows:
Forward Rate
Spot rate For Aug. 1, 2011
April 1, 2011 1.16 1.17
April 30, 2011 (year-end) 1.20 1.18
The second forward contract was strictly for speculation. On April 30, 2011, what amount of foreign
currency transaction gain should Trent report in income.
a. $0.
b. $3,000.
c. $9,000.
d. $12,000.
Problems
12-1 On November 1, 2010, Dorsey Company sold inventory to a company in England. The sale was for
600,000 British pounds and payment will be received on February 1, 2011. On November 1, Dorsey
entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of
$1.65. Spot rates for the British pound are as follows:
November 1 $1.61
December 31 1.67
February 1 1.62
Dorsey has a December 31 fiscal year-end.
Required:
Compute each of the following:
1. The dollars to be received on February 1, 2011, from selling the 600,000 pounds to the exchange
dealer.
2. The dollars that would have been received from the account receivable if Dorsey had not hedged the
sale contract with the forward contract.
3. The discount or premium on the forward contract.
4. The transaction gain or loss on the exposed asset related to the sale in 2010 and 2011.
5. The transaction gain or loss on the forward contract in 2010 and 2011.
6. The amount of the discount or premium on the forward contract amortized in 2010 and 2011.
12-2 On December 1, 2010, Derrick Corporation agreed to purchase a machine to be manufactured by a

company in Brazil. The purchase price is 1,150,000 Brazilian reals. To hedge against fluctuations in
the exchange rate, Derrick entered into a forward contract on December 1 to buy 1,150,000 reals on
April 1, the agreed date of machine delivery, for $0.375 per real. The following exchange rates were
quoted:
Forward Rate
Date Spot Rate (Delivery on 4/1)
December 1 0.390 0.375
December 31 0.370 0.373
April 1 0.385 --
Required:
Prepare journal entries necessary for Derrick during 2010 and 2011 to account for the transactions described
above.
12-3 Colony Corp., a U.S. corporation, entered into a contract on November 1, 2010, to sell two
machines to Crown Company, for 95,000 foreign currency units (FCU). The machines were to be
delivered and the amount collected on March 1, 2011.
In order to hedge its commitment, Colony entered into a forward contract for 95,000 FCU delivery
on March 1, 2011. The forward contract met all conditions for hedging an identifiable foreign
currency commitment.
Selected exchange rates for FCU at various dates were as follows:

November 1, 2010 – Spot rate $1.3076

Forward rate for delivery on March 1, 2011 1.2980
December 31, 2010 – Spot rate 1.3060
Forward rate for delivery on March 1, 2011 1.3150
March 1, 2011 – Spot rate 1.2972
Required:
Prepare all journal entries relative to the above on the books of Colony Corp. on the following dates:
1. November 1, 2010.
2. Year-end adjustments on December 31, 2010.
3. March 1, 2011. (Include all adjustments related to the forward contract.)
12-4 On October 1, 2010, Nance Company purchased inventory from a foreign customer for 750,000 units
of foreign currency (FCU) due on January 31, 2011. Simultaneously, Nance entered into a forward
contract for 750,000 units of FC for delivery on January 31, 2011, at the forward rate of $0.75.
Payment was made to the foreign customer on January 31, 2011. Spot rates on October 1, December
31, and January 31, were $0.72, $0.73, and $0.76, respectively. Nance amortizes all premiums and
discounts on forward contracts and closes its books on December 31.
Required:
A. Prepare all journal entries relative to the above to be made by Nance on October 1, 2010.
B. Prepare all journal entries relative to the above to be made by Nance on December 31, 2010.
C. Compute the transaction gain or loss on the forward contract that would be recorded in 2011.
Indicate clearly whether the amount is a gain or loss.
12-5 On October 1, 2010, Kline Company shipped equipment to a foreign customer for a foreign currency
(FC) price of FC 3,000,000 due on January 31, 2011. All revenue realization criteria were satisfied
and accordingly the sale was recorded by Kline Company on October 1. Simultaneously, Kline
entered into a forward contract to sell 3,000,000 FCU on January 31, 2011 for $1,200,000. Payment
was received from the foreign customer on January 31, 2011. Spot rates on October 1, December 31,
and January 31 were $0.42, $0.425, and $0.435, respectively. Kline amortizes all premiums and
discounts on forward contracts and closes its books on December 31.
Required:
Prepare all journal entries relative to the above to be made by Kline during 2010 and 2011.
12-6 On July 15, Worth, Inc. purchased 88,500,000 yen worth of parts from a Tokyo company paying
20% down, and the balance is due in 90 days. Interest is payable at a rate of 8% on the unpaid
balance. The exchange rate on July 15, was $1.00 = 118 Japanese yen. On October 13, the exchange
rate was $1.00 = 114 Japanese yen.
Required:
Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S.
dollars.
12-7 On November 1, 2010, Bisk Corporation, a calendar-year U.S. Corporation, invested in a

speculative contract to purchase 700,000 euros on January 31, 2011, from a German brokerage firm.
Bisk agreed to buy 700,000 euros at a fixed price of $1.46 per euro. The brokerage firm agreed to
send 700,000 euros to Bisk on January 31, 2011. The spot rates for euros are:
November 1, 2010 1 euro = 1.45

December 31, 2010 1 euro = 1.43
January 31, 2011 1 euro = 1.44
Required:
Prepare the journal entries that Bisk would record on November 1, December 31, and January 31.
12-8 Consider the following information:
1. On November 1, 2011, a U.S. firm contracts to sell equipment (with an asking price of 500,000
pesos) in Mexico. The firm will take delivery and will pay for the equipment on February 1,
2012.
2. On November 1, 2011, the company enters into a forward contract to sell 500,000 pesos for
$0.0948 on February 1, 2012.
3. Spot rates and the forward rates for February 1, 2012, settlement were as follows (dollars per
peso):
Forward Rate
Spot Rate for 2/1/12
November 1, 2011 $0.0954 $0.0948
Balance sheet date (12/31/11) 0.0949 0.0944
February 1, 2012 0.0947
4. On February 1, the equipment was sold for 500,000 pesos. The cost of the equipment was
$20,000.
Required:
Prepare all journal entries needed on November 1, December 31, and February 1 to account for the forward
contract, the firm commitment, and the transaction to sell the equipment.
ANSWER KEY
Multiple Choice
1. c 8. b 15. d 22. b
2. b 9. c 16. a 23. c
3. c 10. b 17. b 24. d
4. b 11. d 18. c 25. b
5. d 12. d 19. d
6. c 13. d 20. b
7. d 14. c 21. d
Problems
12-1 1. Dollars received = 600,000 × $1.65 = $990,000
2. Dollars received = 600,000 × $1.62 = $972,000
3. Premium on forward contract = ($1.65 - $1.61) × 600,000 = $24,000
4. 2010 transaction gain = ($1.67 - $1.61) × 600,000 = $36,000
2011 transaction loss = ($1.67 - $1.62) × 600,000 = $(30,000)
5. 2010 transaction loss = ($1.67 - $1.61) × 600,000 = ($36,000)
2011 transaction gain = ($1.67 - $1.62) × 600,000 = $30,000
6. Premium amortized in 2010 = $24,000 × 2/3 = $16,000

Premium amortized in 2011 = $24,000 × 1/3 = $8,000
12-2 2010
Dec. 1 FC Receivable from Exchange Dealer 448,500
Deferred Transaction Adjustment 17,250
Dollars Payable to Exchange Dealer 431,250
Dec. 31 Deferred Transaction Adjustment 23,000

FC Receivable from Exchange Dealer 23,000
($0.39 - $0.37) × 1,150,000)
12-2 (Continued)
2011
Apr. 1 FC Receivable from Exchange Dealer 17,250
($0.385 - $0.370) × 1,150,000)
Investment in Foreign Currency 442,750


Cash 431,250
Machine 442,750

Machine 11,500
12-3 1. November 1, 2010

Dollars Receivable from Exchange Dealer 123,310
Deferred Transaction Adjustment 912
FC Payable to Exchange Dealer 124,222
($1.2980 × 95,000 = $123,310)
[($1.3076 - $1.2980) × 95,000 = $912)
($1.3076 × 95,000 = $124,222)
2. December 31, 2010

FC Payable to Exchange Dealer 152
[($1.3076 - $1.3060) × 95,000 = $152]
3. March 1, 2011
FC Payable to Exchange Dealer 836
[($1.3060 - $1.2972) × 95,000 = $836]

Sales 123,234
($1.2972 × 95,000 = $123,234)

($1.2972 × 95,000 = $123,234)
Cash 123,310
($1.2980 × 95,000 = $123,310)

Sales 76
[($1.2980 - $1.2972) × 95,000 = $76]
12-4 A. October 1
Purchases 540,000
Accounts Payable 540,000
($0.72 × 750,000 = $540,000)

($0.72 × 750,000 = $540,000)
($0.75 - $0.72) × 750,000 = $22,500)
($0.75 × 750,000 = $562,500)
B. December 31
Transaction Loss 7,500
[($0.73 - $0.72) × 750,000 = $7,500]

Transaction Gain 7,500
[($0.73 - $0.72) × 750,000 = $7,500]
Amortization Expense 16,875

[($0.75 - $0.72) × 750,000 × (3/4) = $16,875]
C. Value of FC receivable – January 31

$0.76 × 750,000 $570,000
Carrying value – December 31 547,500
Transaction gain $ 22,500
12-5 October 1
Accounts Receivable 1,260,000
Sales 1,260,000
Dollars Receivable from Exchange Dealer 1,200,000

FC Payable to Exchange Dealer 1,260,000
December 31
Accounts Receivable 15,000
(3,000,000 × 0.425) = 1,275,000 – 1,260,000
Transaction 15,000
Amortization Expense (60,000 × 3/4) 45,000

12-5 (Continued)
January 31
Accounts Receivable 30,000
($3,000,000 × 0.435) = $1,305,000 – $1,275,000

Investment in FC 1,305,000
Accounts Receivable 1,305,000
Cash 1,200,000
FC Payable to Exchange Dealer 1,305,000
Dollars Receivable from Exchange Dealer 1,200,000
Amortization Expense 15,000

12-6
July 15 Purchases 750,000

Cash 150,000
(88,500,000 yen / 118)
Oct. 13 Accounts Payable 600,000

Cash 621,053
(70,800,000 yen / 114)
Interest Expense 12,421

Cash 12,421
(70,800,000 yen × (90/360) × 8% = 1,416,000 yen / 114 = 12,421)
12-7
Nov. 1, 2010 FC Receivable from Exchange Dealer 1,022,000
Dollars Payable to Exchange Dealer 1,022,000
(700,000 × $1.46)
Dec. 31, 2010 Transaction Loss 14,000

(700,000 × ($1.44 – $1.46))
12-7 (Continued)
Jan. 31, 2011 Dollars Payable to Exchange Dealer 1,022,000

Cash 1,022,000
FC Receivable from Exchange Dealer 1,008,000
Cash 1,008,000
12-8
Nov. 1 Dollars Receivable from Exchange Dealer (500,000 × $0.0948) 47,400

Dec. 31 FC Payable from Exchange Dealer 200

Foreign Exchange Gain
200 [(500,000 × ($0.0948 - $0.0944)]
Foreign Exchange Loss 200

Firm Commitment
200 [(500,000 × ($0.0948 - $0.0944)]
Feb. 1 Foreign Exchange Loss 150

FC Payable from Exchange Dealer
150 [(500,000 × ($0.0944 - $0.0947)]
Firm Commitment 150

Foreign Exchange Gain
150 [(500,000 × ($0.0944 - $0.0947)]
Investment in FC 47,350
Firm Commitment 50
Sales (500,000 × $0.0948) 47,400
Cash 47,400
Investment in FC 47,350

Inventory 20,000

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING REVIEW

CONSOLIDATED FINANCIAL STATEMENTS AFTER ACQUISITION

4. Under the cost method, the workpaper entry to establish reciprocity

5. Under the cost method, the investment account is reduced when

6. The parent company records its share of a subsidiary‟s income by

Cost Method Partial Equity Method

Use the following information in answering questions 17 and 18.

Use the following information in answering questions 23 and 24.

Use the following information to answer questions 26 and 27

Use the following information to answer questions 29 and 30.

A. Prepare the workpaper eliminating entries for a consolidated statements workpaper on

B. Calculate the controlling interest in consolidated net income for 2011.

Common stock $220,000

Common stock, $20 par value $400,000

Cash $30,000 Current Liabilities $40,000

Total Assets $560,000 Total Liabilities and Equities $560,000

1. b 8. d 15. a 22. b 29. c

4-1 A. Dividend Income (80,000 × .80) 64,000

Common Stock – Stahl 925,000*

*[(1,040,000 – 60,000)/.8] – 300,000

4-2 A. Dividend Income (8,000 × .90) 7,200

Common Stock - Shipley 90,000

*BV=[90,000 + 40,000 + 50,000 + (160,000 × 9/12)] = $300,000

B. Controlling interest in Consolidated Net Income

4-3 A. Investment in Stanley Company 600,000

Investment in Stanley Company

Cash (.80 × 120,000) 96,000

B. Equity in Subsidiary Income 216,000

Common Stock – Stanley 220,000

4-4 A. Cash 48,000

$295,000 – $210,000 + $60,000 = $145,000 Retained Earnings on 1/1/11

Common Stock – Selby 540,000

Implied Value = $680,000/.80 = $850,000. Diff = $850,000 – $805,000BV.

4-5 Equity in Subsidiary Income 270,000

Common Stock – S 400,000

Investment in Sax Company 36,000

Equity in Subsidiary Income ($75,000*/20) 3,750

* $675,000/.8 – $750,000 = $93,750 write-up of PPE; Parent‟s share = 80%, or $75,000

Investment in Sax Company 48,000

Equity in Subsidiary Income 3,750

4-7 Workpaper entries 12/31/11

Dividend Income 36,000

Common Stock - Silk Company# 1,800,000

Computation and Allocation of Difference between Implied and Book Value

Parent Non- Entire

4-8 A. Investment in Small 525,000

Investment in Small ($222,000)(.85) 188,700

Cash ($75,000)(.85) 63,750

B. Equity in Subsidiary Income 188,700

Common Stock - Small 150,000

Computation and Allocation of Difference between Implied and Book Value

A. Picture Company 2011 equity-method income:

Proportionate share of reported income ($30,000 x .40) $ 12,000

Purchase price $150,000

B. Dividend income, 2011 ($9,000 x .40) $ 3,600

C. Cost-method account balance (unchanged): $150,000

Equity-method account balance:

Allocation and Depreciation of Differences Between Implied and Book Value

Use the following information to answer questions 17 through 20.

Saturn Co. Saturn Co.

Cash $ 18,000 $155,000 $155,000

Accounts payable $156,000 $105,000 $105,000

17. What amount of inventory will be reported?

18. What amount of goodwill will be reported?