ACCT415 Chapter 6
Playa Inc. owns 85 percent of Seashore Inc. During 20X8, Playa sold goods with a 25 percent gross profit to
Seashore. Seashore sold all of these goods in 20X8. How should 20X8 consolidated income statement items be
adjusted?
A) No adjustment is necessary.
B) Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales.
C) Net income should be reduced by 85 percent of the gross profit on intercompany sales.
D) Sales and cost of goods sold should be reduced by the intercompany sales
D) Sales and cost of goods sold should be reduced by the intercompany sales
During the year a parent makes sales of inventory at a profit to its 75 percent owned subsidiary. The subsidiary also
makes sales of inventory at a profit to its parent during the same year. Both the parent and the subsidiary have on
hand at the end of the year 20 percent of the inventory acquired from one another. Consolidated revenues for the
year should exclude:
A) 80 percent of the total revenues from intercompany sales.
B) total revenues from intercompany sales.
C) only the revenues from the subsidiary's intercompany sales.
D) only the revenues from the parent's intercompany sales.
B) total revenues from intercompany sales.
Consolidated net income may include the parent's separate operating income plus the parent's share of the
subsidiary's reported net income:
A) plus the unrealized profit on upstream intercompany sales of inventory made during the current year.
B) plus the profit realized this year from upstream intercompany sales of inventory made last year.
C) plus unrealized profit on downstream intercompany sales of inventory made during the current year.
D) minus the parent's share of profit realized this year from upstream intercompany sales of inventory made last year.
B) plus the profit realized this year from upstream intercompany sales of inventory made last year.
Perth Corporation owns 90 percent of Sydney Company's stock. At the end of 20X8, Perth and Sydney reported the
following partial operating results and inventory balances:
P Corp S Corp
Total sales $500,000 $350,000
Sales to Sydney Company 100,000
Sales to Perth Corporation 150,000
Net income 15,000
Operating income (excluding investment income from Sydney)
56,000
Inventory on hand, December 31, 20X8, purchased from:
Sydney Company 36,000
Perth Corporation 31,000
Perth regularly prices its products at cost plus a 30 percent markup for profit. Sydney prices its sales at cost plus a 10
percent markup. The total sales reported by Perth and Sydney include both intercompany sales and sales to
nonaffiliates.
,Based on the information given above, what amount of sales will be reported in the consolidated income statement
for 20X8?
A) $500,000
B) $850,000
C) $600,000
D) $800,000
C) $600,000
A newly created subsidiary sold all of its inventory to its parent at a profit in its first year of existence. The parent, in
turn, sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The parent had no other
sales during the year. The amount that should be reported as cost of goods sold in this year's consolidated income
statement should be:
A) 80 percent of the amount reported as intercompany sales by the subsidiary.
B) 80 percent of the amount reported as cost of goods sold by the subsidiary.
C) the amount reported as cost of goods sold by the parent minus unrealized profit in the ending inventory of the
parent.
D) 80 percent of the amount reported as cost of goods sold by the parent.
B) 80 percent of the amount reported as cost of goods sold by the subsidiary.
Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's
stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1
then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000
of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8.
Based on the information given above, what amount should be reported in the 20X8 consolidated income statement
as cost of goods sold?
A) $36,000
B) $12,000
C) $48,000
D) $45,000
A) $36,000
Pole Corporation owns 65 percent of Stick Company's stock. At the end of 20X3, Pole and Stick reported the
following partial operating results and inventory balances:
P Corp S Corp
Total sales $750,000 $200,000
Sales to Stick Company 150,000
Sales to Pole Corporation 75,000
Net income 35,000
Operating income (excluding investment income from Stick)
73,000
Inventory on hand, December 31, 20X8, purchased from:
Sydney Company 11,000
Perth Corporation 62,000
Pole regularly prices its products at cost plus a 40 percent markup for profit. Stick prices its sales at cost plus a 25
percent markup. The total sales reported by Pole and Stick include both intercompany sales and sales to
nonaffiliates.
Based on the information given above, what balance will be reported for inventory in the consolidated balance sheet
for December 31, 20X3?
, A) $8,800
B) $44,286
C) $53,086
D) $73,000
C) $53,086
Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating:
A) all unrealized profit in downstream intercompany inventory sales, and unrealized profit in upstream intercompany
inventory sales made during the current year.
B) all unrealized profit in downstream intercompany inventory sales, and the noncontrolling interest's share of
unrealized profit in upstream inventory sales made during the current year.
C) the controlling interest's share of unrealized profit in downstream intercompany sales, and the controlling interest's
share of unrealized profit in upstream sales made during the current year.
D) all unrealized profit in downstream intercompany sales, and the noncontrolling interest's share of unrealized profit
in upstream sales made during the current year.
A) all unrealized profit in downstream intercompany inventory sales, and unrealized profit in upstream
intercompany inventory sales made during the current year.
When a parent and its subsidiary use a periodic inventory system rather than a perpetual system, the income and
asset balances reported in the consolidated financial statements are:
I. affected only if there are upstream intercompany sales of inventory.
II. affected only if there are downstream intercompany sales of inventory.
A) I
B) II
C) Both I and II
D) Neither I nor II
D) Neither I nor II
Pirate Corporation acquired 85 percent of Ship Company's voting shares of stock in 20X7. During 20X8, Pirate
purchased 50,000 circuit boards for $15 each and sold 28,000 of them to Ship for $20 each. Ship sold all of the units
to unrelated entities prior to December 31, 20X8, for $30 each. Both companies use perpetual inventory systems.
Which worksheet consolidating entry is needed in preparing consolidated financial statements for 20X8 to remove all
effects of the intercompany sale?
A. Sales 560,000
Cost of Goods Sold 560,000
B. Sales 650,000
Cost of Goods Sold 650,000
C. Cost of Goods Sold 560,000
Sales 560,000
D. Cost of Goods Sold 650,000
Sales 650,000
A) Option A
B) Option B
C) Option C
D) Option D
A) Option A
Playa Inc. owns 85 percent of Seashore Inc. During 20X8, Playa sold goods with a 25 percent gross profit to
Seashore. Seashore sold all of these goods in 20X8. How should 20X8 consolidated income statement items be
adjusted?
A) No adjustment is necessary.
B) Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales.
C) Net income should be reduced by 85 percent of the gross profit on intercompany sales.
D) Sales and cost of goods sold should be reduced by the intercompany sales
D) Sales and cost of goods sold should be reduced by the intercompany sales
During the year a parent makes sales of inventory at a profit to its 75 percent owned subsidiary. The subsidiary also
makes sales of inventory at a profit to its parent during the same year. Both the parent and the subsidiary have on
hand at the end of the year 20 percent of the inventory acquired from one another. Consolidated revenues for the
year should exclude:
A) 80 percent of the total revenues from intercompany sales.
B) total revenues from intercompany sales.
C) only the revenues from the subsidiary's intercompany sales.
D) only the revenues from the parent's intercompany sales.
B) total revenues from intercompany sales.
Consolidated net income may include the parent's separate operating income plus the parent's share of the
subsidiary's reported net income:
A) plus the unrealized profit on upstream intercompany sales of inventory made during the current year.
B) plus the profit realized this year from upstream intercompany sales of inventory made last year.
C) plus unrealized profit on downstream intercompany sales of inventory made during the current year.
D) minus the parent's share of profit realized this year from upstream intercompany sales of inventory made last year.
B) plus the profit realized this year from upstream intercompany sales of inventory made last year.
Perth Corporation owns 90 percent of Sydney Company's stock. At the end of 20X8, Perth and Sydney reported the
following partial operating results and inventory balances:
P Corp S Corp
Total sales $500,000 $350,000
Sales to Sydney Company 100,000
Sales to Perth Corporation 150,000
Net income 15,000
Operating income (excluding investment income from Sydney)
56,000
Inventory on hand, December 31, 20X8, purchased from:
Sydney Company 36,000
Perth Corporation 31,000
Perth regularly prices its products at cost plus a 30 percent markup for profit. Sydney prices its sales at cost plus a 10
percent markup. The total sales reported by Perth and Sydney include both intercompany sales and sales to
nonaffiliates.
,Based on the information given above, what amount of sales will be reported in the consolidated income statement
for 20X8?
A) $500,000
B) $850,000
C) $600,000
D) $800,000
C) $600,000
A newly created subsidiary sold all of its inventory to its parent at a profit in its first year of existence. The parent, in
turn, sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The parent had no other
sales during the year. The amount that should be reported as cost of goods sold in this year's consolidated income
statement should be:
A) 80 percent of the amount reported as intercompany sales by the subsidiary.
B) 80 percent of the amount reported as cost of goods sold by the subsidiary.
C) the amount reported as cost of goods sold by the parent minus unrealized profit in the ending inventory of the
parent.
D) 80 percent of the amount reported as cost of goods sold by the parent.
B) 80 percent of the amount reported as cost of goods sold by the subsidiary.
Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's
stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1
then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000
of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8.
Based on the information given above, what amount should be reported in the 20X8 consolidated income statement
as cost of goods sold?
A) $36,000
B) $12,000
C) $48,000
D) $45,000
A) $36,000
Pole Corporation owns 65 percent of Stick Company's stock. At the end of 20X3, Pole and Stick reported the
following partial operating results and inventory balances:
P Corp S Corp
Total sales $750,000 $200,000
Sales to Stick Company 150,000
Sales to Pole Corporation 75,000
Net income 35,000
Operating income (excluding investment income from Stick)
73,000
Inventory on hand, December 31, 20X8, purchased from:
Sydney Company 11,000
Perth Corporation 62,000
Pole regularly prices its products at cost plus a 40 percent markup for profit. Stick prices its sales at cost plus a 25
percent markup. The total sales reported by Pole and Stick include both intercompany sales and sales to
nonaffiliates.
Based on the information given above, what balance will be reported for inventory in the consolidated balance sheet
for December 31, 20X3?
, A) $8,800
B) $44,286
C) $53,086
D) $73,000
C) $53,086
Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating:
A) all unrealized profit in downstream intercompany inventory sales, and unrealized profit in upstream intercompany
inventory sales made during the current year.
B) all unrealized profit in downstream intercompany inventory sales, and the noncontrolling interest's share of
unrealized profit in upstream inventory sales made during the current year.
C) the controlling interest's share of unrealized profit in downstream intercompany sales, and the controlling interest's
share of unrealized profit in upstream sales made during the current year.
D) all unrealized profit in downstream intercompany sales, and the noncontrolling interest's share of unrealized profit
in upstream sales made during the current year.
A) all unrealized profit in downstream intercompany inventory sales, and unrealized profit in upstream
intercompany inventory sales made during the current year.
When a parent and its subsidiary use a periodic inventory system rather than a perpetual system, the income and
asset balances reported in the consolidated financial statements are:
I. affected only if there are upstream intercompany sales of inventory.
II. affected only if there are downstream intercompany sales of inventory.
A) I
B) II
C) Both I and II
D) Neither I nor II
D) Neither I nor II
Pirate Corporation acquired 85 percent of Ship Company's voting shares of stock in 20X7. During 20X8, Pirate
purchased 50,000 circuit boards for $15 each and sold 28,000 of them to Ship for $20 each. Ship sold all of the units
to unrelated entities prior to December 31, 20X8, for $30 each. Both companies use perpetual inventory systems.
Which worksheet consolidating entry is needed in preparing consolidated financial statements for 20X8 to remove all
effects of the intercompany sale?
A. Sales 560,000
Cost of Goods Sold 560,000
B. Sales 650,000
Cost of Goods Sold 650,000
C. Cost of Goods Sold 560,000
Sales 560,000
D. Cost of Goods Sold 650,000
Sales 650,000
A) Option A
B) Option B
C) Option C
D) Option D
A) Option A
