adv acct hw part 2 solved

QUIZ 3 – INTERCOMPANY TRANSACTIONS
PART ONE – Multiple Choice
Select the one best answer to each item, and circle the appropriate letter.
1.Included in a working elimination (in journal entry format) for intercompany sales
of merchandise was a debit to Retained Earnings of Subsidiary. This
debit indicates that
a.the parent company sold merchandise to a partially owned subsidiary
b.a wholly owned subsidiary sold merchandise to a partially owned
subsidiary
c.a partially owned subsidiary sold merchandise to the parent or to another
subsidiary
d.the parent company sold merchandise to a wholly owned subsidiary.
2.Emron Company owns a 100% interest in the common stock of the Dietz Company. On January 1, 2016, Emron sold Dietz a fixed asset that Dietz will use over a 5-year period. The asset was sold at a $5,000 profit. In the consolidated statements, this profit will
a. not be recorded.
b. be recognized over 5 years.
c. be recognized in the year of sale.
d. be recognized when the asset is resold to outside parties at the end of its period of use.
3.Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 8%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current year’s consolidated statements?
a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.

b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c. Retirement of the bonds at a gain as of the purchase date.
d. Retirement of the bonds at a loss as of the purchase date.
4. In 2014, Purple Company sold land (which cost them $40,000 when purchased on 2008) to its 80%-
owned sub Silver Company for $37,000. In 2015, Silver sold the land to a nonaffiliated company for
$39,000. The 2017 worksheet elimination related to the land transactions should include:
a.a debit to Gain on Sale for $3,000.
b.a debit to Retained Earnings – P for $2,400.
c.a debit to Loss on Sale for $1,000.
d.a debit to Retained Earnings – P for $3,000
5. On 7/1/15, Sumac, an 80%-owned subsidiary of Pine, sold a patent to Pine for $100.000. The patent
was carried on Sumac’s books at $80,000. The patent had a remaining useful life of 5 years. The
elimination entry (entries) at 12/31/16 have the net effect of:
decreasing the Patent account by $20,000.
decreasing the Patent account by $14,000.
decreasing the Patent account by $12,000.
increasing Patent Amortization Expense by $2,000.
6.During 2016, a parent company billed its 100%-owned subsidiary for computer services at the rate of $1,000 per month. At year end, one month’s bill remained unpaid. As a part of the consolidation process, net income
a. should be reduced $12,000.
b. should be reduced $1,000.
c. needs no adjustment.
d. needs an adjustment, but the amount is not provided by this information.
PART TWO – Intercompany Inventory Transactions (18 points)
During 2016, Simon Company, an 80%-owned subsidiary of Peter Corporation, sold merchandise to Peter at a total selling price of $300,000. At 12/31/16, one-fourth of this merchandise remained in Peter’s inventory. During 2017, Simon’s sales to Peter were at a total selling price of $400,000, and one-fifth of this merchandise was in Peter’s inventory at 12/31/17. Simon’s gross profit rate on all intercompany sales was 40%.
Prepare all worksheet eliminations (in journal entry format) for Peter Corporation and subsidiary that would be made on the 2017 consolidated worksheet as a result of these inventory transactions. Show all computations.
Answer
Compute unrealized profits
for 2016
300,000*1/4*40%= 30,000
for 2017
400,000*1/5*40%= 32,000
Worksheet for 2017
item DrCr
Profit and Loss A/C 2000 Stock Reserve 2000
Nb: 32,000-30,000