TEST BANK FOR ADVANCED
FINANCIAL ACCOUNTING 13TH
EDITION BY THEODORE
CHRISTENSEN CHAPTER 1 - 20
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, Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
When land is sold in an Upstream Sale(Sub to Parent) in a prior yr., you eliminate the Gain in
subsequent yrs. from Beginning Retained Earnings of the Sub. Although the Gain was
eliminated on the prior yr.'s working paper, it remained on Sub's books and was closed to
Retained Earnings in the yr. of the sale.)
On a worksheet prepared to consolidate the financial statements of a parent and subsidiary,
elimination entries made to remove intercompany Gains on downstream sales of land sold in
prior years will affect which account? Investment in Subsidiary
(Explanation: Yr. of Sale Elimination Entry
(I) DR Gain on Sale of Land 20,000
CR Land 20,000
Yr. 2 on, as long as Parent still has Land
(I) DR Inv. in Sub 20,000
CR Land 20,000
When Downstream Sales occur, in subsequent yrs. you ADD the unconfirmed Gain to the
Investment Account.
Parent sold Sub land in a prior year for a gain of $40,000. The land is still held by Sub. Parent
owns 80% of Sub. The elimination entry necessary for this intercompany transaction on the
current year's worksheet includes: A Debit to the Investment Account for $40,000
(Explanation:
Yr. of Sale Entry (I)
DR Gain on Sale of Land 40,000
CR Land 40,000
To reduce the Land to the Original Cost
Subsequent Yr, Entry (I)
DR Inv. in Sub 40,000
CR Land 40,000
To reduce the Land to Original Acquis. Cost
A parent provides services to a subsidiary, at a markup of 20% over cost. The subsidiary
reports the cost of the services as part of its operating expenses. What elimination entry is
necessary with respect to this intercompany transaction? )I) Entry
DR Sales Revenue
CR Operating Expenses
For the price the subsidiary PAID for the services
(Explanation: If the services were proveded on Account the eliminating entries would include:
(I-1)
DR Accounts Payable (Total $ of Service with Markup)
, CR Accounts Recievable (Total $ of Service with Markup)
To eliminate intercompany payables/recievables
(I-2)
DR Service Revenue (Total $ of Service with Markup)
CR Operating Expenses (Total $ of Service with Markup)
To eliminate the intercompany revenues/expenses
Parent sold Sub some land at a gain in 2012. Sub still holds the land. On a work paper prepared
to consolidate the financial statements of a parent and a subsidiary in 2014, the elimination
entry connected with this land includes a debit to: Investment in S, because the gain reduced
the Investment account in 2012
Which statement is false concerning the elimination entries required for intercompany sales of
land from a subsidiary to its parent? If Sub sold the land to Parent in 2013 and Parent sells the
land to outsiders in 2014, no elimination entries are required in 2014
Parent owns 75% of the outstanding voting stock of Sub. During 2013, Parent sold inventory
priced at $1,000,000 to Sub, and Parent's profits on these sales amounted to $50,000.
All inventory sold by Parent to Sub was sold by Sub to outside customers during 2013.
Here is what Parent and Sub report for total sales, cost of goods sold, and ending inventory at
December 31, 2013 (for total sales between Parent and Sub and to outside customers).
Parent's books-Inventory $300,000
Sales revenue $5,000,000
COGS $4,000,000
Sub's Books-Inventory $150,000
Sale Revenue $3,500,000
COGS $2,700,000.
At what amounts should the 2013 consolidated financial statements report these three
balances?
Inventory, Sales revenue, & Cost of goods sold Inventory-$450,000
Sales Revenue-$7,500,000
COGS-$5,700,000
A parent company sells equipment to its subsidiary on January 1, 2012 for $100,000. At the
time, the equipment was reported on the parent's books at an original cost of $85,000 and
accumulated depreciation of $25,000. The remaining life of the equipment as of January 1,
2012 is six years, and straight-line depreciation, no residual value is used. At what net value
should this equipment be reported on a December 31, 2013 consolidated balance sheet?
$40,000
(Explanation: Original Cost for Parent $85,000-25,000(acc. dep.)= $60,000
Depreciation is based on Original cost for Parent because they are consolidating the financial
statements, which is $60,000/6 yr life remaining=$10,000 yr.; $10,000x2=$20,000; $60,000-
$20,000=$40,000
A parent owns 90% of a subsidiary. The parent provides marketing services to the subsidiary
during 2014. The parent charged the subsidiary $1,000,000 for the services. The services cost
the parent $700,000. Which statement is TRUE concerning the consolidation elimination entry
or entries related to the intercompany services? Service revenue is reduced by $1,000,000
in elimination I.
