accounting-What is the primary reason we defer financial statement recognition

QUESTION

1.

What is the primary reason we defer financial statement
recognition of gross profits on intra-entity sales for goods that remain within
the consolidated entity at year-end?

a. Revenues and
COGS must be recognized for all intra-entity sales regardless of whether the
sales are upstream or downstream.
b. Intra-entity
sales result in gross profit overstatements regardless of amounts remaining in
ending inventory.
c. Gross profits
must be deferred indefinitely because sales among affiliates always remain in
the consolidated group.
d. When
intra-entity sales remain in ending inventory, ownership of the goods has not
changed.
2.

King Corporation owns 80 percent of Lee Corporation’s common
stock. During October, Lee sold merchandise to King for $100,000. At December
31, 50 percent of this merchandise remains in King’s inventory. Gross profit
percentages were 30 percent for King and 40 percent for Lee. The amount of unrealized
intra-entity profit in ending inventory at December 31 that should be
eliminated in the consolidation process is

a. $40,000.
b. $20,000.
c. $16,000.
d. $15,000.

(AICPA adapted)

3.

In computing the noncontrolling interest’s share of
consolidated net income, how should the subsidiary’s net income be adjusted for
intra-entity transfers?

a. The
subsidiary’s reported net income is adjusted for the impact of upstream
transfers prior to computing the noncontrolling interest’s allocation.
b. The
subsidiary’s reported income is adjusted for the impact of all transfers prior
to computing the noncontrolling interest’s allocation.
c. The
subsidiary’s reported income is not adjusted for the impact of transfers prior
to computing the noncontrolling interest’s allocation.
d. The
subsidiary’s reported income is adjusted for the impact of downstream transfers
prior to computing the noncontrolling interest’s allocation.
9.

Wallton Corporation owns 70 percent of the outstanding stock
of Hastings, Incorporated. On January 1, 2011, Wallton acquired a building with
a 10-year life for $300,000. Wallton anticipated no salvage value, and the
building was to be depreciated on the straight-line basis. On January 1, 2013,
Wallton sold this building to Hastings for $280,000. At that time, the building
had a remaining life of eight years but still no expected salvage value. In
preparing financial statements for 2013, how does this transfer affect the
computation of consolidated net income?

a. Income must be
reduced by $32,000.
b. Income must be
reduced by $35,000.
c. Income must be
reduced by $36,000.
d. Income must be
reduced by $40,000.
16.

Following are several figures reported for Preston and
Sanchez as of December 31, 2013:
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Preston acquired 70 percent of Sanchez in January 2012. In
allocating the newly acquired subsidiary’s fair value at the acquisition date,
Preston noted that Sanchez had developed a customer list worth $65,000 that was
unrecorded on its accounting records and had a five-year remaining life. Any
remaining excess fair value over Sanchez’s book value was attributed to
goodwill. During 2013, Sanchez sells inventory costing $120,000 to Preston for
$160,000. Of this amount, 20 percent remains unsold in Preston’s warehouse at
year-end. For Preston’s consolidated reports, determine the following amounts
to be reported for the current year.

Inventory
Sales
Cost of Goods Sold
Operating Expenses
Noncontrolling Interest in the Subsidiary’s
Net Income

ANSWER:

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