Accounting

Multiple-choice Questions (5 marks)

1. 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.
2. Phobos Company holds 80 percent of Deimos Company’s voting shares. During the preparation of consolidated financial statements for 20X9, the following eliminating entry was made:

Which of the following statements is correct?

A. Phobos Company purchased land from Deimos Company during 20X9.

B. Phobos Company purchased land from Deimos Company before January 1, 20X9.
C. Deimos Company purchased land from Phobos Company during 20X9.
D. Deimos Company purchased land from Phobos Company before January 1, 20X9.
3. 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
4. Parent Company owns 70% of Son Company’s outstanding stock. During 20X1 Son Company sold land to Parent Company for a gain of $25,000. Parent company held the land all of 20X1. The gain on the sale to Parent should be:
A. recorded on Son’s books as a gain of $25,000 and then eliminated during the consolidation process.
B. deferred by Son until Parent sells the land to an outside party.
C. recorded on Son’s books as a gain of $17,500 and eliminated during the consolidation process.
D. recorded on Parent’s book as a gain of $17,500 and eliminated during the consolidation process.
5. Using the fully adjusted equity method, an intercompany gain on an upstream sale of land is:
A. recognized by the parent and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary.
B. recognized by the subsidiary and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary.
C. deferred by the subsidiary until the land is sold to an entity outside the consolidated group.
D. recognized by the subsidiary and the deferral is completely allocated to the controlling stockholders of the subsidiary.
6. Based on the information provided, in the preparation of the 20X8 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
7. On January 1, 20X9, 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, 20X9, consolidated balance sheet, this tractor should be included in fixed-asset cost and accumulated depreciation as:

A. Option A
B. Option B
C. Option C
D. Option Mortar Corporation acquired 80 percent of Granite Corporation’s voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, 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.

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8. Based on the preceding information, in the preparation of the 20X8 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.

9. Based on the preceding information, the gain on sale of the equipment recorded by Mortar for 20X8 is:
A. $150,000
B. $65,000

C. $110,000 D. $40,000

10.. Based on the preceding information, in the preparation of the 20X9 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.

Long essay question (5 marks)

Q1. On January 1, 20X7, Jones Company acquired 90 percent of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent was still in Jones’ ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith use perpetual inventory systems. Income and dividend information for both Jones and Smith for 20X7 and 20X8 are as follows:

Assume Jones uses the fully adjusted equity method to account for its investment in Smith.

Required:
Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7

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