Chap 006

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Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
Chapter 06
Intercompany Transfers of Services and Noncurrent Assets
Multiple Choice Questions
1. Blue Company owns 70 percent of Black Company's outstanding common stock. On

December 31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying
amount, but less than its original cost. On a consolidated balance sheet at December 31, 2008,
the carrying amount of the equipment should be reported at:
A. Blue's original cost.
B. Black's original cost.
C. Blue's original cost less Black's recorded gain.
D. Blue's original cost less 70 percent of Black's recorded gain.
2. A parent and its 80 percent owned subsidiary have made several intercompany sales of
noncurrent assets during the past two years. The amount of income assigned to the
noncontrolling interest for the second year should include the noncontrolling interest's share
of gains:
A. unrealized in the second year from upstream sales made in the second year.
B. realized in the second year from downstream sales made in both years.
C. realized in the second year from upstream sales made in both years.
D. both realized and unrealized from upstream sales made in the second year.
3. 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.
6-1
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Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 2008, Sky sold a
building to Earth for $33,000. Sky had purchased this building on January 1, 2006, for
$36,000. The building's original eight-year estimated total economic life remains unchanged.
Both companies use straight-line depreciation. The equipment's residual value is considered
negligible.
4. Based on the information provided, in the preparation of the 2008 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
5. Based on the information provided, the gain on sale of the building eliminated in the
consolidated financial statements for 2008 is:
A. $8,250.
B. $10,500.
C. $6,000.
D. $11,250.
6. Based on the information provided, while preparing the 2008 consolidated income
statement, depreciation expense will be:
A. debited for $750 in the eliminating entries.
B. credited for $750 in the eliminating entries.
C. credited for $1500 in the eliminating entries.
D. debited for $1500 in the eliminating entries.
7. Based on the information provided, in the preparation of the 2009 consolidated income
B. credited for $750 the eliminating entries.
6-2
8. Based on the information provided, in the preparation of a consolidated balance sheet at

January 1, 2009, retained earnings will be:
A. debited for $6,750 in the eliminating entries.
B. credited for $6,750 in the eliminating entries.
C. credited for $7,500 in the eliminating entries.
D. debited for $7,500 in the eliminating entries.
9. Phobos Company holds 80 percent of Deimos Company's voting shares. During the
preparation of consolidated financial statements for 2009, the following eliminating entry was
made:
Which of the following statements is correct?

A. Phobos Company purchased land from Deimos Company during 2009.
B. Phobos Company purchased land from Deimos Company before January 1, 2009.
C. Deimos Company purchased land from Phobos Company during 2009.
D. Deimos Company purchased land from Phobos Company before January 1, 2009.
ABC Corporation purchased land on January 1, 2006, for $50,000. On July 15, 2008, it sold
the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's
voting shares.
6-3
10. Based on the preceding information, what will be the workpaper eliminating entry to
remove the effects of the intercompany sale of land in preparing the consolidated financial
statements for 2008?
A. Option A
B. Option B
C. Option C
D. Option D
6-4
A. Option A
B. Option B
C. Option C
D. Option D
6-5
12. Which workpaper eliminating entry will be made on December 31, 2009, if XYZ
Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15,
2008, for $70,000?
A. Option A
B. Option B
C. Option C
D. Option D
Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on

January 1, 2007. On December 31, 2008, Mortar received $390,000 from Granite for a
equipment Mortar had purchased on January 1, 2005, 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.
13. Based on the preceding information, in the preparation of the 2008 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.
6-6
14. Based on the preceding information, the gain on sale of the equipment recorded by Mortar
for 2008 is:
A. $150,000
B. $65,000
C. $110,000
D. $40,000
16. Based on the preceding information, in the preparation of the 2009 consolidated income
C. debited for $15,000 in the eliminating entries.
D. credited for $25,000 in the eliminating entries.
17. Based on the preceding information, in the preparation of the 2009 consolidated balance
sheet, accumulated depreciation will be:

January 1, 2007. On January 1, 2008, Mortar received $350,000 from Granite for a equipment
Mortar had purchased on January 1, 2005, 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.
6-7
19. Based on the preceding information, the gain on sale of equipment recorded by Mortar for
2008 is:
A. $70,000.
B. $65,000.
C. $50,000.
D. $40,000.
A. Debited for $40,000 in the eliminating entries.
B. Credited for $10,000 in the eliminating entries.
C. Debited for $10,000 in the eliminating entries.
D. Credited for $40,000 in the eliminating entries.
6-8
On January 1, 2007, Servant Company purchased a machine with an expected economic life
of five years. On January 1, 2009, Servant sold the machine to Master Corporation and
recorded the following entry:
Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income
of $50,000, and Master reported income from its own operations of $100,000 for 2009. There
is no change in the estimated economic life of the equipment as a result of the intercorporate
transfer.
sheet, machine will be:
6-9
25. Based on the preceding information, income assigned to the noncontrolling interest in the
2009 consolidated income statement will be:
A. $12,000.
B. $14,000.
C. $12,500.
D. $48,000.
26. Based on the preceding information, consolidated net income for 2009 will be:
A. $150,000.
B. $100,000.
C. $148,000.
D. $130,000.
27. On January 1, 2009, 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, 2009, 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 D
6-10
Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1,
2003, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black
uses straight-line depreciation for all depreciable assets. On December 31, 2008, Blue
purchased the building from Black for $180,000. Blue reported income, excluding investment
income from Black, of $140,000 and $162,000 for 2008 and 2009, respectively. Black
reported net income of $30,000 and $45,000 for 2008 and 2009, respectively.
28. Based on the preceding information, the amount to be reported as consolidated net income
for 2008 will be:
A. $190,000.
B. $170,000.
C. $175,000.
D. $150,000.
29. Based on the preceding information, the amount of income assigned to the controlling
shareholders in the consolidated income statement for 2008 will be:
A. $190,000.
B. $170,000.
C. $175,000.
D. $150,000.
for 2009 will be:
A. $207,000.
B. $202,000.
C. $212,000.
D. $190,000.
A. $207,000.
B. $202,000.
C. $212,000.
D. $190,000.
6-11
32. Which of the following are examples of intercompany balances and transactions that must
be eliminated in preparing consolidated financial statements?
I. Security holdings
II. Interest and dividends
III. Sales and purchases
A. I, II
B. I, III
C. I, II, III
D. II
Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 2008.
This purchase followed a series of transactions between P-controlled subsidiaries. On
February 15, 2008, S3 Corporation purchased the land from a nonaffiliate for $160,000. It
sold the land to S2 Company for $145,000 on October 19, 2008, and S2 sold the land to S1
for $197,000 on November 27, 2008. Parent has control of the following companies:
Parent reported income from its separate operations of $200,000 for 2008.
33. Based on the preceding information, at what amount should the land be reported in the
consolidated balance sheet as of December 31, 2008?
A. $145,000
B. $220,000
C. $197,000
D. $160,000
6-12
34. Based on the preceding information, what amount of gain or loss on sale of land should be
reported in the consolidated income statement for 2008?
A. $60,000
B. $0
C. $75,000
D. $23,000
35. Based on the preceding information, what should be the amount of income assigned to the
controlling shareholders in the consolidated income statement for 2008?
A. $369,400
B. $405,000
C. $465,000
D. $60,000
Big Corporation receives management consulting services from its 92 percent owned
subsidiary, Small Inc. During 2007, Big paid Small $125,432 for its services. For the year
2008, Small billed Big $140,000 for such services and collected all but $7,900 by year-end.
Small's labor cost and other associated costs for the employees providing services to Big
totaled $86,000 in 2007 and $121,000 in 2008. Big reported $2,567,000 of income from its
own separate operations for 2008, and Small reported net income of $695,000.
36. Based on the preceding information, what amount of consolidated net income should be
reported in 2008?
A. $3,262,000
B. $4,050,000
C. $3,254,100
D. $3,122,000
37. Based on the preceding information, what amount of income should be assigned to the
noncontrolling shareholders in the consolidated income statement for 2008?
A. $47,700
B. $44,400
C. $55,600
D. $60,000
6-13
38. Based on the preceding information, what amount of receivable/payable should be

eliminated in the 2008 consolidated financial statements?
A. $125,432
B. $7,900
C. $5,560
D. $140,000
39. A parent sold land to its partially owned subsidiary during the year at a loss. The
subsidiary 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 intercompany loss.
B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net
income.
C. the parent's separate operating income, minus the intercompany loss.
D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's
net income.
40. 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
Essay Questions
6-14
41. Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on
March 21, 2005, at book value. At that date, the fair value of the noncontrolling interest was
equal to 25 percent of the book value of Winner Company. The companies' permanent
accounts on December 31, 2008, contained the following balances:
On January 1, 2004, Fred paid $150,000 for equipment with a 10-year expected total
economic life. The equipment was depreciated on a straight-line basis with no residual value.
Winner purchased the equipment from Fred on December 31, 2006, for $140,000. Winner
sold land it had purchased for $75,000 on February 18, 2004, to Fred for $60,000 on October
10, 2007.
Required: Prepare a consolidated balance sheet workpaper in good form as of December 31,
2008.
6-15
42. New Company acquired 75 percent of Old Company's stock at underlying book value on
January 1, 2008. At that date, the fair value of the noncontrolling interest was equal to 25
percent of the book value of Old Company. Old Company reported shares outstanding of
$350,000 and retained earnings of $100,000. During 2008, Old Company reported net income
of $60,000 and paid dividends of $3,000. In 2009, Old Company reported net income of
$90,000 and paid dividends of $15,000. The following transactions occurred between New
Company and Old Company in 2008 and 2009:
Old Co. sold computer equipment to New Co. for a $42,000 profit on December 26, 2008.
The equipment had a five-year estimated economic life remaining at the time of intercompany
transfer and is depreciated on a straight-line basis.
New sold land costing $90,000 to Old Company on June 28, 2009, for $110,000.
Required:
1) Give all eliminating entries needed to prepare a consolidation workpaper for 2009
assuming that New Co. uses the fully adjusted equity method to account for its investment in
Old Company.
assuming that New Co. uses the cost method to account for its investment in Old Company.
43. Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course
of 2008 Peter provides $100,000 of architectural services associated with Smith's new
manufacturing facility, which will open January 4, 2009, and has a 5 year useful life. Explain
the impact providing this service has on Peter Architectural Services' 2008 and 2009
consolidated financial statements.
6-16
44. PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent
owned subsidiary, on January 1, 2008. The cost of the land was $75,000, when it was
purchased in 2007. In 2010, Seven Star sells the land to Hot Properties Inc., an unrelated
entity, for $120,000. How is the land reported in the consolidated financial statements for
2008, 2009 and 2010?
Chapter 06 Intercompany Transfers of Services and Noncurrent Assets Answer

Key
Multiple Choice Questions
1. Blue Company owns 70 percent of Black Company's outstanding common stock. On

December 31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying
amount, but less than its original cost. On a consolidated balance sheet at December 31, 2008,
the carrying amount of the equipment should be reported at:
A. Blue's original cost.
B. Black's original cost.
C. Blue's original cost less Black's recorded gain.
D. Blue's original cost less 70 percent of Black's recorded gain.
AACSB: Analytic
AICPA: Reporting
6-17
2. A parent and its 80 percent owned subsidiary have made several intercompany sales of
noncurrent assets during the past two years. The amount of income assigned to the
noncontrolling interest for the second year should include the noncontrolling interest's share
of gains:
A. unrealized in the second year from upstream sales made in the second year.
B. realized in the second year from downstream sales made in both years.
C. realized in the second year from upstream sales made in both years.
D. both realized and unrealized from upstream sales made in the second year.
AACSB: Analytic
AICPA: Reporting
3. 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.
AACSB: Analytic
AICPA: Decision Making
Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 2008, Sky sold a
building to Earth for $33,000. Sky had purchased this building on January 1, 2006, for
$36,000. The building's original eight-year estimated total economic life remains unchanged.
Both companies use straight-line depreciation. The equipment's residual value is considered
negligible.
6-18
4. Based on the information provided, in the preparation of the 2008 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
AACSB: Analytic
AICPA: Measurement
5. Based on the information provided, the gain on sale of the building eliminated in the
consolidated financial statements for 2008 is:
A. $8,250.
B. $10,500.
C. $6,000.
D. $11,250.
AACSB: Analytic
AICPA: Measurement
6. Based on the information provided, while preparing the 2008 consolidated income
B. credited for $750 in the eliminating entries.
AACSB: Analytic
AICPA: Measurement
6-19
7. Based on the information provided, in the preparation of the 2009 consolidated income
B. credited for $750 the eliminating entries.
AACSB: Analytic
AICPA: Measurement
8. Based on the information provided, in the preparation of a consolidated balance sheet at

January 1, 2009, retained earnings will be:
AACSB: Analytic
AICPA: Measurement
9. Phobos Company holds 80 percent of Deimos Company's voting shares. During the
preparation of consolidated financial statements for 2009, the following eliminating entry was
made:
Which of the following statements is correct?

A. Phobos Company purchased land from Deimos Company during 2009.
B. Phobos Company purchased land from Deimos Company before January 1, 2009.
C. Deimos Company purchased land from Phobos Company during 2009.
D. Deimos Company purchased land from Phobos Company before January 1, 2009.
AACSB: Analytic
AICPA: Measurement
6-20
ABC Corporation purchased land on January 1, 2006, for $50,000. On July 15, 2008, it sold
the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's
voting shares.
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
6-21
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
6-22
12. Which workpaper eliminating entry will be made on December 31, 2009, if XYZ
Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15,
2008, for $70,000?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement

January 1, 2007. On December 31, 2008, Mortar received $390,000 from Granite for a
equipment Mortar had purchased on January 1, 2005, 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.
6-23
AACSB: Analytic
AICPA: Measurement
14. Based on the preceding information, the gain on sale of the equipment recorded by Mortar
for 2008 is:
A. $150,000
B. $65,000
C. $110,000
D. $40,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
6-24
C. debited for $15,000 in the eliminating entries.
D. credited for $25,000 in the eliminating entries.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement

January 1, 2007. On January 1, 2008, Mortar received $350,000 from Granite for a equipment
Mortar had purchased on January 1, 2005, 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.
AACSB: Analytic
AICPA: Measurement
6-25
19. Based on the preceding information, the gain on sale of equipment recorded by Mortar for
2008 is:
A. $70,000.
B. $65,000.
C. $50,000.
D. $40,000.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
6-26
AACSB: Analytic
AICPA: Measurement
On January 1, 2007, Servant Company purchased a machine with an expected economic life
of five years. On January 1, 2009, Servant sold the machine to Master Corporation and
recorded the following entry:
Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income
of $50,000, and Master reported income from its own operations of $100,000 for 2009. There
is no change in the estimated economic life of the equipment as a result of the intercorporate
transfer.
AACSB: Analytic
AICPA: Measurement
6-27
sheet, machine will be:
AACSB: Analytic
AICPA: Measurement
25. Based on the preceding information, income assigned to the noncontrolling interest in the
2009 consolidated income statement will be:
A. $12,000.
B. $14,000.
C. $12,500.
D. $48,000.
AACSB: Analytic
AICPA: Measurement
26. Based on the preceding information, consolidated net income for 2009 will be:
A. $150,000.
B. $100,000.
C. $148,000.
D. $130,000.
AACSB: Analytic
AICPA: Measurement
6-28
27. On January 1, 2009, 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, 2009, 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 D
AACSB: Analytic
AICPA: Measurement
Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1,
2003, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black
uses straight-line depreciation for all depreciable assets. On December 31, 2008, Blue
purchased the building from Black for $180,000. Blue reported income, excluding investment
income from Black, of $140,000 and $162,000 for 2008 and 2009, respectively. Black
reported net income of $30,000 and $45,000 for 2008 and 2009, respectively.
for 2008 will be:
A. $190,000.
B. $170,000.
C. $175,000.
D. $150,000.
AACSB: Analytic
AICPA: Measurement
6-29
A. $190,000.
B. $170,000.
C. $175,000.
D. $150,000.
AACSB: Analytic
AICPA: Measurement
for 2009 will be:
A. $207,000.
B. $202,000.
C. $212,000.
D. $190,000.
AACSB: Analytic
AICPA: Measurement
A. $207,000.
B. $202,000.
C. $212,000.
D. $190,000.
AACSB: Analytic
AICPA: Measurement
6-30
32. Which of the following are examples of intercompany balances and transactions that must
be eliminated in preparing consolidated financial statements?
I. Security holdings
II. Interest and dividends
III. Sales and purchases
A. I, II
B. I, III
C. I, II, III
D. II
AACSB: Analytic
AICPA: Reporting
Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 2008.
This purchase followed a series of transactions between P-controlled subsidiaries. On
February 15, 2008, S3 Corporation purchased the land from a nonaffiliate for $160,000. It
sold the land to S2 Company for $145,000 on October 19, 2008, and S2 sold the land to S1
for $197,000 on November 27, 2008. Parent has control of the following companies:
Parent reported income from its separate operations of $200,000 for 2008.
33. Based on the preceding information, at what amount should the land be reported in the
consolidated balance sheet as of December 31, 2008?
A. $145,000
B. $220,000
C. $197,000
D. $160,000
AACSB: Analytic
AICPA: Measurement
6-31
34. Based on the preceding information, what amount of gain or loss on sale of land should be
reported in the consolidated income statement for 2008?
A. $60,000
B. $0
C. $75,000
D. $23,000
AACSB: Analytic
AICPA: Measurement
35. Based on the preceding information, what should be the amount of income assigned to the
controlling shareholders in the consolidated income statement for 2008?
A. $369,400
B. $405,000
C. $465,000
D. $60,000
AACSB: Analytic
AICPA: Measurement
Big Corporation receives management consulting services from its 92 percent owned
subsidiary, Small Inc. During 2007, Big paid Small $125,432 for its services. For the year
2008, Small billed Big $140,000 for such services and collected all but $7,900 by year-end.
Small's labor cost and other associated costs for the employees providing services to Big
totaled $86,000 in 2007 and $121,000 in 2008. Big reported $2,567,000 of income from its
own separate operations for 2008, and Small reported net income of $695,000.
36. Based on the preceding information, what amount of consolidated net income should be
reported in 2008?
A. $3,262,000
B. $4,050,000
C. $3,254,100
D. $3,122,000
AACSB: Analytic
AICPA: Measurement
6-32
37. Based on the preceding information, what amount of income should be assigned to the
noncontrolling shareholders in the consolidated income statement for 2008?
A. $47,700
B. $44,400
C. $55,600
D. $60,000
AACSB: Analytic
AICPA: Measurement
38. Based on the preceding information, what amount of receivable/payable should be

eliminated in the 2008 consolidated financial statements?
A. $125,432
B. $7,900
C. $5,560
D. $140,000
AACSB: Analytic
AICPA: Measurement
39. A parent sold land to its partially owned subsidiary during the year at a loss. The
subsidiary 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 intercompany loss.
B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net
income.
C. the parent's separate operating income, minus the intercompany loss.
D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's
net income.
AACSB: Analytic
AICPA: Reporting
6-33
40. 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
AACSB: Analytic
AICPA: Reporting
Essay Questions
6-34
41. Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on
March 21, 2005, at book value. At that date, the fair value of the noncontrolling interest was
equal to 25 percent of the book value of Winner Company. The companies' permanent
accounts on December 31, 2008, contained the following balances:
On January 1, 2004, Fred paid $150,000 for equipment with a 10-year expected total
economic life. The equipment was depreciated on a straight-line basis with no residual value.
Winner purchased the equipment from Fred on December 31, 2006, for $140,000. Winner
sold land it had purchased for $75,000 on February 18, 2004, to Fred for $60,000 on October
10, 2007.
Required: Prepare a consolidated balance sheet workpaper in good form as of December 31,
2008.
6-35
Eliminating entries:
6-36
AACSB: Analytic
AICPA: Measurement
6-37
42. New Company acquired 75 percent of Old Company's stock at underlying book value on
January 1, 2008. At that date, the fair value of the noncontrolling interest was equal to 25
percent of the book value of Old Company. Old Company reported shares outstanding of
$350,000 and retained earnings of $100,000. During 2008, Old Company reported net income
of $60,000 and paid dividends of $3,000. In 2009, Old Company reported net income of
$90,000 and paid dividends of $15,000. The following transactions occurred between New
Company and Old Company in 2008 and 2009:
Old Co. sold computer equipment to New Co. for a $42,000 profit on December 26, 2008.
The equipment had a five-year estimated economic life remaining at the time of intercompany
transfer and is depreciated on a straight-line basis.
New sold land costing $90,000 to Old Company on June 28, 2009, for $110,000.
Required:
assuming that New Co. uses the fully adjusted equity method to account for its investment in
Old Company.
assuming that New Co. uses the cost method to account for its investment in Old Company.
6-38
1) Fully Adjusted Equity Method Eliminating Entries, December 31, 2009:
2) Cost Method Eliminating Entries, December 31, 2009:
6-39
AACSB: Analytic
AICPA: Measurement
6-40
43. Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course
of 2008 Peter provides $100,000 of architectural services associated with Smith's new
manufacturing facility, which will open January 4, 2009, and has a 5 year useful life. Explain
the impact providing this service has on Peter Architectural Services' 2008 and 2009
consolidated financial statements.
Peter has provided a service to the subsidiary Smith. During 2008 the cost of the architectural
services will be capitalized by Smith as part of the cost of the manufacturing facility. The
profit earned on the consulting services must be eliminated in 2008 against the cost of the
building. In this manner consolidated net income is not overstated.
Beginning in 2009 the intercompany profit would be realized over a 5 year period. In each of
the years, depreciation expense is decreased and consolidated net income is increased; as
income to the controlling interests.
AACSB: Communication
AICPA: Decision Making
44. PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent
owned subsidiary, on January 1, 2008. The cost of the land was $75,000, when it was
purchased in 2007. In 2010, Seven Star sells the land to Hot Properties Inc., an unrelated
entity, for $120,000. How is the land reported in the consolidated financial statements for
2008, 2009 and 2010?
PeopleMag cannot report a gain on the sale of land for 2008 or 2009 in the consolidated
financial statements. The land must be reported on the consolidated balance sheet at its
original cost of $75,000. The intercompany gain is unrealized and is eliminated. In 2010, the
entire gain of $45,000 ($120,000 - $75,000) is realized and recognized when the land is sold
to an outside party.
AACSB: Communication
AICPA: Reporting
6-41

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Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Multiple Choice Questions

1. Blue Company owns 70 percent of Black Company's outstanding common stock. On

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

8. Based on the information provided, in the preparation of a consolidated balance sheet at

Which of the following statements is correct?

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

38. Based on the preceding information, what amount of receivable/payable should be

I. in the year of the downstream sale.

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 Intercompany Transfers of Services and Noncurrent Assets Answer

Multiple Choice Questions

1. Blue Company owns 70 percent of Black Company's outstanding common stock. On

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

8. Based on the information provided, in the preparation of a consolidated balance sheet at

Which of the following statements is correct?

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

38. Based on the preceding information, what amount of receivable/payable should be

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

I. in the year of the downstream sale.

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

1) Fully Adjusted Equity Method Eliminating Entries, December 31, 2009:

2) Cost Method Eliminating Entries, December 31, 2009:

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets

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