Flashcards in FAR 45 - Intercompany Trans and Bal 1 - Trans & Balance/Inventory Deck (19):
Pride, Inc. owns 80% of Simba, Inc.'s outstanding common stock. Simba, in turn, owns 10% of Pride's outstanding common stock.
What percentage of the common stock cash dividends declared by the individual companies should be reported as dividends declared in the consolidated financial statements?
Dividends declared by Pride
Dividends declared by Simba
Dividends declared by Pride = 90%
Dividends declared by Simba = 0%
Subsidiary dividends are never considered part of consolidated dividends. They are either eliminated in the consolidation entries or allocated to reducing non-controlling interests. In this problem, 80% of Simba's dividends will be eliminated as intercompany, and 20% will be allocated to reducing non-controlling interest.
In addition, since 10% of the dividends of Pride never go outside the consolidated entity, they are not considered dividends of the consolidated entity either.
Which one of the following is not a characteristic associated with intercompany transactions?
A. Intercompany transactions must be eliminated in the consolidating process.
B. Gains and losses must be eliminated in the consolidating process.
C. Transactions that originate with a subsidiary must be eliminated in the consolidating process.
D. Transactions between two subsidiaries to be consolidated with the same parent do not need to be eliminated.
D. Intercompany transactions between two subsidiaries that will be consolidated with the same parent do need to be eliminated. Intercompany transactions (i.e., transactions between affiliated firms) must be eliminated regardless of whether the transactions are between the parent and its subsidiaries or between two subsidiaries of the same parent. The consolidated financial statements must reflect accounts and amounts as though intercompany transactions never occurred.
During 2008, Popco acquired 80% of the voting stock of Sonco in a legal acquisition. Which one of the following is least likely to be a type of intercompany balance that results from transactions between Popco and Sonco during 2009?
C. Goodwill will occur on the date of a business combination as a result of the parent paying more for its investment in a subsidiary than the fair value of identifiable net assets acquired. Goodwill does not occur as a result of operating period transactions between a parent and its subsidiaries.
T/F: If a parent has both intercompany interest receivable and intercompany interest revenue from the same subsidiary, that receivable and revenue would be eliminated against each other in the consolidating process.
The interest receivable and interest revenue would be eliminated, but would be separate entries in the consolidating process.
T/F: Only asset and liability account balances may result from intercompany transactions.
Equity account balances may also be affected by IC trans.
T/F: If a parent has revenue earned from a 60% owned subsidiary, in the consolidating process 100% of that revenue would be eliminated.
T/F: Intercompany transactions can result in gains or losses on the books of affiliated entities.
T/F: For consolidated statement purposes, separate legal entities are treated as a single economic entity.
During 200X, Papa Company sold inventory, which cost it $18,000, to its subsidiary, Sonnyco, for $27,000. At the end of 200X, Sonnyco had $9,000 of the intercompany goods still on its books. The balance had been resold to unaffiliated customers for $24,000. Which one of the following is the amount of intercompany sales that should be eliminated for 200X consolidated statements?
Since only the transaction between Papa and Sonnyco is an intercompany transaction, only the amount of that transaction, $27,000, will be eliminated. The purchase of inventory by Papa and the sale by Sonnyco are both with non-affiliates. Therefore, those transaction amounts would not be eliminated.
Which one of the following will occur on consolidated financial statements if an intercompany inventory transaction is not eliminated?
A. An understatement of sales.
B. An overstatement of sales.
C. An understatement of purchases.
D. An overstatement of accounts receivable.
B. If an intercompany inventory transaction is not eliminated in the consolidating process, consolidated financial statements would show an overstatement of sales. Sales would be overstated by the amount of the intercompany sales reported by the selling affiliate. All intercompany sales and related purchases must be eliminated, even if they do not result in a profit or loss.
During 200X, Papa Company sold inventory, which cost it $18,000, to its subsidiary, Sonnyco, for $27,000. At the end of 200X, Sonnyco had $9,000 of the intercompany goods still on its books. The balance had been resold to unaffiliated customers for $24,000. Which one of the following is the amount of ending inventory that should be eliminated for consolidated statements?
With a cost from non-affiliates of $18,000 and an intercompany selling price of $27,000, there is a $9,000 intercompany profit on the inventory transaction. Therefore, $9,000 profit/$27,000 cost to the buying affiliate results in a one third profit in ending inventory. Since the ending inventory at the buying affiliate's cost is $9,000, 1/3 x $9,000 = $3,000 is the intercompany profit in ending inventory and the amount that would have to be eliminated.
Which of the following can be overstated on consolidated financial statements if intercompany inventory balances on-hand at the end of a period are not eliminated?
Both. Either consolidated income or consolidated loss could be overstated on consolidated statements as a result of failure to eliminate intercompany inventory balances. An overstatement of income would result if the goods were sold by the selling affiliate at a price greater than the cost to the selling affiliate. An overstatement of loss would result if the goods were sold by the selling affiliate at a price less than the cost to the selling affiliate.
T/F: Any unconfirmed profit or loss resulting from the transaction in one period will be brought onto the consolidating worksheet of the subsequent period in the account balances of the affiliated entities.
T/F: A sale of inventory from a subsidiary to a parent is an upstream sale.
T/F: When an intercompany inventory profit resulting from a sale by a less than 100% owned subsidiary to its parent is eliminated, the full amount (100%) of the decrease in profit is deducted from consolidated net income available to the parent shareholders.
The profit elimination would be allocated between the parent and the non-controlling shareholders' interest in proportion to their respective ownership percentages as part of the allocation to NI.
T/F: If one affiliate sells inventory to another affiliate at a profit, for consolidated purposes the inventory will be overvalued until it is resold to a non-affiliate.
T/F: The elimination of intercompany profit in beginning inventory on the consolidating worksheet causes the profit deferred in the ending inventory of the prior period to be recognized in the subsequent period.
T/F: Failure to eliminate intercompany sales against intercompany purchases will result in an overstatement of consolidated net income.
There may be no effect on consolidated NI if the sale was at cost to the selling affiliate. Although IC sales and COGS would be overstated.