Chapter 6 Test Bank

INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS

Multiple Choice Questions

Use the following information for questions 1 and 2.

LO1
1.

LO1
2.

In 2004, Parrot Company sold land to its subsidiary, Tree

Corporation, for $12,000. It had a book value of $10,000. In
the next year, Tree sold the land for $18,000 to an
unaffiliated firm.
Which of the following is correct?
a. No consolidation working paper entry was necessary in 2004.
b. A consolidation working paper entry was required only if
the subsidiary was less than 100% owned in 2004.
c. A consolidation working paper entry is required each year
until the land is sold outside the related parties.
d. A consolidated working paper entry was required only if the
land was held for resale in 2004.
The 2004 unrealized gain
a. was deferred until 2006.
b. was eliminated from consolidated net income by a working
paper entry that credited land $2,000.
c. made consolidated net income $2,000 less than it would have
been had the sale not occurred.
d. made consolidated net income $2,000 greater than it would
have been had the sale not occurred.

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LO1
3.

On January 1, 2005, Eagle Corporation sold equipment with a

book value of $40,000 and a 20-year remaining useful life to
its wholly-owned subsidiary, Rabbit Corporation, for $60,000.
Both Eagle and Rabbit use the straight-line depreciation
method, assuming no salvage value. On December 31, 2005, the
separate company financial statements held the following
balances associated with the equipment:
Eagle
Rabbit
Gain on sale of equipment
$ 20,000
Depreciation expense
$
3,000
Equipment
60,000
Accumulated depreciation
3,000
A working paper entry to consolidate the financial statements
of Eagle and Rabbit on December 31, 2005 included a
a.
b.
c.
d.

debit to gain on sale of equipment for $19,000.

credit to gain on sale of equipment for $20,000.
debit to accumulated depreciation for $1,000.
credit to depreciation expense for $3,000.

Use the following information for questions 4 and 5.

On December 31, 2005, Corella Corporation sold equipment with a
three-year remaining useful life and a book value of $21,000 to
its 70%-owned subsidiary Hollow Company for a price of $27,000.
Corella bought the equipment four years ago for $49,000.
LO1
4.

What was the intercompany sale impact on the consolidated

financial statements for the year ended December 31, 2005?

a.
b.
c.
d.
LO1
5.

Corellas Net Income

Corellas Income
from Hollow

No effect.
No effect.
Decreased.
Increased.

No effect.
Decreased.
No effect.
Decreased.

What was the intercompany sale impact on the consolidated

financial statements for the year ended December 31, 2005?

a.
b.
c.
d.

Consolidated Net
Income

Consolidated Net
Assets

No effect.
No effect.
Decreased.
Decreased.

No effect.
Increased.
Decreased.
No effect.

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LO1
6.

On January 2, 2005 Kakapo Company sold a truck with book value

of $45,000 to Flightless Corporation, its completely owned
subsidiary, for $60,000. The truck had a remaining useful life
of three years with zero salvage value. Both firms use the
straight-line depreciation method, and assume no salvage value.
If Kakapo failed to make year-end equity adjustments, Kakapos
investment in Flightless at December 31, 2005 was
a.
b.
c.
d.

$5,000 too high.

$10,000 too low.
$10,000 too high.
$15,000 too high.

LO1, 2 & 4
Use the following information to answer questions 7 through 10.
On January 1, 2003, Shrimp Corporation purchased a delivery
truck with an expected useful life of five years. On January 1,
2005, Shrimp sold the truck to Avocet Corporation and recorded
the following journal entry:

Cash
Accumulated depreciation
Truck
Gain on Sale of Truck

Debit
50,000
18,000

Credit
53,000
15,000

Avocet holds 60% of Shrimp. Shrimp reported net income of

$55,000 in 2005 and Avocet's separate net income (excludes
interest in Shrimp) for 2005 was $98,000.
LO1
7.

LO1
8.

In preparing the consolidated financial statements for 2005,

the elimination entry for depreciation expense was a
a.
b.
c.
d.

debit for $5,000.

credit for $5,000.
debit for $15,000.
credit for $15,000.

In the consolidation working papers, the Truck account was

a.
b.
c.
d.

debited for $3,000.

credited for $3,000.
debited for $15,000.
credited for $15,000.

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LO2
9.

Consolidated net income for 2005 was

a.
b.
c.
d.

LO4
10.

$121,000.
$125,000.
$131,000.
$143,000.

The minority interest income for 2005 was

a.
b.
c.
d.

LO2
11.

$18,000.
$22,000.
$23,000.
$27,000.

Ground Parrot Company completely owns Heathlands Inc.

On
January 2, 2005 Ground Parrot sold Heathlands machinery at its
book value of $30,000.
Ground Parrot had the machinery two
years before selling it and used a five-year straight-line
depreciation method, with zero salvage value. Heathlands will
use a three-year straight-line method. In the 2005 consolidated
income statement, the depreciation expense
a.
b.
c.
d.

LO2
12.

required no adjustment.
decreased by $4,000.
increased by $4,000
increased by $30,000.

In reference to the downstream or upstream sale

depreciable assets, which of the following statements
correct?
a.
b.
c.

d.

of
is

Upstream sales from the subsidiary to the parent company

always result in unrealized gains or losses.
The initial effect of unrealized gains and losses from
downstream sales of depreciable assets is different from the
sale of nondepreciable assets.
Gains, but not losses, appear in the parent-company accounts
in the year of sale and must be eliminated by the parent
company in determining its investment income under the equity
method of accounting.
Gains and losses appear in the parent-company accounts in the
year of sale and must be eliminated by the parent company in
determining its investment income under the equity method of
accounting.

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LO2
13.

Falcon Corporation sold equipment to its 80%-owned subsidiary,

Rodent Corp., on January 1, 2005.
Falcon sold the equipment
for $110,000 when its book value was $85,000 and it had a 5year remaining useful life with no expected salvage value.
Separate balance sheets for Falcon and Rodent included the
following equipment and accumulated depreciation amounts on
December 31, 2005:
Equipment
Less: Accumulated depreciation
Equipment-net

Falcon
Rodent
$
750,000 $
300,000
( 200,000)
(
50,000)
$
550,000 $
250,000

Consolidated amounts for equipment and accumulated depreciation

at December 31, 2005 were respectively
a.
b.
c.
d.
LO2
14.

$1,025,000
$1,025,000
$1,025,000
$1,050,000

and
and
and
and

$245,000.
$250,000.
$245,000.
$250,000.

Peregrine Corporation acquired a 90% interest in Cliff

Corporation in 2004 at a time when Cliffs book values and fair
values were equal to one another.
On January 1, 2005, Cliff
sold a truck with a $45,000 book value to Peregrine for
$90,000. Peregrine is depreciating the truck over 10 years
using the straight-line method. Separate incomes for Peregrine
and Cliff for 2005 were as follows:
Sales
Gain on sale of truck
Cost of Goods Sold
Depreciation expense
Other expenses
Separate incomes

Peregrine
1,800,000

$
(
(
(
$

Cliff
$ 1,050,000
45,000
750,000)
( 285,000)
450,000)
( 135,000)
180,000)
( 450,000)
420,000 $
225,000

Peregrines investment income from Cliff for 2005 was

a.
b.
c.
d.

$161,550.
$162,000.
$166,050.
$202,500.

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LO2
15.

Kestrel Company acquired an 80% interest in Reptile Corporation

on January 1, 2004. On January 1, 2005, Reptile sold a building
with a book value of $50,000 to Kestrel for $80,000. The
building had a remaining useful life of ten years and no
salvage value. The separate balance sheets of Kestrel and
Reptile on December 31, 2005 included the following balances:
Buildings
Accumulated Depreciation Buildings

Kestrel
400,000
120,000

Reptile
250,000
75,000

The
consolidated
amounts
for
Buildings
and
Accumulated
Depreciation - Buildings that appeared, respectively, on the
balance sheet at December 31, 2005, were
a.
b.
c.
d.
LO2
16.

and
and
and
and

$192,000.
$195,000.
$192,000.
$195,000.

Pigeon
Corporation
purchased
land
from
its
60%-owned
subsidiary, Seed Inc., in 2003 at a cost $30,000 greater than
Seeds book value. In 2005, Pigeon sold the land to an outside
entity for $40,000 more than Pigeons book value. The 2005
consolidated income statement reported a gain on the sale of
land of
a.
b.
c.
d.

LO2
17.

$620,000
$620,000
$650,000
$650,000

$40,000.
$42,000.
$58,000.
$70,000.

Pied Imperial-Pigeon Corporation acquired a 90% interest in

Offshore Corporation in 2003 when Offshore book values were
equivalent to fair values. Offshore sold equipment with a book
value of $80,000 to Pied Imperial-Pigeon for $130,000 on
January 1, 2005. Pied Imperial-Pigeon is fully depreciating the
equipment over a 4-year period by using the straight-line
method. Offshore reported net income for 2005 was $320,000.
Pied Imperial-Pigeons 2005 net income from Offshore was
a.
b.
c.
d.

$249,250.
$250,500.
$254,250.
$288,000.

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LO3
18.

Lorikeet Corporation acquired a 80% interest in Nectar

Corporation on January 1, 2000 at a cost equal to book value
and fair value.
In the same year Nectar sold land costing
$30,000 to Lorikeet for $50,000 On July 1, 2005, Lorikeet sold
the land to an unrelated party for $110,000. What was the gain
on the consolidated income statement?
a.
b.
c.
d.

LO4
19.

On January 1, 2005 Rainforest Co. recorded a $30,000 profit on

the upstream sale of some equipment that had a remaining fouryear life under the straight-line depreciation method. The
effect of this transaction on the amount recorded in 2005 by
the parent company Wompoo as its investment income in the
Rainforest was
a.
b.
c.
d.

LO4
20.

$48,000.
$60,000.
$64,000.
$80,000.

a decrease of $18,000 if the Rainforest was 80% owned.

a decrease of $27,000 if the Rainforest was 90% owned.
an increase of $22,500 if the Rainforest was wholly owned.
an increase of $30,000 if the Rainforest was wholly owned.

Swift Parrot Corporation acquired a 60% interest in Berries

Corp. on January 1, 2005, when Berriess book values and fair
values were equivalent. On January 1, 2005, Berries sold a
building with a book value of $600,000 to Swift Parrot for
$700,000. The building had a remaining life of 10 years, no
salvage value, and was depreciated by the straight-line method.
Berries reported net income of $2,000,000 for 2005. What was
the noncontrolling interest for 2005?
a.
b.
c.
d.

$710,000.
$764,000.
$800,000.
$900,000.

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LO1
Exercise 1
Spiniflex Pigeon Company owns 90% of the outstanding stock of
Waterhole Corporation. This interest was purchased on January 1,
1999, when Waterholes book values were equal to its fair values. The
amount paid by Spiniflex Pigeon included $10,000 for goodwill.
On January 1, 2000, Spiniflex Pigeon purchased equipment for $100,000
which had no salvage value with a useful life of 8 years. on a
straight-line basis. On January 1, 2005, Spiniflex Pigeon sold the
truck to Waterhole Corporation for $40,000. The equipment was
estimated to have a four-year remaining life on this date.
All
affiliates use the straight-line depreciation method.
Required:
Prepare all relevant entries with respect to the truck.
1. Record the journal entries on Spiniflex Pigeons books for 2005.
2. Record the journal entries on Waterholes books for 2005.

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LO1&2
Exercise 2
Stork Corporation paid $15,700
Corporation on January 1, 2004,
consisted of $10,000 Capital Stock
The excess cost over book value was

for a 90% interest in Swamp

when Swamp stockholders equity
and $3,000 of Retained Earnings.
attributable to goodwill.

Additional information:
1. Stork sells merchandise to Swamp at 120% of Storks cost. During
2004, Storks sales to Swamp were $4,800, of which half of the
merchandise remained in Swamps inventory at December 31, 2004.
During 2005, Storks sales to Swamp were $6,000 of which 60%
remained in Swamps inventory at December 31, 2005. At year-end
2005 Swamp owed Stork $1,500 for the inventory purchased during
2005.
2. Stork Corporation sold equipment with a book value of $2,000 and
a remaining useful life of four years and no salvage value to
Swamp Corporation on January 1, 2005 for $2,800.
3. Separate company financial statements for Stork Corporation and
Subsidiary at December 31, 2005 are summarized in the first two
columns of the consolidation working papers.
4. Helpful hint: Stork's investment in Swamp account balance at
December 31, 2004 consisted of the following:
Investment cost
Equity in Swamps income for 2004
Less: Unrealized inventory profit

15,700
3,600
(
400)

Less: Dividends received from Swamp

Investment in Swamp, December 31, 2004

( 1,800)
$ 17,100

Required:
Complete the working papers to consolidate the financial statements
of Stork Corporation and subsidiary for the year ended December 31,
2005.

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Stork Corporation and Subsidiary

Consolidation Working Papers
at December 31, 2005
Eliminations
Stork
Swamp
Debit
Credit
INCOME STATEMENT
Sales
$
Income from
Swamp
Gain on
equipment sale
Cost of Sales
(
Other Expenses
(
Net income
Retained
Earnings 1/1
Add: Net income
Dividends
(
Retained
Earnings 12/31
$
BALANCE SHEET
Cash
Receivables
Inventories
Equipment-net
Land
Investment in
Swamp
Goodwill
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Capital
Stock
Retained
Earnings
1/1 Noncontrl.
Interest
12/31 Noncontrl.
Interest
TOTAL LIAB. &
EQUITY
$

60,000

Non- Balance
Cntrl. Sheet

$14,000

4,500
800
26,000) (
28,000) (
11,300

4,400)
3,600)
6,000

9,500
11,300
7,000) (

5,000
6,000
2,000)

13,800

$ 9,000

6,000
7,000
10,000
24,000
4,000

3,000
4,000
4,500
9,000
3,500

19,800
70,800

$24,000

7,000

5,000

50,000

10,000

13,800

9,000

70,800

$24,000

LO1&2
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Exercise 3
Dove Corporation acquired all of the outstanding voting common stock
of the Squab Corporation several years ago when the book values and
fair values of Squabs net assets were equal.
On April 1, 2003, Dove sold land that cost $25,000 to Squab for
$40,000. Squab resold the land for $45,000 on December 1, 2005.
On July 1, 2005, Dove sold equipment with a book value of $10,000 to
Squab for $26,000. Squab is depreciating the equipment over a fouryear period using the straight-line method.
Required:
The first two columns in the working papers presented below summarize
income statement information from the separate company financial
statements of Dove and Squab for the year ended December 31, 2005.
Fill in the consolidated working paper columns to show how each of
the items from the separate company reports will appear in the
consolidated income statement.
Sales
Income from Squab
Gain on sale of equipment
Gain on sale of land
Cost of sales
Depreciation expense
Other expenses
Net income

Dove
450,000
46,000
16,000
( 211,500)
( 45,500)
( 120,000)
135,000

Squab
200,000

(
(
(

Consolidated

5,000
91,500)
23,500)
34,000)
56,000

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LO1&2
Exercise 4
Brolga Corporation paid $26,800 cash for a 70% interest in Dance
Company on January 1, 2004, when Dances stockholders equity
consisted of $15,000 Capital Stock and $9,000 of Retained Earnings.
Additional information:
1. The cost-book value differential was allocated to a patent with
a 20-year amortization period.
2. Brolga Corporation sold inventory items that cost $4,000 to
Dance for $4,800 during 2004 and one-half of these inventory
items remained unsold by Dance on December 31, 2004.
3. During 2005 Brolga Corporation sold inventory items that cost
$5,000 to Dance for $6,000 and 30% of these inventory items
remained unsold by Dance on December 31, 2005. Dance Corporation
owed Brolga $700 on account at year-end 2005.
4. Brolga Corporation sold equipment with a 5-year remaining life
and a book value of $4,000 to Dance for $5,000 on January 1,
2005. Straight-line depreciation is used.
5. Brolga and Dance pay annual dividends of $10,000 and $3,000,
respectively.
6. Separate financial statements for Brolga and Dance Corporations
appear on partially completed consolidation working papers.
Required:
Complete the working papers to consolidate the financial statements
for 2005.

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Brolga Corporation and Subsidiary

Consolidation Working Papers
at December 31, 2005
Eliminations
Brolga
Dance
Debit
Credit
INCOME STATEMENT
Sales
Income from
Dance
Gain on
equipment sale
Cost of sales
Depreciation exp
Other Expenses
Net income
Retained
Earnings 1/1
Add: Net income
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Receivables
Dividends Rec
Inventories
Equipment-net
Investment in
Dance
Patent
TOTAL ASSETS
LIAB. & EQUITY
Accounts payable
Dividend payable
Other Debt
Capital stock
Retained
Earnings
1/1 Noncontrl.
Interest
12/31 Noncontrl.
Interest
TOTAL LIAB. &
EQUITY

90,000

Non- ConsolCntrl. idated

$35,000

2,300
1,000
( 40,000) ( 20,000)
( 6,000) ( 2,000)
( 24,500) ( 8,000)
22,800
5,000
25,000
12,000
22,800
5,000
( 10,000) ( 3,000)
$

37,800

$14,000

10,350
1,500
1,050
12,000
41,000

1,500
2,700
6,000
23,500

28,200
$

94,100

$33,700

6,300
10,000
40,000

2,200
1,500
1,000
15,000

37,800

14,000

94,100

$33,700

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LO2
Exercise 5
Barn Owl Corporation acquired 70% of the outstanding voting stock of
Cave Inc. on January 1, 2003 for $60,000 less than book value. The
$60,000 reduction was all assigned to a tractor. The tractor had a
remaining life of 15 years. On April 1, 2003, Cave sold land to Barn
Owl for a gain of $40,000 and originally cost $35,000. Barn Owl sold
the property for $85,000 on October 1, 2005. Barn Owl sold equipment
for $96,000 to Cave on January 1, 2004 which had a book value of
$80,000. The equipment cost Barn Owl $72,000. The equipment had a
remaining useful life of 8 years on the sale date and is depreciated
under the straight-line method.
Required:
Prepare a schedule for the calculation of consolidated net income for
Barn Owl and subsidiary for 2003, 2004 and 2005.
2003
300,000
90,000

Barn Owls separate income

Caves net income

2004
225,000
110,000

2005
60,000
120,000

LO2
Exercise 6
Separate income statements of Nightjar Corporation and its 90%-owned
subsidiary, Branch Inc., for 2005 were as follows:

Sales Revenue
Cost of sales
Other expenses
Gain on equipment
Income from Branch
Net income

$
(
(
$

Nightjar
2,000,000
1,200,000 )
400,000 )
80,000
180,000
660,000

Branch
$ 1,200,000
(
800,000 )
(
200,000 )
$

200,000

Additional information:
1. Nightjar acquired its 90% interest in Branch Inc. when the book
values were equal to the fair values.
2. The gain on equipment relates to equipment with a book value of
$120,000 and a 4-year remaining useful life that Branch sold to
Nightjar for $200,000 on January 2, 2005. The straight-line
depreciation method is used.
3. In 2004 Nightjar sold inventory to Branch of which the remainder
was sold in 2005.
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Intercompany sales
Cost of intercompany sales
Percentage unsold at year-end

2004
300,000
180,000
40

2005
200,000
120,000
50

Required:
Prepare a consolidated income statement for Nightjar Corporation and
Subsidiary for the year ended December 31, 2005.
LO2&3
Exercise 7
Osprey Corporation created a wholly owned subsidiary, Branch
Corporation, on January 1, 2003, at which time Osprey sold land with
a book value of $90,000 to Branch at its fair market value of
$140,000. Also, on January 1, 2003, Osprey sold to Branch equipment
with a book value of $130,000 and a fair value of $165,000. The
equipment had a remaining useful life of 4 years and is being
depreciated under the straight-line method. On January 1, 2005,
Branch resold the land to an outside entity for $150,000. Branch
continues to use the equipment purchased from Osprey.
Income statements for Osprey and Branch for the year ended December
31, 2005 are summarized below:
Sales
Gain on sale of land
Income from Branch
Cost of sales
Depreciation expense
Other expenses
Net income

$
(
(
(
$

Osprey
450,000

55,000
220,000 ) (
95,000 ) (
37,000 ) (
153,000
$

Branch
100,000
10,000
50,000 )
32,000 )
8,000 )
20,000

Required:
At what amounts did the following items appear on a consolidated
income statement for Osprey Corporation and Subsidiary for the year
ended December 31, 2005?
1. Gain on Sale of Land
2. Depreciation Expense
3. Consolidated net income

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LO3
Exercise 8
Separate income statements of Quail Corporation and its 80%-owned
subsidiary, Savannah Corporation, for 2005 are as follows:

Sales Revenue
Gain on equipment
Gain on land
Cost of sales
Other expenses
Separate incomes

Quail
800,000
35,000

(
(
$

400,000 )
265,000 )
170,000

(
(
$

Savannah
300,000
20,000
160,000 )
60,000 )
100,000

Additional information:
1. Quail acquired its 80% interest in Savannah Corporation when the
book values were equal to the fair values.
2. The gain on equipment relates to equipment with a book value of
$85,000 and a 7-year remaining useful life that Quail sold to
Savannah for $120,000 on January 2, 2005. The straight-line
depreciation method was used.
3. In 2005, Savannah sold land to an outside entity for $80,000.
The land was acquired from Quail in 2003 for $60,000. The
original cost of the land to Quail was $35,000.
Required:
Prepare a consolidated income statement for Quail Corporation and
Subsidiary for the year 2005.

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LO3
Exercise 9
Cassowary Corporation acquired a 70% interest in Fruit Corporation in
1999 at a time when Fruits book values and fair values were equal.
In 2003, Fruit sold land to Cassowary for $82,000 that cost $72,000.
The land remained in Cassowarys possession until 2005 when Cassowary
sold it outside the combined entity for $102,000.
After the books were closed in 2005, it was discovered that Cassowary
had not considered the unrealized gain from its intercompany purchase
of land in preparing the consolidated financial statements. The only
entry on Cassowarys books was a debit to Land and a credit to Cash
in 2003 for $82,000, and, in 2005, a debit to Cash for $102,000 and
credits to Land for $82,000 and Gain on sale of land for $20,000.
Before the discovery of the error, the
statements disclosed the following amounts:
Consolidated net income
Land

2003
750,000
200,000

consolidated

2004
600,000
240,000

financial
2005
910,000
300,000

Required:
1. Determine the correct amounts of consolidated net income for
2003, 2004, and 2005.
2. Determine the correct amounts for Land in 2003, 2004, and 2005.
3. Calculate the amount at which the gain on the sale of land
should have been reported in 2005.

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LO2&4
Exercise 10
Buzzard Corporation acquired 70% of the outstanding voting common
stock of Tool Inc. in 1998. On January 1, 1999, Tool Inc. purchased a
depreciable machine for $120,000 cash with an estimated useful life
of 10 years that was depreciated on a straight-line basis. Tool used
the machine until the end of 2004. On January 2, 2005, Tool sold the
machine to Buzzard who continued to use the same estimated life and
depreciation method that was used by Tool.
At the end of 2005, Buzzard made the following elimination entry in
the consolidation working papers.
Machine
Gain on Sale of Machine
Depreciation Expense
Accumulated Depreciation

22,000
14,000
2,000
34,000

Required:
Answer the following questions concerning Buzzard and Tool.
1. How much depreciation expense did Buzzard record in 2005?
2. What amounts were reported for the Machine and the Accumulated
Depreciation in the consolidated balance sheet on December 31,
2005?
3. If Tool reported $60,000 of net income for 2005, what amount was
assigned to the non-controlling interest?

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SOLUTIONS
Multiple Choice Questions
1

($15,000 gain/ 3 years)

($53,000 - $50,000)

$98,000 + [($55,000 - $15,000 +

$5,000) x 60%] =

125,000

10

($55,000 - $15,000 + $5,000) x

40%=

18,000

Combined equipment amounts

Less: gain on sale
Consolidated equipment balance

$ 1,050,000
(
25,000 )
$ 1,025,000

Combined Accumulated Depreciation

Less: Depreciation on gain
Consolidated Accumulated
Depreciation

$
(

250,000
5,000 )

245,000

Cliff reported income

Less: Intercompany gain on
truck
Plus: Piecemeal recognition of
gain = $45,000/10 years
Cliffs adjusted income
Majority percentage
Income from Cliff

225,000

11

12

13

14

45,000 )
4,500
184,500
90%
166,050

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15

16

17

18

19

20

Combined building amounts

Less: Intercompany gain
Consolidated building amounts

$
(
$

650,000
30,000 )
620,000

Combined Accumulated Depreciation

Less: Piecemeal recognition of
gain
Consolidated accumulated
depreciation

195,000

Pied Imperial-Pigeons share of

Rogers income = ($320,000 x 90%)
=
Less: Profit on intercompany sale
($130,000 - $80,000) x 90% =
Add: Piecemeal recognition of
deferred profit ($50,000/4 years)
x 90% =
Income from Offshore

$30,000 - (1/4 x $30,000) =

3,000 )

192,000

288,000

45,000 )
11,250
254,250

22,500

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Exercise 1
Requirement 1: Spiniflex Pigeons books
01/01/05

Cash
Accumulated Depreciation
Equipment
Gain on Sale

40,000
62,500
100,000
2,500

Requirement 2: Waterholes books

01/01/05
12/31/05

Equipment
Cash

40,000
40,000

Depreciation Expense
Accumulated Depreciation

7,500

7,500

Exercise 2
Stork Corporation and Subsidiary
Consolidation Working Papers
at December 31, 2005
Eliminations
Stork
Swamp
Debit
Credit
INCOME STATEMENT
Sales
$
Income from
Swamp
Gain on
equipment sale
Cost of Sales
Other Expenses
Minority income
Net income
Retained
Earnings 1/1
Add: Net income
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Receivables
Inventories
Equipment-net
Land
Investment in
Swamp

60,000

$ 6,000

4,500

4,500

800

d
b

( 26,000) (
( 28,000) (

$14,000

11,300

4,400)
3,600)

5,000 f
6,000
2,000)

13,800

$ 9,000

6,000
7,000
10,000
24,000
4,000

3,000
4,000
4,500
9,000
3,500

800
600 a
c
d

$ 6,000
400
200

5,000
e

(24,600)
(31,400)
600(
600)
11,400

9,500
11,400
1,800( 200) ( 7,000)
$13,900

c
19,800

$68,000

6,000

9,500
11,300
( 7,000) (
$

Non- Consolcontl. idated

g
b
d

1,500
600
600

400 e
f

2,700
17,500

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9,000
9,500
13,900
32,400
7,500

Goodwill
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Capital
Stock
Retained
Earnings
1/1 Noncntrl.
Interest
12/31 Noncntrl.
Interest
TOTAL LIAB. &
$
EQUITIES

4,000 g

4,000
$76,300

70,800

$24,000

7,000

5,000

1,500

10,500

50,000

10,000

10,000

50,000

13,800

9,000

13,900
f

1,500 1,500
1,900

70,800

$24,000

1,900
$76,300

Exercise 3
Sales
Income from Squab
Gain on sale of equipment
Gain on sale of land
Cost of sales
Depreciation expense
Other expenses
Net income

Dove
450,000
46,000
16,000
( 211,500)
( 45,500)
( 120,000)
135,000

Squab
200,000

(
(
(

5,000
91,500)
23,500)
34,000)
56,000

Consolidated
650,000
0
0
20,000
( 303,000)
(
67,000)
( 154,000)
146,000

Exercise 4
Brolga Corporation and Subsidiary
Consolidation Working Papers
at December 31, 2005
Eliminations
Brolga
Dance
Debit
Credit
INCOME STATEMENT
Sales
$ 90,000
$35,000
Income from
2,300
Dance
Gain on
equipment sale
1,000
Cost of sales
( 40,000) ( 20,000)
Depreciation exp
Minority income
Other Expenses
Net income
Retained
Earnings 1/1

6,000) (

( 24,500) (
22,800
25,000

a
f
d
c

2,000)
8,000) h
5,000
12,000

NonContrl.

$ 6,000
2,300
1,000
300 a
b
e
500

Consolidated
$ 119,000

$ 6,000
400
( 53,900)
200
( 7,800)
$ 1,500 ( 1,500)
( 33,000)
22,800

12,000

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25,000

Add: Net income

Dividends
(
Retained
Earnings 12/31
$
BALANCE SHEET
Cash
Receivables
Dividends Rec
Inventories
Equipment-net
Investment in
Dance
Patent
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Dividend payable
Other Debt
Capital stock
Retained
Earnings
1/1 Noncontrl.
Interest
12/31 Noncontrl.
Interest
TOTAL LIAB. &
$
EQUITY

22,800
10,000) (

5,000
3,000)

37,800

$14,000

10,350
1,500
1,050
12,000
41,000

1,500
2,700
6,000
23,500

28,200
94,100

$33,700

6,300
10,000
40,000

2,200
1,500
1,000
15,000

37,800

14,000

22,800
900) ( 10,000)

2,100(

$37,800

i
j
c
200 d
400 g
f
9,500 h

i
j

700
1,050

15,000

e
b

11,850
3,500

700
1,050
300
1,000
28,400
200
500

17,700
63,700
9,000
$105,750
7,800
450
11,000
40,000
37,800

8,100 8,100
8,700

94,100

$33,700

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8,700
$105,750

Exercise 5

Barn Owls separate income

Caves net income
Tractor Adjustment
Land gain
Equipment gain
Depreciation Expense
Minority Interest Expense
Net Income
Tractor Adjustment 60,000/15
Land gain (40,000)
Land gain 28,000+10,000
Equipment
Depreciation
expense
(96,00080,000)/8
Minority Interest Expense
[90,000-40,000]*.3=15,000
Minority Interest Expense
110,000*.3
Minority Interest Expense
(85,000-75,000)*.3=3,000 +
120,000*.3

2003
300,000
90,000
4,000
(40,000)
(16,000)
(2,000)
(15,000)
321,000
4,000
(40,000)
(16,000)
(2,000)

2004
225,000
110,000
4,000

2005
60,000
120,000
4,000
38,000

(2,000)
(33,000)
304,000

(2,000)
(39,000)
181,000

4,000

4,000
38,000

(2,000)

(2,000)

(15,000)
(33,000)
(39,000)

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Exercise 6
Nightjar Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2005
Sales (see below)
Cost of sales (see below)
Other expenses (see below)
Minority interest (see below)
Consolidated net income

Sales:
$2,000,000 + 1,200,000 - 200,000

$
(
(
(

3,000,000
1,792,000 )
580,000 )
20,000 )
608,000

3,000,000

Cost of Sales
$1,200,000 + 800,000 - 200,000 - 48,000 + 40,000
Other expenses:
$400,000 + 200,000 - 20,000

1,792,000

580,000

Minority income
Net income from Branch x 10%: ($200,000 x 10%) =

20,000

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Exercise 7
Requirement 1
The gain on the sale of the land in 2005 was equal to the sales price
minus the original cost of the land when it was first acquired by the
combined entity. In this case the gain was $150,000 - $90,000, or
$60,000.
Requirement 2
The consolidated amount of depreciation expense was the combined
amounts of depreciation expense showing on the separate income
statements minus the piecemeal recognition of the gain on the sale of
the equipment. Thus, the consolidated amount of depreciation expense
was $95,000 + $32,000 ($35,000/4 years) = $118,250.
Requirement 3
Consolidated net income:
Osprey separate income (not including Income
from Branch)= $153,000 - $55,000 =
Income from Branch
Plus: Deferred gain on land
Plus: Piecemeal recognition of gain on equipment sale: $35,000 gain/4 years =
Consolidated net income

$ 98,000
20,000
50,000
8,750
$176,750

Exercise 8
Quail Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2005
Sales
Gain on land ($20,000 + $25,000)
Cost of sales
Other expenses (see below)
Minority interest (see below)
Consolidated net income

$
(
(
(
$

1,100,000
45,000
560,000 )
320,000 )
20,000 )
245,000

Other expenses:
$265,000 + $60,000 - $5,000 piecemeal recognition of
gain on equipment

320,000

Minority income
Net income from Savannah x 20%: ($100,000 x 20%) =

20,000

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Exercise 9
Requirement 1
Consolidated net income as
reported
Less: $10,000 deferred gain
Plus:
Minority
interest
portion of the gain
Plus: Deferred gain
Corrected consolidated net
income
Requirement 2
Land account as reported
Less: Intercompany profit
Restated land account

2003

2004

2005

$ 750,000
-10,000

$ 600,000

$ 910,000

3,000
7,000
$ 743,000

$ 600,000

$ 917,000

2003
$ 200,000
-10,000
$ 190,000

2004
$ 240,000
-10,000
$ 230,000

2005
$ 300,000
$ 300,000

Requirement 3
Final sales price outside the entity minus the original cost to the
combined entity equals $102,000 minus $72,000 = $30,000

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Exercise 10
Requirement 1
On the consolidated balance sheet, the machine must be reported at
its original cost when Tool purchased it on January 1, 1999, which is
$120,000. Since the elimination entry debited the machine account for
$22,000 which must be the amount needed to bring the machine account
up to $120,000, Buzzard must have recorded the machine at $98,000.
Since the remaining useful life is seven years, Buzzard will record
$14,000 of depreciation expense each year.
Requirement 2
The correct balances on the consolidated balance sheet for the
Machine and Accumulated Depreciation accounts are the balances that
would be in the accounts if there had been no sale. The balance in
the machine account would be the original purchase price to Tool or
$120,000. The balance in the Accumulated Depreciation account will be
the original amount of annual depreciation, ($12,000) times the
number of years the machine has been depreciated (4), or $48,000.
Requirement 3
The minority interest income will be 30% of Tool adjusted net
income. Tool reported net income of $60,000 is reduced by the
$14,000 unrealized gain on the sale of the machine and is increased
by the piecemeal recognition of the gain, which is $2,000. The net
result of $48,000 is then multiplied by 30% to calculate a $14,400
income for the non-controlling interest.

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