BADVAC1X – ACCOUNTING FOR BUSINESS COMBINATIONS

MODULE 4: INTERCOMPANY TRANSACTIONS – INVENTORY (QUIZ 4)

1. The following must be eliminated in the consolidation process except

a. Sales between parent and subsidiary
b. Sales between subsidiary and parent
c. Intercompany dividends (under cost method)
d. Sales made to unaffiliated parties
2. In computing the noncontrolling interest’s share of consolidated net income, how should the subsidiary’s income
be adjusted for intra-entity transfers?
a. The subsidiary’s reported 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
3. Pop Corporation sells inventory items for $500,000 to Son Corporation, its 80 percent–owned subsidiary. The
consolidated workpaper entry to eliminate the effect of this intercompany sale will include a debit to sales for:
a. $500,000
b. $400,000
c. The amount remaining in Son’s ending inventory
d. 80 percent of the amount remaining in Son’s ending inventory
4. The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory includes
a
a. Credit to Ending Inventory (Cost of Sales)
b. Credit to Sales
c. Debit to Ending Inventory (Cost of Sales)
d. Debit to Inventory – Balance Sheet
5. In 20x5, an intercompany inventory transfer above cost occurred. In 20x6, all this inventory was resold to an
outside party. Which of the following accounts would require adjustment or elimination in consolidation at
12/31/x6?
a. Cost of sales c. Intercompany sales
b. Intercompany cost of sales d. Inventory
6. Sun Corporation, a 90 percent–owned subsidiary of Pam Corporation, buys half of its raw materials from Pam.
The transfer price is exactly the same price as Sun pays to buy identical raw materials from outside suppliers and
the same price as Pam sells the materials to unrelated customers. In preparing consolidated statements for Pam
Corporation and Subsidiary:
a. The intercompany transactions can be ignored because the transfer price represents arm’s-length bargaining
b. Any unrealized profit from intercompany sales remaining in Pam’s ending inventory must be offset against
the unrealized profit in Pam’s beginning inventory
c. Any unrealized profit on the intercompany transactions in Sun’s ending inventory is eliminated in its entirety
d. Only 90 percent of any unrealized profit on the intercompany transactions in Sun’s ending inventory is
eliminated

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 7. Sun Corporation regularly sells inventory items to its parent, Pam Corporation. In preparing the consolidated
income statement, which of the following items would not be affected by the direction (upstream or
downstream) of these intercompany sales?
a. Consolidated gross profit
b. Noncontrolling interest share
c. Controlling interest share of consolidated net income
d. Consolidated retained earnings
8. Pop, Inc., owns 80 percent of Son, Inc. During 2016, Pop sold goods with a 40 percent gross profit to Son. Son
sold all of these goods in 2016. For 2016 consolidated financial statements, how should the summation of Pop
and Son income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales
b. Sales and cost of goods sold should be reduced by 80 percent of the intercompany sales
c. Net income should be reduced by 80 percent of the gross profit on intercompany sales
d. No adjustment is necessary
9. Bellgrade, Inc., acquired a 60 percent interest in Hansen Company several years ago. During 2011, Hansen sold
inventory costing $75,000 to Bellgrade for $100,000. A total of 16 percent of this inventory was not sold to
outsiders until 2012. During 2012, Hansen sold inventory costing $96,000 to Bellgrade for $120,000. A total of 35
percent of this inventory was not sold to outsiders until 2013. In 2012, Bellgrade reported cost of goods sold of
$380,000 while Hansen reported $210,000.
What is the consolidated cost of goods sold in 2012?
a. $465,600 b. $473,440 c. $474,400 d. $522,400
10. Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top reports sales of
$800,000 and cost of goods sold of $600,000. For this same period, Bottom has sales of $300,000 and cost of
goods sold of $180,000. During the current year, Top sold merchandise to Bottom for $100,000. The subsidiary
still possesses 40 percent of this inventory at the current yearend. Top had established the transfer price based
on its normal markup. What are the consolidated sales and cost of goods sold?
a. $1,000,000 and $690,000 c. $1,000,000 and $740,000
b. $1,000,000 and $705,000 d. $970,000 and $696,000
11. Use the same information as in problem 10 except assume that the transfers were from Bottom Company to Top
Company. What are the consolidated sales and cost of goods sold?
a. $1,000,000 and $720,000 c. $1,000,000 and $696,000
b. $1,000,000 and $755,000 d. $970,000 and $712,000

Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 2007, at underlying book value. On that date,
the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer
purchased inventory from Scrooge for $90,000 on August 20, 2008, and resold 70 percent of the inventory to unaffiliated
companies on December 1, 2008, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The
companies had no other transactions during 2008.

12. Based on the information given above, what amount of sales will be reported in the 2008 consolidated income
statement?
a. $90,000 b. $120,000 c. $100,000 d. $67,000
13. Based on the information given above, what amount of cost of goods sold will be reported in the 2008
consolidated income statement?
a. $60,900 b. $90,000 c. $46,900 d. $67,000
14. Based on the information given above, what amount of consolidated net income will be assigned to the
controlling interest for 2008?

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 a. $51,490 b. $53,100 c. $37,000 d. $20,100
15. Based on the information given above, what inventory balance will be reported by the consolidated entity on
December 31, 2008?
a. $51,490 b. $53,100 c. $37,000 d. $20,100

Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases all its inventory from Sub.
The incomes reported by the companies over the past three years are as follows:

Year Sub Company’s Net Income Par Corporations’ Operating Inc

2006 $150,000 $225,000
2007 135,000 360,000
2008 240,000 450,000

Sub Company sold inventory for $300,000, $262,500 and $337,500 in the years 2006, 2007,and 2008 respectively. Par
Company reported ending inventory of $105,000, $157,500 and$180,000 for 2006, 2007, and 2008 respectively. Par
acquired 70 percent of the ownership of Sub on January 1, 2006, at underlying book value. The fair value of the
noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Sub Company.
16. Based on the information given above, what will be the consolidated net income for 2006?
a. $357,500 b. $375,000 c. $490,000 d. $317,750
17. Based on the information given above, what will be the consolidated net income for 2007?
a. $495,000 b. $317,750 c. $486,250 d. $690,000
18. Based on the information given above, what will be the income assigned to controlling interest for 2007?
a. $448,375 b. $495,000 c. $486,250 d. $615,375
19. Based on the information given above, what will be the income to noncontrolling interest for 2008?
a. $39,750 b. $37,875 c. $71,275 d. $70,875
20. Based on the information given above, what will be the income to controlling interest for 2008?
a. $615,375 b. $686,250 c. $690,000 d. $694,000

Eagle Company owns 80% of Flyway Inc’s common stock that was purchased at its underlying book value. The two
companies report the following information for 20x4 and 20x5:
20x4 Selected Data Eagle Flyway
Sales revenue P600,000 P320,000
Cost of goods sold 320,000 155,000
Other expenses 100,000 89,000
Net Income P180,000 P76,000
Dividends paid P19,000 P0

20x5 Selected Data Eagle Flyway

Sales revenue P580,000 P445,000
Cost of goods sold 300,000 180,000
Other expenses 130,000 171,000
Net Income P150,000 P94,000
Dividends paid P16,000 P 5,000
During 20x4, one company sold inventory to the other company for P50,000 which cost the transferor P40,000.
As of the end of 20x4, 30% of the inventory was unsold. In 20x5, the remaining inventory was resold to outside
the consolidated entity.

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21. If the sale referred to above was a downstream sale, by what amount must Inventory be reduced to reflect the
correct balance as of the end of 20x4?
a. P3,000 b. P10,000 c. P14,000 d. P20,000
22. For 20x4, consolidated net income will be what amount if the intercompany sale was downstream?
a. P253,000 b. P476,800 c. P486,400 d. P506,000
23. If the intercompany sale mentioned above was an upstream sale, what will be the reported amount of total sales
revenue for 20x5?
a. P1,025,000 b. P1,900,000 c. P1,950,000 d. P2,000,000
24. If the intercompany sale was an upstream sale, the total amount of consolidated cost of goods sold for 20x5 will
be?
a. P300,000 b. P430,000 c. P470,000 d. P477,000