Use the following information in answering questions 1 and 2:
Par Company sells land with a book value of $5,000 to Sub Company for $6,000 in 2011. Sub Company holds the land during 2012. Sub Company sells the land for $8,000 to an outside entity in 2013.
1. In 2011 the unrealized gain:
a To be eliminated is affected by the noncontrolling interest percentage
b Is initially included in the subsidiary’s accounts and must be eliminated from Par Company’s income from Sub Company under the equity method
c Is eliminated from consolidated net income by a workpaper entry that includes a credit to the land account for $1,000
d Is eliminated from consolidated net income by a workpaper entry that includes a credit to the land account for $6,000
2. Which of the following statements is true?
a Under the equity method, Par Company’s Investment in Sub account will be $1,000 less than its underlying equity in Sub throughout 2012.
b No workpaper adjustments for the land are required in 2012 if Par Company has applied the equity method correctly.
c A workpaper entry debiting gain on sale of land and crediting land will be required each year until the land is sold outside the consolidated entity.
d In 2013, the year of Sub’s sale to an outside entity, the workpaper adjustment for the land will include a debit to gain on sale of land for $2,000.
Use the following information in answering questions 3 and 4:
Pen Corporation sold machinery to its 80 percent-owned subsidiary, Sam Corporation, for $100,000 on December 31, 2011. The cost of the machinery to Pen was $80,000, the book value at the time of sale was $60,000, and the machinery had a remaining useful life of five years.
3. How will the intercompany sale affect Pen’s income from Sam and Pen’s net income for 2011?
Pen’s Income from Sam
Pen’s Net Income
a
No effect
No effect
b
Increased
No effect
c
Decreased
No effect
d
No effect
Decreased
4. How will the consolidated assets and consolidated net income for 2011 be affected by the intercompany sale?
Consolidated Net Assets
Consolidated Net Income
a
No effect
Decreased
b
Decreased
Decreased
c
Increased
No effect
d
No effect
No effect
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