Problem

Use the following information in answering questions 1 and 2:Par Company sells land with a...

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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