Multiple-Choice Questions on Intercompany Transactions
Select the correct answer for each of the following questions.
1. Upper Company holds 60 percent of Lower Company’s voting shares. During the preparation of consolidated financial statements for 20X5, the following eliminating entry was made:
Investment in Lower | 10,000 |
|
Land |
| 10,000 |
Which of the following statements is correct?
a.Upper Company purchased land from Lower Company during 20X5.
b.Upper Company purchased land from Lower Company before January 1, 20X5.
c.Lower Company purchased land from Upper Company during 20X5.
d.Lower Company purchased land from Upper Company before January 1, 20X5.
2. Middle Company holds 60 percent of Bottom Corporation’s voting shares. Bottom has developed a new type of production equipment that appears to be quite marketable. It spent $40,000 in developing the equipment; however, Middle agreed to purchase the production rights for the machine for $100,000. If the intercompany sale occurred on January 1, 20X2, and the production rights are expected to have value for five years, at what amount should the rights be reported in the consolidated balance sheet for December 31, 20X2?
a.$0.
b.$32,000.
c.$80,000.
d.$100,000.
Note: Questions 3 through 6 are based on the following information:
On January 1, 20X4, Gold Company purchased a computer with an expected economic life of five years. On January 1, 20X6, Gold sold the computer to TLK Corporation and recorded the following entry:
Cash | 39,000 |
|
Accumulated Depreciation | 16,000 |
|
Computer Equipment |
| 40,000 |
Gain on Sale of Equipment |
| 15,000 |
TLK Corporation holds 60 percent of Gold’s voting shares. Gold reported net income of $45,000, and TLK reported income from its own operations of $85,000 for 20X6. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer.
3. In the preparation of the 20X6 consolidated income statement, depreciation expense will be
a.Debited for $5,000 in the eliminating entries.
b.Credited for $5,000 in the eliminating entries.
c.Debited for $13,000 in the eliminating entries.
d.Credited for $13,000 in the eliminating entries.
4. In the preparation of the 20X6 consolidated balance sheet, computer equipment will be
a.Debited for $1,000.
b.Debited for $15,000.
c.Credited for $24,000.
d.Debited for $40,000.
5. Income assigned to the noncontrolling interest in the 20X6 consolidated income statement will be
a.$12,000.
b.$14,000.
c.$18,000.
d.$52,000.
6. Consolidated net income for 20X6 will be
a.$106,000.
b.$112,000.
c.$120,000.
d.$130,000.
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