Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted]
Select the correct answer for each of the following questions.
1. Perez Inc. owns 80 percent of Senior Inc. During 20X2, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 20X2. For 20X2 consolidated financial statements, how should the summation of Perez and Senior 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.
2. Parker Corporation owns 80 percent of Smith Inc.’s common stock. During 20X1, Parker sold inventory to Smith for $250,000 on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in 20X1. The following information pertains to Smith’s and Parker’s sales for 20X1:
| Parker | Smith |
Sales | $1,000,000 | $ 700,000 |
Cost of Sales | (400,000) | (350,000) |
Gross Profit | $ 600,000 | $ 350,000 |
What amount should Parker report as cost of sales in its 20X1 consolidated income statement?
a. $750,000.
b. $680,000.
c. $500,000.
d. $430,000.
Note: Items 3 and 4 are based on the following information:
Nolan owns 100 percent of the capital stock of both Twill Corporation and Webb Corporation. Twill purchases merchandise inventory from Webb at 140 percent of Webb’s cost.
During 20X0, Webb sold merchandise that had cost it $40,000 to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 20X0. In preparing combined financial statements for 20X0, Nolan’s bookkeeper disregarded the common ownership of Twill and Webb.
3. What amount should be eliminated from cost of goods sold in the combined income statement for 20X0?
a. $56,000.
b. $40,000.
c. $24,000.
d. $16,000.
4. By what amount was unadjusted revenue overstated in the combined income statement for 20X0?
a. $16,000.
b. $40,000.
c. $56,000.
d. $81,200.
5. Clark Company had the following transactions with affiliated parties during 20X2:
• Sales of $60,000 to Dean Inc., with $20,000 gross profit. Dean had $15,000 of this inventory on hand at year-end. Clark owns a 15 percent interest in Dean and does not exert significant influence.
• Purchases of raw materials totaling $240,000 from Kent Corporation, a wholly owned subsidiary. Kent’s gross profit on the sales was $48,000. Clark had $60,000 of this inventory remaining on December 31, 20X2.
Before eliminating entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its December 31, 20X2, consolidated balance sheet for current assets?
a. $320,000.
b. $317,000.
c. $308,000.
d. $303,000.
6. Selected data for two subsidiaries of Dunn Corporation taken from the December 31, 20X8, preclosing trial balances are as follows:
| Banks Co. (Debits) | Lamm Co. (Credits) |
Shipments to Banks | $ − | $150,000 |
Shipments from Lamm | 200,000 | − |
Intercompany Inventory Profit on Total Shipments |
| 50,000 |
Additional data relating to the December 31, 20X8, inventory are as follows:
Inventory acquired by Banks from outside parties | $175,000 |
Inventory acquired by Lamm from outside parties | 250,000 |
Inventory acquired by Banks from Lamm | 60,000 |
At December 31, 20X8, the inventory reported on the combined balance sheet of the two subsidiaries should be:
a. $425,000.
b. $435,000.
c. $470,000.
d. $485,000.
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