Ch. 5 Solution - Multiple Choice Questions 1. Redstone owns...

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Multiple Choice Questions 1. Redstone owns 60% of Granite Co.’s outstanding common stock. Redstone reports cost of goods sold in 2011 of $1,400,000 while Granite Co. reports $460,000. During 2011, Redstone sold inventory costing $250,000 to Granite Co. for $400,000. 30% of these goods are not resold by Granite Co. until the following year. What is consolidated cost of goods sold ? A. $1,860,000 B. $1,460,000 C. $1,505,000 D. $1,415,000 E. $1,721,000 1. C Intra-entity gain ($400,000 – $250,000) $ 150,000 Inventory remaining at year-end × 30% Unrealized intra-entity gain at December 31 $ 45,000 Cost of goods sold – Redstone, Inc. $1,400,000 Cost of goods sold — Granite Co. 460,000 Remove intra-entity transfer (400,000) Defer unrealized gain + 45,000 Consolidated cost of goods sold $1,505,000
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2. McKnight Inc. owns 80% of Horse Co.’s common stock. On January 2, 2011, McKnight Inc. sold Horse Co. some equipment for $640,000. The equipment had a carrying amount of $400,000. At the acquisition date, the equipment has a remaining useful life of 8 years. Horse Co. uses the straight- line method. The net adjustments to calculate 2011 and 2012 consolidated net income would be an increase (decrease) of 2011 2012 A. $(240,000) $ 50,000 B. $ 210,000 $ 30,000 C. $ 240,000 $ 30,000 D. $(210,000) $ (30,000) E. $(210,000) $ 30,000 2. E In 2011, the consolidated entity has a gain of $240,000 to eliminate. In addition, while McKnight’s depreciation expense is now $80,000 ($640,000 ÷ 8 years), it would have only been $50,000 ($400,000 ÷ 8 years) if the transfer had not taken place. Therefore, we also have to eliminate $30,000 in depreciation expense in 2011. If we eliminate a gain of $240,000 (Consolidation Entry TA) and we eliminate the excess depreciation (Consolidation Entry ED), the net income effect would be to reduce consolidated net income by $210,000. In 2012, the original gain is still on the seller’s records, but it is now in Retained Earnings. Therefore the original gain should be removed from retained earnings, and there is no income effect related to the original gain. In addition, last year’s excess depreciation is removed with Consolidation Entry *TA. Finally, there is still the need to remove the excess depreciation for this year. Consolidation Entry ED is repeated to eliminate the excess depreciation. The net effect on income in 2012 is an increase of $30,000.
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Items 3 through 7 are based on the following information. Presented below are several figures reported for Park Inc. and Masters Co. as of December 31, 2012. Park Inc. Masters Co. Inventory $ 400,000 $ 200,000 Sales 900,000 500,000 Cost of Goods Sold 300,000 180,000 Expenses 180,000 140,000 Park Inc. acquired 75% of Masters Co.’s outstanding common stock on January 1, 2011. Land use rights valued at $281,250 were owned by Masters Co. and should be amortized over twenty years. During 2011, Masters sold Park inventory costing $80,000 for $100,000. 30% of this inventory was not sold to
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Ch. 5 Solution - Multiple Choice Questions 1. Redstone owns...

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