Intercompany Transactions Exam Review
Course Introduction
This course explores the accounting, tax, and regulatory issues related to intercompany transactions between entities within a corporate group. Students will examine the principles and frameworks that guide the recording, reconciliation, and elimination of transactions such as sales, loans, services, transfers of assets, and cost allocations between related companies. Topics include transfer pricing policies, consolidation procedures, legal documentation requirements, potential impacts on financial statements, and compliance with local and international standards. Real-world case studies are used to illustrate common challenges and best practices for managing intercompany relationships in both domestic and multinational contexts.
Recommended Textbook
Advanced Accounting Global 12th Edition by
Floyd A. Beams
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Chapter 1: Business Combinations
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Q1) Historically, much of the controversy concerning accounting requirements for business combinations involved the ________ method.
A) purchase
B) pooling of interests
C) equity
D) acquisition
Answer: B
Q2) With respect to goodwill, an impairment
A) will be amortized over the remaining useful life.
B) is a two-step process which first compares book value to fair value at the business reporting unit level.
C) is a one-step process considering the entire firm.
D) occurs when asset values are adjusted to fair value in a purchase.
Answer: B
Q3) Under the current GAAP, Goodwill arising from a business combination is
A) charged to Retained Earnings after the acquisition is completed.
B) amortized over 40 years or its useful life, whichever is longer.
C) amortized over 40 years or its useful life, whichever is shorter.
D) never amortized.
Answer: D
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Chapter 2: Stock Investments - Investor Accounting and Reporting
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Q1) Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1, 2013 for $300,000. This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31, 2015 was $440,000. The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year. In 2016, Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May. If Jabiru sold one-half of its investment in Fish on August 1, 2016 for $500,000, how much gain was recognized on this transaction?
A) $278,950
B) $280,000
C) $280,950
D) $282,000
Answer: C
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4
Chapter 3: An Introduction to Consolidated Financial Statements
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Q1) Pardo Corporation paid $140,000 for a 70% interest in Spedeal Inc. on January 1, 2014, when Spedeal had Capital Stock of $50,000 and Retained Earnings of $100,000. Fair values of identifiable net assets were the same as recorded book values. During 2014, Spedeal had income of $40,000, declared dividends of $15,000, and paid $10,000 of dividends. On December 31, 2014, the consolidated financial statements will show
A) investment in Spedeal account of $170,000.
B) investment in Spedeal account of $165,000.
C) consolidated goodwill of $50,000.
D) consolidated dividends receivable of $5,000.
Answer: C
Q2) The unamortized excess account is
A) a contra-equity account.
B) used in allocating the amounts paid for recorded balance sheet accounts that are above or below their fair values.
C) used in allocating the amounts paid for each asset and liability that are above or below their book values, especially when numerous assets or liabilities are involved.
D) the excess purchase cost that is attributable to goodwill.
Answer: C
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Chapter 4: Consolidated Techniques and Procedures
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Q1) On consolidated working papers, a subsidiary's net income is
A) deducted from beginning consolidated retained earnings.
B) deducted from ending consolidated retained earnings.
C) allocated between the noncontrolling interest share and the parent's share.
D) only an entry in the parent company's general ledger.
Q2) Which one of the following will increase consolidated retained earnings?
A) An increase in the value of goodwill associated with a subsidiary subsequent to the parent's date of acquisition
B) The amortization of a $10,000 excess in the fair value of a note payable over its recorded book value
C) The depreciation of a $10,000 excess in the fair value of equipment over its recorded book value
D) The sale of inventory by a subsidiary that had a $10,000 excess in fair value over recorded book value on the parent's date of acquisition
Q3) What is the amount of total assets?
A) $1,380,000
B) $1,402,000
C) $1,470,000
D) $1,875,000
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Page 6
Chapter 5: Intercompany Profit Transactions Inventories
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Q1) Shalles Corporation, a 80%-owned subsidiary of Pani Corporation, sold inventory items to its parent at a $48,000 profit in 2014. Pani resold one-third of this inventory to outside entities. Shalles reported net income of $200,000 for 2014. Noncontrolling interest share of consolidated net income that will appear in the income statement for 2014 is A) $30,400.
B) $32,000.
C) $33,600.
D) $40,000.
Q2) If the sale referred to above was a downstream sale, the total sales revenue reported in the consolidated income statement for 2014 would be A) $870,000.
B) $880,000.
C) $920,000.
D) $970,000.
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Chapter 6: Intercompany Profit Transactions Plant Assets
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Q1) Park Incorporated purchased a 70% interest in Silk Company in 2012 at book value. On January 1, 2014, equipment having a historical cost of $100,000 and a net book value of $70,000 is sold in an intercompany transfer for $90,000. The equipment has a remaining useful life of five years and no salvage value. Straight-line depreciation is used by both companies. Silk reports net income of $180,000 in 2014 and $200,000 in 2015.
Required:
1. Assume Park sold the equipment to Silk.
A. Prepare the consolidating worksheet entries for the equipment for 2014 and 2015.
B. Calculate the noncontrolling interest share in Silk's income for 2014 and 2015.
2. Assume that Silk sold the equipment to Park.
A. Prepare the consolidating worksheet entries for the equipment for 2014 and 2015.
B. Calculate the noncontrolling interest share in Silk's income for 2014 and 2015.
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Chapter 7: Intercompany Profit Transactions Bonds
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Q1) Noncontrolling interest share for 2013 was
A) $23,000.
B) $23,600.
C) $24,000.
D) $24,400.
Q2) Pachelor Corporation owns 70% of the outstanding stock of Stabb Company. On January 1, 2013, Stabb issued $1,000,000 in 7% bonds that matured on January 1, 2018. At the time of issuance, the bonds were sold at a discount of $125,000. At January 2, 2015, Pachelor purchased the bonds for $1,400,000, and constructively retired the debt. Interest is paid annually on January 1. Straight-line amortization is used by both companies. Required:
1. Calculate the gain or loss that the consolidated entity incurred to retire the debt.
2. Prepare eliminating/adjusting entries for the consolidating work papers for the year ended December 31, 2015.
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Chapter 8: Consolidations - Changes in Ownership
Interests
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Q1) On September 1, 2013, Beck Corporation acquired an 80% interest in Johnsen Corporation for $700,000. Johnsen's stockholders' equity at January 1, 2013 consisted of $200,000 of Common Stock and $600,000 of Retained Earnings. The book values of its assets and liabilities were equal to their respective fair values on this date. All excess purchase cost was attributed to goodwill.
During 2013, Johnsen uniformly earned $78,000 and paid dividends of $9,000 on each of four dates: February 1, June 1, August 1, and December 1.
Required: Compute the following:
1. Implied goodwill associated with Johnsen Corporation based on Beck's purchase price on September 1, 2013.
2. Beck's income from Johnsen for 2013.
3. Preacquisition income for Beck Corporation and Subsidiary for 2013.
4. Noncontrolling interest share for 2013.
5. What is the balance in Beck's Investment in Johnsen account at December 31, 2013?
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10
Chapter 9: Indirect and Mutual Holdings
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Q1) Noncontrolling interest share for Achille is
A) $18,000.
B) $25,200.
C) $36,200.
D) $72,000.
Q2) The net income reported for Pahm Corporation for the current year is
A) $504,800.
B) $516,800.
C) $545,200.
D) $557,200.
Q3) Paglia Corporation owns 80% of Aburn Corporation and has separate net income of $200,000 for 2013. Aburn Corporation has separate net income of $100,000 and owns 70% of the outstanding stock of Badley Corporation. Badley Corporation has separate net income of $80,000. (Separate net incomes exclude investment income.) The cost of each investment was equal to book value and fair value. The controlling interest share of consolidated net income for 2013 is
A) $324,800.
B) $328,800.
C) $344,800.
D) $348,800.
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Chapter 10: Subsidiary Preferred Stock, Consolidated
Earnings Per Share, and Consolidated Income Taxation
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Q1) Parker Corporation owns an 80% interest in Sample Corporation's common stock. Throughout 2014, Sample had 10,000 shares of common stock outstanding and Parker had 100,000 shares of common stock outstanding. Sample's only dilutive security consists of $50,000 face amount of 8% bonds payable. Each $1,000 bond is convertible into 20 shares of Sample stock. Parker and Sample's separate incomes for the year are $100,000 and $75,000, respectively. Assume a 34% flat income tax rate.
Required:
Compute the amount of basic and diluted earnings per share for Parker (Consolidated) and Sample Corporations.
Q2) Palomba Corporation allocates consolidated income taxes to its 90%-owned subsidiary using the percentage allocation method. Under this method, consolidated income tax expense will be allocated to a subsidiary
A) on the basis of the agreement between the parent and subsidiary.
B) on the basis of the subsidiary's pretax income as a percentage of consolidated pretax income.
C) on the basis of the income taxes remitted to the IRS.
D) 90% to the subsidiary.
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Page 12
Chapter
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Q1) With regard to a variable interest entity (VIE), Ann Company may meet the following two conditions: Condition I
Ann Company has the power to direct VIE activities that significantly impact VIE's economic performance.
Condition II
Ann Company has an obligation to absorb losses and/or a right to receive significant benefits from the VIE.
Ann Company must consolidate a VIE if
A) Condition I is met only.
B) Condition II is met only.
C) either Condition I or Condition II is met.
D) both Condition I and Condition II are met.
Q2) Under the entity theory, a consolidated balance sheet prepared immediately after the business combination will show goodwill of
A) $15,000.
B) $22,500.
C) $25,000.
D) $32,500.
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Chapter 12: Derivatives and Foreign Currency: Concepts and Common Transactions
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Q1) A U.S. importer that purchased merchandise from a South Korean firm would be exposed to a net exchange gain on the unpaid balance if the
A) dollar weakened relative to the Korean won and the won was the denominated currency.
B) dollar weakened relative to the Korean won and the dollar was the denominated currency.
C) dollar strengthened relative to the Korean won and the won was the denominated currency.
D) dollar strengthened relative to the Korean won and the dollar was the denominated currency.
Q2) If a sale on account by a U.S. company is made with a foreign company, and the U.S. company has no foreign currency risk, then
A) the U.S. company has measured the transaction in US dollars.
B) the U.S. company has denominated the transaction in US dollars.
C) the foreign company has measured the transaction in their own currency.
D) the foreign company has denominated the transaction in their own currency.
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Chapter 13: Accounting for Derivatives and Hedging
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Q1) International accounting standards differ from U.S. Generally Accepted Accounting Principles in that International standards
A) require that firm sale or purchase commitments are accounted for as fair value hedges.
B) require that firm sale or purchase commitments are accounted for as cash flow hedges.
C) state that firm sale or purchase commitments may not be treated as a hedged transaction.
D) permit firm sale or purchase commitments to be accounted for as either fair value hedges or cash flow hedges.
Q2) What is the fair value of the forward contract at January 30?
A) $796 liability
B) $796 asset
C) $800 liability
D) $800 asset
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Chapter 14: Foreign Currency Financial Statements
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Q1) Assume the functional currency of a foreign entity is the U.S. dollar, but the books are kept in euros. The objective of remeasurement of a foreign entity's accounts is to
A) produce the same results as if the foreign entity's books were maintained in the currency of the largest customer.
B) produce the same results as if the foreign entity's books were maintained solely in the local currency.
C) produce the same results as if the foreign entity's books were maintained solely in the U.S. dollar.
D) produce the results reflective of the foreign entity's economics in the local currency.
Q2) When translating foreign subsidiary income statements using the current rate method, why are some accounts translated at an average rate?
A) This approach improves matching.
B) This approach accentuates the conservatism principle.
C) This approach smoothes out highly volatile exchange rate fluctuations.
D) This approach approximates the effect of transactions which occur continuously during the period.
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Chapter 15: Segment and Interim Financial Reporting
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Q1) For an operating segment to be considered a reporting segment under the revenue threshold, its reported revenue must be 10% or more of
A) the combined enterprise revenues, eliminating all relevant intracompany transfers and balances.
B) the combined revenues, excluding intersegment revenues, of all operating segments.
C) the combined revenues, including intersegment revenues, of all operating segments.
D) the consolidated revenue of all operating segments.
Q2) Similar operating segments may be combined if the segments have similar economic characteristics. Which one of the following is a similar economic characteristic under GAAP?
A) The segments' management teams
B) The tax reporting law sections
C) The distribution method for products or services
D) The expected rates of return and risk for the segments' productive assets
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Chapter 16: Partnerships - Formation, Operations, and Changes in Ownership Interests
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Q1) What goodwill will be recorded?
A) $ 80,000
B) $240,000
C) $320,000
D) $400,000
Q2) The profit and loss sharing agreement for the Tuttle, Upman, and Veer partnership provides for residual profits and losses to be allocated 2:3:6 to Tuttle, Upman, and Veer, respectively. In 2014, the partnership recorded $11,000 of net income that was properly allocated to the partners' capital accounts. On January 18, 2015, after the books were closed for 2014, Tuttle discovered that the $16,500 payment for the partnership's liability and workers compensation insurance for 2015 was recorded as insurance expense when it was paid on December 28, 2014.
Required:
Prepare the necessary correcting entry(s) for the partnership.
Q3) What partnership capital will Robert have after Quincy retires?
A) $200,000
B) $280,000
C) $360,000
D) $440,000
Page 18
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Chapter 17: Partnership Liquidation
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Q1) The cash available for distribution to the partners on July 31, 2014 is
A) $ 4,000.
B) $ 8,000.
C) $14,000.
D) $22,000.
Q2) Using a safe payment schedule, how much cash should Lola receive in the first distribution?
A) $ 81,000
B) $ 98,000
C) $168,600
D) $202,500
Q3) In partnership liquidation, how are partner salary allocations treated?
A) Salary allocations take precedence over creditor payments.
B) Salary allocations take precedence over amounts due to partners with respect to their capital interests, but not profits.
C) Salary allocations take precedence over amounts due to partners with respect to their capital profits, but not capital interests.
D) Salary allocations are disregarded.
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19
Chapter 18: Corporate Liquidations and Reorganizations
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Q1) What is an advantage of filing a Chapter 11 petition?
A) The continuation of interest accrual on liabilities
B) Restrictions imposed by the bankruptcy court on day-to-day transactions
C) It is less costly than filing Chapter 7.
D) The opportunity to cancel unfavorable contracts
Q2) Which of the following must approve a Chapter 11 plan?
A) The organization's management and the assigned trustee
B) The assigned trustee and creditors
C) The assigned trustee and entity's stockholders
D) The bankruptcy court and the creditors
Q3) In a liquidation under Chapter 7, the trustee
A) may not be appointed, but may only be elected.
B) may not be elected, but may only be appointed.
C) is responsible for converting assets to cash and distributing payments to claimants.
D) is responsible for appointing a creditors' committee.
Q4) Trustin Corporation is in a Chapter 7 bankruptcy liquidation. For each of the following transactions, show the journal entry that would be required by the trustee of the estate.
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Chapter 19: An Introduction to Accounting for State and Local Governmental Units
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Q1) The following are transactions for the city of Clinton.
a. Borrowed $100,000 by issuing a one-year, 5% note, three months before year-end.
b. Accrued interest at year end, but did not pay the interest at year end.
c. Charges for services rendered of $2,500 were billed and collected immediately.
d. Incurred salary costs of $5,000, unpaid.
Required:
Analyze the above transactions by using the accounting equation for a governmental fund.
Q2) The following are transactions for the city of Greenville.
a. Issued $50,000 10-year bonds.
b. Used $30,000 of the cash to buy a truck.
c. Sold the truck that was replaced which had cost $28,000, for $2,000. The old truck was fully depreciated. Residual value is zero.
d. Computed depreciation on the new truck for the year of $6,000.
Required:
Analyze the above transactions by using the accounting equation for a governmental fund.
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Page 21
Chapter 20: Accounting for State and Local Governmental Units
- Governmental Funds
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Q1) The proper sequence of events is
A) purchase order, appropriation, encumbrance, expenditure.
B) purchase order, encumbrance, expenditure, appropriation.
C) appropriation, encumbrance, purchase order, expenditure.
D) appropriation, purchase order, encumbrance, expenditure.
Q2) Carson County had the following transactions for their General Fund relating to the levy and collection of property taxes.
1. Property tax bills for $1,000,000 are sent to property tax owners. Taxes are due in 45 days. History shows that Carson County should expect 1.5% of the property taxes to be uncollectible.
2. $850,000 in property taxes is collected. The remaining receivables are past due.
3. An additional $80,000 of the delinquent taxes is collected.
4. Wrote off $10,000 of delinquent taxes determined to be uncollectible.
Required:
Prepare the journal entries in the General Fund for the transactions.
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Page 22
Chapter 21: Accounting for State and Local Governmental Units
- Proprietary and Fiduciary Funds
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Q1) In a Statement of Cash Flows for a proprietary fund, what are the primary categories of cash flow activities?
A) Operating, Financing, Investing
B) Operating, Noncapital Financing, Capital and Related Financing, Investing
C) Operating, Financing, Noncapital Investing, Capital and Related Investing
D) Noncapital Operating, Capital and Related Operating, Investing, Financing
Q2) Journalize the following utility transactions in the Quest County Enterprise Fund:
1. Billings to external customers $1,600,000; billings to Quest County governmental funds $130,000.
2. Collected refundable deposits from new customers $10,000.
3. Collected 95% of all billings by fiscal year-end.
4. Refunded $4,000 in deposits to former customers.
5. Unbilled services to outside customers at year-end $14,000.
Q3) GASB requires ________ method(s) for the cash flow statement for proprietary funds.
A) the reconciliation
B) the indirect
C) the direct
D) either the direct or indirect
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Chapter 22: Accounting for Not-For-Profit Organizations
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Q1) Which one of the following statements is not required for voluntary health and welfare organizations?
A) A statement of financial position
B) A statement of activities
C) A statement of functional expenses
D) A statement of changes in net assets
Q2) A nongovernmental, not-for-profit entity is subject to: I. GASB II) FASB
A) I only
B) II only
C) a combination of I and II depending on the entity's purpose
D) neither I or II
Q3) For a Voluntary Health and Welfare Organization, what entry is prepared when the restriction on a cash donation is met?
A) Debit Unrestricted Net Assets, Credit Restricted Net Assets
B) Debit Unrestricted Fund Balance, Credit Restricted Fund Balance
C) Debit Restricted Fund Balance, Credit Unrestricted Fund Balance
D) Debit Temporarily Restricted Net Assets - Reclassifications out, Credit Unrestricted Net Assets - Reclassifications in
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Chapter 23: Estates and Trusts
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Q1) Buddy, a dog, is cared for by a trust set up by his owner's will. The following transactions occurred for the trust.
1. The trust was established with $100,000 from his owner's estate, by deposit to a savings account.
2. A check is written to Paws and Claws Puppy Farm to cover the first month of Buddy's room and board, for $680.
3. A check is received for interest earned on the savings account amounting to $417.
4. Buddy dies. Paws and Claws sends a final room and board bill for $430, with additional charges for Buddy's burial of $270. The invoice is paid.
5. The balance of the trust is turned over to the Humane Society, as prescribed by Buddy's owner's will, and the trust is closed.
Required:
Prepare the journal entries for the listed transactions. Disregard the impact of estate and income taxes.
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