MIDTERM EXAM-AdvAcctgII 2nd Sem 2011-2012

1. For the fiscal year ended December 31, 2010, Nike Corporation’s 85%-owned
subsidiary, Shasha Company, declared dividends totaling P20,000 and had a net
income of P50,000. Year 2010 depreciation and amortization of the date-of-
business-combination differences between the current fair values and carrying
amounts of Sasha’s identifiable net assets totaled P15,000. The net amount of
2010 intercompany revenue recorded by Nike for its ownership interest in Sasha
under the cost method of accounting is:

a P29,750 c P20,000
. .
b P42,750 d Some other amount
. .
ANS: D
interco. Revenue: 17,000= 20,000 x 85%

PTS: 1

2. Which of the following is the characteristic of the cost method of accounting for a
subsidiary’s operation?

a Parent company’s net income equals consolidated net income

.
b More working paper eliminations are required for the equity method of
. accounting

c Consolidated amount differ from the comparable amounts under the

. equity method of accounting

d None of the foregoing

.
ANS: B PTS: 1 REF: guerrero txtbook, mc

3. Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill
purchases merchandise inventory from Webb at 140% of Webb's cost. During
2010, merchandise that cost Webb P40,000 was sold to Twill. Twill sold all of this
merchandise to unrelated customers for P81,200 during 2010. In preparing
combined financial statements for 2010, Nolan's bookkeeper disregarded the
common ownership of Twill and Webb. By what amount was unadjusted revenue
overstated in the combined income statement for 2010?

a P16,000 b P40,000 c P56,000 d P81,200

. . . .
ANS: C
overstatement: 56000 = 40,000 x 140%

PTS: 1
4. On September 1, 2010, Faith Company purchased 75% of the outstanding shares
of Superman at a cost of P2,400,000. On that date, Superman had P2,500,000 of
capital stock and P1,000,000 of retained earnings. For 2010, Faith reported
income from its separate operations of P1,525,000 and paid dividends of
P175,000, while Superman reported net income of P570,000 and paid dividends
of P105,000 on December 31, 2010. Income of Superman was evenly throughout
the year.

On November 1, 2010, Faith purchased an equipment from Superman for

P500,000. The book value of the equipment was P620,000. The loss was reflected
in the income of Superman in its books. The equipment has a remaining life of 4
years from the date of the sale. In the December 31, 2010 consolidated financial
statements, how much is the consolidated net income attributable to Faith?

a Some other amount c P1,675,000

. .
b P1,751,250 d P1,976,250
. .
ANS: A
net inc.-superman ((570,000+120,000)/12*4) 230,0
00
realized loss on sale (5,000)
225,000
x % controlling interest 75%
Adjusted NI of subsidiary 168,750
gain on acquisition (2,400,000- 225,000
(3,500,000*.75)
adjusted net inc.-Faith
net income 1,525,0
00
div. revenue (78,7 1,446,2
50) 50
CNI attributable to 1,840,0
Faith 00

PTS: 1

5. On January 2, 2003 Ryan Co. purchased 75% of Dale Co’s outstanding common
stock. Selected balance sheet at December 31, 2003 is as follows:

Ryan Dale
Total Assets P840,000 P360,000
Liabilities P240,000 P120,000
Common stock 200,000 100,000
Retained Earnings 400,000 140,000
Total Liabilities and SHE P840,000 P360,000

During 2003, Ryan and Dale paid cash dividends of P50,000 and P10,000,
respectively to their shareholders. There were no other intercompany
transactions.
 In December 31, 2003 consolidated statement of retained earnings, what amount
should Ryan report as dividend paid?

a P10,000 b P50,000 c P52,500 d P60,000

. . . .
ANS: B
The 10,000 cash dividend paid by Dale Co. must be eliminated in preparing the Consolidated
Statement of Retained Earnings.

PTS: 1

6. In Ryan’s December 31, 2003 consolidated balance sheet, what amount should
be reported as non-controlling interest?

a a. P-0- b a. P60,000 c P90,000 d P210,00

. . . .
ANS: B
NCI: 60,000=240,000 x 25%

PTS: 1 NOT: refer to number 5

7. In its December 31, 2003 consolidated balance sheet, what amount should be
reported as common stock?

a P100,000 b P200,000 c P275,000 d P300,000

. . . .
ANS: B PTS: 1 NOT: refer to number 5

8. Cute Company, the 90% owned subsidiary of Ganda Corporation had a net
income of P60,000 and declared and paid dividends of P20,000 for the fiscal year
ended March 31, 2010. Depreciation and amortization of differences between the
current fair values and carrying amounts of Cute’s identifiable net assets for the
year ended March 31, 2010 totaled P10,000. The amount of the working paper
elimination of Ganda Corporation and subsidiary for non-controlling interest in the
net income of the subsidiary for the year ended March 31, 2010 is:

a a. P2,000 c P5,000
. .
b P4,000 d Some other amount
. .
ANS: C
net income 60,000

dep'n & amort'n of excess (10,000)

adjusted net income 50,000

X 10%
NCINIS 5,000

PTS: 1
9. Consolidated financial statements are appropriate for Pro Corporation, Soy
Company, and San Compnay if:

a Pro owns all the outstanding common stock for Soy and San; Soy is
. being liquidated in bankruptcy proceedings

b Pro owns 55% of the outstanding common stock of Soy and 50% of the
. outstanding common stock of San

c Pro owns 40% of the outstanding common stock of Soy and 85% of
. outstanding common stock of San; unrelated Gel Corporation owns
40% of the outstanding common stock of Soy

d Pro owns 35% of the outstanding common stock of Soy and 80% of the
. outstanding common stock of San; San owns 45% of the outstanding
common stock of Soy

ANS: D
Answer letter D is an example of indirect holdings.

PTS: 1

10. Water Co. owns 80% of the outstanding common stock of Fire Co. On December
31, 2010, Fire sold equipment to Water at a price in excess of Fire's carrying
amount, but less than its original cost. On a consolidated balance sheet at
December 31, 2010, the carrying amount of the (cost less accumulated
depreciation) equipment should be reported at:

a Water's original cost. c Water's original cost less Fire's

. . recorded gain.

b Fire's original cost. d Water's original cost less 80% of

. . Fire's recorded gain.

ANS: C PTS: 1

11. Bedong Corporation purchased 70% of Diane Company’s outstanding stock on

January 2, 2010 for P346,500 cash. At that date, Diane Co. reported book value of
its net assets as P420,000. The excess is allocated to a depreciable asset with a
remaining life of 10 years. The companies reported the following data for 2010:

Retained
Earnings,
January 1 Net Income Dividends
Bedong Corp. P780,000 P180,000 P75,000
Diane Co. 345,000 37,500 15,000
Non-controlling interest is measured at its estimated fair value. The following
entry was included in the eliminating entries to prepare the consolidated financial
statements at December 31, 2010:

Retained Earnings-1/1-Diane 31,500

Non-controlling Interest 31,500

 What is the amount of retained earnings of Diane Co. on January 2, 2010?

a a. P232,500 b P247,500 c P240,000 d P255,000

. . . .
ANS: A PTS: 1

12. What is the consolidated retained earnings to be reported on January 2011?

a P853,500 b P885,000 c P861,000 d P1,125,000

. . . .
ANS: A PTS: 1

13. What is the consolidated net income attributable to parent shareholders on

December 31, 2011?

a P199,500 b P190,500 c P217,500 d P210,000

. . . .
ANS: B PTS: 1

14. What is the consolidated retained earnings at December 31, 2011?

a P969,000 b P895,500 c P978,000 d P1,035,000

. . . .
ANS: A PTS: 1

15. Big Company owns 100 percent of the outstanding shares of Little. During the
current year, Big sold inventory costing P90,000 to Little for P100,000. Although
this inventory has now been sold to an outside party, Little has not repaid Big. At
the balance sheet date, Big has total current assets of P800,000 whereas Little
has total current assets of P500,000. Assume that there were no allocations
established at the date of acquisition. What is the total amount reported on the
consolidated balance sheet for current assets?

a P1,190,000 b P1,200,000 c P1,210,000 d P1,300,000

. . . .
ANS: B
Big's total current 800,00
assets 0
receivable from Little (100,00
0)
Big's current assets 700,00
0
Little's current assets 500,00
0
consolidated current asset 1,200,00
0

PTS: 1
16. Big Company owns 100 percent of the outstanding shares of Little. During the
current year, Big sold inventory costing P90,000 to Little for P100,000. Little has
resold all of this merchandise to outside parties by the last day of the year. For
the year, Big reported cost of goods sold of P600,000 and Little reported cost of
goods sold of P500,000. What is the total amount reported on the consolidated
income statement for cost of goods sold?

a P1,100,000 c P1,010,000
. .
b P1,090,000 d P1,000,00
. .
ANS: D
Big's COGS 600,00
0
intercompany sale (100,00
0)
Total 500,00
0
Little's COGS 500,00
0
consolidated COGS 1,000,00
0

PTS: 1

17. Parent Company owns all of the outstanding shares of Son Company. On January
1, Year One, Parent transfers a building to Son for its fair value of P400,000. At
that date, Parent was reporting this building at a net book value of P320,000 with
no residual value and a remaining life of ten years. In taking the individual
records of these two companies at the end of Year One and turning them into
consolidated statements, what is the impact on net income created by this
transfer?

a There is no impact when consolidated net income is computed.

.
b A reduction of P80,000 is made to arrive at consolidated net income.
.
c A reduction of P72,000 is made to arrive at consolidated net income.
.
d A reduction of P48,000 is made to arrive
.
ANS: C
price of selling affiliate 400,00
0
net book value in selling affiliate (320,00
0)
unrealized gain on sale bldg(elim) 80,00
0
realized gain on sale of bldg (8,00
0)
adjustment in net income-reduction 72,00
0
 PTS: 1

18. Several years ago, Jumbo Corporation bought Shrimp Company. Shrimp was a
supplier of merchandise for Jumbo and one of the primary reasons for this
acquisition was so that Jumbo could save money on these purchases. In the
current year, Jumbo reports cost of goods sold of P900,000 while Shrimp reports
P500,000. Half of Shrimp’s sales were made to Jumbo for P400,000. As of the last
day of the year, Jumbo still held 10 percent of these goods and planned to sell
them early in the following year. What amount should Jumbo report as
consolidated cost of goods sold?

a P1,015,000 b P1,040,000 c P1,165,000 d P1,190,000

. . . .
ANS: A
COGS-Shrimp 500,0
00
intercompany sale (400,00
0)
unrealized profit((400,000-250,000)*10%) 15,0
00
COGS-Jumbo 900,0
00
consolidated COGS 1,015,0
00

PTS: 1

19. On January 2, 2011, Pare Co. acquired 75% of Kidd Co.'s outstanding common
stock. Selected balance sheet data at December 31, 2011, is as follows:

Pare Kid
Total assets P420,000 P180,000
Liabilities P120,000 P 60,000
Common stock 100,000 50,000
Retained earnings 200,000 70,000
P420,000 P180,000
During 2011, Pare and Kidd paid cash dividends of P25,000 and P5,000,
respectively, to their shareholders. There were no other intercompany
transactions.

In its December 31, 2011, consolidated statement of retained earnings, what

amount should Pare report as dividends paid?

a P5,000 b P25,000 c P26,250 d P30,000

. . . .
ANS: B PTS: 1

20. Kylie Company’s balance sheet on December 31, 2010 was as follows:

Assets
 Cash P80,000
Trade and other receivable(net) 160,000
Inventories 400,000
plant assets(net) 720,000
Total assets P1,360,000

Liabilities and SHE

Current Liabilities P240,000
Long -term debt 400,000
Common Stock, P1 80,000
Additional Paid in Capital 160,000
Retained earnings 480,000
Total Liabilities and stockholder's equity P1,360,000

On December 31, 2010, Kaye Corporation acquired all the outstanding common
stock of Kylie for P1,200,000. On that date, the current fair value of Kylie’s
inventories was P360,000 and the current fair value of Kylie’s plant assets was
P800,000. The current fair values of all the other identifiable assets and liabilities
of Kylie were equal to their carrying amounts.

As a result of the acquisition of Kylie by Kaye, the December 31, 2010

consolidated balance of Kaye and subsidiary displays goodwill in the amount of:

a P400,000 c P520,000
. .
b P440,000 d Some other amount
. .
ANS: B
Cost P1,200,000
FV of INA(1,400,000-640,000) (760,000)
Goodwill P 440,000

PTS: 1

21. Assuming the unconsolidated balance sheet of Kaye Corporation on December

31, 2010 included retained earnings of P1,600,000, what amount of retained
earnings is displayed in the December 31, 2010 consolidated balance sheet of
Kaye corporation and subsidiary?

a P1,600,000 c P2,240,000
. .
b P2,080,000 d Some other amount
. .
ANS: A
Only the Retained Earnings of the parent remains in the consolidated Financial Position.

PTS: 1
22. Selected information from the separate and consolidated balance sheets and
income statements of Pare, Inc. and its subsidiary, Shel Co., as of December 31,
2011, and for the year then ended is as follows:

Pare Shel Consolidated

Balance sheet accounts
Accounts receivable P52000 P38,000 P78,000
60,00 50,00
Inventory 0 0 104,000

Income statement accounts

Revenues P400,000 P280,000 P616,000
300,00 220,00
Cost of goods sold 0 0 462,000
100,00 60,00
Gross profit 0 0 154,000

Additional information:

During 2011, Pare sold goods to Shel at the same markup on cost that Pare uses
for all sales.

What was the amount of intercompany sales from Pare to Shel during 2011?

a P6,000 b P12,000 c P58,000 d P64,000

. . . .
ANS: D
Revenue-Pare P 400,000
Revenue-Shel 280,000
Consolidated Revenue (616,000)
Intercompany Sales P 64,000

PTS: 1

23. At December 31, 2011, what was the amount of Shel's payable to Pare for
intercompany sales?

a P6,000 b P12,000 c P58,000 d P64,000

. . . .
ANS: B
A/R-Pare P 52,000
A/R-Shel 38,000
Consolidated A/R (78,000)
A/P of Shel from intercompany sale P 12,000

PTS: 1

24. In Pare's consolidating worksheet, what amount of unrealized intercompany profit

was eliminated?

a P6,000 b P12,000 c P58,000 d P64,000

. . . .
 ANS: A
Inventory-Pare P 60,000
Inventory-Shel 50,000
Consoliodated Inventory (104,000)
Unrealized Intercompany Profit P 6,000

PTS: 1

25. Sun, Inc. is a wholly owned subsidiary of Patton, Inc. On June 1, 2010, Patton
declared and paid a P1 per share cash dividend to stockholders of record on May
15, 2010. On May 1, 2010, Sun bought 10,000 shares of Patton's common stock
for P700,000 on the open market, when the book value per share was P30. What
amount of gain should Patton report from this transaction in its consolidated
income statement for the year ended December 31,2010?
a P0 b P390,000 c P400,000 d P410,000
. . . .
ANS: A
Choice "a" is correct, P0 gain from the purchase of Patton's (parent) stock by Sun (subsidiary). The
purchase by the member of a consolidated group of stock of another member of the consolidated
group is treated as a treasury stock transaction. This follows the theory of consolidated financial
statements presenting one economic entity. (You cannot make money selling stock to yourself.)

PTS: 1

26. Port, Inc. owns 100% of Salem Inc. On January 1, 2009, Port sold Salem delivery
equipment at a gain. Port had owned the equipment for two years and used a
five-year straight-line depreciation rate with no residual value. Salem is using a
three-year straight-line depreciation rate with no residual value for the
equipment. In the consolidated income statement, Salem's recorded depreciation
expense on the equipment for 2009 will be decreased by:
a 20% of the gain on sale. c 50% of the gain on sale.
. .
b 33 1/3% of the gain on sale. d 100% of the gain on sale.
. .
ANS: B
Choice "b" is correct; depreciation expense will be decreased by 33 1/3% of the gain on sale, the
amount that depreciation expense has been overstated.
Example:
Original purchase price by Port P 100
Two years' depreciation (P100 5 P20 per year 2) (40)
Net book value at date of sale P 60
Sale price to Salem 75
Gain on sale P 15

Depreciation expense recorded by Salem (P75 3 year life) P 25

Consolidated depreciation expense (P100 5 year life) 20
Elimination of excess depreciation (P15 gain x 1/3) P 5

PTS: 1
27. A 70%-owned subsidiary company declares and pays a cash dividend. What
effect does the dividend have on the retained earnings and noncontrolling
interest balances in the parent company's consolidated balance sheet?
a No effect on either retained earnings or noncontrolling interest.
.
b No effect on retained earnings and a decrease in noncontrolling
. interest.
c Decrea.ses in both retained earnings and noncontrolling interest.
.
d A decrease in retained earnings and no effect on noncontrolling
. interest.
ANS: B PTS: 1

28. The following information pertains to shipments of merchandise from Home Office
to Branch during 20X1:

Home Office's cost of merchandise P160,000

Intracompany billing 200,000
Sales by Branch 250,000
Unsold merchandise at Branch on December 31, 20X1 20,000

In the combined income statement of Home Office and Branch for the year ended
December 31, 20X1, what amount of the above transactions should be included
in sales?
a P250,000 b P230,000 c P200,000 d P180,000
. . . .
ANS: A
Rule: All intercompany billings are eliminated in consolidation.
Choice "a" is correct, P250,000. Sales by the branch are to outside parties and are not eliminated.
Choices "b", "c", and "d" are incorrectf per the above explanation.

PTS: 1

29. Ahm Corp. owns 90% of Bee Corp.'s common stock and 80% of Cee Corp.'s
common stock. The remaining common shares of Bee and Cee are owned by their
respective employees. Bee sells exclusively to Cee, Cee buys exclusively from
Bee, and Cee sells exclusively to unrelated companies. Selected 20X1 information
for Bee and Cee follows:
Bee Corp. Cee Corp.
Sales 130,000 91,000
Cost of sales 100,000 65,000
Beginning inventory none none
Ending inventory none 65,000

What amount should be reported as gross profit in Bee and Cee's combined
income statement for the year ended December 31, 20X1?
a P26,000 b P41,000 c P47,800 d P56,000
. . . .
ANS: B
 Choice "b" is correct, $41,000 gross profit in combined income statement.
Rule: "Combined financial statements" do not eliminate "equity" accounts (they are all added across);
however, all other intercompany "transactions" and "balances" are eliminated in combined financial
statements just as they are in consolidated financial statements.

PTS: 1

30. Wright Corp. has several subsidiaries that are included in its consolidated
financial statements. In its December 31, 20X2, trial balance, Wright had the
following intercompany balances before eliminations:
Debit Credit
32,
Current receivable due from Main Co. 000
114,
Noncurrent receivable from Main 000
6,
Cash advance to Corn Corp. 000
Cash advance from King Co. 15,000
101,0
Intercompany payable to King 00
In its December 31, 20X2, consolidated balance sheet, what amount should
Wright report as intercompany receivables?
a P152,000 b P146,000 c P36,000 d P0
. . . .
ANS: D PTS: 1

31. Perez, Inc. owns 80% of Senior, Inc. During 20X2, Perez sold goods with a 40%
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% of the
 . intercompany sales.
c Net income should be reduced by 80% of the gross profit on
. intercompany sales.
d No adjustment is necessary.
.
ANS: A PTS: 1

32. On January 1, 20X0, Poe Corp. sold a machine for P900,000 to Saxe Corp., its
wholly-owned subsidiary. Poe paid P1,100,000 for this machine, which had
accumulated depreciation of P250,000. Poe estimated a P100,000 salvage value
and depreciated the machine on the straight-line method over 20 years, a policy
which Saxe continued. In Poe's December 31, 20X0, consolidated balance sheet,
this machine should be included in cost and accumulated depreciation as:
Cost Accumulated Depreciation
a P1,100,000 P300,000
.
b P1,100,000 P290,000
.
c P900,000 P40,000
.
d P850,000 P42,500
.
ANS: A
Original Cost 1,100,000
Salvage Value (100,000)
Deprecaible Amount 1,000,000
divided by: 20 yrs
Original Depreciation 50,000
Accumulated Depreciation-before interco. sale 250,000
Consolidated Accum. Depreciation 300,000

Consolidated Equipment balance 1,100,000

PTS: 1

33. CPA Corp. acquired a 70% interest in BSAC Co. in 2011. For the year ended
December 31, 2011 and 2012, BSAC reported net income of P160,000 and
P180,000, respectively. During 2011, BSAC sold merchandise to CPA for P20,000
at a profit of P4,000. The merchandise was later resold by CPA Corp. to outsider
for P30,000 during 2012. For consolidation purposes, what is the non-controlling
interest’s share of BSAC’s net income for 2011 and 2012, respectively?
2011 2012
a P46,800 P55,200
.
b P48,000 P54,000
.
c P49,000 P52,800
.
d P53,200 P50,000
.
 ANS: A
2011 2012
Net Income of Subsidiary 160,000 180,000
Intercompany Profit (4,000) 4,000
Adjusted Net Income of Subsidiary 156,000 184,000
%NCI 30% 30%
NCINIS 46,800 55,200

PTS: 1

34. Mr. Cord owns four corporations. Combined financial statements are being
prepared for these corporations, which have intercompany loans of P200,000 and
intercompany profits of P500,000. What amount of these intercompany loans and
profits should be included in the combined financial statements?
Intercompany
Loans Profits
a P200,000 P0
.
b P200,000 P500,000
.
c P0 P0
.
d P0 P500,000
.
ANS: C PTS: 1

35. SS, a private company has arranged for CC a public company to acquire it as a
means of obtaining a stock exchange listing. CC issues 15 million shares to
acquire the whole of the share capital of SS (6 million shares). The fair value of
the net assets of SS and CC are P30 million and P18 million respectively. The fair
value of each of the shares of SS is P6 and the quoted market price of CC’s shares
is P2. The share capital of CC is P25 million shares after the acquisition. Calculate
the value of the goodwill in the above acquisition.
a P16 million b P12 million c P10 million d 6 million
. . . .
ANS: D
Consideration transfered(4M* x 6) P24,000,000
less: book value of SHE-Man: 18,000,000 x 100% 18,000,000
allocated excess 6,000,000
less:over/under valuation of INA 0
Goodwill 6,000,000
100%
* Man-------------------------------------->Mask
currently issued 15M 60%** 6M 60%
additional shares issued 10M 40% <---------------------4M 40%
total shares 25M (4M/40%) 10M
**15M/25M

PTS: 1 REF: Dayag Reviewer

36. On January 1, 20X1, Dallas, Inc. acquired 80% of Style, Inc.'s outstanding
common stock for P120,000. On that date, the carrying amounts of Style's assets
and liabilities approximated their fair values. During 20X1, Style paid P5,000 cash
dividends to its stockholders. Summarized balance sheet information for the two
companies follows:
Dallas Style
12/31/201
1 12/31/2011 1/31/2011
132,0
Investment in Style(equity method) 00

Other asset 138,000 115,000 100,000

270,000 115,000 100,000

Common Stock 50,000 20,000 20,000

80,2 44,00 44,00
Additional Paid in Capital 50 0 0
Retained Earnings 139,750 51,000 36,000
270,000 115,000 100,000
What amount should Dallas report as earnings from subsidiary, in its 20X1
income statement?
a P12,000 b P15,000 c P16,000 d P20,000
. . . .
ANS: C PTS: 1

37. What amount of total stockholders' equity should be reported in Dallas'

December 31, 20X1, consolidated balance sheet?
a P270,000 b P286,000 c P362,000 d P385,000
. . . .
ANS: A PTS: 1

38. On January 1, 20X9, Pacific Corporation acquired 75% of Sand Corporation's

200,000 outstanding common shares for P2,850,000. The remaining shares
traded at P18.50 per share on the acquisition date. On January 1, the book value
of Sand's net assets was P3,000,000. Book value equaled fair value for all of
Sand's assets and liabilities except land, which had a fair value P200,000 greater
than book value, and equipment, which had a fair value P150,000 greater than
book value. On January 1, 20X9, Sand had a noncompete agreement with a fair
value of P300,000. What is the goodwill to be reported on Pacific Corporation's
December 31, 20X9 balance sheet?
a P125,000 b P287,500 c P337,500 d P425,000
. . . .
ANS: A PTS: 1

39. On October 1, 20X8, Pepper Inc. acquired 100% of Salt Inc. for P275,000. On that
date, the carrying values of Salt Inc.'s assets and liabilities were P450,000 and
P200,000, respectively. The fair values of Salt's assets and liabilities were
P550,000 and P200,000, respectively. Additionally, Salt had identifiable intangible
assets at the time of acquisition with a fair value of P60,000. What is the gain to
be reported on Pepper's December 31, 20X8 consolidated income statement?
 a P0 b P25,000 c P75,000 d P135,000
. . . .
ANS: D
cost of 275,000 less fv of 410,000 = 135,000 gain on bargain purchase

PTS: 1

40. Refer to information given in item number 19. In Pare's December 31, 2011,
consolidated balance sheet, what amount should be reported as non-controlling
interest in net assets?
a P0 b P30,000 c P45,000 d P105,000
. . . .
ANS: B PTS: 1

41. Which of the following is not typical of the journal entries prepared by a parent
company to account for its subsidiary’s operations under the cost method of
accounting?

a Accrual of parent company’s share of the subsidiary’s net income or

. loss
b A credit to the intercompany dividend income account
.
c Depreciation and amortization of the differences between current fair
. values and book values of the subsidiary’s identifiable net assets on
the date of the acquisition
d None of the foregoing
.
ANS: A PTS: 1

42. In the consolidated income statements, the NCI net income should be:

a Subtracted to arrive at the consolidated net income if the subsidiary

. had a net income
b Added to arrive at consolidated net income if the subsidiary had a net
. income
c Subtracted to arrive at the consolidated net income if the subsidiary
. had a net loss
d Subtracted to arrive at the consolidated net loss if both the parent and
. the subsidiary had a net loss
ANS: B PTS: 1

43. Under the cost method of accounting for the investment, the consolidated
retained earnings are equal to:

a The parent’s retained earnings

.
b The parent retained earnings adjusted for the amortization of the
. excess of cost
c The parent retained earnings less dividends paid by parent
.
d The parent retained earnings adjusted for the amortization of the
 . excess of cost, changes in the retained earnings of the subsidiary, and
dividends paid by subsidiary to parent
ANS: D PTS: 1

44. P Company sells inventory items to its subsidiary, S company. If the unrealized
profits in S Co.’s 2010 year-end inventory exceed the unrealized profits in its 2009
year-end inventory:

a Combined cost of sale will be less than the consolidated cost of sales
. in 2009

b Combined cost of sale will be more than the consolidated cost of sales
. in 2009
c Combined gross profit will be greater than the consolidated gross profit
. in 2009
d Combined sales will be less than consolidated sales in 2009
.
ANS: B PTS: 1

45. The direction of intercompany sales (downstream or upstream) does not affect
consolidation working elimination procedures when the intercompany sales
between affiliated companies are made:

a More than the book value c At book value

. .
b At fair value d To a wholly owned subsidiary
. .
ANS: C PTS: 1

46. The unrealized profit in the intercompany sales above cost is elinated in the
consolidated balance sheet from the :

a Seller’s beginning inventory c Seller’s ending inventory

. .
b Buyer’s beginning inventory d Buyer’s ending inventory
. .
ANS: D PTS: 1

47. When an 65%-owned subsidiary records a gain on sale to a parent during the
current period and the land is not resold before the end of the period:

a The full amount of the gain will be excluded from the consolidated net
. income
b Consolidated net income will be increased by the full amount of gain
.
c A proportionate share of the unrealized gain will be excluded from the
. income assigned to NCI
d The full amount of the unrealized gain will be excluded from the
. income assigned to NCI
ANS: A PTS: 1
48. If an intercompany sale of a depreciable asset occurs on the last day of the period
and results in a gain to seller:

a The whole of downstream gain must be removed from the

. consolidated net income
b The parent’s proportionate share of an upstream gain must be
. removed from the consolidated net income and the remainder
removed from the NCI net income
c The asset must be shown on the consolidated balance sheet at its
. original book value
d All of the above
.
ANS: D PTS: 1

49. In 2011, a depreciable asset is sold to an affiliate at a loss. What is the effect do
the working paper eliminating entries which defer or recognize the effect of this
intercompany sale have on the consolidated net income in 2011 and 2012?

2011 2012

a Increase Increase
.
b Increase Decrease
.
c Decrease Increase
.
d Decrease Decrease
.
ANS: B PTS: 1

50. A parent buys merchandise from its 90%-owned subsidiary above cost and does
not resell it before the year-end. What percent of the unrealized profit in the
parent’s ending inventory should be removed from the consolidated net income?

a 90% b 100% c 10% d None

. . . .
ANS: B PTS: 1