Reference no: EM1311985

Sale of Machinery to Subsidiary Corporation as well as Calculation of Income in Acquired Company

Q1

Petro Celli Corporation sold machinery with a 3-year remaining useful life to its wholly owned subsidiary, Sun woo Corporation, on July 1, 2003, for a price of $5,000 in excess of its book value. The sales price of the machinery to Sun woo is equal to its fair value. Which of the following statements is correct?

1. From the viewpoint of the consolidated entity, there are no unrealized profits because the transfer was at fair value.
2. No adjustment for unrealized profits is necessary in the consolidation working papers because the subsidiary is 100% owned.
3. The effects of the unrealized profits should be eliminated from investment income under the equity method and from the consolidated financial statements.
4. No adjustment for unrealized profits is required in the consolidation working papers if Petro celli uses the equity method in accounting for its investment in Sun woo

Q2

The material sale f inventory items by a parent company to an affiliated company:

1. Enters he consolidate revenue computation only if the transfer was the result of arms\'s length bargaining
2. Affects consolidated net income under a periodic inventory systems but not under perpetual inventory system
3. Does not result in consolidated income until the merchandise is sold to outside parties
4. Does not require a working paper adjustment if the merchandise was transferred at cost

Q3

Penguin Corporation acquired a 60% interest in Swift Corporation on January 1, 2003, at book value equal to fair value. During 2003, Paquin sold merchandise that cost $90,000 to Swift for $126,000 . One thrd of this merchandise remained in Swift's inventory at December 31, 2003. Swift reported net income at 80,000 for 2003.

Paquin's income from Swift for 2003 is

1. $ 24,000
2. $33,600
3. $36,000
4. $40,800

Q4

Please use information for the following questions:

On January 1, 2003, Dunn Corporation purchased 75% of the common stock of Lapp Corporation. Separate balance sheet data for the companies at the combination date are given below:

At the date of the combination, the book value of Lapp's net assets were equal to the fair value except for Lapp's inventory which had a fair value of 30,000.

Determine below what the consolidated balance would be for each of the requested amounts?                                    

a. What is the reported amount for the minority interest?

1. $34,667
2. $50,000
3. $65,333
4. $75,000

b. What amount of total liabilities will be reported?

1. $103,000
2. $130,500
3.  $156,140
4. $174.000

c. What amount of Goodwill will be reported?

1. $5,250
2. $10,000
3. $21,000
4. 37,750