Intercompany Profit Transaction Research Paper

Chapter 5 109 Chapter 5 INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES SOLUTIONS TO EXERCISES Solution E5-1 1 a 5 c 2 d 6 a 3 a 7 a 4 c 8 c Solution E5-2 [AICPA adapted] 1 a 2 c Unrealized profits from intercompany sales with Kent are eliminated from the ending inventory: $320,000 combined current assets less $12,000 unrealized profit ($60,000 × 20%). 3 c Combined cost of sales of $750,000 less $250,000 intercompany sales Solution 5-3 1 d Philly's separate income $1,000,000 Add: Share of Silvio's income ($500,000 × 100%) 500,000 Add: Realization of profit deferred in 2006 $1,500,000 - ($1,500,000/150%) 500,000 Less: Unrealized profit in 2007 inventory $1,200,000 - ($1,200,000/150%) (400,000 ) Consolidated net income $1,600,000 2 d Combined sales $1,400,000 Less: Intercompany sales (50,000 ) Consolidated sales $1,350,000 3 c Combined cost of sales $ 680,000 Less: Intercompany purchases (50,000) 109


LO16.On January 2, 2005 Kakapo Company sold a truck with book valueof $45,000 to Flightless Corporation, its completely ownedsubsidiary, for $60,000. The truck had a remaining useful lifeof three years with zero salvage value. Both firms use thestraight-line depreciation method, and assume no salvage value.If Kakapo failed to make year-end equity adjustments, Kakapo’sinvestment in Flightless at December 31, 2005 wasa.$5,000 too high.b.$10,000 too low.c.$10,000 too high.d.$15,000 too high.LO1, 2 & 4Use the following information to answer questions 7 through 10.On January 1, 2003, Shrimp Corporation purchased a deliverytruck with an expected useful life of five years. On January 1,2005, Shrimp sold the truck to Avocet Corporation and recordedthe following journal entry:DebitCreditCash50,000Accumulated depreciation18,000Truck53,000Gain on Sale of Truck15,000Avocet holds 60% of Shrimp. Shrimp reported net income of$55,000 in 2005 and Avocet's separate net income (excludesinterest in Shrimp) for 2005 was $98,000.LO17.In preparing the consolidated financial statements for 2005,the elimination entry for depreciation expense was aa.debit for $5, for $5,000.c.debit for $15, for $15,000.LO18.In the consolidation working papers, the


account wasa.debited for $3,000.b.credited for $3,000.c.debited for $15,000.d.credited for $15,000.

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