Modern Advanced Accounting in Canada 8th Edition By Murray Hilton – Test Bank
1. Intercompany profits on sales of inventory are only realized:
A. once the seller receives payment for the sale.
B. once the inventory has been sold to outsiders.
C. when the inventory has been received by the purchaser.
D. when the inventory has been shipped to the purchaser.
2. If a parent company borrows money from its subsidiary, what effect (if any) will this have on the non-controlling interest?
A. This would have no effect on the non-controlling interest.
B. The subsidiary would book its pro-rata share of any interest revenue.
C. The non-controlling interest balance would be reduced by the amount of the loan.
D. The subsidiary would record any interest revenue as an extraordinary gain.
3. How would any management fees charged by a Parent Company to its Subsidiary be accounted for during the consolidation process?
A. The Parent Company would only record its pro rata share of any management revenues.
B. The Parent Company’s profit on the rendering of management services would be charged to retained earnings.
C. Both the Parent’s management fees and the subsidiary’s related expense would be eliminated when preparing Consolidated Financial Statements.
D. No special accounting treatment is required, since this would have no effect on Consolidated Net Income.
4. Which of the following statements best describes the required accounting treatment with respect to income taxes on unrealized intercompany profits?
A. These taxes can be ignored since an increase in income tax expense for one company is offset by an equivalent reduction in Income Tax expense for the other.
B. They would be recognized as assets for the purchasing entity and liabilities for the selling entity.
C. They would be recognized as assets for the selling entity.
D. They would be charged to retained earnings during the preparation of Financial Statements.
X Inc. owns 80% of Y Inc. During 2018, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y’s warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X’s warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc.
5. What is the after-tax dollar value of X’s unrealized profits during the year on its sales to Y?
6. What is the after-tax dollar value of X’s realized profits during the year on its sales to Y?
7. What is the after-tax dollar value of Y’s unrealized profits during the year on its sales to X?
8. What is the after-tax dollar value of Y’s realized profits during the year on its sales to X?