Modern Advanced Accounting in Canada 9Th Edition By Darrel -Test Bank
Chapter 07
(A) Intercompany Profits in Depreciable Assets (B) Intercompany Bondholdings
Multiple Choice Questions
1. Rin owns 90% of Stempy Inc. On January 1, 2019, the investment in Stempy account had a balance of $350,000 and Stempy’s common shares and retained earnings on that date were valued at $200,000 and $100,889 respectively. Moreover, the assets to which the unamortized acquisition differential relates had a remaining life of 10 years on that date. Rin uses the equity method to account for its investment in Stempy.
Rin sold depreciable assets to Stempy on January 1, 2019 at an after-tax gain of $10,000. On January 1, 2020, Stempy sold depreciable assets to Rin at an after-tax gain of $20,000. Both assets are being depreciated over 10 years.
The tax rate for both companies is zero.
Stempy’s Net Income and Dividends for 2019 and 2020 are shown below.
2019 2020
Net Income $80,000 $120,000
Dividends $20,000 $30,000
How much intercompany (after-tax) profit was realized during 2020 from Rin’s 2019 sale of assets to Stempy?
A. $9,000
B. $1,000
C. $2,000
D. $900
After-tax profit realized during 2020 from Rin’s 2019 sale of assets to Stempy = $1,000 = $10,000/10 years.
Before tax 0% tax After tax
Equipment Gain–Rin (parent) selling to Stempy (sub)
Intercompany gain, Jan.1,2019 $10,000 0 $10,000
less: realized by depreciation in 2019 (10 years straight-line) $1,000 0 $1,000
Balance, unrealized at Dec.31,2019 $9,000 0 $9,000
less: realized by depreciation in 2020 (10 years straight-line) $1,000 0 $1,000
Balance, unrealized at Dec.31,2020 $8,000 0 $8,000
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 07-01 Prepare consolidated financial statements that reflect the elimination and subsequent realization of upstream and downstream intercompany profits in depreciable assets.
Topic: 07-01 (A) Intercompany Profits in Depreciable Assets
Topic: 07-02 Holdback and Realization-Year 4
2. Rin owns 90% of Stempy Inc. On January 1, 2019, the investment in Stempy account had a balance of $350,000 and Stempy’s common shares and retained earnings on that date were valued at $200,000 and $100,889 respectively. Moreover, the assets to which the unamortized acquisition differential relates had a remaining life of 10 years on that date. Rin uses the equity method to account for its investment in Stempy.
The tax rate for both companies is zero.
Rin sold depreciable assets to Stempy on January 1, 2019 at an after-tax gain of $10,000. On January 1, 2020, Stempy sold depreciable assets to Rin at an after-tax gain of $20,000. Both assets are being depreciated over 10 years.
Stempy’s Net Income and Dividends for 2019 and 2020 are shown below.
2019 2020
Net Income $80,000 $120,000
Dividends $20,000 $30,000
How much intercompany (after-tax) profit was realized during 2020 on Stempy’s 2020 sale of assets to Rin?
A. $18,000
B. $1,000
C. $2,000
D. $1,800.
After-tax profit realized during 2020 from Stempy’s 2020 sale of assets to Rin = $2,000 = $20,000/10 years.
Before tax 0% tax After tax
Equipment Gain–Stempy (sub) selling to Rin (parent)
Intercompany gain, Jan.1,2020 $20,000 0 $20,000
less: realized by depreciation in 2020 (10 years straight-line) $2,000 0 $2,000
Balance, unrealized at Dec.31,2020 $18,000 0 $18,000
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