Chapter 8 Solutions - Advanced Modern Accounting in Canada

Chapter 8

(A) Intercompany Profits in

Depreciable Assets

(B) Intercompany Bondholdings

DESCRIPTION OF CASES AND PROBLEMS

Problem 5 (80 min.)

The preparation of a consolidated balance sheet and consolidated retained earnings statement when the parent has used the cost method is required. There are unrealized profits in inventories and land involved as well as intercompany bondholdings, which are accounted for using the effective-interest method. The question also requires the preparation of the year's equity method journal entries and an explanation of why deferred income taxes arise with the elimination of intercompany bondholdings.

Problem 8 (90 min.)

A comprehensive problem that involves all of the consolidation adjustments taken to the end of Chapter 8.

Problem 16 (55 min.)

This comprehensive problem originally appeared on a CMA national examination. It involves an intercompany loss on a building and unrealized gains on equipment and inventories when the parent has used the cost method. The preparation of a consolidated income statement and retained earnings statement is required along with an explanation of the rationale for not always eliminating intercompany losses in depreciable assets. It also compares the straight-line and effective-interest method for bond amortization.

MULTIPLE-CHOICE QUESTIONS

1. d 3,000/.8 – (1,000 + 1,500) = 1,250

2. b 2,100 + 3,500 – (800 – 640) x 6/8 = 5,480

3. a 250 + 300 – (800 – 640) / 8 = 530

4. c 300 + 350 + (800 – 640) / 8 x 40% = 658

5. d [525 + (800 – 640) / 8 x (1 - 40%)] x 20% = 107.4

6. c [1,000 + 2,800 + 525 + 1,250 - (800 – 640) x 6/8 x (1 - 40%)] x 20% = 1,100.6

7. c (800 – 640) x 6/8 x 40% = 48

8. a (800 – 640) x 7/8 x (1 - 40%) = 84

9. b 2005 20,000 x .6 x 4/5 = 9,600

2006 20,000 x .6 x 1/5 = 2,400

10. d

11. c

12. d

13. b [200,000 + 12,000] x 70% = 148,400

14. a 12,000 x 30% x 10% = 360