Theories
MULTIPLE CHOICE
1. In reference to the downstream or upstream sale of depreciable assets, which of the following
statements is correct?
a. Upstream sales from the subsidiary to the parent company always result in unrealized gains or
losses.
b. The initial effect of unrealized gains and losses from downstream sales of depreciable assets is
different from the sale of non-depreciable assets.
c. Gains, but not losses, appear in the parent company accounts in the year of sale and must be
eliminated by the parent company in determining its investment income under the equity method
of accounting.
d. Gains and losses appear in the parent company accounts in the year of sale and must be
eliminated by the parent company determining its investment income under the equity method of
accounting.
2. In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting
1. Retained Earnings-P Co 2. Retained Earnings - S Co 3. Gain on Sale of Land.
a. 1
b. 2
c. 3
d. both 1 and 2
3. In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a
gain, the non-controlling interest in consolidated income is computed by multiplying the non-controlling
interest percentage by the subsidiary's reported net income
a. minus the net amount of unrealized gain on the intercompany sale.
b. plus the net amount of unrealized gain on the intercompany sale.
c. minus intercompany gain considered reaized in the current period.
d. plus intercompany gain considered realized in the current period.
4. Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of the
intercompany sale, a workpoper entry is made under the cost method debiting
a. Retained Earnings - P.
b. Non-controlling interest
c. Equipment
d. all of these.
5. P Corp. owns 90% of the outstanding common stock of s Company. On December 31, 20x4, S sold
equipment to P for an amount greater than the equipment's book value but less than its original cost. The
equipment should be reported on the December 31, 20x4 consolidated balance sheet at
a. P's original cost less 90% of S's recorded gain.
b. P's original cost less S's recorded gain.
c. S's original cost.
d. P's original cost.
Multiple Choice Problems
Use the following information for questions 1 to 3:
On 1/3/X6, Pylux sold equipment costing P100,000 to its 100%-owned subsidiary, Sylux, for P80,000. At
the time of the sale, the equipment had been 50% depreciated (using the straight-line method and an
assigned life of 10 years). Sylux continued depreciating the equipment by using the straight-line method
over a remaining life of 5 years.
1. What are the cost and accumulated depreciation, respectively, of this equipment in the 12/31/x6
consolidated balance sheet?
a. P80,000 and P16,000.
b. P80,000 and P56,000.
c. P80,000 and P60,000.
d. P100,000 and P16,000.
e. P100,000 and P60,000.
2. What is the amount of the intercompany profit or loss that must be deferred at 12/31/x6?
a. P6,000
b. P14,000
c. P16,000
d. P24,000
e. P30,000
3. What is the amount of the adjustment to Depreciation Expense in preparing the consolidation
worksheet at 12/31/x6?
a. P-0-
b. P3,000
C. P4,000
d. P5,000
e. P6,000
4. Petunia Corporation owns 100% of Stone Company's common stock. On January 1, 20x4, Petunia sold
equipment with a book value of P210,000 to Stone for P300,000. Stone is depreciating the equipment
over a ten-year life by the straight-line method. The net adjustments to compute 20x4 and 20x5
consolidated income would be an increase (decrease) of
20x4 20x5
a. (P90,000) Р 0
b. (P90,000) P9,000
c. (P81,000) P 0
d. (P81,000) P9,000
5. Patriot Corporation owns 100% of Simon Company's common stock. On January 1, 20x4, Patriot sold
equipment with a book value of P350,000 to Simon for P400,000. Simon is depreciating the equipment
over a ten-yeat life by the straight-line method. The net adjustments to compute 20x4 and 20x5
consolidated income would be an increase (decrease) of
20x4 20x5
a. (P150,000) Р -0-
b. (P150,000) P15,000
c. (P135,000) P -0-
d. (P135,000) P15,000
ANSWER AND SOLUTIONS:
Theories
1) D
2) C
3) D
4) D
5) B
Multiple Choice Problems
1) e
Original cost of P 100,000
Accumulated depreciation, 1/1/20x6 (P100,000 x 50%) P 50,000
Add: Additional depreciation (P100,000 – P50,000) / 5 years ___10,000
Accumulated depreciation, 12/31/20x6 P 60,000
2) d
Sales price P 80,000
Less: Book value
Cost P100,000
Less: Accumulated depreciation (50% x P100,000) __50,000 __50,000
Unrealized gain on sale P 30,000
Less: Realized gain - depreciation (P30,000 / 5 years) ___6,000
Net unrealized gain, 12/31/20x6 P 24,000
3) e
Eliminating entries:
12/31/20x6: subsequent to date of acquisition
Realized Gain – depreciation
Accumulated depreciation 6,000
Depreciation expense 6,000
[P80,000 - (P100,000 - {P100,000 x 50%])] = P30,000 / 5 years or
P15,000 – P8,000 = P7,000
“Should be in CFS” Parent – Pylux “Recorded as” Subsidiary - Sylux
Depreciation expense Depreciation expense
(P50,000 /5 years) 10,000 (P80,000 / 5 years) 16,000
Acc. Depreciation 8,000 Acc. depreciation 16,000
4) d
20x4 20x5
Unrealized gain on sales of equipment (downstream sales) ( 90,000) -0-
Realized gain on sale of equipment (downstream sales) through depreciation
P90,000 / 10 years ___9,000 9,000
Net ( 81,000) 9,000
5) d
20x4 20x5
Unrealized gain on sale of equipment (downstream sales) ( 150,000) -0-
Realized gain on sale of equipment (downstream sales) through depreciation
P150,000 / 10 years ___15,000 15,000
Net ( 135,000) 15,000
