1. Water Company owns 80 percent of Fire Company's outstanding common stock. On December 31, 20x9, Fire sold equipment to Water at price in excess of Fire's carrying amount, but less than its original cost. On consolidated balance sheet at December 31, 20x9, carrying amount of the equipment must be reported at:
a. Water's original cost
b. Fire's original cost
c. Water's original cost less Fire's recorded gain
d. Water's original cost less 80 percent of Fire's recorded gain
2. Port Inc. owns 100 percent of Salem Inc. On January 1, 20x2, Port sold delivery equipment to Salem at gain. Port had owned equipment for two years and used five-year straight-line depreciation rate with no residual value. Salem is using three-year straight-line depreciation rate with no residual value for equipment. In consolidated income statement, Salem's recorded depreciation expense on equipment for 20x2 will be decreased by:
a. 20 percent of the gain on the sale
b. 33 1/3 percent of the gain on the sale
c. 50 percent of the gain on the sale
d. 100 percent of the gain on the sale
3. Middle Company holds 60 percent of Bottom Corporation's voting shares. Bottom has developed new type of production equipment that seems to be quite marketable. It spent $40,000 in developing equipment; though, Middle agreed to buy production rights for machine for $100,000. If intercompany sale occurred on January 1, 20x2, and production rights are expected to have value for five years, at what amount must rights be reported in consolidated balance sheet for December 31, 20x2?
a. $0
b. $32,000
c. $80,000
d. $100,000
4. A 70 percent owned subsidiary company declares and pays cash dividend. What effect does dividend have on retained earnings and minority interest balances in parent company's consolidated balance sheet?
a. No effect on either retained earnings or minority interest
b. No effect on retained earnings and decrease in minority interest
c. Decreases in both retained earnings and minority interest
d. A decrease in retained earnings and no effect on minority interest
5. On January 1, 20x1, Prim Inc. acquired all of Scrap Inc.'s outstanding common shares for cash equal to stock's book value. Carrying amount of Scrap's assets and liabilities approximated their fair values, except that carrying amount of its building was more than fair value. In creating Prim's 20x2 consolidated income statement, which of the given adjustments would be made?
a. Decrease depreciation expense and recognize goodwill amortization
b. Increase depreciation expense and recognize goodwill amortization
c. Decrease depreciation expense and recognize no goodwill amortization
d. Increase depreciation expense and recognize no goodwill amortization