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Intercompany Transactions: Upper Company and Middle Company

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1. Upper Company holds 60 % of Lower Company's voting shares. During the preparation of consolidated financial statements for 20X5, the following eliminating entry was made:

Retained Earnings, January 1 10,000
Land 10,000

Which of the following statements is correct?

a. Upper Company purchased land from Lower Company during 20X5.
b. Upper Company purchased land from Lower Company before January 1, 20X5.
c. Lower Company purchased land from Upper Company during 20X5.
d. Lower Company purchased land from Upper Company before January 1, 20X5.

2. Middle Company holds 60% of Bottom Corporation's voting shares. Bottom has developed a new type or production equipment that appears to be quite marketable. It spent $40,000 in developing the equipment; however, Middle agreed to purchase the production rights for the machine for $100,000. If the intercompany sale occurred on January 1, 20X2, and the production rights are expected to have value for five years, at what amount should the rights be reported in the consolidated balance sheet for December 31, 20X2?

a. $0
b. $32,000
c. $80,000
d. $100,000

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Solution Summary

This solutions explicates concepts of intercompany transactions and the financial statements involved.

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For your convenience, I have attached a formatted Microsoft Excel spreadsheet containing the text below.

1.Upper Company holds 60 % of Lower Company's voting shares.  During the preparation of consolidated financial statements for 20X5, the following eliminating entry was made:

Retained Earnings, January 1 10,000
Land 10,000
(Eliminating entry for sale of land to daughter company)

Which of the ...

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