### Calculation of cost of goods solditems 1 and 2 are based on

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Calculation of cost of goods sold

Items 1 and 2 are based on the following information.

Nolan owns 100 percent of the capital stock of both Twill Corporation and Webb Corporation. Twill purchases merchandise inventory from Webb at 140 percent of Webb's cost. During 20x0, Webb sold merchandise that had cost it \$40,000 to Twill. Twill sold all of this merchandise to unrelated customers for \$81,200 during 20x0. In preparing combined financial statements for 20x0, Nolan's bookkeeper disregarded the common ownership of Twill and Webb.

1.What amount should be eliminated from cost of goods sold in the combined income statement for 20x0?

a. \$56,000

b. \$40,000

c. \$24,000

d. \$16,000

2.By what amount was unadjusted revenue overstated in the combined income statement for 20x0?

a. \$16,000

b. \$40,000

c. \$56,000

d. \$81,200

Items 3, 4, 1nd 5 are based on the following information.

Blue Company purchased 60 percent ownership of Kelly Corporation in 20x1. On May 10, 20x2, Kelly purchased inventory from Blue for \$60,000. Kelly sold all of the inventory to an unaffiliated company for \$86,000 on November 10, 20x2. Blue produced the inventory sold to Kelly for \$47,000. The companies had no other transactions during 20x2.

3.What amount of sales will be reported in the 20x2 consolidated income statement?

a. \$51,600

b. \$60,000

c. \$86,000

d. \$146,000

4. What amount of cost of goods sold will be reported in the 20x2 consolidated income statement?

a. \$36,000

b. \$47,000

c. \$60,000

d. \$107,000

5.What amount will be reported as consolidated net income for 20x2?

a. \$13,000

b. \$26,000

c. \$28,600

d. \$39,000

6.When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

a. Reliability

b.Materiality

c. Legal entity

d.Economic entity

7.Consolidated financial statements are typically prepared when one company has a controlling interest in another unless:

a. The subsidiary is a finance company

b. The fiscal year-ends of the two companies are more than three months apart

c. Circumstances prevent the exercise of control

c. The two companies are in unrelated industries, such as real estate and manufacturing

8.Penn Inc., a manufacturing company, owns 75 percent of the common stock of Sell Inc., an investment company. Sell owns 60 percent of the common stock of Vane Inc., an insurance company. In Penn's consolidated statements, should consolidation accounting or equity-method accounting be used for Sell and Vane?

a. Consolidation used for Sell and equity method used for Vane

b. Consolidation used for both Sell and Vane

c. Equity method used for Sell and consolidation used for Vane

d. Equity method used for both Sell and Vane

9.Special-purpose entities generally:

a. Have a much larger portion of assets financed by equity shareholders than do companies such as General Motors

b. Have relatively large amounts of preferred stock and convertible securities outstanding

c. Have a much smaller portion of their assets financed by equity shareholders than do companies such as General Motors

d. Pay out a relatively high percentage of their earnings as dividends to facilitate the sale of additional shares

10. Variable interest entities may be established as:

a.Corporations

b.Trusts

c. Partnerships

d. All of the above

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