Financial Accounting and Reporting > Consolidated Financial Statements > Intercompany Transactions

1. Big Company owns 100 percent of the outstanding shares of Little. During the current year, Big
sold inventory costing $90,000 to Little for $100,000. Although this inventory has now been sold
to an outside party, Little has not repaid Big. At the balance sheet date, Big has total current
assets of $800,000 whereas Little has total current assets of $500,000. Assume that there were
no allocations established at the date of acquisition. What is the total amount reported on the
consolidated balance sheet for current assets?
A $1,190,000
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B $1,200,000
C $1,210,000
D $1,300,000
The correct answer was B.
Under normal conditions, consolidated assets are just the book value of the two companies added
together plus any allocations established at the date of acquisition. However, Little owes $100,000 to
Big. Little reports a payable while Big reports a receivable. These are intercompany balances since they
are owed by one company in the business combination to the other company. For consolidation
purposes, the two balances are offset or eliminated. That removes $100,000 from the current assets so
that the consolidated total is $1.2 million ($800,000 plus $500,000 less $100,000). No adjustment needs
to be made to the Inventory balance since that merchandise has already been sold to outside parties.

2. Big Company owns 60 percent of the outstanding shares of Little. During the current year, Big
sold inventory costing $90,000 to Little for $100,000. Although this inventory has now been sold
to an outside party, Little has not yet paid Big. At the balance sheet date, Big has total current
assets of $600,000 whereas Little has total current assets of $400,000. Assume that there were
no allocations established at the date of acquisition. What is the total amount reported on the
consolidated balance sheet for current assets?
A $740,000
B $780,000
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C $900,000
D $940,000
The correct answer was C. Under normal conditions, consolidated assets are just the book value of the
two companies added together plus any allocations established at the date of acquisition. This process is
not affected by the percentage of stock that the parent holds. Here, Little owes $100,000 to Big. Little
reports a payable of that amount while Big reports a receivable. These are intercompany balances since
they are owed by one company in the business combination to the other company. For consolidation
purposes, the two balances are offset or eliminated. The entire amount is eliminated in consolidation
regardless of the percentage of ownership. Thus, $100,000 is removed from the current assets so that
the consolidated total is $900,000 ($600,000 plus $400,000 less $100,000). No adjustment needs to be
made to the Inventory balance since that merchandise has already been sold to outside parties.

3. Big Company owns 60 percent of the outstanding shares of Little. During the current year, Big
sold inventory costing $90,000 to Little for $100,000. Little has already transferred cash in full
payment. Little still holds all of this inventory on the last day of the year. At the balance sheet
date, Big has total current assets of $700,000 whereas Little has total current assets of
$400,000. Assume that there were no allocations established at the date of acquisition. What is
the total amount reported on the consolidated balance sheet for current assets?
A $1,000,000
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B $1,090,000
C $1,094,000
D $1,100,000

The correct answer was B. Under normal conditions, the total for any and all consolidated assets is just
the book value of the two companies added together plus any allocations established at the date of
acquisition. This process is not affected by the percentage of stock that the parent holds. In this case,
one of the companies is holding inventory at a transfer price of $100,000 when it actually entered the
business combination at a cost of only $90,000. The $10,000 gain was created by the transfer and not by
a sale to an outside party. This unrealized gain must be removed in the process of creating consolidated
financial statements. The consolidated total for assets is $1,090,000 ($700,000 plus $400,000 less
$10,000 unrealized gain in ending inventory).

Big Company owns 100 percent of the outstanding shares of Little. During the current year, Big sold
inventory costing $90,000 to Little for $100,000. Little has resold all of this merchandise to outside
parties by the last day of the year. For the year, Big reported cost of goods sold of $600,000 and Little
reported cost of goods sold of $500,000. What is the total amount reported on the consolidated income
statement for cost of goods sold?
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A $1,000,000
B $1,010,000
C $1,090,000
D $1,100,000