REFERENCE: Ref.05_01 Pot Co.holds 90% of the Common Stock of Skillet Co.During

question 109

Multiple Choice

REFERENCE: Ref.05_01
Pot Co.holds 90% of the common stock of Skillet Co.During 2009,Pot reported sales of $1,120,000 and cost of goods sold of $840,000.For this same period,Skillet had sales of $420,000 and cost of goods sold of $252,000.Also during 2009,Pot sold merchandise to Skillet for $140,000.The subsidiary still possesses 40% of this inventory at the end of 2009.Pot had established the transfer price based on its normal markup.
-Dalton Corp.owned 70% of the outstanding common stock of Shrugs Inc.On January 1,2007,Dalton acquired a building with a ten-year life for $420,000.No salvage value was anticipated and the building was to be depreciated on the straight-line basis.On January 1,2009,Dalton sold this building to Shrugs for $392,000.At that time,the building had a remaining life of eight years but still no expected salvage value.In preparing financial statements for 2009,how does this transfer affect the calculation of Dalton's share of consolidated net income?

• A)Consolidated net income must be reduced by $44,800.
• B)Consolidated net income must be reduced by $50,400.
• C)Consolidated net income must be reduced by $49,000.
• D)Consolidated net income must be reduced by $56,000.
• E)Consolidated net income must be reduced by $53,200.

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Definitions:

Flexible

The ability to easily adapt to new, different, or changing requirements and conditions with minimal disruption.

Top Management

The highest level of managers and executives who are responsible for controlling and overseeing the entire organization.

Functional Structure

An organizational design that groups employees based on specialty, function, or related roles.

Process Structure

An organization structure that groups jobs and activities that are part of the same processes.