Chapter 6 - Solution Manual 48662r

Chapter 06 - Intercompany Inventory Transactions

CHAPTER 6 INTERCOMPANY INVENTORY TRANSACTIONS ANSWERS TO QUESTIONS Q6-1 All inventory transfers between related companies must be eliminated to avoid an overstatement of revenue and cost of goods sold in the consolidated income statement. In addition, when unrealized profits exist at the end of the period, the eliminations are needed to avoid overstating inventory and consolidated net income. Q6-2 An inventory transfer at cost results in an overstatement of sales and cost of goods sold. While net income is not affected, gross profit ratios and other financial statement analysis may be substantially in error if appropriate eliminations are not made. Q6-3 An upstream sale occurs when the parent purchases items from one or more subsidiaries. A downstream sale occurs when the sale is made by the parent to one or more subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation worksheet will know whether to reduce consolidated net income assigned to the controlling interest by the full amount of the unrealized profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream). Q6-4 As in all cases, the total amount of the unrealized profit must be eliminated in preparing the consolidated statements. When the profits are on the parent company's books, consolidated net income and income assigned to the controlling interest are reduced by the full amount of the unrealized profit. Q6-5 Consolidated net income is reduced by the full amount of the unrealized profits. In the upstream sale, the unrealized profits are apportioned between the parent company shareholders and the noncontrolling shareholders. Thus, consolidated net income assigned to the controlling and noncontrolling interests is reduced by a pro rata portion of the unrealized profits. Q6-6 Income assigned to the noncontrolling interest is affected when unrealized profits are recorded on the subsidiary's books as a result of an upstream sale. A downstream sale should have no effect on the income assigned to noncontrolling interest because the profits are on the books of the parent. Q6-7 The basic eliminating entry needed when the item is resold before the end of the period is: Sales Cost of Goods Sold

XXXXXX

XXXXXX

The debit to sales is based on the intercorporate sale price. This means that only the revenue recorded by the company ultimately selling to the non is to be included in the consolidated income statement. Cost of goods sold is credited for the amount paid by the purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded by the initial owner to be reported in the consolidated statement.

6-1


Q6-8 The basic eliminating entry needed when one or more of the items are not resold before the end of the period is: Sales Cost of Goods Sold Inventory

XXXXXX

XXXXXX XXXXXX

The debit to sales is for the full amount of the transfer price. Inventory is credited for the unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold by the company making the intercompany sale. Q6-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an external party. The amount reported as cost of goods sold is based on the amount paid for the inventory when it was produced or purchased from an external party. If inventory has been purchased by one company and sold to a related company, the cost of goods sold recorded on the intercorporate sale must be eliminated. Q6-10 No adjustment to retained earnings is needed if the intercorporate sales have been made at cost or if all intercorporate sales have been resold to an external party in the same ing period. If all of the intercorporate sales have not been resold by the end of the period, under the fully adjusted equity method, the parent defers unrealized profits in the investment in sub and income from sub s. This adjustment would be made to retained earnings under the modified equity method. However, regardless of the parent’s method for ing for the investment, the amount of the noncontrolling interest is reduced by the NCI’s proportionate share of the unrealized profit associated with upstream sales. Q6-11 A proportionate share of the realized retained earnings of the subsidiary are assigned to the noncontrolling interest. Any unrealized profits on upstream sales are deducted proportionately from the amount assigned to the noncontrolling interest. Unrealized profits on downstream sales do not affect the noncontrolling interest. Q6-12 When inventory profits from a prior period intercompany transfer are realized in the current period, the profit is added to consolidated net income and to the income assigned to the shareholders of the company that made the intercompany sale. If the unrealized profits arise from a downstream sale, income assigned to the controlling interest will increase by the full amount of profit realized. When the profits arise from an upstream sale, income assigned to the controlling and noncontrolling interests will be increased proportionately in the period the profit is realized. Thus, knowledge of whether the profits resulted from an upstream or a downstream sale is imperative in asg consolidated net income to the appropriate shareholder group. Q6-13 Under the fully adjusted equity method, consolidated retained earnings is not affected directly by unrealized profits. Unrealized profits are deferred in the investment in sub and income from sub s on the parent’s books. Income from sub is closed out to retained earnings, so the deferral of unrealized profits indirectly affects retained earnings. As a result, the amount reported for consolidated retained earnings is always equal to the parent’s retained earnings. Q6-14 Consolidated retained earnings are always equal to the parent’s retained earnings under the fully adjusted equity method. Since the parent company defers unrealized profits in the income from sub and investment in sub s and since income from sub is closed out to the parent’s retained earnings, the ending balance in consolidated retained earnings will reflect the reduction associated with the deferral of unrealized profits.

6-2


Q6-15* Sales between subsidiaries are treated in the same manner as upstream sales. Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the end of the period are eliminated and consolidated net income and income assigned to the controlling and noncontrolling interests is reduced. Q6-16* When a company is acquired in a business combination the transactions occurring before the combination generally are regarded as transactions with unrelated parties and no adjustments or eliminations are needed. All transactions between the companies following the combination must be fully eliminated.

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SOLUTIONS TO CASES C6-1 Measuring Cost of Goods Sold a. While the rule covers only a part of the elimination needed, Charlie is correct in that the cost of goods sold recorded by the selling company must be eliminated to avoid overstating that caption in the consolidated income statement. b. The rules will result in the proper consolidated totals if rule #1 is expanded to include a debit to sales and a credit to ending inventory for the amount of profit recorded by the company that sold to its . c. The way in which the rule is stated makes it appear to be incorrect, but it is correct. The rule is appropriate in that the cost of goods sold recorded by the purchasing is equal to the cost of goods sold to the first owner plus the profit the first owner recorded on the sale. Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold. If an equal amount of sales is eliminated, the rule should result in proper consolidated financial statement totals. d. The employee would be forced to look at the books of the selling and determine the difference between the intercorporate sale price and the price it paid to acquire or produce the items. If the items sold to s are routinely produced and costs do not fluctuate greatly, it may be possible to use some form of gross profit ratio to estimate the amount of unrealized profit. C6-2 Inventory Values and Intercompany Transfers MEMO To: From: Re:

President Water Products Corporation , A Inventory Sale and Purchase of New Inventory

If Water Products holds only a small percent of the ownership of Plumbers Products and Growinkle Manufacturing, it should have no difficulty in reporting the desired results. This would not be the case if the two companies are subsidiaries of Water Products. If both Plumbers Products and Growinkel are subsidiaries of Water Products, both the sale of inventory to Plumbers Supply and the purchase of inventory from Growinkle Manufacturing must be eliminated. In addition, the unrealized profit on any unsold inventory involved in these transfers must be eliminated in preparing the financial statements for the current period. The consolidated income statement should include the same amount of income on the inventory sold to Plumbers Supply and resold during the year as would have been recorded if Water Products had sold the inventory directly to the purchaser. Any income recorded by Water Products on inventory not resold by Plumbers Supply must be eliminated.

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Similarly, the consolidated income statement should include the same amount of income on the inventory purchased by Water Products and resold during the year as would have been recorded if Growinkle Manufacturing had sold the inventory directly to the purchaser. Any income recorded by Growinkle Manufacturing on inventory not resold by Water Products must be eliminated. Consolidated net income may increase if Plumbers Supply is able to sell the inventory it purchased from Water Products at a higher price than would have been received by Water Products or if it is able to sell a larger number of units. The same can be said for the inventory purchased by Water Products from Growinkle Manufacturing. It is important to recognize that the transfer of inventory between Water Products and its subsidiaries does not in itself generate income for the consolidated entity. An additional level of complexity may arise in this situation if Water Products uses the LIFO inventory method. It might, for example, be forced to carry over its LIFO cost basis on the old inventory sold to Plumbers Supply to the new inventory purchased from Growinkle Manufacturing since it was replaced within the ing period. Primary citation: ARB 51, Par. 6 (ASC 810) C6-3 Intercorporate Inventory Transfers MEMO To: From: Re:

Treasurer Evert Corporation , A Inventory Sale to Parent

This memo is prepared in response to your request for information on the appropriate treatment of intercompany inventory transfers in consolidated financial statements. The specific eliminating entries required in this case depend on the valuation assigned to the inventory at December 31, 20X2. Frankle Company sold inventory with a carrying value of $240,000 to Evert for $180,000 on December 20, 20X2. Since the exchange price was well below Frankle’s cost, consideration should be given to whether the inventory should be reported at $180,000 or $240,000 in the consolidated statements at December 31, 20X2, under the lower-of-cost-or-market rule. While the value of the inventory apparently had fallen below Frankle’s carrying value, the ing standards indicate no loss should be recognized when the evidence indicates that cost will be recovered with an approximately normal profit margin upon sale in the ordinary course of business. [ARB 43, Chapter 4, Par. 9; ASC 330] We are told the management of Frankle considered the drop in prices to be temporary and Evert was able to sell the inventory for $70,000 more than the original amount paid by Frankle. It therefore seems appropriate for the consolidated entity to report the inventory at Frankle’s cost of $240,000 at December 31, 20X2. In preparing the consolidated statements at December 31, 20X2 and 20X3, the effects of the 6-5


intercompany transfer should be eliminated. [ARB 51, Par. 6; ASC 810] The following eliminating entry is required at December 31, 20X2: Sales Inventory Cost of Goods Sold

180,000 60,000

240,000

The above entry will increase the carrying value of the inventory to $240,000. Eliminating sales of $180,000 and cost of goods sold of $240,000 will increase consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x 0.10). These changes will result in an increase in consolidated retained earnings and the amount assigned to the noncontrolling shareholders in the consolidated balance sheet by $54,000 and $6,000, respectively. C6-3 (continued) The following eliminating entry is required at December 31, 20X3: Cost of Goods Sold Investment in Sub NCI in NA of Sub

60,000

54,000 6,000

The above entry will reduce consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x .10). The credits to Investment in Sub and NCI in NA of Sub needed to bring the beginning balances into agreement with those reported at December 31, 20X2. No eliminations are required for balances reported at December 31, 20X3, because the inventory has been sold to a non prior to year-end. Primary citations: ARB 43, CH 4, Par. 9 (ASC 330) ARB 51, Par. 6 (ASC 810) C6-4 Unrealized Inventory Profits a. When the amount of unrealized inventory profits on the books of the subsidiary at the beginning of the period is greater than the amount at the end of the period, the income assigned to the noncontrolling interest for the period will exceed a pro rata portion of the reported net income of the subsidiary. b. The subsidiary apparently had less unrealized inventory profit at the end of the period than it did at the start of the period. In addition, the parent must have had more unrealized profit on its books at the end of the period than it did at the beginning. The negative effect of the latter apparently offset the positive effect of the reduction in unrealized profits by the subsidiary. c. The most likely reason is that a substantial amount of the parent company sales was made to its subsidiaries and the cost of goods sold on those items was eliminated in preparing the consolidated statements.

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d. A loss was recorded by the seller on an intercompany sale of inventory to an and the purchaser continues to hold the inventory. C6-5 Eliminating Inventory Transfers a. If no intercompany sales are eliminated, the income statement may include overstated sales revenue and cost of goods sold. The net impact on income will depend upon whether there were more unrealized profits at the beginning or end of the year. If Ready Building does not hold total ownership of the subsidiaries, the amount of income assigned to noncontrolling shareholders is likely to be incorrect as well. Inventory, current assets and total assets, retained earnings, and stockholders' equity are likely to be overstated if inventories are sold to s at a profit. If the companies pay income taxes on their individual earnings, the amount of income tax expense also will be overstated in the period in which unrealized profits are reported and understated in the period in which the profits are realized. b. Because profit margins vary considerably, the amount of unrealized profit may vary considerably if uneven amounts of product are purchased by s from period to period. Ready Building needs to establish a formal system to monitor intercompany sales. Perhaps the best alternative would be to establish a separate series of s to be used solely for intercompany transfers. Alternatively, it may be possible to use unique shipping containers for intercompany sales or to specifically mark the containers in some way to identify the intercompany shipments at the time of receipt. The purchaser might then use a different type of inventory tag or mark these units in some way when the product is received and placed in inventory. Inventory count teams could then easily identify the product when inventories are taken. c. A number of factors might be considered. The most important inventory system is the one used by the company making the intercompany purchase. When intercompany inventory purchases are bunched at the end of the year, the amount of unrealized profit included in ending inventory may be quite different under FIFO versus LIFO. If intercompany purchases are placed in a LIFO inventory base, inventories may be misstated for a period of years before the inventory is resold. Eliminating entries must be made each of the years until resale to avoid a misstatement of assets and equities. In those cases where the intercompany purchases are in high volume and the inventory turns over very quickly, a small amount of inventory left at the end of the period may be immaterial and of little concern. Typically, a parent will align inventory costing methods subsequent to a subsidiary acquisition to avoid problems caused by differences in ing for the same items or types of items. d. It may be necessary to start by looking at intercorporate cash receipts and disbursements to determine the extent of intercorporate sales. One or more months might be selected and all vouchers examined to establish the level of intercorporate sales and the profit margins recorded on the sales. For those products sold throughout the year, it may be possible to estimate for the year as a whole based on an examination of several months. Once total intercompany sales and profit margins have been estimated, the amount of unrealized profit at year end should be estimated. One approach would be to take a physical inventory of the specific product types which have been identified and attempt to trace back using the product identification numbers or shipping numbers to determine what portion of the inventory on hand was purchased from s.

6-7


C6-6 Intercompany Profits and Transfers of Inventory a. The intercompany transfers of Xerox (www.xerox.com) between segments are apparently relatively insignificant because they are not reported in the notes to the consolidated financial statements relating to segment reporting. For consolidation purposes, all significant intercompany s and transactions are eliminated. b. Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated market prices. The amount of intercompany transfers is large. In the fiscal year ending December 31, 2009, Exxon Mobil reported eliminations of $302.6 billion of intersegment transfers, which does not include intercompany transfers within segments. This amount represents nearly 50 percent of total reported segment sales. For consolidation purposes, Exxon Mobil eliminates the effects of intercompany transactions. c. Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles, parts, and components manufactured by the company and its subsidiaries, with a smaller amount of financial and other services included. The amount of intercompany transfers is relatively small in relation to sales to und customers. The amount has been decreasing in recent years. The effects of intercompany transfers are eliminated in consolidation.

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SOLUTIONS TO EXERCISES E6-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AIA Adapted] 1.

a

2.

c

3.

a

4.

c

5.

c

6.

c

Net assets reported Profit on intercompany sale Proportion of inventory unsold at year end ($60,000 / $240,000) Unrealized profit at year end Amount reported in consolidated statements Inventory reported by Banks ($175,000 + $60,000) Inventory reported by Lamm Total inventory reported Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] Amount reported in consolidated statements

6-9

$48,000 x

0.25

$320,000

(12,000) $308,000 $235,000 250,000 $485,000 (15,000) $470,000


E6-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AIA Adapted] 1.

b

Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small ($500,000 x 0.40) Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x 4 / 5) x 0.60] Cost of goods sold for consolidated entity

$ 800,000 700,000 $1,500,000 (200,000) (240,000) $1,060,000

Note:

Answer b in the actual A examination question was $1,100,000, requiring candidates to select the closest answer.

2.

d

$32,000

=

($200,000 + $140,000) – $308,000

3.

b

$6,000

=

($26,000 + $19,000) – $39,000

4.

c

$9,000

=

Inventory held by Spin ($32,000 x 0.375) Unrealized profit on sale [($30,000 + $25,000) – $52,000] Carrying cost of inventory for Power

$12,000 (3,000) $ 9,000

5.

b

0.20 = $14,000 / [(Stockholders’ Equity $50,000) +(Patent $20,000)]

6.

b

14 years = ($28,000 / [(28,000 - $20,000) / 4 years]

E6-3 Multiple Choice – Consolidated Income Statement 1.

c

2.

b

3.

c

Total income ($86,000 - $47,000) Income assigned to noncontrolling interest [0.40($86,000 - $60,000)] Consolidated net income assigned to controlling interest

6-10

$39,000 (10,400) $28,600


E6-4 Multiple-Choice Questions — Consolidated Balances 1.

c

2.

a

Amount paid by Lorn Corporation Unrealized profit Actual cost Portion sold Cost of goods sold

$120,000 (45,000) $ 75,000 x 0.80 $ 60,000

3.

e

Consolidated sales Cost of goods sold Consolidated net income Income to Dresser’s noncontrolling interest: Sales Reported cost of sales Report income Portion realized Realized net income Portion to Noncontrolling Interest Income to noncontrolling Interest Income to controlling interest

$140,000 (60,000) $ 80,000

4.

a

$120,000 (75,000) $ 45,000 x 0.80 $ 36,000 x

0.30 (10,800) $ 69,200

Inventory reported by Lorn Unrealized profit ($45,000 x .20) Ending inventory reported

$ 24,000 (9,000) $ 15,000

E6-5 Multiple-Choice Questions — Consolidated Income Statement 1.

a

$20,000 = $30,000 x [($48,000 - $16,000) / $48,000]

2.

d

Sales reported by Movie Productions Inc. Cost of goods sold ($30,000 x 2/3) Consolidated net income

3.

a

$7,000 = [($67,000 - $32,000) x 0.20]

6-11

$67,000 (20,000) $47,000


E6-6 Realized Profit on Intercompany Sale a.

b.

c.

Journal entries recorded by Nordway Corporation: (1)

Inventory Cash (s Payable)

960,000

(2)

Cash (s Receivable) Sales

750,000

(3)

Cost of Goods Sold Inventory

600,000

960,000 750,000 600,000

Journal entries recorded by Olman Company: (1)


750,000

(2)


1,125,000

(3)


750,000

750,000 1,125,000 750,000

Eliminating entry: Sales Cost of Goods Sold

750,000

6-12

750,000


E6-7 Sale of Inventory to Subsidiary a.

b.

c.

Journal entries recorded by Nordway Corporation: (1)


960,000

(2)


750,000

(3)


600,000

960,000 750,000 600,000

Journal entries recorded by Olman Company: (1)


750,000

(2)


810,000

(3)


540,000

750,000 810,000 540,000

Eliminating entry: Sales Cost of Goods Sold Inventory

750,000

Calculations

Sales COGS Gross Profit Gross Profit %

Total = Re-Sold + 750,000 540,000 600,000 432,000 150,000 108,000 20%

6-13

Ending Inventory 210,000 168,000 42,000

708,000 42,000


E6-8 Inventory Transfer between Parent and Subsidiary a.

Karlow Corporation reported cost of goods sold of $820,000 ($82 x 10,000 desks) and Draw Company reported cost of goods sold of $658,000 ($94 x 7,000 desks).

b.

Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks).

c.

Eliminating entry: Sales Cost of Goods Sold Inventory

940,000

904,000 36,000

Calculations

Sales COGS Gross Profit Gross Profit % d.

Total = Re-sold + 940,000 658,000 820,000 574,000 120,000 84,000 12.77%

Eliminating entry: Investment in Draw Company Cost of Goods Sold

e.


36,000

36,000

Eliminating entry: Investment in Draw Company NCI in NA of Draw Company Cost of Goods Sold

21,600 14,400

6-14

36,000


E6-9 Income Statement Effects of Unrealized Profit a.

b.

Sale price to Holiday Bakery per bag ($900,000 / 100,000) Profit per bag [$9.00 - ($9.00 / 1.5)] Cost per bag Bags sold by Holiday Bakery (100,000 - 20,000) Consolidated cost of goods sold Sales Cost of Goods Sold Inventory ($3.00 x 20,000 bags)

$

9.00 (3.00) $ 6.00 x 80,000 $480,000 900,000

840,000 60,000

Calculations


Total 900,000 600,000 300,000

=

Re-sold + 720,000 480,000 240,000


33.33%

Required Adjustment to Cost of Goods Sold: Cost of goods sold — Farmco ($900,000 / 1.5) Cost of goods sold — Holiday ($9.00 x 80,000 units)

$ 600,000 720,000 $1,320,000 (480,000) $ 840,000

Consolidated cost of goods sold ($6.00 x 80,000 units) Required adjustment c.

Operating income of Holiday Bakery Net income of Farmco Products

$400,000 150,000 $550,000 (60,000) $490,000

Less: Unrealized inventory profits Consolidated net income Less: Income assigned to noncontrolling interest ($150,000 - $60,000 unrealized profit) x 0.40 Income assigned to controlling interest Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Unrealized profits ($3.00 x 20,000 units) Realized net income Ownership held by Holiday Bakery Income assigned to controlling interest

6-15

(36,000) $454,000

$150,000 (60,000) $ 90,000 x 0.60

$400,000

54,000 $454,000


E6-10 Prior-Period Unrealized Inventory Profit a.

Cost per bag of flour ($9.00 / 1.5) Bags sold Cost of goods sold from inventory held, January 1, 20X9

$ 6.00 x 20,000 $120,000

b. Investment in Farmco NCI in NA of Farmco Cost of Goods Sold $60,000 = 20,000 bags x $3.00 c.

36,000 24,000

Operating income of Holiday Bakery Net income of Farmco Products Add: Inventory profits realized in 20X9 Consolidated net income Less: Income assigned to noncontrolling shareholders ($250,000 + $60,000) x 0.40 Income assigned to controlling interest Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Inventory profits realized in 20X9 Realized net income Ownership held by Holiday Bakery

$250,000 60,000 $310,000 x 0.60

Income assigned to controlling interest

6-16

60,000 $300,000 250,000 $550,000 60,000 $610,000 (124,000) $486,000 $300,000

186,000 $486,000


E6-11 Computation of Consolidated Income Statement Data Downstream Transaction Calculations


Total = 30,000 20,000 10,000 33.33%

Re-sold 24,000 16,000 8,000

+


Worksheet Entry (not requested in problem) Sales 30,000 Cost of Goods Sold 28,000 Inventory 2,000 Upstream Transaction Calculations


Total = 80,000 50,000 30,000 37.50%

Re-sold 60,000 37,500 22,500

+


Worksheet Entry (not requested in problem) Sales 80,000 Cost of Goods Sold 72,500 Inventory 7,500 a.

Reported sales of Prem Company Reported sales of Cooper Company Intercompany sales by Prem Company in 20X5 Intercompany sales by Cooper Company in 20X5 Sales reported on consolidated income statement

6-17

$ 30,000 80,000

$400,000 200,000 $600,000 (110,000) $490,000


E6-11 (continued) b.

Cost of goods sold reported by Prem Company Cost of goods sold reported by Cooper Company

$250,000 120,000 $370,000 (100,500) $269,500

Adjustment due to intercompany sales Consolidated cost of goods sold Adjustment to cost of goods sold:

c.

d.

CGS charged by Prem on sale to Cooper CGS charged by Cooper ($30,000 - $6,000) Total charged to CGS CGS for consolidated entity $20,000 x ($24,000 / $30,000) Required adjustment to CGS

$ 20,000 24,000 $ 44,000

CGS charged by Cooper on sale to Prem CGS charged by Prem ($80,000 - $20,000) Total charged to CGS CGS for consolidated entity $50,000 x ($60,000 / $80,000) Required adjustment to CGS Total adjustment required

$ 50,000 60,000 $110,000

(16,000)

(37,500)

Reported net income of Cooper Company Unrealized profit on sale to Prem Company $30,000 x ($20,000 / $80,000) Realized net income Noncontrolling interest's share Income assigned to noncontrolling interest Reported net income of Pem Company Less: Income from Cooper Net income of Cooper Company Operating income Less: Unrealized inventory profits of Prem Company [$10,000 x ($6,000 / $30,000)] Unrealized inventory profits of Copper Company [$30,000 x ($20,000 / $80,000)] Income assigned to noncontrolling interest Income assigned to controlling interest

6-18

$ 28,000

72,500 $100,500 $ 45,000 (7,500) $ 37,500 x 0.40 $ 15,000

$100,500 (20,500)

$ 80,000 45,000 $125,000

$ 2,000 7,500 15,000

(24,500) $ 100,500


E6-12 Sale of Inventory at a Loss a.

Entries recorded by Trent Company: Inventory Cash Purchase inventory.

400,000

Cash Sales Sale of inventory to Gord Corporation.

300,000

Cost of Goods Sold Inventory Record cost of goods sold.

400,000

400,000

300,000

400,000

Entries recorded by Gord Corporation Inventory Cash Purchase of inventory from Trent.

300,000

Cash Sales Sale of inventory to nons.

360,000

Cost of Goods Sold Inventory Record cost of goods sold: $180,000 = $300,000 x .60

180,000

b.

Consolidated cost of goods sold for 20X8 should be reported as $240,000 ($400,000 x 0.60).

c.

Operating income reported by Gord Net income reported by Trent Unrealized loss on intercorporate sale ($400,000 - $300,000) x 0.40 Consolidated net income Income to assigned to noncontrolling interest ($120,000 x 0.25) Income assigned to controlling interest

6-19

$ 80,000 40,000

300,000

360,000

180,000

$230,000 120,000 $350,000 (30,000) $320,000


E6-12 (continued) d.

Eliminating entry, December 31, 20X8: Sales Inventory Cost of Goods Sold

300,000 40,000

340,000

Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Trent Cost of goods sold recorded by Gord Total recorded Consolidated cost of goods sold Required elimination

$400,000 180,000 $580,000 (240,000) $340,000

Intercompany Transaction Calculations


Total = Re-sold + 300,000 180,000 400,000 240,000 (100,000) (60,000) -33.33%

6-20

Ending Inventory 120,000 160,000 (40,000)


E6-13 Intercompany Sales 20X4 Calculations: Sales COGS Gross Profit Gross Profit %

Total = Re-sold 180,000 135,000 120,000 90,000 60,000 45,000 33.33%

+


Worksheet Entry (not required in problem) Sales 180,000 Cost of Goods Sold 165,000 Inventory 15,000 20X5 Calculations: 20X5 Upstream Sales COGS Gross Profit Gross Profit %

Total 135,000 90,000 45,000 33.33%

=

Re-sold 105,000 70,000 35,000

+


20X5 Downstream Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 280,000 170,000 140,000 85,000 140,000 85,000 50.00%


Worksheet Elimination Entries (not required in problem): Eliminate Upstream Transactions Sales 135,000 Cost of Goods Sold Inventory

125,000 10,000

Eliminate Downstream Transactions Sales 280,000 Cost of Goods Sold Inventory

225,000 55,000

Reversal of 20X4 Upstream Deferral Investment in Surg 10,500 NCI in NA of Surg 4,500

6-21


Cost of Goods Sold

6-22

15,000


E6-13 (continued) a.

Consolidated net income for 20X4: Operating income of Hollow Corporation Net income of Surg Corporation

$160,000 90,000 $250,000 (15,000) $235,000

Less: Unrealized profit — Surg Corporation Consolidated net income b.

c.

Inventory balance, December 31, 20X5: Inventory reported by Hollow Corporation Unrealized profit on books of Surg Corporation ($135,000 - $90,000) x ($30,000/$135,000)

$ 30,000

Inventory reported by Surg Corporation Unrealized profit on books of Hollow Corporation ($280,000 - $140,000) x ($110,000/$280,000) Inventory, December 31, 20X5

$110,000

(10,000)

55,000 $75,000

Consolidated cost of goods sold for 20X5: COGS on sale of inventory on hand January 1, 20X5 $45,000 x ($120,000 / $180,000) COGS on items purchased from Surg in 20X5 ($135,000 - $30,000) x ($90,000 / $135,000) COGS on items purchased from Hollow in 20X5 ($280,000 - $110,000) x ($140,000 / $280,000) Total cost of goods sold

d.

(55,000)

$20,000

$ 30,000 70,000 85,000 $185,000

Income assigned to controlling interest: Operating income of Hollow Corporation Net income of Surg Corporation Add: Inventory profit of prior year realized in 20X5 Less: Unrealized inventory profit — Surg Corporation Unrealized inventory profit — Hollow Corporation Income to noncontrolling interest ($85,000 + $15,000 - $10,000) x 0.30 Income assigned to controlling interest

6-23

$220,000 85,000 $305,000 15,000 (10,000) (55,000) (27,000) $228,000


E6-14 Consolidated Balance Sheet Worksheet a. Equity Method Entries on Doorst Corp.'s Books: Investment in Hingle Co. 49,000 Income from Hingle Co.

49,000

Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 income Cash 9,800 Investment in Hingle Co. 9,800 Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 dividend Income from Hingle Co. 10,000 Investment in Hingle Co. 10,000 Eliminate the deferred gross profit from downstream sales in 20X8 Income from Hingle Co. 28,000 Investment in Hingle Co. Eliminate the deferred gross profit from upstream sales in 20X8

28,000

Book Value Calculations:

Original book value + Net Income - Dividends

NCI 30% 103,200 21,000 (4,200)

Ending book value

120,000

Doorst Corp. 70% 240,800 49,000 (9,800)

+

=

Common Stock 150,000

280,000

+

150,000

Reversal/Deferred GP Calculations:

Downstream Deferred GP

Total (10,000)

Upstream Deferred GP Total

(40,000) (50,000)

=

Doorst Corp.'s share (10,000) (28,000) (38,000)

6-24

+

NCI's share 0 (12,000 ) (12,000)

Retained Earnings 194,000 70,000 (14,000) 250,000


E6-14 (continued) Basic elimination entry Common stock Retained earnings Income from Hingle Co. NCI in NI of Hingle Co. Dividends declared Investment in Hingle Co. NCI in NA of Hingle Co.

150,000 194,000 11,000 9,000 14,000 242,000 108,000

← Original amount invested (100%) ← Beginning balance in retained earnings ← Doorst’s % of NI - Deferred GP + Reversal ← NCI share of NI - Deferred GP + Reversal ← 100% of Hingle Co.'s dividends declared ← Net book value - Deferred GP + Reversal ← NCI share of BV - Deferred GP + Reversal

Deferral of this year's unrealized profits on inventory transfers Sales 400,000 Cost of Goods Sold 350,000 Inventory 50,000 20X8 Downstream Transactions

Sales COGS

60,000

45,000

15,000

Gross Profit

40,000

30,000

10,000

Gross Profit %

=

Re-sold 75,000

+

Ending Inventory 25,000

Total 100,000

40.00%

20X8 Upstream Transactions

Sales COGS

173,684

118,684

55,000

Gross Profit

126,316

86,316

40,000

Gross Profit %

Acquisition Price 70% Net Income

Ending Balance

=

Re-sold 205,000

+


Total 300,000

42.11% Investment in Hingle Co. 240,800 49,000 9,800 38,000 242,000 242,000

Income from Hingle Co.

70% Dividends Deferred GP

38,000

Basic

11,000

0

49,000

70% Net Income

11,000

Ending Balance

0

6-25

Chapter 06 - Intercompany Inventory Transactions E6-14 (continued) b. Elimination Entries Doorst Corp.

Hingle Co.

Balance Sheet Cash and Receivables Inventory Buildings & Equipment (net) Investment in Hingle Co. Total Assets

98,000 150,000 310,000 242,000 800,000

40,000 100,000 280,000

s Payable Common Stock Retained Earnings

70,000 200,000 530,000

20,000 150,000 250,000

NCI in NA of Hingle Co. Total Liabilities & Equity

800,000

420,000

420,000

6-26

DR

CR 50,000 0

150,000 194,000 11,000 9,000 400,000 764,000

242,000 292,000

14,000 350,000 108,000 472,000

Consolidate d 138,000 200,000 590,000 0 928,000 90,000 200,000 530,000

108,000 928,000


E6-15* Multiple Transfers between s a.

Entries recorded by Klon Corporation Cash Sales Sale of inventory to Brant Company.

150,000


100,000

150,000

100,000

Entries recorded by Brant Company Inventory Cash Purchase of inventory from Klon.

150,000

Cash Sales Sale of inventory to Torkel Company.

150,000


150,000

150,000

150,000

150,000

Entries recorded by Torkel Company Inventory Cash Purchase of inventory from Brant.

150,000

Cash Sales Sale of inventory to nons.

120,000


90,000

b.

Cost of goods sold for 20X8 should be reported as $60,000 [$90,000 x ($100,000 / $150,000)].

c.

Inventory at December 31, 20X8, should be reported at $40,000 [$60,000 x ($100,000 / $150,000)].

6-27

150,000

120,000

90,000


E6-15* (continued) d.

Eliminating entry for inventory: Sales Cost of Goods Sold Inventory

300,000

280,000 20,000

Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Klon Cost of goods sold recorded by Brant Cost of goods sold recorded by Torkel Total recorded Consolidated cost of goods sold Required elimination

$100,000 150,000 90,000 $340,000 (60,000) $280,000

Computation of reduction to carrying value of inventory Inventory reported by Torkel Inventory balance to be reported Required elimination

$60,000 (40,000) $20,000

6-28


E6-16 Inventory Sales a.

Journal entries recorded by Spice Company: (1)

Inventory Cash (s Payable) Record purchases from non.

150,000

(2)

Cash (s Receivable) Sales Record sale to Herb Corporation.

60,000

(3)

Cost of Goods Sold Inventory Record cost of goods sold to Herb Corporation.

40,000

150,000

60,000

40,000

Journal entries recorded by Herb Corporation:

b.

(1)

Inventory Cash (s Payable) Record purchases from Spice Company.

60,000

(2)

Cash (s Receivable) Sales Record sale of items to nons.

90,000

(3)


45,000

(4)

Income from Herb 5,000 Investment in Herb 5,000 Eliminate unrealized gross profit on inventory purchases from Herb.

60,000

90,000

45,000

Eliminating entry:


Total = Re-sold + 60,000 45,000 40,000 30,000 20,000 15,000 33.33%


Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.

6-29

60,000

55,000 5,000


E6-17 Prior-Period Inventory Profits a. 20X8 Sale:


Total = Re-sold + 180,000 170,000 120,000 113,333 60,000 56,667 33.33%


20X9 Sale:


Total = Re-sold + 240,000 170,000 160,000 113,333 80,000 56,667 33.33%


Investment in Level Brothers NCI in NA of Level Brothers Cost of goods sold Reversal of 20X8 gross profit deferral Sales Cost of Goods Sold Inventory Eliminate 20X9 intercompany sale of inventory. b.

Reported net income of Level Brothers Unrealized profit, December 31, 20X8 Unrealized profit, December 31, 20X9 Realized net income Noncontrolling interest's share of ownership Income assigned to noncontrolling interest

6-30

7,500 2,500

240,000

20X8 $350,000 (10,000) $340,000 x 0.25 $ 85,000

10,000

190,000 50,000

20X9 $420,000 10,000 (50,000) $380,000 x 0.25 $ 95,000


SOLUTIONS TO PROBLEMS P6-18 Consolidated Income Statement Data a.

$180,000 = $550,000 + $450,000 - $820,000

b.

January 1, 20X2: $25,000 = $75,000 - $50,000 December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000

c.

Investment in Bitner NCI in NA of Bitner Cost of Goods Sold Eliminate beginning inventory profit. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.

d.

Reported net income of Bitner Company Prior-period profit realized in 20X2 Unrealized profit on 20X2 sales Realized income Proportion held by noncontrolling interest Income assigned to noncontrolling interest

6-31

15,000 10,000

180,000

25,000

165,000 15,000

$ 90,000 25,000 (15,000) $100,000 x 0.40 $ 40,000


P6-19 Unrealized Profit on Upstream Sales 20X2


Total = Re-sold + 200,000 130,000 160,000 104,000 40,000 26,000 20.00%


20X3


Total = 175,000 140,000 35,000 20.00%

Re-sold 70,000 56,000 14,000

+


20X4


Total = Re-sold + 225,000 105,000 180,000 84,000 45,000 21,000 20.00%

Operating income reported by Pacific Net income reported by Carroll Inventory profit, December 31, 20X2 $70,000 - ($70,000 / 1.25) Inventory profit, December 31, 20X3 $105,000 - ($105,000 / 1.25) Inventory profit, December 31, 20X4 $120,000 - ($120,000 / 1.25) Consolidated net income Income to noncontrolling interest: ($100,000 - $14,000) x 0.40 ($90,000 + $14,000 - $21,000) x 0.40 ($160,000 + $21,000 - $24,000) x 0.40 Income to controlling interest

20X2

20X3

20X4

$150,000 100,000 $250,000

$240,000 90,000 $330,000

$300,000 160,000 $460,000

(14,000)

14,000

$236,000 (34,400) $201,600

6-32


(21,000)

21,000

$323,000

(24,000) $457,000

(33,200) $289,800

(62,800) $394,200


P6-20 Net Income of Consolidated Entity Operating income of Master for 20X5 Net income of Crown for 20X5

$118,000 65,000 $183,000 25,000 40,000 (14,000) (55,000)

Add:

Prior year profits realized by Master Prior year profits realized by Crown Less: Unrealized profits for 20X5 by Master Unrealized profits for 20X5 by Crown Amortization of differential ($45,000 / 15 years) Consolidated net income, 20X5 Less: Income to noncontrolling interest ($65,000 + $40,000 - $55,000 - $3,000) x 0.30 Income to controlling interest

(3,000) $176,000 (14,100) $161,900

P6-21 Correction of Eliminating Entries a.

Proportion of intercompany inventory purchases resold during 20X5: Unrealized profit at year end $ 12,000 Intercompany transfer price $140,000 Cost of inventory sold ($140,000 / 1.40) (100,000) Total Profit ÷ 40,000 Proportion of intercompany sale held by Bolger at year end 0.30 Proportion of intercompany purchases resold by Bolger during 20X5 (1.00 - 0.30)

b.

0.70

Eliminating entries, December 31, 20X5: Intercompany Transactions


Total = Re-sold + 140,000 98,000 100,000 70,000 40,000 28,000 28.57%

s Payable s Receivable Eliminate intercompany receivable/payable. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.

6-33


80,000

140,000

80,000

128,000 12,000


P6-22 Incomplete Data a.

Increase in fair value of buildings and equipment: Consolidated total Balance reported by Lever Balance reported by Tropic Increase in value

b.

$ 680,000 (400,000) (240,000) $ 40,000

Accumulated depreciation for consolidated entity: Accumulated depreciation reported by Lever Accumulated depreciation reported by Tropic Cumulative write-off of differential ($5,000 x 6 years) Accumulated depreciation for consolidated entity

c.

$ 60,000 30,000 $ 90,000 40,000 $130,000 x 0.75 $ 97,500

Investment in Tropic Company stock reported at December 31, 20X6: Tropic's common stock outstanding December 31, 20X6 Tropic's retained earnings reported December 31, 20X6 Total book value Proportion of ownership held by Lever Lever's share of net book value Unamortized differential ($5,000 x 2 years) x 0.75 20X6 Gross Profit Deferral on Downstream Sale Investment in Tropic Company stock

e.

30,000 $320,000

Amount paid by Lever to acquire ownership in Tropic: Common stock outstanding Retained earnings at acquisition Total book value at acquisition Increase in value of buildings and equipment Fair value of net assets acquired Proportion of ownership acquired Amount paid by Lever

d.

$180,000 110,000

$ 60,000 112,000 $172,000 x 0.75 $129,000 7,500 (3,000) $133,500

Intercorporate sales of inventory in 20X6: Sales reported by Lever Sales reported by Tropic Total sales Sales reported in consolidated income statement Intercompany sales during 20X6

6-34

$420,000 260,000 $680,000 (650,000) $ 30,000


P6-22 (continued) f.

Unrealized inventory profit, December 31, 20X6: Inventory reported by Lever Inventory reported by Tropic Total inventory Inventory reported in consolidated balance sheet Unrealized inventory profit, December 31, 20X6

g.

Eliminating entry to remove the effects of intercompany inventory sales during 20X6: Sales Cost of Goods Sold Inventory

h.

$125,000 90,000 $215,000 (211,000) $ 4,000

30,000

Unrealized inventory profit at January 1, 20X6: Cost of goods sold reported by Lever Cost of goods sold reported by Tropic Reduction of cost of goods sold for intercompany sales during 20X6 Adjusted cost of goods sold Cost of goods sold reported in consolidated income statement Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory

i.

26,000 4,000

$310,000 170,000 (26,000) $454,000 (445,000) $ 9,000

s receivable reported by Lever at December 31, 20X6: s receivable reported for consolidated entity s receivable reported by Tropic Difference Adjustment for intercompany receivable/payable: s payable reported by Lever s payable reported by Tropic Total reported s payable s payable reported for consolidated entity Adjustment for intercompany receivable/payable s receivable reported by Lever

6-35

$145,000 (55,000) $ 90,000 $ 86,000 20,000 $106,000 (89,000)

17,000 $107,000


P6-23 Eliminations for Upstream Sales a. Equity Method Entries on Clean Air's Books: Investment in Special Filter Income from Special Filter

32,000 32,000

Record Clean Air's 80% share of Special Filter's 20X8 income Investment in Special Filter 16,000 Income from Special Filter 16,000 Reverse of the deferred gross profit from upstream sales in 20X7 Income from Special Filter 12,000 Investment in Special Filter Eliminate the deferred gross profit from upstream sales in 20X8

12,000


Original book value + Net Income

NCI 20% 62,000 8,000

Ending book value

70,000

+

Clean Air 80% 248,000 32,000

=

280,000

Common Stock 90,000

+

Retained Earnings 220,000 40,000

90,000

260,000


Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Basic elimination entry: Common stock Retained earnings Income from Special Filter NCI in NI of Special Filter Investment in Special Filter NCI in NA of Special Filter

Total 0 20,000 0 (15,000) 5,000

=

Clean Air's share 0 16,000 0 (12,000) 4,000

+

90,000 220,000 36,000 9,000

4,000 (3,000) 1,000

← Original amount invested (100%) ← Beginning balance in RE ← Parent’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal

284,000 71,000

6-36

NCI's share

← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal


P6-23 (continued) 20X7 Upstream Transactions 20X8 Beg. Inventory Sales 60,000 COGS Gross Profit Gross Profit %

40,000 20,000 33.33%

20X8 Upstream Transactions

Sales COGS

100,000

70,000

30,000

50,000 33.33%

35,000

15,000

Gross Profit Gross Profit % Reversal of last year's deferral: Investment in Special Filter NCI in NA of Special Filter Cost of Goods Sold

=

Re-sold 105,000

16,000 4,000 20,000

Deferral of this year's unrealized profits on inventory transfers Sales Cost of Goods Sold Inventory

150,000 135,000 15,000

6-37

+


Total 150,000


P6-23 (continued) b.

Computation of consolidated net income and income assigned to controlling interest: Operating income reported by Clean Air Products ($250,000 - $175,000 - $30,000) Net income of Superior Filter ($200,000 - $140,000 - $20,000) Inventory profit realized from 20X7 Unrealized inventory profit for 20X8 Consolidated net income Income assigned to noncontrolling interest ($40,000 + $20,000 - $15,000) x 0.20 Income assigned to controlling interest

c.

$ 45,000 40,000 $ 85,000 20,000 (15,000) $ 90,000 (9,000) $ 81,000

Noncontrolling interest, December 31, 20X8: Common stock Retained earnings ($220,000 + $40,000) Less: Unrealized inventory profit Proportion of stock held by noncontrolling interest Noncontrolling interest

6-38

$ 90,000 260,000 (15,000) $335,000 x 0.20 $ 67,000


P6-24 Multiple Inventory Transfers a.

b.

c.

Consolidated net income for 20X8: Operating income of Ajax Corporation Unrealized profit, December 31, 20X8 ($35,000 - $15,000) x ($7,000 / $35,000)

$80,000

Net income of Beta Corporation Profit realized from 20X7 ($30,000 - $24,000) x ($10,000 / $30,000) Unrealized profit, December 31, 20X8 ($72,000 - $63,000) x ($12,000 / $72,000)

$37,500

Net income of Cole Corporation Profit realized from 20X7 ($72,000 - $60,000) x ($18,000 / $72,000) Unrealized profit, December 31, 20X8 ($45,000 - $27,000) x ($15,000 / $45,000) Consolidated net income

$20,000

(4,000)

$ 76,000

2,000 (1,500)

38,000

3,000 (6,000)

17,000 $131,000

Inventory balance, December 31, 20X8: Balance per Beta Corporation Less: Unrealized profit

$ 7,000 (4,000)

$ 3,000

Balance per Cole Corporation Less: Unrealized profit

$12,000 (1,500)

10,500

Balance per Ajax Corporation Less: Unrealized profit Inventory balance per consolidated statement

$15,000 (6,000)

9,000 $22,500

Income assigned to noncontrolling interest in 20X8: Realized income of Beta Corporation Proportion of stock held by noncontrolling interest

$38,000

Realized income of Cole Corporation Proportion of stock held by noncontrolling interest Income to noncontrolling interest

$17,000

x

x

6-39

0.30

0.10

$11,400

1,700 $13,100


P6-25

Consolidation with Inventory Transfers and Other Comprehensive Income 20X4 Downstream Transactions Sales COGS Gross Profit Gross Profit %

Total 108,000 90,000 18,000 16.67%

=

Re-sold 60,000 50,000 10,000

+

=

Re-sold 27,000 18,000 9,000

+

=

Re-sold 24,000 20,000 4,000

+

=

Re-sold 6,000 4,000 2,000

+


20X4 Upstream Transactions Sales COGS Gross Profit Gross Profit %

Total 45,000 30,000 15,000 33.33%


20X5 Downstream Transactions Sales COGS Gross Profit Gross Profit %

Total 36,000 30,000 6,000 16.67%



Beg. Balance 90% Net Income

20X4 Reversal Ending Balance Reversal

Total 48,000 32,000 16,000 33.33%

Investment in Tall Corp. 1,246,600 81,000 54,000 18,000 13,400 1,290,400 13,400

14,600 1,285,800 18,000


Income from Tall Corp. 90% Dividends 90% of OCI Gain Deferred GP Basic OCI Entry

0

14,600

81,000

90% Net Income

13,400 79,800

20X4 Reversal Ending Balance

79,800 0

6-40


P6-25 (continued) a.

Balance in investment at December 31, 20X5:

b.

Proportionate share of Tall's net assets, January 1 ([$1,400,000 x .90] – 8,000 – [6,000 x 0.90]) Proportionate share of 20X5 net income ($90,000 x 0.90) Proportionate share of other comprehensive income for 20X5 ($20,000 x 0.90) Proportionate share of dividends received ($60,000 x 0.90) Reversal of deferred gain from 20X4 downstream transaction Reversal of deferred gain from 20X4 upstream transaction ($6,000 x .090) Deferred gain from downstream transaction Proportionate share of deferred gain from upstream transaction ($14,000 x 0.90) Balance in investment December 31, 20X5 Investment income for 20X5: Net income reported by Tall Proportion of ownership held by Priority Priority’s share of reported income from Tall Reversal of deferred gain from 20X4 downstream transaction Reversal of deferred gain from 20X4 upstream transaction ($6,000 x 0.90) Deferred gain from downstream transaction Proportionate share of deferred gain from upstream transaction ($14,000 x 0.90) Investment income for 20X5

c.

$1,246,600 81,000 18,000 (54,000) 8,000 5,400 (2,000) (12,600) $1,290,400 $90,000 x 0.90 81,000 8,000 5,400 (2,000) (12,600) $79,800

Income to noncontrolling interests for 20X5: Net income reported by Tall 20X4 inventory profits realized in 20X5 ($15,000 x 0.40) 20X5 unrealized inventory profits $30,000 - [$30,000 x ($48,000 / $90,000)] Realized net income Proportion of ownership held by noncontrolling interest Income to noncontrolling interest

6-41

$90,000 6,000 (14,000) $82,000 x 0.10 $ 8,200


P6-25 (continued) d.

Balance assigned to noncontrolling interest in consolidated balance sheet: Net assets reported by Tall, January 1 Net income for 20X5 Dividends paid in 20X5 Net assets reported, December 31, 20X5 Unrealized inventory profits at December 31, 20X5 Other comprehensive income in 20X5 Adjusted net assets, December 31, 20X5 Proportion of ownership held by noncontrolling interest Net assets assigned to noncontrolling interest

e.

f.

$1,400,000 90,000 (60,000) $1,430,000 (14,000) 20,000 $1,436,000 x 0.10 $ 143,600

Inventory reported in consolidated balance sheet: Inventory held by Priority Less: Unrealized profit

$120,000 (14,000)

Inventory held by Tall Less: Unrealized profit $6,000 - [$6,000 x ($24,000 / $36,000)] Inventory

$100,000 (2,000)

98,000 $204,000

Consolidated net income for 20X5: Operating income of Priority Net income of Tall Total unadjusted income 20X4 inventory profits realized in 20X5 ($6,000 + $8,000) Unrealized inventory profits on 20X5 sales ($14,000 + $2,000) Consolidated net income

g.

$106,000

$240,000 90,000 $330,000 14,000 (16,000) $328,000

Eliminating entries, December 31, 20X5


Original book value + Net Income - Dividends Ending book value

NCI 10% 140,000 9,000 (6,000) 143,000

+

Priority Corp. 90% 1,260,000 81,000 (54,000) 1,287,000

=

Comm. Stock 400,000 400,000

6-42

+

Add. Paid-In Capital 200,000 200,000

+

Retained

Earnings 790,000 90,000 (60,000) 820,000

+

Acc. OCI 10,000 10,000


6-43


P6-25 (continued) Reversal/Deferred GP Calculations: Total Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

8,000 6,000 (2,000) (14,000) (2,000)

Basic elimination entry Common stock Additional paid-in capital Retained earnings Accumulated OCI Income from Tall Corp. NCI in NI of Tall Corp. Investment in Tall Corp. NCI in NA of Tall Corp. Other Comprehensive Income Entry: OCI from Tall Corp. OCI to the NCI Investment in Tall Corp. NCI in NA of Tall Corp. Reversal of last year's deferral: Investment in Tall Corp. NCI in NA of Tall Corp. Cost of Goods Sold

=

Priority Corp.'s share 8,000 5,400 (2,000) (12,600) (1,200)

+

NCI's share 600 (1,400) (800)

400,000 200,000 790,000 10,000 79,800 8,200

← Original amount invested (100%) ← Beginning balance in APIC ← Beginning balance in RE ← Beginning balance in Acc. OCI ← PC.’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal

1,285,800 142,200

18,000 2,000 18,000 2,000

13,400 600 14,000

Deferral of this year's unrealized profits on inventory transfers Sales 126,000 Cost of Goods Sold 110,000 Inventory 16,000

6-44



P6-26 Multiple Inventory Transfers between Parent and Subsidiary 20X5 Downstream Total = Re-sold + 150,000 90,000 100,000 60,000 50,000 30,000 33.33%


Ending Inventory, 20X5 60,000 40,000 20,000

20X5 Upstream


Total = Re-sold + 100,000 30,000 70,000 21,000 30,000 9,000 30.00%


Beg Inventory, 20X6 = Re-sold + 70,000 50,000 49,000 35,000 21,000 15,000 30.00%



20X6 Downstream


Total = Re-sold + 60,000 54,000 40,000 36,000 20,000 18,000 33.33%


20X6 Upstream


Total = Re-sold + 240,000 60,000 200,000 50,000 40,000 10,000 16.67%

6-45



a.

b.

Eliminating entries: Investment in Slinky 20,000 Cost of goods sold Eliminate beginning inventory profit of Proud Company.

20,000

Investment in Slinky 12,600 NCI in NA of Slinky 8,400 Cost of goods sold Inventory Eliminate beginning inventory profit of Slinky Company.

15,000 6,000

Sales 60,000 Cost of goods sold Inventory Eliminate intercompany sale of inventory by Proud Company.

58,000 2,000

Sales 240,000 Cost of goods sold Inventory Eliminate intercompany sale of inventory by Slinky Company.

210,000 30,000

Computation of cost of goods sold for consolidated entity: Inventory produced by Proud in 20X5 ($100,000 x 0.40) Inventory produced by Slinky in 20X5 ($70,000 x 0.50) Inventory produced by Proud in 20X6 ($40,000 x 0.90) Inventory produced by Slinky in 20X6 ($200,000 x 0.25) Cost of goods sold reported in consolidated income statement

$ 40,000 35,000 36,000 50,000 $161,000

6-46


P6-27 Consolidation following Inventory Transactions a. Equity Method Entries on Bell Co.'s Books: Investment in Troll Corp. 18,000 Income from Troll Corp. Record Bell Co.'s 60% share of Troll Corp.'s 20X2 income

18,000

Cash 6,000 Investment in Troll Corp. Record Bell Co.'s 60% share of Troll Corp.'s 20X2 dividend

6,000

Income from Troll Corp. 6,500 Investment in Troll Corp. Eliminate the deferred gross profit from downstream sales in 20X2

6,500

Investment in Troll Corp. 2,040 Income from Troll Corp. Reverse of the deferred gross profit from upstream sales in 20X1

2,040

Income from Troll Corp. 2,520 Investment in Troll Corp. Eliminate the deferred gross profit from upstream sales in 20X2

2,520

b. Book Value Calculations:


NCI 40% 60,000 12,000 (4,000)

Ending book value

68,000

Bell Co. 60% 90,000 18,000 (6,000)

+

=

102,000


100,000



Total 0 3,400 (6,500) (4,200) (7,300)

=

Bell Co.'s share 0 2,040 (6,500) (2,520) (6,980)

6-47

+

NCI's share 1,360 (1,680) (320)

+



P6-27 (continued) Basic elimination entry Common stock Retained earnings Income from Troll Corp. NCI in NI of Troll Corp. Dividends declared Investment in Troll Corp. NCI in NA of Troll Corp.

100,000 50,000 11,020 11,680

← Original amount invested (100%) ← Beginning balance in RE ← Bell’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal

10,000 95,020 67,680

Excess Value (Differential) Calculations: NCI Bell Co. 40% + 60% Beginning balance 7,200 10,800 Changes 0 0 Ending balance 7,200 10,800

Excess value (differential) reclassification entry: Land 18,000 Investment in Troll Corp. NCI in NA of Troll Corp.

=

Land 18,000 0 18,000

10,800 7,200

Optional accumulated depreciation elimination entry Accumulated depreciation 45,000 Building & equipment 45,000 Reversal of last year's deferral: Investment in Troll Corp. NCI in NA of Troll Corp. Cost of Goods Sold

2,040 1,360 3,400


6-48

← 100% of Troll Corp.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal


P6-27 (continued) 20X2 Downstream Transactions Total 28,000

Sales

=

Re-sold 15,000

+


COGS

14,000

7,500

6,500

Gross Profit Gross Profit %

14,000 50.00%

7,500

6,500

20X1 Upstream Transactions Total 42,500

Sales

=

Re-sold 34,000

+


COGS

25,500

20,400

5,100


17,000 40.00%

13,600

3,400


Sales

=

Re-sold 24,500

+


COGS

21,000

14,700

6,300


14,000 40.00%

9,800

4,200

Investment in Troll Corp. Beginning Balance 60% Net Income 20X1 Reversal Ending Balance Reversal

Income from Troll Corp.

98,760 18,000 2,040 103,780 2,040

6,000 9,020


95,020 10,800

Basic Excess Reclass.

0

9,020

18,000

60% Net Income

2,040 11,020


11,020 0

6-49


P6-27 (continued) c. Elimination Entries DR CR

Bell Co.

Troll Corp.

200,000 (99,800)

120,000 (61,000)

(25,000) (6,000) 11,020 80,220

(15,000) (14,000) 30,000

11,020 74,020 11,680

55,700

80,220

30,000

85,700

55,700

80,220

227,960 80,220 (40,000) 268,180

50,000 30,000 (10,000) 70,000

50,000 85,700

55,700 10,000 65,700

227,960 80,220 (40,000) 268,180

69,400 60,000 40,000 520,000 (175,000) 103,780

51,200 55,000 30,000 350,000 (75,000)

Total Assets

618,180

411,200

s Payable Bonds Payable Bonds Common Stock Retained Earnings NCI in NA of Troll Corp.

68,800 80,000 1,200 200,000 268,180

41,200 200,000 100,000 70,000

100,000 135,700 1,360

Total Liabilities & Equity

618,180

411,200

237,060

Income Statement Sales Less: COGS Less: Depreciation Expense Less: Interest Expense Income from Troll Corp. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and s Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Troll Corp.

6-50

63,000 52,300 3,400

135,700

10,700 18,000 45,000 45,000 2,040 65,040

95,020 10,800 161,520

65,700 67,680 7,200 140,580

Consolidated 257,000 (105,100) (40,000) (20,000) 0 91,900 (11,680)

120,600 104,300 88,000 825,000 (205,000) 0 932,900 110,000 280,000 1,200 200,000 268,180 73,520 932,900


P6-28 Consolidation Worksheet a. Equity Method Entries on Crow Corp.'s Books: Investment in West Co. Income from West Co.

14,000 14,000

Record Crow Corp.'s 70% share of West Co.'s 20X9 income Cash 3,500 Investment in West Co. Record Crow Corp.'s 70% share of West Co.'s 20X9 dividend Investment in West Co. Income from West Co.

3,500

15,000 15,000

Reverse of the deferred gross profit from downstream sales in 20X8 Income from West Co. 8,000 Investment in West Co. 8,000 Eliminate the deferred gross profit from downstream sales in 20X9 Investment in West Co. 21,000 Income from West Co. Reverse of the deferred gross profit from upstream sales in 20X8

21,000

Income from West Co. 17,500 Investment in West Co. Eliminate the deferred gross profit from upstream sales in 20X9

17,500

Book Value Calculations: NCI 30% Original book value + Net Income - Dividends Ending book value

120,000 6,000 (1,500) 124,500

+

Crow Corp. 70%

=

280,000 14,000 (3,500) 290,500

6-51

Common Stock 150,000 150,000

+



P6-28 (continued) Reversal/Deferred GP Calculations:


Total 15,000 30,000 (8,000) (25,000) 12,000

Basic elimination entry Common stock Retained earnings Income from West Co. NCI in NI of West Co. Dividends declared Investment in West Co. NCI in NA of West Co.

Crow Corp.'s share 15,000 21,000 (8,000) (17,500) 10,500

=

+

NCI's share

150,000 250,000 24,500 7,500 5,000 301,000 126,000

Excess Value (Differential) Calculations: NCI Crow Corp. 30% + 70% Beginning balance 10,800 25,200 Changes 0 0 Ending balance 10,800 25,200

=

Land 14,000 0 14,000

Excess value (differential) reclassification entry: Land 14,000 Goodwill 22,000 Investment in West Co. NCI in NA of West Co.

25,200 10,800

Reversal of last year's deferral: Investment in West Co. NCI in NA of West Co. Cost of Goods Sold

45,000

36,000 9,000


6-52

9,000 (7,500) 1,500

← Original amount invested (100%) ← Beginning balance in RE ← Crow’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal ← 100% of West Co.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

+

Goodwill 22,000 0 22,000


P6-28 (continued) 20X9 Downstream Transactions Total 90,000

Sales

=

Re-sold 70,000

+


COGS

54,000

42,000

12,000


36,000 40.00%

28,000

8,000


Sales

=

Re-sold 0

+


COGS

37,000

0

37,000


25,000 40.32%

0

25,000

Investment in West Co. Beginning Balance 70% Net Income 20X8 Reversal Ending Balance Reversal

Income from West Co.

269,200 14,000 36,000 290,200 36,000

3,500 25,500


301,000 25,200

Basic Excess Reclass.

0

25,500

14,000

70% Net Income

36,000 24,500


24,500 0

6-53

Chapter 06 - Intercompany Inventory Transactions P6-28 (continued) b. Crow Corp.

West Co.

300,000 (200,000)

200,000 (150,000)

(40,000) 24,500 84,500

(30,000)

84,500

20,000

Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance

532,000 84,500 (35,000) 581,500

250,000 20,000 (5,000) 265,000

Balance Sheet Cash and Receivable Inventory Land, Buildings, and Equipment (net) Investment in West Co.

81,300 200,000 270,000 290,200

85,000 110,000 250,000

Goodwill Total Assets

841,500

445,000

s Payable Common Stock Retained Earnings NCI in NA of West Co.

60,000 200,000 581,500

30,000 150,000 265,000


841,500

445,000

Income Statement Sales Less: COGS Less: Depreciation Expense Income from West Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income

c.

20,000

Retained earnings reconciliation, December 31, 20X9: Retained earnings, Crow Corporation Retained earnings, West Company Elimination of West’s beginning RE Elimination debits in income statement Elimination credits in income statement Remove West’s dividends Consolidated retained earnings

6-54

Elimination Entries DR CR 152,000 119,000 45,000 24,500 176,500 7,500 184,000

250,000 184,000 434,000

22,000 72,000

150,000 434,000 9,000 593,000

348,000 (186,000)

164,000

(70,000) 0 92,000 (7,500) 84,500

164,000 5,000 169,000

532,000 84,500 (35,000) 581,500

164,000

33,000 14,000 36,000

Consolidated

301,000 25,200 359,200

169,000 126,000 10,800 305,800

166,300 277,000 534,000 0 22,000 999,300 90,000 200,000 581,500 127,800 999,300

$581,500 265,000 (250,000) (184,000) 164,000 5,000 $581,500


P6-29 Computation of Consolidated Totals a.

Consolidated sales for 20X8: Sales reported Intercorporate sales Sales to nons

b.

Bunker Corp. $660,000 (140,000) $520,000

Harrison Co. $510,000 (240,000) $270,000

$660,000 ÷ 1.4 $471,429

$510,000 ÷ 1.2 $425,000

(128,000) $343,429

(232,000) $193,000

Consolidated $790,000

Consolidated cost of goods sold: Total sales reported Ratio of cost to sales price Cost of goods sold Amount to be eliminated (see entry) Cost of goods sold adjusted

$536,429

Downstream: Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 140,000 98,000 100,000 70,000 40,000 28,000 28.57%


Upstream: Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 240,000 192,000 200,000 160,000 40,000 32,000 16.67%


Eliminating entries: Sales Cost of Goods Sold Inventory Elimination of sales by Bunker to Harrison:

140,000

Sales Cost of Goods Sold Inventory Elimination of sales by Harrison to Bunker:

240,000

6-55

128,000 12,000

232,000 8,000


P6-29 (continued) c.

Operating income of Bunker Corporation (excluding income from Harrison Company) Net income of Harrison Company

$70,000 20,000 $90,000 (12,000) (8,000) $70,000

Less: Unrealized inventory profits of Bunker Unrealized inventory profits of Harrison Consolidated net income Less: Income assigned to noncontrolling interest ($20,000 - $8,000) x 0.20 Income to controlling interest 20X8 d.

(2,400) $67,600

Inventory balance in consolidated balance sheet: Inventory reported by Bunker Corporation Unrealized profits

$48,000 (8,000)

Inventory reported by Harrison Company Unrealized profits Inventory balance, December 31, 20X8

$42,000 (12,000)

6-56

$40,000 30,000 $70,000


P6-30 Intercompany Transfer of Inventory and Land a. Equity Method Entries on Pine Corp.'s Books: Investment in Bock Co. 17,500 Income from Bock Co. Record Pine Corp.'s 70% share of Bock Co.'s 20X3 income

17,500

Cash 10,500 Investment in Bock Co. Record Pine Corp.'s 70% share of Bock Co.'s 20X3 dividend

10,500

Income from Bock Co. Investment in Bock Co. Record amortization of excess acquisition price

6,300

6,300

Income from Bock Co. 3,800 Investment in Bock Co. 3,800 Eliminate the deferred gross profit from downstream sales in 20X3 Investment in Bock Co. 6,300 Income from Bock Co. 6,300 Reverse of the deferred gross profit from upstream sales in 20X2 Income from Bock Co. 5,600 Investment in Bock Co. Eliminate the deferred gross profit from upstream sales in 20X3 Book Value Calculations: NCI 30% Original book value 39,000 + Net Income 7,500 - Dividends (4,500) Ending book value 42,000

+

Pine Corp. 70% 91,000 17,500 (10,500) 98,000

=

5,600

Common Stock 70,000

+

70,000



Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Total 9,000 (3,800) (8,000) (2,800)

=

Pine Corp.'s share 6,300 (3,800) (5,600) (3,100)

6-57

+

NCI's share 2,700 (2,400) 300


P6-30 (continued) Basic elimination entry Common stock Retained earnings Income from Bock Co. NCI in NI of Bock Co. Dividends declared Investment in Bock Co. NCI in NA of Bock Co.

70,000 60,000 14,400 7,800

← Original amount invested (100%) ← Beginning balance in RE ← Pine’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal

15,000 94,900 42,300

Excess Value (Differential) Calculations: NCI Pine Corp. 30% + 70% Beginning balance 13,800 32,200 Changes (2,700) (6,300) Ending balance 11,100 25,900

=


Buildings and Equipment 20,000 20,000

Amortized excess value reclassification entry: Amortization expense 7,000 Depreciation expense 2,000 Income from Bock Co. NCI in NI of Bock Co.

6,300 2,700

Excess value (differential) reclassification entry: Buildings and Equipment 20,000 Patents 21,000 Accumulated depreciation Investment in Bock Co. NCI in NA of Bock Co.

4,000 25,900 11,100

Optional accumulated depreciation elimination entry: Accumulated depreciation 50,000 Building & equipment 50,000 Reversal of last year's deferral: Investment in Bock Co. NCI in NA of Bock Co. Cost of Goods Sold

← 100% of Bock Co.'s dividends

6,300 2,700 9,000

6-58

+

Patents 28,000 (7,000) 21,000

+

Acc. Depr. (2,000) (2,000) (4,000)


P6-30 (continued) Deferral of this year's unrealized profits on inventory transfers Investment in Bock Co. 4,900 NCI in NA of Bock Co. 2,100 Inventory 7,000 Deferral of this year's unrealized profits on inventory transfers Sales 120,000 Cost of Goods Sold 108,200 Inventory 11,800 20X3 Downstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 30,000 15,000 15,000 50.00%

=

Re-sold 22,400 11,200 11,200

Ending Inventory, 20X2 48,000 32,000

Re-sold, 20X3 27,000 18,000

+


20X2 Upstream Transactions:


=

16,000 33.33%

Ending Inventory, 20X3 21,000 14,000

+

9,000

7,000


Beg. Balance 70% Net Income 20X2 Reversal Ending Balance Reversal 20X2 Deferred GP

Total 90,000 60,000 30,000 33.33%

Investment in Bock Co. 112,000 17,500 10,500 6,300 6,300 9,400 109,600 6,300 94,900 4,900 0

25,900

=

Re-sold 66,000 44,000 22,000

+


Income from Bock Co. 70% Dividends Excess Val. Amort. Deferred GP

6,300 9,400

Basic

14,400

Excess Reclass.

6-59

17,500

70% Net Income

6,300 8,100


6,300 0

Chapter 06 - Intercompany Inventory Transactions P6-30 (continued) b. Pine Corp.

Bock Co.

260,000 13,600 (186,000)

125,000 (79,800)

(20,000) (16,000)

(15,000) (5,200)

Elimination Entries DR CR

Consolidated

Income Statement Sales Other Income Less: COGS Less: Depreciation Expense Less: Interest Expense Less: Amortization Expense Income from Bock Co.

8,100

Consolidated Net Income NCI in Net Income

59,700

25,000

Controlling Interest in Net Income

59,700

25,000

Statement of Retained Earnings Beginning Balance

127,900

60,000

Net Income Less: Dividends Declared

59,700 (30,000)

25,000 (15,000)

Ending Balance

157,600

70,000

Balance Sheet Cash and s Receivable Inventory

15,400 165,000

21,600 35,000

Land Buildings & Equipment Less: Accumulated Depreciation Investment in Bock Co.

80,000 340,000 (140,000) 109,600

40,000 260,000 (80,000)

Patents Total Assets

570,000

276,600

s Payable Bonds Payable Bonds Common Stock

92,400 200,000 120,000

35,000 100,000 1,600 70,000

Retained Earnings NCI in NA of Bock Co.

157,600

70,000


570,000

276,600

6-60

120,00 0 108,200 9,000 2,000 7,000 14,400 143,40 0 7,800 151,20 0

60,000 151,20 0 211,20 0

6,300

(37,000) (21,200) (7,000) 0

123,500 2,700

64,800 (5,100)

126,200

59,700

127,900 126,200 15,000

59,700 (30,000)

141,200

157,600

11,800 7,000 20,000 50,000 6,300 4,900 21,000 102,20 0

70,000 211,20 0 2,700 2,100 286,00 0

265,000 13,600 (148,600)

50,000 4,000 94,900 25,900

37,000 181,200 120,000 570,000 (174,000) 0 21,000

193,600

755,200 127,400 300,000 1,600 120,000

141,200 42,300 11,100

157,600 48,600

194,600

755,200


P7-30 (continued) Note: Financial statements are not required. Pine Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X3 Cash and s Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patent Total Assets

$570,000 (174,000)

s Payable Bonds Payable Bond Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders' Equity

$300,000 1,600 $120,000 157,600 $277,600 48,600

$ 37,000 181,200 120,000 396,000 21,000 $755,200 $127,400 301,600

326,200 $755,200

Pine Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X3 Sales Other Income Total Income Cost of Goods Sold Depreciation Expense Interest Expense Amortization Expense Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest

$148,600 37,000 21,200 7,000

$265,000 13,600 $278,600

(213,800) $ 64,800 (5,100) $ 59,700

Pine Corporation and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X3 Retained Earnings, January 1, 20X3 Income to Controlling Interest, 20X3

$127,900 59,700 $187,600 (30,000) $157,600

Dividends Declared, 20X3 Retained Earnings, December 31, 20X3

6-61


P6-31 Consolidation Using Financial Statement Data a. Equity Method Entries on Bower Corp.'s Books: Investment in Concerto Co. 21,000 Income from Concerto Co. Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 income

21,000

Cash 12,000 Investment in Concerto Co. Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 dividend

12,000

Income from Concerto Co. Investment in Concerto Co. Record amortization of excess acquisition price

6,000

6,000

Investment in Concerto Co. 4,000 Income from Concerto Co. Reverse of the deferred gross profit from downstream sales in 20X5

4,000

Income from Concerto Co. 2,000 Investment in Concerto Co. Eliminate the deferred gross profit from downstream sales in 20X6

2,000

Investment in Concerto Co. 4,800 Income from Concerto Co. Reverse of the deferred gross profit from upstream sales in 20X5

4,800

Income from Concerto Co. 5,400 Investment in Concerto Co. Eliminate the deferred gross profit from upstream sales in 20X6

5,400



NCI 40% 80,000 14,000 (8,000)

Ending book value

86,000

+

Bower Corp. 60% 120,000 21,000 (12,000)

=

129,000

6-62

Common Stock 50,000

50,000

+


Chapter 06 - Intercompany Inventory Transactions P6-31 (continued) Reversal/Deferred GP Calculations:

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total Basic elimination entry Common stock Retained earnings Income from Concerto Co. NCI in NI of Concerto Co. Dividends declared Investment in Concerto Co. NCI in NA of Concerto Co.

Total 4,000 8,000 (2,000) (9,000) 1,000

=

Bower Corp.'s share 4,000 4,800 (2,000) (5,400) 1,400

+

NCI's share 3,200 (3,600) (400)

50,000 150,000 22,400 13,600 20,000 130,400 85,600

Excess Value (Differential) Calculations: NCI Bower Corp. 40% + 60% Beginning balance 16,000 24,000 Changes (4,000) (6,000) Ending balance 12,000 18,000

=

Goodwill 40,000 (10,000) 30,000

Amortized excess value reclassification entry: Goodwill impairment loss 10,000 Income from Concerto Co. NCI in NI of Concerto Co.

6,000 4,000

Excess value (differential) reclassification entry: Goodwill 30,000 Investment in Concerto Co. NCI in NA of Concerto Co.

18,000 12,000

Optional accumulated depreciation elimination entry Accumulated depreciation 25,000 Building & equipment

6-63

← Original amount invested (100%) ← Beginning balance in RE ← Bower’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal ← 100% of Concerto Co.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

25,000


P6-31 (continued) Reversal of last year's deferral: Investment in Concerto Co. NCI in NA of Concerto Co. Cost of Goods Sold

8,800 3,200 12,000

Deferral of this year's unrealized profits on inventory transfers Sales 112,000 Cost of Goods Sold 101,000 Inventory 11,000 20X5 Downstream Transactions:


Ending Inv., 20X5 14,000 10,000 4,000 28.57%

20X6 Downstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 22,000 15,714 6,286 28.57%

=

Re-sold 15,000 10,714 4,286

+

=

Re-sold 36,000 30,000 6,000

+


20X5 Upstream Transactions:


Ending Inv., 20X5 48,000 40,000 8,000 16.67%

20X6 Upstream Transactions: Sales COGS Gross Profit Gross Profit % P6-31 (continued)

Total 90,000 75,000 15,000 16.67%

Investment in Concerto Co.


Income from Concerto Co.

6-64

Chapter 06 - Intercompany Inventory Transactions P6-31 (continued) Beg. Balance 60% Net Income

20X5 Reversal Ending Balance Reversal

135,200 21,000

8,800 139,600 8,800

12,000 6,000 7,400

60% Dividends Excess Val. Amort. Deferred GP

6,000 7,400

130,400

Basic

22,400

18,000

Excess Reclass.

0

21,000

60% Net Income

8,800 16,400


6,000 0

b. Income Statement Sales Less: COGS Less: Depreciation & Amort. Expense Less: Other Expenses Less: Goodwill Impairment Loss Income from Concerto Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income

Bower Corp.

Concerto Co.

400,000 (280,000)

200,000 (120,000)

(25,000) (35,000)

(15,000) (30,000)

16,400 76,400

35,000

76,400

35,000

285,000 76,400 (50,000) 311,400

150,000 35,000 (20,000) 165,000

26,800 80,000 120,000 70,000 340,000 (165,000) 139,600

35,000 40,000 90,000 20,000 200,000 (85,000)

611,400

300,000

s Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Concerto Co.

80,000 120,000 100,000 311,400

15,000 70,000 50,000 165,000


611,400

300,000

Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash s Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Concerto Co. Goodwill Total Assets

6-65

Elimination Entries DR CR 112,000 12,000 101,000

10,000 22,400 144,400 13,600 158,000

150,000 158,000 308,000

6,000 119,000 4,000 123,000

123,000 20,000 143,000

285,000 76,400 (50,000) 311,400

25,000

30,000 63,800

50,000 308,000 3,200 361,200

488,000 (287,000) (40,000) (65,000) (10,000) 0 86,000 (9,600) 76,400

11,000 25,000 8,800

Consolidated

130,400 18,000 184,400

143,000 85,600 12,000 240,600

61,800 120,000 199,000 90,000 515,000 (225,000) 0 30,000 790,800 95,000 190,000 100,000 311,400 94,400 790,800


P6-32 Intercorporate Transfers of Inventory and Equipment a.

Consolidated cost of goods sold for 20X9: Amount reported by Foster Company Amount reported by Block Corporation Adjustment for unrealized profit in beginning inventory sold in 20X9 Adjustment for inventory purchased from subsidiary and resold during 20X9: CGS recorded by Foster ($30,000 x 0.60) CGS recorded by Block Total recorded CGS based on Block's cost ($20,000 x 0.60) Required adjustment Cost of goods sold

b.

(15,000) $18,000 20,000 $38,000 (12,000)

(26,000) $822,000

Consolidated inventory balance: Amount reported by Foster Amount reported by Block Total inventory reported Unrealized profit in ending inventory held by Foster [($30,000 - $20,000) x 0.40] Consolidated balance

c.

$593,000 270,000

$137,000 130,000 $267,000 (4,000) $263,000

Income assigned to noncontrolling interest: Net income reported by Block Corporation Adjustment for realization of profit on inventory sold to Foster in 20X8 Adjustment for unrealized profit on inventory sold to Foster in 20X9 Realized net income of Block for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest

6-66

$70,000 15,000 (4,000) $81,000 x 0.10 $ 8,100



Amount assigned to noncontrolling interest in consolidated balance sheet: Block Corporation common stock outstanding Block Corporation retained earnings, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Book value, December 31, 20X9 Adjustment for unrealized profit on inventory sold to Foster Realized book value of Block Corporation Proportion of ownership held by noncontrolling interest Balance assigned to noncontrolling interest

e.

$ 50,000 165,000 70,000 (20,000) $265,000 (4,000) $261,000 x 0.10 $ 26,100

Consolidated retained earnings at December 31, 20X9: Balance reported by Foster Company, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Balance reported by Foster Company, December 31, 20X9

f.

$235,000 180,900 (40,000) $375,900

Eliminating entries:



NCI 10% 21,500 7,000 (2,000)

+ Foster Co. 90% 193,500 63,000 (18,000)

Ending book value

26,500

238,500

=

Comm on Stock 50,000

50,000

6-67

+


Chapter 06 - Intercompany Inventory Transactions P6-32 (continued) Reversal/Deferred GP Calculations:


Total 0 15,000 0 (4,000) 11,000

Basic elimination entry Common stock Retained earnings Income from Block Corp. NCI in NI of Block Corp. Dividends declared Investment in Block Corp. NCI in NA of Block Corp. Reversal of last year's deferral: Investment in Block Corp. NCI in NA of Block Corp. Cost of Goods Sold

Foster Co.'s share 0 13,500 0 (3,600) 9,900

=

+

NCI's share

50,000 165,000 72,900 8,100 20,000 248,400 27,600

1,500 (400) 1,100

← Original amount invested (100%) ← Beginning balance in RE ← Foster’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal ← 100% of Block Corp.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

13,500 1,500 15,000

Deferral of this year's unrealized profits on inventory transfers Sales 30,000 Cost of Goods Sold 26,000 Inventory 4,000 20X8 Upstream Transactions:


Ending Inventory 75,000 60,000 15,000 20.00%

20X9 Upstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 30,000 20,000 10,000 33.33%

=

6-68

Re-sold 18,000 12,000 6,000

+


Chapter 06 - Intercompany Inventory Transactions P6-32 (continued)

Beg. Balance 90% Net Income 20X8 Reversal Ending Balance Reversal

Investment in Block Corp. 180,000 63,000 18,000 13,500 3,600 234,900 13,500 248,400 0

Income from Block Corp.


3,600

Basic

72,900

63,000

90% Net Income

13,500 72,900


0

g. Elimination Entries DR CR

Foster Co.

Block Corp.

815,000 26,000 (593,000)

415,000 15,000 (270,000)

Less: Depreciation Expense Less: Other Expenses Income from Block Corp.

(45,000) (95,000) 72,900

(15,000) (75,000)

Consolidated Net Income NCI in Net Income Controlling Interest in Net Income

180,900

70,000

180,900

70,000

Beginning Balance

235,000

165,000

Net Income Less: Dividends Declared

180,900 (40,000)

70,000 (20,000)

Ending Balance

375,900

215,000

187,000 80,000 40,000 137,000 80,000 500,000 (155,000) 234,900 1,103,900

57,400 90,000 10,000 130,000 60,000 250,000 (75,000)

63,000 95,000 250,000

35,000 20,000 200,000 2,400 50,000

50,000

215,000

276,00

Income Statement Sales Other Income Less: COGS

30,000 15,000 26,000 72,900 102,90 0 8,100 111,00 0

Consolidated 1,200,000 41,000 (822,000) (60,000) (170,000) 0

41,000

189,000 (8,100)

41,000

180,900

Statement of Retained Earnings

Balance Sheet Cash s Receivable Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Block Corp. Total Assets s Payable Other Payables Bonds Payable Bond Common Stock Additional Paid-in Capital Retained Earnings

210,000 110,000 375,900

6-69

522,400

165,00 0 111,00 0 276,00 0

235,000 41,000 20,000

180,900 (40,000)

61,000

375,900

248,400 252,400

244,400 170,000 50,000 263,000 140,000 750,000 (230,000) 0 1,387,400

61,000

98,000 115,000 450,000 2,400 210,000 110,000 375,900

4,000

13,500 13,500


NCI in NA of Block Corp. Total Liabilities & Equity

1,103,900

6-70

522,400

0 1,500 327,50 0

27,600

26,100

88,600

1,387,400


P6-33 Consolidated Balance Sheet Worksheet [AIA Adapted] Book Value Calculations: Original book value + Net Income - Dividends Ending book value

NCI 10% 80,000 10,100 (100) 90,000

+

Pine Corp. 90% 720,000 90,900 (900) 810,000

=



+

200,000



Basic elimination entry Common stock Retained earnings Income from Slim Corp. NCI in NI of Slim Corp. Dividends declared Investment in Slim Corp. NCI in NA of Slim Corp.

Total 0 0 -3,000 0 (3,000)

Pine Corp.'s share 0 0 -3,000 0 (3,000)

=

+

NCI's share

200,000 600,000 87,900 10,100

Excess value (differential) reclassification entry: Goodwill 500,000 Investment in Slim Corp. NCI in NA of Slim Corp.

6-71

0 0

← Original amount invested (100%) ← Beginning balance in RE ← Pine’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal

1,000 807,000 90,000

Excess Value (Differential) Calculations: NCI Pine Corp. 10% + 90% Beginning balance 50,000 450,000 Changes 0 0 Ending balance 50,000 450,000

0

=

Goodwill 500,000 0 500,000

450,000 50,000

← 100% of Slim Corp.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

Chapter 06 - Intercompany Inventory Transactions P6-33 (continued) Intercompany Transactions Dividends Payable Dividends Receivable

900 900

s Payable s Receivable

90,000 90,000

Note Payable Note Receivable

100,000 100,000

Interest Payable Interest Receivable

5,000 5,000

Deferral of this year's unrealized profits on inventory transfers Sales 300,000 Cost of Goods Sold 297,000 Inventory 3,000 20X6 Downstream Transactions:

Sales COGS

240,000

228,000

12,000

60,000 20.00%

57,000

3,000


=

Re-sold 285,000

Investment in Slim Corp. Acquisition Price 90% Net Income

Income from Slim Corp.

1,170,000 90,900 900 3,000

Ending Balance

+


Total 300,000

90% Dividends Deferred GP Basic Excess Reclass.

0

90% Net Income

87,900

Ending Balance

3,000

1,257,000 807,000 450,000

90,900

87,900 0

6-72


P6-33 (continued) Pine Corp.

Slim Corp.

Balance Sheet Cash AR & Other Receivables

105,000 410,000

15,000 120,000

Merchandise Inventory Plant & Equipment (net) Investment in Slim Corp.

920,000 1,000,000 1,257,000

670,000 400,000


3,692,000

1,205,000

140,000

305,000

500,000 3,052,000

200,000 700,000

AP & Other Liabilities

Common Stock Retained Earnings

Elimination Entries DR CR

900 90,000 100,000 5,000 3,000 807,000 450,000 500,000 500,000 900 90,000 100,000 5,000 200,000 600,000 87,900 10,100 300,000

NCI in NA of Slim Corp. Total Liabilities & Equity

3,692,000

1,205,000

6-73

1,393,900

1,455,900

Consolidated 120,000 334,100

1,587,000 1,400,000 0 500,000 3,941,100 249,100

1,000 297,000 90,000 50,000 438,000

500,000 3,052,000

140,000 3,941,100


P6-34 Comprehensive Worksheet Problem a. Equity Method Entries on Randall Corp.'s Books: Investment in Sharp Co.

320,000

Cash Record the initial investment in Sharp Co.

320,000

Investment in Sharp Co. Income from Sharp Co.

32,000 32,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income Cash 20,000 Investment in Sharp Co. Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend Income from Sharp Co.

20,000

4,000

Investment in Sharp Co. Record amortization of excess acquisition price

4,000

Investment in Sharp Co. Income from Sharp Co.

2,000 2,000

Reverse of the deferred gross profit from downstream sales in 20X6 Income from Sharp Co. 3,000 Investment in Sharp Co. 3,000 Eliminate the deferred gross profit from downstream sales in 20X7 Investment in Sharp Co. 6,400 Income from Sharp Co. Reverse of the deferred gross profit from upstream sales in 20X6

6,400

Income from Sharp Co. 8,000 Investment in Sharp Co. Eliminate the deferred gross profit from upstream sales in 20X7

8,000

6-74


6-34 (continued) b. Book Value Calculations:


NCI 20% 67,000 8,000 (5,000)

Ending book value

70,000

+

Randall Corp. 80% 268,000 32,000 (20,000)

Retained =


280,000

+

Add. Paidin Capital 20,000

100,000

+

20,000

Earnings 215,000 40,000 (25,000) 230,000



Basic elimination entry Common stock Additional paid-in capital Retained earnings Income from Sharp Co. NCI in NI of Sharp Co. Dividends declared Investment in Sharp Co. NCI in NA of Sharp Co.

Total 2,000 8,000 (3,000) (10,000) (3,000)

=

Randall Corp.'s share 2,000 6,400 (3,000) (8,000) (2,600)

+

NCI's share 1,600

(2,000) (400)

100,000 20,000 215,000 29,400 7,600

← Original amount invested (100%) ← Beginning balance in APIC ← Beginning balance in RE ← Randall’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal

25,000 277,400 69,600

Excess Value (Differential) Calculations: NCI Randall 20% + Corp. 80% Beginning balance 7,000 28,000 Changes (1,000) (4,000) Ending balance 6,000 24,000

6-75

=

← 100% of Sharp Co.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

Buildings & equipment 50,000 50,000

+

Acc. Depr. (15,000) (5,000) (20,000)


P6-34 (continued) Amortized excess value reclassification entry: Depreciation expense 5,000 Income from Sharp Co. NCI in NI of Sharp Co.

4,000 1,000

Excess value (differential) reclassification entry: Buildings & equipment 50,000 Accumulated depreciation Investment in Sharp Co. NCI in NA of Sharp Co.

20,000 24,000 6,000

Eliminate intercompany s: s payable s receivable

10,000

10,000

Optional accumulated depreciation elimination entry Accumulated depreciation 40,000 Building & equipment Reversal of last year's deferral: Investment in Sharp Co. NCI in NA of Sharp Co. Cost of Goods Sold

40,000

8,400 1,600 10,000

Deferral of this year's unrealized profits on inventory transfers Sales 57,000 Cost of Goods Sold 44,000 Inventory 13,000 20X6 Downstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 26,000 20,000 6,000 23.08%

=

Re-sold 17,333 13,333 4,000

+

Re-sold

+


20X7 Downstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 12,000 9,000 3,000 25.00%

=

6-76

0 0 0



P6-34 (continued) 20X6 Upstream Transactions: Total 60,000


=

Re-sold 36,000

+


40,000

24,000

16,000

20,000 33.33%

12,000

8,000

20X7 Upstream Transactions: Total 45,000


Beginning Balance 80% Net Income

Investment in Sharp Co. 287,600 32,000 20,000


8,400 293,000

Reversal

8,400

=

Re-sold 15,000

+


30,000

10,000

20,000

15,000 33.33%

5,000

10,000

Income from Sharp Co.

4,000 11,000


4,000 11,000

277,400

Basic

29,400

24,000

Excess Reclass.

0

6-77

32,000

80% Net Income

8,400 25,400


4,000 0


P6-34 (continued) Elimination Entries DR CR

Randall Corp.

Sharp Co.

500,000 20,400 (416,000)

250,000 30,000 (202,000)

57,000

(30,000) (24,000) 25,400 75,800

(20,000) (18,000)

5,000

40,000

29,400 91,400 7,600

4,000 58,000 1,000

(55,000) (42,000) 0 82,400 (6,600)

75,800

40,000

99,000

59,000

75,800

337,500 75,800 (50,000) 363,300

215,000 40,000 (25,000) 230,000

215,000 99,000

59,000 25,000 84,000

337,500 75,800 (50,000) 363,300

130,300 80,000 170,000 600,000 (310,000) 293,000

10,000 70,000 110,000 400,000 (120,000)

Total Assets

963,300

470,000

98,400

s Payable Bonds Payable Bond Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Sharp Co.

100,000 300,000

10,000

363,300

15,200 100,000 4,800 100,000 20,000 230,000


963,300

470,000

Income Statement Sales Other Income Less: COGS Less: Depreciation & Amortization Exp. Less: Other Expenses Income from Sharp Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash s Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Sharp Co.

200,000

6-78

10,000 44,000

314,000

50,000 40,000 8,400

100,000 20,000 314,000 1,600 445,600

10,000 13,000 40,000 20,000 277,400 24,000 384,400

84,000 69,600 6,000 159,600

Consolidated 693,000 50,400 (564,000)

140,300 140,000 267,000 1,010,000 (410,000) 0 1,147,300 105,200 400,000 4,800 200,000 0 363,300 74,000 1,147,300



Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7

Cash s Receivable Inventory Total Current Assets Buildings and Equipment Less: Accumulated Depreciation Total Assets

$ 140,300 140,000 267,000 $ 547,300 $1,010,000 (410,000)

s Payable Bonds Payable Bond Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders' Equity

600,000 $1,147,300 $ 105,200

$ 400,000 4,800

404,800

$ 200,000 363,300 $ 563,300 74,000 637,300 $1,147,300

Randall Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X7 Sales Other Income

$ 693,000 50,400 $ 743,400

Cost of Goods Sold Depreciation and Amortization Expense Other Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest

$ 564,000 55,000 42,000

Randall Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X7

6-79

(661,000) $ 82,400 (6,600) $ 75,800


Retained Earnings, January 1, 20X7 Income to Controlling Interest, 20X7

$ 337,500 75,800 $ 413,300 (50,000) $ 363,300

Dividends Declared, 20X7 Retained Earnings, December 31, 20X7

6-80


P6-35 Comprehensive Consolidation Worksheet; Equity Method [AIA Adapted] Equity Method Entries on Fran Corp.'s Books: Investment in Brey Inc.

750,000

Cash Record the initial investment in Brey Inc.

750,000

Investment in Brey Inc. Income from Brey Inc.

190,000 190,000

Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 income Cash 40,000 Investment in Brey Inc. Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 dividend Income from Brey Inc.

40,000

44,000

Investment in Brey Inc. Record amortization of excess acquisition price

44,000

Income from Brey Inc. 18,000 Investment in Brey Inc. Eliminate the deferred gross profit from upstream sales in 20X9

18,000

Retained

Original book value + Net Income - Dividends Ending book value

Fran Corp. 100% 636,000 190,000 (40,000)

=

786,000


400,000

+


80,000


Upstream Deferred GP Total

Total (18,000) (18,000)

=

Fran Corp.'s share (18,000) (18,000)

6-81

+ Earnings 156,000 190,000 (40,000) 306,000


P6-35 (continued) Basic elimination entry Common stock Additional paid-in capital Retained earnings Income from Brey Inc. Dividends declared Investment in Brey Inc.

Beginning balance Changes Ending balance

Fran Corp. 100% 114,000 (44,000) 70,000

400,000 80,000 156,000 172,000

← Original amount invested (100%) ← Beginning balance in APIC ← Beginning balance in RE ← Fran’s % of NI - Def. GP

40,000 768,000

=

Machinery 54,000 54,000

+

← Net book value - Def. GP

Acc. Depr. 0 (9,000) (9,000)

Amortized excess value reclassification entry: Depreciation expense 9,000 Goodwill impairment loss 35,000 Income from Brey Inc.

44,000

Excess value (differential) reclassification entry: Machinery 54,000 Goodwill 25,000 Accumulated depreciation Investment in Brey Inc.

9,000 70,000


86,000

86,000


6-82

← 100% of Brey Inc.'s dividends

+

Goodwill 60,000 (35,000) 25,000


P6-35 (continued) 20X9 Upstream Transactions Total 180,000

Sales

=

Re-sold 144,000

+


COGS

90,000

72,000

18,000


90,000 50.00%

72,000

18,000

Acquisition Price 100% Net Income

Ending Balance

Investment in Brey Inc. 750,000 190,000 40,000 44,000 18,000 838,000

Income from Brey Inc.


768,000

Basic

70,000

Excess Reclass.

0

6-83

190,000

100% Net Income

128,000

Ending Balance

44,000 18,000 172,000 44,000 0


P6-35 (continued) Note that in the 8th edition, the sale of the warehouse was an intercompany transaction and needed to be eliminated. We changed the problem in the 9 th edition to assume that the sale was to a non-d third party. Thus, the gain on the sale of the warehouse is not eliminated in this problem.

Income Statement Net Sales Gain on Sale of Warehouse Less: COGS Less: Operating Expenses Less: Goodwill Impairment Income from Brey Inc. Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance

Fran Corp.

Brey Inc.

3,800,000 30,000 (2,360,000) (1,100,000)

1,500,000 (870,000) (440,000)

128,000 498,000

190,000

440,000 498,000

156,000 190,000 (40,000) 306,000

938,000

Elimination Entries DR CR 180,000

156,000 396,000 552,000

Balance Sheet Cash s Receivable (net) Inventories Land, Plant, and Equipment Less: Accumulated Depreciation Investment in Brey Inc.

570,000 860,000 1,060,000 1,320,000 (370,000) 838,000

150,000 350,000 410,000 680,000 (210,000)


4,278,000

1,380,000

25,000 79,000

s Payable & Accrued Expenses Common Stock Additional Paid-in Capital Retained Earnings Total Liabilities & Equity

1,340,000 1,700,000 300,000 938,000 4,278,000

594,000 400,000 80,000 306,000 1,380,000

86,000 400,000 80,000 552,000 1,118,000

6-84

44,000 206,000

5,120,000 30,000 (3,068,000) (1,549,000) (35,000) 0 498,000

206,000 40,000 246,000

440,000 498,000 0 938,000

162,000 9,000 35,000 172,000 396,000

Consolidated

86,000 18,000 54,000 9,000 768,000 70,000

720,000 1,124,000 1,452,000 2,054,000 (589,000) 0

951,000

25,000 4,786,000

246,000 246,000

1,848,000 1,700,000 300,000 938,000 4,786,000


P6-36A Fully Adjusted Equity Method a. Adjusted trial balance: Item Cash s Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock Cost of Goods Sold Depreciation and Amortization Other Expenses Dividends Declared Accumulated Depreciation s Payable Bonds Payable Bond Common Stock Additional Paid-In Capital Retained Earnings Sales Other Income Income from Subsidiary

Randall Corporation Debit Credit

Sharp Company Debit Credit

$ 130,300 80,000 170,000 600,000

$ 10,000 70,000 110,000 400,000

304,000 416,000 30,000 24,000 50,000

202,000 20,000 18,000 25,000

$ 310,000 100,000 300,000 200,000

$1,804,300

345,900 500,000 20,400 28,000 $1,804,300

$855,000

b. Equity Method Entries on Randall Corp.'s Books: Investment in Sharp Co. Income from Sharp Co.

32,000 32,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income Cash 20,000 Investment in Sharp Co. Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend Income from Sharp Co.

20,000

4,000

Investment in Sharp Co. Record amortization of excess acquisition price

4,000

6-85

$120,000 15,200 100,000 4,800 100,000 20,000 215,000 250,000 30,000 $855,000


P6-36A (continued) c. Book Value Calculations: Retained


NCI 20% 67,000 8,000 (5,000)

Ending book value

70,000

+

Randall Corp. 80% 268,000 32,000 (20,000)

=

280,000

Commo n Stock 100,000

100,000

+


+

Earning s 215,000 40,000 (25,000)

20,000

230,000



Basic elimination entry Common stock Additional paid-in capital Retained earnings Income from Sharp Co. NCI in NI of Sharp Co. Dividends declared Investment in Sharp Co. NCI in NA of Sharp Co.

Total 2,000 8,000 (3,000) (10,000) (3,000)

Randall Corp.'s share 2,000 6,400 (3,000) (8,000) (2,600)

=

100,000 20,000 215,000 32,000 7,600

6,000

24,000

6-86

NCI's share 1,600 (2,000) (400)

← Original amount invested (100%) ← Beginning balance in APIC ← Beginning balance in RE ← Randall Corp.’s % of NI ← NCI share of NI - Def. GP + Reversal

25,000 280,000 69,600

Excess Value (Differential) Calculations: NCI Randall Corp. 20% + 80% Beginning balance 7,000 28,000 Changes (1,000) (4,000) Ending balance

+

=

← 100% of Sharp Co.'s dividends ← Net book value ← NCI share of BV - Def. GP + Reversal

Buildings & equipment 50,000 50,000

+

Acc. Depr. (15,000) (5,000) (20,000)

Chapter 06 - Intercompany Inventory Transactions P6-36A (continued) Amortized excess value reclassification entry: Depreciation expense 5,000 Income from Sharp Co. NCI in NI of Sharp Co.

4,000 1,000

Excess value (differential) reclassification entry: Buildings & equipment 50,000 Accumulated depreciation Investment in Sharp Co. NCI in NA of Sharp Co.

20,000 24,000 6,000


10,000

10,000

Optional accumulated depreciation elimination entry Accumulated depreciation 40,000 Building & equipment Reversal of last year's deferral: Retained earnings NCI in NA of Sharp Co. Cost of Goods Sold

40,000

8,400 1,600 10,000

Deferral of this year's unrealized profits on inventory transfers Sales 57,000 Cost of Goods Sold 44,000 Inventory 13,000 (See Problem 6-34 for unrealized profit calculations.)

6-87

Chapter 06 - Intercompany Inventory Transactions P6-36A (continued) d. Elimination Entries DR CR

Randall Corp.

Sharp Co.

500,000 20,400 (416,000)

250,000 30,000 (202,000)

57,000

(30,000) (24,000) 28,000 78,400

(20,000) (18,000)

5,000

40,000

32,000 94,000 7,600

4,000 58,000 1,000

(55,000) (42,000) 0 82,400 (6,600)

78,400

40,000

101,600

59,000

75,800


345,900

215,000

Net Income Less: Dividends Declared Ending Balance

78,400 (50,000) 374,300

40,000 (25,000) 230,000

215,000 8,400 101,600

130,300 80,000 170,000 600,000 (310,000) 304,000

10,000 70,000 110,000 400,000 (120,000)

50,000 40,000

Total Assets

974,300

470,000

90,000


100,000 300,000

10,000

374,300

15,200 100,000 4,800 100,000 20,000 230,000


974,300

470,000

Income Statement Sales Other Income Less: COGS Less: Depreciation & Amortization Exp. Less: Other Expenses Income from Sharp Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income

Balance Sheet Cash s Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Sharp Co.

200,000

6-88

44,000 10,000

325,000

100,000 20,000 325,000 1,600 456,600

Consolidated 693,000 50,400 (564,000)

337,500 59,000 25,000 84,000

10,000 13,000 40,000 20,000 280,000 24,000 387,000

84,000 69,600 6,000 159,600

75,800 (50,000) 363,300

140,300 140,000 267,000 1,010,000 (410,000) 0 1,147,300 105,200 400,000 4,800 200,000 0 363,300 74,000 1,147,300


P6-37A Cost Method a. Equity Method Entries on Randall Corp.'s Books: Investment in Sharp Co. Income from Sharp Co.

20,000 20,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income b. Investment elimination entry: Common stock Additional paid-in capital Retained earnings Investment in Sharp Co. NCI in NA of Sharp Co. Dividend elimination entry: Dividend Income NCI in NI of Sharp Co. Dividends Declared

100,000 20,000 180,000 240,000 60,000

20,000 5,000 25,000

Excess value (differential) reclassification entry: Buildings & equipment 50,000 Investment in Sharp Co. NCI in NA of Sharp Co.

40,000 10,000

Amortize differential from previous years: Retained earnings 12,000 NCI in NA of Sharp Co. 3,000 Accumulated Depreciation

15,000

Amortize differential for 20X7 Depreciation Expense

5,000

Accumulated Depreciation

5,000

Assign Sharp's undistributed income to NCI NCI in NA of Sharp Co. 1,600 Retained Earnings 7,000 NCI in NA of Sharp Co.

6-89

8,600


P6-37A (continued) Eliminate intercompany s: s payable s receivable

10,000 10,000

Optional accumulated depreciation elimination entry Accumulated depreciation 40,000 Building & equipment Reversal of last year's deferral: Retained Earnings NCI in NA of Sharp Co. Cost of Goods Sold

40,000

8,400 1,600 10,000

Deferral of this year's unrealized profits on inventory transfers Sales 57,000 Cost of Goods Sold 44,000 Inventory 13,000 (See Problem 6-34 for unrealized profit calculations.)

6-90

Chapter 06 - Intercompany Inventory Transactions P6-37A (continued) Elimination Entries DR CR

Randall Corp.

Sharp Co.

500,000 20,400

57,000

(416,000)

250,000 30,000 20,000 (202,000)

(30,000) (24,000) 50,400

(20,000) (18,000) 60,000

5,000

50,400


Net Income Less: Dividends Declared Ending Balance

Income Statement Sales Other Income Dividend Income Less: COGS Less: Depreciation & Amortization Exp. Less: Other Expenses Consolidated Net Income NCI in Net Income of Sharp Co. Controlling Interest in Net Income

Balance Sheet Cash s Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation

20,000 10,000 44,000

82,000 5,000 1,600

54,000

60,000

88,600

54,000

329,900

215,000

50,400 (50,000) 330,300

60,000 (25,000) 250,000

180,000 8,400 12,000 7,000 88,600

130,300 80,000 170,000 600,000 (310,000)

10,000 70,000 110,000 400,000 (120,000)

296,000

50,000 40,000

Investment in Sharp Co.

280,000

Total Assets

950,300

470,000

90,000


100,000 300,000

10,000

330,300

15,200 100,000 4,800 100,000 20,000 250,000


930,300

490,000

200,000

6-91

100,000 20,000 296,000 1,600 3,000 430,600

Consolidated 693,000 50,400 0 (564,000) (55,000) (42,000) 82,400 (6,600) 75,800

337,500

54,000 25,000 79,000

10,000 13,000 40,000 5,000 15,000 240,000 40,000 363,000

79,000 60,000 10,000 8,600 157,600

75,800 (50,000) 363,300

140,300 140,000 267,000 1,010,000 (410,000) 0 1,147,300 105,200 400,000 4,800 200,000 0 363,300 74,000 1,147,300

Chapter 6 - Solution Manual 48662r

Overview 26281t

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