Chap 006

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 XXXXXX Cost of Goods Sold 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 nonaffiliate 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.

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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 XXXXXX Cost of Goods Sold XXXXXX Inventory 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 accounting 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 accounts. This adjustment would be made to retained earnings under the modified equity method. However, regardless of the parent’s method for accounting 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 assigning 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 accounts 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 accounts 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.

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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 affiliate.

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 affiliate 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 affiliate 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 affiliates 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: PresidentWater Products Corporation

From: , CPA

Re: 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 accounting period.

Primary citation:ARB 51, Par. 6 (ASC 810)

C6-3 Intercorporate Inventory Transfers

MEMO

To: TreasurerEvert Corporation

From: , CPA

Re: 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 accounting 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

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intercompany transfer should be eliminated. [ARB 51, Par. 6; ASC 810]

The following eliminating entry is required at December 31, 20X2:

Sales 180,000Inventory 60,000 Cost of Goods Sold 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 60,000 Investment in Sub 54,000 NCI in NA of Sub 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 nonaffiliate 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 affiliate 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 affiliates 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 affiliates 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 accounts 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 accounting 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 affiliates.

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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 accounts 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 unaffiliated customers. The amount has been decreasing in recent years. The effects of intercompany transfers are eliminated in consolidation.

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http://www.ford.com/

http://www.exxonmobil.com/

http://www.xerox.com/


SOLUTIONS TO EXERCISES

E6-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted]

1. a

2. c

3. a

4. c

5. c Net assets reported $320,000 Profit on intercompany sale $48,000Proportion of inventory unsold at year end ($60,000 / $240,000) x 0.25 Unrealized profit at year end (12,000 )Amount reported in consolidated statements $308,000

6. c Inventory reported by Banks ($175,000 + $60,000) $235,000 Inventory reported by Lamm 250,000 Total inventory reported $485,000 Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] (15,000 )Amount reported in consolidated statements $470,000

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E6-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted]

1. b Cost of goods sold reported by Park $ 800,000 Cost of goods sold reported by Small 700,000 Total cost of goods sold reported $1,500,000 Cost of goods sold reported by Park on sale to Small ($500,000 x 0.40) (200,000)Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x 4 / 5) x 0.60] (240,000 )Cost of goods sold for consolidated entity $1,060,000

Note: Answer b in the actual CPA 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)

$12,000

Unrealized profit on sale [($30,000 + $25,000) – $52,000]

(3,000 )

Carrying cost of inventory for Power $ 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) $39,000 Income assigned to noncontrolling interest [0.40($86,000 - $60,000)] (10,400 )Consolidated net income assigned to controlling interest $28,600

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E6-4 Multiple-Choice Questions — Consolidated Balances

1. c

2. a Amount paid by Lorn Corporation $120,000 Unrealized profit (45,000 )Actual cost $ 75,000 Portion sold x 0.80 Cost of goods sold $ 60,000

3. e Consolidated sales $140,000 Cost of goods sold (60,000 )Consolidated net income $ 80,000 Income to Dresser’s noncontrolling interest: Sales $120,000 Reported cost of sales (75,000 ) Report income $ 45,000 Portion realized x 0.80 Realized net income $ 36,000 Portion to Noncontrolling Interest x 0.30 Income to noncontrolling Interest (10,800 )Income to controlling interest $ 69,200

4. a Inventory reported by Lorn $ 24,000 Unrealized profit ($45,000 x .20) (9,000 )Ending inventory reported $ 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. $67,000 Cost of goods sold ($30,000 x 2/3) (20,000 )Consolidated net income $47,000

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

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E6-6 Realized Profit on Intercompany Sale

a. Journal entries recorded by Nordway Corporation:

(1) Inventory 960,000 Cash (Accounts Payable) 960,000

(2) Cash (Accounts Receivable) 750,000 Sales 750,000

(3) Cost of Goods Sold 600,000 Inventory 600,000

b. Journal entries recorded by Olman Company:


(2) Cash (Accounts Receivable) 1,125,000 Sales 1,125,000


c. Eliminating entry:

Sales 750,000 Cost of Goods Sold 750,000

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E6-7 Sale of Inventory to Subsidiary

a. Journal entries recorded by Nordway Corporation:




b. Journal entries recorded by Olman Company:





Sales 750,000 Cost of Goods Sold 708,000 Inventory 42,000

Calculations

Total = Re-Sold +Ending

InventorySales 750,000 540,000 210,000 COGS 600,000 432,000 168,000 Gross Profit 150,000 108,000 42,000Gross Profit % 20%

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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).



Calculations

Total = Re-sold +Ending

InventorySales 940,000 658,000 282,000

COGS 820,000 574,000 246,000

Gross Profit 120,000 84,000 36,000 Gross Profit % 12.77%

d. Eliminating entry:

Investment in Draw Company 36,000 Cost of Goods Sold 36,000

e. Eliminating entry:

Investment in Draw Company 21,600NCI in NA of Draw Company 14,400 Cost of Goods Sold 36,000

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E6-9 Income Statement Effects of Unrealized Profit

a. Sale price to Holiday Bakery per bag ($900,000 / 100,000) $ 9.00 Profit per bag [$9.00 - ($9.00 / 1.5)] (3.00 )Cost per bag $ 6.00 Bags sold by Holiday Bakery (100,000 - 20,000) x 80,000 Consolidated cost of goods sold $480,000

b. Sales 900,000 Cost of Goods Sold 840,000 Inventory ($3.00 x 20,000 bags) 60,000

Calculations


InventorySales 900,000 720,000 180,000

COGS 600,000 480,000 120,000


Required Adjustment to Cost of Goods Sold:

Cost of goods sold — Farmco ($900,000 / 1.5) $ 600,000 Cost of goods sold — Holiday ($9.00 x 80,000 units) 720,000

$1,320,000 Consolidated cost of goods sold ($6.00 x 80,000 units) (480,000 ) Required adjustment $ 840,000

c. Operating income of Holiday Bakery $400,000 Net income of Farmco Products 150,000

$550,000 Less: Unrealized inventory profits (60,000 )Consolidated net income $490,000 Less: Income assigned to noncontrolling interest ($150,000 - $60,000 unrealized profit) x 0.40 (36,000 )Income assigned to controlling interest $454,000

Alternate computation:Operating income of Holiday Bakery $400,000 Net income of Farmco Products $150,000 Unrealized profits ($3.00 x 20,000 units) (60,000 )Realized net income $ 90,000 Ownership held by Holiday Bakery x 0.60

54,000 Income assigned to controlling interest $454,000

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E6-10 Prior-Period Unrealized Inventory Profit

a. Cost per bag of flour ($9.00 / 1.5) $ 6.00 Bags sold x 20,000 Cost of goods sold from inventory held, January 1, 20X9 $120,000

b.Investment in Farmco 36,000NCI in NA of Farmco 24,000 Cost of Goods Sold 60,000 $60,000 = 20,000 bags x $3.00

c. Operating income of Holiday Bakery $300,000 Net income of Farmco Products 250,000

$550,000 Add: Inventory profits realized in 20X9 60,000 Consolidated net income $610,000 Less: Income assigned to noncontrolling shareholders ($250,000 + $60,000) x 0.40 (124,000 )Income assigned to controlling interest $486,000

Alternate computation:Operating income of Holiday Bakery $300,000 Net income of Farmco Products $250,000Inventory profits realized in 20X9 60,000 Realized net income $310,000Ownership held by Holiday Bakery x 0.60

186,000 Income assigned to controlling interest $486,000

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E6-11 Computation of Consolidated Income Statement Data

Downstream Transaction Calculations


InventorySales 30,000 24,000 6,000

COGS 20,000 16,000 4,000


Worksheet Entry (not requested in problem)Sales 30,000 Cost of Goods Sold 28,000

Inventory 2,000

Upstream Transaction Calculations



COGS 50,000 37,500 12,500


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

Inventory 7,500

a. Reported sales of Prem Company $400,000 Reported sales of Cooper Company 200,000

$600,000 Intercompany sales by Prem Company in 20X5 $ 30,000 Intercompany sales by Cooper Company in 20X5 80,000 (110,000)Sales reported on consolidated income statement $490,000

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E6-11 (continued)

b. Cost of goods sold reported by Prem Company $250,000 Cost of goods sold reported by Cooper Company 120,000

$370,000 Adjustment due to intercompany sales (100,500)Consolidated cost of goods sold $269,500

Adjustment to cost of goods sold:

CGS charged by Prem on sale to Cooper $ 20,000 CGS charged by Cooper ($30,000 - $6,000) 24,000 Total charged to CGS $ 44,000 CGS for consolidated entity $20,000 x ($24,000 / $30,000) (16,000 ) Required adjustment to CGS $ 28,000

CGS charged by Cooper on sale to Prem $ 50,000 CGS charged by Prem ($80,000 - $20,000) 60,000 Total charged to CGS $110,000 CGS for consolidated entity $50,000 x ($60,000 / $80,000) (37,500 ) Required adjustment to CGS 72,500 Total adjustment required $100,500

c. Reported net income of Cooper Company $ 45,000 Unrealized profit on sale to Prem Company $30,000 x ($20,000 / $80,000) (7,500 )Realized net income $ 37,500 Noncontrolling interest's share x 0.40 Income assigned to noncontrolling interest $ 15,000

d. Reported net income of Pem Company $100,500 Less: Income from Cooper (20,500 ) $ 80,000 Net income of Cooper Company 45,000 Operating income $125,000 Less: Unrealized inventory profits of Prem

Company [$10,000 x ($6,000 / $30,000)] $ 2,000 Unrealized inventory profits of Copper Company [$30,000 x ($20,000 / $80,000)] 7,500 Income assigned to noncontrolling interest 15,000 (24,500 )

Income assigned to controlling interest $ 100,500

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E6-12 Sale of Inventory at a Loss

a. Entries recorded by Trent Company:

Inventory 400,000 Cash 400,000 Purchase inventory.

Cash 300,000 Sales 300,000 Sale of inventory to Gord Corporation.

Cost of Goods Sold 400,000 Inventory 400,000 Record cost of goods sold.

Entries recorded by Gord Corporation

Inventory 300,000 Cash 300,000 Purchase of inventory from Trent.

Cash 360,000 Sales 360,000 Sale of inventory to nonaffiliates.

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

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

c. Operating income reported by Gord $230,000 Net income reported by Trent $ 80,000Unrealized loss on intercorporate sale ($400,000 - $300,000) x 0.40 40,000 120,000 Consolidated net income $350,000 Income to assigned to noncontrolling interest ($120,000 x 0.25) (30,000 )Income assigned to controlling interest $320,000

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E6-12 (continued)

d. Eliminating entry, December 31, 20X8:

Sales 300,000Inventory 40,000 Cost of Goods Sold 340,000

Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Trent $400,000 Cost of goods sold recorded by Gord 180,000 Total recorded $580,000 Consolidated cost of goods sold (240,000 )Required elimination $340,000

Intercompany Transaction Calculations


InventorySales 300,000 180,000 120,000

COGS 400,000 240,000 160,000

Gross Profit (100,000) (60,000) (40,000)Gross Profit % -33.33%

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E6-13 Intercompany Sales

20X4 Calculations:


InventorySales 180,000 135,000 45,000 COGS 120,000 90,000 30,000 Gross Profit 60,000 45,000 15,000 Gross Profit % 33.33%

Worksheet Entry (not required in problem)Sales 180,000 Cost of Goods Sold 165,000 Inventory 15,000

20X5 Calculations:

20X5 Upstream



20X5 Downstream



Worksheet Elimination Entries (not required in problem):

Eliminate Upstream TransactionsSales 135,000 Cost of Goods Sold 125,000 Inventory 10,000

Eliminate Downstream TransactionsSales 280,000 Cost of Goods Sold 225,000 Inventory 55,000

Reversal of 20X4 Upstream DeferralInvestment in Surg 10,500 NCI in NA of Surg 4,500 Cost of Goods Sold 15,000

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E6-13 (continued)

a. Consolidated net income for 20X4:

Operating income of Hollow Corporation $160,000 Net income of Surg Corporation 90,000

$250,000 Less: Unrealized profit — Surg Corporation (15,000 )Consolidated net income $235,000

b. Inventory balance, December 31, 20X5:

Inventory reported by Hollow Corporation $ 30,000 Unrealized profit on books of Surg Corporation ($135,000 - $90,000) x ($30,000/$135,000) (10,000 ) $20,000

Inventory reported by Surg Corporation $110,000 Unrealized profit on books of Hollow Corporation ($280,000 - $140,000) x ($110,000/$280,000) (55,000 ) 55,000 Inventory, December 31, 20X5 $75,000

c. Consolidated cost of goods sold for 20X5:

COGS on sale of inventory on hand January 1, 20X5 $45,000 x ($120,000 / $180,000) $ 30,000 COGS on items purchased from Surg in 20X5 ($135,000 - $30,000) x ($90,000 / $135,000) 70,000 COGS on items purchased from Hollow in 20X5 ($280,000 - $110,000) x ($140,000 / $280,000) 85,000 Total cost of goods sold $185,000

d. Income assigned to controlling interest:

Operating income of Hollow Corporation $220,000 Net income of Surg Corporation 85,000

$305,000 Add: Inventory profit of prior year realized in 20X5 15,000 Less: Unrealized inventory profit — Surg Corporation (10,000)

Unrealized inventory profit — Hollow Corporation (55,000)Income to noncontrolling interest ($85,000 + $15,000 - $10,000) x 0.30 (27,000 )

Income assigned to controlling interest $228,000

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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


Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 dividend



Eliminate the deferred gross profit from downstream sales in 20X8



Eliminate the deferred gross profit from upstream sales in 20X8

Book Value Calculations:

NCI30%

+Doorst Corp.70%

= CommonStock

+ Retained Earnings

Original book value 103,200 240,800 150,000 194,000

+ Net Income 21,000 49,000 70,000

- Dividends (4,200) (9,800) (14,000)

Ending book value 120,000 280,000 150,000 250,000

Reversal/Deferred GP Calculations:

Total =

Doorst Corp.'s

share + NCI's share

Downstream Deferred GP (10,000) (10,000) 0

Upstream Deferred GP (40,000) (28,000) (12,000

)

Total (50,000) (38,000) (12,000)

6-23


E6-14 (continued)

Basic elimination entry

Common stock 150,000 ← Original amount invested (100%)

Retained earnings 194,000 ← Beginning balance in retained earnings

Income from Hingle Co. 11,000 ← Doorst’s % of NI - Deferred GP + Reversal

NCI in NI of Hingle Co. 9,000 ← NCI share of NI - Deferred GP + Reversal

Dividends declared 14,000 ← 100% of Hingle Co.'s dividends declared

Investment in Hingle Co. 242,000 ← Net book value - Deferred GP + Reversal

NCI in NA of Hingle Co. 108,000 ← 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


Inventory

Sales 100,000 75,000 25,000

COGS 60,000 45,000 15,000

Gross Profit 40,000 30,000 10,000

Gross Profit % 40.00%

20X8 Upstream Transactions


Inventory

Sales 300,000 205,000 95,000

COGS 173,684 118,684 55,000

Gross Profit 126,316 86,316 40,000


Investment in Income from

Hingle Co. Hingle Co.

Acquisition Price 240,800

70% Net Income 49,000 49,000 70% Net Income

9,800 70% Dividends

38,000 Deferred GP 38,000

Ending Balance 242,000 11,000 Ending Balance

242,000 Basic 11,000

0 0

6-24


E6-14 (continued)

b.

Doorst Corp.

Hingle

Co.

Elimination Entries

DR CR Consolidate

d Balance Sheet Cash and Receivables 98,000 40,000 138,000 Inventory 150,000 100,000 50,000 200,000 Buildings & Equipment (net) 310,000 280,000 590,000 Investment in Hingle Co. 242,000 242,000 0 Total Assets 800,000 420,000 0 292,000 928,000

Accounts Payable 70,000 20,000 90,000 Common Stock 200,000 150,000 150,000 200,000 Retained Earnings 530,000 250,000 194,000 14,000 530,000 11,000 350,000 9,000 400,000 NCI in NA of Hingle Co. 108,000 108,000 Total Liabilities & Equity 800,000 420,000 764,000 472,000 928,000

6-25


E6-15* Multiple Transfers between Affiliates

a. Entries recorded by Klon Corporation

Cash 150,000 Sales 150,000 Sale of inventory to Brant Company.


Entries recorded by Brant Company

Inventory 150,000 Cash 150,000 Purchase of inventory from Klon.

Cash 150,000 Sales 150,000 Sale of inventory to Torkel Company.


Entries recorded by Torkel Company

Inventory 150,000 Cash 150,000 Purchase of inventory from Brant.

Cash 120,000 Sales 120,000 Sale of inventory to nonaffiliates.


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)].

6-26


E6-15* (continued)

d. Eliminating entry for inventory:


Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Klon $100,000 Cost of goods sold recorded by Brant 150,000 Cost of goods sold recorded by Torkel 90,000 Total recorded $340,000 Consolidated cost of goods sold (60,000 )Required elimination $280,000

Computation of reduction to carrying value of inventory

Inventory reported by Torkel $60,000 Inventory balance to be reported (40,000 )Required elimination $20,000

6-27


E6-16 Inventory Sales

a. Journal entries recorded by Spice Company:

(1) Inventory 150,000 Cash (Accounts Payable) 150,000 Record purchases from nonaffiliate.

(2) Cash (Accounts Receivable) 60,000 Sales 60,000 Record sale to Herb Corporation.

(3) Cost of Goods Sold 40,000 Inventory 40,000 Record cost of goods sold to Herb Corporation.

Journal entries recorded by Herb Corporation:

(1) Inventory 60,000 Cash (Accounts Payable) 60,000 Record purchases from Spice Company.

(2) Cash (Accounts Receivable) 90,000 Sales 90,000 Record sale of items to nonaffiliates.

(3) Cost of Goods Sold 45,000 Inventory 45,000 Record cost of goods sold.

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

b. Eliminating entry:



COGS 40,000 30,000 10,000


Sales 60,000 Cost of Goods Sold 55,000 Inventory 5,000 Eliminate intercompany sale of inventory.

6-28


E6-17 Prior-Period Inventory Profits

a.20X8 Sale:


InventorySales 180,000 170,000 30,000

COGS 120,000 113,333 20,000


20X9 Sale:


InventorySales 240,000 170,000 150,000

COGS 160,000 113,333 100,000


Investment in Level Brothers 7,500 NCI in NA of Level Brothers 2,500 Cost of goods sold 10,000 Reversal of 20X8 gross profit deferral

Sales 240,000 Cost of Goods Sold 190,000 Inventory 50,000 Eliminate 20X9 intercompany sale of inventory.

b. 20X8 20X9 Reported net income of Level Brothers $350,000 $420,000 Unrealized profit, December 31, 20X8 (10,000) 10,000 Unrealized profit, December 31, 20X9 (50,000 )Realized net income $340,000 $380,000 Noncontrolling interest's share of ownership x 0.25 x 0.25 Income assigned to noncontrolling interest $ 85,000 $ 95,000

6-29


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

c. Investment in Bitner 15,000 NCI in NA of Bitner 10,000 Cost of Goods Sold 25,000 Eliminate beginning inventory profit.


d. Reported net income of Bitner Company $ 90,000 Prior-period profit realized in 20X2 25,000 Unrealized profit on 20X2 sales (15,000 )Realized income $100,000 Proportion held by noncontrolling interest x 0.40 Income assigned to noncontrolling interest $ 40,000

6-30


P6-19 Unrealized Profit on Upstream Sales

20X2


InventorySales 200,000 130,000 70,000

COGS 160,000 104,000 56,000


20X3


InventorySales 175,000 70,000 105,000

COGS 140,000 56,000 84,000


20X4


InventorySales 225,000 105,000 120,000

COGS 180,000 84,000 96,000


20X2 20X3 20X4

Operating income reported by Pacific $150,000 $240,000 $300,000 Net income reported by Carroll 100,000 90,000 160,000

$250,000 $330,000 $460,000 Inventory profit, December 31, 20X2 $70,000 - ($70,000 / 1.25) (14,000) 14,000 Inventory profit, December 31, 20X3 $105,000 - ($105,000 / 1.25) (21,000) 21,000 Inventory profit, December 31, 20X4 $120,000 - ($120,000 / 1.25) (24,000 )Consolidated net income $236,000 $323,000 $457,000 Income to noncontrolling interest: ($100,000 - $14,000) x 0.40 (34,400) ($90,000 + $14,000 - $21,000) x 0.40 (33,200) ($160,000 + $21,000 - $24,000) x 0.40 (62,800 )Income to controlling interest $201,600 $289,800 $394,200

6-31


P6-20 Net Income of Consolidated Entity

Operating income of Master for 20X5 $118,000 Net income of Crown for 20X5 65,000

$183,000 Add: Prior year profits realized by Master 25,000

Prior year profits realized by Crown 40,000 Less: Unrealized profits for 20X5 by Master (14,000)

Unrealized profits for 20X5 by Crown (55,000)Amortization of differential ($45,000 / 15 years) (3,000 )

Consolidated net income, 20X5 $176,000 Less: Income to noncontrolling interest

($65,000 + $40,000 - $55,000 - $3,000) x 0.30 (14,100 )Income to controlling interest $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) 0.70

b. Eliminating entries, December 31, 20X5:

Intercompany Transactions


InventorySales 140,000 98,000 42,000

COGS 100,000 70,000 30,000


Accounts Payable 80,000 Accounts Receivable 80,000 Eliminate intercompany receivable/payable.


6-32


P6-22 Incomplete Data

a. Increase in fair value of buildings and equipment:

Consolidated total $ 680,000 Balance reported by Lever (400,000)Balance reported by Tropic (240,000 )Increase in value $ 40,000

b. Accumulated depreciation for consolidated entity:

Accumulated depreciation reported by Lever $180,000 Accumulated depreciation reported by Tropic 110,000 Cumulative write-off of differential ($5,000 x 6 years) 30,000 Accumulated depreciation for consolidated entity $320,000

c. Amount paid by Lever to acquire ownership in Tropic:

Common stock outstanding $ 60,000 Retained earnings at acquisition 30,000 Total book value at acquisition $ 90,000 Increase in value of buildings and equipment 40,000 Fair value of net assets acquired $130,000 Proportion of ownership acquired x 0.75 Amount paid by Lever $ 97,500

d. Investment in Tropic Company stock reported at December 31, 20X6:

Tropic's common stock outstanding December 31, 20X6 $ 60,000 Tropic's retained earnings reported December 31, 20X6 112,000 Total book value $172,000 Proportion of ownership held by Lever x 0.75 Lever's share of net book value $129,000 Unamortized differential ($5,000 x 2 years) x 0.75 7,500 20X6 Gross Profit Deferral on Downstream Sale (3,000) Investment in Tropic Company stock $133,500

e. Intercorporate sales of inventory in 20X6:

Sales reported by Lever $420,000 Sales reported by Tropic 260,000 Total sales $680,000 Sales reported in consolidated income statement (650,000)Intercompany sales during 20X6 $ 30,000

6-33


P6-22 (continued)

f. Unrealized inventory profit, December 31, 20X6:

Inventory reported by Lever $125,000 Inventory reported by Tropic 90,000 Total inventory $215,000 Inventory reported in consolidated balance sheet (211,000)Unrealized inventory profit, December 31, 20X6 $ 4,000

g. Eliminating entry to remove the effects of intercompany inventorysales during 20X6:


h. Unrealized inventory profit at January 1, 20X6:

Cost of goods sold reported by Lever $310,000 Cost of goods sold reported by Tropic 170,000 Reduction of cost of goods sold for intercompany sales during 20X6 (26,000 )Adjusted cost of goods sold $454,000 Cost of goods sold reported in consolidated income statement (445,000)Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory $ 9,000

i. Accounts receivable reported by Lever at December 31, 20X6:

Accounts receivable reported for consolidated entity $145,000 Accounts receivable reported by Tropic (55,000 )Difference $ 90,000 Adjustment for intercompany receivable/payable: Accounts payable reported by Lever $ 86,000 Accounts payable reported by Tropic 20,000 Total reported accounts payable $106,000 Accounts payable reported for consolidated entity (89,000 ) Adjustment for intercompany receivable/payable 17,000 Accounts receivable reported by Lever $107,000

6-34


P6-23 Eliminations for Upstream Salesa.

Equity Method Entries on Clean Air's Books:

Investment in Special Filter 32,000

Income from Special Filter 32,000

Record Clean Air's 80% share of Special Filter's 20X8 income



Reverse of the deferred gross profit from upstream sales in 20X7





NCI20%

+ Clean Air80%

= CommonStock

+ Retained Earnings


+ Net Income 8,000 32,000 40,000



Total =

Clean Air's

share + NCI's share

Downstream Reversal 0 0

Upstream Reversal 20,000 16,000 4,000

Downstream Deferred GP 0 0

Upstream Deferred GP (15,000) (12,000) (3,000)

Total 5,000 4,000 1,000

Basic elimination entry:


Retained earnings 220,000 ← Beginning balance in RE

Income from Special Filter 36,000 ← Parent’s % of NI - Def. GP + Reversal

NCI in NI of Special Filter 9,000 ← NCI share of NI - Def. GP + Reversal

Investment in Special Filter 284,000 ← Net book value - Def. GP + Reversal

NCI in NA of Special Filter 71,000 ← NCI share of BV - Def. GP + Reversal

6-35


P6-23 (continued)

20X7 Upstream Transactions20X8 Beg.

Inventory

Sales 60,000

COGS 40,000

Gross Profit 20,000




Inventory

Sales 150,000 105,000 45,000

COGS 100,000 70,000 30,000

Gross Profit 50,000 35,000 15,000



Sales 150,000


Inventory 15,000

6-36

Reversal of last year's deferral:


NCI in NA of Special Filter 4,000



P6-23 (continued)

b. Computation of consolidated net income and income assignedto controlling interest:

Operating income reported by Clean Air Products ($250,000 - $175,000 - $30,000) $ 45,000 Net income of Superior Filter ($200,000 - $140,000 - $20,000) 40,000

$ 85,000 Inventory profit realized from 20X7 20,000 Unrealized inventory profit for 20X8 (15,000 )Consolidated net income $ 90,000 Income assigned to noncontrolling interest ($40,000 + $20,000 - $15,000) x 0.20 (9,000 )Income assigned to controlling interest $ 81,000

c. Noncontrolling interest, December 31, 20X8:

Common stock $ 90,000 Retained earnings ($220,000 + $40,000) 260,000 Less: Unrealized inventory profit (15,000 )

$335,000 Proportion of stock held by noncontrolling interest x 0.20 Noncontrolling interest $ 67,000

6-37


P6-24 Multiple Inventory Transfers

a. Consolidated net income for 20X8:

Operating income of Ajax Corporation $80,000 Unrealized profit, December 31, 20X8 ($35,000 - $15,000) x ($7,000 / $35,000) (4,000 ) $ 76,000

Net income of Beta Corporation $37,500 Profit realized from 20X7 ($30,000 - $24,000) x ($10,000 / $30,000) 2,000 Unrealized profit, December 31, 20X8 ($72,000 - $63,000) x ($12,000 / $72,000) (1,500 ) 38,000

Net income of Cole Corporation $20,000 Profit realized from 20X7 ($72,000 - $60,000) x ($18,000 / $72,000) 3,000 Unrealized profit, December 31, 20X8 ($45,000 - $27,000) x ($15,000 / $45,000) (6,000 ) 17,000 Consolidated net income $131,000

b. Inventory balance, December 31, 20X8:

Balance per Beta Corporation $ 7,000 Less: Unrealized profit (4,000 ) $ 3,000

Balance per Cole Corporation $12,000 Less: Unrealized profit (1,500 ) 10,500

Balance per Ajax Corporation $15,000 Less: Unrealized profit (6,000 ) 9,000 Inventory balance per consolidated statement $22,500

c. Income assigned to noncontrolling interest in 20X8:

Realized income of Beta Corporation $38,000 Proportion of stock held by noncontrolling interest x 0.30 $11,400

Realized income of Cole Corporation $17,000 Proportion of stock held by noncontrolling interest x 0.10 1,700 Income to noncontrolling interest $13,100

6-38


P6-25 Consolidation with Inventory Transfers and Other Comprehensive Income













Investment in Income from Tall Corp. Tall Corp.

Beg. Balance 1,246,600 90% Net Income 81,000 81,000 90% Net Income

54,000 90% Dividends

18,000 90% of OCI

Gain 20X4 Reversal 13,400 14,600 Deferred GP 14,600 13,400 20X4 Reversal

Ending Balance 1,290,400 79,800 Ending BalanceReversal 13,400 1,285,800 Basic 79,800

18,000 OCI Entry 0 0

6-39


P6-25 (continued)

a. Balance in investment account at December 31, 20X5:

Proportionate share of Tall's net assets, January 1 ([$1,400,000 x .90] – 8,000 – [6,000 x 0.90]) $1,246,600 Proportionate share of 20X5 net income ($90,000 x 0.90) 81,000 Proportionate share of other comprehensive income for 20X5 ($20,000 x 0.90) 18,000 Proportionate share of dividends received ($60,000 x 0.90) (54,000)Reversal of deferred gain from 20X4 downstream transaction 8,000Reversal of deferred gain from 20X4 upstream transaction

($6,000 x .090)5,400

Deferred gain from downstream transaction (2,000) Proportionate share of deferred gain from upstream

transaction ($14,000 x 0.90) (12,600) Balance in investment account December 31, 20X5 $1,290,400

b. Investment income for 20X5:

Net income reported by Tall $90,000 Proportion of ownership held by Priority x 0.90 Priority’s share of reported income from Tall 81,000 Reversal of deferred gain from 20X4 downstream transaction 8,000Reversal of deferred gain from 20X4 upstream transaction

($6,000 x 0.90)5,400

Deferred gain from downstream transaction (2,000) Proportionate share of deferred gain from upstream

transaction ($14,000 x 0.90) (12,600) Investment income for 20X5 $79,800

c. Income to noncontrolling interests for 20X5:

Net income reported by Tall $90,000 20X4 inventory profits realized in 20X5 ($15,000 x 0.40) 6,000 20X5 unrealized inventory profits $30,000 - [$30,000 x ($48,000 / $90,000)] (14,000 )Realized net income $82,000 Proportion of ownership held by noncontrolling interest x 0.10 Income to noncontrolling interest $ 8,200

6-40


P6-25 (continued)

d. Balance assigned to noncontrolling interest in consolidated balance sheet:

Net assets reported by Tall, January 1 $1,400,000 Net income for 20X5 90,000 Dividends paid in 20X5 (60,000 )Net assets reported, December 31, 20X5 $1,430,000 Unrealized inventory profits at December 31, 20X5 (14,000)Other comprehensive income in 20X5 20,000 Adjusted net assets, December 31, 20X5 $1,436,000 Proportion of ownership held by noncontrolling interest x 0.10 Net assets assigned to noncontrolling interest $ 143,600

e. Inventory reported in consolidated balance sheet:

Inventory held by Priority $120,000 Less: Unrealized profit (14,000 ) $106,000

Inventory held by Tall $100,000 Less: Unrealized profit

$6,000 - [$6,000 x ($24,000 / $36,000)] (2,000 ) 98,000 Inventory $204,000

f. Consolidated net income for 20X5:

Operating income of Priority $240,000 Net income of Tall 90,000 Total unadjusted income $330,000 20X4 inventory profits realized in 20X5 ($6,000 + $8,000) 14,000 Unrealized inventory profits on 20X5 sales ($14,000 + $2,000) (16,000 )Consolidated net income $328,000

g. Eliminating entries, December 31, 20X5


NCI10%

+Priority Corp.90%

= Comm. Stock

+Add.

Paid-In Capital

+ Retained Earnings

+ Acc. OCI

Original book value 140,000 1,260,000 400,000 200,000 790,000 10,000 + Net Income 9,000 81,000 90,000 - Dividends (6,000) (54,000) (60,000) Ending book value 143,000 1,287,000 400,000 200,000 820,000 10,000

6-41


6-42


P6-25 (continued)


Total =

Priority Corp.'s share +

NCI's share

Downstream Reversal 8,000 8,000 Upstream Reversal 6,000 5,400 600 Downstream Deferred GP (2,000) (2,000) Upstream Deferred GP (14,000) (12,600) (1,400) Total (2,000) (1,200) (800)



Additional paid-in capital 200,000 ← Beginning balance in APIC


Accumulated OCI 10,000 ← Beginning balance in Acc. OCI

Income from Tall Corp. 79,800 ← PC.’s % of NI - Def. GP + Reversal

NCI in NI of Tall Corp. 8,200 ← NCI share of NI - Def. GP + Reversal

Investment in Tall Corp. 1,285,800 ← Net book value - Def. GP + Reversal

NCI in NA of Tall Corp. 142,200 ← NCI share of BV - Def. GP + Reversal

Other Comprehensive Income Entry:

OCI from Tall Corp. 18,000

OCI to the NCI 2,000

Investment in Tall Corp. 18,000

NCI in NA of Tall Corp. 2,000


Investment in Tall Corp. 13,400

NCI in NA of Tall Corp. 600



Sales 126,000


Inventory 16,000

6-43


P6-26 Multiple Inventory Transfers between Parent and Subsidiary

20X5 Downstream

Total = Re-sold +

Ending Inventory,

20X5Sales 150,000 90,000 60,000 COGS 100,000 60,000 40,000 Gross Profit 50,000 30,000 20,000 Gross Profit % 33.33%

20X5 Upstream

Total = Re-sold +

Ending Inventory,


Beg Inventory,

20X6 = Re-sold +

Ending Inventory,


20X6 Downstream

Total = Re-sold +

Ending Inventory,


20X6 Upstream

Total = Re-sold +

Ending Inventory,


6-44


a. Eliminating entries:

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

Investment in Slinky 12,600NCI in NA of Slinky 8,400 Cost of goods sold 15,000 Inventory 6,000 Eliminate beginning inventory profit of Slinky Company.

Sales 60,000 Cost of goods sold 58,000 Inventory 2,000 Eliminate intercompany sale of inventory by Proud Company.

Sales 240,000 Cost of goods sold 210,000 Inventory 30,000 Eliminate intercompany sale of inventory by Slinky Company.

b. Computation of cost of goods sold for consolidated entity:

Inventory produced by Proud in 20X5 ($100,000 x 0.40) $ 40,000Inventory produced by Slinky in 20X5 ($70,000 x 0.50) 35,000Inventory produced by Proud in 20X6 ($40,000 x 0.90) 36,000Inventory produced by Slinky in 20X6 ($200,000 x 0.25) 50,000 Cost of goods sold reported in consolidated income statement $161,000

6-45


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

Cash 6,000 Investment in Troll Corp. 6,000 Record Bell Co.'s 60% share of Troll Corp.'s 20X2 dividend Income from Troll Corp. 6,500 Investment in Troll Corp. 6,500 Eliminate the deferred gross profit from downstream sales in 20X2

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

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

b.Book Value Calculations:

NCI40%

+ Bell Co.60%

= CommonStock

+ Retained Earnings


+ Net Income 12,000 18,000 30,000

- Dividends (4,000) (6,000) (10,000)



Total =Bell Co.'s

share + NCI's share

Downstream Reversal 0 0


Downstream Deferred GP (6,500) (6,500)


Total (7,300) (6,980) (320)

6-46


P6-27 (continued)




Income from Troll Corp. 11,020 ← Bell’s % of NI - Def. GP + Reversal

NCI in NI of Troll Corp. 11,680 ← NCI share of NI - Def. GP + Reversal

Dividends declared 10,000 ← 100% of Troll Corp.'s dividends

Investment in Troll Corp. 95,020 ← Net book value - Def. GP + Reversal

NCI in NA of Troll Corp. 67,680 ← NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations:

NCI 40% +

Bell Co. 60% = Land

Beginning balance 7,200 10,800 18,000

Changes 0 0 0

Ending balance 7,200 10,800 18,000

Excess value (differential) reclassification entry:

Land 18,000

Investment in Troll Corp. 10,800

NCI in NA of Troll Corp. 7,200

Optional accumulated depreciation elimination entry

Accumulated depreciation 45,000

Building & equipment 45,000


Investment in Troll Corp. 2,040

NCI in NA of Troll Corp. 1,360



Sales 63,000


Inventory 10,700

6-47


P6-27 (continued)



Inventory

Sales 28,000 15,000 13,000

COGS 14,000 7,500 6,500

Gross Profit 14,000 7,500 6,500




Inventory

Sales 42,500 34,000 8,500

COGS 25,500 20,400 5,100

Gross Profit 17,000 13,600 3,400




Inventory

Sales 35,000 24,500 10,500

COGS 21,000 14,700 6,300

Gross Profit 14,000 9,800 4,200


Investment in Income from Troll Corp. Troll Corp.

Beginning Balance 98,760

60% Net Income 18,000 18,000 60% Net Income 6,000 60% Dividends

20X1 Reversal 2,040 9,020 Deferred GP 9,020 2,040 20X1 ReversalEnding Balance 103,780 11,020 Ending Balance

Reversal 2,040 95,020 Basic 11,020 10,800 Excess Reclass.

0 0

6-48


P6-27 (continued)

c.

Bell Co. Troll

Corp. Elimination Entries

DR CR Consolidated Income Statement Sales 200,000 120,000 63,000 257,000 Less: COGS (99,800) (61,000) 52,300 (105,100) 3,400 Less: Depreciation Expense (25,000) (15,000) (40,000) Less: Interest Expense (6,000) (14,000) (20,000) Income from Troll Corp. 11,020 11,020 0 Consolidated Net Income 80,220 30,000 74,020 55,700 91,900 NCI in Net Income 11,680 (11,680)

Controlling Interest in Net Income 80,220 30,000 85,700 55,700 80,220

Statement of Retained Earnings Beginning Balance 227,960 50,000 50,000 227,960 Net Income 80,220 30,000 85,700 55,700 80,220 Less: Dividends Declared (40,000) (10,000) 10,000 (40,000) Ending Balance 268,180 70,000 135,700 65,700 268,180

Balance Sheet Cash and Accounts Receivable 69,400 51,200 120,600 Inventory 60,000 55,000 10,700 104,300 Land 40,000 30,000 18,000 88,000 Buildings & Equipment 520,000 350,000 45,000 825,000 Less: Accumulated Depreciation (175,000) (75,000) 45,000 (205,000) Investment in Troll Corp. 103,780 2,040 95,020 0 10,800 Total Assets 618,180 411,200 65,040 161,520 932,900

Accounts Payable 68,800 41,200 110,000 Bonds Payable 80,000 200,000 280,000 Bonds Premium 1,200 1,200 Common Stock 200,000 100,000 100,000 200,000 Retained Earnings 268,180 70,000 135,700 65,700 268,180 NCI in NA of Troll Corp. 1,360 67,680 73,520 7,200 Total Liabilities & Equity 618,180 411,200 237,060 140,580 932,900

6-49


P6-28 Consolidation Worksheet

a.Equity Method Entries on Crow Corp.'s Books:

Investment in West Co. 14,000

Income from West Co. 14,000

Record Crow Corp.'s 70% share of West Co.'s 20X9 income

Cash 3,500


Record Crow Corp.'s 70% share of West Co.'s 20X9 dividend



Reverse of the deferred gross profit from downstream sales in 20X8











NCI30%

+Crow Corp.70%

= CommonStock

+ Retained Earnings

Original book value 120,000 280,000 150,000 250,000 + Net Income 6,000 14,000 20,000 - Dividends (1,500) (3,500) (5,000) Ending book value 124,500 290,500 150,000 265,000

6-50


P6-28 (continued)


Total =

Crow Corp.'s

share + NCI's shareDownstream Reversal 15,000 15,000 Upstream Reversal 30,000 21,000 9,000 Downstream Deferred GP (8,000) (8,000) Upstream Deferred GP (25,000) (17,500) (7,500) Total 12,000 10,500 1,500

Basic elimination entryCommon stock 150,000 ← Original amount invested (100%)Retained earnings 250,000 ← Beginning balance in REIncome from West Co. 24,500 ← Crow’s % of NI - Def. GP + ReversalNCI in NI of West Co. 7,500 ← NCI share of NI - Def. GP + Reversal Dividends declared 5,000 ← 100% of West Co.'s dividends Investment in West Co. 301,000 ← Net book value - Def. GP + Reversal NCI in NA of West Co. 126,000 ← NCI share of BV - Def. GP + Reversal


NCI 30% +

Crow Corp. 70% = Land + Goodwill

Beginning balance 10,800 25,200 14,000 22,000 Changes 0 0 0 0 Ending balance 10,800 25,200 14,000 22,000

Excess value (differential) reclassification entry:Land 14,000 Goodwill 22,000 Investment in West Co. 25,200 NCI in NA of West Co. 10,800

Reversal of last year's deferral:Investment in West Co. 36,000 NCI in NA of West Co. 9,000 Cost of Goods Sold 45,000

Deferral of this year's unrealized profits on inventory transfersSales 152,000 Cost of Goods Sold 119,000 Inventory 33,000

6-51


P6-28 (continued)



Inventory

Sales 90,000 70,000 20,000

COGS 54,000 42,000 12,000

Gross Profit 36,000 28,000 8,000




Inventory

Sales 62,000 0 62,000

COGS 37,000 0 37,000

Gross Profit 25,000 0 25,000



West Co. West Co. Beginning

Balance 269,200


3,500 70% Dividends

20X8 Reversal 36,000 25,500 Deferred GP 25,500 36,000 20X8 Reversal


Reversal 36,000 301,000 Basic 24,500

25,200 Excess Reclass.

0 0

6-52


P6-28 (continued)

b. Crow

Corp.

West Co. Elimination Entries

DR CR Consolidated Income Statement Sales 300,000 200,000 152,000 348,000 Less: COGS (200,000) (150,000) 119,000 (186,000) 45,000 Less: Depreciation Expense (40,000) (30,000) (70,000) Income from West Co. 24,500 24,500 0 Consolidated Net Income 84,500 20,000 176,500 164,000 92,000 NCI in Net Income 7,500 (7,500) Controlling Interest in Net Income 84,500 20,000 184,000 164,000 84,500


Balance Sheet Cash and Receivable 81,300 85,000 166,300 Inventory 200,000 110,000 33,000 277,000 Land, Buildings, and Equipment (net) 270,000 250,000 14,000 534,000 Investment in West Co. 290,200 36,000 301,000 0 25,200 Goodwill 22,000 22,000 Total Assets 841,500 445,000 72,000 359,200 999,300

Accounts Payable 60,000 30,000 90,000 Common Stock 200,000 150,000 150,000 200,000 Retained Earnings 581,500 265,000 434,000 169,000 581,500 NCI in NA of West Co. 9,000 126,000 127,800 10,800 Total Liabilities & Equity 841,500 445,000 593,000 305,800 999,300

c. Retained earnings reconciliation, December 31, 20X9:Retained earnings, Crow Corporation $581,500 Retained earnings, West Company 265,000Elimination of West’s beginning RE (250,000)Elimination debits in income statement (184,000)Elimination credits in income statement 164,000Remove West’s dividends 5,000 Consolidated retained earnings $581,500

6-53


P6-29 Computation of Consolidated Totals

a. Consolidated sales for 20X8:Bunker Harrison Consol- Corp. Co. idated

Sales reported $660,000 $510,000 Intercorporate sales (140,000) (240,000)Sales to nonaffiliates $520,000 $270,000 $790,000

b. Consolidated cost of goods sold:

Total sales reported $660,000 $510,000 Ratio of cost to sales price ÷ 1.4 ÷ 1.2 Cost of goods sold $471,429 $425,000 Amount to be eliminated (see entry) (128,000) (232,000)Cost of goods sold adjusted $343,429 $193,000 $536,429

Downstream:



Upstream:



Eliminating entries:

Sales 140,000 Cost of Goods Sold 128,000 Inventory 12,000 Elimination of sales by Bunker to Harrison:

Sales 240,000 Cost of Goods Sold 232,000 Inventory 8,000 Elimination of sales by Harrison to Bunker:

6-54


P6-29 (continued)

c. Operating income of Bunker Corporation (excluding income from Harrison Company) $70,000 Net income of Harrison Company 20,000

$90,000 Less: Unrealized inventory profits of Bunker (12,000)

Unrealized inventory profits of Harrison (8,000 )Consolidated net income $70,000 Less: Income assigned to noncontrolling interest ($20,000 - $8,000) x 0.20 (2,400 )Income to controlling interest 20X8 $67,600

d. Inventory balance in consolidated balance sheet:

Inventory reported by Bunker Corporation $48,000 Unrealized profits (8,000 ) $40,000

Inventory reported by Harrison Company $42,000 Unrealized profits (12,000) 30,000 Inventory balance, December 31, 20X8 $70,000

6-55


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

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

Income from Bock Co. 6,300 Investment in Bock Co. 6,300 Record amortization of excess acquisition price

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. 5,600 Eliminate the deferred gross profit from upstream sales in 20X3


NCI30%

+Pine Corp.

70%=

CommonStock

+Retained Earnings

Original book value 39,000 91,000 70,000 60,000 + Net Income 7,500 17,500 25,000 - Dividends (4,500) (10,500) (15,000) Ending book value 42,000 98,000 70,000 70,000


Total =

Pine Corp.'s

share + NCI's shareUpstream Reversal 9,000 6,300 2,700 Downstream Deferred GP (3,800) (3,800) Upstream Deferred GP (8,000) (5,600) (2,400) Total (2,800) (3,100) 300

6-56


P6-30 (continued)




Income from Bock Co. 14,400 ← Pine’s % of NI - Def. GP + Reversal

NCI in NI of Bock Co. 7,800 ← NCI share of NI - Def. GP + Reversal

Dividends declared 15,000 ← 100% of Bock Co.'s dividends

Investment in Bock Co. 94,900 ← Net book value - Def. GP + Reversal

NCI in NA of Bock Co. 42,300 ← NCI share of BV - Def. GP + Reversal


NCI 30% +

Pine Corp. 70% =

Buildings and Equipment + Patents +

Acc. Depr.

Beginning balance 13,800 32,200 20,000 28,000 (2,000)

Changes (2,700) (6,300) (7,000) (2,000)

Ending balance 11,100 25,900 20,000 21,000 (4,000)

Amortized excess value reclassification entry:

Amortization expense 7,000

Depreciation expense 2,000

Income from Bock Co. 6,300

NCI in NI of Bock Co. 2,700


Buildings and Equipment 20,000

Patents 21,000


Investment in Bock Co. 25,900

NCI in NA of Bock Co. 11,100

Optional accumulated depreciation elimination entry:




Investment in Bock Co. 6,300

NCI in NA of Bock Co. 2,700


6-57


P6-30 (continued)

Deferral of this year's unrealized profits on inventory transfersInvestment in Bock Co. 4,900 NCI in NA of Bock Co. 2,100 Inventory 7,000


Investment in Income from Bock Co. Bock Co.

Beg. Balance 112,000 70% Net Income 17,500 17,500 70% Net Income

10,500 70% Dividends 6,300 Excess Val. Amort. 6,300

20X2 Reversal 6,300 9,400 Deferred GP 9,400 6,300 20X2 ReversalEnding Balance 109,600 8,100 Ending Balance

Reversal 6,300 94,900 Basic 14,400 20X2 Deferred

GP 4,900 25,900 Excess Reclass. 6,300 0 0

6-58

20X3 Downstream Transactions:



20X2 Upstream Transactions:

Ending Inventory, 20X2 =

Re-sold, 20X3 +

Ending Inventory,

20X3Sales 48,000 27,000 21,000COGS 32,000 18,000 14,000Gross Profit 16,000 9,000 7,000 Gross Profit % 33.33%





P6-30 (continued)

b. Pine

Corp. Bock

Co. Elimination Entries

DR CR Consolidated Income Statement Sales 260,000 125,000 120,000 265,000 Other Income 13,600 13,600 Less: COGS (186,000) (79,800) 108,200 (148,600) 9,000

Less: Depreciation Expense (20,000) (15,000) 2,000 (37,000)

Less: Interest Expense (16,000) (5,200) (21,200)

Less: Amortization Expense 7,000 (7,000)

Income from Bock Co. 8,100 14,400 6,300 0

Consolidated Net Income 59,700 25,000 143,400 123,500 64,800

NCI in Net Income 7,800 2,700 (5,100)



Balance Sheet Cash and Accounts Receivable 15,400 21,600 37,000 Inventory 165,000 35,000 11,800 181,200 7,000 Land 80,000 40,000 120,000 Buildings & Equipment 340,000 260,000 20,000 50,000 570,000 Less: Accumulated Depreciation (140,000) (80,000) 50,000 4,000 (174,000) Investment in Bock Co. 109,600 6,300 94,900 0 4,900 25,900 Patents 21,000 21,000 Total Assets 570,000 276,600 102,200 193,600 755,200

Accounts Payable 92,400 35,000 127,400 Bonds Payable 200,000 100,000 300,000 Bonds Premium 1,600 1,600 Common Stock 120,000 70,000 70,000 120,000 Retained Earnings 157,600 70,000 211,200 141,200 157,600 NCI in NA of Bock Co. 2,700 42,300 48,600 2,100 11,100 Total Liabilities & Equity 570,000 276,600 286,000 194,600 755,200

6-59


P7-30 (continued)

Note: Financial statements are not required.

Pine Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X3

Cash and Accounts Receivable $ 37,000 Inventory 181,200 Land 120,000 Buildings and Equipment $570,000 Less: Accumulated Depreciation (174,000) 396,000 Patent 21,000 Total Assets $755,200

Accounts Payable $127,400 Bonds Payable $300,000 Bond Premium 1,600 301,600 Stockholders’ Equity: Controlling Interest: Common Stock $120,000 Retained Earnings 157,600 Total Controlling Interest $277,600 Noncontrolling Interest 48,600 Total Stockholders’ Equity 326,200 Total Liabilities and Stockholders' Equity $755,200

Pine Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X3

Sales $265,000 Other Income 13,600 Total Income $278,600 Cost of Goods Sold $148,600 Depreciation Expense 37,000 Interest Expense 21,200 Amortization Expense 7,000 Total Expenses (213,800)Consolidated Net Income $ 64,800 Income to Noncontrolling Interest (5,100 )Income to Controlling Interest $ 59,700

Pine Corporation and SubsidiaryConsolidated Retained Earnings Statement

Year Ended December 31, 20X3

Retained Earnings, January 1, 20X3 $127,900 Income to Controlling Interest, 20X3 59,700

$187,600 Dividends Declared, 20X3 (30,000 )Retained Earnings, December 31, 20X3 $157,600

6-60


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. 21,000 Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 income

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

Income from Concerto Co. 6,000 Investment in Concerto Co. 6,000 Record amortization of excess acquisition price

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

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

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

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


NCI40%

+Bower Corp.60%

= CommonStock

+ Retained Earnings


+ Net Income 14,000 21,000 35,000

- Dividends (8,000) (12,000) (20,000)


6-61


P6-31 (continued)


Total =

Bower Corp.'s

share + NCI's shareDownstream Reversal 4,000 4,000 Upstream Reversal 8,000 4,800 3,200 Downstream Deferred GP (2,000) (2,000) Upstream Deferred GP (9,000) (5,400) (3,600) Total 1,000 1,400 (400)

Basic elimination entryCommon stock 50,000 ← Original amount invested (100%)Retained earnings 150,000 ← Beginning balance in REIncome from Concerto Co. 22,400 ← Bower’s % of NI - Def. GP + ReversalNCI in NI of Concerto Co. 13,600 ← NCI share of NI - Def. GP + Reversal Dividends declared 20,000 ← 100% of Concerto Co.'s dividends Investment in Concerto Co. 130,400 ← Net book value - Def. GP + Reversal NCI in NA of Concerto Co. 85,600 ← NCI share of BV - Def. GP + Reversal


NCI 40% +

Bower Corp. 60% = Goodwill

Beginning balance 16,000 24,000 40,000 Changes (4,000) (6,000) (10,000)Ending balance 12,000 18,000 30,000

Amortized excess value reclassification entry:Goodwill impairment loss 10,000 Income from Concerto Co. 6,000 NCI in NI of Concerto Co. 4,000

Excess value (differential) reclassification entry:Goodwill 30,000 Investment in Concerto Co. 18,000 NCI in NA of Concerto Co. 12,000




6-62


P6-31 (continued)


Investment in Concerto Co. 8,800

NCI in NA of Concerto Co. 3,200



Sales 112,000


Inventory 11,000


Ending Inv., 20X5

Sales 14,000 COGS 10,000 Gross Profit 4,000 Gross Profit % 28.57%





Ending Inv., 20X5





P6-31 (continued)Investment in Income from

Concerto Co. Concerto Co.

6-63


P6-31 (continued)Beg. Balance 135,200



6,000 Excess Val. Amort. 6,000



Reversal 8,800 130,400 Basic 22,400

18,000 Excess Reclass. 6,000

0 0

b. Bower

Corp. Concerto


DR CR Consolidated Income Statement Sales 400,000 200,000 112,000 488,000 Less: COGS (280,000) (120,000) 12,000 (287,000) 101,000 Less: Depreciation & Amort. Expense (25,000) (15,000) (40,000) Less: Other Expenses (35,000) (30,000) (65,000)

Less: Goodwill Impairment Loss 10,000 (10,000)

Income from Concerto Co. 16,400 22,400 6,000 0


NCI in Net Income 13,600 4,000 (9,600)



Balance Sheet Cash 26,800 35,000 61,800 Accounts Receivable 80,000 40,000 120,000 Inventory 120,000 90,000 11,000 199,000 Land 70,000 20,000 90,000 Buildings & Equipment 340,000 200,000 25,000 515,000 Less: Accumulated Depreciation (165,000) (85,000) 25,000 (225,000) Investment in Concerto Co. 139,600 8,800 130,400 0 18,000 Goodwill 30,000 30,000 Total Assets 611,400 300,000 63,800 184,400 790,800

Accounts Payable 80,000 15,000 95,000 Bonds Payable 120,000 70,000 190,000 Common Stock 100,000 50,000 50,000 100,000 Retained Earnings 311,400 165,000 308,000 143,000 311,400 NCI in NA of Concerto Co. 3,200 85,600 94,400 12,000 Total Liabilities & Equity 611,400 300,000 361,200 240,600 790,800

6-64


P6-32 Intercorporate Transfers of Inventory and Equipment

a. Consolidated cost of goods sold for 20X9:

Amount reported by Foster Company $593,000 Amount reported by Block Corporation 270,000 Adjustment for unrealized profit in beginning inventory sold in 20X9 (15,000)Adjustment for inventory purchased from subsidiary and resold during 20X9: CGS recorded by Foster ($30,000 x 0.60) $18,000 CGS recorded by Block 20,000 Total recorded $38,000 CGS based on Block's cost ($20,000 x 0.60) (12,000) Required adjustment (26,000 )Cost of goods sold $822,000

b. Consolidated inventory balance:

Amount reported by Foster $137,000 Amount reported by Block 130,000 Total inventory reported $267,000 Unrealized profit in ending inventory held by Foster [($30,000 - $20,000) x 0.40] (4,000 )Consolidated balance $263,000

c. Income assigned to noncontrolling interest:

Net income reported by Block Corporation $70,000 Adjustment for realization of profit on inventory sold to Foster in 20X8 15,000 Adjustment for unrealized profit on inventory sold to Foster in 20X9 (4,000 )Realized net income of Block for 20X9 $81,000 Proportion of ownership held by noncontrolling interest x 0.10 Income assigned to noncontrolling interest $ 8,100

6-65


P6-32 (continued)

d. Amount assigned to noncontrolling interest in consolidated balancesheet:

Block Corporation common stock outstanding $ 50,000 Block Corporation retained earnings, January 1, 20X9 165,000 Net income for 20X9 70,000 Dividends paid in 20X9 (20,000 )Book value, December 31, 20X9 $265,000 Adjustment for unrealized profit on inventory sold to Foster (4,000 )Realized book value of Block Corporation $261,000 Proportion of ownership held by noncontrolling interest x 0.10 Balance assigned to noncontrolling interest $ 26,100

e. Consolidated retained earnings at December 31, 20X9:

Balance reported by Foster Company, January 1, 20X9 $235,000 Net income for 20X9 180,900 Dividends paid in 20X9 (40,000 )Balance reported by Foster Company, December 31, 20X9 $375,900

f. Eliminating entries:


NCI10%

+ Foster Co.90%

=Comm

onStock

+ Retained Earnings


+ Net Income 7,000 63,000 70,000

- Dividends (2,000) (18,000) (20,000)


6-66


P6-32 (continued)


Total =

Foster Co.'s share + NCI's share

Downstream Reversal 0 0 Upstream Reversal 15,000 13,500 1,500 Downstream Deferred GP 0 0 Upstream Deferred GP (4,000) (3,600) (400) Total 11,000 9,900 1,100

Basic elimination entryCommon stock 50,000 ← Original amount invested (100%)Retained earnings 165,000 ← Beginning balance in REIncome from Block Corp. 72,900 ← Foster’s % of NI - Def. GP + ReversalNCI in NI of Block Corp. 8,100 ← NCI share of NI - Def. GP + Reversal Dividends declared 20,000 ← 100% of Block Corp.'s dividends Investment in Block Corp. 248,400 ← Net book value - Def. GP + Reversal NCI in NA of Block Corp. 27,600 ← NCI share of BV - Def. GP + Reversal

Reversal of last year's deferral:Investment in Block Corp. 13,500 NCI in NA of Block Corp. 1,500 Cost of Goods Sold 15,000



Ending Inventory





6-67


P6-32 (continued)


Block Corp. Block Corp.

Beg. Balance 180,000





Reversal 13,500 248,400 Basic 72,900

0 0

g. Foster

Co. Block

Corp. Elimination Entries

DR CR Consolidated Income Statement Sales 815,000 415,000 30,000 1,200,000 Other Income 26,000 15,000 41,000 Less: COGS (593,000) (270,000) 15,000 (822,000) 26,000 Less: Depreciation Expense (45,000) (15,000) (60,000) Less: Other Expenses (95,000) (75,000) (170,000) Income from Block Corp. 72,900 72,900 0 Consolidated Net Income 180,900 70,000 102,900 41,000 189,000 NCI in Net Income 8,100 (8,100)



Balance Sheet Cash 187,000 57,400 244,400 Accounts Receivable 80,000 90,000 170,000 Other Receivables 40,000 10,000 50,000 Inventory 137,000 130,000 4,000 263,000 Land 80,000 60,000 140,000 Buildings & Equipment 500,000 250,000 750,000 Less: Accumulated Depreciation (155,000) (75,000) (230,000) Investment in Block Corp. 234,900 13,500 248,400 0 Total Assets 1,103,900 522,400 13,500 252,400 1,387,400

Accounts Payable 63,000 35,000 98,000 Other Payables 95,000 20,000 115,000 Bonds Payable 250,000 200,000 450,000 Bond Premium 2,400 2,400 Common Stock 210,000 50,000 50,000 210,000 Additional Paid-in Capital 110,000 110,000 Retained Earnings 375,900 215,000 276,000 61,000 375,900 NCI in NA of Block Corp. 1,500 27,600 26,100 Total Liabilities & Equity 1,103,900 522,400 327,500 88,600 1,387,400

6-68


P6-33 Consolidated Balance Sheet Worksheet [AICPA Adapted]


NCI10%

+Pine Corp.

90%=

CommonStock

+Retained Earnings

Original book value 80,000 720,000 200,000 600,000 + Net Income 10,100 90,900 101,000 - Dividends (100) (900) (1,000) Ending book value 90,000 810,000 200,000 700,000


Total =

Pine Corp.'s

share + NCI's shareDownstream Reversal 0 0 Upstream Reversal 0 0 0 Downstream Deferred GP -3,000 -3,000 Upstream Deferred GP 0 0 0 Total (3,000) (3,000) 0




Income from Slim Corp. 87,900 ← Pine’s % of NI - Def. GP + Reversal

NCI in NI of Slim Corp. 10,100 ← NCI share of NI - Def. GP + Reversal

Dividends declared 1,000 ← 100% of Slim Corp.'s dividends

Investment in Slim Corp. 807,000 ← Net book value - Def. GP + Reversal

NCI in NA of Slim Corp. 90,000 ← NCI share of BV - Def. GP + Reversal


NCI 10% +

Pine Corp. 90% = Goodwill

Beginning balance 50,000 450,000 500,000

Changes 0 0 0

Ending balance 50,000 450,000 500,000


Goodwill 500,000

Investment in Slim Corp. 450,000

NCI in NA of Slim Corp. 50,000

6-69


P6-33 (continued)

Intercompany Transactions

Dividends Payable 900

Dividends Receivable 900

Accounts Payable 90,000

Accounts Receivable 90,000

Note Payable 100,000

Note Receivable 100,000

Interest Payable 5,000

Interest Receivable 5,000


Sales 300,000


Inventory 3,000



Inventory

Sales 300,000 285,000 15,000

COGS 240,000 228,000 12,000

Gross Profit 60,000 57,000 3,000



Slim Corp. Slim Corp. Acquisition

Price 1,170,000


900 90% Dividends


Ending Balance 1,257,000 87,900 Ending Balance

807,000 Basic 87,900

450,000 Excess Reclass.

0 0

6-70


P6-33 (continued)

Pine Corp.

Slim Corp.

Elimination Entries DR CR Consolidated Balance Sheet Cash 105,000 15,000 120,000

AR & Other Receivables 410,000 120,000 900 334,100 90,000 100,000 5,000 Merchandise Inventory 920,000 670,000 3,000 1,587,000 Plant & Equipment (net) 1,000,000 400,000 1,400,000 Investment in Slim Corp. 1,257,000 807,000 0 450,000 Goodwill 500,000 500,000 Total Assets 3,692,000 1,205,000 500,000 1,455,900 3,941,100

AP & Other Liabilities 140,000 305,000 900 249,100 90,000 100,000 5,000 Common Stock 500,000 200,000 200,000 500,000 Retained Earnings 3,052,000 700,000 600,000 1,000 3,052,000 87,900 297,000 10,100 300,000 NCI in NA of Slim Corp. 90,000 140,000 50,000 Total Liabilities & Equity 3,692,000 1,205,000 1,393,900 438,000 3,941,100

6-71


P6-34 Comprehensive Worksheet Problem

a.Equity Method Entries on Randall Corp.'s Books:

Investment in Sharp Co. 320,000

Cash 320,000

Record the initial investment in Sharp Co.


Income from Sharp Co. 32,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income

Cash 20,000


Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend



Record amortization of excess acquisition price



Reverse of the deferred gross profit from downstream sales in 20X6










6-72


6-34 (continued)

b.Book Value Calculations:

NCI20%

+Randall Corp.80%

= CommonStock

+ Add. Paid-in Capital

+Retained

Earnings

Original book value 67,000 268,000 100,000 20,000 215,000

+ Net Income 8,000 32,000 40,000

- Dividends (5,000) (20,000) (25,000)

Ending book value 70,000 280,000 100,000 20,000 230,000


Total =

Randall Corp.'s

share + NCI's share

Downstream Reversal 2,000 2,000

Upstream Reversal 8,000 6,400 1,600 Downstream Deferred GP (3,000) (3,000)


Total (3,000) (2,600) (400)





Income from Sharp Co. 29,400 ← Randall’s % of NI - Def. GP + Reversal

NCI in NI of Sharp Co. 7,600 ← NCI share of NI - Def. GP + Reversal

Dividends declared 25,000 ← 100% of Sharp Co.'s dividends

Investment in Sharp Co. 277,400 ← Net book value - Def. GP + Reversal

NCI in NA of Sharp Co. 69,600 ← NCI share of BV - Def. GP + Reversal


NCI 20% +

Randall Corp. 80% =

Buildings & equipment + Acc. Depr.

Beginning balance 7,000 28,000 50,000 (15,000)

Changes (1,000) (4,000) (5,000)

Ending balance 6,000 24,000 50,000 (20,000)

6-73


P6-34 (continued)

Amortized excess value reclassification entry:Depreciation expense 5,000 Income from Sharp Co. 4,000 NCI in NI of Sharp Co. 1,000

Excess value (differential) reclassification entry:Buildings & equipment 50,000 Accumulated depreciation 20,000 Investment in Sharp Co. 24,000 NCI in NA of Sharp Co. 6,000

Eliminate intercompany accounts:Accounts payable 10,000 Accounts receivable 10,000

Optional accumulated depreciation elimination entryAccumulated depreciation 40,000 Building & equipment 40,000

Reversal of last year's deferral:Investment in Sharp Co. 8,400 NCI in NA of Sharp Co. 1,600 Cost of Goods Sold 10,000







InventorySales 12,000 0 12,000 COGS 9,000 0 9,000 Gross Profit 3,000 0 3,000 Gross Profit % 25.00%

6-74


P6-34 (continued)



Inventory

Sales 60,000 36,000 24,000

COGS 40,000 24,000 16,000

Gross Profit 20,000 12,000 8,000




Inventory

Sales 45,000 15,000 30,000

COGS 30,000 10,000 20,000

Gross Profit 15,000 5,000 10,000



Sharp Co. Sharp Co.

Beginning Balance 287,600



4,000 Excess Val.

Amort. 4,000



Reversal 8,400 277,400 Basic 29,400


0 0

6-75


P6-34 (continued)

Randall Corp.

Sharp Co.

Elimination Entries DR CR Consolidated Income Statement Sales 500,000 250,000 57,000 693,000 Other Income 20,400 30,000 50,400 Less: COGS (416,000) (202,000) 10,000 (564,000) 44,000

Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000)

Less: Other Expenses (24,000) (18,000) (42,000)

Income from Sharp Co. 25,400 29,400 4,000 0


NCI in Net Income 7,600 1,000 (6,600)



Balance Sheet Cash 130,300 10,000 140,300 Accounts Receivable 80,000 70,000 10,000 140,000 Inventory 170,000 110,000 13,000 267,000 Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000 Less: Accumulated Depreciation (310,000) (120,000) 40,000 20,000 (410,000) Investment in Sharp Co. 293,000 8,400 277,400 0 24,000 Total Assets 963,300 470,000 98,400 384,400 1,147,300

Accounts Payable 100,000 15,200 10,000 105,200 Bonds Payable 300,000 100,000 400,000 Bond Premium 4,800 4,800 Common Stock 200,000 100,000 100,000 200,000 Additional Paid-in Capital 20,000 20,000 0 Retained Earnings 363,300 230,000 314,000 84,000 363,300 NCI in NA of Sharp Co. 1,600 69,600 74,000 6,000 Total Liabilities & Equity 963,300 470,000 445,600 159,600 1,147,300

6-76


P6-34 (continued)

d. Randall Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X7

Cash $ 140,300 Accounts Receivable 140,000 Inventory 267,000 Total Current Assets $ 547,300 Buildings and Equipment $1,010,000 Less: Accumulated Depreciation (410,000 ) 600,000 Total Assets $1,147,300

Accounts Payable $ 105,200 Bonds Payable $ 400,000 Bond Premium 4,800 404,800 Stockholders’ Equity: Controlling Interest: Common Stock $ 200,000 Retained Earnings 363,300 Total Controlling Interest $ 563,300 Noncontrolling Interest 74,000 Total Stockholders’ Equity 637,300 Total Liabilities and Stockholders' Equity $1,147,300

Randall Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X7

Sales $ 693,000 Other Income 50,400

$ 743,400 Cost of Goods Sold $ 564,000 Depreciation and Amortization Expense 55,000 Other Expenses 42,000 (661,000 )Consolidated Net Income $ 82,400 Income to Noncontrolling Interest (6,600 )Income to Controlling Interest $ 75,800

Randall Corporation and SubsidiaryConsolidated Statement of Retained Earnings

Year Ended December 31, 20X7

Retained Earnings, January 1, 20X7 $ 337,500 Income to Controlling Interest, 20X7 75,800

$ 413,300

6-77


Dividends Declared, 20X7 (50,000 )Retained Earnings, December 31, 20X7 $ 363,300

6-78


P6-35 Comprehensive Consolidation Worksheet; Equity Method [AICPA Adapted]

Equity Method Entries on Fran Corp.'s Books:

Investment in Brey Inc. 750,000

Cash 750,000

Record the initial investment in Brey Inc.


Income from Brey Inc. 190,000

Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 income

Cash 40,000


Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 dividend







Fran Corp.

100%= Common

Stock+ Add. Paid-

in Capital+

Retained

Earnings


+ Net Income 190,000 190,000

- Dividends (40,000) (40,000)



Total =Fran Corp.'s

share

Upstream Deferred GP (18,000) (18,000)

Total (18,000) (18,000)

6-79


P6-35 (continued)





Income from Brey Inc. 172,000 ← Fran’s % of NI - Def. GP

Dividends declared 40,000 ← 100% of Brey Inc.'s dividends

Investment in Brey Inc. 768,000 ← Net book value - Def. GP

Fran Corp.

100% = Machinery + Acc. Depr. + Goodwill

Beginning balance 114,000 54,000 0 60,000

Changes (44,000) (9,000) (35,000)

Ending balance 70,000 54,000 (9,000) 25,000



Goodwill impairment loss 35,000



Machinery 54,000

Goodwill 25,000



Eliminate intercompany accounts:

Accounts payable 86,000

Accounts receivable 86,000


Sales 180,000


Inventory 18,000

6-80


P6-35 (continued)



Inventory

Sales 180,000 144,000 36,00

0

COGS 90,000 72,000 18,00

0

Gross Profit 90,000 72,000 18,000



Brey Inc. Brey Inc.

Acquisition Price 750,000



44,000 Excess Val. Amort. 44,000



768,000 Basic 172,000


0 0

6-81


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 9th edition to assume that the sale was to a non-affiliated third party. Thus, the gain on the sale of the warehouse is not eliminated in this problem.

Fran Corp.

Brey Inc.

Elimination Entries DR CR Consolidated Income Statement Net Sales 3,800,000 1,500,000 180,000 5,120,000 Gain on Sale of Warehouse 30,000 30,000 Less: COGS (2,360,000) (870,000) 162,000 (3,068,000)

Less: Operating Expenses (1,100,000) (440,000) 9,000 (1,549,000)

Less: Goodwill Impairment 35,000 (35,000)

Income from Brey Inc. 128,000 172,000 44,000 0

Net Income 498,000 190,000 396,000 206,000 498,000

Statement of Retained Earnings

Beginning Balance 440,000 156,000 156,000 440,000 Net Income 498,000 190,000 396,000 206,000 498,000 Less: Dividends Declared (40,000) 40,000 0 Ending Balance 938,000 306,000 552,000 246,000 938,000

Balance Sheet Cash 570,000 150,000 720,000 Accounts Receivable (net) 860,000 350,000 86,000 1,124,000 Inventories 1,060,000 410,000 18,000 1,452,000 Land, Plant, and Equipment 1,320,000 680,000 54,000 2,054,000 Less: Accumulated Depreciation (370,000) (210,000) 9,000 (589,000) Investment in Brey Inc. 838,000 768,000 0 70,000 Goodwill 25,000 25,000 Total Assets 4,278,000 1,380,000 79,000 951,000 4,786,000

Accounts Payable & Accrued

Expenses 1,340,000 594,000 86,000 1,848,000 Common Stock 1,700,000 400,000 400,000 1,700,000 Additional Paid-in Capital 300,000 80,000 80,000 300,000 Retained Earnings 938,000 306,000 552,000 246,000 938,000 Total Liabilities & Equity 4,278,000 1,380,000 1,118,000 246,000 4,786,000

6-82


P6-36A Fully Adjusted Equity Method

a. Adjusted trial balance:

Randall Corporation Sharp Company Item Debit Credit Debit Credit

Cash $ 130,300 $ 10,000Accounts Receivable 80,000 70,000Inventory 170,000 110,000Buildings and Equipment 600,000 400,000Investment in Sharp Company Stock 304,000Cost of Goods Sold 416,000 202,000Depreciation and Amortization 30,000 20,000Other Expenses 24,000 18,000Dividends Declared 50,000 25,000Accumulated Depreciation $ 310,000 $120,000Accounts Payable 100,000 15,200Bonds Payable 300,000 100,000Bond Premium 4,800Common Stock 200,000 100,000Additional Paid-In Capital 20,000Retained Earnings 345,900 215,000Sales 500,000 250,000Other Income 20,400 30,000Income from Subsidiary 28,000

$1,804,300 $1,804,300 $855,000 $855,000

b.

Equity Method Entries on Randall Corp.'s Books:




Cash 20,000


Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend




6-83


P6-36A (continued)

c.Book Value Calculations:

NCI20%

+Randall Corp.80%

=Commo

nStock

+Add. Paid-in Capital

+

Retained

Earnings

Original book value 67,000 268,000 100,000 20,000 215,000

+ Net Income 8,000 32,000 40,000

- Dividends (5,000) (20,000) (25,000)

Ending book value 70,000 280,000 100,000 20,000 230,000


Total =

Randall Corp.'s

share + NCI's share

Downstream Reversal 2,000 2,000


Downstream Deferred GP (3,000) (3,000)


Total (3,000) (2,600) (400)





Income from Sharp Co. 32,000 ← Randall Corp.’s % of NI

NCI in NI of Sharp Co. 7,600 ← NCI share of NI - Def. GP + Reversal

Dividends declared 25,000 ← 100% of Sharp Co.'s dividends

Investment in Sharp Co. 280,000 ← Net book value

NCI in NA of Sharp Co. 69,600 ← NCI share of BV - Def. GP + Reversal


NCI 20% +

Randall Corp. 80% =

Buildings & equipment + Acc. Depr.

Beginning balance 7,000 28,000 50,000 (15,000)

Changes (1,000) (4,000) (5,000)

Ending balance 6,000 24,000 50,000 (20,000)

6-84


P6-36A (continued)




NCI in NI of Sharp Co. 1,000


Buildings & equipment 50,000



NCI in NA of Sharp Co. 6,000








Retained earnings 8,400




Sales 57,000


Inventory 13,000

(See Problem 6-34 for unrealized profit calculations.)

6-85


P6-36A (continued)

d. Randall

Corp. Sharp


DR CR Consolidated Income Statement Sales 500,000 250,000 57,000 693,000 Other Income 20,400 30,000 50,400 Less: COGS (416,000) (202,000) 44,000 (564,000) 10,000 Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000) Less: Other Expenses (24,000) (18,000) (42,000) Income from Sharp Co. 28,000 32,000 4,000 0 Consolidated Net Income 78,400 40,000 94,000 58,000 82,400 NCI in Net Income 7,600 1,000 (6,600)


Statement of Retained Earnings Beginning Balance 345,900 215,000 215,000 337,500 8,400 Net Income 78,400 40,000 101,600 59,000 75,800 Less: Dividends Declared (50,000) (25,000) 25,000 (50,000) Ending Balance 374,300 230,000 325,000 84,000 363,300

Balance Sheet Cash 130,300 10,000 140,300 Accounts Receivable 80,000 70,000 10,000 140,000 Inventory 170,000 110,000 13,000 267,000 Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000 Less: Accumulated Depreciation (310,000) (120,000) 40,000 20,000 (410,000) Investment in Sharp Co. 304,000 280,000 0 24,000 Total Assets 974,300 470,000 90,000 387,000 1,147,300

Accounts Payable 100,000 15,200 10,000 105,200 Bonds Payable 300,000 100,000 400,000 Bond Premium 4,800 4,800 Common Stock 200,000 100,000 100,000 200,000 Additional Paid-in Capital 20,000 20,000 0 Retained Earnings 374,300 230,000 325,000 84,000 363,300 NCI in NA of Sharp Co. 1,600 69,600 74,000 6,000 Total Liabilities & Equity 974,300 470,000 456,600 159,600 1,147,300

6-86


P6-37A Cost Method

a.Equity Method Entries on Randall Corp.'s Books:




b.Investment elimination entry:

Common stock 100,000

Additional paid-in capital 20,000




Dividend elimination entry:

Dividend Income 20,000

NCI in NI of Sharp Co. 5,000

Dividends Declared 25,000


Buildings & equipment 50,000



Amortize differential from previous years:



Accumulated Depreciation 15,000

Amortize differential for 20X7

Depreciation Expense 5,000

Accumulated Depreciation 5,000

Assign Sharp's undistributed income to NCI


Retained Earnings 7,000


6-87


P6-37A (continued)








Retained Earnings 8,400




Sales 57,000


Inventory 13,000

(See Problem 6-34 for unrealized profit calculations.)

6-88


P6-37A (continued)

Randall Corp.

Sharp Co.

Elimination Entries DR CR Consolidated Income Statement Sales 500,000 250,000 57,000 693,000 Other Income 20,400 30,000 50,400 Dividend Income 20,000 20,000 0 Less: COGS (416,000) (202,000) 10,000 (564,000) 44,000

Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000)

Less: Other Expenses (24,000) (18,000) (42,000) Consolidated Net Income 50,400 60,000 82,000 54,000 82,400 NCI in Net Income of Sharp Co. 5,000 (6,600) 1,600


Statement of Retained Earnings Beginning Balance 329,900 215,000 180,000 337,500 8,400 12,000 7,000 Net Income 50,400 60,000 88,600 54,000 75,800 Less: Dividends Declared (50,000) (25,000) 25,000 (50,000) Ending Balance 330,300 250,000 296,000 79,000 363,300

Balance Sheet Cash 130,300 10,000 140,300 Accounts Receivable 80,000 70,000 10,000 140,000 Inventory 170,000 110,000 13,000 267,000 Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000

Less: Accumulated Depreciation (310,000) (120,000) 40,000 5,000 (410,000)

15,000 Investment in Sharp Co. 280,000 240,000 0 40,000 Total Assets 950,300 470,000 90,000 363,000 1,147,300

Accounts Payable 100,000 15,200 10,000 105,200 Bonds Payable 300,000 100,000 400,000 Bond Premium 4,800 4,800 Common Stock 200,000 100,000 100,000 200,000 Additional Paid-in Capital 20,000 20,000 0 Retained Earnings 330,300 250,000 296,000 79,000 363,300 NCI in NA of Sharp Co. 1,600 60,000 74,000 3,000 10,000 8,600 Total Liabilities & Equity 930,300 490,000 430,600 157,600 1,147,300

6-89

Chap 006

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