Chapter 06 - Intercompany Profit Transactions - Plant Assets

Chapter 6 Test Bank

INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS

Multiple Choice Questions

Use the following information for questions 1 and 2.

In 2004, Parrot Company sold land to its subsidiary, Tree Corporation, for $12,000. It had a book value of $10,000. In the next year, Tree sold the land for $18,000 to an unaffiliated firm.

LO11. Which of the following is correct?

a. No consolidation working paper entry was necessary in 2004.b. A consolidation working paper entry was required only if

the subsidiary was less than 100% owned in 2004.c. A consolidation working paper entry is required each year

until the land is sold outside the related parties.d. A consolidated working paper entry was required only if the

land was held for resale in 2004.LO12. The 2004 unrealized gain

a. was deferred until 2006.b. was eliminated from consolidated net income by a working

paper entry that credited land $2,000.c. made consolidated net income $2,000 less than it would have

been had the sale not occurred.d. made consolidated net income $2,000 greater than it would

have been had the sale not occurred.

©2009 Pearson Education, Inc. publishing as Prentice Hall6-1

LO13. On January 1, 2005, Eagle Corporation sold equipment with a

book value of $40,000 and a 20-year remaining useful life to its wholly-owned subsidiary, Rabbit Corporation, for $60,000. Both Eagle and Rabbit use the straight-line depreciation method, assuming no salvage value. On December 31, 2005, the separate company financial statements held the following balances associated with the equipment:

Eagle RabbitGain on sale of equipment $ 20,000Depreciation expense $ 3,000Equipment 60,000Accumulated depreciation 3,000

A working paper entry to consolidate the financial statements of Eagle and Rabbit on December 31, 2005 included a

a. debit to gain on sale of equipment for $19,000.b. credit to gain on sale of equipment for $20,000.c. debit to accumulated depreciation for $1,000.d. credit to depreciation expense for $3,000.

Use the following information for questions 4 and 5.

On December 31, 2005, Corella Corporation sold equipment with a three-year remaining useful life and a book value of $21,000 to its 70%-owned subsidiary Hollow Company for a price of $27,000. Corella bought the equipment four years ago for $49,000.

LO14. What was the intercompany sale impact on the consolidated

financial statements for the year ended December 31, 2005?

Corella’s Net Income Corella’s Income from Hollow

a. No effect. No effect.b. No effect. Decreased.c. Decreased. No effect.d. Increased. Decreased.

LO15. What was the intercompany sale impact on the consolidated

financial statements for the year ended December 31, 2005?

Consolidated Net Income

Consolidated Net Assets

a. No effect. No effect.b. No effect. Increased.c. Decreased. Decreased.d. Decreased. No effect.


LO16. On January 2, 2005 Kakapo Company sold a truck with book value

of $45,000 to Flightless Corporation, its completely owned subsidiary, for $60,000. The truck had a remaining useful life of three years with zero salvage value. Both firms use the straight-line depreciation method, and assume no salvage value. If Kakapo failed to make year-end equity adjustments, Kakapo’s investment in Flightless at December 31, 2005 was

a. $5,000 too high.b. $10,000 too low.c. $10,000 too high.d. $15,000 too high.

LO1, 2 & 4Use the following information to answer questions 7 through 10.

On January 1, 2003, Shrimp Corporation purchased a delivery truck with an expected useful life of five years. On January 1, 2005, Shrimp sold the truck to Avocet Corporation and recorded the following journal entry:

Debit CreditCash 50,000Accumulated depreciation 18,000 Truck 53,000 Gain on Sale of Truck 15,000

Avocet holds 60% of Shrimp. Shrimp reported net income of $55,000 in 2005 and Avocet's separate net income (excludes interest in Shrimp) for 2005 was $98,000.

LO17. In preparing the consolidated financial statements for 2005,

the elimination entry for depreciation expense was a

a. debit for $5,000.b. credit for $5,000.c. debit for $15,000.d. credit for $15,000.

LO18. In the consolidation working papers, the Truck account was

a. debited for $3,000.b. credited for $3,000.c. debited for $15,000.d. credited for $15,000.


LO29. Consolidated net income for 2005 was

a. $121,000.b. $125,000.c. $131,000.d. $143,000.

LO410. The minority interest income for 2005 was

a. $18,000.b. $22,000.c. $23,000.d. $27,000.

LO211. Ground Parrot Company completely owns Heathlands Inc. On

January 2, 2005 Ground Parrot sold Heathlands machinery at its book value of $30,000. Ground Parrot had the machinery two years before selling it and used a five-year straight-line depreciation method, with zero salvage value. Heathlands will use a three-year straight-line method. In the 2005 consolidated income statement, the depreciation expense

a. required no adjustment.b. decreased by $4,000.c. increased by $4,000d. increased by $30,000.

LO212. In reference to the downstream or upstream sale of

depreciable assets, which of the following statements is correct?

a. Upstream sales from the subsidiary to the parent company always result in unrealized gains or losses.

b. The initial effect of unrealized gains and losses from downstream sales of depreciable assets is different from the sale of nondepreciable assets.

c. Gains, but not losses, appear in the parent-company accounts in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting.

d. Gains and losses appear in the parent-company accounts in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting.


LO213. Falcon Corporation sold equipment to its 80%-owned subsidiary,

Rodent Corp., on January 1, 2005. Falcon sold the equipment for $110,000 when its book value was $85,000 and it had a 5-year remaining useful life with no expected salvage value. Separate balance sheets for Falcon and Rodent included the following equipment and accumulated depreciation amounts on December 31, 2005:

Falcon RodentEquipment $ 750,000 $ 300,000Less: Accumulated depreciation ( 200,000) ( 50,000)Equipment-net $ 550,000 $ 250,000

Consolidated amounts for equipment and accumulated depreciation at December 31, 2005 were respectively

a. $1,025,000 and $245,000.b. $1,025,000 and $250,000.c. $1,025,000 and $245,000.d. $1,050,000 and $250,000.

LO214. Peregrine Corporation acquired a 90% interest in Cliff

Corporation in 2004 at a time when Cliff’s book values and fair values were equal to one another. On January 1, 2005, Cliff sold a truck with a $45,000 book value to Peregrine for $90,000. Peregrine is depreciating the truck over 10 years using the straight-line method. Separate incomes for Peregrine and Cliff for 2005 were as follows:

Peregrine CliffSales $ 1,800,000 $ 1,050,000Gain on sale of truck 45,000Cost of Goods Sold ( 750,000) ( 285,000)Depreciation expense ( 450,000) ( 135,000)Other expenses ( 180,000) ( 450,000)Separate incomes $ 420,000 $ 225,000

Peregrine’s investment income from Cliff for 2005 was

a. $161,550.b. $162,000.c. $166,050.d. $202,500.


LO215. Kestrel Company acquired an 80% interest in Reptile Corporation

on January 1, 2004. On January 1, 2005, Reptile sold a building with a book value of $50,000 to Kestrel for $80,000. The building had a remaining useful life of ten years and no salvage value. The separate balance sheets of Kestrel and Reptile on December 31, 2005 included the following balances:

Kestrel ReptileBuildings $ 400,000 $ 250,000Accumulated Depreciation - Buildings

120,000 75,000

The consolidated amounts for Buildings and Accumulated Depreciation - Buildings that appeared, respectively, on the balance sheet at December 31, 2005, were

a. $620,000 and $192,000.b. $620,000 and $195,000.c. $650,000 and $192,000.d. $650,000 and $195,000.

LO216. Pigeon Corporation purchased land from its 60%-owned

subsidiary, Seed Inc., in 2003 at a cost $30,000 greater than Seed’s book value. In 2005, Pigeon sold the land to an outside entity for $40,000 more than Pigeon’s book value. The 2005 consolidated income statement reported a gain on the sale of land of

a. $40,000.b. $42,000.c. $58,000.d. $70,000.

LO217. Pied Imperial-Pigeon Corporation acquired a 90% interest in

Offshore Corporation in 2003 when Offshore’ book values were equivalent to fair values. Offshore sold equipment with a book value of $80,000 to Pied Imperial-Pigeon for $130,000 on January 1, 2005. Pied Imperial-Pigeon is fully depreciating the equipment over a 4-year period by using the straight-line method. Offshore’ reported net income for 2005 was $320,000. Pied Imperial-Pigeon’s 2005 net income from Offshore was

a. $249,250.b. $250,500.c. $254,250.d. $288,000.


LO318. Lorikeet Corporation acquired a 80% interest in Nectar

Corporation on January 1, 2000 at a cost equal to book value and fair value. In the same year Nectar sold land costing $30,000 to Lorikeet for $50,000 On July 1, 2005, Lorikeet sold the land to an unrelated party for $110,000. What was the gain on the consolidated income statement?

a. $48,000.b. $60,000.c. $64,000.d. $80,000.

LO419. On January 1, 2005 Rainforest Co. recorded a $30,000 profit on

the upstream sale of some equipment that had a remaining four-year life under the straight-line depreciation method. The effect of this transaction on the amount recorded in 2005 by the parent company Wompoo as its investment income in the Rainforest was

a. a decrease of $18,000 if the Rainforest was 80% owned.b. a decrease of $27,000 if the Rainforest was 90% owned.c. an increase of $22,500 if the Rainforest was wholly owned.d. an increase of $30,000 if the Rainforest was wholly owned.

LO420. Swift Parrot Corporation acquired a 60% interest in Berries

Corp. on January 1, 2005, when Berries’s book values and fair values were equivalent. On January 1, 2005, Berries sold a building with a book value of $600,000 to Swift Parrot for $700,000. The building had a remaining life of 10 years, no salvage value, and was depreciated by the straight-line method. Berries reported net income of $2,000,000 for 2005. What was the noncontrolling interest for 2005?

a. $710,000.b. $764,000.c. $800,000.d. $900,000.


LO1Exercise 1

Spiniflex Pigeon Company owns 90% of the outstanding stock of Waterhole Corporation. This interest was purchased on January 1, 1999, when Waterhole’s book values were equal to its fair values. The amount paid by Spiniflex Pigeon included $10,000 for goodwill.

On January 1, 2000, Spiniflex Pigeon purchased equipment for $100,000 which had no salvage value with a useful life of 8 years. on a straight-line basis. On January 1, 2005, Spiniflex Pigeon sold the truck to Waterhole Corporation for $40,000. The equipment was estimated to have a four-year remaining life on this date. All affiliates use the straight-line depreciation method.

Required:

Prepare all relevant entries with respect to the truck.

1. Record the journal entries on Spiniflex Pigeon’s books for 2005.

2. Record the journal entries on Waterhole’s books for 2005.


LO1&2Exercise 2

Stork Corporation paid $15,700 for a 90% interest in Swamp Corporation on January 1, 2004, when Swamp stockholders’ equity consisted of $10,000 Capital Stock and $3,000 of Retained Earnings. The excess cost over book value was attributable to goodwill.

Additional information:

1. Stork sells merchandise to Swamp at 120% of Stork’s cost. During 2004, Stork’s sales to Swamp were $4,800, of which half of the merchandise remained in Swamp’s inventory at December 31, 2004. During 2005, Stork’s sales to Swamp were $6,000 of which 60% remained in Swamp’s inventory at December 31, 2005. At year-end 2005 Swamp owed Stork $1,500 for the inventory purchased during 2005.

2. Stork Corporation sold equipment with a book value of $2,000 and a remaining useful life of four years and no salvage value to Swamp Corporation on January 1, 2005 for $2,800.

3. Separate company financial statements for Stork Corporation and Subsidiary at December 31, 2005 are summarized in the first two columns of the consolidation working papers.

4. Helpful hint: Stork's investment in Swamp account balance at December 31, 2004 consisted of the following:

Investment cost $ 15,700 Equity in Swamp’s income for 2004 3,600 Less: Unrealized inventory profit ( 400)

Less: Dividends received from Swamp ( 1,800) Investment in Swamp, December 31, 2004 $ 17,100

Required:

Complete the working papers to consolidate the financial statements of Stork Corporation and subsidiary for the year ended December 31, 2005.


Stork Corporation and SubsidiaryConsolidation Working Papers

at December 31, 2005

Stork SwampEliminations Non-

Cntrl.BalanceSheetDebit Credit

INCOME STATEMENTSales $ 60,000 $14,000Income fromSwamp 4,500Gain onequipment sale 800

Cost of Sales ( 26,000) ( 4,400)Other Expenses ( 28,000) ( 3,600)Net income 11,300 6,000RetainedEarnings 1/1 9,500 5,000Add: Net income 11,300 6,000Dividends ( 7,000) ( 2,000)RetainedEarnings 12/31 $ 13,800 $ 9,000BALANCE SHEETCash 6,000 3,000Receivables 7,000 4,000Inventories 10,000 4,500Equipment-net 24,000 9,000Land 4,000 3,500Investment inSwamp 19,800GoodwillTOTAL ASSETS $ 70,800 $24,000LIAB. & EQUITYAccounts payable

7,000 5,000

CapitalStock 50,000 10,000RetainedEarnings 13,800 9,0001/1 Noncontrl.Interest12/31 Noncontrl.InterestTOTAL LIAB. & EQUITY $ 70,800 $24,000


LO1&2Exercise 3

Dove Corporation acquired all of the outstanding voting common stock of the Squab Corporation several years ago when the book values and fair values of Squab’s net assets were equal.

On April 1, 2003, Dove sold land that cost $25,000 to Squab for $40,000. Squab resold the land for $45,000 on December 1, 2005.

On July 1, 2005, Dove sold equipment with a book value of $10,000 to Squab for $26,000. Squab is depreciating the equipment over a four-year period using the straight-line method.

Required:The first two columns in the working papers presented below summarize income statement information from the separate company financial statements of Dove and Squab for the year ended December 31, 2005. Fill in the consolidated working paper columns to show how each of the items from the separate company reports will appear in the consolidated income statement.

Dove Squab ConsolidatedSales 450,000 200,000Income from Squab 46,000Gain on sale of equipment 16,000Gain on sale of land 5,000Cost of sales ( 211,500) ( 91,500)Depreciation expense ( 45,500) ( 23,500)Other expenses ( 120,000) ( 34,000)Net income 135,000 56,000


LO1&2Exercise 4

Brolga Corporation paid $26,800 cash for a 70% interest in Dance Company on January 1, 2004, when Dance’s stockholders’ equity consisted of $15,000 Capital Stock and $9,000 of Retained Earnings.

Additional information:

1. The cost-book value differential was allocated to a patent with a 20-year amortization period.

2. Brolga Corporation sold inventory items that cost $4,000 to Dance for $4,800 during 2004 and one-half of these inventory items remained unsold by Dance on December 31, 2004.

3. During 2005 Brolga Corporation sold inventory items that cost $5,000 to Dance for $6,000 and 30% of these inventory items remained unsold by Dance on December 31, 2005. Dance Corporation owed Brolga $700 on account at year-end 2005.

4. Brolga Corporation sold equipment with a 5-year remaining life and a book value of $4,000 to Dance for $5,000 on January 1, 2005. Straight-line depreciation is used.

5. Brolga and Dance pay annual dividends of $10,000 and $3,000, respectively.

6. Separate financial statements for Brolga and Dance Corporations appear on partially completed consolidation working papers.

Required:

Complete the working papers to consolidate the financial statements for 2005.


Brolga Corporation and SubsidiaryConsolidation Working Papers


Brolga DanceEliminations Non-

Cntrl.Consol-idatedDebit Credit

INCOME STATEMENTSales $ 90,000 $35,000Income fromDance 2,300Gain onequipment sale 1,000Cost of sales ( 40,000) ( 20,000)Depreciation exp ( 6,000) ( 2,000)Other Expenses ( 24,500) ( 8,000)Net income 22,800 5,000RetainedEarnings 1/1 25,000 12,000Add: Net income 22,800 5,000Dividends ( 10,000) ( 3,000)RetainedEarnings 12/31 $ 37,800 $14,000BALANCE SHEETCash 10,350 1,500Receivables 1,500 2,700Dividends Rec 1,050Inventories 12,000 6,000Equipment-net 41,000 23,500Investment inDance 28,200PatentTOTAL ASSETS $ 94,100 $33,700LIAB. & EQUITYAccounts payable 6,300 2,200Dividend payable 1,500Other Debt 10,000 1,000Capital stock 40,000 15,000RetainedEarnings 37,800 14,0001/1 Noncontrl.Interest12/31 Noncontrl.InterestTOTAL LIAB. & EQUITY

$ 94,100 $33,700


LO2

Exercise 5

Barn Owl Corporation acquired 70% of the outstanding voting stock of Cave Inc. on January 1, 2003 for $60,000 less than book value. The $60,000 reduction was all assigned to a tractor. The tractor had a remaining life of 15 years. On April 1, 2003, Cave sold land to Barn Owl for a gain of $40,000 and originally cost $35,000. Barn Owl sold the property for $85,000 on October 1, 2005. Barn Owl sold equipment for $96,000 to Cave on January 1, 2004 which had a book value of $80,000. The equipment cost Barn Owl $72,000. The equipment had a remaining useful life of 8 years on the sale date and is depreciated under the straight-line method.

Required:

Prepare a schedule for the calculation of consolidated net income for Barn Owl and subsidiary for 2003, 2004 and 2005.

2003 2004 2005Barn Owl’s separate income 300,000 225,000 60,000Cave’s net income 90,000 110,000 120,000

LO2Exercise 6

Separate income statements of Nightjar Corporation and its 90%-owned subsidiary, Branch Inc., for 2005 were as follows:

Nightjar BranchSales Revenue $ 2,000,000 $ 1,200,000Cost of sales ( 1,200,000 ) ( 800,000 )Other expenses ( 400,000 ) ( 200,000 )Gain on equipment 80,000 Income from Branch 180,000Net income $ 660,000 $ 200,000

Additional information:1. Nightjar acquired its 90% interest in Branch Inc. when the book

values were equal to the fair values.

2. The gain on equipment relates to equipment with a book value of $120,000 and a 4-year remaining useful life that Branch sold to Nightjar for $200,000 on January 2, 2005. The straight-line depreciation method is used.

3. In 2004 Nightjar sold inventory to Branch of which the remainder was sold in 2005.


2004 2005Intercompany sales $ 300,000 200,000Cost of intercompany sales 180,000 120,000Percentage unsold at year-end 40 50

Required:

Prepare a consolidated income statement for Nightjar Corporation and Subsidiary for the year ended December 31, 2005.

LO2&3Exercise 7

Osprey Corporation created a wholly owned subsidiary, Branch Corporation, on January 1, 2003, at which time Osprey sold land with a book value of $90,000 to Branch at its fair market value of $140,000. Also, on January 1, 2003, Osprey sold to Branch equipment with a book value of $130,000 and a fair value of $165,000. The equipment had a remaining useful life of 4 years and is being depreciated under the straight-line method. On January 1, 2005, Branch resold the land to an outside entity for $150,000. Branch continues to use the equipment purchased from Osprey.

Income statements for Osprey and Branch for the year ended December 31, 2005 are summarized below:

Osprey BranchSales $ 450,000 $ 100,000Gain on sale of land 10,000Income from Branch 55,000Cost of sales ( 220,000 ) ( 50,000 )Depreciation expense ( 95,000 ) ( 32,000 )Other expenses ( 37,000 ) ( 8,000 )Net income $ 153,000 $ 20,000

Required:

At what amounts did the following items appear on a consolidated income statement for Osprey Corporation and Subsidiary for the year ended December 31, 2005?

1. Gain on Sale of Land2. Depreciation Expense3. Consolidated net income


LO3Exercise 8

Separate income statements of Quail Corporation and its 80%-owned subsidiary, Savannah Corporation, for 2005 are as follows:

Quail SavannahSales Revenue $ 800,000 $ 300,000Gain on equipment 35,000Gain on land 20,000Cost of sales ( 400,000 ) ( 160,000 )Other expenses ( 265,000 ) ( 60,000 )Separate incomes $ 170,000 $ 100,000

Additional information:1. Quail acquired its 80% interest in Savannah Corporation when the

book values were equal to the fair values.

2. The gain on equipment relates to equipment with a book value of $85,000 and a 7-year remaining useful life that Quail sold to Savannah for $120,000 on January 2, 2005. The straight-line depreciation method was used.

3. In 2005, Savannah sold land to an outside entity for $80,000. The land was acquired from Quail in 2003 for $60,000. The original cost of the land to Quail was $35,000.

Required:

Prepare a consolidated income statement for Quail Corporation and Subsidiary for the year 2005.


LO3Exercise 9

Cassowary Corporation acquired a 70% interest in Fruit Corporation in 1999 at a time when Fruit’s book values and fair values were equal. In 2003, Fruit sold land to Cassowary for $82,000 that cost $72,000. The land remained in Cassowary’s possession until 2005 when Cassowary sold it outside the combined entity for $102,000.

After the books were closed in 2005, it was discovered that Cassowary had not considered the unrealized gain from its intercompany purchase of land in preparing the consolidated financial statements. The only entry on Cassowary’s books was a debit to Land and a credit to Cash in 2003 for $82,000, and, in 2005, a debit to Cash for $102,000 and credits to Land for $82,000 and Gain on sale of land for $20,000.

Before the discovery of the error, the consolidated financial statements disclosed the following amounts:

2003 2004 2005Consolidated net income $ 750,000 $ 600,000 $ 910,000Land 200,000 240,000 300,000

Required:

1. Determine the correct amounts of consolidated net income for 2003, 2004, and 2005.

2. Determine the correct amounts for Land in 2003, 2004, and 2005.

3. Calculate the amount at which the gain on the sale of land should have been reported in 2005.


LO2&4Exercise 10

Buzzard Corporation acquired 70% of the outstanding voting common stock of Tool Inc. in 1998. On January 1, 1999, Tool Inc. purchased a depreciable machine for $120,000 cash with an estimated useful life of 10 years that was depreciated on a straight-line basis. Tool used the machine until the end of 2004. On January 2, 2005, Tool sold the machine to Buzzard who continued to use the same estimated life and depreciation method that was used by Tool.

At the end of 2005, Buzzard made the following elimination entry in the consolidation working papers.

Machine 22,000 Gain on Sale of Machine 14,000 Depreciation Expense 2,000 Accumulated Depreciation 34,000

Required:

Answer the following questions concerning Buzzard and Tool.

1. How much depreciation expense did Buzzard record in 2005?

2. What amounts were reported for the Machine and the Accumulated Depreciation in the consolidated balance sheet on December 31, 2005?

3. If Tool reported $60,000 of net income for 2005, what amount was assigned to the non-controlling interest?


SOLUTIONS

Multiple Choice Questions

1 c

2 b

3 c

4 a

5 a

6 d

7 b ($15,000 gain/ 3 years)

8 a ($53,000 - $50,000)

9 b $98,000 + [($55,000 - $15,000 +$5,000) x 60%] = $ 125,000

10 a ($55,000 - $15,000 + $5,000) x 40%= $ 18,000

11 a

12 d

13 a Combined equipment amounts $ 1,050,000Less: gain on sale ( 25,000 )Consolidated equipment balance $ 1,025,000

Combined Accumulated Depreciation $ 250,000Less: Depreciation on gain ( 5,000 )Consolidated Accumulated Depreciation $ 245,000

14 c Cliff reported income $ 225,000Less: Intercompany gain on truck ( 45,000 )Plus: Piecemeal recognition of gain = $45,000/10 years 4,500Cliff’s adjusted income 184,500Majority percentage 90%Income from Cliff $ 166,050

15 a Combined building amounts $ 650,000©2009 Pearson Education, Inc. publishing as Prentice Hall

6-19

Less: Intercompany gain ( 30,000 )Consolidated building amounts $ 620,000

Combined Accumulated Depreciation $ 195,000Less: Piecemeal recognition of gain ( 3,000 )Consolidated accumulated depreciation $ 192,000

16 d

17 c Pied Imperial-Pigeon’s share of Roger’s income = ($320,000 x 90%) =

$ 288,000

Less: Profit on intercompany sale ($130,000 - $80,000) x 90% = ( 45,000 )Add: Piecemeal recognition of deferred profit ($50,000/4 years) x 90% = 11,250Income from Offshore $ 254,250

18 d

19 c $30,000 - (1/4 x $30,000) = $ 22,500

20 b

Exercise 1


Requirement 1: Spiniflex Pigeon’s books

01/01/05 Cash 40,000Accumulated Depreciation 62,500 Equipment 100,000 Gain on Sale 2,500

Requirement 2: Waterhole’s books

01/01/05 Equipment 40,000 Cash 40,000

12/31/05 Depreciation Expense 7,500 Accumulated Depreciation 7,500

Exercise 2

Stork Corporation and SubsidiaryConsolidation Working Papers


Stork SwampEliminations Non-

contl.Consol-idatedDebit Credit

INCOME STATEMENTSales $ 60,000 $14,000 a $ 6,000 $68,000Income fromSwamp 4,500 e 4,500Gain onequipment sale 800 d 800

Cost of Sales ( 26,000) ( 4,400)b 600 a

c$ 6,000

400 (24,600)Other Expenses ( 28,000) ( 3,600) d 200 (31,400)Minority income 600( 600)Net income 11,300 6,000 11,400RetainedEarnings 1/1 9,500 5,000 f 5,000 9,500Add: Net income 11,300 6,000 11,400Dividends ( 7,000) ( 2,000) e 1,800( 200) ( 7,000)RetainedEarnings 12/31 $ 13,800 $ 9,000 $13,900BALANCE SHEETCash 6,000 3,000 9,000Receivables 7,000 4,000 g 1,500 9,500Inventories 10,000 4,500 b 600 13,900Equipment-net 24,000 9,000 d 600 32,400Land 4,000 3,500 7,500Investment inSwamp 19,800

c 400 ef

2,70017,500

Goodwill f 4,000 g 4,000


TOTAL ASSETS $ 70,800 $24,000 $76,300LIAB. & EQUITYAccounts payable

7,000 5,000 g 1,500 10,500

CapitalStock 50,000 10,000 f 10,000 50,000RetainedEarnings 13,800 9,000 13,9001/1 Noncntrl.Interest f 1,500 1,50012/31 Noncntrl.Interest 1,900 1,900TOTAL LIAB. & EQUITIES

$ 70,800 $24,000 $76,300

Exercise 3

Dove Squab ConsolidatedSales 450,000 200,000 650,000Income from Squab 46,000 0Gain on sale of equipment 16,000 0Gain on sale of land 5,000 20,000Cost of sales ( 211,500) ( 91,500) ( 303,000)Depreciation expense ( 45,500) ( 23,500) ( 67,000)Other expenses ( 120,000) ( 34,000) ( 154,000)Net income 135,000 56,000 146,000

Exercise 4

Brolga Corporation and SubsidiaryConsolidation Working Papers


Brolga DanceEliminations Non-

Contrl.Consol-idatedDebit Credit

INCOME STATEMENTSales $ 90,000 $35,000 a $ 6,000 $ 119,000Income from Dance

2,300 f 2,300

Gain onequipment sale 1,000 d 1,000Cost of sales ( 40,000) ( 20,000) c 300 a

b$ 6,000

400 ( 53,900)Depreciation exp ( 6,000) ( 2,000) e 200 ( 7,800)Minority income $ 1,500 ( 1,500)Other Expenses ( 24,500) ( 8,000) h 500 ( 33,000)Net income 22,800 5,000 22,800RetainedEarnings 1/1 25,000 12,000 g 12,000 25,000Add: Net income 22,800 5,000 22,800


Dividends ( 10,000) ( 3,000) f 2,100( 900) ( 10,000)RetainedEarnings 12/31 $ 37,800 $14,000 $37,800BALANCE SHEETCash 10,350 1,500 11,850Receivables 1,500 2,700 i 700 3,500Dividends Rec 1,050 j 1,050Inventories 12,000 6,000 c 300 17,700Equipment-net 41,000 23,500 e 200 d 1,000 63,700Investment inDance 28,200

b 400 gf

28,400200

Patent g 9,500 h 500 9,000TOTAL ASSETS $ 94,100 $33,700 $105,750LIAB. & EQUITYAccounts payable 6,300 2,200 i 700 7,800Dividend payable 1,500 j 1,050 450Other Debt 10,000 1,000 11,000Capital stock 40,000 15,000 g 15,000 40,000RetainedEarnings 37,800 14,000 37,8001/1 Noncontrl.Interest g 8,100 8,10012/31 Noncontrl.Interest 8,700 8,700TOTAL LIAB. & EQUITY

$ 94,100 $33,700 $105,750

Exercise 5


2003 2004 2005Barn Owl’s separate income 300,000 225,000 60,000Cave’s net income 90,000 110,000 120,000Tractor Adjustment 4,000 4,000 4,000Land gain (40,000) 38,000Equipment gain (16,000)Depreciation Expense (2,000) (2,000) (2,000)Minority Interest Expense (15,000) (33,000) (39,000)Net Income 321,000 304,000 181,000

Tractor Adjustment 60,000/15 4,000 4,000 4,000Land gain (40,000) (40,000)Land gain 28,000+10,000 38,000Equipment (16,000)Depreciation expense (96,000-80,000)/8

(2,000) (2,000) (2,000)

Minority Interest Expense[90,000-40,000]*.3=15,000

(15,000)

Minority Interest Expense110,000*.3

(33,000)

Minority Interest Expense(85,000-75,000)*.3=3,000 +120,000*.3

(39,000)


Exercise 6

Nightjar Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 2005

Sales (see below) $ 3,000,000Cost of sales (see below) ( 1,792,000 )Other expenses (see below) ( 580,000 )Minority interest (see below) ( 20,000 )Consolidated net income $ 608,000

Sales:$2,000,000 + 1,200,000 - 200,000 $ 3,000,000

Cost of Sales$1,200,000 + 800,000 - 200,000 - 48,000 + 40,000 $ 1,792,000

Other expenses:$400,000 + 200,000 - 20,000 $ 580,000

Minority incomeNet income from Branch x 10%: ($200,000 x 10%) = $ 20,000


Exercise 7

Requirement 1

The gain on the sale of the land in 2005 was equal to the sales price minus the original cost of the land when it was first acquired by the combined entity. In this case the gain was $150,000 - $90,000, or $60,000.

Requirement 2

The consolidated amount of depreciation expense was the combined amounts of depreciation expense showing on the separate income statements minus the piecemeal recognition of the gain on the sale of the equipment. Thus, the consolidated amount of depreciation expense was $95,000 + $32,000 – ($35,000/4 years) = $118,250.

Requirement 3

Consolidated net income:Osprey separate income (not including Income from Branch)= $153,000 - $55,000 = $ 98,000Income from Branch 20,000Plus: Deferred gain on land 50,000Plus: Piecemeal recognition of gain on equipment sale: $35,000 gain/4 years = 8,750Consolidated net income $176,750

Exercise 8

Quail Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 2005

Sales $ 1,100,000Gain on land ($20,000 + $25,000) 45,000Cost of sales ( 560,000 )Other expenses (see below) ( 320,000 )Minority interest (see below) ( 20,000 )Consolidated net income $ 245,000

Other expenses:$265,000 + $60,000 - $5,000 piecemeal recognition of gain on equipment $ 320,000

Minority incomeNet income from Savannah x 20%: ($100,000 x 20%) = $ 20,000


Exercise 9

Requirement 1 2003 2004 2005Consolidated net income as reported $ 750,000 $ 600,000 $ 910,000Less: $10,000 deferred gain -10,000Plus: Minority interest portion of the gain 3,000Plus: Deferred gain 7,000Corrected consolidated net income $ 743,000 $ 600,000 $ 917,000

Requirement 2 2003 2004 2005Land account as reported $ 200,000 $ 240,000 $ 300,000Less: Intercompany profit -10,000 -10,000Restated land account $ 190,000 $ 230,000 $ 300,000

Requirement 3Final sales price outside the entity minus the original cost to the combined entity equals $102,000 minus $72,000 = $30,000


Exercise 10

Requirement 1

On the consolidated balance sheet, the machine must be reported at its original cost when Tool purchased it on January 1, 1999, which is $120,000. Since the elimination entry debited the machine account for $22,000 which must be the amount needed to bring the machine account up to $120,000, Buzzard must have recorded the machine at $98,000. Since the remaining useful life is seven years, Buzzard will record $14,000 of depreciation expense each year.

Requirement 2

The correct balances on the consolidated balance sheet for the Machine and Accumulated Depreciation accounts are the balances that would be in the accounts if there had been no sale. The balance in the machine account would be the original purchase price to Tool or $120,000. The balance in the Accumulated Depreciation account will be the original amount of annual depreciation, ($12,000) times the number of years the machine has been depreciated (4), or $48,000.

Requirement 3

The minority interest income will be 30% of Tool’ adjusted net income. Tool’ reported net income of $60,000 is reduced by the $14,000 unrealized gain on the sale of the machine and is increased by the piecemeal recognition of the gain, which is $2,000. The net result of $48,000 is then multiplied by 30% to calculate a $14,400 income for the non-controlling interest.


Chapter 06 - Intercompany Profit Transactions - Plant Assets

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Transcript of Chapter 06 - Intercompany Profit Transactions - Plant Assets