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Intercompany profit transactions inventories

Intercompany profit transactions inventories

 

 

Intercompany profit transactions inventories

Answers to Questions

1              Profits and losses on sales between affiliated companies are realized for consolidated statement purposes when the purchasing affiliate resells the merchandise to parties outside of the consolidated entity. If all merchandise sold to affiliates is resold to outside parties in the same period, there will be no unrealized profit to eliminate in preparing the consolidated financial statements.

2              Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits according to ARB No. 51.

3              The amount of unrealized profit to be eliminated in the preparation of consolidated financial statements is not affected by the existence of a noncontrolling interest. All unrealized profit must be eliminated. In the case of upstream sales, however, the unrealized profit should be allocated between majority and noncontrolling interests.

4              The elimination of intercompany sales and purchases does not affect consolidated net income. This is because equal amounts are deducted from sales and cost of sales and the net effect on consolidated net income is nil. The importance of the elimination lies in a correct statement of consolidated sales and cost of sales.

5              Consolidated working capital is not affected by the elimination of intercompany accounts receivable and accounts payable balances. Since equal amounts are deducted from current assets and current liabilities, the effect on the computation "current assets less current liabilities" is nil.

6              Upstream sales are sales from subsidiary to parent company. Downstream sales are sales from parent company to subsidiary. The importance of this designation lies in the fact that the profit or loss on such transactions is the selling affiliate's profit or loss. In the case of unrealized profit or loss on downstream sales, all the profit or loss is assigned to the parent company-seller. But unrealized profit or loss on upstream sales is profit or loss of the subsidiary-seller and is assigned to the parent company and noncontrolling interest in relation to their proportionate holdings.

7              Yes. If unrealized profits are not eliminated at year end, consolidated net income will be overstated. The ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the beginning inventory will understate consolidated net income. The analysis of the effect of unrealized inventory profits on consolidated net income is basically the same as the analysis for inventory errors. Like inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting periods. Consolidated net income for 2008 is not affected.

8              The noncontrolling interest expense is affected by upstream sales if the merchandise has not been resold by the parent company to outside parties by the end of the accounting period. This is because the noncontrolling interest expense is based on the income of the subsidiary. If the subsidiary has unrealized profit from intercompany sales, its realized income will be less than its reported income. The noncontrolling interest expense should be based on the realized income of the subsidiary.

9              A parent company's investment income and investment accounts are adjusted for unrealized profits on intercompany sales to subsidiaries in accordance with the one-line consolidation concept. The parent company reduces its investment and investment income accounts for the full amount of the unrealized profits in the year of intercompany sale. When the goods are sold to outside parties by the subsidiary, the profits of the parent company are realized and the parent company increases its investment and investment income accounts.

10           Combined cost of goods sold is overstated when there are unrealized profits in the beginning inventory and understated when there are unrealized profits in the ending inventory. The elimination of unrealized profits in the beginning inventory reduces (credits) cost of goods sold and the elimination of unrealized profits in the ending inventory increases (debits) cost of goods sold.

11           The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling interest or by the direction of the intercompany sales. All unrealized profit from both upstream and downstream sales is eliminated from consolidated cost of goods sold.

12           Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is eliminated by reducing (crediting) cost of sales and debiting the investment account if a correct equity method has been used and the intercompany sales are downstream. In the case of upstream sales, cost of sales is credited and the noncontrolling interest and the investment account are debited proportionately. When the parent company does not adjust its investment account for unrealized profits from intercompany sales, the above debits to the investment account would be to retained earnings.

13           There are two equally good approaches for computing noncontrolling interest expense when there are unrealized profits from upstream sales in both beginning and ending inventories. One approach is to compute realized income of the subsidiary by adding unrealized profits in the beginning inventory to reported subsidiary net income and deducting unrealized profits in the ending inventory. The noncontrolling interest expense is then equal to the realized income of the subsidiary multiplied by the noncontrolling interest percentage.
The other approach is to compute the noncontrolling interest percentage in reported subsidiary net income, in unrealized profits in beginning inventory, and in unrealized profits in ending inventory. Noncontrolling interest expense is then computed by adding the noncontrolling interest percentage in unrealized profits in the beginning inventory to the noncontrolling interest share of reported income, and subtracting the noncontrolling interest percentage relating to the unrealized profits in the ending inventory.

14           The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a convenience, but it does not result in incorrect measurements of consolidated net income as long as the unrealized profits at any statement date are correctly determined. This is because any unrealized profits in beginning inventory that are considered realized are credited to cost of sales. The same items will appear as unrealized profits in the ending inventory if they remain unsold, and the elimination of these items results in debiting cost of sales for the same amount. Thus, the working paper effects are offsetting as illustrated in the following working paper entries, which assume $5,000 unrealized profits from downstream sales.

 

 

 

 

 

 

 

 

 

 

 

Investment in subsidiary (retained earnings)

 5,000

 

 

                               Cost of sales

 

 5,000

 

                To eliminate unrealized profit in beginning inventory.

 

 

 

 

 

 

 

Cost of sales

 5,000

 

 

                               Inventory

 

 5,000

 

                To eliminate unrealized profit in ending inventory.

 

 

 


SOLUTIONS TO EXERCISES

 

Solution E5-1

 

1     a                                5     c

2     d                                6     a

3     a                                7     a

4     c                                8     c

 

Solution E5-2 [AICPA adapted]

 

1     a

 

2     c

      Unrealized profits from intercompany sales with Kent are eliminated from the ending inventory: $320,000 combined current assets less $12,000 unrealized profit ($60,000 20%).

 

3     c

      Combined cost of sales of $750,000 less $250,000 intercompany sales

 

Solution 5-3

 

1     d

 

 

 

 

 

 

 

 

Philly's separate income

$1,000,000

 

Add: Share of Silvio's income ($500,000 100%)

   500,000

 

Add: Realization of profit deferred in 2006

 

 

  $1,500,000 - ($1,500,000/150%)

   500,000

 

Less: Unrealized profit in 2007 inventory

 

 

  $1,200,000 - ($1,200,000/150%)

  (400,000)

 

Consolidated net income

$1,600,000

 

2     d

 

 

 

 

Combined sales

$1,400,000

 

Less: Intercompany sales

   (50,000)

 

Consolidated sales

$1,350,000

 

3     c

 

 

 

 

 

 

 

Combined cost of sales

$  680,000

 

Less: Intercompany purchases

   (50,000)

 

 

 

 

Less: Unrealized profit in beginning inventory

    (4,000)

 

Add: Unrealized profit in ending inventory

    10,000

 

Consolidated cost of sales

$  636,000

 


Solution E5-4

 

1     b

 

 

 

 

 

Pride's share of Sedita's income ($60,000 80%)

$   48,000

 

Less: Unrealized profit in ending inventory

 

 

  ($20,000 50% unsold 80% owned)

    (8,000)

 

Income from Sedita

$   40,000

 

2     d

 

 

 

 

 

Combined cost of sales

$  450,000

 

Less: Intercompany sales

  (100,000)

 

Add: Unrealized profit in ending inventory

    10,000

 

Consolidated cost of sales

$  360,000

 

3     b

 

 

 

 

 

 

Reported income of Sedita

$   60,000

 

Unrealized profit

   (10,000)

 

Sedita's realized income

    50,000

 

Noncontrolling interest percentage

        20%

 

Noncontrolling interest expense

$   10,000

 

Solution E5-5

 

1     c

 

 

 

 

Combined sales

$1,800,000

 

Less: Intercompany sales

  (400,000)

 

Consolidated sales

$1,400,000

 

2     c

 

 

 

 

 

 

Unrealized profit in beginning inventory

 

 

  $100,000 - ($100,000/125%)

$   20,000

 

 

 

 

Unrealized profit in ending inventory

 

 

  $125,000 - ($125,000/125%)

$   25,000

 

3     b

 

 

 

 

 

 

 

 

Combined cost of goods sold

$1,440,000

 

Less: Intercompany sales

  (400,000)

 

Less: Unrealized profit in beginning inventory

 

 

  $100,000 - ($100,000/125%)

   (20,000)

 

Add: Unrealized profit in ending inventory

 

 

  $125,000 - ($125,000/125%)

    25,000

 

Consolidated cost of goods sold

$1,045,000

 


Solution E5-6

 

1     a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patti's separate income

$200,000

 

Add: Income from Susan:

 

 

Share of Susan's reported income ($200,000 70%)

 140,000

 

Less: Patents amortization

 (20,000)

 

Add: Unrealized profit in beginning inventory

 

 

  [$112,500 - ($112,500/150%)] 70%

  26,250

 

Less: Unrealized profit in ending inventory

 

 

  [$33,000 - ($33,000/150%)] 70%

  (7,700)

 

Consolidated net income

$338,550

 

 

 

 

Noncontrolling interest expense:

 

 

Susan's reported income

$200,000

 

Add: Unrealized profit in beginning inventory

  37,500

 

Less: Unrealized profit in ending inventory

 (11,000)

 

Susan's realized income

 226,500

 

Noncontrolling interest percentage

     30%

 

Noncontrolling interest expense

$ 67,950

 

2     c

 

 

 

 

 

 

 

 

Packman's share of Slocum's reported net loss

 

 

  ($150,000 loss 60%)

$(90,000)

 

Add: Unrealized profit in ending inventory

 

 

  ($200,000 1/4 unsold)

 (50,000)

 

Income from Slocum

(140,000)

 

Packman's separate income

 300,000

 

Consolidated net income

$160,000

 

3     b

 

 

 

 

 

 

 

Parnell's share of Santini's income ($300,000 75%)

$225,000

 

Add: Realized profit in beginning inventory

 

 

  $150,000 - ($150,000/1.25) 75%

  22,500

 

Less: Deferred profit in ending inventory

 

 

  $200,000 - ($200,000/1.25) 75%

 (30,000)

 

Income from Santini

$217,500

 

Solution E5-7

 

 

 

 

 

 

 

 

 

 

2007

2008

2009

Pansy's separate income

$300,000

$400,000

$350,000

Add: 80% of Sheridan's reported income

 400,000

 440,000

 380,000

Add: Realization of profits in

 

 

 

  beginning inventory

 

  30,000

  40,000

Less: Unrealized profits in ending

 

 

 

  inventory

  (30,000)

  (40,000)

  (20,000)

Consolidated net income

$670,000

$830,000

$750,000

 


Solution E5-8

 

Pycus Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales ($400,000 + $100,000 - $40,000 intercompany sales)

$  460,000

 

 

Cost of sales ($200,000 + $60,000 - $40,000 intercompany

 

  purchases + $10,000 unrealized profit in ending inventory)

  (230,000)

 

 

      Gross profit

   230,000

 

 

Other expenses ($100,000 + $30,000)

  (130,000)

 

 

      Total consolidated income

   100,000

 

 

Less: Noncontrolling interest expense ($10,000 20%)

    (2,000)

 

 

      Consolidated net income

$   98,000

 

Solution E5-9

 

1     Noncontrolling interest expense

 

 

 

 

 

 

 

 

Seven's reported net income 40%

$   20,000

 

Add: Intercompany profit from upstream sales in

 

 

  beginning inventory ($5,000 40%)

     2,000

 

Less: Intercompany profit from upstream sales in

 

 

  ending inventory ($10,000 40%)

    (4,000)

 

      Noncontrolling interest expense

$   18,000

 

2     Consolidated sales

 

 

 

 

 

Combined sales

$1,250,000

 

Less: Intercompany sales

   100,000

 

Consolidated sales

$1,150,000

 

            Consolidated cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined cost of sales

$  650,000

 

Less: Intercompany sales

  (100,000)

 

Add: Intercompany profit in ending inventory

    10,000

 

Less: Intercompany profit in beginning inventory

    (5,000)

 

 

 

 

      Consolidated cost of sales

$  555,000

 

 

 

 

Total Consolidated Income

 

 

Combined income

$  300,000

 

Less: Intercompany profit in ending inventory

   (10,000)

 

Add: Intercompany profit in beginning inventory

     5,000

 

Total Consolidated Income

$  295,000

 


Solution E5-10

 

Papillion Corporation and Subsidiary

Consolidated Income Statement

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales ($1,000,000 + $500,000 - $90,000 intercompany)

$1,410,000

 

 

Cost of sales ($400,000 + $250,000 - $90,000 intercompany -

 

  $10,000 unrealized profit in beginning inventory + $15,000

 

    unrealized profit in ending inventory

  (565,000)

Gross profit

   845,000

 

 

Depreciation expense

  (170,000)

 

 

Other expenses ($90,000 + $60,000 + $4,000 patents amortization)

  (154,000)

 

 

Total consolidated income

   521,000

 

 

Less: Noncontrolling interest expense ($150,000 + $10,000 profit

 

in beginning inventory - $15,000 profit in end. inventory) 20%

   (29,000)

 

 

Consolidated net income

$  492,000

 

 

Supporting computations

 

Cost of investment in Saiki at January 1, 2007

$  600,000

Book value acquired ($700,000 80%)

  (560,000)

      Patents

$   40,000

Patents amortization ($40,000/10 years) = $4,000 per year

 

 

Solution E5-11

 

Pill Corporation and Subsidiary

Consolidated Income Statement

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales ($1,000,000 + $500,000 - $90,000 intercompany)

$1,410,000

 

 

Cost of sales ($400,000 + $250,000 - $90,000 intercompany -

 

  $10,000 unrealized profit in beginning inventory + $15,000

 

    unrealized profit in ending inventory

  (565,000)

 

 

Gross profit

   845,000

 

 

Depreciation expense

  (170,000)

 

 

Other expenses ($90,000 + $60,000)

  (150,000)

 

 

Total consolidated income

   525,000

 

 

Less: Noncontrolling interest income ($150,000 + $10,000 profit

 

in beginning inventory - $15,000 profit in end. inventory) 20%

   (29,000)

 

 

Consolidated net income

$  496,000

 

 

Supporting computations

 

Cost of investment in Saiki at January 1, 2010

$  600,000

Book value acquired ($700,000 80%)

  (560,000)

      Goodwill

$   40,000

 


Solution E5-12

 

1     b

 

 

 

 

 

 

 

 

 

Income as reported

$  200,000

 

Add: Realization of profits in beginning inventory

 

 

  $120,000 - ($120,000/1.2)

    20,000

 

Less: Unrealized profits in ending inventory

 

 

  $360,000 - ($360,000/1.2)

   (60,000)

 

Realized income

   160,000

 

Percent ownership

        60%

 

      Income from Suey

$   96,000

 

2     c

 

 

 

 

 

 

Suey's equity as reported ($3,400,000 + $2,100,000)

$5,500,000

 

Less: Unrealized profit in ending inventory

   (60,000)

 

Realized equity

 5,440,000

 

Noncontrolling share

        40%

 

      Noncontrolling interest December 31, 2011

$2,176,000

 

3     b

 

 

 

 

Realized equity

$5,440,000

 

Majority share

        60%

 

      Investment balance December 31, 2011

$3,264,000

 

Note: The excess cost over book value is fully amortized. Therefore, the investment balance of $3,264,000 plus the noncontrolling interest of $2,176,000 is equal to the $5,440,000 realized equity at the balance sheet date.

 

Solution E5-13 [AICPA adapted]

 

1     d

Combined revenues $340,000 - consolidated revenues $308,000

 

2     b

Combined accounts receivable $45,000 - $39,000 consolidated accounts receivable

 

3     c

Revenues $200,000/$150,000 cost of sales = 1 1/3 markup on cost

 

Amount of Spin's ending inventory from Pard ($32,000 intercompany sales 3/8 remaining unsold) = $12,000 at billed prices 3/4 = $9,000

 

4     b

      $10,000 noncontrolling interest/$50,000 stockholders' equity of Spin

 

5     a

      $30,000 unamortized patents/$2,000 amortization = 15 years remaining

 


Solution E5-14

 

Pullen Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales ($1,380,000 - $120,000 intercompany sales)

$1,260,000

 

 

Cost of sales ($920,000 - $120,000 - $5,000a + $12,000b)

  (807,000)

 

 

      Gross profit

   453,000

 

 

Operating expenses

  (160,000)

 

 

      Total consolidated income

   293,000

 

 

Less: Noncontrolling interest expense [$40,000 - ($12,000 .2)]

   (37,600)

 

 

      Consolidated net income

$  255,400

 

a  Unrealized profit in beginning inventory (downstream) ($180,000 - $160,000) .25 = $5,000

b  Unrealized profit in ending inventory (upstream ($120,000 - $90,000) .4 = $12,000

 

SOLUTIONS TO PROBLEMS

 

Solution P5-1

 

Proctor Corporation and Subsidiary

Consolidated Statement of Income and Retained Earnings

for the year ended December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales ($1,300,000 + $650,000 - $80,000 intercompany sales)

$1,870,000

 

 

Less: Cost of sales ($800,000 + $390,000 - $80,000 inter-

 

    company purchases - $12,000 unrealized profit in beginning

 

    inventory + $16,000 unrealized profit in ending inventory)

(1,114,000)

 

 

      Gross profit

   756,000

 

 

Other expenses ($340,000 + $160,000)

  (500,000

 

 

      Income before noncontrolling interest

   256,000

 

 

Noncontrolling interest expense($100,000+$12,000 - $16,000) 10%

    (9,600)

 

 

      Consolidated net income

   246,400

 

 

Add: Beginning consolidated retained earnings

   369,200

 

 

Less: Dividends for 2008

  (100,000)

 

 

      Consolidated retained earnings December 31, 2008

$  515,600

 


Solution P5-2

 

1     Consolidated cost of sales2007

 

 

 

 

 

 

 

 

Combined cost of sales ($625,000 + $300,000)

$  925,000

 

Less: Intercompany purchases

  (300,000)

 

Add: Profit in ending inventory

    24,000

 

Less: Profit in beginning inventory

   (12,000)

 

 

 

 

      Consolidated cost of sales

$  637,000

 

2     Noncontrolling interest expense2007

 

 

 

 

 

 

 

 

 

Slam's net income ($600,000 - $300,000 - $150,000)

$  150,000

 

Add: Profit in beginning inventory

    12,000

 

Less: Profit in ending inventory

   (24,000)

 

Slam's realized income

   138,000

 

Noncontrolling interest percentage

        10%

 

 

 

 

      Noncontrolling interest expense

$   13,800

 

3     Consolidated net income2007

 

 

 

 

 

 

 

 

Consolidated sales ($900,000 + $600,000 - $300,000)

$1,200,000

 

Less: Consolidated cost of sales

  (637,000)

 

Less: Consolidated expenses ($225,000 + $150,000)

  (375,000)

 

Less: Noncontrolling interest expense

   (13,800)

 

 

 

 

      Consolidated net income

$  174,200

 

      Alternatively,

 

 

 

 

 

Putt's separate income

$   50,000

 

Add: Income from Slam

   124,200

 

 

 

 

      Consolidated net income

$  174,200

 

4     Noncontrolling interest at December 31, 2007

 

 

 

 

 

 

 

 

Equity of Slam December 31, 2007

$  520,000

 

Less: Unrealized profit in ending inventory

   (24,000)

 

 

   496,000

 

Noncontrolling interest percentage

        10%

 

 

 

 

      Noncontrolling interest December 31, 2007

$   49,600

 


Solution P5-3

 

1     Inventories appearing in consolidated balance sheet at December 31, 2007

 

 

 

 

 

 

 

 

 

Beginning inventoryPotter ($60,000 - $4,000a)

$ 56,000

 

Beginning inventoryScan ($38,750 - $7,750b)

  31,000

 

Beginning inventoryTray ($24,000 - 0)

  24,000

 

 

 

 

      Inventories December 31, 2007

$111,000

 

 

 

 

Intercompany profit:

 

Potter:

 

 

 

 

 

Inventory acquired intercompany ($60,000 40%)

$ 24,000

 

 

Cost of intercompany inventory ($24,000/1.2)

 (20,000)

 

 

Unrealized profit in Potter's inventory

$  4,000

 

Scan:

 

 

 

 

 

Inventory acquired intercompany ($38,750 100%)

$ 38,750

 

 

Cost of intercompany inventory ($38,750/1.25)

 (31,000)

 

 

Unrealized profit in Scan's inventory

$  7,750

 

2     Inventories appearing in consolidated balance sheet at December 31, 2008

 

 

 

 

 

 

 

 

 

Ending inventoryPotter ($54,000 - $4,500c)

$ 49,500

 

Ending inventoryScan ($31,250 - $6,250d)

  25,000

 

Ending inventoryTray ($36,000 - 0)

  36,000

 

 

 

 

      Inventories December 31, 2008

$110,500

 

 

 

 

Intercompany profit:

 

Potter:

 

 

 

 

 

Inventory acquired intercompany ($54,000 50%)

$ 27,000

 

 

Cost of intercompany inventory ($27,000/1.2)

 (22,500)

 

 

Unrealized profit in Potter's inventory

$  4,500

 

Scan:

 

 

 

 

 

Inventory acquired intercompany ($31,250 100%)

$ 31,250

 

 

Cost of intercompany inventory ($31,250/1.25)

 (25,000)

 

 

Unrealized profit in Scan's inventory

$  6,250

 


Solution P5-4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Plier's income from Stuff

2007

2008

2009

 

 

 

 

 

 

75% of Stuff's net income

$  300,000

$  337,500

$  262,500

 

 

 

 

 

 

Unrealized profit in December 31,

 

 

 

 

  2007 inventory (downstream)

 

 

 

 

      ($200,000 1/2) 100%

  (100,000)

   100,000

 

 

 

 

 

 

 

Unrealized profit in December 31,

 

 

 

 

  2008 inventory (upstream)

 

 

 

 

      $100,000 75%

          

   (75,000)

    75,000

 

 

 

 

 

 

Plier's income from Stuff

$  200,000

$  362,500

$  337,500

 

 

 

 

 

2

Plier's net income

 

 

 

 

 

 

 

 

 

Plier's separate income

$1,800,000

$1,700,000

$2,000,000

 

 

 

 

 

 

Add: Income from Stuff

   200,000

   362,500

   337,500

 

 

 

 

 

 

Plier's net income

$2,000,000

$2,062,500

$2,337,500

 

 

 

 

 

3

Consolidated net income

 

 

 

 

 

 

 

 

 

Separate incomes of Plier and

 

 

 

 

  Stuff combined

$2,200,000

$2,150,000

$2,350,000

 

 

 

 

 

 

Unrealized profit in December 31,

 

 

 

 

  2007 inventory

  (100,000)

  100,000

 

 

 

 

 

 

 

Unrealized profit in December 31,

 

 

 

 

  2008 inventory

          

 (100,000)

   100,000

 

 

 

 

 

 

Total income

 2,100,000

2,150,000

 2,450,000

 

 

 

 

 

 

Less: Noncontrolling interest expense

 

 

 

 

      2007 $400,000 25%

  (100,000)

 

 

 

      2008 ($450,000 - $100,000)

 

 

 

 

        25%

 

   (87,500)

 

 

      2009 ($350,000 + $100,000)

 

 

 

 

        25%

          

          

  (112,500)

 

 

 

 

 

 

Consolidated net income

$2,000,000

$2,062,500

$2,337,500

 


Solution P5-5

Pane Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pane

 

100% Seal

Adjustments and

Eliminations

Consolidated

Statements

Income Statement

Sales

 

$  800,000

 

$ 400,000

 

a 120,000

 

 

$1,080,000

Income from Seal

   102,000

 

d 102,000

 

 

Cost of sales

   400,000*

  200,000*

b  12,000

a 120,000

c  20,000

   472,000*

Depreciation expense

   110,000*

   40,000*

 

 

   150,000*

Other expenses

   192,000*

   60,000*

f   6,000

 

   258,000*

Net income

$  200,000

$ 100,000

 

 

$  200,000

 

 

 

 

 

 

Retained Earnings

Retained earningsPane

 

$  600,000

 

 

 

 

   600,000

Retained earningsSeal

 

$ 380,000

e 380,000

 

 

Net income

   200,000

  100,000

 

 

   200,000

Dividends

   100,000*

   50,000*

 

d  50,000

   100,000*

Retained earnings

  December 31

 

$  700,000

 

$ 430,000

 

 

 

$  700,000

 

 

 

 

 

 

Balance Sheet

Cash

 

$   54,000

 

$  37,000

 

 

 

$   91,000

Receivablesnet

    90,000

   60,000

 

g  17,000

   133,000

Inventories

   100,000

   80,000

 

b  12,000

   168,000

Other assets

    70,000

   90,000

 

 

   160,000

Land

    50,000

   50,000

 

 

   100,000

Buildingsnet

   200,000

  150,000

 

 

   350,000

Equipmentnet

   500,000

  400,000

 

 

   900,000

Investment in Seal

   736,000

 

c  20,000

d  52,000

e 704,000

 

Patents

 

 

e  24,000

f   6,000

    18,000

 

$1,800,000

$ 867,000 

 

 

$1,920,000

 

 

 

 

 

 

Accounts payable

$  160,000

$  47,000

g  17,000

 

$  190,000

Other liabilities

   340,000

   90,000

 

 

   430,000

Common stock, $10 par

   600,000

  300,000

e 300,000

 

   600,000

Retained earnings

   700,000

  430,000

 

 

   700,000

 

$1,800,000

$ 867,000

 

 

$1,920,000

 

Supporting computations

Unrealized profit in beginning inventory ($40,000 1/2) = $20,000

Unrealized profit in ending inventory ($48,000 1/4) = $12,000

 

Seal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patents amortization equals $102,000 income from Seal.


Solution P5-6

Patty Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patty

 

Sue 75%

Adjustments and

Eliminations

Consolidated

Statements

Income Statement

Sales

 

$  600,000

 

$ 400,000

 

a 130,000

 

 

$  870,000

Income from Sue

   102,500

 

d 102,500

 

 

Cost of sales

   270,000*

  210,000*

b  20,000

a 130,000

c  10,000

   360,000*

Operating expenses

   145,000*

   40,000*

 

 

   185,000*

Noncontrolling int.expense

 

 

f  37,500

 

    37,500*

Net income

$  287,500

$ 150,000

 

 

$  287,500

 

 

 

 

 

 

Retained Earnings

Retained earningsPatty

 

$  182,500

 

 

 

 

$  182,500

Retained earningsSue

 

$  90,000

e  90,000

 

 

Net income

   287,500

  150,000

 

 

   287,500

Dividends

   150,000*

   50,000*

 

d  37,500

f  12,500

 

   150,000*

Retained earnings

  December 31

 

$  320,000

 

$ 190,000

 

 

 

$  320,000

 

 

 

 

 

 

Balance Sheet

Cash

 

$   85,000

 

$  30,000

 

 

 

$  115,000

Accounts receivable

   165,000

  100,000

 

g  15,000

   250,000

Dividends receivable

    15,000

 

 

h  15,000

 

Inventories

    60,000

   80,000

 

b  20,000

   120,000

Land

    80,000

   50,000

 

 

   130,000

Buildingsnet

   230,000

  100,000

 

 

   330,000

Equipmentnet

   200,000

  140,000

 

 

   340,000

Investment in Sue

   385,000

 

c  10,000

d  65,000

e 330,000

 

Goodwill

 

 

e 150,000

 

   150,000

 

$1,220,000

$ 500,000

 

 

$1,435,000

 

 

 

 

 

 

Accounts payable

$  225,000

$ 100,000

g  15,000

 

$  310,000

Dividends payable

    70,000

   20,000

h  15,000

 

    75,000

Other liabilities

   155,000

   40,000

 

 

   195,000

Common stock, $10 par

   450,000

  150,000

e 150,000

 

   450,000

Retained earnings

   320,000

  190,000

 

 

   320,000

 

$1,220,000

$ 500,000

 

 

 

 

 

 

 

 

 

Noncontrolling interest January 1

 

e  60,000

 

Noncontrolling interest December 31

 

f  25,000

    85,000

 

 

 

 

 

$1,435,000

*   Deduct

 

Supporting computations

 

 

 

Investment in Sue at January 1, 2007

$300,000

Book value acquired ($200,000 75%)

 150,000

       Goodwill

$150,000


Solution P5-7

 

Preliminary computations

 

 

 

 

Investment cost

$275,000

Less: Book value acquired ($250,000 90%)

 225,000

      Patents

$ 50,000

 

Patents amortization    $50,000/10 years = $5,000 per year

 

Upstream sales

 

      Unrealized profit in December 31, 2006 inventory of Poly

        $28,000 - ($28,000 1.4) = $8,000

 

      Unrealized profit in December 31, 2007 inventory of Poly

        $42,000 - ($42,000 1.4) = $12,000

 

Income from Susan

 

 

 

 

 

 

Share of Susan's reported income ($100,000 90%)

$ 90,000

Less: Patents amortization

  (5,000)

Less: Unrealized profit in ending inventory ($12,000 90%)

 (10,800)

Add: Unrealized profit in beginning inventory ($8,000 90%)

   7,200

      Income from Susan

$ 81,400

 

Investment balance

 

 

 

 

 

 

 

Initial investment cost

$275,000

Increase in Susan's net assets from December 31, 2004

 

  to December 31, 2007 ($70,000 90%)

  63,000

Patent amortization for 3 years

 (15,000)

Unrealized profit in December 31, 2007 inventory

 (10,800)

      Investment balance December 31, 2007

$312,200

 

Noncontrolling interest expense

 

 

 

 

 

 

 

Reported income of Susan

$100,000

Add: Unrealized profit in beginning inventory

   8,000

Less: Unrealized profit in ending inventory

 (12,000)

Susan's realized income

  96,000

Noncontrolling interest percentage

      10%

Noncontrolling interest expense

$  9,600

 


Solution P5-7 (continued)

 

Poly Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Poly

 

Susan 90%

Adjustments and

Eliminations

Consolidated

Statements

Income Statement

Sales

 

$ 819,000

 

$ 560,000

 

a 560,000

 

 

$ 819,000

Income from Susan

   81,400

 

d  81,400

 

 

Cost of sales

  546,000*

  400,000*

b  12,000

a 560,000

c   8,000

  390,000*

Other expenses

  154,400*

   60,000*

f   5,000

 

  219,400*

Noncontrolling int.expense

 

 

h   9,600

 

    9,600*

Net income

$ 200,000

$ 100,000

 

 

$ 200,000

 

 

 

 

 

 

Retained Earnings

Retained earningsPoly

 

$ 120,000

 

 

 

 

$ 120,000

Retained earningsSusan

 

$  70,000

e  70,000

 

 

Net income

  200,000

  100,000

 

 

  200,000

Dividends

  100,000*

   50,000*

 

d  45,000

h   5,000

 

  100,000*

Retained earnings

  December 31

 

$ 220,000

 

$ 120,000

 

 

 

$ 220,000

 

 

 

 

 

 

Balance Sheet

Cash

 

$  75,800

 

$  50,000

 

 

 

$ 125,800

Inventory

   42,000

   80,000

 

b  12,000

  110,000

Other current assets

   60,000

   20,000

 

g  10,000

   70,000

Plant assets net

  300,000

  300,000

 

 

  600,000

Investment in Susan

  312,200

 

c   7,200

d  36,400

e 283,000

 

Patents

 

 

e  40,000

f   5,000

   35,000

 

$ 790,000

$ 450,000

 

 

$ 940,800

 

 

 

 

 

 

Current liabilities

$ 170,000

$ 130,000

g  10,000

 

$ 290,000

Capital stock

  400,000

  200,000

e 200,000

 

  400,000

Retained earnings

  220,000

  120,000

 

 

  220,000

 

$ 790,000

$ 450,000

 

 

 

 

 

 

 

 

 

Noncontrolling interest January 1

c     800

e  27,000

 

Noncontrolling interest December 31

 

h   4,600

   30,800

 

 

 

 

 

$ 940,800

*   Deduct

 


Solution P5-8

 

1     Entries to correct Phil's income from Sert and investment accounts

 

 

 

 

Retained earnings January 1, 2011

   4,500

 

 

            Investment in Sert

 

   4,500

To adjust beginning retained earnings and beginning investment accounts for unrealized profit in the December 31, 2010 inventory ($5,000 90%).

 

 

 

 

Investment in Sert

   4,500

 

 

            Income from Sert

 

   4,500

To recognize intercompany profit in the December 31, 2010 inventory of goods acquired from Sert ($5,000 90%).

 

 

 

 

Income from Sert

   4,000

 

 

            Investment in Sert

 

   4,000

To eliminate intercompany profit in the December 31, 2011 inventory.

 

Working paper entries in general journal form:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

a

Noncontrolling interest

    500

 

 

Investment in Sert

  4,500

 

 

      Cost of sales

 

   5,000

 

 

 

 

b

Sales

 10,000

 

 

      Cost of sales

 

  10,000

 

 

 

 

c

Cost of sales

  4,000

 

 

      Inventory

 

   4,000

 

 

 

 

d

Income from Sert

 27,500

 

 

      Dividends

 

  18,000

 

      Investment in Sert

 

   9,500

 

 

 

 

e

Capital stockSert

 80,000

 

 

Retained earningsSert

 40,000

 

 

      Investment in Sert

 

 108,000

 

      Noncontrolling interest

 

  12,000

 

 

 

 

f

Accounts payable

 10,000

 

 

      Accounts receivable

 

 10,000

 

 

 

 

g

Noncontrolling interest expense

  3,500

 

 

      Dividends

 

   2,000

 

      Noncontrolling interest

 

   1,500

 


Solution P5-8 (continued)

 

 

 

 

2

Phil Corporation and Subsidiary

 

Consolidation Working Papers

 

for the year ended December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Phil

 

Sert 90%

Adjustments and Eliminations

Consolidated

Statements

 

Income Statement

Sales

 

$ 500,000

 

$ 100,000

 

b 10,000

 

 

$ 590,000

 

Income from Sert

   27,500

 

d 27,500

 

 

 

Cost of sales

  240,000*

   40,000*

c  4,000

a   5,000

b  10,000

  269,000*

 

Other expenses

  174,000*

   30,000*

 

 

  204,000*

 

Noncontr.int.expense

 

 

g  3,500

 

    3,500*

 

Net income

$ 113,500

$  30,000

 

 

$ 113,500

 

 

 

 

 

 

 

 

Retained Earnings

Retained earnings

  Phil

 

 

$ 105,500

 

 

 

 

 

$ 105,500

 

Retained earnings

  Sert

 

 

$  40,000

 

e 40,000

 

 

 

Net income

  113,500

   30,000

 

 

  113,500

 

Dividends

   70,000*

   20,000*

 

d  18,000

g   2,000

 

   70,000*

 

Retained earnings

  December 31

 

$ 149,000

 

$  50,000

 

 

 

$ 149,000

 

 

 

 

 

 

 

 

Balance Sheet

Cash

 

$  63,000

 

$  30,000

 

 

 

$  93,000

 

Inventories

   60,000

   15,000

 

c   4,000

   71,000

 

Accounts receivable

   40,000

   20,000

 

f  10,000

   50,000

 

Plant assetsnet

  220,000

  105,000

 

 

  325,000

 

Investment in Sert

  113,000

 

a  4,500

d   9,500

e 108,000

 

 

 

$ 496,000

$ 170,000

 

 

$ 539,000

 

 

 

 

 

 

 

 

Accounts payable

$  47,000

$  40,000

f 10,000

 

$  77,000

 

Capital stock

  300,000

   80,000

e 80,000

 

  300,000

 

Retained earnings

  149,000

   50,000

 

 

  149,000

 

 

$ 496,000

$ 170,000

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest January 1

a    500

e  12,000

 

 

Noncontrolling interest December 31

 

g   1,500

   13,000

 

 

 

 

 

 

$ 539,000

*   Deduct

 

      Noncontrolling interest expense: ($30,000 + $5,000) 10%

Solution P5-9

Pan Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pan

100%

Sal

Adjustments and

Eliminations

Consolidated

Statements

Income Statement

Sales

 

$  800,000

 

$  400,000

 

a 120,000

 

 

$1,080,000

Income from Sal

   108,000

 

d 108,000

 

 

Cost of sales

   400,000*

   200,000*

b  12,000

a 120,000

c  20,000

   472,000*

Depreciation expense

   110,000*

    40,000*

 

 

   150,000*

Other expenses

   192,000*

    60,000*

 

 

   252,000*

Net income

$  206,000

$  100,000

 

 

$  206,000

 

 

 

 

 

 

Retained Earnings

Retained earningsPan

 

$  606,000

 

 

 

 

   606,000

Retained earningsSal

 

$  380,000

e 380,000

 

 

Net income

   206,000

   100,000

 

 

   206,000

Dividends

   100,000*

    50,000*

 

d  50,000

   100,000*

Retained earnings

  December 31

 

$  712,000

 

$  430,000

 

 

 

$  712,000

 

 

 

 

 

 

Balance Sheet

Cash

 

$   54,000

 

$   37,000

 

 

 

$   91,000

Receivablesnet

    90,000

    60,000

 

f  17,000

   133,000

Inventories

   100,000

    80,000

 

b  12,000

   168,000

Other assets

    70,000

    90,000

 

 

   160,000

Land

    50,000

    50,000

 

 

   100,000

Buildingsnet

   200,000

   150,000

 

 

   350,000

Equipmentnet

   500,000

   400,000

 

 

   900,000

Investment in Sal

   748,000

 

c  20,000

d  58,000

e 710,000

 

       Goodwill

 

 

e  30,000

 

    30,000

 

$1,812,000

$  867,000

 

 

$1,932,000

 

 

 

 

 

 

Accounts payable

$  160,000

$   47,000

f  17,000

 

$  190,000

Other liabilities

   340,000

    90,000

 

 

   430,000

Common stock, $10 par

   600,000

   300,000

e 300,000

 

   600,000

Retained earnings

   712,000

   430,000

 

 

   712,000

 

$1,812,000

$  867,000

 

 

$1,932,000

 

Supporting computations

Unrealized profit in beginning inventory ($40,000 1/2) = $20,000

Unrealized profit in ending inventory ($48,000 1/4) = $12,000

 

Sal's income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory.


Solution P5-10

Pat Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pat

 

Sun 75%

Adjustments and Eliminations

Consolidated

Statements

Income Statement

Sales

 

$  600,000

 

$  400,000

 

a 130,000

 

 

$  870,000

Income from Sun

    92,500

 

d  92,500

 

 

Cost of sales

   270,000*

   210,000*

b  20,000

a 130,000

c  10,000

   360,000*

Operating expenses

   145,000*

    40,000*

f  10,000

 

   195,000*

Noncontrolling int.expense

 

 

i  37,500

 

    37,500*

Net income

$  277,500

$  150,000

 

 

$  277,500

 

 

 

 

 

 

Retained Earnings

Retained earningsPat

 

$  172,500

 

 

 

 

$  172,500

Retained earningsSun

 

$   90,000

e  90,000

 

 

Net income

   277,500

   150,000

 

 

   277,500

Dividends

   150,000*

    50,000*

 

d  37,500

i  12,500

 

   150,000*

Retained earnings

  December 31

 

$  300,000

 

$  190,000

 

 

 

$  300,000

 

 

 

 

 

 

Balance Sheet

Cash

 

$   85,000

 

$   30,000

 

 

 

$  115,000

Accounts receivable

   165,000

   100,000

 

g  15,000

   250,000

Dividends receivable

    15,000

 

 

h  15,000

 

Inventories

    60,000

    80,000

 

b  20,000

   120,000

Land

    80,000

    50,000

 

 

   130,000

Buildingsnet

   230,000

   100,000

 

 

   330,000

Equipmentnet

   200,000

   140,000

 

 

   340,000

Investment in Sun

   365,000

 

c  10,000

d  55,000

e 320,000

 

Patents

 

 

e 140,000

f  10,000

   130,000

 

$1,200,000

$  500,000

 

 

$1,415,000

 

 

 

 

 

 

Accounts payable

$  225,000

$  100,000

g  15,000

 

$  310,000

Dividends payable

    70,000

    20,000

h  15,000

 

    75,000

Other liabilities

   155,000

    40,000

 

 

   195,000

Common stock, $10 par

   450,000

   150,000

e 150,000

 

   450,000

Retained earnings

   300,000

   190,000

 

 

   300,000

 

$1,200,000

$  500,000

 

 

 

Noncontrolling interest January 1

 

e  60,000

 

Noncontrolling interest December 31

 

i  25,000

    85,000

 

 

 

 

 

$1,415,000

*   Deduct

 

Supporting computations

 

 

 

Investment in Sun at January 1, 2007

$300,000

Book value acquired ($200,000 75%)

 150,000

       Patents (15 year amortization)

$150,000


Solution P5-11

 

Preliminary computations

 

 

 

 

Investment cost

$275,000

Less: Book value acquired ($250,000 90%)

 225,000

      Goodwill

$ 50,000

 

Upstream sales

 

      Unrealized profit in December 31, 2009 inventory of Po

        $28,000 - ($28,000 1.4) = $8,000

 

      Unrealized profit in December 31, 2010 inventory of Po

        $42,000 - ($42,000 1.4) = $12,000

 

Income from San

 

 

 

 

 

 

Share of San's reported income ($100,000 90%)

$ 90,000

Less: Unrealized profit in ending inventory ($12,000 90%)

 (10,800)

Add: Unrealized profit in beginning inventory ($8,000 90%)

   7,200

 

 

      Income from San

$ 86,400

 

Investment balance

 

 

 

 

 

 

 

Initial investment cost

$275,000

Increase in San's net assets from December 31, 2007

 

  to December 31, 2010 ($70,000 90%)

  63,000

Unrealized profit in December 31, 2010 inventory

 (10,800)

 

 

      Investment balance December 31, 2010

$327,200

 

Noncontrolling interest expense

 

 

 

 

 

 

 

Reported income of San

$100,000

Add: Unrealized profit in beginning inventory

   8,000

Less: Unrealized profit in ending inventory

 (12,000)

San's realized income

  96,000

Noncontrolling interest percentage

      10%

 

 

Noncontrolling interest expense

$  9,600

 

 


Solution P5-11 (continued)

 

Po Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Po

 

San 90%

Adjustments and

Eliminations

Consolidated

Statements

Income Statement

Sales

 

$ 819,000

 

$ 560,000

 

a 560,000

 

 

$ 819,000

Income from San

   86,400

 

d  86,400

 

 

Cost of sales

  546,000*

  400,000*

b  12,000

a 560,000

c   8,000

  390,000*

Other expenses

  154,400*

   60,000*

 

 

  214,400*

Noncontrolling int.expense

 

 

f   9,600

 

    9,600*

Net income

$ 205,000

$ 100,000

 

 

$ 205,000

 

 

 

 

 

 

Retained Earnings

Retained earningsPo

 

$ 130,000

 

 

 

 

$ 130,000

Retained earningsSan

 

$  70,000

e  70,000

 

 

Net income

  205,000

  100,000

 

 

  205,000

Dividends

  100,000*

   50,000*

 

d  45,000

f   5,000

  100,000*

Retained earnings

  December 31

 

$ 235,000

 

$ 120,000

 

 

 

$ 235,000

 

 

 

 

 

 

Balance Sheet

Cash

 

$  75,800

 

$  50,000

 

 

 

$ 125,800

Inventory

   42,000

   80,000

 

b  12,000

  110,000

Other current assets

   60,000

   20,000

 

g  10,000

   70,000

Plant assetsnet

  300,000

  300,000

 

 

  600,000

Investment in San

  327,200

 

c   7,200

d  41,400

e 293,000

 

Goodwill

 

 

e  50,000

 

   50,000

 

$ 805,000

$ 450,000

 

 

$ 955,800

 

 

 

 

 

 

Current liabilities

$ 170,000

$ 130,000

g  10,000

 

$ 290,000

Capital stock

  400,000

  200,000

e 200,000

 

  400,000

Retained earnings

  235,000

  120,000

 

 

  235,000

 

$ 805,000

$ 450,000

 

 

 

 

 

 

 

 

 

Noncontrolling interest January 1

c     800

e  27,000

 

Noncontrolling interest December 31

 

f   4,600

   30,800

 

 

 

 

 

$ 955,800

*   Deduct

 


 

Source: http://www.sba.oakland.edu/faculty/bazaz/acc401/beams9esm_ch05.doc

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