CH07MAN

CHAPTER 7 INTERCOMPANY INVENTORY TRANSACTIONS
ANSWERS TO QUESTIONS Q7-1 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. Q7-2 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. Q7-3 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 workpaper will know whether to reduce consolidated net income by the full amount of unrealized profits (downstream) or to reduce consolidated income and income to noncontrolling shareholders on a proportionate basis (upstream). Q7-4 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 is reduced by the full amount of the unrealized profit. Q7-5 The full amount of the unrealized profits are again eliminated. In the upstream sale, however, the unrealized profits are apportioned between the parent company shareholders and the noncontrolling shareholders. Thus, consolidated net income is reduced by a pro rata portion of the unrealized profits on an upstream sale. Q7-6 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. Q7-7 The basic eliminating entry needed when the item is resold before the end of the period is Sales Cost of Goods Sold XXXXXX XXXXXX
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002
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. Q7-8 The basic eliminating entry needed when one or more of the items are not resold before the end of the period is Sales Cost of Goods Sold Inventory XXXXXX XXXXXX XXXXXX
The debit to sales is for the full amount of the transfer price. Inventory is credited for the unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold by the company making the intercompany sale. Q7-9 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. Q7-10 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 not all of the intercorporate sales have been resold by the end of the period, consolidated retained earnings must be reduced by the parent's proportionate share of any unrealized profits. Q7-11 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 and consolidated retained earnings. Unrealized profits on downstream sales are deducted entirely from the retained earnings assigned to the consolidated entity. Q7-12 When inventory profits from a prior period intercompany transfer are realized in the current period, the profit is added to the income of the company that made the intercompany sale. If the unrealized profits arise from a downstream sale, consolidated net income will increase by the full amount of profit realized. When the profits arise from an upstream sale, both consolidated net income and income assigned to the noncontrolling interest 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 calculating consolidated net income.
Q7-13 Consolidated retained earnings must be reduced by the full amount of any unrealized profit on the parent company books. Q7-14 Consolidated retained earnings must be reduced by the proportionate share of the unrealized profit on the subsidiary's books. parent's
Q7-15* Sales between subsidiaries are treated in the same manner as upstream sales. Whenever the profits are on the books of one of the subsidiaries, all the unrealized profits at the end of the period are eliminated and consolidated net income is reduced by the parent company's proportionate share of the unrealized profits. Q7-16* When purchase accounting is used in recording the 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. On the other hand, when pooling of interests accounting is used in recording a business combination, the companies are considered to have always been together and it is appropriate to eliminate all transactions between the companies, both before and after the business combination. Q7-17A Two eliminating entries are needed when the periodic inventory system is used and there are unrealized profits on intercorporate sales during the period. In the first entry, sales is debited and purchases credited for the amount of the transfer price to the affiliate. In the second entry, the unrealized profits at the end of the period are debited to ending inventory in the income statement portion of the workpaper (ending inventory is treated as a credit balance account in computing cost of goods sold in the income statement) and credited to ending inventory in the balance sheet portion of the workpaper (inventory is a debit balance account in the balance sheet). Q7-18A A single eliminating entry is needed when the item is resold in the period. The appropriate entry is to debit sales and credit purchases for the amount of the intercorporate transfer price. Q7-19A The eliminating entry for unrealized profits at the start of the period requires a debit to beginning retained earnings if the basic equity method is being recorded by the parent or to the investment in subsidiary account if the fully-adjusted equity method is being used, along with a credit to beginning inventory. By reducing beginning inventory for the unrealized profit at the start of the period, cost of goods sold and consolidated net income are properly computed.
SOLUTIONS TO CASES C7-1 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. 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 company 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.
C7-2
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.
d. Only the beginning inventory balance and purchases are included in the trial balance when the periodic inventory system is used. Ending inventory must be included if the perpetual system is used. The companies must be using periodic inventory systems if the ending inventory balances do not appear in the trial balance.
C7-3 a.
Intercompany Profit Elimination Alternatives Amount at which inventory would be reported: (1) Proportionate elimination: $40,000 - ($40,000 x .40 x .90) = $25,600 Full elimination against controlling interest: $40,000 - ($40,000 x .40) = $24,000 Full elimination with proportionate allocation against controlling and noncontrolling interests: $40,000 - ($40,000 x .40) = $24,000
(2)
(3)
b. Amount of unrealized intercompany profit that would be eliminated from consolidated net income: (1) Proportionate elimination: ($40,000 x .40 x .90) = $14,400 Full elimination against controlling interest: ($40,000 x .40) = $16,000 Full elimination with proportionate allocation against controlling and noncontrolling interests: ($40,000 x .40 x .90) = $14,400
(2)
(3)
Amount of unrealized intercompany profit that would be eliminated from income to the noncontrolling interest: (1) Proportionate elimination: $0 Full elimination against controlling interest: $0 Full elimination with proportionate allocation against controlling and noncontrolling interests: ($40,000 x .40 x .10) = $1,600
(2)
(3)
C7-3 c.
(continued) (1) Proportionate elimination: The elimination of only the parent's share of unrealized intercompany profit recognized by a subsidiary is supported by viewing the noncontrolling interest of the subsidiary as an outside or unrelated ownership interest. Sales from the subsidiary to the parent represent sales that are, at least in part, from an unrelated party. Thus, the noncontrolling stockholders' profit is considered realized from the viewpoint of the consolidated entity. Because a portion of the profit on the intercompany sale accrues to the noncontrolling shareholders, the cost to the parent company can be viewed as having been increased by purchasing inventory from a less-than-wholly-owned subsidiary. As this additional cost to the parent company is viewed as one portion of the total cost of purchasing the inventory, the noncontrolling interest's share of the intercompany profit is not eliminated from the inventory when preparing consolidated financial statements. This viewpoint, at least with respect to upstream sales, is consistent with the parent company theory of consolidation. This approach currently is not acceptable in practice because ARB No. 51 requires complete elimination of all unrealized intercompany profits.
(2) Full elimination against controlling interest: Full elimination of unrealized intercompany profits is consistent with viewing the parent and subsidiary together as a single entity. However, eliminating all the unrealized profit against the controlling interest assumes a legalistic viewpoint rather than treating all ownership groups equally. From the subsidiary's separate viewpoint, profit on an upstream sale is realized at the time of sale, and, therefore, the noncontrolling interest has a legal claim on its share of the profit from the sale. The preparation of consolidated financial statements by the controlling interest does not alter the legal claim of the noncontrolling shareholders. This approach, then, fully eliminates unrealized intercompany profit, consistent with the entity theory of consolidation, but states the noncontrolling interest at the amount of its legal claim; this results in consolidated net income being adjusted for the full amount of the unrealized intercompany profit. ARB No. 51 requires full elimination of all unrealized intercompany profits, but permits either full elimination against the controlling interest or proportionate allocation between the controlling and noncontrolling interests. While full elimination against the controlling interest currently is acceptable in practice, it is not the most widely used approach.
C7-3
(continued) (3) Full elimination with proportionate allocation against controlling and noncontrolling interests: This approach is consistent with the entity theory of consolidation. The full amount of the unrealized intercompany profit is eliminated, and controlling and noncontrolling interests are treated equally, with the amount eliminated allocated between the two ownership groups; the profit eliminations are borne by those having recognized the profits. While some would argue that this approach is theoretically more acceptable than full elimination against the controlling interest, it does result in the noncontrolling interest being stated at an amount other than the legal claim of the noncontrolling shareholders. This approach is acceptable under ARB No. 51 and is used widely in practice.
C7-4
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. One alternative would be to establish a separate series of accounts which are to be used solely for intercompany transfers. If Ready Building is a small company and all receipts are kept in a cigar box, a separate box should be used by each affiliate to accumulate receipts on intercompany transfers. It may be possible to use unique shipping containers on 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.
C7-4
(continued)
(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.
C7-5
Intercompany Profits and Transfers of Inventory
a. The intercompany revenues reported by Xerox (www.xerox.com) in its segment disclosures are relatively insignificant. However, these intercompany revenues only reflect intercompany transactions between different operating segments but not intercompany transactions within segments. When Xerox defined its segments differently several years ago, the reported intercompany revenues were considerably larger. 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. Exxon Mobil reports over $20 billion of intersegment transfers, which does not include intercompany transfers within segments. This amount is relatively small in relation to sales to unaffiliated customers, but the amount is still significant. 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 significant, totaling over $20 billion and equal to well over 10 percent of the companys revenues from sales to unaffiliated customers. The effects of intercompany transfers are eliminated in consolidation.
SOLUTIONS TO EXERCISES E7-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted] a
1.
2.
3.
4.
5.
Net assets reported Profit on intercompany sale Proportion of inventory unsold at year end ($60,000 / $240,000) Unrealized profit at year end Amount reported in consolidated statements
$320,000 $48,000 x .25 (12,000) $308,000
6.
Inventory reported by Banks ($175,000 + $60,000) Inventory reported by Lamm Total inventory reported Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] Amount reported in consolidated statements
$235,000 250,000 $485,000 (15,000) $470,000
E7-2
Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted] b Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small ($500,000 x .40) Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x 4 / 5) x .60] Cost of goods sold for consolidated entity $ 800,000 700,000 $1,500,000 (200,000)
1.
(240,000) $1,060,000 $1,100,000,
Note: Answer b in the actual CPA examination question was requiring candidates to select the closest answer.
2.
$32,000 = ($200,000 + $140,000) - $308,000
3.
$6,000 = ($26,000 + $19,000) - $39,000
4.
$9,000 = Inventory held by Spin ($32,000 x .375) Unrealized profit on sale [($30,000 + $25,000) - $52,000] Inventory included in consolidated balance sheet
$12,000 (3,000) $ 9,000
5.
.20 = ($10,000 / $50,000)
6.
19 years = [$30,000 + ($2,000 x 4 years)] / $2,000
E7-3 1. 2. 3. c b c
Multiple-Choice Questions__Consolidated Income Statement
Total income ($86,000 - $47,000) Income assigned to noncontrolling interest [.40($86,000 - $60,000)] Consolidated net income
$39,000 (10,400) $28,600
E7-4 1. 2. c a
Multiple-Choice Questions__Consolidated Balances
Amount paid by Lorn Corporation Unrealized profit Actual cost Portion sold Cost of goods sold Consolidated sales Cost of goods sold Total income Income to noncontrolling interest: Reported income Reported cost of sales Report income Portion realized Realized net income Portion to Noncontrolling interest Assigned to noncontrolling interest Consolidated net income Inventory reported by Lorn Unrealized profit ($45,000 x .2) Ending inventory reported
$120,000 (45,000) $ 75,000 x .80 $ 60,000 $140,000 (60,000) $ 80,000
3.
$120,000 (75,000) $ 45,000 x .80 $ 36,000 x .30 (10,800) $ 69,200 $ 24,000 (9,000) $ 15,000
4.
E7-5 1. 2. a c
Multiple-Choice Questions__Consolidated Income Statement $20,000 = $30,000 x [($48,000 - $16,000) / $48,000] Sales reported by Movie Productions, Inc. Cost of goods sold ($30,000 x 2/3) Income to noncontrolling interest [($67,000 - $32,000) x .20] Consolidated net income $67,000 (20,000) $47,000 (7,000) $40,000
3.
$7,000 = [($67,000 - $32,000) x .20]
E7-6 a.
Realized Profit on Intercompany Sales Journal entries recorded by Nordway Corporation: (1) Inventory Cash (Accounts Payable) Cash (Accounts Receivable) Sales Cost of Goods Sold Inventory 960,000 960,000 750,000 750,000 600,000 600,000
(2)
(3)
b.
Journal entries recorded by Olman Company: (1) Inventory Cash (Accounts Payable) Cash (Accounts Receivable) Sales Cost of Goods Sold Inventory 750,000 750,000 1,125,000 1,125,000 750,000 750,000
(2)
(3)
c.
Eliminating entry: E(1) Sales Cost of Goods Sold 750,000 750,000
E7-7 a.
Sale of Inventory to Subsidiary Journal entries recorded by Nordway Corporation:
(1)
Inventory Cash (Accounts Payable) Cash (Accounts Receivable) Sales Cost of Goods Sold Inventory
960,000 960,000 750,000 750,000 600,000 600,000
(2)
(3)
b.
Journal entries recorded by Olman Company: (1) Inventory Cash (Accounts Payable) Cash (Accounts Receivable) Sales Cost of Goods Sold Inventory 750,000 750,000 810,000 810,000 540,000 540,000
(2)
(3)
c.
Eliminating entry: E(1) Sales Cost of Goods Sold Inventory 750,000 708,000 42,000
E7-8 a.
Inventory Transfer between Parent and Subsidiary 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). Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks). Eliminating entry:
b.
c.
E(1)
Sales Cost of Goods Sold Inventory
940,000 904,000 36,000
d.
Eliminating entry: E(1) Retained Earnings, January 1 Cost of Goods Sold 36,000 36,000
e.
Eliminating entry: E(1) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold 21,600 14,400 36,000
E7-9 a.
Income Statement Effects of Unrealized Profit Sale price to Holiday Bakery per bag ($900,000 / 100,000) Profit per bag [$9.00 - ($9.00 / 1.5)] Cost per bag Bags sold by Holiday Bakery (100,000 - 20,000) Consolidated cost of goods sold $ 9.00 (3.00) $ 6.00 x 80,000 $480,000
b. E(1)
Sales Inventory ($3.00 x 20,000 bags) Cost of Goods Sold
900,000 60,000 840,000
Required Adjustment to Cost of Goods Sold: Cost of goods sold__Farmco ($900,000 / 1.5) Cost of goods sold__Holiday ($9.00 x 80,000 units) Consolidated cost of goods sold ($6.00 x 80,000 units) Required adjustment $ 600,000 720,000 $1,320,000 (480,000) $ 840,000
c.
Operating income of Holiday Bakery Net income of Farmco Products Less: Unrealized inventory profits Less: Income assigned to noncontrolling interest ($150,000 - $60,000 unrealized profit) x .40 Consolidated net income Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Unrealized profits ($3.00 x 20,000 units) Realized net income Ownership held by Holiday Bakery Consolidated net income
$400,000 150,000 $550,000 (60,000) $490,000 (36,000) $454,000
$400,000 $150,000 (60,000) $ 90,000 x .60 54,000 $454,000
E7-10 a.
Prior-Period Unrealized Inventory Profit $ 6.00 x 20,000 $120,000
Cost per bag of flour ($9.00 / 1.5) Bags sold Cost of goods sold from inventory held, January 1, 20X9
b.
Assuming the basic equity method is used by Holiday Bakery in accounting for its investment in Farmco Products, the following eliminating entry is needed: E(1) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold $60,000 = 20,000 bags x $3.00 36,000 24,000 60,000
c.
Operating income of Holiday Bakery Net income of Farmco Products Add: Inventory profits realized in 20X9 Less: Income assigned to noncontrolling shareholders ($250,000 + $60,000) x .40 Consolidated net income Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Inventory profits realized in 20X9 Realized net income Ownership held by Holiday Bakery
$300,000 250,000 $550,000 60,000 $610,000 (124,000) $486,000
$300,000 $250,000 60,000 $310,000 x .60 186,000 $486,000
E7-11 a.
Computation of Consolidated Income Statement Data $400,000 200,000 $600,000 $30,000 80,000 (110,000) $490,000 $250,000 120,000 $370,000 (100,500) $269,500
Reported sales of Bass Company Reported sales of Cooper Company Intercompany sales by Bass Company in 20X5 Intercompany sales by Cooper Company in 20X5 Sales reported on consolidated income statement
b.
Cost of goods sold reported by Bass Company Cost of goods sold reported by Cooper Company Adjustment due to intercompany sales Consolidated cost of goods sold Adjustment to cost of goods sold: CGS charged by Bass on sale to Cooper CGS charged by Cooper ($30,000 - $6,000) Total charged to CGS CGS for consolidated entity: $20,000 x ($24,000 / $30,000) Required adjustment to CGS CGS charged by Cooper on sale to Bass CGS charged by Bass ($80,000 - $20,000) Total charged to CGS CGS for consolidated entity: $50,000 x ($60,000 / $80,000) Required adjustment to CGS Total adjustment required $20,000 24,000 $44,000 (16,000)
$ 28,000 $ 50,000 60,000 $110,000 (37,500) 72,500 $100,500 $ 45,000 (7,500) $ 37,500 x .40 $ 15,000 $105,000 (25,000)
c.
Reported net income of Cooper Company Unrealized profit on sale to Bass Company: $30,000 x ($20,000 / $80,000) Realized net income Noncontrolling interest's share Income assigned to noncontrolling interest Reported net income of Bass Company Less: Income from subsidiary Net income of Cooper Company Less: Unrealized inventory profits of Bass Company: $10,000 x ($6,000 / $30,000) Unrealized inventory profits of Copper Company: $30,000 x ($20,000 / $80,000) Amortization of purchase differential ($20,000 / 10 years) Income assigned to noncontrolling interest Consolidated net income
d.
$ 80,000 45,000 $125,000
$ 2,000 7,500 2,000 15,000 (26,500) $ 98,500
E7-12 a.
Sale of Inventory at a Loss
Entries recorded by Trent Company Inventory Cash Purchase inventory. Cash Sales Sale of inventory to Gord Company. Cost of Goods Sold Inventory Record cost of goods sold. 400,000 400,000 400,000 400,000
300,000 300,000
Entries recorded by Gord Company Inventory Cash Purchase of inventory from Trent. Cash Sales Sale of inventory to nonaffiliates. Cost of Goods Sold Inventory Record cost of goods sold. 180,000 180,000 300,000 300,000
360,000 360,000
b.
Consolidated cost of goods sold for 20X8 should be reported as $240,000 ($400,000 x .60).
c.
Operating income reported by Gord Net income reported by Trent Unrealized loss on intercorporate sale ($400,000 - $300,000) x .40 Realized net income of Trent Proportion owned by Gord Realized net income from subsidiary Consolidated net income
$230,000 $ 80,000 40,000 $120,000 x .75 90,000 $320,000
E7-12
(continued)
d.
Eliminating entry, December 31, 20X8: E(1) Sales Inventory Cost of Goods Sold 300,000 40,000 340,000
Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Trent Cost of goods sold recorded by Gord Total recorded Consolidated cost of goods sold Required elimination $400,000 180,000 $580,000 (240,000) $340,000
E7-13 a.
Intercompany Sales
Consolidated net income for 20X4: Operating income of Hollow Corporation Net income of Surg Corporation Less: Unrealized profit__Surg Corporation Income to noncontrolling interest ($90,000 - $15,000) x .30 Consolidated net income $160,000 90,000 $250,000 (15,000) (22,500) $212,500
b.
Inventory balance, December 31, 20X5: Inventory reported by Hollow Corporation Unrealized profit on books of Surg Corporation ($135,000 - $90,000) x ($30,000/$135,000) Inventory reported by Surg Corporation Unrealized profit on books of Hollow Corporation ($280,000 - $140,000) x ($110,000/$280,000) Inventory, December 31, 20X5 $30,000
(10,000) $110,000
$20,000
(55,000)
55,000 $75,000
c.
Consolidated cost of goods sold for 20X5: CGS on sale of inventory on hand January 1, 20X5 $45,000 x ($120,000 / $180,000) CGS on items purchased from Surg in 20X5 ($135,000 - $30,000) x ($90,000 / $135,000) CGS on items purchased from Hollow in 20X5 ($280,000 - $110,000) x ($140,000 / $280,000) Total cost of goods sold
$ 30,000 70,000 85,000 $185,000
d.
Consolidated net income for 20X5: Operating income of Hollow Corporation Net income of Surg Corporation Add: Inventory profit of prior year realized in 20X5 Less: Unrealized inventory profit__Surg Corporation Unrealized inventory profit__Hollow Corporation Income to noncontrolling interest ($85,000 + $15,000 - $10,000) x .30 Consolidated net income $220,000 85,000 $305,000 15,000 (10,000) (55,000) (27,000) $228,000
E7-14 a.
Consolidated Balance Sheet Workpaper
Eliminating entries: E(1) Common Stock__Hingle Company Retained Earnings Investment in Hingle Company Stock Noncontrolling Interest Eliminate investment balance. Retained Earnings, January 1 Noncontrolling Interest Inventory Eliminate unrealized inventory profit of Hingle Company. Retained Earnings, January 1 Inventory Eliminate unrealized inventory profit of Doorst Corporation. 150,000 250,000 280,000 120,000
E(2)
28,000 12,000 40,000
E(3)
10,000 10,000
b.
Doorst Corporation and Hingle Company Consolidated Balance Sheet Workpaper December 31, 20X8 Doorst Corp. 98,000 150,000 Hingle Co. 40,000 100,000 Eliminations Debit Credit Consolidated 138,000 (2) 40,000 (3) 10,000 200,000 590,000 (1)280,000 420,000 20,000 150,000 250,000 928,000 90,000 200,000
Item Cash and Receivables Inventory Buildings and Equipment (net) Investment in Hingle Company Stock Debits Accounts Payable Common Stock Retained Earnings
310,000 280,000 838,000 70,000 200,000 568,000
280,000
Noncontrolling Interest Credits
838,000
420,000
(1)150,000 (1)250,000 (2) 28,000 (3) 10,000 (2) 12,000 450,000
(1)120,000 450,000
530,000 108,000 928,000
E7-15*
Multiple Transfers between Affiliates
a.
Entries recorded by Klon Corporation Cash Sales Sale of inventory to Brant Company. Cost of Goods Sold Inventory Record cost of goods sold. 100,000 100,000 150,000 150,000
Entries recorded by Brant Company Inventory Cash Purchase of inventory from Klon. Cash Sales Sale of inventory to Torkel Company. Cost of Goods Sold Inventory Record cost of goods sold. 150,000 150,000 150,000 150,000
150,000 150,000
Entries recorded by Torkel Company Inventory Cash Purchase of inventory from Brant. Cash Sales Sale of inventory to nonaffiliates. Cost of Goods Sold Inventory Record cost of goods sold. 90,000 90,000 150,000 150,000
120,000 120,000
b.
Cost of goods sold for 20X8 should be reported as $60,000 [$90,000 x ($100,000 / $150,000)].
c.
Inventory at December 31, 20X8, should be reported at $40,000 [$60,000 x ($100,000 / $150,000)].
E7-15*
(continued)
d.
Eliminating entry for inventory: E(1) Sales Cost of Goods Sold Inventory Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Klon Cost of goods sold recorded by Brant Cost of goods sold recorded by Torkel Total recorded Consolidated cost of goods sold Required elimination $100,000 150,000 90,000 $340,000 (60,000) $280,000 300,000 280,000 20,000
Computation of reduction to carrying value of inventory Inventory reported by Torkel Inventory balance to be reported Required elimination $60,000 (40,000) $20,000
E7-16A a.
Inventory Sales under Periodic Inventory System
Journal entries recorded by Spice Company: (1) Purchases Cash (Accounts Payable) Record purchases from nonaffiliate. Cash (Accounts Receivable) Sales Record sale to Herb Corporation. 150,000 150,000
(2)
60,000 60,000
Journal entries recorded by Herb Corporation: (1) Purchases Cash (Accounts Payable) Record purchases from Spice Company. Cash (Accounts Receivable) Sales Record sale of items to nonaffiliates. 60,000 60,000
(2)
90,000 90,000
b.
Eliminating entries: E(1) Sales Purchases Eliminate intercompany inventory sale. E(2) Ending Inventory (Income Statement) Inventory (Ending, Balance Sheet) Eliminate unrealized inventory profit: $20,000 x $15,000 / $60,000 5,000 5,000 60,000 60,000
E7-17A a.
Prior-Period Profits under Periodic Inventory System
Eliminating entries: E(1) Retained Earnings, January 1 Noncontrolling Interest Beginning Inventory Eliminate beginning inventory profit: $10,000 = ($180,000 - $120,000) x ($30,000 / $180,000) Sales Purchases Eliminate intercompany inventory sale. E(3) Ending Inventory (Income Statement) 50,000 Inventory (Ending, Balance Sheet) Eliminate unrealized inventory profit: ($240,000 - $160,000) x ($150,000 / $240,000) 7,500 2,500 10,000
E(2)
240,000 240,000
50,000
b. Reported net income of Level Brothers Unrealized profit, December 31, 20X8 Unrealized profit, December 31, 20X9 Realized net income Noncontrolling interest's share of ownership Income assigned to noncontrolling interest
20X8 20X9 $350,000 $420,000 (10,000) 10,000 (50,000) $340,000 $380,000 x .25 x .25 $ 85,000 $ 95,000
SOLUTIONS TO PROBLEMS P7-18 a. Consolidated Income Statement Data
$180,000 = $550,000 + $450,000 - $820,000
b.
January 1, 20X2: $25,000 = $75,000 - $50,000 December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000
c. E(1)
Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.
15,000 10,000 25,000
E(2)
180,000 165,000 15,000
d.
Reported net income of Bitner Company Prior-period profit realized in 20X2 Unrealized profit on 20X2 sales Proportion held by noncontrolling interest Income assigned to noncontrolling interest
$ 90,000 25,000 (15,000) $100,000 x .40 $ 40,000
P7-19
Unrealized Profit on Upstream Sales 20X2 20X3 $240,000 90,000 $330,000 14,000 (21,000) 21,000 (24,000) $457,000 20X4 $300,000 160,000 $460,000
Operating income reported by Pacific Net income reported by Carroll Inventory profit, December 31, 20X2 $70,000 - ($70,000 / 1.25) Inventory profit, December 31, 20X3 $105,000 - ($105,000 / 1.25) Inventory profit, December 31, 20X4 $120,000 - ($120,000 / 1.25) Income to noncontrolling interest ($100,000 - $14,000) x .40 ($90,000 + $14,000 - $21,000) x .40 ($160,000 + $21,000 - $24,000) x .40 Consolidated net income
$150,000 100,000 $250,000 (14,000)
$236,000 (34,400)
$323,000
(33,200) $201,600 $289,800 (62,800) $394,200
P7-20
Net Income of Consolidated Entity $118,000 65,000 $183,000 25,000 40,000 (14,000) (55,000) (4,000) (15,000) $160,000
Operating income of Stem for 20X5 Net income of Crown for 20X5 Add: Prior year profits realized by Stem Prior year profits realized by Crown Less: Unrealized profits for 20X5 by Stem Unrealized profits for 20X5 by Crown Amortization of differential ($80,000 / 20 years) Less: Income to noncontrolling interest ($65,000 + $40,000 - $55,000) x .30 Consolidated net income, 20X5
P7-21 a.
Correction of Eliminating Entries Proportion of intercompany inventory purchases resold during 20X5: Unrealized profit at year end Intercompany transfer price Cost of inventory sold ($140,000 / 1.40) Total Profit Proportion of intercompany sale held by Bolger at year end Proportion of intercompany purchases resold by Bolger during 20X5 (1.00 - .30) $12,000 $140,000 (100,000) 40,000 .30
.70
b.
Eliminating entries, December 31, 20X5: E(1) Accounts Payable 80,000 Accounts Receivable Eliminate intercompany receivable/payable. Sales Inventory Cost of Goods Sold Eliminate intercompany sale of inventory. 140,000 12,000 128,000
80,000
E(2)
P7-22 a.
Incomplete Data
Purchase differential paid by Keller Corporation: Depreciation expense for consolidated entity Depreciation expense reported by Keller Depreciation expense reported by Tropic Depreciation of differential during 20X6 Number of years of write-off Amount of purchase differential $48,000 (20,000) (25,000) $ 3,000 x 10 $30,000
b.
Accumulated depreciation for consolidated entity: Accumulated depreciation reported by Keller Accumulated depreciation reported by Tropic Cumulative write-off of differential ($3,000 x 6 years) Accumulated depreciation for consolidated entity $180,000 110,000 18,000 $308,000
c.
Amount paid by Keller to acquire ownership in Tropic: Common stock outstanding Retained earnings at acquisition Total book value at acquisition Proportion of ownership acquired Book value of net assets acquired Purchase differential Amount paid by Keller $60,000 30,000 $90,000 x .75 $67,500 30,000 $97,500
d.
Investment in Tropic Company stock reported at December 31, 20X6: Tropic's common stock outstanding December 31, 20X6 Tropic's retained earnings reported December 31, 20X6 Total book value Proportion of ownership held by Keller Keller's share of net book value Unamortized purchase differential ($3,000 x 4 years) Investment in Tropic Company stock $ 60,000 112,000 $172,000 x .75 $129,000 12,000 $141,000
e.
Intercorporate sales of inventory in 20X6: Sales reported by Keller Sales reported by Tropic Total sales Sales reported in consolidated income statement Intercompany sales during 20X6 $420,000 260,000 $680,000 (650,000) $ 30,000
P7-22 f.
(continued)
Unrealized inventory profit, December 31, 20X6: Inventory reported by Keller Inventory reported by Tropic Total inventory Inventory reported in consolidated balance sheet Unrealized inventory profit, December 31, 20X6 $125,000 90,000 $215,000 (211,000) $ 4,000
g.
Determination of direction of inventory sales during 20X6: The unrealized profit on inventory sales made during 20X6 was in the books of Tropic Company, as show below. Thus, the sales were upstream. Net income reported by Tropic Proportion of ownership held by noncontrolling interest Proportionate share of net income Income assigned to noncontrolling interest Adjustment for unrealized profit $40,000 x .25 $10,000 (9,000) $ 1,000
h. Eliminating entry to remove the effects of intercompany inventory sales during 20X6: E(1) Sales Cost of Goods Sold Inventory i. Unrealized inventory profit at January 1, 20X6: Cost of goods sold reported by Keller Cost of goods sold reported by Tropic Reduction of cost of goods sold for intercompany sales during 20X6 Adjusted cost of goods sold Cost of goods sold reported in consolidated income statement Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory j. $310,000 170,000 (26,000) $454,000 (445,000) $ 9,000 30,000 26,000 4,000
Accounts receivable reported by Keller 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 Keller $ 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 Keller $107,000
P7-23 a.
Eliminations for Upstream Sales
Eliminating entries, December 31, 20X8: E(1) Income from Subsidiary Investment in Superior Filter Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Noncontrolling Interest Assign income to noncontrolling interest. Common Stock__Superior Filter Company Retained Earnings, January 1 Investment in Superior Filter Stock Noncontrolling Interest Eliminate beginning investment balance. Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit. Sales 32,000 32,000
E(2)
9,000 9,000
E(3)
90,000 220,000 248,000 62,000
E(4)
16,000 4,000 20,000
E(5)
150,000 Cost of Goods Sold 135,000 Inventory 15,000 Eliminate unrealized inventory profit: $15,000 = $45,000 - [$45,000 x ($100,000 / $150,000)] $135,000 = $100,000 CGS recorded by Superior 105,000 CGS recorded by Clean Air $205,000 (70,000) Consolidated amount: $100,000 x ($105,000 / $150,000) $135,000 Required elimination
P7-23 b.
(continued)
Computation of consolidated net income: Operating income reported by Clean Air Products ($250,000 - $175,000 - $30,000) Net income of Superior Filter ($200,000 - $140,000 - $20,000) Inventory profit realized from 20X7 Unrealized inventory profit for 20X8 Income assigned to noncontrolling interest ($40,000 + $20,000 - $15,000) x .20 Consolidated net income
$ 45,000 40,000 $ 85,000 20,000 (15,000) $ 90,000 (9,000) $ 81,000
c.
Noncontrolling interest, December 31, 20X8: Common stock Retained earnings ($220,000 + $40,000) Less: Unrealized inventory profit Proportion of stock held by noncontrolling interest Noncontrolling interest $ 90,000 260,000 (15,000) $335,000 x .20 $ 67,000
P7-24 a.
Multiple Inventory Transfers
Consolidated net income for 20X8: Operating income of Ajax Corporation Unrealized profit, December 31, 20X8 ($35,000 - $15,000) x ($7,000 / $35,000) Net income of Beta Corporation Profit realized from 20X7 ($30,000 - $24,000) x ($10,000 / $30,000) Unrealized profit, December 31, 20X8 ($72,000 - $63,000) x ($12,000 / $72,000) Net income of Cole Corporation Profit realized from 20X7 ($72,000 - $60,000) x ($18,000 / $72,000) Unrealized profit, December 31, 20X8 ($45,000 - $27,000) x ($15,000 / $45,000) $80,000 (4,000) $37,500 2,000 (1,500) $20,000 3,000 (6,000) 17,000 $131,000 38,000 $ 76,000
Income assigned to noncontrolling shareholders Beta Corporation ($38,000 x .30) Cole Corporation ($17,000 x .10) Consolidated net income
$11,400 1,700
(13,100) $117,900
b.
Inventory balance, December 31, 20X8: Balance per Beta Corporation Less: Unrealized profit Balance per Cole Corporation Less: Unrealized profit Balance per Ajax Corporation Less: Unrealized profit Inventory balance per consolidated statement $ 7,000 (4,000) $12,000 (1,500) $15,000 (6,000)
$ 3,000
10,500
9,000 $22,500
c.
Income assigned to noncontrolling interest in 20X8: Realized income of Beta Corporation Proportion of stock held by noncontrolling interest Realized income of Cole Corporation Proportion of stock held by noncontrolling interest Income to noncontrolling interest $38,000 x .30 $11,400
$17,000 x .10 1,700 $13,100
P7-25
Consolidation with Inventory Transfers and Other Comprehensive Income
a.
Balance in investment account at December 31, 20X5: Proportionate share of Tall's net assets, January 1 ($1,400,000 x .90) Proportionate share of 20X5 net income ($90,000 x .90) Proportionate share of other comprehensive income for 20X5 ($20,000 x .90) Proportionate share of dividends received ($60,000 x .90) Balance in investment account December 31, 20X5
$1,260,000 81,000 18,000 (54,000) $1,305,000
b.
Investment income for 20X5: Net income reported by Tall Proportion of ownership held by Priority Investment income for 20X5 $90,000 x .90 $81,000
c.
Income to noncontrolling interests for 20X5: Net income reported by Tall 20X4 inventory profits realized in 20X5 ($15,000 x .40) 20X5 unrealized inventory profits $30,000 - [$30,000 x ($48,000 / $90,000)] Realized net income Proportion of ownership held by noncontrolling interest Income to noncontrolling interest $90,000 6,000 (14,000) $82,000 x .10 $ 8,200
d. Balance assigned to noncontrolling interest in consolidated balance sheet: Net assets reported by Tall, January 1 Net income for 20X5 Dividends paid in 20X5 Net assets reported, December 31, 20X5 Unrealized inventory profits at December 31, 20X5 Other comprehensive income in 20X5 Adjusted net assets, December 31, 20X5 Proportion of ownership held by noncontrolling interest Net assets assigned to noncontrolling interest $1,400,000 90,000 (60,000) $1,430,000 (14,000) 20,000 $1,436,000 x $ .10 143,600
P7-25 e.
(continued)
Inventory reported in consolidated balance sheet: Inventory held by Priority Less unrealized profit Inventory held by Tall Less unrealized profit Inventory $120,000 (14,000) $100,000 (2,000)
$106,000
98,000 $204,000
f.
Consolidated net income for 20X5: Operating income of Priority Investment income from Tall Inventory profit from 20X4 realized in 20X5: Reported by Priority Reported by Tall ($6,000 x .90) Unrealized inventory profit reported in 20X5: Reported by Priority Reported by Tall ($14,000 x .90) Consolidated net income or Operating income of Priority Net income of Tall Total unadjusted income 20X4 inventory profits realized in 20X5 ($6,000 + $8,000) Unrealized inventory profits on 20X5 sales ($14,000 + $2,000) Realized income Income to noncontrolling interest Consolidated net income $240,000 90,000 $330,000 14,000 (16,000) $328,000 ( 8,200) $319,800 $240,000 81,000 8,000 5,400 (2,000) (12,600) $319,800
g.
Eliminating entries, December 31, 20X5 E(1) Income from Investment in Subsidiary Dividends Declared Investment in Tall Common Stock Eliminate income from subsidiary. 81,000 54,000 27,000
E(2)
Income to Noncontrolling Interest 8,200 Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest. Other Comprehensive Income from Subsidiary (OCI) Investment in Tall Company Stock Eliminate other comprehensive income from subsidiary.
6,000 2,200
E(3)
18,000 18,000
P7-25 E(4)
(continued) Other Comprehensive Income to Noncontrolling Interest Noncontrolling Interest Assign other comprehensive income to noncontrolling interest. Common Stock__Tall Company Additional Paid-In Capital__Tall Company Retained Earnings, January 1 Accumulated Other Comprehensive Income Investment in Tall Common Stock Noncontrolling Interest Eliminate beginning investment balance. Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Tall Company. Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Priority Corporation. Sales Inventory Cost of Goods Sold Eliminate intercompany sale of inventory by Priority Corporation.
2,000 2,000
E(5)
400,000 200,000 790,000 10,000 1,260,000 140,000
E(6)
5,400 600 6,000
E(9)
8,000 8,000
E(10)
36,000 2,000 34,000
E(11)
Sales Inventory Cost of Goods Sold Eliminate intercompany sale of inventory by Tall Company.
90,000 14,000 76,000
P7-26 a.
Multiple Inventory Transfers between Parent and Subsidiary
Eliminating entries: E(1) Retained earnings, January 1 Cost of goods sold Eliminate beginning inventory profit of Proud Company. Retained earnings, January 1 Noncontrolling Interest Cost of goods sold Inventory Eliminate beginning inventory profit of Slinky Company. Sales Inventory Cost of goods sold Eliminate intercompany sale of inventory by Proud Company. E(4) Sales Inventory Cost of goods sold Eliminate intercompany sale of inventory by Slinky Company. 240,000 30,000 210,000 20,000 20,000
E(2)
12,600 8,400 15,000 6,000
E(3)
60,000 2,000 58,000
b.
Computation of cost of goods sold for consolidated entity: Inventory produced by Proud in 20X5 ($100,000 x .40) Inventory produced by Slinky in 20X5 ($70,000 x .50) Inventory produced by Proud in 20X6 ($40,000 x .90) Inventory produced by Slinky in 20X6 ($200,000 x .25) Cost of goods sold reported in consolidated income statement
$ 40,000 35,000 36,000 50,000 $161,000
P7-27
Consolidation following Inventory Transactions
a. Entries recorded by Bell on its investment in Troll: Investment in Troll Corporation Stock Income from Subsidiary Record equity-method income: $30,000 x .60 Cash Investment in Troll Corporation Stock Record dividends from Troll: $10,000 x .60 b. Eliminating entries, December 31, 20X2: E(1) Income from Subsidiary Dividends Declared Investment in Troll Corporation Stock Eliminate income from subsidiary. 18,000 6,000 12,000 18,000 18,000
6,000 6,000
E(2)
Income to Noncontrolling Interest 11,680 Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $11,680 = ($30,000 + $3,400 - $4,200) x .40 Common Stock__Troll Corporation 100,000 Retained Earnings, January 1 50,000 Land 11,000 Investment in Troll Corporation Stock Noncontrolling Interest Eliminate beginning investment balance: $11,000 = $83,000 - ($100,000 + $20,000) x .60 $101,000 = $113,000 - $12,000 $60,000 = ($100,000 + $50,000) x .40 Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Troll Corporation. Sales Cost of Goods Sold Inventory Eliminate intercompany upstream sale of inventory by Troll Corporation: $4,200 = ($35,000 - $21,000) x .30 2,040 1,360
4,000 7,680
E(3)
101,000 60,000
E(4)
3,400
E(5)
35,000 30,800 4,200
E(6)
Sales Cost of Goods Sold Inventory Eliminate intercompany downstream sale of inventory by Bell Company: $6,500 = $13,000 x ($14,000/$28,000)
28,000 21,500 6,500
P7-27
(continued) c.Bell Company and Troll Corporation Consolidation Workpaper December 31, 20X2 Bell Co. 200,000 18,000 218,000 99,800 Troll Corp. 120,000 Eliminations Debit Credit (5) 35,000 (6) 28,000 (1) 18,000 (4) 3,400 (5) 30,800 (6) 21,500 Consolidated 257,000 257,000
Item Sales Income from Subsidiary Credits Cost of Goods Sold
120,000 61,000
Depreciation Expense Interest Expense Debits Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1 Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash and Accounts Receivable Inventory Land Buildings and Equipment Investment in Troll Corporation Stock Debits Accum. Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Bell Company Troll Corporation Retained Earnings, from above Noncontrolling Interest 802,200 486,200
25,000 15,000 6,000 14,000 (130,800) (90,000)
105,100 40,000 20,000 (165,100) 91,900 (11,680)
(2) 11,680 87,200 230,000 30,000 50,000 92,680 (3) 50,000 (4) 2,040 92,680 (1) (2) 144,720 55,700
80,220 227,960 80,220 308,180 (40,000) 268,180 120,400
87,200 30,000 317,200 80,000 (40,000) (10,000)
55,700 6,000 4,000 65,700
277,200 69,200 60,000 40,000 520,000 113,000 802,200 175,000 68,800 80,000 1,200 200,000
70,000 51,200 55,000 30,000 350,000
(5) (6) (3) 11,000
4,200 6,500
104,300 81,000 870,000
(1) 12,000 (3)101,000 486,200 75,000 41,200 200,000 1,175,700 250,000 110,000 280,000 1,200 200,000 100,000 (3)100,000 144,720 (4) 1,360 65,700 (2) 7,680 (3) 60 000 268,180
277,200
70,000
66,320
Credits
257,080
257,080
1,175,700
P7-28 a.
Consolidation Workpaper Eliminating entries: Income from Subsidiary Dividends Declared Investment in West Company Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,950 = ($20,000 + $30,000 - $25,000 + $1,500) x .30 Common Stock__West Company Retained Earnings, January 1 Differential Investment in West Company Stock Noncontrolling Interest Eliminate beginning investment balance. $25,200 = $291,200 - ($380,000 x .70) $305,000 = $315,700 - $10,500 $120,000 = ($250,000 + $150,100) x .30 Land Goodwill Differential Assign beginning differential: $9,800 = $14,000 x .70 Computation of goodwill Amount paid by Crow Book value of West's assets Fair value increment for land Fair value of net assets Proportion owned by Crow Fair value of ownership purchased Goodwill at acquisition 14,000 3,500 10,500
E(1)
E(2)
7,950 1,500 6,450
E(3)
150,000 250,000 25,200 305,200 120,000
E(4)
9,800 15,400 25,200
$291,200 $380,000 14,000 $394,000 x .70 (275,800) $ 15,400 21,000 9,000 30,000
E(5)
Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of West Company.
P7-28 E(6)
(continued) Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Crow Corporation. Sales Cost of Goods Sold Inventory Eliminate intercompany upstream sale of inventory by West Company: $25,000 = $62,000 - $37,000 15,000 15,000
E(7)
62,000 37,000 25,000
E(8)
Sales
90,000 Cost of Goods Sold Inventory Eliminate intercompany downstream sale of inventory by Crow Corporation: $8,000 = ($90,000 - $54,000) x ($20,000 / $90,000) $82,000 = $ 54,000 CGS recorded by Crow Corporation 70,000 CGS recorded by West Company $124,000 (42,000) Consolidated amount: $54,000 x ($70,000 / $90,000) $ 82,000 Required elimination 7,350 3,150
82,000 8,000
E(9)
Retained Earnings, January 1 Noncontrolling Interest Depreciation Expense Buildings and Equipment (net) Eliminate unrealized gain on equipment: $7,350 = [$15,000 - ($1,500 x 3)] x .70 $3,150 = [$15,000 - ($1,500 x 3)] x .30 $1,500 = $9,500 -$8,000 $9,000 = [$95,000 - ($9,500 x 4)] [$120,000 - ($8,000 x 9)]
1,500 9,000
P7-28 b.
(continued) Crow Corporation and West Company Consolidation Workpaper December 31, 20X9 Crow Corp. 300,000 14,000 314,000 200,000 West Co. 200,000 Eliminations Debit Credit (7) 62,000 (8) 90,000 (1) 14,000 (5) (6) (7) (8) (9) 30,000 15,000 37,000 82,000 1,500 Consolidated
Item Sales and Service Revenue Income from Subsidiary Credits Cost of Goods and Services
348,000 348,000
200,000 150,000
Depreciation Expense Debits Income to Noncontrolling Interest Net Income, carry forward Retained Earnings, Jan. 1
40,000 30,000 (240,000)(180,000)
186,000 68,500 (254,500) 93,500 (7,950)
(2) 74,000 568,000 20,000 250,000
7,950 173,950 165,500
85,550
Net Income, from above Dividends Declared Retained Earnings, Dec. 31, carry forward Cash and Receivables Inventory Land Buildings & Equipment (net) Investment in West Company Stock Differential Goodwill Debits Accounts Payable Common Stock Ret. Earnings, from above Noncontrolling Interest Credits
74,000 20,000 642,000 270,000 (35,000) (5,000)
(3)250,000 (5) 21,000 (6) 15,000 (9) 7,350 173,950 (1) (2) 467,300
165,500 3,500 1,500 170,500
524,650 85,550 610,200 (35,000) 575,200 166,300
607,000 81,300 200,000
265,000 85,000 110,000 (4)
(7) 25,000 (8) 8,000 9,800 (9) 9,000
270,000 315,700
250,000
277,000 9,800 511,000
(1) 10,500 (3)305,200 (3) 25,200 (4) 25,200 (4) 15,400 445,000 30,000 150,000 265,000
867,000 60,000 200,000 607,000
867,000
445,000
(3)150,000 467,300 170,500 (5) 9,000 (2) 6,450 (9) 3,150 (3)120,000 679,850 679,850
15,400 979,500 90,000 200,000 575,200 114,300 979,500
P7-28 c.
(continued)
Retained earnings reconciliation, December 31, 20X9: Retained earnings, Crow Corporation Unrealized profits on Crow Corporation's books ($90,000 - $54,000) x ($20,000 / $90,000) Unrealized profits on West Company's books ($62,000 - $37,000) x .70 Unrealized profit on equipment transfer [($15,000 - ($1,500 x 4)] x .70 Consolidated retained earnings $607,000 (8,000) (17,500) (6,300) $575,200
P7-29 a.
Computation of Consolidated Totals
Consolidated sales for 20X8: Bunker Corp. $660,000 (140,000) $520,000 Harrison Co. $510,000 (240,000) $270,000 Consolidated
Sales reported Intercorporate sales Sales to nonaffiliates
$790,000
b.
Consolidated cost of goods sold: Total sales reported Ratio of cost to sales price Cost of goods sold Amount to be eliminated (see entry) Cost of goods sold adjusted Eliminating entries: E(1) Sales Inventory Cost of Goods Sold Elimination of sales by Bunker to Harrison: $12,000 = $42,000 - ($42,000 / 1.40) $128,000 = $140,000 - $12,000 E(2) Sales Inventory Cost of Goods Sold Elimination of sales by Harrison to Bunker: $8,000 = $48,000 - ($48,000 / 1.20) $232,000 = $240,000 - $8,000 240,000 8,000 232,000 140,000 12,000 128,000 $660,000 1.4 $471,429 (128,000) $343,429 $510,000 1.2 $425,000 (232,000) $193,000
$536,429
P7-29 c.
(continued)
Operating income of Bunker Corporation (excluding income from Harrison Company) Net income of Harrison Company Less: Unrealized inventory profits of Bunker Unrealized inventory profits of Harrison Less: Income assigned to noncontrolling interest ($20,000 - $8,000) x .20 Consolidated net income for 20X8
$70,000 20,000 $90,000 (12,000) (8,000) $70,000 (2,400) $67,600
d.
Inventory balance in consolidated balance sheet: Inventory reported by Bunker Corporation Unrealized profits Inventory reported by Harrison Company Unrealized profits Inventory balance, December 31, 20X8 $48,000 (8,000) $42,000 (12,000)
$40,000
30,000 $70,000
P7-30 a.
Intercompany Transfer of Inventory and Land
Eliminating entries: E(1) Income from Subsidiary 14,100 Dividends Declared Investment in Bock Company Stock Eliminate income from subsidiary: $14,100 = ($25,000 x .70) - $1,400 - $2,000 $10,500 = $15,000 x .70 Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,800 = ($25,000 + $9,000 - $8,000) x .30 $4,500 = $15,000 x .30 Common stock__Bock Company Retained Earnings, January 1 Differential Investment in Bock Company Stock Noncontrolling Interest Eliminate beginning investment balance: $111,600 = $115,200 - $3,600 7,800 4,500 3,300
10,500 3,600
E(2)
E(3)
80,000 50,000 20,600 111,600 39,000
Computation of unamortized purchase differential Purchase price Book value of Spencer's net assets ($80,000 + $20,000) x .70 Differential at acquisition Amortization of amount assigned to: Buildings and equipment [($20,000 x .70) / 10 years] x 1 year Patent ($10,000 / 5 years) x 1 year Unamortized differential, January 1, 20X7 E(4) Buildings and Equipment Patent Accumulated Depreciation Differential Assign beginning differential: $14,000 = $20,000 x .70 $8,000 = $10,000 - ($2,000 x 1 year) $1,400 = $1,400 x 1 year $94,000 (70,000) $24,000
(1,400) (2,000) $20,600 14,000 8,000 1,400 20,600
P7-30 E(5)
(continued) Depreciation Expense Amortization Expense Accumulated Depreciation Patent Amortize differential: $1,400 = $14,000 / 10 years $2,000 = $10,000 / 5 years Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Inventory Eliminate beginning inventory profit of Bock Company: $11,200 = ($48,000 - $32,000) x .70 $4,800 = ($48,000 - $32,000) x .30 $9,000 = $27,000 - ($27,000 x 2/3) $7,000 = $21,000 - ($21,000 x 2/3) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Bock Company: $8,000 = $24,000 - ($24,000 x 2/3) 1,400 2,000 1,400 2,000
E(6)
11,200 4,800 9,000 7,000
E(7)
90,000 82,000 8,000
E(8)
Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Hart Corporation: $3,800 = $7,600 - ($7,600 x 1/2)
30,000 26,200 3,800
E(9)
Retained Earnings, January 1 Noncontrolling Interest Land Eliminate unrealized profit on land. $15,000 = $37,000 - $22,000
10,500 4,500 15,000
P7-30
(continued) b.Hart Corporation and Bock Company Consolidation Workpaper December 31, 20X3 Hart Corp. 260,000 13,600 14,100 287,700 186,000 Bock Co. 125,000 Eliminations Debit Credit (7) 90,000 (8) 30,000 (1) 14,100 125,000 79,800 278,600 (6) 9,000 (7) 82,000 (8) 26,200 (5) (5) (222,000)(100,000) 1,400 2,000 Consolidated
Item Sales Other Income Income from Subsidiary Credits Cost of Goods Sold
265,000 13,600
Depreciation Expense Interest Expense Amortization Expense Debits Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1
20,000 16,000
15,000 5,200
148,600 36,400 21,200 2,000 (208,200) 70,400 (7,800)
(2) 65,700 142,000 25,000 50,000
7,800 145,300 117,200
62,600
Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash and Accounts Receivable Inventory
65,700 25,000 207,700 75,000 (30,000) (15,000)
(3) 50,000 (6) 11,200 (9) 10,500 145,300
117,200 (1) 10,500 (2) 4,500
120,300 62,600 182,900 (30,000) 152,900
177,700
60,000
217,000
132,200
29,900 165,000
21,600 35,000
51,500 (6) 7,000 (7) 8,000 (8) 3,800 (9) 15,000 (4) 14,000 (1) 3,600 (3)111,600 (3) 20,600 (4) 20,600 (4) 8,000 (5) 2,000
Land Buildings and Equipment Investment in Bock Company Stock Differential Patent Debits
80,000 340,000 115,200
40,000 260,000
181,200 105,000 614,000
730,100
356,600
6,000 957,700
P7-30
(continued) Hart Corp. 140,000 92,400 200,000 Bock Co. 80,000 35,000 100,000 1,600 Eliminations Debit Credit (4) (5) 1,400 1,400 Consolidated
Item Accum. Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Hart Corporation Bock Company Retained Earnings, from above Noncontrolling Interest Credits
222,800 127,400 300,000 1,600 120,000
120,000 80,000 177,700 60,000 (6) (9) 730,100 356,600 (3) 80,000 217,000 132,200
152,900
4,800 (2) 3,300 4,500 (3) 39,000 348,900 348,900
33,000 957,700
P7-30
(continued)
Note: Financial statements are not required.
Hart Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X3 Cash and Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patent Total Assets Accounts Payable Bonds Payable Bond Premium Noncontrolling Interest Common Stock Retained Earnings Total Liabilities and Stockholders' Equity $ 51,500 181,200 105,000 $614,000 (222,800) 391,200 6,000 $734,900 $127,400 $300,000 1,600 $120,000 152,900 301,600 33,000 272,900 $734,900
Hart Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X3 Sales Other Income Total Income Cost of Goods Sold Depreciation Expense Interest Expense Amortization Expense Total Expenses Income to Noncontrolling Interest Consolidated Net Income $265,000 13,600 $278,600 $148,600 36,400 21,200 2,000 (208,200) $ 70,400 (7,800) $ 62,600
P7-30
(continued)
Hart Corporation and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X3 Retained Earnings, January 1, 20X3 20X3 Net Income Dividends Paid in 20X3 Retained Earnings, December 31, 20X3 $120,300 62,600 $182,900 (30,000) $152,900
P7-31 a.
Consolidation Using Financial Statement Data
Eliminating entries, December 31, 20X6: E(1) Income from Subsidiary Dividends Declared Investment in Concerto Company Stock Eliminate income from subsidiary. 21,000 12,000 9,000
E(2)
Income to Noncontrolling Interest 13,600 Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $13,600 = ($35,000 + $8,000 - $9,000) x .40 Common Stock__Concerto Company Retained Earnings, January 1 Differential Investment in Concerto Company Stock Noncontrolling Interest Eliminate beginning investment balance. 50,000 150,000 24,000
8,000 5,600
E(3)
144,000 80,000
P7-31 E(4)
(continued) Goodwill Differential Assign differential to goodwill. Goodwill Impairment Loss Goodwill Recognize impairment of goodwill. Retained Earnings, January 1 Noncontrolling Interest Land Eliminate unrealized gain on land. Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Direct Sales: $14,000 - ($14,000 / 1.40) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Concerto Company: $8,000 = $48,000 - ($48,000 / 1.20) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Direct Sales: $2,000 = $7,000 - ($7,000 / 1.40) 24,000 24,000
E(5)
12,000 12,000
E(6)
6,000 4,000 10,000
E(7)
4,000 4,000
E(8)
4,800 3,200 8,000
E(9)
22,000 20,000 2,000
E(10)
Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Concerto Company: $9,000 = $54,000 - ($54,000 / 1.20)
90,000 81,000 9,000
P7-31 b.
(continued) Direct Sales Corporation and Concerto Company Consolidation Workpaper December 31, 20X6 Direct Sales 400,000 21,000 421,000 280,000 Concerto Co. 200,000 Eliminations Debit Credit (9) 22,000 (10)90,000 (1) 21,000 (7) 4,000 (8) 8,000 (9) 20,000 (10)81,000 Consolidated
Item Sales Income from Subsidiary Credits Cost of Goods Sold
488,000 488,000
200,000 120,000
287,000 40,000 12,000 65,000 (404,000) 84,000 (13,600)
Depreciation and Amortization 25,000 15,000 Goodwill Impairment Loss (5) 12,000 Other Expenses 35,000 30,000 Debits (340,000)(165,000) Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1
(2) 13,600 81,000 293,800 35,000 150,000 158,600 (3)150,000 (6) 6,000 (7) 4,000 (8) 4,800 158,600 113,000
70,400
Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward
81,000 35,000 374,800 185,000 (50,000) (20,000)
113,000 (1) 12,000 (2) 8,000
279,000 70,400 349,400 (50,000) 299,400
324,800
165,000
323,400
133,000
P7-31
(continued) Direct Sales 26,800 80,000 120,000 70,000 340,000 153,000 Concerto Co. 35,000 40,000 90,000 20,000 200,000 Eliminations Debit Credit Consolidated 61,800 120,000 (9) 2,000 (10) 9,000 (6) 10,000 199,000 80,000 540,000
Item Cash Accounts Receivable Inventory Land Buildings and Equipment Investment in Concerto Company Stock Differential Goodwill Debits Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest Credits
(1) 9,000 (3)144,000 (3) 24,000 (4) 24,000 (4) 24,000 (5) 12,000 385,000 85,000 15,000 70,000 50,000 165,000 (6) (8)
789,800 165,000 80,000 120,000 100,000 324,800
12,000 1,012,800 250,000 95,000 190,000 100,000 299,400 78,400 1,012,800
(3) 50,000 323,400 133,000 4,000 (2) 5,600 3,200 (3) 80,000 428,600 428,600
789,800
385,000
P7-32 a.
Intercorporate Transfers of Inventory and Equipment
Consolidated cost of goods sold for 20X9: Amount reported by Foster Company Amount reported by Block Corporation Adjustment for unrealized profit in beginning inventory sold in 20X9 Adjustment for inventory purchased from subsidiary and resold during 20X9: CGS recorded by Foster ($30,000 x .60) CGS recorded by Block Total recorded CGS based on Block's cost ($20,000 x .60) Required adjustment Cost of goods sold $593,000 270,000 (15,000)
$18,000 20,000 $38,000 (12,000) (26,000) $822,000
b.
Consolidated inventory balance: Amount reported by Foster Amount reported by Block Total inventory reported Unrealized profit in ending inventory held by Foster [($30,000 - $20,000) x .40] Consolidated balance $137,000 130,000 $267,000 (4,000) $263,000
c.
Income assigned to noncontrolling interest: Net income reported by Block Corporation Adjustment for realization of loss on equipment sold to Foster in 20X7 Adjustment for realization of profit on inventory sold to Foster in 20X8 Adjustment for unrealized profit on inventory sold to Foster in 20X9 Realized net income of Block for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest $70,000 (3,000) 15,000 (4,000) $78,000 x .10 $ 7,800
P7-32
(continued)
d.
Amount assigned to noncontrolling interest in consolidated balance sheet: Block Corporation common stock outstanding Block Corporation retained earnings, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Book value, December 31, 20X9 Adjustment for unrealized loss on equipment $24,000 - [($24,000 / 8 years) x 3 years] Adjustment for unrealized profit on inventory sold to Foster Realized book value of Block Corporation Proportion of ownership held by noncontrolling interest Balance assigned to noncontrolling interest $ 50,000 165,000 70,000 (20,000) $265,000 15,000 (4,000) $276,000 x .10 $ 27,600
e.
Consolidated retained earnings at December 31, 20X9: Balance reported by Foster Company, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Balance reported by Foster Company, December 31, 20X9 Adjustment for proportionate share of unrealized loss on sale of equipment ($15,000 x .90) Adjustment for proportionate share of unrealized gain on inventory ($4,000 x .90) Consolidated retained earnings, December 31, 20X9 $248,500 171,000 (40,000) $379,500 13,500 (3,600) $389,400
f.
Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Block Corporation Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest. Common Stock__Block Corporation Retained Earnings, January 1 Investment in Block Corporation Stock Noncontrolling Interest Eliminate beginning investment balance. 63,000 18,000 45,000
E(2)
7,800 2,000 5,800
E(3)
50,000 165,000 193,500 21,500
P7-32 E(4)
(continued) Buildings and Equipment 42,000 Depreciation Expense 3,000 Retained Earnings, January 1 Noncontrolling Interest Accumulated Depreciation Eliminate intercorporate sale of equipment: $42,000 = $90,000 - $48,000 $3,000 = ($90,000 / 10 years) - ($48,000 / 8 years) $16,200 = [$24,000 - ($3,000 x 2 years)] x .90 $1,800 = [$24,000 - ($3,000 x 2 years)] x .10 $27,000 = [($90,000 / 10 years) x 5 years] - [($48,000 / 8 years) x 3 years] Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Block Corporation 30,000 26,000 4,000
16,200 1,800 27,000
E(5)
E(6)
Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Block Corporation.
13,500 1,500 15,000
P7-32
(continued) Foster Company and Block Corporation Consolidation Workpaper December 31, 20X9 Foster Co. 815,000 26,000 Block Corp. Eliminations Debit Credit Consolidated
Item Sales Other Income from Subsidiary Credits Cost of Goods Sold
415,000 (5) 30,000 1,200,000 15,000 41,000 63,000 (1) 63,000 904,000 430,000 1,241,000 593,000 270,000 (5) 26,000 (6) 15,000 822,000 Depreciation Expense 45,000 15,000 (4) 3,000 63,000 Other Expenses 95,000 75,000 170,000 Debits (733,000)(360,000) (1,055,000) 186,000 Income to Noncontrolling Interest (2) 7,800 (7,800) Net Income, carry forward 171,000 70,000 103,800 41,000 178,200 Ret. Earnings, Jan. 1 Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivable Other Receivables Inventory Land Buildings and Equipment Investment in Block Corporation Stock Debits 248,500 165,000 (3)165,000 (4) 16,200 (6) 13,500 103,800 41,000 (1) 18,000 (2) 2,000 282,300 77,200
Income
171,000 70,000 419,500 235,000 (40,000) (20,000)
251,200 178,200 429,400 (40,000) 389,400 244,400 170,000 50,000 263,000 140,000 792,000
379,500 187,000 80,000 40,000 137,000 80,000 500,000 238,500 1,262,500
215,000 57,400 90,000 10,000 130,000 60,000 250,000
(5) (4) 42,000
4,000
(1) 45,000 (3)193,500 597,400 1,659,400
P7-32
(continued) Foster Co. 155,000 63,000 95,000 250,000 Block Corp. 75,000 35,000 20,000 200,000 2,400 Eliminations Debit Credit (4) 27,000 Consolidated 257,000 98,000 115,000 450,000 2,400 210,000 50,000 110,000 379,500 215,000 (6) 282,300 77,200 (3) 50,000 110,000 389,400
Item Accum. Depreciation Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock Foster Company Block Corporation Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest
210,000
Credits
1,262,500
597,400
1,500 (2) 5,800 (3) 21,500 (4) 1,800 375,800 375,800
27,600 1,659,400
P7-33 1. b
Comprehensive Multiple-Choice Problem $72,400 = $50,000 + $20,000 + $2,400 Amortization of differential assigned to buildings and equipment ($24,000 / 10 years)
$2,400
2.
$394,000 = $200,000 + $200,000 - ($70,000 - $50,000) x .30
3.
$254,000 = $220,000 + $100,000 - $2,000 - $64,000 Adjustment for unrealized profits, January 1, 20X6 ($35,000 - $30,000) x .40 Adjustment for intercompany sales in 20X6: CGS recorded by Dime Stores on sale to Mega Retailers CGS recorded by Mega Retailers ($70,000 x .70) Correct CGS for consolidation total ($50,000 x .70) Required adjustment to CGS
$2,000
$50,000 49,000 $99,000 (35,000) $64,000
4.
$22,400 = $27,200 - ($2,400 x 2 years)
5.
$3,200 Assignment of differential: Purchase price Underlying book value ($200,000 + $50,000) x .80 Differential Assigned to buildings and equipment ($30,000 x .80) Assigned to goodwill
$227,200 (200,000) $ 27,200 (24,000) $ 3,200
6.
$7,200 =
Reported net income of Dime Stores Inventory profits realized from prior year Unrealized profits on 20X6 intercompany sales ($70,000 - $50,000) x .30 Realized net income Proportion of ownership held Income assigned to noncontrolling interest
$40,000 2,000 (6,000) $36,000 x .20 $ 7,200
P7-33 7. b
(continued) $63,800 = Common stock Retained earnings, December 31, 20X6 Unrealized inventory profits Proportion of stock held by noncontrolling interest Noncontrolling interest $200,000 125,000 (6,000) $319,000 x .20 $ 63,800
8.
$50,400 = Operating income of Mega Retail ($300,000 + $34,000 - $310,000) Net income of Dime Stores Inventory profits realized from prior year Unrealized inventory profits for 20X6 Amortization of differential Assigned to buildings Income assigned to noncontrolling interest Consolidated net income
$24,000 40,000 2,000 (6,000) (2,400) $57,600 (7,200) $50,400
P7-34
Consolidated Balance Sheet Workpaper [AICPA Adapted]
Pine Corp. and Subsidiary Consolidated Balance Sheet Workpaper December 31, 20X6
Pine Corp. Assets Cash Accounts and Other Current Receivables 75,000
Slim Corp.
Adjustments and Eliminations Debit Credit
Consolidated
15,000
90,000
410,000
120,000
[b]
900
[3] 900 [4] 5,000 [5] 100,000 [7] 90,000 [6] 3,000
335,000 1,587,000
Merchandise Inventory Plant and Equipment, net Investment in Slim
920,000
670,000
1,000,000 1,200,000
400,000 [a] 90,900 [b] 900 [1] 480,000 [2] 810,000
1,400,000
Goodwill Totals
[1] 480,000 3,605,000 1,205,000
480,000 3,892,000
Liabilities and Stockholders' Equity Accounts Payable and Other Current Liabilities
140,000
305,000
[3] 900 [4] 5,000 [5] 100,000 [7] 90,000 [2] 200,000
249,100 500,000
Common Stock ($10 par) Retained Earnings
500,000 2,965,000
200,000 700,000
[2] 700,000 [6] 3,000 Noncontrolling Interest, 10 percent Totals
[a]
90,900
3,052,900
3,605,000
1,205,000
1,670,700
[2] 90,000 1,670,700
90,000 3,892,000
P7-34
(continued) Explanations of Workpaper Adjustments and Eliminations
[a]
To record net income of Slim Corporation accruing to Pine Corporation: Slim Corporation's retained earnings at December 31, 20X6 $700,000 Slim Corporation's retained earnings at January 1, 20X6 (600,000) Increase in retained earnings after dividend declaration $100,000 Add dividend declaration 1,000 Slim Corporation's net income for year ended December 31, 20X6 $101,000 Pine Corporation's share, 90 percent $ 90,900 To record Pine Corporation's share of dividend declared by Slim Corporation: 90 percent of $1,000 To record goodwill: Purchase price of 90 percent of Slim Corporation's common stock Slim Corporation's book value at January 1, 20X6 Common stock Retained earnings Total Pine Corporation's share, 90 percent Goodwill
[b]
$900
[1]
$1,200,000 $200,000 600,000 $800,000 $ 720,000 480,000
[2]
To eliminate 90 percent of Slim Corporation's book value and record noncontrolling interest: Common stock Retained earnings at December 31, 20X6 Total Pine Corporation's share, 90 percent Minority interest, 10 percent Total
$200,000 700,000 $900,000 $810,000 90,000 $900,000
[3]
To eliminate intercompany dividend receivable and payable: 90 percent of $1,000 To eliminate intercompany accrued interest: $100,000 @ 10 percent x _ year To eliminate intercompany loan: To eliminate intercompany profit in Slim Corporation's December 31 inventory: Sales from Pine Corporation to Slim Corporation 5 percent remaining in Slim Corporation's December 31 inventory Multiply by .20 ($60,000 / $300,000) [7]
$900
[4]
$5,000 $100,000
[5] [6]
$300,000 $ 15,000 $ 3,000 $90,000
To eliminate intercompany trade account receivable and payable:
P7-35 a.
Comprehensive Worksheet Problem__Perpetual Inventories
Basic equity-method entries for 20X7: (1) Investment in Sharp Company Stock Income from Subsidiary Record equity-method income: $40,000 x .80 Cash Investment in Sharp Company Stock Record dividend from Sharp Company: $25,000 x .80 (3) Income from Subsidiary Investment in Sharp Company Stock Amortize differential: $40,000 / 10 years 4,000 4,000 32,000 32,000
(2)
20,000 20,000
b.
Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Sharp Company Stock Eliminate income from subsidiary: $28,000 = $32,000 - $4,000 Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,600 = ($40,000 + $8,000 - $10,000) x .20 Common Stock__Sharp Company Additional Paid-In Capital Retained Earnings, January 1 Differential Investment in Sharp Company Stock Noncontrolling Interest Eliminate beginning investment balance. Buildings and Equipment Depreciation Expense Accumulated Depreciation Differential Assign differential: $16,000 = ($40,000 / 10 years) x 4 years Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Sharp Company. 28,000 20,000 8,000
E(2)
7,600 5,000 2,600
E(3)
100,000 20,000 215,000 28,000 296,000 67,000
E(4)
40,000 4,000 16,000 28,000
E(5)
6,400 1,600 8,000
P7-35 E(6)
(continued) Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Randall Corporation. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Sharp Company. 2,000 2,000
E(7)
45,000 35,000 10,000
E(8)
Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Randall Corporation.
12,000 9,000 3,000
E(9)
Buildings and Equipment Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment.
25,000 17,500 2,500 40,000
Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) $ 6,250 Depreciation required ($75,000 / 20 years) (3,750) Required decrease $ 2,500 Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x 2 years) Required increase E(10) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable.
$52,500 (12,500) $40,000 10,000 10,000
P7-35 c.
(continued) Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Randall Corp. 500,000 20,400 28,000 548,400 416,000 Sharp Co. 250,000 30,000 (1) 28,000 280,000 202,000 743,400 (5) 8,000 (6) 2,000 (7) 35,000 (8) 9,000 4,000 (9) 2,500 Eliminations Debit Credit (7) 45,000 (8) 12,000 Consolidated
693,000 50,400
Deprec. and Amortization Other Expenses Debits Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1
30,000 20,000 (4) 24,000 18,000 (470,000)(240,000)
564,000 51,500 42,000 (657,500) 85,900 (7,600)
(2) 78,400 345,900 40,000 215,000
7,600 96,600 56,500
78,300
78,400 40,000 424,300 255,000 (50,000) (25,000)
(3)215,000 (5) 6,400 (6) 2,000 (9) 17,500 96,600
56,500 (1) 20,000 (2) 5,000
320,000 78,300 398,300 (50,000) 348,300
374,300
230,000
337,500
81,500
P7-35
(continued) Randall Corp. 130,300 80,000 170,000 600,000 Sharp Co. 10,000 70,000 110,000 400,000 (4) 40,000 (9) 25,000 (1) 8,000 (3)296,000 (3) 28,000 (4) 28,000 590,000 120,000 15,200 100,000 4,800 100,000 20,000 374,300 230,000 (5) 1,284,300 590,000 (10)10,000 (4) 16,000 (9) 40,000 1,612,300 Eliminations Debit Credit Consolidated 140,300 140,000 267,000 1,065,000
Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock Differential Debits Accum. Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits
(10) 10,000 (7) 10,000 (8) 3,000
304,000
1,284,300 310,000 100,000 300,000 200,000
(3)100,000 (3) 20,000 337,500 81,500 1,600 (2) 2,600 (3) 67,000 562,100 562,100
486,000 105,200 400,000 4,800 200,000
348,300 68,000 1,612,300
P7-35 d.
(continued) Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7 $ 140,300 140,000 267,000 $ $1,065,000 (486,000) 547,300
Cash Accounts Receivable Inventory Total Current Assets Buildings and Equipment Less: Accumulated Depreciation Total Assets Accounts Payable Bonds Payable Bond Premium Noncontrolling Interest Common Stock Retained Earnings Total Liabilities and Stockholders' Equity
579,000 $1,126,300 $ 105,200 404,800 68,000 548,300 $1,126,300
$400,000 4,800 $200,000 348,300
Randall Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X7 Sales Other Income Cost of Goods Sold Depreciation and Amortization Expense Other Expenses Noncontrolling Interest Consolidated Net Income $564,000 51,500 42,000 $693,000 50,400 $743,400
657,500 $ 85,900 (7,600) $ 78,300
Randall Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X7 Retained Earnings, January 1, 20X7 Consolidated Net Income Less: Dividends Paid in 20X7 Retained Earnings, December 31, 20X7 $320,000 78,300 $398,300 (50,000) $348,300
P7-36
Comprehensive Consolidation Workpaper; Equity Method [AICPA Adapted]
Fran Corp. and Subsidiary Consolidation Workpaper December 31, 20X9 Adjustments and Eliminations Dr. Cr. 180,000 181,000 30,000 [7] 35,000 162,000 3,068,000 35,000
Fran Corp. Dr. (Cr.)
Brey, Inc. Dr. (Cr.)
Adjusted Balance (5,120,000)
Income Statement: Net Sales (3,800,000) (1,500,000) [7] Equity in Brey's Income (181,000) [1] Gain on Sale of Warehouse (30,000) [5] Cost of Goods Sold 2,360,000 870,000 Goodwill Impairment Loss [4] Operating Expenses (including depreciation) 1,100,000 440,000 [3] Net Income (551,000) (190,000) [a] Retained Earnings Statement: Balance, 1/1/X9 Net Income Dividends Paid Balance, 12/31/X9 Balance Sheet: Assets: Cash Accounts Receivable (net) Inventories Land, Plant and Equipment Accumulated Depreciation Investment in Brey Goodwill Total Assets
9,000 [6] 435,000 [a]
2,000 164,000
1,547,000 (470,000)
(440,000) (551,000) (991,000)
(156,000) [2] (190,000) [a] 40,000 (306,000) [b]
156,000 435,000 [a] [1] 591,000 [b]
164,000 40,000 204,000
(440,000) (470,000) (910,000)
570,000 860,000 1,060,000 1,320,000 (370,000) 891,000
150,000 350,000 410,000 680,000 [2] [8] [7] 54,000 [5] 2,000 [3] [1] [2] 60,000 [4] 86,000 18,000 30,000 9,000 141,000 750,000 35,000
720,000 1,124,000 1,452,000 2,024,000 (587,000)
(210,000) [6]
[2] 4,331,000 1,380,000
25,000 4,758,000
Liabilities and Stockholders' Equity: Accounts Payable and Accrued Expenses (1,340,000) (594,000) [8] Common Stock (1,700,000) (400,000) [2] Additional Paid-In Capital (300,000) (80,000) [2] Retained Earnings (991,000) (306,000) [b] Total Liabilities and Equity (4,331,000) (1,380,000) (4,758,000)
McGraw-Hill/Irwin
86,000 400,000 80,000 591,000 [b] 1,273,000
(1,848,000) (1,700,000) (300,000) (910,000)
204,000 1,273,000
The McGraw-Hill Companies, Inc., 2002
P7-36
(continued)
Explanations of Adjustments and Eliminations: [1] To eliminate Fran's investment income recognized from Brey, Brey's dividends, and the change in the investment account during 20X9. Fran's investment is carried at equity at December 31, 20X9, adjusted for the amortization of the differential assigned to the machinery. [2] To eliminate reciprocal elements as of the beginning of the year from the investment and equity accounts and to assign the differential to machinery and goodwill. [3] To record amortization of the fair value in excess of book value of Brey's machinery at date of acquisition ($54,000 / 6). [4] To record goodwill impairment loss of $35,000.
[5] To eliminate intercompany profit on the sale of the warehouse by Fran to Brey. [6] To eliminate the excess depreciation on the warehouse building sold by Fran to Brey [($86,000 - $66,000) x 1/5 x _]. [7] To eliminate intercompany sales from Brey to Fran and the inter-company profit in Fran's ending inventory as follows: Total $180,000 90,000 $ 90,000* On hand $36,000 18,000 $18,000 Sold $144,000 72,000* $ 72,000
Sales Gross profit Cost
* Cost of Goods Sold elimination: $162,000 = $90,000 + $72,000 [8] To eliminate Fran's intercompany balance to Brey for the merchandise it purchased.
P7-37A a.
Comprehensive Worksheet Problem__Periodic Inventories
Basic equity-method entries for 20X7: (1) Investment in Sharp Company Stock Income from Subsidiary Record equity-method income: $40,000 x .80 Cash Investment in Sharp Company Stock Record dividend from Sharp Company: $25,000 x .80 (3) Income from Subsidiary Investment in Sharp Company Stock Amortize differential: $40,000 / 10 years 4,000 4,000 32,000 32,000
(2)
20,000 20,000
b.
Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Sharp Company Stock Eliminate income from subsidiary: $28,000 = $32,000 - $4,000 Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,600 = ($40,000 + $8,000 - $10,000) x .20 Common Stock__Sharp Company Additional Paid-In Capital Retained Earnings, January 1 Differential Investment in Sharp Company Stock Noncontrolling Interest Eliminate beginning investment balance. Buildings and Equipment Depreciation Expense Accumulated Depreciation Differential Assign differential: $16,000 = ($40,000 / 10 years) x 4 years Retained Earnings, January 1 Noncontrolling Interest Beginning Inventory Eliminate beginning inventory profit of Sharp Company. 28,000 20,000 8,000
E(2)
7,600 5,000 2,600
E(3)
100,000 20,000 215,000 28,000 296,000 67,000
E(4)
40,000 4,000 16,000 28,000
E(5)
6,400 1,600 8,000
P7-37A E(6)
(continued) Retained Earnings, January 1 Beginning Inventory Eliminate beginning inventory profit of Randall Corporation. Sales Purchases Eliminate inventory transfer by Sharp Company. 2,000 2,000
E(7)
45,000 45,000
E(8)
Ending Inventory (Income Statement) Inventory (Ending, Balance Sheet) Eliminate unrealized profit on upstream sale of inventory. Sales Purchases Eliminate inventory transfer by Randall Corporation.
10,000 10,000
E(9)
12,000 12,000
E(10)
Ending Inventory (Income Statement) Inventory (Ending, Balance Sheet) Eliminate unrealized profit on downstream sale of inventory. Buildings and Equipment Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment.
3,000 3,000
E(11)
25,000 17,500 2,500 40,000
Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) Depreciation required ($75,000 / 20 years) Required decrease Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x 2 years) Required increase E(12) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable.
$ 6,250 (3,750) $ 2,500
$52,500 (12,500) $40,000 10,000 10,000
P7-37A c.
(continued) Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Randall Corp. 500,000 20,400 28,000 170,000 718,400 436,000 150,000 Sharp Co. 250,000 30,000 110,000 390,000 192,000 120,000 (1) 28,000 (8) 10,000 (10) 3,000 (7) 45,000 (9) 12,000 (5) 8,000 (6) 2,000 4,000(11) 2,500 Eliminations Debit Credit (7) 45,000 (9) 12,000 Consolidated
Item Sales Other Income Income from Subsidiary Ending Inventory Credits Purchases Beginning Inventory Deprec. and Amortization Other Expenses Debits Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1
693,000 50,400
267,000 1,010,400 571,000 260,000 51,500 42,000 (924,500) 85,900 (7,600) 69,500 78,300
30,000 20,000 (4) 24,000 18,000 (640,000)(350,000)
(2) 78,400 345,900 40,000 215,000
7,600 109,600
(3)215,000 (5) 6,400 (6) 2,000 (11) 17,500 78,400 40,000 109,600 69,500 424,300 255,000 (50,000) (25,000) (1) 20,000 (2) 5,000 374,300 230,000 350,500 94,500
320,000 78,300 398,300 (50,000) 348,300
P7-37A
(continued) Randall Corp. 130,300 80,000 170,000 600,000 Sharp Co. 10,000 70,000 110,000 400,000 (4) 40,000 (11) 25,000 (1) 8,000 (3)296,000 (3) 28,000 (4) 28,000 590,000 120,000 15,200 (12) 10,000 100,000 4,800 100,000 (3)100,000 20,000 374,300 230,000 (5) 1,284,300 590,000 (3) 20,000 350,500 94,500 1,600 (2) 2,600 (3) 67,000 575,100 575,100 348,300 68,000 1,612,300 (4) 16,000 (11) 40,000 1,612,300 Eliminations Debit Credit Consolidated 140,300 140,000 267,000 1,065,000
Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock Differential Debits Accum. Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits
(12) 10,000 (8) 10,000 (10) 3,000
304,000
1,284,300 310,000 100,000 300,000 200,000
486,000 105,200 400,000 4,800 200,000
P7-37A d.
(continued) Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7 $140,300 140,000 267,000 $ $1,065,000 (486,000) 547,300
Cash Accounts Receivable Inventory Total Current Assets Buildings and Equipment Less: Accumulated Depreciation Total Assets Accounts Payable Bonds Payable Bond Premium Noncontrolling Interest Common Stock Retained Earnings Total Liabilities and Stockholders' Equity
579,000 $1,126,300 $ 105,200 404,800 68,000 548,300 $1,126,300
$400,000 4,800 $200,000 348,300
Randall Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X7 Sales Other Income Beginning Inventory Purchases Goods Available Ending Inventory Cost of Goods Sold Depreciation and Amortization Expense Other Expenses Noncontrolling Interest Consolidated Net Income $260,000 571,000 $831,000 (267,000) $564,000 51,500 42,000 $693,000 50,400 $743,400
657,500 $ 85,900 (7,600) $ 78,300
Randall Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X7 Retained Earnings, January 1, 20X7 Consolidated Net Income Less: Dividends Paid in 20X7 Retained Earnings, December 31, 20X7 $320,000 78,300 $398,300 (50,000) $348,300
P7-38B a.
Fully Adjusted Equity Method
Adjusted trial balance: Randall Corporation Debit Credit Sharp Company Debit Credit $ 10,000 70,000 110,000 400,000
Item
Cash $ 130,300 Accounts Receivable 80,000 Inventory 170,000 Buildings and Equipment 600,000 Investment in Sharp Company Stock 278,000 Cost of Goods Sold 416,000 Depreciation and Amortization 30,000 Other Expenses 24,000 Dividends Declared 50,000 Accumulated Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings Sales Other Income Income from Subsidiary $1,778,300
202,000 20,000 18,000 25,000 $ 310,000 100,000 300,000 200,000 320,000 500,000 20,400 27,900 $1,778,300 $120,000 15,200 100,000 4,800 100,000 20,000 215,000 250,000 30,000 $855,000 $855,000
P7-38B b.
(continued)
Fully adjusted equity-method entries for 20X7: (1) Investment in Sharp Company Stock Income from Subsidiary Record equity-method income: $40,000 x .80 Cash Investment in Sharp Company Stock Record dividends from Sharp Company: $25,000 x .80 (3) Income from Subsidiary Investment in Sharp Company Stock Amortize purchase differential: $40,000 / 10 years Investment in Sharp Company Stock Income from Subsidiary Recognize deferred profit on upstream sale of inventory: $8,000 x .80 Investment in Sharp Company Stock Income from Subsidiary Recognize deferred profit on downstream sale of inventory. Income from Subsidiary Investment in Sharp Company Stock Remove unrealized profit on upstream sale of inventory: $10,000 x .80 Income from Subsidiary Investment in Sharp Company Stock Remove unrealized profit on downstream sale of inventory. Investment in Sharp Company Stock Income from Subsidiary Recognize portion of gain on sale of equipment: $20,000 / 8 years 4,000 4,000 32,000 32,000
(2)
20,000 20,000
(4)
6,400 6,400
(5)
2,000 2,000
(6)
8,000 8,000
(7)
3,000 3,000
(8)
2,500 2,500
P7-38B c.
(continued)
Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Sharp Company Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,600 = ($40,000 + $8,000 - $10,000) x .20 Common Stock__Sharp Company Additional Paid-In Capital Retained Earnings, January 1 Differential Investment in Sharp Company Stock Noncontrolling Interest Eliminate beginning investment balance. Buildings and Equipment Depreciation Expense Accumulated Depreciation Differential Assign differential: $16,000 = ($40,000 / 10 years) x 4 years Investment in Sharp Company Stock Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Sharp Company. 27,900 20,000 7,900
E(2)
7,600 5,000 2,600
E(3)
100,000 20,000 215,000 28,000 296,000 67,000
E(4)
40,000 4,000 16,000 28,000
E(5)
6,400 1,600 8,000
P7-38B E(6)
(continued) Investment in Sharp Company Stock Cost of Goods Sold Eliminate beginning inventory profit of Randall Corporation. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Sharp Company. 2,000 2,000
E(7)
45,000 35,000 10,000
E(8)
12,000 9,000 3,000
E(9)
Buildings and Equipment Investment in Sharp Company Stock Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment. Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) Depreciation required ($75,000 / 20 years) Required decrease Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x 2 years) Required increase
25,000 17,500 2,500 40,000
$6,250 (3,750) $2,500
$52,500 (12,500) $40,000 10,000 10,000
E(10)
Accounts Payable Accounts Receivable Eliminate intercorporate receivables.
P7-38B d.
(continued) Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Randall Corp. 500,000 20,400 27,900 548,300 416,000 Sharp Co. 250,000 30,000 (1) 27,900 280,000 202,000 743,400 (5) 8,000 (6) 2,000 (7) 35,000 (8) 9,000 4,000 (9) 2,500 Eliminations Debit Credit (7) 45,000 (8) 12,000 Consolidated
693,000 50,400
Deprec. & Amortization Other Expenses Debits Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1 Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward
30,000 20,000 (4) 24,000 18,000 (470,000)(240,000)
564,000 51,500 42,000 (657,500) 85,900 (7,600)
(2) 78,300 40,000
7,600 96,500 56,500
78,300 320,000 78,300 398,300 (50,000) 348,300
320,000 215,000 (3)215,000 78,300 40,000 96,500 56,500 398,300 255,000 (50,000) (25,000) (1) 20,000 (2) 5,000 348,300 230,000 311,500 81,500
P7-38B
(continued) Randall Corp. 130,300 80,000 170,000 600,000 Sharp Co. 10,000 70,000 110,000 400,000 (4) 40,000 (9) 25,000 (5) 6,400 (1) 7,900 (6) 2,000 (3)296,000 (9) 17,500 (3) 28,000 (4) 28,000 590,000 120,000 15,200 100,000 4,800 100,000 20,000 348,300 230,000 (5) 1,258,300 590,000 (10)10,000 (4) 16,000 (9) 40,000 1,612,300 Eliminations Debit Credit Consolidated 140,300 140,000 267,000 1,065,000
Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock
(10) 10,000 (7) 10,000 (8) 3,000
278,000
Differential Debits Accum. Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits
1,258,300 310,000 100,000 300,000 200,000
(3)100,000 (3) 20,000 311,500 81,500 1,600 (2) 2,600 (3) 67,000 562,000 562,000
486,000 105,200 400,000 4,800 200,000
348,300 68,000 1,612,300
P7-39B
Comprehensive Consolidation Workpaper; Cost Method [AICPA Adapted]
Fran Corp. and Subsidiary Consolidation Workpaper December 31, 20X9 Adjustment and Eliminations Dr. Cr. 180,000 40,000 30,000 [7] [3] 35,000 162,000 3,068,000 35,000
Fran Corp. Dr. (Cr.) Income Statement: Net Sales Dividends from Brey Gain on Sale of Warehouse Cost of Goods Sold Goodwill Impairment Loss Operating Expenses (including depreciation) Net Income Retained Earnings Statement: Balance, 1/1/X9 Net Income Dividends Paid Balance, 12/31/X9 Balance Sheet: Assets: Cash Accounts Receivable (net) Inventories Land, Plant and Equipment Accumulated Depreciation Investment in Brey (at cost) Goodwill Total Assets
Brey, Inc. Dr. (Cr.)
Adjusted Balance (5,120,000)
(3,800,000) (1,500,000) [7] (40,000) [4] (30,000) 2,360,000 [5] 870,000
1,100,000 (410,000)
440,000 [2] (190,000) [a]
9,000 [6] 294,000 [a]
2,000 164,000
1,547,000 (470,000)
(440,000) (410,000) (850,000)
(156,000) [1] (190,000) [a] 40,000 (306,000) [b]
156,000 294,000 [a] [4] 450,000 [b]
164,000 40,000 204,000
(440,000) (470,000) (910,000)
570,000 860,000 1,060,000 1,320,000 (370,000) 750,000
150,000 350,000 410,000 680,000 [1] [8] [7] 54,000 [5] 2,000 [2] [1] 60,000 [3] 86,000 18,000 30,000 9,000 750,000 35,000
720,000 1,124,000 1,452,000 2,024,000 (587,000)
(210,000) [6]
[1] 4,190,000 1,380,000
25,000 4,758,000
Liabilities and Stockholders' Equity: Accounts Payable and Accrued Expenses (1,340,000) (594,000) Common Stock ($10 par) (1,700,000) (400,000) Additional Paid-In Capital (300,000) (80,000) Retained Earnings (850,000) (306,000) Total Liabilities and Equity (4,190,000) (1,380,000)
[8] [1] [1] [b]
86,000 400,000 80,000 450,000 [b] 1,132,000
(1,848,000) (1,700,000) (300,000) (910,000)
204,000
1,132,000 (4,758,000)
P7-39B
(continued)
Explanations of Adjustments and Eliminations: [1] To eliminate the reciprocal elements in investment, goodwill, equity and property accounts. Fran's investment is carried at cost at December 31, 20X9.
[2] To record amortization of the fair value in excess of book value of Brey's machinery at date of acquisition ($54,000 / 6).
[3]
To record goodwill impairment loss of $35,000.
[4]
To eliminate Fran's dividend revenue from Brey.
[5] To eliminate intercompany profit on the sale of the warehouse by Fran to Brey.
[6] To eliminate the excess depreciation on the warehouse building sold by Fran to Brey [($86,000 - $66,000) x 1/5 x _].
[7] To eliminate intercompany sales from Brey to Fran and the intercompany profit in Fran's ending inventory as follows: Total $180,000 90,000 $ 90,000* On hand $36,000 18,000 $18,000 Sold $144,000 72,000* $ 72,000
Sales Gross profit Cost
*Cost of Goods Sold elimination: $162,000 = $90,000 + $72,000
[8] To eliminate Fran's intercompany balance to Brey for the merchandise it purchased.
P7-40B a.
Cost Method
Journal entry recorded by Randall Corporation: Cash Dividend Income Record dividend from Sharp Company: $25,000 x .80 20,000 20,000
b.
Eliminating entries, December 31, 20X7: E(1) Dividend Income Dividends Declared Eliminate dividend income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,600 = ($40,000 + $8,000 - $10,000) x .20 20,000 20,000
E(2)
7,600 5,000 2,600
E(3)
Common Stock__Sharp Company 100,000 Additional Paid-In Capital 20,000 Retained Earnings, January 1 180,000 Differential 40,000 Investment in Sharp Company Stock Noncontrolling Interest Eliminate investment balance at date of acquisition: $180,000 = ($300,000 - $100,000 - $20,000) Retained Earnings, January 1 Noncontrolling Interest Assign undistributed prior earnings of subsidiary to noncontrolling interest: Retained earnings, January 1, 20X7 Net assets of Sharp at acquisition $300,000 Common stock (100,000) Additional paid-in capital (20,000) Retained earnings at acquisition Net increase Proportion of stock held by noncontrolling interest Increase assigned to noncontrolling interest 7,000
280,000 60,000
E(4)
7,000
$215,000
180,000 $ 35,000 x $ .20 7,000 40,000 40,000
E(5)
Buildings and Equipment Differential Assign differential at date of acquisition.
P7-40B E(6)
(continued) Retained Earnings, January 1 Accumulated Depreciation Amortize differential for prior periods: ($40,000 / 10 years) x 3 years Depreciation Expense Accumulated Depreciation Amortize differential. Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Sharp Company. Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Randall Corporation. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Sharp Company. 12,000 12,000
E(7)
4,000 4,000
E(8)
6,400 1,600 8,000
E(9)
2,000 2,000
E(10)
45,000 35,000 10,000
E(11)
12,000 9,000 3,000
E(12)
Buildings and Equipment Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment.
25,000 17,500 2,500 40,000
Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) $ 6,250 Depreciation required ($75,000 / 20 years) (3,750) Required decrease $ 2,500 Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x 2 years) Required increase
$52,500 (12,500) $40,000
P7-40B E(13)
(continued) Accounts Payable Accounts Receivable Eliminate intercorporate receivables. 10,000 10,000
c.
Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Randall Corp. 500,000 Sharp Co. Eliminations Debit Credit Consolidated
Item Sales Other Income Dividend Income Credits Cost of Goods Sold
Deprec. & Amortization Other Expenses Debits Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1
250,000 (10) 45,000 (11) 12,000 20,400 30,000 20,000 (1) 20,000 540,400 280,000 416,000 202,000 (8) 8,000 (9) 2,000 (10) 35,000 (11) 9,000 30,000 20,000 (7) 4,000(12) 2,500 24,000 18,000 (470,000)(240,000)
693,000 50,400 743,400
564,000 51,500 42,000 (657,500) 85,900 (7,600)
(2) 70,400 329,900 40,000 215,000
7,600 88,600 56,500
78,300
(3)180,000 (4) 7,000 (6) 12,000 (8) 6,400 (9) 2,000 (12) 17,500 70,400 40,000 88,600 56,500 400,300 255,000 (50,000) (25,000) (1) 20,000 (2) 5,000 350,300 230,000 313,500 81,500
320,000 78,300 398,300 (50,000) 348,300
P7-40B
(continued) Randall Corp. 130,300 80,000 170,000 600,000 Sharp Co. 10,000 70,000 110,000 400,000 (5) 40,000 (12) 25,000 (3)280,000 (3) 40,000 (5) 40,000 590,000 120,000 (6) 12,000 (7) 4,000 (12) 40,000 1,612,300 Eliminations Debit Credit Consolidated 140,300 140,000 267,000 1,065,000
Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock Differential Debits Accum. Depreciation
(13) 10,000 (10) 10,000 (11) 3,000
280,000 1,260,300 310,000
Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest
100,000 300,000 200,000
15,200 (13) 10,000 100,000 4,800 100,000 (3)100,000 20,000 (3) 20,000 313,500 81,500 1,600 (2) 2,600 (3) 60,000 (4) 7,000 550,100 550,100
486,000 105,200 400,000 4,800 200,000
350,300
230,000 (8)
348,300
Credits
1,260,300
590,000
68,000 1,612,300
(Page Intentionally Left Blank)

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CHAPTER 7 INTERCOMPANY INVENTORY TRANSACTIONS

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

SOLUTIONS TO CASES C7-1 Measuring Cost of Goods Sold

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Unrealized Inventory Profits

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Eliminating Inventory Transfers

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Intercompany Profits and Transfers of Inventory

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

$320,000 $48,000 x .25 (12,000) $308,000

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

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

(240,000) $1,060,000 $1,100,000,

$32,000 = ($200,000 + $140,000) - $308,000

$6,000 = ($26,000 + $19,000) - $39,000

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

.20 = ($10,000 / $50,000)

19 years = [$30,000 + ($2,000 x 4 years)] / $2,000

Multiple-Choice Questions__Consolidated Income Statement

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

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Multiple-Choice Questions__Consolidated Balances

$120,000 (45,000) $ 75,000 x .80 $ 60,000 $140,000 (60,000) $ 80,000

$7,000 = [($67,000 - $32,000) x .20]

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Eliminating entry: E(1) Sales Cost of Goods Sold 750,000 750,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Sale of Inventory to Subsidiary Journal entries recorded by Nordway Corporation:

960,000 960,000 750,000 750,000 600,000 600,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Sales Cost of Goods Sold Inventory

940,000 904,000 36,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Sales Inventory ($3.00 x 20,000 bags) Cost of Goods Sold

900,000 60,000 840,000

$400,000 150,000 $550,000 (60,000) $490,000 (36,000) $454,000

$400,000 $150,000 (60,000) $ 90,000 x .60 54,000 $454,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Prior-Period Unrealized Inventory Profit $ 6.00 x 20,000 $120,000

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

$300,000 $250,000 60,000 $310,000 x .60 186,000 $486,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

$ 80,000 45,000 $125,000

$ 2,000 7,500 2,000 15,000 (26,500) $ 98,500

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Sale of Inventory at a Loss

$230,000 $ 80,000 40,000 $120,000 x .75 90,000 $320,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

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

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002

Consolidated Balance Sheet Workpaper

28,000 12,000 40,000

310,000 280,000 838,000 70,000 200,000 568,000

Noncontrolling Interest Credits

(1)150,000 (1)250,000 (2) 28,000 (3) 10,000 (2) 12,000 450,000

530,000 108,000 928,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002