CH06MAN

CHAPTER 6 INTERCORPORATE TRANSFERS: NONCURRENT ASSETS
ANSWERS TO QUESTIONS Q6-1 Profits on intercorporate sales generally are considered to be realized when the affiliate that has purchased the item sells it to a nonaffiliate. For depreciable or amortizable items that are used by the affiliate in its operations, profits are considered to be realized as the purchaser depreciates or amortizes the asset. Q6-2 An upstream sale occurs when a subsidiary sells an item to the parent company. If the asset is not resold before the end of the period, the parent is the company holding the asset and any unrealized profits are recorded on the books of the subsidiary. Q6-3 (a) Unrealized profit on an intercorporate sale generally is included in the reported net income of the seller. (b) All unrealized profit on excluded from consolidated net nonaffiliate. current-period intercorporate sales must be income until realized through resale to a
Q6-4 Profits on intercompany sales are included in consolidated net income in the period in which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one of the companies at the start of the period and the item is sold to a nonaffiliate during the current period, the intercompany profit is included in the computation of consolidated net income for the current period. Q6-5 The profits continue to be unrealized in this case and therefore must be eliminated from both the beginning and ending asset and retained earnings balances when consolidated statements are prepared. There should be no income statement effect for the current period. Q6-6 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is not resold before the end of the period, the subsidiary is the company holding the asset at year-end and any unrealized profits are recorded on the books of the parent company. Q6-7 The entire balance of unrealized profits is eliminated in all cases. While the direction of the sale will affect the allocation of unrealized profits between companies, it does not change the total amount of profit eliminated.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2002
Q6-8 Consolidated net income is reduced by the amount of unrealized profits assigned to the shareholders of the parent company. When a downstream sale occurs, all the profit is on the parent's books and consolidated net income is reduced by the full amount of any unrealized profit. On the other hand, when an upstream sale occurs all the intercorporate profit is recorded on the books of the subsidiary and the amount of income assigned to both the parent company shareholders and the noncontrolling shareholders is reduced by a proportionate amount of any unrealized profit. Q6-9 The amount of intercorporate profit realized in the current period from prior years' sales to the parent is added to the reported net income of the subsidiary in computing income assigned to the noncontrolling interest. Q6-10 Income assigned to noncontrolling interest for the current period will be less than a proportionate share of the reported net income of the subsidiary. In determining the amount of income to be assigned to the noncontrolling interest in the consolidated income statement, the net income reported by the subsidiary must be adjusted to exclude any unrealized gain recorded during the period on the sale of depreciable assets to the parent. On the other hand, if an unrealized loss had been recorded, the basis used in assigning income to the noncontrolling interest would be greater than the reported net income of the subsidiary. Such adjustments must be made to assure that the income assigned to noncontrolling interest is based on the contribution of the subsidiary to consolidated net income rather than the amount the subsidiary may have reported as net income. Q6-11 All other factors being equal, the income assigned to noncontrolling interest will be larger if the sale occurs at the start of the current period. Some part of the gain will be considered realized in the current period as the parent depreciates the asset if the sale occurs before year-end. None of the gain will be considered realized in the period of transfer if the sale occurs at year-end. Q6-12 As in all other cases, income from the subsidiary recorded on the parent's books must be eliminated in preparing the consolidated income statement and an appropriate amount of subsidiary net income must be assigned to the noncontrolling interest if the parent owns less than 100 percent of the subsidiary's stock. The gain recorded on the parent's books also must be eliminated. Q6-13 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of the consolidated entity when the subsidiary pays the parent more than book value for the asset at the start of the period. As a result, an eliminating entry is needed to reduce depreciation expense and accumulated depreciation by the amount of excess depreciation recorded during 20X3.
Q6-14 Following an intercorporate sale of a depreciable asset, the eliminating entries should adjust the balance in the asset account to reflect the original purchase price to the first owner and accumulated depreciation should be adjusted to reflect the balance that would be reported if the asset were still held by the first owner. In the case of an intercorporate sale of an intangible asset, only the unamortized balance normally is reported and an eliminating entry is needed to adjust the carrying value to that which would be reported if the asset were still held by the first owner. Q6-15 Profit on an intercorporate sale of land is considered realized at the time the purchaser sells the land to a nonaffiliate. Profit on equipment normally is considered realized as the asset is used and depreciated on the books of the purchaser. Equipment typically is considered to be used up in the production process and therefore is charged to expense over its remaining economic life, while land is not. Q6-16 A portion of the profit is considered realized each period as the asset is depreciated by the purchaser. Thus, the net amount considered unrealized decreases each period and a smaller debit to beginning retained earnings is needed. Q6-17A The balance in the investment account will depend on which method the parent uses to account for its investment in the subsidiary. If the parent uses (a) the cost method or (b) the basic equity method, no adjustments are made on the parent company's books for unrealized intercompany profits and the balance in the investment account will be the same as if there were no unrealized profits. If the parent uses (c) the fully-adjusted equity method, the balance in the investment account will be reduced by the full amount of the unrealized profit when the profit is on the parent's books and by a proportionate share of the unrealized profit when it is on the subsidiary's books.
SOLUTIONS TO CASES C6-1 Historical Cost Model
A change to replacement cost accounting could potentially simplify the elimination process when there have been intercorporate transfers. If assets are transferred between affiliates at fair value, the balance sheet amount reported by the purchaser should reflect replacement cost on the date of transfer and no adjustment would be needed if consolidation were to occur at that time. In the periods that follow, the adjustment for the change in replacement cost from the beginning of the period to the end of the period on the books of the purchaser should be the same as if there had been no intercompany transfer and no eliminating entries are needed. In preparing the consolidated income statement for the period of transfer, any gain or loss recorded by the seller on the intercorporate sale must be eliminated. The exact nature of the adjustment will depend on whether the change in replacement cost each period is considered to be a realized or an unrealized gain. If the change in replacement cost each period is considered realized, the gain or loss recorded on the intercorporate sale will need to be treated as an adjustment to the gain or loss on the change in replacement cost in the period of transfer. No special adjustment will be needed in the years that follow. If the change in replacement cost is considered unrealized, the gain or loss recorded at the time of transfer will be treated as an adjustment to the unrealized gain or loss on the change in replacement cost each time consolidated statements are prepared.
C6-2
Impact of the Elimination Process
a. While items purchased from an affiliate may be physically segregated or marked, some aspect of the recordkeeping system typically is used to keep track of such items. A unique series of accounts, inventory numbers, purchase order numbers, or other records may be used to identify items acquired from affiliates. In a very simple setting the vouchers on intercompany purchases may be kept in a special folder and checked at year-end to see if those items are still on hand. More formal procedures generally are needed when intercompany transfers are quite frequent or the accounting system does not generate documents that can be readily used for tracking intercorporate sales.
b. When unrealized profits are not eliminated, consolidated net income and one or more asset balances will be incorrectly stated. If the number of transactions between the companies is relatively constant over time, there may be little effect on the amount of income reported in any year. On the other hand, if the level of purchases varies substantially from year to year, failure to eliminate unrealized profits can significantly affect the amount of reported net income and the amount reported in various asset categories. There also is danger of intentional manipulation of intercompany transfers to attain a desired level of income when profits are not eliminated.
c. If the amount of unrealized profit at the end of a given year is greater than the amount at the start of the year, consolidated net income will decrease when the appropriate eliminating entries are made. However, when the reverse is true, consolidated net income will increase as a result of entering the eliminating entries in the consolidated workpaper. Thus, the effect depends on whether the level of unrealized profit has increased or decreased during the period.
C6-3
Noncontrolling Interest
a. When there are no unrealized profits on the subsidiary's books, a pro rata portion of the reported net income of the subsidiary is assigned to the noncontrolling interest.
b. When there are no unrealized profits on the subsidiary's books, a pro rata portion of the book value of the net assets of the subsidiary is reported in the consolidated balance sheet as noncontrolling interest.
c. The effect of unrealized profits depends on which company has recorded the profits. Those recorded on the books of the parent do not affect the income assigned to the noncontrolling interest. When subsidiary net income includes unrealized profits, the income assigned to noncontrolling interest is reduced by its portion of the unrealized profit in the period of the intercorporate sale. (1) On a sale of land, the profit remains unrealized until the land is sold to a nonaffiliate. When the land is resold, the profit is added to the reported net income of the subsidiary in computing income assigned to noncontrolling interest. (2) On an intercorporate sale of a depreciable asset, a portion of the profit will be considered realized each period as the purchaser depreciates the asset. Thus, in the period of the intercorporate sale, the adjustment to subsidiary net income for unrealized profits is based on the gain or loss less any portion considered realized before the end of the period. Each period thereafter, a portion of the profit or loss is considered realized and treated as an adjustment to subsidiary income in determining the income assigned to noncontrolling interest.
d. Noncontrolling shareholders generally will not gain a great deal of useful information from the consolidated statements. Their primary focus must continue to be on the income and net assets of the subsidiary in which they hold direct ownership. In the event there are a number of transactions with the parent or other affiliates, the success of the operations of the entire economic entity may provide information useful to the noncontrolling shareholders. Debt guarantees or other assurances by the parent may also lead to an examination of the parent company and consolidated statements.
C6-4
Intercompany Sale of Services
a. When preparing consolidated financial statements, Schwartz's revenue from the sale of services to Diamond and Diamond's expenses associated with the services acquired from Schwartz must be eliminated. The expenses related to the janitorial and maintenance activities that will be reported in the consolidated income statement will be the actual salary and associated costs incurred by Schwartz to provide the services to Diamond. The eliminations have no effect on consolidated net income because revenues and expenses of equal amount are eliminated in the preparation of the consolidated financial statements. b. Intercompany profits from the sale of services to an affiliate normally are considered realized at the time the services are provided. Realization of intercompany profits on services normally is considered to occur as the services are consumed, and services such as maintenance and repair services normally are considered to be consumed by the purchasing affiliate at the time received.
C6-5
Intercompany Profits
Answers can be found in the companies' 10-K filings with the SEC and in their annual reports. a. Century Telephone Enterprises, Inc. (www.centurytel.com), and its subsidiaries bill one another for services and materials provided in such amounts as to provide a reasonable return on investment. When preparing consolidated financial statements, the company eliminates intercompany profits on transactions with unregulated subsidiaries, but profits on transactions with regulated subsidiaries are not eliminated, as permitted by FASB Statement No. 71. This statement is applicable because phone companies are regulated as public utilities. b. Verizon (www.verizon.com) eliminates all intercompany profits. It no longer applies the provisions of FASB 71. c. New York Life (www.newyorklife.com) indicates in its annual report the amount of income and expenses for New York Life, New York Life Insurance and Annuity Corporation, and the consolidated amounts. While the intercompany eliminations implied by the differences in the consolidated amounts from the sum of those of the individual companies are small, and are zero in some cases, there are some intercompany transactions that are eliminated. d. All of Harleys intercompany transactions are eliminated except some occurring between the Motorcycles and Financial Services segments. Some interest and fees recognized as income by Financial Services and expense by Motorcycles are not eliminated. This leads to higher finance income and higher expenses, but net income is unaffected.
SOLUTIONS TO EXERCISES E6-1 Multiple-Choice Questions on Intercompany Transfers [AICPA Adapted] c d b a b Depreciation expense recorded by Pirn Depreciation expense recorded by Scroll Total depreciation reported Adjustment for excess depreciation charged by Scroll as a result of increase in carrying value of equipment due to gain on intercompany sale ($12,000 / 4 years) Depreciation for consolidated statements $40,000 10,000 $50,000
1. 2. 3. 4. 5.
(3,000) $47,000
E6-2 1.
Multiple-Choice Questions on Intercompany Transactions d When only retained earnings is debited, and not the noncontrolling interest, a gain has been recorded in a prior period on the parent's books.
2.
a The costs incurred by Bottom to develop the equipment are research and development costs and must be expensed as they are incurred (FASB Statement No. 2, par. 12). Transfer to another legal entity does not cause a change in accounting treatment within the economic entity.
3.
b Under the conditions given, the full $39,000 paid to Gold Company must be charged to depreciation expense by Silver Corporation over the remaining 3 years of ownership. As a result, Silver Corporation will debit depreciation expense for $13,000 each year. Gold Company had charged $16,000 to accumulated depreciation in 2 years, for an annual rate of $8,000. Depreciation expense therefore must be reduced by $5,000 in preparing the consolidated statements.
4.
a Silver Corporation will record the purchase at $39,000, the amount it paid. Gold Company had the equipment recorded at $40,000; thus, a debit of $1,000 will raise the equipment balance back to its original cost from the viewpoint of the consolidated entity.
E6-2 5. b
(continued) Reported net income of Gold Company Reported gain on sale of equipment $15,000 Intercompany profit realized in 20X6 (5,000) Realized net income of Gold Company Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interests $45,000 (10,000) $35,000 x .40 $14,000
6.
Operating income reported by Silver Corporation Net income reported by Gold Company Less: Unrealized gain on sale of equipment ($15,000 - $5,000) Income to noncontrolling interest Consolidated net income
$ 85,000 45,000 $130,000 (10,000) (14,000) $106,000
E6-3 a.
Elimination Entries for Land Transfer Eliminating entry, December 31, 20X4:
E(1)
Gain on Sale of Land Land
10,000 10,000
Eliminating entry, December 31, 20X5: E(1) Retained Earnings, January 1 Land 10,000 10,000
b.
Eliminating entry, December 31, 20X4: E(1) Gain on Sale of Land Land 10,000 10,000
Eliminating entry, December 31, 20X5: E(1) Retained Earnings, January 1 Noncontrolling Interest Land 6,000 4,000 10,000
E6-4 a.
Elimination Entries for Depreciable Asset Transfer: Year-End Sale Eliminating entry, December 31, 20X6
E(1)
Truck Gain on Sale of Truck Accumulated Depreciation
5,000 10,000 15,000
b.
Eliminating entry, December 31, 20X7: E(1) Truck Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation 5,000 10,000 1,000 14,000
Accumulated depreciation adjustment: Required [($45,000 / 15 years) x 6 years] Recorded [($40,000 / 10 years) x 1 year] Required increase
$18,000 (4,000) $14,000
E6-5 a.
Transfer of Land Eliminating entry, December 31, 20X2:
E(1)
Gain on Sale of Land Land
45,000 45,000
Eliminating entry, December 20X3: E(1) Retained Earnings, January 1 Noncontrolling Interest Land 31,500 13,500 45,000
b.
Eliminating entries, December 31, 20X3 and 20X4: E(1) Retained Earnings, January 1 Land 30,000 30,000
E6-6 a.
Transfer of Depreciable Asset at Year-End Eliminating entry, December 31, 20X5
E(1)
Truck Gain on Sale of Truck Accumulated Depreciation
90,000 30,000 120,000
b.
Accumulated depreciation adjustment: Required [($300,000 / 10 years) x 5 years] Recorded [($210,000 / 6 years) x 1 year] Required increase
$150,000 (35,000) $115,000
E6-7 a.
Transfer of Depreciable Asset at Beginning of Year Eliminating entry, December 31, 20X5
E(1)
Truck Gain on Sale of Truck Depreciation Expense Accumulated Depreciation
55,000 35,000 5,000 85,000
Accumulated depreciation adjustment: Required [($300,000 / 10 years) x 4 years] Reported [($245,000 / 7 years) x 1 year] Required increase
$120,000 (35,000) $ 85,000
b.
Accumulated depreciation adjustment: Required [($300,000 / 10 years) x 5 years] Reported [($245,000 / 7 years) x 2 years] Required increase
$150,000 (70,000) $ 80,000
E6-8 a.
Sale of Equipment to Subsidiary in Current Period Journal entry to record sale: Cash Accumulated Depreciation Equipment Gain on Sale of Equipment Record the sale of equipment: $84,000 = $150,000 - $80,000 + $14,000 $80,000 = ($150,000 / 15 years) x 8 years 84,000 80,000 150,000 14,000
b.
Journal entry to record purchase: Equipment Cash 84,000 84,000
Journal entry to record depreciation expense: Depreciation Expense Accumulated Depreciation 12,000 12,000
Eliminating entry at December 31, 20X7, to eliminate intercompany sale of equipment: Equipment Gain on Sale of Equipment Depreciation Expense Accumulated Depreciation Eliminate unrealized profit on equipment. Adjustment to equipment Amount paid by Wainwrite to acquire building Amount paid by Lance on intercompany sale Adjustment to buildings and equipment Adjustment to depreciation expense Depreciation expense recorded by Lance Corporation ($84,000 / 7 years) Depreciation expense recorded by Wainwrite Corporation ($150,000 / 15 years) Adjustment to depreciation expense Adjustment to accumulated depreciation Amount required ($10,000 x 9 years) Amount reported by Lance ($12,000 x 1 year) Required adjustment $90,000 (12,000) $78,000 $150,000 (84,000) $ 66,000 66,000 14,000 2,000 78,000
$12,000 (10,000) $ 2,000
E6-8
(continued)
d.
Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment and prepare a consolidated balance sheet only: Equipment Retained Earnings Accumulated Depreciation Eliminate unrealized profit on equipment. 66,000 12,000 78,000
E6-9 a.
Upstream Sale of Equipment in Prior Period Consolidated net income for 20X8: Operating income reported by Baywatch Net income reported by Tubberware Amount of gain realized in 20X8 ($30,000 / 12 years) Realized net income of Tubberware Proportion of ownership held by Baywatch Consolidated net income $100,000 $40,000 2,500 $42,500 x .80
34,000 $134,000
b.
Consolidated net income for 20X8 would be $500 greater [$2,500 - ($2,500 x . 80)] if the sale of equipment had been from parent to subsidiary on January 1, 20X6.
E6-9 c.
(continued) Eliminating entry, December 31, 20X8:
E(1)
Buildings and Equipment Retained Earnings Noncontrolling Interest Depreciation Expense Accumulated Depreciation Eliminate unrealized profit on building. Adjustment to buildings and equipment Amount paid by Tubberware to acquire building Amount paid by Baywatch on intercompany sale Adjustment to buildings and equipment Adjustment to retained earnings, January 1, 20X8 Unrealized gain recorded January 1, 20X6 Amount realized following intercompany sale ($2,500 x 2) Unrealized gain, January 1, 20X8 Proportion of ownership held by Baywatch Required adjustment
30,000 20,000 5,000 2,500 52,500
$300,000 (270,000) $ 30,000
$30,000 (5,000) $25,000 x .80 $20,000
Adjustment to Noncontrolling interest, January 1, 20X8 Unrealized gain at January 1, 20X8 Proportion of ownership held by noncontrolling interest Required adjustment Adjustment to depreciation expense Depreciation expense recorded by Baywatch Industries ($270,000 / 12 years) Depreciation expense recorded by Tubberware Corporation ($300,000 / 15 years) Adjustment to depreciation expense Adjustment to accumulated depreciation Amount required ($20,000 x 6 years) Amount reported by Baywatch ($22,500 x 3 years) Required adjustment $120,000 (67,500) $ 52,500 $25,000 x .20 $ 5,000
$22,500 (20,000) $ 2,500
E6-10 a.
Elimination Entries for Midyear Depreciable Asset Transfer
Eliminating entry, December 31, 20X3: E(1) Equipment Gain on Sale of Equipment Depreciation Expense Accumulated Depreciation 2,000 10,500 1,500 11,000 $28,000 $30,000 (12,500) (17,500) $10,500
Purchase price paid by subsidiary Purchase price paid by parent Less: Accumulated Depreciation ($5,000 x 2 1/2 years) Book value at time of sale Gain on sale of equipment
Accumulated depreciation adjustment: Required [($30,000 / 6 years) x 3 years] Recorded [($28,000 / 3 1/2 years) x 1/2 year] Required increase
$15,000 (4,000) $11,000
b.
Eliminating entry, December 31, 20X4 E(1) Equipment Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation 2,000 9,000 3,000 8,000 $10,500 (1,500) $ 9,000
Unrealized gain, July 1, 20X3 Realized in 20X3 Unrealized balance, January 1, 20X4
Accumulated depreciation adjustment: Required [($30,000 / 6 years) x 4 years] $20,000 Recorded [($28,000 / 3 1/2 years) x 1 1/2 years] (12,000) Required increase $ 8,000
E6-11 a.
Consolidated Net Income Computation
Downstream sale of land: Consolidated net income for 20X4: Verry Corporation income (excluding investment income from Spawn Corporation) Spawn Corporation net income Less: Gain on sale of land Income assigned to noncontrolling interest (.25 x $60,000) Consolidated net income Consolidated net income for 20X5: Verry Corporation income (excluding investment income from Spawn Corporation) Spawn Corporation net income Less: Income assigned to noncontrolling interest (.25 x $40,000) Consolidated net income
$ 90,000 60,000 $150,000 (25,000) (15,000) $110,000
$110,000 40,000 $150,000 (10,000) $140,000
b.
Upstream sale of land: Consolidated net income for 20X4: Verry Corporation income (excluding investment income from Spawn Corporation) Spawn Corporation net income Less: Gain on sale of land Income assigned to noncontrolling interest [.25 ($60,000 - $25,000)] Consolidated net income Consolidate net income for 20X5: Verry Corporation income (excluding investment income from Spawn Corporation) Spawn Corporation net income Less: Income assigned to noncontrolling interest (.25 x $40,000) Consolidated net income
$ 90,000 60,000 $150,000 (25,000) ( 8,750) $116,250
$110,000 40,000 $150,000 (10,000) $140,000
E6-12 a.
Elimination Entries for Intercompany Transfers $ 65,000 40,000 $105,000 $25,000 3,000 (28,000) $ 77,000
Operating income of Speedy Delivery Net income of Acme Real Estate Company Combined income Less: Unrealized profit on land sale Income assigned to noncontrolling interest [($40,000 - $25,000) x .20] Consolidated net income Journal entries recorded by Speedy Delivery: (1) Investment in Acme Real Estate Stock Income from Subsidiary Record equity-method income: $40,000 x .80 Cash Investment in Acme Real Estate Stock Record dividends from Acme Real Estate: $10,000 x .80
b.
32,000 32,000
(2)
8,000 8,000
c.
Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Acme Real Estate Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $3,000 = ($40,000 - $25,000) x .20 Common Stock__Acme Real Estate Company Retained Earnings, January 1 Investment in Acme Real Estate Stock Noncontrolling Interest Eliminate beginning investment balance. Gain on Sale of Land Land Eliminate unrealized gain on land. Service Revenue Delivery Expense Eliminate courier services performed by Speedy Delivery Service. 32,000 8,000 24,000
E(2)
3,000 2,000 1,000
E(3)
300,000 100,000 320,000 80,000
E(4)
25,000 25,000
E(5)
15,000 15,000
E6-13 a.
Sale of Building to Parent in Prior Period
Turner will recorded annual depreciation expense of $25,000 ($300,000 / 12 years).
b.
Split would have recorded annual depreciation expense of $20,000 ($400,000 / 20 years).
c.
Eliminating entry, December 31, 20X9: E(1) Buildings and Equipment Retained Earnings Noncontrolling Interest Depreciation Expense Accumulated Depreciation Eliminate unrealized profit on building. Adjustment to buildings and equipment Amount paid by Split to acquire building Amount paid by Turner on intercompany sale Adjustment to buildings and equipment $400,000 (300,000) $100,000 100,000 42,000 18,000 5,000 155,000
Adjustment to retained earnings, January 1, 20X9 Unrealized gain, December 31, 20X8 [$300,000 - ($400,000 - $160,000)] Proportion of ownership held by Turner Required adjustment
$60,000 x .70 $42,000
Adjustment to Noncontrolling interest, January 1, 20X8 Unrealized gain, December 31, 20X8 Proportion of ownership held by noncontrolling interest Required adjustment Adjustment to depreciation expense Depreciation expense recorded by Turner Company ($300,000 / 12 years) Depreciation expense recorded by Split Company ($400,000 / 20 years) Adjustment to depreciation expense Adjustment to accumulated depreciation Amount required ($20,000 x 9 years) Amount reported by Turner ($25,000 x 1 year) Required adjustment $180,000 (25,000) $155,000 $60,000 x .30 $18,000
$25,000 (20,000) $ 5,000
E6-13 d.
(continued)
Income assigned to noncontrolling interest for 20X9: Net income reported by Split Company Amount of gain realized in 20X9 ($60,000 / 12 years) Realized net income for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest $40,000 5,000 $45,000 x .30 $13,500
e.
Amount assigned to noncontrolling interest in 20X9 consolidated balance sheet: Split Company net assets, January 1, 20X9 ($350,000 - $150,000) Realized net income for 20X9 Dividends paid in 20X9 Realized book value December 31, 20X9 Proportion of ownership held by noncontrolling interest Amount assigned to noncontrolling interest in December 31, 20X9, consolidated balance sheet
$200,000 45,000 (15,000) $230,000 x .30
$ 69,000
E6-14 a.
Intercompany Sale at a Loss
Consolidated net income for 20X8 will be greater than Parent Company's income from operations plus its proportionate share of Sunway's reported net income. The eliminating entries at December 31, 20X8, will result in an increase of $18,000 to consolidated net income.
b.
As a result of purchasing the equipment at less than Parent's book value, depreciation expense reported by Sunway will be $2,000 ($16,000 / 8 years) below the amount that would have been recorded by Parent. Thus, depreciation expense must be increased by $2,000 when eliminating entries are prepared at December 31, 20X9. Because the loss was recorded on Parent's books in 20X8, consolidated net income will be decreased by the full amount of the $2,000 increase in depreciation expense.
E6-15 a.
Eliminating Entries Following Intercompany Sale at a Loss
Eliminating entry, December 31, 20X7: E(X) Buildings and Equipment Loss on Sale of Building Accumulated Depreciation Eliminate unrealized loss on building. 156,000 36,000 120,000
b.
Consolidated net income for 20X7: Operating income reported by Brown Net income reported by Transom Add loss on sale of building Realized net income of Transom Proportion of ownership held by Brown Consolidated net income $125,000 $15,000 36,000 $51,000 x .70
35,700 $160,700
c.
Eliminating entry, December 31, 20X8: E(X) Buildings and Equipment Depreciation Expense Accumulated Depreciation Retained Earnings Noncontrolling Interest Eliminate unrealized profit on building. Adjustment to buildings and equipment Amount paid by Transom to acquire building Amount paid by Brown on intercompany sale Adjustment to buildings and equipment Adjustment to depreciation expense Depreciation expense recorded by Transom Company ($300,000 / 15 years) Depreciation expense recorded by Brown Corporation ($144,000 / 9 years) Adjustment to depreciation expense Adjustment to accumulated depreciation Amount required ($20,000 x 7 years) Amount reported by Brown ($16,000 x 1 year) Required adjustment $140,000 (16,000) $124,000 $300,000 (144,000) $156,000 156,000 4,000 124,000 25,200 10,800
$20,000 (16,000) $ 4,000
E6-15
(continued)
Adjustment to retained earnings, January 1, 20X8 Unrealized loss recorded, December 31, 20X7 Proportion of ownership held by Brown Required adjustment $36,000 x .70 $25,200
Adjustment to Noncontrolling interest, January 1, 20X8 Unrealized loss recorded, December 31, 20X7 $36,000 Proportion of ownership held by noncontrolling interest x .30 Required adjustment $10,800
d.
Consolidated net income for 20X8: Operating income reported by Brown Net income reported by Transom Adjustment for loss on sale of building Realized net income of Transom Proportion of ownership held by Brown Consolidated net income $150,000 $40,000 (4,000) $36,000 x .70
25,200 $175,200
E6-16 a. b. c.
Multiple Transfers of Asset
$145,000 No gain or loss should be reported. Swanson Corporation operating income Sullivan Corporation net income Loss on sale of land ($145,000 - $130,000) Realized net income of Sullivan Corporation Proportion of stock held by Swanson Kolder Company net income Gain on sale of land ($180,000 - $130,000) Realized net income of Kolder Company Proportion of stock held by Swanson Clayton Corporation net income Gain on sale of land ($240,000 - $180,000) Realized net income of Clayton Corporation Proportion of stock held by Swanson Consolidated net income Alternate Computation: Swanson Corporation operating income Sullivan Corporation net income Kolder Company net income Clayton Corporation net income Combined income Unrealized loss Unrealized gain Unrealized gain Realized income recorded by Sullivan Corp. recorded by Kolder Company recorded by Clayton Corp. available to all shareholders $(15,000) 50,000 60,000 $150,000 120,000 60,000 80,000 $410,000 $120,000 15,000 $135,000 x .80 $ 60,000 (50,000) $ 10,000 x .70 $ 80,000 (60,000) $ 20,000 x .90 $150,000
108,000
7,000
18,000 $283,000
(95,000) $315,000
Income assigned to noncontrolling interest: Sullivan Corp. ($120,000 + $15,000) x .20 Kolder Company ($60,000 - $50,000) x .30 Clayton Corp. ($80,000 - $60,000) x .10 Consolidated net income d. Eliminating entry: E(1)
$27,000 3,000 2,000
(32,000) $283,000
Gain on Sale of Land 110,000 Loss on Sale of Land Land Eliminate gains and loss on land transfer: $110,000 = $50,000 + $60,000 $95,000 = $110,000 - $15,000
15,000 95,000
E6-17 a. b. c.
Elimination Entry in Period of Transfer
$300,000 = $276,000 + $24,000 15 years = $300,000 / ($60,000 / 3 years) E(X) Trucks Retained Earnings Noncontrolling Interest Depreciation Expense Accumulated Depreciation Eliminate unrealized gain on trucks: $21,600 = $36,000 x .60 $14,400 = $36,000 x .40 $57,000 = ($20,000 x 4 years) - ($23,000 x 1 year) 24,000 21,600 14,400 3,000 57,000
E6-18 a.
Elimination Entry Computation
Eliminating entry, December 31, 20X6: E(1) Equipment Gain on Sale of Equipment Depreciation Expense Accumulated Depreciation 90,000 60,000 6,000 144,000
Depreciation expense adjustment: Recorded ($360,000 / 10 years) Required [($450,000 - $150,000) / 10 years] Required decrease Accumulated depreciation adjustment: Accumulated depreciation, January 1, 20X6 20X6 depreciation required Required balance 20X6 depreciation recorded Required increase
$36,000 (30,000) $ 6,000
$150,000 30,000 $180,000 (36,000) $144,000
b.
Eliminating entry, December 31, 20X7: E(1) Equipment Retained Earnings, January 1 Noncontrolling Interest Depreciation Expense Accumulated Depreciation 90,000 37,800 16,200 6,000 138,000
Retained earnings adjustment: Unrealized profit, January 1, 20X6 Realized in 20X6 Unrealized profit, January 1, 20X7 Proportion of stock held by Stern Share of unrealized profit Accumulated depreciation adjustment: Accumulated depreciation, January 1, 20X6 Depreciation based on historical cost [($300,000 / 10 years) x 2] Required balance Depreciation recorded [($360,000 / 10) x 2] Required increase
$60,000 (6,000) $54,000 x .70 $37,800
$150,000 60,000 $210,000 (72,000) $138,000
E6-19 a.
Using the Eliminating Entry to Determine Account Balances
Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber Corporation. The subsidiary was the owner. The sale was from the subsidiary to the parent, as evidenced by the debit to noncontrolling interest in the eliminating entry. Intercompany transfer price: Amount paid by Somber Corporation Increase to buildings and equipment in eliminating entry Amount paid by Pastel to Somber for equipment $120,000 (53,500) $ 66,500
b.
c.
d.
Income assigned to noncontrolling interest for 20X9: Net income reported by Somber Amount of gain realized in 20X9 ($10,500 / 7 years) Realized net income for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest $25,000 1,500 $26,500 x .10 $ 2,650
e.
Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported by the consolidated entity for 20X9. Eliminating entries at December 31, 20X9:
f.
E(1)
Income from Subsidiary Dividends Declared Investment in Somber Corporation Stock Eliminate income from subsidiary. $22,500 = $25,000 x .90 $5,400 = $6,000 x .90 Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest. $2,650 = ($25,000 + $1,500) x .10 $600 = $6,000 x .10 Common Stock__Somber Corporation Retained Earnings, January 1 Investment in Somber Corporation Stock Noncontrolling Interest Eliminate beginning investment balance.
22,500 5,400 17,100
E(2)
2,650 600 2,050
E(3)
300,000 200,000 450,000 50,000
E6-19
(continued)
E(4)
Buildings and Equipment Retained Earnings, January 1 Noncontrolling Interest Accumulated Depreciation Eliminate unrealized gain on upstream sale of equipment. Accumulated Depreciation Depreciation Expense Adjust depreciation for realization of intercompany gain.
53,500 9,450 1,050 64,000
E(5)
1,500 1,500
E6-20 a.
Intercompany Sale of Services
Eliminating entries, 20X4: E(1) Consulting Revenue 138,700 Consulting Fees Expense Eliminate intercompany revenue and expense. Accounts Payable Accounts Receivable Eliminate intercompany receivable/payable. 6,600 6,600
138,700
E(2)
b.
Consolidated net income, 20X4: Norgaard's separate operating income Bline's net income Eliminations: Consulting revenue Consulting fees expense Less income to noncontrolling interest: $631,000 x .25 Consolidated net income, 20X4 $2,342,000 631,000 (138,700) 138,700 $2,973,000 (157,750) $2,815,250
E6-21A a.
Fully Adjusted Equity Method and Cost Method
Fully Adjusted equity-method journal entries, 20X4: (1) Investment in TV Sales Company Stock Income from Subsidiary Record equity-method income: $70,000 x .65 Cash Investment in TV Sales Company Stock Record dividends from TV Sales Company: $20,000 x .65 (3) Income from Subsidiary Investment in TV Sales Company Stock Remove unrealized gain on sale of land. Investment in TV Sales Company Stock Income from Subsidiary Recognize portion of gain on sale of equipment: $8,000 x .65 11,000 11,000 45,500 45,500
(2)
13,000 13,000
(4)
5,200 5,200
Eliminating entries, December 31, 20X4: E(1) Income from Subsidiary Dividends Declared Investment in TV Sales Company Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $27,300 = ($70,000 + $8,000) x .35 Common Stock__TV Sales Company Retained Earnings, January 1 Investment in TV Sales Company Stock Noncontrolling Interest Eliminate beginning investment balance. Gain on Sale of Land Land Eliminate unrealized gain on land. Investment in TV Sales Company Stock Noncontrolling Interest Equipment Eliminate unrealized gain on upstream sale of equipment. 39,700 13,000 26,700
E(2)
27,300 7,000 20,300
E(3)
300,000 145,000 289,250 155,750
E(4)
11,000 11,000
E(5)
26,000 14,000 40,000
E6-21A E(6)
(continued) Accumulated Depreciation Depreciation Expense Adjust depreciation for realization of intercompany gain. 8,000 8,000
b.
Cost-method journal entry recorded by Newtime Products: (1) Cash Dividend Income Record dividend income from TV Sales Company. Cost-method eliminating entries, December 31, 20X4: E(1) Dividend Income Dividends Declared Eliminate dividend income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $27,300 = ($70,000 + $8,000) x .35 Common Stock__TV Sales Company Retained Earnings, January 1 Investment in TV Sales Company Stock Noncontrolling Interest Eliminate investment balance at date of acquisition. Retained Earnings, January 1 Noncontrolling Interest Assign undistributed prior earnings of subsidiary to noncontrolling interest: $45,000 x .35 Gain on Sale of Land Land Eliminate unrealized gain on land. Retained Earnings, January 1 Noncontrolling Interest Equipment Eliminate unrealized gain on upstream sale of equipment. Accumulated Depreciation Depreciation Expense Adjust depreciation for realization of intercompany gain. 13,000 13,000 13,000 13,000
E(2)
27,300 7,000 20,300
E(3)
300,000 100,000 260,000 140,000
E(4)
15,750 15,750
E(5)
11,000 11,000
E(6)
26,000 14,000 40,000
E(7)
8,000 8,000
SOLUTIONS TO PROBLEMS P6-22 a. Computation of Consolidated Net Income Separate operating income of Petime Corporation Reported net income of United Grain Company $19,000 Unrealized profit of sale of land (7,000) Realized income for 20X4 $12,000 Proportion of stock held by Petime x .90 $10,800 Amortization of differential ($9,000 / 10) (900) Contribution to 20X4 consolidated net income Consolidated net income Separate operating income of Petime Corporation Reported net income by United Grain Company $19,000 Proportion of stock held by Petime x .90 $17,100 Amortization of differential (900) Contribution to 20X4 consolidated income Unrealized profit on sale of land Consolidated net income $34,000
9,900 $43,900 $34,000
b.
16,200 (7,000) $43,200
Reported income will decrease by $700. In the upstream case the unrealized profit ($7,000) is apportioned to both majority ($6,300) and noncontrolling ($700) shareholders. In the downstream case, it is apportioned entirely to the majority shareholders ($7,000).
P6-23 a.
Subsidiary Net Income
Toll Corporation reported net income of $90,000 for 20X4, computed as follows: .25(X - $20,000) = $17,500 X - $20,000 = $70,000 X = $70,000 + $20,000 X = $90,000
b.
Consolidated net income for 20X4 is $283,000, computed as follows: Lander Corporation operating income Toll Corporation net income Amortization of differential: Purchase price Book value of net assets [.75 x ($150,000 + $270,000)] Differential Number of years amortized Income to noncontrolling interest Unrealized profit on building Consolidated net income $234,000 90,000 $350,000 (315,000) $ 35,000 10
(3,500) (17,500) (20,000) $283,000
P6-24 a.
Consolidated Net Income $ 83,000 30,000

Operating income of Forest Corporation Part Company net income
Unrealized profit on sale of land Reported net income of Part Company Unrealized profit on sale of land Realized income for 20X4 Proportion of stock held by noncontrolling Interest Income to noncontrolling interest Amortization of differential: Purchase price Book value of net assets [.70 x ($150,000 + $260,000)] Differential Number of years amortized Consolidated net income for 20X4
$113,000 (8,000) $30,000 (8,000) $22,000 x .30 (6,600) $304,000 (287,000) $ 17,000 10
(1,700) $96,700
b.
Operating income of Forest Corporation Part Company net income Unrealized profit on sale of land Reported net income of Part Company Proportion of stock held by noncontrolling Interest Income to noncontrolling interest Amortization of differential: Purchase price Book value of net assets [.70 x ($150,000 + $260,000)] Differential Number of years amortized Consolidated net income for 20X4
$ 83,000 30,000 $113,000 (8,000) $30,000 x .30 (9,000) $304,000 (287,000) $ 17,000 10
(1,700) $94,300
P6-25
Transfer of Asset from One Subsidiary to Another Bugle Corporation Cook Products Corporation $ 3,000 45,000 3,000 --Consolidated Entity $ 2,000 40,000 12,000 ---
Depreciation expense Fixed assets__Warehouse Accumulated depreciation Gain on sale of warehouse
------15,000
P6-26 a.
Consolidation Eliminating Entry
Master paid Rakel $460,000 ($600,000 - $140,000). as
b. Accumulated deprecation at January 1, 20X7, was $168,000, computed follows: Purchase price paid by Rakel Amount paid by Master Gain recorded by Rakel Book value at date of sale Accumulated depreciation at date of sale c. $600,000 $460,000 (28,000) (432,000) $168,000
Annual depreciation expense recorded by Rakel was $28,000 ($168,000/6 years). The estimated residual value was $40,000, computed as follows: Purchase price paid by Rakel Amount to be depreciated by Rakel ($28,000 x 20 years) Estimated residual value $600,000 (560,000) $ 40,000
d.
e.
Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 - $40,000) / 14 years). Reported net income of Rakel Unrealized gain on sale of truck ($28,000 - $2,000) Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interest $ 80,000 (26,000) $ 54,000 x .40 $ 21,600
f.
f.
Reported net income of Rakel Portion of gain on sale of truck realized in 20X8 Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interest
$ 65,000 2,000 $ 67,000 x .40 $ 26,800
P6-27 1. 2. 3. 4. 5. d c d a d
Multiple-Choice Questions
P6-28 a.
Consolidated Net Income with Intercorporate Transfers
Entry to record intercompany transfer of equipment, 20X6: Cash 240,000 Accumulated Depreciation 140,000 Equipment Gain on Sale of Equipment Record sale of equipment to Subsidence Mining: $140,000 = ($350,000 / 10 years) x 4 years
350,000 30,000
b.
20X7 eliminating entries related to intercorporate transfers: E(1) Land Loss on Sale of Land Eliminate unrealized loss on land: $560,000 - $500,000 E(2) Equipment Retained Earnings, January 1 Accumulated Depreciation Depreciation Expense Eliminate unrealized profit on equipment: $110,000 = $350,000 - $240,000 $25,000 = $30,000 - $5,000 $130,000 = ($35,000 x 6) - ($40,000 x 2) $5,000 = $40,000 - $35,000 110,000 25,000 130,000 5,000 60,000 60,000
c.
Subsidence Mining's 20X7 net income: Subsidence Mining's income to noncontrolling shareholders Noncontrolling interest's share of subsidiary income Subsidence Mining's realized net income Less unrealized loss on intercompany sale of land Subsidence Mining's 20X7 net income
$ 45,000 .30 $150,000 (60,000) $ 90,000
P6-28 d.
(continued)
Skekel's 20X7 income from its separate operations: Consolidated net income Less: Proportionate share of realized income of Subsidence Mining ($150,000 x .70) Partial realization of prior year's intercompany profit ($30,000 / 6 years) Add back: Amortization of differential ($300,000 / 20 years) Skekel's 20X7 income from its separate operations $921,000
(105,000) (5,000) 15,000 $826,000
P6-29
Computation of Retained Earnings following Multiple Transfers
Consolidated retained earnings, January 1, 20X8: Great Company retained earnings, January 1 Unrealized profit on land ($16,000 x .80) Unrealized profit on depreciable assets [$22,000 - ($2,200 x 2)] Consolidated retained earnings $450,000 (12,800) (17,600) $419,600
Consolidated retained earnings, December 31, 20X8: Great Company retained earnings, January 1 Operating income for 20X8 Dividends paid in 20X8 Investment income from Meager Company for 20X8: Meager's net income $30,000 Proportion of ownership held x .80 Great Company's proportionate share Amortization of differential Assigned to equipment [($325,000 - $290,000) x .80] / 10 years Goodwill impairment loss Great Company retained earnings Unrealized profit on land ($16,000 x .80) Unrealized profit on depreciable assets [$22,000 - ($2,200 x 3)] Consolidated retained earnings $450,000 65,000 (45,000)
24,000
(2,800) (14,000) $477,200 (12,800) (15,400) $449,000
P6-30 a.
Preparation of Consolidated Balance Sheet
Consolidated balance sheet workpaper: Lofton Company and Temple Corporation Consolidated Balance Sheet Workpaper December 31, 20X6 Lofton Company Temple Corp. Eliminations Debit Credit Consolidated
Item Cash and Accounts Receivable Inventory Land Buildings and Equipment Investment in Temple Corporation Stock Debits Accum. Depreciation Accounts Payable Notes Payable Common Stock Retained Earnings Noncontrolling Interest Credits
101,000 80,000 150,000 400,000 150,000 881,000 135,000 90,000 200,000 100,000 356,000
20,000 40,000 90,000 300,000
(2) 10,000 (3) 9,000 (1)150,000
121,000 120,000 250,000 709,000
450,000 85,000 25,000 90,000 200,000 50,000 (3) 24,000
1,200,000 244,000 115,000 290,000 100,000 347,000 104,000 1,200,000
881,000
450,000
(1)200,000 (1) 50,000 (2) 6,000 (3) 15,000 (1)100,000 (2) 4,000 284,000 284,000
P6-30
(continued)
Eliminating entries: E(1) Common Stock__Temple Corporation Retained Earnings Investment in Temple Corporation Stock Noncontrolling Interest Eliminate investment account balance. Land Retained Earnings Noncontrolling Interest Eliminate unrealized loss on sale of land. E(3) Buildings and Equipment Retained Earnings Accumulated Depreciation Eliminate unrealized gain on sale of equipment. 9,000 15,000 24,000 200,000 50,000 150,000 100,000
E(2)
10,000 6,000 4,000
Accumulated depreciation adjustment: Required [($100,000 / 10 years) x 5 years] Recorded [($91,000 / 7 years) x 2 years] Required increase Gain recorded by Temple Corporation, January 1, 20X5 Realized in 20X5 and 20X6 ($3,000 x 2 years) Unrealized balance, December 31, 20X6
$50,000 (26,000) $24,000
$21,000 (6,000) $15,000
b.
Consolidated balance sheet: Lofton Company and Subsidiary Consolidated Balance Sheet December 31, 20X6 Cash and Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Total Assets Accounts Payable Notes Payable Noncontrolling Interest Common Stock Retained Earnings Total Liabilities and Stockholders' Equity $121,000 120,000 250,000 $709,000 (244,000) 465,000 $956,000 $115,000 290,000 104,000 $100,000 347,000 447,000 $956,000
P6-31 a.
Consolidation Workpaper with Intercompany Transfers
Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Blank Corp. Stock Eliminate income from subsidiary: $19,500 = $30,000 x .65 $3,250 = $5,000 x .65 Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $6,265 = ($30,000 - $13,200 + $1,100) x .35 $1,750 = $5,000 x .35 19,500 3,250 16,250
E(2)
6,265 1,750 4,515
E(3)
Common Stock__Blank Corporation 60,000 Retained Earnings, January 1 85,000 Investment in Blank Corp. Stock Noncontrolling Interest Eliminate beginning investment balance: $85,000 = $110,000 - ($30,000 - $5,000) $94,250 = $110,500 - $16,250 $50,750= ($110,000 + $60,000 - $25,000) x .35 Sales and Service Revenue Other Expenses Eliminate intercompany services. Gain on Sale of Land Land Eliminate gain on sale of land to Blank Corporation. Gain on Sale of Building Depreciation Expense Buildings and Equipment (net) Eliminate gain on sale of building to Mist Company. 24,000
94,250 50,750
E(4)
24,000
E(5)
4,000 4,000
E(6)
13,200 1,100 12,100
P6-31 b.
(continued) Mist Company and Blank Corporation Consolidation Workpaper December 31, 20X4 Mist Company Blank Corp. Eliminations Debit Credit Consolidated
Item Sales and Service Revenue Gain on Sale of Land Gain on Sale of Building Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense 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 Cash Accounts Receivable Inventory Land Buildings and Equipment (net) Investment in Blank Corporation Stock Debits Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest Credits P6-31 (continued) c.
286,500 4,000
128,500
(4) 24,000 (5) 4,000
391,000
13,200 (6) 13,200 19,500 (1) 19,500 310,000 141,700 391,000 160,000 75,000 235,000 22,000 19,000 (6) 1,100 39,900 76,000 17,700 (4) 24,000 69,700 (258,000)(111,700) (344,600) 46,400 (2) 52,000 30,000 6,265 66,965 25,100 (6,265) 40,135 198,000 40,135 238,135 (25,000) 213,135 54,500 99,000 166,000 51,000 312,900
198,000 85,000 (3) 85,000 52,000 30,000 66,965 25,100 250,000 115,000 (25,000) ( 5,000) (1) 3,250 (2) 1,750 225,000 32,500 62,000 95,000 40,000 200,000 110,500 540,000 35,000 180,000 100,000 225,000 270,000 20,000 80,000 60,000 110,000 110,000 22,000 37,000 71,000 15,000 125,000 151,965 30,100
(4)
4,000
(5) 12,100 (1) 16,250 (3) 94,250
683,400 55,000 260,000 100,000 213,135 55,265 683,400
(3) 60,000 151,965 30,100 (2) 4,515 (3) 50,750 211,965 211,965
540,000
270,000
Mist Company and Subsidiary Consolidated Balance Sheet

December 31, 20X4 Cash Accounts Receivable Inventory Land Buildings and Equipment (net) Total Assets Accounts Payable Bonds Payable Noncontrolling Interest Common Stock Retained Earnings Total Liabilities and Stockholders' Equity $ 54,500 99,000 166,000 51,000 312,900 $683,400 $ 55,000 260,000 55,265 $100,000 213,135 313,135 $683,400
Mist Company and Subsidiary Consolidated Income Statement Year Ended December 31, 20X4 Sales Cost of Goods Sold Depreciation Expense Other Expenses Total Expenses Income to Noncontrolling Interest Consolidated Net Income $391,000 $235,000 39,900 69,700 344,600 $ 46,400 (6,265) $ 40,135
Mist Company and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X4 Retained Earnings, January 1, 20X4 20X4 Net Income Dividends Paid in 20X4 Retained Earnings, December 31, 20X4 $198,000 40,135 $238,135 (25,000) $213,135
P6-32 a.
Consolidation Workpaper in Year of Intercompany Transfer
Eliminating entries, December 31, 20X6: E(1) Income from Subsidiary Dividends Declared Investment in Lane Company Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $8,000 = $40,000 x .20 Common Stock__Lane Company Retained Earnings, January 1 Differential Investment in Lane Company Stock Noncontrolling Interest Eliminate beginning investment balance. 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. Buildings and Equipment Gain on Sale of Equipment Depreciation and Amortization Expense Accumulated Depreciation Eliminate intercorporate sale of equipment. 32,000 4,000 28,000
E(2)
8,000 1,000 7,000
E(3)
100,000 105,000 40,000 204,000 41,000
E(4)
40,000 40,000
E(5)
25,000 25,000
E(6)
8,000 2,000 10,000
E(7)
5,000 20,000 2,000 23,000
Depreciation expense adjustment: Depreciation recorded ($70,000 / 10 years) Depreciation required ($75,000 / 15 years) Required decrease Accumulated depreciation adjustment: Required balance ($5,000 x 6 years) Balance recorded ($7,000 x 1 year) Required increase E(8) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable.
$ 7,000 (5,000) $ 2,000
$30,000 (7,000) $23,000 7,000 7,000
P6-32 b.
(continued) Prime Company and Lane Company Consolidation Workpaper December 31, 20X6 Prime Company Lane Company Eliminations Debit Credit Consolidated 360,000
Item
Sales 240,000 120,000 Gain on Sale of Equip. 20,000 (7) 20,000 Income from Subsidiary 32,000 (1) 32,000 Credits 292,000 120,000 Cost of Goods Sold 140,000 60,000 Deprec. & Amortization 25,000 15,000 (7) Goodwill Impairment Loss (5) 25,000 Other Expenses 15,000 5,000 Debits (180,000) (80,000) 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 Receivables Inventory Land Buildings and Equipment Investment in Lane Company Stock Differential Goodwill Debits Accum. Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest Credits
2,000
360,000 200,000 38,000 25,000 20,000 (283,000) 77,000 (8,000)
(2) 112,000 338,000 40,000 105,000
8,000 85,000 2,000
69,000
112,000 40,000 450,000 145,000 (30,000) (5,000)
(3)105,000 (6) 8,000 85,000 (1) (2) 198,000 (8)
2,000 4,000 1,000 7,000 7,000
330,000 69,000 399,000 (30,000) 369,000 141,000 350,000 150,000 655,000
420,000 113,000 260,000 80,000 500,000 232,000
140,000 35,000 90,000 80,000 150,000
(6) 10,000 (7) 5,000
(1) 28,000 (3)204,000 (3) 40,000 (4) 40,000 (4) 40,000 (5) 25,000 355,000 45,000 20,000 50,000 100,000 140,000 (6) (7) 23,000 (8) 7,000
1,185,000 205,000 60,000 200,000 300,000 420,000
15,000 1,311,000 273,000 73,000 250,000 300,000
(3)100,000
1,185,000
355,000
198,000 7,000 369,000 2,000 (2) 7,000 (3) 41,000 46,000 392,000 392,000 1,311,000
P6-32 c.
(continued) Prime Company and Subsidiary Consolidated Balance Sheet December 31, 20X6 $ 141,000 350,000 150,000
Cash and Receivables Inventory Land Buildings and Equipment Less: Accumulated Depreciation Goodwill Total Assets Accounts Payable Bonds Payable Noncontrolling Interest Common Stock Retained Earnings Total Liabilities and Stockholders' Equity
$655,000 (273,000)
382,000 15,000 $1,038,000 $ 73,000 250,000 46,000 300,000 369,000 $1,038,000
Prime Company and Subsidiary Consolidated Income Statement Year Ended December 31, 20X6 Sales Cost of Goods Sold Depreciation and Amortization Expense Goodwill Impairment Loss Other Expenses Total Expenses Income to Noncontrolling Interest Consolidated Net Income $ $200,000 38,000 25,000 20,000 $ $ 283,000 77,000 (8,000) 69,000 360,000
Prime Company and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X6 Retained Earnings, January 1, 20X6 20X6 Net Income Dividends Paid in 20X6 Retained Earnings, December 31, 20X6 $ $ $ 330,000 69,000 399,000 (30,000) 369,000
P6-33 a.
Intercorporate Sales in Prior Years
Eliminating entries, December 31, 20X8: E(1) Income from Subsidiary Dividends Declared Investment in Skate Company Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest. Common Stock__Skate Company Additional Paid-In Capital__Skate Company Retained Earnings, January 1 Differential Investment in Skate Company Stock Noncontrolling Interest Eliminate beginning investment balance. Patents Buildings and Equipment Accumulated Depreciation Differential Assign differential: $34,000 = $40,000 - [($40,000 / 20 years) x 3 years] $3,000 = ($20,000 / 20 years) x 3 years Amortization Expense Depreciation Expense Patents Accumulated Depreciation Amortize differential. Buildings and Equipment Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation Eliminate unrealized profit on buildings: $60,000 = $125,000 - $65,000 $15,000 = $65,000 - ($125,000 - $75,000) $ 1,500 = ($65,000 / 10 years) ($125,000 / 25 years) $73,500 = ($5,000 x 16 years) - ($6,500 x 1 year) Retained Earnings, January 1 Noncontrolling Interest Land Eliminate unrealized profit on land. 21,000 8,000 13,000
E(2)
6,000 2,000 4,000
E(3)
30,000 20,000 150,000 51,000 211,000 40,000
E(4)
34,000 20,000 3,000 51,000
E(5)
2,000 1,000 2,000 1,000
E(6)
60,000 15,000 1,500 73,500
E(7)
10,400 2,600 13,000
P6-33
(continued) b.Pond Corporation and Skate Company Consolidation Workpaper December 31, 20X8 Pond Corp. 450,000 21,000 14,900 485,900 285,000 50,000 35,000 24,000 11,900 Skate Co. 250,000 (1) 21,000 250,000 136,000 40,000 24,000 10,500 9,500 14,900 714,900 421,000 90,000 58,500 34,500 21,400 2,000 (627,400) 87,500 (6,000) 1,500 81,500 Eliminations Debit Credit Consolidated 700,000
Item Sales Income from Subsidiary Interest Income Credits Cost of Goods Sold Other Operating Expenses Depreciation Expense Interest Expense Miscellaneous Expenses Amortization Expense Debits Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1
(5)
1,000 (6)
1,500
(5) (405,900) (220,000)
2,000
(2) 80,000 241,400 30,000 150,000
6,000 30,000
Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash Accounts Receivable Interest and Other Receivables Inventory Land Buildings and Equipment Investment in Skate Company Stock Investment in Tin Co. Bonds Bond Discount Differential Patents Debits
80,000 321,400 (30,000)
30,000 180,000 (10,000)
(3)150,000 (6) 15,000 (7) 10,400 30,000 (1) (2) 205,400
1,500 8,000 2,000 11,500
216,000 81,500 297,500 (30,000) 267,500 115,400 195,000 55,000 190,000 59,000 720,000
291,400 68,400 130,000 45,000 140,000 50,000 400,000
170,000 47,000 65,000 10,000 50,000 22,000 240,000
(7) 13,000 (4) 20,000 (6) 60,000 (1) 13,000 (3)211,000
224,000
134,000 3,000 (3) 51,000 (4) 51,000 (4) 34,000 (5) 2,000 1,191,400 437,000
134,000 3,000 32,000 1,503,400
P6-33
(continued) Pond Corp. 185,000 Skate Co. 94,000 Eliminations Debit Credit (4) 3,000 (5) 1,000 (6) 73,500 Consolidated
Item Accum. Depreciation
Accounts Payable Interest and Other Payables Bonds Payable Common Stock Pond Corporation Skate Company Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits
65,000 45,000 300,000 150,000
11,000 12,000 100,000
356,500 76,000 57,000 400,000 150,000
30,000 155,000 291,400 20,000 170,000
(3) 30,000 (3) 20,000 205,400 (7) 11,500 155,000 267,500
1,191,400
437,000
2,600 (2) 4,000 (3) 40,000 423,000 423,000
41,400 1,503,400
P6-34 a.
Intercorporate Sale of Land and Depreciable Asset
Unamortized purchase differential, January 1, 20X5: Purchase price Common stock outstanding at acquisition Retained earnings at acquisition Book value of net assets at acquisition Proportion of ownership acquired Net book value acquired Purchase differential at acquisition Amortization of differential: Buildings and equipment [($25,000 x .70) / 10 years] x 2 years Copyright ($7,500 / 5 years) x 2 years Unamortized purchase differential $154,500 $100,000 85,000 $185,000 x .70 (129,500) $ 25,000
(3,500) (3,000) $ 18,500
b.
Reconciliation between book value and investment balance at December 31, 20X5: Underlying book value of Morris Company stock: Common stock outstanding Retained earnings, January 1, 20X5 Net income for 20X5 Dividends paid in 20X5 Net book value Proportion of ownership held by Champion Net book value of ownership held by Champion Unamortized purchase differential: Buildings and equipment ($17,500 x 7/10 years) Copyright ($7,500 x 2/5 years) Investment in Morris Company stock
$100,000 100,000 30,000 ( 5,000) $225,000 x .70 $157,500 12,250 3,000 $172,750
c.
Eliminating entries: E(1) Income from Subsidiary 17,750 Dividends Declared Investment in Morris Company Stock Eliminate income from subsidiary: $17,750 = ($30,000 x .70) - $1,750 - $1,500 $3,500 = $5,000 x .70 Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $6,480 = ($30,000 - $9,600 + $1,200) x .30 $1,500 = $5,000 x .30 6,480 1,500 4,980
3,500 14,250
E(2)
P6-34 E(3)
(continued) Common stock__Morris Company Retained Earnings, January 1 Differential Investment in Morris Company Stock Noncontrolling Interest Eliminate beginning investment balance. Buildings and Equipment Copyright Accumulated Depreciation Differential Assign beginning differential. Depreciation Expense Amortization Expense Accumulated Depreciation Copyright Amortize differential. Retained Earnings Land Eliminate unrealized gain on land. Equipment Gain on Sale of Equipment Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment: $8,400 = $100,000 - $91,600 $9,600 = $91,600 - ($100,000 - $18,000) $1,200 = ($81,600 / 8 years) - ($90,000 / 10 years) $16,800 = ($9,000 x 3 years) - ($10,200 x 1 year) 100,000 100,000 18,500 158,500 60,000
E(4)
17,500 4,500 3,500 18,500
E(5)
1,750 1,500 1,750 1,500
E(6)
11,000 11,000
E(7)
8,400 9,600 1,200 16,800
P6-34
(continued) d.Champion Corporation and Morris Company Consolidation Workpaper December 31, 20X5 Champion Corp. 450,000 28,250 Morris Co. 190,400 Eliminations Debit Credit Consolidated 640,400 28,250 (7) 9,600 (1) 17,750 668,650 485,000 35,550 57,000 45,000 1,500 (624,050) 44,600 (6,480) 1,200 38,120
Item Sales Other Income Gain on Sale of Equipment Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Interest Expense Other Expenses Amortization 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 Accounts Receivable Interest and Other Receivables Inventory Land Buildings and Equipment Bond Discount Investment in Morris Company Stock Differential Copyright Debits
9,600 17,750 496,000 375,000 25,000 24,000 28,000 200,000 110,000 10,000 33,000 17,000
(5)
1,750 (7)
1,200
(5) (452,000) (170,000)
1,500
(2) 44,000 178,000 44,000 222,000 (30,000) 30,000 100,000 30,000 130,000 (5,000)
6,480 37,080
(3)100,000 (6) 11,000 37,080 (1) (2) 148,080
1,200 3,500 1,500 6,200
167,000 38,120 205,120 (30,000) 175,120 78,250 135,000 40,000 330,000 129,000 580,900 15,000
192,000 20,250 65,000 30,000 150,000 80,000 315,000
125,000 58,000 70,000 10,000 180,000 60,000 240,000 15,000
(6) 11,000 (4) 17,500 (7) 8,400
172,750
(1) 14,250 (3)158,500 (3) 18,500 (4) 18,500 (4) 4,500 (5) 1,500 633,000
833,000
3,000 1,311,150
P6-34
(continued) Champion Corp. Morris Co. Eliminations Debit Credit Consolidated
Item Accum. Depreciation Buildings and Equip.
120,000
60,000
(4) 3,500 (5) 1,750 (7) 16,800
Accounts Payable Other Payables Bonds Payable Common Stock Champion Corporation Morris Company Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits
61,000 30,000 250,000 150,000
28,000 20,000 300,000
202,050 89,000 50,000 550,000 150,000
100,000 30,000 192,000 125,000
(3)100,000 30,000 148,080 6,200 175,120
833,000
633,000
(2) 4,980 (3) 60,000 296,980 296,980
64,980 1,311,150
P6-35 a.
Consolidation Workpaper in Year following Intercompany Transfer
Income from subsidiary for 20X7: Reported net income of Lane Company Proportion of stock held by Prime Company Income from Subsidiary $45,000 x .80 $36,000
b.
Reconciliation of underlying book value and balance in investment account: Net book value reported by Lane Company Common stock outstanding Retained earnings balance, January 1, 20X7 Net income for 20X7 Dividends paid in 20X7 Retained earnings balance, December 31, 20X7 Proportion of stock held by Prime Company Add: Goodwill Balance in investment account
$100,000 $140,000 45,000 (35,000) 150,000 $250,000 x .80 $200,000 40,000 $240,000
P6-35 c.
(continued)
Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Lane Company Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $9,000 = $45,000 x .20 36,000 28,000 8,000
E(2)
9,000 7,000 2,000
E(3)
Common Stock__Lane Company 100,000 Retained Earnings, January 1 140,000 Differential 40,000 Investment in Lane Company Stock Noncontrolling Interest Eliminate beginning investment balance: $40,000 = $160,000 - $50,000 + $100,000) x .80 $232,000 = $240,000 - $8,000 $48,000 = ($100,000 + $140,000) x .20 Goodwill Retained Earnings Differential Assign differential to goodwill. Retained Earnings, January 1 Noncontrolling Interest Land Eliminate unrealized profit on land. Buildings and Equipment Retained Earnings, January 1 Depreciation and Amortization Expense Accumulated Depreciation Eliminate unrealized profit on equipment. 15,000 25,000
232,000 48,000
E(4)
40,000
E(5)
8,000 2,000 10,000
E(6)
5,000 18,000 2,000 21,000
Accumulated depreciation adjustment: Required balance ($5,000 x 7 years) Balance recorded ($7,000 x 2 years) Required increase E(7) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable.
$35,000 (14,000) $21,000 4,000 4,000
P6-35
(continued)
d.
Prime Company and Lane Company Consolidation Workpaper December 31, 20X7 Consolidated 400,000 400,000 240,000 38,000 30,000 (308,000) 92,000 (9,000) 2,000 83,000
Prime Lane Eliminations Company Company Debit Credit Sales 250,000 150,000 Income from Subsidiary 36,000 (1) 36,000 Credits 286,000 150,000 Cost of Goods Sold 160,000 80,000 Deprec. and Amortization 25,000 15,000 (6) 2,000 Other Expenses 20,000 10,000 Debits (205,000)(105,000) Item Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1
(2) 81,000 420,000 45,000 140,000
9,000 45,000
Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash and Receivables Inventory Land Buildings and Equipment Investment in Lane Company Stock Differential Goodwill Debits Accum. Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest Credits
81,000 45,000 501,000 185,000 (60,000) (35,000)
(3)140,000 (4) 25,000 (5) 8,000 (6) 18,000 45,000
2,000 (1) 28,000 (2) 7,000
369,000 83,000 452,000 (60,000) 392,000 202,000 340,000 170,000 655,000
441,000 151,000 240,000 100,000 500,000 240,000
150,000 55,000 100,000 80,000 150,000
236,000 (7)
37,000 4,000
(5) 10,000 (6) 5,000
(1) 8,000 (3)232,000 (3) 40,000 (4) 40,000 (4) 15,000 385,000 60,000 25,000 50,000 100,000 150,000 (5) (6) 21,000 (7) 4,000
1,231,000 230,000 60,000 200,000 300,000 441,000
15,000 1,382,000 311,000 81,000 250,000 300,000
(3)100,000
1,231,000
385,000
236,000 37,000 392,000 2,000 (2) 2,000 (3) 48,000 48,000 402,000 402,000 1,382,000
P6-36 (a) (b) (c) (d) (e) (f)
Incomplete Data $100,000 $140,000 $250,000 = $593,000 - $343,000 $100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000] $2,500 = [$105,000 - ($50,000 + $70,000 + $30,000) x .60] / 6 years Investment in Shadow Company Stock: $105,000 Purchase price, January 1, 20X4 30,000 Undistributed earnings from January 1, 20X4, to January 1, 20X7 [($80,000 - $30,000) x .60] 6,000 Undistributed income for 20X7 ($10,000 x .60) (10,000) Amortization of purchase differential [($15,000 / 6 years) x 4 years] $131,000 Balance in investment account at December 31, 20X7 $7,000 = ($70,000 + $90,000) - $153,000 $-0$510,000 = $345,000 + $150,000 + ($60,000 - $45,000) $278,000 = $180,000 + $80,000 + [($60,000 / 5 years) x 4 years] - [($45,000 / 3 years) x 2 years) Consolidated retained earnings at January 1, 20X7: $380,000 Retained earnings reported by Phantom Corporation Phantom's share of unrealized profit on sale of equipment $9,000 Gain recorded: [$45,000 - ($60,000 x 3 / 5)] (3,000) Amortized in 20X6: ($9,000 / 3) $6,000 Unamortized gain x .60 Phantom's proportionate share (3,600) $3,600 Reduction of Phantoms retained earnings $376,400 Consolidated retained earnings Income to noncontrolling shareholders: $ 30,000 Shadow's 20X7 net income ($250,000 - $195,000 - $10,000 - $15,000) 3,000 Realized profit on 20X6 sale of building to Phantom $ 33,000 Realized net income x .40 Noncontrolling interest's proportionate share $ 13,200 Income assigned
(g) (h) (i) (j)
(k)
(l)
P6-37
Multiple-Choice Questions__Computation of Various Account Balances Income to noncontrolling interest: [($40,000 - $8,000) x .40] = $12,800
1.
2.
Unamortized identifiable intangible assets: $30,000 - [($30,000 / 10 years) x 3 years] = $21,000
3.
Buildings and equipment (net), Kendel Manufacturing Buildings and equipment (net), Trendy Products Unrealized gain on transfer of equipment ($10,000 - $2,000) Consolidated balance
$300,000 200,000 (8,000) $492,000
4.
Land reported by Kendel Manufacturing Land reported by Trendy Products Unrealized gain on intercompany sale of land Consolidated balance
$120,000 80,000 (20,000) $180,000
5.
Separate operating income of Kendel Manufacturing Net income of Trendy Products Less: Amortization of differential ($30,000 / 10 years) Unrealized gain on transfer of equipment during period ($10,000 - $2,000) Income assigned to noncontrolling interest Consolidated net income
$ 75,000 40,000 $115,000 (3,000) (8,000) (12,800) $ 91,200
P6-37
(continued)
6.
Retained earnings of Kendel Manufacturing Unrealized gain on downstream sale of land Unrealized gain on upstream sale of equipment ($10,000 - $2,000) x .60 Consolidated retained earnings
$421,000 (20,000) (4,800) $396,200
Alternate computation: Retained earnings of Kendel Manufacturing Retained earnings of Trendy Products Total Unrealized gain on downstream sale of land Unrealized gain on upstream sale of equipment ($10,000 - $2,000) Kendel Manufacturing's proportionate share of Trendy Products retained earnings ($200,000 x .60) Trendy Products retained earnings assigned to noncontrolling interest ($200,000 - $8,000) x .40 Consolidated retained earnings $421,000 200,000 $621,000 (20,000) (8,000)
(120,000)
(76,800) $396,200
7.
Trendy Products: Common stock outstanding Additional paid-in capital Retained earnings Book value of net assets Unrealized gain on transfer of equipment Proportion of stock held by noncontrolling interest Noncontrolling interest, December 31, 20X4
$ 90,000 10,000 200,000 $300,000 (8,000) $292,000 x .40 $116,800
8.
Trendy Products: Common stock outstanding Additional paid-in capital Retained earnings: December 31, 20X4 $200,000 Increase in 20X4 ($40,000 - $15,000) (25,000) Balance, December 31, 20X3 Net book value, December 31, 20X3 Proportion of stock held by noncontrolling interest Balance, December 31, 20X3
$ 90,000 10,000
175,000 $275,000 x .40 $110,000
P6-38 a.
Intercompany Sale of Equipment in Prior Period at a Loss
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: $5,700 = ($60,000 - $3,000) x .10 Common stock__Block Corporation Retained Earnings, January 1 Investment in Block Corporation Stock Noncontrolling Interest Eliminate beginning investment balance. 54,000 18,000 36,000
E(2)
5,700 2,000 3,700
E(3)
50,000 150,000 180,000 20,000
E(4)
Buildings and Equipment 42,000 Depreciation Expense 3,000 Retained Earnings, January 1 Noncontrolling Interest Accumulated Depreciation Eliminate intercorporate sale of equipment. Adjustment to depreciation expense Depreciation based on original cost ($90,000 / 10 years) Depreciation based on intercompany sale price ($48,000 / 8 years) Adjustment to depreciation expense Adjustment to retained earnings Book value of equipment at time of sale [$90,000 - ($9,000 x 2 years)] Intercompany sale price Loss recorded by Block on sale Partial realization of loss [($9,000 - $6,000) x 2 years] Loss not yet realized for consolidated statement purposes Foster's proportionate share Adjustment to retained earnings
16,200 1,800 27,000
$9,000 (6,000) $3,000
$72,000 (48,000) $24,000 (6,000) $18,000 x .90 $16,200
P6-38
(continued) Adjustment to noncontrolling interest Loss not yet realized for consolidated statement purposes Proportion of ownership held by noncontrolling interest Adjustment to noncontrolling interest Adjustment to accumulated depreciation Accumulated depreciation based on original cost [($90,000 / 10 years) x 5 years] Accumulated depreciation recorded by Foster [($48,000 / 8 years) x 3 years] Adjustment to accumulated depreciation
$18,000 x .10 $ 1,800
$45,000 (18,000) $27,000
P6-38
(continued) b.Foster Company and Block Corporation Consolidation Workpaper December 31, 20X9 Foster Co. Block Corp. Eliminations Debit Credit Consolidated 1,065,000 41,000 1,106,000 750,000 63,000 170,000 (983,000) 123,000 (5,700) 117,300 251,200 117,300 368,500 (40,000) 328,500 114,400 170,000 50,000 330,000 140,000 792,000 (1) 36,000 (3)180,000 572,400 1,596,400
Item Sales Other Income Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense 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 Cash Accounts Receivable Other Receivables Inventory Land Buildings and Equipment Investment in Block Corporation Stock Debits
680,000 385,000 26,000 15,000 54,000 (1) 54,000 760,000 400,000 500,000 250,000 45,000 15,000 (4) 3,000 95,000 75,000 (640,000) (340,000)
(2) 120,000 235,000 120,000 355,000 (40,000) 60,000
5,700 62,700
150,000 (3)150,000 (4) 16,200 60,000 62,700 210,000 (20,000) (1) 18,000 (2) 2,000 190,000 32,400 90,000 10,000 130,000 60,000 250,000 212,700 36,200
315,000 82,000 80,000 40,000 200,000 80,000 500,000 216,000 1,198,000
(4) 42,000
P6-38
(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 50,000 110,000 315,000 190,000 212,700 36,200 (3) 50,000 110,000 328,500
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
1,198,000
572,400
(2) 3,700 (3) 20,000 (4) 1,800 304,700 304,700
25,500 1,596,400
P6-39 a.
Comprehensive Problem: Intercorporate Transfers
Computation of differential as of January 1, 20X8: Original differential at December 31, 20X1 Less: Portion written off for sale of inventory Remaining differential, January 1, 20X8 $112,500 (22,500) $ 90,000
b.
Verification of balance in Investment in Schmid Stock account: Schmid retained earnings, January 1, 20X8 Schmid net income, 20X8: Sales Cost of goods sold Depreciation and amortization Other expenses Other income (loss) Schmid dividends, 20X8 Schmid retained earnings, December 31, 20X8 Schmid stockholders' equity: Common stock Additional paid-in capital Retained earnings, December 31, 20X8 Stockholders' equity, December 31, 20X8 Rossman's ownership share Book value of shares held by Rossman Remaining differential at January 1, 20X8 Balance in Investment in Schmid Stock account, December 31, 20X8 $1,400,000 $985,000 (525,000) (88,000) (227,000) (35,000) 110,000 (20,000) $1,490,000
$1,000,000 1,350,000 1,490,000 $3,840,000 x .75 $2,880,000 90,000 $2,970,000
c.
Elimination entries: E(1) Income from Subsidiary Dividends Declared Investment in Schmid Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest $36,500 = [$110,000 + $40,000 - ($40,000 / 10)] x .25 82,500 15,000 67,500
E(2)
36,500 5,000 31,500
P6-39 E(3)
(continued) Common Stock__Schmid Additional Paid-In Capital Retained Earnings, January 1 Differential Investment in Schmid Stock Noncontrolling Interest Eliminate beginning investment balance: $2,902,500 = $2,970,000 - ($110,000 - $20,000) x .75 $937,500 = ($1,000,000 + $1,350,000 + $1,400,000) x .25 Land Goodwill Differential Assign differential. Retained Earnings, January 1 Land Eliminate unrealized gain on land. 1,000,000 1,350,000 1,400,000 90,000 2,902,500 937,500
E(4)
40,000 50,000 90,000
E(5)
23,000 23,000
E(6)
Buildings and Equipment 185,000 Depreciation and Amortization 4,000 Accumulated Depreciation Other Income (Loss on Sale of Equipment) Eliminate unrealized loss on equipment: $185,000 = $435,000 - $250,000 $4,000 = ($435,000 / 15) - ($250,000 / 10) $149,000 = [($435,000 / 15) x 5] + $4,000 $40,000 = $290,000 - $250,000 Other Income Other Expenses Eliminate intercompany sale of services. Current Payables Current Receivables Eliminate intercompany receivable/payable. Current Payables Current Receivables Eliminate intercompany dividend owed: $5,000 x .75 80,000
149,000 40,000
E(7)
80,000
E(8)
20,000 20,000
E(9)
3,750 3,750
P6-39
(continued) d.Rossman Corporation and Schmid Distributors, Inc. Consolidation Workpaper December 31, 20X8 Eliminations Debit Credit Consolidated 5,786,000 82,500 80,000 (6) 40,000 15,000 5,801,000 2,718,000 294,000 1,528,000 (4,540,000) 1,261,000 (36,500) 120,000 1,224,500
Item
Rossman
Schmid 985,000 (1) (35,000) (7) 950,000 525,000 88,000 (6) 227,000 (840,000)
Sales 4,801,000 Income from Subsidiary 82,500 Other Income (Loss) 90,000 Credits 4,973,500 Cost of Goods Sold 2,193,000 Depreciation and Amortization 202,000 Other Expenses 1,381,000 Debits (3,776,000) Income to Noncontrolling Interest Net Income, carry forward Retained Earnings, Jan. 1 Net Income, from above Dividends Declared
4,000 (7) 80,000
(2) 1,197,500 110,000
36,500 203,000
1,497,800
1,400,000
1,197,500 110,000 2,695,300 1,510,000 (50,000) (20,000)
(3)1,400,000 (5) 23,000 203,000 (1) (2) 1,626,000
120,000 15,000 5,000 140,000
1,474,800 1,224,500 2,699,300 (50,000) 2,649,300
Retained Earnings, Dec. 31, carry forward 2,645,300
1,490,000
P6-39
(continued) Eliminations Debit Credit Consolidated 88,700 (8) (9) 20,000 3,750 167,450 504,900
Item Cash Current Receivables Inventory Investment in Schmid Stock Land Buildings and Equipment Goodwill Differential Debits Accumulated Depreciation Current Payables
Rossman 50,700 101,800 286,000 2,970,000 400,000 2,400,000
Schmid 38,000 89,400 218,900
1,200,000 2,990,000
(4) (6) (4) (3)
40,000 185,000 50,000 90,000
(1) 67,500 (3)2,902,500 (5) 23,000
1,617,000 5,575,000 50,000
(4)
90,000 8,003,050
6,208,500
4,536,300
1,105,000 86,200
420,000 76,300 200,000
(6) (8) (9) 20,000 3,750
149,000
1,674,000 138,750 1,200,000 100,000
Bonds Payable 1,000,000 Common Stock Rossman Corporation 100,000 Schmid Distributors Additional Paid-In Capital 1,272,000 Retained Earnings, from above 2,645,300 Noncontrolling Interest Credits 8,003,050
1,000,000 1,350,000 1,490,000
(3)1,000,000 (3)1,350,000 1,626,000 (2) (3) 4,364,750 1,272,000 140,000 2,649,300 31,500 937,500 969,000 4,364,750
6,208,500
4,536,300
P6-40A a.
Fully Adjusted Equity Method
Adjusted trial balance: Prime Company Debit Credit Lane Company Debit Credit $ 55,000 100,000 80,000 150,000
Item
Cash and Accounts Receivable $ 151,000 Inventory 240,000 Land 100,000 Buildings and Equipment 500,000 Investment in Lane Company Stock 216,000 Cost of Goods Sold 160,000 Depreciation and Amortization 25,000 Other Expenses 20,000 Dividends Declared 60,000 Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Income from Subsidiary Total $1,472,000
80,000 15,000 10,000 35,000 $ 230,000 60,000 200,000 300,000 394,000 250,000 38,000 $1,472,000 $ 60,000 25,000 50,000 100,000 140,000 150,000 $525,000 $525,000
b.
Journal entries recorded by Prime Company: (1) Investment in Lane Company Stock Income from Subsidiary Record equity-method income: $45,000 x .80 Cash Investment in Lane Company Stock Record dividends from Lumpy Coal: $35,000 x .80 (3) Investment in Lane Company Stock Income from Subsidiary Recognize portion of gain on sale of equipment: $20,000 / 10 years 2,000 2,000 36,000 36,000
(2)
28,000 28,000
P6-40A c.
(continued)
Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Lane Company Stock Eliminate income from subsidiary. Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $9,000 = $45,000 x .20 38,000 28,000 10,000
E(2)
9,000 7,000 2,000
E(3)
Common Stock__Lane Company 100,000 Retained Earnings, January 1 140,000 Differential 40,000 Investment in Lane Company Stock Noncontrolling Interest Eliminate beginning investment balance: $40,000 = $160,000 - ($50,000 + $100,000) x .80 $232,000 = $240,000 - $8,000 $48,000 = ($100,000 + $140,000) x .20 Goodwill Retained Earnings Differential Assign differential to goodwill. Investment in Lane Company Stock Noncontrolling Interest Land Eliminate unrealized profit on land. Buildings and Equipment Investment in Lane Company Stock Depreciation and Amortization Expense Accumulated Depreciation Eliminate unrealized profit on equipment. 15,000 25,000
232,000 48,000
E(4)
40,000
E(5)
8,000 2,000 10,000
E(6)
5,000 18,000 2,000 21,000
Accumulated depreciation adjustment: Required balance ($5,000 x 7 years) Balance recorded ($7,000 x 2 years) Required increase E(7) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable.
$35,000 (14,000) $21,000 4,000 4,000
P6-40A d.
(continued) Prime Company and Lane Company Consolidation Workpaper December 31, 20X7 Prime Company Lane Company Eliminations Debit Credit Consolidated 400,000 400,000 240,000 38,000 30,000 (308,000) 92,000 (9,000) 2,000 83,000 369,000 2,000 (1) 28,000 (2) 7,000 212,000 (7) 37,000 4,000 83,000 452,000 (60,000) 392,000 202,000 340,000 170,000 655,000
Item
Sales 250,000 150,000 Income from Subsidiary 38,000 (1) 38,000 Credits 288,000 150,000 Cost of Goods Sold 160,000 80,000 Deprec. and Amortization 25,000 15,000 (6) Other Expenses 20,000 10,000 Debits (205,000)(105,000) 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 Receivables Inventory Land Buildings and Equipment Investment in Lane Company Stock Differential Goodwill Debits Accum. Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest Credits
2,000
(2) 83,000 394,000 45,000 140,000
9,000 47,000
83,000 45,000 477,000 185,000 (60,000) (35,000)
(3)140,000 (4) 25,000 47,000
417,000 151,000 240,000 100,000 500,000 216,000
150,000 55,000 100,000 80,000 150,000
(5) 10,000 (6) 5,000
(5) 8,000 (1) 10,000 (6) 18,000 (3)232,000 (3) 40,000 (4) 40,000 (4) 15,000 385,000 60,000 25,000 50,000 100,000 150,000 (5) (6) 21,000 (7) 4,000
1,207,000 230,000 60,000 200,000 300,000 417,000
15,000 1,382,000 311,000 81,000 250,000 300,000 392,000 48,000 1,382,000
(3)100,000 212,000 37,000 2,000 (2) 2,000 (3) 48,000 404,000 404,000
1,207,000
385,000
P6-41A a.
Cost Method
Journal entry recorded by Prime Company: Cash Dividend Income Record dividend from Lane Company. 28,000 28,000
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: $9,000 = $45,000 x .20 28,000 28,000
E(2)
9,000 7,000 2,000
E(3)
Common Stock__Lane Company 100,000 Retained Earnings, January 1 50,000 Differential 40,000 Investment in Lane Company Stock Noncontrolling Interest Eliminate investment balance at date of acquisition: $40,000 = $160,000 - ($100,000 + $50,000) x .80 $30,000 = ($100,000 + $50,000) x .20 Retained Earnings, January 1 Noncontrolling Interest Assign undistributed prior earnings of subsidiary to noncontrolling interest: ($140,000 - $50,000) x .20 Goodwill Retained Earnings, January 1 Differential Assign differential at beginning of period. 18,000
160,000 30,000
E(4)
18,000
E(5)
15,000 25,000 40,000
P6-41A E(6)
(continued) Retained Earnings, January 1 Noncontrolling Interest Land Eliminate unrealized profit on land. Buildings and Equipment Retained Earnings, January 1 Depreciation and Amortization Expense Accumulated Depreciation Eliminate unrealized profit on equipment. 8,000 2,000 10,000
E(7)
5,000 18,000 2,000 21,000
E(8)
Accounts Payable 4,000 Accounts Receivable Eliminate intercorporate receivable/payable.
4,000
P6-41A c.
(continued) Prime Company and Lane Company Consolidation Workpaper December 31, 20X7 Prime Company Lane Company Eliminations Debit Credit Consolidated 400,000 400,000 240,000 38,000 30,000 (308,000) 92,000 (9,000) 2,000 83,000
Item
Sales 250,000 150,000 Dividend Income 28,000 (1) 28,000 Credits 278,000 150,000 Cost of Goods Sold 160,000 80,000 Deprec. and Amortization 25,000 15,000 (7) Other Expenses 20,000 10,000 Debits (205,000)(105,000) Income to Noncontrolling Interest Net Income, carry forward Ret. Earnings, Jan. 1
2,000
(2) 73,000 348,000 45,000 140,000 (3) (4) (5) (6) (7)
9,000 37,000 50,000 18,000 25,000 8,000 18,000 37,000
Net Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward
73,000 45,000 421,000 185,000 (60,000) (35,000)
2,000 (1) 28,000 (2) 7,000
369,000 83,000 452,000 (60,000) 392,000 202,000 340,000 170,000 655,000
361,000
150,000 55,000 100,000 80,000 150,000
156,000 (8)
37,000 4,000
Cash and Receivables 151,000 Inventory 240,000 Land 100,000 Buildings and Equipment 500,000 Investment in Lane Company Stock 160,000 Differential Goodwill Debits 1,151,000 Accum. Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest 230,000 60,000 200,000 300,000 361,000
(6) 10,000 (7) 5,000
(3)160,000 (3) 40,000 (5) 40,000 (5) 15,000 385,000 60,000 25,000 50,000 100,000 150,000 (6) (7) 21,000 (8) 4,000
15,000 1,382,000 311,000 81,000 250,000 300,000 392,000
(3)100,000 156,000 37,000 2,000 (2) 2,000 (3) 30,000 (4) 18,000 322,000 322,000
Credits
1,151,000
385,000
48,000 1,382,000
(Page Intentionally Left Blank)

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CHAPTER 6 INTERCORPORATE TRANSFERS: NONCURRENT ASSETS

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 C6-1 Historical Cost Model

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

Impact of the Elimination Process

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

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

Intercompany Sale of Services

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

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

$ 85,000 45,000 $130,000 (10,000) (14,000) $106,000

Gain on Sale of Land Land

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

Truck Gain on Sale of Truck Accumulated Depreciation

5,000 10,000 15,000

$18,000 (4,000) $14,000

Transfer of Land Eliminating entry, December 31, 20X2:

Gain on Sale of Land Land

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

Transfer of Depreciable Asset at Year-End Eliminating entry, December 31, 20X5

Truck Gain on Sale of Truck Accumulated Depreciation

90,000 30,000 120,000

$150,000 (35,000) $115,000

Truck Gain on Sale of Truck Depreciation Expense Accumulated Depreciation

55,000 35,000 5,000 85,000

$120,000 (35,000) $ 85,000

$150,000 (70,000) $ 80,000

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

Journal entry to record purchase: Equipment Cash 84,000 84,000

$12,000 (10,000) $ 2,000

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

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

(continued) Eliminating entry, December 31, 20X8:

30,000 20,000 5,000 2,500 52,500

$300,000 (270,000) $ 30,000

$30,000 (5,000) $25,000 x .80 $20,000

$22,500 (20,000) $ 2,500

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

Elimination Entries for Midyear Depreciable Asset Transfer

$15,000 (4,000) $11,000

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

Consolidated Net Income Computation

$ 90,000 60,000 $150,000 (25,000) (15,000) $110,000

$110,000 40,000 $150,000 (10,000) $140,000

$ 90,000 60,000 $150,000 (25,000) ( 8,750) $116,250

$110,000 40,000 $150,000 (10,000) $140,000

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

3,000 2,000 1,000

300,000 100,000 320,000 80,000

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

Sale of Building to Parent in Prior Period

Turner will recorded annual depreciation expense of $25,000 ($300,000 / 12 years).

$60,000 x .70 $42,000

$25,000 (20,000) $ 5,000

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

$200,000 45,000 (15,000) $230,000 x .30

Intercompany Sale at a Loss

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

Eliminating Entries Following Intercompany Sale at a Loss

$20,000 (16,000) $ 4,000

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

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