Chapter 6 INTERCOMPANY PROFIT TRANSACTIONS PLANT ASSETS

Answers to Questions 1 The objective of eliminating the effect of inte!com"an# ale of "lant a et i to !eflect "lant a et an$ !elate$ $e"!eciation amo%nt in the con oli$ate$ financial tatement at co t to the con oli$ate$ entit#& 2 Con oli$ation "!oce$%!e fo! eliminating %n!eali'e$ "!ofit on "lant a et a!e affecte$ b# the $i!ection of the ale& The f%ll amo%nt of %n!eali'e$ "!ofit o! lo on $o(n t!eam ale )"a!ent to %b i$ia!#* i cha!ge$ o! c!e$ite$ to the cont!olling inte!e t& In the ca e of %" t!eam ale + ho(eve!+ %n!eali'e$ "!ofit o! lo i allocate$ bet(een cont!olling an$ noncont!olling inte!e t & ,eca% e the!e i no allocation to noncont!olling inte!e t in the ca e of a -.. "e!cent o(ne$ %b i$ia!#+ con oli$ation "!oce$%!e a!e the ame fo! %" t!eam ale a fo! $o(n t!eam ale & /n!eali'e$ gain an$ lo e f!om inte!com"an# ale of lan$ a!e !eali'e$ f!om the vie("oint of the elling affiliate (hen the "%!cha ing affiliate !e ell the lan$ to "a!tie o%t i$e the con oli$ate$ entit#& Thi i al o the "oint at (hich the con oli$ate$ entit# !ecogni'e gain o! lo on the $iffe!ence bet(een the elling "!ice to o%t i$e "a!tie an$ the co t to the "%!cha ing affiliate& Noncont!olling inte!e t ha!e i not affecte$ b# $o(n t!eam ale of lan$ beca% e the !eali'e$ income of the %b i$ia!# i not affecte$ b# $o(n t!eam ale & In the ca e of %" t!eam ale of lan$+ the !e"o!te$ income of the %b i$ia!# i a$j% te$ $o(n(a!$ fo! %n!eali'e$ "!ofit an$ %"(a!$ fo! %n!eali'e$ lo e to $ete!mine !eali'e$ income& Since noncont!olling inte!e t ha!e i com"%te$ on the ba i of !eali'e$ %b i$ia!# income+ the com"%tation of noncont!olling inte!e t ha!e i affecte$ b# %" t!eam ale of lan$& Con oli$ation "!oce$%!e a!e $e igne$ to eliminate -.. "e!cent of all %n!eali'e$ "!ofit o! lo on all inte!com"an# t!an action & The i %e i not (hethe! -.. "e!cent of the %n!eali'e$ "!ofit o! lo i eliminate$+ b%t if the amo%nt eliminate$ i allocate$ bet(een cont!olling an$ noncont!olling inte!e t & In the ca e of an %" t!eam ale of lan$+ -.. "e!cent of the %n!eali'e$ "!ofit f!om the ale i eliminate$+ b%t the amo%nt i allocate$ bet(een cont!olling an$ noncont!olling inte!e t in !elation to thei! o(ne! hi" hol$ing & /n!eali'e$ gain an$ lo e f!om inte!com"an# ale of $e"!eciable a et a!e !eali'e$ th!o%gh % e if the a et a!e hel$ (ithin the con oli$ate$ entit# an$ th!o%gh ale if the a et a!e ol$ to o%t i$e "a!tie & The "!oce of !ecogni'ing "!evio% l# %n!eali'e$ gain an$ lo e th!o%gh % e i a "iecemeal !ecognition ove! the !emaining % ef%l life of the $e"!eciable a et& The com"%tation of noncont!olling inte!e t ha!e in the #ea! of an %" t!eam ale of $e"!eciable "lant a et i a follo( 0 Unrealized Unrealized Gain on Sale Loss on Sale Income of subsidiary as reported XXX XXX Deduct: Gain on sale of plant assets - XX Add: Loss on sale of plant assets +XX Add: Piecemeal recognition of gain on sale of plant assets + X Deduct: Piecemeal recognition of loss on sale of plant assets - X Realized subsidiary income XXX XXX X X Noncont!olling interest percentage XXX XXX Noncont!olling interest s!are

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6-2

Intercompany Profit Transactions Plant Assets

The effect of %n!eali'e$ gain on inte!com"an# ale of "lant a et a!e cha!ge$ again t the "a!ent6 income f!om %b i$ia!# acco%nt in the #ea! of the inte!com"an# ale+ (ith e7%al amo%nt being $e$%cte$ f!om the inve tment in %b i$ia!# acco%nt& In %b e7%ent #ea! + the income f!om %b i$ia!# an$ inve tment in %b i$ia!# acco%nt a!e inc!ea e$ fo! $e"!eciation on the %n!eali'e$ gain that i !eco!$e$ on the %b i$ia!# boo8 fo! $o(n t!eam ale o! fo! the "a!ent6 "!o"o!tionate ha!e fo! %" t!eam ale & If the %n!eali'e$ gain !elate to lan$+ no ent!ie a!e nee$e$ %ntil the lan$ i ol$ to entitie o%t i$e of the affiliation t!%ct%!e& Acco%nting "!oce$%!e a!e $e igne$ to eliminate the effect of inte!com"an# ale of "lant a et on both "a!ent income an$ con oli$ate$ net income %ntil the gain an$ lo e on %ch ale a!e !eali'e$ th!o%gh % e o! th!o%gh ale to o%t i$e "a!tie & In #ea! %b e7%ent to inte!com"an# ale of $e"!eciable "lant a et + the effect on "a!ent income i eliminate$ b# a$j% ting $e"!eciation e9"en e to a co t ba i fo! the con oli$ate$ entit#& Con oli$ation (o!8"a"e! ent!ie to eliminate the effect of a gain on ale of $e"!eciable "lant a et f!om a $o(n t!eam ale a!e ill% t!ate$ a follo( 0 Year of sale :ain on ale Acc%m%late$ $e"!eciation ;e"!eciation e9"en e Plant a et To !e$%ce "lant a et an$ !elate$ $e"!eciation amo%nt to a co t ba i con oli$ate$ entit# an$ to eliminate %n!eali'e$ gain on inte!com"an# ale& Subsequent years Inve tment in %b i$ia!# Acc%m%late$ $e"!eciation ;e"!eciation e9"en e Plant a et To !e$%ce "lant a et an$ !elate$ $e"!eciation amo%nt to a co t ba i to the con oli$ate$ entit# an$ to a$j% t the inve tment acco%nt fo! %n!eali'e$ "!ofit at the beginning of the c%!!ent #ea!& to the

10

SOLUTIONS TO EXERCISES Solution E6-1 1 2 3 4 c a c d

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Chapter 6

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Solution E6-2 1 Par*s income from +am ,ill be decreased by -#.'$$$ as a result of t!e follo,ing entry: Income from +am #.'$$$ In/estment in +am #.'$$$ 0o eliminate unrealized gain on do,nstream sale of land( Par*s net income for #$%1 ,ill not be affected by t!e sale since t!e -#.'$$$ gain ,ill be offset by a -#.'$$$ decrease in income from +am( 0!e in/estment in +am account at December 2%' #$%1 ,ill be -#.'$$$ less as a result of t!e sale as indicated by t!e abo/e entry( 30!e total balance s!eet effect is to reduce land to its cost' reduce t!e in/estment account for t!e profit' and increase cas! or ot!er assets for t!e proceeds(4 2 0!e consolidated financial statements ,ill not be affected because t!e gain on t!e sale is eliminated in t!e consolidated income statement and t!e land is reduced to its cost basis to t!e consolidated entity( A ,or5paper ad6ustment ,ould s!o,: Gain on sale of land Land 3 #.'$$$ #.'$$$

7eit!er Par*s income from +am or net income for #$%. ,ill be affected by t!e #$%1 sale of land( 0!e in/estment in +am account' !o,e/er' ,ill still be -#.'$$$ less t!an if t!e land !ad not been sold' e/en t!oug! t!ere are no c!anges in t!e in/estment account during #$%.( 0!e sale of t!e land ,ill not affect +am*s net income since it is being sold at +am*s cost( )o,e/er' t!e sale triggers recognition of t!e postponed gain on t!e original sale from Par to +am( Income from +am increases -#.'$$$( In/estment in +am Income from +am 0o recognize t!e gain deferred in #$%1( #.'$$$ #.'$$$

8onsolidated income ,ill also feel t!e same impact of t!e recognition of t!e deferred gain( In/estment in +am Gain on sale of land #.'$$$ #.'$$$

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6-4

Intercompany Profit Transactions Plant Assets

Solution E6-3 1a Controlling Share of Consolidated Net Income Pit*s separate income Add: &9uity in +ir*s income #$%% -:$'$$$ ;$ #$%# -=$'$$$ ;$ Gain on sale of land 8ontrolling s!are of consolidated net income 1b Noncontrolling interest share +ir*s net income %$ 2a Controlling Share of Consolidated Net Income Pit*s separate income Add: &9uity in +ir*s income Less: Gain on land ;$ 8ontrolling s!are of consolidated net income 2b Noncontrolling interest share +ir*s net income %$ Less: Gain on land %$ 7oncontrolling interest s!are Solution E6-4 1 Entries for 2011 8as! In/estment in +al 0o record di/idends recei/ed from +al( In/estment in +al Income from +al %$:'$$$ %$:'$$$ %2.'$$$ 32$'$$$4 2'$$$ %$:'$$$ ;$'$$$ ;$'$$$ :'$$$ 3%'$$$4 <'$$$ ='$$$ --='$$$ 2$$'$$$ <#'$$$ 3;'$$$4 2=2'$$$ 1$$'$$$ .1'$$$ --1.1'$$$ :'$$$ ='$$$ #$%% 2$$'$$$ <#'$$$ 3%$'$$$4 2=#'$$$ .1'$$$ --1.1'$$$ #$%# 1$$'$$$

0o record income from +al computed as follo,s: +!are of +al*s reported income 3-%.$'$$$ ;$ 4 Less: Gain on building sold to +al Add: Piecemeal recognition of gain on building 3-2$'$$$>%$ years4 Income from +al 2 +ales 8ost of sales Gross profit Pig Corporation and Sub idiar! 8onsolidated Income +tatement for t!e year ended December 2%' #$%%

-#'#$$'$$$ 3%'1$$'$$$4 :$$'$$$

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?perating e@penses 0otal consolidated income Noncont!olling interest s!are 8ontrolling interest s!are

311<'$$$4 2.2'$$$ 3%.'$$$4 - 22:'$$$

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6-6

Intercompany Profit Transactions Plant Assets

Solution E6-" AAI8PA adaptedB 1 d 0!e e9uipment must be s!o,n at its -%'1$$'$$$ boo5 /alue to t!e consolidated entity and d is t!e only c!oice t!at pro/ides a -%'1$$'$$$ boo5 /alue( ?rdinarily' t!e e9uipment ,ould be s!o,n at -%'.$$'$$$' its boo5 /alue at t!e time of transfer' less t!e -%$$'$$$ depreciation after transfer( c Reciprocal recei/ables and payables accounts and purc!ases and sales accounts must al,ays be eliminated( Cut di/idend income 3parent4 and di/idends paid 3subsidiary4 accounts are reciprocals only ,!en t!e cost met!od is used( a Amount to be eliminated from consolidated net income in 2011 Intercompany gain on do,nstream sale of mac!inery -%$'$$$ Less: Realized t!roug! depreciation of intercompany gain on mac!inery 3-%$'$$$>. years4 3#'$$$4 Decrease in consolidated net income from - :'$$$ intercompany sale Amount to be added to consolidated net income in #$%# for realization t!roug! depreciation of intercompany gain on mac!inery - #'$$$ b ?ne-t!ird of t!e unrealized intercompany profit is recognized t!roug! depreciation for #$%%(

Solution E6-6 1 a +elling price in #$%; 8ost to consolidated entity Gain on sale of land ..'$$$ %.'$$$ 1$'$$$

b Gain on e9uipment 2$'$$$ Less: Depreciation on gain 3%$'$$$4 7et effect on in/estment account #$'$$$ 0!e in/estment account ,ill be -#$'$$$ less t!an t!e underlying e9uity interest( b 8ombined e9uipment net Less: Dnrealized gain Add: Piecemeal recognition of gain 8onsolidated e9uipment net b !he "or#$a$er entr% to eliminate the unrealized $rofit is Gain on sale of e9uipment %'.$$ &9uipment :$$'$$$ 3#$'$$$4 .'$$$ <:.'$$$

%'.$$

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Chapter 6

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"

c In/estment income ,ill be decreased by -%#'$$$ gain less -2'$$$ piecemeal recognition of t!e gain( c +in*s net income Less: Dnrealized gain Add: Piecemeal recognition Realized income 7oncontrolling interest percentage 7oncontrolling interest s!are -%'$$$'$$$ 3.$'$$$4 .'$$$ ;..'$$$ 1$ - 2:#'$$$

Solution E6-# Pod Corporation and Sub idiar! 8onsolidated Income +tatement for t!e year ended December 2%' #$%% +ales 3-.$$'$$$ + -2$$'$$$4 Gain on sale of mac!inerya 0otal re/enue 8ost of sales 3-#$$'$$$ + -%2$'$$$4 Depreciation e@pense 3-.$'$$$ + -2$'$$$ - -.'$$$ from depreciation on intercompany profit for #$%%4 ?t!er e@penses 3-:$'$$$ + -1$'$$$4 0otal e@penses 8onsolidated net income 7oncontrolling s!are 3-%$$'$$$+-.'$$$ piecemeal recognition from depreciation + -%$'$$$ remaining deferred gain4 #. noncontrolling interest 8ontrolling interest s!are
a +elling price of mac!inery at December #:' #$%% Coo5 /alue on Pod*s boo5s -=.'$$$ E 3-=.'$$$>. years 2 years4 Gain on sale of mac!inery ?riginal intercompany profit Piecemeal recognition of gain -#.'$$$>. years 2 years Dnamortized gain from intercompany sales Gain on sale of mac!inery to outside entity

-:$$'$$$ #$'$$$ :#$'$$$ 22$'$$$ <.'$$$ %#$'$$$ .#.'$$$ -#;.'$$$ #:'<.$ -#=='#.$
- 2='$$$ #='$$$ - %$'$$$ - #.'$$$ %.'$$$ - %$'$$$ - #$'$$$

Solution E6-$ &reliminar% com$utations In/estment in +at 31$ 4 at cost Implied total fair /alue of +at 3-%$$'$$$ > 1$ 4 Coo5 /alue &@cess allocated to patents Annual amortization of patents 3-.$'$$$>. years4 1 Income from Sat 2011 +!are of +at*s net income 3-1$'$$$ %># year 1$ 4

-%$$'$$$ -#.$'$$$ 3#$$'$$$4 - .$'$$$ - %$'$$$

:'$$$

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6-8

Intercompany Profit Transactions Plant Assets

Amortization of patents 3-%$'$$$ %># year 1$ 4 Dnrealized in/entory profit from upstream sale 3-1'$$$ 1$ 4 Dnrealized gain from do,nstream sale of land 3-#'$$$ %$$ 4 Income from +at

3#'$$$4 3%'=$$4 3#'$$$4 - #'1$$

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Chapter 6

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Solution E6-$ 3continued4 2 Income from Sat 2012 +at*s net income Amortization of patents Dnrealized in/entory profits from upstream sales: Recognition of profit in beginning in/entory Deferral of profit in ending in/entory +at*s ad6usted and realized income Income from +at 31$ s!are4 Solution E6-% 1 Income from Si$' net income and consolidated net income +ip*s reported net income Less: Amortization of e@cess allocated to buildings 3-.$$'$$$ - -1$$'$$$4>#$ years Less: -#$'$$$ unrealized profit on e9uipment +ip*s ad6usted and realized income Income from +ip 3:$ s!are4 #$%2 Add: +eparate income of Pan for #$%2 7et income of Pan #$%2 +ip*s reported net income Less: Amortization of e@cess allocated to buildings Add: Piecemeal recognition of unrealized gain on e9uipment 3-#$'$$$>1 years4 +ip*s ad6usted and realized income -%$$'$$$ 3.'$$$4 3#$'$$$4 - <.'$$$ - =$'$$$ .$$'$$$ -.=$'$$$ -%%$'$$$ 3.'$$$4 .'$$$ -%%$'$$$ - =$'$$$ 3%$'$$$4 1'$$$ 3='$$$4 - 1:'$$$ - %;'#$$

- ::'$$$ Income from +ip )<.=* #$%1 Add: +eparate income of Pan =$$'$$$ -=::'$$$ 7et income of Pan #$%1 Controlling share of consolidated net income for 201( and 201) * &an+s net income Alternati/ely' #$%2 #$%1 +eparate incomes combined -=$$'$$$ -<%$'$$$ Less: Amortization of e@cess 3buildings4 3.'$$$4 3.'$$$4 Less: Dnrealized gain on e9uipment in #$%2 3#$'$$$4 Add: Piecemeal recognition of gain in #$%1 .'$$$ 8onsolidated net income -.<.'$$$ -<%$'$$$ Less: 7oncontrolling interest s!are: 3%.'$$$4 #$%2 3-%$$'$$$ - -#$'$$$ - -.'$$$4 #$ 3##'$$$4 #$%1 3-%%$'$$$ + -.'$$$ - -.'$$$4 #$ 8ontrolling interest s!are -.=$'$$$ -=::'$$$ 2 In,estment in Si$ 8ost of in/estment Fuly %' #$%% Add: Pan*s s!are of +ip*s retained earnings increase from Fuly %' #$%% to December 2%' #$%# 3-%.$'$$$ - -%$$'$$$4 :$ Less: :$ Amortization of e@cess 3-1'$$$ %(. years4 In/estment in +ip December 2%' #$%# -1$$'$$$ 1$'$$$ 3='$$$4 121'$$$

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6-10

Intercompany Profit Transactions Plant Assets

#$'$$$ Add: #$%2 income less di/idends A-=$'$$$ - 3-.$'$$$ :$ 4B In/estment in +ip December 2%' #$%2 1.1'$$$ 1$'$$$ Add: #$%1 income less di/idends A-::'$$$ - 3-=$'$$$ :$ 4B In/estment in +ip December 2%' #$%1 -1;1'$$$ Solution E6-% 3continued4 Alternati,e solution for chec# at -ecember (1' 201) +!are of +ip*s e9uity December 2%' #$%1 3-..$'$$$ :$ 4 Add: :$ Dnamortized e@cess on buildings :$ A?riginal e@cess -%$$'$$$ - 3-.'$$$ 2(. years4B Less: Dnrealized profit on e9uipment 3-#$'$$$ gain - -.'$$$ recognized4 :$ In/estment in +ip December 2%' #$%1 Solution E6-1& &reliminar% com$utations 0ransfer price of in/entory to +pa 3-%:$'$$$ #4 8ost to consolidated entity Dnrealized profit on Fanuary 2 Amortization of unrealized profit from consolidated /ie,: -%:$'$$$>= years G -2$'$$$ per year 1 -2=$'$$$ 3%:$'$$$4 -%:$'$$$ -11$'$$$ =='$$$ 3%#'$$$4 -1;1'$$$

Consolidated balance sheet amounts 2011 &9uipment 3at transfer price4 -2=$'$$$ Less: Dnrealized profit 3%:$'$$$4 Less: Depreciation ta5en by +pa 3-2=$'$$$>= years4 3=$'$$$4 Add: Depreciation on unrealized profit 3-%:$'$$$>= years4 2$'$$$ &9uipment net to be included on consolidated balance s!eet -%.$'$$$ Alternati/ely: &9uipment 3at cost to t!e consolidated entity4 Less: Depreciation based on cost 3-%:$'$$$>= years4 &9uipment net 2012 Hear after intercompany sale &9uipment net beginning of t!e period on cost basis Less: Depreciation 3based on cost4 &9uipment net -%:$'$$$ 32$'$$$4 -%.$'$$$ -%.$'$$$ 32$'$$$4 -%#$'$$$

Consolidation "or#$a$er entries 2011 +ales 2=$'$$$ 8ost of goods sold %:$'$$$ %.$'$$$ &9uipment net Depreciation e@pense 2$'$$$ 0o eliminate intercompany in/entory sale' return e9uipment to its cost to t!e consolidated entity' and eliminate depreciation on t!e intercompany profit( 2012 In/estment in +pa %.$'$$$

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%#$'$$$ &9uipment net Depreciation e@pense 2$'$$$ 0o eliminate unrealized profit from t!e e9uipment account and t!e current year*s depreciation on t!e unrealized profit and establis! reciprocity bet,een t!e in/estment account and beginning-of-t!e-period subsidiary e9uity accounts(

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6-12

Intercompany Profit Transactions Plant Assets

Solution E6-11 Par Corporation and Sub idiar! +c!edule for 8omputation of 8onsolidated 7et Income #$%% #$%# #$%2 #$%1 8ombined separate incomes -#=$'$$$ -##$'$$$ -%#$'$$$ -#%$'$$$ Add: Amortization of negati/e differential assigned to plant assets 3-.$'$$$>%$ years4I .'$$$ .'$$$ .'$$$ .'$$$ Dnrealized gain on land 37ote 0!at Par*s -.'$$$ gain is included in Par*s separate income4 3.'$$$4 .'$$$ Dnrealized gain on mac!inery 3#.'$$$4 Piecemeal recognition of Gain on mac!inery .'$$$ .'$$$ .'$$$ Dnrealized in/entory profits 3:'$$$4 :'$$$ 8onsolidated net income #=$'$$$ #$.'$$$ %##'$$$ #22'$$$ Less: 7oncontrolling interest s!are 3%#'$$$4 2011 3-=$'$$$--.'$$$+-.'$$$4 #$ 3 %.'$$$4 2012 3-<$'$$$+-.'$$$4 #$ 3%.'1$$4 201( 3-:$'$$$--:'$$$+-.'$$$44 #$ 201) 3-;$'$$$ + -:'$$$ + 3#%'=$$4 -.'$$$ + -.'$$$44 #$ 8ontrolling s!are of 7I -#1:'$$$ -%;$'$$$ -%$='=$$ -#%%'1$$ Alternati,e Solution Par*s separate income Add: :$ of +um*s income Amortize t!e negati/e differential assigned to plant asset :$ Dnrealized profit on upstream +ale of land 3-.'$$$ :$ 4 Dnrealized profit on do,nstream +ale of mac!inery Piecemeal recognition of gain 3-#.'$$$>. years4 Dnrealized profit on upstream +ale of in/entory items -:'$$$ :$ Par*s net income and controlling s!are of consolidated net income -#$$'$$$ 1:'$$$ 1'$$$ 31'$$$4 3#.'$$$4 .'$$$ .'$$$ 3='1$$4 -#1:'$$$ -%;$'$$$ -%$='=$$ .'$$$ ='1$$ -#%%'1$$ -%.$'$$$ .='$$$ 1'$$$ - 1$'$$$ =1'$$$ 1'$$$ -%#$'$$$ <#'$$$ 1'$$$ 1'$$$

I 7ote: +ince Par paid -1$'$$$ more t!an boo5 /alue for its :$ implied total fair /alue minus boo5 /alue of +um is -.$'$$$(

s!are' t!e

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SOLUTIONS TO PRO'LE(S Solution P6-1 1 Income from Sea 2011 &9uity in +ea*s income 3-%$$'$$$ ;$ 4 Add: Deferred in/entory profit from #$%$ 3-1$'$$$ .$ 4 Less: Dnrealized in/entory profit from #$%% 3-=$'$$$ 1$ 4 Less: Intercompany profit on e9uipment 3-%$$'$$$ - -=$'$$$4 Add: Piecemeal recognition of profit on e9uipment -1$'$$$>1 years Income from +ea 3corrected amount4 2 P)a Corporation and Sub idiar! 8onsolidated Income +tatement for t!e year ended December 2%' #$%% +ales A-%'=$$'$$$ combined - -%.$'$$$ intercompanyB 8ost of sales A-%'$$$'$$$ combined - -%.$'$$$ intercompany + -#1'$$$ ending in/entory profits - -#$'$$$ beginning in/entory profitsB Gross profit ?t!er e@penses A-2$$'$$$ combined - -%$'$$$ piecemeal recognition of profit on e9uipmentB 8onsolidated net income Less: 7oncontrolling interest s!are 8ontrolling interest s!are 8!ec5: +eparate income of Pea Add: Income from +ea 8ontrolling interest s!are -%'1.$'$$$ ;$'$$$ #$'$$$ 3#1'$$$4 31$'$$$4 %$'$$$ .='$$$

:.1'$$$ .;='$$$ #;$'$$$ 2$='$$$ %$'$$$ #;='$$$ #1$'$$$ .='$$$ #;='$$$

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6-14

Intercompany Profit Transactions Plant Assets

Solution P6-2 &reliminar% com$utations 7?0&: +ince Pal paid a price -1.'$$$ in e@cess of boo5 /alue for its ;$ s!are' t!e implied total e@cess of fair /alue o/er boo5 is -.$'$$$ 3-1.'$$$ > ;$ 4( Com$utation of income from Sim +!are of +im*s reported income 3-1$'$$$ (;4 Add: Realization of deferred profits in beginning in/entory Less: Dnrealized profits in ending in/entory Less: Dnrealized profit on intercompany sale of e9uipment 3-2$'$$$ - -#%'$$$4 Add: Piecemeal recognition of deferred profit in e9uipment 3-;'$$$>2 years4 Income from +im Consolidation "or#$a$er entries A 8as! #'$$$ Accounts recei/able 0o record cas! in transit from +im on account( #$'$$$ 8ost of sales 0o eliminate intercompany cost of sales and sales( #'$$$ -2='$$$ .'$$$ 31'$$$4 3;'$$$4 2'$$$ -2%'$$$

+ales

#$'$$$

In/estment in +im .'$$$ 8ost of sales .'$$$ 0o recognize pre/iously deferred profit from beginning in/entory( 8ost of sales 1'$$$ In/entory 0o defer unrealized profit from ending in/entory( 1'$$$

&

In/estment in +im 2'$$$ Land 2'$$$ 0o reduce land to its cost basis and ad6ust t!e in/estment account to establis! reciprocity ,it! +im*s beginning of t!e period e9uity accounts( Gain on sale of e9uipment ;'$$$ ;'$$$ &9uipment net 0o eliminate gain on intercompany sale of e9uipment and reduce e9uipment to a cost basis(

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Chapter 6

6-15

Solution P6-2 3continued4 g 2'$$$ &9uipment net ?perating e@penses 2'$$$ 0o eliminate current year*s depreciation of unrealized gain( Income from +im 2%'$$$ %:'$$$ Di/idends +im In/estment in +im %2'$$$ 0o eliminate income and di/idends from +im and return in/estment account to its beginning of t!e period balance( <$'$$$ Retained earnings +im .$'$$$ 8apital stoc5 +im Good,ill .$'$$$ In/estment in +im %.2'$$$ %<'$$$ 7oncontrolling interest Fanuary % 0o eliminate reciprocal in/estment and e9uity amounts' establis! beginning noncontrolling interest' and enter beginning-of-t!eperiod fair /alue boo5 /alue differential 3good,ill4( 7oncontrolling Interest +!are 1'$$$ #'$$$ Di/idends +im 7oncontrolling Interest #'$$$ 0o record 7oncontrolling interest s!are of subsidiary income and di/idends( Di/idends payable ;'$$$ Di/idends recei/able 0o eliminate reciprocal recei/ables and payables( ;'$$$

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6-16

Intercompany Profit Transactions Plant Assets

Solution P6-2 3continued4 Pal Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e year ended December 2%' #$%# 3in t!ousands4
Pal Income Statement +ales Income from +im Gain on e9uipment 8ost of sales ?perating e@penses 8onsolidated 7I - 2$$ 2% ; %1$ I =$I +im ;$ - %$$ Ad6ustments and &liminations b #$ ! 2% f ; d 1 8onsolidated +tatements - 2:$

.$I %$I

b c g

#$ . 2

7oncontrolling s!are
8ontrolling s!are of 7I .etained Earnings Retained earnings Pal Retained earnings +im 8ontrolling s!are of 7I Di/idends Retained earnings December 2% /alance Sheet 8as! Accounts recei/able Di/idends recei/able In/entories Land Cuildings net &9uipment net In/estment in +im Good,ill - <%< Accounts payable Di/idends payable ?t!er liabilities 8apital stoc5 Retained earnings ;: %. =< 2$$ #2< - <%< - #$$ 2$ %$ #$ .$ ;$ - #$$ - %1$ 1$

%=; I =<I %11 1I - %1$

- %.< %1$ =$I <$ 1$ #$I i <$

- %.< %1$ ! 6 %: # =$I - #2<

- #2<

;$

- %$$ ;$ ; #$ 1$ %2. %=. %.:

%< .$ : %. .$ =$

# a 5 d e # ; 1 2

- %%; %2: #1 .# %:. #%;

g 2 c . e 2 i .$

f ; ! %2 i %.2

.$ - <:< - %#: %= :< 2$$ #2<

i .$

7oncontrolling interest Fanuary %

%<

"#$%% Pearson &ducation' Inc( publis!ing as Prentice )all

Chapter 6

6-17 6 # %; - <:<

7oncontrolling interest December 2%

I Deduct

Solution P6-3 &reliminar% com$utations 8ost Fanuary %' #$%% Implied fair /alue of +or 3-#<$'$$$ > ;$ 4 Coo5 /alue of +or &@cess of fair /alue o/er boo5 /alue - Good,ill 8ost Fanuary %' #$%% Add: Income from +or for #$%% - 2='$$$ &9uity in income 3-1$'$$$ ;$ 4 Less: Dnrealized in/entory profit 3%$'$$$4 Less: Dnrealized profit on mac!inery 3selling price -2.'$$$ - boo5 /alue -#:'$$$4 3<'$$$4 Add: Piecemeal recognition of profit on %'$$$ mac!inery 3-<'$$$>2(. years (. year4 Income from +or for #$%% Less: Di/idends -%$'$$$ ;$ In/estment balance Fanuary %' #$%# Add: Income from +or for #$%# &9uity in income 3-.$'$$$ ;$ 4 Add: Dnrealized profit in beginning in/entory Less: Dnrealized profit in ending in/entory Add: Piecemeal recognition of profit on mac!inery 3-<'$$$>2(. years4 Less: Gain on sale of land Income from +or for #$%# Less: Di/idends 3-#$'$$$ ;$ 4 In/estment balance December 2%' #$%# -#<$'$$$ -2$$'$$$ 3#1$'$$$4 - =$'$$$ -#<$'$$$

#$'$$$ 3;'$$$4 #:%'$$$

- 1.'$$$ %$'$$$ 3%#'$$$4 #'$$$ 3.'$$$4 1$'$$$ 3%:'$$$4 -2$2'$$$

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6-18

Intercompany Profit Transactions Plant Assets

Solution P6-3 3continued4 Pal Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e Hear &nded December 2%' #$%# 3in t!ousands4
Pal Income Statement +ales Income from +or Gain on land 8ost of sales ?perating e@pense 1.$ 1$ . 3#$$4 3%%24 +or ;$ - %;$ a f e c Ad6ustments and &liminations <# 1$ . %# 8onsolidated +tatements .=:

3%$$4 31$4

a b d

<# %$ #

8onsolidated 7I 7oncontrolling s!are

8ontrolling s!are of 7I .etained Earnings Retained earnings Pal Retained earnings +or 8ontrolling s!are of 7I Di/idends Retained earnings December 2% /alance Sheet 8as! Accounts recei/able Di/idends recei/able In/entories Land Cuildings net Lac!inery net In/estment in +or Good,ill 0otal assets Accounts payable Di/idends payable ?t!er liabilities 8apital stoc5 Retained earnings 0otal e9uities %:# .$

3#2$4 3%.%4 %:< 3.4 %:#

#$# %:# 3%.$4 - %#$ .$ 3#$4 g %#$

#$# %:#

f !

%: # -

3%.$4 #21

#21

- %.$

%22 %:$ %: =$ %$$ #:$ 22$ 2$2

%1 %$$ 2= 2$ :$ %1$ b d g %$ = =$

i 6 c e %$ %: %# .

%1< #<$ :1 %#. 2=$ 1==

d 1 f ## g #;<

-%'1$1 #$$ 2$ %1$ :$$ #21 -%'1$1

- 1$$ .$ #$ 2$ %.$ %.$ - 1$$ i 6 %$ %:

=$ -%'.%# #1$ 2# %<$ :$$ #21

g %.$

7oncontrolling interest Fanuary % 7oncontrolling interest December 2%

g !

22 2 2=

"#$%% Pearson &ducation' Inc( publis!ing as Prentice )all

Chapter 6 -%'.%#

6-19

" #$%% Pearson &ducation' Inc( publis!ing as Prentice )all

6-20

Intercompany Profit Transactions Plant Assets

Solution P6-4 Par Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e year ended December 2%' #$%% 3in t!ousands4
Par Income Statement +ales Income from +ag Gain on land Gain on e9uipment 8ost of sales Depreciation e@pense ?t!er e@penses <$$ <$ #$ 2$$ I ;$I #$$ I +ag ;$ - .$$ %$ 2$$ I 2.I =.I a e c d b Ad6ustments and &liminations .$ <$ %$ #$ . 8onsolidated Calance +!eet -%'%.$

a d

.$ .

8onsolidated 7I 7oncontrolling s!are

8ontrolling s!are of 7I .etained Earnings Retained earnings Par Retained earnings +ag 8ontrolling s!are of 7I Di/idends Retained earnings December 2% /alance Sheet 8as! Accounts recei/able In/entories ?t!er current items Land Cuildings net &9uipment net In/estment in +ag #$$ - %%$

... I %#$ I #=. I #%$ %$I #$$

%$

=$$ #$$ %$$ I - #$$ %%$ .$I f #$$

=$$ #$$

e !

1. . -

%$$ I <$$

<$$

- #=$

2. ;$ %$$ <$ .$ #$$ .$$ =..

2$ %%$ :$ 1$ <$ %.$ 1$$

g b c %$ . %$

d %. e #. f =2$

=. %;$ %<. %%$ %%$ 2.$ ::.

-%'<$$ Accounts payable ?t!er liabilities 8apital stoc5 Retained earnings %=$ 21$ .$$ <$$ -%'<$$

- ::$ .$ <$ .$$ #=$ - ::$ g %$

-%'::. #$$ 1%$ .$$ <$$

f .$$

7oncontrolling interest Fanuary % 7oncontrolling interest December 2%

f !

<$ . <.

"#$%% Pearson &ducation' Inc( publis!ing as Prentice )all

Chapter 6 -%'::.
I Deduct

6-21

7?0&: Purc!ase price implies boo5 /alues are e9ual to fair /alues(

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6-22

Intercompany Profit Transactions Plant Assets

Solution P6-" &reliminar% com$utations 8ost Fanuary %' #$%% Add: Income from +to for #$%% &9uity in income 3-1$'$$$ ;$ 4 Less: Patent amortize( 3-=$'$$$>%$ years4@ ;$ Less: Dnrealized in/entory profit Less: Dnrealized profit on mac!inery 3selling price -2.'$$$ - boo5 /alue -#:'$$$4 Add: Piecemeal recognition of profit on mac!inery 3-<'$$$>2(. years (. year4 Income from +to for #$%% Less: Di/idends -%$'$$$ ;$ In/estment balance Fanuary %' #$%# Add: Income from +to for #$%# &9uity in income 3-.$'$$$ ;$ 4 Less: Patent amortization 3;$ 4 Add: Dnrealized profit in beginning in/entory Less: Dnrealized profit in ending in/entory Add: Piecemeal recognition of profit on mac!inery 3-<'$$$>2(. years4 Less: Gain on sale of land Income from +to for #$%# Less: Di/idends 3-#$'$$$ ;$ 4 In/estment balance December 2%' #$%# 7oncontrolling interest s!are of +to*s income 3%$ 4 +to*s reported net income Less: Patent amortization +to*s ad6usted income %$ 7oncontrollling interest s!are 2011 -1$'$$$ 3='$$$4 -21'$$$ - 2'1$$ -#<$'$$$ -2='$$$ 3.'1$$4 3%$'$$$4 3<'$$$4 %'$$$ %1'=$$ 3;'$$$4 #<.'=$$ -1.'$$$ 3.'1$$4 %$'$$$ 3%#'$$$4 #'$$$ 3.'$$$4 21'=$$ 3%:'$$$4 -#;#'#$$ 2012 -.$'$$$ 3='$$$4 -11'$$$ - 1'1$$

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Chapter 6

6-23

Solution P6-" 3continued4 Pal Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e Hear &nded December 2%' #$%#
Pal Income Statement +ales Income from +to Gain on land 8ost of sales ?perating e@pense 8onsolidated 7I 7oncontrolling s!are 8ontrolling s!are of 7I .etained Earnings Retained earnings Pal Retained earnings +to 8ontrolling s!are of 7I Di/idends Retained earnings December 2% /alance Sheet 8as! Accounts recei/able Di/idends recei/able In/entories Land Cuildings net Lac!inery net In/estment in +to Patents 0otal assets Accounts payable Di/idends payable ?t!er liabilities 8apital stoc5 Retained earnings 0otal e9uities +to ;$ a f e c ! 5 %<='=$$ .$'$$$ Ad6ustments and &liminations <#'$$$ 21'=$$ .'$$$ %#'$$$ a b ='$$$ d 1'1$$ 8onsolidated +tatements .=:'$$$

1.$'$$$ - %;$'$$$ 21'=$$ .'$$$ 3#$$'$$$4 3%$$'$$$4 3%%2'$$$4 31$'$$$4

<#'$$$ %$'$$$ #'$$$

3#2$'$$$4 3%.<'$$$4 %:%'$$$ 31'1$$4 - %<='=$$

#$$'$$$ - %#$'$$$ %<='=$$ 3%.$'$$$4 .$'$$$ 3#$'$$$4 g %#$'$$$

#$$'$$$ %<='=$$

f 5

%:'$$$ #'$$$ -

3%.$'$$$4 ##='=$$

##='=$$

- %.$'$$$

%2='1$$ %:$'$$$ %:'$$$ =$'$$$ %$$'$$$ #:$'$$$ 22$'$$$ #;#'#$$

%1'$$$ %$$'$$$ 2='$$$ 2$'$$$ :$'$$$ %1$'$$$ b d g

i 6 c e d %$'$$$ %:'$$$ %#'$$$ .'$$$ 1'$$$

%.$'1$$ #<$'$$$ :1'$$$ %#.'$$$ 2=$'$$$ 1=='$$$

%$'$$$ f %='=$$ ='$$$ g #;%'=$$ .1'$$$ ! ='$$$

-%'2;='=$$ #$$'$$$ 2$'$$$ %1$'$$$ :$$'$$$ ##='=$$ -%'2;='=$$

- 1$$'$$$ .$'$$$ #$'$$$ 2$'$$$ %.$'$$$ %.$'$$$ - 1$$'$$$ i 6 %$'$$$ %:'$$$

1:'$$$ -%'.$2'1$$ #1$'$$$ 2#'$$$ %<$'$$$ :$$'$$$ ##='=$$

g %.$'$$$

7oncontrolling interest Fanuary % 7oncontrolling interest December 2%

g 5

2#'1$$ #'1$$

21':$$

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6-24

Intercompany Profit Transactions Plant Assets -%'.$2'1$$

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Chapter 6

6-25

Solution P6-6 &reliminar% com$utations In/estment cost Implied fair /alue of +an 3-#;$'$$$ > :$ 4 Coo5 /alue of +an &@cess fair /alue o/er boo5 /alue - allocated .$ to Patents ,it! a ten-year life 3-2%'#.$4 - allocated .$ to In/entory sold in #$$; 3-2%'#.$4 .econciliation of income from San Pil*s s!are of +an*s net income 3-.$'$$$ :$ 4 Less: :$ of Patent amortization 3-2%'#.$>%$ years4 Add: Depreciation on deferred gain on e9uipment 3-%.'$$$>. years4 :$ Less: Dnrealized profit on upstream sale of land 3-%$'$$$ :$ 4 Income from +an .econciliation of in,estment account +!are of +an*s underlying e9uity 3-1$$'$$$ :$ 4 Add: :$ of Dnamort( patent 3-2%'#.$ - 3-2'%#. 2 years44 @ :$ Less: Dnrealized gain on e9uipment A-%.'$$$ - 3-2'$$$ # years4B :$ Less: +!are of unrealized gain on land In/estment in +an December 2%' #$%% Noncontrolling interest share +an*s reported income Add: Piecemeal recognition of gain on sale of mac!inery Less: Patent amortization Less: Dnrealized gain on upstream sale of land Realized income 7oncontrolling percentage 7oncontrolling interest s!are -#;$'$$$ -2=#'.$$ 32$$'$$$4 - =#'.$$

- 1$'$$$ 3#'.$$4 #'1$$ 3:'$$$4 - 2%';$$ -2#$'$$$ %<'.$$ 3<'#$$4 3:'$$$4 -2##'2$$ - .$'$$$ 2'$$$ 3 2'%#.4 3%$'$$$4 2;':<. #$ - <';<.

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6-26

Intercompany Profit Transactions Plant Assets

Solution P6-6 3continued4 Pil Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e year ended December 2%' #$%%
Pil Income Statement +ales Income from +an Gain on land Depreciation e@pense ?t!er e@penses 8onsolidated 7I 7oncontrolling s!are 8ontrolling s!are of 7I .etained Earnings Retained earnings Pil Retained earnings +an 8ontrolling s!are of 7I Di/idends Retained earnings December 2% /alance Sheet 8urrent assets Plant assets Accumulated depreciation In/estment in +an Patent - ;.#'2$$ 8urrent liabilities 8apital stoc5 Retained earnings - 1.$'$$$ - #%$'$$$ 2%';$$ 1$'$$$ I %%$'$$$ I +an :$ - %2$'$$$ %$'$$$ 2$'$$$ I =$'$$$ I c b e f ;%';$$ .$'$$$ 2%';$$ %$'$$$ a 2'%#. <';<. 2'$$$ =<'$$$ I %<2'%#. I ;;':<. <';<. I ;%';$$ Ad6ustments and &liminations 8onsolidated +tatements 21$'$$$

- %1$'1$$ ;%';$$ 2$'$$$ I - #$#'2$$ .$'$$$ d .$'$$$ .$'$$$

%1$'1$$ ;%';$$ 2$'$$$ I

- %$$'$$$

#$#'2$$

- #$$'$$$ ..$'$$$ %#$'$$$ I 2##'2$$

- %<$'$$$ 2.$'$$$ <$'$$$ I a a d

a b %.'$$$ %$'$$$

2<$'$$$ :<.'$$$ %:1'$$$ I

='$$$ ;'=$$ c 2%';$$ d 2$$'$$$ #.'$$$ e 2'%#.

#%':<. -%'$:#':<. #$$'$$$ =$$'$$$ #$#'2$$

- %.$'$$$ - .$'$$$ =$$'$$$ 2$$'$$$ d 2$$'$$$ #$#'2$$ %$$'$$$ - ;.#'2$$ - 1.$'$$$ a #'1$$ d f <.'$$$ <';<.

7oncontrolling interest Fanuary % 7oncontrolling interest December 2%

I Deduct

:$'.<. -%'$:#':<.

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Chapter 6

6-27

Solution 6-6 3continued4 Consolidation "or#$a$er entries a Accumulated depreciation ='$$$ In/estment in +an ;'=$$ 7oncontrolling interest #'1$$ Depreciation e@pense 2'$$$ Plant assets %.'$$$ 0o eliminate unrealized profit on #$%$ sale of plant assets and reduce plant assets to cost( Gain on land %$'$$$ Plant assets %$'$$$ 0o eliminate unrealized gain on #$%% upstream sale of land and reduce plant assets to cost(

Income from +an 2%';$$ In/estment in +an 2%';$$ 0o eliminate income from +an and ad6ust in/estment to beginning of period( 8apital stoc5M+an 2$$'$$$ Retained earningsM+an Fanuary % .$'$$$ Patent #.'$$$ In/estment in +an 2$$'$$$ 7oncontrolling interest Fanuary % <.'$$$ 0o eliminate in/estment in +an and stoc5!olders* e9uity of +an and enter beginning of t!e period patent( ?t!er e@penses Patent 0o pro/ide for patent amortization( 2'%#. 2'%#.

7oncontrolling Interest +!are <';<. 7oncontrolling Interest <';<. 0o enter noncontrolling interest s!are of subsidiary income(

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6-28

Intercompany Profit Transactions Plant Assets

Solution P6-# &reliminar% com$utations 0amounts in thousands1 In/estment cost for %$$ of +5i' April %' #$%% Coo5 /alue ac9uired &@cess fair /alue o/er boo5 /alue &@cess allocated: Dnder/alued in/entory items 3sold in #$%%4 Dnder/alued buildings 3<-year remaining useful life4 Good,ill &@cess fair /alue o/er boo5 /alue .econciliation of in,estment account balance In/estment cost April %' #$%% Add: Increase in +5i*s retained earnings Less: &@cess allocated to in/entories sold in #$%% Less: Depreciation on e@cess allocated to buildings 3-2'.$$>< years4 1(<. years Less: Dnrealized in/entory profits December 2%' #$%. Less: Dnrealized profit on e9uipment 3-:$$ intercompany profit - -#$$ recognized4 In/estment balance December 2%' #$%. .econciliation of in,estment income balance +!are of +5i*s income 3%$$ 4 Add: Dnrealized profit in beginning in/entory Add: Realization of pre/iously deferred profit on land Less: Dnrealized profit in ending in/entory Less: Depreciation on e@cess allocated to buildings Less: Dnrealized profit on e9uipment Income from +5i - #'$$$ %$$ .$$ 3%#$4 3.$$4 3=$$4 - %'2:$ -%.'$$$ 2'$$$ 3.$$4 3#'2<.4 3%#$4 3=$$4 -%1'1$. -%.'$$$ 3<'$$$4 - :'$$$ .$$ 2'.$$ 1'$$$ - :'$$$

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Chapter 6

6-29

Solution P6-# 3continued4 Pot Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e year ended December 2%' #$%. 3in t!ousands4
Pot Income Statement +ales Gain on land Gain on e9uipment Income from +5i 8ost of sales -#='$$$ <$$ %'2:$ %.'$$$I +5i -%%'$$$ :$$ .'$$$I #'$$$I #':$$I - #'$$$

Ad6ustments and &liminations

8onsolidated +tatements -2.'.$$ %'#$$

b %'.$$ a e :$$ g %'2:$ d %#$ i .$$ .$$

Depreciation e@pense 2'<$$I ?t!er e@penses 1'#:$I 8onsolidated net income - .'%$$ .etained Earnings Retained earnings Pot

b c f

%'.$$ %$$ #$$

%:'.#$I ='$$$I <'$:$I - .'%$$

-%#'2<. - 1'$$$ #'$$$ %'$$$I - .'$$$ ! 1'$$$ g %'$$$

-%#'2<.

Retained earnings +5i 8onsolidated net income .'%$$ Di/idends 2'$$$I Retained earnings December 2% -%1'1<. /alance Sheet 8as! Accounts recei/able In/entories Land Cuildings net &9uipment net In/estment in +5i Good,ill -.%'.<. Accounts payable ?t!er liabilities 8apital stoc5 Retained earnings I Deduct - 1'%$$ <'$$$ #='$$$ %1'1<. -.%'.<.

.'%$$ 2'$$$I -%1'1<.

- %'%<$ #'$$$ .'$$$ 1'$$$ %.'$$$ %$'$$$ %1'1$.

.$$ %'.$$ #'$$$ %'$$$ 1'$$$ 1'$$$

6 d ! %'=#. f #$$ a .$$ c %$$ ! 1'$$$ i e

2$$ %#$ .$$ :$$

- %'=<$ 2'#$$ ='::$ .'$$$ #$'%#. %2'1$$

g 2:$ ! %1'=#. 1'$$$ -.1'#<.

-%2'$$$ - %'$$$ #'$$$ .'$$$ .'$$$ -%2'$$$ 6 2$$

! .'$$$

- 1':$$ ;'$$$ #='$$$ %1'1<. -.1'#<.

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6-30

Intercompany Profit Transactions Plant Assets

Solution P6-$ &reliminar% com$utations In/estment cost Fanuary %' #$%% Implied fair /alue of +ic 3-%2='$$$ > :$ 4 Coo5 /alue of +ic &@cess fair /alue o/er boo5 /alue Anal%sis of in,estment in Sic account on &ic+s boo#s: In/estment cost +!are of +ic*s #$%% reported income 3-2$'$$$ :$ 4 In/estment in +ic as reported on Pic*s boo5s at December 2%' #$%% +!are of +ic*s #$%# reported income 3-1$'$$$ :$ 4 In/estment in +ic as reported on Pic*s boo5s at December 2%' #$%# Note that &ic has not eliminated intercom$an% $rofits from its in,estment income from Sic for either 2011 or 20122 In/estment balance as reported on Pic*s boo5s December 2%' #$%% Gain on mac!inery 3-.'$$$ :$ 4 Piecemeal recognition of gain 3-%'$$$ :$ 4 In/estment account balance under t!e e9uity met!od at December 2%' #$%% +!are of +ic*s #$%# reported income Piecemeal recognition of gain in #$%# 3-%'$$$ :$ 4 In/estment account balance under t!e e9uity met!od at December 2%' #$%# Noncontrolling interest share for 2011: +ic*s reported net income Less: Gain on sale of mac!inery Add: Piecemeal recognition of gain on mac!inery t!roug! Depreciation +ic*s realized income 7oncontrolling interest percentage 7oncontrolling interest s!are for #$%% Noncontrolling interest share for 2012: +ic*s reported net income Add: Piecemeal recognition of unrealized gain on mac!inery t!roug! depreciation +ic*s realized income 7oncontrolling interest percentage 7oncontrolling interest s!are for #$%# - 1$'$$$ %'$$$ 1%'$$$ #$ - :'#$$ - 2$'$$$ 3.'$$$4 %'$$$ - #='$$$ #$ - .'#$$ -%=$'$$$ 31'$$$4 :$$ -%.=':$$ 2#'$$$ :$$ -%:;'=$$ -%2='$$$ #1'$$$ -%=$'$$$ 2#'$$$ -%;#'$$$ -%2='$$$ -%<$'$$$ 3%<$'$$$4 $

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Chapter 6

6-31

Solution P6-$ 3continued4 Pi* Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e year ended December 2%' #$%%
Pic Income Statement +ales Income from +ic Gain on plant assets 8ost of sales Depreciation e@pense ?t!er e@penses 8onsolidated 7I 7oncontrolling s!are 8ontrolling s!are of 7I .etained Earnings Retained earnings Pic Retained earnings +ic 8ontrolling s!are of 7I Retained earnings December 2% /alance Sheet 8as! and e9ui/alents ?t!er current assets Plant and e9uipment Accumulated depreciation In/estment in +ic - 1$$'$$$ #1'$$$ #.$'$$$ I .$'$$$ I =$'$$$ I +ic :$ - #$$'$$$ .'$$$ %2$'$$$ I #.'$$$ I #$'$$$ I c a #1'$$$ .'$$$ b %'$$$ 2:$'$$$ I <1'$$$ I :$'$$$ I =='$$$ .'#$$ I - =$':$$ Ad6ustments and &liminations 8onsolidated +tatements - =$$'$$$

e =1'$$$ 2$'$$$

.'#$$

- %#='$$$ =1'$$$ - %;$'$$$ <$'$$$ d 2$'$$$ <$'$$$

- %#='$$$ =$':$$ - %:=':$$

- %$$'$$$

.$'$$$ %2$'$$$ 1$$'$$$ %.$'$$$ I %=$'$$$

2$'$$$ <$'$$$ #$$'$$$ .$'$$$ I

a b %'$$$ c #1'$$$ d %2='$$$ .'$$$

:$'$$$ #$$'$$$ .;.'$$$ %;;'$$$ I

- .;$'$$$ Liabilities 8apital stoc5 Retained earnings

- #.$'$$$

- =<='$$$ - %.$'$$$ 2$$'$$$ %:=':$$

- %$$'$$$ - .$'$$$ 2$$'$$$ %$$'$$$ d %$$'$$$ %;$'$$$ %$$'$$$ - .;$'$$$ - #.$'$$$ d e 21'$$$ .'#$$

7oncontrolling interest Fanuary % 7oncontrolling interest December 2%

I Deduct

2;'#$$ - =<='$$$

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6-32

Intercompany Profit Transactions Plant Assets

Solution P6-$ 3continued4 Pi* Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e year ended December 2%' #$%#
Pic Income Statement +ales Income from +ic 8ost of sales Depreciation e@pense ?t!er e@penses 8onsolidated 7I 7oncontrolling s!are 8ontrolling s!are of 7I .etained Earnings Retained earnings Pic Retained earnings +ic 8ontrolling s!are of 7I Retained earnings December 2% /alance Sheet 8as! and e9ui/alent ?t!er current assets Plant and e9uipment Accumulated depreciation In/estment in +ic - 12$'$$$ 2#'$$$ #=$'$$$ I .$'$$$ I ..'$$$ I +ic :$ - #2.'$$$ b %1$'$$$ I #.'$$$ I 2$'$$$ I d ;<'$$$ 1$'$$$ :'#$$ 2#'$$$ a 1$$'$$$ I %'$$$ <1'$$$ I :.'$$$ I %$='$$$ :'#$$ I - ;<':$$ Ad6ustments and &liminations 8onsolidated +tatements - ==.'$$$

- %;$'$$$

a 2'#$$ - %$$'$$$ c %$$'$$$ ;<'$$$ 1$'$$$ - %1$'$$$

- %:=':$$ ;<':$$ - #:1'=$$

- #:<'$$$

=2'$$$ %1$'$$$ 11$'$$$ #$$'$$$ I %;#'$$$

2$'$$$ :$'$$$ #1.'$$$ <.'$$$ I

a a #'$$$ b 2#'$$$ c %=$'$$$ .'$$$

;2'$$$ ##$'$$$ =:$'$$$ #<2'$$$ I

- =2.'$$$ Liabilities 8apital stoc5 Retained earnings -

- #:$'$$$

- <#$'$$$ ::'$$$ 2$$'$$$ #:1'=$$

1:'$$$ - 1$'$$$ 2$$'$$$ %$$'$$$ c %$$'$$$ #:<'$$$ %1$'$$$ - =2.'$$$ - #:$'$$$ a :$$ c d 1$'$$$ :'#$$

7oncontrolling interest Fanuary % 7oncontrolling interest December 2%

I Deduct

1<'1$$ - <#$'$$$

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Chapter 6

6-33

Solution P6-% &reliminar% com$utations In/estment cost Fanuary %' #$%% Implied fair /alue of +in 3-%$:'$$$ > :$ 4 Coo5 /alue of +in &@cess fair /alue o/er boo5 /alue allocated to patent Patent amortization: -#.'$$$>%$ years .econciliation of in,estment income +in*s reported income Less: Patent amortization Less: Dnrealized profit in ending in/entory Add: Dnrealized profit in beginning in/entory Add: Piecemeal recognition of deferred profit on plant assets 3-#$'$$$ > . years4 +in*s ad6usted income Par*s :$ #$ controlling s!are - .$'$$$ 3#'.$$4 3%'$$$4 #'$$$ 1'$$$ - .#'.$$ - 1#'$$$ - %$'.$$ -%$:'$$$ -%2.'$$$ 3%%$'$$$4 - #.'$$$ - #'.$$

7oncontrolling interest s!are

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6-34

Intercompany Profit Transactions Plant Assets

Solution P6-% 3continued4 Par Corporation and Sub idiar! 8onsolidation Kor5Papers for t!e year ended December 2%' #$%1
Par Income Statement +ales Income from +in 8ost of sales ?t!er e@penses 8onsolidated 7I 7oncontrolling s!are 8ontrolling s!are of 7I .etained Earnings Retained earnings Par Retained earnings +in 8ontrolling s!are of 7I Di/idends Retained earnings December 2% /alance Sheet 8as! Accounts recei/able In/entories Plant assets Accumulated depreciation In/estment in +in Patent - 1;;'=$$ Accounts payable 8apital stoc5 Retained earnings - %:$'$$$ - =.$'$$$ 1#'$$$ 2;$'$$$ I %<$'$$$ I +in :$ - %#$'$$$ 1$'$$$ I 2$'$$$ I a e b g i - %2#'$$$ .$'$$$ Ad6ustments and &liminations :'$$$ 1#'$$$ %'$$$ a c #'.$$ d %$'.$$ 8onsolidated +tatements - <=#'$$$ :'$$$ #'$$$ 1'$$$ 1#%'$$$ I %;:'.$$ I %1#'.$$ %$'.$$ I - %2#'$$$

;.'=$$ %2#'$$$ <$'$$$ I #$'$$$ f .$'$$$ #$'$$$ I #$'$$$

;.'=$$ %2#'$$$

e i

%='$$$ 1'$$$

<$'$$$ I - %.<'=$$

- %.<'=$$

.$'$$$

.:'$$$ 1$'$$$ =$'$$$ #;$'$$$ <$'$$$ I %#%'=$$

#$'$$$ #$'$$$ 2.'$$$ #$.'$$$ %$$'$$$ I

! b d d c d f 1'$$$ %'$$$ #$'$$$

:'$$$ %'=$$ e #='$$$ %#':$$ f %%$'$$$ %<'.$$ g #'.$$

<:'$$$ .='$$$ ;1'$$$ 1<.'$$$ %=#'$$$ I

%.'$$$ - ..='$$$ =:'$$$ 2$$'$$$ %.<'=$$

1#'$$$ - 2$'$$$ ! 1'$$$ 2$$'$$$ %$$'$$$ f %$$'$$$ %.<'=$$ .$'$$$ - 1;;'=$$ - %:$'$$$ c d 1$$ f 2'#$$ i #<'.$$ ='.$$

7oncontrolling interest Fanuary % 7oncontrolling interest December 2%

I Deduct

2$'1$$ - ..='$$$

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Chapter 6

6-35

Solution P6-1& &reliminar% com$utations In/estment cost Implied fair /alue of +un 3-#;$'$$$ > :$ 4 Coo5 /alue of +un &@cess fair /alue o/er boo5 /alue &@cess allocated: In/entories 3.$ 4- +old in #$$; Good,ill &@cess fair /alue o/er boo5 /alue .econciliation of income from Sun: +un*s reported net income Add: Depreciation on deferred gain on e9uipment 3-%.'$$$>. years Less: Dnrealized profit on upstream sale of land +un*s ad6usted and realized income Pal*s :$ #$ controlling s!are -#;$'$$$ -2=#'.$$ 32$$'$$$4 - =#'.$$ - 2%'#.$ 2%'#.$ - =#'.$$ - .$'$$$ 2'$$$ 3%$'$$$4 - 12'$$$ - 21'1$$ :'=$$

7oncontrolling interest s!are

.econciliation of in,estment account +!are of +un*s underlying e9uity 3-1$$'$$$ :$ 4 Add: :$ of unamortized good,ill Less: Dnrealized gain on e9uipment A-%.'$$$ - 3-2'$$$ # years4B :$ Less: +!are of unrealized gain on land In/estment in +un December 2%' #$%%

-2#$'$$$ #.'$$$ 3<'#$$4 3:'$$$4 -2#;':$$

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6-36

Intercompany Profit Transactions Plant Assets

Solution P6-1& 3continued4 Pal Corporation and Sub idiar! 8onsolidation Kor5Paper for t!e year ended December 2%' #$%%
Pal Income Statement +ales Income from +un Gain on land Depreciation e@pense ?t!er e@penses 8onsolidated 7I 7oncontrolling s!are 8ontrolling s!are of 7I .etained Earnings Retained earnings Pal Retained earnings +un 8onsolidated s!are of 7I Di/idends Retained earnings December 2% /alance Sheet 8urrent assets Plant assets Accumulated depreciation In/estment in +un Good,ill - ;.;':$$ 8urrent liabilities 8apital stoc5 Retained earnings - 1.$'$$$ - #%$'$$$ 21'1$$ 1$'$$$ I %%$'$$$ I +un :$ - %2$'$$$ %$'$$$ 2$'$$$ I =$'$$$ I c b 21'1$$ %$'$$$ a 2'$$$ =<'$$$ I %<$'$$$ I %$2'$$$ :'=$$ I ;1'1$$ Ad6ustments and &liminations 8onsolidated +tatements 21$'$$$

e ;1'1$$ .$'$$$

:'=$$ -

- %1.'1$$ ;1'1$$ 2$'$$$ I - #$;':$$ .$'$$$ d .$'$$$ .$'$$$

%1.'1$$ ;1'1$$ 2$'$$$ I

- %$$'$$$

#$;':$$

- #$$'$$$ ..$'$$$ %#$'$$$ I 2#;':$$

- %<$'$$$ 2.$'$$$ <$'$$$ I a a d

a b %.'$$$ %$'$$$

2<$'$$$ :<.'$$$ %:1'$$$ I

='$$$ ;'=$$ c 21'1$$ d 2$.'$$$ 2%'#.$

2%'#.$ -%'$;#'#.$ #$$'$$$ =$$'$$$ #$;':$$

- %.$'$$$ - .$'$$$ =$$'$$$ 2$$'$$$ d 2$$'$$$ #$;':$$ %$$'$$$ - ;.;':$$ - 1.$'$$$ a #'1$$ d e <='#.$ :'=$$

7oncontrolling interest Fanuary % 7oncontrolling interest December 2%

I Deduct

:#'1.$ -%'$;#'#.$

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Chapter 6

6-37

Solution 6-1& 3continued4 Consolidation "or#$a$er entries a Accumulated depreciation ='$$$ In/estment in +un ;'=$$ 7oncontrolling interest #'1$$ Depreciation e@pense 2'$$$ Plant assets %.'$$$ 0o eliminate unrealized profit on #$%$ sale of plant assets( Gain on land %$'$$$ Plant assets %$'$$$ 0o eliminate unrealized gain on #$%% upstream sale of land(

Income from +un 21'1$$ In/estment in +un 21'1$$ 0o eliminate income from +un against t!e in/estment in +un( 8apital stoc5M+un 2$$'$$$ Retained earningsE+un Fanuary % .$'$$$ Good,ill 2%'#.$ In/estment in +un 2$.'$$$ 7oncontrolling interest Fanuary % <='#.$ 0o eliminate in/estment in +un and stoc5!olders* e9uity of +un and enter beginning of t!e period good,ill( 7oncontrolling Interest +!are :'=$$ 7oncontrolling Interest :'=$$ 0o enter noncontrolling interest s!are of subsidiary income(

Solution P6-11 1 0!e ;$ percent o,ners!ip interest can be determined in se/eral ,ays( a( b( c( 2 -%2'.$$ di/idends recei/able -%.'$$$ di/idends payable G ;$ -2<'#$$ noncontrolling interest 3-21$'$$$ +al*s stoc5!olders* e9uity + -2#'$$$ unamortized patent4 G %$ 3-1'=$$ noncontrolling interest s!are 3-.$'$$$ net income of +al less -1'$$$ patent amortization4 G %$

Hes( Pop*s net income of -#$$'1$$ e9uals t!e controlling interest s!are consolidated net income of -#$$'1$$( Pop*s retained earnings of -2.$'1$$ e9uals consolidated retained earnings( Hes( 8ombined sales 8onsolidated sales Intercompany sales -:$$'$$$ <%='$$$ - :1'$$$

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6-38

Intercompany Profit Transactions Plant Assets

8ombined in/entories 8onsolidated in/entories Dnrealized in/entory profits Solution P6-11 3continued4 " .econciliation of combined and consolidated cost of sales 8ombined cost of sales 3gi/en4 Less: Intercompany sales 3see 2 abo/e4 Add: Dnrealized profits in ending in/entory 3see 1 abo/e4 Less: Dnrealized profits in beginning in/entory 3sol/e for t!is4 8onsolidated cost of sales 3gi/en4 6 .econciliation of combined and consolidated e3ui$ment net

-%.$'$$$ %2='$$$ - %1'$$$

-2.$'$$$ 3:1'$$$4 %1'$$$ 3.'$$$4 -#<.'$$$

8ombined e9uipment net of -.=.'$$$ less consolidated e9uipment net of -..$'$$$ s!o,s a difference of -%.'$$$( 0!e ,or5paper entry to eliminate t!e effects of an intercompany sale of e9uipment must !a/e been: Gain on e9uipment Depreciation e@pense &9uipment net # #$'$$$ .'$$$ %.'$$$

4es2 Intercom$an% recei,ables and $a%ables are as follo"s Accounts recei/able Accounts payable Di/idends recei/able Di/idends payable 8ombined - :$'$$$ %%$'$$$ %2'.$$ %.'$$$ 8onsolidated - <$'$$$ %$$'$$$ --%'.$$ Intercompany -%$'$$$ %$'$$$ %2'.$$ %2'.$$

.econciliation of noncontrolling interest 7oncontrolling interest Fanuary %' #$%# 3-2#$'$$$ %$ 4 %$ of unamortized patent at Fanuary % Add: 7oncontrolling interest s!are for #$%# Less: 7oncontrolling interest di/idends 3-2$'$$$ %$ 4 7oncontrolling interest December 2%' #$%# - 2#'$$$ 2'=$$ 1'=$$ 32'$$$4 - 2<'#$$

&atent at -ecember (1' 2011 Patent December 2%' #$%# Add: Patent amortization 3-%1%'$$$ consolidated ot!er e@penses - -%2<'$$$ combined ot!er e@penses4 Patent December 2%' #$%% - 2#'$$$ 1'$$$ - 2='$$$

1&

Anal%sis of in,estment in Sal account Coo5 /alue 3+al*s stoc5!olders* e9uity -21$'$$$ ;$ 4 Less: Dnrealized profit in ending in/entory -2$='$$$ 3%1'$$$4

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Chapter 6

6-39

Less: Dnrealized profit in e9uipment Add: ;$ of Dnamortized patent In/estment in +al December 2%' #$%#

3%.'$$$4 #:':$$ -2$.':$$

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