Accounting Basic

Chapter 6
INTERCOMPANY PROFIT TRANSACTIONS PLANT ASSETS

Answers to Questions
1 The objective of eliminating the effect of inte!com"an# ale of "lant aet i to !eflect "lant aet an$
!elate$ $e"!eciation amo%nt in the conoli$ate$ financial tatement at cot to the conoli$ate$ entit#&
2 Conoli$ation "!oce$%!e fo! eliminating %n!eali'e$ "!ofit on "lant aet a!e affecte$ b# the $i!ection of
the ale& The f%ll amo%nt of %n!eali'e$ "!ofit o! lo on $o(nt!eam ale )"a!ent to %bi$ia!#* i cha!ge$
o! c!e$ite$ to the cont!olling inte!et& In the cae of %"t!eam ale+ ho(eve!+ %n!eali'e$ "!ofit o! lo i
allocate$ bet(een cont!olling an$ noncont!olling inte!et& ,eca%e the!e i no allocation to
noncont!olling inte!et in the cae of a -.. "e!cent o(ne$ %bi$ia!#+ conoli$ation "!oce$%!e a!e the
ame fo! %"t!eam ale a fo! $o(nt!eam ale&
3 /n!eali'e$ gain an$ loe f!om inte!com"an# ale of lan$ a!e !eali'e$ f!om the vie("oint of the elling
affiliate (hen the "%!chaing affiliate !eell the lan$ to "a!tie o%ti$e the conoli$ate$ entit#& Thi i alo
the "oint at (hich the conoli$ate$ entit# !ecogni'e gain o! lo on the $iffe!ence bet(een the elling
"!ice to o%ti$e "a!tie an$ the cot to the conoli$ate$ entit#&
4 Noncont!olling inte!et ha!e i not affecte$ b# $o(nt!eam ale of lan$ beca%e the !eali'e$ income of
the %bi$ia!# i not affecte$ b# $o(nt!eam ale& In the cae of %"t!eam ale of lan$+ the !e"o!te$
income of the %bi$ia!# i a$j%te$ $o(n(a!$ fo! %n!eali'e$ "!ofit an$ %"(a!$ fo! %n!eali'e$ loe to
$ete!mine !eali'e$ income& Since noncont!olling inte!et ha!e i com"%te$ on the bai of !eali'e$
%bi$ia!# income+ the com"%tation of noncont!olling inte!et ha!e i affecte$ b# %"t!eam ale of lan$&
5 Conoli$ation "!oce$%!e a!e $eigne$ to eliminate -.. "e!cent of all %n!eali'e$ "!ofit o! lo on all
inte!com"an# t!anaction& 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!et& In
the cae 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!et in !elation to thei! o(ne!hi"
hol$ing&
6 /n!eali'e$ gain an$ loe f!om inte!com"an# ale of $e"!eciable aet a!e !eali'e$ th!o%gh %e if the
aet a!e hel$ (ithin the conoli$ate$ entit# an$ th!o%gh ale if the aet a!e ol$ to o%ti$e "a!tie& The
"!oce of !ecogni'ing "!evio%l# %n!eali'e$ gain an$ loe th!o%gh %e i a "iecemeal !ecognition ove!
the !emaining %e life of the $e"!eciable aet&
7 The com"%tation of noncont!olling inte!et ha!e in the #ea! of an %"t!eam ale of $e"!eciable "lant aet
i a follo(0
Unrealized Unrealized
Gain on Sale Loss on Sale
Income of subsidiary as reported XXX XXX
Deduct: Gain on sale of plant assets - XX
Add: Loss on sale of plant assets + XX
Add: Piecemeal recognition of gain on sale
of plant assets + X
Deduct: Piecemeal recognition of loss on
sale of plant assets - X
Realized subsidiary income XXX XXX
Noncont!olling nterest percentage X X
Noncont!olling interest s!are XXX XXX
12..3 Pea!on E$%cation+ Inc& "%blihing a P!entice 4all
56-
6-2 Intercompany Profit Transactions Plant Assets
8 The effect of %n!eali'e$ gain on inte!com"an# ale of "lant aet a!e cha!ge$ againt the "a!ent
com"an#7 income f!om %bi$ia!# acco%nt in the #ea! of the inte!com"an# ale+ (ith e8%al amo%nt
being $e$%cte$ f!om the invetment in %bi$ia!# acco%nt& In %be8%ent #ea!+ the income f!om
%bi$ia!# an$ invetment in %bi$ia!# acco%nt a!e inc!eae$ fo! $e"!eciation on the %n!eali'e$ gain that
i !eco!$e$ on the %bi$ia!# boo9 fo! $o(nt!eam ale o! fo! the "a!ent7 "!o"o!tionate ha!e fo!
%"t!eam ale& If the %n!eali'e$ gain !elate to lan$+ no ent!ie a!e nee$e$ %ntil the lan$ i ol$ to entitie
o%ti$e of the affiliation t!%ct%!e&
9 Acco%nting "!oce$%!e a!e $eigne$ to eliminate the effect of inte!com"an# ale of "lant aet on both
"a!ent com"an# income an$ conoli$ate$ net income %ntil the gain an$ loe on %ch ale a!e !eali'e$
th!o%gh %e o! th!o%gh ale to o%ti$e "a!tie& In #ea! %be8%ent to inte!com"an# ale of $e"!eciable
"lant aet+ the effect on "a!ent com"an# income i eliminate$ b# a$j%ting $e"!eciation e:"ene to a cot
bai fo! the conoli$ate$ entit#&
10 Conoli$ation (o!9ing "a"e! ent!ie to eliminate the effect of a gain on ale of $e"!eciable "lant aet
f!om a $o(nt!eam ale a!e ill%t!ate$ a follo(0
Year of sale
;ain on ale
Acc%m%late$ $e"!eciation
<e"!eciation e:"ene
Plant aet
To !e$%ce "lant aet an$ !elate$ $e"!eciation amo%nt to a cot bai to the
conoli$ate$ entit# an$ to eliminate %n!eali'e$ gain on inte!com"an# ale&
Subsequent years
Invetment in %bi$ia!#
Acc%m%late$ $e"!eciation
<e"!eciation e:"ene
Plant aet
To !e$%ce "lant aet an$ !elate$ $e"!eciation amo%nt to a cot bai to the
conoli$ate$ entit# an$ to a$j%t the invetment acco%nt fo! %n!eali'e$ "!ofit at the
beginning of the c%!!ent #ea!&
SOLUTIONS TO EXERCISES
Solution E6-1
1 c
2 a
3 c
4 d
"#$$% Pearson &ducation' Inc( publis!ing as Prentice )all
Chapter 6 6-3
Solution E6-2
1 Parsen*s income from +amit ,ill be decreased by -#.'$$$ as a result of
t!e follo,ing entry:
Income from +amit #.'$$$
In/estment in +amit #.'$$$
0o eliminate unrealized gain on do,nstream sale of land(
Parsen*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 +amit(
0!e in/estment in +amit account at December 21' #$1# ,ill be -#.'$$$
less as a result of t!e sale as indicated by t!e abo/e entry( 30!e total
balance s!eet effect is to reduce land to its cost' reduce t!e
in/estment account for t!e profit' and increase cas! or ot!er assets for
t!e proceeds(4
2 0!e consolidated financial statements ,ill not be affected because t!e
gain on t!e sale is eliminated in t!e consolidated income statement and
t!e land is reduced to its cost basis to t!e consolidated entity( A
,or5ing paper ad6ustment ,ould s!o,:
Gain on sale of land #.'$$$
Land #.'$$$
3 7eit!er Parsen*s income from +amit or net income for #$12 ,ill be
affected by t!e #$1# sale of land( 0!e in/estment in +amit account'
!o,e/er' ,ill still be -#.'$$$ 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 #$12(
4 0!e sale of t!e land ,ill not affect +amit*s net income since it is
being sold at +amit*s cost( )o,e/er' t!e sale triggers recognition of
t!e postponed gain on t!e original sale from Parsen to +amit(
Income from +amit #.'$$$
0o recognize t!e gain deferred in #$$8(
9onsolidated income ,ill also feel t!e same impact of t!e recognition of
t!e deferred gain(
Gain on sale of land #.'$$$
" #$$% Pearson &ducation' Inc( publis!ing as Prentice )all
Solution E6-3
1a Consolidated net income
#$$% #$1$
Pruitt*s separate income - 2$$'$$$ - :$$'$$$
Add: &;uity in +il/erman*s income
#$$% -<$'$$$ %$
=#'$$$
#$1$ -8$'$$$ %$
.:'$$$
Gain on sale of land 31$'$$$4 ---
9onsolidated net income - 28#'$$$ - :.:'$$$
1b Noncontrolling interest share
+il/erman*s net income 1$
- <'$$$ - 8'$$$
2a Consolidated net income
Pruitt*s separate income - 2$$'$$$ - :$$'$$$
Add: &;uity in +il/erman*s income =#'$$$ .:'$$$
Less: Gain on land %$
3%'$$$4 ---
9onsolidated net income - 282'$$$ - :.:'$$$
2b Noncontrolling interest share
+il/erman*s net income 1$
- <'$$$ - 8'$$$
Less: Gain on land 1$
31'$$$4 ---
7oncontrolling interest s!are - ='$$$ - 8'$$$
Solution E6-4
1 Entries for 2009
9as! %$'$$$
In/estment in +almar5 %$'$$$
0o record di/idends recei/ed from +almar5(
In/estment in +almar5 1$<'$$$
Income from +almar5 1$<'$$$
0o record income from +almar5 computed as follo,s:
+!are of +almar5*s reported income 3-1.$'$$$ %$4
- 12.'$$$
Less: Gain on building sold to +almar5 32$'$$$4
Add: Piecemeal recognition of gain on building
3-2$'$$$>1$ years4 2'$$$
Income from +almar5 - 1$<'$$$
2 Pigwich Co!oation an" Sub#i"ia$
9onsolidated Income +tatement
for t!e year ended December 21' #$$%
+ales -#'#$$'$$$
9ost of sales 31':$$'$$$4
Gross profit <$$'$$$
?perating e@penses 3::='$$$4
Chapter 6 6-5
0otal consolidated income 2.2'$$$
Noncont!olling interest s!are 31.'$$$4
9ontrolling interest s!are - 22<'$$$
Solution E6-% AAI9PA adaptedB
1 d
0!e e;uipment 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 e;uipment ,ould be s!o,n at -1'.$$'$$$' its
boo5 /alue at t!e time of transfer' less t!e -1$$'$$$ depreciation after
transfer(
2 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(
3 a
Amount to be eliminated from consolidated net income in 2009:
Intercompany gain on do,nstream sale of mac!inery -1$'$$$
Less: Realized t!roug! depreciation of intercompany
gain on mac!inery 3-1$'$$$>. years4 3#'$$$4
Decrease in consolidated net income from
intercompany sale
- <'$$$
Amount to be added to consolidated net income in #$1$ for
realization t!roug! depreciation of intercompany gain
on mac!inery - #'$$$
4 b
?ne-t!ird of t!e unrealized intercompany profit is recognized t!roug!
depreciation for #$$%(
Solution E6-6
1 a
+elling price in #$1= - ..'$$$
9ost to consolidated entity 1.'$$$
Gain on sale of land - :$'$$$
2 b
Gain on e;uipment - 2$'$$$
Less: Depreciation on gain 31$'$$$4
7et effect on in/estment account - #$'$$$
0!e in/estment account ,ill be -#$'$$$ less t!an t!e underlying e;uity
interest(
3 b
9ombined e;uipment net - <$$'$$$
Less: Dnrealized gain 3#$'$$$4
Add: Piecemeal recognition of gain .'$$$
9onsolidated e;uipment net - =<.'$$$
4 b
he !or"ing #a#er entr$ to eliminate the unrealized #rofit is:
Gain on sale of e;uipment 1'.$$
&;uipment 1'.$$
Chapter 6 6-7
% c
In/estment income ,ill be decreased by -1#'$$$ gain less -2'$$$
piecemeal recognition of t!e gain(
6 c
+artin*s net income -1'$$$'$$$
Less: Dnrealized gain 3.$'$$$4
Add: Piecemeal recognition .'$$$
Realized income %..'$$$
Noncont!olling interest percentage :$
7oncont!olling interest s!are - 2<#'$$$
Solution E6-&
Po" Co!oation an" Sub#i"ia$
+ales 3-.$$'$$$ + -2$$'$$$4 -<$$'$$$
Gain on sale of mac!inery
a
#$'$$$
0otal re/enue <#$'$$$
9ost of sales 3-#$$'$$$ + -12$'$$$4 22$'$$$
Depreciation e@pense 3-.$'$$$ + -2$'$$$ - -.'$$$ from
depreciation on intercompany profit for #$$%4 =.'$$$
?t!er e@penses 3-<$'$$$ + -:$'$$$4 1#$'$$$
0otal e@penses .#.'$$$
9onsolidated net income -#%.'$$$
7oncontrolling s!are 3-1$$'$$$+-.'$$$ piecemeal recognition from
depreciation + -1$'$$$ remaining deferred gain4 #.
noncontrolling interest #<'=.$
9ontrolling interest s!are -#88'#.$
a +elling price of mac!inery at December #<' #$$% - 28'$$$
Coo5 /alue on Pod*s boo5s -8.'$$$ E 3-8.'$$$>. years 2 years4
#8'$$$
Gain on sale of mac!inery - 1$'$$$
?riginal intercompany profit - #.'$$$
Piecemeal recognition of gain -#.'$$$>. years 2 years
1.'$$$
Dnamortized gain from intercompany sales - 1$'$$$
Gain on sale of mac!inery to outside entity - #$'$$$
Solution E6-'
%reliminar$ com#utations:
In/estment in +alt 3:$4 at cost -1$$'$$$
Implied total fair /alue of +alt 3-1$$'$$$ > :$4 -#.$'$$$
Coo5 /alue 3#$$'$$$4
&@cess allocated to patents - .$'$$$
Annual amortization of patents 3-.$'$$$>. years4 - 1$'$$$
1 &ncome from Salt 2009
+!are of +alt*s net income 3-:$'$$$ 1># year :$4
- <'$$$
Amortization of patents 3-1$'$$$ 1># year :$4
3#'$$$4
Dnrealized in/entory profit from upstream sale
3-:'$$$ :$4
31'8$$4
Dnrealized gain from do,nstream sale of land
3-#'$$$ 1$$4
3#'$$$4
Income from +alt - #':$$
Chapter 6 6-9
Solution E6-' 3continued4
2 &ncome from Salt 20'0
+alt*s net income - 8$'$$$
Amortization of patents 31$'$$$4
Dnrealized in/entory profits from upstream sales:
Recognition of profit in beginning in/entory :'$$$
Deferral of profit in ending in/entory 38'$$$4
+alt*s ad6usted and realized income - :<'$$$
Income from +alt 3:$ s!are4 - 1%'#$$
Solution E6-(
1 &ncome from Sim#le( net income and consolidated net income:
+imple*s reported net income -1$$'$$$
Less: Amortization of e@cess allocated to buildings
3-.$$'$$$ - -:$$'$$$4>#$ years 3.'$$$4
Less: -#$'$$$ unrealized profit on e;uipment 3#$'$$$4
+imple*s ad6usted and realized income - =.'$$$
Income from +imple 3<$ s!are4 #$11 - 8$'$$$
Add: +eparate income of Plain for #$11 .$$'$$$
7et income of Plain #$11 -.8$'$$$
+imple*s reported net income -11$'$$$
Less: Amortization of e@cess allocated to buildings 3.'$$$4
Add: Piecemeal recognition of unrealized gain
on e;uipment 3-#$'$$$>: years4 .'$$$
+imple*s ad6usted and realized income -11$'$$$
Income from +imple )=.>* #$1# - <<'$$$
Add: +eparate income of Plain 8$$'$$$
7et income of Plain #$1# -8<<'$$$
Consolidated net income for 20'' and 20'2 ) %lain*s net income
Alternati/ely' #$11 #$1#
+eparate incomes combined -8$$'$$$ -=1$'$$$
Less: Amortization of e@cess 3buildings4 3.'$$$4 3.'$$$4
Less: Dnrealized gain on e;uipment in #$11 3#$'$$$4
Add: Piecemeal recognition of gain in #$1# .'$$$
9onsolidated net income -.=.'$$$ -=1$'$$$
Less: 7oncontrolling interest s!are:
#$11 3-1$$'$$$ - -#$'$$$ - -.'$$$4 #$
31.'$$$4
#$1# 3-11$'$$$ + -.'$$$ - -.'$$$4 #$
3##'$$$4
9ontrolling interest s!are -.8$'$$$ -8<<'$$$
2 &n+estment in Sim#le
9ost of in/estment Fuly 1' #$$% -:$$'$$$
Add: Plain*s s!are of +imple*s retained earnings increase
from Fuly 1' #$$% to December 21' #$1$
3-1.$'$$$ - -1$$'$$$4 <$
:$'$$$
Less: <$ Amortization of e@cess 3-:'$$$ 1(. years4
38'$$$4
In/estment in +imple December 21' #$1$ :2:'$$$
Add: #$11 income less di/idends A-<$'$$$ - 3-.$'$$$ <$4B
:$'$$$
In/estment in +imple December 21' #$11 :=:'$$$
Add: #$1# income less di/idends A-<<'$$$ - 3-8$'$$$ <$4B
:$'$$$
In/estment in +imple December 21' #$1# -.1:'$$$
Solution E6-( 3continued4
Alternati+e solution for chec" at ,ecember -'( 20'2:
+!are of +imple*s e;uity December 21' #$1# 3-..$'$$$ <$4
-::$'$$$
Add: <$ Dnamortized e@cess on buildings
?riginal e@cess -1$$'$$$ - 3-:'$$$ 2(. years4
<8'$$$
Less: Dnrealized profit on e;uipment
3-#$'$$$ gain - -.'$$$ recognized4 <$
31#'$$$4
In/estment in +imple December 21' #$1# -.1:'$$$
Solution E6-1)
%reliminar$ com#utations
0ransfer price of in/entory to +pano 3-1<$'$$$ #4
-28$'$$$
9ost to consolidated entity 31<$'$$$4
Dnrealized profit on Fanuary 2 -1<$'$$$
Amortization of unrealized profit from consolidated /ie,:
-1<$'$$$>8 years G -2$'$$$ per year
1 Consolidated balance sheet amounts:
2009
&;uipment 3at transfer price4 -28$'$$$
Less: Dnrealized profit 31<$'$$$4
Less: Depreciation ta5en by +pano 3-28$'$$$>8 years4 38$'$$$4
Add: Depreciation on unrealized profit 3-1<$'$$$>8 years4 2$'$$$
&;uipment net to be included on consolidated balance s!eet -1.$'$$$
Alternati/ely:
&;uipment 3at cost to t!e consolidated entity4 -1<$'$$$
Less: Depreciation based on cost 3-1<$'$$$>8 years4 32$'$$$4
&;uipment net -1.$'$$$
20'0 Hear after intercompany sale
&;uipment net beginning of t!e period on cost basis -1.$'$$$
Less: Depreciation 3based on cost4 32$'$$$4
&;uipment net -1#$'$$$
2 Consolidation !or"ing #a#er entries:
2009
+ales 28$'$$$
9ost of goods sold 1<$'$$$
&;uipment net 1.$'$$$
Depreciation e@pense 2$'$$$
0o eliminate intercompany in/entory sale' return e;uipment
to its cost to t!e consolidated entity' and eliminate
depreciation on t!e intercompany profit(
20'0
In/estment in +pano 1.$'$$$
Chapter 6 6-11
&;uipment net 1#$'$$$
Depreciation e@pense 2$'$$$
0o eliminate unrealized profit from t!e e;uipment 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 e;uity accounts(
Solution E6-11
Pa#co Co!oation an" Sub#i"ia$
+c!edule for 9omputation of 9onsolidated 7et Income
#$$% #$1$ #$11 #$1#
9ombined separate incomes -#8$'$$$ -##$'$$$ -1#$'$$$ -#1$'$$$
Add: Amortization of negati/e
differential assigned to plant
assets 3-.$'$$$>1$ years4I .'$$$ .'$$$ .'$$$ .'$$$
Dnrealized gain on land 37ote
0!at Pasco*s -.'$$$ gain is
included in Pasco*s separate
income4 3.'$$$4 .'$$$
Dnrealized gain on mac!inery 3#.'$$$4
Piecemeal recognition of
Gain on mac!inery .'$$$ .'$$$ .'$$$
Dnrealized in/entory profits 3<'$$$4 <'$$$
9onsolidated net income #8$'$$$ #$.'$$$ 1##'$$$ #22'$$$
Less: 7oncontrolling interest s!are
2009 3-8$'$$$--.'$$$+-.'$$$4 #$
31#'$$$4
20'0 3-=$'$$$+-.'$$$4 #$
3 1.'$$$4
20'' 3-<$'$$$--<'$$$+-.'$$$44 #$
31.':$$4
20'2 3-%$'$$$ + -<'$$$ +
-.'$$$ + -.'$$$44 #$
3#1'8$$4
9ontrolling s!are of 7I -#:<'$$$ -1%$'$$$ -1$8'8$$ -#11':$$
Alternati+e Solution:
Pasco*s separate income -#$$'$$$ -1.$'$$$ - :$'$$$ -1#$'$$$
Add: <$ of +locum*s income :<'$$$ .8'$$$ 8:'$$$ =#'$$$
Amortize t!e negati/e differential
assigned to plant asset <$4
:'$$$ :'$$$ :'$$$ :'$$$
Dnrealized profit on upstream
+ale of land 3-.'$$$ <$4
3:'$$$4 :'$$$
Dnrealized profit on do,nstream
+ale of mac!inery 3#.'$$$4
Piecemeal recognition of gain
3-#.'$$$>. years4 .'$$$ .'$$$ .'$$$
Dnrealized profit on upstream
+ale of in/entory items
-<'$$$ <$
38':$$4 8':$$
Pasco*s net income and controlling
s!are of consolidated net income -#:<'$$$ -1%$'$$$ -1$8'8$$ -#11':$$
I 7ote: +ince Pasco paid -:$'$$$ more t!an boo5 /alue for its <$ s!are' t!e
implied total fair /alue minus boo5 /alue of +locum is -.$'$$$(
Chapter 6 6-13
SOLUTIONS TO PRO*LE+S
Solution P6-1
1 &ncome from Sear 2009
&;uity in +ear*s income 3-1$$'$$$ %$4
- %$'$$$
Add: Deferred in/entory profit from #$$< 3-:$'$$$ .$4
#$'$$$
Less: Dnrealized in/entory profit from #$$% 3-8$'$$$ :$4
3#:'$$$4
Less: Intercompany profit on e;uipment 3-1$$'$$$ - -8$'$$$4 3:$'$$$4
Add: Piecemeal recognition of profit on e;uipment
-:$'$$$>: years 1$'$$$
Income from +ear 3corrected amount4 - .8'$$$
2 P,al Co!oation an" Sub#i"ia$
+ales A-1'8$$'$$$ combined - -1.$'$$$ intercompanyB -1':.$'$$$
9ost of sales A-1'$$$'$$$ combined - -1.$'$$$ inter-
company + -#:'$$$ ending in/entory profits - -#$'$$$
beginning in/entory profitsB <.:'$$$
Gross profit .%8'$$$
?t!er e@penses A-2$$'$$$ combined - -1$'$$$ piecemeal
recognition of profit on e;uipmentB #%$'$$$
9onsolidated net income - 2$8'$$$
Less: 7oncontrolling interest s!are 1$'$$$
9ontrolling interest s!are - #%8'$$$
9!ec5:
+eparate income of Pearl - #:$'$$$
Add: Income from +ear .8'$$$
9ontrolling interest s!are - #%8'$$$
Solution P6-2
7?0&: +ince Pal paid a price -:.'$$$ in e@cess of boo5 /alue for its %$
s!are' t!e implied total e@cess of fair /alue o/er boo5 is -.$'$$$ 3-:.'$$$ >
%$4(
Com#utation of income from Sim:
+!are of +im*s reported income 3-:$'$$$ (%4
-28'$$$
Add: Realization of deferred profits in beginning in/entory .'$$$
Less: Dnrealized profits in ending in/entory 3:'$$$4
Less: Dnrealized profit on intercompany sale of e;uipment
3-2$'$$$ - -#1'$$$4 3%'$$$4
Add: Piecemeal recognition of deferred profit in e;uipment
3-%'$$$>2 years4 2'$$$
Income from +im -21'$$$
Consolidation !or"ing #a#er entries
A 9as! #'$$$
Accounts recei/able #'$$$
0o record cas! in transit from +im on account(
C +ales #$'$$$
9ost of sales #$'$$$
0o eliminate intercompany purc!ases and sales(
9 In/estment in +im .'$$$
9ost of sales .'$$$
0o recognize pre/iously deferred profit from beginning in/entory(
D 9ost of sales :'$$$
In/entory :'$$$
0o defer unrealized profit from ending in/entory(
& In/estment in +im 2'$$$
Land 2'$$$
0o reduce land to its cost basis and ad6ust t!e in/estment account
to establis! reciprocity ,it! +im*s beginning of t!e period e;uity
accounts(
J Gain on sale of e;uipment %'$$$
&;uipment net %'$$$
0o eliminate gain on intercompany sale of e;uipment and reduce
e;uipment to a cost basis(
Chapter 6 6-15
Solution P6-2 3continued4
g &;uipment net 2'$$$
?perating e@penses 2'$$$
0o eliminate current year*s depreciation of unrealized gain(
! Income from +im 21'$$$
Di/idends +im 1<'$$$
In/estment in +im 12'$$$
0o eliminate income and di/idends from +im and return in/estment
account to its beginning of t!e period balance(
i Retained earnings +im =$'$$$
9apital stoc5 +im .$'$$$
Good,ill .$'$$$
In/estment in +im 1.2'$$$
7oncontrolling interest Fanuary 1 1='$$$
0o eliminate reciprocal in/estment and e;uity amounts' establis!
beginning noncontrolling interest' and enter beginning-of-t!e-
period fair /alue boo5 /alue differential 3good,ill4(
6 7oncontrolling Interest +!are :'$$$
Di/idends +im #'$$$
7oncontrolling Interest #'$$$
0o record 7oncontrolling interest s!are of subsidiary income and
di/idends(
5 Di/idends payable %'$$$
Di/idends recei/able %'$$$
0o eliminate reciprocal recei/ables and payables(
Pal Co!oation an" Sub#i"ia$
9onsolidation Kor5ing Papers
for t!e year ended December 21' #$1$
3in t!ousands4
Pal +im %$
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales - 2$$ - 1$$ b #$ - 2<$
Income from +im 21 ! 21
Gain on e;uipment % f %
9ost of sales 1:$I .$I d : b #$
c . 18%I
?perating e@penses 8$I 1$I g 2 8=I
9onsolidated 7I 1::
7oncontrolling s!are 6 : :I
9ontrolling s!are of 7I - 1:$ - :$ - 1:$
.etained Earnings
Retained earnings Pal - 1.= - 1.=
Retained earnings +im - =$ i =$
9ontrolling s!are of 7I 1:$ :$ 1:$
Di/idends 8$I #$I ! 1<
6 # 8$I
Retained earnings
December 21 - #2= - %$ - #2=
/alance Sheet
9as! - 1$$ - 1= a # - 11%
Accounts recei/able %$ .$ a # 12<
Di/idends recei/able % 5 %
In/entories #$ < d : #:
Land :$ 1. e 2 .#
Cuildings net 12. .$ 1<.
&;uipment net 18. 8$ g 2 f % #1%
In/estment in +im 1.< c .
e 2
! 12
i 1.2
Good,ill i .$ .$
- =1= - #$$ - =<=
Accounts payable - %< - 2$ - 1#<
Di/idends payable 1. 1$ 5 % 18
?t!er liabilities 8= #$ <=
9apital stoc5 2$$ .$ i .$ 2$$
Retained earnings #2= %$ #2=
- =1= - #$$
7oncontrolling interest Fanuary 1 i 1=
Chapter 6 6-17
7oncontrolling interest December 21 6 # 1%
- =<=
I Deduct
Solution P6-3
9ost Fanuary 1' #$$% -#=$'$$$
Implied fair /alue of +tor 3-#=$'$$$ > %$4 -2$$'$$$
Coo5 /alue of +tor 3#:$'$$$4
&@cess of fair /alue o/er boo5 /alue - Good,ill - 8$'$$$
9ost Fanuary 1' #$$% -#=$'$$$
Add: Income from +tor for #$$%
&;uity in income 3-:$'$$$ %$4
- 28'$$$
Less: Dnrealized in/entory profit 31$'$$$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
1'$$$
Income from +tor for #$$% #$'$$$
Less: Di/idends -1$'$$$ %$
3%'$$$4
In/estment balance Fanuary 1' #$1$ #<1'$$$
Add: Income from +tor for #$1$
&;uity in income 3-.$'$$$ %$4
- :.'$$$
Add: Dnrealized profit in beginning in/entory 1$'$$$
Less: Dnrealized profit in ending in/entory 31#'$$$4
mac!inery 3-='$$$>2(. years4 #'$$$
Less: Gain on sale of land 3.'$$$4
Income from +tor for #$1$ :$'$$$
Less: Di/idends 3-#$'$$$ %$4
31<'$$$4
In/estment balance December 21' #$1$ -2$2'$$$
Pall Co!oation an" Sub#i"ia$
for t!e Hear &nded December 21' #$1$
3in t!ousands4
Pall +tor %$
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales - :.$ - 1%$ a =# - .8<
Income from +tor :$ f :$
Gain on land . e .
9ost of sales 3#$$4 31$$4 c 1# a =#
b 1$ 3#2$4
?perating e@pense 31124 3:$4 d # 31.14
9onsolidated 7I 1<=
7oncontrolling s!are ! . 3.4
9ontrolling s!are of 7I - 1<# - .$ - 1<#
.etained Earnings
Retained earnings Pall - #$# - #$#
Retained earnings +tor - 1#$ g 1#$
9ontrolling s!are of 7I 1<# .$ 1<#
Di/idends 31.$4 3#$4 f 1<
! # 31.$4
Retained earnings
December 21 - #2: - 1.$ - #2:
/alance Sheet
9as! - 122 - 1: - 1:=
Accounts recei/able 1<$ 1$$ i 1$ #=$
Di/idends recei/able 1< 6 1<
In/entories 8$ 28 c 1# <:
Land 1$$ 2$ e . 1#.
Cuildings net #<$ <$ 28$
Lac!inery net 22$ 1:$ d : :88
In/estment in +tor 2$2 b 1$
d 8
f ##
g #%=
Good,ill g 8$ 8$
0otal assets -1':$: - :$$ -1'.1#
Accounts payable - #$$ - .$ i 1$ - #:$
Di/idends payable 2$ #$ 6 1< 2#
?t!er liabilities 1:$ 2$ 1=$
9apital stoc5 <$$ 1.$ g 1.$ <$$
Retained earnings #2: 1.$ #2:
0otal e;uities -1':$: - :$$
7oncontrolling interest Fanuary 1 g 22
7oncontrolling interest December 21 ! 2 28
Chapter 6 6-19
-1'.1#
Solution P6-4
Pach Co!oation an" Sub#i"ia$
3in t!ousands4
Parc! +arg %$
Ad6ustments and
&liminations
9onsolidated
Calance +!eet
&ncome Statement
+ales - =$$ - .$$ a .$ -1'1.$
Income from +arg =$ e =$
Gain on land 1$ c 1$
Gain on e;uipment #$ d #$
9ost of sales 2$$I 2$$I b . a .$ ...I
Depreciation e@pense %$I 2.I d . 1#$I
?t!er e@penses #$$I 8.I #8.I
9onsolidated 7I #1$
7oncontrolling s!are ! 1$ 1$I
9ontrolling s!are of 7I - #$$ - 11$ - #$$
.etained Earnings
Retained earnings Parc! - 8$$ - 8$$
Retained earnings +arg - #$$ f #$$
9ontrolling s!are of 7I #$$ 11$ #$$
Di/idends 1$$I .$I e :.
! . 1$$I
Retained earnings
December 21 - =$$ - #8$ - =$$
/alance Sheet
9as! - 2. - 2$ - 8.
Accounts recei/able %$ 11$ g 1$ 1%$
In/entories 1$$ <$ b . 1=.
?t!er current items =$ :$ 11$
Land .$ =$ c 1$ 11$
Cuildings net #$$ 1.$ 2.$
&;uipment net .$$ :$$ d 1. <<.
In/estment in +arg 8.. e #.
f 82$
-1'=$$ - <<$ -1'<<.
Accounts payable - 18$ - .$ g 1$ - #$$
?t!er liabilities 2:$ =$ :1$
9apital stoc5 .$$ .$$ f .$$ .$$
Retained earnings =$$ #8$ =$$
-1'=$$ - <<$
7oncontrolling interest Fanuary 1 f =$
7oncontrolling interest December 21 ! . =.
Chapter 6 6-21
-1'<<.
I Deduct
7?0&: Purc!ase price implies boo5 /alues are e;ual to fair /alues(
Solution P6-%
9ost Fanuary 1' #$$% -#=$'$$$
Add: Income from +tor for #$$%
&;uity in income 3-:$'$$$ %$4
-28'$$$
Less: Patent amortize( 3-8$'$$$>1$ years4@ %$ 3.':$$4
Less: Dnrealized in/entory profit 31$'$$$4
Less: Dnrealized profit on mac!inery
3selling price -2.'$$$ - boo5 /alue -#<'$$$4 3='$$$4
mac!inery 3-='$$$>2(. years (. year4
1'$$$
Income from +tor for #$$% 1:'8$$
Less: Di/idends -1$'$$$ %$
3%'$$$4
In/estment balance Fanuary 1' #$1$ #=.'8$$
Add: Income from +tor for #$1$
&;uity in income 3-.$'$$$ %$4
-:.'$$$
Less: Patent amortization 3%$4 3.':$$4
Add: Dnrealized profit in beginning in/entory 1$'$$$
Less: Dnrealized profit in ending in/entory 31#'$$$4
mac!inery 3-='$$$>2(. years4 #'$$$
Less: Gain on sale of land 3.'$$$4
Income from +tor for #$1$ 2:'8$$
Less: Di/idends 3-#$'$$$ %$4
31<'$$$4
In/estment balance December 21' #$1$ -#%#'#$$
7oncontrolling interest s!are of +tor*s income 31$4 2009 20'0
+tor*s reported net income -:$'$$$ -.$'$$$
Less: Patent amortization 38'$$$4 38'$$$4
+tor*s ad6usted income -2:'$$$ -::'$$$
1$ 7oncontrollling interest s!are - 2':$$ - :':$$
Chapter 6 6-23
Solution P6-% 3continued4
Pall Co!oation an" Sub#i"ia$
for t!e Hear &nded December 21' #$1$
Pall +tor %$
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales - :.$'$$$ - 1%$'$$$ a =#'$$$ - .8<'$$$
Income from +tor 2:'8$$ f 2:'8$$
Gain on land .'$$$ e .'$$$
9ost of sales 3#$$'$$$4 31$$'$$$4 c 1#'$$$ a =#'$$$
b 1$'$$$ 3#2$'$$$4
?perating e@pense 3112'$$$4 3:$'$$$4 ! 8'$$$ d #'$$$ 31.='$$$4
9onsolidated 7I 1<1'$$$
7oncontrolling s!are 5 :':$$ 3:':$$4
9ontrolling s!are of 7I - 1=8'8$$ - .$'$$$ - 1=8'8$$
.etained Earnings
Retained earnings Pall
- #$$'$$$ - #$$'$$$
Retained earnings +tor
- 1#$'$$$ g 1#$'$$$
9ontrolling s!are of 7I 1=8'8$$ .$'$$$ 1=8'8$$
Di/idends 31.$'$$$4 3#$'$$$4 f 1<'$$$
5 #'$$$ 31.$'$$$4
Retained earnings
December 21 - ##8'8$$ - 1.$'$$$ - ##8'8$$
/alance Sheet
9as! - 128':$$ - 1:'$$$ - 1.$':$$
Accounts recei/able 1<$'$$$ 1$$'$$$ i 1$'$$$ #=$'$$$
Di/idends recei/able 1<'$$$ 6 1<'$$$
In/entories 8$'$$$ 28'$$$ c 1#'$$$ <:'$$$
Land 1$$'$$$ 2$'$$$ e .'$$$ 1#.'$$$
Cuildings net
#<$'$$$ <$'$$$ 28$'$$$
Lac!inery net
22$'$$$ 1:$'$$$ d :'$$$ :88'$$$
In/estment in +tor #%#'#$$ b 1$'$$$
d 8'$$$
f 18'8$$
g #%1'8$$
Patents g .:'$$$ ! 8'$$$ :<'$$$
0otal assets -1'2%8'8$$ - :$$'$$$ -1'.$2':$$
Accounts payable - #$$'$$$ - .$'$$$ i 1$'$$$ - #:$'$$$
Di/idends payable 2$'$$$ #$'$$$ 6 1<'$$$ 2#'$$$
?t!er liabilities 1:$'$$$ 2$'$$$ 1=$'$$$
9apital stoc5 <$$'$$$ 1.$'$$$ g 1.$'$$$ <$$'$$$
Retained earnings ##8'8$$ 1.$'$$$ ##8'8$$
0otal e;uities -1'2%8'8$$ - :$$'$$$
7oncontrolling interest Fanuary 1 g 2#':$$
7oncontrolling interest December 21 5 #':$$ 2:'<$$
-1'.$2':$$
Chapter 6 6-25
Solution P6-6
In/estment cost -#%$'$$$
Implied fair /alue of +an5 3-#%$'$$$ > <$4 -28#'.$$
Coo5 /alue of +an5 32$$'$$$4
&@cess fair /alue o/er boo5 /alue - 8#'.$$
- allocated .$ to Patents ,it! a ten-year life 3-21'#.$4
- allocated .$ to In/entory sold in #$$= 3-21'#.$4
.econciliation of income from San":
Pill*s s!are of +an5*s net income 3-.$'$$$ <$4
- :$'$$$
Less: <$ of Patent amortization 3-21'#.$>1$ years4 3#'.$$4
Add: Depreciation on deferred gain on e;uipment
3-1.'$$$>. years4 <$
#':$$
Less: Dnrealized profit on upstream sale of land 3-1$'$$$ <$4
3<'$$$4
Income from +an5 - 21'%$$
.econciliation of in+estment account:
+!are of +an5*s underlying e;uity 3-:$$'$$$ <$4
-2#$'$$$
Add: <$ of Dnamort( patent 3-21'#.$ - 3-2'1#. 2 years44 @ <$
1='.$$
Less: Dnrealized gain on e;uipment
A-1.'$$$ - 3-2'$$$ # years4B <$
3='#$$4
Less: +!are of unrealized gain on land 3<'$$$4
In/estment in +an5 December 21' #$$% -2##'2$$
Noncontrolling interest share:
+an5*s reported income - .$'$$$
Add: Piecemeal recognition of gain on sale of mac!inery 2'$$$
Less: Patent amortization 3 2'1#.4
Less: Dnrealized gain on upstream sale of land 31$'$$$4
Realized income 2%'<=.
7oncontrolling percentage #$
7oncontrolling interest s!are - ='%=.
Pill Co!oation an" Sub#i"ia$
Pill +an5 <$
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales - #1$'$$$ - 12$'$$$ - 2:$'$$$
Income from +an5 21'%$$ c 21'%$$
Gain on land 1$'$$$ b 1$'$$$
Depreciation e@pense :$'$$$I 2$'$$$I a 2'$$$ 8='$$$I
?t!er e@penses 11$'$$$I 8$'$$$I e 2'1#. 1=2'1#.I
9onsolidated 7I %%'<=.
7oncontrolling s!are f ='%=. ='%=.I
9ontrolling s!are of 7I - %1'%$$ - .$'$$$ - %1'%$$
.etained Earnings
Retained earnings Pill - 1:$':$$ - 1:$':$$
Retained earnings +an5 - .$'$$$ d .$'$$$
9ontrolling s!are of 7I %1'%$$ .$'$$$ %1'%$$
Di/idends 2$'$$$I 2$'$$$I
Retained earnings
December 21 - #$#'2$$ - 1$$'$$$ - #$#'2$$
/alance Sheet
9urrent assets - #$$'$$$ - 1=$'$$$ - 2=$'$$$
Plant assets ..$'$$$ 2.$'$$$ a 1.'$$$
b 1$'$$$
<=.'$$$
Accumulated depreciation 1#$'$$$I =$'$$$I a 8'$$$ 1<:'$$$I
In/estment in +an5 2##'2$$ a %'8$$ c 21'%$$
d 2$$'$$$
Patent d #.'$$$ e 2'1#. #1'<=.
- %.#'2$$ - :.$'$$$ -1'$<#'<=.
9urrent liabilities - 1.$'$$$ - .$'$$$ - #$$'$$$
9apital stoc5 8$$'$$$ 2$$'$$$ d 2$$'$$$ 8$$'$$$
Retained earnings #$#'2$$ 1$$'$$$ #$#'2$$
- %.#'2$$ - :.$'$$$
7oncontrolling interest Fanuary 1 a #':$$ d =.'$$$
7oncontrolling interest December 21 f ='%=. <$'.=.
-1'$<#'<=.
I Deduct
Chapter 6 6-27
Solution 6-6 3continued4
a Accumulated depreciation 8'$$$
In/estment in +an5 %'8$$
7oncontrolling interest #':$$
Depreciation e@pense 2'$$$
Plant assets 1.'$$$
0o eliminate unrealized profit on #$$< sale of plant assets(
b Gain on land 1$'$$$
Plant assets 1$'$$$
0o eliminate unrealized gain on #$$% upstream sale of land(
c Income from +an5 21'%$$
In/estment in +an5 21'%$$
0o eliminate income from +an5 against t!e in/estment in +an5(
d 9apital stoc5M+an5 2$$'$$$
Retained earningsM+an5 Fanuary 1 .$'$$$
Patent #.'$$$
In/estment in +an5 2$$'$$$
7oncontrolling interest Fanuary 1 =.'$$$
0o eliminate in/estment in +an5 and stoc5!olders* e;uity of +an5
and enter beginning of t!e period patent(
e ?t!er e@penses 2'1#.
Patent 2'1#.
0o pro/ide for patent amortization(
f 7oncontrolling Interest +!are ='%=.
7oncontrolling Interest ='%=.
0o enter noncontrolling interest s!are of subsidiary income(
Solution P6-&
%reliminar$ com#utations 0amounts in thousands1
In/estment cost for 1$$ of +5ip' April 1' #$$% -1.'$$$
Coo5 /alue ac;uired 3='$$$4
&@cess fair /alue o/er boo5 /alue - <'$$$
&@cess allocated:
Dnder/alued in/entory items 3sold in #$$%4 - .$$
Dnder/alued buildings 3=-year remaining useful life4 2'.$$
Good,ill :'$$$
&@cess fair /alue o/er boo5 /alue - <'$$$
.econciliation of in+estment account balance:
In/estment cost April 1' #$$% -1.'$$$
Add: Increase in +5ip*s retained earnings 2'$$$
Less: &@cess allocated to in/entories sold in #$$% 3.$$4
Less: Depreciation on e@cess allocated to buildings
3-2'.$$>= years4 :(=. years
3#'2=.4
Less: Dnrealized in/entory profits December 21' #$12 31#$4
Less: Dnrealized profit on e;uipment
3-<$$ intercompany profit - -#$$ recognized4 38$$4
In/estment balance December 21' #$12 -1:':$.
.econciliation of in+estment income balance:
+!are of +5ip*s income 31$$4 - #'$$$
Add: Dnrealized profit in beginning in/entory 1$$
Add: Realization of pre/iously deferred profit on land .$$
Less: Dnrealized profit in ending in/entory 31#$4
Less: Depreciation on e@cess allocated to buildings 3.$$4
Less: Dnrealized profit on e;uipment 38$$4
Income from +5ip - 1'2<$
Chapter 6 6-29
Solution P6-& 3continued4
Pot Co!oation an" Sub#i"ia$
for t!e year ended December 21' #$12
3in t!ousands4
Port +5ip
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales -#8'$$$ -11'$$$ b 1'.$$ -2.'.$$
Gain on land =$$ a .$$ 1'#$$
Gain on e;uipment <$$ e <$$
Income from +5ip 1'2<$ g 1'2<$
9ost of sales 1.'$$$I .'$$$I d 1#$ b 1'.$$ 1<'.#$I
c 1$$
Depreciation e@pense 2'=$$I #'$$$I i .$$ f #$$ 8'$$$I
?t!er e@penses :'#<$I #'<$$I ='$<$I
9onsolidated net income
- .'1$$ - #'$$$ - .'1$$
.etained Earnings
Retained earnings
Port -1#'2=. -1#'2=.
Retained earnings
+5ip - :'$$$ ! :'$$$
9onsolidated net income .'1$$ #'$$$ .'1$$
Di/idends 2'$$$I 1'$$$I g 1'$$$ 2'$$$I
Retained earnings
December 21
-1:':=. - .'$$$ -1:':=.
/alance Sheet
9as! - 1'1=$ - .$$ - 1'8=$
Accounts recei/able #'$$$ 1'.$$ 6 2$$ 2'#$$
In/entories .'$$$ #'$$$ d 1#$ 8'<<$
Land :'$$$ 1'$$$ .'$$$
Cuildings net 1.'$$$ :'$$$ ! 1'8#. i .$$ #$'1#.
&;uipment net 1$'$$$ :'$$$ f #$$ e <$$ 12':$$
In/estment in +5ip 1:':$. a .$$ g 2<$
c 1$$ ! 1:'8#.
Good,ill ! :'$$$ :'$$$
-.1'.=. -12'$$$ -.:'#=.
Accounts payable - :'1$$ - 1'$$$ 6 2$$ - :'<$$
?t!er liabilities ='$$$ #'$$$ %'$$$
9apital stoc5 #8'$$$ .'$$$ ! .'$$$ #8'$$$
Retained earnings 1:':=. .'$$$ 1:':=.
-.1'.=. -12'$$$ -.:'#=.
I Deduct
Solution P6-'
In/estment cost Fanuary 1' #$$% -128'$$$
Implied fair /alue of +ic 3-128'$$$ > <$4 -1=$'$$$
Coo5 /alue of +ic 31=$'$$$4
&@cess fair /alue o/er boo5 /alue $
Anal$sis of in+estment in Sic account on %ic*s boo"s:
In/estment cost -128'$$$
+!are of +ic*s #$$% reported income 3-2$'$$$ <$4
#:'$$$
In/estment in +ic as reported on Pic*s boo5s
at December 21' #$$% -18$'$$$
+!are of +ic*s #$1$ reported income 3-:$'$$$ <$4
2#'$$$
In/estment in +ic as reported on Pic*s boo5s
at December 21' #$1$ -1%#'$$$
Note that %ic has not eliminated intercom#an$ #rofits from
its in+estment income from Sic for either 2009 or 20'02
In/estment balance as reported on Pic*s boo5s December 21' #$$% -18$'$$$
Gain on mac!inery 3-.'$$$ <$4
3:'$$$4
Piecemeal recognition of gain 3-1'$$$ <$4
<$$
In/estment account balance under t!e e;uity met!od
at December 21' #$$% -1.8'<$$
+!are of +ic*s #$1$ reported income 2#'$$$
Piecemeal recognition of gain in #$1$ 3-1'$$$ <$4
<$$
In/estment account balance under t!e e;uity met!od
at December 21' #$1$ -1<%'8$$
Noncontrolling interest share for 2009:
+ic*s reported net income - 2$'$$$
Less: Gain on sale of mac!inery 3.'$$$4
Add: Piecemeal recognition of gain on mac!inery t!roug!
Depreciation 1'$$$
+ic*s realized income - #8'$$$
7oncontrolling interest percentage #$
7oncontrolling interest s!are for #$$% - .'#$$
Noncontrolling interest share for 20'0:
+ic*s reported net income - :$'$$$
Add: Piecemeal recognition of unrealized gain on mac!inery
t!roug! depreciation 1'$$$
+ic*s realized income :1'$$$
7oncontrolling interest percentage #$
7oncontrolling interest s!are for #$1$ - <'#$$
Chapter 6 6-31
Solution P6-' 3continued4
Pic Co!oation an" Sub#i"ia$
Pic +ic <$
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales - :$$'$$$ - #$$'$$$ - 8$$'$$$
Income from +ic #:'$$$ c #:'$$$
Gain on plant assets .'$$$ a .'$$$
9ost of sales #.$'$$$I 12$'$$$I 2<$'$$$I
Depreciation e@pense .$'$$$I #.'$$$I b 1'$$$ =:'$$$I
?t!er e@penses 8$'$$$I #$'$$$I <$'$$$I
9onsolidated 7I 88'$$$
7oncontrolling s!are e .'#$$ .'#$$I
9ontrolling s!are of 7I - 8:'$$$ - 2$'$$$ - 8$'<$$
.etained Earnings
Retained earnings Pic - 1#8'$$$ - 1#8'$$$
Retained earnings +ic - =$'$$$ d =$'$$$
9ontrolling s!are of 7I 8:'$$$ 2$'$$$ 8$'<$$
Retained earnings
December 21 - 1%$'$$$ - 1$$'$$$ - 1<8'<$$
/alance Sheet
9as! and e;ui/alents - .$'$$$ - 2$'$$$ - <$'$$$
9urrent assets 12$'$$$ =$'$$$ #$$'$$$
Plant and e;uipment :$$'$$$ #$$'$$$ a .'$$$ .%.'$$$
Accumulated depreciation 1.$'$$$I .$'$$$I b 1'$$$ 1%%'$$$I
In/estment in +ic 18$'$$$ c #:'$$$
d 128'$$$
- .%$'$$$ - #.$'$$$ - 8=8'$$$
Liabilities - 1$$'$$$ - .$'$$$ - 1.$'$$$
9apital stoc5 2$$'$$$ 1$$'$$$ d 1$$'$$$ 2$$'$$$
Retained earnings 1%$'$$$ 1$$'$$$ 1<8'<$$
- .%$'$$$ - #.$'$$$
7oncontrolling interest Fanuary 1 d 2:'$$$
7oncontrolling interest December 21 e .'#$$ 2%'#$$
- 8=8'$$$
I Deduct
Solution P6-' 3continued4
Pic Co!oation an" Sub#i"ia$
for t!e year ended December 21' #$1$
Pic +ic <$
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales - :2$'$$$ - #2.'$$$ - 88.'$$$
Income from +ic 2#'$$$ b 2#'$$$
9ost of sales #8$'$$$I 1:$'$$$I :$$'$$$I
Depreciation e@pense .$'$$$I #.'$$$I a 1'$$$ =:'$$$I
?t!er e@penses ..'$$$I 2$'$$$I <.'$$$I
9onsolidated 7I 1$8'$$$
7oncontrolling s!are d <'#$$ <'#$$I
9ontrolling s!are of 7I - %='$$$ - :$'$$$ - %='<$$
.etained Earnings
Retained earnings Pic - 1%$'$$$ a 2'#$$ - 1<8'<$$
Retained earnings +ic - 1$$'$$$ c 1$$'$$$
9ontrolling s!are of 7I %='$$$ :$'$$$ %='<$$
Retained earnings
December 21 - #<='$$$ - 1:$'$$$ - #<:'8$$
/alance Sheet
9as! and e;ui/alent - 82'$$$ - 2$'$$$ - %2'$$$
9urrent assets 1:$'$$$ <$'$$$ ##$'$$$
Plant and e;uipment ::$'$$$ #:.'$$$ a .'$$$ 8<$'$$$
Accumulated depreciation #$$'$$$I =.'$$$I a #'$$$ #=2'$$$I
In/estment in +ic 1%#'$$$ b 2#'$$$
c 18$'$$$
- 82.'$$$ - #<$'$$$ - =#$'$$$
Liabilities - :<'$$$ - :$'$$$ - <<'$$$
9apital stoc5 2$$'$$$ 1$$'$$$ c 1$$'$$$ 2$$'$$$
Retained earnings #<='$$$ 1:$'$$$ #<:'8$$
- 82.'$$$ - #<$'$$$
7oncontrolling interest Fanuary 1 a <$$ c :$'$$$
7oncontrolling interest December 21 d <'#$$ :=':$$
- =#$'$$$
I Deduct
Chapter 6 6-33
Solution P6-(
In/estment cost Fanuary 1' #$$% -1$<'$$$
Implied fair /alue of +pin 3-1$<'$$$ > <$4 -12.'$$$
Coo5 /alue of +pin 311$'$$$4
&@cess fair /alue o/er boo5 /alue allocated to patent - #.'$$$
Patent amortization: -#.'$$$>1$ years - #'.$$
.econciliation of in+estment income:
+pin*s reported income - .$'$$$
Less: Patent amortization 3#'.$$4
Less: Dnrealized profit in ending in/entory 31'$$$4
Add: Dnrealized profit in beginning in/entory #'$$$
Add: Piecemeal recognition of deferred profit on plant
assets 3-#$'$$$ > . years4 :'$$$
+pin*s ad6usted income - .#'.$$
Par5*s <$ controlling s!are - :#'$$$
#$ 7oncontrolling interest s!are - 1$'.$$
Solution P6-( 3continued4
Pa- Co!oation an" Sub#i"ia$
for t!e year ended December 21' #$1#
Par5 +pin <$
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales - 8.$'$$$ - 1#$'$$$ a <'$$$ - =8#'$$$
Income from +pin :#'$$$ e :#'$$$
9ost of sales 2%$'$$$I :$'$$$I b 1'$$$ a <'$$$ :#1'$$$I
c #'$$$
?t!er e@penses 1=$'$$$I 2$'$$$I g #'.$$ d :'$$$ 1%<'.$$I
9onsolidated 7I 1:#'.$$
7oncontrolling s!are i 1$'.$$ 1$'.$$I
9ontrolling s!are of 7I - 12#'$$$ - .$'$$$ - 12#'$$$
.etained Earnings
Retained earnings Par5 - %.'8$$ - %.'8$$
Retained earnings +pin - #$'$$$ f #$'$$$
9ontrolling s!are of 7I 12#'$$$ .$'$$$ 12#'$$$
Di/idends =$'$$$I #$'$$$I e 18'$$$
i :'$$$ =$'$$$I
Retained earnings
December 21 - 1.='8$$ - .$'$$$ - 1.='8$$
/alance Sheet
9as! - .<'$$$ - #$'$$$ - =<'$$$
Accounts recei/able :$'$$$ #$'$$$ ! :'$$$ .8'$$$
In/entories 8$'$$$ 2.'$$$ b 1'$$$ %:'$$$
Plant assets #%$'$$$ #$.'$$$ d #$'$$$ :=.'$$$
Accumulated depreciation =$'$$$I 1$$'$$$I d <'$$$ 18#'$$$I
In/estment in +pin 1#1'8$$ c 1'8$$ e #8'$$$
d 1#'<$$ f 11$'$$$
Patent f 1='.$$ g #'.$$ 1.'$$$
- :%%'8$$ - 1<$'$$$ - ..8'$$$
Accounts payable - :#'$$$ - 2$'$$$ ! :'$$$ - 8<'$$$
9apital stoc5 2$$'$$$ 1$$'$$$ f 1$$'$$$ 2$$'$$$
Retained earnings 1.='8$$ .$'$$$ 1.='8$$
- :%%'8$$ - 1<$'$$$
7oncontrolling interest Fanuary 1 c :$$ f #='.$$
d 2'#$$
7oncontrolling interest December 21 i 8'.$$ 2$':$$
- ..8'$$$
I Deduct
Chapter 6 6-35
Solution P6-1)
In/estment cost -#%$'$$$
Implied fair /alue of +an5 3-#%$'$$$ > <$4 -28#'.$$
Coo5 /alue of +an5 32$$'$$$4
&@cess allocated:
In/entories 3.$4- +old in #$$= - 21'#.$
Good,ill 21'#.$
.econciliation of income from San":
+an5*s reporte:d net income - .$'$$$
Add: Depreciation on deferred gain on e;uipment
3-1.'$$$>. years 2'$$$
Less: Dnrealized profit on upstream sale of land 31$'$$$4
+an5*s ad6usted and realized income - :2'$$$
Pill*s <$ controlling s!are - 2:':$$
#$ 7oncontrolling interest s!are - <'8$$
.econciliation of in+estment account:
+!are of +an5*s underlying e;uity 3-:$$'$$$ <$4
-2#$'$$$
Add: <$ of unamortized good,ill #.'$$$
Less: Dnrealized gain on e;uipment
A-1.'$$$ - 3-2'$$$ # years4B <$
3='#$$4
Less: +!are of unrealized gain on land 3<'$$$4
In/estment in +an5 December 21' #$$% -2#%'<$$
Solution P6-1) 3continued4
Pill Co!oation an" Sub#i"ia$
Pill +an5 <$
Ad6ustments and
&liminations
9onsolidated
+tatements
&ncome Statement
+ales - #1$'$$$ - 12$'$$$ - 2:$'$$$
Income from +an5 2:':$$ c 2:':$$
Gain on land 1$'$$$ b 1$'$$$
Depreciation e@pense :$'$$$I 2$'$$$I a 2'$$$ 8='$$$I
?t!er e@penses 11$'$$$I 8$'$$$I 1=$'$$$I
9onsolidated 7I 1$2'$$$
7oncontrolling s!are e <'8$$ <'8$$I
9ontrolling s!are of 7I - %:':$$ - .$'$$$ - %:':$$
.etained Earnings
Retained earnings Pill - 1:.':$$ - 1:.':$$
Retained earnings +an5 - .$'$$$ d .$'$$$
9onsolidated s!are of 7I %:':$$ .$'$$$ %:':$$
Di/idends 2$'$$$I 2$'$$$I
Retained earnings
December 21 - #$%'<$$ - 1$$'$$$ - #$%'<$$
/alance Sheet
9urrent assets - #$$'$$$ - 1=$'$$$ - 2=$'$$$
Plant assets ..$'$$$ 2.$'$$$ a 1.'$$$
b 1$'$$$
<=.'$$$
Accumulated depreciation 1#$'$$$I =$'$$$I a 8'$$$ 1<:'$$$I
In/estment in +an5 2#%'<$$ a %'8$$ c 2:':$$
d 2$.'$$$
Good,ill d 21'#.$ 21'#.$
- %.%'<$$ - :.$'$$$ -1'$%#'#.$
9urrent liabilities - 1.$'$$$ - .$'$$$ - #$$'$$$
9apital stoc5 8$$'$$$ 2$$'$$$ d 2$$'$$$ 8$$'$$$
Retained earnings #$%'<$$ 1$$'$$$ #$%'<$$
- %.%'<$$ - :.$'$$$
7oncontrolling interest Fanuary 1 a #':$$ d =8'#.$
7oncontrolling interest December 21 e <'8$$ <#':.$
-1'$%#'#.$
I Deduct
Chapter 6 6-37
Solution 6-1) 3continued4
a Accumulated depreciation 8'$$$
In/estment in +an5 %'8$$
7oncontrolling interest #':$$
Depreciation e@pense 2'$$$
Plant assets 1.'$$$
0o eliminate unrealized profit on #$$< sale of plant assets(
b Gain on land 1$'$$$
Plant assets 1$'$$$
0o eliminate unrealized gain on #$$% upstream sale of land(
c Income from +an5 2:':$$
In/estment in +an5 2:':$$
0o eliminate income from +an5 against t!e in/estment in +an5(
d 9apital stoc5M+an5 2$$'$$$
Retained earningsE+an5 Fanuary 1 .$'$$$
Good,ill 21'#.$
In/estment in +an5 2$.'$$$
7oncontrolling interest Fanuary 1 =8'#.$
0o eliminate in/estment in +an5 and stoc5!olders* e;uity of +an5
and enter beginning of t!e period good,ill(
e 7oncontrolling Interest +!are <'8$$
7oncontrolling Interest <'8$$
0o enter noncontrolling interest s!are of subsidiary income(
Solution P6-11
1 0!e %$ percent o,ners!ip interest can be determined in se/eral ,ays(
a( -12'.$$ di/idends recei/ed -1.'$$$ di/idends paid G %$
b( -2='#$$ noncontrolling interest 3-2:$'$$$ +ac!*s stoc5!olders*
e;uity + -2#'$$$ unamortized patent4 G 1$
c( 3-:'8$$ noncontrolling interest s!are 3-.$'$$$ net income of
+ac! less -:'$$$ patent amortization4 G 1$
2 Hes( Pape*s net income of -#$$':$$ e;uals t!e controlling interest s!are
consolidated net income of -#$$':$$( Pape*s retained earnings of
-2.$':$$ e;uals consolidated retained earnings(
3 Hes(
9ombined sales -<$$'$$$
9onsolidated sales =18'$$$
Intercompany sales - <:'$$$
4 Hes(
9ombined in/entories -1.$'$$$
9onsolidated in/entories 128'$$$
Dnrealized in/entory profits - 1:'$$$
% .econciliation of combined and consolidated cost of sales
9ombined cost of sales 3gi/en4 -2.$'$$$
Less: Intercompany sales 3see 2 abo/e4 3<:'$$$4
Add: Dnrealized profits in ending in/entory 3see : abo/e4 1:'$$$
Less: Dnrealized profits in beginning in/entory 3sol/e for
t!is4 3.'$$$4
9onsolidated cost of sales 3gi/en4 -#=.'$$$
6 .econciliation of combined and consolidated e3ui#ment net
9ombined e;uipment net of -.8.'$$$ less consolidated e;uipment net
of -..$'$$$ s!o,s a difference of -1.'$$$( 0!e ,or5ing paper entry to
eliminate t!e effects of an intercompany sale of e;uipment must !a/e
been:
Gain on e;uipment #$'$$$
Depreciation e@pense .'$$$
&;uipment net 1.'$$$
& 4es2 &ntercom#an$ recei+ables and #a$ables are as follo!s:
9ombined 9onsolidated Intercompany
Accounts recei/able - <$'$$$ - =$'$$$ -1$'$$$
Accounts payable 11$'$$$ 1$$'$$$ 1$'$$$
Di/idends recei/able 12'.$$ --- 12'.$$
Di/idends payable 1.'$$$ 1'.$$ 12'.$$
' .econciliation of noncontrolling interest:
7oncontrolling interest Fanuary 1' #$1$ 3-2#$'$$$ 1$4
- 2#'$$$
1$ of unamortized patent at Fanuary 1 2'8$$
Add: 7oncontrolling interest s!are for #$1$ :'8$$
Less: 7oncontrolling interest di/idends 3-2$'$$$ 1$4
32'$$$4
7oncontrolling interest December 21' #$1$ - 2='#$$
( %atent at ,ecember -'( 2009
Patent December 21' #$1$ - 2#'$$$
Add: Patent amortization 3-1:1'$$$ consolidated ot!er
e@penses - -12='$$$ combined ot!er e@penses4 :'$$$
Patent December 21' #$$% - 28'$$$
1) Anal$sis of in+estment in Sach account
Coo5 /alue 3+ac!*s stoc5!olders* e;uity -2:$'$$$ %$4
-2$8'$$$
Less: Dnrealized profit in ending in/entory 31:'$$$4
Chapter 6 6-39
Less: Dnrealized profit in e;uipment 31.'$$$4
Add: %$ of Dnamortized patent #<'<$$
In/estment in +ac! December 21' #$1$ -2$.'<$$

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Chapter 6

INTERCOMPANY PROFIT TRANSACTIONS PLANT ASSETS

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