HER EXAMPLE

Parent

sub

sales
COGS

1000
-750
250

sales
COGS

200
-160
40

P sales: 1000 + 75 =
COGS: 750 + 50 =

Intercompany transaction: P sells inventory to

Price
75
COGS
-50
290
25

1075
-800
275 this is overstated by $25

Consolidated statement
Sales
1075+200-75
COGS
800+160-75+25

1200
-910
290

if reducing inventory, it must be credited

for the next year since ending inventory goes to opening inventory, the overstatement reverses
itself so if we add it to this year we deduct it from next year
this example was a 'downstream' transaction,; if the sub sold to the parent it would be an 'upstream'
transaction and it would need to be split to NCI and not be 100% as it was now

on: P sells inventory to S

must be credited

tatement reverses

would be an 'upstream'

Problem 6-12
Runner (P)

A.D. = 280,000
70%

Road
A.D. Schedule
Inventory
land
equipment
patents
GW

Jan 1 yr 1
yr 1
yr 2
yr 3
100,000 100,000
50,000
60,000
12,000
12,000
40,000
5,000
5,000
30,000
280,000 117,000
17000

Intercompany revenue/expenses
Intercompany sales
intercompany rentals

420,000
35,000

Intercompany profit schedule

before tax
tax
after tax
open (up)
75,000
30,000
45,000
Close (up)
Income Statement
Sales
rental
materials
WIP
inter. Invest
benefits
interest exp.
depreiation
amortization
rental
GW impairment
inome tax expense

40,000

24,000

5,680,000 (4000+2100-420)
35,000 (0+70-35)
-2,380,000 (2000+800-420)
10,000 (45-20+40-75)
0
-1,030,000 (550+480)
-390,000 (250+140)
-662,000 (405+245+12)
-30,000 (0+25+5)
0 (35-35)
-3,000
-514,000 (300+200-16-30)

consolidated net income

Attributed to:
parent NI

16,000

716,000

625,700

yr 4

12,000
5,000

12,000
5,000

17000

17,000

NCI

90,300
716,000
716,000

Sub NI
A.D.
less close (up)
plus open (up)

300,000
-20,000
-24,000
45,000
301,000 x30% = 90,300

yr 5

Dec 31 yr 5
0
50,000
12,000
0
5,000
15,000
3000
27,000
20,000
92,000
0

Problem 6-10
Evans
80%
Falcon

Intercompany revenue/expenses
Intercompany sales
office rent
notes payable
dividends

267,000
33,600 (2800*12)
18,000 (360K*5%
32,000 (40K * 80%)

Intercompany profit schedule

before tax
open (down)
open (up)

4250
3,300
7,550

after tax
1700
2550
1,320
1,980
3,020
4,530

open (down)
Close (up)

5750
900
6,650

2300
360
2,660

Income Statement
Sales
divident revenue
rental revenues
interest revenues
inter. Invest
raw materials + FG
changes in inv
other expenses
other expenses
inome tax expense

tax

783,000 (450+600-267)
0 (32-32)
0 (33.6-33.6)
0 (18-18)
0
-329,000 (268+328-267)
-44,100 (20+25+6650-7550)
-216,400 (104+146+33.6)
-12,000 (30-18)
-75,560 (31.7+73.5-2.66+3.02)

consolidated net income

NCI Split
parent NI
less divs
less ending (down)
plus opening (down)

3450
540
3,990

105,940

61,900
-32,000
-3,450
2,550
29,000

Sub NI
A.D.
less close (up)
plus open (up)

Attributed to:
parent
NCI

75,500
0
-540
1,980
76,940
x80%

61,552
90,552

90,522
15,388 (76940*20%)
105,910

consolidated opening retained earnings

Opening R/E - parent
less opening aftertax inv (down)

632,000
-2550
629,450

R/E opening - subsidiary

at acquisition
less opening aftertax inv (up)

348,000
0
-1,980
346,020
x80%

276,816
906,266

21,250/1.25=17,000
21,250-17,000 = 4250
11,000*0.30 = 3300

Prblem 6-13
Jan 1 yr. 2
cost
implied
BV
A.D.

Post
70%
Sage
A.D. Schedule
Inventory
equipment
GW

Jan 1 yr 2
yr 1
yr 2
yr 3
-12000
-12000
-18000
-3600
-3600
55,000
2600
460
25,000
-13000
-3140

Intercompany revenue/expenses
management fee
26,500
sales
215,000 (125+90)
interest on note
3,300 (55K * 12% * 1/2)
Intercompany rec/pay
note payable

55,000

Intercompany profit schedule

before tax
tax
after tax
open inventory (up)
3,500
1,400
2,100
close inv (up)
close inv (down)
Land (up)
Income Statement
Sales
management fee rev
interest revenues
Gain on sale
COGS
interest
other expenses
GW impairment
inome tax expense
consolidated net income

7000
4500

2800
1800

4200
2700

30,000

12,000

18,000

925,000 (900+240-215)
0 (26.5-26.5)
3,500 (6.5-3.5)
0 (30-30)
-495,000 (540+162-215+11.5-3.5)
-16,700 (20-3.3)
-224,700 (180+74.8-26.5-3.6)
-1,530 (30-18)
-80,800 (80+16-4.6+1.4-12)
109,770

-3600
1530
-2070

Attributed to: (equity method)

parent
NCI

Balance sheet
land
plant and equip
accumulated depn
investment
inventory
note recievable
A/R
Deferred tax
Cash
Goodwill
Total assets

107,979
1,791 [30% (24,000+2070-4200+2100-18,000)
109,770

164,000 (175+19-30)
575,000 (520+65-10)
-236,400 (229.4+17-10)
0
49,500 (34+27-11.5)
0 (55-55)
26,300 (17.2+9.1)
16,600 (30+11.5 * 40%)
25,100 (12.2+12.9)
50,410
670,510

shares
R/E
notes payable
A/P
NCI
lease agreement

63,000
90,000
-65,000
25,000

Dec31 yr 3
0
-7200
50,410
43,210

100,000
265,707
0 (55-55)
252,000 (212+40)
45,603 (30% * 50+81+43.210+18-4.2)
7,200
670,510