Intercompany Transfers of Services and Noncurrent Assets: Answer

Chapter 7
Intercompany Transfers of Services and Noncurrent Assets
Summary
1. How is the gain on an intra-entity transfer of a depreciable asset realized? Answer: The gain
on an intra-entity transfer of a depreciable asset may be realized in one of two ways: (1)
through the use of the asset in operations or (2) through the sale of the asset to an independent
third party (nonaffiliates).
2. How does a gain on an intra-entity sale of equipment affect the calculation of a non-
controlling interest? Answer: If the equipment is sold by the parent to the subsidiary
downstream), the sale of the equipment does not affect the calculation of the non-controlling
interest's share of the subsidiary's net income. When the sale of equipment is upstream, the
gain on the sale must be subtracted from the subsidiary's income to obtain realized income (RI),
and this elimination may be allocated between the controlling interest and non-controlling
interest share of the subsidiary’s earnings.
3. What is the purpose of the adjustments to depreciation expense within the consolidation
process when there has been an intra-entity transfer of a depreciable asset? Answer:
Depreciable assets are often transferred between the members of a business combination at
amounts in excess of book value. The buyer will then compute depreciation expense based on
this inflated transfer price rather than on an historical cost basis. From the perspective of the
business combination, depreciation should be calculated solely on historical cost figures. Thus,
within the consolidation process for each period, adjustment of the depreciation (recorded by
the buyer) is necessary to reduce the expense to a cost-based figure (piecemeal removal of
unrealized gain/loss).
4. Intercorporate transfer of services (service fees vs service revenues) need to be eliminated to
avoid overstating revenues and services. But, eliminations of service fees vs service revenues
would not affect consolidated income
Examples
1. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2013, Stroban
sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to
Hambly for $145,000. Stroban's reported net income for 2013 was $119,000.
The non-controlling interest's share of Stroban Co.'s net income:
Stroban Co.’s 2013 net income as reported $ 119,000
Unrealized gain on land sale ($145,000 – $82,000) ( 63,000)
Stroban Co.’s 2013 realized income $ 56,000
Non-controlling interest percentage 20%
Non-controlling interest’s share of Stroban Co.’s net income $ 11,200
2. Parent Corporation purchased land from S1 Corporation for $220,000 on December 26,
20X8. This purchase followed a series of transactions between P-controlled subsidiaries. On
February 15, 20X8, S3 Corporation purchased the land from a nonaffiliate for $160,000. It
sold the land to S2 Company for $145,000 on October 19, 20X8, and S2 sold the land to S1
for $197,000 on November 27, 20X8. Parent has control of the following companies:

Parent reported income from its separate operations of $200,000 for 20X8.
Based on the preceding information,
A. The amount that the land should be reported in the consolidated balance sheet as of
December 31, 20X8: $160,000
B. The amount of gain or loss on sale of land that should be reported in the consolidated
income statement for 20X8: $0
C. the amount of income assigned to the controlling shareholders in the consolidated
income statement for 20X8: $369,400=200,000+(100,000+15,000)*80%+(70,000-
52,000)*70%+(95,000-23,000)*90% = 200,000+92,000+12,600+64,800
3. ABC Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold
the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting
shares.
A. the worksheet consolidating entry to remove the effects of the intercompany sale of
land in preparing the consolidated financial statements for 20X8:
Gain on Sale of Land 20,000
Land 20,000
B. the worksheet consolidating entry to remove the effects of the intercompany sale of
land in preparing the consolidated financial statements for 20X9:
Investment in XYZ
20,000
Land 20,000
C. if XYZ Corporation had initially purchased the land for $50,000 and then sold it to ABC
on July 15, 20X8, for $70,000, the worksheet consolidating entry will be made on
December 31, 20X9:
Investment in XYZ
16,000
NCI in NA of XYZ 4,000
Land 20,000
4. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on
January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for
equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is
expected to have a 10-year useful life and no salvage value. Both companies depreciate
equipment on a straight-line basis.
A. in the preparation of the 20X8 consolidated financial statements, equipment will be

debited for $10,000
B. the gain on sale of the equipment recorded by Mortar for 20X8 is: $150,000=390,000-
(400,000-40,000*4)
C. in the preparation of the 20X9 consolidated financial statements, equipment will be
debited for $10,000
D. in the preparation of the 20X9 consolidated income statements, depreciation expense
will be credited for $25,000 =65,000-40,000
E. in the preparation of consolidation entries related to the equipment transfer for the
20X9 consolidated financial statements, the net effect on accumulated depreciation will
be: an increase of (credited for) $135,000 = 40,000*5 – 65,000
5. (Intercompany transfer of services) Big Corporation receives management consulting services

from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its
services. For the year 20X8, Small billed Big $140,000 for such services and collected all but
$7,900 by year-end. Small's labor cost and other associated costs for the employees providing
services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of
income from its own separate operations for 20X8, and Small reported net income of $695,000.
A. the amount of consolidated net income that should be reported in 20X8: CNI =
$3,262,000 = 2,567,000+695,000
B. the amount of income that should be assigned to the noncontrolling shareholders in the
consolidated income statement for 20X8: NCI in CNI = $55,600 = 8%*695,000
C. the amount of receivable/payable that should be eliminated in the 20X8 consolidated
financial statements: $7,900
6. Pie Company acquired 75 percent of Strawberry Company's stock at the underlying book value
on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25
percent of the book value of Strawberry Company. Strawberry Company reported shares
outstanding of $350,000 and retained earnings of $100,000. During 20X8, Strawberry Company
reported net income of $60,000 and paid dividends of $3,000. In 20X9, Strawberry Company
reported net income of $90,000 and paid dividends of $15,000. The following transactions
occurred between Pie Company and Strawberry Company in 20X8 and 20X9:
Strawberry Co. sold equipment to Pie Co. for a $42,000 gain on December 31, 20X8. Strawberry
Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000
on December 31, 20X8. At the time of the purchase, Pie Co. estimated that the equipment still
had a seven-year remaining useful life.
Pie Co. sold land costing $90,000 to Strawberry Co. on June 28, 20X9, for $110,000.
Required:
Give all consolidating entries needed to prepare a consolidation worksheet for 20X9
assuming that Pie Co. uses the fully adjusted equity method to account for its investment in
Strawberry Company.
X8
Investment in S 45
Income from S 45
S’ income accrual
Cash 2.25
Investment 2.25
Dividend
Inc from S (42*.75) 31.5

Investment 31.5
Gain from equip sale
S’ RI = 60-42 = 18
X9
Investment in S 67.5
Income from S 67.5
S’ income accrual
Cash 11.25
Investment 11.25
Dividend
Invest (42/7*.75) 4.5
Income from S 4.5
Gain removal
S’ RI = 90+6 = 96
Income from S 20
Investment 20
Defer Unrealized Gain from land sale
Answer:
Book Value Calculations:
NCI Pie Co. Common Retained

25% + 75% = Stock + Earnings
Beginning Book Value 126,750 380,250 350,000 157,000
+ Net Income 22,500 67,500 90,000
- Dividends (3,750) (11,250) (15,000)
Ending Book Value 145,500 436,500 350,000 232,000

Deferred Gain Calculations:
Pie Co.'s
Total = share + NCI's share
Downstream Land (20,000) (20,000)
Extra Depreciation 6,000 4,500 1,500
Total (14,000) (15,500) 1,500

Basic consolidation entry:

Common Stock 350,000 ← Common Stock
Retained Earnings 157,000 ← Beginning RE
Income from Strawberry Co. 52,000 ← Pie Co's % of NI − Deferred Land Gain + Extra Depr.
NCI in NI of Strawberry Co. 24,000 ← NCI share of reported NI + Extra Depr.
Dividends declared 15,000 ← 100% of sub’s dividends declared
Investment in Strawberry Co. 421,000 ← Net BV − Deferred Land Gain + Extra Depr.
NCI in NA of Strawberry Co. 147,000 ← NCI share of net book value + Extra Depr.
Eliminate gain on purchase of land

Land 20,000
Accumulated
Equipment Depreciation
Pie Co. 70,000 Actual 10,000
70,000 6,000 112,000
Strawberry Co. 140,000 As if 116,000
Eliminate gain on equipment sale and correct asset basis:

Investment in Strawberry Co. 31,500
NCI in NA of Strawberry Co. 10,500
Equipment 70,000
Accumulated Depreciation 112,000

Depreciation Expense 6,000
7. Consolidation Entries for Intercompany Transfers
Grand Delivery Service acquired at book value 80 percent of the voting shares of Acme Real Estate
Company. On that date, the fair value of the noncontrolling interest was equal to 20 percent of Acme’s
book value. Acme Real Estate reported common stock of $300,000 and retained earnings of $100,000.
During 20X3 Grand Delivery provided courier services for Acme Real Estate in the amount of $15,000.
Also during 20X3, Acme Real Estate purchased land for $1,000. It sold the land to Grand Delivery
Service for $26,000 so that Grand Delivery could build a new transportation center. Grand Delivery
reported $65,000 of operating income from its delivery operations in 20X3. Acme Real Estate reported
net income of $40,000 and paid dividends of $10,000 in 20X3.

Required:
a Compute consolidated net income for 20X3.
.

b Prepare all journal entries recorded by Grand Delivery Service related to its investment in Acme Real
. Estate assuming Grand uses the fully adjusted equity method in accounting for the investment. (If no
entry is required for a transaction/event, select "No journal entry required" in the first account
field.)

c. Prepare all consolidation entries required in preparing a consolidation worksheet as of December 31,
20X3. (If no entry is required for a transaction/event, select "No journal entry required" in the
first account field.)
Answers:
a. Operating income of Grand Delivery $65,000

Net income of Acme Real Estate Company $40,000
Less: Unrealized profit on land sale (25,000)
Acme’s realized net income 15,000
Consolidated net income $80,000
b. Journal entries recorded by Grand Delivery:
Cash 8,000
Investment in Acme Real Estate 8,000
Record dividends from Acme Real Estate: $10,000 x 0.80

Income from Acme Real Estate 32,000
Record equity-method income: $40,000 x 0.80
Income from Acme Real Estate 20,000

Eliminate unrealized gain on sale
c. Book Value
Calculations:
Grand Commo
NCI + Delivery = n + Retained
20% 80% Stock Earnings
Beginning book
value 80,000 320,000 300,000 100,000
+ Net Income 8,000 32,000 40,000
- Dividends (2,000) (8,000) (10,000)
Ending book value 86,000 344,000 300,000 130,000

Adjustment to Basic Consolidation Entry:
Grand

NCI Delivery
Net Income 8,000 32,000
- Gain on Land (Up) (5,000) (20,000)
Income to be eliminated 3,000 12,000
-------------------------------------------------------------------------------------
Ending Book Value 86,000 344,000
- Gain on Land (Up) (5,000) (20,000)
Adjusted Book Value 81,000 324,000
108,000 242,000
Basic Consolidation Entry

Retained Earnings 100,000 ← Beginning balance in retained earnings
Income from Acme Real Estate 12,000 ← Grand’s share of NI with Adjustments
NCI in NI of Acme Real Estate 3,000 ← NCI share of NI with Adjustments
Dividends Declared 10,000 ← 100% of Acme’s dividends declared
324,00
Investment in Acme Real Estate 0 ← Grand’s share of BV with Adjustments
NCI in NA of Acme Real Estate 81,000 ← NCI share of BV with Adjustments
Eliminate Gain on Purchase of
Land
Land 25,000
Eliminate Courier services

Service Revenue 15,000
Delivery Expense 15,000
8.
Using the Consolidation Entry to Determine Account Balances
Pastel Corporation acquired a controlling interest in Somber Corporation in 20X5

for an amount equal to its underlying book value. At the date of acquisition, the
fair value of the noncontrolling interest was equal to its proportionate share of
the book value of Somber Corporation. In preparing a consolidated balance
sheet worksheet at January 1, 20X9, Pastel's controller included the following
consolidation entry:
Equipment 53,5
00
Investment in Somber 9,45

Corp. 0
NCI in NA of Somber 1,05

0
Accumulated 64,0
Depreciation 00
A note at the bottom of the consolidation worksheet at January 1, 20X9,

indicates the equipment was purchased from a nonaffiliate on January 1, 20X1,
for $120,000 and was sold to an affiliate on December 31, 20X8. The equipment
is being depreciated on a 15-year straight-line basis. Somber reported stock
outstanding of $300,000 and retained earnings of $200,000 at January 1, 20X9.
Somber reported net income of $25,000 and paid dividends of $6,000 for 20X9.
Required
a. What percentage ownership of Somber Corporation does Pastel hold?
b. Was the parent or subsidiary the owner prior to the intercompany sale of
equipment? Explain.
c. What was the intercompany transfer price of the equipment on December

31, 20X8?
d. What amount of income will be assigned to the noncontrolling interest in

the consolidated income statement for 20X9?
e. Assuming Pastel and Somber report depreciation expense of $15,000 and

$9,000, respectively, for 20X9, what depreciation amount will be reported
in the consolidated income statement for 20X9?
f. Give all remaining consolidation entries needed at December 31, 20X9, to

prepare a complete set of consolidated financial statements.
Answers
a. Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber

Corporation.
b. The subsidiary was the owner. The sale was from the subsidiary to the parent, as
evidenced by the debit to noncontrolling interest in the consolidation entry.
c. Intercompany transfer price:
Amount paid by Somber Corporation $120,000

Increase to buildings and equipment in consolidation (53,500)
entry
Amount paid by Pastel to Somber for equipment $ 66,500
d. Income assigned to noncontrolling interest for 20X9:
Net income reported by Somber $ 25,000

Amount of gain realized in 20X9 ($10,500 / 7 years) 1,500
Realized net income for 20X9 $ 26,500
Proportion of ownership held by noncontrolling
interest x 0.10
Income assigned to noncontrolling interest $ 2,650
e. Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be

reported by the consolidated entity for 20X9.
f. Consolidation entries at December 31, 20X9:

Pastel
NCI + Corp. = Common + Retained
Original Book Value 50,000 450,000 300,000 200,000
+ Net Income 2,500 22,500 25,000
- Dividends (600) (5,400) (6,000)

Adjustment to Basic Consolidation Entry:
NCI Pastel Corp.
Net Income 2,500 22,500

+Extra Depreciation 150 1,350

-------------------------------------------------------------------------------------
+Extra Depreciation 150 1,350
108,000 242,000
Common Stock 300,000 ← Original amount invested (100%)
Retained Earnings 200,000 ← Beginning balance in RE
Income from Somber Corp. 23,850 ← Pastel’s share of NI with Adjustments
NCI in NI of Somber Corp. 2,650 ← NCI share of NI with Adjustments
Dividends Declared 6,000 ← 100% of Somber's dividends
Investment in Somber Corp. 468,450 ← Pastel 's share of BV with Adjustments

NCI in NA of Somber Corp. 52,050 ← NCI share of BV with Adjustments
Accumulated
Actual (Pastel Corp.): 66,500 9,500

53,500 1,500 64,000
“As if” (Somber Corp.): 120,000 72,000
Eliminate the Gain on Equipment and Correct Asset's Basis:

Investment in Somber Corp. 9,450
NCI in NA of Somber Corp. 1,050
Equipment 53,500

Intercompany Sale of Services
Norgaard Corporation purchased management consulting services from its 75
percent-owned subsidiary, Bline Inc. During 20X3, Norgaard paid Bline $123,200
for its services. For the year 20X4, Bline billed Norgaard $138,700 for such
services and collected all but $6,600 by year-end. Bline's labor cost and other
associated costs for the employees providing services to Norgaard totaled
$91,000 in 20X3 and $112,000 in 20X4. Norgaard reported $2,342,000 of income
from its own separate operations for 20X4, and Bline reported net income of
$631,000.
Required
a. Present all consolidation entries related to the intercompany sale of
services that would be needed in the consolidation worksheet used to
prepare a complete set of consolidated financial statements for 20X4.
b. Compute consolidated net income for 20X4 and the amount of income
assigned to the controlling interest.
Intercompany Sale of Services
a. Consolidation entries, 20X4:
Consulting Revenue 138,700

Consulting Fees Expense 138,700
Eliminate intercompany revenue and expense.
Accounts Payable 6,600

Accounts Receivable 6,600
Eliminate intercompany receivable/payable.
The basic entry (not shown) would complete the elimination process.
b. Consolidated net income and income to controlling

interest for 20X4:
Norgaard's separate operating income $2,342,000

Bline's net income 631,000
Consolidated net income 2,973,000
Income to noncontrolling interest ($631,000 x 0.25) (157,750)
Income to controlling interest $2,815,250
10.
P7- Consolidation Worksheet in Year of Intercompany Transfer

32 Prime Company holds 80 percent of Lane Company's stock, acquired on
January 1, 20X2, for $160,000. On the acquisition date, the fair value of
the noncontrolling interest was $40,000. Lane reported retained
earnings of $50,000 and had $100,000 of common stock outstanding.
Prime uses the fully adjusted equity method in accounting for its
investment in Lane.
Trial balance data for the two companies on December 31, 20X6, are as
follows:
Additional Information
1. At the date of combination, the book values and fair values of all
separately identifiable assets and liabilities of Lane were the same.
At December 31, 20X6, the management of Prime reviewed the
amount attributed to goodwill as a result of its purchase of Lane
stock and concluded an impairment loss of $18,000 should be
recognized in 20X6 and shared proportionately between the
controlling and noncontrolling shareholders.
2. On January 1, 20X5, Lane sold land that had cost $8,000 to Prime
for $18,000.
3. On January 1, 20X6, Prime sold to Lane equipment that it had

purchased for $75,000 on January 1, 20X1. The equipment has a
total economic life of 15 years and was sold to Lane for $70,000.
Both companies use straight-line depreciation.
4. There was $7,000 of intercompany receivables and payables on

December 31, 20X6.
Required
a. Give all consolidation entries needed to prepare a consolidation
worksheet for 20X6.
b. Prepare a three-part worksheet for 20X6 in good form.
c. Prepare a consolidated balance sheet, income statement, and

retained earnings statement for 20X6.
Prime’s RI = (240+20-180) -20+2 = 62 Lane’s RI: Same as reported net income less amortized
differential = 130-80 – 18 = 32, where 18 is the GW impairment
CNI = 62+32 = 94, Income to NCI = 32*20% = 6.4, Income to CI = 94-6.4 = 87.6
The following consolidation entries related to intercompany tranfer of Land and
Equipment only
Consolidation entries in 20X6 for the 20X5 Intercompany Transfer of Land
Investment in Lane Company Stock 8
NCI 2
Land 10
To continue to defer the unrealized gain from the land transfer of 20X5
Consolidation entries in 20X6, the Year of Intercompany Transfer of Equipment

Gain on Sale of Equipment 20
Equip 5
A/D 25
To eliminate the gain from the 20X6 intercompany Transfer of the equipment
A/D 2
Depreciation Expense 2
To recognize the realization of $2,000 (20,000/10) of the 20,000 unrealized gain recorded
at 1/1/20X6 as the difference between the $7,000 (D/E recorded by Lane) and what would
have been recorded $5,000 had the transfer not been treated as a sale. As one can see
that the recorded $20,000 gain in X6 from intra-entity transfer of equipment is offset by
the higher recorded depreciation expense based on transfer price: usually dubbed as
“piecemeal removal of gain”.
Notice that the effect of adjustment to A/D is a credit of 23 (25-2)

a.
Equity Method Entries on Prime Co.'s Books:
Investment in Lane Co. 40,000
Income from Lane Co. 40,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 income
Cash 4,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend

Record amortization of excess acquisition price (GW

impairment loss)
Defer unrealized gain on Equipment
Reverse the deferred gain
+ = +
NCI Prime Co. Commo Retained
n

+ Net Income 10,000 40,000 50,000
- Dividends (1,000) (4,000) (5,000)

Adjustment to basic consolidation entry:
NCI Prime Co.

Net Income 10,000 40,000
-Gain on Equipment (Down) (20,000)
+Extra Depreciation (Down) 2,000
-------------------------------------------------------------------------------------
-Gain on Equipment (Down) (20,000)
108,000 242,000
P7-32 (continued)

← Prime’s share of NI with
Adjustments
NCI in NI of Lane Co. 10,000 ← NCI share of Lane Co.'s NI
Dividends Declared 5,000 ← 100% of Lane Co.'s dividends
Investment in Lane Co. 174,000 ← Prime's share of BV with
Adjustments
NCI in NA of Lane Co. 48,000 ← NCI share of BV of net assets
Excess Value (Differential) Calculations:
NCI Goodwil
20% + Prime Co. 80% = l
Beginning balance 10,000 40,000 50,000

Changes (3,600) (14,400) (18,000)
Ending balance 6,400 25,600 32,000

Amortized Excess Value Reclassification Entry:
Goodwill impairment loss 18,000

NCI in NI of Lane Co. 3,600
Excess Value (Differential) Reclassification Entry:
Goodwill 32,000
NCI in NA of Lane Co. 6,400
Eliminate Intercompany Accounts:

Cash and Accounts Receivable 7,000
Eliminate Gain on Purchase of Land
Land 10,000
Accumulated
Lane Co. 70,000 Actual 7,000

5,000 2,000 25,000
Prime Co. 75,000 "As If" 30,000
Eliminate the gain on Equipment and Correct Asset's Basis:
Gain on sale 20,000
Equipment 5,000
Investment in Income from

Lane Co. Lane Co.
Beginning Balance 188,000

80% Net Income 40,000 40,000 80% Net Income
4,000 80% Dividends
14,400 Excess Val. Amort. 14,400
Realize Def. Gain 2,000 20,000 Defer Equipment Gain 20,000 2,000 Realize Def. Gain
Ending Balance 191,600 7,600 Ending Balance

174,000 Basic 22,000
Land Adjustment 8,000 25,600 Excess Reclass. 14,400
0 0
b.
Consolidation
Entries
Prime Co. Lane Co. DR CR Consolidated
Income Statement
Sales 240,000 130,000 370,000
Gain on Sale of Equipment 20,000 20,000 0
Less: COGS (140,000) (60,000) (200,000)
Less: Depr. & Amort. Expense (25,000) (15,000) 2,000 (38,000)
Less: Other Expenses (15,000) (5,000) (20,000)
Less: Goodwill Impairment Loss 18,000 (18,000)
Income from Lane Co. 7,600 22,000 14,400 0
Consolidated Net Income 87,600 50,000 60,000 16,400 94,000
NCI in Net Income 10,000 3,600 (6,400)
Controlling Interest in NI 87,600 50,000 70,000 20,000 87,600

Statement of Retained Earnings
Beginning Balance 322,000 95,000 95,000 322,000
Net Income 87,600 50,000 70,000 20,000 87,600
Less: Dividends Declared (30,000) (5,000) 5,000 (30,000)
Ending Balance 379,600 140,000 165,000 25,000 379,600

Balance Sheet
Cash and Accounts Receivable 113,000 35,000 7,000 141,000
Inventory 260,000 90,000 350,000
Land 80,000 80,000 10,000 150,000
Buildings & Equipment 500,000 150,000 5,000 655,000
Less: Accumulated
Depreciation (205,000) (45,000) 2,000 25,000 (273,000)
174,00
Investment in Lane Co. 191,600 8,000 0 0
25,600
Goodwill 32,000 32,000
241,60
Total Assets 939,600 310,000 47,000 0 1,055,000

Accounts Payable 60,000 20,000 7,000 73,000
Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 100,000 300,000
Retained Earnings 379,600 140,000 165,000 25,000 379,600
NCI in NA of Lane Co. 2,000 48,000 52,400
6,400
Total Liabilities & Equity 939,600 310,000 274,000 79,400 1,055,000

c. Prime Company and Subsidiary
Consolidated Balance Sheet
December 31, 20X6
Cash and Receivables $ 141,000

Inventory 350,000
Land 150,000
Buildings and Equipment $655,000
Less: Accumulated Depreciation (273,000) 382,000
Goodwill 32,000
Total Assets $1,055,000
Accounts Payable $ 73,000

Bonds Payable 250,000
Stockholders’ Equity:
Controlling Interest:
Common Stock $300,000
Retained Earnings 379,600
Total Controlling Interest $679,600
Total Noncontrolling Interest 52,400
Total Stockholders’ Equity 732,000
Total Liabilities and Stockholders' Equity $1,055,000
Prime Company and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X6
Sales $ 370,000
Cost of Goods Sold $200,000
Depreciation and Amortization Expense 38,000
Goodwill Impairment Loss 18,000
Other Expenses 20,000
Total Expenses (276,000)
Consolidated Net Income $ 94,000
Income to Noncontrolling Interest (6,400)
Income to Controlling Interest $ 87,600
Prime Company and Subsidiary

Consolidated Retained Earnings Statement
Year Ended December 31, 20X6
Retained Earnings, January 1, 20X6 $ 322,000

Income to Controlling Interest, 20X6 87,600
$ 409,600
Dividends Declared, 20X6 (30,000)
Retained Earnings, December 31, 20X6 $ 379,600
11.
P7- Consolidation Worksheet in Year Following Intercompany Transfer

33 Prime Company holds 80 percent of Lane Company's stock, acquired on
January 1, 20X2, for $160,000. On the date of acquisition, Lane reported
retained earnings of $50,000 and $100,000 of common stock
outstanding, and the fair value of the noncontrolling interest was
$40,000. Prime uses the fully adjusted equity method in accounting for
its investment in Lane.
Trial balance data for the two companies on December 31, 20X7, are as
follows:
Additional Information
1. At the date of combination, the book values and fair values of
Lane's separately identifiable assets and liabilities were equal. The
full amount of the increased value of the entity was attributed to
goodwill. At December 31, 20X6, the management of Prime reviewed
the amount attributed to goodwill as a result of its purchase of Lane
stock and recognized an impairment loss of $18,000. No further
impairment occurred in 20X7.
2. On January 1, 20X5, Lane sold land for $18,000 that had cost
$8,000 to Prime.
3. On January 1, 20X6, Prime sold to Lane equipment that it had

purchased for $75,000 on January 1, 20X1. The equipment has a
total 15-year economic life and was sold to Lane for $70,000. Both
companies use straight-line depreciation.
4. Intercompany receivables and payables total $4,000 on December

31, 20X7.
Required
a. Prepare a reconciliation between the balance in Prime's
Investment in Lane Company Stock account reported on
December 31, 20X7, and Lane's book value.
b. Prepare all worksheet consolidation entries needed as of

December 31, 20X7, and complete a three-part consolidation
worksheet for 20X7.
Prime’s RI = (250+205) +2 = 47 Lane’s RI: Same as reported net income less amortized differential =
150-105 = 45
CNI = 47+45 = 92, Income to NCI = 45*20% = 9, Income to CI = 92-9 = 83 or, 47+45*80% = 47+36
The following consolidation entries related to intercompany tranfer of Land and
Equipment only
Consolidation entries in 20X7 for the 20X5 Intercompany Transfer of Land
Investment in Lane Company Stock 8
NCI 2
Land 10
To continue to defer the unrealized gain from the land transfer of 20X5
Consolidation entries in 20X7, two Years after 1/1/X6 Intercompany Transfer of

Equipment
Investment I Lane 18
Equip 5
A/D 23
Eliminate the Gain on Equipment and Correct Asset's basis:
A/D 2
To recognize the realization of $2,000 (20,000/10) the 20,000 unrealized gain recorded at
1/1/20X6 as the difference between the $7,000 D/E recorded by Lane and what would have
been recorded $5,000 had the transfer not been treated as a sale.
Notice that the effect of adjustment to A/D is a credit of 21 (23-2). From this and 200X6
(previous problem) consolidation entries you can see what the 20X8’s consolidation
entries should look like (Try it!)
Consolidation Worksheet in Year following Intercompany Transfer

a. Reconciliation of underlying book value and balance in investment account:
Net book value reported by Lane Company

Common stock outstanding $100,000
Retained earnings balance, January 1, 20X7 $140,000
Net income for 20X7 45,000
Dividends paid in 20X7 (35,000)
Retained earnings balance, December 31, 20X7 150,000
$250,000
Proportion of stock held by Prime Company x .80
$200,000
Minus: Upstream Land Gain (10,000 x 0.80) (8,000)
Minus: Downstream Equipment Transfer Gain (20,000)
Add: Reversal of deferred gain 20X6 on equipment 2,000
Add: Reversal of deferred gain 20X7 on equipment 2,000
Add: Goodwill (32,000 x 0.80) 25,600
Balance in investment account $201,600
b.
Equity Method Entries on Prime Co.'s Books:

Record Prime Co.'s 80% share of Lane Co.'s 20X7 income
Cash 28,000
Record Prime Co.'s 80% share of Lane Co.'s 20X7 dividend

Reverse the deferred gain on

equipment
NCI Prime Co. Common Retained

+ = +

+ Net Income 9,000 36,000 45,000
- Dividends (7,000) (28,000) (35,000)

Adjustments to Basic Consolidation Entry:
NCI Prime Co.
Net Income 9,000 36,000

-------------------------------------------------------------------------------------
108,000 242,000


← Prime’s share of NI with
Adjustments
NCI in NI of Lane Co. 9,000 ← NCI share of Lane Co.'s NI
Dividends Declared 35,000 ← 100% of Lane Co.'s dividends

← Prime's share of BV with
Adjustments
NCI in NA of Lane Co. 50,000 ← NCI share of BV of net assets
Excess Value (Differential) Calculations:
NCI Goodwil
20% + Prime Co. 80% = l
Beginning balance 6,400 25,600 32,000

Changes 0 0 0
Ending balance 6,400 25,600 32,000

Excess Value (Differential) Reclassification Entry:
Goodwill 32,000
Eliminate Gain on Land
Land 10,000
Accumulated
Actual (Lane Co.): 70,000 14,000

5,000 2,000 23,000
“As if” (Prime Co.): 75,000 35,000

Eliminate the Gain on Equipment and Correct Asset's basis:
Equipment 5,000

2,00
Investment in Income from

Lane Co. Lane Co.
Beginning Balance 191,600

80% Net Income 36,000 36,000 80% Net Income
28,000 80% Dividends
Realize Def. Gain 2,000 2,000 Realize Def. Gain
Ending Balance 201,600 38,000 Ending Balance

202,00
0 Basic 38,000
Land Adjustment 8,000 25,600 Excess Reclass.
18,000
0 0
Eliminate Intercompany Receivable/Payable

Accounts Receivable 4,000
b.
Consolidation
Entries
Prime Lane Consolidate

Co. Co. DR CR d
Income Statement
Sales 250,000 150,000 400,000
(80,000
Less: COGS (160,000) ) (240,000)
(15,000
Less: Depr. & Amort. Expense (25,000) ) 2,000 (38,000)
(10,000
Less: Other Expenses (20,000) ) (30,000)
Income from Lane Co. 38,000 38,000 0
Consolidated Net Income 83,000 45,000 38,000 2,000 92,000
NCI in Net Income 9,000 (9,000)
Controlling Interest in NI 83,000 45,000 47,000 2,000 83,000

Statement of Retained Earnings
140,00
Beginning Balance 379,600 140,000 0 379,600
Net Income 83,000 45,000 47,000 2,000 83,000
(35,000
Less: Dividends Declared (60,000) ) 35,000 (60,000)
187,00
Ending Balance 402,600 150,000 0 37,000 402,600

Balance Sheet
Cash and Accounts

Receivable 151,000 55,000 4,000 202,000
Inventory 240,000 100,000 340,000
Land 100,000 80,000 10,000 170,000
Buildings & Equipment 500,000 150,000 5,000 655,000
(60,000
Less: Accumulated Depr. (230,000) ) 2,000 23,000 (311,000)
Investment in Lane Co. 201,600 8,000 202,00 0

0
18,000 25,600
Goodwill 32,000 32,000
264,60
Total Assets 962,600 325,000 65,000 0 1,088,000

Accounts Payable 60,000 25,000 4,000 81,000
Bonds Payable 200,000 50,000 250,000
100,00
Common Stock 300,000 100,000 0 300,000
187,00
Retained Earnings 402,600 150,000 0 37,000 402,600
NCI in NA of Lane Co. 2,000 50,000 54,400
6,400
293,00
Total Liabilities & Equity 962,600 325,000 0 93,400 1,088,000

Intercompany Transfers of Services and Noncurrent Assets: Answer

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Intercompany Transfers of Services and Noncurrent Assets: Answer

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Chapter 7

Intercompany Transfers of Services and Noncurrent Assets

Gain on Sale of Land 20,000

NCI in NA of XYZ 4,000

A. in the preparation of the 20X8 consolidated financial statements, equipment will be

5. (Intercompany transfer of services) Big Corporation receives management consulting services

Inc from S (42*.75) 31.5

NCI Pie Co. Common Retained

Ending Book Value 145,500 436,500 350,000 232,000

Deferred Gain Calculations:

Total (14,000) (15,500) 1,500

Basic consolidation entry:

Retained Earnings 157,000 ← Beginning RE

NCI in NI of Strawberry Co. 24,000 ← NCI share of reported NI + Extra Depr.

Dividends declared 15,000 ← 100% of sub’s dividends declared

Eliminate gain on purchase of land

Strawberry Co. 140,000 As if 116,000

Eliminate gain on equipment sale and correct asset basis:

Accumulated Depreciation 6,000

a. Operating income of Grand Delivery $65,000

b. Journal entries recorded by Grand Delivery:

Investment in Acme Real Estate 32,000

Income from Acme Real Estate 20,000

Ending book value 86,000 344,000 300,000 130,000

Adjustment to Basic Consolidation Entry:

Basic Consolidation Entry

Eliminate Courier services

Pastel Corporation acquired a controlling interest in Somber Corporation in 20X5

Investment in Somber 9,45

NCI in NA of Somber 1,05

A note at the bottom of the consolidation worksheet at January 1, 20X9,

c. What was the intercompany transfer price of the equipment on December

d. What amount of income will be assigned to the noncontrolling interest in

e. Assuming Pastel and Somber report depreciation expense of $15,000 and

f. Give all remaining consolidation entries needed at December 31, 20X9, to

a. Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber

c. Intercompany transfer price:

Amount paid by Somber Corporation $120,000

d. Income assigned to noncontrolling interest for 20X9:

Net income reported by Somber $ 25,000

e. Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be

f. Consolidation entries at December 31, 20X9:

Book Value Calculations:

Adjustment to Basic Consolidation Entry:

NCI Pastel Corp.

Net Income 2,500 22,500

Income to be eliminated 2,650 23,850

Adjusted Book Value 52,050 468,450

Investment in Somber Corp. 468,450 ← Pastel 's share of BV with Adjustments

Actual (Pastel Corp.): 66,500 9,500

“As if” (Somber Corp.): 120,000 72,000

Eliminate the Gain on Equipment and Correct Asset's Basis:

Accumulated Depreciation 1,500

Intercompany Sale of Services

a. Consolidation entries, 20X4:

Consulting Revenue 138,700

Accounts Payable 6,600

b. Consolidated net income and income to controlling

Norgaard's separate operating income $2,342,000

P7- Consolidation Worksheet in Year of Intercompany Transfer

3. On January 1, 20X6, Prime sold to Lane equipment that it had

4. There was $7,000 of intercompany receivables and payables on

b. Prepare a three-part worksheet for 20X6 in good form.