Chapter 6

INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS

Electronic Supplement

Solution W6-1

1 Gain on sale of building will not appear on consolidated income

statement.

2 Consolidated depreciation expense

Combined depreciation expense $160,000

Less: Piecemeal recognition of excess depreciation
($60,000 - $40,000)/10 years (2,000)

Consolidated depreciation expense $158,000

3 Consolidated net income

Park's reported income $295,000

Less: Gain on building (20,000)
Add: Piecemeal recognition of excess depreciation 2,000

Consolidated net income $277,000

Alternatively,
Park's separate income $220,000
Add: Income from Skyline ($100,000 x 75%) - $18,000 57,000

Consolidated net income $277,000

4 Correcting entry

Retained earnings $18,000

Investment in Skyline $18,000
To correct error of omission ($20,000 gain - $2,000 piecemeal
recognition).

168
Chapter 6 169

Solution W6-2

Pony Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2008

Current Assets
Cash $ 4,400,000
Receivables-net 6,760,000
Inventoriesa 5,790,000 $16,950,000

Plant Assets
Landb $ 5,500,000
Buildings-net 12,000,000
Equipment-net 20,000,000
Patentsc 350,000 37,850,000

Total assets $54,800,000

Liabilities
Accounts payable $ 6,000,000
Other liabilities 10,000,000 $16,000,000

Stockholders' Equity
Common stock $30,000,000
Retained earningsd 7,620,000
Minority intereste 1,180,000 38,800,000

Total liabilities and stockholders' equity $54,800,000

a
Combined inventories $5,840,000 - $50,000 unrealized profit in ending
inventory = $5,790,000
b
Combined land $5,700,000 - $200,000 unrealized profit = $5,500,000
c
Patents December 31, 2005 $500,000
Less: Amortization for 3 years ($50,000 x 3) (150,000)
Patents December 31, 2008 $350,000
d
Retained earnings-Pony December 31, 2008 $8,000,000
Less: Patents amortization for 3 years (150,000)
Less: Unrealized profit in ending inventory (50,000)
Less: Unrealized gain on land ($200,000 x 90%) (180,000)
Consolidated retained earnings December 31, 2008 $7,620,000
e
Equity in Sox ($12,000,000 x 10%) $1,200,000
Less: Minority share of unrealized gain on land ($200,000 x 10%) (20,000)
Minority interest December 31, 2008 $1,180,000
170 Intercompany Profit Transactions - Plant Assets

Solution W6-3

Prime Corporation and Subsidiary

Comparative Consolidated Income Statements
for the years ended December 31, 2006 and 2005

2006 2005

Sales $800,000 $660,000

Cost of sales (442,000) (368,000)

Gross profit 358,000 292,000

Operating expenses (178,000) (138,000)

Total consolidated income 180,000 154,000

Minority interest expense (10,000) (10,000)

Consolidated net income $170,000 $144,000

Supporting computations:

Consolidated sales:
Combined sales $850,000 $700,000
Less: Intercompany sales (50,000) (40,000)
Consolidated sales $800,000 $660,000

Consolidated cost of goods sold:

Combined cost of goods sold $490,000 $400,000
Less: Intercompany sales (50,000) (40,000)
Add: Unrealized profit in ending inventory 10,000 8,000
Less: Unrealized profit in beginning inventory (8,000)
Consolidated cost of sales $442,000 $368,000

Consolidated operating expenses:

Combined operating expenses $180,000 $140,000
Less: Piecemeal recognition of gain on
machinery $10,000/.2 2,000 2,000
Consolidated operating expenses $178,000 $138,000

Minority interest expense:

Select's reported income $ 65,000 $ 50,000
Less: Gain on upstream sale of land (5,000)
Less: Unrealized gain in upstream inventory sales (10,000)
Realized income 50,000 50,000
Minority percentage 20% 20%
Minority interest expense $ 10,000 $ 10,000
Chapter 6 171

Solution W6-4

Income from Shad for 2000

Share of Shad's reported income for 2000 ($80,000 x 90%) $ 72,000

Less: Unrealized profit in ending inventory ($20,000 x 40%) (8,000)
Add: Unrealized profit in beginning inventory ($20,000 x 50%) 10,000
Add: Piecemeal recognition of gain on building
($20,000/4 years) x 90% interest 4,500
Less: Unrealized gain on downstream sale of equipment (18,000)
Add: Piecemeal recognition of gain on equipment
($18,000/6 years) 3,000
Income from Shad - 2000 $ 63,500

Reconciliation of investment account balance:

Share of Shad's underlying equity ($280,000 x 90%) $252,000

Less: Share of unrealized gain on land ($5,000 x 90%) (4,500)
Less: Share of unrealized gain on building
($20,000 gain - $10,000 recognized) x 90% (9,000)
Less: Unrealized gain on equipment ($18,000 - $3,000 recognized) (15,000)
Less: Unrealized profit in ending inventory (8,000)
Investment in Shad December 31, 2000 $215,500

Minority interest expense:

Shad's reported income $ 80,000

Add: Piecemeal recognition of gain on building 5,000
Shad's realized income 85,000
Minority interest 10%
Minority interest expense $ 8,500
172 Intercompany Profit Transactions - Plant Assets

Solution W6-4 (continued)

Pike Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2000

| | | Adjustments and |Consolidated

| Pike | Shad 90%| Eliminations | Statements
| | | | |
Income Statement | | | | |
Sales |$ 600,000 |$200,000 |a 40,000| | $ 760,000
Income from Shad | 63,500 | |f 63,500| |
Gain on equipment | 18,000 | |e 18,000| |
Cost of sales | 270,000*| 100,000*|c 8,000|a 40,000| 328,000*
| | | |b 10,000|
Operating expense | 121,500*| 20,000*| |d 5,000| 133,500*
| | | |e 3,000|
Minority expense | | |j 8,500 | | 8,500*
Net income |$ 290,000 |$ 80,000 | | | $ 290,000
| | | | |
Retained Earnings | | | | |
Retained earnings -Pike|$ 70,000 | | | | $ 70,000
Retained earnings -Shad| |$ 90,000 |g 90,000| |
Net income | 290,000 | 80,000 | | | 290,000
Dividends | 150,000*| 40,000*| |f 36,000|
|j 4,000*| 150,000*
Retained earnings | | | | |
December 31, 2000 | $ 210,000 |$130,000 | | | $ 210,000
| | | | |
Balance Sheet | | | | |
Cash |$ 166,500 |$ 23,000 | | | $ 189,500
Accounts receivable | 180,000 | 100,000 | |h 5,000| 275,000
Dividends receivable | 18,000 | | |i 18,000|
Inventories | 60,000 | 27,000 | |c 8,000| 79,000
Land | 100,000 | 30,000 | |d 5,000| 125,000
Buildings -net | 280,000 | 100,000 | |d 10,000| 370,000
Equipment -net | 330,000 | 120,000 | |e 15,000| 435,000
Investment in Shad | 215,500 | |b 10,000|f 27,500|
| | |d 18,000|g 216,000|
|$1,350,000 |$400,000 | | | $1,473,500
| | | | |
Accounts payable |$ 225,000 |$ 60,000 |h 5,000| | $ 280,000
Dividends payable | 30,000 | 20,000 |i 18,000| | 32,000
Other liabilities | 150,000 | 40,000 | | | 190,000
Capital stock | 600,000 | 100,000 |g 100,000| | 600,000
Other paid -in capital | 135,000 | 50,000 |g 50,000| | 135,000
Retained earnings | 210,000 | 130,000 | | | 210,000
|$1,350,000 |$400,000 | | |
| | |
Minority interest January 1, 2000 |d 2,000|g 24,000|
Minority interest December 31, 2000 | |j 4,500| 26,500
| | | $1,473,500
| | |
*Deduct
Chapter 6 173
Solution W6-5 [AICPA adapted]

Preliminary computations

Investment cost (25,000 shares x $30 per share) $750,000

Book value acquired (636,000)
Excess cost over book value acquired $114,000

Excess allocated:
Machinery (6-year remaining useful life) $ 54,000
Goodwill 60,000
Excess cost over book value acquired $114,000

One-line consolidation check:

Equity in Sey's income $190,000

Less: Amortization of excess machinery ($54,000/6 years) (9,000)
Less: Unrealized gain on land ($43,000 - $33,000 book value) (10,000)
Less: Unrealized gain on building ($86,000 - $66,000 book value) (20,000)
Add: Piecemeal recognition of depreciation on building
$20,000/5 years x 1/2 year 2,000
Less: Unrealized profit in ending inventories ($36,000 x 50%) (18,000)
Income from Sey on equity basis $135,000

Working paper entries in general journal form

a Dividends from Sey $ 40,000

Dividends $ 40,000
To eliminate dividend income and dividends of Sey.

b Gain on sale of warehouse $ 30,000

Land, plant, and equipment $ 30,000
To eliminate unrealized gain on the $129,000 intercompany sale of
a warehouse with a $99,000 book value.

c Accumulated depreciation $ 2,000

Operating expense $ 2,000
To recognize depreciation for one-half year on the intercompany
gain allocated to the building computed as follows:
Gain $30,000 x 2/3 allocated to building = $20,000 to building
$20,000/5 year life x 1/2 year = $2,000 piecemeal recognition of
gain allocated to the building.

d Sales $180,000
Cost of sales $180,000
To eliminate intercompany purchases and sales of merchandise.
174 Intercompany Profit Transactions - Plant Assets

Solution W6-5 (continued)

e Cost of sales $ 18,000

Inventory $ 18,000
To eliminate unrealized profit from intercompany sales of
merchandise computed as follows:
$90,000 intercompany profit x 20% unrealized = $18,000

f Common stock (Sey) $400,000

Additional paid-in capital (Sey) 80,000
Retained earnings January 1, 2009 (Sey) 156,000
Land, plant, and equipment (for machinery) 54,000
Goodwill 60,000
Investment in Sey $750,000
To eliminate Sey's stockholders' equity and the investment in Sey
account and to enter beginning goodwill and the excess allocated
to the undervalued machinery.

g Operating expenses $ 9,000

Accumulated depreciation $ 9,000
To enter current depreciation on excess allocated to machinery
computed as $54,000 excess  6 years = $9,000.

h Accounts payable $ 86,000

Accounts receivable $ 86,000
To eliminate intercompany receivable and payable.
Chapter 6 175

Solution W6-5 (continued)

Pain Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2009

| | | Adjustments and |Consolidated

| Pain | Sey | Eliminations | Statements
| | | | |
Income Statement | | | | |
Net sales |$3,800,000 |$1,500,000 |d 180,000| | $5,120,000
Dividends from Sey | 40,000 | |a 40,000| |
Gain on sale of | | | | |
warehouse | 30,000 | |b 30,000| |
Cost of sales | 2,360,000*| 870,000*|e 18,000|d 180,000| 3,068,000*
Operating expenses- | 1,100,000*| 440,000*|g 9,000|c 2,000| 1,547,000*
including depreciation | | | | |
Net income |$ 410,000 |$ 190,000 | | | $ 505,000
| | | | |
Retained earnings | | | | |
Retained earnings-Pain |$ 440,000 | | | | $ 440,000
Retained earnings-Sey | |$ 156,000 |f 156,000| |
Net income | 410,000 | 190,000| | | 505,000
Dividends | 0 | 40,000*| |a 40,000|
Retained earnings | | | | |
December 31, 2009 |$ 850,000 |$ 306,000 | | | $ 945,000
| | | | |
Balance Sheet | | | | |
Cash |$ 570,000 |$ 150,000 | | | $ 720,000
Accounts receivable -net | 860,000 | 350,000 | |h 86,000| 1,124,000
Inventories | 1,060,000 | 410,000 | |e 18,000| 1,452,000
Land, plant, and | | | | |
equipment | 1,320,000 | 680,000 |f 54,000|b 30,000| 2,024,000
Accumulated depreciation| 370,000*| 210,000*|c 2,000|g 9,000| 587,000*
Investment in Sey | 750,000 | | |f 750,000|
Goodwill | | |f 60,000| | 60,000
|$4,190,000 |$1,380,000 | | | $4,793,000
| | | | |
Accounts and accrued | | | | |
payables |$1,340,000 |$ 594,000 |h 86,000| | $1,848,000
Common stock $10 par | 1,700,000 | 400,000 |f 400,000| | 1,700,000
Additional paid-in | | | | |
capital | 300,000 | 80,000 |f 80,000| | 300,000
Retained earnings | 850,000 | 306,000| | | 945,000
|$4,190,000 |$1,380,000 | | | $4,793,000
| | | | |
*Deduct