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					Chapter 5                                                                                                         109

                                                    Chapter 5

                INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES

Answers to Questions

1       Profits and losses on sales between affiliated companies are realized for consolidated statement purposes
        when the purchasing affiliate resells the merchandise to parties outside of the consolidated entity. If all
        merchandise sold to affiliates is resold to outside parties in the same period, there will be no unrealized
        profit to eliminate in preparing the consolidated financial statements.

2       Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory
        profits according to ARB No. 51.

3       The amount of unrealized profit to be eliminated in the preparation of consolidated financial statements is
        not affected by the existence of a noncontrolling interest. All unrealized profit must be eliminated. In the
        case of upstream sales, however, the unrealized profit should be allocated between majority and
        noncontrolling interests.

4       The elimination of intercompany sales and purchases does not affect consolidated net income. This is
        because equal amounts are deducted from sales and cost of sales and the net effect on consolidated net
        income is nil. The importance of the elimination lies in a correct statement of consolidated sales and cost of
        sales.

5       Consolidated working capital is not affected by the elimination of intercompany accounts receivable and
        accounts payable balances. Since equal amounts are deducted from current assets and current liabilities, the
        effect on the computation "current assets less current liabilities" is nil.

6       Upstream sales are sales from subsidiary to parent company. Downstream sales are sales from parent
        company to subsidiary. The importance of this designation lies in the fact that the profit or loss on such
        transactions is the selling affiliate's profit or loss. In the case of unrealized profit or loss on downstream
        sales, all the profit or loss is assigned to the parent company-seller. But unrealized profit or loss on
        upstream sales is profit or loss of the subsidiary-seller and is assigned to the parent company and
        noncontrolling interest in relation to their proportionate holdings.

7       Yes. If unrealized profits are not eliminated at year end, consolidated net income will be overstated. The
        ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the
        beginning inventory will understate consolidated net income. The analysis of the effect of unrealized
        inventory profits on consolidated net income is basically the same as the analysis for inventory errors. Like
        inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting
        periods. Consolidated net income for 2008 is not affected.

8       The noncontrolling interest expense is affected by upstream sales if the merchandise has not been resold by
        the parent company to outside parties by the end of the accounting period. This is because the
        noncontrolling interest expense is based on the income of the subsidiary. If the subsidiary has unrealized
        profit from intercompany sales, its realized income will be less than its reported income. The noncontrolling
        interest expense should be based on the realized income of the subsidiary.

9       A parent company's investment income and investment accounts are adjusted for unrealized profits on
        intercompany sales to subsidiaries in accordance with the one-line consolidation concept. The parent
        company reduces its investment and investment income accounts for the full amount of the unrealized
        profits in the year of intercompany sale. When the goods are sold to outside parties by the subsidiary, the



                                                        109
110                                                                    Intercompany Profit Transactions — Inventories

      profits of the parent company are realized and the parent company increases its investment and investment
      income accounts.

10    Combined cost of goods sold is overstated when there are unrealized profits in the beginning inventory and
      understated when there are unrealized profits in the ending inventory. The elimination of unrealized profits
      in the beginning inventory reduces (credits) cost of goods sold and the elimination of unrealized profits in
      the ending inventory increases (debits) cost of goods sold.

11    The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling
      interest or by the direction of the intercompany sales. All unrealized profit from both upstream and
      downstream sales is eliminated from consolidated cost of goods sold.

12    Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is
      eliminated by reducing (crediting) cost of sales and debiting the investment account if a correct equity
      method has been used and the intercompany sales are downstream. In the case of upstream sales, cost of
      sales is credited and the noncontrolling interest and the investment account are debited proportionately.
      When the parent company does not adjust its investment account for unrealized profits from intercompany
      sales, the above debits to the investment account would be to retained earnings.

13    There are two equally good approaches for computing noncontrolling interest expense when there are
      unrealized profits from upstream sales in both beginning and ending inventories. One approach is to
      compute realized income of the subsidiary by adding unrealized profits in the beginning inventory to
      reported subsidiary net income and deducting unrealized profits in the ending inventory. The noncontrolling
      interest expense is then equal to the realized income of the subsidiary multiplied by the noncontrolling
      interest percentage.
                The other approach is to compute the noncontrolling interest percentage in reported subsidiary net
      income, in unrealized profits in beginning inventory, and in unrealized profits in ending inventory.
      Noncontrolling interest expense is then computed by adding the noncontrolling interest percentage in
      unrealized profits in the beginning inventory to the noncontrolling interest share of reported income, and
      subtracting the noncontrolling interest percentage relating to the unrealized profits in the ending inventory.

14    The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a
      convenience, but it does not result in incorrect measurements of consolidated net income as long as the
      unrealized profits at any statement date are correctly determined. This is because any unrealized profits in
      beginning inventory that are considered realized are credited to cost of sales. The same items will appear as
      unrealized profits in the ending inventory if they remain unsold, and the elimination of these items results in
      debiting cost of sales for the same amount. Thus, the working paper effects are offsetting as illustrated in
      the following working paper entries, which assume $5,000 unrealized profits from downstream sales.

      Investment in subsidiary (retained earnings)                              5,000
                       Cost of sales                                                               5,000
              To eliminate unrealized profit in beginning inventory.

      Cost of sales                                                             5,000
                       Inventory                                                                   5,000
               To eliminate unrealized profit in ending inventory.




                                                      110
Chapter 5                                                                     111
SOLUTIONS TO EXERCISES

Solution E5-1

1       a                                5     c
2       d                                6     a
3       a                                7     a
4       c                                8     c

Solution E5-2 [AICPA adapted]

1       a

2       c
        Unrealized profits from intercompany sales with Kent are eliminated from
        the ending inventory: $320,000 combined current assets less $12,000
        unrealized profit ($60,000  20%).

3       c
        Combined cost of sales of $750,000 less $250,000 intercompany sales

Solution 5-3

1       d
        Philly's separate income                                    $1,000,000
        Add: Share of Silvio's income ($500,000  100%)                500,000
        Add: Realization of profit deferred in 2006
          $1,500,000 - ($1,500,000/150%)                                500,000
        Less: Unrealized profit in 2007 inventory
          $1,200,000 - ($1,200,000/150%)                              (400,000)
        Consolidated net income                                     $1,600,000

2       d
        Combined sales                                              $1,400,000
        Less: Intercompany sales                                       (50,000)
        Consolidated sales                                          $1,350,000

3       c
        Combined cost of sales                                      $   680,000
        Less: Intercompany purchases                                    (50,000)

        Less: Unrealized profit in beginning inventory                   (4,000)
        Add: Unrealized profit in ending inventory                       10,000
        Consolidated cost of sales                                  $   636,000




                                       111
112                                                Intercompany Profit Transactions — Inventories
Solution E5-4

1     b
      Pride's share of Sedita's income ($60,000  80%)                        $     48,000
      Less: Unrealized profit in ending inventory
        ($20,000  50% unsold  80% owned)                                          (8,000)
      Income from Sedita                                                      $     40,000

2     d
      Combined cost of sales                                                  $  450,000
      Less: Intercompany sales                                                  (100,000)
      Add: Unrealized profit in ending inventory                                  10,000
      Consolidated cost of sales                                              $ 360,000

3     b
      Reported income of Sedita                                               $    60,000
      Unrealized profit                                                           (10,000)
      Sedita's realized income                                                     50,000
      Noncontrolling interest percentage                                               20%
      Noncontrolling interest expense                                         $    10,000

Solution E5-5

1     c
      Combined sales                                                          $1,800,000
      Less: Intercompany sales                                                  (400,000)
      Consolidated sales                                                      $1,400,000

2     c
      Unrealized profit in beginning inventory
        $100,000 - ($100,000/125%)                                            $     20,000

      Unrealized profit in ending inventory
        $125,000 - ($125,000/125%)                                            $     25,000

3     b
      Combined cost of goods sold                                             $1,440,000
      Less: Intercompany sales                                                  (400,000)
      Less: Unrealized profit in beginning inventory
        $100,000 - ($100,000/125%)                                                (20,000)
      Add: Unrealized profit in ending inventory
        $125,000 - ($125,000/125%)                                                25,000
      Consolidated cost of goods sold                                         $1,045,000




                                     112
Chapter 5                                                                           113
Solution E5-6

1       a
        Patti's separate income                                         $200,000
        Add: Income from Susan:
        Share of Susan's reported income ($200,000  70%)                140,000
        Less: Patents amortization                                       (20,000)
        Add: Unrealized profit in beginning inventory
          [$112,500 - ($112,500/150%)]  70%                              26,250
        Less: Unrealized profit in ending inventory
          [$33,000 - ($33,000/150%)]  70%                                (7,700)
        Consolidated net income                                         $338,550

        Noncontrolling interest expense:
        Susan's reported income                                         $200,000
        Add: Unrealized profit in beginning inventory                     37,500
        Less: Unrealized profit in ending inventory                      (11,000)
        Susan's realized income                                          226,500
        Noncontrolling interest percentage                                   30%
        Noncontrolling interest expense                                 $ 67,950

2       c
        Packman's share of Slocum's reported net loss
          ($150,000 loss  60%)                                         $(90,000)
        Add: Unrealized profit in ending inventory
          ($200,000  1/4 unsold)                                        (50,000)
        Income from Slocum                                              (140,000)
        Packman's separate income                                        300,000
        Consolidated net income                                         $160,000

3       b
        Parnell's share of Santini's income ($300,000  75%)            $225,000
        Add: Realized profit in beginning inventory
          $150,000 - ($150,000/1.25)  75%                                22,500
        Less: Deferred profit in ending inventory
          $200,000 - ($200,000/1.25)  75%                               (30,000)
        Income from Santini                                             $217,500

Solution E5-7

                                                2007          2008          2009
Pansy's separate income                       $300,000      $400,000      $350,000
Add: 80% of Sheridan's reported income         400,000       440,000       380,000
Add: Realization of profits in
  beginning inventory                                          30,000       40,000
Less: Unrealized profits in ending
  inventory                                    (30,000)      (40,000)      (20,000)
Consolidated net income                       $670,000      $830,000      $750,000




                                       113
114                                             Intercompany Profit Transactions — Inventories
Solution E5-8

                       Pycus Corporation and Subsidiary
                         Consolidated Income Statement
                     for the year ended December 31, 2009

Sales ($400,000 + $100,000 - $40,000 intercompany sales)                   $   460,000

Cost of sales ($200,000 + $60,000 - $40,000 intercompany
  purchases + $10,000 unrealized profit in ending inventory)                   (230,000)

      Gross profit                                                              230,000

Other expenses ($100,000 + $30,000)                                            (130,000)

      Total consolidated income                                                 100,000

Less: Noncontrolling interest expense ($10,000  20%)                            (2,000)

      Consolidated net income                                              $     98,000

Solution E5-9

1     Noncontrolling interest expense

      Seven's reported net income  40%                                    $     20,000
      Add: Intercompany profit from upstream sales in
        beginning inventory ($5,000  40%)                                         2,000
      Less: Intercompany profit from upstream sales in
        ending inventory ($10,000  40%)                                         (4,000)
            Noncontrolling interest expense                                $     18,000

2     Consolidated sales

      Combined sales                                                       $1,250,000
      Less: Intercompany sales                                                100,000
      Consolidated sales                                                   $1,150,000

            Consolidated cost of sales

      Combined cost of sales                                               $    650,000
      Less: Intercompany sales                                                 (100,000)
      Add: Intercompany profit in ending inventory                               10,000
      Less: Intercompany profit in beginning inventory                           (5,000)

            Consolidated cost of sales                                     $   555,000

      Total Consolidated Income
      Combined income                                                      $   300,000
      Less: Intercompany profit in ending inventory                            (10,000)
      Add: Intercompany profit in beginning inventory                            5,000
      Total Consolidated Income                                            $   295,000




                                        114
Chapter 5                                                                     115
Solution E5-10

                       Papillion Corporation and Subsidiary
                           Consolidated Income Statement
                                 December 31, 2011

Sales ($1,000,000 + $500,000 - $90,000 intercompany)               $1,410,000

Cost of sales ($400,000 + $250,000 - $90,000 intercompany -
  $10,000 unrealized profit in beginning inventory + $15,000
    unrealized profit in ending inventory                              (565,000)
Gross profit                                                            845,000

Depreciation expense                                                   (170,000)

Other expenses ($90,000 + $60,000 + $4,000 patents amortization)       (154,000)

Total consolidated income                                               521,000

Less: Noncontrolling interest expense ($150,000 + $10,000 profit
in beginning inventory - $15,000 profit in end. inventory)  20%        (29,000)

Consolidated net income                                            $    492,000

Supporting computations
Cost of investment in Saiki at January 1, 2007                     $  600,000
Book value acquired ($700,000  80%)                                 (560,000)
      Patents                                                      $   40,000
Patents amortization ($40,000/10 years) = $4,000 per year

Solution E5-11

                          Pill Corporation and Subsidiary
                           Consolidated Income Statement
                                 December 31, 2011

Sales ($1,000,000 + $500,000 - $90,000 intercompany)               $1,410,000
Cost of sales ($400,000 + $250,000 - $90,000 intercompany -
  $10,000 unrealized profit in beginning inventory + $15,000
    unrealized profit in ending inventory                              (565,000)
Gross profit                                                            845,000
Depreciation expense                                                   (170,000)
Other expenses ($90,000 + $60,000)                                     (150,000)
Total consolidated income                                               525,000
Less: Noncontrolling interest income ($150,000 + $10,000 profit
in beginning inventory - $15,000 profit in end. inventory)  20%        (29,000)

Consolidated net income                                            $    496,000

Supporting computations
Cost of investment in Saiki at January 1, 2010                     $  600,000
Book value acquired ($700,000  80%)                                 (560,000)
      Goodwill                                                     $   40,000


                                        115
116                                                Intercompany Profit Transactions — Inventories
Solution E5-12

1     b
      Income as reported                                                      $   200,000
      Add: Realization of profits in beginning inventory
        $120,000 - ($120,000/1.2)                                                   20,000
      Less: Unrealized profits in ending inventory
        $360,000 - ($360,000/1.2)                                                 (60,000)
      Realized income                                                             160,000
      Percent ownership                                                                60%
            Income from Suey                                                  $    96,000

2     c
      Suey's equity as reported ($3,400,000 + $2,100,000)                     $5,500,000
      Less: Unrealized profit in ending inventory                                (60,000)
      Realized equity                                                          5,440,000
      Noncontrolling share                                                            40%
            Noncontrolling interest December 31, 2011                         $2,176,000

3     b
      Realized equity                                                         $5,440,000
      Majority share                                                                  60%
            Investment balance December 31, 2011                              $3,264,000

      Note: The excess cost over book value is fully amortized. Therefore, the
      investment balance of $3,264,000 plus the noncontrolling interest of
      $2,176,000 is equal to the $5,440,000 realized equity at the balance
      sheet date.

Solution E5-13 [AICPA adapted]

1     d
      Combined revenues $340,000 - consolidated revenues $308,000

2     b
      Combined accounts receivable $45,000 - $39,000 consolidated accounts
      receivable

3     c
      Revenues $200,000/$150,000 cost of sales = 1 1/3 markup on cost

      Amount of Spin's ending inventory from Pard ($32,000 intercompany sales
       3/8 remaining unsold) = $12,000 at billed prices  3/4 = $9,000

4     b
      $10,000 noncontrolling interest/$50,000 stockholders' equity of Spin

5     a
      $30,000 unamortized patents/$2,000 amortization = 15 years remaining




                                     116
Chapter 5                                                                            117
Solution E5-14

                          Pullen Corporation and Subsidiary
                            Consolidated Income Statement
                        for the year ended December 31, 2006

Sales ($1,380,000 - $120,000 intercompany sales)                          $1,260,000

Cost of sales ($920,000 - $120,000 - $5,000a + $12,000b)                      (807,000)

        Gross profit                                                           453,000

Operating expenses                                                            (160,000)

        Total consolidated income                                              293,000

Less: Noncontrolling interest expense [$40,000 - ($12,000  .2)]               (37,600)

        Consolidated net income                                           $    255,400

a   Unrealized profit in beginning inventory (downstream) ($180,000 - $160,000)  .25 =
    $5,000
b   Unrealized profit in ending inventory (upstream ($120,000 - $90,000)  .4 = $12,000

SOLUTIONS TO PROBLEMS

Solution P5-1

                        Proctor Corporation and Subsidiary
              Consolidated Statement of Income and Retained Earnings
                       for the year ended December 31, 2008

Sales ($1,300,000 + $650,000 - $80,000 intercompany sales)                $1,870,000

Less: Cost of sales ($800,000 + $390,000 - $80,000 inter-
    company purchases - $12,000 unrealized profit in beginning
    inventory + $16,000 unrealized profit in ending inventory)            (1,114,000)

        Gross profit                                                           756,000

Other expenses ($340,000 + $160,000)                                          (500,000

        Income before noncontrolling interest                                  256,000

Noncontrolling interest expense($100,000+$12,000 - $16,000)  10%               (9,600)

        Consolidated net income                                                246,400

Add: Beginning consolidated retained earnings                                  369,200

Less: Dividends for 2008                                                      (100,000)

        Consolidated retained earnings December 31, 2008                  $    515,600




                                          117
118                                             Intercompany Profit Transactions — Inventories
Solution P5-2

1     Consolidated cost of sales — 2007

      Combined cost of sales ($625,000 + $300,000)                         $    925,000
      Less: Intercompany purchases                                             (300,000)
      Add: Profit in ending inventory                                            24,000
      Less: Profit in beginning inventory                                       (12,000)

            Consolidated cost of sales                                     $   637,000

2     Noncontrolling interest expense — 2007

      Slam's net income ($600,000 - $300,000 - $150,000)                   $   150,000
      Add: Profit in beginning inventory                                        12,000
      Less: Profit in ending inventory                                         (24,000)
      Slam's realized income                                                   138,000
      Noncontrolling interest percentage                                            10%

            Noncontrolling interest expense                                $     13,800

3     Consolidated net income — 2007

      Consolidated sales ($900,000 + $600,000 - $300,000)                  $1,200,000
      Less: Consolidated cost of sales                                       (637,000)
      Less: Consolidated expenses ($225,000 + $150,000)                      (375,000)
      Less: Noncontrolling interest expense                                   (13,800)

            Consolidated net income                                        $   174,200

      Alternatively,
      Putt's separate income                                               $     50,000
      Add: Income from Slam                                                     124,200

            Consolidated net income                                        $   174,200

4     Noncontrolling interest at December 31, 2007

      Equity of Slam December 31, 2007                                     $   520,000
      Less: Unrealized profit in ending inventory                              (24,000)
                                                                               496,000
      Noncontrolling interest percentage                                            10%

            Noncontrolling interest December 31, 2007                      $     49,600




                                       118
Chapter 5                                                                       119
Solution P5-3

1       Inventories appearing in consolidated balance sheet at December 31, 2007

        Beginning inventory — Potter ($60,000 - $4,000a)            $ 56,000
        Beginning inventory — Scan ($38,750 - $7,750b)                31,000
        Beginning inventory — Tray ($24,000 - 0)                      24,000

               Inventories December 31, 2007                        $111,000

        Intercompany profit:
        a   Potter:
            Inventory acquired intercompany ($60,000  40%)         $ 24,000
            Cost of intercompany inventory ($24,000/1.2)             (20,000)
            Unrealized profit in Potter's inventory                 $ 4,000

        b   Scan:
            Inventory acquired intercompany ($38,750  100%)        $ 38,750
            Cost of intercompany inventory ($38,750/1.25)            (31,000)
            Unrealized profit in Scan's inventory                   $ 7,750

2       Inventories appearing in consolidated balance sheet at December 31, 2008

        Ending inventory — Potter ($54,000 - $4,500c)               $ 49,500
        Ending inventory — Scan ($31,250 - $6,250d)                   25,000
        Ending inventory — Tray ($36,000 - 0)                         36,000

               Inventories December 31, 2008                        $110,500

        Intercompany profit:
        c   Potter:
            Inventory acquired intercompany ($54,000  50%)         $ 27,000
            Cost of intercompany inventory ($27,000/1.2)             (22,500)
            Unrealized profit in Potter's inventory                 $ 4,500

        d   Scan:
            Inventory acquired intercompany ($31,250  100%)        $ 31,250
            Cost of intercompany inventory ($31,250/1.25)            (25,000)
            Unrealized profit in Scan's inventory                   $ 6,250




                                           119
120                                                  Intercompany Profit Transactions — Inventories
Solution P5-4

1     Plier's income from Stuff                     2007             2008             2009

      75% of Stuff's net income               $    300,000 $       337,500 $         262,500

      Unrealized profit in December 31,
        2007 inventory (downstream)
            ($200,000  1/2)  100%               (100,000)        100,000

      Unrealized profit in December 31,
        2008 inventory (upstream)
            $100,000  75%                                         (75,000)            75,000

      Plier's income from Stuff               $    200,000 $       362,500 $         337,500

2     Plier's net income

      Plier's separate income                 $1,800,000 $1,700,000 $2,000,000

      Add: Income from Stuff                       200,000         362,500           337,500

      Plier's net income                      $2,000,000 $2,062,500 $2,337,500

3     Consolidated net income

      Separate incomes of Plier and
        Stuff combined                        $2,200,000 $2,150,000 $2,350,000

      Unrealized profit in December 31,
        2007 inventory                            (100,000)       100,000

      Unrealized profit in December 31,
        2008 inventory                                          (100,000)            100,000

      Total income                                2,100,000 2,150,000             2,450,000

      Less: Noncontrolling interest expense
            2007 $400,000  25%                   (100,000)
            2008 ($450,000 - $100,000)
               25%                                                (87,500)
            2009 ($350,000 + $100,000)
               25%                                                                 (112,500)

      Consolidated net income                 $2,000,000 $2,062,500 $2,337,500




                                      120
Chapter 5                                                                                           121
Solution P5-5
                             Pane Corporation and Subsidiary
                               Consolidation Working Papers
                           for the year ended December 31, 2007

                                                              Adjustments and           Consolidated
                               Pane           100% Seal        Eliminations              Statements
Income Statement
Sales                      $   800,000 $ 400,000          a 120,000                 $1,080,000
Income from Seal               102,000                    d 102,000
Cost of sales                  400,000*  200,000*         b 12,000     a 120,000         472,000*
                                                                       c 20,000
Depreciation expense           110,000*   40,000*                                        150,000*
Other expenses                 192,000*   60,000*         f    6,000                     258,000*
Net income                 $   200,000 $ 100,000                                    $    200,000

Retained Earnings
Retained earnings — Pane   $   600,000                                                   600,000
Retained earnings — Seal                  $ 380,000       e 380,000
Net income                     200,000        100,000                                  200,000
Dividends                      100,000*         50,000*                d   50,000        100,000*
Retained earnings
  December 31              $   700,000    $ 430,000                                 $    700,000

Balance Sheet
Cash                       $    54,000    $    37,000                               $     91,000
Receivables — net               90,000         60,000                  g   17,000        133,000
Inventories                    100,000          80,000                 b   12,000        168,000
Other assets                    70,000          90,000                                   160,000
Land                            50,000          50,000                                   100,000
Buildings — net                200,000         150,000                                   350,000
Equipment — net                500,000         400,000                                   900,000
Investment in Seal             736,000                    c   20,000   d 52,000
                                                                       e 704,000
Patents                                                   e   24,000   f   6,000        18,000
                           $1,800,000     $ 867,000                                 $1,920,000

Accounts payable           $  160,000 $ 47,000   g 17,000                           $  190,000
Other liabilities             340,000    90,000                                        430,000
Common stock, $10 par         600,000   300,000  e 300,000                             600,000
Retained earnings             700,000  430,000                                       700,000
                           $1,800,000 $ 867,000                                     $1,920,000

Supporting computations
Unrealized profit in beginning inventory ($40,000  1/2) = $20,000
Unrealized profit in ending inventory ($48,000  1/4) = $12,000

Seal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000
profit in ending inventory, and less $6,000 patents amortization equals $102,000
income from Seal.




                                               121
122                                                            Intercompany Profit Transactions — Inventories
Solution P5-6
                              Patty Corporation and Subsidiary
                                Consolidation Working Papers
                            for the year ended December 31, 2008

                                                               Adjustments and             Consolidated
                                 Patty          Sue 75%          Eliminations               Statements
Income Statement
Sales                        $   600,000 $ 400,000         a 130,000                      $   870,000
Income from Sue                  102,500                   d 102,500
Cost of sales                    270,000*  210,000*        b 20,000       a 130,000           360,000*
                                                                          c 10,000
Operating expenses               145,000*        40,000*                                      185,000*
Noncontrolling int.expense                                 f   37,500                          37,500*
Net income                 $     287,500 $ 150,000                                      $   287,500

Retained Earnings
Retained earnings — Patty    $   182,500                                                  $   182,500
Retained earnings — Sue                     $   90,000     e   90,000
Net income                       287,500       150,000                                      287,500
Dividends                        150,000*        50,000*                  d   37,500
                                                                          f   12,500          150,000*
Retained earnings
  December 31                $   320,000 $ 190,000                                        $   320,000

Balance Sheet
Cash                         $    85,000 $ 30,000                                         $   115,000
Accounts receivable              165,000   100,000                        g   15,000          250,000
Dividends receivable              15,000                                  h   15,000
Inventories                       60,000    80,000                        b   20,000          120,000
Land                              80,000    50,000                                            130,000
Buildings — net                  230,000   100,000                                            330,000
Equipment — net                  200,000        140,000                                       340,000
Investment in Sue                385,000                   c   10,000     d 65,000
                                                                          e 330,000
Goodwill                                                   e 150,000                         150,000
                             $1,220,000 $ 500,000                                         $1,435,000

Accounts payable             $  225,000 $ 100,000  g 15,000                               $   310,000
Dividends payable                70,000    20,000  h 15,000                                    75,000
Other liabilities               155,000    40,000                                             195,000
Common stock, $10 par           450,000   150,000  e 150,000                                  450,000
Retained earnings               320,000  190,000                                            320,000
                             $1,220,000 $ 500,000

Noncontrolling interest January 1                                         e   60,000
Noncontrolling interest December 31                                       f   25,000          85,000
                                                                                          $1,435,000
*     Deduct

Supporting computations
Investment in Sue at January 1, 2007                                                      $300,000
Book value acquired ($200,000  75%)                                                       150,000
       Goodwill                                                                           $150,000

                                                122
Chapter 5                                                                      123
Solution P5-7

Preliminary computations

Investment cost                                                    $275,000
Less: Book value acquired ($250,000  90%)                          225,000
      Patents                                                      $ 50,000

Patents amortization       $50,000/10 years = $5,000 per year

Upstream sales

        Unrealized profit in December 31, 2006 inventory of Poly
          $28,000 - ($28,000  1.4) = $8,000

        Unrealized profit in December 31, 2007 inventory of Poly
          $42,000 - ($42,000  1.4) = $12,000

Income from Susan

Share of Susan's reported income ($100,000  90%)                  $ 90,000
Less: Patents amortization                                           (5,000)
Less: Unrealized profit in ending inventory ($12,000  90%)         (10,800)
Add: Unrealized profit in beginning inventory ($8,000  90%)          7,200
      Income from Susan                                            $ 81,400

Investment balance

Initial investment cost                                            $275,000
Increase in Susan's net assets from December 31, 2004
  to December 31, 2007 ($70,000  90%)                               63,000
Patent amortization for 3 years                                     (15,000)
Unrealized profit in December 31, 2007 inventory                    (10,800)
      Investment balance December 31, 2007                         $312,200

Noncontrolling interest expense

Reported income of Susan                                           $100,000
Add: Unrealized profit in beginning inventory                         8,000
Less: Unrealized profit in ending inventory                         (12,000)
Susan's realized income                                              96,000
Noncontrolling interest percentage                                       10%
Noncontrolling interest expense                                    $ 9,600




                                        123
124                                                            Intercompany Profit Transactions — Inventories
Solution P5-7 (continued)

                          Poly Corporation and Subsidiary
                            Consolidation Working Papers
                       for the year ended December 31, 2007

                                                               Adjustments and             Consolidated
                                 Poly          Susan 90%         Eliminations               Statements
Income Statement
Sales                       $ 819,000  $ 560,000           a 560,000                      $ 819,000
Income from Susan              81,400                      d 81,400
Cost of sales                 546,000*   400,000*          b 12,000       a 560,000          390,000*
                                                                          c   8,000
Other expenses               154,400*    60,000*           f    5,000                       219,400*
Noncontrolling int.expense                                 h    9,600                         9,600*
Net income                 $ 200,000  $ 100,000                                           $ 200,000

Retained Earnings
Retained earnings — Poly    $ 120,000                                                     $ 120,000
Retained earnings — Susan                  $    70,000     e   70,000
Net income                      200,000        100,000                                     200,000
Dividends                       100,000*         50,000*                  d   45,000
                                                                          h    5,000         100,000*
Retained earnings
  December 31               $ 220,000      $ 120,000                                      $ 220,000

Balance Sheet
Cash                        $    75,800    $     50,000                                   $ 125,800
Inventory                        42,000          80,000                   b   12,000        110,000
Other current assets             60,000          20,000                   g   10,000         70,000
Plant assets — net              300,000         300,000                                     600,000
Investment in Susan             312,200                    c    7,200     d 36,400
                                                                          e 283,000
Patents                                                    e   40,000     f   5,000          35,000
                            $ 790,000      $ 450,000                                      $ 940,800

Current liabilities         $ 170,000  $ 130,000  g 10,000                                $ 290,000
Capital stock                 400,000    200,000  e 200,000                                 400,000
Retained earnings             220,000   120,000                                           220,000
                            $ 790,000  $ 450,000

Noncontrolling interest January 1                          c      800     e   27,000
Noncontrolling interest December 31                                       h    4,600         30,800
                                                                                          $ 940,800
*     Deduct




                                                124
Chapter 5                                                                       125
Solution P5-8

1       Entries to correct Phil's income from Sert and investment accounts

        Retained earnings January 1, 2011                  4,500
                    Investment in Sert                                 4,500
              To adjust beginning retained earnings and beginning investment
              accounts for unrealized profit in the December 31, 2010 inventory
              ($5,000  90%).

        Investment in Sert                                 4,500
                    Income from Sert                                    4,500
              To recognize intercompany profit in the December 31, 2010
              inventory of goods acquired from Sert ($5,000  90%).

        Income from Sert                                   4,000
                    Investment in Sert                                  4,000
              To eliminate intercompany profit in the December 31, 2011
              inventory.

Working paper entries in general journal form:

a       Noncontrolling interest                             500
        Investment in Sert                                4,500
              Cost of sales                                            5,000

b       Sales                                            10,000
                Cost of sales                                         10,000

c       Cost of sales                                     4,000
              Inventory                                                4,000

d       Income from Sert                                 27,500
              Dividends                                               18,000
              Investment in Sert                                       9,500

e       Capital stock — Sert                             80,000
        Retained earnings — Sert                         40,000
              Investment in Sert                                     108,000
              Noncontrolling interest                                 12,000

f       Accounts payable                                 10,000
              Accounts receivable                                    10,000

g       Noncontrolling interest expense                   3,500
              Dividends                                                2,000
              Noncontrolling interest                                  1,500




                                          125
126                                                            Intercompany Profit Transactions — Inventories
Solution P5-8 (continued)

2                              Phil Corporation and Subsidiary
                                 Consolidation Working Papers
                            for the year ended December 31, 2011

                                                                Adjustments and            Consolidated
                                  Phil          Sert 90%          Eliminations              Statements
      Income Statement
      Sales                  $ 500,000  $ 100,000          b 10,000                        $ 590,000
      Income from Sert          27,500                     d 27,500
      Cost of sales            240,000*    40,000*         c 4,000         a    5,000          269,000*
                                                                           b   10,000
      Other expenses         174,000*            30,000*                                     204,000*
      Noncontr.int.expense                                 g   3,500                           3,500*
      Net income           $ 113,500  $          30,000                                    $ 113,500

      Retained Earnings
      Retained earnings —
        Phil                 $ 105,500                                                     $ 105,500
      Retained earnings —
        Sert                                $    40,000    e 40,000
      Net income                 113,500        30,000                                       113,500
      Dividends                   70,000*        20,000*                   d   18,000
                                                                           g    2,000           70,000*
      Retained earnings
        December 31          $ 149,000      $    50,000                                    $ 149,000

      Balance Sheet
      Cash                   $    63,000    $    30,000                                    $    93,000
      Inventories                 60,000         15,000                    c    4,000           71,000
      Accounts receivable         40,000         20,000                    f   10,000           50,000
      Plant assets — net         220,000        105,000                                        325,000
      Investment in Sert         113,000                   a   4,500       d   9,500
                                                                           e 108,000
                             $ 496,000      $ 170,000                                      $ 539,000

      Accounts payable       $  47,000  $ 40,000   f 10,000                                $    77,000
      Capital stock            300,000     80,000  e 80,000                                    300,000
      Retained earnings        149,000    50,000                                             149,000
                             $ 496,000  $ 170,000

      Noncontrolling interest January 1                    a      500      e   12,000
      Noncontrolling interest December 31                                  g    1,500         13,000
                                                                                           $ 539,000
      *   Deduct

      Noncontrolling interest expense: ($30,000 + $5,000)  10%




                                                126
Chapter 5                                                                                         127
Solution P5-9
                             Pan Corporation and Subsidiary
                              Consolidation Working Papers
                          for the year ended December 31, 2007

                                               100%           Adjustments and       Consolidated
                                 Pan           Sal              Eliminations         Statements
Income Statement
Sales                       $   800,000    $   400,000  a 120,000                   $1,080,000
Income from Sal                 108,000                 d 108,000
Cost of sales                   400,000*       200,000* b 12,000       a 120,000        472,000*
                                                                       c 20,000
Depreciation expense            110,000*        40,000*                                 150,000*
Other expenses                  192,000*        60,000*                                 252,000*
Net income                  $   206,000    $   100,000                              $   206,000

Retained Earnings
Retained earnings — Pan     $   606,000                                                 606,000
Retained earnings — Sal                    $   380,000    e 380,000
Net income                      206,000       100,000                                 206,000
Dividends                       100,000*        50,000*                d   50,000       100,000*
Retained earnings
  December 31               $   712,000    $   430,000                              $   712,000

Balance Sheet
Cash                        $    54,000    $    37,000                              $    91,000
Receivables — net                90,000         60,000                 f   17,000       133,000
Inventories                     100,000         80,000                 b   12,000       168,000
Other assets                     70,000         90,000                                  160,000
Land                             50,000         50,000                                  100,000
Buildings — net                 200,000        150,000                                  350,000
Equipment — net                 500,000        400,000                                  900,000
Investment in Sal               748,000                   c   20,000   d 58,000
                                                                       e 710,000
        Goodwill                                          e   30,000                    30,000
                            $1,812,000     $   867,000                              $1,932,000

Accounts payable            $  160,000     $    47,000    f   17,000                $  190,000
Other liabilities              340,000          90,000                                 430,000
Common stock, $10 par          600,000         300,000    e 300,000                    600,000
Retained earnings              712,000         430,000                                 712,000
                            $1,812,000     $   867,000                              $1,932,000

Supporting computations
Unrealized profit in beginning inventory ($40,000  1/2) = $20,000
Unrealized profit in ending inventory ($48,000  1/4) = $12,000

Sal's income of $100,000 plus $20,000 profit in beginning inventory less
$12,000 profit in ending inventory.




                                               127
128                                                            Intercompany Profit Transactions — Inventories
Solution P5-10
                             Pat Corporation and Subsidiary
                              Consolidation Working Papers
                          for the year ended December 31, 2008

                                                                 Adjustments and           Consolidated
                                  Pat            Sun 75%           Eliminations             Statements
Income Statement
Sales                        $   600,000    $    400,000  a 130,000                        $   870,000
Income from Sun                   92,500                  d 92,500
Cost of sales                    270,000*        210,000* b 20,000          a 130,000          360,000*
                                                                            c 10,000
Operating expenses               145,000*         40,000* f      10,000                        195,000*
Noncontrolling int.expense                                i      37,500                         37,500*
Net income                 $     277,500    $    150,000                                   $   277,500

Retained Earnings
Retained earnings — Pat      $   172,500                                                   $   172,500
Retained earnings — Sun                     $     90,000  e      90,000
Net income                       277,500        150,000                                      277,500
Dividends                        150,000*         50,000*                   d   37,500
                                                                            i   12,500         150,000*
Retained earnings
  December 31                $   300,000    $    190,000                                   $   300,000

Balance Sheet
Cash                         $    85,000    $     30,000                                   $   115,000
Accounts receivable              165,000         100,000                    g   15,000         250,000
Dividends receivable              15,000                                    h   15,000
Inventories                       60,000          80,000                    b   20,000         120,000
Land                              80,000          50,000                                       130,000
Buildings — net                  230,000         100,000                                       330,000
Equipment — net                  200,000         140,000                                       340,000
Investment in Sun                365,000                   c     10,000     d 55,000
                                                                            e 320,000
Patents                                                    e 140,000        f 10,000          130,000
                             $1,200,000     $    500,000                                   $1,415,000

Accounts payable             $  225,000     $    100,000  g 15,000                         $   310,000
Dividends payable                70,000           20,000  h 15,000                              75,000
Other liabilities               155,000           40,000                                       195,000
Common stock, $10 par           450,000          150,000  e 150,000                            450,000
Retained earnings               300,000         190,000                                      300,000
                             $1,200,000     $    500,000
Noncontrolling interest January 1                                           e   60,000
Noncontrolling interest December 31                                         i   25,000         85,000
                                                                                           $1,415,000
*     Deduct

Supporting computations
Investment in Sun at January 1, 2007                                                      $300,000
Book value acquired ($200,000  75%)                                                       150,000
       Patents (15 year amortization)                                                     $150,000


                                                128
Chapter 5                                                                       129
Solution P5-11

Preliminary computations

Investment cost                                                  $275,000
Less: Book value acquired ($250,000  90%)                        225,000
      Goodwill                                                   $ 50,000

Upstream sales

        Unrealized profit in December 31, 2009 inventory of Po
          $28,000 - ($28,000  1.4) = $8,000

        Unrealized profit in December 31, 2010 inventory of Po
          $42,000 - ($42,000  1.4) = $12,000

Income from San

Share of San's reported income ($100,000  90%)                  $ 90,000
Less: Unrealized profit in ending inventory ($12,000  90%)       (10,800)
Add: Unrealized profit in beginning inventory ($8,000  90%)        7,200

        Income from San                                          $ 86,400

Investment balance

Initial investment cost                                          $275,000
Increase in San's net assets from December 31, 2007
  to December 31, 2010 ($70,000  90%)                                63,000
Unrealized profit in December 31, 2010 inventory                     (10,800)

        Investment balance December 31, 2010                     $327,200

Noncontrolling interest expense
Reported income of San                                           $100,000
Add: Unrealized profit in beginning inventory                       8,000
Less: Unrealized profit in ending inventory                       (12,000)
San's realized income                                              96,000
Noncontrolling interest percentage                                     10%

Noncontrolling interest expense                                  $     9,600




                                       129
130                                                            Intercompany Profit Transactions — Inventories
Solution P5-11 (continued)

                              Po Corporation and Subsidiary
                               Consolidation Working Papers
                          for the year ended December 31, 2010

                                                               Adjustments and             Consolidated
                                   Po           San 90%          Eliminations               Statements
Income Statement
Sales                        $ 819,000      $ 560,000      a 560,000                       $ 819,000
Income from San                 86,400                     d 86,400
Cost of sales                  546,000*         400,000*   b 12,000       a 560,000          390,000*
                                                                          c   8,000
Other expenses               154,400*            60,000*                                     214,400*
Noncontrolling int.expense                                 f    9,600                          9,600*
Net income                 $ 205,000        $ 100,000                                      $ 205,000

Retained Earnings
Retained earnings — Po       $ 130,000                                                     $ 130,000
Retained earnings — San                     $    70,000    e   70,000
Net income                       205,000       100,000                                     205,000
Dividends                        100,000*        50,000*                  d   45,000         100,000*
                                                                          f    5,000
Retained earnings
  December 31                $ 235,000      $ 120,000                                      $ 235,000

Balance Sheet
Cash                         $    75,800    $    50,000                                    $ 125,800
Inventory                         42,000         80,000                   b   12,000         110,000
Other current assets              60,000         20,000                   g   10,000          70,000
Plant assets — net               300,000        300,000                                      600,000
Investment in San                327,200                   c    7,200     d 41,400
                                                                          e 293,000
Goodwill                                                   e   50,000                         50,000
                             $ 805,000      $ 450,000                                      $ 955,800

Current liabilities          $ 170,000  $ 130,000  g 10,000                                $ 290,000
Capital stock                  400,000    200,000  e 200,000                                 400,000
Retained earnings              235,000   120,000                                           235,000
                             $ 805,000  $ 450,000

Noncontrolling interest January 1                          c      800     e   27,000
Noncontrolling interest December 31                                       f    4,600          30,800
                                                                                           $ 955,800
*     Deduct




                                                130

				
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