Chapter 6 - Solution Manual

Chapter 06 - Intercompany Inventory Transactions

CHAPTER 6 INTERCOMPANY INVENTORY TRANSACTIONS ANSWERS TO QUESTIONS Q6-1  All inventory transfers between related companies must be eliminated to avoid an

overstatement of revenue and cost of goods sold in the consolidated income statement. In addition, addition, when unrealized profits profits exist at the end of the period, the eliminations eliminations are needed to avoid overstating inventory and consolidated net income. Q6-2  An inventory transfer at cost results in an overstatement of sales and cost of goods sold.

While net income is not affected, gross profit ratios and other financial statement analysis may be substantially in error if appropriate eliminations are not made. Q6-3  An upstream sale occurs when the parent purchases items from one or more

subsidiaries. A downstream sale occurs when the sale is made by the parent to one or more subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation worksheet will know whether to reduce consolidated net income income assign assigned ed to the controll controlling ing intere interest st by the full amount amount of the unrealize unrealized d profit profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream). Q6-4  As in all cases, the total amount of the unrealized profit must be eliminated in preparing

the consolidated statements. When the profits are on the parent company's books, consolidated net income and income assigned to the controlling interest are reduced by the full amount of the unrealized profit. Q6-5 Consolidated net income is reduced by the full amount of the unrealized profits. In the

upst upstre ream am sale sale,, the the unre unreal aliz ized ed prof profit its s are are appo apport rtio ione ned d betw betwee een n the the paren parentt comp compan any y shareholders and the noncontrolling shareholders. Thus, consolidated net income assigned to the controlling and noncontrolling interests is reduced by a pro rata portion of the unrealized profits. Q6-6 Income assigned to the noncontrolling interest is affected when unrealized profits are

recorded on the subsidiary's books as a result of an upstream sale. A downstream sale should have no effect on the income assigned to noncontrolling interest because the profits are on the books of the parent. Q6-7 The basic eliminating entry needed when the item is resold before the end of the period

is: Sales Cost of Goods Sold

XXXXXX XXXXXX

The debit to sales is based on the intercorporat intercorporate e sale price. price. This means that only the revenue reco recorde rded d by the the comp compan any y ulti ultima mate tely ly sell selling ing to the the nona nonaff ffililia iate te is to be incl includ uded ed in the the consolidated income statement. Cost of goods sold is credited for the amount paid by the purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded by the initial owner to be reported in the consolidated statement.

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Chapter 06 - Intercompany Inventory Transactions

Q6-8 The basic eliminating entry needed when one or more of the items are not resold before

the end of the period is: Sales Cost of Goods Sold Inventory

XXXXXX XXXXXX XXXXXX

The debit to sales is for the full amount of the transfer price. Inventory is credited for the unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold by the company making the intercompany sale. Q6-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an

external party. The amount reported as cost of goods sold is based on the amount paid for the inventory when it was produced or purchased from an external party. If inventory has been purchased by one company and sold to a related company, the cost of goods sold recorded on the intercorporate sale must be eliminated. Q6-10 No adjustment to retained earnings is needed if the intercorporate sales have been

made at cost or if all intercorporate sales have been resold to an external party in the same accounting period. If all of the intercorporate sales have not been resold by the end of the period period,, under under the fully fully adjust adjusted ed equity equity method method,, the parent parent defers defers unreal unrealize ized d profit profits s in the investment in sub and income from sub accounts. This adjustment would be made to retained earnings under the modified equity method. However, regardless of the parent’s method for  accounting for the investment, the amount of the noncontrolling interest is reduced by the NCI’s proportionate share of the unrealized profit associated with upstream sales. Q6-11  A proportionate share of the realized retained earnings of the subsidiary are assigned to

the the nonc noncon ontr trol olliling ng inte intere rest st.. Any Any unre unreal aliz ized ed prof profit its s on upst upstre ream am sale sales s are are dedu deduct cted ed proportionately from the amount assigned to the noncontrolling interest. Unrealized profits on downstream sales do not affect the noncontrolling interest. Q6-12 When inventory profits from a prior period intercompany transfer are realized in the

current period, the profit is added to consolidated net income and to the income assigned to the shareholders of the company that made the intercompany sale. If the unrealized profits arise from a downstream sale, income assigned to the controlling interest will increase by the full amount of profit realized. When the profits arise from an upstream sale, income assigned to the controlling and noncontrolling interests will be increased proportionately in the period the profit is realized. Thus, knowledge of whether the profits resulted from an upstream or a downstream sale is imperative imperative in assigning consolidated net income to the appropriate shareholder group. Q6-13 Under the fully adjusted equity method, consolidated retained earnings is not affected

directly by unrealized profits. Unrealized profits are deferred in the investment in sub and income from sub accounts on the parent’s books. Income from sub is closed out to retained earnings, so the deferral of unrealized profits indirectly affects retained earnings. As a result, the amount reported for consolidated retained earnings is always equal to the parent’s retained earnings. Q6-14 Consolidated retained earnings are always equal to the parent’s retained earnings under 

the fully adjusted adjusted equity method. method. Since the parent parent company defers defers unrealized unrealized profits in the income from sub and investment in sub accounts and since income from sub is closed out to the parent’s retained earnings, the ending balance in consolidated retained earnings will reflect the reduction associated with the deferral of unrealized profits.

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Chapter 06 - Intercompany Inventory Transactions

Q6-15* Sales Sales betwee between n subsid subsidiar iaries ies are treate treated d in the same same manner manner as upstre upstream am sales. sales.

Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the end of the period are eliminated and consolidated net income and income assigned to the controlling and noncontrolling interests is reduced. Q6-16* When a company is acquired in a business combination the transactions occurring

before the combination generally are regarded as transactions with unrelated parties and no adjustments or eliminations are needed. All transactions between the companies following the combination must be fully eliminated.

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Chapter 06 - Intercompany Inventory Transactions

SOLUTIONS TO CASES C6-1 Measuring Cost of Goods Sold

a. While the rule covers only a part of the elimination needed, Charlie is correct in that the cost of goods sold recorded by the selling company must be eliminated to avoid overstating that caption in the consolidated income statement. b. The rules will result in the proper consolidated totals if rule #1 is expanded to include a debit to sales and a credit to ending inventory for the amount of profit recorded by the company that sold to its affiliate. c. The way in which the rule is stated makes it appear to be incorrect, but it is correct. The rule is appropriate in that the cost of goods sold recorded by the purchasing affiliate is equal to the cost of goods sold to the first owner plus the profit the first owner recorded on the sale. Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold. If  an equal amount of sales is eliminated, the rule should result in proper consolidated financial statement totals. d. The employee would be forced to look at the books of the selling affiliate and determine the difference between the intercorporate sale price and the price it paid to acquire or produce the items. If the items sold to affiliates are routinely produced and costs do not fluctuate greatly, it may be possible to use some form of gross profit ratio to estimate the amount of unrealized profit. C6-2 Inventory Values and Intercompany Transfers

MEMO To: From: Re:

President Water Products Corporation , CPA Inventory Sale and Purchase of New Inventory

If Water Products holds only a small percent of the ownership of Plumbers Products and Growinkle Manufacturing, it should have no difficulty in reporting the desired results. This would not be the case if the two companies are subsidiaries of Water Products. If both Plumbers Products and Growinkel are subsidiaries of Water Products, both the sale of  inventory to Plumbers Supply and the purchase of inventory from Growinkle Manufacturing must be eliminated. In addition, the unrealized profit on any unsold inventory involved in these transfers must be eliminated in preparing the financial statements for the current period. The consolidated income statement should include the same amount of income on the inventory sold to Plumbers Supply and resold during the year as would have been recorded if Water  Products had sold the inventory directly to the purchaser. Any income recorded by Water  Products on inventory not resold by Plumbers Supply must be eliminated.

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Chapter 06 - Intercompany Inventory Transactions

Similarly, the consolidated income statement should include the same amount of income on the inventory purchased by Water Products and resold during the year as would have been recorded if Growinkle Manufacturing had sold the inventory directly to the purchaser. Any income recorded by Growinkle Manufacturing on inventory not resold by Water Products must be eliminated. Consolidated net income may increase if Plumbers Supply is able to sell the inventory it purchased from Water Products at a higher price than would have been received by Water  Products or if it is able to sell a larger number of units. The same can be said for the inventory purchased by Water Products from Growinkle Manufacturing. It is important to recognize that the transfer of inventory between Water Products and its subsidiaries does not in itself generate income for the consolidated entity.  An additional level of complexity may arise in this situation if Water Products uses the LIFO inventory method. It might, for example, be forced to carry over its LIFO cost basis on the old inventory sold to Plumbers Supply to the new inventory purchased from Growinkle Manufacturing since it was replaced within the accounting period. Primary citation:

 ARB 51, Par. 6 (ASC 810) C6-3 Intercorporate Inventory Transfers

MEMO To: From: Re:

Treasurer   Evert Corporation , CPA Inventory Sale to Parent

This memo is prepared in response to your request for information on the appropriate treatment of intercompany inventory transfers in consolidated financial statements. The specific eliminating entries required in this case depend on the valuation assigned to the inventory at December 31, 20X2. Frankle Company sold inventory with a carrying value of $240,000 to Evert for $180,000 on December 20, 20X2. Since the exchange price was well below Frankle’s cost, consideration should be given to whether the inventory should be reported at $180,000 or $240,000 in the consolidated statements at December 31, 20X2, under the lower-of-cost-or-market rule. While the value of the inventory apparently had fallen below Frankle’s carrying value, the accounting standards indicate no loss should be recognized when the evidence indicates that cost will be recovered with an approximately normal profit margin upon sale in the ordinary course of  business. [ARB 43, Chapter 4, Par. 9; ASC 330] We are told the management of Frankle considered the drop in prices to be temporary and Evert was able to sell the inventory for $70,000 more than the original amount paid by Frankle. It therefore seems appropriate for the consolidated entity to report the inventory at Frankle’s cost of $240,000 at December 31, 20X2. In preparing the consolidated statements at December 31, 20X2 and 20X3, the effects of the 6-5

Chapter 06 - Intercompany Inventory Transactions

intercompany transfer should be eliminated. [ARB 51, Par. 6; ASC 810] The following eliminating entry is required at December 31, 20X2: Sales Inventory Cost of Goods Sold

180,000 60,000 240,000

The above entry will increase the carrying value of the inventory to $240,000. Eliminating sales of $180,000 and cost of goods sold of $240,000 will increase consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x 0.10). These changes will result in an increase in consolidated retained earnings and the amount assigned to the noncontrolling shareholders in the consolidated balance sheet by $54,000 and $6,000, respectively. C6-3 (continued)

The following eliminating entry is required at December 31, 20X3: Cost of Goods Sold Investment in Sub NCI in NA of Sub

60,000 54,000 6,000

The above entry will reduce consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x .10). The credits to Investment in Sub and NCI in NA of Sub needed to bring the beginning balances into agreement with those reported at December 31, 20X2. No eliminations are required for balances reported at December 31, 20X3, because the inventory has been sold to a nonaffiliate prior to year-end. Primary citations:

 ARB 43, CH 4, Par. 9 (ASC 330)  ARB 51, Par. 6 (ASC 810) C6-4 Unrealized Inventory Profits

a. When the amount of unrealized inventory profits on the books of the subsidiary at the beginning of the period is greater than the amount at the end of the period, the income assigned to the noncontrolling interest for the period will exceed a pro rata portion of the reported net income of the subsidiary. b. The subsidiary apparently had less unrealized inventory profit at the end of the period than it did at the start of the period. In addition, the parent must have had more unrealized profit on its books at the end of the period than it did at the beginning. The negative effect of the latter  apparently offset the positive effect of the reduction in unrealized profits by the subsidiary. c. The most likely reason is that a substantial amount of the parent company sales was made to its subsidiaries and the cost of goods sold on those items was eliminated in preparing the consolidated statements.

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Chapter 06 - Intercompany Inventory Transactions

d. A loss was recorded by the seller on an intercompany sale of inventory to an affiliate and the purchaser continues to hold the inventory. C6-5 Eliminating Inventory Transfers

a. If no intercompany sales are eliminated, the income statement may include overstated sales revenue and cost of goods sold. The net impact on income will depend upon whether there were more unrealized profits at the beginning or end of the year. If Ready Building does not hold total ownership of the subsidiaries, the amount of income assigned to noncontrolling shareholders is likely to be incorrect as well. Inventory, current assets and total assets, retained earnings, and stockholders' equity are likely to be overstated if inventories are sold to affiliates at a profit. If the companies pay income taxes on their individual earnings, the amount of income tax expense also will be overstated in the period in which unrealized profits are reported and understated in the period in which the profits are realized. b. Because profit margins vary considerably, the amount of unrealized profit may vary considerably if uneven amounts of product are purchased by affiliates from period to period. Ready Building needs to establish a formal system to monitor intercompany sales. Perhaps the best alternative would be to establish a separate series of accounts to be used solely for  intercompany transfers. Alternatively, it may be possible to use unique shipping containers for  intercompany sales or to specifically mark the containers in some way to identify the intercompany shipments at the time of receipt. The purchaser might then use a different type of  inventory tag or mark these units in some way when the product is received and placed in inventory. Inventory count teams could then easily identify the product when inventories are taken. c. A number of factors might be considered. The most important inventory system is the one used by the company making the intercompany purchase. When intercompany inventory purchases are bunched at the end of the year, the amount of unrealized profit included in ending inventory may be quite different under FIFO versus LIFO. If intercompany purchases are placed in a LIFO inventory base, inventories may be misstated for a period of years before the inventory is resold. Eliminating entries must be made each of the years until resale to avoid a misstatement of assets and equities. In those cases where the intercompany purchases are in high volume and the inventory turns over very quickly, a small amount of inventory left at the end of the period may be immaterial and of little concern. Typically, a parent will align inventory costing methods subsequent to a subsidiary acquisition to avoid problems caused by differences in accounting for the same items or types of items. d. It may be necessary to start by looking at intercorporate cash receipts and disbursements to determine the extent of intercorporate sales. One or more months might be selected and all vouchers examined to establish the level of intercorporate sales and the profit margins recorded on the sales. For those products sold throughout the year, it may be possible to estimate for the year as a whole based on an examination of several months. Once total intercompany sales and profit margins have been estimated, the amount of unrealized profit at year end should be estimated. One approach would be to take a physical inventory of the specific product types which have been identified and attempt to trace back using the product identification numbers or  shipping numbers to determine what portion of the inventory on hand was purchased from affiliates.

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Chapter 06 - Intercompany Inventory Transactions

C6-6 Intercompany Profits and Transfers of Inventory

a. The intercompany transfers of Xerox (www.xerox.com) between segments are apparently relatively insignificant because they are not reported in the notes to the consolidated financial statements relating to segment reporting. For consolidation purposes, all significant intercompany accounts and transactions are eliminated. b. Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated market prices. The amount of intercompany transfers is large. In the fiscal year ending December 31, 2009, Exxon Mobil reported eliminations of $302.6 billion of intersegment transfers, which does not include intercompany transfers within segments. This amount represents nearly 50 percent of total reported segment sales. For consolidation purposes, Exxon Mobil eliminates the effects of intercompany transactions. c. Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles, parts, and components manufactured by the company and its subsidiaries, with a smaller  amount of financial and other services included. The amount of intercompany transfers is relatively small in relation to sales to unaffiliated customers. The amount has been decreasing in recent years. The effects of intercompany transfers are eliminated in consolidation.

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Chapter 06 - Intercompany Inventory Transactions

SOLUTIONS TO EXERCISES E6-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted]

1.

a

2.

c

3.

a

4.

c

5.

c

6.

c

Net assets reported Profit on intercompany sale Proportion of inventory unsold at year end ($60,000 / $240,000) Unrealized profit at year end  Amount reported in consolidated statements Inventory reported by Banks ($175,000 + $60,000) Inventory reported by Lamm Total inventory reported Unrealized profit at year end [$50,000 x ($60,000 / $200,000)]  Amount reported in consolidated statements

6-9

$320,000 $48,000 x

0.25 (12,000) $308,000 $235,000 250,000 $485,000 (15,000) $470,000

Chapter 06 - Intercompany Inventory Transactions

E6-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted]

1.

b

Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small ($500,000 x 0.40) Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x 4 / 5) x 0.60] Cost of goods sold for consolidated entity

$ 800,000 700,000 $1,500,000 (200,000) (240,000) $1,060,000

Note:

Answer b in the actual CPA examination question was $1,100,000, requiring candidates to select the closest answer.

2.

d

$32,000

=

($200,000 + $140,000) – $308,000

3.

b

$6,000

=

($26,000 + $19,000) – $39,000

4.

c

$9,000

=

Inventory held by Spin ($32,000 x 0.375) Unrealized profit on sale [($30,000 + $25,000) – $52,000] Carrying cost of inventory for  Power

$12,000 (3,000 ) $ 9,000

5.

b

0.20 = $14,000 / [(Stockholders’ Equity $50,000) +(Patent $20,000)]

6.

b

14 years = ($28,000 / [(28,000 - $20,000) / 4 years]

E6-3 Multiple Choice – Consolidated Income Statement

1.

c

2.

b

3.

c

Total income ($86,000 - $47,000) Income assigned to noncontrolling interest [0.40($86,000 - $60,000)] Consolidated net income assigned to controlling interest

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$39,000 (10,400) $28,600

Chapter 06 - Intercompany Inventory Transactions

E6-4 Multiple-Choice Questions — Consolidated Balances

1.

c

2.

a

Amount paid by Lorn Corporation Unrealized profit  Actual cost Portion sold Cost of goods sold

$120,000 (45,000) $ 75,000 x 0.80 $ 60,000

3.

e

Consolidated sales Cost of goods sold Consolidated net income Income to Dresser’s noncontrolling interest: Sales Reported cost of sales Report income Portion realized Realized net income Portion to Noncontrolling Interest Income to noncontrolling Interest Income to controlling interest

$140,000 (60,000) $ 80,000

4.

a

$120,000 (75,000) $ 45,000 x 0.80 $ 36,000 x

0.30 (10,800) $ 69,200

Inventory reported by Lorn Unrealized profit ($45,000 x .20) Ending inventory reported

$ 24,000 (9,000) $ 15,000

E6-5 Multiple-Choice Questions — Consolidated Income Statement

1.

a

$20,000 = $30,000 x [($48,000 - $16,000) / $48,000]

2.

d

Sales reported by Movie Productions Inc. Cost of goods sold ($30,000 x 2/3) Consolidated net income

3.

a

$7,000 = [($67,000 - $32,000) x 0.20]

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$67,000 (20,000) $47,000

Chapter 06 - Intercompany Inventory Transactions

E6-6 Realized Profit on Intercompany Sale

a.

Journal entries recorded by Nordway Corporation: (1) (2) (3)

b.

960,000

Cash (Accounts Receivable) Sales

750,000

Cost of Goods Sold Inventory

600,000

960,000 750,000 600,000

Journal entries recorded by Olman Company: (1) (2) (3)

c.

Inventory Cash (Accounts Payable)

Inventory Cash (Accounts Payable)

750,000

Cash (Accounts Receivable) Sales

1,125,000

750,000 1,125,000

Cost of Goods Sold Inventory

750,000 750,000

Eliminating entry: Sales Cost of Goods Sold

750,000 750,000

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Chapter 06 - Intercompany Inventory Transactions

E6-7 Sale of Inventory to Subsidiary

a.

Journal entries recorded by Nordway Corporation: (1) (2) (3)

b.

960,000

Cash (Accounts Receivable) Sales

750,000

Cost of Goods Sold Inventory

600,000

960,000 750,000 600,000

Journal entries recorded by Olman Company: (1) (2) (3)

c.

Inventory Cash (Accounts Payable)

Inventory Cash (Accounts Payable)

750,000

Cash (Accounts Receivable) Sales

810,000

Cost of Goods Sold Inventory

540,000

750,000 810,000 540,000

Eliminating entry: Sales Cost of Goods Sold Inventory

750,000 708,000 42,000 Calculations

Sales COGS Gross Profit Gross Profit %

Total = Re-Sold + 750,000 540,000 600,000 432,000 150,000 108,000 20%

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Ending Inventory 210,000 168,000 42,000

Chapter 06 - Intercompany Inventory Transactions

E6-8 Inventory Transfer between Parent and Subsidiary

a.

Karlow Corporation reported cost of goods sold of $820,000 ($82 x 10,000 desks) and Draw Company reported cost of goods sold of $658,000 ($94 x 7,000 desks).

b.

Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks).

c.

Eliminating entry: Sales Cost of Goods Sold Inventory

940,000 904,000 36,000 Calculations

Sales COGS Gross Profit Gross Profit % d.

Total = 940,000 820,000 120,000 12.77%

Eliminating entry: Investment in Draw Company Cost of Goods Sold

e.

Re-sold + 658,000 574,000 84,000

Ending Inventory 282,000 246,000 36,000

36,000 36,000

Eliminating entry: Investment in Draw Company NCI in NA of Draw Company Cost of Goods Sold

21,600 14,400 36,000

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Chapter 06 - Intercompany Inventory Transactions

E6-9 Income Statement Effects of Unrealized Profit

a.

b.

Sale price to Holiday Bakery per bag ($900,000 / 100,000) Profit per bag [$9.00 - ($9.00 / 1.5)] Cost per bag Bags sold by Holiday Bakery (100,000 - 20,000) Consolidated cost of goods sold Sales Cost of Goods Sold Inventory ($3.00 x 20,000 bags)

$

9.00 (3.00) $ 6.00 x 80,000 $480,000 900,000 840,000 60,000

Calculations

Sales COGS Gross Profit Gross Profit %

Total 900,000 600,000 300,000

=

Re-sold + 720,000 480,000 240,000

Ending Inventory 180,000 120,000 60,000

33.33%

Required Adjustment to Cost of Goods Sold: Cost of goods sold — Farmco ($900,000 / 1.5) Cost of goods sold — Holiday ($9.00 x 80,000 units)

$ 600,000 720,000 $1,320,000 (480,000) $ 840,000

Consolidated cost of goods sold ($6.00 x 80,000 units) Required adjustment c.

Operating income of Holiday Bakery Net income of Farmco Products

$400,000 150,000 $550,000 (60,000) $490,000

Less: Unrealized inventory profits Consolidated net income Less: Income assigned to noncontrolling interest ($150,000 - $60,000 unrealized profit) x 0.40 Income assigned to controlling interest  Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Unrealized profits ($3.00 x 20,000 units) Realized net income Ownership held by Holiday Bakery Income assigned to controlling interest

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(36,000) $454,000 $400,000 $150,000 (60,000) $ 90,000 x 0.60 54,000 $454,000

Chapter 06 - Intercompany Inventory Transactions

E6-10 Prior-Period Unrealized Inventory Profit

a.

Cost per bag of flour ($9.00 / 1.5) Bags sold Cost of goods sold from inventory held, January 1, 20X9

$ 6.00 x 20,000 $120,000

b. Investment in Farmco NCI in NA of Farmco Cost of Goods Sold $60,000 = 20,000 bags x $3.00 c.

36,000 24,000 60,000

Operating income of Holiday Bakery Net income of Farmco Products  Add: Inventory profits realized in 20X9 Consolidated net income Less: Income assigned to noncontrolling shareholders ($250,000 + $60,000) x 0.40 Income assigned to controlling interest  Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Inventory profits realized in 20X9 Realized net income Ownership held by Holiday Bakery

$300,000 250,000 $550,000 60,000 $610,000 (124,000) $486,000 $300,000

$250,000 60,000 $310,000 x 0.60

Income assigned to controlling interest

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186,000 $486,000

Chapter 06 - Intercompany Inventory Transactions

E6-11 Computation of Consolidated Income Statement Data

Downstream Transaction Calculations

Sales COGS Gross Profit Gross Profit %

Total = 30,000 20,000 10,000 33.33%

Re-sold 24,000 16,000 8,000

+

Ending Inventory 6,000 4,000 2,000

Worksheet Entry (not requested in problem) Sales 30,000 Cost of Goods Sold 28,000 Inventory 2,000 Upstream Transaction Calculations

Sales COGS Gross Profit Gross Profit %

Total = 80,000 50,000 30,000 37.50%

Re-sold 60,000 37,500 22,500

+

Ending Inventory 20,000 12,500 7,500

Worksheet Entry (not requested in problem) Sales 80,000 Cost of Goods Sold 72,500 Inventory 7,500 a.

Reported sales of Prem Company Reported sales of Cooper Company

$400,000 200,000 $600,000

Intercompany sales by Prem Company in 20X5 Intercompany sales by Cooper Company in 20X5 Sales reported on consolidated income statement

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$ 30,000 80,000

(110,000) $490,000

Chapter 06 - Intercompany Inventory Transactions

E6-11 (continued)

b.

Cost of goods sold reported by Prem Company Cost of goods sold reported by Cooper Company

$250,000 120,000 $370,000 (100,500) $269,500

 Adjustment due to intercompany sales Consolidated cost of goods sold  Adjustment to cost of goods sold:

c.

d.

CGS charged by Prem on sale to Cooper CGS charged by Cooper ($30,000 - $6,000) Total charged to CGS CGS for consolidated entity $20,000 x ($24,000 / $30,000) Required adjustment to CGS

$ 20,000 24,000 $ 44,000

CGS charged by Cooper on sale to Prem CGS charged by Prem ($80,000 - $20,000) Total charged to CGS CGS for consolidated entity $50,000 x ($60,000 / $80,000) Required adjustment to CGS Total adjustment required

$ 50,000 60,000 $110,000

(16,000) $ 28,000

(37,500) 72,500 $100,500

Reported net income of Cooper Company Unrealized profit on sale to Prem Company $30,000 x ($20,000 / $80,000) Realized net income Noncontrolling interest's share Income assigned to noncontrolling interest Reported net income of Pem Company Less: Income from Cooper Net income of Cooper Company Operating income Less: Unrealized inventory profits of Prem Company [$10,000 x ($6,000 / $30,000)] Unrealized inventory profits of Copper  Company [$30,000 x ($20,000 / $80,000)] Income assigned to noncontrolling interest Income assigned to controlling interest

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$ 45,000 (7,500) $ 37,500 x 0.40 $ 15,000 $100,500 (20,500)

$ 80,000 45,000 $125,000

$ 2,000 7,500 15,000

(24,500) $ 100,500

Chapter 06 - Intercompany Inventory Transactions

E6-12 Sale of Inventory at a Loss

a.

Entries recorded by Trent Company: Inventory Cash Purchase inventory.

400,000

Cash Sales Sale of inventory to Gord Corporation.

300,000

Cost of Goods Sold Inventory Record cost of goods sold.

400,000

400,000

300,000

400,000

Entries recorded by Gord Corporation Inventory Cash Purchase of inventory from Trent.

300,000

Cash Sales Sale of inventory to nonaffiliates.

360,000

Cost of Goods Sold Inventory Record cost of goods sold: $180,000 = $300,000 x .60

180,000

300,000

360,000

180,000

b.

Consolidated cost of goods sold for 20X8 should be reported as $240,000 ($400,000 x 0.60).

c.

Operating income reported by Gord Net income reported by Trent Unrealized loss on intercorporate sale ($400,000 - $300,000) x 0.40 Consolidated net income Income to assigned to noncontrolling interest ($120,000 x 0.25) Income assigned to controlling interest

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$230,000 $ 80,000 40,000

120,000 $350,000 (30,000) $320,000

Chapter 06 - Intercompany Inventory Transactions

E6-12 (continued)

d.

Eliminating entry, December 31, 20X8: Sales Inventory Cost of Goods Sold

300,000 40,000 340,000

Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Trent Cost of goods sold recorded by Gord Total recorded Consolidated cost of goods sold Required elimination

$400,000 180,000 $580,000 (240,000) $340,000

Intercompany Transaction Calculations

Sales COGS Gross Profit Gross Profit %

Total = 300,000 400,000 (100,000) -33.33%

6-20

Re-sold + 180,000 240,000 (60,000)

Ending Inventory 120,000 160,000 (40,000)

Chapter 06 - Intercompany Inventory Transactions

E6-13 Intercompany Sales

20X4 Calculations: Sales COGS Gross Profit Gross Profit %

Total = 180,000 120,000 60,000 33.33%

Re-sold + 135,000 90,000 45,000

Ending Inventory 45,000 30,000 15,000

Worksheet Entry (not required in problem) Sales 180,000 Cost of Goods Sold 165,000 Inventory 15,000 20X5 Calculations: 20X5 Upstream

Sales COGS Gross Profit Gross Profit %

Total 135,000 90,000 45,000 33.33%

=

Re-sold 105,000 70,000 35,000

+

Ending Inventory 30,000 20,000 10,000

20X5 Downstream Sales COGS Gross Profit Gross Profit %

Total = 280,000 140,000 140,000 50.00%

Re-sold + 170,000 85,000 85,000

Ending Inventory 110,000 55,000 55,000

Worksheet Elimination Entries (not required in problem): Eliminate Upstream Transactions Sales 135,000 Cost of Goods Sold Inventory

125,000 10,000

Eliminate Downstream Transactions Sales 280,000 Cost of Goods Sold Inventory

225,000 55,000

Reversal of 20X4 Upstream Deferral Investment in Surg 10,500 NCI in NA of Surg 4,500

6-21

Chapter 06 - Intercompany Inventory Transactions

Cost of Goods Sold

6-22

15,000

Chapter 06 - Intercompany Inventory Transactions

E6-13 (continued)

a.

Consolidated net income for 20X4: Operating income of Hollow Corporation Net income of Surg Corporation

$160,000 90,000 $250,000 (15,000) $235,000

Less: Unrealized profit — Surg Corporation Consolidated net income b.

c.

Inventory balance, December 31, 20X5: Inventory reported by Hollow Corporation Unrealized profit on books of Surg Corporation ($135,000 - $90,000) x ($30,000/$135,000)

$ 30,000

Inventory reported by Surg Corporation Unrealized profit on books of Hollow Corporation ($280,000 - $140,000) x ($110,000/$280,000) Inventory, December 31, 20X5

$110,000

(10,000)

55,000 $75,000

Consolidated cost of goods sold for 20X5: COGS on sale of inventory on hand January 1, 20X5 $45,000 x ($120,000 / $180,000) COGS on items purchased from Surg in 20X5 ($135,000 - $30,000) x ($90,000 / $135,000) COGS on items purchased from Hollow in 20X5 ($280,000 - $110,000) x ($140,000 / $280,000) Total cost of goods sold

d.

(55,000)

$20,000

$ 30,000 70,000 85,000 $185,000

Income assigned to controlling interest: Operating income of Hollow Corporation Net income of Surg Corporation  Add: Inventory profit of prior year realized in 20X5 Less: Unrealized inventory profit — Surg Corporation Unrealized inventory profit — Hollow Corporation Income to noncontrolling interest ($85,000 + $15,000 - $10,000) x 0.30 Income assigned to controlling interest

6-23

$220,000 85,000 $305,000 15,000 (10,000) (55,000) (27,000) $228,000

Chapter 06 - Intercompany Inventory Transactions

E6-14 Consolidated Balance Sheet Worksheet a. Equity Method Entries on Doorst Corp.'s Books:

Investment in Hingle Co.

49,000

Income from Hingle Co.

49,000

Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 income Cash Investment in Hingle Co.

9,800 9,800

Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 dividend Income from Hingle Co. Investment in Hingle Co.

10,000 10,000

Eliminate the deferred gross profit from downstream sales in 20X8 Income from Hingle Co. Investment in Hingle Co.

28,000 28,000

Eliminate the deferred gross profit from upstream sales in 20X8 Book Value Calculations: NCI 30% Original book value

Doorst Corp. 70%

+

=

Common Stock

+

103,200

240,800

+ Net Income

21,000

49,000

70,000

- Dividends

(4,200)

(9,800)

(14,000)

120,000

280,000

Ending book value

150,000

Retained Earnings

150,000

Reversal/Deferred GP Calculations:

Total

=

Doorst Corp.'s share

+

NCI's share

Downstream Deferred GP

(10,000)

(10,000)

Upstream Deferred GP

(40,000)

(28,000)

0 (12,000 )

Total

(50,000)

(38,000)

(12,000)

6-24

194,000

250,000

Chapter 06 - Intercompany Inventory Transactions

E6-14 (continued) Basic elimination entry Common stock

150,000

Retained earnings

194,000

← Original amount invested (100%) ← Beginning balance in retained earnings

Investment in Hingle Co.

242,000

← Doorst’s % of NI - Deferred GP + Reversal ← NCI share of NI - Deferred GP + Reversal ← 100% of Hingle Co.'s dividends declared ← Net book value - Deferred GP + Reversal

NCI in NA of Hingle Co.

108,000

← NCI share of BV - Deferred GP + Reversal

Income from Hingle Co.

11,000

NCI in NI of Hingle Co.

9,000

Dividends declared

14,000

Deferral of this year's unrealized profits on inventory transfers Sales

400,000

Cost of Goods Sold

350,000

Inventory

50,000

20X8 Downstream Transactions

Sales

Total 100,000

COGS

60,000

45,000

15,000

Gross Profit

40,000

30,000

10,000

Gross Profit %

=

Re-sold 75,000

+

Ending Inventory 25,000

40.00%

20X8 Upstream Transactions

Total

=

Re-sold

+

Ending Inventory

Sales

300,000

205,000

95,000

COGS

173,684

118,684

55,000

Gross Profit

126,316

86,316

40,000

Gross Profit %

42.11% Investment in

Income from

Hingle Co.

Hingle Co.

Acquisition Price

240,800

70% Net Income

49,000

Ending Balance

9,800

70% Dividends

38,000

Deferred GP Basic

0

70% Net Income

11,000

Ending Balance

38,000

242,000 242,000

49,000

11,000 0

6-25

Chapter 06 - Intercompany Inventory Transactions

E6-14 (continued)

b. Elimination Entries Doorst Corp.

Hingle Co.

Balance Sheet Cash and Receivables Inventory Buildings & Equipment (net) Investment in Hingle Co. Total Assets

98,000 150,000 310,000 242,000 800,000

40,000 100,000 280,000

 Accounts Payable Common Stock Retained Earnings

70,000 200,000 530,000

20,000 150,000 250,000

NCI in NA of Hingle Co. Total Liabilities & Equity

800,000

420,000

420,000

6-26

DR

CR

50,000

0

150,000 194,000 11,000 9,000 400,000 764,000

242,000 292,000

14,000 350,000 108,000 472,000

Consolidate d

138,000 200,000 590,000 0 928,000 90,000 200,000 530,000

108,000 928,000

Chapter 06 - Intercompany Inventory Transactions

E6-15* Multiple Transfers between Affiliates

a.

Entries recorded by Klon Corporation

Cash Sales Sale of inventory to Brant Company.

150,000

Cost of Goods Sold Inventory Record cost of goods sold.

100,000

150,000

100,000

Entries recorded by Brant Company

Inventory Cash Purchase of inventory from Klon.

150,000

Cash Sales Sale of inventory to Torkel Company.

150,000

Cost of Goods Sold Inventory Record cost of goods sold.

150,000

150,000

150,000

150,000

Entries recorded by Torkel Company

Inventory Cash Purchase of inventory from Brant.

150,000

Cash Sales Sale of inventory to nonaffiliates.

120,000

150,000

120,000

Cost of Goods Sold Inventory Record cost of goods sold.

90,000 90,000

b.

Cost of goods sold for 20X8 should be reported as $60,000 [$90,000 x ($100,000 / $150,000)].

c.

Inventory at December 31, 20X8, should be reported at $40,000 [$60,000 x ($100,000 / $150,000)].

6-27

Chapter 06 - Intercompany Inventory Transactions

E6-15* (continued)

d.

Eliminating entry for inventory: Sales Cost of Goods Sold Inventory

300,000 280,000 20,000

Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Klon Cost of goods sold recorded by Brant Cost of goods sold recorded by Torkel Total recorded Consolidated cost of goods sold Required elimination

$100,000 150,000 90,000 $340,000 (60,000) $280,000

Computation of reduction to carrying value of inventory Inventory reported by Torkel Inventory balance to be reported Required elimination

$60,000 (40,000) $20,000

6-28

Chapter 06 - Intercompany Inventory Transactions

E6-16 Inventory Sales

a.

Journal entries recorded by Spice Company: (1)

(2)

(3)

Inventory Cash (Accounts Payable) Record purchases from nonaffiliate.

150,000 150,000

Cash (Accounts Receivable) Sales Record sale to Herb Corporation.

60,000

Cost of Goods Sold Inventory Record cost of goods sold to Herb Corporation.

40,000

60,000

40,000

Journal entries recorded by Herb Corporation: (1)

(2)

(3)

(4)

b.

Inventory Cash (Accounts Payable) Record purchases from Spice Company.

60,000

Cash (Accounts Receivable) Sales Record sale of items to nonaffiliates.

90,000

Cost of Goods Sold Inventory Record cost of goods sold.

45,000

60,000

90,000

45,000

Income from Herb 5,000 Investment in Herb 5,000 Eliminate unrealized gross profit on inventory purchases from Herb.

Eliminating entry:

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 60,000 45,000 40,000 30,000 20,000 15,000 33.33%

Ending Inventory 15,000 10,000 5,000

Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.

6-29

60,000 55,000 5,000

Chapter 06 - Intercompany Inventory Transactions

E6-17 Prior-Period Inventory Profits

a. 20X8 Sale:

Sales COGS Gross Profit Gross Profit %

Total = 180,000 120,000 60,000 33.33%

Re-sold + 170,000 113,333 56,667

Ending Inventory 30,000 20,000 10,000

Re-sold + 170,000 113,333 56,667

Ending Inventory 150,000 100,000 50,000

20X9 Sale:

Sales COGS Gross Profit Gross Profit %

Total = 240,000 160,000 80,000 33.33%

Investment in Level Brothers NCI in NA of Level Brothers Cost of goods sold Reversal of 20X8 gross profit deferral Sales Cost of Goods Sold Inventory Eliminate 20X9 intercompany sale of inventory. b. Reported net income of Level Brothers Unrealized profit, December 31, 20X8 Unrealized profit, December 31, 20X9 Realized net income Noncontrolling interest's share of ownership Income assigned to noncontrolling interest

6-30

7,500 2,500 10,000 240,000 190,000 50,000

20X8 $350,000 (10,000) $340,000 x 0.25 $ 85,000

20X9 $420,000 10,000 (50,000) $380,000 x 0.25 $ 95,000

Chapter 06 - Intercompany Inventory Transactions

SOLUTIONS TO PROBLEMS P6-18 Consolidated Income Statement Data

a.

$180,000 = $550,000 + $450,000 - $820,000

b.

January 1, 20X2: $25,000 = $75,000 - $50,000 December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000

c.

Investment in Bitner NCI in NA of Bitner Cost of Goods Sold Eliminate beginning inventory profit. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.

d.

Reported net income of Bitner Company Prior-period profit realized in 20X2 Unrealized profit on 20X2 sales Realized income Proportion held by noncontrolling interest Income assigned to noncontrolling interest

6-31

15,000 10,000 25,000 180,000 165,000 15,000

$ 90,000 25,000 (15,000) $100,000 x 0.40 $ 40,000

Chapter 06 - Intercompany Inventory Transactions

P6-19 Unrealized Profit on Upstream Sales

20X2

Sales COGS Gross Profit Gross Profit %

Total = 200,000 160,000 40,000 20.00%

Re-sold + 130,000 104,000 26,000

Ending Inventory 70,000 56,000 14,000

Re-sold 70,000 56,000 14,000

Ending Inventory 105,000 84,000 21,000

20X3

Sales COGS Gross Profit Gross Profit %

Total = 175,000 140,000 35,000 20.00%

+

20X4

Sales COGS Gross Profit Gross Profit %

Total = 225,000 180,000 45,000 20.00%

Operating income reported by Pacific Net income reported by Carroll Inventory profit, December 31, 20X2 $70,000 - ($70,000 / 1.25) Inventory profit, December 31, 20X3 $105,000 - ($105,000 / 1.25) Inventory profit, December 31, 20X4 $120,000 - ($120,000 / 1.25) Consolidated net income Income to noncontrolling interest: ($100,000 - $14,000) x 0.40 ($90,000 + $14,000 - $21,000) x 0.40 ($160,000 + $21,000 - $24,000) x 0.40 Income to controlling interest

Re-sold + 105,000 84,000 21,000

Ending Inventory 120,000 96,000 24,000

20X2

20X3

20X4

$150,000 100,000 $250,000

$240,000 90,000 $330,000

$300,000 160,000 $460,000

(14,000)

14,000

$236,000

(21,000)

21,000

$323,000

(24,000) $457,000

(34,400) (33,200) $201,600

6-32

$289,800

(62,800) $394,200

Chapter 06 - Intercompany Inventory Transactions

P6-20 Net Income of Consolidated Entity

Operating income of Master for 20X5 Net income of Crown for 20X5

$118,000 65,000 $183,000 25,000 40,000 (14,000) (55,000)

 Add:

Prior year profits realized by Master Prior year profits realized by Crown Less: Unrealized profits for 20X5 by Master Unrealized profits for 20X5 by Crown  Amortization of differential ($45,000 / 15 years) Consolidated net income, 20X5 Less: Income to noncontrolling interest ($65,000 + $40,000 - $55,000 - $3,000) x 0.30 Income to controlling interest

(3,000) $176,000 (14,100) $161,900

P6-21 Correction of Eliminating Entries

a.

Proportion of intercompany inventory purchases resold during 20X5: Unrealized profit at year end $ 12,000 Intercompany transfer price $140,000 Cost of inventory sold ($140,000 / 1.40) (100,000) Total Profit ÷ 40,000 Proportion of intercompany sale held by Bolger at year end 0.30 Proportion of intercompany purchases resold by Bolger during 20X5 (1.00 - 0.30)

b.

0.70

Eliminating entries, December 31, 20X5: Intercompany Transactions

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 140,000 98,000 100,000 70,000 40,000 28,000 28.57%

 Accounts Payable  Accounts Receivable Eliminate intercompany receivable/payable. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.

6-33

Ending Inventory 42,000 30,000 12,000

80,000 80,000 140,000 128,000 12,000

Chapter 06 - Intercompany Inventory Transactions

P6-22 Incomplete Data

a.

Increase in fair value of buildings and equipment: Consolidated total Balance reported by Lever Balance reported by Tropic Increase in value

b.

$ 680,000 (400,000) (240,000) $ 40,000

Accumulated depreciation for consolidated entity:  Accumulated depreciation reported by Lever  Accumulated depreciation reported by Tropic Cumulative write-off of differential ($5,000 x 6 years)  Accumulated depreciation for consolidated entity

c.

$ 60,000 30,000 $ 90,000 40,000 $130,000 x 0.75 $ 97,500

Investment in Tropic Company stock reported at December 31, 20X6: Tropic's common stock outstanding December 31, 20X6 Tropic's retained earnings reported December 31, 20X6 Total book value Proportion of ownership held by Lever Lever's share of net book value Unamortized differential ($5,000 x 2 years) x 0.75 20X6 Gross Profit Deferral on Downstream Sale Investment in Tropic Company stock

e.

30,000 $320,000

Amount paid by Lever to acquire ownership in Tropic: Common stock outstanding Retained earnings at acquisition Total book value at acquisition Increase in value of buildings and equipment Fair value of net assets acquired Proportion of ownership acquired  Amount paid by Lever

d.

$180,000 110,000

$ 60,000 112,000 $172,000 x 0.75 $129,000 7,500 (3,000) $133,500

Intercorporate sales of inventory in 20X6: Sales reported by Lever Sales reported by Tropic Total sales Sales reported in consolidated income statement Intercompany sales during 20X6

6-34

$420,000 260,000 $680,000 (650,000) $ 30,000

Chapter 06 - Intercompany Inventory Transactions

P6-22 (continued)

f.

Unrealized inventory profit, December 31, 20X6: Inventory reported by Lever Inventory reported by Tropic Total inventory Inventory reported in consolidated balance sheet Unrealized inventory profit, December 31, 20X6

g.

Eliminating entry to remove the effects of intercompany inventory sales during 20X6: Sales Cost of Goods Sold Inventory

h.

$125,000 90,000 $215,000 (211,000) $ 4,000

30,000 26,000 4,000

Unrealized inventory profit at January 1, 20X6: Cost of goods sold reported by Lever Cost of goods sold reported by Tropic Reduction of cost of goods sold for intercompany sales during 20X6  Adjusted cost of goods sold Cost of goods sold reported in consolidated income statement  Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory

i.

$310,000 170,000 (26,000) $454,000 (445,000) $ 9,000

Accounts receivable reported by Lever at December 31, 20X6:  Accounts receivable reported for consolidated entity  Accounts receivable reported by Tropic Difference  Adjustment for intercompany receivable/payable: Accounts payable reported by Lever  Accounts payable reported by Tropic Total reported accounts payable  Accounts payable reported for consolidated entity Adjustment for intercompany receivable/payable  Accounts receivable reported by Lever

6-35

$145,000 (55,000) $ 90,000 $ 86,000 20,000 $106,000 (89,000) 17,000 $107,000

Chapter 06 - Intercompany Inventory Transactions

P6-23 Eliminations for Upstream Sales a. Equity Method Entries on Clean Air's Books:

Investment in Special Filter Income from Special Filter

32,000 32,000

Record Clean Air's 80% share of Special Filter's 20X8 income Investment in Special Filter

16,000

Income from Special Filter 16,000 Reverse of the deferred gross profit from upstream sales in 20X7 Income from Special Filter

12,000

Investment in Special Filter Eliminate the deferred gross profit from upstream sales in 20X8

12,000

Book Value Calculations: NCI 20% Original book value

Clean Air  80%

62,000

248,000

8,000

32,000

70,000

280,000

+ Net Income Ending book value

+

=

Common Stock

+

Retained Earnings

90,000

220,000 40,000

90,000

260,000

Reversal/Deferred GP Calculations:

Total Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

=

Clean Air's share

0

0

20,000

16,000

0 (15,000) 5,000

+

NCI's share 4,000

0 (12,000) 4,000

(3,000) 1,000

Basic elimination entry: Common stock Retained earnings Income from Special Filter NCI in NI of Special Filter

90,000

← Original amount invested (100%)

220,000

← Beginning balance in RE

36,000

← Parent’s % of NI - Def. GP + Reversal

9,000

Investment in Special Filter

← NCI share of NI - Def. GP + Reversal

284,000

NCI in NA of Special Filter 

71,000

6-36

← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

Chapter 06 - Intercompany Inventory Transactions

P6-23 (continued) 20X7 Upstream Transactions 20X8 Beg. Inventory Sales 60,000 COGS Gross Profit Gross Profit %

40,000 20,000 33.33%

20X8 Upstream Transactions

Sales

Total 150,000

COGS

100,000

70,000

30,000

50,000 33.33%

35,000

15,000

Gross Profit Gross Profit %

=

Re-sold 105,000

Reversal of last year's deferral: Investment in Special Filter NCI in NA of Special Filter

16,000 4,000

Cost of Goods Sold

20,000

Deferral of this year's unrealized profits on inventory transfers Sales

150,000

Cost of Goods Sold

135,000

Inventory

15,000

6-37

+

Ending Inventory 45,000

Chapter 06 - Intercompany Inventory Transactions

P6-23 (continued)

b.

Computation of consolidated net income and income assigned to controlling interest: Operating income reported by Clean Air Products ($250,000 - $175,000 - $30,000) Net income of Superior Filter  ($200,000 - $140,000 - $20,000) Inventory profit realized from 20X7 Unrealized inventory profit for 20X8 Consolidated net income Income assigned to noncontrolling interest ($40,000 + $20,000 - $15,000) x 0.20 Income assigned to controlling interest

c.

$ 45,000 40,000 $ 85,000 20,000 (15,000) $ 90,000 (9,000) $ 81,000

Noncontrolling interest, December 31, 20X8: Common stock Retained earnings ($220,000 + $40,000) Less: Unrealized inventory profit Proportion of stock held by noncontrolling interest Noncontrolling interest

6-38

$ 90,000 260,000 (15,000) $335,000 x 0.20 $ 67,000

Chapter 06 - Intercompany Inventory Transactions

P6-24 Multiple Inventory Transfers

a.

b.

c.

Consolidated net income for 20X8: Operating income of Ajax Corporation Unrealized profit, December 31, 20X8 ($35,000 - $15,000) x ($7,000 / $35,000)

$80,000

Net income of Beta Corporation Profit realized from 20X7 ($30,000 - $24,000) x ($10,000 / $30,000) Unrealized profit, December 31, 20X8 ($72,000 - $63,000) x ($12,000 / $72,000)

$37,500

Net income of Cole Corporation Profit realized from 20X7 ($72,000 - $60,000) x ($18,000 / $72,000) Unrealized profit, December 31, 20X8 ($45,000 - $27,000) x ($15,000 / $45,000) Consolidated net income

$20,000

(4,000)

$ 76,000

2,000 (1,500)

38,000

3,000 (6,000)

17,000 $131,000

Inventory balance, December 31, 20X8: Balance per Beta Corporation Less: Unrealized profit

$ 7,000 (4,000)

$ 3,000

Balance per Cole Corporation Less: Unrealized profit

$12,000 (1,500)

10,500

Balance per Ajax Corporation Less: Unrealized profit Inventory balance per consolidated statement

$15,000 (6,000)

9,000 $22,500

Income assigned to noncontrolling interest in 20X8: Realized income of Beta Corporation Proportion of stock held by noncontrolling interest

$38,000

Realized income of Cole Corporation Proportion of stock held by noncontrolling interest Income to noncontrolling interest

$17,000

x

x

6-39

0.30

0.10

$11,400

1,700 $13,100

Chapter 06 - Intercompany Inventory Transactions

P6-25

Consolidation with Inventory Transfers and Other Comprehensive Income 20X4 Downstream Transactions Sales COGS Gross Profit Gross Profit %

Total 108,000 90,000 18,000 16.67%

=

Re-sold 60,000 50,000 10,000

+

=

Re-sold 27,000 18,000 9,000

+

Ending Inventory 48,000 40,000 8,000

20X4 Upstream Transactions Sales COGS Gross Profit Gross Profit %

Total 45,000 30,000 15,000 33.33%

Ending Inventory 18,000 12,000 6,000

20X5 Downstream Transactions Sales COGS Gross Profit Gross Profit %

Total 36,000 30,000 6,000 16.67%

=

Re-sold 24,000 20,000 4,000

+

=

Re-sold 6,000 4,000 2,000

+

Ending Inventory 12,000 10,000 2,000

20X5 Upstream Transactions Sales COGS Gross Profit Gross Profit %

Beg. Balance 90% Net Income

20X4 Reversal Ending Balance Reversal

Total 48,000 32,000 16,000 33.33%

Investment in Tall Corp. 1,246,600 81,000 54,000 18,000 13,400 1,290,400 13,400

14,600 1,285,800 18,000

Ending Inventory 42,000 28,000 14,000

Income from Tall Corp. 81,000 90% Dividends 90% of OCI Gain Deferred GP Basic OCI Entry

0

14,600

13,400 20X4 Reversal 79,800 Ending Balance

79,800 0

6-40

90% Net Income

Chapter 06 - Intercompany Inventory Transactions

P6-25 (continued)

a.

Balance in investment account at December 31, 20X5:

b.

Proportionate share of Tall's net assets, January 1 ([$1,400,000 x .90] – 8,000 – [6,000 x 0.90]) Proportionate share of 20X5 net income ($90,000 x 0.90) Proportionate share of other comprehensive income for 20X5 ($20,000 x 0.90) Proportionate share of dividends received ($60,000 x 0.90) Reversal of deferred gain from 20X4 downstream transaction Reversal of deferred gain from 20X4 upstream transaction ($6,000 x .090) Deferred gain from downstream transaction Proportionate share of deferred gain from upstream transaction ($14,000 x 0.90) Balance in investment account December 31, 20X5 Investment income for 20X5: Net income reported by Tall Proportion of ownership held by Priority Priority’s share of reported income from Tall Reversal of deferred gain from 20X4 downstream transaction Reversal of deferred gain from 20X4 upstream transaction ($6,000 x 0.90) Deferred gain from downstream transaction Proportionate share of deferred gain from upstream transaction ($14,000 x 0.90) Investment income for 20X5

c.

$1,246,600 81,000 18,000 (54,000) 8,000 5,400 (2,000) (12,600) $1,290,400 $90,000 x 0.90 81,000 8,000 5,400 (2,000) (12,600) $79,800

Income to noncontrolling interests for 20X5: Net income reported by Tall 20X4 inventory profits realized in 20X5 ($15,000 x 0.40) 20X5 unrealized inventory profits $30,000 - [$30,000 x ($48,000 / $90,000)] Realized net income Proportion of ownership held by noncontrolling interest Income to noncontrolling interest

6-41

$90,000 6,000 (14,000) $82,000 x 0.10 $ 8,200

Chapter 06 - Intercompany Inventory Transactions

P6-25 (continued)

d.

Balance assigned to noncontrolling interest in consolidated balance sheet: Net assets reported by Tall, January 1 Net income for 20X5 Dividends paid in 20X5 Net assets reported, December 31, 20X5 Unrealized inventory profits at December 31, 20X5 Other comprehensive income in 20X5  Adjusted net assets, December 31, 20X5 Proportion of ownership held by noncontrolling interest Net assets assigned to noncontrolling interest

e.

f.

$1,400,000 90,000 (60,000) $1,430,000 (14,000) 20,000 $1,436,000 x 0.10 $ 143,600

Inventory reported in consolidated balance sheet: Inventory held by Priority Less: Unrealized profit

$120,000 (14,000)

Inventory held by Tall Less: Unrealized profit $6,000 - [$6,000 x ($24,000 / $36,000)] Inventory

$100,000 (2,000)

98,000 $204,000

Consolidated net income for 20X5: Operating income of Priority Net income of Tall Total unadjusted income 20X4 inventory profits realized in 20X5 ($6,000 + $8,000) Unrealized inventory profits on 20X5 sales ($14,000 + $2,000) Consolidated net income

g.

$106,000

$240,000 90,000 $330,000 14,000 (16,000) $328,000

Eliminating entries, December 31, 20X5

Book Value Calculations:

Original book value + Net Income - Dividends Ending book value

NCI 10% 140,000 9,000 (6,000) 143,000

+

Priority Corp. 90% 1,260,000 81,000 (54,000) 1,287,000

=

Comm. Stock 400,000

400,000

6-42

+

Add. Paid-In Capital 200,000

200,000

+

Retained

Earnings 790,000 90,000 (60,000) 820,000

+

Acc. OCI 10,000

10,000

Chapter 06 - Intercompany Inventory Transactions

6-43

Chapter 06 - Intercompany Inventory Transactions

P6-25 (continued) Reversal/Deferred GP Calculations:

Total Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

8,000 6,000 (2,000) (14,000) (2,000)

=

Priority Corp.'s share 8,000 5,400 (2,000) (12,600) (1,200)

+

NCI's share 600 (1,400) (800)

Basic elimination entry Common stock

400,000

← Original amount invested (100%)

Additional paid-in capital

200,000

← Beginning balance in APIC

Retained earnings

790,000

← Beginning balance in RE

Accumulated OCI

10,000

← Beginning balance in Acc. OCI

Income from Tall Corp.

79,800

← PC.’s % of NI - Def. GP + Reversal

NCI in NI of Tall Corp.

8,200

Investment in Tall Corp.

← NCI share of NI - Def. GP + Reversal

1,285,800

NCI in NA of Tall Corp.

142,200

Other Comprehensive Income Entry: OCI from Tall Corp. OCI to the NCI

18,000 2,000

Investment in Tall Corp.

18,000

NCI in NA of Tall Corp.

2,000

Reversal of last year's deferral: Investment in Tall Corp. NCI in NA of Tall Corp.

13,400 600

Cost of Goods Sold

14,000

Deferral of this year's unrealized profits on inventory transfers Sales

126,000

Cost of Goods Sold

110,000

Inventory

16,000

6-44

← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

Chapter 06 - Intercompany Inventory Transactions

P6-26 Multiple Inventory Transfers between Parent and Subsidiary

20X5 Downstream Total = Re-sold + 150,000 90,000 100,000 60,000 50,000 30,000 33.33%

Sales COGS Gross Profit Gross Profit %

Ending Inventory, 20X5 60,000 40,000 20,000

20X5 Upstream

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 100,000 30,000 70,000 21,000 30,000 9,000 30.00%

Sales COGS Gross Profit Gross Profit %

Beg Inventory, 20X6 = Re-sold + 70,000 50,000 49,000 35,000 21,000 15,000 30.00%

Ending Inventory, 20X5 70,000 49,000 21,000

Ending Inventory, 20X6 20,000 14,000 6,000

20X6 Downstream

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 60,000 54,000 40,000 36,000 20,000 18,000 33.33%

Ending Inventory, 20X6 6,000 4,000 2,000

20X6 Upstream

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 240,000 60,000 200,000 50,000 40,000 10,000 16.67%

6-45

Ending Inventory, 20X6 180,000 150,000 30,000

Chapter 06 - Intercompany Inventory Transactions

a.

b.

Eliminating entries: Investment in Slinky 20,000 Cost of goods sold Eliminate beginning inventory profit of Proud Company.

20,000

Investment in Slinky 12,600 NCI in NA of Slinky 8,400 Cost of goods sold Inventory Eliminate beginning inventory profit of Slinky Company.

15,000 6,000

Sales 60,000 Cost of goods sold Inventory Eliminate intercompany sale of inventory by Proud Company.

58,000 2,000

Sales 240,000 Cost of goods sold Inventory Eliminate intercompany sale of inventory by Slinky Company.

210,000 30,000

Computation of cost of goods sold for consolidated entity: Inventory produced by Proud in 20X5 ($100,000 x 0.40) Inventory produced by Slinky in 20X5 ($70,000 x 0.50) Inventory produced by Proud in 20X6 ($40,000 x 0.90) Inventory produced by Slinky in 20X6 ($200,000 x 0.25) Cost of goods sold reported in consolidated income statement

$ 40,000 35,000 36,000 50,000 $161,000

6-46

Chapter 06 - Intercompany Inventory Transactions

P6-27 Consolidation following Inventory Transactions a. Equity Method Entries on Bell Co.'s Books:

Investment in Troll Corp. 18,000 Income from Troll Corp. Record Bell Co.'s 60% share of Troll Corp.'s 20X2 income

18,000

Cash 6,000 Investment in Troll Corp. Record Bell Co.'s 60% share of Troll Corp.'s 20X2 dividend

6,000

Income from Troll Corp. 6,500 Investment in Troll Corp. Eliminate the deferred gross profit from downstream sales in 20X2

6,500

Investment in Troll Corp. 2,040 Income from Troll Corp. Reverse of the deferred gross profit from upstream sales in 20X1

2,040

Income from Troll Corp. 2,520 Investment in Troll Corp. Eliminate the deferred gross profit from upstream sales in 20X2

2,520

b. Book Value Calculations: NCI 40%

Bell Co. 60%

+

=

Common Stock 100,000

+

Retained Earnings

Original book value

60,000

90,000

+ Net Income

12,000

18,000

30,000

- Dividends

(4,000)

(6,000)

(10,000)

Ending book value

68,000

102,000

100,000

Reversal/Deferred GP Calculations: Total Downstream Reversal

=

Bell Co.'s share

+

NCI's share

0

0

3,400

2,040

Downstream Deferred GP

(6,500)

(6,500)

Upstream Deferred GP

(4,200)

(2,520)

(1,680)

Total

(7,300)

(6,980)

(320)

Upstream Reversal

6-47

1,360

50,000

70,000

Chapter 06 - Intercompany Inventory Transactions

P6-27 (continued) Basic elimination entry Common stock

100,000

← Original amount invested (100%)

Retained earnings

50,000

← Beginning balance in RE

Income from Troll Corp.

11,020

← Bell’s % of NI - Def. GP + Reversal

NCI in NI of Troll Corp.

11,680

← NCI share of NI - Def. GP + Reversal

Dividends declared

10,000

← 100% of Troll Corp.'s dividends

Investment in Troll Corp.

95,020

← Net book value - Def. GP + Reversal

NCI in NA of Troll Corp.

67,680

← NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Bell Co. 40% + 60% Beginning balance

Land

7,200

10,800

18,000

0

0

0

7,200

10,800

18,000

Changes Ending balance

=

Excess value (differential) reclassification entry: Land

18,000

Investment in Troll Corp.

10,800

NCI in NA of Troll Corp.

7,200

Optional accumulated depreciation elimination entry Accumulated depreciation

45,000

Building & equipment

45,000

Reversal of last year's deferral: Investment in Troll Corp.

2,040

NCI in NA of Troll Corp.

1,360

Cost of Goods Sold

3,400

Deferral of this year's unrealized profits on inventory transfers Sales

63,000

Cost of Goods Sold

52,300

Inventory

10,700

6-48

Chapter 06 - Intercompany Inventory Transactions

P6-27 (continued) 20X2 Downstream Transactions

Total 28,000

Sales

=

Re-sold 15,000

+

Ending Inventory 13,000

COGS

14,000

7,500

6,500

Gross Profit

14,000

7,500

6,500

Gross Profit %

50.00%

20X1 Upstream Transactions

Total

=

Re-sold

+

Ending Inventory

Sales

42,500

34,000

8,500

COGS

25,500

20,400

5,100

Gross Profit

17,000

13,600

3,400

Gross Profit %

40.00%

Re-sold 24,500

Ending Inventory 10,500

20X2 Upstream Transactions

Total 35,000

Sales

=

+

COGS

21,000

14,700

6,300

Gross Profit

14,000

9,800

4,200

Gross Profit %

40.00%

Investment in Troll Corp. Beginning Balance 60% Net Income 20X1 Reversal Ending Balance Reversal

Income from Troll Corp.

98,760 18,000 2,040 103,780 2,040

6,000 9,020

60% Dividends Deferred GP

95,020 10,800

Basic Excess Reclass.

0

9,020

18,000

60% Net Income

2,040 11,020

20X1 Reversal Ending Balance

11,020 0

6-49

Chapter 06 - Intercompany Inventory Transactions

P6-27 (continued)

c. Elimination Elimination Entries DR CR

Bell Co.

Troll Corp.

200,000 (99,800)

120,000 (61,000)

(25,000) (6,000) 11,020 80,220

(15,000) (14,000) 30,000

11,020 74,020 11,680

55,700

80,220

30,000

85,700

55,700

80,220

227,960 80,220 (40,000) 268,180

50,000 30,000 (10,000) 70,000

50,000 85,700

55,700 10,000 65 65,700

227,960 80,220 (40,000) 268,180

69,4 69,400 00 60,000 40,000 520,000 (175,00 ,000) 103,780

51,20 1,200 0 55,000 30,000 350,000 (75,000)

Total Assets

618,180

411,200

 Accounts Payable Bonds Payable Bonds Premium Common Stock Retained Earnings NCI in NA of Troll Corp.

68,800 80,000 1,200 200,000 268,180

41,200 200,000 100,000 70,000

100,000 135,700 1,360

Total Liabilities & Equity

618,180

411,200

237,060

Income Statement Sales Less: COGS

Less: Depreciation Expense Less: Interest Expense Income from Troll Corp. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Cash and Acco Accoun unts ts Recei eceiva vabl ble e Inventory Land Buildings & Equipment Less: Accu ccumulated ted Deprecia ciatio tion Investment in Troll Corp.

6-50

63,000 52,300 3,400

13 135,700

10,700 18,000 45,000 45,000 2,040 65 6 5,040

95,020 10,800 16 1 61,520

65,700 67,680 7,200 140,580

Consolidated

257,000 (105,100) (40,000) (20,000) 0 91,900 (11,680)

120, 120,60 600 0 104,300 88,000 825,000 (205,00 ,000) 0 932,900

110,000 280,000 1,200 200,000 268,180 73,520 932,900

Chapter 06 - Intercompany Inventory Transactions

P6-28 Consolidation Consolidatio n Worksheet a. Equity Method Entries on Crow Corp.'s Books:

Investment in West Co. Income from West Co.

14,000 14,000

Record Crow Corp.'s 70% share of West Co.'s 20X9 income Cash

3,500

Investment in West Co. Record Crow Corp.'s 70% share of West Co.'s 20X9 dividend Investment in West Co. Income from West Co.

3,500

15,000 15,000

Reverse of the deferred gross profit p rofit from downstream sales in 20X8 Income from West Co.

8,000

Investment in West est Co.

8,000

Eliminate the deferred gross profit from downstream sales in 20X9 Investment in West Co. 21,000 Income from West Co. Reverse of the deferred gross profit p rofit from upstream sales in 20X8

21,000

Income from West Co. 17,500 Inves nvesttment ent in West est Co. Eliminate the deferred gross profit from upstream sales in 20X9

17,5 17,500 00

Book Value Calculations: NCI 30% Original book value + Net Income - Dividends Ending book value

120,000 6,000 (1,500) 124,500

+

Crow Corp. 70%

=

280,000 14,000 (3,500) 290,500

6-51

Common Stock 150,000

150,000

+

Retained Earnings 250,000 20,000 (5,000) 265,000

Chapter 06 - Intercompany Inventory Transactions

P6-28 (continued) Reversal/Deferred GP Calculations: Calculations:

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Total 15,000 30,000 (8,000) (25,000) 12,000

Basic elimination entry Common stock Retained earnings Income from West Co. NCI in NI of West Co. Dividends declared Investment in West Co. NCI in NA of West Co.

Crow Corp.'s share 15,000 21,000 (8,000) (17,500) 10,500

=

150,000 250,000 24,500 7,500 5,000 301,000 126,000

Excess Value (Differential) Calculations: Calculations: NCI Crow Corp. 30% + 70% Beginning balance 10,800 25,200 Changes 0 0 Ending balan alance ce 10, 10,800 800 25,20 5,200 0

Excess value (differential) (differential) reclassification entry: Land 14,000 Goodwill 22,000 Investment in West Co. NCI in NA of West Co. Reversal of last year's deferral: Investment in West Co. NCI in NA of West Co. Cost of Goods Sold

+

=

Land 14,000 0 14,0 14,000 00

25,200 10,800

36,000 9,000 45,000

Deferral of this year's unrealized profits on inventory transfers Sales Cost of Goods Sold Inventory

152,000 119,000 33,000

6-52

NCI's share 9,000 (7,500) 1,500

← Original amount invested (100%) ← Beginning balance in RE ← Crow’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal ← 100% of West Co.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP GP + Reversal

+

Goodwill 22,000 0 22,0 22,000 00

Chapter 06 - Intercompany Inventory Transactions

P6-28 (continued) 20X9 Downstream Transactions Total 90,000

Sales

=

Re-sold 70,000

+

Ending Inventory 20,000

COGS

54,000

42,000

12,000

Gross Profit

36,000

28,000

8,000

Gross Profit %

40.00%

20X9 Upstream Transactions Total

=

Re-sold

+

Ending Inventory

Sales

62,000

0

62,000

COGS

37,000

0

37,000

Gross Profit Gross Profit %

25,000 40.32%

0

25,000

Investment in

Income from

West Co.

West Co.

Beginning Balance

269,200

70% Net Income

14,000

20X8 Reversal

36,000

Ending Balance

290,200

Reversal

36,000

3,500

70% Dividends

25,500

Deferred GP

301,000

Basic

25,200

Excess Reclass.

0

25,500

14,000

70% Net Income

36,000

20X8 Reversal

24,500

Ending Balance

24,500 0

6-53

Chapter 06 - Intercompany Inventory Transactions

P6-28 (continued)

b. Crow Corp.

West Co.

300,000 (200,000)

200,000 (150,000)

(40,000) 24,500 84,500

(30,000)

84,500 84,500

20,000 20,000

Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance

532,000 84,500 (35,000) 581,500

250,000 20,000 (5,000) 265,000

Balance Sheet Cash and Receivable Inventory Land Land,, Buil Buildi ding ngs, s, and and Equi Equipm pmen entt (net (net)) Investment in West Co.

81,300 200,000 270, 270,00 000 0 290,200

85,000 110,000 250, 250,00 000 0

Income Statement Sales Less: COGS

Less: Depreciation Expense Income from West Co. Consolidated Net Income NCI in Net Income Contro Controll lling ing Intere Interest st in Net Incom Income e

Goodwill Total Assets

c.

20,000

841,500

445,000

 Accounts Payable Common Stock Retained Earnings NCI in NA of West Co.

60,000 200,000 581,500

30,000 150,000 265,000

Total Liabilities & Equity

841,500

445,000

Reta Retain ined ed ear earni ning ngs s reco reconc ncililia iati tion on,, Dece Decemb mber er 31, 31, 20X 20X9: 9: Retained earnings, Crow Corporation Retained earnings, West Company Elimination of West’s beginning RE Elimination debits in income statement Elimination credits in income statement Remove West’s dividends Consolidated retained earnings

6-54

Elimination Elimination Entries DR CR

152,000 119,000 45,000 24,500 176,500 7,500 184,00 184,000 0

250,000 184,000 43 4 34,000

22,000 72,000

150,000 434,000 9,000 593,000

348,000 (186,000)

164,00 164,000 0

(70,000) 0 92,000 (7,500) 84,500 84,500

164,000 5,000 169,000

532,000 84,500 (35,000) 581,500

16 164,000

33,000 14,0 14,000 00 36,000

Consolidated

301,000 25,200 35 359,200

169,000 126,000 10,800 305,800

166,300 277,000 534, 534,00 000 0 0 22,000 999,300 90,000 200,000 581,500 127,800 999,300

$581,500 265,000 (250,000) (184,000) 164,000 5,000 $581,500

Chapter 06 - Intercompany Inventory Transactions

P6-29 Computation of Consolidated Totals

a.

Consolidated sa sales fo for 20 20X8: Sales reported Intercorporate sales Sales to nonaffiliates

b.

Bunker Corp. $660,000 (140,000) $520,000

Harrison Co. $510,000 (240,000) $270,000

$660,000 ÷ 1.4 $471,429

$510,000 ÷ 1.2 $425,000

(128,000) $343,429

(232,000) $193,000

Consolidated $790,000

Consolidated co cost of of go goods so sold: Total sales reported Ratio of cost to sales price Cost of goods sold  Amount to be eliminated (see entry) Cost of goods sold adjusted

$536,429

Downstream: Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 140,000 98,000 100,000 70,000 40,000 28,000 28.57%

Ending Inventory 42,000 30,000 12,000

Upstream: Sales COGS Gross Profit Gross Profit %

Total = 240,000 200,000 40,000 16.67%

Re-sold + 192,000 160,000 32,000

Ending Inventory 48,000 40,000 8,000

Eliminating entries: Sales Cost of Goods Sold Inventory Elimination of sales by Bunker to Harrison:

140,000

Sales Cost of Goods Sold Inventory Elimination of sales by Harrison to Bunker:

240,000

6-55

128,000 12,000

232,000 8,000

Chapter 06 - Intercompany Inventory Transactions

P6-29 (continued)

c.

Oper Operat atin ing g inco income me of of Bun Bunke kerr Corp Corpor orat atio ion n (exc (exclu ludi ding ng income from Harrison Company) Net income of Harrison Company

$70,000 20,000 $90,000 (12,000) (8,000) $70,000

Less: Unrealized inventory profits of Bunker Unrealized inventory profits of Harrison Consolidated net income Less: Income assigned to noncontrolling interest ($20,000 - $8,000) x 0.20 Income to controlling interest 20X8 d.

(2,400) $67,600

Inve Invent ntor ory y bal balan ance ce in in con conso solilida date ted d bala balanc nce e she sheet et:: Inventory reported by Bunker Corporation Unrealized profits

$48,000 (8,000)

Inventory reported by Harrison Company Unrealized profits Inventory balance, December 31, 20X8

$42,000 (12,000)

6-56

$40,000 30,000 $70,000

Chapter 06 - Intercompany Inventory Transactions

P6-30 Intercompany Transfer of Inventory and Land a. Equity Method Entries on Pine Corp.'s Books:

Investment in Bock Co. 17,500 Income from Bock Co. Record Pine Corp.'s 70% share of Bock Co.'s 20X3 income

17,500

Cash 10,500 Investment in Bock Co. Record Pine Corp.'s 70% share of Bock Co.'s 20X3 dividend

10,500

Income from Bock Co. Investment in Bock Co. Record amortization of excess acquisition price

6,300

6,300

Income from Bock Co. 3,800 Investment in Bock Co. 3,800 Eliminate the deferred gross profit from downstream sales in 20X3 Investment in Bock Co. 6,300 Income from Bock Co. 6,300 Reverse of the deferred gross profit from upstream sales in 20X2 Income from Bock Co. 5,600 Investment in Bock Co. Eliminate the deferred gross profit from upstream sales in 20X3 Book Value Calculations: NCI 30% Original book value 39,000 + Net Income 7,500 - Dividends (4,500) Ending book value 42,000

+

Pine Corp. 70% 91,000 17,500 (10,500) 98,000

=

5,600

Common Stock 70,000

+

70,000

Retained Earnings 60,000 25,000 (15,000) 70,000

Reversal/Deferred GP Calculations:

Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Total 9,000 (3,800) (8,000) (2,800)

=

Pine Corp.'s share 6,300 (3,800) (5,600) (3,100)

6-57

+

NCI's share 2,700 (2,400) 300

Chapter 06 - Intercompany Inventory Transactions

P6-30 (continued) Basic elimination entry Common stock

70,000

← Original amount invested (100%)

Retained earnings

60,000

← Beginning balance in RE

Income from Bock Co.

14,400

← Pine’s % of NI - Def. GP + Reversal

7,800

← NCI share of NI - Def. GP + Reversal

NCI in NI of Bock Co. Dividends declared

15,000

← 100% of Bock Co.'s dividends

Investment in Bock Co.

94,900

← Net book value - Def. GP + Reversal

NCI in NA of Bock Co.

42,300

← NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Pine Corp. 30% + 70% Beginning balance 13,800 32,200 Changes

(2,700)

(6,300)

Ending balance

11,100

25,900

=

Buildings and Equipment 20,000 20,000

Amortized excess value reclassification entry: Amortization expense

7,000

Depreciation expense

2,000

Income from Bock Co.

6,300

NCI in NI of Bock Co.

2,700

Excess value (differential) reclassification entry: Buildings and Equipment

20,000

Patents

21,000

Accumulated depreciation

4,000

Investment in Bock Co.

25,900

NCI in NA of Bock Co.

11,100

Optional accumulated depreciation elimination entry: Accumulated depreciation

50,000

Building & equipment

50,000

Reversal of last year's deferral: Investment in Bock Co.

6,300

NCI in NA of Bock Co.

2,700

Cost of Goods Sold

9,000

6-58

+

Patents

+

Acc. Depr.

28,000

(2,000)

(7,000)

(2,000)

21,000

(4,000)

Chapter 06 - Intercompany Inventory Transactions

P6-30 (continued) Deferral of this year's unrealized profits on inventory transfers Investment in Bock Co. 4,900 NCI in NA of Bock Co. 2,100 Inventory 7,000 Deferral of this year's unrealized profits on inventory transfers Sales 120,000 Cost of Goods Sold 108,200 Inventory 11,800

20X3 Downstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 30,000 15,000 15,000 50.00%

=

Re-sold 22,400 11,200 11,200

Ending Inventory, 20X2 48,000 32,000

Re-sold, 20X3 27,000 18,000

+

Ending Inventory 7,600 3,800 3,800

20X2 Upstream Transactions:

Sales COGS Gross Profit Gross Profit %

=

16,000 33.33%

Ending Inventory, 20X3 21,000 14,000

+

9,000

7,000

Re-sold 66,000 44,000 22,000

Ending Inventory 24,000 16,000 8,000

20X3 Upstream Transactions Sales COGS Gross Profit Gross Profit %

Beg. Balance 70% Net Income

20X2 Reversal Ending Balance Reversal 20X2 Deferred GP

Total 90,000 60,000 30,000 33.33%

Investment in Bock Co. 112,000 17,500 10,500 6,300 6,300 9,400 109,600 6,300 94,900 4,900 0

25,900

=

+

Income from Bock Co.

70% Dividends Excess Val. Amort. Deferred GP Basic Excess Reclass.

6-59

6,300 9,400

17,500

70% Net Income

6,300 8,100

20X2 Reversal Ending Balance

14,400 6,300 0

Chapter 06 - Intercompany Inventory Transactions

P6-30 (continued)

b. Pine Corp.

Bock Co.

260,000 13,600 (186,000)

125,000 (79,800)

(20,000) (16,000)

(15,000) (5,200)

Elimination Entries DR CR

Consolidated

Income Statement

Sales Other Income Less: COGS Less: Depreciation Expense Less: Interest Expense Less: Amortization Expense Income from Bock Co.

8,100

Consolidated Net Income NCI in Net Income

59,700

25,000

Controlling Interest in Net Income

59,700

25,000

Statement of Retained Earnings Beginning Balance

127,900

60,000

Net Income Less: Dividends Declared

59,700 (30,000)

25,000 (15,000)

Ending Balance

157,600

70,000

Balance Sheet Cash and Accounts Receivable Inventory

15,400 165,000

21,600 35,000

Land Buildings & Equipment Less: Accumulated Depreciation Investment in Bock Co.

80,000 340,000 (140,000) 109,600

40,000 260,000 (80,000)

Patents Total Assets

570,000

276,600

 Accounts Payable Bonds Payable Bonds Premium Common Stock

92,400 200,000 120,000

35,000 100,000 1,600 70,000

Retained Earnings NCI in NA of Bock Co.

157,600

70,000

Total Liabilities & Equity

570,000

276,600

6-60

120,00 0 108,200 9,000 2,000 7,000 14,400 143,40 0 7,800 151,20 0

60,000 151,20 0 211,20 0

6,300

(37,000) (21,200) (7,000) 0

123,500 2,700

64,800 (5,100)

126,200

59,700

127,900 126,200 15,000

59,700 (30,000)

141,200

157,600

11,800 7,000 20,000 50,000 6,300 4,900 21,000 102,20 0

70,000 211,20 0 2,700 2,100 286,00 0

265,000 13,600 (148,600)

50,000 4,000 94,900 25,900

37,000 181,200 120,000 570,000 (174,000) 0 21,000

193,600

755,200

127,400 300,000 1,600 120,000 141,200 42,300 11,100

157,600 48,600

194,600

755,200

Chapter 06 - Intercompany Inventory Transactions

P7-30 (continued)

Note: Financial statements are not required. Pine Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X3 Cash and Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patent Total Assets

$ 37,000 181,200 120,000 $570,000 (174,000)

 Accounts Payable Bonds Payable Bond Premium Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders' Equity

396,000 21,000 $755,200 $127,400

$300,000 1,600

301,600

$120,000 157,600 $277,600 48,600 326,200 $755,200

Pine Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X3 Sales Other Income Total Income Cost of Goods Sold Depreciation Expense Interest Expense  Amortization Expense Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest

$265,000 13,600 $278,600 $148,600 37,000 21,200 7,000 (213,800) $ 64,800 (5,100) $ 59,700

Pine Corporation and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X3 Retained Earnings, January 1, 20X3 Income to Controlling Interest, 20X3

$127,900 59,700 $187,600 (30,000) $157,600

Dividends Declared, 20X3 Retained Earnings, December 31, 20X3

6-61

Chapter 06 - Intercompany Inventory Transactions

P6-31 Consolidation Using Financial Statement Data a. Equity Method Entries on Bower Corp.'s Books:

Investment in Concerto Co. 21,000 Income from Concerto Co. Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 income

21,000

Cash 12,000 Investment in Concerto Co. Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 dividend

12,000

Income from Concerto Co. Investment in Concerto Co. Record amortization of excess acquisition price

6,000

6,000

Investment in Concerto Co. 4,000 Income from Concerto Co. Reverse of the deferred gross profit from downstream sales in 20X5

4,000

Income from Concerto Co. 2,000 Investment in Concerto Co. Eliminate the deferred gross profit from downstream sales in 20X6

2,000

Investment in Concerto Co. 4,800 Income from Concerto Co. Reverse of the deferred gross profit from upstream sales in 20X5

4,800

Income from Concerto Co. 5,400 Investment in Concerto Co. Eliminate the deferred gross profit from upstream sales in 20X6

5,400

Book Value Calculations: NCI 40%

+

Bower  Corp. 60%

=

Original book value

80,000

120,000

+ Net Income

14,000

21,000

- Dividends

(8,000)

(12,000)

Ending book value

86,000

129,000

6-62

Common Stock 50,000

+

Retained Earnings 150,000 35,000 (20,000)

50,000

165,000

Chapter 06 - Intercompany Inventory Transactions

P6-31 (continued) Reversal/Deferred GP Calculations:

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Basic elimination entry Common stock Retained earnings Income from Concerto Co. NCI in NI of Concerto Co. Dividends declared Investment in Concerto Co. NCI in NA of Concerto Co.

Total 4,000 8,000 (2,000) (9,000) 1,000

=

Bower  Corp.'s share + 4,000 4,800 (2,000) (5,400) 1,400

NCI's share 3,200 (3,600) (400)

50,000 150,000 22,400 13,600 20,000 130,400 85,600

Excess Value (Differential) Calculations: NCI Bower Corp. 40% 60% + Beginning balance 16,000 24,000 Changes (4,000) (6,000) Ending balance 12,000 18,000

=

Goodwill 40,000 (10,000) 30,000

Amortized excess value reclassification entry: Goodwill impairment loss 10,000 Income from Concerto Co. NCI in NI of Concerto Co.

6,000 4,000

Excess value (differential) reclassification entry: Goodwill 30,000 Investment in Concerto Co. NCI in NA of Concerto Co.

18,000 12,000

Optional accumulated depreciation elimination entry Accumulated depreciation

25,000

Building & equipment

25,000

6-63

← Original amount invested (100%) ← Beginning balance in RE ← Bower’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal ← 100% of Concerto Co.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

Chapter 06 - Intercompany Inventory Transactions

P6-31 (continued) Reversal of last year's deferral: Investment in Concerto Co.

8,800

NCI in NA of Concerto Co.

3,200

Cost of Goods Sold

12,000

Deferral of this year's unrealized profits on inventory transfers Sales

112,000

Cost of Goods Sold

101,000

Inventory

11,000

20X5 Downstream Transactions:

Sales COGS Gross Profit Gross Profit %

Ending Inv., 20X5 14,000 10,000 4,000 28.57%

20X6 Downstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 22,000 15,714 6,286 28.57%

=

Re-sold 15,000 10,714 4,286

+

Ending Inventory 7,000 5,000 2,000

20X5 Upstream Transactions:

Sales COGS Gross Profit Gross Profit %

Ending Inv., 20X5 48,000 40,000 8,000 16.67%

20X6 Upstream Transactions: Sales COGS Gross Profit Gross Profit % P6-31 (continued)

Total 90,000 75,000 15,000 16.67%

=

Re-sold 36,000 30,000 6,000

+

Ending Inventory 54,000 45,000 9,000

Investment in

Income from

Concerto Co.

Concerto Co.

6-64

Chapter 06 - Intercompany Inventory Transactions

P6-31 (continued) Beg. Balance 60% Net Income

20X5 Reversal Ending Balance Reversal

135,200 21,000

8,800

12,000

60% Dividends

6,000

Excess Val. Amort.

6,000

7,400

Deferred GP

7,400

139,600 8,800

130,400

Basic

18,000

Excess Reclass.

21,000

60% Net Income

8,800

20X5 Reversal

16,400

Ending Balance

22,400 6,000

0

0

b. Income Statement Sales Less: COGS

Less: Depreciation & Amort. Expense Less: Other Expenses Less: Goodwill Impairment Loss Income from Concerto Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income

Bower  Corp.

Concerto Co.

400,000 (280,000)

200,000 (120,000)

(25,000) (35,000)

(15,000) (30,000)

16,400 76,400

35,000

76,400

35,000

285,000 76,400 (50,000) 311,400

150,000 35,000 (20,000) 165,000

26,800 80,000 120,000 70,000 340,000 (165,000) 139,600

35,000 40,000 90,000 20,000 200,000 (85,000)

611,400

300,000

 Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Concerto Co.

80,000 120,000 100,000 311,400

15,000 70,000 50,000 165,000

Total Liabilities & Equity

611,400

300,000

Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash  Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Concerto Co.

Goodwill Total Assets

6-65

Elimination Entries DR CR

112,000 12,000 101,000

10,000 22,400 144,400 13,600 158,000

150,000 158,000 308,000

6,000 119,000 4,000 123,000

123,000 20,000 143,000

285,000 76,400 (50,000) 311,400

25,000

30,000 63,800

50,000 308,000 3,200 361,200

488,000 (287,000) (40,000) (65,000) (10,000) 0 86,000 (9,600) 76,400

11,000 2 5,000 8,800

Consolidated

130,400 18,000 184,400

143,000 85,600 12,000 240,600

61,800 120,000 199,000 90,000 515,000 (225,000) 0 30,000 790,800 95,000 190,000 100,000 311,400 94,400 790,800

Chapter 06 - Intercompany Inventory Transactions

P6-32 Intercorporate Transfers of Inventory and Equipment

a.

Consolidated cost of goods sold for 20X9:  Amount reported by Foster Company  Amount reported by Block Corporation  Adjustment for unrealized profit in beginning inventory sold in 20X9  Adjustment for inventory purchased from subsidiary and resold during 20X9: CGS recorded by Foster ($30,000 x 0.60) CGS recorded by Block Total recorded CGS based on Block's cost ($20,000 x 0.60) Required adjustment Cost of goods sold

b.

(15,000) $18,000 20,000 $38,000 (12,000) (26,000) $822,000

Consolidated inventory balance:  Amount reported by Foster  Amount reported by Block Total inventory reported Unrealized profit in ending inventory held by Foster [($30,000 - $20,000) x 0.40] Consolidated balance

c.

$593,000 270,000

$137,000 130,000 $267,000 (4,000) $263,000

Income assigned to noncontrolling interest: Net income reported by Block Corporation  Adjustment for realization of profit on inventory sold to Foster in 20X8  Adjustment for unrealized profit on inventory sold to Foster in 20X9 Realized net income of Block for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest

6-66

$70,000 15,000 (4,000) $81,000 x 0.10 $ 8,100

Chapter 06 - Intercompany Inventory Transactions

P6-32 (continued)

d.

Amount assigned to noncontrolling interest in consolidated balance sheet: Block Corporation common stock outstanding Block Corporation retained earnings, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Book value, December 31, 20X9  Adjustment for unrealized profit on inventory sold to Foster Realized book value of Block Corporation Proportion of ownership held by noncontrolling interest Balance assigned to noncontrolling interest

e.

$ 50,000 165,000 70,000 (20,000) $265,000 (4,000) $261,000 x 0.10 $ 26,100

Consolidated retained earnings at December 31, 20X9: Balance reported by Foster Company, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Balance reported by Foster Company, December 31, 20X9

f.

$235,000 180,900 (40,000) $375,900

Eliminating entries:

Book Value Calculations: + Foster Co. 90%

Comm = on Stock

21,500

193,500

50,000

7,000

63,000

70,000

- Dividends

(2,000)

(18,000)

(20,000)

Ending book value

26,500

238,500

NCI 10% Original book value + Net Income

50,000

6-67

+

Retained Earnings 165,000

215,000

Chapter 06 - Intercompany Inventory Transactions

P6-32 (continued) Reversal/Deferred GP Calculations:

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Total 0 15,000 0 (4,000) 11,000

Basic elimination entry Common stock Retained earnings Income from Block Corp. NCI in NI of Block Corp. Dividends declared Investment in Block Corp. NCI in NA of Block Corp. Reversal of last year's deferral: Investment in Block Corp. NCI in NA of Block Corp. Cost of Goods Sold

Foster  Co.'s share + 0 13,500 0 (3,600) 9,900

=

NCI's share

50,000 165,000 72,900 8,100 20,000 248,400 27,600

1,500 (400) 1,100

← Original amount invested (100%) ← Beginning balance in RE ← Foster’s % of NI - Def. GP + Reversal ← NCI share of NI - Def. GP + Reversal ← 100% of Block Corp.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

13,500 1,500 15,000

Deferral of this year's unrealized profits on inventory transfers Sales 30,000 Cost of Goods Sold 26,000 Inventory 4,000

20X8 Upstream Transactions:

Sales COGS Gross Profit Gross Profit %

Ending Inventory 75,000 60,000 15,000 20.00%

20X9 Upstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 30,000 20,000 10,000 33.33%

=

6-68

Re-sold 18,000 12,000 6,000

+

Ending Inventory 12,000 8,000 4,000

Chapter 06 - Intercompany Inventory Transactions

P6-32 (continued)

Beg. Balance 90% Net Income 20X8 Reversal Ending Balance Reversal

Investment in

Income from

Block Corp.

Block Corp.

180,000 63,000 13,500

18,000

90% Dividends

3,600

Deferred GP

3,600

234,900 13,500

248,400

Basic

63,000

90% Net Income

13,500

20X8 Reversal

72,900

Ending Balance

72,900

0

0

g. Elimination Entries DR CR

Foster  Co.

Block Corp.

815,000 26,000 (593,000)

415,000 15,000 (270,000)

Less: Depreciation Expense Less: Other Expenses Income from Block Corp.

(45,000) (95,000) 72,900

(15,000) (75,000)

Consolidated Net Income NCI in Net Income Controlling Interest in Net Income

180,900

70,000

180,900

70,000

Beginning Balance

235,000

165,000

Net Income Less: Dividends Declared

180,900 (40,000)

70,000 (20,000)

Ending Balance

375,900

215,000

187,000 80,000 40,000 137,000 80,000 500,000 (155,000) 234,900 1,103,900

57,400 90,000 10,000 130,000 60,000 250,000 (75,000)

63,000 95,000 250,000

35,000 20,000 200,000 2,400 50,000

50,000

215,000

276,00

Income Statement Sales Other Income Less: COGS

30,000 15,000 26,000 72,900 102,90 0 8,100 111,00 0

Consolidated

1,200,000 41,000 (822,000) (60,000) (170,000) 0

41,000

189,000 (8,100)

41,000

180,900

Statement of Retained Earnings

Balance Sheet Cash  Accounts Receivable Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Block Corp. Total Assets

 Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock  Additional Paid-in Capital Retained Earnings

210,000 110,000 375,900

6-69

522,400

165,00 0 111,00 0 276,00 0

235,000 41,000 20,000

180,900 (40,000)

61,000

375,900

248,400 252,400

244,400 170,000 50,000 263,000 140,000 750,000 (230,000) 0 1,387,400

61,000

98,000 115,000 450,000 2,400 210,000 110,000 375,900

4,000

13,500 13,500

Chapter 06 - Intercompany Inventory Transactions

NCI in NA of Block Corp. Total Liabilities & Equity

1,103,900

6-70

522,400

0 1,500 327,50 0

27,600

26,100

88,600

1,387,400

Chapter 06 - Intercompany Inventory Transactions

P6-33 Consolidated Balance Sheet Worksheet [AICPA Adapted] Book Value Calculations: NCI 10% 80,000 10,100 (100) 90,000

Original book value + Net Income - Dividends Ending book value

+

Pine Corp. 90% 720,000 90,900 (900) 810,000

=

Common Stock 200,000

Retained Earnings 600,000 101,000 (1,000) 700,000

+

200,000

Reversal/Deferred GP Calculations:

Total 0 0 -3,000 0 (3,000)

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Pine Corp.'s share 0 0 -3,000 0 (3,000)

=

+

NCI's share 0 0 0

Basic elimination entry Common stock

200,000

← Original amount invested (100%)

Retained earnings

600,000

← Beginning balance in RE

Income from Slim Corp.

87,900

← Pine’s % of NI - Def. GP + Reversal

NCI in NI of Slim Corp.

10,100

← NCI share of NI - Def. GP + Reversal

Dividends declared

1,000

Investment in Slim Corp.

807,000

NCI in NA of Slim Corp.

90,000

Excess Value (Differential) Calculations: NCI Pine Corp. 10% 90% + Beginning balance Changes Ending balance

← 100% of Slim Corp.'s dividends

=

← NCI share of BV - Def. GP + Reversal

Goodwill

50,000

450,000

500,000

0

0

0

50,000

450,000

500,000

Excess value (differential) reclassification entry: Goodwill

500,000

Investment in Slim Corp.

450,000

NCI in NA of Slim Corp.

50,000

6-71

← Net book value - Def. GP + Reversal

Chapter 06 - Intercompany Inventory Transactions

P6-33 (continued) Intercompany Transactions Dividends Payable

900

Dividends Receivable

900

Accounts Payable

90,000

Accounts Receivable

90,000

Note Payable

100,000

Note Receivable

100,000

Interest Payable

5,000

Interest Receivable

5,000

Deferral of this year's unrealized profits on inventory transfers Sales

300,000

Cost of Goods Sold

297,000

Inventory

3,000

20X6 Downstream Transactions:

Sales

Total 300,000

COGS

240,000

228,000

12,000

60,000 20.00%

57,000

3,000

Gross Profit Gross Profit %

Acquisition Price 90% Net Income

Re-sold 285,000

+

Investment in

Income from

Slim Corp.

Slim Corp.

1,170,000 90,900 900 3,000

Ending Balance

=

Ending Inventory 15,000

90,900

90% Net Income

87,900

Ending Balance

90% Dividends Deferred GP

3,000

1,257,000 807,000

Basic

450,000

Excess Reclass.

0

87,900 0

6-72

Chapter 06 - Intercompany Inventory Transactions

P6-33 (continued) Pine Corp.

Slim Corp.

Balance Sheet Cash  AR & Other Receivables

105,000 410,000

15,000 120,000

Merchandise Inventory Plant & Equipment (net) Investment in Slim Corp.

920,000 1,000,000 1,257,000

670,000 400,000

Goodwill Total Assets

3,692,000

1,205,000

140,000

305,000

500,000 3,052,000

200,000 700,000

 AP & Other Liabilities

Common Stock Retained Earnings

Elimination Entries DR CR

900 90,000 100,000 5,000 3,000 807,000 450,000 500,000 500,000 900 90,000 100,000 5,000 200,000 600,000 87,900 10,100 300,000

NCI in NA of Slim Corp. Total Liabilities & Equity

3,692,000

1,205,000

6-73

1,393,900

1,455,900

Consolidated

120,000 334,100

1,587,000 1,400,000 0 500,000 3,941,100 249,100

1,000 297,000 90,000 50,000 438,000

500,000 3,052,000

140,000 3,941,100

Chapter 06 - Intercompany Inventory Transactions

P6-34 Comprehensive Worksheet Problem a. Equity Method Entries on Randall Corp.'s Books:

Investment in Sharp Co.

320,000

Cash

320,000

Record the initial investment in Sharp Co. Investment in Sharp Co. Income from Sharp Co.

32,000 32,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income Cash 20,000 Investment in Sharp Co. Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend Income from Sharp Co.

20,000

4,000

Investment in Sharp Co. Record amortization of excess acquisition price

4,000

Investment in Sharp Co. Income from Sharp Co.

2,000 2,000

Reverse of the deferred gross profit from downstream sales in 20X6 Income from Sharp Co. 3,000 Investment in Sharp Co. Eliminate the deferred gross profit from downstream sales in 20X7

3,000

Investment in Sharp Co. 6,400 Income from Sharp Co. Reverse of the deferred gross profit from upstream sales in 20X6

6,400

Income from Sharp Co. 8,000 Investment in Sharp Co. Eliminate the deferred gross profit from upstream sales in 20X7

8,000

6-74

Chapter 06 - Intercompany Inventory Transactions

6-34 (continued) b. Book Value Calculations: NCI 20% Original book value

+

Randall Corp. 80%

Retained =

Common Stock

+

Add. Paidin Capital 20,000

Earnings

67,000

268,000

8,000

32,000

40,000

- Dividends

(5,000)

(20,000)

(25,000)

Ending book value

70,000

280,000

+ Net Income

100,000

+

100,000

20,000

215,000

230,000

Reversal/Deferred GP Calculations:

Total

=

Randall Corp.'s share

+

NCI's share

Downstream Reversal

2,000

2,000

Upstream Reversal Downstream Deferred GP

8,000

6,400

(3,000)

(3,000)

Upstream Deferred GP

(10,000)

(8,000)

(2,000)

(3,000)

(2,600)

(400)

Total

1,600

Basic elimination entry Common stock

100,000

Additional paid-in capital Retained earnings

← Original amount invested (100%)

20,000

← Beginning balance in APIC

215,000

Income from Sharp Co.

← Beginning balance in RE

29,400

NCI in NI of Sharp Co.

← Randall’s % of NI - Def. GP + Reversal

7,600

← NCI share of NI - Def. GP + Reversal

Dividends declared

25,000

Investment in Sharp Co.

277,400

NCI in NA of Sharp Co.

69,600

Excess Value (Differential) Calculations: NCI Randall 20% + Corp. 80% Beginning balance Changes Ending balance

7,000

28,000

(1,000)

(4,000)

6,000

24,000

6-75

=

← 100% of Sharp Co.'s dividends ← Net book value - Def. GP + Reversal ← NCI share of BV - Def. GP + Reversal

Buildings & equipment 50,000

+

Acc. Depr. (15,000) (5,000)

50,000

(20,000)

Chapter 06 - Intercompany Inventory Transactions

P6-34 (continued) Amortized excess value reclassification entry: Depreciation expense 5,000 Income from Sharp Co. NCI in NI of Sharp Co.

4,000 1,000

Excess value (differential) reclassification entry: Buildings & equipment 50,000 Accumulated depreciation Investment in Sharp Co. NCI in NA of Sharp Co.

20,000 24,000 6,000

Eliminate intercompany accounts: Accounts payable Accounts receivable

10,000 10,000

Optional accumulated depreciation elimination entry Accumulated depreciation 40,000 Building & equipment Reversal of last year's deferral: Investment in Sharp Co. NCI in NA of Sharp Co. Cost of Goods Sold

40,000

8,400 1,600 10,000

Deferral of this year's unrealized profits on inventory transfers Sales 57,000 Cost of Goods Sold 44,000 Inventory 13,000

20X6 Downstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 26,000 20,000 6,000 23.08%

=

Re-sold 17,333 13,333 4,000

+

Re-sold

+

Ending Inventory 8,667 6,667 2,000

20X7 Downstream Transactions: Sales COGS Gross Profit Gross Profit %

Total 12,000 9,000 3,000 25.00%

=

6-76

0 0 0

Ending Inventory 12,000 9,000 3,000

Chapter 06 - Intercompany Inventory Transactions

P6-34 (continued) 20X6 Upstream Transactions: Total 60,000

Sales COGS Gross Profit Gross Profit %

=

Re-sold 36,000

+

Ending Inventory 24,000

40,000

24,000

16,000

20,000 33.33%

12,000

8,000

Re-sold 15,000

Ending Inventory 30,000

20X7 Upstream Transactions: Total 45,000

Sales COGS Gross Profit Gross Profit %

=

+

30,000

10,000

20,000

15,000 33.33%

5,000

10,000

Investment in

Income from

Sharp Co.

Sharp Co.

Beginning Balance

287,600

80% Net Income

32,000

32,000 20,000

20X6 Reversal

8,400

Ending Balance

293,000

Reversal

8,400

4,000

80% Dividends Excess Val. Amort.

4,000

11,000

Deferred GP

11,000

8,400 25,400

277,400

Basic

24,000

Excess Reclass.

0

29,400 4,000 0

6-77

80% Net Income

20X6 Reversal Ending Balance

Chapter 06 - Intercompany Inventory Transactions

P6-34 (continued)

Income Statement Sales Other Income Less: COGS

Less: Depreciation & Amortization Exp. Less: Other Expenses Income from Sharp Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income

Elimination Entries DR CR

Randall Corp.

Sharp Co.

500,000 20,400 (416,000)

250,000 30,000 (202,000)

57,000

(30,000) (24,000) 25,400 75,800

(20,000) (18,000)

5,000

10,000 44,000

Consolidated

693,000 50,400 (564,000)

40,000

29,400 91,400 7,600

4,000 58,000 1,000

(55,000) (42,000) 0 82,400 (6,600)

75,800

40,000

99,000

59,000

75,800

337,500 75,800 (50,000) 363,300

215,000 40,000 (25,000) 230,000

215,000 99,000

59,000 25,000 84,000

337,500 75,800 (50,000) 363,300

130,300 80,000 170,000 600,000 (310,000) 293,000

10,000 70,000 110,000 400,000 (120,000)

Total Assets

963,300

470,000

98,400

 Accounts Payable Bonds Payable Bond Premium Common Stock  Additional Paid-in Capital Retained Earnings NCI in NA of Sharp Co.

100,000 300,000

10,000

363,300

15,200 100,000 4,800 100,000 20,000 230,000

963,300

470,000

Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash  Accounts Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Sharp Co.

Total Liabilities & Equity

200,000

6-78

314,000

50,000 40,000 8,400

100,000 20,000 314,000 1,600 445,600

10,000 13,000 40,000 20,000 277,400 24,000 384,400

84,000 69,600 6,000 159,600

140,300 140,000 267,000 1,010,000 (410,000) 0 1,147,300

105,200 400,000 4,800 200,000 0 363,300 74,000 1,147,300

Chapter 06 - Intercompany Inventory Transactions

P6-34 (continued)

d.

Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7

Cash  Accounts Receivable Inventory Total Current Assets Buildings and Equipment Less: Accumulated Depreciation Total Assets

$ 140,300 140,000 267,000 $ 547,300 $1,010,000 (410,000)

 Accounts Payable Bonds Payable Bond Premium Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders' Equity

600,000 $1,147,300 $ 105,200

$ 400,000 4,800

404,800

$ 200,000 363,300 $ 563,300 74,000 637,300 $1,147,300

Randall Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X7 Sales Other Income

$ 693,000 50,400 $ 743,400

Cost of Goods Sold Depreciation and Amortization Expense Other Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest

$ 564,000 55,000 42,000

Randall Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X7

6-79

(661,000) $ 82,400 (6,600) $ 75,800

Chapter 06 - Intercompany Inventory Transactions

Retained Earnings, January 1, 20X7 Income to Controlling Interest, 20X7

$ 337,500 75,800 $ 413,300 (50,000) $ 363,300

Dividends Declared, 20X7 Retained Earnings, December 31, 20X7

6-80

Chapter 06 - Intercompany Inventory Transactions

P6-35 Comprehensive Consolidation Worksheet; Equity Method [AICPA Adapted] Equity Method Entries on Fran Corp.'s Books:

Investment in Brey Inc.

750,000

Cash Record the initial investment in Brey Inc.

750,000

Investment in Brey Inc.

190,000

Income from Brey Inc.

190,000

Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 income Cash Investment in Brey Inc.

40,000 40,000

Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 dividend Income from Brey Inc.

44,000

Investment in Brey Inc. Record amortization of excess acquisition price

44,000

Income from Brey Inc. 18,000 Investment in Brey Inc. Eliminate the deferred gross profit from upstream sales in 20X9

18,000

Retained Fran Corp. 100%

=

Common Stock

+

400,000

Add. Paidin Capital

Earnings

Original book value

636,000

+ Net Income

190,000

190,000

- Dividends

(40,000)

(40,000)

Ending book value

786,000

400,000

80,000

+

80,000

Reversal/Deferred GP Calculations: Total

=

Fran Corp.'s share

Upstream Deferred GP

(18,000)

(18,000)

Total

(18,000)

(18,000)

6-81

156,000

306,000

Chapter 06 - Intercompany Inventory Transactions

P6-35 (continued) Basic elimination entry Common stock

400,000

Additional paid-in capital

← Original amount invested (100%)

80,000

← Beginning balance in APIC

Retained earnings

156,000

← Beginning balance in RE

Income from Brey Inc.

172,000

← Fran’s % of NI - Def. GP

Dividends declared

40,000

Investment in Brey Inc.

768,000

Fran Corp. 100% Beginning balance

114,000

Changes

(44,000)

Ending balance

← 100% of Brey Inc.'s dividends

70,000

=

Machinery

+

← Net book value - Def. GP

Acc. Depr.

54,000

0

54,000

Goodwill impairment loss

(9,000)

25,000

35,000 44,000

Excess value (differential) reclassification entry: Machinery

54,000

Goodwill

25,000

Accumulated depreciation

9,000

Investment in Brey Inc.

70,000

Eliminate intercompany accounts: Accounts payable

86,000

Accounts receivable

86,000

Deferral of this year's unrealized profits on inventory transfers Sales

180,000

Cost of Goods Sold

162,000

Inventory

18,000

6-82

60,000 (35,000)

9,000

Income from Brey Inc.

Goodwill

(9,000)

Amortized excess value reclassification entry: Depreciation expense

+

Chapter 06 - Intercompany Inventory Transactions

P6-35 (continued) 20X9 Upstream Transactions Total 180,000

Sales

=

Re-sold 144,000

+

Ending Inventory 36,000

COGS

90,000

72,000

18,000

Gross Profit

90,000

72,000

18,000

Gross Profit %

50.00%

Investment in

Income from

Brey Inc.

Brey Inc.

Acquisition Price

750,000

100% Net Income

190,000

Ending Balance

40,000

100% Dividends

44,000

Excess Val. Amort.

44,000

18,000

Deferred GP

18,000

838,000 768,000

Basic

70,000

Excess Reclass.

0

190,000

100% Net Income

128,000

Ending Balance

172,000 44,000 0

6-83

Chapter 06 - Intercompany Inventory Transactions

P6-35 (continued)

Note that in the 8 th edition, the sale of the warehouse was an intercompany transaction and needed to be eliminated. We changed the problem in the 9 th edition to assume that the sale was to a non-affiliated third party. Thus, the gain on the sale of the warehouse is not eliminated in this problem.

Income Statement Net Sales Gain on Sale of Warehouse Less: COGS Less: Operating Expenses Less: Goodwill Impairment Income from Brey Inc. Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance

Fran Corp.

Brey Inc.

3,800,000 30,000 (2,360,000) (1,100,000)

1,500,000 (870,000) (440,000)

128,000 498,000

190,000

440,000 498,000

156,000 190,000 (40,000) 306,000

938,000

Elimination Entries DR CR

180,000

156,000 396,000 552,000

Balance Sheet Cash  Accounts Receivable (net) Inventories Land, Plant, and Equipment Less: Accumulated Depreciation Investment in Brey Inc.

570,000 860,000 1,060,000 1,320,000 (370,000) 838,000

150,000 350,000 410,000 680,000 (210,000)

Goodwill Total Assets

4,278,000

1,380,000

25,000 79,000

 Accounts Payable & Accrued Expenses Common Stock  Additional Paid-in Capital Retained Earnings Total Liabilities & Equity

1,340,000 1,700,000 300,000 938,000 4,278,000

594,000 400,000 80,000 306,000 1,380,000

86,000 400,000 80,000 552,000 1,118,000

6-84

44,000 206,000

5,120,000 30,000 (3,068,000) (1,549,000) (35,000) 0 498,000

206,000 40,000 246,000

440,000 498,000 0 938,000

162,000 9,000 35,000 172,000 396,000

Consolidated

86,000 18,000 54,000 9,000 768,000 70,000

720,000 1,124,000 1,452,000 2,054,000 (589,000) 0

951,000

25,000 4,786,000

246,000 246,000

1,848,000 1,700,000 300,000 938,000 4,786,000

Chapter 06 - Intercompany Inventory Transactions

P6-36A Fully Adjusted Equity Method

a. Adjusted trial balance: Item Cash  Accounts Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock Cost of Goods Sold Depreciation and Amortization Other Expenses Dividends Declared  Accumulated Depreciation  Accounts Payable Bonds Payable Bond Premium Common Stock  Additional Paid-In Capital Retained Earnings Sales Other Income Income from Subsidiary

Randall Corporation Debit Credit

Sharp Company Debit Credit

$ 130,300 80,000 170,000 600,000

$ 10,000 70,000 110,000 400,000

304,000 416,000 30,000 24,000 50,000

202,000 20,000 18,000 25,000 $ 310,000 100,000 300,000

$120,000 15,200 100,000 4,800 100,000 20,000 215,000 250,000 30,000

200,000

$1,804,300

345,900 500,000 20,400 28,000 $1,804,300

$855,000

b. Equity Method Entries on Randall Corp.'s Books:

Investment in Sharp Co. Income from Sharp Co.

32,000 32,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income Cash 20,000 Investment in Sharp Co. Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend Income from Sharp Co.

20,000

4,000

Investment in Sharp Co. Record amortization of excess acquisition price

4,000

6-85

$855,000

Chapter 06 - Intercompany Inventory Transactions

P6-36A (continued)

c. Book Value Calculations: Retained NCI 20% Original book value

Randall Corp. 80%

+

=

67,000

268,000

8,000

32,000

- Dividends

(5,000)

(20,000)

Ending book value

70,000

280,000

+ Net Income

Commo n Stock 100,000

+

Add. Paidin Capital

+

Earning s

20,000

215,000 40,000 (25,000)

100,000

20,000

230,000

Reversal/Deferred GP Calculations:

Total

Randall Corp.'s share

=

+

NCI's share

Downstream Reversal

2,000

2,000

Upstream Reversal

8,000

6,400

(3,000)

(3,000)

(10,000)

(8,000)

(2,000)

(3,000)

(2,600)

(400)

Downstream Deferred GP Upstream Deferred GP Total

1,600

Basic elimination entry Common stock

100,000

Additional paid-in capital Retained earnings

20,000

← Randall Corp.’s % of NI

7,600

Dividends declared

← NCI share of NI - Def. GP + Reversal

25,000

Investment in Sharp Co.

280,000

NCI in NA of Sharp Co.

69,600

Excess Value (Differential) Calculations: NCI Randall Corp. 20% + 80%

Ending balance

← Beginning balance in RE

32,000

NCI in NI of Sharp Co.

Changes

← Beginning balance in APIC

215,000

Income from Sharp Co.

Beginning balance

← Original amount invested (100%)

7,000

28,000

(1,000)

(4,000)

6,000

24,000

6-86

=

← 100% of Sharp Co.'s dividends ← Net book value ← NCI share of BV - Def. GP + Reversal

Buildings & equipment 50,000

+

Acc. Depr. (15,000) (5,000)

50,000

(20,000)

Chapter 06 - Intercompany Inventory Transactions

P6-36A (continued) Amortized excess value reclassification entry: Depreciation expense

5,000

Income from Sharp Co.

4,000

NCI in NI of Sharp Co.

1,000

Excess value (differential) reclassification entry: Buildings & equipment

50,000

Accumulated depreciation

20,000

Investment in Sharp Co.

24,000

NCI in NA of Sharp Co.

6,000

Eliminate intercompany accounts: Accounts payable

10,000

Accounts receivable

10,000

Optional accumulated depreciation elimination entry Accumulated depreciation

40,000

Building & equipment

40,000

Reversal of last year's deferral: Retained earnings

8,400

NCI in NA of Sharp Co.

1,600

Cost of Goods Sold

10,000

Deferral of this year's unrealized profits on inventory transfers Sales

57,000

Cost of Goods Sold

44,000

Inventory

13,000

(See Problem 6-34 for unrealized profit calculations.)

6-87

Chapter 06 - Intercompany Inventory Transactions

P6-36A (continued)

d. Elimination Entries DR CR

Randall Corp.

Sharp Co.

500,000 20,400 (416,000)

250,000 30,000 (202,000)

57,000

(30,000) (24,000) 28,000 78,400

(20,000) (18,000)

5,000

40,000

32,000 94,000 7,600

4,000 58,000 1,000

(55,000) (42,000) 0 82,400 (6,600)

78,400

40,000

101,600

59,000

75,800

Statement of Retained Earnings Beginning Balance

345,900

215,000

Net Income Less: Dividends Declared Ending Balance

78,400 (50,000) 374,300

40,000 (25,000) 230,000

215,000 8,400 101,600

130,300 80,000 170,000 600,000 (310,000) 304,000

10,000 70,000 110,000 400,000 (120,000)

50,000 40,000

Total Assets

974,300

470,000

90,000

 Accounts Payable Bonds Payable Bond Premium Common Stock  Additional Paid-in Capital Retained Earnings NCI in NA of Sharp Co.

100,000 300,000

10,000

374,300

15,200 100,000 4,800 100,000 20,000 230,000

974,300

470,000

Income Statement Sales Other Income Less: COGS

Less: Depreciation & Amortization Exp. Less: Other Expenses Income from Sharp Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income

Balance Sheet Cash  Accounts Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Sharp Co.

Total Liabilities & Equity

200,000

6-88

44,000 10,000

325,000

100,000 20,000 325,000 1,600 456,600

Consolidated

693,000 50,400 (564,000)

337,500 59,000 25,000 84,000

10,000 13,000 40,000 20,000 280,000 24,000 387,000

84,000 69,600 6,000 159,600

75,800 (50,000) 363,300

140,300 140,000 267,000 1,010,000 (410,000) 0 1,147,300

105,200 400,000 4,800 200,000 0 363,300 74,000 1,147,300

Chapter 06 - Intercompany Inventory Transactions

P6-37A Cost Method

a. Equity Method Entries on Randall Corp.'s Books:

Investment in Sharp Co. Income from Sharp Co.

20,000 20,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income b. Investment elimination entry: Common stock Additional paid-in capital Retained earnings

100,000 20,000 180,000

Investment in Sharp Co.

240,000

NCI in NA of Sharp Co.

60,000

Dividend elimination entry: Dividend Income NCI in NI of Sharp Co.

20,000 5,000

Dividends Declared

25,000

Excess value (differential) reclassification entry: Buildings & equipment

50,000

Investment in Sharp Co.

40,000

NCI in NA of Sharp Co.

10,000

Amortize differential from previous years: Retained earnings NCI in NA of Sharp Co.

12,000 3,000

Accumulated Depreciation

15,000

Amortize differential for 20X7 Depreciation Expense

5,000

Accumulated Depreciation

5,000

Assign Sharp's undistributed income to NCI NCI in NA of Sharp Co.

1,600

Retained Earnings

7,000

NCI in NA of Sharp Co.

8,600

6-89

Chapter 06 - Intercompany Inventory Transactions

P6-37A (continued) Eliminate intercompany accounts: Accounts payable

10,000

Accounts receivable

10,000

Optional accumulated depreciation elimination entry Accumulated depreciation

40,000

Building & equipment

40,000

Reversal of last year's deferral: Retained Earnings

8,400

NCI in NA of Sharp Co.

1,600

Cost of Goods Sold

10,000

Deferral of this year's unrealized profits on inventory transfers Sales

57,000

Cost of Goods Sold

44,000

Inventory

13,000

(See Problem 6-34 for unrealized profit calculations.)

6-90