solusi manual advanced acc zy Chap007

Chapter 07 - Intercompany Inventory Transactions

CHAPTER 7

INTERCOMPANY INVENTORY TRANSACTIONS

ANSWERS TO QUESTIONS

Q7-1 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, when unrealized profits exist at the end of the period, the eliminations are needed to avoid overstating inventory and consolidated net income.

Q7-2 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.

Q7-3 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 workpaper will know whether to reduce consolidated net income assigned to the controlling interest by the full amount of the unrealized profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream).

Q7-4 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.

Q7-5 Consolidated net income is reduced by the full amount of the unrealized profits. In the upstream sale, the unrealized profits are apportioned between the parent company 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.

Q7-6 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.

Q7-7 The basic eliminating entry needed when the item is resold before the end of the period is:

Sales XXXXXX Cost of Goods Sold XXXXXX

The debit to sales is based on the intercorporate sale price. This means that only the revenue recorded by the company ultimately selling to the nonaffiliate is to be included in 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.

7-1


Q7-8 The basic eliminating entry needed when one or more of the items are not resold before the end of the period is:

Sales XXXXXX Cost of Goods Sold XXXXXX Inventory 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.

Q7-9 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.

Q7-10 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 not all of the intercorporate sales have been resold by the end of the period, consolidated retained earnings must be reduced by the parent's proportionate share of any unrealized profits.

Q7-11 A proportionate share of the realized retained earnings of the subsidiary are assigned to the noncontrolling interest. Any unrealized profits on upstream sales are deducted proportionately from the amount assigned to the noncontrolling interest and consolidated retained earnings. Unrealized profits on downstream sales are deducted entirely from the retained earnings assigned to the consolidated entity.

Q7-12 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 in assigning consolidated net income to the appropriate shareholder group.

Q7-13 Consolidated retained earnings must be reduced by the full amount of any unrealized profit on the parent company books.

Q7-14 Consolidated retained earnings must be reduced by the parent's proportionate share of the unrealized profit on the subsidiary's books.

Q7-15* Sales between subsidiaries are treated in the same manner as upstream 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.

7-2


Q7-16* 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.SOLUTIONS TO CASES

C7-1 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.

C7-2 Inventory Values and Intercompany Transfers

MEMO

To: PresidentWater Products Corporation

From: , CPA

Re: 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.

7-3


C7-2 (continued)

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.

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

7-4


C7-3 Intercorporate Inventory Transfers

MEMO

To: TreasurerEvert Corporation

From: , CPA

Re: 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]

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 intercompany transfer should be eliminated. [ARB 51, Par. 6]

The following eliminating entry is required at December 31, 20X2:

E(1) Sales 180,000Inventory 60,000 Cost of Goods Sold 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 .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.

7-5


C7-3 (continued)

The following eliminating entry is required at December 31, 20X3:

E(2) Cost of Goods Sold 60,000 Retained Earnings 54,000 Noncontrolling interest 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 retained earnings and noncontrolling interest are 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. 9ARB 51, Par. 6

C7-4 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.

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.

7-6


C7-5 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.

7-7


C7-5 (continued)

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.

C7-6 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, 2006, Exxon Mobil reported eliminations of $368 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 significant, totaling almost $4 billion, but 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.

7-8

http://www.ford.com/

http://www.exxonmobil.com/

http://www.xerox.com/


SOLUTIONS TO EXERCISES

E7-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted]

1. a

2. c

3. a

4. c

5. c Net assets reported $320,000 Profit on intercompany sale $48,000Proportion of inventory unsold at year end ($60,000 / $240,000) x .25 Unrealized profit at year end (12,000 )Amount reported in consolidated statements $308,000

6. c Inventory reported by Banks ($175,000 + $60,000) $235,000 Inventory reported by Lamm 250,000 Total inventory reported $485,000 Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] (15,000 )Amount reported in consolidated statements $470,000

7-9


E7-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted]

1. b Cost of goods sold reported by Park $ 800,000 Cost of goods sold reported by Small 700,000 Total cost of goods sold reported $1,500,000 Cost of goods sold reported by Park on sale to Small ($500,000 x .40) (200,000)Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x 4 / 5) x .60] (240,000 )Cost of goods sold for consolidated entity $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 .375)

$12,000

Unrealized profit on sale [($30,000 + $25,000) – $52,000]

(3,000 )

Carrying cost of inventory for Power $ 9,000

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

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

E7-3 Multiple Choice – Consolidated Income Statement 1.

c

2. b

3. c Total income ($86,000 - $47,000) $39,000 Income assigned to noncontrolling interest [.40($86,000 - $60,000)] (10,400 )Consolidated net income assigned to controlling interest $28,600

7-10


E7-4 Multiple-Choice Questions — Consolidated Balances

1. c

2. a Amount paid by Lorn Corporation $120,000 Unrealized profit (45,000 )Actual cost $ 75,000 Portion sold x .80 Cost of goods sold $ 60,000

3. e Consolidated sales $140,000 Cost of goods sold (60,000 )Consolidated net income $ 80,000 Income to Dresser’s noncontrolling interest: Sales $120,000 Reported cost of sales (75,000 ) Report income $ 45,000 Portion realized x .80 Realized net income $ 36,000 Portion to Noncontrolling Interest x .30 Income to noncontrolling Interest (10,800 )Income to controlling interest $ 69,200

4. a Inventory reported by Lorn $ 24,000 Unrealized profit ($45,000 x .20) (9,000 )Ending inventory reported $ 15,000

E7-5 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. $67,000 Cost of goods sold ($30,000 x 2/3) (20,000 )Consolidated net income $47,000

3. a $7,000 = [($67,000 - $32,000) x .20]

7-11


E7-6 Realized Profit on Intercompany Sale

a. Journal entries recorded by Nordway Corporation:

(1) Inventory 960,000 Cash (Accounts Payable) 960,000

(2) Cash (Accounts Receivable) 750,000 Sales 750,000

(3) Cost of Goods Sold 600,000 Inventory 600,000

b. Journal entries recorded by Olman Company:


(2) Cash (Accounts Receivable) 1,125,000 Sales 1,125,000


c. Eliminating entry:

E(1) Sales 750,000 Cost of Goods Sold 750,000

7-12


E7-7 Sale of Inventory to Subsidiary

a. Journal entries recorded by Nordway Corporation:




b. Journal entries recorded by Olman Company:





E(1) Sales 750,000 Cost of Goods Sold 708,000 Inventory 42,000

7-13


E7-8 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).



d. Eliminating entry:

E(1) Retained Earnings, January 1 36,000 Cost of Goods Sold 36,000

e. Eliminating entry:

E(1) Retained Earnings, January 1 21,600Noncontrolling Interest 14,400 Cost of Goods Sold 36,000

7-14


7-15


E7-9 Income Statement Effects of Unrealized Profit

a. Sale price to Holiday Bakery per bag ($900,000 / 100,000) $ 9.00 Profit per bag [$9.00 - ($9.00 / 1.5)] (3.00 )Cost per bag $ 6.00 Bags sold by Holiday Bakery (100,000 - 20,000) x 80,000 Consolidated cost of goods sold $480,000

b. E(1) Sales 900,000 Inventory ($3.00 x 20,000 bags) 60,000 Cost of Goods Sold 840,000

Required Adjustment to Cost of Goods Sold:

Cost of goods sold — Farmco ($900,000 / 1.5) $ 600,000 Cost of goods sold — Holiday ($9.00 x 80,000 units) 720,000

$1,320,000 Consolidated cost of goods sold ($6.00 x 80,000 units) (480,000 ) Required adjustment $ 840,000

c. Operating income of Holiday Bakery $400,000 Net income of Farmco Products 150,000

$550,000 Less: Unrealized inventory profits (60,000 )Consolidated net income $490,000 Less: Income assigned to noncontrolling interest ($150,000 - $60,000 unrealized profit) x .40 (36,000 )Income assigned to controlling interest $454,000

Alternate computation:

Operating income of Holiday Bakery $400,000 Net income of Farmco Products $150,000 Unrealized profits ($3.00 x 20,000 units) (60,000 )Realized net income $ 90,000 Ownership held by Holiday Bakery x .60

54,000 Income assigned to controlling interest $454,000

7-16


E7-10 Prior-Period Unrealized Inventory Profit

a. Cost per bag of flour ($9.00 / 1.5) $ 6.00 Bags sold x 20,000 Cost of goods sold from inventory held, January 1, 20X9 $120,000

b. Assuming the basic equity method is used by Holiday Bakery inaccounting for its investment in Farmco Products, the followingeliminating entry is needed:

E(1) Retained Earnings, January 1 36,000Noncontrolling Interest 24,000 Cost of Goods Sold 60,000 $60,000 = 20,000 bags x $3.00

c. Operating income of Holiday Bakery $300,000 Net income of Farmco Products 250,000

$550,000 Add: Inventory profits realized in 20X9 60,000 Consolidated net income $610,000 Less: Income assigned to noncontrolling shareholders ($250,000 + $60,000) x .40 (124,000 )Income assigned to controlling interest $486,000

Alternate computation:

Operating income of Holiday Bakery $300,000 Net income of Farmco Products $250,000Inventory profits realized in 20X9 60,000 Realized net income $310,000Ownership held by Holiday Bakery x .60

186,000 Income assigned to controlling interest $486,000

7-17


E7-11 Computation of Consolidated Income Statement Data

a. Reported sales of Prem Company $400,000 Reported sales of Cooper Company 200,000

$600,000 Intercompany sales by Prem Company in 20X5 $ 30,000 Intercompany sales by Cooper Company in 20X5 80,000 (110,000)Sales reported on consolidated income statement $490,000

b. Cost of goods sold reported by Prem Company $250,000 Cost of goods sold reported by Cooper Company 120,000

$370,000 Adjustment due to intercompany sales (100,500)Consolidated cost of goods sold $269,500

Adjustment to cost of goods sold:

CGS charged by Prem on sale to Cooper $ 20,000 CGS charged by Cooper ($30,000 - $6,000) 24,000 Total charged to CGS $ 44,000 CGS for consolidated entity $20,000 x ($24,000 / $30,000) (16,000 ) Required adjustment to CGS $ 28,000

CGS charged by Cooper on sale to Prem $ 50,000 CGS charged by Prem ($80,000 - $20,000) 60,000 Total charged to CGS $110,000 CGS for consolidated entity $50,000 x ($60,000 / $80,000) (37,500 ) Required adjustment to CGS 72,500 Total adjustment required $100,500

c. Reported net income of Cooper Company $ 45,000 Unrealized profit on sale to Prem Company $30,000 x ($20,000 / $80,000) (7,500 )Realized net income $ 37,500 Noncontrolling interest's share x .40 Income assigned to noncontrolling interest $ 15,000

d. Reported net income of Pem Company $107,000 Less: Income from subsidiary (27,000 ) $ 80,000 Net income of Cooper Company 45,000 Operating income $125,000 Less: Unrealized inventory profits of Prem

Company [$10,000 x ($6,000 / $30,000)] $ 2,000 Unrealized inventory profits of Copper Company [$30,000 x ($20,000 / $80,000)] 7,500 Income assigned to noncontrolling interest 15,000 (24,500 )

Income assigned to controlling interest $ 98,500

7-18


7-19


E7-12 Sale of Inventory at a Loss

a. Entries recorded by Trent Company

Inventory 400,000 Cash 400,000 Purchase inventory.

Cash 300,000 Sales 300,000 Sale of inventory to Gord Corporation.

Cost of Goods Sold 400,000 Inventory 400,000 Record cost of goods sold.

Entries recorded by Gord Corporation

Inventory 300,000 Cash 300,000 Purchase of inventory from Trent.

Cash 360,000 Sales 360,000 Sale of inventory to nonaffiliates.

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

b. Consolidated cost of goods sold for 20X8 should be reportedas $240,000 ($400,000 x .60).

c. Operating income reported by Gord $230,000 Net income reported by Trent $ 80,000Unrealized loss on intercorporate sale ($400,000 - $300,000) x .40 40,000 120,000 Consolidated net income $350,000 Income to assigned to noncontrolling interest ($120,000 x .25) (30,000 )Income assigned to controlling interest $320,000

7-20


E7-12 (continued)

d. Eliminating entry, December 31, 20X8:

E(1) Sales 300,000Inventory 40,000 Cost of Goods Sold 340,000

Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Trent $400,000 Cost of goods sold recorded by Gord 180,000 Total recorded $580,000 Consolidated cost of goods sold (240,000 )Required elimination $340,000

7-21


E7-13 Intercompany Sales

a. Consolidated net income for 20X4:

Operating income of Hollow Corporation $160,000 Net income of Surg Corporation 90,000

$250,000 Less: Unrealized profit — Surg Corporation (15,000 )Consolidated net income $235,000

b. Inventory balance, December 31, 20X5:

Inventory reported by Hollow Corporation $ 30,000 Unrealized profit on books of Surg Corporation ($135,000 - $90,000) x ($30,000/$135,000) (10,000 ) $20,000

Inventory reported by Surg Corporation $110,000 Unrealized profit on books of Hollow Corporation ($280,000 - $140,000) x ($110,000/$280,000) (55,000 ) 55,000 Inventory, December 31, 20X5 $75,000

c. Consolidated cost of goods sold for 20X5:

CGS on sale of inventory on hand January 1, 20X5 $45,000 x ($120,000 / $180,000) $ 30,000 CGS on items purchased from Surg in 20X5 ($135,000 - $30,000) x ($90,000 / $135,000) 70,000 CGS on items purchased from Hollow in 20X5 ($280,000 - $110,000) x ($140,000 / $280,000) 85,000 Total cost of goods sold $185,000

d. Income assigned to controlling interest:

Operating income of Hollow Corporation $220,000 Net income of Surg Corporation 85,000

$305,000 Add: Inventory profit of prior year realized in 20X5 15,000 Less: Unrealized inventory profit — Surg Corporation (10,000)

Unrealized inventory profit — Hollow Corporation (55,000)Income to noncontrolling interest ($85,000 + $15,000 - $10,000) x .30 (27,000 )

Income assigned to controlling interest $228,000

7-22


E7-14 Consolidated Balance Sheet Workpaper

a. Eliminating entries:

E(1) Common Stock — Hingle Company 150,000Retained Earnings 250,000 Investment in Hingle Company Stock 280,000 Noncontrolling Interest 120,000 Eliminate investment balance.

E(2) Retained Earnings 28,000Noncontrolling Interest 12,000 Inventory 40,000 Eliminate unrealized inventory profit of Hingle Company.

E(3) Retained Earnings 10,000 Inventory 10,000 Eliminate unrealized inventory profit of Doorst Corporation.

b. Doorst Corporation and Hingle CompanyConsolidated Balance Sheet Workpaper

December 31, 20X8

Doorst Hingle Eliminations Consol- Item Corp. Co. Debit Credit idated

Cash and Receivables 98,000 40,000 138,000Inventory 150,000 100,000 (2) 40,000

(3) 10,000 200,000Buildings and Equipment (net) 310,000 280,000 590,000Investment in Hingle Company Stock 280,000 (1)280,000 Debits 838,000 420,000 928,000

Accounts Payable 70,000 20,000 90,000Common Stock 200,000 150,000 (1)150,000 200,000Retained Earnings 568,000 250,000 (1)250,000

(2) 28,000(3) 10,000 530,000

Noncontrolling Interest (2) 12,000 (1)120,000 108,000Credits 838,000 420,000 450,000 450,000 928,000

7-23


E7-15* Multiple Transfers between Affiliates

a. Entries recorded by Klon Corporation

Cash 150,000 Sales 150,000 Sale of inventory to Brant Company.


Entries recorded by Brant Company

Inventory 150,000 Cash 150,000 Purchase of inventory from Klon.

Cash 150,000 Sales 150,000 Sale of inventory to Torkel Company.


Entries recorded by Torkel Company

Inventory 150,000 Cash 150,000 Purchase of inventory from Brant.

Cash 120,000 Sales 120,000 Sale of inventory to nonaffiliates.


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)].

7-24


E7-15* (continued)

d. Eliminating entry for inventory:


Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Klon $100,000 Cost of goods sold recorded by Brant 150,000 Cost of goods sold recorded by Torkel 90,000 Total recorded $340,000 Consolidated cost of goods sold (60,000 )Required elimination $280,000

Computation of reduction to carrying value of inventory

Inventory reported by Torkel $60,000 Inventory balance to be reported (40,000 )Required elimination $20,000

7-25


E7-16 Inventory Sales

a. Journal entries recorded by Spice Company:

(1) Inventory 150,000 Cash (Accounts Payable) 150,000 Record purchases from nonaffiliate.

(2) Cash (Accounts Receivable) 60,000 Sales 60,000 Record sale to Herb Corporation.

(3) Cost of Goods Sold 40,000 Inventory 40,000 Record cost of goods sold to Herb Corporation.

Journal entries recorded by Herb Corporation:

(1) Inventory 60,000 Cash (Accounts Payable) 60,000 Record purchases from Spice Company.

(2) Cash (Accounts Receivable) 90,000 Sales 90,000 Record sale of items to nonaffiliates.

(3) Cost of Goods Sold 45,000 Inventory 45,000 Record cost of goods sold.

b. Eliminating entry:

E(1) Sales 60,000 Cost of Goods Sold 55,000 Inventory 5,000 Eliminate intercompany sale of inventory.

7-26


E7-17 Prior-Period Inventory Profits


E(1) Retained Earnings, January 1 7,500 Noncontrolling Interest 2,500 Cost of goods sold 10,000 Eliminate beginning inventory profit: $10,000 = ($180,000 - $120,000) x ($30,000 / $180,000)


b. 20X8 20X9 Reported net income of Level Brothers $350,000 $420,000 Unrealized profit, December 31, 20X8 (10,000) 10,000 Unrealized profit, December 31, 20X9 (50,000 )Realized net income $340,000 $380,000 Noncontrolling interest's share of ownership x .25 x .25 Income assigned to noncontrolling interest $ 85,000 $ 95,000

7-27


SOLUTIONS TO PROBLEMS

P7-18 Consolidated Income Statement Data

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

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

c. E(1) Retained Earnings, January 1 15,000 Noncontrolling Interest 10,000 Cost of Goods Sold 25,000 Eliminate beginning inventory profit.


d. Reported net income of Bitner Company $ 90,000 Prior-period profit realized in 20X2 25,000 Unrealized profit on 20X2 sales (15,000 )Realized income $100,000 Proportion held by noncontrolling interest x .40 Income assigned to noncontrolling interest $ 40,000

P7-19 Unrealized Profit on Upstream Sales

20X2 20X3 20X4

Operating income reported by Pacific $150,000 $240,000 $300,000 Net income reported by Carroll 100,000 90,000 160,000

$250,000 $330,000 $460,000 Inventory profit, December 31, 20X2 $70,000 - ($70,000 / 1.25) (14,000) 14,000 Inventory profit, December 31, 20X3 $105,000 - ($105,000 / 1.25) (21,000) 21,000 Inventory profit, December 31, 20X4 $120,000 - ($120,000 / 1.25) (24,000 )Consolidated net income $236,000 $323,000 $457,000 Income to noncontrolling interest: ($100,000 - $14,000) x .40 (34,400) ($90,000 + $14,000 - $21,000) x .40 (33,200) ($160,000 + $21,000 - $24,000) x .40 (62,800 )Income to controlling interest $201,600 $289,800 $394,200

7-28


P7-20 Net Income of Consolidated Entity

Operating income of Master for 20X5 $118,000 Net income of Crown for 20X5 65,000

$183,000 Add: Prior year profits realized by Master 25,000

Prior year profits realized by Crown 40,000 Less: Unrealized profits for 20X5 by Master (14,000)

Unrealized profits for 20X5 by Crown (55,000)Amortization of differential ($45,000 / 15 years) (3,000 )

Consolidated net income, 20X5 $176,000 Less: Income to noncontrolling interest

($65,000 + $40,000 - $55,000 - $3,000) x .30 (14,100 )Income to controlling interest $161,900

P7-21 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 .30

Proportion of intercompany purchases resold by Bolger during 20X5 (1.00 - .30) .70

b. Eliminating entries, December 31, 20X5:

E(1) Accounts Payable 80,000 Accounts Receivable 80,000 Eliminate intercompany receivable/payable.

E(2) Sales 140,000 Inventory 12,000 Cost of Goods Sold 128,000 Eliminate intercompany sale of inventory.

7-29


P7-22 Incomplete Data

a. Increase in fair value of buildings and equipment:

Consolidated total $ 680,000 Balance reported by Lever (400,000)Balance reported by Tropic (240,000 )Increase in value $ 40,000

b. Accumulated depreciation for consolidated entity:

Accumulated depreciation reported by Lever $180,000 Accumulated depreciation reported by Tropic 110,000 Cumulative write-off of differential ($5,000 x 6 years) 30,000 Accumulated depreciation for consolidated entity $320,000

c. Amount paid by Lever to acquire ownership in Tropic:

Common stock outstanding $ 60,000 Retained earnings at acquisition 30,000 Total book value at acquisition $ 90,000 Increase in value of buildings and equipment 40,000 Fair value of net assets acquired $130,000 Proportion of ownership acquired x .75 Amount paid by Lever $ 97,500

d. Investment in Tropic Company stock reported at December 31, 20X6:

Tropic's common stock outstanding December 31, 20X6 $ 60,000 Tropic's retained earnings reported December 31, 20X6 112,000 Total book value $172,000 Proportion of ownership held by Lever x .75 Lever's share of net book value $129,000 Unamortized differential ($5,000 x 2 years) x .75 7,500 Investment in Tropic Company stock $136,500

e. Intercorporate sales of inventory in 20X6:

Sales reported by Lever $420,000 Sales reported by Tropic 260,000 Total sales $680,000 Sales reported in consolidated income statement (650,000)Intercompany sales during 20X6 $ 30,000

7-30


P7-22 (continued)

f. Unrealized inventory profit, December 31, 20X6:

Inventory reported by Lever $125,000 Inventory reported by Tropic 90,000 Total inventory $215,000 Inventory reported in consolidated balance sheet (211,000)Unrealized inventory profit, December 31, 20X6 $ 4,000

g. Eliminating entry to remove the effects of intercompany inventorysales during 20X6:


h. Unrealized inventory profit at January 1, 20X6:

Cost of goods sold reported by Lever $310,000 Cost of goods sold reported by Tropic 170,000 Reduction of cost of goods sold for intercompany sales during 20X6 (26,000 )Adjusted cost of goods sold $454,000 Cost of goods sold reported in consolidated income statement (445,000)Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory $ 9,000

i. Accounts receivable reported by Lever at December 31, 20X6:

Accounts receivable reported for consolidated entity $145,000 Accounts receivable reported by Tropic (55,000 )Difference $ 90,000 Adjustment for intercompany receivable/payable: Accounts payable reported by Lever $ 86,000 Accounts payable reported by Tropic 20,000 Total reported accounts payable $106,000 Accounts payable reported for consolidated entity (89,000 ) Adjustment for intercompany receivable/payable 17,000 Accounts receivable reported by Lever $107,000

7-31


P7-23 Eliminations for Upstream Sales

a. Eliminating entries, December 31, 20X8:

E(1) Income from Subsidiary 32,000 Investment in Superior Filter Stock 32,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 9,000 Noncontrolling Interest 9,000 Assign income to noncontrolling interest.

E(3) Common Stock — Superior Filter Company 90,000Retained Earnings, January 1 220,000 Investment in Superior Filter Stock 248,000 Noncontrolling Interest 62,000 Eliminate beginning investment balance.

E(4) Retained Earnings, January 1 16,000Noncontrolling Interest 4,000 Cost of Goods Sold 20,000 Eliminate beginning inventory profit.

E(5) Sales 150,000 Cost of Goods Sold 135,000 Inventory 15,000 Eliminate unrealized inventory profit: $15,000 = $ 45,000 - [$45,000 x ($100,000 / $150,000)] $135,000 = $100,000 CGS recorded by Superior

105,000 CGS recorded by Clean Air$205,000 (70,000) Consolidated amount: $100,000 x ($105,000 / $150,000)$135,000 Required elimination

7-32


P7-23 (continued)

b. Computation of consolidated net income and income assignedto controlling interest:

Operating income reported by Clean Air Products ($250,000 - $175,000 - $30,000) $ 45,000 Net income of Superior Filter ($200,000 - $140,000 - $20,000) 40,000

$ 85,000 Inventory profit realized from 20X7 20,000 Unrealized inventory profit for 20X8 (15,000 )Consolidated net income $ 90,000 Income assigned to noncontrolling interest ($40,000 + $20,000 - $15,000) x .20 (9,000 )Income assigned to controlling interest $ 81,000

c. Noncontrolling interest, December 31, 20X8:

Common stock $ 90,000 Retained earnings ($220,000 + $40,000) 260,000 Less: Unrealized inventory profit (15,000 )

$335,000 Proportion of stock held by noncontrolling interest x .20 Noncontrolling interest $ 67,000

7-33


P7-24 Multiple Inventory Transfers

a. Consolidated net income for 20X8:

Operating income of Ajax Corporation $80,000 Unrealized profit, December 31, 20X8 ($35,000 - $15,000) x ($7,000 / $35,000) (4,000 ) $ 76,000

Net income of Beta Corporation $37,500 Profit realized from 20X7 ($30,000 - $24,000) x ($10,000 / $30,000) 2,000 Unrealized profit, December 31, 20X8 ($72,000 - $63,000) x ($12,000 / $72,000) (1,500 ) 38,000

Net income of Cole Corporation $20,000 Profit realized from 20X7 ($72,000 - $60,000) x ($18,000 / $72,000) 3,000 Unrealized profit, December 31, 20X8 ($45,000 - $27,000) x ($15,000 / $45,000) (6,000 ) 17,000 Consolidated net income $131,000

b. Inventory balance, December 31, 20X8:

Balance per Beta Corporation $ 7,000 Less: Unrealized profit (4,000 ) $ 3,000

Balance per Cole Corporation $12,000 Less: Unrealized profit (1,500 ) 10,500

Balance per Ajax Corporation $15,000 Less: Unrealized profit (6,000 ) 9,000 Inventory balance per consolidated statement $22,500

c. Income assigned to noncontrolling interest in 20X8:

Realized income of Beta Corporation $38,000 Proportion of stock held by noncontrolling interest x .30 $11,400

Realized income of Cole Corporation $17,000 Proportion of stock held by noncontrolling interest x .10 1,700 Income to noncontrolling interest $13,100

7-34


P7-25 Consolidation with Inventory Transfers and Other Comprehensive Income

a. Balance in investment account at December 31, 20X5:

Proportionate share of Tall's net assets, January 1 ($1,400,000 x .90) $1,260,000 Proportionate share of 20X5 net income ($90,000 x .90) 81,000 Proportionate share of other comprehensive income for 20X5 ($20,000 x .90) 18,000 Proportionate share of dividends received ($60,000 x .90) (54,000 )Balance in investment account December 31, 20X5 $1,305,000

b. Investment income for 20X5:

Net income reported by Tall $90,000 Proportion of ownership held by Priority x .90 Investment income for 20X5 $81,000

c. Income to noncontrolling interests for 20X5:

Net income reported by Tall $90,000 20X4 inventory profits realized in 20X5 ($15,000 x .40) 6,000 20X5 unrealized inventory profits $30,000 - [$30,000 x ($48,000 / $90,000)] (14,000 )Realized net income $82,000 Proportion of ownership held by noncontrolling interest x .10 Income to noncontrolling interest $ 8,200

d. Balance assigned to noncontrolling interest in consolidated balancesheet:

Net assets reported by Tall, January 1 $1,400,000 Net income for 20X5 90,000 Dividends paid in 20X5 (60,000 )Net assets reported, December 31, 20X5 $1,430,000 Unrealized inventory profits at December 31, 20X5 (14,000)Other comprehensive income in 20X5 20,000 Adjusted net assets, December 31, 20X5 $1,436,000 Proportion of ownership held by noncontrolling interest x .10 Net assets assigned to noncontrolling interest $ 143,600

7-35


P7-25 (continued)

e. Inventory reported in consolidated balance sheet:

Inventory held by Priority $120,000 Less: Unrealized profit (14,000 ) $106,000

Inventory held by Tall $100,000 Less: Unrealized profit

$6,000 - [$6,000 x ($24,000 / $36,000)] (2,000 ) 98,000 Inventory $204,000

f. Consolidated net income for 20X5:

Operating income of Priority $240,000 Net income of Tall 90,000 Total unadjusted income $330,000 20X4 inventory profits realized in 20X5 ($6,000 + $8,000) 14,000 Unrealized inventory profits on 20X5 sales ($14,000 + $2,000) (16,000 )Consolidated net income $328,000

g. Eliminating entries, December 31, 20X5

E(1) Income from Investment in Subsidiary 81,000 Dividends Declared 54,000 Investment in Tall Common Stock 27,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 8,200 Dividends Declared 6,000 Noncontrolling Interest 2,200 Assign income to noncontrolling interest.

7-36


P7-25 (continued)

E(3) Other Comprehensive Income fromSubsidiary (OCI) 18,000 Investment in Tall Corporation Stock 18,000 Eliminate other comprehensive income from subsidiary.

E(4) Other Comprehensive Income to Noncontrolling Interest 2,000 Noncontrolling Interest 2,000 Assign other comprehensive income to noncontrolling interest.

E(5) Common Stock — Tall Corporation 400,000Additional Paid-In Capital — Tall Corporation 200,000Retained Earnings, January 1 790,000Accumulated Other Comprehensive Income 10,000 Investment in Tall Common Stock 1,260,000 Noncontrolling Interest 140,000 Eliminate beginning investment balance.

E(6) Retained Earnings, January 1 5,400Noncontrolling Interest 600 Cost of Goods Sold 6,000 Eliminate beginning inventory profit of Tall Company.

E(7) Retained Earnings, January 1 8,000 Cost of Goods Sold 8,000 Eliminate beginning inventory profit of Priority Corporation.

E(8) Sales 36,000 Inventory 2,000 Cost of Goods Sold 34,000 Eliminate intercompany sale of inventory by Priority Corporation.

E(9) Sales 90,000 Inventory 14,000 Cost of Goods Sold 76,000 Eliminate intercompany sale of inventory by Tall Company.

7-37


P7-26 Multiple Inventory Transfers between Parent and Subsidiary


E(1) Retained earnings, January 1 20,000 Cost of goods sold 20,000 Eliminate beginning inventory profit of Proud Company.

E(2) Retained earnings, January 1 12,600Noncontrolling Interest 8,400 Cost of goods sold 15,000 Inventory 6,000 Eliminate beginning inventory profit of Slinky Company.

E(3) Sales 60,000 Inventory 2,000 Cost of goods sold 58,000 Eliminate intercompany sale of inventory by Proud Company.

E(4) Sales 240,000 Inventory 30,000 Cost of goods sold 210,000 Eliminate intercompany sale of inventory by Slinky Company.

b. Computation of cost of goods sold for consolidated entity:

Inventory produced by Proud in 20X5 ($100,000 x .40) $ 40,000Inventory produced by Slinky in 20X5 ($70,000 x .50) 35,000Inventory produced by Proud in 20X6 ($40,000 x .90) 36,000Inventory produced by Slinky in 20X6 ($200,000 x .25) 50,000 Cost of goods sold reported in consolidated income statement $161,000

7-38


P7-27 Consolidation following Inventory Transactions

a. Entries recorded by Bell on its investment in Troll:

Cash 6,000 Investment in Troll Corporation Stock 6,000 Record dividends from Troll: $10,000 x .60

Investment in Troll Corporation Stock 18,000 Income from Subsidiary 18,000 Record equity-method income: $30,000 x .60


E(1) Income from Subsidiary 18,000 Dividends Declared 6,000 Investment in Troll Corporation Stock 12,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 11,680 Dividends Declared 4,000 Noncontrolling Interest 7,680 Assign income to noncontrolling interest: $11,680 = ($30,000 + $3,400 - $4,200) x .40

E(3) Common Stock — Troll Corporation 100,000Retained Earnings, January 1 50,000Land 18,000 Investment in Troll Corporation Stock 100,800 Noncontrolling Interest 67,200 Eliminate beginning investment balance: $18,000 = ($82,800 + $55,200) - ($100,000 + $20,000) $100,800 = $82,800 + [($50,000 - $20,000) x .60] $67,200 = ($100,000 + $50,000 + $18,000) x .40

E(4) Retained Earnings, January 1 2,040Noncontrolling Interest 1,360 Cost of Goods Sold 3,400 Eliminate beginning inventory profit of Troll Corporation: $3,400 = ($42,500 - $25,500) x .20

E(5) Sales 35,000 Cost of Goods Sold 30,800 Inventory 4,200 Eliminate intercompany upstream sale of inventory by Troll Corporation: $4,200 = ($35,000 - $21,000) x .30

E(6) Sales 28,000 Cost of Goods Sold 21,500 Inventory 6,500 Eliminate intercompany downstream sale of inventory by Bell Company: $6,500 = $13,000 x ($14,000 / $28,000)

7-39

P7-27 (continued)

c. Bell Company and Troll CorporationConsolidation WorkpaperDecember 31, 20X2

Bell Troll Eliminations Consol- Item Co. Corp. Debit Credit idated Sales 200,000 120,000 (5) 35,000

(6) 28,000 257,000 Income from Subsidiary 18,000 (1) 18,000 Credits 218,000 120,000 257,000 Cost of Goods Sold 99,800 61,000 (4) 3,400

(5) 30,800(6) 21,500 105,100

Depreciation Expense 25,000 15,000 40,000 Interest Expense 6,000 14,000 20,000 Debits (130,800) (90,000) (165,100 )Consolidated Net Income 91,900 Income to Noncon- trolling Interest (2) 11,680 (11,680 )Income, carry forward 87,200 30,000 92,680 55,700 80,220 Ret. Earnings, Jan. 1 230,000 50,000 (3) 50,000

(4) 2,040 227,960 Income, from above 87,200 30,000 92,680 55,700 80,220

317,200 80,000 308,180 Dividends Declared (40,000) (10,000) (1) 6,000

(2) 4,000 (40,000 )Ret. Earnings, Dec. 31, carry forward 277,200 70,000 144,720 65,700 268,180 Cash and Accounts Receivable 69,400 51,200 120,600 Inventory 60,000 55,000 (5) 4,200

(6) 6,500 104,300 Land 40,000 30,000 (3) 18,000 88,000 Buildings and Equipment 520,000 350,000 870,000 Investment in Troll Corporation Stock 112,800 (1) 12,000

(3)100,800 Debits 802,200 486,200 1,182,900 Accum. Depreciation 175,000 75,000 250,000 Accounts Payable 68,800 41,200 110,000 Bonds Payable 80,000 200,000 280,000 Bond Premium 1,200 1,200 Common Stock Bell Company 200,000 200,000 Troll Corporation 100,000 (3)100,000Retained Earnings, from above 277,200 70,000 144,720 65,700 268,180 Noncontrolling Interest (4) 1,360 (2) 7,680

(3) 67 200 73,520 Credits 802,200 486,200 264,080 264,080 1,182,900

P7-28 Consolidation Workpaper


E(1) Income from Subsidiary 14,000 Dividends Declared 3,500 Investment in West Company Stock 10,500 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 7,950 Dividends Declared 1,500 Noncontrolling Interest 6,450 Assign income to noncontrolling interest: $7,950 = ($20,000 + $30,000 - $25,000 + $1,500) x .30

E(3) Common Stock — West Company 150,000Retained Earnings, January 1 250,000Differential 36,000 Investment in West Company Stock 305,200 Noncontrolling Interest 130,800 Eliminate beginning investment balance: $36,000 = $291,200 + $124,800 - $380,000 $305,200 = $315,700 - $10,500 $130,800 = ($250,000 + $150,000 + $36,000) x .30

E(4) Land, Buildings and Equipment (net) 14,000Goodwill 22,000 Differential 36,000 Assign beginning differential.

E(5) Retained Earnings, January 1 21,000Noncontrolling Interest 9,000 Cost of Goods and Services 30,000 Eliminate beginning inventory profit of West Company.

P7-28 (continued)

E(6) Retained Earnings, January 1 15,000 Cost of Goods and Services 15,000 Eliminate beginning inventory profit of Crow Corporation.

E(7) Sales 62,000 Cost of Goods and Services 37,000 Inventory 25,000 Eliminate intercompany upstream sale of inventory by West Company: $25,000 = $62,000 - $37,000

E(8) Sales 90,000 Cost of Goods and Services 82,000 Inventory 8,000 Eliminate intercompany downstream sale of inventory by Crow Corporation: $8,000 = ($90,000 - $54,000) x ($20,000 / $90,000) $82,000 = $ 54,000 CGS recorded by Crow Corporation

70,000 CGS recorded by West Company$ 124,000

(42,000) Consolidated amount [$54,000 x ($70,000 / $90,000)]$ 82,000 Required elimination

E(9) Retained Earnings, January 1 7,350

Noncontrolling Interest 3,150 Depreciation Expense 1,500 Land, Buildings and Equipment (net) 9,000 Eliminate unrealized gain on equipment: $7,350 = [$15,000 - ($1,500 x 3)] x .70 $3,150 = [$15,000 - ($1,500 x 3)] x .30 $1,500 = $9,500 -$8,000 $9,000 = [$95,000 - ($9,500 x 4)] - [$120,000 - ($8,000 x 9)]

P7-28 (continued)

b. Crow Corporation and West CompanyConsolidation Workpaper

December 31, 20X9

Crow West Eliminations Consol- Item Corp. Co. Debit Credit idated Sales and Service Revenue 300,000 200,000 (7) 62,000

(8) 90,000 348,000 Income from Subsidiary 14,000 (1) 14,000 Credits 314,000 200,000 348,000 Cost of Goods and Services 200,000 150,000 (5) 30,000

(6) 15,000(7) 37,000(8) 82,000 186,000

Depreciation Expense 40,000 30,000 (9) 1,500 68,500 Debits (240,000) (180,000) (254,500)Consolidated Net Income 93,500 Income to Noncon- trolling Interest (2) 7,950 (7,950 )Income, carry forward 74,000 20,000 173,950 165,500 85,550

Retained Earnings, Jan. 1 568,000 250,000 (3)250,000(5) 21,000(6) 15,000(9) 7,350 524,650

Income, from above 74,000 20,000 173,950 165,500 85,550 642,000 270,000 610,200

Dividends Declared (35,000) (5,000) (1) 3,500 (2) 1,500 (35,000 )

Retained Earnings, Dec. 31, carry forward 607,000 265,000 467,300 170,500 575,200

Cash and Receivables 81,300 85,000 166,300 Inventory 200,000 110,000 (7) 25,000

(8) 8,000 277,000 Land, Buildings & Equipment (net) 270,000 250,000 (4) 14,000 (9) 9,000 525,000 Investment in West Company Stock 315,700 (1) 10,500

(3) 305,200Differential (3) 36,000 (4) 36,000Goodwill (4) 22,000 22,000 Debits 867,000 445,000 990,300 Accounts Payable 60,000 30,000 90,000 Common Stock 200,000 150,000 (3)150,000 200,000 Ret. Earnings, from above 607,000 265,000 467,300 170,500 575,200 Noncontrolling Interest (5) 9,000 (2) 6,450

(9) 3,150 (3)130,800 125,100 Credits 867,000 445,000 701,450 701,450 990,300

P7-28 (continued)

c. Retained earnings reconciliation, December 31, 20X9:

Retained earnings, Crow Corporation $607,000 Unrealized profits on Crow Corporation's books ($90,000 - $54,000) x ($20,000 / $90,000) (8,000)Unrealized profits on West Company's books ($62,000 - $37,000) x .70 (17,500)Unrealized profit on equipment transfer [($15,000 - ($1,500 x 4)] x .70 (6,300 )Consolidated retained earnings $575,200

P7-29 Computation of Consolidated Totals

a. Consolidated sales for 20X8:Bunker Harrison Consol-

Corp. Co. idated Sales reported $660,000 $510,000 Intercorporate sales (140,000) (240,000)Sales to nonaffiliates $520,000 $270,000 $790,000

b. Consolidated cost of goods sold:

Total sales reported $660,000 $510,000 Ratio of cost to sales price ÷ 1.4 ÷ 1.2 Cost of goods sold $471,429 $425,000 Amount to be eliminated (see entry) (128,000) (232,000)Cost of goods sold adjusted $343,429 $193,000 $536,429

Eliminating entries:

E(1) Sales 140,000 Inventory 12,000 Cost of Goods Sold 128,000 Elimination of sales by Bunker to Harrison: $12,000 = $42,000 - ($42,000 / 1.40) $128,000 = $140,000 - $12,000

E(2) Sales 240,000 Inventory 8,000 Cost of Goods Sold 232,000 Elimination of sales by Harrison to Bunker: $8,000 = $48,000 - ($48,000 / 1.20) $232,000 = $240,000 - $8,000

P7-29 (continued)

c. Operating income of Bunker Corporation (excluding income from Harrison Company) $70,000 Net income of Harrison Company 20,000

$90,000 Less: Unrealized inventory profits of Bunker (12,000)

Unrealized inventory profits of Harrison (8,000 )Consolidated net income $70,000 Less: Income assigned to noncontrolling interest ($20,000 - $8,000) x .20 (2,400 )Income to controlling interest 20X8 $67,600

d. Inventory balance in consolidated balance sheet:

Inventory reported by Bunker Corporation $48,000 Unrealized profits (8,000 ) $40,000

Inventory reported by Harrison Company $42,000 Unrealized profits (12,000) 30,000 Inventory balance, December 31, 20X8 $70,000

P7-30 Intercompany Transfer of Inventory and Land


E(1) Income from Subsidiary 11,200 Dividends Declared 10,500 Investment in Bock Company Stock 700 Eliminate income from subsidiary: $11,200 = ($25,000 - $2,000 - $7,000) x .70 $10,500 = $15,000 x .70

E(2) Income to Noncontrolling Interest 5,100 Dividends Declared 4,500 Noncontrolling Interest 600 Assign income to noncontrolling interest: $5,100 = ($25,000 - $2,000 - $7,000 + $9,000 - $8,000) x .30 $4,500 = $15,000 x .30

E(3) Common stock – Bock Company 70,000 Retained Earnings, January 1 60,000 Differential 46,000 Investment in Bock Company Stock 123,200 Noncontrolling Interest 52,800 Eliminate beginning investment balance: $123,200 = ($70,000 +$60,000 + $46,000) x .7 $52,800 = ($70,000 + $60,000 + $46,000) x .3

Computation of unamortized differential

Fair value of compensation given by Pine $108,500 Fair value of noncontrolling interest 46,500 Less: Book value of Spencer's net assets ($70,000 + $30,000) (100,000)Differential at acquisition $ 55,000 Amortization of amount assigned to: Buildings and equipment [($20,000 / 10 years] x 1 year (2,000) Patent ($35,000 / 5 years) x 1 year (7,000 )Unamortized differential, January 1, 20X7 $46,000

E(4) Buildings and Equipment 20,000 Patent 28,000 Accumulated Depreciation 2,000 Differential 46,000 Assign beginning differential: $28,000 = $35,000 - $7,000 $2,000 = $20,000 / 10 years

P7-30 (continued)

E(5) Depreciation Expense 2,000Amortization Expense 7,000 Accumulated Depreciation 2,000 Patent 7,000 Amortize differential: $2,000 = $20,000 / 10 years $7,000 = $35,000 / 5 years

E(6) Retained Earnings, January 1 11,200Noncontrolling Interest 4,800 Cost of Goods Sold 9,000 Inventory 7,000 Eliminate beginning inventory profit of Bock Company: $11,200 = ($48,000 - $32,000) x .70 $4,800 = ($48,000 - $32,000) x .30 $9,000 = $27,000 - ($27,000 x 2/3) $7,000 = $21,000 - ($21,000 x 2/3)

E(7) Sales 90,000 Cost of Goods Sold 82,000 Inventory 8,000 Eliminate intercompany sale of inventory by Bock Company: $8,000 = $24,000 - ($24,000 x 2/3)

E(8) Sales 30,000 Cost of Goods Sold 26,200 Inventory 3,800 Eliminate intercompany sale of inventory by Pine Corporation: $3,800 = $7,600 - ($7,600 x 1/2)

E(9) Retained Earnings, January 1 10,500Noncontrolling Interest 4,500 Land 15,000 Eliminate unrealized profit on land: $15,000 = $37,000 - $22,000

P7-30 (continued)

b. Pine Corporation and Bock CompanyConsolidation Workpaper

December 31, 20X3

Pine Bock Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 260,000 125,000 (7) 90,000(8) 30,000 265,000

Other Income 13,600 13,600 Income from Subsidiary 11,200 (1) 11,200 Credits 284,800 125,000 278,600 Cost of Goods Sold 186,000 79,800 (6) 9,000

(7) 82,000(8) 26,200 148,600

Depreciation Expense 20,000 15,000 (5) 2,000 37,000 Interest Expense 16,000 5,200 21,200 Amortization Expense (5) 7,000 7,000 Debits (222,000) (100,000) (213,800)Consolidated Net Income 64,800 Income to Noncon- trolling Interest (2) 5,100 (5,100 )Income, carry forward 62,800 25,000 145,300 117,200 59,700

Retained Earnings, Jan. 1 139,100 60,000 (3) 60,000(6) 11,200(9) 10,500 117,400



Retained Earnings, Dec. 31, carry forward 171,900 70,000 227,000 132,200 147,100

Cash and Accounts Receivable 15,400 21,600 37,000 Inventory 165,000 35,000 (6) 7,000

(7) 8,000(8) 3,800 181,200

Land 80,000 40,000 (9) 15,000 105,000 Buildings and Equipment 340,000 260,000 (4) 20,000 620,000 Investment in Bock Company Stock 123,900 (1) 700

(3)123,200Differential (3) 46,000 (4) 46,000Patent (4) 28,000 (5) 7,000 21,000 Debits 724,300 356,600 964,200

P7-30 (continued)

Pine Bock Eliminations Consol- Item Corp. Co. Debit Credit idated

Accum. Depreciation 140,000 80,000 (4) 2,000(5) 2,000 224,000

Accounts Payable 92,400 35,000 127,400Bonds Payable 200,000 100,000 300,000Bond Premium 1,600 1,600Common Stock Pine Corporation 120,000 120,000 Bock Company 70,000 (3) 70,000Retained Earnings, from above 171,900 70,000 227,000 132,200 147,100Noncontrolling Interest (6) 4,800 (2) 600

(9) 4,500 (3) 52,800 44,100 Credits 724,300 356,600 400,300 400,300 964,200

P7-30 (continued)

Note: Financial statements are not required.

Pine Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X3

Cash and Accounts Receivable $ 37,000 Inventory 181,200 Land 105,000 Buildings and Equipment $620,000 Less: Accumulated Depreciation (224,000) 396,000 Patent 21,000 Total Assets $740,200

Accounts Payable $127,400 Bonds Payable $300,000 Bond Premium 1,600 301,600 Stockholders’ Equity: Controlling Interest: Common Stock $120,000 Retained Earnings 147,100 Total Controlling Interest $267,100 Noncontrolling Interest 44,100 Total Stockholders’ Equity 311,200 Total Liabilities and Stockholders' Equity $740,200

Pine Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X3

Sales $265,000 Other Income 13,600 Total Income $278,600 Cost of Goods Sold $148,600 Depreciation Expense 37,000 Interest Expense 21,200 Amortization Expense 7,000 Total Expenses (213,800)Consolidated Net Income $ 64,800 Income to Noncontrolling Interest (5,100 )Income to Controlling Interest $ 59,700

P7-30 (continued)

Pine Corporation and SubsidiaryConsolidated Retained Earnings Statement

Year Ended December 31, 20X3

Retained Earnings, January 1, 20X3 $117,400 Income to Controlling Interest, 20X3 59,700

$177,100 Dividends Declared, 20X3 (30,000 )Retained Earnings, December 31, 20X3 $147,100

P7-31 Consolidation Using Financial Statement Data

a. Eliminating entries, December 31, 20X6:

E(1) Income from Subsidiary 21,000 Dividends Declared 12,000 Investment in Concerto Company Stock 9,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 9,600 Dividends Declared 8,000 Noncontrolling Interest 1,600 Assign income to noncontrolling interest: $9,600 = ($35,000 + $8,000 - $9,000 - $10,000) x .40

E(3) Common Stock – Concerto Company 50,000Retained Earnings, January 1 150,000Differential 40,000 Investment in Concerto Company Stock 144,000 Noncontrolling Interest 96,000 Eliminate beginning investment balance: $40,000 = $24,000 + $16,000

P7-31 (continued)

E(4) Goodwill 40,000 Differential 40,000 Assign differential to goodwill.

E(5) Goodwill Impairment Loss 10,000 Goodwill 10,000 Recognize impairment of goodwill.

E(6) Retained Earnings, January 1 6,000Noncontrolling Interest 4,000 Land 10,000 Eliminate unrealized gain on land.

E(7) Retained Earnings, January 1 4,000 Cost of Goods Sold 4,000 Eliminate beginning inventory profit of Bower: $14,000 - ($14,000 / 1.40)

E(8) Retained Earnings, January 1 4,800Noncontrolling Interest 3,200 Cost of Goods Sold 8,000 Eliminate beginning inventory profit of Concerto Company: $8,000 = $48,000 - ($48,000 / 1.20)

E(9) Sales 22,000 Cost of Goods Sold 20,000 Inventory 2,000 Eliminate intercompany sale of inventory by Bower: $2,000 = $7,000 - ($7,000 / 1.40)

E(10) Sales 90,000 Cost of Goods Sold 81,000 Inventory 9,000 Eliminate intercompany sale of inventory by Concerto Company: $9,000 = $54,000 - ($54,000 / 1.20)

P7-31 (continued)

b. Bower Corporation and Concerto CompanyConsolidation Workpaper

December 31, 20X6

Bower Concerto Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 400,000 200,000 (9) 22,000(10) 90,000 488,000

Income from Subsidiary 21,000 (1) 21,000 Credits 421,000 200,000 488,000 Cost of Goods Sold 280,000 120,000 (7) 4,000

(8) 8,000(9) 20,000

(10)81,000 287,000 Depreciation and Amortization 25,000 15,000 40,000 Goodwill Impairment Loss (5) 10,000 10,000 Other Expenses 35,000 30,000 65,000 Debits (340,000) (165,000) (402,000 )Consolidated Net Income 86,000 Income to Noncon- trolling Interest (2) 9,600 (9,600 )Income, carry forward 81,000 35,000 152,600 113,000 76,400

Retained Earnings, Jan. 1 293,800 150,000 (3)150,000(6) 6,000(7) 4,000(8) 4,800 279,000



Ret. Earnings, Dec. 31, carry forward 324,800 165,000 317,400 133,000 305,400

P7-31 (continued)

Bower Concerto Eliminations Consol- Item Corp. Co. Debit Credit idated

Cash 26,800 35,000 61,800Accounts Receivable 80,000 40,000 120,000Inventory 120,000 90,000 (9) 2,000

(10) 9,000 199,000Land 70,000 20,000 (6) 10,000 80,000Buildings and Equipment 340,000 200,000 540,000Investment in Concerto Company Stock 153,000 (1) 9,000

(3)144,000Differential (3) 40,000 (4) 40,000Goodwill (4) 40,000 (5) 10,000 30,000 Debits 789,800 385,000 1,030,800

Accumulated Depreciation 165,000 85,000 250,000Accounts Payable 80,000 15,000 95,000Bonds Payable 120,000 70,000 190,000Common Stock 100,000 50,000 (3) 50,000 100,000Retained Earnings, from above 324,800 165,000 317,400 133,000 305,400Noncontrolling Interest (6) 4,000 (2) 1,600

(8) 3,200 (3) 96,000 90,400 Credits 789,800 385,000 454,600 454,600 1,030,800

P7-32 Intercorporate Transfers of Inventory and Equipment

a. Consolidated cost of goods sold for 20X9:

Amount reported by Foster Company $593,000 Amount reported by Block Corporation 270,000 Adjustment for unrealized profit in beginning inventory sold in 20X9 (15,000)Adjustment for inventory purchased from subsidiary and resold during 20X9: CGS recorded by Foster ($30,000 x .60) $18,000 CGS recorded by Block 20,000 Total recorded $38,000 CGS based on Block's cost ($20,000 x .60) (12,000) Required adjustment (26,000 )Cost of goods sold $822,000

b. Consolidated inventory balance:

Amount reported by Foster $137,000 Amount reported by Block 130,000 Total inventory reported $267,000 Unrealized profit in ending inventory held by Foster [($30,000 - $20,000) x .40] (4,000 )Consolidated balance $263,000

c. Income assigned to noncontrolling interest:

Net income reported by Block Corporation $70,000 Adjustment for realization of loss on equipment sold to Foster in 20X7 (3,000)Adjustment for realization of profit on inventory sold to Foster in 20X8 15,000 Adjustment for unrealized profit on inventory sold to Foster in 20X9 (4,000 )Realized net income of Block for 20X9 $78,000 Proportion of ownership held by noncontrolling interest x .10 Income assigned to noncontrolling interest $ 7,800

P7-32 (continued)

d. Amount assigned to noncontrolling interest in consolidated balancesheet:

Block Corporation common stock outstanding $ 50,000 Block Corporation retained earnings, January 1, 20X9 165,000 Net income for 20X9 70,000 Dividends paid in 20X9 (20,000 )Book value, December 31, 20X9 $265,000 Adjustment for unrealized loss on equipment $24,000 - [($24,000 / 8 years) x 3 years] 15,000 Adjustment for unrealized profit on inventory sold to Foster (4,000 )Realized book value of Block Corporation $276,000 Proportion of ownership held by noncontrolling interest x .10 Balance assigned to noncontrolling interest $ 27,600

e. Consolidated retained earnings at December 31, 20X9:

Balance reported by Foster Company, January 1, 20X9 $248,500 Net income for 20X9 171,000 Dividends paid in 20X9 (40,000 )Balance reported by Foster Company, December 31, 20X9 $379,500 Adjustment for proportionate share of unrealized loss on sale of equipment ($15,000 x .90) 13,500 Adjustment for proportionate share of unrealized gain on inventory ($4,000 x .90) (3,600 )Consolidated retained earnings, December 31, 20X9 $389,400

f. Eliminating entries:

E(1) Income from Subsidiary 63,000 Dividends Declared 18,000 Investment in Block Corporation Stock 45,000 Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 7,800 Dividends Declared 2,000 Noncontrolling Interest 5,800 Assign income to noncontrolling interest.

E(3) Common Stock — Block Corporation 50,000Retained Earnings, January 1 165,000 Investment in Block Corporation Stock 193,500 Noncontrolling Interest 21,500 Eliminate beginning investment balance.

P7-32 (continued)

E(4) Buildings and Equipment 42,000Depreciation Expense 3,000 Retained Earnings, January 1 16,200 Noncontrolling Interest 1,800 Accumulated Depreciation 27,000 Eliminate intercorporate sale of equipment: $42,000 = $90,000 - $48,000 $3,000 = ($90,000 / 10 years) - ($48,000 / 8 years) $16,200 = [$24,000 - ($3,000 x 2 years)] x .90 $1,800 = [$24,000 - ($3,000 x 2 years)] x .10 $27,000 = [($90,000 / 10 years) x 5 years] - [($48,000 / 8 years) x 3 years]

E(5) Sales 30,000 Cost of Goods Sold 26,000 Inventory 4,000 Eliminate intercompany sale of inventory by Block Corporation.

E(6) Retained Earnings, January 1 13,500Noncontrolling Interest 1,500 Cost of Goods Sold 15,000 Eliminate beginning inventory profit of Block Corporation.

P7-32 (continued)

g. Foster Company and Block CorporationConsolidation Workpaper

December 31, 20X9

Foster Block Eliminations Consol- Item Co. Corp. Debit Credit idated

Sales 815,000 415,000 (5) 30,000 1,200,000 Other Income 26,000 15,000 41,000 Income from Subsidiary 63,000 (1) 63,000 Credits 904,000 430,000 1,241,000 Cost of Goods Sold 593,000 270,000 (5) 26,000

(6) 15,000 822,000 Depreciation Expense 45,000 15,000 (4) 3,000 63,000 Other Expenses 95,000 75,000 170,000 Debits (733,000) (360,000) (1,055,000)Consolidated Net Income 186,000 Income to Noncon- trolling Interest (2) 7,800 (7,800 )Income, carry forward 171,000 70,000 103,800 41,000 178,200

Ret. Earnings, Jan. 1 248,500 165,000 (3)165,000 (4) 16,200(6) 13,500 251,200




Cash 187,000 57,400 244,400 Accounts Receivable 80,000 90,000 170,000 Other Receivables 40,000 10,000 50,000 Inventory 137,000 130,000 (5) 4,000 263,000 Land 80,000 60,000 140,000 Buildings and Equipment 500,000 250,000 (4) 42,000 792,000 Investment in Block Corporation Stock 238,500 (1) 45,000

(3)193,500 Debits 1,262,500 597,400 1,659,400

P7-32 (continued)

Foster Block Eliminations Consol- Item Co. Corp. Debit Credit idated

Accum. Depreciation 155,000 75,000 (4) 27,000 257,000Accounts Payable 63,000 35,000 98,000Other Payables 95,000 20,000 115,000Bonds Payable 250,000 200,000 450,000Bond Premium 2,400 2,400Common Stock Foster Company 210,000 210,000 Block Corporation 50,000 (3) 50,000Additional Paid-In Capital 110,000 110,000Retained Earnings, from above 379,500 215,000 282,300 77,200 389,400Noncontrolling Interest (6) 1,500 (2) 5,800

(3) 21,500 (4) 1,800 27,600

Credits 1,262,500 597,400 375,800 375,800 1,659,400

P7-33 Consolidated Balance Sheet Workpaper [AICPA Adapted]

Pine Corp. and SubsidiaryConsolidated Balance Sheet Workpaper

December 31, 20X6

Adjustments and Eliminations Consol-

Pine Corp. Slim Corp. Debit Credit Idated

Assets Cash 105,000 15,000 120,000

Accounts and Other Current Receivables 410,000 120,000 [b] 900 [3] 900

[4] 5,000[5] 100,000[7] 90,000 335,000

Merchandise Inventory 920,000 670,000 [6] 3,000 1,587,000

Plant and Equipment, net 1,000,000 400,000 1,400,000

Investment in Slim 1,170,000 [a] 90,900 [b] 900[1] 450,000[2] 810,000

Goodwill [1] 500,000 500,000 Totals 3,605,000 1,205,000 3,942,000

Liabilities and Stockholders' Equity Accounts Payable and Other Current Liabilities 140,000 305,000 [3] 900

[4] 5,000[5] 100,000[7] 90,000 249,100

Common Stock ($10 par) 500,000 200,000 [2] 200,000 500,000

Retained Earnings 2,965,000 700,000[2] 700,000[6] 3,000 [a] 90,900 3,052,900

Noncontrolling [1] 50,000 Interest, 10 percent [2] 90,000 140,000 Totals 3,605,000 1,205,000 1,690,700 1,690,700 3,942,000

P7-33 (continued)

Explanations of Workpaper Adjustments and Eliminations

[a] To record net income of Slim Corporation accruing to Pine Corporation:Slim Corporation's retained earnings at December 31, 20X6 $700,000 Slim Corporation's retained earnings at January 1, 20X6 (600,000)Increase in retained earnings after dividend declaration $100,000 Add: Dividend declaration 1,000 Slim Corporation's net income for year ended December 31, 20X6 $101,000 Pine Corporation's share, 90 percent $ 90,900

[b] To record Pine Corporation's share of dividend declared by Slim Corporation:90 percent of $1,000 $900

[1] To record goodwill:Fair value of compensation given by Pine $1,170,000 Fair value of nonconctolling interest at acquisition 130,000 Slim Corporation's book value at January 1, 20X6: Common stock $200,000 Retained earnings 600,000 Total book value (800,000 )Goodwill $ 500,000

[2] To eliminate 90 percent of Slim Corporation's book value and record noncontrolling interest:Common stock $200,000 Retained earnings at December 31, 20X6 700,000 Total $900,000

Pine Corporation's 90 percent share $810,000 Minority interest’s 10 percent share 90,000 Total $900,000

[3] To eliminate intercompany dividend receivable and payable:90 percent of $1,000 $900

[4] To eliminate intercompany accrued interest:$100,000 @ 10 percent x ½ year $5,000

[5] To eliminate intercompany loan: $100,000

[6] To eliminate intercompany profit in Slim Corporation's December 31 inventory:Sales from Pine Corporation to Slim Corporation $ 300,000 5 percent remaining in Slim Corporation's December 31 inventory $ 15,000 Multiply by .20($60,000 / $300,000) x .20 Inventory profit $ 3,000

[7] To eliminate intercompany trade account receivable and payable $90,000

P7-34 Comprehensive Worksheet Problem

a. Basic equity-method entries for 20X7:

(1) Cash 20,000 Investment in Sharp Company Stock 20,000 Record dividend from Sharp Company: $25,000 x .80

(2) Investment in Sharp Company Stock 32,000 Income from Subsidiary 32,000 Record equity-method income: $40,000 x .80

(3) Income from Subsidiary 4,000 Investment in Sharp Company Stock 4,000 Amortize differential: $4,000 = ($50,000 / 10 years) x .80


E(1) Income from Subsidiary 28,000 Dividends Declared 20,000 Investment in Sharp Company Stock 8,000 Eliminate income from subsidiary: $28,000 = $32,000 - $4,000


E(3) Common Stock — Sharp Company 100,000Additional Paid-In Capital 20,000Retained Earnings, January 1 215,000Differential 35,000 Investment in Sharp Company Stock 296,000 Noncontrolling Interest 74,000 Eliminate beginning investment balance. $35,000 = $50,000 – [($50,000 / 10) x 3 years]

E(4) Buildings and Equipment 50,000Depreciation Expense 5,000 Accumulated Depreciation 20,000 Differential 35,000 Assign differential: $20,000 = ($50,000 / 10 years) x 4 years

P 7-34 (continued)

E(5) Retained Earnings, January 1 6,400Noncontrolling Interest 1,600 Cost of Goods Sold 8,000 Eliminate beginning inventory profit of Sharp Company.

E(6) Retained Earnings, January 1 2,000 Cost of Goods Sold 2,000 Eliminate beginning inventory profit of Randall Corporation.

E(7) Sales 45,000 Cost of Goods Sold 35,000 Inventory 10,000 Eliminate intercompany sale of inventory by Sharp Company.

E(8) Sales 12,000 Cost of Goods Sold 9,000 Inventory 3,000 Eliminate intercompany sale of inventory by Randall Corporation.

E(9) Buildings and Equipment 25,000 Retained Earnings, January 1 17,500 Depreciation Expense 2,500 Accumulated Depreciation 40,000 Eliminate intercorporate sale of equipment.

Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) $ 6,250 Depreciation required ($75,000 / 20 years) (3,750 ) Required decrease $ 2,500

Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) $52,500 Balance recorded ($6,250 x 2 years) (12,500) Required increase $40,000

E(10) Accounts Payable 10,000 Accounts Receivable 10,000 Eliminate intercorporate receivable/payable.

P7-34 (continued)

c. Randall Corporation and Sharp CompanyConsolidation Workpaper

December 31, 20X7

Randall Sharp Eliminations Consol- Item Corp. Co. Debit Credit idated

Sales 500,000 250,000 (7) 45,000(8) 12,000 693,000

Other Income 20,400 30,000 50,400 Income from Subsidiary 28,000 (1) 28,000 Credits 548,400 280,000 743,400 Cost of Goods Sold 416,000 202,000 (5) 8,000

(6) 2,000(7) 35,000(8) 9,000 564,000

Deprec. and Amortization 30,000 20,000 (4) 5,000 (9) 2,500 52,500 Other Expenses 24,000 18,000 42,000 Debits (470,000) (240,000) (658,500)Consolidated Net Income 84,900 Income to Noncon- trolling Interest (2) 6,600 (6,600 )Income, carry forward 78,400 40,000 96,600 56,500 78,300

Ret. Earnings, Jan. 1 345,900 215,000 (3)215,000(5) 6,400(6) 2,000(9) 17,500 320,000




P7-34 (continued)


Cash 130,300 10,000 140,300Accounts Receivable 80,000 70,000 (10) 10,000 140,000Inventory 170,000 110,000 (7) 10,000

(8) 3,000 267,000Buildings and Equipment 600,000 400,000 (4) 50,000

(9) 25,000 1,075,000Investment in Sharp Company Stock 304,000 (1) 8,000

(3)296,000Differential (3) 35,000 (4) 35,000 Debits 1,284,300 590,000 1,622,300


Accounts Payable 100,000 15,200 (10) 10,000 105,200Bonds Payable 300,000 100,000 400,000Bond Premium 4,800 4,800Common Stock 200,000 100,000 (3)100,000 200,000Additional Paid-In Capital 20,000 (3) 20,000Retained Earnings, from above 374,300 230,000 337,500 81,500 348,300Noncontrolling Interest (5) 1,600 (2) 1,600

(3) 74,000 74,000 Credits 1,284,300 590,000 579,100 579,100 1,622,300

P7-34 (continued)

d. Randall Corporation and SubsidiaryConsolidated Balance Sheet

December 31, 20X7

Cash $ 140,300 Accounts Receivable 140,000 Inventory 267,000 Total Current Assets $ 547,300 Buildings and Equipment $1,065,000 Less: Accumulated Depreciation (486,000 ) 579,000 Total Assets $1,126,300

Accounts Payable $ 105,200 Bonds Payable $ 400,000 Bond Premium 4,800 404,800 Stockholders’ Equity: Controlling Interest: Common Stock $ 200,000 Retained Earnings 348,300 Total Controlling Interest $ 548,300 Noncontrolling Interest 68,000 Total Stockholders’ Equity 616,300 Total Liabilities and Stockholders' Equity $1,126,300

Randall Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X7

Sales $ 693,000 Other Income 50,400

$ 743,400 Cost of Goods Sold $ 564,000 Depreciation and Amortization Expense 52,500 Other Expenses 42,000 (658,500 )Consolidated Net Income $ 84,900 Income to Noncontrolling Interest (6,600 )Income to Controlling Interest $ 78,300

Randall Corporation and SubsidiaryConsolidated Statement of Retained Earnings

Year Ended December 31, 20X7

Retained Earnings, January 1, 20X7 $ 320,000 Income to Controlling Interest, 20X7 78,300

$ 398,300

Dividends Declared, 20X7 (50,000 )Retained Earnings, December 31, 20X7 $ 348,300

P7-35 Comprehensive Consolidation Workpaper; Equity Method [AICPA Adapted]

Fran Corp. and SubsidiaryConsolidation Workpaper

December 31, 20X9

AdjustmentsFran Corp Brey Inc. and Eliminations AdjustedDr. (Cr.) Dr. (Cr.) Dr. Cr. Balance

Income Statement:Net Sales (3,800,000) (1,500,000) [7] 180,000 (5,120,000)Equity in Brey's Income (181,000) [1] 181,000Gain on Sale of Warehouse (30,000) [5] 30,000Cost of Goods Sold 2,360,000 870,000 [7] 162,000 3,068,000 Goodwill Impairment Loss [4] 35,000 35,000 Operating Expenses (including depreciation) 1,100,000 440,000 [3] 9,000 [6] 2,000 1,547,000 Net Income (551,000 ) (190,000 ) [a] 435,000 [a] 164,000 (470,000 )

Retained Earnings Statement:Balance, 1/1/X9 (440,000) (156,000) [2] 156,000 (440,000)Net Income (551,000) (190,000) [a] 435,000 [a] 164,000 (470,000)Dividends Paid 40,000 [1] 40,000 Balance, 12/31/X9 (991,000 ) (306,000 ) [b] 591,000 [b] 204,000 (910,000 )

Balance Sheet:Assets:Cash 570,000 150,000 720,000 Accounts Receivable (net) 860,000 350,000 [8] 86,000 1,124,000 Inventories 1,060,000 410,000 [7] 18,000 1,452,000 Land, Plant and Equipment 1,320,000 680,000 [2] 54,000 [5] 30,000 2,024,000 Accumulated Depreciation (370,000) (210,000) [6] 2,000 [3] 9,000 (587,000)Investment in Brey 891,000 [1] 141,000

[2] 750,000Goodwill [2] 60,000 [4] 35,000 25,000 Total Assets 4,331,000 1,380,000 4,758,000

Liabilities and Stockholders' Equity:Accounts Payable and Accrued Expenses (1,340,000) (594,000) [8] 86,000 (1,848,000)Common Stock (1,700,000) (400,000) [2] 400,000 (1,700,000)Additional Paid-In Capital (300,000) (80,000) [2] 80,000 (300,000)Retained Earnings (991,000 ) (306,000 ) [b] 591,000 [b] 204,000 (910,000 )Total Liabilities and Equity (4,331,000) (1,380,000) 1,273,000 1,273,000 (4,758,000)

P7-35 (continued)

Explanations of Adjustments and Eliminations:

[1] To eliminate Fran's investment income recognized from Brey, Brey's dividends, and the change in the investment account during 20X9. Fran's investment is carried at equity at December 31, 20X9, adjusted for the amortization of the differential assigned to the machinery.

[2] To eliminate reciprocal elements as of the beginning of the year from the investment and equity accounts and to assign the differential to machinery and goodwill.

[3] To record amortization of the fair value in excess of book value of Brey's machinery at date of acquisition ($54,000 / 6).

[4] To record goodwill impairment loss of $35,000.

[5] To eliminate intercompany profit on the sale of the warehouse by Fran to Brey.

[6] To eliminate the excess depreciation on the warehouse building sold by Fran to Brey [($86,000 - $66,000) x 1/5 x ½].

[7] To eliminate intercompany sales from Brey to Fran and the inter-company profit in Fran's ending inventory as follows:

Total On hand Sold Sales $180,000 $36,000 $144,000 Gross profit (90,000 ) (18,000 ) (72,000 )*Cost $ 90,000 * $18,000 $ 72,000

* Cost of Goods Sold elimination: $162,000 = $90,000 + $72,000

[8] To eliminate Fran's intercompany balance to Brey for the merchandise it purchased.

P7-36A Fully Adjusted Equity Method

a. Adjusted trial balance:

Randall Corporation Sharp Company Item Debit Credit Debit Credit

Cash $ 130,300 $ 10,000Accounts Receivable 80,000 70,000Inventory 170,000 110,000Buildings and Equipment 600,000 400,000Investment in Sharp Company Stock 278,000Cost of Goods Sold 416,000 202,000Depreciation and Amortization 30,000 20,000Other Expenses 24,000 18,000Dividends Declared 50,000 25,000Accumulated Depreciation $ 310,000 $120,000Accounts Payable 100,000 15,200Bonds Payable 300,000 100,000Bond Premium 4,800Common Stock 200,000 100,000Additional Paid-In Capital 20,000Retained Earnings 320,000 215,000Sales 500,000 250,000Other Income 20,400 30,000Income from Subsidiary 27,900

$1,778,300 $1,778,300 $855,000 $855,000

P7-36A (continued)

b. Fully adjusted equity-method entries for 20X7:

(1) Cash 20,000 Investment in Sharp Company Stock 20,000 Record dividends from Sharp Company: $25,000 x .80

(2) Investment in Sharp Company Stock 32,000 Income from Subsidiary 32,000 Record equity-method income: $40,000 x .80

(3) Income from Subsidiary 4,000 Investment in Sharp Company Stock 4,000 Amortize differential: $4,000 = ($50,000 / 10 years) x .80

(4) Investment in Sharp Company Stock 6,400 Income from Subsidiary 6,400 Recognize deferred profit on upstream sale of inventory: $8,000 x .80

(5) Investment in Sharp Company Stock 2,000 Income from Subsidiary 2,000 Recognize deferred profit on downstream sale of inventory.

(6) Income from Subsidiary 8,000 Investment in Sharp Company Stock 8,000 Remove unrealized profit on upstream sale of inventory: $10,000 x .80

(7) Income from Subsidiary 3,000 Investment in Sharp Company Stock 3,000 Remove unrealized profit on downstream sale of inventory.

(8) Investment in Sharp Company Stock 2,500 Income from Subsidiary 2,500 Recognize portion of gain on sale of equipment: $20,000 / 8 years

P7-36A (continued)

c. Eliminating entries, December 31, 20X7:

E(1) Income from Subsidiary 27,900 Dividends Declared 20,000 Investment in Sharp Company Stock 7,900 Eliminate income from subsidiary.


E(3) Common Stock — Sharp Company 100,000Additional Paid-In Capital 20,000Retained Earnings, January 1 215,000Differential 35,000 Investment in Sharp Company Stock 296,000 Noncontrolling Interest 74,000 Eliminate beginning investment balance.

E(4) Buildings and Equipment 50,000Depreciation Expense 5,000 Accumulated Depreciation 20,000 Differential 35,000 Assign differential: $20,000 = ($50,000 / 10 years) x 4 years

E(5) Investment in Sharp Company Stock 6,400Noncontrolling Interest 1,600 Cost of Goods Sold 8,000 Eliminate beginning inventory profit of Sharp Company.

P7-36A (continued)

E(6) Investment in Sharp Company Stock 2,000 Cost of Goods Sold 2,000 Eliminate beginning inventory profit of Randall Corporation.



E(9) Buildings and Equipment 25,000 Investment in Sharp Company Stock 17,500 Depreciation Expense 2,500 Accumulated Depreciation 40,000 Eliminate intercorporate sale of equipment.

Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) $6,250 Depreciation required ($75,000 / 20 years) (3,750) Required decrease $2,500



P7-36A (continued)

d. Randall Corporation and Sharp CompanyConsolidation Workpaper

December 31, 20X7


Sales 500,000 250,000 (7) 45,000(8) 12,000 693,000

Other Income 20,400 30,000 50,400 Income from Subsidiary 27,900 (1) 27,900 Credits 548,300 280,000 743,400 Cost of Goods Sold 416,000 202,000 (5) 8,000

(6) 2,000(7) 35,000(8) 9,000 564,000

Deprec. & Amortization 30,000 20,000 (4) 5,000 (9) 2,500 52,500 Other Expenses 24,000 18,000 42,000 Debits (470,000) (240,000) (658,500 )Consolidated Net Income 84,900 Income to Noncon- trolling Interest (2) 6,600 (6,600 )Income, carry forward 78,300 40,000 96,500 56,500 78,300

Ret. Earnings, Jan. 1 320,000 215,000 (3)215,000 320,000 Income, from above 78,300 40,000 96,500 56,500 78,300


(2) 5,000 (50,000 )Ret. Earnings, Dec. 31, carry forward 348,300 230,000 311,500 81,500 348,300

P7-36A (continued)



(8) 3,000 267,000Buildings and Equipment 600,000 400,000 (4) 50,000Investment in Sharp (9) 25,000 1,075,000 Company Stock 278,000 (5) 6,400 (1) 7,900

(6) 2,000 (3)296,000(9) 17,500

Differential (3) 35,000 (4) 35,000 Debits 1,258,300 590,000 1,622,300


Accounts Payable 100,000 15,200 (10) 10,000 105,200Bonds Payable 300,000 100,000 400,000Bond Premium 4,800 4,800Common Stock 200,000 100,000 (3)100,000 200,000Additional Paid-In Capital 20,000 (3) 20,000Retained Earnings, from above 348,300 230,000 311,500 81,500 348,300Noncontrolling Interest (5) 1,600 (2) 1,600

(3) 74,000 74,000 Credits 1,258,300 590,000 579,000 579,000 1,622,300

P7-37A Cost Method

a. Journal entry recorded by Randall Corporation:

Cash 20,000 Dividend Income 20,000 Record dividend from Sharp Company: $25,000 x .80


E(1) Dividend Income 20,000 Dividends Declared 20,000 Eliminate dividend income from subsidiary.


E(3) Common Stock — Sharp Company 100,000 Additional Paid-In Capital 20,000 Retained Earnings, January 1 180,000 Differential 50,000 Investment in Sharp Company Stock 280,000 Noncontrolling Interest 70,000 Eliminate investment balance at date of acquisition: $180,000 = ($300,000 - $100,000 - $20,000)

E(4) Retained Earnings, January 1 7,000 Noncontrolling Interest 7,000 Assign undistributed prior earnings of subsidiary to noncontrolling interest.

Retained earnings, January 1, 20X7 $215,000 Net assets of Sharp at acquisition $300,000 Common stock (100,000) Additional paid-in capital (20,000 ) Retained earnings at acquisition (180,000 ) Net increase $ 35,000 Proportion of stock held by noncontrolling interest x .20 Increase assigned to noncontrolling interest $ 7,000

E(5) Buildings and Equipment 50,000 Differential 50,000 Assign differential at date of acquisition.

P7-37A (continued)

E(6) Retained Earnings, January 1 12,000 Noncontrolling Interest 3,000 Accumulated Depreciation 15,000 Amortize differential for prior periods: ($50,000 / 10 years) x 3 years

E(7) Depreciation Expense 5,000 Accumulated Depreciation 5,000 Amortize differential.

E(8) Retained Earnings, January 1 6,400 Noncontrolling Interest 1,600 Cost of Goods Sold 8,000 Eliminate beginning inventory profit of Sharp Company.

E(9) Retained Earnings, January 1 2,000 Cost of Goods Sold 2,000 Eliminate beginning inventory profit of Randall Corporation.



E(12) Buildings and Equipment 25,000 Retained Earnings, January 1 17,500 Depreciation Expense 2,500 Accumulated Depreciation 40,000 Eliminate intercorporate sale of equipment.

Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) $ 6,250 Depreciation required ($75,000 / 20 years) (3,750 ) Required decrease $ 2,500


P7-37A (continued)


c. Randall Corporation and Sharp CompanyConsolidation Workpaper

December 31, 20X7


Sales 500,000 250,000 (10) 45,000(11) 12,000 693,000

Other Income 20,400 30,000 50,400 Dividend Income 20,000 (1) 20,000 Credits 540,400 280,000 743,400 Cost of Goods Sold 416,000 202,000 (8) 8,000

(9) 2,000(10) 35,000(11) 9,000 564,000

Deprec. & Amortization 30,000 20,000 (7) 5,000 (12) 2,500 52,500 Other Expenses 24,000 18,000 42,000 Debits (470,000) (240,000) (658,500)Consolidated Net Income 84,900 Income to Noncon- trolling Interest (2) 6,600 (6,600 )Income, carry forward 70,400 40,000 88,600 56,500 78,300

Ret. Earnings, Jan. 1 329,900 215,000 (3)180,000(4) 7,000(6) 12,000(8) 6,400(9) 2,000

(12) 17,500 320,000 Income, from above 70,400 40,000 88,600 56,500 78,300


(2) 5,000 (50,000 )Ret. Earnings, Dec. 31, carry forward 350,300 230,000 313,500 81,500 348,300

P7-37A (continued)



(11) 3,000 267,000Buildings and Equipment 600,000 400,000 (5) 50,000

(12) 25,000 1,075,000Investment in Sharp Company Stock 280,000 (3)280,000Differential (3) 50,000 (5) 50,000 Debits 1,260,300 590,000 1,622,300

Accum. Depreciation 310,000 120,000 (6) 15,000(7) 5,000

(12) 40,000 490,000Accounts Payable 100,000 15,200 (13) 10,000 105,200Bonds Payable 300,000 100,000 400,000Bond Premium 4,800 4,800Common Stock 200,000 100,000 (3)100,000 200,000Additional Paid-In Capital 20,000 (3) 20,000Retained Earnings, from above 350,300 230,000 313,500 81,500 348,300Noncontrolling Interest (6) 3,000 (2) 1,600

(8) 1,600 (3) 70,000 (4) 7,000 74,000

Credits 1,260,300 590,000 573,100 573,100 1,622,300

Business

solusi manual advanced acc zy Chap007