CHAPTER 5CONSOLIDATED FINANCIAL STATEMENTS INTERCOMPANY ASSET TRANSACTIONS

Answers to Questions

1. One reason for the significant volume and frequency of intercompany transfers is that many business combinations are specifically organized so that the companies can provide products for each other. This design is intended to benefit the business combination as a whole because of the economies provided by vertical integration. In effect, more profit can often be generated by the combination if one member is able to buy from another rather than from an outside party.

2. The sales between Barker and Walden totaled $100,000. Regardless of the ownership percentage or the markup, the $100,000 was simply an intercompany asset transfer. Thus, within the consolidation process, the entire $100,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts.

3. Sales price per unit ($900,000 ÷ 3,000 units) $ 300Number of units in Safeco’s ending inventory × 500Intercompany inventory at transfer price $150,000Gross profit rate (.6 ÷ 1.6) .375Intercompany profit in ending inventory $56,250

4. In intercompany transactions, a transfer price is often established that exceeds the cost of the inventory. Hence, the seller is recording a gross profit on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset is consumed or sold to an outside party. Any unrealized gross profit on merchandise still held by the buyer must be eliminated whenever consolidated financial statements are produced. For the year of transfer, this consolidation procedure is carried out by removing the unrealized gross profit from the inventory account on the balance sheet and from the ending inventory balance within cost of goods sold. In the year following the transfer (if the goods are resold or consumed), the unrealized gross profit must again be eliminated within the consolidation process. This second reduction is made on the worksheet to the beginning inventory component of cost of goods sold as well as to the beginning retained earnings balance of the original seller. The gross profit is then moved into the year of realization. If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year must be made to the equity in subsidiary earnings account rather than to retained earnings.

5. On the individual financial records of James, Inc., a gross profit is recorded in the year of transfer. From the viewpoint of the business combination, this gross profit is actually earned in the period in which the products are sold or consumed by Matthews Co. An initial consolidation entry must be made in the year of transfer to defer any gross profit that remains unrealized. A second entry must be made in the following time period to allow the gross profit to be recognized in the year of its ultimate realization.

6. Currently, no official accounting pronouncement answers the question as to the relationship between unrealized intercompany profits and noncontrolling interest values, although the issue has been under study by the FASB. This textbook reasons that unrealized profits relate to the seller and to the computation of the seller's income. Therefore, any unrealized

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profits created by upstream transfers (from subsidiary to parent) are attributed to the subsidiary. The effects resulting from the deferral and eventual recognition of these intercompany profits are considered to have an impact on the calculation of noncontrolling interest balances. In contrast, unrealized profits from downstream transfers are viewed as relating solely to the parent (as the seller) and, thus, have no effect on the noncontrolling interest.

7. The basic consolidation process does not differ between downstream and upstream transfers. Sales and purchases (Inventory) balances created by the transactions must be eliminated in total. Any unrealized gross profits remaining at the end of a fiscal period are deferred until ultimately earned through sale or consumption of the assets.The direction of intercompany transfers (upstream versus downstream) does have one effect on consolidated financial statements. In computing noncontrolling interest balances (if present), the deferral of unrealized gross profits on upstream sales is taken into account. Downstream sales, however, are attributed to the parent and are viewed as having no impact on the outside interest.

8. The computation of this noncontrolling interest balance is dependent on the direction of the intercompany transactions that is not indicated in this question. If the unrealized gross profits were created by downstream sales from King to Pawn, they relate only to King. The noncontrolling interest in the subsidiary's net income is not affected and would be $11,000 ($110,000 × 10%). In contrast, if the transfers were upstream from Pawn to King, the deferral and recognition of the profits are attributed to Pawn. Pawn's "realized" income would be $80,000 and the noncontrolling interest's share of the subsidiary's income is reported as $8,000:

Pawn's reported income ............................................... $110,000Recognition of prior year unrealized gross profit .......... 30,000Deferral of current year unrealized gross profit ............ (60,000)Pawn's realized income ................................................ $80,000Outside ownership percentage ..................................... 10%Noncontrolling interest in subsidiary's income.............. $ 8,000

9. The deferral and subsequent recognition of intercompany profits are allocated to the noncontrolling interest in the same periods as the parent. When one affiliate sells to another affiliate, ownership does not change and therefore the underlying profit is deferred. When the purchasing affiliate subsequently sells the inventory to an entity outside the affiliated group, ownership changes, and the profit may be recognized. Intercompany profits are not really eliminated, but simply deferred until a sale to an outsider takes place.

10. Several differences can be cited that exist between the consolidated process applicable to inventory transfers and that which is appropriate for land transfers. The total intercompany Sales balance is offset against Purchases (Inventory) when inventory is transferred but no corresponding entry is needed when land is involved. Furthermore, in the year of the sale, ending unrealized inventory gross profits are eliminated through an adjustment to cost of goods sold but a specific gross profit account exists (and must be removed) when land has been sold. Finally, unrealized inventory gross profits are usually expected to be realized in the year following the transfer. This effect is mirrored in that period by reduction of the beginning inventory figure (within cost of goods sold). For land transfers, however, the unrealized gain must be repeatedly deferred in each fiscal period for as long as the land continues to be held within the business combination.

11. As long as the land is held by the parent, its recorded value must be reduced to historical cost within each consolidated set of financial statements. In the year of the original transfer,

the asset reduction is offset against the subsidiary's recorded gain. For all subsequent years in which the property is held, the credit to the Land account is made against the beginning retained earnings balance of the subsidiary (since the unrealized gain will have been closed into that account).According to this question, the land is eventually sold to an outside party. The intercompany gain (which has been deferred in each of the previous years) is realized by the sale and should be recognized in the consolidated statements of this later period.Because the transfer was upstream from subsidiary to parent, the above consolidated entries will also affect any noncontrolling interest balances being reported. Because of the deferral of the intercompany gross profit, the realized income balances applicable to the subsidiary will be less than the reported values. In the year of resale, however, the realized income for consolidation purposes is higher than reported. All noncontrolling interest totals are computed on the realized balances rather than the reported figures.

12. Depreciable assets are often transferred between the members of a business combination at amounts in excess of book value. The buyer will then compute depreciation expense based on this inflated transfer price rather than on an historical cost basis. From the perspective of the business combination, depreciation should be calculated solely on historical cost figures. Thus, within the consolidation process for each period, adjustment of the depreciation (that is recorded by the buyer) is necessary to reduce the expense to a cost-based figure.

13. From the viewpoint of the business combination, an unrealized gain has been created by the intercompany transfer and must be eliminated whenever consolidated financial statements are produced. This unrealized gain is closed by the seller into retained earnings necessitating subsequent reductions to that account. In the individual financial records, however, another income effect is created which gradually reduces the overstatement of retained earnings each period. The asset will be depreciated by the buyer based on the inflated transfer price. The resulting expense will be higher than the amount appropriate to the historical cost of the item. Because this excess depreciation is closed into retained earnings annually, the overstatement of the equity account is gradually reduced to a zero balance over the life of the asset.

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Answers to Problems

1. C

2. B Inventory remaining $100,000 × 50% = $50,000 Unrealized gross profit (based on Lee's markup as the seller) $50,000 × 40% = $20,000. The ownership percentage has no impact on this computation.

3. A

4. C UNREALIZED GROSS PROFIT, 12/31/09Intercompany Gross profit ($100,000 – $75,000) ......................... $25,000Inventory Remaining at Year's End ............................................... 16%Unrealized Intercompany Gross profit, 12/31/09 ......................... $4,000

UNREALIZED GROSS PROFIT, 12/31/10Intercompany Gross profit ($120,000 – $96,000) ......................... $24,000Inventory Remaining at Year's End ............................................... 35%Unrealized Intercompany Gross profit, 12/31/10 ......................... $8,400

CONSOLIDATED COST OF GOODS SOLDParent balance ........................................................................... $380,000Subsidiary Balance ................................................................... 210,000Remove Intercompany Transfer ............................................... (120,000)Recognize 2009 Deferred Gross profit .................................... (4,000)Defer 2010 Unrealized Gross profit .......................................... 8,400

Cost of Goods Sold ........................................................................ $474,400

5. A Intercompany sales and purchases of $100,000 must be eliminated. Additionally, an unrealized gross profit of $10,000 must be removed from ending inventory based on a markup of 25 percent ($200,000 gross profit/$800,000 sales) which is multiplied by the $40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for consolidation purposes is $690,000 ($600,000 + $180,000 – $100,000 + $10,000).

6. C The only change here from Problem 5 is the markup percentage which would now be 40 percent ($120,000 gross profit $300,000 sales). Thus, the unrealized gross profit to be deferred is $16,000 ($40,000 × 40%). Consequently, consolidated cost of goods sold is $696,000 ($600,000 + $180,000 – $100,000 + $16,000).

7. B UNREALIZED GROSS PROFIT, 12/31/09Ending inventory ....................................................................... $40,000Markup ($33,000/$110,000) ....................................................... 30%Unrealized intercompany gross profit, 12/31/09 ..................... $12,000

UNREALIZED GROSS PROFIT, 12/31/10Ending inventory ....................................................................... $50,000Markup ($48,000/$120,000) ....................................................... 40 % Unrealized intercompany gross profit, 12/31/10 ..................... $20,000

NONCONTROLLING INTEREST IN SUBSIDIARY'S INCOMEReported income for 2010 ........................................................ $90,000Realized gross profit deferred in 2009 .................................... 12,000Deferral of 2010 unrealized gross profit .................................. (20,000)Realized income of subsidiary ................................................. $82,000Outside ownership .................................................................... 10 % Noncontrolling interest ............................................................. $8,200

8. A Individual Records after Transfer12/31/09

Machinery—$40,000Gain—$10,000Depreciation expense $8,000 ($40,000/5 years)Income effect net—$2,000 ($10,000 – $8,000)

12/31/10Depreciation expense—$8,000

Consolidated Figures—Historical Cost12/31/09

Machinery—$30,000Depreciation expense—$6,000 ($30,000/5 years)

12/31/10Depreciation expense--$6,000

Adjustments for Consolidation Purposes:2009: $2,000 income is reduced to a $6,000 expense (income is reduced

by $8,000)2010: $8,000 expense is reduced to a $6,000 expense (income is increased

by $2,000)

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9. B UNREALIZED GAINTransfer Price ............................................................................ $280,000Book Value (cost after two years of depreciation) ................. 240,000Unrealized Gain ......................................................................... $40,000

EXCESS DEPRECIATIONAnnual Depreciation Based on Cost ($300,000/10 years)..... $30,000Annual Depreciation Based on Transfer Price

($280,000/8 years) ................................................................ 35,000Excess Depreciation ................................................................. $5,000

ADJUSTMENTS TO CONSOLIDATED NET INCOMEDefer Unrealized Gain ............................................................... $(40,000)Remove Excess Depreciation .................................................. 5,000Decrease to Consolidated Net Income .................................... $(35,000)

10.D Add the two book values and remove $100,000 intercompany transfers.

11.C Intercompany gross profit ($100,000 - $80,000) ........................... $20,000Inventory remaining at year's end ................................................. 60%Unrealized intercompany gross profit .......................................... $12,000

CONSOLIDATED COST OF GOODS SOLDParent balance ........................................................................... $140,000Subsidiary balance .................................................................... 80,000Remove intercompany transfer ................................................ (100,000)Defer unrealized gross profit (above) ...................................... 12,000

Cost of goods sold ......................................................................... $132,000

12.C Consideration transferred ............................ $260,000Noncontrolling interest fair value.................. 65,000Suarez total fair value..................................... $325,000Book value of net assets................................ (250,000)Excess fair over book value $75,000

Annual ExcessLife Amortizations

Excess fair value assigned to undervalued assets:Equipment................................................... 25,000 5 years $5,000Secret Formulas ........................................ $50,000 20 years 2,500

Total ................................................................ -0- $7,500

Consolidated Expenses = $37,500 (add the two book values and include current year amortization expense)

13. A 20% of the beginning book value $50,000

Excess fair value allocation (20%× $75,000) 15,00020% share of Suarez net income adjusted for amortization (20% × [110,000 – 7,500]) 20,500Ending noncontrolling interest balance $85,500

14. C Add the two book values plus the original allocation ($25,000) less one year of excess amortization expense ($5,000).

15. B Add the two book values less the ending unrealized gross profit of $12,000.

Intercompany Gross profit ($100,000 – $80,000) ......................... $20,000Inventory Remaining at Year's End ............................................... 60%Unrealized Intercompany Gross profit, 12/31 .............................. $12,000

16. (15 Minutes) (Determine selected consolidated balances; includes inventory transfers and an outside ownership.)

Customer list amortization = $65,000/5 years = $13,000 per year

Intercompany Gross profit ($160,000 – $120,000) ....................... $40,000Inventory Remaining at Year's End................................................ 20%Unrealized Intercompany Gross profit, 12/31 .............................. $8,000

CONSOLIDATED TOTALS Inventory = $592,000 (add the two book values and subtract the ending

unrealized gross profit of $8,000) Sales = $1,240,000 (add the two book values and subtract the $160,000

intercompany transfer) Cost of Goods Sold = $548,000 (add the two book values and subtract the

intercompany transfer and add [to defer] ending unrealized gross profit) Operating Expenses = $443,000 (add the two book values and the

amortization expense for the period) Noncontrolling Interest in Subsidiary's Net Income = $8,700 (30 percent of

the reported income after subtracting 13,000 excess fair value amortization and deferring $8,000 ending unrealized gross profit) Gross profit is included in this computation because the transfer was upstream from Sanchez to Preston.

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17. (60 minutes) (Downstream intercompany profit adjustments when parent uses equity method and a noncontrolling interest is present)

Consideration transferred by Corgan $980,000Noncontrolling interest fair value 245,000Smashing’s acquisition-date fair value 1,225,000Book value of subsidiary 950,000Excess fair over book value 275,000Excess assigned to covenants 275,000Useful life in years ÷ 20 Annual amortization $13,750

2009 Ending Inventory Profit Deferral Cost = $100,000 ÷ 1.6 = $62,500 Intercompany Gross profit = $100,000 – $62,500 = $37,500 Ending inventory gross profit = $37,500 × 40% = $15,000

2010 Ending Inventory Profit Deferral Cost = $120,000 ÷ 1.6 = $75,000 Intercompany Gross profit = $120,000 – $75,000 = $45,000 Ending inventory gross profit = $45,000 40% = $18,000

a. Investment account:Consideration transferred, January 1, 2009 $980,000

Smashing’s 2009 income × 80% $120,000Covenant amortization (13,750 × 80%) (11,000)Ending inventory profit deferral (100%) (15,000)

Equity in Smashing’s earnings 94,0002009 dividends (28,000)Investment balance 12/31/09 $1,046,000

Smashing’s 2010 income × 80% $104,000Covenants amortization (13,750 × 80%) (11,000)Beginning inventory profit recognition 15,000Ending inventory profit deferral (100%) (18,000)Equity in Smashing’s earnings 90,000

2010 dividends (36,000)Investment balance 12/31/10 $1,100,000

17. (continued)

b. 12/31/10 Worksheet Adjustments

*G Equity in earnings of Smashing 15,000COGS 15,000

S Common stock—Smashing 700,000Retained earnings—Smashing 365,000

Investment in Smashing 852,000Noncontrolling interest 213,000

A Covenants 261,250Investment in Smashing 209,000Noncontrolling interest 52,250

I Equity in earnings of Smashing 75,000Investment in Smashing 75,000

D Investment in Smashing 36,000Dividends paid 36,000

E Amortization expense 13,750Covenants 13,750

TI Sales 120,000COGS 120,000

G COGS 18,000Inventory 18,000

18. (40 Minutes) (Series of independent questions concerning various aspects of the consolidation process when intercompany transfers have occurred)

a. 2009 Unrealized gross profit to be recognized in 2010

Total interco. gross profit on transfers ($90,000 – $54,000) . $36,000Inventory retained at end of 2009 ............................................ 20%

Unrealized gross profit—12/31/09 ...................................... $7,200

2010 Unrealized Gross profit Deferred

Total interco. gross profit on transfers ($120,000 – $66,000) $54,000

Inventory retained at end of 2010 ............................................ 30%Unrealized gross profit—12/31/10....................................... $16,200

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18. a. (continued)

Noncontrolling Interest's Share of Kane's IncomeKane's reported income 2010.................................................... $110,000Amortization of excess fair value to intangibles..................... (5,000)2009 gross profit realized in 2010 (upstream sales) .............. 7,2002010 gross profit deferred (upstream sales) .......................... (16,200)Kane's realized income ............................................................. $96,000Noncontrolling interest ownership .......................................... 20%Noncontrolling Interest's Share of Kane's Income................. $19,200

b. Inventory—Smith book value ................................................... $140,000Inventory—Kane book value .................................................... 90,000Unrealized gross profit, 12/31/10 (see part a) ......................... (16,200)Consolidated Inventory ............................................................ $213,800(Direction of transfer has no impact here)

c. Downstream transfers do not affect the noncontrolling interest.Kane's reported income—2010 ............................................... $110,000Noncontrolling interest ownership ......................................... 20%Noncontrolling Interest's Share of Kane's Income................. $22,000

d. Smith's reported income 2010................................................... $300,000Elimination of intercompany dividend income recorded

by parent ($40,000 × 80%) ................................................... (32,000)Kane's reported income 2010 ................................................... 110,000Amortization expense (given) ................................................. (5,000)Realization of 2009 intercompany gross profit (see part a) . 7,200Deferral of 2010 intercompany gross profit (see part a) ........ (16,200)Consolidated net income........................................................... $364,000

e. Because the parent applies the partial equity method, its retained earnings balance does not reflect the consolidated balance. Excess amortization and the effect of the unrealized gain at that date must be taken into account to arrive at a consolidated total.

Smith's retained earnings, December 31, 2010 (given) ........ $600,000Excess amortizations 2009–2010 ($5,000× 2) ........................ (10,000)Deferral of parent's 12/31/10 interco. gross profit (part a)..... (16,200)Consolidated Retained Earnings 12/31/10 ............................. $573,800

18. (continued)

f. Because the parent applies the partial equity method, its retained earnings balance does not equal the consolidated balance. Excess amortizations must be taken into account to arrive at a consolidated total. In addition, because the intercompany transfer was upstream, the parent's equity accrual did not reflect the intercompany profit deferral . Income recognition would have been based on the subsidiary's reported figures rather than its realized income. The parent would have included the $16,200 ending unrealized gross profit in the subsidiary's income in computing the annual equity accrual. Hence, that portion of the accrual (80% of $16,200 or $12,960) is overstated, causing the parent's retained earnings to be too high by that amount; reduction is necessary to arrive at the consolidated balance.

The adjustment caused by the intercompany transfer can be computed in a second manner. The entire $16,200 unrealized gross profit will be deferred on the consolidated statements. However, because the transfer was upstream, the portion of the subsidiary's income assigned to the outside owners will be reduced by 20 percent of that deferral or $3,240. The net effect on consolidated net income (and, hence, on the ending retained earnings balance) is $12,960.

Smith's retained earnings, December 31, 2010 (given).......... $600,000Excess Amortizations, 2009–2010 ($5,000 × 2) ....................... (10,000)Reduction of equity accrual because of subsidiary's unrealized gross profit (explained above) .............................................. (12,960)CONSOLIDATED RETAINED EARNINGS, 12/31/10 ................. $577,040

g. Land—Smith’s book value ....................................................... $600,000Land—Kane's book value ......................................................... 200,000Elimination of unrealized gain on intercompany land ........... (20,000)CONSOLIDATED LAND ACCOUNT .......................................... $780,000

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18. (continued)h. The intercompany transfer was upstream from Kane to Smith. Because the

transfer occurred in 2009, beginning retained earnings of the seller for 2010 contains the remaining portion of the unrealized gain.

Transfer Pricing Figures2009 Equipment = $80,000

Gain = $20,000 ($80,000 – $60,000)Depreciation expense = $16,000 ($80,000/5)Income effect = $4,000 ($20,000 – $16,000)Accumulated depreciation = $16,000

2010 Depreciation expense = $16,000Accumulated depreciation = $32,000

Historical Cost Figures2009 Equipment = $100,000

Depreciation expense = $12,000 ($60,000/5 years)Accumulated depreciation = $52,000 ($40,000 + $12,000)

2010 Depreciation expense = $12,000Accumulated depreciation = $64,000

CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT

ENTRY *TARetained Earnings, 1/1/10 (Kane) ............................. 16,000Equipment ($100,000 – $80,000) .............................. 20,000

Accumulated Depreciation ($52,000 – $16,000). 36,000To change beginning of year figures to historical cost by removing impact of 2009 transactions. Retained earnings reduction removes $4,000 income effect (above) and replaces it with $12,000 depreciation expense for 2009.

ENTRY EDAccumulated Depreciation ....................................... 4,000

Depreciation Expense ......................................... 4,000To reduce depreciation from transfer price figure ($16,000) to historical cost of $12,000.

This intercompany transfer was upstream from Kane to Smith. Thus, income effects are assumed to relate to the original seller (Kane). Because the sale occurred in 2009, the only effect in 2010 relates to depreciation expense. The expense based on the transfer price is $4,000 higher than the amount based on the historical cost. As an upstream transfer, this adjustment affects Kane and the noncontrolling interest computations.

Transfer price depreciation: $80,000/5 yrs. = $16,000Historical cost depreciation (based on book value): $60,000/5 yrs. = $12,000

18. (continued)

Noncontrolling Interest in Kane's IncomeKane's reported income less excess amortization .................. $105,000Reduction of depreciation expense to historical cost figure. 4,000Kane's realized income .............................................................. $109,000Outside ownership percentage ................................................. 20%

Noncontrolling interest in Kane’s income .......................... $21,800

19. (20 Minutes) (Consolidation entries and noncontrolling interest balances affected by inventory transfers.)

a. Conversion from Markup on Cost to Gross Profit RateMarkup (given as a percentage of cost) .................................. 25 % Convert to gross profit rate [.25 (1.00 + 0.25)]..................... 20 %

Noncontrolling Interest's Share of Subsidiary’s IncomeReported income of subsidiary—2010..................................... $160,0002009 intercompany gross profit realized in 2010

($250,000 × 30% × 20%) ........................................................ 15,0002010 intercompany gross profit deferred

($300,000 × 30% × 20%) ........................................................ (18,000)Realized income of subsidiary—2010 ................................ $157,000

Outside ownership .................................................................... 40%Noncontrolling interest's share of subsidiary's income . . $62,800

b. Entry *GRetained Earnings, Jan. 1 (subsidiary) ........ 15,000

Cost of Goods Sold ................................... 15,000To remove intercompany gross profit from previous year so that it can be recognized in current year.

Entry TlSales................................................................. 300,000

Cost of Goods Sold (purchases) ............. 300,000To eliminate intercompany inventory sale and purchase.

Entry GCost of Goods Sold ........................................ 18,000

Inventory .................................................... 18,000To remove effects of current year unrealized gross profit.

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20. (30 Minutes) (Compute selected balances based on three different intercompany asset transfer scenarios)

a. Consolidated Cost of Goods SoldPenguin’s cost of goods sold .................................................. $290,000Snow’s cost of goods sold ....................................................... 197,000Elimination of 2010 intercompany transfers ........................... (110,000)Reduction of beginning Inventory because of

2009 unrealized gross profit ($28,000/1.4 = $20,000cost; $28,000 transfer price less $20,000cost = $8,000 unrealized gross profit) ................................ (8,000)

Reduction of ending inventory because of2010 unrealized gross profit ($42,000/1.4 = $30,000cost; $42,000 transfer price less $30,000cost = $12,000 unrealized gross profit) .............................. 12,000

Consolidated cost of goods sold .................................. $381,000

Consolidated InventoryPenguin book value ............................................................. $346,000Snow book value .................................................................. 110,000Eliminate ending unrealized gross profit (see above) ..... (12,000)Consolidated Inventory ....................................................... $444,000

Noncontrolling Interest in Subsidiary’s Net IncomeBecause all intercompany sales were downstream, the deferrals do not affect Snow. Thus, the noncontrolling interest is 20% of the $58,000 (revenues minus cost of goods sold and expenses) reported income or $11,600.

b. Consolidated Cost of Goods SoldPenguin book value .................................................................. $290,000Snow book value ....................................................................... 197,000Elimination of 2010 intercompany transfers ........................... (80,000)Reduction of beginning inventory because of

2009 unrealized gross profit ($21,000/1.4 = $15,000cost; $21,000 transfer price less $15,000cost = $6,000 unrealized gross profit) ................................ (6,000)

Reduction of ending inventory because of2010 unrealized gross profit ($35,000/1.4 = $25,000cost; $35,000 transfer price less $25,000cost = $10,000 unrealized gross profit) .............................. 10,000

Consolidated cost of goods sold ............................................ $411,000

20. b. (continued)

Consolidated Inventory

Penguin book value .................................................................. $346,000Snow book value ....................................................................... 110,000Eliminate ending unrealized gross profit (see above) ........... (10,000)

Consolidated inventory ....................................................... $446,000

Noncontrolling Interest in Subsidiary's Net income

Since all intercompany sales are upstream, the effect on Snow's income must be reflected in the noncontrolling interest computation:

Snow reported income .............................................................. $58,0002009 unrealized gross profit realized in 2010 (above) ........... 6,0002010 unrealized gross profit to be realized in 2011 (above) . (10,000)Snow realized income ............................................................... $54,000Outside ownership percentage ................................................ 20%

Noncontrolling interest in Snow's income ........................ $10,800

c. Consolidated Buildings (Net)

Penguin’s buildings ............................................... $358,000Snow's buildings .................................................... 157,000Remove write-up created by transfer

($80,000 – $50,000) ............................................ $(30,000)Remove excess depreciation created by transfer

($30,000 unrealized gain over 5 year life)(2 years) .............................................................. 12,000 (18,000)Consolidated buildings (net) ........................... $497,000

Consolidated Expenses

Penguin’s book value ............................................. $150,000Snow's book value ................................................. 105,000Remove excess depreciation on transferred building

($30,000) unrealized gain/5 years) ................... (6,000)Consolidated expenses ......................................... $249,000

Noncontrolling Interest in Subsidiary’s Net Income

Because the transfer was made downstream, it has no effect on the noncontrolling interest. Thus, Snow's reported income ($58,000 computed as revenues minus cost of goods sold and expenses) is used for this computation. The 20 percent outside ownership will be allotted income of $11,600 (20% × $58,000).

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21. (15 Minutes) (Prepare consolidated income statement with a wholly-owned subsidiary, includes transfers)a. In this business combination, the direction of the intercompany transfers

(either upstream or downstream) is not important to the consolidated totals. Because Akron controls all of Toledo's outstanding stock, no noncontrolling interest figures are computed. If present, noncontrolling interest balances are affected by upstream sales but not by downstream.For purposes of a 2010 consolidation, the following worksheet entries would affect income statement balances:Entry *G

Retained Earnings, 1/1/10 (seller) ...... 17,500Cost of Goods Sold ........................ 17,500

To remove 2009 unrealized gross profit from beginning account balances. Gross profit is the 25% markup ($80,000 ÷ $320,000) multiplied by remaining inventory ($70,000).

Entry EAmortization Expense.......................... 15,000

Patented technology ...................... 15,000To recognize excess amortization expense for the current period.

Entry TlSales....................................................... 320,000

Cost of Goods Sold ........................ 320,000To eliminate intercompany transfers of inventory during 2010.

Entry GCost of Goods Sold ............................. 12,500

Inventory ......................................... 12,500To remove 2010 unrealized gross profit from ending account balances. Gross profit is the 25% markup ($80,000 ÷ $320,000) multiplied by remaining inventory ($50,000).

b. By including the impact of each of these four consolidation entries, the following income statement can be created from the individual account balances:

AKRON, INC. AND CONSOLIDATED SUBSIDIARYIncome Statement

Year Ending December 31, 2010Sales ..................................................................................... $1,380,000Cost of goods sold .............................................................. 575,000

Gross profit ..................................................................... 805,000Operating expenses ............................................................. 635,000

Consolidated net income ............................................... $170,00022. (60 minutes) (Downstream intercompany asset transfer when parent uses

equity method and when a noncontrolling interest is present)

a. Investment account:Consideration paid (fair value) 1/1/09 $810,000Netspeed’s reported income for 2009 $80,000Database amortization (12,000)Netspeed’s adjusted net income $68,000Quickport's ownership percentage 90 % Quickport's share of Netspeed’s income $61,200Gain on equipment transfer deferral (3,000)Depreciation adjustment (6 months) 500

Equity in earnings of Netspeed Company, $58,700Quickport’s share of Netspeed’s dividends (90%) (7,200)Balance 12/31/09 $861,500Netspeed’s reported income for 2010 $115,000

Database amortization (12,000)Netspeed’s adjusted 2010 net income $103,000Quickport's ownership percentage 90 % Quickport's share of Netspeed income $92,700Depreciation adjustment 1,000

Equity in earnings of Netspeed Company, 2010 $93,700Quickport’s share of Netspeed’s dividends, 2010 (90%) (7,200)Balance 12/31/10 $948,000

b. 12/31/10 Worksheet Adjustments*TA Equipment 6,000

Investment in S 2,500Accumulated depreciation 8,500

To transfer the unrealized interco. equipment reduction (as of Jan. 1, 2010) from the Investment account to the equipment and A.D. accounts.S Common stock—S 800,000

RE—S 112,000Investment in S 820,800Noncontrolling interest 91,200

A Database 48,000Investment in S 43,200Noncontrolling interest 4,800

I Equity in earnings of S 93,700Investment in S 93,700

D Investment in S 7,200Dividends paid 7,200

22. (continued)E Amortization expense 12,000

Database 12,000

5-17

ED Accumulated depreciation 1,000Depreciation expense 1,000

Alternative set of equivalent adjustments for part b.

*TA Equipment 6,000Investment in S 1,500

Accumulated Depreciation 7,500To transfer the unrealized intercompany equipment reduction (as of Dec. 31, 2010) from the investment account to the equipment and A.D. accounts.

*ED Equity in earnings of S 1,000Depreciation expense 1,000

To transfer the current realized portion of the intercompany equipment gain from the Equity in Earnings of S account to increase current consolidated income through a reduction in depreciation expense.

S Common stock—S 800,000RE—S 112,000

Investment in S 820,800Noncontrolling interest 91,200

A Database 48,000Investment in S 43,200Noncontrolling interest 4,800

I Equity in earnings of S 92,700Investment in S 92,700

D Investment in S 7,200Dividends paid 7,200

E Amortization expense 12,000Database 12,000

23. (20 Minutes) (Consolidation entries for intercompany equipment transfer.)

INDIVIDUAL RECORDS BASED ON TRANSFER PRICE12/31/09 Equipment = $95,000 Gain on transfer = $45,000 ($95,000 – $50,000) Depreciation expense = $19,000 ($95,000/5 years) Accumulated depreciation = $19,000

12/31/10 Depreciation expense $19,000 Accumulated depreciation = $38,000 (2 years)

12/31/11 Effect on retained earnings, 1/1/11 = $7,000 credit balance (gain less two

years depreciation) Depreciation expense = $19,000 Accumulated depreciation = $57,000 (3 years)

CONSOLIDATED REPORTING BASED ON HISTORICAL COST12/31/09 Equipment = $130,000 Depreciation expense = $10,000 ($50,000/5 years) Accumulated depreciation = $90,000 ($80,000 + $10,000)

12/31/10 Depreciation expense = $10,000 Accumulated depreciation = $100,000 ($90,000 + $10,000)

12/31/11 Effect on retained earnings, 1/1/11 = ($20,000) (two years depreciation) Depreciation expense = $10,000 Accumulated depreciation = $110,000 ($100,000 + $10,000)

Entry *TARetained earnings, 1/1/11 (Padre) ...................... 27,000Equipment ($130,000 – $95,000) ......................... 35,000

Accumulated depreciation ($100,000 – $38,000) 62,000To adjust beginning-of-year amounts to balances for consolidated entity. Retained earnings adjustment reduces $7,000 credit balance to $20,000 debit balance as computed above.

Entry EDAccumulated Depreciation................................... 9,000

Depreciation Expense .................................... 9,000To remove excess depreciation for current year to reflect an allocation of the historical cost ($10,000) rather than the transfer price ($19,000).

5-19

24. (20 Minutes) (Determine consolidated net income when an intercompany transfer of equipment occurs. Includes an outside ownership)

a. Income—Slaughter .................................................................... $220,000Income—Bennett........................................................................ 90,000Excess amortization for unpatented technology.................... (8,000)Remove unrealized gain on equipment ................................... (50,000)($120,000 – $70,000)Remove excess depreciation created by

inflated transfer price ($50,000 ÷ 5) .................................... 10,000Consolidated net income .......................................................... $262,000

b. Income calculated in (part a.) ................................................... $262,000Noncontrolling interest in Bennett's income

Income—Bennett ................................................. $90,000Excess amortization ............................................ (8,000)Adjusted net income ............................................ $82,000Noncontrolling interest in Bennett’s income (10%)........... (8,200 )

Consolidated net income to parent company......................... $253,800

c. Income calculated in (part a.) ................................................... $262,000Noncontrolling interest in Bennett's income (see Schedule 1) (4,200)Consolidated net income to parent company......................... $257,800

Schedule 1: Noncontrolling Interest in Bennett's Income (includes upstream transfer)

Reported net income of subsidiary ......................................... $90,000Excess amortization................................................................... (8,000)Eliminate unrealized gain on equipment transfer .................. (50,000)Eliminate excess depreciation ($50,000 ÷ 5) ........................... 10,000Bennett's realized net income .................................................. $42,000Outside ownership .................................................................... 10%

Noncontrolling interest in subsidiary's income ................ $ 4,200

d. Net income 2010—Slaughter .................................................... $240,000Net income 2010—Bennett ....................................................... 100,000Excess amortization................................................................... (8,000)Eliminate excess depreciation stemming from transfer

($50,000 ÷ 5) (year after transfer) ........................................ 10,000 Consolidated net income ................................................ $342,000

25. (35 minutes) (Compute consolidated totals with transfers of both inventory and a building.)

Excess Amortization ExpensesEquipment $60,000 ÷ 10 years = $6,000 per yearFranchises $80,000 ÷ 20 years = $4,000 per yearAnnual excess amortizations $10,000

Unrealized Gross profit—Inventory, 1/1/11Markup ($70,000 – $49,000) ...................................................... $21,000Markup percentage ($21,000 ÷ $70,000) .................................. 30%

Remaining inventory ................................................................. $30,000Markup percentage ................................................................... 30%Unrealized gross profit, 1/1/11.................................................. $9,000

Unrealized Gross profit—Inventory, 12/31/11Markup ($100,000 – $50,000) .................................................... $50,000Markup percentage ($50,000 ÷ $100,000) ................................ 50%

Remaining inventory ................................................................. $40,000Markup percentage ................................................................... 50%Unrealized gross profit, 12/31/11 ............................................. $20,000

Impact of intercompany Building Transfer

12/31/10—Transfer price figuresTransfer price ....................................................................... $50,000Gain on transfer ($50,000 – $30,000) .................................. 20,000Depreciation expense ($50,000 ÷ 5) ................................... 10,000Accumulated depreciation .................................................. 10,000

12/31/11—Transfer price figuresDepreciation expense .......................................................... 10,000Accumulated depreciation .................................................. 20,000

12/31/10—Historical cost figuresHistorical cost ...................................................................... $70,000Depreciation expense ($30,000 book value ÷ 5 years) ..... 6,000Accumulated depreciation ($40,000 + $6,000) .................. 46,000

12/31/11—Historical cost figuresDepreciation expense .......................................................... 6,000Accumulated depreciation .................................................. 52,000

5-21

25. (continued)

CONSOLIDATED BALANCES Sales = $1,000,000 (add the two book values and subtract $100,000 in intercom-

pany transfers) Cost of Goods Sold = $571,000 (add the two book values and subtract $100,000 in

intercompany purchases. Subtract $9,000 because of the previous year unrealized gross profit and add $20,000 to defer the current year unrealized gross profit.)

Operating Expenses = $206,000 (add the two book values and include the $10,000 excess amortization expenses but remove the $4,000 in excess depreciation expense [$10,000 – $6,000] created by building transfer)

Investment Income = $0 (the intercompany balance is removed so that the individual revenue and expense accounts of the subsidiary can be shown)

Inventory = $280,000 (add the two book values and subtract the $20,000 ending unrealized gross profit)

Equipment (net) = $292,000 (add the two book values and include the $60,000 allocation from the acquisition-date fair value less three years of excess amortizations)

Buildings (net) = $528,000 (add the two book values and subtract the $20,000 unrealized gain on the transfer after two years of excess depreciation [$4,000 per year])

26. (35 Minutes) (Prepare consolidation entries for a business combination with intercompany inventory and equipment transfers; includes an outside ownership.)

a. Entry *GRetained Earnings, 1/1/11 (Sledge) ............... 2,000

Cost of Goods Sold ................................... 2,000To remove unrealized gross profit from beginning account balances. This is the 40% markup ($6,000/$15,000) multiplied by remaining inventory ($5,000).

Entry *TAEquipment........................................................ 4,000Investment in Sledge ...................................... 2,400

Accumulated Depreciation ....................... 6,400To adjust the equipment balance to original cost ($16,000) and to adjust accumulated depreciation to the correct consolidated January 1, 2011 balance ($7,000 less $600 extra depreciation in 2010). The net reduction to the reported equipment balance (cost less A.D. = $2,400) equals the amount of unrealized gain at January 1, 2011. The $2,400 debit to the Investment account appropriately transfers the reduction in the net book value of the transferred equipment to the subsidiary’s accounts. The Investment account was reduced by $3,000 in 2010 for the original intercompany gain and increased by $600 in 2010 for the extra depreciation ($3,000 gain/5 years) through application of the equity method. Entry ED (below) completes the adjustment of A.D. and depreciation expense to their correct December 31, 2011 balances.

Entry SCommon Stock (Sledge) ........................................... 120,000Retained Earnings, 1/1/11 (adjusted) (Sledge)....... 258,000

Investment in Sledge (80%) ................................ 302,400Noncontrolling interest in Sledge, 1/1/11 (20%). 75,600

To eliminate subsidiary's stockholders' equity accounts (after adjustment for Entry *G) and recognize noncontrolling interest balance as of January 1, 2011.

Entry AContracts ($60,000 – $3,000 for 2 years) ................. 54,000Buildings ($20,000 – $2,000 for 2 years) ................. 16,000

Investment in Sledge (80%)................................. 56,000Noncontrolling interest in Sledge, 1/1/11 (20%). 14,000

To recognize acquisition-date fair value allocations adjusted for 2 years of amortization (2009 and 2010).

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26. (continued)

Entry IEquity Income of Subsidiary .................................... 10,600

Investment in Sledge ........................................... 10,600To remove intercompany income accrual recorded by parent using full equity method (80% of $17,500 realized income [see Part b] less $5,000 in excess amortizations for the year [see Entry E] plus $600 removal of excess depreciation from 2010 intercompany equipment transfer).

Entry EDepreciation Expense................................................ 2,000Amortization Expense................................................ 3,000

Contracts ($60,000 ÷ 20 years) ........................... 3,000Buildings ($20,000 ÷ 10 years) ............................ 2,000

To record excess amortizations for 2011 based on allocations and useful lives.

Entry TISales............................................................................ 20,000

Cost of Goods Sold ............................................. 20,000To eliminate intercompany inventory transfers during 2011.

Entry GCost of Goods Sold ................................................... 4,500

Inventory ............................................................... 4,500To remove unrealized gross profit from ending account balances. The gross profit is the 45% markup ($9,000 ÷ $20,000) multiplied by remaining inventory ($10,000).

Entry EDAccumulated Depreciation ....................................... 600

Depreciation Expense ......................................... 600To eliminate excess depreciation on equipment recorded at transfer price. Expense is being reduced from the recorded amount ($2,400 or $12,000 ÷ 5) to historical cost figure ($1,800 or $9,000 ÷ 5).

26. (continued)

b. Noncontrolling Interest in the Subsidiary's Income 2011

Revenues..................................................................................... $130,000Cost of goods sold .................................................................... (70,000)Other expenses .......................................................................... (40,000)Excess acquisition-date fair value amortization..................... (5,000 )

Income adjusted for amortization ...................................... $15,000Gross profit on 2010 upstream inventory transfer

realized in 2011 (Entry *G) .................................................. 2,000Gross profit on 2011 upstream inventory transfer

deferred until 2012 (Entry G) ............................................... (4,500)Realized income of subsidiary—2011...................................... $12,500Outside ownership .................................................................... 20%

Noncontrolling interest in subsidiary's net income ......... $2,500

27. (65 Minutes) (Determine consolidation totals after answering a series of questions about combination and intercompany inventory transfers)

a. Consideration transferred ....................... $342,000Noncontrolling interest fair value............. 38,000Subsidiary fair value at acquisition-date 380,000Book value.................................................. (326,000)Fair value in excess of book value .......... $54,000 Annual Excess

Excess fair value assignments Life AmortizationsTo building ........................................... 18,000 9 yrs. $2,000To patented technology ...................... 36,000 6 yrs. 6,000Totals..................................................... -0- $8,000

b. Because Brey sold inventory to Petino, the transfers are upstream.

c. Gross profit on 2010 transfers ($135,000 – $81,000) .............. $54,000Gross profit percentage ($54,000 ÷ $135,000) ........................ 40%

Inventory remaining, 12/31/10 ................................................. $37,500Gross profit percentage ............................................................ 40%Unrealized gross profit, January 1, 2011 ............................... $15,000

d. Gross profit on 2011 transfers ($160,000 – $92,800) ............. $67,200Gross profit percentage ($67,200 ÷ $160,000) ........................ 42%

Inventory remaining, 12/31/11 ................................................. $50,000Gross profit percentage ............................................................ 42%Unrealized gross profit, December 31, 2011 ........................... $21,000

27. (continued)

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e. Petino is applying the equity method because the $68,400 equals neither 90% of Brey's reported Income nor 90% of the dividends paid by Brey.

Brey’s reported income ............................................................ $90,000Excess fair value amortization.................................................. (8,000)Realized gross profit ................................................................ 15,000Deferred gross profit.................................................................. (21,000 ) Adjusted subsidiary income..................................................... $76,000Ownership .................................................................................. 90%Investment income—Brey ........................................................ $68,400

f. Brey’s adjusted income (see e.) ............................................... $76,000Outside ownership .................................................................... 10%Noncontrolling interest in subsidiary's net income ............... $7,600

g. Investment in Brey (initial value) ............................................. $342,000Income of Brey

Reported 2009....................................... $64,0002010 .................................................. 80,0002011 ................................................. 90,000Total ................................................. 234,000

Unrealized gross profit, 12/31/11(see d.) (21,000)Realized income 2009-2011 ............... 213,000Petino’s ownership .............................. 90% 191,700

Excess amortizations ($8,000 × 3 years × 90%) (21,600)

Dividends paid by Brey2009 .................................................. $19,0002010 .................................................. 23,0002011 ................................................. 27,000Total ................................................. 69,000

Pitino's ownership ............................... 90% (62,100)Investment in Brey, 12/31/11 ................... $450,000

h. Entry SCommon Stock (Brey) ............................... 150,000Retained Earnings, 1/1/11 (Brey) (reduced by 1/1/11 unrealized gross profit) ................. 263,000

Investment in Brey (90%) .................... 371,700Noncontrolling Interest in Brey (10%) 41,300

27. (continued) part i.

Sales Revenues = $1,068,000 (total less $160,000 intercompany sales) Cost of Goods Sold = $570,000 (add book values less $160,000 in

intercompany purchases. Also, adjust for 2010 unrealized gross profit [subtract $15,000] and 2011 unrealized gross profit [add $21,000])

Expenses = $260,400 (add book values with $8,000 amortization for excess fair value allocations)

Investment Income—Brey = $0 (intercompany balance is eliminated to include individual revenue and expense accounts of the subsidiary)

Noncontrolling Interest in Subsidiary's Net Income = $7,600 (see f.) Consolidated net income to parent = $230,000 (consolidated revenues less

consolidated cost of goods sold, expenses, and the noncontrolling interest's share of the subsidiary's income)

Retained Earnings, 1/1 = $488,000 (parent equity method balance) Dividends Paid = $136,000 (parent balance only) Retained Earnings, 12/31 = $582,000 (consolidated beginning balance plus net

income less dividends paid) Cash and Receivables = $228,000 (total less $16,000 intercompany balance) Inventory = $370,000 (total less ending unrealized gross profit) Investment in Brey = $0 (intercompany balance is eliminated so that the

individual assets and liabilities of the subsidiary can be reported) Land, Buildings, and Equipment = $1,304,000 (add book values and include a

$12,000 net allocation after 3 years of amortization) Patented Technology = $18,000 (original allocation after 3 years of

amortization [$6,000 per year]) Total Assets = $1,920,000 (add consolidated figures) Liabilities = $773,000 (add book values less $16,000 intercompany balance) Noncontrolling Interest in Brey, 12/31 = $50,000 ([10% of subsidiary's book

value at beginning of period plus unamortized excess less beginning unrealized gross profit] plus 10% of the subsidiary's realized net income less 10% of subsidiary dividends).

Common Stock = $515,000 (parent balance only) Retained Earnings, 12/31 = $582,000 (see above) Total Liabilities and Stockholders' Equity = $1,920,000 (summation)

28. (20 Minutes) (Computation of selected consolidation balances as affected by downstream inventory transfers)

5-27

UNREALIZED GROSS PROFIT, 12/31/09: (downstream transfer)Intercompany gross profit ($120,000 – $72,000) .................... $48,000Inventory remaining at year's end ........................................... 30%

Unrealized Intercompany Gross profit, 12/31/09 ......................... $14,400

UNREALIZED GROSS PROFIT, 12/31/10: (downstream transfer)Intercompany gross profit ($250,000 – $200,000) .................. $50,000Inventory remaining at year's end ........................................... 20%

Unrealized intercompany gross profit, 12/31/10 .......................... $10,000

CONSOLIDATED TOTALS Sales = $1,150,000 (add the two book values and eliminate intercompany

sales of $250,000) Cost of goods sold:

Benson's book value ................................................................. $535,000Broadway's book value ............................................................. 400,000Eliminate intercompany transfers ............................................ (250,000)Realized gross profit deferred in 2009 .................................... (14,400)Deferral of 2010 unrealized gross profit .................................. 10,000

Cost of goods sold .............................................................. $680,600 Operating expenses = $210,000 (add the two book values and include

intangible amortization for current year) Dividend income = -0- (intercompany transfer eliminated in consolidation) Noncontrolling interest in consolidated income: (impact of transfers is not

included because they were downstream)Broadway reported income for 2010 .................................. $100,000Intangible amortization......................................................... (10,000 ) Broadway adjusted income.................................................. 90,000 Outside ownership ............................................................... 30 %

Noncontrolling interest in Broadway’s earnings.......... $27,000 Inventory = $988,000 (add the two book values less the $10,000 ending

unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/10 = $385,500

30% beginning $950,000 book value..................................... $285,000Excess January 1 intangible allocation (30% × $295,000)... 88,500Noncontrolling Interest in Broadway’s earnings.................. 27,000Dividends (30% × $50,000)...................................................... (15,000 ) Total noncontrolling interest at 12/31/10............................... $385,500

29. (25 Minutes) (Computation of selected consolidation balances as affected by upstream inventory transfers)

UNREALIZED GROSS PROFIT, 12/31/09: (upstream transfer)

Intercompany gross profit ($120,000 – $72,000) .................... $48,000Inventory remaining at year's end ........................................... 30%

Unrealized intercompany gross profit, 12/31/09 .......................... $14,400

UNREALIZED GROSS PROFIT, 12/31/10: (upstream transfer)Intercompany gross profit ($250,000 – $200,000) .................. $50,000Inventory remaining at year's end ........................................... 20%

Unrealized intercompany gross profit, 12/31/10 .......................... $10,000

CONSOLIDATED TOTALS Sales = $1,150,000 (add the two book values and eliminate the

Intercompany transfer) Cost of goods sold:

Benson's COGS book value ..................................................... $535,000Broadway's COGS book value ................................................. 400,000Eliminate intercompany transfers ............................................ (250,000)Realized gross profit deferred in 2009 .................................... (14,400)Deferral of 2010 unrealized gross profit .................................. 10,000

Consolidated cost of goods sold ....................................... $680,600 Operating expenses = $210,000 (add the two book values and include

intangible amortization for current year) Dividend income = -0- (interco. transfer eliminated in consolidation) Noncontrolling interest in consolidated income: (impact of transfers is

included because they were upstream)Broadway reported income for 2010 ....................................... $100,000

Intangible amortization......................................................... (10,000)2009 gross profit recognized in 2010 ................................. 14,4002010 gross profit deferred ................................................... (10,000)Broadway realized income for 2010.................................... $94,400Outside ownership ............................................................... 30%

Noncontrolling interest ............................................................. $28,320 Inventory = $988,000 (add the two book values and defer the $10,000

ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/10 = $382,500

30% beginning book value less $14,400 unrealized gross profit (30% × $935,600)......................... $280,680Excess intangible allocation (30% × $295,000).................. (88,500)Noncontrolling Interest in Broadway’s earnings............... 28,320Dividends (30% × $50,000)................................................... (15,000 ) Total noncontrolling interest at 12/31/10............................ $382,500

30. (75 Minutes) (Determine consolidated balances after impact of upstream Inventory transfers and downstream transfer of building. Parent uses initial value method.)

PRELIMINARY COMPUTATIONS

5-29

a. Consideration transferred ....................... $657,000Noncontrolling interest fair value............. 73,000Subsidiary fair value at acquisition-date 730,000Book value.................................................. (620,000)Fair value in excess of book value .......... $110,000 Annual Excess

Excess fair value assignments Life Amortizationsto equipment......................................... 20,000 4 yrs. $5,000to liabilities ........................................... 40,000 5 yrs. 8,000to brand names .................................... 50,000 10 yrs. 5,000Totals..................................................... -0- $18,000

Determination of Subsidiary Book Value on 1/1/09Book Value, 1/1/10 (based on stockholders' equity accounts) $700,000Eliminate Net Income – 2009 .................................................... (80,000)Eliminate Dividends – 2009 ...................................................... -0 -

Book Value, 1/1/09 ................................................................ $620,000

Beginning inventory unrealized gross profit, 12/31/09 (Upstream)Ending Inventory ($160,000 × 40%) ......................................... $64,000Markup (given) ........................................................................... 20%Unrealized Intercompany Gross profit, 12/31/09 .................... $12,800

Ending inventory unrealized gross profit, 12/31/10 (Upstream)Ending Inventory ($145,000 × 30%) ......................................... $43,500Markup (given) ........................................................................... 20%Unrealized Intercompany Gross profit, 12/31/10 .................... $8,700

30. (continued)

Building unrealized gross profit, 1/2/09 (Downstream)Transfer Price ............................................................................ $25,000Book Value ................................................................................. 10,000Unrealized Gross profit ............................................................. $15,000

Annual Excess DepreciationAnnual Depreciation Based on Book Value ($10,000/5 years) $2,000Annual Depreciation Based on Transfer Price

($25,000/ 5 years) ................................................................. 5,000Excess Depreciation-Each Year ............................................... $3,000

Adjust to Building to return to historical cost at 1/1/10Consolidation

Transfer Price Historical Cost AdjustmentBuildings $25,000 $100,000 $75,000Accumulated Depreciation

(1/1/09 balance after 1more year of depreciation) 5,000 92,000 87,000

Consolidated Totals Sales and Other Income = $1,240,000 (add the two book values and

eliminate the intercompany transfers) Cost of Goods Sold:

Moore's book value ................................................................... $500,000Kirby's book value ..................................................................... 400,000Eliminate intercompany transfers ............................................ (160,000)Realized gross profit deferred in 2009..................................... (8,700)Deferral of 2010 unrealized gross profit .................................. 12,800Cost of goods sold .................................................................... $744,100

Operating and Interest Expense = $275,000 (add the two book values and include $18,000 amortization for current year but eliminate $3,000 excess depreciation from asset transfer)

Noncontrolling Interest in Subsidiary’s Income = $1,790 (impact of inventory transfers is included because they were upstream but building transfer is omitted because it was downstream)

5-31

30. (continued) initial

Reported income for 2010 ................................................................... $40,000Realized gross profit deferred in 2009 .................................... 8,700Deferral of 2010 unrealized gross profit .................................. (12,800)Realized income of subsidiary ................................................. $35,900Excess fair value amortization.................................................. (18,000 ) Adjusted subsidiary net income............................................... 17,900

Outside Ownership ......................................................................... 10%Noncontrolling Interest ............................................................. $1,790

Consolidated Net Income = $220,900 (consolidated sales less consolidated cost of goods sold, expenses, and noncontrolling interest)

To noncontrolling interest = $1,790 (above) To controlling interest = $219,110

Retained Earnings, 1/1/10 = $1,025,970 (because the parent uses the initial value method, its retained earnings must be adjusted for changes in subsidiary's book value, excess amortizations, and the impact of unrealized gross profits in previous years)

Moore's Reported Balance, 1/1/10 ............................... $990,000Impact of Building Transfer (parent's income was over-

stated by the $15,000 gain but has been reduced byone prior year of excess depreciation) ................... (12,000)

Adjustments to Convert Initial Value to Equity Method:Increase in subsidiary's book value during prior

years ..................................................................... $80,000Excess fair value amortization ................................. (18,000)Deferral of 12/31/09 unrealized gross profit

(subsidiary's prior income was overstated) ...... (8,700)Realized increase in book value ......................... 53,300

Ownership................................................................... 90%Equity Accrual ........................................................... 47,970

Retained Earnings, 1/1/10 ................................... $1,025,970

Dividends Paid = $130,000 (parent balance only)Retained Earnings, 12/31/10 = $1,115,080 (the beginning balance plus controlling

interest share of consolidated net income less dividends paid)Cash and Receivables = $397,000 (add the two book values)Inventory = $371,200 (add the two book values and defer the $12,800 ending

unrealized gross profit)Investment in Kirby = -0- (eliminated for consolidation purposes)

30. (continued)Equipment (Net) = $1,030,000 (add the two book values adjusted for excess

allocation and amortization)Buildings = $1,725,000 (add the two book values and add the $75,000 impact to

return to historical cost as computed above for transfer)Accumulated Depreciation = $384,000 (add the two book values plus adjustment

to historical cost ($87,000 at beginning of year less $3,000 excess depreciation for current year)

Other Assets = $300,000 (add the two book values)Brand Names = $40,000 (the original $50,000 allocation less two years of

amortization at $5,000 per year)Total Assets = $3,479,200 (summation of the consolidated totals)Liabilities = $1,684,000 (add the two book values and subtract the original

allocation [$40,000] after two years of amortization [$8,000 per year])NCI 12/31/10 = $80,120 (10 percent of $691,300 adjusted beginning book value

[$700,000 less $8,700 deferral of unrealized gross profit] plus $9,200 share of beginning unamortized excess fair value allocations plus $1,790 income share)

Common Stock = $600,000 (parent balance only)Retained Earnings, 12/31/10 = $1,115,080 (computed above)Total Liabilities and Equities = $3,479,200 (summation of consolidated balances).

The same consolidation balances can be derived by setting up a worksheet and utilizing the following entries:

CONSOLIDATION ENTRIESEntry *G

Retained Earnings, 1/1/10 (Kirby) ....................... 8,700Cost of Goods Sold ........................................ 8,700

(To recognize 2009 deferred gross profit as income in 2010)

Entry *TABuilding.................................................................. 75,000Retained earnings, 1/1/10 (Moore) ...................... 12,000

Accumulated Depreciation ............................ 87,000(To adjust 1/1/10 balance to historical cost figures)

Entry *CInvestment in Kirby .............................................. 47,970

Retained Earnings, 1/1/10 (Moore) ................ 47,970(To convert from initial value to equity method based on the following computation)

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30. (continued)

Increase in subsidiary's book value during prior years(income of $80,000)........................................ $80,000

Excess amortization for 2009.............................. (18,000)Deferral of 12/31/09 unrealized gross profit....... (8,700)Realized increase in subsidiary's book value.... $53,300Ownership ............................................................ 90%Conversion to equity method adjustment.......... $47,970

S Common Stock (Kirby) ........................................ 150,000Retained Earnings, 1/1/10 as adjusted (Kirby)... 541,300

Investment in Kirby (90%) .............................. 622,170Noncontrolling Interest in Kirby (10%) ......... 69,130

(To eliminate subsidiary's beginning stockholders' equity accounts and recognize beginning noncontrolling interest balance)

A Liabilities .............................................................. 32,000Equipment ............................................................ 15,000Brand Names ........................................................ 45,000

Investment in Kirby ........................................ 82,800Noncontrolling Interest in Kirby (10%) ......... 9,200

(To recognize unamortized balance of excess allocations as of 1/1/10. Figures have been reduced by one year of amortization)

Entry I (the subsidiary paid no dividends so no adjustment needed)

E Operating and interest expense.......................... 18,000Liabilities ......................................................... 8,000Equipment........................................................ 5,000Brand names ................................................... 5,000

(To recognize excess amortization expenses for current year)

Tl Sales ...................................................................... 160,000Cost of Goods Sold ........................................ 160,000

(To eliminate intercompany transfers for 2010)

G Cost of Goods Sold ............................................. 12,800Inventory ......................................................... 12,800

(To defer ending unrealized inventory gross profit)

ED Accumulated Depreciation .................................. 3,000Depreciation Expense .................................... 3,000

(To adjust depreciation for current year created by transfer of building)

31. (55 Minutes) (Investment account balance and consolidated worksheet with downstream inventory transfers when parent uses equity method)

Acquisition-date fair value allocation and excess amortizationsa. Consideration transferred .......................... $372,000

Noncontrolling interest fair value............... 248,000Subsidiary fair value at acquisition-date ... $620,000Book value..................................................... (320,000)Fair value in excess of book value ............. $300,000 Annual Excess

Excess fair value assignments.............. Life Amortizationsto patents................................................. 70,000 10 yrs. $7,000to customer list ....................................... 45,000 15 yrs. 3,000to goodwill ............................................... $185,000 indefinite -0 -

$10,000Determination of Investment in Scott account balanceConsideration transferred ................................................... $372,000

Increase in Scott’s book value 1/1/09 to 12/31/10......... $105,000Excess fair value amortization (2 years)....................... (20,000)Scott’s adjusted book value increase........................... 85,000Woods’ ownership percentage...................................... 60 %

Woods’ share of Scott’s adjusted book value increase.... 51,000 2009 ending inventory profit deferral (100%)..................... (10,000) 2010 beginning inventory profit deferral (100%)................ 10,000 2010 ending inventory profit deferral (100%)..................... (12,000)

Investment account balance 12/31/10................................. $411,000

Intercompany profits (downstream) 2009 2010Intercompany transfers remaining in inventory 50,000 40,000 Gross profit rate* 20% 30%

$10,000 $12,000* (150,000 – 120,000) ÷ 150,000 = 20% (160,000 – 112,000) ÷ 160,000 = 30%

5-35

31. (continued)

Woods Scott Adj. & Elim. NCI ConsolidatedSales (700,000) (335,000) (TI)150,000 (885,000)Cost of goods sold 460,000 205,000 (G) 12,000 (*G) 10,000 517,000

(TI) 150,000 Operating expenses 188,000 70,000 (E) 10,000 268,000 Income of Scott (28,000) (I) 18,000 -0-

(*G) 10,000 Separate company income (80,000) (60,000) Consolidated net income (100,000) to noncontrolling interest (20,000) 20,000 to parent (80,000)

Retained earnings, 1/1 (695,000) (280,000) (S) 280,000 (695,000)Net income (above) (80,000) (60,000) (80,000)Dividends paid 45,000 15,000 (D) 9,000 6,000 45,000 Retained earnings, 12/31 (730,000) (325,000) (730,000)

Cash and receivables 248,000 148,000 396,000 Inventory 233,000 129,000 (G) 12,000 350,000 Investment in Scott 411,000 -0- (D) 9,000 (S) 228,000 -0-

(A)174,000 (I) 18,000

Buildings (net) 308,000 202,000 510,000 Equipment (net) 220,000 86,000 306,000 Patents (net) -0- 20,000 (A) 63,000 (E) 7,000 76,000 Customer list (A) 42,000 (E) 3,000 39,000 Goodwill (A)185,000 185,000 Total assets 1,420,000 585,000 1,862,000

Liabilities (390,000) (160,000) (550,000)Common stock (300,000) (100,000) (S) 100,000 (300,000)Noncontrolling interest 1/1 (S) 152,000

(A)116,000 (268,000)Noncontrolling interest 12/31 282,000 (282,000)Retained earnings, 12/31 (730,000 ) (325,000 ) (730,000 ) Total liabilities and equities (1,420,000) (585,000) 884,000 884,000 (1,862,000)

32. Investment balance and worksheet preparation—upstream sales, equity method

a. 2011 income reported by Sander $230,000Excess patent fair value amortization ($350,000 ÷ 5 years) (70,000)Deferred gross profit for 12/31/11 intercompany inventory (160,000 × 25%) (40,000)Recognized gross profit for 1/1/11 intercompany inventory (125,000 × 28%) 35,000Sander’s income adjusted $155,000 To controlling interest (80%) $124,000 To noncontrolling interest (20%) $31,000

Adjustments

Plymouth Sander & Eliminations NCIConsolidate

dRevenues (1,740,000) (950,000) (TI) 300,000     (2,390,000)

Cost of goods sold 820,000 500,000 (G) 40,000 (TI)300,00

0   1,025,000

     (*G)

35,000    Depreciation expense 104,000 85,000       189,000 Amortization expense 220,000 120,000 (E) 70,000     410,000 Interest expense 20,000 15,000       35,000 Equity earnings—Sander (124,000)   (I) 124,000     0 Separate company income (700,000) (230,000)      Consolidated net income           (731,000) to noncontrolling interest         (31,000) 31,000 to controlling interest (700,000)

Retained Earnings 1/1 (2,800,000) (345,000) (S) 310,000     (2,800,000)    (*G) 35,000      

Net Income (700,000) (230,000)       (700,000)Dividends paid 200,000 25,000   (D) 20,000 5,000 200,000 Retained Earnings 12/31 (3,300,000) (550,000)       (3,300,000)

           Cash 535,000 115,000       650,000 Accounts receivable 575,000 215,000       790,000 Inventory 990,000 800,000   (G) 40,000   1,750,000 Investment in Sander 1,420,000   (D) 20,000 (S)968,000    

      (A)348,000 0       (I) 124,000    

Buildings and Equipment 1,025,000 863,000       1,888,000 Patents 950,000 107,000 (A) 210,000 (E) 70,000 1,197,000 Goodwill     (A) 225,000     225,000 Total Assets 5,495,000 2,100,000       6,500,000

           Accounts Payable (450,000) (200,000)       (650,000)Notes Payable (545,000) (450,000)       (995,000)NCI in Sander 1/1       (S)242,000    

      (A) 87,000 (329,000)  NCI in Sander 12/31       355,000 (355,000)Common Stock (900,000) (800,000) (S) 800,000     (900,000)APIC (300,000) (100,000) (S) 100,000     (300,000)

5-37

Retained Earnings 12/31 (3,300,000) (550,000)       (3,300,000)Total Liab. and SE (5,495,000) (2,100,000) 2,234,000 2,234,000   (6,500,000)

33. (50 Minutes) (Prepare consolidation entries for a combination where upstream inventory transfers have occurred as well as downstream equipment transfers. Parent has applied initial value method)

Consideration transferred ............................... $665,000Noncontrolling interest fair value..................... 285,000Subsidiary fair value at acquisition-date ........ $950,000Book value.......................................................... (800,000)Fair value in excess of book value .................. $150,000 Annual Excess

Excess fair value assignments.................... Life Amortizationsto building..................................................... 50,000 5 yrs. $10,000to franchise agreements ............................. 100,000 10 yrs. 10,000

-0- $20,000Inventory Transfers (Upstream)2010 gross profit deferred until 2011 ($12,000 × 30%)................. $3,6002011 gross profit deferred until 2012 ($18,000 × 30%)................. $5,400Equipment Transfer (Downstream)Unrealized gain as of January 1, 2011:

Unrealized gain on transfer (1/1/10) ......................................... $36,0002010 excess depreciation ($36,000 ÷ 6 yrs.) ........................... (6,000)

Unrealized gain January 1, 2011.................................................... $30,000

Excess depreciation—2011 ($36,000 ÷ 6 yrs.) .............................. $6,000

Entry *GRetained Earnings, 1/1/11 (Young) ..................... 3,600

Cost of Goods Sold ........................................ 3,600To recognize upstream intercompany inventory gross profit deferred from previous year.

Entry *TARetained Earnings, 1/1/11 (Monica) .................. 30,000Equipment ($50,000 – $36,000) ........................... 14,000

Accumulated Depreciation ($50,000 – $6,000) 44,000To return equipment accounts to beginning book value based on historical cost and to remove unrealized gain from beginning retained earnings.

5-39

33. (continued)Entry *C

Investment in Young ...................................... 123,480Retained Earnings, 1/1/11 (Monica) ......... 123,480

Because the parent uses the initial value method, its retained earnings must be adjusted for the subsidiary's increase in book value less excess amortizations and upstream profits during 2009–2010 as follows.

Retained earnings of Young, December 31, 2011 (given) $740,000Eliminate income and dividends of Young

($160,000 – $50,000) ............................................. (110,000)Retained earnings of Young, December 31, 2010 . . 630,000Removal of unrealized gross profit (Entry *G) ....... (3,600)Realized retained earnings of Young,

December 31, 2010................................................ 626,400Retained earnings at date of acquisition ................ (410,000)Increase in retained earnings during 2009–2010.... 216,400Ownership percentage .............................................. 70 % Income accrual to be recognized ............................. 151,480Excess amortization for 2009–2010 ($20,000 × 70%× 2 yrs.) (28,000)ENTRY *C ADJUSTMENT (above) ............................ $123,480

Entry SCommon Stock (Young) ...................................... 300,000Additional Paid-in Capital (Young) ..................... 90,000Retained Earnings, 1/1/11

(Young) (adjusted for *G) ............................... 626,400Investment in Young (70%) ...................... 711,480Noncontrolling Interest in Young (30%) .. 304,920

To eliminate stockholders' equity accounts of subsidiary and recognize noncontrolling interest; amount of retained earnings was previously reduced to realized balance by Entry *G. The $626,400 figure is computed above.

Entry AFranchise Agreement........................................... 80,000Buildings ............................................................... 30,000

Investment in Young ...................................... 77,000Noncontrolling Interest in Young (30%) ....... 33,000

To recognize amount paid within acquisition price for buildings and the franchise agreement. Balances have been reduced by two years of excess amortizations.

33. (continued)

Entry IDividend Income .................................................. 35,000

Dividends Paid ................................................ 35,000To eliminate Intercompany dividend payments recorded by parent as income since initial value method is used.

Entry EDepreciation Expense.......................................... 10,000Amortization Expense ......................................... 10,000

Franchise Agreement ..................................... 10,000Buildings.......................................................... 10,000

To recognize current year excess amortization expense.Entry Tl

Sales ..................................................................... 90,000Cost of Goods Sold (or Purchases) .............. 90,000

To remove intercompany inventory transfers made during the current year.Entry G

Cost of Goods Sold (or Ending Inventory) ........ 5,400Inventory.......................................................... 5,400

To defer unrealized gross profit on 2011 intercompany inventory transfers (computed above).

Entry EDAccumulated Depreciation .................................. 6,000

Depreciation Expense .................................... 6,000To remove current year depreciation on transferred item since its historical cost has been fully depreciated.

Noncontrolling Interest's Share of Subsidiary's Net IncomeReported income of Young (given) .................................... $160,000Excess fair value amortization ............................................ (20,000)Recognition of 2010 unrealized gross profit (Entry *G) . . . 3,600Deferral of 2011 unrealized gross profit (Entry G) (upstream) (5,400)Realized income of Young .................................................. $138,200Outside ownership percentage .......................................... 30%Noncontrolling interest in subsidiary’s income ................ $41,460

5-41

34. (35 Minutes) (Consolidation entries with upstream Inventory transfers and downstream equipment transfers. Parent uses equity method)Entry *G (Same as Entry *G in Problem 33.)Entry *TA

Investment in Young ............................................ 30,000Equipment ............................................................ 14,000

Accumulated Depreciation ............................ 44,000To return equipment account to its book value based on historical cost. Because the parent uses the equity method and the transfer is downstream, the unrealized gain has already been removed from the parent's retained earnings. Thus, the remaining gain is eliminated here from the Investment account rather than from retained earnings.

Entry *C (No Entry *C is needed because equity method has been applied.)Entry S (Same as Entry S in Problem 33.)Entry A (Same as Entry A in Problem 33.)Entry I

Investment Income .............................................. 102,740Investment in Young ...................................... 102,740

To eliminate intercompany income accrual.Reported income of Young (given) ............................................ $160,000Excess fair value amortization .................................................... (20,000)Recognition of 2010 unrealized gross profit (Entry *G) ........... 3,600Deferral of 2011 unrealized gross profit (Entry G) (upstream) (5,400)Realized income of Young .......................................................... $138,200Outside ownership percentage .................................................. 70 % Monica’s share of Young’s realized income.............................. $96,740Depreciation adjustment for asset transfer gain....................... 6,000

Equity accrual for 2011........................................................... $102,740

Entry DInvestment in Young ............................................ 35,000

Dividends Paid ................................................ 35,000To eliminate intercompany dividend transfers.

Entry E (Same as Entry E in Problem 33.)Entry TI (Same as Entry Tl in Problem 33.)Entry G (Same as Entry G in Problem 33.)Entry ED (Same as Entry ED in Problem 33.)Noncontrolling interest in subsidiary’s income (Same as in Problem 33.)

35. (60 Minutes) (Consolidation worksheet for combination with upstream inventory transfers and downstream transfer of land. Also asks about transfer of a building. Parent uses partial equity method.)

Consideration transferred ............................... $570,000Noncontrolling interest fair value..................... 380,000Subsidiary fair value at acquisition-date ........ $950,000Book value.......................................................... (850,000)Fair value in excess of book value .................. $100,000 Annual Excess

Excess fair value assignment ..................... Life Amortizationsto customer list............................................. 100,000 20 yrs. $5,000

-0-a. CONSOLIDATION ENTRIES

Entry *TLRetained Earnings, 1/1/10 (Gibson) .............. 40,000

Land ............................................................ 40,000To remove unrealized gain on Intercompany downstream transfer of land made in 2009.

Entry *GRetained Earnings, 1/1/10 (Keller) ................. 10,000

Cost of Goods Sold ................................... 10,000To defer unrealized upstream Inventory gross profit from 2009 until 2010 computed as the 2009 ending inventory balance of $30,000 (20% × $150,000) multiplied by 33-1/3% markup ($50,000/$150,000).

Entry *CRetained earnings, 1/1/10 (Gibson) .............. 9,000

Investment in Keller .................................. 9,000Parent is applying the partial equity method as can be seen by the amount in the Income of Keller Company account (60 percent of the reported balance). Thus, the parent’s share of amortization of $3,000 ($100,000 divided by 20 years × 60%) must be recognized for the previous year 2009. In addition, the equity accrual recorded by the parent has been based on Keller's reported income. As shown in Entry *G, $10,000 of that reported income has not actually been realized as of January 1, 2010. Thus, the previous accrual must be reduced by $6,000 to mirror the parent's 60% ownership. The total of the two adjustments being made here is $9,000.

5-43

35. (continued)

Entry SCommon Stock (Keller) .................................. 320,000Additional Paid-in Capital .............................. 90,000Retained earnings, 1/1/10 (Keller) (adjusted

for Entry *G) ............................................... 610,000Investment in Keller (60%) .................. 612,000Noncontrolling Interest in Keller, 1/1/10 (40%) 408,000

To remove stockholders' equity accounts of Keller and recognize beginning noncontrolling interest. Retained earnings balance has been adjusted in Entry *G.

Entry ACustomer List................................................... 95,000

Investment in Keller .................................. 57,000Noncontrolling Interest in Keller, 1/1/10 (40%) 38,000

To recognize amount paid within acquisition price for the customer list. Original balance is adjusted for previous year’s amortization.

Entry IIncome of Keller .............................................. 84,000

Investment in Keller .................................. 84,000To eliminate intercompany income accrual.

Entry DInvestment in Keller ....................................... 36,000

Dividends Paid .......................................... 36,000To eliminate intercompany dividend transfers—60% of subsidiary's payment.

Entry EAmortization Expense..................................... 5,000

Customer List ............................................ 5,000To recognize current period excess amortization expense.

Entry PLiabilities.......................................................... 40,000

Accounts Receivable ................................ 40,000To eliminate intercompany debt.

Entry TlSales................................................................. 200,000

Cost of Goods Sold ................................... 200,000To eliminate current year intercompany inventory transfer.

Entry GCost of Goods Sold ........................................ 12,000

Inventory..................................................... 12,000To defer 2010 unrealized inventory gross profit. Unrealized gain is the ending inventory of $40,000 (20% of $200,000) multiplied by 30% markup ($60,000/$200,000).

Noncontrolling Interest in Keller's Net IncomeKeller reported net income ................................. $140,000Excess fair value amortization ........................... (5,000)2009 Intercompany gross profit realized in 2010 (inventory) 10,0002010 Intercompany gross profit deferred (inventory) (12,000)Keller realized income 2010................................. $133,000Outside ownership percentage .......................... 40%

Noncontrolling interest in Keller's net income $53,200

5-45

35. a. (continued) GIBSON AND KELLERConsolidation Worksheet

Year Ending December 31, 2010

Consolidation Entries Noncontrolling Consolidated Accounts Gibson Keller Debit Credit Interest Totals Sales (800,000) (500,000) (TI) 200,000 (1,100,000)Cost of goods sold 500,000 300,000 (G) 12,000 (*G) 10,000 602,000

(TI) 200,000Operating expenses 100,000 60,000 (E) 5,000 165,000Income of Keller (84,000 ) -0- (I) 84,000 -0-Separate company net income (284,000 ) (140,000 ) Consolidated net income (333,000)

To noncontrolling interest (53,200) 53,200To parent (279,800 )

RE, 1/1/10—Gibson (1,116,000) (*TL) 40,000 (1,067,000)(*C) 9,000

RE, 1/1/10—Keller (620,000) (*G) 10,000(S) 610,000

Net income (above) (284,000) (140,000) (279,800)Dividends 115,000 60,000 (D) 36,000 24,000 115,000

Retained earnings, 12/31/10 (1,285,000 ) (700,000 ) (1,231,800 ) Cash 177,000 90,000 267,000Accounts receivable 356,000 410,000 (P) 40,000 726,000Inventory 440,000 320,000 (G) 12,000 748,000Investment in Keller 726,000 (D) 36,000 (*C) 9,000 -0-

(S) 612,000(I) 84,000(A) 57,000

Land 180,000 390,000 (*TL) 40,000 530,000Buildings and equipment (net) 496,000 300,000 796,000Customer List (A) 95,000 (E) 5,000 90,000

Total assets 2,375,000 1,510,000 3,157,000Liabilities (480,000) (400,000) (P) 40,000 (840,000)Common stock (610,000) (320,000) (S) 320,000 (610,000)Additional paid-in capital (90,000) (S) 90,000Retained earnings, 12/31/10 (1,285,000) (700,000) (1,231,800)NCI in Keller, 1/1/10 (S) 408,000 (408,000) (A) 38,000 (38,000)NCI In Keller, 12/31/10 475,200 (475,200 )

Total liabilities and equity (2,375,000 ) (1,510,000 ) (3,157,000 )

35. (continued)

b. If the intercompany transfer had been a building rather than land, two adjustments to the consolidation entries would be needed. Entry *TL would be changed and relabeled as Entry *TA and an Entry ED would be added to eliminate the overstatement of depreciation expense for 2010. All other consolidation entries would be the same as shown in Part a. As a downstream transfer, entries *C and S are not affected.

Entry *TARetained Earnings, 1/1/10 (Gibson) .............. 36,000Buildings ......................................................... 40,000

Accumulated Depreciation ....................... 76,000To eliminate unrealized gain ($40,000 original amount less one year of excess depreciation at $4,000 per year) as of beginning of year. Entry also returns Buildings account to historical cost (from $100,000 to $140,000) and Accumulated Depreciation account to historical cost (original $80,000 less one year of excess depreciation at $4,000). Because the Buildings account is shown at net value in the information given in this problem, the above entry would probably be made as follows:

Entry *TA (Alternative)Retained Earnings, 1/1/10 (Gibson) .............. 36,000

Buildings (net) ........................................... 36,000

Entry EDAccumulated Depreciation ............................ 4,000

Operating (or Depreciation) Expense ...... 4,000To remove excess depreciation for current year created by transfer price. Excess depreciation for each year would be $4,000 based on allocating the $60,000 historical cost book value over 10 years ($6,000 per year) rather than the $100,000 transfer price ($10,000 per year).

5-47

36. (40 Minutes) (Prepare consolidation worksheet with intercompany transfer of inventory and land. No outside ownership exists)

a. Skyline reported income............................................................ $(88,000)Patented technology amortization............................................ 15,000Beginning inventory gross profit recognized.......................... (14,400)Ending inventory gross profit deferred.................................... 14,000Deferral of land gain on sale.................................................... 18,000Equity in Skyline’s earnings...................................................... $(55,400)

b. Acquisition-Date Fair Value AllocationConsideration transferred (fair value of shares issued) ........ $450,000Book value of subsidiary .......................................................... 300,000Fair value in excess of book value .......................................... $150,000Excess fair over book value assigned to:

Trademarks (indefinite life) ................................................... 30,000 Patented technology .............................................................. $120,000 Life of patented technology .................................................. 8 yearsAnnual amortization .................................................................. $15,000

Unrealized Upstream Inventory Gross profit, 1/1Inventory being held ($50,000 × 72%) ..................................... $36,000Markup ($20,000/$50,000) ......................................................... 40%Unrealized gross profit, 1/1 ...................................................... $14,400

Unrealized Upstream Inventory Gross profit, 12/31Inventory being held (given) .................................................... $28,000Markup ($40,000/$80,000) ......................................................... 50%Unrealized gross profit, 12/31................................................... $14,000

CONSOLIDATION ENTRIESEntry *G

Retained earnings 1/1 (Skyline) .......................... 14,400Cost of goods sold ......................................... 14,400

To remove impact of beginning unrealized gross profit. Amount computed above.

Entry SCommon stock (Skyline) ..................................... 120,000Additional paid-in capital (Skyline) .................... 30,000Retained earnings 1/1 (Skyline, adjusted) ......... 277,600

Investment in Skyline...................................... 427,600To remove stockholders' equity accounts of subsidiary. Retained earnings is adjusted for elimination of beginning unrealized gross profit in Entry *G.

36. (continued)

Entry ATrademarks ........................................................... 30,000Patented technology ........................................... 105,000

Investment in Skyline ..................................... 135,000To recognize excess fair value allocations as of 1/1. Patented technology is adjusted for 4 prior years of amortization at $15,000 per year.

Entry IInvestment income .............................................. 55,400

Investment in Skyline ..................................... 55,400To remove intercompany income accrued by parent using the equity method.

Entry DInvestment in Skyline .......................................... 20,000

Dividends distributed ..................................... 20,000To eliminate Intercompany dividend payments.

Entry EOther operating expenses.................................... 15,000

Patented technology ...................................... 15,000To recognize current year amortization expense on patented technology

Entry TlRevenues .............................................................. 80,000

Cost of goods sold ......................................... 80,000To eliminate intercompany inventory transfer for current year.

Entry GCost of goods sold .............................................. 14,000

Inventory.......................................................... 14,000To defer unrealized inventory gross profit. Amount is computed above.

Entry TLGain on sale of land ............................................. 18,000

Land ................................................................. 18,000To remove gain from intercompany transfer of land during current year.

Entry PAccounts payable ................................................ 65,000

Accounts receivable........................................ 65,000To remove intercompany payable and receivable.

5-49

36. (continued) PARKWAY AND SKYLINEConsolidation Worksheet

Year Ending December 31, 2010

Consolidation Entries Consolidated Accounts Parkway Skyline Debit Credit Totals Revenues (627,000) (358,000) (TI) 80,000 (905,000)Cost of goods sold 289,000 195,000 (G) 14,000 (TI) 80,000

(*G) 14,400 403,600Other operation expenses 170,000 75,000 (E) 15,000 260,000Gain on sale of land (18,000) (TL) 18,000 -0-Investment income (55,400) (I) 55,400 -0-

Net income (241,400) (88,000) (241,400)

Retained earnings 1/1 (314,600) (292,000) (*G) 14,400 (314,600)(S) 277,600 -0-

Net income (above) (241,400) (88,000) (241,400)Dividends distributed 70,000 20,000 (D) 20,000 70,000

Retained earnings 12/31 (486,000) (360,000) (486,000)Cash and receivables 134,000 150,000 (P) 65,000 219,000Inventory 281,000 112,000 (G) 14,000 379,000Investment in Skyline 598,000 (D) 20,000 (S) 427,600

(A) 135,000 -0-(I) 55,400

Trademarks 50,000 (A) 30,000 80,000Patented technology 130,000 (A) 105,000 (E) 15,000 220,000Land, buildings, and equipment (net) 637,000 283,000 (TL) 18,000 902,000

Total assets 1,650,000 725,000 1,800,000

Liabilities (463,000) (215,000) (P) 65,000 (613,000)Common stock (410,000) (120,000) (S) 120,000 (410,000)Additional paid-in capital (291,000) (30,000) (S) 30,000 (291,000)Retained earnings (above) (486,000) (360,000 ) (486,000 ) Total liabilities & stockholders’ equity (1,650,000) (725,000) (1,800,000)