ISMChap005

Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions

CHAPTER 5

CONSOLIDATED FINANCIAL STATEMENTS—INTRA-ENTITY ASSET TRANSACTIONS

Chapter Outline

I. The transfer of assets between the companies forming a business combination is a common practice. The opportunity for such direct acquisition (especially of inventory) is often the underlying motive for the creation of the combination.

II. Intra-entity inventory transfers

A. The individual accounting systems of the two companies will record the transfer as a sale by one party and as a purchase by the other

B. Because the transaction was not made with an outside, unrelated party, the sales and purchases balances created by the transfer are eliminated in consolidation (Entry Tl)

C. Any transferred inventory retained at the end of the year is recorded at its transfer price which in (many cases) will include an unrealized gross profit

1. For consolidation purposes, this intra-entity gross profit must be deferred by eliminating the amount from the inventory account on the balance sheet and from the ending inventory figure within cost of goods sold (Entry G).

2. Because transfer effects carry over to the subsequent fiscal period, the unrealized gross profit must also be removed a second time: from the beginning inventory component of cost of goods sold and from the beginning retained earnings balance (Entry *G).

a. The retained earnings figure being adjusted is that of the original seller.

b. If the equity method has been applied and the transfer was made downstream (by the parent), the beginning retained earnings account will be correct; therefore, in this one case, the adjustment is to the Investment in Subsidiary account.

3. The consolidation process is designed to shift the profit from the period of transfer into the time period in which the goods are actually sold to unrelated parties or consumed

D. Effect of deferral process on the valuation of a noncontrolling interest

1. Official accounting pronouncements permit but do not require deferral of unrealized profits on the valuation of noncontrolling interest balances

2. This textbook adjusts the noncontrolling interest balances but only if the sale was made upstream from subsidiary to parent. Downstream sales are made by the parent and, thus, are viewed as having no effect on the outside interest.

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III. Intra-entity land transfers

A. Any gain created by intra-entity land transfers is unrealized and will remain so until the land is sold to an outside party

B. For each subsequent consolidation, the recorded value of the land account is reduced to original cost. The unrealized gain recorded by the seller must also be removed and deferred until the land is sold to an outsider.

1. In the year of transfer, an actual gain account exists within the accounting records of the seller and must be removed.

2. In all later time periods, since the unrealized gain has become an element of the seller's beginning retained earnings balance, the reduction is made to this equity account.

3. If the land is ever sold to an outside party, the intra-entity gain is realized and has to be recognized within that time period.

IV. Intra-entity transfer of depreciable assets

A. As with other intra-entity transfers, any unrealized gross profit must be deferred for consolidation purposes to establish appropriate historical cost balances.

B. However, the difference between the transfer-based accounting value and the historical cost of the asset will change each year because of the effects of depreciation. The amount of unrealized gain within retained earnings will also be reduced annually since excess depreciation expense is recognized (and closed into retained earnings) based on the inflated transfer price.

C. Consequently, elimination of the unrealized gain (within retained earnings) and the reduction of the asset value to historical cost will differ from year to year.

D. Also within the consolidation process, the recorded depreciation expense must be decreased every period to an amount appropriately based on the asset's original acquisition price.

Answers to Discussion Questions

Earnings Management: By selling goods to special purpose entities that it controlled but did not consolidate, did Enron overstate its earnings?

According to the Power’s Report (Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp.—February 1, 2004)

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These partnerships—Chewco, LJM1, and LJM2—were used by Enron Management to enter into transactions that it could not, or would not, do with unrelated commercial entities. Many of the most significant transactions apparently were designed to accomplish favorable financial statement results,

not to achieve bona fide economic objectives or to transfer risk. (page 4)

Assuming Enron controlled LJM2, the transactions that produced the $67 million gain and the $20.3 million agency fee were not arm’s length and thus did not provide a proper basis for recognizing income.

What effect does consolidation have on the financial reporting for transactions with controlled entities?

In consolidation, all intra-entity profit would have been deferred until the goods were sold to an outside party. Also the intra-entity note receivable and payable would have been eliminated in consolidation.

As noted by Bala Dahran in his February 6, Congressional Testimony

Despite their potential for economic and business benefits, the use of SPEs has always raised the question of whether the sponsoring company has some other accounting motivations, such as hiding of debt, hiding of poor-performing assets, or earnings management. Additionally, explosive growth in the use of SPEs led to debates among managers, auditors and accounting standard setters as to whether and when SPEs should be consolidated. This is because the intended accounting effects of SPEs can only be achieved if the SPEs are reported as unconsolidated entities separate from the sponsoring entity.

FASB Activity on Variable Interest Entities (VIEs)

Fortunately the FASB’s ASC Topic 810 explains how to identify an SPE (a type of entity that is often a VIE) that is not subject to control through voting ownership interests, but is nonetheless controlled by another enterprise and therefore subject to consolidation. The entity that controls the SPE is then required to include the assets, liabilities, and results of the activities of the SPE in its consolidated financial statements.

What Price Should We Charge Ourselves?

Transfer pricing is actually a topic for a managerial accounting discussion. Students, though, need to be aware that managerial and financial accounting do overlap at times. In this illustration, the price set by company officials for this component will affect the specific consolidation procedures needed in the preparation of financial statements for external reporting purposes.

Since Slagle owns 100 percent of Harrison's common stock, consolidated net income will not be altered by the transfer pricing decision. All intra-entity transactions as well as unrealized profits will be removed entirely. However, because the sales are upstream, if a noncontrolling interest had been present, the portion of the subsidiary's net income attributed to these outside owners would be influenced by the

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markup. Both the noncontrolling interest figure on the balance sheet and on the income statement are impacted by the amount of profits that remain unrealized when transactions are from subsidiary to parent.

To the accountant, the easiest approach is to set the transfer price at the seller's cost ($70.00 in this case). No intra-entity profits are created and the consolidation process is less complicated. However, as indicated in the narrative, that price may penalize the seller since no profits are recognized by that profit center. In addition, the buyer will then show artificially inflated income. Thus, some amount of profit is usually built into transfer pricing decisions. Those students who have already completed cost/managerial accounting can be asked to describe the various factors that should influence the establishment of this price. Interaction between accounting courses is beneficial to the students.

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Answers to Questions

1. One reason for the significant volume and frequency of intra-entity 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 gross profit rate, the $100,000 was simply an intra-entity 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) $ 300

Number of units in Safeco’s ending inventory × 500

Intra-entity inventory at transfer price $150,000

Gross profit rate (0.6 ÷ 1.6) .375

Intra-entity profit in ending inventory $ 56,250

4. In intra-entity 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 deferred whenever consolidated financial statements are prepared. 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 realized gross profit must be recognized within the consolidation process. Reductions are made on the worksheet to the beginning inventory component of cost of goods sold and to the beginning retained earnings balance of the original seller. The gross profit is thus taken out of last year’s earnings (retained earnings) and recognized in the current year through the reduction of cost of goods sold. If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year is made to the Investment in Subsidiary 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.

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6. Currently accounting pronouncement allow discretion regarding the effect of unrealized intra-entity profits and noncontrolling interest values. This textbook reasons that unrealized profits relate to the seller and to the computation of the seller's income. Therefore, any unrealized 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 intra-entity profits are considered in 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. Consolidated financial statements are largely unchanged across downstream versus upstream transfers. Sales and purchases (Inventory) balances created by the transactions are eliminated in total. Any unrealized gross profits remaining at the end of a fiscal period get deferred until ultimately earned through sale or consumption of the assets.

The direction of intra-entity 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 depends on the direction of the intra-entity transfers which is not indicated in the question. If the unrealized gross profits were created by downstream sales from King to Pawn, they relate only to King. The net income attributable to

the noncontrolling interest 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" net income would be $80,000 and the noncontrolling interest's share of consolidated net income is reported as $8,000:

Pawn's reported net income .......................................... $110,000

Recognition of prior year unrealized gross profit ........... 30,000

Deferral of current year unrealized gross profit ............. (60,000)

Pawn's realized net income ........................................... $ 80,000

Outside ownership percentage ...................................... 10%

Net income attributable to noncontrolling interest.......... $ 8,000

9. The deferral and subsequent recognition of intra-entity 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. Intra-entity profits are not really eliminated, but simply deferred until a sale to an outsider takes place.

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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 intra-entity 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 deferred 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 intra-entity 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 intra-entity gross profit, the realized net income balances applicable to the subsidiary will be less than the reported values. In the year of resale, however, the realized net 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 intra-entity transfer and must be deferred in the preparation of consolidated financial statements. 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 remaining life of the asset.

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Answers to Problems

1. D

2. B Merchandise remaining in James’s inventory $250,000 × 40% = $100,000.

Unrealized gross profit (based on subsidiary's gross profit rate as the seller) $100,000 × 30% = $30,000. James’s ownership percentage of Carl has no impact on this computation.

3. A

4. D UNREALIZED GROSS PROFIT, 12/31/14

Intra-entity gross profit ($200,000 – $160,000) ............................. $40,000

Inventory remaining at year's end ................................................. 18%

Unrealized intra-entity gross profit, 12/31/14 ................................ $ 7,200

UNREALIZED GROSS PROFIT, 12/31/15



Unrealized intra-entity gross profit, 12/31/15 ................................ $15,750

CONSOLIDATED COST OF GOODS SOLD

Parent balance ........................................................................... $607,500

Subsidiary balance .................................................................... 450,000

Remove intra-entity transfer ..................................................... (350,000)

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Recognize 2014 deferred gross profit ..................................... (7,200)

Defer 2015 unrealized gross profit ........................................... 15,750

Cost of goods sold .......................................................................... $716,050

5. A Intra-entity 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 gross profit rate 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 gross profit rate 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).

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7. B UNREALIZED GROSS PROFIT, 12/31/14

Ending inventory ....................................................................... $40,000

Gross profit rate ($33,000 ÷ $110,000) ..................................... 30%

Unrealized intra-entity gross profit, 12/31/14 .......................... $12,000

UNREALIZED GROSS PROFIT, 12/31/15

Ending inventory ....................................................................... $50,000

Gross profit rate ($48,000 ÷ $120,000) ..................................... 40 %


NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

Reported net income for 2015 .................................................. $90,000

Realized gross profit deferred in 2014 ..................................... 12,000

Deferral of 2015 unrealized gross profit .................................. (20,000)

Realized net income of subsidiary ........................................... $82,000

Outside ownership .................................................................... 10 %

Noncontrolling interest ............................................................. $ 8,200

8. A Individual records after transfer:

12/31/14

Machinery = $40,000

Gain = $10,000

Depreciation expense $8,000 ($40,000 ÷ 5 years)

Net effect on income = $2,000 ($10,000 – $8,000)

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12/31/15

Depreciation expense = $8,000

Consolidated figures—historical cost:

12/31/14

Machinery = $30,000

Depreciation expense = $6,000 ($30,000 ÷ 5 years)

12/31/15


Adjustments for consolidation purposes:

2014: $2,000 income is reduced to a $6,000 expense (net income is reduced

by $8,000)

2015: $8,000 expense is reduced to a $6,000 expense (net income is increased

by $2,000)

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9. D UNREALIZED GAIN

Transfer price ............................................................................. $430,400

Book value (original cost less two years depreciation) ......... 368,000

Unrealized gain........................................................................... $ 62,400

EXCESS DEPRECIATION

Annual depreciation based on cost ($460,000 ÷ 10 years).. . . $46,000

Annual depreciation based on transfer price

($430,400 ÷ 8 years) .............................................................. 53,800

Excess depreciation .................................................................. $ 7,800

ADJUSTMENTS TO CONSOLIDATED NET INCOME

Defer unrealized gain ................................................................ $(62,400)

Remove excess depreciation ................................................... 7,800

Net reduction in consolidated net income .............................. $(54,600)

10.D Add the two book values and remove $100,000 intra-entity transfers.

11.C Intra-entity gross profit ($100,000 - $80,000) ................................ $20,000


Unrealized intra-entity gross profit ............................................... $12,000

CONSOLIDATED COST OF GOODS SOLD

Parent balance ........................................................................... $140,000

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Subsidiary balance .................................................................... 80,000

Remove intra-entity transfer ..................................................... (100,000)

Defer unrealized gross profit (above) ...................................... 12,000

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

12.C Consideration transferred ............................. $260,000

Noncontrolling interest fair value................... 65,000

Suarez total fair value...................................... $325,000

Book value of net assets................................. (250,000)

Excess fair over book value $ 75,000

Remaining Annual Excess

Excess fair value to undervalued assets: Life Amortizations

Equipment................................................... $25,000 5 years $5,000

Secret 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)

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

Excess fair value allocation (20%× $75,000) 15,000

20% share of Suarez net income

adjusted for amortization (20% × [110,000 – 7,500]) 20,500

Ending noncontrolling interest balance $85,500

14. C Add the two book values plus the $25,000 original allocation 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.

Combined pre-consolidation inventory balances......................... $260,000

Intra-entity gross profit ($100,000 – $80,000) ................... $20,000

Inventory remaining at year's end ..................................... 60%

Unrealized intra-entity gross profit, 12/31 .................................... 12,000

Consolidated total for inventory..................................................... $248,000

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

Customer list amortization = $78,000 ÷ 4 years = $19,500 per year


Inventory remaining at year end..................................................... 10%

Unrealized intra-entity gross profit, 12/31 .................................... $ 5,000

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CONSOLIDATED TOTALS

Inventory = $795,000 (add the two book values and subtract the ending unrealized gross profit of $5,000)

Sales = $1,620,000 (add the two book values and subtract the $180,000 intra-entity transfer)

Cost of goods sold = $725,000 (add the two book values and subtract the intra-entity transfer and add [to defer] ending unrealized gross profit)

Operating expenses = $549,500 (add the two book values and the amortization expense for the period)

Barone’s net income............................................................ $100,000

Intra-entity gross profit deferral......................................... (5,000)

Excess fair value amortization............................................ (19,500)

Adjusted subsidiary net income......................................... $75,500

Noncontrolling interest percentage................................... 10%

Net income attributable to noncontrolling interest........ $ 7,550

Gross profit deferral is allocated to the noncontrolling interest because the transfer was upstream from Barone to Allister.

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

Consideration transferred by Corgan $980,000

Noncontrolling interest fair value 245,000

Smashing’s acquisition-date fair value 1,225,000

Book value of subsidiary 950,000

Excess fair over book value 275,000

Excess assigned to covenants 275,000

Remaining useful life in years ÷ 20

Annual amortization $13,750

2014 Ending Inventory Profit Deferral

Cost = $100,000 ÷ 1.6 = $62,500

Intra-entity gross profit = $100,000 – $62,500 = $37,500

Ending inventory gross profit = $37,500 × 40% = $15,000

2015 Ending Inventory Profit Deferral

Cost = $120,000 ÷ 1.6 = $75,000

Intra-entity gross profit = $120,000 – $75,000 = $45,000

Ending inventory gross profit = $45,000 40% = $18,000

a. Investment account:

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Consideration transferred, January 1, 2014 $980,000

Smashing’s 2014 net income × 80% $120,000

Covenant amortization (13,750 × 80%) (11,000)

Ending inventory profit deferral (100%) (15,000)Equity in Smashing’s earnings 94,0002014 dividends (28,000)

Investment balance 12/31/14 $1,046,000

Smashing’s 2015 net income × 80% $104,000

Covenants amortization (13,750 × 80%) (11,000)

Beginning inventory profit recognition 15,000

Ending inventory profit deferral (100%) (18,000)

Equity in Smashing’s earnings 90,0002015 dividends (36,000)

Investment balance 12/31/15 $1,100,000

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17. (continued)

b. 12/31/15 Worksheet Adjustments

*G Investment in Smashing 15,000

Cost of goods sold 15,000

S Common stock—Smashing 700,000

Retained earnings—Smashing 365,000

Investment in Smashing 852,000Noncontrolling interest 213,000

A Covenants 261,250

Investment in Smashing 209,000

Noncontrolling interest 52,250

I Equity in earnings of Smashing 90,000

Investment in Smashing 90,000

D Investment in Smashing 36,000

Dividends declared 36,000

E Amortization expense 13,750

Covenants 13,750

TI Sales 120,000

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Cost of goods sold 120,000

G Cost of goods sold 18,000

Inventory 18,000

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

a. Placid Lake's 2015 net income before effect from Scenic...... $300,000

Scenic's reported net income 2015 .......................................... 110,000

Amortization expense (given) .................................................. (5,000)

Realization of 2014 intra-entity gross profit (see below) ...... 7,200

Deferral of 2015 intra-entity gross profit (see below) ............. (16,200)

Consolidated net income........................................................... $396,000

2014 Unrealized gross profit to be recognized in 2015:

Intra-entity gross profit on transfers ($90,000 – $54,000) ...... $36,000

Inventory retained at end of 2014 ............................................. 20%

Unrealized gross profit—12/31/14 ....................................... $ 7,200

2015 Unrealized gross profit deferred:

Intra-entity gross profit on transfers ($120,000 – $66,000) .... $54,000

Inventory retained at end of 2015 ............................................. 30%

Unrealized gross profit—12/31/15........................................ $16,200

b. Noncontrolling interest's share of consolidated net income

(upstream sales):

Scenic's reported net income 2015........................................... $110,000

Amortization of excess fair value to intangibles..................... (5,000)

2014 gross profit realized in 2015 (upstream sales) ............... 7,200

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2015 gross profit deferred (upstream sales) ........................... (16,200)

Scenic's realized net income .................................................... $96,000

Noncontrolling interest ownership .......................................... 20%

Noncontrolling interest share of consolidated net income.... $19,200

Placid Lake’s net income from own operations....................... $300,000

Placid Lake’s share of Scenic’s adjusted NI (80%× $96,000).... 76,800

Placid Lake’s share of consolidated net income .................... $376,800

c. Noncontrolling interest's share of consolidated net income (downstream sales): Downstream transfers do not affect the noncontrolling interest.

Scenic's reported net income 2015 after amortization............ $105,000

Noncontrolling interest ownership .......................................... 20%

Noncontrolling interest share of consolidated net income . . . $21,000

Placid Lake’s net income from own operations....................... $300,000

Placid Lake’s share of Scenic’s adjusted NI (80% × $105,000). 84,000

Realization of 2014 intra-entity gross profit (see part a.) ...... 7,200

Deferral of 2015 intra-entity gross profit (see part a.) ............ (16,200)

Placid Lake’s share of consolidated net income .................... $375,000

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18. (continued)

d. Inventory—Placid Lake book value ......................................... $140,000

Inventory—Scenic book value .................................................. 90,000

Unrealized gross profit, 12/31/15 (see part a) .......................... (16,200)

Consolidated inventory ............................................................. $213,800

(Direction of transfer has no impact here)

e. Land—Placid Lake’s book value .............................................. $600,000

Land—Scenic's book value ...................................................... 200,000

Elimination of unrealized intra-entity gain on land ................. (20,000)

Consolidated land balance ....................................................... $780,000

f. The intra-entity transfer was upstream from Scenic to Placid Lake. Because the transfer occurred in 2014, beginning retained earnings of the seller for 2015 contains the remaining portion of the unrealized gain.

Transfer pricing figures:

2014 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

2015 Depreciation expense = $16,000


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Historical cost figures:

2014 Equipment = $100,000


Accumulated depreciation = $52,000 ($40,000 + $12,000)

2015 Depreciation expense = $12,000


CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT

ENTRY *TA

Retained earnings, 1/1/15 (Scenic) ........................... 16,000

Equipment ($100,000 – $80,000) ............................... 20,000

Accumulated depreciation ($52,000 – $16,000). . 36,000

To change beginning of year figures to historical cost by removing impact of 2014 transactions. Retained earnings reduction removes $4,000 income effect (above) and replaces it with $12,000 depreciation expense for 2014.

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18. (continued)

ENTRY ED

Accumulated depreciation ........................................ 4,000

Depreciation expense .......................................... 4,000

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

This intra-entity transfer was upstream from Scenic to Placid Lake. Thus, income effects are assumed to relate to the original seller (Scenic). Because the sale occurred in 2014, the only effect in 2015 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 Scenic and the noncontrolling interest computations.

Transfer price depreciation: $80,000 ÷ 5 yrs. = $16,000

Historical cost depreciation (based on book value): $60,000 ÷ 5 yrs. = $12,000

Net income attributable to noncontrolling interest

Scenic's reported net income less excess amortization ......... $105,000

Reduction of depreciation expense to historical cost figure.. 4,000

Scenic's realized net income ..................................................... $109,000

Outside ownership percentage .................................................. 20%

Net income attributable to noncontrolling interest ............ $ 21,800

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

a. Conversion from Markup on Cost to Gross Profit Rate

Markup (given as a percentage of cost) .................................. 25 %

Convert to gross profit rate [.25 (1.00 + 0.25)]...................... 20 %

Noncontrolling Interest's Share of Consolidated Net Income

Reported net income of subsidiary—2015............................... $160,000

2014 intra-entity gross profit realized in 2015

($250,000 × 30% × 20%) ......................................................... 15,000

2015 intra-entity gross profit deferred

($300,000 × 30% × 20%) ......................................................... (18,000)

Realized net income of subsidiary—2015 .......................... $157,000

Outside ownership .................................................................... 40%

Noncontrolling interest's share of consolidated net income $ 62,800

b. Entry *G

Retained earnings, Jan. 1 (subsidiary) ......... 15,000

Cost of goods sold .................................... 15,000

To remove intra-entity gross profit from previous year so that it can be recognized in current year.

Entry Tl

Sales................................................................. 300,000

5-26




To eliminate intra-entity inventory sale and purchase.

Entry G

Cost of goods sold ......................................... 18,000

Inventory .................................................... 18,000

To remove effects of current year unrealized gross profit.

5-27



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

a. Consolidated Cost of Goods Sold

Protrade’s cost of goods sold .................................................. $410,000

Seacraft’s cost of goods sold ................................................... 317,000

Elimination of 2015 intra-entity transfers ................................ (134,000)

Realized gross profit deferred in 2014

(2015 beginning inventory)

$52,000 transfer price ÷ 1.6 = $32,500 cost

$52,000 – $32,500 = $19,500 unrealized gross profit....... (19,500)

Deferral of 2015 unrealized gross profit

in ending inventory:


$66,000 – $41,250 = $24,750 unrealized gross profit....... 24,750

Consolidated cost of goods sold ............................................. $598,250

Consolidated Inventory

Protrade book value ............................................................. $370,000

Seacraft book value ............................................................. 144,000

Defer ending unrealized gross profit (see above) ............ (24,750)

Consolidated Inventory ....................................................... $489,250

Net income attributable to noncontrolling interest:

5-28



Because all intra-entity sales were downstream, the deferrals do not affect Seacraft. Thus, the noncontrolling interest share is 20% of the $154,000 reported net income (revenues minus cost of goods sold and expenses) or $30,800.

b. Consolidated Cost of Goods Sold

Protrade book value .................................................................. $410,000

Seacraft book value ................................................................... 317,000

Elimination of 2015 intra-entity transfers ................................ (104,000)

Realized gross profit deferred in 2014

(2015 beginning inventory)


$45,000 – $28,125 = $16,875 unrealized gross profit ......... (16,875)

Deferral of 2015 unrealized gross profit

in ending inventory:


$59,000 – $36,875 = $22,125 unrealized gross profit ......... 22,125

Consolidated cost of goods sold ............................................. $628,250

5-29



20. b. (continued)

Consolidated inventory

Protrade book value .................................................................. $370,000

Seacraft book value ................................................................... 144,000

Defer ending unrealized gross profit (see above) .................. (22,125)

Consolidated inventory ............................................................. $491,875


Since all intra-entity sales are upstream, the effect on Seacraft's net income must be reflected in the noncontrolling interest computation:

Seacraft reported net income ................................................... $154,000

2014 unrealized gross profit realized in 2015 (above) ............ 16,875

2015 unrealized gross profit deferred until 2016 (above) ...... (22,125)

Seacraft realized net income .................................................... $148,750

Outside ownership percentage ................................................ 20%

Net income attributable to noncontrolling interest................. $ 29,750

c. Consolidated buildings (net):

Protrade’s buildings ............................................... $382,000

Seacraft's buildings ................................................ 181,000

Remove write-up created by transfer

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($128,000 – $74,000) .......................................... $(54,000)

Remove excess depreciation created by transfer

($54,000 unrealized gain ÷ 5-year

remaining life × 2 years) ................................... 21,600 (32,400)

Consolidated buildings (net) ................................. $530,600

Consolidated expenses:

Protrade’s book value ............................................ $174,000

Seacraft's book value ............................................. 129,000

Remove excess depreciation on transferred building

($54,000 unrealized gain ÷ 5 year remaining life) (10,800)

Consolidated expenses .......................................... $292,200


Because the transfer was made downstream, it has no effect on the noncontrolling interest. Thus, Seacraft's reported net income ($154,000 computed as revenues minus cost of goods sold and expenses) is used for this computation. The 20 percent outside ownership will be allotted consolidated net income of $30,800 (20% × $154,000).

5-31



21. (15 Minutes) (Prepare consolidated income statement with a wholly-owned subsidiary, includes transfers)

a. In this business combination, the direction of the intra-entity 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 2015 consolidation, the following worksheet entries would affect income statement balances:

Entry *G

Retained earnings, 1/1/15 (seller) ....... 17,500

Cost of goods sold ......................... 17,500

To remove 2014 unrealized gross profit from beginning account balances. Gross profit is the 25% gross profit rate ($80,000 ÷ $320,000) multiplied by remaining inventory ($70,000).

Entry E

Amortization expense........................... 15,000

Patented technology ...................... 15,000

To recognize excess amortization expense for the current period.

Entry Tl

Sales....................................................... 320,000

Cost of goods sold ......................... 320,000

To eliminate intra-entity transfers of inventory during 2015.

Entry G

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Cost of goods sold ............................... 12,500

Inventory ......................................... 12,500

To remove 2015 unrealized gross profit from ending account balances. Gross profit is the 25% gross profit rate ($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 SUBSIDIARY

Income Statement

Year Ending December 31, 2015

Sales ..................................................................................... $1,380,000

Cost of goods sold ............................................................... 575,000

Gross profit ..................................................................... 805,000

Operating expenses ............................................................. 635,000

Consolidated net income ............................................... $170,000

5-33



22. (60 minutes) (Downstream intra-entity asset transfer when parent uses equity method and when a noncontrolling interest is present)

a. Investment account:Consideration paid (fair value) 1/1/14 $810,000

Netspeed’s reported net income for 2014 $80,000

Database amortization (12,000)

Netspeed’s adjusted net income $68,000

Quickport's ownership percentage 90 %

Quickport's share of Netspeed’s net income $61,200

Gain on equipment transfer deferral (3,000)

Depreciation adjustment (6 months) 500

Equity in earnings of Netspeed Company, $58,700

Quickport’s share of Netspeed’s dividends (90%) (7,200)

Balance 12/31/14 $861,500

Netspeed’s reported net income for 2015 $115,000

Database amortization (12,000)

Netspeed’s adjusted 2015 net income $103,000

Quickport's ownership percentage 90 %

Quickport's share of Netspeed net income $ 92,700

Depreciation adjustment 1,000

Equity in earnings of Netspeed Company, 2015 $93,700

Quickport’s share of Netspeed’s dividends, 2015 (90%) (7,200)

Balance 12/31/15 $948,000

b. 12/31/15 Worksheet Adjustments

5-34



*TA Equipment 6,000

Investment in Netspeed 2,500

Accumulated depreciation 8,500

To transfer the unrealized intra-entity equipment reduction (as of Jan. 1, 2015) from the Investment account to the equipment and A.D. accounts.

S Common stock—Netspeed 800,000

Retained earnings—Netspeed 112,000



A Database 48,000Investment in Netspeed 43,200


I Equity in earnings of Netspeed 93,700


D Investment in Netspeed 7,200

Dividends declared 7,200

5-35



22. (continued)


Database 12,000

ED Accumulated depreciation 1,000

Depreciation expense 1,000

23. (20 Minutes) (Consolidation entries for intra-entity equipment transfer.)

INDIVIDUAL RECORDS BASED ON TRANSFER PRICE

12/31/13 Equipment = $95,000

Gain on transfer = $45,000 ($95,000 – $50,000)



12/31/14 Depreciation expense $19,000

Accumulated depreciation = $38,000 (2 years)

12/31/15 Effect on retained earnings, 1/1/15 = $7,000 credit balance (gain less two years depreciation)


Accumulated depreciation = $57,000 (3 years)

CONSOLIDATED REPORTING BASED ON HISTORICAL COST

12/31/13 Equipment = $130,000



12/31/14 Depreciation expense = $10,000

5-36




12/31/15 Effect on retained earnings, 1/1/15 = ($20,000) (two years depreciation)



Entry *TA Retained earnings, 1/1/15 (Padre) ........................................ 27,000

Equipment ($130,000 – $95,000) ..................................... 35,000

Accumulated depreciation ($100,000 – $38,000) ........... 62,000

To adjust to beginning-of-year balances for consolidated entity. Retained earnings adjustment reduces $7,000 credit balance to $20,000 debit balance as computed above.

Entry ED Accumulated depreciation..................................................... 9,000

Depreciation expense ................................................. 9,000

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

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

a. Net income—Ackerman ............................................................ $300,000

Net income—Brannigan............................................................. 98,000

Excess amortization for unpatented technology..................... (4,000)

Remove unrealized gain on equipment ................................... (90,000)

($200,000 – $110,000)

Remove excess depreciation created by

5-37



inflated transfer price ($90,000 ÷ 5) .................................... 18,000

Consolidated net income .......................................................... $322,000

b. Net income calculated in (part a.) ............................................ $322,000


Net income—Brannigan ......................................... $98,000

Excess amortization ............................................... (4,000)

Adjusted net income ............................................... $94,000

NI attributable to the noncontrolling interest ....................... 10% (9,400 )

Consolidated net income to parent company.......................... $312,600

c. Net income calculated in (part a.) ............................................ $322,000

NI attributable to noncontrolling interest (see Schedule 1). (2,200)

Consolidated net income to parent company.......................... $319,800

Schedule 1: Net income attributable to noncontrolling interest (includes upstream transfer)

Reported subsidiary net income............................................... $98,000

Excess amortization................................................................... (4,000)

Defer unrealized gain on equipment transfer .......................... (90,000)

Eliminate excess depreciation ($90,000 ÷ 5) ........................... 18,000

Brannigan's realized net income .............................................. $22,000

5-38



Outside ownership .................................................................... 10 %

Net income attributable to noncontrolling interest ........... $ 2,200

d. Net income 2016—Ackerman ................................................... 320,000

Net income 2016—Brannigan ................................................... 108,000

Excess amortization................................................................... (4,000)

Eliminate excess depreciation stemming from transfer

($90,000 ÷ 5) (year after transfer) ........................................ 18,000

Consolidated net income ................................................. $442,000

5-39



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

Excess Amortization Expenses

Equipment $60,000 ÷ 10 years = $ 6,000 per year

Franchises $80,000 ÷ 20 years = 4,000 per year

Annual excess amortizations $10,000

Unrealized Gross Profit—Inventory, 1/1/15:

Gross profit ($70,000 – $49,000) ............................................... $21,000

Gross profit rate ($21,000 ÷ $70,000) ....................................... 30%

Remaining inventory ................................................................. $30,000

Gross profit rate ......................................................................... 30%

Unrealized gross profit, 1/1/15................................................... $ 9,000

Unrealized Gross Profit—Inventory, 12/31/15:

Gross profit ($100,000 – $50,000) ............................................. $50,000

Gross profit rate ($50,000 ÷ $100,000) ..................................... 50%

Remaining inventory ................................................................. $40,000

Gross profit rate.......................................................................... 50%

Unrealized gross profit, 12/31/15 .............................................. $20,000

Impact of Intra-Entity Building Transfer:

5-40



12/31/14—Transfer price figures

Transfer price ....................................................................... $50,000

Gain on transfer ($50,000 – $30,000) .................................. 20,000

Depreciation expense ($50,000 ÷ 5 years) .......................... 10,000

Accumulated depreciation .................................................. 10,000

12/31/15—Transfer price figures

Depreciation expense .......................................................... 10,000


12/31/14—Historical cost figures

Historical cost ....................................................................... $70,000

Depreciation expense ($30,000 book value ÷ 5 years) ...... 6,000

Accumulated depreciation ($40,000 + $6,000) ................... 46,000

12/31/15—Historical cost figures

Depreciation expense .......................................................... 6,000


5-41



25. (continued)

CONSOLIDATED BALANCES

Sales = $1,000,000 (add the two book values and subtract $100,000 in intra-entity transfers)

Cost of Goods Sold = $571,000 (add the two book values and subtract $100,000 in intra-entity 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 intra-entity 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])

5-42



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

a. Entry *G

Retained earnings, 1/1/15 (Sledge) ................ 2,000


To remove unrealized gross profit from beginning account balances. This is the 40% gross profit rate ($6,000 ÷ $15,000) multiplied by remaining inventory ($5,000).

Entry *TA

Equipment........................................................ 4,000

Investment in Sledge ...................................... 2,400

Accumulated depreciation ........................ 6,400

To adjust the equipment balance to original cost ($16,000) and to adjust accumulated depreciation to the correct consolidated January 1, 2015 balance ($7,000 less $600 extra depreciation in 2014). The net reduction to the reported equipment balance (cost less A.D. = $2,400) equals the amount of unrealized gain at January 1, 2015. 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 2014 for the original intra-entity gain and increased by $600 in 2014 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, 2015 balances.

Entry S

Common stock (Sledge) ........................................... 120,000

Retained earnings, 1/1/15 (adjusted) (Sledge)........ 258,000

5-43



Investment in Sledge (80%) ................................. 302,400

Noncontrolling interest in Sledge, 1/1/15 (20%). 75,600

To eliminate subsidiary's stockholders' equity accounts (after adjustment for Entry *G) and recognize noncontrolling interest balance as of January 1, 2015.

Entry A

Contracts ($60,000 – $3,000 for 2 years) ................. 54,000

Buildings ($20,000 – $2,000 for 2 years) .................. 16,000

Investment in Sledge (80%).................................. 56,000

Noncontrolling interest in Sledge, 1/1/15 (20%). 14,000

To recognize acquisition-date fair value allocations adjusted for 2 years of amortization (2013 and 2014).

5-44



26. (continued)

Entry I

Equity in income of Sledge ....................................... 10,600

Investment in Sledge ........................................... 10,600

To remove parent’s recognized intra-entity income using equity method.

Subsidiary reported net income.................................................................... $20,000

Realized upstream intra-entity gross profit in beginning inventory ....... 2,000

Deferred upstream intra-entity gross profit in ending inventory........... (4,500)

Excess amortization.................................................................................... (5,000 )

2015 realized subsidiary net income............................................................. $12,500

Parent’s ownership percentage..................................................................... 80%

Parent’s share of subsidiary realized net income........................................ $10,000

Depreciation adjustment from 2014 downstream fixed asset sale.......... 600

Parent’s recorded 2015 equity income from subsidiary.............................. $10,600

Entry E

Depreciation expense................................................ 2,000

Amortization expense................................................ 3,000

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

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

To recognize 2015 excess amortizations.

Entry TI

Sales............................................................................ 20,000

5-45



Cost of goods sold ............................................... 20,000

To eliminate intra-entity inventory transfers during 2015.

Entry G

Cost of goods sold .................................................... 4,500

Inventory ............................................................... 4,500

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

Entry ED

Accumulated depreciation ........................................ 600

Depreciation expense .......................................... 600

To 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).

5-46



26. (continued)

b. Net income attributable to noncontrolling interest (2015)

Revenues..................................................................................... $130,000

Cost of goods sold .................................................................... (70,000)

Other expenses .......................................................................... (40,000)

Excess acquisition-date fair value amortization...................... (5,000 )

Net income adjusted for amortization ................................ $15,000

Gross profit on 2014 upstream inventory transfer

realized in 2015 (Entry *G) .................................................. 2,000

Gross profit on 2015 upstream inventory transfer

deferred until 2016 (Entry G) ............................................... (4,500)

Realized net income of subsidiary—2015................................ $12,500



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

a. Consideration transferred ....................... $342,000

Noncontrolling interest fair value............. 38,000

Subsidiary fair value at acquisition-date . 380,000

Book value.................................................. (326,000)

Fair value in excess of book value .......... $54,000 Remaining Annual Excess

5-47



Excess fair value assignments Life Amortizations

To building ............................................ 18,000 9 yrs. $2,000

To patented technology ....................... 36,000 6 yrs. 6,000

Totals..................................................... -0- $8,000

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

c. Gross profit on 2014 transfers ($135,000 – $81,000) .............. $54,000

Gross profit percentage ($54,000 ÷ $135,000) ......................... 40%

Inventory remaining, 12/31/14 ................................................. $37,500

Gross profit percentage ............................................................ 40%

Unrealized gross profit, January 1, 2015 ................................ $15,000

d. Gross profit on 2015 transfers ($160,000 – $92,800) ............. $67,200

Gross profit percentage ($67,200 ÷ $160,000) ......................... 42%

Inventory remaining, 12/31/15 ................................................. $50,000

Gross profit percentage ............................................................ 42%

Unrealized gross profit, December 31, 2015 ........................... $21,000

5-48



27. (continued)

e. Pitino is applying the equity method because the $68,400 equals neither 90% of Brey's reported net income nor 90% of the dividends declared by Brey.

Brey’s reported net income ...................................................... $90,000

Excess fair value amortization.................................................. (8,000)

Realized gross profit ................................................................ 15,000

Deferred gross profit.................................................................. (21,000 )

Adjusted subsidiary net income............................................... $76,000

Ownership .................................................................................. 90%

Equity in earnings of Brey ........................................................ $68,400

f. Brey’s adjusted net income (see e.) ......................................... $76,000


Net income attributable to noncontrolling interest ................ $ 7,600

g. Investment in Brey (consideration transferred) ...................... $342,000

Net income of Brey

Reported 2013....................................... $64,000

2014 .................................................. 80,000

2015 ................................................. 90,000

Total ................................................. 234,000

Unrealized gross profit, 12/31/15(see d.) (21,000)

Realized net income 2013-2015 ......... 213,000

5-49



Pitino’s ownership ............................... 90% 191,700

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

Dividends declared by Brey

2013 .................................................. $19,000

2014 .................................................. 23,000

2015 ................................................. 27,000

Total ................................................. 69,000

Pitino's ownership ............................... 90% (62,100)

Investment in Brey, 12/31/15 ................... $450,000

h. Entry S

Common stock (Brey) ............................... 150,000

Retained earnings, 1/1/15 (Brey) (reduced by

1/1/15 unrealized gross profit) .................. 263,000

Investment in Brey (90%) .................... 371,700

Noncontrolling interest in Brey (10%) 41,300

5-50



27. (continued) part i.

Sales Revenues = $1,068,000 (total less $160,000 intra-entity sales)

Cost of Goods Sold = $570,000 (add book values less $160,000 in intra-entity purchases. Also, adjust for 2014 unrealized gross profit [subtract $15,000] and 2015 unrealized gross profit [add $21,000])

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

Equity in Earnings of Brey = $0 (intra-entity balance is eliminated to include individual revenue and expense accounts of the subsidiary)

Consolidated Net Income = $237,600 (consolidated revenues less COGS and expenses)

Net Income Attributable to Noncontrolling Interest = $7,600 (see f.)

Net Income to Pitino (parent) = $230,000 (consolidated revenues less consolidated cost of goods sold, expenses, and the noncontrolling interest's share of the subsidiary's net income)

Retained Earnings, 1/1 = $488,000 (parent equity method balance)

Dividends Declared = $136,000 (parent balance only)

Retained Earnings, 12/31 = $582,000 (consolidated beginning balance plus net income less dividends declared)

Cash and Receivables = $228,000 (total less $16,000 intra-entity balance)

Inventory = $370,000 (total less ending unrealized gross profit)

Investment in Brey = $0 (intra-entity 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)5-51



Liabilities = $773,000 (add book values less $16,000 intra-entity 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)

5-52



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

UNREALIZED GROSS PROFIT, 12/31/14: (downstream transfer)

Intra-entity gross profit ($120,000 – $72,000) .......................... $48,000

Inventory remaining at year's end ............................................ 30%


UNREALIZED GROSS PROFIT, 12/31/15: (downstream transfer)

Intra-entity gross profit ($250,000 – $200,000) ........................ $50,000



CONSOLIDATED TOTALS

Sales = $1,150,000 (combine amounts and eliminate intra-entity sales of $250,000)

Cost of goods sold:

Brannigan's book value ............................................................ $535,000

Zeigler's book value .................................................................. 400,000

Eliminate intra-entity transfers ................................................. (250,000)

Realized gross profit deferred in 2014 ..................................... (14,400)

Deferral of 2015 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- (intra-entity transfer eliminated in consolidation)5-53



Net income attributable to noncontrolling interest: (impact of transfers is not included because they were downstream)

Zeigler reported net income for 2015 ................................. $(100,000)

Intangible amortization......................................................... 10,000

Zeigler adjusted net income................................................. (90,000)

Outside ownership ............................................................... 30 %

Net income attributable to noncontrolling interest....... $(27,000 )

Inventory = $980,000 (combine amounts less the $10,000 ending unrealized gross profit)

Noncontrolling interest in subsidiary

30% beginning $950,000 book value...................................... $(285,000)

Excess January 1 intangible allocation (30% × $395,000).... (118,500)

Net income attributable to noncontrolling interest............... (27,000)

Dividends (30% × $50,000)...................................................... 15,000

Total noncontrolling interest at 12/31/15............................... $(415,500 )

5-54



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

UNREALIZED GROSS PROFIT, 12/31/14: (upstream transfer)

Intra-entity gross profit ($120,000 – $72,000) .......................... $48,000



UNREALIZED GROSS PROFIT, 12/31/15: (upstream transfer)

Intra-entity gross profit ($250,000 – $200,000) ........................ $50,000



CONSOLIDATED TOTALS

Sales = $1,150,000 (combine amounts and eliminate intra-entity transfer)

Cost of goods sold:

Brannigan's COGS book value ................................................. $535,000

Zeigler's COGS book value ....................................................... 400,000


Realized gross profit deferred in 2014 ..................................... (14,400)


Consolidated cost of goods sold ........................................ $680,600

Operating expenses = $210,000 (combine amounts and include intangible amortization for current year)

Dividend income = -0- (intra-entity transfer eliminated in consolidation)

5-55



Net income attributable to noncontrolling interest: (impact of transfers is included because they were upstream)

Zeigler reported net income for 2015 ....................................... $100,000

Intangible amortization......................................................... (10,000)

2014 gross profit recognized in 2015 ................................. 14,400

2015 gross profit deferred ................................................... (10,000)

Zeigler realized net income for 2015................................... $94,400

Outside ownership ............................................................... 30%

Net income attributable to noncontrolling interest ................ $28,320

Inventory = $980,000 (combine amounts and defer the $10,000 ending unrealized gross profit)

Noncontrolling interest in subsidiary, 12/31/15

30% beginning book value less $14,400

unrealized gross profit (30% × $935,600)......................... $(280,680)

Excess intangible allocation (30% × $395,000)................... (118,500)

Net income attributable to noncontrolling interest............ (28,320)

Dividends (30% × $50,000).................................................... 15,000

Total noncontrolling interest at 12/31/15............................. $(412,500 )

5-56



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

PRELIMINARY COMPUTATIONS

a. Consideration transferred ....................... $657,000

Noncontrolling interest fair value............. 73,000

Subsidiary fair value at acquisition-date . 730,000

Book value.................................................. (620,000)

Fair value in excess of book value .......... $110,000 Remaining Annual Excess

Excess fair value assignments Life Amortizations

to equipment......................................... 20,000 4 yrs. $5,000

to liabilities ........................................... 40,000 5 yrs. 8,000

to brand names .................................... 50,000 10 yrs. 5,000

Totals..................................................... -0- $18,000

Determination of subsidiary book value on 1/1/14

Book value, 1/1/15 (based on stockholders' equity accounts) $700,000

Eliminate net income – 2014 ..................................................... (80,000)

Eliminate dividends – 2014 ....................................................... -0 -

Book value, 1/1/14 ................................................................ $620,000

Beginning inventory unrealized gross profit, 12/31/14 (Upstream)

Ending Inventory ($145,000 × 30%) .......................................... $43,500

Gross profit rate (given) ............................................................ 20%

Unrealized intra-entity gross profit, 12/31/14 .......................... $ 8,700

5-57



Ending inventory unrealized gross profit, 12/31/15 (Upstream)

Ending Inventory ($160,000 × 40%) .......................................... $64,000

Gross profit rate (given) ............................................................ 20%


Building unrealized gross profit, 1/2/14 (Downstream)

Transfer price ............................................................................. $25,000

Book value ................................................................................. 10,000

Unrealized gross profit .............................................................. $15,000

Annual excess depreciation

Annual depreciation based on book value ($10,000 ÷ 5 years) $2,000

Annual depreciation based on transfer price

($25,000 ÷ 5 years) ................................................................ 5,000

Excess annual depreciation ..................................................... $3,000

5-58



30. (continued)

Adjustment to buildings to return to historical cost at 1/1/15

Consolidation

Transfer Price Historical Cost Adjustment

Buildings $25,000 $100,000 $75,000

Accumulated depreciation

(1/1/15 balance after 1

more 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 intra-entity transfers)

Cost of goods sold:

Moore's book value ................................................................... $500,000

Kirby's book value ..................................................................... 400,000


Realized gross profit deferred in 2014...................................... (8,700)


Cost of goods sold .................................................................... $744,100

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

5-59



Net income attributable to noncontrolling interest = $1,790 (impact of inventory transfers is included because they were upstream but building transfer is omitted because it was downstream)

Reported net income for 2015 ........................................................ $40,000

Realized gross profit deferred in 2014 ..................................... 8,700

Deferral of 2015 unrealized gross profit .................................. (12,800)

Realized net income of subsidiary ........................................... $35,900

Excess fair value amortization.................................................. (18,000 )

Adjusted subsidiary net income............................................... 17,900

Outside ownership .......................................................................... 10%

Net income attributable to 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

5-60



30. (continued)

Retained earnings, 1/1/15 = $1,025,970 (because the parent uses the initial value method, worksheet entries adjust its retained earnings for changes in subsidiary's book value, excess amortizations, and the impact of unrealized gross profits in previous years)

Moore's reported balance, 1/1/15 ................................. $990,000

Impact of building transfer (parent's income was over-

stated by the $15,000 gain but has been reduced by

one prior year of excess depreciation) .................... (12,000)

Adjustments to convert initial value to equity method:

Increase in subsidiary's book value during prior

years ..................................................................... $80,000

Excess fair value amortization ................................. (18,000)

Deferral of 12/31/14 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, 1/1/15 .................................... $1,025,970

Dividends declared = $130,000 (parent balance only)

Retained Earnings, 12/31/15 = $1,115,080 (the beginning balance plus controlling interest share of consolidated net income less dividends declared)

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)

5-61



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

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])

5-62



30. (continued)

Noncontrolling interest 12/31/15 = $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 net income share)

Common Stock = $600,000 (parent balance only)

Retained Earnings, 12/31/15 = $1,115,080 (computed above)

Total Liabilities and Equities = $3,479,200 (summation of consolidated balances).

The same consolidation balances can be derived using a worksheet and the following adjusting and eliminating entries:

CONSOLIDATION ENTRIES

Entry *G

Retained earnings, 1/1/15 (Kirby) ........................ 8,700


(To recognize 2014 deferred gross profit as income in 2015)

Entry *TA

Building.................................................................. 75,000

Retained earnings, 1/1/15 (Moore) ...................... 12,000

Accumulated depreciation ............................. 87,000

(To adjust 1/1/15 balance to historical cost figures)

Entry *C

Investment in Kirby .............................................. 47,970

5-63



Retained earnings, 1/1/15 (Moore) ................. 47,970

(To convert from initial value to equity method as follows:)

Increase in subsidiary's book value during prior years

(income of $80,000)........................................................... $80,000

Excess amortization for 2014.................................................. (18,000)

Deferral of 12/31/14 unrealized gross profit........................... (8,700)

Realized increase in subsidiary's book value........................ $53,300

Ownership ................................................................................ 90%

Conversion to equity method (full accrual) adjustment....... $47,970

S Common stock (Kirby) ......................................... 150,000

Retained earnings, 1/1/15 as adjusted (Kirby).... 541,300

Investment in Kirby (90%) .............................. 622,170

Noncontrolling interest in Kirby (10%) ......... 69,130

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

30. (continued)

A Liabilities ............................................................... 32,000

Equipment ............................................................. 15,000

Brand names ........................................................ 45,000

Investment in Kirby ........................................ 82,800

5-64



Noncontrolling interest in Kirby (10%) ......... 9,200

(To recognize unamortized balance of excess allocations as of 1/1/15. Figures have been reduced by one year of amortization)

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

E Operating and interest expense........................... 18,000

Liabilities ......................................................... 8,000

Equipment........................................................ 5,000

Brand names ................................................... 5,000

(To recognize excess amortization expenses for current year)

Tl Sales ...................................................................... 160,000


(To eliminate intra-entity transfers for 2015)

G Cost of goods sold ............................................... 12,800

Inventory .......................................................... 12,800

(To defer ending unrealized inventory gross profit)

ED Accumulated depreciation .................................. 3,000

Depreciation expense ..................................... 3,000

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

5-65



30. continued: Worksheet (not part of requirements)

Moore Company and Subsidiary

Consolidated Worksheet

December 31, 2015

Moore Kirby NCI Consolidated

Sales and other income (800,000) (600,000) (TI) 160,000 (1,240,000)

Cost of goods sold 500,000 400,000 (G) 12,800 (G*) 8,700 744,100

(TI)160,000

Op. and interest expenses 100,000 160,000 (E) 18,000 (ED) 3,000 275,000

Separate company income (200,000) (40,000)

Consolidated net income (220,900)

to noncontrolling interest (1,790) 1,790

to Moore Company (219,110)

Retained earnings, 1/1 (990,000) (TA*) 12,000 (*C) 47,970 (1,025,970)

(550,000) (S) 541,300

(G*) 8,700

Net income (200,000) (40,000) (219,110)

Dividends declared 130,000 0 130,000

Retained earnings, 12/31 (1,060,000) (590,000) (1,115,080)

Cash and receivables 217,000 180,000 397,000

Inventory 224,000 160,000 (G) 12,800 371,200

Investment in Kirby 657,000 0 (*C) 47,970 (S) 622,170 0

(A) 82,800

Equipment (net) 600,000 420,000 (A) 15,000 (E) 5,000 1,030,000

Buildings 1,000,000 650,000 (TA*) 75,000 1,725,000

5-66



Acc. depreciation—buildings (100,000) (200,000) (ED) 3,000 (TA*) 87,000 (384,000)

Brand names 0 0 (A) 45,000 (E) 5,000 40,000

Other assets 200,000 100,000 300,000

Total assets 2,798,000 1,310,000 3,479,200

Liabilities (1,138,000) (570,000) (A) 32,000 (E) 8,000 (1,684,000)

Common stock (600,000) (150,000) (S)150,000 (600,000)

Noncontrolling interest , 1/1 (S) 69,130

(A) 9,200 (78,330)

Noncontrolling interest,12/31 (80,120) (80,120)


Total liabilities and equity (2,798,000) (1,310,000) 1,120,770 1,120,770 (3,479,200)

5-67



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 amortizations

a. Consideration transferred .......................... $372,000

Noncontrolling interest fair value................ 248,000

Subsidiary fair value at acquisition-date . . . $620,000

Acquisition-date book value........................ (320,000)

Fair value in excess of book value ............. $300,000 Remaining Annual Excess

Excess fair value assignments............... Life Amortizations

to patents.................................................. 70,000 10 yrs. $7,000

to customer list ....................................... 45,000 15 yrs. 3,000

to goodwill ............................................... $185,000 indefinite -0 -

$10,000

Determination of Investment in Stinson account balance

Consideration transferred ................................................... $372,000

Increase in Stinson’s retained earnings 1/1/14 to 1/1/15

[(280,000 – 220,000) × 60%]........................................... $36,000

Excess fair value amortization × 60%............................ (6,000)

2014 ending inventory profit deferral (100%)................ (10,000 ) 20,000

McIlroy’s equity in earnings of Stinson for 2015*......... 28,000

Stinson 2015 dividends declared to McIlroy................. (9,000 )

Investment account balance 12/31/15................................. $411,000

5-68



* Stinson’s 2015 net income.............................................. $60,000

Excess fair value amortization....................................... (10,000 )

Adjusted net income........................................................ $50,000

McIlroy’s percentage ownership.................................... 60 %

McIlroy’s share of Stinson’s adjusted net income........ $30,000

2014 intra-entity inventory profit recognized................ 10,000

2015 intra-entity inventory profit deferred..................... (12,000 )

McIlroy’s equity in earnings of Stinson......................... $28,000

Intra-entity profits (downstream) 2014 2015

Intra-entity 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%

5-69



31. (continued)

b. McIlroy Stinson Adj. & Elim. NCI Consolidated

Sales (700,000) (335,000) (TI)160,000 (875,000)

Cost of goods sold 460,000 205,000 (G) 12,000 (*G) 10,000 507,000

(TI) 160,000

Operating expenses 188,000 70,000 (E) 10,000 268,000

Equity in earnings of Stinson (28,000) (I) 28,000 -0-

Separate company net income (80,000) (60,000)


to noncontrolling interest (20,000) 20,000

to McIlroy, Inc. (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 declared 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 Stinson 411,000 -0- (D) 9,000 (S) 228,000 -0-

(*G) 10,000 (A)174,000

(I) 28,000

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

5-70



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) 899,000 899,000 (1,862,000)

5-71



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

a. 2015 net income reported by Sander $230,000

Excess patent fair value amortization ($350,000 ÷ 5 years) (70,000)

Deferred gross profit for 12/31/15 intra-entity inventory (160,000 × 25%) (40,000)

Recognized gross profit for 1/1/15 intra-entity inventory (125,000 × 28%) 35,000

Sander’s net income adjusted $155,000

To controlling interest (80%) $124,000

To noncontrolling interest (20%) $31,000

Adjustments

b. Plymouth Sander & Eliminations NCI Consolidated

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

Cost of goods sold 820,000 500,000 (G) 40,000 (TI)300,000 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 in earnings of Sander (124,000) (I) 124,000 0

Separate company net income (700,000) (230,000)


to noncontrolling

interest (31,000) 31,000

to Plymouth Corp. (700,000)

Retained earnings 1/1 (2,800,000) (345,000) (S) 310,000 (2,800,000)

(*G) 35,000

5-72



Net income (700,000) (230,000) (700,000)


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)

Noncontrolling interest 1/1 (S)242,000

(A) 87,000 (329,000)

Noncontrolling interest 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)

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)

5-73



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 ............................... $665,000

Noncontrolling interest fair value..................... 285,000

Subsidiary fair value at acquisition-date ......... $950,000

Book value.......................................................... (800,000)

Fair value in excess of book value .................. $150,000 Remaining Annual Excess

Excess fair value assignments.................... Life Amortizations

to building...................................................... 50,000 5 yrs. $10,000

to franchise agreements .............................. 100,000 10 yrs. 10,000

-0- $20,000

Inventory Transfers (Upstream)

2014 gross profit deferred until 2015 ($12,000 × 30%).................. $3,600

2015 gross profit deferred until 2016 ($18,000 × 30%).................. $5,400

Equipment Transfer (Downstream)

Unrealized gain as of January 1, 2015:

Unrealized gain on transfer (1/1/14) ......................................... $36,000

2014 excess depreciation ($36,000 ÷ 6 yrs.) ............................ (6,000)

Unrealized gain January 1, 2015..................................................... $30,000

5-74



Excess depreciation—2015 ($36,000 ÷ 6 yrs.) .............................. $6,000

Entry *G

Retained earnings, 1/1/15 (Young) ...................... 3,600


To recognize upstream intra-entity inventory gross profit deferred from previous year.

Entry *TA

Retained earnings, 1/1/15 (Monica) ................... 30,000

Equipment ($50,000 – $36,000) ........................... 14,000

Accumulated depreciation ($50,000 – $6,000) 44,000

To return equipment accounts to beginning book value based on historical cost and to remove unrealized gain from beginning retained earnings.

5-75



33. (continued)

Entry *C

Investment in Young ....................................... 123,480

Retained earnings, 1/1/15 (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 2013–2014 as follows.

Retained earnings of Young, December 31, 2015 (given) $740,000

Eliminate income and dividends of Young

($160,000 – $50,000) ............................................. (110,000)

Retained earnings of Young, December 31, 2014 ... 630,000

Removal of unrealized gross profit (Entry *G) ........ (3,600)

Realized retained earnings of Young,

December 31, 2014................................................ 626,400

Retained earnings at date of acquisition ................. (410,000)

Increase in retained earnings during 2013–2014..... 216,400

Ownership percentage .............................................. 70 %

Income accrual to be recognized ............................. 151,480

Excess amortization for 2013–2014 ($20,000 × 70%× 2 yrs.) (28,000)

ENTRY *C ADJUSTMENT (above) ............................ $123,480

Entry S

Common stock (Young) ....................................... 300,000

Additional paid-in capital (Young) ...................... 90,000

5-76



Retained earnings, 1/1/15

(Young) (adjusted for *G) ............................... 626,400

Investment in Young (70%) ....................... 711,480

Noncontrolling 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 A

Franchise agreement............................................ 80,000

Buildings ............................................................... 30,000


Noncontrolling 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.

5-77



33. (continued)

Entry I

Dividend income .................................................. 35,000

Dividends declared ......................................... 35,000

To eliminate Intra-entity dividend declarations recorded by parent as income under the initial value method.

Entry E

Depreciation expense........................................... 10,000

Amortization expense .......................................... 10,000

Franchise agreement ...................................... 10,000

Buildings.......................................................... 10,000

To recognize current year excess amortization expense.

Entry Tl

Sales ..................................................................... 90,000


To remove intra-entity inventory transfers made during the current year.

Entry G


Inventory........................................................... 5,400

To defer unrealized gross profit on 2015 intra-entity inventory transfers (computed above).

Entry ED5-78



Accumulated depreciation .................................. 6,000

Depreciation expense ..................................... 6,000

To remove current year depreciation on transferred item since its historical cost has been fully depreciated.

Noncontrolling Interest's Share of Consolidated Net Income

Reported net income of Young (given) .............................. $160,000

Excess fair value amortization ............................................ (20,000)

Recognition of 2014 unrealized gross profit (Entry *G) .... 3,600

Deferral of 2015 unrealized gross profit (Entry G) (upstream) (5,400)

Realized net income of Young ............................................ $138,200

Outside ownership percentage ........................................... 30 %


5-79



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 ............................................ 30,000

Equipment ............................................................. 14,000


To 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 ............................................... 102,740


To eliminate intra-entity income accrual.

Reported net income of Young (given) ...................................... $160,000

Excess fair value amortization .................................................... (20,000)

Recognition of 2014 unrealized gross profit (Entry *G) ............ 3,600

5-80



Deferral of 2015 unrealized gross profit (Entry G) (upstream) (5,400 )

Realized net income of Young .................................................... $138,200

Outside ownership percentage ................................................... 70 %

Monica’s share of Young’s realized net income......................... $ 96,740

Depreciation adjustment for asset transfer gain........................ 6,000

Equity accrual for 2015............................................................ $102,740

Entry D

Investment in Young ............................................ 35,000


To eliminate intra-entity 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.)

Net income attributable to noncontrolling interest (Same as in Problem 33.)

5-81



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 ............................... $570,000

Noncontrolling interest fair value..................... 380,000

Subsidiary fair value at acquisition-date ......... $950,000

Book value.......................................................... (850,000)

Fair value in excess of book value .................. $100,000 Remaining Annual Excess

Excess fair value assignment ..................... Life Amortization

to customer list............................................. 100,000 20 yrs. $5,000

-0-

a. CONSOLIDATION ENTRIES

Entry *TL

Retained earnings, 1/1/15 (Gibson) ............... 40,000

Land ............................................................ 40,000

To remove unrealized gain on Intra-entity downstream transfer of land made in 2014.

Entry *G

Retained earnings, 1/1/15 (Keller) ................. 10,000


To defer unrealized upstream Inventory gross profit from 2014 until 2015 computed as the 2014 ending inventory balance of $30,000 (20% × $150,000) multiplied by 33-1/3% gross profit rate ($50,000 ÷ $150,000).

5-82



Entry *C


Investment in Keller .................................. 9,000

Parent is applying the partial equity method as can be seen by the amount in the Equity in earnings 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 2014. In addition, the equity accrual recorded by the parent has been based on Keller's reported net income. As shown in Entry *G, $10,000 of that reported net income has not actually been realized as of January 1, 2015. 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.

5-83



35. (continued)

Entry S

Common stock (Keller) ................................... 320,000

Additional paid-in capital ............................... 90,000

Retained earnings, 1/1/15 (Keller) (adjusted

for Entry *G) ............................................... 610,000

Investment in Keller (60%) .................. 612,000

Noncontrolling interest in Keller, 1/1/15 (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 A

Customer list.................................................... 95,000


Noncontrolling interest in Keller, 1/1/15 (40%) 38,000

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

Entry I

Equity in earnings of Keller ........................... 84,000


To eliminate intra-entity income accrual.

5-84



Entry D

Investment in Keller ........................................ 36,000

Dividends declared .................................... 36,000

To eliminate intra-entity (60%) dividend transfers.

Entry E

Amortization expense...................................... 5,000

Customer list ............................................. 5,000

To recognize current period excess amortization expense.

Entry P

Liabilities.......................................................... 40,000

Accounts receivable .................................. 40,000

To eliminate intra-entity debt.

Entry Tl

Sales................................................................. 200,000


To eliminate current year intra-entity inventory transfer.

5-85



35. (continued)

Entry G


Inventory..................................................... 12,000

To defer 2015 unrealized inventory gross profit. Unrealized gain is the ending inventory of $40,000 (20% of $200,000) multiplied by 30% gross profit rate ($60,000 ÷ $200,000).


Keller reported net income ......................................................... $140,000

Excess fair value amortization ................................................... (5,000)

2014 Intra-entity gross profit realized in 2015 (inventory)........ 10,000

2015 Intra-entity gross profit deferred (inventory) ................... (12,000)

Keller realized net income 2015.................................................. $133,000

Outside ownership percentage .................................................. 40%

Net income attributable to noncontrolling interest ............ $ 53,200

5-86



35. a. (continued) GIBSON AND KELLER

Consolidation Worksheet


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) 200,000

Operating expenses 100,000 60,000 (E) 5,000 165,000

Equity in earnings of Keller (84,000 ) -0- (I) 84,000 -0-

Separate company net net income (284,000 ) (140,000 )


To noncontrolling interest (53,200) 53,200

To Gibson Company (279,800 )

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

(*C) 9,000

RE, 1/1—Keller (620,000) (*G) 10,000

(S) 610,000

Net income (above) (284,000) (140,000) (279,800)


5-87



Retained earnings, 12/31 (1,285,000 ) (700,000 ) (1,231,800 )

Cash 177,000 90,000 267,000

Accounts receivable 356,000 410,000 (P) 40,000 726,000

Inventory 440,000 320,000 (G) 12,000 748,000

Investment 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) 40,000 530,000

Buildings and equipment (net) 496,000 300,000 796,000

Customer list -0- -0- (A) 95,000 (E) 5,000 90,000

Total assets 2,375,000 1,510,000 3,157,000

Liabilities (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) 90,000


NCI in Keller, 1/1 (S) 408,000 (408,000)

(A) 38,000 (38,000)

NCI In Keller, 12/31 (475,200 ) (475,200 )

Total liabilities and equity (2,375,000 ) (1,510,000 ) 1,551,000 1,551,000 (3,157,000 )

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35. (continued)

b. If the intra-entity 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 2015. 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 *TA


Buildings ......................................................... 40,000

Accumulated depreciation ........................ 76,000

To defer 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)


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

Entry ED


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Operating (or depreciation) expense ....... 4,000

To 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).

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

a. Skyline reported net income...................................................... $(88,000)

Patented technology amortization............................................ 15,000

Beginning inventory gross profit recognized.......................... (14,400)

Ending inventory gross profit deferred.................................... 14,000

Deferral of land gain on sale..................................................... 18,000

Equity in Skyline’s earnings...................................................... $(55,400)

b. Acquisition-Date Fair Value Allocation

Consideration transferred (fair value of shares issued) ........ $450,000

Book value of subsidiary .......................................................... 300,000

Fair value in excess of book value ........................................... $150,000

Excess fair over book value assigned to:

Trademarks (indefinite life) .................................................... 30,000

Patented technology .............................................................. $120,000

Remaining life of patented technology ................................. 8 years

Annual amortization .................................................................. $ 15,000

Unrealized Upstream Inventory Gross Profit, 1/1

Inventory being held ($50,000 × 72%) ...................................... $36,000


Unrealized gross profit, 1/1 ....................................................... $14,4005-91



Unrealized Upstream Inventory Gross Profit, 12/31

Inventory being held (given) ..................................................... $28,000


Unrealized gross profit, 12/31.................................................... $14,000

CONSOLIDATION ENTRIES

Entry *G

Retained earnings 1/1 (Skyline) .......................... 14,400


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

Entry S

Common stock (Skyline) ..................................... 120,000

Additional paid-in capital (Skyline) ..................... 30,000

Retained earnings 1/1 (Skyline, adjusted) ......... 277,600

Investment in Skyline...................................... 427,600

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

36. (continued)

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Entry A

Trademarks ........................................................... 30,000

Patented technology ............................................ 105,000

Investment in Skyline ..................................... 135,000

To recognize excess fair value allocations as of 1/1. Patented technology is adjusted for one prior year of amortization at $15,000 per year.

Entry I

Investment income ............................................... 55,400

Investment in Skyline ..................................... 55,400

To remove intra-entity income accrued by parent using the equity method.

Entry D

Investment in Skyline .......................................... 20,000


To eliminate Intra-entity dividends.

Entry E

Other operating expenses.................................... 15,000

Patented technology ...................................... 15,000

To recognize current year amortization expense on patented technology

Entry Tl

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Revenues .............................................................. 80,000


To eliminate intra-entity inventory transfer for current year.

Entry G


Inventory........................................................... 14,000

To defer unrealized inventory gross profit. Amount is computed above.

Entry TL

Gain on sale of land ............................................. 18,000

Land ................................................................. 18,000

To remove gain from intra-entity transfer of land during current year.

Entry P

Accounts payable ................................................ 65,000

Accounts receivable........................................ 65,000

To remove intra-entity payable and receivable.

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36. (continued) PARKWAY AND SKYLINE

Consolidation Worksheet


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) 14,400 403,600

Other operating expenses 170,000 75,000 (E) 15,000 260,000

Gain 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 declared 70,000 20,000 (D) 20,000 70,000

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Retained earnings 12/31 (486,000) (360,000) (486,000)

Cash and receivables 134,000 150,000 (P) 65,000 219,000

Inventory 281,000 112,000 (G) 14,000 379,000

Investment in Skyline 598,000 (D) 20,000 (S) 427,600

(A) 135,000 -0-

(I) 55,400

Trademarks 50,000 (A) 30,000 80,000

Patented technology 130,000 (A) 105,000 (E) 15,000 220,000

Land, 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) 844,400 844,400 (1,800,000)

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Chapter 5 Excel Case Solution

Excel Case Equity in Shawn Co. Earnings

2014 78,000

Fair Value Allocation Schedule 1/1/2014El profit (34,200)

Consideration transferred 1,000,000 Amortization (12,600 )

C.S. 500,000 Equity earnings 31,200

R.E. 185,000

685,000 Life Amort. 2015 85,000

Tradename 315,000 25 12,600 BI profit 34,200

Inventory El profit (37,800)

Shawn sells GPR remaining Amortization (12,600 )

to Patrick 60% 30% Equity earnings 68,800

Intra-entity Inventory Transfers (upstream) Shawn Co. dividends

Sales Inventory Intra. profit 2014 25,000

2014 190,000 57,000 34,200 2015 27,000

2015 210,000 63,000 37,800

Consolidation Adjustments

Investment account *G RE-Shawn 34,200

Cost 1,000,000 COGS 34,200

2014 Equity earnings 31,200

dividends (25,000 ) S Common stock-Shawn 500,000

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12/31/14 1,006,200 RE-Shawn 203,800

Investment in Shawn703,800

2015 Equity earnings 68,800

dividends (27,000 ) A Tradename 302,400

12/31/15 1,048,000 Investment in Shawn302,400

I Equity in earnings of Shawn68,800

Investment in Shawn68,800

D Investment in Shawn 27,000

Dividends declared27,000


Tradename12,600

IT Sales 210,000

COGS210,000

G COGS 37,800

Inventory37,800

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Investment account goes to zero? 0

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Analysis and Research—Accounting Information and Salary Negotiations

a. With common control over related enterprises, a consolidated income statement better portrays economic reality. For example, it is likely that the Stadium’s concession and parking revenues would have been less if the team did not play there. Additionally, the $1,400,000 rent expense does not represent an arm’s length transaction—given that the $1,400,000 is the only rent revenue, it appears that the stadium is used exclusively for baseball with its fortunes intertwined with the team.

Searching the FASB ASC for “separate statements” and then “intra-entity” yields the following relevant support:

There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities. FASB ASC (para. 810-10-10-1).

As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, such statements should not include gain or loss on transactions among the entities in the consolidated group. FASB ASC (para. 810-10-45-1).

Granger Eagles Team and Stadium Consolidated Income Statement

Ticket revenues $2,000,000

Concession revenue 800,000

Parking revenue 100,000 $2,900,000

Ticket expense 25,000

Promotion 35,000

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COGS 250,000

Depreciation 80,000

Player salaries 400,000

Staff salaries 350,000 1,140,000

Consolidated net income $1,760,000

b. Other pertinent factors include

Any available comparisons for the market values for the players

The market value of any alternative uses for the stadium

The amount the owners have invested in the team

The amount the owners have invested in the stadium

Fair rates of return for the owners’ investments in the team and the stadium

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