Chapter 5

Chapter 5

109

Chapter 5 INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES Answers to Questions 1

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

2

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

3

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

4

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

5

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

6

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

7

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

8

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

9

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

109

Intercompany Profit Transactions — Inventories

110

profits of the parent company are realized and the parent company increases its investment and investment income accounts. 10

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

11

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

12

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

13

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

14

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

5,000

Cost of sales

5,000

Inventory To eliminate unrealized profit in ending inventory.

110

5,000

5,000

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111

SOLUTIONS TO EXERCISES Solution E5-1 1 2 3 4

a d a c

5 6 7 8

c a a c

Solution E5-2 [AICPA adapted] 1

a

2

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

3

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

Solution 5-3 1

2

3

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

$1,000,000 500,000 500,000 (400,000) $1,600,000 $1,400,000 (50,000) $1,350,000

c Combined cost of sales Less: Intercompany purchases

$

Less: Unrealized profit in beginning inventory Add: Unrealized profit in ending inventory Consolidated cost of sales

111

$

680,000 (50,000) (4,000) 10,000 636,000

Intercompany Profit Transactions — Inventories

112

Solution E5-4 1

2

3

b Pride's share of Sedita's income ($60,000  80%) Less: Unrealized profit in ending inventory ($20,000  50% unsold  80% owned) Income from Sedita d Combined cost of sales Less: Intercompany sales Add: Unrealized profit in ending inventory Consolidated cost of sales b Reported income of Sedita Unrealized profit Sedita's realized income Noncontrolling interest percentage Noncontrolling interest expense

$

48,000

$

(8,000) 40,000

$

450,000 (100,000) 10,000 $ 360,000 $

$

60,000 (10,000) 50,000 20% 10,000

Solution E5-5 1

2

3

c Combined sales Less: Intercompany sales Consolidated sales

$1,800,000 (400,000) $1,400,000

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

$

20,000

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

$

25,000

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

112

$1,440,000 (400,000) (20,000) 25,000 $1,045,000

Chapter 5

113

Solution E5-6 1

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

$200,000 140,000 (20,000) 26,250 (7,700) $338,550

Noncontrolling interest expense: Susan's reported income Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory Susan's realized income Noncontrolling interest percentage Noncontrolling interest expense 2

3

$200,000 37,500 (11,000) 226,500 30% $ 67,950

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

$(90,000) (50,000) (140,000) 300,000 $160,000

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

$225,000 22,500 (30,000) $217,500

Solution E5-7 Pansy's separate income Add: 80% of Sheridan's reported income Add: Realization of profits in beginning inventory Less: Unrealized profits in ending inventory Consolidated net income

113

2007 $300,000 400,000

(30,000) $670,000

2008 $400,000 440,000

2009 $350,000 380,000

30,000

40,000

(40,000) $830,000

(20,000) $750,000

Intercompany Profit Transactions — Inventories

114

Solution E5-8 Pycus Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2009 Sales ($400,000 + $100,000 - $40,000 intercompany sales)

$

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

460,000 (230,000)

Gross profit

230,000

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

(130,000)

Total consolidated income

100,000 (2,000)

Less: Noncontrolling interest expense ($10,000  20%) Consolidated net income

$

98,000

$

20,000

Solution E5-9 1

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

2

2,000

$

(4,000) 18,000

Consolidated sales Combined sales Less: Intercompany sales Consolidated sales

$1,250,000 100,000 $1,150,000

Consolidated cost of sales Combined cost of sales Less: Intercompany sales Add: Intercompany profit in ending inventory Less: Intercompany profit in beginning inventory Consolidated cost of sales Total Consolidated Income Combined income Less: Intercompany profit in ending inventory Add: Intercompany profit in beginning inventory Total Consolidated Income

114

$

650,000 (100,000) 10,000 (5,000)

$

555,000

$

300,000 (10,000) 5,000 295,000

$

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115

Solution E5-10 Papillion Corporation and Subsidiary Consolidated Income Statement December 31, 2011 Sales ($1,000,000 + $500,000 - $90,000 intercompany)

$1,410,000

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

(565,000) 845,000

Depreciation expense

(170,000)

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

(154,000)

Total consolidated income

521,000

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

(29,000)

Consolidated net income

$

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

492,000

$

600,000 (560,000) $ 40,000

Solution E5-11 Pill Corporation and Subsidiary Consolidated Income Statement December 31, 2011 Sales ($1,000,000 + $500,000 - $90,000 intercompany)

$1,410,000

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

(565,000)

Gross profit

845,000

Depreciation expense

(170,000)

Other expenses ($90,000 + $60,000)

(150,000)

Total consolidated income

525,000

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

(29,000)

Consolidated net income

$

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

115

$

496,000

600,000 (560,000) $ 40,000

Intercompany Profit Transactions — Inventories

116

Solution E5-12 1

2

3

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

$

200,000 20,000

$

(60,000) 160,000 60% 96,000

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

$5,500,000 (60,000) 5,440,000 40% $2,176,000

b Realized equity Majority share Investment balance December 31, 2011

$5,440,000 60% $3,264,000

Note: The excess cost over book value is fully amortized. Therefore, the investment balance of $3,264,000 plus the noncontrolling interest of $2,176,000 is equal to the $5,440,000 realized equity at the balance sheet date. Solution E5-13 [AICPA adapted] 1

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

2

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

3

c Revenues $200,000/$150,000 cost of sales = 1 1/3 markup on cost Amount of Spin's ending inventory from Pard ($32,000 intercompany sales  3/8 remaining unsold) = $12,000 at billed prices  3/4 = $9,000

4

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

5

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

116

Chapter 5

117

Solution E5-14 Pullen Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2006 Sales ($1,380,000 - $120,000 intercompany sales)

$1,260,000

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

(807,000)

Gross profit

453,000

Operating expenses

(160,000)

Total consolidated income

293,000 (37,600)

Less: Noncontrolling interest expense [$40,000 - ($12,000  .2)] Consolidated net income a b

$

255,400

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

SOLUTIONS TO PROBLEMS Solution P5-1 Proctor Corporation and Subsidiary Consolidated Statement of Income and Retained Earnings for the year ended December 31, 2008 Sales ($1,300,000 + $650,000 - $80,000 intercompany sales)

$1,870,000

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

(1,114,000)

Gross profit

756,000

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

(500,000

Income before noncontrolling interest

256,000 (9,600)

Noncontrolling interest expense($100,000+$12,000 - $16,000)  10% Consolidated net income

246,400

Add: Beginning consolidated retained earnings

369,200

Less: Dividends for 2008

(100,000)

Consolidated retained earnings December 31, 2008

117

$

515,600

Intercompany Profit Transactions — Inventories

118

Solution P5-2 1

Consolidated cost of sales — 2007 Combined cost of sales ($625,000 + $300,000) Less: Intercompany purchases Add: Profit in ending inventory Less: Profit in beginning inventory Consolidated cost of sales

2

Noncontrolling interest expense

$

637,000

$

150,000 12,000 (24,000) 138,000 10%

$

13,800

Consolidated net income — 2007 Consolidated sales ($900,000 + $600,000 - $300,000) Less: Consolidated cost of sales Less: Consolidated expenses ($225,000 + $150,000) Less: Noncontrolling interest expense Consolidated net income Alternatively, Putt's separate income Add: Income from Slam Consolidated net income

4

925,000 (300,000) 24,000 (12,000)

Noncontrolling interest expense — 2007 Slam's net income ($600,000 - $300,000 - $150,000) Add: Profit in beginning inventory Less: Profit in ending inventory Slam's realized income Noncontrolling interest percentage

3

$

$1,200,000 (637,000) (375,000) (13,800) $

174,200

$

50,000 124,200

$

174,200

$

520,000 (24,000) 496,000 10%

$

49,600

Noncontrolling interest at December 31, 2007 Equity of Slam December 31, 2007 Less: Unrealized profit in ending inventory Noncontrolling interest percentage Noncontrolling interest December 31, 2007

118

Chapter 5

119

Solution P5-3 1

Inventories appearing in consolidated balance sheet at December 31, 2007 Beginning inventory — Potter ($60,000 - $4,000a) Beginning inventory — Scan ($38,750 - $7,750b) Beginning inventory — Tray ($24,000 - 0) Inventories December 31, 2007

$ 56,000 31,000 24,000 $111,000

Intercompany profit:

a

b

2

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

$ 24,000 (20,000) $ 4,000

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

$ 38,750 (31,000) $ 7,750

Inventories appearing in consolidated balance sheet at December 31, 2008 Ending inventory — Potter ($54,000 - $4,500c) Ending inventory — Scan ($31,250 - $6,250d) Ending inventory — Tray ($36,000 - 0) Inventories December 31, 2008

$ 49,500 25,000 36,000 $110,500

Intercompany profit:

c

d

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

$ 27,000 (22,500) $ 4,500

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

$ 31,250 (25,000) $ 6,250

119

Intercompany Profit Transactions — Inventories

120

Solution P5-4 1

Plier's income from Stuff

2007

75% of Stuff's net income

$

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

300,000 $

(100,000)

Unrealized profit in December 31, 2008 inventory (upstream) $100,000  75% Plier's income from Stuff 2

337,500 $

200,000 $

2009 262,500

100,000

(75,000) $

362,500 $

75,000 337,500

Plier's net income Plier's separate income

$1,800,000 $1,700,000 $2,000,000

Add: Income from Stuff

200,000

Plier's net income 3

2008

362,500

337,500

$2,000,000 $2,062,500 $2,337,500

Consolidated net income Separate incomes of Plier and Stuff combined

$2,200,000 $2,150,000 $2,350,000

Unrealized profit in December 31, 2007 inventory

(100,000)

Unrealized profit in December 31, 2008 inventory Total income

100,000 (100,000)

2,100,000 2,150,000

Less: Noncontrolling interest expense 2007 $400,000  25% 2008 ($450,000 - $100,000)  25% 2009 ($350,000 + $100,000)  25% Consolidated net income

100,000 2,450,000

(100,000) (87,500) (112,500) $2,000,000 $2,062,500 $2,337,500

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Chapter 5

121

Solution P5-5 Pane Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2007 Pane Income Statement Sales Income from Seal Cost of sales

$

800,000 $ 400,000 102,000 400,000* 200,000*

a 120,000 d 102,000 b 12,000

f

Depreciation expense Other expenses Net income

$

110,000* 40,000* 192,000* 60,000* 200,000 $ 100,000

Retained Earnings Retained earnings — Pane

$

600,000

$

700,000

Balance Sheet Cash

$

54,000 90,000

200,000 100,000*

Buildings — net Equipment — net Investment in Seal

a 120,000 c 20,000

472,000*

$

150,000* 258,000* 200,000

e 380,000 d

$

37,000 60,000 80,000 90,000 50,000 150,000

500,000

400,000

736,000

200,000 100,000*

50,000

$ 430,000

Patents

Accounts payable Other liabilities Common stock, $10 par Retained earnings

$1,080,000

6,000

100,000 50,000*

100,000 70,000 50,000 200,000

$1,800,000

Consolidated Statements

600,000 $ 380,000

Retained earnings — Seal Net income Dividends Retained earnings December 31

Receivables — net Inventories Other assets Land

Adjustments and Eliminations

100% Seal

g

17,000

b

12,000

$

700,000

$

91,000 133,000 168,000 160,000 100,000 350,000 900,000

c

20,000

e

24,000

d 52,000 e 704,000 f 6,000

$ 867,000

$

160,000 $ 47,000 g 17,000 340,000 90,000 600,000 300,000 e 300,000 700,000 430,000 $1,800,000 $ 867,000

18,000 $1,920,000 $

190,000 430,000 600,000 700,000 $1,920,000

Supporting computations Unrealized profit in beginning inventory ($40,000  1/2) = $20,000 Unrealized profit in ending inventory ($48,000  1/4) = $12,000 Seal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patents amortization equals $102,000 income from Seal.

121

Intercompany Profit Transactions — Inventories

122

Solution P5-6 Patty Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2008 Patty Income Statement Sales Income from Sue Cost of sales

$

Adjustments and Eliminations

Sue 75%

600,000 $ 400,000 102,500 270,000* 210,000*

$ a 130,000 c 10,000

870,000 360,000*

Operating expenses Noncontrolling int.expense Net income $

287,500 $ 150,000

$

185,000* 37,500* 287,500

Retained Earnings Retained earnings — Patty

182,500

$

182,500

$

Balance Sheet Cash Accounts receivable Dividends receivable Inventories Land

40,000* f

$

Retained earnings — Sue Net income Dividends Retained earnings December 31

145,000*

a 130,000 d 102,500 b 20,000

Consolidated Statements

287,500 150,000*

90,000

320,000 $ 190,000

$

85,000 $ 30,000 165,000 100,000 15,000 60,000 80,000 80,000 50,000 230,000 100,000 200,000

Equipment — net Investment in Sue

g h b

37,500 12,500

150,000* $

320,000

$

115,000 250,000

15,000 15,000 20,000

120,000 130,000 330,000 340,000

c

10,000

d 65,000 e 330,000

$1,220,000 $ 500,000

e 150,000

150,000 $1,435,000

$

$

225,000 $ 100,000 g 15,000 70,000 20,000 h 15,000 155,000 40,000 450,000 150,000 e 150,000 320,000 190,000 $1,220,000 $ 500,000

Noncontrolling interest January 1 Noncontrolling interest December 31 *

287,500 d f

140,000

385,000

Goodwill

Accounts payable Dividends payable Other liabilities Common stock, $10 par Retained earnings

90,000

150,000 50,000*

$

Buildings — net

e

37,500

e f

60,000 25,000

310,000 75,000 195,000 450,000 320,000

85,000 $1,435,000

Deduct

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

$300,000 150,000 $150,000

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Chapter 5

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Solution P5-7 Preliminary computations Investment cost Less: Book value acquired ($250,000  90%) Patents Patents amortization

$275,000 225,000 $ 50,000

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

Upstream sales Unrealized profit in December 31, 2006 inventory of Poly $28,000 - ($28,000  1.4) = $8,000 Unrealized profit in December 31, 2007 inventory of Poly $42,000 - ($42,000  1.4) = $12,000 Income from Susan Share of Susan's reported income ($100,000  90%) Less: Patents amortization Less: Unrealized profit in ending inventory ($12,000  90%) Add: Unrealized profit in beginning inventory ($8,000  90%) Income from Susan

$ 90,000 (5,000) (10,800) 7,200 $ 81,400

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

$275,000 63,000 (15,000) (10,800) $312,200

Noncontrolling interest expense Reported income of Susan Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory Susan's realized income Noncontrolling interest percentage Noncontrolling interest expense

123

$100,000 8,000 (12,000) 96,000 10% $ 9,600

Intercompany Profit Transactions — Inventories

124

Solution P5-7 (continued) Poly Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2007 Poly Income Statement Sales Income from Susan Cost of sales

$ 819,000 $ 560,000 81,400 546,000* 400,000*

Other expenses 154,400* 60,000* Noncontrolling int.expense Net income $ 200,000 $ 100,000 Retained Earnings Retained earnings — Poly

Balance Sheet Cash Inventory Other current assets Plant assets — net Investment in Susan

200,000 100,000*

5,000 9,600

e

70,000

$ 819,000 a 560,000 c 8,000

390,000* 219,400* 9,600* $ 200,000

70,000

200,000

100,000 50,000*

d h

45,000 5,000

100,000*

$ 220,000

$ 120,000

$ 220,000

$

$

$ 125,800 110,000 70,000 600,000

75,800 42,000 60,000 300,000

50,000 80,000 20,000 300,000

312,200

$ 790,000

b g c

7,200

e

40,000

12,000 10,000

d 36,400 e 283,000 f 5,000

$ 450,000

$ 170,000 $ 130,000 g 10,000 400,000 200,000 e 200,000 220,000 120,000 $ 790,000 $ 450,000

Noncontrolling interest January 1 Noncontrolling interest December 31 *

f h

Consolidated Statements

$ 120,000 $

Patents

Current liabilities Capital stock Retained earnings

a 560,000 d 81,400 b 12,000

$ 120,000

Retained earnings — Susan Net income Dividends Retained earnings December 31

Adjustments and Eliminations

Susan 90%

c

Deduct

124

800

35,000 $ 940,800 $ 290,000 400,000 220,000

e h

27,000 4,600

30,800 $ 940,800

Chapter 5

125

Solution P5-8 1

Entries to correct Phil's income from Sert and investment accounts Retained earnings January 1, 2011 4,500 Investment in Sert 4,500 To adjust beginning retained earnings and beginning investment accounts for unrealized profit in the December 31, 2010 inventory ($5,000  90%). Investment in Sert 4,500 Income from Sert 4,500 To recognize intercompany profit in the December 31, 2010 inventory of goods acquired from Sert ($5,000  90%). Income from Sert 4,000 Investment in Sert 4,000 To eliminate intercompany profit in the December 31, 2011 inventory.

Working paper entries in general journal form: a

b

Noncontrolling interest Investment in Sert Cost of sales

500 4,500 5,000

Sales

10,000 Cost of sales

c d

e

f g

10,000

Cost of sales Inventory

4,000 4,000

Income from Sert Dividends Investment in Sert

27,500

Capital stock — Sert Retained earnings — Sert Investment in Sert Noncontrolling interest

80,000 40,000

Accounts payable Accounts receivable

10,000

18,000 9,500

108,000 12,000 10,000

Noncontrolling interest expense Dividends Noncontrolling interest

3,500 2,000 1,500

125

Intercompany Profit Transactions — Inventories

126

Solution P5-8 (continued) 2

Phil Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2011 Phil Income Statement Sales Income from Sert Cost of sales

$ 500,000 $ 100,000 27,500 240,000* 40,000*

Other expenses 174,000* Noncontr.int.expense Net income $ 113,500 $ Retained Earnings Retained earnings — Phil

Balance Sheet Cash Inventories Accounts receivable

g

5,000 10,000

269,000* 204,000* 3,500* $ 113,500

3,500

$ 105,500 40,000

e 40,000 113,500

30,000 20,000*

$ 149,000

$

50,000

$

$

30,000 15,000 20,000 105,000

113,000 $ 496,000

d g

18,000 2,000

$ c f 4,500

4,000 10,000

93,000 71,000 50,000 325,000

d 9,500 e 108,000

$ 170,000

$ 539,000

$

47,000 $ 40,000 f 10,000 300,000 80,000 e 80,000 149,000 50,000 $ 496,000 $ 170,000 a

500

$

e g

12,000 1,500

Deduct

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

126

70,000* $ 149,000

a

Noncontrolling interest January 1 Noncontrolling interest December 31 *

a b

30,000

113,500 70,000*

63,000 60,000 40,000 220,000

Consolidated Statements $ 590,000

30,000*

$

Plant assets — net Investment in Sert

Accounts payable Capital stock Retained earnings

b 10,000 d 27,500 c 4,000

$ 105,500

Retained earnings — Sert Net income Dividends Retained earnings December 31

Adjustments and Eliminations

Sert 90%

77,000 300,000 149,000

13,000 $ 539,000

Chapter 5

127

Solution P5-9 Pan Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2007 100% Sal

Pan Income Statement Sales Income from Sal Cost of sales

$

800,000 108,000 400,000*

Depreciation expense Other expenses Net income

$

110,000* 192,000* 206,000

Retained Earnings Retained earnings — Pan

$

606,000

$

$

400,000

a 120,000 d 108,000 200,000* b 12,000

$

380,000

$

712,000

$

430,000

Balance Sheet Cash

$

54,000 90,000

$

37,000 60,000

Equipment — net Investment in Sal

100,000 70,000 50,000 200,000

80,000 90,000 50,000 150,000

500,000

400,000

748,000

$1,812,000

$

867,000

$

$

47,000 90,000 300,000 430,000 867,000

160,000 340,000 600,000 712,000 $1,812,000

472,000*

$

150,000* 252,000* 206,000

e 380,000

100,000 50,000*

Goodwill

Accounts payable Other liabilities Common stock, $10 par Retained earnings

a 120,000 c 20,000

606,000

206,000 100,000*

Buildings — net

Consolidated Statements $1,080,000

40,000* 60,000* 100,000

Retained earnings — Sal Net income Dividends Retained earnings December 31

Receivables — net Inventories Other assets Land

Adjustments and Eliminations

$

d

206,000 100,000*

50,000

f

17,000

b

12,000

$

712,000

$

91,000 133,000 168,000 160,000 100,000 350,000 900,000

c

20,000

d 58,000 e 710,000

e

30,000

30,000 $1,932,000

f

17,000

$

e 300,000

190,000 430,000 600,000 712,000 $1,932,000

Supporting computations Unrealized profit in beginning inventory ($40,000  1/2) = $20,000 Unrealized profit in ending inventory ($48,000  1/4) = $12,000 Sal's income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory.

127

Intercompany Profit Transactions — Inventories

128

Solution P5-10 Pat Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2008 Pat Income Statement Sales Income from Sun Cost of sales

$

Operating expenses Noncontrolling int.expense Net income $ Retained Earnings Retained earnings — Pat Retained earnings — Sun Net income Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Dividends receivable Inventories Land Buildings — net Equipment — net Investment in Sun

$

600,000 92,500 270,000*

$

145,000* 277,500

$

400,000

a 130,000 d 92,500 210,000* b 20,000

40,000* f i 150,000

10,000 37,500

$

90,000 e 150,000 50,000*

90,000

277,500 150,000*

$

300,000

$

190,000

$

85,000 165,000 15,000 60,000 80,000 230,000 200,000 365,000

$

30,000 100,000

d i

10,000

e 140,000 $1,200,000

$

500,000

$

$

100,000 g 15,000 20,000 h 15,000 40,000 150,000 e 150,000 190,000 500,000

225,000 70,000 155,000 450,000 300,000 $1,200,000

$

870,000 360,000*

$

195,000* 37,500* 277,500

$

172,500 277,500

80,000 50,000 100,000 140,000

Noncontrolling interest January 1 Noncontrolling interest December 31 *

a 130,000 c 10,000

g h b

c

Consolidated Statements $

172,500

Patents

Accounts payable Dividends payable Other liabilities Common stock, $10 par Retained earnings

Adjustments and Eliminations

Sun 75%

37,500 12,500

150,000* $

300,000

$

115,000 250,000

15,000 15,000 20,000

d 55,000 e 320,000 f 10,000

120,000 130,000 330,000 340,000

130,000 $1,415,000 $

e i

60,000 25,000

310,000 75,000 195,000 450,000 300,000

85,000 $1,415,000

Deduct

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

$300,000 150,000 $150,000

128

Chapter 5

129

Solution P5-11 Preliminary computations Investment cost Less: Book value acquired ($250,000  90%) Goodwill

$275,000 225,000 $ 50,000

Upstream sales Unrealized profit in December 31, 2009 inventory of Po $28,000 - ($28,000  1.4) = $8,000 Unrealized profit in December 31, 2010 inventory of Po $42,000 - ($42,000  1.4) = $12,000 Income from San Share of San's reported income ($100,000  90%) Less: Unrealized profit in ending inventory ($12,000  90%) Add: Unrealized profit in beginning inventory ($8,000  90%) Income from San

$ 90,000 (10,800) 7,200 $ 86,400

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

$275,000 63,000 (10,800) $327,200

Noncontrolling interest expense Reported income of San Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory San's realized income Noncontrolling interest percentage

$100,000 8,000 (12,000) 96,000 10%

Noncontrolling interest expense

$

129

9,600

Intercompany Profit Transactions — Inventories

130

Solution P5-11 (continued) Po Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Po Income Statement Sales Income from San Cost of sales

$ 819,000 86,400 546,000*

Other expenses 154,400* Noncontrolling int.expense Net income $ 205,000 Retained Earnings Retained earnings — Po

Balance Sheet Cash Inventory Other current assets Plant assets — net Investment in San

$ 560,000 400,000*

a 560,000 c 8,000

9,600

e

70,000

390,000* 214,400* 9,600* $ 205,000

$ 100,000

$ 130,000 $

205,000 100,000*

70,000 100,000 50,000*

d f

45,000 5,000

205,000 100,000*

$ 235,000

$ 120,000

$ 235,000

$

$

$ 125,800 110,000 70,000 600,000

75,800 42,000 60,000 300,000

50,000 80,000 20,000 300,000

327,200

b g

12,000 10,000

c

7,200

e

50,000

50,000 $ 955,800

$ 170,000 $ 130,000 g 10,000 400,000 200,000 e 200,000 235,000 120,000 $ 805,000 $ 450,000

$ 290,000 400,000 235,000

$ 805,000

d 41,400 e 293,000

$ 450,000

Noncontrolling interest January 1 Noncontrolling interest December 31 *

f

Consolidated Statements $ 819,000

60,000*

Goodwill

Current liabilities Capital stock Retained earnings

a 560,000 d 86,400 b 12,000

$ 130,000

Retained earnings — San Net income Dividends Retained earnings December 31

Adjustments and Eliminations

San 90%

c

Deduct

130

800

e f

27,000 4,600

30,800 $ 955,800