CHAPTER 5faculty.uml.edu/ccarter/AASC05.doc · Web view2008-02-03 · Hoyle, Schaefer, Doupnik, Fundamentals of Advanced Accounting, 1/e 5-1. Title: CHAPTER 5 Author: Faculty/Staff

CHAPTER 5CONSOLIDATED FINANCIAL STATEMENTS

INTERCOMPANY ASSET TRANSACTIONS

Answers to Questions1. One reason for the significant volume and frequency of intercompany transfers is that

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

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

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

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

5. On the individual financial records of James, Inc., a gain is being recorded in the year of transfer. From the viewpoint of the business combination, this gain 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 gain that remains unrealized. A second entry must be made in the following time period to allow the gain to be recognized in the year of its ultimate realization.

6. Currently, no official accounting pronouncement answers the question as to the relationship between unrealized intercompany gains and noncontrolling interest values, although the issue has been under study by the FASB. This textbook reasons that unrealized gains relate to the seller and to the computation of the seller's income. Therefore, any unrealized gains created by upstream transfers (from subsidiary to parent) are attributed to the subsidiary. The effects resulting from the deferral and

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eventual recognition of these intercompany gains are considered to have an impact on the calculation of noncontrolling interest balances. In contrast, unrealized gains from downstream transfers are viewed as relating solely to the parent (as the seller) and, thus, have no effect on the noncontrolling interest.

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

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

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

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

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

11. As long as the land is held by the parent, its recorded value must be reduced to historical cost within each consolidated set of financial statements. In the year of the original transfer, the asset reduction is offset against the subsidiary's recorded gain. For all subsequent years in which the property is held, the credit to the Land account is


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

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

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


Answers to Problems

1. C

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

3. A

4. C UNREALIZED GAIN, 12/31/06Intercompany Gain ($100,000 – $75,000) ...................................... $25,000Inventory Remaining at Year's End ............................................... 16%Unrealized Intercompany Gain, 12/31/06 ...................................... $4,000

UNREALIZED GAIN, 12/31/07Intercompany Gain ($120,000 – $96,000) ...................................... $24,000Inventory Remaining at Year's End ............................................... 35%Unrealized Intercompany Gain, 12/31/07 ...................................... $8,400

CONSOLIDATED COST OF GOODS SOLDParent balance ........................................................................... $380,000Subsidiary Balance .................................................................... 210,000Remove Intercompany Transfer ............................................... (120,000)Recognize 2006 Deferred Gain ................................................. (4,000)Defer 2007 Unrealized Gain ...................................................... 8,400

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

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

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


7. B UNREALIZED GAIN, 12/31/05Ending Inventory ....................................................................... $40,000Markup ($33,000/$110,000) ........................................................ 30%Unrealized Intercompany Gain, 12/31/05 ................................. $12,000

UNREALIZED GAIN, 12/31/06Ending Inventory ....................................................................... $50,000Markup ($48,000/$120,000) ........................................................ 40 % Unrealized Intercompany Gain, 12/31/06 ................................. $20,000

NONCONTROLLING INTEREST IN SUBSIDIARY'S INCOMEReported Income for 2006 ......................................................... $90,000Realized Gain Deferred In 2005 ................................................ 12,000Deferral of 2006 Unrealized Gain .............................................. (20,000)Realized Income of Subsidiary ................................................. $82,000Outside Ownership .................................................................... 10 % Noncontrolling Interest ............................................................. $8,200

8. A Individual Records after Transfer12/31/06

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

12/31/07Depreciation expense—$8,000

Consolidated Figures—Historical Cost12/31/06

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

12/31/07Depreciation expense--$6,000

Adjustments for Consolidation Purposes:2006: $2,000 income is reduced to a $6,000 expense (income is reduced

by $8,000)2007: $8,000 expense is reduced to a $6,000 expense (income is increased

by $2,000)


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

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

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

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

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

11.B Purchase Price ................................................ $260,000Book Value of Net Assets

($250,000 × 80%)......................................... (200,000)Purchase Price in Excess of Annual Excess

Book Value ................................................. $60,000 Life AmortizationsExcess Purchase Price AssignedBased on Market Value:—Equipment ($25,000 × 80%) ........................ 20,000 5 years $4,000Secret Formulas .............................................. $40,000 20 years 2,000Total ................................................................ $6,000

Consolidated Expenses = $36,000 (add the two book values and includeamortization expense for the current year)

12.C Intercompany Gain ($100,000 - $80,000) ....................................... $20,000Inventory Remaining at Year's End ............................................... 60%Unrealized Intercompany Gain, 12/31/06 ...................................... $12,000

CONSOLIDATED COST OF GOODS SOLDParent Balance ........................................................................... $140,000Subsidiary Balance .................................................................... 80,000Remove Intercompany Transfer ............................................... (100,000)Defer Unrealized Gain (above) .................................................. 12,000

Cost of Goods Sold ......................................................................... $132,000


13.A 20% of the ending book value of the subsidiary. Because transfers were downstream, they do not affect this computation. As an alternative, add 20% of subsidiary's Income to 20% of beginning book value and subtract 20% of dividends.

14. B Add the two book values plus the original allocation ($20,000) less one year of excess amortization expense ($4,000).

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

Intercompany Gain ($100,000 – $80,000) ...................................... $20,000Inventory Remaining at Year's End ............................................... 60%Unrealized Intercompany Gain, 12/31/06 ...................................... $12,000

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

Intangible asset amortization = $180,000/20 years = $9,000 per year

Intercompany Gain ($150,000 – $100,000) .................................... $50,000Inventory Remaining at Year's End................................................ 10%Unrealized Intercompany Gain, 12/31/06 ...................................... $5,000

CONSOLIDATED TOTALS Inventory = $395,000 (add the two book values and subtract the ending

unrealized gain of $5,000) Sales = $1,050,000 (add the two book values and subtract the $150,000

intercompany transfer) Cost of Goods Sold = $355,000 (add the two book values and subtract

the intercompany transfer and add [to defer] ending unrealized gain) Operating Expenses = $409,000 (add the two book values and the

amortization expense for the period) Noncontrolling Interest in Subsidiary's Net Income = $19,000 (20 percent

of the reported income after deferring $5,000 ending unrealized gain. Gain is included in this computation because the transfer was upstream from Sam to Pop)


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

Purchase price $980,000Book value of subsidiary $950,000Portion acquired 80 % 760,000Excess assigned to covenants $220,000Useful life in years ÷ 20 Annual amortization $11,000

2005 Ending Inventory Profit Deferral Cost = $100,000/1.6 or $62,500 Intercompany Gain = $100,000 – $62,500 or $37,500 Ending Inventory Gain = $37,500 × 40% or $15,000

2006 Ending Inventory Profit Deferral Cost = $120,000 ÷ 1.6 or $75,000 Intercompany Gain = $120,000 – $75,000 or $45,000 Ending Inventory Gain = $45,000 40% or $18,000

a. Investment account:Cost, January 1, 2005 $980,000

Smashing’s 2005 income × 80% $120,000Covenant amortization (11,000)Ending inventory profit deferral (15,000)

Equity in Smashing’s earnings 94,0002005 dividends (28,000)Investment balance 12/31/05 $1,046,000

Smashing’s 2006 income 80% $104,000Covenants amortization (11,000)Beginning inventory profit recognition 15,000Ending inventory profit deferral (18,000)Equity in Smashing’s earnings 90,000

2006 dividends (36,000)Investment balance 12/31/06 $1,100,000


17. (continued)

b. 12/31/06 Worksheet Adjustments

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

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

Investment in S 852,000Noncontrolling interest 213,000

A Covenants 209,000Investment in S 209,000

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

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

E Amortization expense 11,000Covenants 11,000

TI Sales 120,000COGS 120,000

G COGS 18,000Inventory 18,000

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

a. 2005 Unrealized Gain to be Recognized in 2006

Total intercompany gain on transfers ($90,000 – $54,000) .... $36,000Inventory retained at end of 2005 ............................................. 20%

Unrealized gain—12/31/05 ................................................... $7,200

2006 Unrealized Gain Deferred

Total intercompany gain on transfers ($120,000 – $66,000) . . $54,000Inventory retained at end of 2006 ............................................. 30%

Unrealized gain—12/31/06.................................................... $16,200


18. a. (continued)

Noncontrolling Interest's Share of Kane's IncomeKane's reported income 2006.................................................... $110,0002005 gain realized in 2006 (upstream sales) ........................... 7,2002006 gain deferred (upstream sales) ....................................... (16,200)Kane's realized income ............................................................. $101,000Noncontrolling interest ownership .......................................... 20%Noncontrolling Interest's Share of Kane's Income.................. $20,200

b. Inventory—Smith book value ................................................... $140,000Inventory—Kane book value .................................................... 90,000Unrealized gain, 12/31/06 (see part a) ...................................... (16,200)Consolidated Inventory ............................................................. $213,800(Direction of transfer has no impact here)

c. Downstream transfers do not affect the noncontrolling interest.Kane's reported income—2006 ............................................... $110,000Noncontrolling interest ownership ......................................... 20%Noncontrolling Interest's Share of Kane's Income.................. $22,000

d. Smith's reported income 2006................................................... $300,000Elimination of intercompany dividend income recorded

by parent ($40,000 × 80%) .................................................... (32,000)Kane's reported income 2006 ................................................... 110,000Amortization expense (given) .................................................. (5,000)Realization of 2005 intercompany gain (see part a) .............. 7,200Deferral of 2006 intercompany gain (see part a) ..................... (16,200)Consolidated net income prior to reduction

for noncontrolling interest ................................................. $364,000

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

Smith's retained earnings, December 31, 2006 (given) ......... $600,000Excess amortizations 1999–2006 ($5,000 8) ........................... (40,000)Deferral of parent's 12/31/06 intercompany gain (see part a). (16,200)Consolidated Retained Earnings 12/31/06 .............................. $543,800


18. (continued)

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

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

Smith's retained earnings, December 31, 2006 (given)........... $600,000Excess Amortizations, 1999–2006 ($5,000 × 8) ....................... (40,000)Reduction of equity accrual because of subsidiary's unrealized gain (explained above) ........................................................... (12,960)CONSOLIDATED RETAINED EARNINGS, 12/31/06 ................. $547,040

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


18. (continued)

h. The intercompany transfer was upstream from Kane to Smith. Because the transfer occurred in 2005, beginning retained earnings of the seller for 2006 contains the remaining portion of the unrealized gain.

Transfer Pricing Figures2005 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

2006 Depreciation expense = $16,000Accumulated depreciation = $32,000

Historical Cost Figures2005 Equipment = $100,000

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

2006 Depreciation expense = $12,000Accumulated depreciation = $64,000


18. h. (continued)

CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT

ENTRY *TARetained Earnings, 1/1/06 (Kane) ............................. 16,000Equipment ($100,000 – $80,000) ............................... 20,000

Accumulated Depreciation ($52,000 – $16,000).. 36,000To change beginning of year figures to historical cost figures by removing impact of 2005 transactions. Retained earnings reduction removes $4,000 income effect (above) and replaces it with $12,000 depreciation expense for 2005.

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

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

This intercompany transfer was upstream from Kane to Smith. Thus, income effects are assumed to relate to the original seller or, in this case, to Kane. Because the sale occurred in 2005, the only effect on 2006 financial statements is from the calculation of depreciation expense. The expense based on the transfer price is $4,000 higher than the amount based on the historical cost figure. As an upstream transfer, this adjustment affects Kane and the noncontrolling interest computations.

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

Noncontrolling Interest in Kane's Income

Kane's reported income ............................................................. $110,000Reduction of depreciation expense to historical cost figure.. 4,000Kane's realized income .............................................................. $114,000Outside ownership percentage .................................................. 20%

NONCONTROLLING INTEREST IN KANE'S INCOME ......... $22,800


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

a. Markup as a Percentage of Sales PriceCost of inventory .................................................................. 100Markup (given as a percentage of cost) ............................. 20Sales price............................................................................. 120Gross profit rate (.2 1.2).................................................... 16.7 %

Noncontrolling Interest's Share of Subsidiary’s IncomeReported income of subsidiary—2006..................................... $120,0002005 Intercompany gain realized in 2006

($252,000 × 1/10 × 16.7 %) .................................................... 4,2082006 Intercompany gain deferred

($288,000 × 1/10 × 16.7 %) .................................................... (4,810)Realized income of subsidiary—2006 ................................ $119,398

Outside ownership .................................................................... 40%Noncontrolling interest's share of subsidiary's income ... $47,759

b. Entry *GRetained Earnings, Jan. 1 (subsidiary) ......... 4,208

Cost of Goods Sold ................................... 4,208To remove intercompany gain from balances carried over from 2005 so that it can be recognized in 2006.

Entry TlSales................................................................. 288,000

Cost of Goods Sold (purchases) .............. 288,000To eliminate effects of intercompany transfer of inventory.

Entry GCost of Goods Sold ........................................ 4,810

Inventory .................................................... 4,810To remove effects of 2006 unrealized gain.


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

a. Consolidated Cost of Goods SoldPenguin book value ................................................................... $290,000Snow book value ....................................................................... 197,000Elimination of 2006 intercompany transfers ........................... (110,000)Reduction of beginning Inventory because of

2005 unrealized gain ($28,000/1.4 = $20,000cost; $28,000 transfer price less $20,000cost = $8,000 unrealized gain) ............................................. (8,000)

Reduction of ending inventory because of2006 unrealized gain ($42,000/1.4 = $30,000cost; $42,000 transfer price less $30,000cost = $12,000 unrealized gain) ........................................... 12,000

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

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

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

b. Consolidated Cost of Goods SoldPenguin book value ................................................................... $290,000Snow book value ....................................................................... 197,000Elimination of 2006 intercompany transfers ........................... (80,000)Reduction of beginning inventory because of

2005 unrealized gain ($21,000/1.4 = $15,000cost; $21,000 transfer price less $15,000cost = $6,000 unrealized gain) ............................................. (6,000)

Reduction of ending inventory because of2006 unrealized gain ($35,000/1.4 = $25,000cost; $35,000 transfer price less $25,000cost = $10,000 unrealized gain) ........................................... 10,000

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


20. b. (continued)

Consolidated Inventory

Penguin book value ................................................................... $346,000Snow book value ....................................................................... 110,000Eliminate ending unrealized gain (see above for amount) . . . . (10,000)

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

Noncontrolling Interest in Subsidiary's Net income

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

Snow reported income .............................................................. $58,0002005 unrealized gain realized in 2006 (above) ........................ 6,0002006 unrealized gain to be realized in 2007 (above) ............... (10,000)Snow realized income ............................................................... $54,000Outside ownership percentage ................................................ 20%

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

c. Consolidated Buildings (Net)

Penguin’s book value ............................................. $358,000Snow's book value .................................................. 157,000Remove inflation created by transfer

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

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

Consolidated Expenses

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

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

Noncontrolling Interest in Subsidiary’s Net Income

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


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

transfers (either upstream or downstream) is not important to the consolidated totals. Because Allen controls all of Bowen'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 2007 consolidation, the following worksheet entries would affect income statement balances:Entry *G

Retained Earnings, 1/1/07 (seller) ....... 18,000Cost of Goods Sold ........................ 18,000

To remove 2006 unrealized gain from beginning account balances. Gain is the 30% markup ($60,000/$200,000) multiplied by remaining inventory ($60,000).

Entry EAmortization Expense.......................... 9,000

Specific Accounts ........................... 9,000To recognize excess amortization expense for the current period.

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

Cost of Goods Sold ........................ 200,000To eliminate intercompany transfers of inventory during 2007.

Entry GCost of Goods Sold .............................. 13,500

Inventory ......................................... 13,500To remove 2007 unrealized gain from ending account balances. Gain is the 30% markup ($60,000/$200,000) multiplied by remaining inventory ($45,000).

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

ALLEN, INC. AND CONSOLIDATED SUBSIDIARYIncome Statement

Year Ending December 31, 2007Sales ..................................................................................... $1,200,000Cost of goods sold ............................................................... 495,500

Gross profit ..................................................................... 704,500Operating expenses ............................................................. 429,000

Consolidated net income ............................................... $275,500


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

a. Investment account:

Cost, January 1, 2005 $1,400,000SpeedNet’s 2005 income 90% $72,000Database amortization (64,000)Gain on equipment transfer deferral (3,000)Depreciation adjustment (6 months) 500

Equity in SpeedNet earnings 5,5002005 Dividends (4,500)Investment balance 12/31/05 $1,401,000

SpeedNet’s 2006 income 90% $103,500Database amortization (64,000)Depreciation adjustment (full year) 1,000

Equity in SpeedNet earnings 40,5002006 Dividends (7,200)Investment balance 12/31/06 $1,434,300

b. 12/31/06 Worksheet Adjustments*TA Equipment 6,000

Investment in S 2,500Accumulated depreciation 8,500

To transfer the unrealized interco. equipment reduction (as of Jan. 1, 2006) from the Investment account to the equipment and A.D. accounts.S Common stock—S 900,000

RE—S 375,000Investment in S 1,147,500Noncontrolling interest 127,500

A Database 256,000Investment in S 256,000



E Amortization expense 64,000Database 64,000

ED Accumulated depreciation 1,000Depreciation expense 1,000


22. (continued)

Alternative set of equivalent adjustments for part b.

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

Accumulated Depreciation 7,500To transfer the unrealized intercompany equipment reduction (as of Dec. 31, 2006) from the investment account to the equipment and A.D. accounts.

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

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

S Common stock—S 900,000RE—S 375,000

Investment in S 1,147,500Noncontrolling interest 127,500

A Database 256,000Investment in S 256,000



E Amortization expense 64,000Database 64,000


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

INDIVIDUAL RECORDS BASED ON TRANSFER PRICE12/31/05 Equipment = $70,000 Gain on transfer = $30,000 ($70,000 – $40,000) Depreciation expense = $14,000 ($70,000/5 years) Accumulated depreciation = $14,000

12/31/06 Depreciation expense $14,000 Accumulated depreciation = $28,000 (2 years)

12/31/07 Retained earnings, 1/1/07 = $2,000 (gain less two years of

depreciation) Depreciation expense = $14,000 Accumulated depreciation = $42,000 (3 years)

CONSOLIDATED REPORTING BASED ON HISTORICAL COST12/31/05 Equipment = $110,000 Depreciation expense = $8,000 ($40,000/5 years) Accumulated depreciation = $78,000 ($70,000 + $8,000)

12/31/06 Depreciation expense = $8,000 Accumulated depreciation = $86,000 ($78,000 + $8,000)

12/31/07 Retained earnings, 1/1/07 = ($16,000) (two years of depreciation) Depreciation expense = $8,000 Accumulated depreciation = $94,000 ($86,000 + $8,000)

Entry *TARetained earnings, 1/1/07 (Plimpton) ................. 18,000Equipment ($110,000 – $70,000) ......................... 40,000

Accumulated depreciation ($86,000 – $28,000) 58,000To adjust beginning-of-year individual financial records to balances for consolidated entity. Retained earnings adjustment reduces $2,000 positive balance to $16,000 negative balance as computed above.

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

Depreciation Expense .................................... 6,000To remove excess depreciation for current year; amount should be computed on historical cost ($8,000) rather than the transfer price ($14,000).


24. (15 Minutes) (Determine consolidated net income when an intercompany transfer of equipment has occurred. Includes an outside ownership)

a. Income—Slaughter .................................................................... $220,000Income—Bennett........................................................................ 90,000Remove unrealized gain on equipment ................................... (50,000)($120,000 – $70,000)Remove excess depreciation created by inflated transfer

price ($50,000/5) ................................................................... 10,000Consolidated net income ..................................................... $270,000

b. Income calculated in (part a.) ................................................... $270,000Noncontrolling interest in Bennett's income ($90,000 × 10%)(9,000)

Consolidated net income ..................................................... $261,000

c. Income calculated in (part a.) ................................................... $270,000Noncontrolling interest in Bennett's income (see Schedule 1) (5,000)

Consolidated net income ..................................................... $265,000

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

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

Noncontrolling interest in subsidiary's income ................ $ 5,000

d. Net income—Slaughter ............................................................. $240,000Net income—Bennett ................................................................ 100,000Eliminate excess depreciation stemming from transfer

($50,000/5) (2nd year) ........................................................... 10,000 Consolidated net income ................................................. $350,000


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

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

Unrealized Gain—Inventory, 1/1/06Markup ($70,000 – $49,000) ....................................................... $21,000Markup percentage ($21,000/$70,000) ..................................... 30%

Remaining inventory ................................................................. $30,000Markup percentage .................................................................... 30%Unrealized gain, 1/1/06............................................................... $9,000

Unrealized Gain—Inventory, 12/31/06Markup ($100,000 – $50,000) ..................................................... $50,000Markup percentage ($50,000/$100,000) ................................... 50%

Remaining inventory ................................................................. $40,000Markup percentage .................................................................... 50%Unrealized gain, 12/31/06 .......................................................... $20,000

Impact of intercompany Building Transfer

12/31/05—Transfer Price FiguresTransfer price ....................................................................... $50,000Gain on transfer ($50,000 – $30,000) .................................. 20,000Depreciation expense ($50,000/5) ....................................... 10,000Accumulated depreciation .................................................. 10,000

12/31/06—Transfer Price FiguresDepreciation expense .......................................................... 10,000Accumulated depreciation .................................................. 20,000

12/31/05—Historical Cost FiguresHistorical cost ....................................................................... $70,000Depreciation expense ($30,000 book value/5 years) ......... 6,000Accumulated depreciation ($40,000 + $6,000) ................... 46,000

12/31/06—Historical Cost FiguresDepreciation expense .......................................................... 6,000Accumulated depreciation .................................................. 52,000


25. (continued)

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

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

$100,000 in intercompany purchases. Subtract $9,000 because of the previous year unrealized gain and add $20,000 to defer the current year unrealized gain.)

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

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

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

Equipment (net) = $292,000 (add the two book values and include the $60,000 allocation from the purchase price less three years of excess amortizations)

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


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

a. Entry *GRetained Earnings, 1/1/06 (Sledge) ............... 2,000

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

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

Accumulated Depreciation ....................... 6,400To adjust the equipment balance to original cost ($16,000) and to adjust accumulated depreciation to the correct consolidated January 1, 2006 balance ($7,000 less $600 extra depreciation in 2005). The net reduction to the reported equipment balance (cost less A.D. = $2,400) equals the amount of unrealized gain at January 1, 2006. 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 2005 for the original intercompany gain and increased by $600 in 2005 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, 2006 balances.

Entry SCommon Stock (Sledge) ........................................... 120,000Retained Earnings, 1/1/06 (adjusted) (Sledge)........ 258,000

Investment in Sledge (80%) ................................. 302,400Noncontrolling interest in Sledge, 1/1/06 (20%). 75,600

To eliminate subsidiary's stockholders' equity accounts (after adjustment for Entry *G) and recognize noncontrolling interest balance as of January 1, 2006.

Entry AContracts ($60,000 – $3,000 for 5 years) ................. 45,000Buildings ($20,000 – $2,000 for 5 years) .................. 10,000

Investment in Sledge ........................................... 55,000To recognize allocations from purchase price adjusted for 5 years of amortization from 2001 through 2005.


26. (continued)

Entry IEquity Income of Subsidiary .................................... 9,600

Investment in Sledge ........................................... 9,600To remove intercompany income accrual recorded by parent using full equity method (80% of $17,500 realized income [see Part b] less $5,000 in excess amortizations for the year [see Entry E] plus $600 removal of excess depreciation from 2005 intercompany equipment transfer).

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

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

To record excess amortizations for 2006 based on allocations and useful lives.

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

Cost of Goods Sold .............................................. 20,000To eliminate intercompany inventory transfers during 2006.

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

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

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

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


26. (continued)

b. Noncontrolling Interest in the Subsidiary's Income 2006

Revenues..................................................................................... $130,000Cost of goods sold .................................................................... (70,000)Other expenses .......................................................................... (40,000)

Reported income .................................................................. $20,000Gain on 2005 upstream inventory transfer realized in 2006

(Entry *G) ............................................................................... 2,000Gain on 2006 upstream inventory transfer deferred

(Entry G) ................................................................................ (4,500)Realized income of subsidiary—2006 ................................ $17,500

Outside ownership .................................................................... 20%Noncontrolling interest in subsidiary's net income .......... $3,500

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

a. Book value, 1/1/06:Common stock ..................................... $150,000Retained earnings, 1/1/06 .................... 278,000 $428,000

Book value, 1/1/04 (given) ......................... (330,000)Increase in book value, 2004–2005 ..... $98,000

b. Purchase price ........................................... $345,000Book value ($330,000 × 90%) .................... (297,000)Price in excess of book value .................. $48,000Excess price assigned to building Annual Excess

based on fair market value Life Amortizations($20,000 × 90%) .................................... 18,000 9 yrs. $2,000

Patented Technology ................................ 30,000 10 yrs. 3,000Totals..................................................... -0- $5,000

c. Since Little sold inventory to Big, the transfers are upstream.

d. Gross profit on 2005 transfers ($135,000 – $81,000) .............. $54,000Gross profit percentage ($54,000/$135,000) ............................ 40%

Inventory remaining, 12/31/05 .................................................. $37,500Gross profit percentage ............................................................ 40%Unrealized gain, January 1, 2006 ............................................. $15,000

e. Retained earnings, 1/1/06 (reported) ........................................ $278,000Unrealized gain, 1/1/06 (above) ................................................ (15,000)Retained earnings, 1/1/06 (realized) ......................................... $263,000

27. (continued)


f. Gross profit on 2006 transfers ($160,000 – $92,800) .............. $67,200Gross profit percentage ($67,200/$160,000) ............................ 42%

Inventory remaining, 12/31/06 .................................................. $50,000Gross profit percentage ............................................................ 42%Unrealized gain, December 31, 2006......................................... $21,000

g. Little’s net income, 2006 (reported) ......................................... $90,0002005 Unrealized gain recognized in 2006 (see d) .................... 15,0002006 Unrealized gain deferred (see f) ...................................... (21,000)Little’s net income, 2006 (realized) .......................................... $84,000

h. Big is applying the equity method since the $70,600 does not equal 90% of Little's reported Income or 90% of the dividends paid by Little.

Little’s realized income (see g) ................................................. $84,000Ownership .................................................................................. 90%Equity Income accrual ............................................................... $75,600Excess amortization expenses (see b) .................................... (5,000)Investment income—Little ........................................................ $70,600

i. Little’s realized income (see g) ................................................. $84,000Outside ownership .................................................................... 10%Noncontrolling interest in subsidiary's net income ............... $8,400

j. Investment in Little (original cost) ........................................... $345,000Income of Little

Reported 2004....................................... $60,0002005 .................................................. 80,0002006 .................................................. 90,000Total ................................................. 230,000

Unrealized gain, 12/31/06 (see f) ......... (21,000)Realized income 2004-2006 ................. 209,000Big’s ownership ................................... 90% 188,100

Excess amortizations ($5,000 × 3 years) . (15,000)

Dividends paid by Little (30% of income)Paid 2004 .............................................. $18,000

2005 .................................................. 24,0002006 .................................................. 27,000Total ................................................. 69,000

Big's ownership ................................... 90% (62,100)Investment in Little, 12/31/06 .................... $456,000

27. (continued)


k. Entry SCommon Stock (Little) .............................. 150,000Retained Earnings, 1/1/06 (Little) (reduced by 1/1/06 unrealized gain) .............................. 263,000

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

l. Sales Revenues = $1,068,000 (add book values and remove $160,000 in

intercompany sales) Cost of Goods Sold = $570,000 (add book values less $160,000 in

intercompany purchases. Also, adjust for 2005 unrealized gain [subtract $15,000] and 2006 unrealized gain [add $21,000])

Expenses = $258,600 (add book values with $5,000 amortization on allocations)

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

Noncontrolling Interest in Subsidiary's Net Income = $8,400 (see i) Net income = $231,000 (consolidated revenues less consolidated cost of

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

Retained Earnings, 1/1/06 = $488,000 (parent equity method balance) Dividends Paid = $136,000 (parent balance only) Retained Earnings, 12/31/06 = $583,000 (consolidated beginning balance

plus net income less dividends paid) Cash and Receivables = $228,000 (add book values less $16,000

intercompany balance) Inventory = $370,000 (add book values and defer ending unrealized gain) Investment in Little = $0 (intercompany balance is eliminated so that the

individual assets and liabilities of the subsidiary can be reported) Land, Buildings, and Equipment = $1,299,000 (add book values and include

$18,000 allocation after 3 years of amortization) Patented Technology = $21,000 (original allocation after 3 years of

amortization [$3,000 per year]) Total Assets = $1,918,000 (add consolidated figures) Liabilities = $773,000 (add book values less $16,000 intercompany balance)

27. (part l. continued)


Noncontrolling Interest in Little, 12/31/06 = $47,000 (10% of ending book value after removal of ending unrealized gain) or (10% of subsidiary's book value at beginning of period less beginning unrealized gain] plus 10% of the subsidiary's realized net income less 10% of subsidiary dividends)

Common Stock = $515,000 (parent balance only) Retained Earnings, 12/31/06= $583,000 (see above) Total Liabilities and Stockholders' Equity = $1,918,000 (summation)

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

UNREALIZED GAIN, 12/31/05: (downstream transfer)Intercompany Gain ($120,000 – $72,000) ................................. $48,000Inventory Remaining at Year's End .......................................... 30%

Unrealized Intercompany Gain, 12/31/05 ...................................... $14,400

UNREALIZED GAIN, 12/31/06: (downstream transfer)Intercompany Gain ($250,000 – $200,000) ............................... $50,000Inventory Remaining at Year's End .......................................... 20%


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

intercompany transfer) Cost of Goods Sold:

Asphalt's Book Value ................................................................ $535,000Broadway's Book Value ............................................................ 400,000Eliminate Intercompany Transfers ........................................... (250,000)Realized Gain Deferred in 2005 ................................................ (14,400)Deferral of 2006 Unrealized Gain .............................................. 10,000

Cost of Goods Sold .............................................................. $680,600

Operating Expenses = $210,000 (add the two book values and include intangible amortization for current year)

Dividend Income = -0- (intercompany transfer eliminated for consolidation purposes)

Noncontrolling Interest in Consolidated Income: (impact of transfers is not included because they were downstream)

Broadway Reported Income for 2006 ................................. $100,000Outside Ownership .............................................................. 30%

Noncontrolling Interest .................................................. $30,000 Inventory = $988,000 (add the two book values and defer the $10,000

ending unrealized gain) Noncontrolling Interest in Subsidiary, 12/31/06 = $300,000 (30 percent of

beginning book value [$950,000 based on stockholder's equity


accounts] gives $285,000. Add income [$30,000 as computed above] and subtract 30 percent of the subsidiary's dividends [$15,000 or 30% of $50,000]. Because the transfers were downstream and did not affect the subsidiary, this computation can also be made as 30% of the subsidiary's ending book value)

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

UNREALIZED GAIN, 12/31/05: (upstream transfer)Intercompany Gain ($120,000 – $72,000) ................................. $48,000Inventory Remaining at Year's End .......................................... 30%


UNREALIZED GAIN, 12/31/06: (upstream transfer)Intercompany Gain ($250,000 – $200,000) ............................... $50,000Inventory Remaining at Year's End .......................................... 20%


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

Intercompany transfer) Cost of Goods Sold:

Asphalt's Book Value ................................................................ $535,000Broadway's Book Value ............................................................ 400,000Eliminate Intercompany Transfers ........................................... (250,000)Realized Gain Deferred in 2005................................................. (14,400)Deferral of 2006 Unrealized Gain .............................................. 10,000Cost of Goods Sold ................................................................... $680,600

Operating Expenses = $210,000 (add the two book values and include intangible amortization for current year)

Dividend Income = -0- (intercompany transfer eliminated for consolidation purposes)

Noncontrolling Interest in Consolidated Income: (impact of transfers is included because they were upstream)Broadway Reported Income for 2006 ...................................... $100,0002005 Gain Deferred into 2006 ................................................... 14,4002006 Gain Deferred .................................................................... (10,000)Broadway Realized Income for 2006......................................... $104,400Outside Ownership .................................................................... 30%Noncontrolling Interest ............................................................. $31,320

Inventory = $988,000 (add the two book values and defer the $10,000 ending unrealized gain)

29. (continued)


Noncontrolling Interest in Subsidiary, 12/31/06 = $297,000 (30 percent of beginning book value after removing beginning unrealized gain [$935,600 based on stockholders' equity accounts after removing $14,400 upstream gain] gives $280,680 and then add income [$31,320 as computed above] and subtract 30 percent of the subsidiary's dividends [$15,000 or 30% of $50,000]. Because the transfers were upstream, this computation can also be made as 30% of the subsidiary's ending book value after removing $10,000 unrealized gain)

30. (75 Minutes) (Determine consolidated balances after impact of upstream Inventory transfers and downstream transfer of building)

PRELIMINARY COMPUTATIONSPurchase Price ................................................ $654,000Book Value of Net Assets (see below)

($540,000 × 90%) ........................................ (486,000)Purchase Price in Excess of Book Value $168,000

Excess Purchase Price Assigned Based Annual Excess on Market Value: Life Amortizations

Equipment ($50,000 × 90%) ................. 45,000 5 years $9,000Liabilities ($30,000 × 90%) ................... 27,000 20 years 1,350

Brand Names ................................................... $96,000 40 years 2,400Annual Excess Amortizations for Each of

First Five Years ..................................................................... $12,750Annual Excess Amortizations After First Five

Years (Equipment is Fully Amortized)................................. $3,750

Determination of Subsidiary Book Value on 1/1/95Book Value, 1/1/06 (based on stockholders' equity accounts) $800,000Eliminate Net Income – 1995 through 2005 ............................. (600,000)Eliminate Dividends – 1995 through 2005 ............................... 340,000

Book Value, 1/1/95 ................................................................ $540,000

INVENTORY UNREALIZED GAIN, 12/31/05 (Upstream)Ending Inventory ($145,000 × 30%) .......................................... $43,500Markup (given) ........................................................................... 20%Unrealized Intercompany Gain, 12/31/05 ................................. $8,700

INVENTORY UNREALIZED GAIN, 12/31/06 (Upstream)Ending Inventory ($160,000 × 40 %) ......................................... $64,000Markup (given) ........................................................................... 20%Unrealized Intercompany Gain, 12/31/06 ................................. $12,800

30. (continued)

BUILDING UNREALIZED GAIN, 1/1/05 (Downstream)


Transfer Price ............................................................................. $25,000Book Value ................................................................................. 10,000Unrealized Gain .......................................................................... $15,000

ANNUAL EXCESS DEPRECIATIONAnnual Depreciation Based on Book Value ($10,000/5 years) $2,000Annual Depreciation Based on Transfer Price

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

ADJUSTMENT TO BUILDING ACCOUNTS TO RETURN TO HISTORICAL COST AT 1/1/06

Consolidation Transfer Price Historical Cost Adjustment

Buildings $25,000 $100,000 $75,000Accumulated Depreciation

(1 /1/05 balance after 1more year of depreciation) 5,000 92,000 87,000

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

eliminate the intercompany transfers) Cost of Goods Sold:

Topper's Book Value ................................................................. $500,000Kirby's Book Value .................................................................... 400,000Eliminate Intercompany Transfers ........................................... (160,000)Realized Gain Deferred in 2005................................................. (8,700)Deferral of 2006 Unrealized Gain .............................................. 12,800Cost of Goods Sold ................................................................... $744,100

Operating and Interest Expense = $260,750 (add the two book values and include $3,750 amortization for current year but eliminate $3,000 excess depreciation)

Noncontrolling Interest in Subsidiary’s Income = $3,590 (impact of inventory transfers is included because they were upstream but building transfer is omitted because it was downstream)

Reported income for 2006 .............................................................. $40,000Realized Gain Deferred in 2005 ................................................ 8,700Deferral of 2006 Unrealized Gain .............................................. (12,800)Realized Income of Subsidiary ................................................. $35,900

30. (continued)

Outside Ownership ......................................................................... 10%Noncontrolling Interest ............................................................. $3,590


Net Income = $231,560 (consolidated sales less consolidated cost of goods sold, expenses, and noncontrolling interest)

Retained Earnings, 1/1/06 = $1,117,920 (because cost method has been used [as indicated by Investment in Kirby balance], the parent's retained earnings must be adjusted for changes in subsidiary's book value, excess amortizations, and the impact of unrealized gains in previous years)

Topper's Reported Balance, 1/1/06 ............................... $990,000Impact of Building Transfer (parent's income was over-

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

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

years (income of $600,000 less dividends of$340,000) ............................................................... $260,000

Deferral of 12/31/05 Unrealized Gain(subsidiary's prior income was overstated) ...... (8,700)Realized increase in book value ......................... 251,300

Ownership................................................................... 90%Equity Accrual ........................................................... 226,170

Amortization Expense for Eleven Prior Years(5 at $12,750 each and 6 at $3,750 each) ................. (86,250)

Retained Earnings, 1/1/06..................................... $1,117,920

Dividends Paid = $130,000 (parent balance only)Retained Earnings, 1/31/06 = $1,219,480 (the beginning balance plus net

income less dividends paid)Cash and Receivables = $370,000 (add the two book values after eliminating

intercompany receivable balance)Inventory = $371,200 (add the two book values and defer the $12,800 ending

unrealized gain)Investment in Kirby = -0- (eliminated for consolidation purposes)Equipment (Net) = $1,000,000 (add the two book values since the original

allocation is now completely amortized)Buildings = $1,875,000 (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 and add the

impact to return to historical cost ($87,000 as computed above for beginning of year less $3,000 excess depreciation for current year)

Other Assets = $300,000 (add the two book values)30. (continued)

Brand Names = $67,200 (the original allocation [$96,000] after twelve years of amortization [$2,400 per year])


Total Assets = $3,599,400 (summation of the consolidated totals)Liabilities = $1,697,200 (add the two book values, eliminate the intercompany

balance, and subtract the original allocation [$27,000] after twelve years of amortization [$1,350 per year])

Noncontrolling Interest, 12/31/06 = $82,720 (10 percent of beginning book value [$791,300 after deferral of unrealized gain] gives $79,130 and then add income [$3,590 as computed above])

Common Stock = $600,000 (parent balance only)Retained Earnings, 12/31/06 = $1,219,480 (computed above)Total Liabilities and Equities = $3,599,400 (summation of consolidated balances).

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

CONSOLIDATION ENTRIESEntry *G

Retained Earnings, 1/1/06 (Kirby) ....................... 8,700Cost of Goods Sold ........................................ 8,700

(To recognize 2005 deferred gain as income in 2006)

Entry *TABuilding.................................................................. 75,000Retained earnings, 1/1/06 (Topper) ..................... 12,000

Accumulated Depreciation ............................. 87,000(To adjust 1/1/06 balance to historical cost figures)

Entry *CInvestment in Kirby .............................................. 139,920

Retained Earnings, 1/1/06 (Topper) ............... 139,920(To convert from cost to equity method based on the following computation)

Increase in subsidiary's book value during prior years(income of $600,000 less dividends of $340,000) $260,000

Deferral of 12/31/05 unrealized gain.................... (8,700)Realized increase in subsidiary's book value... . $251,300Ownership ............................................................. 90%Income accrual ..................................................... $226,170Excess amortization expenses for eleven prior years

(5 at $12,750 each and 6 at $3,750 each) ...... (86,250)Cost to equity method adjustment ..................... $139,920

30. (continued)Entry S

Common Stock (Kirby) ........................................ 300,000Retained Earnings, 1/1/06 as adjusted (Kirby). . . 491,300

Investment in Kirby (90%) .............................. 712,170


Noncontrolling Interest in Kirby (10%) ......... 79,130(To eliminate subsidiary's beginning stockholders' equity accounts and recognize beginning noncontrolling interest balance)

Entry ALiabilities ............................................................... 12,150Brand Names ........................................................ 69,600

Investment in Kirby ........................................ 81,750(To recognize unamortized balance of excess allocations as of 1/1/06. Figures have been reduced by eleven previous years of amortization)

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

Entry EInterest Expense................................................... 1,350Brand Names Amortization Expense ................. 2,400

Liabilities ......................................................... 1,350Brand Names ................................................... 2,400

(To recognize excess amortization expenses for current year)

Entry PAccounts Payable ................................................ 20,000

Accounts Receivable ...................................... 20,000(To eliminate intercompany debt)

Entry TlSales ...................................................................... 160,000

Cost of Goods Sold ........................................ 160,000(To eliminate intercompany transfers for 2006)

Entry GCost of Goods Sold .............................................. 12,800

Inventory .......................................................... 12,800(To defer ending unrealized inventory gain)

Entry EDAccumulated Depreciation .................................. 3,000

Depreciation Expense .................................... 3,000(To adjust depreciation for current year created by transfer of building)


31. (45 Minutes) (Determine selected consolidated balances after impact of downstream inventory transfers and upstream transfer of building)

Purchase Price Allocation and Excess AmortizationsPurchase price ................................................ $372,000Book value equivalency ($350,000 × 60%) .......................................... (210,000)Excess cost over book value ......................... $162,000

Annual ExcessLife Amortizations

Excess cost allocated to patents($120,000 × 60%) ........................................ 72,000 12 yrs. $6,000

Customer List .................................................. $90,000 10 yrs. 9,000Total ............................................................ $15,000

January 1, 2006 Unrealized Gain from Intercompany Building Transfer (Upstream)Unrealized gain at date of transfer

($80,000 – $30,000) ..................................$50,000Excess depreciation for 2004–2005

($50,000/5 = 10,000 × 2 years) .................(20,000)Unrealized gain as of

January 1, 2006 .......................................$30,000January 1, 2006 Unrealized Gain from Intercompany Inventory Transfers(Downstream)Remaining inventory as of

December 31, 2005...................................$50,000Markup percentage 2005

($30,000/$150,000) ................................... 20%Unrealized gain as of

January 1, 2006........................................$10,000December 31, 2006 Unrealized Gain from Intercompany Inventory Transfers (Downstream)Remaining Inventory as of December 31, 2006.....................................$40,000Markup percentage 2006 ($48,000/$160,000) ..................................... 30%Unrealized gain as of December 31, 2006 ....................................$12,000

Because the parent's "Income of Smith" is exactly 60 percent of subsidiary’s income, the partial equity method is apparently in use.


31. (continued)Consolidated Balances:a. Cost of Goods Sold

Atkins’ book value ................................................................ $460,000Smith’s book value ............................................................... 205,000Eliminate current year transfers ......................................... (160,000)Recognition of previous year unrealized gain ................... (10,000)Deferral of current year unrealized gain ............................. 12,000

Cost of goods sold ......................................................... $507,000b. Operating Expenses

Atkins’ book value ................................................................ $170,000Smith’s book value ............................................................... 70,000Amortization expense (above) ............................................ 15,000Elimination of current excess depreciation created by

building transfer ($50,000/5 yrs.) ................................... (10,000)Operating expenses ........................................................ $245,000

c. Net IncomeSales (summation of two book values after elimination

of intercompany sales) ................................................... $840,000Cost of goods sold (above) ................................................. (507,000)Operating expenses (above) ............................................... (245,000)Noncontrolling interest in Smith's income (below) ........... (14,000)

Net income ....................................................................... $74,000Noncontrolling interest in Smith's income:Smith's reported income ..................................................... $25,000Elimination of current excess depreciation

on transferred building (upstream)................................ 10,000Smith's realized income ....................................................... $35,000Outside ownership percentage ........................................... 40%

Noncontrolling interest in Smith's income ................... $14,000d. Retained Earnings, January 1, 2006

Atkins reported balance ...................................................... $690,000Elimination of 2005 unrealized inventory gain (downstream) (10,000)Recognition of 2000–2005 excess amortizations required

because of use of partial equity method ($15,000 × 6) (90,000)Reduction required by Smith's January 1, 2006 unrealized

gain on building (remaining gain of $30,000 × 60% because transfer was upstream) ................................... (18,000)

Retained earnings, January 1, 2006 ................................... $572,000

31. (continued)


e. Inventory Atkins’ book value ................................................................ $233,000Smith’s book value ............................................................... 229,000Elimination of current year unrealized gain (above) ......... (12,000)

Inventory .......................................................................... $450,000

f. Buildings (Net) Atkins’ book value ................................................................ $308,000Smith’s book value ............................................................... 202,000Reduction for 1/1/04 unrealized gain .................................. (50,000)Reduction—2004–2006 excess depreciation

($10,000 per year) ............................................................ 30,000Buildings (net) ................................................................. $490,000

g. Patents (Net) Smith’s book value ............................................................... $20,000Acquisition price allocation (above) ................................... 72,000Amortization ($6,000 × 7 years) ........................................... (42,000)

Patents (net) .................................................................... $50,000

h. Common Stock = $300,000 (Atkins’ book value)

i. Noncontrolling Interest in SmithSmith's book value, December 31, 2006 ............................ $520,000Elimination of remaining unrealized building gain............ (20,000)Smith's realized book value, 12/31/06 ................................ $500,000Outside ownership percentage ........................................... 40%

Noncontrolling interest in Smith, December 31, 2006. $200,000

The balance can also be computed as follows:

Smith's book value, January 1, 2006................................... $500,000Elimination of remaining unrealized building gain............ (30,000)Realized book value, January 1, 2006 ................................ $470,000Outside ownership ............................................................... 40%Noncontrolling interest in Smith, January 1, 2006............. $188,000Noncontrolling interest in Smith's income (see c above) . 14,000Noncontrolling interest in dividends ($5,000 × 40%) ........ (2,000)Noncontrolling interest in Smith, December 31, 2006 ...... $200,000


32. (45 Minutes) (Produce a consolidated worksheet for a combination that has upstream inventory transfers)

a. The $10,000 figure does not equal 60% of the subsidiary's reported income or dividend payments. Thus, neither the partial equity method nor the cost method is being applied. The equity method is used by the parent as can be seen in the computation of the $10,000:

Annual ExcessPurchase Price Allocation Life Amortizations

Equipment ............................................ $70,000 10 yrs. $7,000Buildings ............................................... 40,000 20 yrs. 2,000Database................................................ 60,000 30 yrs. 2,000

Total ................................................. $170,000 $11,000Unrealized gain in beginning inventory: $20,000 × 25% = $5,000Unrealized gain in ending inventory: $40,000 × 25% = $10,000

Reported income balance—Short ............................................ $40,000Recognition of previous year unrealized gain (upstream) ..... 5,000Deferral of current year unrealized gain (upstream) .............. (10,000)Short's realized income ............................................................. $35,000Parent's ownership .................................................................... 60%Equity income accrual ............................................................... $21,000Amortization expense (above) .................................................. 11,000

Equity earnings of Short ...................................................... $10,000b. CONSOLIDATION ENTRIES

Entry *GRetained Earnings, 1/1/06 (Short) .................. 5,000

Cost of Goods Sold ................................... 5,000To remove unrealized gain from beginning account balances so that recognition can be made in 2006. Amount is computed above.

Entry SCommon Stock (Short) ................................... 90,000Additional Paid-in Capital (Short) .................. 60,000Retained Earnings, 1/1/06 (Short, as adjusted) 345,000

Investment in Short (60%) ........................ 297,000Noncontrolling Interest in Short, 1/1/06 (40%) 198,000

To eliminate beginning stockholders' equity accounts of subsidiary along with recognition of beginning noncontrolling interest balance.


32. (continued)

Entry AEquipment ....................................................... 56,000Buildings.......................................................... 36,000Database .......................................................... 56,000

Investment in Short ................................... 148,000To recognize unamortized purchase price allocations as of January 1, 2006 after two years of excess amortizations.

Entry IEquity Earnings of Short ................................ 10,000

Investment in Short ................................... 10,000To eliminate intercompany income recognized during year using the equity method.

Entry DInvestment in Short ........................................ 15,000

Dividends Paid ........................................... 15,000To eliminate intercompany dividend payments—60% of subsidiary's distribution for the year.

Entry EOperating expenses (depreciation)................ 9,000Amortization expense...................................... 2,000

Equipment .................................................. 7,000Buildings..................................................... 2,000Database..................................................... 2,000

To recognize excess amortization expenses for the current period.Entry P

Liabilities.......................................................... 30,000Receivables ................................................ 30,000

To eliminate intercompany debt.Entry Tl

Revenues ......................................................... 140,000Cost of Goods Sold ................................... 140,000

To eliminate intercompany inventory transfers.Entry G

Cost of Goods Sold ........................................ 10,000Inventory..................................................... 10,000

To eliminate ending unrealized gain.

Noncontrolling interest in subsidiary's income = $14,000 (40% of realized income [computed above] of $35,000)


32. (continued)TALL AND SUBSIDIARY

Consolidating WorksheetDecember 31, 2006

Accounts Tall Short Consolidation Entries Noncontrolling Consolidated Company Company Debit Credit Interest Balances Revenues $(984,000) $(438,000) (TI) 140,000 $(1,282,000)Cost of goods sold 551,000 286,000 (G) 10,000 (TI) 140,000

(*G) 5,000 702,000Operating expenses 198,000 112,000 (E) 9,000 319,000Database amortization (E) 2,000 2,000Noncontrolling Interest in

Short’s Income (14,000) 14,000Equity earnings of Short (10,000) (I) 10,000 -0-

Net Income $(245,000) $(40,000) $(245,000)

Retained earnings, 1/1/06 $(871,000) $(350,000) (*G) 5,000 $(871,000)(S) 345,000 -0-

Net Income (above) (245,000) (40,000) (245,000)Dividends paid 110,000 25,000 (D) 15,000 10,000 110,000

Retained earnings, 12/31/06 $(1,006,000) $(365,000) $(1,006,000)

Cash and receivables $239,000 $57,000 (P) 30,000 $ 266,000Inventory 454,000 95,000 (G) 10,000 539,000Investment in Short 440,000 (D) 15,000 (S) 297,000

(I) 10,000(A) 148,000 -0-

Land and buildings (net) 722,000 394,000( A) 36,000 (E) 2,000 1,150,000Equipment (net) 328,000 257,000 (A) 56,000 (E) 7,000 634,000Database (A) 56,000 (E) 2,000 54,000

Total assets $2,183,000 $803,000 $2,643,000

Liabilities $(686,000) $(288,000) (P) 30,000 $(944,000)

Noncontrolling interest in Short (S) 198,000 (198,000 ) 202,000 (202,000)

Common stock (320,000) (90,000) (S) 90,000 (320,000)Additional Paid-in capital (171,000) (60,000) (S) 60,000 (171,000)Retained earnings (above)................................ (1,006,000) (365,000) (1,006,000)

Total liabilities and stockholders’ equity $(2,183,000) $(803,000) $2,643,000


33. (50 Minutes) (Prepare consolidation entries for a combination where upstream inventory transfers have occurred as well as downstream equipment transfers. Parent has applied cost method)Purchase Price Allocation and Excess AmortizationsPurchase price ................................................ $665,000Book value equivalency

($800,000 × 70%) ........................................ (560,000) Annual ExcessCost in excess of book value ......................... $105,000 Life AmortizationsExcess cost allocation

—Buildings ($50,000 × 70%) ................... 35,000 5 yrs. $7,000Franchise Agreement ..................................... $70,000 10 yrs. 7,000

Total ............................................................ $14,000Inventory Transfers (Upstream)2005 Gain deferred until 2006 ($12,000 × 30%).............................. $3,6002006 Gain deferred until 2007 ($18,000 × 30%).............................. $5,400Equipment Transfer (Downstream)Unrealized gain as of January 1, 2006:

Unrealized gain on transfer (1/1/05) ......................................... $20,0002005 Excess depreciation ($20,000/5 yrs.) .............................. (4,000)

Unrealized gain January 1, 2006..................................................... $16,000

Excess depreciation—2006 ($20,000/5 yrs.) ................................. $4,000

Entry *GRetained Earnings, 1/1/06 (Young) ..................... 3,600

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

Entry *TARetained Earnings, 1/1/06

(Silvey) (above) ............................................... 16,000Equipment ($50,000 – $20,000) ........................... 30,000

Accumulated Depreciation($50,000 – $4,000) ........................................... 46,000

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


33. (continued)Entry *C

Investment in Young ....................................... 123,480Retained Earnings, 1/1/06 (Silvey) ........... 123,480

As cost method has been applied by parent, subsidiary's increase in book value during 2004–2005 and excess amortizations for that period must be recorded with computation as follows.

Retained Earnings of Young, December 31, 2006(given) ................................................................... $740,000

Eliminate Income and Dividends of Young($160,000 – $50,000) ............................................. (110,000)

Retained Earnings of Young, December 31, 2005 . . 630,000Removal of Unrealized Gain (Entry *G) ................... (3,600)Realized Retained Earnings of Young,

December 31, 2005................................................ 626,400Retained Earnings at Date of Acquisition ............... (410,000)Increase in Retained Earnings during 2004–2005

(represents increase in book value) ................... 216,400Ownership Percentage .............................................. 70%Income Accrual to be Recognized ........................... 151,480Excess Amortizations for 2004–2005 ($14,000 × 2 yrs.) (28,000)ENTRY *C ADJUSTMENT (above) ............................ $123,480

Entry SCommon Stock (Young) ...................................... 300,000Additional Paid-in Capital (Young) ..................... 90,000Retained Earnings, 1/1/06

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

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

Entry AFranchise Agreement........................................... 56,000Buildings ............................................................... 21,000

Investment in Young ....................................... 77,000To recognize amount paid within acquisition price for buildings and the franchise agreement. Balances have been reduced by two years of excess amortizations.


33. (continued)

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

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

Entry EDepreciation Expense........................................... 7,000Amortization Expense ......................................... 7,000

Franchise Agreement ..................................... 7,000Buildings.......................................................... 7,000

To recognize current year excess amortization expense.Entry Tl

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

To remove intercompany inventory transfers made during the current year.

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

Inventory........................................................... 5,400To defer unrealized gain on 2006 intercompany inventory transfers (computed above).

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

Depreciation Expense .................................... 4,000To remove current year depreciation on transferred item since its historical cost has been fully depreciated.

Noncontrolling Interest's Share of Subsidiary's Net IncomeReported income of Young (given) ..................................... $160,000Recognition of 2005 unrealized gain (Entry *G) (upstream) 3,600Deferral of 2006 unrealized gain (Entry G) (upstream) ..... (5,400)Realized income of Young ................................................... $158,200Outside ownership percentage ........................................... 30%Noncontrolling interest in subsidiary’s income ................ $47,460


34. (35 Minutes) (Prepare consolidation entries for a combination where upstream Inventory transfers have occurred as well as downstream equipment transfers. Parent has applied equity method)Entry *G (Same as Entry *G in Problem 33.)Entry *TA

Investment in Young ............................................ 16,000Equipment ............................................................. 30,000

Accumulated Depreciation ............................. 46,000To return equipment account to its book value based on historical cost. Because equity method has been applied and the transfer is downstream, the unrealized gain will have already been removed from the parent's retained earnings through an investment adjustment. 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 ............................................... 100,740Investment in Young ....................................... 100,740

To eliminate intercompany income accrual.Entry D

Investment in Young ............................................ 35,000Dividends Paid ................................................ 35,000

To eliminate intercompany dividend transfers.Entry E (Same as Entry E in Problem 33.)Entry TI (Same as Entry Tl in Problem 33.)Entry G (Same as Entry G in Problem 33.)Entry ED (Same as Entry ED in Problem 33.)Noncontrolling interest's share of subsidiary’s net income (Same as in Problem 33.)


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

a. CONSOLIDATION ENTRIES

Entry *TLRetained Earnings, 1/1/06 (Bumpus) ............. 40,000

Land ............................................................ 40,000To remove unrealized gain on Intercompany downstream transfer of land made in 2003.

Entry *GRetained Earnings, 1/1/06 (Keller) ................. 10,000

Cost of Goods Sold ................................... 10,000To defer unrealized upstream Inventory gain from 2005 until 2006. Unrealized gain is the 2005 ending inventory balance of $30,000 (20% × $150,000) multiplied by 33-1/3% markup ($50,000/$150,000).

Entry *CRetained earnings, 1/1/06 (Bumpus) ............. 31,000

Investment in Keller .................................. 31,000Parent is applying the partial equity method as can be seen by the amount in the Income of Keller Company account (60 percent of the reported balance). Thus, amortization of $25,000 must be recognized ($100,000 divided by 20 years or $5,000 per year for the five-year period from 2001 through 2005). In addition, the equity accrual recorded by the parent has been based on Keller's reported income. As shown in Entry *G, $10,000 of that reported income has not actually been realized as of January 1, 2006. 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 $31,000.

Entry SCommon Stock (Keller) .................................. 320,000Additional Paid-in Capital .............................. 90,000Retained earnings, 1/1/06 (Keller) (adjusted

by Entry *G) ................................................ 610,000Investment in Keller (60%) .................. 612,000Noncontrolling Interest in Keller, 1/1/06 (40%) 408,000

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

35. (continued)


Entry ACustomer List................................................... 75,000

Investment in Keller .................................. 75,000To recognize amount paid within acquisition price for the customer list. Original balance has been adjusted for five previous years of amortization.

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

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

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

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

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

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

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

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

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

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

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

Inventory..................................................... 12,000To defer 2006 unrealized inventory gain. Unrealized gain is the ending inventory of $40,000 (20% of $200,000) multiplied by 30% markup ($60,000/$200,000).

Noncontrolling Interest in Keller's Net IncomeKeller reported net income .................................. $140,0002005 Intercompany gain realized in 2006 (inventory) 10,0002006 Intercompany gain deferred (inventory) . . . (12,000)Keller realized income 2006................................. $138,000Outside ownership percentage ........................... 40%

Noncontrolling interest in Keller's net income $55,200


35. a. (continued) BUMPUS AND KELLERConsolidation Worksheet

Year Ending December 31, 2006Consolidation Entries Noncontrolling Consolidated

Accounts Bumpus Keller Debit Credit Interest Totals Sales $(800,000) $(500,000) (TI) 200,000 $(1,100,000)Cost of goods sold 500,000 300,000 (G) 12,000 (*G) 10,000 602,000

(TI) 200,000Operating expenses 100,000 60,000 160,000Amortization expense (E) 5,000 5,000Income of Keller (84,000) -0- (I) 84,000 -0-Noncontrolling interest

in Keller’s net income -0- -0- (55,200) 55,200Net income $(284,000 ) $(140,000 ) $(277,800 )

RE, 1/1/06—Bumpus $(1,116,000) (*TL) 40,000 $(1,045,000)(*C) 31,000

RE, 1/1/06—Keller (620,000) (*G) 10,000(S) 610,000

Net income (above) (284,000) (140,000) (277,800)Dividends 115,000 60,000 (D) 36,000 24,000 115,000

Retained earnings, 12/31/06 $(1,285,000 ) $(700,000 ) $(1,207,800 ) Cash $ 177,000 $90,000 $267,000Accounts receivable 316,000 410,000 (P) 40,000 686,000Inventory 440,000 320,000 (G) 12,000 748,000Investment in Keller 766,000 (D) 36,000 (*C) 31,000 -0-

(S) 612,000(I) 84,000(A) 75,000

Land 180,000 390,000 (*TL) 40,000 530,000Buildings and equipment (net) 496,000 300,000 796,000Customer List (A) 75,000 (E) 5,000 70,000

Total assets $2,375,000 $1,510,000 $3,097,000Liabilities $(480,000) $(400,000) (P) 40,000 (840,000)Common stock (610,000) (320,000) (S) 320,000 (610,000)Additional paid-in capital (90,000) (S) 90,000Retained earnings, 12/31/06 (1,285,000) (700,000) (1,207,800)NCI in Keller, 1/1/06 (S) 408,000 (408,000 ) NCI In Keller, 12/31/06 (439,200 ) (439,200 )

Total liabilities and equity $(2,375,000 ) $(1,510,000 ) $(3,097,000 )


35. (continued)

b. If the intercompany transfer had been a building rather than land, two adjustments to the consolidation entries would be needed. Entry *TL would be changed and relabeled as Entry *TA and an Entry ED would be added to eliminate the overstatement of depreciation expense for 2006. All other consolidation entries would be the same as shown in Part a. As a downstream transfer, entries *C and S are not affected.

Entry *TARetained Earnings, 1/1/06 (Bumpus) ............. 28,000Buildings ......................................................... 40,000

Accumulated Depreciation ....................... 68,000To eliminate current unrealized gain ($40,000 original amount less three years of excess depreciation at the rate of $4,000 per 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 plus three years of depreciation at $6,000 per year). Because the Buildings account is shown at net value in the information given in this problem, the above entry would probably be made as follows:

Entry *TA (Alternative)Retained Earnings, 1/1/06 (Bumpus) ............. 28,000

Buildings (net) ........................................... 28,000

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

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


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

Purchase price (fair value of shares issued) ........................... $450,000Book value of subsidiary .......................................................... 300,000Cost in excess of book value ................................................... $150,000

Excess cost assigned based on fair values:Land ............................................................................................ 30,000Franchise .................................................................................... $120,000Life of Franchise ........................................................................ 40 yearsAnnual amortization .................................................................. $ 3,000

Unrealized Upstream Inventory Gain, 1/1/07Inventory being held ($100,000 × 30%) .................................... $30,000Markup ($40,000/$100,000) ........................................................ 40%Unrealized gain, 1/1/07 .............................................................. $12,000

Unrealized Upstream Inventory Gain, 12/31/07Inventory being held (given) ..................................................... $20,000Markup ($75,000/$150,000) ........................................................ 50%Unrealized gain, 12/31/07........................................................... $10,000

CONSOLIDATION ENTRIESEntry *G

Retained Earnings, 1/1/07 (Meadow) .................. 12,000Cost of Goods Sold ........................................ 12,000

To remove impact of beginning unrealized gain. Amount computed above.

Entry SCommon Stock (Meadow) ................................... 120,000Additional Paid-In Capital (Meadow) .................. 30,000Retained Earnings, 1/1/07 (Meadow) (adjusted) 280,000

Investment in Meadow..................................... 430,000To remove stockholders' equity accounts of subsidiary. Retained earnings has been adjusted for elimination of beginning unrealized gain in Entry *G.

Entry ALand ....................................................................... 30,000Franchise .............................................................. 108,000

Investment in Meadow .................................... 138,000To recognize allocation balances as of January 1, 2007. Franchise account has been adjusted for four prior years of amortization at $3,000 per year.

36. (continued)


Entry IInvestment Income ............................................... 82,000

Investment in Meadow .................................... 82,000To remove intercompany income accrued by parent using the equity method.

Entry DInvestment in Meadow ......................................... 20,000

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

Entry EAmortization (or General and Administrative)Expense................................................................. 3,000

Franchise ......................................................... 3,000To recognize amortization expense on franchise for the current period.

Entry PLiabilities................................................................ 17,000

Receivables ..................................................... 17,000To eliminate intercompany receivable/payable balance created by transfer of land.

Entry TlRevenues .............................................................. 150,000

Cost of Goods Sold ........................................ 150,000To eliminate intercompany inventory transfer for 2007.

Entry GCost of Goods Sold .............................................. 10,000

Inventory........................................................... 10,000To defer unrealized inventory gain. Amount is computed above.

Entry TLGain on Sale of Land ........................................... 5,000

Land ................................................................. 5,000To remove gain created by intercompany transfer of land during current year.


36. (continued)GREENE AND MEADOWConsolidation Worksheet

Year Ending December 31, 2007

Consolidation EntriesConsolidated

Accounts Greene Meadow Debit Credit Totals Revenues $(477,000) $(358,000) (TI) 150,000

$(685,000)Cost of goods sold 289,000 195,000 (G) 10,000 (TI) 150,000

(*G) 12,000 332,000General and administrative expenses 170,000 75,000 (E) 3,000

248,000Gain on sale of land (5,000) (TL) 5,000

-0-Investment income (82,000 ) (I) 82,000

-0-Net income $(105,000 ) $(88,000 ) $(105,000)

Retained earnings, 1/1/07 $(365,000) $(292,000) (*G) 12,000(365,000)

(S) 280,000-0-

Net income (above) (105,000) (88,000)(105,000)

Dividends distributed 70,000 20,000 (D) 20,000 70,000

Retained earnings, 12/31/07 $(400,000 ) $(360,000 ) $(400,000)

Cash and receivables $169,000 $210,000 (P) 17,000 $362,000Inventory 281,000 232,000 (G) 10,000 503,000Investment in Meadow 630,000 (D) 20,000 (S) 430,000

(A) 138,000 -0-

(I) 82,000Land, buildings, and equipment (net) 487,000 284,000 (A) 30,000 (TL) 5,000 796,000Franchise (A) 108,000 (E) 3,000 105,000

Total assets $1,567,000 $726,000$1,766,000

Liabilities $(466,000) $(216,000) (P) 17,000$(665,000)

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) (400,000 ) (360,000 ) (400,000)

Total liabilities & stockholders’ equity $(1,567,000 ) $(726,000 ) $(1,766,000)

Parentheses indicate a credit balance


CHAPTER 5faculty.uml.edu/ccarter/AASC05.doc · Web view2008-02-03 · Hoyle, Schaefer, Doupnik, Fundamentals of Advanced Accounting, 1/e 5-1. Title: CHAPTER 5 Author: Faculty/Staff

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