Chapter 5



Chapter 5

INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES

Answers to Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

The other approach is to compute the noncontrolling interest percentage in reported subsidiary net income, in unrealized profits in beginning inventory, and in unrealized profits in ending inventory. Noncontrolling interest expense is then computed by adding the noncontrolling interest percentage in unrealized profits in the beginning inventory to the noncontrolling interest share of reported income, and subtracting the noncontrolling interest percentage relating to the unrealized profits in the ending inventory.

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

| |Investment in subsidiary (retained earnings) | 5,000 | |

|

| | Cost of sales | | 5,000 |

|

| | To eliminate unrealized profit in beginning inventory. | | |

|

| | | | |

|

| |Cost of sales | 5,000 | |

|

| | Inventory | | 5,000 |

|

| | To eliminate unrealized profit in ending inventory. | | |

|

SOLUTIONS TO EXERCISES

Solution E5-1

1 a 5 c

2 d 6 a

3 a 7 a

4 c 8 c

Solution E5-2 [AICPA adapted]

1 a

2 c

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

3 c

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

Solution 5-3

1 d

| |Philly's separate income |$1,000,000 |

|

| |Add: Share of Silvio's income ($500,000 100%) | 500,000 |

|

| |Add: Realization of profit deferred in 2006 | |

|

| | $1,500,000 - ($1,500,000/150%) | 500,000 |

|

| |Less: Unrealized profit in 2007 inventory | |

|

| | $1,200,000 - ($1,200,000/150%) | (400,000) |

|

| |Consolidated net income |$1,600,000 |

|

2 d

| |Combined sales |$1,400,000 |

|

| |Less: Intercompany sales | (50,000) |

|

| |Consolidated sales |$1,350,000 |

|

3 c

| |Combined cost of sales |$ 680,000 |

|

| |Less: Intercompany purchases | (50,000) |

|

| | | |

|

| |Less: Unrealized profit in beginning inventory | (4,000) |

|

| |Add: Unrealized profit in ending inventory | 10,000 |

|

| |Consolidated cost of sales |$ 636,000 |

|

Solution E5-4

1 b

| |Pride's share of Sedita's income ($60,000 80%) |$ 48,000 |

|

| |Less: Unrealized profit in ending inventory | |

|

| | ($20,000 50% unsold 80% owned) | (8,000) |

|

| |Income from Sedita |$ 40,000 |

|

2 d

| |Combined cost of sales |$ 450,000 |

|

| |Less: Intercompany sales | (100,000) |

|

| |Add: Unrealized profit in ending inventory | 10,000 |

|

| |Consolidated cost of sales |$ 360,000 |

|

3 b

| |Reported income of Sedita |$ 60,000 |

|

| |Unrealized profit | (10,000) |

|

| |Sedita's realized income | 50,000 |

|

| |Noncontrolling interest percentage | 20% |

|

| |Noncontrolling interest expense |$ 10,000 |

|

Solution E5-5

1 c

| |Combined sales |$1,800,000 |

|

| |Less: Intercompany sales | (400,000) |

|

| |Consolidated sales |$1,400,000 |

|

2 c

| |Unrealized profit in beginning inventory | |

|

| | $100,000 - ($100,000/125%) |$ 20,000 |

|

| | | |

|

| |Unrealized profit in ending inventory | |

|

| | $125,000 - ($125,000/125%) |$ 25,000 |

|

3 b

| |Combined cost of goods sold |$1,440,000 |

|

| |Less: Intercompany sales | (400,000) |

|

| |Less: Unrealized profit in beginning inventory | |

|

| | $100,000 - ($100,000/125%) | (20,000) |

|

| |Add: Unrealized profit in ending inventory | |

|

| | $125,000 - ($125,000/125%) | 25,000 |

|

| |Consolidated cost of goods sold |$1,045,000 |

|

Solution E5-6

1 a

| |Patti's separate income |$200,000 |

|

| |Add: Income from Susan: | |

|

| |Share of Susan's reported income ($200,000 70%) | 140,000 |

|

| |Less: Patents amortization | (20,000) |

|

| |Add: Unrealized profit in beginning inventory | |

|

| | [$112,500 - ($112,500/150%)] 70% | 26,250 |

|

| |Less: Unrealized profit in ending inventory | |

|

| | [$33,000 - ($33,000/150%)] 70% | (7,700) |

|

| |Consolidated net income |$338,550 |

|

| | | |

|

| |Noncontrolling interest expense: | |

|

| |Susan's reported income |$200,000 |

|

| |Add: Unrealized profit in beginning inventory | 37,500 |

|

| |Less: Unrealized profit in ending inventory | (11,000) |

|

| |Susan's realized income | 226,500 |

|

| |Noncontrolling interest percentage | 30% |

|

| |Noncontrolling interest expense |$ 67,950 |

|

2 c

| |Packman's share of Slocum's reported net loss | |

|

| | ($150,000 loss 60%) |$(90,000) |

|

| |Add: Unrealized profit in ending inventory | |

|

| | ($200,000 1/4 unsold) | (50,000) |

|

| |Income from Slocum |(140,000) |

|

| |Packman's separate income | 300,000 |

|

| |Consolidated net income |$160,000 |

|

3 b

| |Parnell's share of Santini's income ($300,000 75%) |$225,000 |

|

| |Add: Realized profit in beginning inventory | |

|

| | $150,000 - ($150,000/1.25) 75% | 22,500 |

|

| |Less: Deferred profit in ending inventory | |

|

| | $200,000 - ($200,000/1.25) 75% | (30,000) |

|

| |Income from Santini |$217,500 |

|

Solution E5-7

| |2007 |2008 |2009 |

|

|Pansy's separate income |$300,000 |$400,000 |$350,000 |

|

|Add: 80% of Sheridan's reported income | 400,000 | 440,000 | 380,000 |

|

|Add: Realization of profits in | | | |

|

| beginning inventory | | 30,000 | 40,000 |

|

|Less: Unrealized profits in ending | | | |

|

| inventory | (30,000) | (40,000) | (20,000) |

|

|Consolidated net income |$670,000 |$830,000 |$750,000 |

|

Solution E5-8

Pycus Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2009

|Sales ($400,000 + $100,000 - $40,000 intercompany sales) |$ 460,000 |

|

| | |

|

|Cost of sales ($200,000 + $60,000 - $40,000 intercompany | |

|

| purchases + $10,000 unrealized profit in ending inventory) | (230,000) |

|

| | |

|

| Gross profit | 230,000 |

|

| | |

|

|Other expenses ($100,000 + $30,000) | (130,000) |

|

| | |

|

| Total consolidated income | 100,000 |

|

| | |

|

|Less: Noncontrolling interest expense ($10,000 20%) | (2,000) |

|

| | |

|

| Consolidated net income |$ 98,000 |

|

Solution E5-9

1 Noncontrolling interest expense

| |Seven's reported net income 40% |$ 20,000 |

|

| |Add: Intercompany profit from upstream sales in | |

|

| | beginning inventory ($5,000 40%) | 2,000 |

|

| |Less: Intercompany profit from upstream sales in | |

|

| | ending inventory ($10,000 40%) | (4,000) |

|

| | Noncontrolling interest expense |$ 18,000 |

|

2 Consolidated sales

| |Combined sales |$1,250,000 |

|

| |Less: Intercompany sales | 100,000 |

|

| |Consolidated sales |$1,150,000 |

|

Consolidated cost of sales

| |Combined cost of sales |$ 650,000 |

|

| |Less: Intercompany sales | (100,000) |

|

| |Add: Intercompany profit in ending inventory | 10,000 |

|

| |Less: Intercompany profit in beginning inventory | (5,000) |

|

| | | |

|

| | Consolidated cost of sales |$ 555,000 |

|

| | | |

|

| |Total Consolidated Income | |

|

| |Combined income |$ 300,000 |

|

| |Less: Intercompany profit in ending inventory | (10,000) |

|

| |Add: Intercompany profit in beginning inventory | 5,000 |

|

| |Total Consolidated Income |$ 295,000 |

|

Solution E5-10

Papillion Corporation and Subsidiary

Consolidated Income Statement

December 31, 2011

|Sales ($1,000,000 + $500,000 - $90,000 intercompany) |$1,410,000 |

|

| | |

|

|Cost of sales ($400,000 + $250,000 - $90,000 intercompany - | |

|

| $10,000 unrealized profit in beginning inventory + $15,000 | |

|

| unrealized profit in ending inventory | (565,000) |

|

|Gross profit | 845,000 |

|

| | |

|

|Depreciation expense | (170,000) |

|

| | |

|

|Other expenses ($90,000 + $60,000 + $4,000 patents amortization) | (154,000) |

|

| | |

|

|Total consolidated income | 521,000 |

|

| | |

|

|Less: Noncontrolling interest expense ($150,000 + $10,000 profit | |

|

|in beginning inventory - $15,000 profit in end. inventory) 20% | (29,000) |

|

| | |

|

|Consolidated net income |$ 492,000 |

|

| | |

|

|Supporting computations | |

|

|Cost of investment in Saiki at January 1, 2007 |$ 600,000 |

|

|Book value acquired ($700,000 80%) | (560,000) |

|

| Patents |$ 40,000 |

|

|Patents amortization ($40,000/10 years) = $4,000 per year | |

|

Solution E5-11

Pill Corporation and Subsidiary

Consolidated Income Statement

December 31, 2011

|Sales ($1,000,000 + $500,000 - $90,000 intercompany) |$1,410,000 |

|

| | |

|

|Cost of sales ($400,000 + $250,000 - $90,000 intercompany - | |

|

| $10,000 unrealized profit in beginning inventory + $15,000 | |

|

| unrealized profit in ending inventory | (565,000) |

|

| | |

|

|Gross profit | 845,000 |

|

| | |

|

|Depreciation expense | (170,000) |

|

| | |

|

|Other expenses ($90,000 + $60,000) | (150,000) |

|

| | |

|

|Total consolidated income | 525,000 |

|

| | |

|

|Less: Noncontrolling interest income ($150,000 + $10,000 profit | |

|

|in beginning inventory - $15,000 profit in end. inventory) 20% | (29,000) |

|

| | |

|

|Consolidated net income |$ 496,000 |

|

| | |

|

|Supporting computations | |

|

|Cost of investment in Saiki at January 1, 2010 |$ 600,000 |

|

|Book value acquired ($700,000 80%) | (560,000) |

|

| Goodwill |$ 40,000 |

|

Solution E5-12

1 b

| |Income as reported |$ 200,000 |

|

| |Add: Realization of profits in beginning inventory | |

|

| | $120,000 - ($120,000/1.2) | 20,000 |

|

| |Less: Unrealized profits in ending inventory | |

|

| | $360,000 - ($360,000/1.2) | (60,000) |

|

| |Realized income | 160,000 |

|

| |Percent ownership | 60% |

|

| | Income from Suey |$ 96,000 |

|

2 c

| |Suey's equity as reported ($3,400,000 + $2,100,000) |$5,500,000 |

|

| |Less: Unrealized profit in ending inventory | (60,000) |

|

| |Realized equity | 5,440,000 |

|

| |Noncontrolling share | 40% |

|

| | Noncontrolling interest December 31, 2011 |$2,176,000 |

|

3 b

| |Realized equity |$5,440,000 |

|

| |Majority share | 60% |

|

| | Investment balance December 31, 2011 |$3,264,000 |

|

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

Solution E5-13 [AICPA adapted]

1 d

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

2 b

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

3 c

Revenues $200,000/$150,000 cost of sales = 1 1/3 markup on cost

Amount of Spin's ending inventory from Pard ($32,000 intercompany sales 3/8 remaining unsold) = $12,000 at billed prices 3/4 = $9,000

4 b

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

5 a

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

Solution E5-14

Pullen Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2006

|Sales ($1,380,000 - $120,000 intercompany sales) |$1,260,000 |

|

| | |

|

|Cost of sales ($920,000 - $120,000 - $5,000a + $12,000b) | (807,000) |

|

| | |

|

| Gross profit | 453,000 |

|

| | |

|

|Operating expenses | (160,000) |

|

| | |

|

| Total consolidated income | 293,000 |

|

| | |

|

|Less: Noncontrolling interest expense [$40,000 - ($12,000 .2)] | (37,600) |

|

| | |

|

| Consolidated net income |$ 255,400 |

|

a Unrealized profit in beginning inventory (downstream) ($180,000 - $160,000) .25 = $5,000

b Unrealized profit in ending inventory (upstream ($120,000 - $90,000) .4 = $12,000

SOLUTIONS TO PROBLEMS

Solution P5-1

Proctor Corporation and Subsidiary

Consolidated Statement of Income and Retained Earnings

for the year ended December 31, 2008

|Sales ($1,300,000 + $650,000 - $80,000 intercompany sales) |$1,870,000 |

|

| | |

|

|Less: Cost of sales ($800,000 + $390,000 - $80,000 inter- | |

|

| company purchases - $12,000 unrealized profit in beginning | |

|

| inventory + $16,000 unrealized profit in ending inventory) |(1,114,000) |

|

| | |

|

| Gross profit | 756,000 |

|

| | |

|

|Other expenses ($340,000 + $160,000) | (500,000 |

|

| | |

|

| Income before noncontrolling interest | 256,000 |

|

| | |

|

|Noncontrolling interest expense($100,000+$12,000 - $16,000) 10% | (9,600) |

|

| | |

|

| Consolidated net income | 246,400 |

|

| | |

|

|Add: Beginning consolidated retained earnings | 369,200 |

|

| | |

|

|Less: Dividends for 2008 | (100,000) |

|

| | |

|

| Consolidated retained earnings December 31, 2008 |$ 515,600 |

|

Solution P5-2

1 Consolidated cost of sales — 2007

| |Combined cost of sales ($625,000 + $300,000) |$ 925,000 |

|

| |Less: Intercompany purchases | (300,000) |

|

| |Add: Profit in ending inventory | 24,000 |

|

| |Less: Profit in beginning inventory | (12,000) |

|

| | | |

|

| | Consolidated cost of sales |$ 637,000 |

|

2 Noncontrolling interest expense — 2007

| |Slam's net income ($600,000 - $300,000 - $150,000) |$ 150,000 |

|

| |Add: Profit in beginning inventory | 12,000 |

|

| |Less: Profit in ending inventory | (24,000) |

|

| |Slam's realized income | 138,000 |

|

| |Noncontrolling interest percentage | 10% |

|

| | | |

|

| | Noncontrolling interest expense |$ 13,800 |

|

3 Consolidated net income — 2007

| |Consolidated sales ($900,000 + $600,000 - $300,000) |$1,200,000 |

|

| |Less: Consolidated cost of sales | (637,000) |

|

| |Less: Consolidated expenses ($225,000 + $150,000) | (375,000) |

|

| |Less: Noncontrolling interest expense | (13,800) |

|

| | | |

|

| | Consolidated net income |$ 174,200 |

|

Alternatively,

| |Putt's separate income |$ 50,000 |

|

| |Add: Income from Slam | 124,200 |

|

| | | |

|

| | Consolidated net income |$ 174,200 |

|

4 Noncontrolling interest at December 31, 2007

| |Equity of Slam December 31, 2007 |$ 520,000 |

|

| |Less: Unrealized profit in ending inventory | (24,000) |

|

| | | 496,000 |

|

| |Noncontrolling interest percentage | 10% |

|

| | | |

|

| | Noncontrolling interest December 31, 2007 |$ 49,600 |

|

Solution P5-3

1 Inventories appearing in consolidated balance sheet at December 31, 2007

| |Beginning inventory — Potter ($60,000 - $4,000a) |$ 56,000 |

|

| |Beginning inventory — Scan ($38,750 - $7,750b) | 31,000 |

|

| |Beginning inventory — Tray ($24,000 - 0) | 24,000 |

|

| | | |

|

| | Inventories December 31, 2007 |$111,000 |

|

| | | |

|

| |Intercompany profit: | |

|a Potter:

| | |Inventory acquired intercompany ($60,000 40%) |$ 24,000 |

|

| | |Cost of intercompany inventory ($24,000/1.2) | (20,000) |

|

| | |Unrealized profit in Potter's inventory |$ 4,000 |

|

b Scan:

| | |Inventory acquired intercompany ($38,750 100%) |$ 38,750 |

|

| | |Cost of intercompany inventory ($38,750/1.25) | (31,000) |

|

| | |Unrealized profit in Scan's inventory |$ 7,750 |

|

2 Inventories appearing in consolidated balance sheet at December 31, 2008

| |Ending inventory — Potter ($54,000 - $4,500c) |$ 49,500 |

|

| |Ending inventory — Scan ($31,250 - $6,250d) | 25,000 |

|

| |Ending inventory — Tray ($36,000 - 0) | 36,000 |

|

| | | |

|

| | Inventories December 31, 2008 |$110,500 |

|

| | | |

|

| |Intercompany profit: | |

|c Potter:

| | |Inventory acquired intercompany ($54,000 50%) |$ 27,000 |

|

| | |Cost of intercompany inventory ($27,000/1.2) | (22,500) |

|

| | |Unrealized profit in Potter's inventory |$ 4,500 |

|

d Scan:

| | |Inventory acquired intercompany ($31,250 100%) |$ 31,250 |

|

| | |Cost of intercompany inventory ($31,250/1.25) | (25,000) |

|

| | |Unrealized profit in Scan's inventory |$ 6,250 |

|

Solution P5-4

|1 |Plier's income from Stuff |2007 |2008 |2009 |

|

| | | | | |

|

| |75% of Stuff's net income |$ 300,000 |$ 337,500 |$ 262,500 |

|

| | | | | |

|

| |Unrealized profit in December 31, | | | |

|

| | 2007 inventory (downstream) | | | |

|

| | ($200,000 1/2) 100% | (100,000) | 100,000 | |

|

| | | | | |

|

| |Unrealized profit in December 31, | | | |

|

| | 2008 inventory (upstream) | | | |

|

| | $100,000 75% |       | (75,000) | 75,000 |

|

| | | | | |

|

| |Plier's income from Stuff |$ 200,000 |$ 362,500 |$ 337,500 |

|

| | | | | |

|

|2 |Plier's net income | | | |

|

| | | | | |

|

| |Plier's separate income |$1,800,000 |$1,700,000 |$2,000,000 |

|

| | | | | |

|

| |Add: Income from Stuff | 200,000 | 362,500 | 337,500 |

|

| | | | | |

|

| |Plier's net income |$2,000,000 |$2,062,500 |$2,337,500 |

|

| | | | | |

|

|3 |Consolidated net income | | | |

|

| | | | | |

|

| |Separate incomes of Plier and | | | |

|

| | Stuff combined |$2,200,000 |$2,150,000 |$2,350,000 |

|

| | | | | |

|

| |Unrealized profit in December 31, | | | |

|

| | 2007 inventory | (100,000) | 100,000 | |

|

| | | | | |

|

| |Unrealized profit in December 31, | | | |

|

| | 2008 inventory |      | (100,000) | 100,000 |

|

| | | | | |

|

| |Total income | 2,100,000 |2,150,000 | 2,450,000 |

|

| | | | | |

|

| |Less: Noncontrolling interest expense | | | |

|

| | 2007 $400,000 25% | (100,000) | | |

|

| | 2008 ($450,000 - $100,000) | | | |

|

| | 25% | | (87,500) | |

|

| | 2009 ($350,000 + $100,000) | | | |

|

| | 25% |     |     | (112,500) |

|

| | | | | |

|

| |Consolidated net income |$2,000,000 |$2,062,500 |$2,337,500 |

|

Solution P5-5

Pane Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

| | | |Adjustments and |Consolidated |

| |Pane |100% Seal |Eliminations |Statements |

|

|Income Statement | | | | | |

|Sales |$ 800,000 |$ 400,000 |a 120,000 | |$1,080,000 |

|

|Income from Seal | 102,000 | |d 102,000 | | |

|

|Cost of sales | 400,000* | 200,000* |b 12,000 |a 120,000 | 472,000* |

| | | | |c 20,000 | |

|

|Depreciation expense | 110,000* | 40,000* | | | 150,000* |

|

|Other expenses | 192,000* | 60,000* |f 6,000 | | 258,000* |

|

|Net income |$ 200,000 |$ 100,000 | | |$ 200,000 |

|

| | | | | | |

|

|Retained Earnings | | | | | |

|Retained earnings — Pane |$ 600,000 | | | |600,000 |

|

|Retained earnings — Seal | |$ 380,000 |e 380,000 | | |

|

|Net income | 200,000 | 100,000 | | | 200,000 |

|

|Dividends | 100,000* | 50,000* | |d 50,000 | 100,000* |

|

|Retained earnings | | | | | |

|December 31 |$ 700,000 |$ 430,000 | | |$ 700,000 |

|

| | | | | | |

|

|Balance Sheet | | | | | |

|Cash |$ 54,000 |$ 37,000 | | |$ 91,000 |

|

|Receivables — net | 90,000 | 60,000 | |g 17,000 | 133,000 |

|

|Inventories | 100,000 | 80,000 | |b 12,000 | 168,000 |

|

|Other assets | 70,000 | 90,000 | | | 160,000 |

|

|Land | 50,000 | 50,000 | | | 100,000 |

|

|Buildings — net | 200,000 | 150,000 | | | 350,000 |

|

|Equipment — net | 500,000 | 400,000 | | | 900,000 |

|

|Investment in Seal | 736,000 | |c 20,000 |d 52,000 | |

| | | | |e 704,000 | |

|

|Patents | | |e 24,000 |f 6,000 | 18,000 |

|

| |$1,800,000 |$ 867,000 | | |$1,920,000 |

|

| | | | | | |

|

|Accounts payable |$ 160,000 |$ 47,000 |g 17,000 | |$ 190,000 |

|

|Other liabilities | 340,000 | 90,000 | | | 430,000 |

|

|Common stock, $10 par | 600,000 | 300,000 |e 300,000 | | 600,000 |

|

|Retained earnings | 700,000 | 430,000 | | | 700,000 |

|

| |$1,800,000 |$ 867,000 | | |$1,920,000 |

|

Supporting computations

Unrealized profit in beginning inventory ($40,000 1/2) = $20,000

Unrealized profit in ending inventory ($48,000 1/4) = $12,000

Seal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patents amortization equals $102,000 income from Seal.

Solution P5-6

Patty Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2008

| | | |Adjustments and |Consolidated |

| |Patty |Sue 75% |Eliminations |Statements |

|

|Income Statement | | | | | |

|Sales |$ 600,000 |$ 400,000 |a 130,000 | |$ 870,000 |

|

|Income from Sue | 102,500 | |d 102,500 | | |

|

|Cost of sales | 270,000* | 210,000* |b 20,000 |a 130,000 | 360,000* |

| | | | |c 10,000 | |

|

|Operating expenses | 145,000* | 40,000* | | | 185,000* |

|

|Noncontrolling int.expense | | |f 37,500 | | 37,500* |

|

|Net income |$ 287,500 |$ 150,000 | | |$ 287,500 |

|

| | | | | | |

|

|Retained Earnings | | | | | |

|Retained earnings — Patty |$ 182,500 | | | |$ 182,500 |

|

|Retained earnings — Sue | |$ 90,000 |e 90,000 | | |

|

|Net income | 287,500 | 150,000 | | | 287,500 |

|

|Dividends | 150,000* | 50,000* | |d 37,500 | |

| | | | |f 12,500 |150,000* |

|

|Retained earnings | | | | | |

|December 31 |$ 320,000 |$ 190,000 | | |$ 320,000 |

|

| | | | | | |

|

|Balance Sheet | | | | | |

|Cash |$ 85,000 |$ 30,000 | | |$ 115,000 |

|

|Accounts receivable | 165,000 | 100,000 | |g 15,000 | 250,000 |

|

|Dividends receivable | 15,000 | | |h 15,000 | |

|

|Inventories | 60,000 | 80,000 | |b 20,000 | 120,000 |

|

|Land | 80,000 | 50,000 | | | 130,000 |

|

|Buildings — net | 230,000 | 100,000 | | | 330,000 |

|

|Equipment — net | 200,000 | 140,000 | | | 340,000 |

|

|Investment in Sue | 385,000 | |c 10,000 |d 65,000 | |

| | | | |e 330,000 | |

|

|Goodwill | | |e 150,000 | | 150,000 |

|

| |$1,220,000 |$ 500,000 | | |$1,435,000 |

|

| | | | | | |

|

|Accounts payable |$ 225,000 |$ 100,000 |g 15,000 | |$ 310,000 |

|

|Dividends payable | 70,000 | 20,000 |h 15,000 | | 75,000 |

|

|Other liabilities | 155,000 | 40,000 | | | 195,000 |

|

|Common stock, $10 par | 450,000 | 150,000 |e 150,000 | | 450,000 |

|

|Retained earnings | 320,000 | 190,000 | | | 320,000 |

|

| |$1,220,000 |$ 500,000 | | | |

|

| | | | | | |

|

|Noncontrolling interest January 1 | |e 60,000 | |

|

|Noncontrolling interest December 31 | |f 25,000 | 85,000 |

|

| | | | | |$1,435,000 |

|* Deduct

Supporting computations

|Investment in Sue at January 1, 2007 |$300,000 |

|

|Book value acquired ($200,000 75%) | 150,000 |

|

| Goodwill |$150,000 |

|

Solution P5-7

Preliminary computations

|Investment cost |$275,000 |

|

|Less: Book value acquired ($250,000 90%) | 225,000 |

|

| Patents |$ 50,000 |

|

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

Upstream sales

Unrealized profit in December 31, 2006 inventory of Poly

$28,000 - ($28,000 1.4) = $8,000

Unrealized profit in December 31, 2007 inventory of Poly

$42,000 - ($42,000 1.4) = $12,000

Income from Susan

|Share of Susan's reported income ($100,000 90%) |$ 90,000 |

|

|Less: Patents amortization | (5,000) |

|

|Less: Unrealized profit in ending inventory ($12,000 90%) | (10,800) |

|

|Add: Unrealized profit in beginning inventory ($8,000 90%) | 7,200 |

|

| Income from Susan |$ 81,400 |

|

Investment balance

|Initial investment cost |$275,000 |

|

|Increase in Susan's net assets from December 31, 2004 | |

|

| to December 31, 2007 ($70,000 90%) | 63,000 |

|

|Patent amortization for 3 years | (15,000) |

|

|Unrealized profit in December 31, 2007 inventory | (10,800) |

|

| Investment balance December 31, 2007 |$312,200 |

|

Noncontrolling interest expense

|Reported income of Susan |$100,000 |

|

|Add: Unrealized profit in beginning inventory | 8,000 |

|

|Less: Unrealized profit in ending inventory | (12,000) |

|

|Susan's realized income | 96,000 |

|

|Noncontrolling interest percentage | 10% |

|

|Noncontrolling interest expense |$ 9,600 |

|

Solution P5-7 (continued)

Poly Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

| | | |Adjustments and |Consolidated |

| |Poly |Susan 90% |Eliminations |Statements |

|

|Income Statement | | | | | |

|Sales |$ 819,000 |$ 560,000 |a 560,000 | |$ 819,000 |

|

|Income from Susan | 81,400 | |d 81,400 | | |

|

|Cost of sales | 546,000* | 400,000* |b 12,000 |a 560,000 | 390,000* |

| | | | |c 8,000 | |

|

|Other expenses | 154,400* | 60,000* |f 5,000 | | 219,400* |

|

|Noncontrolling int.expense | | |h 9,600 | | 9,600* |

|

|Net income |$ 200,000 |$ 100,000 | | |$ 200,000 |

|

| | | | | | |

|

|Retained Earnings | | | | | |

|Retained earnings — Poly |$ 120,000 | | | |$ 120,000 |

|

|Retained earnings — Susan | |$ 70,000 |e 70,000 | | |

|

|Net income | 200,000 | 100,000 | | | 200,000 |

|

|Dividends | 100,000* | 50,000* | |d 45,000 | |

| | | | |h 5,000 |100,000* |

|

|Retained earnings | | | | | |

|December 31 |$ 220,000 |$ 120,000 | | |$ 220,000 |

|

| | | | | | |

|

|Balance Sheet | | | | | |

|Cash |$ 75,800 |$ 50,000 | | |$ 125,800 |

|

|Inventory | 42,000 | 80,000 | |b 12,000 | 110,000 |

|

|Other current assets | 60,000 | 20,000 | |g 10,000 | 70,000 |

|

|Plant assets — net | 300,000 | 300,000 | | | 600,000 |

|

|Investment in Susan | 312,200 | |c 7,200 |d 36,400 | |

| | | | |e 283,000 | |

|

|Patents | | |e 40,000 |f 5,000 | 35,000 |

|

| |$ 790,000 |$ 450,000 | | |$ 940,800 |

|

| | | | | | |

|

|Current liabilities |$ 170,000 |$ 130,000 |g 10,000 | |$ 290,000 |

|

|Capital stock | 400,000 | 200,000 |e 200,000 | | 400,000 |

|

|Retained earnings | 220,000 | 120,000 | | | 220,000 |

|

| |$ 790,000 |$ 450,000 | | | |

|

| | | | | | |

|

|Noncontrolling interest January 1 |c 800 |e 27,000 | |

|

|Noncontrolling interest December 31 | |h 4,600 | 30,800 |

|

| | | | | |$ 940,800 |

|* Deduct

Solution P5-8

1 Entries to correct Phil's income from Sert and investment accounts

| |Retained earnings January 1, 2011 | 4,500 | |

|

| | Investment in Sert | | 4,500 |

|To adjust beginning retained earnings and beginning investment accounts for unrealized profit in the December 31, 2010 inventory ($5,000 90%).

| |Investment in Sert | 4,500 | |

|

| | Income from Sert | | 4,500 |

|To recognize intercompany profit in the December 31, 2010 inventory of goods acquired from Sert ($5,000 90%).

| |Income from Sert | 4,000 | |

|

| | Investment in Sert | | 4,000 |

|To eliminate intercompany profit in the December 31, 2011 inventory.

Working paper entries in general journal form:

|a |Noncontrolling interest | 500 | |

|

| |Investment in Sert | 4,500 | |

|

| | Cost of sales | | 5,000 |

|

| | | | |

|

|b |Sales | 10,000 | |

|

| | Cost of sales | | 10,000 |

|

| | | | |

|

|c |Cost of sales | 4,000 | |

|

| | Inventory | | 4,000 |

|

| | | | |

|

|d |Income from Sert | 27,500 | |

|

| | Dividends | | 18,000 |

|

| | Investment in Sert | | 9,500 |

|

| | | | |

|

|e |Capital stock — Sert | 80,000 | |

|

| |Retained earnings — Sert | 40,000 | |

|

| | Investment in Sert | | 108,000 |

|

| | Noncontrolling interest | | 12,000 |

|

| | | | |

|

|f |Accounts payable | 10,000 | |

|

| | Accounts receivable | | 10,000 |

|

| | | | |

|

|g |Noncontrolling interest expense | 3,500 | |

|

| | Dividends | | 2,000 |

|

| | Noncontrolling interest | | 1,500 |

|

Solution P5-8 (continued)

|2 |Phil Corporation and Subsidiary |

|

| |Consolidation Working Papers |

|

| |for the year ended December 31, 2011 |

|

| | | | |Adjustments and Eliminations |Consolidated |

| | |Phil |Sert 90% | |Statements |

|

| |Income Statement | | | | | |

| |Sales |$ 500,000 |$ 100,000 |b 10,000 | |$ 590,000 |

|

| |Income from Sert | 27,500 | |d 27,500 | | |

|

| |Cost of sales | 240,000* | 40,000* |c 4,000 |a 5,000 | 269,000* |

| | | | | |b 10,000 | |

|

| |Other expenses | 174,000* | 30,000* | | | 204,000* |

|

| |Noncontr.int.expense | | |g 3,500 | | 3,500* |

|

| |Net income |$ 113,500 |$ 30,000 | | |$ 113,500 |

|

| | | | | | | |

|

| |Retained Earnings | | | | | |

| |Retained earnings — | | | | | |

| |Phil |$ 105,500 | | | |$ 105,500 |

|

| |Retained earnings — | | | | | |

| |Sert | |$ 40,000 |e 40,000 | | |

|

| |Net income | 113,500 | 30,000 | | | 113,500 |

|

| |Dividends | 70,000* | 20,000* | |d 18,000 | |

| | | | | |g 2,000 |70,000* |

|

| |Retained earnings | | | | | |

| |December 31 |$ 149,000 |$ 50,000 | | |$ 149,000 |

|

| | | | | | | |

|

| |Balance Sheet | | | | | |

| |Cash |$ 63,000 |$ 30,000 | | |$ 93,000 |

|

| |Inventories | 60,000 | 15,000 | |c 4,000 | 71,000 |

|

| |Accounts receivable | 40,000 | 20,000 | |f 10,000 | 50,000 |

|

| |Plant assets — net | 220,000 | 105,000 | | | 325,000 |

|

| |Investment in Sert | 113,000 | |a 4,500 |d 9,500 | |

| | | | | |e 108,000 | |

|

| | |$ 496,000 |$ 170,000 | | |$ 539,000 |

|

| | | | | | | |

|

| |Accounts payable |$ 47,000 |$ 40,000 |f 10,000 | |$ 77,000 |

|

| |Capital stock | 300,000 | 80,000 |e 80,000 | | 300,000 |

|

| |Retained earnings | 149,000 | 50,000 | | | 149,000 |

|

| | |$ 496,000 |$ 170,000 | | | |

|

| | | | | | | |

|

| |Noncontrolling interest January 1 |a 500 |e 12,000 | |

|

| |Noncontrolling interest December 31 | |g 1,500 | 13,000 |

|

| | | | | | |$ 539,000 |

|* Deduct

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

Solution P5-9

Pan Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

| | |100% |Adjustments and |Consolidated |

| |Pan |Sal |Eliminations |Statements |

|

|Income Statement | | | | | |

|Sales |$ 800,000 |$ 400,000 |a 120,000 | |$1,080,000 |

|

|Income from Sal | 108,000 | |d 108,000 | | |

|

|Cost of sales | 400,000* | 200,000* |b 12,000 |a 120,000 | 472,000* |

| | | | |c 20,000 | |

|

|Depreciation expense | 110,000* | 40,000* | | | 150,000* |

|

|Other expenses | 192,000* | 60,000* | | | 252,000* |

|

|Net income |$ 206,000 |$ 100,000 | | |$ 206,000 |

|

| | | | | | |

|

|Retained Earnings | | | | | |

|Retained earnings — Pan |$ 606,000 | | | |606,000 |

|

|Retained earnings — Sal | |$ 380,000 |e 380,000 | | |

|

|Net income | 206,000 | 100,000 | | | 206,000 |

|

|Dividends | 100,000* | 50,000* | |d 50,000 | 100,000* |

|

|Retained earnings | | | | | |

|December 31 |$ 712,000 |$ 430,000 | | |$ 712,000 |

|

| | | | | | |

|

|Balance Sheet | | | | | |

|Cash |$ 54,000 |$ 37,000 | | |$ 91,000 |

|

|Receivables — net | 90,000 | 60,000 | |f 17,000 | 133,000 |

|

|Inventories | 100,000 | 80,000 | |b 12,000 | 168,000 |

|

|Other assets | 70,000 | 90,000 | | | 160,000 |

|

|Land | 50,000 | 50,000 | | | 100,000 |

|

|Buildings — net | 200,000 | 150,000 | | | 350,000 |

|

|Equipment — net | 500,000 | 400,000 | | | 900,000 |

|

|Investment in Sal | 748,000 | |c 20,000 |d 58,000 | |

| | | | |e 710,000 | |

|

| Goodwill | | |e 30,000 | | 30,000 |

|

| |$1,812,000 |$ 867,000 | | |$1,932,000 |

|

| | | | | | |

|

|Accounts payable |$ 160,000 |$ 47,000 |f 17,000 | |$ 190,000 |

|

|Other liabilities | 340,000 | 90,000 | | | 430,000 |

|

|Common stock, $10 par | 600,000 | 300,000 |e 300,000 | | 600,000 |

|

|Retained earnings | 712,000 | 430,000 | | | 712,000 |

|

| |$1,812,000 |$ 867,000 | | |$1,932,000 |

|

Supporting computations

Unrealized profit in beginning inventory ($40,000 1/2) = $20,000

Unrealized profit in ending inventory ($48,000 1/4) = $12,000

Sal's income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory.

Solution P5-10

Pat Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2008

| | | |Adjustments and Eliminations |Consolidated |

| |Pat |Sun 75% | |Statements |

|

|Income Statement | | | | | |

|Sales |$ 600,000 |$ 400,000 |a 130,000 | |$ 870,000 |

|

|Income from Sun | 92,500 | |d 92,500 | | |

|

|Cost of sales | 270,000* | 210,000* |b 20,000 |a 130,000 | 360,000* |

| | | | |c 10,000 | |

|

|Operating expenses | 145,000* | 40,000* |f 10,000 | | 195,000* |

|

|Noncontrolling int.expense | | |i 37,500 | | 37,500* |

|

|Net income |$ 277,500 |$ 150,000 | | |$ 277,500 |

|

| | | | | | |

|

|Retained Earnings | | | | | |

|Retained earnings — Pat |$ 172,500 | | | |$ 172,500 |

|

|Retained earnings — Sun | |$ 90,000 |e 90,000 | | |

|

|Net income | 277,500 | 150,000 | | | 277,500 |

|

|Dividends | 150,000* | 50,000* | |d 37,500 | |

| | | | |i 12,500 |150,000* |

|

|Retained earnings | | | | | |

|December 31 |$ 300,000 |$ 190,000 | | |$ 300,000 |

|

| | | | | | |

|

|Balance Sheet | | | | | |

|Cash |$ 85,000 |$ 30,000 | | |$ 115,000 |

|

|Accounts receivable | 165,000 | 100,000 | |g 15,000 | 250,000 |

|

|Dividends receivable | 15,000 | | |h 15,000 | |

|

|Inventories | 60,000 | 80,000 | |b 20,000 | 120,000 |

|

|Land | 80,000 | 50,000 | | | 130,000 |

|

|Buildings — net | 230,000 | 100,000 | | | 330,000 |

|

|Equipment — net | 200,000 | 140,000 | | | 340,000 |

|

|Investment in Sun | 365,000 | |c 10,000 |d 55,000 | |

| | | | |e 320,000 | |

|

|Patents | | |e 140,000 |f 10,000 | 130,000 |

|

| |$1,200,000 |$ 500,000 | | |$1,415,000 |

|

| | | | | | |

|

|Accounts payable |$ 225,000 |$ 100,000 |g 15,000 | |$ 310,000 |

|

|Dividends payable | 70,000 | 20,000 |h 15,000 | | 75,000 |

|

|Other liabilities | 155,000 | 40,000 | | | 195,000 |

|

|Common stock, $10 par | 450,000 | 150,000 |e 150,000 | | 450,000 |

|

|Retained earnings | 300,000 | 190,000 | | | 300,000 |

|

| |$1,200,000 |$ 500,000 | | | |

|

|Noncontrolling interest January 1 | |e 60,000 | |

|

|Noncontrolling interest December 31 | |i 25,000 | 85,000 |

|

| | | | | |$1,415,000 |

|* Deduct

Supporting computations

|Investment in Sun at January 1, 2007 |$300,000 |

|

|Book value acquired ($200,000 75%) | 150,000 |

|

| Patents (15 year amortization) |$150,000 |

|

Solution P5-11

Preliminary computations

|Investment cost |$275,000 |

|

|Less: Book value acquired ($250,000 90%) | 225,000 |

|

| Goodwill |$ 50,000 |

|

Upstream sales

Unrealized profit in December 31, 2009 inventory of Po

$28,000 - ($28,000 1.4) = $8,000

Unrealized profit in December 31, 2010 inventory of Po

$42,000 - ($42,000 1.4) = $12,000

Income from San

|Share of San's reported income ($100,000 90%) |$ 90,000 |

|

|Less: Unrealized profit in ending inventory ($12,000 90%) | (10,800) |

|

|Add: Unrealized profit in beginning inventory ($8,000 90%) | 7,200 |

|

| | |

|

| Income from San |$ 86,400 |

|

Investment balance

|Initial investment cost |$275,000 |

|

|Increase in San's net assets from December 31, 2007 | |

|

| to December 31, 2010 ($70,000 90%) | 63,000 |

|

|Unrealized profit in December 31, 2010 inventory | (10,800) |

|

| | |

|

| Investment balance December 31, 2010 |$327,200 |

|

Noncontrolling interest expense

|Reported income of San |$100,000 |

|

|Add: Unrealized profit in beginning inventory | 8,000 |

|

|Less: Unrealized profit in ending inventory | (12,000) |

|

|San's realized income | 96,000 |

|

|Noncontrolling interest percentage | 10% |

|

| | |

|

|Noncontrolling interest expense |$ 9,600 |

|

Solution P5-11 (continued)

Po Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2010

| | | |Adjustments and |Consolidated |

| |Po |San 90% |Eliminations |Statements |

|

|Income Statement | | | | | |

|Sales |$ 819,000 |$ 560,000 |a 560,000 | |$ 819,000 |

|

|Income from San | 86,400 | |d 86,400 | | |

|

|Cost of sales | 546,000* | 400,000* |b 12,000 |a 560,000 | 390,000* |

| | | | |c 8,000 | |

|

|Other expenses | 154,400* | 60,000* | | | 214,400* |

|

|Noncontrolling int.expense | | |f 9,600 | | 9,600* |

|

|Net income |$ 205,000 |$ 100,000 | | |$ 205,000 |

|

| | | | | | |

|

|Retained Earnings | | | | | |

|Retained earnings — Po |$ 130,000 | | | |$ 130,000 |

|

|Retained earnings — San | |$ 70,000 |e 70,000 | | |

|

|Net income | 205,000 | 100,000 | | | 205,000 |

|

|Dividends | 100,000* | 50,000* | |d 45,000 | 100,000* |

| | | | |f 5,000 | |

|

|Retained earnings | | | | | |

|December 31 |$ 235,000 |$ 120,000 | | |$ 235,000 |

|

| | | | | | |

|

|Balance Sheet | | | | | |

|Cash |$ 75,800 |$ 50,000 | | |$ 125,800 |

|

|Inventory | 42,000 | 80,000 | |b 12,000 | 110,000 |

|

|Other current assets | 60,000 | 20,000 | |g 10,000 | 70,000 |

|

|Plant assets — net | 300,000 | 300,000 | | | 600,000 |

|

|Investment in San | 327,200 | |c 7,200 |d 41,400 | |

| | | | |e 293,000 | |

|

|Goodwill | | |e 50,000 | | 50,000 |

|

| |$ 805,000 |$ 450,000 | | |$ 955,800 |

|

| | | | | | |

|

|Current liabilities |$ 170,000 |$ 130,000 |g 10,000 | |$ 290,000 |

|

|Capital stock | 400,000 | 200,000 |e 200,000 | | 400,000 |

|

|Retained earnings | 235,000 | 120,000 | | | 235,000 |

|

| |$ 805,000 |$ 450,000 | | | |

|

| | | | | | |

|

|Noncontrolling interest January 1 |c 800 |e 27,000 | |

|

|Noncontrolling interest December 31 | |f 4,600 | 30,800 |

|

| | | | | |$ 955,800 |

|* Deduct

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