Advanced Key Chapter 5.doc

CHAPTER 1

Chapter 5

Consolidated Financial Statements Intercompany Asset Transactions

Answers to Questions

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

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

3.Sales price per unit ($900,000 3,000 units)$ 300

Number of units in Safecos ending inventory 500Intercompany inventory at transfer price$150,000

Gross profit rate (.6 1.6) .375Intercompany profit in ending inventory$56,250

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

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

6.Currently, no official accounting pronouncement answers the question as to the relationship between unrealized intercompany profits and noncontrolling interest values, although the issue has been under study by the FASB. This textbook reasons that unrealized profits relate to the seller and to the computation of the seller's income. Therefore, any unrealized profits created by upstream transfers (from subsidiary to parent) are attributed to the subsidiary. The effects resulting from the deferral and eventual recognition of these intercompany profits are considered to have an impact on the calculation of noncontrolling interest balances. In contrast, unrealized profits from downstream transfers are viewed as relating solely to the parent (as the seller) and, thus, have no effect on the noncontrolling interest.

7.The basic consolidation process does not differ between downstream and upstream transfers. Sales and purchases (Inventory) balances created by the transactions must be eliminated in total. Any unrealized gross profits remaining at the end of a fiscal period are deferred until ultimately earned through sale or consumption of the assets.

The direction of intercompany transfers (upstream versus downstream) does have one effect on consolidated financial statements. In computing noncontrolling interest balances (if present), the deferral of unrealized gross profits on upstream sales is taken into account. Downstream sales, however, are attributed to the parent and are viewed as having no impact on the outside interest.

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

Pawn's reported income

$110,000

Recognition of prior year unrealized gross profit

30,000

Deferral of current year unrealized gross profit

(60,000)

Pawn's realized income

$80,000

Outside ownership percentage

10%

Noncontrolling interest in subsidiary's income $ 8,0009.The deferral and subsequent recognition of intercompany profits are allocated to the noncontrolling interest in the same periods as the parent. When one affiliate sells to another affiliate, ownership does not change and therefore the underlying profit is deferred. When the purchasing affiliate subsequently sells the inventory to an entity outside the affiliated group, ownership changes, and the profit may be recognized. Intercompany profits are not really eliminated, but simply deferred until a sale to an outsider takes place.

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

11.As long as the land is held by the parent, its recorded value must be reduced to historical cost within each consolidated set of financial statements. In the year of the original transfer, the asset reduction is offset against the subsidiary's recorded gain. For all subsequent years in which the property is held, the credit to the Land account is made against the beginning retained earnings balance of the subsidiary (since the unrealized gain will have been closed into that account).

According to this question, the land is eventually sold to an outside party. The intercompany gain (which has been deferred in each of the previous years) is realized by the sale and should be recognized in the consolidated statements of this later period.

Because the transfer was upstream from subsidiary to parent, the above consolidated entries will also affect any noncontrolling interest balances being reported. Because of the deferral of the intercompany gross profit, the realized income balances applicable to the subsidiary will be less than the reported values. In the year of resale, however, the realized income for consolidation purposes is higher than reported. All noncontrolling interest totals are computed on the realized balances rather than the reported figures.

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

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

Answers to Problems1.C

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

3.A

4.CUNREALIZED GROSS PROFIT, 12/31/09

Intercompany Gross profit ($100,000 $75,000)

$25,000

Inventory Remaining at Year's End

16%

Unrealized Intercompany Gross profit, 12/31/09

$4,000

UNREALIZED GROSS PROFIT, 12/31/10


$24,000


35%


$8,400

CONSOLIDATED COST OF GOODS SOLD

Parent balance

$380,000

Subsidiary Balance

210,000

Remove Intercompany Transfer

(120,000)

Recognize 2009 Deferred Gross profit

(4,000)

Defer 2010 Unrealized Gross profit

8,400

Cost of Goods Sold

$474,4005.AIntercompany sales and purchases of $100,000 must be eliminated. Additionally, an unrealized gross profit of $10,000 must be removed from ending inventory based on a markup of 25 percent ($200,000 gross profit/$800,000 sales) which is multiplied by the $40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for consolidation purposes is $690,000 ($600,000 + $180,000 $100,000 + $10,000).

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

7.BUNREALIZED GROSS PROFIT, 12/31/09

Ending inventory

$40,000

Markup ($33,000/$110,000)

30%

Unrealized intercompany gross profit, 12/31/09

$12,000

UNREALIZED GROSS PROFIT, 12/31/10

Ending inventory

$50,000

Markup ($48,000/$120,000)

40%


$20,000

NONCONTROLLING INTEREST IN SUBSIDIARY'S INCOME

Reported income for 2010

$90,000

Realized gross profit deferred in 2009

12,000

Deferral of 2010 unrealized gross profit

(20,000)

Realized income of subsidiary

$82,000

Outside ownership

10%

Noncontrolling interest

$8,2008.AIndividual Records after Transfer

12/31/09

Machinery$40,000

Gain$10,000

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

Income effect net$2,000 ($10,000 $8,000)

12/31/10

Depreciation expense$8,000

Consolidated FiguresHistorical Cost

12/31/09

Machinery$30,000

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

12/31/10

Depreciation expense--$6,000

Adjustments for Consolidation Purposes:

2009: $2,000 income is reduced to a $6,000 expense (income is reduced

by $8,000)

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

by $2,000)9.BUNREALIZED GAIN

Transfer Price

$280,000

Book Value (cost after two years of depreciation)

240,000

Unrealized Gain

$40,000

EXCESS DEPRECIATION

Annual Depreciation Based on Cost ($300,000/10 years) $30,000

Annual Depreciation Based on Transfer Price

($280,000/8 years)

35,000

Excess Depreciation

$5,000

ADJUSTMENTS TO CONSOLIDATED NET INCOME

Defer Unrealized Gain

$(40,000)

Remove Excess Depreciation

5,000

Decrease to Consolidated Net Income

$(35,000)

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

11.CIntercompany gross profit ($100,000 $80,000)

$20,000

Inventory remaining at year's end

60%

Unrealized intercompany gross profit

$12,000

CONSOLIDATED COST OF GOODS SOLD

Parent balance

$140,000

Subsidiary balance

80,000

Remove intercompany transfer

(100,000)

Defer unrealized gross profit (above)

12,000

Cost of goods sold

$132,000

12.CConsideration transferred

$260,000

Noncontrolling interest fair value

65,000

Suarez total fair value

$325,000

Book value of net assets

(250,000)

Excess fair over book value$75,000

Annual Excess

Life Amortizations

Excess fair value assigned to undervalued assets:

Equipment

25,0005 years$5,000

Secret Formulas

$50,00020 years 2,500

Total

-0-

$7,500Consolidated Expenses = $37,500 (add the two book values and include current year amortization expense)

13. A20% of the beginning book value $50,000

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

20% share of Suarez net income

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

Ending noncontrolling interest balance$85,500

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

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


$20,000


60%

Unrealized Intercompany Gross profit, 12/31

$12,00016.

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

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


$40,000


20%

Unrealized Intercompany Gross profit, 12/31

$8,000CONSOLIDATED TOTALS

Inventory = $592,000 (add the two book values and subtract the ending unrealized gross profit of $8,000)

Sales = $1,240,000 (add the two book values and subtract the $160,000 intercompany transfer)

Cost of Goods Sold = $548,000 (add the two book values and subtract the intercompany transfer and add [to defer] ending unrealized gross profit)

Operating Expenses = $443,000 (add the two book values and the amortization expense for the period)

Noncontrolling Interest in Subsidiary's Net Income = $8,700 (30 percent of the reported income after subtracting 13,000 excess fair value amortization and deferring $8,000 ending unrealized gross profit) Gross profit is included in this computation because the transfer was upstream from Sanchez to Preston.17.(60 minutes) (Downstream intercompany profit adjustments when parent uses equity method and a noncontrolling interest is present)

Consideration transferred by Corgan $980,000


245,000

Smashings acquisition-date fair value

1,225,000

Book value of subsidiary

950,000

Excess fair over book value

275,000

Excess assigned to covenants 275,000

Useful life in years 20

Annual amortization $13,750

2009 Ending Inventory Profit Deferral Cost = $100,000 1.6 = $62,500

Intercompany Gross profit = $100,000 $62,500 = $37,500

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

2010 Ending Inventory Profit Deferral Cost = $120,000 1.6 = $75,000

Intercompany Gross profit = $120,000 $75,000 = $45,000

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

a. Investment account:

Consideration transferred, January 1, 2009

$980,000

Smashings 2009 income 80%$120,000

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

Ending inventory profit deferral (100%)(15,000)

Equity in Smashings earnings

94,000

2009 dividends

(28,000)

Investment balance 12/31/09

$1,046,000

Smashings 2010 income 80%$104,000

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

Beginning inventory profit recognition15,000

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

Equity in Smashings earnings

90,000

2010 dividends

(36,000)

Investment balance 12/31/10

$1,100,00017. (continued)

b. 12/31/10 Worksheet Adjustments

*GEquity in earnings of Smashing15,000

COGS

15,000

SCommon stockSmashing700,000

Retained earningsSmashing365,000

Investment in Smashing

852,000


213,000

ACovenants

261,250


209,000


52,250

IEquity in earnings of Smashing75,000


75,000

DInvestment in Smashing36,000

Dividends paid

36,000

EAmortization expense13,750

Covenants

13,750TISales

120,000

COGS

120,000

GCOGS

18,000

Inventory

18,00018.

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

a.2009 Unrealized gross profit to be recognized in 2010

Total interco. gross profit on transfers ($90,000 $54,000)

$36,000

Inventory retained at end of 2009

20%

Unrealized gross profit12/31/09

$7,200

2010 Unrealized Gross profit Deferred

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

$54,000

Inventory retained at end of 2010

30%

Unrealized gross profit12/31/10

$16,20018. a. (continued)

Noncontrolling Interest's Share of Kane's Income

Kane's reported income 2010

$110,000

Amortization of excess fair value to intangibles

(5,000)

2009 gross profit realized in 2010 (upstream sales)

7,200

2010 gross profit deferred (upstream sales)

(16,200)

Kane's realized income

$96,000

Noncontrolling interest ownership

20%


$19,200

b.InventorySmith book value

$140,000

InventoryKane book value

90,000

Unrealized gross profit, 12/31/10 (see part a)

(16,200)

Consolidated Inventory

$213,800

(Direction of transfer has no impact here)

c. Downstream transfers do not affect the noncontrolling interest.

Kane's reported income2010

$110,000

Noncontrolling interest ownership

20%


$22,000

d.Smith's reported income 2010

$300,000

Elimination of intercompany dividend income recorded

by parent ($40,000 80%)

(32,000)

Kane's reported income 2010

110,000

Amortization expense (given)

(5,000)

Realization of 2009 intercompany gross profit (see part a)

7,200

Deferral of 2010 intercompany gross profit (see part a)

(16,200)

Consolidated net income

$364,000

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

Smith's retained earnings, December 31, 2010 (given)

$600,000

Excess amortizations 20092010 ($5,000 2)

(10,000)

Deferral of parent's 12/31/10 interco. gross profit (part a)

(16,200)

Consolidated Retained Earnings 12/31/10

$573,80018. (continued)

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

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

Smith's retained earnings, December 31, 2010 (given)

$600,000

Excess Amortizations, 20092010 ($5,000 2)

(10,000)

Reduction of equity accrual because of subsidiary's unrealized

gross profit (explained above)

(12,960)

CONSOLIDATED RETAINED EARNINGS, 12/31/10

$577,040g.LandSmiths book value

$600,000

LandKane's book value

200,000

Elimination of unrealized gain on intercompany land

(20,000)

CONSOLIDATED LAND ACCOUNT

$780,00018. (continued)

h.The intercompany transfer was upstream from Kane to Smith. Because the transfer occurred in 2009, beginning retained earnings of the seller for 2010 contains the remaining portion of the unrealized gain.

Transfer Pricing Figures

2009 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

2010Depreciation expense = $16,000


Historical Cost Figures

2009 Equipment = $100,000

Depreciation expense = $12,000 ($60,000/5 years)

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

2010 Depreciation expense = $12,000


CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT

ENTRY *TA

Retained Earnings, 1/1/10 (Kane)

16,000

Equipment ($100,000 $80,000)

20,000

Accumulated Depreciation ($52,000 $16,000)

36,000

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

ENTRY ED

Accumulated Depreciation

4,000

Depreciation Expense

4,000

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

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

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

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

18. (continued)

Noncontrolling Interest in Kane's Income

Kane's reported income less excess amortization

$105,000

Reduction of depreciation expense to historical cost figure 4,000

Kane's realized income

$109,000


20%

Noncontrolling interest in Kanes income

$21,80019.

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

a.Conversion from Markup on Cost to Gross Profit Rate

Markup (given as a percentage of cost)

25%

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

20%

Noncontrolling Interest's Share of Subsidiarys IncomeReported income of subsidiary2010

$160,000

2009 intercompany gross profit realized in 2010

($250,000 30% 20%)

15,0002010 intercompany gross profit deferred

($300,000 30% 20%)

(18,000)

Realized income of subsidiary2010

$157,000Outside ownership

40%

Noncontrolling interest's share of subsidiary's income

$62,800b.Entry *G

Retained Earnings, Jan. 1 (subsidiary)

15,000

Cost of Goods Sold

15,000

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

Entry Tl

Sales

300,000

Cost of Goods Sold (purchases)

300,000

To eliminate intercompany inventory sale and purchase.

Entry G

Cost of Goods Sold

18,000

Inventory

18,000

To remove effects of current year unrealized gross profit.

20.

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

a.Consolidated Cost of Goods Sold

Penguins cost of goods sold

$290,000

Snows cost of goods sold

197,000

Elimination of 2010 intercompany transfers

(110,000)

Reduction of beginning Inventory because of

2009 unrealized gross profit ($28,000/1.4 = $20,000

cost; $28,000 transfer price less $20,000

cost = $8,000 unrealized gross profit)

(8,000)

Reduction of ending inventory because of




12,000

Consolidated cost of goods sold

$381,000


Penguin book value

$346,000

Snow book value

110,000

Eliminate ending unrealized gross profit (see above) (12,000)


$444,000

Noncontrolling Interest in Subsidiarys Net Income

Because 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 Sold

Penguin book value

$290,000

Snow book value

197,000

Elimination of 2010 intercompany transfers

(80,000)

Reduction of beginning inventory because of




(6,000)

Reduction of ending inventory because of




10,000


$411,00020. b.(continued)


Penguin book value

$346,000

Snow book value

110,000

Eliminate ending unrealized gross profit (see above)

(10,000)

Consolidated inventory

$446,000

Noncontrolling Interest in Subsidiary's Net income

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

Snow reported income

$58,000

2009 unrealized gross profit realized in 2010 (above)

6,000

2010 unrealized gross profit to be realized in 2011 (above)

(10,000)

Snow realized income

$54,000


20%

Noncontrolling interest in Snow's income

$10,800c.Consolidated Buildings (Net)

Penguins buildings

$358,000

Snow's buildings

157,000

Remove write-up created by transfer

($80,000 $50,000)

$(30,000)

Remove excess depreciation created by transfer

($30,000 unrealized gain over 5 year life)

(2 years)

12,000(18,000)

Consolidated buildings (net)

$497,000

Consolidated Expenses

Penguins book value

$150,000

Snow's book value

105,000

Remove excess depreciation on transferred building

($30,000) unrealized gain/5 years)

(6,000)

Consolidated expenses

$249,000

Noncontrolling Interest in Subsidiarys 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 whollyowned subsidiary, includes transfers)

a.In this business combination, the direction of the intercompany transfers (either upstream or downstream) is not important to the consolidated totals. Because Akron controls all of Toledo's outstanding stock, no noncontrolling interest figures are computed. If present, noncontrolling interest balances are affected by upstream sales but not by downstream.

For purposes of a 2010 consolidation, the following worksheet entries would affect income statement balances:

Entry *G

Retained Earnings, 1/1/10 (seller)

17,500

Cost of Goods Sold

17,500

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

Entry E

Amortization Expense

15,000

Patented technology

15,000

To recognize excess amortization expense for the current period.

Entry Tl

Sales

320,000

Cost of Goods Sold

320,000

To eliminate intercompany transfers of inventory during 2010.

Entry G

Cost of Goods Sold

12,500

Inventory

12,500

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

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

AKRON, INC. AND CONSOLIDATED SUBSIDIARY

Income Statement

Year Ending December 31, 2010

Sales

$1,380,000

Cost of goods sold

575,000

Gross profit

805,000

Operating expenses

635,000


$170,00022.(60 minutes) (Downstream intercompany asset transfer when parent uses equity method and when a noncontrolling interest is present)

a. Investment account:

Consideration paid (fair value) 1/1/09

$810,000

Netspeeds reported income for 2009 $80,000

Database amortization(12,000)

Netspeeds adjusted net income$68,000

Quickport's ownership percentage90%

Quickport's share of Netspeeds income$61,200

Gain on equipment transfer deferral(3,000)

Depreciation adjustment (6 months)500

Equity in earnings of Netspeed Company,

$58,700Quickports share of Netspeeds dividends (90%)

(7,200)

Balance 12/31/09

$861,500Netspeeds reported income for 2010 $115,000Database amortization (12,000)

Netspeeds adjusted 2010 net income$103,000Quickport's ownership percentage90%Quickport's share of Netspeed income$92,700Depreciation adjustment1,000Equity in earnings of Netspeed Company, 2010

$93,700Quickports share of Netspeeds dividends, 2010 (90%)

(7,200)

Balance 12/31/10

$948,000

b. 12/31/10 Worksheet Adjustments

*TAEquipment

6,000

Investment in S

2,500

Accumulated depreciation

8,500

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

SCommon stockS 800,000

RES112,000

Investment in S

820,800


91,200

ADatabase48,000

Investment in S

43,200


4,800

IEquity in earnings of S93,700

Investment in S

93,700DInvestment in S7,200

Dividends paid

7,200

22. (continued)

EAmortization expense12,000

Database

12,000

EDAccumulated depreciation1,000

Depreciation expense

1,000

Alternative set of equivalent adjustments for part b.

*TAEquipment6,000

Investment in S1,500


7,500

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

*EDEquity in earnings of S1,000


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.

SCommon stockS 800,000

RES112,000

Investment in S

820,800


91,200

ADatabase48,000

Investment in S

43,200


4,800

I

Equity in earnings of S92,700

Investment in S

92,700

D

Investment in S7,200

Dividends paid

7,200

E

Amortization expense12,000

Database

12,000

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

INDIVIDUAL RECORDS BASED ON TRANSFER PRICE

12/31/09 Equipment = $95,000

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



12/31/10 Depreciation expense $19,000

Accumulated depreciation = $38,000 (2 years)

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

Depreciation expense = $19,000

Accumulated depreciation = $57,000 (3 years)

CONSOLIDATED REPORTING BASED ON HISTORICAL COST

12/31/09 Equipment = $130,000



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


12/31/11 Effect on retained earnings, 1/1/11 = ($20,000) (two years depreciation)

Depreciation expense = $10,000


Entry *TA

Retained earnings, 1/1/11 (Padre)

27,000

Equipment ($130,000 $95,000)

35,000

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

To adjust beginningofyear amounts to balances for consolidated entity. Retained earnings adjustment reduces $7,000 credit balance to $20,000 debit balance as computed above.

Entry ED


9,000


9,000

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

24.

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

a.IncomeSlaughter

$220,000

IncomeBennett

90,000

Excess amortization for unpatented technology

(8,000)

Remove unrealized gain on equipment

(50,000)

($120,000 $70,000)

Remove excess depreciation created by

inflated transfer price ($50,000 5)

10,000


$262,000b.Income calculated in (part a.)

$262,000

Noncontrolling interest in Bennett's income

IncomeBennett

$90,000

Excess amortization

(8,000)

Adjusted net income

$82,000

Noncontrolling interest in Bennetts income (10%)

(8,200)

Consolidated net income to parent company

$253,800c.Income calculated in (part a.)

$262,000

Noncontrolling interest in Bennett's income (see Schedule 1) (4,200)

Consolidated net income to parent company

$257,800

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

Reported net income of subsidiary

$90,000

Excess amortization

(8,000)

Eliminate unrealized gain on equipment transfer

(50,000)

Eliminate excess depreciation ($50,000 5)

10,000

Bennett's realized net income

$42,000

Outside ownership

10%

Noncontrolling interest in subsidiary's income

$ 4,200d.Net income 2010Slaughter

$240,000

Net income 2010Bennett

100,000

Excess amortization

(8,000)

Eliminate excess depreciation stemming from transfer

($50,000 5) (year after transfer)

10,000


$342,00025.

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

Excess Amortization Expenses

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

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

Annual excess amortizations $10,000Unrealized Gross profitInventory, 1/1/11

Markup ($70,000 $49,000)

$21,000

Markup percentage ($21,000 $70,000)

30%

Remaining inventory

$30,000

Markup percentage

30%

Unrealized gross profit, 1/1/11

$9,000

Unrealized Gross profitInventory, 12/31/11

Markup ($100,000 $50,000)

$50,000

Markup percentage ($50,000 $100,000)

50%

Remaining inventory

$40,000

Markup percentage

50%

Unrealized gross profit, 12/31/11

$20,000Impact of intercompany Building Transfer

12/31/10Transfer price figures

Transfer price

$50,000

Gain on transfer ($50,000 $30,000)

20,000

Depreciation expense ($50,000 5)

10,000


10,000

12/31/11Transfer price figures


10,000


20,000

12/31/10Historical cost figures

Historical cost

$70,000

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

6,000

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

46,000

12/31/11Historical cost figures


6,000


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 gross profit and add $20,000 to defer the current year unrealized gross profit.)

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

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

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

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

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

26.

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

a.Entry *G

Retained Earnings, 1/1/11 (Sledge)

2,000

Cost of Goods Sold

2,000

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

Entry *TA

Equipment

4,000

Investment in Sledge

2,400


6,400

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

Entry S

Common Stock (Sledge)

120,000

Retained Earnings, 1/1/11 (adjusted) (Sledge) 258,000

Investment in Sledge (80%)

302,400

Noncontrolling interest in Sledge, 1/1/11 (20%)

75,600

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

Entry A

Contracts ($60,000 $3,000 for 2 years)

54,000

Buildings ($20,000 $2,000 for 2 years)

16,000

Investment in Sledge (80%)

56,000

Noncontrolling interest in Sledge, 1/1/11 (20%)

14,000

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

26. (continued)

Entry I

Equity Income of Subsidiary

10,600

Investment in Sledge

10,600

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

Entry E


2,000


3,000

Contracts ($60,000 20 years)

3,000

Buildings ($20,000 10 years)

2,000

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

Entry TI

Sales

20,000

Cost of Goods Sold

20,000

To eliminate intercompany inventory transfers during 2011.

Entry G

Cost of Goods Sold

4,500

Inventory

4,500

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

Entry ED


600


600

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

26. (continued)

b.Noncontrolling Interest in the Subsidiary's Income 2011Revenues

$130,000

Cost of goods sold

(70,000)

Other expenses

(40,000)

Excess acquisition-date fair value amortization

(5,000)

Income adjusted for amortization

$15,000

Gross profit on 2010 upstream inventory transfer

realized in 2011 (Entry *G)

2,000

Gross profit on 2011 upstream inventory transfer

deferred until 2012 (Entry G)

(4,500)

Realized income of subsidiary2011

$12,500

Outside ownership

20%

Noncontrolling interest in subsidiary's net income

$2,50027.

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

a.Consideration transferred

$342,000


38,000

Subsidiary fair value at acquisition-date

380,000

Book value

(326,000)

Fair value in excess of book value

$54,000

Annual Excess

Excess fair value assignments

Life Amortizations

To building

18,0009 yrs.$2,000

To patented technology

36,0006 yrs. 6,000

Totals

-0-

$8,000

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

c.Gross profit on 2010 transfers ($135,000 $81,000)

$54,000

Gross profit percentage ($54,000 $135,000)

40%

Inventory remaining, 12/31/10

$37,500

Gross profit percentage

40%

Unrealized gross profit, January 1, 2011

$15,000

d.Gross profit on 2011 transfers ($160,000 $92,800)

$67,200

Gross profit percentage ($67,200 $160,000)

42%

Inventory remaining, 12/31/11

$50,000

Gross profit percentage

42%

Unrealized gross profit, December 31, 2011

$21,00027. (continued)

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

Breys reported income

$90,000

Excess fair value amortization

(8,000)

Realized gross profit

15,000

Deferred gross profit

(21,000)

Adjusted subsidiary income

$76,000

Ownership

90%

Investment incomeBrey

$68,400

f.Breys adjusted income (see e.)

$76,000

Outside ownership

10%

Noncontrolling interest in subsidiary's net income

$7,600

g.Investment in Brey (initial value)

$342,000

Income of Brey

Reported 2009

$64,000

2010

80,000

2011

90,000

Total

234,000

Unrealized gross profit, 12/31/11(see d.) (21,000)

Realized income 20092011

213,000

Petinos ownership

90%191,700

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

(21,600)

Dividends paid by Brey

2009

$19,000

2010

23,000

2011

27,000

Total

69,000

Pitino's ownership

90%(62,100)

Investment in Brey, 12/31/11

$450,000h.Entry S

Common Stock (Brey)

150,000

Retained Earnings, 1/1/11 (Brey) (reduced by

1/1/11 unrealized gross profit)

263,000

Investment in Brey (90%)

371,700

Noncontrolling Interest in Brey (10%)

41,300

27. (continued) part i. Sales Revenues = $1,068,000 (total less $160,000 intercompany sales)

Cost of Goods Sold = $570,000 (add book values less $160,000 in intercompany purchases. Also, adjust for 2010 unrealized gross profit [subtract $15,000] and 2011 unrealized gross profit [add $21,000])

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

Investment IncomeBrey = $0 (intercompany balance is eliminated to include individual revenue and expense accounts of the subsidiary) Noncontrolling Interest in Subsidiary's Net Income = $7,600 (see f.)

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

Retained Earnings, 1/1 = $488,000 (parent equity method balance) Dividends Paid = $136,000 (parent balance only)

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

Cash and Receivables = $228,000 (total less $16,000 intercompany balance)

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

Investment in Brey = $0 (intercompany balance is eliminated so that the individual assets and liabilities of the subsidiary can be reported)

Land, Buildings, and Equipment = $1,304,000 (add book values and include a $12,000 net allocation after 3 years of amortization) Patented Technology = $18,000 (original allocation after 3 years of amortization [$6,000 per year])

Total Assets = $1,920,000 (add consolidated figures)

Liabilities = $773,000 (add book values less $16,000 intercompany balance)

Noncontrolling Interest in Brey, 12/31 = $50,000 ([10% of subsidiary's book value at beginning of period plus unamortized excess less beginning unrealized gross profit] plus 10% of the subsidiary's realized net income less 10% of subsidiary dividends). Common Stock = $515,000 (parent balance only)

Retained Earnings, 12/31 = $582,000 (see above)

Total Liabilities and Stockholders' Equity = $1,920,000 (summation)28.

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

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

Intercompany gross profit ($120,000 $72,000)

$48,000


30%


$14,400

UNREALIZED GROSS PROFIT, 12/31/10: (downstream transfer)


$50,000


20%


$10,000

CONSOLIDATED TOTALS

Sales = $1,150,000 (add the two book values and eliminate intercompany sales of $250,000)

Cost of goods sold:

Benson's book value

$535,000

Broadway's book value

400,000

Eliminate intercompany transfers

(250,000)


(14,400)


10,000

Cost of goods sold

$680,600 Operating expenses = $210,000 (add the two book values and include intangible amortization for current year)

Dividend income = 0 (intercompany transfer eliminated in consolidation)

Noncontrolling interest in consolidated income: (impact of transfers is not included because they were downstream)

Broadway reported income for 2010

$100,000

Intangible amortization

(10,000)

Broadway adjusted income

90,000

Outside ownership

30%

Noncontrolling interest in Broadways earnings

$27,000

Inventory = $988,000 (add the two book values less the $10,000 ending unrealized gross profit)

Noncontrolling interest in subsidiary, 12/31/10 = $385,500

30% beginning $950,000 book value

$285,000

Excess January 1 intangible allocation (30% $295,000)

88,500

Noncontrolling Interest in Broadways earnings

27,000

Dividends (30% $50,000)

(15,000)

Total noncontrolling interest at 12/31/10

$385,50029.

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

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


$48,000


30%


$14,400

UNREALIZED GROSS PROFIT, 12/31/10: (upstream transfer)


$50,000


20%


$10,000

CONSOLIDATED TOTALS

Sales = $1,150,000 (add the two book values and eliminate the Intercompany transfer)

Cost of goods sold:

Benson's COGS book value

$535,000

Broadway's COGS book value

400,000


(250,000)


(14,400)


10,000


$680,600 Operating expenses = $210,000 (add the two book values and include intangible amortization for current year)

Dividend income = -0- (interco. transfer eliminated in consolidation)

Noncontrolling interest in consolidated income: (impact of transfers is included because they were upstream)

Broadway reported income for 2010

$100,000

Intangible amortization

(10,000)

2009 gross profit recognized in 2010

14,400

2010 gross profit deferred

(10,000)

Broadway realized income for 2010

$94,400

Outside ownership

30%


$28,320 Inventory = $988,000 (add the two book values and defer the $10,000 ending unrealized gross profit)

Noncontrolling interest in subsidiary, 12/31/10 = $382,500

30% beginning book value less $14,400

unrealized gross profit (30% $935,600)

$280,680

Excess intangible allocation (30% $295,000)

(88,500)

Noncontrolling Interest in Broadways earnings

28,320

Dividends (30% $50,000)

(15,000)

Total noncontrolling interest at 12/31/10

$382,50030.

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

PRELIMINARY COMPUTATIONS


$657,000


73,000


730,000

Book value

(620,000)


$110,000

Annual Excess


Life Amortizations

to equipment

20,0004 yrs.$5,000

to liabilities

40,0005 yrs. 8,000

to brand names

50,00010 yrs. 5,000

Totals

-0-

$18,000

Determination of Subsidiary Book Value on 1/1/09

Book Value, 1/1/10 (based on stockholders' equity accounts)$700,000

Eliminate Net Income 2009

(80,000)

Eliminate Dividends 2009

-0-

Book Value, 1/1/09

$620,000

Beginning inventory unrealized gross profit, 12/31/09 (Upstream)

Ending Inventory ($160,000 40%)

$64,000

Markup (given)

20%


$12,800

Ending inventory unrealized gross profit, 12/31/10 (Upstream)

Ending Inventory ($145,000 30%)

$43,500

Markup (given)

20%


$8,70030. (continued)

Building unrealized gross profit, 1/2/09 (Downstream)

Transfer Price

$25,000

Book Value

10,000

Unrealized Gross profit

$15,000

Annual Excess Depreciation

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

Annual Depreciation Based on Transfer Price

($25,000/ 5 years)

5,000

Excess DepreciationEach Year

$3,000Adjust to Building to return to historical cost at 1/1/10

Consolidation

Transfer Price Historical Cost Adjustment

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


(1/1/09 balance after 1

more year of depreciation)5,00092,00087,000

Consolidated Totals

Sales and Other Income = $1,240,000 (add the two book values and eliminate the intercompany transfers)

Cost of Goods Sold:

Moore's book value

$500,000

Kirby's book value

400,000


(160,000)


(8,700)


12,800

Cost of goods sold

$744,100 Operating and Interest Expense = $275,000 (add the two book values and include $18,000 amortization for current year but eliminate $3,000 excess depreciation from asset transfer)

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

30. (continued) initial

Reported income for 2010

$40,000


8,700


(12,800)

Realized income of subsidiary

$35,900


(18,000)

Adjusted subsidiary net income

17,900

Outside Ownership

10%

Noncontrolling Interest

$1,790 Consolidated Net Income = $220,900 (consolidated sales less consolidated cost of goods sold, expenses, and noncontrolling interest)

To noncontrolling interest = $1,790 (above)

To controlling interest = $219,110

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

Moore's Reported Balance, 1/1/10

$990,000

Impact of Building Transfer (parent's income was over-

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

one prior year of excess depreciation)

(12,000)

Adjustments to Convert Initial Value to Equity Method:

Increase in subsidiary's book value during prior

years

$80,000


(18,000)

Deferral of 12/31/09 unrealized gross profit

(subsidiary's prior income was overstated)

(8,700)

Realized increase in book value

53,300

Ownership

90%

Equity Accrual

47,970

Retained Earnings, 1/1/10

$1,025,970Dividends Paid = $130,000 (parent balance only)

Retained Earnings, 12/31/10 = $1,115,080 (the beginning balance plus controlling interest share of consolidated net income less dividends paid)

Cash and Receivables = $397,000 (add the two book values)

Inventory = $371,200 (add the two book values and defer the $12,800 ending unrealized gross profit)

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

30. (continued)

Equipment (Net) = $1,030,000 (add the two book values adjusted for excess allocation and amortization)

Buildings = $1,725,000 (add the two book values and add the $75,000 impact to return to historical cost as computed above for transfer)

Accumulated Depreciation = $384,000 (add the two book values plus adjustment to historical cost ($87,000 at beginning of year less $3,000 excess depreciation for current year)

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

Brand Names = $40,000 (the original $50,000 allocation less two years of amortization at $5,000 per year)

Total Assets = $3,479,200 (summation of the consolidated totals)

Liabilities = $1,684,000 (add the two book values and subtract the original allocation [$40,000] after two years of amortization [$8,000 per year])

NCI 12/31/10 = $80,120 (10 percent of $691,300 adjusted beginning book value [$700,000 less $8,700 deferral of unrealized gross profit] plus $9,200 share of beginning unamortized excess fair value allocations plus $1,790 income share)

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

Retained Earnings, 12/31/10 = $1,115,080 (computed above)

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

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

CONSOLIDATION ENTRIES

Entry *G

Retained Earnings, 1/1/10 (Kirby)

8,700

Cost of Goods Sold

8,700

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

Entry *TA

Building

75,000

Retained earnings, 1/1/10 (Moore)

12,000


87,000

(To adjust 1/1/10 balance to historical cost figures)

Entry *C

Investment in Kirby

47,970

Retained Earnings, 1/1/10 (Moore)

47,970

(To convert from initial value to equity method based on the following computation)30. (continued)

Increase in subsidiary's book value during prior years

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

Excess amortization for 2009

(18,000)

Deferral of 12/31/09 unrealized gross profit

(8,700)

Realized increase in subsidiary's book value

$53,300

Ownership

90%

Conversion to equity method adjustment

$47,970

SCommon Stock (Kirby)

150,000

Retained Earnings, 1/1/10 as adjusted (Kirby)

541,300

Investment in Kirby (90%)

622,170

Noncontrolling Interest in Kirby (10%)

69,130

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

ALiabilities

32,000

Equipment

15,000

Brand Names

45,000

Investment in Kirby

82,800

Noncontrolling Interest in Kirby (10%)

9,200

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

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

EOperating and interest expense

18,000

Liabilities

8,000

Equipment

5,000

Brand names

5,000

(To recognize excess amortization expenses for current year)

TlSales

160,000

Cost of Goods Sold

160,000

(To eliminate intercompany transfers for 2010)

GCost of Goods Sold

12,800

Inventory

12,800

(To defer ending unrealized inventory gross profit)

EDAccumulated Depreciation

3,000


3,000

(To adjust depreciation for current year created by transfer of building)31.(55 Minutes) (Investment account balance and consolidated worksheet with downstream inventory transfers when parent uses equity method)

Acquisition-date fair value allocation and excess amortizations


$372,000


248,000


$620,000

Book value

(320,000)


$300,000

Annual Excess


Life Amortizations

to patents

70,00010 yrs.$7,000

to customer list

45,00015 yrs. 3,000

to goodwill

$185,000indefinite -0-

$10,000

Determination of Investment in Scott account balance

Consideration transferred

$372,000

Increase in Scotts book value 1/1/09 to 12/31/10

$105,000

Excess fair value amortization (2 years)

(20,000)

Scotts adjusted book value increase

85,000

Woods ownership percentage

60%

Woods share of Scotts adjusted book value increase

51,000 2009 ending inventory profit deferral (100%)

(10,000)

2010 beginning inventory profit deferral (100%)

10,000

2010 ending inventory profit deferral (100%)

(12,000)

Investment account balance 12/31/10

$411,000Intercompany profits (downstream)20092010Intercompany transfers remaining in inventory50,000 40,000

Gross profit rate*

20%30%

$10,000 $12,000*(150,000 120,000) 150,000 = 20% (160,000 112,000) 160,000 = 30%31. (continued)

WoodsScottAdj. & Elim.

NCIConsolidatedSales (700,000) (335,000)(TI)150,000

(885,000)Cost of goods sold 460,000 205,000 (G) 12,000 (*G) 10,000 517,000

(TI) 150,000

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

268,000 Income of Scott (28,000) (I) 18,000

-0-

(*G) 10,000

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


(100,000) to noncontrolling interest

(20,000)20,000 to parent

(80,000)Retained earnings, 1/1 (695,000)(280,000)(S) 280,000

(695,000)Net income (above) (80,000)(60,000)

(80,000)Dividends paid 45,000 15,000 (D) 9,000 6,000 45,000 Retained earnings, 12/31(730,000) (325,000)

(730,000)Cash and receivables 248,000 148,000

396,000 Inventory 233,000 129,000

(G) 12,000 350,000 Investment in Scott 411,000 -0-(D) 9,000 (S) 228,000

-0-

(A)174,000

(I) 18,000

Buildings (net) 308,000 202,000

510,000 Equipment (net) 220,000 86,000

306,000 Patents (net) -0- 20,000 (A) 63,000 (E) 7,000

76,000 Customer list

(A) 42,000 (E) 3,000

39,000 Goodwill

(A)185,000

185,000 Total assets 1,420,000 585,000

1,862,000 Liabilities (390,000) (160,000)

(550,000)Common stock (300,000) (100,000)(S) 100,000

(300,000)Noncontrolling interest 1/1

(S) 152,000

(A)116,000 (268,000)

Noncontrolling interest 12/31

282,000 (282,000)Retained earnings, 12/31 (730,000)(325,000)

(730,000)Total liabilities and equities(1,420,000)(585,000)884,000 884,000

(1,862,000)32. Investment balance and worksheet preparationupstream sales, equity method

a.2011 income reported by Sander$230,000

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

Deferred gross profit for 12/31/11 intercompany inventory (160,000 25%)(40,000)

Recognized gross profit for 1/1/11 intercompany inventory (125,000 28%)35,000Sanders income adjusted $155,000

To controlling interest (80%)$124,000

To noncontrolling interest (20%)$31,000

Adjustments

PlymouthSander & EliminationsNCIConsolidated

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

Cost of goods sold820,000 500,000 (G) 40,000 (TI)300,000 1,025,000

(*G) 35,000

Depreciation expense104,000 85,000 189,000

Amortization expense220,000 120,000 (E) 70,000 410,000

Interest expense20,000 15,000 35,000

Equity earningsSander(124,000)(I) 124,000 0

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

Consolidated net income (731,000)

to noncontrolling

interest (31,000)31,000

to controlling interest(700,000)

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

(*G) 35,000

Net Income(700,000)(230,000)(700,000)

Dividends paid200,000 25,000 (D) 20,000 5,000 200,000

Retained Earnings 12/31(3,300,000)(550,000)(3,300,000)

Cash535,000 115,000 650,000

Accounts receivable575,000 215,000 790,000

Inventory990,000 800,000 (G) 40,000 1,750,000

Investment in Sander1,420,000 (D) 20,000 (S)968,000

(A)348,000 0

(I) 124,000

Buildings and Equipment1,025,000 863,000 1,888,000

Patents950,000 107,000 (A) 210,000 (E) 70,000 1,197,000

Goodwill(A) 225,000 225,000

Total Assets5,495,000 2,100,000 6,500,000

Accounts Payable(450,000)(200,000)(650,000)

Notes Payable(545,000)(450,000)(995,000)

NCI in Sander 1/1(S)242,000

(A) 87,000 (329,000)

NCI in Sander 12/31355,000(355,000)

Common Stock(900,000)(800,000)(S) 800,000 (900,000)

APIC(300,000)(100,000)(S) 100,000 (300,000)

Retained Earnings 12/31(3,300,000)(550,000)(3,300,000)

Total Liab. and SE(5,495,000)(2,100,000)2,234,000 2,234,000 (6,500,000)

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


$665,000


285,000


$950,000

Book value

(800,000)


$150,000

Annual Excess


Life Amortizations

to building

50,0005 yrs.$10,000

to franchise agreements

100,00010 yrs. 10,000

-0-

$20,000

Inventory Transfers (Upstream)

2010 gross profit deferred until 2011 ($12,000 30%)

$3,600

2011 gross profit deferred until 2012 ($18,000 30%)

$5,400

Equipment Transfer (Downstream)

Unrealized gain as of January 1, 2011:

Unrealized gain on transfer (1/1/10)

$36,000

2010 excess depreciation ($36,000 6 yrs.)

(6,000)

Unrealized gain January 1, 2011

$30,000

Excess depreciation2011 ($36,000 6 yrs.)

$6,000

Entry *G

Retained Earnings, 1/1/11 (Young)

3,600

Cost of Goods Sold

3,600

To recognize upstream intercompany inventory gross profit deferred from previous year.

Entry *TA

Retained Earnings, 1/1/11 (Monica)

30,000

Equipment ($50,000 $36,000)

14,000

Accumulated Depreciation ($50,000 $6,000)

44,000

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

33. (continued)

Entry *C

Investment in Young

123,480

Retained Earnings, 1/1/11 (Monica)

123,480

Because the parent uses the initial value method, its retained earnings must be adjusted for the subsidiary's increase in book value less excess amortizations and upstream profits during 20092010 as follows.

Retained earnings of Young, December 31, 2011 (given)$740,000

Eliminate income and dividends of Young

($160,000 $50,000)

(110,000)

Retained earnings of Young, December 31, 2010

630,000

Removal of unrealized gross profit (Entry *G)

(3,600)

Realized retained earnings of Young,

December 31, 2010

626,400

Retained earnings at date of acquisition

(410,000)

Increase in retained earnings during 20092010

216,400

Ownership percentage

70%

Income accrual to be recognized

151,480

Excess amortization for 20092010 ($20,000 70% 2 yrs.) (28,000)

ENTRY *C ADJUSTMENT (above)

$123,480

Entry S

Common Stock (Young)

300,000

Additional Paidin Capital (Young)

90,000

Retained Earnings, 1/1/11

(Young) (adjusted for *G)

626,400

Investment in Young (70%)

711,480

Noncontrolling Interest in Young (30%)

304,920

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

Entry A

Franchise Agreement

80,000

Buildings

30,000

Investment in Young

77,000

Noncontrolling Interest in Young (30%)

33,000

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

33. (continued)

Entry I

Dividend Income

35,000

Dividends Paid

35,000

To eliminate Intercompany dividend payments recorded by parent as income since initial value method is used.

Entry E


10,000


10,000

Franchise Agreement

10,000

Buildings

10,000

To recognize current year excess amortization expense.

Entry Tl

Sales

90,000

Cost of Goods Sold (or Purchases)

90,000

To remove intercompany inventory transfers made during the current year.

Entry G

Cost of Goods Sold (or Ending Inventory)

5,400

Inventory

5,400

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

Entry ED


6,000


6,000

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

Noncontrolling Interest's Share of Subsidiary's Net Income

Reported income of Young (given)

$160,000


(20,000)

Recognition of 2010 unrealized gross profit (Entry *G)

3,600

Deferral of 2011 unrealized gross profit (Entry G) (upstream) (5,400)

Realized income of Young

$138,200


30%

Noncontrolling interest in subsidiarys income

$41,46034.

(35 Minutes) (Consolidation entries with upstream Inventory transfers and downstream equipment transfers. Parent uses equity method)

Entry *G (Same as Entry *G in Problem 33.)

Entry *TA

Investment in Young

30,000

Equipment

14,000


44,000

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

Entry *C (No Entry *C is needed because equity method has been applied.)

Entry S (Same as Entry S in Problem 33.)

Entry A (Same as Entry A in Problem 33.)

Entry I

Investment Income

102,740

Investment in Young

102,740

To eliminate intercompany income accrual.

Reported income of Young (given)

$160,000


(20,000)

Recognition of 2010 unrealized gross profit (Entry *G)

3,600

Deferral of 2011 unrealized gross profit (Entry G) (upstream) (5,400)

Realized income of Young

$138,200


70%

Monicas share of Youngs realized income

$96,740

Depreciation adjustment for asset transfer gain

6,000

Equity accrual for 2011

$102,740

Entry D

Investment in Young

35,000

Dividends 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 in subsidiarys income (Same as in Problem 33.)35.

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


$570,000


380,000


$950,000

Book value

(850,000)


$100,000

Annual Excess

Excess fair value assignment

Life Amortizations

to customer list

100,00020 yrs.$5,000

-0-

a.CONSOLIDATION ENTRIES

Entry *TL

Retained Earnings, 1/1/10 (Gibson)

40,000

Land

40,000

To remove unrealized gain on Intercompany downstream transfer of land made in 2009.

Entry *G

Retained Earnings, 1/1/10 (Keller)

10,000

Cost of Goods Sold

10,000

To defer unrealized upstream Inventory gross profit from 2009 until 2010 computed as the 2009 ending inventory balance of $30,000 (20% $150,000) multiplied by 331/3% markup ($50,000/$150,000).

Entry *C

Retained earnings, 1/1/10 (Gibson)

9,000

Investment in Keller

9,000

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

35. (continued)

Entry S

Common Stock (Keller)

320,000

Additional Paidin Capital

90,000

Retained earnings, 1/1/10 (Keller) (adjusted

for Entry *G)

610,000

Investment in Keller (60%)

612,000

Noncontrolling Interest in Keller, 1/1/10 (40%)

408,000

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

Entry A

Customer List

95,000


57,000

Noncontrolling Interest in Keller, 1/1/10 (40%)

38,000

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

Entry I

Income of Keller

84,000


84,000

To eliminate intercompany income accrual.

Entry D


36,000

Dividends Paid

36,000

To eliminate intercompany dividend transfers60% of subsidiary's payment.

Entry E


5,000

Customer List

5,000

To recognize current period excess amortization expense.

Entry P

Liabilities

40,000

Accounts Receivable

40,000

To eliminate intercompany debt.

Entry Tl

Sales

200,000

Cost of Goods Sold

200,000

To eliminate current year intercompany inventory transfer.

Entry G

Cost of Goods Sold

12,000

Inventory

12,000

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

Noncontrolling Interest in Keller's Net Income

Keller reported net income

$140,000


(5,000)

2009 Intercompany gross profit realized in 2010 (inventory) 10,000

2010 Intercompany gross profit deferred (inventory)

(12,000)

Keller realized income 2010

$133,000


40%

Noncontrolling interest in Keller's net income

$53,20035. a. (continued) GIBSON AND KELLER

Consolidation WorksheetYear Ending December 31, 2010

Consolidation EntriesNoncontrollingConsolidated

Accounts

GibsonKellerDebitCreditInterestTotalsSales

(800,000)(500,000)(TI) 200,000

(1,100,000)

Cost of goods sold

500,000300,000(G) 12,000(*G) 10,000

602,000

(TI) 200,000

Operating expenses

100,00060,000(E) 5,000

165,000

Income of Keller

(84,000)-0-(I) 84,000

-0-Separate company net income(284,000) (140,000)Consolidated net income

(333,000)

To noncontrolling interest

(53,200) 53,200To parent

(279,800)

RE, 1/1/10Gibson

(1,116,000)

(*TL) 40,000

(1,067,000)

(*C) 9,000

RE, 1/1/10Keller

(620,000)(*G) 10,000

(S) 610,000

Net income (above)

(284,000)(140,000)

(279,800)

Dividends

115,000 60,000

(D) 36,00024,000 115,000

Retained earnings, 12/31/10

(1,285,000)(700,000)

(1,231,800)

Cash

177,00090,000

267,000

Accounts receivable

356,000410,000

(P) 40,000

726,000

Inventory

440,000320,000

(G) 12,000

748,000


726,000

(D) 36,000(*C) 9,000

-0-

(S) 612,000

(I) 84,000

(A) 57,000

Land

180,000390,000

(*TL) 40,000

530,000

Buildings and equipment (net)

496,000300,000

796,000

Customer List

(A) 95,000(E) 5,000

90,000

Total assets

2,375,0001,510,000

3,157,000Liabilities

(480,000)(400,000)(P) 40,000

(840,000)

Common stock

(610,000)(320,000)(S) 320,000

(610,000)

Additional paid-in capital

(90,000)(S) 90,000

Retained earnings, 12/31/10

(1,285,000)(700,000)

(1,231,800)

NCI in Keller, 1/1/10

(S) 408,000(408,000)

(A) 38,000(38,000)

NCI In Keller, 12/31/10

475,200 (475,200)

Total liabilities and equity

(2,375,000)(1,510,000)

(3,157,000)35. (continued)

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

Entry *TA


36,000

Buildings

40,000


76,000

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

Entry *TA (Alternative)


36,000

Buildings (net)

36,000

Entry ED


4,000

Operating (or Depreciation) Expense

4,000

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

36.

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

a.Skyline reported income

$(88,000)

Patented technology amortization

15,000

Beginning inventory gross profit recognized

(14,400)

Ending inventory gross profit deferred

14,000

Deferral of land gain on sale 18,000

Equity in Skylines earnings

$(55,400)

b. Acquisition-Date Fair Value Allocation

Consideration transferred (fair value of shares issued)

$450,000

Book value of subsidiary

300,000


$150,000

Excess fair over book value assigned to:

Trademarks (indefinite life)

30,000

Patented technology

$120,000

Life of patented technology

8 years

Annual amortization

$15,000Unrealized Upstream Inventory Gross profit, 1/1

Inventory being held ($50,000 72%)

$36,000

Markup ($20,000/$50,000)

40%

Unrealized gross profit, 1/1

$14,400Unrealized Upstream Inventory Gross profit, 12/31

Inventory being held (given)

$28,000

Markup ($40,000/$80,000)

50%

Unrealized gross profit, 12/31

$14,000

CONSOLIDATION ENTRIES

Entry *G

Retained earnings 1/1 (Skyline)

14,400

Cost of goods sold

14,400

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

Entry S

Common stock (Skyline)

120,000

Additional paidin capital (Skyline)

30,000

Retained earnings 1/1 (Skyline, adjusted)

277,600

Investment in Skyline

427,600

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

36. (continued)

Entry A

Trademarks

30,000

Patented technology

105,000


135,000

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

Entry I

Investment income

55,400


55,400

To remove intercompany income accrued by parent using the equity method.

Entry D


20,000

Dividends distributed

20,000

To eliminate Intercompany dividend payments.

Entry E

Other operating expenses

15,000

Patented technology

15,000

To recognize current year amortization expense on patented technology

Entry Tl

Revenues

80,000

Cost of goods sold

80,000

To eliminate intercompany inventory transfer for current year.

Entry G

Cost of goods sold

14,000

Inventory

14,000

To defer unrealized inventory gross profit. Amount is computed above.

Entry TL

Gain on sale of land

18,000

Land

18,000

To remove gain from intercompany transfer of land during current year.

Entry P

Accounts payable

65,000

Accounts receivable

65,000

To remove intercompany payable and receivable.

36. (continued)

PARKWAY AND SKYLINEConsolidation Worksheet

Year Ending December 31, 2010

Consolidation EntriesConsolidated

Accounts

ParkwaySkylineDebitCredit

TotalsRevenues

(627,000)(358,000)(TI) 80,000

(905,000)

Cost of goods sold

289,000195,000(G) 14,000(TI) 80,000

(*G) 14,400403,600

Other operation expenses

170,00075,000(E) 15,000

260,000

Gain on sale of land

(18,000)

(TL) 18,000

-0-

Investment income (55,400)

(I) 55,400

-0-

Net income

(241,400)(88,000)

(241,400)Retained earnings 1/1

(314,600)(292,000)(*G) 14,400

(314,600)

(S) 277,600

-0-

Net income (above)

(241,400)(88,000)

(241,400)Dividends distributed 70,000 20,000

(D) 20,000 70,000

Retained earnings 12/31

(486,000)(360,000)

(486,000)Cash and receivables

134,000150,000

(P) 65,000219,000

Inventory

281,000112,000

(G) 14,000379,000


598

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