Intercompany Profit Transactions Inventories

Chapter 5 109

Chapter 5

INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES

Answers to Questions

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

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

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

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

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

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

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

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

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

109 110 Intercompany Profit Transactions — Inventories

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.

110 Chapter 5 111

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]

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

112 Chapter 5 113

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

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)

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

114 Chapter 5 115

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

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

116 Chapter 5 117

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)

2 Consolidated sales

Combined sales $1,250,000 Less: Intercompany sales 100,000

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)

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

118 Chapter 5 119

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)

Depreciation expense (170,000)

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

Less: Noncontrolling interest expense ($150,000 + $10,000 profit in beginning inventory - $15,000 profit in end. inventory) ´ 20% (29,000)

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)

Depreciation expense (170,000)

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

Less: Noncontrolling interest income ($150,000 + $10,000 profit in beginning inventory - $15,000 profit in end. inventory) ´ 20% (29,000)

Supporting computations

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

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

Goodwill $ 40,000

120 Chapter 5 121

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

122 Chapter 5 123

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)

Operating expenses (160,000)

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)

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

124 Chapter 5 125

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)

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

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)

Alternatively, Putt's separate income $ 50,000 Add: Income from Slam 124,200

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 December 31, 2007 $ 49,600

126 Chapter 5 127

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

128 Chapter 5 129

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

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

2007 inventory (100,000) 100,000

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

130 Chapter 5 131

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 200,000ü 100,000ü 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 700,000ü 430,000ü 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.

132 Chapter 5 133

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 $ 287,500ü $ 150,000ü $ 287,500

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

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

Net income 287,500ü 150,000ü 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

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

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

$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

134 Chapter 5 135

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

Susan's realized income 96,000

136 Chapter 5 137

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 200,000ü 100,000ü 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

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

$ 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

138 Chapter 5 139

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

140 Chapter 5 141

2 Phil Corporation and Subsidiary Consolidation Working Papers

for the year ended December 31, 2011

Adjustments and Consolidated Phil Sert 90% Eliminations 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 113,500ü 30,000ü 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

$ 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%

142 Chapter 5 143

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 206,000ü 100,000ü 206,000

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

Retained earnings December 31 $ 712,000 $ 430,000 $ 712,000

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

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.

144 Chapter 5 145

Solution P5-10 Pat Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2008

Adjustments and Consolidated Pat Sun 75% Eliminations 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 277,500ü 150,000ü 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

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

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

$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

146 Chapter 5 147

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

San's realized income 96,000

148 Chapter 5 149

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 205,000ü 100,000ü 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

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

$ 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

150 Chapter 5 151