Intercompany Profit Transactions Inventories

Chapter 5 109Chapter 5INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIESAnswers to Questions1 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 — Inventories10 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 5,000To eliminate unrealized profit in beginning inventory.Cost of sales 5,000Inventory 5,000To eliminate unrealized profit in ending inventory.110 Chapter 5 111SOLUTIONS TO EXERCISESSolution E5-11 a 5 c 2 d 6 a 3 a 7 a 4 c 8 cSolution E5-2 [AICPA adapted]1 a2 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 5-31 d Philly's separate income $1,000,000 Add: Share of Silvio's income ($500,000 ´ 100%) 500,000Add: Realization of profit deferred in 2006 $1,500,000 - ($1,500,000/150%) 500,000Less: Unrealized profit in 2007 inventory$1,200,000 - ($1,200,000/150%) (400,000)Consolidated net income $1,600,0002 d Combined sales $1,400,000 Less: Intercompany sales (50,000)Consolidated sales $1,350,0003 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 10,000111 112 Intercompany Profit Transactions — InventoriesConsolidated cost of sales $ 636,000112 Chapter 5 113Solution E5-41 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 $ 40,0002 d Combined cost of sales $ 450,000 Less: Intercompany sales (100,000)Add: Unrealized profit in ending inventory 10,000Consolidated cost of sales $ 360,0003 b Reported income of Sedita $ 60,000 Unrealized profit (10,000)Sedita's realized income 50,000Noncontrolling interest percentage 20%Noncontrolling interest expense $ 10,000Solution E5-51 c Combined sales $1,800,000 Less: Intercompany sales (400,000)Consolidated sales $1,400,0002 c Unrealized profit in beginning inventory $100,000 - ($100,000/125%) $ 20,000Unrealized profit in ending inventory$125,000 - ($125,000/125%) $ 25,0003 b Combined cost of goods sold $1,440,000 Less: Intercompany sales (400,000)113 114 Intercompany Profit Transactions — InventoriesLess: Unrealized profit in beginning inventory$100,000 - ($100,000/125%) (20,000)Add: Unrealized profit in ending inventory$125,000 - ($125,000/125%) 25,000Consolidated cost of goods sold $1,045,000114 Chapter 5 115Solution E5-61 a Patti's separate income $200,000 Add: Income from Susan:Share of Susan's reported income ($200,000 ´ 70%) 140,000Less: Patents amortization (20,000)Add: Unrealized profit in beginning inventory[$112,500 - ($112,500/150%)] ´ 70% 26,250Less: Unrealized profit in ending inventory[$33,000 - ($33,000/150%)] ´ 70% (7,700)Consolidated net income $338,550Noncontrolling interest expense:Susan's reported income $200,000Add: Unrealized profit in beginning inventory 37,500Less: Unrealized profit in ending inventory (11,000)Susan's realized income 226,500Noncontrolling interest percentage 30%Noncontrolling interest expense $ 67,9502 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 300,000Consolidated net income $160,0003 b Parnell's share of Santini's income ($300,000 ´ 75%) $225,000115 116 Intercompany Profit Transactions — InventoriesAdd: Realized profit in beginning inventory$150,000 - ($150,000/1.25) ´ 75% 22,500Less: Deferred profit in ending inventory$200,000 - ($200,000/1.25) ´ 75% (30,000)Income from Santini $217,500Solution E5-72007 2008 2009 Pansy's separate income $300,000 $400,000 $350,000Add: 80% of Sheridan's reported income 400,000 440,000 380,000Add: Realization of profits in beginning inventory 30,000 40,000Less: Unrealized profits in ending inventory (30,000) (40,000) (20,000)Consolidated net income $670,000 $830,000 $750,000116 Chapter 5 117Solution E5-8Pycus Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2009Sales ($400,000 + $100,000 - $40,000 intercompany sales) $ 460,000Cost of sales ($200,000 + $60,000 - $40,000 intercompany purchases + $10,000 unrealized profit in ending inventory) (230,000)Gross profit 230,000Other expenses ($100,000 + $30,000) (130,000)Total consolidated income 100,000Less: Noncontrolling interest expense ($10,000 ´ 20%) (2,000)Consolidated net income $ 98,000Solution E5-91 Noncontrolling interest expenseSeven's reported net income ´ 40% $ 20,000 Add: Intercompany profit from upstream sales in beginning inventory ($5,000 ´ 40%) 2,000Less: Intercompany profit from upstream sales in ending inventory ($10,000 ´ 40%) (4,000)Noncontrolling interest expense $ 18,0002 Consolidated salesCombined sales $1,250,000 Less: Intercompany sales 100,000117 118 Intercompany Profit Transactions — InventoriesConsolidated sales $1,150,000Consolidated cost of salesCombined cost of sales $ 650,000 Less: Intercompany sales (100,000)Add: Intercompany profit in ending inventory 10,000Less: Intercompany profit in beginning inventory (5,000)Consolidated cost of sales $ 555,000Total Consolidated IncomeCombined income $ 300,000Less: Intercompany profit in ending inventory (10,000)Add: Intercompany profit in beginning inventory 5,000Total Consolidated Income $ 295,000118 Chapter 5 119Solution E5-10Papillion Corporation and Subsidiary Consolidated Income Statement December 31, 2011Sales ($1,000,000 + $500,000 - $90,000 intercompany) $1,410,000Cost of sales ($400,000 + $250,000 - $90,000 intercompany -$10,000 unrealized profit in beginning inventory + $15,000 unrealized profit in ending inventory (565,000)Gross profit 845,000Depreciation expense (170,000)Other expenses ($90,000 + $60,000 + $4,000 patents amortization) (154,000)Total consolidated income 521,000Less: Noncontrolling interest expense ($150,000 + $10,000 profit in beginning inventory - $15,000 profit in end. inventory) ´ 20% (29,000)Consolidated net income $ 492,000Supporting computationsCost of investment in Saiki at January 1, 2007 $ 600,000Book value acquired ($700,000 ´ 80%) (560,000)Patents $ 40,000Patents amortization ($40,000/10 years) = $4,000 per yearSolution E5-11119 120 Intercompany Profit Transactions — InventoriesPill Corporation and Subsidiary Consolidated Income Statement December 31, 2011Sales ($1,000,000 + $500,000 - $90,000 intercompany) $1,410,000Cost of sales ($400,000 + $250,000 - $90,000 intercompany -$10,000 unrealized profit in beginning inventory + $15,000 unrealized profit in ending inventory (565,000)Gross profit 845,000Depreciation expense (170,000)Other expenses ($90,000 + $60,000) (150,000)Total consolidated income 525,000Less: Noncontrolling interest income ($150,000 + $10,000 profit in beginning inventory - $15,000 profit in end. inventory) ´ 20% (29,000)Consolidated net income $ 496,000Supporting computationsCost of investment in Saiki at January 1, 2010 $ 600,000Book value acquired ($700,000 ´ 80%) (560,000)Goodwill $ 40,000120 Chapter 5 121Solution E5-121 b Income as reported $ 200,000 Add: Realization of profits in beginning inventory$120,000 - ($120,000/1.2) 20,000Less: Unrealized profits in ending inventory$360,000 - ($360,000/1.2) (60,000)Realized income 160,000Percent ownership 60%Income from Suey $ 96,0002 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 5,440,000Noncontrolling share 40%Noncontrolling interest December 31, 2011 $2,176,0003 b Realized equity $5,440,000 Majority share 60%Investment balance December 31, 2011 $3,264,000Note: 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 $308,0002 b Combined accounts receivable $45,000 - $39,000 consolidated accounts receivable3 c Revenues $200,000/$150,000 cost of sales = 1 1/3 markup on cost121 122 Intercompany Profit Transactions — InventoriesAmount of Spin's ending inventory from Pard ($32,000 intercompany sales ´ 3/8 remaining unsold) = $12,000 at billed prices ´ 3/4 = $9,0004 b $10,000 noncontrolling interest/$50,000 stockholders' equity of Spin5 a $30,000 unamortized patents/$2,000 amortization = 15 years remaining122 Chapter 5 123Solution E5-14Pullen Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2006Sales ($1,380,000 - $120,000 intercompany sales) $1,260,000Cost of sales ($920,000 - $120,000 - $5,000a + $12,000b) (807,000)Gross profit 453,000Operating expenses (160,000)Total consolidated income 293,000Less: 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 = $12,000SOLUTIONS TO PROBLEMSSolution P5-1Proctor Corporation and Subsidiary Consolidated Statement of Income and Retained Earnings for the year ended December 31, 2008Sales ($1,300,000 + $650,000 - $80,000 intercompany sales) $1,870,000Less: Cost of sales ($800,000 + $390,000 - $80,000 intercompany purchases - $12,000 unrealized profit in beginning inventory + $16,000 unrealized profit in ending inventory) (1,114,000)123 124 Intercompany Profit Transactions — InventoriesGross profit 756,000Other expenses ($340,000 + $160,000) (500,000Income before noncontrolling interest 256,000Noncontrolling interest expense($100,000+$12,000 - $16,000) ´ 10% (9,600)Consolidated net income 246,400Add: Beginning consolidated retained earnings 369,200Less: Dividends for 2008 (100,000)Consolidated retained earnings December 31, 2008 $ 515,600124 Chapter 5 125Solution P5-21 Consolidated cost of sales — 2007Combined cost of sales ($625,000 + $300,000) $ 925,000 Less: Intercompany purchases (300,000)Add: Profit in ending inventory 24,000 Less: Profit in beginning inventory (12,000)Consolidated cost of sales $ 637,000 2 Noncontrolling interest expense — 2007Slam's net income ($600,000 - $300,000 - $150,000) $ 150,000 Add: Profit in beginning inventory 12,000 Less: Profit in ending inventory (24,000)Slam's realized income 138,000 Noncontrolling interest percentage 10% Noncontrolling interest expense $ 13,800 3 Consolidated net income — 2007Consolidated sales ($900,000 + $600,000 - $300,000) $1,200,000 Less: Consolidated cost of sales (637,000)Less: Consolidated expenses ($225,000 + $150,000) (375,000)Less: Noncontrolling interest expense (13,800)Consolidated net income $ 174,200 Alternatively, Putt's separate income $ 50,000 Add: Income from Slam 124,200 Consolidated net income $ 174,200 125 126 Intercompany Profit Transactions — Inventories4 Noncontrolling interest at December 31, 2007Equity of Slam December 31, 2007 $ 520,000 Less: Unrealized profit in ending inventory (24,000)496,000 Noncontrolling interest percentage 10% Noncontrolling interest December 31, 2007 $ 49,600 126 Chapter 5 127Solution P5-31 Inventories appearing in consolidated balance sheet at December 31, 2007Beginning 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, 2008Ending 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)127 128 Intercompany Profit Transactions — InventoriesUnrealized profit in Scan's inventory $ 6,250 128 Chapter 5 129Solution P5-41 Plier's income from Stuff 2007 2008 200975% of Stuff's net income $ 300,000 $ 337,500 $ 262,500 Unrealized profit in December 31,2007 inventory (downstream)($200,000 ´ 1/2) ´ 100% (100,000) 100,000 Unrealized profit in December 31,2008 inventory (upstream)$100,000 ´ 75% (75,000) 75,000 Plier's income from Stuff $ 200,000 $ 362,500 $ 337,500 2 Plier's net incomePlier'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 incomeSeparate incomes of Plier andStuff combined $2,200,000 $2,150,000 $2,350,000 129 130 Intercompany Profit Transactions — InventoriesUnrealized profit in December 31,2007 inventory (100,000) 100,000 Unrealized profit in December 31,2008 inventory (100,000) 100,000 Total income 2,100,000 2,150,000 2,450,000 Less: Noncontrolling interest expense2007 $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 131Solution P5-5 Pane Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2007Adjustments and Consolidated Pane 100% Seal Eliminations Statements Income Statement Sales $ 800,000 $ 400,000 a 120,000 $1,080,000Income from Seal 102,000 d 102,000Cost 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 $ 200,000Retained Earnings Retained earnings — Pane $ 600,000 600,000Retained earnings — Seal $ 380,000 e 380,000Net income 200,000ü 100,000ü 200,000Dividends 100,000* 50,000* d 50,000 100,000*Retained earnings December 31 $ 700,000 $ 430,000 $ 700,000Balance Sheet Cash $ 54,000 $ 37,000 $ 91,000Receivables — net 90,000 60,000 g 17,000 133,000Inventories 100,000 80,000 b 12,000 168,000Other assets 70,000 90,000 160,000Land 50,000 50,000 100,000Buildings — net 200,000 150,000 350,000Equipment — net 500,000 400,000 900,000Investment in Seal 736,000 c 20,000 d 52,000 e 704,000131 132 Intercompany Profit Transactions — InventoriesPatents e 24,000 f 6,000 18,000$1,800,000 $ 867,000 $1,920,000Accounts payable $ 160,000 $ 47,000 g 17,000 $ 190,000Other liabilities 340,000 90,000 430,000Common stock, $10 par 600,000 300,000 e 300,000 600,000Retained earnings 700,000ü 430,000ü 700,000$1,800,000 $ 867,000 $1,920,000Supporting computations Unrealized profit in beginning inventory ($40,000 ´ 1/2) = $20,000 Unrealized profit in ending inventory ($48,000 ´ 1/4) = $12,000Seal'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 133Solution P5-6 Patty Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2008Adjustments and Consolidated Patty Sue 75% Eliminations Statements Income Statement Sales $ 600,000 $ 400,000 a 130,000 $ 870,000Income from Sue 102,500 d 102,500Cost 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 $ 287,500Retained Earnings Retained earnings — Patty $ 182,500 $ 182,500Retained earnings — Sue $ 90,000 e 90,000Net income 287,500ü 150,000ü 287,500Dividends 150,000* 50,000* d 37,500 f 12,500 150,000* Retained earnings December 31 $ 320,000 $ 190,000 $ 320,000Balance Sheet Cash $ 85,000 $ 30,000 $ 115,000Accounts receivable 165,000 100,000 g 15,000 250,000Dividends receivable 15,000 h 15,000Inventories 60,000 80,000 b 20,000 120,000Land 80,000 50,000 130,000Buildings — net 230,000 100,000 330,000Equipment — net 200,000 140,000 340,000Investment in Sue 385,000 c 10,000 d 65,000 e 330,000133 134 Intercompany Profit Transactions — InventoriesGoodwill e 150,000 150,000$1,220,000 $ 500,000 $1,435,000Accounts payable $ 225,000 $ 100,000 g 15,000 $ 310,000Dividends payable 70,000 20,000 h 15,000 75,000Other liabilities 155,000 40,000 195,000Common stock, $10 par 450,000 150,000 e 150,000 450,000Retained earnings 320,000ü 190,000ü 320,000$1,220,000 $ 500,000Noncontrolling interest January 1 e 60,000Noncontrolling interest December 31 f 25,000 85,000$1,435,000* DeductSupporting computations Investment in Sue at January 1, 2007 $300,000 Book value acquired ($200,000 ´ 75%) 150,000Goodwill $150,000134 Chapter 5 135Solution P5-7Preliminary computationsInvestment cost $275,000 Less: Book value acquired ($250,000 ´ 90%) 225,000Patents $ 50,000Patents amortization $50,000/10 years = $5,000 per yearUpstream salesUnrealized profit in December 31, 2006 inventory of Poly $28,000 - ($28,000 ¸ 1.4) = $8,000Unrealized profit in December 31, 2007 inventory of Poly $42,000 - ($42,000 ¸ 1.4) = $12,000Income from SusanShare 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%) 7,200Income from Susan $ 81,400Investment balanceInitial investment cost $275,000 Increase in Susan's net assets from December 31, 2004 to December 31, 2007 ($70,000 ´ 90%) 63,000Patent amortization for 3 years (15,000)Unrealized profit in December 31, 2007 inventory (10,800)Investment balance December 31, 2007 $312,200Noncontrolling interest expenseReported income of Susan $100,000 Add: Unrealized profit in beginning inventory 8,000Less: Unrealized profit in ending inventory (12,000)135 136 Intercompany Profit Transactions — InventoriesSusan's realized income 96,000Noncontrolling interest percentage 10%Noncontrolling interest expense $ 9,600136 Chapter 5 137Solution P5-7 (continued)Poly Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2007Adjustments and Consolidated Poly Susan 90% Eliminations Statements Income Statement Sales $ 819,000 $ 560,000 a 560,000 $ 819,000Income from Susan 81,400 d 81,400Cost 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 $ 200,000Retained Earnings Retained earnings — Poly $ 120,000 $ 120,000Retained earnings — Susan $ 70,000 e 70,000Net income 200,000ü 100,000ü 200,000Dividends 100,000* 50,000* d 45,000 h 5,000 100,000* Retained earnings December 31 $ 220,000 $ 120,000 $ 220,000Balance Sheet Cash $ 75,800 $ 50,000 $ 125,800Inventory 42,000 80,000 b 12,000 110,000Other current assets 60,000 20,000 g 10,000 70,000Plant assets — net 300,000 300,000 600,000Investment 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 $ 940,800137 138 Intercompany Profit Transactions — InventoriesCurrent liabilities $ 170,000 $ 130,000 g 10,000 $ 290,000Capital stock 400,000 200,000 e 200,000 400,000Retained earnings 220,000ü 120,000ü 220,000$ 790,000 $ 450,000Noncontrolling interest January 1 c 800 e 27,000Noncontrolling interest December 31 h 4,600 30,800$ 940,800* Deduct138 Chapter 5 139Solution P5-81 Entries to correct Phil's income from Sert and investment accountsRetained earnings January 1, 2011 4,500 Investment in Sert 4,500To 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 4,500To 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 4,000To eliminate intercompany profit in the December 31, 2011 inventory.Working paper entries in general journal form: a Noncontrolling interest 500 Investment in Sert 4,500Cost of sales 5,000 b Sales 10,000Cost of sales 10,000 c Cost of sales 4,000Inventory 4,000 d Income from Sert 27,500Dividends 18,000Investment in Sert 9,500 e Capital stock — Sert 80,000139 140 Intercompany Profit Transactions — InventoriesRetained earnings — Sert 40,000Investment in Sert 108,000Noncontrolling interest 12,000 f Accounts payable 10,000Accounts receivable 10,000 g Noncontrolling interest expense 3,500Dividends 2,000Noncontrolling interest 1,500140 Chapter 5 141Solution P5-8 (continued)2 Phil Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2011Adjustments 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 27,500Cost 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 $ 113,500Retained Earnings Retained earnings — Phil $ 105,500 $ 105,500 Retained earnings — Sert $ 40,000 e 40,000 Net income 113,500ü 30,000ü 113,500Dividends 70,000* 20,000* d 18,000 g 2,000 70,000* Retained earnings December 31 $ 149,000 $ 50,000 $ 149,000Balance Sheet Cash $ 63,000 $ 30,000 $ 93,000 Inventories 60,000 15,000 c 4,000 71,000Accounts receivable 40,000 20,000 f 10,000 50,000Plant assets — net 220,000 105,000 325,000Investment in Sert 113,000 a 4,500 d 9,500 e 108,000 $ 496,000 $ 170,000 $ 539,000Accounts payable $ 47,000 $ 40,000 f 10,000 $ 77,000141 142 Intercompany Profit Transactions — InventoriesCapital stock 300,000 80,000 e 80,000 300,000Retained earnings 149,000ü 50,000ü 149,000$ 496,000 $ 170,000Noncontrolling interest January 1 a 500 e 12,000Noncontrolling interest December 31 g 1,500 13,000$ 539,000* DeductNoncontrolling interest expense: ($30,000 + $5,000) ´ 10%142 Chapter 5 143Solution P5-9 Pan Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2007100% Adjustments and Consolidated Pan Sal Eliminations Statements Income Statement Sales $ 800,000 $ 400,000 a 120,000 $1,080,000Income from Sal 108,000 d 108,000Cost 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 $ 206,000Retained Earnings Retained earnings — Pan $ 606,000 606,000Retained earnings — Sal $ 380,000 e 380,000Net income 206,000ü 100,000ü 206,000Dividends 100,000* 50,000* d 50,000 100,000*Retained earnings December 31 $ 712,000 $ 430,000 $ 712,000Balance Sheet Cash $ 54,000 $ 37,000 $ 91,000Receivables — net 90,000 60,000 f 17,000 133,000Inventories 100,000 80,000 b 12,000 168,000Other assets 70,000 90,000 160,000Land 50,000 50,000 100,000Buildings — net 200,000 150,000 350,000Equipment — net 500,000 400,000 900,000Investment in Sal 748,000 c 20,000 d 58,000 e 710,000143 144 Intercompany Profit Transactions — InventoriesGoodwill e 30,000 30,000$1,812,000 $ 867,000 $1,932,000Accounts payable $ 160,000 $ 47,000 f 17,000 $ 190,000Other liabilities 340,000 90,000 430,000Common stock, $10 par 600,000 300,000 e 300,000 600,000Retained earnings 712,000 430,000 712,000$1,812,000 $ 867,000 $1,932,000Supporting computations Unrealized profit in beginning inventory ($40,000 ´ 1/2) = $20,000 Unrealized profit in ending inventory ($48,000 ´ 1/4) = $12,000Sal's income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory. 144 Chapter 5 145Solution P5-10 Pat Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2008Adjustments and Consolidated Pat Sun 75% Eliminations Statements Income Statement Sales $ 600,000 $ 400,000 a 130,000 $ 870,000Income from Sun 92,500 d 92,500Cost 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 $ 277,500Retained Earnings Retained earnings — Pat $ 172,500 $ 172,500Retained earnings — Sun $ 90,000 e 90,000Net income 277,500ü 150,000ü 277,500Dividends 150,000* 50,000* d 37,500 i 12,500 150,000* Retained earnings December 31 $ 300,000 $ 190,000 $ 300,000Balance Sheet Cash $ 85,000 $ 30,000 $ 115,000Accounts receivable 165,000 100,000 g 15,000 250,000Dividends receivable 15,000 h 15,000Inventories 60,000 80,000 b 20,000 120,000Land 80,000 50,000 130,000Buildings — net 230,000 100,000 330,000Equipment — net 200,000 140,000 340,000Investment in Sun 365,000 c 10,000 d 55,000 e 320,000 Patents e 140,000 f 10,000 130,000145 146 Intercompany Profit Transactions — Inventories$1,200,000 $ 500,000 $1,415,000Accounts payable $ 225,000 $ 100,000 g 15,000 $ 310,000Dividends payable 70,000 20,000 h 15,000 75,000Other liabilities 155,000 40,000 195,000Common stock, $10 par 450,000 150,000 e 150,000 450,000Retained earnings 300,000ü 190,000ü 300,000$1,200,000 $ 500,000Noncontrolling interest January 1 e 60,000Noncontrolling interest December 31 i 25,000 85,000$1,415,000* DeductSupporting computations Investment in Sun at January 1, 2007 $300,000 Book value acquired ($200,000 ´ 75%) 150,000Patents (15 year amortization) $150,000146 Chapter 5 147Solution P5-11Preliminary computationsInvestment cost $275,000 Less: Book value acquired ($250,000 ´ 90%) 225,000Goodwill $ 50,000Upstream salesUnrealized profit in December 31, 2009 inventory of Po $28,000 - ($28,000 ¸ 1.4) = $8,000Unrealized profit in December 31, 2010 inventory of Po $42,000 - ($42,000 ¸ 1.4) = $12,000Income from SanShare 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%) 7,200Income from San $ 86,400Investment balanceInitial investment cost $275,000 Increase in San's net assets from December 31, 2007 to December 31, 2010 ($70,000 ´ 90%) 63,000Unrealized profit in December 31, 2010 inventory (10,800)Investment balance December 31, 2010 $327,200Noncontrolling interest expense Reported income of San $100,000 Add: Unrealized profit in beginning inventory 8,000Less: Unrealized profit in ending inventory (12,000)San's realized income 96,000Noncontrolling interest percentage 10%147 148 Intercompany Profit Transactions — InventoriesNoncontrolling interest expense $ 9,600148 Chapter 5 149Solution P5-11 (continued)Po Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010Adjustments and Consolidated Po San 90% Eliminations Statements Income Statement Sales $ 819,000 $ 560,000 a 560,000 $ 819,000Income from San 86,400 d 86,400Cost 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 $ 205,000Retained Earnings Retained earnings — Po $ 130,000 $ 130,000Retained earnings — San $ 70,000 e 70,000Net income 205,000ü 100,000ü 205,000Dividends 100,000* 50,000* d 45,000 100,000* f 5,000 Retained earnings December 31 $ 235,000 $ 120,000 $ 235,000Balance Sheet Cash $ 75,800 $ 50,000 $ 125,800Inventory 42,000 80,000 b 12,000 110,000Other current assets 60,000 20,000 g 10,000 70,000Plant assets — net 300,000 300,000 600,000Investment in San 327,200 c 7,200 d 41,400 e 293,000 Goodwill e 50,000 50,000$ 805,000 $ 450,000 $ 955,800149 150 Intercompany Profit Transactions — InventoriesCurrent liabilities $ 170,000 $ 130,000 g 10,000 $ 290,000Capital stock 400,000 200,000 e 200,000 400,000Retained earnings 235,000ü 120,000ü 235,000$ 805,000 $ 450,000Noncontrolling interest January 1 c 800 e 27,000Noncontrolling interest December 31 f 4,600 30,800$ 955,800* Deduct150 Chapter 5 151151

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