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solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
solusi manual advanced acc zy Chap007
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solusi manual advanced acc zy Chap007

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  • 1. Chapter 07 - Intercompany Inventory Transactions CHAPTER 7 INTERCOMPANY INVENTORY TRANSACTIONS ANSWERS TO QUESTIONS Q7-1 All inventory transfers between related companies must be eliminated to avoid an overstatement of revenue and cost of goods sold in the consolidated income statement. In addition, when unrealized profits exist at the end of the period, the eliminations are needed to avoid overstating inventory and consolidated net income. Q7-2 An inventory transfer at cost results in an overstatement of sales and cost of goods sold. While net income is not affected, gross profit ratios and other financial statement analysis may be substantially in error if appropriate eliminations are not made. Q7-3 An upstream sale occurs when the parent purchases items from one or more subsidiaries. A downstream sale occurs when the sale is made by the parent to one or more subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation workpaper will know whether to reduce consolidated net income assigned to the controlling interest by the full amount of the unrealized profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream). Q7-4 As in all cases, the total amount of the unrealized profit must be eliminated in preparing the consolidated statements. When the profits are on the parent company's books, consolidated net income and income assigned to the controlling interest are reduced by the full amount of the unrealized profit. Q7-5 Consolidated net income is reduced by the full amount of the unrealized profits. In the upstream sale, the unrealized profits are apportioned between the parent company shareholders and the noncontrolling shareholders. Thus, consolidated net income assigned to the controlling and noncontrolling interests is reduced by a pro rata portion of the unrealized profits. Q7-6 Income assigned to the noncontrolling interest is affected when unrealized profits are recorded on the subsidiary's books as a result of an upstream sale. A downstream sale should have no effect on the income assigned to noncontrolling interest because the profits are on the books of the parent. Q7-7 The basic eliminating entry needed when the item is resold before the end of the period is: Sales Cost of Goods Sold XXXXXX XXXXXX The debit to sales is based on the intercorporate sale price. This means that only the revenue recorded by the company ultimately selling to the nonaffiliate is to be included in the consolidated income statement. Cost of goods sold is credited for the amount paid by the purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded by the initial owner to be reported in the consolidated statement. 7-1
  • 2. Chapter 07 - Intercompany Inventory Transactions Q7-8 The basic eliminating entry needed when one or more of the items are not resold before the end of the period is: Sales Cost of Goods Sold Inventory XXXXXX XXXXXX XXXXXX The debit to sales is for the full amount of the transfer price. Inventory is credited for the unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold by the company making the intercompany sale. Q7-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an external party. The amount reported as cost of goods sold is based on the amount paid for the inventory when it was produced or purchased from an external party. If inventory has been purchased by one company and sold to a related company, the cost of goods sold recorded on the intercorporate sale must be eliminated. Q7-10 No adjustment to retained earnings is needed if the intercorporate sales have been made at cost or if all intercorporate sales have been resold to an external party in the same accounting period. If not all of the intercorporate sales have been resold by the end of the period, consolidated retained earnings must be reduced by the parent's proportionate share of any unrealized profits. Q7-11 A proportionate share of the realized retained earnings of the subsidiary are assigned to the noncontrolling interest. Any unrealized profits on upstream sales are deducted proportionately from the amount assigned to the noncontrolling interest and consolidated retained earnings. Unrealized profits on downstream sales are deducted entirely from the retained earnings assigned to the consolidated entity. Q7-12 When inventory profits from a prior period intercompany transfer are realized in the current period, the profit is added to consolidated net income and to the income assigned to the shareholders of the company that made the intercompany sale. If the unrealized profits arise from a downstream sale, income assigned to the controlling interest will increase by the full amount of profit realized. When the profits arise from an upstream sale, income assigned to the controlling and noncontrolling interests will be increased proportionately in the period the profit is realized. Thus, knowledge of whether the profits resulted from an upstream or a downstream sale is imperative in assigning consolidated net income to the appropriate shareholder group. Q7-13 Consolidated retained earnings must be reduced by the full amount of any unrealized profit on the parent company books. Q7-14 Consolidated retained earnings must be reduced by the parent's proportionate share of the unrealized profit on the subsidiary's books. Q7-15* Sales between subsidiaries are treated in the same manner as upstream sales. Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the end of the period are eliminated and consolidated net income and income assigned to the controlling and noncontrolling interests is reduced. 7-2
  • 3. Chapter 07 - Intercompany Inventory Transactions Q7-16* When a company is acquired in a business combination the transactions occurring before the combination generally are regarded as transactions with unrelated parties and no adjustments or eliminations are needed. All transactions between the companies following the combination must be fully eliminated. SOLUTIONS TO CASES C7-1 Measuring Cost of Goods Sold a. While the rule covers only a part of the elimination needed, Charlie is correct in that the cost of goods sold recorded by the selling company must be eliminated to avoid overstating that caption in the consolidated income statement. b. The rules will result in the proper consolidated totals if rule #1 is expanded to include a debit to sales and a credit to ending inventory for the amount of profit recorded by the company that sold to its affiliate. c. The way in which the rule is stated makes it appear to be incorrect, but it is correct. The rule is appropriate in that the cost of goods sold recorded by the purchasing affiliate is equal to the cost of goods sold to the first owner plus the profit the first owner recorded on the sale. Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold. If an equal amount of sales is eliminated, the rule should result in proper consolidated financial statement totals. d. The employee would be forced to look at the books of the selling affiliate and determine the difference between the intercorporate sale price and the price it paid to acquire or produce the items. If the items sold to affiliates are routinely produced and costs do not fluctuate greatly, it may be possible to use some form of gross profit ratio to estimate the amount of unrealized profit. C7-2 Inventory Values and Intercompany Transfers MEMO To: From: Re: President Water Products Corporation , CPA Inventory Sale and Purchase of New Inventory If Water Products holds only a small percent of the ownership of Plumbers Products and Growinkle Manufacturing, it should have no difficulty in reporting the desired results. This would not be the case if the two companies are subsidiaries of Water Products. If both Plumbers Products and Growinkel are subsidiaries of Water Products, both the sale of inventory to Plumbers Supply and the purchase of inventory from Growinkle Manufacturing must be eliminated. In addition, the unrealized profit on any unsold inventory involved in these transfers must be eliminated in preparing the financial statements for the current period. 7-3
  • 4. Chapter 07 - Intercompany Inventory Transactions C7-2 (continued) The consolidated income statement should include the same amount of income on the inventory sold to Plumbers Supply and resold during the year as would have been recorded if Water Products had sold the inventory directly to the purchaser. Any income recorded by Water Products on inventory not resold by Plumbers Supply must be eliminated. Similarly, the consolidated income statement should include the same amount of income on the inventory purchased by Water Products and resold during the year as would have been recorded if Growinkle Manufacturing had sold the inventory directly to the purchaser. Any income recorded by Growinkle Manufacturing on inventory not resold by Water Products must be eliminated. Consolidated net income may increase if Plumbers Supply is able to sell the inventory it purchased from Water Products at a higher price than would have been received by Water Products or if it is able to sell a larger number of units. The same can be said for the inventory purchased by Water Products from Growinkle Manufacturing. It is important to recognize that the transfer of inventory between Water Products and its subsidiaries does not in itself generate income for the consolidated entity. An additional level of complexity may arise in this situation if Water Products uses the LIFO inventory method. It might, for example, be forced to carry over its LIFO cost basis on the old inventory sold to Plumbers Supply to the new inventory purchased from Growinkle Manufacturing since it was replaced within the accounting period. Primary citation: ARB 51, Par. 6 7-4
  • 5. Chapter 07 - Intercompany Inventory Transactions C7-3 Intercorporate Inventory Transfers MEMO To: Treasurer Evert Corporation From: Re: , CPA Inventory Sale to Parent This memo is prepared in response to your request for information on the appropriate treatment of intercompany inventory transfers in consolidated financial statements. The specific eliminating entries required in this case depend on the valuation assigned to the inventory at December 31, 20X2. Frankle Company sold inventory with a carrying value of $240,000 to Evert for $180,000 on December 20, 20X2. Since the exchange price was well below Frankle’s cost, consideration should be given to whether the inventory should be reported at $180,000 or $240,000 in the consolidated statements at December 31, 20X2, under the lower-of-cost-or-market rule. While the value of the inventory apparently had fallen below Frankle’s carrying value, the accounting standards indicate no loss should be recognized when the evidence indicates that cost will be recovered with an approximately normal profit margin upon sale in the ordinary course of business. [ARB 43, Chapter 4, Par. 9] We are told the management of Frankle considered the drop in prices to be temporary and Evert was able to sell the inventory for $70,000 more than the original amount paid by Frankle. It therefore seems appropriate for the consolidated entity to report the inventory at Frankle’s cost of $240,000 at December 31, 20X2. In preparing the consolidated statements at December 31, 20X2 and 20X3, the effects of the intercompany transfer should be eliminated. [ARB 51, Par. 6] The following eliminating entry is required at December 31, 20X2: E(1) Sales Inventory Cost of Goods Sold 180,000 60,000 240,000 The above entry will increase the carrying value of the inventory to $240,000. Eliminating sales of $180,000 and cost of goods sold of $240,000 will increase consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x .10). These changes will result in an increase in consolidated retained earnings and the amount assigned to the noncontrolling shareholders in the consolidated balance sheet by $54,000 and $6,000, respectively. 7-5
  • 6. Chapter 07 - Intercompany Inventory Transactions C7-3 (continued) The following eliminating entry is required at December 31, 20X3: E(2) Cost of Goods Sold Retained Earnings Noncontrolling interest 60,000 54,000 6,000 The above entry will reduce consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x .10). The credits to retained earnings and noncontrolling interest are needed to bring the beginning balances into agreement with those reported at December 31, 20X2. No eliminations are required for balances reported at December 31, 20X3, because the inventory has been sold to a nonaffiliate prior to year-end. Primary citations: ARB 43, CH 4, Par. 9 ARB 51, Par. 6 C7-4 Unrealized Inventory Profits a. When the amount of unrealized inventory profits on the books of the subsidiary at the beginning of the period is greater than the amount at the end of the period, the income assigned to the noncontrolling interest for the period will exceed a pro rata portion of the reported net income of the subsidiary. b. The subsidiary apparently had less unrealized inventory profit at the end of the period than it did at the start of the period. In addition, the parent must have had more unrealized profit on its books at the end of the period than it did at the beginning. The negative effect of the latter apparently offset the positive effect of the reduction in unrealized profits by the subsidiary. c. The most likely reason is that a substantial amount of the parent company sales was made to its subsidiaries and the cost of goods sold on those items was eliminated in preparing the consolidated statements. d. A loss was recorded by the seller on an intercompany sale of inventory to an affiliate and the purchaser continues to hold the inventory. 7-6
  • 7. Chapter 07 - Intercompany Inventory Transactions C7-5 Eliminating Inventory Transfers a. If no intercompany sales are eliminated, the income statement may include overstated sales revenue and cost of goods sold. The net impact on income will depend upon whether there were more unrealized profits at the beginning or end of the year. If Ready Building does not hold total ownership of the subsidiaries, the amount of income assigned to noncontrolling shareholders is likely to be incorrect as well. Inventory, current assets and total assets, retained earnings, and stockholders' equity are likely to be overstated if inventories are sold to affiliates at a profit. If the companies pay income taxes on their individual earnings, the amount of income tax expense also will be overstated in the period in which unrealized profits are reported and understated in the period in which the profits are realized. b. Because profit margins vary considerably, the amount of unrealized profit may vary considerably if uneven amounts of product are purchased by affiliates from period to period. Ready Building needs to establish a formal system to monitor intercompany sales. Perhaps the best alternative would be to establish a separate series of accounts to be used solely for intercompany transfers. Alternatively, it may be possible to use unique shipping containers for intercompany sales or to specifically mark the containers in some way to identify the intercompany shipments at the time of receipt. The purchaser might then use a different type of inventory tag or mark these units in some way when the product is received and placed in inventory. Inventory count teams could then easily identify the product when inventories are taken. c. A number of factors might be considered. The most important inventory system is the one used by the company making the intercompany purchase. When intercompany inventory purchases are bunched at the end of the year, the amount of unrealized profit included in ending inventory may be quite different under FIFO versus LIFO. If intercompany purchases are placed in a LIFO inventory base, inventories may be misstated for a period of years before the inventory is resold. Eliminating entries must be made each of the years until resale to avoid a misstatement of assets and equities. In those cases where the intercompany purchases are in high volume and the inventory turns over very quickly, a small amount of inventory left at the end of the period may be immaterial and of little concern. Typically, a parent will align inventory costing methods subsequent to a subsidiary acquisition to avoid problems caused by differences in accounting for the same items or types of items. 7-7
  • 8. Chapter 07 - Intercompany Inventory Transactions C7-5 (continued) d. It may be necessary to start by looking at intercorporate cash receipts and disbursements to determine the extent of intercorporate sales. One or more months might be selected and all vouchers examined to establish the level of intercorporate sales and the profit margins recorded on the sales. For those products sold throughout the year, it may be possible to estimate for the year as a whole based on an examination of several months. Once total intercompany sales and profit margins have been estimated, the amount of unrealized profit at year end should be estimated. One approach would be to take a physical inventory of the specific product types which have been identified and attempt to trace back using the product identification numbers or shipping numbers to determine what portion of the inventory on hand was purchased from affiliates. C7-6 Intercompany Profits and Transfers of Inventory a. The intercompany transfers of Xerox (www.xerox.com) between segments are apparently relatively insignificant because they are not reported in the notes to the consolidated financial statements relating to segment reporting. For consolidation purposes, all significant intercompany accounts and transactions are eliminated. b. Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated market prices. The amount of intercompany transfers is large. In the fiscal year ending December 31, 2006, Exxon Mobil reported eliminations of $368 billion of intersegment transfers, which does not include intercompany transfers within segments. This amount represents nearly 50 percent of total reported segment sales. For consolidation purposes, Exxon Mobil eliminates the effects of intercompany transactions. c. Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles, parts, and components manufactured by the company and its subsidiaries, with a smaller amount of financial and other services included. The amount of intercompany transfers is significant, totaling almost $4 billion, but is relatively small in relation to sales to unaffiliated customers. The amount has been decreasing in recent years. The effects of intercompany transfers are eliminated in consolidation. 7-8
  • 9. Chapter 07 - Intercompany Inventory Transactions SOLUTIONS TO EXERCISES E7-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted] 1. a 2. c 3. a 4. c 5. c 6. c Net assets reported Profit on intercompany sale Proportion of inventory unsold at year end ($60,000 / $240,000) Unrealized profit at year end Amount reported in consolidated statements Inventory reported by Banks ($175,000 + $60,000) Inventory reported by Lamm Total inventory reported Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] Amount reported in consolidated statements 7-9 $48,000 x .25 $320,000 (12,000) $308,000 $235,000 250,000 $485,000 (15,000) $470,000
  • 10. Chapter 07 - Intercompany Inventory Transactions E7-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted] 1. b Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small ($500,000 x .40) Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x 4 / 5) x .60] Cost of goods sold for consolidated entity $ 800,000 700,000 $1,500,000 (200,000) (240,000) $1,060,000 Note: Answer b in the actual CPA examination question was $1,100,000, requiring candidates to select the closest answer. 2. d $32,000 = ($200,000 + $140,000) – $308,000 3. b $6,000 = ($26,000 + $19,000) – $39,000 4. c $9,000 = Inventory held by Spin ($32,000 x .375) Unrealized profit on sale [($30,000 + $25,000) – $52,000] Carrying cost of inventory for Power 5. b b (3,000) $ 9,000 .20 = $14,000 / [(Stockholders’ Equity $50,000) + (Patent $20,000)] 6. $12,000 14 years = ($28,000 / [(28,000 - $20,000) / 4 years] E7-3 Multiple Choice – Consolidated Income Statement c 1. 2. b 3. c Total income ($86,000 - $47,000) Income assigned to noncontrolling interest [.40($86,000 - $60,000)] Consolidated net income assigned to controlling interest 7-10 $39,000 (10,400) $28,600
  • 11. Chapter 07 - Intercompany Inventory Transactions E7-4 Multiple-Choice Questions — Consolidated Balances 1. c 2. a Amount paid by Lorn Corporation Unrealized profit Actual cost Portion sold Cost of goods sold $120,000 (45,000) $ 75,000 x .80 $ 60,000 3. e Consolidated sales Cost of goods sold Consolidated net income Income to Dresser’s noncontrolling interest: Sales Reported cost of sales Report income Portion realized Realized net income Portion to Noncontrolling Interest Income to noncontrolling Interest Income to controlling interest $140,000 (60,000) $ 80,000 4. a $120,000 (75,000) $ 45,000 x .80 $ 36,000 x .30 (10,800) $ 69,200 Inventory reported by Lorn Unrealized profit ($45,000 x .20) Ending inventory reported $ 24,000 (9,000) $ 15,000 E7-5 Multiple-Choice Questions — Consolidated Income Statement 1. a $20,000 = $30,000 x [($48,000 - $16,000) / $48,000] 2. d Sales reported by Movie Productions Inc. Cost of goods sold ($30,000 x 2/3) Consolidated net income 3. a $7,000 = [($67,000 - $32,000) x .20] 7-11 $67,000 (20,000) $47,000
  • 12. Chapter 07 - Intercompany Inventory Transactions E7-6 Realized Profit on Intercompany Sale a. Journal entries recorded by Nordway Corporation: (1) 960,000 (2) Cash (Accounts Receivable) Sales 750,000 (3) b. Inventory Cash (Accounts Payable) Cost of Goods Sold Inventory 600,000 750,000 600,000 Journal entries recorded by Olman Company: (1) Inventory Cash (Accounts Payable) 750,000 (2) Cash (Accounts Receivable) Sales 1,125,000 (3) c. 960,000 Cost of Goods Sold Inventory 750,000 750,000 1,125,000 750,000 Eliminating entry: E(1) Sales Cost of Goods Sold 750,000 7-12 750,000
  • 13. Chapter 07 - Intercompany Inventory Transactions E7-7 Sale of Inventory to Subsidiary a. Journal entries recorded by Nordway Corporation: (1) 960,000 (2) Cash (Accounts Receivable) Sales 750,000 (3) b. Inventory Cash (Accounts Payable) Cost of Goods Sold Inventory 600,000 750,000 600,000 Journal entries recorded by Olman Company: (1) Inventory Cash (Accounts Payable) 750,000 (2) Cash (Accounts Receivable) Sales 810,000 (3) c. 960,000 Cost of Goods Sold Inventory 540,000 750,000 810,000 540,000 Eliminating entry: E(1) Sales Cost of Goods Sold Inventory 750,000 7-13 708,000 42,000
  • 14. Chapter 07 - Intercompany Inventory Transactions E7-8 Inventory Transfer between Parent and Subsidiary a. Karlow Corporation reported cost of goods sold of $820,000 ($82 x 10,000 desks) and Draw Company reported cost of goods sold of $658,000 ($94 x 7,000 desks). b. Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks). c. Eliminating entry: E(1) d. 940,000 904,000 36,000 Eliminating entry: E(1) e. Sales Cost of Goods Sold Inventory Retained Earnings, January 1 Cost of Goods Sold 36,000 36,000 Eliminating entry: E(1) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold 21,600 14,400 7-14 36,000
  • 15. Chapter 07 - Intercompany Inventory Transactions E7-9 Income Statement Effects of Unrealized Profit a. b. Sale price to Holiday Bakery per bag ($900,000 / 100,000) Profit per bag [$9.00 - ($9.00 / 1.5)] Cost per bag Bags sold by Holiday Bakery (100,000 - 20,000) Consolidated cost of goods sold E(1) Sales Inventory ($3.00 x 20,000 bags) Cost of Goods Sold $ 9.00 (3.00) $ 6.00 x 80,000 $480,000 900,000 60,000 840,000 Required Adjustment to Cost of Goods Sold: Cost of goods sold — Farmco ($900,000 / 1.5) Cost of goods sold — Holiday ($9.00 x 80,000 units) $ 600,000 720,000 $1,320,000 (480,000) $ 840,000 Consolidated cost of goods sold ($6.00 x 80,000 units) Required adjustment c. Operating income of Holiday Bakery Net income of Farmco Products $400,000 150,000 $550,000 (60,000) $490,000 Less: Unrealized inventory profits Consolidated net income Less: Income assigned to noncontrolling interest ($150,000 - $60,000 unrealized profit) x .40 Income assigned to controlling interest (36,000) $454,000 Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Unrealized profits ($3.00 x 20,000 units) Realized net income Ownership held by Holiday Bakery Income assigned to controlling interest 7-15 $150,000 (60,000) $ 90,000 x .60 $400,000 54,000 $454,000
  • 16. Chapter 07 - Intercompany Inventory Transactions E7-10 Prior-Period Unrealized Inventory Profit a. Cost per bag of flour ($9.00 / 1.5) Bags sold Cost of goods sold from inventory held, January 1, 20X9 b. Assuming the basic equity method is used by Holiday Bakery in accounting for its investment in Farmco Products, the following eliminating entry is needed: E(1) c. Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold $60,000 = 20,000 bags x $3.00 $ 6.00 x 20,000 $120,000 36,000 24,000 Operating income of Holiday Bakery Net income of Farmco Products 60,000 $300,000 250,000 $550,000 60,000 $610,000 Add: Inventory profits realized in 20X9 Consolidated net income Less: Income assigned to noncontrolling shareholders ($250,000 + $60,000) x .40 Income assigned to controlling interest (124,000) $486,000 Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Inventory profits realized in 20X9 Realized net income Ownership held by Holiday Bakery $250,000 60,000 $310,000 x .60 Income assigned to controlling interest 7-16 $300,000 186,000 $486,000
  • 17. Chapter 07 - Intercompany Inventory Transactions E7-11 Computation of Consolidated Income Statement Data a. Reported sales of Prem Company Reported sales of Cooper Company Intercompany sales by Prem Company in 20X5 Intercompany sales by Cooper Company in 20X5 Sales reported on consolidated income statement b. $ 30,000 80,000 Cost of goods sold reported by Prem Company Cost of goods sold reported by Cooper Company $400,000 200,000 $600,000 (110,000) $490,000 $250,000 120,000 $370,000 (100,500) $269,500 Adjustment due to intercompany sales Consolidated cost of goods sold Adjustment to cost of goods sold: CGS charged by Prem on sale to Cooper CGS charged by Cooper ($30,000 - $6,000) Total charged to CGS CGS for consolidated entity $20,000 x ($24,000 / $30,000) Required adjustment to CGS CGS charged by Cooper on sale to Prem CGS charged by Prem ($80,000 - $20,000) Total charged to CGS CGS for consolidated entity $50,000 x ($60,000 / $80,000) Required adjustment to CGS Total adjustment required c. d. $ 20,000 24,000 $ 44,000 $ 50,000 60,000 $110,000 (16,000) (37,500) Reported net income of Cooper Company Unrealized profit on sale to Prem Company $30,000 x ($20,000 / $80,000) Realized net income Noncontrolling interest's share Income assigned to noncontrolling interest Reported net income of Pem Company Less: Income from subsidiary Net income of Cooper Company Operating income Less: Unrealized inventory profits of Prem Company [$10,000 x ($6,000 / $30,000)] Unrealized inventory profits of Copper Company [$30,000 x ($20,000 / $80,000)] Income assigned to noncontrolling interest Income assigned to controlling interest 7-17 $ 28,000 72,500 $100,500 $ 45,000 (7,500) $ 37,500 x .40 $ 15,000 $107,000 (27,000) $ 80,000 45,000 $125,000 $ 2,000 7,500 15,000 (24,500) $ 98,500
  • 18. Chapter 07 - Intercompany Inventory Transactions E7-12 Sale of Inventory at a Loss a. Entries recorded by Trent Company Inventory Cash Purchase inventory. 400,000 Cash Sales Sale of inventory to Gord Corporation. 300,000 Cost of Goods Sold Inventory Record cost of goods sold. 400,000 400,000 300,000 400,000 Entries recorded by Gord Corporation Inventory Cash Purchase of inventory from Trent. 300,000 Cash Sales Sale of inventory to nonaffiliates. 360,000 Cost of Goods Sold Inventory Record cost of goods sold: $180,000 = $300,000 x .60 180,000 b. Operating income reported by Gord Net income reported by Trent Unrealized loss on intercorporate sale ($400,000 - $300,000) x .40 Consolidated net income Income to assigned to noncontrolling interest ($120,000 x .25) Income assigned to controlling interest 360,000 180,000 Consolidated cost of goods sold for 20X8 should be reported as $240,000 ($400,000 x .60). c. 300,000 7-18 $ 80,000 40,000 $230,000 120,000 $350,000 (30,000) $320,000
  • 19. Chapter 07 - Intercompany Inventory Transactions E7-12 (continued) d. Eliminating entry, December 31, 20X8: E(1) Sales Inventory Cost of Goods Sold 300,000 40,000 340,000 Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Trent Cost of goods sold recorded by Gord Total recorded Consolidated cost of goods sold Required elimination 7-19 $400,000 180,000 $580,000 (240,000) $340,000
  • 20. Chapter 07 - Intercompany Inventory Transactions E7-13 Intercompany Sales a. Consolidated net income for 20X4: Operating income of Hollow Corporation Net income of Surg Corporation $160,000 90,000 $250,000 (15,000) $235,000 Less: Unrealized profit — Surg Corporation Consolidated net income b. Inventory balance, December 31, 20X5: Inventory reported by Hollow Corporation Unrealized profit on books of Surg Corporation ($135,000 - $90,000) x ($30,000/$135,000) Inventory reported by Surg Corporation Unrealized profit on books of Hollow Corporation ($280,000 - $140,000) x ($110,000/$280,000) Inventory, December 31, 20X5 c. $ 30,000 $110,000 (10,000) 55,000 $75,000 Consolidated cost of goods sold for 20X5: CGS on sale of inventory on hand January 1, 20X5 $45,000 x ($120,000 / $180,000) CGS on items purchased from Surg in 20X5 ($135,000 - $30,000) x ($90,000 / $135,000) CGS on items purchased from Hollow in 20X5 ($280,000 - $110,000) x ($140,000 / $280,000) Total cost of goods sold d. (55,000) $20,000 $ 30,000 70,000 85,000 $185,000 Income assigned to controlling interest: Operating income of Hollow Corporation Net income of Surg Corporation Add: Inventory profit of prior year realized in 20X5 Less: Unrealized inventory profit — Surg Corporation Unrealized inventory profit — Hollow Corporation Income to noncontrolling interest ($85,000 + $15,000 - $10,000) x .30 Income assigned to controlling interest 7-20 $220,000 85,000 $305,000 15,000 (10,000) (55,000) (27,000) $228,000
  • 21. Chapter 07 - Intercompany Inventory Transactions E7-14 Consolidated Balance Sheet Workpaper a. Eliminating entries: E(1) E(2) E(3) Common Stock — Hingle Company Retained Earnings Investment in Hingle Company Stock Noncontrolling Interest Eliminate investment balance. 150,000 250,000 Retained Earnings Noncontrolling Interest Inventory Eliminate unrealized inventory profit of Hingle Company. 28,000 12,000 Retained Earnings Inventory Eliminate unrealized inventory profit of Doorst Corporation. 10,000 b. 280,000 120,000 40,000 10,000 Doorst Corporation and Hingle Company Consolidated Balance Sheet Workpaper December 31, 20X8 Item Cash and Receivables Inventory Buildings and Equipment (net) Investment in Hingle Company Stock Debits Accounts Payable Common Stock Retained Earnings Noncontrolling Interest Credits Doorst Corp. Hingle Co. 98,000 150,000 40,000 100,000 310,000 280,000 280,000 838,000 420,000 70,000 200,000 568,000 20,000 150,000 250,000 838,000 420,000 7-21 Eliminations Debit Credit (2) 40,000 (3) 10,000 Consolidated 138,000 200,000 590,000 (1)280,000 (1)150,000 (1)250,000 (2) 28,000 (3) 10,000 (2) 12,000 450,000 928,000 90,000 200,000 (1)120,000 450,000 530,000 108,000 928,000
  • 22. Chapter 07 - Intercompany Inventory Transactions E7-15* Multiple Transfers between Affiliates a. Entries recorded by Klon Corporation Cash Sales Sale of inventory to Brant Company. 150,000 Cost of Goods Sold Inventory Record cost of goods sold. 100,000 150,000 100,000 Entries recorded by Brant Company Inventory Cash Purchase of inventory from Klon. 150,000 Cash Sales Sale of inventory to Torkel Company. 150,000 Cost of Goods Sold Inventory Record cost of goods sold. 150,000 150,000 150,000 150,000 Entries recorded by Torkel Company Inventory Cash Purchase of inventory from Brant. 150,000 Cash Sales Sale of inventory to nonaffiliates. 120,000 Cost of Goods Sold Inventory Record cost of goods sold. 90,000 b. Cost of goods sold for 20X8 should be reported as $60,000 [$90,000 x ($100,000 / $150,000)]. c. Inventory at December 31, 20X8, should be reported at $40,000 [$60,000 x ($100,000 / $150,000)]. 7-22 150,000 120,000 90,000
  • 23. Chapter 07 - Intercompany Inventory Transactions E7-15* (continued) d. Eliminating entry for inventory: E(1) Sales Cost of Goods Sold Inventory 300,000 280,000 20,000 Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Klon Cost of goods sold recorded by Brant Cost of goods sold recorded by Torkel Total recorded Consolidated cost of goods sold Required elimination $100,000 150,000 90,000 $340,000 (60,000) $280,000 Computation of reduction to carrying value of inventory Inventory reported by Torkel Inventory balance to be reported Required elimination 7-23 $60,000 (40,000) $20,000
  • 24. Chapter 07 - Intercompany Inventory Transactions E7-16 Inventory Sales a. Journal entries recorded by Spice Company: (1) Inventory Cash (Accounts Payable) Record purchases from nonaffiliate. 150,000 (2) Cash (Accounts Receivable) Sales Record sale to Herb Corporation. 60,000 (3) Cost of Goods Sold Inventory Record cost of goods sold to Herb Corporation. 40,000 150,000 60,000 40,000 Journal entries recorded by Herb Corporation: (1) 60,000 (2) Cash (Accounts Receivable) Sales Record sale of items to nonaffiliates. 90,000 (3) b. Inventory Cash (Accounts Payable) Record purchases from Spice Company. Cost of Goods Sold Inventory Record cost of goods sold. 45,000 60,000 90,000 45,000 Eliminating entry: E(1) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory. 7-24 60,000 55,000 5,000
  • 25. Chapter 07 - Intercompany Inventory Transactions E7-17 Prior-Period Inventory Profits a. Eliminating entries: E(1) E(2) b. Retained Earnings, January 1 Noncontrolling Interest Cost of goods sold Eliminate beginning inventory profit: $10,000 = ($180,000 - $120,000) x ($30,000 / $180,000) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory. Reported net income of Level Brothers Unrealized profit, December 31, 20X8 Unrealized profit, December 31, 20X9 Realized net income Noncontrolling interest's share of ownership Income assigned to noncontrolling interest 7-25 7,500 2,500 240,000 20X8 $350,000 (10,000) $340,000 x .25 $ 85,000 10,000 190,000 50,000 20X9 $420,000 10,000 (50,000) $380,000 x .25 $ 95,000
  • 26. Chapter 07 - Intercompany Inventory Transactions SOLUTIONS TO PROBLEMS P7-18 Consolidated Income Statement Data a. $180,000 = $550,000 + $450,000 - $820,000 b. January 1, 20X2: $25,000 = $75,000 - $50,000 December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000 c. E(1) E(2) d. Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit. 15,000 10,000 Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory. 180,000 Reported net income of Bitner Company Prior-period profit realized in 20X2 Unrealized profit on 20X2 sales Realized income Proportion held by noncontrolling interest Income assigned to noncontrolling interest 25,000 165,000 15,000 $ 90,000 25,000 (15,000) $100,000 x .40 $ 40,000 P7-19 Unrealized Profit on Upstream Sales 20X2 $240,000 90,000 $330,000 $300,000 160,000 $460,000 (14,000) Inventory profit, December 31, 20X2 $70,000 - ($70,000 / 1.25) Inventory profit, December 31, 20X3 $105,000 - ($105,000 / 1.25) Inventory profit, December 31, 20X4 $120,000 - ($120,000 / 1.25) Consolidated net income Income to noncontrolling interest: ($100,000 - $14,000) x .40 ($90,000 + $14,000 - $21,000) x .40 ($160,000 + $21,000 - $24,000) x .40 Income to controlling interest 20X4 $150,000 100,000 $250,000 Operating income reported by Pacific Net income reported by Carroll 20X3 14,000 (21,000) $236,000 (34,400) $201,600 7-26 21,000 $323,000 (24,000) $457,000 (33,200) $289,800 (62,800) $394,200
  • 27. Chapter 07 - Intercompany Inventory Transactions P7-20 Net Income of Consolidated Entity Operating income of Master for 20X5 Net income of Crown for 20X5 $118,000 65,000 $183,000 25,000 40,000 (14,000) (55,000) Add: Prior year profits realized by Master Prior year profits realized by Crown Less: Unrealized profits for 20X5 by Master Unrealized profits for 20X5 by Crown Amortization of differential ($45,000 / 15 years) Consolidated net income, 20X5 Less: Income to noncontrolling interest ($65,000 + $40,000 - $55,000 - $3,000) x .30 Income to controlling interest (3,000) $176,000 (14,100) $161,900 P7-21 Correction of Eliminating Entries a. Proportion of intercompany inventory purchases resold during 20X5: Unrealized profit at year end Intercompany transfer price Cost of inventory sold ($140,000 / 1.40) Total Profit Proportion of intercompany sale held by Bolger at year end $140,000 (100,000) ÷ 40,000 .30 Proportion of intercompany purchases resold by Bolger during 20X5 (1.00 - .30) b. $ 12,000 .70 Eliminating entries, December 31, 20X5: E(1) Accounts Payable Accounts Receivable Eliminate intercompany receivable/payable. E(2) Sales Inventory Cost of Goods Sold Eliminate intercompany sale of inventory. 7-27 80,000 140,000 80,000 12,000 128,000
  • 28. Chapter 07 - Intercompany Inventory Transactions P7-22 Incomplete Data a. Increase in fair value of buildings and equipment: Consolidated total Balance reported by Lever Balance reported by Tropic Increase in value b. $ 680,000 (400,000) (240,000) $ 40,000 Accumulated depreciation for consolidated entity: Accumulated depreciation reported by Lever Accumulated depreciation reported by Tropic Cumulative write-off of differential ($5,000 x 6 years) Accumulated depreciation for consolidated entity c. $ 60,000 30,000 $ 90,000 40,000 $130,000 x .75 $ 97,500 Investment in Tropic Company stock reported at December 31, 20X6: Tropic's common stock outstanding December 31, 20X6 Tropic's retained earnings reported December 31, 20X6 Total book value Proportion of ownership held by Lever Lever's share of net book value Unamortized differential ($5,000 x 2 years) x .75 Investment in Tropic Company stock e. 30,000 $320,000 Amount paid by Lever to acquire ownership in Tropic: Common stock outstanding Retained earnings at acquisition Total book value at acquisition Increase in value of buildings and equipment Fair value of net assets acquired Proportion of ownership acquired Amount paid by Lever d. $180,000 110,000 $ 60,000 112,000 $172,000 x .75 $129,000 7,500 $136,500 Intercorporate sales of inventory in 20X6: Sales reported by Lever Sales reported by Tropic Total sales Sales reported in consolidated income statement Intercompany sales during 20X6 7-28 $420,000 260,000 $680,000 (650,000) $ 30,000
  • 29. Chapter 07 - Intercompany Inventory Transactions P7-22 (continued) f. Unrealized inventory profit, December 31, 20X6: Inventory reported by Lever Inventory reported by Tropic Total inventory Inventory reported in consolidated balance sheet Unrealized inventory profit, December 31, 20X6 g. Eliminating entry to remove the effects of intercompany inventory sales during 20X6: E(1) h. $125,000 90,000 $215,000 (211,000) $ 4,000 Sales Cost of Goods Sold Inventory 30,000 Unrealized inventory profit at January 1, 20X6: Cost of goods sold reported by Lever Cost of goods sold reported by Tropic Reduction of cost of goods sold for intercompany sales during 20X6 Adjusted cost of goods sold Cost of goods sold reported in consolidated income statement Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory i. 26,000 4,000 $310,000 170,000 (26,000) $454,000 (445,000) $ 9,000 Accounts receivable reported by Lever at December 31, 20X6: Accounts receivable reported for consolidated entity Accounts receivable reported by Tropic Difference Adjustment for intercompany receivable/payable: Accounts payable reported by Lever Accounts payable reported by Tropic Total reported accounts payable Accounts payable reported for consolidated entity Adjustment for intercompany receivable/payable Accounts receivable reported by Lever 7-29 $145,000 (55,000) $ 90,000 $ 86,000 20,000 $106,000 (89,000) 17,000 $107,000
  • 30. Chapter 07 - Intercompany Inventory Transactions P7-23 Eliminations for Upstream Sales a. Eliminating entries, December 31, 20X8: E(1) Income from Subsidiary Investment in Superior Filter Stock Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest Noncontrolling Interest Assign income to noncontrolling interest. E(3) Common Stock — Superior Filter Company Retained Earnings, January 1 Investment in Superior Filter Stock Noncontrolling Interest Eliminate beginning investment balance. E(4) E(5) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit. 32,000 9,000 90,000 220,000 16,000 4,000 32,000 9,000 248,000 62,000 20,000 Sales 150,000 Cost of Goods Sold 135,000 Inventory 15,000 Eliminate unrealized inventory profit: $15,000 = $ 45,000 - [$45,000 x ($100,000 / $150,000)] $135,000 = $100,000 CGS recorded by Superior 105,000 CGS recorded by Clean Air $205,000 (70,000) Consolidated amount: $100,000 x ($105,000 / $150,000) $135,000 Required elimination 7-30
  • 31. Chapter 07 - Intercompany Inventory Transactions P7-23 (continued) b. Computation of consolidated net income and income assigned to controlling interest: Operating income reported by Clean Air Products ($250,000 - $175,000 - $30,000) Net income of Superior Filter ($200,000 - $140,000 - $20,000) Inventory profit realized from 20X7 Unrealized inventory profit for 20X8 Consolidated net income Income assigned to noncontrolling interest ($40,000 + $20,000 - $15,000) x .20 Income assigned to controlling interest c. $ 45,000 40,000 $ 85,000 20,000 (15,000) $ 90,000 (9,000) $ 81,000 Noncontrolling interest, December 31, 20X8: Common stock Retained earnings ($220,000 + $40,000) Less: Unrealized inventory profit Proportion of stock held by noncontrolling interest Noncontrolling interest 7-31 $ 90,000 260,000 (15,000) $335,000 x .20 $ 67,000
  • 32. Chapter 07 - Intercompany Inventory Transactions P7-24 Multiple Inventory Transfers a. Consolidated net income for 20X8: Operating income of Ajax Corporation Unrealized profit, December 31, 20X8 ($35,000 - $15,000) x ($7,000 / $35,000) Net income of Beta Corporation Profit realized from 20X7 ($30,000 - $24,000) x ($10,000 / $30,000) Unrealized profit, December 31, 20X8 ($72,000 - $63,000) x ($12,000 / $72,000) $37,500 Net income of Cole Corporation Profit realized from 20X7 ($72,000 - $60,000) x ($18,000 / $72,000) Unrealized profit, December 31, 20X8 ($45,000 - $27,000) x ($15,000 / $45,000) Consolidated net income b. $80,000 $20,000 (4,000) $ 76,000 2,000 (1,500) 38,000 3,000 (6,000) 17,000 $131,000 Inventory balance, December 31, 20X8: Balance per Beta Corporation Less: Unrealized profit $ 3,000 Balance per Cole Corporation Less: Unrealized profit $12,000 (1,500) 10,500 Balance per Ajax Corporation Less: Unrealized profit Inventory balance per consolidated statement c. $ 7,000 (4,000) $15,000 (6,000) 9,000 $22,500 Income assigned to noncontrolling interest in 20X8: Realized income of Beta Corporation Proportion of stock held by noncontrolling interest $38,000 Realized income of Cole Corporation Proportion of stock held by noncontrolling interest Income to noncontrolling interest $17,000 x x 7-32 .30 .10 $11,400 1,700 $13,100
  • 33. Chapter 07 - Intercompany Inventory Transactions P7-25 a. Consolidation with Inventory Transfers and Other Comprehensive Income Balance in investment account at December 31, 20X5: Proportionate share of Tall's net assets, January 1 ($1,400,000 x .90) Proportionate share of 20X5 net income ($90,000 x .90) Proportionate share of other comprehensive income for 20X5 ($20,000 x .90) Proportionate share of dividends received ($60,000 x .90) Balance in investment account December 31, 20X5 b. 18,000 (54,000) $1,305,000 $90,000 x .90 $81,000 Income to noncontrolling interests for 20X5: Net income reported by Tall 20X4 inventory profits realized in 20X5 ($15,000 x .40) 20X5 unrealized inventory profits $30,000 - [$30,000 x ($48,000 / $90,000)] Realized net income Proportion of ownership held by noncontrolling interest Income to noncontrolling interest d. 81,000 Investment income for 20X5: Net income reported by Tall Proportion of ownership held by Priority Investment income for 20X5 c. $1,260,000 $90,000 6,000 (14,000) $82,000 x .10 $ 8,200 Balance assigned to noncontrolling interest in consolidated balance sheet: Net assets reported by Tall, January 1 Net income for 20X5 Dividends paid in 20X5 Net assets reported, December 31, 20X5 Unrealized inventory profits at December 31, 20X5 Other comprehensive income in 20X5 Adjusted net assets, December 31, 20X5 Proportion of ownership held by noncontrolling interest Net assets assigned to noncontrolling interest 7-33 $1,400,000 90,000 (60,000) $1,430,000 (14,000) 20,000 $1,436,000 x .10 $ 143,600
  • 34. Chapter 07 - Intercompany Inventory Transactions P7-25 (continued) e. Inventory reported in consolidated balance sheet: Inventory held by Priority Less: Unrealized profit Inventory held by Tall Less: Unrealized profit $6,000 - [$6,000 x ($24,000 / $36,000)] Inventory f. $120,000 (14,000) $100,000 (2,000) 98,000 $204,000 Consolidated net income for 20X5: Operating income of Priority Net income of Tall Total unadjusted income 20X4 inventory profits realized in 20X5 ($6,000 + $8,000) Unrealized inventory profits on 20X5 sales ($14,000 + $2,000) Consolidated net income g. $106,000 $240,000 90,000 $330,000 14,000 (16,000) $328,000 Eliminating entries, December 31, 20X5 E(1) Income from Investment in Subsidiary Dividends Declared Investment in Tall Common Stock Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest. 7-34 81,000 8,200 54,000 27,000 6,000 2,200
  • 35. Chapter 07 - Intercompany Inventory Transactions P7-25 (continued) E(3) E(4) E(5) E(6) Other Comprehensive Income from Subsidiary (OCI) Investment in Tall Corporation Stock Eliminate other comprehensive income from subsidiary. Other Comprehensive Income to Noncontrolling Interest Noncontrolling Interest Assign other comprehensive income to noncontrolling interest. Common Stock — Tall Corporation Additional Paid-In Capital — Tall Corporation Retained Earnings, January 1 Accumulated Other Comprehensive Income Investment in Tall Common Stock Noncontrolling Interest Eliminate beginning investment balance. 18,000 2,000 400,000 200,000 790,000 10,000 Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Tall Company. 5,400 600 E(7) Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Priority Corporation. 8,000 E(8) Sales Inventory Cost of Goods Sold Eliminate intercompany sale of inventory by Priority Corporation. 36,000 E(9) Sales Inventory Cost of Goods Sold Eliminate intercompany sale of inventory by Tall Company. 90,000 7-35 18,000 2,000 1,260,000 140,000 6,000 8,000 2,000 34,000 14,000 76,000
  • 36. Chapter 07 - Intercompany Inventory Transactions P7-26 Multiple Inventory Transfers between Parent and Subsidiary a. Eliminating entries: E(1) 20,000 E(2) Retained earnings, January 1 Noncontrolling Interest Cost of goods sold Inventory Eliminate beginning inventory profit of Slinky Company. 12,600 8,400 E(3) Sales Inventory Cost of goods sold Eliminate intercompany sale of inventory by Proud Company. 60,000 E(4) b. Retained earnings, January 1 Cost of goods sold Eliminate beginning inventory profit of Proud Company. Sales Inventory Cost of goods sold Eliminate intercompany sale of inventory by Slinky Company. 240,000 20,000 15,000 6,000 2,000 58,000 30,000 210,000 Computation of cost of goods sold for consolidated entity: Inventory produced by Proud in 20X5 ($100,000 x .40) Inventory produced by Slinky in 20X5 ($70,000 x .50) Inventory produced by Proud in 20X6 ($40,000 x .90) Inventory produced by Slinky in 20X6 ($200,000 x .25) Cost of goods sold reported in consolidated income statement $ 40,000 35,000 36,000 50,000 $161,000 7-36
  • 37. Chapter 07 - Intercompany Inventory Transactions P7-27 Consolidation following Inventory Transactions a. Entries recorded by Bell on its investment in Troll: Cash Investment in Troll Corporation Stock Record dividends from Troll: $10,000 x .60 Investment in Troll Corporation Stock Income from Subsidiary Record equity-method income: $30,000 x .60 b. 6,000 18,000 6,000 18,000 Eliminating entries, December 31, 20X2: E(1) Income from Subsidiary Dividends Declared Investment in Troll Corporation Stock Eliminate income from subsidiary. 18,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $11,680 = ($30,000 + $3,400 - $4,200) x .40 11,680 E(3) Common Stock — Troll Corporation 100,000 Retained Earnings, January 1 50,000 Land 18,000 Investment in Troll Corporation Stock Noncontrolling Interest Eliminate beginning investment balance: $18,000 = ($82,800 + $55,200) - ($100,000 + $20,000) $100,800 = $82,800 + [($50,000 - $20,000) x .60] $67,200 = ($100,000 + $50,000 + $18,000) x .40 E(4) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Troll Corporation: $3,400 = ($42,500 - $25,500) x .20 2,040 1,360 E(5) Sales Cost of Goods Sold Inventory Eliminate intercompany upstream sale of inventory by Troll Corporation: $4,200 = ($35,000 - $21,000) x .30 35,000 E(6) Sales Cost of Goods Sold Inventory Eliminate intercompany downstream sale of inventory by Bell Company: $6,500 = $13,000 x ($14,000 / $28,000) 28,000 7-37 6,000 12,000 4,000 7,680 100,800 67,200 3,400 30,800 4,200 21,500 6,500
  • 38. Chapter 07 - Intercompany Inventory Transactions P7-27 (continued) c. Bell Company and Troll Corporation Consolidation Workpaper December 31, 20X2 Item Bell Co. 200,000 Troll Corp. 120,000 Income from Subsidiary Credits Cost of Goods Sold 18,000 218,000 99,800 120,000 61,000 25,000 6,000 (130,800) 15,000 14,000 (90,000) 87,200 230,000 30,000 50,000 87,200 317,200 (40,000) 30,000 80,000 (10,000) 277,200 70,000 69,400 60,000 51,200 55,000 Land Buildings and Equipment Investment in Troll Corporation Stock 40,000 520,000 30,000 350,000 Debits Accum. Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Bell Company Troll Corporation Retained Earnings, from above Noncontrolling Interest 802,200 175,000 68,800 80,000 1,200 Credits 802,200 Sales Depreciation Expense Interest Expense Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Ret. Earnings, Jan. 1 Income, from above Dividends Declared Ret. Earnings, Dec. 31, carry forward Cash and Accounts Receivable Inventory Eliminations Debit Credit (5) 35,000 (6) 28,000 (1) 18,000 (4) 3,400 (5) 30,800 (6) 21,500 (2) 11,680 92,680 (3) 50,000 (4) 2,040 92,680 277,200 55,700 (1) (2) 144,720 (3) 18,000 112,800 200,000 55,700 6,000 4,000 65,700 (5) (6) 4,200 6,500 (1) 12,000 (3)100,800 486,200 75,000 41,200 200,000 Consolidated 257,000 257,000 105,100 40,000 20,000 (165,100) 91,900 (11,680) 80,220 227,960 80,220 308,180 (40,000) 268,180 120,600 104,300 88,000 870,000 1,182,900 250,000 110,000 280,000 1,200 200,000 100,000 (3)100,000 70,000 144,720 65,700 268,180 1,360 (2) 7,680 (3) 67 200 264,080 73,520 1,182,900 (4) 486,200 7-38 264,080
  • 39. Chapter 07 - Intercompany Inventory Transactions P7-28 Consolidation Workpaper a. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in West Company Stock Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $7,950 = ($20,000 + $30,000 - $25,000 + $1,500) x .30 E(3) Common Stock — West Company Retained Earnings, January 1 Differential Investment in West Company Stock Noncontrolling Interest Eliminate beginning investment balance: $36,000 = $291,200 + $124,800 - $380,000 $305,200 = $315,700 - $10,500 $130,800 = ($250,000 + $150,000 + $36,000) x .30 E(4) E(5) 14,000 7,950 150,000 250,000 36,000 Land, Buildings and Equipment (net) Goodwill Differential Assign beginning differential. 14,000 22,000 Retained Earnings, January 1 Noncontrolling Interest Cost of Goods and Services Eliminate beginning inventory profit of West Company. 21,000 9,000 7-39 3,500 10,500 1,500 6,450 305,200 130,800 36,000 30,000
  • 40. Chapter 07 - Intercompany Inventory Transactions P7-28 (continued) E(6) Retained Earnings, January 1 Cost of Goods and Services Eliminate beginning inventory profit of Crow Corporation. 15,000 E(7) Sales Cost of Goods and Services Inventory Eliminate intercompany upstream sale of inventory by West Company: $25,000 = $62,000 - $37,000 62,000 E(8) Sales 90,000 Cost of Goods and Services 82,000 Inventory 8,000 Eliminate intercompany downstream sale of inventory by Crow Corporation: $8,000 = ($90,000 - $54,000) x ($20,000 / $90,000) $82,000 = $ 54,000 CGS recorded by Crow Corporation 70,000 CGS recorded by West Company $ 124,000 (42,000) Consolidated amount [$54,000 x ($70,000 / $90,000)] $ 82,000 Required elimination E(9) Retained Earnings, January 1 Noncontrolling Interest Depreciation Expense Land, Buildings and Equipment (net) Eliminate unrealized gain on equipment: $7,350 = [$15,000 - ($1,500 x 3)] x .70 $3,150 = [$15,000 - ($1,500 x 3)] x .30 $1,500 = $9,500 -$8,000 $9,000 = [$95,000 - ($9,500 x 4)] [$120,000 - ($8,000 x 9)] 7-40 7,350 3,150 15,000 37,000 25,000 1,500 9,000
  • 41. Chapter 07 - Intercompany Inventory Transactions P7-28 (continued) b. Crow Corporation and West Company Consolidation Workpaper December 31, 20X9 Item Sales and Service Revenue Crow Corp. 300,000 West Co. 200,000 Income from Subsidiary Credits Cost of Goods and Services 14,000 314,000 200,000 200,000 150,000 Depreciation Expense Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Eliminations Debit Credit (7) 62,000 (8) 90,000 (1) 14,000 (5) (6) (7) (8) (9) 40,000 30,000 (240,000) (180,000) 74,000 20,000 Retained Earnings, Jan. 1 568,000 250,000 Income, from above Dividends Declared 74,000 642,000 (35,000) 20,000 270,000 (5,000) Retained Earnings, Dec. 31, carry forward 607,000 265,000 Cash and Receivables Inventory 81,300 200,000 250,000 7,950 173,950 165,500 (3)250,000 (5) 21,000 (6) 15,000 (9) 7,350 173,950 165,500 85,000 110,000 270,000 (2) Land, Buildings & Equipment (net) Investment in West Company Stock Differential Goodwill Debits Accounts Payable Common Stock Ret. Earnings, from above Noncontrolling Interest Credits (1) (2) 467,300 445,000 30,000 150,000 265,000 867,000 445,000 7-41 3,500 1,500 170,500 (7) 25,000 (8) 8,000 (4) 14,000 315,700 867,000 60,000 200,000 607,000 30,000 15,000 37,000 82,000 1,500 (3) 36,000 (4) 22,000 (3)150,000 467,300 (5) 9,000 (9) 3,150 701,450 (9) 9,000 (1) 10,500 (3) 305,200 (4) 36,000 170,500 (2) 6,450 (3)130,800 701,450 Consolidated 348,000 348,000 186,000 68,500 (254,500) 93,500 (7,950) 85,550 524,650 85,550 610,200 (35,000) 575,200 166,300 277,000 525,000 22,000 990,300 90,000 200,000 575,200 125,100 990,300
  • 42. Chapter 07 - Intercompany Inventory Transactions P7-28 (continued) c. Retained earnings reconciliation, December 31, 20X9: Retained earnings, Crow Corporation Unrealized profits on Crow Corporation's books ($90,000 - $54,000) x ($20,000 / $90,000) Unrealized profits on West Company's books ($62,000 - $37,000) x .70 Unrealized profit on equipment transfer [($15,000 - ($1,500 x 4)] x .70 Consolidated retained earnings $607,000 (8,000) (17,500) (6,300) $575,200 P7-29 Computation of Consolidated Totals a. Consolidated sales for 20X8: Bunker Corp. $660,000 (140,000) $520,000 $660,000 ÷ 1.4 $471,429 b. $510,000 ÷ 1.2 $425,000 (128,000) $343,429 Sales reported Intercorporate sales Sales to nonaffiliates Harrison Co. $510,000 (240,000) $270,000 (232,000) $193,000 Consolidated $790,000 Consolidated cost of goods sold: Total sales reported Ratio of cost to sales price Cost of goods sold Amount to be eliminated (see entry) Cost of goods sold adjusted $536,429 Eliminating entries: E(1) Sales Inventory Cost of Goods Sold Elimination of sales by Bunker to Harrison: $12,000 = $42,000 - ($42,000 / 1.40) $128,000 = $140,000 - $12,000 140,000 E(2) Sales Inventory Cost of Goods Sold Elimination of sales by Harrison to Bunker: $8,000 = $48,000 - ($48,000 / 1.20) $232,000 = $240,000 - $8,000 240,000 7-42 12,000 128,000 8,000 232,000
  • 43. Chapter 07 - Intercompany Inventory Transactions P7-29 (continued) c. Operating income of Bunker Corporation (excluding income from Harrison Company) Net income of Harrison Company $70,000 20,000 $90,000 (12,000) (8,000) $70,000 Less: Unrealized inventory profits of Bunker Unrealized inventory profits of Harrison Consolidated net income Less: Income assigned to noncontrolling interest ($20,000 - $8,000) x .20 Income to controlling interest 20X8 d. (2,400) $67,600 Inventory balance in consolidated balance sheet: Inventory reported by Bunker Corporation Unrealized profits $48,000 (8,000) Inventory reported by Harrison Company Unrealized profits Inventory balance, December 31, 20X8 $42,000 (12,000) 7-43 $40,000 30,000 $70,000
  • 44. Chapter 07 - Intercompany Inventory Transactions P7-30 Intercompany Transfer of Inventory and Land a. Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Bock Company Stock Eliminate income from subsidiary: $11,200 = ($25,000 - $2,000 - $7,000) x .70 $10,500 = $15,000 x .70 11,200 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $5,100 = ($25,000 - $2,000 - $7,000 + $9,000 - $8,000) x .30 $4,500 = $15,000 x .30 5,100 E(3) Common stock – Bock Company Retained Earnings, January 1 Differential Investment in Bock Company Stock Noncontrolling Interest Eliminate beginning investment balance: $123,200 = ($70,000 +$60,000 + $46,000) x .7 $52,800 = ($70,000 + $60,000 + $46,000) x .3 70,000 60,000 46,000 10,500 700 4,500 600 123,200 52,800 Computation of unamortized differential Fair value of compensation given by Pine Fair value of noncontrolling interest Less: Book value of Spencer's net assets ($70,000 + $30,000) Differential at acquisition Amortization of amount assigned to: Buildings and equipment [($20,000 / 10 years] x 1 year Patent ($35,000 / 5 years) x 1 year Unamortized differential, January 1, 20X7 E(4) Buildings and Equipment Patent Accumulated Depreciation Differential Assign beginning differential: $28,000 = $35,000 - $7,000 $2,000 = $20,000 / 10 years $108,500 46,500 (100,000) $ 55,000 (2,000) (7,000) $46,000 20,000 28,000 7-44 2,000 46,000
  • 45. Chapter 07 - Intercompany Inventory Transactions P7-30 (continued) E(5) E(6) Depreciation Expense Amortization Expense Accumulated Depreciation Patent Amortize differential: $2,000 = $20,000 / 10 years $7,000 = $35,000 / 5 years 2,000 7,000 Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Inventory Eliminate beginning inventory profit of Bock Company: $11,200 = ($48,000 - $32,000) x .70 $4,800 = ($48,000 - $32,000) x .30 $9,000 = $27,000 - ($27,000 x 2/3) $7,000 = $21,000 - ($21,000 x 2/3) 11,200 4,800 E(7) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Bock Company: $8,000 = $24,000 - ($24,000 x 2/3) 90,000 E(8) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Pine Corporation: $3,800 = $7,600 - ($7,600 x 1/2) 30,000 E(9) Retained Earnings, January 1 Noncontrolling Interest Land Eliminate unrealized profit on land: $15,000 = $37,000 - $22,000 10,500 4,500 7-45 2,000 7,000 9,000 7,000 82,000 8,000 26,200 3,800 15,000
  • 46. Chapter 07 - Intercompany Inventory Transactions P7-30 (continued) b. Pine Corporation and Bock Company Consolidation Workpaper December 31, 20X3 Pine Corp. Bock Co. Sales 260,000 125,000 Other Income Income from Subsidiary Credits Cost of Goods Sold 13,600 11,200 284,800 186,000 125,000 79,800 20,000 16,000 15,000 5,200 Item Depreciation Expense Interest Expense Amortization Expense Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward (222,000) (100,000) 62,800 25,000 Retained Earnings, Jan. 1 139,100 60,000 Income, from above Dividends Declared 62,800 201,900 (30,000) 25,000 85,000 (15,000) Retained Earnings, Dec. 31, carry forward 171,900 70,000 Cash and Accounts Receivable Inventory 15,400 165,000 40,000 260,000 (7) 90,000 (8) 30,000 (5) 2,000 Land Buildings and Equipment Investment in Bock Company Stock Differential Patent Debits (2) 5,100 145,300 117,200 (3) 60,000 (6) 11,200 (9) 10,500 145,300 117,200 (1) 10,500 (2) 4,500 (4) 20,000 123,900 724,300 356,600 7-46 (6) 9,000 (7) 82,000 (8) 26,200 (5) 7,000 227,000 (3) 46,000 (4) 28,000 Consolidated 265,000 13,600 (1) 11,200 21,600 35,000 80,000 340,000 Eliminations Debit Credit 132,200 (6) 7,000 (7) 8,000 (8) 3,800 (9) 15,000 (1) 700 (3)123,200 (4) 46,000 (5) 7,000 278,600 148,600 37,000 21,200 7,000 (213,800) 64,800 (5,100) 59,700 117,400 59,700 177,100 (30,000) 147,100 37,000 181,200 105,000 620,000 21,000 964,200
  • 47. Chapter 07 - Intercompany Inventory Transactions P7-30 (continued) Item Pine Corp. Bock Co. Accum. Depreciation 140,000 80,000 Accounts Payable Bonds Payable Bond Premium Common Stock Pine Corporation Bock Company Retained Earnings, from above Noncontrolling Interest 92,400 200,000 35,000 100,000 1,600 Credits 724,300 Eliminations Debit Credit 120,000 171,900 (4) 2,000 (5) 2,000 Consolidated 224,000 127,400 300,000 1,600 120,000 70,000 (3) 70,000 70,000 227,000 132,200 147,100 356,600 (6) 4,800 (9) 4,500 400,300 (2) 600 (3) 52,800 400,300 44,100 964,200 7-47
  • 48. Chapter 07 - Intercompany Inventory Transactions P7-30 (continued) Note: Financial statements are not required. Pine Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X3 Cash and Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patent Total Assets $620,000 (224,000) Accounts Payable Bonds Payable Bond Premium Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders' Equity $300,000 1,600 $120,000 147,100 $267,100 44,100 $ 37,000 181,200 105,000 396,000 21,000 $740,200 $127,400 301,600 311,200 $740,200 Pine Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X3 Sales Other Income Total Income Cost of Goods Sold Depreciation Expense Interest Expense Amortization Expense Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest $148,600 37,000 21,200 7,000 7-48 $265,000 13,600 $278,600 (213,800) $ 64,800 (5,100) $ 59,700
  • 49. Chapter 07 - Intercompany Inventory Transactions P7-30 (continued) Pine Corporation and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X3 Retained Earnings, January 1, 20X3 Income to Controlling Interest, 20X3 $117,400 59,700 $177,100 (30,000) $147,100 Dividends Declared, 20X3 Retained Earnings, December 31, 20X3 P7-31 Consolidation Using Financial Statement Data a. Eliminating entries, December 31, 20X6: E(1) Income from Subsidiary Dividends Declared Investment in Concerto Company Stock Eliminate income from subsidiary. 21,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $9,600 = ($35,000 + $8,000 - $9,000 - $10,000) x .40 9,600 E(3) Common Stock – Concerto Company Retained Earnings, January 1 Differential Investment in Concerto Company Stock Noncontrolling Interest Eliminate beginning investment balance: $40,000 = $24,000 + $16,000 7-49 50,000 150,000 40,000 12,000 9,000 8,000 1,600 144,000 96,000
  • 50. Chapter 07 - Intercompany Inventory Transactions P7-31 (continued) E(4) Goodwill Differential Assign differential to goodwill. 40,000 E(5) Goodwill Impairment Loss Goodwill Recognize impairment of goodwill. 10,000 E(6) Retained Earnings, January 1 Noncontrolling Interest Land Eliminate unrealized gain on land. 6,000 4,000 E(7) Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Bower: $14,000 - ($14,000 / 1.40) 4,000 E(8) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Concerto Company: $8,000 = $48,000 - ($48,000 / 1.20) 4,800 3,200 E(9) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Bower: $2,000 = $7,000 - ($7,000 / 1.40) 22,000 E(10) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Concerto Company: $9,000 = $54,000 - ($54,000 / 1.20) 90,000 7-50 40,000 10,000 10,000 4,000 8,000 20,000 2,000 81,000 9,000
  • 51. Chapter 07 - Intercompany Inventory Transactions P7-31 (continued) b. Bower Corporation and Concerto Company Consolidation Workpaper December 31, 20X6 Bower Corp. Concerto Co. Sales 400,000 200,000 Income from Subsidiary Credits Cost of Goods Sold 21,000 421,000 280,000 200,000 120,000 Item Depreciation and Amortization Goodwill Impairment Loss Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward 25,000 15,000 35,000 30,000 (340,000) (165,000) 81,000 35,000 Retained Earnings, Jan. 1 293,800 150,000 Income, from above Dividends Declared 81,000 374,800 (50,000) 35,000 185,000 (20,000) Ret. Earnings, Dec. 31, carry forward 324,800 165,000 7-51 Eliminations Debit Credit (9) 22,000 (10) 90,000 (1) 21,000 488,000 (7) 4,000 (8) 8,000 (9) 20,000 (10)81,000 9,600 152,600 113,000 (3)150,000 (6) 6,000 (7) 4,000 (8) 4,800 152,600 113,000 (1) 12,000 (2) 8,000 317,400 488,000 287,000 40,000 10,000 65,000 (402,000) 86,000 (5) 10,000 (2) Consolidated 133,000 (9,600) 76,400 279,000 76,400 355,400 (50,000) 305,400
  • 52. Chapter 07 - Intercompany Inventory Transactions P7-31 (continued) Item Bower Corp. Concerto Co. Cash Accounts Receivable Inventory 26,800 80,000 120,000 35,000 40,000 90,000 Land Buildings and Equipment Investment in Concerto Company Stock 70,000 340,000 Eliminations Debit Credit 20,000 200,000 Differential Goodwill Debits (9) 2,000 (10) 9,000 (6) 10,000 153,000 789,800 385,000 Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest 165,000 80,000 120,000 100,000 85,000 15,000 70,000 50,000 324,800 165,000 Credits 789,800 385,000 7-52 (3) 40,000 (4) 40,000 (1) 9,000 (3)144,000 (4) 40,000 (5) 10,000 61,800 120,000 199,000 80,000 540,000 30,000 1,030,800 250,000 95,000 190,000 100,000 (3) 50,000 317,400 (6) 4,000 (8) 3,200 454,600 Consolidated 133,000 (2) 1,600 (3) 96,000 454,600 305,400 90,400 1,030,800
  • 53. Chapter 07 - Intercompany Inventory Transactions P7-32 Intercorporate Transfers of Inventory and Equipment a. Consolidated cost of goods sold for 20X9: Amount reported by Foster Company Amount reported by Block Corporation Adjustment for unrealized profit in beginning inventory sold in 20X9 Adjustment for inventory purchased from subsidiary and resold during 20X9: CGS recorded by Foster ($30,000 x .60) CGS recorded by Block Total recorded CGS based on Block's cost ($20,000 x .60) Required adjustment Cost of goods sold b. (15,000) $18,000 20,000 $38,000 (12,000) (26,000) $822,000 Consolidated inventory balance: Amount reported by Foster Amount reported by Block Total inventory reported Unrealized profit in ending inventory held by Foster [($30,000 - $20,000) x .40] Consolidated balance c. $593,000 270,000 $137,000 130,000 $267,000 (4,000) $263,000 Income assigned to noncontrolling interest: Net income reported by Block Corporation Adjustment for realization of loss on equipment sold to Foster in 20X7 Adjustment for realization of profit on inventory sold to Foster in 20X8 Adjustment for unrealized profit on inventory sold to Foster in 20X9 Realized net income of Block for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest 7-53 $70,000 (3,000) 15,000 (4,000) $78,000 x .10 $ 7,800
  • 54. Chapter 07 - Intercompany Inventory Transactions P7-32 (continued) d. Amount assigned to noncontrolling interest in consolidated balance sheet: Block Corporation common stock outstanding Block Corporation retained earnings, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Book value, December 31, 20X9 Adjustment for unrealized loss on equipment $24,000 - [($24,000 / 8 years) x 3 years] Adjustment for unrealized profit on inventory sold to Foster Realized book value of Block Corporation Proportion of ownership held by noncontrolling interest Balance assigned to noncontrolling interest e. $ 50,000 165,000 70,000 (20,000) $265,000 15,000 (4,000) $276,000 x .10 $ 27,600 Consolidated retained earnings at December 31, 20X9: Balance reported by Foster Company, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Balance reported by Foster Company, December 31, 20X9 Adjustment for proportionate share of unrealized loss on sale of equipment ($15,000 x .90) Adjustment for proportionate share of unrealized gain on inventory ($4,000 x .90) Consolidated retained earnings, December 31, 20X9 f. $248,500 171,000 (40,000) $379,500 13,500 (3,600) $389,400 Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Block Corporation Stock Eliminate income from subsidiary. 63,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest. 7,800 E(3) Common Stock — Block Corporation Retained Earnings, January 1 Investment in Block Corporation Stock Noncontrolling Interest Eliminate beginning investment balance. 50,000 165,000 7-54 18,000 45,000 2,000 5,800 193,500 21,500
  • 55. Chapter 07 - Intercompany Inventory Transactions P7-32 (continued) E(4) Buildings and Equipment Depreciation Expense Retained Earnings, January 1 Noncontrolling Interest Accumulated Depreciation Eliminate intercorporate sale of equipment: $42,000 = $90,000 - $48,000 $3,000 = ($90,000 / 10 years) - ($48,000 / 8 years) $16,200 = [$24,000 - ($3,000 x 2 years)] x .90 $1,800 = [$24,000 - ($3,000 x 2 years)] x .10 $27,000 = [($90,000 / 10 years) x 5 years] - [($48,000 / 8 years) x 3 years] 42,000 3,000 E(5) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Block Corporation. 30,000 E(6) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Block Corporation. 13,500 1,500 7-55 16,200 1,800 27,000 26,000 4,000 15,000
  • 56. Chapter 07 - Intercompany Inventory Transactions P7-32 (continued) g. Foster Company and Block Corporation Consolidation Workpaper December 31, 20X9 Item Foster Co. Block Corp. Sales Other Income Income from Subsidiary Credits Cost of Goods Sold 815,000 26,000 63,000 904,000 593,000 415,000 15,000 Depreciation Expense Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward 430,000 270,000 45,000 15,000 95,000 75,000 (733,000) (360,000) 171,000 70,000 Ret. Earnings, Jan. 1 248,500 165,000 Income, from above Dividends Declared 171,000 419,500 (40,000) 70,000 235,000 (20,000) Ret. Earnings, Dec. 31, carry forward 379,500 215,000 187,000 80,000 40,000 137,000 80,000 500,000 57,400 90,000 10,000 130,000 60,000 250,000 Cash Accounts Receivable Other Receivables Inventory Land Buildings and Equipment Investment in Block Corporation Stock Debits 238,500 1,262,500 597,400 7-56 Eliminations Debit Credit (5) 30,000 1,200,000 41,000 (1) 63,000 (4) 3,000 (2) (5) 26,000 (6) 15,000 7,800 103,800 (3)165,000 (6) 13,500 103,800 Consolidated 41,000 (4) 16,200 41,000 (1) 18,000 (2) 2,000 282,300 77,200 (5) 4,000 (4) 42,000 (1) 45,000 (3)193,500 1,241,000 822,000 63,000 170,000 (1,055,000) 186,000 (7,800) 178,200 251,200 178,200 429,400 (40,000) 389,400 244,400 170,000 50,000 263,000 140,000 792,000 1,659,400
  • 57. Chapter 07 - Intercompany Inventory Transactions P7-32 (continued) Item Accum. Depreciation Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock Foster Company Block Corporation Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits Foster Co. 155,000 63,000 95,000 250,000 210,000 Block Corp. Eliminations Debit Credit 75,000 35,000 20,000 200,000 2,400 50,000 (4) 27,000 257,000 98,000 115,000 450,000 2,400 210,000 (3) 50,000 110,000 379,500 Consolidated 110,000 597,400 7-57 282,300 77,200 389,400 (6) 1,500 1,262,500 215,000 (2) 5,800 (3) 21,500 (4) 1,800 375,800 27,600 1,659,400 375,800
  • 58. Chapter 07 - Intercompany Inventory Transactions P7-33 Consolidated Balance Sheet Workpaper [AICPA Adapted] Pine Corp. and Subsidiary Consolidated Balance Sheet Workpaper December 31, 20X6 Adjustments and Eliminations Debit Credit Pine Corp. Slim Corp. Cash Assets Accounts and Other Current Receivables Merchandise Inventory 105,000 15,000 410,000 120,000 920,000 1,000,000 1,170,000 Goodwill Totals 3,605,000 1,205,000 [b] 900 [3] [4] [5] [7] 900 5,000 100,000 90,000 335,000 [6] 3,000 1,587,000 400,000 Investment in Slim 120,000 670,000 Plant and Equipment, net Liabilities and Stockholders' Equity Accounts Payable and Other Current Liabilities Common Stock ($10 par) Retained Earnings Noncontrolling Interest, 10 percent Totals 140,000 1,400,000 [a] 305,000 500,000 200,000 2,965,000 700,000 3,605,000 1,205,000 7-58 ConsolIdated 90,900 [b] [1] [2] 900 450,000 810,000 [1] 500,000 500,000 3,942,000 [3] 900 [4] 5,000 [5] 100,000 [7] 90,000 249,100 [2] 200,000 500,000 [2] 700,000 [6] 3,000 1,690,700 [a] 90,900 3,052,900 [1] [2] 50,000 90,000 1,690,700 140,000 3,942,000
  • 59. Chapter 07 - Intercompany Inventory Transactions P7-33 (continued) Explanations of Workpaper Adjustments and Eliminations [a] To record net income of Slim Corporation accruing to Pine Corporation: Slim Corporation's retained earnings at December 31, 20X6 Slim Corporation's retained earnings at January 1, 20X6 Increase in retained earnings after dividend declaration Add: Dividend declaration Slim Corporation's net income for year ended December 31, 20X6 Pine Corporation's share, 90 percent [b] To record Pine Corporation's share of dividend declared by Slim Corporation: 90 percent of $1,000 [1] [2] To record goodwill: Fair value of compensation given by Pine Fair value of nonconctolling interest at acquisition Slim Corporation's book value at January 1, 20X6: Common stock Retained earnings Total book value Goodwill $700,000 (600,000) $100,000 1,000 $101,000 $ 90,900 $900 $1,170,000 130,000 $200,000 600,000 (800,000) $ 500,000 To eliminate 90 percent of Slim Corporation's book value and record noncontrolling interest: Common stock Retained earnings at December 31, 20X6 Total $200,000 700,000 $900,000 Pine Corporation's 90 percent share Minority interest’s 10 percent share Total $810,000 90,000 $900,000 [3] To eliminate intercompany dividend receivable and payable: 90 percent of $1,000 [4] To eliminate intercompany accrued interest: $100,000 @ 10 percent x ½ year [5] To eliminate intercompany loan: $100,000 [6] To eliminate intercompany profit in Slim Corporation's December 31 inventory: Sales from Pine Corporation to Slim Corporation 5 percent remaining in Slim Corporation's December 31 inventory Multiply by .20($60,000 / $300,000) Inventory profit $ 300,000 $ 15,000 x .20 $ 3,000 [7] $900 $5,000 To eliminate intercompany trade account receivable and payable 7-59 $90,000
  • 60. Chapter 07 - Intercompany Inventory Transactions P7-34 Comprehensive Worksheet Problem a. Basic equity-method entries for 20X7: (1) 20,000 (2) Investment in Sharp Company Stock Income from Subsidiary Record equity-method income: $40,000 x .80 32,000 (3) b. Cash Investment in Sharp Company Stock Record dividend from Sharp Company: $25,000 x .80 Income from Subsidiary Investment in Sharp Company Stock Amortize differential: $4,000 = ($50,000 / 10 years) x .80 4,000 20,000 32,000 4,000 Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Sharp Company Stock Eliminate income from subsidiary: $28,000 = $32,000 - $4,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $6,600 = ($40,000 + $8,000 - $10,000 - $5,000) x .20 6,600 E(3) Common Stock — Sharp Company Additional Paid-In Capital Retained Earnings, January 1 Differential Investment in Sharp Company Stock Noncontrolling Interest Eliminate beginning investment balance. $35,000 = $50,000 – [($50,000 / 10) x 3 years] 100,000 20,000 215,000 35,000 Buildings and Equipment Depreciation Expense Accumulated Depreciation Differential Assign differential: $20,000 = ($50,000 / 10 years) x 4 years 50,000 5,000 E(4) 7-60 28,000 20,000 8,000 5,000 1,600 296,000 74,000 20,000 35,000
  • 61. Chapter 07 - Intercompany Inventory Transactions P 7-34 (continued) E(5) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Sharp Company. 6,400 1,600 E(6) Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Randall Corporation. 2,000 E(7) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Sharp Company. 45,000 E(8) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Randall Corporation. 12,000 E(9) Buildings and Equipment Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment. 25,000 17,500 Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) Depreciation required ($75,000 / 20 years) Required decrease E(10) 2,000 35,000 10,000 9,000 3,000 2,500 40,000 $ 6,250 (3,750) $ 2,500 Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x 2 years) Required increase 8,000 $52,500 (12,500) $40,000 Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable. 10,000 7-61 10,000
  • 62. Chapter 07 - Intercompany Inventory Transactions P7-34 (continued) c. Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Randall Corp. Sharp Co. Sales 500,000 250,000 Other Income Income from Subsidiary Credits Cost of Goods Sold 20,400 28,000 548,400 416,000 30,000 Item Deprec. and Amortization Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward 280,000 202,000 30,000 20,000 24,000 18,000 (470,000) (240,000) 78,400 40,000 Ret. Earnings, Jan. 1 345,900 215,000 Income, from above Dividends Declared 78,400 424,300 (50,000) 40,000 255,000 (25,000) Ret. Earnings, Dec. 31, carry forward 374,300 230,000 7-62 Eliminations Debit Credit (7) 45,000 (8) 12,000 693,000 50,400 (1) 28,000 (4) 5,000 (5) 8,000 (6) 2,000 (7) 35,000 (8) 9,000 (9) 2,500 (2) 6,600 96,600 56,500 (3)215,000 (5) 6,400 (6) 2,000 (9) 17,500 96,600 56,500 (1) 20,000 (2) 5,000 337,500 Consolidated 81,500 743,400 564,000 52,500 42,000 (658,500) 84,900 (6,600) 78,300 320,000 78,300 398,300 (50,000) 348,300
  • 63. Chapter 07 - Intercompany Inventory Transactions P7-34 (continued) Item Randall Corp. Sharp Co. Cash Accounts Receivable Inventory 130,300 80,000 170,000 10,000 70,000 110,000 Buildings and Equipment 600,000 400,000 Investment in Sharp Company Stock Eliminations Debit Credit 304,000 Differential Debits (4) 50,000 (9) 25,000 (3) 35,000 1,284,300 590,000 Accum. Depreciation 310,000 120,000 Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest 100,000 300,000 15,200 100,000 4,800 100,000 (10) 10,000 20,000 (10) 10,000 (7) 10,000 (8) 3,000 Consolidated 140,300 140,000 267,000 1,075,000 (1) 8,000 (3)296,000 (4) 35,000 (3) 20,000 Credits 200,000 374,300 230,000 1,284,300 590,000 7-63 (4) 20,000 (9) 40,000 (3)100,000 (5) 337,500 1,600 579,100 81,500 (2) 1,600 (3) 74,000 579,100 1,622,300 490,000 105,200 400,000 4,800 200,000 348,300 74,000 1,622,300
  • 64. Chapter 07 - Intercompany Inventory Transactions P7-34 (continued) d. Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7 Cash Accounts Receivable Inventory Total Current Assets Buildings and Equipment Less: Accumulated Depreciation Total Assets $ 140,300 140,000 267,000 $ 547,300 $1,065,000 (486,000) Accounts Payable Bonds Payable Bond Premium Stockholders’ Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders’ Equity Total Liabilities and Stockholders' Equity 579,000 $1,126,300 $ 105,200 $ 400,000 4,800 404,800 $ 200,000 348,300 $ 548,300 68,000 616,300 $1,126,300 Randall Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X7 Sales Other Income $ 693,000 50,400 $ 743,400 Cost of Goods Sold Depreciation and Amortization Expense Other Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest $ 564,000 52,500 42,000 (658,500) $ 84,900 (6,600) $ 78,300 Randall Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X7 Retained Earnings, January 1, 20X7 Income to Controlling Interest, 20X7 $ 320,000 78,300 $ 398,300 7-64
  • 65. Chapter 07 - Intercompany Inventory Transactions Dividends Declared, 20X7 Retained Earnings, December 31, 20X7 (50,000) $ 348,300 7-65
  • 66. Chapter 07 - Intercompany Inventory Transactions P7-35 Comprehensive Consolidation Workpaper; Equity Method [AICPA Adapted] Fran Corp. and Subsidiary Consolidation Workpaper December 31, 20X9 Fran Corp Dr. (Cr.) Income Statement: Net Sales Equity in Brey's Income Gain on Sale of Warehouse Cost of Goods Sold Goodwill Impairment Loss Operating Expenses (including depreciation) Net Income Retained Earnings Statement: Balance, 1/1/X9 Net Income Dividends Paid Balance, 12/31/X9 Balance Sheet: Assets: Cash Accounts Receivable (net) Inventories Land, Plant and Equipment Accumulated Depreciation Investment in Brey Goodwill Total Assets Liabilities and Stockholders' Equity: Accounts Payable and Accrued Expenses Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Equity Adjustments and Eliminations Dr. Cr. Brey Inc. Dr. (Cr.) (3,800,000) (1,500,000) [7] (181,000) [1] (30,000) 2,360,000 180,000 181,000 [5] 30,000 [4] 1,100,000 (551,000) 440,000 [3] (190,000) [a] 9,000 435,000 (440,000) (551,000) (156,000) [2] (190,000) [a] 40,000 (306,000) [b] 156,000 435,000 (5,120,000) 35,000 (991,000) 870,000 570,000 350,000 410,000 1,320,000 680,000 [7] 162,000 3,068,000 35,000 [6] [a] 2,000 164,000 [a] [1] [b] 164,000 40,000 204,000 150,000 860,000 1,060,000 591,000 Adjusted Balance 1,547,000 (470,000) (440,000) (470,000) (910,000) 720,000 [8] [7] 86,000 18,000 1,124,000 1,452,000 [2] 54,000 [5] 30,000 2,024,000 (210,000) [6] 2,000 60,000 9,000 141,000 750,000 35,000 (587,000) [2] [3] [1] [2] [4] (1,340,000) (1,700,000) (594,000) [8] (400,000) [2] 86,000 400,000 (300,000) (991,000) (80,000) [2] (306,000) [b] 80,000 591,000 (370,000) 891,000 4,331,000 1,380,000 (4,331,000) (1,380,000) 7-66 1,273,000 25,000 4,758,000 (1,848,000) (1,700,000) [b] 204,000 (300,000) (910,000) 1,273,000 (4,758,000)
  • 67. Chapter 07 - Intercompany Inventory Transactions P7-35 (continued) Explanations of Adjustments and Eliminations: [1] To eliminate Fran's investment income recognized from Brey, Brey's dividends, and the change in the investment account during 20X9. Fran's investment is carried at equity at December 31, 20X9, adjusted for the amortization of the differential assigned to the machinery. [2] To eliminate reciprocal elements as of the beginning of the year from the investment and equity accounts and to assign the differential to machinery and goodwill. [3] To record amortization of the fair value in excess of book value of Brey's machinery at date of acquisition ($54,000 / 6). [4] To record goodwill impairment loss of $35,000. [5] To eliminate intercompany profit on the sale of the warehouse by Fran to Brey. [6] To eliminate the excess depreciation on the warehouse building sold by Fran to Brey [($86,000 - $66,000) x 1/5 x ½]. [7] To eliminate intercompany sales from Brey to Fran and the inter-company profit in Fran's ending inventory as follows: Sales Gross profit Cost Total $180,000 (90,000) $ 90,000* On hand $36,000 (18,000) $18,000 Sold $144,000 (72,000)* $ 72,000 * Cost of Goods Sold elimination: $162,000 = $90,000 + $72,000 [8] To eliminate Fran's intercompany balance to Brey for the merchandise it purchased. 7-67
  • 68. Chapter 07 - Intercompany Inventory Transactions P7-36A Fully Adjusted Equity Method a. Adjusted trial balance: Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock Cost of Goods Sold Depreciation and Amortization Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings Sales Other Income Income from Subsidiary Randall Corporation Debit Credit Sharp Company Debit Credit $ 130,300 80,000 170,000 600,000 $ 10,000 70,000 110,000 400,000 278,000 416,000 30,000 24,000 50,000 202,000 20,000 18,000 25,000 $ 310,000 100,000 300,000 200,000 $1,778,300 7-68 320,000 500,000 20,400 27,900 $1,778,300 $855,000 $120,000 15,200 100,000 4,800 100,000 20,000 215,000 250,000 30,000 $855,000
  • 69. Chapter 07 - Intercompany Inventory Transactions P7-36A (continued) b. Fully adjusted equity-method entries for 20X7: (1) Cash Investment in Sharp Company Stock Record dividends from Sharp Company: $25,000 x .80 20,000 (2) Investment in Sharp Company Stock Income from Subsidiary Record equity-method income: $40,000 x .80 32,000 (3) Income from Subsidiary Investment in Sharp Company Stock Amortize differential: $4,000 = ($50,000 / 10 years) x .80 4,000 (4) Investment in Sharp Company Stock Income from Subsidiary Recognize deferred profit on upstream sale of inventory: $8,000 x .80 6,400 (5) Investment in Sharp Company Stock Income from Subsidiary Recognize deferred profit on downstream sale of inventory. 2,000 (6) Income from Subsidiary Investment in Sharp Company Stock Remove unrealized profit on upstream sale of inventory: $10,000 x .80 8,000 (7) Income from Subsidiary Investment in Sharp Company Stock Remove unrealized profit on downstream sale of inventory. 3,000 (8) Investment in Sharp Company Stock Income from Subsidiary Recognize portion of gain on sale of equipment: $20,000 / 8 years 2,500 7-69 20,000 32,000 4,000 6,400 2,000 8,000 3,000 2,500
  • 70. Chapter 07 - Intercompany Inventory Transactions P7-36A (continued) c. Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Sharp Company Stock Eliminate income from subsidiary. E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $6,600 = ($40,000 + $8,000 - $10,000 - $5,000) x .20 6,600 E(3) Common Stock — Sharp Company Additional Paid-In Capital Retained Earnings, January 1 Differential Investment in Sharp Company Stock Noncontrolling Interest Eliminate beginning investment balance. 100,000 20,000 215,000 35,000 Buildings and Equipment Depreciation Expense Accumulated Depreciation Differential Assign differential: $20,000 = ($50,000 / 10 years) x 4 years 50,000 5,000 E(4) E(5) Investment in Sharp Company Stock Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Sharp Company. 7-70 27,900 6,400 1,600 20,000 7,900 5,000 1,600 296,000 74,000 20,000 35,000 8,000
  • 71. Chapter 07 - Intercompany Inventory Transactions P7-36A (continued) E(6) Investment in Sharp Company Stock Cost of Goods Sold Eliminate beginning inventory profit of Randall Corporation. E(7) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Sharp Company. 45,000 E(8) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Randall Corporation. 12,000 E(9) Buildings and Equipment Investment in Sharp Company Stock Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment. 25,000 17,500 Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) Depreciation required ($75,000 / 20 years) Required decrease Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x 2 years) Required increase E(10) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable. 7-71 2,000 2,000 35,000 10,000 9,000 3,000 2,500 40,000 $6,250 (3,750) $2,500 $52,500 (12,500) $40,000 10,000 10,000
  • 72. Chapter 07 - Intercompany Inventory Transactions P7-36A (continued) d. Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Item Randall Corp. Sharp Co. Sales 500,000 250,000 Other Income Income from Subsidiary Credits Cost of Goods Sold 20,400 27,900 548,300 416,000 30,000 Deprec. & Amortization Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward 280,000 202,000 30,000 20,000 24,000 18,000 (470,000) (240,000) Eliminations Debit Credit (7) 45,000 (8) 12,000 (4) 5,000 (5) 8,000 (6) 2,000 (7) 35,000 (8) 9,000 (9) 2,500 (2) 6,600 96,500 56,500 56,500 40,000 215,000 40,000 255,000 (25,000) (3)215,000 96,500 Dividends Declared 320,000 78,300 398,300 (50,000) Ret. Earnings, Dec. 31, carry forward 348,300 230,000 311,500 Ret. Earnings, Jan. 1 Income, from above 7-72 693,000 50,400 (1) 27,900 78,300 Consolidated (1) 20,000 (2) 5,000 81,500 743,400 564,000 52,500 42,000 (658,500) 84,900 (6,600) 78,300 320,000 78,300 398,300 (50,000) 348,300
  • 73. Chapter 07 - Intercompany Inventory Transactions P7-36A (continued) Item Randall Corp. Sharp Co. Cash Accounts Receivable Inventory 130,300 80,000 170,000 10,000 70,000 110,000 Buildings and Equipment Investment in Sharp Company Stock 600,000 400,000 Eliminations Debit Credit Differential Debits 278,000 (4) (9) (5) (6) (9) (3) 50,000 25,000 6,400 2,000 17,500 35,000 1,258,300 590,000 Accum. Depreciation 310,000 120,000 Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest 100,000 300,000 15,200 100,000 4,800 100,000 (10) 10,000 20,000 (10) 10,000 (7) 10,000 (8) 3,000 (1) 7,900 (3)296,000 (4) 35,000 Consolidated 140,300 140,000 267,000 1,075,000 (3) 20,000 Credits 200,000 348,300 230,000 1,258,300 590,000 7-73 (4) 20,000 (9) 40,000 (3)100,000 (5) 311,500 1,600 579,000 81,500 (2) 1,600 (3) 74,000 579,000 1,622,300 490,000 105,200 400,000 4,800 200,000 348,300 74,000 1,622,300
  • 74. Chapter 07 - Intercompany Inventory Transactions P7-37A Cost Method a. Journal entry recorded by Randall Corporation: Cash Dividend Income Record dividend from Sharp Company: $25,000 x .80 b. 20,000 20,000 Eliminating entries, December 31, 20X7: E(1) Dividend Income Dividends Declared Eliminate dividend income from subsidiary. E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $6,600 = ($40,000 + $8,000 - $10,000 - $5,000) x .20 E(3) Common Stock — Sharp Company Additional Paid-In Capital Retained Earnings, January 1 Differential Investment in Sharp Company Stock Noncontrolling Interest Eliminate investment balance at date of acquisition: $180,000 = ($300,000 - $100,000 - $20,000) E(4) 20,000 100,000 20,000 180,000 50,000 Retained Earnings, January 1 Noncontrolling Interest Assign undistributed prior earnings of subsidiary to noncontrolling interest. Retained earnings, January 1, 20X7 Net assets of Sharp at acquisition $300,000 Common stock (100,000) Additional paid-in capital (20,000) Retained earnings at acquisition Net increase Proportion of stock held by noncontrolling interest Increase assigned to noncontrolling interest E(5) 6,600 Buildings and Equipment Differential Assign differential at date of acquisition. 7,000 5,000 1,600 280,000 70,000 7,000 $215,000 (180,000) $ 35,000 x .20 $ 7,000 50,000 7-74 20,000 50,000
  • 75. Chapter 07 - Intercompany Inventory Transactions P7-37A (continued) E(6) Retained Earnings, January 1 Noncontrolling Interest Accumulated Depreciation Amortize differential for prior periods: ($50,000 / 10 years) x 3 years 12,000 3,000 E(7) Depreciation Expense Accumulated Depreciation Amortize differential. 5,000 E(8) Retained Earnings, January 1 Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Sharp Company. 6,400 1,600 E(9) Retained Earnings, January 1 Cost of Goods Sold Eliminate beginning inventory profit of Randall Corporation. 2,000 E(10) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Sharp Company. 45,000 E(11) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Randall Corporation. 12,000 E(12) Buildings and Equipment Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment. 25,000 17,500 Depreciation expense adjustment: Depreciation recorded ($50,000 / 8 years) Depreciation required ($75,000 / 20 years) Required decrease $ 6,250 (3,750) $ 2,500 Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x 2 years) Required increase $52,500 (12,500) $40,000 7-75 15,000 5,000 8,000 2,000 35,000 10,000 9,000 3,000 2,500 40,000
  • 76. Chapter 07 - Intercompany Inventory Transactions P7-37A (continued) E(13) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable. c. 10,000 10,000 Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Item Randall Corp. Sharp Co. Sales 500,000 250,000 Other Income Dividend Income Credits Cost of Goods Sold 20,400 20,000 540,400 416,000 30,000 Deprec. & Amortization Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward 280,000 202,000 30,000 20,000 24,000 18,000 (470,000) (240,000) 70,400 40,000 Ret. Earnings, Jan. 1 329,900 215,000 Income, from above Dividends Declared 70,400 400,300 (50,000) 40,000 255,000 (25,000) Ret. Earnings, Dec. 31, carry forward 350,300 230,000 7-76 Eliminations Debit Credit (10) 45,000 (11) 12,000 693,000 50,400 (1) 20,000 (7) 5,000 (8) 8,000 (9) 2,000 (10) 35,000 (11) 9,000 (12) 2,500 (2) 6,600 88,600 56,500 (3)180,000 (4) 7,000 (6) 12,000 (8) 6,400 (9) 2,000 (12) 17,500 88,600 56,500 (1) 20,000 (2) 5,000 313,500 Consolidated 81,500 743,400 564,000 52,500 42,000 (658,500) 84,900 (6,600) 78,300 320,000 78,300 398,300 (50,000) 348,300
  • 77. P7-37A (continued) Item Randall Corp. Sharp Co. Cash Accounts Receivable Inventory 130,300 80,000 170,000 10,000 70,000 110,000 Buildings and Equipment 600,000 400,000 Eliminations Debit Credit Investment in Sharp Company Stock Differential Debits 280,000 (5) 50,000 (12) 25,000 (3) 50,000 1,260,300 590,000 Accum. Depreciation 310,000 120,000 Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest 100,000 300,000 15,200 100,000 4,800 100,000 (13) 10,000 20,000 (13) 10,000 (10) 10,000 (11) 3,000 Consolidated 140,300 140,000 267,000 1,075,000 (3)280,000 (5) 50,000 (3) 20,000 Credits 200,000 350,300 230,000 1,260,300 590,000 (6) 15,000 (7) 5,000 (12) 40,000 (3)100,000 (6) (8) 313,500 3,000 1,600 573,100 81,500 (2) 1,600 (3) 70,000 (4) 7,000 573,100 1,622,300 490,000 105,200 400,000 4,800 200,000 348,300 74,000 1,622,300

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