Advanced Accounting 11th Edition Solution by Beams - Test Bank

Advanced Accounting 11th Edition Solution by Beams – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

 

 

 

 

 

 

Chapter 5

 

INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES

 

Answers to Questions

 

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

 

• Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits according to GAAP.

 

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

 

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

 

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

 

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

 

• If unrealized profits are not eliminated at year end, consolidated net income will be overstated in 2011. The ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the beginning inventory will understate consolidated net income in 2012. The analysis of the effect of unrealized inventory profits on consolidated net income is basically the same as the analysis for inventory errors. Like inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting periods. Consolidated net income for 2013 is unaffected.

 

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

 

 

 

 

 

 

 

 

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5-1

 

 

 

 

 

5-2                                                                                                                            Intercompany Profit Transactions — Inventories

 

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

 

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

 

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

 

• Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is eliminated by reducing (crediting) cost of sales and debiting the investment account if a correct equity method has been used and the intercompany sales are downstream. In the case of upstream sales, cost of sales is credited and the noncontrolling interest and the investment account are debited proportionately. .

 

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

 

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

 

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

 

Investment in subsidiary (retained earnings)	5,000
Cost of sales	5,000
To eliminate unrealized profit in beginning inventory.
Cost of sales	5,000
Inventory	5,000
To eliminate unrealized profit in ending inventory.

 

 

 

 

 

 

 

 

 

 

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Chapter 5			5-3
SOLUTIONS TO EXERCISES
Solution E5-1
1	b	5	c
2	d	6	a
3	a	7	a
4	c	8	c

 

Solution E5-2 [AICPA adapted]

 

• a

 

• c

Unrealized profits from intercompany sales with Ken are eliminated from the ending inventory: $960,000 combined current assets less $36,000 unrealized profit ($180,000 20%).

 

• c

Combined cost of sales of $2,250,000 less $750,000 intercompany sales

 

Solution 5-3

 

• d

	Pil’s separate income (in thousands)	$2,000
	Add: Share of Sil’s income ($1,000   100%)	1,000
	Add: Realization of profit deferred in 2011	1,000
	$3,000 – ($3,000/150%)
	Less: Unrealized profit in 2012 inventory	(800)
	$2,400 – ($2,400/150%)
	Controlling share of consolidated net income
				$3,200
2	d
		$2,800
	Combined sales
	Less: Intercompany sales	(100)
	Consolidated sales
				$2,700
3	c
		$1,360
	Combined cost of sales
	Less: Intercompany purchases	(100)
	Less: Unrealized profit in beginning inventory	(8)
	Add: Unrealized profit in ending inventory	20
	Consolidated cost of sales
				$1,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

5-4                                                                                                                            Intercompany Profit Transactions — Inventories

 

Solution E5-4

 

1	b	$		96,000
	Pid’s share of Sed’s income ($120,000   80%)
	Less: Unrealized profit in ending inventory			(16,000)
	($40,000   50% unsold   80% owned)
	Income from Sed		$	80,000

 

• d

	Combined cost of sales	$		900,000
	Less: Intercompany sales			(200,000)
	Add: Unrealized profit in ending inventory			20,000
	Consolidated cost of sales
			$	720,000
3	b
		$		120,000
	Reported income of Sed
	Unrealized profit			(20,000)
	Sed’s realized income
				100,000
	Noncontrolling interest percentage			20%
	Noncontrolling interest share
			$	20,000

 

Solution E5-5

 

1	c	$1,800,000
	Combined sales
	Less: Intercompany sales	(400,000)
	Consolidated sales
			$1,400,000

 

• c

Unrealized profit in beginning inventory

	$100,000	– ($100,000/125%)	$		20,000
	Unrealized	profit in ending inventory
			$		25,000
	$125,000	– ($125,000/125%)
3	b
			$1,440,000
	Combined cost of goods sold
	Less: Intercompany sales				(400,000)
	Less: Unrealized profit in beginning inventory				(20,000)
	$100,000	– ($100,000/125%)
	Add: Unrealized profit in ending inventory				25,000
	$125,000	– ($125,000/125%)
	Consolidated cost of goods sold
				$1,045,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Chapter 5

5-5

 

Solution E5-6

 

1	a	$200,000
	Pat’s separate income
	Add: Income from Sue (below)	144,550
	Controlling share of consolidated net income
				$344,550
	Sue’s reported income	$200,000
	Less: Patent amortization	(20,000)
	Add: Unrealized profit in beginning inventory	37,500
	[$112,500 – ($112,500/150%)]
	Less: Unrealized profit in ending inventory	(11,000)
	[$33,000 – ($33,000/150%)]
	Sue’s adjusted and realized income
				$206,500
	Pat’s 70% controlling share of Sue’s realized income	$144,550
	Noncontrolling interest share (30%)
				$ 61,950

 

• c

Pac’s share of Slo’s reported net loss

 

	($150,000 loss   60%)												$(90,000)
	Add: Unrealized profit in ending inventory												(50,000)
	($200,000   1/4 unsold)
	Income from Slo															(140,000)
	Pac’s separate income												300,000
	Controlling share of consolidated net income
																$160,000
3	b
													$300,000
	San’s reported net income
	Add: Realized profit in beginning inventory												30,000
	$150,000 – ($150,000/1.25)
	Less: Deferred profit in ending inventory												(40,000)
	$200,000 – ($200,000/1.25)
	Income from San
																$290,000
	Par’s 75% controlling share of San’s income
																$217,500
	Noncontrolling interest share (25%)
																$ 72,500
Solution E5-7
(in thousands)					2011			2012					2013
Pan’s separate income		$						$					$
					900					1,200								1,050
Add: 80% of She’s reported income					1,200			1,320					1,140
Add: Realization of profits in								90					120
	beginning inventory
Less: Unrealized profits in ending					(90)			(120)					(60)
	Inventory
Controlling share of consolidated NI
				$2,010					$2,490								$2,250
Noncontrolling interest share
					300
1,500 x 20%
1,650 x 20%								330
1,425 x 20%																	285
Consolidated net income		$2,310						$2,820					$2,535

 

 

 

 

 

 

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5-6	Intercompany Profit Transactions — Inventories
Solution E5-8
Pic Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2011
(in thousands)		$		920
Sales ($800 + $200 – $80 intercompany sales)
Cost of sales ($480 – $80 intercompany				(420)
purchases + $20 unrealized profit in ending inventory)
Gross profit
				500
Other expenses ($200 + $60)				(260)
Cnsolidated net income
				240
Less: Noncontrolling interest share ($60   20%)				(12)
Controlling share of consolidated net income			$	228

 

Solution E5-9

 

• Noncontrolling interest share

	Sev’s reported net	income	$		50,000
	Add: Intercompany profit from upstream sales in				5,000
	beginning inventory
	Less: Intercompany profit from upstream sales in				(10,000)
	ending inventory
	Sev’s adjusted and realized income
				$	45,000
	Noncontrolling interest share (40%)
				$	18,000
2	Consolidated sales
			$1,250,000
	Combined sales
	Less: Intercompany sales				100,000
	Consolidated sales
				$1,150,000
	Consolidated cost of sales
			$		650,000
	Combined cost of sales
	Less: Intercompany sales				(100,000)
	Add: Intercompany profit in ending inventory				10,000
	Less: Intercompany profit in beginning inventory				(5,000)
	Consolidated cost of sales
				$	555,000
	Total Consolidated Income
			$		300,000
	Combined income
	Less: Intercompany profit in ending inventory				(10,000)
	Add: Intercompany profit in beginning inventory				5,000
	Total Consolidated Income
				$	295,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

Chapter 5

5-7

 

Solution E5-10

 

Pap Corporation and Subsidiary

 

Consolidated Income Statement

December 31, 2013

 

(in thousands)

 

Sales	($2,000 + $1,000 – $180 intercompany)	$2,820
Cost of sales ($800 + $500 – $180 intercompany –
$20	unrealized profit in beginning inventory + $30				(1,130)
unrealized profit in ending inventory
Gross profit
					1,690
Depreciation expense					(340)
Other expenses ($180 + $120)					(300)
Total consolidated income
					1,050
Less: Noncontrolling interest share ($300 + $20 profit					(58)
in beginning inventory – $30 profit in end. inventory)   20%
Controlling interest share of consolidated net income				$	992
Supporting computations
		$			1,200
Cost of investment in Sak at January 1, 2012
Implied fair value of Sak ($1,200 / 80%)
			$		1,500
Book value of Sak					(1,400)
	Goodwill
				$	100
Solution E5-11
1	b	$			200,000
	Income as reported
	Add: Realization of profits in beginning inventory				20,000
	$120,000 – ($120,000/1.2)
	Less: Unrealized profits in ending inventory				(60,000)
	$360,000 – ($360,000/1.2)
	Realized income
					160,000
	Percent ownership				60%
	Income from Sue
				$	96,000

 

• c

	Sue’s equity as reported ($3,400,000 + $2,100,000)	$5,500,000
	Less: Unrealized profit in ending inventory	(60,000)
	Realized equity
				5,440,000
	Noncontrolling share	40%
	Noncontrolling interest December 31, 2011
				$2,176,000
3	b
		$5,440,000
	Realized equity
	Controlling share	60%
	Investment balance December 31, 2011
				$3,264,000

 

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

 

 

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

5-8                                                                                                                            Intercompany Profit Transactions — Inventories

 

Solution E5-12

 

Pul Corporation and Subsidiary

 

Consolidated Income Statement

for the year ended December 31, 2011

 

Sales ($2,760,000 – $240,000 intercompany sales)	$2,520,000
Cost of sales ($1,840,000 – $240,000 – $10,000a + $24,000b)	(1,614,000)
Gross profit
		906,000
Operating expenses	(320,000)
Total consolidated income
		586,000
Less: Noncontrolling interest share [$80,000 – ($24,000   .2)]	(75,200)
Controlling share of consolidated net income		$  510,800

 

• Unrealized profit in beginning inventory (downstream) ($360,000 – $320,000) .25 = $10,000
• Unrealized profit in ending inventory (upstream ($240,000 – $180,000) .4 = $24,000

 

SOLUTIONS TO PROBLEMS

 

Solution P5-1

 

Por Corporation and Subsidiary Consolidated Statement of Income and Retained Earnings for the year ended December 31, 2012

 

Sales ($6,500,000 + $3,250,000 – $400,000 intercompany sales)	$9,350,000
Less: Cost of sales ($4,000,000 + $1,950,000 – $400,000 inter-
company purchases – $60,000 unrealized profit in beginning	(5,570,000)
inventory + $80,000 unrealized profit in ending inventory)
Gross profit
			3,780,000
Other expenses ($1,700,000 + $800,000)	(2,500,000)
Consolidated net income
			1,280,000
Noncontrolling interest share($500,000+$60,000 – $80,000)   10%	(48,000)
Controlling share of consolidated net income			1,232,000
Add: Beginning consolidated retained earnings	1,846,000
Less: Dividends for the year	(500,000)
Consolidated retained earnings December 31
			$2,578,000

 

Solution P5-2

 

• Consolidated cost of sales — 2013

	Combined cost of sales ($625,000 + $300,000)	$			925,000
	Less: Intercompany purchases				(300,000)
	Add: Profit in ending inventory				24,000
	Less: Profit in beginning inventory				(12,000)
	Consolidated cost of sales
				$	637,000
2	Noncontrolling interest share — 2013
		$			150,000
	Sam’s net income ($600,000 – $300,000 – $150,000)
	Add: Profit in beginning inventory				12,000
	Less: Profit in ending inventory				(24,000)
	Sam’s realized income
					138,000
	Noncontrolling interest percentage				10%
	Noncontrolling interest share
				$	13,800

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

Chapter 5

5-9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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5-10                                                                                                                          Intercompany Profit Transactions — Inventories

 

Solution P5-2 (continued)

 

3	Consolidated Controlling share of NI— 2013	$1,200,000
	Consolidated sales ($900,000 + $600,000 – $300,000)
	Less: Consolidated cost of sales			(637,000)
	Less: Consolidated expenses ($225,000 + $150,000)			(375,000)
	Less: Noncontrolling interest share			(13,800)
	Controlling share of consolidated net income
			$	174,200
	Alternatively,
		$		50,000
	Put’s separate income
	Add: Income from Sam			124,200
	Controlling share of consolidated net income
			$	174,200

 

• Noncontrolling interest at December 31, 2013

Equity of Sam December 31, 2013	$		520,000
Less: Unrealized profit in ending inventory			(24,000)
Noncontrolling interest percentage
			10%
Noncontrolling interest December 31
		$	49,600

 

Solution P5-3

 

• Inventories appearing in consolidated balance sheet at December 31, 2012

Beginning inventory — Pot ($120,000 – $8,000a)		$112,000
Beginning inventory — San ($77,500 – $15,500b)				62,000
Beginning inventory — Tay ($48,000 – 0)				48,000
	Inventories December 31		$222,000
Intercompany profit:
a	Pot:	$		48,000
	Inventory acquired intercompany ($120,000   40%)
	Cost of intercompany inventory ($48,000/1.2)			(40,000)
	Unrealized profit in Pot’s inventory
			$	8,000
b	San:
		$		77,500
	Inventory acquired intercompany ($77,500   100%)
	Cost of intercompany inventory ($77,500/1.25)			(62,000)
	Unrealized profit in San’s inventory
			$	15,500

 

• Inventories appearing in consolidated balance sheet at December 31, 2013

Ending inventory — Pot ($108,000 – $9,000c)		$		99,000
Ending inventory — San ($62,500 – $12,500d)				50,000
Ending inventory — Tay ($72,000 – 0)				72,000
	Inventories December 31		$221,000
Intercompany profit:
c	Pot:	$		54,000
	Inventory acquired intercompany ($108,000   50%)
	Cost of intercompany inventory ($54,000/1.2)	(45,000)
	Unrealized profit in Pot’s inventory
			$	9,000
d	San:
		$		62,500
	Inventory acquired intercompany ($62,500   100%)
	Cost of intercompany inventory ($62,500/1.25)	(50,000)
	Unrealized profit in San’s inventory
			$	12,500

 

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

 

Chapter 5

 

Solution P5-4

 

• Pli’s income from Stu

75% of Stu’s net income Unrealized profit in December 31,

2011 inventory (downstream)

 

($600,000 1/2) 100% Unrealized profit in December 31,

2012 inventory (upstream)

 

$300,000   75%

Pli’s income from Stu

 

• Pli’s net income Pli’s separate income Add: Income from Stu Pli’s net income

 

• Consolidated net income Separate incomes of Pli and

Stu combined

Unrealized profit in December 31, 2011 inventory

 

Unrealized profit in December 31, 2012 inventory

Total consolidated income

Less: Noncontrolling interest share 2011 $1,200,000 25%

2012 ($1,350,000 – $300,000)   25%

 

2011 ($1,050,000 + $300,000) 25% Controlling share of net income

 

 

5-11

 

 

2011                    2012                    2013

 

$  900,000  $1,012,500  $ 787,500

 

 

(300,000)         300,000

 

 

(225,000)    225,000 $  600,000  $1,087,500  $1,012,500

 

$5,400,000  $5,100,000  $6,000,000 600,000   1,087,500   1,012,500 $6,000,000  $6,187,500  $7,012,500

 

 

$6,600,000  $6,450,000  $7,050,000

 

(300,000)         300,000

 

(300,000)        300,000

6,300,000  6,450,000  7,350,000

 

(300,000)

 

(262,500)

 

(337,500)

 

$6,000,000  $6,187,500  $7,012,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

5-12                                                                                                                          Intercompany Profit Transactions — Inventories

 

Solution P5-5

 

				Pan Corporation and Subsidiary
				Consolidation Workpapers
	for the year ended December 31, 2012
						(in thousands)							Adjustments and					Consolidated
				Pan					100% Sal
													Eliminations					Statements
Income Statement		$		800			$		400			a 120				$1,080
Sales
Income from Sal				102								d 102
Cost of sales				400*					200*			b	12	a 120				472*
														c	20
Depreciation expense				110*					40*									150*
Other expenses				192*					60*			f	6					258*
Net income		$		200			$		100							$		200
Retained Earnings		$		600														600
Retained earnings — Pan
Retained earnings — Sal							$		380			e 380
Net income				200ü					100ü									200
Dividends				100*					50*					d	50			100*
Retained earnings
December 31		$		700			$		430							$		700
Balance Sheet		$		54			$		37							$		91
Cash
Receivables — net				90					60					g	17			133
Inventories				100					80					b	12			168
Other assets				70					90									160
Land				50					50									100
Buildings — net				200					150									350
Equipment — net				500					400									900
Investment in Sal				736								c	20	d	52
														e 704
Patents												e	24	f	6			18
		$1,800					$		867							$1,920
Accounts payable		$		160			$		47			g	17			$		190
Other liabilities				340					90									430
Common stock, $10 par				600					300			e 300						600
Retained earnings				700ü					430ü									700
		$1,800					$		867							$1,920

 

Supporting computations

 

Unrealized profit in beginning inventory ($40,000 1/2) = $20,000 Unrealized profit in ending inventory ($48,000 1/4) = $12,000

 

Sal’s income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patent amortization equals $102,000 income from Sal.

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

Chapter 5

5-13

 

Solution P5-6

 

				Pay Corporation and Subsidiary
				Consolidation Workpapers
	for the year ended December 31, 2012
						(in thousands)							Adjustments and				Consolidated
				Pay				Sue 75%
													Eliminations					Statements
Income Statement		$1,200					$	800				a 260					$1,740
Sales
Income from Sue				205								d 205
Cost of sales				540*				420*				b	40	a 260				720*
														c	20
Operating expenses				290*				80*											370*
Consolidated net income																	$	650
Noncontrolling int.share												f	75					75 *
Controlling share of NI		$		575ü			$	300ü									$	575
Retained Earnings		$		365													$	365
Retained earnings — Pay
Retained earnings — Sue							$	180				e 180
Controlling share of NI				575ü				300ü										575
Dividends				300*				100*						d	75			300*
														f	25
Retained earnings		$		640			$	380									$	640
December 31
Balance Sheet		$		170			$	60									$	230
Cash
Accounts receivable				330				200						g	30			500
Dividends receivable				30										h	30
Inventories				120				160						b	40			240
Land				160				100										260
Buildings — net				460				200										660
Equipment — net				400				280										680
Investment in Sue				770								c	20	d 130
														e 660
Goodwill												e 400						400
			$2,440				$1,000										$2,970
Accounts payable		$		450			$	200				g	30				$	620
Dividends payable				140				40				h	30					150
Other liabilities				310				80										390
Common stock, $10 par				900				300				e 300						900
Retained earnings				640ü				380ü										640
		$2,440					$1,000
Noncontrolling interest January 1														e 220
Noncontrolling interest December 31														f	50			270
*   Deduct																	$2,970
Supporting computations																$600,000
Investment in Sue at January 1, 2011
Implied fair value of Sue ($600,000 / 75%)
																$800,000
Book value of Sue																400,000
Goodwill
																$400,000

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

5-14					Intercompany Profit Transactions — Inventories
Solution P5-7
Preliminary computations						$2,700,000
Investment cost
Implied fair value of San
								$3,000,000
Less: Book value of San										2,500,000
Patents
									$	500,000
Patent amortization	$500,000/10 years = $50,000 per year
Upstream sales
Unrealized profit in December 31, 2011 inventory of Pol
$280,000 – ($280,000   1.4) = $80,000
				inventory of Pol
Unrealized profit in December 31, 2012
$420,000 – ($420,000   1.4) = $120,000
Income from San						$1,000,000
San’s reported net income
Less: Patent amortization										(50,000)
Less: Unrealized profit in ending inventory										(120,000)
Add: Unrealized profit in beginning inventory										80,000
San’s adjusted and realized income
									$	910,000
Pol’s 90% controlling share of San’s income						$				819,000
10% noncontrolling interest share of San’s income
									$	91,000
Investment balance
						$2,700,000
Initial investment cost
Increase in San’s net assets from December 31, 2010										630,000
to December 31, 2012 ($700,000   90%)
Patent amortization for 2 years (90%)										( 90,000)
Unrealized profit in December 31, 2012 inventory										(108,000)
Investment balance December 31, 2012
									$3,132,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

Chapter 5

5-15

 

Solution P5-7 (continued)

 

Pol Corporation and Subsidiary

 

Consolidation Workpapers

for the year ended December 31, 2012

 

(in thousands)

 

			Pol					San 90%			Adjustments and				Consolidated
											Eliminations					Statements
Income Statement	$8,190					$5,600				a 5,600				$		8,190
Sales
Income from San			819							d	819
Cost of sales			5,460*					4,000*		b	120	a 5,600				3,900*
												c	80
Other expenses			1,544*					600*		f	50					2,194*
Consolidated net income														$		2,096
Noncontrolling int.share										h	91					91*
Controlling share of NI	$		2,005			$1,000								$		2,005
Retained Earnings	$		1,200											$		1,200
Retained earnings — Pol
Retained earnings — San						$		700		e	700
Controlling share of NI			2,005ü					1,000ü								2,005
Dividends			1,000*					500*				d	450			1,000*
												h	50
Retained earnings
December 31	$		2,205			$1,200								$		2,205
Balance Sheet	$		753			$		500						$		1,253
Cash
Inventory			420					800				b	120			1,100
Other current assets			600					200				g	100			700
Plant assets — net			3,000					3,000								6,000
Investment in San			3,132							c	72	d	369
												e 2,835
Patents										e	450	f	50			400
		$7,905					$4,500								$	9,453
Current liabilities	$		1,700			$1,300				g	100			$		2,900
Capital stock			4,000					2,000		e 2,000						4,000
Retained earnings			2,205ü					1,200ü								2,205
	$		7,905			$4,500
Noncontrolling interest January 1										c	8	e	315
Noncontrolling interest December 31												h	41			348
														$		9,453

• Deduct

 

 

 

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

5-16                                                                                                                          Intercompany Profit Transactions — Inventories

 

Solution P5-8

 

Pan Corporation and Subsidiary

 

Consolidation Workpapers

for the year ended December 31, 2012

 

(in thousands)

 

			Pan				100%			Adjustments and						Consolidated
							Sal				Eliminations						Statements
Income Statement	$		800		$		400		a 120						$1,080
Sales
Income from Sal			108						d 108
Cost of sales			400*				200*		b	12		a 120					472*
												c	20
Depreciation expense			110*				40*										150*
Other expenses			192*				60*										252*
Net income	$		206		$		100								$		206
Retained Earnings	$		606														606
Retained earnings — Pan
Retained earnings — Sal					$		380		e 380
Net income			206ü				100ü										206
Dividends			100*				50*					d	50				100*
Retained earnings
December 31	$		712		$		430								$		712
Balance Sheet	$		54		$		37								$		91
Cash
Receivables — net			90				60					f	17				133
Inventories			100				80					b	12				168
Other assets			70				90										160
Land			50				50										100
Buildings — net			200				150										350
Equipment — net			500				400										900
Investment in Sal			748						c	20		d	58
												e 710
Goodwill									e	30							30
	$1,812				$		867								$1,932
Accounts payable	$		160		$		47		f	17					$		190
Other liabilities			340				90										430
Common stock, $10 par			600				300		e 300								600
Retained earnings			712				430										712
	$1,812				$		867								$1,932

 

Supporting computations

 

Unrealized profit in beginning inventory ($40,000 1/2) = $20,000 Unrealized profit in ending inventory ($48,000 1/4) = $12,000

 

Sal’s income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory equals Income from Sal $108,000.

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

Chapter 5								5-17
Solution P5-9
Preliminary computations					$2,700,000
Investment cost
Implied fair value of San ($2,700,000 / 90%)
						$3,000,000
Less: Book value of San								2,500,000
Goodwill
							$	500,000
Upstream sales
Unrealized profit in December 31, 2013 inventory of Poe
$280,000 – ($280,000   1.4) = $80,000
			inventory of Poe
Unrealized profit in December 31, 2014
$420,000 – ($420,000   1.4) = $120,000
Income from San					$1,000,000
San’s reported net income
Less: Unrealized profit in ending inventory								(120,000)
Add: Unrealized profit in beginning inventory								80,000
San’s adjusted and realized income
							$	960,000
Poe’s 90% controlling interest share of San’s income					$			864,000
10% noncontrolling interest share of San’s income
							$	96,000
Investment balance
					$2,700,000
Initial investment cost
Increase in San’s net assets from December 31, 2011								630,000
to December 31, 2014 ($700,000   90%)
Unrealized profit in December 31, 2014 inventory (90%)								(108,000)
Investment balance December 31, 2014
							$3,222,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

 

 

 

 

 

5-18												Intercompany Profit Transactions — Inventories
Solution P5-10 (continued)
	Poe Corporation and Subsidiary
				Consolidation Workpapers
	for the year ended December 31, 2014
						(in thousands)						Adjustments and				Consolidated
				Poe					San 90%
												Eliminations					Statements
Income Statement		$		8,190			$		5,600		a 5,600				$		8,190
Sales
Income from San				864							d	864
Cost of sales				5,460*					4,000*		b	120	a 5,600				3,900*
													c	80
Other expenses				1,544*					600*								2,144*
Consolidated net income															$		2,146
Noncontrolling int.share											f	96					96*
Controlling share of NI		$		2,050			$		1,000						$		2,050
Retained Earnings		$		1,250											$		1,250
Retained earnings — Po
Retained earnings — San							$		700		e	700
Controlling share of NI				2,050ü					1,000ü								2,050
Dividends				1,000*					500*				d	450			1,000*
													f	50
Retained earnings
December 31		$		2,300			$		1,200						$		2,300
Balance Sheet		$		758			$		500						$		1,258
Cash
Inventory				420					800				b	120			1,100
Other current assets				600					200				g	100			700
Plant assets — net				3,000					3,000								6,000
Investment in San				3,222							c	72	d	414
													e 2,880
Goodwill											e	500					500
			$	8,000			$		4,500						$		9,558
Current liabilities		$		1,700			$		1,300		g	100			$		2,900
Capital stock				4,000					2,000		e 2,000						4,000
Retained earnings				2,300ü					1,200ü								2,300
		$		8,000			$		4,500
Noncontrolling interest January 1											c	8	e	320
Noncontrolling interest December 31													f	46			358
*   Deduct															$		9,558