Chapter 6 - Solution Manual

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CHAPTER 6 CHAPTER 6

INTERCOMPANY INVENTORY TRANSACTIONS INTERCOMPANY INVENTORY TRANSACTIONS

ANSWERS TO QUESTIONS ANSWERS TO QUESTIONS Q6-1

Q6-1 All All inventory inventory transfers transfers between between related related companies companies must must be be eliminated eliminated to to avoid avoid anan overstatement of revenue and cost of goods sold in the consolidated income statement. In overstatement of revenue and cost of goods sold in the consolidated income statement. In addit

addition, when unrealized profition, when unrealized profits exist s exist at the at the end of end of the period, the eliminatithe period, the eliminations are ons are needed toneeded to avoid overstating inventory and consolidated net income.

avoid overstating inventory and consolidated net income. Q6-2

Q6-2 An inventory transfer at cost results in An inventory transfer at cost results in an overstatement of sales and cost of an overstatement of sales and cost of goods sold.goods sold. While net income is not affected, gross profit ratios and other financial statement analysis may 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.

be substantially in error if appropriate eliminations are not made. Q6-3

Q6-3 An An upstream upstream sale sale occurs occurs when when the the parent parent purchases purchases items items from from one one or or moremore subsidiaries. A downstream sale occurs when the sale is made by the parent to 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 subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation worksheet will know whether to reduce consolidated that the person preparing the consolidation worksheet will know whether to reduce consolidated net incom

net income e assassignigned ed to to the contrthe controllolling ing intintereerest st by by the full the full amoamount unt of of the unrealthe unrealizeized d proprofitfit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream).

interests on a proportionate basis (upstream). Q6-4

Q6-4 As in As in all cases, all cases, the total the total amount of amount of the unrealized the unrealized profit must profit must be eliminated be eliminated in preparingin preparing the consolidated statements. When the profits are

the consolidated statements. When the profits are on the parent company's books, on the parent company's books, consolidatedconsolidated net income and income assigned to the

net income and income assigned to the controlling interest are reduced by the full amount controlling interest are reduced by the full amount of theof the unrealized profit.

unrealized profit. Q6-5

Q6-5 Consolidated net income is reduced by the full amount of the unrealized profits. In theConsolidated net income is reduced by the full amount of the unrealized profits. In the up

upststreream am sasalele, , ththe e ununrerealalizized ed prprofofitits s arare e apappoportrtioionened d bebetwtweeeen n ththe e paparenrent t cocompmpananyy shareholders and the noncontrolling shareholders. Thus, consolidated net income assigned to 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 the controlling and noncontrolling interests is reduced by a pro rata portion of the unrealized profits.

profits. Q6-6

Q6-6 Income assigned to the noncontrolling interest is affected when unrealized profits areIncome 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 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 have no effect on the income assigned to noncontrolling interest because the profits are on the books of the parent.

books of the parent. Q6-7

Q6-7 The basic eliminating entry needed when the item is resold before the end of the periodThe basic eliminating entry needed when the item is resold before the end of the period is:

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Q6-8

Q6-8 The basic eliminating entry needed when one or more of the items are not resold beforeThe basic eliminating entry needed when one or more of the items are not resold before the end of the period is:

the end of the period is: S

Saalleess XXXXXXXXXXXX

C

Coosst t oof f GGoooodds s SSoolldd XXXXXXXXXXXX

IInnvveennttoorryy XXXXXXXXXXXX

The debit to sales is for the full amount of the transfer price. Inventory is credited for the 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 unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold

charged to cost of goods sold by the company making the intercompany sale.by the company making the intercompany sale. Q6-9

Q6-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to anCost 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 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 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 purchased by one company and sold to a related company, the cost of goods sold recorded on the intercorporate sale must be eliminated.

the intercorporate sale must be eliminated. Q6-10

Q6-10 No adjustment to retained earnings is needed if the intercorporate sales have beenNo 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 made at cost or if all intercorporate sales have been resold to an external party in the same accounting period. If all of the intercorporate sales have not been resold by the end of the accounting period. If all of the intercorporate sales have not been resold by the end of the per

periodiod, , undunder er the the fulfully ly adjadjustusted ed equequity ity metmethodhod, , the the pareparent nt defdefers ers unrunrealealizeized d proprofitfits s in in thethe investment in sub and income from sub accounts. This adjustment would be made to retained investment in sub and income from sub accounts. This adjustment would be made to retained earnings under the modified equity method. However, regardless of the parent’s method for earnings under the modified equity method. However, regardless of the parent’s method for accounting for the investment, the amount of the noncontrolling interest is reduced by the NCI’s accounting for the investment, the amount of the noncontrolling interest is reduced by the NCI’s proportionate share of the unrealized

proportionate share of the unrealized profit associated with upstream sales.profit associated with upstream sales. Q6-11

Q6-11 A proportionate share of A proportionate share of the realized retained earnings the realized retained earnings of the subsidiary are assigned of the subsidiary are assigned toto th

the e nononcnconontrtrololliling ng inintetererestst. . AnAny y ununrerealalizized ed prprofofitits s on on upupststreream am sasaleles s arare e dededuductcteded proportionately from the amount assigned to the noncontrolling interest. Unrealized profits on proportionately from the amount assigned to the noncontrolling interest. Unrealized profits on downstream sales do not affect the noncontrolling interest.

downstream sales do not affect the noncontrolling interest. Q6-12

Q6-12 When inventory profits from a prior period intercompany transfer are realized in theWhen 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 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 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 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 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 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 is realized. Thus, knowledge of whether the profits resulted from an upstream or a downstream sale is imperativ

sale is imperative in assigning e in assigning consolidated net income consolidated net income to the appropriate to the appropriate shareholder group.shareholder group. Q6-13

Q6-13 Under the fully adjusted equity method, consolidated retained earnings is not affectedUnder the fully adjusted equity method, consolidated retained earnings is not affected directly by unrealized profits. Unrealized profits are deferred in the investment in sub and directly by unrealized profits. Unrealized profits are deferred in the investment in sub and income from sub accounts on the parent’s books. Income from sub is closed out to retained income from sub accounts on the parent’s books. Income from sub is closed out to retained earnings, so the deferral of unrealized profits indirectly affects retained earnings. As a result, the earnings, so the deferral of unrealized profits indirectly affects retained earnings. As a result, the amount reported for consolidated retained earnings is always equal to the parent’s retained amount reported for consolidated retained earnings is always equal to the parent’s retained

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Q6-15

**

SalSales es betbetweeween n subsubsidsidiariaries ies are are tretreateated d in in the the samsame e manmanner ner as as upsupstretream am salsales.es. Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the 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 end of the period are eliminated and consolidated net income and income assigned to the controlling and noncontrolling interests is reduced.

controlling and noncontrolling interests is reduced. Q6-16

Q6-16

**

When a company is acquired in a business combination the transactions occurringWhen a company is acquired in a business combination the transactions occurring before the combination generally are regarded as transactions with unrelated parties and no 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 adjustments or eliminations are needed. All transactions between the companies following the combination must be fully eliminated.

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SOLUTIONS TO CASES

C6-1 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.

C6-2 Inventory Values and Intercompany Transfers MEMO

To: President

Water Products Corporation

From: , CPA

Re: 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.

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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 (ASC 810)

C6-3 Intercorporate Inventory Transfers MEMO

To: Treasurer

Evert Corporation

From: , CPA

Re: 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;ASC 330]

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.

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intercompany transfer should be eliminated. [ARB 51, Par. 6; ASC 810] The following eliminating entry is required at December 31, 20X2:

Sales 180,000

Inventory 60,000

Cost of Goods Sold 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 0.10). 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.

C6-3 (continued)

The following eliminating entry is required at December 31, 20X3:

Investmentin Sub 54,000

NCIinNA ofSub 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 Investment in Sub and NCI in NA of Sub 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 (ASC 330) ARB 51, Par. 6 (ASC 810)

C6-4 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

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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.

C6-5 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.

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.

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C6-6 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, 2009, Exxon Mobil reported eliminations of $302.6 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 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.

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E6-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted] 1. a 2. c 3. a 4. c

5. c Net assets reported $320,000

Profit on intercompany sale $48,000

Proportion of inventory unsold at year end

($60,000 / $240,000) x 0.25

Unrealized profit at year end (12,000 )

Amount reported in consolidated statements $308,000

6. c Inventory reported by Banks ($175,000 + $60,000) $235,000

Inventory reported by Lamm 250,000

Total inventory reported $485,000

Unrealized profit at year end

[$50,000 x ($60,000 / $200,000)] (15,000 )

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E6-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted]

1. b Cost of goods sold reported by Park $ 800,000 Cost of goods sold reported by Small 700,000

Total cost of goods sold reported $1,500,000

Cost of goods sold reported by Park on

sale to Small ($500,000 x 0.40) (200,000)

Reduction of cost of goods sold reported by Small for profit on intercompany sale

[($500,000 x 4 / 5) x 0.60] (240,000 )

Cost of goods sold for consolidated entity $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 0.375)

$12,000 Unrealized profit on sale

[($30,000 + $25,000) – $52,000]

(3,000 ) Carrying cost of inventory for

Power $ 9,000

5. b 0.20 = $14,000 / [(Stockholders’ Equity $50,000) +(Patent $20,000)]

6. b 14 years = ($28,000 / [(28,000 - $20,000) / 4 years]

E6-3 Multiple Choice – Consolidated Income Statement

1. c

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1. c

2. a Amount paid by Lorn Corporation $120,000

Unrealized profit (45,000 )

Actual cost $ 75,000

Portion sold x 0.80

Cost of goods sold $ 60,000

3. e Consolidated sales $140,000

Cost of goods sold (60,000 )

Consolidated net income $ 80,000

Income to Dresser’s noncontrolling interest:

Sales $120,000

Reported cost of sales (75,000 )

Report income $ 45,000

Portion realized x 0.80

Realized net income $ 36,000

Portion to Noncontrolling

Interest x 0.30

Income to noncontrolling

Interest (10,800)

Income to controlling interest $ 69,200

4. a Inventory reported by Lorn $ 24,000

Unrealized profit ($45,000 x .20) (9,000 )

Ending inventory reported $ 15,000

E6-5 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. $67,000

Cost of goods sold ($30,000 x 2/3) (20,000 )

Consolidated net income $47,000

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E6-6 Realized Profit on Intercompany Sale

a. Journal entries recorded by Nordway Corporation:

(1) Inventory 960,000

Cash (Accounts Payable) 960,000

(2) Cash (Accounts Receivable) 750,000

Sales 750,000

(3) Cost of Goods Sold 600,000

Inventory 600,000

b. Journal entries recorded by Olman Company:

(2) Cash (Accounts Receivable) 1,125,000

Sales 1,125,000

Inventory 750,000

c. Eliminating entry:

Sales 750,000

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a. Journal entries recorded by Nordway Corporation:

Sales 750,000

Inventory 600,000

b. Journal entries recorded by Olman Company:

Sales 810,000

Inventory 540,000

c. Eliminating entry:

Sales 750,000

Inventory 42,000 Calculations Total = Re-Sold + Ending Inventory Sales 750,000 540,000 210,000 COGS 600,000 432,000 168,000 Gross Profit 150,000 108,000 42,000 Gross Profit % 20%

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E6-8 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:

Sales 940,000

Inventory 36,000 Calculations Total = Re-sold + Ending Inventory Sales 940,000 658,000 282,000 COGS 820,000 574,000 246,000 Gross Profit 120,000 84,000 36,000 Gross Profit % 12.77% d. Eliminating entry:

Investment in Draw Company 36,000

CostofGoods Sold 36,000

e. Eliminating entry:

Investment in Draw Company 21,600

NCI in NA of Draw Company 14,400

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E6-9 Income Statement Effects of Unrealized Profit

a. Sale price to Holiday Bakery per bag ($900,000 / 100,000) $ 9.00

Profit per bag [$9.00 - ($9.00 / 1.5)] (3.00 )

Cost per bag $ 6.00

Bags sold by Holiday Bakery (100,000 - 20,000) x 80,000

Consolidated cost of goods sold $480,000

b. Sales 900,000

Inventory ($3.00 x 20,000 bags) 60,000 Calculations Total = Re-sold + Ending Inventory Sales 900,000 720,000 180,000 COGS 600,000 480,000 120,000 Gross Profit 300,000 240,000 60,000 Gross Profit % 33.33%

Required Adjustment to Cost of Goods Sold:

Cost of goods sold — Farmco ($900,000 / 1.5) $ 600,000 Cost of goods sold — Holiday ($9.00 x 80,000 units) 720,000 $1,320,000 Consolidated cost of goods sold ($6.00 x 80,000 units) (480,000 )

Required adjustment $ 840,000

c. Operating income of Holiday Bakery $400,000

Net income of Farmco Products 150,000

$550,000

Less: Unrealized inventory profits (60,000 )

Less: Income assigned to noncontrolling interest

($150,000 - $60,000 unrealized profit) x 0.40 (36,000 )

Income assigned to controlling interest $454,000

Alternate computation:

Operating income of Holiday Bakery $400,000

Net income of Farmco Products $150,000

Unrealized profits ($3.00 x 20,000 units) (60,000 )

Realized net income $ 90,000

Ownership held by Holiday Bakery x 0.60

54,000

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E6-10 Prior-Period Unrealized Inventory Profit

a. Cost per bag of flour ($9.00 / 1.5) $ 6.00

Bags sold x 20,000

Cost of goods sold from inventory held, January 1, 20X9 $120,000 b.

Investment in Farmco 36,000

NCI in NA of Farmco 24,000

$60,000 = 20,000 bags x $3.00

c. Operating income of Holiday Bakery $300,000

Net income of Farmco Products 250,000

$550,000

Add: Inventory profits realized in 20X9 60,000

Less: Income assigned to noncontrolling shareholders

($250,000 + $60,000) x 0.40 (124,000 )

Income assigned to controlling interest $486,000

Alternate computation:

Operating income of Holiday Bakery $300,000

Net income of Farmco Products $250,000

Inventory profits realized in 20X9 60,000

Realized net income $310,000

Ownership held by Holiday Bakery x 0.60

186,000

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Downstream Transaction Calculations Total = Re-sold + Ending Inventory Sales 30,000 24,000 6,000 COGS 20,000 16,000 4,000 Gross Profit 10,000 8,000 2,000 Gross Profit % 33.33%

Worksheet Entry (not requested in problem)

Sales 30,000

Inventory 2,000

Upstream Transaction Calculations

Total = Re-sold + Ending Inventory Sales 80,000 60,000 20,000 COGS 50,000 37,500 12,500 Gross Profit 30,000 22,500 7,500 Gross Profit % 37.50%

Worksheet Entry (not requested in problem)

Sales 80,000

Inventory 7,500

a. Reported sales of Prem Company $400,000

Reported sales of Cooper Company 200,000

$600,000 Intercompany sales by Prem Company in 20X5 $ 30,000

Intercompany sales by Cooper Company in 20X5 80,000 (110,000)

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E6-11 (continued)

b. Cost of goods sold reported by Prem Company $250,000

Cost of goods sold reported by Cooper Company 120,000

$370,000

Adjustment due to intercompany sales (100,500)

Consolidated cost of goods sold $269,500

Adjustment to cost of goods sold:

CGS charged by Prem on sale to Cooper $ 20,000 CGS charged by Cooper ($30,000 - $6,000) 24,000

Total charged to CGS $ 44,000

CGS for consolidated entity

$20,000 x ($24,000 / $30,000) (16,000 )

Required adjustment to CGS $ 28,000

CGS charged by Cooper on sale to Prem $ 50,000 CGS charged by Prem ($80,000 - $20,000) 60,000

Total charged to CGS $110,000

CGS for consolidated entity

$50,000 x ($60,000 / $80,000) (37,500 )

Required adjustment to CGS 72,500

Total adjustment required $100,500

c. Reported net income of Cooper Company $ 45,000

Unrealized profit on sale to Prem Company

$30,000 x ($20,000 / $80,000) (7,500 )

Realizednet income $ 37,500

Noncontrolling interest's share x 0.40

Income assigned to noncontrolling interest $ 15,000

d. Reported net income of Pem Company $100,500

Less: Income from Cooper (20,500 ) $ 80,000

Net income of Cooper Company 45,000

Operating income $125,000

Less: Unrealized inventory profits of Prem

Company [$10,000 x ($6,000 / $30,000)] $ 2,000 Unrealized inventory profits of Copper

Company [$30,000 x ($20,000 / $80,000)] 7,500 Income assigned to noncontrolling

interest 15,000 (24,500 )

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E6-12 Sale of Inventory at a Loss

a. Entries recorded by Trent Company:

Inventory 400,000

Cash 400,000

Purchase inventory.

Cash 300,000

Sales 300,000

Sale of inventory to Gord Corporation.

Inventory 400,000

Record cost of goods sold.

Entries recorded by Gord Corporation

Inventory 300,000

Cash 300,000

Purchase of inventory from Trent.

Cash 360,000

Sales 360,000

Sale of inventory to nonaffiliates.

Inventory 180,000

Record cost of goods sold: $180,000 = $300,000 x .60 b. Consolidated cost of goods sold for 20X8 should be reported

as $240,000 ($400,000 x 0.60).

c. Operating income reported by Gord $230,000

Net income reported by Trent $ 80,000

Unrealized loss on intercorporate sale

($400,000 - $300,000) x 0.40 40,000 120,000

Income to assigned to noncontrolling interest

($120,000x 0.25) (30,000)

(21)

E6-12 (continued)

d. Eliminating entry, December 31, 20X8:

Sales 300,000

Inventory 40,000

Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Trent $400,000

Cost of goods sold recorded by Gord 180,000

Totalrecorded $580,000

Consolidated cost of goods sold (240,000 )

Required elimination $340,000

Intercompany Transaction Calculations

Total = Re-sold + Ending Inventory Sales 300,000 180,000 120,000 COGS 400,000 240,000 160,000 Gross Profit (100,000) (60,000) (40,000) Gross Profit % -33.33%

(22)

E6-13 Intercompany Sales 20X4 Calculations: Total = Re-sold + Ending Inventory Sales 180,000 135,000 45,000 COGS 120,000 90,000 30,000 Gross Profit 60,000 45,000 15,000 Gross Profit % 33.33%

Worksheet Entry (not required in problem)

Sales 180,000

Inventory 15,000 20X5 Calculations: 20X5 Upstream Total = Re-sold + Ending Inventory Sales 135,000 105,000 30,000 COGS 90,000 70,000 20,000 Gross Profit 45,000 35,000 10,000 Gross Profit % 33.33% 20X5 Downstream Total = Re-sold + Ending Inventory Sales 280,000 170,000 110,000 COGS 140,000 85,000 55,000 Gross Profit 140,000 85,000 55,000 Gross Profit % 50.00%

Worksheet Elimination Entries (not required in problem): Eliminate Upstream Transactions

Sales 135,000

Inventory 10,000

Eliminate Downstream Transactions

Sales 280,000

Inventory 55,000

Reversal of 20X4 Upstream Deferral

Investment in Surg 10,500

(23)

(24)

E6-13 (continued)

a. Consolidated net income for 20X4:

Operating income of Hollow Corporation $160,000

Net income of Surg Corporation 90,000

$250,000

Less: Unrealized profit — Surg Corporation (15,000 )

b. Inventory balance, December 31, 20X5:

Inventory reported by Hollow Corporation $ 30,000 Unrealized profit on books of Surg

Corporation

($135,000 - $90,000) x ($30,000/$135,000) (10,000 ) $20,000 Inventory reported by Surg Corporation $110,000

Unrealized profit on books of Hollow Corporation

($280,000 - $140,000) x ($110,000/$280,000) (55,000 ) 55,000

Inventory, December 31, 20X5 $75,000

c. Consolidated cost of goods sold for 20X5:

COGS on sale of inventory on hand January 1, 20X5

$45,000 x ($120,000 / $180,000) $ 30,000

COGS on items purchased from Surg in 20X5

($135,000 - $30,000) x ($90,000 / $135,000) 70,000

COGS on items purchased from Hollow in 20X5

($280,000 - $110,000) x ($140,000 / $280,000) 85,000

Total cost of goods sold $185,000

d. Income assigned to controlling interest:

Operating income of Hollow Corporation $220,000

Net income of Surg Corporation 85,000

$305,000

Add: Inventory profit of prior year realized in 20X5 15,000

Less: Unrealized inventory profit — Surg Corporation (10,000) Unrealized inventory profit — Hollow Corporation (55,000) Income to noncontrolling interest

($85,000 + $15,000 - $10,000) x 0.30 (27,000 )

(25)

E6-14 Consolidated Balance Sheet Worksheet a.

Equity Method Entries on Doorst Corp.'s Books:

Investment in Hingle Co. 49,000

Income from Hingle Co. 49,000

Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 income

Cash 9,800

Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 dividend

Eliminate the deferred gross profit from downstream sales in 20X8

Eliminate the deferred gross profit from upstream sales in 20X8

Book Value Calculations:

NCI 30% + Doorst Corp. 70% = Common Stock + Retained Earnings Original book value 103,200 240,800 150,000 194,000

+ Net Income 21,000 49,000 70,000

- Dividends (4,200) (9,800) (14,000)

Ending book value 120,000 280,000 150,000 250,000

Reversal/Deferred GP Calculations:

Total =

Doorst Corp.'s

share + NCI's share Downstream Deferred GP (10,000) (10,000) 0 Upstream Deferred GP (40,000) (28,000)

(12,000 )

(26)

E6-14 (continued)

Basic elimination entry

Common stock 150,000 ← Original amount invested (100%)

Retained earnings 194,000 ← Beginning balance in retained earnings

Income from Hingle Co. 11,000 ← Doorst’s % of NI - Deferred GP + Reversal

NCI in NI of Hingle Co. 9,000 ← NCI share of NI - Deferred GP + Reversal

Dividends declared 14,000 ← 100% of Hingle Co.'s dividends declared

Investment in Hingle Co. 242,000 ← Net book value - Deferred GP + Reversal

NCI in NA of Hingle Co. 108,000 ← NCI share of BV - Deferred GP + Reversal

Deferral of this year's unrealized profits on inventory transfers

Sales 400,000

Inventory 50,000 20X8 Downstream Transactions Total = Re-sold + Ending Inventory Sales 100,000 75,000 25,000 COGS 60,000 45,000 15,000 Gross Profit 40,000 30,000 10,000 Gross Profit % 40.00% 20X8 Upstream Transactions Total = Re-sold + Ending Inventory Sales 300,000 205,000 95,000 COGS 173,684 118,684 55,000 Gross Profit 126,316 86,316 40,000 Gross Profit % 42.11%

Investment in Income from

Hingle Co. Hingle Co.

Acquisition Price 240,800

70% Net Income 49,000 49,000 70% Net Income

9,800 70% Dividends

38,000 Deferred GP 38,000

Ending Balance 242,000 11,000 Ending Balance

242,000 Basic 11,000

(27)

E6-14 (continued) b. Doorst Corp. Hingle Co. Elimination Entries DR CR Consolidate d Balance Sheet

Cash and Receivables 98,000 40,000 138,000

Inventory 150,000 100,000 50,000 200,000

Buildings & Equipment (net) 310,000 280,000 590,000

Investment in Hingle Co. 242,000 242,000 0

Total Assets 800,000 420,000 0 292,000 928,000 Accounts Payable 70,000 20,000 90,000 Common Stock 200,000 150,000 150,000 200,000 Retained Earnings 530,000 250,000 194,000 14,000 530,000 11,000 350,000 9,000 400,000

NCI in NA of Hingle Co. 108,000 108,000

(28)

*

a. Entries recorded by Klon Corporation

Cash 150,000

Sales 150,000

Sale of inventory to Brant Company.

Inventory 100,000

Entries recorded by Brant Company

Inventory 150,000

Cash 150,000

Purchase of inventory from Klon.

Cash 150,000

Sales 150,000

Sale of inventory to Torkel Company.

Inventory 150,000

Entries recorded by Torkel Company

Inventory 150,000

Cash 150,000

Purchase of inventory from Brant.

Cash 120,000

Sales 120,000

Sale of inventory to nonaffiliates.

Inventory 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)].

(29)

E6-15

*

(continued)

d. Eliminating entry for inventory:

Sales 300,000

Inventory 20,000

Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Klon $100,000

Cost of goods sold recorded by Brant 150,000

Cost of goods sold recorded by Torkel 90,000

Totalrecorded $340,000

Consolidated cost of goods sold (60,000 )

Required elimination $280,000

Computation of reduction to carrying value of inventory

Inventory reported by Torkel $60,000

Inventory balance to be reported (40,000 )

(30)

a. Journal entries recorded by Spice Company:

Record purchases from nonaffiliate.

Sales 60,000

Record sale to Herb Corporation.

Inventory 40,000

Record cost of goods sold to Herb Corporation.

Journal entries recorded by Herb Corporation:

Record purchases from Spice Company.

Sales 90,000

Record sale of items to nonaffiliates.

Inventory 45,000

(4) Income from Herb 5,000

Investment in Herb 5,000

Eliminate unrealized gross profit on inventory purchases from Herb. b. Eliminating entry: Total = Re-sold + Ending Inventory Sales 60,000 45,000 15,000 COGS 40,000 30,000 10,000 Gross Profit 20,000 15,000 5,000 Gross Profit % 33.33% Sales 60,000

Inventory 5,000

(31)

E6-17 Prior-Period Inventory Profits a. 20X8 Sale: Total = Re-sold + Ending Inventory Sales 180,000 170,000 30,000 COGS 120,000 113,333 20,000 Gross Profit 60,000 56,667 10,000 Gross Profit % 33.33% 20X9 Sale: Total = Re-sold + Ending Inventory Sales 240,000 170,000 150,000 COGS 160,000 113,333 100,000 Gross Profit 80,000 56,667 50,000 Gross Profit % 33.33%

Investment in Level Brothers 7,500

NCI in NA of Level Brothers 2,500

Costofgoods sold 10,000

Reversal of 20X8 gross profit deferral

Sales 240,000

Inventory 50,000

Eliminate 20X9 intercompany sale of inventory.

b. 20X8 20X9

Reported net income of Level Brothers $350,000 $420,000

Unrealized profit, December 31, 20X8 (10,000) 10,000

Unrealized profit, December 31, 20X9 (50,000 )

Realized net income $340,000 $380,000

Noncontrolling interest's share of ownership x 0.25 x 0.25 Income assigned to noncontrolling interest $ 85,000 $ 95,000

(32)

P6-18 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. Investment in Bitner 15,000 NCI in NA of Bitner 10,000

Eliminate beginning inventory profit.

Sales 180,000

Inventory 15,000

Eliminate intercompany sale of inventory.

d. Reported net income of Bitner Company $ 90,000

Prior-period profit realized in 20X2 25,000

Unrealized profit on 20X2 sales (15,000 )

Realized income $100,000

Proportion held by noncontrolling interest x 0.40

(33)

P6-19 Unrealized Profit on Upstream Sales 20X2 Total = Re-sold + Ending Inventory Sales 200,000 130,000 70,000 COGS 160,000 104,000 56,000 Gross Profit 40,000 26,000 14,000 Gross Profit % 20.00% 20X3 Total = Re-sold + Ending Inventory Sales 175,000 70,000 105,000 COGS 140,000 56,000 84,000 Gross Profit 35,000 14,000 21,000 Gross Profit % 20.00% 20X4 Total = Re-sold + Ending Inventory Sales 225,000 105,000 120,000 COGS 180,000 84,000 96,000 Gross Profit 45,000 21,000 24,000 Gross Profit % 20.00% 20X2 20X3 20X4

Operating income reported by Pacific $150,000 $240,000 $300,000

Net income reported by Carroll 100,000 90,000 160,000

$250,000 $330,000 $460,000 Inventory profit, December 31, 20X2

$70,000 - ($70,000 / 1.25) (14,000) 14,000

Inventory profit, December 31, 20X3

$105,000 - ($105,000 / 1.25) (21,000) 21,000

Inventory profit, December 31, 20X4

$120,000 - ($120,000 / 1.25) (24,000 )

(34)

Operating income of Master for 20X5 $118,000

Net income of Crown for 20X5 65,000

$183,000

Add: Prior year profits realized by Master 25,000

Prior year profits realized by Crown 40,000

Less: Unrealized profits for 20X5 by Master (14,000)

Unrealized profits for 20X5 by Crown (55,000)

Amortization of differential

($45,000 / 15 years) (3,000 )

Consolidated net income, 20X5 $176,000

Less: Income to noncontrolling interest

($65,000 + $40,000 - $55,000 - $3,000) x 0.30 (14,100 )

Income to controlling interest $161,900

P6-21 Correction of Eliminating Entries

a. Proportion of intercompany inventory purchases resold during 20X5:

Unrealized profit at year end $ 12,000

Intercompany transfer price $140,000

Cost of inventory sold ($140,000 / 1.40) (100,000 )

TotalProfit ÷ 40,000

Proportion of intercompany sale held by

Bolgerat yearend 0.30

Proportion of intercompany purchases resold

by Bolger during 20X5 (1.00 - 0.30) 0.70

b. Eliminating entries, December 31, 20X5:

Intercompany Transactions Total = Re-sold + Ending Inventory Sales 140,000 98,000 42,000 COGS 100,000 70,000 30,000 Gross Profit 40,000 28,000 12,000 Gross Profit % 28.57% Accounts Payable 80,000 Accounts Receivable 80,000

Eliminate intercompany receivable/payable.

Sales 140,000

Inventory 12,000

(35)

P6-22 Incomplete Data

a. Increase in fair value of buildings and equipment:

Consolidated total $ 680,000

Balance reported by Lever (400,000)

Balance reported by Tropic (240,000 )

Increase invalue $ 40,000

b. Accumulated depreciation for consolidated entity:

Accumulated depreciation reported by Lever $180,000

Accumulated depreciation reported by Tropic 110,000

Cumulative write-off of differential

($5,000x 6years) 30,000

Accumulated depreciation for consolidated entity $320,000

c. Amount paid by Lever to acquire ownership in Tropic:

Common stock outstanding $ 60,000

Retained earnings at acquisition 30,000

Total book value at acquisition $ 90,000

Increase in value of buildings and equipment 40,000

Fair value of net assets acquired $130,000

Proportion of ownership acquired x 0.75

Amount paid by Lever $ 97,500

d. Investment in Tropic Company stock reported at December 31, 20X6:

Tropic's common stock outstanding December 31, 20X6 $ 60,000 Tropic's retained earnings reported December 31, 20X6 112,000

Total bookvalue $172,000

Proportion of ownership held by Lever x 0.75

Lever's share of net book value $129,000

Unamortized differential ($5,000 x 2 years) x 0.75 7,500

20X6 Gross Profit Deferral on Downstream Sale (3,000)

Investment in Tropic Company stock $133,500

e. Intercorporate sales of inventory in 20X6:

Sales reported by Lever $420,000

Sales reported by Tropic 260,000

Total sales $680,000

Sales reported in consolidated income statement (650,000)

(36)

f. Unrealized inventory profit, December 31, 20X6:

Inventory reported by Lever $125,000

Inventory reported by Tropic 90,000

Totalinventory $215,000

Inventory reported in consolidated balance sheet (211,000)

Unrealized inventory profit, December 31, 20X6 $ 4,000

g. Eliminating entry to remove the effects of intercompany inventory sales during 20X6:

Sales 30,000

Inventory 4,000

h. Unrealized inventory profit at January 1, 20X6:

Cost of goods sold reported by Lever $310,000

Cost of goods sold reported by Tropic 170,000

Reduction of cost of goods sold for intercompany

sales during20X6 (26,000)

Adjusted cost of goods sold $454,000

Cost of goods sold reported in consolidated

income statement (445,000)

Additional adjustment to cost of goods sold

due to unrealized profit in beginning inventory $ 9,000

i. Accounts receivable reported by Lever at December 31, 20X6:

Accounts receivable reported for consolidated entity $145,000

Accounts receivable reported by Tropic (55,000 )

Difference $ 90,000

Adjustment for intercompany receivable/payable:

Accounts payable reported by Lever $ 86,000

Accounts payable reported by Tropic 20,000

Total reported accounts payable $106,000

Accounts payable reported for consolidated

entity (89,000)

Adjustment for intercompany receivable/payable 17,000

(37)

P6-23 Eliminations for Upstream Sales a.

Equity Method Entries on Clean Air's Books:

Investment in Special Filter 32,000

Income from Special Filter 32,000

Record Clean Air's 80% share of Special Filter's 20X8 income Investment in Special Filter 16,000

Reverse of the deferred gross profit from upstream sales in 20X7

Investment in Special Filter 12,000

Eliminate the deferred gross profit from upstream sales in 20X8

Book Value Calculations: NCI 20% + Clean Air 80% = Common Stock + Retained Earnings Original book value 62,000 248,000 90,000 220,000

+ Net Income 8,000 32,000 40,000

Total =

Clean Air's

share + NCI's share

Downstream Reversal 0 0

Upstream Reversal 20,000 16,000 4,000 Downstream Deferred GP 0 0

Upstream Deferred GP (15,000) (12,000) (3,000)

Total 5,000 4,000 1,000

Basic elimination entry:

Common stock 90,000 ← Original amount invested (100%) Retained earnings 220,000 ← Beginning balance in RE

(38)

P6-23 (continued) 20X7 Upstream Transactions 20X8 Beg. Inventory Sales 60,000 COGS 40,000 Gross Profit 20,000 Gross Profit % 33.33% 20X8 Upstream Transactions Total = Re-sold + Ending Inventory Sales 150,000 105,000 45,000 COGS 100,000 70,000 30,000 Gross Profit 50,000 35,000 15,000 Gross Profit % 33.33%

Sales 150,000

Inventory 15,000

Reversal of last year's deferral:

Investment in Special Filter 16,000 NCI in NA of Special Filter 4,000

(39)

P6-23 (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) $ 45,000

Net income of Superior Filter

($200,000 - $140,000 - $20,000) 40,000

$ 85,000

Inventory profit realized from 20X7 20,000

Unrealized inventory profit for 20X8 (15,000 )

Consolidated net income $ 90,000

Income assigned to noncontrolling interest

($40,000 + $20,000 - $15,000) x 0.20 (9,000 )

Income assigned to controlling interest $ 81,000

c. Noncontrolling interest, December 31, 20X8:

Common stock $ 90,000

Retained earnings ($220,000 + $40,000) 260,000

Less: Unrealized inventory profit (15,000 )

$335,000 Proportion of stock held by noncontrolling interest x 0.20

(40)

a. Consolidated net income for 20X8:

Operating income of Ajax Corporation $80,000

Unrealized profit, December 31, 20X8

($35,000 - $15,000) x ($7,000 / $35,000) (4,000 ) $ 76,000

Net income of Beta Corporation $37,500

Profit realized from 20X7

($30,000 - $24,000) x ($10,000 / $30,000) 2,000 Unrealized profit, December 31, 20X8

($72,000 - $63,000) x ($12,000 / $72,000) (1,500 ) 38,000

Net income of Cole Corporation $20,000

Profit realized from 20X7

($72,000 - $60,000) x ($18,000 / $72,000) 3,000 Unrealized profit, December 31, 20X8

($45,000 - $27,000) x ($15,000 / $45,000) (6,000 ) 17,000

b. Inventory balance, December 31, 20X8:

Balance per Beta Corporation $ 7,000

Less: Unrealized profit (4,000 ) $ 3,000

Balance per Cole Corporation $12,000

Less: Unrealized profit (1,500 ) 10,500

Balance per Ajax Corporation $15,000

Less: Unrealized profit (6,000 ) 9,000

Inventory balance per consolidated statement $22,500

c. Income assigned to noncontrolling interest in 20X8:

Realized income of Beta Corporation $38,000

Proportion of stock held by

noncontrolling interest x 0.30 $11,400

Realized income of Cole Corporation $17,000

Proportion of stock held by

noncontrolling interest x 0.10 1,700

(41)

P6-25 Consolidation with Inventory Transfers and Other Comprehensive Income 20X4 Downstream Transactions Total = Re-sold + Ending Inventory Sales 108,000 60,000 48,000 COGS 90,000 50,000 40,000 Gross Profit 18,000 10,000 8,000 Gross Profit % 16.67% 20X4 Upstream Transactions Total = Re-sold + Ending Inventory Sales 45,000 27,000 18,000 COGS 30,000 18,000 12,000 Gross Profit 15,000 9,000 6,000 Gross Profit % 33.33% 20X5 Downstream Transactions Total = Re-sold + Ending Inventory Sales 36,000 24,000 12,000 COGS 30,000 20,000 10,000 Gross Profit 6,000 4,000 2,000 Gross Profit % 16.67% 20X5 Upstream Transactions Total = Re-sold + Ending Inventory Sales 48,000 6,000 42,000 COGS 32,000 4,000 28,000 Gross Profit 16,000 2,000 14,000 Gross Profit % 33.33%

Tall Corp. Tall Corp.

Beg. Balance 1,246,600

54,000 90% Dividends 18,000

90% of OCI Gain

20X4 Reversal 13,400 14,600 Deferred GP 14,600 13,400 20X4 Reversal

Ending Balance 1,290,400 79,800 Ending Balance

Reversal 13,400 1,285,800 Basic 79,800 18,000 OCI Entry

(42)

P6-25 (continued)

a. Balance in investment account at December 31, 20X5: Proportionate share of Tall's net assets,

January 1 ([$1,400,000 x .90] – 8,000 – [6,000 x 0.90]) $1,246,600 Proportionate share of 20X5 net income

($90,000 x0.90) 81,000

Proportionate share of other comprehensive

income for 20X5 ($20,000 x 0.90) 18,000

Proportionate share of dividends received

($60,000 x0.90) (54,000)

Reversal of deferred gain from 20X4 downstream transaction 8,000 Reversal of deferred gain from 20X4 upstream transaction

($6,000 x .090)

5,400

Deferred gain from downstream transaction (2,000)

Proportionate share of deferred gain from upstream

transaction ($14,000 x 0.90) (12,600)

Balance in investment account December 31, 20X5 $1,290,400

b. Investment income for 20X5:

Net income reported by Tall $90,000

Proportion of ownership held by Priority x 0.90

Priority’s share of reported income from Tall 81,000

Reversal of deferred gain from 20X4 downstream transaction 8,000 Reversal of deferred gain from 20X4 upstream transaction

($6,000 x 0.90)

5,400

Deferred gain from downstream transaction (2,000)

Proportionate share of deferred gain from upstream

transaction ($14,000 x 0.90) (12,600)

Investment income for 20X5 $79,800

c. Income to noncontrolling interests for 20X5:

Net income reported by Tall $90,000

20X4 inventory profits realized in 20X5

($15,000 x0.40) 6,000

20X5 unrealized inventory profits

$30,000 - [$30,000 x ($48,000 / $90,000)] (14,000 )

Realized netincome $82,000

Proportion of ownership held by noncontrolling interest x 0.10

(43)

P6-25 (continued)

d. Balance assigned to noncontrolling interest in consolidated balance sheet:

Net assets reported by Tall, January 1 $1,400,000

Net income for20X5 90,000

Dividends paid in 20X5 (60,000 )

Net assets reported, December 31, 20X5 $1,430,000

Unrealized inventory profits at

December 31, 20X5 (14,000)

Other comprehensive income in 20X5 20,000

Adjusted net assets, December 31, 20X5 $1,436,000

Proportion of ownership held by noncontrolling

interest x 0.10

Net assets assigned to noncontrolling interest $ 143,600

e. Inventory reported in consolidated balance sheet:

Inventory held by Priority $120,000

Less: Unrealized profit (14,000 ) $106,000

Inventory held by Tall $100,000

Less: Unrealized profit

$6,000 - [$6,000 x ($24,000 / $36,000)] (2,000 ) 98,000

Inventory $204,000

f. Consolidated net income for 20X5:

Operating income of Priority $240,000

Net income ofTall 90,000

Total unadjusted income $330,000

20X4 inventory profits realized in 20X5

($6,000+$8,000) 14,000

Unrealized inventory profits on 20X5 sales

($14,000 + $2,000) (16,000 )

g. Eliminating entries, December 31, 20X5

(44)

(45)

P6-25 (continued) Reversal/Deferred GP Calculations: Total = Priority Corp.'s share + NCI's share Downstream Reversal 8,000 8,000 Upstream Reversal 6,000 5,400 600 Downstream Deferred GP (2,000) (2,000) Upstream Deferred GP (14,000) (12,600) (1,400) Total (2,000) (1,200) (800)

Common stock 400,000 ← Original amount invested (100%) Additional paid-in capital 200,000 ← Beginning balance in APIC Retained earnings 790,000 ← Beginning balance in RE Accumulated OCI 10,000 ← Beginning balance in Acc. OCI Income from Tall Corp. 79,800 ← PC.’s % of NI - Def. GP + Reversal NCI in NI of Tall Corp. 8,200 ← NCI share of NI - Def. GP + Reversal

Investment in Tall Corp. 1,285,800 ← Net book value - Def. GP + Reversal NCI in NA of Tall Corp. 142,200 ← NCI share of BV - Def. GP + Reversal Other Comprehensive Income Entry:

OCI from Tall Corp. 18,000

OCI to the NCI 2,000

Investment in Tall Corp. 18,000

NCI in NA of Tall Corp. 2,000

Reversal of last year's deferral:

Investment in Tall Corp. 13,400 NCI in NA of Tall Corp. 600

Sales 126,000

(46)

20X5 Downstream Total = Re-sold + Ending Inventory, 20X5 Sales 150,000 90,000 60,000 COGS 100,000 60,000 40,000 Gross Profit 50,000 30,000 20,000 Gross Profit % 33.33% 20X5 Upstream Total = Re-sold + Ending Inventory, 20X5 Sales 100,000 30,000 70,000 COGS 70,000 21,000 49,000 Gross Profit 30,000 9,000 21,000 Gross Profit % 30.00% Beg Inventory, 20X6 = Re-sold + Ending Inventory, 20X6 Sales 70,000 50,000 20,000 COGS 49,000 35,000 14,000 Gross Profit 21,000 15,000 6,000 Gross Profit % 30.00% 20X6 Downstream Total = Re-sold + Ending Inventory, 20X6 Sales 60,000 54,000 6,000 COGS 40,000 36,000 4,000 Gross Profit 20,000 18,000 2,000 Gross Profit % 33.33% 20X6 Upstream Total = Re-sold + Ending Inventory, 20X6 Sales 240,000 60,000 180,000 COGS 200,000 50,000 150,000 Gross Profit 40,000 10,000 30,000 Gross Profit % 16.67%

(47)

a. Eliminating entries:

Investment in Slinky 20,000

Cost of goods sold 20,000

Eliminate beginning inventory profit of Proud Company.

Investment in Slinky 12,600

NCI in NA of Slinky 8,400

Inventory 6,000

Eliminate beginning inventory profit of Slinky Company.

Sales 60,000

Inventory 2,000

Eliminate intercompany sale of inventory by Proud Company.

Sales 240,000

Inventory 30,000

Eliminate intercompany sale of inventory by Slinky Company. b. Computation of cost of goods sold for consolidated entity:

Inventory produced by Proud in 20X5

($100,000 x0.40) $ 40,000

Inventory produced by Slinky in 20X5

($70,000x 0.50) 35,000

Inventory produced by Proud in 20X6

($40,000x 0.90) 36,000

Inventory produced by Slinky in 20X6

($200,000 x0.25) 50,000

Cost of goods sold reported in

(48)

a.

Equity Method Entries on Bell Co.'s Books:

Investment in Troll Corp. 18,000

Income from Troll Corp. 18,000

Record Bell Co.'s 60% share of Troll Corp.'s 20X2 income

Cash 6,000

Record Bell Co.'s 60% share of Troll Corp.'s 20X2 dividend

Eliminate the deferred gross profit from downstream sales in 20X2

Reverse of the deferred gross profit from upstream sales in 20X1

Eliminate the deferred gross profit from upstream sales in 20X2 b.

Book Value Calculations: NCI 40% + Bell Co. 60% = Common Stock + Retained Earnings Original book value 60,000 90,000 100,000 50,000

+ Net Income 12,000 18,000 30,000

- Dividends (4,000) (6,000) (10,000)

Total =

Bell Co.'s

share + NCI's share

Downstream Reversal 0 0

Upstream Reversal 3,400 2,040 1,360

Downstream Deferred GP (6,500) (6,500)

Upstream Deferred GP (4,200) (2,520) (1,680)

(49)

P6-27 (continued)

Common stock 100,000 ← Original amount invested (100%) Retained earnings 50,000 ← Beginning balance in RE

Income from Troll Corp. 11,020 ← Bell’s % of NI - Def. GP + Reversal NCI in NI of Troll Corp. 11,680 ← NCI share of NI - Def. GP + Reversal

Dividends declared 10,000 ← 100% of Troll Corp.'s dividends Investment in Troll Corp. 95,020 ← Net book value - Def. GP + Reversal NCI in NA of Troll Corp. 67,680 ← NCI share of BV - Def. GP + Reversal Excess Value (Differential) Calculations:

NCI 40% + Bell Co. 60% = Land Beginning balance 7,200 10,800 18,000 Changes 0 0 0 Ending balance 7,200 10,800 18,000

Excess value (differential) reclassification entry:

Land 18,000

Investment in Troll Corp. 10,800 NCI in NA of Troll Corp. 7,200 Optional accumulated depreciation elimination entry

Accumulated depreciation 45,000

Building & equipment 45,000 Reversal of last year's deferral:

Investment in Troll Corp. 2,040 NCI in NA of Troll Corp. 1,360

Sales 63,000

(50)

P6-27 (continued) 20X2 Downstream Transactions Total = Re-sold + Ending Inventory Sales 28,000 15,000 13,000 COGS 14,000 7,500 6,500 Gross Profit 14,000 7,500 6,500 Gross Profit % 50.00% 20X1 Upstream Transactions Total = Re-sold + Ending Inventory Sales 42,500 34,000 8,500 COGS 25,500 20,400 5,100 Gross Profit 17,000 13,600 3,400 Gross Profit % 40.00% 20X2 Upstream Transactions Total = Re-sold + Ending Inventory Sales 35,000 24,500 10,500 COGS 21,000 14,700 6,300 Gross Profit 14,000 9,800 4,200 Gross Profit % 40.00%

Troll Corp. Troll Corp.

Beginning

Balance 98,760

6,000 60% Dividends

20X1 Reversal 2,040 9,020 Deferred GP 9,020 2,040 20X1 Reversal

Ending Balance 103,780 11,020 Ending Balance

Reversal 2,040 95,020 Basic 11,020 10,800 Excess Reclass.

(51)

P6-27 P6-27 (continued)(continued) c. c. Bell Co. Bell Co. Troll Troll Corp. Corp. Eliminatio

Elimination n EntriesEntries D DR R CCR R CCoonnssoolliiddaatteedd Income Statement Income Statement S Saallees s 220000,,00000 0 112200,,00000 0 6633,,00000 0 225577,,000000 L Leessss: : CCOOGGS S ((9999,,880000) ) ((6611,,000000) ) 5522,,33000 0 ((110055,,110000)) 3,400 3,400 L

Leessss: : DDeepprreecciiaattiioon n EExxppeennsse e ((2255,,000000) ) ((1155,,000000) ) ((4400,,000000)) L

Leessss: : IInntteerreesst t EExxppeennsse e ((66,,000000) ) ((1144,,000000) ) ((2200,,000000)) IInnccoomme e ffrroom m TTrroolll l CCoorrpp. . 1111,,00220 0 1111,,00220 0 00 C

Coonnssoolliiddaatteed d NNeet t IInnccoomme e 8800,,22220 0 3030,,00000 0 7744,,00220 0 5555,,77000 0 9911,,990000 N

NCCI I iin n NNeet t IInnccoomme e 1111,,66880 0 ((1111,,668800))

Controlling Interest in Net Controlling Interest in Net

IInnccoomme e 8800,,22220 0 3300,,00000 0 8855,,77000 0 5555,,77000 0 8800,,222200 Statement of Retained Earnings

Statement of Retained Earnings

B

Beeggiinnnniinng g BBaallaanncce e 222277,,99660 0 5500,,00000 0 5500,,00000 0 222277,,996600 Net Income

Net Income 80,220 80,220 30,000 30,000 85,700 85,700 55,70055,700 80,22080,220 L

Leessss: : DDiivviiddeenndds s DDeeccllaarreed d ((4400,,000000) ) ((1100,,000000) ) 1100,,00000 0 ((4400,,000000))

E

Ennddiinng g BBaallaanncce e 226688,,11880 0 7700,,00000 0 113355,,77000 0 6655,,77000 0 226688,,118800 Balance Sheet

Balance Sheet

Ca

Cash sh aand nd AcAccocoununts ts RRececeieivavablble e 6969,4,400 00 551,1,20200 0 12120,0,606000 IInnvveennttoorry y 6600,,00000 0 5555,,00000 0 1100,,77000 0 110044,,330000 L

Laannd d 4400,,00000 0 3300,,00000 0 1188,,00000 0 8888,,000000 B

Buuiillddiinnggs s & & EEqquuiippmmeennt t 552200,,00000 0 335500,,00000 0 4455,,00000 0 882255,,000000 L

Leessss: : AAccccuummuullaateted d DDeepprreeciciaatitioon n ((117755,0,00000) ) ((7755,,000000) ) 4545,,00000 0 ((220055,0,00000)) IInnvveessttmmeennt t iin n TTrroolll l CCoorrpp. . 110033,,77880 0 22,,00440 0 9955,,00220 0 00

10,800 10,800 T Toottaal l AAsssseetts s 616188,,11880 0 441111,,22000 0 6655,,00440 0 116611,,55220 0 993322,,990000 Accounts Payable Accounts Payable 68,800 68,800 41,200 41,200 110,000110,000 B Boonndds s PPaayyaabblle e 8800,,00000 0 220000,,00000 0 228800,,000000 B Boonndds s PPrreemmiiuum m 11,,22000 0 11,,220000 C Coommmmoon n SSttoocck k 220000,,00000 0 110000,,00000 0 110000,,00000 0 220000,,000000 Retained Earnings Retained Earnings 268,180 268,180 70,000 70,000 135,700 135,700 65,70065,700 268,180268,180 N

NCCI I iin n NNA A oof f TTrroolll l CCoorrpp. . 1,,313660 0 6677,,66880 0 7733,,552200 7,200

7,200

T