Solution manual advanced accounting 4e jeter ch07

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CHAPTER 7
Note: The letter A indicated for a question, exercise, or problem means that the question,
exercise, or problem relates to a chapter appendix.
ANSWERS TO QUESTIONS
1. Intercompany profit in depreciable asset transfers is realized as a result of the utilization of the asset
in the generation of revenue. Such utilization is measured by depreciation and, accordingly, the
recognition of the realization of intercompany profit is accomplished through depreciation
adjustments in the periods following the intercompany transfers.
When intercompany sales involve nondepreciable assets, any profit recognized by the selling
affiliate will remain unrealized from the consolidated entity‟s point of view for all subsequent
periods or until the asset is disposed of.
2. Intercompany profit may be included in the selling affiliate‟s carrying value of an asset that is sold
to third parties. If the sales price in the sale to the third party is less that the inflated carrying value,
the selling affiliate will recognize a loss on the sale. From the point of view of the consolidated
entity, however, the carrying value of the asset is its cost to the affiliated group (selling affiliate‟s
cost less unrealized intercompany profit) and if this value is less than the selling price to the third
party, the consolidated group will recognize a gain. In effect, previously unrecognized
intercompany profit is realized upon the sale of the asset to a third party.
3. The only procedural difference in the workpaper entries relating to the elimination of unrealized
intercompany profit in depreciable or nondepreciable assets when the selling affiliate is a less than
wholly owned subsidiary is that the noncontrolling interest in the unrealized intercompany profit at
the beginning of the year must be recognized by debiting or crediting the noncontrolling
shareholders‟ percentage interest in such adjustments to the beginning retained earnings of the
subsidiary.

7-1


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4. Consolidated income is equal to the parent company‟s income from its independent operations that
has been realized in transactions with third parties plus subsidiary income that has been realized in
transactions with third parties and adjusted for the amortization, depreciation, or impairment of the
differences between implied and book values (this total is then allocated to the controlling and
noncontrolling interests). The controlling interest in consolidated income is equal to the parent
company‟s income from its independent operations that has been realized in transactions with third
parties plus its share of subsidiary income that has been realized in transactions with third parties
and adjusted for the amortization, depreciation, or impairment of the differences between implied
and book values.
Controlling Interest in Consolidated Income
Unrealized gain on intercompany
sale (downstream sales)

Net income internally generated by P Company
Gain realized through usage (depreciation adjustment)

Unrealized profit on downstream
sales to S Company (ending
Inventory)

Realized profit (downstream sales) from beginning inventory
P Company's percentage of S Company's adjusted income
realized from third parties

Controlling interest in Consolidated Income

5. It is important to distinguish between upstream and downstream sales of property and equipment
because calculation of the noncontrolling interest in the consolidated financial statements differs
depending on whether the sale giving rise to the intercompany profit is upstream or downstream.

6. Profit relating to the intercompany sale of property and equipment is recognized in the consolidated
financial statements over the useful life of the equipment. It is recognized in the consolidated
financial statements by reducing depreciation expense (thus increasing consolidated income).
7. Consolidated retained earnings may be defined as the parent company‟s cost basis retained earnings
that has been realized in transactions with third parties plus (minus) the parent company‟s share of
the increase (decrease) in subsidiary retained earnings that has been realized in transactions with
third parties from the date of acquisition to the current date and adjusted for the cumulative effect
of amortization of the difference between implied and book values.

7-2


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ANSWERS TO BUSINESS ETHICS CASE

1. The arguments against expensing options include the following:
Valuation is subjective, involves assumptions that may be unrealistic, and may yield
numbers that time will prove to be of limited usefulness.
Disclosure is a reasonable substitute.
Companies may alter their reward systems with the result that lower level employees are
most affected.
Options are not a “real” expense and may never be exercised.
Option valuation opens the door for manipulation as managers can alter their
assumptions.
Diluted earnings per share are already disclosed, and expensing options amounts to
double counting.
Expensing may destroy any advantage held by the U.S. as a world leader in technology,
and distract corporate America from more important issues related to executive
compensation and governance in general.

The arguments in favor of expensing options include the following:
Difficulty or subjectivity in valuation is not a reason for avoidance of recording other
relevant financial statement items, such as deferred taxes, pension liabilities, etc.
Transparency is a major objective of financial reporting, and without proper expensing
of executive compensation, transparency is lacking.
Not expensing options generates costs of misinformation.
If employees are over-compensated, the users need to be aware of that fact.
When options qualify as a “real” expense, as defined in the conceptual framework,
based on the best available information at the balance sheet date, they should be
reflected as such in the financial statements.
2.

Ideally the CEO or CFO should not be a past employee of the company‟s audit firm, as such a
relationship could jeopardize his or her independence. However, it is not unusual for a
company to hire a former auditor, who might later be promoted to CEO or CFO, or might even
be hired to such a position. If this happens, the company might want to consider switching
auditors or taking other measures to make sure that the audit firm is viewed as sufficiently
independent. Under the Sarbanes-Oxley Act of 2002 mandates that the audit firm‟s
independence is impaired if a former member of the audit engagement team accepts a
supervisory accounting position, unless the individual observes a one-year „cooling off‟ period.

3.

The Sarbanes-Oxley Act of 2002 mandates that each member of the audit committee be a
outside member of the board of directors of the issuer and to be independent. Independent
means not receiving any consulting, advisory, or other compensatory fee from the issuer. At
least one member must be a financial expert. The audit committee is responsible for
appointment, compensation, retention, and oversight of the independent auditors.

7-3


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ANSWERS TO EXERCISES
Exercise 7-1
2011
Income of Paradise Company realized in transactions with third parties
Paradise Company‟s share of income of Sherwood Company realized in
transactions with third parties 0.8 ($300,000 - $240,000 + $30,000)
Controlling interest in consolidated net income

$550,000
72,000
$622,000

$840,000 - $600,000 = $240,000
$240,000
= $30,000
8
2012
Income of Paradise Company realized in transactions with third parties
Paradise Company‟s share of income of Sherwood Company realized in
transactions with third parties 0.8 ($300,000 + $30,000)
Controlling interest in consolidated net income

$550,000
264,000
$814,000

Exercise 7-2
2011
Income of Polar Company realized in transitions with third parties
($400,000 - $160,000 + $20,000)
Polar Company‟ share of income of Superior Company realized in
transactions with third parties (.8 $200,000)
Controlling interest in consolidated net income

$260,000
160,000
$420,000

$560,000 - $400,000 = $160,000
$160,000/8= $20,000
2012
Income of Polar Company realized in transactions with third parties
($400,000 + $20,000)
Polar Company‟s share of income of Superior Company realized in
transactions with third parties (.8 $200,000)
Controlling interest in consolidated net income

Exercise 7-3
Cost of equipment
Accumulated Depreciation ($300,000
Book value 1/1 2011
Proceeds from sale
Gain on sale

5 years)

7-4

$420,000
160,000
$580,000

$ 300,000
150,000
150,000
200,000
$ 50,000


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Exercise 7-3 (continued)
Part A 2011
(1) Equipment ($300,000 - $200,000)
Gain on Sale of Equipment
Accumulated Depreciation($300,000)(5/10)

100,000
50,000
150,000

(2) Accumulated Depreciation – Equipment
Depreciation Expense ($50,000/5)

10,000

10,000

2012
(1) Equipment
Beginning Retained Earnings – Pearson (.9 $50,000)
Noncontrolling Interest (.1 $50,000)
Accumulated Depreciation – Equipment
(2) Accumulated Depreciation – Equipment
Depreciation Expense
Beginning Retained Earnings – Pearson (.9
Noncontrolling Interest (.10 $10,000)

100,000
45,000
5,000
150,000
20,000
10,000
9,000
1,000

$10,000)

Part B Controlling interest in Consolidated Net Income for 2012 = $150,000 + .9($100,000 +
$10,000) = $249,000
Exercise 7-4
Part A 2011
Land
Cash

350,000
350,000

2012
None. No further entries are recorded on the books of Procter Company unless and until the
land is sold to outsiders.
Part B (1) 2011
Gain on Sale of Land
Land ($350,000 - $200,000)

150,000
150,000

(2) 2012
Cost Method and Partial Equity Method
Beginning Retained Earnings – Procter Company
(.9 $150,000)
Noncontrolling Interest
(.10 $150,000)
Land
Complete Equity Method
Investment in Silex Company
(.9 $150,000)
Noncontrolling Interest
(.10 $150,000)
Land
7-5

135,000
15,000

150,000

135,000
15,000
150,000


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Exercise 7-5
Cost Method and Partial Equity Method
Part A Upstream Sale
Beginning Retained Earnings – Patterson Co. (.8
Noncontrolling Interest (.2 $300,000)
Land ($800,000 - $500,000)

$300,000)

Part B Downstream Sale
Beginning Retained Earnings – Patterson Co.
Land
Complete Equity Method
Part A Upstream Sale
Investment in Stevens Co. (.8 $300,000)
Noncontrolling Interest (.2 $300,000)
Land ($800,000 - $500,000)
Part B Downstream Sale
Investment in Stevens Co.
Land

240,000
60,000
300,000
300,000
300,000
240,000
60,000
300,000
300,000
300,000

Exercise 7-6
Part A $700,000 - $600,000 = $100,000
Part B $700,000 - $400,000 = $300,000
Part C Cost Method and Partial Equity Method
Beginning Retained Earnings – P Company (.9 $200,000)
Noncontrolling Interest (.1 $200,000)
Gain on Sale of Equipment ($300,000 - $100,000)
Complete Equity Method
Investment in S Company (.9 $200,000)
Noncontrolling Interest (.1 $200,000)
Gain on Sale of Equipment ($300,000 - $100,000)

180,000
20,000
200,000
180,000
20,000
200,000

Exercise 7-7
Part A (1) Sales

100,000
Cost of Sales (Purchases)

100,000

(2) Accounts Payable
Accounts Receivable

17,500
17,500

(3) Cost of Sales (beginning inventory – income statement)
Inventory ($20,000 – ($20,000/1.25))

4,000

(4) Beginning Retained Earnings – Price ($25,000 – ($25,000/1.25)

5,000

7-6

4,000


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Cost of Sales (beginning inventory – income statement)

5,000

Exercise 7-7 (continued)
(5) Beginning Retained Earnings – Price ($5,500
Noncontrolling Interest ($5,500 .2)
Property Plant and Equipment

.8)

5,500

(6) Accumulated Depreciation
Depreciation Expense ($5,500/5)
Beginning Retained Earnings – Price ($1,100
Noncontrolling Interest ($1,100 .2)
Part B Noncontrolling Interest in Consolidated Income .2

4,400
1,100
2,200
1,100
880
220

.8)

($40,000 + $1,100) = $8,220

Exercise 7-8
P Company‟s income realized in transactions with third parties
($300,000 - $40,000 + $10,000)
P Company‟s share of income of S Company realized in transactions with third parties
(.9 ($120,000 - $15,000))
Controlling interest in consolidated net income
$120,000 - $80,000
$40,000
4
$225,000
$75,000
$75,000 –
1.25

$270,000
94,500
$364,500

= $40,000
= $10,000
= $75,000
= $15,000

Exercise 7-9
Sales

390,000
Cost of Goods Sold ($390,000/1.3)
Selling Expense ($260,000 – ($260,000/1.3))
Administrative Expense ($130,000 – ($130,000/1.3))

300,000
60,000
30,000

Exercise 7-10
2010

2011

Architectural Fees
Salary Expense
Other Expense
Building

700,000

Beginning Retained Earnings – Pier One
Building

150,000

400,000
150,000
150,000

Accumulated Depreciation ($150,000/30)
7-7

150,000

5,000


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Depreciation Expense

5,000

Exercise 7-10 (continued)
2012
Beginning Retained Earnings – Pier One
Accumulated Depreciation
Building
Accumulated Depreciation
Depreciation Expense

145,000
5,000
150,000
5,000
5,000

Exercise 7-11
Part A

2011
(1) Sales

400,000

Equipment
Cost of Sales

90,000
310,000

Accumulated Depreciation (($90,000/9)
Depreciation Expense
2012
(2) Cost Method or Partial Equity Method
Beginning Retained Earnings – Pinta Co.
Equipment
Accumulated Depreciation
Depreciation Expense
Beginning Retained Earnings – Pinta Co.
Complete Equity Method
Investment in Standard Co.
Equipment

10,000

90,000
90,000
20,000
10,000
10,000

90,000
90,000

Accumulated Depreciation
Depreciation Expense
Investment in Standard Co.
Part B
2011

10,000

20,000
10,000
10,000

Calculation of Controlling interest in Consolidated Net Income For Year Ended Dec. 31,

Pinta Company‟s net income from operations
Less unrealized profit on 2011 sales of equipment to Standard Company
Plus profit on sales of equipment to Standard Company realized through
depreciation in 2011
Pinta Company‟s income from its independent operations that
has been realized in transactions with third parties
Income of Standard Company that has been realized in transactions
with third parties
Pinta Company‟s share
7-8

$700,000
(90,000)
10,000
620,000
$250,000

80%

200,000


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Controlling Interest in Consolidated Net Income – 2011

$820,000

Exercise 7-12

Original Cost
After Purchase (Sale)
Adjustments

Book
Value
$ 600,000
780,000
$ 180,000

Remaining
life
3 yr
3 yr

Excess
Depreciation

$ 200,000
260,000
$ 60,000

2011
Gain on Sale of Equipment
Equipment (net)

180,000

Accumulated Depreciation
Depreciation Expense

60,000

180,000
60,000

2012
Beginning Retained Earnings – Pomeroy (.9
Noncontrolling Interest (.1 $180,000)
Equipment

$180,000)

Accumulated Depreciation
Depreciation Expense
Beginning Retained Earnings – Pomeroy (.9
Noncontrolling Interest (.1 $60,000)

7-9

162,000
18,000
180,000
120,000

$60,000)

60,000
54,000
6,000


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ANSWERS TO PROBLEMS
Problem 7-1
Intercompany sale of equipment
Accumulated
Cost
Depreciation
Original Cost
$780,000
$400,000
Intercompany Selling Price 500,000
_______
Difference
$280,000
$400,000

Part A
(1)

(2)

(1)

(2)

Part B

Remaining
Carrying Value
Life
Depreciation
$380,000
4 yr
$ 95,000
500,000
4 yr
125,000
$120,000
$ 30,000

2011
Equipment
Gain on Sale of Equipment ($500,000 - $380,000)
Accumulated Depreciation - Equipment

280,000
120,000
400,000

Accumulated Depreciation - Equipment
Depreciation Expense ($120,000/4)(1/2)

15,000
15,000

2012
Equipment (to original cost)
Beginning Retained Earnings - Powell Co. ($120,000
Noncontrolling Interest ($120,000 .2)
Accumulated Depreciation - Equipment

280,000
96,000
24,000

.8)

Accumulated Depreciation - Equipment
Depreciation Expense ($120,000/4)
Beginning Retained Earnings - Powell Co. ($15,000
Noncontrolling Interest ($15,000 .2)

400,000
45,000
.8)

30,000
12,000
3,000

Consolidated Income = $300,000 + $200,000 + $30,000
$ 530,000
Noncontrolling Interest in Consolidated Income = .20 ($200,000 + $30,000)
(46,000)
Controlling Interest in Consolidated Net Income
= $300,000 + [.8 ($200,000 + $30,000)]
$ 484,000

Problem 7-2
Intercompany Sale of Equipment
Accumulated
Cost
Depreciation
Original Cost
$ 260,000
-0Intercompany Selling Price 350,000
_______
Difference
$ 90,000

7 - 10

Carrying Value
$ 260,000
350,000

$ 90,000

Remaining
Life
Depreciation
6 yr
$ 43,333
6 yr
58,333
$ 15,000


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Problem 7-2(continued)
Part A
2011
(1) Sales
Cost of Goods Sold
Equipment

350,000
260,000
90,000

(2) Accumulated Depreciation
Depreciation Expense ($90,000/6)

15,000
15,000

2012
(1) Beginning Retained Earnings - Pico
Equipment

90,000
90,000

(2) Accumulated Depreciation
Depreciation Expense
Beginning Retained Earnings - Pico
Part B

30,000
15,000
15,000

Pico Company's reported net income
$ 600,000
Less unrealized intercompany profit on 1/1/11 sales of equipment to
Seward Company
(90,000)
Plus Profit on 1/1/11 sale realized through depreciation
15,000
Pico Company's reported net income from independent operations
that has been realized in transactions with third parties
525,000
180,000
Plus Pico Company's share of Seward's reported net income (.90 $200,000)
Controlling Interest in Consolidated Net Income

$ 705,000

Problem 7-3
Intercompany sale of equipment
Accumulated
Cost
Depreciation
Original Cost
$450,000
-0Intercompany Selling Price 600,000
_______
Difference
$150,000
Part A
(1)
(2)

P Company’s Books
2011
Equipment
Cash

Carrying Value
$450,000
600,000
$150,000

Remaining
Life
Depreciation

6 yr
$ 75,000
6 yr
100,000
$ 25,000

600,000
600,000

Depreciation Expense - Equipment
Accumulated Depreciation

100,000
100,000

2012
Cash
Accumulated Depreciation ($600,000/6)
Equipment
Gain on Sale of Equipment
7 - 11

550,000
100,000
600,000
50,000


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Problem 7-3 (continued)
P Company
$600,000
(100,000)
500,000
550,000
$50,000

Part B
Cost
Accumulated Depreciation
1/1/2012 Book Value
Proceeds
Gain
*$450,000 -

Consolidated

$ 375,000*
550,000
$ 175,000

1
($450,000) = $375,000
6

Cost Method or Partial Equity Method
Beginning Retained Earnings - P Company (.8 $125,000)
Noncontrolling Interest (.2 $125,000)
Gain on Sale of Equipment ($175,000 - $50,000)

100,000
25,000

Complete Equity Method
Investment in S Company (.8 $125,000)
Noncontrolling Interest (.2 $125,000)
Gain on Sale of Equipment ($175,000 - $50,000)

100,000
25,000

7 - 12

125,000

125,000


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Problem 7-4
Part A

PROUT COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper
For the Year Ended December 31, 2012
Prout
Sexton
Company Company

INCOME STATEMENT
Sales
Dividend Income
Total Revenue
Cost of Goods Sold:
Income Tax Expense
Other Expenses
Total Cost & Expenses
Net /Consolidated Income
Noncontrolling Interest Income
Net Income to Retained Earnings

1,475,000 1,110,000
80,000
(4)
1,555,000 1,110,000
942,000
795,000
187,200
90,000
145,000
90,000
1,274,200
975,000
280,800
135,000
280,800

135,000

STATEMENT OF RETAINED EARNINGS
1/1 Retained Earnings
Prout Company
1,300,000
Sexton Company
Net Income from above
Dividends Declared
Prout Company
Sexton Company
12/31 Retained Earnings
to Balance Sheet

Eliminations
Debit
Credit

Noncontrolling Consolidated
Interest
Balances
2,585,000

80,000

(3)

80,000

8,000

8,000

(2)

120,000 (1)
(3)
1,040,000 (5) 1,040,000
280,800
135,000
80,000

2,585,000
1,737,000
277,200
227,000
2,241,200
343,800
27,000 * (27,000)
27,000
316,800

192,000
8,000

1,380,000

8,000

27,000

80,000

(20,000 )

288,000

7,000

(120,000 )

316,800
(120,000)

(100,000 )
1,460,800 1,075,000

* Noncontrolling interest in consolidated income = .20
Explanations of workpaper entries are on next page

(4)
1,240,000

$135,000 = $27,000

7 - 13

1,576,800


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Problem 7-4 (continued)
Prout
Sexton
Company Company
BALANCE SHEET
Current Assets
Investment in Sexton Company
Fixed Assets
Accumulated Depreciation
Other Assets
Total Assets

568,000
271,000
1,600,000
(1)
1,972,000
830,000 (2)
(375,000 ) (290,000 ) (3)
1,000,800 1,600,000
4,765,800 2,411,000

Eliminations
Debit
Credit

839,000
192,000 (5) 1,792,000
40,000

16,000 (2) 160,000

Other Liabilities
305,000
136,000
Capital Stock
Prout Company
3,000,000
Sexton Company
1,200,000 (5) 1,200,000
Retained Earnings from above
1,460,800 1,075,000
1,240,000
Noncontrolling Interest in Net Assets
(5)
Total Liabilities & Equity

4,765,800 2,411,000

Noncontrolling Consolidated
Interest
Balances

2,688,000

7 - 14

2,842,000
(809,000)
2,600,800

5,472,800
441,000
3,000,000

288,000
448,000
2,688,000

7,000
448,000
455,000

1,576,800
455,000
5,472,800


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Problem 7-4 (continued)
Intercompany Sale of Equipment
Accumulated
Cost
Depreciation
Original Cost
$400,000
$160,000
Intercompany Selling Price 360,000
_______
Difference

$ 40,000
$160,000
Explanation to workpaper entries (not required)
(1) Investment in Sexton Company
Retained Earnings - Prout
To establish reciprocity/convert to equity (.80

Remaining
Life
Depreciation
15 yr
$16,000
15 yr
24,000
$ 8,000

Carrying Value
$240,000
360,000
$120,000

192,000
192,000
($1,040,000 - $800,000))

(2) Equipment
40,000
Beginning Retained Earnings - Prout
120,000
Accumulated Depreciation

160,000
To reduce beginning consolidated retained earnings by amount of unrealized profit at the beginning of the
year, to restate property and equipment to its book value to Prout Company on the date of the intercompany
sale.
(3) Accumulated Depreciation
16,000
Depreciation Expense
8,000
Beginning Retained Earnings - Prout
8,000
To reverse amount of excess depreciation recorded during current year and recognize an equivalent amount
of intercompany profit as realized
(4) Dividend Income
Dividends Declared
To eliminate intercompany dividends

80,000
80,000

(5) Beginning Retained Earnings – Sexton
Common Stocks – Sexton
Investment in Sexton Company ($1,600,000 + $192,000)
Noncontrolling Interest [$400,000 + ($1,040,000 - $800,000) x .20]
To eliminate investment account and create noncontrolling interest account
Part B (1)Cash
Accumulated Depreciation - Fixed Assets ($360,000/15)(2 )
Loss on Sale of Equipment
Plant and Equipment
(2)Beginning Retained Earnings - Prout
Loss on Sale of Equipment

Gain on Sale of Equipment

1,040,000
1,200,000
1,792,000
448,000
300,000
48,000
12,000
360,000
104,000
12,000
92,000

Cost to the Affiliated Companies
Accumulated Depreciation Based on Original Cost ((12/25)
Book Value to the Affiliated Companies on 1/1/13
Proceeds from Sale to Non-affiliate
Gain to Affiliated Companies on Sale

$400,000)

$400,000
192,000
208,000
(300,000)
$92,000

(3) No workpaper entries are necessary for 2014 and later years. As of Dec. 31, 2013, the amount of
profit recorded by the affiliates on their books ($120,000 - $12,000 = $108,000) is equal to the amount

of profit considered realized in the consolidated financial statements ($8,000 + $8,000 + $92,000) =
$108,000.
7 - 15


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Problem 7-5

Debits
Currents Assets
Investment in Sexton Company
Fixed Assets
Other Assets
Dividends Declared
Prout Company
Sexton Company
Cost of Goods Sold
Other Expenses
Income Tax Expense
Totals
Credits
Liabilities
Accumulated Depreciation
Common Stock
Prout Company
Sexton Company
Retained Earnings
Prout Company
Sexton Company

Sales
Dividend Income
Totals

PROUT COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper – For the Year Ended 12/31/12
Prout
Sexton
Eliminations
Consolidated Consolidated Noncontrol. Consolidated
Company Company
Debit
Credit
Income Stat. Ret. Earnings Interest
balances
568,000
271,000
839,000
1,600,000
(1) 192,000 (5) 1,792,000
1,972,000
830,000 (2)
40,000
2,842,000
1,000,800 1,600,000
2,600,800
120,000
942,000
145,000
187,200

6,535,000
305,000
375,000

(120,000 )
100,000
795,000
90,000
90,000
3,776,000

(4)
(3)

80,000
8,000

(20,000 )
1,737,000
227,000
277,200
6,281,800

136,000
290,000 (3)

441,000
809,000

16,000 (2) 160,000

3,000,000

3,000,000
1,200,000 (5) 1,200,000

1,300,000

(2)

120,000 (1)
(3)
1,040,000 (5) 1,040,000
1,475,000 1,110,000
80,000
(4)
80,000
6,535,000 3,776,000

192,000
8,000

1,380,000

(2,585,000 )

Net/ Consolidated Income
Noncontrolling Interest in Income (.20 x $135,000 = $27,000)
Controlling Interest in Consolidated Income

343,800
(27,000)
316,800

Consolidated Retained Earnings

27,000
316,800
1,576,800

Noncontrolling Interest in Net Assets

(5)

448,000

1,576,800
448,000
455,000

2,688,000
Totals

455,000

2,688,000
6,281,800

7 - 16

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Problem 7-6
Part A

PITTS COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper
For the Year Ended December 31, 2012
Pitts
Company

Income Statement
Sales
Dividend Income
Total Revenue
Cost of Goods Sold:
Other Expenses
Total Cost & Expenses
Net/Consolidated Income
Noncontrolling Interest Income
Net Income to Retained Earnings
Statement of Retained Earnings
1/1 Retained Earnings
Pitts Company

1,950,000
60,000
2,010,000
1,350,000

225,000
1,575,000
435,000
435,000

Eliminations
Noncontrolling Consolidated
Debit
Credit
Interest
Balances

1,350,000

3,300,000
(4)

60,000

1,350,000
900,000
150,000
1,050,000
300,000

(3) 15,000

300,000

1,215,000

Shannon Company
Net Income from above
Dividends Declared
Pitts Company
Shannon Company
12/31 Retained Earnings to Balance Sheet

Shannon
Company

60,000

(2)

120,000

15,000

63,000*
63,000

(1) 290,400
(3) 12,000

3,300,000
2,250,000
360,000
2,610,000
690,000

(63,000)
627,000

1,397,400

1,038,000 (5) 1,038,000
435,000

300,000

60,000

15,000

63,000

(150,000)
1,500,000

627,000
(150,000)

(75,000)
1,263,000

*Noncontrolling interest in income = .20 ($300,000 + $15,000) = $63,000.
Explanations of workpaper entries are on separate page.

7 - 17

1,218,000

(4) 60,000
377,400

(15,000)
48,000

1,874,400


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Problem 7-6 (continued)
Balance Sheet
Assets
Inventory
Investment in Shannon Company
Fixed Assets
Accumulated Depreciation
Total Assets
Liabilities
Capital Stock
Pitts Company
Shannon Company
Retained Earnings from above
Noncontrolling Interest
Total Liabilities and Equity

Pitts

Company

Shannon
Company

498,000
225,000
960,000
(1)
2,168,100
2,625,000
(900,000)
(612,000) (3)
2,726,100
2,238,000
465,600

Eliminations
Noncontrolling
Debit
Credit
Interest

723,000
290,400(5)
(2) 390,000
30,000(2)

1,250,400
5,183,100

(2,022,000)
3,884,100

540,000

450,000

915,600

760,500
1,500,000

2,726,100

Consolidated
Balances

760,500
525,000 (5)
1,263,000
(2)
2,238,000

7 - 18

525,000
1,218,000
30,000(5)
(3)
2,483,400

377,400
312,600
3,000
2,483,400

48,000
285,600

1,874,400

333,600

333,600
3,884,100


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Problem 7-6 (continued)
Intercompany Sale of Equipment
Accumulated
Cost
Depreciation
Original Cost
$1,350,000 $540,000
Intercompany Selling Price 960,000
_______
Difference
$ 390,000 $540,000

Explanation of workpaper entries (not required)
(1) Investment in Shannon Company
Retained Earnings – Pitts
To establish reciprocity/convert to equity (.80

Carrying Value
$810,000
960,000
$150,000

Remaining
Life
Depreciation
10 yr
$81,000
10 yr
96,000
$15,000
290,400
290,400

($1,038,000 - $675,000))

(2) Equipment
390,000
Retained Earnings – Pitts ($150,000)(.80)
120,000
Noncontrolling Interest ($150,000)(.20)
30,000
Accumulated Depreciation

540,000
To reduce controlling and noncontrolling interests for their respective shares of unrealized
intercompany profit at beginning of year, to restore property and equipment to its book value
to the selling affiliate on the date of the intercompany sale
(3) Accumulated Depreciation
30,000
Other Expenses (Depreciation Expense)
Retained Earnings – Pitts ($15,000
)
Noncontrolling Interest ($15,000
)
To reverse amount of excess depreciation recorded during year and to
recognize an equivalent amount of intercompany profit as realized
(4) Dividend Income
Dividends Declared

15,000
12,000
3,000

60,000
60,000

(5) Beginning Retained Earnings - Shannon
1,038,000
Common Stock - Shannon
525,000
Investment in Shannon Company ($960,000 + $290,400)
Noncontrolling Interest [$240,000 + ($1,038,000 – $675,000) x.20]
To eliminate investment account and create noncontrolling interest account

Part B Calculation of Consolidated Retained Earnings
Pitts Company's retained earnings on 12/31/12
Amount of Pitts Company‟s retained earnings that have not been realized
in transactions with third parties
Pitts Company's retained earnings that have been realized in
transactions with third parties
Increase in retained earnings of Shannon Company from date
of acquisition to 12/31/12 ($1,263,000 - $675,000)
$588,000
Less unrealized profit on sales of equipment to Pitts on 1/1/11
included therein ($150,000 - $15,000 - $15,000)
(120,000)
Increase in reported retained earnings of Shannon Company
that has been realized in transactions with third parties
468,000
Pitts Company share
___80%
Consolidated retained earnings on 12/31/12
7 - 19

1,250,400
312,600

$1,500,000
0
1,500,000

374,400
$1,874,400

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Problem 7-6 (continued)
Consolidated Retained Earnings
Pitts Company's Retained Earnings on
12/31/12
Pitts' Company‟s share of unrealized
gain on upstream sales
of equipment from S Company
($150,000 - $15,000 - $15,000).8

Pitts Company's share of the increase in
Shannon Company's Retained Earnings
96,000 since acquisition ($1,263,000 - $675,000).8

Consolidated Retained Earnings

7 - 20

$1,500,000

470,400

$1,874,400


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Problem 7-7

Part A

PARSONS COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper
For the Year Ended December 31, 2013
Parsons
Shea
Company Company

Income Statement
Sales
Dividend Income
Total Revenue
Cost of Goods Sold
Expenses
Total Cost & Expense
Net/Consolidated Income
Noncontrolling Interest in Income
Net Income to Retained Earnings
Statement of Retained Earnings
1/1 Retained Earnings
Parsons Company

2,555,500
54,000
2,609,500
1,730,000
654,500
2,384,500
225,000

1,120,000
1,120,000
690,500

Eliminations
Noncontrolling Consolidated
Debit
Credit
Interest
Balances
(6)
(12)
(8)

251,000 (11)
941,500
178,500

375,000
54,000

3,300,500

10,500 (5)
7,500
(6) 375,000
12,667 (3)
9,500

225,000

178,500

452,167

595,000

(2)
(4)
(5)
(11)
139,500 (9)

47,500 (1)
13,500 (3)
6,750
17,100
139,500

178,500

452,167

Shea Company

Net income from above
225,000
Dividend Declared
Parsons Company

(100,000)
Shea Company
12/31 Retained Earnings to Balance Sheet 720,000

3,300,500
2,048,500

392,000

16,283 *
16,283

71,550
9,500

908,667
2,957,167
343,333
(16,283)*
327,050

591,200

392,000

16,283

54,000
527,050

(6,000)
10,283

327,050
(100,000)

(60,000)
258,000

(12)
676,517

7 - 21

818,250


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Problem 7-7 (continued)
Balance Sheet
Cash
Accounts Receivable
Inventory
Other Current Assets
Investment in Shea Company
Difference between Implied and Book
Value
Land
Plant and Equipment

Accumulated Depreciation
Manufacturing Formula
Total Assets
Accounts Payable
Other Liabilities
Capital Stock
Parsons Company
Shea Company
Additional Paid-in Capital
Shea Company
Retained Earnings from above
1/1 Noncontrolling Interest in Net Assets

12/31Noncontrolling Interest in Net Assets
Total Liabilities & Equity

Parsons
Shea
Company Company
119,500
342,000
362,000
40,500
426,000

150,000
825,000
(207,000)

Eliminations

Debit
Credit

132,500
125,000
201,000
13,000

241,000
(53,500)

2,058,000

659,000

295,000
43,000

32,000
19,000

Noncontrolling Consolidated
Interest
Balances
252,000
407,000
552,500
53,500

(7) 60,000

(8) 10,500
(1) 71,550

(9) 497,550

(9) 63,333

(10) 63,333
(4) 15,000

(2) 2,500
(3) 19,000
(10) 63,333

135,000
1,068,500
(291,500)
31,666
2,208,666

(2) 50,000
(11) 31,667

(7) 60,000

267,000
62,000

1,000,000

720,000

2,058,000

1,000,000
300,000

(9) 300,000

50,000
258,000

(9) 50,000
676,517
(4)
1,500 (9)
(5)
750
(11)
1,900

659,000

1,310,383

527,050
55,283

1,310,383

* Noncontrolling interest income = .10 ($178,500 + $7,500 - $10,500 - $12,667) = $16,283
Explanations of the workpaper entries are on a separate page
7 - 22

10,283
51,133

818,250

61,416

61,416
2,208,666


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Problem 7-7 (continued)
Intercompany Sale of Equipment
Accumulated
Cost
Depreciation
Original Cost
$100,000
$50,000
Intercompany Selling Price 97,500
_______
Difference
$ 2,500
$50,000

Remaining
Carrying Value
Life
Depreciation
$50,000
5 yr
$10,000
97,500
5 yr
19,500
$47,500
$ 9,500

Explanations of workpaper entries
(1) Investment in Shea Company
1/1 Retained Earnings - Parsons Co.
To establish reciprocity/convert to equity (.9
(2)

(3)

(4)

(5)

(6)

71,550
71,550

($139,500 - $60,000))

Plant and Equipment ($100,000 - $97,500)
2,500
Beginning Retained Earnings – Parsons ($50,000 - $2,500)
47,500
Accumulated Depreciation
To eliminate unrealized profit on intercompany sale of equipment and to restore
plant and equipment to its book value on the date of intercompany sale
Accumulated Depreciation
Expenses (Depreciation Expense)
Beginning Retained Earnings - Parsons
To reverse excess depreciation recorded during 2013 (.20

19,000
9,500
9,500
$47,500)

Beginning Retained Earnings - Parsons Co. (.90 $15,000)
13,500
Noncontrolling Interest (.10 $15,000)
1,500
Land
To eliminate unrealized profit on intercompany sale of land (upstream sale)
Beginning Retained Earnings - Parsons Co. (.90 $7,500)
Noncontrolling Interest (.10 $7,500)
Cost of Goods Sold
To eliminate intercompany profit in beginning inventory (upstream sale)
Sales

(8)

15,000

6,750
750
7,500

375,000

Cost of Goods Sold (Purchases)
To eliminate intercompany sale
(7)

50,000

375,000

Accounts Payable
Accounts Receivable
To eliminate intercompany payables and receivables

60,000

Cost of Goods Sold (Ending Inventory – Income Statement)
Inventory
To eliminate unrealized profit in ending inventories

10,500

7 - 23

60,000

10,500


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Problem 7-7 (continued)
(9) Beginning Retained Earnings - Shea Co.
139,500
Capital Stock - Shea Co.
300,000
Additional Paid-in Capital - Shea Co.
50,000
Difference between Implied and Book Value
63,333
Investment in Shea ($426,000 + $71,550)
Noncontrolling Interest [$47,333 + ($139,500 – $60,000) x .10]
To eliminate the investment account and create noncontrolling interest account
(10) Manufacturing Formula
Difference between Implied and Book Value
To allocate the difference between implied and book value

63,333

(11) Beginning Retained Earnings - Parsons Co. ($63,333/5 x 1.5) x .90
Noncontrolling Interest ($63,333/5 x 1.5) x .10

Expenses ($63,333/5)
Manufacturing Formula
To amortize the difference between implied and book value

17,100
1,900
12,667

Alternative to entries (10) and (11)
(10a) Beginning Retained Earnings - Parsons Co. ($63,333/5 x 1.5) x .90
Noncontrolling Interest ($63,333/5 x 1.5) x .10
Manufacturing Formula
Expenses ($63,333/5)
Difference between Implied and Book Value
To allocate and amortize the difference between implied and book value
($63,333/5) = $12,667; $63,333 - ($12,667 2.5) = $31,666
(12) Dividend Income
Dividends Declared
To eliminate intercompany dividend ($60,000

497,550
55,283

63,333

31,667

17,100
1,900
31,666

12,667
63,333

54,000
54,000
.90 = $54,000)

7 - 24


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Problem 7-7 (continued)
Part B
Parsons Company's retained earnings on 12/31/2013
Less intercompany unrealized profit on sales of equipment to Shea
on 12/31/2011 included therein ($47,500 - $9,500 - $9,500)
Parsons Company's retained earnings that have been realized in
transactions with third parties
Increase in retained earnings of Shea Company from date of acquisition
to 12/31/2013 ($258,000 - $60,000)
Less cumulative effect of adjustment to date relating to amortization
of manufacturing formula ($19,000 + $12,667)
Less unrealized profit on sales to Parsons in 2012 and 2013 that has not been
realized by sales to third parties ($15,000 + $10,500)
Increase in reported retained earnings of Shea since acquisition that
has been realized in transactions with third parties
Parsons Company share thereof (.90 $140,833)
Consolidated retained earnings on 12/31/2013

$ 720,000
(28,500)
691,500
198,000
(31,667)
(25,500)
140,833
___90%

126,750
$ 818,250

Alternatively
Consolidated Retained Earnings
Unrealized profit on upstream sales
in Parson‟s ending inventory
($15,000 + $10,500)(.90)

Parsons Company's Retained Earnings on 12/31/13

$720,000

22,950 Increase in Shea Company's Retained
Earnings since acquisition
($258,000 - $60,000) = $198,000
Unrealized gain on downstream sales of
Less: amortization of the difference
equipment to Shea Company
between implied and book value
31,667

($47,500 - $9,500 - $9,500)
28,500 Adjusted increase
$166,333
Parson Company‟s share
_ 90%

149,700

Consolidated Retained Earnings

7 - 25

$818,250