Solution manual advanced accounting 10e by beams ch06

Chapter 6
INTERCOMPANY PROFIT TRANSACTIONS — PLANT ASSETS
Answers to Questions
1
The objective of eliminating the effects of intercompany sales of plant assets is to reflect plant assets and
related depreciation amounts in the consolidated financial statements at cost to the consolidated entity.
2

Consolidation procedures for eliminating unrealized profit on plant assets are affected by the direction
of the sale. The full amount of unrealized profit or loss on downstream sales (parent to subsidiary) is
charged or credited to the controlling interest. In the case of upstream sales, however, unrealized profit
or loss is allocated between controlling and noncontrolling interests. Because there is no allocation to
noncontrolling interests in the case of a 100 percent owned subsidiary, consolidation procedures are the
same for upstream sales as for downstream sales.

3

Unrealized gains and losses from intercompany sales of land are realized from the viewpoint of the
selling affiliate when the purchasing affiliate resells the land to parties outside the consolidated entity.
This is also the point at which the consolidated entity recognizes gain or loss on the difference between
the selling price to outside parties and the cost to the consolidated entity.

4

Noncontrolling interest share is not affected by downstream sales of land because the realized income of
the subsidiary is not affected by downstream sales. In the case of upstream sales of land, the reported
income of the subsidiary is adjusted downward for unrealized profits and upward for unrealized losses
to determine realized income. Since noncontrolling interest share is computed on the basis of realized
subsidiary income, the computation of noncontrolling interest share is affected by upstream sales of
land.

5

Consolidation procedures are designed to eliminate 100 percent of all unrealized profit or loss on all
intercompany transactions. The issue is not whether 100 percent of the unrealized profit or loss is
eliminated, but if the amount eliminated is allocated between controlling and noncontrolling interests. In
the case of an upstream sale of land, 100 percent of the unrealized profit from the sale is eliminated, but
the amount is allocated between controlling and noncontrolling interests in relation to their ownership
holdings.

6

Unrealized gains and losses from intercompany sales of depreciable assets are realized through use if the
assets are held within the consolidated entity and through sale if the assets are sold to outside parties.
The process of recognizing previously unrealized gains and losses through use is a piecemeal recognition
over the remaining use life of the depreciable asset.

7

The computation of noncontrolling interest share in the year of an upstream sale of depreciable plant
asset is as follows:
Unrealized
Unrealized
Gain on Sale Loss on Sale
Income of subsidiary as reported
XXX
XXX
Deduct: Gain on sale of plant assets
- XX
Add: Loss on sale of plant assets
+ XX

Add: Piecemeal recognition of gain on sale
of plant assets
+ X
Deduct: Piecemeal recognition of loss on
sale of plant assets
- X
Realized subsidiary income
XXX
XXX
X%
X%
Noncontrolling nterest percentage
XXX
XXX
Noncontrolling interest share

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6-1


6-2

Intercompany Profit Transactions — Plant Assets

8

The effects of unrealized gains on intercompany sales of plant assets are charged against the parent
company’s income from subsidiary account in the year of the intercompany sale, with equal amounts
being deducted from the investment in subsidiary account. In subsequent years, the income from
subsidiary and investment in subsidiary accounts are increased for depreciation on the unrealized gain

that is recorded on the subsidiary books for downstream sales or for the parent’s proportionate share for
upstream sales. If the unrealized gain relates to land, no entries are needed until the land is sold to
entities outside of the affiliation structure.

9

Accounting procedures are designed to eliminate the effects of intercompany sales of plant assets on
both parent company income and consolidated net income until the gains and losses on such sales are
realized through use or through sale to outside parties. In years subsequent to intercompany sales of
depreciable plant assets, the effect on parent company income is eliminated by adjusting depreciation
expense to a cost basis for the consolidated entity.

10

Consolidation working paper entries to eliminate the effect of a gain on sale of depreciable plant assets
from a downstream sale are illustrated as follows:
Year of sale
Gain on sale
Accumulated depreciation
Depreciation expense
Plant assets
To reduce plant assets and related depreciation amounts to a cost basis to the
consolidated entity and to eliminate unrealized gain on intercompany sale.
Subsequent years
Investment in subsidiary
Accumulated depreciation
Depreciation expense
Plant assets
To reduce plant assets and related depreciation amounts to a cost basis to the
consolidated entity and to adjust the investment account for unrealized profits at the

beginning of the current year.

SOLUTIONS TO EXERCISES
Solution E6-1
1

c

2

a

3

c

4

d

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Chapter 6

6-3

Solution E6-2
1

Parsen’s income from Samit will be decreased by $25,000 as a result of
the following entry:
Income from Samit
25,000
Investment in Samit
25,000
To eliminate unrealized gain on downstream sale of land.
Parsen’s net income for 2012 will not be affected by the sale since the
$25,000 gain will be offset by a $25,000 decrease in income from Samit.
The investment in Samit account at December 31, 2012 will be $25,000
less as a result of the sale as indicated by the above entry. (The total
balance sheet effect is to reduce land to its cost, reduce the
investment account for the profit, and increase cash or other assets for
the proceeds.)

2

The consolidated financial statements will not be affected because the
gain on the sale is eliminated in the consolidated income statement and
the land is reduced to its cost basis to the consolidated entity. A
working paper adjustment would show:
Gain on sale of land
Land

25,000
25,000

3

Neither Parsen’s income from Samit or net income for 2013 will be

affected by the 2012 sale of land. The investment in Samit account,
however, will still be $25,000 less than if the land had not been sold,
even though there are no changes in the investment account during 2013.

4

The sale of the land will not affect Samit’s net income since it is
being sold at Samit’s cost. However, the sale triggers recognition of
the postponed gain on the original sale from Parsen to Samit.
Investment in Samit
Income from Samit
To recognize the gain deferred in 2006.

25,000
25,000

Consolidated income will also feel the same impact of the recognition of
the deferred gain.
Investment in Samit
Gain on sale of land

25,000
25,000

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6-4

Intercompany Profit Transactions — Plant Assets

Solution E6-3
1a

Consolidated net income
$

2010
400,000

$

(10,000)
362,000 $

54,000
--454,000

$

8,000

$

6,000

$

300,000 $
72,000

(9,000)
363,000 $

400,000
54,000
--454,000

8,000 $
(1,000)
7,000 $

6,000
--6,000

Pruitt’s separate income
Add: Equity in Silverman’s income
2009 $80,000 × 90%
2010 $60,000 × 90%
Gain on sale of land
Consolidated net income
1b

$

72,000

Noncontrolling interest share
Silverman’s net income × 10%

2a

Consolidated net income
Pruitt’s separate income
Add: Equity in Silverman’s income
Less: Gain on land × 90%
Consolidated net income

2b

2009
300,000

$

Noncontrolling interest share
Silverman’s net income × 10%
Less: Gain on land × 10%
Noncontrolling interest share

$
$

Solution E6-4
1

Entries for 2009
Cash

90,000
Investment in Salmark

To record dividends received from Salmark.

Investment in Salmark
Income from Salmark

90,000
108,000

To record income from Salmark computed as follows:
Share of Salmark’s reported income ($150,000 × 90%)
Less: Gain on building sold to Salmark
Add: Piecemeal recognition of gain on building
($30,000/10 years)
Income from Salmark
2

108,000
$

$

135,000
(30,000)
3,000
108,000

Pigwich Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2009
Sales

Cost of sales
Gross profit
Operating expenses

$2,200,000
(1,400,000)
800,000
(447,000)

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Chapter 6

6-5

Total consolidated income
Noncontrolling interest share
Controlling interest share

$

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353,000
(15,000)
338,000


6-6

Intercompany Profit Transactions — Plant Assets

Solution E6-5 [AICPA adapted]
1

d
The equipment must be shown at its $1,400,000 book value to the
consolidated entity and d is the only choice that provides a $1,400,000
book value. Ordinarily, the equipment would be shown at $1,500,000, its
book value at the time of transfer, less the $100,000 depreciation after
transfer.

2

c
Reciprocal receivables and payables accounts and purchases and sales
accounts must always be eliminated. But dividend income (parent) and
dividends paid (subsidiary) accounts are reciprocals only when the cost
method is used.

3

a
Amount to be eliminated from consolidated net income in 2009:
Intercompany gain on downstream sale of machinery
$10,000
Less: Realized through depreciation of intercompany
gain on machinery ($10,000/5 years)
(2,000)

Decrease in consolidated net income from
$ 8,000
intercompany sale
Amount to be added to consolidated net income in 2010 for
realization through depreciation of intercompany gain
on machinery
$ 2,000

4

b
One-third of the unrealized intercompany profit is recognized through
depreciation for 2009.

Solution E6-6
1

a
Selling price in 2017
Cost to consolidated entity
Gain on sale of land

$
$

55,000
15,000
40,000

2

b
Gain on equipment
$
30,000
Less: Depreciation on gain
(10,000)
Net effect on investment account
$
20,000
The investment account will be $20,000 less than the underlying equity
interest.

3

b
Combined equipment — net
Less: Unrealized gain
Add: Piecemeal recognition of gain
Consolidated equipment — net

4

$
$

b
The working paper entry to eliminate the unrealized profit is:
Gain on sale of equipment
1,500

Equipment

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800,000
(20,000)
5,000
785,000

1,500


Chapter 6

6-7

5

c
Investment income will be decreased by $12,000 gain less $3,000
piecemeal recognition of the gain.

6

c
Sartin’s net income
Less: Unrealized gain
Add: Piecemeal recognition
Realized income
Noncontrolling interest percentage

Noncontrolling interest share

$1,000,000
(50,000)
5,000
955,000
40%
$ 382,000

Solution E6-7
Pod Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2009
Sales ($500,000 + $300,000)
Gain on sale of machinerya
Total revenue
Cost of sales ($200,000 + $130,000)
Depreciation expense ($50,000 + $30,000 - $5,000 from
depreciation on intercompany profit for 2009)
Other expenses ($80,000 + $40,000)
Total expenses
Consolidated net income
Noncontrolling share ($100,000+$5,000 piecemeal recognition from
depreciation + $10,000 remaining deferred gain) × 25%
noncontrolling interest
Controlling interest share
a

330,000
75,000

120,000
525,000
$295,000
28,750
$266,250

Selling price of machinery at December 28, 2009
Book value on Pod’s books $65,000 – ($65,000/5 years × 3 years)
Gain on sale of machinery

$ 36,000
26,000
$ 10,000

Original intercompany profit
Piecemeal recognition of gain $25,000/5 years × 3 years
Unamortized gain from intercompany sales

$ 25,000
15,000
$ 10,000

Gain on sale of machinery to outside entity

$ 20,000

Solution E6-8
Preliminary computations:
Investment in Salt (40%) at cost
Implied total fair value of Salt ($100,000 / 40%)

Book value
Excess allocated to patents
Annual amortization of patents ($50,000/5 years)
1

$800,000
20,000
820,000

$100,000
$250,000
(200,000)
$ 50,000
$ 10,000

Income from Salt — 2009
Share of Salt’s net income ($40,000 × 1/2 year × 40%)

$

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8,000


6-8

Intercompany Profit Transactions — Plant Assets

Amortization of patents ($10,000 × 1/2 year × 40%)

Unrealized inventory profit from upstream sale
($4,000 × 40%)
Unrealized gain from downstream sale of land
($2,000 × 100%)
Income from Salt

(2,000)
(1,600)
(2,000)
$ 2,400

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Chapter 6

6-9

Solution E6-8 (continued)
2

Income from Salt — 2010
Salt’s net income
Amortization of patents
Unrealized inventory profits from upstream sales:
Recognition of profit in beginning inventory
Deferral of profit in ending inventory
Salt’s adjusted and realized income
Income from Salt (40% share)

$ 60,000
(10,000)
4,000
(6,000)
$ 48,000
$ 19,200

Solution E6-9
1

Income from Simple, net income and consolidated net income:
Simple’s reported net income
$100,000
Less: Amortization of excess allocated to buildings
($500,000 - $400,000)/20 years
(5,000)
Less: $20,000 unrealized profit on equipment
(20,000)
Simple’s adjusted and realized income
$ 75,000
Income from Simple (80% share) — 2011
Add: Separate income of Plain for 2011
Net income of Plain — 2011

$ 60,000
500,000
$560,000

Simple’s reported net income
Less: Amortization of excess allocated to buildings

Add: Piecemeal recognition of unrealized gain
on equipment ($20,000/4 years)
Simple’s adjusted and realized income

$110,000
(5,000)

Income from Simple (80%) — 2012
Add: Separate income of Plain
Net income of Plain — 2012

$ 88,000
600,000
$688,000

5,000
$110,000

Consolidated net income for 2011 and 2012 = Plain’s net income
Alternatively,
2011
2012
Separate incomes combined
$600,000
$710,000
Less: Amortization of excess (buildings)
(5,000)
(5,000)
Less: Unrealized gain on equipment in 2011
(20,000)

Add: Piecemeal recognition of gain in 2012
5,000
Consolidated net income
$575,000
$710,000
Less: Noncontrolling interest share:
(15,000)
2011 ($100,000 - $20,000 - $5,000) × 20%
(22,000)
2012 ($110,000 + $5,000 - $5,000) × 20%
Controlling interest share
$560,000
$688,000
2

Investment in Simple
Cost of investment July 1, 2009
Add: Plain’s share of Simple’s retained earnings increase
from July 1, 2009 to December 31, 2010
($150,000 - $100,000) × 80%
Less: 80% Amortization of excess ($4,000 × 1.5 years)
Investment in Simple December 31, 2010

$400,000
40,000
(6,000)
434,000

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6-10

Intercompany Profit Transactions — Plant Assets

40,000
Add: 2011 income less dividends [$80,000 - ($50,000 × 80%)]
Investment in Simple December 31, 2011
474,000
40,000
Add: 2012 income less dividends [$88,000 - ($60,000 × 80%)]
Investment in Simple December 31, 2012
$514,000
Solution E6-9 (continued)
Alternative solution for check at December 31, 2012:
Share of Simple’s equity December 31, 2012 ($550,000 × 80%) $440,000
Add: 80% Unamortized excess on buildings
86,000
Original excess $100,000 - ($4,000 × 3.5 years)
Less: Unrealized profit on equipment
(12,000)
($20,000 gain - $5,000 recognized) × 80%
Investment in Simple December 31, 2012
$514,000
Solution E6-10
Preliminary computations
Transfer price of inventory to Spano ($180,000 × 2)
Cost to consolidated entity
Unrealized profit on January 3
Amortization of unrealized profit from consolidated view:

$180,000/6 years = $30,000 per year
1

2

$360,000
(180,000)
$180,000

Consolidated balance sheet amounts:
2009
Equipment (at transfer price)
$360,000
Less: Unrealized profit
(180,000)
Less: Depreciation taken by Spano ($360,000/6 years)
(60,000)
Add: Depreciation on unrealized profit ($180,000/6 years)
30,000
Equipment — net to be included on consolidated balance sheet $150,000
Alternatively:
Equipment (at cost to the consolidated entity)
Less: Depreciation based on cost ($180,000/6 years)
Equipment — net

$180,000
(30,000)
$150,000

2010 Year after intercompany sale

Equipment — net beginning of the period on cost basis
Less: Depreciation (based on cost)
Equipment — net

$150,000
(30,000)
$120,000

Consolidation working paper entries:
2009
Sales
360,000
Cost of goods sold
180,000
150,000
Equipment — net
Depreciation expense
30,000
To eliminate intercompany inventory sale, return equipment
to its cost to the consolidated entity, and eliminate
depreciation on the intercompany profit.
2010
Investment in Spano

150,000

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Chapter 6

6-11

120,000
Equipment — net
Depreciation expense
30,000
To eliminate unrealized profit from the equipment account
and the current year’s depreciation on the unrealized profit
and establish reciprocity between the investment account and
beginning-of-the-period subsidiary equity accounts.

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6-12

Intercompany Profit Transactions — Plant Assets

Solution E6-11
Pasco Corporation and Subsidiary
Schedule for Computation of Consolidated Net Income
2009
2010
2011
2012
Combined separate incomes
$260,000
$220,000
$120,000

$210,000
Add: Amortization of negative
differential assigned to plant
assets ($50,000/10 years)*
5,000
5,000
5,000
5,000
Unrealized gain on land (Note
That Pasco’s $5,000 gain is
included in Pasco’s separate
income)
(5,000)
5,000
Unrealized gain on machinery
(25,000)
Piecemeal recognition of
Gain on machinery
5,000
5,000
5,000
Unrealized inventory profits
(8,000)
8,000
Consolidated net income
260,000
205,000
122,000
233,000
Less: Noncontrolling interest share

(12,000)
2009 ($60,000-$5,000+$5,000) × 20%
( 15,000)
2010 ($70,000+$5,000) × 20%
(15,400)
2011 ($80,000-$8,000+$5,000)) × 20%
2012 ($90,000 + $8,000 +
(21,600)
$5,000 + $5,000)) × 20%
Controlling share of NI
$248,000
$190,000
$106,600
$211,400
Alternative Solution:
Pasco’s separate income
Add: 80% of Slocum’s income
Amortize the negative differential
assigned to plant asset × 80%)
Unrealized profit on upstream
Sale of land ($5,000 × 80%)
Unrealized profit on downstream
Sale of machinery
Piecemeal recognition of gain
($25,000/5 years)
Unrealized profit on upstream
Sale of inventory items
$8,000 × 80%
Pasco’s net income and controlling
share of consolidated net income

$200,000
48,000

$150,000
56,000

$ 40,000
64,000

$120,000
72,000

4,000

4,000

4,000

4,000

(4,000)

4,000
(25,000)
5,000

$248,000

$190,000

5,000

5,000

(6,400)

6,400

$106,600

$211,400

* Note: Since Pasco paid $40,000 more than book value for its 80% share, the
implied total fair value minus book value of Slocum is $50,000.

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Chapter 6

6-13

SOLUTIONS TO PROBLEMS
Solution P6-1
1

Income from Sear — 2009
Equity in Sear’s income ($100,000 × 90%)

$

Add: Deferred inventory profit from 2008 ($40,000 × 50%)

90,000
20,000

Less: Unrealized inventory profit from 2009 ($60,000 × 40%)

(24,000)

Less: Intercompany profit on equipment ($100,000 - $60,000)

(40,000)

Add: Piecemeal recognition of profit on equipment
$40,000/4 years
Income from Sear (corrected amount)
2

10,000
$

56,000

Pearl Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2009
Sales [$1,600,000 combined - $150,000 intercompany]

$1,450,000

Cost of sales [$1,000,000 combined - $150,000 intercompany + $24,000 ending inventory profits - $20,000
beginning inventory profits]

854,000

Gross profit

596,000

Other expenses [$300,000 combined - $10,000 piecemeal
recognition of profit on equipment]
Consolidated net income
Less: Noncontrolling interest share
Controlling interest share
Check:
Separate income of Pearl
Add: Income from Sear
Controlling interest share

$
$
$
$

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290,000
306,000

10,000
296,000
240,000
56,000
296,000


6-14

Intercompany Profit Transactions — Plant Assets

Solution P6-2
Preliminary computations
NOTE: Since Pal paid a price $45,000 in excess of book value for its 90%
share, the implied total excess of fair value over book is $50,000 ($45,000 /
90%).
Computation of income from Sim:
Share of Sim’s reported income ($40,000 × .9)
Add: Realization of deferred profits in beginning inventory
Less: Unrealized profits in ending inventory
Less: Unrealized profit on intercompany sale of equipment
($30,000 - $21,000)
Add: Piecemeal recognition of deferred profit in equipment
($9,000/3 years)
Income from Sim

$36,000
5,000
(4,000)
(9,000)

3,000
$31,000

Consolidation working paper entries
A

B

Cash

Sales

2,000
Accounts receivable
To record cash in transit from Sim on account.

2,000

20,000
Cost of sales
To eliminate intercompany purchases and sales.

20,000

C

Investment in Sim
5,000
Cost of sales
5,000

To recognize previously deferred profit from beginning inventory.

D

Cost of sales
4,000
Inventory
To defer unrealized profit from ending inventory.

4,000

E

Investment in Sim
3,000
Land
3,000
To reduce land to its cost basis and adjust the investment account
to establish reciprocity with Sim’s beginning of the period equity
accounts.

F

Gain on sale of equipment
9,000
9,000
Equipment — net
To eliminate gain on intercompany sale of equipment and reduce
equipment to a cost basis.

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Chapter 6

6-15

Solution P6-2 (continued)
g

3,000
Equipment — net
Operating expenses
3,000
To eliminate current year’s depreciation of unrealized gain.

h

Income from Sim
31,000
18,000
Dividends — Sim
Investment in Sim
13,000
To eliminate income and dividends from Sim and return investment
account to its beginning of the period balance.

i

70,000

Retained earnings — Sim
50,000
Capital stock — Sim
Goodwill
50,000
Investment in Sim
153,000
17,000
Noncontrolling interest — January 1
To eliminate reciprocal investment and equity amounts, establish
beginning noncontrolling interest, and enter beginning-of-theperiod fair value — book value differential (goodwill).

j

Noncontrolling Interest Share
4,000
2,000
Dividends — Sim
Noncontrolling Interest
2,000
To record Noncontrolling interest share of subsidiary income and
dividends.

k

Dividends payable
9,000
Dividends receivable
To eliminate reciprocal receivables and payables.

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9,000


6-16

Intercompany Profit Transactions — Plant Assets

Solution P6-2 (continued)
Pal Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2010
(in thousands)
Pal
Income Statement
Sales
Income from Sim
Gain on equipment
Cost of sales

$ 300
31
9
140 *

Operating expenses
Consolidated NI

$ 100

50*

60*

Retained Earnings
Retained earnings — Pal
Retained earnings — Sim
Controlling share of NI
Dividends

j
$ 140ü

$

40ü

$

70
40
20*

b
c
g

20
5

3

4

$ 237

$

90

Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land
Buildings — net
Equipment — net
Investment in Sim

$ 100
90
9
20
40
135
165
158

$

17
50

$ 717

$ 200

$

$

8
15
50
60

Goodwill

Noncontrolling interest January 1

169 *
67*
144
4*
$ 140

$ 157

140

60*

98
15
67
300
237ü
$ 717

Consolidated
Statements
$ 380

$ 157

Retained earnings
December 31

Accounts payable
Dividends payable
Other liabilities
Capital stock
Retained earnings

b 20
h 31
f 9
d 4

10*

Noncontrolling share
Controlling share of NI

Adjustments and
Eliminations

Sim 90%

30
10
20
50
90ü
$ 200

i 70
140
h
j

18
2

60*
$ 237

a

2

a
k
d
e

g 3
c 5
e 3
i 50

k

2
9
4
3

f
9
h 13
i 153

$ 119
138
24
52
185
219

50

$ 787
$ 128
16
87
300
237

9

i 50

i

17

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Chapter 6

6-17

Noncontrolling interest December 31

j

2

19
$ 787

*

Deduct

Solution P6-3
Preliminary computations
Cost January 1, 2009
Implied fair value of Stor ($270,000 / 90%)
Book value of Stor
Excess of fair value over book value - Goodwill

$270,000
$300,000
(240,000)
$ 60,000

Cost January 1, 2009
Add: Income from Stor for 2009
$ 36,000
Equity in income ($40,000 × 90%)
Less: Unrealized inventory profit
(10,000)
Less: Unrealized profit on machinery
(selling price $35,000 - book value $28,000)
(7,000)
Add: Piecemeal recognition of profit on
1,000
machinery ($7,000/3.5 years × .5 year)
Income from Stor for 2009

Less: Dividends $10,000 × 90%

$270,000

Investment balance January 1, 2010
Add: Income from Stor for 2010
Equity in income ($50,000 × 90%)
Add: Unrealized profit in beginning inventory
Less: Unrealized profit in ending inventory
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years)
Less: Gain on sale of land
Income from Stor for 2010
Less: Dividends ($20,000 × 90%)
Investment balance December 31, 2010

20,000
(9,000)
281,000

$ 45,000
10,000
(12,000)
2,000
(5,000)
40,000
(18,000)
$303,000

© 2009 Pearson Education, Inc. publishing as Prentice Hall

6-18

Intercompany Profit Transactions — Plant Assets

Solution P6-3 (continued)
Pall Corporation and Subsidiary
Consolidation Working Papers
for the Year Ended December 31, 2010
(in thousands)
Pall
Income Statement
Sales
Income from Stor
Gain on land
Cost of sales

$

Operating expense

450
40
5
(200)

$ 190

(100)

(113)

Retained Earnings
Retained earnings — Pall
Retained earnings — Stor
Controlling share of NI
Dividends
Retained earnings
December 31
Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land
Buildings — net
Machinery — net
Investment in Stor
Goodwill
Total assets
Accounts payable
Dividends payable
Other liabilities
Capital stock
Retained earnings
Total equities

a
f

e
c

h
$

182

$

202
182
(150)

$

$ 120
50
(20)

234

$ 150

$

133
180
18
60

100
280
330
303

$

72
10
2

$

$

50
20
30
150
150
$ 400

(230)
(151)
187
(5)
$

182

$

202

g 120
182
f
h

i
j
c
e

36
30
80
140

$ 400

Noncontrolling interest January 1
Noncontrolling interest December 31

a
b
d

568

5

14
100

$1,404

Consolidated
Statements
$

50

$

200
30
140
800
234
$1,404

72
40
5
12

(40)

Consolidated NI

Noncontrolling share
Controlling share of NI

Adjustments and
Eliminations

Stor 90%

b
d
g

10
6
60

i
j

10
18

18
2

(150)
$

234

$

147
270

10
18
12
5

84
125
360
466

d
4
f 22
g 297

60
$1,512
$

g 150

g

33

h

3

©2009 Pearson Education, Inc. publishing as Prentice Hall

240
32
170
800
234

36


Chapter 6

6-19
$1,512

© 2009 Pearson Education, Inc. publishing as Prentice Hall


6-20

Intercompany Profit Transactions — Plant Assets

Solution P6-4
Parch Corporation and Subsidiary
Consolidation Working Papers

for the year ended December 31, 2009
(in thousands)
Parch
Income Statement
Sales
Income from Sarg
Gain on land
Gain on equipment
Cost of sales
Depreciation expense
Other expenses

$

700
70

$ 500
10

20
300 *
90*
200 *

300 *
35*
65*

Consolidated NI

Noncontrolling share
Controlling share of NI

$

Retained Earnings
Retained earnings — Parch $
Retained earnings — Sarg
Controlling share of NI
Dividends
Retained earnings
December 31
Balance Sheet
Cash
Accounts receivable
Inventories
Other current items
Land
Buildings — net
Equipment — net
Investment in Sarg

Accounts payable
Other liabilities
Capital stock
Retained earnings

200

Adjustments and

Eliminations

Consolidated
Balance Sheet

a
e
c
d
b

50
70
10
20
5

$1,150

h

10

Sarg 90%

a
d

50
5

10*

$ 110

600
200ü
100 *

$ 200
110ü
50*

$

700

$ 260

$

35
90
100
70
50
200
500
655

$

$ 880

$

$

160
340
500
700ü
$1,700

Noncontrolling interest January 1
Noncontrolling interest December 31

50
70
500
260ü
$ 880

$

200

$

600

f 200
200
e
h

30
110
80
40
70
150
400

$1,700

555 *
120 *
265 *
210

45
5

g
b

10
5

c

10

100 *
$

700

$

65
190
175
110
110
350
885

d 15
e 25
f 630

$1,885
g

10

$

f 500

f

70

h

5

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200
410
500
700

75


Chapter 6

6-21
$1,885

*

Deduct

NOTE: Purchase price implies book values are equal to fair values.

© 2009 Pearson Education, Inc. publishing as Prentice Hall


6-22

Intercompany Profit Transactions — Plant Assets

Solution P6-5
Preliminary computations
Cost January 1, 2009
Add: Income from Stor for 2009
Equity in income ($40,000 × 90%)
Less: Patent amortize. ($60,000/10 years)x 90%
Less: Unrealized inventory profit
Less: Unrealized profit on machinery
(selling price $35,000 - book value $28,000)
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years × .5 year)
Income from Stor for 2009
Less: Dividends $10,000 × 90%
Investment balance January 1, 2010
Add: Income from Stor for 2010
Equity in income ($50,000 × 90%)
Less: Patent amortization (90%)
Add: Unrealized profit in beginning inventory
Less: Unrealized profit in ending inventory
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years)
Less: Gain on sale of land

Income from Stor for 2010
Less: Dividends ($20,000 × 90%)

$270,000
$36,000
(5,400)
(10,000)
(7,000)
1,000
14,600
(9,000)
275,600
$45,000
(5,400)
10,000
(12,000)
2,000
(5,000)
34,600
(18,000)

Investment balance December 31, 2010
Noncontrolling interest share of Stor’s income (10%)
Stor’s reported net income
Less: Patent amortization
Stor’s adjusted income
10% Noncontrollling interest share

$292,200
2009

2010

$40,000
(6,000)
$34,000
$ 3,400

$50,000
(6,000)
$44,000
$ 4,400

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 6

6-23

Solution P6-5 (continued)
Pall Corporation and Subsidiary
Consolidation Working Papers
for the Year Ended December 31, 2010
Pall
Income Statement
Sales
Income from Stor
Gain on land
Cost of sales

$

450,000 $ 190,000
34,600
5,000
(200,000) (100,000)

a
f
e
c

(113,000)

h

Operating expense
Consolidated NI
Noncontrolling share
Controlling share of NI

$

176,600

Retained Earnings
Retained earnings — Pall

$

200,000

Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land

72,000
10,000
2,000

4,400

$ 150,000

$

136,400
180,000
18,000
60,000
100,000
280,000

$

(230,000)

(157,000)
181,000
(4,400)
$ 176,600

14,000
100,000

140,000

292,200

$1,396,600

$ 400,000

$

$

50,000
20,000
30,000
150,000
150,000
$ 400,000

200,000
176,600

f
k

36,000
30,000
80,000

330,000

568,000

g 120,000

50,000
(20,000)

226,600

Noncontrolling interest January 1
Noncontrolling interest December 31

$

50,000

$

200,000
30,000
140,000

800,000
226,600
$1,396,600

72,000
34,600
5,000
12,000 a
b
6,000 d

Consolidated
Statements

$

176,600
(150,000)

Machinery — net
Investment in Stor

Accounts payable
Dividends payable
Other liabilities
Capital stock
Retained earnings
Total equities

$

$ 120,000

Buildings — net

Patents
Total assets

(40,000)

k

Retained earnings — Stor
Controlling share of NI
Dividends
Retained earnings
December 31

Adjustments and
Eliminations

Stor 90%

18,000
2,000

i
j
c
e

10,000
18,000
12,000
5,000

d

4,000

b
d
g

10,000 f 16,600
6,000 g 291,600
54,000 h
6,000

i
j

10,000
18,000

(150,000)
$

226,600

$

150,400
270,000
84,000
125,000
360,000
466,000

48,000
$1,503,400
$

g 150,000

g
k

240,000
32,000
170,000
800,000
226,600

32,400
2,400

© 2009 Pearson Education, Inc. publishing as Prentice Hall

34,800

6-24

Intercompany Profit Transactions — Plant Assets
$1,503,400

©2009 Pearson Education, Inc. publishing as Prentice Hall


Chapter 6

6-25

Solution P6-6
Preliminary computations
Investment cost
Implied fair value of Sank ($290,000 / 80%)
Book value of Sank
Excess fair value over book value
- allocated 50% to Patents with a ten-year life ($31,250)
- allocated 50% to Inventory sold in 2007 ($31,250)
Reconciliation of income from Sank:
Pill’s share of Sank’s net income ($50,000 × 80%)
Less: 80% of Patent amortization ($31,250/10 years)
Add: Depreciation on deferred gain on equipment
($15,000/5 years) × 80%
Less: Unrealized profit on upstream sale of land ($10,000 × 80%)
Income from Sank
Reconciliation of investment account:

Share of Sank’s underlying equity ($400,000 × 80%)
Add: 80% of Unamort. patent ($31,250 - ($3,125 × 3 years)) x 80%
Less: Unrealized gain on equipment
[$15,000 - ($3,000 × 2 years)] × 80%
Less: Share of unrealized gain on land
Investment in Sank December 31, 2009
Noncontrolling interest share:
Sank’s reported income
Add: Piecemeal recognition of gain on sale of machinery
Less: Patent amortization
Less: Unrealized gain on upstream sale of land
Realized income
Noncontrolling percentage
Noncontrolling interest share

$290,000
$362,500
(300,000)
$ 62,500

$ 40,000
(2,500)
2,400
(8,000)
$ 31,900
$320,000
17,500
(7,200)
(8,000)
$322,300

$ 50,000
3,000
( 3,125)
(10,000)
39,875
20%
$ 7,975

© 2009 Pearson Education, Inc. publishing as Prentice Hall