Solution manual advanced accounting 11th by beams chapter05

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Chapter 5
INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES
Answers to Questions
1

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

2

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

3

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

4

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

5

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

6

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

7

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

8

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

based on the realized income of the subsidiary.

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5-1


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Intercompany Profit Transactions — Inventories

5-2

9

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

10

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

11

The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling

interest or by the direction of the intercompany sales. All unrealized profit from both upstream and
downstream sales is eliminated from consolidated cost of goods sold.

12

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

13

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

14

The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a
convenience, but it does not result in incorrect measurements of consolidated net income as long as the
unrealized profits at any statement date are correctly determined. This is because any unrealized profits in
beginning inventory that are considered realized are credited to cost of sales. The same items will appear as

unrealized profits in the ending inventory if they remain unsold, and the elimination of these items results
in debiting cost of sales for the same amount. Thus, the workpaper effects are offsetting as illustrated in the
following workpaper entries, which assume $5,000 unrealized profits from downstream sales.
Investment in subsidiary (retained earnings)
Cost of sales
To eliminate unrealized profit in beginning inventory.

5,000

Cost of sales

5,000

Inventory
To eliminate unrealized profit in ending inventory.

5,000

5,000

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Chapter 5

5-3

SOLUTIONS TO EXERCISES

Solution E5-1
1
2
3
4

b
d
a
c

5
6
7
8

c
a
a
c

Solution E5-2 [AICPA adapted]
1

a

2

c
Unrealized profits from intercompany sales with Ken are eliminated from

the ending inventory: $960,000 combined current assets less $36,000
unrealized profit ($180,000  20%).

3

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

Solution 5-3
1

2

3

d
Pil's separate income (in thousands)
Add: Share of Sil's income ($1,000  100%)
Add: Realization of profit deferred in 2011
$3,000 - ($3,000/150%)
Less: Unrealized profit in 2012 inventory
$2,400 - ($2,400/150%)
Controlling share of consolidated net income

(800)
$3,200

d
Combined sales
Less: Intercompany sales

Consolidated sales

$2,800
(100)
$2,700

c
Combined cost of sales
Less: Intercompany purchases

$1,360
(100)

Less: Unrealized profit in beginning inventory
Add: Unrealized profit in ending inventory
Consolidated cost of sales

(8)
20
$1,272

$2,000
1,000
1,000

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Intercompany Profit Transactions — Inventories

5-4

Solution E5-4
1

2

3

b
Pid's share of Sed's income ($120,000  80%)
Less: Unrealized profit in ending inventory
($40,000  50% unsold  80% owned)
Income from Sed
d
Combined cost of sales
Less: Intercompany sales
Add: Unrealized profit in ending inventory
Consolidated cost of sales
b
Reported income of Sed
Unrealized profit
Sed's realized income
Noncontrolling interest percentage
Noncontrolling interest share

$

96,000

$

(16,000)
80,000

$

900,000
(200,000)
20,000
$ 720,000

$

$

120,000
(20,000)
100,000
20%
20,000

Solution E5-5
1

2

3

c
Combined sales
Less: Intercompany sales
Consolidated sales

$1,800,000
(400,000)
$1,400,000

c
Unrealized profit in beginning inventory
$100,000 - ($100,000/125%)

$

20,000

Unrealized profit in ending inventory
$125,000 - ($125,000/125%)

$

25,000

b
Combined cost of goods sold
Less: Intercompany sales
Less: Unrealized profit in beginning inventory
$100,000 - ($100,000/125%)

Add: Unrealized profit in ending inventory
$125,000 - ($125,000/125%)
Consolidated cost of goods sold

$1,440,000
(400,000)
(20,000)
25,000
$1,045,000

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Chapter 5

5-5

Solution E5-6
1

2

3

a
Pat's separate income
Add: Income from Sue (below)
Controlling share of consolidated net income

$200,000
144,550
$344,550

Sue's reported income
Less: Patent amortization
Add: Unrealized profit in beginning inventory
[$112,500 - ($112,500/150%)]
Less: Unrealized profit in ending inventory
[$33,000 - ($33,000/150%)]
Sue’s adjusted and realized income

$200,000
(20,000)

(11,000)
$206,500

Pat’s 70% controlling share of Sue’s realized income
Noncontrolling interest share (30%)

$144,550
$ 61,950

37,500

c
Pac's share of Slo's reported net loss
($150,000 loss  60%)

Add: Unrealized profit in ending inventory
($200,000  1/4 unsold)
Income from Slo
Pac's separate income
Controlling share of consolidated net income

$(90,000)
(50,000)
(140,000)
300,000
$160,000

b
San's reported net income
Add: Realized profit in beginning inventory
$150,000 - ($150,000/1.25)
Less: Deferred profit in ending inventory
$200,000 - ($200,000/1.25)
Income from San
Par’s 75% controlling share of San’s income
Noncontrolling interest share (25%)

$300,000
30,000
(40,000)
$290,000
$217,500
$ 72,500

Solution E5-7

(in thousands)
Pan's separate income
Add: 80% of She's reported income
Add: Realization of profits in
beginning inventory
Less: Unrealized profits in ending
Inventory
Controlling share of consolidated NI
Noncontrolling interest share
1,500 x 20%
1,650 x 20%
1,425 x 20%
Consolidated net income

2011
$ 900
1,200

(90)
$2,010

2012
$1,200
1,320

2013
$1,050
1,140

90

120

(120)
$2,490

(60)
$2,250

300
330
285
$2,310

$2,820

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$2,535


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Intercompany Profit Transactions — Inventories

5-6

Solution E5-8
Pic Corporation and Subsidiary
Consolidated Income Statement

for the year ended December 31, 2011
(in thousands)
Sales ($800 + $200 - $80 intercompany sales)
Cost of sales ($480 - $80 intercompany
purchases + $20 unrealized profit in ending inventory)
Gross profit
Other expenses ($200 + $60)
Cnsolidated net income
Less: Noncontrolling interest share ($60  20%)
Controlling share of consolidated net income

$

920

(420)
500
(260)
240
(12)
$ 228

Solution E5-9
1

2

Noncontrolling interest share
Sev's reported net income
Add: Intercompany profit from upstream sales in

beginning inventory
Less: Intercompany profit from upstream sales in
ending inventory
Sev’s adjusted and realized income
Noncontrolling interest share (40%)

(10,000)
$ 45,000
$ 18,000

Consolidated sales
Combined sales
Less: Intercompany sales
Consolidated sales

$1,250,000
100,000
$1,150,000

Consolidated cost of sales
Combined cost of sales
Less: Intercompany sales
Add: Intercompany profit in ending inventory
Less: Intercompany profit in beginning inventory
Consolidated cost of sales
Total Consolidated Income
Combined income
Less: Intercompany profit in ending inventory
Add: Intercompany profit in beginning inventory
Total Consolidated Income

$ 50,000
5,000

$

650,000
(100,000)
10,000
(5,000)
$ 555,000
$
$

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300,000
(10,000)
5,000
295,000


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Chapter 5

5-7

Solution E5-10
Pap Corporation and Subsidiary

Consolidated Income Statement
December 31, 2013
(in thousands)
Sales ($2,000 + $1,000 - $180 intercompany)
Cost of sales ($800 + $500 - $180 intercompany $20 unrealized profit in beginning inventory + $30
unrealized profit in ending inventory
Gross profit
Depreciation expense
Other expenses ($180 + $120)
Total consolidated income
Less: Noncontrolling interest share ($300 + $20 profit
in beginning inventory - $30 profit in end. inventory)  20%
Controlling interest share of consolidated net income

$2,820

$

Supporting computations
Cost of investment in Sak at January 1, 2012
Implied fair value of Sak ($1,200 / 80%)
Book value of Sak
Goodwill

$ 1,200
$ 1,500
(1,400)
$
100

(1,130)
1,690
(340)
(300)
1,050
(58)
992

Solution E5-11
1

2

3

b
Income as reported
Add: Realization of profits in beginning inventory
$120,000 - ($120,000/1.2)
Less: Unrealized profits in ending inventory
$360,000 - ($360,000/1.2)
Realized income
Percent ownership
Income from Sue

$

200,000
20,000

$

(60,000)
160,000
60%
96,000

c
Sue's equity as reported ($3,400,000 + $2,100,000)
Less: Unrealized profit in ending inventory
Realized equity
Noncontrolling share
Noncontrolling interest December 31, 2011

$5,500,000
(60,000)
5,440,000
40%
$2,176,000

b
Realized equity
Controlling share
Investment balance December 31, 2011

$5,440,000
60%
$3,264,000

Note: The excess fair value over book value is fully amortized.

Therefore, the investment balance of $3,264,000 plus the noncontrolling
interest of $2,176,000 is equal to the $5,440,000 realized equity at the
balance sheet date.

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Intercompany Profit Transactions — Inventories

5-8

Solution E5-12
Pul Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2011
Sales ($2,760,000 - $240,000 intercompany sales)
Cost of sales ($1,840,000 - $240,000 - $10,000a + $24,000b)
Gross profit
Operating expenses
Total consolidated income
Less: Noncontrolling interest share [$80,000 - ($24,000  .2)]
Controlling share of consolidated net income
a
b

$2,520,000
(1,614,000)
906,000

(320,000)
586,000
(75,200)
$ 510,800

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

SOLUTIONS TO PROBLEMS
Solution P5-1
Por Corporation and Subsidiary
Consolidated Statement of Income and Retained Earnings
for the year ended December 31, 2012
Sales ($6,500,000 + $3,250,000 - $400,000 intercompany sales)
Less: Cost of sales ($4,000,000 + $1,950,000 - $400,000 intercompany purchases - $60,000 unrealized profit in beginning
inventory + $80,000 unrealized profit in ending inventory)
Gross profit
Other expenses ($1,700,000 + $800,000)
Consolidated net income
Noncontrolling interest share($500,000+$60,000 - $80,000)  10%
Controlling share of consolidated net income
Add: Beginning consolidated retained earnings
Less: Dividends for the year
Consolidated retained earnings December 31

$9,350,000
(5,570,000)
3,780,000

(2,500,000)
1,280,000
(48,000)
1,232,000
1,846,000
(500,000)
$2,578,000

Solution P5-2
1

2

Consolidated cost of sales — 2013
Combined cost of sales ($625,000 + $300,000)
Less: Intercompany purchases
Add: Profit in ending inventory
Less: Profit in beginning inventory
Consolidated cost of sales
Noncontrolling interest share — 2013
Sam's net income ($600,000 - $300,000 - $150,000)
Add: Profit in beginning inventory
Less: Profit in ending inventory
Sam's realized income
Noncontrolling interest percentage
Noncontrolling interest share

$

925,000

(300,000)
24,000
(12,000)
$ 637,000

$

$

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150,000
12,000
(24,000)
138,000
10%
13,800


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Chapter 5

5-9

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Intercompany Profit Transactions — Inventories

5-10

Solution P5-2 (continued)
3

Consolidated Controlling share of NI— 2013
Consolidated sales ($900,000 + $600,000 - $300,000)
Less: Consolidated cost of sales
Less: Consolidated expenses ($225,000 + $150,000)
Less: Noncontrolling interest share
Controlling share of consolidated net income
Alternatively,
Put's separate income
Add: Income from Sam
Controlling share of consolidated net income

4

Noncontrolling interest at December 31, 2013
Equity of Sam December 31, 2013
Less: Unrealized profit in ending inventory
Noncontrolling interest percentage
Noncontrolling interest December 31

$1,200,000
(637,000)
(375,000)
(13,800)

$ 174,200
$
$

$
$

50,000
124,200
174,200

520,000
(24,000)
10%
49,600

Solution P5-3
1

Inventories appearing in consolidated balance sheet at December 31, 2012
$112,000
Beginning inventory — Pot ($120,000 - $8,000a)
62,000
Beginning inventory — San ($77,500 - $15,500b)
48,000
Beginning inventory — Tay ($48,000 - 0)
Inventories December 31
$222,000
Intercompany profit:
a

b

2

Pot:
Inventory acquired intercompany ($120,000  40%)
Cost of intercompany inventory ($48,000/1.2)
Unrealized profit in Pot's inventory

$ 48,000
(40,000)
$ 8,000

San:
Inventory acquired intercompany ($77,500  100%)
Cost of intercompany inventory ($77,500/1.25)
Unrealized profit in San's inventory

$ 77,500
(62,000)
$ 15,500

Inventories appearing in consolidated balance sheet at December 31, 2013
$ 99,000
Ending inventory — Pot ($108,000 - $9,000c)
50,000
Ending inventory — San ($62,500 - $12,500d)
72,000
Ending inventory — Tay ($72,000 - 0)

Inventories December 31
$221,000
Intercompany profit:
c

d

Pot:
Inventory acquired intercompany ($108,000  50%)
Cost of intercompany inventory ($54,000/1.2)
Unrealized profit in Pot's inventory

$ 54,000
(45,000)
$ 9,000

San:
Inventory acquired intercompany ($62,500  100%)
Cost of intercompany inventory ($62,500/1.25)
Unrealized profit in San's inventory

$ 62,500
(50,000)
$ 12,500

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Chapter 5

5-11

Solution P5-4
1

2

3

Pli's income from Stu
75% of Stu's net income
Unrealized profit in December 31,
2011 inventory (downstream)
($600,000  1/2)  100%
Unrealized profit in December 31,
2012 inventory (upstream)
$300,000  75%
Pli's income from Stu
Pli's net income
Pli's separate income
Add: Income from Stu
Pli's net income
Consolidated net income
Separate incomes of Pli and
Stu combined
Unrealized profit in December 31,
2011 inventory
Unrealized profit in December 31,

2012 inventory
Total consolidated income
Less: Noncontrolling interest share
2011 $1,200,000  25%
2012 ($1,350,000 - $300,000)  25%
2011 ($1,050,000 + $300,000)  25%
Controlling share of net income

$

2011
2012
900,000 $1,012,500 $
(300,000)

$

2013
787,500

300,000

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

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

$6,600,000 $6,450,000 $7,050,000
(300,000)
6,300,000

300,000
(300,000)
300,000
6,450,000 7,350,000

(300,000)
(262,500)
(337,500)
$6,000,000 $6,187,500 $7,012,500

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Intercompany Profit Transactions — Inventories

5-12

Solution P5-5
Pan Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2012
(in thousands)
Adjustments and
Pan

100% Sal
Eliminations
Income Statement
Sales
Income from Sal
Cost of sales

$

800
102
400*

$ 400

40*
60*
$ 100

f

$ 380

e 380

Depreciation expense
Other expenses
Net income

$

110*
192*
200

Retained Earnings
Retained earnings — Pan

$

600

Retained earnings — Sal
Net income
Dividends
Retained earnings
December 31

$

700

Balance Sheet
Cash

$

54
90

200*

472*

$

d

150*
258*
200

$

37
60

Buildings — net
Equipment — net
Investment in Sal

500

400

736

Patents
$1,800

$ 867

$

$

47
90
300
430
$ 867

200
100*

50

$ 430

80
90
50
150

160
340
600
700
$1,800

a 120
c 20

6

100
50*

100
70
50
200

Accounts payable
Other liabilities
Common stock, $10 par
Retained earnings

$1,080

600

200
100*

Receivables — net
Inventories
Other assets
Land

a 120
d 102
b 12

Consolidated
Statements

g

17

b

12

$

700

$

91
133
168
160
100
350
900

c

20

e

24

g

17

d 52
e 704
f
6

e 300

18
$1,920
$

190
430
600
700
$1,920

Supporting computations
Unrealized profit in beginning inventory ($40,000  1/2) = $20,000

Unrealized profit in ending inventory ($48,000  1/4) = $12,000
Sal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000
profit in ending inventory, and less $6,000 patent amortization equals $102,000 income
from Sal.

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Chapter 5

5-13

Solution P5-6
Pay Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2012
(in thousands)
Adjustments and
Pay
Sue 75%
Eliminations
Income Statement
Sales
Income from Sue
Cost of sales

$1,200
205

540*

Operating expenses
Consolidated net income
Noncontrolling int.share
Controlling share of NI

$

575

Retained Earnings
Retained earnings — Pay

$

365

420*

290*

f

$ 180
575
300*

720*

$

370*
650
75*
575

$

365

$

$

Buildings — net

170
330
30
120
160
460

Equipment — net
Investment in Sue

770

400

e 180
575
d
f

60
200

g
h
b

160
100
200

75
25

300*
$

640

$

230
500

30
30
40

240
260
660

280

680
c

Goodwill
$2,440

$1,000

$

$ 200
40
80
300
380
$1,000

450
140
310

900
640
$2,440
Noncontrolling interest January 1
Noncontrolling interest December 31

75

300
100*

$ 380

*

a 260
c 20

$ 300

640

Accounts payable
Dividends payable
Other liabilities
Common stock, $10 par
Retained earnings

$1,740

80*

$

Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land

a 260
d 205
b 40

$

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

$ 800

Consolidated
Statements

20

d 130
e 660

e 400

400
$2,970

g
h

$

30
30

e 300

e 220
f 50

620
150
390
900
640

270
$2,970

Deduct

Supporting computations
Investment in Sue at January 1, 2011
Implied fair value of Sue ($600,000 / 75%)
Book value of Sue
Goodwill

$600,000
$800,000
400,000
$400,000

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Intercompany Profit Transactions — Inventories

5-14

Solution P5-7
Preliminary computations
Investment cost
Implied fair value of San
Less: Book value of San
Patents
Patent amortization
Upstream sales

Unrealized
$280,000
Unrealized
$420,000

$2,700,000
$3,000,000
2,500,000
$ 500,000

$500,000/10 years = $50,000 per year

profit in December
- ($280,000  1.4)
profit in December
- ($420,000  1.4)

31, 2011 inventory of Pol
= $80,000
31, 2012 inventory of Pol
= $120,000

Income from San
San's reported net income
Less: Patent amortization
Less: Unrealized profit in ending inventory
Add: Unrealized profit in beginning inventory
San’s adjusted and realized income

$1,000,000

(50,000)
(120,000)
80,000
$ 910,000

Pol’s 90% controlling share of San’s income
10% noncontrolling interest share of San’s income

$ 819,000
$ 91,000

Investment balance
Initial investment cost
Increase in San's net assets from December 31, 2010
to December 31, 2012 ($700,000  90%)
Patent amortization for 2 years (90%)
Unrealized profit in December 31, 2012 inventory
Investment balance December 31, 2012

$2,700,000
630,000
( 90,000)
(108,000)
$3,132,000

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Chapter 5

5-15

Solution P5-7 (continued)
Pol Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2012
(in thousands)
Pol
Income Statement
Sales
Income from San
Cost of sales

$8,190
819
5,460*

Other expenses
Consolidated net income
Noncontrolling int.share
Controlling share of NI

$ 2,005

Retained Earnings
Retained earnings — Pol

$ 1,200

Retained earnings
December 31
Balance Sheet
Cash
Inventory
Other current assets
Plant assets — net
Investment in San

$5,600
4,000*

1,544*

600*

2,005
1,000*

700

$1,200

$

$

*

h

91

e

$ 8,190
a 5,600
c
80

3,900*
2,194*
$ 2,096
91*
$ 2,005

700
2,005
d
h

$7,905

$4,500

$ 1,700
4,000
2,205
$ 7,905

$1,300
2,000
1,200
$4,500

450
50

1,000*
$ 2,205

500
800
200
3,000

3,132

Noncontrolling interest January 1
Noncontrolling interest December 31

50

1,000
500*

Patents

Current liabilities

Capital stock
Retained earnings

f

Consolidated
Statements

$ 1,200

$ 2,205

753
420
600
3,000

a 5,600
d
819
b
120

$1,000

$

Retained earnings — San
Controlling share of NI
Dividends

Adjustments and
Eliminations

San 90%

b
g
c

72

e

450

120
100

d
369
e 2,835
f
50

g
100
e 2,000

c

8

$ 1,253
1,100
700
6,000

400
$ 9,453
$ 2,900
4,000
2,205

e
h

315
41

348
$ 9,453

Deduct

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Intercompany Profit Transactions — Inventories

5-16

Solution P5-8
Pan Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2012
(in thousands)
100%
Sal

Pan
Income Statement
Sales
Income from Sal
Cost of sales

$

800
108
400*

Depreciation expense
Other expenses
Net income

$

110*
192*
206

Retained Earnings
Retained earnings — Pan

$

606

$

400
200*

$

$

380

712

$

430

Balance Sheet
Cash

$

54
90

$

37
60

206
100*

$1,080
a 120
c 20

472*

$

150*
252*
206

e 380

100
50*

Buildings — net

100
70
50
200

80
90
50
150

Equipment — net
Investment in Sal

500

400

748

Goodwill
$1,812

$

867

$

$

47
90
300
430
867

160
340
600
712
$1,812

Consolidated
Statements

606

$

Accounts payable
Other liabilities
Common stock, $10 par
Retained earnings

a 120
d 108
b 12

40*
60*
100

Retained earnings — Sal
Net income
Dividends
Retained earnings
December 31

Receivables — net
Inventories
Other assets
Land

Adjustments and
Eliminations

$

d

206
100*

50

f

17

b

12

$

712

$

91
133
168
160
100
350
900

c

20

d 58
e 710

e

30

30
$1,932

f

17

$

e 300

190
430
600
712
$1,932

Supporting computations
Unrealized profit in beginning inventory ($40,000  1/2) = $20,000
Unrealized profit in ending inventory ($48,000  1/4) = $12,000
Sal's income of $100,000 plus $20,000 profit in beginning inventory less
$12,000 profit in ending inventory equals Income from Sal $108,000.

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Chapter 5

5-17

Solution P5-9
Preliminary computations
Investment cost
Implied fair value of San ($2,700,000 / 90%)
Less: Book value of San
Goodwill
Upstream sales
Unrealized
$280,000
Unrealized
$420,000

profit in December
- ($280,000  1.4)
profit in December
- ($420,000  1.4)

$2,700,000
$3,000,000
2,500,000
$ 500,000

31, 2013 inventory of Poe
= $80,000
31, 2014 inventory of Poe
= $120,000

Income from San
San's reported net income
Less: Unrealized profit in ending inventory
Add: Unrealized profit in beginning inventory
San’s adjusted and realized income

$1,000,000
(120,000)
80,000
$ 960,000

Poe’s 90% controlling interest share of San’s income
10% noncontrolling interest share of San’s income

$
$

Investment balance
Initial investment cost
Increase in San's net assets from December 31, 2011
to December 31, 2014 ($700,000  90%)
Unrealized profit in December 31, 2014 inventory (90%)
Investment balance December 31, 2014

864,000
96,000

$2,700,000
630,000
(108,000)

$3,222,000

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Intercompany Profit Transactions — Inventories

5-18

Solution P5-10 (continued)
Poe Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2014
(in thousands)
Poe
Income Statement
Sales
Income from San
Cost of sales

$ 8,190
864
5,460*

Other expenses
Consolidated net income
Noncontrolling int.share
Controlling share of NI

$ 2,050

Retained Earnings
Retained earnings — Po

$ 1,250

Retained earnings
December 31
Balance Sheet
Cash
Inventory
Other current assets
Plant assets — net
Investment in San

$ 5,600
4,000*

1,544*

*

96

e

700

1,000
500*

$ 2,300

$ 1,200

$

$

3,900*
2,144*
$ 2,146
96*
$ 2,050

d
f

$ 8,000

$ 4,500

$ 1,700
4,000
2,300
$ 8,000

$ 1,300

2,000
1,200
$ 4,500

2,050
1,000*

450
50

$ 2,300

500
800
200
3,000

3,222

Noncontrolling interest January 1
Noncontrolling interest December 31

a 5,600
c
80

$ 1,250
700

Goodwill

Current liabilities
Capital stock
Retained earnings

f

Consolidated
Statements
$ 8,190

$ 1,000

2,050
1,000*

758
420
600
3,000

a 5,600
d
864
b
120

600*

$

Retained earnings — San
Controlling share of NI
Dividends

Adjustments and
Eliminations

San 90%

b
g

120
100

$ 1,258
1,100
700
6,000

c

72

e

500

500

$ 9,558

g
100
e 2,000

$ 2,900
4,000
2,300

c

8

d
414
e 2,880

e
f

320
46

358
$ 9,558

Deduct

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