Solution manual advanced accounting 11th by beams chapter06

Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

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 purchasing affiliate.

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 useful 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 interest percentage
XXX
XXX
Noncontrolling interest share

©2011 Pearson Education, Inc. publishing as Prentice Hall
6-1


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-2

8

The effects of unrealized gains on intercompany sales of plant assets are charged against the parent’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 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 income is eliminated by adjusting depreciation expense to a cost basis for the consolidated
entity.

10

Consolidation workpaper 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

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-3

Solution E6-2
1

Par’s income from Sam will be decreased by $25,000 as a result of the
following entry:
Income from Sam
25,000
Investment in Sam
25,000
To eliminate unrealized gain on downstream sale of land.
Par’s net income for 2014 will not be affected by the sale since the
$25,000 gain will be offset by a $25,000 decrease in income from Sam.
The investment in Sam account at December 31, 2014 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
workpaper adjustment would show:
Gain on sale of land
Land

25,000

25,000

3

Neither Par’s income from Sam or net income for 2015 will be affected by
the 2014 sale of land. The investment in Sam 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 2015.

4

The sale of the land will not affect Sam’s net income since it is being
sold at Sam’s cost. However, the sale triggers recognition of the
postponed gain on the original sale from Par to Sam. Income from Sam
increases $25,000.
Investment in Sam
Income from Sam
To recognize the gain deferred in 2014.

25,000
25,000

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

25,000
25,000

© 2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-4

Solution E6-3
1a

Controlling Share of Consolidated Net Income
Pit’s separate income
Add: Equity in Sir’s income
2011 $80,000  90%
2012 $60,000  90%
Gain on sale of land
Controlling share of consolidated net income

1b

$

(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

72,000

Controlling Share of Consolidated Net Income
Pit’s separate income

Add: Equity in Sir’s income
Less: Gain on land  90%
Controlling share of consolidated net income
$

2b

2012
400,000

Noncontrolling interest share
Sir’s net income  10%

2a

2011
300,000

$

$

$

Noncontrolling interest share
Sir’s net income  10%
Less: Gain on land  10%
Noncontrolling interest share

$

$

Solution E6-4
1

Entries for 2011
Cash

90,000
Investment in Sal
To record dividends received from Sal.

Investment in Sal
Income from Sal

90,000
108,000

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

108,000
$

$

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

Pig Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2011
Sales
Cost of sales
Gross profit
Operating expenses
Total consolidated income
Noncontrolling interest share

$2,200,000
(1,400,000)
800,000
(447,000)
353,000
(15,000)

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-5

Controlling interest share

$

© 2011 Pearson Education, Inc. publishing as Prentice Hall

338,000


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-6

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 2011:
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 2012 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 2011.

Solution E6-6
1

a
Selling price in 2019
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

5

$

$

b
The workpaper entry to eliminate the unrealized profit is:
Gain on sale of equipment
1,500
Equipment
c
Investment income will be decreased by $12,000 gain less $3,000
piecemeal recognition of the gain.
©2011 Pearson Education, Inc. publishing as Prentice Hall

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

1,500

Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6

6-7

c
Sin’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, 2011
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 2011)
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, 2011
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 Sat (40%) at cost
Implied total fair value of Sat ($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 Sat — 2011
Share of Sat’s net income ($40,000  1/2 year  40%)
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 Sat

$

8,000
(2,000)
(1,600)

$

© 2011 Pearson Education, Inc. publishing as Prentice Hall

(2,000)
2,400


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-8

Solution E6-8 (continued)
2

Income from Sat — 2012
Sat’s net income
Amortization of patents
Unrealized inventory profits from upstream sales:
Recognition of profit in beginning inventory
Deferral of profit in ending inventory
Sat’s adjusted and realized income
Income from Sat (40% share)

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

Solution E6-9
1

Income from Sip, net income and consolidated net income:
Sip’s reported net income
Less: Amortization of excess allocated to buildings
($500,000 - $400,000)/20 years
Less: $20,000 unrealized profit on equipment
Sip’s adjusted and realized income

(5,000)

(20,000)
$ 75,000

Income from Sip (80% share) — 2013
Add: Separate income of Pan for 2013
Net income of Pan — 2013

$ 60,000
500,000
$560,000

Sip’s reported net income
Less: Amortization of excess allocated to buildings
Add: Piecemeal recognition of unrealized gain
on equipment ($20,000/4 years)
Sip’s adjusted and realized income

$110,000
(5,000)

$100,000

5,000
$110,000

$ 88,000
Income from Sip (80%) — 2014
Add: Separate income of Pan
600,000
$688,000

Net income of Pan — 2014
Controlling share of consolidated net income for 2013 and 2014
= Pan’s net income
2014
Alternatively,
2013
Separate incomes combined
$600,000
$710,000
Less: Amortization of excess (buildings)
(5,000)
(5,000)
Less: Unrealized gain on equipment in 2013
(20,000)
Add: Piecemeal recognition of gain in 2014
5,000
Consolidated net income
$575,000
$710,000
Less: Noncontrolling interest share:
(15,000)
2013 ($100,000 - $20,000 - $5,000)  20%
(22,000)
2014 ($110,000 + $5,000 - $5,000)  20%
Controlling interest share
$560,000
$688,000
2

Investment in Sip

Cost of investment July 1, 2011
$400,000
Add: Pan’s share of Sip’s retained earnings increase
from July 1, 2011 to December 31, 2012
40,000
($150,000 - $100,000)  80%
(6,000)
Less: 80% Amortization of excess ($4,000  1.5 years)
Investment in Sip December 31, 2012
434,000
20,000
Add: 2013 income less dividends [$60,000 - ($50,000  80%)]
Investment in Sip December 31, 2013
454,000
40,000
Add: 2014 income less dividends [$88,000 - ($60,000  80%)]
©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-9

Investment in Sip December 31, 2014
Solution E6-9 (continued)

$494,000

Alternative solution for check at December 31, 2014:
Share of Sip’s equity December 31, 2014 ($550,000  80%)
Add: 80% Unamortized excess on buildings
80%[Original excess $100,000 - ($5,000  3.5 years)]
Less: Unrealized profit on equipment
($20,000 gain - $5,000 recognized)  80%
Investment in Sip December 31, 2014

$440,000
66,000
(12,000)
$494,000

Solution E6-10
Preliminary computations
Transfer price of inventory to Spa ($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:
2011

Equipment (at transfer price)
$360,000
Less: Unrealized profit
(180,000)
Less: Depreciation taken by Spa ($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

2012 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 workpaper entries:
2011
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.
2012
Investment in Spa
150,000
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.
© 2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-10

Solution E6-11
Par Corporation and Subsidiary
Schedule for Computation of Consolidated Net Income
2012
2013
2014
2011
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 Par’s $5,000 gain is
included in Par’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
(8,000)

8,000
Unrealized inventory profits
Consolidated net income
260,000
205,000
122,000
233,000
Less: Noncontrolling interest share
(12,000)
2011 ($60,000-$5,000+$5,000)  20%
( 15,000)
2012 ($70,000+$5,000)  20%
(15,400)
2013 ($80,000-$8,000+$5,000))  20%
2014 ($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:
Par’s separate income
Add: 80% of Sum’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%
Par’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 Par paid $40,000 more than book value for its 80% share, the
implied total fair value minus book value of Sum is $50,000.

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-11

SOLUTIONS TO PROBLEMS
Solution P6-1
1

Income from Sea — 2011
Equity in Sea’s income ($100,000  90%)

$

Add: Deferred inventory profit from 2010 ($40,000  50%)

90,000
20,000

Less: Unrealized inventory profit from 2011 ($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 Sea (corrected amount)
2

10,000
$

56,000

Pea Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2011
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 Pea
Add: Income from Sea
Controlling interest share

$
$

$
$

© 2011 Pearson Education, Inc. publishing as Prentice Hall

290,000
306,000
10,000
296,000
240,000
56,000
296,000


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-12

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 workpaper 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 cost of sales 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.

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-13

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.

© 2011 Pearson Education, Inc. publishing as Prentice Hall

9,000


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-14

Solution P6-2 (continued)
Pal Corporation and Subsidiary
Consolidation WorkPapers
for the year ended December 31, 2012
(in thousands)
Pal
Income Statement
Sales

Income from Sim
Gain on equipment
Cost of sales

$ 300
31
9
140*

Operating expenses
Consolidated NI
Noncontrolling share
Controlling share of NI

$ 140

Retained Earnings
Retained earnings — Pal

$ 157

Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land
Buildings — net

$ 100

50*

60*

10*

$

$

b
c
g

20
5
3

4

169*
67*
144
4*
$ 140

70

i 70

40
20*

$

90

$ 100
90
9
20
40
135

$

17
50

140
h
j

165

60

a

2

g

3

c 5
e 3
i 50

Goodwill
$ 717

$ 200

$

$

30
10
20
50
90
$ 200

18
2

60*

$ 237

8
15
50

158

Noncontrolling interest January 1
Noncontrolling interest December 31

$ 380

40

$ 237

98
15
67
300
237
$ 717

Consolidated
Statements

$ 157

140

60*

Equipment — net
Investment in Sim

Accounts payable
Dividends payable
Other liabilities
Capital stock
Retained earnings

b 20
h 31
f 9
d 4

j

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

Adjustments and
Eliminations

Sim 90%

k

a
k
d
e

2
9
4
3

f

9

$ 119
138
24
52
185
219

h 13
i 153
50
$ 787
$ 128
16
87
300

237

9

i 50

i

17

j

2

19
$ 787

*

Deduct

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-15

Solution P6-3
Preliminary computations
Cost January 1, 2011
Implied fair value of Sor ($270,000 / 90%)
Book value of Sor
Excess of fair value over book value - Goodwill

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

Cost January 1, 2011
Add: Income from Sor for 2011
$ 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 Sor for 2011
Less: Dividends $10,000  90%

$270,000

Investment balance January 1, 2012

Add: Income from Sor for 2012
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 Sor for 2012
Less: Dividends ($20,000  90%)
Investment balance December 31, 2012

20,000
(9,000)
281,000

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

© 2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-16

Solution P6-3 (continued)
Pal Corporation and Subsidiary
Consolidation WorkPapers
for the Year Ended December 31, 2012
(in thousands)
Pal
Income Statement
Sales
Income from Sor
Gain on land
Cost of sales

$

Operating expense

450
40
5
(200)

$ 190

(100)

(113)

h

Controlling share of NI

$

182

Retained Earnings
Retained earnings — Pal

$

202

$

182
(150)

234

$ 150

$

$

Buildings — net

133
180
18
60
100
280

Machinery — net
Investment in Sor

303

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

72
10
2

$

$

50
20
30

150
150
$ 400

568

(230)
(151)
187
(5)
$

182

$

202
182

140

$ 400

Noncontrolling interest January 1
Noncontrolling interest December 31

a
b
d

f
h

14
100

$1,404
200
30
140
800
234
$1,404

$

g 120

36
30
80

330

Consolidated
Statements

5

50

(20)

$

Goodwill
Total assets

72
40
5
12

50

$ 120

Retained earnings — Sor
Controlling share of NI
Dividends

Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land

a
f
e

c

(40)

Consolidated NI
Noncontrolling share

Retained earnings
December 31

Adjustments and
Eliminations

Sor 90%

b
d
g

10
6
60

i
j

10
18

18

2

i
j
c
e

10
18
12
5

d

4

(150)
$

234

$

147
270
84
125
360
466

f 22
g 297
60
$1,512
$

g 150

g

33

h

3

240
32
170
800
234

36
$1,512

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-17

Solution P6-4
Par Corporation and Subsidiary
Consolidation WorkPapers
for the year ended December 31, 2011
(in thousands)
Par
Income Statement
Sales
Income from Sag
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

$

200

Retained Earnings
Retained earnings — Par

$

600

Retained earnings
December 31

200
100*

700

$ 260

$

$

Buildings — net

35
90
100
70
50
200

Equipment — net
Investment in Sag

655

Accounts payable
Other liabilities
Capital stock
Retained earnings

500

10

Consolidated
Balance Sheet

$1,150

a
d

50
5

555*
120*
265*
210
10*
$

200

$

600

f 200
200
e
h

400

45
5

g
b

10
5

c

10

d

15

100*
$

700

$

65
190
175
110
110
350
885

e 25
f 630
$ 880

$

$

Noncontrolling interest January 1
Noncontrolling interest December 31

h

30
110
80
40
70
150

$1,700
160
340
500
700
$1,700

50
70
10

20
5

110
50*

$

Balance Sheet
Cash
Accounts receivable
Inventories
Other current items
Land

a
e
c
d
b

$ 110

$ 200

Retained earnings — Sag
Controlling share of NI
Dividends

Adjustments and

Eliminations

Sag 90%

50
70
500
260
$ 880

$1,885
g

10

$

f 500

f

70

h

5

200
410
500

700

75
$1,885

*

Deduct

© 2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

6-18

Intercompany Profit Transactions — Plant Assets

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

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-19

Solution P6-5

Preliminary computations
Cost January 1, 2011
Add: Income from Sto for 2011
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 Sto for 2011
Less: Dividends $10,000  90%
Investment balance January 1, 2012
Add: Income from Sto for 2012
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 Sto for 2012
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, 2012
Noncontrolling interest share of Sto’s income (10%)
Sto’s reported net income
Less: Patent amortization
Sto’s adjusted income
10% Noncontrollling interest share

$292,200
2011

2012

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

$50,000

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

© 2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-20

Solution P6-5 (continued)
Pal Corporation and Subsidiary
Consolidation WorkPapers
for the Year Ended December 31, 2012
Pal
Income Statement
Sales
Income from Sto
Gain on land
Cost of sales
Operating expense
Consolidated NI
Noncontrolling share
Controlling share of NI

$

Adjustments and
Eliminations

Sto 90%

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

a
f
e
c

(113,000)

h

(40,000)

k
$

176,600

$

200,000

$

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

Consolidated
Statements
$

72,000
10,000
2,000

4,400

50,000

568,000

(230,000)
(157,000)
181,000
(4,400)
$ 176,600

Retained Earnings

Retained earnings — Pal
Retained earnings — Sto
Controlling share of NI
Dividends
Retained earnings
December 31
Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land

176,600
(150,000)

226,600

$ 150,000

$

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

$

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

14,000
100,000

140,000

292,200

$1,396,600

$ 400,000

$

$

200,000
30,000
140,000
800,000
226,600
$1,396,600

Noncontrolling interest January 1
Noncontrolling interest December 31

176,600
f
k

36,000
30,000
80,000

330,000

Machinery — net
Investment in Sto

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

200,000

g 120,000

50,000
(20,000)

$

Buildings — net

Patents
Total assets

$
$ 120,000

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

32,400
2,400

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

34,800
$1,503,400

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-21

Solution P6-6
Preliminary computations
Investment cost
Implied fair value of San ($290,000 / 80%)

Book value of San
Excess fair value over book value
- allocated 50% to Patents with a ten-year life ($31,250)
- allocated 50% to Inventory sold in 2009 ($31,250)
Reconciliation of income from San:
Pil’s share of San’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 San

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

$ 40,000
(2,500)
2,400
(8,000)
$ 31,900

Reconciliation of investment account:
Share of San’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 San December 31, 2011

(7,200)
(8,000)
$322,300

Noncontrolling interest share:
San’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

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

$320,000
17,500

© 2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-22

Solution P6-6 (continued)
Pil Corporation and Subsidiary
Consolidation WorkPapers
for the year ended December 31, 2011
Pil
Income Statement
Sales
Income from San
Gain on land
Depreciation expense
Other expenses
Consolidated NI
Noncontrolling share
Controlling share of NI
Retained Earnings
Retained earnings — Pil

$ 210,000
31,900

$ 130,000
10,000
30,000*
60,000*

40,000*

110,000*

$

91,900

$

50,000

$

50,000

$ 202,300

$ 100,000

Balance Sheet
Current assets
Plant assets

$ 200,000
550,000

$ 170,000
350,000

91,900
30,000*

31,900
10,000

e

3,125

f

7,975

a

d

120,000*
322,300

70,000*

$ 952,300

$ 450,000

$ 150,000
600,000
202,300
$ 952,300

$

Noncontrolling interest January 1
Noncontrolling interest December 31

$

340,000

$

67,000*
173,125*
99,875
7,975*
91,900

$

140,400

3,000

50,000
91,900
30,000*

a
b
a

a
d

Current liabilities
Capital stock
Retained earnings

Consolidated
Statements

50,000

Patent

*

c
b

$ 140,400

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

Accumulated depreciation
Investment in San

Adjustments and
Eliminations

San 80%

50,000
300,000
100,000
$ 450,000

$

202,300

$

370,000
875,000

15,000
10,000

6,000
9,600 c 31,900
d 300,000
25,000 e
3,125

184,000*

21,875
$1,082,875
$

d 300,000

a

2,400 d
f

75,000
7,975

200,000
600,000
202,300

80,575
$1,082,875

Deduct

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-23

Solution 6-6 (continued)
Consolidation workpaper entries
a

Accumulated depreciation
6,000
Investment in San
9,600
Noncontrolling interest
2,400
Depreciation expense
3,000
Plant assets
15,000
To eliminate unrealized profit on 2010 sale of plant assets and
reduce plant assets to cost.

b

Gain on land
10,000
Plant assets
10,000
To eliminate unrealized gain on 2011 upstream sale of land and
reduce plant assets to cost.

c

Income from San
31,900
Investment in San
31,900
To eliminate income from San and adjust investment to beginning of
period.

d

Capital stock—San
300,000
Retained earnings—San January 1
50,000
Patent
25,000
Investment in San
300,000
Noncontrolling interest January 1
75,000
To eliminate investment in San and stockholders’ equity of San and
enter beginning of the period patent.

e

Other expenses
Patent
To provide for patent amortization.

f

3,125
3,125

Noncontrolling Interest Share
7,975
Noncontrolling Interest
7,975
To enter noncontrolling interest share of subsidiary income.

© 2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Intercompany Profit Transactions — Plant Assets

6-24

Solution P6-7
Preliminary computations (amounts in thousands)
Investment cost for 100% of Ski, April 1, 2011
Book value acquired
Excess fair value over book value
Excess allocated:
Undervalued inventory items (sold in 2011)
Undervalued buildings (7-year remaining useful life)
Goodwill
Excess fair value over book value

$15,000

(7,000)
$ 8,000
$

500
3,500
4,000
$ 8,000

Reconciliation of investment account balance:
Investment cost April 1, 2011
Add: Increase in Ski’s retained earnings
Less: Excess allocated to inventories sold in 2011
Less: Depreciation on excess allocated to buildings
($3,500/7 years)  4.75 years
Less: Unrealized inventory profits December 31, 2015
Less: Unrealized profit on equipment
($800 intercompany profit - $200 recognized)
Investment balance December 31, 2015

$15,000
3,000
(500)
(2,375)
(120)
(600)
$14,405

Reconciliation of investment income balance:
Share of Ski’s income (100%)

Add: Unrealized profit in beginning inventory
Add: Realization of previously deferred profit on land
Less: Unrealized profit in ending inventory
Less: Depreciation on excess allocated to buildings
Less: Unrealized profit on equipment
Income from Ski

$ 2,000
100
500
(120)
(500)
(600)
$ 1,380

©2011 Pearson Education, Inc. publishing as Prentice Hall


Find more slides, ebooks, solution manual and testbank on www.downloadslide.com

Chapter 6

6-25

Solution P6-7 (continued)
Pot Corporation and Subsidiary
Consolidation WorkPapers
for the year ended December 31, 2015
(in thousands)
Pot

Income Statement
Sales
Gain on land
Gain on equipment
Income from Ski
Cost of sales

$26,000
700

Retained Earnings
Retained earnings —
Pot
Retained earnings —
Ski
Consolidated net income
Dividends
Retained earnings
December 31

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

$11,000

800

1,380
15,000*

Depreciation expense
3,700*
Other expenses
4,280*
Consolidated net income $ 5,100

5,000*
2,000*
2,800*

*

b 1,500
e
800
g 1,380
d
120
i

500

a

500

b
c
f

1,500
100
200

$ 2,000

$35,500
1,200

18,520*
6,000*
7,080*

$12,375
$ 4,000

5,100
3,000*

h 4,000
5,100

2,000
1,000*

$14,475

$ 5,000

$ 1,170
2,000
5,000
4,000
15,000

$

10,000

Consolidated
Statements

$ 5,100

$12,375

500
1,500
2,000
1,000
4,000
4,000

14,405

g

$51,575

$13,000

$ 4,100
7,000
26,000

$ 1,000
2,000
5,000

14,475
$51,575

5,000
$13,000

1,000

3,000*
$14,475

j
d

300
120

h 1,625

i

500

$ 1,670
3,200
6,880
5,000
20,125

f

e

800

13,400

200

a
500
c
100
h 4,000

Goodwill

Accounts payable
Other liabilities
Capital stock
Retained earnings

Adjustments and
Eliminations

Ski

g
380
h 14,625
4,000
$54,275

j

300

h 5,000

$ 4,800
9,000
26,000
14,475
$54,275

Deduct

© 2011 Pearson Education, Inc. publishing as Prentice Hall