Capter Enam

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2011 Pearson Education, Inc. publishing as Prentice Hall6-1

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 andrelated 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 ofthe sale. The full amount of unrealized profit or loss on downstream sales (parent to subsidiary) is chargedor credited to the controlling interest. In the case of upstream sales, however, unrealized profit or loss isallocated between controlling and noncontrolling interests. Because there is no allocation to noncontrollinginterests in the case of a 100 percent owned subsidiary, consolidation procedures are the same for upstreamsales as for downstream sales.

3 Unrealized gains and losses from intercompany sales of land are realized from the viewpoint of the sellingaffiliate when the purchasing affiliate resells the land to parties outside the consolidated entity. This is alsothe 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 ofthe subsidiary is not affected by downstream sales. In the case of upstream sales of land, the reportedincome of the subsidiary is adjusted downward for unrealized profits and upward for unrealized losses todetermine realized income. Since noncontrolling interest share is computed on the basis of realizedsubsidiary 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 allintercompany transactions. The issue is not whether 100 percent of the unrealized profit or loss iseliminated, but if the amount eliminated is allocated between controlling and noncontrolling interests. Inthe case of an upstream sale of land, 100 percent of the unrealized profit from the sale is eliminated, but theamount 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 theassets 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 overthe remaining useful life of the depreciable asset.

7 The computation of noncontrolling interest share in the year of an upstream sale of depreciable plant assetis as follows:

Unrealized Unrealized Gain on Sale Loss on Sale

I ncome of subsi di ar y as r epor t ed XXX XXXDeduct : Gai n on sal e of pl ant asset s - XXAdd: Loss on sal e of pl ant asset s +XXAdd: Pi ecemeal r ecogni t i on of gai n on sal e

of pl ant asset s + XDeduct : Pi ecemeal r ecogni t i on of l oss on

sal e of pl ant asset s - XReal i zed subsi di ar y i ncome XXX XXX

Noncontrolling i nt erest per cent age X% X% Noncontrolling i nt er est shar e XXX XXX


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6-2 Intercompany Profit Transactions Plant Assets

2011 Pearson Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

8 The effects of unrealized gains on intercompany sales of plant assets are charged against the parentsincome from subsidiary account in the year of the intercompany sale, with equal amounts being deductedfrom the investment in subsidiary account. In subsequent years, the income from subsidiary andinvestment in subsidiary accounts are increased for depreciation on the unrealized gain that is recorded onthe subsidiary books for downstream sales or for the parents proportionate share for upstream sales. If theunrealized gain relates to land, no entries are needed until the land is sold to entities outside of theaffiliation 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 useor through sale to outside parties. In years subsequent to intercompany sales of depreciable plant assets, theeffect on parent income is eliminated by adjusting depreciation expense to a cost basis for the consolidatedentity.

10 Consolidation workpaper entries to eliminate the effect of a gain on sale of depreciable plant assets from adownstream sale are illustrated as follows:

Year of sale Gain on saleAccumulated depreciation

Depreciation expensePlant assets

To reduce plant assets and related depreciation amounts to a cost basis to theconsolidated entity and to eliminate unrealized gain on intercompany sale.

Subsequent years Investment in subsidiaryAccumulated depreciation

Depreciation expensePlant assets

To reduce plant assets and related depreciation amounts to a cost basis to theconsolidated 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

2011 Pear son Educat i on, I nc. publ i shi ng as Prent i ce Hal l

Solution E6-2

1 Par s i ncome f r om Sam wi l l be decr eased by $25, 000 as a r esul t of t hef ol l owi ng ent r y:

I ncome f r om Sam 25, 000

I nvest ment i n Sam 25, 000 To el i mi nat e unr eal i zed gai n on downst r eam sal e of l and.

Par s net i ncome f or 2014 wi l l not be af f ect ed by t he sal e si nce t he$25, 000 gai n wi l l be of f set by a $25, 000 decrease i n i ncome f r om Sam.

The i nvest ment i n Sam account at December 31, 2014 wi l l be $25, 000 l essas a r esul t of t he sal e as i ndi cat ed by t he above ent r y. ( The t ot albal ance sheet ef f ect i s t o r educe l and t o i t s cost , r educe t hei nvest ment account f or t he pr of i t , and i ncr ease cash or ot her asset s f ort he pr oceeds. )

2 The consol i dat ed f i nanci al st at ement s wi l l not be af f ect ed because t hegai n on t he sal e i s el i mi nat ed i n t he consol i dat ed i ncome st at ement andt he l and i s r educed t o i t s cost basi s t o the consol i dat ed ent i t y. Awor kpaper adj ust ment woul d show:

Gai n on sal e of l and 25, 000Land 25, 000

3 Nei t her Par s i ncome f r om Sam or net i ncome f or 2015 wi l l be af f ect ed byt he 2014 sal e of l and. The i nvest ment i n Sam account , however , wi l lst i l l be $25, 000 l ess t han i f t he l and had not been sol d, even t hought her e ar e no changes i n t he i nvest ment account dur i ng 2015.

4 The sal e of t he l and wi l l not af f ect Sam s net i ncome si nce i t i s bei ngsol d at Sam s cost . However , t he sal e t r i gger s r ecogni t i on of t hepost poned gai n on t he or i gi nal sal e f r om Par t o Sam. I ncome f r om Sami ncr eases $25, 000.

I nvest ment i n Sam 25, 000I ncome f r om Sam 25, 000

To r ecogni ze t he gai n def er r ed i n 2014.

Consol i dat ed i ncome wi l l al so f eel t he same i mpact of t he r ecogni t i on oft he def er r ed gai n.

I nvest ment i n Sam 25, 000Gai n on sal e of l and 25, 000


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Chapter 6 6-7


6 cSi n s net i ncome $1, 000, 000Less: Unr eal i zed gai n ( 50, 000)Add: Pi ecemeal r ecogni t i on 5, 000Real i zed i ncome 955, 000

Noncont r ol l i ng i nt er est per cent age 40% Noncont r ol l i ng i nt er est shar e $ 382, 000

Solution E6-7

Pod Corporation and Subsidiary Consol i dat ed I ncome St at ement

f or t he year ended December 31, 2011

Sal es ( $500, 000 + $300, 000) $800, 000Gai n on sal e of machi ner y a 20, 000

Tot al r evenue 820, 000

Cost of sal es ( $200, 000 + $130, 000) 330, 000Depr eci at i on expense ( $50, 000 + $30, 000 - $5, 000 f r om

depr eci at i on on i nt er company pr of i t f or 2011) 75, 000Ot her expenses ( $80, 000 + $40, 000) 120, 000

Tot al expenses 525, 000Consol i dat ed net i ncome $295, 000Noncont r ol l i ng shar e ( $100, 000+$5, 000 pi ecemeal r ecogni t i on f r om

depr eci at i on + $10, 000 r emai ni ng def err ed gai n) 25%noncont r ol l i ng i nt er est 28, 750

Cont r ol l i ng i nt er est shar e $266, 250

a Sel l i ng pr i ce of machi ner y at December 28, 2011 $ 36, 000Book val ue on Pod s books $65, 000 ( $65, 000/ 5 year s 3 years ) 26, 000

Gai n on sal e of machi ner y $ 10, 000

Or i gi nal i nt ercompany pr of i t $ 25, 000Pi ecemeal r ecogni t i on of gai n $25, 000/ 5 years 3 year s 15, 000

Unamor t i zed gai n f r om i nter company sal es $ 10, 000

Gai n on sal e of machi nery t o out si de ent i t y $ 20, 000

Solution E6-8 Preliminary computations:I nvest ment i n Sat ( 40%) at cost $100, 000I mpl i ed t ot al f ai r val ue of Sat ( $100, 000 / 40%) $250, 000Book val ue ( 200, 000)

Excess al l ocat ed t o pat ent s $ 50, 000Annual amort i zat i on of pat ent s ( $50, 000/ 5 year s) $ 10, 000

1 Income from Sat 2011

Shar e of Sat s net i ncome ( $40, 000 1/ 2 year 40%) $ 8, 000Amort i zat i on of pat ent s ( $10, 000 1/ 2 year 40%) ( 2, 000)Unr eal i zed i nvent or y pr of i t f r om upst r eam sal e

( $4, 000 40%) ( 1, 600)Unr eal i zed gai n f r om downst r eam sal e of l and

( $2, 000 100%) ( 2, 000)I ncome f r om Sat $ 2, 400


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Solution E6-8 ( cont i nued)

2 Income from Sat 2012

Sat s net i ncome $ 60, 000Amor t i zat i on of pat ent s ( 10, 000)

Unr eal i zed i nvent or y pr of i t s f r om upst r eam sal es:Recogni t i on of pr of i t i n begi nni ng i nvent or y 4, 000Def er r al of pr of i t i n endi ng i nvent or y ( 6, 000)

Sat s adj ust ed and r eal i zed i ncome $ 48, 000I ncome f r om Sat ( 40% shar e) $ 19, 200

Solution E6-9

1 Income from Sip, net income and consolidated net income: Si p s r epor t ed net i ncome $100, 000Less: Amort i zat i on of excess al l ocat ed t o bui l di ngs

( $500, 000 - $400, 000) / 20 years ( 5, 000)Less: $20, 000 unr eal i zed pr of i t on equi pment ( 20, 000)Si p s adj ust ed and r eal i zed i ncome $ 75, 000

I ncome f r om Si p ( 80% shar e) 2013 $ 60, 000Add: Separ at e i ncome of Pan f or 2013 500, 000

Net i ncome of Pan 2013 $560, 000

Si p s r epor t ed net i ncome $110, 000Less: Amort i zat i on of excess al l ocat ed t o bui l di ngs ( 5, 000)Add: Pi ecemeal r ecogni t i on of unr eal i zed gai n

on equi pment ( $20, 000/ 4 year s) 5, 000Si p s adj ust ed and r eal i zed i ncome $110, 000

I ncome f r om Si p (80%) 2014 $ 88, 000Add: Separ at e i ncome of Pan 600, 000

Net i ncome of Pan 2014 $688, 000

Controlling share of consolidated net income for 2013 and 2014= Pans net income

Al t ernat i vel y, 2013 2014Separ at e i ncomes combi ned $600, 000 $710, 000Less: Amor t i zat i on of excess ( bui l di ngs) ( 5, 000) ( 5, 000)Less: Unr eal i zed gai n on equi pment i n 2013 ( 20, 000)Add: Pi ecemeal r ecogni t i on of gai n i n 2014 5, 000Consol i dat ed net i ncome $575, 000 $710, 000Less: Noncont r ol l i ng i nt er est shar e:

2013 ( $100, 000 - $20, 000 - $5, 000) 20% ( 15, 000)2014 ( $110, 000 + $5, 000 - $5, 000) 20% ( 22, 000)Cont r ol l i ng i nt er est shar e $560, 000 $688, 000

2 Investment in Sip Cost of i nvest ment J ul y 1, 2011 $400, 000Add: Pan s shar e of Si p s r et ai ned ear ni ngs i ncr ease

f r om J ul y 1, 2011 t o December 31, 2012( $150, 000 - $100, 000) 80%

40, 000

Less: 80% Amort i zat i on of excess ( $4, 000 1. 5 year s) ( 6, 000)I nvest ment i n Si p December 31, 2012 434, 000

Add: 2013 i ncome l ess di vi dends [ $60, 000 - ( $50, 000 80%) ] 20, 000I nvest ment i n Si p December 31, 2013 454, 000

Add: 2014 i ncome l ess di vi dends [ $88, 000 - ( $60, 000 80%) ] 40, 000


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Chapter 6 6-9


I nvest ment i n Si p December 31, 2014 $494, 000Solution E6-9 ( cont i nued)

Alternative solution for check at December 31, 2014:

Shar e of Si p s equi t y December 31, 2014 ( $550, 000 80%) $440, 000

Add: 80% Unamor t i zed excess on bui l di ngs80%[ Or i gi nal excess $100, 000 - ( $5, 000 3. 5 year s) ] 66, 000Less: Unr eal i zed pr of i t on equi pment

( $20, 000 gai n - $5, 000 r ecogni zed) 80% ( 12, 000)I nvest ment i n Si p December 31, 2014 $494, 000

Solution E6-10

Preliminary computations Tr ansf er pr i ce of i nvent or y t o Spa ( $180, 000 2) $360, 000Cost t o consol i dat ed ent i t y ( 180, 000)

Unr eal i zed pr of i t on J anuar y 3 $180, 000Amor t i zat i on of unr eal i zed pr of i t f r om consol i dat ed vi ew:

$180, 000/ 6 year s = $30, 000 per year

1 Consolidated balance sheet amounts: 2011 Equi pment ( at t r ansf er pr i ce) $360, 000Less: Unr eal i zed pr of i t ( 180, 000)Less: Depr eci at i on t aken by Spa ( $360, 000/ 6 year s) ( 60, 000)Add: Depr eci at i on on unr eal i zed pr of i t ( $180, 000/ 6 year s) 30, 000Equi pment net t o be i ncl uded on consol i dat ed bal ance sheet $150, 000

Al t ernat i vel y:Equi pment ( at cost t o t he consol i dat ed ent i t y) $180, 000Less: Depr eci at i on based on cost ( $180, 000/ 6 year s) ( 30, 000)Equi pment net $150, 000

2012 Year af t er i nt er company sal eEqui pment net begi nni ng of t he per i od on cost basi s $150, 000Less: Depr eci at i on ( based on cost ) ( 30, 000)Equi pment net $120, 000

2 Consolidation workpaper entries: 2011

Sal es 360, 000Cost of goods sol d 180, 000Equi pment net 150, 000Depr eci at i on expense 30, 000

To el i mi nat e i nt er company i nvent or y sal e, r et ur n equi pmentt o i t s cost t o t he consol i dat ed ent i t y, and el i mi nat e

depr eci at i on on t he i nt er company pr of i t .2012

I nvest ment i n Spa 150, 000Equi pment net 120, 000Depr eci at i on expense 30, 000

To el i mi nat e unreal i zed pr of i t f r om t he equi pment accountand t he cur r ent year s depr eci at i on on t he unr eal i zed pr of i tand est abl i sh r eci proci t y bet ween t he i nvest ment account andbegi nni ng- of - t he- per i od subsi di ar y equi t y account s.


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Solution E6-11

Par Corporation and Subsidiary Schedul e f or Comput at i on of Consol i dat ed Net I ncome

2011 2012 2013 2014

Combi ned separ at e i ncomes $260, 000 $220, 000 $120, 000 $210, 000Add: Amort i zat i on of negat i vedi f f er ent i al assi gned t o pl ant

asset s ( $50, 000/ 10 years ) * 5, 000 5, 000 5, 000 5, 000Unr eal i zed gai n on l and ( Not e

That Par s $5, 000 gai n i si ncl uded i n Par s separ at ei ncome) ( 5, 000) 5, 000

Unr eal i zed gai n on machi ner y ( 25, 000)Pi ecemeal r ecogni t i on of

Gai n on machi ner y 5, 000 5, 000 5, 000Unr eal i zed i nvent or y pr of i t s ( 8, 000) 8, 000Consol i dat ed net i ncome 260, 000 205, 000 122, 000 233, 000Less: Noncont r ol l i ng i nt er est shar e

2011 ( $60, 000- $5, 000+$5, 000) 20% ( 12, 000)

2012 ( $70, 000+$5, 000) 20% ( 15, 000)2013 ( $80, 000- $8, 000+$5, 000) ) 20% ( 15, 400)2014 ( $90, 000 + $8, 000 +

$5, 000 + $5, 000) ) 20% ( 21, 600)Cont r ol l i ng share of NI $248, 000 $190, 000 $106, 600 $211, 400

Alternative Solution:Par s separat e i ncome $200, 000 $150, 000 $ 40, 000 $120, 000Add: 80% of Sum s i ncome 48, 000 56, 000 64, 000 72, 000Amor t i ze t he negat i ve di f f er ent i alassi gned t o pl ant asset 80% 4, 000 4, 000 4, 000 4, 000Unr eal i zed pr of i t on upst r eam

Sal e of l and ( $5, 000 80%) ( 4, 000) 4, 000Unr eal i zed pr of i t on downst r eam

Sal e of machi nery ( 25, 000)Pi ecemeal r ecogni t i on of gai n

( $25, 000/ 5 years ) 5, 000 5, 000 5, 000Unr eal i zed pr of i t on upst r eam

Sal e of i nvent or y i t ems$8, 000 80% ( 6, 400) 6, 400

Par s net i ncome and cont r ol l i ngshar e of consol i dat ed net i ncome $248, 000 $190, 000 $106, 600 $211, 400

* Not e: Si nce Par pai d $40, 000 more t han book val ue f or i t s 80% shar e, t hei mpl i ed t otal f ai r val ue mi nus book val ue of Sum i s $50, 000.


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Chapter 6 6-11


SOLUTIONS TO PROBLEMS

Solution P6-1

1 Income from Sea 2011

Equi t y i n Sea s i ncome ( $100, 000 90%) $ 90, 000

Add: Def er r ed i nvent or y pr of i t f r om 2010 ( $40, 000 50%) 20, 000

Less: Unr eal i zed i nvent or y pr of i t f r om 2011 ( $60, 000 40%) ( 24, 000)

Less: I nt ercompany pr of i t on equi pment ( $100, 000 - $60, 000) ( 40, 000)

Add: Pi ecemeal r ecogni t i on of pr of i t on equi pment$40, 000/ 4 year s 10, 000

I ncome f r om Sea ( cor r ect ed amount ) $ 56, 000

2 Pea Corporation and Subsidiary Consol i dat ed I ncome St at ement


Sal es [ $1, 600, 000 combi ned - $150, 000 i nt er company] $1, 450, 000

Cost of sal es [ $1, 000, 000 combi ned - $150, 000 i nt er -company + $24, 000 endi ng i nvent or y pr of i t s - $20, 000

begi nni ng i nvent or y pr of i t s] 854, 000

Gr oss pr of i t 596, 000

Ot her expenses [ $300, 000 combi ned - $10, 000 pi ecemealr ecogni t i on of pr of i t on equi pment ] 290, 000

Consol i dat ed net i ncome $ 306, 000

Less: Noncont r ol l i ng i nt er est shar e 10, 000Cont r ol l i ng i nt er est shar e $ 296, 000

Check:Separ at e i ncome of Pea $ 240, 000Add: I ncome f r om Sea 56, 000Cont r ol l i ng i nt er est shar e $ 296, 000


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Solution P6-2

Preliminary computations

NOTE: Si nce Pal pai d a pr i ce $45, 000 i n excess of book val ue f or i t s 90%shar e, t he i mpl i ed t ot al excess of f ai r val ue over book i s $50, 000 ( $45, 000 /

90%) .Computation of income from Sim:Shar e of Si m s r epor t ed i ncome ( $40, 000 . 9) $36, 000Add: Real i zat i on of def er r ed pr of i t s i n begi nni ng i nvent or y 5, 000Less: Unr eal i zed pr of i t s i n endi ng i nvent or y ( 4, 000)Less: Unr eal i zed pr of i t on i nt er company sal e of equi pment

( $30, 000 - $21, 000) ( 9, 000)Add: Pi ecemeal r ecogni t i on of def err ed pr of i t i n equi pment

( $9, 000/ 3 years) 3, 000I ncome f r om Si m $31, 000

Consolidation workpaper entries

A Cash 2, 000Account s r ecei vabl e 2, 000 To r ecor d cash i n t r ansi t f r om Si m on account .

B Sal es 20, 000Cost of sal es 20, 000

To el i mi nat e i nt er company cos t of sal es and sal es.

C I nvest ment i n Si m 5, 000Cost of sal es 5, 000

To r ecogni ze pr evi ousl y def er r ed pr of i t f r om begi nni ng i nvent or y.

D Cost of sal es 4, 000I nvent ory 4, 000

To def er unr eal i zed pr of i t f r om endi ng i nvent or y.

E I nvest ment i n Si m 3, 000Land 3, 000

To r educe l and t o i t s cost basi s and adj ust t he i nvest ment accountt o est abl i sh r eci pr oci t y wi t h Si m s begi nni ng of t he per i od equi t yaccount s.

F Gai n on sal e of equi pment 9, 000Equi pment net 9, 000

To el i mi nat e gai n on i nt er company sal e of equi pment and r educeequi pment t o a cost basi s.


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Chapter 6 6-13


Solution P6-2 ( cont i nued)

g Equi pment net 3, 000Oper at i ng expenses 3, 000

To el i mi nat e cur r ent year s depr eci at i on of unreal i zed gai n.

h I ncome f r om Si m 31, 000Di vi dends Si m 18, 000I nvest ment i n Si m 13, 000

To el i mi nat e i ncome and di vi dends f r om Si m and r et ur n i nvest mentaccount t o i t s begi nni ng of t he per i od bal ance.

i Ret ai ned ear ni ngs Si m 70, 000Capi t al st ock Si m 50, 000Goodwi l l 50, 000

I nvest ment i n Si m 153, 000Noncont r ol l i ng i nt er est J anuar y 1 17, 000

To el i mi nat e r eci pr ocal i nvest ment and equi t y amount s, est abl i shbegi nni ng noncont r ol l i ng i nt er est , and ent er begi nni ng- of - t he-per i od f ai r val ue book val ue di f f er ent i al ( goodwi l l ) .

j Noncont r ol l i ng I nt er est Shar e 4, 000Di vi dends Si m 2, 000Noncont r ol l i ng I nt er est 2, 000

To r ecor d Noncont r ol l i ng i nt er est share of subsi di ar y i ncome anddi vi dends.

k Di vi dends payabl e 9, 000Di vi dends r ecei vabl e 9, 000

To el i mi nat e r eci pr ocal r ecei vabl es and payabl es.


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Pal Corporation and Subsidiary Consol i dat i on Wor kPapers

f or t he year ended December 31, 2012( i n t housands)

Pal Si m 90%Adj ust ment s and

El i mi nat i onsConsol i dat ed

St at ement sIncome Statement Sal es $ 300 $ 100 b 20 $ 380I ncome f r om Si m 31 h 31Gai n on equi pment 9 f 9Cost of sal es 140 * 50 * d 4 b 20

c 5 169 * Oper at i ng expenses 60 * 10 * g 3 67 * Consol i dat ed NI 144Noncont r ol l i ng share j 4 4 * Cont r ol l i ng shar e of NI $ 140 $ 40 $ 140

Retained Earnings Ret ai ned earni ngs Pal $ 157 $ 157

Ret ai ned earni ngs Si m $ 70 i 70Cont r ol l i ng shar e of NI 140 40 140Di vi dends 60 * 20 * h 18

j 2 60*Ret ai ned earni ngs

December 31 $ 237 $ 90 $ 237

Balance Sheet Cash $ 100 $ 17 a 2 $ 119Account s r ecei vabl e 90 50 a 2 138

Di vi dends r ecei vabl e 9 k 9I nvent or i es 20 8 d 4 24Land 40 15 e 3 52Bui l di ngs net 135 50 185

Equi pment net 165 60 g 3 f 9 219I nvest ment i n Si m 158 c 5

e 3h 13i 153

Goodwi l l i 50 50$ 717 $ 200 $ 787

Account s payabl e $ 98 $ 30 $ 128Di vi dends payabl e 15 10 k 9 16

Ot her l i abi l i t i es 67 20 87Capi t al st ock 300 50 i 50 300Ret ai ned earni ngs 237 90 237

$ 717 $ 200

Noncont r ol l i ng i nt er est J anuar y 1 i 17Noncont r ol l i ng i nt er est December 31 j 2 19

$ 787* Deduct


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Chapter 6 6-15


Solution P6-3


Cost J anuar y 1, 2011 $270, 000

I mpl i ed f ai r val ue of Sor ( $270, 000 / 90%) $300, 000Book val ue of Sor ( 240, 000)Excess of f ai r val ue over book val ue - Goodwi l l $ 60, 000

Cost J anuar y 1, 2011 $270, 000Add: I ncome f r om Sor f or 2011

Equi t y i n i ncome ( $40, 000 90%) $ 36, 000Less: Unr eal i zed i nvent or y pr of i t ( 10, 000)

Less: Unr eal i zed pr of i t on machi ner y( sel l i ng pr i ce $35, 000 - book val ue $28, 000) ( 7, 000)

Add: Pi ecemeal r ecogni t i on of pr of i t onmachi ner y ( $7, 000/ 3. 5 year s . 5 year ) 1, 000

I ncome f r om Sor f or 2011 20, 000Less: Di vi dends $10, 000 90% ( 9, 000)

I nvest ment bal ance J anuar y 1, 2012 281, 000Add: I ncome f r om Sor f or 2012

Equi t y i n i ncome ( $50, 000 90%) $ 45, 000Add: Unr eal i zed pr of i t i n begi nni ng i nvent or y 10, 000Less: Unr eal i zed pr of i t i n endi ng i nvent ory ( 12, 000)Add: Pi ecemeal r ecogni t i on of pr of i t on

machi ner y ( $7, 000/ 3. 5 year s) 2, 000Less: Gai n on sal e of l and ( 5, 000)

I ncome f r om Sor f or 2012 40, 000Less: Di vi dends ( $20, 000 90%) ( 18, 000)

I nvest ment bal ance December 31, 2012 $303, 000


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f or t he Year Ended December 31, 2012( i n t housands)

Pal Sor 90%Adj ust ment s and


St at ement sIncome Statement Sal es $ 450 $ 190 a 72 $ 568I ncome f r om Sor 40 f 40Gai n on l and 5 e 5Cost of sal es ( 200) ( 100) c 12 a 72

b 10 ( 230)Oper at i ng expense ( 113) ( 40) d 2 ( 151)Consol i dat ed NI 187Noncont r ol l i ng share h 5 ( 5)Cont r ol l i ng shar e of NI $ 182 $ 50 $ 182

Retained Earnings Ret ai ned earni ngs Pal $ 202 $ 202

Ret ai ned earni ngs Sor $ 120 g 120Cont r ol l i ng shar e of NI 182 50 182Di vi dends ( 150) ( 20) f 18

h 2 ( 150)Ret ai ned earni ngs

December 31 $ 234 $ 150 $ 234

Balance Sheet Cash $ 133 $ 14 $ 147Account s r ecei vabl e 180 100 i 10 270

Di vi dends r ecei vabl e 18 j 18I nvent or i es 60 36 c 12 84Land 100 30 e 5 125Bui l di ngs net 280 80 360

Machi ner y net 330 140 d 4 466I nvest ment i n Sor 303 b 10

d 6f 22g 297

Goodwi l l g 60 60 Tot al asset s $1, 404 $ 400 $1, 512

Account s payabl e $ 200 $ 50 i 10 $ 240Di vi dends payabl e 30 20 j 18 32

Ot her l i abi l i t i es 140 30 170Capi t al st ock 800 150 g 150 800Ret ai ned ear ni ngs 234 150 234

Tot al equi t i es $1, 404 $ 400

Noncont r ol l i ng i nt er est J anuar y 1 g 33Noncont r ol l i ng i nt er est December 31 h 3 36

$1, 512


17/34

Chapter 6 6-17


Solution P6-4

Par Corporation and Subsidiary Consol i dat i on Wor kPapers


Par Sag 90%Adj ust ment s and


Bal ance SheetIncome Statement Sal es $ 700 $ 500 a 50 $1, 150I ncome f r om Sag 70 e 70Gai n on l and 10 c 10Gai n on equi pment 20 d 20Cost of sal es 300 * 300 * b 5 a 50 555 * Depr eci at i on expense 90 * 35 * d 5 120 * Ot her expenses 200 * 65 * 265 * Consol i dat ed NI 210Noncont r ol l i ng shar e h 10 10 * Cont r ol l i ng shar e of NI $ 200 $ 110 $ 200

Retained Earnings Ret ai ned earni ngs Par $ 600 $ 600

Ret ai ned earni ngs Sag $ 200 f 200Cont r ol l i ng shar e of NI 200 110 200Di vi dends 100 * 50 * e 45

h 5 100 * Ret ai ned ear ni ngs

December 31 $ 700 $ 260 $ 700

Balance Sheet Cash $ 35 $ 30 $ 65Account s r ecei vabl e 90 110 g 10 190I nvent or i es 100 80 b 5 175Ot her cur r ent i t ems 70 40 110Land 50 70 c 10 110Bui l di ngs net 200 150 350

Equi pment net 500 400 d 15 885I nvest ment i n Sag 655 e 25

f 630$1, 700 $ 880 $1, 885

Account s payabl e $ 160 $ 50 g 10 $ 200Ot her l i abi l i t i es 340 70 410Capi t al st ock 500 500 f 500 500Ret ai ned ear ni ngs 700 260 700

$1, 700 $ 880

Noncont r ol l i ng i nt er est J anuar y 1 f 70Noncont r ol l i ng i nt er est December 31 h 5 75

$1, 885* Deduct


18/34



NOTE: Pur chase pr i ce i mpl i es book val ues ar e equal t o f ai r val ues.


19/34

Chapter 6 6-19


Solution P6-5


Cost J anuar y 1, 2011 $270, 000Add: I ncome f r om St o f or 2011

Equi t y i n i ncome ( $40, 000 90%) $36, 000Less: Pat ent amor t i ze. ( $60, 000/ 10 year s) x 90% ( 5, 400)Less: Unr eal i zed i nvent or y pr of i t ( 10, 000)Less: Unr eal i zed pr of i t on machi ner y

( sel l i ng pr i ce $35, 000 - book val ue $28, 000) ( 7, 000)Add: Pi ecemeal r ecogni t i on of pr of i t on

machi ner y ( $7, 000/ 3. 5 year s . 5 year ) 1, 000I ncome f r om St o f or 2011 14, 600Less: Di vi dends $10, 000 90% ( 9, 000)

I nvest ment bal ance J anuar y 1, 2012 275, 600Add: I ncome f r om St o f or 2012

Equi t y i n i ncome ( $50, 000 90%) $45, 000Less: Pat ent amort i zat i on ( 90%) ( 5, 400)Add: Unr eal i zed pr of i t i n begi nni ng i nvent or y 10, 000Less: Unr eal i zed pr of i t i n endi ng i nvent ory ( 12, 000)Add: Pi ecemeal r ecogni t i on of pr of i t on

machi ner y ( $7, 000/ 3. 5 year s) 2, 000Less: Gai n on sal e of l and ( 5, 000)

I ncome f r om St o f or 2012 34, 600Less: Di vi dends ( $20, 000 90%) ( 18, 000)

I nvest ment bal ance December 31, 2012 $292, 200

Noncont r ol l i ng i nt erest shar e of St o s i ncome ( 10%) 2011 2012

St o s r epor t ed net i ncome $40, 000 $50, 000Less: Pat ent amor t i zat i on ( 6, 000) ( 6, 000)

St o s adj ust ed i ncome $34, 000 $44, 00010% Noncont r ol l l i ng i nt er est shar e $ 3, 400 $ 4, 400


20/34





f or t he Year Ended December 31, 2012

Pal St o 90%Adj ust ment s and


St at ement sIncome Statement Sal es $ 450, 000 $ 190, 000 a 72, 000 $ 568, 000I ncome f r om Sto 34, 600 f 34, 600Gai n on l and 5, 000 e 5, 000Cost of sal es ( 200, 000) ( 100, 000) c 12, 000 a 72, 000

b 10, 000 ( 230, 000)Operat i ng expense ( 113, 000) ( 40, 000) h 6, 000 d 2, 000 ( 157, 000)Consol i dat ed NI 181, 000Noncont r ol l i ng share k 4, 400 ( 4, 400)Cont r ol l i ng shar e of NI $ 176, 600 $ 50, 000 $ 176, 600

Retained Earnings Ret ai ned earni ngs Pal $ 200, 000 $ 200, 000

Ret ai ned earni ngs St o $ 120, 000 g 120, 000Cont r ol l i ng shar e of NI 176, 600 50, 000 176, 600Di vi dends ( 150, 000) ( 20, 000) f 18, 000

k 2, 000 ( 150, 000)Ret ai ned earni ngs

December 31 $ 226, 600 $ 150, 000 $ 226, 600

Balance Sheet Cash $ 136, 400 $ 14, 000 $ 150, 400Account s r ecei vabl e 180, 000 100, 000 i 10, 000 270, 000

Di vi dends r ecei vabl e 18, 000 j 18, 000I nvent or i es 60, 000 36, 000 c 12, 000 84, 000Land 100, 000 30, 000 e 5, 000 125, 000

Bui l di ngs net 280, 000 80, 000 360, 000

Machi ner y net 330, 000 140, 000 d 4, 000 466, 000I nvest ment i n St o 292, 200 b 10, 000

d 6, 000f 16, 600g 291, 600

Pat ent s g 54, 000 h 6, 000 48, 000 Tot al ass et s $1, 396, 600 $ 400, 000 $1, 503, 400

Account s payabl e $ 200, 000 $ 50, 000 i 10, 000 $ 240, 000Di vi dends payabl e 30, 000 20, 000 j 18, 000 32, 000Ot her l i abi l i t i es 140, 000 30, 000 170, 000Capi t al st ock 800, 000 150, 000 g 150, 000 800, 000Ret ai ned earni ngs 226, 600 150, 000 226, 600

Tot al equi t i es $1, 396, 600 $ 400, 000Noncont r ol l i ng i nt er est J anuary 1 g 32, 400Noncont r ol l i ng i nt er est December 31 k 2, 400 34, 800

$1, 503, 400


21/34

Chapter 6 6-21


Solution P6-6

Preliminary computations I nvest ment cost $290, 000I mpl i ed f ai r val ue of San ( $290, 000 / 80%) $362, 500Book val ue of San ( 300, 000)

Excess f ai r val ue over book val ue $ 62, 500- al l ocat ed 50% t o Pat ent s wi t h a t en- year l i f e ( $31, 250)- al l ocat ed 50% t o I nvent or y sol d i n 2009 ( $31, 250)

Reconciliation of income from San:Pi l s share of San s net i ncome ( $50, 000 80%) $ 40, 000Less: 80% of Pat ent amort i zat i on ( $31, 250/ 10 year s) ( 2, 500)Add: Depr eci at i on on def er r ed gai n on equi pment

( $15, 000/ 5 year s) 80%

2, 400Less: Unr eal i zed pr of i t on upst r eam sal e of l and ( $10, 000 80%) ( 8, 000)

I ncome f r om San $ 31, 900

Reconciliation of investment account:Shar e of San s under l yi ng equi t y ( $400, 000 80%) $320, 000

Add: 80% of Unamor t . pat ent ( $31, 250 - ( $3, 125 3 years ) ) x 80% 17, 500Less: Unr eal i zed gai n on equi pment

[ $15, 000 - ( $3, 000 2 year s) ] 80%

( 7, 200)Less: Share of unr eal i zed gai n on l and ( 8, 000)I nvest ment i n San December 31, 2011 $322, 300

Noncontrolling interest share:San s r epor t ed i ncome $ 50, 000Add: Pi ecemeal r ecogni t i on of gai n on sal e of machi ner y 3, 000Less: Pat ent amor t i zat i on ( 3, 125)Less: Unr eal i zed gai n on upst r eam sal e of l and ( 10, 000)Real i zed i ncome 39, 875Noncont r ol l i ng perc ent age 20%Noncont r ol l i ng i nt er est shar e $ 7, 975


22/34




Pil Corporation and Subsidiary Consol i dat i on Wor kPapers


Pi l San 80%Adj ust ment s and


St at ement sIncome Statement Sal es $ 210, 000 $ 130, 000 $ 340, 000I ncome f r om San 31, 900 c 31, 900Gai n on l and 10, 000 b 10, 000Depr eci at i on expense 40, 000 * 30, 000 * a 3, 000 67, 000 * Ot her expenses 110, 000 * 60, 000 * e 3, 125 173, 125 * Consol i dat ed NI 99, 875Noncont r ol l i ng shar e f 7, 975 7, 975 * Cont r ol l i ng shar e of NI $ 91, 900 $ 50, 000 $ 91, 900

Retained Earnings

Ret ai ned earni ngs Pi l $ 140, 400 $ 140, 400Ret ai ned earni ngs San $ 50, 000 d 50, 000Cont r ol l i ng shar e of NI 91, 900 50, 000 91, 900Di vi dends 30, 000 * 30, 000 * Ret ai ned earni ngs

December 31 $ 202, 300 $ 100, 000 $ 202, 300

Balance Sheet Cur r ent asset s $ 200, 000 $ 170, 000 $ 370, 000Pl ant asset s 550, 000 350, 000 a 15, 000

b 10, 000875, 000

Accumul at ed depreci at i on 120, 000 * 70, 000 * a 6, 000 184, 000 *

I nvest ment i n San 322, 300 a 9, 600 c 31, 900d 300, 000

Pat ent d 25, 000 e 3, 125 21, 875$ 952, 300 $ 450, 000 $1, 082, 875

Cur r ent l i abi l i t i es $ 150, 000 $ 50, 000 $ 200, 000Capi t al st ock 600, 000 300, 000 d 300, 000 600, 000Ret ai ned earni ngs 202, 300 100, 000 202, 300

$ 952, 300 $ 450, 000

Noncont r ol l i ng i nt erest J anuary 1 a 2, 400 d 75, 000Noncont r ol l i ng i nt erest December 31 f 7, 975 80, 575

$1, 082, 875* Deduct


23/34

Chapter 6 6-23


Solution 6-6 ( cont i nued)

Consolidation workpaper entries

a Accumul at ed depreci at i on 6, 000I nvest ment i n San 9, 600

Noncont r ol l i ng i nt er est 2, 400Depr eci at i on expense 3, 000Pl ant asset s 15, 000

To el i mi nat e unr eal i zed pr of i t on 2010 sal e of pl ant ass et s andr educe pl ant asset s t o cost .

b Gai n on l and 10, 000Pl ant asset s 10, 000

To el i mi nat e unr eal i zed gai n on 2011 upst r eam sal e of l and andr educe pl ant asset s t o cost .

c I ncome f r om San 31, 900I nvest ment i n San 31, 900

To el i mi nat e i ncome f r om San and adj ust i nvest ment t o begi nni ng ofper i od.

d Capi t al st ockSan 300, 000Ret ai ned ear ni ngsSan J anuar y 1 50, 000Pat ent 25, 000

I nvest ment i n San 300, 000Noncont r ol l i ng i nt er est J anuar y 1 75, 000

To el i mi nat e i nvest ment i n San and st ockhol der s equi t y of San andent er begi nni ng of t he per i od pat ent .

e Ot her expenses 3, 125Pat ent 3, 125

To pr ovi de f or pat ent amor t i zat i on.

f Noncont r ol l i ng I nt er est Shar e 7, 975Noncont r ol l i ng I nt er est 7, 975

To ent er noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome.


24/34



Solution P6-7

Preliminary computations (amounts in thousands)

I nvest ment cost f or 100% of Ski , Apr i l 1, 2011 $15, 000Book val ue acqui r ed ( 7, 000)

Excess f ai r val ue over book val ue $ 8, 000Excess al l ocat ed:Underval ued i nvent or y i t ems ( sol d i n 2011) $ 500Under val ued bui l di ngs ( 7- year r emai ni ng usef ul l i f e) 3, 500Goodwi l l 4, 000Excess f ai r val ue over book val ue $ 8, 000

Reconciliation of investment account balance:

I nvest ment cost Apr i l 1, 2011 $15, 000Add: I ncr ease i n Ski s r et ai ned ear ni ngs 3, 000Less: Excess al l ocat ed t o i nvent or i es sol d i n 2011 ( 500)Less: Depr eci at i on on excess al l ocat ed t o bui l di ngs

( $3, 500/ 7 year s) 4. 75 years( 2, 375)

Less: Unr eal i zed i nvent ory pr of i t s December 31, 2015 ( 120)Less: Unr eal i zed pr of i t on equi pment

( $800 i nt er company pr of i t - $200 r ecogni zed) ( 600)I nvest ment bal ance December 31, 2015 $14, 405

Reconciliation of investment income balance:

Shar e of Ski s i ncome ( 100%) $ 2, 000Add: Unr eal i zed pr of i t i n begi nni ng i nvent or y 100Add: Real i zat i on of pr evi ousl y def er r ed pr of i t on l and 500Less: Unr eal i zed pr of i t i n endi ng i nvent or y ( 120)Less: Depr eci at i on on excess al l ocat ed t o bui l di ngs ( 500)Less: Unr eal i zed pr of i t on equi pment ( 600)I ncome f r om Ski $ 1, 380


25/34

Chapter 6 6-25



Pot Corporation and Subsidiary Consol i dat i on Wor kPapers


Pot SkiAdj ust ment s and


St at ement sIncome Statement Sal es $26, 000 $11, 000 b 1, 500 $35, 500Gai n on l and 700 a 500 1, 200Gai n on equi pment 800 e 800I ncome f r om Ski 1, 380 g 1, 380Cost of sal es 15, 000 * 5, 000 * d 120 b 1, 500 18, 520 *

c 100Depr eci at i on expense 3, 700 * 2, 000 * i 500 f 200 6, 000 * Ot her expenses 4, 280 * 2, 800 * 7, 080 * Consol i dat ed net i ncome $ 5, 100 $ 2, 000 $ 5, 100

Retained Earnings

Ret ai ned earni ngs Pot $12, 375 $12, 375

Ret ai ned earni ngs Ski $ 4, 000 h 4, 000

Consol i dat ed net i ncome 5, 100 2, 000 5, 100Di vi dends 3, 000 * 1, 000 * g 1, 000 3, 000 * Ret ai ned ear ni ngs

December 31 $14, 475 $ 5, 000 $14, 475

Balance Sheet Cash $ 1, 170 $ 500 $ 1, 670Accounts r ecei vabl e 2, 000 1, 500 j 300 3, 200I nvent ori es 5, 000 2, 000 d 120 6, 880Land 4, 000 1, 000 5, 000Bui l di ngs net 15, 000 4, 000 h 1, 625 i 500 20, 125

Equi pment net 10, 000 4, 000 f 200 e 800 13, 400

I nvest ment i n Ski 14, 405 a 500 g 380c 100 h 14, 625

Goodwi l l h 4, 000 4, 000

$51, 575 $13, 000 $54, 275

Account s payabl e $ 4, 100 $ 1, 000 j 300 $ 4, 800Ot her l i abi l i t i es 7, 000 2, 000 9, 000Capi t al st ock 26, 000 5, 000 h 5, 000 26, 000Ret ai ned ear ni ngs 14, 475 5, 000 14, 475

$51, 575 $13, 000 $54, 275* Deduct


26/34



Solution P6-8

Preliminary computations I nvest ment cost J anuar y 1, 2011 $136, 000I mpl i ed f ai r val ue of Si c ( $136, 000 / 80%) $170, 000Book val ue of Si c ( 170, 000)

Excess f ai r val ue over book val ue 0Analysis of investment in Sic account on Pics books :

I nvest ment cost $136, 000Share of Si c s 2011 r epor t ed i ncome ( $30, 000 80%) 24, 000I nvest ment i n Si c as r eport ed on Pi c s books

at December 31, 2011 $160, 000Share of Si c s 2012 r epor t ed i ncome ( $40, 000 80%) 32, 000I nvest ment i n Si c as r eport ed on Pi c s books

at December 31, 2012 $192, 000

Note that Pic has not eliminated intercompany profits fromits investment income from Sic for either 2011 or 2012.

I nvest ment bal ance as r epor t ed on Pi c s books December 31, 2011 $160, 000Gai n on machi ner y ( $5, 000 80%) ( 4, 000)Pi ecemeal r ecogni t i on of gai n ( $1, 000 80%) 800I nvest ment account bal ance under t he equi t y met hod

at December 31, 2011 $156, 800Shar e of Si c s 2012 r epor t ed i ncome 32, 000Pi ecemeal r ecogni t i on of gai n i n 2012 ( $1, 000 80%) 800I nvest ment account bal ance under t he equi t y met hod

at December 31, 2012 $189, 600

Noncontrolling interest share for 2011 :

Si c s r epor t ed net i ncome $ 30, 000Less: Gai n on sal e of machi ner y ( 5, 000)Add: Pi ecemeal r ecogni t i on of gai n on machi ner y t hr ough

Depr eci at i on 1, 000Si c s r eal i zed i ncome $ 26, 000Noncont r ol l i ng i nt er est per cent age 20%Noncont r ol l i ng i nt er est shar e f or 2011 $ 5, 200

Noncontrolling interest share for 2012 :

Si c s r epor t ed net i ncome $ 40, 000Add: Pi ecemeal r ecogni t i on of unr eal i zed gai n on machi nery

t hr ough depr eci at i on 1, 000Si c s r eal i zed i ncome 41, 000Noncont r ol l i ng i nt er est per cent age 20%

Noncont r ol l i ng i nt er est shar e f or 2012 $ 8, 200


27/34

Chapter 6 6-27



Pic Corporation and Subsidiary Consol i dat i on Wor kPapers


Pi c Si c 80%Adj ust ment s and


St at ement sIncome Statement Sal es $ 400, 000 $ 200, 000 $ 600, 000I ncome f r om Si c 24, 000 c 24, 000Gai n on pl ant asset s 5, 000 a 5, 000Cost of sal es 250, 000 * 130, 000 * 380, 000 * Depr eci at i on expense 50, 000 * 25, 000 * b 1, 000 74, 000 * Ot her expenses 60, 000 * 20, 000 * 80, 000 * Consol i dat ed NI 66, 000Noncont r ol l i ng shar e e 5, 200 5, 200 * Cont r ol l i ng shar e of NI $ 64, 000 $ 30, 000 $ 60, 800

Retained Earnings Ret ai ned ear ni ngs Pi c $ 126, 000 $ 126, 000

Ret ai ned ear ni ngs Si c $ 70, 000 d 70, 000Cont r ol l i ng shar e of NI 64, 000 30, 000 60, 800Ret ai ned earni ngs

December 31 $ 190, 000 $ 100, 000 $ 186, 800

Balance Sheet Cash and equi val ent s $ 50, 000 $ 30, 000 $ 80, 000Ot her cur r ent asset s 130, 000 70, 000 200, 000Pl ant and equi pment 400, 000 200, 000 a 5, 000 595, 000Accumul at ed depreci at i on 150, 000 * 50, 000 * b 1, 000 199, 000 *

I nvest ment i n Si c 160, 000 c 24, 000d 136, 000

$ 590, 000 $ 250, 000 $ 676, 000

Li abi l i t i es $ 100, 000 $ 50, 000 $ 150, 000Capi t al st ock 300, 000 100, 000 d 100, 000 300, 000Ret ai ned earni ngs 190, 000 100, 000 186, 800

$ 590, 000 $ 250, 000

Noncont r ol l i ng i nt erest J anuary 1 d 34, 000Noncont r ol l i ng i nt er est December 31 e 5, 200 39, 200

$ 676, 000* Deduct


28/34




Pic Corporation and Subsidiary Consol i dat i on Wor kPapers


Pi c Si c 80%Adj ust ment s and


St at ement sIncome Statement Sal es $ 430, 000 $ 235, 000 $ 665, 000I ncome f r om Si c 32, 000 b 32, 000Cost of sal es 260, 000 * 140, 000 * 400, 000 * Depr eci at i on expense 50, 000 * 25, 000 * a 1, 000 74, 000 * Ot her expenses 55, 000 * 30, 000 * 85, 000 * Consol i dat ed NI 106, 000Noncont r ol l i ng shar e d 8, 200 8, 200 * Cont r ol l i ng shar e of NI $ 97, 000 $ 40, 000 $ 97, 800

Retained Earnings

Ret ai ned earni ngs Pi c $ 190, 000 a 3, 200 $ 186, 800Ret ai ned earni ngs Si c $ 100, 000 c 100, 000Cont r ol l i ng shar e of NI 97, 000 40, 000 97, 800Ret ai ned earni ngs

December 31 $ 287, 000 $ 140, 000 $ 284, 600

Balance Sheet Cash and equi val ent $ 63, 000 $ 30, 000 $ 93, 000Ot her cur r ent asset s 140, 000 80, 000 220, 000Pl ant and equi pment 440, 000 245, 000 a 5, 000 680, 000Accumul at ed depreci at i on 200, 000 * 75, 000 * a 2, 000 273, 000 * I nvest ment i n Si c 192, 000 b 32, 000

c 160, 000$ 635, 000 $ 280, 000 $ 720, 000

Li abi l i t i es $ 48, 000 $ 40, 000 $ 88, 000Capi t al st ock 300, 000 100, 000 c 100, 000 300, 000Ret ai ned earni ngs 287, 000 140, 000 284, 600

$ 635, 000 $ 280, 000

Noncont r ol l i ng i nt erest J anuary 1 a 800 c 40, 000Noncont r ol l i ng i nt er est December 31 d 8, 200 47, 400

$ 720, 000* Deduct


29/34

Chapter 6 6-29


Solution P6-9


I nvest ment cost J anuar y 1, 2011 $108, 000I mpl i ed f ai r val ue of Si n ( $108, 000 / 80%) $135, 000

Book val ue of Si n ( 110, 000)Excess f ai r val ue over book val ue al l ocat ed t o pat ent $ 25, 000Pat ent amort i zat i on: $25, 000/ 10 year s $ 2, 500

Reconciliation of investment income:

Si n s r epor t ed i ncome $ 50, 000Less: Pat ent amor t i zat i on ( 2, 500)Less: Unr eal i zed pr of i t i n endi ng i nvent or y ( 1, 000)Add: Unr eal i zed pr of i t i n begi nni ng i nvent ory 2, 000Add: Pi ecemeal r ecogni t i on of def er r ed pr of i t on pl ant

asset s ( $20, 000 / 5 year s) 4, 000Si n s adj ust ed i ncome $ 52, 500

Par s 80% cont r ol l i ng shar e $ 42, 000

20% Noncont r ol l i ng i nt er est shar e $ 10, 500


30/34




Par Corporation and Subsidiary Consol i dat i on Wor kPapers


Par Si n 80%Adj ust ment s and


St at ement sIncome Statement Sal es $ 650, 000 $ 120, 000 a 8, 000 $ 762, 000I ncome f r om Si n 42, 000 e 42, 000Cost of sal es 390, 000 * 40, 000 * b 1, 000 a 8, 000 421, 000 *

c 2, 000Ot her expenses 170, 000 * 30, 000 * g 2, 500 d 4, 000 198, 500 * Consol i dat ed NI 142, 500Noncont r ol l i ng shar e i 10, 500 10, 500 * Cont r ol l i ng shar e of NI $ 132, 000 $ 50, 000 $ 132, 000

Retained Earnings

Ret ai ned ear ni ngs Par $ 95, 600 $ 95, 600Ret ai ned ear ni ngs Si n $ 20, 000 f 20, 000Cont r ol l i ng shar e of NI 132, 000 50, 000 132, 000Di vi dends 70, 000 * 20, 000 * e 16, 000

i 4, 000 70, 000 * Ret ai ned earni ngs

December 31 $ 157, 600 $ 50, 000 $ 157, 600

Balance Sheet Cash $ 58, 000 $ 20, 000 $ 78, 000Account s r ecei vabl e 40, 000 20, 000 h 4, 000 56, 000I nvent or i es 60, 000 35, 000 b 1, 000 94, 000

Pl ant asset s 290, 000 205, 000 d 20, 000 475, 000Accumul at ed depreci at i on 70, 000 * 100, 000 * d 8, 000 162, 000 * I nvest ment i n Si n 121, 600 c 1, 600 e 26, 000

d 12, 800 f 110, 000Pat ent f 17, 500 g 2, 500 15, 000

$ 499, 600 $ 180, 000 $ 556, 000

Account s payabl e $ 42, 000 $ 30, 000 h 4, 000 $ 68, 000Capi t al st ock 300, 000 100, 000 f 100, 000 300, 000Ret ai ned earni ngs 157, 600 50, 000 157, 600

$ 499, 600 $ 180, 000

Noncont r ol l i ng i nt er est J anuary 1 c 400 f 27, 500d 3, 200

Noncont r ol l i ng i nt erest December 31 i 6, 500 30, 400$ 556, 000

* Deduct


31/34

Chapter 6 6-31


Solution P6-10

Preliminary computations I nvest ment cost $290, 000I mpl i ed f ai r val ue of Sun ( $290, 000 / 80%) $362, 500Book val ue of Sun ( 300, 000)

Excess f ai r val ue over book val ue $ 62, 500Excess al l ocat ed:I nvent or i es ( 50%) - Sol d i n 2009 $ 31, 250Goodwi l l 31, 250

Excess f ai r val ue over book val ue $ 62, 500

Reconciliation of income from Sun :Sun s r epor t ed net i ncome $ 50, 000Add: Depr eci at i on on def er r ed gai n on equi pment

( $15, 000/ 5 years 3, 000Less: Unr eal i zed pr of i t on upst r eam sal e of l and ( 10, 000)Sun s adj ust ed and r eal i zed i ncome $ 43, 000

Pal s 80% cont r ol l i ng shar e $ 34, 400

20% Noncont r ol l i ng i nt er est shar e $ 8, 600

Reconciliation of investment account:Shar e of Sun s under l yi ng equi t y ( $400, 000 80%) $320, 000Add: 80% of unamor t i zed goodwi l l 25, 000Less: Unr eal i zed gai n on equi pment

[ $15, 000 - ( $3, 000 2 year s) ] 80%

( 7, 200)Less: Share of unr eal i zed gai n on l and ( 8, 000)I nvest ment i n Sun December 31, 2011 $329, 800


32/34




Pal Corporation and Subsidiary Consol i dat i on Wor kPaper


Pal Sun 80%Adj ust ment s and


St at ement sIncome Statement Sal es $ 210, 000 $ 130, 000 $ 340, 000I ncome f r om Sun 34, 400 c 34, 400Gai n on l and 10, 000 b 10, 000Depr eci at i on expense 40, 000 * 30, 000 * a 3, 000 67, 000 * Ot her expenses 110, 000 * 60, 000 * 170, 000 * Consol i dat ed NI 103, 000Noncont r ol l i ng shar e e 8, 600 8, 600 * Cont r ol l i ng shar e of NI $ 94, 400 $ 50, 000 $ 94, 400

Retained Earnings

Ret ai ned earni ngs Pal $ 145, 400 $ 145, 400Ret ai ned earni ngs Sun $ 50, 000 d 50, 000Consol i dated share of NI 94, 400 50, 000 94, 400Di vi dends 30, 000 * 30, 000 * Ret ai ned earni ngs

December 31 $ 209, 800 $ 100, 000 $ 209, 800

Balance Sheet Cur r ent asset s $ 200, 000 $ 170, 000 $ 370, 000Pl ant asset s 550, 000 350, 000 a 15, 000

b 10, 000875, 000

Accumul at ed depreci at i on 120, 000 * 70, 000 * a 6, 000 184, 000 *

I nvest ment i n Sun 329, 800 a 9, 600 c 34, 400d 305, 000

Goodwi l l d 31, 250 31, 250$ 959, 800 $ 450, 000 $1, 092, 250

Cur r ent l i abi l i t i es $ 150, 000 $ 50, 000 $ 200, 000Capi t al st ock 600, 000 300, 000 d 300, 000 600, 000Ret ai ned earni ngs 209, 800 100, 000 209, 800

$ 959, 800 $ 450, 000

Noncont r ol l i ng i nt erest J anuary 1 a 2, 400 d 76, 250Noncont r ol l i ng i nt er est December 31 e 8, 600 82, 450

$1, 092, 250* Deduct


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5 Reconciliation of combined and consolidated cost of sales

Combi ned cost of sal es ( gi ven) $350, 000

Less: I nt ercompany sal es ( see 3 above) ( 84, 000)Add: Unr eal i zed pr of i t s i n endi ng i nvent ory ( see 4 above) 14, 000Less: Unr eal i zed pr of i t s i n begi nni ng i nvent or y (sol ve f ort hi s ) ( 5, 000)

Consol i dat ed cost of sal es ( gi ven) $275, 000

6 Reconciliation of combined and consolidated equipment net

Combi ned equi pment net of $565, 000 l ess consol i dat ed equi pment netof $550, 000 shows a di f f erence of $15, 000. The wor kpaper ent r y t oel i mi nat e t he ef f ect s of an i nt er company sal e of equi pment must havebeen:

Gai n on equi pment 20, 000Depr eci at i on expense 5, 000Equi pment net 15, 000

7 Yes. Intercompany receivables and payables are as follows:

Combi ned Consol i dat ed I nt er companyAccount s r ecei vabl e $ 80, 000 $ 70, 000 $10, 000Account s payabl e 110, 000 100, 000 10, 000Di vi dends r ecei vabl e 13, 500 - - - 13, 500Di vi dends payabl e 15, 000 1, 500 13, 500

8 Reconciliation of noncontrolling interest:

Noncont r ol l i ng i nt erest J anuar y 1, 2012 ( $320, 000 10%) $ 32, 00010% of unamor t i zed pat ent at J anuar y 1 3, 600Add: Noncont r ol l i ng i nt er est shar e f or 2012 4, 600Less: Noncont r ol l i ng i nt er est di vi dends ( $30, 000 10%) ( 3, 000)Noncont r ol l i ng i nt er est December 31, 2012 $ 37, 200

9 Patent at December 31, 2011

Pat ent December 31, 2012 $ 32, 000Add: Pat ent amort i zat i on ( $141, 000 consol i dat ed ot her

expenses - $137, 000 combi ned ot her expenses) 4, 000

Pat ent December 31, 2011 $ 36, 000

10 Analysis of investment in Sal account

Book val ue ( Sal s st ockhol ders equi t y $340, 000 90%) $306, 000Less: Unr eal i zed pr of i t i n endi ng i nvent or y ( 14, 000)Less: Unr eal i zed pr of i t i n equi pment ( 15, 000)Add: 90% of Unamor t i zed pat ent 28, 800

I nvest ment i n Sal December 31, 2012 $305, 800

Capter Enam

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