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Transcript of CINTERCOMPANY INVENTORY TRANSACTIONShap 006
Chapter 06 - Intercompany Inventory Transactions
CHAPTER 6
INTERCOMPANY INVENTORY TRANSACTIONS
ANSWERS TO QUESTIONS
Q6-1 All inventory transfers between related companies must be eliminated to avoid an overstatement of revenue and cost of goods sold in the consolidated income statement. In addition, when unrealized profits exist at the end of the period, the eliminations are needed to avoid overstating inventory and consolidated net income.
Q6-2 An inventory transfer at cost results in an overstatement of sales and cost of goods sold. While net income is not affected, gross profit ratios and other financial statement analysis may be substantially in error if appropriate eliminations are not made.
Q6-3 An upstream sale occurs when the parent purchases items from one or more subsidiaries. A downstream sale occurs when the sale is made by the parent to one or more subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation worksheet will know whether to reduce consolidated net income assigned to the controlling interest by the full amount of the unrealized profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream).
Q6-4 As in all cases, the total amount of the unrealized profit must be eliminated in preparing the consolidated statements. When the profits are on the parent company's books, consolidated net income and income assigned to the controlling interest are reduced by the full amount of the unrealized profit.
Q6-5 Consolidated net income is reduced by the full amount of the unrealized profits. In the upstream sale, the unrealized profits are apportioned between the parent company shareholders and the noncontrolling shareholders. Thus, consolidated net income assigned to the controlling and noncontrolling interests is reduced by a pro rata portion of the unrealized profits.
Q6-6 Income assigned to the noncontrolling interest is affected when unrealized profits are recorded on the subsidiary's books as a result of an upstream sale. A downstream sale should have no effect on the income assigned to noncontrolling interest because the profits are on the books of the parent.
Q6-7 The basic eliminating entry needed when the item is resold before the end of the period is:
Sales XXXXXX Cost of Goods Sold XXXXXX
The debit to sales is based on the intercorporate sale price. This means that only the revenue recorded by the company ultimately selling to the nonaffiliate is to be included in the consolidated income statement. Cost of goods sold is credited for the amount paid by the purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded by the initial owner to be reported in the consolidated statement.
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Chapter 06 - Intercompany Inventory Transactions
Q6-8 The basic eliminating entry needed when one or more of the items are not resold before the end of the period is:
Sales XXXXXX Cost of Goods Sold XXXXXX Inventory XXXXXX
The debit to sales is for the full amount of the transfer price. Inventory is credited for the unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold by the company making the intercompany sale.
Q6-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an external party. The amount reported as cost of goods sold is based on the amount paid for the inventory when it was produced or purchased from an external party. If inventory has been purchased by one company and sold to a related company, the cost of goods sold recorded on the intercorporate sale must be eliminated.
Q6-10 No adjustment to retained earnings is needed if the intercorporate sales have been made at cost or if all intercorporate sales have been resold to an external party in the same accounting period. If all of the intercorporate sales have not been resold by the end of the period, under the fully adjusted equity method, the parent defers unrealized profits in the investment in sub and income from sub accounts. This adjustment would be made to retained earnings under the modified equity method. However, regardless of the parent’s method for accounting for the investment, the amount of the noncontrolling interest is reduced by the NCI’s proportionate share of the unrealized profit associated with upstream sales.
Q6-11 A proportionate share of the realized retained earnings of the subsidiary are assigned to the noncontrolling interest. Any unrealized profits on upstream sales are deducted proportionately from the amount assigned to the noncontrolling interest. Unrealized profits on downstream sales do not affect the noncontrolling interest.
Q6-12 When inventory profits from a prior period intercompany transfer are realized in the current period, the profit is added to consolidated net income and to the income assigned to the shareholders of the company that made the intercompany sale. If the unrealized profits arise from a downstream sale, income assigned to the controlling interest will increase by the full amount of profit realized. When the profits arise from an upstream sale, income assigned to the controlling and noncontrolling interests will be increased proportionately in the period the profit is realized. Thus, knowledge of whether the profits resulted from an upstream or a downstream sale is imperative in assigning consolidated net income to the appropriate shareholder group.
Q6-13 Under the fully adjusted equity method, consolidated retained earnings is not affected directly by unrealized profits. Unrealized profits are deferred in the investment in sub and income from sub accounts on the parent’s books. Income from sub is closed out to retained earnings, so the deferral of unrealized profits indirectly affects retained earnings. As a result, the amount reported for consolidated retained earnings is always equal to the parent’s retained earnings.
Q6-14 Consolidated retained earnings are always equal to the parent’s retained earnings under the fully adjusted equity method. Since the parent company defers unrealized profits in the income from sub and investment in sub accounts and since income from sub is closed out to the parent’s retained earnings, the ending balance in consolidated retained earnings will reflect the reduction associated with the deferral of unrealized profits.
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Chapter 06 - Intercompany Inventory Transactions
Q6-15* Sales between subsidiaries are treated in the same manner as upstream sales. Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the end of the period are eliminated and consolidated net income and income assigned to the controlling and noncontrolling interests is reduced.
Q6-16* When a company is acquired in a business combination the transactions occurring before the combination generally are regarded as transactions with unrelated parties and no adjustments or eliminations are needed. All transactions between the companies following the combination must be fully eliminated.
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Chapter 06 - Intercompany Inventory Transactions
SOLUTIONS TO CASES
C6-1 Measuring Cost of Goods Sold
a. While the rule covers only a part of the elimination needed, Charlie is correct in that the cost of goods sold recorded by the selling company must be eliminated to avoid overstating that caption in the consolidated income statement.
b. The rules will result in the proper consolidated totals if rule #1 is expanded to include a debit to sales and a credit to ending inventory for the amount of profit recorded by the company that sold to its affiliate.
c. The way in which the rule is stated makes it appear to be incorrect, but it is correct. The rule is appropriate in that the cost of goods sold recorded by the purchasing affiliate is equal to the cost of goods sold to the first owner plus the profit the first owner recorded on the sale. Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold. If an equal amount of sales is eliminated, the rule should result in proper consolidated financial statement totals.
d. The employee would be forced to look at the books of the selling affiliate and determine the difference between the intercorporate sale price and the price it paid to acquire or produce the items. If the items sold to affiliates are routinely produced and costs do not fluctuate greatly, it may be possible to use some form of gross profit ratio to estimate the amount of unrealized profit.
C6-2 Inventory Values and Intercompany Transfers
MEMO
To: PresidentWater Products Corporation
From: , CPA
Re: Inventory Sale and Purchase of New Inventory
If Water Products holds only a small percent of the ownership of Plumbers Products and Growinkle Manufacturing, it should have no difficulty in reporting the desired results. This would not be the case if the two companies are subsidiaries of Water Products.
If both Plumbers Products and Growinkel are subsidiaries of Water Products, both the sale of inventory to Plumbers Supply and the purchase of inventory from Growinkle Manufacturing must be eliminated. In addition, the unrealized profit on any unsold inventory involved in these transfers must be eliminated in preparing the financial statements for the current period.
The consolidated income statement should include the same amount of income on the inventory sold to Plumbers Supply and resold during the year as would have been recorded if Water Products had sold the inventory directly to the purchaser. Any income recorded by Water Products on inventory not resold by Plumbers Supply must be eliminated.
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Chapter 06 - Intercompany Inventory Transactions
Similarly, the consolidated income statement should include the same amount of income on the inventory purchased by Water Products and resold during the year as would have been recorded if Growinkle Manufacturing had sold the inventory directly to the purchaser. Any income recorded by Growinkle Manufacturing on inventory not resold by Water Products must be eliminated.
Consolidated net income may increase if Plumbers Supply is able to sell the inventory it purchased from Water Products at a higher price than would have been received by Water Products or if it is able to sell a larger number of units. The same can be said for the inventory purchased by Water Products from Growinkle Manufacturing. It is important to recognize that the transfer of inventory between Water Products and its subsidiaries does not in itself generate income for the consolidated entity.
An additional level of complexity may arise in this situation if Water Products uses the LIFO inventory method. It might, for example, be forced to carry over its LIFO cost basis on the old inventory sold to Plumbers Supply to the new inventory purchased from Growinkle Manufacturing since it was replaced within the accounting period.
Primary citation:ARB 51, Par. 6 (ASC 810)
C6-3 Intercorporate Inventory Transfers
MEMO
To: TreasurerEvert Corporation
From: , CPA
Re: Inventory Sale to Parent
This memo is prepared in response to your request for information on the appropriate treatment of intercompany inventory transfers in consolidated financial statements. The specific eliminating entries required in this case depend on the valuation assigned to the inventory at December 31, 20X2.
Frankle Company sold inventory with a carrying value of $240,000 to Evert for $180,000 on December 20, 20X2. Since the exchange price was well below Frankle’s cost, consideration should be given to whether the inventory should be reported at $180,000 or $240,000 in the consolidated statements at December 31, 20X2, under the lower-of-cost-or-market rule. While the value of the inventory apparently had fallen below Frankle’s carrying value, the accounting standards indicate no loss should be recognized when the evidence indicates that cost will be recovered with an approximately normal profit margin upon sale in the ordinary course of business. [ARB 43, Chapter 4, Par. 9; ASC 330]
We are told the management of Frankle considered the drop in prices to be temporary and Evert was able to sell the inventory for $70,000 more than the original amount paid by Frankle. It therefore seems appropriate for the consolidated entity to report the inventory at Frankle’s cost of $240,000 at December 31, 20X2.
In preparing the consolidated statements at December 31, 20X2 and 20X3, the effects of the
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Chapter 06 - Intercompany Inventory Transactions
intercompany transfer should be eliminated. [ARB 51, Par. 6; ASC 810]
The following eliminating entry is required at December 31, 20X2:
Sales 180,000Inventory 60,000 Cost of Goods Sold 240,000
The above entry will increase the carrying value of the inventory to $240,000. Eliminating sales of $180,000 and cost of goods sold of $240,000 will increase consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x 0.10). These changes will result in an increase in consolidated retained earnings and the amount assigned to the noncontrolling shareholders in the consolidated balance sheet by $54,000 and $6,000, respectively.
C6-3 (continued)
The following eliminating entry is required at December 31, 20X3:
Cost of Goods Sold 60,000 Investment in Sub 54,000 NCI in NA of Sub 6,000
The above entry will reduce consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x .10). The credits to Investment in Sub and NCI in NA of Sub needed to bring the beginning balances into agreement with those reported at December 31, 20X2.
No eliminations are required for balances reported at December 31, 20X3, because the inventory has been sold to a nonaffiliate prior to year-end.
Primary citations:ARB 43, CH 4, Par. 9 (ASC 330)ARB 51, Par. 6 (ASC 810)
C6-4 Unrealized Inventory Profits
a. When the amount of unrealized inventory profits on the books of the subsidiary at the beginning of the period is greater than the amount at the end of the period, the income assigned to the noncontrolling interest for the period will exceed a pro rata portion of the reported net income of the subsidiary.
b. The subsidiary apparently had less unrealized inventory profit at the end of the period than it did at the start of the period. In addition, the parent must have had more unrealized profit on its books at the end of the period than it did at the beginning. The negative effect of the latter apparently offset the positive effect of the reduction in unrealized profits by the subsidiary.
c. The most likely reason is that a substantial amount of the parent company sales was made to its subsidiaries and the cost of goods sold on those items was eliminated in preparing the consolidated statements.
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Chapter 06 - Intercompany Inventory Transactions
d. A loss was recorded by the seller on an intercompany sale of inventory to an affiliate and the purchaser continues to hold the inventory.
C6-5 Eliminating Inventory Transfers
a. If no intercompany sales are eliminated, the income statement may include overstated sales revenue and cost of goods sold. The net impact on income will depend upon whether there were more unrealized profits at the beginning or end of the year. If Ready Building does not hold total ownership of the subsidiaries, the amount of income assigned to noncontrolling shareholders is likely to be incorrect as well.
Inventory, current assets and total assets, retained earnings, and stockholders' equity are likely to be overstated if inventories are sold to affiliates at a profit. If the companies pay income taxes on their individual earnings, the amount of income tax expense also will be overstated in the period in which unrealized profits are reported and understated in the period in which the profits are realized.
b. Because profit margins vary considerably, the amount of unrealized profit may vary considerably if uneven amounts of product are purchased by affiliates from period to period. Ready Building needs to establish a formal system to monitor intercompany sales. Perhaps the best alternative would be to establish a separate series of accounts to be used solely for intercompany transfers. Alternatively, it may be possible to use unique shipping containers for intercompany sales or to specifically mark the containers in some way to identify the intercompany shipments at the time of receipt. The purchaser might then use a different type of inventory tag or mark these units in some way when the product is received and placed in inventory. Inventory count teams could then easily identify the product when inventories are taken.
c. A number of factors might be considered. The most important inventory system is the one used by the company making the intercompany purchase. When intercompany inventory purchases are bunched at the end of the year, the amount of unrealized profit included in ending inventory may be quite different under FIFO versus LIFO. If intercompany purchases are placed in a LIFO inventory base, inventories may be misstated for a period of years before the inventory is resold. Eliminating entries must be made each of the years until resale to avoid a misstatement of assets and equities. In those cases where the intercompany purchases are in high volume and the inventory turns over very quickly, a small amount of inventory left at the end of the period may be immaterial and of little concern. Typically, a parent will align inventory costing methods subsequent to a subsidiary acquisition to avoid problems caused by differences in accounting for the same items or types of items.
d. It may be necessary to start by looking at intercorporate cash receipts and disbursements to determine the extent of intercorporate sales. One or more months might be selected and all vouchers examined to establish the level of intercorporate sales and the profit margins recorded on the sales. For those products sold throughout the year, it may be possible to estimate for the year as a whole based on an examination of several months. Once total intercompany sales and profit margins have been estimated, the amount of unrealized profit at year end should be estimated. One approach would be to take a physical inventory of the specific product types which have been identified and attempt to trace back using the product identification numbers or shipping numbers to determine what portion of the inventory on hand was purchased from affiliates.
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Chapter 06 - Intercompany Inventory Transactions
C6-6 Intercompany Profits and Transfers of Inventory
a. The intercompany transfers of Xerox (www.xerox.com) between segments are apparently relatively insignificant because they are not reported in the notes to the consolidated financial statements relating to segment reporting. For consolidation purposes, all significant intercompany accounts and transactions are eliminated.
b. Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated market prices. The amount of intercompany transfers is large. In the fiscal year ending December 31, 2009, Exxon Mobil reported eliminations of $302.6 billion of intersegment transfers, which does not include intercompany transfers within segments. This amount represents nearly 50 percent of total reported segment sales. For consolidation purposes, Exxon Mobil eliminates the effects of intercompany transactions.
c. Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles, parts, and components manufactured by the company and its subsidiaries, with a smaller amount of financial and other services included. The amount of intercompany transfers is relatively small in relation to sales to unaffiliated customers. The amount has been decreasing in recent years. The effects of intercompany transfers are eliminated in consolidation.
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Chapter 06 - Intercompany Inventory Transactions
SOLUTIONS TO EXERCISES
E6-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted]
1. a
2. c
3. a
4. c
5. c Net assets reported $320,000 Profit on intercompany sale $48,000Proportion of inventory unsold at year end ($60,000 / $240,000) x 0.25 Unrealized profit at year end (12,000 )Amount reported in consolidated statements $308,000
6. c Inventory reported by Banks ($175,000 + $60,000) $235,000 Inventory reported by Lamm 250,000 Total inventory reported $485,000 Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] (15,000 )Amount reported in consolidated statements $470,000
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Chapter 06 - Intercompany Inventory Transactions
E6-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted]
1. b Cost of goods sold reported by Park $ 800,000 Cost of goods sold reported by Small 700,000 Total cost of goods sold reported $1,500,000 Cost of goods sold reported by Park on sale to Small ($500,000 x 0.40) (200,000)Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x 4 / 5) x 0.60] (240,000 )Cost of goods sold for consolidated entity $1,060,000
Note: Answer b in the actual CPA examination question was $1,100,000, requiring candidates to select the closest answer.
2. d $32,000 = ($200,000 + $140,000) – $308,000
3. b $6,000 = ($26,000 + $19,000) – $39,000
4. c $9,000 = Inventory held by Spin ($32,000 x 0.375)
$12,000
Unrealized profit on sale [($30,000 + $25,000) – $52,000]
(3,000 )
Carrying cost of inventory for Power $ 9,000
5. b 0.20 = $14,000 / [(Stockholders’ Equity $50,000) +(Patent $20,000)]
6. b 14 years = ($28,000 / [(28,000 - $20,000) / 4 years]
E6-3 Multiple Choice – Consolidated Income Statement
1. c
2. b
3. c Total income ($86,000 - $47,000) $39,000 Income assigned to noncontrolling interest [0.40($86,000 - $60,000)] (10,400 )Consolidated net income assigned to controlling interest $28,600
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Chapter 06 - Intercompany Inventory Transactions
E6-4 Multiple-Choice Questions — Consolidated Balances
1. c
2. a Amount paid by Lorn Corporation $120,000 Unrealized profit (45,000 )Actual cost $ 75,000 Portion sold x 0.80 Cost of goods sold $ 60,000
3. e Consolidated sales $140,000 Cost of goods sold (60,000 )Consolidated net income $ 80,000 Income to Dresser’s noncontrolling interest: Sales $120,000 Reported cost of sales (75,000 ) Report income $ 45,000 Portion realized x 0.80 Realized net income $ 36,000 Portion to Noncontrolling Interest x 0.30 Income to noncontrolling Interest (10,800 )Income to controlling interest $ 69,200
4. a Inventory reported by Lorn $ 24,000 Unrealized profit ($45,000 x .20) (9,000 )Ending inventory reported $ 15,000
E6-5 Multiple-Choice Questions — Consolidated Income Statement
1. a $20,000 = $30,000 x [($48,000 - $16,000) / $48,000]
2. d Sales reported by Movie Productions Inc. $67,000 Cost of goods sold ($30,000 x 2/3) (20,000 )Consolidated net income $47,000
3. a $7,000 = [($67,000 - $32,000) x 0.20]
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Chapter 06 - Intercompany Inventory Transactions
E6-6 Realized Profit on Intercompany Sale
a. Journal entries recorded by Nordway Corporation:
(1) Inventory 960,000 Cash (Accounts Payable) 960,000
(2) Cash (Accounts Receivable) 750,000 Sales 750,000
(3) Cost of Goods Sold 600,000 Inventory 600,000
b. Journal entries recorded by Olman Company:
(1) Inventory 750,000 Cash (Accounts Payable) 750,000
(2) Cash (Accounts Receivable) 1,125,000 Sales 1,125,000
(3) Cost of Goods Sold 750,000 Inventory 750,000
c. Eliminating entry:
Sales 750,000 Cost of Goods Sold 750,000
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Chapter 06 - Intercompany Inventory Transactions
E6-7 Sale of Inventory to Subsidiary
a. Journal entries recorded by Nordway Corporation:
(1) Inventory 960,000 Cash (Accounts Payable) 960,000
(2) Cash (Accounts Receivable) 750,000 Sales 750,000
(3) Cost of Goods Sold 600,000 Inventory 600,000
b. Journal entries recorded by Olman Company:
(1) Inventory 750,000 Cash (Accounts Payable) 750,000
(2) Cash (Accounts Receivable) 810,000 Sales 810,000
(3) Cost of Goods Sold 540,000 Inventory 540,000
c. Eliminating entry:
Sales 750,000 Cost of Goods Sold 708,000 Inventory 42,000
Calculations
Total = Re-Sold +Ending
InventorySales 750,000 540,000 210,000 COGS 600,000 432,000 168,000 Gross Profit 150,000 108,000 42,000Gross Profit % 20%
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Chapter 06 - Intercompany Inventory Transactions
E6-8 Inventory Transfer between Parent and Subsidiary
a. Karlow Corporation reported cost of goods sold of $820,000 ($82 x 10,000 desks) and Draw Company reported cost of goods sold of $658,000 ($94 x 7,000 desks).
b. Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks).
c. Eliminating entry:
Sales 940,000 Cost of Goods Sold 904,000 Inventory 36,000
Calculations
Total = Re-sold +Ending
InventorySales 940,000 658,000 282,000
COGS 820,000 574,000 246,000
Gross Profit 120,000 84,000 36,000 Gross Profit % 12.77%
d. Eliminating entry:
Investment in Draw Company 36,000 Cost of Goods Sold 36,000
e. Eliminating entry:
Investment in Draw Company 21,600NCI in NA of Draw Company 14,400 Cost of Goods Sold 36,000
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Chapter 06 - Intercompany Inventory Transactions
E6-9 Income Statement Effects of Unrealized Profit
a. Sale price to Holiday Bakery per bag ($900,000 / 100,000) $ 9.00 Profit per bag [$9.00 - ($9.00 / 1.5)] (3.00 )Cost per bag $ 6.00 Bags sold by Holiday Bakery (100,000 - 20,000) x 80,000 Consolidated cost of goods sold $480,000
b. Sales 900,000 Cost of Goods Sold 840,000 Inventory ($3.00 x 20,000 bags) 60,000
Calculations
Total = Re-sold +Ending
InventorySales 900,000 720,000 180,000
COGS 600,000 480,000 120,000
Gross Profit 300,000 240,000 60,000 Gross Profit % 33.33%
Required Adjustment to Cost of Goods Sold:
Cost of goods sold — Farmco ($900,000 / 1.5) $ 600,000 Cost of goods sold — Holiday ($9.00 x 80,000 units) 720,000
$1,320,000 Consolidated cost of goods sold ($6.00 x 80,000 units) (480,000 ) Required adjustment $ 840,000
c. Operating income of Holiday Bakery $400,000 Net income of Farmco Products 150,000
$550,000 Less: Unrealized inventory profits (60,000 )Consolidated net income $490,000 Less: Income assigned to noncontrolling interest ($150,000 - $60,000 unrealized profit) x 0.40 (36,000 )Income assigned to controlling interest $454,000
Alternate computation:Operating income of Holiday Bakery $400,000 Net income of Farmco Products $150,000 Unrealized profits ($3.00 x 20,000 units) (60,000 )Realized net income $ 90,000 Ownership held by Holiday Bakery x 0.60
54,000 Income assigned to controlling interest $454,000
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Chapter 06 - Intercompany Inventory Transactions
E6-10 Prior-Period Unrealized Inventory Profit
a. Cost per bag of flour ($9.00 / 1.5) $ 6.00 Bags sold x 20,000 Cost of goods sold from inventory held, January 1, 20X9 $120,000
b.Investment in Farmco 36,000NCI in NA of Farmco 24,000 Cost of Goods Sold 60,000 $60,000 = 20,000 bags x $3.00
c. Operating income of Holiday Bakery $300,000 Net income of Farmco Products 250,000
$550,000 Add: Inventory profits realized in 20X9 60,000 Consolidated net income $610,000 Less: Income assigned to noncontrolling shareholders ($250,000 + $60,000) x 0.40 (124,000 )Income assigned to controlling interest $486,000
Alternate computation:Operating income of Holiday Bakery $300,000 Net income of Farmco Products $250,000Inventory profits realized in 20X9 60,000 Realized net income $310,000Ownership held by Holiday Bakery x 0.60
186,000 Income assigned to controlling interest $486,000
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Chapter 06 - Intercompany Inventory Transactions
E6-11 Computation of Consolidated Income Statement Data
Downstream Transaction Calculations
Total = Re-sold +Ending
InventorySales 30,000 24,000 6,000
COGS 20,000 16,000 4,000
Gross Profit 10,000 8,000 2,000 Gross Profit % 33.33%
Worksheet Entry (not requested in problem)Sales 30,000 Cost of Goods Sold 28,000
Inventory 2,000
Upstream Transaction Calculations
Total = Re-sold +Ending
InventorySales 80,000 60,000 20,000
COGS 50,000 37,500 12,500
Gross Profit 30,000 22,500 7,500 Gross Profit % 37.50%
Worksheet Entry (not requested in problem)Sales 80,000 Cost of Goods Sold 72,500
Inventory 7,500
a. Reported sales of Prem Company $400,000 Reported sales of Cooper Company 200,000
$600,000 Intercompany sales by Prem Company in 20X5 $ 30,000 Intercompany sales by Cooper Company in 20X5 80,000 (110,000)Sales reported on consolidated income statement $490,000
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Chapter 06 - Intercompany Inventory Transactions
E6-11 (continued)
b. Cost of goods sold reported by Prem Company $250,000 Cost of goods sold reported by Cooper Company 120,000
$370,000 Adjustment due to intercompany sales (100,500)Consolidated cost of goods sold $269,500
Adjustment to cost of goods sold:
CGS charged by Prem on sale to Cooper $ 20,000 CGS charged by Cooper ($30,000 - $6,000) 24,000 Total charged to CGS $ 44,000 CGS for consolidated entity $20,000 x ($24,000 / $30,000) (16,000 ) Required adjustment to CGS $ 28,000
CGS charged by Cooper on sale to Prem $ 50,000 CGS charged by Prem ($80,000 - $20,000) 60,000 Total charged to CGS $110,000 CGS for consolidated entity $50,000 x ($60,000 / $80,000) (37,500 ) Required adjustment to CGS 72,500 Total adjustment required $100,500
c. Reported net income of Cooper Company $ 45,000 Unrealized profit on sale to Prem Company $30,000 x ($20,000 / $80,000) (7,500 )Realized net income $ 37,500 Noncontrolling interest's share x 0.40 Income assigned to noncontrolling interest $ 15,000
d. Reported net income of Pem Company $100,500 Less: Income from Cooper (20,500 ) $ 80,000 Net income of Cooper Company 45,000 Operating income $125,000 Less: Unrealized inventory profits of Prem
Company [$10,000 x ($6,000 / $30,000)] $ 2,000 Unrealized inventory profits of Copper Company [$30,000 x ($20,000 / $80,000)] 7,500 Income assigned to noncontrolling interest 15,000 (24,500 )
Income assigned to controlling interest $ 100,500
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Chapter 06 - Intercompany Inventory Transactions
E6-12 Sale of Inventory at a Loss
a. Entries recorded by Trent Company:
Inventory 400,000 Cash 400,000 Purchase inventory.
Cash 300,000 Sales 300,000 Sale of inventory to Gord Corporation.
Cost of Goods Sold 400,000 Inventory 400,000 Record cost of goods sold.
Entries recorded by Gord Corporation
Inventory 300,000 Cash 300,000 Purchase of inventory from Trent.
Cash 360,000 Sales 360,000 Sale of inventory to nonaffiliates.
Cost of Goods Sold 180,000 Inventory 180,000 Record cost of goods sold: $180,000 = $300,000 x .60
b. Consolidated cost of goods sold for 20X8 should be reportedas $240,000 ($400,000 x 0.60).
c. Operating income reported by Gord $230,000 Net income reported by Trent $ 80,000Unrealized loss on intercorporate sale ($400,000 - $300,000) x 0.40 40,000 120,000 Consolidated net income $350,000 Income to assigned to noncontrolling interest ($120,000 x 0.25) (30,000 )Income assigned to controlling interest $320,000
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Chapter 06 - Intercompany Inventory Transactions
E6-12 (continued)
d. Eliminating entry, December 31, 20X8:
Sales 300,000Inventory 40,000 Cost of Goods Sold 340,000
Computation of cost of goods sold to be eliminated
Cost of goods sold recorded by Trent $400,000 Cost of goods sold recorded by Gord 180,000 Total recorded $580,000 Consolidated cost of goods sold (240,000 )Required elimination $340,000
Intercompany Transaction Calculations
Total = Re-sold +Ending
InventorySales 300,000 180,000 120,000
COGS 400,000 240,000 160,000
Gross Profit (100,000) (60,000) (40,000)Gross Profit % -33.33%
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Chapter 06 - Intercompany Inventory Transactions
E6-13 Intercompany Sales
20X4 Calculations:
Total = Re-sold +Ending
InventorySales 180,000 135,000 45,000 COGS 120,000 90,000 30,000 Gross Profit 60,000 45,000 15,000 Gross Profit % 33.33%
Worksheet Entry (not required in problem)Sales 180,000 Cost of Goods Sold 165,000 Inventory 15,000
20X5 Calculations:
20X5 Upstream
Total = Re-sold +Ending
InventorySales 135,000 105,000 30,000 COGS 90,000 70,000 20,000 Gross Profit 45,000 35,000 10,000 Gross Profit % 33.33%
20X5 Downstream
Total = Re-sold +Ending
InventorySales 280,000 170,000 110,000 COGS 140,000 85,000 55,000 Gross Profit 140,000 85,000 55,000 Gross Profit % 50.00%
Worksheet Elimination Entries (not required in problem):
Eliminate Upstream TransactionsSales 135,000 Cost of Goods Sold 125,000 Inventory 10,000
Eliminate Downstream TransactionsSales 280,000 Cost of Goods Sold 225,000 Inventory 55,000
Reversal of 20X4 Upstream DeferralInvestment in Surg 10,500 NCI in NA of Surg 4,500 Cost of Goods Sold 15,000
6-21
Chapter 06 - Intercompany Inventory Transactions
E6-13 (continued)
a. Consolidated net income for 20X4:
Operating income of Hollow Corporation $160,000 Net income of Surg Corporation 90,000
$250,000 Less: Unrealized profit — Surg Corporation (15,000 )Consolidated net income $235,000
b. Inventory balance, December 31, 20X5:
Inventory reported by Hollow Corporation $ 30,000 Unrealized profit on books of Surg Corporation ($135,000 - $90,000) x ($30,000/$135,000) (10,000 ) $20,000
Inventory reported by Surg Corporation $110,000 Unrealized profit on books of Hollow Corporation ($280,000 - $140,000) x ($110,000/$280,000) (55,000 ) 55,000 Inventory, December 31, 20X5 $75,000
c. Consolidated cost of goods sold for 20X5:
COGS on sale of inventory on hand January 1, 20X5 $45,000 x ($120,000 / $180,000) $ 30,000 COGS on items purchased from Surg in 20X5 ($135,000 - $30,000) x ($90,000 / $135,000) 70,000 COGS on items purchased from Hollow in 20X5 ($280,000 - $110,000) x ($140,000 / $280,000) 85,000 Total cost of goods sold $185,000
d. Income assigned to controlling interest:
Operating income of Hollow Corporation $220,000 Net income of Surg Corporation 85,000
$305,000 Add: Inventory profit of prior year realized in 20X5 15,000 Less: Unrealized inventory profit — Surg Corporation (10,000)
Unrealized inventory profit — Hollow Corporation (55,000)Income to noncontrolling interest ($85,000 + $15,000 - $10,000) x 0.30 (27,000 )
Income assigned to controlling interest $228,000
6-22
Chapter 06 - Intercompany Inventory Transactions
E6-14 Consolidated Balance Sheet Worksheet
a.Equity Method Entries on Doorst Corp.'s Books:
Investment in Hingle Co. 49,000
Income from Hingle Co. 49,000
Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 income
Cash 9,800
Investment in Hingle Co. 9,800
Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 dividend
Income from Hingle Co. 10,000
Investment in Hingle Co. 10,000
Eliminate the deferred gross profit from downstream sales in 20X8
Income from Hingle Co. 28,000
Investment in Hingle Co. 28,000
Eliminate the deferred gross profit from upstream sales in 20X8
Book Value Calculations:
NCI30%
+Doorst Corp.70%
= CommonStock
+ Retained Earnings
Original book value 103,200 240,800 150,000 194,000
+ Net Income 21,000 49,000 70,000
- Dividends (4,200) (9,800) (14,000)
Ending book value 120,000 280,000 150,000 250,000
Reversal/Deferred GP Calculations:
Total =
Doorst Corp.'s
share + NCI's share
Downstream Deferred GP (10,000) (10,000) 0
Upstream Deferred GP (40,000) (28,000) (12,000
)
Total (50,000) (38,000) (12,000)
6-23
Chapter 06 - Intercompany Inventory Transactions
E6-14 (continued)
Basic elimination entry
Common stock 150,000 ← Original amount invested (100%)
Retained earnings 194,000 ← Beginning balance in retained earnings
Income from Hingle Co. 11,000 ← Doorst’s % of NI - Deferred GP + Reversal
NCI in NI of Hingle Co. 9,000 ← NCI share of NI - Deferred GP + Reversal
Dividends declared 14,000 ← 100% of Hingle Co.'s dividends declared
Investment in Hingle Co. 242,000 ← Net book value - Deferred GP + Reversal
NCI in NA of Hingle Co. 108,000 ← NCI share of BV - Deferred GP + Reversal
Deferral of this year's unrealized profits on inventory transfers
Sales 400,000
Cost of Goods Sold 350,000
Inventory 50,000
20X8 Downstream Transactions
Total = Re-sold +Ending
Inventory
Sales 100,000 75,000 25,000
COGS 60,000 45,000 15,000
Gross Profit 40,000 30,000 10,000
Gross Profit % 40.00%
20X8 Upstream Transactions
Total = Re-sold +Ending
Inventory
Sales 300,000 205,000 95,000
COGS 173,684 118,684 55,000
Gross Profit 126,316 86,316 40,000
Gross Profit % 42.11%
Investment in Income from
Hingle Co. Hingle Co.
Acquisition Price 240,800
70% Net Income 49,000 49,000 70% Net Income
9,800 70% Dividends
38,000 Deferred GP 38,000
Ending Balance 242,000 11,000 Ending Balance
242,000 Basic 11,000
0 0
6-24
Chapter 06 - Intercompany Inventory Transactions
E6-14 (continued)
b.
Doorst Corp.
Hingle
Co.
Elimination Entries
DR CR Consolidate
d Balance Sheet Cash and Receivables 98,000 40,000 138,000 Inventory 150,000 100,000 50,000 200,000 Buildings & Equipment (net) 310,000 280,000 590,000 Investment in Hingle Co. 242,000 242,000 0 Total Assets 800,000 420,000 0 292,000 928,000
Accounts Payable 70,000 20,000 90,000 Common Stock 200,000 150,000 150,000 200,000 Retained Earnings 530,000 250,000 194,000 14,000 530,000 11,000 350,000 9,000 400,000 NCI in NA of Hingle Co. 108,000 108,000 Total Liabilities & Equity 800,000 420,000 764,000 472,000 928,000
6-25
Chapter 06 - Intercompany Inventory Transactions
E6-15* Multiple Transfers between Affiliates
a. Entries recorded by Klon Corporation
Cash 150,000 Sales 150,000 Sale of inventory to Brant Company.
Cost of Goods Sold 100,000 Inventory 100,000 Record cost of goods sold.
Entries recorded by Brant Company
Inventory 150,000 Cash 150,000 Purchase of inventory from Klon.
Cash 150,000 Sales 150,000 Sale of inventory to Torkel Company.
Cost of Goods Sold 150,000 Inventory 150,000 Record cost of goods sold.
Entries recorded by Torkel Company
Inventory 150,000 Cash 150,000 Purchase of inventory from Brant.
Cash 120,000 Sales 120,000 Sale of inventory to nonaffiliates.
Cost of Goods Sold 90,000 Inventory 90,000 Record cost of goods sold.
b. Cost of goods sold for 20X8 should be reported as $60,000 [$90,000 x ($100,000 / $150,000)].
c. Inventory at December 31, 20X8, should be reported at $40,000 [$60,000 x ($100,000 / $150,000)].
6-26
Chapter 06 - Intercompany Inventory Transactions
E6-15* (continued)
d. Eliminating entry for inventory:
Sales 300,000 Cost of Goods Sold 280,000 Inventory 20,000
Computation of cost of goods sold to be eliminated
Cost of goods sold recorded by Klon $100,000 Cost of goods sold recorded by Brant 150,000 Cost of goods sold recorded by Torkel 90,000 Total recorded $340,000 Consolidated cost of goods sold (60,000 )Required elimination $280,000
Computation of reduction to carrying value of inventory
Inventory reported by Torkel $60,000 Inventory balance to be reported (40,000 )Required elimination $20,000
6-27
Chapter 06 - Intercompany Inventory Transactions
E6-16 Inventory Sales
a. Journal entries recorded by Spice Company:
(1) Inventory 150,000 Cash (Accounts Payable) 150,000 Record purchases from nonaffiliate.
(2) Cash (Accounts Receivable) 60,000 Sales 60,000 Record sale to Herb Corporation.
(3) Cost of Goods Sold 40,000 Inventory 40,000 Record cost of goods sold to Herb Corporation.
Journal entries recorded by Herb Corporation:
(1) Inventory 60,000 Cash (Accounts Payable) 60,000 Record purchases from Spice Company.
(2) Cash (Accounts Receivable) 90,000 Sales 90,000 Record sale of items to nonaffiliates.
(3) Cost of Goods Sold 45,000 Inventory 45,000 Record cost of goods sold.
(4) Income from Herb 5,000 Investment in Herb 5,000 Eliminate unrealized gross profit on inventory purchases from Herb.
b. Eliminating entry:
Total = Re-sold +Ending
InventorySales 60,000 45,000 15,000
COGS 40,000 30,000 10,000
Gross Profit 20,000 15,000 5,000 Gross Profit % 33.33%
Sales 60,000 Cost of Goods Sold 55,000 Inventory 5,000 Eliminate intercompany sale of inventory.
6-28
Chapter 06 - Intercompany Inventory Transactions
E6-17 Prior-Period Inventory Profits
a.20X8 Sale:
Total = Re-sold +Ending
InventorySales 180,000 170,000 30,000
COGS 120,000 113,333 20,000
Gross Profit 60,000 56,667 10,000 Gross Profit % 33.33%
20X9 Sale:
Total = Re-sold +Ending
InventorySales 240,000 170,000 150,000
COGS 160,000 113,333 100,000
Gross Profit 80,000 56,667 50,000 Gross Profit % 33.33%
Investment in Level Brothers 7,500 NCI in NA of Level Brothers 2,500 Cost of goods sold 10,000 Reversal of 20X8 gross profit deferral
Sales 240,000 Cost of Goods Sold 190,000 Inventory 50,000 Eliminate 20X9 intercompany sale of inventory.
b. 20X8 20X9 Reported net income of Level Brothers $350,000 $420,000 Unrealized profit, December 31, 20X8 (10,000) 10,000 Unrealized profit, December 31, 20X9 (50,000 )Realized net income $340,000 $380,000 Noncontrolling interest's share of ownership x 0.25 x 0.25 Income assigned to noncontrolling interest $ 85,000 $ 95,000
6-29
Chapter 06 - Intercompany Inventory Transactions
SOLUTIONS TO PROBLEMS
P6-18 Consolidated Income Statement Data
a. $180,000 = $550,000 + $450,000 - $820,000
b. January 1, 20X2: $25,000 = $75,000 - $50,000December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000
c. Investment in Bitner 15,000 NCI in NA of Bitner 10,000 Cost of Goods Sold 25,000 Eliminate beginning inventory profit.
Sales 180,000 Cost of Goods Sold 165,000 Inventory 15,000 Eliminate intercompany sale of inventory.
d. Reported net income of Bitner Company $ 90,000 Prior-period profit realized in 20X2 25,000 Unrealized profit on 20X2 sales (15,000 )Realized income $100,000 Proportion held by noncontrolling interest x 0.40 Income assigned to noncontrolling interest $ 40,000
6-30
Chapter 06 - Intercompany Inventory Transactions
P6-19 Unrealized Profit on Upstream Sales
20X2
Total = Re-sold +Ending
InventorySales 200,000 130,000 70,000
COGS 160,000 104,000 56,000
Gross Profit 40,000 26,000 14,000 Gross Profit % 20.00%
20X3
Total = Re-sold +Ending
InventorySales 175,000 70,000 105,000
COGS 140,000 56,000 84,000
Gross Profit 35,000 14,000 21,000 Gross Profit % 20.00%
20X4
Total = Re-sold +Ending
InventorySales 225,000 105,000 120,000
COGS 180,000 84,000 96,000
Gross Profit 45,000 21,000 24,000 Gross Profit % 20.00%
20X2 20X3 20X4
Operating income reported by Pacific $150,000 $240,000 $300,000 Net income reported by Carroll 100,000 90,000 160,000
$250,000 $330,000 $460,000 Inventory profit, December 31, 20X2 $70,000 - ($70,000 / 1.25) (14,000) 14,000 Inventory profit, December 31, 20X3 $105,000 - ($105,000 / 1.25) (21,000) 21,000 Inventory profit, December 31, 20X4 $120,000 - ($120,000 / 1.25) (24,000 )Consolidated net income $236,000 $323,000 $457,000 Income to noncontrolling interest: ($100,000 - $14,000) x 0.40 (34,400) ($90,000 + $14,000 - $21,000) x 0.40 (33,200) ($160,000 + $21,000 - $24,000) x 0.40 (62,800 )Income to controlling interest $201,600 $289,800 $394,200
6-31
Chapter 06 - Intercompany Inventory Transactions
P6-20 Net Income of Consolidated Entity
Operating income of Master for 20X5 $118,000 Net income of Crown for 20X5 65,000
$183,000 Add: Prior year profits realized by Master 25,000
Prior year profits realized by Crown 40,000 Less: Unrealized profits for 20X5 by Master (14,000)
Unrealized profits for 20X5 by Crown (55,000)Amortization of differential ($45,000 / 15 years) (3,000 )
Consolidated net income, 20X5 $176,000 Less: Income to noncontrolling interest
($65,000 + $40,000 - $55,000 - $3,000) x 0.30 (14,100 )Income to controlling interest $161,900
P6-21 Correction of Eliminating Entries
a. Proportion of intercompany inventory purchases resold during 20X5:Unrealized profit at year end $ 12,000 Intercompany transfer price $140,000 Cost of inventory sold ($140,000 / 1.40) (100,000 )Total Profit ÷ 40,000 Proportion of intercompany sale held by Bolger at year end 0.30
Proportion of intercompany purchases resold by Bolger during 20X5 (1.00 - 0.30) 0.70
b. Eliminating entries, December 31, 20X5:
Intercompany Transactions
Total = Re-sold +Ending
InventorySales 140,000 98,000 42,000
COGS 100,000 70,000 30,000
Gross Profit 40,000 28,000 12,000 Gross Profit % 28.57%
Accounts Payable 80,000 Accounts Receivable 80,000 Eliminate intercompany receivable/payable.
Sales 140,000 Cost of Goods Sold 128,000 Inventory 12,000 Eliminate intercompany sale of inventory.
6-32
Chapter 06 - Intercompany Inventory Transactions
P6-22 Incomplete Data
a. Increase in fair value of buildings and equipment:
Consolidated total $ 680,000 Balance reported by Lever (400,000)Balance reported by Tropic (240,000 )Increase in value $ 40,000
b. Accumulated depreciation for consolidated entity:
Accumulated depreciation reported by Lever $180,000 Accumulated depreciation reported by Tropic 110,000 Cumulative write-off of differential ($5,000 x 6 years) 30,000 Accumulated depreciation for consolidated entity $320,000
c. Amount paid by Lever to acquire ownership in Tropic:
Common stock outstanding $ 60,000 Retained earnings at acquisition 30,000 Total book value at acquisition $ 90,000 Increase in value of buildings and equipment 40,000 Fair value of net assets acquired $130,000 Proportion of ownership acquired x 0.75 Amount paid by Lever $ 97,500
d. Investment in Tropic Company stock reported at December 31, 20X6:
Tropic's common stock outstanding December 31, 20X6 $ 60,000 Tropic's retained earnings reported December 31, 20X6 112,000 Total book value $172,000 Proportion of ownership held by Lever x 0.75 Lever's share of net book value $129,000 Unamortized differential ($5,000 x 2 years) x 0.75 7,500 20X6 Gross Profit Deferral on Downstream Sale (3,000) Investment in Tropic Company stock $133,500
e. Intercorporate sales of inventory in 20X6:
Sales reported by Lever $420,000 Sales reported by Tropic 260,000 Total sales $680,000 Sales reported in consolidated income statement (650,000)Intercompany sales during 20X6 $ 30,000
6-33
Chapter 06 - Intercompany Inventory Transactions
P6-22 (continued)
f. Unrealized inventory profit, December 31, 20X6:
Inventory reported by Lever $125,000 Inventory reported by Tropic 90,000 Total inventory $215,000 Inventory reported in consolidated balance sheet (211,000)Unrealized inventory profit, December 31, 20X6 $ 4,000
g. Eliminating entry to remove the effects of intercompany inventorysales during 20X6:
Sales 30,000 Cost of Goods Sold 26,000 Inventory 4,000
h. Unrealized inventory profit at January 1, 20X6:
Cost of goods sold reported by Lever $310,000 Cost of goods sold reported by Tropic 170,000 Reduction of cost of goods sold for intercompany sales during 20X6 (26,000 )Adjusted cost of goods sold $454,000 Cost of goods sold reported in consolidated income statement (445,000)Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory $ 9,000
i. Accounts receivable reported by Lever at December 31, 20X6:
Accounts receivable reported for consolidated entity $145,000 Accounts receivable reported by Tropic (55,000 )Difference $ 90,000 Adjustment for intercompany receivable/payable: Accounts payable reported by Lever $ 86,000 Accounts payable reported by Tropic 20,000 Total reported accounts payable $106,000 Accounts payable reported for consolidated entity (89,000 ) Adjustment for intercompany receivable/payable 17,000 Accounts receivable reported by Lever $107,000
6-34
Chapter 06 - Intercompany Inventory Transactions
P6-23 Eliminations for Upstream Salesa.
Equity Method Entries on Clean Air's Books:
Investment in Special Filter 32,000
Income from Special Filter 32,000
Record Clean Air's 80% share of Special Filter's 20X8 income
Investment in Special Filter 16,000
Income from Special Filter 16,000
Reverse of the deferred gross profit from upstream sales in 20X7
Income from Special Filter 12,000
Investment in Special Filter 12,000
Eliminate the deferred gross profit from upstream sales in 20X8
Book Value Calculations:
NCI20%
+ Clean Air80%
= CommonStock
+ Retained Earnings
Original book value 62,000 248,000 90,000 220,000
+ Net Income 8,000 32,000 40,000
Ending book value 70,000 280,000 90,000 260,000
Reversal/Deferred GP Calculations:
Total =
Clean Air's
share + NCI's share
Downstream Reversal 0 0
Upstream Reversal 20,000 16,000 4,000
Downstream Deferred GP 0 0
Upstream Deferred GP (15,000) (12,000) (3,000)
Total 5,000 4,000 1,000
Basic elimination entry:
Common stock 90,000 ← Original amount invested (100%)
Retained earnings 220,000 ← Beginning balance in RE
Income from Special Filter 36,000 ← Parent’s % of NI - Def. GP + Reversal
NCI in NI of Special Filter 9,000 ← NCI share of NI - Def. GP + Reversal
Investment in Special Filter 284,000 ← Net book value - Def. GP + Reversal
NCI in NA of Special Filter 71,000 ← NCI share of BV - Def. GP + Reversal
6-35
Chapter 06 - Intercompany Inventory Transactions
P6-23 (continued)
20X7 Upstream Transactions20X8 Beg.
Inventory
Sales 60,000
COGS 40,000
Gross Profit 20,000
Gross Profit % 33.33%
20X8 Upstream Transactions
Total = Re-sold +Ending
Inventory
Sales 150,000 105,000 45,000
COGS 100,000 70,000 30,000
Gross Profit 50,000 35,000 15,000
Gross Profit % 33.33%
Deferral of this year's unrealized profits on inventory transfers
Sales 150,000
Cost of Goods Sold 135,000
Inventory 15,000
6-36
Reversal of last year's deferral:
Investment in Special Filter 16,000
NCI in NA of Special Filter 4,000
Cost of Goods Sold 20,000
Chapter 06 - Intercompany Inventory Transactions
P6-23 (continued)
b. Computation of consolidated net income and income assignedto controlling interest:
Operating income reported by Clean Air Products ($250,000 - $175,000 - $30,000) $ 45,000 Net income of Superior Filter ($200,000 - $140,000 - $20,000) 40,000
$ 85,000 Inventory profit realized from 20X7 20,000 Unrealized inventory profit for 20X8 (15,000 )Consolidated net income $ 90,000 Income assigned to noncontrolling interest ($40,000 + $20,000 - $15,000) x 0.20 (9,000 )Income assigned to controlling interest $ 81,000
c. Noncontrolling interest, December 31, 20X8:
Common stock $ 90,000 Retained earnings ($220,000 + $40,000) 260,000 Less: Unrealized inventory profit (15,000 )
$335,000 Proportion of stock held by noncontrolling interest x 0.20 Noncontrolling interest $ 67,000
6-37
Chapter 06 - Intercompany Inventory Transactions
P6-24 Multiple Inventory Transfers
a. Consolidated net income for 20X8:
Operating income of Ajax Corporation $80,000 Unrealized profit, December 31, 20X8 ($35,000 - $15,000) x ($7,000 / $35,000) (4,000 ) $ 76,000
Net income of Beta Corporation $37,500 Profit realized from 20X7 ($30,000 - $24,000) x ($10,000 / $30,000) 2,000 Unrealized profit, December 31, 20X8 ($72,000 - $63,000) x ($12,000 / $72,000) (1,500 ) 38,000
Net income of Cole Corporation $20,000 Profit realized from 20X7 ($72,000 - $60,000) x ($18,000 / $72,000) 3,000 Unrealized profit, December 31, 20X8 ($45,000 - $27,000) x ($15,000 / $45,000) (6,000 ) 17,000 Consolidated net income $131,000
b. Inventory balance, December 31, 20X8:
Balance per Beta Corporation $ 7,000 Less: Unrealized profit (4,000 ) $ 3,000
Balance per Cole Corporation $12,000 Less: Unrealized profit (1,500 ) 10,500
Balance per Ajax Corporation $15,000 Less: Unrealized profit (6,000 ) 9,000 Inventory balance per consolidated statement $22,500
c. Income assigned to noncontrolling interest in 20X8:
Realized income of Beta Corporation $38,000 Proportion of stock held by noncontrolling interest x 0.30 $11,400
Realized income of Cole Corporation $17,000 Proportion of stock held by noncontrolling interest x 0.10 1,700 Income to noncontrolling interest $13,100
6-38
Chapter 06 - Intercompany Inventory Transactions
P6-25 Consolidation with Inventory Transfers and Other Comprehensive Income
20X4 Downstream Transactions
Total = Re-sold +Ending
InventorySales 108,000 60,000 48,000 COGS 90,000 50,000 40,000 Gross Profit 18,000 10,000 8,000 Gross Profit % 16.67%
20X4 Upstream Transactions
Total = Re-sold +Ending
InventorySales 45,000 27,000 18,000 COGS 30,000 18,000 12,000 Gross Profit 15,000 9,000 6,000 Gross Profit % 33.33%
20X5 Downstream Transactions
Total = Re-sold +Ending
InventorySales 36,000 24,000 12,000 COGS 30,000 20,000 10,000 Gross Profit 6,000 4,000 2,000 Gross Profit % 16.67%
20X5 Upstream Transactions
Total = Re-sold +Ending
InventorySales 48,000 6,000 42,000 COGS 32,000 4,000 28,000 Gross Profit 16,000 2,000 14,000 Gross Profit % 33.33%
Investment in Income from Tall Corp. Tall Corp.
Beg. Balance 1,246,600 90% Net Income 81,000 81,000 90% Net Income
54,000 90% Dividends
18,000 90% of OCI
Gain 20X4 Reversal 13,400 14,600 Deferred GP 14,600 13,400 20X4 Reversal
Ending Balance 1,290,400 79,800 Ending BalanceReversal 13,400 1,285,800 Basic 79,800
18,000 OCI Entry 0 0
6-39
Chapter 06 - Intercompany Inventory Transactions
P6-25 (continued)
a. Balance in investment account at December 31, 20X5:
Proportionate share of Tall's net assets, January 1 ([$1,400,000 x .90] – 8,000 – [6,000 x 0.90]) $1,246,600 Proportionate share of 20X5 net income ($90,000 x 0.90) 81,000 Proportionate share of other comprehensive income for 20X5 ($20,000 x 0.90) 18,000 Proportionate share of dividends received ($60,000 x 0.90) (54,000)Reversal of deferred gain from 20X4 downstream transaction 8,000Reversal of deferred gain from 20X4 upstream transaction
($6,000 x .090)5,400
Deferred gain from downstream transaction (2,000) Proportionate share of deferred gain from upstream
transaction ($14,000 x 0.90) (12,600) Balance in investment account December 31, 20X5 $1,290,400
b. Investment income for 20X5:
Net income reported by Tall $90,000 Proportion of ownership held by Priority x 0.90 Priority’s share of reported income from Tall 81,000 Reversal of deferred gain from 20X4 downstream transaction 8,000Reversal of deferred gain from 20X4 upstream transaction
($6,000 x 0.90)5,400
Deferred gain from downstream transaction (2,000) Proportionate share of deferred gain from upstream
transaction ($14,000 x 0.90) (12,600) Investment income for 20X5 $79,800
c. Income to noncontrolling interests for 20X5:
Net income reported by Tall $90,000 20X4 inventory profits realized in 20X5 ($15,000 x 0.40) 6,000 20X5 unrealized inventory profits $30,000 - [$30,000 x ($48,000 / $90,000)] (14,000 )Realized net income $82,000 Proportion of ownership held by noncontrolling interest x 0.10 Income to noncontrolling interest $ 8,200
6-40
Chapter 06 - Intercompany Inventory Transactions
P6-25 (continued)
d. Balance assigned to noncontrolling interest in consolidated balance sheet:
Net assets reported by Tall, January 1 $1,400,000 Net income for 20X5 90,000 Dividends paid in 20X5 (60,000 )Net assets reported, December 31, 20X5 $1,430,000 Unrealized inventory profits at December 31, 20X5 (14,000)Other comprehensive income in 20X5 20,000 Adjusted net assets, December 31, 20X5 $1,436,000 Proportion of ownership held by noncontrolling interest x 0.10 Net assets assigned to noncontrolling interest $ 143,600
e. Inventory reported in consolidated balance sheet:
Inventory held by Priority $120,000 Less: Unrealized profit (14,000 ) $106,000
Inventory held by Tall $100,000 Less: Unrealized profit
$6,000 - [$6,000 x ($24,000 / $36,000)] (2,000 ) 98,000 Inventory $204,000
f. Consolidated net income for 20X5:
Operating income of Priority $240,000 Net income of Tall 90,000 Total unadjusted income $330,000 20X4 inventory profits realized in 20X5 ($6,000 + $8,000) 14,000 Unrealized inventory profits on 20X5 sales ($14,000 + $2,000) (16,000 )Consolidated net income $328,000
g. Eliminating entries, December 31, 20X5
Book Value Calculations:
NCI10%
+Priority Corp.90%
= Comm. Stock
+Add.
Paid-In Capital
+ Retained Earnings
+ Acc. OCI
Original book value 140,000 1,260,000 400,000 200,000 790,000 10,000 + Net Income 9,000 81,000 90,000 - Dividends (6,000) (54,000) (60,000) Ending book value 143,000 1,287,000 400,000 200,000 820,000 10,000
6-41
Chapter 06 - Intercompany Inventory Transactions
6-42
Chapter 06 - Intercompany Inventory Transactions
P6-25 (continued)
Reversal/Deferred GP Calculations:
Total =
Priority Corp.'s share +
NCI's share
Downstream Reversal 8,000 8,000 Upstream Reversal 6,000 5,400 600 Downstream Deferred GP (2,000) (2,000) Upstream Deferred GP (14,000) (12,600) (1,400) Total (2,000) (1,200) (800)
Basic elimination entry
Common stock 400,000 ← Original amount invested (100%)
Additional paid-in capital 200,000 ← Beginning balance in APIC
Retained earnings 790,000 ← Beginning balance in RE
Accumulated OCI 10,000 ← Beginning balance in Acc. OCI
Income from Tall Corp. 79,800 ← PC.’s % of NI - Def. GP + Reversal
NCI in NI of Tall Corp. 8,200 ← NCI share of NI - Def. GP + Reversal
Investment in Tall Corp. 1,285,800 ← Net book value - Def. GP + Reversal
NCI in NA of Tall Corp. 142,200 ← NCI share of BV - Def. GP + Reversal
Other Comprehensive Income Entry:
OCI from Tall Corp. 18,000
OCI to the NCI 2,000
Investment in Tall Corp. 18,000
NCI in NA of Tall Corp. 2,000
Reversal of last year's deferral:
Investment in Tall Corp. 13,400
NCI in NA of Tall Corp. 600
Cost of Goods Sold 14,000
Deferral of this year's unrealized profits on inventory transfers
Sales 126,000
Cost of Goods Sold 110,000
Inventory 16,000
6-43
Chapter 06 - Intercompany Inventory Transactions
P6-26 Multiple Inventory Transfers between Parent and Subsidiary
20X5 Downstream
Total = Re-sold +
Ending Inventory,
20X5Sales 150,000 90,000 60,000 COGS 100,000 60,000 40,000 Gross Profit 50,000 30,000 20,000 Gross Profit % 33.33%
20X5 Upstream
Total = Re-sold +
Ending Inventory,
20X5Sales 100,000 30,000 70,000 COGS 70,000 21,000 49,000 Gross Profit 30,000 9,000 21,000 Gross Profit % 30.00%
Beg Inventory,
20X6 = Re-sold +
Ending Inventory,
20X6Sales 70,000 50,000 20,000 COGS 49,000 35,000 14,000 Gross Profit 21,000 15,000 6,000 Gross Profit % 30.00%
20X6 Downstream
Total = Re-sold +
Ending Inventory,
20X6Sales 60,000 54,000 6,000 COGS 40,000 36,000 4,000 Gross Profit 20,000 18,000 2,000 Gross Profit % 33.33%
20X6 Upstream
Total = Re-sold +
Ending Inventory,
20X6Sales 240,000 60,000 180,000 COGS 200,000 50,000 150,000 Gross Profit 40,000 10,000 30,000 Gross Profit % 16.67%
6-44
Chapter 06 - Intercompany Inventory Transactions
a. Eliminating entries:
Investment in Slinky 20,000 Cost of goods sold 20,000 Eliminate beginning inventory profit of Proud Company.
Investment in Slinky 12,600NCI in NA of Slinky 8,400 Cost of goods sold 15,000 Inventory 6,000 Eliminate beginning inventory profit of Slinky Company.
Sales 60,000 Cost of goods sold 58,000 Inventory 2,000 Eliminate intercompany sale of inventory by Proud Company.
Sales 240,000 Cost of goods sold 210,000 Inventory 30,000 Eliminate intercompany sale of inventory by Slinky Company.
b. Computation of cost of goods sold for consolidated entity:
Inventory produced by Proud in 20X5 ($100,000 x 0.40) $ 40,000Inventory produced by Slinky in 20X5 ($70,000 x 0.50) 35,000Inventory produced by Proud in 20X6 ($40,000 x 0.90) 36,000Inventory produced by Slinky in 20X6 ($200,000 x 0.25) 50,000 Cost of goods sold reported in consolidated income statement $161,000
6-45
Chapter 06 - Intercompany Inventory Transactions
P6-27 Consolidation following Inventory Transactionsa.Equity Method Entries on Bell Co.'s Books:Investment in Troll Corp. 18,000 Income from Troll Corp. 18,000 Record Bell Co.'s 60% share of Troll Corp.'s 20X2 income
Cash 6,000 Investment in Troll Corp. 6,000 Record Bell Co.'s 60% share of Troll Corp.'s 20X2 dividend Income from Troll Corp. 6,500 Investment in Troll Corp. 6,500 Eliminate the deferred gross profit from downstream sales in 20X2
Investment in Troll Corp. 2,040 Income from Troll Corp. 2,040 Reverse of the deferred gross profit from upstream sales in 20X1
Income from Troll Corp. 2,520 Investment in Troll Corp. 2,520 Eliminate the deferred gross profit from upstream sales in 20X2
b.Book Value Calculations:
NCI40%
+ Bell Co.60%
= CommonStock
+ Retained Earnings
Original book value 60,000 90,000 100,000 50,000
+ Net Income 12,000 18,000 30,000
- Dividends (4,000) (6,000) (10,000)
Ending book value 68,000 102,000 100,000 70,000
Reversal/Deferred GP Calculations:
Total =Bell Co.'s
share + NCI's share
Downstream Reversal 0 0
Upstream Reversal 3,400 2,040 1,360
Downstream Deferred GP (6,500) (6,500)
Upstream Deferred GP (4,200) (2,520) (1,680)
Total (7,300) (6,980) (320)
6-46
Chapter 06 - Intercompany Inventory Transactions
P6-27 (continued)
Basic elimination entry
Common stock 100,000 ← Original amount invested (100%)
Retained earnings 50,000 ← Beginning balance in RE
Income from Troll Corp. 11,020 ← Bell’s % of NI - Def. GP + Reversal
NCI in NI of Troll Corp. 11,680 ← NCI share of NI - Def. GP + Reversal
Dividends declared 10,000 ← 100% of Troll Corp.'s dividends
Investment in Troll Corp. 95,020 ← Net book value - Def. GP + Reversal
NCI in NA of Troll Corp. 67,680 ← NCI share of BV - Def. GP + Reversal
Excess Value (Differential) Calculations:
NCI 40% +
Bell Co. 60% = Land
Beginning balance 7,200 10,800 18,000
Changes 0 0 0
Ending balance 7,200 10,800 18,000
Excess value (differential) reclassification entry:
Land 18,000
Investment in Troll Corp. 10,800
NCI in NA of Troll Corp. 7,200
Optional accumulated depreciation elimination entry
Accumulated depreciation 45,000
Building & equipment 45,000
Reversal of last year's deferral:
Investment in Troll Corp. 2,040
NCI in NA of Troll Corp. 1,360
Cost of Goods Sold 3,400
Deferral of this year's unrealized profits on inventory transfers
Sales 63,000
Cost of Goods Sold 52,300
Inventory 10,700
6-47
Chapter 06 - Intercompany Inventory Transactions
P6-27 (continued)
20X2 Downstream Transactions
Total = Re-sold +Ending
Inventory
Sales 28,000 15,000 13,000
COGS 14,000 7,500 6,500
Gross Profit 14,000 7,500 6,500
Gross Profit % 50.00%
20X1 Upstream Transactions
Total = Re-sold +Ending
Inventory
Sales 42,500 34,000 8,500
COGS 25,500 20,400 5,100
Gross Profit 17,000 13,600 3,400
Gross Profit % 40.00%
20X2 Upstream Transactions
Total = Re-sold +Ending
Inventory
Sales 35,000 24,500 10,500
COGS 21,000 14,700 6,300
Gross Profit 14,000 9,800 4,200
Gross Profit % 40.00%
Investment in Income from Troll Corp. Troll Corp.
Beginning Balance 98,760
60% Net Income 18,000 18,000 60% Net Income 6,000 60% Dividends
20X1 Reversal 2,040 9,020 Deferred GP 9,020 2,040 20X1 ReversalEnding Balance 103,780 11,020 Ending Balance
Reversal 2,040 95,020 Basic 11,020 10,800 Excess Reclass.
0 0
6-48
Chapter 06 - Intercompany Inventory Transactions
P6-27 (continued)
c.
Bell Co. Troll
Corp. Elimination Entries
DR CR Consolidated Income Statement Sales 200,000 120,000 63,000 257,000 Less: COGS (99,800) (61,000) 52,300 (105,100) 3,400 Less: Depreciation Expense (25,000) (15,000) (40,000) Less: Interest Expense (6,000) (14,000) (20,000) Income from Troll Corp. 11,020 11,020 0 Consolidated Net Income 80,220 30,000 74,020 55,700 91,900 NCI in Net Income 11,680 (11,680)
Controlling Interest in Net Income 80,220 30,000 85,700 55,700 80,220
Statement of Retained Earnings Beginning Balance 227,960 50,000 50,000 227,960 Net Income 80,220 30,000 85,700 55,700 80,220 Less: Dividends Declared (40,000) (10,000) 10,000 (40,000) Ending Balance 268,180 70,000 135,700 65,700 268,180
Balance Sheet Cash and Accounts Receivable 69,400 51,200 120,600 Inventory 60,000 55,000 10,700 104,300 Land 40,000 30,000 18,000 88,000 Buildings & Equipment 520,000 350,000 45,000 825,000 Less: Accumulated Depreciation (175,000) (75,000) 45,000 (205,000) Investment in Troll Corp. 103,780 2,040 95,020 0 10,800 Total Assets 618,180 411,200 65,040 161,520 932,900
Accounts Payable 68,800 41,200 110,000 Bonds Payable 80,000 200,000 280,000 Bonds Premium 1,200 1,200 Common Stock 200,000 100,000 100,000 200,000 Retained Earnings 268,180 70,000 135,700 65,700 268,180 NCI in NA of Troll Corp. 1,360 67,680 73,520 7,200 Total Liabilities & Equity 618,180 411,200 237,060 140,580 932,900
6-49
Chapter 06 - Intercompany Inventory Transactions
P6-28 Consolidation Worksheet
a.Equity Method Entries on Crow Corp.'s Books:
Investment in West Co. 14,000
Income from West Co. 14,000
Record Crow Corp.'s 70% share of West Co.'s 20X9 income
Cash 3,500
Investment in West Co. 3,500
Record Crow Corp.'s 70% share of West Co.'s 20X9 dividend
Investment in West Co. 15,000
Income from West Co. 15,000
Reverse of the deferred gross profit from downstream sales in 20X8
Income from West Co. 8,000
Investment in West Co. 8,000
Eliminate the deferred gross profit from downstream sales in 20X9
Investment in West Co. 21,000
Income from West Co. 21,000
Reverse of the deferred gross profit from upstream sales in 20X8
Income from West Co. 17,500
Investment in West Co. 17,500
Eliminate the deferred gross profit from upstream sales in 20X9
Book Value Calculations:
NCI30%
+Crow Corp.70%
= CommonStock
+ Retained Earnings
Original book value 120,000 280,000 150,000 250,000 + Net Income 6,000 14,000 20,000 - Dividends (1,500) (3,500) (5,000) Ending book value 124,500 290,500 150,000 265,000
6-50
Chapter 06 - Intercompany Inventory Transactions
P6-28 (continued)
Reversal/Deferred GP Calculations:
Total =
Crow Corp.'s
share + NCI's shareDownstream Reversal 15,000 15,000 Upstream Reversal 30,000 21,000 9,000 Downstream Deferred GP (8,000) (8,000) Upstream Deferred GP (25,000) (17,500) (7,500) Total 12,000 10,500 1,500
Basic elimination entryCommon stock 150,000 ← Original amount invested (100%)Retained earnings 250,000 ← Beginning balance in REIncome from West Co. 24,500 ← Crow’s % of NI - Def. GP + ReversalNCI in NI of West Co. 7,500 ← NCI share of NI - Def. GP + Reversal Dividends declared 5,000 ← 100% of West Co.'s dividends Investment in West Co. 301,000 ← Net book value - Def. GP + Reversal NCI in NA of West Co. 126,000 ← NCI share of BV - Def. GP + Reversal
Excess Value (Differential) Calculations:
NCI 30% +
Crow Corp. 70% = Land + Goodwill
Beginning balance 10,800 25,200 14,000 22,000 Changes 0 0 0 0 Ending balance 10,800 25,200 14,000 22,000
Excess value (differential) reclassification entry:Land 14,000 Goodwill 22,000 Investment in West Co. 25,200 NCI in NA of West Co. 10,800
Reversal of last year's deferral:Investment in West Co. 36,000 NCI in NA of West Co. 9,000 Cost of Goods Sold 45,000
Deferral of this year's unrealized profits on inventory transfersSales 152,000 Cost of Goods Sold 119,000 Inventory 33,000
6-51
Chapter 06 - Intercompany Inventory Transactions
P6-28 (continued)
20X9 Downstream Transactions
Total = Re-sold +Ending
Inventory
Sales 90,000 70,000 20,000
COGS 54,000 42,000 12,000
Gross Profit 36,000 28,000 8,000
Gross Profit % 40.00%
20X9 Upstream Transactions
Total = Re-sold +Ending
Inventory
Sales 62,000 0 62,000
COGS 37,000 0 37,000
Gross Profit 25,000 0 25,000
Gross Profit % 40.32%
Investment in Income from
West Co. West Co. Beginning
Balance 269,200
70% Net Income 14,000 14,000 70% Net Income
3,500 70% Dividends
20X8 Reversal 36,000 25,500 Deferred GP 25,500 36,000 20X8 Reversal
Ending Balance 290,200 24,500 Ending Balance
Reversal 36,000 301,000 Basic 24,500
25,200 Excess Reclass.
0 0
6-52
Chapter 06 - Intercompany Inventory Transactions
P6-28 (continued)
b. Crow
Corp.
West Co. Elimination Entries
DR CR Consolidated Income Statement Sales 300,000 200,000 152,000 348,000 Less: COGS (200,000) (150,000) 119,000 (186,000) 45,000 Less: Depreciation Expense (40,000) (30,000) (70,000) Income from West Co. 24,500 24,500 0 Consolidated Net Income 84,500 20,000 176,500 164,000 92,000 NCI in Net Income 7,500 (7,500) Controlling Interest in Net Income 84,500 20,000 184,000 164,000 84,500
Statement of Retained Earnings Beginning Balance 532,000 250,000 250,000 532,000 Net Income 84,500 20,000 184,000 164,000 84,500 Less: Dividends Declared (35,000) (5,000) 5,000 (35,000) Ending Balance 581,500 265,000 434,000 169,000 581,500
Balance Sheet Cash and Receivable 81,300 85,000 166,300 Inventory 200,000 110,000 33,000 277,000 Land, Buildings, and Equipment (net) 270,000 250,000 14,000 534,000 Investment in West Co. 290,200 36,000 301,000 0 25,200 Goodwill 22,000 22,000 Total Assets 841,500 445,000 72,000 359,200 999,300
Accounts Payable 60,000 30,000 90,000 Common Stock 200,000 150,000 150,000 200,000 Retained Earnings 581,500 265,000 434,000 169,000 581,500 NCI in NA of West Co. 9,000 126,000 127,800 10,800 Total Liabilities & Equity 841,500 445,000 593,000 305,800 999,300
c. Retained earnings reconciliation, December 31, 20X9:Retained earnings, Crow Corporation $581,500 Retained earnings, West Company 265,000Elimination of West’s beginning RE (250,000)Elimination debits in income statement (184,000)Elimination credits in income statement 164,000Remove West’s dividends 5,000 Consolidated retained earnings $581,500
6-53
Chapter 06 - Intercompany Inventory Transactions
P6-29 Computation of Consolidated Totals
a. Consolidated sales for 20X8:Bunker Harrison Consol- Corp. Co. idated
Sales reported $660,000 $510,000 Intercorporate sales (140,000) (240,000)Sales to nonaffiliates $520,000 $270,000 $790,000
b. Consolidated cost of goods sold:
Total sales reported $660,000 $510,000 Ratio of cost to sales price ÷ 1.4 ÷ 1.2 Cost of goods sold $471,429 $425,000 Amount to be eliminated (see entry) (128,000) (232,000)Cost of goods sold adjusted $343,429 $193,000 $536,429
Downstream:
Total = Re-sold +Ending
InventorySales 140,000 98,000 42,000 COGS 100,000 70,000 30,000 Gross Profit 40,000 28,000 12,000 Gross Profit % 28.57%
Upstream:
Total = Re-sold +Ending
InventorySales 240,000 192,000 48,000 COGS 200,000 160,000 40,000 Gross Profit 40,000 32,000 8,000 Gross Profit % 16.67%
Eliminating entries:
Sales 140,000 Cost of Goods Sold 128,000 Inventory 12,000 Elimination of sales by Bunker to Harrison:
Sales 240,000 Cost of Goods Sold 232,000 Inventory 8,000 Elimination of sales by Harrison to Bunker:
6-54
Chapter 06 - Intercompany Inventory Transactions
P6-29 (continued)
c. Operating income of Bunker Corporation (excluding income from Harrison Company) $70,000 Net income of Harrison Company 20,000
$90,000 Less: Unrealized inventory profits of Bunker (12,000)
Unrealized inventory profits of Harrison (8,000 )Consolidated net income $70,000 Less: Income assigned to noncontrolling interest ($20,000 - $8,000) x 0.20 (2,400 )Income to controlling interest 20X8 $67,600
d. Inventory balance in consolidated balance sheet:
Inventory reported by Bunker Corporation $48,000 Unrealized profits (8,000 ) $40,000
Inventory reported by Harrison Company $42,000 Unrealized profits (12,000) 30,000 Inventory balance, December 31, 20X8 $70,000
6-55
Chapter 06 - Intercompany Inventory Transactions
P6-30 Intercompany Transfer of Inventory and Landa.Equity Method Entries on Pine Corp.'s Books:Investment in Bock Co. 17,500 Income from Bock Co. 17,500 Record Pine Corp.'s 70% share of Bock Co.'s 20X3 income
Cash 10,500 Investment in Bock Co. 10,500 Record Pine Corp.'s 70% share of Bock Co.'s 20X3 dividend
Income from Bock Co. 6,300 Investment in Bock Co. 6,300 Record amortization of excess acquisition price
Income from Bock Co. 3,800 Investment in Bock Co. 3,800 Eliminate the deferred gross profit from downstream sales in 20X3
Investment in Bock Co. 6,300 Income from Bock Co. 6,300 Reverse of the deferred gross profit from upstream sales in 20X2
Income from Bock Co. 5,600 Investment in Bock Co. 5,600 Eliminate the deferred gross profit from upstream sales in 20X3
Book Value Calculations:
NCI30%
+Pine Corp.
70%=
CommonStock
+Retained Earnings
Original book value 39,000 91,000 70,000 60,000 + Net Income 7,500 17,500 25,000 - Dividends (4,500) (10,500) (15,000) Ending book value 42,000 98,000 70,000 70,000
Reversal/Deferred GP Calculations:
Total =
Pine Corp.'s
share + NCI's shareUpstream Reversal 9,000 6,300 2,700 Downstream Deferred GP (3,800) (3,800) Upstream Deferred GP (8,000) (5,600) (2,400) Total (2,800) (3,100) 300
6-56
Chapter 06 - Intercompany Inventory Transactions
P6-30 (continued)
Basic elimination entry
Common stock 70,000 ← Original amount invested (100%)
Retained earnings 60,000 ← Beginning balance in RE
Income from Bock Co. 14,400 ← Pine’s % of NI - Def. GP + Reversal
NCI in NI of Bock Co. 7,800 ← NCI share of NI - Def. GP + Reversal
Dividends declared 15,000 ← 100% of Bock Co.'s dividends
Investment in Bock Co. 94,900 ← Net book value - Def. GP + Reversal
NCI in NA of Bock Co. 42,300 ← NCI share of BV - Def. GP + Reversal
Excess Value (Differential) Calculations:
NCI 30% +
Pine Corp. 70% =
Buildings and Equipment + Patents +
Acc. Depr.
Beginning balance 13,800 32,200 20,000 28,000 (2,000)
Changes (2,700) (6,300) (7,000) (2,000)
Ending balance 11,100 25,900 20,000 21,000 (4,000)
Amortized excess value reclassification entry:
Amortization expense 7,000
Depreciation expense 2,000
Income from Bock Co. 6,300
NCI in NI of Bock Co. 2,700
Excess value (differential) reclassification entry:
Buildings and Equipment 20,000
Patents 21,000
Accumulated depreciation 4,000
Investment in Bock Co. 25,900
NCI in NA of Bock Co. 11,100
Optional accumulated depreciation elimination entry:
Accumulated depreciation 50,000
Building & equipment 50,000
Reversal of last year's deferral:
Investment in Bock Co. 6,300
NCI in NA of Bock Co. 2,700
Cost of Goods Sold 9,000
6-57
Chapter 06 - Intercompany Inventory Transactions
P6-30 (continued)
Deferral of this year's unrealized profits on inventory transfersInvestment in Bock Co. 4,900 NCI in NA of Bock Co. 2,100 Inventory 7,000
Deferral of this year's unrealized profits on inventory transfersSales 120,000 Cost of Goods Sold 108,200 Inventory 11,800
Investment in Income from Bock Co. Bock Co.
Beg. Balance 112,000 70% Net Income 17,500 17,500 70% Net Income
10,500 70% Dividends 6,300 Excess Val. Amort. 6,300
20X2 Reversal 6,300 9,400 Deferred GP 9,400 6,300 20X2 ReversalEnding Balance 109,600 8,100 Ending Balance
Reversal 6,300 94,900 Basic 14,400 20X2 Deferred
GP 4,900 25,900 Excess Reclass. 6,300 0 0
6-58
20X3 Downstream Transactions:
Total = Re-sold +Ending
InventorySales 30,000 22,400 7,600 COGS 15,000 11,200 3,800 Gross Profit 15,000 11,200 3,800 Gross Profit % 50.00%
20X2 Upstream Transactions:
Ending Inventory, 20X2 =
Re-sold, 20X3 +
Ending Inventory,
20X3Sales 48,000 27,000 21,000COGS 32,000 18,000 14,000Gross Profit 16,000 9,000 7,000 Gross Profit % 33.33%
20X3 Upstream Transactions
Total = Re-sold +Ending
InventorySales 90,000 66,000 24,000 COGS 60,000 44,000 16,000 Gross Profit 30,000 22,000 8,000 Gross Profit % 33.33%
Chapter 06 - Intercompany Inventory Transactions
P6-30 (continued)
b. Pine
Corp. Bock
Co. Elimination Entries
DR CR Consolidated Income Statement Sales 260,000 125,000 120,000 265,000 Other Income 13,600 13,600 Less: COGS (186,000) (79,800) 108,200 (148,600) 9,000
Less: Depreciation Expense (20,000) (15,000) 2,000 (37,000)
Less: Interest Expense (16,000) (5,200) (21,200)
Less: Amortization Expense 7,000 (7,000)
Income from Bock Co. 8,100 14,400 6,300 0
Consolidated Net Income 59,700 25,000 143,400 123,500 64,800
NCI in Net Income 7,800 2,700 (5,100)
Controlling Interest in Net Income 59,700 25,000 151,200 126,200 59,700
Statement of Retained Earnings Beginning Balance 127,900 60,000 60,000 127,900 Net Income 59,700 25,000 151,200 126,200 59,700 Less: Dividends Declared (30,000) (15,000) 15,000 (30,000) Ending Balance 157,600 70,000 211,200 141,200 157,600
Balance Sheet Cash and Accounts Receivable 15,400 21,600 37,000 Inventory 165,000 35,000 11,800 181,200 7,000 Land 80,000 40,000 120,000 Buildings & Equipment 340,000 260,000 20,000 50,000 570,000 Less: Accumulated Depreciation (140,000) (80,000) 50,000 4,000 (174,000) Investment in Bock Co. 109,600 6,300 94,900 0 4,900 25,900 Patents 21,000 21,000 Total Assets 570,000 276,600 102,200 193,600 755,200
Accounts Payable 92,400 35,000 127,400 Bonds Payable 200,000 100,000 300,000 Bonds Premium 1,600 1,600 Common Stock 120,000 70,000 70,000 120,000 Retained Earnings 157,600 70,000 211,200 141,200 157,600 NCI in NA of Bock Co. 2,700 42,300 48,600 2,100 11,100 Total Liabilities & Equity 570,000 276,600 286,000 194,600 755,200
6-59
Chapter 06 - Intercompany Inventory Transactions
P7-30 (continued)
Note: Financial statements are not required.
Pine Corporation and SubsidiaryConsolidated Balance Sheet
December 31, 20X3
Cash and Accounts Receivable $ 37,000 Inventory 181,200 Land 120,000 Buildings and Equipment $570,000 Less: Accumulated Depreciation (174,000) 396,000 Patent 21,000 Total Assets $755,200
Accounts Payable $127,400 Bonds Payable $300,000 Bond Premium 1,600 301,600 Stockholders’ Equity: Controlling Interest: Common Stock $120,000 Retained Earnings 157,600 Total Controlling Interest $277,600 Noncontrolling Interest 48,600 Total Stockholders’ Equity 326,200 Total Liabilities and Stockholders' Equity $755,200
Pine Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X3
Sales $265,000 Other Income 13,600 Total Income $278,600 Cost of Goods Sold $148,600 Depreciation Expense 37,000 Interest Expense 21,200 Amortization Expense 7,000 Total Expenses (213,800)Consolidated Net Income $ 64,800 Income to Noncontrolling Interest (5,100 )Income to Controlling Interest $ 59,700
Pine Corporation and SubsidiaryConsolidated Retained Earnings Statement
Year Ended December 31, 20X3
Retained Earnings, January 1, 20X3 $127,900 Income to Controlling Interest, 20X3 59,700
$187,600 Dividends Declared, 20X3 (30,000 )Retained Earnings, December 31, 20X3 $157,600
6-60
Chapter 06 - Intercompany Inventory Transactions
P6-31 Consolidation Using Financial Statement Data
a.Equity Method Entries on Bower Corp.'s Books:Investment in Concerto Co. 21,000 Income from Concerto Co. 21,000 Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 income
Cash 12,000 Investment in Concerto Co. 12,000 Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 dividend
Income from Concerto Co. 6,000 Investment in Concerto Co. 6,000 Record amortization of excess acquisition price
Investment in Concerto Co. 4,000 Income from Concerto Co. 4,000 Reverse of the deferred gross profit from downstream sales in 20X5
Income from Concerto Co. 2,000 Investment in Concerto Co. 2,000 Eliminate the deferred gross profit from downstream sales in 20X6
Investment in Concerto Co. 4,800 Income from Concerto Co. 4,800 Reverse of the deferred gross profit from upstream sales in 20X5
Income from Concerto Co. 5,400 Investment in Concerto Co. 5,400 Eliminate the deferred gross profit from upstream sales in 20X6
Book Value Calculations:
NCI40%
+Bower Corp.60%
= CommonStock
+ Retained Earnings
Original book value 80,000 120,000 50,000 150,000
+ Net Income 14,000 21,000 35,000
- Dividends (8,000) (12,000) (20,000)
Ending book value 86,000 129,000 50,000 165,000
6-61
Chapter 06 - Intercompany Inventory Transactions
P6-31 (continued)
Reversal/Deferred GP Calculations:
Total =
Bower Corp.'s
share + NCI's shareDownstream Reversal 4,000 4,000 Upstream Reversal 8,000 4,800 3,200 Downstream Deferred GP (2,000) (2,000) Upstream Deferred GP (9,000) (5,400) (3,600) Total 1,000 1,400 (400)
Basic elimination entryCommon stock 50,000 ← Original amount invested (100%)Retained earnings 150,000 ← Beginning balance in REIncome from Concerto Co. 22,400 ← Bower’s % of NI - Def. GP + ReversalNCI in NI of Concerto Co. 13,600 ← NCI share of NI - Def. GP + Reversal Dividends declared 20,000 ← 100% of Concerto Co.'s dividends Investment in Concerto Co. 130,400 ← Net book value - Def. GP + Reversal NCI in NA of Concerto Co. 85,600 ← NCI share of BV - Def. GP + Reversal
Excess Value (Differential) Calculations:
NCI 40% +
Bower Corp. 60% = Goodwill
Beginning balance 16,000 24,000 40,000 Changes (4,000) (6,000) (10,000)Ending balance 12,000 18,000 30,000
Amortized excess value reclassification entry:Goodwill impairment loss 10,000 Income from Concerto Co. 6,000 NCI in NI of Concerto Co. 4,000
Excess value (differential) reclassification entry:Goodwill 30,000 Investment in Concerto Co. 18,000 NCI in NA of Concerto Co. 12,000
Optional accumulated depreciation elimination entry
Accumulated depreciation 25,000
Building & equipment 25,000
6-62
Chapter 06 - Intercompany Inventory Transactions
P6-31 (continued)
Reversal of last year's deferral:
Investment in Concerto Co. 8,800
NCI in NA of Concerto Co. 3,200
Cost of Goods Sold 12,000
Deferral of this year's unrealized profits on inventory transfers
Sales 112,000
Cost of Goods Sold 101,000
Inventory 11,000
20X5 Downstream Transactions:
Ending Inv., 20X5
Sales 14,000 COGS 10,000 Gross Profit 4,000 Gross Profit % 28.57%
20X6 Downstream Transactions:
Total = Re-sold +Ending
InventorySales 22,000 15,000 7,000 COGS 15,714 10,714 5,000 Gross Profit 6,286 4,286 2,000 Gross Profit % 28.57%
20X5 Upstream Transactions:
Ending Inv., 20X5
Sales 48,000 COGS 40,000 Gross Profit 8,000 Gross Profit % 16.67%
20X6 Upstream Transactions:
Total = Re-sold +Ending
InventorySales 90,000 36,000 54,000 COGS 75,000 30,000 45,000 Gross Profit 15,000 6,000 9,000 Gross Profit % 16.67%
P6-31 (continued)Investment in Income from
Concerto Co. Concerto Co.
6-63
Chapter 06 - Intercompany Inventory Transactions
P6-31 (continued)Beg. Balance 135,200
60% Net Income 21,000 21,000 60% Net Income
12,000 60% Dividends
6,000 Excess Val. Amort. 6,000
20X5 Reversal 8,800 7,400 Deferred GP 7,400 8,800 20X5 Reversal
Ending Balance 139,600 16,400 Ending Balance
Reversal 8,800 130,400 Basic 22,400
18,000 Excess Reclass. 6,000
0 0
b. Bower
Corp. Concerto
Co. Elimination Entries
DR CR Consolidated Income Statement Sales 400,000 200,000 112,000 488,000 Less: COGS (280,000) (120,000) 12,000 (287,000) 101,000 Less: Depreciation & Amort. Expense (25,000) (15,000) (40,000) Less: Other Expenses (35,000) (30,000) (65,000)
Less: Goodwill Impairment Loss 10,000 (10,000)
Income from Concerto Co. 16,400 22,400 6,000 0
Consolidated Net Income 76,400 35,000 144,400 119,000 86,000
NCI in Net Income 13,600 4,000 (9,600)
Controlling Interest in Net Income 76,400 35,000 158,000 123,000 76,400
Statement of Retained Earnings Beginning Balance 285,000 150,000 150,000 285,000 Net Income 76,400 35,000 158,000 123,000 76,400 Less: Dividends Declared (50,000) (20,000) 20,000 (50,000) Ending Balance 311,400 165,000 308,000 143,000 311,400
Balance Sheet Cash 26,800 35,000 61,800 Accounts Receivable 80,000 40,000 120,000 Inventory 120,000 90,000 11,000 199,000 Land 70,000 20,000 90,000 Buildings & Equipment 340,000 200,000 25,000 515,000 Less: Accumulated Depreciation (165,000) (85,000) 25,000 (225,000) Investment in Concerto Co. 139,600 8,800 130,400 0 18,000 Goodwill 30,000 30,000 Total Assets 611,400 300,000 63,800 184,400 790,800
Accounts Payable 80,000 15,000 95,000 Bonds Payable 120,000 70,000 190,000 Common Stock 100,000 50,000 50,000 100,000 Retained Earnings 311,400 165,000 308,000 143,000 311,400 NCI in NA of Concerto Co. 3,200 85,600 94,400 12,000 Total Liabilities & Equity 611,400 300,000 361,200 240,600 790,800
6-64
Chapter 06 - Intercompany Inventory Transactions
P6-32 Intercorporate Transfers of Inventory and Equipment
a. Consolidated cost of goods sold for 20X9:
Amount reported by Foster Company $593,000 Amount reported by Block Corporation 270,000 Adjustment for unrealized profit in beginning inventory sold in 20X9 (15,000)Adjustment for inventory purchased from subsidiary and resold during 20X9: CGS recorded by Foster ($30,000 x 0.60) $18,000 CGS recorded by Block 20,000 Total recorded $38,000 CGS based on Block's cost ($20,000 x 0.60) (12,000) Required adjustment (26,000 )Cost of goods sold $822,000
b. Consolidated inventory balance:
Amount reported by Foster $137,000 Amount reported by Block 130,000 Total inventory reported $267,000 Unrealized profit in ending inventory held by Foster [($30,000 - $20,000) x 0.40] (4,000 )Consolidated balance $263,000
c. Income assigned to noncontrolling interest:
Net income reported by Block Corporation $70,000 Adjustment for realization of profit on inventory sold to Foster in 20X8 15,000 Adjustment for unrealized profit on inventory sold to Foster in 20X9 (4,000 )Realized net income of Block for 20X9 $81,000 Proportion of ownership held by noncontrolling interest x 0.10 Income assigned to noncontrolling interest $ 8,100
6-65
Chapter 06 - Intercompany Inventory Transactions
P6-32 (continued)
d. Amount assigned to noncontrolling interest in consolidated balancesheet:
Block Corporation common stock outstanding $ 50,000 Block Corporation retained earnings, January 1, 20X9 165,000 Net income for 20X9 70,000 Dividends paid in 20X9 (20,000 )Book value, December 31, 20X9 $265,000 Adjustment for unrealized profit on inventory sold to Foster (4,000 )Realized book value of Block Corporation $261,000 Proportion of ownership held by noncontrolling interest x 0.10 Balance assigned to noncontrolling interest $ 26,100
e. Consolidated retained earnings at December 31, 20X9:
Balance reported by Foster Company, January 1, 20X9 $235,000 Net income for 20X9 180,900 Dividends paid in 20X9 (40,000 )Balance reported by Foster Company, December 31, 20X9 $375,900
f. Eliminating entries:
Book Value Calculations:
NCI10%
+ Foster Co.90%
=Comm
onStock
+ Retained Earnings
Original book value 21,500 193,500 50,000 165,000
+ Net Income 7,000 63,000 70,000
- Dividends (2,000) (18,000) (20,000)
Ending book value 26,500 238,500 50,000 215,000
6-66
Chapter 06 - Intercompany Inventory Transactions
P6-32 (continued)
Reversal/Deferred GP Calculations:
Total =
Foster Co.'s share + NCI's share
Downstream Reversal 0 0 Upstream Reversal 15,000 13,500 1,500 Downstream Deferred GP 0 0 Upstream Deferred GP (4,000) (3,600) (400) Total 11,000 9,900 1,100
Basic elimination entryCommon stock 50,000 ← Original amount invested (100%)Retained earnings 165,000 ← Beginning balance in REIncome from Block Corp. 72,900 ← Foster’s % of NI - Def. GP + ReversalNCI in NI of Block Corp. 8,100 ← NCI share of NI - Def. GP + Reversal Dividends declared 20,000 ← 100% of Block Corp.'s dividends Investment in Block Corp. 248,400 ← Net book value - Def. GP + Reversal NCI in NA of Block Corp. 27,600 ← NCI share of BV - Def. GP + Reversal
Reversal of last year's deferral:Investment in Block Corp. 13,500 NCI in NA of Block Corp. 1,500 Cost of Goods Sold 15,000
Deferral of this year's unrealized profits on inventory transfersSales 30,000 Cost of Goods Sold 26,000 Inventory 4,000
20X8 Upstream Transactions:
Ending Inventory
Sales 75,000 COGS 60,000 Gross Profit 15,000 Gross Profit % 20.00%
20X9 Upstream Transactions:
Total = Re-sold +Ending
InventorySales 30,000 18,000 12,000 COGS 20,000 12,000 8,000 Gross Profit 10,000 6,000 4,000 Gross Profit % 33.33%
6-67
Chapter 06 - Intercompany Inventory Transactions
P6-32 (continued)
Investment in Income from
Block Corp. Block Corp.
Beg. Balance 180,000
90% Net Income 63,000 63,000 90% Net Income
18,000 90% Dividends
20X8 Reversal 13,500 3,600 Deferred GP 3,600 13,500 20X8 Reversal
Ending Balance 234,900 72,900 Ending Balance
Reversal 13,500 248,400 Basic 72,900
0 0
g. Foster
Co. Block
Corp. Elimination Entries
DR CR Consolidated Income Statement Sales 815,000 415,000 30,000 1,200,000 Other Income 26,000 15,000 41,000 Less: COGS (593,000) (270,000) 15,000 (822,000) 26,000 Less: Depreciation Expense (45,000) (15,000) (60,000) Less: Other Expenses (95,000) (75,000) (170,000) Income from Block Corp. 72,900 72,900 0 Consolidated Net Income 180,900 70,000 102,900 41,000 189,000 NCI in Net Income 8,100 (8,100)
Controlling Interest in Net Income 180,900 70,000 111,000 41,000 180,900
Statement of Retained Earnings Beginning Balance 235,000 165,000 165,000 235,000 Net Income 180,900 70,000 111,000 41,000 180,900 Less: Dividends Declared (40,000) (20,000) 20,000 (40,000) Ending Balance 375,900 215,000 276,000 61,000 375,900
Balance Sheet Cash 187,000 57,400 244,400 Accounts Receivable 80,000 90,000 170,000 Other Receivables 40,000 10,000 50,000 Inventory 137,000 130,000 4,000 263,000 Land 80,000 60,000 140,000 Buildings & Equipment 500,000 250,000 750,000 Less: Accumulated Depreciation (155,000) (75,000) (230,000) Investment in Block Corp. 234,900 13,500 248,400 0 Total Assets 1,103,900 522,400 13,500 252,400 1,387,400
Accounts Payable 63,000 35,000 98,000 Other Payables 95,000 20,000 115,000 Bonds Payable 250,000 200,000 450,000 Bond Premium 2,400 2,400 Common Stock 210,000 50,000 50,000 210,000 Additional Paid-in Capital 110,000 110,000 Retained Earnings 375,900 215,000 276,000 61,000 375,900 NCI in NA of Block Corp. 1,500 27,600 26,100 Total Liabilities & Equity 1,103,900 522,400 327,500 88,600 1,387,400
6-68
Chapter 06 - Intercompany Inventory Transactions
P6-33 Consolidated Balance Sheet Worksheet [AICPA Adapted]
Book Value Calculations:
NCI10%
+Pine Corp.
90%=
CommonStock
+Retained Earnings
Original book value 80,000 720,000 200,000 600,000 + Net Income 10,100 90,900 101,000 - Dividends (100) (900) (1,000) Ending book value 90,000 810,000 200,000 700,000
Reversal/Deferred GP Calculations:
Total =
Pine Corp.'s
share + NCI's shareDownstream Reversal 0 0 Upstream Reversal 0 0 0 Downstream Deferred GP -3,000 -3,000 Upstream Deferred GP 0 0 0 Total (3,000) (3,000) 0
Basic elimination entry
Common stock 200,000 ← Original amount invested (100%)
Retained earnings 600,000 ← Beginning balance in RE
Income from Slim Corp. 87,900 ← Pine’s % of NI - Def. GP + Reversal
NCI in NI of Slim Corp. 10,100 ← NCI share of NI - Def. GP + Reversal
Dividends declared 1,000 ← 100% of Slim Corp.'s dividends
Investment in Slim Corp. 807,000 ← Net book value - Def. GP + Reversal
NCI in NA of Slim Corp. 90,000 ← NCI share of BV - Def. GP + Reversal
Excess Value (Differential) Calculations:
NCI 10% +
Pine Corp. 90% = Goodwill
Beginning balance 50,000 450,000 500,000
Changes 0 0 0
Ending balance 50,000 450,000 500,000
Excess value (differential) reclassification entry:
Goodwill 500,000
Investment in Slim Corp. 450,000
NCI in NA of Slim Corp. 50,000
6-69
Chapter 06 - Intercompany Inventory Transactions
P6-33 (continued)
Intercompany Transactions
Dividends Payable 900
Dividends Receivable 900
Accounts Payable 90,000
Accounts Receivable 90,000
Note Payable 100,000
Note Receivable 100,000
Interest Payable 5,000
Interest Receivable 5,000
Deferral of this year's unrealized profits on inventory transfers
Sales 300,000
Cost of Goods Sold 297,000
Inventory 3,000
20X6 Downstream Transactions:
Total = Re-sold +Ending
Inventory
Sales 300,000 285,000 15,000
COGS 240,000 228,000 12,000
Gross Profit 60,000 57,000 3,000
Gross Profit % 20.00%
Investment in Income from
Slim Corp. Slim Corp. Acquisition
Price 1,170,000
90% Net Income 90,900 90,900 90% Net Income
900 90% Dividends
3,000 Deferred GP 3,000
Ending Balance 1,257,000 87,900 Ending Balance
807,000 Basic 87,900
450,000 Excess Reclass.
0 0
6-70
Chapter 06 - Intercompany Inventory Transactions
P6-33 (continued)
Pine Corp.
Slim Corp.
Elimination Entries DR CR Consolidated Balance Sheet Cash 105,000 15,000 120,000
AR & Other Receivables 410,000 120,000 900 334,100 90,000 100,000 5,000 Merchandise Inventory 920,000 670,000 3,000 1,587,000 Plant & Equipment (net) 1,000,000 400,000 1,400,000 Investment in Slim Corp. 1,257,000 807,000 0 450,000 Goodwill 500,000 500,000 Total Assets 3,692,000 1,205,000 500,000 1,455,900 3,941,100
AP & Other Liabilities 140,000 305,000 900 249,100 90,000 100,000 5,000 Common Stock 500,000 200,000 200,000 500,000 Retained Earnings 3,052,000 700,000 600,000 1,000 3,052,000 87,900 297,000 10,100 300,000 NCI in NA of Slim Corp. 90,000 140,000 50,000 Total Liabilities & Equity 3,692,000 1,205,000 1,393,900 438,000 3,941,100
6-71
Chapter 06 - Intercompany Inventory Transactions
P6-34 Comprehensive Worksheet Problem
a.Equity Method Entries on Randall Corp.'s Books:
Investment in Sharp Co. 320,000
Cash 320,000
Record the initial investment in Sharp Co.
Investment in Sharp Co. 32,000
Income from Sharp Co. 32,000
Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income
Cash 20,000
Investment in Sharp Co. 20,000
Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend
Income from Sharp Co. 4,000
Investment in Sharp Co. 4,000
Record amortization of excess acquisition price
Investment in Sharp Co. 2,000
Income from Sharp Co. 2,000
Reverse of the deferred gross profit from downstream sales in 20X6
Income from Sharp Co. 3,000
Investment in Sharp Co. 3,000
Eliminate the deferred gross profit from downstream sales in 20X7
Investment in Sharp Co. 6,400
Income from Sharp Co. 6,400
Reverse of the deferred gross profit from upstream sales in 20X6
Income from Sharp Co. 8,000
Investment in Sharp Co. 8,000
Eliminate the deferred gross profit from upstream sales in 20X7
6-72
Chapter 06 - Intercompany Inventory Transactions
6-34 (continued)
b.Book Value Calculations:
NCI20%
+Randall Corp.80%
= CommonStock
+ Add. Paid-in Capital
+Retained
Earnings
Original book value 67,000 268,000 100,000 20,000 215,000
+ Net Income 8,000 32,000 40,000
- Dividends (5,000) (20,000) (25,000)
Ending book value 70,000 280,000 100,000 20,000 230,000
Reversal/Deferred GP Calculations:
Total =
Randall Corp.'s
share + NCI's share
Downstream Reversal 2,000 2,000
Upstream Reversal 8,000 6,400 1,600 Downstream Deferred GP (3,000) (3,000)
Upstream Deferred GP (10,000) (8,000) (2,000)
Total (3,000) (2,600) (400)
Basic elimination entry
Common stock 100,000 ← Original amount invested (100%)
Additional paid-in capital 20,000 ← Beginning balance in APIC
Retained earnings 215,000 ← Beginning balance in RE
Income from Sharp Co. 29,400 ← Randall’s % of NI - Def. GP + Reversal
NCI in NI of Sharp Co. 7,600 ← NCI share of NI - Def. GP + Reversal
Dividends declared 25,000 ← 100% of Sharp Co.'s dividends
Investment in Sharp Co. 277,400 ← Net book value - Def. GP + Reversal
NCI in NA of Sharp Co. 69,600 ← NCI share of BV - Def. GP + Reversal
Excess Value (Differential) Calculations:
NCI 20% +
Randall Corp. 80% =
Buildings & equipment + Acc. Depr.
Beginning balance 7,000 28,000 50,000 (15,000)
Changes (1,000) (4,000) (5,000)
Ending balance 6,000 24,000 50,000 (20,000)
6-73
Chapter 06 - Intercompany Inventory Transactions
P6-34 (continued)
Amortized excess value reclassification entry:Depreciation expense 5,000 Income from Sharp Co. 4,000 NCI in NI of Sharp Co. 1,000
Excess value (differential) reclassification entry:Buildings & equipment 50,000 Accumulated depreciation 20,000 Investment in Sharp Co. 24,000 NCI in NA of Sharp Co. 6,000
Eliminate intercompany accounts:Accounts payable 10,000 Accounts receivable 10,000
Optional accumulated depreciation elimination entryAccumulated depreciation 40,000 Building & equipment 40,000
Reversal of last year's deferral:Investment in Sharp Co. 8,400 NCI in NA of Sharp Co. 1,600 Cost of Goods Sold 10,000
Deferral of this year's unrealized profits on inventory transfersSales 57,000 Cost of Goods Sold 44,000 Inventory 13,000
20X6 Downstream Transactions:
Total = Re-sold +Ending
InventorySales 26,000 17,333 8,667 COGS 20,000 13,333 6,667 Gross Profit 6,000 4,000 2,000 Gross Profit % 23.08%
20X7 Downstream Transactions:
Total = Re-sold +Ending
InventorySales 12,000 0 12,000 COGS 9,000 0 9,000 Gross Profit 3,000 0 3,000 Gross Profit % 25.00%
6-74
Chapter 06 - Intercompany Inventory Transactions
P6-34 (continued)
20X6 Upstream Transactions:
Total = Re-sold +Ending
Inventory
Sales 60,000 36,000 24,000
COGS 40,000 24,000 16,000
Gross Profit 20,000 12,000 8,000
Gross Profit % 33.33%
20X7 Upstream Transactions:
Total = Re-sold +Ending
Inventory
Sales 45,000 15,000 30,000
COGS 30,000 10,000 20,000
Gross Profit 15,000 5,000 10,000
Gross Profit % 33.33%
Investment in Income from
Sharp Co. Sharp Co.
Beginning Balance 287,600
80% Net Income 32,000 32,000 80% Net Income
20,000 80% Dividends
4,000 Excess Val.
Amort. 4,000
20X6 Reversal 8,400 11,000 Deferred GP 11,000 8,400 20X6 Reversal
Ending Balance 293,000 25,400 Ending Balance
Reversal 8,400 277,400 Basic 29,400
24,000 Excess Reclass. 4,000
0 0
6-75
Chapter 06 - Intercompany Inventory Transactions
P6-34 (continued)
Randall Corp.
Sharp Co.
Elimination Entries DR CR Consolidated Income Statement Sales 500,000 250,000 57,000 693,000 Other Income 20,400 30,000 50,400 Less: COGS (416,000) (202,000) 10,000 (564,000) 44,000
Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000)
Less: Other Expenses (24,000) (18,000) (42,000)
Income from Sharp Co. 25,400 29,400 4,000 0
Consolidated Net Income 75,800 40,000 91,400 58,000 82,400
NCI in Net Income 7,600 1,000 (6,600)
Controlling Interest in Net Income 75,800 40,000 99,000 59,000 75,800
Statement of Retained Earnings Beginning Balance 337,500 215,000 215,000 337,500 Net Income 75,800 40,000 99,000 59,000 75,800 Less: Dividends Declared (50,000) (25,000) 25,000 (50,000) Ending Balance 363,300 230,000 314,000 84,000 363,300
Balance Sheet Cash 130,300 10,000 140,300 Accounts Receivable 80,000 70,000 10,000 140,000 Inventory 170,000 110,000 13,000 267,000 Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000 Less: Accumulated Depreciation (310,000) (120,000) 40,000 20,000 (410,000) Investment in Sharp Co. 293,000 8,400 277,400 0 24,000 Total Assets 963,300 470,000 98,400 384,400 1,147,300
Accounts Payable 100,000 15,200 10,000 105,200 Bonds Payable 300,000 100,000 400,000 Bond Premium 4,800 4,800 Common Stock 200,000 100,000 100,000 200,000 Additional Paid-in Capital 20,000 20,000 0 Retained Earnings 363,300 230,000 314,000 84,000 363,300 NCI in NA of Sharp Co. 1,600 69,600 74,000 6,000 Total Liabilities & Equity 963,300 470,000 445,600 159,600 1,147,300
6-76
Chapter 06 - Intercompany Inventory Transactions
P6-34 (continued)
d. Randall Corporation and SubsidiaryConsolidated Balance Sheet
December 31, 20X7
Cash $ 140,300 Accounts Receivable 140,000 Inventory 267,000 Total Current Assets $ 547,300 Buildings and Equipment $1,010,000 Less: Accumulated Depreciation (410,000 ) 600,000 Total Assets $1,147,300
Accounts Payable $ 105,200 Bonds Payable $ 400,000 Bond Premium 4,800 404,800 Stockholders’ Equity: Controlling Interest: Common Stock $ 200,000 Retained Earnings 363,300 Total Controlling Interest $ 563,300 Noncontrolling Interest 74,000 Total Stockholders’ Equity 637,300 Total Liabilities and Stockholders' Equity $1,147,300
Randall Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X7
Sales $ 693,000 Other Income 50,400
$ 743,400 Cost of Goods Sold $ 564,000 Depreciation and Amortization Expense 55,000 Other Expenses 42,000 (661,000 )Consolidated Net Income $ 82,400 Income to Noncontrolling Interest (6,600 )Income to Controlling Interest $ 75,800
Randall Corporation and SubsidiaryConsolidated Statement of Retained Earnings
Year Ended December 31, 20X7
Retained Earnings, January 1, 20X7 $ 337,500 Income to Controlling Interest, 20X7 75,800
$ 413,300
6-77
Chapter 06 - Intercompany Inventory Transactions
Dividends Declared, 20X7 (50,000 )Retained Earnings, December 31, 20X7 $ 363,300
6-78
Chapter 06 - Intercompany Inventory Transactions
P6-35 Comprehensive Consolidation Worksheet; Equity Method [AICPA Adapted]
Equity Method Entries on Fran Corp.'s Books:
Investment in Brey Inc. 750,000
Cash 750,000
Record the initial investment in Brey Inc.
Investment in Brey Inc. 190,000
Income from Brey Inc. 190,000
Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 income
Cash 40,000
Investment in Brey Inc. 40,000
Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 dividend
Income from Brey Inc. 44,000
Investment in Brey Inc. 44,000
Record amortization of excess acquisition price
Income from Brey Inc. 18,000
Investment in Brey Inc. 18,000
Eliminate the deferred gross profit from upstream sales in 20X9
Fran Corp.
100%= Common
Stock+ Add. Paid-
in Capital+
Retained
Earnings
Original book value 636,000 400,000 80,000 156,000
+ Net Income 190,000 190,000
- Dividends (40,000) (40,000)
Ending book value 786,000 400,000 80,000 306,000
Reversal/Deferred GP Calculations:
Total =Fran Corp.'s
share
Upstream Deferred GP (18,000) (18,000)
Total (18,000) (18,000)
6-79
Chapter 06 - Intercompany Inventory Transactions
P6-35 (continued)
Basic elimination entry
Common stock 400,000 ← Original amount invested (100%)
Additional paid-in capital 80,000 ← Beginning balance in APIC
Retained earnings 156,000 ← Beginning balance in RE
Income from Brey Inc. 172,000 ← Fran’s % of NI - Def. GP
Dividends declared 40,000 ← 100% of Brey Inc.'s dividends
Investment in Brey Inc. 768,000 ← Net book value - Def. GP
Fran Corp.
100% = Machinery + Acc. Depr. + Goodwill
Beginning balance 114,000 54,000 0 60,000
Changes (44,000) (9,000) (35,000)
Ending balance 70,000 54,000 (9,000) 25,000
Amortized excess value reclassification entry:
Depreciation expense 9,000
Goodwill impairment loss 35,000
Income from Brey Inc. 44,000
Excess value (differential) reclassification entry:
Machinery 54,000
Goodwill 25,000
Accumulated depreciation 9,000
Investment in Brey Inc. 70,000
Eliminate intercompany accounts:
Accounts payable 86,000
Accounts receivable 86,000
Deferral of this year's unrealized profits on inventory transfers
Sales 180,000
Cost of Goods Sold 162,000
Inventory 18,000
6-80
Chapter 06 - Intercompany Inventory Transactions
P6-35 (continued)
20X9 Upstream Transactions
Total = Re-sold +Ending
Inventory
Sales 180,000 144,000 36,00
0
COGS 90,000 72,000 18,00
0
Gross Profit 90,000 72,000 18,000
Gross Profit % 50.00%
Investment in Income from
Brey Inc. Brey Inc.
Acquisition Price 750,000
100% Net Income 190,000 190,000 100% Net Income
40,000 100% Dividends
44,000 Excess Val. Amort. 44,000
18,000 Deferred GP 18,000
Ending Balance 838,000 128,000 Ending Balance
768,000 Basic 172,000
70,000 Excess Reclass. 44,000
0 0
6-81
Chapter 06 - Intercompany Inventory Transactions
P6-35 (continued)
Note that in the 8th edition, the sale of the warehouse was an intercompany transaction and needed to be eliminated. We changed the problem in the 9th edition to assume that the sale was to a non-affiliated third party. Thus, the gain on the sale of the warehouse is not eliminated in this problem.
Fran Corp.
Brey Inc.
Elimination Entries DR CR Consolidated Income Statement Net Sales 3,800,000 1,500,000 180,000 5,120,000 Gain on Sale of Warehouse 30,000 30,000 Less: COGS (2,360,000) (870,000) 162,000 (3,068,000)
Less: Operating Expenses (1,100,000) (440,000) 9,000 (1,549,000)
Less: Goodwill Impairment 35,000 (35,000)
Income from Brey Inc. 128,000 172,000 44,000 0
Net Income 498,000 190,000 396,000 206,000 498,000
Statement of Retained Earnings
Beginning Balance 440,000 156,000 156,000 440,000 Net Income 498,000 190,000 396,000 206,000 498,000 Less: Dividends Declared (40,000) 40,000 0 Ending Balance 938,000 306,000 552,000 246,000 938,000
Balance Sheet Cash 570,000 150,000 720,000 Accounts Receivable (net) 860,000 350,000 86,000 1,124,000 Inventories 1,060,000 410,000 18,000 1,452,000 Land, Plant, and Equipment 1,320,000 680,000 54,000 2,054,000 Less: Accumulated Depreciation (370,000) (210,000) 9,000 (589,000) Investment in Brey Inc. 838,000 768,000 0 70,000 Goodwill 25,000 25,000 Total Assets 4,278,000 1,380,000 79,000 951,000 4,786,000
Accounts Payable & Accrued
Expenses 1,340,000 594,000 86,000 1,848,000 Common Stock 1,700,000 400,000 400,000 1,700,000 Additional Paid-in Capital 300,000 80,000 80,000 300,000 Retained Earnings 938,000 306,000 552,000 246,000 938,000 Total Liabilities & Equity 4,278,000 1,380,000 1,118,000 246,000 4,786,000
6-82
Chapter 06 - Intercompany Inventory Transactions
P6-36A Fully Adjusted Equity Method
a. Adjusted trial balance:
Randall Corporation Sharp Company Item Debit Credit Debit Credit
Cash $ 130,300 $ 10,000Accounts Receivable 80,000 70,000Inventory 170,000 110,000Buildings and Equipment 600,000 400,000Investment in Sharp Company Stock 304,000Cost of Goods Sold 416,000 202,000Depreciation and Amortization 30,000 20,000Other Expenses 24,000 18,000Dividends Declared 50,000 25,000Accumulated Depreciation $ 310,000 $120,000Accounts Payable 100,000 15,200Bonds Payable 300,000 100,000Bond Premium 4,800Common Stock 200,000 100,000Additional Paid-In Capital 20,000Retained Earnings 345,900 215,000Sales 500,000 250,000Other Income 20,400 30,000Income from Subsidiary 28,000
$1,804,300 $1,804,300 $855,000 $855,000
b.
Equity Method Entries on Randall Corp.'s Books:
Investment in Sharp Co. 32,000
Income from Sharp Co. 32,000
Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income
Cash 20,000
Investment in Sharp Co. 20,000
Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend
Income from Sharp Co. 4,000
Investment in Sharp Co. 4,000
Record amortization of excess acquisition price
6-83
Chapter 06 - Intercompany Inventory Transactions
P6-36A (continued)
c.Book Value Calculations:
NCI20%
+Randall Corp.80%
=Commo
nStock
+Add. Paid-in Capital
+
Retained
Earnings
Original book value 67,000 268,000 100,000 20,000 215,000
+ Net Income 8,000 32,000 40,000
- Dividends (5,000) (20,000) (25,000)
Ending book value 70,000 280,000 100,000 20,000 230,000
Reversal/Deferred GP Calculations:
Total =
Randall Corp.'s
share + NCI's share
Downstream Reversal 2,000 2,000
Upstream Reversal 8,000 6,400 1,600
Downstream Deferred GP (3,000) (3,000)
Upstream Deferred GP (10,000) (8,000) (2,000)
Total (3,000) (2,600) (400)
Basic elimination entry
Common stock 100,000 ← Original amount invested (100%)
Additional paid-in capital 20,000 ← Beginning balance in APIC
Retained earnings 215,000 ← Beginning balance in RE
Income from Sharp Co. 32,000 ← Randall Corp.’s % of NI
NCI in NI of Sharp Co. 7,600 ← NCI share of NI - Def. GP + Reversal
Dividends declared 25,000 ← 100% of Sharp Co.'s dividends
Investment in Sharp Co. 280,000 ← Net book value
NCI in NA of Sharp Co. 69,600 ← NCI share of BV - Def. GP + Reversal
Excess Value (Differential) Calculations:
NCI 20% +
Randall Corp. 80% =
Buildings & equipment + Acc. Depr.
Beginning balance 7,000 28,000 50,000 (15,000)
Changes (1,000) (4,000) (5,000)
Ending balance 6,000 24,000 50,000 (20,000)
6-84
Chapter 06 - Intercompany Inventory Transactions
P6-36A (continued)
Amortized excess value reclassification entry:
Depreciation expense 5,000
Income from Sharp Co. 4,000
NCI in NI of Sharp Co. 1,000
Excess value (differential) reclassification entry:
Buildings & equipment 50,000
Accumulated depreciation 20,000
Investment in Sharp Co. 24,000
NCI in NA of Sharp Co. 6,000
Eliminate intercompany accounts:
Accounts payable 10,000
Accounts receivable 10,000
Optional accumulated depreciation elimination entry
Accumulated depreciation 40,000
Building & equipment 40,000
Reversal of last year's deferral:
Retained earnings 8,400
NCI in NA of Sharp Co. 1,600
Cost of Goods Sold 10,000
Deferral of this year's unrealized profits on inventory transfers
Sales 57,000
Cost of Goods Sold 44,000
Inventory 13,000
(See Problem 6-34 for unrealized profit calculations.)
6-85
Chapter 06 - Intercompany Inventory Transactions
P6-36A (continued)
d. Randall
Corp. Sharp
Co. Elimination Entries
DR CR Consolidated Income Statement Sales 500,000 250,000 57,000 693,000 Other Income 20,400 30,000 50,400 Less: COGS (416,000) (202,000) 44,000 (564,000) 10,000 Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000) Less: Other Expenses (24,000) (18,000) (42,000) Income from Sharp Co. 28,000 32,000 4,000 0 Consolidated Net Income 78,400 40,000 94,000 58,000 82,400 NCI in Net Income 7,600 1,000 (6,600)
Controlling Interest in Net Income 78,400 40,000 101,600 59,000 75,800
Statement of Retained Earnings Beginning Balance 345,900 215,000 215,000 337,500 8,400 Net Income 78,400 40,000 101,600 59,000 75,800 Less: Dividends Declared (50,000) (25,000) 25,000 (50,000) Ending Balance 374,300 230,000 325,000 84,000 363,300
Balance Sheet Cash 130,300 10,000 140,300 Accounts Receivable 80,000 70,000 10,000 140,000 Inventory 170,000 110,000 13,000 267,000 Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000 Less: Accumulated Depreciation (310,000) (120,000) 40,000 20,000 (410,000) Investment in Sharp Co. 304,000 280,000 0 24,000 Total Assets 974,300 470,000 90,000 387,000 1,147,300
Accounts Payable 100,000 15,200 10,000 105,200 Bonds Payable 300,000 100,000 400,000 Bond Premium 4,800 4,800 Common Stock 200,000 100,000 100,000 200,000 Additional Paid-in Capital 20,000 20,000 0 Retained Earnings 374,300 230,000 325,000 84,000 363,300 NCI in NA of Sharp Co. 1,600 69,600 74,000 6,000 Total Liabilities & Equity 974,300 470,000 456,600 159,600 1,147,300
6-86
Chapter 06 - Intercompany Inventory Transactions
P6-37A Cost Method
a.Equity Method Entries on Randall Corp.'s Books:
Investment in Sharp Co. 20,000
Income from Sharp Co. 20,000
Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income
b.Investment elimination entry:
Common stock 100,000
Additional paid-in capital 20,000
Retained earnings 180,000
Investment in Sharp Co. 240,000
NCI in NA of Sharp Co. 60,000
Dividend elimination entry:
Dividend Income 20,000
NCI in NI of Sharp Co. 5,000
Dividends Declared 25,000
Excess value (differential) reclassification entry:
Buildings & equipment 50,000
Investment in Sharp Co. 40,000
NCI in NA of Sharp Co. 10,000
Amortize differential from previous years:
Retained earnings 12,000
NCI in NA of Sharp Co. 3,000
Accumulated Depreciation 15,000
Amortize differential for 20X7
Depreciation Expense 5,000
Accumulated Depreciation 5,000
Assign Sharp's undistributed income to NCI
NCI in NA of Sharp Co. 1,600
Retained Earnings 7,000
NCI in NA of Sharp Co. 8,600
6-87
Chapter 06 - Intercompany Inventory Transactions
P6-37A (continued)
Eliminate intercompany accounts:
Accounts payable 10,000
Accounts receivable 10,000
Optional accumulated depreciation elimination entry
Accumulated depreciation 40,000
Building & equipment 40,000
Reversal of last year's deferral:
Retained Earnings 8,400
NCI in NA of Sharp Co. 1,600
Cost of Goods Sold 10,000
Deferral of this year's unrealized profits on inventory transfers
Sales 57,000
Cost of Goods Sold 44,000
Inventory 13,000
(See Problem 6-34 for unrealized profit calculations.)
6-88
Chapter 06 - Intercompany Inventory Transactions
P6-37A (continued)
Randall Corp.
Sharp Co.
Elimination Entries DR CR Consolidated Income Statement Sales 500,000 250,000 57,000 693,000 Other Income 20,400 30,000 50,400 Dividend Income 20,000 20,000 0 Less: COGS (416,000) (202,000) 10,000 (564,000) 44,000
Less: Depreciation & Amortization Exp. (30,000) (20,000) 5,000 (55,000)
Less: Other Expenses (24,000) (18,000) (42,000) Consolidated Net Income 50,400 60,000 82,000 54,000 82,400 NCI in Net Income of Sharp Co. 5,000 (6,600) 1,600
Controlling Interest in Net Income 50,400 60,000 88,600 54,000 75,800
Statement of Retained Earnings Beginning Balance 329,900 215,000 180,000 337,500 8,400 12,000 7,000 Net Income 50,400 60,000 88,600 54,000 75,800 Less: Dividends Declared (50,000) (25,000) 25,000 (50,000) Ending Balance 330,300 250,000 296,000 79,000 363,300
Balance Sheet Cash 130,300 10,000 140,300 Accounts Receivable 80,000 70,000 10,000 140,000 Inventory 170,000 110,000 13,000 267,000 Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000
Less: Accumulated Depreciation (310,000) (120,000) 40,000 5,000 (410,000)
15,000 Investment in Sharp Co. 280,000 240,000 0 40,000 Total Assets 950,300 470,000 90,000 363,000 1,147,300
Accounts Payable 100,000 15,200 10,000 105,200 Bonds Payable 300,000 100,000 400,000 Bond Premium 4,800 4,800 Common Stock 200,000 100,000 100,000 200,000 Additional Paid-in Capital 20,000 20,000 0 Retained Earnings 330,300 250,000 296,000 79,000 363,300 NCI in NA of Sharp Co. 1,600 60,000 74,000 3,000 10,000 8,600 Total Liabilities & Equity 930,300 490,000 430,600 157,600 1,147,300
6-89