aa2e_hal_sm_ch04.docx

Solution Manual (Updated through November 11, 2013)

Chapter 4 - Consolidated Financial Statements and Intercompany Transactions 1.

For any sale, the seller’s sale price of the asset becomes the buyer’s purchase cost. In the sale process, the asset sold is written up or down in value from its original cost to its market value at the time of sale, and that write-up or down in the carrying amount of the asset is reflected in the income statement as profit or loss (i.e., gross profit or loss on inventory sales and gain or loss on sales of land and depreciable assets). Since companies within a controlled group are viewed as one entity under GAAP, the sale is not recognized until the asset is sold outside of the controlled group. It is only then that profit or loss has been earned by the controlled group and can be recognized in the income statement.

2. FASB ASC 810-10-45-1 states the following: “In the preparation of consolidated financial statements, intra-entity balances and transactions shall be eliminated. This includes intraentity open account balances, security holdings, sales and purchases, interest, dividends, and so forth. As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, such statements shall not include gain or loss on transactions among the entities in the consolidated group. Accordingly, any intra-entity profit or loss on assets remaining within the consolidated group shall be eliminated.”

3. We need only defer the deferred intercompany profit on the inventories that have not been resold during the period. The amount of deferred profit to be deferred, then, is equal to the dollar amount of the deferred profit on the intercompany sale multiplied by the percentage of inventories that are unsold at the end of the period: $ Profit to defer

=

$ Total deferred profit

X

% unsold inventories

4. Inventories that remain at the end of the accounting period are typically resold in the following period, while land and depreciable assets are typically held for longer periods of time. The deferral and recognition sequence for inventories usually involves the recognition of the deferred profit from the prior period and the deferral of the profit on current period sales. For land and depreciable assets, the profit is deferred in the period of sale and must be deferred as well in future periods for as long as the asset is held within the controlled group.

©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 4

4-1

5. In the case of wholly owned subsidiaries, there is no difference in the elimination process for upstream versus downstream transactions. This is because all deferred profit must be removed from the combined financial statements, regardless of the direction of the transaction (the upstream-downstream distinction becomes extremely important in Chapter 5, however, where we introduce the concept of non-wholly owned subsidiaries and the resulting non-controlling interest reported in consolidated financial statements).

6. The net effect of these two entries is this: Sales

xxx Cost of goods sold Inventories

xxx xxx

These two entries reverse the effects of the inventory sale. Sales and Cost of Goods Sold for the intercompany sale are eliminated and the write-up of inventories as a result of the sale is reversed.

7. In the period of sale, the gain is reversed and the Land account is reduced to its pre-sale balance. In subsequent periods, and while the land is held within the controlled group, we must reduce Retained Earnings to remove the gain from the land sale that remains in that account from the prior period.

8. The first line of the entry reverses the Gain on Sale so that the profit is not included in the consolidated income statement. Then, the Equipment account and its related accumulated depreciation are restored to their pre-sale amounts.

9. The depreciation reported by the purchaser will be different from that which the seller would have reported had the sale not occurred. This entry adjusts the reported Depreciation Expense (and the related Accumulated Depreciation) in the consolidated income statement to the correct pre-sale amount.

10. Answer: d All of the statements are false except for answer d.

©Cambridge Business Publishers, 2014 4-2

Advanced Accounting by Halsey & Hopkins, 2nd Edition

11. Answer: b When the intercompany inventory is sold to an unaffiliated party in 2013, the recorded revenues is correctly stated in the consolidated financial statements without any need for a consolidating entry. In contrast, cost of goods sold is dependent on the stated inventory levels at the beginning of the year and the end of the year. This is illustrated by the following identity: Beginning inventory + Purchases - Ending inventory = Cost of goods sold Thus, in this case, the 2013 cost of goods sold would be too high without an adjustment removing the profits that were in beginning inventory.

12. Answer: c The full amount of the intercompany sale that took place during 2013 must be eliminated from revenues in preparation of the consolidated financial statements. Thus, consolidated revenues equal $3,150,000 (i.e., $2,100,000 + $1,450,000 - $400,000).

13. Answer: d Given that there are no intercompany sales in either beginning or ending inventories, gross profit is unaffected by the intercompany sales. Consolidated gross profit equals $1,385,000 (i.e., $735,000 + $650,000).

14. Answer: b The full amount of the intercompany sale that took place during 2013 must be eliminated from revenues in preparation of the consolidated financial statements. Thus, consolidated revenues equal $3,987,500 (i.e., $2,625,000 + $1,812,500 - $450,000).


4-3

15. Answer: a Gross profit is affected for profits included in inventories purchased from affiliated companies and that are included in beginning and/or ending inventories. Intercompany profits in beginning inventory increase the gross profit of the period in which they are sold. Intercompany profits in ending inventory decrease the gross profit of the period. In this case, there is only intercompany profit in ending inventory. The intercompany sales were from the parent to the subsidiary; thus, the parent’s gross profit rate is relevant. The parent’s gross profit rate is 40% (i.e., $1,050,000 / $2,625,000). Therefore, there is $54,000 (i.e., 40% x $135,000) of intercompany profit in the subsidiary’s ending inventory. This means that consolidated gross profit is $54,000 lower than the unadjusted amount. Consolidated gross profit equals $1,808,500 (i.e., $1,050,000 + $812,500 - $54,000).

16. Answer: a Under the full equity method, all intercompany profits (both upstream and downstream) are eliminated in the determination of the pre-consolidation “income from subsidiary” and the “investment in subsidiary” accounts. For downstream sales, the relevant profit margin is the profit earned by the parent on the intercompany sales to the subsidiary. In this case, the profit margin on downstream sales is 35% (i.e., $980,000 / $2,800,000). The intercompany inventories still held by the subsidiary equals $62,500 (i.e., 25% x $250,000). The profit that must be deferred equals $21,875 (i.e., 35% x $62,500). Therefore, the “income from subsidiary” recognized by the parent under the full equity method should be $233,125 (i.e., $255,000 - $21,875).

17. Answer: c Under the full equity method, all intercompany profits (both upstream and downstream) are eliminated in the determination of the pre-consolidation “income from subsidiary” and the “investment in subsidiary” accounts. For upstream sales, the relevant profit margin is the profit earned by the subsidiary on the intercompany sales to the parent. In this case, the profit margin on upstream sales is 40% (i.e., $760,000 / $1,900,000). The intercompany inventories still held by the parent equal $62,500 (i.e., 25% x $250,000). The profit that must be deferred equals $25,000 (i.e., 40% x $62,500). Therefore, the “income from subsidiary” recognized by the parent under the full equity method should be $230,000 (i.e., $255,000 - $25,000).



18. Answer: d For a 100% owned subsidiary when there is no acquisition accounting premium, consolidated net income can be determined based on the following incremental components: Parent’s “stand alone” net income + Subsidiary’s “stand alone” net income + Profit deferred in prior year’s on inventory sold in the current year to non-affiliate - Profit deferred in current year on inventory retained in affiliated group at end of period = Consolidated net income This results in the following:

+ + =

$300,000 $160,000 $4,500 (i.e., 30% x $15,000) $3,600 (i.e., 30% x $12,000) $460,900

19. Answer: a Intercompany sales among an affiliated group are 100% eliminated in the determination of consolidated revenues. We can infer the amount eliminated by adding the preconsolidation parent and subsidiary revenues and subtracting consolidated revenues: $2,800,000 + $1,900,000 - $4,100,000 = $600,000

20. Answer: b We can determine the amount of intercompany profit in the ending inventories of the affiliated companies by adding the pre-consolidation ending inventories of the parent and subsidiary and then subtracting the consolidated ending inventory: $130,000 + $90,000 $204,250 = $15,750


4-5

21. Answer: a This problem uses the answers to the preceding two multiple choice questions as inputs to the answer. The correct solution can be inferred via comparison of pre-consolidation cost of goods sold (CGS) for the parent and the subsidiary versus consolidate cost of goods sold. The net consolidation adjustment of CGS is equal to a decrease of CGS equal to $598,250 (i.e., $1,820,000 + $1,140,000 - $2,361,750). Using the following CGS identity, beginning inventory is the only unknown: Consolidation adjustment Beginning inventory + Purchases - Ending inventory = Cost of goods sold

-? - $600,000 (MC#19: $2,800,000 + $1,900,000 - $4,100,000) - $15,750 (MC#20: $130,000 + $90,000 -$204,250) - $598,250 (i.e., $1,820,000 + $1,140,000 - $2,361,750)

Thus, we know that the adjustment for the recognition of deferred intercompany profits in beginning inventory (i.e., for intercompany items sold in the current period) must have been $14,000.

22. Answer: d All intercompany payables and receivables among an affiliated group are 100% eliminated in the determination of consolidated balances. We can infer the amount eliminated by adding the pre-consolidation parent and subsidiary accounts payable and subtracting consolidated accounts payable: $80,000 + $55,000 - $103,000 = $32,000

23. Answer: d Under the full equity method, 100% of the profit on the intercompany sale of land would have been removed from the investment account in the year of the transaction (i.e., 2012). In 2013, in order to prepare the consolidated financial statements, the parent company will need to remove the deferred gain from the investment account because the investment account is always adjusted to zero in the consolidated financial statements. This entry will also remove the gain from the land account because the gain was not actually removed from the land account. The adjustment in 2013 would be as follows: [I] [Igain] Investment in Subsidiary 100 consolidation entry Land (to defer the gain on sale and to restate the Land in the years after account to its pre-sale reported amount) intercompany sale

100



24. Answer: b When affiliated companies transfer depreciable noncurrent assets, the resulting consolidated financial statements are prepared to look like the intercompany transaction never happened. In this case, the original cost of the equipment was $180,000 to the parent and it was depreciated assuming a 12-year useful life. This means the parent company was recognizing $15,000 per year in depreciation expense prior to the intercompany transfer. This means, if we assume the intercompany transfer never occurred, then the parent would have recognized an additional year of depreciation and the accumulated depreciation account at December 31, 2013 would have equaled $60,000 (i.e., $45,000 + $15,000). Thus, the net equipment balance would be $120,000 (i.e., $180,000 $60,000), which is the amount that should be reported in the consolidated financial statements.

25. Answer: b The equipment had a carrying value on the parent’s books equal to $144,000 (i.e., $180,000 - $36,000). The parent sold the equipment to the subsidiary; thus, during 2013, the parent recorded in its pre-consolidation income statement a $24,000 loss on the intercompany equipment transfer. On December 31, 2013, the equipment will have a carrying value of $120,000 on the subsidiary’s pre-consolidation balance sheet, with no accumulated depreciation. The consolidating journal entry will need to remove the loss and reestablish the pre-intercompany-transfer balances. The consolidating entry is as follows: [I] [Igain] Equipment 60,000 consolidation entry Accum. Deprec. 36,000 in the year of Loss on Equip. Sale 24,000 (to defer the loss on sale and to restate the equip intercompany sale and A.D. to pre-I-C-sale reported amount)


4-7

26. a. If the parent uses the equity method to account for its Equity Investment, the amount of Equity Income it will report this year is equal to the following (the subsidiary is wholly owned and there is no AAP, hence no amortization): Net income of subsidiary $500,000 + 2012 deferred profit ($50,000x30%x9%) 1,350 - 2013 deferred profit ($75,000x32%x10%) (2,400) Equity Income 2013 $498,950 Investment in subsidiary @ BOY 1,350 Cost of goods sold 1,350 [Icogs] (Reverses prior year profit elimination from investment in subsidiary and recognizes deferred profit from inventories in current period ($50,000x30%x9%))

Sales [Isales]

75,000 Cost of goods sold

75,000

(Eliminates current period intercompany Sales and Cost of Goods Sold)

[Icogs]

Investment in subsidiary @ BOY Cost of goods sold

1,350 1,350

(Reverses prior year profit elimination from investment in subsidiary and recognizes deferred profit from inventories in current period ($50,000x30%x9%))

[Icogs]

Cost of goods sold Inventory

2,400

[Ipay]

Accounts payable Accounts receiable

2,400

(Defer current period deferred profit on intercompany sale of inventories ($75,000x32%x10%))

25,000 25,000

(Eliminates intercompany receivable and payable)



27. a. If the parent uses the equity method to account for its Equity Investment, the amount of Equity Income it will report this year is equal to the following (the subsidiary is wholly owned and there is no AAP, hence no amortization): Net income of subsidiary + 2012 deferred profit - 2013 deferred profit Equity Income 2013

$300,000 13,500 (18,000) $295,500

b. (Note to instructors: if the parent company used the partial equity method instead of the full equity method, consolidating entry [Icogs] would include a debit to retained earnings of the parent at the BOY, instead of a debit to the Investment at the BOY.)

[Icogs]

Investment in subsidiary @BOY Cost of goods sold

13,500

13,500

(Reverses prior year profit elimination from investment in subsidiary and recognizes deferred profit from inventories in current period)

Sales

50,000 Cost of goods sold

[Isales]

50,000

(Eliminates current period intercompany Sales and Cost of Goods Sold)

[Icogs]


18,000 18,000

(Defer current period deferred profit on intercompany sale of inventories)

[Ipay]

Accounts payable Accounts receivable

20,000 20,000

(Eliminates intercompany receivable and payable)


4-9

28. (Note to instructors: if the parent company used the partial equity method instead of the full equity method, consolidating entries b. and [Igain] in c. would include a debit to retained earnings of the parent at the BOY, instead of a debit to the Investment at the BOY.) a.

Gain on sale

30,000

Land (to defer the gain on sale and to restate the Land account to its pre-sale reported amount) b.

Investment in subsidiary @BOY

30,000

30,000

Land (Reverses prior year profit elimination from investment in subsidiary and to restate the Land account to its pre-sale reported amount) c.

Cash

30,000

190,000

Land Gain on sale (to record the sale of land to an unaffiliated company) [Igain] Investment in subsidiary @BOY

130,000 60,000

30,000

Gain on sale (Reverses prior year profit elimination from investment in subsidiary and shifts the profit into the year of sale to unaffiliated party)

30,000

d. The consolidated income statement will report a Gain on Sale of $90,000, the difference between the sale price of the land ($190,000) and its original cost ($100,000). This is the result of the recognition of the gain on sale of $60,000 by the subsidiary and the recognition of the deferred profit of $30,000.



29. (Note to instructors: if the parent company used the partial equity method instead of the full equity method, consolidating entries in part b. and [Igain] in part c. would include a debit to retained earnings of the parent at the BOY, instead of a debit to the Investment at the BOY.) a.

Gain on sale

40,000

Land (to defer the gain on sale and to restate the Land account to its pre-sale reported amount) b.

Investment in subsidiary @BOY

40,000

40,000

Land (Reverses prior year profit elimination from investment in subsidiary and to restate the Land account to its pre-sale reported amount) c.

Cash

40,000

175,000

Land Gain on sale (to record the sale of land to an unaffiliated company) [Igain] Investment in subsidiary @BOY Gain on sale (Reverses prior year profit elimination from investment in subsidiary and shifts the profit into the year of sale to unaffiliated party)

120,000 55,000

40,000 40,000

d. The subsidiary will report a Gain on Sale of $55,000 ($175,000 - $120,000). In addition, the [I] consolidation journal entry in part c recognizes an additional $40,000 of Gain on Sale. The total Gain on Sale of $95,000 ($55,000 + $40,000) represents the difference between the ultimate sale price of the land ($175,000) and its original cost ($80,000).


4-11

30. Sale of depreciable assets - (Note to instructors: if the parent company used the partial equity method instead of the full equity method, consolidating entry [Igain] in part d. would include a debit to retained earnings of the parent at the BOY, instead of a debit to the Investment at the BOY.) a. Depreciation expense (subsidiary) = $140,000 / 10 = $14,000 per year. Depreciation expense (parent) = $120,000 / 6 = $20,000 per year. b. Net book value on date of sale = $140,000 – (4 x $14,000) = $84,000 Gain on sale = $120,000 - $84,000 = $36,000 c. The Equipment (cost) write-down during the sale = $140,000 - $120,000 = $20,000. Given the Accumulated Depreciation of $56,000 (4 x $14,000) and the Gain on Sale of $36,000 (part b), the [I] consolidation journal entries in 2011: [Igain]

Gain on sale of equipment 36,000 Equipment 20,000 Accumulated depreciation 56,000 (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry)

[Idep]

Accumulated depreciation 6,000 Depreciation expense 6,000 (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount)

d. The excess depreciation expense is $6,000 ($20,000 - $14,000) per year. By the beginning of 2013, the Gain on Sale has been reduced by $12,000 (2 x $6,000). So, the retained earnings of the subsidiary must be reduced by only $24,000 ($36,000 $12,000) of the deferred Gain on Sale. Likewise, only $44,000 ($56,000 – 2 x $6,000) of the Accumulated Depreciation on the date of sale must be adjusted. The resulting [Igain] and [Idep] holding period consolidation journal entries are, [Igain]

Investment in subsidiary @BOY Equipment

24,000 20,000

Accumulated depreciation 44,000 (Reverses prior year unconfirmed profit elimination from investment, and restates Equipment and Accumulated Depreciation as if intercompany transaction never occurred) [Idep]

Accumulated depreciation Depreciation expense

6,000 6,000

(to reverse the excess depreciation expense for the period)



d. continued The [Igain] entry reverses prior year unconfirmed profit elimination from investment, adjusts the Equipment (at cost) to its pre-sale amount, and adjusts the Accumulated Depreciation for the difference between the balance that the subsidiary would have reported had the sale not taken place and the amount that the parent currently reports. The [Idep] entry reduces the current period depreciation expense, reported by the parent at $20,000, to the amount that the subsidiary would have reported ($14,000) had the sale not taken place. e. We will need to make the [Igain] and [Idep] consolidation journal entries for the remaining useful life of the equipment. At the end of its 10-year useful life, the equipment will be fully depreciated. At that point, the Gain on Sale reported by the subsidiary ($36,000) will have been completely offset by the additional depreciation expense reported by the parent ($36,000 = 6 x $6,000 per year). The cumulative consolidated net income will be the same as the combined entity would have reported had the sale not taken place. However, even after the equipment is fully depreciated, the [I] consolidation journal entry will continue to “gross up” the equipment and accumulated depreciation to the pre-intercompany sale levels until the equipment is retired or disposed.

31.

Sale of depreciable assets - (Note to instructors: if the parent company used the partial equity method instead of the full equity method, consolidating entry [Igain] in part d. would include a debit to retained earnings of the parent at the BOY, instead of a debit to the Investment at the BOY.) a. Depreciation expense (parent) = $80,000 / 10 = $8,000 per year. Depreciation expense (subsidiary) = $70,000 / 7 = $10,000 per year. b. Net book value on date of sale = $80,000 – (3 x $8,000) = $56,000 Gain on sale = $70,000 - $56,000 = $14,000 c. The Equipment (cost) write-down during the sale = $80,000 - $70,000 = $10,000. Given the Accumulated Depreciation of $24,000 (3 x $8,000) and the Gain on Sale of $14,000 (part b), the [I] consolidation journal entries in 2009: [Igain]

[Idep]

Gain on sale of equipment 14,000 Equipment 10,000 Accumulated depreciation 24,000 (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) Accumulated depreciation 2,000 Depreciation expense 2,000 (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount)


4-13

d. The excess depreciation expense is $2,000 ($10,000 - $8,000) per year. By the beginning of 2013, the Gain on Sale has been reduced by $8,000 (4 x $2,000). So, the retained earnings of the subsidiary must be reduced by only $6,000 ($14,000 - $8,000) of the deferred Gain on Sale. Likewise, only $16,000 ($24,000 – 4 x $2,000) of the Accumulated Depreciation on the date of sale must be adjusted. The resulting [Igain] and [Idep] holding period consolidation journal entries are, [Igain]

Investment in subsidiary @BOY Equipment Accumulated depreciation

6,000 10,000 16,000

(Reverses prior year unconfirmed profit elimination from investment, and restates Equipment and Accumulated Depreciation as if intercompany transaction never occurred)

[Idep]


2,000 2,000

(to reverse the excess depreciation expense for the period)

The [Igain] entry reverses prior year unconfirmed profit elimination from investment, adjusts the Equipment (at cost) to its pre-sale amount, and adjusts the Accumulated Depreciation for the difference between the balance that the subsidiary would have reported had the sale not taken place and the amount that the parent currently reports. The [Idep] entry reduces the current period depreciation expense, reported by the parent at $10,000, to the amount that the subsidiary would have reported ($8,000) had the sale not taken place. e. We will need to make the [Igain] and [Idep] consolidation journal entries for the remaining useful life of the equipment. At the end of its 10-year useful life, the equipment will be fully depreciated. At that point, the Gain on Sale reported by the subsidiary ($14,000) will have been completely offset by the additional depreciation expense reported by the parent ($14,000 = 7 x $2,000 per year). The cumulative consolidated net income will be the same as the combined entity would have reported had the sale not taken place. However, even after the equipment is fully depreciated, the [I] consolidation journal entry will continue to “gross up” the equipment and accumulated depreciation to the pre-intercompany sale levels until the equipment is retired or disposed.



32. a. The statement “Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis” means that the parent Caterpillar, Inc., and all of its subsidiaries other than Financial Products are consolidated in the heading Machinery & Engines. The Financial Products subsidiary is reported separately and is represented on the Machinery & Engines consolidated balance sheet (the balance sheet is not presented with the problem) as an Equity Investment in the same manner in which we have represented the subsidiary on the parent’s balance sheet in the text. b. This adjustment eliminates the intercompany sale of financial products from Financial Products to Machinery and Engines. c. If the sale of products or services was made on account, we will expect to see eliminations for intercompany receivables and payables. d. The statement “Elimination of Financial Products' profit due to equity method of accounting” represents our elimination of Equity Income in the consolidation process. Both the Equity Investment and the related Equity Income will be eliminated from the consolidated balance sheet and income statement, respectively, and will be replaced by the revenues, expenses, assets and liabilities to which they relate. The consolidating adjustment discussed in footnote #7 is our [C] entry.

33. a. The $908 elimination column relates to sales of products and/or services from the Financial Services Operations entity to the Motorcycles & Related Products Operations. These intercompany revenues must be eliminated in the consolidation process. b. If the sale of products or services were made on account, we would expect to see eliminations for intercompany receivables and payables.


4-15

34. a.

b.

Equity Income Subsidiary net income Recognition of prior year deferral of gross profit Deferral of current year gross profit Depreciation of [A] asset Equity Income

$109,620 12,597 (19,380) (35,000) $67,837

Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP BOY Deferred profit Equity income Dividends Equity investment

$404,550 52,200 65,250 395,000* (12,597) 67,837 (14,251) $957,989

*BOY AAP assets: PPE, net @ BOY Customer list @ BOY Royalty Agreement @ BOY Goodwill BOY AAP assets

dep/amort 100,000 - 3 x 5,000 = 85,000 175,000 - 3 x 17,500 = 122,500 125,000 - 3 x 12,500 = 87,500 100,000 = 100,000 500,000 35,000 395,000



c. [C]

[E]

[A]

[D]

[Icogs]

Equity investment income Dividends Equity investment

67,837 14,251 53,586

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY

52,200 65,250 404,550

PPE, net @ BOY Customer List @ BOY Royalty Agreement @ BOY Goodwill Equity Investment - @BOY

85,000 122,500 87,500 100,000

Operating expenses PPE, net @ BOY Customer list @ BOY Royalty agreement @ BOY

35,000

Equity investment Cost of goods sold

12,597

[Isales] Sales

522,000

395,000

5,000 17,500 12,500

12,597 68,000

Cost of goods sold [Icogs]

[Ipay]

68,000


19,380


27,200

19,380

27,200


4-17

d. Parent Income statement: Sales Cost of goods sold

$4,370,000 (3,059,000)

Gross profit 1,311,000 Equity income 67,837 Operating expenses (830,300) Net income $ 548,537 Statement of retained earnings: BOY retained earnings $2,195,488 Net income 548,537 Dividends (126,164) Ending retained earnings $2,617,861 Balance sheet: Assets Cash Accounts receivable Inventory Building, net Customer List @ BOY Royalty agreement @ BOY Goodwill Equity investment

$ 650,639 559,360 847,780 4,078,084

Sub $783,000 [Isales] (469,800) [Icogs]

Liabilities and stockholders’ equity Accounts Payable $ 327,313 Other current liabilities 403,228 Long-term liabilities 2,500,000 Common stock 714,495 APIC 530,955 Retained earnings 2,617,861 $7,093,852

68,000 19,380

[Icogs] [Isales]

Cr

12,597 68,000

313,200 (203,580) $109,620 $404,550 109,620 (14,251) $499,919

$ 253,087 181,656 233,334 431,694

957,989

$7,093,852

Elimination entries Dr

[C] [D]

67,837 35,000

[E]

404,550

85,000 122,500 87,500 100,000 12,597

14,251

[Ipay] [Icogs] [D] [D] [D]

27,200 19,380 5,000 17,500 12,500

[C] [E] [A]

53,586 522,000 395,000

$1,099,771

$

93,459 127,943 261,000 52,200 65,250 499,919 $1,099,771

$5,085,000 (3,467,583) 1,617,417 0 (1,068,880) $ 548,537

[C]

[A] [A] [A] [A] [Icogs]

Consolidated

$2,195,488 548,537 (126,164) $2,617,861

$ 903,726 713,816 1,061,734 4,589,778 105,000 75,000 100,000 0

$7,549,054

[Ipay]

27,200

[E] [E]

52,200 65,250

∑

1,147,014

∑

1,147,014

$ 393,572 531,171 2,761,000 714,495 530,955 2,617,861 $7,549,054



35. a.

b.

Equity Income Subsidiary net income Recognition of prior year deferral of gross profit Deferral of current year gross profit Depreciation of [A] asset Equity Income Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP BOY deferred profit Equity income Dividends Equity investment *BOY AAP assets: Patent @ BOY BOY AAP assets

$216,930 19,137 (29,441) (17,500) $189,126

$800,575 103,300 129,125 140,000* (19,137) 189,126 (28,201) $1,314,788

dep/amort 175,000 - 2 x 17,500 = 140,000 175,000 17,500 140,000


4-19

c. [C]

Equity income

189,126 Dividends Equity investment

[E]

[A]

28,201 160,925


103,300 129,125 800,575

Patent @ BOY

140,000

1,033,000

Equity Investment - @BOY [D]

[Icogs]

140,000

Operating expenses Patent @ BOY

17,500

Equity Investment @BOY Cost of goods sold

19,137

[Isales] Sales

17,500

19,137 103,300


[Ipay]

103,300


29,441


41,320

29,441

41,320



d.

Parent

Elimination entries Dr Cr

Sub

Consolidated

Income statement: Sales

$8,220,000

$1,549,500

[Isales]

103,300

Cost of goods sold

(5,754,000)

(929,700)

[Icogs]

29,441

Gross profit Equity income

2,466,000

$9,666,200 [Icogs]

19,137

[Isales]

103,300

(6,590,704)

619,800

189,126

Operating expenses

(1,561,800)

(402,870)

Net income

$1,093,326

$ 216,930

$4,129,728

$800,575

1,093,326

216,930

3,075,496 [C]

189,126

[D]

17,500

0 (1,982,170) $1,093,326

Statement of retained earnings: BOY retained earnings Net income Dividends Ending retained earnings

(251,465)

[E]

800,575

$4,129,728 1,093,326

(28,201)

[C]

28,201

(251,465)

$4,971,589

$989,304

$4,971,589

$ 555,910

$ 500,842

$ 1,056,752

Accounts receivable

1,052,160

359,484

[Ipay]

41,320

1,370,324

Inventory

1,594,680

461,751

[Icogs]

29,441

2,026,990

Building, net

7,670,904

854,291

Balance sheet: Assets Cash

Patent Equity investment

1,314,788

8,525,195 [A]

140,000

[D]

17,500

122,500

[Icogs]

19,137

[C]

160,925

0

[E]

1,033,000

[A]

140,000

$12,188,442 $2,176,368

$13,101,761

Liabilities and stockholders’ equity Accounts payable

$ 615,678

$ 184,948

758,475

253,191

1,011,666

Long-term liabilities

3,500,000

516,500

4,016,500

Common stock

1,343,970

103,300

[E]

103,300

1,343,970

998,730

129,125

[E]

129,125

998,730

4,971,589

989,304

Other current liabilities

APIC Retained earnings

$12,188,442 $2,176,368

[Ipay]

41,320

$

759,306

4,971,589 ∑

1,572,824

∑

1,572,824

$13,101,761


4-21

36. a.

Equity Income Subsidiary net income Recognition of prior year deferral of gross profit Deferral of current year gross profit Depreciation of [A] asset Equity income

b. Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP BOY deferred profit Equity income Dividends Equity investment *BOY AAP assets: Patent @ BOY Goodwill BOY AAP assets

$105,000 23,472 (36,110) (20,000) $72,362

$387,500 50,000 62,500 220,000* (23,472) 72,362 (13,650) $755,240

dep/amort 200,000 - 4 x 20,000 = 120,000 100,000 = 100,000 300,000 10,000 220,000



c. [C]

[E]

[A]

Equity income


13,650 58,712

Common stock (S) - @BOY 50,000 APIC (S) - @BOY 62,500 Retained earnings (S) @BOY 387,500 Equity investment - @BOY

500,000

Patent @ BOY Goodwill

120,000 100,000 Equity investment - @BOY

[D]

[Icogs]

220,000

Operating expenses Patent @ BOY

20,000

Equity investment @BOY Cost of goods sold

23,472

[Isales] Sales

20,000

23,472 126,700


[Ipay]

126,700


36,110


50,680

36,110

50,680


4-23

d.

Income statement: Sales Cost of goods sold Gross Profit Equity Investment income Operating expenses Net income

Parent

Subsidiary

$5,000,000 (3,500,000)

$750,000 (450,000)

1,500,000 72,362 (950,000) $ 622,362

Elimination entries Dr [Isales] [Icogs]

126,700 36,110

Cr

[Icogs]

23,472

[Isales]

126,700

300,000 (195,000)

[C] [D]

Consolidated $5,623,300 (3,835,938) 1,787,362 0 (1,165,000)

72,362 20,000

$105,000

$ 622,362

Statement of retained earnings: BOY retained earnings $2,512,000 Net income 622,362 Dividends (143,143)

$387,500 105,000 (13,650)

Ending retained earnings

$2,991,219

$478,850

$2,991,219

$ 720,839 640,000 970,000 4,666,000

$ 242,421 174,000 223,500 413,500

$ 963,260 763,320 1,157,390 5,079,500 100,000 100,000 0

Balance sheet: Assets Cash Accounts receivable Inventory Building, net Patent Goodwill Equity Investment

[E]

[C]

[A] [A] [Icogs]

755,240

387,500

120,000 100,000 23,472

$7,752,079

$1,053,421

Liabilities and Stockholders’ Equity Accounts Payable $ 374,500 Other Current Liabilities 461,360 Long-term Liabilities 2,500,000 Common Stock 817,500 APIC 607,500 Retained Earnings 2,991,219

$ 89,520 122,551 250,000 50,000 62,500 478,850

[Ipay]

50,680

[E] [E]

50,000 62,500

$7,752,079

$1,053,421

∑

1,049,324

13,650

[Ipay] [Icogs]

50,680 36,110

[D]

20,000

[C] [E] [A]

58,712 500,000 220,000

$2,512,000 622,362 (143,143)

$8,163,470

$ 413,340 583,911 2,750,000 817,500 607,500 2,991,219 ∑

1,049,324

$8,163,470



37. a.

Equity Income Subsidiary net income Recognition of prior year deferral of gross profit Deferral of current year gross profit Depreciation of [A] asset Equity income

b. Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP BOY deferred profit Equity income Dividends Equity investment *BOY AAP assets: PPE, net Customer list Royalty agreement Goodwill BOY AAP assets

$189,000 17,840 (27,446) (45,000) $134,394

$697,500 90,000 112,500 420,000* (17,840) 134,394 (24,570) $1,411,984

dep/amort 100,000 - 4 x 5,000 = 80,000 150,000 - 4 x 15,000 = 90,000 250,000 - 4 x 25,000 = 150,000 100,000 = 100,000 600,000 45,000 420,000


4-25

c. [C]

Equity income


[E]

[A]

[D]

[Icogs]

24,570 109,824


90,000 112,500 697,500

PPE, net Customer List Royalty agreement Goodwill Equity investment - @BOY

80,000 90,000 150,000 100,000

900,000

420,000

Operating Expenses PPE, net Customer List Royalty Agreement

45,000


17,840

[Isales] Sales

5,000 15,000 25,000

17,840 96,300


[Ipay]

96,300


27,446


38,520

27,446

38,520



d. Parent

Subsidiary

Income statement: Sales Cost of goods sold

$6,670,000 (4,669,000)

$1,350,000 (810,000)

Gross profit Equity income Operating expenses

2,001,000 134,394 (1,267,300)

540,000 (351,000)

868,094

$ 189,000

Net income

$

Statement of retained earnings: BOY retained earnings $3,351,008 Net income 868,094 Dividends (199,662)

$697,500 189,000 (24,570)


$861,930

Balance sheet: Assets Cash Accounts receivable Inventory Building, net Customer list Royalty agreement Goodwill Equity investment

$4,019,440

$

251,259 853,760 1,293,980 6,224,444

$ 436,358 313,200 402,300 744,300

1,411,984

Elimination entries Dr [Isales] [Icogs]

[C] [D]

96,300 27,446

Cr

[Icogs]

17,840

[Isales]

96,300

Consolidated $7,923,700 (5,392,306) 2,531,394 0 (1,663,300)

134,394 45,000

$ 868,094 [E]

697,500 [C]

24,570

$3,351,008 868,094 (199,662) $4,019,440

$

[A] [A] [A] [A] [Icogs]

80,000 90,000 150,000 100,000 17,840

$10,035,427

$1,896,158

Liabilities and stockholders’ equity Accounts payable $ 499,583 Other current liabilities 615,454 Long-term liabilities 3,000,000 Common stock 1,090,545 APIC 810,405 Retained earnings 4,019,440

$ 161,136 220,592 450,000 90,000 112,500 861,930

[Ipay]

38,520

[E] [E]

90,000 112,500

$10,035,427

$1,896,158

∑

1,679,500

[Ipay] [Icogs] [D] [D] [D]

38,520 27,446 5,000 15,000 25,000

[C] [E] [A]

109,824 900,000 420,000

687,617 1,128,440 1,668,834 7,043,744 75,000 125,000 100,000 0

$10,828,635

$

∑

1,679,500

622,199 836,046 3,450,000 1,090,545 810,405 4,019,440

$10,828,635


4-27

38. a.

Equity Income Subsidiary net income Depreciation of [A] asset Equity income

$52,500 (20,000) $32,500

b. Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP Unconfirmed gain on intercompany sale @ BOY Equity income Dividends Equity investment *BOY AAP assets: Patent @ BOY Goodwill BOY AAP assets

$193,750 25,000 31,250 260,000* (30,000) 32,500 (6,825) $505,675

dep/amort 200,000 - 2 x 20,000 = 160,000 100,000 = 100,000 300,000 20,000 260,000

c. [C]

Equity income


[E]

[A]

6,825 25,675


25,000 31,250 193,750

Patent @ BOY Goodwill

160,000 100,000

250,000

Equity investment - @BOY [D]

Operating Expenses Patent @ BOY

[Igain] Equity investment @BOY Land

260,000 20,000 20,000 30,000 30,000



d. Parent Income statement: Sales Cost of goods sold

Sub

$ 3,000,000 $375,000 (2,100,000) (225,000)

Gross Profit Equity Investment income (Partial) Operating expenses Net income

$

900,000 32,500 (570,000)

150,000

362,500

$ 52,500

(97,500)

Statement of retained earnings: BOY retained earnings Net income Dividends

$1,477,200 $193,750 362,500 52,500 (83,375) (6,825)


$1,756,325

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net Patent @ BOY Goodwill Equity Investment

Liabilities and Stockholders’ Equity Accounts Payable Other Current Liabilities Long-term Liabilities Common Stock APIC Retained Earnings


$

341,566 384,000 582,000 2,799,600

$3,375,000 (2,325,000) [C] [D]

1,050,000 0 (687,500)

32,500 20,000

$ 362,500 [E]

193,750 [C]

6,825

$239,425

$

[A] [A] [Igain]

$4,612,841

$526,711

$ 224,700 276,816 1,500,000 490,500 364,500 1,756,325

$ 44,760 61,276 125,000 25,000 31,250 239,425

$4,612,841

$526,711

$1,447,200 362,500 (83,375) $1,756,325

$121,211 87,000 111,750 206,750

505,675

Consolidated

160,000 100,000 30,000

[Igain] [D]

30,000 20,000

[C] [E] [A]

25,675 250,000 260,000

462,777 471,000 693,750 2,976,350 140,000 100,000 0

$4,843,877

$

[E] [E]

25,000 31,250

∑

$592,500

∑

$592,500

269,460 338,092 1,625,000 490,500 364,500 1,756,325

$4,843,877


4-29

39. a.

b.

Equity Income Subsidiary net income Depreciation of [A] asset Equity income

$113,400 (50,000) $63,400

Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP Unconfirmed gain on intercompany sale @ BOY Equity income Dividends Equity investment

$418,500 54,000 67,500 350,000* (50,000) 63,400 (14,742) $888,658

*BOY AAP assets: dep/amort Royalty agreement @ BOY 300,000 - 3 x 30,000 = 210,000 Customer list 200,000 - 3 x 20,000 = 140,000 BOY AAP assets 500,000 50,000 350,000 c. [C]

Equity income


[E]

[A]

[D]

14,742 48,658


54,000 67,500 418,500

Royalty agreement @ BOY Customer list Equity investment - @BOY

210,000 140,000

Operating expenses Royalty agreement Customer list


540,000

350,000 50,000 30,000 20,000 50,000 50,000



d. Elimination entries Dr Cr

Parent

Sub

Consolidated

Sales

$4,600,000

$810,000

$5,410,000

Cost of goods sold

(3,220,000)

(486,000)

(3,706,000)

1,380,000

324,000

1,704,000

Income statement:

Gross Profit Equity Investment income (Partial)

63,400

Operating expenses Net income

(874,000)

(210,600)

$ 569,400

[C]

63,400

[D]

50,000

0 (1,134,600)

$113,400

$ 569,400


$2,261,040

$418,500

569,400

113,400

(130,962)

(14,742)

$2,699,478

$517,158

$ 616,891

$ 261,815

588,800

187,920

892,400

241,380

4,292,720

446,580

[E]

418,500

$2,261,040 569,400 [C]

14,742

(130,962) $2,699,478

Balance sheet: Assets Cash Accounts receivable Inventory PPE, net

$

878,706 776,720 1,133,780

[Igain]

50,000

4,689,300

Royalty Agreement @ BOY

[A]

210,000

[D]

30,000

180,000

Customer List

[A]

140,000

[D]

20,000

120,000

[Igain]

50,000

[C]

48,658

0

[E]

540,000

[A]

350,000

Equity Investment

888,658

$7,279,469

$1,137,695

$7,778,506

Liabilities and Stockholders’ Equity Accounts Payable Other Current Liabilities

$ 344,540

$

96,682

$

441,222

424,451

132,355

556,806

2,500,000

270,000

2,770,000

Common Stock

752,100

54,000

[E]

54,000

752,100

APIC

558,900

67,500

[E]

67,500

558,900

2,699,478

517,158

$7,279,469

$1,137,695

Long-term Liabilities

Retained Earnings

2,699,478 ∑

$1,053,400

∑

$1,053,400

$7,778,506


4-31

40. a.

b.

Equity Income Subsidiary net income Depreciation of [A] asset Equity income Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP Unconfirmed gain on intercompany sale @ BOY Equity income Dividends Equity investment *BOY AAP assets: Patent Goodwill BOY AAP assets

$315,000 (30,000) $285,000

$1,162,500 150,000 187,500 310,000* (40,000) 285,000 (40,950) $2,014,050

dep/amort 300,000 - 3 x 30,000 = 210,000 100,000 = 100,000 400,000 30,000 310,000

c. [C]

[E]

[A]

Equity income Dividends Equity investment Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY Patent Goodwill

285,000 40,950 244,050 150,000 187,500 1,162,500 1,500,000 210,000 100,000


Operating expenses Patent


310,000 30,000 30,000 40,000 40,000



d.

Parent


Sub

Consolidated

Income statement: Sales Cost of goods sold Gross Profit Equity Investment income (Partial) Operating expenses Net income

6,000,000

2,250,000

8,250,000

(4,200,000) (1,350,000) 1,800,000

900,000

285,000 (1,140,000)

(5,550,000)

(585,000)

945,000

315,000

2,974,400

1,162,500

945,000

315,000

(217,350)

(40,950)

2,700,000 [C]

285,000

0

[D]

30,000

(1,755,000) 945,000


[E]

1,162,500

2,974,400 945,000 [C]

40,950

(217,350)

3,702,050

1,436,550

3,702,050

Cash

369,831

727,263

1,097,094

Accounts receivable

768,000

522,000

1,290,000

Inventory

1,164,000

670,500

1,834,500

PPE, net

5,599,200

1,240,500

Balance sheet: Assets

Patent

[A]

210,000

Goodwill

[A]

100,000

Equity Investment

2,014,050

[Igain]

40,000

[Igain]

40,000

6,799,700

[D]

30,000

180,000 100,000

[C]

244,050

[E]

1,500,000

[A]

310,000

0

9,915,081

3,160,263

11,301,294

Accounts Payable

449,400

268,560

717,960

Other Current Liabilities

553,631

367,653

921,284

3,500,000

750,000

4,250,000

981,000

150,000

[E]

150,000

[E]

187,500

Liabilities and Stockholders’ Equity

Long-term Liabilities Common Stock APIC Retained Earnings

729,000

187,500

3,702,050

1,436,550

9,915,081

3,160,263

981,000 729,000 3,702,050

∑

2,165,000

∑

2,165,000

11,301,294


4-33

41. a. Equity Income Subsidiary net income Depreciation of [A] asset Equity Income

$420,000 (30,000) $390,000

b. Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP Unconfirmed gain on intercompany sale @ BOY Equity income Dividends Equity investment *BOY AAP assets: Customer list Patent Goodwill BOY AAP assets

200,000 100,000 100,000 400,000

$1,550,000 200,000 250,000 280,000* (80,000) 390,000 (54,600) $2,535,400

dep/amort -4x 20,000 = 120,000 -4x 10,000 = 60,000 = 100,000 30,000 280,000

c. [C]

Equity income


[E]

[A]

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY Customer list Patent Goodwill

54,600 335,400 200,000 250,000 1,550,000 2,000,000 120,000 60,000 100,000


Operating expenses Customer list Patent


280,000 30,000 20,000 10,000 80,000 80,000



d. Elimination entries Dr Cr

Parent

Sub

Consolidated

8,000,000

3,000,000

11,000,000

(5,600,000)

(1,800,000)

(7,400,000)

2,400,000

1,200,000

3,600,000

Income statement: Sales Cost of goods sold Gross Profit Equity Investment income Operating expenses Net income

390,000 (1,520,000)

(780,000)

1,270,000

420,000

[C]

390,000

[D]

30,000

0 (2,330,000) 1,270,000

Statement of retained earnings: BOY retained earnings

3,939,200

1,550,000

Net income

1,270,000

420,000

Dividends Ending retained earnings

(292,100)

[E]

1,550,000

3,939,200 1,270,000

(54,600)

[C]

54,600

(292,100)

4,917,100

1,915,400

4,917,100

457,475

469,684

927,159

Accounts receivable

1,024,000

696,000

1,720,000

Inventory

1,552,000

894,000

2,446,000

PPE, net

7,465,600

1,654,000


[Igain]

80,000

9,039,600

Customer List

[A]

120,000

[D]

20,000

100,000

Patent Goodwill

[A]

60,000

[D]

10,000

50,000

[A]

100,000

Equity Investment

2,535,400

13,034,475

[Igain]

100,000

80,000

[C]

335,400

[E]

2,000,000

[A]

280,000

0

3,713,684

14,382,759

Liabilities and Stockholders’ Equity Accounts Payable

599,200

358,080

957,280


738,175

490,204

1,228,379


4,500,000

500,000

5,000,000

Common Stock

1,308,000

200,000

[E]

200,000

1,308,000

972,000

250,000

[E]

250,000

972,000

4,917,100

1,915,400

13,034,475

3,713,684

APIC Retained Earnings

4,917,100 ∑

2,780,000

∑

2,780,000

14,382,759


4-35

42. a. Cash Accumulated depreciation Equipment Gain on sale (to record the sale of equipment)

120,000 56,000

Equipment

120,000

140,000 36,000

Cash (to record the purchase of equipment)

120,000

[Igain] Gain on sale Equipment

36,000 20,000

Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) [Idep]

Accumulated depreciation Depreciation expense (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $6,000 ($120,000 / 6 = $20,000 vs. $140,000 / 10 = $14,000).

56,000

6,000 6,000

b. The excess depreciation is $6,000 ($120,000 / 6 = $20,000 vs. $140,000 / 10 = $14,000). Since 1 year has passed, at the beginning of the current year, the deferred gain is $30,000 ($36,000 - $6,000). c.

Equity Income Subsidiary net income Depreciation of [A] asset Confirmed gain intercompany sale Equity Income

$140,000 (20,000) 6,000 $126,000



d.

Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP Equity income Unconfirmed gain on intercompany sale @ BOY Dividends Equity investment *BOY AAP assets: Customer List Goodwill BOY AAP assets

200,000 - 4 x 100,000 300,000

$225,000 124,000 155,000 220,000* 126,000 (30,000) (20,000) $800,000

dep/amort 20,000 = 120,000 = 100,000 20,000 220,000

e. [C]

Equity income

126,000 Dividends Equity Investment

[E]

[A]

20,000 106,000


124,000 155,000 225,000

Customer list Goodwill

120,000 100,000

504,000


Operating expenses Customer list

[Igain] Equity investment - @BOY Equipment

220,000 20,000 20,000 30,000 20,000

Accumulated depreciation [Idep]

Accumulated Depreciation Depreciation Expense

50,000 6,000 6,000


4-37

f. Elimination entries Dr Cr

Parent

Sub

Consolidated

Sales

10,000,000

1,000,000

Cost of goods sold

(7,200,000)

(600,000)

(7,800,000)

Gross Profit Equity Investment income

2,800,000

400,000

3,200,000

Income statement:

Operating expenses Net income

126,000 (1,500,000)

(260,000)

1,426,000

140,000

11,000,000

[C]

126,000

[D]

20,000

0 [Idep]

6,000

(1,774,000) 1,426,000

Statement of retained earnings: BOY retained earnings

5,814,300

225,000

Net income

1,426,000

140,000

Dividends Ending retained earnings

(285,200)

[E]

225,000

5,814,300 1,426,000

(20,000)

[C]

20,000

(285,200)

6,955,100

345,000

6,955,100

Cash

1,058,100

322,000

1,380,100

Accounts receivable

1,750,000

430,000

2,180,000

Inventory

2,600,000

550,000

3,150,000

PPE, net

10,060,000

1,030,000


[Igain]

20,000

[Idep]

6,000

Patent

[A]

120,000

Goodwill

[A]

100,000

[Igain]

30,000

Equity Investment

800,000

16,268,100

[Igain]

50,000

11,066,000

[D]

20,000

100,000 100,000

[C]

106,000

[E]

504,000

[A]

220,000

0

2,332,000

17,976,100


1,010,000

178,000

1,188,000


1,190,000

230,000

1,420,000


2,500,000

1,300,000

3,800,000

553,000

124,000

[E]

124,000

553,000

APIC

4,060,000

155,000

[E]

155,000

4,060,000

Retained Earnings

6,955,100

345,000

16,268,100

2,332,000

Common Stock

6,955,100 ∑

926,000

∑

926,000

17,976,100



43. a. Cash Accumulated depreciation

250,000 288,000

Equipment Gain on sale (to record the sale of equipment)

480,000 58,000

Equipment

250,000


250,000

[Igain] Gain on sale Equipment

58,000 230,000

Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) [Idep]

Accumulated depreciation

288,000

14,500

Depreciation expense (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $14,500 ($250,000 / 4 = $62,500 vs. $480,000 / 10 = $48,000).

14,500

b. The excess depreciation is $14,500 ($250,000 / 4 = $62,500 vs. $480,000 / 10 = $48,000). Since three years have passed, the deferred gain is now $14,500 ($58,000 – 3 x $14,500). c. Equity Income Subsidiary net income Depreciation of [A] asset Confirmed gain on intercompany sale Equity Income

$122,640 (70,000) 14,500 $67,140


4-39

d.

Equity Investment BOY subsidiary Retained Earnings BOY subsidiary Common Stock BOY subsidiary APIC BOY Unamortized AAP Unconfirmed gain on intercompany sale @ BOY Equity income Dividends Equity Investment

$197,100 108,624 135,780 140,000* (14,500) 67,140 (17,520) $616,624

*BOY AAP assets: dep/amort Royalty Agreement 140,000 - 5 x 20,000 = 40,000 Customer List 350,000 - 5 x 50,000 = 100,000 BOY AAP assets 490,000 70,000 140,000

e. [C]

Equity income


[E]

[A]

[D]

17,520 49,620


108,624 135,780 197,100

Royalty Agreement Customer List Equity investment - @BOY

40,000 100,000

Operating expenses Royalty agreement Customer list

[Igain] Equity investment @ BOY Equipment

441,504

140,000 70,000 20,000 50,000 14,500 230,000


[Idep]


244,500 14,500 14,500



f. Elimination entries Dr Cr

Parent

Sub

Consolidated

3,380,000

876,000

4,256,000

(2,433,600)

(525,600)

(2,959,200)

Income statement: Sales Cost of goods sold Gross Profit Equity Investment income (Partial) Operating expenses Net income

946,400

350,400

67,140 (507,000)

(227,760)

506,540

122,640

1,960,873

197,100

506,540

122,640

(101,308)

(17,520)

1,296,800 [C]

67,140

[D]

70,000

0 [Idep]

14,500

(790,260) 506,540


[E]

197,100

1,960,873 506,540 [C]

17,520

(101,308)

2,366,105

302,220

2,366,105

Cash

681,695

243,272

924,967

Accounts receivable

591,500

376,680

968,180

Inventory

878,800

481,800

1,360,600

3,400,280

902,280


PPE, net

[Igain]

230,000

[Idep]

14,500

Royalty Agreement

[A]

Customer List Equity Investment

616,624

[Igain]

244,500

4,302,560

40,000

[D]

20,000

20,000

[A]

100,000

[D]

50,000

50,000

[Igain]

14,500

[C]

49,620

0

[E]

441,504

[A]

140,000

6,168,899

2,004,032

7,626,307

Accounts Payable

341,380

155,928

497,308


402,220

201,480

603,700

1,500,000

1,100,000

2,600,000

Liabilities and Stockholders’ Equity

Long-term Liabilities Common Stock

186,914

108,624

[E]

108,624

186,914

APIC

1,372,280

135,780

[E]

135,780

1,372,280

Retained Earnings

2,366,105

302,220

6,168,899

2,004,032

2,366,105 ∑

977,644

∑

977,644

7,626,307


4-41


150,000 87,500

Equipment

150,000

175,000 62,500

Cash (to record the purchase of equipment) [Igain]

150,000

Gain on sale 62,500 Equipment 25,000 Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry)

[Idep] Accumulated depreciation 12,500 Depreciation expense (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $12,500 ($150,000 / 5= $30,000 vs. $175,000 / 10 = $17,500).

87,500

12,500

b. The excess depreciation is $12,500 ($150,000 / 5 = $30,000 vs. $175,000 / 10 = $17,500). Since one year has passed, the deferred gain is now $50,000 ($62,500 – 1 x $12,500). c.

Equity Income Subsidiary net income Depreciation of [A] asset Confirmed gain on intercompany sale Equity Income

$356,720 (50,000) 12,500 $319,220



d.

Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP Unconfirmed gain on intercompany sale @ BOY Equity income Dividends Equity investment *BOY AAP assets: Patent Customer List Goodwill BOY AAP assets

100,000 200,000 300,000 600,000

$573,300 315,952 394,940 450,000* (50,000) 319,220 (50,960) $1,952,452

amort - 3 x 10,000 = 70,000 - 3 x 40,000 = 80,000 = 300,000 50,000 450,000

e. [C]

Equity income


[E]

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY

50,960 268,260 315,952 394,940 573,300

Equity investment - @BOY [A]

Patent Customer list Goodwill

1,284,192 70,000 80,000 300,000


Operating expenses

450,000 50,000

Patent Customer list [Igain] Equity investment @ BOY

10,000 40,000 50,000

Equipment

25,000 Accumulated depreciation

[Idep]


75,000 12,500

Depreciation expense

12,500


4-43

f. Parent

Elimination entries Dr

Sub

Cr

Consolidated

Income statement: Sales Cost of goods sold Gross Profit Equity Investment income (Full)

8,920,000

2,548,000

11,468,000

(6,422,400)

(1,528,800)

(7,951,200)

2,497,600

1,019,200

3,516,800

319,220

Operating expenses

(1,338,000)

(662,480)

1,478,820

356,720

BOY retained earnings

5,213,116

573,300

Net income

1,478,820

356,720

Net income

[C]

319,220

[D]

50,000

0

[Idep]

12,500

(2,037,980) 1,478,820

Statement of retained earnings:

Dividends

(295,764)


6,396,172

[E]

573,300

5,213,116 1,478,820

(50,960)

[C]

50,960

879,060

(295,764) 6,396,172


167,196

508,056

675,252

Accounts receivable

1,561,000

1,095,640

2,656,640

Inventory

2,319,200

1,401,400

3,720,600

PPE, net

8,973,520

2,624,440

[Igain]

25,000

[Idep]

12,500

[Igain]

75,000

11,560,460

Patent

[A]

70,000

[D]

10,000

60,000

Customer List Goodwill

[A]

80,000

[D]

40,000

40,000

[A]

300,000

Equity Investment

[Igain]

1,952,452

14,973,368

50,000

300,000 [C]

268,260

[E]

1,284,192

[A]

450,000

0

5,629,536

19,012,952

900,920

453,544

1,354,464


1,061,480

586,040

1,647,520


2,500,000

3,000,000

493,276

315,952

[E]

315,952

493,276

APIC

3,621,520

394,940

[E]

394,940

3,621,520

Retained Earnings

6,396,172

879,060

14,973,368

5,629,536


Common Stock

5,500,000

6,396,172 ∑

2,190,912

∑

2,190,912

19,012,952




70,000 27,000

Equipment

70,000

90,000 7,000


70,000

[Igain] Gain on sale 7,000 Equipment 20,000 Accumulated depreciation (to adjust Gain, Equipment, and Accumulated Depreciation on the date of the intercompany transfer of equipment – given that the transaction occurred at the beginning of the year, usage of the equipment for the year must be reflected in a separate entry) [Idep]

Accumulated depreciation Depreciation expense (to eliminate the excess depreciation expense recorded by the subsidiary, and to adjust accumulated depreciation from the BOY amount to the EOY amount). The excess depreciation is $1,000 ($70,000 / 7 = $10,000 vs. $90,000 / 10 = $9,000).

27,000

1,000 1,000

b. The Excess depreciation is $1,000 ($70,000 / 7 = $10,000 vs. $90,000 / 10 = $9,000). Since 3 years have passed, the deferred gain is now $4,000 ($7,000 – 3 x $1,000). c.

Equity Income Subsidiary net income Confirmed gain on intercompany sale Depreciation of [A] asset Equity Income

$421,540 1,000 (40,000) $382,540


4-45

d. Equity Investment BOY subsidiary retained earnings BOY subsidiary common stock BOY subsidiary APIC BOY Unamortized AAP Unconfirmed gain on intercompany sale @ BOY Equity income Dividends Equity investment

$677,475 373,364 466,705 160,000* (4.000) 382,540 (60,220) $1,995,864

*License agreement 400,000 - 6 x 40,000 = 160,000

e. [C]

Equity income


[E]

Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY

60,220 322,320 373,364 466,705 677,475

Equity investment - @BOY [A]

License agreement

1,517,544 160,000


Operating expenses

160,000 40,000

License agreement [Igain] Equity investment - @BOY

40,000 4,000

Equipment

20,000 Accumulated depreciation

[Idep]


24,000 1,000

Depreciation expense

1,000



f.

Parent

Sub

6,540,000

3,011,000


Consolidated

Income statement: Sales Cost of goods sold

9,551,000

(4,708,800) (1,806,600)

Gross Profit

1,831,200

Equity Investment income (Full)

1,204,400

382,540

Operating expenses

(981,000)

Net income

(6,515,400)

(782,860)

1,232,740

421,540

BOY retained earnings

3,822,172

677,475

Net income

1,232,740

421,540

3,035,600 [C]

382,540

[D]

40,000

0

[Idep]

1,000

(1,802,860) 1,232,740

Statement of retained earnings:

Dividends

(246,548)


4,808,364

[E]

677,475

3,822,172 1,232,740

(60,220)

[C]

60,220

1,038,795

(246,548) 4,808,364


344,062

355,242

699,304

Accounts receivable

1,144,500

1,294,730

2,439,230

Inventory

1,700,400

1,656,050

3,356,450

PPE, net

6,579,240

3,101,330

License Agreement

[Igain]

20,000

[Idep]

1,000

[A]

Equity Investment

[Igain]

1,995,864

11,764,066

[Igain]

24,000

9,677,570

160,000

[D]

40,000

120,000

4,000

[C]

322,320

0

[E]

1,517,544

[A]

160,000

6,407,352

16,292,554


660,540

535,958

1,196,498


778,260

692,530

1,470,790

2,500,000

3,300,000

5,800,000

361,662

373,364

[E]

373,364

361,662

[E]

466,705

2,655,240

Long-term Liabilities Common Stock APIC

2,655,240

466,705

Retained Earnings

4,808,364

1,038,795

11,764,066

6,407,352

4,808,364 ∑

2,125,084

∑

2,125,084

16,292,554


4-47

46.A a. Since the parent has used the cost method to account for its investment in the subsidiary, the balance of the Equity Investment account at the end of the period is reported at the original cost of the investment: $1,700,000. Subsequent to the acquisition, the parent would have recorded the following changes to the Equity Investment account if it applied the equity method: Cumulative understatement of Equity Investment Increase in Sub Ret Earnings since acquisition Cumulative depreciation of [A] assets Deferred profit @ BOY Cumulative understatement of Equity Investment account

200,000 (80,000) (30,640) 89,360

The required [ADJ] consolidation entry is: [ADJ] Equity investment @ BOY

89,360

Retained Earnings (P) @ BOY (to restate the Equity Investment account from cost to equity method)

89,360

As a result of this adjusting entry, the BOY Equity Investment is equal to the balance that the parent would have reported had it used the equity method rather than the cost method. The consolidation process can proceed as usual following this initial [ADJ] entry.



b. [ADJ] Equity investment @ BOY Retained earnings (P) @ BOY [C]

[E]

[A]

Dividend income Dividends Common stock (S) - @BOY APIC (S) - @BOY Retained earnings (S) @BOY Equity investment - @BOY Building, net Customer list

89,360 89,360 24,133 24,133 100,000 125,000 1,425,000 1,650,000 80,000 90,000


[Icogs]

170,000

Operating expenses PPE, net Customer list

20,000


30,640

[Isales] Sales

5,000 15,000

30,640 165,400


[Ipay]

165,400


47,139


66,160

47,139

66,160


4-49

c.

Parent


Subsidiary

Consolidated

Income statement: Sales Cost of goods sold Gross profit Dividend income Operating expenses Net income

$9,640,000 (6,748,000) 2,892,000 24,133 (1,831,600) $1,084,533

$1,326,000 (795,600)

[Isales] [Icogs]

165,400 47,139

$10,800,600 [Icogs] [Isales]

30,640 165,400

1,425,000 [ADJ]

89,360

530,400 (344,760) $ 185,640

[C] [D]

24,133 20,000

(7,394,699) 3,405,901 0 (2,196,360) $ 1,209,541

Statement of retained earnings: BOY retained earnings $4,843,136 Net income 1,084,533 Dividends (249,443)

$1,425,000 185,640 (24,133)


$1,586,507

$5,892,594

$ 752,601 307,632 395,148 731,068

$ 1,489,636 1,475,392 2,218,169 9,802,116 75,000

Balance sheet: Assets Cash Accounts receivable Inventory Building, net Customer list Equity investment

$5,678,226

$

737,035 1,233,920 1,870,160 8,996,048

1,700,000

$14,537,163

$2,186,449

Liabilities and stockholders’ equity Accounts payable $ 722,036 Other current liabilities 889,501 Long-term liabilities 4,500,000 Common stock 1,576,140 APIC 1,171,260 Retained earnings 5,678,226 $14,537,163

$ 158,272 216,670 0 100,000 125,000 1,586,507 $2,186,449

[E]

[C]

[A] [A]

80,000 90,000

[Ipay] [Icogs] [D] [D]

[ADJ] [Icogs]

89,360 30,640

[E] [A]

24,133

66,160 47,139 5,000 15,000

$4,932,496 1,209,541 (249,443)

1,650,000 170,000

0

$15,060,313

[Ipay]

66,160

[E] [E]

100,000 125,000

∑

2,262,832

$

∑

2,262,832

814,148 1,106,171 4,500,000 1,576,140 1,171,260 5,892,594 $15,060,313



47. a. The trial balance information converted to financial statement format is presented, below. A completed consolidation spreadsheet is included in the solution to part (f) of this comprehensive review. Pre-Consolidation Financial Statements for the Year Ended December 31, 2013 Parent Subsidiary Income Statement Sales 672,000 252,000 Cost of Goods Sold (336,000) (151,200) Gross Profit 336,000 100,800 Depreciation & Amortization Expense (16,800) (13,440) Operating Expenses (218,400) (53,760) Total expenses (235,200) (67,200) Equity Income from subsidiary 25,900 Net Income 126,700 33,600 Retained Earnings Statement Beginning retained earnings Net income Dividends Declared Ending Retained Earnings

408,520 126,700 (84,000) 451,220

154,000 33,600 (19,600) 168,000

54,208 75,600 182,000 176,400 79,800

21,000 67,200 64,400 126,000 140,000 14,000

Balance Sheet Cash Accounts receivable Inventories Property, Plant & Equipment, net Other assets Customer list Investment in subsidiary Total Assets

365,120 933,128

432,600

Accounts Payable Notes Payable Other liabilities Common stock Retained Earnings Total Liabilities and Equity

45,108 70,000 30,800 336,000 451,220 933,128

16,800 29,400 36,400 182,000 168,000 432,600


4-51

b. Given the five-year time horizon between the acquisition date and the consolidated financial statement date, the following schedules separately document the annual AAP amortization and the year-end unamortized AAP balance for each year, 2009 through 2013. 100% AAP:

100% AAP Amortization – Dr (Cr) Accounts Rec. Buildings & Equipment, net Customer list Notes payable Net Amortization

2009 (5,600) 4,200 8,400 2,100 9,100

Year Ended December 31, 2010 2011 2012 4,200 4,200 4,200 8,400 8,400 8,400 2,100 2,100 2,100 14,700 14,700 14,700

2013 4,200 8,400 12,600

December 31, 100% Unamortized AAP – Dr (Cr) Accounts Rec. Buildings & Equipment, net Customer list Notes payable Goodwill Unamortized Balance

Jan. 1, 2009 (5,600) 25,200 58,800 8,400 10,920 97,720

2009

2010

2011

2012

2013

21,000 50,400 6,300 10,920 88,620

16,800 42,000 4,200 10,920 73,920

12,600 33,600 2,100 10,920 59,220

8,400 25,200 10,920 44,520

4,200 16,800 10,920 31,920

c. Intercompany depreciable asset sale: One downstream asset sale. Intercompany profit recognized on January 1, 2012: $91,000 - $70,500 = $21,000, 6-year remaining life Profit confirmed each year: $21,000 / 6 = $3,500 Net intercompany profit deferred at January 1, 2013 Less: Deferred intercompany profit recognized during 2013 Net intercompany profit deferred at December 31, 2013

Downstream $17,500 3,500 $14,000

Upstream $0 0 $0

Downstream (in Sub’s inventory) $4,200 $0

Upstream (in Parent’s inventory) $0 $2,800

Intercompany inventory transactions: Intercompany inventory sales during 2013: $21,000

Intercompany profit in inventory on January 1, 2013 Intercompany profit in inventory on December 31, 2013

Intercompany accounts receivables and payables at December 31, 2013: $5,600 ©Cambridge Business Publishers, 2014 4-52


d. The following is the general formula for computing the equity investment account (under the full equity method) at any point in time when the parent company owns 100% of a subsidiary: (1) Book value of the net assets of the subsidiary Plus: (2) Unamortized AAP Less: (3) Downstream deferred intercompany profits Less: (4) Upstream deferred intercompany profits Full equity method investment account Equity investment account balance at January 1, 2013:

Plus: Less: Less:

Jan. 1, 2013 336,000 44,520 (17,500) (4,200) $358,820

(1) $182,000 + $154,000 (2) $44,520 (from part b.) (3) $17,500 (from part c.) (3) $16,800 x 25% (from part c.)

Equity investment account balance at December 31, 2013:

Plus: Less:

Dec. 31, 2013 $350,000 31,920 (14,000) (2,800) $365,120

(1) $182,000 + $168,000 (2) $313,920 (from part b.) (3) $14,000 (from part c.) (4) $11,200 x 25% (from part c.)

e. Full equity method investment accounting includes the following routine adjustments during any given period: (1) recognition of p% of the subsidiary’s income, (2) amortization of the p% AAP, (3) recognition of p% of the dividends declared by the subsidiary, (4) recognition of prior period deferred intercompany profits that have been confirmed though either transactions with unaffiliated parties or depreciation/amortization, and (5) deferral of intercompany profits newly originating during the current period. With respect to the deferred intercompany profits, when the parent company owns 100% of a subsidiary, then 100% of the profit is deferred for downstream and upstream transactions. Information for items (1) and (2) is available in the initial information, information for item (3) was summarized in part b, and information for items (4) and (5) was summarized in part c. These items are all reflected in the following completed T-account.


4-53

e. continued Equity Investment 358,820

January 1, 2013 (1) p% x net income of Sub. = 100% x $54,000

33,600

19,600

(2) p% x Dividends of Sub. = 100% x $31,500

(4) p% x BOY downstream inventory profits recognized during 2013 = 100% x $9,000

4,200

12,600

(3) p% AAP amortization (see part b)

(4) 100% x downstream equipment profits recognized via depreciation during 2013

3,500

2,800

December 31, 2013

(5) 100% x EOY downstream inventory profits deferred until year of sale to unaffiliated party

365,120

f. [C]

[E]

[A]

[D]

[Icogs] [Isales]

Equity Income from Subsidiary Dividends - Subsidiary Investment in Subsidiary

25,900 19,600 6,300

Common Stock (S) @ BOY Retained Earnings (S) 2 BOY Investment in Subsidiary @ BOY

182,000 154,000

Buildings & Equipment @ BOY Customer list Goodwill Investment in Subsidiary @ BOY

8,400 25,200 10,920

Depreciation & Amort Expense Property, Plant & Equipment, net Customer list

12,600

Investment in Subsidiary @ BOY Cost of Goods Sold

336,000

44,520 4,200 8,400 4,200 4,200

Sales

21,000 Cost of Goods Sold

[Icogs] [Ipay]

21,000

Cost of Goods Sold Inventories

2,800

Accounts Payable

5,600

2,800

Accounts receivable [Iasset] [Ideprec]

5,600

Investment in Subsidiary @ BOY Buildings & Equipment, net @ BOY Property, Plant & Equipment, net Depreciation expense

17,500 17,500 3,500 3,500



f.

continued

Consolidation Spreadsheet for the year ended December 31, 2013 Parent Income Statement Sales Cost of Goods Sold Gross Profit Depreciation & Amort Expense Operating Expenses Total expenses Equity Income from Subsidiary Consolidated Net Income Retained Earnings Statement Beg. Ret. Earn. - Parent Beg. Ret. Earn. - Subsidiary Income attributable to Controlling Int Dividends Declared Parent

Subsidiary

672,000 (336,000)

252,000 (151,200)

336,000

100,800

(16,800) (218,400) (235,200) 25,900 126,700

(13,440) (53,760) (67,200) 33,600

[D]

12,600

[C]

25,900

154,000 33,600 187,600

[E]

154,000

126,700 535,220

[Icogs] [Isales]

4,200 21,000

903,000 (464,800) 438,200

[Ideprec]

3,500

(39,340) (272,160) (311,500) 126,700

408,520 126,700 535,220 (84,000)

451,220

Balance Sheet Cash Accounts receivable Inventories Buildings and Equipment, net

54,208 75,600 182,000 176,400

21,000 67,200 64,400 126,000

79,800

140,000 14,000

Accounts Payable Notes Payable Other liabilities Common Stock Parent Subsidiary Retained Earnings Total Liabilities and Equity

21,000 2,800

Consolidated

(84,000) (19,600) 168,000

Goodwill Total Assets

[Isales] [Icogs]

Cr

408,520

Subsidiary Ending Retained Earnings

Other assets Customer list Investment in Subsidiary

Dr

365,120

[C]

19,600

[Ipay] [Icogs] [D] [Iasset]

5,600 2,800 4,200 17,500

[D] [C] [E] [A]

8,400 6,300 336,000 44,520

75,208 137,200 243,600 292,600

[A] [Ideprec]

8,400 3,500

[A] [Icogs] [Iasset]

25,200 4,200 17,500

[A]

10,920

10,920 1,010,128 56,308 99,400 67,200

933,128

432,600

45,108 70,000 30,800

16,800 29,400 36,400

[Ipay]

5,600

182,000 168,000 432,600

[E]

182,000

336,000 451,220 933,128

451,220

473,620

473,620

219,800 30,800 -

336,000 451,220 1,010,128


4-55

aa2e_hal_sm_ch04.docx

Recommend Documents