Ch_04

Chapter 4—Intercompany Transactions: Merchandise, Plant Assets, and Notes MULTIPLE CHOICE

1. Schi Schiff ff Com Compa pany ny owns owns 100% 100% of the the out outst stan andi ding ng comm common on stoc stock k of of the the Vie Viell Company. During 20X1, Schiff sold merchandise to Viel that Viel, in turn, sold to unrelated firms. There were no such goods in Viel's ending inventory. However, some of the intercompany purchase purc hasess from fr om Schif S chifff had ha d not no t yet ye t been be en paid. p aid. Which of the t he follow f ollowing ing amoun a mounts ts will wi ll be incorrec inco rrectt in the consolidated statements if no adjustments are made? a. b. c. d.

inve invent ntor ory, y, acco accoun unts ts paya payabl ble, e, net net inc incom omee inventory, invent ory, sales, sales , cost co st of goods sold, accounts accou nts receiv r eceivable able sales sales,, cost cost of of good goodss sold sold,, accou account ntss recei receivab vable le,, accou account ntss payab payable le.. acco accoun unts ts rec recei eiva vabl ble, e, acc accou ount ntss paya payabl blee

ANS: C 2. company a. b. c. d.

DIF:

M

OBJ: 4- 1 | 4-2

The The mate materi rial al sal salee of inv inven ento tory ry ite items ms b by y a pare parent nt com compa pany ny to to an aff affil ilia iate ted d

enters enters the consol consolidat idated ed reven revenue ue compu computat tation ion only if the the trans transfer fer was was the the resul resultt of arm's arm's length bargaining. affects affe cts consolida cons olidated ted net income incom e under un der a period pe riodic ic inven i nventory tory system syste m but bu t not no t under un der a perpetual perpe tual inventory inve ntory system. syste m. does does not not result result in in consol consolida idated ted incom incomee until until the the mercha merchandi ndise se is sold sold to outs outside ide enti entitie ties. s. does not require require a workin working g paper paper adjustme adjustment nt if if the the merchan merchandis disee was was transf transferred erred at cost cost..

ANS: C

DIF:

E

OBJ: 4- 1 | 4-2

3. Will Willia iard rd Cor Corpo pora rati tion on reg regul ularl arly y sell sellss inve invent ntor ory y items items to its its sub subsi sidi diary ary,, Petty Petty,, Inc. Inc. If unrealized profits in Petty's 20X1 year-end inventory exceed the unrealized profits in its 20X2 year-end inventory, 20X2 combined a. b. c. d.

cost cost of of sale saless will will be be less less tha than n cons consol olid idat ated ed cos costt of sal sales es in in 20X2 20X2.. gross profit profi t will wi ll be greater grea ter than consolidat conso lidated ed gross g ross profit profi t in 20X2. sale saless wil willl be be les lesss tha than n con conso soli lida date ted d sal sales es in 20X2 20X2.. cost cost of of sales sales will will be be great greater er than than cons consoli olidat dated ed cost cost of of sale saless in in 20X2 20X2..

ANS: D

DIF:

D

OBJ: 4- 1 | 4-2

4. Sall Sally y Corp Corpor orat atio ion, n, an 80% 80%-o -own wned ed sub subsi sidi diar ary y of Reyn Reynol olds ds Com Compa pany ny,, buys buys hal halff of its raw materials from Reynolds. The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers. In preparing consolidated statements for Reynolds Company and Subsidiary Sally Corporation, a. b. c. d.

the intercom intercompany pany transact transaction ionss can can be be ignor ignored ed becau because se the transfer transfer price price repres represents ents arm's length bargaining. any unrealiz unre alized ed profi p rofitt from fr om inter i ntercomp company any sales sale s remain re maining ing in Reyno R eynolds' lds' ending endi ng inven i nventotory must be offset against the unrealized profit in Reynolds' beginning inventory. any unrealiz unrealized ed profi profitt on on the the inter intercomp company any transact transactions ions in Sally's Sally's ending ending inventor inventory y is is eliminated in its entirety. eighty eighty percent percent of any any unrealiz unrealized ed profi profitt on on the the inter intercomp company any transact transactions ions in Sally's Sally's ending inventory is eliminated.

ANS: C 5.

DIF:

M

OBJ: 4- 1 | 4-2

Catt Cattle le Com Compa pany ny sol sold d inve invent ntor ory y with with a cost cost of of $40, $40,00 000 0 to to its its 90% 90%-o -own wned ed

subsidiary, Range Corp., for $100,000 in 20X1. Range resold $75,000 of this inventory for $100,000 in 20X1. Based on this information, the amount of inventory reported on the consolidated financial statements at the end of 20X1 is ____. a. $10,000 b. $18, $1 8,00 000 0 c. $21,000 d. $30,000 ANS: A

DIF:

M

OBJ: 4- 1 | 4-2

6. Dill Diller er own ownss 80% 80% of Lak Lakee Comp Compan any y comm common on stoc stock. k. Duri During ng Octo Octobe berr 20X 20X7, 7, Lak Lakee sold merchandise to Diller for $300,000. On December 31, 20X7, one-half of this merchandise remained in Diller's inventory. For 20X7, gross profit percentages were 30% for Diller and 40% for Lake. The amount of unrealized profit in the ending inventory on December 31, 20X7 that should be eliminated in consolidation is ____. a. $80,000 b. $60, $6 0,00 000 0 c. $32,000 d. $30,000 ANS: B

DIF:

M

OBJ: 4- 1 | 4-2

7. Perr Perry, y, Inc Inc.. owns owns a 90% 90% inte intere rest st in in Brow Brown n Corp Corp.. Duri During ng 20X6 20X6,, Brow Brown n sold sold $100,000 in merchandise to Perry at a 30% gross profit. Ten percent of the goods are unsold by Perry at year end. The noncontrolling interest will receive what gross profit as a result of these sales? a. $0 b. $2,7 $2 ,700 00 c. $3,000 d. $27,000 ANS: B

DIF:

M

OBJ: 4- 1 | 4-2

8. On Janua January ry 1, 20X1 20X1 Bullo Bullock, ck, Inc. Inc. sells sells land land to its 80%-o 80%-own wned ed subs subsid idiar iary, y, Humphrey Corporation, at a $20,000 gain. The land is still held by Humphrey on December 31, 20X3. What is the effect of the intercompany sale of land on 20X3 consolidated net income? a. Cons Consol olid idate ated d net net inco income me will will be be the the same same as it it woul would d have have been been had had the the sale sale not not occurred. b. Consolidat Conso lidated ed net n et income i ncome will be $20,00 $ 20,000 0 less les s than th an it i t would wou ld have ha ve been b een had the sale s ale not occurred. c. Consoli Consolidate dated d net net income income will will be $16 $16,000 ,000 less less than than it it would would have been had the sale not occurred. d. Consolid Consolidated ated net income income will will be $20,0 $20,000 00 greater greater than it would would have been had the sale not occurred. ANS: A

DIF:

E

OBJ: 44 -3

9. Emro Em ron n Com Compa pany ny owns owns a 100 100% % int inter eres estt in in the the comm common on stoc stock k of of the the Diet Dietzz Company. On January 1, 20X2, Emron sold Dietz a fixed asset that Dietz will use over a 5-year period. period . The asset was sold so ld at a $5,000 $5, 000 profit. p rofit. In the th e consolida co nsolidated ted statem s tatements, ents, this profit p rofit will a. n ot be r e c or de d. b. be recogni rec ognized zed over 5 years ye ars.. c. be rec reco ognize nized d in in th the yea yearr of of sa sale. le. d. be recog recognize nized d when when the the asset asset is resol resold d to outsid outsidee partie partiess at the end of its its perio period d of use. use. ANS: B

DIF:

M

OBJ: 44 -3

subsidiary, Range Corp., for $100,000 in 20X1. Range resold $75,000 of this inventory for $100,000 in 20X1. Based on this information, the amount of inventory reported on the consolidated financial statements at the end of 20X1 is ____. a. $10,000 b. $18, $1 8,00 000 0 c. $21,000 d. $30,000 ANS: A

DIF:

M

OBJ: 4- 1 | 4-2

6. Dill Diller er own ownss 80% 80% of Lak Lakee Comp Compan any y comm common on stoc stock. k. Duri During ng Octo Octobe berr 20X 20X7, 7, Lak Lakee sold merchandise to Diller for $300,000. On December 31, 20X7, one-half of this merchandise remained in Diller's inventory. For 20X7, gross profit percentages were 30% for Diller and 40% for Lake. The amount of unrealized profit in the ending inventory on December 31, 20X7 that should be eliminated in consolidation is ____. a. $80,000 b. $60, $6 0,00 000 0 c. $32,000 d. $30,000 ANS: B

DIF:

M

OBJ: 4- 1 | 4-2

7. Perr Perry, y, Inc Inc.. owns owns a 90% 90% inte intere rest st in in Brow Brown n Corp Corp.. Duri During ng 20X6 20X6,, Brow Brown n sold sold $100,000 in merchandise to Perry at a 30% gross profit. Ten percent of the goods are unsold by Perry at year end. The noncontrolling interest will receive what gross profit as a result of these sales? a. $0 b. $2,7 $2 ,700 00 c. $3,000 d. $27,000 ANS: B

DIF:

M

OBJ: 4- 1 | 4-2

8. On Janua January ry 1, 20X1 20X1 Bullo Bullock, ck, Inc. Inc. sells sells land land to its 80%-o 80%-own wned ed subs subsid idiar iary, y, Humphrey Corporation, at a $20,000 gain. The land is still held by Humphrey on December 31, 20X3. What is the effect of the intercompany sale of land on 20X3 consolidated net income? a. Cons Consol olid idate ated d net net inco income me will will be be the the same same as it it woul would d have have been been had had the the sale sale not not occurred. b. Consolidat Conso lidated ed net n et income i ncome will be $20,00 $ 20,000 0 less les s than th an it i t would wou ld have ha ve been b een had the sale s ale not occurred. c. Consoli Consolidate dated d net net income income will will be $16 $16,000 ,000 less less than than it it would would have been had the sale not occurred. d. Consolid Consolidated ated net income income will will be $20,0 $20,000 00 greater greater than it would would have been had the sale not occurred. ANS: A

DIF:

E

OBJ: 44 -3

9. Emro Em ron n Com Compa pany ny owns owns a 100 100% % int inter eres estt in in the the comm common on stoc stock k of of the the Diet Dietzz Company. On January 1, 20X2, Emron sold Dietz a fixed asset that Dietz will use over a 5-year period. period . The asset was sold so ld at a $5,000 $5, 000 profit. p rofit. In the th e consolida co nsolidated ted statem s tatements, ents, this profit p rofit will a. n ot be r e c or de d. b. be recogni rec ognized zed over 5 years ye ars.. c. be rec reco ognize nized d in in th the yea yearr of of sa sale. le. d. be recog recognize nized d when when the the asset asset is resol resold d to outsid outsidee partie partiess at the end of its its perio period d of use. use. ANS: B

DIF:

M

OBJ: 44 -3

10. Pease Pease Corp Corpora oratio tion n owns owns 100% 100% of Sade Sade Corpor Corporati ation on comm common on stoc stock. k. On On Janu January ary 2, 20X6, Pease sold machinery with a carrying amount of $30,000 to Sade for $50,000. Sade is depreciating the acquired machinery over a 5-year life using the straight-line method. The related net adjustments to compute the 20X6 and 20X7 consolidated income before income tax would be an increase (decrease) of

a. b. c. d.

20X6 $( 16, 0 00) $(16,0 $(1 6,000) 00) $( 20, 0 00) $(20, 000)

ANS: A

20X7 $4, 0 00 $0 $4, 0 00 $0 DIF:

D

OBJ: 44 -3

11. On Janu January ary 1, 20X1 20X1,, Poe Poe Corp. Corp. sold sold a mach machine ine for $90 $900,0 0,000 00 to to Saxe Saxe Corp Corp., ., its its wholly-owned wholly-owned subsidiary. Poe paid $1,100,000 for this machine. On the sale date, accumulated depreciation was $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy that Saxe continued. In Poe's December 31, 20X1, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as a. b. c. d.

Cost Accumulated Depreciation $1,100,000 $300,000 $1,100,000 $290,000 $ 900,000 $ 40,000 $

850,000

ANS: A

$ 42,500

DIF:

M

OBJ: 4 - 3

12. Porch Porch Comp Compan any y owns owns a 90% 90% inte interes restt in the Screen Screen Compan Company. y. Porc Porch h sold sold Scre Screen en a milling machine on January 1, 20X1, for $50,000 when the book value of the machine on Porch's books was $40,000. Porch financed the sale with Screen signing a 3-year, 8% interest, note for the entire $50,000. The machine will be used for 10 years and depreciated using the straight-line method. The following amounts related to this transaction were located on the companies trial balances: Interest Revenue Inte rest Expense De pre ci ation Expe nse

$4, 000 $4, 000 $5, 000

Based upon the information related to this transaction what will be the amounts eliminated in preparing prepa ring the 20X1 2 0X1 consoli c onsolidated dated financial finan cial statements state ments?? Interest Revenue 4,000 a. 4,000 b. 3,600 c.

d.

Interest Expense 4,000

3,600

ANS: B

DIF:

M

Depreciation Expense 5,000

4,000 3,600

1,000 900

3,600

4,500

OBJ: 44 -3

13. On 1/1/ 1/1/X1 X1 Peck Peck sell sellss a machi machine ne with with a $20,0 $20,000 00 boo book k value value to its its sub subsid sidiar iary y Shea Shea for $30,000. Shea intends to use the machine for 4 years. On 12/31/X2 Shea sells the machine to an outside party for $14,000. What amount of gain or (loss) for the sale of assets is reported on the consolidated financial statements? a.

lo s s of $6 , 0 00

b. c. d.

loss of $1,000 $1,0 00 ga in of $4 , 000 ga in o f $14, 000

ANS: C

DIF:

M

OBJ: 44 -3

Scenario 4-1

Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On January 1, 20X2, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated party for $100,000 on September 26, 20X3. 14. Refer Refer to Scenar Scenario io 4-1. 4-1. The land land wil willl be be incl includ uded ed in the Decemb December er 31, 31, 20X2 20X2 consolidated balance sheet of Pennie, Inc. and Subsidiary at ____. a. $48,000 b. $60, $6 0,00 000 0 c. $72,000 d. $90,000 ANS: B

DIF:

M

OBJ: 44 -3

15. Refer Refer to to Scen Scenari ario o 4-1. 4-1. The The gain gain from from sale sale of of land land that that will will app appear ear in the the cons consol oliidated income statements for 20X2 and 20X3, respectively, is ____. a. $0 a n d $ 10 , 0 00 b. $0 and an d $40 ,000 ,0 00 c. $3 0 , 0 0 0 a nd $1 0 , 0 00 d. $3 0 , 0 0 0 a nd $4 0 , 0 00 ANS: B

DIF:

E

OBJ: 44 -3

16. Compan Company y P owns owns 100% 100% of the common common stock stock of Compan Company y S. S. Compa Company ny P is is constructing an asset for Company S that will be used in Company S's manufacturing operations over a 5-year period. The asset was 50% complete at the end of 20X1 and was completed on December 31, 20X2. Company P is recording the construction under the percentage of completion method. The asset was put into use by Company S on January 1, 20X3. The profit on the asset was estimated to be $50,000. Actual results complied to the estimate. On the consolidated statements, the profit recognized will be 20X1

a. b. c. d.

0 25,000

20X2 50,000 25,000

0 0

0 0

ANS: C

DIF:

D

20X3 0 0 10,000 50,000

20X4 - 20X7 0 0 10,000/year 0

OBJ: 44 -4

17. The fol follo lowi wing ng acco accoun unts ts were were noted noted in in review reviewin ing g the tria triall balanc balancee for Pare Parent nt Co. Co. and Subsidiary Corp.: Assets under Construction Contracts Receivable Billings on Construction in Progress Earned Income on Long-Term Contracts Contracts Payable Which of these accounts do you expect to eliminate when producing Parent Co. consolidated financial statements?

a. b. c. d.

Assets under Construction; Billings on Construction in Progress; Earned Income on Long-Term Contracts Contracts Receivable; Billings on Construction in Progress; Earned Income on LongTerm Contracts Assets under Construction; Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable Contracts Receivable; Billings on Construction in Progress; Earned Income on LongTerm Contracts; Contracts Payable

ANS: D

DIF:

E

OBJ: 4-4

18. During 20X3, a parent company billed its 100%-owned subsidiary for computer services at the rate of $1,000 per month. At year end, one month's bill remained unpaid. As a part of the consolidation process, net income a. b. c. d.

should be reduced $12,000. should be reduced $1,000. needs no adjustment. needs an adjustment, but the amount is not provided by this information.

ANS: C

DIF:

E

OBJ: 4-5

19. On January 1, 20X1, a parent loaned $30,000 to its 100%-owned subsidiary on a 5-year, 8% note. The note requires a principal payment at the end of each year of $6,000 plus payment of interest accrued to date. The following accounts require adjustment in the consolidation process: Assets Yes a.

Debt Yes

No Yes No

No Yes No

b. c. d.

ANS: C

DIF:

M

Controlling Retained Earnings Yes Yes No No

OBJ: 4-5

20. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp. Based upon the following information what amount does Phelps Co. record as subsidiary income? Phelps internally generated income: Shore internally generated income: Intercompany profit on Shore beginning inventory: Intercompany profit on Shore ending inventory: a. b. c. d.

$50,000 $44,000 $40,000 $36,000

ANS: D

DIF:

M

OBJ: 4 -6

PROBLEM

1.

Account balances are as of December 31, 20X3 except where noted.

$250,000 $ 50,000 $ 10,000 $ 15,000

Selected Income Statement Amounts: Sales Cost of Goods Sold Gain on Sale of Equipment Earnings from Investment in Subsidiary Interest Revenue Interest Expense Depreciation

Pipe

Match

$710,000 490,000

$530,000 370,000 21,000

61,000 2,880 2,880 20,000

25,000

Selected Balance Sheet Amounts {Debits/(Credits)}: Cash Notes Receivable Inventories Equipment Accumulated Depreciation Investment in Shaw Notes Payable Common Stock Additional Paid-In-Capital Retained Earnings

(100,000) (250,000) (402,000)

(36,000) (10,000) (40,000) (140,000)

Selected Statement of Retained Earnings Amounts: Beginning Balance, January 1, 20X3 Net Income Dividends Paid

$272,000 210,000 80,000

$100,000 70,000 30,000

$ 50,000 36, 000 229,000 440,000 (200,000) 189,000

$ 15,000 150,000 360,000 (120,000)

Additional Information: On January 2, 20X3 Pipe purchased 90% of Match for $155,000. On that date Match's shareholders' equity equaled $150,000 and the fair values of Match's assets and liabilities equaled their carrying amounts. Excess, if any, is attributed to patents and is amortized over 10 years. On September 4, 20X3 Match paid cash dividends of $30,000. On January 3, 20X3 Match sold equipment with an original cost of $30,000 and a carrying value of $15,000 to Pipe for $36,000. The equipment had a remaining useful life of 3 years. Straightline depreciation is used. On January 4, 20X3 Match signed an 8% Note Payable. All interest payments were made as of December 31, 20X3. During the year Match sold merchandise to Pipe for $60,000, which included a profit of $20,000. At year end 50% of the merchandise remained in Pipe's inventory. Required: 1.

Which method is Pipe using to account for the investment in Match? How do you know?

2.

What elimination entry(ies) are associated with the elimination of intercompany profits due to the sale of merchandise?

3.

What elimination entry(ies) are necessary with the sale of equipment by Match to Pipe?

4.

What elimination entry(ies) are associated with the note to Match? Why are the entry(ies) made?

ANS: 1.

2.

3.

Sophisticated Equity: Match Net Income Amortization of patent Earnings from Investment in subsidiary Sales Cost of Goods Sold

60,000

Cost of Goods Sold Inventory (50% ! $20,000)

10,000

Gain on Sale of Equipment Equipment

21,000

60,000

10,000

21,000

Accumulated Depreciation Depreciation Expense ($21,000 ÷ 3 years) 4.

$63,000 (2,000) $61,000

7,000 7,000

Notes Payable Notes Receivable

36,000

Interest Revenue Interest Expense

2,880

36,000

2,880

The note receivable and payable, and the associated interest revenue and expense should not be included on the consolidated financial statements. DIF:

E

OBJ: 4-1 | 4-2 | 4-3 | 4-5 | 4-6

2. On January 1, 20X1, Prange Company acquired 100% of the common stock of Seaman Company for $600,000. On this date Seaman had total owners' equity of $400,000. Any excess of cost over book value is attributable to a patent, which is to be amortized over 10 years. During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method. On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seaman's gross profit on all sales is 40%. On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December. Required: Complete the Figure 4-1 worksheet for consolidated financial statements for the year ended December 31, 20X2. Figure 4-1

Trial Balance Prange

Seaman

Eliminations and Adjustments

Account Titles

Company

Company

Inventory, December 31

100,000

105,000

Other Current Assets

207,000

325,000

Investment in Sub. Company

710,000

Land

140,000

80,000

Buildings and Equipment

315,000

340,000

Accumulated Depreciation

(220,000)

(130,000)

Patent Current Liabilities

(150,000)

(70,000) (100,000)

Other Long-Term Liabilities

(200,000)

Common Stock—P Co.

(200,000)

Other Paid in Capital—P Co.

(10 0,00 0)

Retained Earnings—P Co.

(492,000)

(40,000)

Common Stock—S Co.

(150,000)

Other Paid in Capital—S Co.

(100,000)

Retained Earnings—S Co.

(200,000)

(60 0,000)

(38 0,0 00)

Cost of Goods Sold

360,000

228,000

Operating Expenses

140,000

62,000

Subsidiary Income

(90,000)

Dividends Declared—P Co.

Credit

20,000

Bonds Payable

Net Sales

Debit

60,000

Dividends Declared—S Co.

30,000

Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31 0

0 (continued)

Consol. Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Company

Income Statement

NCI

Control.

Consol.

Retained Earnings

Balance Sheet

Land Buildings and Equipment Accumulated Depreciation Patent Current Liabilities Bonds Payable Other Long-Term Liabilities Common Stock—P Co. Other Paid in Capital—P Co. Retained Earnings—P Co.

Common Stock—S Co. Other Paid in Capital—S Co. Retained Earnings—S Co.

Net Sales Cost of Goods Sold Operating Expenses Subsidiary Income Dividends Declared—P Co. Dividends Declared—S Co.

Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31

ANS: For the worksheet solution, please refer to Answer 4-1. Answer 4-1

Trial Balance

Eliminations and

Prange Company

Seaman Company


100,000

105,000

(EI)

8,000


207,000

325,000

(IA)

20,000


710,000

(CY)

60,000

(EL)

450,000

(D)

200,000

Account Titles

Land

140,000

80,000


315,000

340,000

Adjustments Debit

Credit

Accumulated Depreciation Patent Current Liabilities

(220,000)

(130,000)

20,000 (150,000)

Bonds Payable

(70,000)

(D)

200,000

(IA)

20,000

(A)

20,000

(BI)

12,000

(200,000)


(200,000)


(10 0,00 0)


(492,000)

(BI)

12,000

(IS)

100,000

(40,000)


(150,000)

(EL)

150,000


(100,000)

(EL)

100,000


(200,000)

(EL)

200,000

(38 0,0 00) 228,000

(IS) (EI)

100 ,00 0 8,000

(60 0,000) 360,000

Operating Expenses

140,000

Subsidiary Income

(90,000)


40,000

(100,000)


Net Sales Cost of Goods Sold

(A)

62,000

(A)

20,000

(CY)

90,000

60,000


30,000

(CY)

30,000


0

Consol. Account Titles

Income Statement

NCI

920,000

920,000 (continued)

Control.

Consol.

Retained Earnings

Balance Sheet


197,000


512,000


0

Land

220,000


655,000


(350,000)

Patent

180,000

Current Liabilities

(200,000)

Bonds Payable

(100,000)


(240,000)


(200,000)


(100,000)


(460,000)


Net Sales

(88 0,000)

Cost of Goods Sold

484,000

Operating Expenses

222,000

Subsidiary Income

0


60,000


Consolidated Net Income NCI

(174,000) 0

Controlling Interest

174,000

(174,000)

Total NCI

0

Ret. Earn. Contr. Int. 12-31

574,000

(574,000) 0

Eliminations and Adjustments: (CY)

Eliminate the current-year entries made in the investment account and in the subsidiary income account.

(EL)

Eliminate the Seaman Company equity balances at the beginning of the year against the investment account.

(D)

Distribute the $200,000 excess of cost over book value to patent.

(A)

Amortize the patent over 10 years, with $20,000 for 20X1 charged to retained earnings, and $20,000 for 20X2 to operating expenses.

(BI)

Eliminate the $12,000 of gross profit in the beginning inventory.

(IS)

Eliminate the entire intercompany sales of $100,000.

(EI)

Eliminate the $8,000 of gross profit in the ending inventory.

(IA)

Eliminate the $20,000 intercompany accounts receivable and payable.

DIF:

M

OBJ: 4-2

MSC: 100%; simple equity

3. On January 1, 20X1, Prange Company acquired 80% of the common stock of Seaman Company for $500,000. On this date Seaman had total owners' equity of $400,000. Any excess of cost over book value is attributable to patent, which is to be amortized over 20 years. During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method. On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seaman's gross profit on all sales is 40%. On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December. Required: Complete the Figure 4-2 worksheet for consolidated financial statements for the year ended December 31, 20X2. Figure 4-2

Trial Balance Prange

Seaman

Company

Company


100,000

105,000


285,000

325,000


588,000

Land

140,000

80,000


315,000

340,000


(252,000)

(130,000)

Account Titles


60,000 (150,000)

Bonds Payable

(70,000) (100,000)


(200,000)


(200,000)


(10 0,00 0)


(474,000)

(40,000)


(150,000)


(100,000)


(200,000)

Net Sales

(60 0,000)

(38 0,0 00)

Cost of Goods Sold

360,000

228,000

Operating Expenses

140,000

62,000

Subsidiary Income

(72,000)

Eliminations and Adjustments Debit Debit

Credit


60,000


30,000


0 (continued)


Land Buildings and Equipment Accumulated Depreciation Patent Current Liabilities Bonds Payable Other Long-Term Liabilities Common Stock—P Co. Other Paid in Capital—P Co. Retained Earnings—P Co.


Net Sales Cost of Goods Sold Operating Expenses Subsidiary Income Dividends Declared—P Co. Dividends Declared—S Co. Consolidated Net Income NCI Controlling Interest Total NCI

Income Statement

NCI

Control.

Consol.

Retained Earnings

Balance Sheet



Trial Balance Prange Account Titles

Eliminations and

Seaman

Adjustments Debit Debit

Company

Company


100,000

105,000

(EI)

8,000


285,000

325,000

(IA)

20,000


588,000

(CY)

48,000

(EL)

360,000

(D)

180,000

(A)

22,500

(D)

45,000

(BI)

12,000

(IS)

100,000

Land

140,000

80,000


315,000

340,000


(252,000)

(130,000)


60,000 (150,000)

Bonds Payable

(70,000)

Credit

(D)

225,000

(IA)

20,000

(A)

9,000

(BI)

9,600

(100,000)


(200,000)


(200,000)


(10 0,00 0)


(474,000)

(40,000)


(150,000)

(EL)

120,000


(100,000)

(EL)

80,000


(200,000)

(EL)

160,000

(BI)

2,400

(A)

2,250

(IS) (EI)

100 ,00 0 8,000


(60 0,000) 360,000

Operating Expenses

140,000

Subsidiary Income

(72,000)


(38 0,0 00) 228,000 62,000

(A)

11,250

(CY)

72,000

60,000


30,000

(CY)

24,000


Consol.

0

843,500

Control.

843,500 (continued) Consol.

Account Titles

Income Statement

NCI

Retained Earnings

Balance Sheet


197,000


590,000


0

Land

220,000


655,000


(382,000)

Patent

262,500

Current Liabilities

(200,000)

Bonds Payable

(100,000)


(240,000)


(200,000)


(100,000)


(455,400)


(30,000)


(20,000)


(80,350)

Net Sales

(88 0,000)

Cost of Goods Sold

484,000

Operating Expenses

213,250

Subsidiary Income

0


60,000

Dividends Declared—S Co. Consolidated Net Income NCI

6,000 (182,750) 16,550

Controlling Interest Total NCI

(16,550)

166,200

(166,200) (140,900)


(140,900) (561,600)

(561,600) 0



(EL)

Eliminate 80% of the Seaman Company equity balances at the beginning of the year against the investment account.

(D)

Distribute the $225,000 excess of cost over book value to patent to Parent and NCI

(A)

Amortize the patent over 20 years, with $11,250 for 20X1 charged to retained earnings of Parent and Sub, and $11,250 for 20X2 to operating expenses.

(BI)


(IS)


(EI)


(IA)


Subsidiary Company Income Distribution Schedule Patent amortization 11,250 Internally generated net income Deferred profit in ending inventory 8,000 Realized profit in beginning inventory Adjusted income NCI Share NCI

90,000 12,000 82,750 20% 16,550

Parent Company Income Distribution Schedule Internally generated net income 80% ! Sub's adjusted income Controlling interest

DIF:

M

OBJ: 4-2

100,000 66,200 166,200


4. Selected information from the separate and consolidated balance sheets and income statements of Palo Alto, Inc. and its subsidiary, Stanford Co., as of December 31, 20X1, and for the year then ended is as follows: Palo Alto

Stanford

Consolidated

Balance sheet accounts: Accounts receivable Inventory Investment in Stanford Stockholders' equity

$ 26,000 30,000 67,000 154,000

$ 19,000 25,000 -50,000

$ 42,000 50,000 -154,000

Income statement accounts: Revenues Cost of goods sold Gross profit

$200,000 150,000 50,000

$140,000 110,000 30,000

$300,000 225,000 75,000

Equity in earnings of Stanford Net income

$ 9,000 $ 36,000

-$ 20, 000

-$ 36, 000

Additional information: During 20X1, Palo Alto sold goods to Stanford at the same markup on cost that Palo Alto uses for all sales. At December 31, 20X1, Stanford had not paid for all of these goods and still held 50% of them in inventory. Palo Alto acquired its interest in Stanford five years earlier (as of December 31, 20X1). Required:

For each of the following items, calculate the required amount. a.

The amount of intercompany sales from Palo Alto to Stanford during 20X1.

b.

The amount of Stanford's payable to Palo Alto for intercompany sales as of December 31, 20X1.

c.

In Palo Alto's December 31, 20X1, consolidated balance sheet, the carrying amount of the inventory that Stanford purchased from Palo Alto.

ANS: a. b. c.

DIF:

$200,000 + $140,000 - X = $300,000; X = $40,000 $26,000 + $19,000 - X = $42,000; X = $3,000 Intercompany sales = $40,000 50% held as ending interco inventory $20, 000 Gross profit (25%) (5,000) Cost of interco ending inventory $15,000 M

OBJ: 4-2 | 4-3

5. On January 1, 20X1, Pinto Company purchased an 80% interest in Sands Inc. for $1,000,000. The equity balances of Sands at the time of the purchase were as follows: Common stock ($10 par) Paid-in capital in excess of par Retained earnings

$100,000 400,000 500,000

Any excess of cost over book value is attributable to goodwill. No dividends were paid by either firm during 20X6. The following trial balances were prepared for Pinto Company and its subsidiary, Sands Inc., on December 31, 20X6:

Cash Accounts receivable Inventory Land Buildings and equipment Accumulated depreciation Investment in Sands Accounts payable Common stock, $10 par Paid-in capital in excess of par Retained earnings Sales Other income Cost of goods sold Other expenses Total

Pinto

San ds

120,000 240,000 200,000 600,000 1,100,000 (180,000) 1,000,000 (110,000) (800,000) (660,000) (1,340,000) (600,000) (40,000) 320,000 150,000 -

70,000 197,000 176,000 180,000 800,000 (120,000) (50,000) (100,000) (400,000) (650,000) (300,000) (15,000) 180,000 32,000 -

Sands sold a machine to Pinto Company for $40,000 on January 1, 20X6. The machine cost Sands $50,000, and $25,000 of accumulated depreciation had been recorded as of the sale date. The machine had a 5-year remaining life and no salvage value. Pinto Company is using straightline depreciation.

Since the purchase date, Pinto has sold merchandise for resale to Sands, Inc. at a mark-up on cost of 25% . Sales during 20X6 were $150,000. The inventory of these goods held by Sands was $15,000 on January 1, 20X6, and $18,000 on December 31, 20X6. Required: Prepare a consolidated income statement for 20X6, including income distribution schedules to support your distribution of income to the noncontrolling and controlling interest interests. ANS: Pinto Company and Subsidiary Sands Inc. Consolidated Income Statement For the Year Ended December 31, 20X6 Sales (600,000 300,000 150,000) Cost of goods sold (320,000 180,000 150,000 3,000 3,600) Gross profit Other expenses ($150,000 $32,000 $3,000) Operating income Other income ($40,000 $15,000 $15,000) Consolidated Net Income

$750,000 350,600 $399,400 179,000 $220,400 40,000 $260,400

Distribution of Consolidated Net Income: Noncontrolling interest Controlling interest

$ 18,200 $ 242,200

Deferred gain on sale of machine

Deferred profit in ending inventory

DIF:

M

Subsidiary Sands Inc. Income Distribution Internally generated $15,000 net income Gain on sale of machine realized through use Adjusted income Noncontrolling share Noncontrolling interest

Parent Pinto Company Income Distribution Internally generated $3,600 net income Realized profit in beginning inventory 80% Sands adjusted income of $91,000 Controlling interest

$103,000 3,000 $ 91,000 20% $ 18,20 0

$170,000 3,000 72,800 $242,200

OBJ: 4-2 | 4-3

6. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for $750,000. On this date Subsidiary had total owners' equity of $540,000. Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.

During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the simple equity method. On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 20X2. Subsidiary's usual gross profit on affiliated sales is 40%. On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December. On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of $20,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method. Required: Complete the Figure 4-3 worksheet for consolidated financial statements for the year ended December 31, 20X2. Figure 4-3

Trial Balance Parent Company

Sub. Company


100,000

80,000


139,000

450,000


880,000

Other Long-Term Investments

50,000

30 ,0 00

Land

140,000

70,000


315,000

400,000


(280,000)

(110,000)

Account Titles

Other Intangibles

60,000

Current Liabilities

(150,000)

Bonds Payable

(100,000)

Premium on Bonds Payable

(5,000)


(200,000)

Common Stock – P Co.

(200,000)

Other Paid in Capital – P Co.

(10 0,00 0)

Retained Earnings – P Co.

(479,000)

(100,000)

(150,000)

Common Stock – S Co.

(100,000)

Other Paid in Capital – S Co.

(200,000)

Retained Earnings – S Co.

(300,000)

Net Sales

(60 0,000)

(38 0,0 00)

Cost of Goods Sold

350,000

180,000

Operating Expenses

140,000

100,000

Subsidiary Income

(100,000)

Eliminations and Adjustments Debit

Credit

Gain on Sale of Equipment

(20,000)

Dividends Declared – P Co.

60,000

Dividends Declared – S Co.

30,000


0 (continued)


Other Long-Term Investments Land Buildings and Equipment Accumulated Depreciation

Other Intangibles Current Liabilities Bonds Payable Premium on Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Retained Earnings – P Co. Common Stock – S Co. Other Paid in Capital – S Co. Retained Earnings – S Co. Net Sales Cost of Goods Sold Operating Expenses Subsidiary Income Gain on Sale of Equipment Dividends Declared – P Co. Dividends Declared – S Co. Consolidated Net Income

Income Statement

NCI

Control.

Consol.

Retained Earnings

Balance Sheet

NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31


Trial Balance

Eliminations and

Parent Company

Sub. Company


100,000

80,000

(EI)

8,000


139,000

450,000

(IA)

20,000


880,000

(CY)

70,000

(EL)

600,000

(D)

210,000

(F1)

20,000

(BI)

4,000

(IS)

100,000

(F2)

4,000

(CY)

30,000

Account Titles


50,000

30 ,0 00

Land

140,000

70,000


315,000

400,000


(280,000)

(110,000)

Goodwill Other Intangibles

Adjustments Debit

(D) (F2)

Credit

10,000 4,000

(D)

200,000

(IA)

20,000

(BI)

4,000

60,000

Current Liabilities

(150,000)

Bonds Payable

(100,000)


(5,000)


(200,000)


(200,000)


(10 0,00 0)


(479,000)

(100,000)

(150,000)


(100,000)

(EL)

100,000


(200,000)

(EL)

200,000


(300,000)

(EL)

300,000

(38 0,0 00) 180,000

(IS) (EI)

100,000 8,000

Net Sales Cost of Goods Sold Operating Expenses Subsidiary Income

(60 0,000) 350,000 140,000

100,000

(100,000)

(CY)

100,000


(20,000)

(F1)

20,000


60,000

Dividends Declared – S Co. Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31

30,000

0

0

Consol. Account Titles

Income Statement

NCI

1,056,000

1,056,000 (continued)

Control.

Consol.

Retained Earnings

Balance Sheet


172,000


569,000


0


80,000

Land

220,000


695,000


(386,000)

Goodwill

200,000

Other Intangibles

60,000

Current Liabilities

(230,000)

Bonds Payable

(100,000)


(5,000)


(350,000)


(200,000)


(100,000)


(475,000)

Common Stock – S Co. Other Paid in Capital – S Co. Retained Earnings – S Co.

Net Sales

(88 0,000)

Cost of Goods Sold

434,000

Operating Expenses

236,000

Subsidiary Income

0


0


60,000

Dividends Declared – S Co. Consolidated Net Income NCI

(210,000) 0

Controlling Interest

210,000

(210,000)

Total NCI

0


(625,000)

(625,000) 0



(EL)

Eliminate the Subsidiary Company equity balances at the beginning of the year against the investment account.

(D)

Distribute the $210,000 excess of cost over book value land ($10,000) and to goodwill.

(BI)


(IS)


(EI)


(IA)


(F1)

Eliminate the $20,000 gain on sale of equipment.

(F2)

Eliminate the $4,000 of excess depreciation for 20X2 on the transferred equipment.

DIF:

M

OBJ: 4-2 | 4-3


7. On January 1, 20X1, Parent Company acquired 80% of the common stock of Subsidiary Company for $560,000. On this date Subsidiary had total owners' equity of $540,000, including retained earnings of $240,000. During 20X1, Subsidiary had net income of $60,000 and paid no dividends. Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill. During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the cost method. On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 20X2. Subsidiary's usual gross profit on affiliated sales is 40%. On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December. On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of $20,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method. Required: Complete the Figure 4-4 worksheet for consolidated financial statements for the year ended December 31, 20X2. Figure 4-4

Trial Balance Parent Company

Sub. Company


100,000

80,000


253,000

450,000


560,000


50,000

Account Titles

30 ,0 00


Credit

Land

140,000

70,000


315,000

400,000


(208,000)

(110,000)

Other Intangibles

60,000

Current Liabilities

(150,000)

Bonds Payable

(100,000)


(5,000)


(200,000)


(200,000)


(10 0,00 0)


(421,000)

(100,000)

(150,000)


(100,000)


(200,000)


(300,000)

Net Sales

(60 0,000)

(38 0,0 00)

Cost of Goods Sold

350,000

180,000

Operating Expenses

140,000

100,000

Dividend Income

(24,000)


(20,000)


60,000


30,000


0 (continued)

Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Company Other Long-Term Investments Land Buildings and Equipment Accumulated Depreciation

Other Intangibles

Consol.

Control.

Consol.

Income Statement

Retained Earnings

Balance Sheet

NCI

Current Liabilities Bonds Payable Premium on Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Retained Earnings – P Co. Common Stock – S Co. Other Paid in Capital – S Co. Retained Earnings – S Co.

Net Sales Cost of Goods Sold Operating Expenses Dividend Income Gain on Sale of Equipment Dividends Declared – P Co. Dividends Declared – S Co. Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31


Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Compa-

Trial Balance Parent Sub. Company Company 100,000 80,000 253,000 450,000


Credit

480,000 (EL)

(EI) (IA)

8,000 20,000

(D)

128,000

(F1)

20,000 30,000


50,000 140,000 315,000 (208,000)

Goodwill Other Intangibles Current Liabilities Bonds Payable Premium on Bonds Payable

60,000 (150,000) (100,000) (5,000)

30,000 70,000 400,000 (110,000)

(100,000)

(D)

10,000

(F2)

4,000

(D)

150,000

(IA)

20,000

Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Retained Earnings – P Co.

(200,000) (200,000)

(150,000)

(100,000) (421,000)


(BI)

3,200

(100,000)

(EL)

80,000

(200,000) (300,000)

(EL) (EL) (BI)

160,000 240,000 800

(IS) (EI)

100,000 8,000


(600,000) 350,000

(380,000) 180,000

Operating Expenses

140,000

100,000

Dividend Income

(24,000)

(CY2)

24,000

Gain on Sale of Equipment Dividends Declared – P Co. Dividends Declared – S Co.

(20,000) 60,000

(F1)

20,000

30,000

(CV)

48,000

(D)

32,000

(BI) (IS) (F2)

4,000 100,000 4,000

(CY2)

24,000


0

868,000

868,000

(continued)

Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Company

Consol. Income Statement

NCI

Control. Retained Earnings

Consol. Balance Sheet 172,000 683,000 0


80,000 220,000 695,000 (314,000)

Goodwill Other Intangibles Current Liabilities Bonds Payable Premium on Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Retained Earnings – P Co.

150,000 60,000 (230,000) (100,000) (5,000) (350,000) (200,000) (100,000)


(465,800) (20,000) (40,000) (91,200)


(880,000) 434,000

Operating Expenses

236,000

Dividend Income

0

Gain on Sale of Equipment Dividends Declared – P Co. Dividends Declared – S Co.

0


(210,000) 19,200 190,800

60,000 6,000

(19,200) (190,800) 164,400

0

0

596,600 0

(164,400) (596,600) 0

Eliminations and Adjustments: (CV)

Convert to the simple equity method as of January 1, 20X2. (80% of $60,000 increase in sub’s retained earnings from January 1, 20X1 to January 1, 20X2.)

(CY2)

Eliminate the current-year dividend income against dividends declared by Subsidiary.

(EL)

Eliminate 80% of the Subsidiary Company equity balances at the beginning of the year against the investment account.

(D)

Distribute the $150,000 excess of cost over book value to land ($8,000) and to goodwill; allocate to Parent and Sub $128,000 and $32,000 respectively.

(BI)

Eliminate the $4,000 of gross profit in the beginning inventory; allocate to Parent and Sub 80/20

(IS)


(EI)


(IA)


(F1)

Eliminate the $20,000 gain on sale of equipment

(F2)


Subsidiary Company Income Distribution Schedule Deferred profit in ending inventory 8,000 Internally generated net income Realized profit in beginning inventory Adjusted income NCI Share NCI

Deferred gain on sale

Parent Company Income Distribution Schedule 20,000 Internally generated net income Recognize 1/5 of gain

100,000 4,000 96,000 20% 19,200

130,000 4,000

80% ! Sub's adjusted income Controlling interest

DIF:

M

OBJ: 4-2 | 4-3

76,800 190,800

MSC: 80%; cost method

Scenario 4-2:

On January 1, 20X1, Powers Company acquired 80% of the common stock of Sculley Company for $195,000. On this date Sculley had total owners' equity of $200,000 (common stock, other paid-in capital, and retained earnings of $10,000, $90,000, and $100,000 respectively) . Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has a remaining life of five years and straight-line depreciation is used. The excess to the patents is to be amortized over 20 years. On July 1, 20X2 Sculley borrowed $100,000 from Powers with a 10% 1-year note; interest is due at maturity. On January 1, 20X2, Powers held merchandise acquired from Sculley for $10,000. During 20X2, Sculley sold merchandise to Powers for $50,000, $20,000 of which is still held by Powers on December 31, 20X2. Sculley's usual gross profit on affiliated sales is 50%. On December 31, 20X1, Powers sold equipment to S culley at a gain of $10,000. During 20X2, the equipment was used by Sculley. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value. Both companies have a calendar-year fiscal year. 8. Refer to Scenario 4-2. Assume that during 20X1 and 20X2, Powers has appropriately accounted for its investment in Sculley using the cost method. Required: a. Using the information above or on the Figure 4-5 worksheet, prepare a determination and distribution of excess schedule. b. Complete the Figure 4-5 worksheet for consolidated financial statements for the year ended December 31, 20X2. Figure 4-5

Trial Balance Powers Company

Sculley Company


145,000

55,000


249,000

205,000


195,000

Land

140,000

100,000


400,000

200,000


(150,000)

(50,000)

Current Liabilities

(150,000)

(120,000)

Bonds Payable

(100,000)

(50,000)

(50,000)

(20,000)

Account Titles

Other Long-Term Liabilities Common Stock – P Co.

(100,000)


Credit


(20 0,00 0)


(310,000)


(10,000)


(90,000)

Retained Earnings – S Co. Net Sales

(150,000) (61 0,000)

(36 5,0 00)

Cost of Goods Sold

360,000

190,000

Operating Expenses

150,000

70,000

Interest Revenue

(5,000)

Interest Expense Dividend Income Dividends Declared – P Co.

5,000 (24,000) 60,000


30,000


0 (continued)


Land Buildings and Equipment Accumulated Depreciation

Current Liabilities Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Retained Earnings – P Co.

Consol.

Control.

Consol.

Income Statement

Retained Earnings

Balance Sheet

NCI

Common Stock – S Co. Other Paid in Capital – S Co. Retained Earnings – S Co. Net Sales Cost of Goods Sold Operating Expenses Interest Revenue Interest Expense Dividend Income Dividends Declared – P Co. Dividends Declared – S Co.


ANS: a. Determination and distribution of excess schedule: Entity Parent Entity FV 243,750 195,000 Book value: Pd-In Capt 100,000 RE 1/1/X1 100,000 Book value: 200,000 160,000 Excess 43,750 35,000 Inventory 6,250 Equipment 12,500 Patent 25,000 Total excess distributed 43,750 Optional amortization schedule: Current Exp Prior* Equipment 2,500 2,500 Patent 1,250 1,250 3,750 3,750 P share 3,00 0 NCI share 750 *adjusted to respective R/E accounts ** adjusted to respective asset (or contra asset) accounts b.

NCI 48,750

40,000 8,750

Total** 5,000 2,500

For the worksheet solution, please refer to Answer 4-5.

Account Titles

Answer 4-5 Trial Balance Powers Sculley Company Company


Credit

Inventory, December 31 Other Current Assets Investment in Sub. Compa-

145,000 249,000

55,000 205,000

200,000 (EL) Land Buildings and Equipment ny Accumulated Depreciation

140,000 400,000 (CV) 195,000 40,000 (150,000)

100,000 200,000 (50,000)

(150,000) (100,000) (50,000) (100,000)

35,000

(F1) (A)

10,000 5,000

(D)

25,000

(A)

2,500

(LN1)

105,000

(D) (A) (BI) (F1)

5,000 3,000 4,000 10,000

(CV)

40,000

(10,000)

(EL)

8,000

(90,000) (150,000)

72,000 120,000 1,250 750 1,000 50,000 10,000

(D)

8,750

(BI) (IS) (F2)

5,000 50,000 2,000

(LN2)

5,000

(CY2)

24,000

(120,000) (50,000) (20,000)


(610,000) 360,000

(365,000) 190,000

(EL) (EL) (D) (A) (BI) (IS) (EI)

Operating Expenses

150,000

70,000

(A)

3,750

(LN2)

5,000

Interest Revenue Interest Expense Dividend Income Dividends Declared – P Co. Dividends Declared – S Co.

(D)

12,500 2,000

(200,000) (310,000)


10,000 105,000

(D) (F2)

Patents Current Liabilities Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Retained Earnings – P Co.

(EI) (LN1)

(5,000) 5,000 (24,000) 60,000

(CY2)

24,000

30,000




0

NCI

502,250


502,250 (continued) Consol. Balance Sheet 190,000 349,000 0


240,000 602,500 (203,000)

Patents

22,500


(165,000) (150,000) (70,000) (100,000) (200,000) (328,000)


(2,000) (18,000) (35,750)


(925,000) 505,000

Operating Expenses

221,750

Interest Revenue Interest Expense Dividend Income Dividends Declared – P Co. Dividends Declared – S Co.

0 0 0


(198,250) 18,250 180,000

60,000 6,000

(18,250) (180,000) 68,000

0

0

448,000 0

(68,000) (448,000) 0

Eliminations and Adjustments: (CV)

Convert to the simple equity method as of January 1, 20X2 (80% of $50,000 increase in retained earnings from January 1, 20X1 to January 1, 20X2).

(CY2)

Eliminate the current-year dividend income against dividends declared by Sculley.

(EL)

Eliminate 80% of the Sculley Company equity balances at the beginning of the year against the investment account.

(D)

Distribute the $43,750 excess of cost over book value to inventory, equipment, and patent; allocate to Parent and Sub $35,000 and $8,750 respectively NOTE: The $6,250 write up to inventory is charged to the two Retained Earnings accounts 80:20 since FIFO is used.

(A)

Amortize the equipment write up over 5 years and the patent over 20 years. Current amounts charged to operating expense; prior year’s amount allocated to Parent and Sub; t otals recorded as adjustments to the asset (or related contra account)

(LN1)

Eliminate $100,000 intercompany notes receivable and notes payable and $5,000 intercompany interest receivable and interest payable ($100,000 10% 6 months)

(LN2)

Eliminate $5,000 intercompany interest revenue and interest expense.

(BI)

Eliminate the $5,000 of gross profit in the beginning inventory; allocate to Parent and Sub

(IS)


(EI)


(F1)

Eliminate the $10,000 20X1 gain on sale of equipment

(F2)


Subsidiary Company Income Distribution Schedule Amort of e quip rest atement 2,500 Internal ly genera ted net in come Amort of patent r evaluation 1,250 Realized profit in b eginning inventory Deferred profit in ending inven 10,000 Adjusted income NCI Share NCI Parent Company Income Distribution Schedule Internally generated net income Recognize 1/5 of gain 80% ! Sub's adjusted income Controlling interest

DIF:

D

100,000 5,000 91,250 20% 18,250

105,000 2,000 73,000 180,000

OBJ: 4-2 | 4-3 | 4-5

9. Refer to Scenario 4-2. Assume that during 20X1 and 20X2, Powers has appropriately accounted for its investment in Sculley using the simple equity method. Required: a.

Using the information above or on the Figure 4-6 worksheet, prepare a determination and distribution of excess schedule.

b.

Complete the Figure 4-6 worksheet for consolidated financial statements for the year ended December 31, 20X2. Figure 4-6

Trial Balance Powers Company

Sculley Company


140,000

65,000


250,000

225,000


259,000

Land

140,000

100,000


400,000

200,000

Account Titles


Credit


(150,000)

(50,000)

Current Liabilities

(150,000)

(120,000)

Bonds Payable

(100,000)

(50,000)

(50,000)

(20,000)


(100,000)


(20 0,00 0)


(310,000)


(10,000)


(90,000)

Retained Earnings – S Co. Net Sales

(150,000) (61 0,000)

(36 5,0 00)

Cost of Goods Sold

360,000

190,000

Operating Expenses

150,000

70,000

Interest Revenue

(5,000)

Interest Expense Subsidiary Income

5,000 (24,000)


0

0

0 (continued)



Current Liabilities Bonds Payable Other Long-Term Liabilities

Consol.

Control.

Consol.

Income Statement

Retained Earnings

Balance Sheet

NCI

Common Stock – P Co. Other Paid in Capital – P Co. Retained Earnings – P Co.

Common Stock – S Co. Other Paid in Capital – S Co. Retained Earnings – S Co. Net Sales Cost of Goods Sold Operating Expenses Interest Revenue Interest Expense Subsidiary Income Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31 0

0

0

ANS: D&D Schedule Entity FV Book value: Pd-In Capt RE 1/1/X1 Book value: Excess Inventory Equipment Patent Total excess distributed

Entity 243,750 100,000 100,000 200,000 43,750 6,250 12,500 25,000 43,750

Parent 195,000

NCI 48,750

160,000 35,000

40,000 8,750

Prior * 2,500 1,250 3,750 3,00 0 750

Total ** 5,000 2,500

Optional amortization schedule:

Equipment Patent

Current Exp 2,500 1,250 3,750 P share NCI share

* adjusted to respective R/E accounts ** adjusted to respective asset (or contra asset) accounts b.

For the worksheet solution, please refer to Answer 4-6. Answer 4-6 Trial Balance

Eliminations and

0

Account Titles Inventory, December 31 Other Current Assets Investment in Sub. Compa-

Powers Company 140,000 250,000

Sculley Company 65,000 225,000

Adjustments Debit

Credit

80,000 (CY) Land Buildings and Equipment Accumulated Depreciation ny Patents Current Liabilities Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Retained Earnings – P Co.

140,000 400,000 (150,000)

100,000 200,000 (50,000)

315,000 (150,000) (100,000) (50,000) (100,000)

(120,000) (50,000) (20,000)

(200,000) (310,000)


(10,000) (90,000) (150,000)

10,000 105,000

(EL) (D)

200,000 35,000

(D) (F2)

12,500 2,000

(F1) (A)

10,000 5,000

(D)

25,000

(A)

2,500

(LN1)

105,000

(D) (A) (BI) (F1) (EL)

5,000 3,000 4,000 10,000 8,000 72,000 120,000 1,250 750 1,000 50,000 10,000

(D)

8,750

(BI) (IS) (F2)

5,000 50,000 2,000

(LN2)

5,000


(610,000) 360,000

(365,000) 190,000

(EL) (EL) (D) (A) (BI) (IS) (EI)

Operating Expenses

150,000

70,000

(A)

3,750

Interest Revenue Interest Expense Subsidiary Income

(5,000)

(LN2)

5,000

(CY)

80,000

5,000 (80,000)

(EI) (LN1)



Land


0

NCI

518,250


518,250 (continued) Consol. Balance Sheet 195,000 370,000 0

240,000

Buildings and Equipment Accumulated Depreciation

602,500 (203,000)

Patents

22,500


(165,000) (150,000) (70,000) (100,000) (200,000) (288,000)


(2,000) (18,000) (35,750)


(925,000) 505,000

Operating Expenses

221,750

Interest Revenue Interest Expense Subsidiary Income Consolidated Net Income NCI Controlling Interest Total NCI Ret. Earn. Contr. Int. 12-31

0 0 0 (198,250) 18,250 180,000

(18,250) (180,000) 74,000

0

0

468,000 0

(74,000) (468,000) 0

Eliminations and Adjustments: (CY) Eliminate the current-year entries made in the investment account and the subsidiary income account.

(EL)

Eliminate 80% of the Sculley Company equity balances at the beginning of the year against the investment account.

(D)


(A)

Amortize the equipment write up over 5 years and the patent over 20 years. Current amounts charged to operating expense; prior year’s amount allocated to Parent and Sub; t otals recorded as adjustments to the asset (or related contra account)

(LN1)

Eliminate $100,000 intercompany notes receivable and notes payable and $5,000 intercompany interest receivable and interest payable ($100,000 !10% ! _6 months)

(LN2)

Eliminate $5,000 intercompany interest revenue and interest expense.

(BI)


(IS)


(EI)


(F1)

Eliminate the $10,000 20X1 gain on sale of equipment

(F2)


Subsidiary Company Income Distribution Schedule Amort of e quip rest atement 2,500 Internal ly genera ted net in come Amort of patent r evaluation 1,250 Realized profit in b eginning inventory Deferred profit in ending inven 10,000 Adjusted income NCI Share NCI Parent Company Income Distribution Schedule Internally generated net income Recognize 1/5 of gain 80% ! Sub's adjusted income Controlling interest

DIF:

D

100,000 5,000 91,250 20% 18,250

105,000 2,000 73,000 180,000

OBJ: 4-2 | 4-3 | 4-5

10. On January 1, 20X1, Pep Company acquired 80% of the common stock of Sky Company for $195,000. On this date Sky had total owners' equity of $200,000 (common stock, other paid-in capital, and retained earning of $10,000, $90,000, and $100,000 respectively). Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has a remaining life of five years and straight-line depreciation is used. The excess attributable to the patents is to be amortized over 20 years. During 20X1 and 20X2, Pep has appropriately accounted for its investment in Sky using the simple equity method. On January 1, 20X2, Pep held merchandise acquired from Sky for $10,000. During 20X2, Sky sold merchandise to Pep for $50,000, $20,000 of which is still held by Pep on December 31, 20X2. Sky's usual gross profit on affiliated sales is 50%. On December 31, 20X1, Pep sold equipment to Sky at a gain of $10,000. During 20X2, the equipment was used by Sky. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value. Required: a.

Using the information above or on the Figure 4-8 worksheet, prepare a determination and distribution of excess schedule.

b.

Complete the Figure 4-8 worksheet for consolidated financial statements for the year ended December 31, 20X2. Figure 4-8

Trial Balance

Eliminations and

Pep Statement - Accounts

Company

Sky Company

Income Statement: Net Sales

(61 0,000)

(36 5,0 00)

Cost of Goods Sold

360,000

190,000

Operating Expenses

150,000

70,000

Subsidiary Income

(84,000)

Net Inco me

(18 4,000)

(10 5,0 00)

NCI Interest NCI NCI NCI Controlling interest Retained Earnings Statement: Balance, January 1 – P Co.

(350,000)

Balance, January 1 – S Co.

Net Inco me (From Abo ve) Dividends Declared – P Co.

(150,000)

(18 4,000) 60,000

Dividends Declared – S Co. Balance, December 31

(10 5,0 00) 30,000

(474,000)

(225,000)


140,000

60,000


249,000

205,000


295,000

Land

140,000

100,000

Building and Equipment

400,000

200,000


(150,000)

(50,000)

Current Liabilities

(150,000)

(120,000)

Bonds Payable

(100,000)

(50,000)

(50,000)

(20,000)

Consolidated Balance Sheet:


(100, 000)


(20 0,00 0)


(10,000)


(90,000)

Retained Earnings - 12/31

(474,000)

(225,000)

Adjustments Debit Debit

Credit

(From Above) Total NCI 0

0 (continued)

Consol. Statement - Accounts Income Statement: Net Sales Cost of Goods Sold Operating Expenses Subsidiary Income NCI in In come Net Inco me Retained Earnings Statement: Balance, January 1 – P Co.


Net Inco me (From Abo ve) Dividends Declared – P Co. Dividends Declared – S Co. Balance, December 31 Consolidated Balance Sheet: Inventory, December 31 Other Current Assets Investment in Sub. Company

Land Building and Equipment Accumulated Depreciation

Current Liabilities Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Common Stock – S Co. Other Paid in Capital – S Co.

NCI

Financial Statements

Retained Earnings - 12/31 (From Above) Total NCI

ANS: Entity Parent D&D Schedule Entity FV 243,750 195,000 Book value: Pd-In Capt 100,000 RE 1/1/X1 100,000 Book value: 200,000 160,000 Excess 43,750 35,000 Inventory 6,250 Equipment 12,500 Patent 25,000 Total excess distributed 43,750 Optional amortization schedule: Current Exp Prior* Equipment 2,500 2,500 Patent 1,250 1,250 3,750 3,750 P share 3,000 NCI share 750 *adjusted to respective R/E accounts **adjusted to respective asset (or contra asset) accounts b.

NCI 48,750

40,000 8,750

Total** 5,000 2,500

For the worksheet solution, please refer to Answer 4-8. Answer 4-8 Trial Balance Pep Sky

Statement - Accounts Income Statement: Net Sales Cost of Goods Sold Operating Expenses Subsidiary Income Net Inco me NCI (see IDS below) Controlling Interest (see IDS) Ret. Earnings Statement: Balance, January 1 – P Co.


Company

Eliminations and Adjustments

Company

Credit Credit

Debit

(61 0,000) 360,000

(36 5,0 00) 190,000

(IS) (EI)

50,00 0 10,000

150,000

70,000

(A)

3,750

(84,000) (18 4,000)

(CY)

84,000

(10 5,0 00)

(D) (A) (BI) (F1)

5,000 3,000 4,000 10,000

(EL) (BI) (D) (A)

120,000 1,000 1,250 750

(350,000)

(150,000)

(BI) (IS) (F2)

5,000 50,000 2,000

(D)

8,750

Net Inco me (From Abo ve) Dividends Declared – P Co. Dividends Declared – S Co. Balance, December 31 Consolidated Balance Sheet: Inventory, December 31 Other Current Assets Investment in Sub. Co.


(18 4,000) 60,000

(10 5,0 00) 30,000 (225,000)

(CY)

24,000

140,000 249,000 295,000

60,000 205,000

(EI)

10,000

(CY) (EL) (D)

60,000 200,000 35,000

140,000 400,000 (150,000)

100,000 200,000 (50,000)

(474,000)

Patents Current Liabilities Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Common Stock – S Co. Other Paid in Capital – S Co.

(150,000) (100,000) (50,000) (100, 000) (20 0,00 0)

Ret. Earnings - December 31 (From Above) Total NCI

(474,000)

(225,000)

0

0

Statement - Accounts Income Statement: Net Sales Cost of Goods Sold

(10,000) (90,000)

NCI

(F1) (A)

10,000 5,000

(D)

25,000

(A)

2,500

(EL) (EL)

8,000 72,000

412,250

Consol. Financial Statements (92 5,0 00) 505,000 221,750

(19,250)

Ret. Earnings Statement: Balance, January 1 – P Co.

0 (19 8,2 50) (179,000)

(328,000)


(35,750)

Net Inco me (From Abo ve) Dividends Declared – P Co. Dividends Declared – S Co. Balance, December 31

(19 ,250)

Consolidated Balance Sheet: Inventory, December 31

12,500 2,000

(120,000) (50,000) (20,000)

Operating Expenses Subsidiary Income Net Inco me Distribution ( see IDS)

(D) (F2)

6,000 (49,000)

(17 9,0 00) 60,000 (447,000)

190,000

412,250 (continued)

Other Current Assets Investment in Sub. Co.

454,000 0


240,000 602,500 (203,000)

Patents

22,500

Current Liabilities Bonds Payable Other Long-Term Liabilities Common Stock – P Co. Other Paid in Capital – P Co. Common Stock – S Co. Other Paid in Capital – S Co. Ret. Earnings - 12/31/X2 (From Above) Total NCI

(270,000) (150,000) (70,000) (100 ,000) (200,000) (2,000) (18,000) (49,000)

(447,000)

69,000 0

(69,000) 0

Eliminations and Adjustments:

(CY)

Eliminate the current-year entries made in the investment account and the subsidiary income account.

(EL)

Eliminate 80% of the Sky Company equity balances at the beginning of the year against the investment account.

(D)


(A)

Amortize the equipment write up over 5 years and the patent over 20 years. Current amounts charged to operating expense; prior year’s amount allocated to Parent and Sub; totals recorded as adjustments to the asset (or related contra account)

(BI)


(IS)


(EI)


(F1)

Eliminate the $10,000 20X1 gain on sale of equipment.

(F2)


Subsidiary Company Income Distribution Schedule Amort of e quip rest atement 2,500 Internal ly genera ted net in come

105,000

Ch_04

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