SMch05Beams

Chapter 5 INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES Answers to Questions 1

Profits and losses on sales between affiliates are realized for consolidated statement purposes when the purchasing affiliate resells the merchandise to parties outside of the consolidated entity. If all merchandise sold to affiliates is resold to outside parties in the same period, there will be no unrealized profit to eliminate in preparing the consolidated financial statements.

2

Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits according to GAAP.

3

The amount of unrealized profit to be eliminated in the preparation of consolidated financial statements is not affected by the existence of a noncontrolling interest. All unrealized profit must be eliminated. In the case of upstream sales, however, the unrealized profit should be allocated between controlling and noncontrolling interests.

4

The elimination of intercompany sales and purchases does not affect consolidated net income. This is because equal amounts are deducted from sales and cost of sales and the net effect on consolidated net income is nil. The importance of the elimination lies in a correct statement of consolidated sales and cost of sales.

5

Consolidated working capital is not affected by the elimination of intercompany accounts receivable and accounts payable balances. Since equal amounts are deducted from current assets and current liabilities, the effect on the computation "current assets less current liabilities" is nil.

6

Upstream sales are sales from subsidiary to parent. Downstream sales are sales from parent to subsidiary. The importance of this designation lies in the fact that the profit or loss on such transactions is the selling affiliate's profit or loss. In the case of unrealized profit or loss on downstream sales, all the profit or loss is assigned to the parent-seller. But unrealized profit or loss on upstream sales is profit or loss of the subsidiary-seller and is assigned to the parent and noncontrolling interest in relation to their proportionate holdings.

7

Yes. If unrealized profits are not eliminated at year end, consolidated net income will be overstated in 2011. The ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the beginning inventory will understate consolidated net income in 2012. The analysis of the effect of unrealized inventory profits on consolidated net income is basically the same as the analysis for inventory errors. Like inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting periods. Consolidated net income for 2013 is unaffected.

8

The noncontrolling interest share is affected by upstream sales if the merchandise has not been resold by the parent to outside parties by the end of the accounting period. This is because the noncontrolling interest share is based on the income of the subsidiary. If the subsidiary has unrealized profit from intercompany sales, its realized income will be less than its reported income. The noncontrolling interest share should be based on the realized income of the subsidiary.

©2011 Pearson Education, Inc. publishing as Prentice Hall 5-1

5-2

Intercompany Profit Transactions — Inventories

9

A parent's investment income and investment accounts are adjusted for unrealized profits on intercompany sales to subsidiaries in accordance with the one-line consolidation concept. The parent reduces its investment and investment income accounts for the full amount of the unrealized profits in the year of intercompany sale. When the goods are sold to outside parties by the subsidiary, the profits of the parent are realized and the parent increases its investment and investment income accounts.

10

Combined cost of goods sold is overstated when there are unrealized profits in the beginning inventory and understated when there are unrealized profits in the ending inventory. The elimination of unrealized profits in the beginning inventory reduces (credits) cost of goods sold and the elimination of unrealized profits in the ending inventory increases (debits) cost of goods sold.

11

The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling interest or by the direction of the intercompany sales. All unrealized profit from both upstream and downstream sales is eliminated from consolidated cost of goods sold.

12

Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is eliminated by reducing (crediting) cost of sales and debiting the investment account if a correct equity method has been used and the intercompany sales are downstream. In the case of upstream sales, cost of sales is credited and the noncontrolling interest and the investment account are debited proportionately. .

13

There are two equally good approaches for computing noncontrolling interest share when there are unrealized profits from upstream sales in both beginning and ending inventories. One approach is to compute realized income of the subsidiary by adding unrealized profits in the beginning inventory to reported subsidiary net income and deducting unrealized profits in the ending inventory. The noncontrolling interest share is then equal to the realized income of the subsidiary multiplied by the noncontrolling interest percentage. The other approach is to compute the noncontrolling interest percentage in reported subsidiary net income, in unrealized profits in beginning inventory, and in unrealized profits in ending inventory. Noncontrolling interest share is then computed by adding the noncontrolling interest percentage in unrealized profits in the beginning inventory to the noncontrolling interest share of reported income, and subtracting the noncontrolling interest percentage relating to the unrealized profits in the ending inventory.

14

The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a convenience, but it does not result in incorrect measurements of consolidated net income as long as the unrealized profits at any statement date are correctly determined. This is because any unrealized profits in beginning inventory that are considered realized are credited to cost of sales. The same items will appear as unrealized profits in the ending inventory if they remain unsold, and the elimination of these items results in debiting cost of sales for the same amount. Thus, the workpaper effects are offsetting as illustrated in the following workpaper entries, which assume $5,000 unrealized profits from downstream sales. Investment in subsidiary (retained earnings) Cost of sales

5,000 5,000

To eliminate unrealized profit in beginning inventory.

Cost of sales

5,000 Inventory

5,000

To eliminate unrealized profit in ending inventory.

©2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 5

5-3

SOLUTIONS TO EXERCISES Solution E5-1 1 2 3 4

b d a c

5 6 7 8

c a a c

Solution E5-2 [AICPA adapted] 1

a

2

c Unrealized profits from intercompany sales with Ken are eliminated from the ending inventory: $960,000 combined current assets less $36,000 unrealized profit ($180,000 × 20%).

3

c Combined cost of sales of $2,250,000 less $750,000 intercompany sales

Solution 5-3 1

d Pil's separate income (in thousands) Add: Share of Sil's income ($1,000 × 100%)

$2,000 1,000

Add: Realization of profit deferred in 2011 $3,000 - ($3,000/150%)

1,000

Less: Unrealized profit in 2012 inventory $2,400 - ($2,400/150%)

2

3

(800)

Controlling share of consolidated net income

$3,200

d Combined sales Less: Intercompany sales

$2,800 (100)

Consolidated sales

$2,700

c Combined cost of sales Less: Intercompany purchases

$1,360 (100)

Less: Unrealized profit in beginning inventory

(8)

Add: Unrealized profit in ending inventory

20


5-4


Consolidated cost of sales

$1,272


Chapter 5

5-5

Solution E5-4 1

b Pid's share of Sed's income ($120,000 × 80%) Less: Unrealized profit in ending inventory

$

($40,000 × 50% unsold × 80% owned)

2

(16,000)

Income from Sed

$

80,000

d Combined cost of sales Less: Intercompany sales

$

900,000 (200,000)

Add: Unrealized profit in ending inventory

3

96,000

20,000


$

720,000

b Reported income of Sed Unrealized profit

$

120,000 (20,000)

Sed's realized income

100,000

Noncontrolling interest percentage Noncontrolling interest share

20% $

20,000

Solution E5-5 1

2

c Combined sales Less: Intercompany sales

$1,800,000 (400,000)

Consolidated sales

$1,400,000

c Unrealized profit in beginning inventory $100,000 - ($100,000/125%)

$

20,000

$

25,000

Unrealized profit in ending inventory $125,000 - ($125,000/125%) 3

b Combined cost of goods sold Less: Intercompany sales

$1,440,000 (400,000)


5-6


Less: Unrealized profit in beginning inventory $100,000 - ($100,000/125%)

(20,000)

Add: Unrealized profit in ending inventory $125,000 - ($125,000/125%) Consolidated cost of goods sold

25,000 $1,045,000


Chapter 5

5-7

Solution E5-6 1

a Pat's separate income Add: Income from Sue (below)

$200,000 144,550


$344,550

Sue's reported income Less: Patent amortization

$200,000 (20,000)

Add: Unrealized profit in beginning inventory [$112,500 - ($112,500/150%)]

37,500

Less: Unrealized profit in ending inventory [$33,000 - ($33,000/150%)]

2

(11,000)

Sue’s adjusted and realized income

$206,500

Pat’s 70% controlling share of Sue’s realized income Noncontrolling interest share (30%)

$144,550 $ 61,950

c Pac's share of Slo's reported net loss ($150,000 loss × 60%)

$(90,000)

Add: Unrealized profit in ending inventory ($200,000 × 1/4 unsold) Income from Slo Pac's separate income

3

(50,000) (140,000) 300,000


$160,000

b San's reported net income Add: Realized profit in beginning inventory

$300,000

$150,000 - ($150,000/1.25)

30,000

Less: Deferred profit in ending inventory $200,000 - ($200,000/1.25) Income from San

(40,000) $290,000


5-8


Par’s 75% controlling share of San’s income

$217,500

Noncontrolling interest share (25%)

$ 72,500

Solution E5-7 (in thousands) Pan's separate income Add: 80% of She's reported income

2011 900

2012 $1,200

2013 $1,050

1,200

1,320

1,140

90

120

$

Add: Realization of profits in beginning inventory Less: Unrealized profits in ending Inventory Controlling share of consolidated NI

Noncontrolling interest share 1,500 x 20% 1,650 x 20% 1,425 x 20% Consolidated net income

(90) $2,010

(120) $2,490

(60) $2,250

300 330 285 $2,310

$2,820


$2,535

Chapter 5

5-9

Solution E5-8 Pic Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 (in thousands) Sales ($800 + $200 - $80 intercompany sales) Cost of sales ($480 - $80 intercompany

$

920

purchases + $20 unrealized profit in ending inventory)

(420)

Gross profit

500

Other expenses ($200 + $60)

(260)

Cnsolidated net income

240

Less: Noncontrolling interest share ($60 × 20%)

(12)


$

228

Solution E5-9 1

Noncontrolling interest share Sev's reported net income Add: Intercompany profit from upstream sales in

$ 50,000

beginning inventory

5,000

Less: Intercompany profit from upstream sales in ending inventory

2

(10,000)

Sev’s adjusted and realized income

$ 45,000

Noncontrolling interest share (40%)

$ 18,000

Consolidated sales Combined sales Less: Intercompany sales

$1,250,000 100,000

Consolidated sales

$1,150,000

Consolidated cost of sales Combined cost of sales Less: Intercompany sales

$

650,000 (100,000)

Add: Intercompany profit in ending inventory

10,000

Less: Intercompany profit in beginning inventory

(5,000)


5-10



$

555,000

$

300,000

Total Consolidated Income Combined income Less: Intercompany profit in ending inventory

(10,000)

Add: Intercompany profit in beginning inventory Total Consolidated Income

5,000 $


295,000

Chapter 5

5-11

Solution E5-10 Pap Corporation and Subsidiary Consolidated Income Statement December 31, 2013 (in thousands) Sales ($2,000 + $1,000 - $180 intercompany) Cost of sales ($800 + $500 - $180 intercompany -

$2,820

$20 unrealized profit in beginning inventory + $30 unrealized profit in ending inventory

(1,130)

Gross profit

1,690

Depreciation expense

(340)

Other expenses ($180 + $120)

(300)

Total consolidated income

1,050

Less: Noncontrolling interest share ($300 + $20 profit in beginning inventory - $30 profit in end. inventory) × 20% Controlling interest share of consolidated net income

(58) $

992

Supporting computations Cost of investment in Sak at January 1, 2012

$ 1,200

Implied fair value of Sak ($1,200 / 80%)

$ 1,500

Book value of Sak Goodwill

$

(1,400) 100

Solution E5-11 1

b Income as reported Add: Realization of profits in beginning inventory

$

$120,000 - ($120,000/1.2)

200,000 20,000

Less: Unrealized profits in ending inventory $360,000 - ($360,000/1.2) Realized income


(60,000) 160,000

5-12


Percent ownership Income from Sue 2

c Sue's equity as reported ($3,400,000 + $2,100,000) Less: Unrealized profit in ending inventory Realized equity

60% $

96,000

$5,500,000 (60,000) 5,440,000

Noncontrolling share Noncontrolling interest December 31, 2011 3

b Realized equity Controlling share Investment balance December 31, 2011

40% $2,176,000

$5,440,000 60% $3,264,000

Note: The excess fair value over book value is fully amortized. Therefore, the investment balance of $3,264,000 plus the noncontrolling interest of $2,176,000 is equal to the $5,440,000 realized equity at the balance sheet date.


Chapter 5

5-13

Solution E5-12 Pul Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 Sales ($2,760,000 - $240,000 intercompany sales) Cost of sales ($1,840,000 - $240,000 - $10,000a + $24,000b)

$2,520,000

Gross profit

(1,614,000) 906,000

Operating expenses

(320,000)

Total consolidated income

586,000

Less: Noncontrolling interest share [$80,000 - ($24,000 × .2)] Controlling share of consolidated net income a b

(75,200) $

510,800

Unrealized profit in beginning inventory (downstream) ($360,000 - $320,000) × .25 = $10,000 Unrealized profit in ending inventory (upstream ($240,000 - $180,000) × .4 = $24,000

SOLUTIONS TO PROBLEMS Solution P5-1 Por Corporation and Subsidiary Consolidated Statement of Income and Retained Earnings for the year ended December 31, 2012 Sales ($6,500,000 + $3,250,000 - $400,000 intercompany sales) Less: Cost of sales ($4,000,000 + $1,950,000 - $400,000 inter-

$9,350,000

company purchases - $60,000 unrealized profit in beginning inventory + $80,000 unrealized profit in ending inventory) Gross profit Other expenses ($1,700,000 + $800,000) Consolidated net income

(5,570,000) 3,780,000 (2,500,000) 1,280,000

Noncontrolling interest share($500,000+$60,000 - $80,000) × 10% Controlling share of consolidated net income Add: Beginning consolidated retained earnings

(48,000) 1,232,000 1,846,000

Less: Dividends for the year


(500,000)

5-14


Consolidated retained earnings December 31

$2,578,000

Solution P5-2 1

Consolidated cost of sales — 2013 Combined cost of sales ($625,000 + $300,000) Less: Intercompany purchases

$

Add: Profit in ending inventory

24,000

Less: Profit in beginning inventory Consolidated cost of sales 2

Noncontrolling interest share — 2013 Sam's net income ($600,000 - $300,000 - $150,000) Add: Profit in beginning inventory

925,000 (300,000)

(12,000) $

637,000

$

150,000 12,000

Less: Profit in ending inventory

(24,000)

Sam's realized income

138,000

Noncontrolling interest percentage Noncontrolling interest share

10% $


13,800

Chapter 5

5-15

Solution P5-2 (continued) 3

Consolidated Controlling share of NI— 2013 Consolidated sales ($900,000 + $600,000 - $300,000) Less: Consolidated cost of sales

$1,200,000 (637,000)

Less: Consolidated expenses ($225,000 + $150,000)

(375,000)

Less: Noncontrolling interest share Controlling share of consolidated net income Alternatively, Put's separate income Add: Income from Sam Controlling share of consolidated net income 4

Noncontrolling interest at December 31, 2013 Equity of Sam December 31, 2013 Less: Unrealized profit in ending inventory

(13,800) $

174,200

$

50,000 124,200

$

174,200

$

520,000 (24,000)

Noncontrolling interest percentage Noncontrolling interest December 31

10% $

49,600

Solution P5-3 1 2012

Inventories appearing in consolidated balance sheet at December 31, Beginning inventory — Pot ($120,000 - $8,000a) Beginning inventory — San ($77,500 - $15,500b)

$112,000 62,000

Beginning inventory — Tay ($48,000 - 0) Inventories December 31

48,000 $222,000

Intercompany profit: a

b

Pot: Inventory acquired intercompany ($120,000 × 40%) Cost of intercompany inventory ($48,000/1.2)

$ 48,000 (40,000 )

Unrealized profit in Pot's inventory

$

San: Inventory acquired intercompany ($77,500 × 100%) Cost of intercompany inventory ($77,500/1.25)

$ 77,500 (62,000 )


8,000

5-16

Intercompany Profit Transactions — Inventories Unrealized profit in San's inventory

2 2013

$ 15,500

Inventories appearing in consolidated balance sheet at December 31, Ending inventory — Pot ($108,000 - $9,000c) Ending inventory — San ($62,500 - $12,500d)

$ 99,000 50,000

Ending inventory — Tay ($72,000 - 0) Inventories December 31

72,000 $221,000

Intercompany profit: c

d

Pot: Inventory acquired intercompany ($108,000 × 50%) Cost of intercompany inventory ($54,000/1.2)

$ 54,000 (45,000 )

Unrealized profit in Pot's inventory

$

San: Inventory acquired intercompany ($62,500 × 100%) Cost of intercompany inventory ($62,500/1.25)

$ 62,500 (50,000 )

Unrealized profit in San's inventory

$ 12,500


9,000

Chapter 5

5-17

Solution P5-4 1

Pli's income from Stu 75% of Stu's net income

2011 2012 900,000 $1,012,500 $

$

2013 787,500

Unrealized profit in December 31, 2011 inventory (downstream) ($600,000 × 1/2) × 100%

(300,000)

300,000

Unrealized profit in December 31, 2012 inventory (upstream) $300,000 × 75% Pli's income from Stu

2

$

225,000

600,000 $1,087,500 $1,012,500

Pli's net income Pli's separate income Add: Income from Stu Pli's net income

3

(225,000)

$5,400,000 $5,100,000 $6,000,000 600,000

1,087,500

1,012,500

$6,000,000 $6,187,500 $7,012,500

Consolidated net income Separate incomes of Pli and Stu combined

$6,600,000 $6,450,000 $7,050,000

Unrealized profit in December 31, 2011 inventory

(300,000)

300,000

Unrealized profit in December 31, 2012 inventory Total consolidated income

(300,000) 6,300,000

6,450,000

300,000 7,350,000

Less: Noncontrolling interest share 2011 $1,200,000 × 25% 2012 ($1,350,000 - $300,000) × 25%

(300,000) (262,500)

2011 ($1,050,000 + $300,000) × 25% ©2011 Pearson Education, Inc. publishing as Prentice Hall

(337,500)

5-18


Controlling share of net income

$6,000,000 $6,187,500 $7,012,500


Chapter 5

5-19

Solution P5-5 Pan Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Adjustments and Pan 100% Sal Eliminations Income Statement Sales

$

800

$ 400

Income from Sal

102

Cost of sales

400 *

200 *


110 *

40*

Other expenses

192 *

60*

Net income

$

200

Retained Earnings Retained earnings — Pan

$

600

Retained earnings — Sal

100ü

Dividends

100 *

50*

Balance Sheet Cash

$

54

Receivables — net

12

a 120 c 20

472 * 150 *

f

6

258 * $

200

600

200ü

700

b

$ 100

Net income

$

$1,080

d 102

$ 380

Retained earnings December 31

a 120

Consolidated Statements

e 380 200 d

50

100 *

$ 430

$

700

$

$

91

37

90

60

g

17

133

100

80

b

12

168

Other assets

70

90

160

Land

50

50

100

Buildings — net

200

150

350

Equipment — net

500

400

900

Investment in Sal

736

Inventories

c

20

d 52 e 704


5-20


Patents

e

Accounts payable

$1,800

$ 867

$

$

160

47

Other liabilities

340

90

Common stock, $10 par

600

300

Retained earnings

700ü

430ü

$1,800

24

f

6

18 $1,920

g

17

$

190 430

e 300

$ 867

600 700 $1,920

Supporting computations Unrealized profit in beginning inventory ($40,000 × 1/2) = $20,000 Unrealized profit in ending inventory ($48,000 × 1/4) = $12,000 Sal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patent amortization equals $102,000 income from Sal.


Chapter 5

5-21

Solution P5-6 Pay Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Adjustments and Pay Sue 75% Eliminations Income Statement Sales

$1,200

$ 800

Income from Sue

205

Cost of sales

540 *

420 *

Operating expenses

290 *

80*

a 260

$1,740

d 205 b

40

a 260 c 20

$

575ü

Retained Earnings Retained earnings — Pay

$

365

f

Retained earnings — Sue Controlling share of NI

575ü

300ü

Dividends

300 *

100 *

$

650

$

75* 575

$

365

75

$ 300ü

$ 180

720 * 370 *

Consolidated net income Noncontrolling int.share Controlling share of NI

Consolidated Statements

e 180 575 d f

75 25

300 *


$

640

$ 380

$

640

Balance Sheet Cash

$

170

$

$

230

Accounts receivable Dividends receivable

330

60 200

30

g

30

h

30

b

40

500

Inventories

120

160

Land

160

100

260

Buildings — net

460

200

660

Equipment — net

400

280

680

Investment in Sue

770

c

20

d 130 e 660


240

5-22


Goodwill

e 400 $2,440

$1,000

$

450

$ 200

g

30

Dividends payable

140

40

h

30

Other liabilities

310

80


900

300

Retained earnings

640ü

380ü

Accounts payable

$2,440

400 $2,970

$

620 150 390

e 300

900 640

$1,000

Noncontrolling interest January 1

e 220

Noncontrolling interest December 31

f

50

270 $2,970

*

Deduct

Supporting computations Investment in Sue at January 1, 2011 Implied fair value of Sue ($600,000 / 75%)

$600,000 $800,000

Book value of Sue Goodwill

400,000 $400,000


Chapter 5

5-23

Solution P5-7 Preliminary computations Investment cost Implied fair value of San

$2,700,000 $3,000,000

Less: Book value of San Patents

$

Patent amortization Upstream sales Unrealized $280,000 Unrealized $420,000

2,500,000 500,000

$500,000/10 years = $50,000 per year

profit in December - ($280,000 ÷ 1.4) profit in December - ($420,000 ÷ 1.4)

31, 2011 inventory of Pol = $80,000 31, 2012 inventory of Pol = $120,000

Income from San San's reported net income Less: Patent amortization

$1,000,000 (50,000)

Less: Unrealized profit in ending inventory

(120,000)

Add: Unrealized profit in beginning inventory

80,000

San’s adjusted and realized income

$

Pol’s 90% controlling share of San’s income 10% noncontrolling interest share of San’s income

$ 819,000 $ 91,000

Investment balance Initial investment cost Increase in San's net assets from December 31, 2010

$2,700,000

to December 31, 2012 ($700,000 × 90%)

910,000

630,000

Patent amortization for 2 years (90%)

( 90,000)

Unrealized profit in December 31, 2012 inventory

(108,000)

Investment balance December 31, 2012

$3,132,000


5-24


Solution P5-7 (continued) Pol Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) Pol Income Statement Sales

$8,190

Income from San

Adjustments and Eliminations

San 90% $5,600

819

a 5,600 d

819

Cost of sales

5,460*

4,000*

b

120

Other expenses

1,544*

600*

f

50

Consolidated Statements $ 8,190

a 5,600 c 80

3,900* 2,194 *

Consolidated net income

$ 2,096

Noncontrolling int.share Controlling share of NI

$ 2,005

h

Retained Earnings Retained earnings — Pol

$ 1,200

Retained earnings — San

91

91* $ 2,005

$1,000

$ 1,200 $

700

Controlling share of NI

2,005ü

1,000ü

Dividends

1,000*

500*

e

700 2,005 d h

450 50

1,000*


$ 2,205

$1,200

$ 2,205

Balance Sheet Cash

$

$

$ 1,253

753

500

Inventory

420

800

b

120

1,100

Other current assets

600

200

g

100

700

Plant assets — net

3,000

3,000

Investment in San

3,132

Patents

6,000 c

72

e

450

d 369 e 2,835 f 50


400

Chapter 5

5-25 $7,905

$4,500

$ 1,700

$1,300

Capital stock

4,000

2,000

Retained earnings

2,205ü

1,200ü

Current liabilities

$ 7,905

Noncontrolling interest January 1 Noncontrolling interest December 31

$ 9,453

g

100

$ 2,900

e 2,000

4,000 2,205

$4,500

c

8

e

315

h

41

348 $ 9,453

*

Deduct


5-26


Solution P5-8 Pan Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2012 (in thousands) 100% Sal

Pan Income Statement Sales

$

800

$

400

Adjustments and Eliminations a 120

Consolidated Statements $1,080

Income from Sal

108

Cost of sales

400 *

200 *


110 *

40*

150 *

Other expenses

192 *

60*

252 *

Net income

$

206

Retained Earnings Retained earnings — Pan

$

606

Retained earnings — Sal

d 108

$

b

12

a 120 c 20

100

472 *

$

206

606 $

380

Net income

206ü

100ü

Dividends

100 *

50*

e 380 206 d

50

100 *


$

712

$

430

$

712

Balance Sheet Cash

$

54

$

37

$

91

Receivables — net

90

60

f

17

133

100

80

b

12

168

Other assets

70

90

160

Land

50

50

100

Buildings — net

200

150

350

Equipment — net

500

400

900

Inventories


Chapter 5

5-27

Investment in Sal

748

Goodwill

Accounts payable

$1,812

$

867

$

$

47

160

c

20

e

30

d 58 e 710 30 $1,932

f

17

$

190

Other liabilities

340

90


600

300

Retained earnings

712

430

712

867

$1,932

$1,812

$

430 e 300

600

Supporting computations Unrealized profit in beginning inventory ($40,000 × 1/2) = $20,000 Unrealized profit in ending inventory ($48,000 × 1/4) = $12,000 Sal's income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory equals Income from Sal $108,000.


5-28


Solution P5-9 Preliminary computations Investment cost Implied fair value of San ($2,700,000 / 90%)

$2,700,000 $3,000,000

Less: Book value of San Goodwill

$

Upstream sales Unrealized $280,000 Unrealized $420,000

profit in December - ($280,000 ÷ 1.4) profit in December - ($420,000 ÷ 1.4)

2,500,000 500,000

31, 2013 inventory of Poe = $80,000 31, 2014 inventory of Poe = $120,000

Income from San San's reported net income Less: Unrealized profit in ending inventory

$1,000,000 (120,000)

Add: Unrealized profit in beginning inventory

80,000

San’s adjusted and realized income

$

960,000

Poe’s 90% controlling interest share of San’s income 10% noncontrolling interest share of San’s income

$ $

864,000 96,000

Investment balance Initial investment cost Increase in San's net assets from December 31, 2011

$2,700,000

to December 31, 2014 ($700,000 × 90%)

630,000

Unrealized profit in December 31, 2014 inventory (90%) Investment balance December 31, 2014

(108,000) $3,222,000


Chapter 5

5-29

Solution P5-10 (continued) Poe Corporation and Subsidiary Consolidation Workpapers for the year ended December 31, 2014 (in thousands) Poe Income Statement Sales

$ 8,190

Income from San

Adjustments and Eliminations

San 90% $ 5,600

864

Cost of sales

5,460 *

4,000 *

Other expenses

1,544 *

600 *

a 5,600 d

864

b

120

Consolidated Statements $ 8,190

a 5,600 c 80

3,900 * 2,144 *

Consolidated net income

$ 2,146

Noncontrolling int.share Controlling share of NI

f $ 2,050

Retained Earnings Retained earnings — Po

$ 1,250

Retained earnings — San

96

96* $ 2,050

$ 1,000

$ 1,250 $

700

Controlling share of NI

2,050ü

1,000ü

Dividends

1,000 *

500 *

e

700 2,050 d f

450 50

1,000 *


$ 2,300

$ 1,200

$ 2,300

Balance Sheet Cash

$

$

$ 1,258

758

500

Inventory

420

800

b

120

1,100

Other current assets

600

200

g

100

700

Plant assets — net

3,000

3,000

Investment in San

3,222

Goodwill $ 8,000

$ 4,500

6,000 c

72

e

500

d 414 e 2,880 500 $ 9,558


5-30


Current liabilities

$ 1,700

$ 1,300

Capital stock

4,000

2,000

Retained earnings

2,300ü

1,200ü

$ 8,000

Noncontrolling interest January 1 Noncontrolling interest December 31

g

100

$ 2,900

e 2,000

4,000 2,300

$ 4,500

c

8

e

320

f

46

358 $ 9,558

*

Deduct


Chapter 5

5-31


SMch05Beams

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