Good to have you back!
If you've signed in to StudyBlue with Facebook in the past, please do that again.
University of Washington - Bothell campus
Chapter 5 Solutions.docx
Chapter 5 Solutions.docx
University of Washington - Bothell campus
† The material on this site is created by StudyBlue users. StudyBlue is not affiliated with, sponsored by or endorsed by the academic institution or instructor.
Get started today
Fundamentals of Advanced Accounting
Intermediate Accounting w/Google Annual Report
Chapter 5 Consolidated Financial Statements Intercompany Asset Transactions Chapter Outline I. The transfer of assets between the companies forming a business combination is a common practice. The opportunity for such direct acquisition (especially of inventory) is often the underlying motive for the creation of the combination. II. Intercompany inventory transfers A. The individual accounting systems of the two companies will record the transfer as a sale by one party and as a purchase by the other B. Because the transaction was not made with an outside, unrelated party, the sales and purchases balances created by the transfer must be eliminated in the consolidation process (Entry Tl) C. Any transferred inventory retained at the end of the year is recorded at its transfer price which in (many cases) will include an unrealized gross profit 1. For consolidation purposes, this intercompany gross profit must be deferred by eliminating the amount from the inventory account on the balance sheet and from the ending inventory figure within cost of goods sold (Entry G). 2. Because the effects of the transfer carry over into the subsequent fiscal period, the unrealized gross profit must also be removed a second time: from the beginning inventory component of cost of goods sold and from the beginning retained earnings balance (Entry *G). a. The retained earnings figure being adjusted is that of the original seller. b. If the equity method has been applied and the transfer was made downstream (by the parent), the beginning retained earnings account will be correct; therefore, in this one case, the adjustment is to the Equity in Investment Earnings account. 3. The consolidation process is designed to shift the profit from the period of transfer into the time period in which the goods are actually sold to unrelated parties or consumed D. Effect of deferral process on the valuation of a noncontrolling interest 1. Official accounting pronouncements do not currently specify whether deferral of unrealized profits has an effect on the valuation of noncontrolling interest balances 2. This textbook adjusts the noncontrolling interest balances but only if the sale was made upstream from subsidiary to parent. Downstream sales are made by the parent and, thus, are viewed as having no effect on the outside interest. III. Intercompany land transfers A. Any gain created by intercompany land transfers is unrealized and will remain so until the land is sold to an outside party B. For each subsequent consolidation, the recorded value of the land account must be reduced to original cost with the unrealized gain that was recorded by the seller also being eliminated 1. In the year of transfer, an actual gain account exists within the accounting records of the seller and must be removed. 2. In all later time periods, since the unrealized gain has become an element of the seller's beginning retained earnings balance, the reduction is made to this equity account. 3. If the land is ever sold to an outside party, the intercompany gain is realized and has to be recognized within that time period. IV. Intercompany transfer of depreciable assets A. As with other intercompany transfers, any unrealized gross profit must be deferred for consolidation purposes to establish appropriate historical cost balances. B. However, the difference between the transferbased accounting value and the historical cost of the asset will change each year because of the effects of depreciation. The amount of unrealized gain within retained earnings will also be reduced annually since excess depreciation expense is recognized (and closed into retained earnings) based on the inflated transfer price. C. Consequently, elimination of the unrealized gain (within retained earnings) and the reduction of the asset value to historical cost will differ from year to year. D. Also within the consolidation process, the recorded depreciation expense must be decreased every period to an amount appropriately based on the asset's original acquisition price. Learning Objectives Understand that intercompany asset transfers often create accounting effects within the financial records of the individual companies that must be eliminated or adjusted prior to production of consolidated financial statements. Eliminate the sales and purchases balances that are created by the intercompany transfer of inventory (Entry Tl). Compute the amount of unrealized gross profit included in the recorded value of any transferred inventory that is still being held by the buyer at the end of a fiscal period. Prepare the consolidation entry (Entry G) to eliminate any intercompany inventory gross profit that remains unrealized at the end of the year of transfer. Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intercompany gross profit from the year of transfer into the year of disposal or consumption. Make the consolidation entry (Entry *G) to eliminate unrealized intercompany gross profits from beginning retained earnings (or in one specific instance from the Equity in Subsidiary Earnings account) and from the cost of goods sold for the period following the year of transfer. Understand the difference in upstream and downstream transfers and how each affects the computation of noncontrolling interest balances. Eliminate any unrealized gain created by the intercompany transfer of land from the accounting records of the year of transfer and subsequent years. Understand that the elimination process for unrealized gross profits created by intercompany land transfers must be repeated in each fiscal period for as long as the asset is held within the business combination. Realize that the account balances created by an unrealized gain resulting from the intercompany transfer of a depreciable asset will change from period to period because of the effect of depreciation expense. Compute and eliminate the unrealized gain created by intercompany transfers of depreciable assets for any date subsequent to the transaction. Produce the worksheet entry to reduce depreciation expense from a figure based on transfer price to one calculated from the asset's historical cost balance. Answers to Discussion Questions Earnings Management By selling goods to special purpose entities that it controlled but did not consolidate, did Enron overstate its earnings? According to the Power?s Report (Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp.?February 1, 2004) These partnerships?Chewco, LJM1, and LJM2?were used by Enron Management to enter into transactions that it could not, or would not, do with unrelated commercial entities. Many of the most significant transactions apparently were designed to accomplish favorable financial statement results, not to achieve bona fide economic objectives or to transfer risk. (page 4) Assuming Enron controlled LJM2, the transactions that produced the $67 million gain and the $20.3 million agency fee were not arm?s length and thus did not provide a proper basis for recognizing income. What effect does consolidation have on the financial reporting for transactions with controlled entities? In consolidation, all intercompany profit would have been deferred until the goods were sold to an outside party. Also the intercompany note receivable and payable would have been eliminated in consolidation. As noted by Bala Dahran in his February 6, Congressional Testimony Despite their potential for economic and business benefits, the use of SPEs has always raised the question of whether the sponsoring company has some other accounting motivations, such as hiding of debt, hiding of poor-performing assets, or earnings management. Additionally, explosive growth in the use of SPEs led to debates among managers, auditors and accounting standard setters as to whether and when SPEs should be consolidated. This is because the intended accounting effects of SPEs can only be achieved if the SPEs are reported as unconsolidated entities separate from the sponsoring entity. FASB Activity on Special Purpose Entities Fortunately the FASB?s Interpretation 46R Consolidation of Variable Interest Entities explains how to identify an SPE that is not subject to control through voting ownership interests, but is nonetheless controlled by another enterprise and therefore subject to consolidation. The FASB requires each enterprise involved with an SPE to determine whether the financial support provided by that enterprise makes it the primary beneficiary of the SPE?s activities. The primary beneficiary of the SPE would then be required to include the assets, liabilities, and results of the activities of the SPE in its consolidated financial statements. What Price Should We Charge Ourselves? Transfer pricing is actually a topic for a managerial accounting discussion. Students, though, need to be aware that managerial and financial accounting do overlap at times. In this illustration, the price set by company officials for this component will affect the specific consolidation procedures needed in the preparation of financial statements for external reporting purposes. Since Slagle owns 100 percent of 's common stock, consolidated net income will not be altered by the transfer pricing decision. All intercompany transactions as well as unrealized profits will be eliminated entirely. However, because the sales are upstream, if a noncontrolling interest had been present, the portion of the subsidiary's income attributed to these outside owners would be influenced by the markup. Both the noncontrolling interest figure on the balance sheet and on the income statement are impacted by the amount of profits that remain unrealized when transactions are from subsidiary to parent. To the accountant, the easiest approach is to set the transfer price at the seller's cost ($70.00 in this case). No intercompany profits are created and the consolidation process is less complicated. However, as indicated in the narrative, that price may penalize the seller since no profits are recognized by that profit center. In addition, the buyer will then show artificially inflated income. Thus, some amount of profit is usually built into transfer pricing decisions. Those students who have already completed cost/managerial accounting can be asked to describe the various factors that should influence the establishment of this price. Interaction between accounting courses is beneficial to the students. Answers to Questions 1. One reason for the significant volume and frequency of intercompany transfers is that many business combinations are specifically organized so that the companies can provide products for each other. This design is intended to benefit the business combination as a whole because of the economies provided by vertical integration. In effect, more profit can often be generated by the combination if one member is able to buy from another rather than from an outside party. 2. The sales between Barker and Walden totaled $100,000. Regardless of the ownership percentage or the markup, the $100,000 was simply an intercompany asset transfer. Thus, within the consolidation process, the entire $100,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts. 3. Sales price per unit ($900,000 ÷ 3,000 units) $ 300 Number of units in Safeco?s ending inventory × 500 Intercompany inventory at transfer price $150,000 Gross profit rate (.6 ÷ 1.6) .375 Intercompany profit in ending inventory $56,250 4. In intercompany transactions, a transfer price is often established that exceeds the cost of the inventory. Hence, the seller is recording a gross profit on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset is consumed or sold to an outside party. Any unrealized gross profit on merchandise still held by the buyer must be eliminated whenever consolidated financial statements are produced. For the year of transfer, this consolidation procedure is carried out by removing the unrealized gross profit from the inventory account on the balance sheet and from the ending inventory balance within cost of goods sold. In the year following the transfer (if the goods are resold or consumed), the unrealized gross profit must again be eliminated within the consolidation process. This second reduction is made on the worksheet to the beginning inventory component of cost of goods sold as well as to the beginning retained earnings balance of the original seller. The gross profit is then moved into the year of realization. If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year must be made to the equity in subsidiary earnings account rather than to retained earnings. 5. On the individual financial records of James, Inc., a gross profit is recorded in the year of transfer. From the viewpoint of the business combination, this gross profit is actually earned in the period in which the products are sold or consumed by Matthews Co. An initial consolidation entry must be made in the year of transfer to defer any gross profit that remains unrealized. A second entry must be made in the following time period to allow the gross profit to be recognized in the year of its ultimate realization. 6. Currently, no official accounting pronouncement answers the question as to the relationship between unrealized intercompany profits and noncontrolling interest values, although the issue has been under study by the FASB. This textbook reasons that unrealized profits relate to the seller and to the computation of the seller's income. Therefore, any unrealized profits created by upstream transfers (from subsidiary to parent) are attributed to the subsidiary. The effects resulting from the deferral and eventual recognition of these intercompany profits are considered to have an impact on the calculation of noncontrolling interest balances. In contrast, unrealized profits from downstream transfers are viewed as relating solely to the parent (as the seller) and, thus, have no effect on the noncontrolling interest. 7. The basic consolidation process does not differ between downstream and upstream transfers. Sales and purchases (Inventory) balances created by the transactions must be eliminated in total. Any unrealized gross profits remaining at the end of a fiscal period are deferred until ultimately earned through sale or consumption of the assets. The direction of intercompany transfers (upstream versus downstream) does have one effect on consolidated financial statements. In computing noncontrolling interest balances (if present), the deferral of unrealized gross profits on upstream sales is taken into account. Downstream sales, however, are attributed to the parent and are viewed as having no impact on the outside interest. 8. The computation of this noncontrolling interest balance is dependent on the direction of the intercompany transactions that is not indicated in this question. If the unrealized gross profits were created by downstream sales from King to Pawn, they relate only to King. The noncontrolling interest in the subsidiary's net income is not affected and would be $11,000 ($110,000 × 10%). In contrast, if the transfers were upstream from Pawn to King, the deferral and recognition of the profits are attributed to Pawn. Pawn's "realized" income would be $80,000 and the noncontrolling interest's share of the subsidiary's income is reported as $8,000: Pawn's reported income $110,000 Recognition of prior year unrealized gross profit 30,000 Deferral of current year unrealized gross profit (60,000) Pawn's realized income $80,000 Outside ownership percentage 10% Noncontrolling interest in subsidiary's income $ 8,000 9. The deferral and subsequent recognition of intercompany profits are allocated to the noncontrolling interest in the same periods as the parent. When one affiliate sells to another affiliate, ownership does not change and therefore the underlying profit is deferred. When the purchasing affiliate subsequently sells the inventory to an entity outside the affiliated group, ownership changes, and the profit may be recognized. Intercompany profits are not really eliminated, but simply deferred until a sale to an outsider takes place. 10. Several differences can be cited that exist between the consolidated process applicable to inventory transfers and that which is appropriate for land transfers. The total intercompany Sales balance is offset against Purchases (Inventory) when inventory is transferred but no corresponding entry is needed when land is involved. Furthermore, in the year of the sale, ending unrealized inventory gross profits are eliminated through an adjustment to cost of goods sold but a specific gross profit account exists (and must be removed) when land has been sold. Finally, unrealized inventory gross profits are usually expected to be realized in the year following the transfer. This effect is mirrored in that period by reduction of the beginning inventory figure (within cost of goods sold). For land transfers, however, the unrealized gain must be repeatedly deferred in each fiscal period for as long as the land continues to be held within the business combination. 11. As long as the land is held by the parent, its recorded value must be reduced to historical cost within each consolidated set of financial statements. In the year of the original transfer, the asset reduction is offset against the subsidiary's recorded gain. For all subsequent years in which the property is held, the credit to the Land account is made against the beginning retained earnings balance of the subsidiary (since the unrealized gain will have been closed into that account). According to this question, the land is eventually sold to an outside party. The intercompany gain (which has been deferred in each of the previous years) is realized by the sale and should be recognized in the consolidated statements of this later period. Because the transfer was upstream from subsidiary to parent, the above consolidated entries will also affect any noncontrolling interest balances being reported. Because of the deferral of the intercompany gross profit, the realized income balances applicable to the subsidiary will be less than the reported values. In the year of resale, however, the realized income for consolidation purposes is higher than reported. All noncontrolling interest totals are computed on the realized balances rather than the reported figures. 12. Depreciable assets are often transferred between the members of a business combination at amounts in excess of book value. The buyer will then compute depreciation expense based on this inflated transfer price rather than on an historical cost basis. From the perspective of the business combination, depreciation should be calculated solely on historical cost figures. Thus, within the consolidation process for each period, adjustment of the depreciation (that is recorded by the buyer) is necessary to reduce the expense to a costbased figure. 13. From the viewpoint of the business combination, an unrealized gain has been created by the intercompany transfer and must be eliminated whenever consolidated financial statements are produced. This unrealized gain is closed by the seller into retained earnings necessitating subsequent reductions to that account. In the individual financial records, however, another income effect is created which gradually reduces the overstatement of retained earnings each period. The asset will be depreciated by the buyer based on the inflated transfer price. The resulting expense will be higher than the amount appropriate to the historical cost of the item. Because this excess depreciation is closed into retained earnings annually, the overstatement of the equity account is gradually reduced to a zero balance over the life of the asset. Answers to Problems 1. C 2. B Inventory remaining $100,000 × 50% = $50,000 Unrealized gross profit (based on Lee's markup as the seller) $50,000 × 40% = $20,000. The ownership percentage has no impact on this computation. 3. A 4. C UNREALIZED GROSS PROFIT, 12/31/09 Intercompany Gross profit ($100,000 ? $75,000) $25,000 Inventory Remaining at Year's End 16% Unrealized Intercompany Gross profit, 12/31/09 $4,000 UNREALIZED GROSS PROFIT, 12/31/10 Intercompany Gross profit ($120,000 ? $96,000) $24,000 Inventory Remaining at Year's End 35% Unrealized Intercompany Gross profit, 12/31/10 $8,400 CONSOLIDATED COST OF GOODS SOLD Parent balance $380,000 Subsidiary Balance 210,000 Remove Intercompany Transfer (120,000) Recognize 2009 Deferred Gross profit (4,000) Defer 2010 Unrealized Gross profit 8,400 Cost of Goods Sold $474,400 5. A Intercompany sales and purchases of $100,000 must be eliminated. Additionally, an unrealized gross profit of $10,000 must be removed from ending inventory based on a markup of 25 percent ($200,000 gross profit/$800,000 sales) which is multiplied by the $40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for consolidation purposes is $690,000 ($600,000 + $180,000 ? $100,000 + $10,000). 6. C The only change here from Problem 5 is the markup percentage which would now be 40 percent ($120,000 gross profit $300,000 sales). Thus, the unrealized gross profit to be deferred is $16,000 ($40,000 × 40%). Consequently, consolidated cost of goods sold is $696,000 ($600,000 + $180,000 ? $100,000 + $16,000). 7. B UNREALIZED GROSS PROFIT, 12/31/09 Ending inventory $40,000 Markup ($33,000/$110,000) 30% Unrealized intercompany gross profit, 12/31/09 $12,000 UNREALIZED GROSS PROFIT, 12/31/10 Ending inventory $50,000 Markup ($48,000/$120,000) 40% Unrealized intercompany gross profit, 12/31/10 $20,000 NONCONTROLLING INTEREST IN SUBSIDIARY'S INCOME Reported income for 2010 $90,000 Realized gross profit deferred in 2009 12,000 Deferral of 2010 unrealized gross profit (20,000) Realized income of subsidiary $82,000 Outside ownership 10% Noncontrolling interest $8,200 8. A Individual Records after Transfer 12/31/09 Machinery?$40,000 Gain?$10,000 Depreciation expense $8,000 ($40,000/5 years) Income effect net?$2,000 ($10,000 ? $8,000) 12/31/10 Depreciation expense?$8,000 Consolidated Figures?Historical Cost 12/31/09 Machinery?$30,000 Depreciation expense?$6,000 ($30,000/5 years) 12/31/10 Depreciation expense--$6,000 Adjustments for Consolidation Purposes: 2009: $2,000 income is reduced to a $6,000 expense (income is reduced by $8,000) 2010: $8,000 expense is reduced to a $6,000 expense (income is increased by $2,000) 9. B UNREALIZED GAIN Transfer Price $280,000 Book Value (cost after two years of depreciation) 240,000 Unrealized Gain $40,000 EXCESS DEPRECIATION Annual Depreciation Based on Cost ($300,000/10 years) $30,000 Annual Depreciation Based on Transfer Price ($280,000/8 years) 35,000 Excess Depreciation $5,000 ADJUSTMENTS TO CONSOLIDATED NET INCOME Defer Unrealized Gain $(40,000) Remove Excess Depreciation 5,000 Decrease to Consolidated Net Income $(35,000) 10. D Add the two book values and remove $100,000 intercompany transfers. 11. C Intercompany gross profit ($100,000 $80,000) $20,000 Inventory remaining at year's end 60% Unrealized intercompany gross profit $12,000 CONSOLIDATED COST OF GOODS SOLD Parent balance $140,000 Subsidiary balance 80,000 Remove intercompany transfer (100,000) Defer unrealized gross profit (above) 12,000 Cost of goods sold $132,000 12. C Consideration transferred $260,000 Noncontrolling interest fair value 65,000 Suarez total fair value $325,000 Book value of net assets (250,000) Excess fair over book value $75,000 Annual Excess Life Amortizations Excess fair value assigned to undervalued assets: Equipment 25,000 5 years $5,000 Secret Formulas $50,000 20 years 2,500 Total -0- $7,500 Consolidated Expenses = $37,500 (add the two book values and include current year amortization expense) 13. A 20% of the beginning book value $50,000 Excess fair value allocation (20%× $75,000) 15,000 20% share of Suarez net income adjusted for amortization (20% × [110,000 ? 7,500]) 20,500 Ending noncontrolling interest balance $85,500 14. C Add the two book values plus the original allocation ($25,000) less one year of excess amortization expense ($5,000). 15. B Add the two book values less the ending unrealized gross profit of $12,000. Intercompany Gross profit ($100,000 ? $80,000) $20,000 Inventory Remaining at Year's End 60% Unrealized Intercompany Gross profit, 12/31 $12,000 16. (15 Minutes) (Determine selected consolidated balances; includes inventory transfers and an outside ownership.) Customer list amortization = $65,000/5 years = $13,000 per year Intercompany Gross profit ($160,000 ? $120,000) $40,000 Inventory Remaining at Year's End 20% Unrealized Intercompany Gross profit, 12/31 $8,000 CONSOLIDATED TOTALS Inventory = $592,000 (add the two book values and subtract the ending unrealized gross profit of $8,000) Sales = $1,240,000 (add the two book values and subtract the $160,000 intercompany transfer) Cost of Goods Sold = $548,000 (add the two book values and subtract the intercompany transfer and add [to defer] ending unrealized gross profit) Operating Expenses = $443,000 (add the two book values and the amortization expense for the period) Noncontrolling Interest in Subsidiary's Net Income = $8,700 (30 percent of the reported income after subtracting 13,000 excess fair value amortization and deferring $8,000 ending unrealized gross profit) Gross profit is included in this computation because the transfer was upstream from Sanchez to Preston. 17. (60 minutes) (Downstream intercompany profit adjustments when parent uses equity method and a noncontrolling interest is present) Consideration transferred by Corgan $980,000 Noncontrolling interest fair value 245,000 Smashing?s acquisition-date fair value 1,225,000 Book value of subsidiary 950,000 Excess fair over book value 275,000 Excess assigned to covenants 275,000 Useful life in years ÷ 20 Annual amortization $13,750 2009 Ending Inventory Profit Deferral Cost = $100,000 ÷ 1.6 = $62,500 Intercompany Gross profit = $100,000 ? $62,500 = $37,500 Ending inventory gross profit = $37,500 × 40% = $15,000 2010 Ending Inventory Profit Deferral Cost = $120,000 ÷ 1.6 = $75,000 Intercompany Gross profit = $120,000 ? $75,000 = $45,000 Ending inventory gross profit = $45,000 40% = $18,000 a. Investment account: Consideration transferred, January 1, 2009 $980,000 Smashing?s 2009 income × 80% $120,000 Covenant amortization (13,750 × 80%) (11,000) Ending inventory profit deferral (100%) (15,000) Equity in Smashing?s earnings 94,000 2009 dividends (28,000) Investment balance 12/31/09 $1,046,000 Smashing?s 2010 income × 80% $104,000 Covenants amortization (13,750 × 80%) (11,000) Beginning inventory profit recognition 15,000 Ending inventory profit deferral (100%) (18,000) Equity in Smashing?s earnings 90,000 2010 dividends (36,000) Investment balance 12/31/10 $1,100,000 17. (continued) b. 12/31/10 Worksheet Adjustments *G Equity in earnings of Smashing 15,000 COGS 15,000 S Common stock?Smashing 700,000 Retained earnings?Smashing 365,000 Investment in Smashing 852,000 Noncontrolling interest 213,000 A Covenants 261,250 Investment in Smashing 209,000 Noncontrolling interest 52,250 I Equity in earnings of Smashing 75,000 Investment in Smashing 75,000 D Investment in Smashing 36,000 Dividends paid 36,000 E Amortization expense 13,750 Covenants 13,750 TI Sales 120,000 COGS 120,000 G COGS 18,000 Inventory 18,000 18. (40 Minutes) (Series of independent questions concerning various aspects of the consolidation process when intercompany transfers have occurred) a. 2009 Unrealized gross profit to be recognized in 2010 Total interco. gross profit on transfers ($90,000 ? $54,000) $36,000 Inventory retained at end of 2009 20% Unrealized gross profit?12/31/09 $7,200 2010 Unrealized Gross profit Deferred Total interco. gross profit on transfers ($120,000 ? $66,000) $54,000 Inventory retained at end of 2010 30% Unrealized gross profit?12/31/10 $16,200 18. a. (continued) Noncontrolling Interest's Share of Kane's Income Kane's reported income 2010 $110,000 Amortization of excess fair value to intangibles (5,000) 2009 gross profit realized in 2010 (upstream sales) 7,200 2010 gross profit deferred (upstream sales) (16,200) Kane's realized income $96,000 Noncontrolling interest ownership 20% Noncontrolling Interest's Share of Kane's Income $19,200 b. Inventory?Smith book value $140,000 Inventory?Kane book value 90,000 Unrealized gross profit, 12/31/10 (see part a) (16,200) Consolidated Inventory $213,800 (Direction of transfer has no impact here) c. Downstream transfers do not affect the noncontrolling interest. Kane's 2010 reported income less excess amortization $105,000 Noncontrolling interest ownership 20% Noncontrolling Interest's Share of Kane's Income $21,000 d. Smith's reported income 2010 $300,000 Elimination of intercompany dividend income recorded by parent ($40,000 × 80%) (32,000) Kane's reported income 2010 110,000 Amortization expense (given) (5,000) Realization of 2009 intercompany gross profit (see part a) 7,200 Deferral of 2010 intercompany gross profit (see part a) (16,200) Consolidated net income $364,000 e. Because the parent applies the partial equity method, its retained earnings balance does not reflect the consolidated balance. Excess amortization and the effect of the unrealized gain at that date must be taken into account to arrive at a consolidated total. Smith's retained earnings, December 31, 2010 (given) $600,000 Excess amortizations 2009?2010 (80% × $5,000 × 2) ............... (8,000) Deferral of parent's 12/31/10 interco. gross profit (part a) (16,200) Consolidated Retained Earnings 12/31/10 ................................... $575,800 18. (continued) f. Because the parent applies the partial equity method, its retained earnings balance does not equal the consolidated balance. Excess amortizations must be taken into account to arrive at a consolidated total. In addition, because the intercompany transfer was upstream, the parent's equity accrual did not reflect the intercompany profit deferral . Income recognition would have been based on the subsidiary's reported figures rather than its realized income. The parent would have included the $16,200 ending unrealized gross profit in the subsidiary's income in computing the annual equity accrual. Hence, that portion of the accrual (80% of $16,200 or $12,960) is overstated, causing the parent's retained earnings to be too high by that amount; reduction is necessary to arrive at the consolidated balance. The adjustment caused by the intercompany transfer can be computed in a second manner. The entire $16,200 unrealized gross profit will be deferred on the consolidated statements. However, because the transfer was upstream, the portion of the subsidiary's income assigned to the outside owners will be reduced by 20 percent of that deferral or $3,240. The net effect on consolidated net income (and, hence, on the ending retained earnings balance) is $12,960. Smith's retained earnings, December 31, 2010 (given) $600,000 Excess amortizations 2009?2010 (80% × $5,000 × 2) ............... (8,000) Reduction of equity accrual because of subsidiary's unrealized gross profit (explained above) (12,960) Consolidated Retained Earnings 12/31/10 ................................. $579,040 g. Land?Smith?s book value $600,000 Land?Kane's book value 200,000 Elimination of unrealized gain on intercompany land (20,000) CONSOLIDATED LAND ACCOUNT $780,000 18. (continued) h. The intercompany transfer was upstream from Kane to Smith. Because the transfer occurred in 2009, beginning retained earnings of the seller for 2010 contains the remaining portion of the unrealized gain. Transfer Pricing Figures 2009 Equipment = $80,000 Gain = $20,000 ($80,000 ? $60,000) Depreciation expense = $16,000 ($80,000/5) Income effect = $4,000 ($20,000 ? $16,000) Accumulated depreciation = $16,000 2010 Depreciation expense = $16,000 Accumulated depreciation = $32,000 Historical Cost Figures 2009 Equipment = $100,000 Depreciation expense = $12,000 ($60,000/5 years) Accumulated depreciation = $52,000 ($40,000 + $12,000) 2010 Depreciation expense = $12,000 Accumulated depreciation = $64,000 CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT ENTRY *TA Retained Earnings, 1/1/10 (Kane) 16,000 Equipment ($100,000 ? $80,000) 20,000 Accumulated Depreciation ($52,000 ? $16,000) 36,000 To change beginning of year figures to historical cost by removing impact of 2009 transactions. Retained earnings reduction removes $4,000 income effect (above) and replaces it with $12,000 depreciation expense for 2009. ENTRY ED Accumulated Depreciation 4,000 Depreciation Expense 4,000 To reduce depreciation from transfer price figure ($16,000) to historical cost of $12,000. This intercompany transfer was upstream from Kane to Smith. Thus, income effects are assumed to relate to the original seller (Kane). Because the sale occurred in 2009, the only effect in 2010 relates to depreciation expense. The expense based on the transfer price is $4,000 higher than the amount based on the historical cost. As an upstream transfer, this adjustment affects Kane and the noncontrolling interest computations. Transfer price depreciation: $80,000/5 yrs. = $16,000 Historical cost depreciation (based on book value): $60,000/5 yrs. = $12,000 18. (continued) Noncontrolling Interest in Kane's Income Kane's reported income less excess amortization $105,000 Reduction of depreciation expense to historical cost figure 4,000 Kane's realized income $109,000 Outside ownership percentage 20% Noncontrolling interest in Kane?s income $21,800 19. (20 Minutes) (Consolidation entries and noncontrolling interest balances affected by inventory transfers.) a. Conversion from Markup on Cost to Gross Profit Rate Markup (given as a percentage of cost) 25% Convert to gross profit rate [.25 (1.00 + 0.25)] 20% Noncontrolling Interest's Share of Subsidiary?s Income Reported income of subsidiary?2010 $160,000 2009 intercompany gross profit realized in 2010 ($250,000 × 30% × 20%) 15,000 2010 intercompany gross profit deferred ($300,000 × 30% × 20%) (18,000) Realized income of subsidiary?2010 $157,000 Outside ownership 40% Noncontrolling interest's share of subsidiary's income $62,800 b. Entry *G Retained Earnings, Jan. 1 (subsidiary) 15,000 Cost of Goods Sold 15,000 To remove intercompany gross profit from previous year so that it can be recognized in current year. Entry Tl Sales 300,000 Cost of Goods Sold (purchases) 300,000 To eliminate intercompany inventory sale and purchase. Entry G Cost of Goods Sold 18,000 Inventory 18,000 To remove effects of current year unrealized gross profit. 20. (30 Minutes) (Compute selected balances based on three different intercompany asset transfer scenarios) a. Consolidated Cost of Goods Sold Penguin?s cost of goods sold $290,000 Snow?s cost of goods sold 197,000 Elimination of 2010 intercompany transfers (110,000) Reduction of beginning Inventory because of 2009 unrealized gross profit ($28,000/1.4 = $20,000 cost; $28,000 transfer price less $20,000 cost = $8,000 unrealized gross profit) (8,000) Reduction of ending inventory because of 2010 unrealized gross profit ($42,000/1.4 = $30,000 cost; $42,000 transfer price less $30,000 cost = $12,000 unrealized gross profit) 12,000 Consolidated cost of goods sold $381,000 Consolidated Inventory Penguin book value $346,000 Snow book value 110,000 Eliminate ending unrealized gross profit (see above) (12,000) Consolidated Inventory $444,000 Noncontrolling Interest in Subsidiary?s Net Income Because all intercompany sales were downstream, the deferrals do not affect Snow. Thus, the noncontrolling interest is 20% of the $58,000 (revenues minus cost of goods sold and expenses) reported income or $11,600. b. Consolidated Cost of Goods Sold Penguin book value $290,000 Snow book value 197,000 Elimination of 2010 intercompany transfers (80,000) Reduction of beginning inventory because of 2009 unrealized gross profit ($21,000/1.4 = $15,000 cost; $21,000 transfer price less $15,000 cost = $6,000 unrealized gross profit) (6,000) Reduction of ending inventory because of 2010 unrealized gross profit ($35,000/1.4 = $25,000 cost; $35,000 transfer price less $25,000 cost = $10,000 unrealized gross profit) 10,000 Consolidated cost of goods sold $411,000 20. b. (continued) Consolidated Inventory Penguin book value $346,000 Snow book value 110,000 Eliminate ending unrealized gross profit (see above) (10,000) Consolidated inventory $446,000 Noncontrolling Interest in Subsidiary's Net income Since all intercompany sales are upstream, the effect on Snow's income must be reflected in the noncontrolling interest computation: Snow reported income $58,000 2009 unrealized gross profit realized in 2010 (above) 6,000 2010 unrealized gross profit to be realized in 2011 (above) (10,000) Snow realized income $54,000 Outside ownership percentage 20% Noncontrolling interest in Snow's income $10,800 c. Consolidated Buildings (Net) Penguin?s buildings $358,000 Snow's buildings 157,000 Remove write-up created by transfer ($80,000 ? $50,000) $(30,000) Remove excess depreciation created by transfer ($30,000 unrealized gain over 5 year life) (2 years) 12,000 (18,000) Consolidated buildings (net) $497,000 Consolidated Expenses Penguin?s book value $150,000 Snow's book value 105,000 Remove excess depreciation on transferred building ($30,000) unrealized gain/5 years) (6,000) Consolidated expenses $249,000 Noncontrolling Interest in Subsidiary?s Net Income Because the transfer was made downstream, it has no effect on the noncontrolling interest. Thus, Snow's reported income ($58,000 computed as revenues minus cost of goods sold and expenses) is used for this computation. The 20 percent outside ownership will be allotted income of $11,600 (20% × $58,000). 21. (15 Minutes) (Prepare consolidated income statement with a whollyowned subsidiary, includes transfers) a. In this business combination, the direction of the intercompany transfers (either upstream or downstream) is not important to the consolidated totals. Because controls all of 's outstanding stock, no noncontrolling interest figures are computed. If present, noncontrolling interest balances are affected by upstream sales but not by downstream. For purposes of a 2010 consolidation, the following worksheet entries would affect income statement balances: Entry *G Retained Earnings, 1/1/10 (seller) 17,500 Cost of Goods Sold 17,500 To remove 2009 unrealized gross profit from beginning account balances. Gross profit is the 25% markup ($80,000 ÷ $320,000) multiplied by remaining inventory ($70,000). Entry E Amortization Expense 15,000 Patented technology 15,000 To recognize excess amortization expense for the current period. Entry Tl Sales 320,000 Cost of Goods Sold 320,000 To eliminate intercompany transfers of inventory during 2010. Entry G Cost of Goods Sold 12,500 Inventory 12,500 To remove 2010 unrealized gross profit from ending account balances. Gross profit is the 25% markup ($80,000 ÷ $320,000) multiplied by remaining inventory ($50,000). b. By including the impact of each of these four consolidation entries, the following income statement can be created from the individual account balances: AKRON, INC. AND CONSOLIDATED SUBSIDIARY Income Statement Year Ending December 31, 2010 Sales $1,380,000 Cost of goods sold 575,000 Gross profit 805,000 Operating expenses 635,000 Consolidated net income $170,000 22. (60 minutes) (Downstream intercompany asset transfer when parent uses equity method and when a noncontrolling interest is present) a. Investment account: Consideration paid (fair value) 1/1/09 $810,000 Netspeed?s reported income for 2009 $80,000 Database amortization (12,000) Netspeed?s adjusted net income $68,000 Quickport's ownership percentage 90% Quickport's share of Netspeed?s income $61,200 Gain on equipment transfer deferral (3,000) Depreciation adjustment (6 months) 500 Equity in earnings of Netspeed Company, $58,700 Quickport?s share of Netspeed?s dividends (90%) (7,200) Balance 12/31/09 $861,500 Netspeed?s reported income for 2010 $115,000 Database amortization (12,000) Netspeed?s adjusted 2010 net income $103,000 Quickport's ownership percentage 90% Quickport's share of Netspeed income $92,700 Depreciation adjustment 1,000 Equity in earnings of Netspeed Company, 2010 $93,700 Quickport?s share of Netspeed?s dividends, 2010 (90%) (7,200) Balance 12/31/10 $948,000 b. 12/31/10 Worksheet Adjustments *TA Equipment 6,000 Investment in S 2,500 Accumulated depreciation 8,500 To transfer the unrealized interco. equipment reduction (as of Jan. 1, 2010) from the Investment account to the equipment and A.D. accounts. S Common stock?S 800,000 RE?S 112,000 Investment in S 820,800 Noncontrolling interest 91,200 A Database 48,000 Investment in S 43,200 Noncontrolling interest 4,800 I Equity in earnings of S 93,700 Investment in S 93,700 D Investment in S 7,200 Dividends paid 7,200 22. (continued) E Amortization expense 12,000 Database 12,000 ED Accumulated depreciation 1,000 Depreciation expense 1,000 Alternative set of equivalent adjustments for part b. *TA Equipment 6,000 Investment in S 1,500 Accumulated Depreciation 7,500 To transfer the unrealized intercompany equipment reduction (as of Dec. 31, 2010) from the investment account to the equipment and A.D. accounts. *ED Equity in earnings of S 1,000 Depreciation expense 1,000 To transfer the current realized portion of the intercompany equipment gain from the Equity in Earnings of S account to increase current consolidated income through a reduction in depreciation expense. S Common stock?S 800,000 RE?S 112,000 Investment in S 820,800 Noncontrolling interest 91,200 A Database 48,000 Investment in S 43,200 Noncontrolling interest 4,800 I Equity in earnings of S 92,700 Investment in S 92,700 D Investment in S 7,200 Dividends paid 7,200 E Amortization expense 12,000 Database 12,000 23. (20 Minutes) (Consolidation entries for intercompany equipment transfer.) INDIVIDUAL RECORDS BASED ON TRANSFER PRICE 12/31/09 Equipment = $95,000 Gain on transfer = $45,000 ($95,000 ? $50,000) Depreciation expense = $19,000 ($95,000/5 years) Accumulated depreciation = $19,000 12/31/10 Depreciation expense $19,000 Accumulated depreciation = $38,000 (2 years) 12/31/11 Effect on retained earnings, 1/1/11 = $7,000 credit balance (gain less two years depreciation) Depreciation expense = $19,000 Accumulated depreciation = $57,000 (3 years) CONSOLIDATED REPORTING BASED ON HISTORICAL COST 12/31/09 Equipment = $130,000 Depreciation expense = $10,000 ($50,000/5 years) Accumulated depreciation = $90,000 ($80,000 + $10,000) 12/31/10 Depreciation expense = $10,000 Accumulated depreciation = $100,000 ($90,000 + $10,000) 12/31/11 Effect on retained earnings, 1/1/11 = ($20,000) (two years depreciation) Depreciation expense = $10,000 Accumulated depreciation = $110,000 ($100,000 + $10,000) Entry *TA Retained earnings, 1/1/11 (Padre) 27,000 Equipment ($130,000 ? $95,000) 35,000 Accumulated depreciation ($100,000 ? $38,000) 62,000 To adjust beginningofyear amounts to balances for consolidated entity. Retained earnings adjustment reduces $7,000 credit balance to $20,000 debit balance as computed above. Entry ED Accumulated Depreciation 9,000 Depreciation Expense 9,000 To remove excess depreciation for current year to reflect an allocation of the historical cost ($10,000) rather than the transfer price ($19,000). 24. (20 Minutes) (Determine consolidated net income when an intercompany transfer of equipment occurs. Includes an outside ownership) a. Income?Slaughter $220,000 Income?Bennett 90,000 Excess amortization for unpatented technology (8,000) Remove unrealized gain on equipment (50,000) ($120,000 ? $70,000) Remove excess depreciation created by inflated transfer price ($50,000 ÷ 5) 10,000 Consolidated net income $262,000 b. Income calculated in (part a.) $262,000 Noncontrolling interest in Bennett's income Income?Bennett $90,000 Excess amortization (8,000) Adjusted net income $82,000 Noncontrolling interest in Bennett?s income (10%) (8,200) Consolidated net income to parent company $253,800 c. Income calculated in (part a.) $262,000 Noncontrolling interest in Bennett's income (see Schedule 1) (4,200) Consolidated net income to parent company $257,800 Schedule 1: Noncontrolling Interest in Bennett's Income (includes upstream transfer) Reported net income of subsidiary $90,000 Excess amortization (8,000) Eliminate unrealized gain on equipment transfer (50,000) Eliminate excess depreciation ($50,000 ÷ 5) 10,000 Bennett's realized net income $42,000 Outside ownership 10% Noncontrolling interest in subsidiary's income $ 4,200 d. Net income 2010?Slaughter $240,000 Net income 2010?Bennett 100,000 Excess amortization (8,000) Eliminate excess depreciation stemming from transfer ($50,000 ÷ 5) (year after transfer) 10,000 Consolidated net income $342,000 25. (35 minutes) (Compute consolidated totals with transfers of both inventory and a building.) Excess Amortization Expenses Equipment $60,000 ÷ 10 years = $6,000 per year Franchises $80,000 ÷ 20 years = $4,000 per year Annual excess amortizations $10,000 Unrealized Gross profit?Inventory, 1/1/11 Markup ($70,000 ? $49,000) $21,000 Markup percentage ($21,000 ÷ $70,000) 30% Remaining inventory $30,000 Markup percentage 30% Unrealized gross profit, 1/1/11 $9,000 Unrealized Gross profit?Inventory, 12/31/11 Markup ($100,000 ? $50,000) $50,000 Markup percentage ($50,000 ÷ $100,000) 50% Remaining inventory $40,000 Markup percentage 50% Unrealized gross profit, 12/31/11 $20,000 Impact of intercompany Building Transfer 12/31/10?Transfer price figures Transfer price $50,000 Gain on transfer ($50,000 ? $30,000) 20,000 Depreciation expense ($50,000 ÷ 5) 10,000 Accumulated depreciation 10,000 12/31/11?Transfer price figures Depreciation expense 10,000 Accumulated depreciation 20,000 12/31/10?Historical cost figures Historical cost $70,000 Depreciation expense ($30,000 book value ÷ 5 years) 6,000 Accumulated depreciation ($40,000 + $6,000) 46,000 12/31/11?Historical cost figures Depreciation expense 6,000 Accumulated depreciation 52,000 25. (continued) CONSOLIDATED BALANCES Sales = $1,000,000 (add the two book values and subtract $100,000 in intercompany transfers) Cost of Goods Sold = $571,000 (add the two book values and subtract $100,000 in intercompany purchases. Subtract $9,000 because of the previous year unrealized gross profit and add $20,000 to defer the current year unrealized gross profit.) Operating Expenses = $206,000 (add the two book values and include the $10,000 excess amortization expenses but remove the $4,000 in excess depreciation expense [$10,000 ? $6,000] created by building transfer) Investment Income = $0 (the intercompany balance is removed so that the individual revenue and expense accounts of the subsidiary can be shown) Inventory = $280,000 (add the two book values and subtract the $20,000 ending unrealized gross profit) Equipment (net) = $292,000 (add the two book values and include the $60,000 allocation from the acquisition-date fair value less three years of excess amortizations) Buildings (net) = $528,000 (add the two book values and subtract the $20,000 unrealized gain on the transfer after two years of excess depreciation [$4,000 per year]) 26. (35 Minutes) (Prepare consolidation entries for a business combination with intercompany inventory and equipment transfers; includes an outside ownership.) a. Entry *G Retained Earnings, 1/1/11 (Sledge) 2,000 Cost of Goods Sold 2,000 To remove unrealized gross profit from beginning account balances. This is the 40% markup ($6,000/$15,000) multiplied by remaining inventory ($5,000). Entry *TA Equipment 4,000 Investment in Sledge 2,400 Accumulated Depreciation 6,400 To adjust the equipment balance to original cost ($16,000) and to adjust accumulated depreciation to the correct consolidated January 1, 2011 balance ($7,000 less $600 extra depreciation in 2010). The net reduction to the reported equipment balance (cost less A.D. = $2,400) equals the amount of unrealized gain at January 1, 2011. The $2,400 debit to the Investment account appropriately transfers the reduction in the net book value of the transferred equipment to the subsidiary?s accounts. The Investment account was reduced by $3,000 in 2010 for the original intercompany gain and increased by $600 in 2010 for the extra depreciation ($3,000 gain/5 years) through application of the equity method. Entry ED (below) completes the adjustment of A.D. and depreciation expense to their correct December 31, 2011 balances. Entry S Common Stock (Sledge) 120,000 Retained Earnings, 1/1/11 (adjusted) (Sledge) 258,000 Investment in Sledge (80%) 302,400 Noncontrolling interest in Sledge, 1/1/11 (20%) 75,600 To eliminate subsidiary's stockholders' equity accounts (after adjustment for Entry *G) and recognize noncontrolling interest balance as of January 1, 2011. Entry A Contracts ($60,000 ? $3,000 for 2 years) 54,000 Buildings ($20,000 ? $2,000 for 2 years) 16,000 Investment in Sledge (80%) 56,000 Noncontrolling interest in Sledge, 1/1/11 (20%) 14,000 To recognize acquisition-date fair value allocations adjusted for 2 years of amortization (2009 and 2010). 26. (continued) Entry I Equity Income of Subsidiary 10,600 Investment in Sledge 10,600 To remove intercompany income accrual recorded by parent using full equity method (80% of $17,500 realized income [see Part b] less $5,000 in excess amortizations for the year [see Entry E] plus $600 removal of excess depreciation from 2010 intercompany equipment transfer). Entry E Depreciation Expense 2,000 Amortization Expense 3,000 Contracts ($60,000 ÷ 20 years) 3,000 Buildings ($20,000 ÷ 10 years) 2,000 To record excess amortizations for 2011 based on allocations and useful lives. Entry TI Sales 20,000 Cost of Goods Sold 20,000 To eliminate intercompany inventory transfers during 2011. Entry G Cost of Goods Sold 4,500 Inventory 4,500 To remove unrealized gross profit from ending account balances. The gross profit is the 45% markup ($9,000 ÷ $20,000) multiplied by remaining inventory ($10,000). Entry ED Accumulated Depreciation 600 Depreciation Expense 600 To eliminate excess depreciation on equipment recorded at transfer price. Expense is being reduced from the recorded amount ($2,400 or $12,000 ÷ 5) to historical cost figure ($1,800 or $9,000 ÷ 5). 26. (continued) b. Noncontrolling Interest in the Subsidiary's Income 2011 Revenues $130,000 Cost of goods sold (70,000) Other expenses (40,000) Excess acquisition-date fair value amortization (5,000) Income adjusted for amortization $15,000 Gross profit on 2010 upstream inventory transfer realized in 2011 (Entry *G) 2,000 Gross profit on 2011 upstream inventory transfer deferred until 2012 (Entry G) (4,500) Realized income of subsidiary?2011 $12,500 Outside ownership 20% Noncontrolling interest in subsidiary's net income $2,500 27. (65 Minutes) (Determine consolidation totals after answering a series of questions about combination and intercompany inventory transfers) a. Consideration transferred $342,000 Noncontrolling interest fair value 38,000 Subsidiary fair value at acquisition-date 380,000 Book value (326,000) Fair value in excess of book value $54,000 Annual Excess Excess fair value assignments Life Amortizations To building 18,000 9 yrs. $2,000 To patented technology 36,000 6 yrs. 6,000 Totals -0- $8,000 b. Because Brey sold inventory to Petino, the transfers are upstream. c. Gross profit on 2010 transfers ($135,000 ? $81,000) $54,000 Gross profit percentage ($54,000 ÷ $135,000) 40% Inventory remaining, 12/31/10 $37,500 Gross profit percentage 40% Unrealized gross profit, January 1, 2011 $15,000 d. Gross profit on 2011 transfers ($160,000 ? $92,800) $67,200 Gross profit percentage ($67,200 ÷ $160,000) 42% Inventory remaining, 12/31/11 $50,000 Gross profit percentage 42% Unrealized gross profit, December 31, 2011 $21,000 27. (continued) e. Petino is applying the equity method because the $68,400 equals neither 90% of Brey's reported Income nor 90% of the dividends paid by Brey. Brey?s reported income $90,000 Excess fair value amortization (8,000) Realized gross profit 15,000 Deferred gross profit (21,000) Adjusted subsidiary income $76,000 Ownership 90% Investment income?Brey $68,400 f. Brey?s adjusted income (see e.) $76,000 Outside ownership 10% Noncontrolling interest in subsidiary's net income $7,600 g. Investment in Brey (initial value) $342,000 Income of Brey Reported 2009 $64,000 2010 80,000 2011 90,000 Total 234,000 Unrealized gross profit, 12/31/11(see d.) (21,000) Realized income 20092011 213,000 Petino?s ownership 90% 191,700 Excess amortizations ($8,000 × 3 years × 90%) (21,600) Dividends paid by Brey 2009 $19,000 2010 23,000 2011 27,000 Total 69,000 Pitino's ownership 90% (62,100) Investment in Brey, 12/31/11 $450,000 h. Entry S Common Stock (Brey) 150,000 Retained Earnings, 1/1/11 (Brey) (reduced by 1/1/11 unrealized gross profit) 263,000 Investment in Brey (90%) 371,700 Noncontrolling Interest in Brey (10%) 41,300 27. (continued) part i. Sales Revenues = $1,068,000 (total less $160,000 intercompany sales) Cost of Goods Sold = $570,000 (add book values less $160,000 in intercompany purchases. Also, adjust for 2010 unrealized gross profit [subtract $15,000] and 2011 unrealized gross profit [add $21,000]) Expenses = $260,400 (add book values with $8,000 amortization for excess fair value allocations) Investment Income?Brey = $0 (intercompany balance is eliminated to include individual revenue and expense accounts of the subsidiary) Noncontrolling Interest in Subsidiary's Net Income = $7,600 (see f.) Consolidated net income to parent = $230,000 (consolidated revenues less consolidated cost of goods sold, expenses, and the noncontrolling interest's share of the subsidiary's income) Retained Earnings, 1/1 = $488,000 (parent equity method balance) Dividends Paid = $136,000 (parent balance only) Retained Earnings, 12/31 = $582,000 (consolidated beginning balance plus net income less dividends paid) Cash and Receivables = $228,000 (total less $16,000 intercompany balance) Inventory = $370,000 (total less ending unrealized gross profit) Investment in Brey = $0 (intercompany balance is eliminated so that the individual assets and liabilities of the subsidiary can be reported) Land, Buildings, and Equipment = $1,304,000 (add book values and include a $12,000 net allocation after 3 years of amortization) Patented Technology = $18,000 (original allocation after 3 years of amortization [$6,000 per year]) Total Assets = $1,920,000 (add consolidated figures) Liabilities = $773,000 (add book values less $16,000 intercompany balance) Noncontrolling Interest in Brey, 12/31 = $50,000 ([10% of subsidiary's book value at beginning of period plus unamortized excess less beginning unrealized gross profit] plus 10% of the subsidiary's realized net income less 10% of subsidiary dividends). Common Stock = $515,000 (parent balance only) Retained Earnings, 12/31 = $582,000 (see above) Total Liabilities and Stockholders' Equity = $1,920,000 (summation) 28. (20 Minutes) (Computation of selected consolidation balances as affected by downstream inventory transfers) UNREALIZED GROSS PROFIT, 12/31/09: (downstream transfer) Intercompany gross profit ($120,000 ? $72,000) $48,000 Inventory remaining at year's end 30% Unrealized Intercompany Gross profit, 12/31/09 $14,400 UNREALIZED GROSS PROFIT, 12/31/10: (downstream transfer) Intercompany gross profit ($250,000 ? $200,000) $50,000 Inventory remaining at year's end 20% Unrealized intercompany gross profit, 12/31/10 $10,000 CONSOLIDATED TOTALS Sales = $1,150,000 (add the two book values and eliminate intercompany sales of $250,000) Cost of goods sold: Benson's book value $535,000 Broadway's book value 400,000 Eliminate intercompany transfers (250,000) Realized gross profit deferred in 2009 (14,400) Deferral of 2010 unrealized gross profit 10,000 Cost of goods sold $680,600 Operating expenses = $210,000 (add the two book values and include intangible amortization for current year) Dividend income = 0 (intercompany transfer eliminated in consolidation) Noncontrolling interest in consolidated income: (impact of transfers is not included because they were downstream) Broadway reported income for 2010 $100,000 Intangible amortization (10,000) Broadway adjusted income 90,000 Outside ownership 30% Noncontrolling interest in Broadway?s earnings $27,000 Inventory = $988,000 (add the two book values less the $10,000 ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/10 = $385,500 30% beginning $950,000 book value $285,000 Excess January 1 intangible allocation (30% × $295,000) 88,500 Noncontrolling Interest in Broadway?s earnings 27,000 Dividends (30% × $50,000) (15,000) Total noncontrolling interest at 12/31/10 $385,500 29. (25 Minutes) (Computation of selected consolidation balances as affected by upstream inventory transfers) UNREALIZED GROSS PROFIT, 12/31/09: (upstream transfer) Intercompany gross profit ($120,000 ? $72,000) $48,000 Inventory remaining at year's end 30% Unrealized intercompany gross profit, 12/31/09 $14,400 UNREALIZED GROSS PROFIT, 12/31/10: (upstream transfer) Intercompany gross profit ($250,000 ? $200,000) $50,000 Inventory remaining at year's end 20% Unrealized intercompany gross profit, 12/31/10 $10,000 CONSOLIDATED TOTALS Sales = $1,150,000 (add the two book values and eliminate the Intercompany transfer) Cost of goods sold: Benson's COGS book value $535,000 Broadway's COGS book value 400,000 Eliminate intercompany transfers (250,000) Realized gross profit deferred in 2009 (14,400) Deferral of 2010 unrealized gross profit 10,000 Consolidated cost of goods sold $680,600 Operating expenses = $210,000 (add the two book values and include intangible amortization for current year) Dividend income = -0- (interco. transfer eliminated in consolidation) Noncontrolling interest in consolidated income: (impact of transfers is included because they were upstream) Broadway reported income for 2010 $100,000 Intangible amortization (10,000) 2009 gross profit recognized in 2010 14,400 2010 gross profit deferred (10,000) Broadway realized income for 2010 $94,400 Outside ownership 30% Noncontrolling interest $28,320 Inventory = $988,000 (add the two book values and defer the $10,000 ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/10 = $382,500 30% beginning book value less $14,400 unrealized gross profit (30% × $935,600) $280,680 Excess intangible allocation (30% × $295,000) (88,500) Noncontrolling Interest in Broadway?s earnings 28,320 Dividends (30% × $50,000) (15,000) Total noncontrolling interest at 12/31/10 $382,500 30. (75 Minutes) (Determine consolidated balances after impact of upstream Inventory transfers and downstream transfer of building. Parent uses initial value method.) PRELIMINARY COMPUTATIONS a. Consideration transferred $657,000 Noncontrolling interest fair value 73,000 Subsidiary fair value at acquisition-date 730,000 Book value (620,000) Fair value in excess of book value $110,000 Annual Excess Excess fair value assignments Life Amortizations to equipment 20,000 4 yrs. $5,000 to liabilities 40,000 5 yrs. 8,000 to brand names 50,000 10 yrs. 5,000 Totals -0- $18,000 Determination of Subsidiary Book Value on 1/1/09 Book Value, 1/1/10 (based on stockholders' equity accounts) $700,000 Eliminate Net Income ? 2009 (80,000) Eliminate Dividends ? 2009 -0- Book Value, 1/1/09 $620,000 Beginning inventory unrealized gross profit, 12/31/09 (Upstream) Ending Inventory ($160,000 × 40%) $64,000 Markup (given) 20% Unrealized Intercompany Gross profit, 12/31/09 $12,800 Ending inventory unrealized gross profit, 12/31/10 (Upstream) Ending Inventory ($145,000 × 30%) $43,500 Markup (given) 20% Unrealized Intercompany Gross profit, 12/31/10 $8,700 30. (continued) Building unrealized gross profit, 1/2/09 (Downstream) Transfer Price $25,000 Book Value 10,000 Unrealized Gross profit $15,000 Annual Excess Depreciation Annual Depreciation Based on Book Value ($10,000/5 years) $2,000 Annual Depreciation Based on Transfer Price ($25,000/ 5 years) 5,000 Excess DepreciationEach Year $3,000 Adjust to Building to return to historical cost at 1/1/10 Consolidation Transfer Price Historical Cost Adjustment Buildings $25,000 $100,000 $75,000 Accumulated Depreciation (1/1/09 balance after 1 more year of depreciation) 5,000 92,000 87,000 Consolidated Totals Sales and Other Income = $1,240,000 (add the two book values and eliminate the intercompany transfers) Cost of Goods Sold: 's book value $500,000 Kirby's book value 400,000 Eliminate intercompany transfers (160,000) Realized gross profit deferred in 2009 (8,700) Deferral of 2010 unrealized gross profit 12,800 Cost of goods sold $744,100 Operating and Interest Expense = $275,000 (add the two book values and include $18,000 amortization for current year but eliminate $3,000 excess depreciation from asset transfer) Noncontrolling Interest in Subsidiary?s Income = $1,790 (impact of inventory transfers is included because they were upstream but building transfer is omitted because it was downstream) 30. (continued) initial Reported income for 2010 $40,000 Realized gross profit deferred in 2009 8,700 Deferral of 2010 unrealized gross profit (12,800) Realized income of subsidiary $35,900 Excess fair value amortization (18,000) Adjusted subsidiary net income 17,900 Outside Ownership 10% Noncontrolling Interest $1,790 Consolidated Net Income = $220,900 (consolidated sales less consolidated cost of goods sold, expenses, and noncontrolling interest) To noncontrolling interest = $1,790 (above) To controlling interest = $219,110 Retained Earnings, 1/1/10 = $1,025,970 (because the parent uses the initial value method, its retained earnings must be adjusted for changes in subsidiary's book value, excess amortizations, and the impact of unrealized gross profits in previous years) 's Reported Balance, 1/1/10 $990,000 Impact of Building Transfer (parent's income was over- stated by the $15,000 gain but has been reduced by one prior year of excess depreciation) (12,000) Adjustments to Convert Initial Value to Equity Method: Increase in subsidiary's book value during prior years $80,000 Excess fair value amortization (18,000) Deferral of 12/31/09 unrealized gross profit (subsidiary's prior income was overstated) (8,700) Realized increase in book value 53,300 Ownership 90% Equity Accrual 47,970 Retained Earnings, 1/1/10 $1,025,970 Dividends Paid = $130,000 (parent balance only) Retained Earnings, 12/31/10 = $1,115,080 (the beginning balance plus controlling interest share of consolidated net income less dividends paid) Cash and Receivables = $397,000 (add the two book values) Inventory = $371,200 (add the two book values and defer the $12,800 ending unrealized gross profit) Investment in Kirby = -0- (eliminated for consolidation purposes) 30. (continued) Equipment (Net) = $1,030,000 (add the two book values adjusted for excess allocation and amortization) Buildings = $1,725,000 (add the two book values and add the $75,000 impact to return to historical cost as computed above for transfer) Accumulated Depreciation = $384,000 (add the two book values plus adjustment to historical cost ($87,000 at beginning of year less $3,000 excess depreciation for current year) Other Assets = $300,000 (add the two book values) Brand Names = $40,000 (the original $50,000 allocation less two years of amortization at $5,000 per year) Total Assets = $3,479,200 (summation of the consolidated totals) Liabilities = $1,684,000 (add the two book values and subtract the original allocation [$40,000] after two years of amortization [$8,000 per year]) NCI 12/31/10 = $80,120 (10 percent of $691,300 adjusted beginning book value [$700,000 less $8,700 deferral of unrealized gross profit] plus $9,200 share of beginning unamortized excess fair value allocations plus $1,790 income share) Common Stock = $600,000 (parent balance only) Retained Earnings, 12/31/10 = $1,115,080 (computed above) Total Liabilities and Equities = $3,479,200 (summation of consolidated balances). The same consolidation balances can be derived by setting up a worksheet and utilizing the following entries: CONSOLIDATION ENTRIES Entry *G Retained Earnings, 1/1/10 (Kirby) 8,700 Cost of Goods Sold 8,700 (To recognize 2009 deferred gross profit as income in 2010) Entry *TA Building 75,000 Retained earnings, 1/1/10 () 12,000 Accumulated Depreciation 87,000 (To adjust 1/1/10 balance to historical cost figures) Entry *C Investment in Kirby 47,970 Retained Earnings, 1/1/10 () 47,970 (To convert from initial value to equity method based on the following computation) 30. (continued) Increase in subsidiary's book value during prior years (income of $80,000) $80,000 Excess amortization for 2009 (18,000) Deferral of 12/31/09 unrealized gross profit (8,700) Realized increase in subsidiary's book value $53,300 Ownership 90% Conversion to equity method adjustment $47,970 S Common Stock (Kirby) 150,000 Retained Earnings, 1/1/10 as adjusted (Kirby) 541,300 Investment in Kirby (90%) 622,170 Noncontrolling Interest in Kirby (10%) 69,130 (To eliminate subsidiary's beginning stockholders' equity accounts and recognize beginning noncontrolling interest balance) A Liabilities 32,000 Equipment 15,000 Brand Names 45,000 Investment in Kirby 82,800 Noncontrolling Interest in Kirby (10%) 9,200 (To recognize unamortized balance of excess allocations as of 1/1/10. Figures have been reduced by one year of amortization) Entry I (the subsidiary paid no dividends so no adjustment needed) E Operating and interest expense 18,000 Liabilities 8,000 Equipment 5,000 Brand names 5,000 (To recognize excess amortization expenses for current year) Tl Sales 160,000 Cost of Goods Sold 160,000 (To eliminate intercompany transfers for 2010) G Cost of Goods Sold 12,800 Inventory 12,800 (To defer ending unrealized inventory gross profit) ED Accumulated Depreciation 3,000 Depreciation Expense 3,000 (To adjust depreciation for current year created by transfer of building) 31. (55 Minutes) (Investment account balance and consolidated worksheet with downstream inventory transfers when parent uses equity method) Acquisition-date fair value allocation and excess amortizations a. Consideration transferred $372,000 Noncontrolling interest fair value 248,000 Subsidiary fair value at acquisition-date $620,000 Book value (320,000) Fair value in excess of book value $300,000 Annual Excess Excess fair value assignments Life Amortizations to patents 70,000 10 yrs. $7,000 to customer list 45,000 15 yrs. 3,000 to goodwill $185,000 indefinite -0- $10,000 Determination of Investment in Scott account balance Consideration transferred $372,000 Increase in Scott?s book value 1/1/09 to 12/31/10 $105,000 Excess fair value amortization (2 years) (20,000) Scott?s adjusted book value increase 85,000 Woods? ownership percentage 60% Woods? share of Scott?s adjusted book value increase 51,000 2009 ending inventory profit deferral (100%) (10,000) 2010 beginning inventory profit deferral (100%) 10,000 2010 ending inventory profit deferral (100%) (12,000) Investment account balance 12/31/10 $411,000 Intercompany profits (downstream) 2009 2010 Intercompany transfers remaining in inventory 50,000 40,000 Gross profit rate* 20% 30% $10,000 $12,000 * (150,000 ? 120,000) ÷ 150,000 = 20% (160,000 ? 112,000) ÷ 160,000 = 30% 31. (continued) Woods Scott Adj. & Elim. NCI Consolidated Sales (700,000) (335,000) (TI)150,000 (885,000) Cost of goods sold 460,000 205,000 (G) 12,000 (*G) 10,000 517,000 (TI) 150,000 Operating expenses 188,000 70,000 (E) 10,000 268,000 Income of Scott (28,000) (I) 18,000 -0- (*G) 10,000 Separate company income (80,000) (60,000) Consolidated net income (100,000) to noncontrolling interest (20,000) 20,000 to parent (80,000) Retained earnings, 1/1 (695,000) (280,000) (S) 280,000 (695,000) Net income (above) (80,000) (60,000) (80,000) Dividends paid 45,000 15,000 (D) 9,000 6,000 45,000 Retained earnings, 12/31 (730,000) (325,000) (730,000) Cash and receivables 248,000 148,000 396,000 Inventory 233,000 129,000 (G) 12,000 350,000 Investment in Scott 411,000 -0- (D) 9,000 (S) 228,000 -0- (A)174,000 (I) 18,000 Buildings (net) 308,000 202,000 510,000 Equipment (net) 220,000 86,000 306,000 Patents (net) -0- 20,000 (A) 63,000 (E) 7,000 76,000 Customer list (A) 42,000 (E) 3,000 39,000 Goodwill (A)185,000 185,000 Total assets 1,420,000 585,000 1,862,000 Liabilities (390,000) (160,000) (550,000) Common stock (300,000) (100,000) (S) 100,000 (300,000) Noncontrolling interest 1/1 (S) 152,000 (A)116,000 (268,000) Noncontrolling interest 12/31 282,000 (282,000) Retained earnings, 12/31 (730,000) (325,000) (730,000) Total liabilities and equities (1,420,000) (585,000) 884,000 884,000 (1,862,000) 33. (50 Minutes) (Prepare consolidation entries for a combination where upstream inventory transfers have occurred as well as downstream equipment transfers. Parent has applied initial value method) Consideration transferred $665,000 Noncontrolling interest fair value 285,000 Subsidiary fair value at acquisition-date $950,000 Book value (800,000) Fair value in excess of book value $150,000 Annual Excess Excess fair value assignments Life Amortizations to building 50,000 5 yrs. $10,000 to franchise agreements 100,000 10 yrs. 10,000 -0- $20,000 Inventory Transfers (Upstream) 2010 gross profit deferred until 2011 ($12,000 × 30%) $3,600 2011 gross profit deferred until 2012 ($18,000 × 30%) $5,400 Equipment Transfer (Downstream) Unrealized gain as of January 1, 2011: Unrealized gain on transfer (1/1/10) $36,000 2010 excess depreciation ($36,000 ÷ 6 yrs.) (6,000) Unrealized gain January 1, 2011 $30,000 Excess depreciation?2011 ($36,000 ÷ 6 yrs.) $6,000 Entry *G Retained Earnings, 1/1/11 (Young) 3,600 Cost of Goods Sold 3,600 To recognize upstream intercompany inventory gross profit deferred from previous year. Entry *TA Retained Earnings, 1/1/11 (Monica) 30,000 Equipment ($50,000 ? $36,000) 14,000 Accumulated Depreciation ($50,000 ? $6,000) 44,000 To return equipment accounts to beginning book value based on historical cost and to remove unrealized gain from beginning retained earnings. 33. (continued) Entry *C Investment in Young 123,480 Retained Earnings, 1/1/11 (Monica) 123,480 Because the parent uses the initial value method, its retained earnings must be adjusted for the subsidiary's increase in book value less excess amortizations and upstream profits during 2009?2010 as follows. Retained earnings of Young, December 31, 2011 (given) $740,000 Eliminate income and dividends of Young ($160,000 ? $50,000) (110,000) Retained earnings of Young, December 31, 2010 630,000 Removal of unrealized gross profit (Entry *G) (3,600) Realized retained earnings of Young, December 31, 2010 626,400 Retained earnings at date of acquisition (410,000) Increase in retained earnings during 2009?2010 216,400 Ownership percentage 70% Income accrual to be recognized 151,480 Excess amortization for 2009?2010 ($20,000 × 70%× 2 yrs.) (28,000) ENTRY *C ADJUSTMENT (above) $123,480 Entry S Common Stock (Young) 300,000 Additional Paidin Capital (Young) 90,000 Retained Earnings, 1/1/11 (Young) (adjusted for *G) 626,400 Investment in Young (70%) 711,480 Noncontrolling Interest in Young (30%) 304,920 To eliminate stockholders' equity accounts of subsidiary and recognize noncontrolling interest; amount of retained earnings was previously reduced to realized balance by Entry *G. The $626,400 figure is computed above. Entry A Franchise Agreement 80,000 Buildings 30,000 Investment in Young 77,000 Noncontrolling Interest in Young (30%) 33,000 To recognize amount paid within acquisition price for buildings and the franchise agreement. Balances have been reduced by two years of excess amortizations. 33. (continued) Entry I Dividend Income 35,000 Dividends Paid 35,000 To eliminate Intercompany dividend payments recorded by parent as income since initial value method is used. Entry E Depreciation Expense 10,000 Amortization Expense 10,000 Franchise Agreement 10,000 Buildings 10,000 To recognize current year excess amortization expense. Entry Tl Sales 90,000 Cost of Goods Sold (or Purchases) 90,000 To remove intercompany inventory transfers made during the current year. Entry G Cost of Goods Sold (or Ending Inventory) 5,400 Inventory 5,400 To defer unrealized gross profit on 2011 intercompany inventory transfers (computed above). Entry ED Accumulated Depreciation 6,000 Depreciation Expense 6,000 To remove current year depreciation on transferred item since its historical cost has been fully depreciated. Noncontrolling Interest's Share of Subsidiary's Net Income Reported income of Young (given) $160,000 Excess fair value amortization (20,000) Recognition of 2010 unrealized gross profit (Entry *G) 3,600 Deferral of 2011 unrealized gross profit (Entry G) (upstream) (5,400) Realized income of Young $138,200 Outside ownership percentage 30% Noncontrolling interest in subsidiary?s income $41,460 34. (35 Minutes) (Consolidation entries with upstream Inventory transfers and downstream equipment transfers. Parent uses equity method) Entry *G (Same as Entry *G in Problem 33.) Entry *TA Investment in Young 30,000 Equipment 14,000 Accumulated Depreciation 44,000 To return equipment account to its book value based on historical cost. Because the parent uses the equity method and the transfer is downstream, the unrealized gain has already been removed from the parent's retained earnings. Thus, the remaining gain is eliminated here from the Investment account rather than from retained earnings. Entry *C (No Entry *C is needed because equity method has been applied.) Entry S (Same as Entry S in Problem 33.) Entry A (Same as Entry A in Problem 33.) Entry I Investment Income 102,740 Investment in Young 102,740 To eliminate intercompany income accrual. Reported income of Young (given) $160,000 Excess fair value amortization (20,000) Recognition of 2010 unrealized gross profit (Entry *G) 3,600 Deferral of 2011 unrealized gross profit (Entry G) (upstream) (5,400) Realized income of Young $138,200 Outside ownership percentage 70% Monica?s share of Young?s realized income $96,740 Depreciation adjustment for asset transfer gain 6,000 Equity accrual for 2011 $102,740 Entry D Investment in Young 35,000 Dividends Paid 35,000 To eliminate intercompany dividend transfers. Entry E (Same as Entry E in Problem 33.) Entry TI (Same as Entry Tl in Problem 33.) Entry G (Same as Entry G in Problem 33.) Entry ED (Same as Entry ED in Problem 33.) Noncontrolling interest in subsidiary?s income (Same as in Problem 33.) 35. (60 Minutes) (Consolidation worksheet for combination with upstream inventory transfers and downstream transfer of land. Also asks about transfer of a building. Parent uses partial equity method.) Consideration transferred $570,000 Noncontrolling interest fair value 380,000 Subsidiary fair value at acquisition-date $950,000 Book value (850,000) Fair value in excess of book value $100,000 Annual Excess Excess fair value assignment Life Amortizations to customer list 100,000 20 yrs. $5,000 -0- a. CONSOLIDATION ENTRIES Entry *TL Retained Earnings, 1/1/10 (Gibson) 40,000 Land 40,000 To remove unrealized gain on Intercompany downstream transfer of land made in 2009. Entry *G Retained Earnings, 1/1/10 (Keller) 10,000 Cost of Goods Sold 10,000 To defer unrealized upstream Inventory gross profit from 2009 until 2010 computed as the 2009 ending inventory balance of $30,000 (20% × $150,000) multiplied by 331/3% markup ($50,000/$150,000). Entry *C Retained earnings, 1/1/10 (Gibson) 9,000 Investment in Keller 9,000 Parent is applying the partial equity method as can be seen by the amount in the Income of Keller Company account (60 percent of the reported balance). Thus, the parent?s share of amortization of $3,000 ($100,000 divided by 20 years × 60%) must be recognized for the previous year 2009. In addition, the equity accrual recorded by the parent has been based on Keller's reported income. As shown in Entry *G, $10,000 of that reported income has not actually been realized as of January 1, 2010. Thus, the previous accrual must be reduced by $6,000 to mirror the parent's 60% ownership. The total of the two adjustments being made here is $9,000. 35. (continued) Entry S Common Stock (Keller) 320,000 Additional Paidin Capital 90,000 Retained earnings, 1/1/10 (Keller) (adjusted for Entry *G) 610,000 Investment in Keller (60%) 612,000 Noncontrolling Interest in Keller, 1/1/10 (40%) 408,000 To remove stockholders' equity accounts of Keller and recognize beginning noncontrolling interest. Retained earnings balance has been adjusted in Entry *G. Entry A Customer List 95,000 Investment in Keller 57,000 Noncontrolling Interest in Keller, 1/1/10 (40%) 38,000 To recognize amount paid within acquisition price for the customer list. Original balance is adjusted for previous year?s amortization. Entry I Income of Keller 84,000 Investment in Keller 84,000 To eliminate intercompany income accrual. Entry D Investment in Keller 36,000 Dividends Paid 36,000 To eliminate intercompany dividend transfers?60% of subsidiary's payment. Entry E Amortization Expense 5,000 Customer List 5,000 To recognize current period excess amortization expense. Entry P Liabilities 40,000 Accounts Receivable 40,000 To eliminate intercompany debt. Entry Tl Sales 200,000 Cost of Goods Sold 200,000 To eliminate current year intercompany inventory transfer. Entry G Cost of Goods Sold 12,000 Inventory 12,000 To defer 2010 unrealized inventory gross profit. Unrealized gain is the ending inventory of $40,000 (20% of $200,000) multiplied by 30% markup ($60,000/$200,000). Noncontrolling Interest in Keller's Net Income Keller reported net income $140,000 Excess fair value amortization (5,000) 2009 Intercompany gross profit realized in 2010 (inventory) 10,000 2010 Intercompany gross profit deferred (inventory) (12,000) Keller realized income 2010 $133,000 Outside ownership percentage 40% Noncontrolling interest in Keller's net income $53,200 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2006 Hoyle, Schaefer, Doupnik, Fundamentals of Advanced Accounting, 1/e 5-1 5-57 35. a. (continued) GIBSON AND KELLER Consolidation Worksheet Year Ending December 31, 2010 Consolidation Entries Noncontrolling Consolidated Accounts Gibson Keller Debit Credit Interest Totals Sales (800,000) (500,000) (TI) 200,000 (1,100,000) Cost of goods sold 500,000 300,000 (G) 12,000 (*G) 10,000 602,000 (TI) 200,000 Operating expenses 100,000 60,000 (E) 5,000 165,000 Income of Keller (84,000) -0- (I) 84,000 -0- Separate company net income (284,000) (140,000) Consolidated net income (333,000) To noncontrolling interest (53,200) 53,200 To parent (279,800) RE, 1/1/10?Gibson (1,116,000) (*TL) 40,000 (1,067,000) (*C) 9,000 RE, 1/1/10?Keller (620,000) (*G) 10,000 (S) 610,000 Net income (above) (284,000) (140,000) (279,800) Dividends 115,000 60,000 (D) 36,000 24,000 115,000 Retained earnings, 12/31/10 (1,285,000) (700,000) (1,231,800) Cash 177,000 90,000 267,000 Accounts receivable 356,000 410,000 (P) 40,000 726,000 Inventory 440,000 320,000 (G) 12,000 748,000 Investment in Keller 726,000 (D) 36,000 (*C) 9,000 -0- (S) 612,000 (I) 84,000 (A) 57,000 Land 180,000 390,000 (*TL) 40,000 530,000 Buildings and equipment (net) 496,000 300,000 796,000 Customer List (A) 95,000 (E) 5,000 90,000 Total assets 2,375,000 1,510,000 3,157,000 Liabilities (480,000) (400,000) (P) 40,000 (840,000) Common stock (610,000) (320,000) (S) 320,000 (610,000) Additional paid-in capital (90,000) (S) 90,000 Retained earnings, 12/31/10 (1,285,000) (700,000) (1,231,800) NCI in Keller, 1/1/10 (S) 408,000 (408,000) (A) 38,000 (38,000) NCI In Keller, 12/31/10 475,200 (475,200) Total liabilities and equity (2,375,000) (1,510,000) (3,157,000) 35. (continued) b. If the intercompany transfer had been a building rather than land, two adjustments to the consolidation entries would be needed. Entry *TL would be changed and relabeled as Entry *TA and an Entry ED would be added to eliminate the overstatement of depreciation expense for 2010. All other consolidation entries would be the same as shown in Part a. As a downstream transfer, entries *C and S are not affected. Entry *TA Retained Earnings, 1/1/10 (Gibson) 36,000 Buildings 40,000 Accumulated Depreciation 76,000 To eliminate unrealized gain ($40,000 original amount less one year of excess depreciation at $4,000 per year) as of beginning of year. Entry also returns Buildings account to historical cost (from $100,000 to $140,000) and Accumulated Depreciation account to historical cost (original $80,000 less one year of excess depreciation at $4,000). Because the Buildings account is shown at net value in the information given in this problem, the above entry would probably be made as follows: Entry *TA (Alternative) Retained Earnings, 1/1/10 (Gibson) 36,000 Buildings (net) 36,000 Entry ED Accumulated Depreciation 4,000 Operating (or Depreciation) Expense 4,000 To remove excess depreciation for current year created by transfer price. Excess depreciation for each year would be $4,000 based on allocating the $60,000 historical cost book value over 10 years ($6,000 per year) rather than the $100,000 transfer price ($10,000 per year). 36. (40 Minutes) (Prepare consolidation worksheet with intercompany transfer of inventory and land. No outside ownership exists) a. Skyline reported income $(88,000) Patented technology amortization 15,000 Beginning inventory gross profit recognized (14,400) Ending inventory gross profit deferred 14,000 Deferral of land gain on sale 18,000 Equity in Skyline?s earnings $(55,400) b. Acquisition-Date Fair Value Allocation Consideration transferred (fair value of shares issued) $450,000 Book value of subsidiary 300,000 Fair value in excess of book value $150,000 Excess fair over book value assigned to: Trademarks (indefinite life) 30,000 Patented technology $120,000 Life of patented technology 8 years Annual amortization $15,000 Unrealized Upstream Inventory Gross profit, 1/1 Inventory being held ($50,000 × 72%) $36,000 Markup ($20,000/$50,000) 40% Unrealized gross profit, 1/1 $14,400 Unrealized Upstream Inventory Gross profit, 12/31 Inventory being held (given) $28,000 Markup ($40,000/$80,000) 50% Unrealized gross profit, 12/31 $14,000 CONSOLIDATION ENTRIES Entry *G Retained earnings 1/1 (Skyline) 14,400 Cost of goods sold 14,400 To remove impact of beginning unrealized gross profit. Amount computed above. Entry S Common stock (Skyline) 120,000 Additional paidin capital (Skyline) 30,000 Retained earnings 1/1 (Skyline, adjusted) 277,600 Investment in Skyline 427,600 To remove stockholders' equity accounts of subsidiary. Retained earnings is adjusted for elimination of beginning unrealized gross profit in Entry *G. 36. (continued) Entry A Trademarks 30,000 Patented technology 105,000 Investment in Skyline 135,000 To recognize excess fair value allocations as of 1/1. Patented technology is adjusted for 4 prior years of amortization at $15,000 per year. Entry I Investment income 55,400 Investment in Skyline 55,400 To remove intercompany income accrued by parent using the equity method. Entry D Investment in Skyline 20,000 Dividends distributed 20,000 To eliminate Intercompany dividend payments. Entry E Other operating expenses 15,000 Patented technology 15,000 To recognize current year amortization expense on patented technology Entry Tl Revenues 80,000 Cost of goods sold 80,000 To eliminate intercompany inventory transfer for current year. Entry G Cost of goods sold 14,000 Inventory 14,000 To defer unrealized inventory gross profit. Amount is computed above. Entry TL Gain on sale of land 18,000 Land 18,000 To remove gain from intercompany transfer of land during current year. Entry P Accounts payable 65,000 Accounts receivable 65,000 To remove intercompany payable and receivable. 36. (continued) PARKWAY AND SKYLINE Consolidation Worksheet Year Ending December 31, 2010 Consolidation Entries Consolidated Accounts Parkway Skyline Debit Credit Totals Revenues (627,000) (358,000) (TI) 80,000 (905,000) Cost of goods sold 289,000 195,000 (G) 14,000 (TI) 80,000 (*G) 14,400 403,600 Other operation expenses 170,000 75,000 (E) 15,000 260,000 Gain on sale of land (18,000) (TL) 18,000 -0- Investment income (55,400) (I) 55,400 -0- Net income (241,400) (88,000) (241,400) Retained earnings 1/1 (314,600) (292,000) (*G) 14,400 (314,600) (S) 277,600 -0- Net income (above) (241,400) (88,000) (241,400) Dividends distributed 70,000 20,000 (D) 20,000 70,000 Retained earnings 12/31 (486,000) (360,000) (486,000) Cash and receivables 134,000 150,000 (P) 65,000 219,000 Inventory 281,000 112,000 (G) 14,000 379,000 Investment in Skyline 598,000 (D) 20,000 (S) 427,600 (A) 135,000 -0- (I) 55,400 Trademarks 50,000 (A) 30,000 80,000 Patented technology 130,000 (A) 105,000 (E) 15,000 220,000 Land, buildings, and equipment (net) 637,000 283,000 (TL) 18,000 902,000 Total assets 1,650,000 725,000 1,800,000 Liabilities (463,000) (215,000) (P) 65,000 (613,000) Common stock (410,000) (120,000) (S) 120,000 (410,000) Additional paid-in capital (291,000) (30,000) (S) 30,000 (291,000) Retained earnings (above) (486,000) (360,000) (486,000) Total liabilities & stockholders? equity (1,650,000) (725,000) (1,800,000) Chapter 5 Excel Case Solution Excel Case Equity in Shawn Co. Earnings 2009 78,000 Fair Value Allocation Schedule 1/1/2009 El profit -34,200 Consideration transferred 1,000,000 Amortization -12,600 C.S. 500,000 Equity earnings 31,200 R.E. 185,000 685,000 Life Amort. 2010 85,000 Tradename 315,000 25 12,600 BI profit 34,200 Inventory El profit -37,800 Shawn sells GPR remaining Amortization -12,600 to Patrick 60% 30% Equity earnings 68,800 Intercompany Inventory Transfers (upstream) Shawn Co. dividends Sales Inventory Interco. profit 2009 25,000 2009 190,000 57,000 34,200 2010 27,000 2010 210,000 63,000 37,800 Consolidation Adjustments Investment account *G RE-Shawn 34,200 Cost 1,000,000 COGS 34,200 2009 Equity earnings 31,200 dividends -25,000 S Common stock-Shawn 500,000 12/31/09 1,006,200 RE-Shawn 203,800 Investment in Shawn 703,800 2010 Equity earnings 68,800 dividends -27,000 A Tradename 302,400 12/31/10 1,048,000 Investment in Shawn 302,400 I Equity in earnings of Shawn 68,800 Investment in Shawn 68,800 D Investment in Shawn 27,000 Dividends paid 27,000 E Amortization expense 12,600 Tradename 12,600 IT Sales 210,000 COGS 210,000 G COGS 37,800 Inventory 37,800 Investment account goes to zero? 0 Analysis and Research?Accounting Information and Salary Negotiations a. With common control over related enterprises, a consolidated income statement better portrays economic reality. For example, it is likely that the Stadium?s concession and parking revenues would have been less if the team did not play there. Additionally, the $1,400,000 rent expense does not represent an arm?s length transaction?given that the $1,400,000 is the only rent revenue, it appears that the stadium is used exclusively for baseball with its fortunes intertwined with the team. Searching SFAS 160 ?separate statements? and then ?intercompany? yields the following relevant support: There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities. [SFAS 160, ¶1] In the preparation of consolidated financial statements, intercompany balances and transactions shall be eliminated. This includes intercompany open account balances, security holdings, sales and purchases, interest, dividends, etc. 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. [SFAS 160, ¶6] Granger Eagles Team and Stadium Consolidated Income Statement Ticket revenues $2,000,000 Concession revenue 800,000 Parking revenue 100,000 $2,900,000 Ticket expense 25,000 Promotion 35,000 COGS 250,000 Depreciation 80,000 Player salaries 400,000 Staff salaries 350,000 1,140,000 Consolidated net income $1,760,000 b. Other pertinent factors include Any available comparisons for the market values for the players The market value of any alternative uses for the stadium The amount the owners have invested in the team The amount the owners have invested in the stadium Fair rates of return for the owners? investments in the team and the stadium
Want to see the other 55 page(s) in Chapter 5 Solutions.docx?
JOIN TODAY FOR FREE!
Words From the Students
"The semester I found StudyBlue, I went from a 2.8 to a 3.8, and graduated with honors!"
Colorado School of Mines
Get started today
Show & Tell
StudyBlue is not sponsored or endorsed by any college, university, or instructor.
© 2014 StudyBlue Inc. All rights reserved.