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Chapter 06 - Intercompany Inventory Transactions

CHAPTER 6 INTERCOMPANY INVENTORY TRANSACTIONS ANSWERS TO QUESTIONS Q6-1 All inventory transfers between related companies must be eliminated to avoid an overstatement of revenue and cost of goods sold in the consolidated income statement. In addition, when unrealized profits exist at the end of the period, the eliminations are needed to avoid overstating inventory and consolidated net income. Q6-2 An inventory transfer at cost results in an overstatement of sales and cost of goods sold. While net income is not affected, gross profit ratios and other financial statement analysis may be substantially in error if appropriate eliminations are not made. Q6-3 An upstream sale occurs when the parent purchases items from one or more subsidiaries. A downstream sale occurs when the sale is made by the parent to one or more subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation worksheet will know whether to reduce consolidated net income assigned to the controlling interest by the full amount of the unrealized profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream). Q6-4 As in all cases, the total amount of the unrealized profit must be eliminated in preparing the consolidated statements. When the profits are on the parent company's books, consolidated net income and income assigned to the controlling interest are reduced by the full amount of the unrealized profit. Q6-5 Consolidated net income is reduced by the full amount of the unrealized profits. In the upstream sale, the unrealized profits are apportioned between the parent company shareholders and the noncontrolling shareholders. Thus, consolidated net income assigned to the controlling and noncontrolling interests is reduced by a pro rata portion of the unrealized profits. Q6-6 Income assigned to the noncontrolling interest is affected when unrealized profits are recorded on the subsidiary's books as a result of an upstream sale. A downstream sale should have no effect on the income assigned to noncontrolling interest because the profits are on the books of the parent. Q6-7 The basic eliminating entry needed when the item is resold before the end of the period is: Sales Cost of Goods Sold XXXXXX XXXXXX

The debit to sales is based on the intercorporate sale price. This means that only the revenue recorded by the company ultimately selling to the nonaffiliate is to be included in the consolidated income statement. Cost of goods sold is credited for the amount paid by the purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded by the initial owner to be reported in the consolidated statement.

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Q6-8 The basic eliminating entry needed when one or more of the items are not resold before the end of the period is: Sales Cost of Goods Sold Inventory XXXXXX XXXXXX XXXXXX

The debit to sales is for the full amount of the transfer price. Inventory is credited for the unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold by the company making the intercompany sale. Q6-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an external party. The amount reported as cost of goods sold is based on the amount paid for the inventory when it was produced or purchased from an external party. If inventory has been purchased by one company and sold to a related company, the cost of goods sold recorded on the intercorporate sale must be eliminated. Q6-10 No adjustment to retained earnings is needed if the intercorporate sales have been made at cost or if all intercorporate sales have been resold to an external party in the same accounting period. If all of the intercorporate sales have not been resold by the end of the period, under the fully adjusted equity method, the parent defers unrealized profits in the investment in sub and income from sub accounts. This adjustment would be made to retained earnings under the modified equity method. However, regardless of the parents method for accounting for the investment, the amount of the noncontrolling interest is reduced by the NCIs proportionate share of the unrealized profit associated with upstream sales. Q6-11 A proportionate share of the realized retained earnings of the subsidiary are assigned to the noncontrolling interest. Any unrealized profits on upstream sales are deducted proportionately from the amount assigned to the noncontrolling interest. Unrealized profits on downstream sales do not affect the noncontrolling interest. Q6-12 When inventory profits from a prior period intercompany transfer are realized in the current period, the profit is added to consolidated net income and to the income assigned to the shareholders of the company that made the intercompany sale. If the unrealized profits arise from a downstream sale, income assigned to the controlling interest will increase by the full amount of profit realized. When the profits arise from an upstream sale, income assigned to the controlling and noncontrolling interests will be increased proportionately in the period the profit is realized. Thus, knowledge of whether the profits resulted from an upstream or a downstream sale is imperative in assigning consolidated net income to the appropriate shareholder group. Q6-13 Under the fully adjusted equity method, consolidated retained earnings is not affected directly by unrealized profits. Unrealized profits are deferred in the investment in sub and income from sub accounts on the parents books. Income from sub is closed out to retained earnings, so the deferral of unrealized profits indirectly affects retained earnings. As a result, the amount reported for consolidated retained earnings is always equal to the parents retained earnings. Q6-14 Consolidated retained earnings are always equal to the parents retained earnings under the fully adjusted equity method. Since the parent company defers unrealized profits in the income from sub and investment in sub accounts and since income from sub is closed out to the parents retained earnings, the ending balance in consolidated retained earnings will reflect the reduction associated with the deferral of unrealized profits.

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Q6-15* Sales between subsidiaries are treated in the same manner as upstream sales. Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the end of the period are eliminated and consolidated net income and income assigned to the controlling and noncontrolling interests is reduced. Q6-16* When a company is acquired in a business combination the transactions occurring before the combination generally are regarded as transactions with unrelated parties and no adjustments or eliminations are needed. All transactions between the companies following the combination must be fully eliminated.

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SOLUTIONS TO CASES C6-1 Measuring Cost of Goods Sold a. While the rule covers only a part of the elimination needed, Charlie is correct in that the cost of goods sold recorded by the selling company must be eliminated to avoid overstating that caption in the consolidated income statement. b. The rules will result in the proper consolidated totals if rule #1 is expanded to include a debit to sales and a credit to ending inventory for the amount of profit recorded by the company that sold to its affiliate. c. The way in which the rule is stated makes it appear to be incorrect, but it is correct. The rule is appropriate in that the cost of goods sold recorded by the purchasing affiliate is equal to the cost of goods sold to the first owner plus the profit the first owner recorded on the sale. Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold. If an equal amount of sales is eliminated, the rule should result in proper consolidated financial statement totals. d. The employee would be forced to look at the books of the selling affiliate and determine the difference between the intercorporate sale price and the price it paid to acquire or produce the items. If the items sold to affiliates are routinely produced and costs do not fluctuate greatly, it may be possible to use some form of gross profit ratio to estimate the amount of unrealized profit. C6-2 Inventory Values and Intercompany Transfers MEMO To: From: Re: President Water Products Corporation , CPA Inventory Sale and Purchase of New Inventory

If Water Products holds only a small percent of the ownership of Plumbers Products and Growinkle Manufacturing, it should have no difficulty in reporting the desired results. This would not be the case if the two companies are subsidiaries of Water Products. If both Plumbers Products and Growinkel are subsidiaries of Water Products, both the sale of inventory to Plumbers Supply and the purchase of inventory from Growinkle Manufacturing must be eliminated. In addition, the unrealized profit on any unsold inventory involved in these transfers must be eliminated in preparing the financial statements for the current period. The consolidated income statement should include the same amount of income on the inventory sold to Plumbers Supply and resold during the year as would have been recorded if Water Products had sold the inventory directly to the purchaser. Any income recorded by Water Products on inventory not resold by Plumbers Supply must be eliminated.

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Similarly, the consolidated income statement should include the same amount of income on the inventory purchased by Water Products and resold during the year as would have been recorded if Growinkle Manufacturing had sold the inventory directly to the purchaser. Any income recorded by Growinkle Manufacturing on inventory not resold by Water Products must be eliminated. Consolidated net income may increase if Plumbers Supply is able to sell the inventory it purchased from Water Products at a higher price than would have been received by Water Products or if it is able to sell a larger number of units. The same can be said for the inventory purchased by Water Products from Growinkle Manufacturing. It is important to recognize that the transfer of inventory between Water Products and its subsidiaries does not in itself generate income for the consolidated entity. An additional level of complexity may arise in this situation if Water Products uses the LIFO inventory method. It might, for example, be forced to carry over its LIFO cost basis on the old inventory sold to Plumbers Supply to the new inventory purchased from Growinkle Manufacturing since it was replaced within the accounting period. Primary citation: ARB 51, Par. 6 (ASC 810) C6-3 Intercorporate Inventory Transfers MEMO To: From: Re: Treasurer Evert Corporation , CPA Inventory Sale to Parent

This memo is prepared in response to your request for information on the appropriate treatment of intercompany inventory transfers in consolidated financial statements. The specific eliminating entries required in this case depend on the valuation assigned to the inventory at December 31, 20X2. Frankle Company sold inventory with a carrying value of $240,000 to Evert for $180,000 on December 20, 20X2. Since the exchange price was well below Frankles cost, consideration should be given to whether the inventory should be reported at $180,000 or $240,000 in the consolidated statements at December 31, 20X2, under the lower-of-cost-or-market rule. While the value of the inventory apparently had fallen below Frankles carrying value, the accounting standards indicate no loss should be recognized when the evidence indicates that cost will be recovered with an approximately normal profit margin upon sale in the ordinary course of business. [ARB 43, Chapter 4, Par. 9; ASC 330] We are told the management of Frankle considered the drop in prices to be temporary and Evert was able to sell the inventory for $70,000 more than the original amount paid by Frankle. It therefore seems appropriate for the consolidated entity to report the inventory at Frankles cost of $240,000 at December 31, 20X2. In preparing the consolidated statements at December 31, 20X2 and 20X3, the effects of the
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intercompany transfer should be eliminated. [ARB 51, Par. 6; ASC 810] The following eliminating entry is required at December 31, 20X2: Sales Inventory Cost of Goods Sold 180,000 60,000

240,000

The above entry will increase the carrying value of the inventory to $240,000. Eliminating sales of $180,000 and cost of goods sold of $240,000 will increase consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x 0.10). These changes will result in an increase in consolidated retained earnings and the amount assigned to the noncontrolling shareholders in the consolidated balance sheet by $54,000 and $6,000, respectively. C6-3 (continued) The following eliminating entry is required at December 31, 20X3: Cost of Goods Sold Investment in Sub NCI in NA of Sub 60,000 54,000 6,000

The above entry will reduce consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x .10). The credits to Investment in Sub and NCI in NA of Sub needed to bring the beginning balances into agreement with those reported at December 31, 20X2. No eliminations are required for balances reported at December 31, 20X3, because the inventory has been sold to a nonaffiliate prior to year-end. Primary citations: ARB 43, CH 4, Par. 9 (ASC 330) ARB 51, Par. 6 (ASC 810) C6-4 Unrealized Inventory Profits a. When the amount of unrealized inventory profits on the books of the subsidiary at the beginning of the period is greater than the amount at the end of the period, the income assigned to the noncontrolling interest for the period will exceed a pro rata portion of the reported net income of the subsidiary. b. The subsidiary apparently had less unrealized inventory profit at the end of the period than it did at the start of the period. In addition, the parent must have had more unrealized profit on its books at the end of the period than it did at the beginning. The negative effect of the latter apparently offset the positive effect of the reduction in unrealized profits by the subsidiary. c. The most likely reason is that a substantial amount of the parent company sales was made to its subsidiaries and the cost of goods sold on those items was eliminated in preparing the consolidated statements.

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d. A loss was recorded by the seller on an intercompany sale of inventory to an affiliate and the purchaser continues to hold the inventory. C6-5 Eliminating Inventory Transfers a. If no intercompany sales are eliminated, the income statement may include overstated sales revenue and cost of goods sold. The net impact on income will depend upon whether there were more unrealized profits at the beginning or end of the year. If Ready Building does not hold total ownership of the subsidiaries, the amount of income assigned to noncontrolling shareholders is likely to be incorrect as well. Inventory, current assets and total assets, retained earnings, and stockholders' equity are likely to be overstated if inventories are sold to affiliates at a profit. If the companies pay income taxes on their individual earnings, the amount of income tax expense also will be overstated in the period in which unrealized profits are reported and understated in the period in which the profits are realized. b. Because profit margins vary considerably, the amount of unrealized profit may vary considerably if uneven amounts of product are purchased by affiliates from period to period. Ready Building needs to establish a formal system to monitor intercompany sales. Perhaps the best alternative would be to establish a separate series of accounts to be used solely for intercompany transfers. Alternatively, it may be possible to use unique shipping containers for intercompany sales or to specifically mark the containers in some way to identify the intercompany shipments at the time of receipt. The purchaser might then use a different type of inventory tag or mark these units in some way when the product is received and placed in inventory. Inventory count teams could then easily identify the product when inventories are taken. c. A number of factors might be considered. The most important inventory system is the one used by the company making the intercompany purchase. When intercompany inventory purchases are bunched at the end of the year, the amount of unrealized profit included in ending inventory may be quite different under FIFO versus LIFO. If intercompany purchases are placed in a LIFO inventory base, inventories may be misstated for a period of years before the inventory is resold. Eliminating entries must be made each of the years until resale to avoid a misstatement of assets and equities. In those cases where the intercompany purchases are in high volume and the inventory turns over very quickly, a small amount of inventory left at the end of the period may be immaterial and of little concern. Typically, a parent will align inventory costing methods subsequent to a subsidiary acquisition to avoid problems caused by differences in accounting for the same items or types of items. d. It may be necessary to start by looking at intercorporate cash receipts and disbursements to determine the extent of intercorporate sales. One or more months might be selected and all vouchers examined to establish the level of intercorporate sales and the profit margins recorded on the sales. For those products sold throughout the year, it may be possible to estimate for the year as a whole based on an examination of several months. Once total intercompany sales and profit margins have been estimated, the amount of unrealized profit at year end should be estimated. One approach would be to take a physical inventory of the specific product types which have been identified and attempt to trace back using the product identification numbers or shipping numbers to determine what portion of the inventory on hand was purchased from affiliates.

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C6-6 Intercompany Profits and Transfers of Inventory a. The intercompany transfers of Xerox (www.xerox.com) between segments are apparently relatively insignificant because they are not reported in the notes to the consolidated financial statements relating to segment reporting. For consolidation purposes, all significant intercompany accounts and transactions are eliminated. b. Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated market prices. The amount of intercompany transfers is large. In the fiscal year ending December 31, 2009, Exxon Mobil reported eliminations of $302.6 billion of intersegment transfers, which does not include intercompany transfers within segments. This amount represents nearly 50 percent of total reported segment sales. For consolidation purposes, Exxon Mobil eliminates the effects of intercompany transactions. c. Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles, parts, and components manufactured by the company and its subsidiaries, with a smaller amount of financial and other services included. The amount of intercompany transfers is relatively small in relation to sales to unaffiliated customers. The amount has been decreasing in recent years. The effects of intercompany transfers are eliminated in consolidation.

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SOLUTIONS TO EXERCISES E6-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted] 1. 2. 3. 4. 5. a c a c c Net assets reported Profit on intercompany sale Proportion of inventory unsold at year end ($60,000 / $240,000) Unrealized profit at year end Amount reported in consolidated statements Inventory reported by Banks ($175,000 + $60,000) Inventory reported by Lamm Total inventory reported Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] Amount reported in consolidated statements $320,000

$48,000 x 0.25

(12,000) $308,000 $235,000 250,000 $485,000 (15,000) $470,000

6.

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E6-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted] 1. b Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small ($500,000 x 0.40) Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x 4 / 5) x 0.60] Cost of goods sold for consolidated entity Note: $ 800,000 700,000 $1,500,000 (200,000) (240,000) $1,060,000

Answer b in the actual CPA examination question was $1,100,000, requiring candidates to select the closest answer. = = = ($200,000 + $140,000) $308,000 ($26,000 + $19,000) $39,000 Inventory held by Spin ($32,000 x 0.375) Unrealized profit on sale [($30,000 + $25,000) $52,000] Carrying cost of inventory for Power $12,000 (3,000) $ 9,000

2. 3. 4.

d b c

$32,000 $6,000 $9,000

5. 6.

b b

0.20 = $14,000 / [(Stockholders Equity $50,000) +(Patent $20,000)] 14 years = ($28,000 / [(28,000 - $20,000) / 4 years]

E6-3 Multiple Choice Consolidated Income Statement 1. 2. 3. c b c Total income ($86,000 - $47,000) Income assigned to noncontrolling interest [0.40($86,000 - $60,000)] Consolidated net income assigned to controlling interest $39,000 (10,400) $28,600

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E6-4 Multiple-Choice Questions Consolidated Balances 1. 2. c a Amount paid by Lorn Corporation Unrealized profit Actual cost Portion sold Cost of goods sold Consolidated sales Cost of goods sold Consolidated net income Income to Dressers noncontrolling interest: Sales Reported cost of sales Report income Portion realized Realized net income Portion to Noncontrolling Interest Income to noncontrolling Interest Income to controlling interest Inventory reported by Lorn Unrealized profit ($45,000 x .20) Ending inventory reported $120,000 (45,000) $ 75,000 x 0.80 $ 60,000 $140,000 (60,000) $ 80,000 $120,000 (75,000) $ 45,000 x 0.80 $ 36,000 x 0.30 (10,800) $ 69,200 $ 24,000 (9,000) $ 15,000

3.

4.

E6-5 Multiple-Choice Questions Consolidated Income Statement 1. 2. a d $20,000 = $30,000 x [($48,000 - $16,000) / $48,000] Sales reported by Movie Productions Inc. Cost of goods sold ($30,000 x 2/3) Consolidated net income $7,000 = [($67,000 - $32,000) x 0.20] $67,000 (20,000) $47,000

3.

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E6-6 Realized Profit on Intercompany Sale a. Journal entries recorded by Nordway Corporation: (1) (2) (3) Inventory Cash (Accounts Payable) Cash (Accounts Receivable) Sales Cost of Goods Sold Inventory 960,000 750,000 600,000 960,000 750,000 600,000

b.

Journal entries recorded by Olman Company: (1) (2) (3) Inventory Cash (Accounts Payable) Cash (Accounts Receivable) Sales Cost of Goods Sold Inventory 750,000 1,125,000 750,000 750,000 1,125,000 750,000

c.

Eliminating entry: Sales Cost of Goods Sold 750,000 750,000

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E6-7 Sale of Inventory to Subsidiary a. Journal entries recorded by Nordway Corporation: (1) (2) (3) Inventory Cash (Accounts Payable) Cash (Accounts Receivable) Sales Cost of Goods Sold Inventory 960,000 750,000 600,000 960,000 750,000 600,000

b.

Journal entries recorded by Olman Company: (1) (2) (3) Inventory Cash (Accounts Payable) Cash (Accounts Receivable) Sales Cost of Goods Sold Inventory 750,000 810,000 540,000 750,000 810,000 540,000

c.

Eliminating entry: Sales Cost of Goods Sold Inventory Calculations Total = Re-Sold + 750,000 540,000 600,000 432,000 150,000 108,000 20% Ending Inventory 210,000 168,000 42,000 750,000 708,000 42,000

Sales COGS Gross Profit Gross Profit %

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E6-8 Inventory Transfer between Parent and Subsidiary a. b. c. Karlow Corporation reported cost of goods sold of $820,000 ($82 x 10,000 desks) and Draw Company reported cost of goods sold of $658,000 ($94 x 7,000 desks). Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks). Eliminating entry: Sales Cost of Goods Sold Inventory Calculations Total = Re-sold + 940,000 658,000 820,000 574,000 120,000 84,000 12.77% Ending Inventory 282,000 246,000 36,000 940,000 904,000 36,000

Sales COGS Gross Profit Gross Profit % d. Eliminating entry:

Investment in Draw Company Cost of Goods Sold e. Eliminating entry: Investment in Draw Company NCI in NA of Draw Company Cost of Goods Sold

36,000

36,000

21,600 14,400

36,000

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E6-9 Income Statement Effects of Unrealized Profit a. Sale price to Holiday Bakery per bag ($900,000 / 100,000) Profit per bag [$9.00 - ($9.00 / 1.5)] Cost per bag Bags sold by Holiday Bakery (100,000 - 20,000) Consolidated cost of goods sold Sales Cost of Goods Sold Inventory ($3.00 x 20,000 bags) Calculations Total 900,000 600,000 300,000 33.33% = Re-sold + 720,000 480,000 240,000 Ending Inventory 180,000 120,000 60,000 900,000 $ 9.00 (3.00) $ 6.00 x 80,000 $480,000

b.

840,000 60,000

Sales COGS Gross Profit Gross Profit %

Required Adjustment to Cost of Goods Sold: Cost of goods sold Farmco ($900,000 / 1.5) Cost of goods sold Holiday ($9.00 x 80,000 units) Consolidated cost of goods sold ($6.00 x 80,000 units) Required adjustment c. Operating income of Holiday Bakery Net income of Farmco Products Less: Unrealized inventory profits Consolidated net income Less: Income assigned to noncontrolling interest ($150,000 - $60,000 unrealized profit) x 0.40 Income assigned to controlling interest Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Unrealized profits ($3.00 x 20,000 units) Realized net income Ownership held by Holiday Bakery Income assigned to controlling interest $ 600,000 720,000 $1,320,000 (480,000) $ 840,000 $400,000 150,000 $550,000 (60,000) $490,000 (36,000) $454,000 $400,000

$150,000 (60,000) $ 90,000 x 0.60

54,000 $454,000

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E6-10 Prior-Period Unrealized Inventory Profit a. Cost per bag of flour ($9.00 / 1.5) Bags sold Cost of goods sold from inventory held, January 1, 20X9 Investment in Farmco NCI in NA of Farmco Cost of Goods Sold $60,000 = 20,000 bags x $3.00 c. Operating income of Holiday Bakery Net income of Farmco Products Add: Inventory profits realized in 20X9 Consolidated net income Less: Income assigned to noncontrolling shareholders ($250,000 + $60,000) x 0.40 Income assigned to controlling interest Alternate computation: Operating income of Holiday Bakery Net income of Farmco Products Inventory profits realized in 20X9 Realized net income Ownership held by Holiday Bakery Income assigned to controlling interest 36,000 24,000 $ 6.00 x 20,000 $120,000

b. 60,000 $300,000 250,000 $550,000 60,000 $610,000 (124,000) $486,000 $300,000

$250,000 60,000 $310,000 x 0.60

186,000 $486,000

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E6-11 Computation of Consolidated Income Statement Data Downstream Transaction Calculations Total = 30,000 20,000 10,000 33.33% Re-sold 24,000 16,000 8,000 + Ending Inventory 6,000 4,000 2,000

Sales COGS Gross Profit Gross Profit %

Worksheet Entry (not requested in problem) Sales 30,000 Cost of Goods Sold 28,000 Inventory 2,000 Upstream Transaction Calculations Total = 80,000 50,000 30,000 37.50% Re-sold 60,000 37,500 22,500 + Ending Inventory 20,000 12,500 7,500

Sales COGS Gross Profit Gross Profit %

Worksheet Entry (not requested in problem) Sales 80,000 Cost of Goods Sold 72,500 Inventory 7,500 a. Reported sales of Prem Company Reported sales of Cooper Company Intercompany sales by Prem Company in 20X5 Intercompany sales by Cooper Company in 20X5 Sales reported on consolidated income statement $ 30,000 80,000 $400,000 200,000 $600,000 (110,000) $490,000

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E6-11 (continued) b. Cost of goods sold reported by Prem Company Cost of goods sold reported by Cooper Company Adjustment due to intercompany sales Consolidated cost of goods sold Adjustment to cost of goods sold: CGS charged by Prem on sale to Cooper CGS charged by Cooper ($30,000 - $6,000) Total charged to CGS CGS for consolidated entity $20,000 x ($24,000 / $30,000) Required adjustment to CGS CGS charged by Cooper on sale to Prem CGS charged by Prem ($80,000 - $20,000) Total charged to CGS CGS for consolidated entity $50,000 x ($60,000 / $80,000) Required adjustment to CGS Total adjustment required c. Reported net income of Cooper Company Unrealized profit on sale to Prem Company $30,000 x ($20,000 / $80,000) Realized net income Noncontrolling interest's share Income assigned to noncontrolling interest Reported net income of Pem Company Less: Income from Cooper Net income of Cooper Company Operating income Less: Unrealized inventory profits of Prem Company [$10,000 x ($6,000 / $30,000)] Unrealized inventory profits of Copper Company [$30,000 x ($20,000 / $80,000)] Income assigned to noncontrolling interest Income assigned to controlling interest $100,500 (20,500) $ 20,000 24,000 $ 44,000 (16,000) $ 50,000 60,000 $110,000 (37,500) 72,500 $100,500 $ 45,000 (7,500) $ 37,500 x 0.40 $ 15,000 $ 80,000 45,000 $125,000 $ 28,000 $250,000 120,000 $370,000 (100,500) $269,500

d.

$ 2,000 7,500 15,000 (24,500) $ 100,500

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E6-12 Sale of Inventory at a Loss a. Entries recorded by Trent Company: Inventory Cash Purchase inventory. Cash Sales Sale of inventory to Gord Corporation. Cost of Goods Sold Inventory Record cost of goods sold. Entries recorded by Gord Corporation Inventory Cash Purchase of inventory from Trent. Cash Sales Sale of inventory to nonaffiliates. Cost of Goods Sold Inventory Record cost of goods sold: $180,000 = $300,000 x .60 b. c. Consolidated cost of goods sold for 20X8 should be reported as $240,000 ($400,000 x 0.60). Operating income reported by Gord Net income reported by Trent Unrealized loss on intercorporate sale ($400,000 - $300,000) x 0.40 Consolidated net income Income to assigned to noncontrolling interest ($120,000 x 0.25) Income assigned to controlling interest $ 80,000 40,000 $230,000 120,000 $350,000 (30,000) $320,000 300,000 300,000 400,000 400,000

300,000

300,000

400,000

400,000

360,000

360,000

180,000

180,000

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E6-12 (continued) d. Eliminating entry, December 31, 20X8: Sales Inventory Cost of Goods Sold Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Trent Cost of goods sold recorded by Gord Total recorded Consolidated cost of goods sold Required elimination Intercompany Transaction Calculations Total = Re-sold + 300,000 180,000 400,000 240,000 (100,000) (60,000) -33.33% Ending Inventory 120,000 160,000 (40,000) $400,000 180,000 $580,000 (240,000) $340,000 300,000 40,000

340,000

Sales COGS Gross Profit Gross Profit %

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E6-13 Intercompany Sales 20X4 Calculations: Sales COGS Gross Profit Gross Profit % Total = Re-sold 180,000 135,000 120,000 90,000 60,000 45,000 33.33% + Ending Inventory 45,000 30,000 15,000

Worksheet Entry (not required in problem) Sales 180,000 Cost of Goods Sold 165,000 Inventory 15,000 20X5 Calculations: 20X5 Upstream Sales COGS Gross Profit Gross Profit % Total 135,000 90,000 45,000 33.33% = Re-sold 105,000 70,000 35,000 + Ending Inventory 30,000 20,000 10,000

20X5 Downstream Sales COGS Gross Profit Gross Profit % Total = Re-sold + 280,000 170,000 140,000 85,000 140,000 85,000 50.00% Ending Inventory 110,000 55,000 55,000

Worksheet Elimination Entries (not required in problem): Eliminate Upstream Transactions Sales 135,000 Cost of Goods Sold Inventory Eliminate Downstream Transactions Sales 280,000 Cost of Goods Sold Inventory Reversal of 20X4 Upstream Deferral Investment in Surg 10,500 NCI in NA of Surg 4,500

125,000 10,000

225,000 55,000

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Cost of Goods Sold

15,000

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E6-13 (continued) a. Consolidated net income for 20X4: Operating income of Hollow Corporation Net income of Surg Corporation Less: Unrealized profit Surg Corporation Consolidated net income b. Inventory balance, December 31, 20X5: Inventory reported by Hollow Corporation Unrealized profit on books of Surg Corporation ($135,000 - $90,000) x ($30,000/$135,000) Inventory reported by Surg Corporation Unrealized profit on books of Hollow Corporation ($280,000 - $140,000) x ($110,000/$280,000) Inventory, December 31, 20X5 c. Consolidated cost of goods sold for 20X5: COGS on sale of inventory on hand January 1, 20X5 $45,000 x ($120,000 / $180,000) COGS on items purchased from Surg in 20X5 ($135,000 - $30,000) x ($90,000 / $135,000) COGS on items purchased from Hollow in 20X5 ($280,000 - $110,000) x ($140,000 / $280,000) Total cost of goods sold d. Income assigned to controlling interest: Operating income of Hollow Corporation Net income of Surg Corporation Add: Inventory profit of prior year realized in 20X5 Less: Unrealized inventory profit Surg Corporation Unrealized inventory profit Hollow Corporation Income to noncontrolling interest ($85,000 + $15,000 - $10,000) x 0.30 Income assigned to controlling interest $220,000 85,000 $305,000 15,000 (10,000) (55,000) (27,000) $228,000 $ 30,000 70,000 85,000 $185,000 $ 30,000 (10,000) $110,000 (55,000) 55,000 $75,000 $20,000 $160,000 90,000 $250,000 (15,000) $235,000

6-23

Chapter 06 - Intercompany Inventory Transactions

E6-14 Consolidated Balance Sheet Worksheet


a. Equity Method Entries on Doorst Corp.'s Books: Investment in Hingle Co. 49,000 Income from Hingle Co. Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 income Cash 9,800 Investment in Hingle Co. 9,800 Record Doorst Corp.'s 70% share of Hingle Co.'s 20X8 dividend Income from Hingle Co. 10,000 Investment in Hingle Co. 10,000 Eliminate the deferred gross profit from downstream sales in 20X8 Income from Hingle Co. 28,000 Investment in Hingle Co. Eliminate the deferred gross profit from upstream sales in 20X8 Book Value Calculations: NCI 30% 103,200 21,000 (4,200) 120,000 + Doorst Corp. 70% 240,800 49,000 (9,800) 280,000 = Common Stock 150,000 + Retained Earnings 194,000 70,000 (14,000) 250,000

49,000

28,000

Original book value + Net Income - Dividends Ending book value

150,000

Reversal/Deferred GP Calculations: Total (10,000) (40,000) (50,000) = Doorst Corp.'s share (10,000) (28,000) (38,000) + NCI's share 0 (12,000 ) (12,000)

Downstream Deferred GP Upstream Deferred GP Total

6-24

Chapter 06 - Intercompany Inventory Transactions

E6-14 (continued)
Basic elimination entry Common stock Retained earnings Income from Hingle Co. NCI in NI of Hingle Co. Dividends declared Investment in Hingle Co. NCI in NA of Hingle Co.

150,000 194,000 11,000 9,000 14,000 242,000 108,000

Original amount invested (100%) Beginning balance in retained earnings Doorsts % of NI - Deferred GP + Reversal NCI share of NI - Deferred GP + Reversal 100% of Hingle Co.'s dividends declared Net book value - Deferred GP + Reversal NCI share of BV - Deferred GP + Reversal

Deferral of this year's unrealized profits on inventory transfers Sales 400,000 Cost of Goods Sold 350,000 Inventory 50,000 20X8 Downstream Transactions Total 100,000 60,000 40,000 40.00% = Re-sold 75,000 45,000 30,000 + Ending Inventory 25,000 15,000 10,000

Sales COGS Gross Profit Gross Profit %

20X8 Upstream Transactions Total 300,000 173,684 126,316 42.11% Investment in Hingle Co. 240,800 49,000 9,800 38,000 242,000 242,000 0 Income from Hingle Co. 49,000 70% Dividends Deferred GP Basic 38,000 11,000 11,000 0 Ending Balance 70% Net Income = Re-sold 205,000 118,684 86,316 + Ending Inventory 95,000 55,000 40,000

Sales COGS Gross Profit Gross Profit %

Acquisition Price 70% Net Income

Ending Balance

6-25

Chapter 06 - Intercompany Inventory Transactions E6-14 (continued) b.


Elimination Entries Doorst Corp. Balance Sheet Cash and Receivables Inventory Buildings & Equipment (net) Investment in Hingle Co. Total Assets Accounts Payable Common Stock Retained Earnings 98,000 150,000 310,000 242,000 800,000 70,000 200,000 530,000 Hingle Co. 40,000 100,000 280,000 420,000 20,000 150,000 250,000 0 DR CR 50,000 242,000 292,000 Consolidate d 138,000 200,000 590,000 0 928,000 90,000 200,000 530,000

150,000 194,000 11,000 9,000 400,000 764,000

14,000 350,000 108,000 472,000

NCI in NA of Hingle Co. Total Liabilities & Equity

800,000

420,000

108,000 928,000

6-26

Chapter 06 - Intercompany Inventory Transactions

E6-15* Multiple Transfers between Affiliates a. Entries recorded by Klon Corporation Cash Sales Sale of inventory to Brant Company. Cost of Goods Sold Inventory Record cost of goods sold. Entries recorded by Brant Company Inventory Cash Purchase of inventory from Klon. Cash Sales Sale of inventory to Torkel Company. Cost of Goods Sold Inventory Record cost of goods sold. Entries recorded by Torkel Company Inventory Cash Purchase of inventory from Brant. Cash Sales Sale of inventory to nonaffiliates. Cost of Goods Sold Inventory Record cost of goods sold. b. c. Cost of goods sold for 20X8 should be reported as $60,000 [$90,000 x ($100,000 / $150,000)]. Inventory at December 31, 20X8, should be reported at $40,000 [$60,000 x ($100,000 / $150,000)]. 150,000 150,000 150,000 150,000 150,000 150,000

100,000

100,000

150,000

150,000

150,000

150,000

120,000

120,000

90,000

90,000

6-27

Chapter 06 - Intercompany Inventory Transactions

E6-15* (continued) d. Eliminating entry for inventory: Sales Cost of Goods Sold Inventory Computation of cost of goods sold to be eliminated Cost of goods sold recorded by Klon Cost of goods sold recorded by Brant Cost of goods sold recorded by Torkel Total recorded Consolidated cost of goods sold Required elimination Computation of reduction to carrying value of inventory Inventory reported by Torkel Inventory balance to be reported Required elimination $60,000 (40,000) $20,000 $100,000 150,000 90,000 $340,000 (60,000) $280,000 300,000 280,000 20,000

6-28

Chapter 06 - Intercompany Inventory Transactions

E6-16 Inventory Sales a. Journal entries recorded by Spice Company: (1) Inventory Cash (Accounts Payable) Record purchases from nonaffiliate. Cash (Accounts Receivable) Sales Record sale to Herb Corporation. Cost of Goods Sold Inventory Record cost of goods sold to Herb Corporation. 150,000 150,000

(2)

60,000

60,000

(3)

40,000

40,000

Journal entries recorded by Herb Corporation: (1) Inventory Cash (Accounts Payable) Record purchases from Spice Company. Cash (Accounts Receivable) Sales Record sale of items to nonaffiliates. Cost of Goods Sold Inventory Record cost of goods sold. 60,000 60,000

(2)

90,000

90,000

(3)

45,000

45,000

(4)

Income from Herb 5,000 Investment in Herb 5,000 Eliminate unrealized gross profit on inventory purchases from Herb. Ending Inventory 15,000 10,000 5,000

b.

Eliminating entry: Total = Re-sold + 60,000 45,000 40,000 30,000 20,000 15,000 33.33%

Sales COGS Gross Profit Gross Profit %

Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.

60,000

55,000 5,000

6-29

Chapter 06 - Intercompany Inventory Transactions

E6-17 Prior-Period Inventory Profits a. 20X8 Sale: Total = Re-sold + 180,000 170,000 120,000 113,333 60,000 56,667 33.33% Ending Inventory 30,000 20,000 10,000

Sales COGS Gross Profit Gross Profit % 20X9 Sale:

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 240,000 170,000 160,000 113,333 80,000 56,667 33.33%

Ending Inventory 150,000 100,000 50,000

Investment in Level Brothers NCI in NA of Level Brothers Cost of goods sold Reversal of 20X8 gross profit deferral Sales Cost of Goods Sold Inventory Eliminate 20X9 intercompany sale of inventory. b.

7,500 2,500

10,000

240,000

190,000 50,000

Reported net income of Level Brothers Unrealized profit, December 31, 20X8 Unrealized profit, December 31, 20X9 Realized net income Noncontrolling interest's share of ownership Income assigned to noncontrolling interest

20X8 $350,000 (10,000) $340,000 x 0.25 $ 85,000

20X9 $420,000 10,000 (50,000) $380,000 x 0.25 $ 95,000

6-30

Chapter 06 - Intercompany Inventory Transactions

SOLUTIONS TO PROBLEMS P6-18 Consolidated Income Statement Data a. b. $180,000 = $550,000 + $450,000 - $820,000 January 1, 20X2: $25,000 = $75,000 - $50,000 December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000 Investment in Bitner NCI in NA of Bitner Cost of Goods Sold Eliminate beginning inventory profit. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory. d. Reported net income of Bitner Company Prior-period profit realized in 20X2 Unrealized profit on 20X2 sales Realized income Proportion held by noncontrolling interest Income assigned to noncontrolling interest 15,000 10,000

c.

25,000

180,000

165,000 15,000

$ 90,000 25,000 (15,000) $100,000 x 0.40 $ 40,000

6-31

Chapter 06 - Intercompany Inventory Transactions

P6-19 Unrealized Profit on Upstream Sales 20X2 Total = Re-sold + 200,000 130,000 160,000 104,000 40,000 26,000 20.00% Ending Inventory 70,000 56,000 14,000

Sales COGS Gross Profit Gross Profit % 20X3

Sales COGS Gross Profit Gross Profit % 20X4

Total = 175,000 140,000 35,000 20.00%

Re-sold 70,000 56,000 14,000

Ending Inventory 105,000 84,000 21,000

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 225,000 105,000 180,000 84,000 45,000 21,000 20.00% 20X2

Ending Inventory 120,000 96,000 24,000

20X3 $240,000 90,000 $330,000 14,000 (21,000)

20X4 $300,000 160,000 $460,000

Operating income reported by Pacific Net income reported by Carroll Inventory profit, December 31, 20X2 $70,000 - ($70,000 / 1.25) Inventory profit, December 31, 20X3 $105,000 - ($105,000 / 1.25) Inventory profit, December 31, 20X4 $120,000 - ($120,000 / 1.25) Consolidated net income Income to noncontrolling interest: ($100,000 - $14,000) x 0.40 ($90,000 + $14,000 - $21,000) x 0.40 ($160,000 + $21,000 - $24,000) x 0.40 Income to controlling interest

$150,000 100,000 $250,000 (14,000)

21,000 (24,000) $457,000

$236,000 (34,400) $201,600

$323,000 (33,200) $289,800

(62,800) $394,200

6-32

Chapter 06 - Intercompany Inventory Transactions

P6-20 Net Income of Consolidated Entity Operating income of Master for 20X5 Net income of Crown for 20X5 Add: Prior year profits realized by Master Prior year profits realized by Crown Less: Unrealized profits for 20X5 by Master Unrealized profits for 20X5 by Crown Amortization of differential ($45,000 / 15 years) Consolidated net income, 20X5 Less: Income to noncontrolling interest ($65,000 + $40,000 - $55,000 - $3,000) x 0.30 Income to controlling interest P6-21 Correction of Eliminating Entries a. Proportion of intercompany inventory purchases resold during 20X5: Unrealized profit at year end $ 12,000 Intercompany transfer price $140,000 Cost of inventory sold ($140,000 / 1.40) (100,000) Total Profit 40,000 Proportion of intercompany sale held by Bolger at year end 0.30 Proportion of intercompany purchases resold by Bolger during 20X5 (1.00 - 0.30) b. Eliminating entries, December 31, 20X5: Intercompany Transactions Total = Re-sold + 140,000 98,000 100,000 70,000 40,000 28,000 28.57% Ending Inventory 42,000 30,000 12,000 0.70 $118,000 65,000 $183,000 25,000 40,000 (14,000) (55,000) (3,000) $176,000 (14,100) $161,900

Sales COGS Gross Profit Gross Profit %

Accounts Payable Accounts Receivable Eliminate intercompany receivable/payable. Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory.

80,000

80,000

140,000

128,000 12,000

6-33

Chapter 06 - Intercompany Inventory Transactions

P6-22 Incomplete Data a. Increase in fair value of buildings and equipment: Consolidated total Balance reported by Lever Balance reported by Tropic Increase in value b. Accumulated depreciation for consolidated entity: Accumulated depreciation reported by Lever Accumulated depreciation reported by Tropic Cumulative write-off of differential ($5,000 x 6 years) Accumulated depreciation for consolidated entity c. Amount paid by Lever to acquire ownership in Tropic: Common stock outstanding Retained earnings at acquisition Total book value at acquisition Increase in value of buildings and equipment Fair value of net assets acquired Proportion of ownership acquired Amount paid by Lever d. Investment in Tropic Company stock reported at December 31, 20X6: Tropic's common stock outstanding December 31, 20X6 Tropic's retained earnings reported December 31, 20X6 Total book value Proportion of ownership held by Lever Lever's share of net book value Unamortized differential ($5,000 x 2 years) x 0.75 20X6 Gross Profit Deferral on Downstream Sale Investment in Tropic Company stock e. Intercorporate sales of inventory in 20X6: Sales reported by Lever Sales reported by Tropic Total sales Sales reported in consolidated income statement Intercompany sales during 20X6 $420,000 260,000 $680,000 (650,000) $ 30,000 $ 60,000 112,000 $172,000 x 0.75 $129,000 7,500 (3,000) $133,500 $ 60,000 30,000 $ 90,000 40,000 $130,000 x 0.75 $ 97,500 $180,000 110,000 30,000 $320,000 $ 680,000 (400,000) (240,000) $ 40,000

6-34

Chapter 06 - Intercompany Inventory Transactions

P6-22 (continued) f. Unrealized inventory profit, December 31, 20X6: Inventory reported by Lever Inventory reported by Tropic Total inventory Inventory reported in consolidated balance sheet Unrealized inventory profit, December 31, 20X6 g. Eliminating entry to remove the effects of intercompany inventory sales during 20X6: Sales Cost of Goods Sold Inventory h. Unrealized inventory profit at January 1, 20X6: Cost of goods sold reported by Lever Cost of goods sold reported by Tropic Reduction of cost of goods sold for intercompany sales during 20X6 Adjusted cost of goods sold Cost of goods sold reported in consolidated income statement Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory i. Accounts receivable reported by Lever at December 31, 20X6: Accounts receivable reported for consolidated entity Accounts receivable reported by Tropic Difference Adjustment for intercompany receivable/payable: Accounts payable reported by Lever Accounts payable reported by Tropic Total reported accounts payable Accounts payable reported for consolidated entity Adjustment for intercompany receivable/payable Accounts receivable reported by Lever $145,000 (55,000) $ 90,000 $ 86,000 20,000 $106,000 (89,000) 17,000 $107,000 $310,000 170,000 (26,000) $454,000 (445,000) $ 9,000 30,000 26,000 4,000 $125,000 90,000 $215,000 (211,000) $ 4,000

6-35

Chapter 06 - Intercompany Inventory Transactions

P6-23 Eliminations for Upstream Sales


a. Equity Method Entries on Clean Air's Books: Investment in Special Filter Income from Special Filter 32,000 32,000

Record Clean Air's 80% share of Special Filter's 20X8 income Investment in Special Filter 16,000 Income from Special Filter 16,000 Reverse of the deferred gross profit from upstream sales in 20X7 Income from Special Filter 12,000 Investment in Special Filter Eliminate the deferred gross profit from upstream sales in 20X8 Book Value Calculations: NCI 20% 62,000 8,000 70,000 + Clean Air 80% 248,000 32,000 280,000 = Common Stock 90,000 90,000 + Retained Earnings 220,000 40,000 260,000

12,000

Original book value + Net Income Ending book value

Reversal/Deferred GP Calculations: Total 0 20,000 0 (15,000) 5,000 = Clean Air's share 0 16,000 0 (12,000) 4,000 + NCI's share 4,000 (3,000) 1,000

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Basic elimination entry: Common stock Retained earnings Income from Special Filter NCI in NI of Special Filter Investment in Special Filter NCI in NA of Special Filter

90,000 220,000 36,000 9,000 284,000 71,000

Original amount invested (100%) Beginning balance in RE Parents % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

6-36

Chapter 06 - Intercompany Inventory Transactions

P6-23 (continued)
20X7 Upstream Transactions 20X8 Beg. Inventory Sales 60,000 COGS Gross Profit Gross Profit % 40,000 20,000 33.33%

20X8 Upstream Transactions Total 150,000 100,000 50,000 33.33% = Re-sold 105,000 70,000 35,000 + Ending Inventory 45,000 30,000 15,000

Sales COGS Gross Profit Gross Profit % Reversal of last year's deferral: Investment in Special Filter NCI in NA of Special Filter Cost of Goods Sold Sales Cost of Goods Sold Inventory

16,000 4,000 20,000 150,000 135,000 15,000

Deferral of this year's unrealized profits on inventory transfers

6-37

Chapter 06 - Intercompany Inventory Transactions

P6-23 (continued) b. Computation of consolidated net income and income assigned to controlling interest: Operating income reported by Clean Air Products ($250,000 - $175,000 - $30,000) Net income of Superior Filter ($200,000 - $140,000 - $20,000) Inventory profit realized from 20X7 Unrealized inventory profit for 20X8 Consolidated net income Income assigned to noncontrolling interest ($40,000 + $20,000 - $15,000) x 0.20 Income assigned to controlling interest c. Noncontrolling interest, December 31, 20X8: Common stock Retained earnings ($220,000 + $40,000) Less: Unrealized inventory profit Proportion of stock held by noncontrolling interest Noncontrolling interest $ 90,000 260,000 (15,000) $335,000 x 0.20 $ 67,000 $ 45,000 40,000 $ 85,000 20,000 (15,000) $ 90,000 (9,000) $ 81,000

6-38

Chapter 06 - Intercompany Inventory Transactions

P6-24 Multiple Inventory Transfers a. Consolidated net income for 20X8: Operating income of Ajax Corporation Unrealized profit, December 31, 20X8 ($35,000 - $15,000) x ($7,000 / $35,000) Net income of Beta Corporation Profit realized from 20X7 ($30,000 - $24,000) x ($10,000 / $30,000) Unrealized profit, December 31, 20X8 ($72,000 - $63,000) x ($12,000 / $72,000) Net income of Cole Corporation Profit realized from 20X7 ($72,000 - $60,000) x ($18,000 / $72,000) Unrealized profit, December 31, 20X8 ($45,000 - $27,000) x ($15,000 / $45,000) Consolidated net income b. Inventory balance, December 31, 20X8: Balance per Beta Corporation Less: Unrealized profit Balance per Cole Corporation Less: Unrealized profit Balance per Ajax Corporation Less: Unrealized profit Inventory balance per consolidated statement c. Income assigned to noncontrolling interest in 20X8: Realized income of Beta Corporation Proportion of stock held by noncontrolling interest Realized income of Cole Corporation Proportion of stock held by noncontrolling interest Income to noncontrolling interest $38,000 x 0.30 $11,400 $ 7,000 (4,000) $12,000 (1,500) $15,000 (6,000) $ 3,000 10,500 9,000 $22,500 $80,000 (4,000) $37,500 2,000 (1,500) $20,000 3,000 (6,000) 17,000 $131,000 38,000 $ 76,000

$17,000 x 0.10 1,700 $13,100

6-39

Chapter 06 - Intercompany Inventory Transactions

P6-25

Consolidation with Inventory Transfers and Other Comprehensive Income


20X4 Downstream Transactions Sales COGS Gross Profit Gross Profit % Total 108,000 90,000 18,000 16.67% = Re-sold 60,000 50,000 10,000 + Ending Inventory 48,000 40,000 8,000

20X4 Upstream Transactions Sales COGS Gross Profit Gross Profit % Total 45,000 30,000 15,000 33.33% = Re-sold 27,000 18,000 9,000 + Ending Inventory 18,000 12,000 6,000

20X5 Downstream Transactions Sales COGS Gross Profit Gross Profit % Total 36,000 30,000 6,000 16.67% = Re-sold 24,000 20,000 4,000 + Ending Inventory 12,000 10,000 2,000

20X5 Upstream Transactions Sales COGS Gross Profit Gross Profit % Total 48,000 32,000 16,000 33.33% = Re-sold 6,000 4,000 2,000 + Ending Inventory 42,000 28,000 14,000

Beg. Balance 90% Net Income

Investment in Tall Corp. 1,246,600 81,000 54,000 18,000 13,400 1,290,400 13,400 0 14,600 1,285,800 18,000

Income from Tall Corp. 81,000 90% Dividends 90% of OCI Gain Deferred GP Basic OCI Entry 90% Net Income

20X4 Reversal Ending Balance Reversal

14,600 79,800

13,400 79,800 0

20X4 Reversal Ending Balance

6-40

Chapter 06 - Intercompany Inventory Transactions

P6-25 (continued) a. Balance in investment account at December 31, 20X5: Proportionate share of Tall's net assets, January 1 ([$1,400,000 x .90] 8,000 [6,000 x 0.90]) Proportionate share of 20X5 net income ($90,000 x 0.90) Proportionate share of other comprehensive income for 20X5 ($20,000 x 0.90) Proportionate share of dividends received ($60,000 x 0.90) Reversal of deferred gain from 20X4 downstream transaction Reversal of deferred gain from 20X4 upstream transaction ($6,000 x .090) Deferred gain from downstream transaction Proportionate share of deferred gain from upstream transaction ($14,000 x 0.90) Balance in investment account December 31, 20X5 Investment income for 20X5: Net income reported by Tall Proportion of ownership held by Priority Prioritys share of reported income from Tall Reversal of deferred gain from 20X4 downstream transaction Reversal of deferred gain from 20X4 upstream transaction ($6,000 x 0.90) Deferred gain from downstream transaction Proportionate share of deferred gain from upstream transaction ($14,000 x 0.90) Investment income for 20X5 c. Income to noncontrolling interests for 20X5: Net income reported by Tall 20X4 inventory profits realized in 20X5 ($15,000 x 0.40) 20X5 unrealized inventory profits $30,000 - [$30,000 x ($48,000 / $90,000)] Realized net income Proportion of ownership held by noncontrolling interest Income to noncontrolling interest $90,000 6,000 (14,000) $82,000 x 0.10 $ 8,200 $1,246,600 81,000 18,000 (54,000) 8,000 5,400 (2,000) (12,600) $1,290,400 $90,000 x 0.90 81,000 8,000 5,400 (2,000) (12,600) $79,800

b.

6-41

Chapter 06 - Intercompany Inventory Transactions

P6-25 (continued) d. Balance assigned to noncontrolling interest in consolidated balance sheet: Net assets reported by Tall, January 1 Net income for 20X5 Dividends paid in 20X5 Net assets reported, December 31, 20X5 Unrealized inventory profits at December 31, 20X5 Other comprehensive income in 20X5 Adjusted net assets, December 31, 20X5 Proportion of ownership held by noncontrolling interest Net assets assigned to noncontrolling interest e. Inventory reported in consolidated balance sheet: Inventory held by Priority Less: Unrealized profit Inventory held by Tall Less: Unrealized profit $6,000 - [$6,000 x ($24,000 / $36,000)] Inventory f. Consolidated net income for 20X5: Operating income of Priority Net income of Tall Total unadjusted income 20X4 inventory profits realized in 20X5 ($6,000 + $8,000) Unrealized inventory profits on 20X5 sales ($14,000 + $2,000) Consolidated net income g. Eliminating entries, December 31, 20X5 $240,000 90,000 $330,000 14,000 (16,000) $328,000 $120,000 (14,000) $100,000 (2,000) 98,000 $204,000 $1,400,000 90,000 (60,000) $1,430,000 (14,000) 20,000 $1,436,000 x 0.10 $ 143,600

$106,000

Book Value Calculations:


NCI 10% 140,000 9,000 (6,000) 143,000 + Priority Corp. 90% 1,260,000 81,000 (54,000) 1,287,000 = Comm. Stock 400,000 400,000 + Add. Paid-In Capital 200,000 200,000 +
Retained

Original book value + Net Income - Dividends Ending book value

Earnings 790,000 90,000 (60,000) 820,000

Acc. OCI 10,000 10,000

6-42

Chapter 06 - Intercompany Inventory Transactions

6-43

Chapter 06 - Intercompany Inventory Transactions

P6-25 (continued) Reversal/Deferred GP Calculations: Total Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total 8,000 6,000 (2,000) (14,000) (2,000) = Priority Corp.'s share 8,000 5,400 (2,000) (12,600) (1,200) + NCI's share 600 (1,400) (800)

Basic elimination entry Common stock Additional paid-in capital Retained earnings Accumulated OCI Income from Tall Corp. NCI in NI of Tall Corp. Investment in Tall Corp. NCI in NA of Tall Corp. Other Comprehensive Income Entry: OCI from Tall Corp. OCI to the NCI Investment in Tall Corp. NCI in NA of Tall Corp. Reversal of last year's deferral: Investment in Tall Corp. NCI in NA of Tall Corp. Cost of Goods Sold

400,000 200,000 790,000 10,000 79,800 8,200 1,285,800 142,200

Original amount invested (100%) Beginning balance in APIC Beginning balance in RE Beginning balance in Acc. OCI PC.s % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

18,000 2,000 18,000 2,000

13,400 600 14,000

Deferral of this year's unrealized profits on inventory transfers Sales 126,000 Cost of Goods Sold 110,000 Inventory 16,000

6-44

Chapter 06 - Intercompany Inventory Transactions

P6-26 Multiple Inventory Transfers between Parent and Subsidiary 20X5 Downstream Total = Re-sold + 150,000 90,000 100,000 60,000 50,000 30,000 33.33% Ending Inventory, 20X5 60,000 40,000 20,000

Sales COGS Gross Profit Gross Profit % 20X5 Upstream

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 100,000 30,000 70,000 21,000 30,000 9,000 30.00% Beg Inventory, 20X6 = Re-sold + 70,000 50,000 49,000 35,000 21,000 15,000 30.00%

Ending Inventory, 20X5 70,000 49,000 21,000

Sales COGS Gross Profit Gross Profit %

Ending Inventory, 20X6 20,000 14,000 6,000

20X6 Downstream Total = Re-sold + 60,000 54,000 40,000 36,000 20,000 18,000 33.33% Ending Inventory, 20X6 6,000 4,000 2,000

Sales COGS Gross Profit Gross Profit % 20X6 Upstream

Sales COGS Gross Profit Gross Profit %

Total = Re-sold + 240,000 60,000 200,000 50,000 40,000 10,000 16.67%

Ending Inventory, 20X6 180,000 150,000 30,000

6-45

Chapter 06 - Intercompany Inventory Transactions

a.

Eliminating entries: Investment in Slinky 20,000 Cost of goods sold Eliminate beginning inventory profit of Proud Company. Investment in Slinky 12,600 NCI in NA of Slinky 8,400 Cost of goods sold Inventory Eliminate beginning inventory profit of Slinky Company. Sales 60,000 Cost of goods sold Inventory Eliminate intercompany sale of inventory by Proud Company. Sales 240,000 Cost of goods sold Inventory Eliminate intercompany sale of inventory by Slinky Company. 20,000

15,000 6,000

58,000 2,000

210,000 30,000

b.

Computation of cost of goods sold for consolidated entity: Inventory produced by Proud in 20X5 ($100,000 x 0.40) Inventory produced by Slinky in 20X5 ($70,000 x 0.50) Inventory produced by Proud in 20X6 ($40,000 x 0.90) Inventory produced by Slinky in 20X6 ($200,000 x 0.25) Cost of goods sold reported in consolidated income statement $ 40,000 35,000 36,000 50,000 $161,000

6-46

Chapter 06 - Intercompany Inventory Transactions

P6-27 Consolidation following Inventory Transactions


a. Equity Method Entries on Bell Co.'s Books: Investment in Troll Corp. 18,000 Income from Troll Corp. Record Bell Co.'s 60% share of Troll Corp.'s 20X2 income Cash 6,000 Investment in Troll Corp. Record Bell Co.'s 60% share of Troll Corp.'s 20X2 dividend Income from Troll Corp. 6,500 Investment in Troll Corp. Eliminate the deferred gross profit from downstream sales in 20X2 Investment in Troll Corp. 2,040 Income from Troll Corp. Reverse of the deferred gross profit from upstream sales in 20X1 Income from Troll Corp. 2,520 Investment in Troll Corp. Eliminate the deferred gross profit from upstream sales in 20X2 b. Book Value Calculations: NCI 40% 60,000 12,000 (4,000) 68,000 + Bell Co. 60% 90,000 18,000 (6,000) 102,000 = Common Stock 100,000 + Retained Earnings 50,000 30,000 (10,000) 70,000

18,000

6,000

6,500

2,040

2,520

Original book value + Net Income - Dividends Ending book value

100,000

Reversal/Deferred GP Calculations: Total 0 3,400 (6,500) (4,200) (7,300) = Bell Co.'s share 0 2,040 (6,500) (2,520) (6,980) + NCI's share 1,360 (1,680) (320)

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

6-47

Chapter 06 - Intercompany Inventory Transactions

P6-27 (continued) Basic elimination entry Common stock Retained earnings Income from Troll Corp. NCI in NI of Troll Corp. Dividends declared Investment in Troll Corp. NCI in NA of Troll Corp.

100,000 50,000 11,020 11,680 10,000 95,020 67,680

Original amount invested (100%) Beginning balance in RE Bells % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal 100% of Troll Corp.'s dividends Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Bell Co. 40% + 60% Beginning balance 7,200 10,800 Changes 0 0 Ending balance 7,200 10,800

Land 18,000 0 18,000

Excess value (differential) reclassification entry: Land 18,000 Investment in Troll Corp. NCI in NA of Troll Corp.

10,800 7,200

Optional accumulated depreciation elimination entry Accumulated depreciation 45,000 Building & equipment 45,000 Reversal of last year's deferral: Investment in Troll Corp. NCI in NA of Troll Corp. Cost of Goods Sold

2,040 1,360 3,400

Deferral of this year's unrealized profits on inventory transfers Sales 63,000 Cost of Goods Sold 52,300 Inventory 10,700

6-48

Chapter 06 - Intercompany Inventory Transactions

P6-27 (continued) 20X2 Downstream Transactions Total 28,000 14,000 14,000 50.00% = Re-sold 15,000 7,500 7,500 + Ending Inventory 13,000 6,500 6,500

Sales COGS Gross Profit Gross Profit %

20X1 Upstream Transactions Total 42,500 25,500 17,000 40.00% = Re-sold 34,000 20,400 13,600 + Ending Inventory 8,500 5,100 3,400

Sales COGS Gross Profit Gross Profit %

20X2 Upstream Transactions Total 35,000 21,000 14,000 40.00% = Re-sold 24,500 14,700 9,800 + Ending Inventory 10,500 6,300 4,200

Sales COGS Gross Profit Gross Profit % Investment in Troll Corp. Beginning Balance 60% Net Income 20X1 Reversal Ending Balance Reversal 98,760 18,000 2,040 103,780 2,040 0 6,000 9,020 95,020 10,800

Income from Troll Corp. 18,000 60% Dividends Deferred GP Basic Excess Reclass. 9,020 11,020 0 2,040 11,020 60% Net Income 20X1 Reversal Ending Balance

6-49

Chapter 06 - Intercompany Inventory Transactions

P6-27 (continued) c.
Bell Co. Income Statement Sales Less: COGS Less: Depreciation Expense Less: Interest Expense Income from Troll Corp. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Troll Corp. Total Assets Accounts Payable Bonds Payable Bonds Premium Common Stock Retained Earnings NCI in NA of Troll Corp. Total Liabilities & Equity 200,000 (99,800) (25,000) (6,000) 11,020 80,220 80,220 Troll Corp. 120,000 (61,000) (15,000) (14,000) 30,000 30,000 11,020 74,020 11,680 85,700 55,700 55,700 Elimination Entries DR CR 63,000 52,300 3,400 Consolidated 257,000 (105,100) (40,000) (20,000) 0 91,900 (11,680) 80,220

227,960 80,220 (40,000) 268,180

50,000 30,000 (10,000) 70,000

50,000 85,700 135,700

55,700 10,000 65,700

227,960 80,220 (40,000) 268,180

69,400 60,000 40,000 520,000 (175,000) 103,780 618,180 68,800 80,000 1,200 200,000 268,180 618,180

51,200 55,000 30,000 350,000 (75,000) 411,200 41,200 200,000 100,000 70,000 411,200

10,700 18,000 45,000 45,000 2,040 65,040 95,020 10,800 161,520

120,600 104,300 88,000 825,000 (205,000) 0 932,900 110,000 280,000 1,200 200,000 268,180 73,520 932,900

100,000 135,700 1,360 237,060

65,700 67,680 7,200 140,580

6-50

Chapter 06 - Intercompany Inventory Transactions

P6-28 Consolidation Worksheet


a. Equity Method Entries on Crow Corp.'s Books: Investment in West Co. Income from West Co. 14,000 14,000

Record Crow Corp.'s 70% share of West Co.'s 20X9 income Cash 3,500 Investment in West Co. Record Crow Corp.'s 70% share of West Co.'s 20X9 dividend Investment in West Co. Income from West Co. 15,000 15,000

3,500

Reverse of the deferred gross profit from downstream sales in 20X8 Income from West Co. 8,000 Investment in West Co. 8,000 Eliminate the deferred gross profit from downstream sales in 20X9 Investment in West Co. 21,000 Income from West Co. Reverse of the deferred gross profit from upstream sales in 20X8 Income from West Co. 17,500 Investment in West Co. Eliminate the deferred gross profit from upstream sales in 20X9 Book Value Calculations: NCI 30% Original book value + Net Income - Dividends Ending book value 120,000 6,000 (1,500) 124,500 + Crow Corp. 70% 280,000 14,000 (3,500) 290,500 = Common Stock 150,000 150,000 + Retained Earnings 250,000 20,000 (5,000) 265,000

21,000

17,500

6-51

Chapter 06 - Intercompany Inventory Transactions

P6-28 (continued)
Reversal/Deferred GP Calculations: Total 15,000 30,000 (8,000) (25,000) 12,000 = Crow Corp.'s share 15,000 21,000 (8,000) (17,500) 10,500 + NCI's share 9,000 (7,500) 1,500

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total Basic elimination entry Common stock Retained earnings Income from West Co. NCI in NI of West Co. Dividends declared Investment in West Co. NCI in NA of West Co.

150,000 250,000 24,500 7,500 5,000 301,000 126,000

Original amount invested (100%) Beginning balance in RE Crows % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal 100% of West Co.'s dividends Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Crow Corp. 30% + 70% Beginning balance 10,800 25,200 Changes 0 0 Ending balance 10,800 25,200 Excess value (differential) reclassification entry: Land 14,000 Goodwill 22,000 Investment in West Co. NCI in NA of West Co. Reversal of last year's deferral: Investment in West Co. NCI in NA of West Co. Cost of Goods Sold

Land 14,000 0 14,000

Goodwill 22,000 0 22,000

25,200 10,800

36,000 9,000 45,000

Deferral of this year's unrealized profits on inventory transfers Sales 152,000 Cost of Goods Sold 119,000 Inventory 33,000

6-52

Chapter 06 - Intercompany Inventory Transactions

P6-28 (continued)
20X9 Downstream Transactions Total 90,000 54,000 36,000 40.00% = Re-sold 70,000 42,000 28,000 + Ending Inventory 20,000 12,000 8,000

Sales COGS Gross Profit Gross Profit %

20X9 Upstream Transactions Total 62,000 37,000 25,000 40.32% = Re-sold 0 0 0 + Ending Inventory 62,000 37,000 25,000

Sales COGS Gross Profit Gross Profit % Investment in West Co. Beginning Balance 70% Net Income 20X8 Reversal Ending Balance Reversal 269,200 14,000 36,000 290,200 36,000 0

Income from West Co.

14,000 3,500 25,500 301,000 25,200 70% Dividends Deferred GP Basic Excess Reclass. 25,500 24,500 0 36,000 24,500

70% Net Income 20X8 Reversal Ending Balance

6-53

Chapter 06 - Intercompany Inventory Transactions P6-28 (continued) b.


Crow Corp. Income Statement Sales Less: COGS Less: Depreciation Expense Income from West Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Receivable Inventory Land, Buildings, and Equipment (net) Investment in West Co. Goodwill Total Assets Accounts Payable Common Stock Retained Earnings NCI in NA of West Co. Total Liabilities & Equity 300,000 (200,000) (40,000) 24,500 84,500 84,500 West Co. 200,000 (150,000) (30,000) 20,000 20,000 24,500 176,500 7,500 184,000 164,000 164,000 Elimination Entries DR CR 152,000 119,000 45,000 Consolidated 348,000 (186,000) (70,000) 0 92,000 (7,500) 84,500

532,000 84,500 (35,000) 581,500

250,000 20,000 (5,000) 265,000

250,000 184,000 434,000

164,000 5,000 169,000

532,000 84,500 (35,000) 581,500

81,300 200,000 270,000 290,200 841,500 60,000 200,000 581,500 841,500

85,000 110,000 250,000

33,000 14,000 36,000 22,000 72,000 301,000 25,200 359,200

166,300 277,000 534,000 0 22,000 999,300 90,000 200,000 581,500 127,800 999,300

445,000 30,000 150,000 265,000 445,000

150,000 434,000 9,000 593,000

169,000 126,000 10,800 305,800

c.

Retained earnings reconciliation, December 31, 20X9: Retained earnings, Crow Corporation Retained earnings, West Company Elimination of Wests beginning RE Elimination debits in income statement Elimination credits in income statement Remove Wests dividends Consolidated retained earnings

$581,500 265,000 (250,000) (184,000) 164,000 5,000 $581,500

6-54

Chapter 06 - Intercompany Inventory Transactions

P6-29 Computation of Consolidated Totals a. Consolidated sales for 20X8: Sales reported Intercorporate sales Sales to nonaffiliates b. Consolidated cost of goods sold: Total sales reported Ratio of cost to sales price Cost of goods sold Amount to be eliminated (see entry) Cost of goods sold adjusted Downstream: Sales COGS Gross Profit Gross Profit % Upstream: Sales COGS Gross Profit Gross Profit % Eliminating entries: Sales Cost of Goods Sold Inventory Elimination of sales by Bunker to Harrison: Sales Cost of Goods Sold Inventory Elimination of sales by Harrison to Bunker: 140,000 128,000 12,000 Total = Re-sold + 240,000 192,000 200,000 160,000 40,000 32,000 16.67% Ending Inventory 48,000 40,000 8,000 Total = Re-sold + 140,000 98,000 100,000 70,000 40,000 28,000 28.57% Ending Inventory 42,000 30,000 12,000 $660,000 1.4 $471,429 (128,000) $343,429 $510,000 1.2 $425,000 (232,000) $193,000 $536,429 Bunker Corp. $660,000 (140,000) $520,000 Harrison Co. $510,000 (240,000) $270,000 Consolidated $790,000

240,000

232,000 8,000

6-55

Chapter 06 - Intercompany Inventory Transactions

P6-29 (continued) c. Operating income of Bunker Corporation (excluding income from Harrison Company) Net income of Harrison Company Less: Unrealized inventory profits of Bunker Unrealized inventory profits of Harrison Consolidated net income Less: Income assigned to noncontrolling interest ($20,000 - $8,000) x 0.20 Income to controlling interest 20X8 d. Inventory balance in consolidated balance sheet: Inventory reported by Bunker Corporation Unrealized profits Inventory reported by Harrison Company Unrealized profits Inventory balance, December 31, 20X8 $48,000 (8,000) $42,000 (12,000) $40,000 30,000 $70,000 $70,000 20,000 $90,000 (12,000) (8,000) $70,000 (2,400) $67,600

6-56

Chapter 06 - Intercompany Inventory Transactions

P6-30 Intercompany Transfer of Inventory and Land


a. Equity Method Entries on Pine Corp.'s Books: Investment in Bock Co. 17,500 Income from Bock Co. Record Pine Corp.'s 70% share of Bock Co.'s 20X3 income Cash 10,500 Investment in Bock Co. Record Pine Corp.'s 70% share of Bock Co.'s 20X3 dividend Income from Bock Co. Investment in Bock Co. Record amortization of excess acquisition price 6,300 6,300

17,500

10,500

Income from Bock Co. 3,800 Investment in Bock Co. 3,800 Eliminate the deferred gross profit from downstream sales in 20X3 Investment in Bock Co. 6,300 Income from Bock Co. 6,300 Reverse of the deferred gross profit from upstream sales in 20X2 Income from Bock Co. 5,600 Investment in Bock Co. Eliminate the deferred gross profit from upstream sales in 20X3 Book Value Calculations: NCI 30% Original book value 39,000 + Net Income 7,500 - Dividends (4,500) Ending book value 42,000 Pine Corp. 70% 91,000 17,500 (10,500) 98,000

5,600

Common Stock 70,000 70,000

Retained Earnings 60,000 25,000 (15,000) 70,000

Reversal/Deferred GP Calculations: Total 9,000 (3,800) (8,000) (2,800) = Pine Corp.'s share 6,300 (3,800) (5,600) (3,100) + NCI's share 2,700 (2,400) 300

Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

6-57

Chapter 06 - Intercompany Inventory Transactions

P6-30 (continued)
Basic elimination entry Common stock Retained earnings Income from Bock Co. NCI in NI of Bock Co. Dividends declared Investment in Bock Co. NCI in NA of Bock Co.

70,000 60,000 14,400 7,800 15,000 94,900 42,300

Original amount invested (100%) Beginning balance in RE Pines % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal 100% of Bock Co.'s dividends Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Pine Corp. 30% + 70% Beginning balance 13,800 32,200 Changes (2,700) (6,300) Ending balance 11,100 25,900

Buildings and Equipment 20,000 20,000

Patents 28,000 (7,000) 21,000

Acc. Depr. (2,000) (2,000) (4,000)

Amortized excess value reclassification entry: Amortization expense 7,000 Depreciation expense 2,000 Income from Bock Co. NCI in NI of Bock Co. Excess value (differential) reclassification entry: Buildings and Equipment 20,000 Patents 21,000 Accumulated depreciation Investment in Bock Co. NCI in NA of Bock Co.

6,300 2,700

4,000 25,900 11,100

Optional accumulated depreciation elimination entry: Accumulated depreciation 50,000 Building & equipment 50,000 Reversal of last year's deferral: Investment in Bock Co. NCI in NA of Bock Co. Cost of Goods Sold

6,300 2,700 9,000

6-58

Chapter 06 - Intercompany Inventory Transactions

P6-30 (continued)
Deferral of this year's unrealized profits on inventory transfers Investment in Bock Co. 4,900 NCI in NA of Bock Co. 2,100 Inventory 7,000 Deferral of this year's unrealized profits on inventory transfers Sales 120,000 Cost of Goods Sold 108,200 Inventory 11,800 20X3 Downstream Transactions: Sales COGS Gross Profit Gross Profit % Total 30,000 15,000 15,000 50.00% = Re-sold 22,400 11,200 11,200 + Ending Inventory 7,600 3,800 3,800

20X2 Upstream Transactions: Ending Inventory, 20X2 48,000 32,000 16,000 33.33% = Re-sold, 20X3 27,000 18,000 9,000 + Ending Inventory, 20X3 21,000 14,000 7,000

Sales COGS Gross Profit Gross Profit %

20X3 Upstream Transactions Sales COGS Gross Profit Gross Profit % Total 90,000 60,000 30,000 33.33% = Re-sold 66,000 44,000 22,000 + Ending Inventory 24,000 16,000 8,000

Beg. Balance 70% Net Income 20X2 Reversal Ending Balance Reversal 20X2 Deferred GP

Investment in Bock Co. 112,000 17,500 10,500 6,300 6,300 9,400 109,600 6,300 94,900 4,900 0 25,900

Income from Bock Co. 17,500 70% Dividends Excess Val. Amort. Deferred GP Basic Excess Reclass. 6,300 9,400 14,400 6,300 0 6,300 8,100 70% Net Income 20X2 Reversal Ending Balance

6-59

Chapter 06 - Intercompany Inventory Transactions P6-30 (continued) b.


Pine Corp. Income Statement Sales Other Income Less: COGS Less: Depreciation Expense Less: Interest Expense Less: Amortization Expense Income from Bock Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Bock Co. Patents Total Assets Accounts Payable Bonds Payable Bonds Premium Common Stock Retained Earnings NCI in NA of Bock Co. Total Liabilities & Equity 570,000 92,400 200,000 120,000 157,600 276,600 35,000 100,000 1,600 70,000 70,000 260,000 13,600 (186,000) (20,000) (16,000) 8,100 59,700 25,000 125,000 (79,800) (15,000) (5,200) 2,000 7,000 14,400 143,40 0 7,800 151,20 0 120,00 0 108,200 9,000 265,000 13,600 (148,600) (37,000) (21,200) (7,000) 0 64,800 (5,100) 59,700 Bock Co. Elimination Entries DR CR Consolidated

6,300 123,500 2,700 126,200

59,700

25,000

127,900 59,700 (30,000) 157,600

60,000 25,000 (15,000) 70,000

60,000 151,20 0 211,20 0

127,900 126,200 15,000 141,200 59,700 (30,000) 157,600

15,400 165,000 80,000 340,000 (140,000) 109,600

21,600 35,000 40,000 260,000 (80,000) 20,000 50,000 6,300 4,900 21,000 102,20 0

11,800 7,000 50,000 4,000 94,900 25,900 193,600

37,000 181,200 120,000 570,000 (174,000) 0 21,000 755,200 127,400 300,000 1,600 120,000

570,000

276,600

70,000 211,20 0 2,700 2,100 286,00 0

141,200 42,300 11,100 194,600

157,600 48,600 755,200

6-60

Chapter 06 - Intercompany Inventory Transactions

P7-30 (continued) Note: Financial statements are not required. Pine Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X3 Cash and Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patent Total Assets Accounts Payable Bonds Payable Bond Premium Stockholders Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders Equity Total Liabilities and Stockholders' Equity Pine Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X3 Sales Other Income Total Income Cost of Goods Sold Depreciation Expense Interest Expense Amortization Expense Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest $265,000 13,600 $278,600 $ 37,000 181,200 120,000 396,000 21,000 $755,200 $127,400 301,600

$570,000 (174,000)

$300,000 1,600 $120,000 157,600 $277,600 48,600

326,200 $755,200

$148,600 37,000 21,200 7,000

(213,800) $ 64,800 (5,100) $ 59,700

Pine Corporation and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X3 Retained Earnings, January 1, 20X3 Income to Controlling Interest, 20X3 Dividends Declared, 20X3 Retained Earnings, December 31, 20X3 $127,900 59,700 $187,600 (30,000) $157,600

6-61

Chapter 06 - Intercompany Inventory Transactions

P6-31 Consolidation Using Financial Statement Data


a. Equity Method Entries on Bower Corp.'s Books: Investment in Concerto Co. 21,000 Income from Concerto Co. Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 income Cash 12,000 Investment in Concerto Co. Record Bower Corp.'s 60% share of Concerto Co.'s 20X6 dividend Income from Concerto Co. Investment in Concerto Co. Record amortization of excess acquisition price 6,000 6,000

21,000

12,000

Investment in Concerto Co. 4,000 Income from Concerto Co. Reverse of the deferred gross profit from downstream sales in 20X5 Income from Concerto Co. 2,000 Investment in Concerto Co. Eliminate the deferred gross profit from downstream sales in 20X6 Investment in Concerto Co. 4,800 Income from Concerto Co. Reverse of the deferred gross profit from upstream sales in 20X5 Income from Concerto Co. 5,400 Investment in Concerto Co. Eliminate the deferred gross profit from upstream sales in 20X6 Book Value Calculations: NCI 40% 80,000 14,000 (8,000) 86,000 + Bower Corp. 60% 120,000 21,000 (12,000) 129,000 = Common Stock 50,000

4,000

2,000

4,800

5,400

Original book value + Net Income - Dividends Ending book value

Retained Earnings 150,000 35,000 (20,000) 165,000

50,000

6-62

Chapter 06 - Intercompany Inventory Transactions P6-31 (continued) Reversal/Deferred GP Calculations: Total 4,000 8,000 (2,000) (9,000) 1,000 = Bower Corp.'s share 4,000 4,800 (2,000) (5,400) 1,400 + NCI's share 3,200 (3,600) (400)

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total Basic elimination entry Common stock Retained earnings Income from Concerto Co. NCI in NI of Concerto Co. Dividends declared Investment in Concerto Co. NCI in NA of Concerto Co.

50,000 150,000 22,400 13,600 20,000 130,400 85,600

Original amount invested (100%) Beginning balance in RE Bowers % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal 100% of Concerto Co.'s dividends Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Bower Corp. 40% + 60% Beginning balance 16,000 24,000 Changes (4,000) (6,000) Ending balance 12,000 18,000 Amortized excess value reclassification entry: Goodwill impairment loss 10,000 Income from Concerto Co. NCI in NI of Concerto Co. Excess value (differential) reclassification entry: Goodwill 30,000 Investment in Concerto Co. NCI in NA of Concerto Co. Optional accumulated depreciation elimination entry Accumulated depreciation 25,000 Building & equipment

Goodwill 40,000 (10,000) 30,000

6,000 4,000

18,000 12,000

25,000

6-63

Chapter 06 - Intercompany Inventory Transactions

P6-31 (continued) Reversal of last year's deferral: Investment in Concerto Co. NCI in NA of Concerto Co. Cost of Goods Sold

8,800 3,200 12,000

Deferral of this year's unrealized profits on inventory transfers Sales 112,000 Cost of Goods Sold 101,000 Inventory 11,000 20X5 Downstream Transactions: Ending Inv., 20X5 14,000 10,000 4,000 28.57%

Sales COGS Gross Profit Gross Profit %

20X6 Downstream Transactions: Sales COGS Gross Profit Gross Profit % Total 22,000 15,714 6,286 28.57% = Re-sold 15,000 10,714 4,286 + Ending Inventory 7,000 5,000 2,000

20X5 Upstream Transactions: Ending Inv., 20X5 48,000 40,000 8,000 16.67%

Sales COGS Gross Profit Gross Profit %

20X6 Upstream Transactions: Sales COGS Gross Profit Gross Profit % P6-31 (continued) Investment in Concerto Co. Total 90,000 75,000 15,000 16.67% = Re-sold 36,000 30,000 6,000 + Ending Inventory 54,000 45,000 9,000

Income from Concerto Co.

6-64

Chapter 06 - Intercompany Inventory Transactions P6-31 (continued) Beg. Balance 60% Net Income 135,200 21,000 12,000 6,000 7,400 130,400 18,000 0 b.
Bower Corp. Income Statement Sales Less: COGS Less: Depreciation & Amort. Expense Less: Other Expenses Less: Goodwill Impairment Loss Income from Concerto Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Concerto Co. Goodwill Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Concerto Co. Total Liabilities & Equity 400,000 (280,000) (25,000) (35,000) 16,400 76,400 76,400 Concerto Co. 200,000 (120,000) (15,000) (30,000) 10,000 22,400 144,400 13,600 158,000 6,000 119,000 4,000 123,000 Elimination Entries DR CR 112,000 12,000 101,000 Consolidated 488,000 (287,000) (40,000) (65,000) (10,000) 0 86,000 (9,600) 76,400

21,000 60% Dividends Excess Val. Amort. Deferred GP Basic Excess Reclass. 6,000 7,400 22,400 6,000 0

60% Net Income

20X5 Reversal Ending Balance Reversal

8,800 139,600 8,800

8,800 16,400

20X5 Reversal Ending Balance

35,000 35,000

285,000 76,400 (50,000) 311,400

150,000 35,000 (20,000) 165,000

150,000 158,000 308,000

123,000 20,000 143,000

285,000 76,400 (50,000) 311,400

26,800 80,000 120,000 70,000 340,000 (165,000) 139,600 611,400 80,000 120,000 100,000 311,400 611,400

35,000 40,000 90,000 20,000 200,000 (85,000)

11,000 25,000 25,000 8,800 30,000 63,800 130,400 18,000 184,400

61,800 120,000 199,000 90,000 515,000 (225,000) 0 30,000 790,800 95,000 190,000 100,000 311,400 94,400 790,800

300,000 15,000 70,000 50,000 165,000 300,000

50,000 308,000 3,200 361,200

143,000 85,600 12,000 240,600

6-65

Chapter 06 - Intercompany Inventory Transactions

P6-32 Intercorporate Transfers of Inventory and Equipment a. Consolidated cost of goods sold for 20X9: Amount reported by Foster Company Amount reported by Block Corporation Adjustment for unrealized profit in beginning inventory sold in 20X9 Adjustment for inventory purchased from subsidiary and resold during 20X9: CGS recorded by Foster ($30,000 x 0.60) CGS recorded by Block Total recorded CGS based on Block's cost ($20,000 x 0.60) Required adjustment Cost of goods sold b. Consolidated inventory balance: Amount reported by Foster Amount reported by Block Total inventory reported Unrealized profit in ending inventory held by Foster [($30,000 - $20,000) x 0.40] Consolidated balance c. Income assigned to noncontrolling interest: Net income reported by Block Corporation Adjustment for realization of profit on inventory sold to Foster in 20X8 Adjustment for unrealized profit on inventory sold to Foster in 20X9 Realized net income of Block for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest $70,000 15,000 (4,000) $81,000 x 0.10 $ 8,100 $137,000 130,000 $267,000 (4,000) $263,000 $593,000 270,000 (15,000) $18,000 20,000 $38,000 (12,000)

(26,000) $822,000

6-66

Chapter 06 - Intercompany Inventory Transactions

P6-32 (continued) d. Amount assigned to noncontrolling interest in consolidated balance sheet: Block Corporation common stock outstanding Block Corporation retained earnings, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Book value, December 31, 20X9 Adjustment for unrealized profit on inventory sold to Foster Realized book value of Block Corporation Proportion of ownership held by noncontrolling interest Balance assigned to noncontrolling interest e. Consolidated retained earnings at December 31, 20X9: Balance reported by Foster Company, January 1, 20X9 Net income for 20X9 Dividends paid in 20X9 Balance reported by Foster Company, December 31, 20X9 f. Eliminating entries: $235,000 180,900 (40,000) $375,900 $ 50,000 165,000 70,000 (20,000) $265,000 (4,000) $261,000 x 0.10 $ 26,100

Book Value Calculations: NCI 10% 21,500 7,000 (2,000) 26,500 + Foster Co. 90% 193,500 63,000 (18,000) 238,500 = Comm on Stock 50,000 + Retained Earnings 165,000 70,000 (20,000) 215,000

Original book value + Net Income - Dividends Ending book value

50,000

6-67

Chapter 06 - Intercompany Inventory Transactions P6-32 (continued) Reversal/Deferred GP Calculations: Total 0 15,000 0 (4,000) 11,000 = Foster Co.'s share 0 13,500 0 (3,600) 9,900 + NCI's share 1,500 (400) 1,100

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total Basic elimination entry Common stock Retained earnings Income from Block Corp. NCI in NI of Block Corp. Dividends declared Investment in Block Corp. NCI in NA of Block Corp. Reversal of last year's deferral: Investment in Block Corp. NCI in NA of Block Corp. Cost of Goods Sold

50,000 165,000 72,900 8,100 20,000 248,400 27,600

Original amount invested (100%) Beginning balance in RE Fosters % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal 100% of Block Corp.'s dividends Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

13,500 1,500 15,000

Deferral of this year's unrealized profits on inventory transfers Sales 30,000 Cost of Goods Sold 26,000 Inventory 4,000 20X8 Upstream Transactions: Ending Inventory 75,000 60,000 15,000 20.00%

Sales COGS Gross Profit Gross Profit %

20X9 Upstream Transactions: Sales COGS Gross Profit Gross Profit % Total 30,000 20,000 10,000 33.33% = Re-sold 18,000 12,000 6,000 + Ending Inventory 12,000 8,000 4,000

6-68

Chapter 06 - Intercompany Inventory Transactions P6-32 (continued) Investment in Block Corp. 180,000 63,000 18,000 13,500 3,600 234,900 13,500 248,400 0 Income from Block Corp. 63,000 90% Dividends Deferred GP Basic 3,600 72,900 0
Elimination Entries DR CR 30,000 15,000 26,000 72,900 102,90 0 8,100 111,00 0

Beg. Balance 90% Net Income 20X8 Reversal Ending Balance Reversal

90% Net Income 20X8 Reversal Ending Balance

13,500 72,900

g.
Foster Co. Income Statement Sales Other Income Less: COGS Less: Depreciation Expense Less: Other Expenses Income from Block Corp. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Block Corp. Total Assets Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock Additional Paid-in Capital Retained Earnings 235,000 180,900 (40,000) 375,900 165,000 70,000 (20,000) 215,000 165,00 0 111,00 0 276,00 0 235,000 41,000 20,000 61,000 180,900 (40,000) 375,900 815,000 26,000 (593,000) (45,000) (95,000) 72,900 180,900 180,900 Block Corp. 415,000 15,000 (270,000) (15,000) (75,000) 70,000 70,000 41,000 41,000 Consolidated 1,200,000 41,000 (822,000) (60,000) (170,000) 0 189,000 (8,100) 180,900

187,000 80,000 40,000 137,000 80,000 500,000 (155,000) 234,900 1,103,900 63,000 95,000 250,000 210,000 110,000 375,900

57,400 90,000 10,000 130,000 60,000 250,000 (75,000) 522,400 35,000 20,000 200,000 2,400 50,000 215,000 13,500 13,500

4,000

248,400 252,400

244,400 170,000 50,000 263,000 140,000 750,000 (230,000) 0 1,387,400 98,000 115,000 450,000 2,400 210,000 110,000 375,900

50,000 276,00 61,000

6-69

Chapter 06 - Intercompany Inventory Transactions


0 1,500 327,50 0

NCI in NA of Block Corp. Total Liabilities & Equity 1,103,900 522,400

27,600 88,600

26,100 1,387,400

6-70

Chapter 06 - Intercompany Inventory Transactions

P6-33 Consolidated Balance Sheet Worksheet [AICPA Adapted]


Book Value Calculations: Original book value + Net Income - Dividends Ending book value NCI 10% 80,000 10,100 (100) 90,000 + Pine Corp. 90% 720,000 90,900 (900) 810,000 = Common Stock 200,000 200,000 + Retained Earnings 600,000 101,000 (1,000) 700,000

Reversal/Deferred GP Calculations: Total 0 0 -3,000 0 (3,000) = Pine Corp.'s share 0 0 -3,000 0 (3,000) + NCI's share 0 0 0

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Basic elimination entry Common stock Retained earnings Income from Slim Corp. NCI in NI of Slim Corp. Dividends declared Investment in Slim Corp. NCI in NA of Slim Corp.

200,000 600,000 87,900 10,100 1,000 807,000 90,000

Original amount invested (100%) Beginning balance in RE Pines % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal 100% of Slim Corp.'s dividends Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Pine Corp. 10% + 90% Beginning balance 50,000 450,000 Changes 0 0 Ending balance 50,000 450,000

Goodwill 500,000 0 500,000

Excess value (differential) reclassification entry: Goodwill 500,000 Investment in Slim Corp. NCI in NA of Slim Corp.

450,000 50,000

6-71

Chapter 06 - Intercompany Inventory Transactions P6-33 (continued) Intercompany Transactions Dividends Payable Dividends Receivable Accounts Payable Accounts Receivable Note Payable Note Receivable Interest Payable Interest Receivable

900 900 90,000 90,000 100,000 100,000 5,000 5,000

Deferral of this year's unrealized profits on inventory transfers Sales 300,000 Cost of Goods Sold 297,000 Inventory 3,000 20X6 Downstream Transactions: Total 300,000 240,000 60,000 20.00% = Re-sold 285,000 228,000 57,000 + Ending Inventory 15,000 12,000 3,000

Sales COGS Gross Profit Gross Profit %

Investment in Slim Corp. Acquisition Price 90% Net Income 1,170,000 90,900 900 3,000 Ending Balance 1,257,000 807,000 450,000 0 Basic Excess Reclass. 90% Dividends Deferred GP

Income from Slim Corp.

90,900 3,000 87,900 87,900 0

90% Net Income

Ending Balance

6-72

Chapter 06 - Intercompany Inventory Transactions

P6-33 (continued)
Pine Corp. Balance Sheet Cash AR & Other Receivables 105,000 410,000 Slim Corp. 15,000 120,000 Elimination Entries DR CR Consolidated 120,000 334,100

Merchandise Inventory Plant & Equipment (net) Investment in Slim Corp. Goodwill Total Assets AP & Other Liabilities

920,000 1,000,000 1,257,000 3,692,000 140,000

670,000 400,000 500,000 500,000 900 90,000 100,000 5,000 200,000 600,000 87,900 10,100 300,000 1,393,900

900 90,000 100,000 5,000 3,000 807,000 450,000

1,587,000 1,400,000 0 500,000 3,941,100 249,100

1,205,000 305,000

1,455,900

Common Stock Retained Earnings

500,000 3,052,000

200,000 700,000

1,000 297,000 90,000 50,000 438,000

500,000 3,052,000

NCI in NA of Slim Corp. Total Liabilities & Equity 3,692,000 1,205,000

140,000 3,941,100

6-73

Chapter 06 - Intercompany Inventory Transactions

P6-34 Comprehensive Worksheet Problem


a. Equity Method Entries on Randall Corp.'s Books: Investment in Sharp Co. Cash Record the initial investment in Sharp Co. Investment in Sharp Co. Income from Sharp Co. 32,000 32,000 320,000 320,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income Cash 20,000 Investment in Sharp Co. Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend Income from Sharp Co. Investment in Sharp Co. Record amortization of excess acquisition price Investment in Sharp Co. Income from Sharp Co. 2,000 2,000 4,000 4,000

20,000

Reverse of the deferred gross profit from downstream sales in 20X6 Income from Sharp Co. 3,000 Investment in Sharp Co. 3,000 Eliminate the deferred gross profit from downstream sales in 20X7 Investment in Sharp Co. 6,400 Income from Sharp Co. Reverse of the deferred gross profit from upstream sales in 20X6 Income from Sharp Co. 8,000 Investment in Sharp Co. Eliminate the deferred gross profit from upstream sales in 20X7

6,400

8,000

6-74

Chapter 06 - Intercompany Inventory Transactions

6-34 (continued)
b. Book Value Calculations: NCI 20% 67,000 8,000 (5,000) 70,000 + Randall Corp. 80% 268,000 32,000 (20,000) 280,000 Retained = Common Stock 100,000 + Add. Paidin Capital 20,000 + Earnings 215,000 40,000 (25,000) 230,000

Original book value + Net Income - Dividends Ending book value

100,000

20,000

Reversal/Deferred GP Calculations: Total 2,000 8,000 (3,000) (10,000) (3,000) = Randall Corp.'s share 2,000 6,400 (3,000) (8,000) (2,600) + NCI's share 1,600

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

(2,000) (400)

Basic elimination entry Common stock Additional paid-in capital Retained earnings Income from Sharp Co. NCI in NI of Sharp Co. Dividends declared Investment in Sharp Co. NCI in NA of Sharp Co.

100,000 20,000 215,000 29,400 7,600 25,000 277,400 69,600

Original amount invested (100%) Beginning balance in APIC Beginning balance in RE Randalls % of NI - Def. GP + Reversal NCI share of NI - Def. GP + Reversal 100% of Sharp Co.'s dividends Net book value - Def. GP + Reversal NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Randall 20% + Corp. 80% Beginning balance 7,000 28,000 Changes (1,000) (4,000) Ending balance 6,000 24,000

Buildings & equipment 50,000 50,000

Acc. Depr. (15,000) (5,000) (20,000)

6-75

Chapter 06 - Intercompany Inventory Transactions

P6-34 (continued)
Amortized excess value reclassification entry: Depreciation expense 5,000 Income from Sharp Co. NCI in NI of Sharp Co. Excess value (differential) reclassification entry: Buildings & equipment 50,000 Accumulated depreciation Investment in Sharp Co. NCI in NA of Sharp Co. Eliminate intercompany accounts: Accounts payable Accounts receivable 10,000 10,000

4,000 1,000

20,000 24,000 6,000

Optional accumulated depreciation elimination entry Accumulated depreciation 40,000 Building & equipment Reversal of last year's deferral: Investment in Sharp Co. NCI in NA of Sharp Co. Cost of Goods Sold

40,000

8,400 1,600 10,000

Deferral of this year's unrealized profits on inventory transfers Sales 57,000 Cost of Goods Sold 44,000 Inventory 13,000 20X6 Downstream Transactions: Sales COGS Gross Profit Gross Profit % Total 26,000 20,000 6,000 23.08% = Re-sold 17,333 13,333 4,000 + Ending Inventory 8,667 6,667 2,000

20X7 Downstream Transactions: Sales COGS Gross Profit Gross Profit % Total 12,000 9,000 3,000 25.00% = Re-sold 0 0 0 + Ending Inventory 12,000 9,000 3,000

6-76

Chapter 06 - Intercompany Inventory Transactions

P6-34 (continued)
20X6 Upstream Transactions: Total 60,000 40,000 20,000 33.33% = Re-sold 36,000 24,000 12,000 + Ending Inventory 24,000 16,000 8,000

Sales COGS Gross Profit Gross Profit %

20X7 Upstream Transactions: Total 45,000 30,000 15,000 33.33% = Re-sold 15,000 10,000 5,000 + Ending Inventory 30,000 20,000 10,000

Sales COGS Gross Profit Gross Profit %

Beginning Balance 80% Net Income

Investment in Sharp Co. 287,600 32,000 20,000 4,000 11,000 277,400 24,000 0

Income from Sharp Co. 32,000 80% Dividends Excess Val. Amort. Deferred GP Basic Excess Reclass. 80% Net Income

20X6 Reversal Ending Balance Reversal

8,400 293,000 8,400

4,000 11,000 29,400

8,400 25,400 4,000 0

20X6 Reversal Ending Balance

6-77

Chapter 06 - Intercompany Inventory Transactions

P6-34 (continued)
Randall Corp. Income Statement Sales Other Income Less: COGS Less: Depreciation & Amortization Exp. Less: Other Expenses Income from Sharp Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Sharp Co. Total Assets Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Sharp Co. Total Liabilities & Equity 500,000 20,400 (416,000) (30,000) (24,000) 25,400 75,800 Sharp Co. 250,000 30,000 (202,000) (20,000) (18,000) 40,000 Elimination Entries DR CR 57,000 10,000 44,000 5,000 29,400 91,400 7,600 99,000 4,000 58,000 1,000 59,000 Consolidated 693,000 50,400 (564,000) (55,000) (42,000) 0 82,400 (6,600) 75,800

75,800

40,000

337,500 75,800 (50,000) 363,300

215,000 40,000 (25,000) 230,000

215,000 99,000 314,000

59,000 25,000 84,000

337,500 75,800 (50,000) 363,300

130,300 80,000 170,000 600,000 (310,000) 293,000 963,300 100,000 300,000 200,000 363,300 963,300

10,000 70,000 110,000 400,000 (120,000) 470,000 15,200 100,000 4,800 100,000 20,000 230,000 470,000

50,000 40,000 8,400 98,400 10,000 100,000 20,000 314,000 1,600 445,600

10,000 13,000 40,000 20,000 277,400 24,000 384,400

140,300 140,000 267,000 1,010,000 (410,000) 0 1,147,300 105,200 400,000 4,800 200,000 0 363,300 74,000 1,147,300

84,000 69,600 6,000 159,600

6-78

Chapter 06 - Intercompany Inventory Transactions

P6-34 (continued) d. Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7 $ 140,300 140,000 267,000 $ 547,300 $1,010,000 (410,000) 600,000 $1,147,300 $ 105,200 $ 400,000 4,800 404,800

Cash Accounts Receivable Inventory Total Current Assets Buildings and Equipment Less: Accumulated Depreciation Total Assets Accounts Payable Bonds Payable Bond Premium Stockholders Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders Equity Total Liabilities and Stockholders' Equity

$ 200,000 363,300 $ 563,300 74,000 637,300 $1,147,300

Randall Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X7 Sales Other Income Cost of Goods Sold Depreciation and Amortization Expense Other Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest $ 564,000 55,000 42,000 $ 693,000 50,400 $ 743,400

(661,000) $ 82,400 (6,600) $ 75,800

Randall Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X7

6-79

Chapter 06 - Intercompany Inventory Transactions

Retained Earnings, January 1, 20X7 Income to Controlling Interest, 20X7 Dividends Declared, 20X7 Retained Earnings, December 31, 20X7

$ 337,500 75,800 $ 413,300 (50,000) $ 363,300

6-80

Chapter 06 - Intercompany Inventory Transactions

P6-35 Comprehensive Consolidation Worksheet; Equity Method [AICPA Adapted]


Equity Method Entries on Fran Corp.'s Books: Investment in Brey Inc. Cash Record the initial investment in Brey Inc. Investment in Brey Inc. Income from Brey Inc. 190,000 190,000 750,000 750,000

Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 income Cash 40,000 Investment in Brey Inc. Record Fran Corp.'s 100% share of Brey Inc.'s 20X9 dividend Income from Brey Inc. Investment in Brey Inc. Record amortization of excess acquisition price Income from Brey Inc. 18,000 Investment in Brey Inc. Eliminate the deferred gross profit from upstream sales in 20X9 44,000 44,000

40,000

18,000

Retained Fran Corp. 100% 636,000 190,000 (40,000) 786,000 = Common Stock 400,000 + Add. Paidin Capital 80,000 + Earnings 156,000 190,000 (40,000) 306,000

Original book value + Net Income - Dividends Ending book value

400,000

80,000

Reversal/Deferred GP Calculations: Total (18,000) (18,000) = Fran Corp.'s share (18,000) (18,000)

Upstream Deferred GP Total

6-81

Chapter 06 - Intercompany Inventory Transactions

P6-35 (continued) Basic elimination entry Common stock Additional paid-in capital Retained earnings Income from Brey Inc. Dividends declared Investment in Brey Inc.

400,000 80,000 156,000 172,000 40,000 768,000

Original amount invested (100%) Beginning balance in APIC Beginning balance in RE Frans % of NI - Def. GP 100% of Brey Inc.'s dividends Net book value - Def. GP

Beginning balance Changes Ending balance

Fran Corp. 100% 114,000 (44,000) 70,000

Machinery 54,000 54,000

Acc. Depr. 0 (9,000) (9,000)

Goodwill 60,000 (35,000) 25,000

Amortized excess value reclassification entry: Depreciation expense 9,000 Goodwill impairment loss 35,000 Income from Brey Inc. Excess value (differential) reclassification entry: Machinery 54,000 Goodwill 25,000 Accumulated depreciation Investment in Brey Inc. Eliminate intercompany accounts: Accounts payable Accounts receivable

44,000

9,000 70,000

86,000 86,000

Deferral of this year's unrealized profits on inventory transfers Sales 180,000 Cost of Goods Sold 162,000 Inventory 18,000

6-82

Chapter 06 - Intercompany Inventory Transactions

P6-35 (continued)
20X9 Upstream Transactions Total 180,000 90,000 90,000 50.00% = Re-sold 144,000 72,000 72,000 + Ending Inventory 36,000 18,000 18,000

Sales COGS Gross Profit Gross Profit % Investment in Brey Inc. 750,000 190,000 40,000 44,000 18,000 838,000 768,000 70,000 0

Income from Brey Inc. 190,000 100% Dividends Excess Val. Amort. Deferred GP Basic Excess Reclass. 44,000 18,000 128,000 172,000 44,000 0 Ending Balance 100% Net Income

Acquisition Price 100% Net Income

Ending Balance

6-83

Chapter 06 - Intercompany Inventory Transactions

P6-35 (continued) Note that in the 8th edition, the sale of the warehouse was an intercompany transaction and needed to be eliminated. We changed the problem in the 9 th edition to assume that the sale was to a non-affiliated third party. Thus, the gain on the sale of the warehouse is not eliminated in this problem.
Fran Corp. Income Statement Net Sales Gain on Sale of Warehouse Less: COGS Less: Operating Expenses Less: Goodwill Impairment Income from Brey Inc. Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable (net) Inventories Land, Plant, and Equipment Less: Accumulated Depreciation Investment in Brey Inc. Goodwill Total Assets Accounts Payable & Accrued Expenses Common Stock Additional Paid-in Capital Retained Earnings Total Liabilities & Equity 3,800,000 30,000 (2,360,000) (1,100,000) 128,000 498,000 Brey Inc. 1,500,000 (870,000) (440,000) Elimination Entries DR CR 180,000 162,000 9,000 35,000 172,000 396,000 Consolidated 5,120,000 30,000 (3,068,000) (1,549,000) (35,000) 0 498,000

190,000

44,000 206,000

440,000 498,000 938,000

156,000 190,000 (40,000) 306,000

156,000 396,000 552,000

206,000 40,000 246,000

440,000 498,000 0 938,000

570,000 860,000 1,060,000 1,320,000 (370,000) 838,000 4,278,000

150,000 350,000 410,000 680,000 (210,000)

86,000 18,000 54,000 9,000 768,000 70,000 25,000 79,000 951,000

720,000 1,124,000 1,452,000 2,054,000 (589,000) 0 25,000 4,786,000

1,380,000

1,340,000 1,700,000 300,000 938,000 4,278,000

594,000 400,000 80,000 306,000 1,380,000

86,000 400,000 80,000 552,000 1,118,000

246,000 246,000

1,848,000 1,700,000 300,000 938,000 4,786,000

6-84

Chapter 06 - Intercompany Inventory Transactions

P6-36A Fully Adjusted Equity Method a. Adjusted trial balance: Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock Cost of Goods Sold Depreciation and Amortization Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings Sales Other Income Income from Subsidiary b.
Equity Method Entries on Randall Corp.'s Books: Investment in Sharp Co. Income from Sharp Co. 32,000 32,000

Randall Corporation Debit Credit $ 130,300 80,000 170,000 600,000 304,000 416,000 30,000 24,000 50,000

Sharp Company Debit Credit $ 10,000 70,000 110,000 400,000 202,000 20,000 18,000 25,000

$ 310,000 100,000 300,000 200,000 345,900 500,000 20,400 28,000 $1,804,300

$120,000 15,200 100,000 4,800 100,000 20,000 215,000 250,000 30,000 $855,000

$1,804,300

$855,000

Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income Cash 20,000 Investment in Sharp Co. Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend Income from Sharp Co. Investment in Sharp Co. Record amortization of excess acquisition price 4,000 4,000

20,000

6-85

Chapter 06 - Intercompany Inventory Transactions

P6-36A (continued) c. Book Value Calculations: Retained NCI 20% 67,000 8,000 (5,000) 70,000 + Randall Corp. 80% 268,000 32,000 (20,000) 280,000 = Commo n Stock 100,000 + Add. Paidin Capital 20,000 + Earning s 215,000 40,000 (25,000) 230,000

Original book value + Net Income - Dividends Ending book value

100,000

20,000

Reversal/Deferred GP Calculations: Total 2,000 8,000 (3,000) (10,000) (3,000) = Randall Corp.'s share 2,000 6,400 (3,000) (8,000) (2,600) + NCI's share 1,600 (2,000) (400)

Downstream Reversal Upstream Reversal Downstream Deferred GP Upstream Deferred GP Total

Basic elimination entry Common stock Additional paid-in capital Retained earnings Income from Sharp Co. NCI in NI of Sharp Co. Dividends declared Investment in Sharp Co. NCI in NA of Sharp Co.

100,000 20,000 215,000 32,000 7,600 25,000 280,000 69,600

Original amount invested (100%) Beginning balance in APIC Beginning balance in RE Randall Corp.s % of NI NCI share of NI - Def. GP + Reversal 100% of Sharp Co.'s dividends Net book value NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations: NCI Randall Corp. 20% + 80% Beginning balance 7,000 28,000 Changes (1,000) (4,000) Ending balance 6,000 24,000

Buildings & equipment 50,000 50,000

Acc. Depr. (15,000) (5,000) (20,000)

6-86

Chapter 06 - Intercompany Inventory Transactions P6-36A (continued) Amortized excess value reclassification entry: Depreciation expense 5,000 Income from Sharp Co. NCI in NI of Sharp Co. Excess value (differential) reclassification entry: Buildings & equipment 50,000 Accumulated depreciation Investment in Sharp Co. NCI in NA of Sharp Co. Eliminate intercompany accounts: Accounts payable Accounts receivable

4,000 1,000

20,000 24,000 6,000

10,000 10,000

Optional accumulated depreciation elimination entry Accumulated depreciation 40,000 Building & equipment Reversal of last year's deferral: Retained earnings NCI in NA of Sharp Co. Cost of Goods Sold

40,000

8,400 1,600 10,000

Deferral of this year's unrealized profits on inventory transfers Sales 57,000 Cost of Goods Sold 44,000 Inventory 13,000 (See Problem 6-34 for unrealized profit calculations.)

6-87

Chapter 06 - Intercompany Inventory Transactions P6-36A (continued) d.


Randall Corp. Income Statement Sales Other Income Less: COGS Less: Depreciation & Amortization Exp. Less: Other Expenses Income from Sharp Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Sharp Co. Total Assets Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Sharp Co. Total Liabilities & Equity 500,000 20,400 (416,000) (30,000) (24,000) 28,000 78,400 Sharp Co. 250,000 30,000 (202,000) (20,000) (18,000) 40,000 Elimination Entries DR CR 57,000 44,000 10,000 5,000 32,000 94,000 7,600 101,600 4,000 58,000 1,000 59,000 Consolidated 693,000 50,400 (564,000) (55,000) (42,000) 0 82,400 (6,600) 75,800

78,400

40,000

345,900 78,400 (50,000) 374,300

215,000 40,000 (25,000) 230,000

215,000 8,400 101,600 325,000

337,500 59,000 25,000 84,000 75,800 (50,000) 363,300

130,300 80,000 170,000 600,000 (310,000) 304,000 974,300 100,000 300,000 200,000 374,300 974,300

10,000 70,000 110,000 400,000 (120,000) 470,000 15,200 100,000 4,800 100,000 20,000 230,000 470,000

50,000 40,000 90,000 10,000 100,000 20,000 325,000 1,600 456,600

10,000 13,000 40,000 20,000 280,000 24,000 387,000

140,300 140,000 267,000 1,010,000 (410,000) 0 1,147,300 105,200 400,000 4,800 200,000 0 363,300 74,000 1,147,300

84,000 69,600 6,000 159,600

6-88

Chapter 06 - Intercompany Inventory Transactions

P6-37A Cost Method a.


Equity Method Entries on Randall Corp.'s Books: Investment in Sharp Co. Income from Sharp Co. Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income b. Investment elimination entry: Common stock Additional paid-in capital Retained earnings Investment in Sharp Co. NCI in NA of Sharp Co. Dividend elimination entry: Dividend Income NCI in NI of Sharp Co. Dividends Declared 100,000 20,000 180,000 240,000 60,000 20,000 20,000

20,000 5,000 25,000

Excess value (differential) reclassification entry: Buildings & equipment 50,000 Investment in Sharp Co. NCI in NA of Sharp Co. Amortize differential from previous years: Retained earnings 12,000 NCI in NA of Sharp Co. 3,000 Accumulated Depreciation Amortize differential for 20X7 Depreciation Expense Accumulated Depreciation Assign Sharp's undistributed income to NCI NCI in NA of Sharp Co. 1,600 Retained Earnings 7,000 NCI in NA of Sharp Co.

40,000 10,000

15,000

5,000 5,000

8,600

6-89

Chapter 06 - Intercompany Inventory Transactions

P6-37A (continued) Eliminate intercompany accounts: Accounts payable Accounts receivable

10,000 10,000

Optional accumulated depreciation elimination entry Accumulated depreciation 40,000 Building & equipment Reversal of last year's deferral: Retained Earnings NCI in NA of Sharp Co. Cost of Goods Sold

40,000

8,400 1,600 10,000

Deferral of this year's unrealized profits on inventory transfers Sales 57,000 Cost of Goods Sold 44,000 Inventory 13,000 (See Problem 6-34 for unrealized profit calculations.)

6-90

Chapter 06 - Intercompany Inventory Transactions P6-37A (continued)


Randall Corp. Income Statement Sales Other Income Dividend Income Less: COGS Less: Depreciation & Amortization Exp. Less: Other Expenses Consolidated Net Income NCI in Net Income of Sharp Co. Controlling Interest in Net Income Statement of Retained Earnings Beginning Balance 500,000 20,400 (416,000) (30,000) (24,000) 50,400 Sharp Co. 250,000 30,000 20,000 (202,000) (20,000) (18,000) 60,000 Elimination Entries DR CR 57,000 20,000 10,000 44,000 5,000 82,000 5,000 1,600 88,600 54,000 Consolidated 693,000 50,400 0 (564,000) (55,000) (42,000) 82,400 (6,600) 75,800

50,400

60,000

54,000

329,900

215,000

Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Inventory Buildings & Equipment Less: Accumulated Depreciation Investment in Sharp Co. Total Assets Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Sharp Co. Total Liabilities & Equity

50,400 (50,000) 330,300

60,000 (25,000) 250,000

180,000 8,400 12,000 7,000 88,600 296,000

337,500

54,000 25,000 79,000

75,800 (50,000) 363,300

130,300 80,000 170,000 600,000 (310,000) 280,000 950,300 100,000 300,000 200,000 330,300

10,000 70,000 110,000 400,000 (120,000)

50,000 40,000

470,000 15,200 100,000 4,800 100,000 20,000 250,000

90,000 10,000 100,000 20,000 296,000 1,600 3,000 430,600

10,000 13,000 40,000 5,000 15,000 240,000 40,000 363,000

140,300 140,000 267,000 1,010,000 (410,000) 0 1,147,300 105,200 400,000 4,800 200,000 0 363,300 74,000 1,147,300

930,300

490,000

79,000 60,000 10,000 8,600 157,600

6-91

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