Problem

PROBLEM
1. Account balances are as of December 31, 20X3 except where noted.
Pipe Match
Selected Income Statement Amounts:
Sales $710,000 $530,000
Cost of Goods Sold 490,000 370,000
Gain on Sale of Equipment 21,000
Earnings from Investment in Subsidiary 61,000
Interest Revenue 2,880
Interest Expense 2,880
Depreciation 25,000 20,000
Selected Balance Sheet Amounts {Debits/(Credits)}:

Cash $ 50,000 $ 15,000
Notes Receivable 36,000
Inventories 229,000 150,000
Equipment 440,000 360,000
Accumulated Depreciation (200,000) (120,000)
Investment in Shaw 189,000
Notes Payable (36,000)
Common Stock (100,000) (10,000)
Additional Paid-In-Capital (250,000) (40,000)
Retained Earnings (402,000) (140,000)
Selected Statement of Retained Earnings Amounts:

Beginning Balance, January 1, 20X3 $272,000 $100,000
Net Income 210,000 70,000
Dividends Paid 80,000 30,000
Additional Information:
On January 2, 20X3 Pipe purchased 90% of Match for $155,000. On that date Match's shareholders' equity equaled $150,000 and the fair values of
Match's assets and liabilities equaled their carrying amounts. Excess, if any, is attributed to patents and is amortized over 10 years.
On September 4, 20X3 Match paid cash dividends of $30,000.
On January 3, 20X3 Match sold equipment with an original cost of $30,000 and a carrying value of $15,000 to Pipe for $36,000. The equipment had
a remaining useful life of 3 years. Straight-line depreciation is used.
On January 4, 20X3 Match signed an 8% Note Payable. All interest payments were made as of December 31, 20X3.
During the year Match sold merchandise to Pipe for $60,000, which included a profit of $20,000. At year end 50% of the merchandise remained in
Pipe's inventory.
Required:
1. Which method is Pipe using to account for the investment in Match? How do you know?
2. What elimination entry(ies) are associated with the elimination of intercompany profits due to the sale of
merchandise?
3. What elimination entry(ies) are necessary with the sale of equipment by Match to Pipe?
4. What elimination entry(ies) are associated with the note to Match? Why are the entry(ies) made?
ANS:
1. Sophisticated Equity:
Match Net Income $63,000
Amortization of patent (2,000)
Earnings from Investment in subsidiary $61,000
2. Sales 60,000
Cost of Goods Sold 60,000

Inventory (50% $20,000) 10,000
4-1
3. Gain on Sale of Equipment 21,000
Equipment 21,000
Accumulated Depreciation 7,000

Depreciation Expense ($21,000 3 years) 7,000
4. Notes Payable 36,000

Notes Receivable 36,000
Interest Revenue 2,880

The note receivable and payable, and the associated interest revenue and expense should not be included on the
consolidated financial statements.
DIF: E OBJ: 4-1 | 4-2 | 4-3 | 4-5 | 4-6
2. On January 1, 20X1, Prange Company acquired 100% of the common stock of Seaman Company for $600,000. On this date Seaman had total
owners' equity of $400,000. Any excess of cost over book value is attributable to a patent, which is to be amortized over 10 years.
During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method.
On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000,
of which $20,000 is held by Prange on December 31, 20X2. Seaman's gross profit on all sales is 40%.
On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December.
Required:
Complete the Figure 4-1 worksheet for consolidated financial statements for the year ended December 31, 20X2.
4-2
ANS:
For the worksheet solution, please refer to Answer 4-1.
Answer 4-1
Trial Balance Eliminations and
Prange Seaman Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 105,000 (EI) 8,000
Other Current Assets 207,000 325,000 (IA) 20,000
Investment in Sub. Company 710,000 (CY) 60,000
(EL) 450,000
(D) 200,000
Land 140,000 80,000

Buildings and Equipment 315,000 340,000
Patent 20,000 (D) 200,000 (A) 40,000
Current Liabilities (150,000) (70,000) (IA) 20,000

Bonds Payable (100,000)
Other Long-Term Liabilities (200,000) (40,000)
Common StockP Co. (200,000)

Other Paid in CapitalP Co. (100,000)
Retained EarningsP Co. (492,000) (A) 20,000
(BI) 12,000
Common StockS Co. (150,000) (EL) 150,000

Other Paid in CapitalS Co. (100,000) (EL) 100,000
Retained EarningsS Co. (200,000) (EL) 200,000
Net Sales (600,000) (380,000) (IS) 100,000

Cost of Goods Sold 360,000 228,000 (EI) 8,000 (BI) 12,000
(IS) 100,000
Operating Expenses 140,000 62,000 (A) 20,000
Subsidiary Income (90,000) (CY) 90,000

Dividends DeclaredP Co. 60,000
Dividends DeclaredS Co. 30,000 (CY) 30,000
Consolidated Net Income

NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 920,000 920,000
(continued)
4-3
Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 197,000
Other Current Assets 512,000
Investment in Sub. Company 0
Land 220,000
Buildings and Equipment 655,000
Accumulated Depreciation (350,000)
Patent 180,000
Current Liabilities (200,000)

Other Long-Term Liabilities (240,000)

Retained EarningsP Co. (460,000)
Common StockS Co.

Other Paid in CapitalS Co.
Retained EarningsS Co.
Net Sales (880,000)

Operating Expenses 222,000
Subsidiary Income 0
Dividends DeclaredS Co.
Consolidated Net Income (174,000)

NCI 0
Controlling Interest 174,000 (174,000)
Total NCI 0
Ret. Earn. Contr. Int. 12-31 574,000 (574,000)
0
4-4
Eliminations and Adjustments:
(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account.
(EL) Eliminate the Seaman Company equity balances at the beginning of the year against the investment
account.
(D) Distribute the $200,000 excess of cost over book value to patent.
(A) Amortize the patent over 10 years, with $20,000 for 20X1 charged to retained earnings, and $20,000 for
20X2 to operating expenses.
(BI) Eliminate the $12,000 of gross profit in the beginning inventory.
(IS) Eliminate the entire intercompany sales of $100,000.
(EI) Eliminate the $8,000 of gross profit in the ending inventory.
(IA) Eliminate the $20,000 intercompany accounts receivable and payable.
DIF: M OBJ: 4-2 MSC: 100%; simple equity
3. On January 1, 20X1, Prange Company acquired 80% of the common stock of Seaman Company for $500,000. On this date Seaman had total owners'
equity of $400,000. Any excess of cost over book value is attributable to patent, which is to be amortized over 20 years.
During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method.
On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000,
of which $20,000 is held by Prange on December 31, 20X2. Seaman's gross profit on all sales is 40%.
On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December.
Required:
4-5
ANS:
Answer 4-2
Prange Seaman Adjustments
Inventory, December 31 100,000 105,000 Debit (EI) 8,000
(EL) 360,000
(D) 180,000
Land 140,000 80,000

Patent 60,000 (D) 225,000 (A) 22,500


Retained EarningsP Co. (474,000) (A) 9,000
(BI) 9,600
Common StockS Co. (150,000) (EL) 120,000

Other Paid in CapitalS Co. (100,000) (EL) 80,000
Retained EarningsS Co. (200,000) (EL) 160,000 (D) 45,000
(BI) 2,400
(A) 2,250
Net Sales (600,000) (380,000) (IS) 100,000
(IS) 100,000
Operating Expenses 140,000 62,000 (A) 11,250

Dividends DeclaredS Co. 30,000 (CY) 24,000

NCI
Total NCI
0 0 843,500 843,500
(continued)
4-6
Land 220,000
Patent 262,500


Retained EarningsP Co. (455,400)
Common StockS Co. (30,000)

Other Paid in CapitalS Co. (20,000)
Retained EarningsS Co. (80,350)
Net Sales (880,000)

Subsidiary Income 0
Dividends DeclaredS Co. 6,000

NCI 16,550 (16,550)
Total NCI (140,900) (140,900)

Ret. Earn. Contr. Int. 12-31 (561,600) (561,600)
0
(EL) Eliminate 80% of the Seaman Company equity balances at the beginning of the year against the investment
account.
(D) Distribute the $225,000 excess of cost over book value to patent to Parent and NCI
(A) Amortize the patent over 20 years, with $11,250 for 20X1 charged to retained earnings of Parent and Sub,
and $11,250 for 20X2 to operating expenses.
4-7
Subsidiary Company Income Distribution Schedule

Patent amortization 11,250 Internally generated net income 90,000
Deferred profit in ending inventory 8,000 Realized profit in beginning inventory 12,000
Adjusted income 82,750
NCI Share 20%
NCI 16,550
Parent Company Income Distribution Schedule

Internally generated net income 100,000
80% Sub's adjusted income 66,200
Controlling interest 166,200
DIF: M OBJ: 4-2 MSC: 80%; simple equity
4. Selected information from the separate and consolidated balance sheets and income statements of Palo Alto, Inc. and its subsidiary, Stanford Co., as
of December 31, 20X1, and for the year then ended is as follows:
Palo Alto Stanford Consolidated

Balance sheet accounts:
Accounts receivable $ 26,000 $ 19,000 $ 42,000
Inventory 30,000 25,000 50,000
Investment in Stanford 67,000 -- --
Stockholders' equity 154,000 50,000 154,000
Income statement accounts:

Revenues $200,000 $140,000 $300,000
Cost of goods sold 150,000 110,000 225,000
Gross profit 50,000 30,000 75,000
Equity in earnings of Stanford $ 9,000 -- --

Net income $ 36,000 $ 20,000 $ 36,000
Additional information:
During 20X1, Palo Alto sold goods to Stanford at the same markup on cost that Palo Alto uses for all sales. At December 31, 20X1, Stanford had not
paid for all of these goods and still held 50% of them in inventory.
Palo Alto acquired its interest in Stanford five years earlier (as of December 31, 20X1).
Required:
For each of the following items, calculate the required amount.
a. The amount of intercompany sales from Palo Alto to Stanford during 20X1.
b. The amount of Stanford's payable to Palo Alto for intercompany sales as of December 31, 20X1.
c. In Palo Alto's December 31, 20X1, consolidated balance sheet, the carrying amount of the inventory that
Stanford purchased from Palo Alto.
ANS:
a. $200,000 + $140,000 - X = $300,000; X = $40,000
b. $26,000 + $19,000 - X = $42,000; X = $3,000
c. Intercompany sales = $40,000
50% held as ending interco inventory $20,000
Gross profit (25%) (5,000)
Cost of interco ending inventory $15,000
DIF: M OBJ: 4-2 | 4-3

4-8
5. On January 1, 20X1, Pinto Company purchased an 80% interest in Sands Inc. for $1,000,000. The equity balances of Sands at the time of the
purchase were as follows:
Common stock ($10 par) $100,000

Paid-in capital in excess of par 400,000
Retained earnings 500,000
Any excess of cost over book value is attributable to goodwill.
No dividends were paid by either firm during 20X6. The following trial balances were prepared for Pinto Company and its subsidiary, Sands Inc., on
December 31, 20X6:
Pinto Sands
Cash 120,000 70,000
Accounts receivable 240,000 197,000
Inventory 200,000 176,000
Land 600,000 180,000
Buildings and equipment 1,100,000 800,000
Accumulated depreciation (180,000) (120,000)
Investment in Sands 1,000,000
Accounts payable (110,000) (50,000)
Common stock, $10 par (800,000) (100,000)
Paid-in capital in excess of par (660,000) (400,000)
Retained earnings (1,340,000) (650,000)
Sales (600,000) (300,000)
Other income (40,000) (15,000)
Cost of goods sold 320,000 180,000
Other expenses 150,000 32,000
Total - -
Sands sold a machine to Pinto Company for $40,000 on January 1, 20X6. The machine cost Sands $50,000, and $25,000 of accumulated depreciation
had been recorded as of the sale date. The machine had a 5-year remaining life and no salvage value. Pinto Company is using straight-line
depreciation.
Since the purchase date, Pinto has sold merchandise for resale to Sands, Inc. at a mark-up on cost of 25%. Sales during 20X6 were $150,000. The
inventory of these goods held by Sands was $15,000 on January 1, 20X6, and $18,000 on December 31, 20X6.
Required:
Prepare a consolidated income statement for 20X6, including income distribution schedules to support your distribution of income to the
noncontrolling and controlling interest interests.
ANS:
Pinto Company and Subsidiary Sands Inc.

Consolidated Income Statement
For the Year Ended December 31, 20X6
Sales (600,000 300,000 150,000) $750,000

Cost of goods sold (320,000 180,000 150,000 3,000 3,600) 350,600
Gross profit $399,400
Other expenses ($150,000 $32,000 $3,000) 179,000
Operating income $220,400
Other income ($40,000 $15,000 $15,000) 40,000
Consolidated Net Income $260,400
Distribution of Consolidated Net Income:

Noncontrolling interest $ 18,200
Controlling interest $ 242,200
Subsidiary Sands Inc. Income Distribution

Deferred gain on sale Internally generated
4-9
of machine $15,000 net income $103,000
Gain on sale of machine
realized through use 3,000
Adjusted income $ 91,000
Noncontrolling share 20%
Noncontrolling interest $ 18,200
Parent Pinto Company Income Distribution

Deferred profit in Internally generated
ending inventory $3,600 net income $170,000
Realized profit in
beginning inventory 3,000
80% Sands adjusted
income of $91,000 72,800
Controlling interest $242,200
DIF: M OBJ: 4-2 | 4-3
6. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for $750,000. On this date Subsidiary had total
owners' equity of $540,000.
Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.
During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the simple equity method.
On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary sold merchandise to Parent for
$100,000, of which $20,000 is held by Parent on December 31, 20X2. Subsidiary's usual gross profit on affiliated sales is 40%.
On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December.
On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of $20,000. The sales price was $40,000.
Subsidiary is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method.
Required:
ANS:
Answer 4-3
Parent Sub. Adjustments
(EL) 600,000
(D) 210,000
Other Long-Term Investments 50,000 30,000
Land 140,000 70,000 (D) 10,000
Buildings and Equipment 315,000 400,000 (F1) 20,000
Accumulated Depreciation (280,000) (110,000) (F2) 4,000
Goodwill (D) 200,000

Other Intangibles 60,000
Premium on Bonds Payable (5,000)
Common Stock P Co. (200,000)
4-10
Other Paid in Capital P Co. (100,000)
Retained Earnings P Co. (479,000) (BI) 4,000
Common Stock S Co. (100,000) (EL) 100,000
Other Paid in Capital S Co. (200,000) (EL) 200,000
Retained Earnings S Co. (300,000) (EL) 300,000
Net Sales (600,000) (380,000) (IS) 100,000

(IS) 100,000
Operating Expenses 140,000 100,000 (F2) 4,000
Gain on Sale of Equipment (20,000) (F1) 20,000

Dividends Declared P Co. 60,000
Dividends Declared S Co. 30,000 (CY) 30,000

NCI
Total NCI
0 0 1,056,000 1,056,000
(continued)

Other Long-Term Investments 80,000

Land 220,000
Goodwill 200,000
Retained Earnings P Co. (475,000)
Common Stock S Co.
Other Paid in Capital S Co.
Retained Earnings S Co.
Net Sales (880,000)

4-11
Subsidiary Income 0
Gain on Sale of Equipment 0

Dividends Declared S Co.

NCI 0
Total NCI 0
Ret. Earn. Contr. Int. 12-31 (625,000) (625,000)
0
(EL) Eliminate the Subsidiary Company equity balances at the beginning of the year against the investment
account.
(D) Distribute the $210,000 excess of cost over book value land ($10,000) and to goodwill.
(F1) Eliminate the $20,000 gain on sale of equipment.
(F2) Eliminate the $4,000 of excess depreciation for 20X2 on the transferred equipment.
DIF: M OBJ: 4-2 | 4-3 MSC: 100%; simple equity
7. On January 1, 20X1, Parent Company acquired 80% of the common stock of Subsidiary Company for $560,000. On this date Subsidiary had total
owners' equity of $540,000, including retained earnings of $240,000. During 20X1, Subsidiary had net income of $60,000 and paid no dividends.
Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.
During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the cost method.
On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary sold merchandise to Parent for
$100,000, of which $20,000 is held by Parent on December 31, 20X2. Subsidiary's usual gross profit on affiliated sales is 40%.
On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December.
On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of $20,000. The sales price was $40,000.
Subsidiary is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method.
Required:
4-12
ANS:
Answer 4-4
Parent Sub. Adjustments
Investment in Sub. Company 560,000 (CV) 48,000 (EL) 480,000
(D) 128,000
Other Long-Term Investments 50,000 30,000
Land 140,000 70,000 (D) 10,000
Buildings and Equipment 315,000 400,000 (F1) 20,000
Accumulated Depreciation (208,000) (110,000) (F2) 4,000 30,000
Goodwill (D) 150,000

Retained Earnings P Co. (421,000) (BI) 3,200 (CV) 48,000

Retained Earnings S Co. (300,000) (EL) 240,000 (D) 32,000
(BI) 800
Net Sales (600,000) (380,000) (IS) 100,000

(IS) 100,000
Operating Expenses 140,000 100,000 (F2) 4,000
Dividend Income (24,000) (CY2) 24,000
Gain on Sale of Equipment (20,000) (F1) 20,000

Dividends Declared S Co. 30,000 (CY2) 24,000

NCI
Total NCI
0 0 868,000 868,000
(continued)
4-13
Other Long-Term Investments 80,000

Land 220,000
Goodwill 150,000
Common Stock S Co. (20,000)

Other Paid in Capital S Co. (40,000)
Retained Earnings S Co. (91,200)
Net Sales (880,000)

Dividend Income 0
Gain on Sale of Equipment 0

Dividends Declared S Co. 6,000

NCI 19,200 (19,200)
Total NCI 164,400 (164,400)
0 0 0 0
(CV) Convert to the simple equity method as of January 1, 20X2. (80% of $60,000 increase in subs retained
earnings from January 1, 20X1 to January 1, 20X2.)
(CY2) Eliminate the current-year dividend income against dividends declared by Subsidiary.
(EL) Eliminate 80% of the Subsidiary Company equity balances at the beginning of the year against the
investment account.
(D) Distribute the $150,000 excess of cost over book value to land ($8,000) and to goodwill; allocate to
Parent and Sub $128,000 and $32,000 respectively.
(BI) Eliminate the $4,000 of gross profit in the beginning inventory; allocate to Parent and Sub 80/20
4-14
(F1) Eliminate the $20,000 gain on sale of equipment

Deferred profit in ending inventory 8,000 Internally generated net income 100,000
Realized profit in beginning inventory 4,000
NCI Share 20%
NCI 19,200

Deferred gain on sale 20,000 Internally generated net income 130,000
Recognize 1/5 of gain 4,000
DIF: M OBJ: 4-2 | 4-3 MSC: 80%; cost method
Scenario 4-2:
On January 1, 20X1, Powers Company acquired 80% of the common stock of Sculley Company for $195,000. On this date Sculley had total owners'
equity of $200,000 (common stock, other paid-in capital, and retained earnings of $10,000, $90,000, and $100,000 respectively).
Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value),
and to patents. FIFO is used for inventories. The equipment has a remaining life of five years and straight-line depreciation is used. The excess to the
patents is to be amortized over 20 years.
On July 1, 20X2 Sculley borrowed $100,000 from Powers with a 10% 1-year note; interest is due at maturity.
On January 1, 20X2, Powers held merchandise acquired from Sculley for $10,000. During 20X2, Sculley sold merchandise to Powers for $50,000,
$20,000 of which is still held by Powers on December 31, 20X2. Sculley's usual gross profit on affiliated sales is 50%.
On December 31, 20X1, Powers sold equipment to Sculley at a gain of $10,000. During 20X2, the equipment was used by Sculley. Depreciation is
being computed using the straight-line method, a five-year life, and no salvage value.
Both companies have a calendar-year fiscal year.
8. Refer to Scenario 4-2. Assume that during 20X1 and 20X2, Powers has appropriately accounted for its investment in Sculley using the cost method.
Required:
a. Using the information above or on the Figure 4-5 worksheet, prepare a determination and distribution of excess
schedule.
b. Complete the Figure 4-5 worksheet for consolidated financial statements for the year ended December 31, 20X2.
a.
Determination and distribution of excess schedule:
Entity Parent NCI
Entity FV 243,750 195,000 48,750
Book value:
Pd-In Capt 100,000
RE 1/1/X1 100,000
Book value: 200,000 160,000 40,000
Excess 43,750 35,000 8,750
Inventory 6,250
Equipment 12,500
Patent 25,000
Total excess distributed 43,750
Optional amortization schedule:

Current Exp Prior* Total**
4-15
Equipment 2,500 2,500 5,000
Patent 1,250 1,250 2,500
3,750 3,750
P share 3,000
NCI share 750
*adjusted to respective R/E accounts
** adjusted to respective asset (or contra asset) accounts
b. For the worksheet solution, please refer to Answer 4-5.
Answer 4-5
Powers Sculley Adjustments
Other Current Assets 249,000 205,000 (LN1) 105,000
Investment in Sub. Company 195,000 (CV) 40,000 (EL) 200,000
(D) 35,000
Land 140,000 100,000

Buildings and Equipment 400,000 200,000 (D) 12,500 (F1) 10,000
Accumulated Depreciation (150,000) (50,000) (F2) 2,000 (A) 5,000
Patents (D) 25,000 (A) 2,500
Current Liabilities (150,000) (120,000) (LN1) 105,000

Bonds Payable (100,000) (50,000)
Retained Earnings P Co. (310,000) (D) 5,000 (CV) 40,000
(A) 3,000
(BI) 4,000
(F1) 10,000

(D) 1,250
(A) 750
(BI) 1,000
Net Sales (610,000) (365,000) (IS) 50,000
(IS) 50,000
Operating Expenses 150,000 70,000 (A) 3,750 (F2) 2,000
Interest Revenue (5,000) (LN2) 5,000

Interest Expense 5,000 (LN2) 5,000
Dividend Income (24,000) (CY2) 24,000
Dividends Declared S Co. 30,000 (CY2) 24,000

NCI
Total NCI
0 0 502,250 502,250
4-16
(continued)

Land 240,000
Patents 22,500


Net Sales (925,000)

Interest Revenue 0
Interest Expense 0
Dividend Income 0

NCI 18,250 (18,250)
Total NCI 68,000 (68,000)
0 0 0 0
(CV) Convert to the simple equity method as of January 1, 20X2 (80% of $50,000 increase in retained
earnings from January 1, 20X1 to January 1, 20X2).
(CY2) Eliminate the current-year dividend income against dividends declared by Sculley.
(EL) Eliminate 80% of the Sculley Company equity balances at the beginning of the year against the
investment account.
4-17
(D) Distribute the $43,750 excess of cost over book value to inventory, equipment, and patent; allocate to
Parent and Sub $35,000 and $8,750 respectively
NOTE: The $6,250 write up to inventory is charged to the two Retained Earnings accounts 80:20 since
FIFO is used.
(A) Amortize the equipment write up over 5 years and the patent over 20 years. Current amounts charged to
operating expense; prior years amount allocated to Parent and Sub; totals recorded as adjustments to the
asset (or related contra account)
(LN1) Eliminate $100,000 intercompany notes receivable and notes payable and $5,000 intercompany interest
receivable and interest payable ($100,000 10% 6 months)
(LN2) Eliminate $5,000 intercompany interest revenue and interest expense.
(BI) Eliminate the $5,000 of gross profit in the beginning inventory; allocate to Parent and Sub
(F1) Eliminate the $10,000 20X1 gain on sale of equipment
4-18
Amort of equip restatement 2,500 Internally generated net income 100,000
Amort of patent revaluation 1,250 Realized profit in beginning inventory 5,000
Deferred profit in ending inven 10,000
NCI Share 20%
NCI 18,250

DIF: D OBJ: 4-2 | 4-3 | 4-5
9. Refer to Scenario 4-2. Assume that during 20X1 and 20X2, Powers has appropriately accounted for its investment in Sculley using the simple equity
method.
Required:
schedule.
b. Complete the Figure 4-6 worksheet for consolidated financial statements for the year ended December 31,
20X2.
Figure 4-6
Inventory, December 31 140,000 65,000
Other Current Assets 250,000 225,000
Investment in Sub. Company 259,000
Land 140,000 100,000

Current Liabilities (150,000) (120,000)

Bonds Payable (100,000) (50,000)

Net Sales (610,000) (365,000)

4-19
Operating Expenses 150,000 70,000
Interest Revenue (5,000)

Subsidiary Income (24,000)

NCI
Total NCI
0 0 0 0
(continued)

Inventory, December 31
Other Current Assets
Investment in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Bonds Payable
Other Long-Term Liabilities
Common Stock P Co.
Other Paid in Capital P Co.
Retained Earnings P Co.
Common Stock S Co.

Retained Earnings S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Interest Revenue
Interest Expense
Subsidiary Income

NCI
Total NCI
0 0 0 0
4-20
ANS:
D&D Schedule Entity Parent NCI
Entity FV 243,750 195,000 48,750
Book value:
Pd-In Capt 100,000
RE 1/1/X1 100,000
Book value: 200,000 160,000 40,000
Excess 43,750 35,000 8,750
Inventory 6,250
Equipment 12,500
Patent 25,000

Current Exp Prior * Total **
Equipment 2,500 2,500 5,000
Patent 1,250 1,250 2,500
3,750 3,750
P share 3,000
NCI share 750
* adjusted to respective R/E accounts
** adjusted to respective asset (or contra asset) accounts
Answer 4-6
Other Current Assets 250,000 225,000 (LN1) 105,000
(EL) 200,000
(D) 35,000
Land 140,000 100,000
Buildings and Equipment 400,000 200,000 (D) 12,500 (F1) 10,000
Patents (D) 25,000 (A) 2,500
Current Liabilities (150,000) (120,000) (LN1) 105,000

Bonds Payable (100,000) (50,000)
Retained Earnings P Co. (310,000) (D) 5,000
(A) 3,000
(BI) 4,000
(F1) 10,000
(D) 1,250
(A) 750
(BI) 1,000
Net Sales (610,000) (365,000) (IS) 50,000
(IS) 50,000
4-21
Interest Revenue (5,000) (LN2) 5,000
Interest Expense 5,000 (LN2) 5,000

NCI
Total NCI
0 0 518,250 518,250
(continued)

Land 240,000
Patents 22,500


Net Sales (925,000)

Interest Revenue 0
Interest Expense 0
Subsidiary Income 0

NCI 18,250 (18,250)
Total NCI 74,000 (74,000)
0 0 0 0

4-22
(CY) Eliminate the current-year entries made in the investment account and the subsidiary income account.
(EL) Eliminate 80% of the Sculley Company equity balances at the beginning of the year against the
investment account.
FIFO is used.
(LN1) Eliminate $100,000 intercompany notes receivable and notes payable and $5,000 intercompany interest
receivable and interest payable ($100,000 10% _ 6 months)
(LN2) Eliminate $5,000 intercompany interest revenue and interest expense.
(F1) Eliminate the $10,000 20X1 gain on sale of equipment
4-23
NCI Share 20%
NCI 18,250

DIF: D OBJ: 4-2 | 4-3 | 4-5
10. On January 1, 20X1, Pep Company acquired 80% of the common stock of Sky Company for $195,000. On this date Sky had total owners' equity of
$200,000 (common stock, other paid-in capital, and retained earning of $10,000, $90,000, and $100,000 respectively).
Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value),
and to patents. FIFO is used for inventories. The equipment has a remaining life of five years and straight-line depreciation is used. The excess
attributable to the patents is to be amortized over 20 years.
During 20X1 and 20X2, Pep has appropriately accounted for its investment in Sky using the simple equity method.
On January 1, 20X2, Pep held merchandise acquired from Sky for $10,000. During 20X2, Sky sold merchandise to Pep for $50,000, $20,000 of
which is still held by Pep on December 31, 20X2. Sky's usual gross profit on affiliated sales is 50%.
On December 31, 20X1, Pep sold equipment to Sky at a gain of $10,000. During 20X2, the equipment was used by Sky. Depreciation is being
computed using the straight-line method, a five-year life, and no salvage value.
Required:
schedule.
b. Complete the Figure 4-8 worksheet for consolidated financial statements for the year ended December 31,
20X2.
4-24
Figure 4-8
Pep Sky Adjustments
Statement - Accounts Company Company Debit Credit
Income Statement: Debit
Net Sales (610,000) (365,000)
Operating Expenses 150,000 70,000
Subsidiary Income (84,000)

Net Income (184,000) (105,000)
NCI Interest
NCI
Controlling interest
NCI
NCI
Retained Earnings Statement:
Balance, January 1 P Co. (350,000)
Balance, January 1 S Co. (150,000)
Net Income (From Above) (184,000) (105,000)

Balance, December 31 (474,000) (225,000)
Consolidated Balance Sheet:

Inventory, December 31 140,000 60,000
Investment in Sub. Company 295,000
Land 140,000 100,000

Building and Equipment 400,000 200,000

Bonds Payable (100,000) (50,000)
Retained Earnings - 12/31 (474,000) (225,000)

(From Above)
Total NCI
0 0
(continued)
Consol.
4-25
Financial
Statement - Accounts NCI Statements
Income Statement:
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
NCI in Income
Net Income
Retained Earnings Statement:

Balance, January 1 P Co.
Balance, January 1 S Co.
Net Income (From Above)

Dividends Declared P Co.
Dividends Declared S Co.
Balance, December 31

Inventory, December 31
Other Current Assets
Investment in Sub. Company
Land
Building and Equipment
Accumulated Depreciation
Current Liabilities
Bonds Payable
Other Long-Term Liabilities
Common Stock P Co.
Other Paid in Capital P Co.
Common Stock S Co.
Retained Earnings - 12/31

(From Above)
Total NCI
ANS:
D&D Schedule Entity Parent NCI
Entity FV 243,750 195,000 48,750
Book value:
Pd-In Capt 100,000
4-26
RE 1/1/X1 100,000
Book value: 200,000 160,000 40,000
Excess 43,750 35,000 8,750
Inventory 6,250
Equipment 12,500
Patent 25,000
Current Exp Prior* Total**
Equipment 2,500 2,500 5,000
Patent 1,250 1,250 2,500
3,750 3,750
P share 3,000
NCI share 750
*adjusted to respective R/E accounts
**adjusted to respective asset (or contra asset) accounts
Answer 4-8
Pep Sky Adjustments
Statement - Accounts Company Company Debit Credit
Income Statement: Credit
Net Sales (610,000) (365,000) (IS) 50,000
(IS) 50,000

Net Income (184,000) (105,000)
NCI (see IDS below)
Controlling Interest (see IDS)
Ret. Earnings Statement:

Balance, January 1 P Co. (350,000) (D) 5,000
(A) 3,000
(BI) 4,000
(F1) 10,000
Balance, January 1 S Co. (150,000) (EL) 120,000 (D) 8,750

(BI) 1,000
(D) 1,250
(A) 750
Dividends Declared S Co. 30,000 (CY) 24,000

Investment in Sub. Co. 295,000 (CY) 60,000
(EL) 200,000
(D) 35,000
Land 140,000 100,000

Building and Equipment 400,000 200,000 (D) 12,500 (F1) 10,000
4-27
Patents (D) 25,000 (A) 2,500

Bonds Payable (100,000) (50,000)
Ret. Earnings - December 31 (474,000) (225,000)

(From Above)
Total NCI
0 0 412,250 412,250
(continued)
4-28
Consol.
Financial
Statement - Accounts NCI Statements
Income Statement:
Net Sales (925,000)
Subsidiary Income 0
Net Income (198,250)
Distribution ( see IDS) (19,250) (179,000)
Ret. Earnings Statement:

Balance, January 1 P Co. (328,000)
Balance, January 1 S Co. (35,750)


Investment in Sub. Co. 0
Land 240,000
Building and Equipment 602,500
Patents 22,500

Ret. Earnings - 12/31/X2 (49,000) (447,000)

(From Above)
Total NCI 69,000 (69,000)
0 0
4-29
(CY) Eliminate the current-year entries made in the investment account and the subsidiary income account.
(EL) Eliminate 80% of the Sky Company equity balances at the beginning of the year against the investment
account.
FIFO is used.
(F1) Eliminate the $10,000 20X1 gain on sale of equipment.

NCI Share 20%
NCI 19,250

DIF: D OBJ: 4-2 | 4-3 | 4-7 MSC: 80%; simple equity
4-30

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PROBLEM

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

Selected Balance Sheet Amounts {Debits/(Credits)}:

Selected Statement of Retained Earnings Amounts:

Cost of Goods Sold 10,000

Accumulated Depreciation 7,000

4. Notes Payable 36,000

Interest Revenue 2,880

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

Land 140,000 80,000

Current Liabilities (150,000) (70,000) (IA) 20,000

Common StockP Co. (200,000)

Common StockS Co. (150,000) (EL) 150,000

Net Sales (600,000) (380,000) (IS) 100,000

Subsidiary Income (90,000) (CY) 90,000

Consolidated Net Income

Current Liabilities (200,000)

Common StockP Co. (200,000)

Common StockS Co.

Net Sales (880,000)

Operating Expenses 222,000

Consolidated Net Income (174,000)

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

(IS) Eliminate the entire intercompany sales of $100,000.

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

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

DIF: M OBJ: 4-2 MSC: 100%; simple equity

Land 140,000 80,000

Current Liabilities (150,000) (70,000) (IA) 20,000

Common StockP Co. (200,000)

Common StockS Co. (150,000) (EL) 120,000

Subsidiary Income (72,000) (CY) 72,000

Consolidated Net Income

Current Liabilities (200,000)

Common StockP Co. (200,000)

Common StockS Co. (30,000)

Net Sales (880,000)

Operating Expenses 213,250

Consolidated Net Income (182,750)

Total NCI (140,900) (140,900)

Eliminations and Adjustments:

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

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

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

Subsidiary Company Income Distribution Schedule

Parent Company Income Distribution Schedule

DIF: M OBJ: 4-2 MSC: 80%; simple equity

Palo Alto Stanford Consolidated

Income statement accounts:

Equity in earnings of Stanford $ 9,000 -- --

DIF: M OBJ: 4-2 | 4-3

Common stock ($10 par) $100,000

Any excess of cost over book value is attributable to goodwill.

Pinto Company and Subsidiary Sands Inc.

Sales (600,000 300,000 150,000) $750,000

Distribution of Consolidated Net Income:

Subsidiary Sands Inc. Income Distribution

Parent Pinto Company Income Distribution

DIF: M OBJ: 4-2 | 4-3

Goodwill (D) 200,000

Net Sales (600,000) (380,000) (IS) 100,000

Subsidiary Income (100,000) (CY) 100,000

Gain on Sale of Equipment (20,000) (F1) 20,000