Test bank with answers for advanced accounting 3e by jeter chapter 06

To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory Multiple Choice Sales from one subsidiary to another are called a downstream sales b upstream sales c intersubsidiary sales d horizontal sales Noncontrolling interest in consolidated income is never affected by a upstream sales b downstream sales c horizontal sales d Noncontrolling interest is affected by all sales Failure to eliminate intercompany sales would result in an overstatement of consolidated a net income b gross profit c cost of sales d all of these Pratt Company owns 80% of Storey Company’s common stock During 2011, Storey sold $400,000 of merchandise to Pratt At December 31, 2011, one-fourth of the merchandise remained in Pratt’s inventory In 2011, gross profit percentages were 25% for Pratt and 30% for Storey The amount of unrealized intercompany profit that should be eliminated in the consolidated statements is a $80,000 b $24,000 c $30,000 d $25,000 The noncontrolling interest’s share of the selling affiliate’s profit on intercompany sales is considered to be realized under a partial elimination b total elimination c 100% elimination d both total and 100% elimination The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory includes a a credit to Ending Inventory (Cost of Sales) b credit to Sales c debit to Ending Inventory (Cost of Sales) d debit to Inventory - Balance Sheet http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Perez Company acquired an 80% interest in Seaman Company in 2010 In 2011 and 2012, Sutton reported net income of $400,000 and $480,000, respectively During 2011, Seaman sold $80,000 of merchandise to Perez for a $20,000 profit Perez sold the merchandise to outsiders during 2012 for $140,000 For consolidation purposes, what is the noncontrolling interest’s share of Seaman's 2011 and 2012 net income? a $90,000 and $96,000 b $100,000 and $76,000 c $84,000 and $92,000 d $76,000 and $100,000 A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2010 Under the partial equity method, the workpaper entry in 2011 to recognize the intercompany profit in beginning inventory realized during 2011 includes a debit to a Retained Earnings - P b Noncontrolling interest c Cost of Sales d both Retained Earnings - P and Noncontrolling Interest The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the noncontrolling minority ownership percentage by the subsidiary’s reported net income a plus unrealized profit in ending inventory less unrealized profit in beginning inventory b plus realized profit in ending inventory less realized profit in beginning inventory c less unrealized profit in ending inventory plus realized profit in beginning inventory d less realized profit in ending inventory plus realized profit in beginning inventory 10 In determining controlling interest in consolidated income in the consolidated financial statements, unrealized intercompany profit on inventory acquired by a parent from its subsidiary should: a not be eliminated b be eliminated in full c be eliminated to the extent of the parent company’s controlling interest in the subsidiary d be eliminated to the extent of the noncontrolling interest in the subsidiary 11 P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000 At the end of the current year, one-third of the merchandise remains in S Company’s inventory Applying the lower-of- cost-or-market rule, S Company wrote this inventory down to $92,000 What amount of intercompany profit should be eliminated on the consolidated statements workpaper? a $20,000 b $18,000 c $12,000 d $10,800 12 The material sale of inventory items by a parent company to an affiliated company: a enters the consolidated revenue computation only if the transfer was the result of arm’s length bargaining b affects consolidated net income under a periodic inventory system but not under a perpetual inventory system c does not result in consolidated income until the merchandise is sold to outside parties d does not require a working paper adjustment if the merchandise was transferred at cost http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 6-3 13 A parent company regularly sells merchandise to its 80%-owned subsidiary Which of the following statements describes the computation of noncontrolling interest income? a the subsidiary’s net income times 20% b (the subsidiary’s net income x 20%) + unrealized profits in the beginning inventory – unrealized profits in the ending inventory c (the subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits in the ending inventory) × 20% d (the subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in the beginning inventory) × 20% 14 P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value During 2011, P sold merchandise that cost $135,000 to S for $189,000 One-third of this merchandise remained in S’s inventory at December 31, 2011 S reported net income of $120,000 for 2011 P’s income from S for 2011 is: a $36,000 b $50,400 c $54,000 d $61,200 Use the following information for Questions 15 & 16: P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation In 2010, P sold merchandise that cost $240,000 to S for $300,000 Half of this merchandise remained in S’s December 31, 2010 inventory During 2011, P sold merchandise that cost $375,000 to S for $468,000 Forty percent of this merchandise inventory remained in S’s December 31, 2011 inventory Selected income statement information for the two affiliates for the year 2011 is as follows: Sales Revenue Cost of Goods Sold Gross profit P _ $2,250,000 1,800,000 $450,000 S _ $1,125,000 937,500 $187,500 15 Consolidated sales revenue for P and Subsidiary for 2011 are: a $2,907,000 b $3,000,000 c $3,205,500 d $3,375,000 16 Consolidated cost of goods sold for P Company and Subsidiary for 2011 are: a $2,260,500 b $2,268,000 c $2,276,700 d $2,737,500 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Use the following information for Questions 17 & 18: P Company owns an 80% interest in S Company During 2011, S sells merchandise to P for $200,000 at a profit of $40,000 On December 31, 2011, 50% of this merchandise is included in P’s inventory Income statements for P and S are summarized below: P $1,200,000 (600,000) (300,000) $300,000 Sales Cost of Sales Operating Expenses Net Income (2011) S $600,000 (400,000) ( 80,000) $120,000 17 Controlling interest in consolidated net income for 2011 is: a $300,000 b $380,000 c $396,000 d $420,000 18 Noncontrolling interest in income for 2011 is: a $4,000 b $19,200 c $20,000 d $24,000 19 The amount of intercompany profit eliminated is the same under total elimination and partial elimination in the case of upstream sales where the selling affiliate is a less than wholly owned subsidiary all downstream sales horizontal sales where the selling affiliate is a wholly owned subsidiary a b c d both and 20 Paige, Inc owns 80% of Sigler, Inc During 2011, Paige sold goods with a 40% gross profit to Sigler Sigler sold all of these goods in 2011 For 2011 consolidated financial statements, how should the summation of Paige and Sigler income statement items be adjusted? a Sales and cost of goods sold should be reduced by the intercompany sales b Sales and cost of goods sold should be reduced by 80% of the intercompany sales c Net income should be reduced by 80% of the gross profit on intercompany sales d No adjustment is necessary 21 P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value During 2011, P sold merchandise that cost $225,000 to S for $315,000 One-third of this merchandise remained in S’s inventory at December 31, 2011 S reported net income of $200,000 for 2011 P’s income from S for 2011 is: a $60,000 b $90,000 c $120,000 d $102,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 6-5 Use the following information for Questions 22 & 23: P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation In 2010, P sold merchandise that cost $192,000 to S for $240,000 Half of this merchandise remained in S’s December 31, 2010 inventory During 2011, P sold merchandise that cost $300,000 to S for $375,000 Forty percent of this merchandise inventory remained in S’s December 31, 2011 inventory Selected income statement information for the two affiliates for the year 2011 is as follows: P _ $1,800,000 1,440,000 $ 360,000 Sales Revenue Cost of Goods Sold Gross profit S _ $900,000 750,000 $150,000 22 Consolidated sales revenue for P and Subsidiary for 2011 are: a $2,325,000 b $2,400,000 c $2,565,000 d $2,700,000 23 Consolidated cost of goods sold for P Company and Subsidiary for 2011 are: a $1,809,000 b $1,815,000 c $1,821,000 d $2,190,000 Use the following information for Questions 24 & 25: P Company owns an 80% interest in S Company During 2011, S sells merchandise to P for $150,000 at a profit of $30,000 On December 31, 2011, 50% of this merchandise is included in P’s inventory Income statements for P and S are summarized below: P $900,000 (450,000) (225,000) $225,000 Sales Cost of Sales Operating Expenses Net Income (2011) 24 Controlling interest in consolidated net income for 2011 is: a $225,000 b $285,000 c $297,000 d $315,000 25 Noncontrolling interest in income for 2011 is: a $3,000 b $14,400 c $15,000 d $18,000 http://downloadslide.blogspot.com S $450,000 (300,000) ( 60,000) $ 90,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Problems 6-1 On January 1, 2011, Palmer Company purchased a 90% interest in Sauder Company for $2,800,000 At that time, Sauder had $1,840,000 of common stock and $360,000 of retained earnings The difference between implied and book value was allocated to the following assets of Sauder Company: Inventory Plant and equipment (net) Goodwill $ 80,000 240,000 591,111 The plant and equipment had a 10-year remaining useful life on January 1, 2011 During 2011, Palmer sold merchandise to Sauder at a 20% markup above cost At December 31, 2011, Sauder still had $180,000 of merchandise in its inventory that it had purchased from Palmer In 2011, Palmer reported net income from independent operations of $1,600,000, while Sauder reported net income of $600,000 Required: A Prepare the workpaper entry to allocate, amortize, and depreciate the difference between implied and book value for 2011 B Calculate controlling interest in consolidated net income for 2011 6-2 Percy Company owns 80% of the common stock of Smyth Company Percy sells merchandise to Smyth at 20% above cost During 2011 and 2012, intercompany sales amounted to $1,080,000 and $1,200,000 respectively At the end of 2011, Smyth had one-fifth of the goods purchased that year from Percy in its ending inventory Smyth’s 2012 ending inventory contained one-fourth of that year’s purchases from Percy There were no intercompany sales prior to 2011 Percy reported net income from its own operations of $720,000 in 2011 and $760,000 in 2012 Smyth reported net income of $400,000 in 2011 and $460,000 in 2012 Neither company declared dividends in either year Required: A Prepare in general journal form all entries necessary on the consolidated statements workpapers to eliminate the effects of the intercompany sales for both 2011 and 2012 B Calculate controlling interest in consolidated net income for 2012 6-3 Payton Company owns 90% of the common stock of Sanders Company Sanders Company sells merchandise to Payton Company at 25% above cost During 2010 and 2011 such sales amounted to $800,000 and $1,020,000, respectively At the end of each year, Payton Company had in its inventory one-fourth of the amount of goods purchased from Sanders Company during that year Payton Company reported income of $1,500,000 from its independent operations in 2010 and $1,720,000 in 2011 Sanders Company reported net income of $600,000 in each year and did not declare any dividends in either year There were no intercompany sales prior to 2010 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 6-7 Required: A Prepare, in general journal form, all entries necessary on the 2011 consolidated statements workpaper to eliminate the effects of intercompany sales B Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2011 C Calculate controlling interest in consolidated net income for 2011 6-4 Powers Company owns an 80% interest in Smiley Company and a 90% interest in Toro Company During 2010 and 2011, intercompany sales of merchandise were made by all three companies Total sales amounted to $2,400,000 in 2010, and $2,700,000 in 2011 The companies sold their merchandise at the following percentages above cost Powers 15% Smiley 20% Toro 25% The amount of merchandise remaining in the 2011 beginning and ending inventories of the companies from these intercompany sales is shown below Merchandise Remaining in Beginning Inventory Powers Smiley Toro Total Sold by Powers Smiley Toro $225,000 $180,000 180,000 $189,000 216,000 135,000 $414,000 396,000 315,000 Merchandise Remaining in Ending Inventory Powers Smiley Toro Total Sold by Powers Smiley Toro $207,000 $144,000 195,000 $138,000 198,000 150,000 $345,000 342,000 345,000 Reported net incomes (from independent operations including sales to affiliates) of Powers, Smiley, and Toro for 2011 were $3,600,000, $1,500,000, and $2,400,000, respectively Required: A Calculate the amount noncontrolling interest to be deducted from consolidated income in the consolidated income statement for 2011 B Calculate the controlling interest in consolidated net income for 2011 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-8 6-5 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition The following balances were taken from the records of S Company: Common stock $2,500,000 Retained earnings, 1/1/11 $1,450,000 Net income for 2011 3,000,000 Dividends declared in 2011 (1,550,000) Retained earnings, 12/31/11 2,900,000 Total stockholders’ equity, 12/31/11 $5,400,000 P Company owns 80% of the common stock of S Company During 2011, P Company purchased merchandise from S Company for $4,000,000 S Company sells merchandise to P Company at cost plus 25% of cost On December 31, 2011, merchandise purchased from S Company for $1,250,000 remains in the inventory of P Company On January 1, 2011, P Company’s inventory contained merchandise purchased from S Company for $525,000 The affiliated companies file a consolidated income tax return There was no difference between the implied value and the book value of net assets acquired Required: A Prepare all workpaper entries necessitated by the intercompany sales of merchandise B Compute noncontrolling interest in consolidated income for 2011 C Compute noncontrolling interest in consolidated net assets on December 31, 2011 6-6 P Corporation acquired 80% of S Corporation on January 1, 2011 for $240,000 cash when S’s stockholders’ equity consisted of $100,000 of Common Stock and $30,000 of Retained Earnings The difference between the price paid by P and the underlying equity acquired in S was allocated solely to a patent amortized over 10 years P sold merchandise to S during the year in the amount of $30,000 $10,000 worth of inventory is still on hand at the end of the year with an unrealized profit of $4,000 The separate company statements for P and S appear in the first two columns of the partially completed consolidated workpaper Required: Complete the consolidated workpaper for P and S for the year 2011 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 6-9 P Corporation and Subsidiary Consolidated Statements Workpaper at December 31, 2011 Income Statement Sales Dividend Income Cost of Sales Other Expenses Noncontrolling Interest in Income Net Income Retained Earnings Statement Retained Earnings 1/1 Add: Net Income Less: Dividends Retained Earnings 12/31 Balance Sheet Cash Accounts Receivable-net Inventories Patent Land Equipment and Buildings-net Investment in S Corporation Total Assets Equities Accounts Payable Common Stock Retained Earnings 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Equities P Corp S Corp 200,000 16,000 (92,000) (23,000) 150,000 (47,000) (40,000) 101,000 63,000 110,000 101,000 ( 30,000) 181,000 30,000 63,000 (20,000) 73,000 20,000 120,000 140,000 19,000 55,000 80,000 270,000 600,000 240,000 695,000 420,000 430,000 1,004,000 909,000 300,000 181,000 831,000 100,000 73,000 1,390,000 1,004,000 Eliminations Dr Cr http://downloadslide.blogspot.com Noncontrolling Interest Consolidated Balances To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 6-7 On January 1, 2011, Porter Company purchased an 80% interest in the capital stock of Shilo Company for $3,400,000 At that time, Shilo Company had common stock of $2,200,000 and retained earnings of $620,000 Porter Company uses the cost method to record its investment in Shilo Company Differences between the fair value and the book value of the identifiable assets of Shilo Company were as follows: Fair Value in Excess of Book Value Equipment Land Inventory $400,000 200,000 80,000 The book values of all other assets and liabilities of Shilo Company were equal to their fair values on January 1, 2011 The equipment had a remaining life of five years on January 1, 2011; the inventory was sold in 2011 Shilo Company’s net income and dividends declared in 2011 were as follows: Year 2011 Net Income of $400,000; Dividends Declared of $100,000 Required: Prepare a consolidated statements workpaper for the year ended December 31, 2012 using the partially completed worksheet http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 6-11 PORTER COMPANY AND SUBSIDIARY Consolidated Statements Workpaper For the Year Ended December 31, 2012 Porter Shilo Eliminations Noncontrolling Consolidated Company Company Dr Cr Interest Balances Income Statement Sales Dividend Income Total Revenue Cost of Goods Sold Depreciation Expense Other Expenses Total Cost & Expenses Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings Retained Earnings Statement 1/1 Retained Earnings Porter Company Shilo Company Net Income from above Dividends Declared Porter Company Shilo Company 12/31 Retained Earnings to Balance Sheet 4,400,000 1,800,000 192,000 4,592,000 1,800,000 3,600,000 800,000 160,000 120,000 240,000 200,000 4,000,000 1,120,000 592,000 680,000 592,000 680,000 2,000,000 592,000 920,000 680,000 (360,000) (240,000) 2,232,000 1,360,000 Porter Shilo Eliminations Noncontrolling Consolidated Company Company Dr Cr Interest Balances Balance Sheet Cash Accounts Receivable Inventory Investment in Shilo Company Difference between Implied and Book Value Land Plant and Equipment Total Assets Accounts Payable Notes Payable Common Stock: Porter Company Shilo Company Retained Earnings from above 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Liabilities & Equity 280,000 1,040,000 960,000 3,400,000 1,440,000 7,120,000 528,000 360,000 260,000 760,000 700,000 1,280,000 1,120,000 4,120,000 440,000 120,000 4,000,000 2,200,000 2,232,000 1,360,000 7,120,000 4,120,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 6-8 Pool Company owns a 90% interest in Slater Company The consolidated income statement drafted by the controller of Pool Company appeared as follows: Pool Company and Subsidiary Consolidated Income Statement for Year Ended December 31, 2011 Sales Cost of Sales Operating Expenses Consolidated Income Less Noncontrolling Interest in Consolidated Income Controlling Interest in Consolidated Net Income $13,800,000 $9,000,000 1,800,000 10,800,000 3,000,000 190,000 $2,810,000 During your audit you discover that intercompany sales transactions were not reflected in the controller’s draft of the consolidated income statement Information relating to intercompany sales and unrealized intercompany profit is as follows: 2010 Sales—Slater to Pool 2011 Sales—Pool to Slater Cost Selling Price Unsold at Year-End $1,500,000 900,000 $1,800,000 1,350,000 1/4 2/5 Required: Prepare a corrected consolidated income statement for Pool Company and Slocum Company for the year ended December 31, 2011 Short Answer Past and proposed GAAP agree that unrealized intercompany profit should not be included in consolidated net income or assets Briefly explain the preferred approach of eliminating intercompany profit Determination of the noncontrolling interest in consolidated net income differs depending on whether intercompany sales are downstream or upstream Explain the difference in calculating noncontrolling interest for downstream and upstream sales Short Answer Questions from the Textbook Does the elimination of the effects of intercompany sales of merchandise always affect the amount of reported consolidated net income? Explain Why is the gross profit on intercompany sales, rather than profit after deducting selling and administrative expenses, ordinarily eliminated from consolidated inventory balances? P Company sells inventory costing $100,000 to its subsidiary, S Company, for $150,000 At the end of the current year, one-half of the goods re-mains in S Company’s inventory Applying the lower of cost or market rule, S Company writes down this inventory to $60,000 What amount of intercompany profit should be eliminated on the consolidated statements workpaper? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 6-13 Are the adjustments to the noncontrolling interest for the effects of intercompany profit eliminations illustrated in this text necessary for fair presentation in accordance with generally accepted accounting principles? Explain Why are adjustments made to the calculation of the noncontrolling interest for the effects of intercompany profit in upstream but not in down-stream sales? What procedure is used in the consolidated statements workpaper to adjust the noncontrolling interest in consolidated net assets at the be-ginning of the year for the effects of intercompany profits? What is the essential procedural difference between workpaper eliminating entries for unrealized intercompany profit made when the selling affiliate is a less than wholly owned subsidiary and those made when the selling affiliate is the parent company or a wholly owned subsidiary? Define the controlling interest in consolidated net income using the t-account or analytical approach Why is it important to distinguish between up-stream and downstream sales in the analysis of intercompany profit eliminations? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition ANSWER KEY Multiple Choice d b c c a c d d 10 11 12 c b c c 13 14 15 16 a c a c 17 18 19 20 b c d a 21 22 23 24 c a c b 25 c Problems 6-1 A Depreciation Expense (240,000/10) Plant and Equipment (net) (240,000 – 24,000) 1/1 Inventory Goodwill Difference Between Implied and Book Value 24,000 216,000 80,000 591,111 911,111 B Palmer’s net income from independent operations Less: unrealized profit on sales to Sauder [180,000 – (180,000/1.20)] Palmer’s income from independent operations that has been realized in transactions with third parties Palmer’s share of Sauder’s income (600,000 × 90) Less: amortization of difference between implied and book value Controlling Interest in Consolidated Net Income for 2011 $1,600,000 (30,000) 1,570,000 540,000 (104,000)* $2,006,000 * 80,000 + (240,000/10) 6-2 A 2011 Sales 1,080,000 Purchases (Cost of Goods Sold) 12/31 Inventory (Income Statement) [216,000 – (216,000/1.20)] 12/31 Inventory(Balance Sheet) 2012 Sales 1,080,000 36,000 36,000 1,200,000 Purchases (Cost of Goods Sold) 1,200,000 12/31 Inventory (Income Statement) [300,000 – (300,000/1.20)] 12/31 Inventory (Balance Sheet) 50,000 Beginning R/E – Percy 1/1 Inventory (Income Statement) 36,000 50,000 http://downloadslide.blogspot.com 36,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory B Percy’s Income from independent operations Less: Unrealized profit in ending inventory Add: Unrealized profit in beginning inventory Percy’s Income Realized in Transactions with third parties Percy’s Share of Subsidiary Income Controlling Interest in Consolidated Net Income 6-3 A Sales $760,000 (50,000) 36,000 746,000 $368,000 $1,114,000 1,020,000 Purchases (Cost of Sales) To eliminate intercompany sales 1,020,000 12/31 Inventory (Income Statement) 51,000 Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory 51,000 Beginning Retained Earnings – Payton (.90 × $40,000) 36,000 Noncontrolling interest 4,000 1/1 Inventory (Balance Sheet) 40,000 To recognize unrealized profit in beginning inventory realized during the year B Noncontrolling Interest Calculation: Sanders Company reported net income Less: Unrealized profit in ending inventory Add: Realized profit in beginning inventory Subsidiary income included in consolidated income Noncontrolling interest ownership percentage $600,000 (51,000) 40,000 589,000 × $ 58,900 Noncontrolling interest in consolidated income C Controlling Interest in Consolidated Net Income: Payton Company’s net income from independent operations Reported net income of Sanders Company Less: Unrealized profit on sales of 2011 Add: Profit on intercompany sales to Payton realized in transactions with third parties Subsidiary income realized in transactions with third parties Payton Company’s share of subsidiary income (589,000 × 9) Controlling interest in consolidated net income $1,720,000 $600,000 (51,000) 40,000 $589,000 http://downloadslide.blogspot.com 530,100 $2,250,100 6-15 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 6-4 Smiley Toro $1,500,000 $2,400,000 66,000 63,000 (57,000) (69,000) 1,509,000 2,394,000 × × $301,800 $239,400 A Reported subsidiary income Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory Subsidiary income included in consolidated income Noncontrolling interest ownership percentage Noncontrolling interest in consolidated income Total noncontrolling interest:$301,800 + $239,400 = $541,200 B Power’s Company’s income independent operations Add: Unrealized profit considered realized in 2011 ($414,000 – $414,000/1.15) Less: Unrealized profit in 2011 income ($345,000 – $345,000/1.15) Power’s income realized in transactions with third parties Smiley Company’s Reported Net Income Add: Unrealized profit considered realized in 2011 ($396,000 – $396,000/1.2) Less: Unrealized profit in 2011 income ($342,000 – $342,000/1.20) Subsidiary income realized in transactions with third parties $3,600,000 54,000 (45,000) $3,609,000 $1,500,000 66,000 (57,000) 1,509,000 Power’s share of subsidiary income (.8 × 1,509,000) Toro Company’s reported net income Add: Unrealized profit considered realized in 2011 ($315,000 – $315,000/1.25) Less: Unrealized profit in 2011 income ($345,000 – $345,000/1.25) Subsidiary income realized in transactions with third parties Power’s share of subsidiary income (.9 × 2,394,000) Controlling Interest in Consolidated Net Income 1,207,200 $2,400,000 63,000 (69,000) $2,394,000 2,154,600 $6,970,800 6-5 A Sales 4,000,000 Cost of Goods Sold Cost of Goods Sold Ending Inventory (Balance Sheet) [$1,250,000 - ($1,250,000/1.25)] 1/1 Retained Earnings – P Company (1) Noncontrolling intrest (2) Cost of Goods Sold (Beginning Inventory) [$525,000 – ($525,000/1.25)] = $105,000 4,000,000 250,000 250,000 84,000 21,000 http://downloadslide.blogspot.com 105,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 6-17 (1) 8($105,000) (2) 2($105,000) B $3,000,000 × 20 = $600,000 noncontrolling interest in consolidated income C [(.20 × $5,400,000) -.20($1,250,000 – $1,250,000/1.25)] = $1,030,000 noncontrolling interest in consolidated net assets on December 31, 2011 6-6 Income Statement Sales Dividend Income Cost of Sales Other Expenses Noncontrolling Interest in Income Net income Retained Earnings Statement Retained Earnings 1/1 Add: Net Income Less: Dividends Retained Earnings 12/31 Balance Sheet Cash Accounts Receivable-net Inventories Patent Land Equipment and Buildings-net Investment in S Corporation Total Assets Equities Accounts Payable Common Stock Retained Earnings from above 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Equities P Corporation and Subsidiary Consolidated Statements Workpaper at December 31, 2011 P S Corp Corp Eliminations Dr Cr $200,000 $ 150,000 (a) 30,000 16,000 (c) 16,000 (92,000) (47,000) (b) 4,000 (23,000) (40,000) (e) 17,000 101,000 63,000 67,000 110,000 101,000 ( 30,000) 181,000 30,000 63,000 (20,000) 73,000 (d) 30,000 67,000 20,000 120,000 140,000 19,000 55,000 80,000 (a) 30,000 30,000 30,000 (c) 16,000 46,000 831,000 100,000 73,000 9,200 9,200 9,200 (4,000) 5,200 110,000 117,800 (30,000) 197,800 39,000 175,000 216,000 153,000 690,000 1,030,000 (d)240,000 2,303,000 (d)100,000 97,000 46,000 5,200 (d)60,000 60,000 65,200 1,390,000 1,004,000 Balances (113,000) (80,000) (9,200) 117,800 (b) 4,000 (e) 17,000 270,000 420,000 600,000 430,000 240,000 1,390,000 1,004,000 909,000 300,000 181,000 Consolidated 320,000 97,000 (d)170,000 Noncontrolli ng Interest 367,000 http://downloadslide.blogspot.com 367,000 1,740,000 300,000 197,800 65,200 2,303,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 6-7 PORTER COMPANY AND SUBSIDIARY Consolidated Statements Workpaper For the Year Ended December 31, 2012 Porter Shilo Company Company Income Statement Sales Dividend Income Total Revenue Cost of Goods Sold Depreciation Expense Other expense Total Cost & Expenses Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings Statement of Retained Earnings 1/1 Retained Earnings Eliminations Dr Cr Noncontrolling Interest Consolidated Balances 120,000 120,000 6,200,000 -6,200,000 4,400,000 360,000 440,000 5,200,000 1,000,000 120,000 880,000 4,400,000 1,800,000 192,000 (a) 192,000 4,592,000 1,800,000 3,600,000 800,000 160,000 120,000 (d) 80,000 240,000 20,000 4,000,000 1,120,000 592,000 680,000 592,000 Porter Company Shilo Company Net Income from above Dividends Declared 2,000,000 Porter Company Shilo Company 12/31 Retained Earnings to Balance Sheet Balance Sheet Cash Accounts Receivable Inventory Investment in Shilo Company Difference between Implied and Book Value Land Plant and Equipment Goodwill Total Assets Accounts Payable Notes Payable Common Stock: Porter Company Shilo Company Retained Earnings from above (360,000) 592,000 680,000 272,000 (c) 64,000 (d) 64,000 (e) 240,000 920,000 (b) 920,000 680,000 272,000 120,000 880,000 (360,000) (240,000) 2,232,000 1,360,000 280,000 1,040,000 960,000 3,400,000 2,112,000 1,320,000 (a) 192,000 (48,000) 432,000 72,000 260,000 760,000 700,000 2,632,000 (e) 240,000 (b)3,640,000 540,000 1,800,000 1,660,000 - (b) 1,430,000 (c)1,430,000 1,280,000 (c) 200,000 1,440,000 1,120,000 (c) 400,000 (d) 160,000 (c) 750,000 7,120,000 4,120,000 528,000 440,000 360,000 120,000 1,480,000 2,800,000 750,000 9,030,000 968,000 480,000 4,000,000 4,000,000 2,200,000 (b) 2,200,000 2,232,000 1,360,000 1,320,000 432,000 http://downloadslide.blogspot.com 72,000 2,632,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 1/1 Noncontrolling Interest in Net Assets (c) 16,000 (b) 910,000 (d) 16,000 12/31 Noncontrolling Interest in Net Assets Total Liabilities & Equity 7,120,000 4,120,000 6-8 6,572,000 6,572,000 6-19 878,000 950,000 712,000 950,000 9,030,000 POOL COMPANY AND SUBSIDIARY Consolidated Income Statement For the Year Ended December 31, 2011 Sales ($13,800,000 – $1,350,000) Cost of Goods Sold (a) Operating Expenses Consolidated Income Less Noncontrolling Interest in Consolidated Income (b) Controlling Interest in Consolidated Net Income $12,450,000 $7,755,000 1,800,000 (a) Reported Cost of Goods Sold Less intercompany sales in 2011 Plus unrealized profit in ending inventory (2/5 x ($1,350,000 - $900,000)) Less realized profit in beginning inventory (1/4 x ($1,800,000 - $1,500,000)) Corrected cost of goods sold 9,555,000 2,895,000 197,500 $2,697,500 $9,000,000 (1,350,000) 180,000 (75,000) $7,755,000 $190,000 $1,900,000 0.1 Plus unrealized profit on subsidiary sales in 2010 that is considered realized in 2011 (1/4 x ($1,800,000 - $1,500,000)) 75,000 Less unrealized profit on subsidiary sales in 2011 (there were no upstream sales in 2011) Income realized in transactions with third parties 1,975,000 × 0.10 Noncontrolling interest in consolidated income $197,500 (b) Reported net income of subsidiary Short Answer Both current and proposed GAAP require 100% elimination of intercompany profit in the preparation of consolidated financial statements Under 100% elimination, the entire amount of unconfirmed intercompany profit is eliminated from consolidated net income and the related asset balance This approach is logical under the proposed view of consolidated financial statements, based on the entity concept For downstream sales, no modification to the noncontrolling interest in consolidated income is needed For upstream sales, the noncontrolling interest must be adjusted The reported income of the subsidiary is reduced by the amount of gross profit remaining in ending inventory of the purchasing affiliate before multiplying by the noncontrolling percentage interest; it is increased for gross profit realized from beginning inventory http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Short Answer Questions in Textbook Solutions No If all of the merchandise sold by one affiliate to another has subsequently been sold to outsiders, the only effect that the elimination of intercompany sales of merchandise will have on the consolidated financial statements is to reduce consolidated sales and consolidated cost of sales by an equal amount Consolidated net income will be unaffected The effect of eliminating profit on intercompany sales after deducting selling and administrative expenses rather than gross profit is to include selling and administrative expenses associated with the intercompany sale in consolidated inventories Support for the gross profit approach is based on the proposition that consolidated inventory balances should include manufacturing costs only and that generally accepted accounting standards normally preclude the capitalization of selling and administrative costs $10,000 in intercompany profit should be eliminated on the consolidated statements workpaper ($60,000 $100,000 = $10,000) After this elimination the merchandise will be included in the consolidated $100,000 statements at its cost to the affiliated group of $50,000 ( ) – Yes Although 100 percent elimination of intercompany profit has long been required in the preparation of consolidated financial statements, the adjustments to the noncontrolling interest described in this text were discretionary prior to the current standard The FASB requires that these adjustments be allocated between the noncontrolling and controlling interests When the subsidiary is the intercompany seller, the unrealized profit is shown in the accounts of the sub (S Company) These accounts provide the starting point for the calculation of the noncontrolling share of current year earnings Failure to eliminate unrealized profit would result in the overstatement of the noncontrolling share in profits However, when the parent is the intercompany seller, the unrealized profit is shown in the accounts of the parent (P Company) Since the noncontrolling interest does not share in the earnings of P Company, the noncontrolling interest is not affected by the unrealized profit therein Noncontrolling interest in consolidated net assets at the beginning of the year is adjusted by debiting or crediting the subsidiary’s beginning retained earnings in the consolidated statements workpaper The only procedural difference in the workpaper entries relating to the elimination of intercompany profits when the selling affiliate is a less than wholly owned subsidiary is that the noncontrolling interest in the amount of intercompany profit in beginning inventory must be recognized by debiting or crediting the noncontrolling shareholders’ percentage interest in such adjustments to the beginning retained earnings of the subsidiary Controlling interest in consolidated net income is equal to the parent company’s income from its independent operations that has been realized in transactions with third parties plus its share of reported subsidiary income that has been realized in transactions with third parties and adjusted for its share of the amortization of the difference between implied and book value for the period It is important to distinguish between upstream and downstream sales because the calculation of noncontrolling interest in the consolidated financial statements differs depending on whether the intercompany sale giving rise to unrealized intercompany profit is upstream or downstream 10 Profit relating to the intercompany sale of merchandise is recognized in the consolidated financial statements in the period in which the merchandise is sold to outsiders It is recognized in the consolidated financial statements by reducing cost of goods sold (thus increasing gross profit and net income) http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Elimination of Unrealized Profit on Intercompany Sales of Inventory 6-21 Answers to Business Ethics Case Independence of the auditor is essential in maintaining effective audits When auditors are involved in non-audit services, their independence may be impaired (in essence they may be viewed as auditing their own work) Many times auditors have to rely on management representation when no supporting evidence is available Auditors’ involvement in non-audit services can help them gain sufficient familiarity with their client’s business and operational activities to reduce such dependencies and perhaps to lower audit risk The growing importance of non-audit service fees to the audit firms over time may have increased the potential for the auditors to lose independence, even to the extent of financial fraud involvement The increasing effort to reduce costs (in a competitive marketplace for audit services) imposes limitations on the scope of the audit work involved to avoid operating at a loss Subsidizing any shortfall between audit revenues and audit costs with non-audit fees can help in overcoming such limitations Audit fees would have to increase if auditors are held liable to a greater degree The increased fees would cover both increased auditor effort to detect errors and to cover the increased litigation settlements/insurance premiums The additional benefits would be weighed against the costs Timeliness and accuracy present constant tradeoffs in any audit Time and budget constraints may potentially result in an audit staff not performing sufficient work to meet deadlines Further, excessive cost-cutting may cause audit work to be inappropriately reduced, which leads to increased reliance by auditors on client presentations to document areas where the data are not easily available Such reliance can cause audit judgments to be inappropriately influenced When factors outside their control cause auditors to rely on the representations of others, they should not be solely responsible for resulting errors Legislation aimed at protecting auditors to some extent also serves to keep audits from becoming prohibitively expensive http://downloadslide.blogspot.com ... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 6-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition