Solution manual advanced accounting 4e jeter ch06

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER Note: The letter A indicated for a question, exercise, or problem means that the question, exercise, or problem relates to the chapter appendix ANSWERS TO QUESTIONS 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 $100,000 ($60,000 – = $10,000) After this elimination the merchandise will be included in the $100,000 consolidated 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 6-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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) 6-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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 6-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO EXERCISES Exercise 6-1 Part A (1) Sales 2,700,000 2,700,000 Purchases (Cost of Goods Sold) To eliminate intercompany sales of 2011 (2) 12/31 Inventory-Income Statement (Cost of Goods Sold) 12/31 Inventory (Balance Sheet) To eliminate unrealized intercompany profit in inventory 487,500 487,500 Exercise 6-2 Reported Net Income- S Company Noncontrolling Interest Percentage Noncontrolling Interest in Net Income $ 525,000 0.20 $ 105,000 Exercise 6-3 2011 Reported net income $ 30,000 $20,800 Unrealized intercompany profit included therein = $5,200; $5,200 Profit included in consolidated income Percentage interest Noncontrolling interest in consolidated income 2012 (Rounded to nearest dollar) Reported net income Intercompany profit included in beginning inventory, now realized $25,000 Unrealized intercompany profit included therein = $6,250; $6,250 Profit included in consolidated income Percentage interest Noncontrolling interest in consolidated income 6-4 0.25 = (1,300) 28,700 0.10 $ 2,870 $ 35,000 1,300 0.25 = (1,563) 34,737 0.10 $ 3,474 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-4 The $600,000 that could not be assigned to specific assets and liabilities is assumed to represent goodwill (the unidentifiable intangible asset), which is not amortized under current GAAP but is reviewed periodically for impairment In contrast, identifiable intangible assets would be amortized if they have a definite life but not if the life is indefinite in duration Thus, only if the $600,000 pertained to an identifiable intangible asset with a finite life would amortization be required We assume that is not the case here 2011 Pearce Company's net income from its independent operations $90 ,000 Amount of income not realized in transactions with third parties ($90,000 – ) 1.25 Pearce Company's income from its independent operations that has been realized in transactions with third parties Pearce's share of Searl Company adjusted income that has been realized in transactions with third parties ($412,500* 0.80) Controlling interest in consolidated net income for 2011 $1,500,000 (18,000) 1,482,000 330,000* $1,812,000 *[$600,000 – ($75,000 + $112,500)] x 0.80 = 330,000, where $75,000 = $375,000/5 Alternatively, Controlling Interest in Consolidated Income Net income internally generated by Pearce Company Unrealized profit on downstream sales to Searl Company (ending Inventory) ($90,000 – $90,000/1.25) $1,500,000 Realized profit (downstream sales) from begin inventory 18,000 Pearce Company's percentage of Searl Company's income realized from third parties, 80($412,500) Controlling interest in Consolidated Income 2012 Pearce Company's net income from its independent operations Less profit included therein that has not been realized in transactions with third parties ($105,000 – ($105,000/1.25)) Plus profit realized in 2012 ($90,000 – ($90,000/1.25)) Pearce Company's income from its independent operations that has been realized in transactions with third parties Pearce's share of Searl Company adjusted income that has been realized in transactions with third parties ($675,0000 80) Controlling interest in consolidated net income for 2012 *[$750,000 – $75,000] x 0.80 = $540,000, where $75,000 = $375,000/5 6-5 330,000 $1,812,000 $1,800,000 (21,000) 18,000 1,797,000 540,000 $2,337,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-4 (continued) Alternatively, Controlling Interest in Consolidated Income Net income internally generated by Pearce Company $1,800,000 Unrealized profit on downstream Realized profit (downstream sales) from begin inventory sales to Searl Company (ending Inventory) 21,000 Pearce Company's percentage of Searl Company's income realized from third parties, 80($675,000) 18,000 540,000 Controlling interest in Consolidated Income $2,337,000 Exercise 6-5 2011 Pearce Company's income from its independent operations Plus: Pearce Company's interest in the realized net income of Searl Company: Reported Net income Less Amortization of difference between implied and book value ($75,000 + $112,500) $90 ,000 Less unrealized profit included therein ($90,000 ) 1.25 Income realized in transaction with third parties Pearce Company's interest therein (0.8 $394,500) Controlling interest in consolidated net income $1,500,000 $600,000 (187,500) (18,000) $394,500 $315,600 $1,815,600 2012 Pearce Company's income from its independent operations Plus: Pearce Company's interest in the realized net income of Searl Company: Reported Net income Less amortization of difference between implied and book value Less profit included therein that has not been realized in transactions $105 ,000 with third parties ($105,000 ) 1.25 $90 ,000 Plus profit realized in 2012 ($90,000 ) 1.25 Income realized in transaction with third parties Pearce Company's interest therein (0.8 $672,000) Controlling interest in consolidated net income 6-6 $1,800,000 $750,000 (75,000) (21,000) 18,000 $672,000 537,600 $2,337,600 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-6 Part A Payne Company's net income from its independent operations Sierra Company's net income from its independent operations Plus: profit realized from beginning inventory Less: unrealized profit in ending inventory Sierra Company's net income realized in transactions with third parties Payne Company's share thereof (1.00 $171,000) Santa Fe Company's net income from its independent operations Plus: profit realized from beginning inventory Less: unrealized profit in ending inventory Santa Fe Company's net income realized in transactions with third parties Payne Company's share thereof (0.80 $122,300) Controlling interest in consolidated net income $280,000 $172,000 3,800 (4,800) $171,000 171,000 $120,000 4,600 (2,300) $122,300 97,840 $548,840 Exercise 6-7 Part A 2011 (1) Sales 450,000 Purchases (Cost of Goods Sold) To eliminate intercompany sales 450,000 (2) Ending Inventory – Income Statement (CoGS) 12/31 Inventory (Balance Sheet) 25,000 25,000 $150 ,000 To eliminate intercompany profit in ending inventory ($150,000 ) 1.20 2012 (1) Sales 486,000 Purchases (Cost of Goods Sold) To eliminate intercompany sales 486,000 (2) Beginning Retained Earnings-Perkins 25,000 Beginning Inventory – Income Statement (CoGS) 25,000 To recognize intercompany profit included in beginning inventory and reduce beginning consolidated retained earnings for unrealized intercompany profit at the beginning of the year (3) Ending Inventory – Income Statement (CoGS) 12/31 Inventory (Balance Sheet) 27,000 27,000 To eliminate intercompany profit in ending inventory ($162,000 - 6-7 $162 ,000 ) 1.20 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-8 2011 (1) Sales Purchases (Cost of Goods Sold) 450,000 450,000 (2) Ending Inventory – Income Statement (CoGS) 12/31 Inventory (Balance Sheet) To eliminate intercompany profit in ending inventory ($150,000 - $150,000/1.2) 2012 (1) Sales 25,000 25,000 486,000 486,000 Purchases (Cost of Goods Sold) To eliminate intercompany sales (2) 1/1 Retained Earnings-Perkins Company (85%)($25,000) 21,250 1/1 Noncontrolling Interest (15%)($25,000) 3,750 Beginning Inventory – Income Statement (CoGS) 25,000 To recognize intercompany profit in beginning inventory realized during the year and reduce controlling and noncontrolling interests for their share of unrealized intercompany profit at beginning of year (3) Ending Inventory – Income Statement (CoGS) 12/31 Inventory (Balance Sheet) To eliminate intercompany profit in ending inventory ($162,000 - $162,000/1.2) 6-8 27,000 27,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-9 PEAT COMPANY AND SUBSIDIARY Consolidated Income Statement For the Year Ended December 31, 2012 Sales ($14,000,000 - $1,400,000) Cost of Goods Sold (a) Operating Expense Consolidated Income Less Noncontrolling Interest in Consolidated Income (b) Controlling Interest in Consolidated Net Income (a) Reported Cost of Goods Sold Less intercompany sales in 2012 $12,600,000 $7,900,000 1,800,000 9,700,000 2,900,000 210,000 $2,690,000 $9,200,000 (1,400,000) ($1,400,000 - $900,000)) Less realized profit in beginning inventory ( ($1,800,000 - $1,500,000)) Corrected cost of goods sold Plus unrealized profit in ending inventory ( 200,000 (100,000) $7,900,000 $200 ,000 $2,000,000 0.1 Plus unrealized profit on subsidiary sales in 2011 that is considered realized in 2012 ( ($1,800,000 - $1,500,000)) 100,000 Less unrealized profit on subsidiary sales in 2012 (there were no upstream sales in 2012) Income realized in transactions with third parties 2,100,000 0.10 Noncontrolling interest in consolidated income $210,000 (b) Reported net income of subsidiary 6-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO PROBLEMS Problem 6-1 Part A 2011 (1) Sales 436,000 Purchases (Cost of Goods Sold) To eliminate intercompany sales 436,000 (2) 12/31 Inventory (Income Statement) Inventory (Balance Sheet) 18,167 18,167 $109 ,000 To eliminate unrealized intercompany profit in ending inventory ($109,000 – ) 1.2 2012 (1) Sales 532,000 Purchases (Cost of Goods Sold) To eliminate intercompany sales 532,000 (2) Beginning Retained Earnings-Peel Co (0.9 $18,167) Noncontrolling Interest (0.10 $18,167) 1/1 Inventory (Income Statement) To recognize gross profit in beginning inventory realized in 2012 16,350 1,817 (3) 12/31 Inventory (Income Statement) Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory ($133,000 – ($133,000/1.2)) 22,167 18,167 Part B Reported subsidiary income Add: Realized profit in beginning inventory Less: Unrealized profit in ending inventory Subsidiary income included in consolidated income Noncontrollong interest ownership percentage Noncontrolling interest in consolidated income Part C Peel Company's net income from independent operations Reported income of Seacore Company Less: Unrealized profit on intercompany sales of 2012 Add: Profit on 2011 sales to Peel realized in transactions with third parties Subsidiary income realized in transactions with third parties Peel 's share of subsidiary income (0.90 $126,000) Controlling interest in consolidated net income - 10 22,167 $130,000 18,167 (22,167) 126,000 0.10 $12,600 $300,000 $130,000 (22,167) 18,167 $126,000 113,400 $413,400 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6-18 (continued) Balance Sheet Cash Accounts Receivable Inventory Investment in Selby Company Perry Company 90,000 297,000 400,000 1,076,400 Difference between Implied & Book Value Plant and Equipment 880,000 Goodwill Other Assets 384,000 Total assets 3,127,400 Accounts Payable Other Current Liabilities Capital Stock: Perry Company Selby Company Retained Earnings from above 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total liabilities & equity 24,300 95,000 Selby Company Eliminations Dr Cr 65,000 85,000 225,000 540,000 (4) 7,200 (6) 30,000 (7) 16,000 (5) 400,000 (6) 200,000 (6) 125,000 Noncontrolling Consolidated Interest Balances 155,000 382,000 609,400 (3) 15,600 (1) 129,600 (5)1,000,000 (6) 400,000 (7) 40,000 230,000 1,145,000 1,580,000 125,000 614,000 3,465,400 25,000 40,000 49,300 135,000 1,000,000 2,008,100 3,127,400 *Noncontrolling Interest in Consolidated Income = 0.20 Explanations of workpaper entries are on next page 1,000,000 400,000 680,000 1,145,000 (5) 400,000 976,700 (4) 1,800 (6) 7,500 (7) 4,000 2,168,200 333,000 (5) 250,000 2,168,200 ($260,000 + $9,000- $37,500- $20,000) = $42,300 6-50 36,300 236,700 2,008,100 273,000 273,000 3,465,400 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6-18 (continued) Computation and Allocation of Difference Schedule Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Inventory ($230,000 - $ 155,000) Equipment ($800,000 - $ 600,000) Balance Goodwill Balance $960,000 640,000 320,000 (60,000) (160,000) 100,000 (100,000) -0- NonEntire Controlling Value Share 240,000 1,200,000 * 160,000 800,000 80,000 400,000 (15,000) (75,000) (40,000) (200,000) 25,000 125,000 (25,000) (125,000) -0-0- *$960,000/.80 Explanation of workpaper entries (1) Equity in Subsidiary Income 153,600* Dividends Declared ($30,000 0.80) Investment in Selby Company To reverse the effect of parent company entries during the year for subsidiary dividends and income * [0.80 ($260,000 + $9,000)] - $15,600 – $16,000 - $30,000 = $153,600 (2) Sales 24,000 129,600 300,000 Purchases (Cost of Goods Sold) To eliminate intercompany sale (3) Ending Inventory - Income Statement (CoGS) Ending Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory ($78,000 0.2) (4) Investment in Selby Company ($9,000 0.80) Noncontrolling Interest ($9,000 0.20) Beginning Inventory –Income Statement (CoGS) To recognize intercompany profit realized during the year and to reduce the controlling and noncontrolling interests for their share of unrealized profit at beginning of year 300,000 15,600 15,600 7,200 1,800 (5) Beginning Retained Earnings- Selby Company 450,000 Common Stock - Selby Company 400,000 Difference between Implied and Book Value 400,000 Investment in Selby Company [$960,000 + ($450,000 - $400,000) x 80] Noncontrolling Interest [$240,000 + ($450,000 - $400,000) x 20] 6-51 9,000 1,000,000 250,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6-18 (continued) (6) Beginning Inventory - Income Statement (CoGS) 37,500 Investment in Selby Company ($37,500 x 80) 30,000 Noncontrolling Interest 7,500 Plant and Equipment 200,000 Goodwill 125,000 Difference between Implied and Book Value To allocate the difference between implied and book value a $75,000 (1/2) = $37,500 (7) Other Expenses ($200,000/10) Investment in Selby Company ($20,000 x 80) Noncontrolling Interest Plant and Equipment (2 $20,000)) 20,000 16,000 4,000 a 400,000 b 40,000 Alternative to entries (6) and (7) (6a) Investment in Selby Company 46,000 c Noncontrolling interest 11,500 d Beginning Inventory -Income Statement (CoGS) 37,500 a Other Expenses 20,000 b Plant and Equipment ($200,000 – (2 $20,000)) 160,000 Goodwill 125,000 Difference between Implied and Book Value 400,000 To allocate, amortize and depreciate the difference between implied and book value a $75,000 (1/2) = $37,500 ($200,000/10) = $20,000 c $30,000 + $16,000 = $46,000 d $7,500 + $4,000 = $11,500 b Part B Perry Company's Retained Earnings on 12/31/2011 Consolidated Retained Earnings on 12/31/2011 Part C The balances are the same as in Problem 6-14 6-52 $2,008,100 $2,008,100 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem – 19A Part A 2011 (1) Sales Purchases (Cost of Goods sold) To eliminate intercompany sales 265,000 265,000 (2) Ending Inventory – Income Statement (CoGS) 12/31 Inventory (Balance Sheet) To eliminate intercompany profit in ending inventory ($150,000 – ($150,000/1.25)) 30,000 30,000 (3) Deferred Tax Asset Income Tax Expense To defer income tax paid or accrued by the selling affiliate on unrealized intercompany profit in ending inventory (.3 $30,000) 2012 (1) Sales 9,000 9,000 475,000 Purchases (Cost of Goods Sold) To eliminate intercompany sales 475,000 (2) Beginning Retained Earnings - Pearson Company 30,000 Beginning Inventory – Income Statement (CoGS) 30,000 To recognize intercompany profit realized during the year and to reduce controlling interest for unrealized intercompany profit at beginning of the year (3) Income Tax Expense Beginning Retained Earnings - Pearson Company To recognize income tax expense on intercompany profit in beginning inventory considered to be realized during the current year and to adjust beginning consolidated retained earnings for the income tax consequences of unrealized profit at the beginning of the year 9,000 9,000 (4) Ending Inventory – Income Statement (CoGS) 12 /31 Inventory (Balance Sheet) To eliminate intercompany profit in ending inventory ($195,000 – ($195,000/1.25)) 39,000 (5) Deferred Tax Asset Income Tax Expense To defer income tax paid or accrued by the selling affiliate on unrealized intercompany profit in ending inventory (.3 $39,000) 11,700 Part B Reported Subsidiary Income Noncontrolling Interest Ownership Noncontrolling Interest in Consolidated Income 6-53 39,000 11,700 2011 $225,000 20% $45,000 2012 $275,000 20% $55,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6–19A (continued) Part C Calculation of Controlling interest in consolidated income For Year Ended December 31, 2012 Pearson Company's net income from independent operations Less after-tax unrealized intercompany profit on 2012 sales to Sedbrook Company ( $39,000 ) Plus after-tax profit on 2011 sales to Sedbrook Company realized in transactions with third parties in 2012 ( $30,000 ) Pearson Company's net income from independent operations that has been realized in transactions with third parties Reported net income of Sedbrook Company Less after-tax unrealized intercompany profit on 2012 sales to Pearson Company Plus after-tax profit on 2011 sales to Sedbrook Company realized in transactions with third parties in 2012 Sedbrook Company's net income that has been realized in transactions with third parties Pearson Company's share Controlling interest in consolidated income 6-54 $480,000 (27,300) 21,000 473,700 $275,000 0 275,000 80% 220,000 $693,700 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem - 20A Part A Income Statement Sales Dividend Income Total Revenue Cost of Goods Sold: Beginning Inventory Purchases Cost of Goods Available Less Ending Inventory Cost of Goods Sold: Income Tax Expense Other Expenses Total Cost and Expense Net /Combined Income Noncontrolling Interest in Income Net Income to Retained Earnings Statement Of Retained Earnings 1/1 Retained Earnings Peck Corporation PECK CORPORATION AND SUBSIDIARY Consolidated Statements Workpaper For the Year Ended December 31, 2011 Peck Corporation 1,100,000 7,000 1,107,000 Seacrest Company 530,000 150,000 850,000 1,000,000 140,000 860,000 27,000 110,000 350,000 460,000 115,000 345,000 28,250 180,000 1,067,000 40,000 114,000 487,250 42,750 40,000 42,750 Net Income from Above Dividends Declared Peck Corporation Seacrest Company 12/31 Retained Earnings to Balance Sheet 120,000 40,000 Noncontrolling Interest 530,000 541,000 Seacrest Company Eliminations Dr Cr (2) 100,000 (8) 7,000 42,750 1,530,000 (5) 10,000 (2) 100,000 (3) 8,000 (6) (7) 4,000 1,901 (5) (7) (5) (9) (4) 250,000 1,100,000 1,350,000 247,000 1,103,000 57,591 3,200 13,185 13,185 120,901 113,200 7,000 784 3,000 84,000 120,901 (1) 14,000 (6) 2,800 (6) 1,200 34,200 113,200 13,185 7,000 138,200 (3,000) 44,385 294,000 1,454,951 75,049 (13,185)* 61,864 550,016 (100,000) 481,000 Consolidated Balances 1,530,000 61,864 (100,000) (10,000) 152,750 6-55 (8) 215,685 511,880 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem - 20A (continued) Balance Sheet Cash Accounts Receivable (net) Inventory Investment in Seacrest Company Deferred Tax Assets Other Assets Total Assets Accounts Payable Other Liabilities Deferred Income Tax Liability Capital Stock Peck Corporation Seacrest Company Retained Earnings from Above Noncontrolling Interest in Net Assets Total Liabilities & Equity Peck Corporation 35,000 211,000 140,000 420,000 Seacrest Company Eliminations Dr Cr 100,000 107,750 115,000 (1) (4) 14,000 3,200 Noncontrolling Interest Consolidated Balances 135,000 318,750 247,000 (3) 8,000 (9) 434,000 500,000 1,306,000 400,000 722,750 3,200 900,000 1,603,950 70,000 55,000 20,000 30,000 35,000 5,000 100,000 90,000 27,685 (7) 2,685 680,000 481,000 1,306,000 680,000 500,000 152,750 722,750 *Noncontrolling interest in consolidated income = 30 ($42,750 + (0.60 Explanations of workpaper entries are on separate page 6-56 (9) 500,000 215,685 138,200 (9) 150,000 732,885 $10,000) – ( 0.60 44,385 150,000 194,385 732,885 $8,000)) = $13,185 511,880 194,385 1,603,950 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem - 20A (Continued) Explanations of workpaper entries (1) Investment in Seacrest Company (.70 ($120,000 - $100,000)) 1/1 Retained Earnings - Peck Co To establish reciprocity/convert to equity as of 1/1/2011 (2) Sales 14,000 14,000 100,000 Purchases (Cost of Goods sold) To eliminate intercompany sales 100,000 (3) Ending Inventory - Income Statement (CoGS) Ending Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory ($40,000 – ($40,000/1.25)) 8,000 (4) Deferred Tax Asset Income Tax Expense To defer income tax paid or accrued by the selling affiliate on unrealized intercompany profit in ending inventory (.40 $8,000) 3,200 8,000 (5) 1/1 Retained Earnings - Peck Co (.70 $10,000) 7,000 1/1 Retained Earnings - Seacrest Co (.30 $10,000) 3,000 Beginning Inventory To recognize income tax expense on intercompany profit in beginning inventory considered to be realized during the current year and to adjust the controlling and the noncontrolling interests for their shares of the income tax consequences of unrealized profit at the beginning of the year (6) Income Tax Expense (.40 $10,000) 4,000 1/1 Retained Earnings - Peck Co (.70 $4,000) 1/1 Retained Earnings - Seacrest Co (.30 $4,000) To recognize income tax expense on intercompany profit in beginning inventory considered to be realized during the current year and to adjust the controlling and the noncontrolling interests for their shares of the income tax consequences of unrealized profit at the beginning of the year (7) 1/1 Retained Earnings - Peck Co 784 Income Tax Expense 1,901 Deferred Income Tax Liability2 To recognize income tax consequences of undistributed subsidiary income $14,000 70 20 40 = $784 $47,950 70 20 40 = $2,685 $2,685 - $784 = $1,901 6-57 3,200 10,000 2,800 1,200 2,685 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem - 20A (Continued) (8) Dividend Income ($10,000 70) Dividends Declared To eliminate intercompany dividends 7,000 (9) 1/1 Retained Earnings - Seacrest Co Common Stock - Seacrest Co Investment in Seacrest Co To eliminate the investment accounts 84,000 350,000 7,000 434,000 Undistributed Income of Seacrest Company That Has Been Included in Consolidated Income From For From Acquisition Calendar Acquisition To 1/1/11 Year 2011 to 12/31/11 Seacrest Company Retained earnings 1/1/2011 Retained earnings 12/31/2011 Retained earnings date of acquisition Increase in retained earnings Net income 2011 Dividends 2011 After-tax unrealized profit on 1/1/2011 (.6 $10,000) After-tax unrealized profit on 12/31/2011 (.6 $8,000) Undistributed income that has been included in consolidated income 6-58 $120,000 $152,750 (100,000) 52,750 (100,000) 20,000 $ 42,750 (10,000) (6,000) 6,000 (4,800) (4,800) $14,000 $33,950 $47,950 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6-20A (continued) Part B Calculation of Consolidated Net Income For year Ended December 31, 2011 Peck Corporation's net income from independent operations ($40,000 - $7,000) Less after-tax unrealized intercompany profit on 2011 sales to Seacrest Company Plus after-tax profit on 2010 sales to Seacrest Company realized in transactions with third parties in 2011 Peck Corporation's net income from independent operation that has been realized in transaction with third parties Reported net income of Seacrest Company $42,750 Less after-tax unrealized intercompany profit on 2011 sales to Peck Corporation (.6 $8,000) (4,800) Plus after-tax profit on 2010 sales to Peck Corporation realized in transactions with third parties in 2011 (.6 $10,000) 6,000 Seacrest Company's net income that has been realized in transactions with third parties 43,950 Peck Corporation's share 70% Less income tax consequence of undistributed income of Seacrest Company for 2011 that has been included in consolidated income ($33,950 70 20 40) Less amortization of the difference between cost and book value Controlling interest in consolidated income $33,000 0 33,000 30,765 (1,901) $61,864 Calculation of Consolidated Retained Earnings December 31, 2011 Peck Corporation’s Retained Earnings on 12/31/2011 Unrealized after-tax profit on downstream sales included therein Unrealized after-tax profit on upstream sales included therein Less income tax consequence of undistributed income of Seacrest Company that has been included in consolidated income from date of acquisition to 12/31/2011 ($47,950 70 20 40) Less cumulative effect to date of the amortization of the difference between cost and book value Consolidated Retained Earnings 12/31/2011 6-59 $517,925 (3,360) (2,685) $511,880 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem - 21A Part A PETRA CORPORATION AND SUBSIDIARY Consolidated Statements Workpaper For the Year Ended December 31, 2011 Petra Corporation Income Statement Sales Equity in Subsidiary Income Total Revenue Cost of Goods Sold: Beginning Inventory Purchases Cost of Goods Available Less Ending Inventory Cost of Goods Sold: Income Tax Expense Other Expenses Total Cost and Expense Net /Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings Statement Of Retained Earnings 1/1 Retained Earnings: Petra Corporation 1,100,000 29,925 1,129,925 530,000 150,000 850,000 1,000,000 140,000 860,000 27,000 110,000 350,000 460,000 115,000 345,000 28,250 180,000 1,067,000 62,925 114,000 487,250 42,750 62,925 42,750 120,000 62,925 Eliminations Dr Cr Noncontrolling Interest (2) 100,000 (1) 29,925 42,750 1,530,000 (5) 10,000 (2) 100,000 (3) 8,000 (6) (7) 4,000 (4) 1,901 143,826 (5) (7) (5) (8) 250,000 1,100,000 1,350,000 247,000 1,103,000 57,591 3,200 113,200 7,000 784 (6) 2,800 3,000 (6) 1,200 84,000 143,826 113,200 13,185 13,185 294,000 1,454,951 75,049 (13,185)* 61,864 550,016 34,200 13,185 (100,000) 517,925 Consolidated Balances 1,530,000 530,000 555,000 Swain Company Net Income from Above Dividends Declared: Petra Corporation Swain Company 12/31/ Retained Earnings to Balance Sheet Swain Company 61,864 (100,000) (100,000) 152,750 6-60 (1) 238,610 7,000 124,200 (3,000) 44,385 511,880 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem – 21A (continued) Balance Sheet Cash Accounts Receivable (net) Inventory Investment in Swain Company Deferred tax asset Other Assets Total Assets Accounts Payable Other Liabilities Deferred Income Tax Liability Capital Stock Petra Corporation Swain Company Retained Earnings from Above Noncontrolling Interest in Net Assets Total Liabilities & Equity Petra Corporation 35,000 211,000 140,000 456,925 Swain Company Eliminations Dr Cr 100,000 107,750 115,000 Noncontrolling Interest 135,000 318,750 247,000 (3) 8,000 (1) 22,925 (8) 434,000 (4) Consolidated Balances 3,200 500,000 1,342,925 400,000 722,750 3,200 900,000 1,603,950 70,000 55,000 20,000 30,000 35,000 5,000 100,000 90,000 27,685 (7) 2,685 680,000 517,925 1,342,925 *Noncontrolling interest in consolidated income = 30 Explanation of workpaper entries on separate page 680,000 500,000 152,750 722,750 ($42,750 + (.60 6-61 (8) 500,000 238,610 741,810 $10,000) – (.60 124,200 (8) 150,000 741,810 $8,000) = $13,185 44,385 150,000 194,385 511,880 194,385 1,603,950 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem – 21A (continued) Explanations of workpaper entries (1) Equity in Subsidiary Income Dividends Declared Investment in Swain Company To reverse the effect of parent company entries during the year for subsidiary dividends and income (2) Sales 29,925 7,000 22,925 100,000 Purchases (Cost of Goods sold) To eliminate intercompany sales 100,000 (3) Ending Inventory – Income Statement (CoGS) Ending Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory ($40,000 – ($40,000/1.25)) 8,000 (4) Deferred Tax Asset Income Tax Expense To defer income tax paid or accrued by the selling affiliate on unrealized intercompany profit in ending inventory (.40 3,200 8,000 3,200 $8,000) (5) 1/1 Retained Earnings – Petra Co 1/1 Retained Earnings – Swain Co Beginning Inventory To recognize intercompany profit realized during the year and to reduce the controlling and controlling interests for their share of unrealized intercompany profit at the beginning of the year 7,000 3,000 (6) Income Tax Expense (.40 $10,000) 1/1 Retained Earnings – Petra Co 1/1 Retained Earnings – Swain Co To recognize income tax expense on intercompany profit in beginning inventory considered to be realized during the current year and to adjust the controlling and the noncontrolling interests for their shares of the income tax consequences of unrealized profit at the beginning of the year 4,000 10,000 (7) 1/1 Retained Earnings – Petra Co 784 Income Tax Expense 1,901 Deferred Income Tax Liability To recognize income tax consequences of undistributed subsidiary income $14,000 70 20 40 = $784 $47,950 70 20 40 = $2,685 $2,685 – $784 = $1,901 6-62 2,800 1,200 2,685 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem – 21A (continued) (8) 1/1 Retained Earnings – Swain Co Common Stock – Swain Co Investment in Swain Co To eliminate the investment accounts 84,000 350,000 434,000 Undistributed Income of Swain Company That Has Been Included in Consolidated Income Swain Company Retained earnings 1/1/2011 Retained earnings 12/31/2011 Retained earnings date of acquisition Increase in retained earnings Net income 2011 Dividends 2011 After-tax unrealized profit on 1/1/2011 (.6 $10,000) After-tax unrealized profit on 12/31/2011 (.6 $8,000) Undistributed income that has been included in consolidated income From Acquisition to 1/1/2011 $120,000 For Calendar From Year Acquisition 2011 to 12/31/2011 $152,750 (100,000) 52,750 (100,000) 20,000 $42,750 (10,000) (6,000) 6,000 _ (4,800) (4,800) $14,000 $33,950 $47,950 Part B Calculation of Consolidated Net Income For year Ended December 31, 2011 Petra Corporation's net income from independent operations ($40,000 - $7,000) Less after-tax unrealized intercompany profit on 2011 sales to Swain Company Plus after-tax profit on 2010 sales to Swain Company realized in transactions with third parties in 2011 Petra Corporation's net income from independent operation that has been realized in transaction with third parties Reported net income of Swain Company Less after-tax unrealized intercompany profit on 2011 sales to Petra Corporation (.6 $8,000) Plus after-tax profit on 2010 sales to Petra Corporation realized in transactions with third parties in 2011 (.6 $10,000) Swain Company's net income that has been realized in transactions with third parties Petra Corporation's share (.70 $43,950) Less income tax consequence of undistributed income of Swain Company for 2011 that has been included in consolidated income ($33,950 70 20 40) Less amortization of the difference between cost and book value Controlling interest in consolidated income 6-63 $33,000 0 33,000 $42,750 (4,800) 6,000 43,950 70% 30,765 (1,901) $61,864 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6-21A (Continued) Calculation of Consolidated Retained Earnings December 31, 2011 Petra Corporation’s Retained Earnings on 12/31/2011 Less after-tax amount of Petra Corporation's retained earnings that have not been realized in transactions with third parties Petra Corporation’s retained earnings that have been realized in transactions with third parties Increase in retained earnings of Swain Company from date of acquisition to 12/31/2011 ($152,700 - $100,000) Less after-tax unrealized profit included in Swain Company's retained earnings on 12/31/2011 (.6 $8,000) Increase in reported retained earnings of Swain Company since acquisition that has been realized in transactions with third parties Petra Corporation's share Less income tax consequence of undistributed income of Swain Company that has been included in consolidated income from date of acquisition to 12/31/2011 ($47,950 70 20 40) Less cumulative amortization of the difference between cost and book value to 12/31/2011 Consolidated Retained Earnings 12/31/2011 6-64 $481,000 481,000 $52,750 (4,800) 47,950 70% 33,565 (2,685) $511,880 ...To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com It is important to distinguish... of goods sold (thus increasing gross profit and net income) 6-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO BUSINESS ETHICS CASE... serves to keep audits from becoming prohibitively expensive 6-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO EXERCISES Exercise 6-1