Chapter INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES Answers to Questions Profits and losses on sales between affiliated companies are realized for consolidated statement purposes when the purchasing affiliate resells the merchandise to parties outside of the consolidated entity If all merchandise sold to affiliates is resold to outside parties in the same period, there will be no unrealized profit to eliminate in preparing the consolidated financial statements Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits according to SFAS No 160 (This treatment was also prescribed by ARB No 51) The amount of unrealized profit to be eliminated in the preparation of consolidated financial statements is not affected by the existence of a noncontrolling interest All unrealized profit must be eliminated In the case of upstream sales, however, the unrealized profit should be allocated between controlling and noncontrolling interests The elimination of intercompany sales and purchases does not affect consolidated net income This is because equal amounts are deducted from sales and cost of sales and the net effect on consolidated net income is nil The importance of the elimination lies in a correct statement of consolidated sales and cost of sales Consolidated working capital is not affected by the elimination of intercompany accounts receivable and accounts payable balances Since equal amounts are deducted from current assets and current liabilities, the effect on the computation "current assets less current liabilities" is nil Upstream sales are sales from subsidiary to parent company Downstream sales are sales from parent company to subsidiary The importance of this designation lies in the fact that the profit or loss on such transactions is the selling affiliate's profit or loss In the case of unrealized profit or loss on downstream sales, all the profit or loss is assigned to the parent company-seller But unrealized profit or loss on upstream sales is profit or loss of the subsidiary-seller and is assigned to the parent company and noncontrolling interest in relation to their proportionate holdings Yes If unrealized profits are not eliminated at year end, consolidated net income will be overstated The ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the beginning inventory will understate consolidated net income The analysis of the effect of unrealized inventory profits on consolidated net income is basically the same as the analysis for inventory errors Like inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting periods Consolidated net income for 2011 is not affected The noncontrolling interest share is affected by upstream sales if the merchandise has not been resold by the parent company to outside parties by the end of the accounting period This is because the noncontrolling interest share is based on the income of the subsidiary If the subsidiary has unrealized profit from intercompany sales, its realized income will be less than its reported income The noncontrolling interest share should be based on the realized income of the subsidiary ©2009 Pearson Education, Inc publishing as Prentice Hall 5-1 5-2 Intercompany Profit Transactions — Inventories A parent company's investment income and investment accounts are adjusted for unrealized profits on intercompany sales to subsidiaries in accordance with the one-line consolidation concept The parent company reduces its investment and investment income accounts for the full amount of the unrealized profits in the year of intercompany sale When the goods are sold to outside parties by the subsidiary, the profits of the parent company are realized and the parent company increases its investment and investment income accounts 10 Combined cost of goods sold is overstated when there are unrealized profits in the beginning inventory and understated when there are unrealized profits in the ending inventory The elimination of unrealized profits in the beginning inventory reduces (credits) cost of goods sold and the elimination of unrealized profits in the ending inventory increases (debits) cost of goods sold 11 The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling interest or by the direction of the intercompany sales All unrealized profit from both upstream and downstream sales is eliminated from consolidated cost of goods sold 12 Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is eliminated by reducing (crediting) cost of sales and debiting the investment account if a correct equity method has been used and the intercompany sales are downstream In the case of upstream sales, cost of sales is credited and the noncontrolling interest and the investment account are debited proportionately When the parent company does not adjust its investment account for unrealized profits from intercompany sales, the above debits to the investment account would be to retained earnings 13 There are two equally good approaches for computing noncontrolling interest share when there are unrealized profits from upstream sales in both beginning and ending inventories One approach is to compute realized income of the subsidiary by adding unrealized profits in the beginning inventory to reported subsidiary net income and deducting unrealized profits in the ending inventory The noncontrolling interest share is then equal to the realized income of the subsidiary multiplied by the noncontrolling interest percentage The other approach is to compute the noncontrolling interest percentage in reported subsidiary net income, in unrealized profits in beginning inventory, and in unrealized profits in ending inventory Noncontrolling interest share is then computed by adding the noncontrolling interest percentage in unrealized profits in the beginning inventory to the noncontrolling interest share of reported income, and subtracting the noncontrolling interest percentage relating to the unrealized profits in the ending inventory 14 The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a convenience, but it does not result in incorrect measurements of consolidated net income as long as the unrealized profits at any statement date are correctly determined This is because any unrealized profits in beginning inventory that are considered realized are credited to cost of sales The same items will appear as unrealized profits in the ending inventory if they remain unsold, and the elimination of these items results in debiting cost of sales for the same amount Thus, the working paper effects are offsetting as illustrated in the following working paper entries, which assume $5,000 unrealized profits from downstream sales Investment in subsidiary (retained earnings) Cost of sales 5,000 5,000 To eliminate unrealized profit in beginning inventory Cost of sales 5,000 Inventory 5,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-3 To eliminate unrealized profit in ending inventory ©2009 Pearson Education, Inc publishing as Prentice Hall 5-4 Intercompany Profit Transactions — Inventories SOLUTIONS TO EXERCISES Solution E5-1 a d a c c a a c Solution E5-2 [AICPA adapted] a c Unrealized profits from intercompany sales with Kent are eliminated from the ending inventory: $320,000 combined current assets less $12,000 unrealized profit ($60,000 ´ 20%) c Combined cost of sales of $750,000 less $250,000 intercompany sales Solution 5-3 d Philly's separate income (in thousands) Add: Share of Silvio's income ($500 ´ 100%) $1,000 500 Add: Realization of profit deferred in 2009 $1,500 - ($1,500/150%) 500 Less: Unrealized profit in 2010 inventory $1,200 - ($1,200/150%) (400) Controlling share of consolidated net income $1,600 d Combined sales Less: Intercompany sales $1,400 (50) Consolidated sales $1,350 c Combined cost of sales Less: Intercompany purchases $ 680 (50) Less: Unrealized profit in beginning inventory (4) Add: Unrealized profit in ending inventory 10 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-5 Consolidated cost of sales $ ©2009 Pearson Education, Inc publishing as Prentice Hall 636 5-6 Intercompany Profit Transactions — Inventories Solution E5-4 b Pride's share of Sedita's income ($60,000 ´ 80%) Less: Unrealized profit in ending inventory $ ($20,000 ´ 50% unsold ´ 80% owned) (8,000) Income from Sedita $ 40,000 d Combined cost of sales Less: Intercompany sales $ 450,000 (100,000) Add: Unrealized profit in ending inventory 48,000 10,000 Consolidated cost of sales $ 360,000 b Reported income of Sedita Unrealized profit $ 60,000 (10,000) Sedita's realized income 50,000 Noncontrolling interest percentage Noncontrolling interest share 20% $ 10,000 Solution E5-5 c Combined sales Less: Intercompany sales $1,800,000 (400,000) Consolidated sales $1,400,000 c Unrealized profit in beginning inventory $100,000 - ($100,000/125%) $ 20,000 $ 25,000 Unrealized profit in ending inventory $125,000 - ($125,000/125%) b Combined cost of goods sold Less: Intercompany sales $1,440,000 (400,000) ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-7 Less: Unrealized profit in beginning inventory $100,000 - ($100,000/125%) (20,000) Add: Unrealized profit in ending inventory $125,000 - ($125,000/125%) Consolidated cost of goods sold 25,000 $1,045,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 5-8 Intercompany Profit Transactions — Inventories Solution E5-6 a Patti's separate income Add: Income from Susan (below) $200,000 144,550 Controlling share of consolidated net income $344,550 Susan's reported income Less: Patents amortization $200,000 (20,000) Add: Unrealized profit in beginning inventory [$112,500 - ($112,500/150%)] 37,500 Less: Unrealized profit in ending inventory [$33,000 - ($33,000/150%)] (11,000) Susan’s adjusted and realized income $206,500 Patti’s 70% controlling share of Susan’s realized income Noncontrolling interest share (30%) $144,550 $ 61,950 c Packman's share of Slocum's reported net loss ($150,000 loss ´ 60%) $(90,000) Add: Unrealized profit in ending inventory ($200,000 ´ 1/4 unsold) Income from Slocum Packman's separate income (50,000) (140,000) 300,000 Controlling share of consolidated net income $160,000 b Santini's reported net income Add: Realized profit in beginning inventory $300,000 $150,000 - ($150,000/1.25) 30,000 Less: Deferred profit in ending inventory $200,000 - ($200,000/1.25) Income from Santini (40,000) $290,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-9 Parnell’s 75% controlling share of Santini’s income $217,500 Noncontrolling interest share (25%) $ 72,500 Solution E5-7 (in thousands) Pansy's separate income Add: 80% of Sheridan's reported income 2009 $300 2010 $400 2011 $350 400 440 380 30 40 (40) (20) Add: Realization of profits in beginning inventory Less: Unrealized profits in ending Inventory Controlling share of consolidated NI (30) $670 $830 ©2009 Pearson Education, Inc publishing as Prentice Hall $750 5-10 Intercompany Profit Transactions — Inventories Solution E5-8 Pycus Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2009 (in thousands) Sales ($400 + $100 - $40 intercompany sales) Cost of sales ($200 + $60 - $40 intercompany $ 460 purchases + $10 unrealized profit in ending inventory) (230) Gross profit 230 Other expenses ($100 + $30) (130) Cnsolidated net income 100 Less: Noncontrolling interest share ($10 ´ 20%) Controlling share of consolidated net income (2) $ 98 Solution E5-9 Noncontrolling interest share Seven's reported net income Add: Intercompany profit from upstream sales in $ 50,000 beginning inventory 5,000 Less: Intercompany profit from upstream sales in ending inventory (10,000) Seven’s adjusted and realized income $ 45,000 Noncontrolling interest share (40%) $ 18,000 Consolidated sales Combined sales Less: Intercompany sales $1,250,000 100,000 Consolidated sales $1,150,000 Consolidated cost of sales Combined cost of sales Less: Intercompany sales $ 650,000 (100,000) Add: Intercompany profit in ending inventory 10,000 Less: Intercompany profit in beginning inventory (5,000) ©2009 Pearson Education, Inc publishing as Prentice Hall 5-20 Intercompany Profit Transactions — Inventories Solution P5-5 Pane Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 (in thousands) Adjustments and Pane 100% Seal Eliminations Income Statement Sales $ 800 $ 400 Income from Seal 102 Cost of sales 400 * 200 * Depreciation expense 110 * 40* Other expenses 192 * 60* Net income $ 200 Retained Earnings Retained earnings — Pane $ 600 Retained earnings — Seal 100ü Dividends 100 * 50* Balance Sheet Cash $ 54 Receivables — net 12 a 120 c 20 472 * 150 * f 258 * $ 200 600 200ü 700 b $ 100 Net income $ $1,080 d 102 $ 380 Retained earnings December 31 a 120 Consolidated Statements e 380 200 d 50 100 * $ 430 $ 700 $ $ 91 37 90 60 g 17 133 100 80 b 12 168 Other assets 70 90 160 Land 50 50 100 Buildings — net 200 150 350 Equipment — net 500 400 900 Investment in Seal 736 Inventories c 20 d 52 e 704 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-21 Patents e Accounts payable $1,800 $ 867 $ $ 160 47 Other liabilities 340 90 Common stock, $10 par 600 300 Retained earnings 700ü 430ü $1,800 24 f 18 $1,920 g 17 $ 190 430 e 300 $ 867 600 700 $1,920 Supporting computations Unrealized profit in beginning inventory ($40,000 ´ 1/2) = $20,000 Unrealized profit in ending inventory ($48,000 ´ 1/4) = $12,000 Seal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patents amortization equals $102,000 income from Seal ©2009 Pearson Education, Inc publishing as Prentice Hall 5-22 Intercompany Profit Transactions — Inventories Solution P5-6 Patty Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 (in thousands) Adjustments and Patty Sue 75% Eliminations Income Statement Sales $ 600 $ 400 Income from Sue 102.5 Cost of sales 270 * 210 * Operating expenses 145 * 40* a 130 $ $ 287.5ü Retained Earnings Retained earnings — Patty $ 182.5 b 20 a 130 c 10 Controlling share of NI 287.5ü Dividends 150 * Retained earnings December 31 $ 320 Balance Sheet Cash $ 85 Accounts receivable 165 90 e $ 325 $ 37.5 * 287.5 $ 182.5 37.5 $ 150ü $ 360 * 185 * f Retained earnings — Sue 870 d 102.5 Consolidated net income Noncontrolling int.share Controlling share of NI Consolidated Statements 90 150ü 287.5 50* d f 37.5 12.5 150 * $ 190 $ 320 $ $ 115 30 100 g 15 h 15 b 20 250 Dividends receivable 15 Inventories 60 80 Land 80 50 130 Buildings — net 230 100 330 Equipment — net 200 140 340 Investment in Sue 385 c 10 d 65 e 330 ©2009 Pearson Education, Inc publishing as Prentice Hall 120 Chapter 5-23 Goodwill e 200 $1,220 $ 500 $ 225 $ 100 g 15 Dividends payable 70 20 h 15 Other liabilities 155 40 Common stock, $10 par 450 150 Retained earnings 320ü 190ü Accounts payable $1,220 200 $1,485 $ 310 75 195 e 150 450 320 $ 500 Noncontrolling interest January e 110 Noncontrolling interest December 31 f 25 135 $1,485 * Deduct Supporting computations Investment in Sue at January 1, 2010 Implied fair value of Sue ($300,000 / 75%) $300,000 $400,000 Book value of Sue Goodwill 200,000 $200,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 5-24 Intercompany Profit Transactions — Inventories Solution P5-7 Preliminary computations Investment cost Implied fair value of Susan $270,000 $300,000 Less: Book value of Susan Patents 250,000 $ 50,000 Patents amortization $50,000/10 years = $5,000 per year Upstream sales Unrealized profit in $28,000 - ($28,000 Unrealized profit in $42,000 - ($42,000 December ¸ 1.4) = December ¸ 1.4) = 31, 2009 inventory of Poly $8,000 31, 2010 inventory of Poly $12,000 Income from Susan Susan's reported net income Less: Patents amortization Less: Unrealized profit in ending inventory $100,000 (5,000) (12,000) Add: Unrealized profit in beginning inventory 8,000 Susan’s adjusted and realized income $ 91,000 Poly’s 90% controlling share of Susan’s income 10% noncontrolling interest share of Susan’s income $ 81,900 $ 9,100 Investment balance Initial investment cost Increase in Susan's net assets from December 31, 2008 $270,000 to December 31, 2010 ($70,000 ´ 90%) 63,000 Patent amortization for years (90%) ( 9,000) Unrealized profit in December 31, 2010 inventory (10,800) Investment balance December 31, 2010 $313,200 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-25 Solution P5-7 (continued) Poly Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Poly Income Statement Sales $ 819,000 Income from Susan Adjustments and Eliminations Susan 90% $ 560,000 81,900 a 560,000 d 81,900 Cost of sales 546,000* 400,000* b 12,000 Other expenses 154,400* 60,000* f 5,000 Consolidated Statements $ 819,000 a 560,000 c 8,000 390,000* 219,400* Consolidated net income $ 209,600 Noncontrolling int.share Controlling share of NI h $ 200,500 Retained Earnings Retained earnings — Poly $ 120,000 Retained earnings — Susan 9,100 9,100* $ 200,500 $ 100,000 $ 120,000 $ 70,000 Controlling share of NI 200,500ü 100,000ü Dividends 100,000* 50,000* e 70,000 200,500 d h 45,000 5,000 100,000* Retained earnings December 31 $ 220,500 $ 120,000 $ 220,500 Balance Sheet Cash $ $ $ 125,300 75,300 50,000 Inventory 42,000 80,000 b 12,000 110,000 Other current assets 60,000 20,000 g 10,000 70,000 Plant assets — net 300,000 300,000 Investment in Susan 313,200 Patents $ 790,500 $ 450,000 600,000 c 7,200 e 45,000 d 36,900 e 283,500 f 5,000 40,000 $ 945,300 ©2009 Pearson Education, Inc publishing as Prentice Hall 5-26 Intercompany Profit Transactions — Inventories Current liabilities $ 170,000 $ 130,000 Capital stock 400,000 200,000 Retained earnings 220,500ü 120,000ü $ 790,500 Noncontrolling interest January Noncontrolling interest December 31 g 10,000 $ 290,000 e 200,000 400,000 220,500 $ 450,000 c 800 e 31,500 h 4,100 34,800 $ 945,300 * Deduct ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-27 Solution P5-8 Pan Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 (in thousands) 100% Sal Pan Income Statement Sales $ 800 $ 400 Adjustments and Eliminations a 120 Consolidated Statements $1,080 Income from Sal 108 Cost of sales 400 * 200 * Depreciation expense 110 * 40* 150 * Other expenses 192 * 60* 252 * Net income $ 206 Retained Earnings Retained earnings — Pan $ 606 Retained earnings — Sal d 108 $ b 12 a 120 c 20 100 472 * $ 206 606 $ 380 Net income 206ü 100ü Dividends 100 * 50* e 380 206 D 50 100 * Retained earnings December 31 $ 712 $ 430 $ 712 Balance Sheet Cash $ 54 $ 37 $ 91 Receivables — net 90 60 F 17 133 100 80 B 12 168 Other assets 70 90 160 Land 50 50 100 Buildings — net 200 150 350 Equipment — net 500 400 900 Inventories ©2009 Pearson Education, Inc publishing as Prentice Hall 5-28 Intercompany Profit Transactions — Inventories Investment in Sal 748 Goodwill Accounts payable $1,812 $ 867 $ $ 47 160 c 20 e 30 d 58 e 710 30 $1,932 f 17 $ 190 Other liabilities 340 90 Common stock, $10 par 600 300 Retained earnings 712 430 712 867 $1,932 $1,812 $ 430 e 300 600 Supporting computations Unrealized profit in beginning inventory ($40,000 ´ 1/2) = $20,000 Unrealized profit in ending inventory ($48,000 ´ 1/4) = $12,000 Sal's income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-29 Solution P5-9 Pat Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Pat Income Statement Sales $ Income from Sun 600,000 Adjustments and Eliminations Sun 75% $ 400,000 90,000 a 130,000 d Cost of sales 270,000* 210,000* b Operating expenses 145,000* 40,000* f $ i $ 275,000 Retained Earnings Retained earnings — Pat $ 172,500 Retained earnings — Sun $ $ 20,000 a 130,000 c 10,000 20,000 Controlling share of NI 275,000ü 150,000ü Dividends 150,000* 50,000* e 360,000* 205,000* $ 305,000 $ 30,000* 275,000 $ 172,500 30,000 150,000 90,000 870,000 90,000 Consolidated net income Noncontrolling int.share Controlling share of NI Consolidated Statements 90,000 275,000 d i 37,500 12,500 150,000* Retained earnings December 31 $ 297,500 $ 190,000 $ 297,500 Balance Sheet Cash $ 85,000 $ 30,000 $ 115,000 Accounts receivable 165,000 100,000 g 15,000 h 15,000 b 20,000 250,000 Dividends receivable 15,000 Inventories 60,000 80,000 Land 80,000 50,000 130,000 Buildings — net 230,000 100,000 330,000 Equipment — net 200,000 140,000 340,000 Investment in Sun 362,500 c 10,000 d 52,500 e 320,000 ©2009 Pearson Education, Inc publishing as Prentice Hall 120,000 5-30 Intercompany Profit Transactions — Inventories Patents e 180,000 f Accounts payable $1,197,500 $ 500,000 $ $ 100,000 g 15,000 h 15,000 225,000 Dividends payable 70,000 20,000 Other liabilities 155,000 40,000 Common stock, $10 par 450,000 150,000 Retained earnings 297,500ü 190,000ü $1,197,500 $ 20,000 160,000 $1,445,000 $ 310,000 75,000 195,000 e 150,000 450,000 297,500 500,000 Noncontrolling interest January e 100,000 Noncontrolling interest December 31 i 17,500 117,500 $1,445,000 * Deduct Supporting computations Investment in Sun at January 1, 2010 Implied fair value of Sun ($300,000 / 75%) $300,000 $400,000 Book value of Sun Patents (10 year amortization) 200,000 $200,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-31 Solution P5-10 Preliminary computations Investment cost Implied fair value of San ($270,000 / 90%) $270,000 $300,000 Less: Book value of San Goodwill 250,000 $ 50,000 Upstream sales Unrealized profit in $28,000 - ($28,000 Unrealized profit in $42,000 - ($42,000 December ¸ 1.4) = December ¸ 1.4) = 31, 2011 inventory of Po $8,000 31, 2012 inventory of Po $12,000 Income from San San's reported net income Less: Unrealized profit in ending inventory $100,000 (12,000) Add: Unrealized profit in beginning inventory 8,000 San’s adjusted and realized income $ 96,000 Po’s 90% controlling interest share of San’s income 10% noncontrolling interest share of San’s income $ 86,400 $ 9,600 Investment balance Initial investment cost Increase in San's net assets from December 31, 2009 $270,000 to December 31, 2012 ($70,000 ´ 90%) Unrealized profit in December 31, 2012 inventory (90%) Investment balance December 31, 2012 63,000 (10,800) $322,200 ©2009 Pearson Education, Inc publishing as Prentice Hall 5-32 Intercompany Profit Transactions — Inventories Solution P5-10 (continued) Po Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 (in thousands) Po Income Statement Sales $ 819 Income from San $ 560 86.4 Cost of sales 546 * Other expenses 154.4 * Adjustments and Eliminations San 90% 400* a 560 d 86.4 b 12 Consolidated Statements $ 819 a 560 c 390 * 60* 214.4 * Consolidated net income $ 214.6 Noncontrolling int.share Controlling share of NI f $ 205 Retained Earnings Retained earnings — Po $ 125 Retained earnings — San 9.6 9.6* $ 205 $ 100 $ 125 $ 70 Controlling share of NI 205ü 100ü Dividends 100 * 50* e 70 205 d f 45 100 * Retained earnings December 31 $ 230 $ 120 $ 230 Balance Sheet Cash $ $ $ 125.8 75.8 50 Inventory 42 80 B 12 110 Other current assets 60 20 G 10 70 Plant assets — net 300 300 Investment in San 322.2 600 c Goodwill e $ 800 $ 450 7.2 d 41.4 e 288 50 50 $ 955.8 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 5-33 Current liabilities $ 170 $ 130 Capital stock 400 200 Retained earnings 230ü 120ü $ 800 Noncontrolling interest January Noncontrolling interest December 31 g 10 $ 290 e 200 400 230 $ 450 c e f 32 4.6 35.8 $ 955.8 * Deduct ©2009 Pearson Education, Inc publishing as Prentice Hall 5-34 Intercompany Profit Transactions — Inventories ©2009 Pearson Education, Inc publishing as Prentice Hall ... publishing as Prentice Hall 5-4 Intercompany Profit Transactions — Inventories SOLUTIONS TO EXERCISES Solution E5-1 a d a c c a a c Solution E5-2 [AICPA adapted] a c Unrealized profits from intercompany... of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling interest or by the direction of the intercompany sales All unrealized profit from both upstream... $5,000 Unrealized profit in ending inventory (upstream ($120,000 - $90,000) ´ = $12,000 SOLUTIONS TO PROBLEMS Solution P5-1 Proctor Corporation and Subsidiary Consolidated Statement of Income and