Chapter INTERCOMPANY PROFIT TRANSACTIONS — PLANT ASSETS Answers to Questions The objective of eliminating the effects of intercompany sales of plant assets is to reflect plant assets and related depreciation amounts in the consolidated financial statements at cost to the consolidated entity Consolidation procedures for eliminating unrealized profit on plant assets are affected by the direction of the sale The full amount of unrealized profit or loss on downstream sales (parent to subsidiary) is charged or credited to the controlling interest In the case of upstream sales, however, unrealized profit or loss is allocated between controlling and noncontrolling interests Because there is no allocation to noncontrolling interests in the case of a 100 percent owned subsidiary, consolidation procedures are the same for upstream sales as for downstream sales Unrealized gains and losses from intercompany sales of land are realized from the viewpoint of the selling affiliate when the purchasing affiliate resells the land to parties outside the consolidated entity This is also the point at which the consolidated entity recognizes gain or loss on the difference between the selling price to outside parties and the cost to the consolidated entity Noncontrolling interest share is not affected by downstream sales of land because the realized income of the subsidiary is not affected by downstream sales In the case of upstream sales of land, the reported income of the subsidiary is adjusted downward for unrealized profits and upward for unrealized losses to determine realized income Since noncontrolling interest share is computed on the basis of realized subsidiary income, the computation of noncontrolling interest share is affected by upstream sales of land Consolidation procedures are designed to eliminate 100 percent of all unrealized profit or loss on all intercompany transactions The issue is not whether 100 percent of the unrealized profit or loss is eliminated, but if the amount eliminated is allocated between controlling and noncontrolling interests In the case of an upstream sale of land, 100 percent of the unrealized profit from the sale is eliminated, but the amount is allocated between controlling and noncontrolling interests in relation to their ownership holdings Unrealized gains and losses from intercompany sales of depreciable assets are realized through use if the assets are held within the consolidated entity and through sale if the assets are sold to outside parties The process of recognizing previously unrealized gains and losses through use is a piecemeal recognition over the remaining use life of the depreciable asset The computation of noncontrolling interest share in the year of an upstream sale of depreciable plant asset is as follows: Unrealized Unrealized Gain on Sale Loss on Sale Income of subsidiary as reported XXX XXX Deduct: Gain on sale of plant assets - XX Add: Loss on sale of plant assets + XX Add: Piecemeal recognition of gain on sale of plant assets + X Deduct: Piecemeal recognition of loss on sale of plant assets - X Realized subsidiary income XXX XXX X% X% Noncontrolling nterest percentage XXX XXX Noncontrolling interest share ©2009 Pearson Education, Inc publishing as Prentice Hall 6-1 6-2 Intercompany Profit Transactions — Plant Assets The effects of unrealized gains on intercompany sales of plant assets are charged against the parent company’s income from subsidiary account in the year of the intercompany sale, with equal amounts being deducted from the investment in subsidiary account In subsequent years, the income from subsidiary and investment in subsidiary accounts are increased for depreciation on the unrealized gain that is recorded on the subsidiary books for downstream sales or for the parent’s proportionate share for upstream sales If the unrealized gain relates to land, no entries are needed until the land is sold to entities outside of the affiliation structure Accounting procedures are designed to eliminate the effects of intercompany sales of plant assets on both parent company income and consolidated net income until the gains and losses on such sales are realized through use or through sale to outside parties In years subsequent to intercompany sales of depreciable plant assets, the effect on parent company income is eliminated by adjusting depreciation expense to a cost basis for the consolidated entity 10 Consolidation working paper entries to eliminate the effect of a gain on sale of depreciable plant assets from a downstream sale are illustrated as follows: Year of sale Gain on sale Accumulated depreciation Depreciation expense Plant assets To reduce plant assets and related depreciation amounts to a cost basis to the consolidated entity and to eliminate unrealized gain on intercompany sale Subsequent years Investment in subsidiary Accumulated depreciation Depreciation expense Plant assets To reduce plant assets and related depreciation amounts to a cost basis to the consolidated entity and to adjust the investment account for unrealized profits at the beginning of the current year SOLUTIONS TO EXERCISES Solution E6-1 c a c d ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-3 Solution E6-2 Parsen’s income from Samit will be decreased by $25,000 as a result of the following entry: Income from Samit 25,000 Investment in Samit 25,000 To eliminate unrealized gain on downstream sale of land Parsen’s net income for 2012 will not be affected by the sale since the $25,000 gain will be offset by a $25,000 decrease in income from Samit The investment in Samit account at December 31, 2012 will be $25,000 less as a result of the sale as indicated by the above entry (The total balance sheet effect is to reduce land to its cost, reduce the investment account for the profit, and increase cash or other assets for the proceeds.) The consolidated financial statements will not be affected because the gain on the sale is eliminated in the consolidated income statement and the land is reduced to its cost basis to the consolidated entity A working paper adjustment would show: Gain on sale of land Land 25,000 25,000 Neither Parsen’s income from Samit or net income for 2013 will be affected by the 2012 sale of land The investment in Samit account, however, will still be $25,000 less than if the land had not been sold, even though there are no changes in the investment account during 2013 The sale of the land will not affect Samit’s net income since it is being sold at Samit’s cost However, the sale triggers recognition of the postponed gain on the original sale from Parsen to Samit Investment in Samit Income from Samit To recognize the gain deferred in 2006 25,000 25,000 Consolidated income will also feel the same impact of the recognition of the deferred gain Investment in Samit Gain on sale of land 25,000 25,000 © 2009 Pearson Education, Inc publishing as Prentice Hall 6-4 Intercompany Profit Transactions — Plant Assets Solution E6-3 1a Consolidated net income $ 2010 400,000 $ (10,000) 362,000 $ 54,000 454,000 $ 8,000 $ 6,000 $ 300,000 $ 72,000 (9,000) 363,000 $ 400,000 54,000 454,000 8,000 $ (1,000) 7,000 $ 6,000 6,000 Pruitt’s separate income Add: Equity in Silverman’s income 2009 $80,000 × 90% 2010 $60,000 × 90% Gain on sale of land Consolidated net income 1b $ 72,000 Noncontrolling interest share Silverman’s net income × 10% 2a Consolidated net income Pruitt’s separate income Add: Equity in Silverman’s income Less: Gain on land × 90% Consolidated net income 2b 2009 300,000 $ Noncontrolling interest share Silverman’s net income × 10% Less: Gain on land × 10% Noncontrolling interest share $ $ Solution E6-4 Entries for 2009 Cash 90,000 Investment in Salmark To record dividends received from Salmark Investment in Salmark Income from Salmark 90,000 108,000 To record income from Salmark computed as follows: Share of Salmark’s reported income ($150,000 × 90%) Less: Gain on building sold to Salmark Add: Piecemeal recognition of gain on building ($30,000/10 years) Income from Salmark 108,000 $ $ 135,000 (30,000) 3,000 108,000 Pigwich Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2009 Sales Cost of sales Gross profit Operating expenses $2,200,000 (1,400,000) 800,000 (447,000) ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-5 Total consolidated income Noncontrolling interest share Controlling interest share $ © 2009 Pearson Education, Inc publishing as Prentice Hall 353,000 (15,000) 338,000 6-6 Intercompany Profit Transactions — Plant Assets Solution E6-5 [AICPA adapted] d The equipment must be shown at its $1,400,000 book value to the consolidated entity and d is the only choice that provides a $1,400,000 book value Ordinarily, the equipment would be shown at $1,500,000, its book value at the time of transfer, less the $100,000 depreciation after transfer c Reciprocal receivables and payables accounts and purchases and sales accounts must always be eliminated But dividend income (parent) and dividends paid (subsidiary) accounts are reciprocals only when the cost method is used a Amount to be eliminated from consolidated net income in 2009: Intercompany gain on downstream sale of machinery $10,000 Less: Realized through depreciation of intercompany gain on machinery ($10,000/5 years) (2,000) Decrease in consolidated net income from $ 8,000 intercompany sale Amount to be added to consolidated net income in 2010 for realization through depreciation of intercompany gain on machinery $ 2,000 b One-third of the unrealized intercompany profit is recognized through depreciation for 2009 Solution E6-6 a Selling price in 2017 Cost to consolidated entity Gain on sale of land $ $ 55,000 15,000 40,000 b Gain on equipment $ 30,000 Less: Depreciation on gain (10,000) Net effect on investment account $ 20,000 The investment account will be $20,000 less than the underlying equity interest b Combined equipment — net Less: Unrealized gain Add: Piecemeal recognition of gain Consolidated equipment — net $ $ b The working paper entry to eliminate the unrealized profit is: Gain on sale of equipment 1,500 Equipment ©2009 Pearson Education, Inc publishing as Prentice Hall 800,000 (20,000) 5,000 785,000 1,500 Chapter 6-7 c Investment income will be decreased by $12,000 gain less $3,000 piecemeal recognition of the gain c Sartin’s net income Less: Unrealized gain Add: Piecemeal recognition Realized income Noncontrolling interest percentage Noncontrolling interest share $1,000,000 (50,000) 5,000 955,000 40% $ 382,000 Solution E6-7 Pod Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2009 Sales ($500,000 + $300,000) Gain on sale of machinerya Total revenue Cost of sales ($200,000 + $130,000) Depreciation expense ($50,000 + $30,000 - $5,000 from depreciation on intercompany profit for 2009) Other expenses ($80,000 + $40,000) Total expenses Consolidated net income Noncontrolling share ($100,000+$5,000 piecemeal recognition from depreciation + $10,000 remaining deferred gain) × 25% noncontrolling interest Controlling interest share a 330,000 75,000 120,000 525,000 $295,000 28,750 $266,250 Selling price of machinery at December 28, 2009 Book value on Pod’s books $65,000 – ($65,000/5 years × years) Gain on sale of machinery $ 36,000 26,000 $ 10,000 Original intercompany profit Piecemeal recognition of gain $25,000/5 years × years Unamortized gain from intercompany sales $ 25,000 15,000 $ 10,000 Gain on sale of machinery to outside entity $ 20,000 Solution E6-8 Preliminary computations: Investment in Salt (40%) at cost Implied total fair value of Salt ($100,000 / 40%) Book value Excess allocated to patents Annual amortization of patents ($50,000/5 years) $800,000 20,000 820,000 $100,000 $250,000 (200,000) $ 50,000 $ 10,000 Income from Salt — 2009 Share of Salt’s net income ($40,000 ì 1/2 year ì 40%) $ â 2009 Pearson Education, Inc publishing as Prentice Hall 8,000 6-8 Intercompany Profit Transactions — Plant Assets Amortization of patents ($10,000 × 1/2 year × 40%) Unrealized inventory profit from upstream sale ($4,000 × 40%) Unrealized gain from downstream sale of land ($2,000 × 100%) Income from Salt (2,000) (1,600) (2,000) $ 2,400 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-9 Solution E6-8 (continued) Income from Salt — 2010 Salt’s net income Amortization of patents Unrealized inventory profits from upstream sales: Recognition of profit in beginning inventory Deferral of profit in ending inventory Salt’s adjusted and realized income Income from Salt (40% share) $ 60,000 (10,000) 4,000 (6,000) $ 48,000 $ 19,200 Solution E6-9 Income from Simple, net income and consolidated net income: Simple’s reported net income $100,000 Less: Amortization of excess allocated to buildings ($500,000 - $400,000)/20 years (5,000) Less: $20,000 unrealized profit on equipment (20,000) Simple’s adjusted and realized income $ 75,000 Income from Simple (80% share) — 2011 Add: Separate income of Plain for 2011 Net income of Plain — 2011 $ 60,000 500,000 $560,000 Simple’s reported net income Less: Amortization of excess allocated to buildings Add: Piecemeal recognition of unrealized gain on equipment ($20,000/4 years) Simple’s adjusted and realized income $110,000 (5,000) Income from Simple (80%) — 2012 Add: Separate income of Plain Net income of Plain — 2012 $ 88,000 600,000 $688,000 5,000 $110,000 Consolidated net income for 2011 and 2012 = Plain’s net income Alternatively, 2011 2012 Separate incomes combined $600,000 $710,000 Less: Amortization of excess (buildings) (5,000) (5,000) Less: Unrealized gain on equipment in 2011 (20,000) Add: Piecemeal recognition of gain in 2012 5,000 Consolidated net income $575,000 $710,000 Less: Noncontrolling interest share: (15,000) 2011 ($100,000 - $20,000 - $5,000) × 20% (22,000) 2012 ($110,000 + $5,000 - $5,000) × 20% Controlling interest share $560,000 $688,000 Investment in Simple Cost of investment July 1, 2009 Add: Plain’s share of Simple’s retained earnings increase from July 1, 2009 to December 31, 2010 ($150,000 - $100,000) × 80% Less: 80% Amortization of excess ($4,000 × 1.5 years) Investment in Simple December 31, 2010 $400,000 40,000 (6,000) 434,000 © 2009 Pearson Education, Inc publishing as Prentice Hall 6-10 Intercompany Profit Transactions — Plant Assets 40,000 Add: 2011 income less dividends [$80,000 - ($50,000 × 80%)] Investment in Simple December 31, 2011 474,000 40,000 Add: 2012 income less dividends [$88,000 - ($60,000 × 80%)] Investment in Simple December 31, 2012 $514,000 Solution E6-9 (continued) Alternative solution for check at December 31, 2012: Share of Simple’s equity December 31, 2012 ($550,000 × 80%) $440,000 Add: 80% Unamortized excess on buildings 86,000 Original excess $100,000 - ($4,000 × 3.5 years) Less: Unrealized profit on equipment (12,000) ($20,000 gain - $5,000 recognized) × 80% Investment in Simple December 31, 2012 $514,000 Solution E6-10 Preliminary computations Transfer price of inventory to Spano ($180,000 × 2) Cost to consolidated entity Unrealized profit on January Amortization of unrealized profit from consolidated view: $180,000/6 years = $30,000 per year $360,000 (180,000) $180,000 Consolidated balance sheet amounts: 2009 Equipment (at transfer price) $360,000 Less: Unrealized profit (180,000) Less: Depreciation taken by Spano ($360,000/6 years) (60,000) Add: Depreciation on unrealized profit ($180,000/6 years) 30,000 Equipment — net to be included on consolidated balance sheet $150,000 Alternatively: Equipment (at cost to the consolidated entity) Less: Depreciation based on cost ($180,000/6 years) Equipment — net $180,000 (30,000) $150,000 2010 Year after intercompany sale Equipment — net beginning of the period on cost basis Less: Depreciation (based on cost) Equipment — net $150,000 (30,000) $120,000 Consolidation working paper entries: 2009 Sales 360,000 Cost of goods sold 180,000 150,000 Equipment — net Depreciation expense 30,000 To eliminate intercompany inventory sale, return equipment to its cost to the consolidated entity, and eliminate depreciation on the intercompany profit 2010 Investment in Spano 150,000 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-25 Solution P6-6 Preliminary computations Investment cost Implied fair value of Sank ($290,000 / 80%) Book value of Sank Excess fair value over book value - allocated 50% to Patents with a ten-year life ($31,250) - allocated 50% to Inventory sold in 2007 ($31,250) Reconciliation of income from Sank: Pill’s share of Sank’s net income ($50,000 × 80%) Less: 80% of Patent amortization ($31,250/10 years) Add: Depreciation on deferred gain on equipment ($15,000/5 years) × 80% Less: Unrealized profit on upstream sale of land ($10,000 × 80%) Income from Sank Reconciliation of investment account: Share of Sank’s underlying equity ($400,000 × 80%) Add: 80% of Unamort patent ($31,250 - ($3,125 × years)) x 80% Less: Unrealized gain on equipment [$15,000 - ($3,000 × years)] × 80% Less: Share of unrealized gain on land Investment in Sank December 31, 2009 Noncontrolling interest share: Sank’s reported income Add: Piecemeal recognition of gain on sale of machinery Less: Patent amortization Less: Unrealized gain on upstream sale of land Realized income Noncontrolling percentage Noncontrolling interest share $290,000 $362,500 (300,000) $ 62,500 $ 40,000 (2,500) 2,400 (8,000) $ 31,900 $320,000 17,500 (7,200) (8,000) $322,300 $ 50,000 3,000 ( 3,125) (10,000) 39,875 20% $ 7,975 © 2009 Pearson Education, Inc publishing as Prentice Hall 6-26 Intercompany Profit Transactions — Plant Assets Solution P6-6 (continued) Pill Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 Pill Income Statement Sales Income from Sank Gain on land Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pill Retained earnings — Sank Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Current assets Plant assets Accumulated depreciation Investment in Sank $ 210,000 31,900 $ 130,000 10,000 30,000 * 60,000 * 40,000 * 110,000 * $ 91,900 c b 31,900 10,000 e 3,125 f 7,975 a $ 50,000 $ 50,000 d 50,000ü 91,900ü 30,000 * $ 202,300 $ 100,000 $ 200,000 550,000 $ 170,000 350,000 120,000 * 322,300 70,000 * d $ 952,300 Current liabilities Capital stock Retained earnings $ 67,000 * 173,125 * 99,875 7,975 * 91,900 $ 140,400 6,000 9,600 c 31,900 d 300,000 25,000 e 3,125 2,400 d f $ 202,300 $ 370,000 875,000 15,000 10,000 $ 450,000 a 340,000 91,900 30,000 * $ 150,000 $ 50,000 600,000 300,000 d 300,000 202,300ü 100,000ü $ 952,300 $ 450,000 Noncontrolling interest January Noncontrolling interest December 31 $ 50,000 a b a a Consolidated Statements 3,000 $ 140,400 Patent * Adjustments and Eliminations Sank 80% 184,000 * 21,875 $1,082,875 $ 75,000 7,975 200,000 600,000 202,300 80,575 $1,082,875 Deduct ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-27 Solution 6-6 (continued) Consolidation working paper entries a Accumulated depreciation 6,000 Investment in Sank 9,600 Noncontrolling interest 2,400 Depreciation expense 3,000 Plant assets 15,000 To eliminate unrealized profit on 2008 sale of plant assets b Gain on land c Income from Sank 31,900 Investment in Sank 31,900 To eliminate income from Sank against the investment in Sank d Capital stock—Sank 300,000 Retained earnings—Sank January 50,000 Patent 25,000 Investment in Sank 300,000 Noncontrolling interest January 75,000 To eliminate investment in Sank and stockholders’ equity of Sank and enter beginning of the period patent e Other expenses Patent To provide for patent amortization f 10,000 Plant assets 10,000 To eliminate unrealized gain on 2009 upstream sale of land 3,125 3,125 Noncontrolling Interest Share 7,975 Noncontrolling Interest 7,975 To enter noncontrolling interest share of subsidiary income © 2009 Pearson Education, Inc publishing as Prentice Hall 6-28 Intercompany Profit Transactions — Plant Assets Solution P6-7 Preliminary computations (amounts in thousands) Investment cost for 100% of Skip, April 1, 2009 Book value acquired Excess fair value over book value Excess allocated: Undervalued inventory items (sold in 2009) Undervalued buildings (7-year remaining useful life) Goodwill Excess fair value over book value $15,000 (7,000) $ 8,000 $ 500 3,500 4,000 $ 8,000 Reconciliation of investment account balance: Investment cost April 1, 2009 Add: Increase in Skip’s retained earnings Less: Excess allocated to inventories sold in 2009 Less: Depreciation on excess allocated to buildings ($3,500/7 years) × 4.75 years Less: Unrealized inventory profits December 31, 2013 Less: Unrealized profit on equipment ($800 intercompany profit - $200 recognized) Investment balance December 31, 2013 $15,000 3,000 (500) (2,375) (120) (600) $14,405 Reconciliation of investment income balance: Share of Skip’s income (100%) Add: Unrealized profit in beginning inventory Add: Realization of previously deferred profit on land Less: Unrealized profit in ending inventory Less: Depreciation on excess allocated to buildings Less: Unrealized profit on equipment Income from Skip $ 2,000 100 500 (120) (500) (600) $ 1,380 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-29 Solution P6-7 (continued) Port Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2013 (in thousands) Port Income Statement Sales Gain on land Gain on equipment Income from Skip Cost of sales $26,000 700 Retained Earnings Retained earnings — Port 800 Buildings — net Equipment — net Investment in Skip 5,000* 2,000* 2,800* * e 800 g 1,380 d 120 i 500 a 500 b c f 1,500 100 200 $ 2,000 $ 1,170 2,000 5,000 4,000 15,000 10,000 Consolidated Statements $35,500 1,200 18,520* 6,000* 7,080* $ 5,100 $12,375 $ 4,000 h 4,000 2,000ü 1,000* g 1,000 $ 5,000 $ 500 1,500 2,000 1,000 4,000 4,000 14,405 $51,575 $13,000 $ 4,100 7,000 26,000 14,475ü $51,575 $ 1,000 2,000 5,000 5,000ü $13,000 5,100 3,000* $14,475 j d 300 120 h 1,625 i 500 $ 1,670 3,200 6,880 5,000 20,125 f e 800 13,400 200 a 500 c 100 h 4,000 Goodwill Accounts payable Other liabilities Capital stock Retained earnings b 1,500 $12,375 Retained earnings — Skip Consolidated net income 5,100ü Dividends 3,000* Retained earnings December 31 $14,475 Balance Sheet Cash Accounts receivable Inventories Land $11,000 1,380 15,000* Depreciation expense 3,700* Other expenses 4,280* Consolidated net income $ 5,100 Adjustments and Eliminations Skip g 380 h 14,625 4,000 $54,275 j 300 h 5,000 $ 4,800 9,000 26,000 14,475 $54,275 Deduct © 2009 Pearson Education, Inc publishing as Prentice Hall 6-30 Intercompany Profit Transactions — Plant Assets Solution P6-8 Preliminary computations Investment cost January 1, 2009 Implied fair value of Sic ($136,000 / 80%) Book value of Sic Excess fair value over book value $136,000 $170,000 (170,000) Analysis of investment in Sic account on Pic’s books: Investment cost Share of Sic’s 2009 reported income ($30,000 × 80%) Investment in Sic as reported on Pic’s books at December 31, 2009 Share of Sic’s 2010 reported income ($40,000 × 80%) Investment in Sic as reported on Pic’s books at December 31, 2010 $136,000 24,000 $160,000 32,000 $192,000 Note that Pic has not eliminated intercompany profits from its investment income from Sic for either 2009 or 2010 Investment balance as reported on Pic’s books December 31, 2009 Gain on machinery ($5,000 × 80%) Piecemeal recognition of gain ($1,000 × 80%) Investment account balance under the equity method at December 31, 2009 Share of Sic’s 2010 reported income Piecemeal recognition of gain in 2010 ($1,000 × 80%) Investment account balance under the equity method at December 31, 2010 $160,000 (4,000) 800 $156,800 32,000 800 $189,600 Noncontrolling interest share for 2009: Sic’s reported net income Less: Gain on sale of machinery Add: Piecemeal recognition of gain on machinery through Depreciation Sic’s realized income Noncontrolling interest percentage Noncontrolling interest share for 2009 $ 30,000 (5,000) 1,000 $ 26,000 20% $ 5,200 Noncontrolling interest share for 2010: Sic’s reported net income Add: Piecemeal recognition of unrealized gain on machinery through depreciation Sic’s realized income Noncontrolling interest percentage Noncontrolling interest share for 2010 $ 40,000 1,000 41,000 20% $ 8,200 ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-31 Solution P6-8 (continued) Pic Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 Pic Income Statement Sales Income from Sic Gain on plant assets Cost of sales Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pic Retained earnings — Sic Controlling share of NI Retained earnings December 31 Balance Sheet Cash and equivalents Current assets Plant and equipment Accumulated depreciation Investment in Sic $ 400,000 24,000 64,000 24,000 5,000 b e 5,200 $ 30,000 $ 70,000 d 30,000ü 70,000 1,000 380,000 * 74,000 * 80,000 * 66,000 5,200 * $ 60,800 $ 126,000 64,000ü 60,800 $ 190,000 $ 100,000 $ 186,800 $ $ $ 50,000 130,000 400,000 150,000 * 160,000 30,000 70,000 200,000 50,000 * a b 5,000 1,000 80,000 200,000 595,000 199,000 * c 24,000 d 136,000 $ 250,000 $ 676,000 $ 100,000 $ 50,000 300,000 100,000 d 100,000 190,000ü 100,000ü $ 590,000 $ 250,000 $ 150,000 300,000 186,800 Noncontrolling interest January Noncontrolling interest December 31 * 5,000 130,000 * 25,000 * 20,000 * Consolidated Statements $ 600,000 c a $ 126,000 $ 590,000 Liabilities Capital stock Retained earnings $ 200,000 250,000 * 50,000 * 60,000 * $ Adjustments and Eliminations Sic 80% d e 34,000 5,200 39,200 $ 676,000 Deduct © 2009 Pearson Education, Inc publishing as Prentice Hall 6-32 Intercompany Profit Transactions — Plant Assets Solution P6-8 (continued) Pic Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2010 Pic Income Statement Sales Income from Sic Cost of sales Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pic Retained earnings — Sic Controlling share of NI Retained earnings December 31 Balance Sheet Cash and equivalent Current assets Plant and equipment Accumulated depreciation Investment in Sic $ 430,000 32,000 260,000 * 50,000 * 55,000 * $ 97,000 32,000 140,000 * 25,000 * 30,000 * $ Consolidated Statements $ 665,000 b a 8,200 40,000 400,000 * 1,000 74,000 * 85,000 * 106,000 8,200 * $ 97,800 $ 190,000 a 3,200 $ 100,000 c 100,000 97,000ü 40,000ü $ 186,800 97,800 $ 287,000 $ 140,000 $ 284,600 $ $ $ 63,000 140,000 440,000 200,000 * 192,000 30,000 80,000 245,000 75,000 * a a 5,000 2,000 93,000 220,000 680,000 273,000 * b 32,000 c 160,000 $ 280,000 $ 720,000 $ 48,000 $ 40,000 300,000 100,000 c 100,000 287,000ü 140,000ü $ 635,000 $ 280,000 Noncontrolling interest January Noncontrolling interest December 31 * $ 235,000 d $ 635,000 Liabilities Capital stock Retained earnings Adjustments and Eliminations Sic 80% a 800 c d $ 40,000 8,200 88,000 300,000 284,600 47,400 $ 720,000 Deduct ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-33 Solution P6-9 Preliminary computations Investment cost January 1, 2009 Implied fair value of Spin ($108,000 / 80%) Book value of Spin Excess fair value over book value allocated to patent Patent amortization: $25,000/10 years $108,000 $135,000 (110,000) $ 25,000 $ 2,500 Reconciliation of investment income: Spin’s reported income Less: Patent amortization Less: Unrealized profit in ending inventory Add: Unrealized profit in beginning inventory Add: Piecemeal recognition of deferred profit on plant assets ($20,000 / years) Spin’s adjusted income $ 50,000 (2,500) (1,000) 2,000 Park’s 80% controlling share $ 42,000 20% Noncontrolling interest share $ 10,500 4,000 $ 52,500 © 2009 Pearson Education, Inc publishing as Prentice Hall 6-34 Intercompany Profit Transactions — Plant Assets Solution P6-9 (continued) Park Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2012 Park Income Statement Sales Income from Spin Cost of sales Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings Park Retained earnings Spin Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Inventories Plant assets Accumulated depreciation Investment in Spin $ 650,000 42,000 390,000 * $ 120,000 40,000 * a e b 30,000 * g 8,000 42,000 1,000 a c 2,500 d i 10,500 $ 50,000 $ 20,000 f 50,000ü 20,000 * 20,000 170,000 * $ 132,000 $ $ 157,600 $ 50,000 $ $ 20,000 20,000 35,000 205,000 100,000 * $ 499,600 198,500 * 142,500 10,500 * $ 132,000 95,600 16,000 4,000 70,000 * $ 157,600 $ h b d d c d f 4,000 1,000 20,000 8,000 1,600 e 26,000 12,800 f 110,000 17,500 g 2,500 $ 180,000 42,000 $ 30,000 h 4,000 300,000 100,000 f 100,000 157,600ü 50,000ü $ 499,600 $ 180,000 Noncontrolling interest December 31 421,000 * 132,000 e i $ Noncontrolling interest January * 8,000 2,000 4,000 $ 132,000ü 70,000 * 58,000 40,000 60,000 290,000 70,000 * 121,600 Consolidated Statements $ 762,000 95,600 Patent Accounts payable Capital stock Retained earnings Adjustments and Eliminations Spin 80% c d 400 f 3,200 i 78,000 56,000 94,000 475,000 162,000 * 15,000 $ 556,000 $ 68,000 300,000 157,600 27,500 6,500 30,400 $ 556,000 Deduct ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-35 Solution P6-10 Preliminary computations Investment cost Implied fair value of Sank ($290,000 / 80%) Book value of Sank Excess fair value over book value Excess allocated: Inventories (50%)- Sold in 2007 Goodwill Excess fair value over book value Reconciliation of income from Sank: Sank’s reporte4d net income Add: Depreciation on deferred gain on equipment ($15,000/5 years Less: Unrealized profit on upstream sale of land Sank’s adjusted and realized income $290,000 $362,500 (300,000) $ 62,500 $ 31,250 31,250 $ 62,500 $ 50,000 3,000 (10,000) $ 43,000 Pill’s 80% controlling share $ 34,400 20% Noncontrolling interest share $ Reconciliation of investment account: Share of Sank’s underlying equity ($400,000 × 80%) Add: 80% of unamortized goodwill Less: Unrealized gain on equipment [$15,000 - ($3,000 × years)] × 80% Less: Share of unrealized gain on land Investment in Sank December 31, 2009 8,600 $320,000 25,000 (7,200) (8,000) $329,800 © 2009 Pearson Education, Inc publishing as Prentice Hall 6-36 Intercompany Profit Transactions — Plant Assets Solution P6-10 (continued) Pill Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2009 Pill Income Statement Sales Income from Sank Gain on land Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pill Retained earnings — Sank Consolidated share of NI Dividends Retained earnings December 31 Balance Sheet Current assets Plant assets Accumulated depreciation Investment in Sank $ 210,000 34,400 $ 130,000 10,000 30,000 * 60,000 * 40,000 * 110,000 * c b $ 94,400 $ 50,000 $ 50,000 d 50,000ü $ 209,800 $ 100,000 $ 200,000 550,000 $ 170,000 350,000 120,000 * 329,800 70,000 * d $ 959,800 Current liabilities Capital stock Retained earnings $ 145,400 94,400 30,000 * 6,000 9,600 c 34,400 d 305,000 31,250 2,400 d e $ 209,800 $ 370,000 875,000 15,000 10,000 $ 450,000 a $ 67,000 * 170,000 * 103,000 8,600 * 94,400 50,000 $ 150,000 $ 50,000 600,000 300,000 d 300,000 209,800ü 100,000ü $ 959,800 $ 450,000 Noncontrolling interest January Noncontrolling interest December 31 340,000 8,600 a b a a $ 3,000 $ 145,400 94,400ü 30,000 * Consolidated Statements 34,400 10,000 a e Goodwill * Adjustments and Eliminations Sank 80% 184,000 * 31,250 $1,092,250 $ 76,250 8,600 200,000 600,000 209,800 82,450 $1,092,250 Deduct ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-37 Solution 6-10 (continued) Consolidation working paper entries a Accumulated depreciation 6,000 Investment in Sank 9,600 Noncontrolling interest 2,400 Depreciation expense 3,000 Plant assets 15,000 To eliminate unrealized profit on 2008 sale of plant assets b Gain on land c Income from Sank 34,400 Investment in Sank 34,400 To eliminate income from Sank against the investment in Sank d Capital stock—Sank 300,000 Retained earnings–Sank January 50,000 Goodwill 31,250 Investment in Sank 305,000 Noncontrolling interest January 76,250 To eliminate investment in Sank and stockholders’ equity of Sank and enter beginning of the period goodwill e Noncontrolling Interest Share 8,600 Noncontrolling Interest 8,600 To enter noncontrolling interest share of subsidiary income 10,000 Plant assets 10,000 To eliminate unrealized gain on 2009 upstream sale of land Solution P6-11 The 90 percent ownership interest can be determined in several ways a $13,500 dividends received ÷ $15,000 dividends paid = 90% b $37,200 noncontrolling interest ÷ ($340,000 Sach’s stockholders’ equity + $32,000 unamortized patent) = 10% c ($4,600 noncontrolling interest share ÷ ($50,000 net income of Sach less $4,000 patent amortization) = 10% Yes Pape’s net income of $200,400 equals the controlling interest share consolidated net income of $200,400 Pape’s retained earnings of $350,400 equals consolidated retained earnings Yes Combined sales Consolidated sales Intercompany sales $800,000 716,000 $ 84,000 Yes © 2009 Pearson Education, Inc publishing as Prentice Hall 6-38 Intercompany Profit Transactions — Plant Assets Combined inventories Consolidated inventories Unrealized inventory profits $150,000 136,000 $ 14,000 Solution P6-11 (continued) Reconciliation of combined and consolidated cost of sales Combined cost of sales (given) Less: Intercompany sales (see above) Add: Unrealized profits in ending inventory (see above) Less: Unrealized profits in beginning inventory (solve for this) $350,000 (84,000) 14,000 Consolidated cost of sales (given) $275,000 (5,000) Reconciliation of combined and consolidated equipment — net Combined equipment — net of $565,000 less consolidated equipment — net of $550,000 shows a difference of $15,000 The working paper entry to eliminate the effects of an intercompany sale of equipment must have been: Gain on equipment Depreciation expense Equipment — net 5,000 15,000 Yes Intercompany receivables and payables are as follows: Accounts receivable Accounts payable Dividends receivable Dividends payable 20,000 Combined $ 80,000 110,000 13,500 15,000 Consolidated $ 70,000 100,000 1,500 Reconciliation of noncontrolling interest: Noncontrolling interest January 1, 2010 ($320,000 × 10%) 10% of unamortized patent at January Add: Noncontrolling interest share for 2010 Less: Noncontrolling interest dividends ($30,000 × 10%) Noncontrolling interest December 31, 2010 10 Intercompany $10,000 10,000 13,500 13,500 $ 32,000 3,600 4,600 (3,000) $ 37,200 Patent at December 31, 2009 Patent December 31, 2010 Add: Patent amortization ($141,000 consolidated other expenses - $137,000 combined other expenses) $ 32,000 Patent December 31, 2009 $ 36,000 4,000 Analysis of investment in Sach account Book value (Sach’s stockholders’ equity $340,000 × 90%) Less: Unrealized profit in ending inventory $306,000 (14,000) ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-39 Less: Unrealized profit in equipment Add: 90% of Unamortized patent Investment in Sach December 31, 2010 (15,000) 28,800 $305,800 © 2009 Pearson Education, Inc publishing as Prentice Hall ... current year SOLUTIONS TO EXERCISES Solution E6-1 c a c d ©2009 Pearson Education, Inc publishing as Prentice Hall Chapter 6-3 Solution E6-2 Parsen’s income from Samit will be decreased by $25,000... downstream sale of land Parsen’s net income for 2012 will not be affected by the sale since the $25,000 gain will be offset by a $25,000 decrease in income from Samit The investment in Samit account... [$88,000 - ($60,000 × 80%)] Investment in Simple December 31, 2012 $514,000 Solution E6-9 (continued) Alternative solution for check at December 31, 2012: Share of Simple’s equity December 31,