Solution manual advanced accounting 11th by beams chapter06

Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 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 purchasing affiliate 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 useful 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 interest percentage XXX XXX Noncontrolling interest share ©2011 Pearson Education, Inc publishing as Prentice Hall 6-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-2 The effects of unrealized gains on intercompany sales of plant assets are charged against the parent’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 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 income is eliminated by adjusting depreciation expense to a cost basis for the consolidated entity 10 Consolidation workpaper 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 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-3 Solution E6-2 Par’s income from Sam will be decreased by $25,000 as a result of the following entry: Income from Sam 25,000 Investment in Sam 25,000 To eliminate unrealized gain on downstream sale of land Par’s net income for 2014 will not be affected by the sale since the $25,000 gain will be offset by a $25,000 decrease in income from Sam The investment in Sam account at December 31, 2014 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 workpaper adjustment would show: Gain on sale of land Land 25,000 25,000 Neither Par’s income from Sam or net income for 2015 will be affected by the 2014 sale of land The investment in Sam 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 2015 The sale of the land will not affect Sam’s net income since it is being sold at Sam’s cost However, the sale triggers recognition of the postponed gain on the original sale from Par to Sam Income from Sam increases $25,000 Investment in Sam Income from Sam To recognize the gain deferred in 2014 25,000 25,000 Consolidated income will also feel the same impact of the recognition of the deferred gain Investment in Sam Gain on sale of land 25,000 25,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-4 Solution E6-3 1a Controlling Share of Consolidated Net Income Pit’s separate income Add: Equity in Sir’s income 2011 $80,000  90% 2012 $60,000  90% Gain on sale of land Controlling share of consolidated net income 1b $ (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 72,000 Controlling Share of Consolidated Net Income Pit’s separate income Add: Equity in Sir’s income Less: Gain on land  90% Controlling share of consolidated net income $ 2b 2012 400,000 Noncontrolling interest share Sir’s net income  10% 2a 2011 300,000 $ $ $ Noncontrolling interest share Sir’s net income  10% Less: Gain on land  10% Noncontrolling interest share $ $ Solution E6-4 Entries for 2011 Cash 90,000 Investment in Sal To record dividends received from Sal Investment in Sal Income from Sal 90,000 108,000 To record income from Sal computed as follows: Share of Sal’s reported income ($150,000  90%) Less: Gain on building sold to Sal Add: Piecemeal recognition of gain on building ($30,000/10 years) Income from Sal 108,000 $ $ 135,000 (30,000) 3,000 108,000 Pig Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2011 Sales Cost of sales Gross profit Operating expenses Total consolidated income Noncontrolling interest share $2,200,000 (1,400,000) 800,000 (447,000) 353,000 (15,000) ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-5 Controlling interest share $ © 2011 Pearson Education, Inc publishing as Prentice Hall 338,000 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-6 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 2011: 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 2012 for realization through depreciation of intercompany gain on machinery $ 2,000 b One-third of the unrealized intercompany profit is recognized through depreciation for 2011 Solution E6-6 a Selling price in 2019 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 workpaper entry to eliminate the unrealized profit is: Gain on sale of equipment 1,500 Equipment c Investment income will be decreased by $12,000 gain less $3,000 piecemeal recognition of the gain ©2011 Pearson Education, Inc publishing as Prentice Hall 800,000 (20,000) 5,000 785,000 1,500 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6 6-7 c Sin’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, 2011 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 2011) 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, 2011 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 Sat (40%) at cost Implied total fair value of Sat ($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 Sat — 2011 Share of Sat’s net income ($40,000  1/2 year  40%) 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 Sat $ 8,000 (2,000) (1,600) $ © 2011 Pearson Education, Inc publishing as Prentice Hall (2,000) 2,400 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-8 Solution E6-8 (continued) Income from Sat — 2012 Sat’s net income Amortization of patents Unrealized inventory profits from upstream sales: Recognition of profit in beginning inventory Deferral of profit in ending inventory Sat’s adjusted and realized income Income from Sat (40% share) $ 60,000 (10,000) 4,000 (6,000) $ 48,000 $ 19,200 Solution E6-9 Income from Sip, net income and consolidated net income: Sip’s reported net income Less: Amortization of excess allocated to buildings ($500,000 - $400,000)/20 years Less: $20,000 unrealized profit on equipment Sip’s adjusted and realized income (5,000) (20,000) $ 75,000 Income from Sip (80% share) — 2013 Add: Separate income of Pan for 2013 Net income of Pan — 2013 $ 60,000 500,000 $560,000 Sip’s reported net income Less: Amortization of excess allocated to buildings Add: Piecemeal recognition of unrealized gain on equipment ($20,000/4 years) Sip’s adjusted and realized income $110,000 (5,000) $100,000 5,000 $110,000 $ 88,000 Income from Sip (80%) — 2014 Add: Separate income of Pan 600,000 $688,000 Net income of Pan — 2014 Controlling share of consolidated net income for 2013 and 2014 = Pan’s net income 2014 Alternatively, 2013 Separate incomes combined $600,000 $710,000 Less: Amortization of excess (buildings) (5,000) (5,000) Less: Unrealized gain on equipment in 2013 (20,000) Add: Piecemeal recognition of gain in 2014 5,000 Consolidated net income $575,000 $710,000 Less: Noncontrolling interest share: (15,000) 2013 ($100,000 - $20,000 - $5,000)  20% (22,000) 2014 ($110,000 + $5,000 - $5,000)  20% Controlling interest share $560,000 $688,000 Investment in Sip Cost of investment July 1, 2011 $400,000 Add: Pan’s share of Sip’s retained earnings increase from July 1, 2011 to December 31, 2012 40,000 ($150,000 - $100,000)  80% (6,000) Less: 80% Amortization of excess ($4,000  1.5 years) Investment in Sip December 31, 2012 434,000 20,000 Add: 2013 income less dividends [$60,000 - ($50,000  80%)] Investment in Sip December 31, 2013 454,000 40,000 Add: 2014 income less dividends [$88,000 - ($60,000  80%)] ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-9 Investment in Sip December 31, 2014 Solution E6-9 (continued) $494,000 Alternative solution for check at December 31, 2014: Share of Sip’s equity December 31, 2014 ($550,000  80%) Add: 80% Unamortized excess on buildings 80%[Original excess $100,000 - ($5,000  3.5 years)] Less: Unrealized profit on equipment ($20,000 gain - $5,000 recognized)  80% Investment in Sip December 31, 2014 $440,000 66,000 (12,000) $494,000 Solution E6-10 Preliminary computations Transfer price of inventory to Spa ($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: 2011 Equipment (at transfer price) $360,000 Less: Unrealized profit (180,000) Less: Depreciation taken by Spa ($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 2012 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 workpaper entries: 2011 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 2012 Investment in Spa 150,000 120,000 Equipment — net Depreciation expense 30,000 To eliminate unrealized profit from the equipment account and the current year’s depreciation on the unrealized profit and establish reciprocity between the investment account and beginning-of-the-period subsidiary equity accounts © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-10 Solution E6-11 Par Corporation and Subsidiary Schedule for Computation of Consolidated Net Income 2012 2013 2014 2011 Combined separate incomes $260,000 $220,000 $120,000 $210,000 Add: Amortization of negative differential assigned to plant assets ($50,000/10 years)* 5,000 5,000 5,000 5,000 Unrealized gain on land (Note That Par’s $5,000 gain is included in Par’s separate income) (5,000) 5,000 Unrealized gain on machinery (25,000) Piecemeal recognition of Gain on machinery 5,000 5,000 5,000 (8,000) 8,000 Unrealized inventory profits Consolidated net income 260,000 205,000 122,000 233,000 Less: Noncontrolling interest share (12,000) 2011 ($60,000-$5,000+$5,000)  20% ( 15,000) 2012 ($70,000+$5,000)  20% (15,400) 2013 ($80,000-$8,000+$5,000))  20% 2014 ($90,000 + $8,000 + (21,600) $5,000 + $5,000))  20% Controlling share of NI $248,000 $190,000 $106,600 $211,400 Alternative Solution: Par’s separate income Add: 80% of Sum’s income Amortize the negative differential assigned to plant asset  80% Unrealized profit on upstream Sale of land ($5,000  80%) Unrealized profit on downstream Sale of machinery Piecemeal recognition of gain ($25,000/5 years) Unrealized profit on upstream Sale of inventory items $8,000  80% Par’s net income and controlling share of consolidated net income $200,000 48,000 $150,000 56,000 $ 40,000 64,000 $120,000 72,000 4,000 4,000 4,000 4,000 (4,000) 4,000 (25,000) 5,000 $248,000 $190,000 5,000 5,000 (6,400) 6,400 $106,600 $211,400 * Note: Since Par paid $40,000 more than book value for its 80% share, the implied total fair value minus book value of Sum is $50,000 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-20 Solution P6-5 (continued) Pal Corporation and Subsidiary Consolidation WorkPapers for the Year Ended December 31, 2012 Pal Income Statement Sales Income from Sto Gain on land Cost of sales Operating expense Consolidated NI Noncontrolling share Controlling share of NI $ Adjustments and Eliminations Sto 90% 450,000 $ 190,000 34,600 5,000 (200,000) (100,000) a f e c (113,000) h (40,000) k $ 176,600 $ 200,000 $ 72,000 34,600 5,000 12,000 a b 6,000 d Consolidated Statements $ 72,000 10,000 2,000 4,400 50,000 568,000 (230,000) (157,000) 181,000 (4,400) $ 176,600 Retained Earnings Retained earnings — Pal Retained earnings — Sto Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Dividends receivable Inventories Land 176,600 (150,000) 226,600 $ 150,000 $ 136,400 180,000 18,000 60,000 100,000 280,000 $ Accounts payable Dividends payable Other liabilities Capital stock Retained earnings Total equities 14,000 100,000 140,000 292,200 $1,396,600 $ 400,000 $ $ 200,000 30,000 140,000 800,000 226,600 $1,396,600 Noncontrolling interest January Noncontrolling interest December 31 176,600 f k 36,000 30,000 80,000 330,000 Machinery — net Investment in Sto 50,000 20,000 30,000 150,000 150,000 $ 400,000 200,000 g 120,000 50,000 (20,000) $ Buildings — net Patents Total assets $ $ 120,000 18,000 2,000 i j c e 10,000 18,000 12,000 5,000 d 4,000 b d g 10,000 f 16,600 6,000 g 291,600 54,000 h 6,000 i j 10,000 18,000 (150,000) $ 226,600 $ 150,400 270,000 84,000 125,000 360,000 466,000 48,000 $1,503,400 $ g 150,000 g k 32,400 2,400 240,000 32,000 170,000 800,000 226,600 34,800 $1,503,400 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-21 Solution P6-6 Preliminary computations Investment cost Implied fair value of San ($290,000 / 80%) Book value of San Excess fair value over book value - allocated 50% to Patents with a ten-year life ($31,250) - allocated 50% to Inventory sold in 2009 ($31,250) Reconciliation of income from San: Pil’s share of San’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 San $290,000 $362,500 (300,000) $ 62,500 $ 40,000 (2,500) 2,400 (8,000) $ 31,900 Reconciliation of investment account: Share of San’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 San December 31, 2011 (7,200) (8,000) $322,300 Noncontrolling interest share: San’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 $ 50,000 3,000 ( 3,125) (10,000) 39,875 20% $ 7,975 $320,000 17,500 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-22 Solution P6-6 (continued) Pil Corporation and Subsidiary Consolidation WorkPapers for the year ended December 31, 2011 Pil Income Statement Sales Income from San Gain on land Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pil $ 210,000 31,900 $ 130,000 10,000 30,000* 60,000* 40,000* 110,000* $ 91,900 $ 50,000 $ 50,000 $ 202,300 $ 100,000 Balance Sheet Current assets Plant assets $ 200,000 550,000 $ 170,000 350,000 91,900 30,000* 31,900 10,000 e 3,125 f 7,975 a d 120,000* 322,300 70,000* $ 952,300 $ 450,000 $ 150,000 600,000 202,300 $ 952,300 $ Noncontrolling interest January Noncontrolling interest December 31 $ 340,000 $ 67,000* 173,125* 99,875 7,975* 91,900 $ 140,400 3,000 50,000 91,900 30,000* a b a a d Current liabilities Capital stock Retained earnings Consolidated Statements 50,000 Patent * c b $ 140,400 Retained earnings — San Controlling share of NI Dividends Retained earnings December 31 Accumulated depreciation Investment in San Adjustments and Eliminations San 80% 50,000 300,000 100,000 $ 450,000 $ 202,300 $ 370,000 875,000 15,000 10,000 6,000 9,600 c 31,900 d 300,000 25,000 e 3,125 184,000* 21,875 $1,082,875 $ d 300,000 a 2,400 d f 75,000 7,975 200,000 600,000 202,300 80,575 $1,082,875 Deduct ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-23 Solution 6-6 (continued) Consolidation workpaper entries a Accumulated depreciation 6,000 Investment in San 9,600 Noncontrolling interest 2,400 Depreciation expense 3,000 Plant assets 15,000 To eliminate unrealized profit on 2010 sale of plant assets and reduce plant assets to cost b Gain on land 10,000 Plant assets 10,000 To eliminate unrealized gain on 2011 upstream sale of land and reduce plant assets to cost c Income from San 31,900 Investment in San 31,900 To eliminate income from San and adjust investment to beginning of period d Capital stock—San 300,000 Retained earnings—San January 50,000 Patent 25,000 Investment in San 300,000 Noncontrolling interest January 75,000 To eliminate investment in San and stockholders’ equity of San and enter beginning of the period patent e Other expenses Patent To provide for patent amortization f 3,125 3,125 Noncontrolling Interest Share 7,975 Noncontrolling Interest 7,975 To enter noncontrolling interest share of subsidiary income © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-24 Solution P6-7 Preliminary computations (amounts in thousands) Investment cost for 100% of Ski, April 1, 2011 Book value acquired Excess fair value over book value Excess allocated: Undervalued inventory items (sold in 2011) 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, 2011 Add: Increase in Ski’s retained earnings Less: Excess allocated to inventories sold in 2011 Less: Depreciation on excess allocated to buildings ($3,500/7 years)  4.75 years Less: Unrealized inventory profits December 31, 2015 Less: Unrealized profit on equipment ($800 intercompany profit - $200 recognized) Investment balance December 31, 2015 $15,000 3,000 (500) (2,375) (120) (600) $14,405 Reconciliation of investment income balance: Share of Ski’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 Ski $ 2,000 100 500 (120) (500) (600) $ 1,380 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-25 Solution P6-7 (continued) Pot Corporation and Subsidiary Consolidation WorkPapers for the year ended December 31, 2015 (in thousands) Pot Income Statement Sales Gain on land Gain on equipment Income from Ski Cost of sales $26,000 700 Retained Earnings Retained earnings — Pot Retained earnings — Ski Consolidated net income Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Inventories Land Buildings — net Equipment — net Investment in Ski $11,000 800 1,380 15,000* Depreciation expense 3,700* Other expenses 4,280* Consolidated net income $ 5,100 5,000* 2,000* 2,800* * b 1,500 e 800 g 1,380 d 120 i 500 a 500 b c f 1,500 100 200 $ 2,000 $35,500 1,200 18,520* 6,000* 7,080* $12,375 $ 4,000 5,100 3,000* h 4,000 5,100 2,000 1,000* $14,475 $ 5,000 $ 1,170 2,000 5,000 4,000 15,000 $ 10,000 Consolidated Statements $ 5,100 $12,375 500 1,500 2,000 1,000 4,000 4,000 14,405 g $51,575 $13,000 $ 4,100 7,000 26,000 $ 1,000 2,000 5,000 14,475 $51,575 5,000 $13,000 1,000 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 Adjustments and Eliminations Ski 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 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-26 Solution P6-8 Preliminary computations Investment cost January 1, 2011 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 2011 reported income ($30,000  80%) Investment in Sic as reported on Pic’s books at December 31, 2011 Share of Sic’s 2012 reported income ($40,000  80%) Investment in Sic as reported on Pic’s books at December 31, 2012 $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 2011 or 2012 Investment balance as reported on Pic’s books December 31, 2011 Gain on machinery ($5,000  80%) Piecemeal recognition of gain ($1,000  80%) Investment account balance under the equity method at December 31, 2011 Share of Sic’s 2012 reported income Piecemeal recognition of gain in 2012 ($1,000  80%) Investment account balance under the equity method at December 31, 2012 $160,000 (4,000) 800 $156,800 32,000 800 $189,600 Noncontrolling interest share for 2011: 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 2011 $ 30,000 (5,000) 1,000 $ 26,000 20% $ 5,200 Noncontrolling interest share for 2012: 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 2012 $ 40,000 1,000 41,000 20% $ 8,200 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-27 Solution P6-8 (continued) Pic Corporation and Subsidiary Consolidation WorkPapers for the year ended December 31, 2011 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 Other current assets Plant and equipment Accumulated depreciation Investment in Sic Liabilities Capital stock Retained earnings $ 400,000 24,000 64,000 5,000 130,000* 25,000* 20,000* $ 30,000 $ 70,000 Consolidated Statements $ 600,000 c a 24,000 5,000 b e 5,200 d 70,000 1,000 $ 126,000 380,000* 74,000* 80,000* 66,000 5,200* $ 60,800 $ 126,000 64,000 60,800 30,000 $ 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 $ 590,000 $ 250,000 $ 100,000 300,000 190,000 $ 590,000 $ Noncontrolling interest January Noncontrolling interest December 31 * $ 200,000 250,000* 50,000* 60,000* $ Adjustments and Eliminations Sic 80% 50,000 100,000 100,000 $ 250,000 $ 676,000 $ 150,000 300,000 186,800 d 100,000 d e 34,000 5,200 39,200 $ 676,000 Deduct © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-28 Solution P6-8 (continued) Pic Corporation and Subsidiary Consolidation WorkPapers for the year ended December 31, 2012 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 Other current assets Plant and equipment Accumulated depreciation Investment in Sic Liabilities Capital stock Retained earnings $ 430,000 32,000 260,000* 50,000* 55,000* $ 235,000 $ $ 97,000 32,000 140,000* 25,000* 30,000* 97,000 a d 8,200 a 3,200 1,000 40,000 $ 100,000 Consolidated Statements $ 665,000 b $ 190,000 400,000* 74,000* 85,000* 106,000 8,200* $ 97,800 $ 186,800 c 100,000 97,800 40,000 $ 287,000 $ 140,000 $ 284,600 $ $ $ 63,000 140,000 440,000 200,000* 192,000 30,000 80,000 245,000 75,000* $ 280,000 $ $ 48,000 300,000 287,000 $ 635,000 a a 5,000 2,000 93,000 220,000 680,000 273,000* b 32,000 c 160,000 $ 635,000 Noncontrolling interest January Noncontrolling interest December 31 * Adjustments and Eliminations Sic 80% 40,000 100,000 140,000 $ 280,000 $ 720,000 $ c 100,000 a 800 c d 40,000 8,200 88,000 300,000 284,600 47,400 $ 720,000 Deduct ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-29 Solution P6-9 Preliminary computations Investment cost January 1, 2011 Implied fair value of Sin ($108,000 / 80%) Book value of Sin 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: Sin’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) Sin’s adjusted income $ 50,000 (2,500) (1,000) 2,000 Par’s 80% controlling share $ 42,000 20% Noncontrolling interest share $ 10,500 4,000 $ 52,500 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-30 Solution P6-9 (continued) Par Corporation and Subsidiary Consolidation WorkPapers for the year ended December 31, 2014 Par Income Statement Sales Income from Sin Cost of sales Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings Par Retained earnings Sin Controlling share of NI Dividends Retained earnings December 31 Balance Sheet Cash Accounts receivable Inventories Plant assets Accumulated depreciation Investment in Sin $ 650,000 42,000 390,000* $ 120,000 170,000* $ 132,000 $ 40,000* a e b 30,000* g 8,000 42,000 1,000 a c 2,500 d i 10,500 f 20,000 $ 50,000 $ 20,000 50,000 20,000* $ 157,600 $ 50,000 $ $ 20,000 20,000 35,000 205,000 100,000* $ 499,600 $ 180,000 $ $ 42,000 300,000 157,600 $ 499,600 Noncontrolling interest January Noncontrolling interest December 31 * 8,000 2,000 4,000 421,000* 198,500* 142,500 10,500* $ 132,000 $ 132,000 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 Sin 80% 30,000 100,000 50,000 $ 180,000 95,600 132,000 e i 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 h 4,000 f 100,000 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 ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-31 Solution P6-10 Preliminary computations Investment cost Implied fair value of Sun ($290,000 / 80%) Book value of Sun Excess fair value over book value Excess allocated: Inventories (50%)- Sold in 2009 Goodwill Excess fair value over book value $290,000 $362,500 (300,000) $ 62,500 $ 31,250 31,250 $ 62,500 Reconciliation of income from Sun: Sun’s reported net income Add: Depreciation on deferred gain on equipment ($15,000/5 years Less: Unrealized profit on upstream sale of land Sun’s adjusted and realized income 3,000 (10,000) $ 43,000 Pal’s 80% controlling share $ 34,400 20% Noncontrolling interest share $ Reconciliation of investment account: Share of Sun’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 Sun December 31, 2011 $ 50,000 8,600 $320,000 25,000 (7,200) (8,000) $329,800 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-32 Solution P6-10 (continued) Pal Corporation and Subsidiary Consolidation WorkPaper for the year ended December 31, 2011 Pal Income Statement Sales Income from Sun Gain on land Depreciation expense Other expenses Consolidated NI Noncontrolling share Controlling share of NI Retained Earnings Retained earnings — Pal $ 210,000 34,400 $ 130,000 10,000 30,000* 60,000* 40,000* 110,000* 94,400 $ 50,000 $ 50,000 a $ 100,000 Balance Sheet Current assets Plant assets $ 200,000 550,000 $ 170,000 350,000 94,400 30,000* d 120,000* 329,800 70,000* 340,000 $ 67,000* 170,000* 103,000 8,600* 94,400 $ 145,400 3,000 8,600 50,000 94,400 30,000* a b a a d $ 959,800 $ 450,000 $ 150,000 600,000 209,800 $ 959,800 $ Noncontrolling interest January Noncontrolling interest December 31 $ 50,000 Goodwill Current liabilities Capital stock Retained earnings Consolidated Statements 34,400 10,000 $ 145,400 $ 209,800 * c b e $ Retained earnings — Sun Consolidated share of NI Dividends Retained earnings December 31 Accumulated depreciation Investment in Sun Adjustments and Eliminations Sun 80% 50,000 300,000 100,000 $ 450,000 $ 209,800 $ 370,000 875,000 15,000 10,000 6,000 9,600 c 34,400 d 305,000 31,250 184,000* 31,250 $1,092,250 $ d 300,000 a 2,400 d e 76,250 8,600 200,000 600,000 209,800 82,450 $1,092,250 Deduct ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-33 Solution 6-10 (continued) Consolidation workpaper entries a Accumulated depreciation 6,000 Investment in Sun 9,600 Noncontrolling interest 2,400 Depreciation expense 3,000 Plant assets 15,000 To eliminate unrealized profit on 2010 sale of plant assets b Gain on land 10,000 Plant assets 10,000 To eliminate unrealized gain on 2011 upstream sale of land c Income from Sun 34,400 Investment in Sun 34,400 To eliminate income from Sun against the investment in Sun d Capital stock—Sun 300,000 Retained earnings–Sun January 50,000 Goodwill 31,250 Investment in Sun 305,000 Noncontrolling interest January 76,250 To eliminate investment in Sun and stockholders’ equity of Sun 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 Solution P6-11 The 90 percent ownership interest can be determined in several ways a $13,500 dividends receivable  $15,000 dividends payable = 90% b $37,200 noncontrolling interest  ($340,000 Sal’s stockholders’ equity + $32,000 unamortized patent) = 10% c ($4,600 noncontrolling interest share  ($50,000 net income of Sal less $4,000 patent amortization) = 10% Yes Pop’s net income of $200,400 equals the controlling interest share consolidated net income of $200,400 Pop’s retained earnings of $350,400 equals consolidated retained earnings Yes Combined sales Consolidated sales Intercompany sales $800,000 716,000 $ 84,000 Yes Combined inventories Consolidated inventories Unrealized inventory profits $150,000 136,000 $ 14,000 © 2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Intercompany Profit Transactions — Plant Assets 6-34 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 workpaper 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, 2012 ($320,000  10%) 10% of unamortized patent at January Add: Noncontrolling interest share for 2012 Less: Noncontrolling interest dividends ($30,000  10%) Noncontrolling interest December 31, 2012 10 Intercompany $10,000 10,000 13,500 13,500 $ 32,000 3,600 4,600 (3,000) $ 37,200 Patent at December 31, 2011 Patent December 31, 2012 Add: Patent amortization ($141,000 consolidated other expenses - $137,000 combined other expenses) $ 32,000 Patent December 31, 2011 $ 36,000 4,000 Analysis of investment in Sal account Book value (Sal’s stockholders’ equity $340,000  90%) Less: Unrealized profit in ending inventory Less: Unrealized profit in equipment Add: 90% of Unamortized patent $306,000 (14,000) (15,000) 28,800 Investment in Sal December 31, 2012 $305,800 ©2011 Pearson Education, Inc publishing as Prentice Hall ... beginning of the current year SOLUTIONS TO EXERCISES Solution E6-1 c a c d ©2011 Pearson Education, Inc publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com... more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-9 Investment in Sip December 31, 2014 Solution E6-9 (continued) $494,000 Alternative solution for check at... publishing as Prentice Hall Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 6-11 SOLUTIONS TO PROBLEMS Solution P6-1 Income from Sea — 2011 Equity in Sea’s