Solution manual advanced financial accounting, 8th edition by baker chap007

Chapter 07 - Intercompany Inventory Transactions CHAPTER INTERCOMPANY INVENTORY TRANSACTIONS ANSWERS TO QUESTIONS Q7-1 All inventory transfers between related companies must be eliminated to avoid an overstatement of revenue and cost of goods sold in the consolidated income statement In addition, when unrealized profits exist at the end of the period, the eliminations are needed to avoid overstating inventory and consolidated net income Q7-2 An inventory transfer at cost results in an overstatement of sales and cost of goods sold While net income is not affected, gross profit ratios and other financial statement analysis may be substantially in error if appropriate eliminations are not made Q7-3 An upstream sale occurs when the parent purchases items from one or more subsidiaries A downstream sale occurs when the sale is made by the parent to one or more subsidiaries Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation workpaper will know whether to reduce consolidated net income assigned to the controlling interest by the full amount of the unrealized profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream) Q7-4 As in all cases, the total amount of the unrealized profit must be eliminated in preparing the consolidated statements When the profits are on the parent company's books, consolidated net income and income assigned to the controlling interest are reduced by the full amount of the unrealized profit Q7-5 Consolidated net income is reduced by the full amount of the unrealized profits In the upstream sale, the unrealized profits are apportioned between the parent company shareholders and the noncontrolling shareholders Thus, consolidated net income assigned to the controlling and noncontrolling interests is reduced by a pro rata portion of the unrealized profits Q7-6 Income assigned to the noncontrolling interest is affected when unrealized profits are recorded on the subsidiary's books as a result of an upstream sale A downstream sale should have no effect on the income assigned to noncontrolling interest because the profits are on the books of the parent Q7-7 The basic eliminating entry needed when the item is resold before the end of the period is: Sales Cost of Goods Sold XXXXXX XXXXXX The debit to sales is based on the intercorporate sale price This means that only the revenue recorded by the company ultimately selling to the nonaffiliate is to be included in the consolidated income statement Cost of goods sold is credited for the amount paid by the purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded by the initial owner to be reported in the consolidated statement 7-1 Chapter 07 - Intercompany Inventory Transactions Q7-8 The basic eliminating entry needed when one or more of the items are not resold before the end of the period is: Sales Cost of Goods Sold Inventory XXXXXX XXXXXX XXXXXX The debit to sales is for the full amount of the transfer price Inventory is credited for the unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold by the company making the intercompany sale Q7-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an external party The amount reported as cost of goods sold is based on the amount paid for the inventory when it was produced or purchased from an external party If inventory has been purchased by one company and sold to a related company, the cost of goods sold recorded on the intercorporate sale must be eliminated Q7-10 No adjustment to retained earnings is needed if the intercorporate sales have been made at cost or if all intercorporate sales have been resold to an external party in the same accounting period If not all of the intercorporate sales have been resold by the end of the period, consolidated retained earnings must be reduced by the parent's proportionate share of any unrealized profits Q7-11 A proportionate share of the realized retained earnings of the subsidiary are assigned to the noncontrolling interest Any unrealized profits on upstream sales are deducted proportionately from the amount assigned to the noncontrolling interest and consolidated retained earnings Unrealized profits on downstream sales are deducted entirely from the retained earnings assigned to the consolidated entity Q7-12 When inventory profits from a prior period intercompany transfer are realized in the current period, the profit is added to consolidated net income and to the income assigned to the shareholders of the company that made the intercompany sale If the unrealized profits arise from a downstream sale, income assigned to the controlling interest will increase by the full amount of profit realized When the profits arise from an upstream sale, income assigned to the controlling and noncontrolling interests will be increased proportionately in the period the profit is realized Thus, knowledge of whether the profits resulted from an upstream or a downstream sale is imperative in assigning consolidated net income to the appropriate shareholder group Q7-13 Consolidated retained earnings must be reduced by the full amount of any unrealized profit on the parent company books Q7-14 Consolidated retained earnings must be reduced by the parent's proportionate share of the unrealized profit on the subsidiary's books Q7-15* Sales between subsidiaries are treated in the same manner as upstream sales Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the end of the period are eliminated and consolidated net income and income assigned to the controlling and noncontrolling interests is reduced 7-2 Chapter 07 - Intercompany Inventory Transactions Q7-16* When a company is acquired in a business combination the transactions occurring before the combination generally are regarded as transactions with unrelated parties and no adjustments or eliminations are needed All transactions between the companies following the combination must be fully eliminated SOLUTIONS TO CASES C7-1 Measuring Cost of Goods Sold a While the rule covers only a part of the elimination needed, Charlie is correct in that the cost of goods sold recorded by the selling company must be eliminated to avoid overstating that caption in the consolidated income statement b The rules will result in the proper consolidated totals if rule #1 is expanded to include a debit to sales and a credit to ending inventory for the amount of profit recorded by the company that sold to its affiliate c The way in which the rule is stated makes it appear to be incorrect, but it is correct The rule is appropriate in that the cost of goods sold recorded by the purchasing affiliate is equal to the cost of goods sold to the first owner plus the profit the first owner recorded on the sale Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold If an equal amount of sales is eliminated, the rule should result in proper consolidated financial statement totals d The employee would be forced to look at the books of the selling affiliate and determine the difference between the intercorporate sale price and the price it paid to acquire or produce the items If the items sold to affiliates are routinely produced and costs not fluctuate greatly, it may be possible to use some form of gross profit ratio to estimate the amount of unrealized profit C7-2 Inventory Values and Intercompany Transfers MEMO To: From: Re: President Water Products Corporation , CPA Inventory Sale and Purchase of New Inventory If Water Products holds only a small percent of the ownership of Plumbers Products and Growinkle Manufacturing, it should have no difficulty in reporting the desired results This would not be the case if the two companies are subsidiaries of Water Products If both Plumbers Products and Growinkel are subsidiaries of Water Products, both the sale of inventory to Plumbers Supply and the purchase of inventory from Growinkle Manufacturing must be eliminated In addition, the unrealized profit on any unsold inventory involved in these transfers must be eliminated in preparing the financial statements for the current period 7-3 Chapter 07 - Intercompany Inventory Transactions C7-2 (continued) The consolidated income statement should include the same amount of income on the inventory sold to Plumbers Supply and resold during the year as would have been recorded if Water Products had sold the inventory directly to the purchaser Any income recorded by Water Products on inventory not resold by Plumbers Supply must be eliminated Similarly, the consolidated income statement should include the same amount of income on the inventory purchased by Water Products and resold during the year as would have been recorded if Growinkle Manufacturing had sold the inventory directly to the purchaser Any income recorded by Growinkle Manufacturing on inventory not resold by Water Products must be eliminated Consolidated net income may increase if Plumbers Supply is able to sell the inventory it purchased from Water Products at a higher price than would have been received by Water Products or if it is able to sell a larger number of units The same can be said for the inventory purchased by Water Products from Growinkle Manufacturing It is important to recognize that the transfer of inventory between Water Products and its subsidiaries does not in itself generate income for the consolidated entity An additional level of complexity may arise in this situation if Water Products uses the LIFO inventory method It might, for example, be forced to carry over its LIFO cost basis on the old inventory sold to Plumbers Supply to the new inventory purchased from Growinkle Manufacturing since it was replaced within the accounting period Primary citation: ARB 51, Par 7-4 Chapter 07 - Intercompany Inventory Transactions C7-3 Intercorporate Inventory Transfers MEMO To: Treasurer Evert Corporation From: Re: , CPA Inventory Sale to Parent This memo is prepared in response to your request for information on the appropriate treatment of intercompany inventory transfers in consolidated financial statements The specific eliminating entries required in this case depend on the valuation assigned to the inventory at December 31, 20X2 Frankle Company sold inventory with a carrying value of $240,000 to Evert for $180,000 on December 20, 20X2 Since the exchange price was well below Frankle’s cost, consideration should be given to whether the inventory should be reported at $180,000 or $240,000 in the consolidated statements at December 31, 20X2, under the lower-of-cost-or-market rule While the value of the inventory apparently had fallen below Frankle’s carrying value, the accounting standards indicate no loss should be recognized when the evidence indicates that cost will be recovered with an approximately normal profit margin upon sale in the ordinary course of business [ARB 43, Chapter 4, Par 9] We are told the management of Frankle considered the drop in prices to be temporary and Evert was able to sell the inventory for $70,000 more than the original amount paid by Frankle It therefore seems appropriate for the consolidated entity to report the inventory at Frankle’s cost of $240,000 at December 31, 20X2 In preparing the consolidated statements at December 31, 20X2 and 20X3, the effects of the intercompany transfer should be eliminated [ARB 51, Par 6] The following eliminating entry is required at December 31, 20X2: E(1) Sales Inventory Cost of Goods Sold 180,000 60,000 240,000 The above entry will increase the carrying value of the inventory to $240,000 Eliminating sales of $180,000 and cost of goods sold of $240,000 will increase consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x 10) These changes will result in an increase in consolidated retained earnings and the amount assigned to the noncontrolling shareholders in the consolidated balance sheet by $54,000 and $6,000, respectively 7-5 Chapter 07 - Intercompany Inventory Transactions C7-3 (continued) The following eliminating entry is required at December 31, 20X3: E(2) Cost of Goods Sold Retained Earnings Noncontrolling interest 60,000 54,000 6,000 The above entry will reduce consolidated net income by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x 10) The credits to retained earnings and noncontrolling interest are needed to bring the beginning balances into agreement with those reported at December 31, 20X2 No eliminations are required for balances reported at December 31, 20X3, because the inventory has been sold to a nonaffiliate prior to year-end Primary citations: ARB 43, CH 4, Par ARB 51, Par C7-4 Unrealized Inventory Profits a When the amount of unrealized inventory profits on the books of the subsidiary at the beginning of the period is greater than the amount at the end of the period, the income assigned to the noncontrolling interest for the period will exceed a pro rata portion of the reported net income of the subsidiary b The subsidiary apparently had less unrealized inventory profit at the end of the period than it did at the start of the period In addition, the parent must have had more unrealized profit on its books at the end of the period than it did at the beginning The negative effect of the latter apparently offset the positive effect of the reduction in unrealized profits by the subsidiary c The most likely reason is that a substantial amount of the parent company sales was made to its subsidiaries and the cost of goods sold on those items was eliminated in preparing the consolidated statements d A loss was recorded by the seller on an intercompany sale of inventory to an affiliate and the purchaser continues to hold the inventory 7-6 Chapter 07 - Intercompany Inventory Transactions C7-5 Eliminating Inventory Transfers a If no intercompany sales are eliminated, the income statement may include overstated sales revenue and cost of goods sold The net impact on income will depend upon whether there were more unrealized profits at the beginning or end of the year If Ready Building does not hold total ownership of the subsidiaries, the amount of income assigned to noncontrolling shareholders is likely to be incorrect as well Inventory, current assets and total assets, retained earnings, and stockholders' equity are likely to be overstated if inventories are sold to affiliates at a profit If the companies pay income taxes on their individual earnings, the amount of income tax expense also will be overstated in the period in which unrealized profits are reported and understated in the period in which the profits are realized b Because profit margins vary considerably, the amount of unrealized profit may vary considerably if uneven amounts of product are purchased by affiliates from period to period Ready Building needs to establish a formal system to monitor intercompany sales Perhaps the best alternative would be to establish a separate series of accounts to be used solely for intercompany transfers Alternatively, it may be possible to use unique shipping containers for intercompany sales or to specifically mark the containers in some way to identify the intercompany shipments at the time of receipt The purchaser might then use a different type of inventory tag or mark these units in some way when the product is received and placed in inventory Inventory count teams could then easily identify the product when inventories are taken c A number of factors might be considered The most important inventory system is the one used by the company making the intercompany purchase When intercompany inventory purchases are bunched at the end of the year, the amount of unrealized profit included in ending inventory may be quite different under FIFO versus LIFO If intercompany purchases are placed in a LIFO inventory base, inventories may be misstated for a period of years before the inventory is resold Eliminating entries must be made each of the years until resale to avoid a misstatement of assets and equities In those cases where the intercompany purchases are in high volume and the inventory turns over very quickly, a small amount of inventory left at the end of the period may be immaterial and of little concern Typically, a parent will align inventory costing methods subsequent to a subsidiary acquisition to avoid problems caused by differences in accounting for the same items or types of items 7-7 Chapter 07 - Intercompany Inventory Transactions C7-5 (continued) d It may be necessary to start by looking at intercorporate cash receipts and disbursements to determine the extent of intercorporate sales One or more months might be selected and all vouchers examined to establish the level of intercorporate sales and the profit margins recorded on the sales For those products sold throughout the year, it may be possible to estimate for the year as a whole based on an examination of several months Once total intercompany sales and profit margins have been estimated, the amount of unrealized profit at year end should be estimated One approach would be to take a physical inventory of the specific product types which have been identified and attempt to trace back using the product identification numbers or shipping numbers to determine what portion of the inventory on hand was purchased from affiliates C7-6 Intercompany Profits and Transfers of Inventory a The intercompany transfers of Xerox (www.xerox.com) between segments are apparently relatively insignificant because they are not reported in the notes to the consolidated financial statements relating to segment reporting For consolidation purposes, all significant intercompany accounts and transactions are eliminated b Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated market prices The amount of intercompany transfers is large In the fiscal year ending December 31, 2006, Exxon Mobil reported eliminations of $368 billion of intersegment transfers, which does not include intercompany transfers within segments This amount represents nearly 50 percent of total reported segment sales For consolidation purposes, Exxon Mobil eliminates the effects of intercompany transactions c Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles, parts, and components manufactured by the company and its subsidiaries, with a smaller amount of financial and other services included The amount of intercompany transfers is significant, totaling almost $4 billion, but is relatively small in relation to sales to unaffiliated customers The amount has been decreasing in recent years The effects of intercompany transfers are eliminated in consolidation 7-8 Chapter 07 - Intercompany Inventory Transactions SOLUTIONS TO EXERCISES E7-1 Multiple-Choice Questions on Intercompany Inventory Transfers [AICPA Adapted] a c a c c c Net assets reported Profit on intercompany sale Proportion of inventory unsold at year end ($60,000 / $240,000) Unrealized profit at year end Amount reported in consolidated statements Inventory reported by Banks ($175,000 + $60,000) Inventory reported by Lamm Total inventory reported Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] Amount reported in consolidated statements 7-9 $48,000 x 25 $320,000 (12,000) $308,000 $235,000 250,000 $485,000 (15,000) $470,000 Chapter 07 - Intercompany Inventory Transactions E7-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted] b Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small ($500,000 x 40) Reduction of cost of goods sold reported by Small for profit on intercompany sale [($500,000 x / 5) x 60] Cost of goods sold for consolidated entity $ 800,000 700,000 $1,500,000 (200,000) (240,000) $1,060,000 Note: Answer b in the actual CPA examination question was $1,100,000, requiring candidates to select the closest answer d $32,000 = ($200,000 + $140,000) – $308,000 b $6,000 = ($26,000 + $19,000) – $39,000 c $9,000 = Inventory held by Spin ($32,000 x 375) Unrealized profit on sale [($30,000 + $25,000) – $52,000] Carrying cost of inventory for Power b 20 = $14,000 / [(Stockholders’ Equity $50,000) + (Patent $20,000)] b 14 years = ($28,000 / [(28,000 - $20,000) / years] $12,000 (3,000) $ 9,000 E7-3 Multiple Choice – Consolidated Income Statement c b c Total income ($86,000 - $47,000) Income assigned to noncontrolling interest [.40($86,000 - $60,000)] Consolidated net income assigned to controlling interest 7-10 $39,000 (10,400) $28,600 P7-35 Comprehensive Consolidation Workpaper; Equity Method [AICPA Adapted] Fran Corp and Subsidiary Consolidation Workpaper December 31, 20X9 Fran Corp Dr (Cr.) Income Statement: Net Sales Equity in Brey's Income Gain on Sale of Warehouse Cost of Goods Sold Goodwill Impairment Loss Operating Expenses (including depreciation) Net Income Retained Earnings Statement: Balance, 1/1/X9 Net Income Dividends Paid Balance, 12/31/X9 Balance Sheet: Assets: Cash Accounts Receivable (net) Inventories Land, Plant and Equipment Accumulated Depreciation Investment in Brey Goodwill Total Assets Liabilities and Stockholders' Equity: Accounts Payable and Accrued Expenses Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Equity Adjustments and Eliminations Dr Cr Brey Inc Dr (Cr.) (3,800,000) (1,500,000) [7] (181,000) [1] (30,000) 2,360,000 180,000 181,000 [5] 30,000 [4] 35,000 1,100,000 (551,000) 440,000 [3] (190,000) [a] 9,000 435,000 (440,000) (551,000) (156,000) [2] (190,000) [a] 40,000 (306,000) [b] 156,000 435,000 (991,000) 870,000 570,000 150,000 860,000 1,060,000 350,000 410,000 1,320,000 680,000 591,000 Adjusted Balance (5,120,000) [7] 162,000 3,068,000 35,000 [6] [a] 2,000 164,000 [a] [1] [b] 164,000 40,000 204,000 1,547,000 (470,000) (440,000) (470,000) (910,000) 720,000 [8] [7] 86,000 18,000 1,124,000 1,452,000 [2] 54,000 [5] 30,000 2,024,000 (210,000) [6] 2,000 60,000 9,000 141,000 750,000 35,000 (587,000) [2] [3] [1] [2] [4] (1,340,000) (1,700,000) (594,000) [8] (400,000) [2] 86,000 400,000 (300,000) (991,000) (80,000) [2] (306,000) [b] 80,000 591,000 (370,000) 891,000 4,331,000 1,380,000 (4,331,000) (1,380,000) 1,273,000 25,000 4,758,000 (1,848,000) (1,700,000) [b] 204,000 (300,000) (910,000) 1,273,000 (4,758,000) P7-35 (continued) Explanations of Adjustments and Eliminations: [1] To eliminate Fran's investment income recognized from Brey, Brey's dividends, and the change in the investment account during 20X9 Fran's investment is carried at equity at December 31, 20X9, adjusted for the amortization of the differential assigned to the machinery [2] To eliminate reciprocal elements as of the beginning of the year from the investment and equity accounts and to assign the differential to machinery and goodwill [3] To record amortization of the fair value in excess of book value of Brey's machinery at date of acquisition ($54,000 / 6) [4] To record goodwill impairment loss of $35,000 [5] To eliminate intercompany profit on the sale of the warehouse by Fran to Brey [6] To eliminate the excess depreciation on the warehouse building sold by Fran to Brey [($86,000 - $66,000) x 1/5 x ½] [7] To eliminate intercompany sales from Brey to Fran and the inter-company profit in Fran's ending inventory as follows: Sales Gross profit Cost Total $180,000 (90,000) $ 90,000* On hand $36,000 (18,000) $18,000 Sold $144,000 (72,000)* $ 72,000 * Cost of Goods Sold elimination: $162,000 = $90,000 + $72,000 [8] To eliminate Fran's intercompany balance to Brey for the merchandise it purchased P7-36A Fully Adjusted Equity Method a Adjusted trial balance: Item Cash Accounts Receivable Inventory Buildings and Equipment Investment in Sharp Company Stock Cost of Goods Sold Depreciation and Amortization Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings Sales Other Income Income from Subsidiary Randall Corporation Debit Credit Sharp Company Debit Credit $ 130,300 80,000 170,000 600,000 $ 10,000 70,000 110,000 400,000 278,000 416,000 30,000 24,000 50,000 202,000 20,000 18,000 25,000 $ 310,000 100,000 300,000 200,000 $1,778,300 320,000 500,000 20,400 27,900 $1,778,300 $855,000 $120,000 15,200 100,000 4,800 100,000 20,000 215,000 250,000 30,000 $855,000 P7-36A (continued) b Fully adjusted equity-method entries for 20X7: (1) Cash Investment in Sharp Company Stock Record dividends from Sharp Company: $25,000 x 80 20,000 (2) Investment in Sharp Company Stock Income from Subsidiary Record equity-method income: $40,000 x 80 32,000 (3) Income from Subsidiary Investment in Sharp Company Stock Amortize differential: $4,000 = ($50,000 / 10 years) x 80 4,000 (4) Investment in Sharp Company Stock Income from Subsidiary Recognize deferred profit on upstream sale of inventory: $8,000 x 80 6,400 (5) Investment in Sharp Company Stock Income from Subsidiary Recognize deferred profit on downstream sale of inventory 2,000 (6) Income from Subsidiary Investment in Sharp Company Stock Remove unrealized profit on upstream sale of inventory: $10,000 x 80 8,000 (7) Income from Subsidiary Investment in Sharp Company Stock Remove unrealized profit on downstream sale of inventory 3,000 (8) Investment in Sharp Company Stock Income from Subsidiary Recognize portion of gain on sale of equipment: $20,000 / years 2,500 20,000 32,000 4,000 6,400 2,000 8,000 3,000 2,500 P7-36A (continued) c Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Sharp Company Stock Eliminate income from subsidiary E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $6,600 = ($40,000 + $8,000 - $10,000 - $5,000) x 20 6,600 E(3) Common Stock — Sharp Company Additional Paid-In Capital Retained Earnings, January Differential Investment in Sharp Company Stock Noncontrolling Interest Eliminate beginning investment balance 100,000 20,000 215,000 35,000 Buildings and Equipment Depreciation Expense Accumulated Depreciation Differential Assign differential: $20,000 = ($50,000 / 10 years) x years 50,000 5,000 E(4) E(5) Investment in Sharp Company Stock Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Sharp Company 27,900 6,400 1,600 20,000 7,900 5,000 1,600 296,000 74,000 20,000 35,000 8,000 P7-36A (continued) E(6) Investment in Sharp Company Stock Cost of Goods Sold Eliminate beginning inventory profit of Randall Corporation E(7) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Sharp Company 45,000 E(8) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Randall Corporation 12,000 E(9) Buildings and Equipment Investment in Sharp Company Stock Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment 25,000 17,500 Depreciation expense adjustment: Depreciation recorded ($50,000 / years) Depreciation required ($75,000 / 20 years) Required decrease Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x years) Required increase E(10) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable 2,000 2,000 35,000 10,000 9,000 3,000 2,500 40,000 $6,250 (3,750) $2,500 $52,500 (12,500) $40,000 10,000 10,000 P7-36A (continued) d Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Item Randall Corp Sharp Co Sales 500,000 250,000 Other Income Income from Subsidiary Credits Cost of Goods Sold 20,400 27,900 548,300 416,000 30,000 Deprec & Amortization Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward 280,000 202,000 30,000 20,000 24,000 18,000 (470,000) (240,000) Eliminations Debit Credit (7) 45,000 (8) 12,000 (4) 5,000 (5) 8,000 (6) 2,000 (7) 35,000 (8) 9,000 (9) 2,500 (2) 6,600 96,500 56,500 56,500 40,000 215,000 40,000 255,000 (25,000) (3)215,000 96,500 Dividends Declared 320,000 78,300 398,300 (50,000) Ret Earnings, Dec 31, carry forward 348,300 230,000 311,500 Ret Earnings, Jan Income, from above 693,000 50,400 (1) 27,900 78,300 Consolidated (1) 20,000 (2) 5,000 81,500 743,400 564,000 52,500 42,000 (658,500) 84,900 (6,600) 78,300 320,000 78,300 398,300 (50,000) 348,300 P7-36A (continued) Item Randall Corp Sharp Co Cash Accounts Receivable Inventory 130,300 80,000 170,000 10,000 70,000 110,000 Buildings and Equipment Investment in Sharp Company Stock 600,000 400,000 Differential Debits 278,000 Eliminations Debit Credit (4) (9) (5) (6) (9) (3) 50,000 25,000 6,400 2,000 17,500 35,000 1,258,300 590,000 Accum Depreciation 310,000 120,000 Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest 100,000 300,000 15,200 100,000 4,800 100,000 (10) 10,000 20,000 (3) 20,000 Credits 200,000 348,300 230,000 1,258,300 590,000 (10) 10,000 (7) 10,000 (8) 3,000 (1) 7,900 (3)296,000 (4) 35,000 (4) 20,000 (9) 40,000 (3)100,000 (5) 311,500 1,600 579,000 81,500 (2) 1,600 (3) 74,000 579,000 Consolidated 140,300 140,000 267,000 1,075,000 1,622,300 490,000 105,200 400,000 4,800 200,000 348,300 74,000 1,622,300 P7-37A Cost Method a Journal entry recorded by Randall Corporation: Cash Dividend Income Record dividend from Sharp Company: $25,000 x 80 b 20,000 20,000 Eliminating entries, December 31, 20X7: E(1) Dividend Income Dividends Declared Eliminate dividend income from subsidiary E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $6,600 = ($40,000 + $8,000 - $10,000 - $5,000) x 20 E(3) Common Stock — Sharp Company Additional Paid-In Capital Retained Earnings, January Differential Investment in Sharp Company Stock Noncontrolling Interest Eliminate investment balance at date of acquisition: $180,000 = ($300,000 - $100,000 - $20,000) E(4) 6,600 100,000 20,000 180,000 50,000 Retained Earnings, January Noncontrolling Interest Assign undistributed prior earnings of subsidiary to noncontrolling interest Retained earnings, January 1, 20X7 Net assets of Sharp at acquisition $300,000 Common stock (100,000) Additional paid-in capital (20,000) Retained earnings at acquisition Net increase Proportion of stock held by noncontrolling interest Increase assigned to noncontrolling interest E(5) 20,000 Buildings and Equipment Differential Assign differential at date of acquisition 7,000 20,000 5,000 1,600 280,000 70,000 7,000 $215,000 (180,000) $ 35,000 x 20 $ 7,000 50,000 50,000 P7-37A (continued) E(6) Retained Earnings, January Noncontrolling Interest Accumulated Depreciation Amortize differential for prior periods: ($50,000 / 10 years) x years 12,000 3,000 E(7) Depreciation Expense Accumulated Depreciation Amortize differential 5,000 E(8) Retained Earnings, January Noncontrolling Interest Cost of Goods Sold Eliminate beginning inventory profit of Sharp Company 6,400 1,600 E(9) Retained Earnings, January Cost of Goods Sold Eliminate beginning inventory profit of Randall Corporation 2,000 E(10) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Sharp Company 45,000 E(11) Sales Cost of Goods Sold Inventory Eliminate intercompany sale of inventory by Randall Corporation 12,000 E(12) Buildings and Equipment Retained Earnings, January Depreciation Expense Accumulated Depreciation Eliminate intercorporate sale of equipment 25,000 17,500 Depreciation expense adjustment: Depreciation recorded ($50,000 / years) Depreciation required ($75,000 / 20 years) Required decrease $ 6,250 (3,750) $ 2,500 Accumulated depreciation adjustment: Required balance ($3,750 x 14 years) Balance recorded ($6,250 x years) Required increase $52,500 (12,500) $40,000 15,000 5,000 8,000 2,000 35,000 10,000 9,000 3,000 2,500 40,000 P7-37A (continued) E(13) Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable c 10,000 10,000 Randall Corporation and Sharp Company Consolidation Workpaper December 31, 20X7 Item Randall Corp Sharp Co Sales 500,000 250,000 Other Income Dividend Income Credits Cost of Goods Sold 20,400 20,000 540,400 416,000 30,000 Deprec & Amortization Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward 280,000 202,000 30,000 20,000 24,000 18,000 (470,000) (240,000) 70,400 40,000 Ret Earnings, Jan 329,900 215,000 Income, from above Dividends Declared 70,400 400,300 (50,000) 40,000 255,000 (25,000) Ret Earnings, Dec 31, carry forward 350,300 230,000 Eliminations Debit Credit (10) 45,000 (11) 12,000 693,000 50,400 (1) 20,000 (7) 5,000 (8) 8,000 (9) 2,000 (10) 35,000 (11) 9,000 (12) 2,500 (2) 6,600 88,600 56,500 (3)180,000 (4) 7,000 (6) 12,000 (8) 6,400 (9) 2,000 (12) 17,500 88,600 56,500 (1) 20,000 (2) 5,000 313,500 Consolidated 81,500 743,400 564,000 52,500 42,000 (658,500) 84,900 (6,600) 78,300 320,000 78,300 398,300 (50,000) 348,300 P7-37A (continued) Item Randall Corp Sharp Co Cash Accounts Receivable Inventory 130,300 80,000 170,000 10,000 70,000 110,000 Buildings and Equipment 600,000 400,000 Investment in Sharp Company Stock Differential Debits 280,000 Eliminations Debit Credit (5) 50,000 (12) 25,000 (3) 50,000 1,260,300 590,000 Accum Depreciation 310,000 120,000 Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest 100,000 300,000 15,200 100,000 4,800 100,000 (13) 10,000 20,000 (3) 20,000 350,300 230,000 313,500 (6) 3,000 (8) 1,600 1,260,300 590,000 573,100 Credits 200,000 (13) 10,000 (10) 10,000 (11) 3,000 Consolidated 140,300 140,000 267,000 1,075,000 (3)280,000 (5) 50,000 (6) 15,000 (7) 5,000 (12) 40,000 (3)100,000 81,500 (2) 1,600 (3) 70,000 (4) 7,000 573,100 1,622,300 490,000 105,200 400,000 4,800 200,000 348,300 74,000 1,622,300 ... reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small ($500,000 x 40) Reduction of cost of goods sold reported by. .. (55,000) Add: Prior year profits realized by Master Prior year profits realized by Crown Less: Unrealized profits for 20X5 by Master Unrealized profits for 20X5 by Crown Amortization of differential... computation: Operating income of Holiday Bakery Net income of Farmco Products Unrealized profits ($3.00 x 20,000 units) Realized net income Ownership held by Holiday Bakery Income assigned to controlling