Any transferred inventory retained at the end of the year is recorded at its transfer price which in many cases will include an unrealized gross profit 1.. For consolidation purposes, t
Trang 1CHAPTER 5 CONSOLIDATED FINANCIAL STATEMENTS -
INTRA-ENTITY ASSET TRANSACTIONS
Chapter Outline
I The transfer of assets between the companies forming a business combination is a
common practice The opportunity for such direct acquisition (especially of inventory) is often the underlying motive for the creation of the combination.
II Intra-entity inventory transfers
A The individual accounting systems of the two companies will record the transfer as a sale by one party and as a purchase by the other
B Because the transaction was not made with an outside, unrelated party, the sales and purchases balances created by the transfer must be eliminated in the
consolidation process (Entry Tl)
C Any transferred inventory retained at the end of the year is recorded at its transfer price which in (many cases) will include an unrealized gross profit
1 For consolidation purposes, this intra-entity gross profit must be deferred by eliminating the amount from the inventory account on the balance sheet and from the ending inventory figure within cost of goods sold (Entry G).
2 Because the effects of the transfer carry over into the subsequent fiscal period, the unrealized gross profit must also be removed a second time: from the beginning inventory component of cost of goods sold and from the beginning retained earnings balance (Entry *G).
a The retained earnings figure being adjusted is that of the original seller.
b If the equity method has been applied and the transfer was made downstream (by the parent), the beginning retained earnings account will be correct; therefore, in this one case, the adjustment is to the Investment in Subsidiary account.
3 The consolidation process is designed to shift the profit from the period of
transfer into the time period in which the goods are actually sold to unrelated parties or consumed
D Effect of deferral process on the valuation of a noncontrolling interest
1 Authoritative accounting literature (FASB ASC) permits but does not require deferral of unrealized profits on the valuation of noncontrolling interest balances
2 This textbook adjusts the noncontrolling interest balances but only if the sale was made upstream from subsidiary to parent Downstream sales are made by the
Trang 2III Intra-entity land transfers
A Any gain created by intra-entity land transfers is unrealized and will remain so until the land is sold to an outside party
B For each subsequent consolidation, the recorded value of the land account must be reduced to original cost The unrealized gain recorded by the seller must also be removed and deferred until the land is sold to an outsider.
1 In the year of transfer, an actual gain account exists within the accounting
records of the seller and must be removed.
2 In all later time periods, since the unrealized gain has become an element of the seller's beginning retained earnings balance, the reduction is made to this equity account.
3 If the land is ever sold to an outside party, the intra-entity gain is realized and has to be recognized within that time period.
IV Intra-entity transfer of depreciable assets
A As with other intra-entity transfers, any unrealized gross profit must be deferred for consolidation purposes to establish appropriate historical cost balances.
B However, the difference between the transfer-based accounting value and the historical cost of the asset will change each year because of the effects of
depreciation The amount of unrealized gain within retained earnings will also be reduced annually since excess depreciation expense is recognized (and closed into retained earnings) based on the inflated transfer price.
C Consequently, elimination of the unrealized gain (within retained earnings) and the reduction of the asset value to historical cost will differ from year to year.
D Also within the consolidation process, the recorded depreciation expense must be decreased every period to an amount appropriately based on the asset's original acquisition price.
Answers to Discussion Questions
Earnings Management
By selling goods to special purpose entities that it controlled but did not consolidate, did Enron overstate its earnings?
According to the Power’s Report (Report of Investigation by the Special Investigative
Committee of the Board of Directors of Enron Corp.—February 1, 2004)
These partnerships—Chewco, LJM1, and LJM2—were used by Enron
Management to enter into transactions that it could not, or would not, do with
unrelated commercial entities Many of the most significant transactions
apparently were designed to accomplish favorable financial statement results,
not to achieve bona fide economic objectives or to transfer risk (page 4)
Assuming Enron controlled LJM2, the transactions that produced the $67 million gain and the
$20.3 million agency fee were not arm’s length and thus did not provide a proper basis for
Trang 3What effect does consolidation have on the financial reporting for transactions with controlled entities?
In consolidation, all intra-entity profit would have been deferred until the goods were sold to an outside party Also the intra-entity note receivable and payable would have been eliminated in consolidation.
As noted by Bala Dahran in his February 6, Congressional Testimony
Despite their potential for economic and business benefits, the use of SPEs has
always raised the question of whether the sponsoring company has some other
accounting motivations, such as hiding of debt, hiding of poor-performing assets,
or earnings management Additionally, explosive growth in the use of SPEs led
to debates among managers, auditors and accounting standard setters as to
whether and when SPEs should be consolidated This is because the intended
accounting effects of SPEs can only be achieved if the SPEs are reported as
unconsolidated entities separate from the sponsoring entity.
FASB Activity on Variable Interest Entities (VIEs)
Fortunately the FASB’s ASC Topic 810 explains how to identify an SPE (a type of entity that is often a VIE) that is not subject to control through voting ownership interests, but is nonetheless controlled by another enterprise and therefore subject to consolidation The entity that controls the SPE is then required to include the assets, liabilities, and results of the activities of the SPE
in its consolidated financial statements.
What Price Should We Charge Ourselves?
Transfer pricing is actually a topic for a managerial accounting discussion Students, though, need to be aware that managerial and financial accounting do overlap at times In this
illustration, the price set by company officials for this component will affect the specific
consolidation procedures needed in the preparation of financial statements for external
reporting purposes.
Since Slagle owns 100 percent of Harrison's common stock, consolidated net income will not
be altered by the transfer pricing decision All intra-entity transactions as well as unrealized
profits will be removed entirely However, because the sales are upstream, if a noncontrolling interest had been present, the portion of the subsidiary's income attributed to these outside owners would be influenced by the markup Both the noncontrolling interest figure on the balance sheet and on the income statement are impacted by the amount of profits that remain unrealized when transactions are from subsidiary to parent.
To the accountant, the easiest approach is to set the transfer price at the seller's cost ($70.00 in this case) No intra-entity profits are created and the consolidation process is less complicated However, as indicated in the narrative, that price may penalize the seller since no profits are recognized by that profit center In addition, the buyer will then show artificially inflated income
Trang 4Answers to Questions
1 One reason for the significant volume and frequency of intra-entity transfers is that many
business combinations are specifically organized so that the companies can provide products for each other This design is intended to benefit the business combination as a whole because of the economies provided by vertical integration In effect, more profit can often be generated by the combination if one member is able to buy from another rather than from an outside party.
2 The sales between Barker and Walden totaled $100,000 Regardless of the ownership
percentage or the gross profit rate, the $100,000 was simply an intra-entity asset
transfer Thus, within the consolidation process, the entire $100,000 should be
eliminated from both the Sales and the Purchases (Inventory) accounts.
3 Sales price per unit ($900,000 ÷ 3,000 units) $ 300
Number of units in Safeco’s ending inventory × 500
Gross profit rate (0.6 ÷ 1.6) .375
4 In intra-entity transactions, a transfer price is often established that exceeds the cost of
the inventory Hence, the seller is recording a gross profit on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset
is consumed or sold to an outside party Any unrealized gross profit on merchandise still held by the buyer must be deferred whenever consolidated financial statements are prepared For the year of transfer, this consolidation procedure is carried out by
removing the unrealized gross profit from the inventory account on the balance sheet and from the ending inventory balance within cost of goods sold In the year following the transfer (if the goods are resold or consumed), the realized gross profit must be recognized within the consolidation process Reductions are made on the worksheet to the beginning inventory component of cost of goods sold and to the beginning retained earnings balance of the original seller The gross profit is thus taken out of last year’s earnings (retained earnings) and recognized in the current year through the reduction of cost of goods sold If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year is made to the Investment in Subsidiary account rather than to retained earnings.
5 On the individual financial records of James, Inc., a gross profit is recorded in the year
of transfer From the viewpoint of the business combination, this gross profit is actually earned in the period in which the products are sold or consumed by Matthews Co An initial consolidation entry must be made in the year of transfer to defer any gross profit that remains unrealized A second entry must be made in the following time period to allow the gross profit to be recognized in the year of its ultimate realization.
6 GAAP allows discretion regarding the effect of unrealized intra-entity profits and
noncontrolling interest values This textbook reasons that unrealized profits relate to the seller and to the computation of the seller's income Therefore, any unrealized profits created by upstream transfers (from subsidiary to parent) are attributed to the
subsidiary The effects resulting from the deferral and eventual recognition of these
Trang 57 Consolidated financial statements are largely unchanged across downstream versus
upstream transfers Sales and purchases (Inventory) balances created by the
transactions are eliminated in total Any unrealized gross profits remaining at the end of
a fiscal period get deferred until ultimately earned through sale or consumption of the assets.
The direction of intra-entity transfers (upstream versus downstream) does have one effect on consolidated financial statements In computing noncontrolling interest
balances (if present), the deferral of unrealized gross profits on upstream sales is taken
into account Downstream sales, however, are attributed to the parent and are viewed
as having no impact on the outside interest.
8 The computation of this noncontrolling interest balance is dependent on the direction of
the intra-entity transactions that is not indicated in this question If the unrealized gross profits were created by downstream sales from King to Pawn, they relate only to King The noncontrolling interest in the subsidiary's net income is not affected and would be
$11,000 ($110,000 × 10%) In contrast, if the transfers were upstream from Pawn to King, the deferral and recognition of the profits are attributed to Pawn Pawn's "realized" income would be $80,000 and the noncontrolling interest's share of the subsidiary's income is reported as $8,000:
Pawn's reported income $110,000
Recognition of prior year unrealized gross profit 30,000
Deferral of current year unrealized gross profit (60,000)
Pawn's realized income $80,000
Outside ownership percentage 10%
Noncontrolling interest in subsidiary's income $ 8,000
9 The deferral and subsequent recognition of intra-entity profits are allocated to the
noncontrolling interest in the same periods as the parent When one affiliate sells to another affiliate, ownership does not change and therefore the underlying profit is deferred When the purchasing affiliate subsequently sells the inventory to an entity outside the affiliated group, ownership changes, and the profit may be recognized Intra- entity profits are not really eliminated, but simply deferred until a sale to an outsider takes place.
10 Several differences can be cited that exist between the consolidated process applicable
to inventory transfers and that which is appropriate for land transfers The total entity Sales balance is offset against Purchases (Inventory) when inventory is
intra-transferred but no corresponding entry is needed when land is involved Furthermore, in the year of the sale, ending unrealized inventory gross profits are deferred through an adjustment to cost of goods sold, but a specific gain or loss account exists (and must be removed) when land has been sold Finally, unrealized inventory gross profits are usually expected to be realized in the year following the transfer This effect is mirrored
in that period by reduction of the beginning inventory figure (within cost of goods sold) For land transfers, however, the unrealized gain or loss must be repeatedly deferred in each fiscal period, through retained earnings, for as long as the land continues to be
Trang 611 As long as the land is held by the parent, its recorded value must be reduced to
historical cost within each consolidated set of financial statements In the year of the original transfer, the asset reduction is offset against the subsidiary's recorded gain For all subsequent years in which the property is held, the credit to the Land account is made against the beginning retained earnings balance of the subsidiary (since the unrealized gain will have been closed into that account).
According to this question, the land is eventually sold to an outside party The intra-entity gain (which has been deferred in each of the previous years) is realized by the sale and should be recognized in the consolidated statements of this later period.
Because the transfer was upstream from subsidiary to parent, the above consolidated entries will also affect any noncontrolling interest balances being reported Because of the deferral of the intra-entity gain, the realized income balances applicable to the subsidiary will be less than the reported values In the year of resale, however, the realized income for consolidation purposes is higher than reported All noncontrolling interest totals are computed on the realized balances rather than the reported figures.
12 Depreciable assets are often transferred between the members of a business
combination at amounts in excess of book value The buyer will then compute
depreciation expense based on this inflated transfer price rather than on an historical cost basis From the perspective of the business combination, depreciation should be calculated solely on historical cost figures Thus, within the consolidation process for each period, adjustment of the depreciation (that is recorded by the buyer) is necessary
to reduce the expense to a cost-based figure.
13 From the viewpoint of the business combination, an unrealized gain has been created
by the intra-entity transfer and must be deferred in the preparation of consolidated financial statements This unrealized gain is closed by the seller into retained earnings necessitating subsequent reductions to that account In the individual financial records, however, another income effect is created which gradually reduces the overstatement of retained earnings each period The asset will be depreciated by the buyer based on the inflated transfer price The resulting expense will be higher than the amount appropriate
to the historical cost of the item Because this excess depreciation is closed into
retained earnings annually, the initial overstatement due to the gain is offset by the acculmulating overstatement ofdepreciation expense Therefore, the overstatement of the equity account is gradually reduced to a zero balance over the life of the asset.
Answers to Problems
1 D
2 B Inventory remaining $100,000 × 50% = $50,000 unrealized gross profit
(based on Lee's gross profit rate as the seller) $50,000 × 40% = $20,000 The ownership percentage has no impact on this computation.
3 A
Trang 74 C UNREALIZED GROSS PROFIT, 12/31/12
Intra-entity gross profit ($100,000 – $75,000) $25,000 Inventory remaining at year's end 16% Unrealized intra-entity gross profit, 12/31/12 $4,000 UNREALIZED GROSS PROFIT, 12/31/13
Intra-entity gross profit ($120,000 – $96,000) $24,000 Inventory remaining at year's end 35% Unrealized intra-entity gross profit, 12/31/13 $8,400 CONSOLIDATED COST OF GOODS SOLD
Parent balance $380,000 Subsidiary balance 210,000 Remove intra-entity transfer (120,000) Recognize 2012 deferred gross profit (4,000) Defer 2013 unrealized gross profit 8,400 Cost of goods sold $474,400
5 A Intra-entity sales and purchases of $100,000 must be eliminated
Additionally, an unrealized gross profit of $10,000 must be removed from ending inventory based on a gross profit rate of 25 percent ($200,000 gross profit ÷ $800,000 sales) which is multiplied by the $40,000 ending balance
This deferral increases cost of goods sold because ending inventory is a
negative component of that computation Thus, cost of goods sold for consolidation purposes is $690,000 ($600,000 + $180,000 – $100,000 +
$10,000).
6 C The only change here from Problem 5 is the gross profit rate which would
now be 40 percent ($120,000 gross profit ÷ $300,000 sales) Thus, the
unrealized gross profit to be deferred is $16,000 ($40,000 × 40%)
Consequently, consolidated cost of goods sold is $696,000 ($600,000 +
$180,000 – $100,000 + $16,000).
7 B UNREALIZED GROSS PROFIT, 12/31/12
Ending inventory $40,000 Gross profit rate ($33,000 ÷ $110,000) 30% Unrealized intra-entity gross profit, 12/31/12 $12,000 UNREALIZED GROSS PROFIT, 12/31/13
Ending inventory $50,000
Trang 8NONCONTROLLING INTEREST IN SUBSIDIARY'S INCOME
Reported net income for 2013 $90,000 Realized gross profit deferred in 2012 12,000 Deferral of 2013 unrealized gross profit (20,000) Realized income of subsidiary $82,000 Outside ownership 10 % Noncontrolling interest $8,200
8 A Individual records after transfer:
12/31/12
Machinery = $40,000
Gain = $10,000
Depreciation expense $8,000 ($40,000 ÷ 5 years)
Net effect on income = $2,000 ($10,000 – $8,000)
Adjustments for consolidation purposes:
2012: $2,000 income is reduced to a $6,000 expense (income is reduced
Annual depreciation based on cost ($300,000 ÷ 10 years) $30,000
Trang 9Excess depreciation $5,000
ADJUSTMENTS TO CONSOLIDATED NET INCOME
Defer unrealized gain $(40,000) Remove excess depreciation 5,000 Decrease to consolidated net income $(35,000)
10 D Add the two book values and remove $100,000 intra-entity transfers.
11 C Intra-entity gross profit ($100,000 - $80,000) $20,000
Inventory remaining at year's end 60% Unrealized intra-entity gross profit $12,000
CONSOLIDATED COST OF GOODS SOLD
Parent balance $140,000 Subsidiary balance 80,000 Remove intra-entity transfer (100,000) Defer unrealized gross profit (above) 12,000 Cost of goods sold $132,000
12 C Consideration transferred $260,000
Noncontrolling interest fair value 65,000
Suarez total fair value $325,000
Book value of net assets (250,000)
Annual Excess
Equipment 25,000 5 years $5,000 Secret Formulas $50,000 20 years 2,500 Total -0- $7,500 Consolidated expenses = $37,500 (add the two book values and include
current year amortization expense)
Excess fair value allocation (20%× $75,000) 15,000
20% share of Suarez net income
adjusted for amortization (20% × [110,000 – 7,500]) 20,500
Trang 1015 B Add the two book values less the ending unrealized gross profit of $12,000.
Combined pre-consolidation inventory balances $260,000 Intra-entity gross profit ($100,000 – $80,000) $20,000
Inventory remaining at year's end 60%
Unrealized intra-entity gross profit, 12/31 12,000 Consolidated total for inventory $248,000
16 (15 Minutes) (Determine selected consolidated balances; includes
inventory transfers and an outside ownership.)
Customer list amortization = $65,000 ÷ 5 years = $13,000 per year
Intra-entity gross profit ($160,000 – $120,000) $40,000 Inventory remaining at year's end 20% Unrealized intra-entity gross profit, 12/31 $8,000 CONSOLIDATED TOTALS
Inventory = $592,000 (add the two book values and subtract the ending unrealized gross profit of $8,000)
Sales = $1,240,000 (add the two book values and subtract the $160,000 intra-entity transfer)
Cost of goods sold = $548,000 (add the two book values and subtract the intra-entity transfer and add [to defer] ending unrealized gross profit)
Operating expenses = $443,000 (add the two book values and the
amortization expense for the period)
Noncontrolling interest in subsidiary's net income = $8,700 (30 percent
of the reported income after subtracting 13,000 excess fair value
amortization and deferring $8,000 ending unrealized gross profit) Gross profit is included in this computation because the transfer was
upstream from Sanchez to Preston.
17 (60 minutes) (Downstream intra-entity profit adjustments when parent uses
equity method and a noncontrolling interest is present)
Consideration transferred by Corgan $980,000
Smashing’s acquisition-date fair value 1,225,000
Trang 112012 Ending Inventory Profit Deferral
Cost = $100,000 ÷ 1.6 = $62,500
Intra-entity gross profit = $100,000 – $62,500 = $37,500
Ending inventory gross profit = $37,500 × 40% = $15,000
2013 Ending Inventory Profit Deferral
Cost = $120,000 ÷ 1.6 = $75,000
Intra-entity gross profit = $120,000 – $75,000 = $45,000
Ending inventory gross profit = $45,000 × 40% = $18,000
a Investment account:
Covenant amortization (13,750 × 80%) (11,000) Ending inventory profit deferral (100%) (15,000)
Covenants amortization (13,750 × 80%) (11,000) Beginning inventory profit recognition 15,000 Ending inventory profit deferral (100%) (18,000)
Trang 1218 (40 Minutes) (Series of independent questions concerning various aspects
of the consolidation process when intra-entity transfers have occurred)
a Placid Lake's 2013 net income before effect from Scenic $300,000 Scenic's reported net income 2013 110,000 Amortization expense (given) (5,000) Realization of 2012 intra-entity gross profit (see below) 7,200 Deferral of 2013 intra-entity gross profit (see below) (16,200)
Consolidated net income $396,000
2012 Unrealized gross profit to be recognized in 2013:
Intra-entity gross profit on transfers ($90,000 – $54,000) $36,000 Inventory retained at end of 2012 20% Unrealized gross profit—12/31/12 $ 7,200
2013 Unrealized gross profit deferred:
Intra-entity gross profit on transfers ($120,000 – $66,000) $54,000 Inventory retained at end of 2013 30% Unrealized gross profit—12/31/13 $16,200
b Noncontrolling interest's share of Scenic's income (upstream sales):
Scenic's reported net income 2013 $110,000 Amortization of excess fair value to intangibles (5,000)
2012 gross profit realized in 2013 (upstream sales) 7,200
Trang 13Scenic's realized income $96,000 Noncontrolling interest ownership 20%
Noncontrolling interest's share of Scenic's net income $19,200 Placid Lake’s net income from own operations $300,000 Placid Lake’s share of Scenic’s adjusted NI (80%× $96,000) 76,800 Placid Lake’s share of consolidated net income $376,800
c Noncontrolling interest's share of Scenic's net income (downstream sales):
Downstream transfers do not affect the noncontrolling interest.
Scenic's reported net income 2013 after amortization $105,000 Noncontrolling interest ownership 20% Noncontrolling interest share of Scenic net income $21,000 Placid Lake’s net income from own operations $300,000 Placid Lake’s share of Scenic’s adjusted NI (80% × $105,000) 84,000 Realization of 2012 intra-entity gross profit (see part a.) 7,200 Deferral of 2013 intra-entity gross profit (see part a.) (16,200) Placid Lake’s share of consolidated net income $375,000
18 (continued)
d Inventory—Placid Lake book value $140,000 Inventory—Scenic book value 90,000 Unrealized gross profit, 12/31/13 (see part a) (16,200)
Consolidated inventory $213,800 (Direction of transfer has no impact here)
e Land—Placid Lake’s book value $600,000 Land—Scenic's book value 200,000 Elimination of unrealized intra-entity gain on land (20,000) Consolidated land balance $780,000
f The intra-entity transfer was upstream from Scenic to Placid Lake
Because the transfer occurred in 2012, beginning retained earnings of the seller for 2013 contains the remaining portion of the unrealized gain.
Transfer pricing figures:
Trang 14To change beginning of year figures to historical cost by removing impact
of 2012 transactions Retained earnings reduction removes $4,000 income effect (above) and replaces it with $12,000 depreciation expense for 2012.
Because the sale occurred in 2012, the only effect in 2013 relates to
depreciation expense The expense based on the transfer price is $4,000 higher than the amount based on the historical cost As an upstream
transfer, this adjustment affects Scenic and the noncontrolling interest computations.
Transfer price depreciation: $80,000 ÷ 5 yrs = $16,000
Historical cost depreciation (based on book value): $60,000 ÷ 5 yrs =
$12,000
Trang 15Noncontrolling Interest in Scenic's Net Income
Scenic's reported net income less excess amortization $105,000 Reduction of depreciation expense to historical cost figure 4,000 Scenic's realized income $109,000 Outside ownership percentage 20% Noncontrolling interest in Scenic’s net income $21,800
19 (20 Minutes) (Consolidation entries and noncontrolling interest balances
affected by inventory transfers.)
a Conversion from Markup on Cost to Gross Profit Rate
Markup (given as a percentage of cost) 25 % Convert to gross profit rate [.25 ÷ (1.00 + 0.25)] 20 %
Noncontrolling Interest's Share of Subsidiary’s Net Income
Reported net income of subsidiary—2013 $160,000
2012 intra-entity gross profit realized in 2013
($250,000 × 30% × 20% ) 15,000
2013 intra-entity gross profit deferred
($300,000 × 30% × 20% ) (18,000) Realized income of subsidiary—2013 $157,000 Outside ownership 40% Noncontrolling interest's share of subsidiary's net income $ 62,800
b Entry *G
Retained Earnings, Jan 1 (subsidiary) 15,000 Cost of Goods Sold 15,000
To remove intra-entity gross profit from previous year so that it can
be recognized in current year.
Entry Tl
Sales 300,000 Cost of Goods Sold 300,000
To eliminate intra-entity inventory sale and purchase.
Trang 1620 (30 Minutes) (Compute selected balances based on three different
intra-entity asset transfer scenarios)
a Consolidated Cost of Goods Sold
Penguin’s cost of goods sold $290,000 Snow’s cost of goods sold 197,000 Elimination of 2013 intra-entity transfers (110,000) Reduction of beginning Inventory because of
2012 unrealized gross profit ($28,000 ÷ 1.4 = $20,000 cost; $28,000 transfer price less $20,000
cost = $8,000 unrealized gross profit) (8,000)
Reduction of ending inventory because of
2013 unrealized gross profit ($42,000 ÷ 1.4 = $30,000 cost; $42,000 transfer price less $30,000
cost = $12,000 unrealized gross profit) 12,000 Consolidated cost of goods sold $381,000
Noncontrolling Interest in Subsidiary’s Net Income
Because all intra-entity sales were downstream, the deferrals do not affect Snow Thus, the noncontrolling interest is 20% of the $58,000 (revenues minus cost of goods sold and expenses) reported net income
or $11,600.
b Consolidated Cost of Goods Sold
Penguin book value $290,000 Snow book value 197,000 Elimination of 2013 intra-entity transfers (80,000) Reduction of beginning inventory because of
2012 unrealized gross profit ($21,000 ÷ 1.4 = $15,000 cost; $21,000 transfer price less $15,000
cost = $6,000 unrealized gross profit) (6,000) Reduction of ending inventory because of
2013 unrealized gross profit ($35,000 ÷ 1.4 = $25,000 cost; $35,000 transfer price less $25,000
cost = $10,000 unrealized gross profit) 10,000 Consolidated cost of goods sold $411,000
Trang 17Noncontrolling interest in subsidiary’s net income
Since all intra-entity sales are upstream, the effect on Snow's net
income must be reflected in the noncontrolling interest computation: Snow reported net income $58,000
2012 unrealized gross profit realized in 2013 (above) 6,000
2013 unrealized gross profit to be realized in 2014 (above) (10,000) Snow realized income $54,000 Outside ownership percentage 20% Noncontrolling interest in Snow's net income $10,800
c Consolidated buildings (net)
Penguin’s buildings $358,000 Snow's buildings 157,000 Remove write-up created by transfer
($80,000 – $50,000) $(30,000) Remove excess depreciation created by transfer
($30,000 unrealized gain over 5 year life) (2 years) 12,000 (18,000) Consolidated buildings (net) $497,000
Consolidated expenses
Penguin’s book value $150,000 Snow's book value 105,000 Remove excess depreciation on transferred building
($30,000) unrealized gain ÷ 5 years) (6,000) Consolidated expenses $249,000
Noncontrolling interest in subsidiary’s net income
Trang 18Because the transfer was made downstream, it has no effect on the noncontrolling interest Thus, Snow's reported net income ($58,000 computed as revenues minus cost of goods sold and expenses) is used for this computation The 20 percent outside ownership will be allotted net income of $11,600 (20% × $58,000).
21 (15 Minutes) (Prepare consolidated income statement with a wholly-owned
subsidiary, includes transfers)
a In this business combination, the direction of the intra-entity transfers (either upstream or downstream) is not important to the consolidated totals Because Akron controls all of Toledo's outstanding stock, no noncontrolling interest figures are computed If present, noncontrolling interest balances are affected by upstream sales but not by
downstream.
For purposes of a 2013 consolidation, the following worksheet entries
would affect income statement balances:
Entry *G
Retained Earnings, 1/1/13 (seller)* 17,500
To remove 2012 unrealized gross profit from beginning account balances Gross profit is the 25% gross profit rate ($80,000 ÷
$320,000) multiplied by remaining inventory ($70,000).
*or Investment in Toledo if Akron uses the equity method
To eliminate intra-entity transfers of inventory during 2013.
Trang 19b By including the impact of each of these four consolidation entries, the following income statement can be created:
Akron, Inc and Consolidated Subsidiary
Income Statement Year Ending December 31, 2013 Sales ($1,100,000 + 600,000 – 320,000) $1,380,000 Cost of goods sold
($500,000 + 400,000 – 17,500 – 320,000 + 12,500) 575,000 Gross profit 805,000 Operating expenses ($400,000 + 220,000 + 15,000) 635,000 Consolidated net income $170,000
22 (60 minutes) (Downstream intra-entity asset transfer when parent uses
equity method and when a noncontrolling interest is present)
a Investment account:
NetSpeed’s reported net income for 2012 $80,000
Quickport's share of Netspeed’s net income $61,200
Netspeed’s reported net income for 2013 $115,000
Quickport's share of Netspeed net income $92,700
Quickport’s share of Netspeed’s dividends, 2013 (90%) (7,200)
Trang 21CONSOLIDATED REPORTING BASED ON HISTORICAL COST
12/31/11 Equipment = $130,000
Depreciation expense = $10,000 ($50,000 ÷ 5 years) Accumulated depreciation = $90,000 ($80,000 + $10,000) 12/31/12 Depreciation expense = $10,000
Accumulated depreciation = $100,000 ($90,000 + $10,000) 12/31/13 Effect on retained earnings, 1/1/13 = ($20,000) (two years
depreciation)
Depreciation expense = $10,000 Accumulated depreciation = $110,000 ($100,000 + $10,000) Entry *TA Retained Earnings, 1/1/13 (Padre) 27,000
Equipment ($130,000 – $95,000) 35,000 Accumulated Depreciation ($100,000 – $38,000) 62,000
To adjust beginning-of-year amounts to balances for consolidated entity Retained Earnings adjustment reduces $7,000 credit balance
to $20,000 debit balance as computed above.
Entry ED Accumulated Depreciation 9,000
Depreciation Expense 9,000
To remove excess depreciation for current year to reflect an allocation of the historical cost ($10,000) rather than the transfer price ($19,000).
24 (20 Minutes) (Determine consolidated net income when an intra-entity
transfer of equipment occurs Includes an outside ownership)
Trang 22a Income—Slaughter $220,000 Income—Bennett 90,000 Excess amortization for unpatented technology (8,000) Remove unrealized gain on equipment (50,000) ($120,000 – $70,000)
Remove excess depreciation created by
inflated transfer price ($50,000 ÷ 5) 10,000 Consolidated net income $262,000
b Income calculated in (part a.) $262,000 Noncontrolling interest in Bennett's net income
Income—Bennett $90,000 Excess amortization (8,000) Adjusted net income $82,000 Noncontrolling interest in Bennett’s net income (10%) (8,200 ) Consolidated net income to parent company $253,800
c Income calculated in (part a.) $262,000 NCI in Bennett's net income (see Schedule 1) (4,200) Consolidated net income to parent company $257,800
Schedule 1: Noncontrolling Interest in Bennett's Net Income (includes upstream transfer)
Reported net income of subsidiary $90,000 Excess amortization (8,000) Defer unrealized gain on equipment transfer (50,000) Eliminate excess depreciation ($50,000 ÷ 5) 10,000 Bennett's realized net income $42,000 Outside ownership 10% Noncontrolling interest in subsidiary's net income $ 4,200
d Net income 2014—Slaughter 240,000 Net income 2014—Bennett 100,000 Excess amortization (8,000) Eliminate excess depreciation stemming from transfer
($50,000 ÷ 5) (year after transfer) 10,000 Consolidated net income $342,000
25 (35 minutes) (Compute consolidated totals with transfers of both inventory
and a building.)
Trang 23Franchises $80,000 ÷ 20 years = $4,000 per year
Annual excess amortizations $10,000
Unrealized Gross Profit—Inventory, 1/1/13:
Gross profit ($70,000 – $49,000) $21,000 Gross profit rate ($21,000 ÷ $70,000) 30%
Remaining inventory $30,000 Gross profit rate 30% Unrealized gross profit, 1/1/13 $9,000
Unrealized Gross Profit—Inventory, 12/31/13:
Gross profit ($100,000 – $50,000) $50,000 Gross profit rate ($50,000 ÷ $100,000) 50% Remaining inventory $40,000 Gross profit rate 50% Unrealized gross profit, 12/31/13 $20,000
Impact of intra-entity Building Transfer:
12/31/12—Transfer price figures
Transfer price $50,000 Gain on transfer ($50,000 – $30,000) 20,000 Depreciation expense ($50,000 ÷ 5 years) 10,000 Accumulated depreciation 10,000 12/31/13—Transfer price figures
Depreciation expense 10,000 Accumulated depreciation 20,000 12/31/12—Historical cost figures
Historical cost $70,000 Depreciation expense ($30,000 book value ÷ 5 years) 6,000 Accumulated depreciation ($40,000 + $6,000) 46,000 12/31/13—Historical cost figures
Depreciation expense 6,000 Accumulated depreciation 52,000
25 (continued)
CONSOLIDATED BALANCES
Trang 24 Cost of Goods Sold = $571,000 (add the two book values and subtract
$100,000 in intra-entity purchases Subtract $9,000 because of the previous year unrealized gross profit and add $20,000 to defer the current year
unrealized gross profit.)
Operating Expenses = $206,000 (add the two book values and include the
$10,000 excess amortization expenses but remove the $4,000 in excess
depreciation expense [$10,000 – $6,000] created by building transfer)
Investment Income = $0 (the intra-entity balance is removed so that the
individual revenue and expense accounts of the subsidiary can be shown)
Inventory = $280,000 (add the two book values and subtract the $20,000
ending unrealized gross profit)
Equipment (net) = $292,000 (add the two book values and include the $60,000
allocation from the acquisition-date fair value less three years of excess
amortizations)
Buildings (net) = $528,000 (add the two book values and subtract the $20,000
unrealized gain on the transfer after two years of excess depreciation [$4,000 per year])
26 (35 Minutes) (Prepare consolidation entries for a business combination
with intra-entity inventory and equipment transfers; includes an outside ownership.)
Entry *TA
Equipment 4,000 Investment in Sledge 2,400 Accumulated Depreciation 6,400
To adjust the equipment balance to original cost ($16,000) and to adjust accumulated depreciation to the correct consolidated January
1, 2013 balance ($7,000 less $600 extra depreciation in 2012) The net reduction to the reported equipment balance (cost less A.D = $2,400) equals the amount of unrealized gain at January 1, 2013 The $2,400 debit to the Investment account appropriately transfers the reduction
in the net book value of the transferred equipment to the subsidiary’s
Trang 25extra depreciation ($3,000 gain ÷ 5 years) through application of the equity method Entry ED (below) completes the adjustment of A.D and depreciation expense to their correct December 31, 2013 balances.
Entry S
Common Stock (Sledge) 120,000 Retained Earnings, 1/1/13 (adjusted) (Sledge) 258,000 Investment in Sledge (80%) 302,400 Noncontrolling Interest in Sledge, 1/1/13 (20%) 75,600
To eliminate subsidiary's stockholders' equity accounts (after adjustment for Entry *G) and recognize noncontrolling interest balance as of January 1, 2013.
Entry A
Contracts ($60,000 – $3,000 for 2 years) 54,000 Buildings ($20,000 – $2,000 for 2 years) 16,000 Investment in Sledge (80%) 56,000 Noncontrolling Interest in Sledge, 1/1/13 (20%) 14,000
To recognize acquisition-date fair value allocations adjusted for 2 years of amortization (2011 and 2012).
Entry E
Depreciation Expense 2,000 Amortization Expense 3,000 Contracts ($60,000 ÷ 20 years) 3,000 Buildings ($20,000 ÷ 10 years) 2,000
To record excess amortizations for 2013 based on allocations and useful lives.
Trang 26Entry TI
Sales 20,000 Cost of Goods Sold 20,000
To eliminate intra-entity inventory transfers during 2013.
Entry ED
Accumulated Depreciation 600 Depreciation Expense 600
To eliminate excess depreciation on equipment recorded at transfer price Expense is being reduced from the recorded amount ($2,400
or $12,000 ÷ 5) to historical cost figure ($1,800 or $9,000 ÷ 5).
26 (continued)
b Noncontrolling Interest in the Subsidiary's Net Income 2013
Revenues $130,000 Cost of goods sold (70,000) Other expenses (40,000) Excess acquisition-date fair value amortization (5,000 ) Net Income adjusted for amortization $15,000 Gross profit on 2012 upstream inventory transfer
realized in 2013 (Entry *G) 2,000 Gross profit on 2013 upstream inventory transfer
deferred until 2014 (Entry G) (4,500) Realized income of subsidiary—2013 $12,500 Outside ownership 20% Noncontrolling interest in subsidiary's net income $2,500
Trang 2727 (65 Minutes) (Determine consolidation totals after answering a series of
questions about combination and intra-entity inventory transfers)
a Consideration transferred $342,000
Noncontrolling interest fair value 38,000
Subsidiary fair value at acquisition-date 380,000
Book value (326,000)
Fair value in excess of book value $54,000 Annual Excess
To building 18,000 9 yrs $2,000
To patented technology 36,000 6 yrs 6,000 Totals -0- $8,000
b Because Brey sold inventory to Petino, the transfers are upstream.
c Gross profit on 2012 transfers ($135,000 – $81,000) $54,000 Gross profit percentage ($54,000 ÷ $135,000) 40% Inventory remaining, 12/31/12 $37,500 Gross profit percentage 40% Unrealized gross profit, January 1, 2013 $15,000
d Gross profit on 2013 transfers ($160,000 – $92,800) $67,200 Gross profit percentage ($67,200 ÷ $160,000) 42% Inventory remaining, 12/31/13 $50,000 Gross profit percentage 42% Unrealized gross profit, December 31, 2013 $21,000
Trang 28f Brey’s adjusted income (see e.) $76,000 Outside ownership 10% Noncontrolling interest in subsidiary's net income $7,600
g Investment in Brey (consideration transferred) $342,000 Net Income of Brey
Reported 2011 $64,000
2012 80,000
2013 90,000 Total 234,000 Unrealized gross profit, 12/31/13(see d.) (21,000) Realized income 2011-2013 213,000 Petino’s ownership 90% 191,700
Dividends paid by Brey
2011 $19,000
2012 23,000
2013 27,000 Total 69,000 Pitino's ownership 90% (62,100) Investment in Brey, 12/31/13 $450,000
h Entry S
Common Stock (Brey) 150,000
Retained Earnings, 1/1/13 (Brey) (reduced by
1/1/13 unrealized gross profit) 263,000
27 (continued) part i.
Sales Revenues = $1,068,000 (total less $160,000 intra-entity sales)
Cost of Goods Sold = $570,000 (add book values less $160,000 in
intra-entity purchases Also, adjust for 2012 unrealized gross profit [subtract
$15,000] and 2013 unrealized gross profit [add $21,000])
Expenses = $260,400 (add book values with $8,000 amortization for excess
fair value allocations)