Chap_007

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

CHAPTER 7

INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS

ANSWERS TO QUESTIONS

Q7-1 Profits on intercorporate sales generally are considered to be realized when the affiliate that has purchased the item sells it to a nonaffiliate. For depreciable or amortizable items that are used by the affiliate in its operations, profits are considered to be realized as the purchaser depreciates or amortizes the asset.

Q7-2 An upstream sale occurs when a subsidiary sells an item to the parent company. If the asset is not resold before the end of the period, the parent is the company holding the asset and any unrealized profits are recorded on the books of the subsidiary.

Q7-3 If the purchaser records the services received as an expense, both revenues and expenses will be overstated in the consolidated income statement in the period in which the intercorporate services are provided. In the event the services are capitalized by the purchaser, the cost of the asset will be overstated, depreciation expense and accumulated depreciation will be overstated if the services are assigned to a depreciable asset, and service revenue will be overstated.

Q7-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net income of the seller.

(b) All unrealized profit on current-period intercorporate sales must be excluded from consolidated net income until realized through resale to a nonaffiliate.

Q7-5 Profits on intercompany sales are included in consolidated net income in the period in which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one of the companies at the start of the period and the item is sold to a nonaffiliate during the current period, the intercompany profit is included in the computation of consolidated net income for the current period.

Q7-6 The profits continue to be unrealized in this case and therefore must be eliminated from both the beginning and ending asset and retained earnings balances when consolidated statements are prepared. There should be no income statement effect for the current period.

Q7-7 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is not resold before the end of the period, the subsidiary is the company holding the asset at year-end and any unrealized profits are recorded on the books of the parent company.

Q7-8 The entire balance of unrealized profits is eliminated in all cases. While the direction of the sale will affect the allocation of unrealized profits between companies, it does not change the total amount of profit eliminated.

Q7-9 Consolidated net income is reduced by the amount of unrealized profits assigned to the shareholders of the parent company. When a downstream sale occurs, all the profit is on the parent's books and consolidated net income is reduced by the full amount of any unrealized profit. On the other hand, when an upstream sale occurs, all the intercorporate profit is recorded on the books of the subsidiary and the amount of income assigned to both the parent company shareholders and the noncontrolling shareholders is reduced by a proportionate amount of any unrealized profit.

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Q7-10 The amount of intercorporate profit realized in the current period from prior years' sales to the parent is added to the reported net income of the subsidiary in computing income assigned to the noncontrolling interest.

Q7-11 Income assigned to noncontrolling interest for the current period will be less than a proportionate share of the reported net income of the subsidiary. In determining the amount of income to be assigned to the noncontrolling interest in the consolidated income statement, the net income reported by the subsidiary must be adjusted to exclude any unrealized gain recorded during the period on the sale of depreciable assets to the parent. On the other hand, if an unrealized loss had been recorded, the basis used in assigning income to the noncontrolling interest would be greater than the reported net income of the subsidiary. Such adjustments must be made to assure that the income assigned to noncontrolling interest is based on the contribution of the subsidiary to consolidated net income rather than the amount the subsidiary may have reported as net income.

Q7-12 All other factors being equal, the income assigned to noncontrolling interest will be larger if the sale occurs at the start of the current period. Some part of the gain will be considered realized in the current period as the parent depreciates the asset if the sale occurs before year-end. None of the gain will be considered realized in the period of transfer if the sale occurs at year-end.

Q7-13 As in all other cases, income from the subsidiary recorded on the parent's books must be eliminated in preparing the consolidated income statement and an appropriate amount of subsidiary net income must be assigned to the noncontrolling interest if the parent owns less than 100 percent of the subsidiary's stock. The gain recorded on the parent's books also must be eliminated.

Q7-14 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of the consolidated entity when the subsidiary pays the parent more than book value for the asset at the start of the period. As a result, an eliminating entry is needed to reduce depreciation expense and accumulated depreciation by the amount of excess depreciation recorded during 20X3.

Q7-15 Following an intercorporate sale of a depreciable asset, the eliminating entries should adjust the balance in the asset account to reflect the original purchase price to the first owner and accumulated depreciation should be adjusted to reflect the balance that would be reported if the asset were still held by the first owner. In the case of an intercorporate sale of an intangible asset, only the unamortized balance normally is reported and an eliminating entry is needed to adjust the carrying value to that which would be reported if the asset were still held by the first owner.

Q7-16 Profit on an intercorporate sale of land is considered realized at the time the purchaser sells the land to a nonaffiliate. Profit on equipment normally is considered realized as the asset is used and depreciated on the books of the purchaser. Equipment typically is considered to be used up in the production process and therefore is charged to expense over its remaining economic life, while land is not.

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Q7-17 A portion of the profit is considered realized each period as the asset is depreciated by the purchaser. Thus, the net amount considered unrealized decreases each period and a smaller debit to beginning retained earnings is needed.

Q7-18A The balance in the investment account will depend on which method the parent uses to account for its investment in the subsidiary. If the parent uses (a) the cost method or (b) the modified equity method, no adjustments are made on the parent company's books for unrealized intercompany profits and the balance in the investment account will be the same as if there were no unrealized profits. If the parent uses (c) the fully-adjusted equity method, the balance in the investment account will be reduced by the full amount of the unrealized profit when the profit is on the parent's books and by a proportionate share of the unrealized profit when it is on the subsidiary's books.

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SOLUTIONS TO CASES

C7-1 Correction of Elimination Procedures

MEMO

To: ControllerPlug Corporation

From: , CPA

Re: Elimination of Intercompany Profit on Equipment

This memo is in response to our review of the elimination procedures used in preparing the consolidated statements for Plug Corporation at December 31, 20X2. You have correctly identified the need to eliminate the effects of the intercorporate sale of equipment. In preparing your consolidated statements, all intercompany balances and transactions should be eliminated. [ARB 51, Par. 6; ASC 810]

Your eliminating entry recorded at December 31, 20X2, was:

Equipment 150,000 Loss on Sale of Equipment 150,000

This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the sale of equipment to Plug and adds $150,000 to the equipment account. By adding back $150,000 to equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000). This represents the carrying value of the equipment on Coy’s books at the time of sale but does not reflect the purchase price paid by Coy ($1,200,000) or the accumulated depreciation at the time of sale ($200,000). Moreover, the eliminating entry above understates depreciation expense for the year. The correct eliminating entry at December 31, 20X2, is:

Equipment 350,000Depreciation Expense 15,000 Accumulated Depreciation 215,000 Loss on Sale of Equipment 150,000

A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by Plug to $1,200,000, the initial purchase price to the consolidated entity. Depreciation expense must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug to $100,000 ($1,200,000/12 years) based on the initial purchase price. Accumulated depreciation must be credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x 1 year] reported by Plug to $300,000 [($1,200,000/12 years) x 3 years]. As previously noted, the $150,000 loss recorded by Coy must be eliminated. If the amounts included in second eliminating entry are omitted, consolidated net income for 20X2 and the retained earnings balance at December 31, 20X2, will be overstated and the balances for equipment and accumulated depreciation will be understated.

Primary citation:ARB 51, Par. 6; ASC 810

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C7-2 Elimination of Intercorporate Services

MEMO

To: Chief AccountantDream Corporation

From: , CPA

Re: Elimination of Legal Services Provided by Parent Company

This memo is in response to our discussion regarding the elimination of intercompany services in preparing consolidated financial statements for Dream Corporation. It is my understanding that at present Dream Corporation does not eliminate such services. In preparing consolidated financial statements all intercompany balances and transactions should be eliminated. [ARB 51, Par. 6; ASC 810]

The legal services provided by Dream Corporation to Classic Company and Plain Company are intercompany transactions that should be eliminated. If the revenues recorded by the parent are equal to the expenses recorded by the subsidiaries and both are properly recorded, elimination of these transactions will have no impact on reported net income but will reduce consolidated revenues and expenses by equal amounts. Financial statement readers will receive a more accurate picture of operations of the consolidated entity if the appropriate amounts are reported. The legal services provided to Classic Company in 20X3 should be eliminated with the following entry:

Legal Services Revenue 80,000 Legal Services Expense 80,000

The information on intercorporate services provided to Plain Company indicates that an additional adjustment is needed in the consolidation process. Although Plain Company recorded its $150,000 payment to the parent as a legal expense, it should have been recorded as an investment in land to be used in future development of its strip mine. This error should be corrected on the books of Plain Company. If it is not, the eliminating entry prepared at December 31, 20X3, should include an adjustment to reflect the appropriate investment in land and would be recorded as:

Legal Services Revenue 150,000Land 100,000 Legal Services Expense 150,000 Wage and Salary Expense 100,000

Care must be taken to capitalize only the cost of legal services in this case. The eliminating entry should contain a debit of $100,000 ($150,000/1.50) to land since Dream Corporation bills its services to the subsidiaries at 150 percent of the cost of services provided. Had Plain Company debited land for its $150,000 payment to Dream, the eliminating entry at December 31, 20X3, would have been:

Legal Services Revenue 150,000 Land 50,000 Wage and Salary Expense 100,000

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C7-2 (continued)

No eliminating entry would be required at December 31, 20X4, on the legal services provided to Classic Company in 20X3. The conditions of the intercorporate transfer of services to Plain Company require an eliminating entry at December 31, 20X4, and in following years, as long as Plain Company owns the strip mine. The entry at December 31, 20X4, would be:

Land 100,000 Investment in Plain 100,000

Had Plain Company debited land for its $150,000 payment to Dream in 20X3, the eliminating entry at December 31, 20X4, would require a $50,000 debit to Investment in Plain and a $50,000 credit to land.

Primary citation:ARB 51, Par. 6; ASC 810

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C7-3 Noncontrolling Interest

a. When there are no unrealized profits on the subsidiary's books, a pro rata portion of the reported net income of the subsidiary is assigned to the noncontrolling interest, adjusted for the noncontrolling interest’s share of any amortization or write-off of differential.

b. When there are no unrealized profits on the subsidiary's books, the noncontrolling interest is reported in the consolidated balance sheet at an amount equal to a pro rata portion of the book value of the net assets of the subsidiary plus the noncontrolling interest’s share of any remaining differential.

c. The effect of unrealized intercompany profits depends on which company has recorded the profits. Those recorded on the books of the parent do not affect the income assigned to the noncontrolling interest. When subsidiary net income includes unrealized intercompany profits, the portion of consolidated net income assigned to the noncontrolling interest is reduced by its portion of the unrealized profit in the period of the intercorporate sale.

(1) On a sale of land, the intercompany profit remains unrealized until the land is sold to a nonaffiliate. When the land is resold, the profit is added to the reported net income of the subsidiary in computing the portion of consolidated net income assigned to the noncontrolling interest.

(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is considered realized each period as the purchaser depreciates the asset. Thus, in the period of the intercorporate sale, the adjustment to subsidiary net income for unrealized profits is based on the gain or loss less any portion considered realized before the end of the period. Each period thereafter, a portion of the profit or loss is considered realized and treated as an adjustment to subsidiary income in determining the portion of consolidated net income assigned to the noncontrolling interest.

d. Noncontrolling shareholders of a subsidiary generally will not gain a great deal of useful information from the consolidated financial statements. Their primary focus must continue to be on the income, assets, and liabilities of the subsidiary in which they hold direct ownership. In the event there are a number of transactions with the parent or other affiliates, the success of the operations of the entire economic entity may provide information useful to the noncontrolling shareholders. Debt guarantees or other assurances by the parent may also lead to an examination of the parent company and consolidated statements.

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C7-4 Intercompany Sale of Services

a. When preparing consolidated financial statements, Schwartz's revenue from the sale of services to Diamond and Diamond's expenses associated with the services acquired from Schwartz must be eliminated. The expenses related to the janitorial and maintenance activities that will be reported in the consolidated income statement will be the actual salary and associated costs incurred by Schwartz to provide the services to Diamond. The eliminations have no effect on consolidated net income because revenues and expenses of equal amount are eliminated in the preparation of the consolidated financial statements.

b. Intercompany profits from the sale of services to an affiliate normally are considered realized at the time the services are provided. Realization of intercompany profits on services normally is considered to occur as the services are consumed, and services such as maintenance and repair services normally are considered to be consumed by the purchasing affiliate at the time received.

C7-5 Intercompany Profits

Answers can be found in the companies' 10-K filings with the SEC and in their annual reports. Note that financial statements are often included in the Form 10-K by reference to the company’s annual report. In such cases, the financial statements are often shown in a separate exhibit rather than in Item 8 of the Form 10-K.

a. Verizon (www.verizon.com) eliminates all intercompany profits. It discontinued the use of regulatory accounting as provided by FASB 71 in 1994 and now no longer applies the provisions of FASB 71.

b. All of Harley-Davidson’s (www.harleydavidson.com) intercompany transactions are eliminated except some occurring between the Motorcycles and Financial Services segments. Some interest and fees recognized as income by Financial Services and expense by Motorcycles are not eliminated. This leads to higher finance income and higher expenses, but net income is unaffected.

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http://www.harleydavidson.com/

http://www.verizon.com/


SOLUTIONS TO EXERCISES

E7-1 Multiple-Choice Questions on Intercompany Transfers [AICPA Adapted]

1. c

2. d

3. b

4. a

5. b Depreciation expense recorded by Pirn $40,000 Depreciation expense recorded by Scroll 10,000 Total depreciation reported $50,000 Adjustment for excess depreciation charged by Scroll as a result of increase in carrying value of equipment due to gain on intercompany sale ($12,000 / 4 years) (3,000 )Depreciation for consolidated statements $47,000

E7-2 Multiple-Choice Questions on Intercompany Transactions

1. d When only retained earnings is debited, and not the noncontrolling interest, a gain has been recorded in a prior period on the parent's books.

2. a The costs incurred by Bottom to develop the equipment are research and development costs and must be expensed as they are incurred (FASB Statement No. 2, par. 12; ASC 730-10-25-1). Transfer to another legal entity does not cause a change in accounting treatment within the economic entity.

3. b The $39,000 paid to Gold Company will be charged to depreciation expense by Top Corporation over the remaining 3 years of ownership. As a result, Top Corporation will debit depreciation expense for $13,000 each year. Gold Company had charged $16,000 to accumulated depreciation in 2 years, for an annual rate of $8,000. Depreciation expense therefore must be reduced by $5,000 ($13,000 - $8,000) in preparing the consolidated statements.

4. a TLK Corporation will record the purchase at $39,000, the amount it paid. Gold Company had the equipment recorded at $40,000; thus, a debit of $1,000 will raise the equipment balance back to its original cost from the viewpoint of the consolidated entity.

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E7-2 (continued)

5. b Reported net income of Gold Company $ 45,000 Reported gain on sale of equipment $15,000 Intercompany profit realized in 20X6 (5,000 ) (10,000 )Realized net income of Gold Company $ 35,000 Proportion of stock held by noncontrolling interest x .40 Income assigned to noncontrolling interests $ 14,000

6. c Operating income reported by Top Corporation $ 85,000 Net income reported by Gold Company 45,000

$130,000 Less: Unrealized gain on sale of equipment ($15,000 - $5,000) (10,000 )Consolidated net income $120,000

E7-3 Elimination Entries for Land Transfer

a. Eliminating entry, December 31, 20X4:

Gain on Sale of Land 10,000 Land 10,000

Eliminating entry, December 31, 20X5:

Investment in Lowly 10,000 Land 10,000

b. Eliminating entry, December 31, 20X4:



Investment in Lowly 6,000 NCI in NA of Lowly 4,000 Land 10,000

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E7-4 Intercompany Services

a. Consolidated net income will not change.

b. One hundred percent of the intercompany services must always be eliminated. Thus, a change in the level of ownership of the subsidiary will not have an impact on the amount eliminated or on consolidated net income.

c. $38,000 = $70,000 - $32,000

E7-5 Elimination Entries for Intercompany Services

Two eliminating entries are required:

Delivery Service Revenue 76,000 Delivery Service Expense 76,000

Accounts Payable 18,000 Accounts Receivable 18,000

E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Salea.

AccumulatedTruck Depreciation

Northern 40,000 Actual 0 5,000 15,000

Pam 45,000 "As If" 15,000

Eliminate the gain on Truck & correct asset's basis:Gain on sale 10,000 Truck 5,000 Accumulated Depreciation 15,000

b.Accumulated

Truck DepreciationNorthern 40,000 Actual 4,000

5,000 1,000 15,000 Pam 45,000 "As If" 18,000

Eliminate the gain on Truck & correct asset's basis:

Investment in Northern 10,000

Truck 5,000

Accumulated Depreciation 15,000


Depreciation Expense 1,000

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E7-7 Transfer of Land




Investment in Roan 31,500 NCI in NA of Roan 13,500 Land 45,000

b. Eliminating entries, December 31, 20X3 and 20X4:

Investment in Roan 30,000 Land 30,000

E7-8 Transfer of Depreciable Asset at Year-Enda.

Truck Accumulated Depreciation

Minnow Corp. 210,000 Actual 0

90,000 120,000 Frazer Corp. 300,000 "As If" 120,000

Eliminate the gain on Truck & correct asset's basis:Gain on sale 30,000 Truck 90,000 Accumulated Depreciation 120,000

Computation of gain on sale of truck:Price paid by Minnow $210,000 Cost of truck to Frazer $300,000Accumulated depreciation ($300,000 / 10 years) x 4 years (120,000) (180,000)Gain on sale of truck $ 30,000

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E7-8 (continued)

b.


Minnow Corp. 210,000 Actual 35,000 90,000 5,000 120,000

Frazer Corp. 300,000 "As If" 150,000

Eliminate the gain on Truck & correct asset's basis:Investment in Minnow Corp. 30,000 Truck 90,000 Accumulated Depreciation 120,000

Accumulated Depreciation 5,000 Depreciation Expense 5,000

E7-9 Transfer of Depreciable Asset at Beginning of Year

a.


Minnow Corp. 245,000 Actual 35,000

55,000 5,000 90,000 Frazer Corp. 300,000 "As If" 120,000


Gain on Sale 35,000

Truck 55,000




Computation of gain on sale of truck:Price paid by Minnow $245,000 Cost of truck to Frazer $300,000Accumulated depreciation ($300,000 / 10 years) x 3 years ( 90,000) (210,000 )Gain on sale of truck $ 35,000

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E7-9 (continued)b.


Minnow Corp. 245,000 Actual 70,000

55,000 5,000 85,000

Frazer Corp. 300,000 "As If" 150,000


Investment in Minnow Corp. 30,000

Truck 55,000




E7-10 Sale of Equipment to Subsidiary in Current Period

a.Cash 84,000


Equipment 150,000

Gain on sale of Equipment 14,000

Record gain on Equipment

b.

Equipment 84,000 Cash 84,000Journal entry to record purchase

Depreciation Expense 12,000 Accumulated Depreciation 12,000Journal entry to record depreciation expense

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E7-10 (continued)c.

Equipment Accumulated Depreciation

Lance Corp. 84,000 Actual 12,000 66,000 2,000 80,000

Wainwrite Corp. 150,000 "As If" 90,000

Eliminate the gain on Equipment & correct asset's basis:Gain on sale 14,000 Equipment 66,000 Accumulated Depreciation 80,000


d. Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment and prepare a consolidated balance sheet only:

Eliminate the gain on Equipment & correct asset's basis:Investment in Lance Corp. 12,000 Equipment 66,000 Accumulated Depreciation 78,000

E7-11 Upstream Sale of Equipment in Prior Period

a. Consolidated net income for 20X8:Operating income reported by Baywatch $100,000Net income reported by Tubberware $40,000Amount of gain realized in 20X8 ($30,000 / 12 years) 2,500 Realized net income of Tubberware 42,500 Consolidated net income $142,500

b. Consolidated net income for 20X8 would be unchanged.

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E7-11 (continued)c.


Baywatch 270,000 Actual 67,500 30,000 2,500 55,000

Tubberware 300,000 "As If" 120,000

Eliminate the gain on Equipment & correct asset's basis:Investment in Tubberware 20,000 NCI in NA of Tubberware 5,000 Equipment 30,000 Accumulated Depreciation 55,000


E7-12 Elimination Entries for Midyear Depreciable Asset Transfera.


Andrews Co. 28,000 Actual 4,000 2,000 1,500 12,500

Kline Corp. 30,000 "As If" 15,000

Eliminate the gain on Equipment & correct asset's basis:Investment in Andrews Co. 10,500 Equipment 2,000 Accumulated Depreciation 12,500


b.


Andrews Co. 28,000 Actual 12,000 2,000 3,000 11,000

Kline Corp. 30,000 "As If" 20,000

Eliminate the gain on Equipment & correct asset's basis:Investment in Andrews Co. 9,000 Equipment 2,000 Accumulated Depreciation 11,000


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E7-13 Consolidated Net Income Computation

a. Downstream sale of land: 20X4 20X5

Verry’s separate operating income $ 90,000 $110,000 Less: Unrealized gain on sale of land (25,000 ) Verry’s realized operating income $ 65,000 $110,000 Spawn’s realized net income 60,000 40,000 Consolidated net income $125,000 $150,000 Income to noncontrolling interest: ($60,000 x 0.25) (15,000) ($40,000 X 0.25) (10,000 )Income to controlling interest $110,000 $140,000

b. Upstream sale of land: 20X4 20X5

Verry’s separate operating income $ 90,000 $110,000 Spawn’s net income $60,000 Less: Unrealized gain on sale of land (25,000)Spawn’s realized net income 35,000 40,000 Consolidated net income $125,000 $150,000 Income to noncontrolling interest: ($35,000 x 0.25) (8,750) ($40,000 x 0.25) (10,000 )Income to controlling interest $116,250 $140,000

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E7-14 Elimination Entries for Intercompany Transfers

a. Operating income of Grand Delivery $65,000 Net income of Acme Real Estate Company $40,000 Less: Unrealized profit on land sale (25,000 )Acme’s realized net income 15,000 Consolidated net income $80,000

b. Note: the term “basic” equity method in part b of the problem slipped through the editorial process. This should have read “fully adjusted” equity method. The answers given here are based on the fully adjusted equity method.

Journal entries recorded by Speedy Delivery:

Cash 8,000 Investment in Acme Real Estate 8,000 Record dividends from Acme Real Estate: $10,000 x 0.80

Investment in Acme Real Estate 32,000 Income from Acme Real Estate 32,000 Record equity-method income: $40,000 x 0.80

Income from Acme Real Estate 20,000 Investment in Acme Real Estate 20,000 Eliminate unrealized gain on sale

E7-14 (continued)c.Book Value Calculations:

NCI20%

+Grand

Delivery80%

= CommonStock

+ Retained Earnings

Original book value 80,000 320,000 300,000 100,000

+ Net Income 8,000 32,000 40,000

- Dividends (2,000) (8,000) (10,000)

Ending book value 86,000 344,000 300,000 130,000

Deferred Gain Calculations:

Total =

Grand Delivery's

share + NCI's share

Upstream Land 25,000 20,000 5,000

Total 25,000 20,000 5,000

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Basic elimination entry

Common stock 300,000 ← Original amount invested (100%)

Retained earnings 100,000 ← Beginning balance in retained earnings

Income from Acme Real Estate 12,000 ← Grand’s share of NI - Def. Gain

NCI in NI of Acme Real Estate 3,000 ← NCI share of NI - Def. Gain

Dividends declared 10,000 ← 100% of Acme’s dividends declared

Investment in Acme Real Estate 324,000 ← Grand’s share of BV - Def. Gain

NCI in NA of Acme Real Estate 81,000 ← NCI share of BV - Def. Gain

Eliminate gain on purchase of land

Gain on sale of land 25,000

Land 25,000

Eliminate courier services

Service Revenue 15,000

Delivery Expense 15,000

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E7-15 Sale of Building to Parent in Prior Period

a. Turner will record annual depreciation expense of $25,000 ($300,000 / 12 years).

b. Split would have recorded annual depreciation expense of $20,000 ($400,000 / 20 years).

c.

Building Accumulated Depreciation

Turner Co. 300,000 Actual 25,000

100,000 5,000 160,000

Split Co. 400,000 "As If" 180,000

Eliminate the gain on building and correct asset's basis:

Investment in Split Co. 42,000

NCI in NA of Split Co. 18,000

Building 100,000




d. Income assigned to noncontrolling interest for 20X9:

Net income reported by Split Company $ 40,000 Amount of gain realized in 20X9 ($60,000 / 12 years) 5,000 Realized net income for 20X9 $ 45,000 Proportion of ownership held by noncontrolling interest x 0.30 Income assigned to noncontrolling interest $ 13,500

e. Amount assigned to noncontrolling interest in 20X9 consolidated balance sheet:

Split Company net assets, January 1, 20X9 ($350,000 - $150,000) $200,000 Net income for 20X9 40,000 Dividends paid in 20X9 (15,000)Unrealized profit on sale of building to Turner Company ($60,000 - $5,000) (55,000 )Realized book value December 31, 20X9 $170,000 Proportion of ownership held by noncontrolling interest x 0.30 Amount assigned to noncontrolling interest in December 31, 20X9, consolidated balance sheet $ 51,000

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E7-16 Intercompany Sale at a Loss

a. Consolidated net income for 20X8 will be greater than Parent Company's income from operations plus Sunway's reported net income. The eliminating entries at December 31, 20X8, will result in an increase of $16,000 to consolidated net income.

b. As a result of purchasing the equipment at less than Parent's book value, depreciation expense reported by Sunway will be $2,000 ($16,000 / 8 years) below the amount that would have been recorded by Parent. Thus, depreciation expense must be increased by $2,000 when eliminating entries are prepared at December 31, 20X9. Consolidated net income will be decreased by the full amount of the $2,000 increase in depreciation expense.

E7-17 Eliminating Entries Following Intercompany Sale at a Loss


Buildings and Equipment 156,000 Loss on Sale of Building 36,000 Accumulated Depreciation 120,000

Eliminate unrealized loss on building.

b. Consolidated net income and income to controlling interest for 20X7:

Operating income reported by Brown $125,000 Net income reported by Transom $ 15,000 Add: Loss on sale of building 36,000 Realized net income of Transom 51,000 Consolidated net income $176,000 Income to noncontrolling interest ($51,000 x 0.30) (15,300 )Income to controlling interest $160,700

c.

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Eliminate the gain on Building and correct asset's basis:

Building 156,000

Investment in Transom Co. 25,200

NCI in NA of Transom Co. 10,800





Brown Corp. 144,000 Actual 16,000

156,000 120,000

4,000

Transom Co. 300,000 "As If" 140,000

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E7-17 (continued)

d. Consolidated net income and income assigned to controlling interest in 20X8:Operating income reported by Brown $150,000 Net income reported by Transom $40,000 Adjustment for loss on sale of building (4,000 )Realized net income of Transom 36,000 Consolidated net income $186,000 Income assigned to noncontrolling interest ($36,000 x 0.30) (10,800) Income assigned to controlling interest $175,200

E7-18 Multiple Transfers of Asset

a. $145,000

b. No gain or loss should be reported.

c. Swanson Corporation operating income $150,000

Sullivan Corporation net income $120,000 Loss on sale of land ($145,000 - $130,000) 15,000 Realized net income of Sullivan Corporation $135,000 Proportion of stock held by Swanson x 0.80 108,000

Kolder Company net income $ 60,000 Gain on sale of land ($180,000 - $130,000) (50,000 )Realized net income of Kolder Company $ 10,000 Proportion of stock held by Swanson x 0.70 7,000

Clayton Corporation net income $ 80,000 Gain on sale of land ($240,000 - $180,000) (60,000 )Realized net income of Clayton Corporation $ 20,000 Proportion of stock held by Swanson x 0.90 18,000 Income assigned to controlling interest $283,000

Alternate Computation:Swanson Corporation operating income $150,000 Sullivan Corporation net income 120,000 Kolder Company net income 60,000 Clayton Corporation net income 80,000 Combined income $410,000

Unrealized loss recorded by Sullivan Corp. $ (15,000)Unrealized gain recorded by Kolder Company 50,000 Unrealized gain recorded by Clayton Corp. 60,000 (95,000 )Realized income available to all shareholders $315,000

Income assigned to noncontrolling interest: Sullivan Corp. ($120,000 + $15,000) x 0.20 $ 27,000 Kolder Company ($60,000 - $50,000) x 0.30 3,000 Clayton Corp. ($80,000 - $60,000) x 0.10 2,000 (32,000 )Income assigned to controlling interest $283,000

7-23


E7-18 (continued)

d. Eliminating entry:

Gain on Sale of Land 110,000 Loss on Sale of Land 15,000 Land 95,000

Eliminate gains and loss on land transfer: $110,000 = $50,000 + $60,000 $95,000 = $110,000 - $15,000

E7-19 Elimination Entry in Period of Transfer

a. $300,000 = $276,000 + $24,000

b. 15 years = $300,000 / ($60,000 / 3 years)

c.


Blank Corp. 276,000 Actual 23,000

24,000 3,000 60,000

Grand Corp. 300,000 "As If" 80,000

Eliminate the gain on Truck and correct asset's basis:

Investment in Grand Corp. 21,600

NCI in NA of Grand Corp. 14,400

Truck 24,000




7-24


E7-20 Elimination Entry Computation

a.


Stern 360,000 Actual 36,000

90,000 6,000 150,000

Subsidiary 450,000 "As If" 180,000

Eliminate the gain on Equipment and correct asset's basis:

Gain on sale 60,000

Equipment 90,000




b.


Stern 360,000 Actual 72,000

90,000 6,00

0 144,000

Subsidiary 450,000 "As If" 210,000


Investment in Subsidiary 37,800

NCI in NA of Subsidiary 16,200

Equipment 90,000




7-25


E7-21 Using the Eliminating Entry to Determine Account Balances

a. Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber Corporation.

b. The subsidiary was the owner. The sale was from the subsidiary to the parent, as evidenced by the debit to noncontrolling interest in the eliminating entry.

c. Intercompany transfer price:

Amount paid by Somber Corporation $120,000 Increase to buildings and equipment in eliminating entry (53,500 )Amount paid by Pastel to Somber for equipment $ 66,500

d. Income assigned to noncontrolling interest for 20X9:

Net income reported by Somber $ 25,000 Amount of gain realized in 20X9 ($10,500 / 7 years) 1,500 Realized net income for 20X9 $ 26,500 Proportion of ownership held by noncontrolling interest x 0.10 Income assigned to noncontrolling interest $ 2,650

e. Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported by the consolidated entity for 20X9.

f. Eliminating entries at December 31, 20X9:

Book Value Calculations:

NCI10%

+Pastel Corp.90%

= CommonStock

+ Retained Earnings

Original book value 50,000 450,000 300,000 200,000 + Net Income 2,500 22,500 25,000 - Dividends (600) (5,400) (6,000) Ending book value 51,900 467,100 300,000 219,000


Total =Pastel Corp.'s

share + NCI's shareExtra Depreciation 1,500 1,350 150

Basic elimination entryCommon stock 300,000 ← Original amount invested (100%)Retained earnings 200,000 ← Beginning balance in REIncome from Somber Corp. 23,850 ← Pastel’s share of NI + Extra Dep.NCI in NI of Somber Corp. 2,650 ← NCI share of NI + Extra Dep. Dividends declared 6,000 ← 100% of Somber's dividends Investment in Somber Corp. 468,450 ← Pastel 's share of BV + Extra Dep. NCI in NA of Somber Corp. 52,050 ← NCI share of BV + Extra Dep.

7-26


E7-21 (continued)


Pastel Corp. 66,500 Actual 9,500 53,500 1,500 64,000

Somber Corp. 120,000 "As If" 72,000

Eliminate the gain on Equipment and correct asset's basis:Investment in Somber Corp. 9,450 NCI in NA of Somber Corp. 1,050 Equipment 53,500 Accumulated Depreciation 64,000


E7-22 Intercompany Sale of Services

a. Eliminating entries, 20X4:

Consulting Revenue 138,700 Consulting Fees Expense 138,700 Eliminate intercompany revenue and expense.

Accounts Payable 6,600 Accounts Receivable 6,600 Eliminate intercompany receivable/payable.

b. Consolidated net income and income to controlling interest for 20X4:

Norgaard's separate operating income $2,342,000 Bline's net income 631,000 Consolidated net income 2,973,000 Income to noncontrolling interest ($631,000 x 0.25) (157,750 )Income to controlling interest $2,815,250

7-27


E7-23A Modified Equity Method and Cost Method

a.

(1)Equity Method Entries on Newtime's Books:

Investment in TV Sales Co. 45,500

Income from TV Sales Co. 45,500

Record Newtime's 65% share of TV Sales Co.'s 20X4 income

Cash 13,000


Record Newtime's 65% share of TV Sales Co.'s 20X4 dividend

(2)Book Value Calculations:

NCI35%

+ Newtime65%

= CommonStock

+ Retained Earnings

Original book value 155,750 289,250 300,000 145,000

+ Net Income 24,500 45,500 70,000

- Dividends (7,000) (13,000) (20,000)


Basic elimination entry

Common stock 300,000 ← Original amount invested (100%)

Retained earnings 145,000 ← Beginning balance in RE

Income from TV Sales Co. 45,500 ← Newtime’s share of NI

NCI in NI of TV Sales Co. 27,300 ← NCI share of NI + Extra Dep.

Dividends declared 20,000 ← 100% of TV Sales Co.'s dividends

Investment in TV Sales Co. 321,750 ← Newtime's share of BV

NCI in NA of TV Sales Co. 176,050 ← NCI share of BV + Extra Dep.



Land 11,000



NCI in NA of TV Sales Co. 14,000

Equipment 40,000



7-28


E7-23A (continued)

b.

(1)

Equity Method Entries on Newtime's Books:Cash 13,000 Dividend Income 13,000 Record dividend income from TV Sales Company. (2)Investment elimination entry

Common stock 300,000

Retained earnings 100,000



Dividend elimination entry

Dividend Income 13,000

NCI in NI of TV Sales Co. 7,000

Dividends declared 20,000

Assign prior undistributed income to NCI

NCI in NI of TV Sales Co. 20,300

Retained Earnings 15,750




Land 11,000




Equipment 40,000



7-29


SOLUTIONS TO PROBLEMS

P7-24 Computation of Consolidated Net Income

a. Separate operating income of Petime Corporation $34,000 Reported net income of United Grain Company $19,000 Unrealized profit of sale of land (7,000 )Realized income for 20X4 $12,000 Amortization of differential ($10,000 / 10 years) ( 1,000 )

$11,000 Proportion of ownership held by Petime x 0.90 Income attributable to controlling interest 9,900 Income to controlling interest $43,900

b. Separate operating income of Petime Corporation $34,000 Reported net income by United Grain Company $19,000 Amortization of differential ($10,000 / 10 years) ( 1,000 )

$18,000 Proportion of stock held by Petime x 0.90

Income attributable to controlling interest 16,200 Unrealized profit on sale of land (7,000 )Income to controlling interest $43,200

Reported income will decrease by $700. In the upstream case the unrealized profit ($7,000) is apportioned to both majority ($6,300) and noncontrolling ($700) shareholders. In the downstream case, it is apportioned entirely to the majority shareholders ($7,000).

P7-25 Subsidiary Net Income

a. Toll Corporation’s reported net income for 20X4 was $94,400: Income assigned to noncontrolling shareholders $17,500 Add: Unrealized profit on building ($20,000 x 0.25) 5,000 Amortization of differential ($4,400 x 0.25) 1,10

0 Income assigned to noncontrolling interest before adjustment

$23,600

Proportion of stock held by noncontrolling interest ÷ 0.25 Reported income of Toll $94,400

Computation of annual amortization: Fair value of consideration given by Bold $348,000 Fair value of noncontrolling interest 116,000 Total fair value $464,000 Book value of Toll’s assets: Common stock $150,000 Retained earnings 270,000 Total book value (420,000) Differential paid by Bold $ 44,000 Number of years in amortization period ÷ 10 Annual amortization $4,400

7-30


P7-25 (continued)

b. Consolidated net income for 20X4 is $304,000:

Bold Corporation’s operating income $234,000 Toll Corporation’s net income 94,400 Amortization of differential ($44,000 / 10 years) (4,400)Unrealized profit on building (20,000 )Consolidated net income $304,000

c. Income assigned to controlling interest is $286,500:

Consolidated net income $304,000 Income assigned to noncontrolling interest (17,500 )Income assigned to controlling interest $286,500

Alternate computation:Operating income of Bold $234,000 Income from Toll: Net income of Toll $94,400 Unrealized profit on building (20,000) Amortization of differential (4,400 ) Realized income $70,000 Portion of ownership held x 0.75 52,500 Income to controlling interest $286,500

P7-26 Transfer of Asset from One Subsidiary to Another

Bugle Cook Products ConsolidatedCorporation Corporation Entity

Depreciation expense $ --- $ 3,000 $ 2,000

Fixed assets — Warehouse --- 45,000 40,000

Accumulated depreciation --- 3,000 12,000

Gain on sale of warehouse 15,000 --- ---

7-31


P7-27 Consolidated Eliminating Entry

a. Master paid Rakel $460,000 ($600,000 - $140,000).

b. Accumulated depreciation at January 1, 20X7, was $168,000, computed as follows:

Purchase price paid by Rakel $600,000 Amount paid by Master $460,000 Gain recorded by Rakel (28,000 ) Book value at date of sale (432,000 ) Accumulated depreciation at date of sale $168,000

c. Annual depreciation expense recorded by Rakel was $28,000($168,000/6 years).

d. The estimated residual value was $40,000, computed as follows:

Purchase price paid by Rakel $600,000 Amount to be depreciated by Rakel ($28,000 x 20 years) (560,000 ) Estimated residual value $ 40,000

e. Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 - $40,000) / 14 years).

f. Reported net income of Rakel $ 80,000 Unrealized gain on sale of building ($28,000 - $2,000) (26,000 )

$ 54,000 Proportion of stock held by noncontrolling interest x 0.40 Income assigned to noncontrolling interest $ 21,600

g. Reported net income of Rakel $ 65,000 Portion of gain on sale of building realized in 20X8 2,000

$ 67,000 Proportion of stock held by noncontrolling interest x 0.40 Income assigned to noncontrolling interest $ 26,800

7-32


P7-28 Multiple-Choice Questions

1. d

2. c

3. a

4. a

5. d

P7-29 Intercompany Services Provided to Subsidiary

The eliminating entry at December 31, 20X4, would be:

Service Revenue 110,000 Building 30,000 Wage Expense 80,000

The eliminating entries at December 31, 20X5, would be:

Investment in Subsidiary 30,000 Building 30,000


P7-30 Consolidated Net Income with Intercorporate Transfers

a.Cash 240,000


Equipment 350,000

Gain on sale of Equipment 30,000

Record gain on Equipment

b.Eliminate loss on purchase of landLand 60,000 Loss on sale of land 60,000

Eliminate the gain on Equipment and correct asset's basis:Investment in Subsidence 25,000 Equipment 110,000 Accumulated Depreciation 135,000


7-33


P7-30 (continued)

c. Subsidence Mining's 20X7 net income was $90,000:

Subsidence Mining's income to noncontrolling shareholders $ 39,000 Noncontrolling interest's share of subsidiary income ÷ 0.30 Subsidence Mining's income before adjustment $130,000 Add: Amortization of differential: ($200,000 / 10 years) 20,000 Less: Unrealized loss on intercompany sale of land (60,000 )Subsidence Mining's 20X7 net income $ 90,000

d. Bower’s operating income was $826,000:

Consolidated net income $961,000 Less: Income to noncontrolling interest (39,000 )Income assigned to controlling interest $922,000 Income from Subsidence Mining: Reported net income $ 90,000 Unrealized loss on land 60,000 Amortization of differential ($200,000 / 10 years) (20,000 ) Realized income $130,000 Portion of ownership held x 0.70 Bower’s share $ 91,000 Realized profit on equipment ($30,000 / 6 years) 5,000 (96,000 )Bower’s 20X7 income from its separate operations $826,000

7-34


P7-31 Preparation of Consolidated Balance Sheet

a. Book Value Calculations:

NCI40%

+ Lofton Co.60%

= CommonStock

+ Retained Earnings



Total =

Lofton Co.'s share + NCI's share

Extra Depreciation 3,000 3,000 0

Total 3,000 3,000 0

Basic elimination entryCommon stock 200,000 ← Original amount invested (100%)Retained earnings 50,000 ← Beginning balance in REIncome from Temple Corp. 3,000 ← Lofton’s share of NI + Extra Dep. Investment in Temple Corp. 153,000 ← Lofton's share of BV + Extra Dep. NCI in NA of Temple Corp. 100,000 ← NCI share of BV of net assets

Eliminate gain on purchase of landLand 10,000 Investment in Temple Corp. 6,000 NCI in NA of Temple Corp. 4,000


Temple Corp. 91,000 Actual 26,000 9,000 3,000 27,000

Lofton Co. 100,000 "As If" 50,000

Eliminate the gain on Equipment and correct asset's basis:Investment in Temple Corp. 18,000 Equipment 9,000 Accumulated Depreciation 27,000


7-35


P7-31 (continued)

Lofton Co.

Temple Corp.

Elimination Entries

DR CR Consolidated

Balance Sheet

Cash and Receivables 101,000 20,000 121,000

Inventory 80,000 40,000 120,000

Land 150,000 90,000 10,000 250,000

Buildings & Equipment 400,000 300,000 9,000 709,000

Less: Accumulated Depr. (135,000) (85,000) 3,000 27,000 (244,000)

Investment in Temple Corp. 141,000 18,000 153,000 0

6,000

Total Assets 737,000 365,000 40,000 186,000 956,000

Accounts Payable 90,000 25,000 115,000

Notes Payable 200,000 90,000 290,000

Common Stock 100,000 200,000 200,000 100,000

Retained Earnings 347,000 50,000 50,000 3,000 347,000

3,000

NCI in NA of Temple Corp. 100,000 104,000

4,000

Total Liabilities & Equity 737,000 365,000 250,000 107,000 956,000

b.

Lofton Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X6

Cash and Accounts Receivable $121,000 Inventory 120,000 Land 250,000 Buildings and Equipment $709,000 Less: Accumulated Depreciation (244,000 ) 465,000 Total Assets $956,000

Accounts Payable $115,000 Notes Payable 290,000 Stockholders’ Equity: Controlling Interest: Common Stock $100,000 Retained Earnings 347,000 Total Controlling Interest $447,000 Noncontrolling interest 104,000 Total Stockholders’ Equity 551,000 Total Liabilities and Stockholders' Equity $956,000

7-36


P7-32 Consolidation Worksheet in Year of Intercompany Transfer

Note: In converting this problem from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:

Investment in Lane Company Stock = 191,600Retained Earnings = 322,000

a. These calculations are based on the corrected numbers

Equity Method Entries on Prime Co.'s Books:Investment in Lane Co. 40,000 Income from Lane Co. 40,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6 income

Cash 4,000 Investment in Lane Co. 4,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend Income from Lane Co. 14,400 Investment in Lane Co. 14,400 Record amortization of excess acquisition price

Income from Lane Co. 20,000 Investment in Lane Co. 20,000 Defer unrealized gain on Equipment

Investment in Lane Co. 2,000 Income from Lane Co. 2,000 Reverse the deferred gain


NCI20%

+ Prime Co.80%

= CommonStock

+ Retained Earnings

Original book value 39,000 156,000 100,000 95,000 + Net Income 10,000 40,000 50,000 - Dividends (1,000) (4,000) (5,000) Ending book value 48,000 192,000 100,000 140,000


Total =

Prime Co.'s share + NCI's share

Downstream Asset (20,000) (20,000)

Extra Depreciation 2,000 2,000 0

Total (18,000) (18,000) 0

7-37


P7-32 (continued)

Basic elimination entryCommon stock 100,000 ← Original amount invested (100%)Retained earnings 95,000 ← Beginning balance in REIncome from Lane Co. 22,000 ← Prime’s share of NI - Def. GainNCI in NI of Lane Co. 10,000 ← NCI share of Lane Co.'s NI Dividends declared 5,000 ← 100% of Lane Co.'s dividends Investment in Lane Co. 174,000 ← Prime's share of BV - Def. Gain NCI in NA of Lane Co. 48,000 ← NCI share of BV of net assets

Excess Value (Differential) Calculations:

NCI 20% + Prime Co. 80% = Goodwill

Beginning balance 10,000 40,000 50,000 Changes (3,600) (14,400) (18,000)Ending balance 6,400 25,600 32,000

Amortized excess value reclassification entry:Goodwill impairment loss 18,000 Income from Lane Co. 14,400 NCI in NI of Lane Co. 3,600

Excess value (differential) reclassification entry:Goodwill 32,000 Investment in Lane Co. 25,600 NCI in NA of Lane Co. 6,400

Eliminate intercompany accounts:Accounts Payable 7,000 Cash and Accounts Receivable 7,000

Eliminate gain on purchase of landInvestment in Lane Co. 8,000 NCI in NI of Lane Co. 2,000 Land 10,000


Lane Co. 70,000 Actual 7,000 5,000 2,000 25,000

Prime Co. 75,000 "As If" 30,000

7-38


Eliminate the gain on Equipment and correct asset's basis:Gain on sale 20,000 Equipment 5,000 Accumulated Depreciation 25,000


P7-32 (continued)

Investment in Income from Lane Co. Lane Co.

Beginning Balance 188,000

80% Net Income 40,000 40,000 80% Net Income 4,000 80% Dividends

14,400 Excess Val. Amort. 14,400 Realize Def. Gain 2,000 20,000 Defer Equipment Gain 20,000 2,000 Realize Def. Gain

Ending Balance 191,600 7,600 Ending Balance 174,000 Basic 22,000

Land Adjustment 8,000 25,600 Excess Reclass. 14,400 0 0

b. This worksheet is based on the corrected numbers:

Prime Co.

Lane Co.

Elimination Entries DR CR Consolidated Income Statement Sales 240,000 130,000 370,000 Gain on Sale of Equipment 20,000 20,000 0 Less: COGS (140,000) (60,000) (200,000) Less: Depr. & Amort. Expense (25,000) (15,000) 2,000 (38,000) Less: Other Expenses (15,000) (5,000) (20,000)

Less: Goodwill Impairment Loss 18,000 (18,000)

Income from Lane Co. 7,600 22,000 14,400 0

Consolidated Net Income 87,600 50,000 60,000 16,400 94,000

NCI in Net Income 10,000 3,600 (6,400)

Controlling Interest in NI 87,600 50,000 70,000 20,000 87,600

Statement of Retained Earnings Beginning Balance 322,000 95,000 95,000 322,000 Net Income 87,600 50,000 70,000 20,000 87,600 Less: Dividends Declared (30,000) (5,000) 5,000 (30,000) Ending Balance 379,600 140,000 165,000 25,000 379,600

Balance Sheet Cash and Accounts Receivable 113,000 35,000 7,000 141,000 Inventory 260,000 90,000 350,000 Land 80,000 80,000 10,000 150,000 Buildings & Equipment 500,000 150,000 5,000 655,000

Less: Accumulated Depreciation (205,000) (45,000) 2,000 25,000 (273,000)

7-39


Investment in Lane Co. 191,600 8,000 174,000 0 25,600 Goodwill 32,000 32,000 Total Assets 939,600 310,000 7,000 42,000 1,055,000

Accounts Payable 60,000 20,000 7,000 73,000 Bonds Payable 200,000 50,000 250,000 Common Stock 300,000 100,000 100,000 300,000 Retained Earnings 379,600 140,000 165,000 25,000 379,600 NCI in NA of Lane Co. 2,000 48,000 52,400 6,400 Total Liabilities & Equity 939,600 310,000 272,000 73,000 1,055,000

7-40


P7-32 (continued)

These financial statements are based on the corrected numbers:

c. Prime Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X6

Cash and Receivables $ 141,000 Inventory 350,000 Land 150,000 Buildings and Equipment $655,000 Less: Accumulated Depreciation (273,000 ) 382,000 Goodwill 32,000 Total Assets $1,055,000

Accounts Payable $ 73,000 Bonds Payable 250,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 379,600 Total Controlling Interest $679,600 Total Noncontrolling Interest 52,400 Total Stockholders’ Equity 732,000 Total Liabilities and Stockholders' Equity $1,055,000

Prime Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X6

Sales $ 370,000 Cost of Goods Sold $200,000 Depreciation and Amortization Expense 38,000 Goodwill Impairment Loss 18,000 Other Expenses 20,000 Total Expenses (276,000 )Consolidated Net Income $ 94,000 Income to Noncontrolling Interest (6,400 )Income to Controlling Interest $ 87,600

Prime Company and SubsidiaryConsolidated Retained Earnings Statement

Year Ended December 31, 20X6

Retained Earnings, January 1, 20X6 $ 322,000 Income to Controlling Interest, 20X6 87,600

$ 409,600 Dividends Declared, 20X6 (30,000 )Retained Earnings, December 31, 20X6 $ 379,600

7-41


P7-32 (continued)

b. This worksheet is based on the uncorrected numbers:

Prime Co.

Lane Co.

Elimination Entries DR CR Consolidated Income Statement Sales 240,000 130,000 370,000 Gain on Sale of Equipment 20,000 20,000 0 Less: COGS (140,000) (60,000) (200,000) Less: Depr. & Amort. Expense (25,000) (15,000) 2,000 (38,000) Less: Other Expenses (15,000) (5,000) (20,000)

Less: Goodwill Impairment Loss 18,000 (18,000)

Income from Lane Co. 7,600 22,000 14,400 0


NCI in Net Income 10,000 3,600 (6,400)



Balance Sheet Cash and Accounts Receivable 113,000 35,000 7,000 141,000 Inventory 260,000 90,000 350,000 Land 80,000 80,000 10,000 150,000 Buildings & Equipment 500,000 150,000 5,000 655,000

Less: Accumulated Depreciation (205,000) (45,000) 2,000 25,000 (273,000)

Investment in Lane Co. 199,600 8,000 174,000 8,000 25,600 Goodwill 32,000 32,000 Total Assets 947,600 310,000 7,000 42,000 1,063,000


7-42


P7-32 (continued)

These financial statements are based on the uncorrected numbers:

c. Prime Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X6

Cash and Receivables $ 141,000 Inventory 350,000 Land 150,000 Buildings and Equipment $655,000 Less: Accumulated Depreciation (273,000 ) 382,000 Investment in Lane Co. 8,000Goodwill 32,000 Total Assets $1,063,000

Accounts Payable $ 73,000 Bonds Payable 250,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 387,600 Total Controlling Interest $687,600 Total Noncontrolling Interest 52,400 Total Stockholders’ Equity 740,000 Total Liabilities and Stockholders' Equity $1,063,000

Prime Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X6

Sales $ 370,000 Cost of Goods Sold $200,000 Depreciation and Amortization Expense 38,000 Goodwill Impairment Loss 18,000 Other Expenses 20,000 Total Expenses (276,000 )Consolidated Net Income $ 94,000 Income to Noncontrolling Interest (6,400 )Income to Controlling Interest $ 87,600

Prime Company and SubsidiaryConsolidated Retained Earnings Statement


Retained Earnings, January 1, 20X6 $ 330,000 Income to Controlling Interest, 20X6 87,600

$ 417,600 Dividends Declared, 20X6 (30,000 )

7-43


Retained Earnings, December 31, 20X6 $ 387,600

P7-33 Consolidation Worksheet in Year following Intercompany Transfer

Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. This error carries over to this problem. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:


These calculations are based on the corrected numbers:

a. Reconciliation of underlying book value and balance in investment account:

Net book value reported by Lane Company Common stock outstanding $100,000 Retained earnings balance, January 1, 20X7 $140,000 Net income for 20X7 45,000 Dividends paid in 20X7 (35,000 ) Retained earnings balance, December 31, 20X7 150,000

$250,000Proportion of stock held by Prime Company x .80

$200,000Minus: Upstream Land Gain (10,000 x 0.80) (8,000)Minus: Downstream Equipment Transfer Gain (20,000)Add: Reversal of deferred gross profit 20X6 2,000Minus: Reversal of deferred gross profit 20X7 2,000Add: Goodwill (32,000 x 0.80) 25,600 Balance in investment account $201,600

These calculations are based on the uncorrected numbers

a. Reconciliation of underlying book value and balance in investment account:

Net book value reported by Lane Company Common stock outstanding $100,000 Retained earnings balance, January 1, 20X7 $140,000 Net income for 20X7 45,000 Dividends paid in 20X7 (35,000 ) Retained earnings balance, December 31, 20X7 150,000

$250,000Proportion of stock held by Prime Company x .80

$200,000Minus: Upstream Land Gain (10,000 x 0.80) (8,000)Minus: Downstream Equipment Transfer Gain (20,000)Add: Reversal of deferred gross profit 20X6 2,000Add: Goodwill (32,000 x 0.80) 25,600Add: Incorrect number 10,000 Balance in investment account $209,600

7-44


P7-33 (continued)

b. These calculations are based on the corrected numbers


Cash 28,000 Investment in Lane Co. 28,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend

Investment in Lane Co. 2,000 Income from Lane Co. 2,000 Reverse the deferred gain


NCI20%

+Prime Co.

80%=

CommonStock

+Retained Earnings



Total =

Prime Co.'s share + NCI's share

Extra Depreciation 2,000 2,000 0 Total 2,000 2,000 0

Basic elimination entryCommon stock 100,000 ← Original amount invested (100%)Retained earnings 140,000 ← Beginning balance in REIncome from Lane Co. 38,000 ← Prime’s share of NI + Extra Dep.NCI in NI of Lane Co. 9,000 ← NCI share of Lane Co.'s NI Dividends declared 35,000 ← 100% of Lane Co.'s dividends Investment in Lane Co. 202,000 ← Prime's share of BV + Extra Dep. NCI in NA of Lane Co. 50,000 ← NCI share of BV of net assets


NCI 20% + Prime Co. 80% = Goodwill

Beginning balance 6,400 25,600 32,000 Changes 0 0 0 Ending balance 6,400 25,600 32,000

7-45


Excess value (differential) reclassification entry:Goodwill 32,000 Investment in Lane Co. 25,600 NCI in NA of Lane Co. 6,400

P7-33 (continued)

Eliminate gain on purchase of landInvestment in Lane Co. 8,000 NCI in NI of Lane Co. 2,000 Land 10,000


Lane Co. 70,000 Actual 14,000 5,000 2,000 23,000

Prime Co. 75,000 "As If" 35,000

Eliminate the gain on Equipment and correct asset's basis:Investment in Lane Co. 18,000 Equipment 5,000 Accumulated Depreciation 23,000


Investment in Income from Lane Co. Lane Co.

Beginning Balance 191,600


Realize Def. Gain 2,000 2,000 Realize Def. GainEnding Balance 201,600 38,000 Ending Balance

202,000 Basic 38,000 Land Adjustment 8,000 25,600 Excess Reclass.

18,000 0 0

Eliminate Intercompany receivable/payable

Accounts Payable 4,000 Accounts Receivable 4,000

7-46


P7-33 (continued)


Prime Co.

Lane Co.

Elimination Entries DR CR Consolidated Income Statement Sales 250,000 150,000 400,000 Less: COGS (160,000) (80,000) (240,000) Less: Depr. & Amort. Expense (25,000) (15,000) 2,000 (38,000) Less: Other Expenses (20,000) (10,000) (30,000) Income from Lane Co. 38,000 38,000 0 Consolidated Net Income 83,000 45,000 38,000 2,000 92,000 NCI in Net Income 9,000 (9,000) Controlling Interest in NI 83,000 45,000 47,000 2,000 83,000


Balance Sheet

Cash and Accounts Receivable 151,000 55,000 4,000 202,000

Inventory 240,000 100,000 340,000 Land 100,000 80,000 10,000 170,000 Buildings & Equipment 500,000 150,000 5,000 655,000 Less: Accumulated Depr. (230,000) (60,000) 2,000 23,000 (311,000) Investment in Lane Co. 201,600 8,000 202,000 0 18,000 25,600 Goodwill 32,000 32,000 Total Assets 962,600 325,000 7,000 37,000 1,088,000


7-47


P7-33 (continued)


Prime Co.

Lane Co.

Elimination Entries

DR CR Consolidated

Income Statement

Sales 250,000 150,000 400,000

Less: COGS (160,000) (80,000) (240,000)

Less: Depreciation & Amort. Exp. (25,000) (15,000) 2,000 (38,000)

Less: Other Expenses (20,000) (10,000) (30,000)

Income from Lane Co. 38,000 38,000 0


NCI in Net Income 9,000 (9,000)


Statement of Retained Earnings

Beginning Balance 387,600 140,000 140,000 387,600

Net Income 83,000 45,000 47,000 2,000 83,000

Less: Dividends Declared (60,000) (35,000) 35,000 (60,000)

Ending Balance 410,600 150,000 187,000 37,000 410,600

Balance Sheet


Inventory 240,000 100,000 340,000

Land 100,000 80,000 10,000 170,000

Buildings & Equipment 500,000 150,000 5,000 655,000

Less: Accumulated Depr. (230,000) (60,000) 2,000 23,000 (311,000)

Investment in Lane Co. 209,600 8,000 202,000 8,000

18,000 25,600

Goodwill 32,000 32,000

Total Assets 970,600 325,000 7,000 37,000 1,096,000

Accounts Payable 60,000 25,000 4,000 81,000

Bonds Payable 200,000 50,000 250,000

Common Stock 300,000 100,000 100,000 300,000

Retained Earnings 410,600 150,000 187,000 37,000 410,600

NCI in NA of Lane Co. 2,000 50,000 54,400

6,400

Total Liabilities & Equity 970,600 325,000 291,000 87,000 1,096,000

7-48


P7-34 Intercorporate Sales in Prior Years

a.Equity Method Entries on Pond Corp.'s Books:Investment in Skate Co. 24,000 Income from Skate Co. 24,000 Record Pond Corp.'s 80% share of Skate Co.'s 20X8 income

Cash 8,000 Investment in Skate Co. 8,000 Record Pond Corp.'s 80% share of Skate Co.'s 20X8 dividend

Income from Skate Co. 3,000 Investment in Skate Co. 3,000 Record amortization of excess acquisition price

Investment in Skate Co. 1,500 Income from Skate Co. 1,500 Reverse a portion of the deferred gain


NCI20%

+Pond Corp.80%

= CommonStock

+ Add Paid-in Capital

+ Retained Earnings

Original book value 40,000 160,000 20,000 30,000 150,000 + Net Income 6,000 24,000 30,000 - Dividends (2,000) (8,000) (10,000) Ending book value 44,000 176,000 20,000 30,000 170,000


Total =Pond Corp.'s

share + NCI's shareExtra Depreciation 1,500 1,500 0 Total 1,500 1,500 0

Basic elimination entryCommon stock 20,000 ← Original amount invested (100%)Additional Paid-in Capital 30,000 ← Beginning balance in APICRetained earnings 150,000 ← Beginning balance in REIncome from Skate Co. 25,500 ← Pond’s share of NI + Extra Dep.NCI in NI of Skate Co. 6,000 ← NCI share of Skate Co.'s NI Dividends declared 10,000 ← 100% of Skate’s dividends declared Investment in Skate Co. 177,500 ← Pond's share of BV + Extra Dep. NCI in NA of Skate Co. 44,000 ← NCI share of BV of net assets

7-49


P7-34 (continued)


NCI 20% + Pond Corp. 80% = Patent +Buildings & Equipment + Acc. Depr.

Beginning balance 12,750 51,000 42,500 25,000 (3,750)Changes (750) (3,000) (2,500) (1,250)Ending balance 12,000 48,000 40,000 25,000 (5,000) Amortized excess value reclassification entry:Amortization Expense 2,500 Depreciation expense 1,250 Income from Skate Co. 3,000 NCI in NI of Skate Co. 750

Excess value (differential) reclassification entry:Patent 40,000 Buildings & Equipment 25,000 Acc. Depr. 5,000 Investment in Skate Co. 48,000 NCI in NA of Skate Co. 12,000 Eliminate gain on purchase of landInvestment in Skate Co. 10,400 NCI in NI of Skate Co. 2,600 Land 13,000


Skate Co. 65,000 Actual 6,500 60,000 1,500 75,000

Pond Corp. 125,000 "As If" 80,000

Eliminate the gain on Building and correct asset's basis:Investment in Skate Co. 15,000 Building 60,000 Accumulated Depreciation 75,000


7-50


P7-34 (continued)Investment in Income from

Skate Co. Skate Co. Beginning Balance 185,600


3,000 Excess Val.

Amort. 3,000

Realize Def. Gain 1,500 1,500 Realize Def. Gain

Ending Balance 200,100 22,500 Ending Balance 177,500 Basic 25,500

Land Adjustment 10,400 48,000 Excess Reclass. 3,000 15,000

0 0

7-51


P7-34 (continued)b. Pond

Corp. Skate

Co. Elimination Entries

DR CR Consolidated Income Statement Sales 450,000 250,000 700,000 Interest Income 14,900 14,900 Less: COGS (285,000) (136,000) (421,000) Less: Other Operating Exp. (50,000) (40,000) (90,000)

Less: Depreciation Exp. (35,000) (24,000) 1,250 1,500 (58,750)

Less: Other Amortization Exp. 2,500 (2,500)

Less: Interest Exp. (24,000) (10,500) (34,500) Less: Miscellaneous Exp. (11,900) (9,500) (21,400)

Income from Skate Co. 22,500 25,500 3,000 0


NCI in Net Income 6,000 750 (5,250)



Balance Sheet Cash 68,400 47,000 115,400 Accounts Receivable 130,000 65,000 195,000

Interest and Other Receivables 45,000 10,000 55,000

Inventory 140,000 50,000 190,000 Land 50,000 22,000 13,000 59,000 Buildings & Equipment 400,000 240,000 60,000 725,000 25,000 Less: Accumulated Depr. (185,000) (94,000) 1,500 75,000 (357,500) 5,000 Investment in Skate Co. 200,100 10,400 177,500 0 15,000 48,000 Investment in Tin Co. Bonds 134,000 134,000 Patent 40,000 40,000 Total Assets 982,500 340,000 151,900 318,500 1,155,900

Accounts Payable 65,000 11,000 76,000 Interest and Other Payables 45,000 12,000 57,000 Bonds Payable 300,000 100,000 400,000 Bond Discount (3,000) (3,000) Common Stock 150,000 30,000 30,000 150,000 Additional Paid-in Capital 155,000 20,000 20,000 155,000 Retained Earnings 267,500 170,000 185,250 15,250 267,500 NCI in NA of Skate Co. 2,600 44,000 53,400 12,000 Total Liabilities & Equity 982,500 340,000 237,850 71,250 1,155,900

7-52


P7-35 Intercorporate Sale of Land and Depreciable Asset

a. Income assigned to noncontrolling interest:

Net income of Morris $ 30,000 Gain on sale of equipment to parent $9,600 Gain realized prior to 20X5 (1,200 ) (8,400)Amortization of differential: Buildings and equipment ($25,000 / 10 years) (2,500) Copyright ($17,000 / 5 years) (3,400 )Realized income $15,700 Portion of ownership held x 0.30 Income to noncontrolling interest $ 4,710

Gain on sale of equipment to parent:Sale price to Topp $91,600 Purchase price $100,000 Accumulated depreciation [($100,000 - $10,000)/10 years] x 2 years (18,000 ) (82,000)Gain on sale $ 9,600

b. Reconciliation between book value and investment balance at December31, 20X5:

Underlying book value of Morris Company stock: Common stock outstanding $100,000 Retained earnings, January 1, 20X5 100,000 Net income for 20X5 30,000 Dividends paid in 20X5 ( 5,000 ) Net book value $225,000 Portion of ownership held by Topp x .70 Net book value of ownership held by Topp $157,500 Unamortized differential: Buildings and equipment [($25,000 x 7/10 years) x 0.70] 12,250 Copyright [($17,000 x 2/5 years) x 0.70] 4,760 Gain on sale of land (11,000)Deferred gross profit on sale of equipment (6,720)Realized deferred gain 840 Investment in Morris Company stock $157,630

b.Book Value Calculations:

NCI30%

+Topp Corp.70%

= CommonStock

+ Retained Earnings


7-53


P7-35 (continued)


Total =

Topp Corp.'s

share + NCI's shareUpstream Asset (9,600) (6,720) (2,880) Extra Depreciation 1,200 840 360 Total (8,400) (5,880) (2,520)

Basic elimination entryCommon stock 100,000 ← Original amount invested (100%)Retained earnings 100,000 ← Beginning balance REIncome from Morris Co. 15,120 ← Topp’s share of NI - Def. Gain + Extra Depr.NCI in NI of Morris Co. 6,480 ← NCI share of NI - Def. Gain + Extra Depr. Dividends declared 5,000 ← 100% of Morris Co.'s dividends Investment in Morris Co. 151,620 ← Topp's share of BV - Def. Gain + Extra Depr. NCI in NA of Morris Co. 64,980 ← NCI share of BV - Def. Gain + Extra Depr.


NCI 30% +

Topp Corp. 70% =

Buildings & Equipment + Copyright +

Acc. Depr.

Beginning balance 9,060 21,140 25,000 10,200 (5,000)Changes (1,770) (4,130) (3,400) (2,500)Ending balance 7,290 17,010 25,000 6,800 (7,500)

Amortized excess value reclassification entry:Amortization Expense 3,400 Depreciation expense 2,500 Income from Morris Co. 4,130 NCI in NI of Morris Co. 1,770

Excess value (differential) reclassification entry:Buildings & Equipment 25,000 Copyright 6,800 Acc. Depr. 7,500 Investment in Morris Co. 17,010 NCI in NA of Morris Co. 7,290

Eliminate gain on purchase of landInvestment in Morris Co. 11,000 Land 11,000

7-54


P7-35 (continued)


Topp Corp. 91,600 Actual 11,450 8,400 1,200 18,000

Morris Co. 100,000 "As If" 28,250


Gain on sale 9,600

Equipment 8,400




Investment in Income from Morris Co. Morris Co.

Beginning Balance150,14

0 70% Net Income 21,000 21,000 70% Net Income

3,500 70% Dividends 4,130 Excess Val. Amort. 4,130

Realize Def. Gain 840 6,720 Defer Asset Gain 6,720 840 Realize Def.Gain

Ending Balance157,63

0 10,990 Ending Balance 151,620 Basic 15,120

Land Adjustment 11,000 17,010 Excess Reclass. 4,130 0 0

7-55


P7-35 (continued)c.

Topp Corp.

Morris Co.

Elimination Entries DR CR Consolidated Income Statement Sales 450,000 190,400 640,400 Other Income 28,250 28,250 Gain on Sale of Equip. 9,600 9,600 0 Less: COGS (375,000) (110,000) (485,000)

Less: Depreciation Exp. (25,000) (10,000) 2,500 1,200 (36,300)

Less: Amortization Exp. 3,400 (3,400)

Less: Interest Expense (24,000) (33,000) (57,000) Less: Other Expenses (28,000) (17,000) (45,000)

Income from Morris Co. 10,990 15,120 4,130 0


NCI in Net Income 6,480 1,770 (4,710)



Balance Sheet Cash 15,850 58,000 73,850 Accounts Receivable 65,000 70,000 135,000

Interest and Other Receivables 30,000 10,000 40,000

Inventory 150,000 180,000 330,000 Land 80,000 60,000 11,000 129,000 Buildings & Equipment 315,000 240,000 25,000 588,400 8,400 Less: Accumulated Depr. (120,000) (60,000) 1,200 7,500 (204,300) 18,000 Investment in Morris Co. 157,630 11,000 151,620 0 17,010 Copyright 6,800 6,800 Total Assets 693,480 558,000 52,400 205,130 1,098,750

Accounts Payable 61,000 28,000 89,000 Other Payables 30,000 20,000 50,000 Bonds Payable 250,000 300,000 550,000 Bond Discount (15,000) (15,000) Common Stock 150,000 100,000 100,000 150,000 Additional Paid-in Capital 30,000 30,000 Retained Earnings 172,480 125,000 137,100 12,100 172,480 NCI in NA of Morris Co. 64,980 72,270 7,290 Total Liabilities & Equity 693,480 558,000 237,100 84,370 1,098,750

7-56


P7-36 Incomplete Data

(a) $100,000

(b) $140,000

(c) $250,000 = $593,000 - $343,000

(d) $100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000]

(e) $4,500 = [($106,200 + $70,800) - ($50,000 + $70,000 + $30,000)] / 6 years

(f) Investment in Shadow Company Stock:$106,200 Purchase price, January 1, 20X4

30,000 Undistributed earnings from January 1, 20X4, to January 1, 20X7 [($80,000 - $30,000) x 0.60]

6,000 Undistributed income for 20X7 ($10,000 x 0.60)(10,800) Amortization of differential [($27,000 / 6 years) x 4 years] x 0.60

(5,400) Mound’s portion of gain on sale of equipment ($9,000 x 0.60)3,600 2 years of extra depreciation ($3,000 x 0.60)

(7,000) Gain on sale of land$122,600 Balance in investment account at December 31, 20X7

(g) $7,000 = ($70,000 + $90,000) - $153,000

(h) $-0-

(i) $510,000 = $345,000 + $150,000 + ($60,000 - $45,000)

(j) $278,000 = $180,000 + $80,000 + [($60,000 / 5 years) x 4 years]- [($45,000 / 3 years) x 2 years)

(k) $375,800 (Same as Mound Corporation’s retained earnings balance.)

(l) Income to noncontrolling shareholders:$ 30,000 Shadow's 20X7 net income ($250,000 - $195,000

- $10,000 - $15,000) 3,000 Realized profit on 20X6 sale of equipment to Mound

(4,500) Amortization of differential$ 28,500 Realized net incomex 0.40 $ 11,400 Income to noncontrolling shareholders

7-57


P7-37 Intercompany Sale of Equipment at a Loss in Prior Period

Note: In converting this problem from the modified to the fully adjusted equity method, we did not correctly adjust for lower depreciation over the three years since the fixed asset sale at a loss. If you complete the problem based on the numbers given in the trial balance in the text, the investment and income from sub accounts will not be fully eliminated. In order to correct this problem, please use the following adjusted numbers for Foster Company:

Investment in Block Corporation Stock = 229,500Income from Block Corporation = 51,300Retained Earnings = 251,200

a. These calculations are based on the corrected numbers


NCI10%

+ Foster Co.90%

= CommonStock

+ Retained Earnings



Total =

Foster Co.'s share + NCI's share

Lower Depreciation (3,00

0) (2,70

0) (30

0)

Total (3,00

0) (2,70

0) (30

0)

Basic elimination entryCommon stock 50,000 ← Original amount invested (100%)Retained earnings 150,000 ← Beginning balance in REIncome from Block Corp. 51,300 ← Foster’s share of NI + Extra Dep.NCI in NI of Block Corp. 5,700 ← NCI share of NI + Extra Dep. Dividends declared 20,000 ← 100% of Block Corp.'s dividends Investment in Block Corp. 213,300 ← Foster's share of BV + Extra Dep. NCI in NA of Block Corp. 23,700 ← NCI share of BV + Extra Dep.


Foster Co. 48,000 Actual 18,000 24,000

7-58


42,000 3,000

Block Corp. 90,000 "As If" 45,0

00

7-59


P7-37 (continued)

Eliminate the gain on Equipment and correct asset's basis:Equipment 42,000 Investment in Block Corp. 16,200 NCI in NA of Block Corp. 1,800 Accumulated Depreciation 24,000

Depreciation Expense 3,000 Accumulated Depreciation 3,000

Investment in Income from Block Corp. Block Corp.

Beginning Balance196,20

0

90% Net Income 54,000 54,000 90% Net Income 18,000 90% Dividends 2,700 Realize Def. Gain 2,700

Ending Balance229,50

0 51,300 Ending Balance

213,30

0 Basic51,30

0 16,200 Equipment Adj.

0 0

7-60


P7-37 (continued)


Foster Co.

Block Corp.

Elimination Entries DR CR Consolidated Income Statement Sales 680,000 385,000 1,065,000 Other Income 26,000 15,000 41,000 Less: COGS (500,000) (250,000) (750,000) Less: Depreciation Exp. (45,000) (15,000) 3,000 (63,000) Less: Other Expenses (95,000) (75,000) (170,000) Income from Block Corp. 51,300 51,300 0 Consolidated Net Income 117,300 60,000 54,300 0 123,000 NCI in Net Income 5,700 (5,700) Controlling Interest in NI 117,300 60,000 60,000 0 117,300

Statement of Retained Earnings Beginning Balance 251,200 150,000 150,000 251,200 Net Income 117,300 60,000 60,000 0 117,300 Less: Dividends Declared (40,000) (20,000) 20,000 (40,000) Ending Balance 328,500 190,000 210,000 20,000 328,500

Balance Sheet Cash 82,000 32,400 114,400 Accounts Receivable 80,000 90,000 170,000 Other Receivables 40,000 10,000 50,000 Inventory 200,000 130,000 330,000 Land 80,000 60,000 140,000 Buildings & Equipment 500,000 250,000 42,000 792,000 Less: Accumulated Depr. (155,000) (75,000) 24,000 (257,000) 3,000 Investment in Block Corp. 229,500 213,300 0 16,200

Total Assets 1,056,50

0 497,400 42,000 256,500 1,339,400

Accounts Payable 63,000 35,000 98,000 Other Payables 95,000 20,000 115,000 Bonds Payable 250,000 200,000 450,000 Bond Premium 2,400 2,400 Common Stock 210,000 50,000 50,000 210,000 Additional Paid-in Capital 110,000 110,000 Retained Earnings 328,500 190,000 210,000 20,000 328,500 NCI in NA of Block Corp. 23,700 25,500 1,800

Total Liabilities & Equity 1,056,50

0 497,400 260,000 45,500 1,339,400

7-61


P7-37 (continued)


Foster Co.

Block Corp.

Elimination Entries DR CR Consolidated Income Statement Sales 680,000 385,000 1,065,000 Other Income 26,000 15,000 41,000 Less: COGS (500,000) (250,000) (750,000) Less: Depreciation Exp. (45,000) (15,000) 3,000 (63,000) Less: Other Expenses (95,000) (75,000) (170,000) Income from Block Corp. 56,700 51,300 5,400 Consolidated Net Income 122,700 60,000 54,300 0 128,400 NCI in Net Income 5,700 (5,700) Controlling Interest in NI 122,700 60,000 60,000 0 122,700

Statement of Retained Earnings Beginning Balance 262,000 150,000 150,000 262,000 Net Income 122,700 60,000 60,000 0 122,700 Less: Dividends Declared (40,000) (20,000) 20,000 (40,000) Ending Balance 344,700 190,000 210,000 20,000 344,700

Balance Sheet Cash 82,000 32,400 114,400 Accounts Receivable 80,000 90,000 170,000 Other Receivables 40,000 10,000 50,000 Inventory 200,000 130,000 330,000 Land 80,000 60,000 140,000 Buildings & Equipment 500,000 250,000 42,000 792,000 Less: Accumulated Depr. (155,000) (75,000) 24,000 (257,000) 3,000 Investment in Block Corp. 245,700 213,300 16,200 16,200


0 497,400 42,000 256,500 1,355,600

Accounts Payable 63,000 35,000 98,000 Other Payables 95,000 20,000 115,000 Bonds Payable 250,000 200,000 450,000 Bond Premium 2,400 2,400 Common Stock 210,000 50,000 50,000 210,000 Additional Paid-in Capital 110,000 110,000 Retained Earnings 344,700 190,000 210,000 20,000 344,700 NCI in NA of Block Corp. 23,700 25,500 1,800


0 497,400 260,000 45,500 1,355,600

7-62


P7-38 Comprehensive Problem: Intercorporate Transfers

Note: In converting this problem from the modified to the fully adjusted equity method, we did not correctly adjust for lower depreciation resulting from the fixed asset sale at a loss. If you complete the problem based on the numbers given in the trial balance in the text, the investment and income from sub accounts will not be fully eliminated. In order to correct this problem, please use the following adjusted numbers for Foster Company:

Investment in Block Corporation Stock = 229,500Income from Block Corporation = 51,300Retained Earnings = 251,200

These calculations are based on the corrected numbers

a. Computation of differential as of January 1, 20X8:

Original differential at December 31, 20X1 $ 150,000 Less: Portion written off for sale of inventory (30,000 )Remaining differential, January 1, 20X8 $ 120,000

b. Verification of balance in Investment in Schmid Stock account:

Schmid retained earnings, January 1, 20X8 $1,400,000 Schmid net income, 20X8: 110,000 Schmid dividends, 20X8 (20,000 )Schmid retained earnings, December 31, 20X8 $1,490,000

Schmid stockholders' equity: Common stock $1,000,000 Additional paid-in capital 1,350,000 Retained earnings, December 31, 20X8 1,490,000 Stockholders' equity, December 31, 20X8 $3,840,000 Rossman's ownership share x .75 Book value of shares held by Rossman $2,880,000 Remaining differential at January 1, 20X8: ($120,000 x 0.75) 90,000 Deferred gain on downstream sale of land (23,000)Loss on sale of equipment 30,000Reverse part of loss on sale of equipment (3,000) Balance in Investment in Schmid account, December 31, 20X8 $2,974,000

7-63


These calculations are based on the uncorrected numbers

b. Verification of balance in Investment in Schmid Stock account:

Schmid retained earnings, January 1, 20X8 $1,400,000 Schmid net income, 20X8: 110,000 Schmid dividends, 20X8 (20,000 )Schmid retained earnings, December 31, 20X8 $1,490,000

Schmid stockholders' equity: Common stock $1,000,000 Additional paid-in capital 1,350,000 Retained earnings, December 31, 20X8 1,490,000 Stockholders' equity, December 31, 20X8 $3,840,000 Rossman's ownership share x .75 Book value of shares held by Rossman $2,880,000 Remaining differential at January 1, 20X8: ($120,000 x 0.75) 90,000 Deferred gain on downstream sale of land (23,000)Loss on sale of equipment 30,000Reverse part of loss on sale of equipment (3,000)Incorrect Number 6,000 Balance in Investment in Schmid account, December 31, 20X8 $2,980,000

7-64


P7-38 (continued)

c. These calculations are based on the corrected numbers


NCI25%

+Rossman

Corp.75%

= CommonStock

+Add.

Paid-in Capital

+Retained

Earnings Original book value 937,500 2,812,500 1,000,000 1,350,000 1,400,000 + Net Income 27,500 82,500 110,000 - Dividends (5,000) (15,000) (20,000) Ending book value 960,000 2,880,000 1,000,000 1,350,000 1,490,000


Total =

Rossman Corp.'s

share + NCI's share

Upstream Asset 40,000 30,000 10,000

Extra Depreciation (4,000) (3,000) (1,000)

Total 36,000 27,000 9,000

7-65


Basic elimination entryCommon stock 1,000,000 ← Original amount invested (100%)Additional Paid-in Capital 1,350,000 ← Beginning balance in APICRetained earnings 1,400,000 ← Beginning balance in REIncome from Schmid Dist. 109,500 ← Rossman’s share of NI - Def. GainNCI in NI of Schmid Dist. 36,500 ← NCI share of NI - Def. Gain Dividends declared 20,000 ← 100% of Schmid.'s dividends Investment in Schmid Dist. 2,907,000 ← Rossman's share of BV - Def. Gain NCI in NA of Schmid Dist. 969,000 ← NCI share of BV - Def. Gain


NCI 25% +Rossman Corp. 75% = Land + Goodwill

Beginning balance 30,000 90,000 56,000 64,000 Changes 0 0 0 0 Ending balance 30,000 90,000 56,000 64,000

Excess value (differential) reclassification entry:Land 56,000 Goodwill 64,000 Investment in Schmid Dist. 90,000 NCI in NA of Schmid Dist. 30,000

7-66


P7-38 (continued)

Eliminate servicesOther Income 80,000 Other Expenses 80,000 Eliminate intercompany payables/receivablesCurrent payables 20,000 Current receivables 20,000 Eliminate intercompany dividend owedCurrent payables 3,750 Current receivables 3,750

Eliminate gain on purchase of landInvestment in Schmid Dist. 23,000 Land 23,000


Rossman Corp. 250,000 Actual 25,000 145,000

185,000 4,000 Schmid Dist. 435,000 "As If" 174,000

Eliminate the gain on Equipment and correct asset's basis:Equipment 185,000 Loss on Sale 40,000 Accumulated Depreciation 145,000

Depreciation Expense 4,000 Accumulated Depreciation 4,000

Investment in Income from Schmid Dist. Schmid Dist.

Beginning Balance 2,879,500


Def. Loss on Equipment 30,000 3,000 Realize Loss Gain 3,000 30,000

Def. Gain on Equipment

Ending Balance 2,974,000 109,500 Ending Balance 2,907,000 Basic 109,500

Def. Gain on Land 23,000 90,000 Excess Reclass.0 0

7-67


P7-38 (continued)

d. This worksheet is based on the corrected numbers:

Rossman Corp.

Schmid Dist.

Elimination Entries DR CR Consolidated Income Statement Sales 4,801,000 985,000 5,786,000 Other Income or Loss 90,000 (35,000) 80,000 40,000 15,000

Less: COGS (2,193,000

) (525,000) (2,718,000)

Less: Depreciation & Amort. Expense (202,000) (88,000) 4,000 (294,000)

Less: Other Expenses (1,381,000

) (227,000) 80,000 (1,528,000) Income from Schmid Dist. 109,500 109,500 0 Consolidated Net Income 1,224,500 110,000 193,500 120,000 1,261,000 NCI in Net Income 36,500 (36,500) Controlling Interest in NI 1,224,500 110,000 230,000 120,000 1,224,500


Beginning Balance 1,474,800 1,400,00

0 1,400,00

0 1,474,800 Net Income 1,224,500 110,000 230,000 120,000 1,224,500 Less: Dividends Declared (50,000) (20,000) 20,000 (50,000)

Ending Balance 2,649,300 1,490,00

0 1,630,00

0 140,000 2,649,300

Balance Sheet Cash 50,700 38,000 88,700 Current Receivables 101,800 89,400 23,750 167,450 Inventory 286,000 218,900 504,900

Land 400,000 1,200,00

0 56,000 23,000 1,633,000

Buildings & Equipment 2,400,000 2,990,00

0 185,000 5,575,000

Less: Accumulated Depr. (1,105,000

) (420,000) 145,000 (1,674,000) 4,000

Investment in Schmid Dist. 2,974,000 23,000 2,907,00

0 0 90,000 Goodwill 64,000 64,000

Total Assets 5,107,500 4,116,30

0 328,000 3,192,75

0 6,359,050

Current Payables 86,200 76,300 23,750 138,750 Bonds Payable 1,000,000 200,000 1,200,000

Common Stock 100,000 1,000,00

0 1,000,00

0 100,000

Additional Paid-in Capital 1,272,000 1,350,00

0 1,350,00

0 1,272,000

Retained Earnings 2,649,300 1,490,00

0 1,630,00

0 140,000 2,649,300 NCI in NA of Schmid Dist. 969,000 999,000 30,000

Total Liabilities & Equity 5,107,500 4,116,30

0 4,003,75

0 1,109,00

0 6,359,050

7-68


7-69


P7-38 (continued)

d. This worksheet is based on the uncorrected numbers:

Rossman Corp.

Schmid Dist.

Elimination Entries DR CR Consolidated Income Statement Sales 4,801,000 985,000 5,786,000 Other Income or Loss 90,000 (35,000) 80,000 40,000 15,000

Less: COGS (2,193,000

) (525,000) (2,718,000)


Less: Other Expenses (1,381,000

) (227,000) 80,000 (1,528,000) Income from Schmid Dist. 115,500 109,500 6,000 Consolidated Net Income 1,230,500 110,000 193,500 120,000 1,267,000 NCI in Net Income 36,500 (36,500) Controlling Interest in NI 1,230,500 110,000 230,000 120,000 1,230,500


Beginning Balance 1,474,800 1,400,00

0 1,400,00

0 1,474,800 Net Income 1,230,500 110,000 230,000 120,000 1,230,500 Less: Dividends Declared (50,000) (20,000) 20,000 (50,000)

Ending Balance 2,655,300 1,490,00

0 1,630,00

0 140,000 2,655,300

Balance Sheet Cash 50,700 38,000 88,700 Current Receivables 101,800 89,400 23,750 167,450 Inventory 286,000 218,900 504,900

Land 400,000 1,200,00

0 56,000 23,000 1,633,000

Buildings & Equipment 2,400,000 2,990,00

0 185,000 5,575,000

Less: Accumulated Depr. (1,105,000

) (420,000) 145,000 (1,674,000) 4,000

Investment in Schmid Dist. 2,980,000 23,000 2,907,00

0 6,000 90,000 Goodwill 64,000 64,000

Total Assets 5,113,500 4,116,30

0 328,000 3,192,75

0 6,365,050

Current Payables 86,200 76,300 23,750 138,750 Bonds Payable 1,000,000 200,000 1,200,000

Common Stock 100,000 1,000,00

0 1,000,00

0 100,000

Additional Paid-in Capital 1,272,000 1,350,00

0 1,350,00

0 1,272,000

Retained Earnings 2,655,300 1,490,00

0 1,630,00

0 140,000 2,655,300 NCI in NA of Schmid Dist. 969,000 999,000 30,000

Total Liabilities & Equity 5,113,500 4,116,30

0 4,003,75

0 1,109,00

0 6,365,050

7-70


7-71


P7-39A Computation of Retained Earnings following Multiple Transfers

Consolidated retained earnings, January 1, 20X8:

Great Company’s retained earnings, January 1 $450,000 Unrealized profit on land ($16,000 x 0.80) (12,800)Unrealized profit on depreciable assets [$22,000 - ($2,200 x 2)] (17,600 )Consolidated retained earnings $419,600

Consolidated retained earnings, December 31, 20X8: Consolidated retained earnings, January 1 $419,600 Great Company’s operating income for 20X8 $65,000 Less: Dividends paid in 20X8 (45,000) Increase in retained earnings from Great’s operations 20,000 Meager’s net income for 20X8 $ 30,000 Less: Amortization of differential assigned to equipment: ($325,000 - $290,000) / 10 years (3,500) Impairment of goodwill (17,500 ) Realized income $ 9,000 Proportion of ownership held x 0.80 7,200 Realization of gain on sale of building ($22,000 / 10 years) 2,200 Consolidated retained earnings $449,000

Alternate computation of retained earnings balance:

Great Company’s retained earnings, January 1 $450,000 Operating income for 20X8 65,000 Dividends paid in 20X8 (45,000) Investment income from Meager Company for 20X8: Meager's net income $30,000 Proportion of ownership held x 0.80

Proportionate share of Meager’s reported net income 24,000 Amortization of differential assigned to equipment: [($325,000 - $290,000) x 0.80] / 10 years (2,800) Goodwill impairment loss ($17,500 x 0.80) (14,000) Great Company’s retained earnings $477,200 Unrealized profit on land ($16,000 x 0.80) (12,800)Unrealized profit on depreciable assets [$22,000 - ($2,200 x 3)] (15,400 )Consolidated retained earnings $449,000

7-72


P7-40A Consolidation Worksheet with Intercompany Transfers (Modified Equity Method)


NCI35%

+Mist Co.65%

= CommonStock

+Retained

Earnings Original book value 50,750 94,250 60,000 85,000 + Net Income 10,500 19,500 30,000 - Dividends (1,750) (3,250) (5,000) Ending book value 59,500 110,500 60,000 110,000

Basic elimination entryCommon stock 60,000 ← Original amount invested (100%)Retained earnings 85,000 ← Beginning balance in retained earnings

Income from Blank Corp. 19,500 ← Mist Co.’s share of NINCI in NI of Blank Corp. 6,265 ← NCI share of NI – Def. Gain + Extra Dep. Dividends declared 5,000 ← 100% of Blank Corp.'s dividends declared Investment in Blank Corp. 110,500 ← Net BV left in the investment account NCI in NA of Blank Corp. 55,265 ← NCI share of BV + Extra Dep.

Eliminate gain on purchase of landGain on Sale of Land 4,000 Land 4,000

Eliminate the gain on Building and correct asset's basis:Gain on Sale on Building 13,200 Depreciation Expense 1,100 Building and Equipment (net) 12,100

Eliminate intercompany servicesSales 24,000 Other Expenses 24,000

7-73


P7-40A (continued)

b.

Mist Co. Blank

Corp. Elimination Entries

DR CR Consolidated Income Statement Sales 286,500 128,500 24,000 391,000 Gain on Sale of Land 4,000 4,000 0 Gain on Sale of Building 13,200 13,200 0 Less: COGS (160,000) (75,000) (235,000) Less: Depreciation Exp. (22,000) (19,000) 1,100 (39,900) Less: Other Expenses (76,000) (17,700) 24,000 (69,700) Income from Blank Corp. 19,500 19,500 0 Consolidated Net Income 52,000 30,000 60,700 25,100 46,400 NCI in Net Income 6,265 (6,265) Controlling Interest in NI 52,000 30,000 66,965 25,100 40,135


Balance Sheet Cash 32,500 22,000 54,500 Accounts Receivable 62,000 37,000 99,000 Inventory 95,000 71,000 166,000 Land 40,000 15,000 4,000 51,000 Buildings & Equipment (net) 200,000 125,000 12,100 312,900 Investment in Blank Corp. 110,500 110,500 0 Total Assets 540,000 270,000 0 126,600 683,400

Accounts Payable 35,000 20,000 55,000 Bonds Payable 180,000 80,000 260,000 Common Stock 100,000 60,000 60,000 100,000 Retained Earnings 225,000 110,000 151,965 30,100 213,135 NCI in NA of Blank Corp. 55,265 55,265 Total Liabilities & Equity 540,000 270,000 211,965 85,365 683,400

7-74


P7-40A (continued)

c. Mist Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X4

Cash $ 54,500 Accounts Receivable 99,000 Inventory 166,000 Land 51,000 Buildings and Equipment (net) 312,900 Total Assets $683,400

Accounts Payable $ 55,000 Bonds Payable 260,000 Stockholders’ Equity: Controlling Interest: Common Stock $100,000 Retained Earnings 213,135 Total Controlling Interest $313,135 Noncontrolling Interest 55,265 Total Stockholders’ Equity 368,400 Total Liabilities and Stockholders' Equity $683,400

Mist Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X4

Sales $391,000 Cost of Goods Sold $235,000Depreciation Expense 39,900Other Expenses 69,700 Total Expenses (344,600 )Consolidated Net Income $ 46,400 Income to Noncontrolling Interest (6,265 )Income to Controlling Interest $ 40,135

Mist Company and SubsidiaryConsolidated Retained Earnings Statement


Retained Earnings, January 1, 20X4 $198,000 Income to Controlling Interest, 20X4 40,135

$238,135 Dividends Declared, 20X4 (25,000 )Retained Earnings, December 31, 20X4 $213,135

7-75


P7-41A Modified Equity Method

Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. This error carries over to this problem. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:


This trial balance is based on the corrected numbers:

a. Adjusted trial balance:

Prime Company Lane Company Item Debit Credit Debit Credit

Cash and Accounts Receivable $ 151,000 $ 55,000Inventory 240,000 100,000Land 100,000 80,000Buildings and Equipment 500,000 150,000Investment in Lane Company Stock 240,000Cost of Goods Sold 160,000 80,000Depreciation and Amortization 25,000 15,000Other Expenses 20,000 10,000Dividends Declared 60,000 35,000Accumulated Depreciation $ 230,000 $ 60,000Accounts Payable 60,000 25,000Bonds Payable 200,000 50,000Common Stock 300,000 100,000Retained Earnings 420,000 140,000Sales 250,000 150,000Income from Subsidiary 36,000 Total $1,496,000 $1,496,000 $525,000 $525,000

7-76


This trial balance is based on the uncorrected numbers:

a. Adjusted trial balance:

Prime Company Lane Company Item Debit Credit Debit Credit

Cash and Accounts Receivable $ 151,000 $ 55,000Inventory 240,000 100,000Land 100,000 80,000Buildings and Equipment 500,000 150,000Investment in Lane Company Stock 248,000Cost of Goods Sold 160,000 80,000Depreciation and Amortization 25,000 15,000Other Expenses 20,000 10,000Dividends Declared 60,000 35,000Accumulated Depreciation $ 230,000 $ 60,000Accounts Payable 60,000 25,000Bonds Payable 200,000 50,000Common Stock 300,000 100,000Retained Earnings 428,000 140,000Sales 250,000 150,000Income from Subsidiary 36,000 Total $1,504,000 $1,504,000 $525,000 $525,000

7-77


P7-41A (continued)

b. These calculations are based on the corrected numbers:


Cash 28,000 Investment in Lane Co. 28,000 Record Prime Co.'s 80% share of Lane Co.'s 20X7 dividend

c.Basic elimination entryCommon stock 100,000 Retained earnings 140,000 Income from Lane Co. 36,000 NCI in NI of Lane Co. 9,000 Dividends declared 35,000 Investment in Lane Co. 200,000 NCI in NA of Lane Co. 50,000

Excess value (differential) reclassification entry:Goodwill 32,000 ← Remaining goodwill

Retained Earnings 14,400 ← Lane's portion of goodwill impairment loss from last year

Investment in Lane Co. 40,000 ← Remaining balance in investment account NCI in NA of Lane Co. 6,400 ← NCI's share of differential and loss [($50,000 - 18,000) * .2]


Eliminate gain on purchase of landRetained Earnings 8,000 NCI in NI of Lane Co. 2,000 Land 10,000

7-78



Lane Co. 70,000 Actual 14,000 5,000 2,000 23,000

Prime Co. 75,000 "As If" 35,000

Eliminate the gain on Equipment and correct asset's basis:Retained Earnings 18,000 Equipment 5,000 Accumulated Depreciation 23,000


7-79


P7-41A (continued)

d. This worksheet is based on the corrected numbers:

Prime Co.

Lane Co.

Elimination Entries DR CR Consolidated Income Statement Sales 250,000 150,000 400,000 Less: COGS (160,000) (80,000) (240,000) Less: Depreciation & Amort. Exp. (25,000) (15,000) 2,000 (38,000) Less: Other Expenses (20,000) (10,000) (30,000) Income from Lane Co. 36,000 36,000 0 Consolidated Net Income 81,000 45,000 36,000 2,000 92,000 NCI in Net Income 9,000 (9,000) Controlling Interest in NI 81,000 45,000 45,000 2,000 83,000

Statement of Retained Earnings Beginning Balance 420,000 140,000 140,000 379,600 14,400 8,000 18,000 Net Income 81,000 45,000 45,000 2,000 83,000 Less: Dividends Declared (60,000) (35,000) 35,000 (60,000) Ending Balance 441,000 150,000 225,400 37,000 402,600

Balance Sheet


Inventory 240,000 100,000 340,000 Land 100,000 80,000 10,000 170,000 Buildings & Equipment 500,000 150,000 5,000 655,000 Less: Accumulated Depr. (230,000) (60,000) 2,000 23,000 (311,000) Investment in Lane Co. 240,000 200,000 0 40,000 Goodwill 32,000 32,000


0 325,000 39,000 277,000 1,088,000

Accounts Payable 60,000 25,000 4,000 81,000 Bonds Payable 200,000 50,000 250,000 Common Stock 300,000 100,000 100,000 300,000 Retained Earnings 441,000 150,000 225,400 37,000 402,600 NCI in NA of Lane Co. 2,000 50,000 54,400 6,400


0 325,000 331,400 93,400 1,088,000

7-80


P7-41A (continued)

d. This worksheet is based on the uncorrected numbers:

Prime Co.

Lane Co.

Elimination Entries DR CR Consolidated Income Statement Sales 250,000 150,000 400,000 Less: COGS (160,000) (80,000) (240,000)


Less: Other Expenses (20,000) (10,000) (30,000) Income from Lane Co. 36,000 36,000 0 Consolidated Net Income 81,000 45,000 36,000 2,000 92,000 NCI in Net Income 9,000 (9,000) Controlling Interest in NI 81,000 45,000 45,000 2,000 83,000


Balance Sheet Cash and Accounts Rec. 151,000 55,000 4,000 202,000 Inventory 240,000 100,000 340,000 Land 100,000 80,000 10,000 170,000 Buildings & Equipment 500,000 150,000 5,000 655,000 Less: Accumulated Depr. (230,000) (60,000) 2,000 23,000 (311,000) Investment in Lane Co. 248,000 200,000 8,000 40,000 Goodwill 32,000 32,000


0 325,000 39,000 277,000 1,096,000

Accounts Payable 60,000 25,000 4,000 81,000 Bonds Payable 200,000 50,000 250,000 Common Stock 300,000 100,000 100,000 300,000 Retained Earnings 449,000 150,000 225,400 37,000 410,600 NCI in NA of Lane Co. 2,000 50,000 54,400 6,400


0 325,000 331,400 93,400 1,096,000

7-81


P6-42A Cost Method

a. Journal entry recorded by Prime Company:

Cash 28,000 Dividend Income 28,000 Record dividend from Lane Company.

b.Investment elimination entryCommon stock 100,000 Retained earnings 70,000 Goodwill 25,000 Investment in Lane Co. 160,000 NCI in NA of Lane Co. 35,000

Dividend elimination entryDividend Income 28,000 NCI in NI of Lane Co. 7,000 Dividends Declared 35,000

Assign undistributed income to NCIRetained Earnings 18,000 NCI in NA of Lane Co. 18,000


Eliminate gain on purchase of landRetained Earnings 8,000 NCI in NI of Lane Co. 2,000 Land 10,000

Eliminate the gain on Equipment and correct asset's basis:Retained Earnings 18,000 Equipment 5,000 Accumulated Depreciation 23,000


7-82


P6-42A (continued)

c.

Prime Co.

Lane Co.

Elimination Entries DR CR Consolidated Income Statement Sales 250,000 150,000 400,000 Less: COGS (160,000) (80,000) (240,000) Less: Depr. & Amort. Exp. (25,000) (15,000) 2,000 (38,000) Less: Other Expenses (20,000) (10,000) (30,000) Dividend Income 28,000 28,000 0 Consolidated Net Income 73,000 45,000 28,000 2,000 92,000 NCI in Net Income 7,000 (9,000) 2,000 Controlling Interest in NI 73,000 45,000 37,000 2,000 83,000


Balance Sheet Cash and Accounts Rec.e 151,000 55,000 4,000 202,000 Inventory 240,000 100,000 340,000 Land 100,000 80,000 10,000 170,000 Buildings & Equipment 500,000 150,000 5,000 655,000 Less: Accumulated Depr. (230,000) (60,000) 2,000 23,000 (311,000) Investment in Lane Co. 160,000 160,000 0 Goodwill 25,000 25,000 Total Assets 921,000 325,000 7,000 37,000 1,081,000

Accounts Payable 60,000 25,000 4,000 81,000 Bonds Payable 200,000 50,000 250,000 Common Stock 300,000 100,000 100,000 300,000 Retained Earnings 361,000 150,000 151,000 37,000 397,000 NCI in NA of Lane Co. 35,000 53,000 18,000 Total Liabilities & Equity 921,000 325,000 255,000 72,000 1,081,000

7-83

Documents

Chap_007