B. Woods Chapter 567

1Chapter 5

Chapter 5

INTERCOMPANY PROFIT TRANSACTIONS - INVENTORIES

Solution 5-3

1 d

Philly's separate income $1,000,000Add: Share of Silvio's income ($500,000 x 100%) 500,000Add: Realization of profit deferred in 2019X03 $1,500,000 - ($1,500,000/150%) 500,000Less: Unrealized profit in 2004 inventory $1,200,000 - ($1,200,000/150%) (400,000)Consolidated net income $1,600,000

2 d

Combined sales $1,400,000Less: Intercompany sales (50,000)Consolidated sales $1,350,000

3 c

Combined cost of sales $680,000Less: Intercompany purchases (50,000)

Less: Unrealized profit in beginning inventory (4,000)Add: Unrealized profit in ending inventory 10,000Consolidated cost of sales $636,000

Solution E5-4

1 b

Pride's share of Sedita's income ($60,000 x 80%) $48,000Less: Unrealized profit in ending inventory ($20,000 x 50% unsold x 80% owned) (8,000)Income from Sedita $40,000

2 d

Combined cost of sales $450,000Less: Intercompany sales (100,000)Add: Unrealized profit in ending inventory 10,000Consolidated cost of sales $360,000

3 b

Reported income of Sedita $60,000Unrealized profit (10,000)Sedita's realized income 50,000Minority interest percentage 20%Minority interest expense $10,000

2 Intercompany Profit Transactions - Inventories

Solution E5-5

1 c

Combined sales $1,800,000 Less: Intercompany sales (400,000)Consolidated sales $1,400,000

2 c

Unrealized profit in beginning inventory $100,000 - ($100,000/125%) $20,000

Unrealized profit in ending inventory $125,000 - ($125,000/125%) $25,000

3 b

Combined cost of goods sold $1,440,000Less: Intercompany sales (400,000)Less: Unrealized profit in beginning inventory $100,000 - ($100,000/125%) (20,000)Add: Unrealized profit in ending inventory $125,000 - ($125,000/125%) 25,000Consolidated cost of goods sold $1,045,000

Solution E5-6

1 a

Patti's separate income $200,000Add: Income from Susan:Share of Susan's reported income ($200,000 x 70%) 140,000Less: Patents amortization (20,000)Add: Unrealized profit in beginning inventory [$112,500 - ($112,500/150%)] x 70% 26,250Less: Unrealized profit in ending inventory [$33,000 - ($33,000/150%)] x 70% (7,700)Consolidated net income $338,550

Minority interest expense:Susan's reported income $200,000Add: Unrealized profit in beginning inventory 37,500Less: Unrealized profit in ending inventory (11,000)Susan's realized income 226,500Minority interest percentage 30%Minority interest expense $ 67,950

2 c

Packman's share of Slocum's reported net loss ($150,000 loss x 60%) $(90,000)

3Chapter 5

Add: Unrealized profit in ending inventory ($200,000 x 1/4 unsold) (50,000)Income from Slocum (140,000)Packman's separate income 300,000Consolidated net income $160,000

3 b

Parnell's share of Santini's income ($300,000 x 75%) $225,000Add: Realized profit in beginning inventory $150,000 - ($150,000/1.25) x 75% 22,500Less: Deferred profit in ending inventory $200,000 - ($200,000/1.25) x 75% (30,000)Income from Santini $217,500

Solution E5-7

20 0 19X 4 20 0 19X 5 20 0 19X 6 PansyPosey's separate income $300,000 $400,000 $350,000Add: 80% of SheridanSable's reported income 400,000 440,000 380,000Add: Realization of profits in beginning inventory 310,000 430,000Less: Unrealized profits in ending inventory ( 3 1 0,000 ) ( 4 3 0,000 ) (20,000)Consolidated net income $6 7 9 0,000 $8 3 2 0,000 $7 5 4 0,000

Solution E5-8

Pycus Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 20019X6

Sales ($400,000 + $100,000 - $40,000 intercompany sales) $460,000

Cost of sales ($200,000 + $60,000 - $40,000 intercompany purchases + $10,000 unrealized profit in ending inventory) (230,000)

Gross profit 230,000

Other expenses ($100,000 + $30,000) (130,000)

Total consolidated income 100,000

Less: Minority interest expense ($10,000 x 20%) (2,000)

Consolidated net income $ 98,000

Solution E5-9


1 Minority interest expense

SevenShephard's reported net income x 40% $ 20,000Add: Intercompany profit from upstream sales in beginning inventory ($5,000 x 40%) 2,000Less: Intercompany profit from upstream sales in ending inventory ($108,000 x 40%) ( 4 3 , 0 2 00 )

Minority interest expense $ 18, 0 8 00

2 Consolidated sales

Combined sales $1,250,000Less: Intercompany sales 100,000Consolidated sales $1,150,000

Consolidated cost of sales

Combined cost of sales $6500,000Less: Intercompany sales (100,000)Add: Intercompany profit in ending inventory 108,000Less: Intercompany profit in beginning inventory (5,000)

Consolidated cost of sales

$5 55 03 ,000

Total Consolidated IncomeCombined income $300,000Less: Intercompany profit in ending inventory (10,000)Add: Intercompany profit in beginning inventory 5,000 Total Consolidated Income $295 ,000

Solution E5-10

Papillion Corporation and SubsidiaryConsolidated Income Statement

December 31, 20019X8

Sales ($1,000,000 + $500,000 - $90,000 intercompany) $1,410,000

Cost of sales ($400,000 + $250,000 - $90,000 intercompany - $10,000 unrealized profit in beginning inventory + $15,000 unrealized profit in ending inventory (565,000)Gross profit 845,000

Depreciation expense (170,000)

Other expenses ($90,000 + $60,000 + $4,000 patents amortization) (154,000)


Less: Minority interest expense ($150,000 + $10,000 profit in beginning inventory - $15,000 profit in ending inventory) x 20% (29,000)


Supporting computations

5Chapter 5

Cost of investment in Saiki at January 1, 20019X7 $600,000Book value acquired ($700,000 x 80%) (560,000) Patents $ 40,000Patents amortization ($40,000/10 years) = $4,000 per year

Solution E5-11Pill Corporation and SubsidiaryConsolidated Income Statement

December 31, 2008

Sales ($1,000,000 + $500,000 - $90,000 intercompany) $1,410,000

Cost of sales ($400,000 + $250,000 - $90,000 intercompany - $10,000 unrealized profit in beginning inventory + $15,000 unrealized profit in ending inventory (565,000)Gross profit 845,000

Depreciation expense (170,000)

Other expenses ($90,000 + $60,000) (150,000)


Less: Minority interest income ($150,000 + $10,000 profit in beginning inventory - $15,000 profit in ending inventory) x 20% (29,000)


Supporting computationsCost of investment in Saiki at January 1, 2007 $600,000Book value acquired ($700,000 x 80%) (560,000) Goodwill $ 40,000

Solution E5-12

1 b

Income as reported $200,000Add: Realization of profits in beginning inventory $120,000 - ($120,000/1.2) 20,000Less: Unrealized profits in ending inventory $360,000 - ($360,000/1.2) (60,000)Realized income 160,000Percent ownership 60% Income from Suey $ 96,000

2 c

Suey's equity as reported ($3,400,000 + $2,100,000) $5,500,000Less: Unrealized profit in ending inventory (60,000)Realized equity 5,440,000Minority share 40% Minority interest December 31, 20019X8 $2,176,000

3 b

Realized equity $5,440,000


Majority share 60% Investment balance December 31, 20019X8 $3,264,000

Note: The excess cost over book value is fully amortized. Therefore, the investment balance of $3,264,000 plus the minority interest of $2,176,000 is equal to the $5,440,000 realized equity at the balance sheet date.

Solution E5-13 [AICPA adapted]

1 d Combined revenues $340,000 - consolidated revenues $308,000

2 b Combined accounts receivable $45,000 - $39,000 consolidated accounts receivable

3 c

Revenues $200,000/$150,000 cost of sales = 1 1/3 markup on cost

Amount of Spin's ending inventory from Pard ($32,000 intercompany sales x 3/8 remaining unsold) = $12,000 at billed prices x 3/4 = $9,000

4 b $10,000 minority interest/$50,000 stockholders' equity of Spin

5 a $30,000 unamortized patents/$2,000 amortization = 15 years remaining

Solution E5-14

Pullen Corporation and SubsidiaryConsolidated Income Statement


Sales ($1,380,000 - $120,000 intercompany sales) $1,260,000

Cost of sales ($920,000 - $120,000 - $5,000a + $12,000b) (807,000)


Operating expenses (160,000)


Less: Minority interest expense [$40,000 - ($12,000 x .2)] (37,600)


aUnrealized profit in beginning inventory (downstream) ($180,000 - $160,000) x .25 = $5,000

bUnrealized profit in ending inventory (upstream)

7Chapter 5

($120,000 - $90,000) x .4 = $12,000

SOLUTIONS TO PROBLEMS

Solution P5-1

Proctor Corporation and SubsidiaryConsolidated Statement of Income and Retained Earnings


Sales ($1,300,000 + $650,000 - $80,000 intercompany sales) $1,870,000

Less: Cost of sales ($800,000 + $390,000 - $80,000 intercompany purchases - $12,000 unrealized profit in beginning inventory + $16,000 unrealized profit in ending inventory) (1,114,000)


Other expenses ($340,000 + $160,000) (500,000

Income before minority interest 256,000

Minority interest expense ($100,000 + $12,000 - $16,000) x 10% (9,600)

Consolidated net income 246,400

Add: Beginning consolidated retained earnings 369,200

Less: Dividends for 20019X8 (100,000)

Consolidated retained earnings December 31, 20019X8 $ 515,600

Solution P5-2

1 Consolidated cost of sales - 20019X7

Combined cost of sales ($625,000 + $300,000) $925,000 Less: Intercompany purchases (300,000)Add: Profit in ending inventory 24,000 Less: Profit in beginning inventory (12,000)

Consolidated cost of sales $637,000

2 Minority interest expense - 20019X7

Slam's net income ($600,000 - $300,000 - $150,000) $150,000 Add: Profit in beginning inventory 12,000 Less: Profit in ending inventory (24,000)Slam's realized income 138,000 Minority interest percentage 10%

Minority interest expense $ 13,800

3 Consolidated net income - 20019X7


Consolidated sales ($900,000 + $600,000 - $300,000) $1,200,000 Less: Consolidated cost of sales (637,000)Less: Consolidated expenses ($225,000 + $150,000) (375,000)Less: Minority interest expense (13,800)


Alternatively,Putt's separate income $ 50,000 Add: Income from Slam 124,200

Consolidated net income $174,200

4 Minority interest at December 31, 20019X7

Equity of Slam December 31, 20019X7 $520,000 Less: Unrealized profit in ending inventory (24,000)

496,000 Minority interest percentage 10%

Minority interest December 31, 20019X7 $ 49,600

Solution P5-3

1 Inventories appearing in consolidated balance sheet at December 31, 2004

Beginning inventory-Potter ($60,000 - $4,000a) $ 56,000 Beginning inventory-Scan ($38,750 - $7,750b) 31,000 Beginning inventory-Tray ($24,000 - 0) 24,000

Inventories December 31, 2004 $111,000

Intercompany profit: aPotter: Inventory acquired intercompany ($60,000 x 40%) $ 24,000 Cost of intercompany inventory ($24,000/1.2) (20,000) Unrealized profit in Potter's inventory $ 4,000

bScan: Inventory acquired intercompany ($38,750 x 100%) $ 38,750 Cost of intercompany inventory ($38,750/1.25) (31,000) Unrealized profit in Scan's inventory $ 7,750

2 Inventories appearing in consolidated balance sheet at December 31, 2005

Ending inventory-Potter ($54,000 - $4,500c) $ 49,500 Ending inventory-Scan ($31,250 - $6,250d) 25,000 Ending inventory-Tray ($36,000 - 0) 36,000

Inventories December 31, 2005 $110,500

9Chapter 5

Intercompany profit: cPotter: Inventory acquired intercompany ($54,000 x 50%) $ 27,000 Cost of intercompany inventory ($27,000/1.2) (22,500) Unrealized profit in Potter's inventory $ 4,500

dScan: Inventory acquired intercompany ($31,250 x 100%) $ 31,250 Cost of intercompany inventory ($31,250/1.25) (25,000) Unrealized profit in Scan's inventory $ 6,250

Solution P5-4

1 Plierrowler's income from Stuoffel 20 0 19X 7 20 0 19X 8 20 0 19X 9

75% of Stufftoffel's net income $ 300,000 $ 337,500 $ 262,500

Unrealized profit in December 31, 20019X7 inventory (downstream) ($200,000 x 1/2) x 100% (100,000) 100,000

Unrealized profit in December 31, 20019X8 inventory (upstream) $1080,000 x 75% ( 75 60 ,000 ) 75 60 ,000

Plierrowler's income from Stuoffel $ 200,000 $ 3 62 77 ,500 $ 3 37 22 ,500

2 Plierrowler's net income

Plierrowler's separate income $1,800,000 $1,700,000 $2,000,000

Add: Income from Stuoffel 200,000 3 62 77 ,500 3 37 22 ,500

Plierrowler's net income $2,000,000 $2,0 62 77 ,500 $2,3 37 22 ,500

3 Consolidated net income

Separate incomes of Prowlier and Stuoffel combined $2,200,000 $2,150,000

$2,350,000

Unrealized profit in December 31, 20019X7 inventory (100,000) 100,000

Unrealized profit in December 31, 20019X8 inventory ( 10 8 0,000 ) 10 8 0,000


Total income 2,100,000 2,1570,000 2,4530,000

Less: Minority interest expense 20019X7 $400,000 x 25% (100,000) 20019X8 ($450,000 - $1080,000) x 25% (8792,500) 20019X9 ($350,000 + $1080,000) x 25% (1 12 07 ,500 )

Consolidated net income $2,000,000 $2,0 62 77 ,500 $2,3 37 22 ,500

Solution P5-5Pane Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2004 | | 100% | Adjustments and |Consolidated | Pane | Seal | Eliminations | Statements | | | | |Income Statement | | | | | Sales |$ 800,000 |$400,000 |a 120,000| | $1,080,000 Income from Seal | 102,000 | |d 102,000| | Cost of sales | 400,000*| 200,000*|b 12,000|a 120,000| 472,000* | | | |c 20,000| Depreciation expense | 110,000*| 40,000*| | | 150,000*Other expenses | 192,000*| 60,000*|f 6,000| | 258,000*Net income |$ 200,000 |$100,000 | | | $ 200,000 | | | | |Retained Earnings | | | | |Retained earnings - Pane|$ 600,000 | | | | 600,000 Retained earnings - Seal| |$380,000 |e 380,000| | Net income | 200,000 | 100,000 | | | 200,000 Dividends | 100,000*| 50,000*| |d 50,000| 100,000*Retained earnings | | | | | December 31, 20 04 | $ 700,000 |$430,000 | | | $ 700,000 | | | | |Balance Sheet | | | | |Cash |$ 54,000 |$ 37,000 | | | $ 91,000 Receivables - net | 90,000 | 60,000 | |g 17,000| 133,000 Inventories | 100,000 | 80,000 | |b 12,000| 168,000 Other assets | 70,000 | 90,000 | | | 160,000 Land | 50,000 | 50,000 | | | 100,000 Buildings - net | 200,000 | 150,000 | | | 350,000 Equipment - net | 500,000 | 400,000 | | | 900,000 Investment in Seal | 736,000 | |c 20,000|d 52,000| | | | |e 704,000| Patents | | |e 24,000|f 6,000| 18,000 |$1,800,000 |$867,000 | | | $1,920,000 | | | | |Accounts payable |$ 160,000 |$ 47,000 |g 17,000| | $ 190,000 Other liabilities | 340,000 | 90,000 | | | 430,000 Common stock, $10 par | 600,000 | 300,000 |e 300,000| | 600,000 Retained earnings | 700,000 | 430,000 | | | 700,000 |$1,800,000 |$867,000 | | | $1,920,000 | | | | |

11Chapter 5

Supporting computationsUnrealized profit in beginning inventory ($40,000 x 1/2) = $20,000Unrealized profit in ending inventory ($48,000 x 1/4) = $12,000

Seal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patents amortization equals $102,000 income from Seal.

Solution P5-6 Pattry Corporation and Subsidiary

Consolidation Working Papersfor the year ended December 31, 20019X8

| | | Adjustments and |Consolidated | Pa tt r y | S ue ady 75%| Eliminations | Statements | | | | | Income Statement | | | | | Sales |$ 6 7 00,000 |$ 4 3 00,000 |a 1 3 0 0,000| | $ 870 900 ,000 Income from S ue ady | 10 2,500 1 1 5,000 | |d 10 2,500 1 1 5,000 | | Cost of sales | 270,000*| 210130,000*|b 20,000|a 1300,000| 3610,000* | | | |c 10,000| Operating expenses | 145,000*| 4 2 0,000*| | | 18 7 5,000* Minority expense | | |f 37,500 15,000 | | 37,500 15,000 * Net income |$ 2 8 7,500 40 0,000 |$150,000 | | | $ 28 7,500 40 0,000 | | | | | Retained Earnings | | | | | Retained earnings - Pa tt r y|$ 1 8 2,500 7 0,000 | | | |$ 1 8 2,500 7 0,000 Retained earnings - S ue ady | |$ 90,000 |e 90,000| | Net income | 2 8 7 40 0 , 5 0 00 |150,000 | | | 2 8 7,500 40 0,000 Dividends | 150,000*| 50,000*| |d 37,50045,000| | | | |f 12,500 5,000 | 150,000* Retained earnings | | | | | December 31, 20 0 19X 8 | $ 32 2 0,000 |$190,000 | | |$ 32 2 0,000 | | | | | Balance Sheet | | | | | Cash |$ 85 1 66 ,000 |$ 30,000 | | |$ 115,000 Accounts receivable | 165 180 ,000 | 100,000 | |g 15,000| 250,000 Dividends receivable | 15 18 ,000 | | |h 15 18 ,000| Inventories | 60,000 | 80,000 | |b 20,000| 120,000 Land | 80 100 ,000 | 50,000 | | | 1 3 5 0,000 Buildings - net | 2 3 8 0,000 | 100,000 | | | 3 3 8 0,000 Equipment - net | 200 330 ,000 | 140,000 | | | 34 47 0,000 Investment in Sueady | 385366,000 | |c 10,000|d 6570,000| | | | |e 3 3 0 3 0 6 ,000| Goodwill | | |e 1 5 9 0,000| | 1 5 8 0,000 |$1, 2 2 50 0,000 |$500,000 | | |$1, 4 3 5 6 6 1 ,000 | | | | |Accounts payable |$ 225,000 |$100,000 |g 15,000| |$ 310,000 Dividends payable | 70,000 | 20,000 |h 1 5 8 ,000| | 7 5 2 ,000 Other liabilities | 15 5 0 ,000 | 40,000 | | | 19 5 0 ,000 Common stock - $10 par | 450 735 ,000 | 150,000 |e 150,000| | 450 735 ,000 Retained earnings | 32 2 0,000 | 190,000 | | | 32 2 0,000 |$1, 2 2 50 0,000 |$500,000 | | | | | | Minority interest January 1, 20 0 19X 8 | |e 60 24 ,000| 24 Minority interest December 31, 20 0 19X 8 | |f 25,000 34| 85 34 ,000 | | |$1, 4 3 5 6 6 1 ,000


| | | *Deduct

Supporting computationsInvestment in Sueady 90% at January 1, 20019X7 $30280,000Book value acquired ($200,000 x 75%) 1 5 8 0,000 Goodwill $ 150 1 00 ,000

Solution P5-7

Preliminary computations

Investment cost $275,000Less: Book value acquired ($250,000 x 90%) 225,000 Patents $ 50,000

Patents amortization $50,000/10 years = $5,000 per year

Upstream sales

Unrealized profit in December 31, 20019X6 inventory of Poly $28,000 - ($28,000 1.4) = $8,000

Unrealized profit in December 31, 20019X7 inventory of Poly $42,000 - ($42,000 1.4) = $12,000

Income from Susan

Share of Susan's reported income ($100,000 x 90%) $ 90,000Less: Patents amortization (5,000)Less: Unrealized profit in ending inventory ($12,000 x 90%) (10,800)Add: Unrealized profit in beginning inventory ($8,000 x 90%) 7,200

Income from Susan $ 81,400

Investment balance

Initial investment cost $275,000Increase in Susan's net assets from December 31, 20019X4 to December 31, 20019X7 ($70,000 x 90%) 63,000Patent amortization for 3 years (15,000)Unrealized profit in December 31, 20019X7 inventory (10,800)

Investment balance December 31, 20019X7 $312,200

Minority interest expense

Reported income of Susan $100,000Add: Unrealized profit in beginning inventory 8,000Less: Unrealized profit in ending inventory (12,000)

13Chapter 5

Susan's realized income 96,000Minority interest percentage 10%


Solution P5-7 (continued)

Poly Corporation and SubsidiaryConsolidation Working Papers


| | | Adjustments and |Consolidated | Poly |Susan 90%| Eliminations | Statements | | | | | Income Statement | | | | |Sales |$819,000 |$560,000 |a 560,000| | $819,000 Income from Susan | 81,400 | |d 81,400| | Cost of sales | 546,000*| 400,000*|b 12,000|a 560,000| 390,000* | | | |c 8,000| Other expenses | 154,400*| 60,000*|f 5,000| | 219,400* Minority expense | | |h 9,600| | 9,600* Net income |$200,000 |$100,000 | | | $200,000 | | | | |Retained Earnings | | | | |Retained earnings- | | | | | Poly |$120,000 | | | | $120,000 Retained earnings- | | | | | Susan | |$ 70,000 |e 70,000| | Net income | 200,000 | 100,000 | | | 200,000 Dividends | 100,000*| 50,000*| |d 45,000| |h 5,000| 100,000* Retained earnings | | | | | December 31, 20 0 19X 7 | $220,000 |$120,000 | | | $220,000 | | | | |Balance Sheet | | | | |Cash |$ 75,800 |$ 50,000 | | | $125,800 Inventory | 42,000 | 80,000 | |b 12,000| 110,000 Other current assets| 60,000 | 20,000 | |g 10,000| 70,000 Plant assets - net | 300,000 | 300,000 | | | 600,000 Investment in Susan | 312,200 | |c 7,200|d 36,400| | | | |e 283,000| Patents | | |e 40,000|f 5,000| 35,000 |$790,000 |$450,000 | | | $940,800 | | | | | Current liabilities |$170,000 |$130,000 |g 10,000| | $290,000 Capital stock | 400,000 | 200,000 |e 200,000| | 400,000 Retained earnings | 220,000 | 120,000 | | | 220,000 |$790,000 |$450,000 | | | | | |Minority interest January 1, 20 0 19X 7 |c 800|e 27,000| Minority interest December 31, 20 0 19X 7 | |h 4,600| 30,800 | | | $940,800 | | | *Deduct

Solution P5-8


1 Entries to correct Phil's income from Sert and investment accounts

Retained earnings January 1, 20019X8 $4,500Investment in Sert $4,500

To adjust beginning retained earnings and beginning investment accounts for unrealized profit in the December 31, 20019X7 inventory ($5,000 x 90%).

Investment in Sert $4,500Income from Sert $4,500

To recognize intercompany profit in the December 31, 20019X7 inventory of goods acquired from Sert ($5,000 x 90%).

Income from Sert $4,000Investment in Sert $4,000

To eliminate intercompany profit in the December 31, 20019X8 inventory.

Working paper entries in general journal form:

a Minority interest $ 500Investment in Sert 4,500

Cost of sales $ 5,000

b Sales $ 10,000Cost of sales $ 10,000

c Cost of sales $ 4,000Inventory $ 4,000

d Income from Sert $ 27,500Dividends $ 18,000Investment in Sert 9,500

e Capital stock-Sert $ 80,000Retained earnings-Sert 40,000

Investment in Sert $108,000Minority interest 12,000

f Accounts payable $ 10,000Accounts receivable $ 10,000

g Minority Interest Expense $ 3,500Dividends 2,000Minority Interest 1,500


2 Phil Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 20019X8 | | | Adjustments and |Consolidated

15Chapter 5

| Phil |Sert 90% | Eliminations | Statements | | | | |Income Statement | | | | |Sales |$500,000 |$100,000 |b 10,000| | $590,000 Income from Sert | 27,500 | |d 27,500| | Cost of sales | 240,000*| 40,000*|c 4,000|a 5,000| 269,000* | | | |b 10,000| Other expenses | 174,000*| 30,000*| | | 204,000* Minority expense | | |g 3,500| | 3,500* Net income |$113,500 |$ 30,000 | | | $113,500 | | | | |Retained Earnings | | | | |Retained earnings- | | | | | Phil |$105,500 | | | | $105,500 Retained earnings- | | | | | Sert | |$ 40,000 |e 40,000| | Net income | 113,500 | 30,000 | | | 113,500 Dividends | 70,000*| 20,000*| |d 18,000| |g 2,000| 70,000* Retained earnings | | | | | December 31, 20 0 19X 8 | $149,000 |$ 50,000 | | | $149,000 | | | | |Balance Sheet | | | | |Cash |$ 63,000 |$ 30,000 | | | $ 93,000 Inventories | 60,000 | 15,000 | |c 4,000| 71,000 Accounts receivable| 40,000 | 20,000 | |f 10,000| 50,000 Plant assets - net | 220,000 | 105,000 | | | 325,000 Investment in Sert | 113,000 | |a 4,500|d 9,500| | | | |e 108,000| |$496,000 |$170,000 | | | $539,000 | | | | |Accounts payable |$ 47,000 |$ 40,000 |f 10,000| | $ 77,000 Capital stock | 300,000 | 80,000 |e 80,000| | 300,000 Retained earnings | 149,000 | 50,000 | | | 149,000 |$496,000 |$170,000 | | | | | |Minority interest January 1, 20 0 19X 8 |a 500|e 12,000| Minority interest December 31, 20 0 19X 8 | |g 1,500| 13,000 | | | $539,000 | | | *Deduct

Minority interest expense: ($30,000 + $5,000) x 10%

Solution P5-9Pan Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2004 | | 100% | Adjustments and |Consolidated | Pan | Sal | Eliminations | Statements | | | | |Income Statement | | | | | Sales |$ 800,000 |$400,000 |a 120,000| | $1,080,000 Income from Sal | 108,000 | |d 108,000| | Cost of sales | 400,000*| 200,000*|b 12,000|a 120,000| 472,000* | | | |c 20,000| Depreciation expense | 110,000*| 40,000*| | | 150,000*Other expenses | 192,000*| 60,000*| | | 252,000*


Net income |$ 206,000 |$100,000 | | | $ 206,000 | | | | |Retained Earnings | | | | |Retained earnings - Pan |$ 606,000 | | | | 606,000 Retained earnings - Sal | |$380,000 |e 380,000| | Net income | 206,000 | 100,000 | | | 206,000 Dividends | 100,000*| 50,000*| |d 50,000| 100,000*Retained earnings | | | | | December 31, 2004 |$ 712,000 |$430,000 | | | $ 712,000 | | | | |Balance Sheet | | | | |Cash |$ 54,000 |$ 37,000 | | | $ 91,000 Receivables - net | 90,000 | 60,000 | |f 17,000| 133,000 Inventories | 100,000 | 80,000 | |b 12,000| 168,000 Other assets | 70,000 | 90,000 | | | 160,000 Land | 50,000 | 50,000 | | | 100,000 Buildings - net | 200,000 | 150,000 | | | 350,000 Equipment - net | 500,000 | 400,000 | | | 900,000 Investment in Sal | 748,000 | |c 20,000|d 58,000| | | | |e 710,000| Goodwill | | |e 30,000| | 30,000 |$1,812,000 |$867,000 | | | $1,932,000 | | | | |Accounts payable |$ 160,000 |$ 47,000 |f 17,000| | $ 190,000 Other liabilities | 340,000 | 90,000 | | | 430,000 Common stock, $10 par | 600,000 | 300,000 |e 300,000| | 600,000 Retained earnings | 712,000 | 430,000 | | | 712,000 |$1,812,000 |$867,000 | | | $1,932,000 | | | | |

Supporting computationsUnrealized profit in beginning inventory ($40,000 x 1/2) = $20,000Unrealized profit in ending inventory ($48,000 x 1/4) = $12,000

Sal's income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory.

17Chapter 5

Solution P5-10 Pat Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2008 | | | Adjustments and |Consolidated | Pat | Sun 75%| Eliminations | Statements | | | | | Income Statement | | | | | Sales |$ 600,000 |$400,000 |a 130,000| | $ 870,000 Income from Sun | 92,500 | |d 92,500 | | Cost of sales | 270,000*| 210,000*|b 20,000|a 130,000| 360,000* | | | |c 10,000| Operating expenses | 145,000*| 40,000*|f 10,000| | 195,000*Minority expense | | |i 37,500| | 37,500*Net income |$ 277,500 |$150,000 | | | $ 277,500 | | | | | Retained Earnings | | | | |Retained earnings - Pat |$ 172,500 | | | |$ 172,500 Retained earnings - Sun | |$ 90,000 |e 90,000| | Net income | 277,500 |150,000 | | | 277,500 Dividends | 150,000*| 50,000*| |d 37,500| |i 12,500| 150,000* Retained earnings | | | | | December 31, 2008 |$ 300,000 |$190,000 | | | $ 300,000 | | | | |Balance Sheet | | | | |Cash |$ 85,000 |$ 30,000 | | | $ 115,000 Accounts receivable | 165,000 | 100,000 | |g 15,000| 250,000 Dividends receivable | 15,000 | | |h 15,000| Inventories | 60,000 | 80,000 | |b 20,000| 120,000 Land | 80,000 | 50,000 | | | 130,000 Buildings - net | 230,000 | 100,000 | | | 330,000 Equipment - net | 200,000 | 140,000 | | | 340,000 Investment in Sun | 365,000 | |c 10,000|d 55,000| | | | |e 320,000| Trademark | | |e 140,000|f 10,000| 130,000 |$1,200,000 |$500,000 | | | $1,415,000 | | | | |Accounts payable |$ 225,000 |$100,000 |g 15,000| | $ 310,000 Dividends payable | 70,000 | 20,000 |h 15,000| | 75,000 Other liabilities | 155,000 | 40,000 | | | 195,000 Common stock - $10 par | 450,000 | 150,000 |e 150,000| | 450,000 Retained earnings | 300,000 | 190,000 | | | 300,000 |$1,200,000 |$500,000 | | | | | | Minority interest January 1, 2008 | |e 60,000| Minority interest December 31, 2008 | |i 25,000| 85,000 | | | $1,415,000 | | | *Deduct

Supporting computationsInvestment in Sun at January 1, 2007 $300,000Book value acquired ($200,000 x 75%) 150,000 Trademark (15 year amortization) $150,000


Solution P5-11


Investment cost $275,000Less: Book value acquired ($250,000 x 90%) 225,000 Goodwill $ 50,000

Upstream sales

Unrealized profit in December 31, 2006 inventory of Po $28,000 - ($28,000 1.4) = $8,000

Unrealized profit in December 31, 2007 inventory of Po $42,000 - ($42,000 1.4) = $12,000

Income from San

Share of San's reported income ($100,000 x 90%) $ 90,000Less: Unrealized profit in ending inventory ($12,000 x 90%) (10,800)Add: Unrealized profit in beginning inventory ($8,000 x 90%) 7,200

Income from San $ 86,400

Investment balance

Initial investment cost $275,000Increase in San's net assets from December 31, 2004 to December 31, 2007 ($70,000 x 90%) 63,000Unrealized profit in December 31, 2007 inventory (10,800)

Investment balance December 31, 2007 $327,200

Minority interest expenseReported income of San $100,000Add: Unrealized profit in beginning inventory 8,000Less: Unrealized profit in ending inventory (12,000)Susan's realized income 96,000Minority interest percentage 10%


19Chapter 5


Po Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2007

| | | Adjustments and |Consolidated | Po |San 90% | Eliminations | Statements | | | | | Income Statement | | | | |Sales |$819,000 |$560,000 |a 560,000| | $819,000 Income from San | 86,400 | |d 86,400| | Cost of sales | 546,000*| 400,000*|b 12,000|a 560,000| 390,000* | | | |c 8,000| Other expenses | 154,400*| 60,000*| | | 214,400* Minority expense | | |f 9,600| | 9,600* Net income |$205,000 |$100,000 | | | $205,000 | | | | |Retained Earnings | | | | |Retained earnings- | | | | | Po |$130,000 | | | | $130,000 Retained earnings- | | | | | San | |$ 70,000 |e 70,000| | Net income | 205,000 | 100,000 | | | 205,000 Dividends | 100,000*| 50,000*| |d 45,000| |f 5,000| 100,000* Retained earnings | | | | | December 31, 2007 |$235,000 |$120,000 | | | $235,000 | | | | |Balance Sheet | | | | |Cash |$ 75,800 |$ 50,000 | | | $125,800 Inventory | 42,000 | 80,000 | |b 12,000| 110,000 Other current assets| 60,000 | 20,000 | |g 10,000| 70,000 Plant assets - net | 300,000 | 300,000 | | | 600,000 Investment in San | 327,200 | |c 7,200|d 41,400| | | | |e 293,000| Goodwill | | |e 50,000| | 50,000 |$805,000 |$450,000 | | | $955,800 | | | | | Current liabilities |$170,000 |$130,000 |g 10,000| | $290,000 Capital stock | 400,000 | 200,000 |e 200,000| | 400,000 Retained earnings | 235,000 | 120,000 | | | 235,000 |$805,000 |$450,000 | | | | | |Minority interest January 1, 2007 |c 800|e 27,000| Minority interest December 31, 2007 | |f 4,600| 30,800 | | | $955,800 | | | *Deduct


Chapter 6

INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS

Solution E6-2

1 Parsecon's income from Samitero will be decreased by $25,000 as a result of the following entry:

Income from Samitero $25,000Investment in Samitero $25,000

To eliminate unrealized gain on downstream sale of land.

Parsecon's net income for 20019X6 will not be affected by the sale since the $25,000 gain will be offset by a $25,000 decrease in income from Samitero. The investment in Samitero account at December 31, 20019X6 will be $25,000 less as a result of the sale as indicated by the above entry. (The total balance sheet effect is to reduce land to its cost, reduce the investment account for the profit, and increase cash or other assets for the proceeds.)

2 The consolidated financial statements will not be affected because the gain on the sale is eliminated in the consolidated income statement and the land is reduced to its cost basis to the consolidated entity. A working paper adjustment would show:

Gain on sale of land $25,000Land $25,000

3 Neither Parsecon's income from Samitero or net income for 2007 will be affected by the 2006 sale of land. The investment in Samitero account, however, will still be $25,000 less than if the land had not been sold, even though there are no changes in the investment account during 2007.

4 The sale of the land will not affect Samit’s net income since it is being sold at Samit’s cost. However, the sale triggers recognition of the postponed gain on the original sale from Parsen to Samit.

Investment in Samit $25,000 Income from Samit $25,000 To recognize the gain deferred in 2006.

Consolidated income will also feel the same impact of the recognition of the deferred gain. Investment in Samit $25,000 Gain on sale of land $25,000

21Chapter 5

Solution E6-3

1a Consolidated net income 20 03 20 04

Pruitt's separate income $300,000 $400,000

Add: Equity in Silverman's income

2003 $80,000 x 90% 72,000 2004 $60,000 x 90% 54,000

Gain on sale of land (10,000) ---

Consolidated net income $362,000 $454,000

1b Minority interest expense

Silverman's net income x 10% $ 8,000 $ 6,000

2a Consolidated net income

Pruitt's separate income $300,000 $400,000

Add: Equity in Silverman's income 72,000 54,000

Less: Gain on land x 90% (9,000) ---

Consolidated net income $363,000 $454,000

2b Minority interest expense

Silverman's net income x 10% $ 8,000 $ 6,000

Less: Gain on land x 10% (1,000) ---

Minority interest expense $ 7,000 $ 6,000

Solution E6-4

1 Entries for 20019X6

Cash $ 90,000Investment in Salmark $ 90,000

To record dividends received from Salmark.

Investment in Salmark $108,000Income from Salmark $108,000

To record income from Salmark computed as follows:Share of Salmark's reported income ($150,000 x 90%) $135,000Less: Gain on building sold to Salmark (30,000)


Add: Piecemeal recognition of gain on building ($30,000/10 years) 3,000Income from Salmark $108,000

2 Pigwich Corporation and SubsidiaryConsolidated Income Statement


Sales $2,200,000

Cost of sales (1,400,000)


Operating expenses (447,000)


Minority interest expense (15,000)


Solution E6-5 [AICPA adapted]

1 d

The equipment must be shown at its $1,400,000 book value to the consolidated entity and d is the only choice that provides a $1,400,000 book value. Ordinarily, the equipment would be shown at $1,500,000, its book value at the time of transfer, less the $100,000 depreciation after transfer.

2 c

Reciprocal receivables and payables accounts and purchases and sales accounts must always be eliminated. But dividend income (parent) and dividends paid (subsidiary) accounts are reciprocals only when the cost method is used.

3 a

Amount to be eliminated from consolidated net income in 20019X6:Intercompany gain on downstream sale of machinery $10,000Less: Realized through depreciation of intercompany gain on machinery ($10,000/5 years) (2,000)

Decrease in consolidated net income from intercompany sale $ 8,000

Amount to be added to consolidated net income in 20019X7 for realization through depreciation of intercompany gain on machinery $ 2,000

4 b One-third of the unrealized intercompany profit is recognized through depreciation for 2003.

23Chapter 5

Solution E6-6

1 a

Selling price in 2011 $55,000Cost to consolidated entity 15,000 Gain on sale of land $40,000

2 b

Gain on equipment $ 30,000 Less: Depreciation on gain (10,000) Net effect on investment account $ 20,000

The investment account will be $20,000 less than the underlying equity interest.

3 b

Combined equipment-net $800,000 Less: Unrealized gain (20,000)Add: Piecemeal recognition of gain 5,000 Consolidated equipment-net $785,000

4 b

The working paper entry to eliminate the unrealized profit is:

Gain on sale of equipment $1,500Equipment $1,500

5 c

Investment income will be decreased by $12,000 gain less $3,000 piecemeal recognition of the gain.

6 c

Sartin's net income $1,000,000 Less: Unrealized gain (50,000)Add: Piecemeal recognition 5,000 Realized income 955,000 Minority interest percentage 40% Minority interest expense $ 382,000

Solution E6-7

Podurdy Corporation and SubsidiaryConsolidated Income Statement


Sales ($500,000 + $300,000) $800,000Gain on sale of machinerya 20,000


Total revenue 820,000

Cost of sales ($200,000 + $130,000) 330,000Depreciation expense ($50,000 + $30,000 - $5,000 from depreciation on intercompany profit for 20019X6) 75,000Other expenses ($80,000 + $40,000) 120,000 Total expenses 525,000Minority expense ($100,000 + $5,000 piecemeal recognition from depreciation + $10,000 remaining deferred gain) x 25% minority interest 28,750 Consolidated net income

$ 266,250 295,000

aSelling price of machinery at December 28, 20019X6 $ 36,000Book value on Podurdy's books $65,000 –($65,000/5 years x 3 years) 26,000 Gain on sale of machinery $ 10,000

Original intercompany profit $ 25,000Piecemeal recognition of gain $25,000/5 years x 3 years 15,000 Unamortized gain from intercompany sales $ 10,000

Gain on sale of machinery to outside entity $ 20,000

Solution E6-8

Preliminary computations:Investment in Salt (40%) at cost $100,000 Book value acquired ($200,000 x 40%) (80,000)

Excess allocated to patents $ 20,000

Annual amortization of patents ($20,000/5 years) $ 4,000

1 Income from Salt-20019X4

Share of Salt's net income ($40,000 x 1/2 year x 40%) $ 8,000

Amortization of patents ($4,000 x 1/2 year) (2,000)

Unrealized inventory profit from upstream sale ($4,000 x 40%) (1,600)

Unrealized gain from downstream sale of land ($2,000 x 100%) (2,000)

Income from Salt-20019X4 $ 2,400

2 Income from Salt-20019X5

Share of Salt's net income ($60,000 x 40%) $ 24,000

25Chapter 5

Amortization of patents (4,000)

Unrealized inventory profits from upstream sales:

Recognition of profit in beginning inventory ($4,000 x 40%) 1,600

Deferral of profit in ending inventory ($6,000 x 40%) (2,400)

Income from Salt-20019X5 $

19,200

Solution E6-9

1 Income from Simple, net income and consolidated net income:

Plain's share of Simple's reported net income ($100,000 x 80%) $ 80,000 Less: Amortization of excess allocated to buildings ($400,000 - $320,000)/20 years (4,000)Less: 80% of $20,000 unrealized profit on equipment (16,000) Income from Simple-20019X5 $ 60,000 Add: Separate income of Plain for 20019X5 500,000 Net income of Plain-20019X5 $560,000

Plain's share of Simple's reported net income ($110,000 x 80%) $ 88,000 Less: Amortization of excess allocated to buildings (4,000)Add: 80% piecemeal recognition of unrealized gain on equipment 80% x ($20,000/4 years) 4,000 Income from Simple-20019X6 $ 88,000 Add: Separate income of Plain 600,000 Net income of Plain-20019X6 $688,000

Consolidated net income for 20019X5 and 20019X6 = Plain's net income

Alternatively, 20 0 19X 5 20 0 19X 6 Separate incomes combined $600,000 $710,000 Less: Amortization of excess (buildings) (4,000) (4,000)Less: Unrealized gain on equipment in 20019X5 (20,000)Add: Piecemeal recognition of gain in 20019X6 5,000 Less: Minority interest expense: 20019X5 ($100,000 - $20,000) x 20% (16,000) 20019X6 ($110,000 + $5,000) x 20% (23,000) Consolidated net income $560,000 $688,000

2 Investment in Simple

Cost of investment July 1, 20019X3 $400,000 Add: Plain's share of Simple's retained earnings increase from July 1, 20019X3 to December 31, 20019X4 ($150,000 - $100,000) x 80% 40,000 Less: Amortization of excess ($4,000 x 1.5 years) (6,000) Investment in Simple December 31, 20019X4 434,000 Add: 20019X5 income less dividends [$60,000 - ($50,000 x 80%)] 20,000 Investment in Simple December 31, 20019X5 454,000


Add: 20019X6 income less dividends [$88,000 - ($60,000 x 80%)] 40,000 Investment in Simple December 31, 20019X6

$494,000

Alternative solution for check at December 31, 20019X6:Share of Simple's equity December 31, 20019X6 ($550,000 x 80%)

$440,000 Add: Unamortized excess on buildings Original excess $80,000 - ($4,000 x 3.5 years) 66,000 Less: Unrealized profit on equipment ($20,000 gain - $5,000 recognized) x 80% (12,000) Investment in Simple December 31, 20019X6

$494,000

Solution E6-10


Transfer price of inventory to Sapanaro ($1820,000 x 21.5)$36180,000

Cost to consolidated entity 18 12 0,000 Unrealized profit on January 3 $ 18 6 0,000

Amortization of unrealized profit from consolidated view: $1860,000/6 years = $310,000 per year

1 Consolidated balance sheet amounts:

20019X5Equipment (at transfer price) $36180,000Less: Unrealized profit (1860,000)Less: Depreciation taken by Sapanaro ($36180,000/6 years) (630,000)Add: Depreciation on unrealized profit ($1860,000/6 years) 3 1 0,000 Equipment-net to be included on consolidated balance sheet $1 5 0 0,000

Alternatively:Equipment (at cost to the consolidated entity) $1820,000Less: Depreciation based on cost ($1820,000/6 years) ( 3 2 0,000 )Equipment-net $1 5 0 0,000

20019X6 Year after intercompany saleEquipment-net beginning of the period on cost basis $1500,000Less: Depreciation (based on cost) ( 3 2 0,000 )Equipment-net $ 12 8 0,000

2 Consolidation working paper entries:

20019X5Sales $36180,000

Cost of goods sold $1820,000Equipment-net 150,000Depreciation expense 310,000

27Chapter 5

To eliminate intercompany inventory sale, return equipment to its cost to the consolidated entity, and eliminate depreciation on the intercompany profit.

20019X6Investment in Sapanaro $ 150,000

Equipment-net $ 1240,000Depreciation expense 310,000

To eliminate unrealized profit from the equipment account and the current year's depreciation on the unrealized profit and establish reciprocity between the investment account and beginning-of-the-period subsidiary equity accounts.

Solution E6-11

Pasco Corporation and SubsidiarySchedule for Computation of Consolidated Net Income

20 03 20 04 20 05 20 06 Combined separate incomes $260,000 $220,000 $120,000 $210,000Add: Amortization of negative goodwill assigned to plant assets ($40,000/10 years) 4,000 4,000 4,000 4,000Unrealized gain on land (Note that Pasco's $5,000 gain is included in Pasco's separate income) (5,000) 5,000Unrealized gain on machinery (25,000)Piecemeal recognition of gain gain on machinery 5,000 5,000 5,000Unrealized inventory profits (8,000) 8,000 Total realized income 259,000 204,000 121,000 232,000Less: Minority interest expense 2003 ($60,000 - $5,000) x 20% (11,000) 2004 ($70,000 x 20%) (14,000) 2005 ($80,000 - $8,000) x 20% (14,400) 2006 ($90,000 + $8,000 + $5,000) x 20% (20,600)Consolidated net income $248,000 $190,000 $106,600 $211,400

Alternative Solution:Pasco's separate income $200,000 $150,000 $ 40,000 $120,000Add: 80% of Slocum's income 48,000 56,000 64,000 72,000Amortization of negative goodwill 4,000 4,000 4,000 4,000Unrealized profit on upstream sale of land ($5,000 x 80%) (4,000) 4,000Unrealized profit on downstream sale of machinery (25,000)Piecemeal recognition of gain ($25,000/5 years) 5,000 5,000 5,000Unrealized profit on upstream sale of inventory items $8,000 x 80% (6,400) 6,400Pasco's net income and consolidated net income $248,000 $190,000 $106,600 $211,400



Solution P6-1

1 Income from Spear - 2004

Equity in Spear's income ($100,000 x 90100%) $90100,000

Add: Deferred inventory profit from 2003 ($40,000 x 50%) 20,000

Less: Unrealized inventory profit from 2004 ($60,000 x 40%) (24,000)

Less: Intercompany profit on equipment ($100,000 - $60,000) (40,000)

Add: Piecemeal recognition of profit on equipment $40,000/4 years 10,000

Income from Spear (corrected amount) $ 5 6 6,000

2 Pearldue Corporation and SubsidiaryConsolidated Income Statement


Sales [$1,600,000 combined - $150,000 intercompany] $1,450,000

Cost of sales [$1,000,000 combined - $150,000 intercompany + $24,000 ending inventory profits - $20,000 beginning inventory profits] 854,000


Other expenses [$300,000 combined - $10,000 piecemeal recognition of profit on equipment] 290,000 Minority Expense 10,000Consolidated net income $ 29 30 6,000

Check: Separate income of Pearldue $240,000 Add: Income from Spear 5 6 6,000 Consolidated net income $ 29 30 6,000

Solution P6-2


Computation of income from Sim:Share of Sim's reported income ($40,000 x .9) $36,000Less: Depreciation on excess allocated to buildings ($20,000/5 years) (4,000)Add: Realization of deferred profits in

29Chapter 5

beginning inventory 5,000Less: Unrealized profits in ending inventory (4,000)Less: Unrealized profit on intercompany sale of equipment ($30,000 - $21,000) (9,000)Add: Piecemeal recognition of deferred profit in equipment ($9,000/3 years) 3,000Income from Sim $27,000

Consolidation working paper entries

a Cash $ 2,000Accounts receivable $ 2,000

To record cash in transit from Sim on account.


To eliminate intercompany purchases and sales.

c Investment in Sim $ 5,000Cost of sales $ 5,000

To recognize previously deferred profit from beginning inventory.

d Cost of sales $ 4,000Inventory $ 4,000

To defer unrealized profit from ending inventory.

e Investment in Sim $ 3,000Land $ 3,000

To reduce land to its cost basis and adjust the investment account to establish reciprocity with Sim's beginning of the period equity accounts.

f Gain on sale of equipment $ 9,000Equipment-net $ 9,000

To eliminate gain on intercompany sale of equipment and reduce equipment to a cost basis.


g Equipment-net $ 3,000Operating expenses $ 3,000

To eliminate current year's depreciation of unrealized gain.

h Income from Sim $ 27,000Dividends-Sim $ 18,000Investment in Sim 9,000


To eliminate income and dividends from Sim and return investment account to its beginning of the period balance.

i Retained earnings-Sim $ 70,000Capital stock-Sim 50,000Buildings-net 16,000Goodwill 20,000

Investment in Sim $144,000Minority interest-January 1 12,000

To eliminate reciprocal investment and equity amounts, establish beginning minority interest, and enter beginning of the period cost-book value differentials.

j Minority Interest Expense $ 4,000Dividends-Sim $2,000Minority Interest 2,000

To record minority interest share of subsidiary income and dividends.

k Operating expenses $ 4,000Buildings-net $ 4,000

To record depreciation on excess allocated to buildings.

l Dividends payable $ 9,000Dividends receivable $ 9,000

To eliminate reciprocal receivables and payables.


Pal Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2008 | | | Adjustments and |Consolidated | Pal | Sim 90% | Eliminations | Statements | | | |Income Statement | | | |Sales |$300,000 |$100,000 |b 20,000 | $380,000 Income from Sim | 27,000 | |h 27,000 | Gain on equipment | 9,000 | |f 9,000 | Cost of sales | 140,000*| 50,000*|d 4,000 b 20,000| | | | c 5,000| 169,000* Operating expenses | 60,000*| 10,000*| g 3,000| 71,000* | | |k 4,000 | Minority expense | | |j 4,000 | 4,000* Net income |$136,000 |$ 40,000 | | $136,000 | | | |Retained Earnings | | | |Retained earnings - Pal|$148,000 | | | $148,000 Retained earnings - Sim| |$ 70,000 |i 70,000 | Net income | 136,000 | 40,000 | | 136,000 Dividends | 60,000*| 20,000*| h 18,000| j 2,000| 60,000*

31Chapter 5

Retained earnings | | | | December 31, 2008 |$224,000 |$ 90,000 | | $224,000 | | | |Balance Sheet | | | |Cash |$100,000 |$ 17,000 |a 2,000 | $119,000 Accounts receivable | 90,000 | 50,000 | a 2,000| 138,000 Dividends receivable | 9,000 | | l 9,000| Inventories | 20,000 | 8,000 | d 4,000| 24,000 Land | 40,000 | 15,000 | e 3,000| 52,000 Buildings - net | 135,000 | 50,000 |i 16,000 k 4,000| 197,000 Equipment - net | 165,000 | 60,000 |g 3,000 f 9,000| 219,000 Investment in Sim | 145,000 | |c 5,000 h 9,000| | | |e 3,000 i 144,000| Goodwill | | |i 20,000 | 20,000 |$704,000 |$200,000 | | $769,000 | | | |Accounts payable |$ 98,000 |$ 30,000 | | $128,000 Dividends payable | 15,000 | 10,000 |l 9,000 | 16,000 Other liabilities | 67,000 | 20,000 | | 87,000 Capital stock | 300,000 | 50,000 |i 50,000 | 300,000 Retained earnings | 224,000 | 90,000 | | 224,000 |$704,000 |$200,000 | | | |Minority interest January 1, 2008 | i 12,000| Minority interest December 31, 2008 | j 2,000| 14,000 | | $769,000 | | *Deduct

Solution P6-3


Cost January 1, 2003 $236,000Add: Income from Stor for 2003 Equity in income ($40,000 x 90%) $36,000 Less: Unrealized inventory profit (10,000) Less: Unrealized profit on machinery (selling price $35,000 - book value $28,000) (7,000) Add: Piecemeal recognition of profit on machinery ($7,000/3.5 years x .5 year) 1,000Income from Stor for 2003 20,000Less: Dividends $10,000 x 90% (9,000)

Investment balance January 1, 2004 247,000Add: Income from Stor for 2004 Equity in income ($50,000 x 90%) $45,000 Add: Unrealized profit in beginning inventory 10,000 Less: Unrealized profit in ending inventory (12,000) Add: Piecemeal recognition of profit on machinery ($7,000/3.5 years) 2,000 Less: Gain on sale of land (5,000)Income from Stor for 2004 40,000Less: Dividends ($20,000 x 90%) (18,000)

Investment balance December 31, 2004 $269,000



Pall Corporation and SubsidiaryConsolidation Working Papers

for the Year Ended December 31, 2004_____________________________________________________________________________ | | | Adjustments and |Consolidated | Pall | Stor 90%| Eliminations | Statements | | | |Income Statement | | | |Sales |$ 450,000 |$190,000 |a 72,000 |$ 568,000 Income from Stor | 40,000 | |f 40,000 | Gain on land | 5,000 | |e 5,000 | Cost of sales | (200,000)|(100,000)|c 12,000 a 72,000| | | | b 10,000| (230,000) Operating expense | (113,000)| (40,000)| d 2,000| (151,000) Minority expense | | |h 5,000 | (5,000) Net income |$ 182,000 |$ 50,000 | |$ 182,000 | | | | Retained Earnings | | | | Retained earnings - Pall|$ 202,000 | | |$ 202,000 Retained earnings - Stor| |$120,000 |g 120,000 | Net income | 182,000 | 50,000 | | 182,000 Dividends | (150,000)| (20,000)| f 18,000| h 2,000| (150,000) Retained earnings | | | | December 31, 2004 |$ 234,000 |$150,000 | |$ 234,000 | | | | Balance Sheet | | | | Cash |$ 167,000 |$ 14,000 | |$ 181,000 Accounts receivable | 180,000 | 100,000 | i 10,000| 270,000 Dividends receivable | 18,000 | | j 18,000| Inventories | 60,000 | 36,000 | c 12,000| 84,000 Land | 100,000 | 30,000 | e 5,000| 125,000 Buildings - net | 280,000 | 80,000 | | 360,000 Machinery - net | 330,000 | 140,000 | d 4,000| 466,000 Investment in Stor | 269,000 | |b 10,000 f 22,000| | | |d 6,000 g 263,000| Goodwill | | |g 20,000 | 20,000 Total assets |$1,404,000 |$400,000 | |$1,506,000 | | | |Accounts payable |$ 200,000 |$ 50,000 |i 10,000 |$ 240,000 Dividends payable | 30,000 | 20,000 |j 18,000 | 32,000 Other liabilities | 140,000 | 30,000 | | 170,000 Capital stock | 800,000 | 150,000 |g 150,000 | 800,000 Retained earnings | 234,000 | 150,000 | | 234,000 Total equities |$1,404,000 |$400,000 | | Minority interest January 1, 2004 | g 27,000| Minority interest December 31, 2004 | h 3,000| 30,000 | |$1,506,000 | | | |

Solution P6-4

Parchge Corporation and SubsidiaryConsolidation Working Papers


33Chapter 5

| | | Adjustments and |Consolidated | Pa rch ge | Sa rg s 90%| Eliminations | Statements | | | | |Income Statement | | | | |Sales |$ 700,000 |$500,000 |a 50,000| | $1,150,000 Income from Sa rg s | 7 6 0,000 | |e 7 6 0,000| | Gain on land | 10,000 | 10,000 |c 10,000| | Gain on equipment | 20,000 | |d 20,000| | Cost of sales | 300,000*| 300,000*|b 5,000|a 50,000| 555,000*Depreciation expense | 90,000*| 35,000*| |d 5,000| 120,000*Other expenses | 200,000*| 65,000*| | | 265,000*Minority expense | | |h 10,000 | | 10,000*Net income |$ 200,000 |$1 1 0 0,000 | | | $ 200,000 | | | | |Retained Earnings | | | | |Retained earnings- | | | | | Pa rch ge |$ 600,000 | | | | $ 600,000 Retained earnings - Sa rg s | |$200,000 |f 200,000| | Net income | 200,000 | 1 1 0 0,000 | | | 200,000 Dividends | 100,000*| 50,000*| |e 45,000| |h 5,000| 100,000*Retained earnings | | | | | December 31, 20 19X 03 | $ 700,000 |$2 6 5 0,000 | | | $ 700,000 | | | | |Balance Sheet | | | | |Cash |$ 3 4 5,000 |$ 3 2 0,000 | | | $ 65,000 Accounts receivable | 90,000 | 110,000 | |g 10,000| 190,000 Inventories | 100,000 | 80,000 | |b 5,000| 175,000 Other current items | 70,000 | 40,000 | | | 110,000 Land | 50,000 | 70,000 | |c 10,000| 110,000 Buildings - net | 200,000 | 150,000 | | | 350,000 Equipment - net | 500,000 | 400,000 | |d 15,000| 885,000 Investment in Sargs | 6545,000 | | |e 215,000| | | | |f 630,000| |$1,700,000 |$8 8 7 0,000 | | | $1,885,000 | | | | |Accounts payable |$ 160,000 |$ 50,000 |g 10,000| | $ 200,000 Other liabilities | 340,000 | 70,000 | | | 410,000 Capital stock | 500,000 | 500,000 |f 500,000| | 500,000 Retained earnings | 700,000 | 2 6 5 0,000 | | | 700,000 |$1,700,000 |$8 8 7 0,000 | | | | | |Minority interest January 1, 20 03 | |f 70,000| Minority interest December 31, 20 03 | |h 5,000| 75,000 | | | $1,885,000 | | | *Deduct

Solution P6-5


Computation of income from Sim:Share of Sim's reported income ($40,000 x 90%) $36,000Less: Patent amortization ($20,000/10 years) (2,000)Less: Depreciation on excess allocated to buildings ($20,000/5 years) (4,000)Add: Realization of deferred profits in beginning inventory 5,000Less: Unrealized profits in ending inventory (4,000)Less: Unrealized profit on intercompany sale


of equipment ($30,000 - $21,000) (9,000)Add: Piecemeal recognition of deferred profit in equipment ($9,000/3 years) 3,000Income from Sim $25,000


a Cash $ 2,000Accounts receivable $ 2,000

To record cash in transit from Sim on account.


To eliminate intercompany purchases and sales.

c Investment in Sim $ 5,000Cost of sales $ 5,000

To recognize previously deferred profit from beginning inventory.

d Cost of sales $ 4,000Inventory $ 4,000

To defer unrealized profit from ending inventory.

e Investment in Sim $ 3,000Land $ 3,000

To reduce land to its cost basis and adjust the investment account to establish reciprocity with Sim's beginning of the period equity accounts.

f Gain on sale of equipment $ 9,000Equipment-net $ 9,000

To eliminate gain on intercompany sale of equipment and reduce equipment to a cost basis.

g Equipment-net $ 3,000Operating expenses $ 3,000

To eliminate current year's depreciation of unrealized gain.


h Income from Sim $ 25,000Dividends-Sim $ 18,000Investment in Sim 7,000

To eliminate income and dividends from Sim and return investment account to its beginning of the period balance.

35Chapter 5

i Retained earnings-Sim $ 70,000Capital stock-Sim 50,000Buildings-net 16,000Patents 18,000

Investment in Sim $142,000Minority interest-January 1 12,000

To eliminate reciprocal investment and equity amounts, establish beginning minority interest, and enter beginning of the period cost-book value differentials.

j Operating expenses $ 2,000Patents $ 2,000

To record current year's amortization.

k Operating expenses $ 4,000Buildings-net $ 4,000

To record depreciation on excess allocated to buildings.

l Dividends payable $ 9,000Dividends receivable $ 9,000

To eliminate reciprocal receivables and payables.

m Minority Interest Expense $ 4,000Dividends-Sim $ 2,000Minority Interest 2,000

To enter minority interest share of subsidiary income and dividends


Pal Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 20019X8 | | | Adjustments and |Consolidated | Pal | Sim 90% | Eliminations | Statements | | | |Income Statement | | | |Sales |$300,000 |$100,000 |b 20,000 | $380,000 Income from Sim | 25,000 | |h 25,000 | Gain on equipment | 9,000 | |f 9,000 | Cost of sales | 140,000*| 50,000*|d 4,000 b 20,000| | | | c 5,000| 169,000* Operating expenses | 60,000*| 10,000*|j 2,000 g 3,000| 73,000* | | |k 4,000 | Minority expense | | |m 4,000 | 4,000* Net income |$134,000 |$ 40,000 | | $134,000 | | | |Retained Earnings | | | |Retained earnings - Pal|$146,000 | | | $146,000 Retained earnings - Sim| |$ 70,000 |i 70,000 | Net income | 134,000 | 40,000 | | 134,000


Dividends | 60,000*| 20,000*| h 18,000| m 2,000| 60,000* Retained earnings | | | | December 31, 20 08 19X | $220,000 |$ 90,000 | | $220,000 | | | |Balance Sheet | | | |Cash |$100,000 |$ 17,000 |a 2,000 | $119,000 Accounts receivable | 90,000 | 50,000 | a 2,000| 138,000 Dividends receivable | 9,000 | | l 9,000| Inventories | 20,000 | 8,000 | d 4,000| 24,000 Land | 40,000 | 15,000 | e 3,000| 52,000 Buildings - net | 135,000 | 50,000 |i 16,000 k 4,000| 197,000 Equipment - net | 165,000 | 60,000 |g 3,000 f 9,000| 219,000 Investment in Sim | 141,000 | |c 5,000 h 7,000| | | |e 3,000 i 142,000| Patents | | |i 18,000 j 2,000| 16,000 |$700,000 |$200,000 | | $765,000 | | | |Accounts payable |$ 98,000 |$ 30,000 | | $128,000 Dividends payable | 15,000 | 10,000 |l 9,000 | 16,000 Other liabilities | 67,000 | 20,000 | | 87,000 Capital stock | 300,000 | 50,000 |i 50,000 | 300,000 Retained earnings | 220,000 | 90,000 | | 220,000 |$700,000 |$200,000 | | | |Minority interest January 1, 20 0 19X 8 | i 12,000| Minority interest December 31, 20 0 19X 8 | m 2,000| 14,000 | | $765,000 | | *Deduct

Solution P6-6


Cost January 1, 20019X3 $236,000Add: Income from Stor for 20019X3 Equity in income ($40,000 x 90%) $36,000 Less: Patent amortization ($20,000/10 years) (2,000) Less: Unrealized inventory profit (10,000) Less: Unrealized profit on machinery (selling price $35,000 - book value $28,000) (7,000) Add: Piecemeal recognition of profit on machinery ($7,000/3.5 years x .5 year) 1,000Income from Stor for 20019X3 18,000Less: Dividends $10,000 x 90% (9,000)

Investment balance January 1, 20019X4 245,000Add: Income from Stor for 20019X4 Equity in income ($50,000 x 90%) $45,000 Less: Patent amortization (2,000) Add: Unrealized profit in beginning inventory 10,000 Less: Unrealized profit in ending inventory (12,000) Add: Piecemeal recognition of profit on machinery ($7,000/3.5 years) 2,000 Less: Gain on sale of land (5,000)Income from Stor for 20019X4 38,000

37Chapter 5

Less: Dividends ($20,000 x 90%) (18,000)

Investment balance December 31, 20019X4 $265,000



Pall Corporation and SubsidiaryConsolidation Working Papers

for the Year Ended December 31, 20019X4_____________________________________________________________________________ | | | Adjustments and |Consolidated | Pall | Stor 90%| Eliminations | Statements | | | |Income Statement | | | |Sales |$ 450,000 |$190,000 |a 72,000 |$ 568,000 Income from Stor | 38,000 | |f 38,000 | Gain on land | 5,000 | |e 5,000 | Cost of sales | (200,000)|(100,000)|c 12,000 a 72,000| | | | b 10,000| (230,000) Operating expense | (113,000)| (40,000)|h 2,000 d 2,000| (153,000) Minority expense | | |k 5,000 | (5,000) Net income |$ 180,000 |$ 50,000 | |$ 180,000 | | | | Retained Earnings | | | | Retained earnings - Pall|$ 200,000 | | |$ 200,000 Retained earnings - Stor| |$120,000 |g 120,000 | Net income | 180,000 | 50,000 | | 180,000 Dividends | (150,000)| (20,000)| f 18,000| k 2,000| (150,000) Retained earnings | | | | December 31, 20 04 | $ 230,000 |$150,000 | |$ 230,000 | | | | Balance Sheet | | | | Cash |$ 167,000 |$ 14,000 | |$ 181,000 Accounts receivable | 180,000 | 100,000 | i 10,000| 270,000 Dividends receivable | 18,000 | | j 18,000| Inventories | 60,000 | 36,000 | c 12,000| 84,000 Land | 100,000 | 30,000 | e 5,000| 125,000 Buildings - net | 280,000 | 80,000 | | 360,000 Machinery - net | 330,000 | 140,000 | d 4,000| 466,000 Investment in Stor | 265,000 | |b 10,000 f 20,000| | | |d 6,000 g 261,000| Patents | | |g 18,000 h 2,000| 16,000 Total assets |$1,400,000 |$400,000 | |$1,502,000 | | | |Accounts payable |$ 200,000 |$ 50,000 |i 10,000 |$ 240,000 Dividends payable | 30,000 | 20,000 |j 18,000 | 32,000 Other liabilities | 140,000 | 30,000 | | 170,000 Capital stock | 800,000 | 150,000 |g 150,000 | 800,000 Retained earnings | 230,000 | 150,000 | | 230,000 Total equities |$1,400,000 |$400,000 | | Minority interest January 1, 20 04 | g 27,000| Minority interest December 31, 20 04 | k 3,000| 30,000 | |$1,502,000 | | | |

39Chapter 5

Solution P6-7

Preliminary computationsInvestment cost $290,000Book value acquired ($300,000 x 80%) (240,000) Excess cost over book value acquired $ 50,000Excess allocated:Inventories ($50,000 x 50%) $ 25,000Patent 25,000 Excess cost over book value acquired $ 50,000

Reconciliation of income from Saink:Pilhal's share of Saink's net income ($50,000 x 80%) $ 40,000Less: Patent amortization ($25,000/10 years) (2,500)Add: Depreciation on deferred gain on equipment ($15,000/5 years) x 80%

23,4000Less: Unrealized profit on upstream sale of land ($10,000 x 80%) (8,000) Income from Saink $ 3 1 2 , 9 5 00

Reconciliation of investment account:Share of Saink's underlying equity ($400,000 x 80%) $320,000Add: Unamortized patent $25,000 - ($2,500 x 3 years) 17,500Less: Unrealized gain on equipment [$15,000 - ($3,000 x 2 years)] x 80%

(79,2000)Less: Share of unrealized gain on land (8,000)Investment in Saink December 31, 20019X6 $3 22 20 , 3 5 00

Minority interest expense:Saink's reported income $ 50,000Add: Piecemeal recognition of gain on sale of machinery 3,000Less: Unrealized gain on upstream sale of land (10,000)Realized income 430,000Minority percentage 20%Minority interest expense $ 8, 0 6 00



Pilhal Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 20019X6 | | | Adjustments and |Consolidated | P il ha l |S a i nk 80% | Eliminations | Statements | | | | |Income Statement | | | | |Sales |$210,000 |$130,000 | | | $ 340,000 Income from S a i nk | 3 1 2 , 9 5 00 | |c 3 1 2 , 9 5 00| | Gain on land | | 10,000 |b 10,000| | Depreciation expense | 40,000*| 30,000*| |a 3,000| 67,000*Other expenses | 110,000*| 60,000*|e 2,500| | 172,500*Minority expense | | |f 8, 6 0 00| | 8, 6 0 00* Net income |$ 9 1 2 , 9 5 00 |$ 50,000 | | | $ 9 1 2 , 9 5 00 | | | | |Retained Earnings | | | | |Retained earnings-P il ha l|$1 40 3 8 , 0 4 00 | | | | $ 1 40 3 8 , 4 0 00 Retained earnings-S a i nk| |$ 50,000 |d 50,000| | Net income | 9 1 2 , 9 5 00 | 50,000 | | | 9 1 2 , 9 5 00 Dividends | 30,000*| | | | 30,000*Retained earnings | | | | | December 31, 20 0 19X 6 | $ 202 200 , 3 5 00 |$100,000 | | | $ 202 200 , 3 5 00 | | | | |Balance Sheet | | | | |Current assets |$200,000 |$170,000 | | | $ 370,000 Plant assets | 550,000 | 350,000 | |a 15,000| 875,000 | | | |b 10,000| Accumulated | | | | | depreciation | 120,000*| 70,000*|a 6,000| | 184,000*Investment in Saink | 32220,3500 | |a 912,0600 |c 312,9500| | | | |d 300,000| Patent | | |d 20,000|e 2,500| 17,500 |$9 52 50 , 3 5 00 |$450,000 | | | $1,078,500 | | | | |Current liabilities |$150,000 |$ 50,000 | | | $ 200,000 Capital stock | 600,000 | 300,000 |d 300,000| | 600,000 Retained earnings | 202 200 , 3 5 00 | 100,000 | | | 202 200 , 3 5 00 |$9 52 50 , 3 5 00 |$450,000 | | | | | | Minority interest January 1, 20 0 19X 6 | a 2,400 |d 70,000| 70 Minority interest December 31, 20 0 19X 6 | |f 8,600 8| 7 6 8 , 2 0 00 | | | $1,078,500 | | | *Deduct

Solution 6-7 (continued)


a Accumulated depreciation $ 6,000Investment in Saink 912,0600

Minority interest 2,400Depreciation expense $ 3,000Plant assets 15,000

To eliminate unrealized profit on 20019X5 sale of plant assets.

41Chapter 5

b Gain on land $ 10,000Plant assets $ 10,000

To eliminate unrealized gain on 20019X6 upstream sale of land.

c Income from Saink $ 312,9500Investment in Saink $ 312,9500

To eliminate income from Saink against the invest investment in

Saink.

d Capital stock--Saink $300,000Retained earnings--Saink January 1 50,000Patent 20,000

Investment in Saink $300,000Minority interest January 1 70,000

To eliminate investment in Saink and stockholders' equity of Saink and enter beginning of the period patent.

e Other expenses $ 2,500Patent $ 2,500

To provide for patent amortization.

f Minority Interest Expense $ 8,600Minority Interest $ 8,600

To enter minority interest share of subsidiary income.

Solution P6-8


Investment cost for 100% of Skip, April 1, 20019X3$15,000,000

Book value acquired (7,000,000)Excess cost over book value acquired $ 8,000,000

Excess allocated:Undervalued inventory items (sold in 2003) $ 500,000Undervalued buildings (7-year remaining useful life) 3,500,000Goodwill 4,000,000Excess cost over book value acquired $ 8,000,000

Reconciliation of investment account balance:

Investment cost April 1, 2003 $15,000,000Add: Increase in Skip's retained earnings 3,000,000Less: Excess allocated to inventories sold in 2003 (500,000)Less: Depreciation on excess allocated to buildings


($3,500,000/7 years) x 4.75 years (2,375,000)Less: Unrealized inventory profits December 31, 2007 (120,000)Less: Unrealized profit on equipment ($800,000 intercompany profit - $200,000 recognized) (600,000)Investment balance December 31, 2007 $14,405,000

Reconciliation of investment income balance:

Share of Skip's income (100%) $ 2,000,000Add: Unrealized profit in beginning inventory 100,000Add: Realization of previously deferred profit on land 500,000Less: Unrealized profit in ending inventory (120,000)Less: Depreciation on excess allocated to buildings (500,000)Less: Unrealized profit on equipment (600,000)Income from Skip $ 1,380,000


Port Corporation and SubsidiaryConsolidation Working Papers


| | | Adjustments and |Consolidated | Port | Skip | Eliminations | Statements | | | | |Income Statement | | | | |Sales |$26,000,000 |$11,000,000 |b 1,500,000| |$35,500,000 Gain on land | 700,000 | | |a 500,000| 1,200,000 Gain on equipment | | 800,000 |e 800,000| | Income from Skip | 1,380,000 | |g 1,380,000| | Cost of sales | 15,000,000*| 5,000,000*|d 120,000|b 1,500,000| 18,520,000* | | | |c 100,000| Depreciation expense| 3,700,000*| 2,000,000*|i 500,000|f 200,000| 6,000,000*Other expenses | 4,280,000*| 2,800,000*| | | 7,080,000*Net income |$ 5,100,000 |$ 2,000,000 | | |$ 5,100,000 | | | | |Retained Earnings | | | | |Retained earnings- | | | | | Port |$12,375,000 | | | |$12,375,000 Retained earnings- | | | | | Skip | |$ 4,000,000 |h 4,000,000| | Net income | 5,100,000 | 2,000,000 | | | 5,100,000 Dividends | 3,000,000*| 1,000,000*| |g 1,000,000| 3,000,000*Retained earnings | | | | | December 31, 20 07 | $14,475,000 |$ 5,000,000 | | |$14,475,000 | | | | |Balance Sheet | | | | |Cash |$ 1,170,000 |$ 500,000 | | |$ 1,670,000 Accounts receivable | 2,000,000 | 1,500,000 | |j 300,000| 3,200,000 Inventories | 5,000,000 | 2,000,000 | |d 120,000| 6,880,000 Land | 4,000,000 | 1,000,000 | | | 5,000,000 Buildings - net | 15,000,000 | 4,000,000 |h 1,625,000|i 500,000| 20,125,000 Equipment - net | 10,000,000 | 4,000,000 |f 200,000|e 800,000| 13,400,000 Investment in Skip | 14,405,000 | |a 500,000|g 380,000| | | |c 100,000|h 14,625,000| Goodwill | | |h 4,000,000| | 4,000,000 |$51,575,000 |$13,000,000 | | |$54,275,000 | | | | |

43Chapter 5

Accounts payable |$ 4,100,000 |$ 1,000,000 |j 300,000| |$ 4,800,000 Other liabilities | 7,000,000 | 2,000,000 | | | 9,000,000 Capital stock | 26,000,000 | 5,000,000 |h 5,000,000| | 26,000,000 Retained earnings | 14,475,000 | 5,000,000 | | | 14,475,000 |$51,575,000 |$13,000,000 | | |$54,275,000 | | | | | *Deduct

Solution P6-9

Preliminary computationsInvestment cost January 1, 20019X5 $136,000Book value acquired ($170,000 x 80%) (136,000) Excess cost over book value acquired 0

Analysis of investment in Sic account on Pic's books:

Investment cost $136,000Share of Sic's 20019X5 reported income ($30,000 x 80%) 24,000Investment in Sic as reported on Pic's books at December 31, 20019X5 $160,000Share of Sic's 20019X6 reported income ($40,000 x 80%) 32,000Investment in Sic as reported on Pic's books at December 31, 20019X6 $192,000

Note that Pic has not eliminated intercompany profits from its investment income from Sic for either 20019X5 or 20019X6.

Investment balance as reported on Pic's books December 31, 20019X5 $160,000Gain on machinery ($5,000 x 80%) (4,000)Piecemeal recognition of gain ($1,000 x 80%) 800Investment account balance under the equity method at December 31, 20019X5 $156,800Share of Sic's 20019X6 reported income 32,000Piecemeal recognition of gain in 20019X6 ($1,000 x 80%) 800Investment account balance under the equity method at December 31, 20019X6 $189,600

Minority interest expense for 20019X5:

Sic's reported net income $ 30,000Less: Gain on sale of machinery (5,000)Add: Piecemeal recognition of gain on machinery through depreciation 1,000Sic's realized income $ 26,000


Minority interest percentage 20%Minority interest expense for 20019X5 $ 5,200

Minority interest expense for 20019X6:

Sic's reported net income $ 40,000Add: Piecemeal recognition of unrealized gain on machinery through depreciation 1,000Sic's realized income 41,000Minority interest percentage 20%Minority interest expense for 20019X6 $ 8,200


Pic Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 20019X5 | | | Adjustments and |Consolidated | Pic | Sic 80% | Eliminations | Statements | | | | |Income Statement | | | | |Sales |$400,000 |$200,000 | | | $600,000 Income from Sic | 24,000 | |c 24,000| | Gain on plant assets | | 5,000 |a 5,000| | Cost of sales | 250,000*| 130,000*| | | 380,000* Depreciation expense | 50,000*| 25,000*| |b 1,000| 74,000* Other expenses | 60,000*| 20,000*| | | 80,000* Minority expense | | |e 5,200| | 5,200* Net income |$ 64,000 |$ 30,000 | | | $ 60,800 | | | | |Retained Earnings | | | | |Retained earnings-Pic|$126,000 | | | | $126,000 Retained earnings-Sic| |$ 70,000 |d 70,000| | Net income | 64,000 | 30,000 | | | 60,800 Retained earnings | | | | | December 31, 20 0 19X 5 | $190,000 |$100,000 | | | $186,800 | | | | |Balance Sheet | | | | |Cash and equivalents |$ 50,000 |$ 30,000 | | | $ 80,000 Current assets | 130,000 | 70,000 | | | 200,000 Plant and equipment | 400,000 | 200,000 | |a 5,000| 595,000 Accumulated | | | | | depreciation | 150,000*| 50,000*|b 1,000| | 199,000* Investment in Sic | 160,000 | | |c 24,000| | | | |d 136,000| |$590,000 |$250,000 | | | $676,000 | | | | |Liabilities |$100,000 |$ 50,000 | | | $150,000 Capital stock | 300,000 | 100,000 |d 100,000| | 300,000 Retained earnings | 190,000 | 100,000 | | | 186,800 |$590,000 |$250,000 | | | | | |Minority interest January 1, 20 0 19X 5 | |d 34,000| Minority interest December 31, 20 0 19X 5 | |e 5,200| 39,200 | | | $676,000 | | |

45Chapter 5

*Deduct


Pic Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 20019X6 | | | Adjustments and |Consolidated | Pic | Sic 80% | Eliminations | Statements | | | | |Income Statement | | | | |Sales |$430,000 |$235,000 | | | $665,000 Income from Sic | 32,000 | |b 32,000| | Cost of sales | 260,000*| 140,000*| | | 400,000* Depreciation expense | 50,000*| 25,000*| |a 1,000| 74,000* Other expenses | 55,000*| 30,000*| | | 85,000* Minority expense | | |d 8,200| | 8,200* Net income |$ 97,000 |$ 40,000 | | | $ 97,800 | | | | |Retained Earnings | | | | |Retained earnings-Pic|$190,000 | |a 3,200| | $186,800 Retained earnings-Sic| |$100,000 |c 100,000| | Net income | 97,000 | 40,000 | | | 97,800 Retained earnings | | | | | December 31, 20 0 19X 6 | $287,000 |$140,000 | | | $284,600 | | | | | Balance Sheet | | | | |Cash and equivalent |$ 63,000 |$ 30,000 | | | $ 93,000 Current assets | 140,000 | 80,000 | | | 220,000 Plant and equipment | 440,000 | 245,000 | |a 5,000| 680,000 Accumulated | | | | | depreciation | 200,000*| 75,000*|a 2,000| | 273,000* Investment in Sic | 192,000 | | |b 32,000| | | | |c 160,000| |$635,000 |$280,000 | | | $720,000 | | | | | Liabilities |$ 48,000 |$ 40,000 | | | $ 88,000 Capital stock | 300,000 | 100,000 |c 100,000| | 300,000 Retained earnings | 287,000 | 140,000 | | | 284,600 |$635,000 |$280,000 | | | | | |Minority interest January 1, 20 0 19X 6 |a 800|c 40,000| Minority interest December 31, 20 0 19X 6 | |d 8,200| 47,400 | | | $720,000 | | | *Deduct

Solution P6-10


Investment cost January 1, 20019X6 $108,000Book value acquired (110,000 x 80%) (88,000)Excess cost over book value acquired allocated to patent $ 20,000Patent amortization: $20,000/10 years $ 2,000


Reconciliation of investment income:

Share of Spin's reported income ($50,000 x 80%) $ 40,000Less: Patent amortization (2,000)Less: Unrealized profit in ending inventory ($1,000 x 80%) (800)Add: Unrealized profit in beginning inventory ($2,000 x 80%) 1,600Add: Piecemeal recognition of deferred profit on plant assets ($20,000/5 years x 80%) 3,200Income from Spin $ 42,000

Minority interest expense:

Spin's reported income $ 50,000Add: Unrealized profit in beginning inventory 2,000Less: Unrealized profit in ending inventory (1,000)Add: Piecemeal recognition of deferred gain on plant assets 4,000Spin's realized income 55,000Minority interest percentage 20%Minority interest expense $ 11,000


Park Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 20019X9 | | | Adjustments and |Consolidated | Park | Spin 80%| Eliminations | Statements | | | | | Income Statement | | | | | Sales |$650,000 |$120,000 |a 8,000| | $762,000 Income from Spin | 42,000 | |e 42,000| | Cost of sales | 390,000*| 40,000*|b 1,000|a 8,000| 421,000* | | | |c 2,000| Other expenses | 170,000*| 30,000*|g 2,000|d 4,000| 198,000* Minority expense | | |i 11,000| | 11,000* Net Income |$132,000 |$ 50,000 | | | $132,000 | | | | |Retained Earnings | | | | |Retained earnings Park|$ 95,600 | | | | $ 95,600 Retained earnings Spin| |$ 20,000 |f 20,000| | Net Income | 132,000 | 50,000 | | | 132,000 Dividends | 70,000*| 20,000*| |e 16,000| | i 4,000| 70,000* Retained earnings | | | | | December 31, 20 0 19X 9 | $157,600 |$ 50,000 | | | $157,600 | | | | |Balance Sheet | | | | |Cash |$ 58,000 |$ 20,000 | | | $ 78,000 Accounts receivable | 40,000 | 20,000 | |h 4,000| 56,000 Inventories | 60,000 | 35,000 | |b 1,000| 94,000 Plant assets | 290,000 | 205,000 | |d 20,000| 475,000 Accumulated | | | | | depreciation | 70,000*| 100,000*|d 8,000| | 162,000* Investment in Spin | 121,600 | |c 1,600|e 26,000| | | |d 12,800|f 110,000| Patent | | |f 14,000|g 2,000| 12,000 |$499,600 |$180,000 | | | $553,000 | | | | |

47Chapter 5

Accounts payable |$ 42,000 |$ 30,000 |h 4,000| | $ 68,000 Capital stock | 300,000 | 100,000 |f 100,000| | 300,000 Retained earnings | 157,600 | 50,000 | | | 157,600 |$499,600 |$180,000 | | | | | |Minority interest January 1, 20019X9 |c 400|f 24,000| |d 3,200| | Minority interest December 31, 20 0 19X 9 | |i 7,000| 27,400 | | | $553,000 | | | *Deduct

Solution P6-11

Preliminary computationsInvestment cost $290,000Book value acquired ($300,000 x 80%) (240,000) Excess cost over book value acquired $ 50,000Excess allocated:Inventories ($50,000 x 50%) $ 25,000Goodwill 25,000 Excess cost over book value acquired $ 50,000

Reconciliation of income from Sank:Pill's share of Sank's net income ($50,000 x 80%) $ 40,000Add: Depreciation on deferred gain on equipment ($15,000/5 years) x 80%

2,400Less: Unrealized profit on upstream sale of land ($10,000 x 80%) (8,000) Income from Sank $ 34,400

Reconciliation of investment account:Share of Sank's underlying equity ($400,000 x 80%) $320,000Add: Unamortized goodwill 25,000Less: Unrealized gain on equipment [$15,000 - ($3,000 x 2 years)] x 80%

(7,200)Less: Share of unrealized gain on land (8,000)Investment in Sank December 31, 2006 $329,800

Minority interest expense:Sank's reported income $ 50,000Add: Piecemeal recognition of gain on sale of machinery 3,000Less: Unrealized gain on upstream sale of land (10,000)Realized income 43,000Minority percentage 20%Minority interest expense $ 8,600


Pill Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2006 | | | Adjustments and |Consolidated


| Pill |Sank 80% | Eliminations | Statements | | | | |Income Statement | | | | |Sales |$210,000 |$130,000 | | | $ 340,000 Income from Sank | 34,400 | |c 34,400| | Gain on land | | 10,000 |b 10,000| | Depreciation expense | 40,000*| 30,000*| |a 3,000| 67,000*Other expenses | 110,000*| 60,000*| | | 170,000*Minority expense | | |e 8,600| | 8,600*Net income |$ 94,400 |$ 50,000 | | | $ 94,400 | | | | |Retained Earnings | | | | |Retained earnings-Pill|$145,400 | | | | $ 145,400 Retained earnings-Sank| |$ 50,000 |d 50,000| | Net income | 94,400 | 50,000 | | | 94,400 Dividends | 30,000*| | | | 30,000*Retained earnings | | | | | December 31, 2006 |$209,800 |$100,000 | | | $ 209,800 | | | | |Balance Sheet | | | | |Current assets |$200,000 |$170,000 | | | $ 370,000 Plant assets | 550,000 | 350,000 | |a 15,000| 875,000 | | | |b 10,000| Accumulated | | | | | depreciation | 120,000*| 70,000*|a 6,000| | 184,000*Investment in Sank | 329,800 | |a 9,600 |c 34,400| | | | |d 305,000| Goodwill | | |d 25,000| | 25,000 |$959,800 |$450,000 | | | $1,086,000 | | | | |Current liabilities |$150,000 |$ 50,000 | | | $ 200,000 Capital stock | 600,000 | 300,000 |d 300,000| | 600,000 Retained earnings | 209,800 | 100,000 | | | 209,800 |$959,800 |$450,000 | | | | | | Minority interest January 1, 2006 |a 2,400 |d 70,000| Minority interest December 31, 2006 | |e 8,600| 76,200 | | | $1,086,000 | | | *Deduct

Solution 6-11 (continued)


a Accumulated depreciation $ 6,000Investment in Sank 9,600Minority interest 2,400

Depreciation expense $ 3,000Plant assets 15,000

To eliminate unrealized profit on 2005 sale of plant assets.

b Gain on land $ 10,000Plant assets $ 10,000

To eliminate unrealized gain on 2006 upstream sale of land.

49Chapter 5

c Income from Sank $ 34,400Investment in Sank $ 34,400

To eliminate income from Sank against the investment in Sank.

d Capital stock--Sank $300,000Retained earnings--Sank January 1 50,000Goodwill 25,000

Investment in Sank $305,000Minority interest January 1 70,000

To eliminate investment in Sank and stockholders' equity of Sank and enter beginning of the period goodwill.

e Minority Interest Expense $ 8,600

Minority Interest $ 8,600

To enter minority interest share of subsidiary income.

Solution P6-12

1 The 90 percent ownership interest can be determined in several ways.

a. $13,500 dividends received $15,000 dividends paid = 90%

b. ($34,000 minority interest $340,000 Sach's stockholders' equity) = 10%

c. ($5,000 minority interest expense $50,000 net income of Sach) = 10%

2 Yes. Pape's net income of $200,000 equals consolidated net income of $200,000. Pape's retained earnings of $350,000 equals consolidated retained earnings.

3 Yes.

Combined sales $800,000Consolidated sales 716,000

Intercompany sales $ 84,000

4 Yes.

Combined inventories $150,000Consolidated inventories 136,000

Unrealized inventory profits $ 14,000

5 Reconciliation of combined and consolidated cost of sales

Combined cost of sales $350,000Less: Intercompany sales (84,000)


Add: Unrealized profits in ending inventory 14,000Less: Unrealized profits in beginning inventory (5,000)

Consolidated cost of sales $275,000

6 Reconciliation of combined and consolidated equipment-net

Combined equipment-net of $565,000 less consolidated equipment-net of $550,000 shows a difference of $15,000. The working paper entry to eliminate the effects of an intercompany sale of equipment must have been:

Gain on equipment $20,000Depreciation expense $ 5,000Equipment-net 15,000


7 Yes. Intercompany receivables and payables are as follows:

Combined Consolidated IntercompanyAccounts receivable $ 80,000 $ 70,000 $10,000Accounts payable 110,000 100,000 10,000Dividends receivable 13,500 --- 13,500Dividends payable 15,000 1,500 13,500

8 Reconciliation of minority interest:

Minority interest January 1, 20019X4 ($320,000 x 10%) $ 32,000Add: Minority interest expense 5,000Less: Minority interest dividends ($30,000 x 10%) (3,000)


9 Patent at December 31, 2003

Patent December 31, 2004 $ 32,000Add: Patent amortization ($141,000 consolidated other expenses - $137,000 combined other expenses) 4,000

Patent December 31, 2003 $ 36,000

10 Analysis of investment in Sach account

Book value (Sach's stockholders' equity $340,000 x 90%) $306,000Less: Unrealized profit in ending inventory (14,000)Less: Unrealized profit in equipment (15,000)Add: Unamortized patent 32,000

Investment in Sach December 31, 2004 $309,000

Chapter 7

51Chapter 5

INTERCOMPANY PROFIT TRANSACTIONS - BONDS

Solution E7-3

1 c

Cost of $80,000 par of Palmer bonds January 1, 20019X5 $ 76,000Book value acquired ($400,000 par - $8,000 discount) x 20% 78,400Constructive gain $ 2,400

2 d

Par value of bonds payable $400,000Less: Unamortized discount ($8,000 - $2,000) (6,000)Book value of bonds 394,000Percent outstanding 80%Bonds payable $315,200

3 c Constructive gain $2,400/4 years x 3 years $ 1,800

4 c

Nominal interest $ 40,000Add: Amortization of discount 2,000

42,000Percent outstanding 80%Interest expense $ 33,600

5 b Piecemeal recognition of gain is $2,400 x 25% in 20019X6.


Solution E7-4

1 Consolidated net income

Paulfeiffer's separate income $ 800,000Add: Income from SallyigmundShare of Sallyigmund's income ($500,000 x 870%) $40350,000Less: Loss on bonds constructively retired Book value ($1,000,000 - $450,000) x 430% $384285,000 Cost to Sallyigmund 400 301 ,000 (16,000)Add: Piecemeal recognition of loss ($16,000/4 years) 4,000 3 8 29 8,000 Consolidated net income $1, 1 8 09 8,000


Sallyigmund's reported income $500,000 x 230% $ 1 0 5 0,000

Solution E7-5

Primrose Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 201119X

Sales $1,500,000Less: Cost of sales (870,000)

Gross profit 630,000Less: Operating expenses (250,000)

Operating profit 380,000Other Items:Bond interest expensea ( 3 2 0,000 )

Income before extraordinary item 3560,000Add: Extraordinary gain on constructive retirement of bondsb 6,000

Consolidated net income $ 3 5 6 6,000

a Parent's bond interest expense $50,000 less interest on bonds held intercompany $230,000 = $320,000.

b Book value of parent's bonds purchased $2300,000 less purchase price $1294,000 = $6,000 gain on constructive retirement.

53Chapter 5

Solution E7-6

1 Constructive loss

Cost paid to retire 1/2 of Smedley's bonds $503,000Book value of bonds retired ($990,000 x .5) 495,000 Constructive loss on bond retirement $ 8,000

2 Income from Smedley

Share of Smedley's reported income $14,000 x 70% $ 9,800Less: Constructive loss $8,000 x 70% (5,600)Add: Piecemeal recognition of constructive loss ($8,000/4 years) x 70% 1,400 Income from Smedley $ 5,600

Solution E7-7

1 a

January 1, 20019X4 cost of $200,000 par bonds $195,500Book value acquired ($1,000,000 + $45,000 premium) x 20% 209,000Constructive gain $ 13,500

2 b

Constructive gain $13,500/5 years x 4 years $ 10,800

3 c

Book value $1,036,000 x 80% outstanding $828,800

Solution E7-8

1a Constructive gain

Book value of bonds January 1, 200419X $970,000Amortization for 6 months ($30,000/5 years x 1/2 year) 3,000Book value of bonds July 1, 2019X04 973,000Percent purchased by Saydo 6 5 0%

Book value of bonds purchased $583486,8500Purchase price 574 477 , 8 5 00

Constructive gain $ 9,000

1b Consolidated bond interest expense for 2019X04


Bond interest expense January 1 to July 1 ($1,000,000 x 8% x 1/2 year) + $3,000 amortization $ 43,000

Bond interest expense July 1 to December 31 [($1,000,000 x 8% x 1/2 year) + $3,000 amortization] x 450% 17 21 , 2 5 00

Consolidated bond interest expense $ 6 0 4 , 2 5 00

1c Bond liability of Partieise

Par Discount Book Value

January 1, 2019X04 $1,000,000 $30,000

$970,000

Amortization 2019X04 - 6,000 + 6,000December 31, 2019X04 $1,000,000 $24,000 $976,000

Consolidated bond liability $976,000 x 40% outstanding $390,400

2 The amounts would not be different if Saydosso had been the issuer and Partieise the purchaser. However, the constructive retirement gains would ‘belong’ to Saydo and would have been allocated to both Partie and the minority interests in Saydo.

Solution E7-9

Subsidiary purchases parent company bonds:

1a Gain on constructive retirement of bonds

Book value of Picarker's bonds constructively retired ($5,000,000 - $100,000 unamortized discount) x 420% $1,96980,000Purchase price of $1,000,000 par bonds 1,90 95 0,000

Gain on constructive bond retirement $ 6 3 0,000

1b Consolidated interest payable

($34,000,000 + $1,000,000) x 10% interest x 1/2 year $2 0 5 0,000

1c Bonds payable at par ($34,000,000 + $1,000,000) $ 4 5 ,000,000

1d None But Skiadden's investment in Picarker bonds will be $1,92960,000.

55Chapter 5

Cost January 2 $1,90950,000Add: Amortization ($1050,000/5 years) 2 1 0,000

$1,92960,000Parent company purchases subsidiary bonds:

2a Loss on constructive retirement of bonds

Skiadden's bonds payable ($1,000,000 + $20,000) $1,020,000Price paid by Picarker 1,0 3 1 0,000

LossGain on constructive retirement of Skidden's bonds $

(10,000 )

2b Consolidated interest expense

Picarker bonds ($5,000,000 x 10% interest) + $20,000 amortization $520,000

2c None Interest receivable of $50,000 is eliminated in consolidation.

2d Book value of bonds payable

Picarker's bonds December 31, 20019X3 $4,900,000Add: Amortization for 20019X4 ($100,000/5 years) 20,000

Book value of bonds payable $4,920,000

Solution E7-10

1 Gain from constructive retirement of bonds

Book value of bonds purchased by Shelly ($2,000,000 + $60,000) x 25% $515,000Price paid by Shelly 490,000

Gain from constructive retirement of bonds $ 25,000

2 Working paper entry to eliminate effect of intercompany bond holdings

12% bonds payable $512,000Interest incomea 62,000Interest payable 30,000

Investment in Perdue bonds $492,000Gain on retirement of bonds 25,000Interest expenseb 57,000Interest receivable 30,000

a($500,000 x 12% interest) + $2,000 amortization = $62,000

b[($2,000,000 x 12%) - $12,000 amortization] x 25% intercompany = $57,000


3 Consolidated income statement amounts - 200519X

a Constructive gain None

b Minority interest expense ($300,000 x 20%) $ 60,000

c Bond interest expense[($2,000,000 x 12%) - $12,000] x 75% outsiders $171,000

d Bond interest income None

4 Consolidated balance sheet amounts - December 31, 2019X05

a Investment in Perdue bonds None

b Book value of bonds payable($2,000,000 + $36,000) x 75% outsiders $1,527,000

c Bond interest receivable None

d Bond interest payable$2,000,000 x 12% x 75% outsiders x 1/2 year $ 90,000

Solution E7-11

Preliminary computations:

Book value of Sandwood bonds on January 1, 2019X04 $1,000,000Purchase price paid by Parrish 783,000

Gain on constructive retirement of Sandwood bonds $ 217,000

Amortization of discount on bonds ($217,000/7 years) $ 31,000

Computation of minority interest expense:

Share of Sandwood's reported income ($140,000 x 20%) $28,000Add: Share of constructive gain ($217,000 x 20%) 43,400Less: Piecemeal recognition of constructive gain ($31,000 x 20%) (6,200)

Minority interest expense $65,200

Parrish Corporation and SubsidiaryConsolidated Income Statement


Sales $1,800,000Less: Cost of sales 950,000

Gross profit 850,000Less: Operating expenses 400,000

Income before minority interest expense and

57Chapter 5

extraordinary item 450,000Less: Minority interest expense 65,200

Income before extraordinary item 384,800Extraordinary gain from constructive retirement of Sandwood bonds 217,000


Solution E7-12

1 Public Corporation and Subsidiary, December 31, 20019X6

Amounts Appearing in Consolidated Financial Statements Interest receivable 0

Investment in Spede bonds 0

Interest payable ($40,000 x 90%) 36,000

8% bonds payable (($1,000,000 x 90%)-13,500 discount) 886,500

Interest income 0

Interest expense ($86,000/2) + .9(86,000/2) 81,700

Loss on intercompany bonds 7,800a

a Computation of loss on intercompany bonds

Balance of investment in bonds at December 31, 20019X6$105,000

Add: Amount amortized for July 1 to December 31, 20019X6 ($5,000 balance at December 31 30/36 months = $6,000 unamortized at July 1) 1,000Investment cost July 1, 20019X6

$106,000Less: Book value acquired [$1,000,000 - ($15,000 unamortized discount at December 31 30/36 months)] x 10% 98,200

Loss on constructive retirement of bonds $ 7,800

Solution E7-12 (continued)

2 Consolidation working paper entries at December 31, 20019X6

Interest income $ 3,0008% bonds payable 98,500Loss on retirement of bonds 7,800

Investment in Spede bonds $105,000


Interest expense 4,300To eliminate intercompany bonds and record constructive loss on retirement of bonds, and eliminate intercompany interest income and interest expense.

Interest payable $ 4,000Interest receivable $ 4,000

To eliminate reciprocal interest payable and interest receivable amounts.

3 Consolidation working paper entries at December 31, 20019X7

Investment in Spede (90%) $ 5,850Minority interest 650Interest income 6,0008% bonds payable 99,100

Investment in Spede bonds $103,000Interest expense 8,600

To eliminate intercompany bonds, interest income and interest expense, and to charge the unrecognized portion of the constructive loss at the beginning of the period 90% to the investment in Spede and 10% to the minority interest.


To eliminate reciprocal interest payable and interest receivable amounts.

Solution E7-13

1 Gain on constructive retirement of bonds

Purchase price of bonds $48,800Book value 50,000 Gain on constructive retirement of bonds $ 1,200

2 Sonny accounts for its investment in Pappy bonds

January 1, 20019X8Investment in Pappy bonds $48,800

Cash $48,800

To record investment in $50,000 par, 8% Pappy bonds.

July 1, 20019X8Cash $ 2,000Investment in Pappy bonds 200

Interest income $ 2,200

To record interest and amortization.


59Chapter 5

Interest receivable $ 2,000Investment in Pappy bonds 200

Interest income $ 2,200

To accrue interest and record amortization.

3 Pappy accounts for its bonds payable

July 1, 20019X8Interest expense $ 4,000

Cash $ 4,000

To record interest payable for 6 months.


Interest expense $ 4,000Interest payable $ 4,000

To accrue interest for 6 months.

4 Pappy accounts for its investment in Sonny

December 31, 20019X8Investment in Sonny $40,800

Income from Sonny $40,800

To record income from Sonny (80% x $50,000) + $1,200 constructive gain - $400 piecemeal recognition of gain.

5 Minority interest expense ($50,000 x 20%) $ 10,000

Consolidated net income ($200,000 + $40,800) $240,800



Solution P7-1

1 Loss on constructive retirement of bonds

Purchase price of $50,000 par bonds April 1, 20019X6 $531,6800Book value of bonds acquired: Par value $100,000 Less: Unamortized discount $1,800 for 27 of 36 months ($1,800 .75) 2,400 Book value of bonds 97,600 Intercompany bonds 50% 48,800

Loss on constructive retirement of bonds $ 4 3 , 8 0 00

2 Interest income and interest expense

Interest income in consolidated income statement - 20019X6 0

Interest expense in consolidated income statement - 20019X6

$8,800 - ($8,800 x 3/4 year x 50%) $ 5,500

3 Interest receivable and interest payable

Interest receivable in consolidated balance sheet at December 31, 20019X6 0

Interest payable in consolidated balance sheet at December 31, 20019X6 $ 1,000

4 Consolidation working paper entries

Loss on constructive retirement of bonds $ 43,80008% bonds payable 49,100Interest income 2,100550

Investment in Pongoanda bonds $521,700350Interest expense 3,300

To eliminate reciprocal interest income and interest expense amounts and reciprocal bond investment and bond liability amounts and enter unrecognized constructive loss.


To eliminate reciprocal payables and receivables.

61Chapter 5

Solution P7-2

Pewter Corporation and Steel CorporationSchedule to Determine Pewter's Net Income and Consolidated Net Income

20 19X 03 20 19X 04 20 19X 05 20 19X 06 Total Pewter's separate income $500,000 $375,000 $460,000 $510,000 $1,845,000

80% of Steel's net income + 80,000 + 96,000 + 88,000 + 96,000 + 360,000

$5,000 unrealized profit in Steel's December 31, 2019X03 inventory - 5,000 + 5,000

$10,000 unrealized profit in Steel's December 31, 2019X03 inventory - 10,000 + 10,000

$15,000 unrealized profit in 2019X03 on sale of land upstream x 80% - 12,000 - 12,000

$30,000 unrealized profit on sale of equipment in 2019X05 - 30,000 - 30,000

$7,500 depreciation on unrealized profit on equipment in 2019X05 and 2019X06 + 7,500 + 7,500 + 15,000

$8,000 constructive loss on purchase of Pewter's bonds in 2019X06 - 8,000 - 8,000

$2,000 piecemeal recognition of constructive loss in 2019X06 + 2,000 + 2,000

Pewter's net income $575,000 $466,000 $523,500 $607,500 $2,172,000


Solution P7-3

Investment cost-book value differential:The $20,000 investment cost over book value acquired [$46,000 - ($32,500 x 80%)] is allocated $12,000 to plant and equipment and $8,000 to goodwill. Current and prior year amortization should have been:

20 19X 06 20 19X 03- 20 05 19

Plant and equipment ($12,000 15 years) $800 $2,400

Constructive gain on Silas bonds:Book value of Silas bonds acquired ($50,000 + $1,000) x 50% $25,500Price paid by Paul 24,000 Constructive gain on bonds $ 1,500

Unrealized profits in inventories - upstream:Unrealized profit-beginning inventory $2,250 - ($2,250/1.2) $375Unrealized profit-ending inventory $4,500 - ($4,500/1.2) $750

Conversion to equity [Working paper entry a]:

December 31, 2019X05 Retained Investment Income Earnings-Paul in Silas from SilasPrior years' effectDepreciation on excess allocated to plant assets 2019X03-2019X05 $(2,400) $(2,400) Unrealized profit in December 31, 2019X05 inventory ($375 x 80%) (300) (300)

Current year's effectDepreciation on excess allocated to plant assets (800) $(800)Realization of deferred profit in beginning inventory ($375 x 80%) 300 300Unrealized profit in December 31, 2019X06 inventory ($750 x 80%) (600) (600)Constructive gain on Silas bonds ($1,500 - $300) x 80% 960 960

Corrections $(2,700) $(2,840) $(140)

Minority interest expense:Silas's reported income $4,000Add: Realization of deferred profit in beginning inventory 375Less: Unrealized profit in ending inventory (750)Add: Constructive gain on Silas bonds 1,500Less: Piecemeal recognition of constructive gain (300)Silas's realized income 4,825Minority interest percentage 20% Minority interest expense $ 965

63Chapter 5


Paul Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 2019X06 | | 80% | Adjustments and |Consolidated | Paul | Silas | Eliminations | Statements | | | | |Income Statement | | | | | Sales |$ 56,600 |$ 20,000 |b 8,000| | $ 68,600 Income from Silas | 3,200 | |a 140| | | | |f 3,060| | Interest income | 2,700 | |e 2,700| | Cost of sales | 28,000*| 7,000*|d 750|b 8,000| | | | |c 375| 27,375* Operating expenses | 12,000*| 4,200*|h 800| | 17,000* Interest expense | | 4,800*| |e 2,400| 2,400* Gain on bonds | | | |e 1,500| 1,500 Minority expense | | |i 965 | | 965* Net income |$ 22,500 |$ 4,000 | | | $ 22,360 | | | | | Retained Earnings | | | | |Retained earnings-Paul |$ 42,000 | |a 2,700| | $ 39,300 Retained earnings-Silas| |$ 14,000 |g 14,000| | Net income | 22,500 | 4,000 | | | 22,360 Dividends | 15,000*| 2,000*| |f 1,600| |i 400| 15,000* Retained earnings | | | | | December 31, 20 19X 06 | $ 49,500 |$ 16,000 | | | $ 46,660 | | | | |Balance Sheet | | | | |Cash |$ 15,000 |$ 31,000 | | | $ 46,000 Accounts receivable | 12,200 | 25,000 | |j 1,500| 35,700 Inventories | 30,000 | 8,000 | |d 750| 37,250 Plant and equipment | 50,000 | 40,000 |g 12,000| | 102,000 Accumulated | | | |g 2,400| depreciation | 10,000*| 4,000*| |h 800| 17,200* Investment in | 53,600 | |c 300|a 2,840| Silas stock | | | |f 1,460| | | | |g 49,600| Investment in | | | | | Silas bonds | 24,200 | | |e 24,200| Goodwill | | |g 8,000| | 8,000 |$175,000 |$100,000 | | | $211,750 | | | | | Accounts payable |$ 25,500 |$ 7,200 |j 1,500| | $ 31,200 Bonds payable | | 50,800 |e 25,400| | 25,400 Common stock | 100,000 | 26,000 |g 26,000| | 100,000 Retained earnings | 49,500 | 16,000 | | | 46,660 |$175,000 |$100,000 | | | Minority interest January 1, 20 19X 06 |c 75|g 8,000| Minority interest December 31, 20 19X 06 | |i 565| 8,490 | | | $211,750 | | | *Deduct


Solution P7-4

1 Loss is from the constructive retirement of bonds

Purchase price of bonds $106,000Book value of bonds ($100,000 + $3,000 premium) 103,000

Loss on retirement of bonds $ 3,000

2 Consolidated sales

Combined sales $280,000Less: Intercompany sales 50,000

Consolidated sales $230,000

3 Consolidated cost of goods sold

Combined cost of goods sold $170,000Less: Intercompany sales (50,000)Less: Unrealized profits in beginning inventory (20,000)Add: Unrealized profits in ending inventory 10,000

Consolidated cost of goods sold $110,000

4 Unrealized profit in beginning inventory

Forced computations ($170,000 + $10,000) - ($50,000 + $110,000) $ 20,000

5 Unrealized profit in ending inventory

Combined inventories ($100,000 + $50,000) $150,000Less: Consolidated inventories 140,000

Unrealized profit in ending inventory $ 10,000

6 Consolidated accounts receivable

Combined accounts receivable ($120,000 + $60,000) $180,000Less: Intercompany receivables 15,000

Consolidated accounts receivable $165,000


Cher's reported income $ 30,000Add: Unrealized profit in beginning inventory 20,000Less: Unrealized profit in ending inventory (10,000)Cher's realized income 40,000Minority interest percentage 20%


65Chapter 5


8 Minority interest December 31, 20019X6

Beginning minority interest ($335,000 x 20%) $ 67,000Less: Unrealized profit in beginning inventory ($20,000 x 20%) (4,000)Less: Minority interest dividends ($15,000 x 20%) (3,000)Add: Minority interest expense 8,000


Alternative computation:Ending equity of Cher ($350,000 x 20%) $ 70,000Less: Unrealized profit in ending inventory ($10,000 x 20%) 2,000


9 Investment in Cher stock at December 31, 20019X5

Investment in Cher stock at cost $320,000Add: Changes in retained earnings to December 31, 20019X5 ($135,000 - $100,000) x 80% 28,000Less: Excess of $80,000/8 years = $10,000 per year x 2 years (20,000)Less: Unrealized profit in beginning inventory ($20,000 x 80%) (16,000)

Investment in Cher stock December 31, 20019X5 $312,000

Alternative computation:Investment in Cher stock December 31, 20019X6 $320,000Less: Income from Cher for 20019X6 (20,000)Add: Dividends from Cher ($15,000 x 80%) 12,000

Investment in Cher stock December 31, 20019X5 $312,000

10 Income from Cher

Share of Cher's reported net income ($30,000 x 80%) $ 24,000Less: Depreciation on excess ($80,000/8 years) (10,000)Add: Unrealized profit in beginning inventory ($20,000 x 80%) 16,000Less: Unrealized profit in ending inventory ($10,000 x 80%) (8,000)Less: Constructive loss on retirement of bonds ($3,000 - $1,000) (2,000)

Peter's income from Cher $ 20,000


Solution P7-5 [AICPA adapted]

1 Consolidated cash ($50,000 + $15,000) $ 65,000

2 Equipment-net ($800,000 equipment - $320,000 accumulated depreciation - $21,000 unrealized profit + $7,000 profitrealized through depreciation of excess) $466,000

3 Investment in Shaw does not appear in consolidated statements.

4 Bonds payable (Shaw's bonds payable of $200,000 x 1/2 heldoutside the consolidated entity) $100,000

5 Common stock (Poe's stock) $100,000

6 Beginning retained earnings (Poe's retained earnings) $272,000

7 Dividends paid (Poe's dividends) $ 80,000

8 Gain on retirement of bonds (Book value of Shaw'sbonds acquired by Poe $100,000 less acquisition costof $91,000. Since bonds were acquired on December 31,200319X, none of the $9,000 gain has been amortized.) $ 9,000

9 Cost of goods sold ($860,000 combined - $60,000 intercompanysales + $10,000 unrealized profit in ending inventory) $810,000

10 Interest expense (Shaw paid interest for the entire year tooutside entities so all of Shaw's interest is reported) $ 16,000

11 Depreciation expense ($45,000 combined - depreciation on theunrealized gain $7,000) $ 38,000

Solution P7-6

Income from Sahl for 20019X4:

Share of reported income of Sahl ($100,000 x 75%) $ 75,000Add: Unrealized profit in beginning inventory of Sahl 12,000Less: Unrealized profit in ending inventory of Sahl (15,000)Add: Piecemeal recognition of gain on sale of equipment to Paar ($24,000/6 years) x 75% 3,000Less: Unrealized gain on sale of land to Sahl (10,000)Less: Unrealized gain on sale of building to Sahl less piecemeal recognition through depreciation ($20,000 - $1,000) (19,000)Add: Gain on constructive retirement of Paar bonds ($100,000 - $94,000) 6,000

Income from Sahl for 20019X4 $ 52,000

Investment in Sahl at December 31, 20019X4:

Underlying equity in Sahl ($520,000 x 75%) $390,000Less: Unrealized profit in Sahl's ending inventory (15,000)

67Chapter 5

Less: Unrealized gain on equipment sold to Paar ($24,000 - $12,000 recognized) x 75% (9,000)Less: Unrealized gain on sale of land to Sahl (10,000)Less: Unrealized gain on sale of building to Sahl ($20,000 - $1,000 recognized) (19,000)Add: Gain on constructive retirement of Paar's bonds 6,000

Investment in Sahl December 31, 20019X4 $343,000

Minority interest expense:

Net income of Sahl $100,000Add: Piecemeal recognition of gain on equipment ($24,000/6 years) 4,000Sahl's realized income 104,000Minority interest percentage 25%



Paar Corporation and SubsidiaryConsolidation Working Papers

for the year ended December 31, 20019X4 | | | Adjustments and |Consolidated | Paar |Sahl 75% | Eliminations | Statements | | | | |Income Statement | | | | |Sales |$630,000 |$500,000 |b 50,000| | $1,080,000 Gain on plant | 30,000 | |f 30,000| | | Income from Sahl | 52,000 | |h 52,000| | | Gain on bonds | | | |g 6,000| 6,000 Cost of sales | 350,000*| 300,000*|d 15,000|b 50,000| | | | |c 12,000| 603,000* Depreciation expense | 76,000*| 40,000*| |e 4,000| | | | |f 1,000| 111,000* Interest expense | 20,000*| | | | 20,000*Operating expense | 46,000*| 60,000*| | | 106,000*Minority expense | | |k 26,000 | | 26,000*Net income |$220,000 |$100,000 | | | $ 220,000 | | | | |Retained Earnings | | | | |Retained earnings - Paar |$150,000 | | | | $ 150,000 Retained earnings - Sahl | |$100,000 |i 100,000| | Net income | 220,000 | 100,000 | | | 220,000 Dividends | 160,000*| 80,000*| |h 60,000| |k 20,000| 160,000* Retained earnings | | | | | December 31, 20 0 19X 4 | $210,000 |$120,000 | | | $ 210,000 | | | | |Balance Sheet | | | | |Cash |$ 27,000 |$ 81,000 |a 10,000| | $ 118,000 Bond interest receivable| | 5,000 | |j 5,000| Other receivables | 40,000 | 30,000 | |a 10,000| 60,000 Inventories | 80,000 | 50,000 | |d 15,000| 115,000 Land | 90,000 | 70,000 | |f 10,000| 150,000 Buildings - net | 150,000 | 180,000 | |f 19,000| 311,000 Equipment - net | 140,000 | 90,000 | |e 12,000| 218,000 Investment in Sahl stock| 343,000 | |c 12,000|i 375,000| | | |e 12,000| |


| | |h 8,000| | Investment in Paar bonds| | 94,000 | |g 94,000| |$870,000 |$600,000 | | | $ 972,000 | | | | |Accounts payable |$ 50,000 |$ 80,000 | | | $ 130,000 Bond interest payable | 10,000 | |j 5,000| | 5,000 10% bonds payable | 200,000 | |g 100,000| | 100,000 Common stock | 400,000 | 400,000 |i 400,000| | 400,000 Retained earnings | 210,000 | 120,000 | | | 210,000 |$870,000 |$600,000 | | | | | |Minority interest January 1, 20 0 19X 4 |e 4,000|i 125,000| Minority interest December 31, 20 0 19X 4 | |k 6,000| 127,000 | | | $ 972,000 | | | *Deduct

Documents

B. Woods Chapter 567