chapter 08, modern advanced accounting-review q & exr

CHAPTER 8CONSOLIDATED FINANCIAL STATEMENTS:

INTERCOMPANY TRANSACTIONS

The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 8–1 Prentiss Corporation (30 minutes, easy)

Journal entries for intercompany promissory note, including discounting of the note with a bank, for both parent corporation and subsidiary.

Pr. 8–2 Pillsbury Corporation (30 minutes, medium)

Journal entries for both parent company and subsidiary to record intercompany promissory note transactions, including discounting of a note.

Pr. 8–3 Pittsburgh Corporation (50 minutes, medium)

Correcting entries for improperly recorded intercompany transactions and balances. Partial working paper for consolidated financial statements to show presentation of intercompany transactions and balances.

Pr. 8–4 Parley Corporation (30 minutes, medium)

Working paper eliminations (in journal entry format) for partially owned subsidiary’s sale of leasehold improvement to parent company and for parent company’s acquisition of subsidiary’s bonds in the open market.

Pr. 8–5 Peke Corporation (30 minutes, medium)

Working paper eliminations (in journal entry format) for downstream and upstream intercompany sales of merchandise. Partially owned subsidiary is involved.

Pr. 8–6 Pandua Corporation (45 minutes, medium)

Working paper eliminations (in journal entry format) for intercompany sales of merchandise and machinery, for parent company’s open-market acquisition of subsidiary’s bonds, and for minority interest in net income of partially owned subsidiary.

Pr. 8–7 Pacific Corporation (50 minutes, medium)

Journal entries and working paper eliminations (in journal entry format) for intercompany sale of machinery and for parent company’s acquisition of wholly owned subsidiary’s bonds in the open market.

Pr. 8–8 Pollard Corporation (50 minutes, medium)

Preparation of three-column ledger accounts for accounts affected by parent company’s open-market acquisition of wholly owned subsidiary’s bonds. Working paper eliminations (in journal entry format) for two years.

Pr. 8–9 Procus Corporation (60 minutes, medium)

Preparation of three-column ledger accounts for accounts affected by intercompany sales-type/capital lease. Working paper eliminations (in journal entry format) for two years.

Pr. 8–10 Patrick Corporation (60 minutes, medium)

Working paper for consolidated balance sheet and related working paper eliminations (in journal entry format) for parent corporation and wholly owned subsidiary having merchandising transactions prior to the business combination.

The McGraw-Hill Companies, Inc., 2006Solutions Manual, Chapter 8 263

Pr. 8–11 Power Corporation (65 minutes, strong)

Working paper for consolidated financial statements and related working paper eliminations (in journal entry format) of parent company and partially owned subsidiary having intercompany transactions for merchandise and equipment.

Pr. 8–12 Pritchard Corporation (65 minutes, strong)

Adjusting entries, working paper eliminations (in journal entry format), and working paper for consolidated financial statements of parent company and wholly owned subsidiary having intercompany transactions for notes, merchandise, and equipment.

ANSWERS TO REVIEW QUESTIONS

1. To assure correct elimination of intercompany transactions and balances in consolidated financial statements, a parent company and subsidiary should set up clearly identified separate ledger accounts to record the intercompany items.

2. Common intercompany transactions between a parent company and its subsidiary include the following (only five are required):

(1) Sales of merchandise

(2) Sales of land or depreciable plant assets

(3) Sales of intangible assets

(4) Leases of property under sales-type/capital leases

(5) Loans on promissory notes or open accounts

(6) Leases of property under operating leases

(7) Rendering of services

3. There are no income tax effects associated with the elimination of intercompany rent revenue and expense under an operating lease. Because the revenue of one affiliate exactly offsets the expense of the other affiliate, there is no intercompany profit (gain) or loss associated with the operating lease in a consolidated income statement.

4. A discounted intercompany note receivable is not eliminated in the preparation of a consolidated balance sheet. Discounting the note in effect makes it payable to an outsiderthe bank that discounted the note.

5. If unrealized intercompany profits (gains) resulting from transactions between parent company and subsidiaries are not eliminated, consolidated financial statements will reflect the results of related party activities within the group, as well as results of transactions with those outside the consolidated entity. In these circumstances, consolidated net income would be subject to manipulation by management of the parent company.

6. The following consolidated financial statement categories are affected by intercompany sales of merchandise at a profit:

Net sales

Cost of goods sold

Net income to parent

Inventories

Total current assets

Total assets

Total stockholders’ equity

The McGraw-Hill Companies, Inc., 2006264 Modern Advanced Accounting, 10/e

7. The unrealized intercompany profit in a subsidiary’s beginning inventories resulting from the parent company’s sales of merchandise to the subsidiary is eliminated from the parent’s beginning retained earnings. This technique is required because the parent had closed the gross profit on its sales to the subsidiaryincluding the profit attributable to the subsidiary’s ending inventories of the preceding accounting periodto its Retained Earnings ledger account.

8. The minority interest in net income of a partially owned subsidiary is affected by working paper eliminations that involve intercompany profits (gains) attributable to that subsidiary. Examples are intercompany profits (gains) on upstream or lateral sales of merchandise, plant assets, or intangible assets, and gains on the open-market acquisition of a partially owned subsidiary’s bonds by the parent company or by another subsidiary.

9. Eliminations of intercompany profit in the parent company’s inventories only to the extent of the parent company’s ownership interest in the selling subsidiary results in a portion of intercompany profit remaining in consolidated net income. This is an undesirable result if the consolidated financial statements are to present the results of transactions with those outside the consolidated entity. The minority stockholders of the subsidiary, although they are considered co-owners of the consolidated entity under the economic unit concept of consolidated financial statements, play no part whatsoever in the negotiation of intercompany sales. Therefore, all the intercompany profit in the parent company’s ending inventories should be eliminated in the preparation of consolidated financial statements.

10. Intercompany sales of plant assets and intangible assets differ from intercompany sales of merchandise in two respects. First, intercompany sales of plant assets and intangible assets are infrequent in occurrence, but intercompany sales of merchandise are recurring transactions once a program for intercompany sales has begun. Second, realization of intercompany gain on sales of plant assets or intangible assets requires the passage of many accounting periods; intercompany profits on sales of merchandise generally are realized rapidly, depending on the frequency of inventories turnover.

11. An intercompany gain on the sale of land is realized only when the land is resold to an outsider. The gain on sale of land between affiliated companies is unrealized from a consolidated point of view.

12. The intercompany gain element of Partin Corporation’s annual depreciation expense is $500 ($2,000 x 1/4 = $500). In the working paper for consolidated financial statements, depreciation expense is reduced by the $500 intercompany gain element. The $500 is considered to be an increase in Sayles Company’s net income, for the computation of the minority interest in net income of subsidiary.

13. Working paper eliminations (in journal entry format) for intercompany leases of property under capital/sales-type leases include eliminations of both intercompany sales and cost of goods sold and the intercompany profit in depreciation expense. Thus, such eliminations have features of both eliminations for intercompany sales of merchandise and eliminations for intercompany sales of plant assets.

14. The quoted statement is unsupportable because it implies that intercompany gain or loss results only from transactions between affiliated companies. When one affiliate acquires another affiliate’s bonds in the open market, a realized gain or loss is recognized on the transaction. Although in form no transaction has taken place between the affiliates, in substance the acquiring affiliate acts as an agent for the issuer of the bonds in the open-market transaction. Thus, the realized gain or loss is recognized in the consolidated income statement and is attributed to the issuer of the bonds.


15. A subsidiary’s reissuance of parent company bonds acquired in the open market by the subsidiary interrupts the orderly amortization of the realized gain or loss on the acquisition of the bonds. A transaction gain or loss on the subsidiary’s reissuance of the parent company’s bonds is not realized by the consolidated entity. Logically, the transaction gain or loss should be treated in consolidation as premium or discount on the reissued bonds.

16. The elimination or recognition of intercompany profits (gains) or losses in inventories, plant assets, intangible assets, or bonds is recorded only in the working paper for consolidated financial statements. Because the parent company generally does not reflect intercompany profit (gain) or loss eliminations in its equity-method recording of the subsidiary’s operating results, the parent company’s net income will differ from consolidated net income.

SOLUTIONS TO EXERCISES

Ex. 8–1 1. b ($51,000 – $850 = $50,150) 8. c2. a 9. d ($120,000 0.60 = $200,000)3. b 10. a4. b 11. b ($84,115 x 0.07 = $5,888)5. c 12. b6. b 13. a7. b 14. b [$60,000 – ($12,000 x 2) = $36,000]

Ex. 8–2 Computation of Parker Corporation’s debit to Cash, Apr. 12, 2006:

Maturity value of note [$100,000 + ($100,000 x 0.08 x 90/360)] $102,000Less: Discount ($102,000 x 0.10 x 60/360) 1,700 Debit to Cash $100,300

Ex. 8–3 Payton Corporation’s journal entry, Mar. 31, 2006:

Cash ($10,175 – $153) 10,022Interest Expense ($153 – $117*) 36

Intercompany Notes Receivable 10,000Intercompany Interest Revenue ($10,000 x 0.07 x 30/360) 58

To record discounting of 7%, 90-day note receivable from Slagle Company dated Mar. 1, 2006, at a discount rate of 9%. Cash proceeds computed as $10,175 maturity value of note, less $153 discount ($10,175 x 0.09 x 60/360 = $153).*$10,000 x 0.07 x 60/360 = $117

Ex. 8–4 Planke Corporation’s journal entry to record discounting of Scully Company note, Mar. 31, 2006:

Cash 18,118Interest Expense ($152 – $135) 17

Intercompany Notes Receivable 18,000Intercompany Interest Revenue 135*

To record discounting of 9%, 60-day note receivable from Scully Company dated Mar. 1, 2006, at a discount rate of 10%. Cash proceeds computed as follows:Maturity value of note [$18,000 + ($18,000 x 0.09 x 60/360)] $18,270Discount ($18,270 x 0.10 x 30/360) 152Proceeds $18,118

*$18,000 x 0.09 x 30/360 = $135


Ex. 8–5 Journal entries for Palos Verdes Corporation:2005June 1 Intercompany Notes Receivable 120,000

Cash 120,000

July 1 Cash ($123,600 – $3,090) 120,510Interest Expense [$3,090 – ($120,000 x 0.12 x 2/12)] 690

Intercompany Notes Receivable 120,000Intercompany Interest Revenue ($120,000 x 0.12 x

1/12) 1,200

2006May 1 Intercompany Dividends Receivable ($80,000 x 0.90) 72,000

Investment in South Gate Company Common Stock 72,000

10 Cash 72,000Intercompany Dividends Receivable 72,000

31 Investment in South Gate Company Common Stock ($200,000 x 0.90) 180,000

Intercompany Investment Income 180,000

Ex. 8–6 Analysis of Peggy Corporation’s sales to Sally Company for year ended Nov. 30, 2006:

Selling price Cost

Gross profit (25% of cost; 20% of selling

price)Beginning inventories $ 18,000 $ 14,400 $ 3,600Add: Sales 120,000 96,000 24,000

Subtotals $138,000 $110,400 $27,600Less: Ending inventories 24,000 19,200 4,800Cost of goods sold $114,000 $ 91,200 $22,800

Ex. 8–7 Working paper elimination for Patter Corporation and subsidiary, Feb. 28, 2006:

Retained EarningsPatter 25,000Intercompany SalesPatter 800,000

Intercompany Cost of Goods SoldPatter 600,000Cost of Goods SoldSmatter 187,500InventoriesSmatter 37,500

Ex. 8–8 Working paper elimination for Pele Corporation and subsidiary, July 31, 2006:

Intercompany SalesPele 120,000Intercompany Cost of Goods SoldPele ($120,000 x 0.83 1/3) 100,000Cost of Goods SoldShad ($84,000 x 0.16 2/3) 14,000InventoriesShad ($36,000 x 0.16 2/3) 6,000

To eliminate intercompany sales and cost of goods sold, and unrealized intercompany profit in inventories. (Income tax effects are disregarded.)

Ex. 8–9 Working paper elimination for Polydom Corporation and subsidiary, Dec. 31, 2006:

Retained EarningsSpring ($160,000 x 0.25 x 0.75) 30,000


Minority Interest in Net Assets of Spring Company ($160,000 x 0.25 x 0.25) 10,000

Intercompany SalesSpring ($600,000 x 1.33 1/3) 800,000Intercompany Cost of Goods SoldSpring 600,000InventoriesSolano ($200,000 x 0.25) 50,000Cost of Goods SoldSolano ($760,000 x 0.25) 190,000

To eliminate intercompany sales and cost of goods sold and unrealized intercompany profit in inventories. (Income tax effects are disregarded.)

Ex. 8–10 Working paper eliminations for Polar Corporation and subsidiaries, Sept. 30, 2006:

Intercompany SalesSolar ($120,000 x 1.25) 150,000Intercompany Cost of Goods SoldSolar 120,000Cost of Goods SoldStellar ($110,000 x 0.20) 22,000InventoriesStellar ($40,000 x 0.20) 8,000

Intercompany SalesStellar ($180,000 x 1.33 1/3) 240,000Intercompany Cost of Goods SoldStellar 180,000Cost of Goods SoldSolar ($180,000 x 0.25) 45,000InventoriesSolar ($60,000 x 0.25) 15,000

Ex. 8–11 a. To eliminate unrealized intercompany gain in machinery and in related depreciation. (Income tax effects are disregarded.)

b. Two years. ($12,500 $6,250 = 2)

c. The credit to Depreciation ExpenseParke in effect represents the realization of a portion of the intercompany gain on Selma’s sale of machinery to Parke two years ago. Thus, $6,250 is added to Selma’s net income for the year ended December 31, 2006, to compute the minority interest in net income of Selma. The consolidated net income of Parke Corporation and subsidiary for the year ended December 31, 2006, is net of the minority interest in net income of Selma.

Ex. 8–12 Working paper elimination for Patria Corporation and subsidiary, Sept. 30, 2008:

Retained EarningsSelena ($4,500* x 0.90) 4,050Minority Interest in Net Assets of Subsidiary ($4,500 x 0.10) 450Accumulated DepreciationPatria [$5,500 x (10/55 + 9/55)] 1,900

EquipmentPatria ($14,500 – $9,000) 5,500Depreciation ExpensePatria ($5,500 x 9/55) 900

To eliminate unrealized intercompany gain in equipment and in related depreciation. (Income tax effects are disregarded.)*$5,500 – ($1,900 – $900) = $4,500

Ex. 8–13 Computation of missing amounts in working paper eliminations for Paulo Corporation and subsidiary:

(1) $480 ($2,400 x 0.20)

(2) $1,920 ($2,400 x 0.80)

(3) $2,400 ($800 x 3)

(4) $160 ($800 x 0.20)

(5) $640 ($800 x 0.80)

(6) $4,000 ($800 x 5)


Ex. 8–14 Working paper elimination for Pelion Corporation and subsidiary, Dec. 31, 2007:

Intercompany Liability under Capital LeaseStyron ($15,849 – $5,000 + $1,585) 12,434

Unearned Intercompany Interest RevenuePelion ($4,151 – $1,585) 2,566

Retained EarningsPelion ($20,849 – $17,000) 3,849Intercompany Lease ReceivablesPelion ($20,000 – $5,000) 15,000Leased EquipmentCapital LeaseStyron ($3,849 – $385) 3,464Depreciation ExpenseStyron ($3,849 10) 385

To eliminate intercompany accounts associated with intercompany lease and to defer unrealized portion of intercompany gross profit on sales-type lease. (Income tax effects are disregarded.)

Note to Instructor: Pelion’s intercompany interest revenue [($20,000 – $4,151) x 0.10 = $1,585] is offset against Styron’s intercompany interest expense ($15,849 x 0.10 = $1,585) on the same line in the income statement section of the working paper for consolidated financial statements.

Ex. 8–15 Working paper elimination for Pawley Corporation and subsidiary, Feb. 28, 2007:Intercompany Gain on Sale of PatentSmart ($80,000 –

$60,000) 20,000Amortization ExpensePawley ($20,000 4) 5,000PatentPawley ($20,000 – $5,000) 15,000

Ex. 8–16 Computation of amount of cash paid by Polka Corporation, Apr. 30, 2007:

Present value of $40,000 due in four years at 12%, with interest paid annually ($40,000 x 0.635518) $25,421

Add: Present value of $4,000 due each year for four years at 12% ($4,000 x 3.037349) 12,149

Cost of $40,000 face amount of bonds $37,570Add: Accrued interest purchased ($40,000 x 0.10) 4,000Amount of cash paid by Polka Corporation $41,570

Computation of gain on extinguishment of bonds:

Carrying amounts of bonds acquired: $100,000 x 0.40 $40,000Less: Cost of bonds to Polka Corporation (see above) 37,570Gain on extinguishment of bonds $ 2,430

Ex. 8–17 Computation of missing amounts in working paper elimination:

(1) Intercompany interest revenue: $58,098 x 0.10 $ 5,810

(2) Premium on intercompany bonds payable:

Premium, Oct. 31, 2007: $58,098 + $3,889 – $60,000 $ 1,987

Amortization for year ended Oct. 31, 2008: $5,400 – ($61,987 x 0.08) 441

Premium, Oct. 31, 2008 $ 1,546

(3) Investment in Sinn Company bonds: $58,098 + ($5,810 – $5,400) $58,508

(4) Intercompany interest expense: $61,987 x 0.08 $ 4,959

(5) Retained earnings: $3,889 x 0.90, or $3,889 – $389 $ 3,500


Ex. 8–18 Computation of minority interest in Sokal Company’s net income:Year 2006 Year 2007

Net income of subsidiary $80,000 $90,000Intercompany profit in parent company’s inventories, unrealized

in Year 2006, realized in Year 2007 (2,000 ) 2,000 Adjusted net income of subsidiary $78,000 $92,000 Minority interest (30%) $23,400 $27,600

CASES

Case 8–1 The journal entries of Seeley Company to record the acquisition and depreciation of machinery are adequate and need not be changed. However, the journal entries of Powell Corporation are incorrect for two reasons:

(1) Idle machinery is accounted for as though it were merchandise. A Sales ledger account is inappropriate for any asset except merchandise sold to customers.

(2) The first journal entry does not identify the transaction as an intercompany transaction. Failure to identify intercompany transactions leads to the risk that such transactions, profits (gains) or losses, and balances will not be eliminated in the preparation of consolidated financial statements.

The working paper elimination prepared by Powell’s accountant does not remove the intercompany gain element from the consolidated income statement. In effect, the elimination accounts for the intercompany gain as though it were a prior period adjustment. This treatment has no justification.

Powell’s journal entry for the intercompany sale of idle machinery should have been as follows:

Cash 50,000

Idle Machinery 40,000

Intercompany Gain on Sale of Idle Machinery 10,000

To record sales of idle equipment to Seeley Company. (Income tax effects are disregarded.)

The correct December 31, 2006, working paper elimination (in journal entry format) is as follows:

Intercompany Gain on Sale of Idle MachineryPowell 10,000

Accumulated Depreciation of MachinerySeeley 1,000

MachinerySeeley 10,000

Depreciation ExpenseSeeley 1,000

To eliminate unrealized intercompany gain in machinery and in related depreciation. (Income tax effects are disregarded.)

Case 8–2 Shelton Company’s $10,000 debit to a deferred charge ledger account for the excess paid by Shelton for the trade accounts receivable acquired from Sawhill Company is inappropriate. A deferred charge is an account established for long-term prepayments for goods or services to be received in the future. The $10,000 excess payment for the trade accounts receivable does not fit the concept of a deferred charge. Further, the nature of the expense account debited by Shelton for the amortization of the deferred charge is not clear. The $10,000 should have been debited to a loss ledger account, because it represents an outlay by Shelton to a liquidating affiliated company for which no benefits were received. The $10,000 loss in Shelton’s accounting records, as recommended above, should be eliminated in the


preparation of consolidated financial statements for Peasley Corporation and subsidiaries for the year ended October 31, 2006. The following working paper elimination (in journal entry format) is required:

Investment Income of Sawhill CompanyPeasley 10,000

Loss on Acquisition of ReceivablesShelton 10,000

To eliminate loss on Shelton Company’s acquisition of trade accounts receivable from Sawhill Company, an unconsolidated subsidiary in liquidation.

The fact that Sawhill is in liquidation and is not consolidated does not change the need for eliminating all intercompany transactions, balances, and profits (gains) or losses from the consolidated financial statements.

Case 8–3 Given that both Winston Corporation and Cranston Company use the periodic inventory system and that markups on Winston’s sales of products to Cranston had varied, it is probably impossible for the newly hired controller of Winston to prepare any consolidated financial statements other than a consolidated balance sheet at the end of the first fiscal year of the controllership. The local CPA firm had prepared separate income tax returns for both Winston and Cranston; thus, it is unlikely that the CPA firm had any records of intercompany profits in Winston’s sales to Cranston and in Cranston’s ending inventories.

If the controller is able to obtain accurate quantities and billed prices of Winston-produced products in Cranston’s ending inventory, and if Winston’s costs of those products are obtainable from Winston’s production records, the amount of the unrealized intercompany profit in Cranston’s ending inventory can be determined, thus facilitating preparation of a consolidated balance sheet. Establishment of appropriate intercompany sales and intercompany cost of goods sold accounting records for Winston for the following fiscal year (which would entail Winston’s adoption of the perpetual inventory system) would enable the controller to prepare consolidated statements of income, retained earnings, and cash flows, as well as consolidated balance sheets, for future fiscal years.

Case 8–4 The accountant’s position is not supported by accounting theory for consolidated financial statements. Under that theory, consolidated financial statements should display amounts resulting from transactions with those outside the consolidated group. Consolidated financial statements should not be distorted by intercompany transactions, which are not the result of arm’s-length bargaining between parties with opposing interests. Despite the fact that Aqua Well Company’s charges for transmission of water to Aqua Water Corporation were at the customary rate approved by the state’s Public Utilities Commission, these charges in the aggregate are dependent on the volume of water ordered from the subsidiary by the parent company. Thus, Aqua Well’s transmission revenue amount must be offset against Aqua Water’s transmission expense amount if the consolidated income statement for the two companies is to comply with generally accepted accounting principles for consolidated financial statements.

Case 8–5 The Audit Committee of the Board of DirectorsPadgett Corporation

At your request, I have found the following misstatements in the condensed consolidated financial statements of Padgett Corporation and subsidiary, Seacoast Company, for the year ended December 31, 2006:


1. The failure to eliminate the intercompany “gain” (actually, because of implicit interest, a $119,417 loss; the present value of $680,583, at an interest rate of 8%, compared with Padgett’s $800,000 cost of the land) on the sale of land to Seacoast by Padgett. Elimination of the “gain” reduces pre-tax consolidated income and consolidated property, plant, and equipment by $200,000.

2. The failure to eliminate the December 31, 2006, intercompany sale, $650,000, and cost of goods sold, $500,000, resulting from a shipment by Padgett to Seacoast. Elimination of the $150,000 intercompany gross margin reduces pre-tax income by that amount.

The net effect of the foregoing errors on the subject consolidated financial statements is as follows:

Balance sheet:

Current assets (inventories) overstated $150,000

Property, plant, and equipment overstated $200,000

Total assets overstated $350,000

Current liabilities (income taxes payable) overstated $119,000 (see below)

Stockholders’ equity overstated $231,000

Income statement:

Net sales overstated $650,000

Cost of goods sold overstated $500,000

Gain on sale of land overstated $200,000

Pre-tax income overstated $350,000

Income tax expense overstated $119,000 ($350,000 x 0.34)

Net income overstated $231,000

Basic earnings per share overstated $3.85 ($231,000 60,000 shares)a 70% overstatement

Very truly yours,

_____________, CPA


30 Minutes, EasyPrentiss Corporation Pr. 8–1

a. Prentiss Corporation

Journal Entries

20 06

Oct 21 Intercompany Notes Receivable 1 0 0 0 0 0

Cash 1 0 0 0 0 0

To record loan to Scopes Company on 90-day, 7 ½%

promissory note.

31 Cash ($101,875 – $2,038) 9 9 8 3 7

Interest Expense ($2,038 – $1,667*) 3 7 1

Intercompany Notes Receivable 1 0 0 0 0 0

Intercompany Interest Revenue ($100,000 x 0.075

x 10/360) 2 0 8

To record discounting of 90-day, 7 ½% note receivable

from Scopes Company dated Oct. 21, 2006, at a

discount rate of 9%. Cash proceeds are computed as

follows:

Maturity value of note [$100,000 + ($100,000 x

0.075 x 90/360)] $101,875

Discount ($101,875 x 0.09 x 80/360) 2,038

Cash proceeds $ 99,837

*100,000 x 0.075 x 80/360 = $1,667

b. Scopes Company

Journal Entries

20 06

Oct 21 Cash 1 0 0 0 0 0

Intercompany Notes Payable 1 0 0 0 0 0

To record loan from Prentiss Corporation on 90-day,

7 ½% promissory note.

31 Intercompany Notes Payable 1 0 0 0 0 0

Intercompany Interest Expense 2 0 8

Notes Payable 1 0 0 0 0 0

Interest Payable 2 0 8

To transfer 90-day, 7 ½% note payable to Prentiss

Corporation dated Oct. 21, 2006, from intercompany

notes to outsider notes. Action is necessary because

Prentiss Corporation discounted the note on this date.


30 Minutes, MediumPillsbury Corporation Pr. 8–2

a. Pillsbury Corporation

Journal Entries

20 06May 1 Intercompany Notes Receivable 1 5 0 0 0

Cash 1 5 0 0 0

To record 7 ½%, 120-day loan to Sarpy Company.

31 Intercompany Notes Receivable 2 0 0 0 0

Cash 2 0 0 0 0

To record 7 ½%, 120-day loan to Sarpy Company.

June 6 Cash ($15,375 – $323) 1 5 0 5 2

Interest Expense ($323 – $262*) 6 1

Intercompany Notes Receivable 1 5 0 0 0

Intercompany Interest Revenue ($15,000 x 0.075

x 36/360) 1 1 3

To record discounting of 7 ½%, 120-day note

receivable from Sarpy Company dated May 1, 2006,

at a discount rate of 9%. Cash proceeds computed as

$15,375 maturity value of note, less $323 discount

($15,375 x 0.09 x 84/360 = $323).

30 Intercompany Interest Receivable 1 2 5

Intercompany Interest Revenue 1 2 5

To accrue interest on June 30, 2006, as follows:

$20,000 x 0.075 x 30/360 = $125.

*$15,000 x 0.075 x 84/360 = $262


Pillsbury Corporation (concluded) Pr. 8–2

b. Sarpy Company

Journal Entries

20 06May 1 Cash 1 5 0 0 0

Intercompany Notes Payable 1 5 0 0 0

To record 7 ½%, 120-day loan from Pillsbury

Corporation.

31 Cash 2 0 0 0 0

Intercompany Notes Payable 2 0 0 0 0

To record 7 ½%, 120-day loan from Pillsbury

Corporation.

June 6 Intercompany Notes Payable 1 5 0 0 0


Notes Payable 1 5 0 0 0


To transfer 7 ½%, 120-day note payable to Pillsbury

Corporation dated May 1, 2006, from intercompany

notes to outsider notes. Action is necessary because

Pillsbury Corporation discounted the note on this date.

Accrued interest computed as $15,000 x 0.075 x

36/360 = $113.

30 Interest Expense 7 5


Interest Payable 7 5

Intercompany Interest Payable 1 2 5

To accrue interest at June 30, 2006, as follows:

$15,000 x 0.075 x 24/360 = $75

$20,000 x 0.075 x 30/360 = $125


50 Minutes, MediumPittsburgh Corporation Pr. 8–3

a. Pittsburgh Corporation (parent company)

Correcting Entries

July 31, 2005

(1)Intercompany Accounts Receivable ($10,000 +

$5,000) 1 5 0 0 0

Intercompany Management Fee Revenue

($2,000 + $2,200) 4 2 0 0

Intercompany Interest Revenue ($50 + $150) 2 0 0

Intercompany Account—Syracuse Company 1 0 6 0 0

To close Intercompany Account and transfer balances

as follows:

Intercompany Accounts Receivable: Unpaid

advances of June 21, 2005, and July 31, 2005

Intercompany Management Fee Revenue:

$2,000 from June 11, 2005, and $2,200 from

July 11, 2005.

Intercompany Interest Revenue: $50 from

June 12, 2005, and $150 from July 27, 2005.

(2)

Intercompany Interest Receivable 1 1 1

Intercompany Interest Revenue 1 1 1

To accrue interest on advance to Syracuse Company

dated June 21, 2005, as follows: $10,000 x 0.10 x

40/360 = $111.

(3)

Intercompany Accounts Receivable 2 4 0 0

Intercompany Management Fee Revenue 2 4 0 0

To accrue management fee due from Syracuse

Company for July, 2005, as follows:

Syracuse Company net sales for 3 months

ended July 31, 2005 $330,000

Management fee ($330,000 x 0.02) $ 6,600

Less: Total paid for May and June, 2005 4,200

Balance due, July 31, 2005 $ 2,400


Pittsburgh Corporation (concluded) Pr. 8–3

b. Syracuse Company (subsidiary company)

Correcting Entries

July 31, 2005

(1)

Intercompany Account—Pittsburgh Corporation 5 6 0 0

Intercompany Management Fee Expense 4 2 0 0


Intercompany Accounts Payable 1 0 0 0 0

To close Intercompany Account and transfer balances

to appropriate accounts.

(2)

Cash in Transit 5 0 0 0

Intercompany Accounts Payable 5 0 0 0

To record cash advance in transit from Pittsburgh

Corporation on July 31, 2005.

(3)



To accrue interest on advance from Pittsburgh

Corporation dated June 21, 2005.

(4)

Intercompany Management Fee Expense 2 4 0 0


To accrue management fee due to Pittsburgh

Corporation for July, 2005.

c. Pittsburgh Corporation and Subsidiary

Partial Working Paper for Consolidated Financial Statements

July 31, 2005

Eliminations

Pittsburgh Syracuse Increase

Corporation Company (decrease) Consolidated

Income Statement

Revenue:

Intercompany revenue

(expenses) 6 9 1 1 ( 6 9 1 1 )

Balance Sheet

Assets

Intercompany receivables

(payables) 1 7 5 1 1 ( 1 7 5 1 1 )


30 Minutes, MediumParley Corporation Pr. 8–4

Parley Corporation and Subsidiary

Working Paper Eliminations

February 28, 2008

(a) Retained Earnings—Silton ($18,000 x 0.90) 1 6 2 0 0Minority Interest in Net Assets of Subsidiary

($18,000 x 0.10) 1 8 0 0

Leasehold Improvements—Parley ($20,000 –

$4,000) 1 6 0 0 0

Amortization Expense—Parley ($20,000 x 1/10) 2 0 0 0

To eliminate unrealized intercompany gain in the

Leasehold Improvements ledger account and in the

related amortization expense. (Income tax effects are

disregarded.)

(b) Intercompany Interest Revenue—Parley ($48,264 x

0.10) 4 8 2 6

Intercompany Bonds Payable—Silton ($100,000 x ½) 5 0 0 0 0

Investment in Silton Company Bonds—Parley

($48,264 + $826*) 4 9 0 90

0

Intercompany Interest Expense—Silton ($50,000

x 0.08) 4 0 0 0

Gain on Extinguishment of Bonds—Silton

($50,000 – $48,264) 1 7 3 6

To eliminate subsidiary’s bonds acquired by parent

company, and to recognize gain on the extinquishment

of the bonds. (Income tax effects are disregarded.)

*$4,826 – $4,000 = $826


30 Minutes, MediumPeke Corporation Pr. 8–5

Peke Corporation and Subsidiary


June 30, 2007

(a) Retained Earnings—Peke ($48,000 x 0.20) 9 6 0 0Intercompany Sales—Peke 6 0 0 0 0 0

Intercompany Cost of Goods Sold—Peke

($600,000 x 0.80) 4 8 0 0 0 0

Cost of Goods Sold—Stoke ($588,000 x 0.20) 1 1 7 6 0 0

Inventories—Stoke ($60,000 x 0.20) 1 2 0 0 0

To eliminate intercompany sales and cost of goods

sold, and unrealized profit in ending inventories

resulting from Peke Corporation sales to Stoke

Company. (Income tax effects are disregarded.)

(b) Retained Earnings—Stoke ($30,000 x 0.25 x 0.75) 5 6 2 5

Minority Interest in Net Assets of Subsidiary ($30,000

x 0.25 x 0.25) 1 8 7 5

Intercompany Sales—Stoke 8 0 0 0 0 0

Intercompany Cost of Goods Sold—Stoke

($800,000 x 0.75) 6 0 0 0 0 0

Cost of Goods Sold—Peke ($790,000 x 0.25) 1 9 7 5 0 0

Inventories—Peke ($40,000 x 0.25) 1 0 0 0 0



resulting from Stoke Company sales to Peke

Corporation . (Income tax effects are disregarded.)

Note to Instructor: A 25% markup on cost equals a

20% markup on selling price.


45 Minutes, MediumPadua Corporation Pr. 8–6

Padua Corporation and Subsidiary


April 30, 2006(a) Retained Earnings—Padua ($54,000 x 0.16 2/3) 9 0 0 0

Intercompany Sales—Padua 1 8 0 0 0 0

Intercompany Cost of Goods Sold—Padua

($180,000 x 0.83 1/3) 1 5 0 0 0 0

Cost of Goods Sold—Scala ($150,000 x

0.16 2/3) 2 5 0 0 0

Inventories—Scala ($84,000 x 0.16 2/3) 1 4 0 0 0

To eliminate intercompany sales, cost of goods sold,

and unrealized profit in inventories. (Income tax effects

are disregarded.)

(b) Intercompany Gain on Sale of Machinery—Scala

($80,000 – $56,000) 2 4 0 0 0

Accumulated Depreciation—Padua ($24,000 8) 3 0 0 0

Machinery—Padua 2 4 0 0 0

Depreciation—Padua 3 0 0 0

To eliminate unrealized intercompany gain in

machinery and in related depreciation. (Income tax

effects are disregarded.)

(c) Intercompany Bonds Payable—Scala 2 0 0 0 0 0

Discount on Intercompany Bonds Payable—Scala

[($45,880 – $1,247*) x ½] 2 2 3 1 7

Investment in Scala Company Bonds—Padua 1 5 8 6 5 8

Gain on Extinguishment of Bonds—Scala 1 9 0 2 5

To eliminate subsidiary’s bonds acquired by parent,

and to recognize gain on the extinguishment of the

bonds. (Income tax effects are disregarded.)

(d) Minority Interest in Net Income of Subsidiary 1 1 8 0 3

Minority Interest in Net Assets of Subsidiary 1 1 8 0 3

To establish minority interest in subsidiary’s adjusted

net income for 2006, as follows:

Net income of subsidiary $120,000

Adjustments in working paper

eliminations:

(b) ($24,000 – $3,000) (21,000)

(c) 19,025

Adjusted net income of subsidiary $118,025

Minority interest share ($118,025 x 0.10) $ 11,803

*($354,120 x 0.12 x ½) – ($400,000 x 0.10 x ½) = $1,247


50 Minutes, MediumPacific Corporation Pr. 8–7

a. Pacific Corporation

Journal Entries

20 05July 1 Cash 1 6 0 0 0

Accumulated Depreciation of Machinery 1 8 0 0 0

Machinery 3 0 0 0 0

Intercompany Gain on Sale of Machinery 4 0 0 0

To record sale of machinery to Sommer Company.

1 Investment in Sommer Company Bonds 3 6 1 5 7 1

Cash 3 6 1 5 7 1

To record acquisition of $400,000 face amount of

Sommer Company’s 8% bonds due June 30, 2008.

20 06

June 30 Cash ($400,000 x 0.08) 3 2 0 0 0

Investment in Sommer Company Bonds ($43,389 –

$32,000) 1 1 3 8 9

Intercompany Interest Revenue ($361,571 x

0.12) 4 3 3 8 9

To record receipt of annual interest on Sommer

Company’s 8% bonds.


Pacific Corporation (concluded) Pr. 8–7

b. Pacific Corporation and Subsidiary


June 30, 2006

(a) Intercompany Gain on Sale of Machinery—Pacific 4 0 0 0Accumulated Depreciation—Sommer ($4,000 8) 5 0 0

Machinery—Sommer 4 0 0 0

Depreciation Expense—Sommer 5 0 0


machinery and in related depreciation. (Income tax


(b) Intercompany Interest Revenue—Pacific 4 3 3 8 9

Intercompany Bonds Payable—Sommer ($500,000 x

4/5) 4 0 0 0 0 0

Discount on Intercompany Bonds Payable—

Sommer [($24,870 x 4/5) – $38,010* + $32,000] 1 3 8 8 6

Investment in Sommer Company Bonds—Pacific

($361,571 + $11,389) 3 7 2 9 6 0

Intercompany Interest Expense—Sommer

[$400,000 – $19,896†) x 0.10] 3 8 0 1 0

Gain on Extinguishment of Bonds—Sommer

[($400,000 – $19,896†) – $361,571] 1 8 5 3 3


and related intercompany interest revenue and

expense; and to recognize gain on the extinguishment

of the bonds. (Income tax effects are disregarded.)

Computations:

*($500,000 – $24,870) x 0.10 x 4/5 = $38,010

†$24,870 x 4/5 = $19,896


50 Minutes, MediumPollard Corporation Pr. 8–8

a. Pollard CorporationLedger Accounts

Investment in Silver Company Bonds

Date Explanation Debit Credit Balance

20 07

Aug 31 Acquisition of $600,000 face amount

of bonds [($600,000 x 0.350344) +

($30,000 x 10.827603)] 5 3 5 0 3 4 5 3 5 0 3 4 dr

20 08

Feb 28 Accumulation of discount ($32,102 –

$30,000) 2 1 0 2 5 3 7 1 3 6 dr

Aug 31 Accumulation of discount ($32,228 –

$30,000) 2 2 2 8 5 3 9 3 6 4 dr

Intercompany Interest Revenue


20 08

Feb 28 ($535,034 x 0.06) 3 2 1 0 2 3 2 1 0 2 cr

Aug 31 ($537,136 x 0.06) 3 2 2 2 8 6 4 3 3 0 cr

Silver CompanyLedger Accounts

Intercompany Bonds Payable


20 07

Aug 31 Bonds acquired by parent company 6 0 0 0 0 0 6 0 0 0 0 0 cr

Discount on Intercompany Bonds Payable


20 07Aug 31 Bonds acquired by parent company

($44,985 x 0.75) 3 3 7 3 9 3 3 7 3 9 dr

20 08

Feb 28 Amortization ($31,144 – $30,000) 1 1 4 4 3 2 5 9 5 dr

Aug 31 Amortization ($31,207 – $30,000) 1 2 0 7 3 1 3 8 8 dr

Intercompany Interest Expense


20 08

Feb 28 ($600,000 – $33,739) x 0.055 3 1 1 4 4 3 1 1 4 4 dr

Aug 31 ($600,000 – $32,595) x 0.055 3 1 2 0 7 6 2 3 5 1 dr


Pollard Corporation (concluded) Pr. 8–8

b. Pollard Corporation and Subsidiary


August 31, 2007 and 2008

20 07Aug 31

(a) Intercompany Bonds Payable—Silver 6 0 0 0 0 0


Silver 3 3 7 3 9

Investment in Silver Company Bonds—Pollard 5 3 5 0 3 4

Gain on Extinguishment of Bonds—Silver 3 1 2 2 7


and to recognize gain on the extinguishment of the

bonds. (Income tax effects are disregarded.)

20 08

Aug 31

(a) Intercompany Interest Revenue—Pollard 6 4 3 3 0

Intercompany Bonds Payable—Silver 6 0 0 0 0 0


Silver 3 1 3 8 8

Investment in Silver Company Bonds—Pollard 5 3 9 3 6 4

Intercompany Interest Expense—Silver 6 2 3 5 1

Retained Earnings—Silver 3 1 2 2 7

To eliminate subsidiary’s bonds owned by parent

company, and related interest revenue and expense;

and to increase subsidiary’s beginning retained

earnings by amount of unamortized realized gain on

the extinguishment of the bonds. (Income tax effects

are disregarded.)


60 Minutes, MediumProcus Corporation Pr. 8–9

a. Procus CorporationLedger Accounts

Intercompany Lease Receivables


20 06

Dec 31 Inception of lease [($20,000 x 3) +

$5,000] 6 5 0 0 0 6 5 0 0 0 dr

31 Receipt of first payment 2 0 0 0 0 4 5 0 0 0 dr

20 07

Dec 31 Receipt of second payment 2 0 0 0 0 2 5 0 0 0 dr

20 08

Dec 31 Receipt of third payment 2 0 0 0 0 5 0 0 0 dr

20 09

Dec 31 Receipt of purchase option 5 0 0 0 - 0 -

Unearned Intercompany Interest Revenue


20 06

Dec 31 Inception of lease ($65,000 –

$60,242) 4 7 5 8 4 7 5 8 cr

20 07

Dec 31 Interest for year [($45,000 – $4,758)

x 0.07] 2 8 1 7 1 9 4 1 cr

20 08

Dec 31 Interest for year [($25,000 – $1,941)

x 0.07] 1 6 1 4 3 2 7 cr

20 09

Dec 31 Interest for year [($5,000 – $327)

x 0.07] 3 2 7 - 0 -

Intercompany Interest Revenue


20 07

Dec 31 Interest for year 2 8 1 7 2 8 1 7 cr

31 Closing entry 2 8 1 7 - 0 -

20 08

Dec 31 Interest for year 1 6 1 4 1 6 1 4 cr


20 09

Dec 31 Interest for year 3 2 7 3 2 7 cr

31 Closing entry 3 2 7 - 0 -


Procus Corporation (continued) Pr. 8–9

Stoffer CompanyLedger Accounts

Leased Equipment—Capital Lease


20 06

Dec 31 Capital lease at inception 6 0 2 4 2 6 0 2 4 2 dr

20 07

Dec 31 Depreciation for Year 2007

($60,242 6) 1 0 0 4 0 5 0 2 0 2 dr

20 08

Dec 31 Depreciation for Year 2008 1 0 0 4 0 4 0 1 6 2 dr

20 09


20 10


20 11


20 12

Dec 31 Depreciation for Year 2012 1 0 0 4 2 * - 0 -

*Difference due to rounding.

Intercompany Liability under Capital Lease


20 06

Dec 31 Capital lease at inception 6 0 2 4 2 6 0 2 4 2 cr

31 First lease payment 2 0 0 0 0 4 0 2 4 2 cr

20 07

Dec 31 ($20,000 - $2,817 interest) 1 7 1 8 3 2 3 0 5 9 cr

20 08

Dec 31 ($20,000 - $1,614 interest) 1 8 3 8 6 4 6 7 3 cr

20 09

Dec 31 ($5,000 - $327 interest) 4 6 7 3 - 0 -

Intercompany Interest Expense


20 07Dec 31 ($40,242 x 0.07) 2 8 1 7 2 8 1 7 dr


20 08

Dec 31 ($23.059 x 0.07) 1 6 1 4 1 6 1 4 dr


20 09

Dec 31 ($4,673 x 0.07) 3 2 7 3 2 7 dr

31 Closing entry - 0 -


Procus Corporation (concluded) Pr. 8–9

b. Procus Corporation and Subsidiary


December 31, 2006 and 2007

20 06Dec 31

(a) Intercompany Liability under Capital Lease—Stoffer 4 0 2 4 2

Unearned Intercompany Interest Revenue—Procus 4 7 5 8

Intercompany Sales—Procus 6 0 2 4 2

Intercompany Cost of Goods Sold—Procus 3 2 0 0 0

Intercompany Lease Receivables—Procus 4 5 0 0 0

Leased Equipment—Capital Lease—Stoffer

($60,242 – $32,000) 2 8 2 4 2

To eliminate intercompany accounts associated with

intercompany lease and to defer unrealized portion of

intercompany gross profit on sales-type lease. (Income

tax effects are disregarded.)

20 07

Dec 31

(a) Intercompany Liability under Capital Lease—Stoffer 2 3 0 59

9

Unearned Intercompany Interest Revenue—Procus 1 9 4 1

Retained Earnings—Procus ($60,242 – $32,000) 2 8 2 4 2

Intercompany Lease Receivables—Procus 2 5 0 0 0

Leased Equipment—Capital Lease—Stoffer

($28,242 – $4,707) 2 3 5 3 5

Depreciation Expense—Stoffer ($28,242 6) 4 7 0 7

To eliminate intercompany accounts associated with

intercompany lease and to defer unrealized portion of

intercompany gross profit on sales-type lease. (Income


Note to Instructor: Procus’s intercompany interest

revenue and Stoffer’s intercompany interest expense

are placed on the same line of the income statement

section of the working paper for consolidated

financial statements to self-eliminate.


60 Minutes, MediumPatrick Corporation Pr. 8–10

Patrick Corporation and SubsidiaryWorking Paper for Consolidated Balance Sheet

December 31, 2005

Eliminations

Patrick Shannon increase


Assets

Cash 7 5 0 0 0 0 3 0 0 0 0 0 1 0 5 0 0 0 0

Trade accounts receivable (net) 1 9 5 0 0 0 0 4 5 0 0 0 0 2 4 0 0 0 0 0


(payables) ( 3 0 0 0 0 0 ) 3 0 0 0 0 0

Inventories 2 1 0 0 0 0 0 9 5 0 0 0 0 (b) ( 6 0 0 0 0 ) 2 9 9 0 0 0 0

Investment in Shannon Company

common stock 2 2 0 5 0 0 0 (a)(2 2 0 5 0 0 0 )

Investment in Shannon Company

bonds 2 2 0 4 2 4 (c)( 2 2 0 4 2 4 )

Plant assets (net) 4 6 6 0 0 0 0 2 0 0 0 0 0 0 6 6 6 0 0 0 0

Other assets 5 6 4 5 7 6 3 5 0 0 0 0 9 1 4 5 7 6

Total assets 12 1 5 0 0 0 0 4 3 5 0 0 0 0 (2 4 8 5 4 2 4 ) 14 0 1 4 5 7 6

Liabilities & Stockholders’ Equity

Other current liabilities 1 4 5 0 0 0 0 9 4 5 0 0 0 2 3 9 5 0 0 0

Bonds payable 1 5 0 0 0 0 0 9 5 0 0 0 0 2 4 5 0 0 0 0

Intercompany bonds payable 2 5 0 0 0 0 (c)( 2 5 0 0 0 0 )

Common stock, $10 par 3 0 0 0 0 0 0 9 0 0 0 0 0 (a)( 9 0 0 0 0 0 ) 3 0 0 0 0 0 0

Additional paid-in capital 1 3 7 0 0 0 0 1 7 5 0 0 0 (a)( 1 7 5 0 0 0 ) 1 3 7 0 0 0 0

Retained earnings 4 8 3 0 0 0 0 1 1 3 0 0 0 0 (a)(1 1 3 0 0 0 0 ) 4 7 9 9 5 7 6

(b) ( 6 0 0 0 0 )

(c) 2 9 5 7 6

Total liabilities & stockholders’

equity 12 1 5 0 0 0 0 4 3 5 0 0 0 0 (2 4 8 5 4 2 4 ) 14 0 1 4 5 7 6


Patrick Corporation (concluded) Pr. 8–10

Patrick Corporation and Subsidiary


December 31, 2005

(a) Common Stock—Shannon 9 0 0 0 0 0Additional Paid-in Capital—Shannon 1 7 5 0 0 0

Retained Earnings—Shannon 1 1 3 0 0 0 0

Investment in Shannon Company Common

Stock—Patrick 2 2 0 5 0 0 0

To eliminate intercompany investment and related

accounts for stockholders’ equity of subsidiary on date

of business combination.

(b) Retained Earnings—Shannon 6 0 0 0 0

Inventories—Patrick ($300,000 x 0.20) 6 0 0 0 0

To eliminate intercompany sales and profit in

inventories. (Income tax effects are disregarded.)

(c) Intercompany Bonds Payable—Shannon 2 5 0 0 0 0

Investment in Shannon Company Bonds—

Patrick 2 2 0 4 2 4

Retained Earnings—Shannon 2 9 5 7 6


and to include gain on the extinguishment of the bonds

in the subsidiary’s retained earnings. (Income tax


Note to instructor:

Because only a consolidated balance sheet is

prepared on the date of a business combination,

unrealized or realized intercompany profits

(gains) in eliminations (b) and (c) must be

debited or credited to the subsidiary’s retained

earnings.


65 Minutes, StrongPower Corporation Pr. 8–11

Power Corporation and Subsidiary

Working Paper for Consolidated Financial Statements

For Year Ended December 31, 2005

Eliminations

Power Snyder increase


Income Statement

Revenue:Net sales 9 0 2 0 0 0 4 0 0 0 0 0 1 3 0 2 0 0 0

Intercompany sales 6 0 0 0 0 1 0 5 0 0 0 (c) ( 6 0 0 0 0 )

(d)( 1 0 5 0 0 0 )


(expenses) 1 2 0 0 ( 1 2 0 0 )

Intercompany investment

income 1 3 2 8 0 (a) ( 1 3 2 8 0 )

Intercompany loss on sale

of equipment ( 2 0 0 0 ) (e) ( 2 0 0 0 )*

Total revenue 9 7 4 4 8 0 5 0 3 8 0 0 ( 1 7 6 2 8 0 ) 1 3 0 2 0 0 0

Cost and expenses: (a) 3 0 0 0

Cost of goods sold 7 2 0 0 0 0 3 0 0 0 0 0 (c) ( 7 0 0 0 ) 1 0 0 0 0 0 0

(d) ( 1 6 0 0 0 )

Intercompany cost of goods

sold 5 0 0 0 0 8 4 0 0 0 (c) ( 5 0 0 0 0 )

(d) ( 8 4 0 0 0 )Operating expenses and

income taxes expense 1 2 4 1 4 0 9 9 8 0 0 (a) 4 0 0 2 2 4 4 4 0

(e) 1 0 0

Minority interest in net income

of subsidiary (f) 2 3 2 0 2 3 2 0

Total costs & expenses and

minority interest 8 9 4 1 4 0 4 8 3 8 0 0 ( 1 5 1 1 8 0 )† 1 2 2 6 7 6 0

Net income 8 0 3 4 0 2 0 0 0 0 ( 2 5 1 0 0 ) 7 5 2 4 0

Statement of Retained Earnings

Retained earnings, beginning of

period 2 2 0 0 0 0 5 0 0 0 0 (a) ( 5 0 0 0 0 ) 2 2 0 0 0 0

Net income 8 0 3 4 0 2 0 0 0 0 ( 2 5 1 0 0 ) 7 5 2 4 0

Subtotal 3 0 0 3 4 0 7 0 0 0 0 ( 7 5 1 0 0 ) 2 9 5 2 4 0

Dividends declared 3 6 0 0 0 9 0 0 0 (a) ( 9 0 0 0 )‡ 3 6 0 0 0

Retained earnings, end of

period 2 6 4 3 4 0 6 1 0 0 0 ( 6 6 1 0 0 ) 2 5 9 2 4 0

* A decrease in intercompany loss on sale of equipment and an increase in total revenue.

† A decrease in costs and expenses and an increase in net income.

‡ A decrease in dividends and an increase in retained earnings.

(Continued on page 291.)


Power Corporation (continued) Pr. 8–11


Working Paper for Consolidated Financial Statements (concluded)


Eliminations

Power Snyder increase


Balance Sheet

Assets

Intercompany receivables (payables) 1 0 0 ( 1 0 0 )

Inventories 3 0 0 0 0 0 7 5 0 0 0 (c) ( 3 0 0 0 ) 3 6 7 0 0 0

(d) ( 5 0 0 0 )

Investment in Snyder Company

common stock 1 6 4 6 8 0 (a)( 1 6 4 6 8 0 )

Investment in Snyder Company

bonds 4 0 0 0 0 (b) ( 4 0 0 0 0 )Plant assets 7 9 4 0 0 0 2 8 0 6 0 0 (a) 4 0 0 0 1 0 8 0 6 0 0

(e) 2 0 0 0

Accumulated depreciation of

plant assets ( 2 6 0 0 0 0 ) ( 3 0 0 0 0 ) (a) 4 0 0 * ( 2 9 0 5 0 0 )

(e) 1 0 0 *

Other assets 6 1 0 9 0 0 7 3 4 0 0 6 8 4 3 0 0

Goodwill (a) 3 4 0 0 3 40

0 0

Total assets 1 6 4 9 6 8 0 3 9 8 9 0 0 ( 2 0 3 7 8 0 ) 1 8 4 4 8 0 0


Dividends payable 1 6 0 0 1 6 0 0

Bonds payable 6 0 0 0 0 0 4 5 0 0 0 6 4 5 0 0 0

Intercompany bonds payable 4 0 0 0 0 (b) ( 4 0 0 0 0 )

Other liabilities 3 7 6 3 4 0 1 1 4 3 0 0 4 9 0 6 4 0

Common stock, $100 par 3 6 0 0 0 0 1 2 5 0 0 0 (a)( 1 2 5 0 0 0 ) 3 6 0 0 0 0

Additional paid-in capital 4 9 0 0 0 1 2 0 0 0 (a) ( 1 2 0 0 0 ) 4 9 0 0 0

Minority interest in net assets of subsidiary (a) 3 7 0 0 0 3 9 3 2 0

(f) 2 3 2 0

Retained earnings 2 6 4 3 4 0 6 1 0 0 0 ( 6 6 1 0 0 ) 2 5 9 2 4 0

Total liabilities &

stockholders’ equity 1 6 4 9 6 8 0 3 9 8 9 0 0 ( 2 0 3 7 8 0 ) 1 8 4 4 8q

0 0

* An increase in accumulated depreciation and a decrease in total assets.


Power Corporation (continued) Pr. 8–11



December 31, 2005

(a) Common Stock—Snyder 1 2 5 0 0 0Additional Paid-in Capital—Snyder 1 2 0 0 0

Retained Earnings—Snyder 5 0 0 0 0

Intercompany Investment Income—Power 1 3 2 8 0

Plant Assets—Snyder 4 0 0 0

Goodwill—Power 3 4 0 0

Cost of Goods Sold—Snyder 3 0 0 0

Operating Expenses and Income Tax Expense—

Snyder 4 0 0

Investment in Snyder Company Common

Stock—Power 1 6 4 6 8 0

Accumulated Depreciation of Plant Assets—

Snyder 4 0 0

Dividends Declared—Snyder 9 0 0 0

Minority Interest in Net Assets of Subsidiary

($38,800 – $1,800) 3 7 0 0 0

To carry out the following:

(1) Eliminate intercompany investment and

equity accounts of subsidiary on July 1,

2005, and subsidiary dividend.

(2) Provide for depreciation and amortization

for six months ended Dec 31, 2005, on

differences between combination date

current fair values and carrying amounts

of Snyder’s identifiable net assets, as

follows:

Cost of

Goods Operating

Sold Expenses

Inventories $3,000

Equipment

depreciation $400

Totals $3,000 $400

(3) Allocate unamortized differences between

combination date current fair values and

carrying amounts to appropriate assets.

(4) Establish minority interest in net assets of

subsidiary on July 1, 2005 ($194,000 x 0.20

= $38,800), less minority interest in

dividends declared by subsidiary during six

months ended Dec. 31, 2005 ($9,000 x 0.20

= $1,800).

(Income tax effects are disregarded.)



Power Corporation (concluded) Pr. 8–11


Working Paper Eliminations (concluded)

December 31, 2005

(b) Intercompany Bonds Payable—Snyder 4 0 0 0 0Investment in Snyder Company Bonds—Power 4 0 0 0 0

To eliminate subsidiary’s bonds acquired by parent

company.

(c) Intercompany Sales—Power 6 0 0 0 0

Intercompany Cost of Goods Sold—Power 5 0 0 0 0

Cost of Goods Sold—Snyder ($42,000 x 0.16 2/3) 7 0 0 0

Inventories—Snyder ($18,000 x 0.16 2/3) 3 0 0 0



resulting from Power’s sales to Snyder. (Income tax


(d) Intercompany Sales—Snyder 1 0 5 0 0 0

Intercompany Cost of Goods Sold—Snyder 8 4 0 0 0

Cost of Goods Sold—Power ($80,000 x 0.20) 1 6 0 0 0

Inventories—Power ($25,000 x 0.20) 5 0 0 0



resulting from Snyder’s sales to Power. (Income tax


(e) Plant Assets—Snyder 2 0 0 0

Operating Expenses—Snyder [($2,000 ÷ 5) x 3/12] 1 0 0

Accumulated Depreciation of Plant Assets—Snyder 1 0 0

Intercompany Loss on Sale of Equipment—Power 2 0 0 0

To eliminate unrealized intercompany loss in

equipment and in related depreciation. (Income tax


(f) Minority Interest in Net Income of Subsidiary 2 3 2 0

Minority Interest in Net Assets of Subsidiary 2 3 2 0

To establish minority interest in subsidiary’s

adjusted net income for six months ended Dec. 31,

2005, as follows:

Net income of subsidiary $20,000

Adjustments in working paper eliminations:

(a) ($3,000 + $400) (3,400)

(b) ($105,000 – $84,000 – $16,000) (5,000 )

Adjusted net income of subsidiary $11,600

Minority interest ($11,600 x 0.20) $ 2,320


Power Corporation (concluded) Pr. 8–11

Notes to Instructor:

(1) Goodwill on July 1, 2005, is computed as follows:Cost of Power’s investment in Snyder $ 1 5 8 6 0 0

Carrying amount of Snyder’s identifiable net assets

($125,000 + $12,000 + $50,000) $ 1 8 7 0 0 0

Add: Amounts applicable to Snyder’s inventories and equipment

($3,000 + $4,000) 7 0 0 0

Subtotal $ 1 9 4 0 0 0Percentage ownership acquired by Power 8 0 % 1 5 5 2 0 0

Goodwill $ 3 4 0 0

(2) Intercompany receivables (payables) consist of the following: Power Snyder

Accounts receivable (payable) $ 5 5 0 0 $ ( 5 5 0 0 )

( 1 3 0 0 0 ) 1 3 0 0 0

Interest receivable (payable) 1 2 0 0 ( 1 2 0 0 )

Dividends receivable (payable) 6 4 0 0 ( 6 4 0 0 )

Net intercompany receivables (payables) $ 1 0 0 $ ( 1 0 0 )

(3) The Investment in Snyder Company Common Stock ledger account

balance is reconciled as follows:

Cost of Power’s investment $ 1 5 8 6 0 0

Add: Intercompany investment income [($20,000 – $3,000 – $400) x

0.80] 1 3 2 8 0

Subtotal $ 1 7 1 8 8 0Less: Dividends ($9,000 x 0.8) 7 2 0 0

Balance, Dec. 31, 2005 $ 1 6 4 6 8 0


65 Minutes, StrongPritchard Corporation Pr. 8–12

a. Pritchard Corporation

Adjusting Entries

December 31, 2005

Inventories (in Transit) 6 0 0 0


To record merchandise in transit from Spangler Co.

Intercompany Dividends Receivable 4 5 0 0

Investment in Spangler Company Common

Stock 4 5 0 0

To record dividend declared by Spangler Company

Dec. 31, 2005, payable Jan. 10, 2006 (3,000 x $1.50 =

$4,500).

Spangler Company

Adjusting Entries

December 31, 2005

Intercompany Notes Payable 3 0 0 0


Interest Expense 1 8 0

Notes Payable 3 0 0 0



To set up accounts for note payable and related

interest discounted with bank by Pritchard Corporation

(the payee).

Interest expense: $3,000 x 0.12 x 6/12 = $180.

Note to Instructor: After the foregoing adjusting entries

are posted, intercompany receivables (payables) are

as follows:

Pritchard Spangler

Accounts receivable (payable) $ 1 6 0 0 0 $ ( 1 6 0 0 0 )

( 6 0 0 0 ) 6 0 0 0

Notes receivable (payable) 5 0 0 0 ( 5 0 0 0 )

Interest receivable (payable) ($5,000 x 0.12 x 6/12) 3 0 0 ( 3 0 0 )

Dividends receivable (payable) 4 5 0 0 ( 4 5 0 0 )

Net intercompany receivables (payables) $ 1 9 8 0 0 $ ( 1 9 8 0 0 )


Pritchard Corporation (continued) Pr. 8–12

b. Pritchard Corporation and Subsidiary

Working Paper for Consolidated Financial Statements


Eliminations

Pritchard Spangler increase


Income Statement

Revenue:Net sales 4 9 9 8 5 0 2 9 8 2 4 0 7 9 8 0 9 0

Intercompany sales 4 0 0 0 0 6 0 0 0 (b) ( 4 0 0 0 0 )

(c) ( 6 0 0 0 )


(expenses) 3 0 0 ( 3 0 0 )

Intercompany investment

income 1 0 2 0 0 (a) ( 1 0 2 0 0 )

Intercompany gain on sale of

equipment 2 0 0 0 (d) ( 2 0 0 0 )

Total revenue 5 5 0 3 5 0 3 0 5 9 4 0 ( 5 8 2 0 0 ) 7 9 8 0 9 0

Cost and expenses:

Cost of goods sold 4 0 0 0 0 0 2 2 5 0 0 0 (b) ( 7 5 0 0 ) 6 1 7 5 0 0

Intercompany cost of

goods sold 3 0 0 0 0 4 8 0 0 (b) ( 3 0 0 0 0 )

Operating expenses and (c) ( 4 8 0 0 )

income taxes expense 8 8 4 5 0 6 5 9 4 0 (d) ( 1 0 0 ) 1 5 4 2 9 0

Total costs and expenses 5 1 8 4 5 0 2 9 5 7 4 0 ( 4 2 4 0 0 )* 7 7 1 7 9 0

Net income 3 1 9 0 0 1 0 2 0 0 ( 1 5 8 0 0 ) 2 6 3 0 0

Statement of Retained Earnings

Retained earnings, beginning

of year 8 9 1 0 0 2 2 1 0 0 (a) ( 2 2 1 0 0 ) 8 9 1 0 0

Net income 3 1 9 0 0 1 0 2 0 0 ( 1 5 8 0 0 ) 2 6 3 0 0

Subtotal 1 2 1 0 0 0 3 2 3 0 0 ( 3 7 9 0 0 ) 1 1 5 4 0 0

Dividends declared 4 5 0 0 (a) ( 4 5 0 0 )†

Retained earnings, end of year 1 2 1 0 0 0 2 7 8 0 0 ( 3 3 4 0 0 ) 1 1 5 4 0 0

* A decrease in cost and expenses and an increase in net income.

† A decrease in dividends and an increase in retained earnings.



Pritchard Corporation (continued) Pr. 8–12

Pritchard Corporation and Subsidiary

Working Paper for Consolidated Financial Statements (concluded)


Eliminations

Pritchard Spangler increase


Balance Sheet

Assets


(payables) 1 9 8 0 0 ( 1 9 8 0 0 )Inventories 8 7 0 5 0 4 9 8 4 0 (b) ( 2 5 0 0 ) 1 3 3 1 9 0

(c) ( 1 2 0 0 )

Investment in Spangler

Company common stock 1 0 7 8 0 0 (a)( 1 0 7 8 0 0 )

Plant assets 8 3 2 0 0 4 3 5 0 0 (d) ( 2 0 0 0 ) 1 2 4 7 0 0

Accumulated depreciation of

plant assets ( 1 2 8 0 0 ) ( 9 3 0 0 ) (d) ( 1 0 0 )* ( 2 2 0 0 0 )

Other assets 7 1 1 5 0 5 6 2 0 0 1 2 7 3 5 0

Total assets 3 5 6 2 0 0 1 2 0 4 4 0 ( 1 1 3 4 0 0 ) 3 6 3 2 4 0


Liabilities 5 6 7 0 0 1 2 6 4 0 6 9 3 4 0

Common stock, $10 par 1 2 0 0 0 0 1 2 0 0 0 0

Common stock, $20 par 6 0 0 0 0 (a) ( 6 0 0 0 0 )

Additional paid-in capital 5 8 5 0 0 2 0 0 0 0 (a) ( 2 0 0 0 0 ) 5 8 5 0 0

Retained earnings 1 2 1 0 0 0 2 7 8 0 0 ( 3 3 4 0 0 ) 1 1 5 4 0 0

Total liabilities &

stockholders’ equity 3 5 6 2 0 0 1 2 0 4 4 0 ( 1 1 3 4 0 0 ) 3 6 3 2 4 0

* A decrease in accumulated depreciation and an increase in total assets.


Pritchard Corporation (concluded) Pr. 8–12

Pritchard Corporation and Subsidiary


December 31, 2005

(a) Common Stock—Spangler 6 0 0 0 0Additional Paid-in Capital—Spangler 2 0 0 0 0

Retained Earnings—Spangler 2 2 1 0 0

Intercompany Investment Income—Pritchard 1 0 2 0 0

Investment in Spangler Company Common

Stock—Pritchard 1 0 7 8 0 0

Dividends Declared—Spangler 4 5 0 0

To eliminate intercompany investment, related

accounts for stockholders’ equity of subsidiary, and

investment income from subsidiary.

(b) Intercompany Sales—Pritchard 4 0 0 0 0

Intercompany Cost of Goods Sold—Pritchard 3 0 0 0 0

Cost of Goods Sold—Spangler ($30,000 x 0.25) 7 5 0 0

Inventories—Spangler ($10,000 x 0.25) 2 5 0 0



resulting from Pritchard’s sales to Spangler. (Income


(c) Intercompany Sales—Spangler 6 0 0 0

Intercompany Cost of Goods Sold—Spangler 4 8 0 0

Inventories—Pritchard ($6,000 x 0.20) 1 2 0 0



resulting from Spangler’s sales to Pritchard. (Income


(d) Intercompany Gain on Sale of Equipment—Spangler 2 0 0 0

Accumulated Depreciation of Plant Assets—Pritchard

($2,000 ÷ 10 x 6/12) 1 0 0

Plant Assets—Pritchard 2 0 0 0

Operating Expenses—Pritchard 1 0 0


equipment and in related depreciation. (Income tax



chapter 08, modern advanced accounting-review q & exr

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