solusi manual advanced acc zy chap006
TRANSCRIPT
Chapter 06 - Intercompany Transfers of Services And Noncurrent Assets
CHAPTER 6
INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS
ANSWERS TO QUESTIONS
Q6-1 Profits on intercorporate sales generally are considered to be realized when the affiliate that has purchased the item sells it to a nonaffiliate. For depreciable or amortizable items that are used by the affiliate in its operations, profits are considered to be realized as the purchaser depreciates or amortizes the asset.
Q6-2 An upstream sale occurs when a subsidiary sells an item to the parent company. If the asset is not resold before the end of the period, the parent is the company holding the asset and any unrealized profits are recorded on the books of the subsidiary.
Q6-3 If the purchaser records the services received as an expense, both revenues and expenses will be overstated in the consolidated income statement in the period in which the intercorporate services are provided. In the event the services are capitalized by the purchaser, the cost of the asset will be overstated, depreciation expense and accumulated depreciation will be overstated if the services are assigned to a depreciable asset, and service revenue will be overstated.
Q6-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net income of the seller.
(b) All unrealized profit on current-period intercorporate sales must be excluded from consolidated net income until realized through resale to a nonaffiliate.
Q6-5 Profits on intercompany sales are included in consolidated net income in the period in which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one of the companies at the start of the period and the item is sold to a nonaffiliate during the current period, the intercompany profit is included in the computation of consolidated net income for the current period.
Q6-6 The profits continue to be unrealized in this case and therefore must be eliminated from both the beginning and ending asset and retained earnings balances when consolidated statements are prepared. There should be no income statement effect for the current period.
Q6-7 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is not resold before the end of the period, the subsidiary is the company holding the asset at year-end and any unrealized profits are recorded on the books of the parent company.
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Chapter 06 - Intercompany Transfers of Services And Noncurrent Assets
Q6-8 The entire balance of unrealized profits is eliminated in all cases. While the direction of the sale will affect the allocation of unrealized profits between companies, it does not change the total amount of profit eliminated.
Q6-9 Consolidated net income is reduced by the amount of unrealized profits assigned to the shareholders of the parent company. When a downstream sale occurs, all the profit is on the parent's books and consolidated net income is reduced by the full amount of any unrealized profit. On the other hand, when an upstream sale occurs, all the intercorporate profit is recorded on the books of the subsidiary and the amount of income assigned to both the parent company shareholders and the noncontrolling shareholders is reduced by a proportionate amount of any unrealized profit.
Q6-10 The amount of intercorporate profit realized in the current period from prior years' sales to the parent is added to the reported net income of the subsidiary in computing income assigned to the noncontrolling interest.
Q6-11 Income assigned to noncontrolling interest for the current period will be less than a proportionate share of the reported net income of the subsidiary. In determining the amount of income to be assigned to the noncontrolling interest in the consolidated income statement, the net income reported by the subsidiary must be adjusted to exclude any unrealized gain recorded during the period on the sale of depreciable assets to the parent. On the other hand, if an unrealized loss had been recorded, the basis used in assigning income to the noncontrolling interest would be greater than the reported net income of the subsidiary. Such adjustments must be made to assure that the income assigned to noncontrolling interest is based on the contribution of the subsidiary to consolidated net income rather than the amount the subsidiary may have reported as net income.
Q6-12 All other factors being equal, the income assigned to noncontrolling interest will be larger if the sale occurs at the start of the current period. Some part of the gain will be considered realized in the current period as the parent depreciates the asset if the sale occurs before year-end. None of the gain will be considered realized in the period of transfer if the sale occurs at year-end.
Q6-13 As in all other cases, income from the subsidiary recorded on the parent's books must be eliminated in preparing the consolidated income statement and an appropriate amount of subsidiary net income must be assigned to the noncontrolling interest if the parent owns less than 100 percent of the subsidiary's stock. The gain recorded on the parent's books also must be eliminated.
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Chapter 06 - Intercompany Transfers of Services And Noncurrent Assets
Q6-14 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of the consolidated entity when the subsidiary pays the parent more than book value for the asset at the start of the period. As a result, an eliminating entry is needed to reduce depreciation expense and accumulated depreciation by the amount of excess depreciation recorded during 20X3.
Q6-15 Following an intercorporate sale of a depreciable asset, the eliminating entries should adjust the balance in the asset account to reflect the original purchase price to the first owner and accumulated depreciation should be adjusted to reflect the balance that would be reported if the asset were still held by the first owner. In the case of an intercorporate sale of an intangible asset, only the unamortized balance normally is reported and an eliminating entry is needed to adjust the carrying value to that which would be reported if the asset were still held by the first owner.
Q6-16 Profit on an intercorporate sale of land is considered realized at the time the purchaser sells the land to a nonaffiliate. Profit on equipment normally is considered realized as the asset is used and depreciated on the books of the purchaser. Equipment typically is considered to be used up in the production process and therefore is charged to expense over its remaining economic life, while land is not.
Q6-17 A portion of the profit is considered realized each period as the asset is depreciated by the purchaser. Thus, the net amount considered unrealized decreases each period and a smaller debit to beginning retained earnings is needed.
Q6-18A The balance in the investment account will depend on which method the parent uses to account for its investment in the subsidiary. If the parent uses (a) the cost method or (b) the basic equity method, no adjustments are made on the parent company's books for unrealized intercompany profits and the balance in the investment account will be the same as if there were no unrealized profits. If the parent uses (c) the fully-adjusted equity method, the balance in the investment account will be reduced by the full amount of the unrealized profit when the profit is on the parent's books and by a proportionate share of the unrealized profit when it is on the subsidiary's books.
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Chapter 06 - Intercompany Transfers of Services And Noncurrent Assets
SOLUTIONS TO CASES
C6-1 Correction of Elimination Procedures
MEMO
To: ControllerPlug Corporation
From: , CPA
Re: Elimination of Intercompany Profit on Equipment
This memo is in response to our review of the elimination procedures used in preparing the consolidated statements for Plug Corporation at December 31, 20X2. You have correctly identified the need to eliminate the effects of the intercorporate sale of equipment. In preparing your consolidated statements, all intercompany balances and transactions should be eliminated. [ARB 51, Par. 6]
Your eliminating entry recorded at December 31, 20X2, was:
E(1) Equipment 150,000 Loss on Sale of Equipment 150,000
This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the sale of equipment to Plug and adds $150,000 to the equipment account. By adding back $150,000 to equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000). This represents the carrying value of the equipment on Coy’s books at the time of sale but does not reflect the purchase price paid by Coy ($1,200,000) or the accumulated depreciation at the time of sale ($200,000). Moreover, eliminating entry E(1) understates depreciation expense for the year. The correct eliminating entry at December 31, 20X2, is:
E(2) Equipment 350,000Depreciation Expense 15,000 Accumulated Depreciation 215,000 Loss on Sale of Equipment 150,000
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C6-1 (continued)
A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by Plug to $1,200,000, the initial purchase price to the consolidated entity. Depreciation expense must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug to $100,000 ($1,200,000/12 years) based on the initial purchase price. Accumulated depreciation must be credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x 1 year] reported by Plug to $300,000 [($1,200,000/12 years) x 3 years]. As previously noted, the $150,000 loss recorded by Coy must be eliminated. If the amounts included in eliminating entry E(2) are omitted, consolidated net income for 20X2 and the retained earnings balance at December 31, 20X2, will be overstated and the balances for equipment and accumulated depreciation will be understated.
Primary citation:ARB 51, Par. 6
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
C6-2 Elimination of Intercorporate Services
MEMO
To: Chief AccountantDream Corporation
From: , CPA
Re: Elimination of Legal Services Provided by Parent Company
This memo is in response to our discussion regarding the elimination of intercompany services in preparing consolidated financial statements for Dream Corporation. It is my understanding that at present Dream Corporation does not eliminate such services. In preparing consolidated financial statements all intercompany balances and transactions should be eliminated. [ARB 51, Par. 6]
The legal services provided by Dream Corporation to Classic Company and Plain Company are intercompany transactions that should be eliminated. If the revenues recorded by the parent are equal to the expenses recorded by the subsidiaries and both are properly recorded, elimination of these transactions will have no impact on reported net income but will reduce consolidated revenues and expenses by equal amounts. Financial statement readers will receive a more accurate picture of operations of the consolidated entity if the appropriate amounts are reported. The legal services provided to Classic Company in 20X3 should be eliminated with the following entry:
E(1) Legal Services Revenue 80,000 Legal Services Expense 80,000
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
The information on intercorporate services provided to Plain Company indicates that an additional adjustment is needed in the consolidation process. Although Plain Company recorded its $150,000 payment to the parent as a legal expense, it should have been recorded as an investment in land to be used in future development of its strip mine. This error should be corrected on the books of Plain Company. If it is not, the eliminating entry prepared at December 31, 20X3, should include an adjustment to reflect the appropriate investment in land and would be recorded as:
E(2) Legal Services Revenue 150,000Land 100,000 Legal Services Expense 150,000 Wage and Salary Expense 100,000
Care must be taken to capitalize only the cost of legal services in this case. The eliminating entry should contain a debit of $100,000 ($150,000/1.50) to land since Dream Corporation bills its services to the subsidiaries at 150 percent of the cost of services provided. Had Plain Company debited land for its $150,000 payment to Dream, the eliminating entry at December 31, 20X3, would have been:
E(3) Legal Services Revenue 150,000 Land 50,000 Wage and Salary Expense 100,000
No eliminating entry would be required at December 31, 20X4, on the legal services provided to Classic Company in 20X3. The conditions of the intercorporate transfer of services to Plain Company require an eliminating entry at December 31, 20X4, and in following years, as long as Plain Company owns the strip mine. The entry at December 31, 20X4, would be:
E(4) Land 100,000 Retained Earnings 100,000
Had Plain Company debited land for its $150,000 payment to Dream in 20X3, the eliminating entry at December 31, 20X4, would require a $50,000 debit to retained earnings and a $50,000 credit to land.
Primary citation:ARB 51, Par. 6
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
C6-3 Noncontrolling Interest
a. When there are no unrealized profits on the subsidiary's books, a pro rata portion of the reported net income of the subsidiary is assigned to the noncontrolling interest, adjusted for the noncontrolling interest’s share of any amortization or write-off of differential.
b. When there are no unrealized profits on the subsidiary's books, the noncontrolling interest is reported in the consolidated balance sheet at an amount equal to a pro rata portion of the book value of the net assets of the subsidiary plus the noncontrolling interest’s share of any remaining differential.
c. The effect of unrealized intercompany profits depends on which company has recorded the profits. Those recorded on the books of the parent do not affect the income assigned to the noncontrolling interest. When subsidiary net income includes unrealized intercompany profits, the portion of consolidated net income assigned to the noncontrolling interest is reduced by its portion of the unrealized profit in the period of the intercorporate sale.
(1) On a sale of land, the intercompany profit remains unrealized until the land is sold to a nonaffiliate. When the land is resold, the profit is added to the reported net income of the subsidiary in computing the portion of consolidated net income assigned to the noncontrolling interest.
(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is considered realized each period as the purchaser depreciates the asset. Thus, in the period of the intercorporate sale, the adjustment to subsidiary net income for unrealized profits is based on the gain or loss less any portion considered realized before the end of the period. Each period thereafter, a portion of the profit or loss is considered realized and treated as an adjustment to subsidiary income in determining the portion of consolidated net income assigned to the noncontrolling interest.
d. Noncontrolling shareholders of a subsidiary generally will not gain a great deal of useful information from the consolidated financial statements. Their primary focus must continue to be on the income, assets, and liabilities of the subsidiary in which they hold direct ownership. In the event there are a number of transactions with the parent or other affiliates, the success of the operations of the entire economic entity may provide information useful to the noncontrolling shareholders. Debt guarantees or other assurances by the parent may also lead to an examination of the parent company and consolidated statements.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
C6-4 Intercompany Sale of Services
a. When preparing consolidated financial statements, Schwartz's revenue from the sale of services to Diamond and Diamond's expenses associated with the services acquired from Schwartz must be eliminated. The expenses related to the janitorial and maintenance activities that will be reported in the consolidated income statement will be the actual salary and associated costs incurred by Schwartz to provide the services to Diamond. The eliminations have no effect on consolidated net income because revenues and expenses of equal amount are eliminated in the preparation of the consolidated financial statements.
b. Intercompany profits from the sale of services to an affiliate normally are considered realized at the time the services are provided. Realization of intercompany profits on services normally is considered to occur as the services are consumed, and services such as maintenance and repair services normally are considered to be consumed by the purchasing affiliate at the time received.
C6-5 Intercompany Profits
Answers can be found in the companies' 10-K filings with the SEC and in their annual reports. Note that financial statements are often included in the Form 10-K by reference to the company’s annual report. In such cases, the financial statements are often shown in a separate exhibit rather than in Item 8 of the Form 10-K.
a. Century Telephone Enterprises, Inc. (www.centurytel.com), and its subsidiaries bill one another for services and materials provided in such amounts as to provide a reasonable return on investment. When preparing consolidated financial statements, the company eliminates intercompany profits on transactions with unregulated subsidiaries, but profits on transactions with regulated subsidiaries are not eliminated, as permitted by FASB Statement No. 71. This statement is applicable because phone companies are regulated as public utilities.
b. Verizon (www.verizon.com) eliminates all intercompany profits. It discontinued the use of regulatory accounting as provided by FASB 71 in 1994 and now no longer applies the provisions of FASB 71.
c. All of Harley-Davidson’s (www.harleydavidson.com) intercompany transactions are eliminated except some occurring between the Motorcycles and Financial Services segments. Some interest and fees recognized as income by Financial Services and expense by Motorcycles are not eliminated. This leads to higher finance income and higher expenses, but net income is unaffected.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
SOLUTIONS TO EXERCISES
E6-1 Multiple-Choice Questions on Intercompany Transfers [AICPA Adapted]
1. c
2. d
3. b
4. a
5. b Depreciation expense recorded by Pirn $40,000 Depreciation expense recorded by Scroll 10,000 Total depreciation reported $50,000 Adjustment for excess depreciation charged by Scroll as a result of increase in carrying value of equipment due to gain on intercompany sale ($12,000 / 4 years) (3,000 )Depreciation for consolidated statements $47,000
E6-2 Multiple-Choice Questions on Intercompany Transactions
1. d When only retained earnings is debited, and not the noncontrolling interest, a gain has been recorded in a prior period on the parent's books.
2. a The costs incurred by Bottom to develop the equipment are research and development costs and must be expensed as they are incurred (FASB Statement No. 2, par. 12). Transfer to another legal entity does not cause a change in accounting treatment within the economic entity.
3. b The $39,000 paid to Gold Company will be charged to depreciation expense by Top Corporation over the remaining 3 years of ownership. As a result, Top Corporation will debit depreciation expense for $13,000 each year. Gold Company had charged $16,000 to accumulated depreciation in 2 years, for an annual rate of $8,000. Depreciation expense therefore must be reduced by $5,000 ($13,000 - $8,000) in preparing the consolidated statements.
4. a TLK Corporation will record the purchase at $39,000, the amount it paid. Gold Company had the equipment recorded at $40,000; thus, a debit of $1,000 will raise the equipment balance back to its original cost from the viewpoint of the consolidated entity.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-2 (continued)
5. b Reported net income of Gold Company $ 45,000 Reported gain on sale of equipment $15,000 Intercompany profit realized in 20X6 (5,000 ) (10,000 )Realized net income of Gold Company $ 35,000 Proportion of stock held by noncontrolling interest x .40 Income assigned to noncontrolling interests $ 14,000
6. c Operating income reported by Top Corporation $ 85,000 Net income reported by Gold Company 45,000
$130,000 Less: Unrealized gain on sale of equipment ($15,000 - $5,000) (10,000 )Consolidated net income $120,000
E6-3 Elimination Entries for Land Transfer
a. Eliminating entry, December 31, 20X4:
E(1) Gain on Sale of Land 10,000 Land 10,000
Eliminating entry, December 31, 20X5:
E(1) Retained Earnings, January 1 10,000 Land 10,000
b. Eliminating entry, December 31, 20X4:
E(1) Gain on Sale of Land 10,000 Land 10,000
Eliminating entry, December 31, 20X5:
E(1) Retained Earnings, January 1 6,000 Noncontrolling Interest 4,000 Land 10,000
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-4 Intercompany Services
a. Consolidated net income will not change.
b. One hundred percent of the intercompany services must always be eliminated. Thus, a change in the level of ownership of the subsidiary will not have an impact on the amount eliminated or on consolidated net income.
c. $38,000 = $70,000 - $32,000
E6-5 Elimination Entries for Intercompany Services
Two eliminating entries are required:
E(1) Delivery Service Revenue 76,000 Delivery Service Expense 76,000
E(2) Accounts Payable 18,000 Accounts Receivable 18,000
E6-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale
a. Eliminating entry, December 31, 20X6
E(1) Truck 5,000 Gain on Sale of Truck 10,000 Accumulated Depreciation 15,000
b. Eliminating entry, December 31, 20X7:
E(1) Truck 5,000 Retained Earnings, January 1 10,000 Depreciation Expense 1,000 Accumulated Depreciation 14,000
Accumulated depreciation adjustment:Required [($45,000 / 15 years) x 6 years] $18,000 Recorded [($40,000 / 10 years) x 1 year] (4,000 )Required increase $14,000
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-7 Transfer of Land
a. Eliminating entry, December 31, 20X2:
E(1) Gain on Sale of Land 45,000 Land 45,000
Eliminating entry, December 31, 20X3:
E(1) Retained Earnings, January 1 31,500 Noncontrolling Interest 13,500 Land 45,000
b. Eliminating entries, December 31, 20X3 and 20X4:
E(1) Retained Earnings, January 1 30,000 Land 30,000
E6-8 Transfer of Depreciable Asset at Year-End
a. Eliminating entry, December 31, 20X5:
E(1) Truck 90,000 Gain on Sale of Truck 30,000 Accumulated Depreciation 120,000
Computation of gain on sale of truck:Price paid by Minnow $210,000 Cost of truck to Frazer $300,000Accumulated depreciation ($300,000 / 10 years) x 4 years (120,000) (180,000)Gain on sale of truck $ 30,000
b. Eliminating entry, December 31, 20X6:
E(1) Truck 90,000 Retained Earnings, January 1 30,000 Depreciation Expense 5,000 Accumulated Depreciation 115,000
Accumulated depreciation adjustment:Required [($300,000 / 10 years) x 5 years] $150,000 Recorded [($210,000 / 6 years) x 1 year] (35,000 )Required increase $115,000
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-9 Transfer of Depreciable Asset at Beginning of Year
a. Eliminating entry, December 31, 20X5:
E(1) Truck 55,000 Gain on Sale of Truck 35,000 Depreciation Expense 5,000 Accumulated Depreciation 85,000
Computation of gain on sale of truck:Price paid by Minnow $245,000 Cost of truck to Frazer $300,000Accumulated depreciation ($300,000 / 10 years) x 3 years ( 90,000) (210,000 )Gain on sale of truck $ 35,000
Accumulated depreciation adjustment:Required [($300,000 / 10 years) x 4 years] $120,000 Reported [($245,000 / 7 years) x 1 year] (35,000 )Required increase $ 85,000
b. Eliminating entry, December 31, 20X6:
E(1) Truck 55,000 Retained Earnings 30,000 Depreciation Expense 5,000 Accumulated Depreciation 80,000
Accumulated depreciation adjustment:Required [($300,000 / 10 years) x 5 years] $150,000 Reported [($245,000 / 7 years) x 2 years] (70,000 )Required increase $ 80,000
E6-10 Sale of Equipment to Subsidiary in Current Period
a. Journal entry to record sale:
Cash 84,000 Accumulated Depreciation 80,000 Equipment 150,000 Gain on Sale of Equipment 14,000 Record the sale of equipment: $84,000 = $150,000 - $80,000 + $14,000 $80,000 = ($150,000 / 15 years) x 8 years
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-10 (continued)
b. Journal entry to record purchase:
Equipment 84,000 Cash 84,000
Journal entry to record depreciation expense:
Depreciation Expense 12,000 Accumulated Depreciation 12,000
c. Eliminating entry at December 31, 20X7, to eliminate intercompany sale of equipment:
E(1) Equipment 66,000 Gain on Sale of Equipment 14,000 Depreciation Expense 2,000 Accumulated Depreciation 78,000 Eliminate unrealized profit on equipment.
Adjustment to equipment
Amount paid by Wainwrite to acquire building $150,000 Amount paid by Lance on intercompany sale (84,000 )Adjustment to buildings and equipment $ 66,000
Adjustment to depreciation expense
Depreciation expense recorded by Lance Corporation ($84,000 / 7 years) $ 12,000 Depreciation expense recorded by Wainwrite Corporation ($150,000 / 15 years) (10,000 )Adjustment to depreciation expense $ 2,000
Adjustment to accumulated depreciation
Amount required ($10,000 x 9 years) $ 90,000 Amount reported by Lance ($12,000 x 1 year) (12,000 )Required adjustment $ 78,000
d. Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment and prepare a consolidated balance sheet only:
E(1) Equipment 66,000 Retained Earnings 12,000 Accumulated Depreciation 78,000 Eliminate unrealized profit on equipment.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-11 Upstream Sale of Equipment in Prior Period
a. Consolidated net income for 20X8:
Operating income reported by Baywatch $100,000Net income reported by Tubberware $40,000Amount of gain realized in 20X8 ($30,000 / 12 years) 2,500 Realized net income of Tubberware 42,500 Consolidated net income $142,500
b. Consolidated net income for 20X8 would be unchanged.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-11 (continued)
c. Eliminating entry, December 31, 20X8:
E(1) Buildings and Equipment 30,000Retained Earnings, January 1 20,000Noncontrolling Interest 5,000 Depreciation Expense 2,500 Accumulated Depreciation 52,500 Eliminate unrealized profit on building.
Adjustment to buildings and equipment
Amount paid by Tubberware to acquire building $300,000 Amount paid by Baywatch on intercompany sale (270,000 )Adjustment to buildings and equipment $ 30,000
Adjustment to retained earnings, January 1, 20X8
Unrealized gain recorded January 1, 20X6 $ 30,000 Amount realized following intercompany sale ($2,500 x 2) (5,000 )Unrealized gain, January 1, 20X8 $ 25,000 Proportion of ownership held by Baywatch x .80 Required adjustment $ 20,000
Adjustment to Noncontrolling interest, January 1, 20X8
Unrealized gain at January 1, 20X8 $ 25,000 Proportion of ownership held by noncontrolling interest x .20 Required adjustment $ 5,000
Adjustment to depreciation expense
Depreciation expense recorded by Baywatch Industries ($270,000 / 12 years) $ 22,500 Depreciation expense recorded by Tubberware Corporation ($300,000 / 15 years) (20,000 )Adjustment to depreciation expense $ 2,500
Adjustment to accumulated depreciation
Amount required ($20,000 x 6 years) $120,000 Amount reported by Baywatch ($22,500 x 3 years) (67,500 )Required adjustment $ 52,500
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-12 Elimination Entries for Midyear Depreciable Asset Transfer
a. Eliminating entry, December 31, 20X3:
E(1) Equipment 2,000 Gain on Sale of Equipment 10,500
Depreciation ExpenseAccumulated Depreciation 1,500
11,000
Purchase price paid by parent $30,000 Purchase price paid by subsidiary (28,000 )Required increase $ 2,000
Purchase price paid by subsidiary $28,000 Purchase price paid by parent $30,000 Less: Accumulated Depreciation ($5,000 x 2 1/2 years) (12,500)Book value at time of sale (17,500 )Gain on sale of equipment $10,500
Depreciation recorded by subsidiary ($28,000/3 ½ years) x ½ year $4,000 Depreciation recorded by parent ((E30,000/6 years) x ½ year (28,000)Required decrease $ 1,500
Accumulated depreciation adjustment: Required [($30,000 / 6 years) x 3 years] $15,000 Recorded [($28,000 / 3 1/2 years) x 1/2 year] (4,000 ) Required increase $11,000
b. Eliminating entry, December 31, 20X4:
E(1) Equipment 2,000 Retained Earnings, January 1 9,000
Depreciation Expense 3,000Accumulated Depreciation 8,000
Unrealized gain, July 1, 20X3 $10,500 Realized in 20X3 (1,500 )Unrealized balance, January 1, 20X4 $ 9,000
Accumulated depreciation adjustment: Required [($30,000 / 6 years) x 4 years] $20,000 Recorded [($28,000 / 3 1/2 years) x 1 1/2 years] (12,000 ) Required increase $ 8,000
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-13 Consolidated Net Income Computation
a. Downstream sale of land: 20X4 20X5
Verry’s separate operating income $ 90,000 $110,000 Less: Unrealized gain on sale of land (25,000 ) Verry’s realized operating income $ 65,000 $110,000 Spawn’s realized net income 60,000 40,000 Consolidated net income $125,000 $150,000 Income to noncontrolling interest: ($60,000 x .25) (15,000) ($40,000 X .25) (10,000 )Income to controlling interest $110,000 $140,000
b. Upstream sale of land: 20X4 20X5
Verry’s separate operating income $ 90,000 $110,000 Spawn’s net income $60,000 Less: Unrealized gain on sale of land (25,000)Spawn’s realized net income 35,000 40,000 Consolidated net income $125,000 $150,000 Income to noncontrolling interest: ($35,000 x .25) (8,750) ($40,000 x .25) (10,000 )Income to controlling interest $116,250 $140,000
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-14 Elimination Entries for Intercompany Transfers
a. Operating income of Grand Delivery $65,000 Net income of Acme Real Estate Company $40,000 Less: Unrealized profit on land sale (25,000 )Acme’s realized net income 15,000 Consolidated net income $80,000
b. Journal entries recorded by Speedy Delivery:
(1) Cash 8,000 Investment in Acme Real Estate Stock 8,000 Record dividends from Acme Real Estate:$10,000 x .80
(2) Investment in Acme Real Estate Stock 32,000 Income from Subsidiary 32,000 Record equity-method income: $40,000 x .80
c. Eliminating entries:
E(1) Income from Subsidiary 32,000 Dividends Declared 8,000 Investment in Acme Real Estate Stock 24,000 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 3,000 Dividends Declared 2,000 Noncontrolling Interest 1,000 Assign income to noncontrolling interest: $3,000 = ($40,000 - $25,000) x .20
E(3) Common Stock — Acme Real Estate Company 300,000 Retained Earnings, January 1 100,000 Investment in Acme Real Estate Stock 320,000 Noncontrolling Interest 80,000 Eliminate beginning investment balance.
E(4) Gain on Sale of Land 25,000 Land 25,000 Eliminate unrealized gain on land.
E(5) Service Revenue 15,000 Delivery Expense 15,000 Eliminate courier services performed by Speedy Delivery Service.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-15 Sale of Building to Parent in Prior Period
a. Turner will record annual depreciation expense of $25,000 ($300,000 / 12 years).
b. Split would have recorded annual depreciation expense of $20,000 ($400,000 / 20 years).
c. Eliminating entry, December 31, 20X9:
E(1) Buildings and Equipment 100,000 Retained Earnings, January 1 42,000 Noncontrolling Interest 18,000 Depreciation Expense 5,000 Accumulated Depreciation 155,000 Eliminate unrealized profit on building.
Adjustment to buildings and equipment
Amount paid by Split to acquire building $400,000 Amount paid by Turner on intercompany sale (300,000 )Adjustment to buildings and equipment $100,000
Adjustment to retained earnings, January 1, 20X9
Unrealized gain, December 31, 20X8 [$300,000 - ($400,000 - $160,000)] $ 60,000 Proportion of ownership held by Turner x .70 Required adjustment $ 42,000
Adjustment to Noncontrolling interest, January 1, 20X9
Unrealized gain, December 31, 20X8 $ 60,000 Proportion of ownership held by noncontrolling interest x .30 Required adjustment $ 18,000
Adjustment to depreciation expense
Depreciation expense recorded by Turner Company ($300,000 / 12 years) $ 25,000 Depreciation expense recorded by Split Company ($400,000 / 20 years) (20,000 )Adjustment to depreciation expense $ 5,000
Adjustment to accumulated depreciation
Amount required ($20,000 x 9 years) $180,000 Amount reported by Turner ($25,000 x 1 year) (25,000 )Required adjustment $155,000
6-21
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-15 (continued)
d. Income assigned to noncontrolling interest for 20X9:
Net income reported by Split Company $ 40,000 Amount of gain realized in 20X9 ($60,000 / 12 years) 5,000 Realized net income for 20X9 $ 45,000 Proportion of ownership held by noncontrolling interest x .30 Income assigned to noncontrolling interest $ 13,500
e. Amount assigned to noncontrolling interest in 20X9 consolidated balance sheet:
Split Company net assets, January 1, 20X9 ($350,000 - $150,000) $200,000 Net income for 20X9 40,000 Dividends paid in 20X9 (15,000)Unrealized profit on sale of building to Turner Company ($60,000 - $5,000) (55,000 )Realized book value December 31, 20X9 $170,000 Proportion of ownership held by noncontrolling interest x .30 Amount assigned to noncontrolling interest in December 31, 20X9, consolidated balance sheet $ 51,000
E6-16 Intercompany Sale at a Loss
a. Consolidated net income for 20X8 will be greater than Parent Company's income from operations plus Sunway's reported net income. The eliminating entries at December 31, 20X8, will result in an increase of $16,000 to consolidated net income.
b. As a result of purchasing the equipment at less than Parent's book value, depreciation expense reported by Sunway will be $2,000 ($16,000 / 8 years) below the amount that would have been recorded by Parent. Thus, depreciation expense must be increased by $2,000 when eliminating entries are prepared at December 31, 20X9. Consolidated net income will be decreased by the full amount of the $2,000 increase in depreciation expense.
6-22
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-17 Eliminating Entries Following Intercompany Sale at a Loss
a. Eliminating entry, December 31, 20X7:
E(1) Buildings and Equipment 156,000 Loss on Sale of Building 36,000 Accumulated Depreciation 120,000 Eliminate unrealized loss on building.
b. Consolidated net income and income to controlling interest for 20X7:
Operating income reported by Brown $125,000 Net income reported by Transom $ 15,000 Add: Loss on sale of building 36,000 Realized net income of Transom 51,000 Consolidated net income $176,000 Income to noncontrolling interest ($51,000 x .30) (15,300 )Income to controlling interest $160,700
c. Eliminating entry, December 31, 20X8:
E(1) Buildings and Equipment 156,000 Depreciation Expense 4,000 Accumulated Depreciation 124,000 Retained Earnings, January 1 25,200 Noncontrolling Interest 10,800 Eliminate unrealized loss on building.
Adjustment to buildings and equipment
Amount paid by Transom to acquire building $300,000 Amount paid by Brown on intercompany sale (144,000 )Adjustment to buildings and equipment $156,000
Adjustment to depreciation expense
Depreciation expense recorded by Transom Company ($300,000 / 15 years) $ 20,000 Depreciation expense recorded by Brown Corporation ($144,000 / 9 years) (16,000 )Adjustment to depreciation expense $ 4,000
Adjustment to accumulated depreciation
Amount required ($20,000 x 7 years) $140,000 Amount reported by Brown ($16,000 x 1 year) (16,000 )Required adjustment $124,000
6-23
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-17 (continued)
Adjustment to retained earnings, January 1, 20X8
Unrealized loss recorded, December 31, 20X7 $36,000 Proportion of ownership held by Brown x .70 Required adjustment $25,200
Adjustment to Noncontrolling interest, January 1, 20X8
Unrealized loss recorded, December 31, 20X7 $36,000 Proportion of ownership held by noncontrolling Interest x .30 Required adjustment $10,800
d. Consolidated net income and income assigned to controlling interest in 20X8:
Operating income reported by Brown $150,000 Net income reported by Transom $40,000 Adjustment for loss on sale of building (4,000 )Realized net income of Transom 36,000 Consolidated net income $186,000 Income assigned to noncontrolling interest ($36,000 x .30) (10,800) Income assigned to controlling interest $175,200
6-24
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-18 Multiple Transfers of Asset
a. $145,000
b. No gain or loss should be reported.
c. Swanson Corporation operating income $150,000
Sullivan Corporation net income $120,000 Loss on sale of land ($145,000 - $130,000) 15,000 Realized net income of Sullivan Corporation $135,000 Proportion of stock held by Swanson x .80 108,000
Kolder Company net income $ 60,000 Gain on sale of land ($180,000 - $130,000) (50,000 )Realized net income of Kolder Company $ 10,000 Proportion of stock held by Swanson x .70 7,000
Clayton Corporation net income $ 80,000 Gain on sale of land ($240,000 - $180,000) (60,000 )Realized net income of Clayton Corporation $ 20,000 Proportion of stock held by Swanson x .90 18,000 Income assigned to controlling interest $283,000
Alternate Computation:
Swanson Corporation operating income $150,000 Sullivan Corporation net income 120,000 Kolder Company net income 60,000 Clayton Corporation net income 80,000 Combined income $410,000
Unrealized loss recorded by Sullivan Corp. $ (15,000)Unrealized gain recorded by Kolder Company 50,000 Unrealized gain recorded by Clayton Corp. 60,000 (95,000 )Realized income available to all shareholders $315,000
Income assigned to noncontrolling interest: Sullivan Corp. ($120,000 + $15,000) x .20 $ 27,000 Kolder Company ($60,000 - $50,000) x .30 3,000 Clayton Corp. ($80,000 - $60,000) x .10 2,000 (32,000 )Income assigned to controlling interest $283,000
d. Eliminating entry:
E(1) Gain on Sale of Land 110,000 Loss on Sale of Land 15,000 Land 95,000 Eliminate gains and loss on land transfer: $110,000 = $50,000 + $60,000 $95,000 = $110,000 - $15,000
6-25
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-19 Elimination Entry in Period of Transfer
a. $300,000 = $276,000 + $24,000
b. 15 years = $300,000 / ($60,000 / 3 years)
c. E(1) Trucks 24,000Retained Earnings, January 1 21,600Noncontrolling Interest 14,400 Depreciation Expense 3,000 Accumulated Depreciation 57,000 Eliminate unrealized gain on trucks: $21,600 = $36,000 x .60 $14,400 = $36,000 x .40 $57,000 = ($20,000 x 4 years) - ($23,000 x 1 year)
6-26
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-20 Elimination Entry Computation
a. Eliminating entry, December 31, 20X6:
E(1) Equipment 90,000 Gain on Sale of Equipment 60,000 Depreciation Expense 6,000 Accumulated Depreciation 144,000
Depreciation expense adjustment: Recorded ($360,000 / 10 years) $ 36,000 Required [($450,000 - $150,000) / 10 years] (30,000 ) Required decrease $ 6,000
Accumulated depreciation adjustment: Accumulated depreciation, January 1, 20X6 $150,000 20X6 depreciation required 30,000 Required balance $180,000 20X6 depreciation recorded (36,000 ) Required increase $144,000
b. Eliminating entry, December 31, 20X7:
E(1) Equipment 90,000 Retained Earnings, January 1 37,800 Noncontrolling Interest 16,200 Depreciation Expense 6,000 Accumulated Depreciation 138,000
Retained earnings adjustment: Unrealized profit, January 1, 20X6 $ 60,000 Realized in 20X6 (6,000 ) Unrealized profit, January 1, 20X7 $ 54,000 Proportion of stock held by Stern x .70 Share of unrealized profit $ 37,800
Accumulated depreciation adjustment: Accumulated depreciation, January 1, 20X6 $150,000 Depreciation based on historical cost [($300,000 / 10 years) x 2] 60,000 Required balance $210,000 Depreciation recorded [($360,000 / 10) x 2] (72,000 ) Required increase $138,000
6-27
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-21 Using the Eliminating Entry to Determine Account Balances
a. Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber Corporation.
b. The subsidiary was the owner. The sale was from the subsidiary to the parent, as evidenced by the debit to noncontrolling interest in the eliminating entry.
c. Intercompany transfer price:
Amount paid by Somber Corporation $120,000 Increase to buildings and equipment in eliminating entry (53,500 )Amount paid by Pastel to Somber for equipment $ 66,500
d. Income assigned to noncontrolling interest for 20X9:
Net income reported by Somber $ 25,000 Amount of gain realized in 20X9 ($10,500 / 7 years) 1,500 Realized net income for 20X9 $ 26,500 Proportion of ownership held by noncontrolling interest x .10 Income assigned to noncontrolling interest $ 2,650
e. Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported by the consolidated entity for 20X9.
f. Eliminating entries at December 31, 20X9:
E(1) Income from Subsidiary 22,500 Dividends Declared 5,400 Investment in Somber Corporation Stock 17,100 Eliminate income from subsidiary:$22,500 = $25,000 x .90$5,400 = $6,000 x .90
E(2) Income to Noncontrolling Interest 2,650 Dividends Declared 600 Noncontrolling Interest 2,050 Assign income to noncontrolling interest: $2,650 = ($25,000 + $1,500) x .10 $600 = $6,000 x .10
E(3) Common Stock — Somber Corporation 300,000Retained Earnings, January 1 200,000 Investment in Somber Corporation Stock 450,000 Noncontrolling Interest 50,000 Eliminate beginning investment balance.
6-28
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-21 (continued)
E(4) Buildings and Equipment 53,500Retained Earnings, January 1 9,450Noncontrolling Interest 1,050 Accumulated Depreciation 64,000 Eliminate unrealized gain on upstream sale of equipment.
E(5) Accumulated Depreciation 1,500 Depreciation Expense 1,500 Eliminate excess depreciation.
E6-22 Intercompany Sale of Services
a. Eliminating entries, 20X4:
E(1) Consulting Revenue 138,700 Consulting Fees Expense 138,700 Eliminate intercompany revenue and expense.
E(2) Accounts Payable 6,600 Accounts Receivable 6,600 Eliminate intercompany receivable/payable.
b. Consolidated net income and income to controlling interest for 20X4:
Norgaard's separate operating income $2,342,000 Bline's net income 631,000 Consolidated net income 2,973,000 Income to noncontrolling interest ($631,000 x .25) (157,750 )Income to controlling interest $2,815,250
6-29
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-23A Fully Adjusted Equity Method and Cost Method
a. Fully Adjusted equity-method journal entries, 20X4:
(1) Cash 13,000 Investment in TV Sales Company Stock 13,000 Record dividends from TV Sales Company: $20,000 x .65
(2) Investment in TV Sales Company Stock 45,500 Income from Subsidiary 45,500 Record equity-method income: $70,000 x .65
(3) Income from Subsidiary 11,000 Investment in TV Sales Company Stock 11,000 Remove unrealized gain on sale of land.
(4) Investment in TV Sales Company Stock 5,200 Income from Subsidiary 5,200 Recognize portion of gain on sale of equipment: $8,000 x .65
Eliminating entries, December 31, 20X4:
E(1) Income from Subsidiary 39,700 Dividends Declared 13,000 Investment in TV Sales Company Stock 26,700 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 27,300 Dividends Declared 7,000 Noncontrolling Interest 20,300 Assign income to noncontrolling interest: $27,300 = ($70,000 + $8,000) x .35
E(3) Common Stock — TV Sales Company 300,000Retained Earnings, January 1 145,000 Investment in TV Sales Company Stock 289,250 Noncontrolling Interest 155,750 Eliminate beginning investment balance.
E(4) Gain on Sale of Land 11,000 Land 11,000 Eliminate unrealized gain on land.
E(5) Investment in TV Sales Company Stock 26,000Noncontrolling Interest 14,000 Equipment 40,000 Eliminate unrealized gain on upstream sale of equipment.
6-30
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
E6-23A (continued)
E(6) Accumulated Depreciation 8,000 Depreciation Expense 8,000 Eliminate excess depreciation.
b. Cost-method journal entry recorded by Newtime Products:
(1) Cash 13,000 Dividend Income 13,000 Record dividend income from TV Sales Company.
Cost-method eliminating entries, December 31, 20X4:
E(1) Dividend Income 13,000 Dividends Declared 13,000 Eliminate dividend income from subsidiary.
E(2) Income to Noncontrolling Interest 27,300 Dividends Declared 7,000 Noncontrolling Interest 20,300 Assign income to noncontrolling interest: $27,300 = ($70,000 + $8,000) x .35
E(3) Common Stock — TV Sales Company 300,000Retained Earnings, January 1 100,000 Investment in TV Sales Company Stock 260,000 Noncontrolling Interest 140,000 Eliminate investment balance at date of acquisition.
E(4) Retained Earnings, January 1 15,750 Noncontrolling Interest 15,750 Assign undistributed prior earnings of subsidiary to noncontrolling interest: $45,000 x .35
E(5) Gain on Sale of Land 11,000 Land 11,000 Eliminate unrealized gain on land.
E(6) Retained Earnings, January 1 26,000Noncontrolling Interest 14,000 Equipment 40,000 Eliminate unrealized gain on upstream sale of equipment.
E(7) Accumulated Depreciation 8,000 Depreciation Expense 8,000 Eliminate excess depreciation.
6-31
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
SOLUTIONS TO PROBLEMS
P6-24 Computation of Consolidated Net Income
a. Separate operating income of Petime Corporation $34,000 Reported net income of United Grain Company $19,000 Unrealized profit of sale of land (7,000 )Realized income for 20X4 $12,000 Amortization of differential ($10,000 / 10 years) ( 1,000 )
$11,000 Proportion of ownership held by Petime x .90 Income attributable to controlling interest 9,900 Income to controlling interest $43,900
b. Separate operating income of Petime Corporation $34,000 Reported net income by United Grain Company $19,000 Amortization of differential ($10,000 / 10 years) ( 1,000 )
$18,000 Proportion of stock held by Petime x .90
Income attributable to controlling interest 16,200 Unrealized profit on sale of land (7,000 )Income to controlling interest $43,200
Reported income will decrease by $700. In the upstream case the unrealized profit ($7,000) is apportioned to both majority ($6,300) and noncontrolling ($700) shareholders. In the downstream case, it is apportioned entirely to the majority shareholders ($7,000).
P6-25 Subsidiary Net Income
a. Toll Corporation’s reported net income for 20X4 was $94,400: Income assigned to noncontrolling shareholders $17,500 Add: Unrealized profit on building ($20,000 x .25) 5,000 Amortization of differential ($4,400 x .25) 1,10
0 Income assigned to noncontrolling interest before adjustment
$23,600
Proportion of stock held by noncontrolling interest ÷ .25 Reported income of Toll $94,400
Computation of annual amortization: Fair value of consideration given by Bold $348,000 Fair value of noncontrolling interest 116,000 Total fair value $464,000 Book value of Toll’s assets: Common stock $150,000 Retained earnings 270,000 Total book value (420,000) Differential paid by Bold $ 44,000 Number of years in amortization period ÷ 10 Annual amortization $4,400
6-32
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-25 (continued)
b. Consolidated net income for 20X4 is $304,000:
Bold Corporation’s operating income $234,000 Toll Corporation’s net income 94,400 Amortization of differential ($44,000 / 10 years) (4,400)Unrealized profit on building (20,000 )Consolidated net income $304,000
c. Income assigned to controlling interest is $286,500:
Consolidated net income $304,000 Income assigned to noncontrolling interest (17,500 )Income assigned to controlling interest $286,500
Alternate computation:Operating income of Bold $234,000 Income from Toll: Net income of Toll $94,400 Unrealized profit on building (20,000) Amortization of differential (4,400 ) Realized income $70,000 Portion of ownership held x .75 52,500 Income to controlling interest $286,500
6-33
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-26 Transfer of Asset from One Subsidiary to Another
Bugle Cook Products ConsolidatedCorporation Corporation Entity
Depreciation expense $ --- $ 3,000 $ 2,000
Fixed assets — Warehouse --- 45,000 40,000
Accumulated depreciation --- 3,000 12,000
Gain on sale of warehouse 15,000 --- ---
P6-27 Consolidated Eliminating Entry
a. Master paid Rakel $460,000 ($600,000 - $140,000).
b. Accumulated deprecation at January 1, 20X7, was $168,000, computed as follows:
Purchase price paid by Rakel $600,000 Amount paid by Master $460,000 Gain recorded by Rakel (28,000 ) Book value at date of sale (432,000 ) Accumulated depreciation at date of sale $168,000
c. Annual depreciation expense recorded by Rakel was $28,000($168,000/6 years).
d. The estimated residual value was $40,000, computed as follows:
Purchase price paid by Rakel $600,000 Amount to be depreciated by Rakel ($28,000 x 20 years) (560,000 ) Estimated residual value $ 40,000
e. Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 - $40,000) / 14 years).
f. Reported net income of Rakel $ 80,000 Unrealized gain on sale of building ($28,000 - $2,000) (26,000 )
$ 54,000 Proportion of stock held by noncontrolling interest x .40 Income assigned to noncontrolling interest $ 21,600
g. Reported net income of Rakel $ 65,000 Portion of gain on sale of building realized in 20X8 2,000
$ 67,000 Proportion of stock held by noncontrolling interest x .40 Income assigned to noncontrolling interest $ 26,800
6-34
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-28 Multiple-Choice Questions
1. d
2. c
3. a
4. a
5. d
P6-29 Intercompany Services Provided to Subsidiary
The eliminating entry at December 31, 20X4, would be:
Service Revenue 110,000 Building 30,000 Wage Expense 80,000
The eliminating entries at December 31, 20X5, would be:
Retained Earnings 30,000 Building 30,000
Accumulated Depreciation 1,200 Depreciation Expense 1,200
P6-30 Consolidated Net Income with Intercorporate Transfers
a. Entry to record intercompany transfer of equipment, 20X6:
Cash 240,000Accumulated Depreciation 140,000 Equipment 350,000 Gain on Sale of Equipment 30,000 Record sale of equipment to Subsidence Mining: $140,000 = ($350,000 / 10 years) x 4 years
6-35
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-30 (continued)
b. 20X7 eliminating entries related to intercorporate transfers:
E(1) Land 60,000 Loss on Sale of Land 60,000 Eliminate unrealized loss on land: $60,000 = $560,000 - $500,000
E(2) Equipment 110,000Retained Earnings, January 1 25,000 Accumulated Depreciation 130,000 Depreciation Expense 5,000 Eliminate unrealized profit on equipment: $110,000 = $350,000 - $240,000 $25,000 = $30,000 - $5,000 $130,000 = ($35,000 x 6) - ($40,000 x 2) $5,000 = $40,000 - $35,000
c. Subsidence Mining's 20X7 net income was $90,000:
Subsidence Mining's income to noncontrolling shareholders $ 39,000 Noncontrolling interest's share of subsidiary income ÷ .30 Subsidence Mining's income before adjustment $130,000 Add: Amortization of differential: ($200,000 / 10 years) 20,000 Less: Unrealized loss on intercompany sale of land (60,000 )Subsidence Mining's 20X7 net income $ 90,000
d. Bower’s operating income was $826,000:
Consolidated net income $961,000 Less: Income to noncontrolling interest (39,000 )Income assigned to controlling interest $922,000 Income from Subsidence Mining: Reported net income $ 90,000 Unrealized loss on land 60,000 Amortization of differential ($200,000 / 10 years) (20,000 ) Realized income $130,000 Portion of ownership held x .70 Bower’s share $ 91,000 Realized profit on equipment ($30,000 / 6 years) 5,000 (96,000 )Bower’s 20X7 income from its separate operations $826,000
6-36
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-31 Computation of Retained Earnings following Multiple Transfers
Consolidated retained earnings, January 1, 20X8:
Great Company’s retained earnings, January 1 $450,000 Unrealized profit on land ($16,000 x .80) (12,800)Unrealized profit on depreciable assets [$22,000 - ($2,200 x 2)] (17,600 )Consolidated retained earnings $419,600
Consolidated retained earnings, December 31, 20X8: Consolidated retained earnings, January 1 $419,600 Great Company’s operating income for 20X8 $65,000 Less: Dividends paid in 20X8 (45,000) Increase in retained earnings from Great’s operations 20,000 Meager’s net income for 20X8 $ 30,000 Less: Amortization of differential assigned to equipment: ($325,000 - $290,000) / 10 years (3,500) Impairment of goodwill (17,500 ) Realized income $ 9,000 Proportion of ownership held x .80 7,200 Realization of gain on sale of building ($22,000 / 10 years) 2,200 Consolidated retained earnings $449,000
Alternate computation of retained earnings balance:
Great Company’s retained earnings, January 1 $450,000 Operating income for 20X8 65,000 Dividends paid in 20X8 (45,000) Investment income from Meager Company for 20X8: Meager's net income $30,000 Proportion of ownership held x .80
Proportionate share of Meager’s reported net income 24,000 Amortization of differential assigned to equipment: [($325,000 - $290,000) x .80] / 10 years (2,800) Goodwill impairment loss ($17,500 x .80) (14,000) Great Company’s retained earnings $477,200 Unrealized profit on land ($16,000 x .80) (12,800)Unrealized profit on depreciable assets [$22,000 - ($2,200 x 3)] (15,400 )Consolidated retained earnings $449,000
6-37
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
6-38
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-32 Preparation of Consolidated Balance Sheet
a. Consolidated balance sheet workpaper:
Lofton Company and Temple CorporationConsolidated Balance Sheet Workpaper
December 31, 20X6
Lofton Temple Eliminations Consol- Item Company Corp. Debit Credit idated
Cash and Accounts Receivable 101,000 20,000 121,000Inventory 80,000 40,000 120,000Land 150,000 90,000 (2) 10,000 250,000Buildings and Equipment 400,000 300,000 (3) 9,000 709,000Investment in Temple Corporation Stock 150,000 (1)150,000 Debits 881,000 450,000 1,200,000
Accum. Depreciation 135,000 85,000 (3) 24,000 244,000Accounts Payable 90,000 25,000 115,000Notes Payable 200,000 90,000 290,000Common Stock 100,000 200,000 (1)200,000 100,000Retained Earnings, 356,000 50,000 (1) 50,000 (2) 6,000
(3) 15,000 347,000Noncontrolling Interest (1)100,000
(2) 4,000 104,000 Credits 881,000 450,000 284,000 284,000 1,200,000
6-39
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-32 (continued)
Eliminating entries:
E(1) Common Stock — Temple Corporation 200,000 Retained Earnings 50,000 Investment in Temple Corporation Stock 150,000 Noncontrolling Interest 100,000 Eliminate investment account balance.
E(2) Land 10,000 Retained Earnings 6,000 Noncontrolling Interest 4,000 Eliminate unrealized loss on sale of land.
E(3) Buildings and Equipment 9,000 Retained Earnings 15,000 Accumulated Depreciation 24,000 Eliminate unrealized gain on sale of equipment.
Accumulated depreciation adjustment: Required [($100,000 / 10 years) x 5 years] $ 50,000 Recorded [($91,000 / 7 years) x 2 years] (26,000 ) Required increase $ 24,000
Gain recorded by Temple Corporation, January 1, 20X5 $ 21,000 Realized in 20X5 and 20X6 ($3,000 x 2 years) (6,000 )Unrealized balance, December 31, 20X6 $ 15,000
6-40
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-32 (continued)
b. Consolidated balance sheet:
Lofton Company and SubsidiaryConsolidated Balance Sheet
December 31, 20X6
Cash and Accounts Receivable $121,000 Inventory 120,000 Land 250,000 Buildings and Equipment $709,000 Less: Accumulated Depreciation (244,000 ) 465,000 Total Assets $956,000
Accounts Payable $115,000 Notes Payable 290,000 Stockholders’ Equity: Controlling Interest: Common Stock $100,000 Retained Earnings 347,000 Total Controlling Interest $447,000 Noncontrolling interest 104,000 Total Stockholders’ Equity 551,000 Total Liabilities and Stockholders' Equity $956,000
6-41
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-33 Consolidation Workpaper with Intercompany Transfers
a. Eliminating entries:
E(1) Income from Subsidiary 19,500 Dividends Declared 3,250 Investment in Blank Corp. Stock 16,250 Eliminate income from subsidiary: $19,500 = $30,000 x .65 $3,250 = $5,000 x .65
E(2) Income to Noncontrolling Interest 6,265 Dividends Declared 1,750 Noncontrolling Interest 4,515 Assign income to noncontrolling interest: $6,265 = ($30,000 - $13,200 + $1,100) x .35 $1,750 = $5,000 x .35
E(3) Common Stock — Blank Corporation 60,000Retained Earnings, January 1 85,000 Investment in Blank Corp. Stock 94,250 Noncontrolling Interest 50,750 Eliminate beginning investment balance: $85,000 = $110,000 - ($30,000 - $5,000) $94,250 = $110,500 - $16,250 $50,750= ($110,000 + $60,000 - $25,000) x .35
E(4) Sales and Service Revenue 24,000 Other Expenses 24,000 Eliminate intercompany services.
E(5) Gain on Sale of Land 4,000 Land 4,000 Eliminate gain on sale of land to Blank Corporation.
E(6) Gain on Sale of Building 13,200 Depreciation Expense 1,100 Buildings and Equipment (net) 12,100 Eliminate gain on sale of building to Mist Company.
6-42
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-33 (continued)
b. Mist Company and Blank CorporationConsolidation Workpaper
December 31, 20X4
Mist Blank Eliminations Consol- Item Company Corp. Debit Credit idated
Sales and Service Revenue 286,500 128,500 (4) 24,000 391,000 Gain on Sale of Land 4,000 (5) 4,000Gain on Sale of Building 13,200 (6) 13,200Income from Subsidiary 19,500 (1) 19,500 Credits 310,000 141,700 391,000 Cost of Goods Sold 160,000 75,000 235,000 Depreciation Expense 22,000 19,000 (6) 1,100 39,900 Other Expenses 76,000 17,700 (4) 24,000 69,700 Debits (258,000) (111,700) (344,600)Consolidated Net Income 46,400 Income to Noncon- trolling Interest (2) 6,265 (6,265 )Income, carry forward 52,000 30,000 66,965 25,100 40,135
Ret. Earnings, Jan. 1 198,000 85,000 (3) 85,000 198,000 Income, from above 52,000 30,000 66,965 25,100 40,135
250,000 115,000 238,135 Dividends Declared (25,000) ( 5,000) (1) 3,250
(2) 1,750 (25,000 )Ret. Earnings, Dec. 31, carry forward 225,000 110,000 151,965 30,100 213,135
Cash 32,500 22,000 54,500 Accounts Receivable 62,000 37,000 99,000 Inventory 95,000 71,000 166,000 Land 40,000 15,000 (5) 4,000 51,000 Buildings and Equipment (net) 200,000 125,000 (6) 12,100 312,900 Investment in Blank Corporation Stock 110,500 (1) 16,250
(3) 94,250 Debits 540,000 270,000 683,400
Accounts Payable 35,000 20,000 55,000 Bonds Payable 180,000 80,000 260,000 Common Stock 100,000 60,000 (3) 60,000 100,000 Retained Earnings, from above 225,000 110,000 151,965 30,100 213,135 Noncontrolling Interest (2) 4,515
(3) 50,750 55,265 Credits 540,000 270,000 211,965 211,965 683,400
6-43
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
6-44
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-33 (continued)
c. Mist Company and SubsidiaryConsolidated Balance Sheet
December 31, 20X4
Cash $ 54,500 Accounts Receivable 99,000 Inventory 166,000 Land 51,000 Buildings and Equipment (net) 312,900 Total Assets $683,400
Accounts Payable $ 55,000 Bonds Payable 260,000 Stockholders’ Equity: Controlling Interest: Common Stock $100,000 Retained Earnings 213,135 Total Controlling Interest $313,135 Noncontrolling Interest 55,265 Total Stockholders’ Equity 368,400 Total Liabilities and Stockholders' Equity $683,400
Mist Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X4
Sales $391,000 Cost of Goods Sold $235,000Depreciation Expense 39,900Other Expenses 69,700 Total Expenses (344,600 )Consolidated Net Income $ 46,400 Income to Noncontrolling Interest (6,265 )Income to Controlling Interest $ 40,135
Mist Company and SubsidiaryConsolidated Retained Earnings Statement
Year Ended December 31, 20X4
Retained Earnings, January 1, 20X4 $198,000 Income to Controlling Interest, 20X4 40,135
$238,135 Dividends Declared, 20X4 (25,000 )Retained Earnings, December 31, 20X4 $213,135
6-45
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-34 Consolidation Workpaper in Year of Intercompany Transfer
a. Eliminating entries, December 31, 20X6:
E(1) Income from Subsidiary 32,000 Dividends Declared 4,000 Investment in Lane Company Stock 28,000 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 4,400 Dividends Declared 1,000 Noncontrolling Interest 3,400 Assign income to noncontrolling interest: $4,400 = ($40,000 - $18,000) x .20
E(3) Common Stock — Lane Company 100,000 Retained Earnings, January 1 105,000 Differential 50,000 Investment in Lane Company Stock 204,000 Noncontrolling Interest 51,000 Eliminate beginning investment balance.
E(4) Goodwill 50,000 Differential 50,000 Assign differential to goodwill.
E(5) Goodwill Impairment Loss 18,000 Goodwill 18,000 Recognize impairment of goodwill.
E(6) Retained Earnings, January 1 8,000 Noncontrolling Interest 2,000 Land 10,000 Eliminate unrealized gain on land.
E(7) Buildings and Equipment 5,000 Gain on Sale of Equipment 20,000 Depreciation and Amortization Expense 2,000 Accumulated Depreciation 23,000 Eliminate intercorporate sale of equipment.
Depreciation expense adjustment: Depreciation recorded ($70,000 / 10 years) $ 7,000 Depreciation required ($75,000 / 15 years) (5,000 ) Required decrease $ 2,000
Accumulated depreciation adjustment: Required balance ($5,000 x 6 years) $30,000 Balance recorded ($7,000 x 1 year) (7,000 ) Required increase $23,000
E(8) Accounts Payable 7,000 Accounts Receivable 7,000 Eliminate intercorporate receivable/payable.
6-46
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-34 (continued)
b. Prime Company and Lane CompanyConsolidation Workpaper
December 31, 20X6
Prime Lane Eliminations Consol- Item Company Company Debit Credit idated
Sales 240,000 120,000 360,000 Gain on Sale of Equip. 20,000 (7) 20,000Income from Subsidiary 32,000 (1) 32,000 Credits 292,000 120,000 360,000 Cost of Goods Sold 140,000 60,000 200,000 Deprec. & Amortization 25,000 15,000 (7) 2,000 38,000 Goodwill Impairment Loss (5) 18,000 18,000 Other Expenses 15,000 5,000 20,000 Debits (180,000) (80,000) (276,000 )Consolidated Net Income 84,000 Income to Noncon- trolling Interest (2) 4,400 (4,400 ) Income, carry forward 112,000 40,000 74,400 2,000 79,600
Ret. Earnings, Jan. 1 338,000 105,000 (3)105,000(6) 8,000 330,000
Income, from above 112,000 40,000 74,400 2,000 79,600 450,000 145,000 409,600
Dividends Declared (30,000) (5,000) (1) 4,000 (2) 1,000 (30,000 )
Ret. Earnings, Dec. 31, carry forward 420,000 140,000 187,400 7,000 379,600
Cash and Receivables 113,000 35,000 (8) 7,000 141,000 Inventory 260,000 90,000 350,000 Land 80,000 80,000 (6) 10,000 150,000 Buildings and Equipment 500,000 150,000 (7) 5,000 655,000 Investment in Lane Company Stock 232,000 (1) 28,000
(3)204,000Differential (3) 50,000 (4) 50,000Goodwill (4) 50,000 (5) 18,000 32,000 Debits 1,185,000 355,000 1,328,000
Accum. Depreciation 205,000 45,000 (7) 23,000 273,000 Accounts Payable 60,000 20,000 (8) 7,000 73,000 Bonds Payable 200,000 50,000 250,000 Common Stock 300,000 100,000 (3)100,000 300,000 Retained Earnings, from above 420,000 140,000 187,400 7,000 379,600 Noncontrolling Interest (6) 2,000 (2) 3,400
(3) 51,000 52,400 Credits 1,185,000 355,000 401,400 401,400 1,328,000
6-47
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
6-48
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-34 (continued)
c. Prime Company and SubsidiaryConsolidated Balance Sheet
December 31, 20X6
Cash and Receivables $ 141,000 Inventory 350,000 Land 150,000 Buildings and Equipment $655,000 Less: Accumulated Depreciation (273,000 ) 382,000 Goodwill 32,000 Total Assets $1,055,000
Accounts Payable $ 73,000 Bonds Payable 250,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 379,600 Total Controlling Interest $679,600 Total Noncontrolling Interest 52,400 Total Stockholders’ Equity 732,000 Total Liabilities and Stockholders' Equity $1,055,000
Prime Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X6
Sales $ 360,000 Cost of Goods Sold $200,000 Depreciation and Amortization Expense 38,000 Goodwill Impairment Loss 18,000 Other Expenses 20,000 Total Expenses (276,000 )Consolidated Net Income $ 84,000 Income to Noncontrolling Interest (4,400 )Income to Controlling Interest $ 79,600
Prime Company and SubsidiaryConsolidated Retained Earnings Statement
Year Ended December 31, 20X6
Retained Earnings, January 1, 20X6 $ 330,000 Income to Controlling Interest, 20X6 79,600
$ 409,600 Dividends Declared, 20X6 (30,000 )Retained Earnings, December 31, 20X6 $ 379,600
6-49
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-35 Intercorporate Sales in Prior Years
a. Eliminating entries, December 31, 20X8:
E(1) Income from Subsidiary 21,000 Dividends Declared 8,000 Investment in Skate Company Stock 13,000 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 5,250 Dividends Declared 2,000 Noncontrolling Interest 3,250 Assign income to noncontrolling interest: $5,250 = ($30,000 - $2,500 - $1,250) x .20
E(3) Common Stock — Skate Company 30,000Additional Paid-In Capital — Skate Company 20,000Retained Earnings, January 1 150,000Differential 63,750 Investment in Skate Company Stock 211,000 Noncontrolling Interest 52,750 Eliminate beginning investment balance: $63,750 = $75,000 – [($50,000 / 20 years) + ($25,000 / 20 years)] x 3 years
E(4) Patents 42,500Buildings and Equipment 25,000 Accumulated Depreciation 3,750 Differential 63,750 Assign differential: $42,500 = $50,000 - [($50,000 / 20 years) x 3 years] $3,750 = ($25,000 / 20 years) x 3 years
E(5) Amortization Expense 2,500Depreciation Expense 1,250 Patents 2,500 Accumulated Depreciation 1,250 Amortize differential.
E(6) Buildings and Equipment 60,000Retained Earnings, January 1 15,000 Depreciation Expense 1,500 Accumulated Depreciation 73,500 Eliminate unrealized profit on buildings: $60,000 = $125,000 - $65,000 $15,000 = $65,000 - ($125,000 - $75,000) $ 1,500 = ($65,000 / 10 years) - ($125,000 / 25 years) $73,500 = ($5,000 x 16 years) - ($6,500 x 1 year)
6-50
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-35 (continued)
E(7) Retained Earnings, January 1 10,400Noncontrolling Interest 2,600 Land 13,000 Eliminate unrealized profit on land.
6-51
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-35 (continued)
b. Pond Corporation and Skate CompanyConsolidation Workpaper
December 31, 20X8
Pond Skate Eliminations Consol- Item Corp. Co. Debit Credit idated
Sales 450,000 250,000 700,000 Income from Subsidiary 21,000 (1) 21,000Interest Income 14,900 14,900 Credits 485,900 250,000 714,900 Cost of Goods Sold 285,000 136,000 421,000 Other Operating Expenses 50,000 40,000 90,000 Depreciation Expense 35,000 24,000 (5) 1,250 (6) 1,500 58,750 Interest Expense 24,000 10,500 34,500 Miscellaneous Expenses 11,900 9,500 21,400 Amortization Expense (5) 2,500 2,500 Debits (405,900) (220,000) (628,150 )Consolidated Net Income 86,750 Income to Noncon- trolling Interest (2) 5,250 (5,250 )Income, carry forward 80,000 30,000 30,000 1,500 81,500
Ret. Earnings, Jan. 1 241,400 150,000 (3)150,000(6) 15,000(7) 10,400 216,000
Net Income, from above 80,000 30,000 30,000 1,500 81,500 321,400 180,000 297,500
Dividends Declared (30,000) (10,000) (1) 8,000 (2) 2,000 (30,000 )
Ret. Earnings, Dec. 31, carry forward 291,400 170,000 205,400 11,500 267,500
Cash 68,400 47,000 115,400 Accounts Receivable 130,000 65,000 195,000 Interest andOther Receivables 45,000 10,000 55,000 Inventory 140,000 50,000 190,000 Land 50,000 22,000 (7) 13,000 59,000 Buildings and Equipment 400,000 240,000 (4) 25,000
(6) 60,000 725,000 Investment in Skate Company Stock 224,000 (1) 13,000
(3)211,000Investment in Tin Co. Bonds 134,000 134,000 Bond Discount 3,000 3,000 Differential (3) 63,750 (4) 63,750Patents (4) 42,500 (5) 2,500 40,000 Debits 1,191,400 437,000 1,516,400
6-52
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-35 (continued)
Pond Skate Eliminations Consol- Item Corp. Co. Debit Credit idated
Accum. Depreciation 185,000 94,000 (4) 3,750(5) 1,250(6) 73,500 357,500
Accounts Payable 65,000 11,000 76,000Interest and Other Payables 45,000 12,000 57,000Bonds Payable 300,000 100,000 400,000Common Stock Pond Corporation 150,000 150,000 Skate Company 30,000 (3) 30,000Additional Paid-In Capital 155,000 20,000 (3) 20,000 155,000Retained Earnings, from above 291,400 170,000 205,400 11,500 267,500Noncontrolling Interest (7) 2,600 (2) 3,250
(3) 52,750 53,400 Credits 1,191,400 437,000 449,250 449,250 1,516,400
6-53
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-36 Intercorporate Sale of Land and Depreciable Asset
a. Income assigned to noncontrolling interest:
Net income of Morris $ 30,000 Gain on sale of equipment to parent $9,600 Gain realized prior to 20X5 (1,200 ) (8,400)Amortization of differential: Buildings and equipment ($25,000 / 10 years) (2,500) Copyright ($17,000 / 5 years) (3,400 )Realized income $15,700 Portion of ownership held x .30 Income to noncontrolling interest $ 4,710
Gain on sale of equipment to parent:Sale price to Topp $91,600 Purchase price $100,000 Accumulated depreciation [($100,000 - $10,000)/10 years] x 2 years (18,000 ) (82,000)Gain on sale $ 9,600
b. Reconciliation between book value and investment balance at December31, 20X5:
Underlying book value of Morris Company stock: Common stock outstanding $100,000 Retained earnings, January 1, 20X5 100,000 Net income for 20X5 30,000 Dividends paid in 20X5 ( 5,000 ) Net book value $225,000 Portion of ownership held by Topp x .70 Net book value of ownership held by Topp $157,500 Unamortized differential: Buildings and equipment [($25,000 x 7/10 years) x .70] 12,250 Copyright [($17,000 x 2/5 years) x .70] 4,760 Investment in Morris Company stock $174,510
c. Eliminating entries:
E(1) Income from Subsidiary 16,870 Dividends Declared 3,500 Investment in Morris Company Stock 13,370 Eliminate income from subsidiary: $16,870 = ($30,000 x .70) - $1,750 - $2,380 $3,500 = $5,000 x .70
E(2) Income to Noncontrolling Interest 4,710 Dividends Declared 1,500 Noncontrolling Interest 3,210 Assign income to noncontrolling interest.
6-54
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
6-55
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-36 (continued)
E(3) Common Stock — Morris Company 100,000Retained Earnings, January 1 100,000Differential 30,200 Investment in Morris Company Stock 161,140 Noncontrolling Interest 69,060 Eliminate beginning investment balance: $30,200 = ($25,000 x 8/10) + ($17,000 x 3/5)
E(4) Buildings and Equipment 25,000Copyright 10,200 Accumulated Depreciation 5,000 Differential 30,200 Assign beginning differential.
E(5) Depreciation Expense 2,500Amortization Expense 3,400 Accumulated Depreciation 2,500 Copyright 3,400 Amortize differential.
E(6) Retained Earnings, January 1 11,000 Land 11,000 Eliminate unrealized gain on land.
E(7) Equipment 8,400Gain on Sale of Equipment 9,600 Depreciation Expense 1,200 Accumulated Depreciation 16,800 Eliminate intercorporate sale of equipment: $8,400 = $100,000 - $91,600 $9,600 = $91,600 - ($100,000 - $18,000) $1,200 = ($81,600 / 8 years) - ($90,000 / 10 years) $16,800 = ($9,000 x 3 years) - ($10,200 x 1 year)
6-56
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-36 (continued)
d. Topp Corporation and Morris CompanyConsolidation Workpaper
December 31, 20X5
Topp Morris Eliminations Consol- Item Corp. Co. Debit Credit idated
Sales 450,000 190,400 640,400 Other Income 28,250 28,250 Gain on Sale of Equipment 9,600 (7) 9,600Income from Subsidiary 16,870 (1) 16,870 Credits 495,120 200,000 668,650 Cost of Goods Sold 375,000 110,000 485,000 Depreciation Expense 25,000 10,000 (5) 2,500 (7) 1,200 36,300 Interest Expense 24,000 33,000 57,000 Other Expenses 28,000 17,000 45,000 Amortization Expense (5) 3,400 3,400 Debits (452,000) (170,000) (626,700 )Consolidated Net Income 41,950 Income to Noncon- trolling Interest (2) 4,710 (4,710 )Income, carry forward 43,120 30,000 37,080 1,200 37,240
Ret. Earnings, Jan. 1 176,240 100,000 (3)100,000(6) 11,000 165,240
Income, from above 43,120 30,000 37,080 1,200 37,240 219,360 130,000 202,480
Dividends Declared (30,000) (5,000) (1) 3,500 (2) 1,500 (30,000 )
Ret. Earnings, Dec. 31, carry forward 189,360 125,000 148,080 6,200 172,480
Cash 15,850 58,000 73,850 Accounts Receivable 65,000 70,000 135,000 Interest and Other Receivables 30,000 10,000 40,000 Inventory 150,000 180,000 330,000 Land 80,000 60,000 (6) 11,000 129,000 Buildings and Equipment 315,000 240,000 (4) 25,000
(7) 8,400 588,400 Bond Discount 15,000 15,000 Investment in Morris Company Stock 174,510 (1) 13,370
(3)161,140Differential (3) 30,200 (4) 30,200Copyrights (4) 10,200 (5) 3,400 6,800 Debits 830,360 633,000 1,318,050
6-57
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-36 (continued)
Topp Morris Eliminations Consol- Item Corp. Co. Debit Credit idated
Accum. Depreciation Buildings and Equip. 120,000 60,000 (4) 5,000
(5) 2,500(7) 16,800 204,300
Accounts Payable 61,000 28,000 89,000Other Payables 30,000 20,000 50,000Bonds Payable 250,000 300,000 550,000Common Stock Topp Corporation 150,000 150,000 Morris Company 100,000 (3)100,000Additional Paid-In Capital 30,000 30,000Retained Earnings, from above 189,360 125,000 148,080 6,200 172,480Noncontrolling Interest (2) 3,210
(3) 69,060 72,270 Credits 830,360 633,000 321,880 321,880 1,318,050
P6-37 Consolidation Workpaper in Year following Intercompany Transfer
a. Reconciliation of underlying book value and balance in investment account:
Net book value reported by Lane Company Common stock outstanding $100,000 Retained earnings balance, January 1, 20X7 $140,000 Net income for 20X7 45,000 Dividends paid in 20X7 (35,000 ) Retained earnings balance, December 31, 20X7 150,000
$250,000Proportion of stock held by Prime Company x .80
$200,000Add: Goodwill (50,000 x .80) 40,000 Balance in investment account $240,000
6-58
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-37 (continued)
b. Eliminating entries, December 31, 20X7:
E(1) Income from Subsidiary 36,000 Dividends Declared 28,000 Investment in Lane Company Stock 8,000 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 9,000 Dividends Declared 7,000 Noncontrolling Interest 2,000 Assign income to noncontrolling interest: $9,000 = $45,000 x .20
E(3) Common Stock — Lane Company 100,000 Retained Earnings, January 1 140,000 Differential 50,000 Investment in Lane Company Stock 232,000 Noncontrolling Interest 58,000 Eliminate beginning investment balance: $50,000 = ($160,000 + $40,000) – ($50,000 + $100,000) $232,000 = $240,000 - $8,000 $58,000 = ($100,000 + $140,000 + $50,000) x .20
E(4) Goodwill 25,000 Retained Earnings, January 1 20,000 Noncontrolling Interest 5,000 Differential 50,000 Assign differential to goodwill.
E(5) Retained Earnings, January 1 8,000 Noncontrolling Interest 2,000 Land 10,000 Eliminate unrealized profit on land.
E(6) Buildings and Equipment 5,000 Retained Earnings, January 1 18,000 Depreciation and Amortization Expense 2,000 Accumulated Depreciation 21,000 Eliminate unrealized profit on equipment.
Accumulated depreciation adjustment: Required balance ($5,000 x 7 years) $ 35,000 Balance recorded ($7,000 x 2 years) (14,000 ) Required increase $ 21,000
E(7) Accounts Payable 4,000 Accounts Receivable 4,000 Eliminate intercorporate receivable/payable.
6-59
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-37 (continued)
b. Prime Company and Lane CompanyConsolidation Workpaper
December 31, 20X7
Prime Lane Eliminations Consol- Item Company Company Debit Credit idated Sales 250,000 150,000 400,000 Income from Subsidiary 36,000 (1) 36,000 Credits 286,000 150,000 400,000 Cost of Goods Sold 160,000 80,000 240,000 Deprec. and Amortization 25,000 15,000 (6) 2,000 38,000 Other Expenses 20,000 10,000 30,000 Debits (205,000) (105,000) (308,000 )Consolidated Net Income 92,000 Income to Noncon- trolling Interest (2) 9,000 (9,000 )Income, carry forward 81,000 45,000 45,000 2,000 83,000
Ret. Earnings, Jan. 1 420,000 140,000 (3) 140,000(4) 20,000(5) 8,000(6) 18,000 374,000
Income, from above 81,000 45,000 45,000 2,000 83,000 501,000 185,000 457,000
Dividends Declared (60,000) (35,000) (1) 28,000 (2) 7,000 (60,000 )
Ret. Earnings, Dec. 31, carry forward 441,000 150,000 231,000 37,000 397,000
Cash and Receivables 151,000 55,000 (7) 4,000 202,000 Inventory 240,000 100,000 340,000 Land 100,000 80,000 (5) 10,000 170,000 Buildings and Equipment 500,000 150,000 (6) 5,000 655,000 Investment in Lane Company Stock 240,000 (1) 8,000
(3)232,000Differential (3) 50,000 (4) 50,000Goodwill (4) 25,000 25,000 Debits 1,231,000 385,000 1,392,000
Accum. Depreciation 230,000 60,000 (6) 21,000 311,000 Accounts Payable 60,000 25,000 (7) 4,000 81,000 Bonds Payable 200,000 50,000 250,000 Common Stock 300,000 100,000 (3)100,000 300,000 Retained Earnings, from above 441,000 150,000 231,000 37,000 397,000 Noncontrolling Interest (4) 5,000 (2) 2,000
(5) 2,000 (3) 58,000 53,000 Credits 1,231,000 385,000 422,000 422,000 1,392,000
6-60
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-38 Incomplete Data
(a) $100,000
(b) $140,000
(c) $250,000 = $593,000 - $343,000
(d) $100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000]
(e) $4,500 = [($106,200 + $70,800) - ($50,000 + $70,000 + $30,000)] / 6 years
(f) Investment in Shadow Company Stock:$106,200 Purchase price, January 1, 20X4
30,000 Undistributed earnings from January 1, 20X4, to January 1, 20X7 [($80,000 - $30,000) x .60]
6,000 Undistributed income for 20X7 ($10,000 x .60)(10,800) Amortization of differential
[($27,000 / 6 years) x 4 years] x .60$131,400 Balance in investment account at December 31, 20X7
(g) $7,000 = ($70,000 + $90,000) - $153,000
(h) $-0-
(i) $510,000 = $345,000 + $150,000 + ($60,000 - $45,000)
(j) $278,000 = $180,000 + $80,000 + [($60,000 / 5 years) x 4 years]- [($45,000 / 3 years) x 2 years)
(k) Consolidated retained earnings at January 1, 20X7:$379,400 Retained earnings reported by Mound Corporation
Mound's share of unrealized profit on sale of equipment$9,000 Gain recorded: [$45,000 - ($60,000 x 3 / 5)](3,000) Amortized in 20X6: ($9,000 / 3)$6,000 Unamortized gainx .60 Mound's proportionate share
(3,600 ) $3,600 Reduction of Mound’s retained earnings$375,800 Consolidated retained earnings
(l) Income to noncontrolling shareholders:$ 30,000 Shadow's 20X7 net income ($250,000 - $195,000
- $10,000 - $15,000) 3,000 Realized profit on 20X6 sale of equipment to Mound
(4,500) Amortization of differential$ 28,500 Realized net incomex .40 $ 11,400 Income to noncontrolling shareholders
6-61
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-39 Intercompany Sale of Equipment at a Loss in Prior Period
a. Eliminating entries:
E(1) Income from Subsidiary 54,000 Dividends Declared 18,000 Investment in Block Corporation Stock 36,000 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 5,700 Dividends Declared 2,000 Noncontrolling Interest 3,700 Assign income to noncontrolling interest: $5,700 = ($60,000 - $3,000) x .10
E(3) Common Stock — Block Corporation 50,000Retained Earnings, January 1 150,000 Investment in Block Corporation Stock 180,000 Noncontrolling Interest 20,000 Eliminate beginning investment balance.
E(4) Buildings and Equipment 42,000Depreciation Expense 3,000 Retained Earnings, January 1 16,200 Noncontrolling Interest 1,800 Accumulated Depreciation 27,000 Eliminate intercorporate sale of equipment.
Adjustment to depreciation expense
Depreciation based on original cost ($90,000 / 10 years) $ 9,000 Depreciation based on intercompany sale price ($48,000 / 8 years) (6,000 )Adjustment to depreciation expense $ 3,000
Adjustment to retained earnings
Book value of equipment at time of sale [$90,000 - ($9,000 x 2 years)] $72,000 Intercompany sale price (48,000 )Loss recorded by Block on sale $24,000 Partial realization of loss [($9,000 - $6,000) x 2 years] (6,000 )Loss not yet realized for consolidated statement purposes $18,000 Foster's proportionate share x .90 Adjustment to retained earnings $16,200
6-62
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-39 (continued)
Adjustment to noncontrolling interest
Loss not yet realized for consolidated statement purposes $18,000 Proportion of ownership held by noncontrolling interest x .10 Adjustment to noncontrolling interest $ 1,800
Adjustment to accumulated depreciation
Accumulated depreciation based on original cost [($90,000 / 10 years) x 5 years] $45,000 Accumulated depreciation recorded by Foster [($48,000 / 8 years) x 3 years] (18,000 )Adjustment to accumulated depreciation $27,000
6-63
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
6-64
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-39 (continued)
b. Foster Company and Block CorporationConsolidation Workpaper
December 31, 20X9
Foster Block Eliminations Consol- Item Co. Corp. Debit Credit idated
Sales 680,000 385,000 1,065,000 Other Income 26,000 15,000 41,000 Income from Subsidiary 54,000 (1) 54,000 Credits 760,000 400,000 1,106,000 Cost of Goods Sold 500,000 250,000 750,000 Depreciation Expense 45,000 15,000 (4) 3,000 63,000 Other Expenses 95,000 75,000 170,000 Debits (640,000) (340,000) (983,000 )Consolidated Net Income 123,000 Income to Noncon- trolling Interest (2) 5,700 (5,700 )Income, carry forward 120,000 60,000 62,700 117,300
Ret. Earnings, Jan. 1 235,000 150,000 (3)150,000 (4) 16,200 251,200 Income, from above 120,000 60,000 62,700 117,300
355,000 210,000 368,500 Dividends Declared (40,000) (20,000) (1) 18,000
(2) 2,000 (40,000 )Ret. Earnings, Dec. 31, carry forward 315,000 190,000 212,700 36,200 328,500
Cash 82,000 32,400 114,400 Accounts Receivable 80,000 90,000 170,000 Other Receivables 40,000 10,000 50,000 Inventory 200,000 130,000 330,000 Land 80,000 60,000 140,000 Buildings and Equipment 500,000 250,000 (4) 42,000 792,000 Investment in Block Corporation Stock 216,000 (1) 36,000
(3)180,000 Debits 1,198,000 572,400 1,596,400
6-65
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-39 (continued)
Foster Block Eliminations Consol- Item Co. Corp. Debit Credit idated
Accum. Depreciation 155,000 75,000 (4) 27,000 257,000Accounts Payable 63,000 35,000 98,000Other Payables 95,000 20,000 115,000Bonds Payable 250,000 200,000 450,000Bond Premium 2,400 2,400Common Stock Foster Company 210,000 210,000 Block Corporation 50,000 (3) 50,000Additional Paid-In Capital 110,000 110,000Retained Earnings, from above 315,000 190,000 212,700 36,200 328,500Noncontrolling Interest (2) 3,700
(3) 20,000 (4) 1,800 25,500
Credits 1,198,000 572,400 304,700 304,700 1,596,400
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-40 Comprehensive Problem: Intercorporate Transfers
a. Computation of differential as of January 1, 20X8:
Original differential at December 31, 20X1 $ 150,000 Less: Portion written off for sale of inventory (30,000 )Remaining differential, January 1, 20X8 $ 120,000
b. Verification of balance in Investment in Schmid Stock account:
Schmid retained earnings, January 1, 20X8 $1,400,000 Schmid net income, 20X8: Sales $985,000 Cost of goods sold (525,000) Depreciation and amortization (88,000) Other expenses (227,000) Other income (loss) (35,000 ) Net income 110,000 Schmid dividends, 20X8 (20,000 )Schmid retained earnings, December 31, 20X8 $1,490,000
Schmid stockholders' equity: Common stock $1,000,000 Additional paid-in capital 1,350,000 Retained earnings, December 31, 20X8 1,490,000 Stockholders' equity, December 31, 20X8 $3,840,000 Rossman's ownership share x .75 Book value of shares held by Rossman $2,880,000 Remaining differential at January 1, 20X8 ($120,000 x .75) 90,000 Balance in Investment in Schmid Stock account, December 31, 20X8 $2,970,000
c. Elimination entries:
E(1) Income from Subsidiary 82,500 Dividends Declared 15,000 Investment in Schmid Stock 67,500 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 36,500 Dividends Declared 5,000 Noncontrolling Interest 31,500 Assign income to noncontrolling interest: $36,500 = [$110,000 + $40,000 - ($40,000 / 10)] x .25
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-40 (continued)
E(3) Common Stock — Schmid 1,000,000Additional Paid-In Capital 1,350,000Retained Earnings, January 1 1,400,000Differential 120,000 Investment in Schmid Stock 2,902,500 Noncontrolling Interest 967,500 Eliminate beginning investment balance: $2,902,500 = $2,970,000 - $67,500 $967,500 = ($1,000,000 + $1,350,000 + $1,400,000 + $120,000) x .25
E(4) Land 56,000Goodwill 64,000 Differential 120,000 Assign differential.
E(5) Retained Earnings, January 1 23,000 Land 23,000 Eliminate unrealized gain on land.
E(6) Buildings and Equipment 185,000Depreciation and Amortization 4,000 Accumulated Depreciation 149,000 Other Income (Loss on Sale of Equipment) 40,000Eliminate unrealized loss on equipment:$185,000 = $435,000 - $250,000$4,000 = ($435,000 / 15) - ($250,000 / 10)$149,000 = [($435,000 / 15) x 5] + $4,000$40,000 = $290,000 - $250,000
E(7) Other Income 80,000 Other Expenses 80,000 Eliminate intercompany sale of services.
E(8) Current Payables 20,000 Current Receivables 20,000 Eliminate intercompany receivable/payable.
E(9) Current Payables 3,750 Current Receivables 3,750 Eliminate intercompany dividend owed: $5,000 x .75
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-40 (continued)
d. Rossman Corporation and Schmid Distributors Inc.Consolidation Workpaper
December 31, 20X8
Eliminations Consol- Item Rossman Schmid Debit Credit idated
Sales 4,801,000 985,000 5,786,000 Income from Subsidiary 82,500 (1) 82,500Other Income (Loss) 90,000 (35,000 ) (7) 80,000 (6) 40,000 15,000 Credits 4,973,500 950,000 5,801,000 Cost of Goods Sold 2,193,000 525,000 2,718,000 Depreciation and Amortization 202,000 88,000 (6) 4,000 294,000 Other Expenses 1,381,000 227,000 (7) 80,000 1,528,000 Debits (3,776,000) (840,000) (4,540,000)Consolidated Net Income 1,261,000 Income to Noncon- trolling Interest (2) 36,500 (36,500 )Income, carry forward 1,197,500 110,000 203,000 120,000 1,224,500
Retained Earnings, Jan. 1 1,497,800 1,400,000 (3)1,400,000
(5) 23,000 1,474,800 Income, from above 1,197,500 110,000 203,000 120,000 1,224,500
2,695,300 1,510,000 2,699,300 Dividends Declared (50,000) (20,000) (1) 15,000
(2) 5,000 (50,000 )Retained Earnings, Dec. 31, carry forward 2,645,300 1,490,000 1,626,000 140,000 2,649,300
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P6-40 (continued)
Eliminations Consol- Item Rossman Schmid Debit Credit idated
Cash 50,700 38,000 88,700Current Receivables 101,800 89,400 (8) 20,000
(9) 3,750 167,450Inventory 286,000 218,900 504,900Investment in Schmid Stock 2,970,000 (1) 67,500
(3)2,902,500Land 400,000 1,200,000 (4) 56,000 (5) 23,000 1,633,000Buildings and Equipment 2,400,000 2,990,000 (6) 185,000 5,575,000Goodwill (4) 64,000 64,000Differential (3) 120,000 (4) 120,000 Debits 6,208,500 4,536,300 8,033,050
Accumulated Depreciation 1,105,000 420,000 (6) 149,000 1,674,000Current Payables 86,200 76,300 (8) 20,000
(9) 3,750 138,750Bonds Payable 1,000,000 200,000 1,200,000Common Stock Rossman Corporation 100,000 100,000 Schmid Distributors 1,000,000 (3)1,000,000Additional Paid-In Capital 1,272,000 1,350,000 (3)1,350,000 1,272,000Retained Earnings, from above 2,645,300 1,490,000 1,626,000 140,000 2,649,300Noncontrolling Interest (2) 31,500
(3) 967,500 999,000 Credits 6,208,500 4,536,300 4,424,750 4,424,750 8,033,050
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-41A Fully Adjusted Equity Method
a. Adjusted trial balance:
Prime Company Lane Company Item Debit Credit Debit Credit
Cash and Accounts Receivable $ 151,000 $ 55,000Inventory 240,000 100,000Land 100,000 80,000Buildings and Equipment 500,000 150,000Investment in Lane Company Stock 216,000Cost of Goods Sold 160,000 80,000Depreciation and Amortization 25,000 15,000Other Expenses 20,000 10,000Dividends Declared 60,000 35,000Accumulated Depreciation $ 230,000 $ 60,000Accounts Payable 60,000 25,000Bonds Payable 200,000 50,000Common Stock 300,000 100,000Retained Earnings 394,000 140,000Sales 250,000 150,000Income from Subsidiary 38,000 Total $1,472,000 $1,472,000 $525,000 $525,000
b. Journal entries recorded by Prime Company:
(1) Cash 28,000 Investment in Lane Company Stock 28,000 Record dividend from Lane Company: $35,000 x .80
(2) Investment in Lane Company Stock 36,000 Income from Subsidiary 36,000 Record equity-method income: $45,000 x .80
(3) Investment in Lane Company Stock 2,000 Income from Subsidiary 2,000 Recognize portion of gain on sale of equipment: $20,000 / 10 years
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-41A (continued)
c. Eliminating entries, December 31, 20X7:
E(1) Income from Subsidiary 38,000 Dividends Declared 28,000 Investment in Lane Company Stock 10,000 Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 9,000 Dividends Declared 7,000 Noncontrolling Interest 2,000 Assign income to noncontrolling interest: $9,000 = $45,000 x .20
E(3) Common Stock — Lane Company 100,000 Retained Earnings, January 1 140,000 Differential 50,000 Investment in Lane Company Stock 232,000 Noncontrolling Interest 58,000 Eliminate beginning investment balance: $50,000 = ($160,000 + $40,000) – ($50,000 + $100,000) $232,000 = $240,000 - $8,000 $58,000 = ($100,000 + $140,000 + $50,000) x .20
E(4) Goodwill 25,000 Retained Earnings, January 1 20,000 Noncontrolling Interest 5,000 Differential 50,000 Assign differential to goodwill.
E(5) Investment in Lane Company Stock 8,000 Noncontrolling Interest 2,000 Land 10,000 Eliminate unrealized profit on land.
E(6) Buildings and Equipment 5,000 Investment in Lane Company Stock 18,000 Depreciation and Amortization Expense 2,000 Accumulated Depreciation 21,000 Eliminate unrealized profit on equipment.
Accumulated depreciation adjustment: Required balance ($5,000 x 7 years) $35,000 Balance recorded ($7,000 x 2 years) (14,000 ) Required increase $21,000
E(7) Accounts Payable 4,000 Accounts Receivable 4,000 Eliminate intercorporate receivable/payable.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-41A (continued)
d. Prime Company and Lane CompanyConsolidation Workpaper
December 31, 20X7
Prime Lane Eliminations Consol- Item Company Company Debit Credit idated
Sales 250,000 150,000 400,000 Income from Subsidiary 38,000 (1) 38,000 Credits 288,000 150,000 400,000 Cost of Goods Sold 160,000 80,000 240,000 Deprec. and Amortization 25,000 15,000 (6) 2,000 38,000 Other Expenses 20,000 10,000 30,000 Debits (205,000) (105,000) (308,000 )Consolidated Net Income 92,000 Income to Noncon- trolling Interest (2) 9,000 (9,000 )Income, carry forward 83,000 45,000 47,000 2,000 83,000
Ret. Earnings, Jan. 1 394,000 140,000 (3) 140,000 374,000 (4) 20,000
Income, from above 83,000 45,000 47,000 2,000 83,000 477,000 185,000 457,000
Dividends Declared (60,000) (35,000) (1) 28,000 (2) 7,000 (60,000 )
Ret. Earnings, Dec. 31, carry forward 417,000 150,000 207,000 37,000 397,000
Cash and Receivables 151,000 55,000 (7) 4,000 202,000 Inventory 240,000 100,000 340,000 Land 100,000 80,000 (5) 10,000 170,000 Buildings and Equipment 500,000 150,000 (6) 5,000 655,000 Investment in Lane Company Stock 216,000 (5) 8,000 (1) 10,000
(6) 18,000 (3) 232,000Differential (3) 50,000 (4) 50,000Goodwill (4) 25,000 25,000 Debits 1,207,000 385,000 1,392,000
Accum. Depreciation 230,000 60,000 (6) 21,000 311,000 Accounts Payable 60,000 25,000 (7) 4,000 81,000 Bonds Payable 200,000 50,000 250,000 Common Stock 300,000 100,000 (3)100,000 300,000 Retained Earnings, from above 417,000 150,000 207,000 37,000 397,000 Noncontrolling Interest (4) 5,000 (2) 2,000
(5) 2,000 (3) 58,000 53,000 Credits 1,207,000 385,000 424,000 424,000 1,392,000
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-42A Cost Method
a. Journal entry recorded by Prime Company:
Cash 28,000 Dividend Income 28,000 Record dividend from Lane Company.
b. Eliminating entries, December 31, 20X7:
E(1) Dividend Income 28,000 Dividends Declared 28,000 Eliminate dividend income from subsidiary.
E(2) Income to Noncontrolling Interest 9,000 Dividends Declared 7,000 Noncontrolling Interest 2,000 Assign income to noncontrolling interest: $9,000 = $45,000 x .20
E(3) Common Stock — Lane Company 100,000Retained Earnings, January 1 50,000Differential 50,000 Investment in Lane Company Stock 160,000 Noncontrolling Interest 40,000 Eliminate investment balance at date of acquisition: $50,000 = ($160,000 + $40,000) – ($100,000 + $50,000) $40,000 = ($100,000 + $50,000 + $50,000) x .20
E(4) Retained Earnings, January 1 18,000 Noncontrolling Interest 18,000 Assign undistributed prior earnings of subsidiary to noncontrolling interest: ($140,000 - $50,000) x .20
E(5) Goodwill 25,000Retained Earnings, January 1 20,000Noncontrolling Interest 5,000 Differential 50,000 Assign differential at beginning of period.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-42A (continued)
E(6) Retained Earnings, January 1 8,000Noncontrolling Interest 2,000 Land 10,000 Eliminate unrealized profit on land.
E(7) Buildings and Equipment 5,000Retained Earnings, January 1 18,000 Depreciation and Amortization Expense 2,000 Accumulated Depreciation 21,000 Eliminate unrealized profit on equipment.
E(8) Accounts Payable 4,000 Accounts Receivable 4,000 Eliminate intercorporate receivable/payable.
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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
P6-42A (continued)
c. Prime Company and Lane CompanyConsolidation Workpaper
December 31, 20X7
Prime Lane Eliminations Consol- Item Company Company Debit Credit idated
Sales 250,000 150,000 400,000 Dividend Income 28,000 (1) 28,000 Credits 278,000 150,000 400,000 Cost of Goods Sold 160,000 80,000 240,000 Deprec. and Amortization 25,000 15,000 (7) 2,000 38,000 Other Expenses 20,000 10,000 30,000 Debits (205,000) (105,000) (308,000 )Consolidated Net Income 92,000 Income to Noncon- trolling Interest (2) 9,000 (9,000 )Income, carry forward 73,000 45,000 37,000 2,000 83,000
Ret. Earnings, Jan. 1 348,000 140,000 (3) 50,000(4) 18,000(5) 20,000(6) 8,000(7) 18,000 374,000
Income, from above 73,000 45,000 37,000 2,000 83,000 421,000 185,000 457,000
Dividends Declared (60,000) (35,000) (1) 28,000 (2) 7,000 (60,000 )
Ret. Earnings, Dec. 31, carry forward 361,000 150,000 151,000 37,000 397,000
Cash and Receivables 151,000 55,000 (8) 4,000 202,000 Inventory 240,000 100,000 340,000 Land 100,000 80,000 (6) 10,000 170,000 Buildings and Equipment 500,000 150,000 (7) 5,000 655,000 Investment in Lane Company Stock 160,000 (3)160,000Differential (3) 50,000 (5) 50,000Goodwill (5) 25,000 25,000 Debits 1,151,000 385,000 1,392,000
Accum. Depreciation 230,000 60,000 (7) 21,000 311,000 Accounts Payable 60,000 25,000 (8) 4,000 81,000 Bonds Payable 200,000 50,000 250,000 Common Stock 300,000 100,000 (3)100,000 300,000 Retained Earnings, from above 361,000 150,000 151,000 37,000 397,000 Noncontrolling Interest (5) 5,000 (2) 2,000
(6) 2,000 (3) 40,000 (4) 18,000 53,000
Credits 1,151,000 385,000 342,000 342,000 1,392,000
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