Advanced Accounting 11th Edition Solution by Beams - Test Bank

Advanced Accounting 11th Edition Solution by Beams – Test Bank

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Chapter 5

INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES

Answers to Questions

Profits and losses on sales between affiliates are realized for consolidated statement purposes when the purchasing affiliate resells the merchandise to parties outside of the consolidated entity. If all merchandise sold to affiliates is resold to outside parties in the same period, there will be no unrealized profit to eliminate in preparing the consolidated financial statements.

Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits according to GAAP.

The amount of unrealized profit to be eliminated in the preparation of consolidated financial statements is not affected by the existence of a noncontrolling interest. All unrealized profit must be eliminated. In the case of upstream sales, however, the unrealized profit should be allocated between controlling and noncontrolling interests.

The elimination of intercompany sales and purchases does not affect consolidated net income. This is because equal amounts are deducted from sales and cost of sales and the net effect on consolidated net income is nil. The importance of the elimination lies in a correct statement of consolidated sales and cost of sales.

Consolidated working capital is not affected by the elimination of intercompany accounts receivable and accounts payable balances. Since equal amounts are deducted from current assets and current liabilities, the effect on the computation “current assets less current liabilities” is nil.

Upstream sales are sales from subsidiary to parent. Downstream sales are sales from parent to subsidiary. The importance of this designation lies in the fact that the profit or loss on such transactions is the selling affiliate’s profit or loss. In the case of unrealized profit or loss on downstream sales, all the profit or loss is assigned to the parent-seller. But unrealized profit or loss on upstream sales is profit or loss of the subsidiary-seller and is assigned to the parent and noncontrolling interest in relation to their proportionate holdings.

Yes. If unrealized profits are not eliminated at year end, consolidated net income will be overstated in 2011. The ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the beginning inventory will understate consolidated net income in 2012. The analysis of the effect of unrealized inventory profits on consolidated net income is basically the same as the analysis for inventory errors. Like inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting periods. Consolidated net income for 2013 is unaffected.

The noncontrolling interest share is affected by upstream sales if the merchandise has not been resold by the parent to outside parties by the end of the accounting period. This is because the noncontrolling interest share is based on the income of the subsidiary. If the subsidiary has unrealized profit from intercompany sales, its realized income will be less than its reported income. The noncontrolling interest share should be based on the realized income of the subsidiary.

 

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5-1

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5-2 Intercompany Profit Transactions — Inventories

A parent’s investment income and investment accounts are adjusted for unrealized profits on intercompany sales to subsidiaries in accordance with the one-line consolidation concept. The parent reduces its investment and investment income accounts for the full amount of the unrealized profits in the year of intercompany sale. When the goods are sold to outside parties by the subsidiary, the profits of the parent are realized and the parent increases its investment and investment income accounts.

Combined cost of goods sold is overstated when there are unrealized profits in the beginning inventory and understated when there are unrealized profits in the ending inventory. The elimination of unrealized profits in the beginning inventory reduces (credits) cost of goods sold and the elimination of unrealized profits in the ending inventory increases (debits) cost of goods sold.

The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling interest or by the direction of the intercompany sales. All unrealized profit from both upstream and downstream sales is eliminated from consolidated cost of goods sold.

Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is eliminated by reducing (crediting) cost of sales and debiting the investment account if a correct equity method has been used and the intercompany sales are downstream. In the case of upstream sales, cost of sales is credited and the noncontrolling interest and the investment account are debited proportionately. .

There are two equally good approaches for computing noncontrolling interest share when there are unrealized profits from upstream sales in both beginning and ending inventories. One approach is to compute realized income of the subsidiary by adding unrealized profits in the beginning inventory to reported subsidiary net income and deducting unrealized profits in the ending inventory. The noncontrolling interest share is then equal to the realized income of the subsidiary multiplied by the noncontrolling interest percentage.

The other approach is to compute the noncontrolling interest percentage in reported subsidiary net income, in unrealized profits in beginning inventory, and in unrealized profits in ending inventory. Noncontrolling interest share is then computed by adding the noncontrolling interest percentage in unrealized profits in the beginning inventory to the noncontrolling interest share of reported income, and subtracting the noncontrolling interest percentage relating to the unrealized profits in the ending inventory.

The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a convenience, but it does not result in incorrect measurements of consolidated net income as long as the unrealized profits at any statement date are correctly determined. This is because any unrealized profits in beginning inventory that are considered realized are credited to cost of sales. The same items will appear as unrealized profits in the ending inventory if they remain unsold, and the elimination of these items results in debiting cost of sales for the same amount. Thus, the workpaper effects are offsetting as illustrated in the following workpaper entries, which assume $5,000 unrealized profits from downstream sales.

Investment in subsidiary (retained earnings) 5,000
Cost of sales 5,000
To eliminate unrealized profit in beginning inventory.
Cost of sales 5,000
Inventory 5,000
To eliminate unrealized profit in ending inventory.

 

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Chapter 5 5-3
SOLUTIONS TO EXERCISES
Solution E5-1
1 b 5 c
2 d 6 a
3 a 7 a
4 c 8 c

Solution E5-2 [AICPA adapted]

a

c

Unrealized profits from intercompany sales with Ken are eliminated from the ending inventory: $960,000 combined current assets less $36,000 unrealized profit ($180,000 20%).

c

Combined cost of sales of $2,250,000 less $750,000 intercompany sales

Solution 5-3

d

Pil’s separate income (in thousands) $2,000
Add: Share of Sil’s income ($1,000   100%) 1,000
Add: Realization of profit deferred in 2011 1,000
$3,000 – ($3,000/150%)
Less: Unrealized profit in 2012 inventory (800)
$2,400 – ($2,400/150%)
Controlling share of consolidated net income
$3,200
2 d
$2,800
Combined sales
Less: Intercompany sales (100)
Consolidated sales
$2,700
3 c
$1,360
Combined cost of sales
Less: Intercompany purchases (100)
Less: Unrealized profit in beginning inventory (8)
Add: Unrealized profit in ending inventory 20
Consolidated cost of sales
$1,272

 

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5-4 Intercompany Profit Transactions — Inventories

Solution E5-4

1 b $ 96,000
Pid’s share of Sed’s income ($120,000   80%)
Less: Unrealized profit in ending inventory (16,000)
($40,000   50% unsold   80% owned)
Income from Sed $ 80,000

d

Combined cost of sales $ 900,000
Less: Intercompany sales (200,000)
Add: Unrealized profit in ending inventory 20,000
Consolidated cost of sales
$ 720,000
3 b
$ 120,000
Reported income of Sed
Unrealized profit (20,000)
Sed’s realized income
100,000
Noncontrolling interest percentage 20%
Noncontrolling interest share
$ 20,000

Solution E5-5

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

c

Unrealized profit in beginning inventory

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

 

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Chapter 5 5-5

Solution E5-6

1 a $200,000
Pat’s separate income
Add: Income from Sue (below) 144,550
Controlling share of consolidated net income
$344,550
Sue’s reported income $200,000
Less: Patent amortization (20,000)
Add: Unrealized profit in beginning inventory 37,500
[$112,500 – ($112,500/150%)]
Less: Unrealized profit in ending inventory (11,000)
[$33,000 – ($33,000/150%)]
Sue’s adjusted and realized income
$206,500
Pat’s 70% controlling share of Sue’s realized income $144,550
Noncontrolling interest share (30%)
$ 61,950

c

Pac’s share of Slo’s reported net loss

($150,000 loss   60%)$(90,000)Add: Unrealized profit in ending inventory(50,000)($200,000   1/4 unsold)Income from Slo(140,000)Pac’s separate income300,000Controlling share of consolidated net income$160,0003b$300,000San’s reported net incomeAdd: Realized profit in beginning inventory30,000$150,000 – ($150,000/1.25)Less: Deferred profit in ending inventory(40,000)$200,000 – ($200,000/1.25)Income from San$290,000Par’s 75% controlling share of San’s income$217,500Noncontrolling interest share (25%)$ 72,500Solution E5-7(in thousands)201120122013Pan’s separate income$$$9001,2001,050Add: 80% of She’s reported income1,2001,3201,140Add: Realization of profits in90120beginning inventoryLess: Unrealized profits in ending

(90) (120) (60)
Inventory

Controlling share of consolidated NI$2,010$2,490$2,250Noncontrolling interest share3001,500 x 20%1,650 x 20%3301,425 x 20%285Consolidated net income

$2,310 $2,820 $2,535

 

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5-6 Intercompany Profit Transactions — Inventories
Solution E5-8
Pic Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2011
(in thousands) $ 920
Sales ($800 + $200 – $80 intercompany sales)
Cost of sales ($480 – $80 intercompany (420)
purchases + $20 unrealized profit in ending inventory)
Gross profit
500
Other expenses ($200 + $60) (260)
Cnsolidated net income
240
Less: Noncontrolling interest share ($60   20%) (12)
Controlling share of consolidated net income $ 228

Solution E5-9

Noncontrolling interest share

Sev’s reported net income $ 50,000
Add: Intercompany profit from upstream sales in 5,000
beginning inventory
Less: Intercompany profit from upstream sales in (10,000)
ending inventory
Sev’s adjusted and realized income
$ 45,000
Noncontrolling interest share (40%)
$ 18,000
2 Consolidated sales
$1,250,000
Combined sales
Less: Intercompany sales 100,000
Consolidated sales
$1,150,000
Consolidated cost of sales
$ 650,000
Combined cost of sales
Less: Intercompany sales (100,000)
Add: Intercompany profit in ending inventory 10,000
Less: Intercompany profit in beginning inventory (5,000)
Consolidated cost of sales
$ 555,000
Total Consolidated Income
$ 300,000
Combined income
Less: Intercompany profit in ending inventory (10,000)
Add: Intercompany profit in beginning inventory 5,000
Total Consolidated Income
$ 295,000

 

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Chapter 5 5-7

Solution E5-10

Pap Corporation and Subsidiary

Consolidated Income Statement

December 31, 2013

(in thousands)

Sales ($2,000 + $1,000 – $180 intercompany) $2,820
Cost of sales ($800 + $500 – $180 intercompany –
$20 unrealized profit in beginning inventory + $30 (1,130)
unrealized profit in ending inventory
Gross profit
1,690
Depreciation expense (340)
Other expenses ($180 + $120) (300)
Total consolidated income
1,050
Less: Noncontrolling interest share ($300 + $20 profit (58)
in beginning inventory – $30 profit in end. inventory)   20%
Controlling interest share of consolidated net income $ 992
Supporting computations
$ 1,200
Cost of investment in Sak at January 1, 2012
Implied fair value of Sak ($1,200 / 80%)
$ 1,500
Book value of Sak (1,400)
Goodwill
$ 100
Solution E5-11
1 b $ 200,000
Income as reported
Add: Realization of profits in beginning inventory 20,000
$120,000 – ($120,000/1.2)
Less: Unrealized profits in ending inventory (60,000)
$360,000 – ($360,000/1.2)
Realized income
160,000
Percent ownership 60%
Income from Sue
$ 96,000

 

c

Sue’s equity as reported ($3,400,000 + $2,100,000) $5,500,000
Less: Unrealized profit in ending inventory (60,000)
Realized equity
5,440,000
Noncontrolling share 40%
Noncontrolling interest December 31, 2011
$2,176,000
3 b
$5,440,000
Realized equity
Controlling share 60%
Investment balance December 31, 2011
$3,264,000

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

 

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5-8 Intercompany Profit Transactions — Inventories

Solution E5-12

Pul Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2011

Sales ($2,760,000 – $240,000 intercompany sales) $2,520,000
Cost of sales ($1,840,000 – $240,000 – $10,000a + $24,000b) (1,614,000)
Gross profit
906,000
Operating expenses (320,000)
Total consolidated income
586,000
Less: Noncontrolling interest share [$80,000 – ($24,000   .2)] (75,200)
Controlling share of consolidated net income $  510,800

Unrealized profit in beginning inventory (downstream) ($360,000 – $320,000) .25 = $10,000

Unrealized profit in ending inventory (upstream ($240,000 – $180,000) .4 = $24,000

SOLUTIONS TO PROBLEMS

Solution P5-1

Por Corporation and Subsidiary Consolidated Statement of Income and Retained Earnings for the year ended December 31, 2012

Sales ($6,500,000 + $3,250,000 – $400,000 intercompany sales) $9,350,000
Less: Cost of sales ($4,000,000 + $1,950,000 – $400,000 inter-
company purchases – $60,000 unrealized profit in beginning (5,570,000)
inventory + $80,000 unrealized profit in ending inventory)
Gross profit
3,780,000
Other expenses ($1,700,000 + $800,000) (2,500,000)
Consolidated net income
1,280,000
Noncontrolling interest share($500,000+$60,000 – $80,000)   10% (48,000)
Controlling share of consolidated net income 1,232,000
Add: Beginning consolidated retained earnings 1,846,000
Less: Dividends for the year (500,000)
Consolidated retained earnings December 31
$2,578,000

Solution P5-2

Consolidated cost of sales — 2013

Combined cost of sales ($625,000 + $300,000) $ 925,000
Less: Intercompany purchases (300,000)
Add: Profit in ending inventory 24,000
Less: Profit in beginning inventory (12,000)
Consolidated cost of sales
$ 637,000
2 Noncontrolling interest share — 2013
$ 150,000
Sam’s net income ($600,000 – $300,000 – $150,000)
Add: Profit in beginning inventory 12,000
Less: Profit in ending inventory (24,000)
Sam’s realized income
138,000
Noncontrolling interest percentage 10%
Noncontrolling interest share
$ 13,800

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Chapter 5 5-9

 

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5-10 Intercompany Profit Transactions — Inventories

Solution P5-2 (continued)

3 Consolidated Controlling share of NI— 2013 $1,200,000
Consolidated sales ($900,000 + $600,000 – $300,000)
Less: Consolidated cost of sales (637,000)
Less: Consolidated expenses ($225,000 + $150,000) (375,000)
Less: Noncontrolling interest share (13,800)
Controlling share of consolidated net income
$ 174,200
Alternatively,
$ 50,000
Put’s separate income
Add: Income from Sam 124,200
Controlling share of consolidated net income
$ 174,200

Noncontrolling interest at December 31, 2013

Equity of Sam December 31, 2013 $ 520,000
Less: Unrealized profit in ending inventory (24,000)
Noncontrolling interest percentage
10%
Noncontrolling interest December 31
$ 49,600

Solution P5-3

Inventories appearing in consolidated balance sheet at December 31, 2012

Beginning inventory — Pot ($120,000 – $8,000a) $112,000
Beginning inventory — San ($77,500 – $15,500b) 62,000
Beginning inventory — Tay ($48,000 – 0) 48,000
Inventories December 31 $222,000
Intercompany profit:
a Pot: $ 48,000
Inventory acquired intercompany ($120,000   40%)
Cost of intercompany inventory ($48,000/1.2) (40,000)
Unrealized profit in Pot’s inventory
$ 8,000
b San:
$ 77,500
Inventory acquired intercompany ($77,500   100%)
Cost of intercompany inventory ($77,500/1.25) (62,000)
Unrealized profit in San’s inventory
$ 15,500

Inventories appearing in consolidated balance sheet at December 31, 2013

Ending inventory — Pot ($108,000 – $9,000c) $ 99,000
Ending inventory — San ($62,500 – $12,500d) 50,000
Ending inventory — Tay ($72,000 – 0) 72,000
Inventories December 31 $221,000
Intercompany profit:
c Pot: $ 54,000
Inventory acquired intercompany ($108,000   50%)
Cost of intercompany inventory ($54,000/1.2) (45,000)
Unrealized profit in Pot’s inventory
$ 9,000
d San:
$ 62,500
Inventory acquired intercompany ($62,500   100%)
Cost of intercompany inventory ($62,500/1.25) (50,000)
Unrealized profit in San’s inventory
$ 12,500

 

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Chapter 5

Solution P5-4

Pli’s income from Stu

75% of Stu’s net income Unrealized profit in December 31,

2011 inventory (downstream)

($600,000 1/2) 100% Unrealized profit in December 31,

2012 inventory (upstream)

$300,000 75%

Pli’s income from Stu

Pli’s net income Pli’s separate income Add: Income from Stu Pli’s net income

Consolidated net income Separate incomes of Pli and

Stu combined

Unrealized profit in December 31, 2011 inventory

Unrealized profit in December 31, 2012 inventory

Total consolidated income

Less: Noncontrolling interest share 2011 $1,200,000 25%

2012 ($1,350,000 – $300,000)   25%

2011 ($1,050,000 + $300,000) 25% Controlling share of net income

 

5-11

2011 2012 2013

$ 900,000  $1,012,500  $ 787,500

(300,000) 300,000

(225,000)    225,000 $  600,000  $1,087,500  $1,012,500

$5,400,000  $5,100,000  $6,000,000 600,000   1,087,500   1,012,500 $6,000,000  $6,187,500  $7,012,500

$6,600,000  $6,450,000  $7,050,000

(300,000) 300,000

(300,000) 300,000

6,300,000 6,450,000 7,350,000

(300,000)

(262,500)

(337,500)

$6,000,000  $6,187,500  $7,012,500

 

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5-12 Intercompany Profit Transactions — Inventories

Solution P5-5

Pan Corporation and SubsidiaryConsolidation Workpapers

for the year ended December 31, 2012

(in thousands)Adjustments andConsolidatedPan100% SalEliminationsStatementsIncome Statement$800$400a 120$1,080SalesIncome from Sal102d 102Cost of sales400*200*b12a 120472*c20Depreciation expense110*40*150*Other expenses192*60*f6258*Net income$200$100$200Retained Earnings$600600Retained earnings — PanRetained earnings — Sal$380e 380Net income200100200Dividends100*50*d50100*Retained earningsDecember 31$700$430$700Balance Sheet$54$37$91CashReceivables — net9060g17133Inventories10080b12168Other assets7090160Land5050100Buildings — net200150350Equipment — net500400900Investment in Sal736c20d52e 704Patentse24f618$1,800$867$1,920Accounts payable$160$47g17$190Other liabilities34090430Common stock, $10 par600300e 300600Retained earnings700430700$1,800$867$1,920

Supporting computations

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

Sal’s income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patent amortization equals $102,000 income from Sal.

 

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Chapter 5 5-13

Solution P5-6

Pay Corporation and SubsidiaryConsolidation Workpapersfor the year ended December 31, 2012(in thousands)Adjustments andConsolidatedPaySue 75%EliminationsStatementsIncome Statement$1,200$800a 260$1,740SalesIncome from Sue205d 205Cost of sales540*420*b40a 260720*c20Operating expenses290*80*370*Consolidated net income$650Noncontrolling int.sharef7575 *Controlling share of NI$575$300$575Retained Earnings$365$365Retained earnings — PayRetained earnings — Sue$180e 180Controlling share of NI575300575Dividends300*100*d75300*f25Retained earnings$640$380$640December 31Balance Sheet$170$60$230CashAccounts receivable330200g30500Dividends receivable30h30Inventories120160b40240Land160100260Buildings — net460200660Equipment — net400280680Investment in Sue770c20d 130e 660Goodwille 400400$2,440$1,000$2,970Accounts payable$450$200g30$620Dividends payable14040h30150Other liabilities31080390Common stock, $10 par900300e 300900Retained earnings640380640$2,440$1,000Noncontrolling interest January 1e 220Noncontrolling interest December 31f50270*   Deduct$2,970Supporting computations$600,000Investment in Sue at January 1, 2011Implied fair value of Sue ($600,000 / 75%)

$800,000

Book value of Sue400,000Goodwill$400,000

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5-14 Intercompany Profit Transactions — Inventories

Solution P5-7Preliminary computations

$2,700,000
Investment cost
Implied fair value of San
$3,000,000

Less: Book value of San2,500,000Patents$500,000Patent amortization$500,000/10 years = $50,000 per yearUpstream salesUnrealized profit in December 31, 2011 inventory of Pol

$280,000 – ($280,000   1.4) = $80,000

inventory of PolUnrealized profit in December 31, 2012$420,000 – ($420,000   1.4) = $120,000

Income from San $1,000,000
San’s reported net income
Less: Patent amortization (50,000)
Less: Unrealized profit in ending inventory (120,000)
Add: Unrealized profit in beginning inventory 80,000
San’s adjusted and realized income
$ 910,000
Pol’s 90% controlling share of San’s income $ 819,000
10% noncontrolling interest share of San’s income
$ 91,000

Investment balance

$2,700,000
Initial investment cost
Increase in San’s net assets from December 31, 2010 630,000
to December 31, 2012 ($700,000   90%)
Patent amortization for 2 years (90%) ( 90,000)
Unrealized profit in December 31, 2012 inventory (108,000)
Investment balance December 31, 2012
$3,132,000

 

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Chapter 5 5-15

Solution P5-7 (continued)

Pol Corporation and Subsidiary

Consolidation Workpapers

for the year ended December 31, 2012

(in thousands)

PolSan 90%Adjustments andConsolidatedEliminationsStatementsIncome Statement$8,190$5,600a 5,600$8,190SalesIncome from San819d819Cost of sales5,460*4,000*b120a 5,6003,900*c80Other expenses1,544*600*f502,194*Consolidated net income$2,096Noncontrolling int.shareh9191*Controlling share of NI$2,005$1,000$2,005Retained Earnings$1,200$1,200Retained earnings — PolRetained earnings — San$700e700Controlling share of NI2,0051,0002,005Dividends1,000*500*d4501,000*h50Retained earningsDecember 31$2,205$1,200$2,205Balance Sheet$753$500$1,253CashInventory420800b1201,100Other current assets600200g100700Plant assets — net3,0003,0006,000Investment in San3,132c72d369e 2,835Patentse450f50400$7,905$4,500$9,453Current liabilities$1,700$1,300g100$2,900Capital stock4,0002,000e 2,0004,000Retained earnings2,2051,2002,205$7,905$4,500Noncontrolling interest January 1c8e315Noncontrolling interest December 31h41348$9,453

Deduct

 

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5-16 Intercompany Profit Transactions — Inventories

Solution P5-8

Pan Corporation and Subsidiary

Consolidation Workpapers

for the year ended December 31, 2012

(in thousands)

Pan100%Adjustments andConsolidatedSalEliminationsStatementsIncome Statement$800$400a 120$1,080SalesIncome from Sal108d 108Cost of sales400*200*b12a 120472*c20Depreciation expense110*40*150*Other expenses192*60*252*Net income$206$100$206Retained Earnings$606606Retained earnings — PanRetained earnings — Sal$380e 380Net income206100206Dividends100*50*d50100*Retained earningsDecember 31$712$430$712Balance Sheet$54$37$91CashReceivables — net9060f17133Inventories10080b12168Other assets7090160Land5050100Buildings — net200150350Equipment — net500400900Investment in Sal748c20d58e 710Goodwille3030$1,812$867$1,932Accounts payable$160$47f17$190Other liabilities34090430Common stock, $10 par600300e 300600Retained earnings712430712$1,812$867$1,932

Supporting computations

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

Sal’s income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory equals Income from Sal $108,000.

 

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Chapter 5 5-17
Solution P5-9
Preliminary computations $2,700,000
Investment cost
Implied fair value of San ($2,700,000 / 90%)
$3,000,000
Less: Book value of San 2,500,000
Goodwill
$ 500,000
Upstream sales
Unrealized profit in December 31, 2013 inventory of Poe
$280,000 – ($280,000   1.4) = $80,000

inventory of PoeUnrealized profit in December 31, 2014

$420,000 – ($420,000   1.4) = $120,000
Income from San $1,000,000
San’s reported net income
Less: Unrealized profit in ending inventory (120,000)
Add: Unrealized profit in beginning inventory 80,000
San’s adjusted and realized income
$ 960,000
Poe’s 90% controlling interest share of San’s income $ 864,000
10% noncontrolling interest share of San’s income
$ 96,000
Investment balance
$2,700,000
Initial investment cost
Increase in San’s net assets from December 31, 2011 630,000
to December 31, 2014 ($700,000   90%)
Unrealized profit in December 31, 2014 inventory (90%) (108,000)
Investment balance December 31, 2014
$3,222,000

 

©2011 Pearson Education, Inc. publishing as Prentice Hall

HYPERLINK “http://www.downloadslide.com” 

5-18Intercompany Profit Transactions — InventoriesSolution P5-10 (continued)Poe Corporation and SubsidiaryConsolidation Workpapers

for the year ended December 31, 2014

(in thousands)Adjustments andConsolidatedPoeSan 90%EliminationsStatementsIncome Statement$8,190$5,600a 5,600$8,190SalesIncome from San864d864Cost of sales5,460*4,000*b120a 5,6003,900*c80Other expenses1,544*600*2,144*Consolidated net income$2,146Noncontrolling int.sharef9696*Controlling share of NI$2,050$1,000$2,050Retained Earnings$1,250$1,250Retained earnings — PoRetained earnings — San$700e700Controlling share of NI2,0501,0002,050Dividends1,000*500*d4501,000*f50Retained earningsDecember 31$2,300$1,200$2,300Balance Sheet$758$500$1,258CashInventory420800b1201,100Other current assets600200g100700Plant assets — net3,0003,0006,000Investment in San3,222c72d414e 2,880Goodwille500500$8,000$4,500$9,558Current liabilities$1,700$1,300g100$2,900Capital stock4,0002,000e 2,0004,000Retained earnings2,3001,2002,300$8,000$4,500Noncontrolling interest January 1c8e320Noncontrolling interest December 31f46358*   Deduct$9,558

©2011 Pearson Education, Inc. publishing as Prentice Hall

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