Chapter 5
109
Chapter 5
INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES
Answers to Questions
1
Profits and losses on sales between affiliated companies 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.
2
Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory
profits according to ARB No. 51.
3
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 majority and
noncontrolling interests.
4
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.
5
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.
6
Upstream sales are sales from subsidiary to parent company. Downstream sales are sales from parent
company 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 company-seller. But unrealized profit or loss on
upstream sales is profit or loss of the subsidiary-seller and is assigned to the parent company and
noncontrolling interest in relation to their proportionate holdings.
7
Yes. If unrealized profits are not eliminated at year end, consolidated net income will be overstated. 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. 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 2008 is not affected.
8
The noncontrolling interest expense is affected by upstream sales if the merchandise has not been resold by
the parent company to outside parties by the end of the accounting period. This is because the
noncontrolling interest expense 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 expense should be based on the realized income of the subsidiary.
9
A parent company'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
company 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
109
Intercompany Profit Transactions — Inventories
110
profits of the parent company are realized and the parent company increases its investment and investment
income accounts.
10
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.
11
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.
12
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.
When the parent company does not adjust its investment account for unrealized profits from intercompany
sales, the above debits to the investment account would be to retained earnings.
13
There are two equally good approaches for computing noncontrolling interest expense 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 expense 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 expense 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.
14
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 working paper effects are offsetting as illustrated in
the following working paper entries, which assume $5,000 unrealized profits from downstream sales.
Investment in subsidiary (retained earnings)
Cost of sales
To eliminate unrealized profit in beginning inventory.
5,000
Cost of sales
5,000
Inventory
To eliminate unrealized profit in ending inventory.
110
5,000
5,000
Chapter 5
111
SOLUTIONS TO EXERCISES
Solution E5-1
1
2
3
4
a
d
a
c
5
6
7
8
c
a
a
c
Solution E5-2 [AICPA adapted]
1
a
2
c
Unrealized profits from intercompany sales with Kent are eliminated from
the ending inventory: $320,000 combined current assets less $12,000
unrealized profit ($60,000  20%).
3
c
Combined cost of sales of $750,000 less $250,000 intercompany sales
Solution 5-3
1
2
3
d
Philly's separate income
Add: Share of Silvio's income ($500,000  100%)
Add: Realization of profit deferred in 2006
$1,500,000 - ($1,500,000/150%)
Less: Unrealized profit in 2007 inventory
$1,200,000 - ($1,200,000/150%)
Consolidated net income
d
Combined sales
Less: Intercompany sales
Consolidated sales
$1,000,000
500,000
500,000
(400,000)
$1,600,000
$1,400,000
(50,000)
$1,350,000
c
Combined cost of sales
Less: Intercompany purchases
$
Less: Unrealized profit in beginning inventory
Add: Unrealized profit in ending inventory
Consolidated cost of sales
111
$
680,000
(50,000)
(4,000)
10,000
636,000
Intercompany Profit Transactions — Inventories
112
Solution E5-4
1
2
3
b
Pride's share of Sedita's income ($60,000  80%)
Less: Unrealized profit in ending inventory
($20,000  50% unsold  80% owned)
Income from Sedita
d
Combined cost of sales
Less: Intercompany sales
Add: Unrealized profit in ending inventory
Consolidated cost of sales
b
Reported income of Sedita
Unrealized profit
Sedita's realized income
Noncontrolling interest percentage
Noncontrolling interest expense
$
48,000
$
(8,000)
40,000
$
450,000
(100,000)
10,000
$ 360,000
$
$
60,000
(10,000)
50,000
20%
10,000
Solution E5-5
1
2
3
c
Combined sales
Less: Intercompany sales
Consolidated sales
$1,800,000
(400,000)
$1,400,000
c
Unrealized profit in beginning inventory
$100,000 - ($100,000/125%)
$
20,000
Unrealized profit in ending inventory
$125,000 - ($125,000/125%)
$
25,000
b
Combined cost of goods sold
Less: Intercompany sales
Less: Unrealized profit in beginning inventory
$100,000 - ($100,000/125%)
Add: Unrealized profit in ending inventory
$125,000 - ($125,000/125%)
Consolidated cost of goods sold
112
$1,440,000
(400,000)
(20,000)
25,000
$1,045,000
Chapter 5
113
Solution E5-6
1
a
Patti's separate income
Add: Income from Susan:
Share of Susan's reported income ($200,000  70%)
Less: Patents amortization
Add: Unrealized profit in beginning inventory
[$112,500 - ($112,500/150%)]  70%
Less: Unrealized profit in ending inventory
[$33,000 - ($33,000/150%)]  70%
Consolidated net income
$200,000
140,000
(20,000)
26,250
(7,700)
$338,550
Noncontrolling interest expense:
Susan's reported income
Add: Unrealized profit in beginning inventory
Less: Unrealized profit in ending inventory
Susan's realized income
Noncontrolling interest percentage
Noncontrolling interest expense
2
3
$200,000
37,500
(11,000)
226,500
30%
$ 67,950
c
Packman's share of Slocum's reported net loss
($150,000 loss  60%)
Add: Unrealized profit in ending inventory
($200,000  1/4 unsold)
Income from Slocum
Packman's separate income
Consolidated net income
$(90,000)
(50,000)
(140,000)
300,000
$160,000
b
Parnell's share of Santini's income ($300,000  75%)
Add: Realized profit in beginning inventory
$150,000 - ($150,000/1.25)  75%
Less: Deferred profit in ending inventory
$200,000 - ($200,000/1.25)  75%
Income from Santini
$225,000
22,500
(30,000)
$217,500
Solution E5-7
Pansy's separate income
Add: 80% of Sheridan's reported income
Add: Realization of profits in
beginning inventory
Less: Unrealized profits in ending
inventory
Consolidated net income
113
2007
$300,000
400,000
(30,000)
$670,000
2008
$400,000
440,000
2009
$350,000
380,000
30,000
40,000
(40,000)
$830,000
(20,000)
$750,000
Intercompany Profit Transactions — Inventories
114
Solution E5-8
Pycus Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2009
Sales ($400,000 + $100,000 - $40,000 intercompany sales)
$
Cost of sales ($200,000 + $60,000 - $40,000 intercompany
purchases + $10,000 unrealized profit in ending inventory)
460,000
(230,000)
Gross profit
230,000
Other expenses ($100,000 + $30,000)
(130,000)
Total consolidated income
100,000
(2,000)
Less: Noncontrolling interest expense ($10,000  20%)
Consolidated net income
$
98,000
$
20,000
Solution E5-9
1
Noncontrolling interest expense
Seven's reported net income  40%
Add: Intercompany profit from upstream sales in
beginning inventory ($5,000  40%)
Less: Intercompany profit from upstream sales in
ending inventory ($10,000  40%)
Noncontrolling interest expense
2
2,000
$
(4,000)
18,000
Consolidated sales
Combined sales
Less: Intercompany sales
Consolidated sales
$1,250,000
100,000
$1,150,000
Consolidated cost of sales
Combined cost of sales
Less: Intercompany sales
Add: Intercompany profit in ending inventory
Less: Intercompany profit in beginning inventory
Consolidated cost of sales
Total Consolidated Income
Combined income
Less: Intercompany profit in ending inventory
Add: Intercompany profit in beginning inventory
Total Consolidated Income
114
$
650,000
(100,000)
10,000
(5,000)
$
555,000
$
300,000
(10,000)
5,000
295,000
$
Chapter 5
115
Solution E5-10
Papillion Corporation and Subsidiary
Consolidated Income Statement
December 31, 2011
Sales ($1,000,000 + $500,000 - $90,000 intercompany)
$1,410,000
Cost of sales ($400,000 + $250,000 - $90,000 intercompany $10,000 unrealized profit in beginning inventory + $15,000
unrealized profit in ending inventory
Gross profit
(565,000)
845,000
Depreciation expense
(170,000)
Other expenses ($90,000 + $60,000 + $4,000 patents amortization)
(154,000)
Total consolidated income
521,000
Less: Noncontrolling interest expense ($150,000 + $10,000 profit
in beginning inventory - $15,000 profit in end. inventory)  20%
(29,000)
Consolidated net income
$
Supporting computations
Cost of investment in Saiki at January 1, 2007
Book value acquired ($700,000  80%)
Patents
Patents amortization ($40,000/10 years) = $4,000 per year
492,000
$
600,000
(560,000)
$
40,000
Solution E5-11
Pill Corporation and Subsidiary
Consolidated Income Statement
December 31, 2011
Sales ($1,000,000 + $500,000 - $90,000 intercompany)
$1,410,000
Cost of sales ($400,000 + $250,000 - $90,000 intercompany $10,000 unrealized profit in beginning inventory + $15,000
unrealized profit in ending inventory
(565,000)
Gross profit
845,000
Depreciation expense
(170,000)
Other expenses ($90,000 + $60,000)
(150,000)
Total consolidated income
525,000
Less: Noncontrolling interest income ($150,000 + $10,000 profit
in beginning inventory - $15,000 profit in end. inventory)  20%
(29,000)
Consolidated net income
$
Supporting computations
Cost of investment in Saiki at January 1, 2010
Book value acquired ($700,000  80%)
Goodwill
115
$
496,000
600,000
(560,000)
$
40,000
Intercompany Profit Transactions — Inventories
116
Solution E5-12
1
2
3
b
Income as reported
Add: Realization of profits in beginning inventory
$120,000 - ($120,000/1.2)
Less: Unrealized profits in ending inventory
$360,000 - ($360,000/1.2)
Realized income
Percent ownership
Income from Suey
$
200,000
20,000
$
(60,000)
160,000
60%
96,000
c
Suey's equity as reported ($3,400,000 + $2,100,000)
Less: Unrealized profit in ending inventory
Realized equity
Noncontrolling share
Noncontrolling interest December 31, 2011
$5,500,000
(60,000)
5,440,000
40%
$2,176,000
b
Realized equity
Majority share
Investment balance December 31, 2011
$5,440,000
60%
$3,264,000
Note: The excess cost 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.
Solution E5-13 [AICPA adapted]
1
d
Combined revenues $340,000 - consolidated revenues $308,000
2
b
Combined accounts receivable $45,000 - $39,000 consolidated accounts
receivable
3
c
Revenues $200,000/$150,000 cost of sales = 1 1/3 markup on cost
Amount of Spin's ending inventory from Pard ($32,000 intercompany sales
 3/8 remaining unsold) = $12,000 at billed prices  3/4 = $9,000
4
b
$10,000 noncontrolling interest/$50,000 stockholders' equity of Spin
5
a
$30,000 unamortized patents/$2,000 amortization = 15 years remaining
116
Chapter 5
117
Solution E5-14
Pullen Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2006
Sales ($1,380,000 - $120,000 intercompany sales)
$1,260,000
Cost of sales ($920,000 - $120,000 - $5,000a + $12,000b)
(807,000)
Gross profit
453,000
Operating expenses
(160,000)
Total consolidated income
293,000
(37,600)
Less: Noncontrolling interest expense [$40,000 - ($12,000  .2)]
Consolidated net income
a
b
$
255,400
Unrealized profit in beginning inventory (downstream) ($180,000 - $160,000)  .25 =
$5,000
Unrealized profit in ending inventory (upstream ($120,000 - $90,000)  .4 = $12,000
SOLUTIONS TO PROBLEMS
Solution P5-1
Proctor Corporation and Subsidiary
Consolidated Statement of Income and Retained Earnings
for the year ended December 31, 2008
Sales ($1,300,000 + $650,000 - $80,000 intercompany sales)
$1,870,000
Less: Cost of sales ($800,000 + $390,000 - $80,000 intercompany purchases - $12,000 unrealized profit in beginning
inventory + $16,000 unrealized profit in ending inventory)
(1,114,000)
Gross profit
756,000
Other expenses ($340,000 + $160,000)
(500,000
Income before noncontrolling interest
256,000
(9,600)
Noncontrolling interest expense($100,000+$12,000 - $16,000)  10%
Consolidated net income
246,400
Add: Beginning consolidated retained earnings
369,200
Less: Dividends for 2008
(100,000)
Consolidated retained earnings December 31, 2008
117
$
515,600
Intercompany Profit Transactions — Inventories
118
Solution P5-2
1
Consolidated cost of sales — 2007
Combined cost of sales ($625,000 + $300,000)
Less: Intercompany purchases
Add: Profit in ending inventory
Less: Profit in beginning inventory
Consolidated cost of sales
2
Noncontrolling interest expense
$
637,000
$
150,000
12,000
(24,000)
138,000
10%
$
13,800
Consolidated net income — 2007
Consolidated sales ($900,000 + $600,000 - $300,000)
Less: Consolidated cost of sales
Less: Consolidated expenses ($225,000 + $150,000)
Less: Noncontrolling interest expense
Consolidated net income
Alternatively,
Putt's separate income
Add: Income from Slam
Consolidated net income
4
925,000
(300,000)
24,000
(12,000)
Noncontrolling interest expense — 2007
Slam's net income ($600,000 - $300,000 - $150,000)
Add: Profit in beginning inventory
Less: Profit in ending inventory
Slam's realized income
Noncontrolling interest percentage
3
$
$1,200,000
(637,000)
(375,000)
(13,800)
$
174,200
$
50,000
124,200
$
174,200
$
520,000
(24,000)
496,000
10%
$
49,600
Noncontrolling interest at December 31, 2007
Equity of Slam December 31, 2007
Less: Unrealized profit in ending inventory
Noncontrolling interest percentage
Noncontrolling interest December 31, 2007
118
Chapter 5
119
Solution P5-3
1
Inventories appearing in consolidated balance sheet at December 31, 2007
Beginning inventory — Potter ($60,000 - $4,000a)
Beginning inventory — Scan ($38,750 - $7,750b)
Beginning inventory — Tray ($24,000 - 0)
Inventories December 31, 2007
$ 56,000
31,000
24,000
$111,000
Intercompany profit:
a
b
2
Potter:
Inventory acquired intercompany ($60,000  40%)
Cost of intercompany inventory ($24,000/1.2)
Unrealized profit in Potter's inventory
$ 24,000
(20,000)
$ 4,000
Scan:
Inventory acquired intercompany ($38,750  100%)
Cost of intercompany inventory ($38,750/1.25)
Unrealized profit in Scan's inventory
$ 38,750
(31,000)
$ 7,750
Inventories appearing in consolidated balance sheet at December 31, 2008
Ending inventory — Potter ($54,000 - $4,500c)
Ending inventory — Scan ($31,250 - $6,250d)
Ending inventory — Tray ($36,000 - 0)
Inventories December 31, 2008
$ 49,500
25,000
36,000
$110,500
Intercompany profit:
c
d
Potter:
Inventory acquired intercompany ($54,000  50%)
Cost of intercompany inventory ($27,000/1.2)
Unrealized profit in Potter's inventory
$ 27,000
(22,500)
$ 4,500
Scan:
Inventory acquired intercompany ($31,250  100%)
Cost of intercompany inventory ($31,250/1.25)
Unrealized profit in Scan's inventory
$ 31,250
(25,000)
$ 6,250
119
Intercompany Profit Transactions — Inventories
120
Solution P5-4
1
Plier's income from Stuff
2007
75% of Stuff's net income
$
Unrealized profit in December 31,
2007 inventory (downstream)
($200,000  1/2)  100%
300,000 $
(100,000)
Unrealized profit in December 31,
2008 inventory (upstream)
$100,000  75%
Plier's income from Stuff
2
337,500 $
200,000 $
2009
262,500
100,000
(75,000)
$
362,500 $
75,000
337,500
Plier's net income
Plier's separate income
$1,800,000 $1,700,000 $2,000,000
Add: Income from Stuff
200,000
Plier's net income
3
2008
362,500
337,500
$2,000,000 $2,062,500 $2,337,500
Consolidated net income
Separate incomes of Plier and
Stuff combined
$2,200,000 $2,150,000 $2,350,000
Unrealized profit in December 31,
2007 inventory
(100,000)
Unrealized profit in December 31,
2008 inventory
Total income
100,000
(100,000)
2,100,000 2,150,000
Less: Noncontrolling interest expense
2007 $400,000  25%
2008 ($450,000 - $100,000)
 25%
2009 ($350,000 + $100,000)
 25%
Consolidated net income
100,000
2,450,000
(100,000)
(87,500)
(112,500)
$2,000,000 $2,062,500 $2,337,500
120
Chapter 5
121
Solution P5-5
Pane Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2007
Pane
Income Statement
Sales
Income from Seal
Cost of sales
$
800,000 $ 400,000
102,000
400,000*
200,000*
a 120,000
d 102,000
b 12,000
f
Depreciation expense
Other expenses
Net income
$
110,000*
40,000*
192,000*
60,000*
200,000 $ 100,000
Retained Earnings
Retained earnings — Pane
$
600,000
$
700,000
Balance Sheet
Cash
$
54,000
90,000
200,000
100,000*
Buildings — net
Equipment — net
Investment in Seal
a 120,000
c 20,000
472,000*
$
150,000*
258,000*
200,000
e 380,000
d
$
37,000
60,000
80,000
90,000
50,000
150,000
500,000
400,000
736,000
200,000
100,000*
50,000
$ 430,000
Patents
Accounts payable
Other liabilities
Common stock, $10 par
Retained earnings
$1,080,000
6,000
100,000
50,000*
100,000
70,000
50,000
200,000
$1,800,000
Consolidated
Statements
600,000
$ 380,000
Retained earnings — Seal
Net income
Dividends
Retained earnings
December 31
Receivables — net
Inventories
Other assets
Land
Adjustments and
Eliminations
100% Seal
g
17,000
b
12,000
$
700,000
$
91,000
133,000
168,000
160,000
100,000
350,000
900,000
c
20,000
e
24,000
d 52,000
e 704,000
f
6,000
$ 867,000
$
160,000 $ 47,000
g 17,000
340,000
90,000
600,000
300,000
e 300,000
700,000
430,000
$1,800,000 $ 867,000
18,000
$1,920,000
$
190,000
430,000
600,000
700,000
$1,920,000
Supporting computations
Unrealized profit in beginning inventory ($40,000  1/2) = $20,000
Unrealized profit in ending inventory ($48,000  1/4) = $12,000
Seal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000
profit in ending inventory, and less $6,000 patents amortization equals $102,000
income from Seal.
121
Intercompany Profit Transactions — Inventories
122
Solution P5-6
Patty Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2008
Patty
Income Statement
Sales
Income from Sue
Cost of sales
$
Adjustments and
Eliminations
Sue 75%
600,000 $ 400,000
102,500
270,000*
210,000*
$
a 130,000
c 10,000
870,000
360,000*
Operating expenses
Noncontrolling int.expense
Net income
$
287,500 $ 150,000
$
185,000*
37,500*
287,500
Retained Earnings
Retained earnings — Patty
182,500
$
182,500
$
Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land
40,000*
f
$
Retained earnings — Sue
Net income
Dividends
Retained earnings
December 31
145,000*
a 130,000
d 102,500
b 20,000
Consolidated
Statements
287,500
150,000*
90,000
320,000 $ 190,000
$
85,000 $ 30,000
165,000
100,000
15,000
60,000
80,000
80,000
50,000
230,000
100,000
200,000
Equipment — net
Investment in Sue
g
h
b
37,500
12,500
150,000*
$
320,000
$
115,000
250,000
15,000
15,000
20,000
120,000
130,000
330,000
340,000
c
10,000
d 65,000
e 330,000
$1,220,000 $ 500,000
e 150,000
150,000
$1,435,000
$
$
225,000 $ 100,000
g 15,000
70,000
20,000
h 15,000
155,000
40,000
450,000
150,000
e 150,000
320,000
190,000
$1,220,000 $ 500,000
Noncontrolling interest January 1
Noncontrolling interest December 31
*
287,500
d
f
140,000
385,000
Goodwill
Accounts payable
Dividends payable
Other liabilities
Common stock, $10 par
Retained earnings
90,000
150,000
50,000*
$
Buildings — net
e
37,500
e
f
60,000
25,000
310,000
75,000
195,000
450,000
320,000
85,000
$1,435,000
Deduct
Supporting computations
Investment in Sue at January 1, 2007
Book value acquired ($200,000  75%)
Goodwill
$300,000
150,000
$150,000
122
Chapter 5
123
Solution P5-7
Preliminary computations
Investment cost
Less: Book value acquired ($250,000  90%)
Patents
Patents amortization
$275,000
225,000
$ 50,000
$50,000/10 years = $5,000 per year
Upstream sales
Unrealized profit in December 31, 2006 inventory of Poly
$28,000 - ($28,000  1.4) = $8,000
Unrealized profit in December 31, 2007 inventory of Poly
$42,000 - ($42,000  1.4) = $12,000
Income from Susan
Share of Susan's reported income ($100,000  90%)
Less: Patents amortization
Less: Unrealized profit in ending inventory ($12,000  90%)
Add: Unrealized profit in beginning inventory ($8,000  90%)
Income from Susan
$ 90,000
(5,000)
(10,800)
7,200
$ 81,400
Investment balance
Initial investment cost
Increase in Susan's net assets from December 31, 2004
to December 31, 2007 ($70,000  90%)
Patent amortization for 3 years
Unrealized profit in December 31, 2007 inventory
Investment balance December 31, 2007
$275,000
63,000
(15,000)
(10,800)
$312,200
Noncontrolling interest expense
Reported income of Susan
Add: Unrealized profit in beginning inventory
Less: Unrealized profit in ending inventory
Susan's realized income
Noncontrolling interest percentage
Noncontrolling interest expense
123
$100,000
8,000
(12,000)
96,000
10%
$ 9,600
Intercompany Profit Transactions — Inventories
124
Solution P5-7 (continued)
Poly Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2007
Poly
Income Statement
Sales
Income from Susan
Cost of sales
$ 819,000
$ 560,000
81,400
546,000*
400,000*
Other expenses
154,400*
60,000*
Noncontrolling int.expense
Net income
$ 200,000
$ 100,000
Retained Earnings
Retained earnings — Poly
Balance Sheet
Cash
Inventory
Other current assets
Plant assets — net
Investment in Susan
200,000
100,000*
5,000
9,600
e
70,000
$ 819,000
a 560,000
c
8,000
390,000*
219,400*
9,600*
$ 200,000
70,000
200,000
100,000
50,000*
d
h
45,000
5,000
100,000*
$ 220,000
$ 120,000
$ 220,000
$
$
$ 125,800
110,000
70,000
600,000
75,800
42,000
60,000
300,000
50,000
80,000
20,000
300,000
312,200
$ 790,000
b
g
c
7,200
e
40,000
12,000
10,000
d 36,400
e 283,000
f
5,000
$ 450,000
$ 170,000
$ 130,000
g 10,000
400,000
200,000
e 200,000
220,000
120,000
$ 790,000
$ 450,000
Noncontrolling interest January 1
Noncontrolling interest December 31
*
f
h
Consolidated
Statements
$ 120,000
$
Patents
Current liabilities
Capital stock
Retained earnings
a 560,000
d 81,400
b 12,000
$ 120,000
Retained earnings — Susan
Net income
Dividends
Retained earnings
December 31
Adjustments and
Eliminations
Susan 90%
c
Deduct
124
800
35,000
$ 940,800
$ 290,000
400,000
220,000
e
h
27,000
4,600
30,800
$ 940,800
Chapter 5
125
Solution P5-8
1
Entries to correct Phil's income from Sert and investment accounts
Retained earnings January 1, 2011
4,500
Investment in Sert
4,500
To adjust beginning retained earnings and beginning investment
accounts for unrealized profit in the December 31, 2010 inventory
($5,000  90%).
Investment in Sert
4,500
Income from Sert
4,500
To recognize intercompany profit in the December 31, 2010
inventory of goods acquired from Sert ($5,000  90%).
Income from Sert
4,000
Investment in Sert
4,000
To eliminate intercompany profit in the December 31, 2011
inventory.
Working paper entries in general journal form:
a
b
Noncontrolling interest
Investment in Sert
Cost of sales
500
4,500
5,000
Sales
10,000
Cost of sales
c
d
e
f
g
10,000
Cost of sales
Inventory
4,000
4,000
Income from Sert
Dividends
Investment in Sert
27,500
Capital stock — Sert
Retained earnings — Sert
Investment in Sert
Noncontrolling interest
80,000
40,000
Accounts payable
Accounts receivable
10,000
18,000
9,500
108,000
12,000
10,000
Noncontrolling interest expense
Dividends
Noncontrolling interest
3,500
2,000
1,500
125
Intercompany Profit Transactions — Inventories
126
Solution P5-8 (continued)
2
Phil Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2011
Phil
Income Statement
Sales
Income from Sert
Cost of sales
$ 500,000
$ 100,000
27,500
240,000*
40,000*
Other expenses
174,000*
Noncontr.int.expense
Net income
$ 113,500
$
Retained Earnings
Retained earnings —
Phil
Balance Sheet
Cash
Inventories
Accounts receivable
g
5,000
10,000
269,000*
204,000*
3,500*
$ 113,500
3,500
$ 105,500
40,000
e 40,000
113,500
30,000
20,000*
$ 149,000
$
50,000
$
$
30,000
15,000
20,000
105,000
113,000
$ 496,000
d
g
18,000
2,000
$
c
f
4,500
4,000
10,000
93,000
71,000
50,000
325,000
d
9,500
e 108,000
$ 170,000
$ 539,000
$
47,000
$ 40,000
f 10,000
300,000
80,000
e 80,000
149,000
50,000
$ 496,000
$ 170,000
a
500
$
e
g
12,000
1,500
Deduct
Noncontrolling interest expense: ($30,000 + $5,000)  10%
126
70,000*
$ 149,000
a
Noncontrolling interest January 1
Noncontrolling interest December 31
*
a
b
30,000
113,500
70,000*
63,000
60,000
40,000
220,000
Consolidated
Statements
$ 590,000
30,000*
$
Plant assets — net
Investment in Sert
Accounts payable
Capital stock
Retained earnings
b 10,000
d 27,500
c 4,000
$ 105,500
Retained earnings —
Sert
Net income
Dividends
Retained earnings
December 31
Adjustments and
Eliminations
Sert 90%
77,000
300,000
149,000
13,000
$ 539,000
Chapter 5
127
Solution P5-9
Pan Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2007
100%
Sal
Pan
Income Statement
Sales
Income from Sal
Cost of sales
$
800,000
108,000
400,000*
Depreciation expense
Other expenses
Net income
$
110,000*
192,000*
206,000
Retained Earnings
Retained earnings — Pan
$
606,000
$
$
400,000
a 120,000
d 108,000
200,000* b 12,000
$
380,000
$
712,000
$
430,000
Balance Sheet
Cash
$
54,000
90,000
$
37,000
60,000
Equipment — net
Investment in Sal
100,000
70,000
50,000
200,000
80,000
90,000
50,000
150,000
500,000
400,000
748,000
$1,812,000
$
867,000
$
$
47,000
90,000
300,000
430,000
867,000
160,000
340,000
600,000
712,000
$1,812,000
472,000*
$
150,000*
252,000*
206,000
e 380,000
100,000
50,000*
Goodwill
Accounts payable
Other liabilities
Common stock, $10 par
Retained earnings
a 120,000
c 20,000
606,000
206,000
100,000*
Buildings — net
Consolidated
Statements
$1,080,000
40,000*
60,000*
100,000
Retained earnings — Sal
Net income
Dividends
Retained earnings
December 31
Receivables — net
Inventories
Other assets
Land
Adjustments and
Eliminations
$
d
206,000
100,000*
50,000
f
17,000
b
12,000
$
712,000
$
91,000
133,000
168,000
160,000
100,000
350,000
900,000
c
20,000
d 58,000
e 710,000
e
30,000
30,000
$1,932,000
f
17,000
$
e 300,000
190,000
430,000
600,000
712,000
$1,932,000
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.
127
Intercompany Profit Transactions — Inventories
128
Solution P5-10
Pat Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2008
Pat
Income Statement
Sales
Income from Sun
Cost of sales
$
Operating expenses
Noncontrolling int.expense
Net income
$
Retained Earnings
Retained earnings — Pat
Retained earnings — Sun
Net income
Dividends
Retained earnings
December 31
Balance Sheet
Cash
Accounts receivable
Dividends receivable
Inventories
Land
Buildings — net
Equipment — net
Investment in Sun
$
600,000
92,500
270,000*
$
145,000*
277,500
$
400,000
a 130,000
d 92,500
210,000* b 20,000
40,000* f
i
150,000
10,000
37,500
$
90,000
e
150,000
50,000*
90,000
277,500
150,000*
$
300,000
$
190,000
$
85,000
165,000
15,000
60,000
80,000
230,000
200,000
365,000
$
30,000
100,000
d
i
10,000
e 140,000
$1,200,000
$
500,000
$
$
100,000
g 15,000
20,000
h 15,000
40,000
150,000
e 150,000
190,000
500,000
225,000
70,000
155,000
450,000
300,000
$1,200,000
$
870,000
360,000*
$
195,000*
37,500*
277,500
$
172,500
277,500
80,000
50,000
100,000
140,000
Noncontrolling interest January 1
Noncontrolling interest December 31
*
a 130,000
c 10,000
g
h
b
c
Consolidated
Statements
$
172,500
Patents
Accounts payable
Dividends payable
Other liabilities
Common stock, $10 par
Retained earnings
Adjustments and
Eliminations
Sun 75%
37,500
12,500
150,000*
$
300,000
$
115,000
250,000
15,000
15,000
20,000
d 55,000
e 320,000
f 10,000
120,000
130,000
330,000
340,000
130,000
$1,415,000
$
e
i
60,000
25,000
310,000
75,000
195,000
450,000
300,000
85,000
$1,415,000
Deduct
Supporting computations
Investment in Sun at January 1, 2007
Book value acquired ($200,000  75%)
Patents (15 year amortization)
$300,000
150,000
$150,000
128
Chapter 5
129
Solution P5-11
Preliminary computations
Investment cost
Less: Book value acquired ($250,000  90%)
Goodwill
$275,000
225,000
$ 50,000
Upstream sales
Unrealized profit in December 31, 2009 inventory of Po
$28,000 - ($28,000  1.4) = $8,000
Unrealized profit in December 31, 2010 inventory of Po
$42,000 - ($42,000  1.4) = $12,000
Income from San
Share of San's reported income ($100,000  90%)
Less: Unrealized profit in ending inventory ($12,000  90%)
Add: Unrealized profit in beginning inventory ($8,000  90%)
Income from San
$ 90,000
(10,800)
7,200
$ 86,400
Investment balance
Initial investment cost
Increase in San's net assets from December 31, 2007
to December 31, 2010 ($70,000  90%)
Unrealized profit in December 31, 2010 inventory
Investment balance December 31, 2010
$275,000
63,000
(10,800)
$327,200
Noncontrolling interest expense
Reported income of San
Add: Unrealized profit in beginning inventory
Less: Unrealized profit in ending inventory
San's realized income
Noncontrolling interest percentage
$100,000
8,000
(12,000)
96,000
10%
Noncontrolling interest expense
$
129
9,600
Intercompany Profit Transactions — Inventories
130
Solution P5-11 (continued)
Po Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2010
Po
Income Statement
Sales
Income from San
Cost of sales
$ 819,000
86,400
546,000*
Other expenses
154,400*
Noncontrolling int.expense
Net income
$ 205,000
Retained Earnings
Retained earnings — Po
Balance Sheet
Cash
Inventory
Other current assets
Plant assets — net
Investment in San
$ 560,000
400,000*
a 560,000
c
8,000
9,600
e
70,000
390,000*
214,400*
9,600*
$ 205,000
$ 100,000
$ 130,000
$
205,000
100,000*
70,000
100,000
50,000*
d
f
45,000
5,000
205,000
100,000*
$ 235,000
$ 120,000
$ 235,000
$
$
$ 125,800
110,000
70,000
600,000
75,800
42,000
60,000
300,000
50,000
80,000
20,000
300,000
327,200
b
g
12,000
10,000
c
7,200
e
50,000
50,000
$ 955,800
$ 170,000
$ 130,000
g 10,000
400,000
200,000
e 200,000
235,000
120,000
$ 805,000
$ 450,000
$ 290,000
400,000
235,000
$ 805,000
d 41,400
e 293,000
$ 450,000
Noncontrolling interest January 1
Noncontrolling interest December 31
*
f
Consolidated
Statements
$ 819,000
60,000*
Goodwill
Current liabilities
Capital stock
Retained earnings
a 560,000
d 86,400
b 12,000
$ 130,000
Retained earnings — San
Net income
Dividends
Retained earnings
December 31
Adjustments and
Eliminations
San 90%
c
Deduct
130
800
e
f
27,000
4,600
30,800
$ 955,800