CHAPTER 5
CONSOLIDATED FINANCIAL STATEMENTS
INTERCOMPANY ASSET TRANSACTIONS
Answers to Questions
1.
2.
3.
4.
5.
6.
One reason for the significant volume and frequency of intercompany transfers is that
many business combinations are specifically organized so that the companies can
provide products for each other. This design is intended to benefit the business
combination as a whole because of the economies provided by vertical integration. In
effect, more profit can often be generated by the combination if one member is able to
buy from another rather than from an outside party.
The sales between Barker and Walden totaled $100,000. Regardless of the ownership
percentage or the markup, the $100,000 was simply an intercompany asset transfer.
Thus, within the consolidation process, the entire $100,000 should be eliminated from
both the Sales and the Purchases (Inventory) accounts.
Sales price per unit ($900,000 ÷ 3,000 units)
$ 300
Number of units in Safeco’s ending inventory
× 500
Intercompany inventory at transfer price
$150,000
Gross profit rate (.6 ÷ 1.6)
.375
Intercompany profit in ending inventory
$56,250
In intercompany transactions, a transfer price is often established that exceeds the cost
of the inventory. Hence, the seller is recording a gain on its books that, from the
perspective of the business combination as a whole, remains unrealized until the asset
is consumed or sold to an outside party. Any unrealized gain on merchandise still being
held by the buyer must be eliminated whenever consolidated financial statements are
produced. For the year of transfer, this consolidation procedure is carried out by
removing the unrealized gain from the inventory account on the balance sheet and from
the ending inventory balance within cost of goods sold. In the year following the transfer
(if the goods are resold or consumed), the unrealized gain must again be eliminated
within the consolidation process. This second reduction is made on the worksheet to the
beginning inventory component of cost of goods sold as well as to the beginning
retained earnings balance of the original seller. The gain is being moved into the year of
realization. If the transfer was downstream in direction and the parent company has
applied the equity method, the adjustment in the subsequent year must be made to the
equity in subsidiary earnings account rather than to retained earnings.
On the individual financial records of James, Inc., a gain is being recorded in the year of
transfer. From the viewpoint of the business combination, this gain is actually earned in
the period in which the products are sold or consumed by Matthews Co. An initial
consolidation entry must be made in the year of transfer to defer any gain that remains
unrealized. A second entry must be made in the following time period to allow the gain to
be recognized in the year of its ultimate realization.
Currently, no official accounting pronouncement answers the question as to the
relationship between unrealized intercompany gains and noncontrolling interest values,
although the issue has been under study by the FASB. This textbook reasons that
unrealized gains relate to the seller and to the computation of the seller's income.
Therefore, any unrealized gains created by upstream transfers (from subsidiary to
parent) are attributed to the subsidiary. The effects resulting from the deferral and
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7.
8.
9.
10.
11.
eventual recognition of these intercompany gains are considered to have an impact on
the calculation of noncontrolling interest balances. In contrast, unrealized gains from
downstream transfers are viewed as relating solely to the parent (as the seller) and,
thus, have no effect on the noncontrolling interest.
The basic consolidation process does not differ between downstream and upstream
transfers. Sales and purchases (Inventory) balances created by the transactions must be
eliminated in total. Any unrealized gains remaining at the end of a fiscal period are
deferred until ultimately earned through sale or consumption of the assets.
The direction of intercompany transfers (upstream versus downstream) does have one
effect on consolidated financial statements. In computing noncontrolling interest
balances (if present), the deferral of unrealized gains on upstream sales is taken into
account. Downstream sales, however, are attributed to the parent and are viewed as
having no impact on the outside interest.
The computation of this noncontrolling interest balance is dependent on the direction of
the intercompany transactions that is not indicated in this question. If the unrealized
gains were created by downstream sales from King to Pawn, they relate only to King.
The noncontrolling interest in the subsidiary's net income is not affected and would be
$11,000 ($110,000 × 10%). In contrast, if the transfers were upstream from Pawn to
King, the deferral and recognition of the gains are attributed to Pawn. Pawn's "realized"
income would be $80,000 and the noncontrolling interest's share of the subsidiary's
income is reported as $8,000:
Pawn's reported income ..............................................
$110,000
Recognition of prior year unrealized gain .....................
30,000
Deferral of current year unrealized gain .......................
(60,000)
Pawn's realized income ...............................................
$80,000
Outside ownership percentage ....................................
10%
Noncontrolling interest in subsidiary's income ...............
$ 8,000
The deferral and subsequent recognition of intercompany profits are allocated to the
noncontrolling interest in the same periods as the parent. When one affiliate sells to
another affiliate, ownership does not change and therefore the underlying profit is
deferred. When the purchasing affiliate subsequently sells the inventory to an entity
outside the affiliated group, ownership changes, and the profit may be recognized.
Intercompany profits are not really eliminated, but simply deferred until a sale to an
outsider takes place.
Several differences can be cited that exist between the consolidated process applicable
to inventory transfers and that which is appropriate for land transfers. The total
intercompany Sales balance is offset against Purchases (Inventory) when inventory is
transferred but no corresponding entry is needed when land is involved. Furthermore, in
the year of the sale, ending unrealized inventory gains are eliminated through an
adjustment to cost of goods sold but a specific gain account exists (and must be
removed) when land has been sold. Finally, unrealized inventory gains are usually
expected to be realized in the year following the transfer. This effect is mirrored in that
period by reduction of the beginning inventory figure (within cost of goods sold). For land
transfers, however, the unrealized gain must be repeatedly deferred in each fiscal period
for as long as the land continues to be held within the business combination.
As long as the land is held by the parent, its recorded value must be reduced to
historical cost within each consolidated set of financial statements. In the year of the
original transfer, the asset reduction is offset against the subsidiary's recorded gain. For
all subsequent years in which the property is held, the credit to the Land account is
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12.
13.
made against the beginning retained earnings balance of the subsidiary (since the
unrealized gain will have been closed into that account).
According to this question, the land is eventually sold to an outside party. The
intercompany gain (which has been deferred in each of the previous years) is realized by
the sale and should be recognized in the consolidated statements of this later period.
Because the transfer was upstream from subsidiary to parent, the above consolidated
entries will also affect any noncontrolling interest balances being reported. Because of
the deferral of the intercompany gain, the realized income balances applicable to the
subsidiary will be less than the reported values. In the year of resale, however, the
realized income for consolidation purposes is higher than reported. All noncontrolling
interest totals are computed on the realized balances rather than the reported figures.
Depreciable assets are often transferred between the members of a business
combination at amounts in excess of book value. The buyer will then compute
depreciation expense based on this inflated transfer price rather than on an historical
cost basis. From the perspective of the business combination, depreciation should be
calculated solely on historical cost figures. Thus, within the consolidation process for
each period, adjustment of the depreciation (being recorded by the buyer) is necessary
to reduce the expense to a cost-based figure.
From the viewpoint of the business combination, an unrealized gain has been created by
the intercompany transfer and must be eliminated whenever consolidated financial
statements are produced. This unrealized gain is closed by the seller into retained
earnings necessitating that subsequent reductions be made to that account. In the
individual financial records, however, another income effect is created which gradually
reduces the overstatement of retained earnings each period. The asset will be
depreciated by the buyer based on the inflated transfer price. The resulting expense will
be higher than the amount appropriate to the historical cost of the item. Because this
excess depreciation is closed into retained earnings annually, the overstatement of the
equity account is gradually reduced to a zero balance over the life of the asset.
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Answers to Problems
1. C
2. B Inventory remaining $100,000 × 50% = $50,000 Unrealized gain (based on
Lee's markup as the seller) $50,000 × 40% = $20,000. The ownership
percentage has no impact on this computation.
3. A
4. C UNREALIZED GAIN, 12/31/06
Intercompany Gain ($100,000 – $75,000) ......................................
Inventory Remaining at Year's End ...............................................
Unrealized Intercompany Gain, 12/31/06 ......................................
$25,000
16%
$4,000
UNREALIZED GAIN, 12/31/07
Intercompany Gain ($120,000 – $96,000) ......................................
Inventory Remaining at Year's End ...............................................
Unrealized Intercompany Gain, 12/31/07 ......................................
$24,000
35%
$8,400
CONSOLIDATED COST OF GOODS SOLD
Parent balance ...........................................................................
Subsidiary Balance ...................................................................
Remove Intercompany Transfer ..............................................
Recognize 2006 Deferred Gain .................................................
Defer 2007 Unrealized Gain ......................................................
Cost of Goods Sold ........................................................................
$380,000
210,000
(120,000)
(4,000)
8,400
$474,400
5. A Intercompany sales and purchases of $100,000 must be eliminated.
Additionally, an unrealized gain of $10,000 must be removed from ending
inventory based on a markup of 25 percent ($200,000 gross profit/$800,000
sales) which is multiplied by the $40,000 ending balance. This deferral
increases cost of goods sold because ending inventory is a negative
component of that computation. Thus, cost of goods sold for consolidation
purposes is $690,000 ($600,000 + $180,000 – $100,000 + $10,000).
6. C The only change here from Problem 5 is the markup percentage which
would now be 40 percent ($120,000 gross profit  $300,000 sales). Thus, the
unrealized gain to be deferred is $16,000 ($40,000 × 40%). Consequently,
consolidated cost of goods sold is $696,000 ($600,000 + $180,000 –
$100,000 + $16,000).
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7. B UNREALIZED GAIN, 12/31/05
Ending Inventory .......................................................................
Markup ($33,000/$110,000) .......................................................
Unrealized Intercompany Gain, 12/31/05 .................................
$40,000
30%
$12,000
UNREALIZED GAIN, 12/31/06
Ending Inventory .......................................................................
Markup ($48,000/$120,000) .......................................................
Unrealized Intercompany Gain, 12/31/06 .................................
$50,000
40%
$20,000
NONCONTROLLING INTEREST IN SUBSIDIARY'S INCOME
Reported Income for 2006 ........................................................
Realized Gain Deferred In 2005 ................................................
Deferral of 2006 Unrealized Gain .............................................
Realized Income of Subsidiary ................................................
Outside Ownership ...................................................................
Noncontrolling Interest .............................................................
$90,000
12,000
(20,000)
$82,000
10%
$8,200
8. A Individual Records after Transfer
12/31/06
Machinery—$40,000
Gain—$10,000
Depreciation expense $8,000 ($40,000/5 years)
Income effect net—$2,000 ($10,000 – $8,000)
12/31/07
Depreciation expense—$8,000
Consolidated Figures—Historical Cost
12/31/06
Machinery—$30,000
Depreciation expense—$6,000 ($30,000/5 years)
12/31/07
Depreciation expense--$6,000
Adjustments for Consolidation Purposes:
2006: $2,000 income is reduced to a $6,000 expense (income is reduced
by $8,000)
2007: $8,000 expense is reduced to a $6,000 expense (income is increased
by $2,000)
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9. B UNREALIZED GAIN
Transfer Price ............................................................................
Book Value (cost after two years of depreciation) .................
Unrealized Gain .........................................................................
$280,000
240,000
$40,000
EXCESS DEPRECIATION
Annual Depreciation Based on Cost ($300,000/10 years) .......
Annual Depreciation Based on Transfer Price
($280,000/8 years) ................................................................
Excess Depreciation .................................................................
$30,000
35,000
$5,000
ADJUSTMENTS TO CONSOLIDATED NET INCOME
Defer Unrealized Gain ...............................................................
Remove Excess Depreciation ..................................................
Decrease to Consolidated Net Income ....................................
$(40,000)
5,000
$(35,000)
10. D Add the two book values and remove $100,000 intercompany transfers.
11. B Purchase Price ................................................
Book Value of Net Assets
($250,000 × 80%).........................................
Purchase Price in Excess of
Book Value .................................................
Excess Purchase Price Assigned
Based on Market Value:
—Equipment ($25,000 × 80%) ........................
Secret Formulas .............................................
Total ................................................................
$260,000
(200,000)
$60,000 Life
Annual Excess
Amortizations
20,000 5 years
$40,000 20 years
$4,000
2,000
$6,000
Consolidated Expenses = $36,000 (add the two book values and include
amortization expense for the current year)
12. C Intercompany Gain ($100,000 - $80,000) .......................................
Inventory Remaining at Year's End ...............................................
Unrealized Intercompany Gain, 12/31/06 ......................................
CONSOLIDATED COST OF GOODS SOLD
Parent Balance ..........................................................................
Subsidiary Balance ...................................................................
Remove Intercompany Transfer ..............................................
Defer Unrealized Gain (above) .................................................
Cost of Goods Sold ........................................................................
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$20,000
60%
$12,000
$140,000
80,000
(100,000)
12,000
$132,000
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13. A 20% of the ending book value of the subsidiary. Because transfers were
downstream, they do not affect this computation. As an alternative, add
20% of subsidiary's Income to 20% of beginning book value and subtract
20% of dividends.
14. B Add the two book values plus the original allocation ($20,000) less one year
of excess amortization expense ($4,000).
15. B Add the two book values less the ending unrealized gain of $12,000.
Intercompany Gain ($100,000 – $80,000) ......................................
Inventory Remaining at Year's End ...............................................
Unrealized Intercompany Gain, 12/31/06 ......................................
16.
$20,000
60%
$12,000
(15 Minutes) (Determine selected consolidated balances; includes
inventory transfers and an outside ownership.)
Intangible asset amortization = $180,000/20 years = $9,000 per year
Intercompany Gain ($150,000 – $100,000) ....................................
Inventory Remaining at Year's End................................................
Unrealized Intercompany Gain, 12/31/06 ......................................
$50,000
10%
$5,000
CONSOLIDATED TOTALS

Inventory = $395,000 (add the two book values and subtract the ending
unrealized gain of $5,000)

Sales = $1,050,000 (add the two book values and subtract the $150,000
intercompany transfer)

Cost of Goods Sold = $355,000 (add the two book values and subtract
the intercompany transfer and add [to defer] ending unrealized gain)

Operating Expenses = $409,000 (add the two book values and the
amortization expense for the period)

Noncontrolling Interest in Subsidiary's Net Income = $19,000 (20 percent
of the reported income after deferring $5,000 ending unrealized gain.
Gain is included in this computation because the transfer was upstream
from Sam to Pop)
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17.
(60 minutes) (Downstream intercompany profit adjustments when parent
uses equity method and a noncontrolling interest is present)
Purchase price
Book value of subsidiary
Portion acquired
Excess assigned to covenants
Useful life in years
Annual amortization
$980,000
$950,000
80%
760,000
$220,000
÷ 20
$11,000
2005 Ending Inventory Profit Deferral



Cost = $100,000/1.6 or $62,500
Intercompany Gain = $100,000 – $62,500 or $37,500
Ending Inventory Gain = $37,500 × 40% or $15,000
2006 Ending Inventory Profit Deferral



Cost = $120,000 ÷ 1.6 or $75,000
Intercompany Gain = $120,000 – $75,000 or $45,000
Ending Inventory Gain = $45,000  40% or $18,000
a. Investment account:
Cost, January 1, 2005
Smashing’s 2005 income × 80%
Covenant amortization
Ending inventory profit deferral
Equity in Smashing’s earnings
2005 dividends
Investment balance 12/31/05
Smashing’s 2006 income  80%
Covenants amortization
Beginning inventory profit recognition
Ending inventory profit deferral
Equity in Smashing’s earnings
2006 dividends
Investment balance 12/31/06
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$980,000
$120,000
(11,000)
(15,000)
94,000
(28,000)
$1,046,000
$104,000
(11,000)
15,000
(18,000)
90,000
(36,000)
$1,100,000
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17. (continued)
b. 12/31/06 Worksheet Adjustments
*G Equity in earnings of S
COGS
15,000
S Common stock—S
Retained earnings—S
Investment in S
Noncontrolling interest
700,000
365,000
A Covenants
Investment in S
209,000
I
Equity in earnings of S
Investment in S
852,000
213,000
209,000
75,000
75,000
D Investment in S
Dividends paid
36,000
E Amortization expense
Covenants
11,000
TI Sales
COGS
G COGS
Inventory
18.
15,000
36,000
11,000
120,000
120,000
18,000
18,000
(40 Minutes) (Series of independent questions concerning various aspects
of the consolidation process when intercompany transfers have occurred)
a. 2005 Unrealized Gain to be Recognized in 2006
Total intercompany gain on transfers ($90,000 – $54,000) ....
Inventory retained at end of 2005 ............................................
Unrealized gain—12/31/05 ...................................................
$36,000
20%
$7,200
2006 Unrealized Gain Deferred
Total intercompany gain on transfers ($120,000 – $66,000) ..
Inventory retained at end of 2006 ............................................
Unrealized gain—12/31/06 ....................................................
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$54,000
30%
$16,200
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18. a. (continued)
Noncontrolling Interest's Share of Kane's Income
Kane's reported income 2006....................................................
2005 gain realized in 2006 (upstream sales) ...........................
2006 gain deferred (upstream sales) .......................................
Kane's realized income .............................................................
Noncontrolling interest ownership ..........................................
Noncontrolling Interest's Share of Kane's Income..................
b. Inventory—Smith book value ...................................................
Inventory—Kane book value ....................................................
Unrealized gain, 12/31/06 (see part a) ......................................
Consolidated Inventory ............................................................
(Direction of transfer has no impact here)
$110,000
7,200
(16,200)
$101,000
20%
$20,200
$140,000
90,000
(16,200)
$213,800
c. Downstream transfers do not affect the noncontrolling interest.
Kane's reported income—2006 ...............................................
$110,000
Noncontrolling interest ownership .........................................
20%
Noncontrolling Interest's Share of Kane's Income..................
$22,000
d. Smith's reported income 2006 ..................................................
Elimination of intercompany dividend income recorded
by parent ($40,000 × 80%) ...................................................
Kane's reported income 2006 ...................................................
Amortization expense (given) .................................................
Realization of 2005 intercompany gain (see part a) ..............
Deferral of 2006 intercompany gain (see part a) ....................
Consolidated net income prior to reduction
for noncontrolling interest .................................................
$300,000
(32,000)
110,000
(5,000)
7,200
(16,200)
$364,000
e. Because the parent has been applying the partial equity method, its
retained earnings balance is not indicative of the consolidated balance.
Excess amortization and the effect of the unrealized gain at that date
must be taken into account to arrive at a consolidated total.
Smith's retained earnings, December 31, 2006 (given) .........
Excess amortizations 1999–2006 ($5,000 8) ..........................
Deferral of parent's 12/31/06 intercompany gain (see part a) .
Consolidated Retained Earnings 12/31/06 .............................
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$600,000
(40,000)
(16,200)
$543,800
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18. (continued)
f. Because the parent has been applying the partial equity method, its
retained earnings balance does not indicate the consolidated balance.
Excess amortizations must be taken into account to arrive at a
consolidated total. In addition, because the intercompany transfer was
upstream, the parent's equity accrual was wrong. Income recognition
would have been based on the subsidiary's reported figures rather than
its realized income. The parent would have included the $16,200 ending
unrealized gain in the subsidiary's income in computing the annual
equity accrual. Hence, that portion of the accrual (80% of $16,200 or
$12,960) is overstated, causing the parent's retained earnings to be too
high by that amount; reduction is necessary to arrive at the
consolidated balance.
The adjustment caused by the intercompany transfer can be computed
in a second manner. The entire $16,200 unrealized gain will be deferred
on the consolidated statements. However, because the transfer was
upstream, the portion of the subsidiary's income assigned to the
outside owners will be reduced by 20 percent of that deferral or $3,240.
The net effect on consolidated net income (and, hence, on the ending
retained earnings balance) is $12,960.
Smith's retained earnings, December 31, 2006 (given) ...........
$600,000
Excess Amortizations, 1999–2006 ($5,000 × 8) .......................
(40,000)
Reduction of equity accrual because of subsidiary's unrealized
gain (explained above) ...........................................................
(12,960)
CONSOLIDATED RETAINED EARNINGS, 12/31/06 ................
$547,040
g. Land—Smith’s book value .......................................................
Land—Kane's book value .........................................................
Elimination of unrealized gain on intercompany land ...........
CONSOLIDATED LAND ACCOUNT ..........................................
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$600,000
200,000
(20,000)
$780,000
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18. (continued)
h. The intercompany transfer was upstream from Kane to Smith. Because
the transfer occurred in 2005, beginning retained earnings of the seller
for 2006 contains the remaining portion of the unrealized gain.
Transfer Pricing Figures
2005 Equipment
Gain
Depreciation expense
Income effect
Accumulated depreciation
2006 Depreciation expense
Accumulated depreciation
=
=
=
=
=
=
=
$80,000
$20,000 ($80,000 – $60,000)
$16,000 ($80,000/5)
$4,000 ($20,000 – $16,000)
$16,000
$16,000
$32,000
Historical Cost Figures
2005 Equipment
Depreciation expense
Accumulated depreciation
2006 Depreciation expense
Accumulated depreciation
=
=
=
=
=
$100,000
$12,000 ($60,000/5 years)
$52,000 ($40,000 + $12,000)
$12,000
$64,000
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18. h. (continued)
CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT
ENTRY *TA
Retained Earnings, 1/1/06 (Kane) ............................
16,000
Equipment ($100,000 – $80,000) ..............................
20,000
Accumulated Depreciation ($52,000 – $16,000) .
36,000
To change beginning of year figures to historical cost figures by removing
impact of 2005 transactions. Retained earnings reduction removes $4,000
income effect (above) and replaces it with $12,000 depreciation expense for
2005.
ENTRY ED
Accumulated Depreciation ......................................
4,000
Depreciation Expense .........................................
4,000
To reduce depreciation from transfer price figure ($16,000) to historical
cost figure of $12,000.
This intercompany transfer was upstream from Kane to Smith. Thus,
income effects are assumed to relate to the original seller or, in this case,
to Kane. Because the sale occurred in 2005, the only effect on 2006
financial statements is from the calculation of depreciation expense. The
expense based on the transfer price is $4,000 higher than the amount
based on the historical cost figure. As an upstream transfer, this
adjustment affects Kane and the noncontrolling interest computations.
Transfer price depreciation: $80,000/5 yrs. = $16,000
Historical cost depreciation (based on book value): $60,000/5 yrs. = $12,000
Noncontrolling Interest in Kane's Income
Kane's reported income .............................................................
Reduction of depreciation expense to historical cost figure...
Kane's realized income ..............................................................
Outside ownership percentage .................................................
NONCONTROLLING INTEREST IN KANE'S INCOME .........
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$110,000
4,000
$114,000
20%
$22,800
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19.
(20 Minutes) (Consolidation entries and noncontrolling interest balances
affected by inventory transfers.)
a. Markup as a Percentage of Sales Price
Cost of inventory .................................................................
Markup (given as a percentage of cost) .............................
Sales price .............................................................................
Gross profit rate (.2  1.2) ....................................................
Noncontrolling Interest's Share of Subsidiary’s Income
Reported income of subsidiary—2006 .....................................
2005 Intercompany gain realized in 2006
($252,000 × 1/10 × 16.7 %) ....................................................
2006 Intercompany gain deferred
($288,000 × 1/10 × 16.7 %) ....................................................
Realized income of subsidiary—2006 ................................
Outside ownership ....................................................................
Noncontrolling interest's share of subsidiary's income ..
100
20
120
16.7 %
$120,000
4,208
(4,810)
$119,398
40%
$47,759
b. Entry *G
Retained Earnings, Jan. 1 (subsidiary) ........
4,208
Cost of Goods Sold ..................................
4,208
To remove intercompany gain from balances carried over from 2005
so that it can be recognized in 2006.
Entry Tl
Sales ................................................................
288,000
Cost of Goods Sold (purchases) .............
To eliminate effects of intercompany transfer of inventory.
Entry G
Cost of Goods Sold .......................................
Inventory ...................................................
To remove effects of 2006 unrealized gain.
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
288,000
4,810
4,810
© The McGraw-Hill Companies, Inc., 2007
5-14
20.
(30 Minutes) (Compute selected balances based on three different
intercompany asset transfer scenarios)
a. Consolidated Cost of Goods Sold
Penguin book value ..................................................................
Snow book value .......................................................................
Elimination of 2006 intercompany transfers ...........................
Reduction of beginning Inventory because of
2005 unrealized gain ($28,000/1.4 = $20,000
cost; $28,000 transfer price less $20,000
cost = $8,000 unrealized gain) ............................................
Reduction of ending inventory because of
2006 unrealized gain ($42,000/1.4 = $30,000
cost; $42,000 transfer price less $30,000
cost = $12,000 unrealized gain) ..........................................
Consolidated cost of goods sold ..................................
Consolidated Inventory
Penguin book value .............................................................
Snow book value .................................................................
Eliminate ending unrealized gain (see above for amount)
Consolidated Inventory .......................................................
$290,000
197,000
(110,000)
(8,000)
12,000
$381,000
$346,000
110,000
(12,000)
$444,000
Noncontrolling Interest in Subsidiary’s Net Income
Because all intercompany sales were downstream, the deferrals do not
affect Snow. Thus, the noncontrolling interest is 20% of the $58,000
(revenues minus cost of goods sold and expenses) reported income or
$11,600.
b. Consolidated Cost of Goods Sold
Penguin book value ..................................................................
Snow book value .......................................................................
Elimination of 2006 intercompany transfers ...........................
Reduction of beginning inventory because of
2005 unrealized gain ($21,000/1.4 = $15,000
cost; $21,000 transfer price less $15,000
cost = $6,000 unrealized gain) ............................................
Reduction of ending inventory because of
2006 unrealized gain ($35,000/1.4 = $25,000
cost; $35,000 transfer price less $25,000
cost = $10,000 unrealized gain) ..........................................
Consolidated cost of goods sold .............................................
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
$290,000
197,000
(80,000)
(6,000)
10,000
$411,000
© The McGraw-Hill Companies, Inc., 2007
5-15
20. b. (continued)
Consolidated Inventory
Penguin book value ..................................................................
Snow book value .......................................................................
Eliminate ending unrealized gain (see above for amount) ....
Consolidated inventory .......................................................
$346,000
110,000
(10,000)
$446,000
Noncontrolling Interest in Subsidiary's Net income
Since all intercompany sales are upstream, the effect on Snow's income
must be reflected in the noncontrolling interest computation:
Snow reported income ..............................................................
2005 unrealized gain realized in 2006 (above) ........................
2006 unrealized gain to be realized in 2007 (above) ..............
Snow realized income ...............................................................
Outside ownership percentage ................................................
Noncontrolling interest in Snow's income ........................
$58,000
6,000
(10,000)
$54,000
20%
$10,800
c. Consolidated Buildings (Net)
Penguin’s book value ............................................
Snow's book value .................................................
Remove inflation created by transfer
($80,000 – $50,000) ...........................................
Remove excess depreciation created by transfer
($30,000 unrealized gain over 5 year life)
(2 years) .............................................................
Consolidated buildings (net) ...........................
$358,000
157,000
$(30,000)
12,000
(18,000)
$497,000
Consolidated Expenses
Penguin’s book value ............................................
Snow's book value .................................................
Remove excess depreciation on transferred building
($30,000) unrealized gain/5 years) ...................
Consolidated expenses .........................................
$150,000
105,000
(6,000)
$249,000
Noncontrolling Interest in Subsidiary’s Net Income
Because the transfer was made downstream, it has no effect on the
noncontrolling interest. Thus, Snow's reported income ($58,000
computed as revenues minus cost of goods sold and expenses) is used
for this computation. The 20 percent outside ownership will be allotted
income of $11,600 (20% × $58,000).
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-16
21.
(15 Minutes) (Prepare consolidated income statement with a wholly-owned
subsidiary, includes transfers)
a. In this business combination, the direction of the intercompany
transfers (either upstream or downstream) is not important to the
consolidated totals. Because Allen controls all of Bowen's outstanding
stock, no noncontrolling interest figures are computed. If present,
noncontrolling interest balances are affected by upstream sales but not
by downstream.
For purposes of a 2007 consolidation, the following worksheet entries
would affect income statement balances:
Entry *G
Retained Earnings, 1/1/07 (seller) .......
18,000
Cost of Goods Sold ........................
18,000
To remove 2006 unrealized gain from beginning account balances.
Gain is the 30% markup ($60,000/$200,000) multiplied by remaining
inventory ($60,000).
Entry E
Amortization Expense ..........................
9,000
Specific Accounts ..........................
9,000
To recognize excess amortization expense for the current period.
Entry Tl
Sales ......................................................
200,000
Cost of Goods Sold ........................
200,000
To eliminate intercompany transfers of inventory during 2007.
Entry G
Cost of Goods Sold .............................
13,500
Inventory .........................................
13,500
To remove 2007 unrealized gain from ending account balances. Gain
is the 30% markup ($60,000/$200,000) multiplied by remaining
inventory ($45,000).
b. By including the impact of each of these four consolidation entries, the
following income statement can be created from the individual account
balances:
ALLEN, INC. AND CONSOLIDATED SUBSIDIARY
Income Statement
Year Ending December 31, 2007
Sales ..................................................................................... $1,200,000
Cost of goods sold ..............................................................
495,500
Gross profit .....................................................................
704,500
Operating expenses .............................................................
429,000
Consolidated net income ...............................................
$275,500
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-17
22.
(60 minutes) (Downstream intercompany asset transfer when parent uses
equity method and when a noncontrolling interest is present)
a. Investment account:
Cost, January 1, 2005
SpeedNet’s 2005 income  90%
Database amortization
Gain on equipment transfer deferral
Depreciation adjustment (6 months)
Equity in SpeedNet earnings
2005 Dividends
Investment balance 12/31/05
SpeedNet’s 2006 income  90%
Database amortization
Depreciation adjustment (full year)
Equity in SpeedNet earnings
2006 Dividends
Investment balance 12/31/06
$1,400,000
$72,000
(64,000)
(3,000)
500
5,500
(4,500)
$1,401,000
$103,500
(64,000)
1,000
40,500
(7,200)
$1,434,300
b. 12/31/06 Worksheet Adjustments
*TA
Equipment
6,000
Investment in S
2,500
Accumulated depreciation
8,500
To transfer the unrealized interco. equipment reduction (as of Jan. 1,
2006) from the Investment account to the equipment and A.D. accounts.
S
A
I
D
E
Common stock—S
RE—S
Investment in S
Noncontrolling interest
900,000
375,000
Database
Investment in S
256,000
Equity in earnings of S
Investment in S
Investment in S
Dividends paid
1,147,500
127,500
256,000
40,500
40,500
7,200
7,200
Amortization expense
Database
64,000
ED Accumulated depreciation
Depreciation expense
1,000
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
64,000
1,000
© The McGraw-Hill Companies, Inc., 2007
5-18
22. (continued)
Alternative set of equivalent adjustments for part b.
*TA
Equipment
6,000
Investment in S
1,500
Accumulated Depreciation
7,500
To transfer the unrealized intercompany equipment reduction (as
of Dec. 31, 2006) from the investment account to the equipment
and A.D. accounts.
*ED
Equity in earnings of S
1,000
Depreciation expense
1,000
To transfer the current realized portion of the intercompany
equipment gain from the Equity in Earnings of S account to
increase current consolidated income through a reduction in
depreciation expense.
S Common stock—S
RE—S
Investment in S
Noncontrolling interest
900,000
375,000
A Database
Investment in S
256,000
I
Equity in earnings of S
Investment in S
D Investment in S
Dividends paid
E Amortization expense
Database
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
1,147,500
127,500
256,000
39,500
39,500
7,200
7,200
64,000
64,000
© The McGraw-Hill Companies, Inc., 2007
5-19
23. (20 Minutes) (Consolidation entries for intercompany equipment transfer.)
INDIVIDUAL RECORDS BASED ON TRANSFER PRICE
12/31/05
 Equipment = $70,000
 Gain on transfer = $30,000 ($70,000 – $40,000)
 Depreciation expense = $14,000 ($70,000/5 years)
 Accumulated depreciation = $14,000
12/31/06
 Depreciation expense $14,000
 Accumulated depreciation = $28,000 (2 years)
12/31/07
 Retained earnings, 1/1/07 = $2,000 (gain less two years of
depreciation)
 Depreciation expense = $14,000
 Accumulated depreciation = $42,000 (3 years)
CONSOLIDATED REPORTING BASED ON HISTORICAL COST
12/31/05
 Equipment = $110,000
 Depreciation expense = $8,000 ($40,000/5 years)
 Accumulated depreciation = $78,000 ($70,000 + $8,000)
12/31/06
 Depreciation expense = $8,000
 Accumulated depreciation = $86,000 ($78,000 + $8,000)
12/31/07
 Retained earnings, 1/1/07 = ($16,000) (two years of depreciation)
 Depreciation expense = $8,000
 Accumulated depreciation = $94,000 ($86,000 + $8,000)
Entry *TA
Retained earnings, 1/1/07 (Plimpton) .................
18,000
Equipment ($110,000 – $70,000) .........................
40,000
Accumulated depreciation ($86,000 – $28,000)
58,000
To adjust beginning-of-year individual financial records to
balances for consolidated entity. Retained earnings adjustment
reduces $2,000 positive balance to $16,000 negative balance as
computed above.
Entry ED
Accumulated Depreciation ..................................
6,000
Depreciation Expense ....................................
6,000
To remove excess depreciation for current year; amount should
be computed on historical cost ($8,000) rather than the transfer
price ($14,000).
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-20
24.
(15 Minutes) (Determine consolidated net income when an intercompany
transfer of equipment has occurred. Includes an outside ownership)
a. Income—Slaughter ...................................................................
Income—Bennett........................................................................
Remove unrealized gain on equipment ...................................
($120,000 – $70,000)
Remove excess depreciation created by inflated transfer
price ($50,000/5) ...................................................................
Consolidated net income ....................................................
$220,000
90,000
(50,000)
10,000
$270,000
b. Income calculated in (part a.) ...................................................
$270,000
Noncontrolling interest in Bennett's income ($90,000 × 10%)(9,000)
Consolidated net income ....................................................
$261,000
c. Income calculated in (part a.) ...................................................
Noncontrolling interest in Bennett's income (see Schedule 1)
Consolidated net income ....................................................
$270,000
(5,000)
$265,000
Schedule 1: Noncontrolling Interest in Bennett's Income (includes
upstream transfer)
Reported net income of subsidiary .........................................
Eliminate unrealized gain on equipment transfer ..................
Eliminate excess depreciation ($50,000/5) ..............................
Bennett's realized net income ..................................................
Outside ownership ....................................................................
Noncontrolling interest in subsidiary's income ................
d. Net income—Slaughter .............................................................
Net income—Bennett ................................................................
Eliminate excess depreciation stemming from transfer
($50,000/5) (2nd year) ..........................................................
Consolidated net income ................................................
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
$90,000
(50,000)
10,000
$50,000
10%
$ 5,000
$240,000
100,000
10,000
$350,000
© The McGraw-Hill Companies, Inc., 2007
5-21
25.
(35 minutes) (Compute consolidated totals with transfers of both inventory
and a building.)
Excess Amortization Expenses
Equipment $60,000/10 years = $6,000 per year
Franchises $80,000/20 years = $4,000 per year
Annual excess amortizations $10,000
Unrealized Gain—Inventory, 1/1/06
Markup ($70,000 – $49,000) ......................................................
Markup percentage ($21,000/$70,000) .....................................
$21,000
30%
Remaining inventory .................................................................
Markup percentage ...................................................................
Unrealized gain, 1/1/06 ...............................................................
$30,000
30%
$9,000
Unrealized Gain—Inventory, 12/31/06
Markup ($100,000 – $50,000) ....................................................
Markup percentage ($50,000/$100,000) ...................................
$50,000
50%
Remaining inventory .................................................................
Markup percentage ...................................................................
Unrealized gain, 12/31/06 ..........................................................
$40,000
50%
$20,000
Impact of intercompany Building Transfer
12/31/05—Transfer Price Figures
Transfer price .......................................................................
Gain on transfer ($50,000 – $30,000) ..................................
Depreciation expense ($50,000/5) ......................................
Accumulated depreciation ..................................................
12/31/06—Transfer Price Figures
Depreciation expense ..........................................................
Accumulated depreciation ..................................................
12/31/05—Historical Cost Figures
Historical cost ......................................................................
Depreciation expense ($30,000 book value/5 years) .........
Accumulated depreciation ($40,000 + $6,000) ...................
12/31/06—Historical Cost Figures
Depreciation expense ..........................................................
Accumulated depreciation ..................................................
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
$50,000
20,000
10,000
10,000
10,000
20,000
$70,000
6,000
46,000
6,000
52,000
© The McGraw-Hill Companies, Inc., 2007
5-22
25. (continued)
CONSOLIDATED BALANCES

Sales = $1,000,000 (add the two book values and subtract $100,000 in
intercompany transfers)

Cost of Goods Sold = $571,000 (add the two book values and subtract
$100,000 in intercompany purchases. Subtract $9,000 because of the previous
year unrealized gain and add $20,000 to defer the current year unrealized
gain.)

Operating Expenses = $206,000 (add the two book values and include the
$10,000 excess amortization expenses but remove the $4,000 in excess
depreciation expense [$10,000 - $6,000] created by building transfer)

Investment Income = $0 (the intercompany balance is removed so that the
individual revenue and expense accounts of the subsidiary can be shown)

Inventory = $280,000 (add the two book values and subtract the $20,000
ending unrealized gain)

Equipment (net) = $292,000 (add the two book values and include the $60,000
allocation from the purchase price less three years of excess amortizations)

Buildings (net) = $528,000 (add the two book values and subtract the $20,000
unrealized gain on the transfer after two years of excess depreciation [$4,000
per year])
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-23
26.
(35 Minutes) (Prepare consolidation entries for a business combination
with intercompany inventory and equipment transfers; includes an outside
ownership.)
a. Entry *G
Retained Earnings, 1/1/06 (Sledge) ..............
2,000
Cost of Goods Sold ..................................
2,000
To remove unrealized gain from beginning account balances. Gain is
40% markup ($6,000/$15,000) multiplied by remaining inventory
($5,000).
Entry *TA
Equipment .......................................................
4,000
Investment in Sledge .....................................
2,400
Accumulated Depreciation ......................
6,400
To adjust the equipment balance to original cost ($16,000) and to
adjust accumulated depreciation to the correct consolidated January
1, 2006 balance ($7,000 less $600 extra depreciation in 2005). The
net reduction to the reported equipment balance (cost less A.D. =
$2,400) equals the amount of unrealized gain at January 1, 2006. The
$2,400 debit to the Investment account appropriately transfers the
reduction in the net book value of the transferred equipment to the
subsidiary’s accounts. The Investment account was reduced by
$3,000 in 2005 for the original intercompany gain and increased by
$600 in 2005 for the extra depreciation ($3,000 gain/5 years) through
application of the equity method. Entry ED (below) completes the
adjustment of A.D. and depreciation expense to their correct
December 31, 2006 balances.
Entry S
Common Stock (Sledge) .......................................... 120,000
Retained Earnings, 1/1/06 (adjusted) (Sledge) ........ 258,000
Investment in Sledge (80%) ................................
302,400
Noncontrolling interest in Sledge, 1/1/06 (20%) .
75,600
To eliminate subsidiary's stockholders' equity accounts (after
adjustment for Entry *G) and recognize noncontrolling interest
balance as of January 1, 2006.
Entry A
Contracts ($60,000 – $3,000 for 5 years) .................
45,000
Buildings ($20,000 – $2,000 for 5 years) .................
10,000
Investment in Sledge ...........................................
55,000
To recognize allocations from purchase price adjusted for 5 years of
amortization from 2001 through 2005.
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-24
26. (continued)
Entry I
Equity Income of Subsidiary ....................................
9,600
Investment in Sledge ...........................................
9,600
To remove intercompany income accrual recorded by parent using
full equity method (80% of $17,500 realized income [see Part b] less
$5,000 in excess amortizations for the year [see Entry E] plus $600
removal of excess depreciation from 2005 intercompany equipment
transfer).
Entry E
Depreciation Expense ...............................................
2,000
Amortization Expense ...............................................
3,000
Contracts ($60,000/20 years) ..............................
3,000
Buildings ($20,000/10 years) ..............................
2,000
To record excess amortizations for 2006 based on allocations and
useful lives.
Entry TI
Sales ...........................................................................
20,000
Cost of Goods Sold .............................................
To eliminate intercompany inventory transfers during 2006.
20,000
Entry G
Cost of Goods Sold ..................................................
4,500
Inventory ..............................................................
4,500
To remove unrealized gain from ending account balances. The gain
is the 45% markup ($9,000/$20,000) multiplied by remaining inventory
($10,000).
Entry ED
Accumulated Depreciation .......................................
600
Depreciation Expense .........................................
600
To eliminate excess depreciation on equipment recorded at transfer
price. Expense is being reduced from the recorded amount ($2,400 or
$12,000/5) to historical cost figure ($1,800 or $9,000/5).
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-25
26. (continued)
b. Noncontrolling Interest in the Subsidiary's Income 2006
Revenues ....................................................................................
Cost of goods sold ....................................................................
Other expenses .........................................................................
Reported income .................................................................
Gain on 2005 upstream inventory transfer realized in 2006
(Entry *G) ..............................................................................
Gain on 2006 upstream inventory transfer deferred
(Entry G) ...............................................................................
Realized income of subsidiary—2006 ................................
Outside ownership ....................................................................
Noncontrolling interest in subsidiary's net income ..........
27.
$130,000
(70,000)
(40,000)
$20,000
2,000
(4,500)
$17,500
20%
$3,500
(65 Minutes) (Determine consolidation totals after answering a series of
questions about combination and intercompany inventory transfers)
a. Book value, 1/1/06:
Common stock .....................................
Retained earnings, 1/1/06 ....................
Book value, 1/1/04 (given) ........................
Increase in book value, 2004–2005 ....
b. Purchase price ..........................................
Book value ($330,000 × 90%) ...................
Price in excess of book value ..................
Excess price assigned to building
based on fair market value
($20,000 × 90%) ....................................
Patented Technology ................................
Totals .....................................................
$150,000
278,000
$428,000
(330,000)
$98,000
$345,000
(297,000)
$48,000
18,000
30,000
-0-
Annual Excess
Life
Amortizations
9 yrs.
$2,000
10 yrs.
3,000
$5,000
c. Since Little sold inventory to Big, the transfers are upstream.
d. Gross profit on 2005 transfers ($135,000 – $81,000) ..............
Gross profit percentage ($54,000/$135,000) ...........................
$54,000
40%
Inventory remaining, 12/31/05 ..................................................
Gross profit percentage ............................................................
Unrealized gain, January 1, 2006 .............................................
$37,500
40%
$15,000
e. Retained earnings, 1/1/06 (reported) .......................................
Unrealized gain, 1/1/06 (above) ................................................
Retained earnings, 1/1/06 (realized) ........................................
27. (continued)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
$278,000
(15,000)
$263,000
© The McGraw-Hill Companies, Inc., 2007
5-26
f. Gross profit on 2006 transfers ($160,000 – $92,800) ..............
Gross profit percentage ($67,200/$160,000) ...........................
$67,200
42%
Inventory remaining, 12/31/06 ..................................................
Gross profit percentage ............................................................
Unrealized gain, December 31, 2006 ........................................
$50,000
42%
$21,000
g. Little’s net income, 2006 (reported) .........................................
2005 Unrealized gain recognized in 2006 (see d) ...................
2006 Unrealized gain deferred (see f) ......................................
Little’s net income, 2006 (realized) ..........................................
$90,000
15,000
(21,000)
$84,000
h. Big is applying the equity method since the $70,600 does not equal 90%
of Little's reported Income or 90% of the dividends paid by Little.
Little’s realized income (see g) ................................................
Ownership ..................................................................................
Equity Income accrual ..............................................................
Excess amortization expenses (see b) ....................................
Investment income—Little ........................................................
$84,000
90%
$75,600
(5,000)
$70,600
i. Little’s realized income (see g) ................................................
Outside ownership ....................................................................
Noncontrolling interest in subsidiary's net income ...............
$84,000
10%
$8,400
j. Investment in Little (original cost) ...........................................
Income of Little
Reported 2004 .......................................
$60,000
2005 .................................................
80,000
2006 .................................................
90,000
Total .................................................
230,000
Unrealized gain, 12/31/06 (see f) .........
(21,000)
Realized income 2004-2006 .................
209,000
Big’s ownership ...................................
90%
Excess amortizations ($5,000 × 3 years) .
$345,000
Dividends paid by Little (30% of income)
Paid 2004 ..............................................
2005 .................................................
2006 .................................................
Total .................................................
Big's ownership ...................................
Investment in Little, 12/31/06 ....................
27. (continued)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
$18,000
24,000
27,000
69,000
90%
188,100
(15,000)
(62,100)
$456,000
© The McGraw-Hill Companies, Inc., 2007
5-27
k. Entry S
Common Stock (Little) ..............................
Retained Earnings, 1/1/06 (Little) (reduced by
1/1/06 unrealized gain) ..............................
Investment in Little (90%) ....................
Noncontrolling Interest in Little (10%)
150,000
263,000
371,700
41,300
l.
 Sales Revenues = $1,068,000 (add book values and remove $160,000 in
intercompany sales)

Cost of Goods Sold = $570,000 (add book values less $160,000 in
intercompany purchases. Also, adjust for 2005 unrealized gain [subtract
$15,000] and 2006 unrealized gain [add $21,000])

Expenses = $258,600 (add book values with $5,000 amortization on
allocations)

Investment Income—Little = $0 (intercompany balance is eliminated to
include individual revenue and expense accounts of the subsidiary)

Noncontrolling Interest in Subsidiary's Net Income = $8,400 (see i)

Net income = $231,000 (consolidated revenues less consolidated cost of
goods sold, expenses, and the noncontrolling interest's share of the
subsidiary's income)

Retained Earnings, 1/1/06 = $488,000 (parent equity method balance)

Dividends Paid = $136,000 (parent balance only)

Retained Earnings, 12/31/06 = $583,000 (consolidated beginning balance
plus net income less dividends paid)

Cash and Receivables = $228,000 (add book values less $16,000
intercompany balance)

Inventory = $370,000 (add book values and defer ending unrealized gain)

Investment in Little = $0 (intercompany balance is eliminated so that the
individual assets and liabilities of the subsidiary can be reported)

Land, Buildings, and Equipment = $1,299,000 (add book values and include
$18,000 allocation after 3 years of amortization)

Patented Technology = $21,000 (original allocation after 3 years of
amortization [$3,000 per year])

Total Assets = $1,918,000 (add consolidated figures)

Liabilities = $773,000 (add book values less $16,000 intercompany balance)
27. (part l. continued)

Noncontrolling Interest in Little, 12/31/06 = $47,000 (10% of ending book
value after removal of ending unrealized gain) or (10% of subsidiary's book
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© The McGraw-Hill Companies, Inc., 2007
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value at beginning of period less beginning unrealized gain] plus 10% of
the subsidiary's realized net income less 10% of subsidiary dividends)
28.

Common Stock = $515,000 (parent balance only)

Retained Earnings, 12/31/06= $583,000 (see above)

Total Liabilities and Stockholders' Equity = $1,918,000 (summation)
(20 Minutes) (Computation of selected consolidation balances as affected
by downstream inventory transfers)
UNREALIZED GAIN, 12/31/05: (downstream transfer)
Intercompany Gain ($120,000 – $72,000) .................................
Inventory Remaining at Year's End .........................................
Unrealized Intercompany Gain, 12/31/05 ......................................
$48,000
30%
$14,400
UNREALIZED GAIN, 12/31/06: (downstream transfer)
Intercompany Gain ($250,000 – $200,000) ...............................
Inventory Remaining at Year's End .........................................
Unrealized Intercompany Gain, 12/31/06 ......................................
$50,000
20%
$10,000
CONSOLIDATED TOTALS
 Sales = $1,150,000 (add the two book values and eliminate the
intercompany transfer)
 Cost of Goods Sold:
Asphalt's Book Value ................................................................
$535,000
Broadway's Book Value ............................................................
400,000
Eliminate Intercompany Transfers ..........................................
(250,000)
Realized Gain Deferred in 2005 ................................................
(14,400)
Deferral of 2006 Unrealized Gain .............................................
10,000
Cost of Goods Sold .............................................................
$680,600





Operating Expenses = $210,000 (add the two book values and include
intangible amortization for current year)
Dividend Income = -0- (intercompany transfer eliminated for
consolidation purposes)
Noncontrolling Interest in Consolidated Income: (impact of transfers is
not included because they were downstream)
Broadway Reported Income for 2006 .................................
$100,000
Outside Ownership ..............................................................
30%
Noncontrolling Interest ..................................................
$30,000
Inventory = $988,000 (add the two book values and defer the $10,000
ending unrealized gain)
Noncontrolling Interest in Subsidiary, 12/31/06 = $300,000 (30 percent of
beginning book value [$950,000 based on stockholder's equity
accounts] gives $285,000. Add income [$30,000 as computed above]
and subtract 30 percent of the subsidiary's dividends [$15,000 or 30% of
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© The McGraw-Hill Companies, Inc., 2007
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$50,000]. Because the transfers were downstream and did not affect the
subsidiary, this computation can also be made as 30% of the
subsidiary's ending book value)
29.
(25 Minutes) (Computation of selected consolidation balances as affected
by upstream inventory transfers)
UNREALIZED GAIN, 12/31/05: (upstream transfer)
Intercompany Gain ($120,000 – $72,000) .................................
Inventory Remaining at Year's End .........................................
Unrealized Intercompany Gain, 12/31/05 ......................................
$48,000
30%
$14,400
UNREALIZED GAIN, 12/31/06: (upstream transfer)
Intercompany Gain ($250,000 – $200,000) ...............................
Inventory Remaining at Year's End .........................................
Unrealized Intercompany Gain, 12/31/06 ......................................
$50,000
20%
$10,000
CONSOLIDATED TOTALS
 Sales = $1,150,000 (add the two book values and eliminate the
Intercompany transfer)
 Cost of Goods Sold:
Asphalt's Book Value ................................................................
$535,000
Broadway's Book Value ............................................................
400,000
Eliminate Intercompany Transfers ..........................................
(250,000)
Realized Gain Deferred in 2005 .................................................
(14,400)
Deferral of 2006 Unrealized Gain .............................................
10,000
Cost of Goods Sold ...................................................................
$680,600
 Operating Expenses = $210,000 (add the two book values and include
intangible amortization for current year)
 Dividend Income = -0- (intercompany transfer eliminated for
consolidation purposes)
 Noncontrolling Interest in Consolidated Income: (impact of transfers is
included because they were upstream)
Broadway Reported Income for 2006 ......................................
$100,000
2005 Gain Deferred into 2006 ...................................................
14,400
2006 Gain Deferred ...................................................................
(10,000)
Broadway Realized Income for 2006 ........................................
$104,400
Outside Ownership ...................................................................
30%
Noncontrolling Interest .............................................................
$31,320
 Inventory = $988,000 (add the two book values and defer the $10,000
ending unrealized gain)
29. (continued)

Noncontrolling Interest in Subsidiary, 12/31/06 = $297,000 (30 percent of
beginning book value after removing beginning unrealized gain
[$935,600 based on stockholders' equity accounts after removing
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$14,400 upstream gain] gives $280,680 and then add income [$31,320 as
computed above] and subtract 30 percent of the subsidiary's dividends
[$15,000 or 30% of $50,000]. Because the transfers were upstream, this
computation can also be made as 30% of the subsidiary's ending book
value after removing $10,000 unrealized gain)
30.
(75 Minutes) (Determine consolidated balances after impact of upstream
Inventory transfers and downstream transfer of building)
PRELIMINARY COMPUTATIONS
Purchase Price ................................................
Book Value of Net Assets (see below)
($540,000 × 90%) ........................................
Purchase Price in Excess of Book Value
$654,000
(486,000)
$168,000
Excess Purchase Price Assigned Based
Annual Excess
on Market Value:
Life Amortizations
Equipment ($50,000 × 90%) .................
45,000 5 years $9,000
Liabilities ($30,000 × 90%) ...................
27,000 20 years 1,350
Brand Names ..................................................
$96,000 40 years 2,400
Annual Excess Amortizations for Each of
First Five Years ....................................................................
$12,750
Annual Excess Amortizations After First Five
Years (Equipment is Fully Amortized) ................................
$3,750
Determination of Subsidiary Book Value on 1/1/95
Book Value, 1/1/06 (based on stockholders' equity accounts)
Eliminate Net Income – 1995 through 2005 .............................
Eliminate Dividends – 1995 through 2005 ...............................
Book Value, 1/1/95 ...............................................................
$800,000
(600,000)
340,000
$540,000
INVENTORY UNREALIZED GAIN, 12/31/05 (Upstream)
Ending Inventory ($145,000 × 30%) .........................................
Markup (given) ...........................................................................
Unrealized Intercompany Gain, 12/31/05 .................................
$43,500
20%
$8,700
INVENTORY UNREALIZED GAIN, 12/31/06 (Upstream)
Ending Inventory ($160,000 × 40 %) ........................................
Markup (given) ...........................................................................
Unrealized Intercompany Gain, 12/31/06 .................................
30. (continued)
BUILDING UNREALIZED GAIN, 1/1/05 (Downstream)
Transfer Price ............................................................................
Book Value .................................................................................
Unrealized Gain .........................................................................
McGraw-Hill/Irwin
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$64,000
20%
$12,800
$25,000
10,000
$15,000
© The McGraw-Hill Companies, Inc., 2007
5-31
ANNUAL EXCESS DEPRECIATION
Annual Depreciation Based on Book Value ($10,000/5 years)
Annual Depreciation Based on Transfer Price
($25,000/ 5 years) .................................................................
Excess Depreciation-Each Year ...............................................
$2,000
5,000
$3,000
ADJUSTMENT TO BUILDING ACCOUNTS TO RETURN TO HISTORICAL
COST AT 1/1/06
Consolidation
Transfer Price Historical Cost
Adjustment
Buildings
$25,000
$100,000
$75,000
Accumulated Depreciation
(1 /1/05 balance after 1
more year of depreciation) 5,000
92,000
87,000
CONSOLIDATED TOTALS

Sales and Other Income = $1,240,000 (add the two book values and
eliminate the intercompany transfers)

Cost of Goods Sold:
Topper's Book Value .................................................................
Kirby's Book Value ....................................................................
Eliminate Intercompany Transfers ..........................................
Realized Gain Deferred in 2005 .................................................
Deferral of 2006 Unrealized Gain .............................................
Cost of Goods Sold ...................................................................
$500,000
400,000
(160,000)
(8,700)
12,800
$744,100

Operating and Interest Expense = $260,750 (add the two book values
and include $3,750 amortization for current year but eliminate $3,000
excess depreciation)

Noncontrolling Interest in Subsidiary’s Income = $3,590 (impact of
inventory transfers is included because they were upstream but
building transfer is omitted because it was downstream)
Reported income for 2006 ..............................................................
Realized Gain Deferred in 2005 ................................................
Deferral of 2006 Unrealized Gain .............................................
Realized Income of Subsidiary ................................................
30. (continued)
Outside Ownership .........................................................................
Noncontrolling Interest .............................................................

$40,000
8,700
(12,800)
$35,900
10%
$3,590
Net Income = $231,560 (consolidated sales less consolidated cost of
goods sold, expenses, and noncontrolling interest)
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
Retained Earnings, 1/1/06 = $1,117,920 (because cost method has been
used [as indicated by Investment in Kirby balance], the parent's retained
earnings must be adjusted for changes in subsidiary's book value,
excess amortizations, and the impact of unrealized gains in previous
years)
Topper's Reported Balance, 1/1/06 ...............................
Impact of Building Transfer (parent's income was overstated by the $15,000 gain but has been reduced by
one prior year of excess depreciation) ...................
Adjustments to Convert Cost to Equity Method:
Increase in subsidiary's book value during prior
years (income of $600,000 less dividends of
$340,000) ..............................................................
Deferral of 12/31/05 Unrealized Gain
(subsidiary's prior income was overstated) ......
Realized increase in book value ........................
Ownership ..................................................................
Equity Accrual ..........................................................
Amortization Expense for Eleven Prior Years
(5 at $12,750 each and 6 at $3,750 each) ................
Retained Earnings, 1/1/06 ....................................
$990,000
(12,000)
$260,000
(8,700)
251,300
90%
226,170
(86,250)
$1,117,920
Dividends Paid = $130,000 (parent balance only)
Retained Earnings, 1/31/06 = $1,219,480 (the beginning balance plus net
income less dividends paid)
Cash and Receivables = $370,000 (add the two book values after eliminating
intercompany receivable balance)
Inventory = $371,200 (add the two book values and defer the $12,800 ending
unrealized gain)
Investment in Kirby = -0- (eliminated for consolidation purposes)
Equipment (Net) = $1,000,000 (add the two book values since the original
allocation is now completely amortized)
Buildings = $1,875,000 (add the two book values and add the $75,000 impact to
return to historical cost as computed above for transfer)
Accumulated Depreciation = $384,000 (add the two book values and add the
impact to return to historical cost ($87,000 as computed above for
beginning of year less $3,000 excess depreciation for current year)
Other Assets = $300,000 (add the two book values)
30. (continued)
Brand Names = $67,200 (the original allocation [$96,000] after twelve years of
amortization [$2,400 per year])
Total Assets = $3,599,400 (summation of the consolidated totals)
Liabilities = $1,697,200 (add the two book values, eliminate the intercompany
balance, and subtract the original allocation [$27,000] after twelve years of
amortization [$1,350 per year])
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Noncontrolling Interest, 12/31/06 = $82,720 (10 percent of beginning book
value [$791,300 after deferral of unrealized gain] gives $79,130 and then
add income [$3,590 as computed above])
Common Stock = $600,000 (parent balance only)
Retained Earnings, 12/31/06 = $1,219,480 (computed above)
Total Liabilities and Equities = $3,599,400 (summation of consolidated balances).
The same consolidation balances can be derived by setting up a worksheet
and utilizing the following entries:
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/06 (Kirby) ......................
Cost of Goods Sold .......................................
(To recognize 2005 deferred gain as income in 2006)
Entry *TA
Building .................................................................
Retained earnings, 1/1/06 (Topper) ....................
Accumulated Depreciation ............................
(To adjust 1/1/06 balance to historical cost figures)
8,700
8,700
75,000
12,000
87,000
Entry *C
Investment in Kirby .............................................
139,920
Retained Earnings, 1/1/06 (Topper) ..............
139,920
(To convert from cost to equity method based on the following
computation)
Increase in subsidiary's book value during prior years
(income of $600,000 less dividends of $340,000)
$260,000
Deferral of 12/31/05 unrealized gain ...................
(8,700)
Realized increase in subsidiary's book value....
$251,300
Ownership ............................................................
90%
Income accrual ....................................................
$226,170
Excess amortization expenses for eleven prior years
(5 at $12,750 each and 6 at $3,750 each) ......
(86,250)
Cost to equity method adjustment ....................
$139,920
30. (continued)
Entry S
Common Stock (Kirby) . ......................................
300,000
Retained Earnings, 1/1/06 as adjusted (Kirby) ...
491,300
Investment in Kirby (90%) .............................
712,170
Noncontrolling Interest in Kirby (10%) .........
79,130
(To eliminate subsidiary's beginning stockholders' equity accounts and
recognize beginning noncontrolling interest balance)
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Entry A
Liabilities ..............................................................
12,150
Brand Names .......................................................
69,600
Investment in Kirby ........................................
81,750
(To recognize unamortized balance of excess allocations as of 1/1/06.
Figures have been reduced by eleven previous years of amortization)
Entry I (the subsidiary paid no dividends so no adjustment needed)
Entry E
Interest Expense ..................................................
1,350
Brand Names Amortization Expense ................
2,400
Liabilities ........................................................
Brand Names ..................................................
(To recognize excess amortization expenses for current year)
Entry P
Accounts Payable ...............................................
Accounts Receivable .....................................
(To eliminate intercompany debt)
Entry Tl
Sales .....................................................................
Cost of Goods Sold .......................................
(To eliminate intercompany transfers for 2006)
Entry G
Cost of Goods Sold .............................................
Inventory .........................................................
(To defer ending unrealized inventory gain)
1,350
2,400
20,000
20,000
160,000
160,000
12,800
12,800
Entry ED
Accumulated Depreciation .................................
3,000
Depreciation Expense ...................................
3,000
(To adjust depreciation for current year created by transfer of building)
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© The McGraw-Hill Companies, Inc., 2007
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31.
(45 Minutes) (Determine selected consolidated balances after impact of
downstream inventory transfers and upstream transfer of building)
Purchase Price Allocation and Excess Amortizations
Purchase price ................................................ $372,000
Book value equivalency
($350,000 × 60%) .......................................... (210,000)
Excess cost over book value ......................... $162,000
Life
Excess cost allocated to patents
($120,000 × 60%) ........................................
Customer List .................................................
Total ...........................................................
72,000
$90,000
Annual Excess
Amortizations
12 yrs.
10 yrs.
$6,000
9,000
$15,000
January 1, 2006 Unrealized Gain from Intercompany Building Transfer
(Upstream)
Unrealized gain at date of transfer
($80,000 – $30,000) ................................. $50,000
Excess depreciation for 2004–2005
($50,000/5 = 10,000 × 2 years) ................ (20,000)
Unrealized gain as of
January 1, 2006 ...................................... $30,000
January 1, 2006 Unrealized Gain from Intercompany Inventory Transfers
(Downstream)
Remaining inventory as of
December 31, 2005 .................................. $50,000
Markup percentage 2005
($30,000/$150,000) ..................................
20%
Unrealized gain as of
January 1, 2006 ....................................... $10,000
December 31, 2006 Unrealized Gain from Intercompany Inventory Transfers
(Downstream)
Remaining Inventory as of
December 31, 2006 .................................... $40,000
Markup percentage 2006
($48,000/$160,000) ....................................
30%
Unrealized gain as of
December 31, 2006 ................................... $12,000
Because the parent's "Income of Smith" is exactly 60 percent of
subsidiary’s income, the partial equity method is apparently in use.
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31. (continued)
Consolidated Balances:
a. Cost of Goods Sold
Atkins’ book value ...............................................................
Smith’s book value ..............................................................
Eliminate current year transfers .........................................
Recognition of previous year unrealized gain ..................
Deferral of current year unrealized gain ............................
Cost of goods sold .........................................................
b. Operating Expenses
Atkins’ book value ...............................................................
Smith’s book value ..............................................................
Amortization expense (above) ............................................
Elimination of current excess depreciation created by
building transfer ($50,000/5 yrs.) ...................................
Operating expenses .......................................................
c. Net Income
Sales (summation of two book values after elimination
of intercompany sales) ..................................................
Cost of goods sold (above) .................................................
Operating expenses (above) ...............................................
Noncontrolling interest in Smith's income (below) ..........
Net income ......................................................................
Noncontrolling interest in Smith's income:
Smith's reported income .....................................................
Elimination of current excess depreciation
on transferred building (upstream) ................................
Smith's realized income ......................................................
Outside ownership percentage ..........................................
Noncontrolling interest in Smith's income ...................
$460,000
205,000
(160,000)
(10,000)
12,000
$507,000
$170,000
70,000
15,000
(10,000)
$245,000
$840,000
(507,000)
(245,000)
(14,000)
$74,000
$25,000
10,000
$35,000
40%
$14,000
d. Retained Earnings, January 1, 2006
Atkins reported balance ......................................................
$690,000
Elimination of 2005 unrealized inventory gain (downstream) (10,000)
Recognition of 2000–2005 excess amortizations required
because of use of partial equity method ($15,000 × 6)
(90,000)
Reduction required by Smith's January 1, 2006 unrealized
gain on building (remaining gain of $30,000 × 60%
because transfer was upstream) ...................................
(18,000)
Retained earnings, January 1, 2006 ...................................
$572,000
31. (continued)
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e. Inventory
Atkins’ book value ...............................................................
Smith’s book value ..............................................................
Elimination of current year unrealized gain (above) .........
Inventory .........................................................................
f. Buildings (Net)
Atkins’ book value ...............................................................
Smith’s book value ..............................................................
Reduction for 1/1/04 unrealized gain ..................................
Reduction—2004–2006 excess depreciation
($10,000 per year) ...........................................................
Buildings (net) ................................................................
g. Patents (Net)
Smith’s book value ..............................................................
Acquisition price allocation (above) ..................................
Amortization ($6,000 × 7 years) ..........................................
Patents (net) ....................................................................
$233,000
229,000
(12,000)
$450,000
$308,000
202,000
(50,000)
30,000
$490,000
$20,000
72,000
(42,000)
$50,000
h. Common Stock = $300,000 (Atkins’ book value)
i. Noncontrolling Interest in Smith
Smith's book value, December 31, 2006 ............................
Elimination of remaining unrealized building gain ............
Smith's realized book value, 12/31/06 ................................
Outside ownership percentage ..........................................
Noncontrolling interest in Smith, December 31, 2006 ..
$520,000
(20,000)
$500,000
40%
$200,000
The balance can also be computed as follows:
Smith's book value, January 1, 2006 ...................................
Elimination of remaining unrealized building gain ............
Realized book value, January 1, 2006 ................................
Outside ownership ...............................................................
Noncontrolling interest in Smith, January 1, 2006 .............
Noncontrolling interest in Smith's income (see c above)
Noncontrolling interest in dividends ($5,000 × 40%) ........
Noncontrolling interest in Smith, December 31, 2006 ......
McGraw-Hill/Irwin
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$500,000
(30,000)
$470,000
40%
$188,000
14,000
(2,000)
$200,000
© The McGraw-Hill Companies, Inc., 2007
5-38
32.
(45 Minutes) (Produce a consolidated worksheet for a combination that has
upstream inventory transfers)
a. The $10,000 figure does not equal 60% of the subsidiary's reported
income or dividend payments. Thus, neither the partial equity method
nor the cost method is being applied. The equity method is used by the
parent as can be seen in the computation of the $10,000:
Annual Excess
Purchase Price Allocation
Life Amortizations
Equipment ............................................ $70,000 10 yrs.
$7,000
Buildings .............................................. 40,000 20 yrs.
2,000
Database ................................................ 60,000 30 yrs.
2,000
Total ................................................. $170,000
$11,000
Unrealized gain in beginning inventory: $20,000 × 25% = $5,000
Unrealized gain in ending inventory: $40,000 × 25% = $10,000
Reported income balance—Short ............................................
Recognition of previous year unrealized gain (upstream) ....
Deferral of current year unrealized gain (upstream) ..............
Short's realized income ............................................................
Parent's ownership ...................................................................
Equity income accrual ..............................................................
Amortization expense (above) .................................................
Equity earnings of Short .....................................................
$40,000
5,000
(10,000)
$35,000
60%
$21,000
11,000
$10,000
b. CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/06 (Short) .................
5,000
Cost of Goods Sold ..................................
5,000
To remove unrealized gain from beginning account balances so that
recognition can be made in 2006. Amount is computed above.
Entry S
Common Stock (Short) ..................................
90,000
Additional Paid-in Capital (Short) .................
60,000
Retained Earnings, 1/1/06 (Short, as adjusted) 345,000
Investment in Short (60%) .......................
297,000
Noncontrolling Interest in Short, 1/1/06 (40%)
198,000
To eliminate beginning stockholders' equity accounts of subsidiary
along with recognition of beginning noncontrolling interest balance.
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32. (continued)
Entry A
Equipment ......................................................
56,000
Buildings .........................................................
36,000
Database .........................................................
56,000
Investment in Short ..................................
148,000
To recognize unamortized purchase price allocations as of January
1, 2006 after two years of excess amortizations.
Entry I
Equity Earnings of Short ...............................
10,000
Investment in Short ..................................
10,000
To eliminate intercompany income recognized during year using the
equity method.
Entry D
Investment in Short .......................................
15,000
Dividends Paid ..........................................
15,000
To eliminate intercompany dividend payments—60% of subsidiary's
distribution for the year.
Entry E
Operating expenses (depreciation) ...............
9,000
Amortization expense.....................................
2,000
Equipment .................................................
7,000
Buildings ....................................................
2,000
Database ....................................................
2,000
To recognize excess amortization expenses for the current period.
Entry P
Liabilities .........................................................
Receivables ...............................................
To eliminate intercompany debt.
30,000
30,000
Entry Tl
Revenues ........................................................
140,000
Cost of Goods Sold ..................................
To eliminate intercompany inventory transfers.
Entry G
Cost of Goods Sold .......................................
Inventory ....................................................
To eliminate ending unrealized gain.
140,000
10,000
10,000
Noncontrolling interest in subsidiary's income = $14,000 (40% of
realized income [computed above] of $35,000)
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32. (continued)
TALL AND SUBSIDIARY
Consolidating Worksheet
December 31, 2006
Accounts
Revenues
Cost of goods sold
Tall
Company
$(984,000)
551,000
Operating expenses
Database amortization
Noncontrolling Interest in
Short’s Income
Equity earnings of Short
Net Income
(10,000)
$(245,000)
Retained earnings, 1/1/06
$(871,000)
Net Income (above)
Dividends paid
Retained earnings, 12/31/06
Cash and receivables
Inventory
Investment in Short
Land and buildings (net)
Equipment (net)
Database
Total assets
Liabilities
198,000
(245,000)
110,000
$(1,006,000)
Short
Consolidation Entries
Noncontrolling
Company
Debit
Credit
Interest
$(438,000) (TI) 140,000
286,000 (G) 10,000 (TI) 140,000
(*G) 5,000
112,000
(E) 9,000
(E) 2,000
Consolidated
Balances
$(1,282,000)
(14,000)
10,000
14,000
-0$(245,000)
$(350,000) (*G) 5,000
(S) 345,000
(40,000)
25,000
$(365,000)
$(871,000)
-0(245,000)
110,000
$(1,006,000)
(I)
$(40,000)
$239,000
454,000
440,000
$57,000
95,000
722,000
328,000
394,000(
257,000
$2,183,000
$803,000
$(686,000)
(D) 15,000
$(288,000)
A) 36,000
(A) 56,000
(A) 56,000
McGraw-Hill/Irwin
(P) 30,000
(G) 10,000
(S) 297,000
(I) 10,000
(A) 148,000
(E) 2,000
(E) 7,000
(E) 2,000
(90,000)
(60,000)
(365,000)
$(803,000)
$ 266,000
539,000
-01,150,000
634,000
54,000
$2,643,000
$(944,000)
(S) 198,000
(320,000)
(171,000)
(1,006,000)
$(2,183,000)
10,000
(P) 30,000
Noncontrolling interest in Short
Common stock
Additional Paid-in capital
Retained earnings (above) ................................
Total liabilities and stockholders’ equity
(D) 15,000
702,000
319,000
2,000
(198,000)
202,000
(S) 90,000
(S) 60,000
© The McGraw-Hill Companies, Inc., 2007
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
5-41
(202,000)
(320,000)
(171,000)
(1,006,000)
$2,643,000
33.
(50 Minutes) (Prepare consolidation entries for a combination where
upstream inventory transfers have occurred as well as downstream
equipment transfers. Parent has applied cost method)
Purchase Price Allocation and Excess Amortizations
Purchase price ................................................
Book value equivalency
($800,000 × 70%) ........................................
Cost in excess of book value ........................
Excess cost allocation
—Buildings ($50,000 × 70%) .....................
Franchise Agreement .....................................
Total ...........................................................
$665,000
(560,000)
Annual Excess
$105,000 Life Amortizations
35,000
$70,000
5 yrs.
10 yrs.
$7,000
7,000
$14,000
Inventory Transfers (Upstream)
2005 Gain deferred until 2006 ($12,000 × 30%) .............................
$3,600
2006 Gain deferred until 2007 ($18,000 × 30%) .............................
$5,400
Equipment Transfer (Downstream)
Unrealized gain as of January 1, 2006:
Unrealized gain on transfer (1/1/05) .........................................
2005 Excess depreciation ($20,000/5 yrs.) ..............................
Unrealized gain January 1, 2006 ....................................................
$20,000
(4,000)
$16,000
Excess depreciation—2006 ($20,000/5 yrs.) .................................
$4,000
Entry *G
Retained Earnings, 1/1/06 (Young) ....................
3,600
Cost of Goods Sold .......................................
3,600
To recognize upstream intercompany inventory gain deferred from
previous year.
Entry *TA
Retained Earnings, 1/1/06
(Silvey) (above) ..............................................
16,000
Equipment ($50,000 – $20,000) ..........................
30,000
Accumulated Depreciation
($50,000 – $4,000) ..........................................
46,000
To return equipment accounts to beginning book value based on
historical cost and to remove unrealized gain from beginning retained
earnings.
McGraw-Hill/Irwin
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© The McGraw-Hill Companies, Inc., 2007
5-42
33. (continued)
Entry *C
Investment in Young ......................................
123,480
Retained Earnings, 1/1/06 (Silvey) ..........
123,480
As cost method has been applied by parent, subsidiary's increase in
book value during 2004–2005 and excess amortizations for that
period must be recorded with computation as follows.
Retained Earnings of Young, December 31, 2006
(given) ...................................................................
$740,000
Eliminate Income and Dividends of Young
($160,000 – $50,000) ............................................
(110,000)
Retained Earnings of Young, December 31, 2005 ..
630,000
Removal of Unrealized Gain (Entry *G) ...................
(3,600)
Realized Retained Earnings of Young,
December 31, 2005 ...............................................
626,400
Retained Earnings at Date of Acquisition ...............
(410,000)
Increase in Retained Earnings during 2004–2005
(represents increase in book value) ..................
216,400
Ownership Percentage .............................................
70%
Income Accrual to be Recognized ...........................
151,480
Excess Amortizations for 2004–2005 ($14,000 × 2 yrs.) (28,000)
ENTRY *C ADJUSTMENT (above) ............................
$123,480
Entry S
Common Stock (Young) .....................................
300,000
Additional Paid-in Capital (Young) ....................
90,000
Retained Earnings, 1/1/06
(Young) (adjusted for *G) ..............................
626,400
Investment in Young (70%) ......................
711,480
Noncontrolling Interest in Young (30%) .
304,920
To eliminate stockholders' equity accounts of subsidiary and recognize
noncontrolling interest; amount of retained earnings has been
previously reduced to realized balance by Entry *G. The $626,400 figure
is computed above.
Entry A
Franchise Agreement ..........................................
56,000
Buildings ..............................................................
21,000
Investment in Young ......................................
77,000
To recognize amount paid within acquisition price for buildings and the
franchise agreement. Balances have been reduced by two years of
excess amortizations.
McGraw-Hill/Irwin
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© The McGraw-Hill Companies, Inc., 2007
5-43
33. (continued)
Entry I
Dividend Income .................................................
35,000
Dividends Paid ...............................................
35,000
To eliminate Intercompany dividend payments recorded by parent as
income since cost method is being used.
Entry E
Depreciation Expense ..........................................
7,000
Amortization Expense .........................................
7,000
Franchise Agreement ....................................
Buildings .........................................................
To recognize current year excess amortization expense.
7,000
7,000
Entry Tl
Sales ....................................................................
90,000
Cost of Goods Sold (or Purchases) .............
90,000
To remove intercompany inventory transfers made during the current
year.
Entry G
Cost of Goods Sold (or Ending Inventory) ........
5,400
Inventory..........................................................
5,400
To defer unrealized gain on 2006 intercompany inventory transfers
(computed above).
Entry ED
Accumulated Depreciation .................................
4,000
Depreciation Expense ...................................
4,000
To remove current year depreciation on transferred item since its
historical cost has been fully depreciated.
Noncontrolling Interest's Share of Subsidiary's Net Income
Reported income of Young (given) ....................................
$160,000
Recognition of 2005 unrealized gain (Entry *G) (upstream)
3,600
Deferral of 2006 unrealized gain (Entry G) (upstream) .....
(5,400)
Realized income of Young ..................................................
$158,200
Outside ownership percentage ..........................................
30%
Noncontrolling interest in subsidiary’s income ................
$47,460
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-44
34.
(35 Minutes) (Prepare consolidation entries for a combination where
upstream Inventory transfers have occurred as well as downstream
equipment transfers. Parent has applied equity method)
Entry *G (Same as Entry *G in Problem 33.)
Entry *TA
Investment in Young ...........................................
16,000
Equipment ............................................................
30,000
Accumulated Depreciation ............................
46,000
To return equipment account to its book value based on historical cost.
Because equity method has been applied and the transfer is
downstream, the unrealized gain will have already been removed from
the parent's retained earnings through an investment adjustment. Thus,
the remaining gain is eliminated here from the Investment account
rather than from retained earnings.
Entry *C (No Entry *C is needed because equity method has been applied.)
Entry S (Same as Entry S in Problem 33.)
Entry A (Same as Entry A in Problem 33.)
Entry I
Investment Income ..............................................
Investment in Young ......................................
To eliminate intercompany income accrual.
Entry D
Investment in Young ...........................................
Dividends Paid ...............................................
To eliminate intercompany dividend transfers.
100,740
100,740
35,000
35,000
Entry E (Same as Entry E in Problem 33.)
Entry TI (Same as Entry Tl in Problem 33.)
Entry G (Same as Entry G in Problem 33.)
Entry ED (Same as Entry ED in Problem 33.)
Noncontrolling interest's share of subsidiary’s net income (Same as in
Problem 33.)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-45
35.
(60 Minutes) (Consolidation worksheet for combination with upstream
inventory transfers and downstream transfer of land. Also asks about
transfer of a building)
a. CONSOLIDATION ENTRIES
Entry *TL
Retained Earnings, 1/1/06 (Bumpus) ............
40,000
Land ...........................................................
40,000
To remove unrealized gain on Intercompany downstream transfer of
land made in 2003.
Entry *G
Retained Earnings, 1/1/06 (Keller) ................
10,000
Cost of Goods Sold ..................................
10,000
To defer unrealized upstream Inventory gain from 2005 until 2006.
Unrealized gain is the 2005 ending inventory balance of $30,000 (20%
× $150,000) multiplied by 33-1/3% markup ($50,000/$150,000).
Entry *C
Retained earnings, 1/1/06 (Bumpus) ............
31,000
Investment in Keller .................................
31,000
Parent is applying the partial equity method as can be seen by the
amount in the Income of Keller Company account (60 percent of the
reported balance). Thus, amortization of $25,000 must be recognized
($100,000 divided by 20 years or $5,000 per year for the five-year
period from 2001 through 2005). In addition, the equity accrual
recorded by the parent has been based on Keller's reported income.
As shown in Entry *G, $10,000 of that reported income has not
actually been realized as of January 1, 2006. Thus, the previous
accrual must be reduced by $6,000 to mirror the parent's 60%
ownership. The total of the two adjustments being made here is
$31,000.
Entry S
Common Stock (Keller) .................................
320,000
Additional Paid-in Capital .............................
90,000
Retained earnings, 1/1/06 (Keller) (adjusted
by Entry *G) ...............................................
610,000
Investment in Keller (60%) ..................
612,000
Noncontrolling Interest in Keller, 1/1/06 (40%)
408,000
To remove stockholders' equity accounts of Keller and recognize
beginning noncontrolling interest. Retained earnings balance has
been adjusted for Entry *G.
35. (continued)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-46
Entry A
Customer List ..................................................
75,000
Investment in Keller .................................
75,000
To recognize amount paid within acquisition price for the customer
list. Original balance has been adjusted for five previous years of
amortization.
Entry I
Income of Keller .............................................
Investment in Keller .................................
To eliminate intercompany income accrual.
84,000
84,000
Entry D
Investment in Keller .......................................
36,000
Dividends Paid ..........................................
36,000
To eliminate intercompany dividend transfers—60% of subsidiary's
payment.
Entry E
Amortization Expense ....................................
5,000
Customer List ...........................................
To recognize current period excess amortization expense.
Entry P
Liabilities .........................................................
Accounts Receivable ...............................
To eliminate intercompany debt.
5,000
40,000
Entry Tl
Sales ................................................................
200,000
Cost of Goods Sold ..................................
To eliminate current year intercompany inventory transfer.
40,000
200,000
Entry G
Cost of Goods Sold .......................................
12,000
Inventory ....................................................
12,000
To defer 2006 unrealized inventory gain. Unrealized gain is the
ending inventory of $40,000 (20% of $200,000) multiplied by 30%
markup ($60,000/$200,000).
Noncontrolling Interest in Keller's Net Income
Keller reported net income .................................
2005 Intercompany gain realized in 2006 (inventory)
2006 Intercompany gain deferred (inventory) ...
Keller realized income 2006 ................................
Outside ownership percentage ..........................
Noncontrolling interest in Keller's net income
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
$140,000
10,000
(12,000)
$138,000
40%
$55,200
© The McGraw-Hill Companies, Inc., 2007
5-47
35. a. (continued)
Accounts
Sales
Cost of goods sold
Operating expenses
Amortization expense
Income of Keller
Noncontrolling interest
in Keller’s net income
Net income
RE, 1/1/06—Bumpus
Bumpus
$(800,000)
500,000
100,000
(84,000)
-0$(284,000)
$(1,116,000)
RE, 1/1/06—Keller
Net income (above)
Dividends
Retained earnings, 12/31/06
Cash
Accounts receivable
Inventory
Investment in Keller
Land
Buildings and equipment (net)
Customer List
Total assets
Liabilities
Common stock
Additional paid-in capital
Retained earnings, 12/31/06
NCI in Keller, 1/1/06
NCI In Keller, 12/31/06
Total liabilities and equity
McGraw-Hill/Irwin
(284,000)
115,000
$(1,285,000)
$ 177,000
316,000
440,000
766,000
180,000
496,000
BUMPUS AND KELLER
Consolidation Worksheet
Year Ending December 31, 2006
Consolidation Entries Noncontrolling
Keller
Debit
Credit
Interest
$(500,000) (TI) 200,000
300,000 (G) 12,000 (*G) 10,000
(TI) 200,000
60,000
(E)
5,000
-0- (I)
84,000
-0$(140,000)
(55,200)
(*TL) 40,000
(*C) 31,000
(620,000) (*G) 10,000
(S) 610,000
(140,000)
60,000
$(700,000)
$90,000
410,000
320,000
(D) 36,000
390,000
300,000
(A)
$2,375,000
$(480,000)
(610,000)
(1,285,000)
$1,510,000
$(400,000)
(320,000)
(90,000)
(700,000)
75,000
(D)
36,000
(P) 40,000
(G) 12,000
(*C) 31,000
(S) 612,000
(I)
84,000
(A) 75,000
(*TL) 40,000
(E)
160,000
5,000
-055,200
$(277,800)
$(1,045,000)
(277,800)
115,000
$(1,207,800)
$267,000
686,000
748,000
-0-
530,000
796,000
70,000
$3,097,000
(840,000)
(610,000)
5,000
(P) 40,000
(S) 320,000
(S) 90,000
(1,207,800)
(S) 408,000
$(2,375,000)
24,000
Consolidated
Totals
$(1,100,000)
602,000
(408,000)
(439,200)
$(1,510,000)
© The McGraw-Hill Companies, Inc., 2007
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
(439,200)
$(3,097,000)
5-48
35. (continued)
b. If the intercompany transfer had been a building rather than land, two
adjustments to the consolidation entries would be needed. Entry *TL
would be changed and relabeled as Entry *TA and an Entry ED would be
added to eliminate the overstatement of depreciation expense for 2006.
All other consolidation entries would be the same as shown in Part a.
As a downstream transfer, entries *C and S are not affected.
Entry *TA
Retained Earnings, 1/1/06 (Bumpus) ............
28,000
Buildings ........................................................
40,000
Accumulated Depreciation ......................
68,000
To eliminate current unrealized gain ($40,000 original amount less
three years of excess depreciation at the rate of $4,000 per year).
Entry also returns Buildings account to historical cost (from
$100,000 to $140,000) and Accumulated Depreciation account to
historical cost (original $80,000 plus three years of depreciation at
$6,000 per year). Because the Buildings account is shown at net
value in the information given in this problem, the above entry would
probably be made as follows:
Entry *TA (Alternative)
Retained Earnings, 1/1/06 (Bumpus) ............
Buildings (net) ..........................................
28,000
28,000
Entry ED
Accumulated Depreciation ............................
4,000
Operating (or Depreciation) Expense .....
4,000
To remove excess depreciation for current year created by transfer
price. Excess depreciation for each year would be $4,000 based on
allocating the $60,000 historical cost book value over 10 years
($6,000 per year) rather than the $100,000 transfer price ($10,000 per
year).
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 8/e
© The McGraw-Hill Companies, Inc., 2007
5-49
36.
(40 Minutes) (Prepare consolidation worksheet with intercompany transfer
of inventory and land. No outside ownership exists)
Purchase Price Allocation
Purchase price (fair value of shares issued) ..........................
Book value of subsidiary ..........................................................
Cost in excess of book value ...................................................
Excess cost assigned based on fair values:
Land ...........................................................................................
Franchise ...................................................................................
Life of Franchise .......................................................................
Annual amortization ..................................................................
$450,000
300,000
$150,000
30,000
$120,000
40 years
$ 3,000
Unrealized Upstream Inventory Gain, 1/1/07
Inventory being held ($100,000 × 30%) ....................................
Markup ($40,000/$100,000) .......................................................
Unrealized gain, 1/1/07 ..............................................................
$30,000
40%
$12,000
Unrealized Upstream Inventory Gain, 12/31/07
Inventory being held (given) ....................................................
Markup ($75,000/$150,000) .......................................................
Unrealized gain, 12/31/07 ...........................................................
$20,000
50%
$10,000
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/07 (Meadow) .................
12,000
Cost of Goods Sold .......................................
12,000
To remove impact of beginning unrealized gain. Amount computed
above.
Entry S
Common Stock (Meadow) ..................................
120,000
Additional Paid-In Capital (Meadow) .................
30,000
Retained Earnings, 1/1/07 (Meadow) (adjusted)
280,000
Investment in Meadow....................................
430,000
To remove stockholders' equity accounts of subsidiary. Retained
earnings has been adjusted for elimination of beginning unrealized gain
in Entry *G.
Entry A
Land .....................................................................
30,000
Franchise .............................................................
108,000
Investment in Meadow ...................................
138,000
To recognize allocation balances as of January 1, 2007. Franchise
account has been adjusted for four prior years of amortization at $3,000
per year.
36. (continued)
McGraw-Hill/Irwin
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© The McGraw-Hill Companies, Inc., 2007
5-50
Entry I
Investment Income ..............................................
82,000
Investment in Meadow ...................................
82,000
To remove intercompany income accrued by parent using the equity
method.
Entry D
Investment in Meadow ........................................
Dividends Distributed ....................................
To eliminate Intercompany dividend payments.
20,000
20,000
Entry E
Amortization (or General and Administrative)
Expense ................................................................
3,000
Franchise ........................................................
3,000
To recognize amortization expense on franchise for the current period.
Entry P
Liabilities...............................................................
17,000
Receivables ....................................................
17,000
To eliminate intercompany receivable/payable balance created by
transfer of land.
Entry Tl
Revenues .............................................................
150,000
Cost of Goods Sold .......................................
To eliminate intercompany inventory transfer for 2007.
150,000
Entry G
Cost of Goods Sold .............................................
10,000
Inventory..........................................................
10,000
To defer unrealized inventory gain. Amount is computed above.
Entry TL
Gain on Sale of Land ...........................................
5,000
Land ................................................................
5,000
To remove gain created by intercompany transfer of land during current
year.
McGraw-Hill/Irwin
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© The McGraw-Hill Companies, Inc., 2007
5-51
36. (continued)
GREENE AND MEADOW
Consolidation Worksheet
Year Ending December 31, 2007
Accounts
Revenues
Cost of goods sold
Greene
$(477,000)
289,000
General and administrative expenses
Gain on sale of land
Investment income
Net income
170,000
(5,000)
(82,000)
$(105,000)
$(88,000)
Retained earnings, 1/1/07
$(365,000)
$(292,000)
Net income (above)
Dividends distributed
Retained earnings, 12/31/07
Cash and receivables
Inventory
Investment in Meadow
(105,000)
70,000
$(400,000)
$169,000
281,000
630,000
(88,000)
20,000
$(360,000)
$210,000
232,000
487,000
284,000
$1,567,000
$726,000
Land, buildings, and equipment (net)
Franchise
Total assets
Liabilities
$(466,000)
Common stock
(410,000)
Additional paid-in capital
(291,000)
Retained earnings (above)
(400,000)
Total liabilities & stockholders’ equity $(1,567,000)
Meadow
$(358,000)
195,000
75,000
Consolidation Entries
Debit
Credit
(TI) 150,000
(G) 10,000 (TI) 150,000
(*G) 12,000
(E)
3,000
(TL) 5,000
(I) 82,000
(*G) 12,000
(S) 280,000
(D) 20,000
(D)
$(216,000)
(120,000)
(30,000)
(360,000)
$(726,000)
20,000
(A) 30,000
(A) 108,000
(P) 17,000
(G) 10,000
(S) 430,000
(A) 138,000
(I) 82,000
(TL) 5,000
(E) 3,000
(P) 17,000
(S) 120,000
(S) 30,000
Parentheses indicate a credit balance
McGraw-Hill/Irwin
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© The McGraw-Hill Companies, Inc., 2007
5-52