Chapter 6 INTERCOMPANY PROFIT TRANSACTIONS PLANT ASSETS

Answers to Questions 1 The objective of eliminating the effect of inte!com"an# ale of "lant a et i to !eflect "lant a et an$ !elate$ $e"!eciation amo%nt in the con oli$ate$ financial tatement at co t to the con oli$ate$ entit#& 2 Con oli$ation "!oce$%!e fo! eliminating %n!eali'e$ "!ofit on "lant a et a!e affecte$ b# the $i!ection of the ale& The f%ll amo%nt of %n!eali'e$ "!ofit o! lo on $o(n t!eam ale )"a!ent to %b i$ia!#* i cha!ge$ o! c!e$ite$ to the cont!olling inte!e t& In the ca e of %" t!eam ale + ho(eve!+ %n!eali'e$ "!ofit o! lo i allocate$ bet(een cont!olling an$ noncont!olling inte!e t & ,eca% e the!e i no allocation to noncont!olling inte!e t in the ca e of a -.. "e!cent o(ne$ %b i$ia!#+ con oli$ation "!oce$%!e a!e the ame fo! %" t!eam ale a fo! $o(n t!eam ale & /n!eali'e$ gain an$ lo e f!om inte!com"an# ale of lan$ a!e !eali'e$ f!om the vie("oint of the elling affiliate (hen the "%!cha ing affiliate !e ell the lan$ to "a!tie o%t i$e the con oli$ate$ entit#& Thi i al o the "oint at (hich the con oli$ate$ entit# !ecogni'e gain o! lo on the $iffe!ence bet(een the elling "!ice to o%t i$e "a!tie an$ the co t to the con oli$ate$ entit#& Noncont!olling inte!e t ha!e i not affecte$ b# $o(n t!eam ale of lan$ beca% e the !eali'e$ income of the %b i$ia!# i not affecte$ b# $o(n t!eam ale & In the ca e of %" t!eam ale of lan$+ the !e"o!te$ income of the %b i$ia!# i a$j% te$ $o(n(a!$ fo! %n!eali'e$ "!ofit an$ %"(a!$ fo! %n!eali'e$ lo e to $ete!mine !eali'e$ income& Since noncont!olling inte!e t ha!e i com"%te$ on the ba i of !eali'e$ %b i$ia!# income+ the com"%tation of noncont!olling inte!e t ha!e i affecte$ b# %" t!eam ale of lan$& Con oli$ation "!oce$%!e a!e $e igne$ to eliminate -.. "e!cent of all %n!eali'e$ "!ofit o! lo on all inte!com"an# t!an action & The i %e i not (hethe! -.. "e!cent of the %n!eali'e$ "!ofit o! lo i eliminate$+ b%t if the amo%nt eliminate$ i allocate$ bet(een cont!olling an$ noncont!olling inte!e t & In the ca e of an %" t!eam ale of lan$+ -.. "e!cent of the %n!eali'e$ "!ofit f!om the ale i eliminate$+ b%t the amo%nt i allocate$ bet(een cont!olling an$ noncont!olling inte!e t in !elation to thei! o(ne! hi" hol$ing & /n!eali'e$ gain an$ lo e f!om inte!com"an# ale of $e"!eciable a et a!e !eali'e$ th!o%gh % e if the a et a!e hel$ (ithin the con oli$ate$ entit# an$ th!o%gh ale if the a et a!e ol$ to o%t i$e "a!tie & The "!oce of !ecogni'ing "!evio% l# %n!eali'e$ gain an$ lo e th!o%gh % e i a "iecemeal !ecognition ove! the !emaining % e life of the $e"!eciable a et& The com"%tation of noncont!olling inte!e t ha!e in the #ea! of an %" t!eam ale of $e"!eciable "lant a et i a follo( 0 Unrealized Unrealized Gain on Sale Loss on Sale Income of subsidiary as reported XXX XXX Deduct: Gain on sale of plant assets - XX Add: Loss on sale of plant assets + XX Add: Piecemeal recognition of gain on sale of plant assets + X Deduct: Piecemeal recognition of loss on sale of plant assets - X Realized subsidiary income XXX XXX X X Noncont!olling nterest percentage XXX XXX Noncont!olling interest s!are

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6-2

Intercompany Profit Transactions Plant Assets

The effect of %n!eali'e$ gain on inte!com"an# ale of "lant a et a!e cha!ge$ again t the "a!ent com"an#7 income f!om %b i$ia!# acco%nt in the #ea! of the inte!com"an# ale+ (ith e8%al amo%nt being $e$%cte$ f!om the inve tment in %b i$ia!# acco%nt& In %b e8%ent #ea! + the income f!om %b i$ia!# an$ inve tment in %b i$ia!# acco%nt a!e inc!ea e$ fo! $e"!eciation on the %n!eali'e$ gain that i !eco!$e$ on the %b i$ia!# boo9 fo! $o(n t!eam ale o! fo! the "a!ent7 "!o"o!tionate ha!e fo! %" t!eam ale & If the %n!eali'e$ gain !elate to lan$+ no ent!ie a!e nee$e$ %ntil the lan$ i ol$ to entitie o%t i$e of the affiliation t!%ct%!e& Acco%nting "!oce$%!e a!e $e igne$ to eliminate the effect of inte!com"an# ale of "lant a et on both "a!ent com"an# income an$ con oli$ate$ net income %ntil the gain an$ lo e on %ch ale a!e !eali'e$ th!o%gh % e o! th!o%gh ale to o%t i$e "a!tie & In #ea! %b e8%ent to inte!com"an# ale of $e"!eciable "lant a et + the effect on "a!ent com"an# income i eliminate$ b# a$j% ting $e"!eciation e:"en e to a co t ba i fo! the con oli$ate$ entit#& Con oli$ation (o!9ing "a"e! ent!ie to eliminate the effect of a gain on ale of $e"!eciable "lant a et f!om a $o(n t!eam ale a!e ill% t!ate$ a follo( 0 Year of sale ;ain on ale Acc%m%late$ $e"!eciation <e"!eciation e:"en e Plant a et To !e$%ce "lant a et an$ !elate$ $e"!eciation amo%nt to a co t ba i con oli$ate$ entit# an$ to eliminate %n!eali'e$ gain on inte!com"an# ale& Subsequent years Inve tment in %b i$ia!# Acc%m%late$ $e"!eciation <e"!eciation e:"en e Plant a et To !e$%ce "lant a et an$ !elate$ $e"!eciation amo%nt to a co t ba i to the con oli$ate$ entit# an$ to a$j% t the inve tment acco%nt fo! %n!eali'e$ "!ofit at the beginning of the c%!!ent #ea!& to the

10

SOLUTIONS TO EXERCISES Solution E6-1 1 2 3 4 c a c d

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Chapter 6

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Solution E6-2 1 Parsen*s income from +amit ,ill be decreased by -#.'$$$ as a result of t!e follo,ing entry: Income from +amit #.'$$$ In/estment in +amit #.'$$$ 0o eliminate unrealized gain on do,nstream sale of land( Parsen*s net income for #$1# ,ill not be affected by t!e sale since t!e -#.'$$$ gain ,ill be offset by a -#.'$$$ decrease in income from +amit( 0!e in/estment in +amit account at December 21' #$1# ,ill be -#.'$$$ less as a result of t!e sale as indicated by t!e abo/e entry( 30!e total balance s!eet effect is to reduce land to its cost' reduce t!e in/estment account for t!e profit' and increase cas! or ot!er assets for t!e proceeds(4 2 0!e consolidated financial statements ,ill not be affected because t!e gain on t!e sale is eliminated in t!e consolidated income statement and t!e land is reduced to its cost basis to t!e consolidated entity( A ,or5ing paper ad6ustment ,ould s!o,: Gain on sale of land Land 3 #.'$$$ #.'$$$

7eit!er Parsen*s income from +amit or net income for #$12 ,ill be affected by t!e #$1# sale of land( 0!e in/estment in +amit account' !o,e/er' ,ill still be -#.'$$$ less t!an if t!e land !ad not been sold' e/en t!oug! t!ere are no c!anges in t!e in/estment account during #$12( 0!e sale of t!e land ,ill not affect +amit*s net income since it is being sold at +amit*s cost( )o,e/er' t!e sale triggers recognition of t!e postponed gain on t!e original sale from Parsen to +amit( In/estment in +amit Income from +amit 0o recognize t!e gain deferred in #$$8( #.'$$$ #.'$$$

9onsolidated income ,ill also feel t!e same impact of t!e recognition of t!e deferred gain( In/estment in +amit Gain on sale of land #.'$$$ #.'$$$

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6-4

Intercompany Profit Transactions Plant Assets

Solution E6-3 1a Consolidated net income Pruitt*s separate income Add: &;uity in +il/erman*s income #$$% -<$'$$$ %$ #$1$ -8$'$$$ %$ Gain on sale of land 9onsolidated net income 1b Noncontrolling interest share +il/erman*s net income 1$ 2a Consolidated net income Pruitt*s separate income Add: &;uity in +il/erman*s income Less: Gain on land %$ 9onsolidated net income 2b Noncontrolling interest share +il/erman*s net income 1$ Less: Gain on land 1$ 7oncontrolling interest s!are Solution E6-4 1 Entries for 2009 9as! In/estment in +almar5 0o record di/idends recei/ed from +almar5( In/estment in +almar5 Income from +almar5 1$<'$$$ 1$<'$$$ 12.'$$$ 32$'$$$4 2'$$$ 1$<'$$$ %$'$$$ %$'$$$ <'$$$ 31'$$$4 ='$$$ 8'$$$ --8'$$$ 2$$'$$$ =#'$$$ 3%'$$$4 282'$$$ :$$'$$$ .:'$$$ --:.:'$$$ <'$$$ 8'$$$ #$$% 2$$'$$$ =#'$$$ 31$'$$$4 28#'$$$ .:'$$$ --:.:'$$$ #$1$ :$$'$$$

0o record income from +almar5 computed as follo,s: +!are of +almar5*s reported income 3-1.$'$$$ %$ 4 Less: Gain on building sold to +almar5 Add: Piecemeal recognition of gain on building 3-2$'$$$>1$ years4 Income from +almar5 2 +ales 9ost of sales Gross profit ?perating e@penses Pigwich Co !o ation an" Sub#i"ia $ 9onsolidated Income +tatement for t!e year ended December 21' #$$%

-#'#$$'$$$ 31':$$'$$$4 <$$'$$$ 3::='$$$4

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0otal consolidated income Noncont!olling interest s!are 9ontrolling interest s!are

2.2'$$$ 31.'$$$4 22<'$$$

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6-6

Intercompany Profit Transactions Plant Assets

Solution E6-% AAI9PA adaptedB 1 d 0!e e;uipment must be s!o,n at its -1':$$'$$$ boo5 /alue to t!e consolidated entity and d is t!e only c!oice t!at pro/ides a -1':$$'$$$ boo5 /alue( ?rdinarily' t!e e;uipment ,ould be s!o,n at -1'.$$'$$$' its boo5 /alue at t!e time of transfer' less t!e -1$$'$$$ depreciation after transfer( c Reciprocal recei/ables and payables accounts and purc!ases and sales accounts must al,ays be eliminated( Cut di/idend income 3parent4 and di/idends paid 3subsidiary4 accounts are reciprocals only ,!en t!e cost met!od is used( a Amount to be eliminated from consolidated net income in 2009: Intercompany gain on do,nstream sale of mac!inery -1$'$$$ Less: Realized t!roug! depreciation of intercompany gain on mac!inery 3-1$'$$$>. years4 3#'$$$4 Decrease in consolidated net income from - <'$$$ intercompany sale Amount to be added to consolidated net income in #$1$ for realization t!roug! depreciation of intercompany gain on mac!inery - #'$$$ b ?ne-t!ird of t!e unrealized intercompany profit is recognized t!roug! depreciation for #$$%(

Solution E6-6 1 a +elling price in #$1= 9ost to consolidated entity Gain on sale of land ..'$$$ 1.'$$$ :$'$$$

b Gain on e;uipment 2$'$$$ Less: Depreciation on gain 31$'$$$4 7et effect on in/estment account #$'$$$ 0!e in/estment account ,ill be -#$'$$$ less t!an t!e underlying e;uity interest( b 9ombined e;uipment net Less: Dnrealized gain Add: Piecemeal recognition of gain 9onsolidated e;uipment net b he !or"ing #a#er entr$ to eliminate the unrealized #rofit is: Gain on sale of e;uipment 1'.$$ &;uipment 1'.$$ <$$'$$$ 3#$'$$$4 .'$$$ =<.'$$$

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c In/estment income ,ill be decreased by -1#'$$$ gain less -2'$$$ piecemeal recognition of t!e gain( c +artin*s net income Less: Dnrealized gain Add: Piecemeal recognition Realized income Noncont!olling interest percentage 7oncont!olling interest s!are -1'$$$'$$$ 3.$'$$$4 .'$$$ %..'$$$ :$ - 2<#'$$$

Solution E6-& Po" Co !o ation an" Sub#i"ia $ 9onsolidated Income +tatement for t!e year ended December 21' #$$% +ales 3-.$$'$$$ + -2$$'$$$4 Gain on sale of mac!inerya 0otal re/enue 9ost of sales 3-#$$'$$$ + -12$'$$$4 Depreciation e@pense 3-.$'$$$ + -2$'$$$ - -.'$$$ from depreciation on intercompany profit for #$$%4 ?t!er e@penses 3-<$'$$$ + -:$'$$$4 0otal e@penses 9onsolidated net income 7oncontrolling s!are 3-1$$'$$$+-.'$$$ piecemeal recognition from depreciation + -1$'$$$ remaining deferred gain4 #. noncontrolling interest 9ontrolling interest s!are
a +elling price of mac!inery at December #<' #$$% Coo5 /alue on Pod*s boo5s -8.'$$$ E 3-8.'$$$>. years 2 years4 Gain on sale of mac!inery ?riginal intercompany profit Piecemeal recognition of gain -#.'$$$>. years 2 years Dnamortized gain from intercompany sales Gain on sale of mac!inery to outside entity

-<$$'$$$ #$'$$$ <#$'$$$ 22$'$$$ =.'$$$ 1#$'$$$ .#.'$$$ -#%.'$$$ #<'=.$ -#88'#.$
- 28'$$$ #8'$$$ - 1$'$$$ - #.'$$$ 1.'$$$ - 1$'$$$ - #$'$$$

Solution E6-' %reliminar$ com#utations: In/estment in +alt 3:$ 4 at cost Implied total fair /alue of +alt 3-1$$'$$$ > :$ 4 Coo5 /alue &@cess allocated to patents Annual amortization of patents 3-.$'$$$>. years4 1 &ncome from Salt 2009 +!are of +alt*s net income 3-:$'$$$ 1># year :$ 4

-1$$'$$$ -#.$'$$$ 3#$$'$$$4 - .$'$$$ - 1$'$$$

<'$$$

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6-8

Intercompany Profit Transactions Plant Assets

Amortization of patents 3-1$'$$$ 1># year :$ 4 Dnrealized in/entory profit from upstream sale 3-:'$$$ :$ 4 Dnrealized gain from do,nstream sale of land 3-#'$$$ 1$$ 4 Income from +alt

3#'$$$4 31'8$$4 3#'$$$4 - #':$$

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Chapter 6

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Solution E6-' 3continued4 2 &ncome from Salt 20'0 +alt*s net income Amortization of patents Dnrealized in/entory profits from upstream sales: Recognition of profit in beginning in/entory Deferral of profit in ending in/entory +alt*s ad6usted and realized income Income from +alt 3:$ s!are4 Solution E6-( 1 &ncome from Sim#le( net income and consolidated net income: +imple*s reported net income -1$$'$$$ Less: Amortization of e@cess allocated to buildings 3-.$$'$$$ - -:$$'$$$4>#$ years 3.'$$$4 Less: -#$'$$$ unrealized profit on e;uipment 3#$'$$$4 +imple*s ad6usted and realized income - =.'$$$ Income from +imple 3<$ s!are4 #$11 Add: +eparate income of Plain for #$11 7et income of Plain #$11 +imple*s reported net income Less: Amortization of e@cess allocated to buildings Add: Piecemeal recognition of unrealized gain on e;uipment 3-#$'$$$>: years4 +imple*s ad6usted and realized income Income from +imple )=.>* #$1# Add: +eparate income of Plain 7et income of Plain #$1# - 8$'$$$ .$$'$$$ -.8$'$$$ -11$'$$$ 3.'$$$4 .'$$$ -11$'$$$ - <<'$$$ 8$$'$$$ -8<<'$$$ - 8$'$$$ 31$'$$$4 :'$$$ 38'$$$4 - :<'$$$ - 1%'#$$

Consolidated net income for 20'' and 20'2 ) %lain*s net income Alternati/ely' #$11 #$1# +eparate incomes combined -8$$'$$$ -=1$'$$$ Less: Amortization of e@cess 3buildings4 3.'$$$4 3.'$$$4 Less: Dnrealized gain on e;uipment in #$11 3#$'$$$4 Add: Piecemeal recognition of gain in #$1# .'$$$ 9onsolidated net income -.=.'$$$ -=1$'$$$ Less: 7oncontrolling interest s!are: 31.'$$$4 #$11 3-1$$'$$$ - -#$'$$$ - -.'$$$4 #$ 3##'$$$4 #$1# 3-11$'$$$ + -.'$$$ - -.'$$$4 #$ 9ontrolling interest s!are -.8$'$$$ -8<<'$$$ 2 &n+estment in Sim#le 9ost of in/estment Fuly 1' #$$% Add: Plain*s s!are of +imple*s retained earnings increase from Fuly 1' #$$% to December 21' #$1$ 3-1.$'$$$ - -1$$'$$$4 <$ Less: <$ Amortization of e@cess 3-:'$$$ 1(. years4 In/estment in +imple December 21' #$1$ -:$$'$$$ :$'$$$ 38'$$$4 :2:'$$$

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6-10

Intercompany Profit Transactions Plant Assets

:$'$$$ Add: #$11 income less di/idends A-<$'$$$ - 3-.$'$$$ <$ 4B In/estment in +imple December 21' #$11 :=:'$$$ :$'$$$ Add: #$1# income less di/idends A-<<'$$$ - 3-8$'$$$ <$ 4B In/estment in +imple December 21' #$1# -.1:'$$$ Solution E6-( 3continued4 Alternati+e solution for chec" at ,ecember -'( 20'2: +!are of +imple*s e;uity December 21' #$1# 3-..$'$$$ <$ 4 -::$'$$$ Add: <$ Dnamortized e@cess on buildings <8'$$$ ?riginal e@cess -1$$'$$$ - 3-:'$$$ 2(. years4 Less: Dnrealized profit on e;uipment 31#'$$$4 3-#$'$$$ gain - -.'$$$ recognized4 <$ In/estment in +imple December 21' #$1# -.1:'$$$ Solution E6-1) %reliminar$ com#utations 0ransfer price of in/entory to +pano 3-1<$'$$$ #4 9ost to consolidated entity Dnrealized profit on Fanuary 2 Amortization of unrealized profit from consolidated /ie,: -1<$'$$$>8 years G -2$'$$$ per year 1 -28$'$$$ 31<$'$$$4 -1<$'$$$

Consolidated balance sheet amounts: 2009 &;uipment 3at transfer price4 -28$'$$$ Less: Dnrealized profit 31<$'$$$4 Less: Depreciation ta5en by +pano 3-28$'$$$>8 years4 38$'$$$4 Add: Depreciation on unrealized profit 3-1<$'$$$>8 years4 2$'$$$ &;uipment net to be included on consolidated balance s!eet -1.$'$$$ Alternati/ely: &;uipment 3at cost to t!e consolidated entity4 Less: Depreciation based on cost 3-1<$'$$$>8 years4 &;uipment net 20'0 Hear after intercompany sale &;uipment net beginning of t!e period on cost basis Less: Depreciation 3based on cost4 &;uipment net -1<$'$$$ 32$'$$$4 -1.$'$$$ -1.$'$$$ 32$'$$$4 -1#$'$$$

Consolidation !or"ing #a#er entries: 2009 +ales 28$'$$$ 9ost of goods sold 1<$'$$$ 1.$'$$$ &;uipment net Depreciation e@pense 2$'$$$ 0o eliminate intercompany in/entory sale' return e;uipment to its cost to t!e consolidated entity' and eliminate depreciation on t!e intercompany profit( 20'0 In/estment in +pano 1.$'$$$

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1#$'$$$ &;uipment net Depreciation e@pense 2$'$$$ 0o eliminate unrealized profit from t!e e;uipment account and t!e current year*s depreciation on t!e unrealized profit and establis! reciprocity bet,een t!e in/estment account and beginning-of-t!e-period subsidiary e;uity accounts(

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6-12

Intercompany Profit Transactions Plant Assets

Solution E6-11 Pa#co Co !o ation an" Sub#i"ia $ +c!edule for 9omputation of 9onsolidated 7et Income #$$% #$1$ #$11 #$1# 9ombined separate incomes -#8$'$$$ -##$'$$$ -1#$'$$$ -#1$'$$$ Add: Amortization of negati/e differential assigned to plant assets 3-.$'$$$>1$ years4I .'$$$ .'$$$ .'$$$ .'$$$ Dnrealized gain on land 37ote 0!at Pasco*s -.'$$$ gain is included in Pasco*s separate income4 3.'$$$4 .'$$$ Dnrealized gain on mac!inery 3#.'$$$4 Piecemeal recognition of Gain on mac!inery .'$$$ .'$$$ .'$$$ Dnrealized in/entory profits 3<'$$$4 <'$$$ 9onsolidated net income #8$'$$$ #$.'$$$ 1##'$$$ #22'$$$ Less: 7oncontrolling interest s!are 31#'$$$4 2009 3-8$'$$$--.'$$$+-.'$$$4 #$ 3 1.'$$$4 20'0 3-=$'$$$+-.'$$$4 #$ 31.':$$4 20'' 3-<$'$$$--<'$$$+-.'$$$44 #$ 20'2 3-%$'$$$ + -<'$$$ + 3#1'8$$4 -.'$$$ + -.'$$$44 #$ 9ontrolling s!are of 7I -#:<'$$$ -1%$'$$$ -1$8'8$$ -#11':$$ Alternati+e Solution: Pasco*s separate income Add: <$ of +locum*s income Amortize t!e negati/e differential assigned to plant asset <$ 4 Dnrealized profit on upstream +ale of land 3-.'$$$ <$ 4 Dnrealized profit on do,nstream +ale of mac!inery Piecemeal recognition of gain 3-#.'$$$>. years4 Dnrealized profit on upstream +ale of in/entory items -<'$$$ <$ Pasco*s net income and controlling s!are of consolidated net income -#$$'$$$ :<'$$$ :'$$$ 3:'$$$4 3#.'$$$4 .'$$$ .'$$$ 38':$$4 -#:<'$$$ -1%$'$$$ -1$8'8$$ .'$$$ 8':$$ -#11':$$ s!are' t!e -1.$'$$$ .8'$$$ :'$$$ - :$'$$$ 8:'$$$ :'$$$ -1#$'$$$ =#'$$$ :'$$$ :'$$$

I 7ote: +ince Pasco paid -:$'$$$ more t!an boo5 /alue for its <$ implied total fair /alue minus boo5 /alue of +locum is -.$'$$$(

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Chapter 6

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SOLUTIONS TO PRO*LE+S Solution P6-1 1 &ncome from Sear 2009 &;uity in +ear*s income 3-1$$'$$$ %$ 4 Add: Deferred in/entory profit from #$$< 3-:$'$$$ .$ 4 Less: Dnrealized in/entory profit from #$$% 3-8$'$$$ :$ 4 Less: Intercompany profit on e;uipment 3-1$$'$$$ - -8$'$$$4 Add: Piecemeal recognition of profit on e;uipment -:$'$$$>: years Income from +ear 3corrected amount4 2 P,a l Co !o ation an" Sub#i"ia $ 9onsolidated Income +tatement for t!e year ended December 21' #$$% +ales A-1'8$$'$$$ combined - -1.$'$$$ intercompanyB 9ost of sales A-1'$$$'$$$ combined - -1.$'$$$ intercompany + -#:'$$$ ending in/entory profits - -#$'$$$ beginning in/entory profitsB Gross profit ?t!er e@penses A-2$$'$$$ combined - -1$'$$$ piecemeal recognition of profit on e;uipmentB 9onsolidated net income Less: 7oncontrolling interest s!are 9ontrolling interest s!are 9!ec5: +eparate income of Pearl Add: Income from +ear 9ontrolling interest s!are -1':.$'$$$ %$'$$$ #$'$$$ 3#:'$$$4 3:$'$$$4 1$'$$$ .8'$$$

<.:'$$$ .%8'$$$ #%$'$$$ 2$8'$$$ 1$'$$$ #%8'$$$ #:$'$$$ .8'$$$ #%8'$$$

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6-14

Intercompany Profit Transactions Plant Assets

Solution P6-2 %reliminar$ com#utations 7?0&: +ince Pal paid a price -:.'$$$ in e@cess of boo5 /alue for its %$ s!are' t!e implied total e@cess of fair /alue o/er boo5 is -.$'$$$ 3-:.'$$$ > %$ 4( Com#utation of income from Sim: +!are of +im*s reported income 3-:$'$$$ (%4 Add: Realization of deferred profits in beginning in/entory Less: Dnrealized profits in ending in/entory Less: Dnrealized profit on intercompany sale of e;uipment 3-2$'$$$ - -#1'$$$4 Add: Piecemeal recognition of deferred profit in e;uipment 3-%'$$$>2 years4 Income from +im Consolidation !or"ing #a#er entries A 9as! #'$$$ Accounts recei/able 0o record cas! in transit from +im on account( #$'$$$ 9ost of sales 0o eliminate intercompany purc!ases and sales( #'$$$ -28'$$$ .'$$$ 3:'$$$4 3%'$$$4 2'$$$ -21'$$$

+ales

#$'$$$

In/estment in +im .'$$$ 9ost of sales .'$$$ 0o recognize pre/iously deferred profit from beginning in/entory( 9ost of sales :'$$$ In/entory 0o defer unrealized profit from ending in/entory( :'$$$

&

In/estment in +im 2'$$$ Land 2'$$$ 0o reduce land to its cost basis and ad6ust t!e in/estment account to establis! reciprocity ,it! +im*s beginning of t!e period e;uity accounts( Gain on sale of e;uipment %'$$$ %'$$$ &;uipment net 0o eliminate gain on intercompany sale of e;uipment and reduce e;uipment to a cost basis(

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Chapter 6

6-15

Solution P6-2 3continued4 g 2'$$$ &;uipment net ?perating e@penses 2'$$$ 0o eliminate current year*s depreciation of unrealized gain( Income from +im 21'$$$ 1<'$$$ Di/idends +im In/estment in +im 12'$$$ 0o eliminate income and di/idends from +im and return in/estment account to its beginning of t!e period balance( =$'$$$ Retained earnings +im .$'$$$ 9apital stoc5 +im Good,ill .$'$$$ In/estment in +im 1.2'$$$ 1='$$$ 7oncontrolling interest Fanuary 1 0o eliminate reciprocal in/estment and e;uity amounts' establis! beginning noncontrolling interest' and enter beginning-of-t!eperiod fair /alue boo5 /alue differential 3good,ill4( 7oncontrolling Interest +!are :'$$$ #'$$$ Di/idends +im 7oncontrolling Interest #'$$$ 0o record 7oncontrolling interest s!are of subsidiary income and di/idends( Di/idends payable %'$$$ Di/idends recei/able 0o eliminate reciprocal recei/ables and payables( %'$$$

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6-16

Intercompany Profit Transactions Plant Assets

Solution P6-2 3continued4 Pal Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e year ended December 21' #$1$ 3in t!ousands4
Pal &ncome Statement +ales Income from +im Gain on e;uipment 9ost of sales ?perating e@penses 9onsolidated 7I - 2$$ 21 % 1:$ I 8$I +im %$ - 1$$ Ad6ustments and &liminations b #$ ! 21 f % d : 9onsolidated +tatements - 2<$

.$I 1$I

b c g

#$ . 2

7oncontrolling s!are
9ontrolling s!are of 7I .etained Earnings Retained earnings Pal Retained earnings +im 9ontrolling s!are of 7I Di/idends Retained earnings December 21 /alance Sheet 9as! Accounts recei/able Di/idends recei/able In/entories Land Cuildings net &;uipment net In/estment in +im Good,ill - =1= Accounts payable Di/idends payable ?t!er liabilities 9apital stoc5 Retained earnings %< 1. 8= 2$$ #2= - =1= - #$$ 2$ 1$ #$ .$ %$ - #$$ - 1:$ :$

18% I 8=I 1:: :I - 1:$

- 1.= 1:$ 8$I =$ :$ #$I i =$

- 1.= 1:$ ! 6 1< # 8$I - #2=

- #2=

%$

- 1$$ %$ % #$ :$ 12. 18. 1.<

1= .$ < 1. .$ 8$

# a 5 d e # % : 2

- 11% 12< #: .# 1<. #1%

g 2 c . e 2 i .$

f % ! 12 i 1.2

.$ - =<= - 1#< 18 <= 2$$ #2=

i .$

7oncontrolling interest Fanuary 1

1=

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Chapter 6

6-17 6 # 1% - =<=

7oncontrolling interest December 21

I Deduct

Solution P6-3 %reliminar$ com#utations 9ost Fanuary 1' #$$% Implied fair /alue of +tor 3-#=$'$$$ > %$ 4 Coo5 /alue of +tor &@cess of fair /alue o/er boo5 /alue - Good,ill 9ost Fanuary 1' #$$% Add: Income from +tor for #$$% - 28'$$$ &;uity in income 3-:$'$$$ %$ 4 Less: Dnrealized in/entory profit 31$'$$$4 Less: Dnrealized profit on mac!inery 3selling price -2.'$$$ - boo5 /alue -#<'$$$4 3='$$$4 Add: Piecemeal recognition of profit on 1'$$$ mac!inery 3-='$$$>2(. years (. year4 Income from +tor for #$$% Less: Di/idends -1$'$$$ %$ In/estment balance Fanuary 1' #$1$ Add: Income from +tor for #$1$ &;uity in income 3-.$'$$$ %$ 4 Add: Dnrealized profit in beginning in/entory Less: Dnrealized profit in ending in/entory Add: Piecemeal recognition of profit on mac!inery 3-='$$$>2(. years4 Less: Gain on sale of land Income from +tor for #$1$ Less: Di/idends 3-#$'$$$ %$ 4 In/estment balance December 21' #$1$ -#=$'$$$ -2$$'$$$ 3#:$'$$$4 - 8$'$$$ -#=$'$$$

#$'$$$ 3%'$$$4 #<1'$$$

- :.'$$$ 1$'$$$ 31#'$$$4 #'$$$ 3.'$$$4 :$'$$$ 31<'$$$4 -2$2'$$$

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6-18

Intercompany Profit Transactions Plant Assets

Solution P6-3 3continued4 Pall Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e Hear &nded December 21' #$1$ 3in t!ousands4
Pall &ncome Statement +ales Income from +tor Gain on land 9ost of sales ?perating e@pense :.$ :$ . 3#$$4 31124 +tor %$ - 1%$ a f e c Ad6ustments and &liminations =# :$ . 1# 9onsolidated +tatements .8<

31$$4 3:$4

a b d

=# 1$ #

9onsolidated 7I 7oncontrolling s!are

9ontrolling s!are of 7I .etained Earnings Retained earnings Pall Retained earnings +tor 9ontrolling s!are of 7I Di/idends Retained earnings December 21 /alance Sheet 9as! Accounts recei/able Di/idends recei/able In/entories Land Cuildings net Lac!inery net In/estment in +tor Good,ill 0otal assets Accounts payable Di/idends payable ?t!er liabilities 9apital stoc5 Retained earnings 0otal e;uities 1<# .$

3#2$4 31.14 1<= 3.4 1<#

#$# 1<# 31.$4 - 1#$ .$ 3#$4 g 1#$

#$# 1<#

f !

1< # -

31.$4 #2:

#2:

- 1.$

122 1<$ 1< 8$ 1$$ #<$ 22$ 2$2

1: 1$$ 28 2$ <$ 1:$ b d g 1$ 8 8$

i 6 c e 1$ 1< 1# .

1:= #=$ <: 1#. 28$ :88

d : f ## g #%=

-1':$: #$$ 2$ 1:$ <$$ #2: -1':$:

- :$$ .$ #$ 2$ 1.$ 1.$ - :$$ i 6 1$ 1<

8$ -1'.1# #:$ 2# 1=$ <$$ #2:

g 1.$

7oncontrolling interest Fanuary 1 7oncontrolling interest December 21

g !

22 2 28

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Chapter 6 -1'.1#

6-19

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6-20

Intercompany Profit Transactions Plant Assets

Solution P6-4 Pa ch Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e year ended December 21' #$$% 3in t!ousands4
Parc! &ncome Statement +ales Income from +arg Gain on land Gain on e;uipment 9ost of sales Depreciation e@pense ?t!er e@penses =$$ =$ #$ 2$$ I %$I #$$ I +arg %$ - .$$ 1$ 2$$ I 2.I 8.I a e c d b Ad6ustments and &liminations .$ =$ 1$ #$ . 9onsolidated Calance +!eet -1'1.$

a d

.$ .

9onsolidated 7I 7oncontrolling s!are

9ontrolling s!are of 7I .etained Earnings Retained earnings Parc! Retained earnings +arg 9ontrolling s!are of 7I Di/idends Retained earnings December 21 /alance Sheet 9as! Accounts recei/able In/entories ?t!er current items Land Cuildings net &;uipment net In/estment in +arg #$$ - 11$

... I 1#$ I #8. I #1$ 1$I #$$

1$

8$$ #$$ 1$$ I - #$$ 11$ .$I f #$$

8$$ #$$

e !

:. . -

1$$ I =$$

=$$

- #8$

2. %$ 1$$ =$ .$ #$$ .$$ 8..

2$ 11$ <$ :$ =$ 1.$ :$$

g b c 1$ . 1$

d 1. e #. f 82$

8. 1%$ 1=. 11$ 11$ 2.$ <<.

-1'=$$ Accounts payable ?t!er liabilities 9apital stoc5 Retained earnings 18$ 2:$ .$$ =$$ -1'=$$

- <<$ .$ =$ .$$ #8$ - <<$ g 1$

-1'<<. #$$ :1$ .$$ =$$

f .$$

7oncontrolling interest Fanuary 1 7oncontrolling interest December 21

f !

=$ . =.

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Chapter 6 -1'<<.
I Deduct

6-21

7?0&: Purc!ase price implies boo5 /alues are e;ual to fair /alues(

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6-22

Intercompany Profit Transactions Plant Assets

Solution P6-% %reliminar$ com#utations 9ost Fanuary 1' #$$% Add: Income from +tor for #$$% &;uity in income 3-:$'$$$ %$ 4 Less: Patent amortize( 3-8$'$$$>1$ years4@ %$ Less: Dnrealized in/entory profit Less: Dnrealized profit on mac!inery 3selling price -2.'$$$ - boo5 /alue -#<'$$$4 Add: Piecemeal recognition of profit on mac!inery 3-='$$$>2(. years (. year4 Income from +tor for #$$% Less: Di/idends -1$'$$$ %$ In/estment balance Fanuary 1' #$1$ Add: Income from +tor for #$1$ &;uity in income 3-.$'$$$ %$ 4 Less: Patent amortization 3%$ 4 Add: Dnrealized profit in beginning in/entory Less: Dnrealized profit in ending in/entory Add: Piecemeal recognition of profit on mac!inery 3-='$$$>2(. years4 Less: Gain on sale of land Income from +tor for #$1$ Less: Di/idends 3-#$'$$$ %$ 4 In/estment balance December 21' #$1$ 7oncontrolling interest s!are of +tor*s income 31$ 4 +tor*s reported net income Less: Patent amortization +tor*s ad6usted income 1$ 7oncontrollling interest s!are 2009 -:$'$$$ 38'$$$4 -2:'$$$ - 2':$$ -#=$'$$$ -28'$$$ 3.':$$4 31$'$$$4 3='$$$4 1'$$$ 1:'8$$ 3%'$$$4 #=.'8$$ -:.'$$$ 3.':$$4 1$'$$$ 31#'$$$4 #'$$$ 3.'$$$4 2:'8$$ 31<'$$$4 -#%#'#$$ 20'0 -.$'$$$ 38'$$$4 -::'$$$ - :':$$

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Chapter 6

6-23

Solution P6-% 3continued4 Pall Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e Hear &nded December 21' #$1$
Pall &ncome Statement +ales Income from +tor Gain on land 9ost of sales ?perating e@pense 9onsolidated 7I 7oncontrolling s!are 9ontrolling s!are of 7I .etained Earnings Retained earnings Pall Retained earnings +tor 9ontrolling s!are of 7I Di/idends Retained earnings December 21 /alance Sheet 9as! Accounts recei/able Di/idends recei/able In/entories Land Cuildings net Lac!inery net In/estment in +tor Patents 0otal assets Accounts payable Di/idends payable ?t!er liabilities 9apital stoc5 Retained earnings 0otal e;uities +tor %$ a f e c ! 5 1=8'8$$ .$'$$$ Ad6ustments and &liminations =#'$$$ 2:'8$$ .'$$$ 1#'$$$ a b 8'$$$ d :':$$ 9onsolidated +tatements .8<'$$$

:.$'$$$ - 1%$'$$$ 2:'8$$ .'$$$ 3#$$'$$$4 31$$'$$$4 3112'$$$4 3:$'$$$4

=#'$$$ 1$'$$$ #'$$$

3#2$'$$$4 31.='$$$4 1<1'$$$ 3:':$$4 - 1=8'8$$

#$$'$$$ - 1#$'$$$ 1=8'8$$ 31.$'$$$4 .$'$$$ 3#$'$$$4 g 1#$'$$$

#$$'$$$ 1=8'8$$

f 5

1<'$$$ #'$$$ -

31.$'$$$4 ##8'8$$

##8'8$$

- 1.$'$$$

128':$$ 1<$'$$$ 1<'$$$ 8$'$$$ 1$$'$$$ #<$'$$$ 22$'$$$ #%#'#$$

1:'$$$ 1$$'$$$ 28'$$$ 2$'$$$ <$'$$$ 1:$'$$$ b d g

i 6 c e d 1$'$$$ 1<'$$$ 1#'$$$ .'$$$ :'$$$

1.$':$$ #=$'$$$ <:'$$$ 1#.'$$$ 28$'$$$ :88'$$$

1$'$$$ f 18'8$$ 8'$$$ g #%1'8$$ .:'$$$ ! 8'$$$

-1'2%8'8$$ #$$'$$$ 2$'$$$ 1:$'$$$ <$$'$$$ ##8'8$$ -1'2%8'8$$

- :$$'$$$ .$'$$$ #$'$$$ 2$'$$$ 1.$'$$$ 1.$'$$$ - :$$'$$$ i 6 1$'$$$ 1<'$$$

:<'$$$ -1'.$2':$$ #:$'$$$ 2#'$$$ 1=$'$$$ <$$'$$$ ##8'8$$

g 1.$'$$$

7oncontrolling interest Fanuary 1 7oncontrolling interest December 21

g 5

2#':$$ #':$$

2:'<$$

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6-24

Intercompany Profit Transactions Plant Assets -1'.$2':$$

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Chapter 6

6-25

Solution P6-6 %reliminar$ com#utations In/estment cost Implied fair /alue of +an5 3-#%$'$$$ > <$ 4 Coo5 /alue of +an5 &@cess fair /alue o/er boo5 /alue - allocated .$ to Patents ,it! a ten-year life 3-21'#.$4 - allocated .$ to In/entory sold in #$$= 3-21'#.$4 .econciliation of income from San": Pill*s s!are of +an5*s net income 3-.$'$$$ <$ 4 Less: <$ of Patent amortization 3-21'#.$>1$ years4 Add: Depreciation on deferred gain on e;uipment 3-1.'$$$>. years4 <$ Less: Dnrealized profit on upstream sale of land 3-1$'$$$ <$ 4 Income from +an5 .econciliation of in+estment account: +!are of +an5*s underlying e;uity 3-:$$'$$$ <$ 4 Add: <$ of Dnamort( patent 3-21'#.$ - 3-2'1#. 2 years44 @ <$ Less: Dnrealized gain on e;uipment A-1.'$$$ - 3-2'$$$ # years4B <$ Less: +!are of unrealized gain on land In/estment in +an5 December 21' #$$% Noncontrolling interest share: +an5*s reported income Add: Piecemeal recognition of gain on sale of mac!inery Less: Patent amortization Less: Dnrealized gain on upstream sale of land Realized income 7oncontrolling percentage 7oncontrolling interest s!are -#%$'$$$ -28#'.$$ 32$$'$$$4 - 8#'.$$

- :$'$$$ 3#'.$$4 #':$$ 3<'$$$4 - 21'%$$ -2#$'$$$ 1='.$$ 3='#$$4 3<'$$$4 -2##'2$$ - .$'$$$ 2'$$$ 3 2'1#.4 31$'$$$4 2%'<=. #$ - ='%=.

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6-26

Intercompany Profit Transactions Plant Assets

Solution P6-6 3continued4 Pill Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e year ended December 21' #$$%
Pill &ncome Statement +ales Income from +an5 Gain on land Depreciation e@pense ?t!er e@penses 9onsolidated 7I 7oncontrolling s!are 9ontrolling s!are of 7I .etained Earnings Retained earnings Pill Retained earnings +an5 9ontrolling s!are of 7I Di/idends Retained earnings December 21 /alance Sheet 9urrent assets Plant assets Accumulated depreciation In/estment in +an5 Patent - %.#'2$$ 9urrent liabilities 9apital stoc5 Retained earnings - :.$'$$$ - #1$'$$$ 21'%$$ :$'$$$ I 11$'$$$ I +an5 <$ - 12$'$$$ 1$'$$$ 2$'$$$ I 8$'$$$ I c b e f %1'%$$ .$'$$$ 21'%$$ 1$'$$$ a 2'1#. ='%=. 2'$$$ 8='$$$ I 1=2'1#. I %%'<=. ='%=. I %1'%$$ Ad6ustments and &liminations 9onsolidated +tatements 2:$'$$$

- 1:$':$$ %1'%$$ 2$'$$$ I - #$#'2$$ .$'$$$ d .$'$$$ .$'$$$

1:$':$$ %1'%$$ 2$'$$$ I

- 1$$'$$$

#$#'2$$

- #$$'$$$ ..$'$$$ 1#$'$$$ I 2##'2$$

- 1=$'$$$ 2.$'$$$ =$'$$$ I a a d

a b 1.'$$$ 1$'$$$

2=$'$$$ <=.'$$$ 1<:'$$$ I

8'$$$ %'8$$ c 21'%$$ d 2$$'$$$ #.'$$$ e 2'1#.

#1'<=. -1'$<#'<=. #$$'$$$ 8$$'$$$ #$#'2$$

- 1.$'$$$ - .$'$$$ 8$$'$$$ 2$$'$$$ d 2$$'$$$ #$#'2$$ 1$$'$$$ - %.#'2$$ - :.$'$$$ a #':$$ d f =.'$$$ ='%=.

7oncontrolling interest Fanuary 1 7oncontrolling interest December 21

I Deduct

<$'.=. -1'$<#'<=.

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Chapter 6

6-27

Solution 6-6 3continued4 Consolidation !or"ing #a#er entries a Accumulated depreciation 8'$$$ In/estment in +an5 %'8$$ 7oncontrolling interest #':$$ Depreciation e@pense 2'$$$ Plant assets 1.'$$$ 0o eliminate unrealized profit on #$$< sale of plant assets( Gain on land 1$'$$$ Plant assets 1$'$$$ 0o eliminate unrealized gain on #$$% upstream sale of land(

Income from +an5 21'%$$ In/estment in +an5 21'%$$ 0o eliminate income from +an5 against t!e in/estment in +an5( 9apital stoc5M+an5 2$$'$$$ Retained earningsM+an5 Fanuary 1 .$'$$$ Patent #.'$$$ In/estment in +an5 2$$'$$$ 7oncontrolling interest Fanuary 1 =.'$$$ 0o eliminate in/estment in +an5 and stoc5!olders* e;uity of +an5 and enter beginning of t!e period patent( ?t!er e@penses Patent 0o pro/ide for patent amortization( 2'1#. 2'1#.

7oncontrolling Interest +!are ='%=. 7oncontrolling Interest ='%=. 0o enter noncontrolling interest s!are of subsidiary income(

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6-28

Intercompany Profit Transactions Plant Assets

Solution P6-& %reliminar$ com#utations 0amounts in thousands1 In/estment cost for 1$$ of +5ip' April 1' #$$% Coo5 /alue ac;uired &@cess fair /alue o/er boo5 /alue &@cess allocated: Dnder/alued in/entory items 3sold in #$$%4 Dnder/alued buildings 3=-year remaining useful life4 Good,ill &@cess fair /alue o/er boo5 /alue .econciliation of in+estment account balance: In/estment cost April 1' #$$% Add: Increase in +5ip*s retained earnings Less: &@cess allocated to in/entories sold in #$$% Less: Depreciation on e@cess allocated to buildings 3-2'.$$>= years4 :(=. years Less: Dnrealized in/entory profits December 21' #$12 Less: Dnrealized profit on e;uipment 3-<$$ intercompany profit - -#$$ recognized4 In/estment balance December 21' #$12 .econciliation of in+estment income balance: +!are of +5ip*s income 31$$ 4 Add: Dnrealized profit in beginning in/entory Add: Realization of pre/iously deferred profit on land Less: Dnrealized profit in ending in/entory Less: Depreciation on e@cess allocated to buildings Less: Dnrealized profit on e;uipment Income from +5ip - #'$$$ 1$$ .$$ 31#$4 3.$$4 38$$4 - 1'2<$ -1.'$$$ 2'$$$ 3.$$4 3#'2=.4 31#$4 38$$4 -1:':$. -1.'$$$ 3='$$$4 - <'$$$ .$$ 2'.$$ :'$$$ - <'$$$

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Chapter 6

6-29

Solution P6-& 3continued4 Po t Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e year ended December 21' #$12 3in t!ousands4
Port &ncome Statement +ales Gain on land Gain on e;uipment Income from +5ip 9ost of sales -#8'$$$ =$$ 1'2<$ 1.'$$$I +5ip -11'$$$ <$$ .'$$$I #'$$$I #'<$$I - #'$$$

Ad6ustments and &liminations

9onsolidated +tatements -2.'.$$ 1'#$$

b 1'.$$ a e <$$ g 1'2<$ d 1#$ i .$$ .$$

Depreciation e@pense 2'=$$I ?t!er e@penses :'#<$I 9onsolidated net income - .'1$$ .etained Earnings Retained earnings Port

b c f

1'.$$ 1$$ #$$

1<'.#$I 8'$$$I ='$<$I - .'1$$

-1#'2=. - :'$$$ #'$$$ 1'$$$I - .'$$$ ! :'$$$ g 1'$$$

-1#'2=.

Retained earnings +5ip 9onsolidated net income .'1$$ Di/idends 2'$$$I Retained earnings December 21 -1:':=. /alance Sheet 9as! Accounts recei/able In/entories Land Cuildings net &;uipment net In/estment in +5ip Good,ill -.1'.=. Accounts payable ?t!er liabilities 9apital stoc5 Retained earnings I Deduct - :'1$$ ='$$$ #8'$$$ 1:':=. -.1'.=.

.'1$$ 2'$$$I -1:':=.

- 1'1=$ #'$$$ .'$$$ :'$$$ 1.'$$$ 1$'$$$ 1:':$.

.$$ 1'.$$ #'$$$ 1'$$$ :'$$$ :'$$$

6 d ! 1'8#. f #$$ a .$$ c 1$$ ! :'$$$ i e

2$$ 1#$ .$$ <$$

- 1'8=$ 2'#$$ 8'<<$ .'$$$ #$'1#. 12':$$

g 2<$ ! 1:'8#. :'$$$ -.:'#=.

-12'$$$ - 1'$$$ #'$$$ .'$$$ .'$$$ -12'$$$ 6 2$$

! .'$$$

- :'<$$ %'$$$ #8'$$$ 1:':=. -.:'#=.

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6-30

Intercompany Profit Transactions Plant Assets

Solution P6-' %reliminar$ com#utations In/estment cost Fanuary 1' #$$% Implied fair /alue of +ic 3-128'$$$ > <$ 4 Coo5 /alue of +ic &@cess fair /alue o/er boo5 /alue Anal$sis of in+estment in Sic account on %ic*s boo"s: In/estment cost +!are of +ic*s #$$% reported income 3-2$'$$$ <$ 4 In/estment in +ic as reported on Pic*s boo5s at December 21' #$$% +!are of +ic*s #$1$ reported income 3-:$'$$$ <$ 4 In/estment in +ic as reported on Pic*s boo5s at December 21' #$1$ Note that %ic has not eliminated intercom#an$ #rofits from its in+estment income from Sic for either 2009 or 20'02 In/estment balance as reported on Pic*s boo5s December 21' #$$% Gain on mac!inery 3-.'$$$ <$ 4 Piecemeal recognition of gain 3-1'$$$ <$ 4 In/estment account balance under t!e e;uity met!od at December 21' #$$% +!are of +ic*s #$1$ reported income Piecemeal recognition of gain in #$1$ 3-1'$$$ <$ 4 In/estment account balance under t!e e;uity met!od at December 21' #$1$ Noncontrolling interest share for 2009: +ic*s reported net income Less: Gain on sale of mac!inery Add: Piecemeal recognition of gain on mac!inery t!roug! Depreciation +ic*s realized income 7oncontrolling interest percentage 7oncontrolling interest s!are for #$$% Noncontrolling interest share for 20'0: +ic*s reported net income Add: Piecemeal recognition of unrealized gain on mac!inery t!roug! depreciation +ic*s realized income 7oncontrolling interest percentage 7oncontrolling interest s!are for #$1$ - :$'$$$ 1'$$$ :1'$$$ #$ - <'#$$ - 2$'$$$ 3.'$$$4 1'$$$ - #8'$$$ #$ - .'#$$ -18$'$$$ 3:'$$$4 <$$ -1.8'<$$ 2#'$$$ <$$ -1<%'8$$ -128'$$$ #:'$$$ -18$'$$$ 2#'$$$ -1%#'$$$ -128'$$$ -1=$'$$$ 31=$'$$$4 $

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Chapter 6

6-31

Solution P6-' 3continued4 Pic Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e year ended December 21' #$$%
Pic &ncome Statement +ales Income from +ic Gain on plant assets 9ost of sales Depreciation e@pense ?t!er e@penses 9onsolidated 7I 7oncontrolling s!are 9ontrolling s!are of 7I .etained Earnings Retained earnings Pic Retained earnings +ic 9ontrolling s!are of 7I Retained earnings December 21 /alance Sheet 9as! and e;ui/alents 9urrent assets Plant and e;uipment Accumulated depreciation In/estment in +ic - :$$'$$$ #:'$$$ #.$'$$$ I .$'$$$ I 8$'$$$ I +ic <$ - #$$'$$$ .'$$$ 12$'$$$ I #.'$$$ I #$'$$$ I c a #:'$$$ .'$$$ b 1'$$$ 2<$'$$$ I =:'$$$ I <$'$$$ I 88'$$$ .'#$$ I - 8$'<$$ Ad6ustments and &liminations 9onsolidated +tatements - 8$$'$$$

e 8:'$$$ 2$'$$$

.'#$$

- 1#8'$$$ 8:'$$$ - 1%$'$$$ =$'$$$ d 2$'$$$ =$'$$$

- 1#8'$$$ 8$'<$$ - 1<8'<$$

- 1$$'$$$

.$'$$$ 12$'$$$ :$$'$$$ 1.$'$$$ I 18$'$$$

2$'$$$ =$'$$$ #$$'$$$ .$'$$$ I

a b 1'$$$ c #:'$$$ d 128'$$$ .'$$$

<$'$$$ #$$'$$$ .%.'$$$ 1%%'$$$ I

- .%$'$$$ Liabilities 9apital stoc5 Retained earnings

- #.$'$$$

- 8=8'$$$ - 1.$'$$$ 2$$'$$$ 1<8'<$$

- 1$$'$$$ - .$'$$$ 2$$'$$$ 1$$'$$$ d 1$$'$$$ 1%$'$$$ 1$$'$$$ - .%$'$$$ - #.$'$$$ d e 2:'$$$ .'#$$

7oncontrolling interest Fanuary 1 7oncontrolling interest December 21

I Deduct

2%'#$$ - 8=8'$$$

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6-32

Intercompany Profit Transactions Plant Assets

Solution P6-' 3continued4 Pic Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e year ended December 21' #$1$
Pic &ncome Statement +ales Income from +ic 9ost of sales Depreciation e@pense ?t!er e@penses 9onsolidated 7I 7oncontrolling s!are 9ontrolling s!are of 7I .etained Earnings Retained earnings Pic Retained earnings +ic 9ontrolling s!are of 7I Retained earnings December 21 /alance Sheet 9as! and e;ui/alent 9urrent assets Plant and e;uipment Accumulated depreciation In/estment in +ic - :2$'$$$ 2#'$$$ #8$'$$$ I .$'$$$ I ..'$$$ I +ic <$ - #2.'$$$ b 1:$'$$$ I #.'$$$ I 2$'$$$ I d %='$$$ :$'$$$ <'#$$ 2#'$$$ a :$$'$$$ I 1'$$$ =:'$$$ I <.'$$$ I 1$8'$$$ <'#$$ I - %='<$$ Ad6ustments and &liminations 9onsolidated +tatements - 88.'$$$

- 1%$'$$$

a 2'#$$ - 1$$'$$$ c 1$$'$$$ %='$$$ :$'$$$ - 1:$'$$$

- 1<8'<$$ %='<$$ - #<:'8$$

- #<='$$$

82'$$$ 1:$'$$$ ::$'$$$ #$$'$$$ I 1%#'$$$

2$'$$$ <$'$$$ #:.'$$$ =.'$$$ I

a a #'$$$ b 2#'$$$ c 18$'$$$ .'$$$

%2'$$$ ##$'$$$ 8<$'$$$ #=2'$$$ I

- 82.'$$$ Liabilities 9apital stoc5 Retained earnings -

- #<$'$$$

- =#$'$$$ <<'$$$ 2$$'$$$ #<:'8$$

:<'$$$ - :$'$$$ 2$$'$$$ 1$$'$$$ c 1$$'$$$ #<='$$$ 1:$'$$$ - 82.'$$$ - #<$'$$$ a <$$ c d :$'$$$ <'#$$

7oncontrolling interest Fanuary 1 7oncontrolling interest December 21

I Deduct

:=':$$ - =#$'$$$

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Chapter 6

6-33

Solution P6-( %reliminar$ com#utations In/estment cost Fanuary 1' #$$% Implied fair /alue of +pin 3-1$<'$$$ > <$ 4 Coo5 /alue of +pin &@cess fair /alue o/er boo5 /alue allocated to patent Patent amortization: -#.'$$$>1$ years .econciliation of in+estment income: +pin*s reported income Less: Patent amortization Less: Dnrealized profit in ending in/entory Add: Dnrealized profit in beginning in/entory Add: Piecemeal recognition of deferred profit on plant assets 3-#$'$$$ > . years4 +pin*s ad6usted income Par5*s <$ #$ controlling s!are - .$'$$$ 3#'.$$4 31'$$$4 #'$$$ :'$$$ - .#'.$$ - :#'$$$ - 1$'.$$ -1$<'$$$ -12.'$$$ 311$'$$$4 - #.'$$$ - #'.$$

7oncontrolling interest s!are

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6-34

Intercompany Profit Transactions Plant Assets

Solution P6-( 3continued4 Pa - Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e year ended December 21' #$1#
Par5 &ncome Statement +ales Income from +pin 9ost of sales ?t!er e@penses 9onsolidated 7I 7oncontrolling s!are 9ontrolling s!are of 7I .etained Earnings Retained earnings Par5 Retained earnings +pin 9ontrolling s!are of 7I Di/idends Retained earnings December 21 /alance Sheet 9as! Accounts recei/able In/entories Plant assets Accumulated depreciation In/estment in +pin Patent - :%%'8$$ Accounts payable 9apital stoc5 Retained earnings - 1<$'$$$ - 8.$'$$$ :#'$$$ 2%$'$$$ I 1=$'$$$ I +pin <$ - 1#$'$$$ :$'$$$ I 2$'$$$ I a e b g i - 12#'$$$ .$'$$$ Ad6ustments and &liminations <'$$$ :#'$$$ 1'$$$ a c #'.$$ d 1$'.$$ 9onsolidated +tatements - =8#'$$$ <'$$$ #'$$$ :'$$$ :#1'$$$ I 1%<'.$$ I 1:#'.$$ 1$'.$$ I - 12#'$$$

%.'8$$ 12#'$$$ =$'$$$ I #$'$$$ f .$'$$$ #$'$$$ I #$'$$$

%.'8$$ 12#'$$$

e i

18'$$$ :'$$$

=$'$$$ I - 1.='8$$

- 1.='8$$

.$'$$$

.<'$$$ :$'$$$ 8$'$$$ #%$'$$$ =$'$$$ I 1#1'8$$

#$'$$$ #$'$$$ 2.'$$$ #$.'$$$ 1$$'$$$ I

! b d d c d f :'$$$ 1'$$$ #$'$$$

<'$$$ 1'8$$ e #8'$$$ 1#'<$$ f 11$'$$$ 1='.$$ g #'.$$

=<'$$$ .8'$$$ %:'$$$ :=.'$$$ 18#'$$$ I

1.'$$$ - ..8'$$$ 8<'$$$ 2$$'$$$ 1.='8$$

:#'$$$ - 2$'$$$ ! :'$$$ 2$$'$$$ 1$$'$$$ f 1$$'$$$ 1.='8$$ .$'$$$ - :%%'8$$ - 1<$'$$$ c d :$$ f 2'#$$ i #='.$$ 8'.$$

7oncontrolling interest Fanuary 1 7oncontrolling interest December 21

I Deduct

2$':$$ - ..8'$$$

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Chapter 6

6-35

Solution P6-1) %reliminar$ com#utations In/estment cost Implied fair /alue of +an5 3-#%$'$$$ > <$ 4 Coo5 /alue of +an5 &@cess fair /alue o/er boo5 /alue &@cess allocated: In/entories 3.$ 4- +old in #$$= Good,ill &@cess fair /alue o/er boo5 /alue .econciliation of income from San": +an5*s reporte:d net income Add: Depreciation on deferred gain on e;uipment 3-1.'$$$>. years Less: Dnrealized profit on upstream sale of land +an5*s ad6usted and realized income Pill*s <$ #$ controlling s!are -#%$'$$$ -28#'.$$ 32$$'$$$4 - 8#'.$$ - 21'#.$ 21'#.$ - 8#'.$$ - .$'$$$ 2'$$$ 31$'$$$4 - :2'$$$ - 2:':$$ <'8$$

7oncontrolling interest s!are

.econciliation of in+estment account: +!are of +an5*s underlying e;uity 3-:$$'$$$ <$ 4 Add: <$ of unamortized good,ill Less: Dnrealized gain on e;uipment A-1.'$$$ - 3-2'$$$ # years4B <$ Less: +!are of unrealized gain on land In/estment in +an5 December 21' #$$%

-2#$'$$$ #.'$$$ 3='#$$4 3<'$$$4 -2#%'<$$

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6-36

Intercompany Profit Transactions Plant Assets

Solution P6-1) 3continued4 Pill Co !o ation an" Sub#i"ia $ 9onsolidation Kor5ing Papers for t!e year ended December 21' #$$%
Pill &ncome Statement +ales Income from +an5 Gain on land Depreciation e@pense ?t!er e@penses 9onsolidated 7I 7oncontrolling s!are 9ontrolling s!are of 7I .etained Earnings Retained earnings Pill Retained earnings +an5 9onsolidated s!are of 7I Di/idends Retained earnings December 21 /alance Sheet 9urrent assets Plant assets Accumulated depreciation In/estment in +an5 Good,ill - %.%'<$$ 9urrent liabilities 9apital stoc5 Retained earnings - :.$'$$$ - #1$'$$$ 2:':$$ :$'$$$ I 11$'$$$ I +an5 <$ - 12$'$$$ 1$'$$$ 2$'$$$ I 8$'$$$ I c b 2:':$$ 1$'$$$ a 2'$$$ 8='$$$ I 1=$'$$$ I 1$2'$$$ <'8$$ I %:':$$ Ad6ustments and &liminations 9onsolidated +tatements 2:$'$$$

e %:':$$ .$'$$$

<'8$$ -

- 1:.':$$ %:':$$ 2$'$$$ I - #$%'<$$ .$'$$$ d .$'$$$ .$'$$$

1:.':$$ %:':$$ 2$'$$$ I

- 1$$'$$$

#$%'<$$

- #$$'$$$ ..$'$$$ 1#$'$$$ I 2#%'<$$

- 1=$'$$$ 2.$'$$$ =$'$$$ I a a d

a b 1.'$$$ 1$'$$$

2=$'$$$ <=.'$$$ 1<:'$$$ I

8'$$$ %'8$$ c 2:':$$ d 2$.'$$$ 21'#.$

21'#.$ -1'$%#'#.$ #$$'$$$ 8$$'$$$ #$%'<$$

- 1.$'$$$ - .$'$$$ 8$$'$$$ 2$$'$$$ d 2$$'$$$ #$%'<$$ 1$$'$$$ - %.%'<$$ - :.$'$$$ a #':$$ d e =8'#.$ <'8$$

7oncontrolling interest Fanuary 1 7oncontrolling interest December 21

I Deduct

<#':.$ -1'$%#'#.$

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Chapter 6

6-37

Solution 6-1) 3continued4 Consolidation !or"ing #a#er entries a Accumulated depreciation 8'$$$ In/estment in +an5 %'8$$ 7oncontrolling interest #':$$ Depreciation e@pense 2'$$$ Plant assets 1.'$$$ 0o eliminate unrealized profit on #$$< sale of plant assets( Gain on land 1$'$$$ Plant assets 1$'$$$ 0o eliminate unrealized gain on #$$% upstream sale of land(

Income from +an5 2:':$$ In/estment in +an5 2:':$$ 0o eliminate income from +an5 against t!e in/estment in +an5( 9apital stoc5M+an5 2$$'$$$ Retained earningsE+an5 Fanuary 1 .$'$$$ Good,ill 21'#.$ In/estment in +an5 2$.'$$$ 7oncontrolling interest Fanuary 1 =8'#.$ 0o eliminate in/estment in +an5 and stoc5!olders* e;uity of +an5 and enter beginning of t!e period good,ill( 7oncontrolling Interest +!are <'8$$ 7oncontrolling Interest <'8$$ 0o enter noncontrolling interest s!are of subsidiary income(

Solution P6-11 1 0!e %$ percent o,ners!ip interest can be determined in se/eral ,ays( a( b( c( 2 -12'.$$ di/idends recei/ed -1.'$$$ di/idends paid G %$ -2='#$$ noncontrolling interest 3-2:$'$$$ +ac!*s stoc5!olders* e;uity + -2#'$$$ unamortized patent4 G 1$ 3-:'8$$ noncontrolling interest s!are 3-.$'$$$ net income of +ac! less -:'$$$ patent amortization4 G 1$

Hes( Pape*s net income of -#$$':$$ e;uals t!e controlling interest s!are consolidated net income of -#$$':$$( Pape*s retained earnings of -2.$':$$ e;uals consolidated retained earnings( Hes( 9ombined sales 9onsolidated sales Intercompany sales -<$$'$$$ =18'$$$ - <:'$$$

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6-38

Intercompany Profit Transactions Plant Assets

9ombined in/entories 9onsolidated in/entories Dnrealized in/entory profits Solution P6-11 3continued4 % .econciliation of combined and consolidated cost of sales 9ombined cost of sales 3gi/en4 Less: Intercompany sales 3see 2 abo/e4 Add: Dnrealized profits in ending in/entory 3see : abo/e4 Less: Dnrealized profits in beginning in/entory 3sol/e for t!is4 9onsolidated cost of sales 3gi/en4 6 .econciliation of combined and consolidated e3ui#ment net

-1.$'$$$ 128'$$$ - 1:'$$$

-2.$'$$$ 3<:'$$$4 1:'$$$ 3.'$$$4 -#=.'$$$

9ombined e;uipment net of -.8.'$$$ less consolidated e;uipment net of -..$'$$$ s!o,s a difference of -1.'$$$( 0!e ,or5ing paper entry to eliminate t!e effects of an intercompany sale of e;uipment must !a/e been: Gain on e;uipment Depreciation e@pense &;uipment net & #$'$$$ .'$$$ 1.'$$$

4es2 &ntercom#an$ recei+ables and #a$ables are as follo!s: Accounts recei/able Accounts payable Di/idends recei/able Di/idends payable 9ombined - <$'$$$ 11$'$$$ 12'.$$ 1.'$$$ 9onsolidated - =$'$$$ 1$$'$$$ --1'.$$ Intercompany -1$'$$$ 1$'$$$ 12'.$$ 12'.$$

'

.econciliation of noncontrolling interest: 7oncontrolling interest Fanuary 1' #$1$ 3-2#$'$$$ 1$ 4 1$ of unamortized patent at Fanuary 1 Add: 7oncontrolling interest s!are for #$1$ Less: 7oncontrolling interest di/idends 3-2$'$$$ 1$ 4 7oncontrolling interest December 21' #$1$ - 2#'$$$ 2'8$$ :'8$$ 32'$$$4 - 2='#$$

%atent at ,ecember -'( 2009 Patent December 21' #$1$ Add: Patent amortization 3-1:1'$$$ consolidated ot!er e@penses - -12='$$$ combined ot!er e@penses4 Patent December 21' #$$% - 2#'$$$ :'$$$ - 28'$$$

1)

Anal$sis of in+estment in Sach account Coo5 /alue 3+ac!*s stoc5!olders* e;uity -2:$'$$$ %$ 4 Less: Dnrealized profit in ending in/entory -2$8'$$$ 31:'$$$4

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Chapter 6

6-39

Less: Dnrealized profit in e;uipment Add: %$ of Dnamortized patent In/estment in +ac! December 21' #$1$

31.'$$$4 #<'<$$ -2$.'<$$

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