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CHAPTER SIX ELIMINATION OF UNREALIZED PROFIT ON INTERCOMPANY SALES OF INVENTORY Updates The concepts that are introduced and

detailed in this chapter are not affected by the changes brought about by SFAS No. 141 and 142. However, several of the homework problems are comprehensive in nature and thus are affected by the elimination of goodwill amortization. The revised homework problems affected are shown here. The revised solutions are available in the solutions manual on the Website and are labeled as 2nd edition solutions. Problem 6-8 Upstream Eliminating Entries and Consolidated Net Income On January 2, 2002, Patten Company purchased a 90% interest in Sterling Company for $1,400,000. At that time Sterling Company had capital stock outstanding of $800,000 and retained earnings of $425,000. The difference between cost and book value was assigned to the following assets: Inventory Plant and equipment (net) Excess of cost over fair value $ 37,500 180,000 80,000

The inventory was sold in 2002. The plant and equipment had a remaining useful life of 12 years on January 2, 2002. During 2002 Sterling sold merchandise with a cost of $950,000 to Patten at a 20% markup above cost. At December 31, 2002, Patten still had merchandise in its inventory that it purchased from Sterling for $576,000. In 2002, Sterling Company reported net income of $410,000 and declared no dividends. Required: A. Prepare in general journal form all entries necessary on the consolidated financial statements workpaper to eliminate the effects of the intercompany sales, to eliminate the investment account, and to assign the difference between cost and book value. B. Assume that Patten Company reports net income of $2,000,000 from its independent operations. Calculate consolidated net income.

C. Calculate noncontrolling interest in combined income.

Problem 6-9 Upstream and Downstream Worksheet On January 1, 2002, Perry Company purchased 80% of Selby Company for $990,000. At that time Selby had capital stock outstanding of $350,000 and retained earnings of $375,000. The fair value of Selby Company's assets and liabilities is equal to their book value except for the following: Inventory Plant and equipment (10-year life) Fair Value $210,000 780,000 Book Value $160,000 630,000

One-half of the inventory was sold in 2002; the remainder was sold in 2003. At the end of 2002, Perry Company had in its ending inventory $60,000 of merchandise it had purchased from Selby Company during the year. Selby Company sold the merchandise at 25% above cost. During 2003, Perry Company sold merchandise to Selby Company for $310,000 at a markup of 20% of the selling price. At December 31, 2003, Selby still had merchandise that it purchased from Perry Company for $82,000 in its inventory. Financial data for 2003 are presented here: Perry Company $1,400,000 20,000 1,420,000 230,000 900,000 1,130,000 450,000 680,000 250,000 930,000 $ 490,000 $1,500,000 490,000 (50,000) $1,940,000 $ 95,000 302,000 450,000 Selby Company $ 800,000 ------800,000 145,000 380,000 525,000 200,000 325,000 195,000 520,000 $ 280,000 $ 480,000 280,000 (25,000) $ 680,000 $ 70,000 90,000 200,000

Sales Dividend income Total revenue Cost of goods sold: Beginning inventory Purchases Cost of Goods Available Less: Ending inventory Cost of goods sold Other expenses Total cost and expense Net Income 1/1 Retained earnings Net income Dividends declared 12/31 Retained earnings Cash Accounts receivable (net) Inventory

Investment in Selby Company Plant and equipment (net) Other assets (net) Total assets Accounts payable Other liabilities Common stock Retained earnings Total liabilities and equity Required:

990,000 850,000 390,000 $3,077,000 $ 75,000 102,000 960,000 1,940,000 $3,077,000

582,000 230,000 $1,175,000 $ 30,000 60,000 350,000 735,000 $1,175,000

A. Prepare the consolidated statements workpaper for the year ended December 31, 2003. B. Calculate consolidated retained earnings on December 31, 2003, using the analytical or T-account approach.

Problem 6-14 Omit the sentence that states that goodwill should be amortized over 40 years.

Problem 6-18 Comprehensive Complete Equity Problem, Cost Greater than Fair Value with Intercompany Sales of Inventory (Note that this is the same problem as Problem 6-14, but assuming the use of the complete equity method.) On January 1, 2003, Perry Company purchased 80% of Selby Company for $960,000. At that time Selby had capital stock outstanding of $400,000 and retained earnings of $400,000. The fair value of Selby Company's assets and liabilities is equal to their book value except for the following:
Inventory Plant and equipment (10-year life) FAIR VALUE $ 230,000 800,000 BOOK VALUE $ 155,000 600,000

One-half of the inventory was sold in 2003; the remainder was sold in 2004. At the end of 2003, Perry Company had in its ending inventory $54,000 of merchandise it had purchased from Selby Company during the year. Selby Company sold the merchandise at 20% above cost. During 2004, Perry Company sold merchandise to Selby Company for $300,000 at a markup of 20% of the selling price. At December 31, 2004, Selby still had merchandise that it purchased from Perry Company for $78,000 in its inventory. Financial data for 2004 are presented here:
PERRY COMPANY $ 1,385,000 153,600 1,538,600 210,000 875,000 1,085,000 400,000 685,000 225,000 910,000 $ 628,600 1,417,000 628,600 (40,000) SELBY COMPANY $ 720,000 720,000 155,000 360,000 515,000 225,000 290,000 170,000 460,000 $ 260,000 450,000 260,000 (30,000)

Sales Equity in subsidiary income Total revenue Cost of goods sold: Beginning inventory Purchases Cost of goods available Less: Ending inventory Cost of goods sold Other expenses Total cost and expense Net income 1/1 Retained earnings Net income Dividends declared

12/31 Retained earnings Cash Accounts receivable Inventory Investment in Selby Company Plant and equipment (net) Other assets Total assets Accounts payable Other current liabilities Common stock Retained earnings Total liabilities and equity

$ $

2,008,100 90,000 297,000 400,000 1,076,400 880,000 384,000 3,127,400 24,300 95,000 1,000,000 2,008,100 3,127,400

$ 680,000 $ 65,000 85,000 225,000 540,000 230,000 $1,145,000 25,000 40,000 400,000 680,000 $1,145,000

Required: A. Prepare the consolidated statements workpaper for the year ended December 31, 2004. B. Calculate consolidated retained earnings on December 31, 2004, using the analytical approach or T-account approach. C. If you completed Problem 6-14, compare the consolidated balances obtained in part (A) with those obtained in that problem.