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2011 Pearson Education, Inc.

publishing as Prentice Hall


6-1
Chapter 6

INTERCOMPANY PROFIT TRANSACTIONS PLANT ASSETS

Answers to Questions
1 The objective of eliminating the effects of intercompany sales of plant assets is to reflect plant assets and
related depreciation amounts in the consolidated financial statements at cost to the consolidated entity.

2 Consolidation procedures for eliminating unrealized profit on plant assets are affected by the direction of
the sale. The full amount of unrealized profit or loss on downstream sales (parent to subsidiary) is charged
or credited to the controlling interest. In the case of upstream sales, however, unrealized profit or loss is
allocated between controlling and noncontrolling interests. Because there is no allocation to noncontrolling
interests in the case of a 100 percent owned subsidiary, consolidation procedures are the same for upstream
sales as for downstream sales.

3 Unrealized gains and losses from intercompany sales of land are realized from the viewpoint of the selling
affiliate when the purchasing affiliate resells the land to parties outside the consolidated entity. This is also
the point at which the consolidated entity recognizes gain or loss on the difference between the selling
price to outside parties and the cost to the purchasing affiliate.

4 Noncontrolling interest share is not affected by downstream sales of land because the realized income of
the subsidiary is not affected by downstream sales. In the case of upstream sales of land, the reported
income of the subsidiary is adjusted downward for unrealized profits and upward for unrealized losses to
determine realized income. Since noncontrolling interest share is computed on the basis of realized
subsidiary income, the computation of noncontrolling interest share is affected by upstream sales of land.

5 Consolidation procedures are designed to eliminate 100 percent of all unrealized profit or loss on all
intercompany transactions. The issue is not whether 100 percent of the unrealized profit or loss is
eliminated, but if the amount eliminated is allocated between controlling and noncontrolling interests. In
the case of an upstream sale of land, 100 percent of the unrealized profit from the sale is eliminated, but the
amount is allocated between controlling and noncontrolling interests in relation to their ownership
holdings.

6 Unrealized gains and losses from intercompany sales of depreciable assets are realized through use if the
assets are held within the consolidated entity and through sale if the assets are sold to outside parties. The
process of recognizing previously unrealized gains and losses through use is a piecemeal recognition over
the remaining useful life of the depreciable asset.

7 The computation of noncontrolling interest share in the year of an upstream sale of depreciable plant asset
is as follows:
Unrealized Unrealized
Gain on Sale Loss on Sale
I ncome of subsi di ar y as r epor t ed XXX XXX
Deduct : Gai n on sal e of pl ant asset s - XX
Add: Loss on sal e of pl ant asset s +XX
Add: Pi ecemeal r ecogni t i on of gai n on sal e
of pl ant asset s + X
Deduct : Pi ecemeal r ecogni t i on of l oss on
sal e of pl ant asset s - X
Real i zed subsi di ar y i ncome XXX XXX

Noncontrolling int er est per cent age
X% X%

Noncontrolling int er est shar e
XXX XXX

6-2 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
8 The effects of unrealized gains on intercompany sales of plant assets are charged against the parents
income from subsidiary account in the year of the intercompany sale, with equal amounts being deducted
from the investment in subsidiary account. In subsequent years, the income from subsidiary and
investment in subsidiary accounts are increased for depreciation on the unrealized gain that is recorded on
the subsidiary books for downstream sales or for the parents proportionate share for upstream sales. If the
unrealized gain relates to land, no entries are needed until the land is sold to entities outside of the
affiliation structure.

9 Accounting procedures are designed to eliminate the effects of intercompany sales of plant assets on both
parent income and consolidated net income until the gains and losses on such sales are realized through use
or through sale to outside parties. In years subsequent to intercompany sales of depreciable plant assets, the
effect on parent income is eliminated by adjusting depreciation expense to a cost basis for the consolidated
entity.

10 Consolidation workpaper entries to eliminate the effect of a gain on sale of depreciable plant assets from a
downstream sale are illustrated as follows:

Year of sale
Gain on sale
Accumulated depreciation
Depreciation expense
Plant assets

To reduce plant assets and related depreciation amounts to a cost basis to the
consolidated entity and to eliminate unrealized gain on intercompany sale.

Subsequent years
Investment in subsidiary
Accumulated depreciation
Depreciation expense
Plant assets

To reduce plant assets and related depreciation amounts to a cost basis to the
consolidated entity and to adjust the investment account for unrealized profits at the
beginning of the current year.

SOLUTIONS TO EXERCISES

Solution E6-1

1 c

2 a

3 c

4 d



Chapter 6 6-3

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E6-2

1 Par s i ncome f r omSamwi l l be decr eased by $25, 000 as a r esul t of t he
f ol l owi ng ent r y:

I ncome f r omSam 25, 000
I nvest ment i n Sam 25, 000
To el i mi nat e unr eal i zed gai n on downst r eamsal e of l and.

Par s net i ncome f or 2014 wi l l not be af f ect ed by t he sal e si nce t he
$25, 000 gai n wi l l be of f set by a $25, 000 decr ease i n i ncome f r omSam.
The i nvest ment i n Samaccount at December 31, 2014 wi l l be $25, 000 l ess
as a r esul t of t he sal e as i ndi cat ed by t he above ent r y. ( The t ot al
bal ance sheet ef f ect i s t o r educe l and t o i t s cost , r educe t he
i nvest ment account f or t he pr of i t , and i ncr ease cash or ot her asset s f or
t he pr oceeds. )

2 The consol i dat ed f i nanci al st at ement s wi l l not be af f ect ed because t he
gai n on t he sal e i s el i mi nat ed i n t he consol i dat ed i ncome st at ement and
t he l and i s r educed t o i t s cost basi s t o t he consol i dat ed ent i t y. A
wor kpaper adj ust ment woul d show:

Gai n on sal e of l and 25, 000
Land 25, 000

3 Nei t her Par s i ncome f r omSamor net i ncome f or 2015 wi l l be af f ect ed by
t he 2014 sal e of l and. The i nvest ment i n Samaccount , however , wi l l
st i l l be $25, 000 l ess t han i f t he l and had not been sol d, even t hough
t her e ar e no changes i n t he i nvest ment account dur i ng 2015.

4 The sal e of t he l and wi l l not af f ect Sam s net i ncome si nce i t i s bei ng
sol d at Sam s cost . However , t he sal e t r i gger s r ecogni t i on of t he
post poned gai n on t he or i gi nal sal e f r omPar t o Sam. I ncome f r omSam
i ncr eases $25, 000.

I nvest ment i n Sam 25, 000
I ncome f r omSam 25, 000
To r ecogni ze t he gai n def er r ed i n 2014.

Consol i dat ed i ncome wi l l al so f eel t he same i mpact of t he r ecogni t i on of
t he def er r ed gai n.

I nvest ment i n Sam 25, 000
Gai n on sal e of l and 25, 000
6-4 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E6-3

1a Controlling Share of Consolidated Net Income
2011 2012
Pi t s separ at e i ncome $ 300, 000 $ 400, 000
Add: Equi t y i n Si r s i ncome

2011 $80, 000 90%
72, 000

2012 $60, 000 90%
54, 000
Gai n on sal e of l and ( 10, 000) - - -
Cont r ol l i ng shar e of consol i dat ed net i ncome $ 362, 000 $ 454, 000

1b Noncontrolling interest share


Si r s net i ncome 10%
$ 8, 000 $ 6, 000

2a Controlling Share of Consolidated Net Income

Pi t s separ at e i ncome $ 300, 000 $ 400, 000
Add: Equi t y i n Si r s i ncome 72, 000 54, 000

Less: Gai n on l and 90%
( 9, 000) - - -
Cont r ol l i ng shar e of consol i dat ed net i ncome $ 363, 000 $ 454, 000
$

2b Noncontrolling interest share


Si r s net i ncome 10%
$ 8, 000 $ 6, 000

Less: Gai n on l and 10%
( 1, 000) - - -
Noncont r ol l i ng i nt er est shar e $ 7, 000 $ 6, 000


Solution E6-4

1 Entries for 2011

Cash 90, 000
I nvest ment i n Sal 90, 000
To r ecor d di vi dends r ecei ved f r omSal .

I nvest ment i n Sal 108, 000
I ncome f r omSal 108, 000

To r ecor d i ncome f r omSal comput ed as f ol l ows:

Shar e of Sal s r epor t ed i ncome ( $150, 000 90%)
$ 135, 000
Less: Gai n on bui l di ng sol d t o Sal ( 30, 000)
Add: Pi ecemeal r ecogni t i on of gai n on bui l di ng
( $30, 000/ 10 year s) 3, 000
I ncome f r omSal $ 108, 000

2 Pig Corporation and Subsidiary
Consol i dat ed I ncome St at ement
f or t he year ended December 31, 2011
Sal es $2, 200, 000
Cost of sal es ( 1, 400, 000)
Gr oss pr of i t 800, 000
Oper at i ng expenses ( 447, 000)
Tot al consol i dat ed i ncome 353, 000

Noncontrolling i nt er est shar e
( 15, 000)
Chapter 6 6-5

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Cont r ol l i ng i nt er est shar e $ 338, 000
6-6 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E6-5 [ AI CPA adapt ed]

1 d
The equi pment must be shown at i t s $1, 400, 000 book val ue t o t he
consol i dat ed ent i t y and d i s t he onl y choi ce t hat pr ovi des a $1, 400, 000
book val ue. Or di nar i l y, t he equi pment woul d be shown at $1, 500, 000, i t s
book val ue at t he t i me of t r ansf er , l ess t he $100, 000 depr eci at i on af t er
t r ansf er .

2 c
Reci pr ocal r ecei vabl es and payabl es account s and pur chases and sal es
account s must al ways be el i mi nat ed. But di vi dend i ncome ( par ent ) and
di vi dends pai d ( subsi di ar y) account s ar e r eci pr ocal s onl y when t he cost
met hod i s used.

3 a
Amount to be eliminated from consolidated net income in 2011:
I nt er company gai n on downst r eamsal e of machi ner y $10, 000
Less: Real i zed t hr ough depr eci at i on of i nt er company
gai n on machi ner y ( $10, 000/ 5 year s) ( 2, 000)
Decr ease i n consol i dat ed net i ncome f r om
i nt er company sal e
$ 8, 000
Amount t o be added t o consol i dat ed net i ncome i n 2012 f or
r eal i zat i on t hr ough depr eci at i on of i nt er company gai n
on machi ner y $ 2, 000

4 b
One- t hi r d of t he unr eal i zed i nt er company pr of i t i s r ecogni zed t hr ough
depr eci at i on f or 2011.

Solution E6-6

1 a
Sel l i ng pr i ce i n 2019 $ 55, 000
Cost t o consol i dat ed ent i t y 15, 000
Gai n on sal e of l and $ 40, 000

2 b
Gai n on equi pment $ 30, 000
Less: Depr eci at i on on gai n ( 10, 000)
Net ef f ect on i nvest ment account $ 20, 000
The i nvest ment account wi l l be $20, 000 l ess t han t he under l yi ng equi t y
i nt er est .

3 b

Combi ned equi pment net
$ 800, 000
Less: Unr eal i zed gai n ( 20, 000)
Add: Pi ecemeal r ecogni t i on of gai n 5, 000

Consol i dat ed equi pment net
$ 785, 000

4 b
The workpaper entry to eliminate the unrealized profit is:
Gai n on sal e of equi pment 1, 500
Equi pment 1, 500

5 c
I nvest ment i ncome wi l l be decr eased by $12, 000 gai n l ess $3, 000
pi ecemeal r ecogni t i on of t he gai n.
Chapter 6 6-7

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

6 c
Si n s net i ncome $1, 000, 000
Less: Unr eal i zed gai n ( 50, 000)
Add: Pi ecemeal r ecogni t i on 5, 000
Real i zed i ncome 955, 000
Noncont r ol l i ng i nt er est per cent age 40%
Noncont r ol l i ng i nt er est shar e $ 382, 000

Solution E6-7

Pod Corporation and Subsidiary
Consol i dat ed I ncome St at ement
f or t he year ended December 31, 2011

Sal es ( $500, 000 + $300, 000) $800, 000
Gai n on sal e of machi ner y
a
20, 000
Tot al r evenue 820, 000

Cost of sal es ( $200, 000 + $130, 000) 330, 000
Depr eci at i on expense ( $50, 000 + $30, 000 - $5, 000 f r om
depr eci at i on on i nt er company pr of i t f or 2011) 75, 000
Ot her expenses ( $80, 000 + $40, 000) 120, 000
Tot al expenses 525, 000
Consol i dat ed net i ncome $295, 000
Noncont r ol l i ng shar e ( $100, 000+$5, 000 pi ecemeal r ecogni t i on f r om
depr eci at i on + $10, 000 r emai ni ng def er r ed gai n) 25%

noncont r ol l i ng i nt er est 28, 750
Cont r ol l i ng i nt er est shar e $266, 250

a
Sel l i ng pr i ce of machi ner y at December 28, 2011 $ 36, 000

Book val ue on Pod s books $65, 000 ( $65, 000/ 5 year s 3 year s)
26, 000
Gai n on sal e of machi ner y $ 10, 000

Or i gi nal i nt er company pr of i t $ 25, 000

Pi ecemeal r ecogni t i on of gai n $25, 000/ 5 year s 3 year s
15, 000
Unamor t i zed gai n f r omi nt er company sal es $ 10, 000

Gai n on sal e of machi ner y t o out si de ent i t y $ 20, 000


Solution E6-8
Preliminary computations:
I nvest ment i n Sat ( 40%) at cost $100, 000
I mpl i ed t ot al f ai r val ue of Sat ( $100, 000 / 40%) $250, 000
Book val ue ( 200, 000)
Excess al l ocat ed t o pat ent s $ 50, 000
Annual amor t i zat i on of pat ent s ( $50, 000/ 5 year s) $ 10, 000

1 Income from Sat 2011


Shar e of Sat s net i ncome ( $40, 000 1/ 2 year 40%)
$ 8, 000

Amor t i zat i on of pat ent s ( $10, 000 1/ 2 year 40%)
( 2, 000)
Unr eal i zed i nvent or y pr of i t f r omupst r eamsal e
( $4, 000 40%)

( 1, 600)
Unr eal i zed gai n f r omdownst r eamsal e of l and
( $2, 000 100%)

( 2, 000)
I ncome f r omSat $ 2, 400
6-8 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E6-8 ( cont i nued)

2 Income from Sat 2012

Sat s net i ncome $ 60, 000
Amor t i zat i on of pat ent s ( 10, 000)
Unr eal i zed i nvent or y pr of i t s f r omupst r eamsal es:
Recogni t i on of pr of i t i n begi nni ng i nvent or y 4, 000
Def er r al of pr of i t i n endi ng i nvent or y ( 6, 000)
Sat s adj ust ed and r eal i zed i ncome $ 48, 000
I ncome f r omSat ( 40%shar e) $ 19, 200

Solution E6-9

1 Income from Sip, net income and consolidated net income:
Si p s r epor t ed net i ncome $100, 000
Less: Amor t i zat i on of excess al l ocat ed t o bui l di ngs
( $500, 000 - $400, 000) / 20 year s ( 5, 000)
Less: $20, 000 unr eal i zed pr of i t on equi pment ( 20, 000)
Si p s adj ust ed and r eal i zed i ncome $ 75, 000


I ncome f r omSi p ( 80%shar e) 2013
$ 60, 000
Add: Separ at e i ncome of Pan f or 2013 500, 000

Net i ncome of Pan 2013
$560, 000

Si p s r epor t ed net i ncome $110, 000
Less: Amor t i zat i on of excess al l ocat ed t o bui l di ngs ( 5, 000)
Add: Pi ecemeal r ecogni t i on of unr eal i zed gai n
on equi pment ( $20, 000/ 4 year s) 5, 000
Si p s adj ust ed and r eal i zed i ncome $110, 000


I ncome f r omSi p (80%) 2014
$ 88, 000
Add: Separ at e i ncome of Pan 600, 000

Net i ncome of Pan 2014
$688, 000
Controlling share of consolidated net income for 2013 and 2014
= Pans net income
Al t er nat i vel y, 2013 2014
Separ at e i ncomes combi ned $600, 000 $710, 000
Less: Amor t i zat i on of excess ( bui l di ngs) ( 5, 000) ( 5, 000)
Less: Unr eal i zed gai n on equi pment i n 2013 ( 20, 000)
Add: Pi ecemeal r ecogni t i on of gai n i n 2014 5, 000
Consol i dat ed net i ncome $575, 000 $710, 000
Less: Noncont r ol l i ng i nt er est shar e:

2013 ( $100, 000 - $20, 000 - $5, 000) 20%
( 15, 000)

2014 ( $110, 000 + $5, 000 - $5, 000) 20%
( 22, 000)
Cont r ol l i ng i nt er est shar e $560, 000 $688, 000

2 Investment in Sip
Cost of i nvest ment J ul y 1, 2011 $400, 000
Add: Pan s shar e of Si p s r et ai ned ear ni ngs i ncr ease
f r omJ ul y 1, 2011 t o December 31, 2012
( $150, 000 - $100, 000) 80%

40, 000

Less: 80%Amor t i zat i on of excess ( $4, 000 1. 5 year s)
( 6, 000)
I nvest ment i n Si p December 31, 2012 434, 000

Add: 2013 i ncome l ess di vi dends [ $60, 000 - ( $50, 000 80%) ]
20, 000
I nvest ment i n Si p December 31, 2013 454, 000

Add: 2014 i ncome l ess di vi dends [ $88, 000 - ( $60, 000 80%) ]
40, 000
Chapter 6 6-9

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
I nvest ment i n Si p December 31, 2014 $494, 000
Solution E6-9 ( cont i nued)




Alternative solution for check at December 31, 2014:

Shar e of Si p s equi t y December 31, 2014 ( $550, 000 80%)
$440, 000
Add: 80%Unamor t i zed excess on bui l di ngs

80%[ Or i gi nal excess $100, 000 - ( $5, 000 3. 5 year s) ]
66, 000
Less: Unr eal i zed pr of i t on equi pment

( $20, 000 gai n - $5, 000 r ecogni zed) 80%
( 12, 000)
I nvest ment i n Si p December 31, 2014 $494, 000

Solution E6-10

Preliminary computations
Tr ansf er pr i ce of i nvent or y t o Spa ( $180, 000 2)
$360, 000
Cost t o consol i dat ed ent i t y ( 180, 000)
Unr eal i zed pr of i t on J anuar y 3 $180, 000
Amor t i zat i on of unr eal i zed pr of i t f r omconsol i dat ed vi ew:
$180, 000/ 6 year s = $30, 000 per year

1 Consolidated balance sheet amounts:
2011
Equi pment ( at t r ansf er pr i ce) $360, 000
Less: Unr eal i zed pr of i t ( 180, 000)
Less: Depr eci at i on t aken by Spa ( $360, 000/ 6 year s) ( 60, 000)
Add: Depr eci at i on on unr eal i zed pr of i t ( $180, 000/ 6 year s) 30, 000

Equi pment net t o be i ncl uded on consol i dat ed bal ance sheet
$150, 000

Al t er nat i vel y:
Equi pment ( at cost t o t he consol i dat ed ent i t y) $180, 000
Less: Depr eci at i on based on cost ( $180, 000/ 6 year s) ( 30, 000)

Equi pment net
$150, 000

2012 Year af t er i nt er company sal e

Equi pment net begi nni ng of t he per i od on cost basi s
$150, 000
Less: Depr eci at i on ( based on cost ) ( 30, 000)

Equi pment net
$120, 000

2 Consolidation workpaper entries:
2011
Sal es 360, 000
Cost of goods sol d 180, 000

Equi pment net
150, 000
Depr eci at i on expense 30, 000
To el i mi nat e i nt er company i nvent or y sal e, r et ur n equi pment
t o i t s cost t o t he consol i dat ed ent i t y, and el i mi nat e
depr eci at i on on t he i nt er company pr of i t .

2012
I nvest ment i n Spa 150, 000

Equi pment net
120, 000
Depr eci at i on expense 30, 000
To el i mi nat e unr eal i zed pr of i t f r omt he equi pment account
and t he cur r ent year s depr eci at i on on t he unr eal i zed pr of i t
and est abl i sh r eci pr oci t y bet ween t he i nvest ment account and
begi nni ng- of - t he- per i od subsi di ar y equi t y account s.
6-10 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution E6-11

Par Corporation and Subsidiary
Schedul e f or Comput at i on of Consol i dat ed Net I ncome

2011 2012 2013 2014
Combi ned separ at e i ncomes $260, 000 $220, 000 $120, 000 $210, 000
Add: Amor t i zat i on of negat i ve
di f f er ent i al assi gned t o pl ant
asset s ( $50, 000/ 10 year s) * 5, 000 5, 000 5, 000 5, 000
Unr eal i zed gai n on l and ( Not e
That Par s $5, 000 gai n i s
i ncl uded i n Par s separ at e
i ncome) ( 5, 000) 5, 000
Unr eal i zed gai n on machi ner y ( 25, 000)
Pi ecemeal r ecogni t i on of
Gai n on machi ner y 5, 000 5, 000 5, 000
Unr eal i zed i nvent or y pr of i t s ( 8, 000) 8, 000
Consol i dat ed net i ncome 260, 000 205, 000 122, 000 233, 000
Less: Noncont r ol l i ng i nt er est shar e
2011 ( $60, 000- $5, 000+$5, 000) 20%
( 12, 000)
2012 ( $70, 000+$5, 000) 20%
( 15, 000)
2013 ( $80, 000- $8, 000+$5, 000) ) 20%
( 15, 400)
2014 ( $90, 000 + $8, 000 +
$5, 000 + $5, 000) ) 20%
( 21, 600)
Cont r ol l i ng shar e of NI $248, 000 $190, 000 $106, 600 $211, 400

Alternative Solution:
Par s separ at e i ncome $200, 000 $150, 000 $ 40, 000 $120, 000
Add: 80%of Sum s i ncome 48, 000 56, 000 64, 000 72, 000
Amor t i ze t he negat i ve di f f er ent i al
assi gned t o pl ant asset 80%

4, 000

4, 000

4, 000

4, 000
Unr eal i zed pr of i t on upst r eam
Sal e of l and ( $5, 000 80%)
( 4, 000) 4, 000
Unr eal i zed pr of i t on downst r eam
Sal e of machi ner y ( 25, 000)
Pi ecemeal r ecogni t i on of gai n
( $25, 000/ 5 year s) 5, 000 5, 000 5, 000
Unr eal i zed pr of i t on upst r eam
Sal e of i nvent or y i t ems
$8, 000 80%
( 6, 400) 6, 400
Par s net i ncome and cont r ol l i ng
shar e of consol i dat ed net i ncome $248, 000 $190, 000 $106, 600 $211, 400

* Not e: Si nce Par pai d $40, 000 mor e t han book val ue f or i t s 80%shar e, t he
i mpl i ed t ot al f ai r val ue mi nus book val ue of Sumi s $50, 000.
Chapter 6 6-11

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
SOLUTIONS TO PROBLEMS

Solution P6-1

1 Income from Sea 2011


Equi t y i n Sea s i ncome ( $100, 000 90%)
$ 90, 000


Add: Def er r ed i nvent or y pr of i t f r om2010 ( $40, 000 50%)
20, 000


Less: Unr eal i zed i nvent or y pr of i t f r om2011 ( $60, 000 40%)
( 24, 000)

Less: I nt er company pr of i t on equi pment ( $100, 000 - $60, 000) ( 40, 000)

Add: Pi ecemeal r ecogni t i on of pr of i t on equi pment
$40, 000/ 4 year s 10, 000

I ncome f r omSea ( cor r ect ed amount ) $ 56, 000

2 Pea Corporation and Subsidiary
Consol i dat ed I ncome St at ement
f or t he year ended December 31, 2011

Sal es [ $1, 600, 000 combi ned - $150, 000 i nt er company] $1, 450, 000

Cost of sal es [ $1, 000, 000 combi ned - $150, 000 i nt er -
company + $24, 000 endi ng i nvent or y pr of i t s - $20, 000
begi nni ng i nvent or y pr of i t s] 854, 000

Gr oss pr of i t 596, 000

Ot her expenses [ $300, 000 combi ned - $10, 000 pi ecemeal
r ecogni t i on of pr of i t on equi pment ] 290, 000
Consol i dat ed net i ncome $ 306, 000
Less: Noncont r ol l i ng i nt er est shar e 10, 000
Cont r ol l i ng i nt er est shar e $ 296, 000

Check:
Separ at e i ncome of Pea $ 240, 000
Add: I ncome f r omSea 56, 000
Cont r ol l i ng i nt er est shar e $ 296, 000

6-12 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-2

Preliminary computations

NOTE: Si nce Pal pai d a pr i ce $45, 000 i n excess of book val ue f or i t s 90%
shar e, t he i mpl i ed t ot al excess of f ai r val ue over book i s $50, 000 ( $45, 000 /
90%) .

Computation of income from Sim:
Shar e of Si m s r epor t ed i ncome ( $40, 000 . 9)
$36, 000
Add: Real i zat i on of def er r ed pr of i t s i n begi nni ng i nvent or y 5, 000
Less: Unr eal i zed pr of i t s i n endi ng i nvent or y ( 4, 000)
Less: Unr eal i zed pr of i t on i nt er company sal e of equi pment
( $30, 000 - $21, 000) ( 9, 000)
Add: Pi ecemeal r ecogni t i on of def er r ed pr of i t i n equi pment
( $9, 000/ 3 year s) 3, 000
I ncome f r omSi m $31, 000

Consolidation workpaper entries

A Cash 2, 000
Account s r ecei vabl e 2, 000
To r ecor d cash i n t r ansi t f r omSi mon account .

B Sal es 20, 000
Cost of sal es 20, 000
To el i mi nat e i nt er company cost of sal es and sal es.

C I nvest ment i n Si m 5, 000
Cost of sal es 5, 000
To r ecogni ze pr evi ousl y def er r ed pr of i t f r ombegi nni ng i nvent or y.

D Cost of sal es 4, 000
I nvent or y 4, 000
To def er unr eal i zed pr of i t f r omendi ng i nvent or y.

E I nvest ment i n Si m 3, 000
Land 3, 000
To r educe l and t o i t s cost basi s and adj ust t he i nvest ment account
t o est abl i sh r eci pr oci t y wi t h Si m s begi nni ng of t he per i od equi t y
account s.

F Gai n on sal e of equi pment 9, 000

Equi pment net
9, 000
To el i mi nat e gai n on i nt er company sal e of equi pment and r educe
equi pment t o a cost basi s.
Chapter 6 6-13

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-2 ( cont i nued)

g
Equi pment net
3, 000
Oper at i ng expenses 3, 000
To el i mi nat e cur r ent year s depr eci at i on of unr eal i zed gai n.

h I ncome f r omSi m 31, 000

Di vi dends Si m
18, 000
I nvest ment i n Si m 13, 000
To el i mi nat e i ncome and di vi dends f r omSi mand r et ur n i nvest ment
account t o i t s begi nni ng of t he per i od bal ance.

i
Ret ai ned ear ni ngs Si m
70, 000

Capi t al st ock Si m
50, 000
Goodwi l l 50, 000
I nvest ment i n Si m 153, 000

Noncont r ol l i ng i nt er est J anuar y 1
17, 000
To el i mi nat e r eci pr ocal i nvest ment and equi t y amount s, est abl i sh
begi nni ng noncont r ol l i ng i nt er est , and ent er begi nni ng- of - t he-
per i od f ai r val ue book val ue di f f er ent i al ( goodwi l l ) .

j Noncont r ol l i ng I nt er est Shar e 4, 000

Di vi dends Si m
2, 000
Noncont r ol l i ng I nt er est 2, 000
To r ecor d Noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome and
di vi dends.

k Di vi dends payabl e 9, 000
Di vi dends r ecei vabl e 9, 000
To el i mi nat e r eci pr ocal r ecei vabl es and payabl es.

6-14 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-2 ( cont i nued)

Pal Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he year ended December 31, 2012
( i n t housands)

Pal

Si m90%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 300

$ 100

b 20

$ 380
I ncome f r omSi m 31 h 31
Gai n on equi pment 9 f 9
Cost of sal es 140* 50* d 4 b 20
c 5

169*
Oper at i ng expenses 60* 10* g 3 67*
Consol i dat ed NI 144
Noncont r ol l i ng shar e j 4 4*
Cont r ol l i ng shar e of NI
$ 140 $ 40 $ 140

Retained Earnings
Ret ai ned ear ni ngs Pal

$ 157

$ 157
Ret ai ned ear ni ngs Si m
$ 70 i 70
Cont r ol l i ng shar e of NI 140 40 140
Di vi dends 60* 20* h 18
j 2

60*
Ret ai ned ear ni ngs
December 31

$ 237


$ 90


$ 237


Balance Sheet
Cash

$ 100

$ 17

a 2

$ 119
Account s r ecei vabl e 90 50 a 2 138
Di vi dends r ecei vabl e 9 k 9
I nvent or i es 20 8 d 4 24
Land 40 15 e 3 52
Bui l di ngs net
135 50 185
Equi pment net
165 60 g 3 f 9 219
I nvest ment i n Si m 158 c 5
e 3
h 13
i 153

Goodwi l l i 50 50

$ 717 $ 200 $ 787

Account s payabl e $ 98 $ 30 $ 128
Di vi dends payabl e 15 10 k 9 16
Ot her l i abi l i t i es 67 20 87
Capi t al st ock 300 50 i 50 300
Ret ai ned ear ni ngs 237 90 237

$ 717 $ 200


Noncont r ol l i ng i nt er est J anuar y 1 i 17
Noncont r ol l i ng i nt er est December 31 j 2 19
$ 787
* Deduct
Chapter 6 6-15

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

Solution P6-3

Preliminary computations

Cost J anuar y 1, 2011 $270, 000
I mpl i ed f ai r val ue of Sor ( $270, 000 / 90%) $300, 000
Book val ue of Sor ( 240, 000)
Excess of f ai r val ue over book val ue - Goodwi l l $ 60, 000

Cost J anuar y 1, 2011 $270, 000
Add: I ncome f r omSor f or 2011
Equi t y i n i ncome ( $40, 000 90%)
$ 36, 000
Less: Unr eal i zed i nvent or y pr of i t ( 10, 000)
Less: Unr eal i zed pr of i t on machi ner y
( sel l i ng pr i ce $35, 000 - book val ue $28, 000) ( 7, 000)
Add: Pi ecemeal r ecogni t i on of pr of i t on
machi ner y ( $7, 000/ 3. 5 year s . 5 year )
1, 000
I ncome f r omSor f or 2011 20, 000
Less: Di vi dends $10, 000 90%
( 9, 000)

I nvest ment bal ance J anuar y 1, 2012 281, 000
Add: I ncome f r omSor f or 2012
Equi t y i n i ncome ( $50, 000 90%)
$ 45, 000
Add: Unr eal i zed pr of i t i n begi nni ng i nvent or y 10, 000
Less: Unr eal i zed pr of i t i n endi ng i nvent or y ( 12, 000)
Add: Pi ecemeal r ecogni t i on of pr of i t on
machi ner y ( $7, 000/ 3. 5 year s) 2, 000
Less: Gai n on sal e of l and ( 5, 000)
I ncome f r omSor f or 2012 40, 000
Less: Di vi dends ( $20, 000 90%)
( 18, 000)

I nvest ment bal ance December 31, 2012 $303, 000
6-16 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-3 ( cont i nued)

Pal Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he Year Ended December 31, 2012
( i n t housands)

Pal

Sor 90%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 450

$ 190

a 72

$ 568
I ncome f r omSor 40 f 40
Gai n on l and 5 e 5
Cost of sal es ( 200) ( 100) c 12 a 72
b 10

( 230)
Oper at i ng expense ( 113) ( 40) d 2 ( 151)
Consol i dat ed NI 187
Noncont r ol l i ng shar e h 5 ( 5)
Cont r ol l i ng shar e of NI
$ 182 $ 50 $ 182

Retained Earnings
Ret ai ned ear ni ngs Pal

$ 202

$ 202
Ret ai ned ear ni ngs Sor
$ 120 g 120
Cont r ol l i ng shar e of NI 182 50 182
Di vi dends ( 150) ( 20) f 18
h 2

( 150)
Ret ai ned ear ni ngs
December 31

$ 234


$ 150


$ 234


Balance Sheet
Cash

$ 133

$ 14

$ 147
Account s r ecei vabl e 180 100 i 10 270
Di vi dends r ecei vabl e 18 j 18
I nvent or i es 60 36 c 12 84
Land 100 30 e 5 125
Bui l di ngs net
280 80 360
Machi ner y net
330 140 d 4 466
I nvest ment i n Sor 303 b 10
d 6
f 22
g 297

Goodwi l l g 60 60
Tot al asset s
$1, 404 $ 400 $1, 512

Account s payabl e $ 200 $ 50 i 10 $ 240
Di vi dends payabl e 30 20 j 18 32
Ot her l i abi l i t i es 140 30 170
Capi t al st ock 800 150 g 150 800
Ret ai ned ear ni ngs 234 150 234
Tot al equi t i es
$1, 404 $ 400

Noncont r ol l i ng i nt er est J anuar y 1 g 33
Noncont r ol l i ng i nt er est December 31 h 3 36
$1, 512

Chapter 6 6-17

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-4

Par Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he year ended December 31, 2011
( i n t housands)

Par

Sag 90%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
Bal ance Sheet
Income Statement
Sal es

$ 700

$ 500

a 50

$1, 150
I ncome f r omSag 70 e 70
Gai n on l and 10 c 10
Gai n on equi pment 20 d 20
Cost of sal es 300* 300* b 5 a 50 555*
Depr eci at i on expense 90* 35* d 5 120*
Ot her expenses 200* 65* 265*
Consol i dat ed NI 210
Noncont r ol l i ng shar e h 10 10*
Cont r ol l i ng shar e of NI
$ 200 $ 110 $ 200

Retained Earnings
Ret ai ned ear ni ngs Par

$ 600

$ 600
Ret ai ned ear ni ngs Sag
$ 200 f 200
Cont r ol l i ng shar e of NI 200 110 200
Di vi dends 100* 50* e 45
h 5

100*
Ret ai ned ear ni ngs
December 31

$ 700


$ 260


$ 700


Balance Sheet
Cash

$ 35

$ 30

$ 65
Account s r ecei vabl e 90 110 g 10 190
I nvent or i es 100 80 b 5 175
Ot her cur r ent i t ems 70 40 110
Land 50 70 c 10 110
Bui l di ngs net
200 150 350
Equi pment net
500 400 d 15 885
I nvest ment i n Sag 655 e 25
f 630


$1, 700 $ 880 $1, 885

Account s payabl e $ 160 $ 50 g 10 $ 200
Ot her l i abi l i t i es 340 70 410
Capi t al st ock 500 500 f 500 500
Ret ai ned ear ni ngs 700 260 700

$1, 700 $ 880


Noncont r ol l i ng i nt er est J anuar y 1 f 70
Noncont r ol l i ng i nt er est December 31 h 5 75
$1, 885
* Deduct
6-18 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
NOTE: Pur chase pr i ce i mpl i es book val ues ar e equal t o f ai r val ues.
Chapter 6 6-19

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-5

Preliminary computations

Cost J anuar y 1, 2011 $270, 000
Add: I ncome f r omSt o f or 2011
Equi t y i n i ncome ( $40, 000 90%)
$36, 000
Less: Pat ent amor t i ze. ( $60, 000/ 10 year s) x 90% ( 5, 400)
Less: Unr eal i zed i nvent or y pr of i t ( 10, 000)
Less: Unr eal i zed pr of i t on machi ner y
( sel l i ng pr i ce $35, 000 - book val ue $28, 000) ( 7, 000)
Add: Pi ecemeal r ecogni t i on of pr of i t on
machi ner y ( $7, 000/ 3. 5 year s . 5 year )
1, 000
I ncome f r omSt o f or 2011 14, 600
Less: Di vi dends $10, 000 90%
( 9, 000)

I nvest ment bal ance J anuar y 1, 2012 275, 600
Add: I ncome f r omSt o f or 2012
Equi t y i n i ncome ( $50, 000 90%)
$45, 000
Less: Pat ent amor t i zat i on ( 90%) ( 5, 400)
Add: Unr eal i zed pr of i t i n begi nni ng i nvent or y 10, 000
Less: Unr eal i zed pr of i t i n endi ng i nvent or y ( 12, 000)
Add: Pi ecemeal r ecogni t i on of pr of i t on
machi ner y ( $7, 000/ 3. 5 year s) 2, 000
Less: Gai n on sal e of l and ( 5, 000)
I ncome f r omSt o f or 2012 34, 600
Less: Di vi dends ( $20, 000 90%)
( 18, 000)

I nvest ment bal ance December 31, 2012 $292, 200

Noncont r ol l i ng i nt er est shar e of St o s i ncome ( 10%) 2011 2012

St o s r epor t ed net i ncome $40, 000 $50, 000
Less: Pat ent amor t i zat i on ( 6, 000) ( 6, 000)
St o s adj ust ed i ncome $34, 000 $44, 000
10%Noncont r ol l l i ng i nt er est shar e $ 3, 400 $ 4, 400

6-20 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-5 ( cont i nued)

Pal Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he Year Ended December 31, 2012


Pal

St o 90%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 450, 000

$ 190, 000

a 72, 000

$ 568, 000
I ncome f r omSt o 34, 600 f 34, 600
Gai n on l and 5, 000 e 5, 000
Cost of sal es ( 200, 000) ( 100, 000) c 12, 000 a 72, 000
b 10, 000

( 230, 000)
Oper at i ng expense ( 113, 000) ( 40, 000) h 6, 000 d 2, 000 ( 157, 000)
Consol i dat ed NI 181, 000
Noncont r ol l i ng shar e k 4, 400 ( 4, 400)
Cont r ol l i ng shar e of NI
$ 176, 600 $ 50, 000 $ 176, 600

Retained Earnings
Ret ai ned ear ni ngs Pal

$ 200, 000

$ 200, 000
Ret ai ned ear ni ngs St o
$ 120, 000 g 120, 000
Cont r ol l i ng shar e of NI 176, 600 50, 000 176, 600
Di vi dends ( 150, 000) ( 20, 000) f 18, 000
k 2, 000

( 150, 000)
Ret ai ned ear ni ngs
December 31

$ 226, 600


$ 150, 000


$ 226, 600


Balance Sheet
Cash

$ 136, 400

$ 14, 000

$ 150, 400
Account s r ecei vabl e 180, 000 100, 000 i 10, 000 270, 000
Di vi dends r ecei vabl e 18, 000 j 18, 000
I nvent or i es 60, 000 36, 000 c 12, 000 84, 000
Land 100, 000 30, 000 e 5, 000 125, 000
Bui l di ngs net
280, 000 80, 000 360, 000
Machi ner y net
330, 000 140, 000 d 4, 000 466, 000
I nvest ment i n St o 292, 200 b 10, 000
d 6, 000
f 16, 600
g 291, 600

Pat ent s g 54, 000 h 6, 000 48, 000
Tot al asset s
$1, 396, 600 $ 400, 000 $1, 503, 400

Account s payabl e $ 200, 000 $ 50, 000 i 10, 000 $ 240, 000
Di vi dends payabl e 30, 000 20, 000 j 18, 000 32, 000
Ot her l i abi l i t i es 140, 000 30, 000 170, 000
Capi t al st ock 800, 000 150, 000 g 150, 000 800, 000
Ret ai ned ear ni ngs 226, 600 150, 000 226, 600
Tot al equi t i es
$1, 396, 600 $ 400, 000

Noncont r ol l i ng i nt er est J anuar y 1 g 32, 400
Noncont r ol l i ng i nt er est December 31 k 2, 400 34, 800
$1, 503, 400

Chapter 6 6-21

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-6

Preliminary computations
I nvest ment cost $290, 000
I mpl i ed f ai r val ue of San ( $290, 000 / 80%) $362, 500
Book val ue of San ( 300, 000)
Excess f ai r val ue over book val ue $ 62, 500
- al l ocat ed 50%t o Pat ent s wi t h a t en- year l i f e ( $31, 250)
- al l ocat ed 50%t o I nvent or y sol d i n 2009 ( $31, 250)

Reconciliation of income from San:
Pi l s shar e of San s net i ncome ( $50, 000 80%)
$ 40, 000
Less: 80%of Pat ent amor t i zat i on ( $31, 250/ 10 year s) ( 2, 500)
Add: Depr eci at i on on def er r ed gai n on equi pment
( $15, 000/ 5 year s) 80%

2, 400
Less: Unr eal i zed pr of i t on upst r eamsal e of l and ( $10, 000 80%)
( 8, 000)
I ncome f r omSan $ 31, 900

Reconciliation of investment account:
Shar e of San s under l yi ng equi t y ( $400, 000 80%)
$320, 000
Add: 80%of Unamor t . pat ent ( $31, 250 - ( $3, 125 3 year s) ) x 80%
17, 500
Less: Unr eal i zed gai n on equi pment
[ $15, 000 - ( $3, 000 2 year s) ] 80%

( 7, 200)
Less: Shar e of unr eal i zed gai n on l and ( 8, 000)
I nvest ment i n San December 31, 2011 $322, 300

Noncontrolling interest share:
San s r epor t ed i ncome $ 50, 000
Add: Pi ecemeal r ecogni t i on of gai n on sal e of machi ner y 3, 000
Less: Pat ent amor t i zat i on ( 3, 125)
Less: Unr eal i zed gai n on upst r eamsal e of l and ( 10, 000)
Real i zed i ncome 39, 875
Noncont r ol l i ng per cent age 20%
Noncont r ol l i ng i nt er est shar e $ 7, 975

6-22 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-6 ( cont i nued)

Pil Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he year ended December 31, 2011


Pi l

San 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 210, 000

$ 130, 000

$ 340, 000
I ncome f r omSan 31, 900 c 31, 900
Gai n on l and 10, 000 b 10, 000
Depr eci at i on expense 40, 000* 30, 000* a 3, 000 67, 000*
Ot her expenses 110, 000* 60, 000* e 3, 125 173, 125*
Consol i dat ed NI 99, 875
Noncont r ol l i ng shar e f 7, 975 7, 975*
Cont r ol l i ng shar e of NI
$ 91, 900 $ 50, 000 $ 91, 900

Retained Earnings
Ret ai ned ear ni ngs Pi l

$ 140, 400

$ 140, 400
Ret ai ned ear ni ngs San
$ 50, 000 d 50, 000
Cont r ol l i ng shar e of NI 91, 900 50, 000 91, 900
Di vi dends 30, 000* 30, 000*
Ret ai ned ear ni ngs
December 31

$ 202, 300


$ 100, 000


$ 202, 300


Balance Sheet
Cur r ent asset s

$ 200, 000

$ 170, 000

$ 370, 000
Pl ant asset s 550, 000 350, 000 a 15, 000
b 10, 000
875, 000
Accumul at ed depr eci at i on 120, 000* 70, 000* a 6, 000 184, 000*
I nvest ment i n San 322, 300 a 9, 600 c 31, 900
d 300, 000

Pat ent d 25, 000 e 3, 125 21, 875

$ 952, 300 $ 450, 000 $1, 082, 875

Cur r ent l i abi l i t i es $ 150, 000 $ 50, 000 $ 200, 000
Capi t al st ock 600, 000 300, 000 d 300, 000 600, 000
Ret ai ned ear ni ngs 202, 300 100, 000 202, 300

$ 952, 300 $ 450, 000


Noncont r ol l i ng i nt er est J anuar y 1 a 2, 400 d 75, 000
Noncont r ol l i ng i nt er est December 31 f 7, 975 80, 575
$1, 082, 875
* Deduct
Chapter 6 6-23

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution 6-6 ( cont i nued)

Consolidation workpaper entries

a Accumul at ed depr eci at i on 6, 000
I nvest ment i n San 9, 600
Noncont r ol l i ng i nt er est 2, 400
Depr eci at i on expense 3, 000
Pl ant asset s 15, 000
To el i mi nat e unr eal i zed pr of i t on 2010 sal e of pl ant asset s and
r educe pl ant asset s t o cost .

b Gai n on l and 10, 000
Pl ant asset s 10, 000
To el i mi nat e unr eal i zed gai n on 2011 upst r eamsal e of l and and
r educe pl ant asset s t o cost .

c I ncome f r omSan 31, 900
I nvest ment i n San 31, 900
To el i mi nat e i ncome f r omSan and adj ust i nvest ment t o begi nni ng of
per i od.

d Capi t al st ockSan 300, 000
Ret ai ned ear ni ngsSan J anuar y 1 50, 000
Pat ent 25, 000
I nvest ment i n San 300, 000
Noncont r ol l i ng i nt er est J anuar y 1 75, 000
To el i mi nat e i nvest ment i n San and st ockhol der s equi t y of San and
ent er begi nni ng of t he per i od pat ent .

e Ot her expenses 3, 125
Pat ent 3, 125
To pr ovi de f or pat ent amor t i zat i on.

f Noncont r ol l i ng I nt er est Shar e 7, 975
Noncont r ol l i ng I nt er est 7, 975
To ent er noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome.


6-24 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-7

Preliminary computations (amounts in thousands)

I nvest ment cost f or 100%of Ski , Apr i l 1, 2011 $15, 000
Book val ue acqui r ed ( 7, 000)
Excess f ai r val ue over book val ue $ 8, 000

Excess al l ocat ed:
Under val ued i nvent or y i t ems ( sol d i n 2011) $ 500
Under val ued bui l di ngs ( 7- year r emai ni ng usef ul l i f e) 3, 500
Goodwi l l 4, 000
Excess f ai r val ue over book val ue $ 8, 000

Reconciliation of investment account balance:

I nvest ment cost Apr i l 1, 2011 $15, 000
Add: I ncr ease i n Ski s r et ai ned ear ni ngs 3, 000
Less: Excess al l ocat ed t o i nvent or i es sol d i n 2011 ( 500)
Less: Depr eci at i on on excess al l ocat ed t o bui l di ngs
( $3, 500/ 7 year s) 4. 75 year s
( 2, 375)
Less: Unr eal i zed i nvent or y pr of i t s December 31, 2015 ( 120)
Less: Unr eal i zed pr of i t on equi pment
( $800 i nt er company pr of i t - $200 r ecogni zed) ( 600)
I nvest ment bal ance December 31, 2015 $14, 405

Reconciliation of investment income balance:

Shar e of Ski s i ncome ( 100%) $ 2, 000
Add: Unr eal i zed pr of i t i n begi nni ng i nvent or y 100
Add: Real i zat i on of pr evi ousl y def er r ed pr of i t on l and 500
Less: Unr eal i zed pr of i t i n endi ng i nvent or y ( 120)
Less: Depr eci at i on on excess al l ocat ed t o bui l di ngs ( 500)
Less: Unr eal i zed pr of i t on equi pment ( 600)
I ncome f r omSki $ 1, 380

Chapter 6 6-25

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-7 ( cont i nued)

Pot Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he year ended December 31, 2015
( i n t housands)

Pot

Ski
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$26, 000

$11, 000

b 1, 500

$35, 500
Gai n on l and 700 a 500 1, 200
Gai n on equi pment 800 e 800
I ncome f r omSki 1, 380 g 1, 380
Cost of sal es 15, 000* 5, 000* d 120 b 1, 500 18, 520*
c 100
Depr eci at i on expense 3, 700* 2, 000* i 500 f 200 6, 000*
Ot her expenses 4, 280* 2, 800* 7, 080*
Consol i dat ed net i ncome
$ 5, 100 $ 2, 000 $ 5, 100

Retained Earnings
Ret ai ned ear ni ngs
Pot


$12, 375


$12, 375
Ret ai ned ear ni ngs
Ski

$ 4, 000

h 4, 000

Consol i dat ed net i ncome 5, 100 2, 000 5, 100
Di vi dends 3, 000* 1, 000* g 1, 000 3, 000*
Ret ai ned ear ni ngs
December 31

$14, 475


$ 5, 000


$14, 475




Balance Sheet
Cash

$ 1, 170

$ 500

$ 1, 670
Account s r ecei vabl e 2, 000 1, 500 j 300 3, 200
I nvent or i es 5, 000 2, 000 d 120 6, 880
Land 4, 000 1, 000 5, 000
Bui l di ngs net
15, 000 4, 000 h 1, 625 i 500 20, 125
Equi pment net
10, 000 4, 000 f 200 e 800 13, 400
I nvest ment i n Ski 14, 405 a 500 g 380
c 100 h 14, 625
Goodwi l l h 4, 000 4, 000

$51, 575 $13, 000 $54, 275

Account s payabl e $ 4, 100 $ 1, 000 j 300 $ 4, 800
Ot her l i abi l i t i es 7, 000 2, 000 9, 000
Capi t al st ock 26, 000 5, 000 h 5, 000 26, 000
Ret ai ned ear ni ngs 14, 475 5, 000 14, 475
$51, 575 $13, 000 $54, 275
* Deduct
6-26 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-8

Preliminary computations
I nvest ment cost J anuar y 1, 2011 $136, 000
I mpl i ed f ai r val ue of Si c ( $136, 000 / 80%) $170, 000
Book val ue of Si c ( 170, 000)
Excess f ai r val ue over book val ue 0

Analysis of investment in Sic account on Pics books:

I nvest ment cost $136, 000
Shar e of Si c s 2011 r epor t ed i ncome ( $30, 000 80%)
24, 000
I nvest ment i n Si c as r epor t ed on Pi c s books
at December 31, 2011 $160, 000
Shar e of Si c s 2012 r epor t ed i ncome ( $40, 000 80%)
32, 000
I nvest ment i n Si c as r epor t ed on Pi c s books
at December 31, 2012 $192, 000

Note that Pic has not eliminated intercompany profits from
its investment income from Sic for either 2011 or 2012.


I nvest ment bal ance as r epor t ed on Pi c s books December 31, 2011 $160, 000
Gai n on machi ner y ( $5, 000 80%)
( 4, 000)
Pi ecemeal r ecogni t i on of gai n ( $1, 000 80%)
800
I nvest ment account bal ance under t he equi t y met hod
at December 31, 2011 $156, 800
Shar e of Si c s 2012 r epor t ed i ncome 32, 000
Pi ecemeal r ecogni t i on of gai n i n 2012 ( $1, 000 80%)
800
I nvest ment account bal ance under t he equi t y met hod
at December 31, 2012 $189, 600

Noncontrolling interest share for 2011:

Si c s r epor t ed net i ncome $ 30, 000
Less: Gai n on sal e of machi ner y ( 5, 000)
Add: Pi ecemeal r ecogni t i on of gai n on machi ner y t hr ough
Depr eci at i on 1, 000
Si c s r eal i zed i ncome $ 26, 000
Noncont r ol l i ng i nt er est per cent age 20%
Noncont r ol l i ng i nt er est shar e f or 2011 $ 5, 200

Noncontrolling interest share for 2012:

Si c s r epor t ed net i ncome $ 40, 000
Add: Pi ecemeal r ecogni t i on of unr eal i zed gai n on machi ner y
t hr ough depr eci at i on 1, 000
Si c s r eal i zed i ncome 41, 000
Noncont r ol l i ng i nt er est per cent age 20%
Noncont r ol l i ng i nt er est shar e f or 2012 $ 8, 200

Chapter 6 6-27

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-8 ( cont i nued)

Pic Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he year ended December 31, 2011


Pi c

Si c 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 400, 000

$ 200, 000

$ 600, 000
I ncome f r omSi c 24, 000 c 24, 000
Gai n on pl ant asset s 5, 000 a 5, 000
Cost of sal es 250, 000* 130, 000* 380, 000*
Depr eci at i on expense 50, 000* 25, 000* b 1, 000 74, 000*
Ot her expenses 60, 000* 20, 000* 80, 000*
Consol i dat ed NI 66, 000
Noncont r ol l i ng shar e e 5, 200 5, 200*
Cont r ol l i ng shar e of NI
$ 64, 000 $ 30, 000 $ 60, 800

Retained Earnings
Ret ai ned ear ni ngs Pi c

$ 126, 000

$ 126, 000
Ret ai ned ear ni ngs Si c
$ 70, 000 d 70, 000
Cont r ol l i ng shar e of NI 64, 000 30, 000 60, 800
Ret ai ned ear ni ngs
December 31

$ 190, 000


$ 100, 000


$ 186, 800


Balance Sheet
Cash and equi val ent s

$ 50, 000

$ 30, 000

$ 80, 000
Ot her cur r ent asset s 130, 000 70, 000 200, 000
Pl ant and equi pment 400, 000 200, 000 a 5, 000 595, 000
Accumul at ed depr eci at i on 150, 000* 50, 000* b 1, 000 199, 000*
I nvest ment i n Si c 160, 000 c 24, 000
d 136, 000


$ 590, 000 $ 250, 000 $ 676, 000

Li abi l i t i es $ 100, 000 $ 50, 000 $ 150, 000
Capi t al st ock 300, 000 100, 000 d 100, 000 300, 000
Ret ai ned ear ni ngs 190, 000 100, 000 186, 800

$ 590, 000 $ 250, 000


Noncont r ol l i ng i nt er est J anuar y 1 d 34, 000
Noncont r ol l i ng i nt er est December 31 e 5, 200 39, 200
$ 676, 000
* Deduct
6-28 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-8 ( cont i nued)

Pic Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he year ended December 31, 2012


Pi c

Si c 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 430, 000

$ 235, 000

$ 665, 000
I ncome f r omSi c 32, 000 b 32, 000
Cost of sal es 260, 000* 140, 000* 400, 000*
Depr eci at i on expense 50, 000* 25, 000* a 1, 000 74, 000*
Ot her expenses 55, 000* 30, 000* 85, 000*
Consol i dat ed NI 106, 000
Noncont r ol l i ng shar e d 8, 200 8, 200*
Cont r ol l i ng shar e of NI
$ 97, 000 $ 40, 000 $ 97, 800

Retained Earnings
Ret ai ned ear ni ngs Pi c

$ 190, 000

a 3, 200

$ 186, 800
Ret ai ned ear ni ngs Si c
$ 100, 000 c 100, 000
Cont r ol l i ng shar e of NI 97, 000 40, 000 97, 800
Ret ai ned ear ni ngs
December 31

$ 287, 000


$ 140, 000


$ 284, 600


Balance Sheet
Cash and equi val ent

$ 63, 000

$ 30, 000

$ 93, 000
Ot her cur r ent asset s 140, 000 80, 000 220, 000
Pl ant and equi pment 440, 000 245, 000 a 5, 000 680, 000
Accumul at ed depr eci at i on 200, 000* 75, 000* a 2, 000 273, 000*
I nvest ment i n Si c 192, 000 b 32, 000
c 160, 000


$ 635, 000 $ 280, 000 $ 720, 000

Li abi l i t i es $ 48, 000 $ 40, 000 $ 88, 000
Capi t al st ock 300, 000 100, 000 c 100, 000 300, 000
Ret ai ned ear ni ngs 287, 000 140, 000 284, 600

$ 635, 000 $ 280, 000


Noncont r ol l i ng i nt er est J anuar y 1 a 800 c 40, 000
Noncont r ol l i ng i nt er est December 31 d 8, 200 47, 400
$ 720, 000
* Deduct
Chapter 6 6-29

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-9

Preliminary computations

I nvest ment cost J anuar y 1, 2011 $108, 000
I mpl i ed f ai r val ue of Si n ( $108, 000 / 80%) $135, 000
Book val ue of Si n ( 110, 000)
Excess f ai r val ue over book val ue al l ocat ed t o pat ent $ 25, 000
Pat ent amor t i zat i on: $25, 000/ 10 year s $ 2, 500

Reconciliation of investment income:

Si n s r epor t ed i ncome $ 50, 000
Less: Pat ent amor t i zat i on ( 2, 500)
Less: Unr eal i zed pr of i t i n endi ng i nvent or y ( 1, 000)
Add: Unr eal i zed pr of i t i n begi nni ng i nvent or y 2, 000
Add: Pi ecemeal r ecogni t i on of def er r ed pr of i t on pl ant
asset s ( $20, 000 / 5 year s) 4, 000
Si n s adj ust ed i ncome $ 52, 500

Par s 80%cont r ol l i ng shar e $ 42, 000

20%Noncont r ol l i ng i nt er est shar e $ 10, 500

6-30 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-9 ( cont i nued)

Par Corporation and Subsidiary
Consol i dat i on Wor kPaper s
f or t he year ended December 31, 2014


Par

Si n 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 650, 000

$ 120, 000

a 8, 000

$ 762, 000
I ncome f r omSi n 42, 000 e 42, 000
Cost of sal es 390, 000* 40, 000* b 1, 000 a 8, 000 421, 000*
c 2, 000
Ot her expenses 170, 000* 30, 000* g 2, 500 d 4, 000 198, 500*
Consol i dat ed NI 142, 500
Noncont r ol l i ng shar e i 10, 500 10, 500*
Cont r ol l i ng shar e of NI
$ 132, 000 $ 50, 000 $ 132, 000

Retained Earnings
Ret ai ned ear ni ngs Par

$ 95, 600

$ 95, 600
Ret ai ned ear ni ngs Si n $ 20, 000 f 20, 000
Cont r ol l i ng shar e of NI 132, 000 50, 000 132, 000
Di vi dends 70, 000* 20, 000* e 16, 000
i 4, 000 70, 000*
Ret ai ned ear ni ngs
December 31

$ 157, 600


$ 50, 000


$ 157, 600


Balance Sheet
Cash

$ 58, 000

$ 20, 000

$ 78, 000
Account s r ecei vabl e 40, 000 20, 000 h 4, 000 56, 000
I nvent or i es 60, 000 35, 000 b 1, 000 94, 000
Pl ant asset s 290, 000 205, 000 d 20, 000 475, 000
Accumul at ed depr eci at i on 70, 000* 100, 000* d 8, 000 162, 000*
I nvest ment i n Si n 121, 600 c 1, 600 e 26, 000
d 12, 800 f 110, 000
Pat ent f 17, 500 g 2, 500 15, 000

$ 499, 600 $ 180, 000 $ 556, 000

Account s payabl e $ 42, 000 $ 30, 000 h 4, 000 $ 68, 000
Capi t al st ock 300, 000 100, 000 f 100, 000 300, 000
Ret ai ned ear ni ngs 157, 600 50, 000 157, 600

$ 499, 600 $ 180, 000


Noncont r ol l i ng i nt er est J anuar y 1 c 400 f 27, 500
d 3, 200
Noncont r ol l i ng i nt er est December 31 i 6, 500 30, 400
$ 556, 000
* Deduct

Chapter 6 6-31

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-10

Preliminary computations
I nvest ment cost $290, 000
I mpl i ed f ai r val ue of Sun ( $290, 000 / 80%) $362, 500
Book val ue of Sun ( 300, 000)
Excess f ai r val ue over book val ue $ 62, 500
Excess al l ocat ed:
I nvent or i es ( 50%) - Sol d i n 2009 $ 31, 250
Goodwi l l 31, 250
Excess f ai r val ue over book val ue $ 62, 500

Reconciliation of income from Sun:
Sun s r epor t ed net i ncome $ 50, 000
Add: Depr eci at i on on def er r ed gai n on equi pment
( $15, 000/ 5 year s

3, 000
Less: Unr eal i zed pr of i t on upst r eamsal e of l and ( 10, 000)
Sun s adj ust ed and r eal i zed i ncome $ 43, 000

Pal s 80%cont r ol l i ng shar e $ 34, 400

20%Noncont r ol l i ng i nt er est shar e $ 8, 600

Reconciliation of investment account:
Shar e of Sun s under l yi ng equi t y ( $400, 000 80%)
$320, 000
Add: 80%of unamor t i zed goodwi l l 25, 000
Less: Unr eal i zed gai n on equi pment
[ $15, 000 - ( $3, 000 2 year s) ] 80%

( 7, 200)
Less: Shar e of unr eal i zed gai n on l and ( 8, 000)
I nvest ment i n Sun December 31, 2011 $329, 800

6-32 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution P6-10 ( cont i nued)

Pal Corporation and Subsidiary
Consol i dat i on Wor kPaper
f or t he year ended December 31, 2011


Pal

Sun 80%
Adj ust ment s and
El i mi nat i ons
Consol i dat ed
St at ement s
Income Statement
Sal es

$ 210, 000

$ 130, 000

$ 340, 000
I ncome f r omSun 34, 400 c 34, 400
Gai n on l and 10, 000 b 10, 000
Depr eci at i on expense 40, 000* 30, 000* a 3, 000 67, 000*
Ot her expenses 110, 000* 60, 000* 170, 000*
Consol i dat ed NI 103, 000
Noncont r ol l i ng shar e e 8, 600 8, 600*
Cont r ol l i ng shar e of NI
$ 94, 400 $ 50, 000 $ 94, 400

Retained Earnings
Ret ai ned ear ni ngs Pal

$ 145, 400

$ 145, 400
Ret ai ned ear ni ngs Sun
$ 50, 000 d 50, 000
Consol i dat ed shar e of NI 94, 400 50, 000 94, 400
Di vi dends 30, 000* 30, 000*
Ret ai ned ear ni ngs
December 31

$ 209, 800


$ 100, 000


$ 209, 800


Balance Sheet
Cur r ent asset s

$ 200, 000

$ 170, 000

$ 370, 000
Pl ant asset s 550, 000 350, 000 a 15, 000
b 10, 000
875, 000
Accumul at ed depr eci at i on 120, 000* 70, 000* a 6, 000 184, 000*
I nvest ment i n Sun 329, 800 a 9, 600 c 34, 400
d 305, 000

Goodwi l l d 31, 250 31, 250

$ 959, 800 $ 450, 000 $1, 092, 250

Cur r ent l i abi l i t i es $ 150, 000 $ 50, 000 $ 200, 000
Capi t al st ock 600, 000 300, 000 d 300, 000 600, 000
Ret ai ned ear ni ngs 209, 800 100, 000 209, 800

$ 959, 800 $ 450, 000


Noncont r ol l i ng i nt er est J anuar y 1 a 2, 400 d 76, 250
Noncont r ol l i ng i nt er est December 31 e 8, 600 82, 450
$1, 092, 250
* Deduct

Chapter 6 6-33

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l
Solution 6-10 ( cont i nued)

Consolidation workpaper entries

a Accumul at ed depr eci at i on 6, 000
I nvest ment i n Sun 9, 600
Noncont r ol l i ng i nt er est 2, 400
Depr eci at i on expense 3, 000
Pl ant asset s 15, 000
To el i mi nat e unr eal i zed pr of i t on 2010 sal e of pl ant asset s.

b Gai n on l and 10, 000
Pl ant asset s 10, 000
To el i mi nat e unr eal i zed gai n on 2011 upst r eamsal e of l and.

c I ncome f r omSun 34, 400
I nvest ment i n Sun 34, 400
To el i mi nat e i ncome f r omSun agai nst t he i nvest ment i n Sun.

d Capi t al st ockSun 300, 000
Ret ai ned ear ni ngsSun J anuar y 1 50, 000
Goodwi l l 31, 250
I nvest ment i n Sun 305, 000
Noncont r ol l i ng i nt er est J anuar y 1 76, 250
To el i mi nat e i nvest ment i n Sun and st ockhol der s equi t y of Sun and
ent er begi nni ng of t he per i od goodwi l l .

e Noncont r ol l i ng I nt er est Shar e 8, 600
Noncont r ol l i ng I nt er est 8, 600
To ent er noncont r ol l i ng i nt er est shar e of subsi di ar y i ncome.

Solution P6-11

1 The 90 per cent owner shi p i nt er est can be det er mi ned i n sever al ways.

a. $13, 500 di vi dends r ecei vabl e $15, 000 di vi dends payabl e = 90%

b. $37, 200 noncont r ol l i ng i nt er est ( $340, 000 Sal s st ockhol der s
equi t y + $32, 000 unamor t i zed pat ent ) = 10%

c. ( $4, 600 noncont r ol l i ng i nt er est shar e ( $50, 000 net i ncome of Sal
l ess $4, 000 pat ent amor t i zat i on) = 10%

2 Yes. Pop s net i ncome of $200, 400 equal s t he cont r ol l i ng i nt er est shar e
consol i dat ed net i ncome of $200, 400. Pop s r et ai ned ear ni ngs of $350, 400
equal s consol i dat ed r et ai ned ear ni ngs.

3 Yes.

Combi ned sal es $800, 000
Consol i dat ed sal es 716, 000
I nt er company sal es $ 84, 000

4 Yes.

Combi ned i nvent or i es $150, 000
Consol i dat ed i nvent or i es 136, 000
Unr eal i zed i nvent or y pr of i t s $ 14, 000
6-34 Intercompany Profit Transactions Plant Assets

2011 Pear son Educat i on, I nc. publ i shi ng as Pr ent i ce Hal l

Solution P6-11 ( cont i nued)

5 Reconciliation of combined and consolidated cost of sales

Combi ned cost of sal es ( gi ven) $350, 000
Less: I nt er company sal es ( see 3 above) ( 84, 000)
Add: Unr eal i zed pr of i t s i n endi ng i nvent or y ( see 4 above) 14, 000
Less: Unr eal i zed pr of i t s i n begi nni ng i nvent or y ( sol ve f or
t hi s)

( 5, 000)

Consol i dat ed cost of sal es ( gi ven) $275, 000

6 Reconciliation of combined and consolidated equipment net

Combi ned equi pment net of $565, 000 l ess consol i dat ed equi pment net
of $550, 000 shows a di f f er ence of $15, 000. The wor kpaper ent r y t o
el i mi nat e t he ef f ect s of an i nt er company sal e of equi pment must have
been:

Gai n on equi pment 20, 000
Depr eci at i on expense 5, 000

Equi pment net
15, 000

7 Yes. Intercompany receivables and payables are as follows:

Combi ned Consol i dat ed I nt er company
Account s r ecei vabl e $ 80, 000 $ 70, 000 $10, 000
Account s payabl e 110, 000 100, 000 10, 000
Di vi dends r ecei vabl e 13, 500 - - - 13, 500
Di vi dends payabl e 15, 000 1, 500 13, 500

8 Reconciliation of noncontrolling interest:


Noncont r ol l i ng i nt er est J anuar y 1, 2012 ( $320, 000 10%)
$ 32, 000
10%of unamor t i zed pat ent at J anuar y 1 3, 600
Add: Noncont r ol l i ng i nt er est shar e f or 2012 4, 600

Less: Noncont r ol l i ng i nt er est di vi dends ( $30, 000 10%)
( 3, 000)
Noncont r ol l i ng i nt er est December 31, 2012 $ 37, 200

9 Patent at December 31, 2011

Pat ent December 31, 2012 $ 32, 000
Add: Pat ent amor t i zat i on ( $141, 000 consol i dat ed ot her
expenses - $137, 000 combi ned ot her expenses) 4, 000

Pat ent December 31, 2011 $ 36, 000

10 Analysis of investment in Sal account


Book val ue ( Sal s st ockhol der s equi t y $340, 000 90%)
$306, 000
Less: Unr eal i zed pr of i t i n endi ng i nvent or y ( 14, 000)
Less: Unr eal i zed pr of i t i n equi pment ( 15, 000)
Add: 90%of Unamor t i zed pat ent 28, 800

I nvest ment i n Sal December 31, 2012 $305, 800