Chapter 7 - Solution Manual

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets
CHAPTER 7
INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS
ANSWERS TO QUESTIONS
Q7-1 Profits on intercorporate sales generally are considered to be realized when the affiliate
that has purchased the item sells it to a nonaffiliate. For depreciable or amortizable items that
are used by the affiliate in its operations, profits are considered to be realized as the purchaser
depreciates or amortizes the asset.
Q7-2 An upstream sale occurs when a subsidiary sells an item to the parent company. If the
asset is not resold before the end of the period, the parent is the company holding the asset and
any unrealized profits are recorded on the books of the subsidiary.
Q7-3 If the purchaser records the services received as an expense, both revenues and
expenses will be overstated in the consolidated income statement in the period in which the
intercorporate services are provided. In the event the services are capitalized by the purchaser,
the cost of the asset will be overstated, depreciation expense and accumulated depreciation will
be overstated if the services are assigned to a depreciable asset, and service revenue will be
overstated.
Q7-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net
income of the seller.
(b) All unrealized profit on current-period intercorporate sales must be excluded from
consolidated net income until realized through resale to a nonaffiliate.
Q7-5 Profits on intercompany sales are included in consolidated net income in the period in
which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one of
the companies at the start of the period and the item is sold to a nonaffiliate during the current
period, the intercompany profit is included in the computation of consolidated net income for the
current period.
Q7-6 The profits continue to be unrealized in this case and therefore must be eliminated from
both the beginning and ending asset and retained earnings balances when consolidated
statements are prepared. There should be no income statement effect for the current period.
Q7-7 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is not
resold before the end of the period, the subsidiary is the company holding the asset at year-end
and any unrealized profits are recorded on the books of the parent company.
Q7-8 The entire balance of unrealized profits is eliminated in all cases. While the direction of
the sale will affect the allocation of unrealized profits between companies, it does not change
the total amount of profit eliminated.
Q7-9 Consolidated net income is reduced by the amount of unrealized profits assigned to the
shareholders of the parent company. When a downstream sale occurs, all the profit is on the
parent's books and consolidated net income is reduced by the full amount of any unrealized
profit. On the other hand, when an upstream sale occurs, all the intercorporate profit is recorded
on the books of the subsidiary and the amount of income assigned to both the parent company
shareholders and the noncontrolling shareholders is reduced by a proportionate amount of any
unrealized profit.
7-1
Q7-10 The amount of intercorporate profit realized in the current period from prior years' sales
to the parent is added to the reported net income of the subsidiary in computing income
assigned to the noncontrolling interest.
Q7-11 Income assigned to noncontrolling interest for the current period will be less than a
proportionate share of the reported net income of the subsidiary. In determining the amount of
income to be assigned to the noncontrolling interest in the consolidated income statement, the
net income reported by the subsidiary must be adjusted to exclude any unrealized gain
recorded during the period on the sale of depreciable assets to the parent. On the other hand, if
an unrealized loss had been recorded, the basis used in assigning income to the noncontrolling
interest would be greater than the reported net income of the subsidiary. Such adjustments must
be made to assure that the income assigned to noncontrolling interest is based on the
contribution of the subsidiary to consolidated net income rather than the amount the subsidiary
may have reported as net income.
Q7-12 All other factors being equal, the income assigned to noncontrolling interest will be larger
if the sale occurs at the start of the current period. Some part of the gain will be considered
realized in the current period as the parent depreciates the asset if the sale occurs before year-
end. None of the gain will be considered realized in the period of transfer if the sale occurs at
year-end.
Q7-13 As in all other cases, income from the subsidiary recorded on the parent's books must
be eliminated in preparing the consolidated income statement and an appropriate amount of
subsidiary net income must be assigned to the noncontrolling interest if the parent owns less
than 100 percent of the subsidiary's stock. The gain recorded on the parent's books also must
be eliminated.
Q7-14 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of the
consolidated entity when the subsidiary pays the parent more than book value for the asset at
the start of the period. As a result, an eliminating entry is needed to reduce depreciation
expense and accumulated depreciation by the amount of excess depreciation recorded during
20X3.
Q7-15 Following an intercorporate sale of a depreciable asset, the eliminating entries should
adjust the balance in the asset account to reflect the original purchase price to the first owner
and accumulated depreciation should be adjusted to reflect the balance that would be reported
if the asset were still held by the first owner. In the case of an intercorporate sale of an
intangible asset, only the unamortized balance normally is reported and an eliminating entry is
needed to adjust the carrying value to that which would be reported if the asset were still held by
the first owner.
Q7-16 Profit on an intercorporate sale of land is considered realized at the time the purchaser
sells the land to a nonaffiliate. Profit on equipment normally is considered realized as the asset
is used and depreciated on the books of the purchaser. Equipment typically is considered to be
used up in the production process and therefore is charged to expense over its remaining
economic life, while land is not.
7-2
Q7-17 A portion of the profit is considered realized each period as the asset is depreciated by
the purchaser. Thus, the net amount considered unrealized decreases each period and a
smaller debit to beginning retained earnings is needed.
Q7-18A The balance in the investment account will depend on which method the parent uses to
account for its investment in the subsidiary. If the parent uses (a) the cost method or (b) the
modified equity method, no adjustments are made on the parent company's books for
unrealized intercompany profits and the balance in the investment account will be the same as if
there were no unrealized profits. If the parent uses (c) the fully-adjusted equity method, the
balance in the investment account will be reduced by the full amount of the unrealized profit
when the profit is on the parent's books and by a proportionate share of the unrealized profit
when it is on the subsidiary's books.
7-3
SOLUTIONS TO CASES
C7-1 Correction of Elimination Procedures
MEMO
To: Controller
Plug Corporation
From: , CPA
Re: Elimination of Intercompany Profit on Equipment
This memo is in response to our review of the elimination procedures used in preparing the
consolidated statements for Plug Corporation at December 31, 20X2. You have correctly
identified the need to eliminate the effects of the intercorporate sale of equipment. In preparing
your consolidated statements, all intercompany balances and transactions should be eliminated.
[ARB 51, Par. 6; ASC 810]
Your eliminating entry recorded at December 31, 20X2, was:
Equipment 150,000
Loss on Sale of Equipment 150,000
This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the sale
of equipment to Plug and adds $150,000 to the equipment account. By adding back $150,000 to
equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000). This represents the
carrying value of the equipment on Coys books at the time of sale but does not reflect the
purchase price paid by Coy ($1,200,000) or the accumulated depreciation at the time of sale
($200,000). Moreover, the eliminating entry above understates depreciation expense for the
year. The correct eliminating entry at December 31, 20X2, is:
Equipment 350,000
Depreciation Expense 15,000
Accumulated Depreciation 215,000
Loss on Sale of Equipment 150,000
A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by
Plug to $1,200,000, the initial purchase price to the consolidated entity. Depreciation expense
must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug to $100,000
($1,200,000/12 years) based on the initial purchase price. Accumulated depreciation must be
credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x 1 year] reported by Plug
to $300,000 [($1,200,000/12 years) x 3 years]. As previously noted, the $150,000 loss recorded
by Coy must be eliminated. If the amounts included in second eliminating entry are omitted,
consolidated net income for 20X2 and the retained earnings balance at December 31, 20X2, will
be overstated and the balances for equipment and accumulated depreciation will be
understated.
Primary citation:
ARB 51, Par. 6; ASC 810
7-4
C7-2 Elimination of Intercorporate Services
MEMO
To: Chief Accountant

Dream Corporation
From: , CPA
Re: Elimination of Legal Services Provided by Parent Company
This memo is in response to our discussion regarding the elimination of intercompany services
in preparing consolidated financial statements for Dream Corporation. It is my understanding
that at present Dream Corporation does not eliminate such services. In preparing consolidated
financial statements all intercompany balances and transactions should be eliminated. [ARB 51,
Par. 6; ASC 810]
The legal services provided by Dream Corporation to Classic Company and Plain Company are
intercompany transactions that should be eliminated. If the revenues recorded by the parent are
equal to the expenses recorded by the subsidiaries and both are properly recorded, elimination
of these transactions will have no impact on reported net income but will reduce consolidated
revenues and expenses by equal amounts. Financial statement readers will receive a more
accurate picture of operations of the consolidated entity if the appropriate amounts are reported.
The legal services provided to Classic Company in 20X3 should be eliminated with the following
entry:
Legal Services Revenue 80,000

Legal Services Expense 80,000
The information on intercorporate services provided to Plain Company indicates that an

additional adjustment is needed in the consolidation process. Although Plain Company recorded
its $150,000 payment to the parent as a legal expense, it should have been recorded as an
investment in land to be used in future development of its strip mine. This error should be
corrected on the books of Plain Company. If it is not, the eliminating entry prepared at
December 31, 20X3, should include an adjustment to reflect the appropriate investment in land
and would be recorded as:

Land 100,000
Legal Services Expense 150,000
Wage and Salary Expense 100,000
Care must be taken to capitalize only the cost of legal services in this case. The eliminating
entry should contain a debit of $100,000 ($150,000/1.50) to land since Dream Corporation bills
its services to the subsidiaries at 150 percent of the cost of services provided. Had Plain
Company debited land for its $150,000 payment to Dream, the eliminating entry at December
31, 20X3, would have been:

Land 50,000
Wage and Salary Expense 100,000
7-5
C7-2 (continued)
No eliminating entry would be required at December 31, 20X4, on the legal services provided to
Classic Company in 20X3. The conditions of the intercorporate transfer of services to Plain
Company require an eliminating entry at December 31, 20X4, and in following years, as long as
Plain Company owns the strip mine. The entry at December 31, 20X4, would be:
Land 100,000
Investment in Plain 100,000
Had Plain Company debited land for its $150,000 payment to Dream in 20X3, the eliminating
entry at December 31, 20X4, would require a $50,000 debit to Investment in Plain and a
$50,000 credit to land.
Primary citation:
ARB 51, Par. 6; ASC 810
7-6
C7-3 Noncontrolling Interest
a. When there are no unrealized profits on the subsidiary's books, a pro rata portion of the
reported net income of the subsidiary is assigned to the noncontrolling interest, adjusted for the
noncontrolling interests share of any amortization or write-off of differential.
b. When there are no unrealized profits on the subsidiary's books, the noncontrolling interest is
reported in the consolidated balance sheet at an amount equal to a pro rata portion of the book
value of the net assets of the subsidiary plus the noncontrolling interests share of any
remaining differential.
c. The effect of unrealized intercompany profits depends on which company has recorded the
profits. Those recorded on the books of the parent do not affect the income assigned to the
noncontrolling interest. When subsidiary net income includes unrealized intercompany profits,
the portion of consolidated net income assigned to the noncontrolling interest is reduced by its
portion of the unrealized profit in the period of the intercorporate sale.
(1) On a sale of land, the intercompany profit remains unrealized until the land is sold to a
nonaffiliate. When the land is resold, the profit is added to the reported net income of the
subsidiary in computing the portion of consolidated net income assigned to the noncontrolling
interest.
(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is

considered realized each period as the purchaser depreciates the asset. Thus, in the period of
the intercorporate sale, the adjustment to subsidiary net income for unrealized profits is based
on the gain or loss less any portion considered realized before the end of the period. Each
period thereafter, a portion of the profit or loss is considered realized and treated as an
adjustment to subsidiary income in determining the portion of consolidated net income assigned
to the noncontrolling interest.
d. Noncontrolling shareholders of a subsidiary generally will not gain a great deal of useful
information from the consolidated financial statements. Their primary focus must continue to be
on the income, assets, and liabilities of the subsidiary in which they hold direct ownership. In the
event there are a number of transactions with the parent or other affiliates, the success of the
operations of the entire economic entity may provide information useful to the noncontrolling
shareholders. Debt guarantees or other assurances by the parent may also lead to an
examination of the parent company and consolidated statements.
7-7
C7-4 Intercompany Sale of Services
a. When preparing consolidated financial statements, Schwartz's revenue from the sale of
services to Diamond and Diamond's expenses associated with the services acquired from
Schwartz must be eliminated. The expenses related to the janitorial and maintenance activities
that will be reported in the consolidated income statement will be the actual salary and
associated costs incurred by Schwartz to provide the services to Diamond. The eliminations
have no effect on consolidated net income because revenues and expenses of equal amount
are eliminated in the preparation of the consolidated financial statements.
b. Intercompany profits from the sale of services to an affiliate normally are considered realized
at the time the services are provided. Realization of intercompany profits on services normally is
considered to occur as the services are consumed, and services such as maintenance and
repair services normally are considered to be consumed by the purchasing affiliate at the time
received.
C7-5 Intercompany Profits
Answers can be found in the companies' 10-K filings with the SEC and in their annual reports.
Note that financial statements are often included in the Form 10-K by reference to the
companys annual report. In such cases, the financial statements are often shown in a separate
exhibit rather than in Item 8 of the Form 10-K.
a. Verizon (www.verizon.com) eliminates all intercompany profits. It discontinued the use of

regulatory accounting as provided by FASB 71 in 1994 and now no longer applies the
provisions of FASB 71.
b. All of Harley-Davidsons (www.harleydavidson.com) intercompany transactions are eliminated

except some occurring between the Motorcycles and Financial Services segments. Some
interest and fees recognized as income by Financial Services and expense by Motorcycles are
not eliminated. This leads to higher finance income and higher expenses, but net income is
unaffected.
7-8
SOLUTIONS TO EXERCISES
E7-1 Multiple-Choice Questions on Intercompany Transfers

[AICPA Adapted]
1. c
2. d
3. b
4. a
5. b Depreciation expense recorded by Pirn $40,000

Depreciation expense recorded by Scroll 10,000
Total depreciation reported $50,000
Adjustment for excess depreciation charged
by Scroll as a result of increase in
carrying value of equipment due to gain
on intercompany sale ($12,000 / 4 years) (3,000)
Depreciation for consolidated statements $47,000
E7-2 Multiple-Choice Questions on Intercompany Transactions
1. d When only retained earnings is debited, and not the noncontrolling interest, a
gain has been recorded in a prior period on the parent's books.
2. a The costs incurred by Bottom to develop the equipment are research and
development costs and must be expensed as they are incurred (FASB
Statement No. 2, par. 12; ASC 730-10-25-1). Transfer to another legal entity
does not cause a change in accounting treatment within the economic entity.
3. b The $39,000 paid to Gold Company will be charged to depreciation expense

by Top Corporation over the remaining 3 years of ownership. As a result, Top
Corporation will debit depreciation expense for $13,000 each year. Gold
Company had charged $16,000 to accumulated depreciation in 2 years, for an
annual rate of $8,000. Depreciation expense therefore must be reduced by
$5,000 ($13,000 - $8,000) in preparing the consolidated statements.
4. a TLK Corporation will record the purchase at $39,000, the amount it paid. Gold
Company had the equipment recorded at $40,000; thus, a debit of $1,000 will
raise the equipment balance back to its original cost from the viewpoint of the
consolidated entity.
7-9
E7-2 (continued)
5. b Reported net income of Gold Company $ 45,000

Reported gain on sale of equipment $15,000
Intercompany profit realized in 20X6 (5,000) (10,000)
Realized net income of Gold Company $ 35,000
Proportion of stock held by
noncontrolling interest x .40
Income assigned to noncontrolling interests $ 14,000
6. c Operating income reported by Top Corporation $ 85,000

Net income reported by Gold Company 45,000
$130,000
Less: Unrealized gain on sale of equipment
($15,000 - $5,000) (10,000)
Consolidated net income $120,000
E7-3 Elimination Entries for Land Transfer
a. Eliminating entry, December 31, 20X4:
Gain on Sale of Land 10,000

Land 10,000
Eliminating entry, December 31, 20X5:
Investment in Lowly 10,000

Land 10,000
b. Eliminating entry, December 31, 20X4:

Land 10,000
Investment in Lowly 6,000

NCI in NA of Lowly 4,000
Land 10,000
7-10
E7-4 Intercompany Services
a. Consolidated net income will not change.
b. One hundred percent of the intercompany services must always be eliminated. Thus, a
change in the level of ownership of the subsidiary will not have an impact on the amount
eliminated or on consolidated net income.
c. $38,000 = $70,000 - $32,000
E7-5 Elimination Entries for Intercompany Services
Two eliminating entries are required:
Delivery Service Revenue 76,000

Delivery Service Expense 76,000
Accounts Payable 18,000

Accounts Receivable 18,000
E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale

a.
Accumulated
Truck Depreciation
Northern 40,000 Actual 0
5,000 15,000
Pam 45,000 "As If" 15,000
Eliminate the gain on Truck & correct asset's basis:

Gain on sale 10,000
Truck 5,000
b.
Accumulated
Truck Depreciation
Northern 40,000 Actual 4,000
5,000 1,000 15,000
Pam 45,000 "As If" 18,000

Investment in Northern 10,000
Truck 5,000

7-11
E7-7 Transfer of Land

Land 45,000
Investment in Roan 31,500

NCI in NA of Roan 13,500
Land 45,000
b. Eliminating entries, December 31, 20X3 and 20X4:
Investment in Roan 30,000

Land 30,000
E7-8 Transfer of Depreciable Asset at Year-End

a.
Accumulated
Truck Depreciation
Minnow
Corp. 210,000 Actual 0
90,000 120,000
Frazer Corp. 300,000 "As If" 120,000

Gain on sale 30,000
Truck 90,000
Computation of gain on sale of truck:

Price paid by Minnow $210,000
Cost of truck to Frazer $300,000
Accumulated depreciation
($300,000 / 10 years) x 4 years (120,000) (180,000)
Gain on sale of truck $ 30,000
7-12
E7-8 (continued)
b.
Accumulated
Truck Depreciation
Minnow Corp. 210,000 Actual 35,000
90,000 5,000 120,000
Frazer Corp. 300,000 "As If" 150,000

Investment in Minnow Corp. 30,000
Truck 90,000

E7-9 Transfer of Depreciable Asset at Beginning of Year
a.
Accumulated
Truck Depreciation
Minnow
Corp. 245,000 Actual 35,000
55,000 5,000 90,000
Frazer Corp. 300,000 "As If" 120,000

Gain on Sale 35,000
Truck 55,000

Computation of gain on sale of truck:

Price paid by Minnow $245,000
Cost of truck to Frazer $300,000
($300,000 / 10 years) x 3 years ( 90,000) (210,000)
Gain on sale of truck $ 35,000
7-13
E7-9 (continued)
b.
Accumulated
Truck Depreciation
Minnow Corp. 245,000 Actual 70,000
55,000 5,000 85,000
Frazer Corp. 300,000 "As If" 150,000

Investment in Minnow Corp. 30,000
Truck 55,000

E7-10 Sale of Equipment to Subsidiary in Current Period
a.
Cash 84,000
Equipment 150,000
Gain on sale of Equipment 14,000
Record gain on Equipment
b.
Equipment 84,000
Cash 84,000
Journal entry to record purchase

Journal entry to record depreciation expense
7-14
E7-10 (continued)
c.
Accumulated
Equipment Depreciation
Lance Corp. 84,000 Actual 12,000
66,000 2,000 80,000
Wainwrite Corp. 150,000 "As If" 90,000
Eliminate the gain on Equipment & correct asset's basis:

Gain on sale 14,000
Equipment 66,000

d. Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment

and prepare a consolidated balance sheet only:

Investment in Lance Corp. 12,000
Equipment 66,000
E7-11 Upstream Sale of Equipment in Prior Period
a. Consolidated net income for 20X8:

Operating income reported by Baywatch $100,000
Net income reported by Tubberware $40,000
Amount of gain realized in 20X8
($30,000 / 12 years) 2,500
Realized net income of Tubberware 42,500
b. Consolidated net income for 20X8 would be unchanged.
7-15
E7-11 (continued)
c.
Accumulated
Baywatch 270,000 Actual 67,500
30,000 2,500 55,000
Tubberware 300,000 "As If" 120,000

Investment in Tubberware 20,000
NCI in NA of Tubberware 5,000
Equipment 30,000

E7-12 Elimination Entries for Midyear Depreciable Asset Transfer

a.
Accumulated
Andrews Co. 28,000 Actual 4,000
2,000 1,500 12,500
Kline Corp. 30,000 "As If" 15,000

Investment in Andrews Co. 10,500
Equipment 2,000

b.
Accumulated
Andrews Co. 28,000 Actual 12,000
2,000 3,000 11,000
Kline Corp. 30,000 "As If" 20,000

Investment in Andrews Co. 9,000
Equipment 2,000

7-16
E7-13 Consolidated Net Income Computation
a. Downstream sale of land:

20X4 20X5
Verrys separate operating income $ 90,000 $110,000
Less: Unrealized gain on sale of land (25,000)
Verrys realized operating income $ 65,000 $110,000
Spawns realized net income 60,000 40,000
Consolidated net income $125,000 $150,000
Income to noncontrolling interest:
($60,000 x 0.25) (15,000)
($40,000 X 0.25) (10,000)
Income to controlling interest $110,000 $140,000
b. Upstream sale of land:

20X4 20X5
Verrys separate operating income $ 90,000 $110,000
Spawns net income $60,000
Less: Unrealized gain on sale of land (25,000)
Spawns realized net income 35,000 40,000
Consolidated net income $125,000 $150,000
Income to noncontrolling interest:
($35,000 x 0.25) (8,750)
($40,000 x 0.25) (10,000)
Income to controlling interest $116,250 $140,000
7-17
E7-14 Elimination Entries for Intercompany Transfers
a. Operating income of Grand Delivery $65,000

Net income of Acme Real Estate Company $40,000
Less: Unrealized profit on land sale (25,000)
Acmes realized net income 15,000
b. Note: the term basic equity method in part b of the problem slipped through the
editorial process. This should have read fully adjusted equity method. The
answers given here are based on the fully adjusted equity method.
Journal entries recorded by Speedy Delivery:
Cash 8,000
Investment in Acme Real Estate 8,000
Record dividends from Acme Real Estate: $10,000 x 0.80

Income from Acme Real Estate 32,000
Record equity-method income: $40,000 x 0.80
Income from Acme Real Estate 20,000

Eliminate unrealized gain on sale
E7-14 (continued)
c.
Book Value Calculations:
Grand
NCI + Delivery = Common + Retained
20% 80% Stock Earnings
Original book value 80,000 320,000 300,000 100,000
+ Net Income 8,000 32,000 40,000
- Dividends (2,000) (8,000) (10,000)
Ending book value 86,000 344,000 300,000 130,000
Deferred Gain Calculations:

Grand
Delivery's
Total = share + NCI's share
Upstream Land 25,000 20,000 5,000
Total 25,000 20,000 5,000
7-18
Basic elimination entry

Common stock 300,000 Original amount invested (100%)
Retained earnings 100,000 Beginning balance in retained earnings
Income from Acme Real Estate 12,000 Grands share of NI - Def. Gain
NCI in NI of Acme Real Estate 3,000 NCI share of NI - Def. Gain
Dividends declared 10,000 100% of Acmes dividends declared
Investment in Acme Real Estate 324,000 Grands share of BV - Def. Gain
NCI in NA of Acme Real Estate 81,000 NCI share of BV - Def. Gain
Eliminate gain on purchase of land

Gain on sale of land 25,000
Land 25,000
Eliminate courier services

Service Revenue 15,000
Delivery Expense 15,000
7-19
E7-15 Sale of Building to Parent in Prior Period
a. Turner will record annual depreciation expense of $25,000

($300,000 / 12 years).
b. Split would have recorded annual depreciation expense of $20,000

($400,000 / 20 years).
c.
Accumulated
Building Depreciation
Turner Co. 300,000 Actual 25,000
100,000 5,000 160,000
Split Co. 400,000 "As If" 180,000
Eliminate the gain on building and correct asset's basis:

Investment in Split Co. 42,000
NCI in NA of Split Co. 18,000
Building 100,000

d. Income assigned to noncontrolling interest for 20X9:
Net income reported by Split Company $ 40,000

Amount of gain realized in 20X9 ($60,000 / 12 years) 5,000
Realized net income for 20X9 $ 45,000
Proportion of ownership held by noncontrolling
interest x 0.30
Income assigned to noncontrolling interest $ 13,500
e. Amount assigned to noncontrolling interest in 20X9 consolidated

balance sheet:
Split Company net assets, January 1, 20X9

($350,000 - $150,000) $200,000
Net income for 20X9 40,000
Dividends paid in 20X9 (15,000)
Unrealized profit on sale of building to Turner Company
($60,000 - $5,000) (55,000)
Realized book value December 31, 20X9 $170,000
interest x 0.30
Amount assigned to noncontrolling interest in
December 31, 20X9, consolidated balance sheet $ 51,000
7-20
E7-16 Intercompany Sale at a Loss
a. Consolidated net income for 20X8 will be greater than Parent Company's income from
operations plus Sunway's reported net income. The eliminating entries at December 31,
20X8, will result in an increase of $16,000 to consolidated net income.
b. As a result of purchasing the equipment at less than Parent's book value, depreciation
expense reported by Sunway will be $2,000 ($16,000 / 8 years) below the amount that
would have been recorded by Parent. Thus, depreciation expense must be increased by
$2,000 when eliminating entries are prepared at December 31, 20X9. Consolidated net
income will be decreased by the full amount of the $2,000 increase in depreciation
expense.
E7-17 Eliminating Entries Following Intercompany Sale at a Loss
Buildings and Equipment 156,000

Loss on Sale of Building 36,000
Eliminate unrealized loss on building.
b. Consolidated net income and income to controlling

interest for 20X7:
Operating income reported by Brown $125,000

Net income reported by Transom $ 15,000
Add: Loss on sale of building 36,000
Realized net income of Transom 51,000
Income to noncontrolling interest ($51,000 x 0.30) (15,300)
Income to controlling interest $160,700
c.
7-21
Eliminate the gain on Building and correct asset's basis:

Building 156,000
Investment in Transom Co. 25,200
NCI in NA of Transom Co. 10,800

Accumulated
Brown Corp. 144,000 Actual 16,000
156,000 120,000
4,000
Transom Co. 300,000 "As If" 140,000
7-22
E7-17 (continued)
d. Consolidated net income and income assigned to controlling interest in 20X8:

Operating income reported by Brown $150,000
Net income reported by Transom $40,000
Adjustment for loss on sale of building (4,000)
Realized net income of Transom 36,000
Income assigned to noncontrolling interest
($36,000 x 0.30) (10,800)
Income assigned to controlling interest $175,200
E7-18 Multiple Transfers of Asset
a. $145,000
b. No gain or loss should be reported.
c. Swanson Corporation operating income $150,000
Sullivan Corporation net income $120,000

Loss on sale of land ($145,000 - $130,000) 15,000
Realized net income of Sullivan Corporation $135,000
Proportion of stock held by Swanson x 0.80 108,000
Kolder Company net income $ 60,000

Gain on sale of land ($180,000 - $130,000) (50,000)
Realized net income of Kolder Company $ 10,000
Clayton Corporation net income $ 80,000

Gain on sale of land ($240,000 - $180,000) (60,000)
Realized net income of Clayton Corporation $ 20,000
Alternate Computation:
Swanson Corporation operating income $150,000
Sullivan Corporation net income 120,000
Kolder Company net income 60,000
Clayton Corporation net income 80,000
Combined income $410,000
Unrealized loss recorded by Sullivan Corp. $ (15,000)

Unrealized gain recorded by Kolder Company 50,000
Unrealized gain recorded by Clayton Corp. 60,000 (95,000)
Realized income available to all shareholders $315,000
Income assigned to noncontrolling interest:

Sullivan Corp. ($120,000 + $15,000) x 0.20 $ 27,000
Kolder Company ($60,000 - $50,000) x 0.30 3,000
Clayton Corp. ($80,000 - $60,000) x 0.10 2,000 (32,000)
7-23
E7-18 (continued)
d. Eliminating entry:

Loss on Sale of Land 15,000
Land 95,000
Eliminate gains and loss on land transfer:
$110,000 = $50,000 + $60,000
$95,000 = $110,000 - $15,000
E7-19 Elimination Entry in Period of Transfer
a. $300,000 = $276,000 + $24,000
b. 15 years = $300,000 / ($60,000 / 3 years)
c.
Accumulated
Truck Depreciation
Blank Corp. 276,000 Actual 23,000
24,000 3,000 60,000
Grand Corp. 300,000 "As If" 80,000
Eliminate the gain on Truck and correct asset's basis:

Investment in Grand Corp. 21,600
NCI in NA of Grand Corp. 14,400
Truck 24,000

7-24
E7-20 Elimination Entry Computation
a.
Accumulated
Stern 360,000 Actual 36,000
90,000 6,000 150,000
Subsidiary 450,000 "As If" 180,000
Eliminate the gain on Equipment and correct asset's basis:

Gain on sale 60,000
Equipment 90,000

b.
Accumulated
Stern 360,000 Actual 72,000
6,00
90,000 0 144,000
Subsidiary 450,000 "As If" 210,000

Investment in Subsidiary 37,800
NCI in NA of Subsidiary 16,200
Equipment 90,000

7-25
E7-21 Using the Eliminating Entry to Determine Account Balances
a. Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber

Corporation.
b. The subsidiary was the owner. The sale was from the subsidiary to the parent, as
evidenced by the debit to noncontrolling interest in the eliminating entry.
c. Intercompany transfer price:
Amount paid by Somber Corporation $120,000

Increase to buildings and equipment in eliminating entry (53,500)
Amount paid by Pastel to Somber for equipment $ 66,500
d. Income assigned to noncontrolling interest for 20X9:
Net income reported by Somber $ 25,000

Amount of gain realized in 20X9 ($10,500 / 7 years) 1,500
Realized net income for 20X9 $ 26,500
interest x 0.10
e. Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported by

the consolidated entity for 20X9.
f. Eliminating entries at December 31, 20X9:

Pastel
NCI + Corp. = Common + Retained
+ Net Income 2,500 22,500 25,000
- Dividends (600) (5,400) (6,000)

Pastel Corp.'s
Extra Depreciation 1,500 1,350 150

Retained earnings 200,000 Beginning balance in RE
Income from Somber Corp. 23,850 Pastels share of NI + Extra Dep.
NCI in NI of Somber Corp. 2,650 NCI share of NI + Extra Dep.
Dividends declared 6,000 100% of Somber's dividends
Investment in Somber Corp. 468,450 Pastel 's share of BV + Extra Dep.
NCI in NA of Somber Corp. 52,050 NCI share of BV + Extra Dep.
7-26
E7-21 (continued)
Accumulated
Pastel Corp. 66,500 Actual 9,500
53,500 1,500 64,000
Somber Corp. 120,000 "As If" 72,000

Investment in Somber Corp. 9,450
NCI in NA of Somber Corp. 1,050
Equipment 53,500

E7-22 Intercompany Sale of Services
a. Eliminating entries, 20X4:
Consulting Revenue 138,700

Consulting Fees Expense 138,700
Eliminate intercompany revenue and expense.

Eliminate intercompany receivable/payable.
b. Consolidated net income and income to controlling

interest for 20X4:
Norgaard's separate operating income $2,342,000

Bline's net income 631,000
Consolidated net income 2,973,000
Income to noncontrolling interest ($631,000 x 0.25) (157,750)
Income to controlling interest $2,815,250
7-27
E7-23A Modified Equity Method and Cost Method
a.
(1)
Equity Method Entries on Newtime's Books:
Investment in TV Sales Co. 45,500
Income from TV Sales Co. 45,500
Record Newtime's 65% share of TV Sales Co.'s 20X4 income
Cash 13,000
Record Newtime's 65% share of TV Sales Co.'s 20X4 dividend
(2)
NCI + Newtime = Common + Retained
Original book
value 155,750 289,250 300,000 145,000
+ Net Income 24,500 45,500 70,000
- Dividends (7,000) (13,000) (20,000)

Income from TV Sales Co. 45,500 Newtimes share of NI
NCI in NI of TV Sales Co. 27,300 NCI share of NI + Extra Dep.
Dividends declared 20,000 100% of TV Sales Co.'s dividends
Investment in TV Sales Co. 321,750 Newtime's share of BV
NCI in NA of TV Sales Co. 176,050 NCI share of BV + Extra Dep.

Land 11,000

NCI in NA of TV Sales Co. 14,000
Equipment 40,000

7-28
E7-23A (continued)
b.
(1)
Equity Method Entries on Newtime's Books:

Cash 13,000
Dividend Income 13,000
Record dividend income from TV Sales Company.
(2)
Investment elimination entry
Common stock 300,000
Retained earnings 100,000
Dividend elimination entry

NCI in NI of TV Sales Co. 7,000
Dividends declared 20,000
Assign prior undistributed income to NCI

NCI in NI of TV Sales Co. 20,300
Retained Earnings 15,750

Land 11,000

Equipment 40,000

7-29
SOLUTIONS TO PROBLEMS
P7-24 Computation of Consolidated Net Income
a. Separate operating income of Petime Corporation $34,000

Reported net income of United Grain Company $19,000
Unrealized profit of sale of land (7,000)
Realized income for 20X4 $12,000
Amortization of differential ($10,000 / 10 years) ( 1,000)
$11,000
Proportion of ownership held by Petime x 0.90
Income attributable to controlling interest 9,900
b. Separate operating income of Petime Corporation $34,000

Reported net income by United Grain Company $19,000
Amortization of differential ($10,000 / 10 years) ( 1,000)
$18,000
Proportion of stock held by Petime x 0.90
Income attributable to controlling interest 16,200
Unrealized profit on sale of land (7,000)
Reported income will decrease by $700. In the upstream case the unrealized profit
($7,000) is apportioned to both majority ($6,300) and noncontrolling ($700)
shareholders. In the downstream case, it is apportioned entirely to the majority
shareholders ($7,000).
P7-25 Subsidiary Net Income
a. Toll Corporations reported net income for 20X4 was $94,400:

Income assigned to noncontrolling shareholders $17,500
Add: Unrealized profit on building ($20,000 x 0.25) 5,000
Amortization of differential ($4,400 x 0.25) 1,10
0
Income assigned to noncontrolling interest before $23,600
adjustment
Proportion of stock held by noncontrolling interest 0.25
Reported income of Toll $94,400
Computation of annual amortization:

Fair value of consideration given by Bold $348,000
Fair value of noncontrolling interest 116,000
Total fair value $464,000
Book value of Tolls assets:
Common stock $150,000
Total book value (420,000)
Differential paid by Bold $ 44,000
Number of years in amortization period 10
Annual amortization $4,400
7-30
P7-25 (continued)
b. Consolidated net income for 20X4 is $304,000:
Bold Corporations operating income $234,000

Toll Corporations net income 94,400
Amortization of differential ($44,000 / 10 years) (4,400)
Unrealized profit on building (20,000)
c. Income assigned to controlling interest is $286,500:

Income assigned to noncontrolling interest (17,500)
Alternate computation:
Operating income of Bold $234,000
Income from Toll:
Net income of Toll $94,400
Unrealized profit on building (20,000)
Amortization of differential (4,400)
Realized income $70,000
Portion of ownership held x 0.75 52,500
P7-26 Transfer of Asset from One Subsidiary to Another
Bugle Cook Products Consolidated

Corporation Corporation Entity
Depreciation expense $ --- $ 3,000 $ 2,000
Fixed assets Warehouse --- 45,000 40,000
Accumulated depreciation --- 3,000 12,000
Gain on sale of warehouse 15,000 --- ---
7-31
P7-27 Consolidated Eliminating Entry
a. Master paid Rakel $460,000 ($600,000 - $140,000).
b. Accumulated depreciation at January 1, 20X7, was $168,000, computed as follows:
Purchase price paid by Rakel $600,000

Amount paid by Master $460,000
Gain recorded by Rakel (28,000)
Book value at date of sale (432,000)
Accumulated depreciation at date of sale $168,000
c. Annual depreciation expense recorded by Rakel was $28,000

($168,000/6 years).
d. The estimated residual value was $40,000, computed as follows:
Purchase price paid by Rakel $600,000

Amount to be depreciated by Rakel ($28,000 x 20 years) (560,000)
Estimated residual value $ 40,000
e. Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 -

$40,000) / 14 years).
f. Reported net income of Rakel $ 80,000

Unrealized gain on sale of building ($28,000 - $2,000) (26,000)
$ 54,000
Proportion of stock held by noncontrolling interest x 0.40
g. Reported net income of Rakel $ 65,000

Portion of gain on sale of building realized in 20X8 2,000
$ 67,000
Proportion of stock held by noncontrolling interest x 0.40
7-32
P7-28 Multiple-Choice Questions
1. d
2. c
3. a
4. a
5. d
P7-29 Intercompany Services Provided to Subsidiary
The eliminating entry at December 31, 20X4, would be:
Service Revenue 110,000

Building 30,000
Wage Expense 80,000
The eliminating entries at December 31, 20X5, would be:
Investment in Subsidiary 30,000

Building 30,000

P7-30 Consolidated Net Income with Intercorporate Transfers
a.
Cash 240,000
Equipment 350,000
Gain on sale of Equipment 30,000
Record gain on Equipment
b.
Eliminate loss on purchase of land
Land 60,000
Loss on sale of land 60,000

Investment in Subsidence 25,000
Equipment 110,000

7-33
P7-30 (continued)
c. Subsidence Mining's 20X7 net income was $90,000:
Subsidence Mining's income to noncontrolling

shareholders $ 39,000
Noncontrolling interest's share of subsidiary income 0.30
Subsidence Mining's income before adjustment $130,000
Add: Amortization of differential:
($200,000 / 10 years) 20,000
Less: Unrealized loss on intercompany sale of land (60,000)
Subsidence Mining's 20X7 net income $ 90,000
d. Bowers operating income was $826,000:

Less: Income to noncontrolling interest (39,000)
Income from Subsidence Mining:
Reported net income $ 90,000
Unrealized loss on land 60,000
Amortization of differential ($200,000 / 10 years) (20,000)
Portion of ownership held x 0.70
Bowers share $ 91,000
Realized profit on equipment ($30,000 / 6 years) 5,000 (96,000)
Bowers 20X7 income from its separate operations $826,000
7-34
P7-31 Preparation of Consolidated Balance Sheet
a.
NCI + Lofton Co. = Common + Retained

Lofton
Co.'s
Total 3,000 3,000 0

Income from Temple Corp. 3,000 Loftons share of NI + Extra Dep.
Investment in Temple Corp. 153,000 Lofton's share of BV + Extra Dep.
NCI in NA of Temple Corp. 100,000 NCI share of BV of net assets

Land 10,000
Investment in Temple Corp. 6,000
NCI in NA of Temple Corp. 4,000
Accumulated
Temple Corp. 91,000 Actual 26,000
9,000 3,000 27,000
Lofton Co. 100,000 "As If" 50,000

Investment in Temple Corp. 18,000
Equipment 9,000

7-35
P7-31 (continued)
Lofton Temple Elimination Entries

Co. Corp. DR CR Consolidated
Balance Sheet
Cash and Receivables 101,000 20,000 121,000
Inventory 80,000 40,000 120,000
Land 150,000 90,000 10,000 250,000
Buildings & Equipment 400,000 300,000 9,000 709,000
Less: Accumulated Depr. (135,000) (85,000) 3,000 27,000 (244,000)
Investment in Temple Corp. 141,000 18,000 153,000 0
6,000
Total Assets 737,000 365,000 40,000 186,000 956,000
Accounts Payable 90,000 25,000 115,000

Notes Payable 200,000 90,000 290,000
Common Stock 100,000 200,000 200,000 100,000
Retained Earnings 347,000 50,000 50,000 3,000 347,000
3,000
NCI in NA of Temple Corp. 100,000 104,000
4,000
Total Liabilities & Equity 737,000 365,000 250,000 107,000 956,000
b.
Lofton Company and Subsidiary

Consolidated Balance Sheet
December 31, 20X6
Cash and Accounts Receivable $121,000

Inventory 120,000
Land 250,000
Buildings and Equipment $709,000
Less: Accumulated Depreciation (244,000) 465,000
Total Assets $956,000
Accounts Payable $115,000

Notes Payable 290,000
Stockholders Equity:
Controlling Interest:
Common Stock $100,000
Total Controlling Interest $447,000
Noncontrolling interest 104,000
Total Stockholders Equity 551,000
Total Liabilities and Stockholders' Equity $956,000
7-36
P7-32 Consolidation Worksheet in Year of Intercompany Transfer
Note: In converting this problem from the modified to the fully adjusted equity method, we failed
to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. If you complete the problem based on the numbers
given in the trial balance in the text, the investment account will not be fully eliminated. In order
to correct this problem, please reduce the Investment in Lane Company Stock and Retained
Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:
Investment in Lane Company Stock = 191,600

Retained Earnings = 322,000
a. These calculations are based on the corrected numbers
Equity Method Entries on Prime Co.'s Books:

Investment in Lane Co. 40,000
Income from Lane Co. 40,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 income
Cash 4,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend

Record amortization of excess acquisition price

Defer unrealized gain on Equipment

Reverse the deferred gain

NCI + Prime Co. = Common + Retained
+ Net Income 10,000 40,000 50,000
- Dividends (1,000) (4,000) (5,000)

Prime
Co.'s
Downstream Asset (20,000) (20,000)
Total (18,000) (18,000) 0
7-37
P7-32 (continued)

Income from Lane Co. 22,000 Primes share of NI - Def. Gain
NCI in NI of Lane Co. 10,000 NCI share of Lane Co.'s NI
Dividends declared 5,000 100% of Lane Co.'s dividends
Investment in Lane Co. 174,000 Prime's share of BV - Def. Gain
NCI in NA of Lane Co. 48,000 NCI share of BV of net assets
Excess Value (Differential) Calculations:

NCI
20% + Prime Co. 80% = Goodwill
Beginning balance 10,000 40,000 50,000
Changes (3,600) (14,400) (18,000)
Ending balance 6,400 25,600 32,000
Amortized excess value reclassification entry:

Goodwill impairment loss 18,000
NCI in NI of Lane Co. 3,600
Excess value (differential) reclassification entry:

Goodwill 32,000
NCI in NA of Lane Co. 6,400
Eliminate intercompany accounts:

Cash and Accounts Receivable 7,000

Land 10,000
Accumulated
Lane Co. 70,000 Actual 7,000
5,000 2,000 25,000
Prime Co. 75,000 "As If" 30,000
7-38

Gain on sale 20,000
Equipment 5,000

P7-32 (continued)
Investment in Income from

Lane Co. Lane Co.
Beginning Balance 188,000
80% Net Income 40,000 40,000 80% Net Income
4,000 80% Dividends
14,400 Excess Val. Amort. 14,400
Realize Def. Gain 2,000 20,000 Defer Equipment Gain 20,000 2,000 Realize Def. Gain
Ending Balance 191,600 7,600 Ending Balance
174,000 Basic 22,000
Land Adjustment 8,000 25,600 Excess Reclass. 14,400
0 0
b. This worksheet is based on the corrected numbers:
Elimination Entries
Prime Co. Lane Co. DR CR Consolidated
Income Statement
Sales 240,000 130,000 370,000
Gain on Sale of Equipment 20,000 20,000 0
Less: COGS (140,000) (60,000) (200,000)
Less: Depr. & Amort. Expense (25,000) (15,000) 2,000 (38,000)
Less: Other Expenses (15,000) (5,000) (20,000)
Less: Goodwill Impairment Loss 18,000 (18,000)
Income from Lane Co. 7,600 22,000 14,400 0
Consolidated Net Income 87,600 50,000 60,000 16,400 94,000
NCI in Net Income 10,000 3,600 (6,400)
Controlling Interest in NI 87,600 50,000 70,000 20,000 87,600
Statement of Retained Earnings

Beginning Balance 322,000 95,000 95,000 322,000
Net Income 87,600 50,000 70,000 20,000 87,600
Less: Dividends Declared (30,000) (5,000) 5,000 (30,000)
Ending Balance 379,600 140,000 165,000 25,000 379,600
Balance Sheet
Cash and Accounts Receivable 113,000 35,000 7,000 141,000
Inventory 260,000 90,000 350,000
Land 80,000 80,000 10,000 150,000
Less: Accumulated Depreciation (205,000) (45,000) 2,000 25,000 (273,000)
Investment in Lane Co. 191,600 8,000 174,000 0
7-39
25,600
Goodwill 32,000 32,000
Total Assets 939,600 310,000 7,000 42,000 1,055,000
Accounts Payable 60,000 20,000 7,000 73,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 100,000 300,000
NCI in NA of Lane Co. 2,000 48,000 52,400
6,400
Total Liabilities & Equity 939,600 310,000 272,000 73,000 1,055,000
7-40
P7-32 (continued)
These financial statements are based on the corrected numbers:
c. Prime Company and Subsidiary

December 31, 20X6
Cash and Receivables $ 141,000

Inventory 350,000
Land 150,000
Goodwill 32,000
Total Assets $1,055,000
Accounts Payable $ 73,000

Bonds Payable 250,000
Total Noncontrolling Interest 52,400
Total Liabilities and Stockholders' Equity $1,055,000
Prime Company and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X6
Sales $ 370,000
Cost of Goods Sold $200,000
Depreciation and Amortization Expense 38,000
Goodwill Impairment Loss 18,000
Other Expenses 20,000
Total Expenses (276,000)
Consolidated Net Income $ 94,000
Income to Noncontrolling Interest (6,400)
Income to Controlling Interest $ 87,600

Consolidated Retained Earnings Statement
Retained Earnings, January 1, 20X6 $ 322,000

Income to Controlling Interest, 20X6 87,600
$ 409,600
Dividends Declared, 20X6 (30,000)
Retained Earnings, December 31, 20X6 $ 379,600
7-41
P7-32 (continued)
b. This worksheet is based on the uncorrected numbers:
Prime Lane Elimination Entries

Co. Co. DR CR Consolidated
Income Statement
Sales 240,000 130,000 370,000
Gain on Sale of Equipment 20,000 20,000 0
Less: COGS (140,000) (60,000) (200,000)
Less: Goodwill Impairment Loss 18,000 (18,000)
Income from Lane Co. 7,600 22,000 14,400 0
NCI in Net Income 10,000 3,600 (6,400)

Net Income 87,600 50,000 70,000 20,000 87,600
Ending Balance 387,600 140,000 165,000 25,000 387,600
Balance Sheet
Cash and Accounts Receivable 113,000 35,000 7,000 141,000
Inventory 260,000 90,000 350,000
Land 80,000 80,000 10,000 150,000
Less: Accumulated Depreciation (205,000) (45,000) 2,000 25,000 (273,000)
Investment in Lane Co. 199,600 8,000 174,000 8,000
25,600
Goodwill 32,000 32,000
Total Assets 947,600 310,000 7,000 42,000 1,063,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 100,000 300,000
6,400
7-42
P7-32 (continued)
These financial statements are based on the uncorrected numbers:
c. Prime Company and Subsidiary

December 31, 20X6
Cash and Receivables $ 141,000

Inventory 350,000
Land 150,000
Goodwill 32,000
Total Assets $1,063,000

Total Noncontrolling Interest 52,400
Total Liabilities and Stockholders' Equity $1,063,000

Sales $ 370,000
Depreciation and Amortization Expense 38,000
Goodwill Impairment Loss 18,000

Retained Earnings, January 1, 20X6 $ 330,000

$ 417,600
7-43
Retained Earnings, December 31, 20X6 $ 387,600
P7-33 Consolidation Worksheet in Year following Intercompany Transfer
Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to
deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. This error carries over to this problem. If you
complete the problem based on the numbers given in the trial balance in the text, the
investment account will not be fully eliminated. In order to correct this problem, please reduce
the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000.
Adjusted balances in the trial balance:

These calculations are based on the corrected numbers:
a. Reconciliation of underlying book value and balance in investment account:
Net book value reported by Lane Company

Common stock outstanding $100,000
Retained earnings balance, January 1, 20X7 $140,000
Retained earnings balance, December 31, 20X7 150,000
$250,000
Proportion of stock held by Prime Company x .80
$200,000
Minus: Upstream Land Gain (10,000 x 0.80) (8,000)
Minus: Downstream Equipment Transfer Gain (20,000)
Add: Reversal of deferred gross profit 20X6 2,000
Minus: Reversal of deferred gross profit 20X7 2,000
Add: Goodwill (32,000 x 0.80) 25,600
Balance in investment account $201,600
These calculations are based on the uncorrected numbers
a. Reconciliation of underlying book value and balance in investment account:
Net book value reported by Lane Company

Retained earnings balance, January 1, 20X7 $140,000
Retained earnings balance, December 31, 20X7 150,000
$250,000
Proportion of stock held by Prime Company x .80
$200,000
Minus: Upstream Land Gain (10,000 x 0.80) (8,000)
Minus: Downstream Equipment Transfer Gain (20,000)
Add: Reversal of deferred gross profit 20X6 2,000
Add: Goodwill (32,000 x 0.80) 25,600
Add: Incorrect number 10,000
Balance in investment account $209,600
7-44
P7-33 (continued)
b. These calculations are based on the corrected numbers

Cash 28,000

Reverse the deferred gain

NCI Prime Co. Common Retained
+ = +
+ Net Income 9,000 36,000 45,000
- Dividends (7,000) (28,000) (35,000)

Prime
Co.'s
Total 2,000 2,000 0

Income from Lane Co. 38,000 Primes share of NI + Extra Dep.
NCI in NI of Lane Co. 9,000 NCI share of Lane Co.'s NI
Dividends declared 35,000 100% of Lane Co.'s dividends
Investment in Lane Co. 202,000 Prime's share of BV + Extra Dep.
NCI in NA of Lane Co. 50,000 NCI share of BV of net assets

NCI
20% + Prime Co. 80% = Goodwill
Beginning balance 6,400 25,600 32,000
Changes 0 0 0
Ending balance 6,400 25,600 32,000
7-45

Goodwill 32,000
P7-33 (continued)

Land 10,000
Accumulated
5,000 2,000 23,000
Prime Co. 75,000 "As If" 35,000

Equipment 5,000


Lane Co. Lane Co.
28,000 80% Dividends
Realize Def. Gain 2,000 2,000 Realize Def. Gain
202,000 Basic 38,000
Land Adjustment 8,000 25,600 Excess Reclass.
18,000
0 0
Eliminate Intercompany receivable/payable

7-46
P7-33 (continued)

Income Statement
Sales 250,000 150,000 400,000
Less: COGS (160,000) (80,000) (240,000)
Income from Lane Co. 38,000 38,000 0
NCI in Net Income 9,000 (9,000)

Net Income 83,000 45,000 47,000 2,000 83,000
Ending Balance 402,600 150,000 187,000 37,000 402,600
Balance Sheet
Cash and Accounts
Receivable 151,000 55,000 4,000 202,000
Inventory 240,000 100,000 340,000
Land 100,000 80,000 10,000 170,000
Investment in Lane Co. 201,600 8,000 202,000 0
18,000 25,600
Goodwill 32,000 32,000
Total Assets 962,600 325,000 7,000 37,000 1,088,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 100,000 300,000
6,400
7-47
P7-33 (continued)

Income Statement
Sales 250,000 150,000 400,000
Less: COGS (160,000) (80,000) (240,000)
Less: Depreciation & Amort. Exp. (25,000) (15,000) 2,000 (38,000)

Net Income 83,000 45,000 47,000 2,000 83,000
Ending Balance 410,600 150,000 187,000 37,000 410,600
Balance Sheet
Cash and Accounts
Receivable 151,000 55,000 4,000 202,000
Inventory 240,000 100,000 340,000
Land 100,000 80,000 10,000 170,000
Investment in Lane Co. 209,600 8,000 202,000 8,000
18,000 25,600
Goodwill 32,000 32,000
Total Assets 970,600 325,000 7,000 37,000 1,096,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 100,000 300,000
6,400
7-48
P7-34 Intercorporate Sales in Prior Years
a.
Equity Method Entries on Pond Corp.'s Books:
Investment in Skate Co. 24,000
Income from Skate Co. 24,000
Record Pond Corp.'s 80% share of Skate Co.'s 20X8 income
Cash 8,000
Record Pond Corp.'s 80% share of Skate Co.'s 20X8 dividend

Record amortization of excess acquisition price

Reverse a portion of the deferred gain

Pond
NCI + Corp. = Common + Add Paid- + Retained
20% 80% Stock in Capital Earnings
Original book value 40,000 160,000 20,000 30,000 150,000
+ Net Income 6,000 24,000 30,000
- Dividends (2,000) (8,000) (10,000)
Ending book value 44,000 176,000 20,000 30,000 170,000

Pond Corp.'s
Extra
Depreciation 1,500 1,500 0
Total 1,500 1,500 0

Additional Paid-in Capital 30,000 Beginning balance in APIC
Income from Skate Co. 25,500 Ponds share of NI + Extra Dep.
NCI in NI of Skate Co. 6,000 NCI share of Skate Co.'s NI
Dividends declared 10,000 100% of Skates dividends declared
Investment in Skate Co. 177,500 Pond's share of BV + Extra Dep.
NCI in NA of Skate Co. 44,000 NCI share of BV of net assets
7-49
P7-34 (continued)

Buildings &
NCI 20% + Pond Corp. 80% = Patent + Equipment + Acc. Depr.
Beginning balance 12,750 51,000 42,500 25,000 (3,750)
Changes (750) (3,000) (2,500) (1,250)
Ending balance 12,000 48,000 40,000 25,000 (5,000)

Amortization Expense 2,500
Depreciation expense 1,250
NCI in NI of Skate Co. 750

Patent 40,000
Buildings & Equipment 25,000
Acc. Depr. 5,000
NCI in NA of Skate Co. 12,000

NCI in NI of Skate Co. 2,600
Land 13,000
Accumulated
Skate Co. 65,000 Actual 6,500
60,000 1,500 75,000
Pond Corp. 125,000 "As If" 80,000

Building 60,000

7-50
P7-34 (continued)
Skate Co. Skate Co.
8,000 80% Dividends
Excess Val.
3,000 Amort. 3,000
Realize Def.
Realize Def. Gain 1,500 1,500 Gain
177,500 Basic 25,500
15,000
0 0
7-51
P7-34 (continued)
b.
Pond Skate Elimination Entries
Corp. Co. DR CR Consolidated
Income Statement
Sales 450,000 250,000 700,000
Interest Income 14,900 14,900
Less: COGS (285,000) (136,000) (421,000)
Less: Other Operating Exp. (50,000) (40,000) (90,000)
Less: Depreciation Exp. (35,000) (24,000) 1,250 1,500 (58,750)
Less: Other Amortization Exp. 2,500 (2,500)
Less: Interest Exp. (24,000) (10,500) (34,500)
Less: Miscellaneous Exp. (11,900) (9,500) (21,400)
Income from Skate Co. 22,500 25,500 3,000 0
NCI in Net Income 6,000 750 (5,250)

Net Income 81,500 30,000 35,250 5,250 81,500
Ending Balance 267,500 170,000 185,250 15,250 267,500
Balance Sheet
Cash 68,400 47,000 115,400
Accounts Receivable 130,000 65,000 195,000
Interest and Other
Receivables 45,000 10,000 55,000
Inventory 140,000 50,000 190,000
Land 50,000 22,000 13,000 59,000
25,000
5,000
Investment in Skate Co. 200,100 10,400 177,500 0
15,000 48,000
Investment in Tin Co. Bonds 134,000 134,000
Patent 40,000 40,000
Total Assets 982,500 340,000 151,900 318,500 1,155,900

Interest and Other Payables 45,000 12,000 57,000
Bonds Payable 300,000 100,000 400,000
Bond Discount (3,000) (3,000)
Common Stock 150,000 30,000 30,000 150,000
Additional Paid-in Capital 155,000 20,000 20,000 155,000
NCI in NA of Skate Co. 2,600 44,000 53,400
12,000
7-52
P7-35 Intercorporate Sale of Land and Depreciable Asset
a. Income assigned to noncontrolling interest:
Net income of Morris $ 30,000

Gain on sale of equipment to parent $9,600
Gain realized prior to 20X5 (1,200) (8,400)
Amortization of differential:
Buildings and equipment ($25,000 / 10 years) (2,500)
Copyright ($17,000 / 5 years) (3,400)
Portion of ownership held x 0.30
Income to noncontrolling interest $ 4,710
Gain on sale of equipment to parent:

Sale price to Topp $91,600
Purchase price $100,000
[($100,000 - $10,000)/10 years] x 2 years (18,000) (82,000)
Gain on sale $ 9,600
b. Reconciliation between book value and investment balance at December

31, 20X5:
Underlying book value of Morris Company stock:

Retained earnings, January 1, 20X5 100,000
Dividends paid in 20X5 ( 5,000)
Net book value $225,000
Portion of ownership held by Topp x .70
Net book value of ownership held by Topp $157,500
Unamortized differential:
Buildings and equipment [($25,000 x 7/10 years) x 0.70] 12,250
Copyright [($17,000 x 2/5 years) x 0.70] 4,760
Gain on sale of land (11,000)
Deferred gross profit on sale of equipment (6,720)
Realized deferred gain 840
Investment in Morris Company stock $157,630
b.
Topp
NCI + Corp. = Common + Retained
+ Net Income 9,000 21,000 30,000
- Dividends (1,500) (3,500) (5,000)
7-53
P7-35 (continued)

Topp
Corp.'s
Upstream Asset (9,600) (6,720) (2,880)
Extra Depreciation 1,200 840 360
Total (8,400) (5,880) (2,520)

Retained earnings 100,000 Beginning balance RE
Income from Morris Co. 15,120 Topps share of NI - Def. Gain + Extra Depr.
NCI in NI of Morris Co. 6,480 NCI share of NI - Def. Gain + Extra Depr.
Dividends declared 5,000 100% of Morris Co.'s dividends
Investment in Morris Co. 151,620 Topp's share of BV - Def. Gain + Extra Depr.
NCI in NA of Morris Co. 64,980 NCI share of BV - Def. Gain + Extra Depr.

Topp
NCI Corp. Buildings & Acc.
30% + 70% = Equipment + Copyright + Depr.
Beginning balance 9,060 21,140 25,000 10,200 (5,000)
Changes (1,770) (4,130) (3,400) (2,500)
Ending balance 7,290 17,010 25,000 6,800 (7,500)

Amortization Expense 3,400
Depreciation expense 2,500
Income from Morris Co. 4,130
NCI in NI of Morris Co. 1,770

Buildings & Equipment 25,000
Copyright 6,800
Acc. Depr. 7,500
Investment in Morris Co. 17,010
NCI in NA of Morris Co. 7,290

Investment in Morris Co. 11,000
Land 11,000
7-54
P7-35 (continued)
Accumulated
Topp Corp. 91,600 Actual 11,450
8,400 1,200 18,000
Morris Co. 100,000 "As If" 28,250

Gain on sale 9,600
Equipment 8,400


Morris Co. Morris Co.
150,14
Beginning Balance 0
3,500 70% Dividends
4,130 Excess Val. Amort. 4,130
Realize Def. Gain 840 6,720 Defer Asset Gain 6,720 840 Realize Def.Gain
157,63
Ending Balance 0 10,990 Ending Balance
151,620 Basic 15,120
0 0
7-55
P7-35 (continued)
c.
Topp Morris Elimination Entries

Corp. Co. DR CR Consolidated
Income Statement
Sales 450,000 190,400 640,400
Other Income 28,250 28,250
Gain on Sale of Equip. 9,600 9,600 0
Less: COGS (375,000) (110,000) (485,000)
Less: Depreciation Exp. (25,000) (10,000) 2,500 1,200 (36,300)
Less: Amortization Exp. 3,400 (3,400)
Less: Interest Expense (24,000) (33,000) (57,000)
Income from Morris Co. 10,990 15,120 4,130 0
NCI in Net Income 6,480 1,770 (4,710)

Net Income 37,240 30,000 37,100 7,100 37,240
Ending Balance 172,480 125,000 137,100 12,100 172,480
Balance Sheet
Cash 15,850 58,000 73,850
Interest and Other
Receivables 30,000 10,000 40,000
Inventory 150,000 180,000 330,000
Land 80,000 60,000 11,000 129,000
8,400
18,000
Investment in Morris Co. 157,630 11,000 151,620 0
17,010
Copyright 6,800 6,800
Total Assets 693,480 558,000 52,400 205,130 1,098,750

Other Payables 30,000 20,000 50,000
Bonds Payable 250,000 300,000 550,000
Bond Discount (15,000) (15,000)
Common Stock 150,000 100,000 100,000 150,000
Additional Paid-in Capital 30,000 30,000
NCI in NA of Morris Co. 64,980 72,270
7,290
7-56
P7-36 Incomplete Data
(a) $100,000
(b) $140,000
(c) $250,000 = $593,000 - $343,000
(d) $100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000]
(e) $4,500 = [($106,200 + $70,800) - ($50,000 + $70,000 + $30,000)] / 6 years
(f) Investment in Shadow Company Stock:

$106,200 Purchase price, January 1, 20X4
30,000 Undistributed earnings from January 1, 20X4,
to January 1, 20X7 [($80,000 - $30,000) x 0.60]
6,000 Undistributed income for 20X7 ($10,000 x 0.60)
(10,800) Amortization of differential [($27,000 / 6 years) x 4 years] x 0.60
(5,400) Mounds portion of gain on sale of equipment ($9,000 x 0.60)
3,600 2 years of extra depreciation ($3,000 x 0.60)
(7,000) Gain on sale of land
$122,600 Balance in investment account at December 31, 20X7
(g) $7,000 = ($70,000 + $90,000) - $153,000
(h) $-0-
(i) $510,000 = $345,000 + $150,000 + ($60,000 - $45,000)
(j) $278,000 = $180,000 + $80,000 + [($60,000 / 5 years) x 4 years]

- [($45,000 / 3 years) x 2 years)
(k) $375,800 (Same as Mound Corporations retained earnings balance.)
(l) Income to noncontrolling shareholders:

$ 30,000 Shadow's 20X7 net income ($250,000 - $195,000
- $10,000 - $15,000)
3,000 Realized profit on 20X6 sale of equipment to Mound
(4,500) Amortization of differential
$ 28,500 Realized net income
x 0.40
$ 11,400 Income to noncontrolling shareholders
7-57
P7-37 Intercompany Sale of Equipment at a Loss in Prior Period
Note: In converting this problem from the modified to the fully adjusted equity method, we did
not correctly adjust for lower depreciation over the three years since the fixed asset sale at a
loss. If you complete the problem based on the numbers given in the trial balance in the text,
the investment and income from sub accounts will not be fully eliminated. In order to correct this
problem, please use the following adjusted numbers for Foster Company:
Investment in Block Corporation Stock = 229,500

Income from Block Corporation = 51,300
a. These calculations are based on the corrected numbers

NCI + Foster Co. = Common + Retained
+ Net Income 6,000 54,000 60,000
- Dividends (2,000) (18,000) (20,000)

Foster
Co.'s
(3,00 (2,70 (30
Lower Depreciation 0) 0) 0)
(3,00 (2,70 (30
Total 0) 0) 0)

Income from Block Corp. 51,300 Fosters share of NI + Extra Dep.
NCI in NI of Block Corp. 5,700 NCI share of NI + Extra Dep.
Dividends declared 20,000 100% of Block Corp.'s dividends
Investment in Block Corp. 213,300 Foster's share of BV + Extra Dep.
NCI in NA of Block Corp. 23,700 NCI share of BV + Extra Dep.
Accumulated
Foster Co. 48,000 Actual 18,000
24,000
7-58
42,000 3,000
45,0
Block Corp. 90,000 "As If" 00
7-59
P7-37 (continued)

Equipment 42,000
Investment in Block Corp. 16,200
NCI in NA of Block Corp. 1,800


Block Corp. Block Corp.
196,20
Beginning Balance 0
2,700 Realize Def. Gain 2,700
229,50
Ending Balance 0 51,300 Ending Balance
213,30 51,30
0 Basic 0
16,200 Equipment Adj.
0 0
7-60
P7-37 (continued)
Foster Block Elimination Entries

Income Statement
Sales 680,000 385,000 1,065,000
Other Income 26,000 15,000 41,000
Less: COGS (500,000) (250,000) (750,000)
Less: Depreciation Exp. (45,000) (15,000) 3,000 (63,000)
Income from Block Corp. 51,300 51,300 0
Consolidated Net Income 117,300 60,000 54,300 0 123,000
Controlling Interest in NI 117,300 60,000 60,000 0 117,300

Net Income 117,300 60,000 60,000 0 117,300
Ending Balance 328,500 190,000 210,000 20,000 328,500
Balance Sheet
Cash 82,000 32,400 114,400
Other Receivables 40,000 10,000 50,000
Inventory 200,000 130,000 330,000
Land 80,000 60,000 140,000
Less: Accumulated Depr. (155,000) (75,000) 24,000 (257,000)
3,000
Investment in Block Corp. 229,500 213,300 0
16,200
1,056,50
Total Assets 0 497,400 42,000 256,500 1,339,400

Other Payables 95,000 20,000 115,000
Bonds Payable 250,000 200,000 450,000
Bond Premium 2,400 2,400
Common Stock 210,000 50,000 50,000 210,000
NCI in NA of Block Corp. 23,700 25,500
1,800
1,056,50
Total Liabilities & Equity 0 497,400 260,000 45,500 1,339,400
7-61
P7-37 (continued)
Foster Block Elimination Entries

Income Statement
Sales 680,000 385,000 1,065,000
Other Income 26,000 15,000 41,000
Less: COGS (500,000) (250,000) (750,000)
Income from Block Corp. 56,700 51,300 5,400
Consolidated Net Income 122,700 60,000 54,300 0 128,400
Controlling Interest in NI 122,700 60,000 60,000 0 122,700

Net Income 122,700 60,000 60,000 0 122,700
Ending Balance 344,700 190,000 210,000 20,000 344,700
Balance Sheet
Cash 82,000 32,400 114,400
Other Receivables 40,000 10,000 50,000
Inventory 200,000 130,000 330,000
Land 80,000 60,000 140,000
Less: Accumulated Depr. (155,000) (75,000) 24,000 (257,000)
3,000
Investment in Block Corp. 245,700 213,300 16,200
16,200
1,072,70
Total Assets 0 497,400 42,000 256,500 1,355,600

Other Payables 95,000 20,000 115,000
Bonds Payable 250,000 200,000 450,000
Bond Premium 2,400 2,400
Common Stock 210,000 50,000 50,000 210,000
NCI in NA of Block Corp. 23,700 25,500
1,800
1,072,70
7-62
P7-38 Comprehensive Problem: Intercorporate Transfers
Note: In converting this problem from the modified to the fully adjusted equity method, we did
not correctly adjust for lower depreciation resulting from the fixed asset sale at a loss. If you
investment and income from sub accounts will not be fully eliminated. In order to correct this
problem, please use the following adjusted numbers for Foster Company:
Investment in Block Corporation Stock = 229,500

Income from Block Corporation = 51,300
These calculations are based on the corrected numbers
a. Computation of differential as of January 1, 20X8:
Original differential at December 31, 20X1 $ 150,000

Less: Portion written off for sale of inventory (30,000)
Remaining differential, January 1, 20X8 $ 120,000
b. Verification of balance in Investment in Schmid Stock account:
Schmid retained earnings, January 1, 20X8 $1,400,000

Schmid net income, 20X8: 110,000
Schmid dividends, 20X8 (20,000)
Schmid retained earnings, December 31, 20X8 $1,490,000
Schmid stockholders' equity:

Common stock $1,000,000
Additional paid-in capital 1,350,000
Retained earnings, December 31, 20X8 1,490,000
Stockholders' equity, December 31, 20X8 $3,840,000
Rossman's ownership share x .75
Book value of shares held by Rossman $2,880,000
Remaining differential at January 1, 20X8: ($120,000 x 0.75) 90,000
Deferred gain on downstream sale of land (23,000)
Loss on sale of equipment 30,000
Reverse part of loss on sale of equipment (3,000)
Balance in Investment in Schmid account, December 31, 20X8 $2,974,000
7-63
These calculations are based on the uncorrected numbers
b. Verification of balance in Investment in Schmid Stock account:
Schmid retained earnings, January 1, 20X8 $1,400,000

Schmid net income, 20X8: 110,000
Schmid dividends, 20X8 (20,000)
Schmid retained earnings, December 31, 20X8 $1,490,000
Schmid stockholders' equity:

Common stock $1,000,000
Additional paid-in capital 1,350,000
Retained earnings, December 31, 20X8 1,490,000
Stockholders' equity, December 31, 20X8 $3,840,000
Rossman's ownership share x .75
Book value of shares held by Rossman $2,880,000
Remaining differential at January 1, 20X8: ($120,000 x 0.75) 90,000
Deferred gain on downstream sale of land (23,000)
Loss on sale of equipment 30,000
Reverse part of loss on sale of equipment (3,000)
Incorrect Number 6,000
Balance in Investment in Schmid account, December 31, 20X8 $2,980,000
7-64
P7-38 (continued)
c. These calculations are based on the corrected numbers

Rossman Add. Retained
NCI + Corp. = Common + Paid-in +
25% 75% Stock Capital Earnings
Original book value 937,500 2,812,500 1,000,000 1,350,000 1,400,000
+ Net Income 27,500 82,500 110,000
- Dividends (5,000) (15,000) (20,000)
Ending book value 960,000 2,880,000 1,000,000 1,350,000 1,490,000

Rossman
Corp.'s
Upstream Asset 40,000 30,000 10,000
Extra Depreciation (4,000) (3,000) (1,000)
Total 36,000 27,000 9,000
7-65

Common stock 1,000,000 Original amount invested (100%)
Additional Paid-in Capital 1,350,000 Beginning balance in APIC
Retained earnings 1,400,000 Beginning balance in RE
Income from Schmid Dist. 109,500 Rossmans share of NI - Def. Gain
NCI in NI of Schmid Dist. 36,500 NCI share of NI - Def. Gain
Dividends declared 20,000 100% of Schmid.'s dividends
Investment in Schmid Dist. 2,907,000 Rossman's share of BV - Def. Gain
NCI in NA of Schmid Dist. 969,000 NCI share of BV - Def. Gain
Excess Value (Differential)

Calculations:
Rossman
NCI 25% + Corp. 75% = Land + Goodwill
Beginning balance 30,000 90,000 56,000 64,000
Changes 0 0 0 0
Ending balance 30,000 90,000 56,000 64,000

Land 56,000
Goodwill 64,000
Investment in Schmid Dist. 90,000
NCI in NA of Schmid Dist. 30,000
7-66
P7-38 (continued)
Eliminate services
Other Income 80,000
Eliminate intercompany payables/receivables

Current payables 20,000
Current receivables 20,000
Eliminate intercompany dividend owed

Current payables 3,750
Current receivables 3,750

Investment in Schmid Dist. 23,000
Land 23,000
Accumulated
Rossman Corp. 250,000 Actual 25,000
145,000
185,000 4,000
Schmid Dist. 435,000 "As If" 174,000

Equipment 185,000
Loss on Sale 40,000


Schmid Dist. Schmid Dist.
Beginning Balance 2,879,500
Def. Loss on Def. Gain on
Equipment 30,000 3,000 Realize Loss Gain 3,000 30,000 Equipment
Ending Balance 2,974,000 109,500 Ending Balance
2,907,000 Basic 109,500
Def. Gain on Land 23,000 90,000 Excess Reclass.
0 0
7-67
P7-38 (continued)
d. This worksheet is based on the corrected numbers:
Rossman Schmid Elimination Entries

Corp. Dist. DR CR Consolidated
Income Statement
Sales 4,801,000 985,000 5,786,000
Other Income or Loss 90,000 (35,000) 80,000 40,000 15,000
(2,193,000
Less: COGS ) (525,000) (2,718,000)
Less: Depreciation & Amort.
Expense (202,000) (88,000) 4,000 (294,000)
(1,381,000
Less: Other Expenses ) (227,000) 80,000 (1,528,000)
Income from Schmid Dist. 109,500 109,500 0
Consolidated Net Income 1,224,500 110,000 193,500 120,000 1,261,000
Controlling Interest in NI 1,224,500 110,000 230,000 120,000 1,224,500

1,400,00 1,400,00
Beginning Balance 1,474,800 0 0 1,474,800
Net Income 1,224,500 110,000 230,000 120,000 1,224,500
1,490,00 1,630,00
Ending Balance 2,649,300 0 0 140,000 2,649,300
Balance Sheet
Cash 50,700 38,000 88,700
Current Receivables 101,800 89,400 23,750 167,450
Inventory 286,000 218,900 504,900
1,200,00
Land 400,000 0 56,000 23,000 1,633,000
2,990,00
Buildings & Equipment 2,400,000 0 185,000 5,575,000
(1,105,000
Less: Accumulated Depr. ) (420,000) 145,000 (1,674,000)
4,000
2,907,00
Investment in Schmid Dist. 2,974,000 23,000 0 0
90,000
Goodwill 64,000 64,000
3,192,75
Total Assets 5,107,500 4,116,300 328,000 0 6,359,050
Current Payables 86,200 76,300 23,750 138,750

Bonds Payable 1,000,000 200,000 1,200,000
1,000,00 1,000,00
Common Stock 100,000 0 0 100,000
1,350,00 1,350,00
Additional Paid-in Capital 1,272,000 0 0 1,272,000
1,490,00 1,630,00
Retained Earnings 2,649,300 0 0 140,000 2,649,300
NCI in NA of Schmid Dist. 969,000 999,000
30,000
4,003,75 1,109,00
Total Liabilities & Equity 5,107,500 4,116,300 0 0 6,359,050
7-68
7-69
P7-38 (continued)
d. This worksheet is based on the uncorrected numbers:
Rossman Schmid Elimination Entries

Corp. Dist. DR CR Consolidated
Income Statement
Sales 4,801,000 985,000 5,786,000
Other Income or Loss 90,000 (35,000) 80,000 40,000 15,000
(2,193,000
Less: COGS ) (525,000) (2,718,000)
Expense (202,000) (88,000) 4,000 (294,000)
(1,381,000
Less: Other Expenses ) (227,000) 80,000 (1,528,000)
Income from Schmid Dist. 115,500 109,500 6,000
Consolidated Net Income 1,230,500 110,000 193,500 120,000 1,267,000
Controlling Interest in NI 1,230,500 110,000 230,000 120,000 1,230,500

1,400,00 1,400,00
Beginning Balance 1,474,800 0 0 1,474,800
Net Income 1,230,500 110,000 230,000 120,000 1,230,500
1,490,00 1,630,00
Ending Balance 2,655,300 0 0 140,000 2,655,300
Balance Sheet
Cash 50,700 38,000 88,700
Current Receivables 101,800 89,400 23,750 167,450
Inventory 286,000 218,900 504,900
1,200,00
Land 400,000 0 56,000 23,000 1,633,000
2,990,00
Buildings & Equipment 2,400,000 0 185,000 5,575,000
(1,105,000
Less: Accumulated Depr. ) (420,000) 145,000 (1,674,000)
4,000
2,907,00
Investment in Schmid Dist. 2,980,000 23,000 0 6,000
90,000
Goodwill 64,000 64,000
3,192,75
Total Assets 5,113,500 4,116,300 328,000 0 6,365,050
Current Payables 86,200 76,300 23,750 138,750

Bonds Payable 1,000,000 200,000 1,200,000
1,000,00 1,000,00
Common Stock 100,000 0 0 100,000
1,350,00 1,350,00
Additional Paid-in Capital 1,272,000 0 0 1,272,000
1,490,00 1,630,00
Retained Earnings 2,655,300 0 0 140,000 2,655,300
NCI in NA of Schmid Dist. 969,000 999,000
30,000
4,003,75 1,109,00
Total Liabilities & Equity 5,113,500 4,116,300 0 0 6,365,050
7-70
7-71
P7-39A Computation of Retained Earnings following Multiple Transfers
Consolidated retained earnings, January 1, 20X8:
Great Companys retained earnings, January 1 $450,000

Unrealized profit on land ($16,000 x 0.80) (12,800)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 2)] (17,600)
Consolidated retained earnings $419,600
Consolidated retained earnings, December 31, 20X8:
Consolidated retained earnings, January 1 $419,600

Great Companys operating income for 20X8 $65,000
Less: Dividends paid in 20X8 (45,000)
Increase in retained earnings from Greats operations 20,000
Meagers net income for 20X8 $ 30,000
Less: Amortization of differential assigned to equipment:
($325,000 - $290,000) / 10 years (3,500)
Impairment of goodwill (17,500)
Realized income $ 9,000
Proportion of ownership held x 0.80 7,200
Realization of gain on sale of building
($22,000 / 10 years) 2,200
Alternate computation of retained earnings balance:
Great Companys retained earnings, January 1 $450,000

Operating income for 20X8 65,000
Investment income from Meager Company for 20X8:
Meager's net income $30,000
Proportion of ownership held x 0.80
Proportionate share of Meagers reported net income 24,000
Amortization of differential assigned to equipment:
[($325,000 - $290,000) x 0.80] / 10 years (2,800)
Goodwill impairment loss ($17,500 x 0.80) (14,000)
Great Companys retained earnings $477,200
Unrealized profit on land ($16,000 x 0.80) (12,800)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 3)] (15,400)
7-72
P7-40A Consolidation Worksheet with Intercompany Transfers (Modified Equity Method)

Mist Retained
NCI + Co. = Common +
+ Net Income 10,500 19,500 30,000
- Dividends (1,750) (3,250) (5,000)

Retained earnings 85,000 Beginning balance in retained earnings
Income from Blank Corp. 19,500 Mist Co.s share of NI
NCI in NI of Blank Corp. 6,265 NCI share of NI Def. Gain + Extra Dep.
Dividends declared 5,000 100% of Blank Corp.'s dividends declared
Investment in Blank Corp. 110,500 Net BV left in the investment account
NCI in NA of Blank Corp. 55,265 NCI share of BV + Extra Dep.

Land 4,000

Gain on Sale on Building 13,200
Building and Equipment (net) 12,100
Eliminate intercompany services

Sales 24,000
7-73
P7-40A (continued)
b.
Blank Elimination Entries
Mist Co. Corp. DR CR Consolidated
Income Statement
Sales 286,500 128,500 24,000 391,000
Gain on Sale of Land 4,000 4,000 0
Gain on Sale of Building 13,200 13,200 0
Less: COGS (160,000) (75,000) (235,000)
Less: Other Expenses (76,000) (17,700) 24,000 (69,700)
Income from Blank Corp. 19,500 19,500 0

Net Income 52,000 30,000 66,965 25,100 40,135
Ending Balance 225,000 110,000 151,965 30,100 213,135
Balance Sheet
Cash 32,500 22,000 54,500
Inventory 95,000 71,000 166,000
Land 40,000 15,000 4,000 51,000
Buildings & Equipment (net) 200,000 125,000 12,100 312,900
Investment in Blank Corp. 110,500 110,500 0
Total Assets 540,000 270,000 0 126,600 683,400

Bonds Payable 180,000 80,000 260,000
Common Stock 100,000 60,000 60,000 100,000
NCI in NA of Blank Corp. 55,265 55,265
Total Liabilities & Equity 540,000 270,000 211,965 85,365 683,400
7-74
P7-40A (continued)
c. Mist Company and Subsidiary

December 31, 20X4
Cash $ 54,500
Inventory 166,000
Land 51,000
Buildings and Equipment (net) 312,900
Total Assets $683,400

Noncontrolling Interest 55,265
Total Liabilities and Stockholders' Equity $683,400
Mist Company and Subsidiary

Sales $391,000
Mist Company and Subsidiary

Retained Earnings, January 1, 20X4 $198,000

$238,135
Retained Earnings, December 31, 20X4 $213,135
7-75
P7-41A Modified Equity Method
Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to
deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. This error carries over to this problem. If you
investment account will not be fully eliminated. In order to correct this problem, please reduce
the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000.
Adjusted balances in the trial balance:

This trial balance is based on the corrected numbers:
a. Adjusted trial balance:
Prime Company Lane Company

Item Debit Credit Debit Credit
Cash and Accounts Receivable $ 151,000 $ 55,000

Inventory 240,000 100,000
Land 100,000 80,000
Buildings and Equipment 500,000 150,000
Investment in Lane Company
Stock 240,000
Cost of Goods Sold 160,000 80,000
Depreciation and Amortization 25,000 15,000
Other Expenses 20,000 10,000
Dividends Declared 60,000 35,000
Accumulated Depreciation $ 230,000 $ 60,000
Accounts Payable 60,000 25,000
Bonds Payable 200,000 50,000
Common Stock 300,000 100,000
Retained Earnings 420,000 140,000
Sales 250,000 150,000
Income from Subsidiary 36,000
Total $1,496,000 $1,496,000 $525,000 $525,000
7-76
This trial balance is based on the uncorrected numbers:
a. Adjusted trial balance:
Prime Company Lane Company

Item Debit Credit Debit Credit
Cash and Accounts Receivable $ 151,000 $ 55,000

Inventory 240,000 100,000
Land 100,000 80,000
Buildings and Equipment 500,000 150,000
Investment in Lane Company
Stock 248,000
Cost of Goods Sold 160,000 80,000
Depreciation and Amortization 25,000 15,000
Other Expenses 20,000 10,000
Dividends Declared 60,000 35,000
Accumulated Depreciation $ 230,000 $ 60,000
Accounts Payable 60,000 25,000
Bonds Payable 200,000 50,000
Common Stock 300,000 100,000
Retained Earnings 428,000 140,000
Sales 250,000 150,000
Income from Subsidiary 36,000
Total $1,504,000 $1,504,000 $525,000 $525,000
7-77
P7-41A (continued)
b. These calculations are based on the corrected numbers:

Cash 28,000
c.
Dividends declared 35,000

Goodwill 32,000 Remaining goodwill
Retained Earnings 14,400 Lane's portion of goodwill impairment loss from last year
Investment in Lane Co. 40,000 Remaining balance in investment account
NCI in NA of Lane Co. 6,400 NCI's share of differential and loss [($50,000 - 18,000) * .2]


Land 10,000
7-78
Accumulated
5,000 2,000 23,000
Prime Co. 75,000 "As If" 35,000

Equipment 5,000

7-79
P7-41A (continued)
d. This worksheet is based on the corrected numbers:

Income Statement
Sales 250,000 150,000 400,000
Less: COGS (160,000) (80,000) (240,000)
Less: Depreciation & Amort. Exp. (25,000) (15,000) 2,000 (38,000)

14,400
8,000
18,000
Net Income 81,000 45,000 45,000 2,000 83,000
Ending Balance 441,000 150,000 225,400 37,000 402,600
Balance Sheet
Cash and Accounts
Receivable 151,000 55,000 4,000 202,000
Inventory 240,000 100,000 340,000
Land 100,000 80,000 10,000 170,000
Investment in Lane Co. 240,000 200,000 0
40,000
Goodwill 32,000 32,000
1,001,00
Total Assets 0 325,000 39,000 277,000 1,088,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 100,000 300,000
6,400
1,001,00
7-80
P7-41A (continued)
d. This worksheet is based on the uncorrected numbers:

Income Statement
Sales 250,000 150,000 400,000
Less: COGS (160,000) (80,000) (240,000)
Expense (25,000) (15,000) 2,000 (38,000)

14,400
8,000
18,000
Net Income 81,000 45,000 45,000 2,000 83,000
Ending Balance 449,000 150,000 225,400 37,000 410,600
Balance Sheet
Cash and Accounts Rec. 151,000 55,000 4,000 202,000
Inventory 240,000 100,000 340,000
Land 100,000 80,000 10,000 170,000
Investment in Lane Co. 248,000 200,000 8,000
40,000
Goodwill 32,000 32,000
1,009,00
Total Assets 0 325,000 39,000 277,000 1,096,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 100,000 300,000
6,400
1,009,00
7-81
P6-42A Cost Method
a. Journal entry recorded by Prime Company:
Cash 28,000
Record dividend from Lane Company.
b.
Investment elimination entry
Goodwill 25,000
Dividend elimination entry

Dividends Declared 35,000
Assign undistributed income to NCI



Land 10,000

Equipment 5,000

7-82
P6-42A (continued)
c.

Income Statement
Sales 250,000 150,000 400,000
Less: COGS (160,000) (80,000) (240,000)
Less: Depr. & Amort. Exp. (25,000) (15,000) 2,000 (38,000)
Dividend Income 28,000 28,000 0
2,000

18,000
8,000
18,000
Net Income 73,000 45,000 37,000 2,000 83,000
Ending Balance 361,000 150,000 151,000 37,000 397,000
Balance Sheet
Cash and Accounts Rec.e 151,000 55,000 4,000 202,000
Inventory 240,000 100,000 340,000
Land 100,000 80,000 10,000 170,000
Investment in Lane Co. 160,000 160,000 0
Goodwill 25,000 25,000

Total Assets 921,000 325,000 7,000 37,000 1,081,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 100,000 300,000
NCI in NA of Lane Co. 35,000 53,000
18,000
7-83

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS

C7-1 Correction of Elimination Procedures

Re: Elimination of Intercompany Profit on Equipment

Your eliminating entry recorded at December 31, 20X2, was:

C7-2 Elimination of Intercorporate Services

To: Chief Accountant

Re: Elimination of Legal Services Provided by Parent Company

Legal Services Revenue 80,000

The information on intercorporate services provided to Plain Company indicates that an

Legal Services Revenue 150,000

Legal Services Revenue 150,000

C7-3 Noncontrolling Interest

(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is

C7-4 Intercompany Sale of Services

C7-5 Intercompany Profits

a. Verizon (www.verizon.com) eliminates all intercompany profits. It discontinued the use of

b. All of Harley-Davidsons (www.harleydavidson.com) intercompany transactions are eliminated

E7-1 Multiple-Choice Questions on Intercompany Transfers

5. b Depreciation expense recorded by Pirn $40,000

E7-2 Multiple-Choice Questions on Intercompany Transactions

3. b The $39,000 paid to Gold Company will be charged to depreciation expense

5. b Reported net income of Gold Company $ 45,000

6. c Operating income reported by Top Corporation $ 85,000

E7-3 Elimination Entries for Land Transfer

a. Eliminating entry, December 31, 20X4:

Gain on Sale of Land 10,000

Eliminating entry, December 31, 20X5:

Investment in Lowly 10,000

b. Eliminating entry, December 31, 20X4:

Gain on Sale of Land 10,000

Eliminating entry, December 31, 20X5:

Investment in Lowly 6,000

E7-4 Intercompany Services

a. Consolidated net income will not change.

c. $38,000 = $70,000 - $32,000

E7-5 Elimination Entries for Intercompany Services

Two eliminating entries are required:

Delivery Service Revenue 76,000

Accounts Payable 18,000

E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale

Eliminate the gain on Truck & correct asset's basis:

Eliminate the gain on Truck & correct asset's basis:

Accumulated Depreciation 1,000

E7-7 Transfer of Land

a. Eliminating entry, December 31, 20X2:

Gain on Sale of Land 45,000

Eliminating entry, December 31, 20X3:

Investment in Roan 31,500

b. Eliminating entries, December 31, 20X3 and 20X4:

Investment in Roan 30,000

E7-8 Transfer of Depreciable Asset at Year-End

Eliminate the gain on Truck & correct asset's basis:

Computation of gain on sale of truck:

Eliminate the gain on Truck & correct asset's basis:

Accumulated Depreciation 5,000

E7-9 Transfer of Depreciable Asset at Beginning of Year

Eliminate the gain on Truck & correct asset's basis:

Accumulated Depreciation 5,000

Computation of gain on sale of truck:

Eliminate the gain on Truck & correct asset's basis:

Accumulated Depreciation 5,000

E7-10 Sale of Equipment to Subsidiary in Current Period