Intercompany profit transactions inventories

Answers to Questions

1 Profits and losses on sales between affiliated companies are realized for consolidated statement purposes when the purchasing affiliate resells the merchandise to parties outside of the consolidated entity. If all merchandise sold to affiliates is resold to outside parties in the same period, there will be no unrealized profit to eliminate in preparing the consolidated financial statements.

2 Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits according to ARB No. 51.

3 The amount of unrealized profit to be eliminated in the preparation of consolidated financial statements is not affected by the existence of a noncontrolling interest. All unrealized profit must be eliminated. In the case of upstream sales, however, the unrealized profit should be allocated between majority and noncontrolling interests.

4 The elimination of intercompany sales and purchases does not affect consolidated net income. This is because equal amounts are deducted from sales and cost of sales and the net effect on consolidated net income is nil. The importance of the elimination lies in a correct statement of consolidated sales and cost of sales.

5 Consolidated working capital is not affected by the elimination of intercompany accounts receivable and accounts payable balances. Since equal amounts are deducted from current assets and current liabilities, the effect on the computation "current assets less current liabilities" is nil.

6 Upstream sales are sales from subsidiary to parent company. Downstream sales are sales from parent company to subsidiary. The importance of this designation lies in the fact that the profit or loss on such transactions is the selling affiliate's profit or loss. In the case of unrealized profit or loss on downstream sales, all the profit or loss is assigned to the parent company-seller. But unrealized profit or loss on upstream sales is profit or loss of the subsidiary-seller and is assigned to the parent company and noncontrolling interest in relation to their proportionate holdings.

7 Yes. If unrealized profits are not eliminated at year end, consolidated net income will be overstated. The ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the beginning inventory will understate consolidated net income. The analysis of the effect of unrealized inventory profits on consolidated net income is basically the same as the analysis for inventory errors. Like inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting periods. Consolidated net income for 2008 is not affected.

8 The noncontrolling interest expense is affected by upstream sales if the merchandise has not been resold by the parent company to outside parties by the end of the accounting period. This is because the noncontrolling interest expense is based on the income of the subsidiary. If the subsidiary has unrealized profit from intercompany sales, its realized income will be less than its reported income. The noncontrolling interest expense should be based on the realized income of the subsidiary.

9 A parent company's investment income and investment accounts are adjusted for unrealized profits on intercompany sales to subsidiaries in accordance with the one-line consolidation concept. The parent company reduces its investment and investment income accounts for the full amount of the unrealized profits in the year of intercompany sale. When the goods are sold to outside parties by the subsidiary, the profits of the parent company are realized and the parent company increases its investment and investment income accounts.

10 Combined cost of goods sold is overstated when there are unrealized profits in the beginning inventory and understated when there are unrealized profits in the ending inventory. The elimination of unrealized profits in the beginning inventory reduces (credits) cost of goods sold and the elimination of unrealized profits in the ending inventory increases (debits) cost of goods sold.

11 The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling interest or by the direction of the intercompany sales. All unrealized profit from both upstream and downstream sales is eliminated from consolidated cost of goods sold.

12 Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is eliminated by reducing (crediting) cost of sales and debiting the investment account if a correct equity method has been used and the intercompany sales are downstream. In the case of upstream sales, cost of sales is credited and the noncontrolling interest and the investment account are debited proportionately. When the parent company does not adjust its investment account for unrealized profits from intercompany sales, the above debits to the investment account would be to retained earnings.

13 There are two equally good approaches for computing noncontrolling interest expense when there are unrealized profits from upstream sales in both beginning and ending inventories. One approach is to compute realized income of the subsidiary by adding unrealized profits in the beginning inventory to reported subsidiary net income and deducting unrealized profits in the ending inventory. The noncontrolling interest expense is then equal to the realized income of the subsidiary multiplied by the noncontrolling interest percentage.
The other approach is to compute the noncontrolling interest percentage in reported subsidiary net income, in unrealized profits in beginning inventory, and in unrealized profits in ending inventory. Noncontrolling interest expense is then computed by adding the noncontrolling interest percentage in unrealized profits in the beginning inventory to the noncontrolling interest share of reported income, and subtracting the noncontrolling interest percentage relating to the unrealized profits in the ending inventory.

14 The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a convenience, but it does not result in incorrect measurements of consolidated net income as long as the unrealized profits at any statement date are correctly determined. This is because any unrealized profits in beginning inventory that are considered realized are credited to cost of sales. The same items will appear as unrealized profits in the ending inventory if they remain unsold, and the elimination of these items results in debiting cost of sales for the same amount. Thus, the working paper effects are offsetting as illustrated in the following working paper entries, which assume $5,000 unrealized profits from downstream sales.

Investment in subsidiary (retained earnings)	5,000
Cost of sales		5,000
To eliminate unrealized profit in beginning inventory.

Cost of sales	5,000
Inventory		5,000
To eliminate unrealized profit in ending inventory.

SOLUTIONS TO EXERCISES

Solution E5-1

1 a 5 c

2 d 6 a

3 a 7 a

4 c 8 c

Solution E5-2 [AICPA adapted]

1 a

2 c

Unrealized profits from intercompany sales with Kent are eliminated from the ending inventory: $320,000 combined current assets less $12,000 unrealized profit ($60,000 20%).

3 c

Combined cost of sales of $750,000 less $250,000 intercompany sales

Solution 5-3

1 d

	Philly's separate income	$1,000,000
	Add: Share of Silvio's income ($500,000 100%)	500,000
	Add: Realization of profit deferred in 2006
	$1,500,000 - ($1,500,000/150%)	500,000
	Less: Unrealized profit in 2007 inventory
	$1,200,000 - ($1,200,000/150%)	(400,000)
	Consolidated net income	$1,600,000

2 d

	Combined sales	$1,400,000
	Less: Intercompany sales	(50,000)
	Consolidated sales	$1,350,000

3 c

	Combined cost of sales	$ 680,000
	Less: Intercompany purchases	(50,000)

	Less: Unrealized profit in beginning inventory	(4,000)
	Add: Unrealized profit in ending inventory	10,000
	Consolidated cost of sales	$ 636,000

Solution E5-4

1 b

	Pride's share of Sedita's income ($60,000 80%)	$ 48,000
	Less: Unrealized profit in ending inventory
	($20,000 50% unsold 80% owned)	(8,000)
	Income from Sedita	$ 40,000

2 d

	Combined cost of sales	$ 450,000
	Less: Intercompany sales	(100,000)
	Add: Unrealized profit in ending inventory	10,000
	Consolidated cost of sales	$ 360,000

3 b

	Reported income of Sedita	$ 60,000
	Unrealized profit	(10,000)
	Sedita's realized income	50,000
	Noncontrolling interest percentage	20%
	Noncontrolling interest expense	$ 10,000

Solution E5-5

1 c

	Combined sales	$1,800,000
	Less: Intercompany sales	(400,000)
	Consolidated sales	$1,400,000

2 c

	Unrealized profit in beginning inventory
	$100,000 - ($100,000/125%)	$ 20,000

	Unrealized profit in ending inventory
	$125,000 - ($125,000/125%)	$ 25,000

3 b

	Combined cost of goods sold	$1,440,000
	Less: Intercompany sales	(400,000)
	Less: Unrealized profit in beginning inventory
	$100,000 - ($100,000/125%)	(20,000)
	Add: Unrealized profit in ending inventory
	$125,000 - ($125,000/125%)	25,000
	Consolidated cost of goods sold	$1,045,000

Solution E5-6

1 a

	Patti's separate income	$200,000
	Add: Income from Susan:
	Share of Susan's reported income ($200,000 70%)	140,000
	Less: Patents amortization	(20,000)
	Add: Unrealized profit in beginning inventory
	[$112,500 - ($112,500/150%)] 70%	26,250
	Less: Unrealized profit in ending inventory
	[$33,000 - ($33,000/150%)] 70%	(7,700)
	Consolidated net income	$338,550

	Noncontrolling interest expense:
	Susan's reported income	$200,000
	Add: Unrealized profit in beginning inventory	37,500
	Less: Unrealized profit in ending inventory	(11,000)
	Susan's realized income	226,500
	Noncontrolling interest percentage	30%
	Noncontrolling interest expense	$ 67,950

2 c

	Packman's share of Slocum's reported net loss
	($150,000 loss 60%)	$(90,000)
	Add: Unrealized profit in ending inventory
	($200,000 1/4 unsold)	(50,000)
	Income from Slocum	(140,000)
	Packman's separate income	300,000
	Consolidated net income	$160,000

3 b

	Parnell's share of Santini's income ($300,000 75%)	$225,000
	Add: Realized profit in beginning inventory
	$150,000 - ($150,000/1.25) 75%	22,500
	Less: Deferred profit in ending inventory
	$200,000 - ($200,000/1.25) 75%	(30,000)
	Income from Santini	$217,500

Solution E5-7

	2007	2008	2009
Pansy's separate income	$300,000	$400,000	$350,000
Add: 80% of Sheridan's reported income	400,000	440,000	380,000
Add: Realization of profits in
beginning inventory		30,000	40,000
Less: Unrealized profits in ending
inventory	(30,000)	(40,000)	(20,000)
Consolidated net income	$670,000	$830,000	$750,000

Solution E5-8

Pycus Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2009

Sales ($400,000 + $100,000 - $40,000 intercompany sales)	$ 460,000

Cost of sales ($200,000 + $60,000 - $40,000 intercompany
purchases + $10,000 unrealized profit in ending inventory)	(230,000)

Gross profit	230,000

Other expenses ($100,000 + $30,000)	(130,000)

Total consolidated income	100,000

Less: Noncontrolling interest expense ($10,000 20%)	(2,000)

Consolidated net income	$ 98,000

Solution E5-9

1 Noncontrolling interest expense

	Seven's reported net income 40%	$ 20,000
	Add: Intercompany profit from upstream sales in
	beginning inventory ($5,000 40%)	2,000
	Less: Intercompany profit from upstream sales in
	ending inventory ($10,000 40%)	(4,000)
	Noncontrolling interest expense	$ 18,000

2 Consolidated sales

	Combined sales	$1,250,000
	Less: Intercompany sales	100,000
	Consolidated sales	$1,150,000

Consolidated cost of sales

	Combined cost of sales	$ 650,000
	Less: Intercompany sales	(100,000)
	Add: Intercompany profit in ending inventory	10,000
	Less: Intercompany profit in beginning inventory	(5,000)

	Consolidated cost of sales	$ 555,000

	Total Consolidated Income
	Combined income	$ 300,000
	Less: Intercompany profit in ending inventory	(10,000)
	Add: Intercompany profit in beginning inventory	5,000
	Total Consolidated Income	$ 295,000

Solution E5-10

Papillion Corporation and Subsidiary

Consolidated Income Statement

December 31, 2011

Sales ($1,000,000 + $500,000 - $90,000 intercompany)	$1,410,000

Cost of sales ($400,000 + $250,000 - $90,000 intercompany -
$10,000 unrealized profit in beginning inventory + $15,000
unrealized profit in ending inventory	(565,000)
Gross profit	845,000

Depreciation expense	(170,000)

Other expenses ($90,000 + $60,000 + $4,000 patents amortization)	(154,000)

Total consolidated income	521,000

Less: Noncontrolling interest expense ($150,000 + $10,000 profit
in beginning inventory - $15,000 profit in end. inventory) 20%	(29,000)

Consolidated net income	$ 492,000

Supporting computations
Cost of investment in Saiki at January 1, 2007	$ 600,000
Book value acquired ($700,000 80%)	(560,000)
Patents	$ 40,000
Patents amortization ($40,000/10 years) = $4,000 per year

Solution E5-11

Pill Corporation and Subsidiary

Consolidated Income Statement

December 31, 2011

Sales ($1,000,000 + $500,000 - $90,000 intercompany)	$1,410,000

Cost of sales ($400,000 + $250,000 - $90,000 intercompany -
$10,000 unrealized profit in beginning inventory + $15,000
unrealized profit in ending inventory	(565,000)

Gross profit	845,000

Depreciation expense	(170,000)

Other expenses ($90,000 + $60,000)	(150,000)

Total consolidated income	525,000

Less: Noncontrolling interest income ($150,000 + $10,000 profit
in beginning inventory - $15,000 profit in end. inventory) 20%	(29,000)

Consolidated net income	$ 496,000

Supporting computations
Cost of investment in Saiki at January 1, 2010	$ 600,000
Book value acquired ($700,000 80%)	(560,000)
Goodwill	$ 40,000

Solution E5-12

1 b

	Income as reported	$ 200,000
	Add: Realization of profits in beginning inventory
	$120,000 - ($120,000/1.2)	20,000
	Less: Unrealized profits in ending inventory
	$360,000 - ($360,000/1.2)	(60,000)
	Realized income	160,000
	Percent ownership	60%
	Income from Suey	$ 96,000

2 c

	Suey's equity as reported ($3,400,000 + $2,100,000)	$5,500,000
	Less: Unrealized profit in ending inventory	(60,000)
	Realized equity	5,440,000
	Noncontrolling share	40%
	Noncontrolling interest December 31, 2011	$2,176,000

3 b

	Realized equity	$5,440,000
	Majority share	60%
	Investment balance December 31, 2011	$3,264,000

Note: The excess cost over book value is fully amortized. Therefore, the investment balance of $3,264,000 plus the noncontrolling interest of $2,176,000 is equal to the $5,440,000 realized equity at the balance sheet date.

Solution E5-13 [AICPA adapted]

1 d

Combined revenues $340,000 - consolidated revenues $308,000

2 b

Combined accounts receivable $45,000 - $39,000 consolidated accounts receivable

3 c

Revenues $200,000/$150,000 cost of sales = 1 1/3 markup on cost

Amount of Spin's ending inventory from Pard ($32,000 intercompany sales 3/8 remaining unsold) = $12,000 at billed prices 3/4 = $9,000

4 b

$10,000 noncontrolling interest/$50,000 stockholders' equity of Spin

5 a

$30,000 unamortized patents/$2,000 amortization = 15 years remaining

Solution E5-14

Pullen Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2006

Sales ($1,380,000 - $120,000 intercompany sales)	$1,260,000

Cost of sales ($920,000 - $120,000 - $5,000a + $12,000b)	(807,000)

Gross profit	453,000

Operating expenses	(160,000)

Total consolidated income	293,000

Less: Noncontrolling interest expense [$40,000 - ($12,000 .2)]	(37,600)

Consolidated net income	$ 255,400

a Unrealized profit in beginning inventory (downstream) ($180,000 - $160,000) .25 = $5,000

b Unrealized profit in ending inventory (upstream ($120,000 - $90,000) .4 = $12,000

SOLUTIONS TO PROBLEMS

Solution P5-1

Proctor Corporation and Subsidiary

Consolidated Statement of Income and Retained Earnings

for the year ended December 31, 2008

Sales ($1,300,000 + $650,000 - $80,000 intercompany sales)	$1,870,000

Less: Cost of sales ($800,000 + $390,000 - $80,000 inter-
company purchases - $12,000 unrealized profit in beginning
inventory + $16,000 unrealized profit in ending inventory)	(1,114,000)

Gross profit	756,000

Other expenses ($340,000 + $160,000)	(500,000

Income before noncontrolling interest	256,000

Noncontrolling interest expense($100,000+$12,000 - $16,000) 10%	(9,600)

Consolidated net income	246,400

Add: Beginning consolidated retained earnings	369,200

Less: Dividends for 2008	(100,000)

Consolidated retained earnings December 31, 2008	$ 515,600

Solution P5-2

1 Consolidated cost of sales — 2007

	Combined cost of sales ($625,000 + $300,000)	$ 925,000
	Less: Intercompany purchases	(300,000)
	Add: Profit in ending inventory	24,000
	Less: Profit in beginning inventory	(12,000)

	Consolidated cost of sales	$ 637,000

2 Noncontrolling interest expense — 2007

	Slam's net income ($600,000 - $300,000 - $150,000)	$ 150,000
	Add: Profit in beginning inventory	12,000
	Less: Profit in ending inventory	(24,000)
	Slam's realized income	138,000
	Noncontrolling interest percentage	10%

	Noncontrolling interest expense	$ 13,800

3 Consolidated net income — 2007

	Consolidated sales ($900,000 + $600,000 - $300,000)	$1,200,000
	Less: Consolidated cost of sales	(637,000)
	Less: Consolidated expenses ($225,000 + $150,000)	(375,000)
	Less: Noncontrolling interest expense	(13,800)

	Consolidated net income	$ 174,200

Alternatively,

	Putt's separate income	$ 50,000
	Add: Income from Slam	124,200

	Consolidated net income	$ 174,200

4 Noncontrolling interest at December 31, 2007

	Equity of Slam December 31, 2007	$ 520,000
	Less: Unrealized profit in ending inventory	(24,000)
		496,000
	Noncontrolling interest percentage	10%

	Noncontrolling interest December 31, 2007	$ 49,600

Solution P5-3

1 Inventories appearing in consolidated balance sheet at December 31, 2007

	Beginning inventory — Potter ($60,000 - $4,000a)	$ 56,000
	Beginning inventory — Scan ($38,750 - $7,750b)	31,000
	Beginning inventory — Tray ($24,000 - 0)	24,000

	Inventories December 31, 2007	$111,000

	Intercompany profit:

a Potter:

		Inventory acquired intercompany ($60,000 40%)	$ 24,000
		Cost of intercompany inventory ($24,000/1.2)	(20,000)
		Unrealized profit in Potter's inventory	$ 4,000

b Scan:

		Inventory acquired intercompany ($38,750 100%)	$ 38,750
		Cost of intercompany inventory ($38,750/1.25)	(31,000)
		Unrealized profit in Scan's inventory	$ 7,750

2 Inventories appearing in consolidated balance sheet at December 31, 2008

	Ending inventory — Potter ($54,000 - $4,500c)	$ 49,500
	Ending inventory — Scan ($31,250 - $6,250d)	25,000
	Ending inventory — Tray ($36,000 - 0)	36,000

	Inventories December 31, 2008	$110,500

	Intercompany profit:

c Potter:

		Inventory acquired intercompany ($54,000 50%)	$ 27,000
		Cost of intercompany inventory ($27,000/1.2)	(22,500)
		Unrealized profit in Potter's inventory	$ 4,500

d Scan:

		Inventory acquired intercompany ($31,250 100%)	$ 31,250
		Cost of intercompany inventory ($31,250/1.25)	(25,000)
		Unrealized profit in Scan's inventory	$ 6,250

Solution P5-4

1	Plier's income from Stuff	2007	2008	2009

	75% of Stuff's net income	$ 300,000	$ 337,500	$ 262,500

	Unrealized profit in December 31,
	2007 inventory (downstream)
	($200,000 1/2) 100%	(100,000)	100,000

	Unrealized profit in December 31,
	2008 inventory (upstream)
	$100,000 75%		(75,000)	75,000

	Plier's income from Stuff	$ 200,000	$ 362,500	$ 337,500

2	Plier's net income

	Plier's separate income	$1,800,000	$1,700,000	$2,000,000

	Add: Income from Stuff	200,000	362,500	337,500

	Plier's net income	$2,000,000	$2,062,500	$2,337,500

3	Consolidated net income

	Separate incomes of Plier and
	Stuff combined	$2,200,000	$2,150,000	$2,350,000

	Unrealized profit in December 31,
	2007 inventory	(100,000)	100,000

	Unrealized profit in December 31,
	2008 inventory		(100,000)	100,000

	Total income	2,100,000	2,150,000	2,450,000

	Less: Noncontrolling interest expense
	2007 $400,000 25%	(100,000)
	2008 ($450,000 - $100,000)
	25%		(87,500)
	2009 ($350,000 + $100,000)
	25%			(112,500)

	Consolidated net income	$2,000,000	$2,062,500	$2,337,500

Solution P5-5

Pane Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

	Pane	100% Seal	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 800,000	$ 400,000	a 120,000		$1,080,000
Income from Seal	102,000		d 102,000
Cost of sales	400,000*	200,000*	b 12,000	a 120,000 c 20,000	472,000*
Depreciation expense	110,000*	40,000*			150,000*
Other expenses	192,000*	60,000*	f 6,000		258,000*
Net income	$ 200,000	$ 100,000			$ 200,000

Retained Earnings Retained earnings — Pane	$ 600,000				600,000
Retained earnings — Seal		$ 380,000	e 380,000
Net income	200,000	100,000			200,000
Dividends	100,000*	50,000*		d 50,000	100,000*
Retained earnings December 31	$ 700,000	$ 430,000			$ 700,000

Balance Sheet Cash	$ 54,000	$ 37,000			$ 91,000
Receivables — net	90,000	60,000		g 17,000	133,000
Inventories	100,000	80,000		b 12,000	168,000
Other assets	70,000	90,000			160,000
Land	50,000	50,000			100,000
Buildings — net	200,000	150,000			350,000
Equipment — net	500,000	400,000			900,000
Investment in Seal	736,000		c 20,000	d 52,000 e 704,000
Patents			e 24,000	f 6,000	18,000
	$1,800,000	$ 867,000			$1,920,000

Accounts payable	$ 160,000	$ 47,000	g 17,000		$ 190,000
Other liabilities	340,000	90,000			430,000
Common stock, $10 par	600,000	300,000	e 300,000		600,000
Retained earnings	700,000	430,000			700,000
	$1,800,000	$ 867,000			$1,920,000

Supporting computations

Unrealized profit in beginning inventory ($40,000 1/2) = $20,000

Unrealized profit in ending inventory ($48,000 1/4) = $12,000

Seal's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in ending inventory, and less $6,000 patents amortization equals $102,000 income from Seal.

Solution P5-6

Patty Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2008

	Patty	Sue 75%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 600,000	$ 400,000	a 130,000		$ 870,000
Income from Sue	102,500		d 102,500
Cost of sales	270,000*	210,000*	b 20,000	a 130,000 c 10,000	360,000*
Operating expenses	145,000*	40,000*			185,000*
Noncontrolling int.expense			f 37,500		37,500*
Net income	$ 287,500	$ 150,000			$ 287,500

Retained Earnings Retained earnings — Patty	$ 182,500				$ 182,500
Retained earnings — Sue		$ 90,000	e 90,000
Net income	287,500	150,000			287,500
Dividends	150,000*	50,000*		d 37,500 f 12,500	150,000*
Retained earnings December 31	$ 320,000	$ 190,000			$ 320,000

Balance Sheet Cash	$ 85,000	$ 30,000			$ 115,000
Accounts receivable	165,000	100,000		g 15,000	250,000
Dividends receivable	15,000			h 15,000
Inventories	60,000	80,000		b 20,000	120,000
Land	80,000	50,000			130,000
Buildings — net	230,000	100,000			330,000
Equipment — net	200,000	140,000			340,000
Investment in Sue	385,000		c 10,000	d 65,000 e 330,000
Goodwill			e 150,000		150,000
	$1,220,000	$ 500,000			$1,435,000

Accounts payable	$ 225,000	$ 100,000	g 15,000		$ 310,000
Dividends payable	70,000	20,000	h 15,000		75,000
Other liabilities	155,000	40,000			195,000
Common stock, $10 par	450,000	150,000	e 150,000		450,000
Retained earnings	320,000	190,000			320,000
	$1,220,000	$ 500,000

Noncontrolling interest January 1				e 60,000
Noncontrolling interest December 31				f 25,000	85,000
					$1,435,000

* Deduct

Supporting computations

Investment in Sue at January 1, 2007	$300,000
Book value acquired ($200,000 75%)	150,000
Goodwill	$150,000

Solution P5-7

Preliminary computations

Investment cost	$275,000
Less: Book value acquired ($250,000 90%)	225,000
Patents	$ 50,000

Patents amortization $50,000/10 years = $5,000 per year

Upstream sales

Unrealized profit in December 31, 2006 inventory of Poly

$28,000 - ($28,000 1.4) = $8,000

Unrealized profit in December 31, 2007 inventory of Poly

$42,000 - ($42,000 1.4) = $12,000

Income from Susan

Share of Susan's reported income ($100,000 90%)	$ 90,000
Less: Patents amortization	(5,000)
Less: Unrealized profit in ending inventory ($12,000 90%)	(10,800)
Add: Unrealized profit in beginning inventory ($8,000 90%)	7,200
Income from Susan	$ 81,400

Investment balance

Initial investment cost	$275,000
Increase in Susan's net assets from December 31, 2004
to December 31, 2007 ($70,000 90%)	63,000
Patent amortization for 3 years	(15,000)
Unrealized profit in December 31, 2007 inventory	(10,800)
Investment balance December 31, 2007	$312,200

Noncontrolling interest expense

Reported income of Susan	$100,000
Add: Unrealized profit in beginning inventory	8,000
Less: Unrealized profit in ending inventory	(12,000)
Susan's realized income	96,000
Noncontrolling interest percentage	10%
Noncontrolling interest expense	$ 9,600

Solution P5-7 (continued)

Poly Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

	Poly	Susan 90%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 819,000	$ 560,000	a 560,000		$ 819,000
Income from Susan	81,400		d 81,400
Cost of sales	546,000*	400,000*	b 12,000	a 560,000 c 8,000	390,000*
Other expenses	154,400*	60,000*	f 5,000		219,400*
Noncontrolling int.expense			h 9,600		9,600*
Net income	$ 200,000	$ 100,000			$ 200,000

Retained Earnings Retained earnings — Poly	$ 120,000				$ 120,000
Retained earnings — Susan		$ 70,000	e 70,000
Net income	200,000	100,000			200,000
Dividends	100,000*	50,000*		d 45,000 h 5,000	100,000*
Retained earnings December 31	$ 220,000	$ 120,000			$ 220,000

Balance Sheet Cash	$ 75,800	$ 50,000			$ 125,800
Inventory	42,000	80,000		b 12,000	110,000
Other current assets	60,000	20,000		g 10,000	70,000
Plant assets — net	300,000	300,000			600,000
Investment in Susan	312,200		c 7,200	d 36,400 e 283,000
Patents			e 40,000	f 5,000	35,000
	$ 790,000	$ 450,000			$ 940,800

Current liabilities	$ 170,000	$ 130,000	g 10,000		$ 290,000
Capital stock	400,000	200,000	e 200,000		400,000
Retained earnings	220,000	120,000			220,000
	$ 790,000	$ 450,000

Noncontrolling interest January 1			c 800	e 27,000
Noncontrolling interest December 31				h 4,600	30,800
					$ 940,800

* Deduct

Solution P5-8

1 Entries to correct Phil's income from Sert and investment accounts

	Retained earnings January 1, 2011	4,500
	Investment in Sert		4,500

To adjust beginning retained earnings and beginning investment accounts for unrealized profit in the December 31, 2010 inventory ($5,000 90%).

	Investment in Sert	4,500
	Income from Sert		4,500

To recognize intercompany profit in the December 31, 2010 inventory of goods acquired from Sert ($5,000 90%).

	Income from Sert	4,000
	Investment in Sert		4,000

To eliminate intercompany profit in the December 31, 2011 inventory.

Working paper entries in general journal form:

a	Noncontrolling interest	500
	Investment in Sert	4,500
	Cost of sales		5,000

b	Sales	10,000
	Cost of sales		10,000

c	Cost of sales	4,000
	Inventory		4,000

d	Income from Sert	27,500
	Dividends		18,000
	Investment in Sert		9,500

e	Capital stock — Sert	80,000
	Retained earnings — Sert	40,000
	Investment in Sert		108,000
	Noncontrolling interest		12,000

f	Accounts payable	10,000
	Accounts receivable		10,000

g	Noncontrolling interest expense	3,500
	Dividends		2,000
	Noncontrolling interest		1,500

Solution P5-8 (continued)

2	Phil Corporation and Subsidiary
	Consolidation Working Papers
	for the year ended December 31, 2011

	Phil	Sert 90%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 500,000	$ 100,000	b 10,000		$ 590,000
Income from Sert	27,500		d 27,500
Cost of sales	240,000*	40,000*	c 4,000	a 5,000 b 10,000	269,000*
Other expenses	174,000*	30,000*			204,000*
Noncontr.int.expense			g 3,500		3,500*
Net income	$ 113,500	$ 30,000			$ 113,500

Retained Earnings Retained earnings — Phil	$ 105,500				$ 105,500
Retained earnings — Sert		$ 40,000	e 40,000
Net income	113,500	30,000			113,500
Dividends	70,000*	20,000*		d 18,000 g 2,000	70,000*
Retained earnings December 31	$ 149,000	$ 50,000			$ 149,000

Balance Sheet Cash	$ 63,000	$ 30,000			$ 93,000
Inventories	60,000	15,000		c 4,000	71,000
Accounts receivable	40,000	20,000		f 10,000	50,000
Plant assets — net	220,000	105,000			325,000
Investment in Sert	113,000		a 4,500	d 9,500 e 108,000
	$ 496,000	$ 170,000			$ 539,000

Accounts payable	$ 47,000	$ 40,000	f 10,000		$ 77,000
Capital stock	300,000	80,000	e 80,000		300,000
Retained earnings	149,000	50,000			149,000
	$ 496,000	$ 170,000

Noncontrolling interest January 1			a 500	e 12,000
Noncontrolling interest December 31				g 1,500	13,000
					$ 539,000

* Deduct

Noncontrolling interest expense: ($30,000 + $5,000) 10%

Solution P5-9

Pan Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2007

	Pan	100% Sal	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 800,000	$ 400,000	a 120,000		$1,080,000
Income from Sal	108,000		d 108,000
Cost of sales	400,000*	200,000*	b 12,000	a 120,000 c 20,000	472,000*
Depreciation expense	110,000*	40,000*			150,000*
Other expenses	192,000*	60,000*			252,000*
Net income	$ 206,000	$ 100,000			$ 206,000

Retained Earnings Retained earnings — Pan	$ 606,000				606,000
Retained earnings — Sal		$ 380,000	e 380,000
Net income	206,000	100,000			206,000
Dividends	100,000*	50,000*		d 50,000	100,000*
Retained earnings December 31	$ 712,000	$ 430,000			$ 712,000

Balance Sheet Cash	$ 54,000	$ 37,000			$ 91,000
Receivables — net	90,000	60,000		f 17,000	133,000
Inventories	100,000	80,000		b 12,000	168,000
Other assets	70,000	90,000			160,000
Land	50,000	50,000			100,000
Buildings — net	200,000	150,000			350,000
Equipment — net	500,000	400,000			900,000
Investment in Sal	748,000		c 20,000	d 58,000 e 710,000
Goodwill			e 30,000		30,000
	$1,812,000	$ 867,000			$1,932,000

Accounts payable	$ 160,000	$ 47,000	f 17,000		$ 190,000
Other liabilities	340,000	90,000			430,000
Common stock, $10 par	600,000	300,000	e 300,000		600,000
Retained earnings	712,000	430,000			712,000
	$1,812,000	$ 867,000			$1,932,000

Supporting computations

Unrealized profit in beginning inventory ($40,000 1/2) = $20,000

Unrealized profit in ending inventory ($48,000 1/4) = $12,000

Sal's income of $100,000 plus $20,000 profit in beginning inventory less $12,000 profit in ending inventory.

Solution P5-10

Pat Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2008

	Pat	Sun 75%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 600,000	$ 400,000	a 130,000		$ 870,000
Income from Sun	92,500		d 92,500
Cost of sales	270,000*	210,000*	b 20,000	a 130,000 c 10,000	360,000*
Operating expenses	145,000*	40,000*	f 10,000		195,000*
Noncontrolling int.expense			i 37,500		37,500*
Net income	$ 277,500	$ 150,000			$ 277,500

Retained Earnings Retained earnings — Pat	$ 172,500				$ 172,500
Retained earnings — Sun		$ 90,000	e 90,000
Net income	277,500	150,000			277,500
Dividends	150,000*	50,000*		d 37,500 i 12,500	150,000*
Retained earnings December 31	$ 300,000	$ 190,000			$ 300,000

Balance Sheet Cash	$ 85,000	$ 30,000			$ 115,000
Accounts receivable	165,000	100,000		g 15,000	250,000
Dividends receivable	15,000			h 15,000
Inventories	60,000	80,000		b 20,000	120,000
Land	80,000	50,000			130,000
Buildings — net	230,000	100,000			330,000
Equipment — net	200,000	140,000			340,000
Investment in Sun	365,000		c 10,000	d 55,000 e 320,000
Patents			e 140,000	f 10,000	130,000
	$1,200,000	$ 500,000			$1,415,000

Accounts payable	$ 225,000	$ 100,000	g 15,000		$ 310,000
Dividends payable	70,000	20,000	h 15,000		75,000
Other liabilities	155,000	40,000			195,000
Common stock, $10 par	450,000	150,000	e 150,000		450,000
Retained earnings	300,000	190,000			300,000
	$1,200,000	$ 500,000
Noncontrolling interest January 1				e 60,000
Noncontrolling interest December 31				i 25,000	85,000
					$1,415,000

* Deduct

Supporting computations

Investment in Sun at January 1, 2007	$300,000
Book value acquired ($200,000 75%)	150,000
Patents (15 year amortization)	$150,000

Solution P5-11

Preliminary computations

Investment cost	$275,000
Less: Book value acquired ($250,000 90%)	225,000
Goodwill	$ 50,000

Upstream sales

Unrealized profit in December 31, 2009 inventory of Po

$28,000 - ($28,000 1.4) = $8,000

Unrealized profit in December 31, 2010 inventory of Po

$42,000 - ($42,000 1.4) = $12,000

Income from San

Share of San's reported income ($100,000 90%)	$ 90,000
Less: Unrealized profit in ending inventory ($12,000 90%)	(10,800)
Add: Unrealized profit in beginning inventory ($8,000 90%)	7,200

Income from San	$ 86,400

Investment balance

Initial investment cost	$275,000
Increase in San's net assets from December 31, 2007
to December 31, 2010 ($70,000 90%)	63,000
Unrealized profit in December 31, 2010 inventory	(10,800)

Investment balance December 31, 2010	$327,200

Noncontrolling interest expense

Reported income of San	$100,000
Add: Unrealized profit in beginning inventory	8,000
Less: Unrealized profit in ending inventory	(12,000)
San's realized income	96,000
Noncontrolling interest percentage	10%

Noncontrolling interest expense	$ 9,600

Solution P5-11 (continued)

Po Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2010

	Po	San 90%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 819,000	$ 560,000	a 560,000		$ 819,000
Income from San	86,400		d 86,400
Cost of sales	546,000*	400,000*	b 12,000	a 560,000 c 8,000	390,000*
Other expenses	154,400*	60,000*			214,400*
Noncontrolling int.expense			f 9,600		9,600*
Net income	$ 205,000	$ 100,000			$ 205,000

Retained Earnings Retained earnings — Po	$ 130,000				$ 130,000
Retained earnings — San		$ 70,000	e 70,000
Net income	205,000	100,000			205,000
Dividends	100,000*	50,000*		d 45,000 f 5,000	100,000*
Retained earnings December 31	$ 235,000	$ 120,000			$ 235,000

Balance Sheet Cash	$ 75,800	$ 50,000			$ 125,800
Inventory	42,000	80,000		b 12,000	110,000
Other current assets	60,000	20,000		g 10,000	70,000
Plant assets — net	300,000	300,000			600,000
Investment in San	327,200		c 7,200	d 41,400 e 293,000
Goodwill			e 50,000		50,000
	$ 805,000	$ 450,000			$ 955,800

Current liabilities	$ 170,000	$ 130,000	g 10,000		$ 290,000
Capital stock	400,000	200,000	e 200,000		400,000
Retained earnings	235,000	120,000			235,000
	$ 805,000	$ 450,000

Noncontrolling interest January 1			c 800	e 27,000
Noncontrolling interest December 31				f 4,600	30,800
					$ 955,800

* Deduct

Source: http://www.sba.oakland.edu/faculty/bazaz/acc401/beams9esm_ch05.doc

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