Intercompany sales of plant assets

Chapter 6

INTERCOMPANY PROFIT TRANSACTIONS — PLANT ASSETS

Answers to Questions

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

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

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

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

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

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

7 The computation of noncontrolling interest expense in the year of an upstream sale of depreciable plant asset is as follows:

	Unrealized	Unrealized
	Gain on Sale	Loss on Sale
Income of subsidiary as reported	XXX	XXX
Deduct: Gain on sale of plant assets	- XX
Add: Loss on sale of plant assets	+ XX
Add: Piecemeal recognition of gain on sale
of plant assets	+ X
Deduct: Piecemeal recognition of loss on
sale of plant assets		- X
Realized subsidiary income	XXX	XXX
Noncontrolling nterest percentage	X%	X%
Noncontrolling interest expense	XXX	XXX

8 The effects of unrealized gains on intercompany sales of plant assets are charged against the parent company’s income from subsidiary account in the year of the intercompany sale, with equal amounts being deducted from the investment in subsidiary account. In subsequent years, the income from subsidiary and investment in subsidiary accounts are increased for depreciation on the unrealized gain that is recorded on the subsidiary books for downstream sales or for the parent’s proportionate share for upstream sales. If the unrealized gain relates to land, no entries are needed until the land is sold to entities outside of the affiliation structure.

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

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

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

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

Subsequent years
Investment in subsidiary
Accumulated depreciation
Depreciation expense
Plant assets

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

SOLUTIONS TO EXERCISES

Solution E6-1

1 c

2 a

3 c

4 d

Solution E6-2

1 Parsen’s income from Samit will be decreased by $25,000 as a result of the following entry:

	Income from Samit	25,000
	Investment in Samit		25,000

To eliminate unrealized gain on downstream sale of land.

Parsen’s net income for 2009 will not be affected by the sale since the $25,000 gain will be offset by a $25,000 decrease in income from Samit. The investment in Samit account at December 31, 2009 will be $25,000 less as a result of the sale as indicated by the above entry. (The total balance sheet effect is to reduce land to its cost, reduce the investment account for the profit, and increase cash or other assets for the proceeds.)

2 The consolidated financial statements will not be affected because the gain on the sale is eliminated in the consolidated income statement and the land is reduced to its cost basis to the consolidated entity. A working paper adjustment would show:

	Gain on sale of land	25,000
	Land		25,000

3 Neither Parsen’s income from Samit or net income for 2010 will be affected by the 2009 sale of land. The investment in Samit account, however, will still be $25,000 less than if the land had not been sold, even though there are no changes in the investment account during 2010.

4 The sale of the land will not affect Samit’s net income since it is being sold at Samit’s cost. However, the sale triggers recognition of the postponed gain on the original sale from Parsen to Samit.

	Investment in Samit	25,000
	Income from Samit		25,000

To recognize the gain deferred in 2006.

Consolidated income will also feel the same impact of the recognition of the deferred gain.

	Investment in Samit	25,000
	Gain on sale of land		25,000

Solution E6-3

1a Consolidated net income

	2006	2007
Pruitt’s separate income	$ 300,000	$ 400,000
Add: Equity in Silverman’s income
2006 $80,000 90%	72,000
2007 $60,000 90%		54,000
Gain on sale of land	(10,000)	---
Consolidated net income	$ 362,000	$ 454,000

1b Noncontrolling interest expense

Silverman’s net income 10%

$ 8,000

$ 6,000

2a Consolidated net income

Pruitt’s separate income	$ 300,000	$ 400,000
Add: Equity in Silverman’s income	72,000	54,000
Less: Gain on land 90%	(9,000)	---
Consolidated net income	$ 363,000	$ 454,000

2b Noncontrolling interest expense

Silverman’s net income 10%	$ 8,000	$ 6,000
Less: Gain on land 10%	(1,000)	---
Noncontrolling interest expense	$ 7,000	$ 6,000

Solution E6-4

1 Entries for 2006

	Cash	90,000
	Investment in Salmark		90,000

To record dividends received from Salmark.

	Investment in Salmark	108,000
	Income from Salmark		108,000

To record income from Salmark computed as follows:

	Share of Salmark’s reported income ($150,000 90%)		$ 135,000
	Less: Gain on building sold to Salmark		(30,000)
	Add: Piecemeal recognition of gain on building
	($30,000/10 years)		3,000
	Income from Salmark		$ 108,000

2	Pigwich Corporation and Subsidiary
	Consolidated Income Statement
	for the year ended December 31, 2006

	Sales	$2,200,000
	Cost of sales	(1,400,000)
	Gross profit	800,000
	Operating expenses	(447,000)
	Total consolidated income	353,000
	Noncontrolling interest expense	(15,000)
	Consolidated net income	$ 338,000

Solution E6-5 [AICPA adapted]

1 d

The equipment must be shown at its $1,400,000 book value to the consolidated entity and d is the only choice that provides a $1,400,000 book value. Ordinarily, the equipment would be shown at $1,500,000, its book value at the time of transfer, less the $100,000 depreciation after transfer.

2 c

Reciprocal receivables and payables accounts and purchases and sales accounts must always be eliminated. But dividend income (parent) and dividends paid (subsidiary) accounts are reciprocals only when the cost method is used.

3 a

Amount to be eliminated from consolidated net income in 2006:

	Intercompany gain on downstream sale of machinery	$10,000
	Less: Realized through depreciation of intercompany
	gain on machinery ($10,000/5 years)	(2,000)
	Decrease in consolidated net income from intercompany sale	$ 8,000

	Amount to be added to consolidated net income in 2007 for
	realization through depreciation of intercompany gain
	on machinery	$ 2,000

4 b

One-third of the unrealized intercompany profit is recognized through depreciation for 2006.

Solution E6-6

1 a

	Selling price in 2014	$ 55,000
	Cost to consolidated entity	15,000
	Gain on sale of land	$ 40,000

2 b

	Gain on equipment	$ 30,000
	Less: Depreciation on gain	(10,000)
	Net effect on investment account	$ 20,000

The investment account will be $20,000 less than the underlying equity interest.

3 b

	Combined equipment — net	$ 800,000
	Less: Unrealized gain	(20,000)
	Add: Piecemeal recognition of gain	5,000
	Consolidated equipment — net	$ 785,000

4 b

The working paper entry to eliminate the unrealized profit is:

	Gain on sale of equipment	1,500
	Equipment		1,500

5 c

Investment income will be decreased by $12,000 gain less $3,000 piecemeal recognition of the gain.

6 c

	Sartin’s net income	$1,000,000
	Less: Unrealized gain	(50,000)
	Add: Piecemeal recognition	5,000
	Realized income	955,000
	Noncontrolling interest percentage	40%
	Noncontrolling interest expense	$ 382,000

Solution E6-7

Pod Corporation and Subsidiary

Consolidated Income Statement

for the year ended December 31, 2006

Sales ($500,000 + $300,000)	$800,000
Gain on sale of machinerya	20,000
Total revenue	820,000

Cost of sales ($200,000 + $130,000)	330,000
Depreciation expense ($50,000 + $30,000 - $5,000 from
depreciation on intercompany profit for 2006)	75,000
Other expenses ($80,000 + $40,000)	120,000
Total expenses	525,000
Noncontrolling expense ($100,000+$5,000 piecemeal recognition from
depreciation + $10,000 remaining deferred gain) 25%
noncontrolling interest	28,750
Consolidated net income	$266,250

a	Selling price of machinery at December 28, 2006	$ 36,000
	Book value on Pod’s books $65,000 – ($65,000/5 years 3 years)	26,000
	Gain on sale of machinery	$ 10,000

	Original intercompany profit	$ 25,000
	Piecemeal recognition of gain $25,000/5 years 3 years	15,000
	Unamortized gain from intercompany sales	$ 10,000

	Gain on sale of machinery to outside entity	$ 20,000

Solution E6-8

Preliminary computations:

Investment in Salt (40%) at cost	$100,000
Book value acquired ($200,000 40%)	(80,000)
Excess allocated to patents	$ 20,000
Annual amortization of patents ($20,000/5 years)	$ 4,000

1 Income from Salt — 2006

	Share of Salt’s net income ($40,000 1/2 year 40%)	$ 8,000
	Amortization of patents ($4,000 1/2 year)	(2,000)
	Unrealized inventory profit from upstream sale ($4,000 40%)	(1,600)
	Unrealized gain from downstream sale of land ($2,000 100%)	(2,000)
	Income from Salt — 2006	$ 2,400

2 Income from Salt — 2007

	Share of Salt’s net income ($60,000 40%)	$ 24,000
	Amortization of patents	(4,000)
	Unrealized inventory profits from upstream sales:
	Recognition of profit in beginning inventory ($4,000 40%)	1,600
	Deferral of profit in ending inventory ($6,000 40%)	(2,400)
	Income from Salt — 2007	$ 19,200

Solution E6-9

1 Income from Simple, net income and consolidated net income:

	Plain’s share of Simple’s reported net income ($100,000 80%)	$ 80,000
	Less: Amortization of excess allocated to buildings
	($400,000 - $320,000)/20 years	(4,000)
	Less: 80% of $20,000 unrealized profit on equipment	(16,000)
	Income from Simple — 2005	$ 60,000
	Add: Separate income of Plain for 2008	500,000
	Net income of Plain — 2008	$560,000

	Plain’s share of Simple’s reported net income ($110,000 80%)	$ 88,000
	Less: Amortization of excess allocated to buildings	(4,000)
	Add: 80% piecemeal recognition of unrealized gain
	on equipment 80% ($20,000/4 years)	4,000
	Income from Simple — 2009	$ 88,000
	Add: Separate income of Plain	600,000
	Net income of Plain — 2009	$688,000

Consolidated net income for 2008 and 2009 = Plain’s net income

Alternatively,	2008	2009
Separate incomes combined	$600,000	$710,000
Less: Amortization of excess (buildings)	(4,000)	(4,000)
Less: Unrealized gain on equipment in 2008	(20,000)
Add: Piecemeal recognition of gain in 2009		5,000
Less: Noncontrolling interest expense:
2008 ($100,000 - $20,000) 20%	(16,000)
2009 ($110,000 + $5,000) 20%		(23,000)
Consolidated net income	$560,000	$688,000

2 Investment in Simple

	Cost of investment July 1, 2006	$400,000
	Add: Plain’s share of Simple’s retained earnings increase
	from July 1, 2006 to December 31, 2007 ($150,000 - $100,000) 80%	40,000
	Less: Amortization of excess ($4,000 1.5 years)	(6,000)
	Investment in Simple December 31, 2007	434,000
	Add: 2008 income less dividends [$60,000 - ($50,000 80%)]	20,000
	Investment in Simple December 31, 2008	454,000
	Add: 2009 income less dividends [$88,000 - ($60,000 80%)]	40,000
	Investment in Simple December 31, 2009	$494,000

	Alternative solution for check at December 31, 2009:
	Share of Simple’s equity December 31, 2009 ($550,000 80%)	$440,000
	Add: Unamortized excess on buildings
	Original excess $80,000 - ($4,000 3.5 years)	66,000
	Less: Unrealized profit on equipment
	($20,000 gain - $5,000 recognized) 80%	(12,000)
	Investment in Simple December 31, 2009	$494,000

Solution E6-10

Preliminary computations

Transfer price of inventory to Spano ($180,000 2)	$360,000
Cost to consolidated entity	180,000
Unrealized profit on January 3	$180,000

Amortization of unrealized profit from consolidated view:

$180,000/6 years = $30,000 per year

1 Consolidated balance sheet amounts:

	2006
	Equipment (at transfer price)	$360,000
	Less: Unrealized profit	(180,000)
	Less: Depreciation taken by Spano ($360,000/6 years)	(60,000)
	Add: Depreciation on unrealized profit ($180,000/6 years)	30,000
	Equipment — net to be included on consolidated balance sheet	$150,000

	Alternatively:
	Equipment (at cost to the consolidated entity)	$180,000
	Less: Depreciation based on cost ($180,000/6 years)	(30,000)
	Equipment — net	$150,000

	2007 Year after intercompany sale
	Equipment — net beginning of the period on cost basis	$150,000
	Less: Depreciation (based on cost)	(30,000)
	Equipment — net	$120,000

2 Consolidation working paper entries:

2006

Sales	360,000
Cost of goods sold		180,000
Equipment — net		150,000
Depreciation expense		30,000

To eliminate intercompany inventory sale, return equipment to its cost to the consolidated entity, and eliminate depreciation on the intercompany profit.

2007

Investment in Spano	150,000
Equipment — net		120,000
Depreciation expense		30,000

To eliminate unrealized profit from the equipment account and the current year’s depreciation on the unrealized profit and establish reciprocity between the investment account and beginning-of-the-period subsidiary equity accounts.

Solution E6-11

Pasco Corporation and Subsidiary

Schedule for Computation of Consolidated Net Income

	2006	2007	2008	2009
Combined separate incomes	$260,000	$220,000	$120,000	$210,000
Add: Amortization of negative
differential assigned to plant
assets ($40,000/10 years)	4,000	4,000	4,000	4,000
Unrealized gain on land (Note
that Pasco’s $5,000 gain is
included in Pasco’s separate
income)	(5,000)			5,000
Unrealized gain on machinery		(25,000)
Piecemeal recognition of
gain on machinery		5,000	5,000	5,000
Unrealized inventory profits			(8,000)	8,000
Total realized income	259,000	204,000	121,000	232,000
Less: Noncontrolling interest exp.
2006 ($60,000 - $5,000) 20%	(11,000)
2007 ($70,000 20%)		( 14,000)
2008 ($80,000 - $8,000) 20%			(14,400)
2009 ($90,000 + $8,000 +
$5,000) 20%				(20,600)
Consolidated net income	$248,000	$190,000	$106,600	$211,400

Alternative Solution:
Pasco’s separate income	$200,000	$150,000	$ 40,000	$120,000
Add: 80% of Slocum’s income	48,000	56,000	64,000	72,000
Amortize the negative differential assigned to plant asset	4,000	4,000	4,000	4,000
Unrealized profit on upstream
sale of land ($5,000 80%)	(4,000)			4,000
Unrealized profit on downstream
sale of machinery		(25,000)
Piecemeal recognition of gain
($25,000/5 years)		5,000	5,000	5,000
Unrealized profit on upstream
sale of inventory items
$8,000 80%			(6,400)	6,400
Pasco’s net income and
consolidated net income	$248,000	$190,000	$106,600	$211,400

SOLUTIONS TO PROBLEMS

Solution P6-1

1 Income from Sear — 2006

	Equity in Sear’s income ($100,000 90%)	$ 90,000

	Add: Deferred inventory profit from 2003 ($40,000 50%)	20,000

	Less: Unrealized inventory profit from 2004 ($60,000 40%)	(24,000)

	Less: Intercompany profit on equipment ($100,000 - $60,000)	(40,000)

	Add: Piecemeal recognition of profit on equipment
	$40,000/4 years	10,000

	Income from Sear (corrected amount)	$ 56,000

2	Pearl Corporation and Subsidiary
	Consolidated Income Statement
	for the year ended December 31, 2006

	Sales [$1,600,000 combined - $150,000 intercompany]	$1,450,000

	Cost of sales [$1,000,000 combined - $150,000 inter-
	company + $24,000 ending inventory profits - $20,000
	beginning inventory profits]	854,000

	Gross profit	596,000

	Other expenses [$300,000 combined - $10,000 piecemeal
	recognition of profit on equipment]	290,000
	Noncontrolling interest expense	10,000
	Consolidated net income	$ 296,000

	Check:
	Separate income of Pearl	$ 240,000
	Add: Income from Sear	56,000
	Consolidated net income	$ 296,000

Solution P6-2

Preliminary computations

Computation of income from Sim:
Share of Sim’s reported income ($40,000 .9)	$36,000
Less: Depreciation on excess allocated to buildings
($20,000/5 years)	(4,000)
Add: Realization of deferred profits in beginning inventory	5,000
Less: Unrealized profits in ending inventory	(4,000)
Less: Unrealized profit on intercompany sale of equipment
($30,000 - $21,000)	(9,000)
Add: Piecemeal recognition of deferred profit in equipment
($9,000/3 years)	3,000
Income from Sim	$27,000

Consolidation working paper entries

a	Cash	2,000
	Accounts receivable		2,000

To record cash in transit from Sim on account.

b	Sales	20,000
	Cost of sales		20,000

To eliminate intercompany purchases and sales.

c	Investment in Sim	5,000
	Cost of sales		5,000

To recognize previously deferred profit from beginning inventory.

d	Cost of sales	4,000
	Inventory		4,000

To defer unrealized profit from ending inventory.

e	Investment in Sim	3,000
	Land		3,000

To reduce land to its cost basis and adjust the investment account to establish reciprocity with Sim’s beginning of the period equity accounts.

f	Gain on sale of equipment	9,000
	Equipment — net		9,000

To eliminate gain on intercompany sale of equipment and reduce equipment to a cost basis.

Solution P6-2 (continued)

g	Equipment — net	3,000
	Operating expenses		3,000

To eliminate current year’s depreciation of unrealized gain.

h	Income from Sim	27,000
	Dividends — Sim		18,000
	Investment in Sim		9,000

To eliminate income and dividends from Sim and return investment account to its beginning of the period balance.

i	Retained earnings — Sim	70,000
	Capital stock — Sim	50,000
	Buildings — net	16,000
	Goodwill	20,000
	Investment in Sim		144,000
	Noncontrolling interest — January 1		12,000

To eliminate reciprocal investment and equity amounts, establish beginning noncontrolling interest, and enter beginning-of-the-period cost — book value differentials.

j	Noncontrolling Interest Expense	4,000
	Dividends — Sim		2,000
	Noncontrolling Interest		2,000

To record Noncontrolling interest share of subsidiary income and dividends.

k	Operating expenses	4,000
	Buildings — net		4,000

To record depreciation on excess allocated to buildings.

l	Dividends payable	9,000
	Dividends receivable		9,000

To eliminate reciprocal receivables and payables.

Solution P6-2 (continued)

Pal Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2008

	Pal	Sim 90%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 300,000	$ 100,000	b 20,000		$ 380,000
Income from Sim	27,000		h 27,000
Gain on equipment	9,000		f 9,000
Cost of sales	140,000*	50,000*	d 4,000	b 20,000 c 5,000	169,000*
Operating expenses	60,000*	10,000*		g 3,000	71,000*
			k 4,000
Noncontrolling expense			j 4,000		4,000*
Net income	$ 136,000	$ 40,000			$ 136,000

Retained Earnings Retained earnings — Pal	$ 148,000				$ 148,000
Retained earnings — Sim		$ 70,000	i 70,000
Net income	136,000	40,000			136,000
Dividends	60,000*	20,000*		h 18,000 j 2,000	60,000*
Retained earnings December 31	$ 224,000	$ 90,000			$ 224,000

Balance Sheet Cash	$ 100,000	$ 17,000	a 2,000		$ 119,000
Accounts receivable	90,000	50,000		a 2,000	138,000
Dividends receivable	9,000			l 9,000
Inventories	20,000	8,000		d 4,000	24,000
Land	40,000	15,000		e 3,000	52,000
Buildings — net	135,000	50,000	i 16,000	k 4,000	197,000
Equipment — net	165,000	60,000	g 3,000	f 9,000	219,000
Investment in Sim	145,000		c 5,000 e 3,000	h 9,000 i 144,000
Goodwill			i 20,000		20,000
	$ 704,000	$ 200,000			$ 769,000

Accounts payable	$ 98,000	$ 30,000			$ 128,000
Dividends payable	15,000	10,000	l 9,000		16,000
Other liabilities	67,000	20,000			87,000
Capital stock	300,000	50,000	i 50,000		300,000
Retained earnings	224,000	90,000			224,000
	$ 704,000	$ 200,000

Noncontrolling interest January 1				i 12,000
Noncontrolling interest December 31				j 2,000	14,000
					$ 769,000

* Deduct

Solution P6-3

Preliminary computations

Cost January 1, 2006		$236,000
Add: Income from Stor for 2006
Equity in income ($40,000 90%)	$ 36,000
Less: Unrealized inventory profit	(10,000)
Less: Unrealized profit on machinery
(selling price $35,000 - book value $28,000)	(7,000)
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years .5 year)	1,000
Income from Stor for 2006		20,000
Less: Dividends $10,000 90%		(9,000)

Investment balance January 1, 2007		247,000
Add: Income from Stor for 2007
Equity in income ($50,000 90%)	$ 45,000
Add: Unrealized profit in beginning inventory	10,000
Less: Unrealized profit in ending inventory	(12,000)
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years)	2,000
Less: Gain on sale of land	(5,000)
Income from Stor for 2007		40,000
Less: Dividends ($20,000 90%)		(18,000)

Investment balance December 31, 2007		$269,000

Solution P6-3 (continued)

Pall Corporation and Subsidiary

Consolidation Working Papers

for the Year Ended December 31, 2007

	Pall	Stor 90%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 450,000	$ 190,000	a 72,000		$ 568,000
Income from Stor	40,000		f 40,000
Gain on land	5,000		e 5,000
Cost of sales	(200,000)	(100,000)	c 12,000	a 72,000 b 10,000	(230,000)
Operating expense	(113,000)	(40,000)		d 2,000	(151,000)
Noncontrolling expense			h 5,000		(5,000)
Net income	$ 182,000	$ 50,000			$ 182,000

Retained Earnings Retained earnings — Pall	$ 202,000				$ 202,000
Retained earnings — Stor		$ 120,000	g 120,000
Net income	182,000	50,000			182,000
Dividends	(150,000)	(20,000)		f 18,000 h 2,000	(150,000)
Retained earnings December 31	$ 234,000	$ 150,000			$ 234,000

Balance Sheet Cash	$ 167,000	$ 14,000			$ 181,000
Accounts receivable	180,000	100,000		i 10,000	270,000
Dividends receivable	18,000			j 18,000
Inventories	60,000	36,000		c 12,000	84,000
Land	100,000	30,000		e 5,000	125,000
Buildings — net	280,000	80,000			360,000
Machinery — net	330,000	140,000		d 4,000	466,000
Investment in Stor	269,000		b 10,000 d 6,000	f 22,000 g 263,000
Goodwill			g 20,000		20,000
Total assets	$1,404,000	$ 400,000			$1,506,000

Accounts payable	$ 200,000	$ 50,000	i 10,000		$ 240,000
Dividends payable	30,000	20,000	j 18,000		32,000
Other liabilities	140,000	30,000			170,000
Capital stock	800,000	150,000	g 150,000		800,000
Retained earnings	234,000	150,000			234,000
Total equities	$1,404,000	$ 400,000
Noncontrolling interest January 1				g 27,000
Noncontrolling interest December 31				h 3,000	30,000
					$1,506,000

Solution P6-4

Parch Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2006

	Parch	Sarg 90%	Adjustments and Eliminations		Consolidated Balance Sheet
Income Statement Sales	$ 700,000	$ 500,000	a 50,000		$1,150,000
Income from Sarg	70,000		e 70,000
Gain on land		10,000	c 10,000
Gain on equipment	20,000		d 20,000
Cost of sales	300,000*	300,000*	b 5,000	a 50,000	555,000*
Depreciation expense	90,000*	35,000*		d 5,000	120,000*
Other expenses	200,000*	65,000*			265,000*
Noncontrolling expense			h 10,000		10,000*
Net income	$ 200,000	$ 110,000			$ 200,000

Retained Earnings Retained earnings — Parch	$ 600,000				$ 600,000
Retained earnings — Sarg		$ 200,000	f 200,000
Net income	200,000	110,000			200,000
Dividends	100,000*	50,000*		e 45,000 h 5,000	100,000*
Retained earnings December 31	$ 700,000	$ 260,000			$ 700,000

Balance Sheet Cash	$ 35,000	$ 30,000			$ 65,000
Accounts receivable	90,000	110,000		g 10,000	190,000
Inventories	100,000	80,000		b 5,000	175,000
Other current items	70,000	40,000			110,000
Land	50,000	70,000		c 10,000	110,000
Buildings — net	200,000	150,000			350,000
Equipment — net	500,000	400,000		d 15,000	885,000
Investment in Sarg	655,000			e 25,000 f 630,000
	$1,700,000	$ 880,000			$1,885,000

Accounts payable	$ 160,000	$ 50,000	g 10,000		$ 200,000
Other liabilities	340,000	70,000			410,000
Capital stock	500,000	500,000	f 500,000		500,000
Retained earnings	700,000	260,000			700,000
	$1,700,000	$ 880,000

Noncontrolling interest January 1				f 70,000
Noncontrolling interest December 31				h 5,000	75,000
					$1,885,000

* Deduct

Solution P6-5

Preliminary computations

Computation of income from Sim:
Share of Sim’s reported income ($40,000 90%)	$36,000
Less: Patent amortization ($20,000/10 years)	(2,000)
Less: Depreciation on excess allocated to buildings
($20,000/5 years)	(4,000)
Add: Realization of deferred profits in beginning inventory	5,000
Less: Unrealized profits in ending inventory	(4,000)
Less: Unrealized profit on intercompany sale of equipment
($30,000 - $21,000)	(9,000)
Add: Piecemeal recognition of deferred profit in equipment
($9,000/3 years)	3,000
Income from Sim	$25,000

Consolidation working paper entries

a	Cash	2,000
	Accounts receivable		2,000

To record cash in transit from Sim on account.

b	Sales	20,000
	Cost of sales		20,000

To eliminate intercompany purchases and sales.

c	Investment in Sim	5,000
	Cost of sales		5,000

To recognize previously deferred profit from beginning inventory.

d	Cost of sales	4,000
	Inventory		4,000

To defer unrealized profit from ending inventory.

e	Investment in Sim	3,000
	Land		3,000

To reduce land to its cost basis and adjust the investment account to establish reciprocity with Sim’s beginning of the period equity accounts.

f	Gain on sale of equipment	9,000
	Equipment — net		9,000

To eliminate gain on intercompany sale of equipment and reduce equipment to a cost basis.

g	Equipment — net	3,000
	Operating expenses		3,000

To eliminate current year’s depreciation of unrealized gain.

Solution P6-5 (continued)

h	Income from Sim	25,000
	Dividends — Sim		18,000
	Investment in Sim		7,000

To eliminate income and dividends from Sim and return investment account to its beginning of the period balance.

i	Retained earnings — Sim	70,000
	Capital stock — Sim	50,000
	Buildings — net	16,000
	Patents	18,000
	Investment in Sim		142,000
	Noncontrolling interest — January 1		12,000

To eliminate reciprocal investment and equity amounts, establish beginning noncontrolling interest, and enter beginning-of-the-period cost — book value differentials.

j	Operating expenses	2,000
	Patents		2,000

To record current year’s amortization.

k	Operating expenses	4,000
	Buildings — net		4,000

To record depreciation on excess allocated to buildings.

l	Dividends payable	9,000
	Dividends receivable		9,000

To eliminate reciprocal receivables and payables.

m	Noncontrolling Interest Expense	4,000
	Dividends — Sim		2,000
	Noncontrolling Interest		2,000

To enter noncontrolling interest share of subsidiary income and dividends

Solution P6-5 (continued)

Pal Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2008

	Pal	Sim 90%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 300,000	$ 100,000	b 20,000		$ 380,000
Income from Sim	25,000		h 25,000
Gain on equipment	9,000		f 9,000
Cost of sales	140,000*	50,000*	d 4,000	b 20,000 c 5,000	169,000*
Operating expenses	60,000*	10,000*	j 2,000 k 4,000	g 3,000	73,000*
Noncontrolling expense			m 4,000		4,000*
Net income	$ 134,000	$ 40,000			$ 134,000

Retained Earnings Retained earnings — Pal	$ 146,000				$ 146,000
Retained earnings — Sim		$ 70,000	i 70,000
Net income	134,000	40,000			134,000
Dividends	60,000*	20,000*		h 18,000 m 2,000	60,000*
Retained earnings December 31	$ 220,000	$ 90,000			$ 220,000

Balance Sheet Cash	$ 100,000	$ 17,000	a 2,000		$ 119,000
Accounts receivable	90,000	50,000		a 2,000	138,000
Dividends receivable	9,000			l 9,000
Inventories	20,000	8,000		d 4,000	24,000
Land	40,000	15,000		e 3,000	52,000
Buildings — net	135,000	50,000	i 16,000	k 4,000	197,000
Equipment — net	165,000	60,000	g 3,000	f 9,000	219,000
Investment in Sim	141,000		c 5,000 e 3,000	h 7,000 i 142,000
Patents			i 18,000	j 2,000	16,000
	$ 700,000	$ 200,000			$ 765,000

Accounts payable	$ 98,000	$ 30,000			$ 128,000
Dividends payable	15,000	10,000	l 9,000		16,000
Other liabilities	67,000	20,000			87,000
Capital stock	300,000	50,000	i 50,000		300,000
Retained earnings	220,000	90,000			220,000
	$ 700,000	$ 200,000

Noncontrolling interest January 1				i 12,000
Noncontrolling interest December 31				m 2,000	14,000
					$ 765,000

* Deduct

Solution P6-6

Preliminary computations

Cost January 1, 2006		$236,000
Add: Income from Stor for 2006
Equity in income ($40,000 90%)	$36,000
Less: Patent amortization ($20,000/10 years)	(2,000)
Less: Unrealized inventory profit	(10,000)
Less: Unrealized profit on machinery
(selling price $35,000 - book value $28,000)	(7,000)
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years .5 year)	1,000
Income from Stor for 2006		18,000
Less: Dividends $10,000 90%		(9,000)

Investment balance January 1, 2007		245,000
Add: Income from Stor for 2007
Equity in income ($50,000 90%)	$45,000
Less: Patent amortization	(2,000)
Add: Unrealized profit in beginning inventory	10,000
Less: Unrealized profit in ending inventory	(12,000)
Add: Piecemeal recognition of profit on
machinery ($7,000/3.5 years)	2,000
Less: Gain on sale of land	(5,000)
Income from Stor for 2007		38,000
Less: Dividends ($20,000 90%)		(18,000)

Investment balance December 31, 2007		$265,000

Solution P6-6 (continued)

Pall Corporation and Subsidiary

Consolidation Working Papers

for the Year Ended December 31, 2007

	Pall	Stor 90%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 450,000	$ 190,000	a 72,000		$ 568,000
Income from Stor	38,000		f 38,000
Gain on land	5,000		e 5,000
Cost of sales	(200,000)	(100,000)	c 12,000	a 72,000 b 10,000	(230,000)
Operating expense	(113,000)	(40,000)	h 2,000	d 2,000	(153,000)
Noncontrolling expense			k 5,000		(5,000)
Net income	$ 180,000	$ 50,000			$ 180,000

Retained Earnings Retained earnings — Pall	$ 200,000				$ 200,000
Retained earnings — Stor		$ 120,000	g 120,000
Net income	180,000	50,000			180,000
Dividends	(150,000)	(20,000)		f 18,000 k 2,000	(150,000)
Retained earnings December 31	$ 230,000	$ 150,000			$ 230,000

Balance Sheet Cash	$ 167,000	$ 14,000			$ 181,000
Accounts receivable	180,000	100,000		i 10,000	270,000
Dividends receivable	18,000			j 18,000
Inventories	60,000	36,000		c 12,000	84,000
Land	100,000	30,000		e 5,000	125,000
Buildings — net	280,000	80,000			360,000
Machinery — net	330,000	140,000		d 4,000	466,000
Investment in Stor	265,000		b 10,000 d 6,000	f 20,000 g 261,000
Patents			g 18,000	h 2,000	16,000
Total assets	$1,400,000	$ 400,000			$1,502,000

Accounts payable	$ 200,000	$ 50,000	i 10,000		$ 240,000
Dividends payable	30,000	20,000	j 18,000		32,000
Other liabilities	140,000	30,000			170,000
Capital stock	800,000	150,000	g 150,000		800,000
Retained earnings	230,000	150,000			230,000
Total equities	$1,400,000	$ 400,000
Noncontrolling interest January 1				g 27,000
Noncontrolling interest December 31				k 3,000	30,000
					$1,502,000

Solution P6-7

Preliminary computations
Investment cost	$290,000
Book value acquired ($300,000 80%)	(240,000)
Excess cost over book value acquired	$ 50,000
Excess allocated:
Inventories ($50,000 50%)	$ 25,000
Patent	25,000
Excess cost over book value acquired	$ 50,000

Reconciliation of income from Sank:
Pill’s share of Sank’s net income ($50,000 80%)	$ 40,000
Less: Patent amortization ($25,000/10 years)	(2,500)
Add: Depreciation on deferred gain on equipment ($15,000/5 years) 80%	2,400
Less: Unrealized profit on upstream sale of land ($10,000 80%)	(8,000)
Income from Sank	$ 31,900

Reconciliation of investment account:
Share of Sank’s underlying equity ($400,000 80%)	$320,000
Add: Unamortized patent $25,000 - ($2,500 3 years)	17,500
Less: Unrealized gain on equipment [$15,000 - ($3,000 2 years)] 80%	(7,200)
Less: Share of unrealized gain on land	(8,000)
Investment in Sank December 31, 2006	$322,300

Noncontrolling interest expense:
Sank’s reported income	$ 50,000
Add: Piecemeal recognition of gain on sale of machinery	3,000
Less: Unrealized gain on upstream sale of land	(10,000)
Realized income	43,000
Noncontrolling percentage	20%
Noncontrolling interest expense	$ 8,600

Solution P6-7 (continued)

Pill Corporation and Subsidiary

Consolidation Working Papers

for the year ended December 31, 2006

	Pill	Sank 80%	Adjustments and Eliminations		Consolidated Statements
Income Statement Sales	$ 210,000	$ 130,000			$ 340,000
Income from Sank	31,900		c 31,900
Gain on land		10,000	b 10,000
Depreciation expense	40,000*	30,000*		a 3,000	67,000*
Other expenses	110,000*	60,000*	e 2,500		172,500*
Noncontrolling expense			f 8,600		8,600*
Net income	$ 91,900	$ 50,000			$ 91,900

Retained Earnings Retained earnings — Pill	$ 140,400				$ 140,400
Retained earnings — Sank		$ 50,000	d 50,000
Net income	91,900	50,000			91,900
Dividends	30,000*				30,000*
Retained earnings December 31	$ 202,300	$ 100,000			$ 202,300

Balance Sheet Current assets	$ 200,000	$ 170,000			$ 370,000
Plant assets	550,000	350,000		a 15,000 b 10,000	875,000
Accumulated depreciation	120,000*	70,000*	a 6,000		184,000*
Investment in Sank	322,300		a 9,600	c 31,900 d 300,000
Patent			d 20,000	e 2,500	17,500
	$ 952,300	$ 450,000			$1,078,500

Current liabilities	$ 150,000	$ 50,000			$ 200,000
Capital stock	600,000	300,000	d 300,000		600,000
Retained earnings	202,300	100,000			202,300
	$ 952,300	$ 450,000

Noncontrolling interest January 1			a 2,400	d 70,000
Noncontrolling interest December 31				f 8,600	76,200
					$1,078,500

* Deduct

Solution 6-7 (continued)

Consolidation working paper entries

a	Accumulated depreciation	6,000
	Investment in Sank	9,600
	Noncontrolling interest	2,400
	Depreciation expense		3,000
	Plant assets		15,000

To eliminate unrealized profit on 2005 sale of plant assets.

b	Gain on land	10,000
	Plant assets		10,000

To eliminate unrealized gain on 2006 upstream sale of land.

c	Income from Sank	31,900
	Investment in Sank		31,900

To eliminate income from Sank against the investment in Sank.

d	Capital stock—Sank	300,000
	Retained earnings—Sank January 1	50,000
	Patent	20,000
	Investment in Sank		300,000
	Noncontrolling interest January 1		70,000

To eliminate investment in Sank and stockholders’ equity of Sank and enter beginning of the period patent.

e	Other expenses	2,500
	Patent		2,500

To provide for patent amortization.

f	Noncontrolling Interest Expense	8,600
	Noncontrolling Interest		8,600

To enter noncontrolling interest share of subsidiary income.

Source: http://www.sba.oakland.edu/faculty/bazaz/acc401/beams9esm_ch06.doc

Web site to visit: http://www.sba.oakland.edu

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