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Chapter 5

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 SFAS No. 160 (This treatment was also prescribed by 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 controlling 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 2011 is not affected.

8 The noncontrolling interest share 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 share 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 share should be based on the realized income of the subsidiary.

©2009 Pearson Education, Inc. publishing as Prentice Hall5-1

5-2 Intercompany Profit Transactions — Inventories

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 share 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 share 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 share 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) 5,000Cost of sales 5,000

To eliminate unrealized profit in beginning inventory.

Cost of sales 5,000

©2009 Pearson Education, Inc. publishing as Prentice Hall

Chapter 5 5-3

Inventory 5,000

To eliminate unrealized profit in ending inventory.



SOLUTIONS TO EXERCISES

Solution E5-1

1 a 5 c2 d 6 a3 a 7 a4 c 8 c

Solution E5-2 [AICPA adapted]

1 a

2 cUnrealized 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 cCombined cost of sales of $750,000 less $250,000 intercompany sales

Solution 5-3

1 dPhilly's separate income (in thousands) $1,000Add: Share of Silvio's income ($500 ´ 100%) 500

Add: Realization of profit deferred in 2009

$1,500 - ($1,500/150%) 500

Less: Unrealized profit in 2010 inventory

$1,200 - ($1,200/150%) (400 )

Controlling share of consolidated net income $1,600

2 dCombined sales $1,400Less: Intercompany sales (50 )

Consolidated sales $1,350

3 cCombined cost of sales $ 680Less: Intercompany purchases (50)

Less: Unrealized profit in beginning inventory (4)

Add: Unrealized profit in ending inventory 10


Chapter 5 5-5

Consolidated cost of sales $ 636



Solution E5-4

1 bPride's share of Sedita's income ($60,000 ´ 80%) $ 48,000Less: Unrealized profit in ending inventory

($20,000 ´ 50% unsold ´ 80% owned) (8,000 )

Income from Sedita $ 40,000

2 dCombined cost of sales $ 450,000Less: Intercompany sales (100,000)

Add: Unrealized profit in ending inventory 10,000

Consolidated cost of sales $ 360,000

3 bReported income of Sedita $ 60,000Unrealized profit (10,000 )

Sedita's realized income 50,000

Noncontrolling interest percentage 20 %

Noncontrolling interest share $ 10,000

Solution E5-5

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

Consolidated sales $1,400,000

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

Unrealized profit in ending inventory

$125,000 - ($125,000/125%) $ 25,000

3 bCombined cost of goods sold $1,440,000Less: Intercompany sales (400,000)


Chapter 5 5-7

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 aPatti's separate income $200,000Add: Income from Susan (below) 144,550


Susan's reported income $200,000Less: Patents amortization (20,000)

Add: Unrealized profit in beginning inventory

[$112,500 - ($112,500/150%)] 37,500

Less: Unrealized profit in ending inventory

[$33,000 - ($33,000/150%)] (11,000 )

Susan’s adjusted and realized income $206,500

Patti’s 70% controlling share of Susan’s realized income $144,550Noncontrolling interest share (30%) $ 61,950

2 cPackman'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


3 bSantini's reported net income $300,000Add: Realized profit in beginning inventory

$150,000 - ($150,000/1.25) 30,000

Less: Deferred profit in ending inventory

$200,000 - ($200,000/1.25) (40,000 )

Income from Santini $290,000


Chapter 5 5-9

Parnell’s 75% controlling share of Santini’s income $217,500

Noncontrolling interest share (25%) $ 72,500

Solution E5-7

(in thousands) 2009 2010 2011Pansy's separate income $300 $400 $350

Add: 80% of Sheridan's reported income 400 440 380

Add: Realization of profits in

beginning inventory 30 40

Less: Unrealized profits in ending

Inventory (30 ) (40 ) (20 )

Controlling share of consolidated NI $670 $830 $750



Solution E5-8

Pycus Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 2009(in thousands)

Sales ($400 + $100 - $40 intercompany sales) $ 460Cost of sales ($200 + $60 - $40 intercompany

purchases + $10 unrealized profit in ending inventory) (230 )

Gross profit 230

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

Cnsolidated net income 100

Less: Noncontrolling interest share ($10 ´ 20%) (2 )

Controlling share of consolidated net income $ 98

Solution E5-9

1 Noncontrolling interest shareSeven's reported net income $ 50,000Add: Intercompany profit from upstream sales in

beginning inventory 5,000

Less: Intercompany profit from upstream sales in

ending inventory (10,000 )

Seven’s adjusted and realized income $ 45,000

Noncontrolling interest share (40%) $ 18,000

2 Consolidated salesCombined sales $1,250,000Less: Intercompany sales 100,000

Consolidated sales $1,150,000

Consolidated cost of salesCombined cost of sales $ 650,000Less: Intercompany sales (100,000)

Add: Intercompany profit in ending inventory 10,000

Less: Intercompany profit in beginning inventory (5,000 )


Chapter 5 5-11


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 SubsidiaryConsolidated Income Statement

December 31, 2011(in thousands)

Sales ($1,000 + $500 - $90 intercompany) $1,410Cost of sales ($400 + $250 - $90 intercompany -

$10 unrealized profit in beginning inventory + $15

unrealized profit in ending inventory (565 )

Gross profit 845

Depreciation expense (170)

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

Total consolidated income 525

Less: Noncontrolling interest share ($150 + $10 profit

in beginning inventory - $15 profit in end. inventory) ´ 20% (29 )

Controlling interest share of consolidated net income $ 496

Supporting computations

Cost of investment in Saiki at January 1, 2010 $ 600

Implied fair value of Saiki ($600 / 80%) $ 750

Book value of Saiki (700 )Goodwill $ 50

Solution E5-11

1 bIncome as reported $ 200,000Add: 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


Chapter 5 5-13

Percent ownership 60 %

Income from Suey $ 96,000

2 cSuey's equity as reported ($3,400,000 + $2,100,000) $5,500,000Less: Unrealized profit in ending inventory (60,000 )

Realized equity 5,440,000

Noncontrolling share 40 %

Noncontrolling interest December 31, 2011 $2,176,000

3 bRealized equity $5,440,000Controlling share 60 %

Investment balance December 31, 2011 $3,264,000

Note: The excess fair value 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 E5-12

Pullen Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 2009

Sales ($1,380,000 - $120,000 intercompany sales) $1,260,000Cost 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 share [$40,000 - ($12,000 ´ .2)] (37,600 )

Controlling share of 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 SubsidiaryConsolidated Statement of Income and Retained Earnings


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

Consolidated net income 256,000

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

Controlling share of consolidated net income 246,400

Add: Beginning consolidated retained earnings 369,200

Less: Dividends for the year (100,000 )


Chapter 5 5-15

Consolidated retained earnings December 31 $ 515,600

Solution P5-2

1 Consolidated cost of sales — 2011Combined 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 )


2 Noncontrolling interest share — 2011Slam'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 share $ 13,800



Solution P5-2 (continued)

3 Consolidated Controlling share of NI— 2011Consolidated 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 share (13,800 )


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


4 Noncontrolling interest at December 31, 2011Equity of Slam December 31, 2011 $ 520,000 Less: Unrealized profit in ending inventory (24,000 )


Noncontrolling interest December 31 $ 49,600

Solution P5-3

1 Inventories appearing in consolidated balance sheet at December 31, 2010Beginning 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 $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


Chapter 5 5-17

2 Inventories appearing in consolidated balance sheet at December 31, 2011Ending 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 $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 2009 2010 201175% of Stuff's net income $ 300,000 $ 337,500 $ 262,500

Unrealized profit in December 31,

2009 inventory (downstream)

($200,000 ´ 1/2) ´ 100% (100,000) 100,000


2010 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


2009 inventory (100,000) 100,000


2010 inventory (100,000 ) 100,000

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

Less: Noncontrolling interest share

2009 $400,000 ´ 25% (100,000)

2010 ($450,000 - $100,000) ´ 25% (87,500)

2011 ($350,000 + $100,000) ´ 25% (112,500 )


Chapter 5 5-19

Controlling share of net income $2,000,000 $2,062,500 $2,337,500



Solution P5-5Pane Corporation and SubsidiaryConsolidation Working Papers


Pane 100% SealAdjustments andEliminations

ConsolidatedStatements

Income StatementSales $ 800 $ 400 a 120 $1,080

Income from Seal 102 d 102

Cost of sales 400* 200* b 12 a 120c 20

472*

Depreciation expense 110* 40* 150*

Other expenses 192* 60* f 6 258*

Net income $ 200 $ 100 $ 200

Retained Earnings

Retained earnings — Pane $ 600 600

Retained earnings — Seal $ 380 e 380

Net income 200ü 100ü 200

Dividends 100* 50* d 50 100*

Retained earnings December 31 $ 700 $ 430 $ 700

Balance SheetCash $ 54 $ 37 $ 91

Receivables — net 90 60 g 17 133

Inventories 100 80 b 12 168

Other assets 70 90 160

Land 50 50 100

Buildings — net 200 150 350

Equipment — net 500 400 900

Investment in Seal 736 c 20 d 52e 704


Chapter 5 5-21

Patents e 24 f 6 18

$1,800 $ 867 $1,920

Accounts payable $ 160 $ 47 g 17 $ 190

Other liabilities 340 90 430

Common stock, $10 par 600 300 e 300 600

Retained earnings 700ü 430ü 700

$1,800 $ 867 $1,920

Supporting computationsUnrealized profit in beginning inventory ($40,000 ´ 1/2) = $20,000Unrealized 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 Papersfor the year ended December 31, 2010

(in thousands)

Patty Sue 75%Adjustments andEliminations


Income StatementSales $ 600 $ 400 a 130 $ 870

Income from Sue 102.5 d 102.5

Cost of sales 270* 210* b 20 a 130c 10

360*

Operating expenses 145* 40* 185 *

Consolidated net income $ 325

Noncontrolling int.share f 37.5 37.5*

Controlling share of NI $ 287.5ü $ 150ü $ 287.5

Retained Earnings

Retained earnings — Patty $ 182.5 $ 182.5

Retained earnings — Sue $ 90 e 90

Controlling share of NI 287.5ü 150ü 287.5

Dividends 150* 50* d 37.5f 12.5 150*



Accounts receivable 165 100 g 15 250

Dividends receivable 15 h 15

Inventories 60 80 b 20 120

Land 80 50 130




Chapter 5 5-23

Investment in Sue 385 c 10 d 65e 330

Goodwill e 200 200

$1,220 $ 500 $1,485

Accounts payable $ 225 $ 100 g 15 $ 310

Dividends payable 70 20 h 15 75




$1,220 $ 500

Noncontrolling interest January 1 e 110

Noncontrolling interest December 31 f 25 135

$1,485

* DeductSupporting computationsInvestment in Sue at January 1, 2010 $300,000Implied fair value of Sue ($300,000 / 75%) $400,000

Book value of Sue 200,000 Goodwill $200,000



Solution P5-7

Preliminary computationsInvestment cost $270,000Implied fair value of Susan $300,000

Less: Book value of Susan 250,000 Patents $ 50,000

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

Upstream salesUnrealized profit in December 31, 2009 inventory of Poly $28,000 - ($28,000 ¸ 1.4) = $8,000Unrealized profit in December 31, 2010 inventory of Poly $42,000 - ($42,000 ¸ 1.4) = $12,000

Income from SusanSusan's reported net income $100,000Less: Patents amortization (5,000)

Less: Unrealized profit in ending inventory (12,000)

Add: Unrealized profit in beginning inventory 8,000

Susan’s adjusted and realized income $ 91,000

Poly’s 90% controlling share of Susan’s income $ 81,90010% noncontrolling interest share of Susan’s income $ 9,100

Investment balanceInitial investment cost $270,000Increase in Susan's net assets from December 31, 2008

to December 31, 2010 ($70,000 ´ 90%) 63,000

Patent amortization for 2 years (90%) ( 9,000)

Unrealized profit in December 31, 2010 inventory (10,800 )

Investment balance December 31, 2010 $313,200


Chapter 5 5-25


Poly Corporation and SubsidiaryConsolidation Working Papers


Poly Susan 90%Adjustments andEliminations


Income StatementSales $ 819,000 $ 560,000 a 560,000 $ 819,000

Income from Susan 81,900 d 81,900

Cost of sales 546,000* 400,000* b 12,000 a 560,000c 8,000

390,000*

Other expenses 154,400* 60,000* f 5,000 219,400 *

Consolidated net income $ 209,600

Noncontrolling int.share h 9,100 9,100*

Controlling share of NI $ 200,500 $ 100,000 $ 200,500

Retained Earnings

Retained earnings — Poly $ 120,000 $ 120,000

Retained earnings — Susan $ 70,000 e 70,000

Controlling share of NI 200,500ü 100,000ü 200,500

Dividends 100,000* 50,000* d 45,000h 5,000 100,000*

Retained earnings December 31 $ 220,500 $ 120,000 $ 220,500

Balance SheetCash $ 75,300 $ 50,000 $ 125,300

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 313,200 c 7,200 d 36,900e 283,500

Patents e 45,000 f 5,000 40,000

$ 790,500 $ 450,000 $ 945,300



Current liabilities $ 170,000 $ 130,000 g 10,000 $ 290,000

Capital stock 400,000 200,000 e 200,000 400,000

Retained earnings 220,500ü 120,000ü 220,500

$ 790,500 $ 450,000

Noncontrolling interest January 1 c 800 e 31,500

Noncontrolling interest December 31 h 4,100 34,800

$ 945,300

* Deduct


Chapter 5 5-27

Solution P5-8

Pan Corporation and SubsidiaryConsolidation Working Papers


Pan100%Sal

Adjustments andEliminations


Income StatementSales $ 800 $ 400 a 120 $1,080

Income from Sal 108 d 108

Cost of sales 400* 200* b 12 a 120c 20

472*

Depreciation expense 110* 40* 150*

Other expenses 192* 60* 252*

Net income $ 206 $ 100 $ 206

Retained Earnings

Retained earnings — Pan $ 606 606

Retained earnings — Sal $ 380 e 380

Net income 206ü 100ü 206

Dividends 100* 50* D 50 100*



Receivables — net 90 60 F 17 133

Inventories 100 80 B 12 168

Other assets 70 90 160

Land 50 50 100





Investment in Sal 748 c 20 d 58e 710

Goodwill e 30 30

$1,812 $ 867 $1,932

Accounts payable $ 160 $ 47 f 17 $ 190



Retained earnings 712 430 712

$1,812 $ 867 $1,932

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


Chapter 5 5-29

Solution P5-9 Pat Corporation and SubsidiaryConsolidation Working Papers


Pat Sun 75%Adjustments and Eliminations


Income StatementSales $ 600,000 $ 400,000 a 130,000 $ 870,000

Income from Sun 90,000 d 90,000

Cost of sales 270,000* 210,000* b 20,000 a 130,000c 10,000

360,000*

Operating expenses 145,000* 40,000* f 20,000 205,000 *

Consolidated net income $ 305,000

Noncontrolling int.share i 30,000 30,000*

Controlling share of NI $ 275,000 $ 150,000 $ 275,000

Retained EarningsRetained earnings — Pat $ 172,500 $ 172,500

Retained earnings — Sun $ 90,000 e 90,000

Controlling share of NI 275,000ü 150,000ü 275,000

Dividends 150,000* 50,000* d 37,500i 12,500 150,000*

Retained earnings December 31 $ 297,500 $ 190,000 $ 297,500

Balance SheetCash $ 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 362,500 c 10,000 d 52,500e 320,000



Patents e 180,000 f 20,000 160,000

$1,197,500 $ 500,000 $1,445,000

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 297,500ü 190,000ü 297,500

$1,197,500 $ 500,000

Noncontrolling interest January 1 e 100,000

Noncontrolling interest December 31 i 17,500 117,500

$1,445,000

* DeductSupporting computationsInvestment in Sun at January 1, 2010 $300,000Implied fair value of Sun ($300,000 / 75%) $400,000

Book value of Sun 200,000 Patents (10 year amortization) $200,000


Chapter 5 5-31

Solution P5-10

Preliminary computationsInvestment cost $270,000Implied fair value of San ($270,000 / 90%) $300,000

Less: Book value of San 250,000 Goodwill $ 50,000

Upstream salesUnrealized profit in December 31, 2011 inventory of Po $28,000 - ($28,000 ¸ 1.4) = $8,000Unrealized profit in December 31, 2012 inventory of Po $42,000 - ($42,000 ¸ 1.4) = $12,000

Income from SanSan's reported net income $100,000Less: Unrealized profit in ending inventory (12,000)

Add: Unrealized profit in beginning inventory 8,000

San’s adjusted and realized income $ 96,000

Po’s 90% controlling interest share of San’s income $ 86,40010% noncontrolling interest share of San’s income $ 9,600

Investment balanceInitial investment cost $270,000Increase in San's net assets from December 31, 2009

to December 31, 2012 ($70,000 ´ 90%) 63,000

Unrealized profit in December 31, 2012 inventory (90%) (10,800 )

Investment balance December 31, 2012 $322,200




Po Corporation and SubsidiaryConsolidation Working Papers


Po San 90%Adjustments andEliminations


Income StatementSales $ 819 $ 560 a 560 $ 819

Income from San 86.4 d 86.4

Cost of sales 546* 400* b 12 a 560c 8

390*

Other expenses 154.4* 60* 214.4 *

Consolidated net income $ 214.6

Noncontrolling int.share f 9.6 9.6*

Controlling share of NI $ 205 $ 100 $ 205

Retained Earnings

Retained earnings — Po $ 125 $ 125

Retained earnings — San $ 70 e 70

Controlling share of NI 205ü 100ü 205

Dividends 100* 50* d 45f 5

100*


Balance SheetCash $ 75.8 $ 50 $ 125.8

Inventory 42 80 B 12 110

Other current assets 60 20 G 10 70

Plant assets — net 300 300 600

Investment in San 322.2 c 7.2 d 41.4e 288

Goodwill e 50 50

$ 800 $ 450 $ 955.8


Chapter 5 5-33

Current liabilities $ 170 $ 130 g 10 $ 290

Capital stock 400 200 e 200 400


$ 800 $ 450

Noncontrolling interest January 1 c .8 e 32

Noncontrolling interest December 31 f 4.6 35.8

$ 955.8

* Deduct


ch05 beams10e sm

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liabilities

noncontrolling

consolidated

consolidated

supporting

noncontrolling

sales depreciation

share controlling