Advanced Accounting 10th Edition Fischer Test Bank

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Advanced Accounting 10th Edition Fischer Test Bank

Description

Chapter 4Intercompany Transactions: Merchandise, Plant Assets, and Notes

MULTIPLE CHOICE

1. Schiff Company owns 100% of the outstanding common stock of the Viel Company. During 20X1, Schiff sold merchandise to Viel that Viel, in turn, sold to unrelated firms. There were no such goods in Viels ending inventory. However, some of the intercompany purchases from Schiff had not yet been paid. Which of the following amounts will be incorrect in the consolidated statements if no adjustments are made?
a. inventory, accounts payable, net income
b. inventory, sales, cost of goods sold, accounts receivable
c. sales, cost of goods sold, accounts receivable, accounts payable.
d. accounts receivable, accounts payable

ANS: C DIF: M OBJ: 4-1 | 4-2

2. The material sale of inventory items by a parent company to an affiliated company
a. enters the consolidated revenue computation only if the transfer was the result of arms length bargaining.
b. affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
c. does not result in consolidated income until the merchandise is sold to outside entities.
d. does not require a working paper adjustment if the merchandise was transferred at cost.

ANS: C DIF: E OBJ: 4-1 | 4-2

3. Williard Corporation regularly sells inventory items to its subsidiary, Petty, Inc. If unrealized profits in Pettys 20X1 year-end inventory exceed the unrealized profits in its 20X2 year-end inventory, 20X2 combined
a. cost of sales will be less than consolidated cost of sales in 20X2.
b. gross profit will be greater than consolidated gross profit in 20X2.
c. sales will be less than consolidated sales in 20X2.
d. cost of sales will be greater than consolidated cost of sales in 20X2.

ANS: D DIF: D OBJ: 4-1 | 4-2

4. Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds. The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers. In preparing consolidated statements for Reynolds Company and Subsidiary Sally Corporation,
a. the intercompany transactions can be ignored because the transfer price represents arms length bargaining.
b. any unrealized profit from intercompany sales remaining in Reynolds ending inventory must be offset against the unrealized profit in Reynolds beginning inventory.
c. any unrealized profit on the intercompany transactions in Sallys ending inventory is eliminated in its entirety.
d. eighty percent of any unrealized profit on the intercompany transactions in Sallys ending inventory is eliminated.

ANS: C DIF: M OBJ: 4-1 | 4-2
5. Cattle Company sold inventory with a cost of $40,000 to its 90%-owned subsidiary, Range Corp., for $100,000 in 20X1. Range resold $75,000 of this inventory for $100,000 in 20X1. Based on this information, the amount of inventory reported on the consolidated financial statements at the end of 20X1 is ____.
a. $10,000
b. $18,000
c. $21,000
d. $30,000

ANS: A DIF: M OBJ: 4-1 | 4-2

6. Diller owns 80% of Lake Company common stock. During October 20X7, Lake sold merchandise to Diller for $300,000. On December 31, 20X7, one-half of this merchandise remained in Dillers inventory. For 20X7, gross profit percentages were 30% for Diller and 40% for Lake. The amount of unrealized profit in the ending inventory on December 31, 20X7 that should be eliminated in consolidation is ____.
a. $80,000
b. $60,000
c. $32,000
d. $30,000

ANS: B DIF: M OBJ: 4-1 | 4-2

7. Perry, Inc. owns a 90% interest in Brown Corp. During 20X6, Brown sold $100,000 in merchandise to Perry at a 30% gross profit. Ten percent of the goods are unsold by Perry at year end. The noncontrolling interest will receive what gross profit as a result of these sales?
a. $0
b. $2,700
c. $3,000
d. $27,000

ANS: B DIF: M OBJ: 4-1 | 4-2

8. On January 1, 20X1 Bullock, Inc. sells land to its 80%-owned subsidiary, Humphrey Corporation, at a $20,000 gain. The land is still held by Humphrey on December 31, 20X3. What is the effect of the intercompany sale of land on 20X3 consolidated net income?
a. Consolidated net income will be the same as it would have been had the sale not occurred.
b. Consolidated net income will be $20,000 less than it would have been had the sale not occurred.
c. Consolidated net income will be $16,000 less than it would have been had the sale not occurred.
d. Consolidated net income will be $20,000 greater than it would have been had the sale not occurred.

ANS: A DIF: E OBJ: 4-3

9. Emron Company owns a 100% interest in the common stock of the Dietz Company. On January 1, 20X2, Emron sold Dietz a fixed asset that Dietz will use over a 5-year period. The asset was sold at a $5,000 profit. In the consolidated statements, this profit will
a. not be recorded.
b. be recognized over 5 years.
c. be recognized in the year of sale.
d. be recognized when the asset is resold to outside parties at the end of its period of use.

ANS: B DIF: M OBJ: 4-3
10. Pease Corporation owns 100% of Sade Corporation common stock. On January 2, 20X6, Pease sold machinery with a carrying amount of $30,000 to Sade for $50,000. Sade is depreciating the acquired machinery over a 5-year life using the straight-line method. The related net adjustments to compute the 20X6 and 20X7 consolidated income before income tax would be an increase (decrease) of
20X6 20X7
a. $(16,000) $4,000
b. $(16,000) $0
c. $(20,000) $4,000
d. $(20,000) $0

ANS: A DIF: D OBJ: 4-3

11. On January 1, 20X1, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly-owned subsidiary. Poe paid $1,100,000 for this machine. On the sale date, accumulated depreciation was $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy that Saxe continued. In Poes December 31, 20X1, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as
Cost Accumulated Depreciation
a. $1,100,000 $300,000
b. $1,100,000 $290,000
c. $ 900,000 $ 40,000
d. $ 850,000 $ 42,500

ANS: A DIF: M OBJ: 4-3

12. Porch Company owns a 90% interest in the Screen Company. Porch sold Screen a milling machine on January 1, 20X1, for $50,000 when the book value of the machine on Porchs books was $40,000. Porch financed the sale with Screen signing a 3-year, 8% interest, note for the entire $50,000. The machine will be used for 10 years and depreciated using the straight-line method. The following amounts related to this transaction were located on the companies trial balances:
Interest Revenue $4,000
Interest Expense $4,000
Depreciation Expense $5,000

Based upon the information related to this transaction what will be the amounts eliminated in preparing the 20X1 consolidated financial statements?
Interest Revenue Interest Expense Depreciation Expense
a. 4,000 4,000 5,000
b. 4,000 4,000 1,000
c. 3,600 3,600 900
d. 3,600 3,600 4,500

ANS: B DIF: M OBJ: 4-3

13. On 1/1/X1 Peck sells a machine with a $20,000 book value to its subsidiary Shea for $30,000. Shea intends to use the machine for 4 years. On 12/31/X2 Shea sells the machine to an outside party for $14,000. What amount of gain or (loss) for the sale of assets is reported on the consolidated financial statements?
a. loss of $6,000
b. loss of $1,000
c. gain of $4,000
d. gain of $14,000

ANS: C DIF: M OBJ: 4-3

Scenario 4-1
Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On January 1, 20X2, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated party for $100,000 on September 26, 20X3.

14. Refer to Scenario 4-1. The land will be included in the December 31, 20X2 consolidated balance sheet of Pennie, Inc. and Subsidiary at ____.
a. $48,000
b. $60,000
c. $72,000
d. $90,000

ANS: B DIF: M OBJ: 4-3

15. Refer to Scenario 4-1. The gain from sale of land that will appear in the consolidated income statements for 20X2 and 20X3, respectively, is ____.
a. $0 and $10,000
b. $0 and $40,000
c. $30,000 and $10,000
d. $30,000 and $40,000

ANS: B DIF: E OBJ: 4-3

16. Company P owns 100% of the common stock of Company S. Company P is constructing an asset for Company S that will be used in Company Ss manufacturing operations over a 5-year period. The asset was 50% complete at the end of 20X1 and was completed on December 31, 20X2. Company P is recording the construction under the percentage of completion method. The asset was put into use by Company S on January 1, 20X3. The profit on the asset was estimated to be $50,000. Actual results complied to the estimate. On the consolidated statements, the profit recognized will be
20X1 20X2 20X3 20X4 20X7
a. 0 50,000 0 0
b. 25,000 25,000 0 0
c. 0 0 10,000 10,000/year
d. 0 0 50,000 0

ANS: C DIF: D OBJ: 4-4

17. The following accounts were noted in reviewing the trial balance for Parent Co. and Subsidiary Corp.:
Assets under Construction
Contracts Receivable
Billings on Construction in Progress
Earned Income on Long-Term Contracts
Contracts Payable
Which of these accounts do you expect to eliminate when producing Parent Co. consolidated financial statements?
a. Assets under Construction; Billings on Construction in Progress; Earned Income on Long-Term Contracts
b. Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts
c. Assets under Construction; Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable
d. Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable

ANS: D DIF: E OBJ: 4-4

18. During 20X3, a parent company billed its 100%-owned subsidiary for computer services at the rate of $1,000 per month. At year end, one months bill remained unpaid. As a part of the consolidation process, net income
a. should be reduced $12,000.
b. should be reduced $1,000.
c. needs no adjustment.
d. needs an adjustment, but the amount is not provided by this information.

ANS: C DIF: E OBJ: 4-5

19. On January 1, 20X1, a parent loaned $30,000 to its 100%-owned subsidiary on a 5-year, 8% note. The note requires a principal payment at the end of each year of $6,000 plus payment of interest accrued to date. The following accounts require adjustment in the consolidation process:

Controlling
Assets Debt Retained Earnings
a. Yes Yes Yes
b. No No Yes
c. Yes Yes No
d. No No No

ANS: C DIF: M OBJ: 4-5

20. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp. Based upon the following information what amount does Phelps Co. record as subsidiary income?

Phelps internally generated income: $250,000
Shore internally generated income: $ 50,000
Intercompany profit on Shore beginning inventory: $ 10,000
Intercompany profit on Shore ending inventory: $ 15,000

a. $50,000
b. $44,000
c. $40,000
d. $36,000

ANS: D DIF: M OBJ: 4-6

PROBLEM

1. Account balances are as of December 31, 20X3 except where noted.

Pipe Match
Selected Income Statement Amounts:
Sales $710,000 $530,000
Cost of Goods Sold 490,000 370,000
Gain on Sale of Equipment 21,000
Earnings from Investment in Subsidiary 61,000
Interest Revenue 2,880
Interest Expense 2,880
Depreciation 25,000 20,000

Selected Balance Sheet Amounts {Debits/(Credits)}:
Cash $ 50,000 $ 15,000
Notes Receivable 36,000
Inventories 229,000 150,000
Equipment 440,000 360,000
Accumulated Depreciation (200,000) (120,000)
Investment in Shaw 189,000
Notes Payable (36,000)
Common Stock (100,000) (10,000)
Additional Paid-In-Capital (250,000) (40,000)
Retained Earnings (402,000) (140,000)

Selected Statement of Retained Earnings Amounts:
Beginning Balance, January 1, 20X3 $272,000 $100,000
Net Income 210,000 70,000
Dividends Paid 80,000 30,000

Additional Information:
On January 2, 20X3 Pipe purchased 90% of Match for $155,000. On that date Matchs shareholders equity equaled $150,000 and the fair values of Matchs assets and liabilities equaled their carrying amounts. Excess, if any, is attributed to patents and is amortized over 10 years.
On September 4, 20X3 Match paid cash dividends of $30,000.
On January 3, 20X3 Match sold equipment with an original cost of $30,000 and a carrying value of $15,000 to Pipe for $36,000. The equipment had a remaining useful life of 3 years. Straight-line depreciation is used.
On January 4, 20X3 Match signed an 8% Note Payable. All interest payments were made as of December 31, 20X3.
During the year Match sold merchandise to Pipe for $60,000, which included a profit of $20,000. At year end 50% of the merchandise remained in Pipes inventory.

Required:

1. Which method is Pipe using to account for the investment in Match? How do you know?

2. What elimination entry(ies) are associated with the elimination of intercompany profits due to the sale of merchandise?

3. What elimination entry(ies) are necessary with the sale of equipment by Match to Pipe?

4. What elimination entry(ies) are associated with the note to Match? Why are the entry(ies) made?

ANS:
1. Sophisticated Equity:
Match Net Income $63,000
Amortization of patent (2,000)
Earnings from Investment in subsidiary $61,000

2. Sales 60,000
Cost of Goods Sold 60,000

Cost of Goods Sold 10,000
Inventory (50% $20,000) 10,000

3. Gain on Sale of Equipment 21,000
Equipment 21,000

Accumulated Depreciation 7,000
Depreciation Expense ($21,000 3 years) 7,000

4. Notes Payable 36,000
Notes Receivable 36,000

Interest Revenue 2,880
Interest Expense 2,880

The note receivable and payable, and the associated interest revenue and expense should not be included on the consolidated financial statements.

DIF: E OBJ: 4-1 | 4-2 | 4-3 | 4-5 | 4-6

2. On January 1, 20X1, Prange Company acquired 100% of the common stock of Seaman Company for $600,000. On this date Seaman had total owners equity of $400,000. Any excess of cost over book value is attributable to a patent, which is to be amortized over 10 years.

During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method.

On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seamans gross profit on all sales is 40%.

On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December.

Required:

Complete the Figure 4-1 worksheet for consolidated financial statements for the year ended December 31, 20X2.

Figure 4-1
Trial Balance Eliminations and
Prange Seaman Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 105,000
Other Current Assets 207,000 325,000
Investment in Sub. Company 710,000

Land 140,000 80,000
Buildings and Equipment 315,000 340,000
Accumulated Depreciation (220,000) (130,000)
Patent 20,000

Current Liabilities (150,000) (70,000)
Bonds Payable (100,000)
Other Long-Term Liabilities (200,000) (40,000)

Common StockP Co. (200,000)
Other Paid in CapitalP Co. (100,000)
Retained EarningsP Co. (492,000)

Common StockS Co. (150,000)
Other Paid in CapitalS Co. (100,000)
Retained EarningsS Co. (200,000)

Net Sales (600,000) (380,000)
Cost of Goods Sold 360,000 228,000

Operating Expenses 140,000 62,000

Subsidiary Income (90,000)
Dividends DeclaredP Co. 60,000
Dividends DeclaredS Co. 30,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company

Land
Buildings and Equipment
Accumulated Depreciation
Patent

Current Liabilities
Bonds Payable
Other Long-Term Liabilities

Common StockP Co.
Other Paid in CapitalP Co.
Retained EarningsP Co.

Common StockS Co.
Other Paid in CapitalS Co.
Retained EarningsS Co.

Net Sales
Cost of Goods Sold

Operating Expenses

Subsidiary Income
Dividends DeclaredP Co.
Dividends DeclaredS Co.

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31

ANS:
For the worksheet solution, please refer to Answer 4-1.

Answer 4-1
Trial Balance Eliminations and
Prange Seaman Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 105,000 (EI) 8,000
Other Current Assets 207,000 325,000 (IA) 20,000
Investment in Sub. Company 710,000 (CY) 60,000
(EL) 450,000
(D) 200,000

Land 140,000 80,000
Buildings and Equipment 315,000 340,000
Accumulated Depreciation (220,000) (130,000)
Patent 20,000 (D) 200,000 (A) 40,000

Current Liabilities (150,000) (70,000) (IA) 20,000
Bonds Payable (100,000)
Other Long-Term Liabilities (200,000) (40,000)

Common StockP Co. (200,000)
Other Paid in CapitalP Co. (100,000)
Retained EarningsP Co. (492,000) (A) 20,000
(BI) 12,000

Common StockS Co. (150,000) (EL) 150,000
Other Paid in CapitalS Co. (100,000) (EL) 100,000
Retained EarningsS Co. (200,000) (EL) 200,000

Net Sales (600,000) (380,000) (IS) 100,000
Cost of Goods Sold 360,000 228,000 (EI) 8,000 (BI) 12,000
(IS) 100,000
Operating Expenses 140,000 62,000 (A) 20,000

Subsidiary Income (90,000) (CY) 90,000
Dividends DeclaredP Co. 60,000
Dividends DeclaredS Co. 30,000 (CY) 30,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 920,000 920,000
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 197,000
Other Current Assets 512,000
Investment in Sub. Company 0

Land 220,000
Buildings and Equipment 655,000
Accumulated Depreciation (350,000)
Patent 180,000

Current Liabilities (200,000)
Bonds Payable (100,000)
Other Long-Term Liabilities (240,000)

Common StockP Co. (200,000)
Other Paid in CapitalP Co. (100,000)
Retained EarningsP Co. (460,000)

Common StockS Co.
Other Paid in CapitalS Co.
Retained EarningsS Co.

Net Sales (880,000)
Cost of Goods Sold 484,000

Operating Expenses 222,000

Subsidiary Income 0
Dividends DeclaredP Co. 60,000
Dividends DeclaredS Co.

Consolidated Net Income (174,000)
NCI 0
Controlling Interest 174,000 (174,000)
Total NCI 0
Ret. Earn. Contr. Int. 12-31 574,000 (574,000)
0

Eliminations and Adjustments:

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account.

(EL) Eliminate the Seaman Company equity balances at the beginning of the year against the investment account.

(D) Distribute the $200,000 excess of cost over book value to patent.

(A) Amortize the patent over 10 years, with $20,000 for 20X1 charged to retained earnings, and $20,000 for 20X2 to operating expenses.

(BI) Eliminate the $12,000 of gross profit in the beginning inventory.

(IS) Eliminate the entire intercompany sales of $100,000.

(EI) Eliminate the $8,000 of gross profit in the ending inventory.

(IA) Eliminate the $20,000 intercompany accounts receivable and payable.

DIF: M OBJ: 4-2 MSC: 100%; simple equity

3. On January 1, 20X1, Prange Company acquired 80% of the common stock of Seaman Company for $500,000. On this date Seaman had total owners equity of $400,000. Any excess of cost over book value is attributable to patent, which is to be amortized over 20 years.

During 20X1 and 20X2, Prange has appropriately accounted for its investment in Seaman using the simple equity method.

On January 1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2, Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by Prange on December 31, 20X2. Seamans gross profit on all sales is 40%.

On December 31, 20X2, Prange still owes Seaman $20,000 for merchandise acquired in December.

Required:

Complete the Figure 4-2 worksheet for consolidated financial statements for the year ended December 31, 20X2.
Figure 4-2
Trial Balance Eliminations and
Prange Seaman Adjustments
Account Titles Company Company Debit
Debit Credit
Inventory, December 31 100,000 105,000
Other Current Assets 285,000 325,000
Investment in Sub. Company 588,000

Land 140,000 80,000
Buildings and Equipment 315,000 340,000
Accumulated Depreciation (252,000) (130,000)
Patent 60,000

Current Liabilities (150,000) (70,000)
Bonds Payable (100,000)
Other Long-Term Liabilities (200,000) (40,000)

Common StockP Co. (200,000)
Other Paid in CapitalP Co. (100,000)
Retained EarningsP Co. (474,000)

Common StockS Co. (150,000)
Other Paid in CapitalS Co. (100,000)
Retained EarningsS Co. (200,000)

Net Sales (600,000) (380,000)
Cost of Goods Sold 360,000 228,000

Operating Expenses 140,000 62,000

Subsidiary Income (72,000)
Dividends DeclaredP Co. 60,000
Dividends DeclaredS Co. 30,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company

Land
Buildings and Equipment
Accumulated Depreciation
Patent

Current Liabilities
Bonds Payable
Other Long-Term Liabilities

Common StockP Co.
Other Paid in CapitalP Co.
Retained EarningsP Co.

Common StockS Co.
Other Paid in CapitalS Co.
Retained EarningsS Co.

Net Sales
Cost of Goods Sold

Operating Expenses

Subsidiary Income
Dividends DeclaredP Co.
Dividends DeclaredS Co.

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31

ANS:
For the worksheet solution, please refer to Answer 4-2.
Answer 4-2
Trial Balance Eliminations and
Prange Seaman Adjustments
Account Titles Company Company Debit
Debit Credit
Inventory, December 31 100,000 105,000 (EI) 8,000
Other Current Assets 285,000 325,000 (IA) 20,000
Investment in Sub. Company 588,000 (CY) 48,000
(EL) 360,000
(D) 180,000

Land 140,000 80,000
Buildings and Equipment 315,000 340,000
Accumulated Depreciation (252,000) (130,000)
Patent 60,000 (D) 225,000 (A) 22,500

Current Liabilities (150,000) (70,000) (IA) 20,000
Bonds Payable (100,000)
Other Long-Term Liabilities (200,000) (40,000)

Common StockP Co. (200,000)
Other Paid in CapitalP Co. (100,000)
Retained EarningsP Co. (474,000) (A) 9,000
(BI) 9,600

Common StockS Co. (150,000) (EL) 120,000
Other Paid in CapitalS Co. (100,000) (EL) 80,000
Retained EarningsS Co. (200,000) (EL) 160,000 (D) 45,000
(BI) 2,400
(A) 2,250
Net Sales (600,000) (380,000) (IS) 100,000
Cost of Goods Sold 360,000 228,000 (EI) 8,000 (BI) 12,000
(IS) 100,000
Operating Expenses 140,000 62,000 (A) 11,250

Subsidiary Income (72,000) (CY) 72,000
Dividends DeclaredP Co. 60,000
Dividends DeclaredS Co. 30,000 (CY) 24,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 843,500 843,500
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 197,000
Other Current Assets 590,000
Investment in Sub. Company 0

Land 220,000
Buildings and Equipment 655,000
Accumulated Depreciation (382,000)
Patent 262,500

Current Liabilities (200,000)
Bonds Payable (100,000)
Other Long-Term Liabilities (240,000)

Common StockP Co. (200,000)
Other Paid in CapitalP Co. (100,000)
Retained EarningsP Co. (455,400)

Common StockS Co. (30,000)
Other Paid in CapitalS Co. (20,000)
Retained EarningsS Co. (80,350)

Net Sales (880,000)
Cost of Goods Sold 484,000

Operating Expenses 213,250

Subsidiary Income 0
Dividends DeclaredP Co. 60,000
Dividends DeclaredS Co. 6,000

Consolidated Net Income (182,750)
NCI 16,550 (16,550)
Controlling Interest 166,200 (166,200)

Total NCI (140,900) (140,900)
Ret. Earn. Contr. Int. 12-31 (561,600) (561,600)
0

Eliminations and Adjustments:

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account.

(EL) Eliminate 80% of the Seaman Company equity balances at the beginning of the year against the investment account.

(D) Distribute the $225,000 excess of cost over book value to patent to Parent and NCI

(A) Amortize the patent over 20 years, with $11,250 for 20X1 charged to retained earnings of Parent and Sub, and $11,250 for 20X2 to operating expenses.

(BI) Eliminate the $12,000 of gross profit in the beginning inventory.

(IS) Eliminate the entire intercompany sales of $100,000.

(EI) Eliminate the $8,000 of gross profit in the ending inventory.

(IA) Eliminate the $20,000 intercompany accounts receivable and payable.

Subsidiary Company Income Distribution Schedule
Patent amortization 11,250 Internally generated net income 90,000
Deferred profit in ending inventory 8,000 Realized profit in beginning inventory 12,000
Adjusted income 82,750
NCI Share 20%
NCI 16,550

Parent Company Income Distribution Schedule
Internally generated net income 100,000
80% Subs adjusted income 66,200
Controlling interest 166,200

DIF: M OBJ: 4-2 MSC: 80%; simple equity

4. Selected information from the separate and consolidated balance sheets and income statements of Palo Alto, Inc. and its subsidiary, Stanford Co., as of December 31, 20X1, and for the year then ended is as follows:

Palo Alto Stanford Consolidated
Balance sheet accounts:
Accounts receivable $ 26,000 $ 19,000 $ 42,000
Inventory 30,000 25,000 50,000
Investment in Stanford 67,000
Stockholders equity 154,000 50,000 154,000

Income statement accounts:
Revenues $200,000 $140,000 $300,000
Cost of goods sold 150,000 110,000 225,000
Gross profit 50,000 30,000 75,000

Equity in earnings of Stanford $ 9,000
Net income $ 36,000 $ 20,000 $ 36,000

Additional information:

During 20X1, Palo Alto sold goods to Stanford at the same markup on cost that Palo Alto uses for all sales. At December 31, 20X1, Stanford had not paid for all of these goods and still held 50% of them in inventory.

Palo Alto acquired its interest in Stanford five years earlier (as of December 31, 20X1).

Required:
For each of the following items, calculate the required amount.
a. The amount of intercompany sales from Palo Alto to Stanford during 20X1.

b. The amount of Stanfords payable to Palo Alto for intercompany sales as of December 31, 20X1.

c. In Palo Altos December 31, 20X1, consolidated balance sheet, the carrying amount of the inventory that Stanford purchased from Palo Alto.

ANS:
a. $200,000 + $140,000 X = $300,000; X = $40,000
b. $26,000 + $19,000 X = $42,000; X = $3,000
c. Intercompany sales = $40,000
50% held as ending interco inventory $20,000
Gross profit (25%) (5,000)
Cost of interco ending inventory $15,000

DIF: M OBJ: 4-2 | 4-3

5. On January 1, 20X1, Pinto Company purchased an 80% interest in Sands Inc. for $1,000,000. The equity balances of Sands at the time of the purchase were as follows:

Common stock ($10 par) $100,000
Paid-in capital in excess of par 400,000
Retained earnings 500,000

Any excess of cost over book value is attributable to goodwill.

No dividends were paid by either firm during 20X6. The following trial balances were prepared for Pinto Company and its subsidiary, Sands Inc., on December 31, 20X6:

Pinto Sands
Cash 120,000 70,000
Accounts receivable 240,000 197,000
Inventory 200,000 176,000
Land 600,000 180,000
Buildings and equipment 1,100,000 800,000
Accumulated depreciation (180,000) (120,000)
Investment in Sands 1,000,000
Accounts payable (110,000) (50,000)
Common stock, $10 par (800,000) (100,000)
Paid-in capital in excess of par (660,000) (400,000)
Retained earnings (1,340,000) (650,000)
Sales (600,000) (300,000)
Other income (40,000) (15,000)
Cost of goods sold 320,000 180,000
Other expenses 150,000 32,000
Total

Sands sold a machine to Pinto Company for $40,000 on January 1, 20X6. The machine cost Sands $50,000, and $25,000 of accumulated depreciation had been recorded as of the sale date. The machine had a 5-year remaining life and no salvage value. Pinto Company is using straight-line depreciation.

Since the purchase date, Pinto has sold merchandise for resale to Sands, Inc. at a mark-up on cost of 25%. Sales during 20X6 were $150,000. The inventory of these goods held by Sands was $15,000 on January 1, 20X6, and $18,000 on December 31, 20X6.

Required:

Prepare a consolidated income statement for 20X6, including income distribution schedules to support your distribution of income to the noncontrolling and controlling interest interests.

ANS:

Pinto Company and Subsidiary Sands Inc.
Consolidated Income Statement
For the Year Ended December 31, 20X6

Sales (600,000 300,000 150,000) $750,000
Cost of goods sold (320,000 180,000 150,000 3,000 3,600) 350,600
Gross profit $399,400
Other expenses ($150,000 $32,000 $3,000) 179,000
Operating income $220,400
Other income ($40,000 $15,000 $15,000) 40,000
Consolidated Net Income $260,400

Distribution of Consolidated Net Income:
Noncontrolling interest $ 18,200
Controlling interest $ 242,200

Subsidiary Sands Inc. Income Distribution
Deferred gain on sale Internally generated
of machine $15,000 net income $103,000
Gain on sale of machine
realized through use 3,000
Adjusted income $ 91,000
Noncontrolling share 20%
Noncontrolling interest $ 18,200

Parent Pinto Company Income Distribution
Deferred profit in Internally generated
ending inventory $3,600 net income $170,000
Realized profit in
beginning inventory 3,000
80% Sands adjusted
income of $91,000 72,800
Controlling interest $242,200

DIF: M OBJ: 4-2 | 4-3

6. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for $750,000. On this date Subsidiary had total owners equity of $540,000.

Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.

During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the simple equity method.

On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 20X2. Subsidiarys usual gross profit on affiliated sales is 40%.

On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December.

On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of $20,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method.

Required:

Complete the Figure 4-3 worksheet for consolidated financial statements for the year ended December 31, 20X2.

Figure 4-3
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 80,000
Other Current Assets 139,000 450,000
Investment in Sub. Company 880,000

Other Long-Term Investments 50,000 30,000
Land 140,000 70,000
Buildings and Equipment 315,000 400,000
Accumulated Depreciation (280,000) (110,000)

Other Intangibles 60,000
Current Liabilities (150,000) (100,000)
Bonds Payable (100,000)
Premium on Bonds Payable (5,000)
Other Long-Term Liabilities (200,000) (150,000)
Common Stock P Co. (200,000)
Other Paid in Capital P Co. (100,000)
Retained Earnings P Co. (479,000)

Common Stock S Co. (100,000)
Other Paid in Capital S Co. (200,000)
Retained Earnings S Co. (300,000)

Net Sales (600,000) (380,000)
Cost of Goods Sold 350,000 180,000

Operating Expenses 140,000 100,000

Subsidiary Income (100,000)

Gain on Sale of Equipment (20,000)
Dividends Declared P Co. 60,000
Dividends Declared S Co. 30,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company

Other Long-Term Investments
Land
Buildings and Equipment
Accumulated Depreciation

Other Intangibles
Current Liabilities
Bonds Payable
Premium on Bonds Payable
Other Long-Term Liabilities
Common Stock P Co.
Other Paid in Capital P Co.
Retained Earnings P Co.

Common Stock S Co.
Other Paid in Capital S Co.
Retained Earnings S Co.

Net Sales
Cost of Goods Sold

Operating Expenses

Subsidiary Income

Gain on Sale of Equipment
Dividends Declared P Co.
Dividends Declared S Co.

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31

ANS:
For the worksheet solution, please refer to Answer 4-3.

Answer 4-3
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 80,000 (EI) 8,000
Other Current Assets 139,000 450,000 (IA) 20,000
Investment in Sub. Company 880,000 (CY) 70,000
(EL) 600,000
(D) 210,000
Other Long-Term Investments 50,000 30,000
Land 140,000 70,000 (D) 10,000
Buildings and Equipment 315,000 400,000 (F1) 20,000
Accumulated Depreciation (280,000) (110,000) (F2) 4,000

Goodwill (D) 200,000
Other Intangibles 60,000
Current Liabilities (150,000) (100,000) (IA) 20,000
Bonds Payable (100,000)
Premium on Bonds Payable (5,000)
Other Long-Term Liabilities (200,000) (150,000)
Common Stock P Co. (200,000)
Other Paid in Capital P Co. (100,000)
Retained Earnings P Co. (479,000) (BI) 4,000
Common Stock S Co. (100,000) (EL) 100,000
Other Paid in Capital S Co. (200,000) (EL) 200,000
Retained Earnings S Co. (300,000) (EL) 300,000

Net Sales (600,000) (380,000) (IS) 100,000
Cost of Goods Sold 350,000 180,000 (EI) 8,000 (BI) 4,000
(IS) 100,000
Operating Expenses 140,000 100,000 (F2) 4,000

Subsidiary Income (100,000) (CY) 100,000

Gain on Sale of Equipment (20,000) (F1) 20,000
Dividends Declared P Co. 60,000
Dividends Declared S Co. 30,000 (CY) 30,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 1,056,000 1,056,000
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 172,000
Other Current Assets 569,000
Investment in Sub. Company 0

Other Long-Term Investments 80,000
Land 220,000
Buildings and Equipment 695,000
Accumulated Depreciation (386,000)

Goodwill 200,000
Other Intangibles 60,000
Current Liabilities (230,000)
Bonds Payable (100,000)
Premium on Bonds Payable (5,000)
Other Long-Term Liabilities (350,000)
Common Stock P Co. (200,000)
Other Paid in Capital P Co. (100,000)
Retained Earnings P Co. (475,000)
Common Stock S Co.
Other Paid in Capital S Co.
Retained Earnings S Co.

Net Sales (880,000)
Cost of Goods Sold 434,000

Operating Expenses 236,000

Subsidiary Income 0

Gain on Sale of Equipment 0
Dividends Declared P Co. 60,000
Dividends Declared S Co.

Consolidated Net Income (210,000)
NCI 0
Controlling Interest 210,000 (210,000)
Total NCI 0
Ret. Earn. Contr. Int. 12-31 (625,000) (625,000)
0

Eliminations and Adjustments:

(CY) Eliminate the current-year entries made in the investment account and in the subsidiary income account.

(EL) Eliminate the Subsidiary Company equity balances at the beginning of the year against the investment account.

(D) Distribute the $210,000 excess of cost over book value land ($10,000) and to goodwill.

(BI) Eliminate the $4,000 of gross profit in the beginning inventory.

(IS) Eliminate the entire intercompany sales of $100,000.

(EI) Eliminate the $8,000 of gross profit in the ending inventory.

(IA) Eliminate the $20,000 intercompany accounts receivable and payable.

(F1) Eliminate the $20,000 gain on sale of equipment.

(F2) Eliminate the $4,000 of excess depreciation for 20X2 on the transferred equipment.

DIF: M OBJ: 4-2 | 4-3 MSC: 100%; simple equity

7. On January 1, 20X1, Parent Company acquired 80% of the common stock of Subsidiary Company for $560,000. On this date Subsidiary had total owners equity of $540,000, including retained earnings of $240,000. During 20X1, Subsidiary had net income of $60,000 and paid no dividends.

Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.

During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the cost method.

On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 20X2. Subsidiarys usual gross profit on affiliated sales is 40%.

On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December.

On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of $20,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method.

Required:

Complete the Figure 4-4 worksheet for consolidated financial statements for the year ended December 31, 20X2.

Figure 4-4
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 80,000
Other Current Assets 253,000 450,000
Investment in Sub. Company 560,000

Other Long-Term Investments 50,000 30,000
Land 140,000 70,000
Buildings and Equipment 315,000 400,000
Accumulated Depreciation (208,000) (110,000)

Other Intangibles 60,000
Current Liabilities (150,000) (100,000)
Bonds Payable (100,000)
Premium on Bonds Payable (5,000)
Other Long-Term Liabilities (200,000) (150,000)
Common Stock P Co. (200,000)
Other Paid in Capital P Co. (100,000)
Retained Earnings P Co. (421,000)

Common Stock S Co. (100,000)
Other Paid in Capital S Co. (200,000)
Retained Earnings S Co. (300,000)

Net Sales (600,000) (380,000)
Cost of Goods Sold 350,000 180,000

Operating Expenses 140,000 100,000

Dividend Income (24,000)

Gain on Sale of Equipment (20,000)
Dividends Declared P Co. 60,000
Dividends Declared S Co. 30,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company

Other Long-Term Investments
Land
Buildings and Equipment
Accumulated Depreciation

Other Intangibles
Current Liabilities
Bonds Payable
Premium on Bonds Payable
Other Long-Term Liabilities
Common Stock P Co.
Other Paid in Capital P Co.
Retained Earnings P Co.

Common Stock S Co.
Other Paid in Capital S Co.
Retained Earnings S Co.

Net Sales
Cost of Goods Sold

Operating Expenses

Dividend Income

Gain on Sale of Equipment
Dividends Declared P Co.
Dividends Declared S Co.

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31

ANS:
For the worksheet solution, please refer to Answer 4-4.

Answer 4-4
Trial Balance Eliminations and
Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 80,000 (EI) 8,000
Other Current Assets 253,000 450,000 (IA) 20,000
Investment in Sub. Company 560,000 (CV) 48,000 (EL) 480,000
(D) 128,000
Other Long-Term Investments 50,000 30,000
Land 140,000 70,000 (D) 10,000
Buildings and Equipment 315,000 400,000 (F1) 20,000
Accumulated Depreciation (208,000) (110,000) (F2) 4,000 30,000

Goodwill (D) 150,000
Other Intangibles 60,000
Current Liabilities (150,000) (100,000) (IA) 20,000
Bonds Payable (100,000)
Premium on Bonds Payable (5,000)
Other Long-Term Liabilities (200,000) (150,000)
Common Stock P Co. (200,000)
Other Paid in Capital P Co. (100,000)
Retained Earnings P Co. (421,000) (BI) 3,200 (CV) 48,000

Common Stock S Co. (100,000) (EL) 80,000
Other Paid in Capital S Co. (200,000) (EL) 160,000
Retained Earnings S Co. (300,000) (EL) 240,000 (D) 32,000
(BI) 800

Net Sales (600,000) (380,000) (IS) 100,000
Cost of Goods Sold 350,000 180,000 (EI) 8,000 (BI) 4,000
(IS) 100,000
Operating Expenses 140,000 100,000 (F2) 4,000

Dividend Income (24,000) (CY2) 24,000

Gain on Sale of Equipment (20,000) (F1) 20,000
Dividends Declared P Co. 60,000
Dividends Declared S Co. 30,000 (CY2) 24,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 868,000 868,000
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 172,000
Other Current Assets 683,000
Investment in Sub. Company 0

Other Long-Term Investments 80,000
Land 220,000
Buildings and Equipment 695,000
Accumulated Depreciation (314,000)

Goodwill 150,000
Other Intangibles 60,000
Current Liabilities (230,000)
Bonds Payable (100,000)
Premium on Bonds Payable (5,000)
Other Long-Term Liabilities (350,000)
Common Stock P Co. (200,000)
Other Paid in Capital P Co. (100,000)
Retained Earnings P Co. (465,800)

Common Stock S Co. (20,000)
Other Paid in Capital S Co. (40,000)
Retained Earnings S Co. (91,200)

Net Sales (880,000)
Cost of Goods Sold 434,000

Operating Expenses 236,000

Dividend Income 0

Gain on Sale of Equipment 0
Dividends Declared P Co. 60,000
Dividends Declared S Co. 6,000

Consolidated Net Income (210,000)
NCI 19,200 (19,200)
Controlling Interest 190,800 (190,800)
Total NCI 164,400 (164,400)
Ret. Earn. Contr. Int. 12-31 596,600 (596,600)
0 0 0 0

Eliminations and Adjustments:

(CV) Convert to the simple equity method as of January 1, 20X2. (80% of $60,000 increase in subs retained earnings from January 1, 20X1 to January 1, 20X2.)

(CY2) Eliminate the current-year dividend income against dividends declared by Subsidiary.

(EL) Eliminate 80% of the Subsidiary Company equity balances at the beginning of the year against the investment account.

(D) Distribute the $150,000 excess of cost over book value to land ($8,000) and to goodwill; allocate to Parent and Sub $128,000 and $32,000 respectively.

(BI) Eliminate the $4,000 of gross profit in the beginning inventory; allocate to Parent and Sub 80/20

(IS) Eliminate the entire intercompany sales of $100,000.

(EI) Eliminate the $8,000 of gross profit in the ending inventory.

(IA) Eliminate the $20,000 intercompany accounts receivable and payable.

(F1) Eliminate the $20,000 gain on sale of equipment

(F2) Eliminate the $4,000 of excess depreciation for 20X2 on the transferred equipment.

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 8,000 Internally generated net income 100,000
Realized profit in beginning inventory 4,000
Adjusted income 96,000
NCI Share 20%
NCI 19,200

Parent Company Income Distribution Schedule
Deferred gain on sale 20,000 Internally generated net income 130,000
Recognize 1/5 of gain 4,000
80% Subs adjusted income 76,800
Controlling interest 190,800

DIF: M OBJ: 4-2 | 4-3 MSC: 80%; cost method

Scenario 4-2:

On January 1, 20X1, Powers Company acquired 80% of the common stock of Sculley Company for $195,000. On this date Sculley had total owners equity of $200,000 (common stock, other paid-in capital, and retained earnings of $10,000, $90,000, and $100,000 respectively).

Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has a remaining life of five years and straight-line depreciation is used. The excess to the patents is to be amortized over 20 years.

On July 1, 20X2 Sculley borrowed $100,000 from Powers with a 10% 1-year note; interest is due at maturity.

On January 1, 20X2, Powers held merchandise acquired from Sculley for $10,000. During 20X2, Sculley sold merchandise to Powers for $50,000, $20,000 of which is still held by Powers on December 31, 20X2. Sculleys usual gross profit on affiliated sales is 50%.

On December 31, 20X1, Powers sold equipment to Sculley at a gain of $10,000. During 20X2, the equipment was used by Sculley. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value.

Both companies have a calendar-year fiscal year.

8. Refer to Scenario 4-2. Assume that during 20X1 and 20X2, Powers has appropriately accounted for its investment in Sculley using the cost method.
Required:
a. Using the information above or on the Figure 4-5 worksheet, prepare a determination and distribution of excess schedule.
b. Complete the Figure 4-5 worksheet for consolidated financial statements for the year ended December 31, 20X2.
Figure 4-5
Trial Balance Eliminations and
Powers Sculley Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 145,000 55,000
Other Current Assets 249,000 205,000
Investment in Sub. Company 195,000

Land 140,000 100,000
Buildings and Equipment 400,000 200,000
Accumulated Depreciation (150,000) (50,000)

Current Liabilities (150,000) (120,000)
Bonds Payable (100,000) (50,000)
Other Long-Term Liabilities (50,000) (20,000)
Common Stock P Co. (100,000)
Other Paid in Capital P Co. (200,000)
Retained Earnings P Co. (310,000)

Common Stock S Co. (10,000)
Other Paid in Capital S Co. (90,000)
Retained Earnings S Co. (150,000)

Net Sales (610,000) (365,000)
Cost of Goods Sold 360,000 190,000

Operating Expenses 150,000 70,000

Interest Revenue (5,000)
Interest Expense 5,000
Dividend Income (24,000)
Dividends Declared P Co. 60,000
Dividends Declared S Co. 30,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company

Land
Buildings and Equipment
Accumulated Depreciation

Current Liabilities
Bonds Payable
Other Long-Term Liabilities
Common Stock P Co.
Other Paid in Capital P Co.
Retained Earnings P Co.

Common Stock S Co.
Other Paid in Capital S Co.
Retained Earnings S Co.

Net Sales
Cost of Goods Sold

Operating Expenses

Interest Revenue
Interest Expense
Dividend Income
Dividends Declared P Co.
Dividends Declared S Co.

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31

ANS:
a.
Determination and distribution of excess schedule:
Entity Parent NCI
Entity FV 243,750 195,000 48,750
Book value:
Pd-In Capt 100,000
RE 1/1/X1 100,000
Book value: 200,000 160,000 40,000
Excess 43,750 35,000 8,750
Inventory 6,250
Equipment 12,500
Patent 25,000
Total excess distributed 43,750
Optional amortization schedule:
Current Exp Prior* Total**
Equipment 2,500 2,500 5,000
Patent 1,250 1,250 2,500
3,750 3,750
P share 3,000
NCI share 750
*adjusted to respective R/E accounts
** adjusted to respective asset (or contra asset) accounts

b. For the worksheet solution, please refer to Answer 4-5.

Answer 4-5
Trial Balance Eliminations and
Powers Sculley Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 145,000 55,000 (EI) 10,000
Other Current Assets 249,000 205,000 (LN1) 105,000
Investment in Sub. Company 195,000 (CV) 40,000 (EL) 200,000
(D) 35,000

Land 140,000 100,000
Buildings and Equipment 400,000 200,000 (D) 12,500 (F1) 10,000
Accumulated Depreciation (150,000) (50,000) (F2) 2,000 (A) 5,000

Patents (D) 25,000 (A) 2,500

Current Liabilities (150,000) (120,000) (LN1) 105,000
Bonds Payable (100,000) (50,000)
Other Long-Term Liabilities (50,000) (20,000)
Common Stock P Co. (100,000)
Other Paid in Capital P Co. (200,000)
Retained Earnings P Co. (310,000) (D) 5,000 (CV) 40,000
(A) 3,000
(BI) 4,000
(F1) 10,000

Common Stock S Co. (10,000) (EL) 8,000
Other Paid in Capital S Co. (90,000) (EL) 72,000
Retained Earnings S Co. (150,000) (EL) 120,000 (D) 8,750
(D) 1,250
(A) 750
(BI) 1,000
Net Sales (610,000) (365,000) (IS) 50,000
Cost of Goods Sold 360,000 190,000 (EI) 10,000 (BI) 5,000
(IS) 50,000
Operating Expenses 150,000 70,000 (A) 3,750 (F2) 2,000

Interest Revenue (5,000) (LN2) 5,000
Interest Expense 5,000 (LN2) 5,000
Dividend Income (24,000) (CY2) 24,000
Dividends Declared P Co. 60,000
Dividends Declared S Co. 30,000 (CY2) 24,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 502,250 502,250
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 190,000
Other Current Assets 349,000
Investment in Sub. Company 0

Land 240,000
Buildings and Equipment 602,500
Accumulated Depreciation (203,000)

Patents 22,500

Current Liabilities (165,000)
Bonds Payable (150,000)
Other Long-Term Liabilities (70,000)
Common Stock P Co. (100,000)
Other Paid in Capital P Co. (200,000)
Retained Earnings P Co. (328,000)

Common Stock S Co. (2,000)
Other Paid in Capital S Co. (18,000)
Retained Earnings S Co. (35,750)

Net Sales (925,000)
Cost of Goods Sold 505,000

Operating Expenses 221,750

Interest Revenue 0
Interest Expense 0
Dividend Income 0
Dividends Declared P Co. 60,000
Dividends Declared S Co. 6,000

Consolidated Net Income (198,250)
NCI 18,250 (18,250)
Controlling Interest 180,000 (180,000)
Total NCI 68,000 (68,000)
Ret. Earn. Contr. Int. 12-31 448,000 (448,000)
0 0 0 0

Eliminations and Adjustments:

(CV) Convert to the simple equity method as of January 1, 20X2 (80% of $50,000 increase in retained earnings from January 1, 20X1 to January 1, 20X2).

(CY2) Eliminate the current-year dividend income against dividends declared by Sculley.

(EL) Eliminate 80% of the Sculley Company equity balances at the beginning of the year against the investment account.

(D) Distribute the $43,750 excess of cost over book value to inventory, equipment, and patent; allocate to Parent and Sub $35,000 and $8,750 respectively

NOTE: The $6,250 write up to inventory is charged to the two Retained Earnings accounts 80:20 since FIFO is used.

(A) Amortize the equipment write up over 5 years and the patent over 20 years. Current amounts charged to operating expense; prior years amount allocated to Parent and Sub; totals recorded as adjustments to the asset (or related contra account)

(LN1) Eliminate $100,000 intercompany notes receivable and notes payable and $5,000 intercompany interest receivable and interest payable ($100,000 10% 6 months)

(LN2) Eliminate $5,000 intercompany interest revenue and interest expense.

(BI) Eliminate the $5,000 of gross profit in the beginning inventory; allocate to Parent and Sub

(IS) Eliminate the entire intercompany sales of $50,000.

(EI) Eliminate the $10,000 of gross profit in the ending inventory.

(F1) Eliminate the $10,000 20X1 gain on sale of equipment

(F2) Eliminate the $2,000 of excess depreciation for 20X2 on the transferred equipment.

Subsidiary Company Income Distribution Schedule
Amort of equip restatement 2,500 Internally generated net income 100,000
Amort of patent revaluation 1,250 Realized profit in beginning inventory 5,000
Deferred profit in ending inven 10,000
Adjusted income 91,250
NCI Share 20%
NCI 18,250

Parent Company Income Distribution Schedule
Internally generated net income 105,000
Recognize 1/5 of gain 2,000
80% Subs adjusted income 73,000
Controlling interest 180,000

DIF: D OBJ: 4-2 | 4-3 | 4-5

9. Refer to Scenario 4-2. Assume that during 20X1 and 20X2, Powers has appropriately accounted for its investment in Sculley using the simple equity method.

Required:

a. Using the information above or on the Figure 4-6 worksheet, prepare a determination and distribution of excess schedule.

b. Complete the Figure 4-6 worksheet for consolidated financial statements for the year ended December 31, 20X2.

Figure 4-6
Trial Balance Eliminations and
Powers Sculley Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 140,000 65,000
Other Current Assets 250,000 225,000
Investment in Sub. Company 259,000

Land 140,000 100,000
Buildings and Equipment 400,000 200,000
Accumulated Depreciation (150,000) (50,000)

Current Liabilities (150,000) (120,000)
Bonds Payable (100,000) (50,000)
Other Long-Term Liabilities (50,000) (20,000)
Common Stock P Co. (100,000)
Other Paid in Capital P Co. (200,000)
Retained Earnings P Co. (310,000)

Common Stock S Co. (10,000)
Other Paid in Capital S Co. (90,000)
Retained Earnings S Co. (150,000)

Net Sales (610,000) (365,000)
Cost of Goods Sold 360,000 190,000

Operating Expenses 150,000 70,000

Interest Revenue (5,000)
Interest Expense 5,000
Subsidiary Income (24,000)

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 0 0
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company

Land
Buildings and Equipment
Accumulated Depreciation

Current Liabilities
Bonds Payable
Other Long-Term Liabilities
Common Stock P Co.
Other Paid in Capital P Co.
Retained Earnings P Co.

Common Stock S Co.
Other Paid in Capital S Co.
Retained Earnings S Co.

Net Sales
Cost of Goods Sold

Operating Expenses

Interest Revenue
Interest Expense
Subsidiary Income

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 0 0

ANS:
D&D Schedule Entity Parent NCI
Entity FV 243,750 195,000 48,750
Book value:
Pd-In Capt 100,000
RE 1/1/X1 100,000
Book value: 200,000 160,000 40,000
Excess 43,750 35,000 8,750
Inventory 6,250
Equipment 12,500
Patent 25,000
Total excess distributed 43,750

Optional amortization schedule:
Current Exp Prior * Total **
Equipment 2,500 2,500 5,000
Patent 1,250 1,250 2,500
3,750 3,750
P share 3,000
NCI share 750
* adjusted to respective R/E accounts
** adjusted to respective asset (or contra asset) accounts

b. For the worksheet solution, please refer to Answer 4-6.

Answer 4-6
Trial Balance Eliminations and
Powers Sculley Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 140,000 65,000 (EI) 10,000
Other Current Assets 250,000 225,000 (LN1) 105,000
Investment in Sub. Company 315,000 (CY) 80,000
(EL) 200,000
(D) 35,000
Land 140,000 100,000
Buildings and Equipment 400,000 200,000 (D) 12,500 (F1) 10,000
Accumulated Depreciation (150,000) (50,000) (F2) 2,000 (A) 5,000

Patents (D) 25,000 (A) 2,500

Current Liabilities (150,000) (120,000) (LN1) 105,000
Bonds Payable (100,000) (50,000)
Other Long-Term Liabilities (50,000) (20,000)
Common Stock P Co. (100,000)
Other Paid in Capital P Co. (200,000)
Retained Earnings P Co. (310,000) (D) 5,000
(A) 3,000
(BI) 4,000
(F1) 10,000
Common Stock S Co. (10,000) (EL) 8,000
Other Paid in Capital S Co. (90,000) (EL) 72,000
Retained Earnings S Co. (150,000) (EL) 120,000 (D) 8,750
(D) 1,250
(A) 750
(BI) 1,000
Net Sales (610,000) (365,000) (IS) 50,000
Cost of Goods Sold 360,000 190,000 (EI) 10,000 (BI) 5,000
(IS) 50,000
Operating Expenses 150,000 70,000 (A) 3,750 (F2) 2,000

Interest Revenue (5,000) (LN2) 5,000
Interest Expense 5,000 (LN2) 5,000
Subsidiary Income (80,000) (CY) 80,000

Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0 0 518,250 518,250
(continued)

Consol. Control. Consol.
Income Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31 195,000
Other Current Assets 370,000
Investment in Sub. Company 0

Land 240,000
Buildings and Equipment 602,500
Accumulated Depreciation (203,000)

Patents 22,500

Current Liabilities (165,000)
Bonds Payable (150,000)
Other Long-Term Liabilities (70,000)
Common Stock P Co. (100,000)
Other Paid in Capital P Co. (200,000)
Retained Earnings P Co. (288,000)

Common Stock S Co. (2,000)
Other Paid in Capital S Co. (18,000)
Retained Earnings S Co. (35,750)

Net Sales (925,000)
Cost of Goods Sold 505,000

Operating Expenses 221,750

Interest Revenue 0
Interest Expense 0
Subsidiary Income 0

Consolidated Net Income (198,250)
NCI 18,250 (18,250)
Controlling Interest 180,000 (180,000)
Total NCI 74,000 (74,000)
Ret. Earn. Contr. Int. 12-31 468,000 (468,000)
0 0 0 0

Eliminations and Adjustments:
(CY) Eliminate the current-year entries made in the investment account and the subsidiary income account.

(EL) Eliminate 80% of the Sculley Company equity balances at the beginning of the year against the investment account.

(D) Distribute the $43,750 excess of cost over book value to inventory, equipment, and patent; allocate to Parent and Sub $35,000 and $8,750 respectively

NOTE: The $6,250 write up to inventory is charged to the two Retained Earnings accounts 80:20 since FIFO is used.

(A) Amortize the equipment write up over 5 years and the patent over 20 years. Current amounts charged to operating expense; prior years amount allocated to Parent and Sub; totals recorded as adjustments to the asset (or related contra

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