Advanced financial accounting 8e chap006

Q6-3 If the purchaser records the services received as an expense, both revenues and expenses will be overstated in the consolidated income statement in the period in which the intercor

Trang 1

CHAPTER 6 INTERCORPORATE TRANSFERS OF SERVICES AND NONCURRENT ASSETS

ANSWERS TO QUESTIONS

Q6-1 Profits on intercorporate sales generally are considered to be realized when the

affiliate that has purchased the item sells it to a nonaffiliate For depreciable or amortizable items that are used by the affiliate in its operations, profits are considered to be realized as the purchaser depreciates or amortizes the asset

Q6-2 An upstream sale occurs when a subsidiary sells an item to the parent company If the

asset is not resold before the end of the period, the parent is the company holding the asset and any unrealized profits are recorded on the books of the subsidiary

Q6-3 If the purchaser records the services received as an expense, both revenues and

expenses will be overstated in the consolidated income statement in the period in which the intercorporate services are provided In the event the services are capitalized by the purchaser, the cost of the asset will be overstated, depreciation expense and accumulated depreciation will be overstated if the services are assigned to a depreciable asset, and service revenue will be overstated

Q6-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net

income of the seller

(b) All unrealized profit on current-period intercorporate sales must be excluded from consolidated net income until realized through resale to a nonaffiliate

Q6-5 Profits on intercompany sales are included in consolidated net income in the period in

which the items are sold to a nonaffiliate If there are unrealized profits on the books of one

of the companies at the start of the period and the item is sold to a nonaffiliate during the current period, the intercompany profit is included in the computation of consolidated net income for the current period

Q6-6 The profits continue to be unrealized in this case and therefore must be eliminated

from both the beginning and ending asset and retained earnings balances when consolidated statements are prepared There should be no income statement effect for the current period

Q6-7 A downstream sale is a sale from the parent to one of its subsidiaries If the asset is

not resold before the end of the period, the subsidiary is the company holding the asset at year-end and any unrealized profits are recorded on the books of the parent company

Trang 2

Q6-8 The entire balance of unrealized profits is eliminated in all cases While the direction

of the sale will affect the allocation of unrealized profits between companies, it does not change the total amount of profit eliminated

Q6-9 Consolidated net income is reduced by the amount of unrealized profits assigned to

the shareholders of the parent company When a downstream sale occurs, all the profit is on the parent's books and consolidated net income is reduced by the full amount of any unrealized profit On the other hand, when an upstream sale occurs, all the intercorporate profit is recorded on the books of the subsidiary and the amount of income assigned to both the parent company shareholders and the noncontrolling shareholders is reduced by a proportionate amount of any unrealized profit

Q6-10 The amount of intercorporate profit realized in the current period from prior years'

sales to the parent is added to the reported net income of the subsidiary in computing income assigned to the noncontrolling interest

Q6-11 Income assigned to noncontrolling interest for the current period will be less than a

proportionate share of the reported net income of the subsidiary In determining the amount

of income to be assigned to the noncontrolling interest in the consolidated income statement, the net income reported by the subsidiary must be adjusted to exclude any unrealized gain recorded during the period on the sale of depreciable assets to the parent On the other hand, if an unrealized loss had been recorded, the basis used in assigning income to the noncontrolling interest would be greater than the reported net income of the subsidiary Such adjustments must be made to assure that the income assigned to noncontrolling interest is based on the contribution of the subsidiary to consolidated net income rather than the amount the subsidiary may have reported as net income

Q6-12 All other factors being equal, the income assigned to noncontrolling interest will be

larger if the sale occurs at the start of the current period Some part of the gain will be considered realized in the current period as the parent depreciates the asset if the sale occurs before year-end None of the gain will be considered realized in the period of transfer

if the sale occurs at year-end

Q6-13 As in all other cases, income from the subsidiary recorded on the parent's books

must be eliminated in preparing the consolidated income statement and an appropriate amount of subsidiary net income must be assigned to the noncontrolling interest if the parent owns less than 100 percent of the subsidiary's stock The gain recorded on the parent's books also must be eliminated

Trang 3

Q6-14 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of

the consolidated entity when the subsidiary pays the parent more than book value for the asset at the start of the period As a result, an eliminating entry is needed to reduce depreciation expense and accumulated depreciation by the amount of excess depreciation recorded during 20X3

Q6-15 Following an intercorporate sale of a depreciable asset, the eliminating entries should

adjust the balance in the asset account to reflect the original purchase price to the first owner and accumulated depreciation should be adjusted to reflect the balance that would be reported if the asset were still held by the first owner In the case of an intercorporate sale of

an intangible asset, only the unamortized balance normally is reported and an eliminating entry is needed to adjust the carrying value to that which would be reported if the asset were still held by the first owner

Q6-16 Profit on an intercorporate sale of land is considered realized at the time the

purchaser sells the land to a nonaffiliate Profit on equipment normally is considered realized

as the asset is used and depreciated on the books of the purchaser Equipment typically is considered to be used up in the production process and therefore is charged to expense over its remaining economic life, while land is not

Q6-17 A portion of the profit is considered realized each period as the asset is depreciated

by the purchaser Thus, the net amount considered unrealized decreases each period and a smaller debit to beginning retained earnings is needed

Q6-18A The balance in the investment account will depend on which method the parent uses

to account for its investment in the subsidiary If the parent uses (a) the cost method or (b) the basic equity method, no adjustments are made on the parent company's books for unrealized intercompany profits and the balance in the investment account will be the same

as if there were no unrealized profits If the parent uses (c) the fully-adjusted equity method, the balance in the investment account will be reduced by the full amount of the unrealized profit when the profit is on the parent's books and by a proportionate share of the unrealized profit when it is on the subsidiary's books

Trang 4

Re: Elimination of Intercompany Profit on Equipment

This memo is in response to our review of the elimination procedures used in preparing the consolidated statements for Plug Corporation at December 31, 20X2 You have correctly identified the need to eliminate the effects of the intercorporate sale of equipment In preparing your consolidated statements, all intercompany balances and transactions should

be eliminated [ARB 51, Par 6]

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

Loss on Sale of Equipment 150,000 This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the sale of equipment to Plug and adds $150,000 to the equipment account By adding back

$150,000 to equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000) This represents the carrying value of the equipment on Coy’s books at the time of sale but does not reflect the purchase price paid by Coy ($1,200,000) or the accumulated depreciation at the time of sale ($200,000) Moreover, eliminating entry E(1) understates depreciation expense for the year The correct eliminating entry at December 31, 20X2, is:

Depreciation Expense 15,000

Accumulated Depreciation 215,000 Loss on Sale of Equipment 150,000

Trang 5

C6-1 (continued)

A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by Plug to $1,200,000, the initial purchase price to the consolidated entity Depreciation expense must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug

to $100,000 ($1,200,000/12 years) based on the initial purchase price Accumulated depreciation must be credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x

1 year] reported by Plug to $300,000 [($1,200,000/12 years) x 3 years] As previously noted, the $150,000 loss recorded by Coy must be eliminated If the amounts included in eliminating entry E(2) are omitted, consolidated net income for 20X2 and the retained earnings balance

at December 31, 20X2, will be overstated and the balances for equipment and accumulated depreciation will be understated

Re: Elimination of Legal Services Provided by Parent Company

This memo is in response to our discussion regarding the elimination of intercompany services in preparing consolidated financial statements for Dream Corporation It is my understanding that at present Dream Corporation does not eliminate such services In preparing consolidated financial statements all intercompany balances and transactions

should be eliminated [ARB 51, Par 6]

The legal services provided by Dream Corporation to Classic Company and Plain Company are intercompany transactions that should be eliminated If the revenues recorded by the parent are equal to the expenses recorded by the subsidiaries and both are properly recorded, elimination of these transactions will have no impact on reported net income but will reduce consolidated revenues and expenses by equal amounts Financial statement readers will receive a more accurate picture of operations of the consolidated entity if the appropriate amounts are reported The legal services provided to Classic Company in 20X3 should be eliminated with the following entry:

E(1) Legal Services Revenue 80,000

Legal Services Expense 80,000

Trang 6

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

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

Wage and Salary Expense 100,000

No eliminating entry would be required at December 31, 20X4, on the legal services provided to Classic Company in 20X3 The conditions of the intercorporate transfer of services to Plain Company require an eliminating entry at December 31, 20X4, and in following years, as long as Plain Company owns the strip mine The entry at December

Primary citation:

ARB 51, Par 6

Trang 7

C6-3 Noncontrolling Interest

a When there are no unrealized profits on the subsidiary's books, a pro rata portion of the reported net income of the subsidiary is assigned to the noncontrolling interest, adjusted for the noncontrolling interest’s share of any amortization or write-off of differential

b When there are no unrealized profits on the subsidiary's books, the noncontrolling interest is reported in the consolidated balance sheet at an amount equal to a pro rata portion of the book value of the net assets of the subsidiary plus the noncontrolling interest’s share of any remaining differential

c The effect of unrealized intercompany profits depends on which company has recorded the profits Those recorded on the books of the parent do not affect the income assigned

to the noncontrolling interest When subsidiary net income includes unrealized intercompany profits, the portion of consolidated net income assigned to the noncontrolling interest is reduced by its portion of the unrealized profit in the period of the intercorporate sale

(1) On a sale of land, the intercompany profit remains unrealized until the land is sold to a nonaffiliate When the land is resold, the profit is added to the reported net income of the subsidiary in computing the portion of consolidated net income assigned to the noncontrolling interest

(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is considered realized each period as the purchaser depreciates the asset Thus, in the period of the intercorporate sale, the adjustment to subsidiary net income for unrealized profits is based on the gain or loss less any portion considered realized before the end of the period Each period thereafter, a portion of the profit or loss is considered realized and treated as an adjustment to subsidiary income in determining the portion of consolidated net income assigned to the noncontrolling interest

d Noncontrolling shareholders of a subsidiary generally will not gain a great deal of useful information from the consolidated financial statements Their primary focus must continue to be on the income, assets, and liabilities of the subsidiary in which they hold direct ownership In the event there are a number of transactions with the parent or other affiliates, the success of the operations of the entire economic entity may provide information useful to the noncontrolling shareholders Debt guarantees or other assurances by the parent may also lead to an examination of the parent company and consolidated statements

Trang 8

C6-4 Intercompany Sale of Services

a When preparing consolidated financial statements, Schwartz's revenue from the sale

of services to Diamond and Diamond's expenses associated with the services acquired from Schwartz must be eliminated The expenses related to the janitorial and maintenance activities that will be reported in the consolidated income statement will be the actual salary and associated costs incurred by Schwartz to provide the services to Diamond The eliminations have no effect on consolidated net income because revenues and expenses of equal amount are eliminated in the preparation of the consolidated financial statements

b Intercompany profits from the sale of services to an affiliate normally are considered realized at the time the services are provided Realization of intercompany profits on services normally is considered to occur as the services are consumed, and services such

as maintenance and repair services normally are considered to be consumed by the purchasing affiliate at the time received

C6-5 Intercompany Profits

Answers can be found in the companies' 10-K filings with the SEC and in their annual reports Note that financial statements are often included in the Form 10-K by reference to the company’s annual report In such cases, the financial statements are often shown in a separate exhibit rather than in Item 8 of the Form 10-K

a Century Telephone Enterprises, Inc (www.centurytel.com), and its subsidiaries bill one another for services and materials provided in such amounts as to provide a reasonable return on investment When preparing consolidated financial statements, the company eliminates intercompany profits on transactions with unregulated subsidiaries, but profits

on transactions with regulated subsidiaries are not eliminated, as permitted by FASB

Statement No 71 This statement is applicable because phone companies are regulated

as public utilities

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

of regulatory accounting as provided by FASB 71 in 1994 and now no longer applies the provisions of FASB 71

c All of Harley-Davidson’s (www.harleydavidson.com) intercompany transactions are eliminated except some occurring between the Motorcycles and Financial Services segments Some interest and fees recognized as income by Financial Services and expense by Motorcycles are not eliminated This leads to higher finance income and higher expenses, but net income is unaffected

Trang 9

5 b Depreciation expense recorded by Pirn $40,000

Depreciation expense recorded by Scroll 10,000Total depreciation reported $50,000 Adjustment for excess depreciation charged

by Scroll as a result of increase in

carrying value of equipment due to gain

on intercompany sale ($12,000 / 4 years) (3,000) Depreciation for consolidated statements $47,000

E6-2 Multiple-Choice Questions on Intercompany Transactions

1 d When only retained earnings is debited, and not the noncontrolling interest, a

gain has been recorded in a prior period on the parent's books

2 a The costs incurred by Bottom to develop the equipment are research and

development costs and must be expensed as they are incurred (FASB

Statement No 2, par 12) Transfer to another legal entity does not cause a

change in accounting treatment within the economic entity

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

by Top Corporation over the remaining 3 years of ownership As a result, Top Corporation will debit depreciation expense for $13,000 each year Gold Company had charged $16,000 to accumulated depreciation in 2 years, for an annual rate of $8,000 Depreciation expense therefore must be reduced by

$5,000 ($13,000 - $8,000) in preparing the consolidated statements

4 a TLK Corporation will record the purchase at $39,000, the amount it paid Gold

Company had the equipment recorded at $40,000; thus, a debit of $1,000 will raise the equipment balance back to its original cost from the viewpoint of the consolidated entity

Trang 10

E6-2 (continued)

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

Reported gain on sale of equipment $15,000

Intercompany profit realized in 20X6 (5,000) (10,000) Realized net income of Gold Company $ 35,000 Proportion of stock held by

noncontrolling interest x .40 Income assigned to noncontrolling interests $ 14,000

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

Net income reported by Gold Company 45,000

$130,000 Less: Unrealized gain on sale of equipment

($15,000 - $5,000) (10,000) Consolidated net income $120,000

E6-3 Elimination Entries for Land Transfer

a Eliminating entry, December 31, 20X4:

E(1) Gain on Sale of Land 10,000

Eliminating entry, December 31, 20X5:

E(1) Retained Earnings, January 1 10,000

b Eliminating entry, December 31, 20X4:

Noncontrolling Interest 4,000

Trang 11

E6-4 Intercompany Services

a Consolidated net income will not change

b One hundred percent of the intercompany services must always be eliminated Thus, a change in the level of ownership of the subsidiary will not have an impact on the amount eliminated or on consolidated net income

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

E6-5 Elimination Entries for Intercompany Services

Two eliminating entries are required:

E(1) Delivery Service Revenue 76,000

Delivery Service Expense 76,000

E6-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale

a Eliminating entry, December 31, 20X6

Required [($45,000 / 15 years) x 6 years] $18,000

Recorded [($40,000 / 10 years) x 1 year] (4,000)

Trang 12

E6-7 Transfer of Land

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

E6-8 Transfer of Depreciable Asset at Year-End

Gain on Sale of Truck 30,000

Accumulated Depreciation 120,000 Computation of gain on sale of truck:

Price paid by Minnow $210,000

Cost of truck to Frazer $300,000

Accumulated depreciation

($300,000 / 10 years) x 4 years (120,000) (180,000)

Gain on sale of truck $ 30,000

Retained Earnings, January 1 30,000

Accumulated Depreciation 115,000 Accumulated depreciation adjustment:

Recorded [($210,000 / 6 years) x 1 year] (35,000)

Required increase $115,000

Trang 13

E6-9 Transfer of Depreciable Asset at Beginning of Year

Gain on Sale of Truck 35,000

Accumulated Depreciation 85,000 Computation of gain on sale of truck:

Price paid by Minnow $245,000 Cost of truck to Frazer $300,000

Accumulated depreciation ($300,000 / 10 years) x 3 years ( 90,000) (210,000) Gain on sale of truck $ 35,000 Accumulated depreciation adjustment:

Required [($300,000 / 10 years) x 4 years] $120,000 Reported [($245,000 / 7 years) x 1 year] (35,000) Required increase $ 85,000

Retained Earnings 30,000 Depreciation Expense 5,000 Accumulated Depreciation 80,000 Accumulated depreciation adjustment:

Required [($300,000 / 10 years) x 5 years] $150,000 Reported [($245,000 / 7 years) x 2 years] (70,000) Required increase $ 80,000

E6-10 Sale of Equipment to Subsidiary in Current Period

a Journal entry to record sale:

Trang 14

Adjustment to equipment

Amount paid by Wainwrite to acquire building $150,000

Amount paid by Lance on intercompany sale (84,000)

Adjustment to buildings and equipment $ 66,000

Adjustment to depreciation expense

Depreciation expense recorded by Lance

Corporation ($84,000 / 7 years) $ 12,000

Depreciation expense recorded by Wainwrite

Corporation ($150,000 / 15 years) (10,000)

Adjustment to depreciation expense $ 2,000

Adjustment to accumulated depreciation

Amount required ($10,000 x 9 years) $ 90,000

Amount reported by Lance ($12,000 x 1 year) (12,000)

Trang 15

E6-11 Upstream Sale of Equipment in Prior Period

a Consolidated net income for 20X8:

Operating income reported by Baywatch $100,000 Net income reported by Tubberware $40,000

Amount of gain realized in 20X8

($30,000 / 12 years) 2,500

Realized net income of Tubberware 42,500

b Consolidated net income for 20X8 would be unchanged

Trang 16

c Eliminating entry, December 31, 20X8:

E(1) Buildings and Equipment 30,000

Accumulated Depreciation 52,500 Eliminate unrealized profit on building

Adjustment to buildings and equipment

Amount paid by Tubberware to acquire building $300,000

Amount paid by Baywatch on intercompany sale (270,000)

Adjustment to buildings and equipment $ 30,000

Adjustment to retained earnings, January 1, 20X8

Unrealized gain recorded January 1, 20X6 $ 30,000

Amount realized following intercompany sale

Unrealized gain, January 1, 20X8 $ 25,000

Proportion of ownership held by Baywatch x .80

Required adjustment $ 20,000

Adjustment to Noncontrolling interest, January 1, 20X8

Unrealized gain at January 1, 20X8 $ 25,000

Proportion of ownership held by noncontrolling

Depreciation expense recorded by Baywatch

Industries ($270,000 / 12 years) $ 22,500

Depreciation expense recorded by Tubberware

Amount required ($20,000 x 6 years) $120,000

Amount reported by Baywatch ($22,500 x 3 years) (67,500)

Trang 17

E6-12 Elimination Entries for Midyear Depreciable Asset Transfer

Purchase price paid by subsidiary (28,000)

Purchase price paid by subsidiary $28,000

Purchase price paid by parent $30,000

Less: Accumulated Depreciation

($5,000 x 2 1/2 years) (12,500)

Book value at time of sale (17,500)

Gain on sale of equipment $10,500

Depreciation recorded by subsidiary

($28,000/3 ½ years) x ½ year $4,000

Depreciation recorded by parent ((E30,000/6

Accumulated depreciation adjustment:

Recorded [($28,000 / 3 1/2 years) x 1/2 year] (4,000)

Unrealized balance, January 1, 20X4 $ 9,000

Recorded [($28,000 / 3 1/2 years) x 1 1/2 years] (12,000)

Trang 18

E6-13 Consolidated Net Income Computation

a Downstream sale of land:

20X4 20X5 Verry’s separate operating income $ 90,000 $110,000 Less: Unrealized gain on sale of land (25,000) Verry’s realized operating income $ 65,000 $110,000 Spawn’s realized net income 60,000 40,000 Consolidated net income $125,000 $150,000 Income to noncontrolling interest:

($40,000 X 25) (10,000) Income to controlling interest $110,000 $140,000

b Upstream sale of land:

20X4 20X5 Verry’s separate operating income $ 90,000 $110,000 Spawn’s net income $60,000

Less: Unrealized gain on sale of land (25,000)

Spawn’s realized net income 35,000 40,000 Consolidated net income $125,000 $150,000 Income to noncontrolling interest:

($40,000 x 25) (10,000) Income to controlling interest $116,250 $140,000

Trang 19

E6-14 Elimination Entries for Intercompany Transfers

a Operating income of Grand Delivery $65,000 Net income of Acme Real Estate Company $40,000

Less: Unrealized profit on land sale (25,000)

Acme’s realized net income 15,000

b Journal entries recorded by Speedy Delivery:

Investment in Acme Real Estate Stock 8,000 Record dividends from Acme Real Estate:

$10,000 x 80

(2) Investment in Acme Real Estate Stock 32,000

Income from Subsidiary 32,000 Record equity-method income:

$3,000 = ($40,000 - $25,000) x 20

E(3) Common Stock — Acme Real Estate Company 300,000

Investment in Acme Real Estate Stock 320,000 Noncontrolling Interest 80,000 Eliminate beginning investment balance

Eliminate unrealized gain on land

Eliminate courier services performed by

Speedy Delivery Service

Trang 20

E6-15 Sale of Building to Parent in Prior Period

a Turner will record annual depreciation expense of $25,000

($300,000 / 12 years)

b Split would have recorded annual depreciation expense of $20,000

($400,000 / 20 years)

Accumulated Depreciation 155,000 Eliminate unrealized profit on building

Amount paid by Split to acquire building $400,000

Amount paid by Turner on intercompany sale (300,000)

Adjustment to buildings and equipment $100,000

Unrealized gain, December 31, 20X8

[$300,000 - ($400,000 - $160,000)] $ 60,000

Proportion of ownership held by Turner x .70

Unrealized gain, December 31, 20X8 $ 60,000

Proportion of ownership held by

noncontrolling interest x .30

Depreciation expense recorded by Turner

Company ($300,000 / 12 years) $ 25,000

Depreciation expense recorded by Split

Company ($400,000 / 20 years) (20,000)

Amount reported by Turner ($25,000 x 1 year) (25,000)

Trang 21

d Income assigned to noncontrolling interest for 20X9:

Net income reported by Split Company $ 40,000 Amount of gain realized in 20X9 ($60,000 / 12 years) 5,000 Realized net income for 20X9 $ 45,000 Proportion of ownership held by noncontrolling

Income assigned to noncontrolling interest $ 13,500

e Amount assigned to noncontrolling interest in 20X9 consolidated

Amount assigned to noncontrolling interest in

December 31, 20X9, consolidated balance sheet $ 51,000

E6-16 Intercompany Sale at a Loss

a Consolidated net income for 20X8 will be greater than Parent Company's income from operations plus Sunway's reported net income The eliminating entries at December 31, 20X8, will result in an increase of $16,000 to consolidated net income

b As a result of purchasing the equipment at less than Parent's book value, depreciation expense reported by Sunway will be $2,000 ($16,000 / 8 years) below the amount that would have been recorded by Parent Thus, depreciation expense must be increased by $2,000 when eliminating entries are prepared at December 31, 20X9 Consolidated net income will be decreased by the full amount of the $2,000 increase in depreciation expense

Trang 22

E6-17 Eliminating Entries Following Intercompany Sale at a Loss

Loss on Sale of Building 36,000 Accumulated Depreciation 120,000 Eliminate unrealized loss on building

b Consolidated net income and income to controlling

interest for 20X7:

Operating income reported by Brown $125,000 Net income reported by Transom $ 15,000

Add: Loss on sale of building 36,000

Realized net income of Transom 51,000

Income to noncontrolling interest ($51,000 x 30) (15,300) Income to controlling interest $160,700

Accumulated Depreciation 124,000 Retained Earnings, January 1 25,200 Noncontrolling Interest 10,800 Eliminate unrealized loss on building

Amount paid by Transom to acquire building $300,000

Amount paid by Brown on intercompany sale (144,000)

Adjustment to buildings and equipment $156,000

Depreciation expense recorded by Transom

Company ($300,000 / 15 years) $ 20,000

Depreciation expense recorded by Brown

Amount reported by Brown ($16,000 x 1 year) (16,000)

Trang 23

Unrealized loss recorded, December 31, 20X7 $36,000

Proportion of ownership held by Brown x 70

Unrealized loss recorded, December 31, 20X7 $36,000

Proportion of ownership held by noncontrolling

Adjustment for loss on sale of building (4,000)

Realized net income of Transom 36,000

Income assigned to noncontrolling interest

Income assigned to controlling interest $175,200

Trang 24

E6-18 Multiple Transfers of Asset

a $145,000

b No gain or loss should be reported

c Swanson Corporation operating income $150,000 Sullivan Corporation net income $120,000

Loss on sale of land ($145,000 - $130,000) 15,000

Realized net income of Sullivan Corporation $135,000

Proportion of stock held by Swanson x .80 108,000 Kolder Company net income $ 60,000

Gain on sale of land ($180,000 - $130,000) (50,000)

Realized net income of Kolder Company $ 10,000

Proportion of stock held by Swanson x .70 7,000 Clayton Corporation net income $ 80,000

Gain on sale of land ($240,000 - $180,000) (60,000)

Realized net income of Clayton Corporation $ 20,000

Proportion of stock held by Swanson x .90 18,000 Income assigned to controlling interest $283,000 Alternate Computation:

Swanson Corporation operating income $150,000 Sullivan Corporation net income 120,000

Clayton Corporation net income 80,000

Unrealized loss recorded by Sullivan Corp $ (15,000)

Unrealized gain recorded by Kolder Company 50,000

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

Sullivan Corp ($120,000 + $15,000) x 20 $ 27,000

Kolder Company ($60,000 - $50,000) x 30 3,000

Clayton Corp ($80,000 - $60,000) x 10 2,000 (32,000) Income assigned to controlling interest $283,000

d Eliminating entry:

Eliminate gains and loss on land transfer:

$110,000 = $50,000 + $60,000

$95,000 = $110,000 - $15,000

Trang 25

E6-19 Elimination Entry in Period of Transfer

$21,600 = $36,000 x 60

$14,400 = $36,000 x 40

$57,000 = ($20,000 x 4 years) - ($23,000

x 1 year)

Trang 26

E6-20 Elimination Entry Computation

Gain on Sale of Equipment 60,000

Accumulated Depreciation 144,000 Depreciation expense adjustment:

Recorded ($360,000 / 10 years) $ 36,000

Required [($450,000 - $150,000) / 10 years] (30,000)

Required decrease $ 6,000

Accumulated depreciation, January 1, 20X6 $150,000

Unrealized profit, January 1, 20X6 $ 60,000

Realized in 20X6 (6,000)

Unrealized profit, January 1, 20X7 $ 54,000

Proportion of stock held by Stern x .70

Share of unrealized profit $ 37,800

Accumulated depreciation, January 1, 20X6 $150,000

Depreciation based on historical cost

[($300,000 / 10 years) x 2] 60,000

Depreciation recorded [($360,000 / 10) x 2] (72,000)

Trang 27

E6-21 Using the Eliminating Entry to Determine Account Balances

a Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber

Corporation

b The subsidiary was the owner The sale was from the subsidiary to the parent, as evidenced by the debit to noncontrolling interest in the eliminating entry

c Intercompany transfer price:

Amount paid by Somber Corporation $120,000 Increase to buildings and equipment

Amount paid by Pastel to Somber for equipment $ 66,500

d Income assigned to noncontrolling interest for 20X9:

Net income reported by Somber $ 25,000 Amount of gain realized in 20X9 ($10,500 / 7 years) 1,500 Realized net income for 20X9 $ 26,500 Proportion of ownership held by noncontrolling

Income assigned to noncontrolling interest $ 2,650

e Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported

by the consolidated entity for 20X9

f Eliminating entries at December 31, 20X9:

E(1) Income from Subsidiary 22,500

$2,650 = ($25,000 + $1,500) x 10

$600 = $6,000 x 10

E(3) Common Stock — Somber Corporation 300,000

Investment in Somber Corporation Stock 450,000 Noncontrolling Interest 50,000 Eliminate beginning investment balance

Trang 28

Accumulated Depreciation 64,000 Eliminate unrealized gain on upstream

sale of equipment

E(5) Accumulated Depreciation 1,500

Eliminate excess depreciation

E6-22 Intercompany Sale of Services

a Eliminating entries, 20X4:

E(1) Consulting Revenue 138,700

Consulting Fees Expense 138,700 Eliminate intercompany revenue and expense

Eliminate intercompany receivable/payable

b Consolidated net income and income to controlling

interest for 20X4:

Norgaard's separate operating income $2,342,000

Consolidated net income 2,973,000 Income to noncontrolling interest ($631,000 x 25) (157,750) Income to controlling interest $2,815,250

Trang 29

E6-23A Fully Adjusted Equity Method and Cost Method

a Fully Adjusted equity-method journal entries, 20X4:

Investment in TV Sales Company Stock 13,000 Record dividends from TV Sales Company:

$20,000 x 65

(2) Investment in TV Sales Company Stock 45,500

Income from Subsidiary 45,500 Record equity-method income: $70,000 x 65

(3) Income from Subsidiary 11,000

Investment in TV Sales Company Stock 11,000 Remove unrealized gain on sale of land

(4) Investment in TV Sales Company Stock 5,200

Recognize portion of gain on sale of

equipment: $8,000 x 65

Eliminating entries, December 31, 20X4:

E(1) Income from Subsidiary 39,700

$27,300 = ($70,000 + $8,000) x 35

E(3) Common Stock — TV Sales Company 300,000

Investment in TV Sales Company Stock 289,250 Noncontrolling Interest 155,750 Eliminate beginning investment balance

E(5) Investment in TV Sales Company Stock 26,000

Eliminate unrealized gain on upstream

Trang 30

E6-23A (continued)

E(6) Accumulated Depreciation 8,000

Eliminate excess depreciation

b Cost-method journal entry recorded by Newtime Products:

Record dividend income from TV Sales

Company

Cost-method eliminating entries, December 31, 20X4:

Eliminate dividend income from subsidiary

E(2) Income to Noncontrolling Interest 27,300

Noncontrolling Interest 20,300 Assign income to noncontrolling interest:

$27,300 = ($70,000 + $8,000) x 35

E(3) Common Stock — TV Sales Company 300,000

Investment in TV Sales Company Stock 260,000 Noncontrolling Interest 140,000 Eliminate investment balance at date of

acquisition

Noncontrolling Interest 15,750 Assign undistributed prior earnings of

subsidiary to noncontrolling interest:

$45,000 x 35

Trang 31

SOLUTIONS TO PROBLEMS

P6-24 Computation of Consolidated Net Income

a Separate operating income of Petime Corporation $34,000 Reported net income of United Grain Company $19,000

Unrealized profit of sale of land (7,000)

Realized income for 20X4 $12,000

Amortization of differential ($10,000 / 10 years) ( 1,000)

$11,000 Proportion of ownership held by Petime x 90

Income attributable to controlling interest 9,900 Income to controlling interest $43,900

b Separate operating income of Petime Corporation $34,000 Reported net income by United Grain Company $19,000

Amortization of differential ($10,000 / 10 years) ( 1,000)

$18,000 Proportion of stock held by Petime x 90

Income attributable to controlling interest 16,200 Unrealized profit on sale of land (7,000) Income to controlling interest $43,200 Reported income will decrease by $700 In the upstream case the unrealized profit ($7,000) is apportioned to both majority ($6,300) and noncontrolling ($700) shareholders In the downstream case, it is apportioned entirely to the majority shareholders ($7,000)

P6-25 Subsidiary Net Income

a Toll Corporation’s reported net income for 20X4 was $94,400:

Income assigned to noncontrolling shareholders $17,500 Add: Unrealized profit on building ($20,000 x 25) 5,000 Amortization of differential ($4,400 x 25) 1,100 Income assigned to noncontrolling interest before

adjustment

$23,600 Proportion of stock held by noncontrolling interest ÷ 25

Computation of annual amortization:

Fair value of consideration given by Bold $348,000 Fair value of noncontrolling interest 116,000

Book value of Toll’s assets:

Retained earnings 270,000

Differential paid by Bold $ 44,000

Trang 32

P6-25 (continued)

b Consolidated net income for 20X4 is $304,000:

Bold Corporation’s operating income $234,000 Toll Corporation’s net income 94,400 Amortization of differential ($44,000 / 10 years) (4,400) Unrealized profit on building (20,000)

c Income assigned to controlling interest is $286,500:

Income assigned to noncontrolling interest (17,500) Income assigned to controlling interest $286,500 Alternate computation:

Income from Toll:

Unrealized profit on building (20,000)

Amortization of differential (4,400)

Portion of ownership held x 75 52,500 Income to controlling interest $286,500

Trang 33

P6-26 Transfer of Asset from One Subsidiary to Another

Bugle Cook Products Consolidated Corporation Corporation Entity Depreciation expense $ - $ 3,000 $ 2,000 Fixed assets — Warehouse - 45,000 40,000 Accumulated depreciation - 3,000 12,000 Gain on sale of warehouse 15,000 - -

P6-27 Consolidated Eliminating Entry

a Master paid Rakel $460,000 ($600,000 - $140,000)

b Accumulated deprecation at January 1, 20X7, was $168,000, computed as follows: Purchase price paid by Rakel $600,000 Amount paid by Master $460,000

Gain recorded by Rakel (28,000)

Book value at date of sale (432,000) Accumulated depreciation at date of sale $168,000

c Annual depreciation expense recorded by Rakel was $28,000

($168,000/6 years)

d The estimated residual value was $40,000, computed as follows:

Purchase price paid by Rakel $600,000

Amount to be depreciated by Rakel ($28,000 x 20 years) (560,000) Estimated residual value $ 40,000

e Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 -

$40,000) / 14 years)

f Reported net income of Rakel $ 80,000

Unrealized gain on sale of building ($28,000 - $2,000) (26,000)

$ 54,000

Proportion of stock held by noncontrolling interest x .40 Income assigned to noncontrolling interest $ 21,600

g Reported net income of Rakel $ 65,000

Portion of gain on sale of building realized in 20X8 2,000

$ 67,000

Proportion of stock held by noncontrolling interest x .40 Income assigned to noncontrolling interest $ 26,800

Trang 34

P6-29 Intercompany Services Provided to Subsidiary

The eliminating entry at December 31, 20X4, would be:

P6-30 Consolidated Net Income with Intercorporate Transfers

a Entry to record intercompany transfer of equipment, 20X6:

Trang 35

P6-30 (continued)

b 20X7 eliminating entries related to intercorporate transfers:

Eliminate unrealized loss on land:

c Subsidence Mining's 20X7 net income was $90,000:

Subsidence Mining's income to noncontrolling

Noncontrolling interest's share of subsidiary income ÷ .30 Subsidence Mining's income before adjustment $130,000 Add: Amortization of differential:

($200,000 / 10 years) 20,000 Less: Unrealized loss on intercompany sale of land (60,000) Subsidence Mining's 20X7 net income $ 90,000

d Bower’s operating income was $826,000:

Less: Income to noncontrolling interest (39,000) Income assigned to controlling interest $922,000 Income from Subsidence Mining:

Reported net income $ 90,000

Unrealized loss on land 60,000

Amortization of differential ($200,000 / 10 years) (20,000)

Định dạng
Số trang	70
Dung lượng	3,27 MB