CHAPTER 8 CONSOLIDATED FINANCIAL STATEMENTS: INTERCOMPANY TRANSACTIONS

The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers. Pr. 8–1 Prentiss Corporation (30 minutes, easy) Journal entries for intercompany promissory note, including discounting of the note with a bank, for both parent corporation and subsidiary. Pillsbury Corporation (30 minutes, medium) Journal entries for both parent company and subsidiary to record intercompany promissory note transactions, including discounting of a note. Pittsburgh Corporation (50 minutes, medium) Correcting entries for improperly recorded intercompany transactions and balances. Partial working paper for consolidated financial statements to show presentation of intercompany transactions and balances. Parley Corporation (30 minutes, medium) Working paper eliminations (in journal entry format) for partially owned subsidiary’s sale of leasehold improvement to parent company and for parent company’s acquisition of subsidiary’s bonds in the open market. Peke Corporation (30 minutes, medium) Working paper eliminations (in journal entry format) for downstream and upstream intercompany sales of merchandise. Partially owned subsidiary is involved. Pandua Corporation (45 minutes, medium) Working paper eliminations (in journal entry format) for intercompany sales of merchandise and machinery, for parent company’s open-market acquisition of subsidiary’s bonds, and for minority interest in net income of partially owned subsidiary. Pacific Corporation (50 minutes, medium) Journal entries and working paper eliminations (in journal entry format) for intercompany sale of machinery and for parent company’s acquisition of wholly owned subsidiary’s bonds in the open market. Pollard Corporation (50 minutes, medium) Preparation of three-column ledger accounts for accounts affected by parent company’s openmarket acquisition of wholly owned subsidiary’s bonds. Working paper eliminations (in journal entry format) for two years. Procus Corporation (60 minutes, medium) Preparation of three-column ledger accounts for accounts affected by intercompany salestype/capital lease. Working paper eliminations (in journal entry format) for two years. Patrick Corporation (60 minutes, medium) Working paper for consolidated balance sheet and related working paper eliminations (in journal entry format) for parent corporation and wholly owned subsidiary having merchandising transactions prior to the business combination.

Pr. 8–2

Pr. 8–3

Pr. 8–4

Pr. 8–5

Pr. 8–6

Pr. 8–7

Pr. 8–8

Pr. 8–9

Pr. 8–10

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Pr. 8–11

Pr. 8–12

Power Corporation (65 minutes, strong) Working paper for consolidated financial statements and related working paper eliminations (in journal entry format) of parent company and partially owned subsidiary having intercompany transactions for merchandise and equipment. Pritchard Corporation (65 minutes, strong) Adjusting entries, working paper eliminations (in journal entry format), and working paper for consolidated financial statements of parent company and wholly owned subsidiary having intercompany transactions for notes, merchandise, and equipment.

ANSWERS TO REVIEW QUESTIONS
1. To assure correct elimination of intercompany transactions and balances in consolidated financial statements, a parent company and subsidiary should set up clearly identified separate ledger accounts to record the intercompany items. Common intercompany transactions between a parent company and its subsidiary include the following (only five are required): (1) Sales of merchandise (2) Sales of land or depreciable plant assets (3) Sales of intangible assets (4) Leases of property under sales-type/capital leases (5) Loans on promissory notes or open accounts (6) Leases of property under operating leases (7) Rendering of services There are no income tax effects associated with the elimination of intercompany rent revenue and expense under an operating lease. Because the revenue of one affiliate exactly offsets the expense of the other affiliate, there is no intercompany profit (gain) or loss associated with the operating lease in a consolidated income statement. A discounted intercompany note receivable is not eliminated in the preparation of a consolidated balance sheet. Discounting the note in effect makes it payable to an outsiderthe bank that discounted the note. If unrealized intercompany profits (gains) resulting from transactions between parent company and subsidiaries are not eliminated, consolidated financial statements will reflect the results of related party activities within the group, as well as results of transactions with those outside the consolidated entity. In these circumstances, consolidated net income would be subject to manipulation by management of the parent company. The following consolidated financial statement categories are affected by intercompany sales of merchandise at a profit: Net sales Cost of goods sold Net income to parent Inventories Total current assets Total assets Total stockholders’ equity

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The unrealized intercompany profit in a subsidiary’s beginning inventories resulting from the parent company’s sales of merchandise to the subsidiary is eliminated from the parent’s beginning retained earnings. This technique is required because the parent had closed the gross profit on its sales to the subsidiaryincluding the profit attributable to the subsidiary’s ending inventories of the preceding accounting periodto its Retained Earnings ledger account. The minority interest in net income of a partially owned subsidiary is affected by working paper eliminations that involve intercompany profits (gains) attributable to that subsidiary. Examples are intercompany profits (gains) on upstream or lateral sales of merchandise, plant assets, or intangible assets, and gains on the open-market acquisition of a partially owned subsidiary’s bonds by the parent company or by another subsidiary. Eliminations of intercompany profit in the parent company’s inventories only to the extent of the parent company’s ownership interest in the selling subsidiary results in a portion of intercompany profit remaining in consolidated net income. This is an undesirable result if the consolidated financial statements are to present the results of transactions with those outside the consolidated entity. The minority stockholders of the subsidiary, although they are considered co-owners of the consolidated entity under the economic unit concept of consolidated financial statements, play no part whatsoever in the negotiation of intercompany sales. Therefore, all the intercompany profit in the parent company’s ending inventories should be eliminated in the preparation of consolidated financial statements. Intercompany sales of plant assets and intangible assets differ from intercompany sales of merchandise in two respects. First, intercompany sales of plant assets and intangible assets are infrequent in occurrence, but intercompany sales of merchandise are recurring transactions once a program for intercompany sales has begun. Second, realization of intercompany gain on sales of plant assets or intangible assets requires the passage of many accounting periods; intercompany profits on sales of merchandise generally are realized rapidly, depending on the frequency of inventories turnover. An intercompany gain on the sale of land is realized only when the land is resold to an outsider. The gain on sale of land between affiliated companies is unrealized from a consolidated point of view. The intercompany gain element of Partin Corporation’s annual depreciation expense is $500 ($2,000 x 1/4 = $500). In the working paper for consolidated financial statements, depreciation expense is reduced by the $500 intercompany gain element. The $500 is considered to be an increase in Sayles Company’s net income, for the computation of the minority interest in net income of subsidiary. Working paper eliminations (in journal entry format) for intercompany leases of property under capital/sales-type leases include eliminations of both intercompany sales and cost of goods sold and the intercompany profit in depreciation expense. Thus, such eliminations have features of both eliminations for intercompany sales of merchandise and eliminations for intercompany sales of plant assets. The quoted statement is unsupportable because it implies that intercompany gain or loss results only from transactions between affiliated companies. When one affiliate acquires another affiliate’s bonds in the open market, a realized gain or loss is recognized on the transaction. Although in form no transaction has taken place between the affiliates, in substance the acquiring affiliate acts as an agent for the issuer of the bonds in the open-market transaction. Thus, the realized gain or loss is recognized in the consolidated income statement and is attributed to the issuer of the bonds.

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16.

A subsidiary’s reissuance of parent company bonds acquired in the open market by the subsidiary interrupts the orderly amortization of the realized gain or loss on the acquisition of the bonds. A transaction gain or loss on the subsidiary’s reissuance of the parent company’s bonds is not realized by the consolidated entity. Logically, the transaction gain or loss should be treated in consolidation as premium or discount on the reissued bonds. The elimination or recognition of intercompany profits (gains) or losses in inventories, plant assets, intangible assets, or bonds is recorded only in the working paper for consolidated financial statements. Because the parent company generally does not reflect intercompany profit (gain) or loss eliminations in its equity-method recording of the subsidiary’s operating results, the parent company’s net income will differ from consolidated net income.

SOLUTIONS TO EXERCISES
Ex. 8–1 1. 2. 3. 4. 5. 6. 7. b ($51,000 – $850 = $50,150) a b b c b b 8. c 9. d ($120,000 ÷ 0.60 = $200,000) 10. a 11. b ($84,115 x 0.07 = $5,888) 12. b 13. a 14. b [$60,000 – ($12,000 x 2) = $36,000] $102,000 1,700 $100,300 10,022 36 10,000 58

Ex. 8–2

Computation of Parker Corporation’s debit to Cash, Apr. 12, 2006: Maturity value of note [$100,000 + ($100,000 x 0.08 x 90/360)] Less: Discount ($102,000 x 0.10 x 60/360) Debit to Cash

Ex. 8–3

Payton Corporation’s journal entry, Mar. 31, 2006: Cash ($10,175 – $153) Interest Expense ($153 – $117*) Intercompany Notes Receivable Intercompany Interest Revenue ($10,000 x 0.07 x 30/360) To record discounting of 7%, 90-day note receivable from Slagle Company dated Mar. 1, 2006, at a discount rate of 9%. Cash proceeds computed as $10,175 maturity value of note, less $153 discount ($10,175 x 0.09 x 60/360 = $153). *$10,000 x 0.07 x 60/360 = $117

Ex. 8–4

Planke Corporation’s journal entry to record discounting of Scully Company note, Mar. 31, 2006: Cash Interest Expense ($152 – $135) Intercompany Notes Receivable Intercompany Interest Revenue To record discounting of 9%, 60-day note receivable from Scully Company dated Mar. 1, 2006, at a discount rate of 10%. Cash proceeds computed as follows: Maturity value of note [$18,000 + ($18,000 x 0.09 x 60/360)] $18,270 Discount ($18,270 x 0.10 x 30/360) 152 Proceeds $18,118 *$18,000 x 0.09 x 30/360 = $135 18,118 17 18,000 135*

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Ex. 8–5

Journal entries for Palos Verdes Corporation: 2005 June 1 Intercompany Notes Receivable Cash July 1 Cash ($123,600 – $3,090) Interest Expense [$3,090 – ($120,000 x 0.12 x 2/12)] Intercompany Notes Receivable Intercompany Interest Revenue ($120,000 x 0.12 x 1/12) Intercompany Dividends Receivable ($80,000 x 0.90) Investment in South Gate Company Common Stock

120,000 120,000 120,510 690 120,000 1,200 72,000 72,000 72,000 72,000 180,000 180,000 Gross profit (25% of cost; 20% of selling price) $ 3,600 24,000 $27,600 4,800 $22,800 25,000 800,000 600,000 187,500 37,500 120,000 100,000 14,000 6,000

2006 May 1

10 Cash Intercompany Dividends Receivable 31 Investment in South Gate Company Common Stock ($200,000 x 0.90) Intercompany Investment Income Ex. 8–6

Analysis of Peggy Corporation’s sales to Sally Company for year ended Nov. 30, 2006:

Beginning inventories Add: Sales Subtotals Less: Ending inventories Cost of goods sold Ex. 8–7

Selling price $ 18,000 120,000 $138,000 24,000 $114,000

Cost $ 14,400 96,000 $110,400 19,200 $ 91,200

Working paper elimination for Patter Corporation and subsidiary, Feb. 28, 2006: Retained EarningsPatter Intercompany SalesPatter Intercompany Cost of Goods SoldPatter Cost of Goods SoldSmatter InventoriesSmatter

Ex. 8–8

Working paper elimination for Pele Corporation and subsidiary, July 31, 2006: Intercompany SalesPele Intercompany Cost of Goods SoldPele ($120,000 x 0.83 1/3) Cost of Goods SoldShad ($84,000 x 0.16 2/3) InventoriesShad ($36,000 x 0.16 2/3) To eliminate intercompany sales and cost of goods sold, and unrealized intercompany profit in inventories. (Income tax effects are disregarded.)

Ex. 8–9

Working paper elimination for Polydom Corporation and subsidiary, Dec. 31, 2006: Retained EarningsSpring ($160,000 x 0.25 x 0.75) Minority Interest in Net Assets of Spring Company ($160,000 x 30,000 10,000

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0.25 x 0.25) Intercompany SalesSpring ($600,000 x 1.33 1/3) Intercompany Cost of Goods SoldSpring InventoriesSolano ($200,000 x 0.25) Cost of Goods SoldSolano ($760,000 x 0.25) To eliminate intercompany sales and cost of goods sold and unrealized intercompany profit in inventories. (Income tax effects are disregarded.) Ex. 8–10 Intercompany SalesSolar ($120,000 x 1.25) Intercompany Cost of Goods SoldSolar Cost of Goods SoldStellar ($110,000 x 0.20) InventoriesStellar ($40,000 x 0.20) Intercompany SalesStellar ($180,000 x 1.33 1/3) Intercompany Cost of Goods SoldStellar Cost of Goods SoldSolar ($180,000 x 0.25) InventoriesSolar ($60,000 x 0.25) Ex. 8–11

800,000 600,000 50,000 190,000

Working paper eliminations for Polar Corporation and subsidiaries, Sept. 30, 2006: 150,000 120,000 22,000 8,000 240,000 180,000 45,000 15,000

a. To eliminate unrealized intercompany gain in machinery and in related depreciation. (Income tax effects are disregarded.) b. Two years. ($12,500 ÷ $6,250 = 2) c. The credit to Depreciation ExpenseParke in effect represents the realization of a portion of the intercompany gain on Selma’s sale of machinery to Parke two years ago. Thus, $6,250 is added to Selma’s net income for the year ended December 31, 2006, to compute the minority interest in net income of Selma. The consolidated net income of Parke Corporation and subsidiary for the year ended December 31, 2006, is net of the minority interest in net income of Selma.

Ex. 8–12

Working paper elimination for Patria Corporation and subsidiary, Sept. 30, 2008: Retained EarningsSelena ($4,500* x 0.90) Minority Interest in Net Assets of Subsidiary ($4,500 x 0.10) Accumulated DepreciationPatria [$5,500 x (10/55 + 9/55)] EquipmentPatria ($14,500 – $9,000) Depreciation ExpensePatria ($5,500 x 9/55) To eliminate unrealized intercompany gain in equipment and in related depreciation. (Income tax effects are disregarded.) *$5,500 – ($1,900 – $900) = $4,500 4,050 450 1,900 5,500 900

Ex. 8–13

Computation of missing amounts in working paper eliminations for Paulo Corporation and subsidiary: (1) $480 ($2,400 x 0.20) (2) $1,920 ($2,400 x 0.80) (3) $2,400 ($800 x 3) (4) $160 ($800 x 0.20) (5) $640 ($800 x 0.80) (6) $4,000 ($800 x 5)

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Ex. 8–14

Working paper elimination for Pelion Corporation and subsidiary, Dec. 31, 2007: Intercompany Liability under Capital LeaseStyron ($15,849 – $5,000 + $1,585) 12,434 Unearned Intercompany Interest RevenuePelion ($4,151 – $1,585) 2,566 Retained EarningsPelion ($20,849 – $17,000) 3,849 Intercompany Lease ReceivablesPelion ($20,000 – $5,000) 15,000 Leased EquipmentCapital LeaseStyron ($3,849 – $385) 3,464 Depreciation ExpenseStyron ($3,849 ÷ 10) 385 To eliminate intercompany accounts associated with intercompany lease and to defer unrealized portion of intercompany gross profit on sales-type lease. (Income tax effects are disregarded.) Note to Instructor: Pelion’s intercompany interest revenue [($20,000 – $4,151) x 0.10 = $1,585] is offset against Styron’s intercompany interest expense ($15,849 x 0.10 = $1,585) on the same line in the income statement section of the working paper for consolidated financial statements. Working paper elimination for Pawley Corporation and subsidiary, Feb. 28, 2007: Intercompany Gain on Sale of PatentSmart ($80,000 – $60,000) 20,000 Amortization ExpensePawley ($20,000 ÷ 4) 5,000 PatentPawley ($20,000 – $5,000) 15,000 Computation of amount of cash paid by Polka Corporation, Apr. 30, 2007: Present value of $40,000 due in four years at 12%, with interest paid annually ($40,000 x 0.635518) Add: Present value of $4,000 due each year for four years at 12% ($4,000 x 3.037349) Cost of $40,000 face amount of bonds Add: Accrued interest purchased ($40,000 x 0.10) Amount of cash paid by Polka Corporation Computation of gain on extinguishment of bonds: Carrying amounts of bonds acquired: $100,000 x 0.40 Less: Cost of bonds to Polka Corporation (see above) Gain on extinguishment of bonds $40,000 37,570 $ 2,430 $ 5,810 $ 1,987 441 $ 1,546 $58,508 $ 4,959 $ 3,500 $25,421 12,149 $37,570 4,000 $41,570

Ex. 8–15

Ex. 8–16

Ex. 8–17

Computation of missing amounts in working paper elimination: (1) Intercompany interest revenue: $58,098 x 0.10 (2) Premium on intercompany bonds payable: Premium, Oct. 31, 2007: $58,098 + $3,889 – $60,000 Amortization for year ended Oct. 31, 2008: $5,400 – ($61,987 x 0.08) Premium, Oct. 31, 2008 (3) Investment in Sinn Company bonds: $58,098 + ($5,810 – $5,400) (4) Intercompany interest expense: $61,987 x 0.08 (5) Retained earnings: $3,889 x 0.90, or $3,889 – $389

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Ex. 8–18

Computation of minority interest in Sokal Company’s net income: Net income of subsidiary Intercompany profit in parent company’s inventories, unrealized in Year 2006, realized in Year 2007 Adjusted net income of subsidiary Minority interest (30%) Year 2006 $80,000 (2,000) $78,000 $23,400 Year 2007 $90,000 2,000 $92,000 $27,600

CASES
Case 8–1 The journal entries of Seeley Company to record the acquisition and depreciation of machinery are adequate and need not be changed. However, the journal entries of Powell Corporation are incorrect for two reasons: (1) Idle machinery is accounted for as though it were merchandise. A Sales ledger account is inappropriate for any asset except merchandise sold to customers. (2) The first journal entry does not identify the transaction as an intercompany transaction. Failure to identify intercompany transactions leads to the risk that such transactions, profits (gains) or losses, and balances will not be eliminated in the preparation of consolidated financial statements. The working paper elimination prepared by Powell’s accountant does not remove the intercompany gain element from the consolidated income statement. In effect, the elimination accounts for the intercompany gain as though it were a prior period adjustment. This treatment has no justification. Powell’s journal entry for the intercompany sale of idle machinery should have been as follows: Cash 50,000 Idle Machinery 40,000 Intercompany Gain on Sale of Idle Machinery 10,000 To record sales of idle equipment to Seeley Company. (Income tax effects are disregarded.) The correct December 31, 2006, working paper elimination (in journal entry format) is as follows: Intercompany Gain on Sale of Idle MachineryPowell 10,000 Accumulated Depreciation of MachinerySeeley MachinerySeeley Depreciation ExpenseSeeley To eliminate unrealized intercompany gain in machinery and in related depreciation. (Income tax effects are disregarded.) Case 8–2 1,000 10,000 1,000

Shelton Company’s $10,000 debit to a deferred charge ledger account for the excess paid by Shelton for the trade accounts receivable acquired from Sawhill Company is inappropriate. A deferred charge is an account established for long-term prepayments for goods or services to be received in the future. The $10,000 excess payment for the trade accounts receivable does not fit the concept of a deferred charge. Further, the nature of the expense account debited by Shelton for the amortization of the deferred charge is not clear. The $10,000 should have been debited to a loss ledger account, because it represents an outlay by Shelton to a liquidating affiliated company for which no benefits were received. The $10,000 loss in Shelton’s accounting records, as recommended above, should be eliminated in the preparation of consolidated financial statements for Peasley Corporation and subsidiaries for the year ended

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October 31, 2006. The following working paper elimination (in journal entry format) is required: Investment Income of Sawhill CompanyPeasley 10,000 Loss on Acquisition of ReceivablesShelton To eliminate loss on Shelton Company’s acquisition of trade accounts receivable from Sawhill Company, an unconsolidated subsidiary in liquidation. 10,000

Case 8–3

Case 8–4

Case 8–5

The fact that Sawhill is in liquidation and is not consolidated does not change the need for eliminating all intercompany transactions, balances, and profits (gains) or losses from the consolidated financial statements. Given that both Winston Corporation and Cranston Company use the periodic inventory system and that markups on Winston’s sales of products to Cranston had varied, it is probably impossible for the newly hired controller of Winston to prepare any consolidated financial statements other than a consolidated balance sheet at the end of the first fiscal year of the controllership. The local CPA firm had prepared separate income tax returns for both Winston and Cranston; thus, it is unlikely that the CPA firm had any records of intercompany profits in Winston’s sales to Cranston and in Cranston’s ending inventories. If the controller is able to obtain accurate quantities and billed prices of Winston-produced products in Cranston’s ending inventory, and if Winston’s costs of those products are obtainable from Winston’s production records, the amount of the unrealized intercompany profit in Cranston’s ending inventory can be determined, thus facilitating preparation of a consolidated balance sheet. Establishment of appropriate intercompany sales and intercompany cost of goods sold accounting records for Winston for the following fiscal year (which would entail Winston’s adoption of the perpetual inventory system) would enable the controller to prepare consolidated statements of income, retained earnings, and cash flows, as well as consolidated balance sheets, for future fiscal years. The accountant’s position is not supported by accounting theory for consolidated financial statements. Under that theory, consolidated financial statements should display amounts resulting from transactions with those outside the consolidated group. Consolidated financial statements should not be distorted by intercompany transactions, which are not the result of arm’s-length bargaining between parties with opposing interests. Despite the fact that Aqua Well Company’s charges for transmission of water to Aqua Water Corporation were at the customary rate approved by the state’s Public Utilities Commission, these charges in the aggregate are dependent on the volume of water ordered from the subsidiary by the parent company. Thus, Aqua Well’s transmission revenue amount must be offset against Aqua Water’s transmission expense amount if the consolidated income statement for the two companies is to comply with generally accepted accounting principles for consolidated financial statements. The Audit Committee of the Board of Directors Padgett Corporation At your request, I have found the following misstatements in the condensed consolidated financial statements of Padgett Corporation and subsidiary, Seacoast Company, for the year ended December 31, 2006:

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1. The failure to eliminate the intercompany “gain” (actually, because of implicit interest, a $119,417 loss; the present value of $680,583, at an interest rate of 8%, compared with Padgett’s $800,000 cost of the land) on the sale of land to Seacoast by Padgett. Elimination of the “gain” reduces pre-tax consolidated income and consolidated property, plant, and equipment by $200,000. 2. The failure to eliminate the December 31, 2006, intercompany sale, $650,000, and cost of goods sold, $500,000, resulting from a shipment by Padgett to Seacoast. Elimination of the $150,000 intercompany gross margin reduces pre-tax income by that amount. The net effect of the foregoing errors on the subject consolidated financial statements is as follows: Balance sheet: Current assets (inventories) overstated $150,000 Property, plant, and equipment overstated $200,000 Total assets overstated $350,000 Current liabilities (income taxes payable) overstated $119,000 (see below) Stockholders’ equity overstated $231,000 Income statement: Net sales overstated Cost of goods sold overstated Gain on sale of land overstated Pre-tax income overstated Income tax expense overstated Net income overstated Basic earnings per share overstated

$650,000 $500,000 $200,000 $350,000 $119,000 ($350,000 x 0.34) $231,000 $3.85 ($231,000 ÷ 60,000 shares)a 70% overstatement Very truly yours, _____________, CPA

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30 Minutes, Easy Prentiss Corporation a. Prentiss Corporation Journal Entries
20 06 Oct 21 Intercompany Notes Receivable Cash To record loan to Scopes Company on 90-day, 7 ½% promissory note. 31 Cash ($101,875 – $2,038) Interest Expense ($2,038 – $1,667*) Intercompany Notes Receivable Intercompany Interest Revenue ($100,000 x 0.075 x 10/360) To record discounting of 90-day, 7 ½% note receivable from Scopes Company dated Oct. 21, 2006, at a discount rate of 9%. Cash proceeds are computed as follows: Maturity value of note [$100,000 + ($100,000 x 0.075 x 90/360)] $101,875 Discount ($101,875 x 0.09 x 80/360) 2,038 Cash proceeds *100,000 x 0.075 x 80/360 = $1,667 $ 99,837

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Scopes Company Journal Entries
20 06 Oct 21 Cash Intercompany Notes Payable To record loan from Prentiss Corporation on 90-day, 7 ½% promissory note. 31 Intercompany Notes Payable Intercompany Interest Expense Notes Payable Interest Payable To transfer 90-day, 7 ½% note payable to Prentiss Corporation dated Oct. 21, 2006, from intercompany notes to outsider notes. Action is necessary because Prentiss Corporation discounted the note on this date. 1 0 0 0 0 0 2 0 8 1 0 0 0 0 0 2 0 8

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30 Minutes, Medium Pillsbury Corporation a. Pillsbury Corporation Journal Entries
20 06 May 1 Intercompany Notes Receivable Cash To record 7 ½%, 120-day loan to Sarpy Company. 31 Intercompany Notes Receivable Cash To record 7 ½%, 120-day loan to Sarpy Company. June 6 Cash ($15,375 – $323) Interest Expense ($323 – $262*) Intercompany Notes Receivable Intercompany Interest Revenue ($15,000 x 0.075 x 36/360) To record discounting of 7 ½%, 120-day note receivable from Sarpy Company dated May 1, 2006, at a discount rate of 9%. Cash proceeds computed as $15,375 maturity value of note, less $323 discount ($15,375 x 0.09 x 84/360 = $323). 30 Intercompany Interest Receivable Intercompany Interest Revenue To accrue interest on June 30, 2006, as follows: $20,000 x 0.075 x 30/360 = $125. *$15,000 x 0.075 x 84/360 = $262

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Pillsbury Corporation (concluded) b. Sarpy Company Journal Entries
20 06 May 1 Cash Intercompany Notes Payable To record 7 ½%, 120-day loan from Pillsbury Corporation. 31 Cash Intercompany Notes Payable To record 7 ½%, 120-day loan from Pillsbury Corporation. June 6 Intercompany Notes Payable Intercompany Interest Expense Notes Payable Interest Payable To transfer 7 ½%, 120-day note payable to Pillsbury Corporation dated May 1, 2006, from intercompany notes to outsider notes. Action is necessary because Pillsbury Corporation discounted the note on this date. Accrued interest computed as $15,000 x 0.075 x 36/360 = $113. 30 Interest Expense Intercompany Interest Expense Interest Payable Intercompany Interest Payable To accrue interest at June 30, 2006, as follows: $15,000 x 0.075 x 24/360 = $75 $20,000 x 0.075 x 30/360 = $125 1 5 0 0 0 1 1 3 2 0 0 0 0

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50 Minutes, Medium Pittsburgh Corporation a. Pittsburgh Corporation (parent company) Correcting Entries July 31, 2005
(1) Intercompany Accounts Receivable ($10,000 + $5,000) Intercompany Management Fee Revenue ($2,000 + $2,200) Intercompany Interest Revenue ($50 + $150) Intercompany Account—Syracuse Company To close Intercompany Account and transfer balances as follows: Intercompany Accounts Receivable: Unpaid advances of June 21, 2005, and July 31, 2005 Intercompany Management Fee Revenue: $2,000 from June 11, 2005, and $2,200 from July 11, 2005. Intercompany Interest Revenue: $50 from June 12, 2005, and $150 from July 27, 2005. (2) Intercompany Interest Receivable Intercompany Interest Revenue To accrue interest on advance to Syracuse Company dated June 21, 2005, as follows: $10,000 x 0.10 x 40/360 = $111. (3) Intercompany Accounts Receivable Intercompany Management Fee Revenue To accrue management fee due from Syracuse Company for July, 2005, as follows: Syracuse Company net sales for 3 months ended July 31, 2005 $330,000 Management fee ($330,000 x 0.02) $ 6,600 Less: Total paid for May and June, 2005 4,200 Balance due, July 31, 2005 $ 2,400

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Pittsburgh Corporation (concluded) b. Syracuse Company (subsidiary company) Correcting Entries July 31, 2005
(1) Intercompany Account—Pittsburgh Corporation Intercompany Management Fee Expense Intercompany Interest Expense Intercompany Accounts Payable To close Intercompany Account and transfer balances to appropriate accounts. (2) Cash in Transit Intercompany Accounts Payable To record cash advance in transit from Pittsburgh Corporation on July 31, 2005. (3) Intercompany Interest Expense Intercompany Interest Payable To accrue interest on advance from Pittsburgh Corporation dated June 21, 2005. (4) Intercompany Management Fee Expense Intercompany Accounts Payable To accrue management fee due to Pittsburgh Corporation for July, 2005. 5 6 0 0 4 2 0 0 2 0 0

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Pittsburgh Corporation and Subsidiary Partial Working Paper for Consolidated Financial Statements July 31, 2005
Eliminations Pittsburgh Corporation Income Statement Syracuse Company Increase (decrease) Consolidated

Revenue: Intercompany revenue (expenses) Balance Sheet Assets Intercompany receivables (payables) 6 9 1 1 ( 6 9 1 1 )

1 7 5 1 1

( 1 7 5 1 1 )

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©The McGraw-Hill Companies, Inc., 2006 21

30 Minutes, Medium Parley Corporation Parley Corporation and Subsidiary Working Paper Eliminations February 28, 2008
(a) Retained Earnings—Silton ($18,000 x 0.90) Minority Interest in Net Assets of Subsidiary ($18,000 x 0.10) Leasehold Improvements—Parley ($20,000 – $4,000) Amortization Expense—Parley ($20,000 x 1/10) To eliminate unrealized intercompany gain in the Leasehold Improvements ledger account and in the related amortization expense. (Income tax effects are disregarded.) (b) Intercompany Interest Revenue—Parley ($48,264 x 0.10) Intercompany Bonds Payable—Silton ($100,000 x ½) Investment in Silton Company Bonds—Parley ($48,264 + $826*) Intercompany Interest Expense—Silton ($50,000 x 0.08) Gain on Extinguishment of Bonds—Silton ($50,000 – $48,264) To eliminate subsidiary’s bonds acquired by parent company, and to recognize gain on the extinquishment of the bonds. (Income tax effects are disregarded.) *$4,826 – $4,000 = $826 1 6 2 0 0 1 8 0 0

Pr. 8–4

1 6 0 0 0 2 0 0 0

4 8 2 6 5 0 0 0 0 4 9 0 9 0 0 4 0 0 0 1 7 3 6

©The McGraw-Hill Companies, Inc., 2006 22

Modern Advanced Accounting, 10/e

30 Minutes, Medium Peke Corporation Peke Corporation and Subsidiary Working Paper Eliminations June 30, 2007
(a) Retained Earnings—Peke ($48,000 x 0.20) Intercompany Sales—Peke Intercompany Cost of Goods Sold—Peke ($600,000 x 0.80) Cost of Goods Sold—Stoke ($588,000 x 0.20) Inventories—Stoke ($60,000 x 0.20) To eliminate intercompany sales and cost of goods sold, and unrealized profit in ending inventories resulting from Peke Corporation sales to Stoke Company. (Income tax effects are disregarded.) (b) Retained Earnings—Stoke ($30,000 x 0.25 x 0.75) Minority Interest in Net Assets of Subsidiary ($30,000 x 0.25 x 0.25) Intercompany Sales—Stoke Intercompany Cost of Goods Sold—Stoke ($800,000 x 0.75) Cost of Goods Sold—Peke ($790,000 x 0.25) Inventories—Peke ($40,000 x 0.25) To eliminate intercompany sales and cost of goods sold, and unrealized profit in ending inventories resulting from Stoke Company sales to Peke Corporation . (Income tax effects are disregarded.) Note to Instructor: A 25% markup on cost equals a 20% markup on selling price. 9 6 0 0 6 0 0 0 0 0

Pr. 8–5

4 8 0 0 0 0 1 1 7 6 0 0 1 2 0 0 0

5 6 2 5 1 8 7 5 8 0 0 0 0 0 6 0 0 0 0 0 1 9 7 5 0 0 1 0 0 0 0

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 23

45 Minutes, Medium Padua Corporation Padua Corporation and Subsidiary Working Paper Eliminations April 30, 2006
(a) Retained Earnings—Padua ($54,000 x 0.16 2/3) Intercompany Sales—Padua Intercompany Cost of Goods Sold—Padua ($180,000 x 0.83 1/3) Cost of Goods Sold—Scala ($150,000 x 0.16 2/3) Inventories—Scala ($84,000 x 0.16 2/3) To eliminate intercompany sales, cost of goods sold, and unrealized profit in inventories. (Income tax effects are disregarded.) (b) Intercompany Gain on Sale of Machinery—Scala ($80,000 – $56,000) Accumulated Depreciation—Padua ($24,000 ÷ 8) Machinery—Padua Depreciation—Padua To eliminate unrealized intercompany gain in machinery and in related depreciation. (Income tax effects are disregarded.) (c) Intercompany Bonds Payable—Scala Discount on Intercompany Bonds Payable—Scala [($45,880 – $1,247*) x ½] Investment in Scala Company Bonds—Padua Gain on Extinguishment of Bonds—Scala To eliminate subsidiary’s bonds acquired by parent, and to recognize gain on the extinguishment of the bonds. (Income tax effects are disregarded.) (d) Minority Interest in Net Income of Subsidiary Minority Interest in Net Assets of Subsidiary To establish minority interest in subsidiary’s adjusted net income for 2006, as follows:
Net income of subsidiary Adjustments in working paper eliminations: (b) ($24,000 – $3,000) (c) Adjusted net income of subsidiary Minority interest share ($118,025 x 0.10) (21,000) 19,025 $118,025 $ 11,803 $120,000

Pr. 8–6

9 0 0 0 1 8 0 0 0 0 1 5 0 0 0 0 2 5 0 0 0 1 4 0 0 0

2 4 0 0 0 3 0 0 0 2 4 0 0 0 3 0 0 0

2 0 0 0 0 0 2 2 3 1 7 1 5 8 6 5 8 1 9 0 2 5

1 1 8 0 3 1 1 8 0 3

*($354,120 x 0.12 x ½) – ($400,000 x 0.10 x ½) = $1,247

©The McGraw-Hill Companies, Inc., 2006 24

Modern Advanced Accounting, 10/e

50 Minutes, Medium Pacific Corporation a. Pacific Corporation Journal Entries
20 05 July 1 Cash Accumulated Depreciation of Machinery Machinery Intercompany Gain on Sale of Machinery To record sale of machinery to Sommer Company. 1 Investment in Sommer Company Bonds Cash To record acquisition of $400,000 face amount of Sommer Company’s 8% bonds due June 30, 2008. 20 06 June 30 Cash ($400,000 x 0.08) Investment in Sommer Company Bonds ($43,389 – $32,000) Intercompany Interest Revenue ($361,571 x 0.12) To record receipt of annual interest on Sommer Company’s 8% bonds.

Pr. 8–7

1 6 0 0 0 1 8 0 0 0 3 0 0 0 0 4 0 0 0

3 6 1 5 7 1 3 6 1 5 7 1

3 2 0 0 0 1 1 3 8 9 4 3 3 8 9

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 25

Pacific Corporation (concluded) b. Pacific Corporation and Subsidiary Working Paper Eliminations June 30, 2006
(a) Intercompany Gain on Sale of Machinery—Pacific Accumulated Depreciation—Sommer ($4,000 ÷ 8) Machinery—Sommer Depreciation Expense—Sommer To eliminate unrealized intercompany gain in machinery and in related depreciation. (Income tax effects are disregarded.) (b) Intercompany Interest Revenue—Pacific Intercompany Bonds Payable—Sommer ($500,000 x 4/5) Discount on Intercompany Bonds Payable— Sommer [($24,870 x 4/5) – $38,010* + $32,000] Investment in Sommer Company Bonds—Pacific ($361,571 + $11,389) Intercompany Interest Expense—Sommer [$400,000 – $19,896†) x 0.10] Gain on Extinguishment of Bonds—Sommer [($400,000 – $19,896†) – $361,571] To eliminate subsidiary’s bonds acquired by parent, and related intercompany interest revenue and expense; and to recognize gain on the extinguishment of the bonds. (Income tax effects are disregarded.) 4 0 0 0 5 0 0

Pr. 8–7

4 0 0 0 5 0 0

4 3 3 8 9 4 0 0 0 0 0 1 3 8 8 6 3 7 2 9 6 0 3 8 0 1 0 1 8 5 3 3

Computations: *($500,000 – $24,870) x 0.10 x 4/5 = $38,010 †$24,870 x 4/5 = $19,896

©The McGraw-Hill Companies, Inc., 2006 26

Modern Advanced Accounting, 10/e

50 Minutes, Medium Pollard Corporation a. Pollard Corporation Ledger Accounts
Credit

Pr. 8–8

Investment in Silver Company Bonds Date Explanation Debit 20 07 Aug 31 Acquisition of $600,000 face amount of bonds [($600,000 x 0.350344) + ($30,000 x 10.827603)] 5 3 5 0 3 4 20 08 28 Accumulation of discount ($32,102 – $30,000) Aug 31 Accumulation of discount ($32,228 – $30,000) Feb

Balance

5 3 5 0 3 4 dr

2 1 0 2 2 2 2 8

5 3 7 1 3 6 dr 5 3 9 3 6 4 dr

Date Explanation 20 08 Feb 28 ($535,034 x 0.06) Aug 31 ($537,136 x 0.06)

Intercompany Interest Revenue Debit

Credit 3 2 1 0 2 3 2 2 2 8

Balance 3 2 1 0 2 cr 6 4 3 3 0 cr

Silver Company Ledger Accounts
Date Explanation 20 07 Aug 31 Bonds acquired by parent company Intercompany Bonds Payable Debit Credit 6 0 0 0 0 0 Balance 6 0 0 0 0 0 cr

Date Aug

Explanation

Discount on Intercompany Bonds Payable Debit Credit

Balance

20 07 31 Bonds acquired by parent company ($44,985 x 0.75) 20 08 28 Amortization ($31,144 – $30,000) 31 Amortization ($31,207 – $30,000)

3 3 7 3 9 1 1 4 4 1 2 0 7

3 3 7 3 9 dr 3 2 5 9 5 dr 3 1 3 8 8 dr

Feb Aug

Date 20 08 Feb 28 Aug 31

Explanation ($600,000 – $33,739) x 0.055 ($600,000 – $32,595) x 0.055

Intercompany Interest Expense Debit 3 1 1 4 4 3 1 2 0 7

Credit

Balance 3 1 1 4 4 6 2 3 5 1 dr dr

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 27

Pollard Corporation (concluded) b. Pollard Corporation and Subsidiary Working Paper Eliminations August 31, 2007 and 2008
20 07 Aug 31 (a) Intercompany Bonds Payable—Silver Discount on Intercompany Bonds Payable— Silver Investment in Silver Company Bonds—Pollard Gain on Extinguishment of Bonds—Silver To eliminate subsidiary’s bonds acquired by parent, and to recognize gain on the extinguishment of the bonds. (Income tax effects are disregarded.) 20 08 Aug 31 (a) Intercompany Interest Revenue—Pollard Intercompany Bonds Payable—Silver Discount on Intercompany Bonds Payable— Silver Investment in Silver Company Bonds—Pollard Intercompany Interest Expense—Silver Retained Earnings—Silver To eliminate subsidiary’s bonds owned by parent company, and related interest revenue and expense; and to increase subsidiary’s beginning retained earnings by amount of unamortized realized gain on the extinguishment of the bonds. (Income tax effects are disregarded.)

Pr. 8–8

6 0 0 0 0 0 3 3 7 3 9 5 3 5 0 3 4 3 1 2 2 7

6 4 3 3 0 6 0 0 0 0 0 3 5 3 6 3 1 9 2 1 3 3 3 2 8 6 5 2 8 4 1 7

©The McGraw-Hill Companies, Inc., 2006 28

Modern Advanced Accounting, 10/e

60 Minutes, Medium Procus Corporation a. Procus Corporation Ledger Accounts
Intercompany Lease Receivables Debit Credit

Pr. 8–9

Date Explanation 20 06 Dec 31 Inception of lease [($20,000 x 3) + $5,000] 31 Receipt of first payment 20 07 Dec 31 Receipt of second payment 20 08 Dec 31 Receipt of third payment 20 09 Dec 31 Receipt of purchase option

Balance

6 5 0 0 0 2 0 0 0 0 2 0 0 0 0 2 0 0 0 0 5 0 0 0

6 5 0 0 0 dr 4 5 0 0 0 dr 2 5 0 0 0 dr 5 0 0 0 dr - 0 -

Date 20 06 Dec 31 20 07 Dec 31 20 08 Dec 31 20 09 Dec 31

Explanation Inception of lease ($65,000 – $60,242)

Unearned Intercompany Interest Revenue Debit Credit

Balance

4 7 5 8

4 7 5 8 cr

Interest for year [($45,000 – $4,758) x 0.07] Interest for year [($25,000 – $1,941) x 0.07] Interest for year [($5,000 – $327) x 0.07]

2 8 1 7

1 9 4 1 cr

1 6 1 4

3 2 7 cr

3 2 7 Intercompany Interest Revenue Debit

- 0 -

Date Explanation 20 07 Dec 31 Interest for year 31 Closing entry 20 08 Dec 31 Interest for year 31 Closing entry 20 09 Dec 31 Interest for year 31 Closing entry

Credit 2 8 1 7

Balance 2 8 1 7 cr - 0 1 6 1 4 cr - 0 3 2 7 cr - 0 -

2 8 1 7 1 6 1 4 1 6 1 4 3 2 7 3 2 7

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 29

Procus Corporation (continued) Stoffer Company Ledger Accounts
Date Explanation 20 06 Dec 31 Capital lease at inception 20 07 Dec 31 Depreciation for Year 2007 ($60,242 ÷ 6) 20 08 Dec 31 Depreciation for Year 2008 20 09 Dec 31 Depreciation for Year 2009 20 10 Dec 31 Depreciation for Year 2010 20 11 Dec 31 Depreciation for Year 2011 20 12 Dec 31 Depreciation for Year 2012 Leased Equipment—Capital Lease Debit 6 0 2 4 2 Credit

Pr. 8–9

Balance 6 0 2 4 2 dr

1 0 0 4 0 1 0 0 4 0 1 0 0 4 0 1 0 0 4 0 1 0 0 4 0 1 0 0 4 2 *

5 0 2 0 2 dr 4 0 1 6 2 dr 3 0 1 2 2 dr 2 0 0 8 2 dr 1 0 0 4 2 dr - 0 -

*Difference due to rounding.

Date 20 06 Dec 31 31 20 07 Dec 31 20 08 Dec 31 20 09 Dec 31

Explanation Capital lease at inception First lease payment ($20,000 - $2,817 interest) ($20,000 - $1,614 interest) ($5,000 - $327 interest)

Intercompany Liability under Capital Lease Debit Credit 6 0 2 4 2 2 0 0 0 0 1 7 1 8 3 1 8 3 8 6 4 6 7 3

Balance 6 0 2 4 2 cr 4 0 2 4 2 cr 2 3 0 5 9 cr 4 6 7 3 cr - 0 -

Date

Explanation

Intercompany Interest Expense Debit 2 8 1 7

Credit

Balance 2 8 1 7 dr - 0 1 6 1 4 dr - 0 3 2 7 dr - 0 -

20 07 Dec 31 ($40,242 x 0.07) 31 Closing entry 20 08 Dec 31 ($23.059 x 0.07) 31 Closing entry 20 09 Dec 31 ($4,673 x 0.07) 31 Closing entry

2 8 1 7 1 6 1 4 1 6 1 4 3 2 7

Procus Corporation (concluded)

Pr. 8–9

©The McGraw-Hill Companies, Inc., 2006 30

Modern Advanced Accounting, 10/e

b.

Procus Corporation and Subsidiary Working Paper Eliminations December 31, 2006 and 2007

20 06 Dec 31 (a) Intercompany Liability under Capital Lease—Stoffer Unearned Intercompany Interest Revenue—Procus Intercompany Sales—Procus Intercompany Cost of Goods Sold—Procus Intercompany Lease Receivables—Procus Leased Equipment—Capital Lease—Stoffer ($60,242 – $32,000) To eliminate intercompany accounts associated with intercompany lease and to defer unrealized portion of intercompany gross profit on sales-type lease. (Income tax effects are disregarded.) 20 07 Dec 31 (a) Intercompany Liability under Capital Lease—Stoffer Unearned Intercompany Interest Revenue—Procus Retained Earnings—Procus ($60,242 – $32,000) Intercompany Lease Receivables—Procus Leased Equipment—Capital Lease—Stoffer ($28,242 – $4,707) Depreciation Expense—Stoffer ($28,242 ÷ 6) To eliminate intercompany accounts associated with intercompany lease and to defer unrealized portion of intercompany gross profit on sales-type lease. (Income tax effects are disregarded.)

4 0 2 4 2 4 7 5 8 6 0 2 4 2 3 2 0 0 0 4 5 0 0 0 2 8 2 4 2

2 3 0 5 9 1 9 9 1 4 2 8 2 4 2 2 5 0 0 0 2 3 5 3 5 4 7 0 7

Note to Instructor: Procus’s intercompany interest revenue and Stoffer’s intercompany interest expense are placed on the same line of the income statement section of the working paper for consolidated financial statements to self-eliminate.

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 31

60 Minutes, Medium Patrick Corporation
Patrick Corporation and Subsidiary Working Paper for Consolidated Balance Sheet December 31, 2005 Eliminations Patrick Corporation Assets Cash Trade accounts receivable (net) Intercompany receivables (payables) Inventories Investment in Shannon Company common stock Investment in Shannon Company bonds Plant assets (net) Other assets Total assets Liabilities & Stockholders’ Equity Other current liabilities Bonds payable Intercompany bonds payable Common stock, $10 par Additional paid-in capital Retained earnings 3 0 0 0 0 0 0 1 3 7 0 0 0 0 4 8 3 0 0 0 0 1 4 5 0 0 0 0 1 5 0 0 0 0 0 9 4 5 0 0 0 9 5 0 0 0 0 2 5 0 0 0 0 9 0 0 0 0 0 1 7 5 0 0 0 1 1 3 0 0 0 0 (c)( 2 5 0 0 0 0 ) (a)( 9 0 0 0 0 0 ) (a)( 1 7 5 0 0 0 ) (a)(1 1 3 0 0 0 0 ) (b) ( 6 0 0 0 0 ) (c) Total liabilities & stockholders’ equity 12 1 5 0 0 0 0 4 3 5 0 0 0 0 (2 4 8 5 4 2 4 ) 2 9 5 7 6 2 2 0 4 2 4 4 6 6 0 0 0 0 5 6 4 5 7 6 12 1 5 0 0 0 0 2 0 0 0 0 0 0 3 5 0 0 0 0 4 3 5 0 0 0 0 (2 4 8 5 4 2 4 ) (c)( 2 2 0 4 2 4 ) 2 2 0 5 0 0 0 (a)(2 2 0 5 0 0 0 ) ( 3 0 0 0 0 0 ) 2 1 0 0 0 0 0 3 0 0 0 0 0 9 5 0 0 0 0 (b) ( 6 0 0 0 0 ) 7 5 0 0 0 0 1 9 5 0 0 0 0 3 0 0 0 0 0 4 5 0 0 0 0 Shannon Company increase (decrease)

Pr. 8–10

Consolidated 1 0 5 0 0 0 0 2 4 0 0 0 0 0

2 9 9 0 0 0 0

6 6 6 0 0 0 0 9 1 4 5 7 6 14 0 1 4 5 7 6

2 3 9 5 0 0 0 2 4 5 0 0 0 0 3 0 0 0 0 0 0 1 3 7 0 0 0 0 4 7 9 9 5 7 6

14 0 1 4 5 7 6

©The McGraw-Hill Companies, Inc., 2006 32

Modern Advanced Accounting, 10/e

Patrick Corporation (concluded) Patrick Corporation and Subsidiary Working Paper Eliminations December 31, 2005
(a) Common Stock—Shannon Additional Paid-in Capital—Shannon Retained Earnings—Shannon Investment in Shannon Company Common Stock—Patrick To eliminate intercompany investment and related accounts for stockholders’ equity of subsidiary on date of business combination. (b) Retained Earnings—Shannon Inventories—Patrick ($300,000 x 0.20) To eliminate intercompany sales and profit in inventories. (Income tax effects are disregarded.) (c) Intercompany Bonds Payable—Shannon Investment in Shannon Company Bonds— Patrick Retained Earnings—Shannon To eliminate subsidiary’s bonds acquired by parent, and to include gain on the extinguishment of the bonds in the subsidiary’s retained earnings. (Income tax effects are disregarded.) 9 0 0 0 0 0 1 7 5 0 0 0 1 3 0 0 0 0

Pr. 8–10

1

2 2 0 5 0 0 0

6 0 0 0 0 6 0 0 0 0

2 5 0 0 0 0 2 2 0 4 2 4 2 9 5 7 6

Note to instructor: Because only a consolidated balance sheet is prepared on the date of a business combination, unrealized or realized intercompany profits (gains) in eliminations (b) and (c) must be debited or credited to the subsidiary’s retained earnings.

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 33

65 Minutes, Strong Power Corporation Power Corporation and Subsidiary Working Paper for Consolidated Financial Statements For Year Ended December 31, 2005
Eliminations Power Corporation Income Statement Revenue: Net sales Intercompany sales Intercompany revenue (expenses) Intercompany investment income Intercompany loss on sale of equipment Total revenue Cost and expenses: Cost of goods sold Intercompany cost of goods sold Operating expenses and income taxes expense Minority interest in net income of subsidiary Total costs & expenses and minority interest Net income Statement of Retained Earnings Retained earnings, beginning of period Net income Subtotal Dividends declared Retained earnings, end of period 8 9 4 1 4 0 8 0 3 4 0 4 8 3 8 0 0 2 0 0 0 0 Snyder Company increase (decrease)

Pr. 8–11

Consolidated

9 0 2 0 0 0 6 0 0 0 0

4 0 0 0 0 0 1 0 5 0 0 0

1 3 0 2 0 0 0 (c) ( 6 0 0 0 0 ) (d)( 1 0 5 0 0 0 )

1 2 0 0 1 3 2 8 0 ( 2 0 0 0 ) 9 7 4 4 8 0 7 2 0 0 0 0

( 1 2 0 0 ) (a) ( 1 3 2 8 0 ) (e) 5 0 3 8 0 0 3 0 0 0 0 0 ( 2 0 0 0 )* 2 0 0 0 8 0 0 0 0 ) 0 0 ) 0 ) 1 3 0 2 0 0 0 1 0 0 0 0 0 0

( 1 7 6 (a) 3 (c) ( 7 (d) ( 1 6

5 0 0 0 0

8 4 0 0 0

(c) ( 5 0 0 0 0 ) (d) ( 8 4 0 0 0 ) (a) (e) (f) 4 0 0 1 0 0 2 3 2 0 2 2 4 4 4 0

1 2 4 1 4 0

9 9 8 0 0

2 3 2 0

( 1 5 1 1 8 0 )† 1 2 2 6 7 6 0 ( 2 5 1 0 0 ) 7 5 2 4 0

2 2 0 0 0 0 8 0 3 4 0 3 0 0 3 4 0 3 6 0 0 0 2 6 4 3 4 0

5 0 0 0 0 2 0 0 0 0 7 0 0 0 0 9 0 0 0 6 1 0 0 0

(a) ( 5 0 0 0 0 ) ( 2 5 1 0 0 ) (a) ( 7 5 1 0 0 ) ( 9 0 0 0 )‡ ( 6 6 1 0 0 )

2 2 0 0 0 0 7 5 2 4 0 2 9 5 2 4 0 3 6 0 0 0 2 5 9 2 4 0

* A decrease in intercompany loss on sale of equipment and an increase in total revenue. † A decrease in costs and expenses and an increase in net income. ‡ A decrease in dividends and an increase in retained earnings.

(Continued on page 291.)

©The McGraw-Hill Companies, Inc., 2006 34

Modern Advanced Accounting, 10/e

Power Corporation (continued) Power Corporation and Subsidiary Working Paper for Consolidated Financial Statements (concluded) For Year Ended December 31, 2005
Eliminations Power Corporation Balance Sheet Assets Intercompany receivables (payables) Inventories Investment in Snyder Company common stock Investment in Snyder Company bonds Plant assets Accumulated depreciation of plant assets Other assets Goodwill Total assets
Liabilities & Stockholders’ Equity

Pr. 8–11

Snyder Company

increase (decrease) Consolidated

1 0 0 3 0 0 0 0 0

( 1 0 0 ) 7 5 0 0 0 (c) (d) ( 3 0 0 0 ) ( 5 0 0 0 ) 3 6 7 0 0 0

1 6 4 6 8 0 4 0 0 0 0 7 9 4 0 0 0

(a)( 1 6 4 6 8 0 ) (b) ( 4 0 0 0 0 ) (a) 4 0 0 0 (e) 2 0 0 0 (a) (e) (a) 4 0 0 * 1 0 0 * 3 4 0 0

2 8 0 6 0 0

1 0 8 0 6 0 0

( 2 6 0 0 0 0 ) 6 1 0 9 0 0 1 6 4 9 6 8 0

( 3 0 0 0 0 ) 7 3 4 0 0 3 9 8 9 0 0

( 2 9 0 5 0 0 ) 6 8 4 3 0 0 3 4 0 0 0 1 8 4 4 8 0 0

( 2 0 3 7 8 0 )

Dividends payable Bonds payable Intercompany bonds payable Other liabilities Common stock, $100 par Additional paid-in capital Minority interest in net assets of subsidiary Retained earnings Total liabilities & stockholders’ equity

6 0 0 0 0 0 3 7 6 3 4 0 3 6 0 0 0 0 4 9 0 0 0

4 4 1 1 1 2 1

1 5 0 4 5 2

6 0 0 3 0 0

0 0 0 0 0 0

0 0 0 0 0 0

1 6 0 0 6 4 5 0 0 0 (b) ( 4 0 0 0 0 ) (a)( 1 2 5 0 0 0 ) (a) ( 1 2 0 0 0 ) (a) (f) 3 7 0 0 0 2 3 2 0 ( 6 6 1 0 0 ) 4 9 0 6 4 0 3 6 0 0 0 0 4 9 0 0 0 3 9 3 2 0 2 5 9 2 4 0 1 8 4 4 8 0 0 q

2 6 4 3 4 0 1 6 4 9 6 8 0

6 1 0 0 0 3 9 8 9 0 0

( 2 0 3 7 8 0 )

* An increase in accumulated depreciation and a decrease in total assets.

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 35

Power Corporation (continued) Power Corporation and Subsidiary Working Paper Eliminations December 31, 2005
(a) Common Stock—Snyder Additional Paid-in Capital—Snyder Retained Earnings—Snyder Intercompany Investment Income—Power Plant Assets—Snyder Goodwill—Power Cost of Goods Sold—Snyder Operating Expenses and Income Tax Expense— Snyder Investment in Snyder Company Common Stock—Power Accumulated Depreciation of Plant Assets— Snyder Dividends Declared—Snyder Minority Interest in Net Assets of Subsidiary ($38,800 – $1,800) To carry out the following: (1) Eliminate intercompany investment and equity accounts of subsidiary on July 1, 2005, and subsidiary dividend. (2) Provide for depreciation and amortization for six months ended Dec 31, 2005, on differences between combination date current fair values and carrying amounts of Snyder’s identifiable net assets, as follows: Cost of Goods Operating Sold Expenses Inventories $3,000 Equipment depreciation $400 Totals $3,000 $400 (3) Allocate unamortized differences between combination date current fair values and carrying amounts to appropriate assets. (4) Establish minority interest in net assets of subsidiary on July 1, 2005 ($194,000 x 0.20 = $38,800), less minority interest in dividends declared by subsidiary during six months ended Dec. 31, 2005 ($9,000 x 0.20 = $1,800). (Income tax effects are disregarded.) 1 2 1 5 1 5 2 0 3 4 3 3 0 0 0 2 0 4 0 0 0 0 8 0 0 0 0 0 0 0 0 0 0

Pr. 8–11

4 0 0 1 6 4 6 8 0 4 0 0 9 0 0 0 3 7 0 0 0

(Continued on page 293.)

©The McGraw-Hill Companies, Inc., 2006 36

Modern Advanced Accounting, 10/e

Power Corporation (concluded) Power Corporation and Subsidiary Working Paper Eliminations (concluded) December 31, 2005
(b) Intercompany Bonds Payable—Snyder Investment in Snyder Company Bonds—Power To eliminate subsidiary’s bonds acquired by parent company. (c) Intercompany Sales—Power Intercompany Cost of Goods Sold—Power Cost of Goods Sold—Snyder ($42,000 x 0.16 2/3) Inventories—Snyder ($18,000 x 0.16 2/3) To eliminate intercompany sales and cost of goods sold, and unrealized profit in ending inventories resulting from Power’s sales to Snyder. (Income tax effects are disregarded.) (d) Intercompany Sales—Snyder Intercompany Cost of Goods Sold—Snyder Cost of Goods Sold—Power ($80,000 x 0.20) Inventories—Power ($25,000 x 0.20) To eliminate intercompany sales and cost of goods sold, and unrealized profit in ending inventories resulting from Snyder’s sales to Power. (Income tax effects are disregarded.) (e) Plant Assets—Snyder Operating Expenses—Snyder [($2,000 ÷ 5) x 3/12] Accumulated Depreciation of Plant Assets—Snyder Intercompany Loss on Sale of Equipment—Power To eliminate unrealized intercompany loss in equipment and in related depreciation. (Income tax effects are disregarded.) (f) Minority Interest in Net Income of Subsidiary Minority Interest in Net Assets of Subsidiary To establish minority interest in subsidiary’s adjusted net income for six months ended Dec. 31, 2005, as follows: Net income of subsidiary $20,000 Adjustments in working paper eliminations: (a) ($3,000 + $400) (3,400) (b) ($105,000 – $84,000 – $16,000) (5,000) Adjusted net income of subsidiary $11,600 Minority interest ($11,600 x 0.20) $ 2,320 4 0 0 0 0

Pr. 8–11

4 0 0 0 0

6 0 0 0 0 5 0 0 0 0 7 0 0 0 3 0 0 0

1 0 5 0 0 0 8 4 0 0 0 1 6 0 0 0 5 0 0 0

2 0 0 0 1 0 0 1 0 0 2 0 0 0

2 3 2 0 2 3 2 0

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 37

Power Corporation (concluded)

Pr. 8–11

Notes to Instructor:
(1) Goodwill on July 1, 2005, is computed as follows: Cost of Power’s investment in Snyder Carrying amount of Snyder’s identifiable net assets ($125,000 + $12,000 + $50,000) Add: Amounts applicable to Snyder’s inventories and equipment ($3,000 + $4,000) Subtotal Percentage ownership acquired by Power Goodwill (2) Intercompany receivables (payables) consist of the following: Accounts receivable (payable) Interest receivable (payable) Dividends receivable (payable) Net intercompany receivables (payables) (3) The Investment in Snyder Company Common Stock ledger account balance is reconciled as follows: Cost of Power’s investment Add: Intercompany investment income [($20,000 – $3,000 – $400) x 0.80] Subtotal Less: Dividends ($9,000 x 0.8) Balance, Dec. 31, 2005 $ 1 5 8 6 0 0 $ 1 8 7 0 0 0 7 0 0 0 $ 1 9 4 0 0 0 8 0 % $ Power 5 5 0 ( 1 3 0 0 1 2 0 6 4 0 $ 1 0 $

1 5 5 2 0 0 3 4 0 0 Snyder 5 5 0 3 0 0 1 2 0 6 4 0 ( 1 0

0 0 ) 0 0 0

$

( 1 ( (

$

0 0 0 0 0

) ) ) )

$ 1 5 8 6 0 0 1 3 2 $ 1 7 1 8 7 2 $ 1 6 4 6 8 8 0 8 0 0 0 0

©The McGraw-Hill Companies, Inc., 2006 38

Modern Advanced Accounting, 10/e

65 Minutes, Strong Pritchard Corporation a. Pritchard Corporation Adjusting Entries December 31, 2005
Inventories (in Transit) Intercompany Accounts Payable To record merchandise in transit from Spangler Co. Intercompany Dividends Receivable Investment in Spangler Company Common Stock To record dividend declared by Spangler Company Dec. 31, 2005, payable Jan. 10, 2006 (3,000 x $1.50 = $4,500). 6 0 0 0

Pr. 8–12

6 0 0 0

4 5 0 0 4 5 0 0

Spangler Company Adjusting Entries December 31, 2005
Intercompany Notes Payable Intercompany Interest Payable Interest Expense Notes Payable Interest Payable Intercompany Interest Expense To set up accounts for note payable and related interest discounted with bank by Pritchard Corporation (the payee). Interest expense: $3,000 x 0.12 x 6/12 = $180. 3 0 0 0 1 8 0 1 8 0 3 0 0 0 1 8 0 1 8 0

Note to Instructor: After the foregoing adjusting entries are posted, intercompany receivables (payables) are as follows: Accounts receivable (payable) Notes receivable (payable) Interest receivable (payable) ($5,000 x 0.12 x 6/12) Dividends receivable (payable) Net intercompany receivables (payables) Pritchard $ 1 6 0 0 ( 6 0 0 5 0 0 3 0 4 5 0 0 0 ) 0 0 0 Spangler $ ( 1 6 0 0 6 0 0 ( 5 0 0 ( 3 0 ( 4 5 0 0 0 0 0 0 ) ) ) )

$ 1 9 8 0 0

$ ( 1 9 8 0 0 )

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 39

Pritchard Corporation (continued) b. Pritchard Corporation and Subsidiary Working Paper for Consolidated Financial Statements For Year Ended December 31, 2005
Eliminations Pritchard Corporation Income Statement Revenue: Net sales Intercompany sales Intercompany revenue (expenses) Intercompany investment income Intercompany gain on sale of equipment Total revenue Cost and expenses: Cost of goods sold Intercompany cost of goods sold Operating expenses and income taxes expense Total costs and expenses Net income Statement of Retained Earnings Retained earnings, beginning of year Net income Subtotal Dividends declared Retained earnings, end of year Spangler Company increase (decrease)

Pr. 8–12

Consolidated

4 9 9 8 5 0 4 0 0 0 0

2 9 8 2 4 0 6 0 0 0

7 9 8 0 9 0 (b) ( 4 0 0 0 0 ) (c) ( 6 0 0 0 )

3 0 0 1 0 2 0 0

( 3 0 0 ) (a) ( 1 0 2 0 0 ) 2 0 0 0 (d) ( 2 0 0 0 ) ( 5 8 2 0 0 ) (b) ( 7 5 0 0 ) 7 9 8 0 9 0 6 1 7 5 0 0

5 5 0 3 5 0 4 0 0 0 0 0 3 0 0 0 0 8 8 4 5 0 5 1 8 4 5 0 3 1 9 0 0

3 0 5 9 4 0 2 2 5 0 0 0 4 8 0 0 6 5 9 4 0 2 9 5 7 4 0 1 0 2 0 0

(b) ( 3 0 0 0 0 ) (c) ( 4 8 0 0 ) (d) ( 1 0 0 ) ( 4 2 4 0 0 )* ( 1 5 8 0 0 )

1 5 4 2 9 0 7 7 1 7 9 0 2 6 3 0 0

8 9 1 0 0 3 1 9 0 0 1 2 1 0 0 0 1 2 1 0 0 0

2 2 1 0 0 1 0 2 0 0 3 2 3 0 0 4 5 0 0 2 7 8 0 0

(a) ( 2 2 1 0 0 ) ( 1 5 8 0 0 ) (a) ( 3 7 9 0 0 ) ( 4 5 0 0 )† ( 3 3 4 0 0 )

8 9 1 0 0 2 6 3 0 0 1 1 5 4 0 0 1 1 5 4 0 0

* A decrease in cost and expenses and an increase in net income. † A decrease in dividends and an increase in retained earnings. (Continued on page 297.)

©The McGraw-Hill Companies, Inc., 2006 40

Modern Advanced Accounting, 10/e

Pritchard Corporation (continued) Pritchard Corporation and Subsidiary Working Paper for Consolidated Financial Statements (concluded) For Year Ended December 31, 2005
Eliminations Pritchard Corporation Balance Sheet Assets Intercompany receivables (payables) Inventories Investment in Spangler Company common stock Plant assets Accumulated depreciation of plant assets Other assets Total assets
Liabilities & Stockholders’ Equity

Pr. 8–12

Spangler Company

increase (decrease) Consolidated

1 9 8 0 0 8 7 0 5 0

( 1 9 8 0 0 ) 4 9 8 4 0

(b) (c)

( 2 5 0 0 ) ( 1 2 0 0 )

1 3 3 1 9 0

1 0 7 8 0 0 8 3 2 0 0 ( 1 2 8 0 0 ) 7 1 1 5 0 3 5 6 2 0 0

4 3 5 0 0 ( 9 3 0 0 ) 5 6 2 0 0 1 2 0 4 4 0

(a)( 1 0 7 8 0 0 ) (d) ( 2 0 0 0 ) (d) ( 1 0 0 )*

1 2 4 7 0 0 ( 2 2 0 0 0 ) 1 2 7 3 5 0 3 6 3 2 4 0

( 1 1 3 4 0 0 )

Liabilities Common stock, $10 par Common stock, $20 par Additional paid-in capital Retained earnings Total liabilities & stockholders’ equity

5 6 7 0 0 1 2 0 0 0 0 5 8 5 0 0 1 2 1 0 0 0 3 5 6 2 0 0

1 2 6 4 0 6 0 0 0 0 2 0 0 0 0 2 7 8 0 0 1 2 0 4 4 0 (a) ( 6 0 0 0 0 ) (a) ( 2 0 0 0 0 ) ( 3 3 4 0 0 ) ( 1 1 3 4 0 0 )

6 9 3 4 0 1 2 0 0 0 0 5 8 5 0 0 1 1 5 4 0 0 3 6 3 2 4 0

* A decrease in accumulated depreciation and an increase in total assets.

Solutions Manual, Chapter 8

©The McGraw-Hill Companies, Inc., 2006 41

Pritchard Corporation (concluded) Pritchard Corporation and Subsidiary Working Paper Eliminations December 31, 2005
(a) Common Stock—Spangler Additional Paid-in Capital—Spangler Retained Earnings—Spangler Intercompany Investment Income—Pritchard Investment in Spangler Company Common Stock—Pritchard Dividends Declared—Spangler To eliminate intercompany investment, related accounts for stockholders’ equity of subsidiary, and investment income from subsidiary. (b) Intercompany Sales—Pritchard Intercompany Cost of Goods Sold—Pritchard Cost of Goods Sold—Spangler ($30,000 x 0.25) Inventories—Spangler ($10,000 x 0.25) To eliminate intercompany sales and cost of goods sold, and unrealized profit in ending inventories resulting from Pritchard’s sales to Spangler. (Income tax effects are disregarded.) (c) Intercompany Sales—Spangler Intercompany Cost of Goods Sold—Spangler Inventories—Pritchard ($6,000 x 0.20) To eliminate intercompany sales and cost of goods sold, and unrealized profit in ending inventories resulting from Spangler’s sales to Pritchard. (Income tax effects are disregarded.) (d) Intercompany Gain on Sale of Equipment—Spangler Accumulated Depreciation of Plant Assets—Pritchard ($2,000 ÷ 10 x 6/12) Plant Assets—Pritchard Operating Expenses—Pritchard To eliminate unrealized intercompany gain in equipment and in related depreciation. (Income tax effects are disregarded.) 6 2 2 1 0 0 2 0 0 0 1 2 0 0 0 0 0 0 0 0

Pr. 8–12

1 0 7 8 0 0 4 5 0 0

4 0 0 0 0 3 0 0 0 0 7 5 0 0 2 5 0 0

6 0 0 0 4 8 0 0 1 2 0 0

2 0 0 0 1 0 0 2 0 0 0 1 0 0

©The McGraw-Hill Companies, Inc., 2006 42

Modern Advanced Accounting, 10/e

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