Chapt er 5

Chapter 5 INTERCOMPANY PROFIT TRANSACTIONS - INVENTORIES Ans w e r s to Que s ti o n s 1 Profits and losses on sales betw e e n affiliated co ! a ni e s are reali"ed for consolidat e d state e n t !#r!os e s w$en t$e !#rc$ asin% affiliate resells t$e erc$ a n dis e to !arties o#tside of t$e consolidat e d entit&' If all erc$ a n dis e sold to affiliates is resold to o#tside !arties in t$e sa e !eriod( t$ere will be no #nre ali"ed !rofit to eli inat e in !re! arin% t$e consolidat e d financial stat e e n t s ' 2 )ross !rofit( rat$ er t$an net !rofit( is t$e conce!t t$at s$o#ld be #sed in co !#tin% #nre ali"ed in*entor& !rofits accordin% to ARB No. 51. 3 T$e a o# n t of #nre ali"ed !rofit to be eli inat e d in t$e !re! ar a tion of consolidat e d financial stat e e n t s is not affecte d b& t$e e+istenc e of a inorit& intere s t' All #nre ali"ed !rofit #st be eli inat e d' In t$e cas e of #!stre a sales( $owe* er( t$e #nreali"ed !rofit s$o#ld be allocat e d betw e e n a,orit& and inorit& intere s t s ' 4 T$e eli ination of interco ! a n & sales and !#rc$a s e s does not affect consolidat e d net inco e' T$is is beca #s e e-#al a o# n t s are ded#ct e d fro sales and cost of sales and t$e net effect on consolidat e d net inco e is nil' T$e i !orta n c e of t$e eli ination lies in a correct stat e e n t of consolidat e d sales and cost of sales' 5 Consolidat e d wor.in% ca!ital is not affecte d b& t$e eli ination of interco ! a n & acco#nts recei*able and acco#nts !a&able balanc e s' Since e-#al a o# n t s are ded#ct e d fro c#rrent ass ets and c#rrent liabilities( t$e effect on t$e co !# t a tion /c#rrent ass et s less c#rrent liabilities/ is nil' 6 0!stre a sales are sales fro s#bsidiar& to !arent co ! a n &' 1ownstr e a sales are sales fro !arent co ! a n & to s#bsidiar&' T$e i !orta n c e of t$is desi%n a tion lies in t$e fact t$at t$e !rofit or loss on s#c$ trans ac tions is t$e sellin% affiliate2s !rofit or loss' In t$e cas e of #nre ali"ed !rofit or loss on downstr e a sales( all t$e !rofit or loss is assi%n e d to t$e !aren t co ! a n &seller' 3#t #nre ali"ed !rofit or loss on #!stre a sales is !rofit or loss of t$e s#bsidiar&- seller and is assi%n e d to t$e !arent co ! a n & and inorit& interes t in relation to t$eir !ro!ortion a t e $oldin%s'

Interco m p a n y Profit Transactions - Inventories

7 Yes' If #nreali"ed !rofits are not eli inat e d at &ear end( consolidat e d net inco e will be o*erst a t e d ' T$e endin% in*entor& of one &ear beco e s t$e be%innin% in*entor& of t$e ne+t &ear( and #nre ali"ed !rofits in t$e be%innin% in*entor& will #nders t a t e consolidat e d net inco e' T$e anal&sis of t$e effect of #nre ali"ed in*entor& !rofits on consolidat e d net inco e is basicall& t$e sa e as t$e anal&sis for in*entor& errors' 5i.e in*entor& errors( errors in eli inatin% #nre ali"ed !rofits are self- correctin% o*er an& two acco#ntin% !eriods' Consolidat e d net inco e for 46 67 is not affecte d' 8 T$e inorit& interes t e+!e n s e is affecte d b& #!stre a sales if t$e erc$ a n dis e $as not been resold b& t$e !arent co ! a n & to o#tside !arties b& t$e end of t$e acco#ntin% !eriod' T$is is beca #s e t$e inorit& intere s t e+!e n s e is bas e d on t$e inco e of t$e s#bsidiar&' If t$e s#bsidiar& $as #nre ali"ed !rofit fro interco ! a n & sales( its reali"ed inco e will be less t$an its re!ort e d inco e' T$e inorit& intere s t e+!e n s e s$o#ld be bas ed on t$e reali"ed inco e of t$e s#bsidiar&' 9 A !arent co ! a n &2 s in*est e n t inco e and in*est e n t acco#nt s are ad,#ste d for #nre ali"ed !rofits on interco ! a n & sales to s#bsidiaries in accord a n c e wit$ t$e one- line consolidation conce!t' T$e !aren t co ! a n & red#c e s its in*est e n t and in*est e n t inco e acco#nts for t$e f#ll a o# n t of t$e #nre ali"ed !rofits in t$e &ear of interco ! a n & sale' 8$en t$e %oods are sold to o#tside !arties b& t$e s#bsidiar&( t$e !rofits of t$e !aren t co ! a n & are reali"ed and t$e !arent co ! a n & increas e s its in*est e n t and in*est e n t inco e acco#nts ' 10 Co bine d cost of %oods sold is o*erst a t e d w$en t$ere are #nre ali"ed !rofits in t$e be%innin% in*entor& and #nders t a t e d w$en t$ere are #nre ali"ed !rofits in t$e endin% in*entor&' T$e eli ination of #nre ali"ed !rofits in t$e be%innin% in*entor& red#c e s 9credits: cost of %oods sold and t$e eli ination of #nre ali"ed !rofits in t$e endin% in*entor& increas e s 9debits: cost of %oods sold' 11 T$e effect of #nre ali"ed affect e d eit$er b& a inorit& sales' All #nre ali"ed !rofit eli inat e d fro consolidat e d !rofits on consolidat e d cost of %oods sold is not interes t or b& t$e direction of t$e interco ! a n & fro bot$ #!stre a and downstr e a sales is cost of %oods sold'

12 0nreali"ed !rofit in t$e be%innin% in*entor& is reflecte d in an o*erst a t e e n t of cost of sales and is eli inat e d b& red#cin% 9creditin%: cost of sales and debitin% t$e in*est e n t acco#nt if a correct e-#it& et$ o d $as been #sed and t$e interco ! a n & sales are downstr e a ' In t$e case of #!stre a sales( cost of sales is credite d and t$e inorit& interes t and t$e in*est e n t acco#nt are debited !ro!ortion a t el&' 8$en t$e !aren t co ! a n & does not ad,#st its in*est e n t acco#nt for #nre ali"ed !rofits fro interco ! a n & sales( t$e abo*e debits to t$e in*est e n t acco#nt wo#ld be to

Chapt er 5

retaine d earnin%s' 13 T$ere are two e-#all& %ood a!!ro ac $ e s for co !#tin% inorit& intere s t e+!e n s e w$en t$ere are #nreali"ed !rofits fro #!stre a sales in bot$ be%innin% and endin% in*entories' One a!!ro ac $ is to co !# t e reali"ed inco e of t$e s#bsidiar& b& addin% #nre ali"ed !rofits in t$e be%innin% in*entor& to re!ort e d s#bsidiar& net inco e and ded#ctin% #nre ali"ed !rofits in t$e endin% in*entor&' T$e inorit& interes t e+!e n s e is t$en e-#al to t$e reali"ed inco e of t$e s#bsidiar& #lti!lied b& t$e inorit& interes t !erce nt a % e ' T$e ot$er a!!ro ac $ is to co !#t e t$e inorit& intere s t !erce nt a % e in re!ort e d s#bsidiar& net inco e( in #nreali"ed !rofits in be%innin% in*entor&( and in #nre ali"ed !rofits in endin% in*entor&' Minorit& intere s t e+!e n s e is t$en co !#t e d b& addin% t$e inorit& interes t !erce nt a % e in #nre ali"ed !rofits in t$e be%innin% in*entor& to t$e inorit& interes t s$are of re!ort e d inco e( and s#btractin% t$e inorit& interes t !erce nt a % e relatin% to t$e #nre ali"ed !rofits in t$e endin% in*entor&' 14 T$e ass# ! tion t$at #nre ali"ed !rofits in an endin% in*entor& are reali"ed in t$e s#cce e din% !eriod is a con*enienc e ( b#t it does not res#lt in incorrect e a s # r e e n t s of consolidat e d net inco e as lon% as t$e #nre ali"ed !rofits at an& stat e e n t date are correctl& deter in e d' T$is is beca# s e an& #nre ali"ed !rofits in be%innin% in*entor& t$at are consider e d reali"ed are credited to cost of sales' T$e sa e ite s will a!! e a r as #nre ali"ed !rofits in t$e endin% in*entor& if t$e& re ain #nsold( and t$e eli ination of t$es e ite s res#lts in debitin% cost of sales for t$e sa e a o# n t' T$#s( t$e wor.in% !a!er effects are offsettin% as ill#strat e d in t$e followin% wor.in% !a!er entries( w$ic$ ass# e <7(666 #nre ali"ed !rofits fro downstr e a sales' In*est <7(666 To eli inat e #nre ali"ed !rofit in be%innin% in*entor&' Cost of sales In*entor& To eli inat e #nre ali"ed !rofit in endin% in*entor&' <7(666 <7(666 e n t in s#bsidiar& 9retaine d earnin%s: Cost of sales <7(666

Interco m p a n y Profit Transactions - Inventories

Chapt er 5

SOLUTIONS TO EXERCISES Solution E5-1 1 2 3 4 a d a c 5 6 7 8 c a a c

Solution E5-2 1 2 a c

[AICPA a a!t" #

Unrealized profits from intercompany sales with Kent are eliminated from the ending inventory: $320,000 combined current assets less $ 2,000 unrealized profit !$"0,000 # 20$%& 'ombined cost of sales of $()0,000 less $2)0,000 intercompany sales

Solution 5-3 1 d $ ,000,000 )00,000 )00,000 !400,000% $ ,"00,000

*hilly+s separate income ,dd: -hare of -ilvio+s income !$)00,000 # 00$% ,dd: .ealization of profit deferred in 20 /003 $ ,)00,000 1 !$ ,)00,0002 )0$% 3ess: Unrealized profit in 2004 inventory $ ,200,000 1 !$ ,200,0002 )0$% 'onsolidated net income 2 d

'ombined sales 3ess: 5ntercompany sales 'onsolidated sales 3 c

$ ,400,000 !)0,000% $ ,3)0,000

'ombined cost of sales 3ess: 5ntercompany purchases 3ess: Unrealized profit in beginning inventory ,dd: Unrealized profit in ending inventory 'onsolidated cost of sales

$"60,000 !)0,000% !4,000% 0,000 $"3",000

>
Solution E5-4 1 b

Interco m p a n y Profit Transactions - Inventories

*ride+s share of -edita+s income !$"0,000 # 60$% 3ess: Unrealized profit in ending inventory !$20,000 # )0$ unsold # 60$ owned% 5ncome from -edita 2 d

$46,000 !6,000% $40,000

'ombined cost of sales 3ess: 5ntercompany sales ,dd: Unrealized profit in ending inventory 'onsolidated cost of sales 3 b

$4)0,000 ! 00,000% 0,000 $3"0,000

.eported income of -edita Unrealized profit -edita+s realized income 7inority interest percentage 7inority interest e#pense

$"0,000 ! 0,000% )0,000 20$ $ 0,000

Solution E5-5 1 c $ ,600,000 !400,000% $ ,400,000

'ombined sales 3ess: 5ntercompany sales 'onsolidated sales 2 c

Unrealized profit in beginning inventory $ 00,000 1 !$ 00,0002 2)$% Unrealized profit in ending inventory $ 2),000 1 !$ 2),0002 2)$% 3 b

$20,000 $2),000

'ombined cost of goods sold 3ess: 5ntercompany sales 3ess: Unrealized profit in beginning inventory $ 00,000 1 !$ 00,0002 2)$% ,dd: Unrealized profit in ending inventory $ 2),000 1 !$ 2),0002 2)$% 'onsolidated cost of goods sold

$ ,440,000 !400,000% !20,000% 2),000 $ ,04),000

Chapt er 5

Solution E5-6 1 a $200,000 40,000 !20,000% 2",2)0 !(,(00% $336,))0 $200,000 3(,)00 ! ,000% 22",)00 30$ $ "(,/)0

*atti+s separate income ,dd: 5ncome from -usan: -hare of -usan+s reported income !$200,000 # (0$% 3ess: *atents amortization ,dd: Unrealized profit in beginning inventory 8$ 2,)00 1 !$ 2,)002 )0$%9 # (0$ 3ess: Unrealized profit in ending inventory 8$33,000 1 !$33,0002 )0$%9 # (0$ 'onsolidated net income 7inority interest e#pense: -usan+s reported income ,dd: Unrealized profit in beginning inventory 3ess: Unrealized profit in ending inventory -usan+s realized income 7inority interest percentage 7inority interest e#pense 2 c

*ac:man+s share of -locum+s reported net loss !$ )0,000 loss # "0$% ,dd: Unrealized profit in ending inventory !$200,000 # 24 unsold% 5ncome from -locum *ac:man+s separate income 'onsolidated net income 3 b

$!/0,000% !)0,000% ! 40,000% 300,000 $ "0,000

*arnell+s share of -antini+s income !$300,000 # ()$% ,dd: .ealized profit in beginning inventory $ )0,000 1 !$ )0,0002 &2)% # ()$ 3ess: ;eferred profit in ending inventory $200,000 1 !$200,0002 &2)% # ()$ 5ncome from -antini

$22),000 22,)00 !30,000% $2 (,)00

@
Solution E5-7

Interco m p a n y Profit Transactions - Inventories

200 /04 200 /0) 200 /0" *ansy*osey+s separate income $300,000 $400,000 $3)0,000 ,dd: 60$ of -heridan-able+s reported income 400,000 440,000 360,000 ,dd: .ealization of profits in beginning inventory 3 0,000 430,000 3ess: Unrealized profits in ending inventory !3 0,000% !430,000% !20,000% 'onsolidated net income $"(/0,000 $6320,000 $()40,000

Solution E5-8 P$%u& Co'!o'ation an Su(&i ia'$ 'onsolidated 5ncome -tatement for the year ended ;ecember 3 , 200 /0" -ales !$400,000 < $ 00,000 1 $40,000 intercompany sales% 'ost of sales !$200,000 < $"0,000 1 $40,000 intercompany purchases < $ 0,000 unrealized profit in ending inventory% =ross profit >ther e#penses !$ 00,000 < $30,000% ?otal consolidated income 3ess: 7inority interest e#pense !$ 0,000 # 20$% $4"0,000 !230,000% 230,000 ! 30,000% 00,000 !2,000% $ /6,000

'onsolidated net income

Chapt er 5

Solution E5-) 1 7inority interest e#pense $ 2,000

-even-hephard+s reported net income # 40$ 20,000 ,dd: 5ntercompany profit from upstream sales in beginning inventory !$),000 # 40$% 3ess: 5ntercompany profit from upstream sales in ending inventory !$ 06,000 # 40$% !43,0200% 7inority interest e#pense 2 'onsolidated sales $

6,0600

'ombined sales 3ess: 5ntercompany sales 'onsolidated sales 'onsolidated cost of sales 'ombined cost of sales 3ess: 5ntercompany sales ,dd: 5ntercompany profit in ending inventory 3ess: 5ntercompany profit in beginning inventory 'onsolidated cost of sales $)))03,000 ?otal 'onsolidated 'ombined income 3ess: 5ntercompany ,dd: 5ntercompany ?otal 'onsolidated Solution E5-1* Pa!illion Co'!o'ation an Su(&i ia'$ 'onsolidated 5ncome -tatement ;ecember 3 , 200 /06 -ales !$ ,000,000 < $)00,000 1 $/0,000 intercompany% 'ost of sales !$400,000 < $2)0,000 1 $/0,000 intercompany 1 $ 0,000 unrealized profit in beginning inventory < $ ),000 unrealized profit in ending inventory =ross profit ;epreciation e#pense >ther e#penses !$/0,000 < $"0,000 < $4,000 patents amortization% ?otal consolidated income 3ess: 7inority interest e#pense !$ )0,000 < $ 0,000 profit in beginning inventory 1 $ ),000 profit in ending inventory% # 20$ 'onsolidated net income $ 5ncome profit in ending inventory profit in beginning inventory 5ncome

$ ,2)0,000 00,000 $ , )0,000

$")00,000 ! 00,000% 06,000 !),000%

$300,000 ! 0,000% ),000 $2/),000

$ ,4 0,000

!)"),000% 64),000 ! (0,000% ! )4,000% )2 ,000 !2/,000% 4/2,000

16

Interco m p a n y Profit Transactions - Inventories

Supporting computations 'ost of investment in -ai:i at @anuary , 200 /0( $"00,000 Aoo: value acBuired !$(00,000 # 60$% *atents *atents amortization !$40,0002 0 years% C $4,000 per year

!)"0,000% $ 40,000

Chapt er 5

11
Pill Co'!o'ation an Su(&i ia'$ 'onsolidated 5ncome -tatement ;ecember 3 , 2006

Solution E5-11

-ales !$ ,000,000 < $)00,000 1 $/0,000 intercompany% 'ost of sales !$400,000 < $2)0,000 1 $/0,000 intercompany 1 $ 0,000 unrealized profit in beginning inventory < $ ),000 unrealized profit in ending inventory =ross profit ;epreciation e#pense >ther e#penses !$/0,000 < $"0,000% ?otal consolidated income 3ess: 7inority interest income !$ )0,000 < $ 0,000 profit in beginning inventory 1 $ ),000 profit in ending inventory% # 20$ 'onsolidated net income Supporting computations 'ost of investment in -ai:i at @anuary Aoo: value acBuired !$(00,000 # 60$% =oodwill , 200(

$ ,4 0,000

!)"),000% 64),000 ! (0,000% ! )0,000% )2),000 !2/,000% $ 4/",000 $"00,000 !)"0,000% $ 40,000

14
Solution E5-12 1 b

Interco m p a n y Profit Transactions - Inventories

5ncome as reported ,dd: .ealization of profits in beginning inventory $ 20,000 1 !$ 20,0002 &2% 3ess: Unrealized profits in ending inventory $3"0,000 1 !$3"0,0002 &2% .ealized income *ercent ownership 5ncome from -uey 2 c

$200,000 20,000 !"0,000% "0,000 "0$ $ /",000

-uey+s eBuity as reported !$3,400,000 < $2, 00,000% 3ess: Unrealized profit in ending inventory .ealized eBuity 7inority share 7inority interest ;ecember 3 , 200 /06 3 b

$),)00,000 !"0,000% ),440,000 40$ $2, (",000

.ealized eBuity 7aDority share 5nvestment balance ;ecember 3 , 200 /06

$),440,000 "0$ $3,2"4,000

Eote: ?he e#cess cost over boo: value is fully amortized& ?herefore, the investment balance of $3,2"4,000 plus the minority interest of $2, (",000 is eBual to the $),440,000 realized eBuity at the balance sheet date&

Solution E5-13 1 2 3 d b c

[AICPA a a!t" #

'ombined revenues $340,000 1 consolidated revenues $306,000 'ombined accounts receivable $4),000 1 $3/,000 consolidated accounts receivable

.evenues $200,0002$ )0,000 cost of sales C

23 mar:up on cost

,mount of -pin+s ending inventory from *ard !$32,000 intercompany sales # 326 remaining unsold% C $ 2,000 at billed prices # 324 C $/,000 4 5 b a $ 0,000 minority interest2$)0,000 stoc:holders+ eBuity of -pin $30,000 unamortized patents2$2,000 amortization C remaining ) years

Chapt er 5

1;

Solution E5-14 Pull"n Co'!o'ation an Su(&i ia'$ 'onsolidated 5ncome -tatement for the year ended ;ecember 3 , 200 /02 -ales !$ ,360,000 1 $ 20,000 intercompany sales% $ ,2"0,000 !60(,000% 4)3,000 ! "0,000% 2/3,000 8$40,000 1 !$ 2,000 # &2%9 $ !3(,"00% 2)),400

'ost of sales !$/20,000 1 $ 20,000 1 $),000a < $ 2,000b% =ross profit >perating e#penses ?otal consolidated income 3ess: 7inority interest e#pense

'onsolidated net income

a

Unrealized profit in beginning inventory !downstream% !$ 60,000 1 $ "0,000% # &2) C $),000 Unrealized profit in ending inventory !upstream% !$ 20,000 1 $/0,000% # &4 C $ 2,000

1=
SOLUTIONS TO PRO+LE,S Solution P5-1

Interco m p a n y Profit Transactions - Inventories

P'o%to' Co'!o'ation an Su(&i ia'$ 'onsolidated -tatement of 5ncome and .etained Farnings for the year ended ;ecember 3 , 200 /06 -ales !$ ,300,000 < $")0,000 1 $60,000 intercompany sales% $ ,6(0,000

3ess: 'ost of sales !$600,000 < $3/0,000 1 $60,000 inter1 company purchases 1 $ 2,000 unrealized profit in beginning inventory < $ ",000 unrealized profit in ending inventory% =ross profit >ther e#penses !$340,000 < $ "0,000% 0$ 5ncome before minority interest 7inority interest e#pense !$ 00,000 < $ 2,000 1 $ ",000% # 'onsolidated net income ,dd: 3ess: Aeginning consolidated retained earnings ;ividends for 200 /06

! ,

4,000% ()",000

!)00,000 2)",000 !/,"00% 24",400 3"/,200 ! 00,000% $ ) ),"00

'onsolidated retained earnings ;ecember 3 , 200 /06

Chapt er 5

17

Solution P5-2 1 'onsolidated cost of sales 1 200 /0( $/2),000 !300,000% 24,000 ! 2,000% $"3(,000

'ombined cost of sales !$"2),000 < $300,000% 3ess: 5ntercompany purchases ,dd: *rofit in ending inventory 3ess: *rofit in beginning inventory 'onsolidated cost of sales 2 7inority interest e#pense 1 200 /0(

-lam+s net income !$"00,000 1 $300,000 1 $ )0,000% ,dd: *rofit in beginning inventory 3ess: *rofit in ending inventory -lam+s realized income 7inority interest percentage 7inority interest e#pense 3 'onsolidated net income 1 200 /0(

$ )0,000 2,000 !24,000% 36,000 0$ $ 3,600

'onsolidated sales !$/00,000 < $"00,000 1 $300,000% 3ess: 'onsolidated cost of sales 3ess: 'onsolidated e#penses !$22),000 < $ )0,000% 3ess: 7inority interest e#pense 'onsolidated net income ,lternatively, *utt+s separate income ,dd: 5ncome from -lam 'onsolidated net income 4 7inority interest at ;ecember 3 , 200 /0(

$ ,200,000 !"3(,000% !3(),000% ! 3,600% $ (4,200 $ )0,000 24,200 $ (4,200

FBuity of -lam ;ecember 3 , 200 /0( 3ess: Unrealized profit in ending inventory 7inority interest percentage 7inority interest ;ecember 3 , 200 /0(

$)20,000 !24,000% 4/",000 0$ $ 4/,"00

1>
Solution P5-3 1

Interco m p a n y Profit Transactions - Inventories

5nventories appearing in consolidated balance sheet at ;ecember 3 , 2004 $ )",000 3 ,000 24,000 $ ,000

Aeginning inventory1*otter !$"0,000 1 $4,000a% Aeginning inventory1-can !$36,()0 1 $(,()0b% Aeginning inventory1?ray !$24,000 1 0% 5nventories ;ecember 3 , 2004 5ntercompany profit: a *otter: 5nventory acBuired intercompany !$"0,000 # 40$% 'ost of intercompany inventory !$24,0002 &2% Unrealized profit in *otter+s inventory
b

$ 24,000 !20,000% $ 4,000 $ 36,()0 !3 ,000% $ (,()0

-can: 5nventory acBuired intercompany !$36,()0 # 00$% 'ost of intercompany inventory !$36,()02 &2)% Unrealized profit in -can+s inventory 2

5nventories appearing in consolidated balance sheet at ;ecember 3 , 200) $ 4/,)00 2),000 3",000 $ 0,)00

Fnding inventory1*otter !$)4,000 1 $4,)00c% Fnding inventory1-can !$3 ,2)0 1 $",2)0d% Fnding inventory1?ray !$3",000 1 0% 5nventories ;ecember 3 , 200) 5ntercompany profit: c *otter: 5nventory acBuired intercompany !$)4,000 # )0$% 'ost of intercompany inventory !$2(,0002 &2% Unrealized profit in *otter+s inventory
d

$ 2(,000 !22,)00% $ 4,)00 $ 3 ,2)0 !2),000% $ ",2)0

-can: 5nventory acBuired intercompany !$3 ,2)0 # 00$% 'ost of intercompany inventory !$3 ,2)02 &2)% Unrealized profit in -can+s inventory

Chapt er 5

1?

Solution P5-4 1 *lierrowler+s income from -tuoffel 200 /0/ $ 200 /0( 300,000 $ 200 /06 33(,)00 $

()$ of -tufftoffel+s net income 2"2,)00 Unrealized profit in ;ecember 3 , 200 /0( inventory !downstream% !$200,000 # 22% # 00$ Unrealized profit in ;ecember 3 , 200 /06 inventory !upstream% $ 060,000 # ()$ ()"0,000 *lierrowler+s income from -tuoffel $ 33(22,)00 2 *lierrowler+s net income

! 00,000%

00,000

!()"0,000% $ 200,000 $ 3"2((,)00

*lierrowler+s separate income ,dd: 5ncome from -tuoffel 33(22,)00 *lierrowler+s net income $2,33(22,)00 3 'onsolidated net income

$ ,600,000 200,000 $2,000,000

$ ,(00,000 3"2((,)00 $2,0"2((,)00

$2,000,000

-eparate incomes of *rowlier and -tuoffel combined $2,3)0,000 Unrealized profit in ;ecember 3 , 200 /0( inventory Unrealized profit in ;ecember 3 , 200 /06 inventory 060,000 ?otal income 3ess: 7inority interest e#pense 200 /0( $400,000 # 2)$ 200 /06 !$4)0,000 1 $ 060,000% # 2)$ 200 /0/ !$3)0,000 < $ 060,000% # 2)$ ! 20(,)00% 'onsolidated net income $2,33(22,)00

$2,200,000

$2, )0,000

! 00,000%

00,000 ! 060,000%

2, 00,000

2, )(0,000

2,4)30,000

! 00,000% !6(/2,)00%

$2,000,000

$2,0"2((,)00

1@

Interco m p a n y Profit Transactions - Inventories

Chapt er 5

1A

Solution P5-5 Pan" Co'!o'ation an Su(&i ia'$ 'onsolidation Gor:ing *apers for the year ended ;ecember 3 , 2004 H H 00$ H ,dDustments and H'onsolidated H *ane H -eal H Fliminations H -tatements H H H H H Income Statement H H H H H -ales H$ 600,000 H$400,000 Ha 20,000H H $ ,060,000 5ncome from -eal H 02,000 H Hd 02,000H H 'ost of sales H 400,000IH 200,000IHb 2,000Ha 20,000H 4(2,000I H H H Hc 20,000H ;epreciation e#pense H 0,000IH 40,000IH H H )0,000I >ther e#penses H /2,000IH "0,000IHf ",000H H 2)6,000I Eet income H$ 200,000 H$ 00,000 H H H $ 200,000 H H H H H Retained Earnings H H H H H .etained earnings1*aneH$ "00,000 H H H H "00,000 .etained earnings1-ealH H$360,000 He 360,000H H Eet income H 200,000H 00,000H H H 200,000 ;ividends H 00,000IH )0,000IH Hd )0,000H 00,000I .etained earnings H H H H H ;ecember 3 , 2004 H$ (00,000 H$430,000 H H H $ (00,000 H H H H H Balance Sheet H H H H H 'ash H$ )4,000 H$ 3(,000 H H H $ / ,000 .eceivables1net H /0,000 H "0,000 H Hg (,000H 33,000 5nventories H 00,000 H 60,000 H Hb 2,000H "6,000 >ther assets H (0,000 H /0,000 H H H "0,000 3and H )0,000 H )0,000 H H H 00,000 Auildings1net H 200,000 H )0,000 H H H 3)0,000 FBuipment1net H )00,000 H 400,000 H H H /00,000 5nvestment in -eal H (3",000 H Hc 20,000Hd )2,000H H H H He (04,000H *atents H H He 24,000Hf ",000H 6,000 H$ ,600,000 H$6"(,000 H H H $ ,/20,000 H H H H H ,ccounts payable H$ "0,000 H$ 4(,000 Hg (,000H H $ /0,000 >ther liabilities H 340,000 H /0,000 H H H 430,000 'ommon stoc:, $ 0 par H "00,000 H 300,000 He 300,000H H "00,000 .etained earnings H (00,000H 430,000H H H (00,000 H$ ,600,000 H$6"(,000 H H H $ ,/20,000 H H H H H Supporting computations Unrealized profit in beginning inventory !$40,000 # 22% C $20,000 Unrealized profit in ending inventory !$46,000 # 24% C $ 2,000 -eal+s income of $ 00,000 plus $20,000 profit in beginning inventory, less $ 2,000 profit in ending inventory, and less $",000 patents amortization eBuals $ 02,000 income from -eal&

46
Solution P5-6

Interco m p a n y Profit Transactions - Inventories

Patt'$ Co'!o'ation an Su(&i ia'$ 'onsolidation Gor:ing *apers for the year ended ;ecember 3 , 200 /06
H H H H H$ H H H H H$ H ,dDustments and H'onsolidated H -ueady ()$H Fliminations H -tatements H H H H H H H H "(00,000 H$4300,000 Ha 300,000H H $ 6(0 /00,000 H 0 2,)00 ),000 H Hd 0 2,)00 ),000 H H 2(0,000IH 2 0 30,000IHb 20,000Ha 300,000H 3" 0,000I H H Hc 0,000H 4),000IH 420,000IH H H 6 (),000I H Hf 3(,)00 ),000 H H *attry 26(,)00400,000 H$ )0,000 H H H $ H

Income Statement -ales 5ncome from -ueady 'ost of sales >perating e#penses 7inority e#pense 3(,)00 ),000 I Eet income 26(,)00400,000

H H H H H Retained Earnings H H H H H .etained earnings 1*attryH$ 62,)00 (0,000 H H H H$ 62,)00 (0,000 .etained earnings 1-ue ady H H$ /0,000 He /0,000H H Eet income H 26(400,)000H )0,000 H H H 26(,)00 400,000 ;ividends H )0,000IH )0,000IH Hd 3(,)004),000H H H H Hf 2,)00 ),000 H )0,000I .etained earnings H H H H H ;ecember 3 , 200 /0 6 H$ 3220,000 H$ /0,000 H H H$ 3220,000 H H H H H Balance Sheet H H H H H 'ash H$ 6) "",000 H$ 30,000 H H H$ ),000 ,ccounts receivable H ") 60,000 H 00,000 H Hg ),000H 2)0,000 ;ividends receivable H ) 6,000 H H Hh ) 6,000H 5nventories H "0,000 H 60,000 H Hb 20,000H 20,000 3and H 60 00,000 H )0,000 H H H 3)0,000 Auildings 1net H 2 360,000 H 00,000 H H H 3 360,000 FBuipment 1net H 200 330,000 H 40,000 H H H 344(0,000 5nvestment in -ueady H 36)3"",000 H Hc 0,000Hd ")(0,000H H H H He 33030",000H =oodwill H H He )/0,000H H )60,000 H$ ,22)00,000 H$)00,000 H H H$ , 43)"" ,000 H H H H H ,ccounts payable H$ 22),000 H$ 00,000 Hg ),000H H$ 3 0,000 ;ividends payable H (0,000 H 20,000 Hh )6,000H H ( )2,000 >ther liabilities H ) )0,000 H 40,000 H H H / )0,000 'ommon stoc: 1$ 0 par H 4)0 (3),000 H )0,000 He )0,000H H 4)0 (3),000 .etained earnings H 32 20,000 H /0,000 H H H 32 20,000 H$ ,22)00,000 H$)00,000 H H H H H H 7inority interest @anuary , 200 /06 H He "024,000H 24 7inority interest ;ecember 3 , 200 /06 H Hf 2),000 34H 6)34,000 H H H $ , 43)"" ,000 H H H I;educt

Supporting computations 5nvestment in -ueady /0$ at @anuary , 200 /0( $30260,000 Aoo: value acBuired !$200,000 # ()$% =oodwill

)60,000

Chapt er 5

41

$ )0 00,000

44
Solution P5-7 Preliminary computations

Interco m p a n y Profit Transactions - Inventories

5nvestment cost 3ess: Aoo: value acBuired !$2)0,000 # /0$% *atents *atents amortization Upstream sales Unrealized profit in ;ecember 3 , 200 /0" inventory of *oly $26,000 1 !$26,000 &4% C $6,000 Unrealized profit in ;ecember 3 , 200 /0( inventory of *oly $42,000 1 !$42,000 &4% C $ 2,000 5ncome from -usan -hare of -usan+s reported income !$ 00,000 # /0$% 3ess: *atents amortization 3ess: Unrealized profit in ending inventory !$ 2,000 # /0$% ,dd: Unrealized profit in beginning inventory !$6,000 # /0$% 5ncome from -usan $)0,0002 0 years C $),000 per year

$2(),000 22),000 $ )0,000

$ /0,000 !),000% ! 0,600% (,200 $ 6 ,400

5nvestment balance 5nitial investment cost 5ncrease in -usan+s net assets from ;ecember 3 , 200 /04 to ;ecember 3 , 200 /0( !$(0,000 # /0$% *atent amortization for 3 years Unrealized profit in ;ecember 3 , 200 /0( inventory 5nvestment balance ;ecember 3 , 200 /0( 7inority interest e#pense .eported income of -usan ,dd: Unrealized profit in beginning inventory 3ess: Unrealized profit in ending inventory -usan+s realized income 7inority interest percentage 7inority interest e#pense $ 00,000 6,000 ! 2,000% /",000 0$ $ /,"00 $2(),000 "3,000 ! ),000% ! 0,600% $3 2,200

Chapt er 5

4;
!continued% Pol$ Co'!o'ation an Su(&i ia'$ 'onsolidation Gor:ing *apers for the year ended ;ecember 3 , 200 /0(

Solution P5-7

H H H ,dDustments and H'onsolidated H *oly H-usan /0$H Fliminations H -tatements H H H H H Income Statement H H H H H -ales H$6 /,000 H$)"0,000 Ha )"0,000H H $6 /,000 5ncome from -usan H 6 ,400 H Hd 6 ,400H H 'ost of sales H )4",000IH 400,000IHb 2,000Ha )"0,000H 3/0,000I H H H Hc 6,000H >ther e#penses H )4,400IH "0,000IHf ),000H H 2 /,400I 7inority e#pense H H Hh /,"00H H /,"00I Eet income H$200,000 H$ 00,000 H H H $200,000 H H H H H Retained Earnings H H H H H .etained earnings1 H H H H H *oly H$ 20,000 H H H H $ 20,000 .etained earnings1 H H H H H -usan H H$ (0,000 He (0,000H H Eet income H 200,000 H 00,000 H H H 200,000 ;ividends H 00,000IH )0,000IH Hd 4),000H Hh ),000H 00,000I .etained earnings H H H H H ;ecember 3 , 200 /0 ( H$220,000 H$ 20,000 H H H $220,000 H H H H H Balance Sheet H H H H H 'ash H$ (),600 H$ )0,000 H H H $ 2),600 5nventory H 42,000 H 60,000 H Hb 2,000H 0,000 >ther current assetsH "0,000 H 20,000 H Hg 0,000H (0,000 *lant assets 1net H 300,000 H 300,000 H H H "00,000 5nvestment in -usan H 3 2,200 H Hc (,200Hd 3",400H H H H He 263,000H *atents H H He 40,000Hf ),000H 3),000 H$(/0,000 H$4)0,000 H H H $/40,600 H H H H H 'urrent liabilities H$ (0,000 H$ 30,000 Hg 0,000H H $2/0,000 'apital stoc: H 400,000 H 200,000 He 200,000H H 400,000 .etained earnings H 220,000 H 20,000 H H H 220,000 H$(/0,000 H$4)0,000 H H H H H H 7inority interest @anuary , 200 /0( Hc 600He 2(,000H 7inority interest ;ecember 3 , 200 /0( H Hh 4,"00H 30,600 H H H $/40,600 H H H I;educt

4=
Solution P5-8 1

Interco m p a n y Profit Transactions - Inventories

Fntries to correct *hil+s income from -ert and investment accounts .etained earnings @anuary , 200 /06 5nvestment in -ert $4,)00 $4,)00

?o adDust beginning retained earnings and beginning investment accounts for unrealized profit in the ;ecember 3 , 200 /0( inventory !$),000 # /0$%& 5nvestment in -ert 5ncome from -ert $4,)00 $4,)00

?o recognize intercompany profit in the ;ecember 3 , 200 /0( inventory of goods acBuired from -ert !$),000 # /0$%& 5ncome from -ert 5nvestment in -ert $4,000 $4,000

?o eliminate intercompany profit in the ;ecember 3 , 200 /06 inventory& Gor:ing paper entries in general Dournal form: a 7inority interest 5nvestment in -ert 'ost of sales -ales 'ost of sales c d 'ost of sales 5nventory 5ncome from -ert ;ividends 5nvestment in -ert 'apital stoc:1-ert .etained earnings1-ert 5nvestment in -ert 7inority interest ,ccounts payable ,ccounts receivable 7inority 5nterest F#pense ;ividends 7inority 5nterest $ 4,000 $ $ 2(,)00 $ $ 60,000 40,000 $ 06,000 2,000 $ $ 0,000 $ 3,)00 2,000 ,)00 0,000 6,000 /,)00 4,000 $ )00 4,)00 $ $ 0,000 $ 0,000 ),000

f g

Chapt er 5

47
!continued% P-il Co'!o'ation an Su(&i ia'$ 'onsolidation Gor:ing *apers for the year ended ;ecember 3 , 200 /06

Solution P5-8 2

H H H ,dDustments and H'onsolidated H *hil H-ert /0$ H Fliminations H -tatements H H H H H Income Statement H H H H H -ales H$)00,000 H$ 00,000 Hb 0,000H H $)/0,000 5ncome from -ert H 2(,)00 H Hd 2(,)00H H 'ost of sales H 240,000IH 40,000IHc 4,000Ha ),000H 2"/,000I H H H Hb 0,000H >ther e#penses H (4,000IH 30,000IH H H 204,000I 7inority e#pense H H Hg 3,)00H H 3,)00I Eet income H$ 3,)00 H$ 30,000 H H H $ 3,)00 H H H H H Retained Earnings H H H H H .etained earnings1 H H H H H *hil H$ 0),)00 H H H H $ 0),)00 .etained earnings1 H H H H H -ert H H$ 40,000 He 40,000H H Eet income H 3,)00H 30,000H H H 3,)00 ;ividends H (0,000IH 20,000IH Hd 6,000H Hg 2,000H (0,000I .etained earnings H H H H H ;ecember 3 , 200 /06 H$ 4/,000 H$ )0,000 H H H $ 4/,000 H H H H H Balance Sheet H H H H H 'ash H$ "3,000 H$ 30,000 H H H $ /3,000 5nventories H "0,000 H ),000 H Hc 4,000H ( ,000 ,ccounts receivableH 40,000 H 20,000 H Hf 0,000H )0,000 *lant assets1net H 220,000 H 0),000 H H H 32),000 5nvestment in -ert H 3,000 H Ha 4,)00Hd /,)00H H H H He 06,000H H$4/",000 H$ (0,000 H H H $)3/,000 H H H H H ,ccounts payable H$ 4(,000 H$ 40,000 Hf 0,000H H $ ((,000 'apital stoc: H 300,000 H 60,000 He 60,000H H 300,000 .etained earnings H 4/,000H )0,000H H H 4/,000 H$4/",000 H$ (0,000 H H H H H H 7inority interest @anuary , 200 /06 Ha )00He 2,000H 7inority interest ;ecember 3 , 200 /06 H Hg ,)00H 3,000 H H H $)3/,000 H H H I;educt 7inority interest e#pense: !$30,000 < $),000% # 0$

4>
Solution P5-)

Interco m p a n y Profit Transactions - Inventories

Pan Co'!o'ation an Su(&i ia'$ 'onsolidation Gor:ing *apers for the year ended ;ecember 3 , 2004 H H 00$ H H *an H -al H H H H Income Statement H H H -ales H$ 600,000 H$400,000 Ha 5ncome from -al H 06,000 H Hd 'ost of sales H 400,000IH 200,000IHb H H H ;epreciation e#pense H 0,000IH 40,000IH >ther e#penses H /2,000IH "0,000IH Eet income H$ 20",000 H$ 00,000 H H H H H H Retained Earnings H H H .etained earnings1*an H$ "0",000 H H .etained earnings1-al H H$360,000 He Eet income H 20",000H 00,000H ;ividends H 00,000IH )0,000IH .etained earnings H H H ;ecember 3 , 2004 H$ ( 2,000 H$430,000 H H H H Balance Sheet H H H 'ash H$ )4,000 H$ 3(,000 H .eceivables1net H /0,000 H "0,000 H 5nventories H 00,000 H 60,000 H >ther assets H (0,000 H /0,000 H 3and H )0,000 H )0,000 H Auildings1net H 200,000 H )0,000 H FBuipment1net H )00,000 H 400,000 H 5nvestment in -al H (46,000 H Hc H H H =oodwill H H He H$ ,6 2,000 H$6"(,000 H H H H ,ccounts payable H$ "0,000 H$ 4(,000 Hf >ther liabilities H 340,000 H /0,000 H 'ommon stoc:, $ 0 par H "00,000 H 300,000 He .etained earnings H ( 2,000H 430,000H H$ ,6 2,000 H$6"(,000 H H H H ,dDustments and H'onsolidated Fliminations H -tatements H H H H 20,000H H $ ,060,000 06,000H H 2,000Ha 20,000H 4(2,000I Hc 20,000H H H )0,000I H H 2)2,000I H H $ 20",000 H H H H 360,000H H H H Hd )0,000H H H H H H H H H H H Hf (,000H Hb 2,000H H H H H H H H H 20,000Hd )6,000H He ( 0,000H 30,000H H H H H H (,000H H H H 300,000H H H H H H H H "0",000 20",000 00,000I $ $ ( 2,000 / ,000 33,000 "6,000 "0,000 00,000 3)0,000 /00,000

30,000 $ ,/32,000 $ /0,000 430,000 "00,000 ( 2,000 $ ,/32,000

Supporting computations Unrealized profit in beginning inventory !$40,000 # 22% C $20,000 Unrealized profit in ending inventory !$46,000 # 24% C $ 2,000 -al+s income of $ 00,000 plus $20,000 profit in beginning inventory less $ 2,000 profit in ending inventory&

Chapt er 5

4?
Pat Co'!o'ation an Su(&i ia'$ 'onsolidation Gor:ing *apers for the year ended ;ecember 3 , 2006

Solution P5-1*

H H H Income Statement H -ales H$ 5ncome from -un H 'ost of sales H H >perating e#penses H 7inority e#pense H Eet income H$ H Retained Earnings H .etained earnings 1*at H$ .etained earnings 1-un H Eet income H ;ividends H

H H ,dDustments and H'onsolidated H -un ()$H Fliminations H -tatements H H H H H H H H "00,000 H$400,000 Ha 30,000H H $ 6(0,000 /2,)00 H Hd /2,)00 H H 2(0,000IH 2 0,000IHb 20,000Ha 30,000H 3"0,000I H H Hc 0,000H 4),000IH 40,000IHf 0,000H H /),000I H Hi 3(,)00H H 3(,)00I 2((,)00 H$ )0,000 H H H $ 2((,)00 H H H H H H H H (2,)00 H H H H$ (2,)00 H$ /0,000 He /0,000H H 2((,)00 H )0,000 H H H 2((,)00 )0,000IH )0,000IH Hd 3(,)00H Hi 2,)00H )0,000I .etained earnings H H H H H ;ecember 3 , 2006 H $ 300,000 H$ /0,000 H H H $ 300,000 H H H H H Balance Sheet H H H H H 'ash H$ 6),000 H$ 30,000 H H H $ ),000 ,ccounts receivable H "),000 H 00,000 H Hg ),000H 2)0,000 ;ividends receivable H ),000 H H Hh ),000H 5nventories H "0,000 H 60,000 H Hb 20,000H 20,000 3and H 60,000 H )0,000 H H H 30,000 Auildings 1net H 230,000 H 00,000 H H H 330,000 FBuipment 1net H 200,000 H 40,000 H H H 340,000 5nvestment in -un H 3"),000 H Hc 0,000Hd )),000H H H H He 320,000H ?rademar: H H He 40,000Hf 0,000H 30,000 H$ ,200,000 H$)00,000 H H H $ ,4 ),000 H H H H H ,ccounts payable H$ 22),000 H$ 00,000 Hg ),000H H $ 3 0,000 ;ividends payable H (0,000 H 20,000 Hh ),000H H (),000 >ther liabilities H )),000 H 40,000 H H H /),000 'ommon stoc: 1$ 0 par H 4)0,000 H )0,000 He )0,000H H 4)0,000 .etained earnings H 300,000 H /0,000 H H H 300,000 H$ ,200,000 H$)00,000 H H H H H H 7inority interest @anuary , 2006 H He "0,000H 7inority interest ;ecember 3 , 2006 H Hi 2),000H 6),000 H H H $ ,4 ),000 H H H I;educt *at

Supporting 5nvestment Aoo: value ?rademar:

computations in -un at @anuary , 200( acBuired !$200,000 # ()$% ! ) year amortization%

$300,000 )0,000 $ )0,000

4@
Solution P5-11 Preliminary computations

Interco m p a n y Profit Transactions - Inventories

5nvestment cost 3ess: Aoo: value acBuired !$2)0,000 # /0$% =oodwill

$2(),000 22),000 $ )0,000

Upstream sales Unrealized profit in ;ecember 3 , 200" inventory of *o $26,000 1 !$26,000 &4% C $6,000 Unrealized profit in ;ecember 3 , 200( inventory of *o $42,000 1 !$42,000 &4% C $ 2,000 5ncome from -an -hare of -an+s reported income !$ 00,000 # /0$% 3ess: Unrealized profit in ending inventory !$ 2,000 # /0$% ,dd: Unrealized profit in beginning inventory !$6,000 # /0$% 5ncome from -an $ /0,000 ! 0,600% (,200 $ 6",400

5nvestment balance 5nitial investment cost 5ncrease in -an+s net assets from ;ecember 3 , 2004 to ;ecember 3 , 200( !$(0,000 # /0$% Unrealized profit in ;ecember 3 , 200( inventory 5nvestment balance ;ecember 3 , 200( 7inority interest e#pense .eported income of -an ,dd: Unrealized profit in beginning inventory 3ess: Unrealized profit in ending inventory -usan+s realized income 7inority interest percentage 7inority interest e#pense $2(),000 "3,000 ! 0,600% $32(,200

$ 00,000 6,000 ! 2,000% /",000 0$ $ /,"00

Chapt er 5

4A
!continued% Po Co'!o'ation an Su(&i ia'$ 'onsolidation Gor:ing *apers for the year ended ;ecember 3 , 200(

Solution P5-11

H H H ,dDustments and H'onsolidated H *o H-an /0$ H Fliminations H -tatements H H H H H Income Statement H H H H H -ales H$6 /,000 H$)"0,000 Ha )"0,000H H $6 /,000 5ncome from -an H 6",400 H Hd 6",400H H 'ost of sales H )4",000IH 400,000IHb 2,000Ha )"0,000H 3/0,000I H H H Hc 6,000H >ther e#penses H )4,400IH "0,000IH H H 2 4,400I 7inority e#pense H H Hf /,"00H H /,"00I Eet income H$20),000 H$ 00,000 H H H $20),000 H H H H H Retained Earnings H H H H H .etained earnings1 H H H H H *o H$ 30,000 H H H H $ 30,000 .etained earnings1 H H H H H -an H H$ (0,000 He (0,000H H Eet income H 20),000 H 00,000 H H H 20),000 ;ividends H 00,000IH )0,000IH Hd 4),000H Hf ),000H 00,000I .etained earnings H H H H H ;ecember 3 , 200( H$23),000 H$ 20,000 H H H $23),000 H H H H H Balance Sheet H H H H H 'ash H$ (),600 H$ )0,000 H H H $ 2),600 5nventory H 42,000 H 60,000 H Hb 2,000H 0,000 >ther current assetsH "0,000 H 20,000 H Hg 0,000H (0,000 *lant assets 1net H 300,000 H 300,000 H H H "00,000 5nvestment in -an H 32(,200 H Hc (,200Hd 4 ,400H H H H He 2/3,000H =oodwill H H He )0,000H H )0,000 H$60),000 H$4)0,000 H H H $/)),600 H H H H H 'urrent liabilities H$ (0,000 H$ 30,000 Hg 0,000H H $2/0,000 'apital stoc: H 400,000 H 200,000 He 200,000H H 400,000 .etained earnings H 23),000 H 20,000 H H H 23),000 H$60),000 H$4)0,000 H H H H H H 7inority interest @anuary , 200( Hc 600He 2(,000H 7inority interest ;ecember 3 , 200( H Hf 4,"00H 30,600 H H H $/)),600 H H H I;educt