Chapter 7 - Solution Manual

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets
CHAPTER 7
INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS
ANSWERS TO QUESTIONS
Q7-1 Profits on intercorporate sales generally are considered to be realized when the affiliate
that has purchased the item sells it to a nonaffiliate. For depreciable or amortizable items that
are used by the affiliate in its operations, profits are considered to be realized as the purchaser
depreciates or amortizes the asset.
Q7-2 An upstream sale occurs when a subsidiary sells an item to the parent company. If the
asset is not resold before the end of the period, the parent is the company holding the asset and
any unrealized profits are recorded on the books of the subsidiary.
Q7-3 If the purchaser records the services received as an expense, both revenues and
expenses will be overstated in the consolidated income statement in the period in which the
intercorporate services are provided. In the event the services are capitalized by the purchaser,
the cost of the asset will be overstated, depreciation expense and accumulated depreciation will
be overstated if the services are assigned to a depreciable asset, and service revenue will be
overstated.
Q7-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net
income of the seller.
(b) All unrealized profit on current-period intercorporate sales must be excluded from
consolidated net income until realized through resale to a nonaffiliate.
Q7-5 Profits on intercompany sales are included in consolidated net income in the period in
which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one of
the companies at the start of the period and the item is sold to a nonaffiliate during the current
period, the intercompany profit is included in the computation of consolidated net income for the
current period.
Q7-6 The profits continue to be unrealized in this case and therefore must be eliminated from
both the beginning and ending asset and retained earnings balances when consolidated
statements are prepared. There should be no income statement effect for the current period.
Q7-7 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is not
resold before the end of the period, the subsidiary is the company holding the asset at year-end
and any unrealized profits are recorded on the books of the parent company.
Q7-8 The entire balance of unrealized profits is eliminated in all cases. While the direction of
the sale will affect the allocation of unrealized profits between companies, it does not change
the total amount of profit eliminated.
Q7-9 Consolidated net income is reduced by the amount of unrealized profits assigned to the
shareholders of the parent company. When a downstream sale occurs, all the profit is on the
parent's books and consolidated net income is reduced by the full amount of any unrealized
profit. On the other hand, when an upstream sale occurs, all the intercorporate profit is recorded
on the books of the subsidiary and the amount of income assigned to both the parent company
shareholders and the noncontrolling shareholders is reduced by a proportionate amount of any
unrealized profit.
7-1
Q7-10 The amount of intercorporate profit realized in the current period from prior years' sales
to the parent is added to the reported net income of the subsidiary in computing income
assigned to the noncontrolling interest.
Q7-11 Income assigned to noncontrolling interest for the current period will be less than a
proportionate share of the reported net income of the subsidiary. In determining the amount of
income to be assigned to the noncontrolling interest in the consolidated income statement, the
net income reported by the subsidiary must be adjusted to exclude any unrealized gain
recorded during the period on the sale of depreciable assets to the parent. On the other hand, if
an unrealized loss had been recorded, the basis used in assigning income to the noncontrolling
interest would be greater than the reported net income of the subsidiary. Such adjustments must
be made to assure that the income assigned to noncontrolling interest is based on the
contribution of the subsidiary to consolidated net income rather than the amount the subsidiary
may have reported as net income.
Q7-12 All other factors being equal, the income assigned to noncontrolling interest will be larger
if the sale occurs at the start of the current period. Some part of the gain will be considered
realized in the current period as the parent depreciates the asset if the sale occurs before yearend. None of the gain will be considered realized in the period of transfer if the sale occurs at
year-end.
Q7-13 As in all other cases, income from the subsidiary recorded on the parent's books must
be eliminated in preparing the consolidated income statement and an appropriate amount of
subsidiary net income must be assigned to the noncontrolling interest if the parent owns less
than 100 percent of the subsidiary's stock. The gain recorded on the parent's books also must
be eliminated.
Q7-14 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of the
consolidated entity when the subsidiary pays the parent more than book value for the asset at
the start of the period. As a result, an eliminating entry is needed to reduce depreciation
expense and accumulated depreciation by the amount of excess depreciation recorded during
20X3.
Q7-15 Following an intercorporate sale of a depreciable asset, the eliminating entries should
adjust the balance in the asset account to reflect the original purchase price to the first owner
and accumulated depreciation should be adjusted to reflect the balance that would be reported
if the asset were still held by the first owner. In the case of an intercorporate sale of an
intangible asset, only the unamortized balance normally is reported and an eliminating entry is
needed to adjust the carrying value to that which would be reported if the asset were still held by
the first owner.
Q7-16 Profit on an intercorporate sale of land is considered realized at the time the purchaser
sells the land to a nonaffiliate. Profit on equipment normally is considered realized as the asset
is used and depreciated on the books of the purchaser. Equipment typically is considered to be
used up in the production process and therefore is charged to expense over its remaining
economic life, while land is not.
7-2
Q7-17 A portion of the profit is considered realized each period as the asset is depreciated by
the purchaser. Thus, the net amount considered unrealized decreases each period and a
smaller debit to beginning retained earnings is needed.
Q7-18A The balance in the investment account will depend on which method the parent uses to
account for its investment in the subsidiary. If the parent uses (a) the cost method or (b) the
modified equity method, no adjustments are made on the parent company's books for
unrealized intercompany profits and the balance in the investment account will be the same as if
there were no unrealized profits. If the parent uses (c) the fully-adjusted equity method, the
balance in the investment account will be reduced by the full amount of the unrealized profit
when the profit is on the parent's books and by a proportionate share of the unrealized profit
when it is on the subsidiary's books.
7-3
SOLUTIONS TO CASES
C7-1 Correction of Elimination Procedures
MEMO
To:
Controller
Plug Corporation
From:
Re:
, CPA
Elimination of Intercompany Profit on Equipment
This memo is in response to our review of the elimination procedures used in preparing the
consolidated statements for Plug Corporation at December 31, 20X2. You have correctly
identified the need to eliminate the effects of the intercorporate sale of equipment. In preparing
your consolidated statements, all intercompany balances and transactions should be eliminated.
[ARB 51, Par. 6; ASC 810]
Your eliminating entry recorded at December 31, 20X2, was:
Equipment
Loss on Sale of Equipment
150,000
150,000
This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the sale
of equipment to Plug and adds $150,000 to the equipment account. By adding back $150,000 to
equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000). This represents the
carrying value of the equipment on Coys books at the time of sale but does not reflect the
purchase price paid by Coy ($1,200,000) or the accumulated depreciation at the time of sale
($200,000). Moreover, the eliminating entry above understates depreciation expense for the
year. The correct eliminating entry at December 31, 20X2, is:
Equipment
Depreciation Expense
Accumulated Depreciation
Loss on Sale of Equipment
350,000
15,000
215,000
150,000
A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by
Plug to $1,200,000, the initial purchase price to the consolidated entity. Depreciation expense
must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug to $100,000
($1,200,000/12 years) based on the initial purchase price. Accumulated depreciation must be
credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x 1 year] reported by Plug
to $300,000 [($1,200,000/12 years) x 3 years]. As previously noted, the $150,000 loss recorded
by Coy must be eliminated. If the amounts included in second eliminating entry are omitted,
consolidated net income for 20X2 and the retained earnings balance at December 31, 20X2, will
be overstated and the balances for equipment and accumulated depreciation will be
understated.
Primary citation:
ARB 51, Par. 6; ASC 810
7-4
C7-2 Elimination of Intercorporate Services

MEMO
To:
Chief Accountant
Dream Corporation
From:
Re:
, CPA
Elimination of Legal Services Provided by Parent Company
This memo is in response to our discussion regarding the elimination of intercompany services
in preparing consolidated financial statements for Dream Corporation. It is my understanding
that at present Dream Corporation does not eliminate such services. In preparing consolidated
financial statements all intercompany balances and transactions should be eliminated. [ARB 51,
Par. 6; ASC 810]
The legal services provided by Dream Corporation to Classic Company and Plain Company are
intercompany transactions that should be eliminated. If the revenues recorded by the parent are
equal to the expenses recorded by the subsidiaries and both are properly recorded, elimination
of these transactions will have no impact on reported net income but will reduce consolidated
revenues and expenses by equal amounts. Financial statement readers will receive a more
accurate picture of operations of the consolidated entity if the appropriate amounts are reported.
The legal services provided to Classic Company in 20X3 should be eliminated with the following
entry:
Legal Services Revenue
Legal Services Expense
80,000
80,000
The information on intercorporate services provided to Plain Company indicates that an

additional adjustment is needed in the consolidation process. Although Plain Company recorded
its $150,000 payment to the parent as a legal expense, it should have been recorded as an
investment in land to be used in future development of its strip mine. This error should be
corrected on the books of Plain Company. If it is not, the eliminating entry prepared at
December 31, 20X3, should include an adjustment to reflect the appropriate investment in land
and would be recorded as:
Land
Legal Services Expense
Wage and Salary Expense
150,000
100,000
150,000
100,000
Care must be taken to capitalize only the cost of legal services in this case. The eliminating
entry should contain a debit of $100,000 ($150,000/1.50) to land since Dream Corporation bills
its services to the subsidiaries at 150 percent of the cost of services provided. Had Plain
Company debited land for its $150,000 payment to Dream, the eliminating entry at December
31, 20X3, would have been:
Land
Wage and Salary Expense
150,000
50,000
100,000
7-5
C7-2 (continued)
No eliminating entry would be required at December 31, 20X4, on the legal services provided to
Classic Company in 20X3. The conditions of the intercorporate transfer of services to Plain
Company require an eliminating entry at December 31, 20X4, and in following years, as long as
Plain Company owns the strip mine. The entry at December 31, 20X4, would be:
Land
Investment in Plain
100,000
100,000
Had Plain Company debited land for its $150,000 payment to Dream in 20X3, the eliminating
entry at December 31, 20X4, would require a $50,000 debit to Investment in Plain and a
$50,000 credit to land.
Primary citation:
ARB 51, Par. 6; ASC 810
7-6
C7-3 Noncontrolling Interest

a. When there are no unrealized profits on the subsidiary's books, a pro rata portion of the
reported net income of the subsidiary is assigned to the noncontrolling interest, adjusted for the
noncontrolling interests share of any amortization or write-off of differential.
b. When there are no unrealized profits on the subsidiary's books, the noncontrolling interest is
reported in the consolidated balance sheet at an amount equal to a pro rata portion of the book
value of the net assets of the subsidiary plus the noncontrolling interests share of any
remaining differential.
c. The effect of unrealized intercompany profits depends on which company has recorded the
profits. Those recorded on the books of the parent do not affect the income assigned to the
noncontrolling interest. When subsidiary net income includes unrealized intercompany profits,
the portion of consolidated net income assigned to the noncontrolling interest is reduced by its
portion of the unrealized profit in the period of the intercorporate sale.
(1) On a sale of land, the intercompany profit remains unrealized until the land is sold to a
nonaffiliate. When the land is resold, the profit is added to the reported net income of the
subsidiary in computing the portion of consolidated net income assigned to the noncontrolling
interest.
(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is
considered realized each period as the purchaser depreciates the asset. Thus, in the period of
the intercorporate sale, the adjustment to subsidiary net income for unrealized profits is based
on the gain or loss less any portion considered realized before the end of the period. Each
period thereafter, a portion of the profit or loss is considered realized and treated as an
adjustment to subsidiary income in determining the portion of consolidated net income assigned
to the noncontrolling interest.
d. Noncontrolling shareholders of a subsidiary generally will not gain a great deal of useful
information from the consolidated financial statements. Their primary focus must continue to be
on the income, assets, and liabilities of the subsidiary in which they hold direct ownership. In the
event there are a number of transactions with the parent or other affiliates, the success of the
operations of the entire economic entity may provide information useful to the noncontrolling
shareholders. Debt guarantees or other assurances by the parent may also lead to an
examination of the parent company and consolidated statements.
7-7
C7-4 Intercompany Sale of Services

a. When preparing consolidated financial statements, Schwartz's revenue from the sale of
services to Diamond and Diamond's expenses associated with the services acquired from
Schwartz must be eliminated. The expenses related to the janitorial and maintenance activities
that will be reported in the consolidated income statement will be the actual salary and
associated costs incurred by Schwartz to provide the services to Diamond. The eliminations
have no effect on consolidated net income because revenues and expenses of equal amount
are eliminated in the preparation of the consolidated financial statements.
b. Intercompany profits from the sale of services to an affiliate normally are considered realized
at the time the services are provided. Realization of intercompany profits on services normally is
considered to occur as the services are consumed, and services such as maintenance and
repair services normally are considered to be consumed by the purchasing affiliate at the time
received.
C7-5 Intercompany Profits
Answers can be found in the companies' 10-K filings with the SEC and in their annual reports.
Note that financial statements are often included in the Form 10-K by reference to the
companys annual report. In such cases, the financial statements are often shown in a separate
exhibit rather than in Item 8 of the Form 10-K.
a. Verizon (www.verizon.com) eliminates all intercompany profits. It discontinued the use of
regulatory accounting as provided by FASB 71 in 1994 and now no longer applies the
provisions of FASB 71.
b. All of Harley-Davidsons (www.harleydavidson.com) intercompany transactions are eliminated
except some occurring between the Motorcycles and Financial Services segments. Some
interest and fees recognized as income by Financial Services and expense by Motorcycles are
not eliminated. This leads to higher finance income and higher expenses, but net income is
unaffected.
7-8
SOLUTIONS TO EXERCISES
E7-1 Multiple-Choice Questions on Intercompany Transfers
[AICPA Adapted]
1.
2.
3.
4.
5.
Depreciation expense recorded by Pirn

Depreciation expense recorded by Scroll
Total depreciation reported
Adjustment for excess depreciation charged
by Scroll as a result of increase in
carrying value of equipment due to gain
on intercompany sale ($12,000 / 4 years)
Depreciation for consolidated statements
$40,000
10,000
$50,000
(3,000)
$47,000
E7-2 Multiple-Choice Questions on Intercompany Transactions

1.
When only retained earnings is debited, and not the noncontrolling interest, a
gain has been recorded in a prior period on the parent's books.
2.
The costs incurred by Bottom to develop the equipment are research and
development costs and must be expensed as they are incurred (FASB
Statement No. 2, par. 12; ASC 730-10-25-1). Transfer to another legal entity
does not cause a change in accounting treatment within the economic entity.
3.
The $39,000 paid to Gold Company will be charged to depreciation expense

by Top Corporation over the remaining 3 years of ownership. As a result, Top
Corporation will debit depreciation expense for $13,000 each year. Gold
Company had charged $16,000 to accumulated depreciation in 2 years, for an
annual rate of $8,000. Depreciation expense therefore must be reduced by
$5,000 ($13,000 - $8,000) in preparing the consolidated statements.
4.
TLK Corporation will record the purchase at $39,000, the amount it paid. Gold
Company had the equipment recorded at $40,000; thus, a debit of $1,000 will
raise the equipment balance back to its original cost from the viewpoint of the
consolidated entity.
7-9
E7-2 (continued)
5.
6.
Reported net income of Gold Company

Reported gain on sale of equipment
Intercompany profit realized in 20X6
Realized net income of Gold Company
Proportion of stock held by
noncontrolling interest
Income assigned to noncontrolling interests
$15,000
(5,000)
$ 45,000
(10,000)
$ 35,000
x
.40
$ 14,000
Operating income reported by Top Corporation

Net income reported by Gold Company
$ 85,000
45,000
$130,000
Less: Unrealized gain on sale of equipment

($15,000 - $5,000)
Consolidated net income
(10,000)
$120,000
E7-3 Elimination Entries for Land Transfer

a.
Eliminating entry, December 31, 20X4:

Gain on Sale of Land
Land
10,000
10,000

Investment in Lowly
Land
b.
10,000
10,000

Land
10,000
10,000

Investment in Lowly
NCI in NA of Lowly
Land
6,000
4,000
10,000
7-10
E7-4 Intercompany Services

a. Consolidated net income will not change.
b. One hundred percent of the intercompany services must always be eliminated. Thus, a
change in the level of ownership of the subsidiary will not have an impact on the amount
eliminated or on consolidated net income.
c. $38,000 = $70,000 - $32,000
E7-5 Elimination Entries for Intercompany Services
Two eliminating entries are required:
Delivery Service Revenue
Delivery Service Expense
76,000
Accounts Payable
Accounts Receivable
18,000
76,000
18,000
E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale

a.
Northern
Pam
Truck
40,000
5,000
45,000
Accumulated
Depreciation
Actual
0
15,000
15,000
"As If"
Eliminate the gain on Truck & correct asset's basis:

Gain on sale
Truck
10,000
5,000
15,000
b.
Northern
Pam
Truck
40,000
5,000
45,000
Accumulated
Depreciation
4,000
1,000
15,000
18,000
Actual
"As If"

Investment in Northern
Truck
10,000
5,000
15,000
1,000
1,000
7-11
E7-7 Transfer of Land

a.

Land
45,000
45,000

Investment in Roan
NCI in NA of Roan
Land
b.
31,500
13,500
45,000
Eliminating entries, December 31, 20X3 and 20X4:
Investment in Roan
Land
30,000
30,000
E7-8 Transfer of Depreciable Asset at Year-End

a.
Accumulated
Depreciation
Truck
Minnow
Corp.
Frazer Corp.
210,000
90,000
300,000
Actual
0
120,000
120,000
"As If"

Gain on sale
30,000
Truck
90,000
Computation of gain on sale of truck:

Price paid by Minnow
Cost of truck to Frazer
Accumulated depreciation
($300,000 / 10 years) x 4 years
Gain on sale of truck
120,000
$300,000
(120,000)
7-12
$210,000
(180,000)
$ 30,000
E7-8 (continued)
b.
Minnow Corp.
Frazer Corp.
Truck
210,000
90,000
300,000
Accumulated
Depreciation
35,000
5,000
120,000
150,000
Actual
"As If"

Investment in Minnow Corp.
30,000
Truck
90,000
120,000
5,000
5,000
E7-9 Transfer of Depreciable Asset at Beginning of Year

a.
Accumulated
Depreciation
Truck
Minnow
Corp.
Frazer Corp.
245,000
55,000
300,000
Actual
5,000
"As If"

Gain on Sale
35,000
Truck
55,000
35,000
90,000
120,000
90,000
5,000
5,000
Computation of gain on sale of truck:

Price paid by Minnow
Cost of truck to Frazer
($300,000 / 10 years) x 3 years
Gain on sale of truck
7-13
$300,000
( 90,000)
$245,000
(210,000)
$ 35,000
E7-9 (continued)
b.
Minnow Corp.
Frazer Corp.
Truck
245,000
55,000
300,000
Actual
"As If"

Investment in Minnow Corp.
30,000
Truck
55,000
Accumulated
Depreciation
70,000
5,000
85,000
150,000
85,000
5,000
5,000
E7-10 Sale of Equipment to Subsidiary in Current Period

a.
Cash
Equipment
Gain on sale of Equipment
Record gain on Equipment
84,000
80,000
150,000
14,000
b.
Equipment
Cash
Journal entry to record purchase
84,000
Journal entry to record depreciation expense
12,000
84,000
12,000
7-14
E7-10 (continued)
c.
Lance Corp.
Wainwrite Corp.
Equipment
84,000
66,000
150,000
Actual
"As If"
Eliminate the gain on Equipment & correct asset's basis:

Gain on sale
14,000
Equipment
66,000
d.
Accumulated
Depreciation
12,000
2,000
80,000
90,000
80,000
2,000
2,000
Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment

and prepare a consolidated balance sheet only:

Investment in Lance Corp.
12,000
Equipment
66,000
78,000
E7-11 Upstream Sale of Equipment in Prior Period

a.
b.
Consolidated net income for 20X8:

Operating income reported by Baywatch
Net income reported by Tubberware
Amount of gain realized in 20X8
($30,000 / 12 years)
Realized net income of Tubberware
$40,000
2,500
Consolidated net income for 20X8 would be unchanged.
7-15
$100,000
42,500
$142,500
E7-11 (continued)
c.
Baywatch
Tubberware
Equipment
270,000
30,000
300,000
Actual
"As If"

Investment in Tubberware
20,000
NCI in NA of Tubberware
5,000
Equipment
30,000
Accumulated
Depreciation
67,500
2,500
55,000
120,000
55,000
2,500
2,500
E7-12 Elimination Entries for Midyear Depreciable Asset Transfer

a.
Andrews Co.
Kline Corp.
Equipment
28,000
2,000
30,000
Actual
"As If"

Investment in Andrews Co.
10,500
Equipment
2,000
Accumulated
Depreciation
4,000
1,500
12,500
15,000
12,500
1,500
1,500
b.
Andrews Co.
Kline Corp.
Equipment
28,000
2,000
30,000
Actual
"As If"

Investment in Andrews Co.
9,000
Equipment
2,000
Accumulated
Depreciation
12,000
3,000
11,000
20,000
11,000
3,000
3,000
7-16
E7-13 Consolidated Net Income Computation

a.
Downstream sale of land:
20X4
$ 90,000
(25,000)
$ 65,000
60,000
$125,000
Verrys separate operating income

Less: Unrealized gain on sale of land
Verrys realized operating income
Spawns realized net income
Income to noncontrolling interest:
($60,000 x 0.25)
($40,000 X 0.25)
Income to controlling interest
b.
(15,000)
Upstream sale of land:

Verrys separate operating income
Spawns net income
Less: Unrealized gain on sale of land
Spawns realized net income
Income to noncontrolling interest:
($35,000 x 0.25)
($40,000 x 0.25)
$60,000
(25,000)
$110,000
40,000
$150,000
$110,000
(10,000)
$140,000
20X4
$ 90,000
20X5
$110,000
35,000
$125,000
40,000
$150,000
(8,750)
$116,250
7-17
20X5
$110,000
(10,000)
$140,000
E7-14 Elimination Entries for Intercompany Transfers

a.
b.
Operating income of Grand Delivery

Net income of Acme Real Estate Company
Less: Unrealized profit on land sale
Acmes realized net income
$40,000
(25,000)
$65,000
15,000
$80,000
Note: the term basic equity method in part b of the problem slipped through the
editorial process. This should have read fully adjusted equity method. The
answers given here are based on the fully adjusted equity method.
Journal entries recorded by Speedy Delivery:
Cash
8,000
Investment in Acme Real Estate
Record dividends from Acme Real Estate: $10,000 x 0.80
Income from Acme Real Estate
Record equity-method income: $40,000 x 0.80
32,000

Eliminate unrealized gain on sale
E7-14 (continued)
c.
20,000
Book Value Calculations:
Original book value

+ Net Income
- Dividends
NCI
20%
80,000
8,000
(2,000)
Ending book value
86,000
Grand
Delivery
80%
320,000
32,000
(8,000)
344,000
Common
Stock
300,000
300,000
Deferred Gain Calculations:
Upstream Land
Total
Total
25,000
25,000
Grand
Delivery's
share
20,000
20,000
7-18
NCI's share
5,000
5,000
Retained
Earnings
100,000
40,000
(10,000)
130,000
8,000
32,000
20,000
Basic elimination entry

Common stock
Retained earnings
NCI in NI of Acme Real Estate
Dividends declared
NCI in NA of Acme Real Estate
300,000
100,000
12,000
3,000
10,000
324,000
81,000
Eliminate gain on purchase of land

Gain on sale of land
Land
25,000
Eliminate courier services

Service Revenue
Delivery Expense
15,000
25,000
15,000
7-19
Original amount invested (100%)

Beginning balance in retained earnings
Grands share of NI - Def. Gain
NCI share of NI - Def. Gain
100% of Acmes dividends declared
Grands share of BV - Def. Gain
NCI share of BV - Def. Gain
E7-15 Sale of Building to Parent in Prior Period

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

($300,000 / 12 years).
b.
Split would have recorded annual depreciation expense of $20,000

($400,000 / 20 years).
c.
Turner Co.
Split Co.
Building
300,000
100,000
400,000
Actual
"As If"
Eliminate the gain on building and correct asset's basis:

Investment in Split Co.
42,000
NCI in NA of Split Co.
18,000
Building
100,000
d.
Accumulated
Depreciation
25,000
5,000
160,000
180,000
160,000
5,000
5,000
Income assigned to noncontrolling interest for 20X9:

Net income reported by Split Company
Amount of gain realized in 20X9 ($60,000 / 12 years)
Realized net income for 20X9
Proportion of ownership held by noncontrolling
interest
Income assigned to noncontrolling interest
e.
$ 40,000
5,000
$ 45,000
x
0.30
$ 13,500
Amount assigned to noncontrolling interest in 20X9 consolidated

balance sheet:
Split Company net assets, January 1, 20X9
($350,000 - $150,000)
Net income for 20X9
Dividends paid in 20X9
Unrealized profit on sale of building to Turner Company
($60,000 - $5,000)
Realized book value December 31, 20X9
interest
Amount assigned to noncontrolling interest in
December 31, 20X9, consolidated balance sheet
7-20
$200,000
40,000
(15,000)
(55,000)
$170,000
x
0.30
$ 51,000
E7-16 Intercompany Sale at a Loss

a.
Consolidated net income for 20X8 will be greater than Parent Company's income from
operations plus Sunway's reported net income. The eliminating entries at December 31,
20X8, will result in an increase of $16,000 to consolidated net income.
b.
As a result of purchasing the equipment at less than Parent's book value, depreciation
expense reported by Sunway will be $2,000 ($16,000 / 8 years) below the amount that
would have been recorded by Parent. Thus, depreciation expense must be increased by
$2,000 when eliminating entries are prepared at December 31, 20X9. Consolidated net
income will be decreased by the full amount of the $2,000 increase in depreciation
expense.
E7-17 Eliminating Entries Following Intercompany Sale at a Loss

a.
Buildings and Equipment

Loss on Sale of Building
156,000
36,000
120,000
Eliminate unrealized loss on building.

b.
Consolidated net income and income to controlling

interest for 20X7:
Operating income reported by Brown
Net income reported by Transom
Add: Loss on sale of building
Realized net income of Transom
Income to noncontrolling interest ($51,000 x 0.30)
c.
7-21
$ 15,000
36,000
$125,000
51,000
$176,000
(15,300)
$160,700
Eliminate the gain on Building and correct asset's basis:

Building
156,000
Investment in Transom Co.
NCI in NA of Transom Co.
25,200
10,800
120,000
4,000
4,000
Brown Corp.
Building
144,000
156,000
Actual
Transom Co.
300,000
"As If"
7-22
Accumulated
Depreciation
16,000
120,000
4,000
140,000
E7-17 (continued)
d.
Consolidated net income and income assigned to controlling interest in 20X8:

Operating income reported by Brown
$150,000
Net income reported by Transom
$40,000
Adjustment for loss on sale of building
(4,000)
Realized net income of Transom
36,000
$186,000
($36,000 x 0.30)
(10,800)
Income assigned to controlling interest
$175,200
E7-18 Multiple Transfers of Asset

a.
$145,000
b.
No gain or loss should be reported.
c.
Swanson Corporation operating income
$150,000
Sullivan Corporation net income

Loss on sale of land ($145,000 - $130,000)
Realized net income of Sullivan Corporation
Proportion of stock held by Swanson
$120,000
15,000
$135,000
x
0.80
108,000
Kolder Company net income

Gain on sale of land ($180,000 - $130,000)
Realized net income of Kolder Company
$ 60,000
(50,000)
$ 10,000
x
0.70
7,000
Clayton Corporation net income

Gain on sale of land ($240,000 - $180,000)
Realized net income of Clayton Corporation
$ 80,000
(60,000)
$ 20,000
x
0.90
Alternate Computation:
Swanson Corporation operating income
Sullivan Corporation net income
Kolder Company net income
Clayton Corporation net income
Combined income
18,000
$283,000
$150,000
120,000
60,000
80,000
$410,000
Unrealized loss recorded by Sullivan Corp.

Unrealized gain recorded by Kolder Company
Unrealized gain recorded by Clayton Corp.
Realized income available to all shareholders
Income assigned to noncontrolling interest:
Sullivan Corp. ($120,000 + $15,000) x 0.20
Kolder Company ($60,000 - $50,000) x 0.30
Clayton Corp. ($80,000 - $60,000) x 0.10
7-23
$ (15,000)
50,000
60,000
$ 27,000
3,000
2,000
(95,000)
$315,000
(32,000)
$283,000
E7-18 (continued)
d.
Eliminating entry:

Loss on Sale of Land
Land
110,000
15,000
95,000
Eliminate gains and loss on land transfer:

$110,000 = $50,000 + $60,000
$95,000 = $110,000 - $15,000
E7-19 Elimination Entry in Period of Transfer
a.
$300,000 = $276,000 + $24,000
b.
15 years = $300,000 / ($60,000 / 3 years)
c.
Blank Corp.
Grand Corp.
Truck
276,000
24,000
300,000
Actual
"As If"
Eliminate the gain on Truck and correct asset's basis:

Investment in Grand Corp.
21,600
NCI in NA of Grand Corp.
14,400
Truck
24,000
Accumulated
Depreciation
23,000
3,000
60,000
80,000
60,000
3,000
3,000
7-24
E7-20 Elimination Entry Computation

a.
Stern
Subsidiary
Equipment
360,000
90,000
450,000
Actual
"As If"
Eliminate the gain on Equipment and correct asset's basis:

Gain on sale
60,000
Equipment
90,000
Accumulated
Depreciation
36,000
6,000
150,000
180,000
150,000
6,000
6,000
b.
Stern
Subsidiary
Equipment
360,000
Actual
90,000
450,000
"As If"

Investment in Subsidiary
37,800
NCI in NA of Subsidiary
16,200
Equipment
90,000
Accumulated
Depreciation
72,000
6,00
0
144,000
210,000
144,000
6,000
6,000
7-25
E7-21 Using the Eliminating Entry to Determine Account Balances

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

Corporation.
b.
The subsidiary was the owner. The sale was from the subsidiary to the parent, as
evidenced by the debit to noncontrolling interest in the eliminating entry.
c.
Intercompany transfer price:

Amount paid by Somber Corporation
Increase to buildings and equipment in eliminating entry
Amount paid by Pastel to Somber for equipment
d.
$120,000
(53,500)
$ 66,500
Income assigned to noncontrolling interest for 20X9:

Net income reported by Somber
Amount of gain realized in 20X9 ($10,500 / 7 years)
Realized net income for 20X9
interest
$ 25,000
1,500
$ 26,500
x 0.10
$ 2,650
e.
Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported by

the consolidated entity for 20X9.
f.
Eliminating entries at December 31, 20X9:
Original book value

+ Net Income
- Dividends
Ending book value
NCI
10%
50,000
2,500
(600)
51,900
Pastel
Corp.
90%
450,000
22,500
(5,400)
467,100
Common
Stock
300,000
300,000
Retained
Earnings
200,000
25,000
(6,000)
219,000

Extra Depreciation
Total
1,500

Common stock
Retained earnings
Income from Somber Corp.
NCI in NI of Somber Corp.
Dividends declared
Investment in Somber Corp.
NCI in NA of Somber Corp.
Pastel Corp.'s
share
1,350
NCI's share
150
300,000
200,000
23,850
2,650
6,000
468,450
52,050
7-26

Beginning balance in RE
Pastels share of NI + Extra Dep.
NCI share of NI + Extra Dep.
100% of Somber's dividends
Pastel 's share of BV + Extra Dep.
NCI share of BV + Extra Dep.
E7-21 (continued)
Pastel Corp.
Somber Corp.
Equipment
66,500
53,500
120,000
Accumulated
Depreciation
9,500
1,500
64,000
72,000
Actual
"As If"

Investment in Somber Corp.
9,450
NCI in NA of Somber Corp.
1,050
Equipment
53,500
64,000
1,500
1,500
E7-22 Intercompany Sale of Services

a.
Eliminating entries, 20X4:
Consulting Revenue
Consulting Fees Expense
138,700
138,700
Eliminate intercompany revenue and expense.

Accounts Payable
Accounts Receivable
6,600
6,600
Eliminate intercompany receivable/payable.

b.
Consolidated net income and income to controlling

interest for 20X4:
Norgaard's separate operating income
Bline's net income
Income to noncontrolling interest ($631,000 x 0.25)
7-27
$2,342,000
631,000
2,973,000
(157,750)
$2,815,250
E7-23A Modified Equity Method and Cost Method

a.
(1)
Equity Method Entries on Newtime's Books:
Investment in TV Sales Co.
Income from TV Sales Co.
Record Newtime's 65% share of TV Sales Co.'s 20X4 income
Cash
Record Newtime's 65% share of TV Sales Co.'s 20X4 dividend
45,500
45,500
13,000
13,000
(2)
NCI
35%
Newtime
65%
Common
Stock
Retained
Earnings
Original book
value
+ Net Income
- Dividends
155,750
24,500
(7,000)
289,250
45,500
(13,000)
300,000
145,000
70,000
(20,000)
Ending book value
173,250
321,750
300,000
195,000

Common stock
Retained earnings
Income from TV Sales Co.
NCI in NI of TV Sales Co.
Dividends declared
NCI in NA of TV Sales Co.
Land
300,000
145,000
45,500
27,300
20,000
321,750
176,050
11,000
11,000

26,000
14,000
Equipment
40,000
8,000
8,000
7-28

Newtimes share of NI
100% of TV Sales Co.'s dividends
Newtime's share of BV
E7-23A (continued)
b.
(1)
Equity Method Entries on Newtime's Books:
Cash
Dividend Income
Record dividend income from TV Sales Company.
13,000
13,000
(2)
Investment elimination entry
Common stock
Retained earnings
Dividend elimination entry
Dividend Income
Dividends declared
300,000
100,000
260,000
140,000
13,000
7,000
20,000
Assign prior undistributed income to NCI

20,300
Retained Earnings
15,750
36,050

Land
11,000
11,000

26,000
14,000
Equipment
40,000
8,000
8,000
7-29
SOLUTIONS TO PROBLEMS
P7-24 Computation of Consolidated Net Income
a.
Separate operating income of Petime Corporation

Reported net income of United Grain Company
Unrealized profit of sale of land
Realized income for 20X4
Amortization of differential ($10,000 / 10 years)
Proportion of ownership held by Petime
Income attributable to controlling interest
b.
Separate operating income of Petime Corporation

Reported net income by United Grain Company
Proportion of stock held by Petime
Income attributable to controlling interest
Unrealized profit on sale of land
$19,000
(7,000)
$12,000
( 1,000)
$11,000
x 0.90
$19,000
( 1,000)
$18,000
x 0.90
$34,000
9,900
$43,900
$34,000
16,200
(7,000)
$43,200
Reported income will decrease by $700. In the upstream case the unrealized profit
($7,000) is apportioned to both majority ($6,300) and noncontrolling ($700)
shareholders. In the downstream case, it is apportioned entirely to the majority
shareholders ($7,000).
P7-25 Subsidiary Net Income
a.
Toll Corporations reported net income for 20X4 was $94,400:

Income assigned to noncontrolling shareholders
Add: Unrealized profit on building ($20,000 x 0.25)
Amortization of differential ($4,400 x 0.25)
$17,500
5,000
1,10
0
$23,600
Income assigned to noncontrolling interest before

adjustment
Proportion of stock held by noncontrolling interest
Reported income of Toll
Computation of annual amortization:
Fair value of consideration given by Bold
Fair value of noncontrolling interest
Total fair value
Book value of Tolls assets:
Common stock
Retained earnings
Total book value
Differential paid by Bold
Number of years in amortization period
Annual amortization
7-30
0.25
$94,400
$348,000
116,000
$464,000
$150,000
270,000
(420,000)
$ 44,000
10
$4,400
P7-25 (continued)
b.
Consolidated net income for 20X4 is $304,000:

Bold Corporations operating income
Toll Corporations net income
Unrealized profit on building
c.
$234,000
94,400
(4,400)
(20,000)
$304,000
Income assigned to controlling interest is $286,500:

$304,000
(17,500)
$286,500
Alternate computation:
Operating income of Bold
Income from Toll:
Net income of Toll
Unrealized profit on building
Amortization of differential
Realized income
Portion of ownership held
$234,000
$94,400
(20,000)
(4,400)
$70,000
x 0.75
52,500
$286,500
P7-26 Transfer of Asset from One Subsidiary to Another

Bugle
Corporation
Depreciation expense
Fixed assets Warehouse
Gain on sale of warehouse
-------
15,000
7-31
Cook Products
Corporation
Consolidated
Entity
$ 3,000
$ 2,000
45,000
40,000
3,000
12,000
---
---
P7-27 Consolidated Eliminating Entry

a.
Master paid Rakel $460,000 ($600,000 - $140,000).
b.
Accumulated depreciation at January 1, 20X7, was $168,000, computed as follows:

Purchase price paid by Rakel
Amount paid by Master
Gain recorded by Rakel
Book value at date of sale
Accumulated depreciation at date of sale
$460,000
(28,000)
c.
Annual depreciation expense recorded by Rakel was $28,000

($168,000/6 years).
d.
The estimated residual value was $40,000, computed as follows:

Purchase price paid by Rakel
Amount to be depreciated by Rakel ($28,000 x 20 years)
Estimated residual value
$600,000
(432,000)
$168,000
$600,000
(560,000)
$ 40,000
e.
Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 $40,000) / 14 years).
f.
Reported net income of Rakel

Unrealized gain on sale of building ($28,000 - $2,000)
g.
Reported net income of Rakel

Portion of gain on sale of building realized in 20X8
7-32
$ 80,000
(26,000)
$ 54,000
x
0.40
$ 21,600
$ 65,000
2,000
$ 67,000
x
0.40
$ 26,800
P7-28 Multiple-Choice Questions

1. d
2. c
3. a
4. a
5. d
P7-29 Intercompany Services Provided to Subsidiary
The eliminating entry at December 31, 20X4, would be:
Service Revenue
Building
Wage Expense
110,000
30,000
80,000
The eliminating entries at December 31, 20X5, would be:

Investment in Subsidiary
Building
30,000
30,000
1,200
1,200
P7-30 Consolidated Net Income with Intercorporate Transfers

a.
Cash
Equipment
Gain on sale of Equipment
Record gain on Equipment
240,000
140,000
350,000
30,000
b.
Eliminate loss on purchase of land
Land
Loss on sale of land
60,000
60,000

Investment in Subsidence
25,000
Equipment
110,000
5,000
7-33
135,000

5,000
7-34
P7-30 (continued)
c.
Subsidence Mining's 20X7 net income was $90,000:

Subsidence Mining's income to noncontrolling
shareholders
Noncontrolling interest's share of subsidiary income
Subsidence Mining's income before adjustment
Add: Amortization of differential:
($200,000 / 10 years)
Less: Unrealized loss on intercompany sale of land
Subsidence Mining's 20X7 net income
d.
$ 39,000
0.30
$130,000
20,000
(60,000)
$ 90,000
Bowers operating income was $826,000:

Less: Income to noncontrolling interest
Income from Subsidence Mining:
Reported net income
Unrealized loss on land
Realized income
Bowers share
Realized profit on equipment ($30,000 / 6 years)
Bowers 20X7 income from its separate operations
7-35
$961,000
(39,000)
$922,000
$ 90,000
60,000
(20,000)
$130,000
x
0.70
$ 91,000
5,000
(96,000)
$826,000
P7-31 Preparation of Consolidated Balance Sheet

a.
Ending book value
NCI
40%
100,000
Lofton Co.
60%
150,000
Common
Stock
200,000
NCI's share
0
0
Retained
Earnings
50,000
Extra Depreciation
Total
Total
3,000
3,000

Common stock
Retained earnings
Income from Temple Corp.
Investment in Temple Corp.
NCI in NA of Temple Corp.
Land
Temple Corp.
Lofton Co.
Equipment
91,000
9,000
100,000
Lofton
Co.'s
share
3,000
3,000
200,000
50,000
3,000

Loftons share of NI + Extra Dep.
Lofton's share of BV + Extra Dep.
NCI share of BV of net assets
153,000
100,000
10,000
6,000
4,000
Actual
"As If"
Accumulated
Depreciation
26,000
3,000
27,000
50,000

18,000
Equipment
9,000
27,000
3,000
3,000
7-36
P7-31 (continued)
Lofton
Co.
Temple
Corp.
101,000
80,000
150,000
400,000
(135,000)
141,000
20,000
40,000
90,000
300,000
(85,000)
Total Assets
737,000
365,000
Accounts Payable
Notes Payable
Common Stock
Retained Earnings
90,000
200,000
100,000
347,000
25,000
90,000
200,000
50,000
Balance Sheet
Cash and Receivables
Inventory
Land
Buildings & Equipment
Less: Accumulated Depr.
Elimination Entries
DR
CR
10,000
9,000
3,000
18,000
40,000
200,000
50,000
3,000

Total Liabilities & Equity
737,000
365,000
250,000
27,000
153,000
6,000
186,000
3,000
100,000
4,000
107,000
Consolidated
121,000
120,000
250,000
709,000
(244,000)
0
956,000
115,000
290,000
100,000
347,000
104,000
956,000
b.
Lofton Company and Subsidiary
Consolidated Balance Sheet
December 31, 20X6
Cash and Accounts Receivable
Inventory
Land
Less: Accumulated Depreciation
Total Assets
$709,000
(244,000)
Accounts Payable
Notes Payable
Stockholders Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Noncontrolling interest
Total Stockholders Equity
Total Liabilities and Stockholders' Equity
$121,000
120,000
250,000
465,000
$956,000
$115,000
290,000
$100,000
347,000
$447,000
104,000
7-37
551,000
$956,000
P7-32 Consolidation Worksheet in Year of Intercompany Transfer

Note: In converting this problem from the modified to the fully adjusted equity method, we failed
to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. If you complete the problem based on the numbers
given in the trial balance in the text, the investment account will not be fully eliminated. In order
to correct this problem, please reduce the Investment in Lane Company Stock and Retained
Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:
Investment in Lane Company Stock = 191,600
Retained Earnings = 322,000
a. These calculations are based on the corrected numbers
Equity Method Entries on Prime Co.'s Books:
Investment in Lane Co.
40,000
Income from Lane Co.
Record Prime Co.'s 80% share of Lane Co.'s 20X6 income
40,000
Cash
4,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend
Record amortization of excess acquisition price
14,400

Defer unrealized gain on Equipment
20,000
4,000
14,400
20,000

Reverse the deferred gain
2,000
2,000
Original book value

+ Net Income
- Dividends
Ending book value
NCI
20%
39,000
10,000
(1,000)
48,000
Prime Co.
80%
156,000
40,000
(4,000)
192,000
Common
Stock
100,000
100,000
Downstream Asset
Total
(20,000)
Prime
Co.'s
share
(20,000)
7-38
NCI's share
Retained
Earnings
95,000
50,000
(5,000)
140,000
Extra Depreciation
Total
2,000
(18,000)
2,000
(18,000)
7-39
0
0
P7-32 (continued)
Common stock
Retained earnings
NCI in NI of Lane Co.
Dividends declared
NCI in NA of Lane Co.
100,000
95,000
22,000
10,000
5,000
174,000
48,000
Excess Value (Differential) Calculations:

NCI
20%
+ Prime Co. 80%
Beginning balance
10,000
40,000
Changes
(3,600)
(14,400)
Ending balance
6,400
25,600
Goodwill
50,000
(18,000)
32,000
Amortized excess value reclassification entry:

Goodwill impairment loss
18,000
14,400
3,600
Excess value (differential) reclassification entry:

Goodwill
32,000
25,600
6,400
Eliminate intercompany accounts:

Accounts Payable
7,000

Land
8,000
2,000
Lane Co.
Prime Co.
Equipment
70,000
5,000
75,000

Primes share of NI - Def. Gain
NCI share of Lane Co.'s NI
100% of Lane Co.'s dividends
Prime's share of BV - Def. Gain
7,000
10,000
Actual
"As If"
7-40
Accumulated
Depreciation
7,000
2,000
25,000
30,000

Gain on sale
20,000
Equipment
5,000
25,000
2,000
2,000
P7-32 (continued)
Beginning Balance
80% Net Income
Realize Def. Gain

Ending Balance
Land Adjustment
Investment in
Lane Co.
188,000
40,000
4,000
14,400
2,000
20,000
191,600
174,000
8,000 25,600
0
Income from
Lane Co.
80% Dividends
Excess Val. Amort.
Defer Equipment Gain
Basic
Excess Reclass.
14,400
20,000
40,000
80% Net Income
2,000
7,600
Realize Def. Gain

Ending Balance
22,000
14,400
0
b. This worksheet is based on the corrected numbers:
Income Statement
Sales
Gain on Sale of Equipment
Less: COGS
Less: Depr. & Amort. Expense
Less: Other Expenses
Less: Goodwill Impairment Loss
Consolidated Net Income
NCI in Net Income
Controlling Interest in NI
Statement of Retained Earnings
Beginning Balance
Net Income
Less: Dividends Declared
Ending Balance
Balance Sheet
Inventory
Land
Prime Co.
Lane Co.
240,000
20,000
(140,000)
(25,000)
(15,000)
130,000
Elimination Entries
DR
CR
14,400
16,400
3,600
20,000
370,000
0
(200,000)
(38,000)
(20,000)
(18,000)
0
94,000
(6,400)
87,600
20,000
5,000
25,000
322,000
87,600
(30,000)
379,600
20,000
(60,000)
(15,000)
(5,000)
7,600
87,600
50,000
87,600
50,000
322,000
87,600
(30,000)
379,600
95,000
50,000
(5,000)
140,000
113,000
260,000
80,000
500,000
(205,000)
35,000
90,000
80,000
150,000
(45,000)
7-41
2,000
18,000
22,000
60,000
10,000
70,000
95,000
70,000
165,000
7,000
10,000
5,000
2,000
Consolidated
25,000
141,000
350,000
150,000
655,000
(273,000)

191,600
8,000
Goodwill
Total Assets
939,600
310,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
60,000
200,000
300,000
379,600
20,000
50,000
100,000
140,000
939,600
310,000
7-42
32,000
7,000
174,000
25,600
42,000
7,000
100,000
165,000
2,000
272,000
25,000
48,000
6,400
73,000
0
32,000
1,055,000
73,000
250,000
300,000
379,600
52,400
1,055,000
P7-32 (continued)
These financial statements are based on the corrected numbers:
c.
Prime Company and Subsidiary

December 31, 20X6

Inventory
Land
Goodwill
Total Assets
$
$655,000
(273,000)
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Total Noncontrolling Interest
382,000
32,000
$1,055,000
$
$300,000
379,600
$679,600
52,400
141,000
350,000
150,000
73,000
250,000
732,000
$1,055,000

Consolidated Income Statement
Year Ended December 31, 20X6
Sales
Cost of Goods Sold
Depreciation and Amortization Expense
Goodwill Impairment Loss
Other Expenses
Total Expenses
Income to Noncontrolling Interest
Income to Controlling Interest
$200,000
38,000
18,000
20,000
$ 370,000
(276,000)
94,000
(6,400)
$ 87,600

Consolidated Retained Earnings Statement
Retained Earnings, January 1, 20X6
Income to Controlling Interest, 20X6
$ 322,000
87,600
$ 409,600
(30,000)
$ 379,600
Dividends Declared, 20X6

Retained Earnings, December 31, 20X6
7-43
P7-32 (continued)
b. This worksheet is based on the uncorrected numbers:
Income Statement
Sales
Gain on Sale of Equipment
Less: COGS
Less: Goodwill Impairment Loss
NCI in Net Income
Prime
Co.
Lane
Co.
240,000
20,000
(140,000)
(25,000)
(15,000)
130,000
(60,000)
(15,000)
(5,000)
50,000
87,600
50,000
330,000
87,600
(30,000)
387,600
95,000
50,000
(5,000)
140,000
113,000
260,000
80,000
500,000
(205,000)
199,600
35,000
90,000
80,000
150,000
(45,000)
947,600
310,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
60,000
200,000
300,000
387,600
20,000
50,000
100,000
140,000
947,600
310,000
Balance Sheet
Inventory
Land
Goodwill
Total Assets
14,400
16,400
3,600
20,000
20,000
5,000
25,000
330,000
87,600
(30,000)
387,600
7-44
2,000
18,000
22,000
60,000
10,000
70,000
95,000
70,000
165,000
7,000
10,000
5,000
2,000
8,000
32,000
7,000
25,000
174,000
25,600
42,000
7,000
100,000
165,000
2,000
272,000
Consolidated
370,000
0
(200,000)
(38,000)
(20,000)
(18,000)
0
94,000
(6,400)
87,600
20,000
7,600
87,600

Beginning Balance
Net Income
Ending Balance
Elimination Entries
DR
CR
25,000
48,000
6,400
73,000
141,000
350,000
150,000
655,000
(273,000)
8,000
32,000
1,063,000
73,000
250,000
300,000
387,600
52,400
1,063,000
P7-32 (continued)
These financial statements are based on the uncorrected numbers:
c.

December 31, 20X6

Inventory
Land
Goodwill
Total Assets
$
$655,000
(273,000)
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Total Noncontrolling Interest
382,000
8,000
32,000
$1,063,000
$
$300,000
387,600
$687,600
52,400
141,000
350,000
150,000
73,000
250,000
740,000
$1,063,000

Sales
Cost of Goods Sold
Depreciation and Amortization Expense
Goodwill Impairment Loss
Other Expenses
Total Expenses
$200,000
38,000
18,000
20,000
$ 370,000
(276,000)
94,000
(6,400)
$ 87,600

$ 330,000
87,600
$ 417,600
(30,000)

7-45
$ 387,600
P7-33 Consolidation Worksheet in Year following Intercompany Transfer

Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to
deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. This error carries over to this problem. If you
complete the problem based on the numbers given in the trial balance in the text, the
investment account will not be fully eliminated. In order to correct this problem, please reduce
the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000.
Adjusted balances in the trial balance:
These calculations are based on the corrected numbers:
a.
Reconciliation of underlying book value and balance in investment account:

Net book value reported by Lane Company
Common stock outstanding
Retained earnings balance, January 1, 20X7
Net income for 20X7
Retained earnings balance, December 31, 20X7
$140,000
45,000
(35,000)
Proportion of stock held by Prime Company

Minus: Upstream Land Gain (10,000 x 0.80)
Minus: Downstream Equipment Transfer Gain
Add: Reversal of deferred gross profit 20X6
Minus: Reversal of deferred gross profit 20X7
Add: Goodwill (32,000 x 0.80)
Balance in investment account
These calculations are based on the uncorrected numbers
a.
$100,000
150,000
$250,000
x
.80
$200,000
(8,000)
(20,000)
2,000
2,000
25,600
$201,600
Reconciliation of underlying book value and balance in investment account:

Net book value reported by Lane Company
Retained earnings balance, January 1, 20X7
Net income for 20X7
Retained earnings balance, December 31, 20X7
Proportion of stock held by Prime Company
Minus: Upstream Land Gain (10,000 x 0.80)
Minus: Downstream Equipment Transfer Gain
Add: Reversal of deferred gross profit 20X6
Add: Goodwill (32,000 x 0.80)
Add: Incorrect number
Balance in investment account
7-46
$140,000
45,000
(35,000)
$100,000
150,000
$250,000
x
.80
$200,000
(8,000)
(20,000)
2,000
25,600
10,000
$209,600
P7-33 (continued)
b. These calculations are based on the corrected numbers
36,000
36,000
Cash
28,000
Reverse the deferred gain
28,000
2,000
2,000

Original book value
+ Net Income
- Dividends
Ending book value
NCI
20%
48,000
9,000
(7,000)
50,000
Prime Co.
80%
192,000
36,000
(28,000)
200,000
Common
Stock
100,000
100,000
Retained
Earnings
140,000
45,000
(35,000)
150,000
Extra Depreciation
Total
Total
2,000
2,000

Common stock
Retained earnings
Dividends declared
Prime
Co.'s
share
2,000
2,000
NCI's share
0
0
100,000
140,000
38,000
9,000
35,000
202,000
50,000

NCI
20%
+ Prime Co. 80%
Beginning balance
6,400
25,600
Changes
0
0
Ending balance
6,400
25,600
7-47

Primes share of NI + Extra Dep.
NCI share of Lane Co.'s NI
100% of Lane Co.'s dividends
Prime's share of BV + Extra Dep.
Goodwill
32,000
0
32,000

Goodwill
32,000
25,600
6,400
P7-33 (continued)

Land
Lane Co.
Prime Co.
Equipment
70,000
5,000
75,000
8,000
2,000
10,000
Actual
"As If"
Accumulated
Depreciation
14,000
2,000
23,000
35,000

18,000
Equipment
5,000
23,000
Beginning Balance
80% Net Income
Realize Def. Gain
Ending Balance
Land Adjustment
Investment in
Lane Co.
191,600
36,000
28,000
2,000
201,600
202,000
8,000 25,600
18,000
0
2,000
2,000
Income from
Lane Co.
80% Net Income
2,000
38,000
Realize Def. Gain

Ending Balance
80% Dividends
Basic
Excess Reclass.
38,000
Eliminate Intercompany receivable/payable

Accounts Payable
Accounts Receivable
36,000
4,000
4,000
7-48
7-49
P7-33 (continued)
Prime
Co.
Lane
Co.
250,000
(160,000)
(25,000)
(20,000)
38,000
83,000
150,000
(80,000)
(15,000)
(10,000)
83,000
45,000
379,600
83,000
(60,000)
402,600
140,000
45,000
(35,000)
150,000
151,000
240,000
100,000
500,000
(230,000)
201,600
55,000
100,000
80,000
150,000
(60,000)
962,600
325,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
60,000
200,000
300,000
402,600
25,000
50,000
100,000
150,000
962,600
325,000
Income Statement
Sales
Less: COGS
NCI in Net Income

Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash and Accounts
Receivable
Inventory
Land
Goodwill
Total Assets
45,000
7-50
Elimination Entries
DR
CR
2,000
400,000
(240,000)
(38,000)
(30,000)
0
92,000
(9,000)
83,000
2,000
35,000
37,000
379,600
83,000
(60,000)
402,600
2,000
38,000
38,000
9,000
47,000
140,000
47,000
187,000
2,000
4,000
10,000
5,000
2,000
8,000
18,000
32,000
7,000
23,000
202,000
25,600
37,000
4,000
100,000
187,000
2,000
291,000
Consolidated
37,000
50,000
6,400
87,000
202,000
340,000
170,000
655,000
(311,000)
0
32,000
1,088,000
81,000
250,000
300,000
402,600
54,400
1,088,000
P7-33 (continued)
Prime
Co.
Lane
Co.
250,000
(160,000)
(25,000)
(20,000)
38,000
83,000
150,000
(80,000)
(15,000)
(10,000)
83,000
45,000
387,600
83,000
(60,000)
410,600
140,000
45,000
(35,000)
150,000
151,000
240,000
100,000
500,000
(230,000)
209,600
55,000
100,000
80,000
150,000
(60,000)
970,600
325,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
60,000
200,000
300,000
410,600
25,000
50,000
100,000
150,000
970,600
325,000
Income Statement
Sales
Less: COGS
Less: Depreciation & Amort. Exp.
NCI in Net Income
Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash and Accounts
Receivable
Inventory
Land
Goodwill
Total Assets
45,000
7-51
Elimination Entries
DR
CR
2,000
400,000
(240,000)
(38,000)
(30,000)
0
92,000
(9,000)
83,000
2,000
35,000
37,000
387,600
83,000
(60,000)
410,600
2,000
38,000
38,000
9,000
47,000
140,000
47,000
187,000
2,000
4,000
10,000
5,000
2,000
8,000
18,000
32,000
7,000
23,000
202,000
25,600
37,000
4,000
100,000
187,000
2,000
291,000
Consolidated
37,000
50,000
6,400
87,000
202,000
340,000
170,000
655,000
(311,000)
8,000
32,000
1,096,000
81,000
250,000
300,000
410,600
54,400
1,096,000
P7-34 Intercorporate Sales in Prior Years

a.
Equity Method Entries on Pond Corp.'s Books:
Investment in Skate Co.
24,000
Income from Skate Co.
Record Pond Corp.'s 80% share of Skate Co.'s 20X8 income
24,000
Cash
8,000
Record Pond Corp.'s 80% share of Skate Co.'s 20X8 dividend
8,000

Record amortization of excess acquisition price
3,000
3,000

Reverse a portion of the deferred gain
1,500
1,500
Original book value

+ Net Income
- Dividends
Ending book value
NCI
20%
40,000
6,000
(2,000)
44,000
Pond
Corp.
80%
160,000
24,000
(8,000)
176,000
Common
Stock
20,000
20,000
Add Paidin Capital

30,000
30,000
Retained
Earnings
150,000
30,000
(10,000)
170,000

Total
Extra
Depreciation
Total
1,500
1,500

Common stock
Additional Paid-in Capital
Retained earnings
NCI in NI of Skate Co.
Dividends declared
NCI in NA of Skate Co.
Pond Corp.'s
share
NCI's share
1,500
1,500
0
0
20,000
30,000
150,000
25,500
6,000
10,000
177,500
44,000
7-52

Beginning balance in APIC
Ponds share of NI + Extra Dep.
NCI share of Skate Co.'s NI
100% of Skates dividends declared
Pond's share of BV + Extra Dep.
P7-34 (continued)
NCI 20% + Pond Corp. 80% =
Beginning balance
12,750
51,000
Changes
(750)
(3,000)
Ending balance
12,000
48,000
Buildings &
Patent + Equipment + Acc. Depr.
42,500
25,000
(3,750)
(2,500)
(1,250)
40,000
25,000
(5,000)

Amortization Expense
2,500
1,250
Patent
40,000
25,000
Acc. Depr.
Land
Skate Co.
Pond Corp.
Building
65,000
60,000
125,000
3,000
750
5,000
48,000
12,000
10,400
2,600
13,000
Accumulated
Depreciation
6,500
1,500
75,000
80,000
Actual
"As If"

15,000
Building
60,000
75,000
1,500
1,500
7-53
P7-34 (continued)
Beginning Balance
80% Net Income
Investment in
Skate Co.
185,600
24,000
8,000
3,000
Realize Def. Gain

Ending Balance
1,500
200,100
Land Adjustment
10,400
15,000
0
177,500
48,000
Income from
Skate Co.
80% Dividends
Excess Val.
Amort.
Basic
Excess Reclass.
24,000
80% Net Income
1,500
22,500
Realize Def.
Gain
Ending Balance
3,000
25,500
3,000
0
7-54
P7-34 (continued)
b.
Income Statement
Sales
Interest Income
Less: COGS
Less: Other Operating Exp.
Less: Depreciation Exp.
Less: Other Amortization Exp.
Less: Interest Exp.
Less: Miscellaneous Exp.
NCI in Net Income
Pond
Corp.
Skate
Co.
450,000
14,900
(285,000)
(50,000)
(35,000)
250,000
(136,000)
(40,000)
(24,000)
Elimination Entries
DR
CR
Consolidated
1,250
2,500
1,500
25,500
29,250
6,000
35,250
3,000
4,500
750
5,250
700,000
14,900
(421,000)
(90,000)
(58,750)
(2,500)
(34,500)
(21,400)
0
86,750
(5,250)
81,500
5,250
10,000
15,250
216,000
81,500
(30,000)
267,500
(24,000)
(11,900)
22,500
81,500
(10,500)
(9,500)
81,500
30,000
216,000
81,500
(30,000)
267,500
150,000
30,000
(10,000)
170,000
68,400
130,000
47,000
65,000
115,400
195,000
45,000
140,000
50,000
400,000
10,000
50,000
22,000
240,000
55,000
190,000
59,000
725,000
(185,000)
(94,000)
200,100
Investment in Tin Co. Bonds

Patent
Total Assets
134,000
982,500
340,000
Accounts Payable
Interest and Other Payables
Bonds Payable
Bond Discount
Common Stock
Retained Earnings
65,000
45,000
300,000
150,000
155,000
267,500
11,000
12,000
100,000
(3,000)
30,000
20,000
170,000
982,500
340,000

Beginning Balance
Net Income
Ending Balance
Balance Sheet
Cash
Accounts Receivable
Interest and Other
Receivables
Inventory
Land
30,000
150,000
35,250
185,250
13,000
60,000
25,000
1,500
10,400
15,000
7-55
40,000
151,900
30,000
20,000
185,250
2,600
237,850
75,000
5,000
177,500
48,000
318,500
15,250
44,000
12,000
71,250
(357,500)
0
134,000
40,000
1,155,900
76,000
57,000
400,000
(3,000)
150,000
155,000
267,500
53,400
1,155,900
P7-35 Intercorporate Sale of Land and Depreciable Asset

a.
Income assigned to noncontrolling interest:

Net income of Morris
Gain on sale of equipment to parent
Gain realized prior to 20X5
Amortization of differential:
Buildings and equipment ($25,000 / 10 years)
Copyright ($17,000 / 5 years)
Realized income
Income to noncontrolling interest
$9,600
(1,200)
(8,400)
(2,500)
(3,400)
$15,700
x 0.30
$ 4,710
Gain on sale of equipment to parent:

Sale price to Topp
Purchase price
[($100,000 - $10,000)/10 years] x 2 years
Gain on sale
b.
$ 30,000
$100,000
(18,000)
$91,600
(82,000)
$ 9,600
Reconciliation between book value and investment balance at December

31, 20X5:
Underlying book value of Morris Company stock:
Retained earnings, January 1, 20X5
Net income for 20X5
Net book value
Portion of ownership held by Topp
Net book value of ownership held by Topp
Unamortized differential:
Buildings and equipment [($25,000 x 7/10 years) x 0.70]
Copyright [($17,000 x 2/5 years) x 0.70]
Gain on sale of land
Deferred gross profit on sale of equipment
Realized deferred gain
Investment in Morris Company stock
$100,000
100,000
30,000
( 5,000)
$225,000
x
.70
$157,500
12,250
4,760
(11,000)
(6,720)
840
$157,630
b.
Original book value

+ Net Income
- Dividends
Ending book value
NCI
30%
60,000
9,000
(1,500)
67,500
Topp
Corp.
70%
140,000
21,000
(3,500)
157,500
7-56
Common
Stock
100,000
100,000
Retained
Earnings
100,000
30,000
(5,000)
125,000
P7-35 (continued)
Upstream Asset
Extra Depreciation
Total
Total
(9,600)
1,200
(8,400)

Common stock
Retained earnings
Income from Morris Co.
NCI in NI of Morris Co.
Dividends declared
Investment in Morris Co.
NCI in NA of Morris Co.
Topp
Corp.'s
share
(6,720)
840
(5,880)
NCI's share
(2,880)
360
(2,520)
100,000
100,000
15,120
6,480

Beginning balance RE
Topps share of NI - Def. Gain + Extra Depr.
NCI share of NI - Def. Gain + Extra Depr.
100% of Morris Co.'s dividends
Topp's share of BV - Def. Gain + Extra Depr.
NCI share of BV - Def. Gain + Extra Depr.
5,000
151,620
64,980

Topp
NCI
Corp.
30%
+
70%
Beginning balance
9,060
21,140
Changes
(1,770)
(4,130)
Ending balance
7,290
17,010
Buildings &
Equipment
25,000
25,000

Amortization Expense
3,400
2,500
NCI in NI of Morris Co.
4,130
1,770

25,000
Copyright
6,800
Acc. Depr.
7,500
17,010
7,290

Land
11,000
11,000
7-57
Copyright
10,200
(3,400)
6,800
Acc.
Depr.
(5,000)
(2,500)
(7,500)
P7-35 (continued)
Topp Corp.
Morris Co.
Equipment
91,600
8,400
100,000
Accumulated
Depreciation
11,450
1,200
18,000
28,250
Actual
"As If"

Gain on sale
9,600
Equipment
8,400
18,000
Beginning Balance
70% Net Income
Realize Def. Gain
Ending Balance
Land Adjustment
1,200
Investment in
Morris Co.
150,14
0
21,000
3,500
4,130
840
6,720
157,63
0
151,620
11,000 17,010
0
1,200
Income from
Morris Co.
70% Dividends
Excess Val. Amort.
Defer Asset Gain
4,130
6,720
21,000
70% Net Income
840
Realize Def.Gain
10,990
Basic
Excess Reclass.
7-58
15,120
4,130
0
Ending Balance
P7-35 (continued)
c.
Income Statement
Sales
Other Income
Gain on Sale of Equip.
Less: COGS
Less: Amortization Exp.
Less: Interest Expense
NCI in Net Income
Topp
Corp.
Morris
Co.
450,000
28,250
190,400
(375,000)
(25,000)
9,600
(110,000)
(10,000)
(24,000)
(28,000)
10,990
37,240
(33,000)
(17,000)
37,240
30,000

Beginning Balance
165,240
Net Income
37,240
(30,000)
Ending Balance
172,480
100,000
30,000
(5,000)
125,000
Balance Sheet
Cash
Accounts Receivable
Interest and Other
Receivables
Inventory
Land
30,000
Elimination Entries
DR
CR
Consolidated
2,500
3,400
1,200
15,120
30,620
6,480
37,100
4,130
5,330
1,770
7,100
640,400
28,250
0
(485,000)
(36,300)
(3,400)
(57,000)
(45,000)
0
41,950
(4,710)
37,240
7,100
5,000
12,100
165,240
37,240
(30,000)
172,480
9,600
100,000
37,100
137,100
15,850
65,000
58,000
70,000
73,850
135,000
30,000
150,000
80,000
315,000
10,000
180,000
60,000
240,000
40,000
330,000
129,000
588,400
(120,000)
(60,000)
157,630
Copyright
Total Assets
693,480
558,000
Accounts Payable
Other Payables
Bonds Payable
Bond Discount
Common Stock
Retained Earnings
61,000
30,000
250,000
28,000
20,000
300,000
(15,000)
100,000
100,000
125,000
137,100
693,480
558,000
237,100
150,000
30,000
172,480
11,000
25,000
8,400
1,200
11,000
7-59
6,800
52,400
7,500
18,000
151,620
17,010
205,130
12,100
64,980
7,290
84,370
(204,300)
0
6,800
1,098,750
89,000
50,000
550,000
(15,000)
150,000
30,000
172,480
72,270
1,098,750
P7-36 Incomplete Data

(a)
$100,000
(b)
$140,000
(c)
$250,000 = $593,000 - $343,000
(d)
$100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000]
(e)
$4,500 = [($106,200 + $70,800) - ($50,000 + $70,000 + $30,000)] / 6 years
(f)
Investment in Shadow Company Stock:

$106,200 Purchase price, January 1, 20X4
30,000 Undistributed earnings from January 1, 20X4,
to January 1, 20X7 [($80,000 - $30,000) x 0.60]
6,000 Undistributed income for 20X7 ($10,000 x 0.60)
(10,800) Amortization of differential [($27,000 / 6 years) x 4 years] x 0.60
(5,400) Mounds portion of gain on sale of equipment ($9,000 x 0.60)
3,600 2 years of extra depreciation ($3,000 x 0.60)
(7,000) Gain on sale of land
$122,600 Balance in investment account at December 31, 20X7
(g)
$7,000 = ($70,000 + $90,000) - $153,000
(h)
$-0-
(i)
$510,000 = $345,000 + $150,000 + ($60,000 - $45,000)
(j)
$278,000 =
(k)
$375,800 (Same as Mound Corporations retained earnings balance.)
(l)
Income to noncontrolling shareholders:

$ 30,000 Shadow's 20X7 net income ($250,000 - $195,000
- $10,000 - $15,000)
3,000 Realized profit on 20X6 sale of equipment to Mound
(4,500) Amortization of differential
$ 28,500 Realized net income
x
0.40
$ 11,400 Income to noncontrolling shareholders
$180,000 + $80,000 + [($60,000 / 5 years) x 4 years]

- [($45,000 / 3 years) x 2 years)
7-60
P7-37 Intercompany Sale of Equipment at a Loss in Prior Period

Note: In converting this problem from the modified to the fully adjusted equity method, we did
not correctly adjust for lower depreciation over the three years since the fixed asset sale at a
loss. If you complete the problem based on the numbers given in the trial balance in the text,
the investment and income from sub accounts will not be fully eliminated. In order to correct this
problem, please use the following adjusted numbers for Foster Company:
Investment in Block Corporation Stock = 229,500
Income from Block Corporation = 51,300
a. These calculations are based on the corrected numbers
Original book value

+ Net Income
- Dividends
Ending book value
NCI
10%
20,000
6,000
(2,000)
24,000
Foster Co.
90%
180,000
54,000
(18,000)
216,000
Common
Stock
50,000
50,000
Retained
Earnings
150,000
60,000
(20,000)
190,000
Lower Depreciation
Total
Total
(3,00
0)
(3,00
0)

Common stock
Retained earnings
Income from Block Corp.
NCI in NI of Block Corp.
Dividends declared
Investment in Block Corp.
NCI in NA of Block Corp.
Foster Co.
Equipment
48,000
Foster
Co.'s
share
(2,70
0)
(2,70
0)
NCI's share
(30
0)
(30
0)
50,000
150,000
51,300
5,700
20,000
213,300
23,700
Actual
7-61

Fosters share of NI + Extra Dep.
100% of Block Corp.'s dividends
Foster's share of BV + Extra Dep.
Accumulated
Depreciation
18,000
24,000
42,000
Block Corp.
90,000
"As If"
7-62
3,000
45,0
00
P7-37 (continued)

Equipment
42,000
16,200
1,800
24,000
Beginning Balance
90% Net Income
Ending Balance
Investment in
Block Corp.
196,20
0
54,000
18,000
2,700
229,50
0
213,30
0
16,200
0
3,000
3,000
Income from
Block Corp.
90% Dividends
Realize Def. Gain
Basic
Equipment Adj.
54,000
90% Net Income
51,300
Ending Balance
2,700
51,30
0
0
7-63
P7-37 (continued)

Foster
Co.
Block
Corp.
680,000
26,000
(500,000)
(45,000)
(95,000)
51,300
117,300
385,000
15,000
(250,000)
(15,000)
(75,000)
117,300
60,000

Beginning Balance
251,200
Net Income
117,300
(40,000)
Ending Balance
328,500
150,000
60,000
(20,000)
190,000
Balance Sheet
Cash
Accounts Receivable
Other Receivables
Inventory
Land
82,000
80,000
40,000
200,000
80,000
500,000
(155,000)
32,400
90,000
10,000
130,000
60,000
250,000
(75,000)
229,500
Total Assets
1,056,50
0
Income Statement
Sales
Other Income
Less: COGS
NCI in Net Income
Accounts Payable
Other Payables
Bonds Payable
Bond Premium
Common Stock
Retained Earnings
63,000
95,000
250,000
210,000
110,000
328,500
1,056,50
0
60,000
497,400
Elimination Entries
DR
CR
1,065,000
41,000
(750,000)
(63,000)
(170,000)
0
123,000
(5,700)
117,300
0
20,000
20,000
251,200
117,300
(40,000)
328,500
3,000
51,300
54,300
5,700
60,000
150,000
60,000
210,000
42,000
24,000
3,000
213,300
16,200
42,000
256,500
35,000
20,000
200,000
2,400
50,000
50,000
190,000
210,000
20,000
23,700
1,800
497,400
260,000
45,500
7-64
Consolidated
114,400
170,000
50,000
330,000
140,000
792,000
(257,000)
0
1,339,400
98,000
115,000
450,000
2,400
210,000
110,000
328,500
25,500
1,339,400
P7-37 (continued)

Foster
Co.
Block
Corp.
680,000
26,000
(500,000)
(45,000)
(95,000)
56,700
122,700
385,000
15,000
(250,000)
(15,000)
(75,000)
122,700
60,000
262,000
122,700
(40,000)
344,700
150,000
60,000
(20,000)
190,000
Balance Sheet
Cash
Accounts Receivable
Other Receivables
Inventory
Land
82,000
80,000
40,000
200,000
80,000
500,000
(155,000)
32,400
90,000
10,000
130,000
60,000
250,000
(75,000)
245,700
Total Assets
1,072,70
0
Income Statement
Sales
Other Income
Less: COGS
NCI in Net Income
Beginning Balance
Net Income
Ending Balance
Accounts Payable
Other Payables
Bonds Payable
Bond Premium
Common Stock
Retained Earnings
63,000
95,000
250,000
210,000
110,000
344,700
1,072,70
0
60,000
497,400
Elimination Entries
DR
CR
1,065,000
41,000
(750,000)
(63,000)
(170,000)
5,400
128,400
(5,700)
122,700
0
20,000
20,000
262,000
122,700
(40,000)
344,700
3,000
51,300
54,300
5,700
60,000
150,000
60,000
210,000
42,000
24,000
3,000
213,300
16,200
42,000
256,500
35,000
20,000
200,000
2,400
50,000
50,000
190,000
210,000
20,000
23,700
1,800
497,400
260,000
45,500
7-65
Consolidated
114,400
170,000
50,000
330,000
140,000
792,000
(257,000)
16,200
1,355,600
98,000
115,000
450,000
2,400
210,000
110,000
344,700
25,500
1,355,600
P7-38 Comprehensive Problem: Intercorporate Transfers

Note: In converting this problem from the modified to the fully adjusted equity method, we did
not correctly adjust for lower depreciation resulting from the fixed asset sale at a loss. If you
investment and income from sub accounts will not be fully eliminated. In order to correct this
problem, please use the following adjusted numbers for Foster Company:
Investment in Block Corporation Stock = 229,500
Income from Block Corporation = 51,300
These calculations are based on the corrected numbers
a.
Computation of differential as of January 1, 20X8:

Original differential at December 31, 20X1
Less: Portion written off for sale of inventory
Remaining differential, January 1, 20X8
b.
$ 150,000
(30,000)
$ 120,000
Verification of balance in Investment in Schmid Stock account:

Schmid retained earnings, January 1, 20X8
Schmid net income, 20X8:
Schmid dividends, 20X8
Schmid retained earnings, December 31, 20X8
$1,400,000
110,000
(20,000)
$1,490,000
Schmid stockholders' equity:

Common stock
Additional paid-in capital
Retained earnings, December 31, 20X8
Stockholders' equity, December 31, 20X8
Rossman's ownership share
Book value of shares held by Rossman
Remaining differential at January 1, 20X8: ($120,000 x 0.75)
Deferred gain on downstream sale of land
Loss on sale of equipment
Reverse part of loss on sale of equipment
Balance in Investment in Schmid account, December 31, 20X8
$1,000,000
1,350,000
1,490,000
$3,840,000
x
.75
$2,880,000
90,000
(23,000)
30,000
(3,000)
$2,974,000
7-66
These calculations are based on the uncorrected numbers

b.
Verification of balance in Investment in Schmid Stock account:

Schmid retained earnings, January 1, 20X8
Schmid net income, 20X8:
Schmid dividends, 20X8
Schmid retained earnings, December 31, 20X8
$1,400,000
110,000
(20,000)
$1,490,000
Schmid stockholders' equity:

Common stock
Additional paid-in capital
Retained earnings, December 31, 20X8
Stockholders' equity, December 31, 20X8
Rossman's ownership share
Book value of shares held by Rossman
Remaining differential at January 1, 20X8: ($120,000 x 0.75)
Deferred gain on downstream sale of land
Loss on sale of equipment
Reverse part of loss on sale of equipment
Incorrect Number
Balance in Investment in Schmid account, December 31, 20X8
$1,000,000
1,350,000
1,490,000
$3,840,000
x
.75
$2,880,000
90,000
(23,000)
30,000
(3,000)
6,000
$2,980,000
7-67
P7-38 (continued)
c. These calculations are based on the corrected numbers

Original book value

+ Net Income
- Dividends
Ending book value
NCI
25%
937,500
27,500
(5,000)
960,000
Rossman
Corp.
75%
2,812,500
82,500
(15,000)
2,880,000
Common
Stock
1,000,000
1,000,000
Upstream Asset
Extra Depreciation
Total
Total
40,000
(4,000)
36,000
Rossman
Corp.'s
share
30,000
(3,000)
27,000
7-68
NCI's share
10,000
(1,000)
9,000
Add.
Paid-in
Capital
1,350,000
1,350,000
Retained
+
Earnings
1,400,000
110,000
(20,000)
1,490,000

Common stock
Retained earnings
Income from Schmid Dist.
NCI in NI of Schmid Dist.
Dividends declared
Investment in Schmid Dist.
NCI in NA of Schmid Dist.
1,000,000
1,350,000
1,400,000
109,500
36,500
20,000
2,907,000
969,000

Beginning balance in APIC
Rossmans share of NI - Def. Gain
NCI share of NI - Def. Gain
100% of Schmid.'s dividends
Rossman's share of BV - Def. Gain
NCI share of BV - Def. Gain
Excess Value (Differential)

Calculations:
Beginning balance
Changes
Ending balance
NCI 25%
30,000
0
30,000
Rossman
Corp. 75%
90,000
0
90,000

Land
56,000
Goodwill
64,000
7-69
Land
56,000
0
56,000
90,000
30,000
Goodwill
64,000
0
64,000
P7-38 (continued)
Eliminate services
Other Income
Other Expenses
80,000
80,000
Eliminate intercompany payables/receivables

Current payables
20,000
Current receivables
Eliminate intercompany dividend owed
Current payables
Current receivables
Land
Rossman Corp.
Schmid Dist.
20,000
3,750
3,750
23,000
23,000
Equipment
250,000
Actual
185,000
435,000
"As If"
Accumulated
Depreciation
25,000
145,000
4,000
174,000

Equipment
185,000
Loss on Sale
40,000
145,000
Beginning Balance
75% Net Income
4,000
4,000
Investment in
Schmid Dist.
2,879,500
82,500
15,000
Def. Loss on
Equipment
Ending Balance
30,000
2,974,000
Def. Gain on Land
23,000
3,000
2,907,000
90,000
Income from
Schmid Dist.
82,500
75% Net Income
30,000
109,500
Def. Gain on
Equipment
Ending Balance
75% Dividends
Realize Loss Gain
3,000
Basic
Excess Reclass.
109,500
7-70
7-71
P7-38 (continued)
d. This worksheet is based on the corrected numbers:
Income Statement
Sales
Other Income or Loss
Less: COGS
Less: Depreciation & Amort.
Expense
NCI in Net Income
Rossman
Corp.
Schmid
Dist.
Elimination Entries
DR
CR
4,801,000
90,000
(2,193,000
)
985,000
(35,000)
80,000
40,000
(525,000)
(202,000)
(1,381,000
)
109,500
1,224,500
(88,000)
(227,000)
1,224,500
110,000
110,000
Consolidated
5,786,000
15,000
(2,718,000)
4,000
(294,000)
80,000
109,500
193,500
36,500
230,000
120,000
(1,528,000)
0
1,261,000
(36,500)
1,224,500
120,000
20,000
1,474,800
1,224,500
(50,000)
140,000
2,649,300
23,750
88,700
167,450
504,900
23,000
1,633,000
120,000

Beginning Balance
Net Income
1,474,800
1,224,500
(50,000)
Ending Balance
2,649,300
Balance Sheet
Cash
Current Receivables
Inventory
50,700
101,800
286,000
Land
400,000

2,400,000
(1,105,000
)
2,974,000
1,400,00
0
110,000
(20,000)
1,490,00
0
38,000
89,400
218,900
1,200,00
0
2,990,00
0
1,400,00
0
230,000
1,630,00
0
56,000
185,000
(420,000)
23,000
Goodwill
145,000
4,000
2,907,00
0
90,000
64,000
Total Assets
5,107,500
4,116,300
328,000
Current Payables
Bonds Payable
86,200
1,000,000
23,750
1,000,00
0
1,350,00
0
1,630,00
0
4,003,75
0
1,272,000
Retained Earnings
2,649,300
76,300
200,000
1,000,00
0
1,350,00
0
1,490,00
0
5,107,500
4,116,300
Common Stock
5,575,000
100,000
7-72
(1,674,000)
0
64,000
3,192,75
0
6,359,050
138,750
1,200,000
100,000
1,272,000
140,000
969,000
30,000
1,109,00
0
2,649,300
999,000
6,359,050
7-73
P7-38 (continued)
d. This worksheet is based on the uncorrected numbers:
Income Statement
Sales
Other Income or Loss
Less: COGS
Expense
NCI in Net Income
Rossman
Corp.
Schmid
Dist.
Elimination Entries
DR
CR
4,801,000
90,000
(2,193,000
)
985,000
(35,000)
80,000
40,000
(525,000)
(202,000)
(1,381,000
)
115,500
1,230,500
(88,000)
(227,000)
1,230,500
110,000
110,000
Consolidated
5,786,000
15,000
(2,718,000)
4,000
(294,000)
80,000
109,500
193,500
36,500
230,000
120,000
(1,528,000)
6,000
1,267,000
(36,500)
1,230,500
120,000
20,000
1,474,800
1,230,500
(50,000)
140,000
2,655,300
23,750
88,700
167,450
504,900
23,000
1,633,000
120,000

Beginning Balance
Net Income
1,474,800
1,230,500
(50,000)
Ending Balance
2,655,300
Balance Sheet
Cash
Current Receivables
Inventory
50,700
101,800
286,000
Land
400,000

2,400,000
(1,105,000
)
2,980,000
1,400,00
0
110,000
(20,000)
1,490,00
0
38,000
89,400
218,900
1,200,00
0
2,990,00
0
1,400,00
0
230,000
1,630,00
0
56,000
185,000
(420,000)
23,000
Goodwill
145,000
4,000
2,907,00
0
90,000
64,000
Total Assets
5,113,500
4,116,300
328,000
Current Payables
Bonds Payable
86,200
1,000,000
23,750
1,000,00
0
1,350,00
0
1,630,00
0
4,003,75
0
1,272,000
Retained Earnings
2,655,300
76,300
200,000
1,000,00
0
1,350,00
0
1,490,00
0
5,113,500
4,116,300
Common Stock
5,575,000
100,000
7-74
(1,674,000)
6,000
64,000
3,192,75
0
6,365,050
138,750
1,200,000
100,000
1,272,000
140,000
969,000
30,000
1,109,00
0
2,655,300
999,000
6,365,050
7-75
P7-39A Computation of Retained Earnings following Multiple Transfers

Consolidated retained earnings, January 1, 20X8:
Great Companys retained earnings, January 1
Unrealized profit on land ($16,000 x 0.80)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 2)]
Consolidated retained earnings
$450,000
(12,800)
(17,600)
$419,600
Consolidated retained earnings, December 31, 20X8:

Consolidated retained earnings, January 1
Great Companys operating income for 20X8
Less: Dividends paid in 20X8
Increase in retained earnings from Greats operations
Meagers net income for 20X8
Less: Amortization of differential assigned to equipment:
($325,000 - $290,000) / 10 years
Impairment of goodwill
Realized income
Proportion of ownership held
Realization of gain on sale of building
($22,000 / 10 years)
$65,000
(45,000)
$ 30,000
(3,500)
(17,500)
$ 9,000
x 0.80
$419,600
20,000
7,200
2,200
$449,000
Alternate computation of retained earnings balance:

Great Companys retained earnings, January 1
Operating income for 20X8
Investment income from Meager Company for 20X8:
Meager's net income
Proportion of ownership held
Proportionate share of Meagers reported net income
Amortization of differential assigned to equipment:
[($325,000 - $290,000) x 0.80] / 10 years
Goodwill impairment loss ($17,500 x 0.80)
Great Companys retained earnings
Unrealized profit on land ($16,000 x 0.80)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 3)]
7-76
$450,000
65,000
(45,000)
$30,000
x 0.80
24,000
(2,800)
(14,000)
$477,200
(12,800)
(15,400)
$449,000
P7-40A Consolidation Worksheet with Intercompany Transfers (Modified Equity Method)

Original book value

+ Net Income
- Dividends
Ending book value
NCI
35%
50,750
10,500
(1,750)
59,500

Common stock
Retained earnings
Income from Blank Corp.
NCI in NI of Blank Corp.
Dividends declared
Investment in Blank Corp.
NCI in NA of Blank Corp.
Mist
Co.
65%
94,250
19,500
(3,250)
110,500
Retained
=
Common
Stock
60,000
60,000
60,000
85,000
19,500
6,265

4,000
Land
5,000
110,500
55,265
4,000
24,000
7-77
Earnings
85,000
30,000
(5,000)
110,000

Beginning balance in retained earnings
Mist Co.s share of NI
NCI share of NI Def. Gain + Extra Dep.
100% of Blank Corp.'s dividends declared
Net BV left in the investment account

Gain on Sale on Building
13,200
1,100
Building and Equipment (net)
12,100
Eliminate intercompany services
Sales
24,000
Other Expenses
P7-40A (continued)
b.
Mist Co.
Income Statement
Sales
Gain on Sale of Building
Less: COGS
Income from Blank Corp.
NCI in Net Income
286,500
4,000
(160,000)
(22,000)
(76,000)
19,500
52,000
Blank
Corp.
128,500
13,200
(75,000)
(19,000)
(17,700)
30,000
52,000
30,000

Beginning Balance
198,000
Net Income
52,000
(25,000)
Ending Balance
225,000
85,000
30,000
(5,000)
110,000
Balance Sheet
Cash
Accounts Receivable
Inventory
Land
Buildings & Equipment (net)
Investment in Blank Corp.
Total Assets
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
NCI in NA of Blank Corp.
Elimination Entries
DR
CR
24,000
4,000
13,200
85,000
66,965
151,965
32,500
62,000
95,000
40,000
200,000
110,500
540,000
22,000
37,000
71,000
15,000
125,000
35,000
180,000
100,000
225,000
20,000
80,000
60,000
110,000
60,000
151,965
540,000
270,000
211,965
270,000
7-78
25,100
391,000
0
0
(235,000)
(39,900)
(69,700)
0
46,400
(6,265)
40,135
25,100
5,000
30,100
198,000
40,135
(25,000)
213,135
4,000
12,100
110,500
126,600
54,500
99,000
166,000
51,000
312,900
0
683,400
30,100
55,265
85,365
55,000
260,000
100,000
213,135
55,265
683,400
1,100
24,000
19,500
60,700
6,265
66,965
Consolidated
25,100
P7-40A (continued)
c.
Mist Company and Subsidiary

December 31, 20X4
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment (net)
Total Assets
$ 54,500
99,000
166,000
51,000
312,900
$683,400
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Noncontrolling Interest
$ 55,000
260,000
$100,000
213,135
$313,135
55,265
368,400
$683,400

Sales
Cost of Goods Sold
Other Expenses
Total Expenses
$235,000
39,900
69,700
$391,000
(344,600)
$ 46,400
(6,265)
$ 40,135

$198,000
40,135
$238,135
(25,000)
$213,135

7-79
P7-41A Modified Equity Method

Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to
deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. This error carries over to this problem. If you
investment account will not be fully eliminated. In order to correct this problem, please reduce
the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000.
Adjusted balances in the trial balance:
This trial balance is based on the corrected numbers:
a. Adjusted trial balance:
Item
Inventory
Land
Investment in Lane Company
Stock
Cost of Goods Sold
Depreciation and Amortization
Other Expenses
Dividends Declared
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Sales
Income from Subsidiary
Total
Prime Company
Debit
Credit
Lane Company
Debit
Credit
$ 151,000
240,000
100,000
500,000
$ 55,000
100,000
80,000
150,000
240,000
160,000
25,000
20,000
60,000
80,000
15,000
10,000
35,000
$ 230,000
60,000
200,000
300,000
420,000
250,000
36,000
$1,496,000 $1,496,000
7-80
$525,000
$ 60,000
25,000
50,000
100,000
140,000
150,000
$525,000
This trial balance is based on the uncorrected numbers:

a. Adjusted trial balance:
Item
Inventory
Land
Investment in Lane Company
Stock
Cost of Goods Sold
Depreciation and Amortization
Other Expenses
Dividends Declared
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Sales
Income from Subsidiary
Total
Prime Company
Debit
Credit
Lane Company
Debit
Credit
$ 151,000
240,000
100,000
500,000
$ 55,000
100,000
80,000
150,000
248,000
160,000
25,000
20,000
60,000
80,000
15,000
10,000
35,000
$ 230,000
60,000
200,000
300,000
428,000
250,000
36,000
$1,504,000 $1,504,000
7-81
$525,000
$ 60,000
25,000
50,000
100,000
140,000
150,000
$525,000
P7-41A (continued)
b. These calculations are based on the corrected numbers:
36,000
36,000
Cash
28,000
28,000
c.
Common stock
Retained earnings
Dividends declared
100,000
140,000
36,000
9,000
35,000
200,000
50,000

Goodwill
32,000
Retained Earnings
14,400
40,000
6,400
Remaining goodwill
Lane's portion of goodwill impairment loss from last year
Remaining balance in investment account
NCI's share of differential and loss [($50,000 - 18,000) * .2]

Accounts Payable
4,000

Retained Earnings
Land
8,000
2,000
4,000
10,000
7-82
Lane Co.
Prime Co.
Equipment
70,000
5,000
75,000
Actual
"As If"

Retained Earnings
18,000
Equipment
5,000
Accumulated
Depreciation
14,000
2,000
23,000
35,000
23,000
2,000
2,000
7-83
P7-41A (continued)
d. This worksheet is based on the corrected numbers:
Prime
Co.
Lane
Co.
250,000
(160,000)
(25,000)
(20,000)
36,000
81,000
150,000
(80,000)
(15,000)
(10,000)
81,000
45,000

Beginning Balance
420,000
140,000
Net Income
Ending Balance
81,000
(60,000)
441,000
45,000
(35,000)
150,000
Balance Sheet
Cash and Accounts
Receivable
Inventory
Land
151,000
240,000
100,000
500,000
(230,000)
240,000
55,000
100,000
80,000
150,000
(60,000)
Income Statement
Sales
Less: COGS
Less: Depreciation & Amort. Exp.
NCI in Net Income
45,000
Goodwill
Total Assets
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Elimination Entries
DR
CR
2,000
36,000
36,000
9,000
45,000
140,000
14,400
8,000
18,000
45,000
225,400
2,000
2,000
2,000
35,000
37,000
83,000
(60,000)
402,600
4,000
202,000
340,000
170,000
655,000
(311,000)
0
23,000
200,000
40,000
32,000
1,001,00
0
325,000
39,000
60,000
200,000
300,000
441,000
25,000
50,000
100,000
150,000
4,000
1,001,00
0
325,000
7-84
100,000
225,400
2,000
331,400
400,000
(240,000)
(38,000)
(30,000)
0
92,000
(9,000)
83,000
379,600
10,000
5,000
2,000
Consolidated
32,000
277,000
37,000
50,000
6,400
93,400
1,088,000
81,000
250,000
300,000
402,600
54,400
1,088,000
P7-41A (continued)
d. This worksheet is based on the uncorrected numbers:
Prime
Co.
Lane
Co.
250,000
(160,000)
150,000
(80,000)
(25,000)
(20,000)
36,000
81,000
(15,000)
(10,000)
81,000
45,000

Beginning Balance
428,000
140,000
Net Income
Ending Balance
81,000
(60,000)
449,000
45,000
(35,000)
150,000
Balance Sheet
Cash and Accounts Rec.
Inventory
Land
151,000
240,000
100,000
500,000
(230,000)
248,000
55,000
100,000
80,000
150,000
(60,000)
Income Statement
Sales
Less: COGS
Expense
NCI in Net Income
45,000
Goodwill
Total Assets
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
Elimination Entries
DR
CR
400,000
(240,000)
2,000
36,000
36,000
9,000
45,000
140,000
14,400
8,000
18,000
45,000
225,400
2,000
2,000
2,000
35,000
37,000
83,000
(60,000)
410,600
4,000
202,000
340,000
170,000
655,000
(311,000)
8,000
23,000
200,000
40,000
32,000
325,000
39,000
60,000
200,000
300,000
449,000
25,000
50,000
100,000
150,000
4,000
1,009,00
0
325,000
100,000
225,400
2,000
331,400
(38,000)
(30,000)
0
92,000
(9,000)
83,000
387,600
10,000
5,000
2,000
1,009,00
0
7-85
Consolidated
32,000
277,000
37,000
50,000
6,400
93,400
1,096,000
81,000
250,000
300,000
410,600
54,400
1,096,000
P6-42A Cost Method

a.
Journal entry recorded by Prime Company:

Cash
Dividend Income
Record dividend from Lane Company.
28,000
b.
Investment elimination entry
Common stock
Retained earnings
Goodwill
100,000
70,000
25,000
160,000
35,000
Dividend elimination entry

Dividend Income
Dividends Declared
28,000
7,000
Assign undistributed income to NCI

Retained Earnings
18,000

Accounts Payable
4,000

Retained Earnings
Land
8,000
2,000
35,000
18,000
4,000
10,000

Retained Earnings
18,000
Equipment
5,000
23,000
2,000
2,000
7-86
28,000
P6-42A (continued)
c.
Elimination Entries
DR
CR
Prime
Co.
Lane
Co.
Income Statement
Sales
Less: COGS
Less: Depr. & Amort. Exp.
Dividend Income
NCI in Net Income
250,000
(160,000)
(25,000)
(20,000)
28,000
73,000
150,000
(80,000)
(15,000)
(10,000)
73,000
45,000

Beginning Balance
348,000
140,000
Net Income
Ending Balance
73,000
(60,000)
361,000
45,000
(35,000)
150,000
Balance Sheet
Cash and Accounts Rec.e
Inventory
Land
151,000
240,000
100,000
500,000
(230,000)
160,000
55,000
100,000
80,000
150,000
(60,000)
5,000
2,000
921,000
325,000
25,000
7,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings
60,000
200,000
300,000
361,000
25,000
50,000
100,000
150,000
100,000
151,000
921,000
325,000
255,000
Goodwill
Total Assets
45,000
7-87
2,000
28,000
28,000
7,000
2,000
37,000
70,000
18,000
8,000
18,000
37,000
151,000
2,000
2,000
Consolidated
400,000
(240,000)
(38,000)
(30,000)
0
92,000
(9,000)
83,000
374,000
2,000
35,000
37,000
83,000
(60,000)
397,000
4,000
23,000
160,000
202,000
340,000
170,000
655,000
(311,000)
0
37,000
25,000
1,081,000
10,000
4,000
37,000
35,000
18,000
72,000
81,000
250,000
300,000
397,000
53,000
1,081,000

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

C7-2 Elimination of Intercorporate Services

The information on intercorporate services provided to Plain Company indicates that an

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

C7-3 Noncontrolling Interest

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

C7-4 Intercompany Sale of Services

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Depreciation expense recorded by Pirn

E7-2 Multiple-Choice Questions on Intercompany Transactions

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

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Reported net income of Gold Company

Operating income reported by Top Corporation

Less: Unrealized gain on sale of equipment

E7-3 Elimination Entries for Land Transfer

Eliminating entry, December 31, 20X4:

Eliminating entry, December 31, 20X5:

Eliminating entry, December 31, 20X4:

Eliminating entry, December 31, 20X5:

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-4 Intercompany Services

E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale

Eliminate the gain on Truck & correct asset's basis:

Eliminate the gain on Truck & correct asset's basis:

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-7 Transfer of Land

Eliminating entry, December 31, 20X2:

Gain on Sale of Land

Eliminating entry, December 31, 20X3:

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

E7-8 Transfer of Depreciable Asset at Year-End

Eliminate the gain on Truck & correct asset's basis:

Computation of gain on sale of truck:

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Eliminate the gain on Truck & correct asset's basis:

E7-9 Transfer of Depreciable Asset at Beginning of Year

Eliminate the gain on Truck & correct asset's basis:

Computation of gain on sale of truck:

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Eliminate the gain on Truck & correct asset's basis:

E7-10 Sale of Equipment to Subsidiary in Current Period

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Eliminate the gain on Equipment & correct asset's basis:

Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment

Eliminate the gain on Equipment & correct asset's basis:

E7-11 Upstream Sale of Equipment in Prior Period

Consolidated net income for 20X8:

Consolidated net income for 20X8 would be unchanged.

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Eliminate the gain on Equipment & correct asset's basis:

E7-12 Elimination Entries for Midyear Depreciable Asset Transfer

Eliminate the gain on Equipment & correct asset's basis:

Eliminate the gain on Equipment & correct asset's basis:

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-13 Consolidated Net Income Computation

Downstream sale of land:

Verrys separate operating income

Upstream sale of land: