Chapter 6 Test Bank INTERCOMPANY PROFIT TRANSACTIONS - PLANT ASSETS

Multiple Choice Questions

Use the following information for questions 1 and 2. In 2004, Parrot Company sold land to its subsidiary, Tree Corporation, for $12,000. It had a book value of $10,000. In the next year, Tree sold the land for $18,000 to an unaffiliated firm. Which of the following is correct? a. No consolidation working paper entry was necessary in 2004. b. A consolidation working paper entry was required only if the subsidiary was less than 100% owned in 2004. c. A consolidation working paper entry is required each year until the land is sold outside the related parties. d. A consolidated working paper entry was required only if the land was held for resale in 2004. The 2004 unrealized gain a. was deferred until 2006. b. was eliminated from consolidated net income by a working paper entry that credited land $2,000. c. made consolidated net income $2,000 less than it would have been had the sale not occurred. d. made consolidated net income $2,000 greater than it would have been had the sale not occurred.

LO1 1.

LO1 2.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-1

LO1 3.

On January 1, 2005, Eagle Corporation sold equipment with a book value of $40,000 and a 20-year remaining useful life to its wholly-owned subsidiary, Rabbit Corporation, for $60,000. Both Eagle and Rabbit use the straight-line depreciation method, assuming no salvage value. On December 31, 2005, the separate company financial statements held the following balances associated with the equipment: Eagle Rabbit Gain on sale of equipment $ 20,000 Depreciation expense $ 3,000 Equipment 60,000 Accumulated depreciation 3,000 A working paper entry to consolidate the financial statements of Eagle and Rabbit on December 31, 2005 included a a. b. c. d. debit to gain on sale of equipment for $19,000. credit to gain on sale of equipment for $20,000. debit to accumulated depreciation for $1,000. credit to depreciation expense for $3,000.

Use the following information for questions 4 and 5. On December 31, 2005, Corella Corporation sold equipment with a three-year remaining useful life and a book value of $21,000 to its 70%-owned subsidiary Hollow Company for a price of $27,000. Corella bought the equipment four years ago for $49,000. LO1 4. What was the intercompany sale impact on the consolidated financial statements for the year ended December 31, 2005? Corella’s Net Income a. b. c. d. LO1 5. No effect. No effect. Decreased. Increased. Corella’s Income from Hollow No effect. Decreased. No effect. Decreased.

What was the intercompany sale impact on the consolidated financial statements for the year ended December 31, 2005? Consolidated Net Income a. b. c. d. No effect. No effect. Decreased. Decreased. Consolidated Net Assets No effect. Increased. Decreased. No effect.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-2

LO1 6.

On January 2, 2005 Kakapo Company sold a truck with book value of $45,000 to Flightless Corporation, its completely owned subsidiary, for $60,000. The truck had a remaining useful life of three years with zero salvage value. Both firms use the straight-line depreciation method, and assume no salvage value. If Kakapo failed to make year-end equity adjustments, Kakapo’s investment in Flightless at December 31, 2005 was a. b. c. d. $5,000 too high. $10,000 too low. $10,000 too high. $15,000 too high.

LO1, 2 & 4 Use the following information to answer questions 7 through 10. On January 1, 2003, Shrimp Corporation purchased a delivery truck with an expected useful life of five years. On January 1, 2005, Shrimp sold the truck to Avocet Corporation and recorded the following journal entry: Debit 50,000 18,000 Credit 53,000 15,000

Cash Accumulated depreciation Truck Gain on Sale of Truck

Avocet holds 60% of Shrimp. Shrimp reported net income of $55,000 in 2005 and Avocet's separate net income (excludes interest in Shrimp) for 2005 was $98,000. LO1 7. In preparing the consolidated financial statements for 2005, the elimination entry for depreciation expense was a a. b. c. d. debit for $5,000. credit for $5,000. debit for $15,000. credit for $15,000.

LO1 8.

In the consolidation working papers, the Truck account was a. b. c. d. debited for $3,000. credited for $3,000. debited for $15,000. credited for $15,000.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-3

LO2 9.

Consolidated net income for 2005 was a. b. c. d. $121,000. $125,000. $131,000. $143,000.

LO4 10.

The minority interest income for 2005 was a. b. c. d. $18,000. $22,000. $23,000. $27,000.

LO2 11.

Ground Parrot Company completely owns Heathlands Inc. On January 2, 2005 Ground Parrot sold Heathlands machinery at its book value of $30,000. Ground Parrot had the machinery two years before selling it and used a five-year straight-line depreciation method, with zero salvage value. Heathlands will use a three-year straight-line method. In the 2005 consolidated income statement, the depreciation expense a. b. c. d. required no adjustment. decreased by $4,000. increased by $4,000 increased by $30,000. of is

LO2 12.

In reference to the downstream or upstream sale depreciable assets, which of the following statements correct? a. b. c.

d.

Upstream sales from the subsidiary to the parent company always result in unrealized gains or losses. The initial effect of unrealized gains and losses from downstream sales of depreciable assets is different from the sale of nondepreciable assets. Gains, but not losses, appear in the parent-company accounts in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting. Gains and losses appear in the parent-company accounts in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-4

LO2 13.

Falcon Corporation sold equipment to its 80%-owned subsidiary, Rodent Corp., on January 1, 2005. Falcon sold the equipment for $110,000 when its book value was $85,000 and it had a 5year remaining useful life with no expected salvage value. Separate balance sheets for Falcon and Rodent included the following equipment and accumulated depreciation amounts on December 31, 2005: Equipment Less: Accumulated depreciation Equipment-net Falcon Rodent $ 750,000 $ 300,000 ( 200,000) ( 50,000) $ 550,000 $ 250,000

Consolidated amounts for equipment and accumulated depreciation at December 31, 2005 were respectively a. b. c. d. LO2 14. $1,025,000 $1,025,000 $1,025,000 $1,050,000 and and and and $245,000. $250,000. $245,000. $250,000.

Peregrine Corporation acquired a 90% interest in Cliff Corporation in 2004 at a time when Cliff’s book values and fair values were equal to one another. On January 1, 2005, Cliff sold a truck with a $45,000 book value to Peregrine for $90,000. Peregrine is depreciating the truck over 10 years using the straight-line method. Separate incomes for Peregrine and Cliff for 2005 were as follows: Sales Gain on sale of truck Cost of Goods Sold Depreciation expense Other expenses Separate incomes $ ( ( ( $ Peregrine 1,800,000 Cliff $ 1,050,000 45,000 750,000) ( 285,000) 450,000) ( 135,000) 180,000) ( 450,000) 420,000 $ 225,000

Peregrine’s investment income from Cliff for 2005 was a. b. c. d. $161,550. $162,000. $166,050. $202,500.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-5

LO2 15.

Kestrel Company acquired an 80% interest in Reptile Corporation on January 1, 2004. On January 1, 2005, Reptile sold a building with a book value of $50,000 to Kestrel for $80,000. The building had a remaining useful life of ten years and no salvage value. The separate balance sheets of Kestrel and Reptile on December 31, 2005 included the following balances: Buildings Accumulated Depreciation Buildings $ Kestrel 400,000 120,000 $ Reptile 250,000 75,000

The consolidated amounts for Buildings and Accumulated Depreciation - Buildings that appeared, respectively, on the balance sheet at December 31, 2005, were a. b. c. d. LO2 16. $620,000 $620,000 $650,000 $650,000 and and and and $192,000. $195,000. $192,000. $195,000.

Pigeon Corporation purchased land from its 60%-owned subsidiary, Seed Inc., in 2003 at a cost $30,000 greater than Seed’s book value. In 2005, Pigeon sold the land to an outside entity for $40,000 more than Pigeon’s book value. The 2005 consolidated income statement reported a gain on the sale of land of a. b. c. d. $40,000. $42,000. $58,000. $70,000.

LO2 17.

Pied Imperial-Pigeon Corporation acquired a 90% interest in Offshore Corporation in 2003 when Offshore’ book values were equivalent to fair values. Offshore sold equipment with a book value of $80,000 to Pied Imperial-Pigeon for $130,000 on January 1, 2005. Pied Imperial-Pigeon is fully depreciating the equipment over a 4-year period by using the straight-line method. Offshore’ reported net income for 2005 was $320,000. Pied Imperial-Pigeon’s 2005 net income from Offshore was a. b. c. d. $249,250. $250,500. $254,250. $288,000.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-6

LO3 18.

Lorikeet Corporation acquired a 80% interest in Nectar Corporation on January 1, 2000 at a cost equal to book value and fair value. In the same year Nectar sold land costing $30,000 to Lorikeet for $50,000 On July 1, 2005, Lorikeet sold the land to an unrelated party for $110,000. What was the gain on the consolidated income statement? a. b. c. d. $48,000. $60,000. $64,000. $80,000.

LO4 19.

On January 1, 2005 Rainforest Co. recorded a $30,000 profit on the upstream sale of some equipment that had a remaining fouryear life under the straight-line depreciation method. The effect of this transaction on the amount recorded in 2005 by the parent company Wompoo as its investment income in the Rainforest was a. b. c. d. a decrease of $18,000 if the Rainforest was 80% owned. a decrease of $27,000 if the Rainforest was 90% owned. an increase of $22,500 if the Rainforest was wholly owned. an increase of $30,000 if the Rainforest was wholly owned.

LO4 20.

Swift Parrot Corporation acquired a 60% interest in Berries Corp. on January 1, 2005, when Berries’s book values and fair values were equivalent. On January 1, 2005, Berries sold a building with a book value of $600,000 to Swift Parrot for $700,000. The building had a remaining life of 10 years, no salvage value, and was depreciated by the straight-line method. Berries reported net income of $2,000,000 for 2005. What was the noncontrolling interest for 2005? a. b. c. d. $710,000. $764,000. $800,000. $900,000.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-7

LO1 Exercise 1 Spiniflex Pigeon Company owns 90% of the outstanding stock of Waterhole Corporation. This interest was purchased on January 1, 1999, when Waterhole’s book values were equal to its fair values. The amount paid by Spiniflex Pigeon included $10,000 for goodwill. On January 1, 2000, Spiniflex Pigeon purchased equipment for $100,000 which had no salvage value with a useful life of 8 years. on a straight-line basis. On January 1, 2005, Spiniflex Pigeon sold the truck to Waterhole Corporation for $40,000. The equipment was estimated to have a four-year remaining life on this date. All affiliates use the straight-line depreciation method. Required: Prepare all relevant entries with respect to the truck. 1. Record the journal entries on Spiniflex Pigeon’s books for 2005. 2. Record the journal entries on Waterhole’s books for 2005.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-8

LO1&2 Exercise 2 Stork Corporation paid $15,700 Corporation on January 1, 2004, consisted of $10,000 Capital Stock The excess cost over book value was Additional information: 1. Stork sells merchandise to Swamp at 120% of Stork’s cost. During 2004, Stork’s sales to Swamp were $4,800, of which half of the merchandise remained in Swamp’s inventory at December 31, 2004. During 2005, Stork’s sales to Swamp were $6,000 of which 60% remained in Swamp’s inventory at December 31, 2005. At year-end 2005 Swamp owed Stork $1,500 for the inventory purchased during 2005. 2. Stork Corporation sold equipment with a book value of $2,000 and a remaining useful life of four years and no salvage value to Swamp Corporation on January 1, 2005 for $2,800. 3. Separate company financial statements for Stork Corporation and Subsidiary at December 31, 2005 are summarized in the first two columns of the consolidation working papers. 4. Helpful hint: Stork's investment in Swamp account balance at December 31, 2004 consisted of the following: Investment cost Equity in Swamp’s income for 2004 Less: Unrealized inventory profit Less: Dividends received from Swamp Investment in Swamp, December 31, 2004 Required: Complete the working papers to consolidate the financial statements of Stork Corporation and subsidiary for the year ended December 31, 2005. $ 15,700 3,600 ( 400) for a 90% interest in Swamp when Swamp stockholders’ equity and $3,000 of Retained Earnings. attributable to goodwill.

( 1,800) $ 17,100

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-9

Stork Corporation and Subsidiary Consolidation Working Papers at December 31, 2005 Eliminations Stork Swamp Debit Credit INCOME STATEMENT Sales $ Income from Swamp Gain on equipment sale Cost of Sales ( Other Expenses ( Net income Retained Earnings 1/1 Add: Net income Dividends ( Retained Earnings 12/31 $ BALANCE SHEET Cash Receivables Inventories Equipment-net Land Investment in Swamp Goodwill TOTAL ASSETS $ LIAB. & EQUITY Accounts payable Capital Stock Retained Earnings 1/1 Noncontrl. Interest 12/31 Noncontrl. Interest TOTAL LIAB. & EQUITY $ 60,000 4,500 800 26,000) ( 28,000) ( 11,300 9,500 11,300 7,000) ( 13,800 6,000 7,000 10,000 24,000 4,000 19,800 70,800 7,000 50,000 13,800 $24,000 5,000 10,000 9,000 4,400) 3,600) 6,000 5,000 6,000 2,000) $ 9,000 3,000 4,000 4,500 9,000 3,500 $14,000

Non- Balance Cntrl. Sheet

70,800

$24,000

LO1&2
©2009 Pearson Education, Inc. publishing as Prentice Hall 6-10

Exercise 3 Dove Corporation acquired all of the outstanding voting common stock of the Squab Corporation several years ago when the book values and fair values of Squab’s net assets were equal. On April 1, 2003, Dove sold land that cost $25,000 to Squab for $40,000. Squab resold the land for $45,000 on December 1, 2005. On July 1, 2005, Dove sold equipment with a book value of $10,000 to Squab for $26,000. Squab is depreciating the equipment over a fouryear period using the straight-line method. Required: The first two columns in the working papers presented below summarize income statement information from the separate company financial statements of Dove and Squab for the year ended December 31, 2005. Fill in the consolidated working paper columns to show how each of the items from the separate company reports will appear in the consolidated income statement. Sales Income from Squab Gain on sale of equipment Gain on sale of land Cost of sales Depreciation expense Other expenses Net income Dove 450,000 46,000 16,000 ( 211,500) ( 45,500) ( 120,000) 135,000 ( ( ( Squab 200,000 5,000 91,500) 23,500) 34,000) 56,000 Consolidated

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-11

LO1&2 Exercise 4 Brolga Corporation paid $26,800 cash for a 70% interest in Dance Company on January 1, 2004, when Dance’s stockholders’ equity consisted of $15,000 Capital Stock and $9,000 of Retained Earnings. Additional information: 1. The cost-book value differential was allocated to a patent with a 20-year amortization period. 2. Brolga Corporation sold inventory items that cost $4,000 to Dance for $4,800 during 2004 and one-half of these inventory items remained unsold by Dance on December 31, 2004. 3. During 2005 Brolga Corporation sold inventory items that cost $5,000 to Dance for $6,000 and 30% of these inventory items remained unsold by Dance on December 31, 2005. Dance Corporation owed Brolga $700 on account at year-end 2005. 4. Brolga Corporation sold equipment with a 5-year remaining life and a book value of $4,000 to Dance for $5,000 on January 1, 2005. Straight-line depreciation is used. 5. Brolga and Dance pay annual dividends of $10,000 and $3,000, respectively. 6. Separate financial statements for Brolga and Dance Corporations appear on partially completed consolidation working papers. Required: Complete the working papers to consolidate the financial statements for 2005.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-12

Brolga Corporation and Subsidiary Consolidation Working Papers at December 31, 2005 Eliminations Brolga Dance Debit Credit INCOME STATEMENT Sales Income from Dance Gain on equipment sale Cost of sales Depreciation exp Other Expenses Net income Retained Earnings 1/1 Add: Net income Dividends Retained Earnings 12/31 BALANCE SHEET Cash Receivables Dividends Rec Inventories Equipment-net Investment in Dance Patent TOTAL ASSETS LIAB. & EQUITY Accounts payable Dividend payable Other Debt Capital stock Retained Earnings 1/1 Noncontrl. Interest 12/31 Noncontrl. Interest TOTAL LIAB. & EQUITY $ 90,000 2,300 1,000 ( 40,000) ( 20,000) ( 6,000) ( 2,000) ( 24,500) ( 8,000) 22,800 5,000 25,000 12,000 22,800 5,000 ( 10,000) ( 3,000) $ 37,800 10,350 1,500 1,050 12,000 41,000 28,200 $ 94,100 6,300 10,000 40,000 37,800 $33,700 2,200 1,500 1,000 15,000 14,000 $14,000 1,500 2,700 6,000 23,500 $35,000

Non- ConsolCntrl. idated

$ 94,100 $33,700

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-13

LO2 Exercise 5 Barn Owl Corporation acquired 70% of the outstanding voting stock of Cave Inc. on January 1, 2003 for $60,000 less than book value. The $60,000 reduction was all assigned to a tractor. The tractor had a remaining life of 15 years. On April 1, 2003, Cave sold land to Barn Owl for a gain of $40,000 and originally cost $35,000. Barn Owl sold the property for $85,000 on October 1, 2005. Barn Owl sold equipment for $96,000 to Cave on January 1, 2004 which had a book value of $80,000. The equipment cost Barn Owl $72,000. The equipment had a remaining useful life of 8 years on the sale date and is depreciated under the straight-line method. Required: Prepare a schedule for the calculation of consolidated net income for Barn Owl and subsidiary for 2003, 2004 and 2005. 2003 300,000 90,000 2004 225,000 110,000 2005 60,000 120,000

Barn Owl’s separate income Cave’s net income LO2 Exercise 6

Separate income statements of Nightjar Corporation and its 90%-owned subsidiary, Branch Inc., for 2005 were as follows: Nightjar 2,000,000 1,200,000 ) 400,000 ) 80,000 180,000 660,000 Branch $ 1,200,000 ( 800,000 ) ( 200,000 ) $ 200,000

Sales Revenue Cost of sales Other expenses Gain on equipment Income from Branch Net income

$ ( ( $

Additional information: 1. Nightjar acquired its 90% interest in Branch Inc. when the book values were equal to the fair values. 2. The gain on equipment relates to equipment with a book value of $120,000 and a 4-year remaining useful life that Branch sold to Nightjar for $200,000 on January 2, 2005. The straight-line depreciation method is used. 3. In 2004 Nightjar sold inventory to Branch of which the remainder was sold in 2005.
©2009 Pearson Education, Inc. publishing as Prentice Hall 6-14

Intercompany sales Cost of intercompany sales Percentage unsold at year-end Required:

$

2004 300,000 180,000 40

2005 200,000 120,000 50

Prepare a consolidated income statement for Nightjar Corporation and Subsidiary for the year ended December 31, 2005. LO2&3 Exercise 7 Osprey Corporation created a wholly owned subsidiary, Branch Corporation, on January 1, 2003, at which time Osprey sold land with a book value of $90,000 to Branch at its fair market value of $140,000. Also, on January 1, 2003, Osprey sold to Branch equipment with a book value of $130,000 and a fair value of $165,000. The equipment had a remaining useful life of 4 years and is being depreciated under the straight-line method. On January 1, 2005, Branch resold the land to an outside entity for $150,000. Branch continues to use the equipment purchased from Osprey. Income statements for Osprey and Branch for the year ended December 31, 2005 are summarized below: Sales Gain on sale of land Income from Branch Cost of sales Depreciation expense Other expenses Net income $ ( ( ( $ Osprey 450,000 $ Branch 100,000 10,000 50,000 ) 32,000 ) 8,000 ) 20,000

55,000 220,000 ) ( 95,000 ) ( 37,000 ) ( 153,000 $

Required: At what amounts did the following items appear on a consolidated income statement for Osprey Corporation and Subsidiary for the year ended December 31, 2005? 1. Gain on Sale of Land 2. Depreciation Expense 3. Consolidated net income

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-15

LO3 Exercise 8 Separate income statements of Quail Corporation and its 80%-owned subsidiary, Savannah Corporation, for 2005 are as follows: Quail 800,000 35,000 400,000 ) 265,000 ) 170,000 Savannah 300,000 20,000 160,000 ) 60,000 ) 100,000

Sales Revenue Gain on equipment Gain on land Cost of sales Other expenses Separate incomes

$ ( ( $

$ ( ( $

Additional information: 1. Quail acquired its 80% interest in Savannah Corporation when the book values were equal to the fair values. 2. The gain on equipment relates to equipment with a book value of $85,000 and a 7-year remaining useful life that Quail sold to Savannah for $120,000 on January 2, 2005. The straight-line depreciation method was used. 3. In 2005, Savannah sold land to an outside entity for $80,000. The land was acquired from Quail in 2003 for $60,000. The original cost of the land to Quail was $35,000. Required: Prepare a consolidated income statement for Quail Corporation and Subsidiary for the year 2005.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-16

LO3 Exercise 9 Cassowary Corporation acquired a 70% interest in Fruit Corporation in 1999 at a time when Fruit’s book values and fair values were equal. In 2003, Fruit sold land to Cassowary for $82,000 that cost $72,000. The land remained in Cassowary’s possession until 2005 when Cassowary sold it outside the combined entity for $102,000. After the books were closed in 2005, it was discovered that Cassowary had not considered the unrealized gain from its intercompany purchase of land in preparing the consolidated financial statements. The only entry on Cassowary’s books was a debit to Land and a credit to Cash in 2003 for $82,000, and, in 2005, a debit to Cash for $102,000 and credits to Land for $82,000 and Gain on sale of land for $20,000. Before the discovery of the error, the statements disclosed the following amounts: Consolidated net income Land Required: 1. Determine the correct amounts of consolidated net income for 2003, 2004, and 2005. 2. Determine the correct amounts for Land in 2003, 2004, and 2005. 3. Calculate the amount at which the gain on the sale of land should have been reported in 2005. $ 2003 750,000 200,000 $ consolidated 2004 600,000 240,000 financial 2005 910,000 300,000

$

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-17

LO2&4 Exercise 10 Buzzard Corporation acquired 70% of the outstanding voting common stock of Tool Inc. in 1998. On January 1, 1999, Tool Inc. purchased a depreciable machine for $120,000 cash with an estimated useful life of 10 years that was depreciated on a straight-line basis. Tool used the machine until the end of 2004. On January 2, 2005, Tool sold the machine to Buzzard who continued to use the same estimated life and depreciation method that was used by Tool. At the end of 2005, Buzzard made the following elimination entry in the consolidation working papers. Machine Gain on Sale of Machine Depreciation Expense Accumulated Depreciation Required: Answer the following questions concerning Buzzard and Tool. 1. How much depreciation expense did Buzzard record in 2005? 2. What amounts were reported for the Machine and the Accumulated Depreciation in the consolidated balance sheet on December 31, 2005? 3. If Tool reported $60,000 of net income for 2005, what amount was assigned to the non-controlling interest? 22,000 14,000 2,000 34,000

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-18

SOLUTIONS
Multiple Choice Questions 1 2 3 4 5 6 7 8 9 10 11 12 13 c b c a a d b a b a a d a Combined equipment amounts Less: gain on sale Consolidated equipment balance Combined Accumulated Depreciation Less: Depreciation on gain Consolidated Accumulated Depreciation $ 1,050,000 ( 25,000 ) $ 1,025,000 $ ( $ 250,000 5,000 ) 245,000 ($15,000 gain/ 3 years) ($53,000 - $50,000) $98,000 + [($55,000 - $15,000 + $5,000) x 60%] = ($55,000 - $15,000 + $5,000) x 40%= $ $ 125,000 18,000

14

c

Cliff reported income Less: Intercompany gain on truck Plus: Piecemeal recognition of gain = $45,000/10 years Cliff’s adjusted income Majority percentage Income from Cliff

$ (

225,000 45,000 ) 4,500 184,500 90% 166,050

$

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-19

15

a

Combined building amounts Less: Intercompany gain Consolidated building amounts Combined Accumulated Depreciation Less: Piecemeal recognition of gain Consolidated accumulated depreciation

$ ( $ $ ( $

650,000 30,000 ) 620,000 195,000 3,000 ) 192,000

16 17

d c Pied Imperial-Pigeon’s share of Roger’s income = ($320,000 x 90%) = Less: Profit on intercompany sale ($130,000 - $80,000) x 90% = Add: Piecemeal recognition of deferred profit ($50,000/4 years) x 90% = Income from Offshore $ ( 288,000 45,000 ) 11,250 254,250

$

18 19 20

d c b $30,000 - (1/4 x $30,000) = $ 22,500

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-20

Exercise 1 Requirement 1: Spiniflex Pigeon’s books 01/01/05 Cash Accumulated Depreciation Equipment Gain on Sale 40,000 62,500 100,000 2,500

Requirement 2: Waterhole’s books 01/01/05 12/31/05 Equipment Cash Depreciation Expense Accumulated Depreciation 40,000 40,000 7,500 7,500

Exercise 2 Stork Corporation and Subsidiary Consolidation Working Papers at December 31, 2005 Eliminations Stork Swamp Debit Credit INCOME STATEMENT Sales $ Income from Swamp Gain on equipment sale Cost of Sales Other Expenses Minority income Net income Retained Earnings 1/1 Add: Net income Dividends Retained Earnings 12/31 BALANCE SHEET Cash Receivables Inventories Equipment-net Land Investment in Swamp 60,000 4,500 800 4,400) 3,600) 6,000 5,000 f 6,000 2,000) $ 9,000 3,000 4,000 4,500 9,000 3,500 c 19,800 g b d 400 e f 1,500 600 600 2,700 17,500 5,000 e $14,000 a e d b $ 6,000 4,500 800 600 a c d $ 6,000 400 200

Non- Consolcontl. idated $68,000

( 26,000) ( ( 28,000) ( 11,300 9,500 11,300 ( 7,000) ( $ 13,800 6,000 7,000 10,000 24,000 4,000

(24,600) (31,400) 600( 600) 11,400

9,500 11,400 1,800( 200) ( 7,000) $13,900 9,000 9,500 13,900 32,400 7,500

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-21

Goodwill TOTAL ASSETS $ LIAB. & EQUITY Accounts payable Capital Stock Retained Earnings 1/1 Noncntrl. Interest 12/31 Noncntrl. Interest TOTAL LIAB. & $ EQUITIES Exercise 3

f 70,800 7,000 50,000 13,800 $24,000 5,000 10,000 9,000 g f

4,000 g 1,500 10,000

4,000 $76,300 10,500 50,000 13,900

f

1,500 1,500 1,900 1,900 $76,300

70,800

$24,000

Sales Income from Squab Gain on sale of equipment Gain on sale of land Cost of sales Depreciation expense Other expenses Net income

Dove 450,000 46,000 16,000 ( 211,500) ( 45,500) ( 120,000) 135,000 ( ( (

Squab 200,000 5,000 91,500) 23,500) 34,000) 56,000

Consolidated 650,000 0 0 20,000 ( 303,000) ( 67,000) ( 154,000) 146,000

Exercise 4 Brolga Corporation and Subsidiary Consolidation Working Papers at December 31, 2005 Eliminations Brolga Dance Debit Credit INCOME STATEMENT Sales $ 90,000 $35,000 Income from 2,300 Dance Gain on equipment sale 1,000 Cost of sales ( 40,000) ( 20,000) Depreciation exp Minority income Other Expenses Net income Retained Earnings 1/1 ( 6,000) ( 2,000) 8,000) h 5,000 12,000 g a f d c $ 6,000 2,300 1,000 300 a b e 500 12,000

NonContrl.

Consolidated $ 119,000

( 24,500) ( 22,800 25,000

$ 6,000 400 ( 53,900) 200 ( 7,800) $ 1,500 ( 1,500) ( 33,000) 22,800 25,000

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-22

Add: Net income Dividends ( Retained Earnings 12/31 $ BALANCE SHEET Cash Receivables Dividends Rec Inventories Equipment-net Investment in Dance Patent TOTAL ASSETS $ LIAB. & EQUITY Accounts payable Dividend payable Other Debt Capital stock Retained Earnings 1/1 Noncontrl. Interest 12/31 Noncontrl. Interest TOTAL LIAB. & $ EQUITY

22,800 10,000) ( 37,800 10,350 1,500 1,050 12,000 41,000 28,200 94,100 6,300 10,000 40,000 37,800

5,000 3,000) $14,000 1,500 2,700 6,000 23,500

f

2,100(

22,800 900) ( 10,000) $37,800

e b g

i j c 200 d 400 g f 9,500 h 700 1,050 15,000

700 1,050 300 1,000 28,400 200 500

11,850 3,500 17,700 63,700 9,000 $105,750 7,800 450 11,000 40,000 37,800

$33,700 2,200 1,500 1,000 15,000 14,000 g 8,100 8,100 8,700 i j g

8,700 $105,750

94,100

$33,700

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-23

Exercise 5 2003 300,000 90,000 4,000 (40,000) (16,000) (2,000) (15,000) 321,000 4,000 (40,000) (16,000) (2,000) (15,000) (33,000) (39,000) 2004 225,000 110,000 4,000 (2,000) (33,000) 304,000 4,000 2005 60,000 120,000 4,000 38,000 (2,000) (39,000) 181,000 4,000 38,000 (2,000) (2,000)

Barn Owl’s separate income Cave’s net income Tractor Adjustment Land gain Equipment gain Depreciation Expense Minority Interest Expense Net Income Tractor Adjustment 60,000/15 Land gain (40,000) Land gain 28,000+10,000 Equipment Depreciation expense (96,00080,000)/8 Minority Interest Expense [90,000-40,000]*.3=15,000 Minority Interest Expense 110,000*.3 Minority Interest Expense (85,000-75,000)*.3=3,000 + 120,000*.3

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-24

Exercise 6 Nightjar Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2005 Sales (see below) Cost of sales (see below) Other expenses (see below) Minority interest (see below) Consolidated net income $ ( ( ( $ 3,000,000 1,792,000 ) 580,000 ) 20,000 ) 608,000

Sales: $2,000,000 + 1,200,000 - 200,000 Cost of Sales $1,200,000 + 800,000 - 200,000 - 48,000 + 40,000 Other expenses: $400,000 + 200,000 - 20,000 Minority income Net income from Branch x 10%: ($200,000 x 10%) =

$

3,000,000

$ $ $

1,792,000 580,000 20,000

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-25

Exercise 7 Requirement 1 The gain on the sale of the land in 2005 was equal to the sales price minus the original cost of the land when it was first acquired by the combined entity. In this case the gain was $150,000 - $90,000, or $60,000. Requirement 2 The consolidated amount of depreciation expense was the combined amounts of depreciation expense showing on the separate income statements minus the piecemeal recognition of the gain on the sale of the equipment. Thus, the consolidated amount of depreciation expense was $95,000 + $32,000 – ($35,000/4 years) = $118,250. Requirement 3 Consolidated net income: Osprey separate income (not including Income from Branch)= $153,000 - $55,000 = Income from Branch Plus: Deferred gain on land Plus: Piecemeal recognition of gain on equipment sale: $35,000 gain/4 years = Consolidated net income

$ 98,000 20,000 50,000 8,750 $176,750

Exercise 8 Quail Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 2005 Sales Gain on land ($20,000 + $25,000) Cost of sales Other expenses (see below) Minority interest (see below) Consolidated net income $ ( ( ( $ 1,100,000 45,000 560,000 ) 320,000 ) 20,000 ) 245,000

Other expenses: $265,000 + $60,000 - $5,000 piecemeal recognition of gain on equipment Minority income Net income from Savannah x 20%: ($100,000 x 20%) =

$ $

320,000 20,000

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-26

Exercise 9 Requirement 1 Consolidated net income as reported Less: $10,000 deferred gain Plus: Minority interest portion of the gain Plus: Deferred gain Corrected consolidated net income Requirement 2 Land account as reported Less: Intercompany profit Restated land account 2003 $ 750,000 -10,000 3,000 7,000 $ 743,000 2003 $ 200,000 -10,000 $ 190,000 $ 600,000 2004 $ 240,000 -10,000 $ 230,000 $ 917,000 2005 $ 300,000 $ 300,000 2004 $ 600,000 2005 $ 910,000

Requirement 3 Final sales price outside the entity minus the original cost to the combined entity equals $102,000 minus $72,000 = $30,000

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-27

Exercise 10 Requirement 1 On the consolidated balance sheet, the machine must be reported at its original cost when Tool purchased it on January 1, 1999, which is $120,000. Since the elimination entry debited the machine account for $22,000 which must be the amount needed to bring the machine account up to $120,000, Buzzard must have recorded the machine at $98,000. Since the remaining useful life is seven years, Buzzard will record $14,000 of depreciation expense each year. Requirement 2 The correct balances on the consolidated balance sheet for the Machine and Accumulated Depreciation accounts are the balances that would be in the accounts if there had been no sale. The balance in the machine account would be the original purchase price to Tool or $120,000. The balance in the Accumulated Depreciation account will be the original amount of annual depreciation, ($12,000) times the number of years the machine has been depreciated (4), or $48,000. Requirement 3 The minority interest income will be 30% of Tool’ adjusted net income. Tool’ reported net income of $60,000 is reduced by the $14,000 unrealized gain on the sale of the machine and is increased by the piecemeal recognition of the gain, which is $2,000. The net result of $48,000 is then multiplied by 30% to calculate a $14,400 income for the non-controlling interest.

©2009 Pearson Education, Inc. publishing as Prentice Hall 6-28

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.