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P4 - Upstream sale Preliminary: trace intra-company sales Intra-company Sales and CGS as reported (stand-alone) in 2011 and 2012

Sub 2011 Sales CGS GP 2012 Sales CGS GP 100 75 25 120 96 24 CGS EI Parent 84 16

CGS -- BI CGS - current EI

16 78 42

Consolidated* 2011 Sales XXX CGS 63 EI 12 2012 Sales XXX CGS -- BI 12 CGS - current 62.4 Total CGS 74.4 EI 33.6

CGS for other than IT: Total CGS reported, P + S Less: S's cgs for IT P's cgs for IT Total CGS other than IT 590 -96 -94 400

*Consolidated column represents consolidated totals for intercompany transfers only.

Required: total consolidated CGS (2012) - one approach: Total CGS, sub + parent (given) Less: Parent's marked up CGS BI Purchases EI Adjustments to subs reported 2012 CGS: Add: 2011 cost for 'sale' realized in 2012 Less: 2012 cost for 'sale' realized in 2013 Consolidated CGS, total 2012 590.0 (16.0) (120.0) 42.0 12.0 (33.6)

(94.0) [this leaves sub's reported CGS of $96]

(21.6) [this adjusts the sub's reported CGS to consolidated basis] 474.4

Required: total consolidated CGS (2012) - text approach** Total CGS, sub + parent (given) Less: Intracompany transfers, 2012 Deferred GP adjustments for IT: BI 25 x .16 EI 24 x .35 Consolidated CGS, total 2012 590.0 (120.0) [this leaves net inventory effects -- P and S] (4.0) 8.4 474.4

P6 - Downstream sale FACTS: Stand-alone reported sales and cgs Top Bottom Sales 800 300 CGS 600 180

Total 1100 780

Sales and CGS reflect internal sale of $100 by Top to Bottom Markup is 25% and 40% of inventory transferred is held by Bottom at year end. Here is stand-alone reporting of IT Top Bottom Sales 100 ?? CGS 75 60 Inventory 0 40 Here is consolidated reporting of IT Sales [Bottom reports correctly] CGS [60% of $75 cost basis] Inventory [40% of $75 cost] ?? 45 30

REQUIRED: Find consolidated sales. Note: The correct consolidated sales number for IT is reflected in Bottom's $300. The $100 intercompany sale is included in the $800 must be eliminated Sales as reported Less: IT sale reported by Top Consolidated sales 1100 100 1000

REQUIRED: Find consolidated cgs. The cgs adjustment is tricky. We must eliminate IT CGS reported by Bottom and we must reduce the cost-based CGS reported by Top for unsold EI. I show this two equivalent ways. CGS as reported Less: Bottom's reported IT CGS Less: Adjust Top's IT CGS for EI Consolidated CGS OR CGS as reported Less: intercompany sale Add: GP on EI Consolidated CGS 780 -60 [=100*60% sold] -30 [=100*(.75 cost ratio)*(40% unsold)] 690 780 -100 [this leaves IT CGS = $75 cost less $40 marked-up EI] 10 [this adjusts cgs and inventory from marked-up to cost basis] 690

P10 through P14 10 $400,000: Remove $100,000 from combined stand-alone sales 11 Stand alone CGS Jarel Suarez Total Less: intracompany sales Add: urealized GP Consolidate CGS OR Sales directly to external parties P S Total Consolidated CGS for IT Total consolidated CGS 12 Confirm excess acquisition-date FV FV consideration transferred (80% interest) FV NCI (20%) Total FV, acquisition date Net assets, 1/1 Excess FV Equipment Secret formulas Consolidated expenses 260,000 65,000 325,000 250,000 75,000 25,000 50,000

140,000 80,000 220,000 (100,000) 12,000 132,000

60,000 [=140,000 total cgs - 80,000] 40,000 [=80,000 total cgs - 100,000*40% sold] 100,000 32,000 [=80,000 cost basis * 40% sold] 132,000

life 5 20

annual amortization 5,000 2,500

37,500 [reported expenses + excess amortization]

13 Book value of subsidiary in consolidation, 12/31 Net assets, 1/1 Add: Excess FV 1/1 Net income Excess amortization Deduct: Dividends paid Book value NCI (20%)

250,000 75,000 110,000 (7,500) 0 427,500 85,500

14 Total as reported Add: excess FV Less: amortization to date Consolidated balance, equipment 12/31

740,000 25,000 (5,000) 760,000

15 Total as reported Remove GP from EI: Book value (Suarez) GP rate Consolidated EI

260,000 60000 0.2

(12,000) 248,000

P5-18 12/31/2011 Inventory Land Equipment (net) Common stock RE Smith 140 600 400 400 600 Kane 90 200 300 200 400 Other facts Nonconrolling interest Excess amortization Intra-entity sales Transfer price Cost GP In inventory, year end a. Subs reported NI Less: excess amortization gp deferral, 2010 gp deferral, 2011 NCI (20%) b. Inventory, S + P Less: gp component in P's 110.0 (5.0) 7.2 (16.2) 96.0 19.2 230.0 (16.2) 213.8 110.0 (5.0) 105.0 21.0 410.0 (32.0) (9.0) (5.0) 364.0 (it would be the same with upstream sales) 600.0 (8.0) 592.0 (16.2) 575.8

NI, 2011 Dividents, 2011

300 100

110 40

gross profit deferral

c.

Subs reported NI Less: excess amortization gp deferral, 2010 gp deferral, 2011 NCI (20%)

d.

NI, P+S Less: Dividends from S in P's NI Less: gp net deferral Less: excess amortization Consolidated NI RE, P Less: excess amortization Subtotal Less: gp deferral Consolidated RE (CI)

e.

(80% S's net income and dividend effects are in this number] (80% of two year's effect: not accounted for by P in partial eq [this is P's RE if equity method correclty applied] (P does not adjust for downstream sales effect. 2010 has wa

f.

RE, P Less: gp deferral Less: excess amortization Consolidated RE (CI)

600.0 (80% S's net income and dividend effects are in this number] (12.96) (P has not adjusted for 80% upstream gp deferral due to use (8.0) (not accounted for by P in partial equity) 579.0

g.

Land, P+S Less: write-up of land at sale Consolidated balance

800.0 (20.0) 780.0

h.

Find consolidated balance of Equipment and consolidated NI. Parent uses partial equity. Equipment, P+S Less: write-up at sale by P Add: depreciation of writeup by P Consolidated balance NI, P+S Less: Dividends from S in P's NI Less: excess amortization Less: excess depreciation by P Consolidated NI 700.0 (20.0) 8.0 688.0 410.0 (32.0) (5.0) (4.0) 373.0 (it would be the same with upstream sales)

20% 5 2010 90 54 36 18 20% 7.2 2011 120 66 54 36 30% 16.2

h upstream sales)

ividend effects are in this number] not accounted for by P in partial equity) hod correclty applied] nstream sales effect. 2010 has washed out)

ividend effects are in this number] % upstream gp deferral due to use of partial equity. 2010 has washed out.) partial equity)

h upstream sales)