You are on page 1of 93

CHAPTER 6

INTERCORPORATE TRANSFERS: NONCURRENT ASSETS


ANSWERS TO QUESTIONS
Q6-1 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.
Q6-2 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.
Q6-3 (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.
Q6-4 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.
Q6-5 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.
Q6-6 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.
Q6-7 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.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Q6-8 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.
Q6-9 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.
Q6-10 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.
Q6-11 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 year-end. None of the
gain will be considered realized in the period of transfer if the sale occurs at year-end.
Q6-12 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.
Q6-13 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.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Q6-14 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.
Q6-15 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.
Q6-16 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.
Q6-17A 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 basic
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.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

SOLUTIONS TO CASES
C6-1 Historical Cost Model
A change to replacement cost accounting could potentially simplify the elimination process when
there have been intercorporate transfers. If assets are transferred between affiliates at fair value, the
balance sheet amount reported by the purchaser should reflect replacement cost on the date of
transfer and no adjustment would be needed if consolidation were to occur at that time. In the
periods that follow, the adjustment for the change in replacement cost from the beginning of the
period to the end of the period on the books of the purchaser should be the same as if there had been
no intercompany transfer and no eliminating entries are needed.
In preparing the consolidated income statement for the period of transfer, any gain or loss recorded
by the seller on the intercorporate sale must be eliminated. The exact nature of the adjustment will
depend on whether the change in replacement cost each period is considered to be a realized or an
unrealized gain. If the change in replacement cost each period is considered realized, the gain or loss
recorded on the intercorporate sale will need to be treated as an adjustment to the gain or loss on the
change in replacement cost in the period of transfer. No special adjustment will be needed in the
years that follow. If the change in replacement cost is considered unrealized, the gain or loss
recorded at the time of transfer will be treated as an adjustment to the unrealized gain or loss on the
change in replacement cost each time consolidated statements are prepared.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

C6-2 Impact of the Elimination Process


a. While items purchased from an affiliate may be physically segregated or marked, some aspect
of the recordkeeping system typically is used to keep track of such items. A unique series of
accounts, inventory numbers, purchase order numbers, or other records may be used to identify
items acquired from affiliates. In a very simple setting the vouchers on intercompany purchases may
be kept in a special folder and checked at year-end to see if those items are still on hand. More
formal procedures generally are needed when intercompany transfers are quite frequent or the
accounting system does not generate documents that can be readily used for tracking intercorporate
sales.
b. When unrealized profits are not eliminated, consolidated net income and one or more asset
balances will be incorrectly stated. If the number of transactions between the companies is relatively
constant over time, there may be little effect on the amount of income reported in any year. On the
other hand, if the level of purchases varies substantially from year to year, failure to eliminate
unrealized profits can significantly affect the amount of reported net income and the amount reported
in various asset categories. There also is danger of intentional manipulation of intercompany
transfers to attain a desired level of income when profits are not eliminated.
c. If the amount of unrealized profit at the end of a given year is greater than the amount at the
start of the year, consolidated net income will decrease when the appropriate eliminating entries are
made. However, when the reverse is true, consolidated net income will increase as a result of
entering the eliminating entries in the consolidated workpaper. Thus, the effect depends on whether
the level of unrealized profit has increased or decreased during the period.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

C6-3 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.
b. When there are no unrealized profits on the subsidiary's books, a pro rata portion of the book
value of the net assets of the subsidiary is reported in the consolidated balance sheet as
noncontrolling interest.
c. The effect of unrealized 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 profits, the income assigned to 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 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 income
assigned to noncontrolling interest.
(2) On an intercorporate sale of a depreciable asset, a portion of the profit will be 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 income assigned to noncontrolling interest.
d. Noncontrolling shareholders generally will not gain a great deal of useful information from the
consolidated statements. Their primary focus must continue to be on the income and net assets 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.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

C6-4 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.

C6-5 Intercompany Profits


Answers can be found in the companies' 10-K filings with the SEC and in their annual reports.
a. Century Telephone Enterprises, Inc. (www.centurytel.com), and its subsidiaries bill one another
for services and materials provided in such amounts as to provide a reasonable return on investment.
When preparing consolidated financial statements, the company eliminates intercompany profits on
transactions with unregulated subsidiaries, but profits on transactions with regulated subsidiaries are
not eliminated, as permitted by FASB Statement No. 71. This statement is applicable because phone
companies are regulated as public utilities.
b. Verizon (www.verizon.com) eliminates all intercompany profits. It no longer applies the
provisions of FASB 71.
c. New York Life (www.newyorklife.com) indicates in its annual report the amount of income and
expenses for New York Life, New York Life Insurance and Annuity Corporation, and the
consolidated amounts. While the intercompany eliminations implied by the differences in the
consolidated amounts from the sum of those of the individual companies are small, and are zero in
some cases, there are some intercompany transactions that are eliminated.
d. All of Harleys 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.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

SOLUTIONS TO EXERCISES
E6-1 Multiple-Choice Questions on Intercompany Transfers
[AICPA Adapted]
1. c
2. d
3. b
4. a
5. b Depreciation expense recorded by Pirn
$40,000
Depreciation expense recorded by Scroll
10,000
Total depreciation reported
$50,000
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)
(3,000)
Depreciation for consolidated statements
$47,000

E6-2 Multiple-Choice Questions on Intercompany Transactions


1. d 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. a 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). Transfer to another
legal entity does not cause a change in accounting treatment within the economic entity.
3. b Under the conditions given, the full $39,000 paid to Gold Company must be charged to
depreciation expense by Silver Corporation over the remaining 3 years of ownership. As a
result, Silver 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 in preparing the consolidated
statements.
4. a Silver 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.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-2 (continued)
5. b Reported net income of Gold Company
$45,000
Reported gain on sale of equipment
$15,000
Intercompany profit realized in 20X6
(5,000) (10,000)
Realized net income of Gold Company
$35,000
Proportion of stock held by
noncontrolling interest
x .40
Income assigned to noncontrolling interests
$14,000
6. b Operating income reported by Silver Corporation
$ 85,000
Net income reported by Gold Company
45,000
$130,000
Less: Unrealized gain on sale of equipment
($15,000 - $5,000)
(10,000)
Income to noncontrolling interest
(14,000)
Consolidated net income
$106,000

E6-3 Elimination Entries for Land Transfer


a. Eliminating entry, December 31, 20X4:
E(1) Gain on Sale of Land
Land

10,000
10,000

Eliminating entry, December 31, 20X5:


E(1) Retained Earnings, January 1
Land

10,000
10,000

b. Eliminating entry, December 31, 20X4:


E(1) Gain on Sale of Land
Land

10,000
10,000

Eliminating entry, December 31, 20X5:


E(1) Retained Earnings, January 1
Noncontrolling Interest
Land

6,000
4,000
10,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-4 Elimination Entries for Depreciable Asset Transfer: Year-End Sale


a. Eliminating entry, December 31, 20X6
E(1) Truck
Gain on Sale of Truck
Accumulated Depreciation

5,000
10,000
15,000

b. Eliminating entry, December 31, 20X7:


E(1) Truck
Retained Earnings, January 1
Depreciation Expense
Accumulated Depreciation

5,000
10,000
1,000
14,000

Accumulated depreciation adjustment:


Required [($45,000 / 15 years) x 6 years]
$18,000
Recorded [($40,000 / 10 years) x 1 year]
(4,000)
Required increase
$14,000

E6-5 Transfer of Land


a. Eliminating entry, December 31, 20X2:
E(1) Gain on Sale of Land
Land

45,000
45,000

Eliminating entry, December 20X3:


E(1) Retained Earnings, January 1
Noncontrolling Interest
Land

31,500
13,500
45,000

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


E(1) Retained Earnings, January 1
Land

30,000
30,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-6 Transfer of Depreciable Asset at Year-End


a. Eliminating entry, December 31, 20X5
E(1) Truck
Gain on Sale of Truck
Accumulated Depreciation

90,000
30,000
120,000

b. Eliminating entry, December 31, 20X6:


E(1) Truck
Retained Earnings, January 1
Depreciation Expense
Accumulated Depreciation

90,000
30,000
5,000
115,000

Accumulated depreciation adjustment:


Required [($300,000 / 10 years) x 5 years]
$150,000
Recorded [($210,000 / 6 years) x 1 year]
(35,000)
Required increase
$115,000

E6-7 Transfer of Depreciable Asset at Beginning of Year


a. Eliminating entry, December 31, 20X5
E(1) Truck
Gain on Sale of Truck
Depreciation Expense
Accumulated Depreciation

55,000
35,000
5,000
85,000

Accumulated depreciation adjustment:


Required [($300,000 / 10 years) x 4 years]
$120,000
Reported [($245,000 / 7 years) x 1 year]
(35,000)
Required increase
$ 85,000
b. Eliminating entry, December 31, 20X6:
E(1) Truck
Retained Earnings, January 1
Depreciation Expense
Accumulated Depreciation

55,000

Accumulated depreciation adjustment:


Required [($300,000 / 10 years) x 5 years]

30,000
5,000
80,000
$150,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Reported [($245,000 / 7 years) x 2 years]


(70,000)
Required increase
$ 80,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-8 Sale of Equipment to Subsidiary in Current Period


a. Journal entry to record sale:
Cash
84,000
Accumulated Depreciation
80,000
Equipment
150,000
Gain on Sale of Equipment
14,000
Record the sale of equipment:
$84,000 = $150,000 - $80,000 + $14,000
$80,000 = ($150,000 / 15 years) x 8 years
b. Journal entry to record purchase:
Equipment
Cash

84,000
84,000

Journal entry to record depreciation expense:


Depreciation Expense
Accumulated Depreciation

12,000
12,000

Eliminating entry at December 31, 20X7, to eliminate intercompany sale of equipment:


Equipment
66,000
Gain on Sale of Equipment
14,000
Depreciation Expense
2,000
Accumulated Depreciation
78,000
Eliminate unrealized profit on equipment.
Adjustment to equipment
Amount paid by Wainwrite to acquire building
$150,000
Amount paid by Lance on intercompany sale
(84,000)
Adjustment to buildings and equipment
$ 66,000
Adjustment to depreciation expense
Depreciation expense recorded by Lance
Corporation ($84,000 / 7 years)
$12,000
Depreciation expense recorded by Wainwrite
Corporation ($150,000 / 15 years)
(10,000)
Adjustment to depreciation expense
$ 2,000
Adjustment to accumulated depreciation
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Amount required ($10,000 x 9 years)


$90,000
Amount reported by Lance ($12,000 x 1 year)
(12,000)
Required adjustment
$78,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-8 (continued)
d.

Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment and prepare
a consolidated balance sheet only:
Equipment
66,000
Retained Earnings
12,000
Accumulated Depreciation
Eliminate unrealized profit on equipment.

78,000

E6-9 Upstream Sale of Equipment in Prior Period


a. Consolidated net income for 20X8:
Operating income reported by Baywatch
$100,000
Net income reported by Tubberware
$40,000
Amount of gain realized in 20X8
($30,000 / 12 years)
2,500
Realized net income of Tubberware
$42,500
Proportion of ownership held by Baywatch
x .80
34,000
Consolidated net income
$134,000
b.

Consolidated net income for 20X8 would be $500 greater [$2,500 - ($2,500 x .80)] if the sale of
equipment had been from parent to subsidiary on January 1, 20X6.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-9 (continued)
c. Eliminating entry, December 31, 20X8:
E(1) Buildings and Equipment
30,000
Retained Earnings
20,000
Noncontrolling Interest
5,000
Depreciation Expense
2,500
Accumulated Depreciation
52,500
Eliminate unrealized profit on building.
Adjustment to buildings and equipment
Amount paid by Tubberware to acquire building
$300,000
Amount paid by Baywatch on intercompany sale
(270,000)
Adjustment to buildings and equipment
$ 30,000
Adjustment to retained earnings, January 1, 20X8
Unrealized gain recorded January 1, 20X6
$30,000
Amount realized following intercompany sale
($2,500 x 2)
(5,000)
Unrealized gain, January 1, 20X8
$25,000
Proportion of ownership held by Baywatch
x .80
Required adjustment
$20,000
Adjustment to Noncontrolling interest, January 1, 20X8
Unrealized gain at January 1, 20X8
$25,000
Proportion of ownership held by noncontrolling
interest
x .20
Required adjustment
$ 5,000
Adjustment to depreciation expense
Depreciation expense recorded by Baywatch
Industries ($270,000 / 12 years)
$22,500
Depreciation expense recorded by Tubberware
Corporation ($300,000 / 15 years)
(20,000)
Adjustment to depreciation expense
$ 2,500
Adjustment to accumulated depreciation
Amount required ($20,000 x 6 years)
$120,000
Amount reported by Baywatch ($22,500 x 3 years) (67,500)
Required adjustment
$ 52,500

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-10 Elimination Entries for Midyear Depreciable Asset Transfer


a. Eliminating entry, December 31, 20X3:
E(1) Equipment
Gain on Sale of Equipment
Depreciation Expense
Accumulated Depreciation

2,000
10,500
1,500
11,000

Purchase price paid by subsidiary


$28,000
Purchase price paid by parent
$30,000
Less: Accumulated Depreciation
($5,000 x 2 1/2 years)
(12,500)
Book value at time of sale
(17,500)
Gain on sale of equipment
$10,500
Accumulated depreciation adjustment:
Required [($30,000 / 6 years) x 3 years]
$15,000
Recorded [($28,000 / 3 1/2 years) x 1/2 year] (4,000)
Required increase
$11,000
b. Eliminating entry, December 31, 20X4
E(1) Equipment
Retained Earnings, January 1
Depreciation Expense
Accumulated Depreciation

2,000
9,000
3,000
8,000

Unrealized gain, July 1, 20X3


Realized in 20X3
Unrealized balance, January 1, 20X4

$10,500
(1,500)
$ 9,000

Accumulated depreciation adjustment:


Required [($30,000 / 6 years) x 4 years]
$20,000
Recorded [($28,000 / 3 1/2 years) x 1 1/2 years] (12,000)
Required increase
$ 8,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-11 Consolidated Net Income Computation


a. Downstream sale of land:
Consolidated net income for 20X4:
Verry Corporation income (excluding investment
income from Spawn Corporation)
$ 90,000
Spawn Corporation net income
60,000
$150,000
Less: Gain on sale of land
(25,000)
Income assigned to noncontrolling interest
(.25 x $60,000)
(15,000)
Consolidated net income
$110,000
Consolidated net income for 20X5:
Verry Corporation income (excluding investment
income from Spawn Corporation)
$110,000
Spawn Corporation net income
40,000
$150,000
Less: Income assigned to noncontrolling interest
(.25 x $40,000)
(10,000)
Consolidated net income
$140,000
b. Upstream sale of land:
Consolidated net income for 20X4:
Verry Corporation income (excluding investment
income from Spawn Corporation)
$ 90,000
Spawn Corporation net income
60,000
$150,000
Less: Gain on sale of land
(25,000)
Income assigned to noncontrolling interest
[.25 ($60,000 - $25,000)]
( 8,750)
Consolidated net income
$116,250
Consolidate net income for 20X5:
Verry Corporation income (excluding investment
income from Spawn Corporation)
$110,000
Spawn Corporation net income
40,000
$150,000
Less: Income assigned to noncontrolling interest
(.25 x $40,000)
(10,000)
Consolidated net income
$140,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-12 Elimination Entries for Intercompany Transfers


a. Operating income of Speedy Delivery
$ 65,000
Net income of Acme Real Estate Company
40,000
Combined income
$105,000
Less: Unrealized profit on land sale
$25,000
Income assigned to noncontrolling
interest [($40,000 - $25,000) x .20]
3,000 (28,000)
Consolidated net income
$ 77,000
b. Journal entries recorded by Speedy Delivery:
(1) Investment in Acme Real Estate Stock
Income from Subsidiary
Record equity-method income:
$40,000 x .80

32,000
32,000

(2) Cash
8,000
Investment in Acme Real Estate Stock
Record dividends from Acme Real Estate:
$10,000 x .80

8,000

c. Eliminating entries:
E(1) Income from Subsidiary
32,000
Dividends Declared
8,000
Investment in Acme Real Estate Stock
24,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest
3,000
Dividends Declared
2,000
Noncontrolling Interest
1,000
Assign income to noncontrolling interest:
$3,000 = ($40,000 - $25,000) x .20
E(3) Common Stock__Acme Real Estate Company
300,000
Retained Earnings, January 1
100,000
Investment in Acme Real Estate Stock
320,000
Noncontrolling Interest
80,000
Eliminate beginning investment balance.
E(4) Gain on Sale of Land
25,000
Land
25,000
Eliminate unrealized gain on land.
E(5) Service Revenue
Delivery Expense

15,000
15,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Eliminate courier services performed by


Speedy Delivery Service.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-13 Sale of Building to Parent in Prior Period


a.

b.

Turner will recorded annual depreciation expense of $25,000


($300,000 / 12 years).
Split would have recorded annual depreciation expense of $20,000 ($400,000 / 20 years).

c. Eliminating entry, December 31, 20X9:


E(1) Buildings and Equipment
100,000
Retained Earnings
42,000
Noncontrolling Interest
18,000
Depreciation Expense
5,000
Accumulated Depreciation
155,000
Eliminate unrealized profit on building.
Adjustment to buildings and equipment
Amount paid by Split to acquire building
$400,000
Amount paid by Turner on intercompany sale (300,000)
Adjustment to buildings and equipment
$100,000
Adjustment to retained earnings, January 1, 20X9
Unrealized gain, December 31, 20X8
[$300,000 - ($400,000 - $160,000)]
$60,000
Proportion of ownership held by Turner
x .70
Required adjustment
$42,000
Adjustment to Noncontrolling interest, January 1, 20X8
Unrealized gain, December 31, 20X8
$60,000
Proportion of ownership held by
noncontrolling interest
x .30
Required adjustment
$18,000
Adjustment to depreciation expense
Depreciation expense recorded by Turner
Company ($300,000 / 12 years)
$25,000
Depreciation expense recorded by Split
Company ($400,000 / 20 years)
(20,000)
Adjustment to depreciation expense
$ 5,000
Adjustment to accumulated depreciation
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Amount required ($20,000 x 9 years)


$180,000
Amount reported by Turner ($25,000 x 1 year) (25,000)
Required adjustment
$155,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-13 (continued)
d.

Income assigned to noncontrolling interest for 20X9:


Net income reported by Split Company
$40,000
Amount of gain realized in 20X9 ($60,000 / 12 years)
5,000
Realized net income for 20X9
$45,000
Proportion of ownership held by noncontrolling
interest
x .30
Income assigned to noncontrolling interest
$13,500

e.

Amount assigned to noncontrolling interest in 20X9 consolidated balance sheet:


Split Company net assets, January 1, 20X9
($350,000 - $150,000)
$200,000
Realized net income for 20X9
45,000
Dividends paid in 20X9
(15,000)
Realized book value December 31, 20X9
$230,000
Proportion of ownership held by noncontrolling
interest
x .30
Amount assigned to noncontrolling interest in
December 31, 20X9, consolidated balance sheet
$ 69,000

E6-14 Intercompany Sale at a Loss


a.

Consolidated net income for 20X8 will be greater than Parent Company's income from
operations plus its proportionate share of Sunway's reported net income. The eliminating entries
at December 31, 20X8, will result in an increase of $18,000 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. Because the loss was recorded on Parent's books in
20X8, consolidated net income will be decreased by the full amount of the $2,000 increase in
depreciation expense.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-15 Eliminating Entries Following Intercompany Sale at a Loss


a. Eliminating entry, December 31, 20X7:
E(X) Buildings and Equipment
Loss on Sale of Building
Accumulated Depreciation
Eliminate unrealized loss on building.

156,000
36,000
120,000

b. Consolidated net income for 20X7:


Operating income reported by Brown
$125,000
Net income reported by Transom
$15,000
Add loss on sale of building
36,000
Realized net income of Transom
$51,000
Proportion of ownership held by Brown
x .70
35,700
Consolidated net income
$160,700
c. Eliminating entry, December 31, 20X8:
E(X) Buildings and Equipment
156,000
Depreciation Expense
4,000
Accumulated Depreciation
124,000
Retained Earnings
25,200
Noncontrolling Interest
10,800
Eliminate unrealized profit on building.
Adjustment to buildings and equipment
Amount paid by Transom to acquire building $300,000
Amount paid by Brown on intercompany sale
(144,000)
Adjustment to buildings and equipment
$156,000
Adjustment to depreciation expense
Depreciation expense recorded by Transom
Company ($300,000 / 15 years)
$20,000
Depreciation expense recorded by Brown
Corporation ($144,000 / 9 years)
(16,000)
Adjustment to depreciation expense
$ 4,000
Adjustment to accumulated depreciation
Amount required ($20,000 x 7 years)
$140,000
Amount reported by Brown ($16,000 x 1 year) (16,000)
Required adjustment
$124,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-15 (continued)
Adjustment to retained earnings, January 1, 20X8
Unrealized loss recorded, December 31, 20X7 $36,000
Proportion of ownership held by Brown
x .70
Required adjustment
$25,200
Adjustment to Noncontrolling interest, January 1, 20X8
Unrealized loss recorded, December 31, 20X7 $36,000
Proportion of ownership held by noncontrolling
interest
x .30
Required adjustment
$10,800
d. Consolidated net income for 20X8:
Operating income reported by Brown
Net income reported by Transom
Adjustment for loss on sale of building
Realized net income of Transom
Proportion of ownership held by Brown
Consolidated net income

$150,000
$40,000
(4,000)
$36,000
x .70
25,200
$175,200

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-16 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


$120,000
Loss on sale of land ($145,000 - $130,000)
15,000
Realized net income of Sullivan Corporation $135,000
Proportion of stock held by Swanson
x .80 108,000
Kolder Company net income
$ 60,000
Gain on sale of land ($180,000 - $130,000)
(50,000)
Realized net income of Kolder Company
$ 10,000
Proportion of stock held by Swanson
x .70
7,000
Clayton Corporation net income
$ 80,000
Gain on sale of land ($240,000 - $180,000)
(60,000)
Realized net income of Clayton Corporation
$ 20,000
Proportion of stock held by Swanson
x .90
18,000
Consolidated net income
$283,000
Alternate Computation:
Swanson Corporation operating income
Sullivan Corporation net income
Kolder Company net income
Clayton Corporation net income
Combined income

$150,000
120,000
60,000
80,000
$410,000

Unrealized loss recorded by Sullivan Corp.


$(15,000)
Unrealized gain recorded by Kolder Company
50,000
Unrealized gain recorded by Clayton Corp.
60,000 (95,000)
Realized income available to all shareholders
$315,000
Income assigned to noncontrolling interest:
Sullivan Corp. ($120,000 + $15,000) x .20
Kolder Company ($60,000 - $50,000) x .30
Clayton Corp. ($80,000 - $60,000) x .10
Consolidated net income

$27,000
3,000
2,000 (32,000)
$283,000

d. Eliminating entry:
E(1) Gain on Sale of Land
Loss on Sale of Land
Land

110,000
15,000
95,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Eliminate gains and loss on land transfer:


$110,000 = $50,000 + $60,000
$95,000 = $110,000 - $15,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-17 Elimination Entry in Period of Transfer


a.

$300,000 = $276,000 + $24,000

b.

15 years = $300,000 / ($60,000 / 3 years)

c. E(X) Trucks
24,000
Retained Earnings
21,600
Noncontrolling Interest
14,400
Depreciation Expense
3,000
Accumulated Depreciation
57,000
Eliminate unrealized gain on trucks:
$21,600 = $36,000 x .60
$14,400 = $36,000 x .40
$57,000 = ($20,000 x 4 years) - ($23,000
x 1 year)

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-18 Elimination Entry Computation


a. Eliminating entry, December 31, 20X6:
E(1) Equipment
Gain on Sale of Equipment
Depreciation Expense
Accumulated Depreciation

90,000
60,000
6,000
144,000

Depreciation expense adjustment:


Recorded ($360,000 / 10 years)
$36,000
Required [($450,000 - $150,000) / 10 years]
(30,000)
Required decrease
$ 6,000
Accumulated depreciation adjustment:
Accumulated depreciation, January 1, 20X6
$150,000
20X6 depreciation required
30,000
Required balance
$180,000
20X6 depreciation recorded
(36,000)
Required increase
$144,000
b. Eliminating entry, December 31, 20X7:
E(1) Equipment
Retained Earnings, January 1
Noncontrolling Interest
Depreciation Expense
Accumulated Depreciation

90,000
37,800
16,200
6,000
138,000

Retained earnings adjustment:


Unrealized profit, January 1, 20X6
Realized in 20X6
Unrealized profit, January 1, 20X7
Proportion of stock held by Stern
Share of unrealized profit

$60,000
(6,000)
$54,000
x .70
$37,800

Accumulated depreciation adjustment:


Accumulated depreciation, January 1, 20X6
$150,000
Depreciation based on historical cost
[($300,000 / 10 years) x 2]
60,000
Required balance
$210,000
Depreciation recorded [($360,000 / 10) x 2]
(72,000)
Required increase
$138,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-19 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
$120,000
Increase to buildings and equipment
in eliminating entry
(53,500)
Amount paid by Pastel to Somber for equipment
$ 66,500
d. Income assigned to noncontrolling interest for 20X9:
Net income reported by Somber
$25,000
Amount of gain realized in 20X9 ($10,500 / 7 years)
1,500
Realized net income for 20X9
$26,500
Proportion of ownership held by noncontrolling
interest
x .10
Income assigned to noncontrolling interest
$ 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:


E(1) Income from Subsidiary
22,500
Dividends Declared
5,400
Investment in Somber Corporation Stock
17,100
Eliminate income from subsidiary.
$22,500 = $25,000 x .90
$5,400 = $6,000 x .90
E(2) Income to Noncontrolling Interest
2,650
Dividends Declared
600
Noncontrolling Interest
2,050
Assign income to noncontrolling interest.
$2,650 = ($25,000 + $1,500) x .10
$600 = $6,000 x .10
E(3) Common Stock__Somber Corporation
300,000
Retained Earnings, January 1
200,000
Investment in Somber Corporation Stock
450,000
Noncontrolling Interest
50,000
Eliminate beginning investment balance.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-19 (continued)
E(4) Buildings and Equipment
53,500
Retained Earnings, January 1
9,450
Noncontrolling Interest
1,050
Accumulated Depreciation
64,000
Eliminate unrealized gain on upstream
sale of equipment.
E(5) Accumulated Depreciation
Depreciation Expense
Adjust depreciation for realization of
intercompany gain.

1,500
1,500

E6-20 Intercompany Sale of Services


a. Eliminating entries, 20X4:
E(1) Consulting Revenue
138,700
Consulting Fees Expense
138,700
Eliminate intercompany revenue and expense.
E(2) Accounts Payable
6,600
Accounts Receivable
6,600
Eliminate intercompany receivable/payable.
b. Consolidated net income, 20X4:
Norgaard's separate operating income
$2,342,000
Bline's net income
631,000
Eliminations:
Consulting revenue
(138,700)
Consulting fees expense
138,700
$2,973,000
Less income to noncontrolling interest:
$631,000 x .25
(157,750)
Consolidated net income, 20X4
$2,815,250

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-21A Fully Adjusted Equity Method and Cost Method


a. Fully Adjusted equity-method journal entries, 20X4:
(1) Investment in TV Sales Company Stock
45,500
Income from Subsidiary
45,500
Record equity-method income: $70,000 x .65
(2) Cash
13,000
Investment in TV Sales Company Stock
Record dividends from TV Sales Company:
$20,000 x .65

13,000

(3) Income from Subsidiary


11,000
Investment in TV Sales Company Stock
Remove unrealized gain on sale of land.
(4) Investment in TV Sales Company Stock
Income from Subsidiary
Recognize portion of gain on sale of
equipment: $8,000 x .65

11,000

5,200
5,200

Eliminating entries, December 31, 20X4:


E(1) Income from Subsidiary
39,700
Dividends Declared
13,000
Investment in TV Sales Company Stock
26,700
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest
27,300
Dividends Declared
7,000
Noncontrolling Interest
20,300
Assign income to noncontrolling interest:
$27,300 = ($70,000 + $8,000) x .35
E(3) Common Stock__TV Sales Company
300,000
Retained Earnings, January 1
145,000
Investment in TV Sales Company Stock
289,250
Noncontrolling Interest
155,750
Eliminate beginning investment balance.
E(4) Gain on Sale of Land
11,000
Land
11,000
Eliminate unrealized gain on land.
E(5) Investment in TV Sales Company Stock
Noncontrolling Interest
14,000

26,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Equipment
40,000
Eliminate unrealized gain on upstream
sale of equipment.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E6-21A (continued)
E(6) Accumulated Depreciation
Depreciation Expense
Adjust depreciation for realization of
intercompany gain.

8,000
8,000

b. Cost-method journal entry recorded by Newtime Products:


(1) Cash
13,000
Dividend Income
13,000
Record dividend income from TV Sales
Company.
Cost-method eliminating entries, December 31, 20X4:
E(1) Dividend Income
13,000
Dividends Declared
13,000
Eliminate dividend income from subsidiary.
E(2) Income to Noncontrolling Interest
27,300
Dividends Declared
7,000
Noncontrolling Interest
20,300
Assign income to noncontrolling interest:
$27,300 = ($70,000 + $8,000) x .35
E(3) Common Stock__TV Sales Company
300,000
Retained Earnings, January 1
100,000
Investment in TV Sales Company Stock
260,000
Noncontrolling Interest
140,000
Eliminate investment balance at date of
acquisition.
E(4) Retained Earnings, January 1
Noncontrolling Interest
Assign undistributed prior earnings of
subsidiary to noncontrolling interest:
$45,000 x .35

15,750
15,750

E(5) Gain on Sale of Land


11,000
Land
11,000
Eliminate unrealized gain on land.
E(6) Retained Earnings, January 1
26,000
Noncontrolling Interest
14,000
Equipment
40,000
Eliminate unrealized gain on upstream
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

sale of equipment.
E(7) Accumulated Depreciation
Depreciation Expense
Adjust depreciation for realization of
intercompany gain.

8,000
8,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

SOLUTIONS TO PROBLEMS
P6-22 Computation of Consolidated Net Income
a. Separate operating income of Petime Corporation
$34,000
Reported net income of United Grain Company $19,000
Unrealized profit of sale of land
(7,000)
Realized income for 20X4
$12,000
Proportion of stock held by Petime
x .90
$10,800
Amortization of differential ($9,000 / 10)
(900)
Contribution to 20X4 consolidated net income
9,900
Consolidated net income
$43,900
b. Separate operating income of Petime Corporation
$34,000
Reported net income by United Grain Company $19,000
Proportion of stock held by Petime
x .90
$17,100
Amortization of differential
(900)
Contribution to 20X4 consolidated income
16,200
Unrealized profit on sale of land
(7,000)
Consolidated net income
$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).
P6-23 Subsidiary Net Income
a.

Toll Corporation reported net income of $90,000 for 20X4, computed as follows:
.25(X - $20,000) = $17,500
X - $20,000 = $70,000
X = $70,000 + $20,000
X = $90,000

b.

Consolidated net income for 20X4 is $283,000, computed as follows:


Lander Corporation operating income
$234,000
Toll Corporation net income
90,000
Amortization of differential:
Purchase price
$350,000
Book value of net assets
[.75 x ($150,000 + $270,000)]
(315,000)
Differential
$ 35,000
Number of years amortized
10
(3,500)
Income to noncontrolling interest
(17,500)
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Unrealized profit on building


Consolidated net income

(20,000)
$283,000

P6-24 Consolidated Net Income


a. Operating income of Forest Corporation
$ 83,000
Part Company net income
30,000
$113,000
Unrealized profit on sale of land
(8,000)
Reported net income of Part Company
$30,000
Unrealized profit on sale of land
(8,000)
Realized income for 20X4
$22,000
Proportion of stock held by noncontrolling
Interest
x .30
Income to noncontrolling interest
(6,600)
Amortization of differential:
Purchase price
$304,000
Book value of net assets
[.70 x ($150,000 + $260,000)]
(287,000)
Differential
$ 17,000
Number of years amortized
10
(1,700)
Consolidated net income for 20X4
$96,700
b. Operating income of Forest Corporation
$ 83,000
Part Company net income
30,000
$113,000
Unrealized profit on sale of land
(8,000)
Reported net income of Part Company
$30,000
Proportion of stock held by noncontrolling
Interest
x .30
Income to noncontrolling interest
(9,000)
Amortization of differential:
Purchase price
$304,000
Book value of net assets
[.70 x ($150,000 + $260,000)]
(287,000)
Differential
$ 17,000
Number of years amortized
10
(1,700)
Consolidated net income for 20X4
$94,300

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-25 Transfer of Asset from One Subsidiary to Another


Bugle Cook Products Consolidated
Corporation Corporation
Entity
Depreciation expense

$ ---

$ 3,000

$ 2,000

Fixed assets__Warehouse

---

45,000

40,000

Accumulated depreciation

---

3,000

12,000

Gain on sale of warehouse

15,000

---

---

P6-26 Consolidation Eliminating Entry


a. Master paid Rakel $460,000 ($600,000 - $140,000).
b. Accumulated deprecation at January 1, 20X7, was $168,000, computed
Purchase price paid by Rakel
Amount paid by Master
Gain recorded by Rakel
Book value at date of sale
sale
$168,000

$600,000
$460,000
(28,000)
(432,000)

as follows:

Accumulated depreciation at date of

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
$600,000
Amount to be depreciated by Rakel ($28,000 x 20 years) (560,000)
Estimated residual value
$ 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
$ 80,000
Unrealized gain on sale of truck ($28,000 - $2,000)
(26,000)
$ 54,000
Proportion of stock held by noncontrolling interest
x .40
Income assigned to noncontrolling interest
$ 21,600
f. Reported net income of Rakel
$ 65,000
Portion of gain on sale of truck realized in 20X8
2,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

$ 67,000
Proportion of stock held by noncontrolling interest
Income assigned to noncontrolling interest

x .40
$ 26,800

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-27 Multiple-Choice Questions


1. d
2. c
3. d
4. a
5. d

P6-28 Consolidated Net Income with Intercorporate Transfers


a. Entry to record intercompany transfer of equipment, 20X6:
Cash
240,000
Accumulated Depreciation
140,000
Equipment
350,000
Gain on Sale of Equipment
30,000
Record sale of equipment to Subsidence
Mining:
$140,000 = ($350,000 / 10 years) x 4 years
b. 20X7 eliminating entries related to intercorporate transfers:
E(1) Land
60,000
Loss on Sale of Land
Eliminate unrealized loss on land:
$560,000 - $500,000

60,000

E(2) Equipment
110,000
Retained Earnings, January 1
25,000
Accumulated Depreciation
130,000
Depreciation Expense
5,000
Eliminate unrealized profit on equipment:
$110,000 = $350,000 - $240,000
$25,000 = $30,000 - $5,000
$130,000 = ($35,000 x 6) - ($40,000 x 2)
$5,000 = $40,000 - $35,000
c. Subsidence Mining's 20X7 net income:
Subsidence Mining's income to noncontrolling
shareholders
$ 45,000
Noncontrolling interest's share of subsidiary income

.30
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Subsidence Mining's realized net income


$150,000
Less unrealized loss on intercompany sale of land
(60,000)
Subsidence Mining's 20X7 net income
$ 90,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-28 (continued)
d. Skekel's 20X7 income from its separate operations:
Consolidated net income
$921,000
Less:
Proportionate share of realized income of
Subsidence Mining ($150,000 x .70)
(105,000)
Partial realization of prior year's
intercompany profit ($30,000 / 6 years)
(5,000)
Add back:
Amortization of differential ($300,000 / 20 years)
15,000
Skekel's 20X7 income from its separate operations
$826,000

P6-29 Computation of Retained Earnings following Multiple Transfers


Consolidated retained earnings, January 1, 20X8:
Great Company retained earnings, January 1
$450,000
Unrealized profit on land ($16,000 x .80)
(12,800)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 2)]
(17,600)
Consolidated retained earnings
$419,600
Consolidated retained earnings, December 31, 20X8:
Great Company retained earnings, January 1
$450,000
Operating income for 20X8
65,000
Dividends paid in 20X8
(45,000)
Investment income from Meager Company for 20X8:
Meager's net income
$30,000
Proportion of ownership held
x .80
Great Company's proportionate share
24,000
Amortization of differential
Assigned to equipment
[($325,000 - $290,000) x .80] / 10 years
(2,800)
Goodwill impairment loss
(14,000)
Great Company retained earnings
$477,200
Unrealized profit on land ($16,000 x .80)
(12,800)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 3)]
(15,400)
Consolidated retained earnings
$449,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-30 Preparation of Consolidated Balance Sheet


a. Consolidated balance sheet workpaper:
Lofton Company and Temple Corporation
Consolidated Balance Sheet Workpaper
December 31, 20X6
Item

Lofton Temple
Eliminations
ConsolCompany Corp. Debit Credit idated

Cash and Accounts


Receivable
101,000 20,000
121,000
Inventory
80,000 40,000
120,000
Land
150,000 90,000 (2) 10,000
250,000
Buildings and Equipment 400,000 300,000 (3) 9,000
709,000
Investment in Temple
Corporation Stock
150,000
(1)150,000
Debits
881,000 450,000
1,200,000
Accum. Depreciation
135,000 85,000
(3) 24,000 244,000
Accounts Payable
90,000 25,000
115,000
Notes Payable
200,000 90,000
290,000
Common Stock
100,000 200,000 (1)200,000
100,000
Retained Earnings
356,000 50,000 (1) 50,000 (2) 6,000
(3) 15,000
347,000
Noncontrolling Interest
(1)100,000
(2) 4,000 104,000
Credits
881,000 450,000 284,000 284,000 1,200,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-30 (continued)
Eliminating entries:
E(1) Common Stock__Temple Corporation
200,000
Retained Earnings
50,000
Investment in Temple Corporation Stock
150,000
Noncontrolling Interest
100,000
Eliminate investment account balance.
E(2) Land
10,000
Retained Earnings
6,000
Noncontrolling Interest
4,000
Eliminate unrealized loss on sale of land.
E(3) Buildings and Equipment
9,000
Retained Earnings
15,000
Accumulated Depreciation
24,000
Eliminate unrealized gain on sale of
equipment.
Accumulated depreciation adjustment:
Required [($100,000 / 10 years) x 5 years]
$50,000
Recorded [($91,000 / 7 years) x 2 years]
(26,000)
Required increase
$24,000
Gain recorded by Temple Corporation,
January 1, 20X5
$21,000
Realized in 20X5 and 20X6 ($3,000 x 2 years)
(6,000)
Unrealized balance, December 31, 20X6
$15,000
b. Consolidated balance sheet:
Lofton Company and Subsidiary
Consolidated Balance Sheet
December 31, 20X6
Cash and Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Total Assets
Accounts Payable
Notes Payable
Noncontrolling Interest

$121,000
120,000
250,000
$709,000
(244,000) 465,000
$956,000
$115,000
290,000
104,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Common Stock
$100,000
Retained Earnings
347,000 447,000
Total Liabilities and Stockholders' Equity
$956,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-31 Consolidation Workpaper with Intercompany Transfers


a. Eliminating entries:
E(1) Income from Subsidiary
Dividends Declared
Investment in Blank Corp. Stock
Eliminate income from subsidiary:
$19,500 = $30,000 x .65
$3,250 = $5,000 x .65

19,500
3,250
16,250

E(2) Income to Noncontrolling Interest


6,265
Dividends Declared
1,750
Noncontrolling Interest
4,515
Assign income to noncontrolling interest:
$6,265 = ($30,000 - $13,200 + $1,100) x .35
$1,750 = $5,000 x .35
E(3) Common Stock__Blank Corporation
60,000
Retained Earnings, January 1
85,000
Investment in Blank Corp. Stock
94,250
Noncontrolling Interest
50,750
Eliminate beginning investment balance:
$85,000 = $110,000 - ($30,000 - $5,000)
$94,250 = $110,500 - $16,250
$50,750= ($110,000 + $60,000 - $25,000) x .35
E(4) Sales and Service Revenue
Other Expenses
Eliminate intercompany services.
E(5) Gain on Sale of Land
Land
Eliminate gain on sale of land to
Blank Corporation.
E(6) Gain on Sale of Building
Depreciation Expense
Buildings and Equipment (net)
Eliminate gain on sale of building to
Mist Company.

24,000
24,000
4,000
4,000

13,200
1,100
12,100

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-31 (continued)
b.

Mist Company and Blank Corporation


Consolidation Workpaper
December 31, 20X4
Item

Mist Blank
Eliminations
ConsolCompany Corp. Debit Credit idated

Sales and Service


Revenue
286,500 128,500 (4) 24,000
391,000
Gain on Sale of Land
4,000
(5) 4,000
Gain on Sale of
Building
13,200 (6) 13,200
Income from Subsidiary 19,500
(1) 19,500
Credits
310,000 141,700
391,000
Cost of Goods Sold
160,000 75,000
235,000
Depreciation Expense 22,000 19,000
(6) 1,100 39,900
Other Expenses
76,000 17,700
(4) 24,000 69,700
Debits
(258,000)(111,700)
(344,600)
46,400
Income to Noncontrolling Interest
(2) 6,265
(6,265)
Net Income,
carry forward
52,000 30,000
66,965 25,100 40,135
Ret. Earnings, Jan. 1 198,000 85,000 (3) 85,000
198,000
Net Income, from above 52,000 30,000
66,965 25,100 40,135
250,000 115,000
238,135
Dividends Declared
(25,000) ( 5,000)
(1) 3,250
(2) 1,750 (25,000)
Ret. Earnings, Dec. 31,
carry forward
225,000 110,000 151,965 30,100 213,135
Cash
32,500 22,000
54,500
Accounts Receivable
62,000 37,000
99,000
Inventory
95,000 71,000
166,000
Land
40,000 15,000
(4) 4,000 51,000
Buildings and Equipment
(net)
200,000 125,000
(5) 12,100 312,900
Investment in Blank
Corporation Stock
110,500
(1) 16,250
(3) 94,250
Debits
540,000 270,000
683,400
Accounts Payable
Bonds Payable
Common Stock

35,000 20,000
180,000 80,000
100,000 60,000 (3) 60,000

55,000
260,000
100,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Retained Earnings,
from above
225,000 110,000 151,965 30,100 213,135
Noncontrolling Interest
(2) 4,515
(3) 50,750 55,265
Credits
540,000 270,000 211,965 211,965 683,400
P6-31 (continued)
c.

Mist Company and Subsidiary


Consolidated Balance Sheet
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
$ 55,000
Bonds Payable
260,000
Noncontrolling Interest
55,265
Common Stock
$100,000
Retained Earnings
213,135 313,135
Total Liabilities and Stockholders' Equity
$683,400

Mist Company and Subsidiary


Consolidated Income Statement
Year Ended December 31, 20X4
Sales
Cost of Goods Sold
Depreciation Expense
Other Expenses
Total Expenses
Income to Noncontrolling Interest
Consolidated Net Income

$391,000
$235,000
39,900
69,700
344,600
$ 46,400
(6,265)
$ 40,135

Mist Company and Subsidiary


Consolidated Retained Earnings Statement
Year Ended December 31, 20X4
Retained Earnings, January 1, 20X4
20X4 Net Income

$198,000
40,135
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

$238,135
Dividends Paid in 20X4
Retained Earnings, December 31, 20X4

(25,000)
$213,135

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-32 Consolidation Workpaper in Year of Intercompany Transfer


a. Eliminating entries, December 31, 20X6:
E(1) Income from Subsidiary
32,000
Dividends Declared
4,000
Investment in Lane Company Stock
28,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest
8,000
Dividends Declared
1,000
Noncontrolling Interest
7,000
Assign income to noncontrolling interest:
$8,000 = $40,000 x .20
E(3) Common Stock__Lane Company
100,000
Retained Earnings, January 1
105,000
Differential
40,000
Investment in Lane Company Stock
204,000
Noncontrolling Interest
41,000
Eliminate beginning investment balance.
E(4) Goodwill
Differential
Assign differential to goodwill.

40,000
40,000

E(5) Goodwill Impairment Loss


Goodwill
Recognize impairment of goodwill.

25,000
25,000

E(6) Retained Earnings, January 1


8,000
Noncontrolling Interest
2,000
Land
10,000
Eliminate unrealized gain on land.
E(7) Buildings and Equipment
5,000
Gain on Sale of Equipment
20,000
Depreciation and Amortization Expense
2,000
Accumulated Depreciation
23,000
Eliminate intercorporate sale
of equipment.
Depreciation expense adjustment:
Depreciation recorded ($70,000 / 10 years)
$ 7,000
Depreciation required ($75,000 / 15 years)
(5,000)
Required decrease
$ 2,000
Accumulated depreciation adjustment:
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Required balance ($5,000 x 6 years)


$30,000
Balance recorded ($7,000 x 1 year)
(7,000)
Required increase
$23,000
E(8) Accounts Payable
Accounts Receivable
Eliminate intercorporate
receivable/payable.

7,000
7,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-32 (continued)
b.

Prime Company and Lane Company


Consolidation Workpaper
December 31, 20X6
Item

Prime Lane
Eliminations
Company Company Debit

ConsolCredit idated

Sales
240,000 120,000
360,000
Gain on Sale of Equip. 20,000
(7) 20,000
Income from Subsidiary 32,000
(1) 32,000
Credits
292,000 120,000
360,000
Cost of Goods Sold
140,000 60,000
200,000
Deprec. & Amortization 25,000 15,000
(7) 2,000 38,000
Goodwill Impairment Loss
(5) 25,000
25,000
Other Expenses
15,000 5,000
20,000
Debits
(180,000) (80,000)
(283,000)
77,000
Income to Noncontrolling Interest
(2) 8,000
(8,000)
Net Income,
carry forward
112,000 40,000 85,000
2,000 69,000
Ret. Earnings, Jan. 1

338,000 105,000 (3)105,000


(6) 8,000
330,000
Net Income, from above 112,000 40,000
85,000
2,000 69,000
450,000 145,000
399,000
Dividends Declared
(30,000) (5,000)
(1) 4,000
(2) 1,000 (30,000)
Ret. Earnings, Dec. 31,
carry forward
420,000 140,000 198,000
7,000 369,000
Cash and Receivables
113,000 35,000
(8) 7,000 141,000
Inventory
260,000 90,000
350,000
Land
80,000 80,000
(6) 10,000 150,000
Buildings and Equipment 500,000 150,000 (7) 5,000
655,000
Investment in Lane
Company Stock
232,000
(1) 28,000
(3)204,000
Differential
(3) 40,000 (4) 40,000
Goodwill
(4) 40,000 (5) 25,000 15,000
Debits
1,185,000 355,000
1,311,000
Accum. Depreciation
205,000 45,000
(7) 23,000 273,000
Accounts Payable
60,000 20,000 (8) 7,000
73,000
Bonds Payable
200,000 50,000
250,000
Common Stock
300,000 100,000 (3)100,000
300,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Retained Earnings,
from above
420,000 140,000 198,000
7,000 369,000
Noncontrolling Interest
(6) 2,000 (2) 7,000
(3) 41,000 46,000
Credits
1,185,000 355,000 392,000 392,000 1,311,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-32 (continued)
c.

Prime Company and Subsidiary


Consolidated Balance Sheet
December 31, 20X6

Cash and Receivables


Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Goodwill
Total Assets

$ 141,000
350,000
150,000
$655,000
(273,000)
382,000
15,000
$1,038,000

Accounts Payable
Bonds Payable
Noncontrolling Interest
Common Stock
Retained Earnings
Total Liabilities and Stockholders' Equity

$ 73,000
250,000
46,000
300,000
369,000
$1,038,000

Prime Company and Subsidiary


Consolidated Income Statement
Year Ended December 31, 20X6
Sales
$ 360,000
Cost of Goods Sold
$200,000
Depreciation and Amortization Expense
38,000
Goodwill Impairment Loss
25,000
Other Expenses
20,000
Total Expenses
283,000
$ 77,000
Income to Noncontrolling Interest
(8,000)
Consolidated Net Income
$ 69,000

Prime Company and Subsidiary


Consolidated Retained Earnings Statement
Year Ended December 31, 20X6
Retained Earnings, January 1, 20X6
20X6 Net Income

$ 330,000
69,000

$ 399,000
Dividends Paid in 20X6
(30,000)
Retained Earnings, December 31, 20X6
$ 369,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-33 Intercorporate Sales in Prior Years


a. Eliminating entries, December 31, 20X8:
E(1) Income from Subsidiary
21,000
Dividends Declared
8,000
Investment in Skate Company Stock
13,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest
6,000
Dividends Declared
2,000
Noncontrolling Interest
4,000
Assign income to noncontrolling interest.
E(3) Common Stock__Skate Company
30,000
Additional Paid-In Capital__Skate Company 20,000
Retained Earnings, January 1
150,000
Differential
51,000
Investment in Skate Company Stock
211,000
Noncontrolling Interest
40,000
Eliminate beginning investment balance.
E(4) Patents
34,000
Buildings and Equipment
20,000
Accumulated Depreciation
3,000
Differential
51,000
Assign differential:
$34,000 = $40,000 - [($40,000 / 20 years)
x 3 years]
$3,000 = ($20,000 / 20 years) x 3 years
E(5) Amortization Expense
Depreciation Expense
Patents
Accumulated Depreciation
Amortize differential.

2,000
1,000
2,000
1,000

E(6) Buildings and Equipment


60,000
Retained Earnings, January 1
15,000
Depreciation Expense
1,500
Accumulated Depreciation
73,500
Eliminate unrealized profit on buildings:
$60,000 = $125,000 - $65,000
$15,000 = $65,000 - ($125,000 - $75,000)
$ 1,500 = ($65,000 / 10 years) ($125,000 / 25 years)
$73,500 = ($5,000 x 16 years) - ($6,500
x 1 year)
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

E(7) Retained Earnings, January 1


Noncontrolling Interest
Land
Eliminate unrealized profit on land.

10,400
2,600
13,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-33 (continued)
b.Pond Corporation and Skate Company
Consolidation Workpaper
December 31, 20X8
Item

Pond
Skate
Corp.
Co.

Eliminations
Debit
Credit

Consolidated

Sales
450,000 250,000
700,000
Income from Subsidiary
21,000
(1) 21,000
Interest Income
14,900
14,900
Credits
485,900 250,000
714,900
Cost of Goods Sold
285,000 136,000
421,000
Other Operating Expenses 50,000 40,000
90,000
Depreciation Expense
35,000 24,000 (5) 1,000 (6) 1,500 58,500
Interest Expense
24,000 10,500
34,500
Miscellaneous Expenses
11,900 9,500
21,400
Amortization Expense
(5) 2,000
2,000
Debits
(405,900) (220,000)
(627,400)
87,500
Income to Noncontrolling Interest
(2) 6,000
(6,000)
Net Income,
carry forward
80,000 30,000
30,000
1,500 81,500
Ret. Earnings, Jan. 1

241,400 150,000 (3)150,000


(6) 15,000
(7) 10,400
216,000
Net Income, from above
80,000 30,000
30,000
1,500 81,500
321,400 180,000
297,500
Dividends Declared
(30,000) (10,000)
(1) 8,000
(2) 2,000 (30,000)
Ret. Earnings, Dec. 31,
carry forward
291,400 170,000 205,400 11,500 267,500
Cash
68,400 47,000
115,400
Accounts Receivable
130,000 65,000
195,000
Interest and
Other Receivables
45,000 10,000
55,000
Inventory
140,000 50,000
190,000
Land
50,000 22,000
(7) 13,000 59,000
Buildings and Equipment 400,000 240,000 (4) 20,000
(6) 60,000
720,000
Investment in Skate
Company Stock
224,000
(1) 13,000
(3)211,000
Investment in Tin Co.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Bonds
Bond Discount
Differential
Patents
Debits

134,000

134,000
3,000
3,000
(3) 51,000 (4) 51,000
(4) 34,000 (5) 2,000 32,000
1,191,400 437,000
1,503,400

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-33 (continued)
Item

Pond
Skate
Corp.
Co.

Accum. Depreciation

185,000

Eliminations
Debit
Credit
94,000
(5) 1,000
(6) 73,500
11,000

Consolidated
(4) 3,000

356,500

Accounts Payable
65,000
76,000
Interest and
Other Payables
45,000 12,000
57,000
Bonds Payable
300,000 100,000
400,000
Common Stock
Pond Corporation
150,000
150,000
Skate Company
30,000 (3) 30,000
Additional Paid-In
Capital
155,000 20,000 (3) 20,000
155,000
Retained Earnings,
from above
291,400 170,000 205,400 11,500 267,500
Noncontrolling
Interest
(7) 2,600 (2) 4,000
(3) 40,000
41,400
Credits
1,191,400 437,000 423,000 423,000 1,503,400

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-34 Intercorporate Sale of Land and Depreciable Asset


a. Unamortized purchase differential, January 1, 20X5:
Purchase price
Common stock outstanding at acquisition
Retained earnings at acquisition
Book value of net assets at acquisition
Proportion of ownership acquired
Net book value acquired
Purchase differential at acquisition
Amortization of differential:
Buildings and equipment
[($25,000 x .70) / 10 years] x 2 years
Copyright
($7,500 / 5 years) x 2 years
Unamortized purchase differential

$154,500
$100,000
85,000
$185,000
x .70
(129,500)
$ 25,000
(3,500)
(3,000)
$ 18,500

b. Reconciliation between book value and investment balance at December


31, 20X5:
Underlying book value of Morris Company stock:
Common stock outstanding
$100,000
Retained earnings, January 1, 20X5
100,000
Net income for 20X5
30,000
Dividends paid in 20X5
( 5,000)
Net book value
$225,000
Proportion of ownership held by Champion
x .70
Net book value of ownership held by Champion
$157,500
Unamortized purchase differential:
Buildings and equipment ($17,500 x 7/10 years)
12,250
Copyright ($7,500 x 2/5 years)
3,000
Investment in Morris Company stock
$172,750
c. Eliminating entries:
E(1) Income from Subsidiary
17,750
Dividends Declared
3,500
Investment in Morris Company Stock
14,250
Eliminate income from subsidiary:
$17,750 = ($30,000 x .70) - $1,750 - $1,500
$3,500 = $5,000 x .70
E(2) Income to Noncontrolling Interest
Dividends Declared
Noncontrolling Interest

6,480
1,500
4,980
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Assign income to noncontrolling interest:


$6,480 = ($30,000 - $9,600 + $1,200) x .30
$1,500 = $5,000 x .30

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-34 (continued)
E(3) Common stock__Morris Company
100,000
Retained Earnings, January 1
100,000
Differential
18,500
Investment in Morris Company Stock
158,500
Noncontrolling Interest
60,000
Eliminate beginning investment balance.
E(4) Buildings and Equipment
Copyright
Accumulated Depreciation
Differential
Assign beginning differential.
E(5) Depreciation Expense
Amortization Expense
Accumulated Depreciation
Copyright
Amortize differential.

17,500
4,500
3,500
18,500
1,750
1,500
1,750
1,500

E(6) Retained Earnings


11,000
Land
11,000
Eliminate unrealized gain on land.
E(7) Equipment
8,400
Gain on Sale of Equipment
9,600
Depreciation Expense
1,200
Accumulated Depreciation
16,800
Eliminate intercorporate sale of equipment:
$8,400 = $100,000 - $91,600
$9,600 = $91,600 - ($100,000 - $18,000)
$1,200 = ($81,600 / 8 years)
- ($90,000 / 10 years)
$16,800 = ($9,000 x 3 years)
- ($10,200 x 1 year)

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-34 (continued)
d.Champion Corporation and Morris Company
Consolidation Workpaper
December 31, 20X5
Item

Champion Morris
Eliminations
ConsolCorp.
Co.
Debit
Credit
idated

Sales
450,000 190,400
640,400
Other Income
28,250
28,250
Gain on Sale of
Equipment
9,600 (7) 9,600
Income from Subsidiary 17,750
(1) 17,750
Credits
496,000 200,000
668,650
Cost of Goods Sold
375,000 110,000
485,000
Depreciation Expense
25,000 10,000 (5) 1,750 (7) 1,200 35,550
Interest Expense
24,000 33,000
57,000
Other Expenses
28,000 17,000
45,000
Amortization Expense
(5) 1,500
1,500
Debits
(452,000) (170,000)
(624,050)
44,600
Income to Noncontrolling Interest
(2) 6,480
(6,480)
Net Income,
carry forward
44,000 30,000
37,080
1,200 38,120
Ret. Earnings, Jan. 1

178,000 100,000 (3)100,000


(6) 11,000
167,000
Net Income, from above 44,000 30,000
37,080
1,200 38,120
222,000 130,000
205,120
Dividends Declared
(30,000) (5,000)
(1) 3,500
(2) 1,500 (30,000)
Ret. Earnings, Dec. 31,
carry forward
192,000 125,000 148,080
6,200 175,120
Cash
20,250 58,000
78,250
Accounts Receivable
65,000 70,000
135,000
Interest and
Other Receivables
30,000 10,000
40,000
Inventory
150,000 180,000
330,000
Land
80,000 60,000
(6) 11,000 129,000
Buildings and Equipment 315,000 240,000 (4) 17,500
(7) 8,400
580,900
Bond Discount
15,000
15,000
Investment in Morris
Company Stock
172,750
(1) 14,250
(3)158,500
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Differential
Copyright
Debits

(3) 18,500 (4) 18,500


(4) 4,500 (5) 1,500
3,000
833,000 633,000
1,311,150

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-34 (continued)
Item

Champion Morris
Eliminations
ConsolCorp.
Co.
Debit
Credit idated

Accum. Depreciation
Buildings and Equip.

120,000

60,000
(5) 1,750
(7) 16,800
61,000 28,000
30,000 20,000
250,000 300,000

(4) 3,500

202,050
Accounts Payable
89,000
Other Payables
50,000
Bonds Payable
550,000
Common Stock
Champion Corporation 150,000
150,000
Morris Company
100,000 (3)100,000
Additional Paid-In
Capital
30,000
30,000
Retained Earnings,
from above
192,000 125,000 148,080
6,200 175,120
Noncontrolling
Interest
(2) 4,980
(3) 60,000
64,980
Credits
833,000 633,000 296,980 296,980 1,311,150

P6-35 Consolidation Workpaper in Year following Intercompany Transfer


a. Income from subsidiary for 20X7:
Reported net income of Lane Company
Proportion of stock held by Prime Company
Income from Subsidiary

$45,000
x .80
$36,000

b. Reconciliation of underlying book value and balance in investment account:


Net book value reported by Lane Company
Common stock outstanding
$100,000
Retained earnings balance, January 1, 20X7 $140,000
Net income for 20X7
45,000
Dividends paid in 20X7
(35,000)
Retained earnings balance, December 31, 20X7
150,000
$250,000
Proportion of stock held by Prime Company
x .80
$200,000
Add: Goodwill
40,000
Balance in investment account
$240,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-35 (continued)
c. Eliminating entries, December 31, 20X7:
E(1) Income from Subsidiary
36,000
Dividends Declared
28,000
Investment in Lane Company Stock
8,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest
9,000
Dividends Declared
7,000
Noncontrolling Interest
2,000
Assign income to noncontrolling interest:
$9,000 = $45,000 x .20
E(3) Common Stock__Lane Company
100,000
Retained Earnings, January 1
140,000
Differential
40,000
Investment in Lane Company Stock
232,000
Noncontrolling Interest
48,000
Eliminate beginning investment balance:
$40,000 = $160,000 - $50,000 + $100,000) x .80
$232,000 = $240,000 - $8,000
$48,000 = ($100,000 + $140,000) x .20
E(4) Goodwill
Retained Earnings
Differential
Assign differential to goodwill.

15,000
25,000
40,000

E(5) Retained Earnings, January 1


8,000
Noncontrolling Interest
2,000
Land
10,000
Eliminate unrealized profit on land.
E(6) Buildings and Equipment
5,000
Retained Earnings, January 1
18,000
Depreciation and Amortization Expense
2,000
Accumulated Depreciation
21,000
Eliminate unrealized profit on equipment.
Accumulated depreciation adjustment:
Required balance ($5,000 x 7 years)
$35,000
Balance recorded ($7,000 x 2 years)
(14,000)
Required increase
$21,000
E(7) Accounts Payable
Accounts Receivable

4,000
4,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Eliminate intercorporate
receivable/payable.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-35 (continued)
d.

Prime Company and Lane Company


Consolidation Workpaper
December 31, 20X7

Prime Lane
Eliminations
ConsolItem
Company Company Debit
Credit idated
Sales
250,000 150,000
400,000
Income from Subsidiary 36,000
(1) 36,000
Credits
286,000 150,000
400,000
Cost of Goods Sold
160,000 80,000
240,000
Deprec. and Amortization 25,000 15,000
(6) 2,000 38,000
Other Expenses
20,000 10,000
30,000
Debits
(205,000)(105,000)
(308,000)
92,000
Income to Noncontrolling Interest
(2) 9,000
(9,000)
Net Income,
carry forward
81,000 45,000
45,000
2,000 83,000
Ret. Earnings, Jan. 1

420,000 140,000 (3)140,000


(4) 25,000
(5) 8,000
(6) 18,000
369,000
Net Income, from above 81,000 45,000
45,000
2,000 83,000
501,000 185,000
452,000
Dividends Declared
(60,000) (35,000)
(1) 28,000
(2) 7,000 (60,000)
Ret. Earnings, Dec. 31,
carry forward
441,000 150,000 236,000 37,000 392,000
Cash and Receivables
151,000 55,000
(7) 4,000 202,000
Inventory
240,000 100,000
340,000
Land
100,000 80,000
(5) 10,000 170,000
Buildings and Equipment 500,000 150,000 (6) 5,000
655,000
Investment in Lane
Company Stock
240,000
(1) 8,000
(3)232,000
Differential
(3) 40,000 (4) 40,000
Goodwill
(4) 15,000
15,000
Debits
1,231,000 385,000
1,382,000
Accum. Depreciation
230,000 60,000
(6) 21,000 311,000
Accounts Payable
60,000 25,000 (7) 4,000
81,000
Bonds Payable
200,000 50,000
250,000
Common Stock
300,000 100,000 (3)100,000
300,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Retained Earnings,
from above
441,000 150,000 236,000 37,000 392,000
Noncontrolling Interest
(5) 2,000 (2) 2,000
(3) 48,000 48,000
Credits
1,231,000 385,000 402,000 402,000 1,382,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-36 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) $2,500 = [$105,000 - ($50,000 + $70,000 + $30,000) x .60] / 6 years
(f) Investment in Shadow Company Stock:
$105,000 Purchase price, January 1, 20X4
30,000 Undistributed earnings from January 1, 20X4,
to January 1, 20X7 [($80,000 - $30,000) x .60]
6,000 Undistributed income for 20X7 ($10,000 x .60)
(10,000) Amortization of purchase differential
[($15,000 / 6 years) x 4 years]
$131,000 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 = $180,000 + $80,000 + [($60,000 / 5 years) x 4 years]
- [($45,000 / 3 years) x 2 years)
(k) Consolidated retained earnings at January 1, 20X7:
$380,000 Retained earnings reported by Phantom Corporation
Phantom's share of unrealized profit on sale of
equipment
$9,000 Gain recorded: [$45,000 - ($60,000 x 3 / 5)]
(3,000) Amortized in 20X6: ($9,000 / 3)
$6,000 Unamortized gain
x .60 Phantom's proportionate share
(3,600) $3,600 Reduction of Phantoms retained earnings
$376,400 Consolidated retained earnings
(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 building to Phantom
$ 33,000 Realized net income
x .40 Noncontrolling interest's proportionate share
$ 13,200 Income assigned
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-37 Multiple-Choice Questions__Computation of Various Account


Balances
1. c Income to noncontrolling interest:
[($40,000 - $8,000) x .40] = $12,800
2. b Unamortized identifiable intangible assets:
$30,000 - [($30,000 / 10 years) x 3 years] = $21,000
3. b Buildings and equipment (net), Kendel Manufacturing $300,000
Buildings and equipment (net), Trendy Products
200,000
Unrealized gain on transfer of equipment
($10,000 - $2,000)
(8,000)
Consolidated balance
$492,000
4. b Land reported by Kendel Manufacturing
$120,000
Land reported by Trendy Products
80,000
Unrealized gain on intercompany sale of land
(20,000)
Consolidated balance
$180,000
5. a Separate operating income of Kendel Manufacturing
$ 75,000
Net income of Trendy Products
40,000
$115,000
Less: Amortization of differential
($30,000 / 10 years)
(3,000)
Unrealized gain on transfer of equipment
during period ($10,000 - $2,000)
(8,000)
Income assigned to noncontrolling
interest
(12,800)
Consolidated net income
$ 91,200

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-37 (continued)
6. a Retained earnings of Kendel Manufacturing
$421,000
Unrealized gain on downstream sale of land
(20,000)
Unrealized gain on upstream sale of
equipment ($10,000 - $2,000) x .60
(4,800)
Consolidated retained earnings
$396,200
Alternate computation:
Retained earnings of Kendel Manufacturing
$421,000
Retained earnings of Trendy Products
200,000
Total
$621,000
Unrealized gain on downstream sale of land
(20,000)
Unrealized gain on upstream sale of
equipment ($10,000 - $2,000)
(8,000)
Kendel Manufacturing's proportionate share
of Trendy Products retained earnings
($200,000 x .60)
(120,000)
Trendy Products retained earnings assigned
to noncontrolling interest
($200,000 - $8,000) x .40
(76,800)
Consolidated retained earnings
$396,200
7. c Trendy Products:
Common stock outstanding
$ 90,000
Additional paid-in capital
10,000
Retained earnings
200,000
Book value of net assets
$300,000
Unrealized gain on transfer of equipment
(8,000)
$292,000
Proportion of stock held by noncontrolling interest x .40
Noncontrolling interest, December 31, 20X4
$116,800
8. b Trendy Products:
Common stock outstanding
$ 90,000
Additional paid-in capital
10,000
Retained earnings:
December 31, 20X4
$200,000
Increase in 20X4 ($40,000 - $15,000) (25,000)
Balance, December 31, 20X3
175,000
Net book value, December 31, 20X3
$275,000
Proportion of stock held by noncontrolling interest x .40
Balance, December 31, 20X3
$110,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-38 Intercompany Sale of Equipment in Prior Period at a Loss


a. Eliminating entries:
E(1) Income from Subsidiary
54,000
Dividends Declared
18,000
Investment in Block Corporation Stock
36,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest
5,700
Dividends Declared
2,000
Noncontrolling Interest
3,700
Assign income to noncontrolling interest:
$5,700 = ($60,000 - $3,000) x .10
E(3) Common stock__Block Corporation
50,000
Retained Earnings, January 1
150,000
Investment in Block Corporation Stock
180,000
Noncontrolling Interest
20,000
Eliminate beginning investment balance.
E(4) Buildings and Equipment
42,000
Depreciation Expense
3,000
Retained Earnings, January 1
16,200
Noncontrolling Interest
1,800
Accumulated Depreciation
27,000
Eliminate intercorporate sale of equipment.
Adjustment to depreciation expense
Depreciation based on original cost
($90,000 / 10 years)
$9,000
Depreciation based on intercompany sale
price ($48,000 / 8 years)
(6,000)
Adjustment to depreciation expense
$3,000
Adjustment to retained earnings
Book value of equipment at time of sale
[$90,000 - ($9,000 x 2 years)]
$72,000
Intercompany sale price
(48,000)
Loss recorded by Block on sale
$24,000
Partial realization of loss
[($9,000 - $6,000) x 2 years]
(6,000)
Loss not yet realized for consolidated
statement purposes
$18,000
Foster's proportionate share
x .90
Adjustment to retained earnings
$16,200
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-38 (continued)
Adjustment to noncontrolling interest
Loss not yet realized for consolidated
statement purposes
$18,000
Proportion of ownership held by noncontrolling
interest
x .10
Adjustment to noncontrolling interest
$ 1,800
Adjustment to accumulated depreciation
Accumulated depreciation based on original
cost [($90,000 / 10 years) x 5 years]
$45,000
Accumulated depreciation recorded by Foster
[($48,000 / 8 years) x 3 years]
(18,000)
Adjustment to accumulated depreciation
$27,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-38 (continued)
b.Foster Company and Block Corporation
Consolidation Workpaper
December 31, 20X9
Item

Foster
Co.

Block
Corp.

Eliminations
Debit
Credit

Consolidated

Sales
680,000 385,000
1,065,000
Other Income
26,000 15,000
41,000
Income from Subsidiary 54,000
(1) 54,000
Credits
760,000 400,000
1,106,000
Cost of Goods Sold
500,000 250,000
750,000
Depreciation Expense
45,000 15,000 (4) 3,000
63,000
Other Expenses
95,000 75,000
170,000
Debits
(640,000) (340,000)
(983,000)
123,000
Income to Noncontrolling Interest
(2) 5,700
(5,700)
Net Income,
carry forward
120,000 60,000
62,700
117,300
Ret. Earnings, Jan. 1 235,000 150,000 (3)150,000 (4) 16,200 251,200
Net Income, from above 120,000 60,000
62,700
117,300
355,000 210,000
368,500
Dividends Declared
(40,000) (20,000)
(1) 18,000
(2) 2,000 (40,000)
Ret. Earnings, Dec. 31,
carry forward
315,000 190,000 212,700 36,200 328,500
Cash
82,000 32,400
114,400
Accounts Receivable
80,000 90,000
170,000
Other Receivables
40,000 10,000
50,000
Inventory
200,000 130,000
330,000
Land
80,000 60,000
140,000
Buildings and Equipment 500,000 250,000 (4) 42,000
792,000
Investment in Block
Corporation Stock
216,000
(1) 36,000
(3)180,000
Debits
1,198,000 572,400
1,596,400

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-38 (continued)
Item

Foster
Co.

Block
Corp.

Eliminations
Debit
Credit

Consolidated

Accum. Depreciation
155,000 75,000
(4) 27,000 257,000
Accounts Payable
63,000 35,000
98,000
Other Payables
95,000 20,000
115,000
Bonds Payable
250,000 200,000
450,000
Bond Premium
2,400
2,400
Common Stock
Foster Company
210,000
210,000
Block Corporation
50,000 (3) 50,000
Additional Paid-In
Capital
110,000
110,000
Retained Earnings,
from above
315,000 190,000 212,700 36,200 328,500
Noncontrolling
Interest
(2) 3,700
(3) 20,000
(4) 1,800 25,500
Credits
1,198,000 572,400 304,700 304,700 1,596,400

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-39 Comprehensive Problem: Intercorporate Transfers


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

$112,500
(22,500)
$ 90,000

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


Schmid retained earnings, January 1, 20X8
$1,400,000
Schmid net income, 20X8:
Sales
$985,000
Cost of goods sold
(525,000)
Depreciation and amortization
(88,000)
Other expenses
(227,000)
Other income (loss)
(35,000)
110,000
Schmid dividends, 20X8
(20,000)
Schmid retained earnings, December 31, 20X8
$1,490,000
Schmid stockholders' equity:
Common stock
$1,000,000
Additional paid-in capital
1,350,000
Retained earnings, December 31, 20X8
1,490,000
Stockholders' equity, December 31, 20X8
$3,840,000
Rossman's ownership share
x
.75
Book value of shares held by Rossman
$2,880,000
Remaining differential at January 1, 20X8
90,000
Balance in Investment in Schmid Stock
account, December 31, 20X8
$2,970,000
c. Elimination entries:
E(1) Income from Subsidiary
Dividends Declared
Investment in Schmid Stock
Eliminate income from subsidiary.

82,500
15,000
67,500

E(2) Income to Noncontrolling Interest


Dividends Declared
Noncontrolling Interest
$36,500 = [$110,000 + $40,000
- ($40,000 / 10)] x .25

36,500
5,000
31,500

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-39 (continued)
E(3) Common Stock__Schmid
1,000,000
Additional Paid-In Capital
1,350,000
Retained Earnings, January 1
1,400,000
Differential
90,000
Investment in Schmid Stock
2,902,500
Noncontrolling Interest
937,500
Eliminate beginning investment balance:
$2,902,500 = $2,970,000 - ($110,000
- $20,000) x .75
$937,500 = ($1,000,000 + $1,350,000
+ $1,400,000) x .25
E(4) Land
Goodwill
Differential
Assign differential.

40,000
50,000
90,000

E(5) Retained Earnings, January 1


23,000
Land
23,000
Eliminate unrealized gain on land.
E(6) Buildings and Equipment
185,000
Depreciation and Amortization
4,000
Accumulated Depreciation
149,000
Other Income
(Loss on Sale of Equipment)
40,000
Eliminate unrealized loss on equipment:
$185,000 = $435,000 - $250,000
$4,000 = ($435,000 / 15) - ($250,000 / 10)
$149,000 = [($435,000 / 15) x 5] + $4,000
$40,000 = $290,000 - $250,000
E(7) Other Income
80,000
Other Expenses
80,000
Eliminate intercompany sale of services.
E(8) Current Payables
20,000
Current Receivables
20,000
Eliminate intercompany receivable/payable.
E(9) Current Payables
3,750
Current Receivables
3,750
Eliminate intercompany dividend owed:
$5,000 x .75

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-39 (continued)
d.Rossman Corporation and Schmid Distributors, Inc.
Consolidation Workpaper
December 31, 20X8
Item

Rossman

Eliminations
Schmid
Debit

ConsolCredit

idated

Sales
4,801,000 985,000
5,786,000
Income from Subsidiary 82,500
(1) 82,500
Other Income (Loss)
90,000 (35,000) (7) 80,000 (6) 40,000 15,000
Credits
4,973,500 950,000
5,801,000
Cost of Goods Sold
2,193,000 525,000
2,718,000
Depreciation
and Amortization
202,000 88,000 (6) 4,000
294,000
Other Expenses
1,381,000 227,000
(7) 80,000 1,528,000
Debits
(3,776,000) (840,000)
(4,540,000)
1,261,000
Income to Noncontrolling Interest
(2) 36,500
(36,500)
Net Income,
carry forward
1,197,500 110,000
203,000
120,000 1,224,500
Retained Earnings,
Jan. 1
1,497,800 1,400,000 (3)1,400,000
(5) 23,000
1,474,800
Net Income, from above 1,197,500 110,000
203,000
120,000 1,224,500
2,695,300 1,510,000
2,699,300
Dividends Declared
(50,000) (20,000)
(1) 15,000
(2) 5,000 (50,000)
Retained Earnings,
Dec. 31, carry forward 2,645,300 1,490,000 1,626,000
140,000 2,649,300

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-39 (continued)
Item

Rossman

Eliminations
Schmid
Debit

ConsolCredit

idated

Cash
50,700 38,000
88,700
Current Receivables
101,800 89,400
(8) 20,000
(9) 3,750 167,450
Inventory
286,000 218,900
504,900
Investment in Schmid
Stock
2,970,000
(1) 67,500
(3)2,902,500
Land
400,000 1,200,000 (4) 40,000 (5) 23,000 1,617,000
Buildings
and Equipment
2,400,000 2,990,000 (6) 185,000
5,575,000
Goodwill
(4) 50,000
50,000
Differential
(3) 90,000 (4) 90,000
Debits
6,208,500 4,536,300
8,003,050
Accumulated
Depreciation
Current Payables

1,105,000 420,000
(6) 149,000 1,674,000
86,200 76,300 (8) 20,000
(9) 3,750
138,750
1,000,000 200,000
1,200,000

Bonds Payable
Common Stock
Rossman Corporation 100,000
100,000
Schmid Distributors
1,000,000 (3)1,000,000
Additional Paid-In
Capital
1,272,000 1,350,000 (3)1,350,000
1,272,000
Retained Earnings,
from above
2,645,300 1,490,000 1,626,000
140,000 2,649,300
Noncontrolling Interest
(2) 31,500
(3) 937,500 969,000
Credits
6,208,500 4,536,300 4,364,750 4,364,750 8,003,050

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-40A Fully Adjusted Equity Method


a. Adjusted trial balance:
Item

Prime Company
Debit
Credit

Lane Company
Debit Credit

Cash and Accounts Receivable $ 151,000


$ 55,000
Inventory
240,000
100,000
Land
100,000
80,000
Buildings and Equipment
500,000
150,000
Investment in Lane Company
Stock
216,000
Cost of Goods Sold
160,000
80,000
Depreciation and Amortization 25,000
15,000
Other Expenses
20,000
10,000
Dividends Declared
60,000
35,000
Accumulated Depreciation
$ 230,000
$ 60,000
Accounts Payable
60,000
25,000
Bonds Payable
200,000
50,000
Common Stock
300,000
100,000
Retained Earnings
394,000
140,000
Sales
250,000
150,000
Income from Subsidiary
38,000
Total
$1,472,000 $1,472,000 $525,000 $525,000

b. Journal entries recorded by Prime Company:


(1) Investment in Lane Company Stock
Income from Subsidiary
Record equity-method income:
$45,000 x .80
(2) Cash
28,000
Investment in Lane Company Stock
Record dividends from Lumpy Coal:
$35,000 x .80
(3) Investment in Lane Company Stock
Income from Subsidiary
Recognize portion of gain on sale of
equipment: $20,000 / 10 years

36,000
36,000

28,000

2,000
2,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-40A (continued)
c. Eliminating entries, December 31, 20X7:
E(1) Income from Subsidiary
38,000
Dividends Declared
28,000
Investment in Lane Company Stock
10,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest
9,000
Dividends Declared
7,000
Noncontrolling Interest
2,000
Assign income to noncontrolling interest:
$9,000 = $45,000 x .20
E(3) Common Stock__Lane Company
100,000
Retained Earnings, January 1
140,000
Differential
40,000
Investment in Lane Company Stock
232,000
Noncontrolling Interest
48,000
Eliminate beginning investment balance:
$40,000 = $160,000 - ($50,000 + $100,000) x .80
$232,000 = $240,000 - $8,000
$48,000 = ($100,000 + $140,000) x .20
E(4) Goodwill
Retained Earnings
Differential
Assign differential to goodwill.

15,000
25,000
40,000

E(5) Investment in Lane Company Stock


Noncontrolling Interest
2,000
Land
10,000
Eliminate unrealized profit on land.

8,000

E(6) Buildings and Equipment


5,000
Investment in Lane Company Stock
18,000
Depreciation and Amortization Expense
2,000
Accumulated Depreciation
21,000
Eliminate unrealized profit on equipment.
Accumulated depreciation adjustment:
Required balance ($5,000 x 7 years)
$35,000
Balance recorded ($7,000 x 2 years)
(14,000)
Required increase
$21,000
E(7) Accounts Payable
Accounts Receivable

4,000
4,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Eliminate intercorporate
receivable/payable.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-40A (continued)
d.

Prime Company and Lane Company


Consolidation Workpaper
December 31, 20X7
Item

Prime Lane
Eliminations
Company Company Debit

ConsolCredit idated

Sales
250,000 150,000
400,000
Income from Subsidiary 38,000
(1) 38,000
Credits
288,000 150,000
400,000
Cost of Goods Sold
160,000 80,000
240,000
Deprec. and Amortization 25,000 15,000
(6) 2,000 38,000
Other Expenses
20,000 10,000
30,000
Debits
(205,000)(105,000)
(308,000)
92,000
Income to Noncontrolling Interest
(2) 9,000
(9,000)
Net Income,
carry forward
83,000 45,000
47,000
2,000 83,000
Ret. Earnings, Jan. 1

394,000 140,000 (3)140,000


369,000
(4) 25,000
Net Income, from above 83,000 45,000
47,000
2,000 83,000
477,000 185,000
452,000
Dividends Declared
(60,000) (35,000)
(1) 28,000
(2) 7,000 (60,000)
Ret. Earnings, Dec. 31,
carry forward
417,000 150,000 212,000 37,000 392,000
Cash and Receivables
151,000 55,000
(7) 4,000 202,000
Inventory
240,000 100,000
340,000
Land
100,000 80,000
(5) 10,000 170,000
Buildings and Equipment 500,000 150,000 (6) 5,000
655,000
Investment in Lane
Company Stock
216,000
(5) 8,000 (1) 10,000
(6) 18,000 (3)232,000
Differential
(3) 40,000 (4) 40,000
Goodwill
(4) 15,000
15,000
Debits
1,207,000 385,000
1,382,000
Accum. Depreciation
230,000 60,000
(6) 21,000 311,000
Accounts Payable
60,000 25,000 (7) 4,000
81,000
Bonds Payable
200,000 50,000
250,000
Common Stock
300,000 100,000 (3)100,000
300,000
Retained Earnings,
from above
417,000 150,000 212,000 37,000 392,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Noncontrolling Interest
Credits

(5) 2,000 (2) 2,000


(3) 48,000 48,000
1,207,000 385,000 404,000 404,000 1,382,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-41A Cost Method


a. Journal entry recorded by Prime Company:
Cash
28,000
Dividend Income
Record dividend from Lane Company.

28,000

b. Eliminating entries, December 31, 20X7:


E(1) Dividend Income
Dividends Declared
Eliminate dividend income from
subsidiary.

28,000
28,000

E(2) Income to Noncontrolling Interest


9,000
Dividends Declared
7,000
Noncontrolling Interest
2,000
Assign income to noncontrolling interest:
$9,000 = $45,000 x .20
E(3) Common Stock__Lane Company
100,000
Retained Earnings, January 1
50,000
Differential
40,000
Investment in Lane Company Stock
160,000
Noncontrolling Interest
30,000
Eliminate investment balance at date
of acquisition:
$40,000 = $160,000 - ($100,000 + $50,000) x .80
$30,000 = ($100,000 + $50,000) x .20
E(4) Retained Earnings, January 1
Noncontrolling Interest
Assign undistributed prior earnings of
subsidiary to noncontrolling interest:
($140,000 - $50,000) x .20

18,000
18,000

E(5) Goodwill
15,000
Retained Earnings, January 1
25,000
Differential
40,000
Assign differential at beginning of
period.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-41A (continued)
E(6) Retained Earnings, January 1
8,000
Noncontrolling Interest
2,000
Land
10,000
Eliminate unrealized profit on land.
E(7) Buildings and Equipment
5,000
Retained Earnings, January 1
18,000
Depreciation and Amortization Expense
2,000
Accumulated Depreciation
21,000
Eliminate unrealized profit on equipment.
E(8) Accounts Payable
4,000
Accounts Receivable
4,000
Eliminate intercorporate receivable/payable.

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

P6-41A (continued)
c.

Prime Company and Lane Company


Consolidation Workpaper
December 31, 20X7
Item

Prime Lane
Eliminations
Company Company Debit

Sales
250,000 150,000
Dividend Income
28,000
(1) 28,000
Credits
278,000 150,000
Cost of Goods Sold
160,000 80,000
Deprec. and Amortization 25,000 15,000
Other Expenses
20,000 10,000
Debits
(205,000)(105,000)
92,000
Income to Noncontrolling Interest
(2) 9,000
Net Income,
carry forward
73,000 45,000
37,000

ConsolCredit idated
400,000
400,000
240,000
(7) 2,000 38,000
30,000
(308,000)
(9,000)
2,000

83,000

Ret. Earnings, Jan. 1

348,000 140,000 (3) 50,000


(4) 18,000
(5) 25,000
(6) 8,000
(7) 18,000
369,000
Net Income, from above 73,000 45,000
37,000
2,000 83,000
421,000 185,000
452,000
Dividends Declared
(60,000) (35,000)
(1) 28,000
(2) 7,000 (60,000)
Ret. Earnings, Dec. 31,
carry forward
361,000 150,000 156,000 37,000 392,000
Cash and Receivables
151,000 55,000
(8) 4,000 202,000
Inventory
240,000 100,000
340,000
Land
100,000 80,000
(6) 10,000 170,000
Buildings and Equipment 500,000 150,000 (7) 5,000
655,000
Investment in Lane
Company Stock
160,000
(3)160,000
Differential
(3) 40,000 (5) 40,000
Goodwill
(5) 15,000
15,000
Debits
1,151,000 385,000
1,382,000
Accum. Depreciation
230,000 60,000
(7) 21,000 311,000
Accounts Payable
60,000 25,000 (8) 4,000
81,000
Bonds Payable
200,000 50,000
250,000
Common Stock
300,000 100,000 (3)100,000
300,000
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

Retained Earnings,
from above
361,000 150,000 156,000 37,000 392,000
Noncontrolling Interest
(6) 2,000 (2) 2,000
(3) 30,000
(4) 18,000 48,000
Credits
1,151,000 385,000 322,000 322,000 1,382,000

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

(Page Intentionally Left Blank)

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002