Professional Documents
Culture Documents
Obu
Obu
A Mod
n
a
l
y
s
i
s
o
f
a
l
t
e
r
n
a
t
i
v
e
s
a
l
e
s
o
f
l
a
n
d
5-1
15-20
f
r
o
m
m
i
n
o
r
i
t
y
s
t
o
c
k
h
o
l
d
e
r
p
e
r
s
p
e
c
t
i
v
e
.
5-2
E5.5
WMod
o
r
k
i
n
g
p
a
p
e
r
e
l
i
m
i
n
a
t
i
o
n
s
i
n
y
e
a
r
o
f
5-3
15-20
s
a
l
e
a
n
d
i
n
s
u
b
s
e
q
u
e
n
t
y
e
a
r
f
o
r
d
o
w
n
s
t
5-4
r
e
a
m
s
a
l
e
o
f
e
q
u
i
p
m
e
n
t
.
E5.6
WMod
o
r
k
i
n
g
p
a
p
e
r
5-5
20-30
e
l
i
m
i
n
a
t
i
o
n
s
r
e
l
a
t
i
n
g
t
o
b
e
g
i
n
n
i
n
g
a
n
d
5-6
e
n
d
i
n
g
u
n
c
o
n
f
i
r
m
e
d
i
n
t
e
r
c
o
m
p
a
n
y
p
r
o
f
i
5-7
t
s
o
n
l
a
n
d
,
m
e
r
c
h
a
n
d
i
s
e
a
n
d
e
q
u
i
p
m
e
n
t
;
5-8
b
o
t
h
u
p
s
t
r
e
a
m
a
n
d
d
o
w
n
s
t
r
e
a
m
t
r
a
n
s
f
e
r
5-9
s
c
o
n
s
i
d
e
r
e
d
.
SUMMARY OF ASSIGNMENT MATERIAL (cont=d.)
Item
Topics Covered
Leve
l
Time
E5.7
Mod
15-20
E5.8
15-20
E5.9
Mod
15-20
E5.10
Mod
20-30
E5.11
Mod
15-25
5-10
P5.1
Mod
40-50
P5.2
Mod
20-25
P5.3
50-60
P5.4
15-20
5-11
Mod
Topics Covered
Leve
l
Time
P5.5
High
40-50
P5.6
High
40-50
P5.7
40-50
P5.8
40-50
P5.9
Mod
20-25
P5.10
Mod
25-30
Topics Covered
Level
Time
P5.11
Mod
20-30
P5.12
High
40-50
CARRYBACK TABLE
The carryback table identifies the assignment items
which are new in this edition and those which are carried over
from the seventh edition. For the latter, the problem number
in the seventh edition is shown.
New
Problem
Number
Source
New
Problem
Number
Q5.1
Q5.1
E5.1
E5.1
P5.1
P5.1
Q5.2
Q5.2
E5.2
E5.2
P5.2
P5.2
Q5.3
Q5.3
E5.3
E5.3
P5.3
P5.3
Q5.4
Q5.4
E5.4
E5.4
P5.4
P5.4
Q5.5
Q5.5
E5.5
E5.5
P5.5
P5.51
Q5.6
Q5.6
E5.6
E5.6
P5.6
P5.61
Q5.7
Q5.7
E5.7
E5.7
P5.7
P5.71
Q5.8
Q5.8
E5.8
E5.8
P5.8
P5.8
Q5.9
Q5.9
E5.9
E5.9
P5.9
P5.9
Q5.10
E5.10
E5.10
P5.10
P5.10
E5.11
E5.11
P5.11
P5.11
P5.12
new
Q5.10
Source
New
Proble
m
Numbe
r
Source
ANSWERS TO QUESTIONS
Q5.1
The answer is based on the general objective of consolidated
statements; namely, to report the financial affairs of a group
of affiliated companies as if they were a single unified
economic entity. Subsidiaries are treated as if they were
branches or divisions. The general objective of the
consolidation process as it relates to intercompany
transactions is to treat intercompany transactions as if they
never occurred.
Q5.2
Gross profit or gross margin refers to the excess of revenue
from sale over the costs clearly attached to the item being
sold. The costs clearly attached are legitimately capitalized as
assets prior to sale. Acquisition costs of property and product
costs of manufactured inventories qualify. Period costs selling, general and administrative (SGA) expenses - are
normally not embodied in assets' values. It is these costs
which are deducted from gross profit to compute net profit.
Elimination of unconfirmed intercompany profits in
consolidation reduces the carrying values of transferred assets
to their original acquisition cost or book value to the
consolidated entity. If only net profit is eliminated in
consolidation, the difference between gross and net profit SGA expenses - would be capitalized in consolidation, a result
contrary to generally accepted accounting principles.
Q5.3
There will be no effect on the consolidated financial
statements. Intercompany sales and purchases are eliminated
in consolidation, as are any unconfirmed profits in ending
inventory. What remains is A's costs from its suppliers and B's
revenues from its customers, neither of which are affected by
the internal transfer price.
Q5.4
In this case, because the subsidiary is the seller, the
elimination of any unconfirmed profits in ending inventory will
affect the minority interest in net income. Otherwise, the
conclusions of answer (3) above apply.
Q5.5
(1)
(2)
Q5.5 (cont=d.)
(3)
Q5.6
There seems to be no obvious intuitive reason for deducting
unconfirmed intercompany profits on downstream sales from
the equity method accrual as they have nothing at all to do
with S's net income. Rather, the requirement is imposed by
APBO 18 through its one-line consolidation concept. In short,
the equity method accrual must reflect all consolidation
working paper adjustments which affect consolidated net
income. Such adjustments include purchase premium
amortization and elimination of unconfirmed intercompany
gains on both upstream and downstream sales.
Q5.7
There is no effect on the minority interest in net income. P
was the seller in the original transaction; the elimination of
depreciation expense represents a partial confirmation of P's
previously unconfirmed profit. There is no effect on S's income
and hence no effect on the minority interest in net income.
Q5.8
Because all the intercompany gain has previously been
confirmed, the only elimination entry that is required is the
restoration of the original (pre-sale) accumulated depreciation
(debit Equipment and credit Accumulated Depreciation).
Q5.9
The text's approach for dealing with unconfirmed
intercompany profits in beginning and ending inventories is
valid for all cost flow assumptions. The cost flow assumption
determines which units (and how much intercompany profit)
remain in ending inventory. Under FIFO the intercompany
profit in beginning inventory will normally not be present in
the ending inventory because the related goods are assumed
sold. Similarly, if LIFO is being used, any intercompany profit
in beginning inventory will also be in the ending inventory
unless inventory has declined during the year. This is true
because the units in beginning inventory are assumed to
remain in the ending inventory under LIFO.
Q5.10
The objection is based on the fact that intercompany transfer
prices are generally considered valid once the external sale
takes place. Thus a gain could be recognized by the selling
affiliate and a loss by the purchasing affiliate if the external
selling price is less than the internal transfer price.
Opportunities for manipulation are possible here also. While
we see the similarity with the LCM case, we believe that our
treatment at least succeeds in avoiding the confirmation of
intercompany profit prior to external sale.
Lower-of-cost-or-market write-downs should not be used to
trigger confirmation of intercompany profits.
SOLUTIONS TO EXERCISES
E5.1 INTERCOMPANY LAND TRANSACTIONS
Requirement 1:
Consolidated Financial Statement Working Paper
20X7
Gain on Sale of Land
50,000
Land
50,000
50,000
Land
50,000
50,000
Gain on Sale of Land
50,000
2.
3.
4.
10,000
18,000
Inventory, 1/1
(Income Statement)
28,000
840,000
Purchases
840,00
0
E5.3 (cont=d)
Inventory, 12/31
(Income Statement)
29,000
Inventory
(Balance Sheet)
29,00
0
To eliminate unconfirmed intercompany profit from ending
inventory
on both the income statement and balance sheet; $29,000 =
$40,000 - ($40,000/1.25) + $91,000 - ($91,000/1.3).
E5.4 ANALYSIS OF LAND SALE ALTERNATIVES
Under a direct sale of the land by S to the developer, S would
have a gain of $3,900,000. The minority interest in net
income would be $780,000 (= .2 x $3,900,000) and the
distribution to the minority shareholder would be $390,000
(= .5 x $780,000).
Under the intercompany sale, even though the gain is larger, it
would be eliminated in consolidation, and would not enter into
the minority interest in net income. So long as P held the land
(which it plans to do under a long-term lease), the gain would
not be reflected in minority interest in net income. Moreover,
the income from the lease is P's income, so the minority
interest would be unaffected. Under this approach, the
minority stockholder would receive nothing.
Hence, the minority stockholder should prefer the direct sale
to the developer.
5,000
Equipment
5,00
0
1,000
Depreciation
1,000
Expense
To eliminate the excess depreciation recorded by Spencer in
20X1. Spencer recorded $10,000 (=$50,000/5) whereas
depreciation based on original acquisition cost would have
been $9,000 (=$45,000/5).
Equipment
15,000
Accumulated
Depreciation
15,000
4,000
1,000
Equipment
5,00
0
To eliminate the amount of intercompany gain unconfirmed
in prior years, remove the excess depreciation recorded in
prior years and reduce the equipment to its net book value
at date of intercompany sale.
Accumulated Depreciation
1,000
Depreciation
Expense
1,000
15,000
Accumulated
Depreciation
15,000
25,000
Land
Retained Earnings - S
25,000
14,000
14,000
32,000
32,000
8,000
4,000
Equipment
Accumulated
Depreciation
12,000
2,000
Depreciation Expense
Equipment
2,000
20,000
Accumulated
20,000
Depreciation
E5.6 (cont=d)
Requirement 2:
Consolidated Financial Statement Working Paper
(Downstream)
Investment in S
25,000
Land
Investment in S
25,000
14,000
14,000
32,000
32,000
8,000
4,000
Equipment
Accumulated Depreciation
12,000
2,000
Depreciation Expense
Equipment
2,000
20,000
Accumulated
Depreciation
20,000
80,000
18,000
Purchase Premium
Depreciation Expense
98,000
6,000
Equipment
6,000
Requirement 2:
Land
80,000
Purchase Premium
80,000
Requirement 3:
No entry
E5.8 INTERCOMPANY TRANSACTIONS; EQUITY METHOD
INCOME ACCRUAL AND MINORITY INTEREST
Requirement 1:
Equity method income accrual:
Income of S ($700,000 x .8)
Unconfirmed loss - land
Unconfirmed gain, ending inventory ($40,000 x .8)
Confirmed gain, beginning inventory ($25,000 x .8)
Confirmed gain, equipment
Amortization of purchase premium
$560,000
30,000
(32,000)
20,000
8,000
(14,000)
$572,000
E5.8 (cont=d.)
Requirement 2:
Minority interest in net income:
Income of S ($700,000 x .2)
Unconfirmed gain, ending inventory ($40,000 x .2)
Confirmed gain, beginning inventory ($25,000 x .2)
Item
1.
2.
3.
4.
Decrease in
Consolidated
Net Income
$ 20,000
24,000
80,000
52,000
$176,000
Decrease in Minority
Interest In Net Income
C
$ 6,000
C
13,000
$19,000
Total
Elimination
$ 20,000
30,000
80,000
65,000
$195,000
$140,000
(8,000)
5,000
$137,000
E5.10
(1)
(2)
Requirement 1:
Schedule to Compute Equity Method Income Accrual
$150,000
PCO=s share of SCO=s net income (.75 X $200,000)
- Purchase premium amortization
(25,000)
- Downstream intercompany profit
(50,000)
- 75% of upstream intercompany profit (.75 X $40,000)
(30,000)
Equity method income accrual
$ 45,000
E5.11 (cont=d.)
Requirement 2:
PCO and SCO
Consolidated Income Statement
Sales ($2,000,000 + $1,200,000 - $400,000)
Cost of Goods Sold ($1,000,000 + $700,000
- $400,000 + $50,000 + $40,000)
Other Expenses ($600,000 + $300,000 + $25,000)
Minority Interest in Net Income [.25 ($200,000 - $40,000)]
Consolidated Net Income
$2,800,000
(1,390,000)
(925,000)
$ 485,000
(40,000)
$ 445,000
SOLUTIONS TO PROBLEMS
P5.1INTERCOMPANY TRANSFERS OF DEPRECIABLE
ASSETS
Requirement 1:
Consolidated Financial Statement Working Paper
Transaction (1)
Investment in S (2.5 x
($80,000/8))
Accumulated
Depreciation (5.5 x
$80,000/8))
25,000
55,000
Plant Assets ($160,000
- ($100,000 -$20,000))
80,000
10,000
Depreciation Expense
10,000
20,000
Accumulated
Depreciation
20,000
P5.1 (cont=d.)
Transaction (2)
Retained earnings-S
(6 x ($50,000/10))
Accumulated
Depreciation (4 x
($50,000/10))
30,000
20,000
Plant Assets ($200,000
- ($450,000 $300,000))
50,000
5,000
Depreciation Expense
5,000
300,00
0
Accumulated
Depreciation
300,00
0
P5.1 (cont=d.)
Transaction (3)
Plant Assets ($200,000 ($600,000 - $360,000))
40,00
0
Investment in S
(4 x $40,000/5))
Accumulated
Depreciation
($40,000/5)
32,000
8,000
8,000
Accumulated
Depreciation
8,000
360,00
0
Accumulated
Depreciation
360,000
30,000
Gain on Sale of Plant
Assets
30,000
P5.2 (cont=d.)
Requirement 4:
Equipment: $120,000
Accumulated depreciation: $75,000
Book value was $45,000 (= $85,000 sale price minus $40,000
gain). Add the seller's accumulated depreciation of $75,000 to
get seller's cost.
Requirement 5:
Equipment: $120,000 (= $85,000 - $40,000 + $75,000)
Accumulated depreciation: 93,000 (=(4 x $8,500) - $16,000 +
$75,000)
P5.3CONDENSED CONSOLIDATED FINANCIAL
STATEMENT WORKING PAPER--INTERCOMPANY
INVENTORY TRANSACTIONS
Requirement 1:
Schedule to Calculate the Equity Method Income Accrual
P's share of S's reported net income (.9 x $900,000)
Plus P's intercompany profits in S's beginning inventory
(downstream)
Plus P's share of S's intercompany profits in P's beginning
inventory (.9 x $100,000; upstream)
Less P's intercompany profits in S's ending
inventory(downstream)
Less P's share of S's intercompany profits in P's ending
inventory (.9 X $80,000; upstream)
Equity method income accrual
$810,00
0
60,000
90,000
(75,000)
(72,000)
$813,00
0
P5.3 (cont=d.)
Income Statement
Sales
Income from S
Inventory, December 31
Total Credits
Inventory, January 1
Purchases
Operating Expenses
Total Debits
Minority Interest in
Net Income
Net Income-to Retained
Earnings Statement
P Company
15,000,000
813,000
1,950,000
17,763,000
2,000,000
9,000,000
4,150,000
15,150,000
S Company
6,000,000
-980,000
6,980,000
950,000
3,200,000
1,930,000
6,080,000
--
--
2,613,000
900,000
6,700,000
--
2,613,000
(1,000,000)
--
8,313,000
--
2,300,000
900,000
-(400,000)
2,800,000
92,000
Consolidated
15,100,000
-2,775,000
17,875,000
2,790,000
6,300,000
6,080,000
15,170,000
(92,000)
6,960,000
6,060,000
2,613,000
6,700,000
(3)
(5)
100,000
2,200,000
6,960,000
-6,060,000
(1)
(6)
9,260,000
360,000
40,000
6,460,000
2,613,000
(1,000,000)
-8,313,000
P5.3 (cont'd.)
Adjustments & Eliminations
Dr.
Cr.
P Company
S Company
1,950,000
3,453,000
980,000
--
10,810,000
16,213,000
5,120,000
6,100,000
4,900,000
3,000,000
--
2,100,000
-1,200,000
8,313,000
--
2,800,000
--
9,260,000
16,213,000
6,100,000
10,460,000
6,460,000
340,000
52,000
6,852,000
10,520,000
10,520,000
Consolidated
Balance Sheet
Inventory
Investment in S
Other Assets
Total
Liabilities
Capital Stock-P
Capital Stock-S
Retained Earnings-from Ret.
Earn. Stmt.
Minority Interest in S
Total
(3)
60,000
(4)
155,000
(1)
453,000
(5) 3,060,000
60,000
3,668,000
2,775,000
-15,930,000
18,705,000
7,000,000
3,000,000
--
(5) 1,200,000
(5)
(6)
8,313,000
392,000
18,705,000
P5.3 (cont'd.)
Formal Eliminating Entries
(Not Required)
(1)
Income from S
813,000
Dividends - S
Investment in S
360,000
453,000
5,900,00
0
Purchases
5,900,00
0
60,000
100,000
Inventory, January 1,
Income Statement
160,000
155,000
Inventory, Balance
Sheet
155,000
P5.3 (cont=d.)
(5)
Retained Earnings - S,
January 1
2,200,00
0
1,200,00
0
Capital Stock - S
Investment in S
3,060,00
0
340,000
Minority Interest in S
92,000
Dividends - S
Minority Interest in S
40,000
52,000
$90,000
10,000
(8,000)
$92,000
P5.4
BONUS BASED ON ADJUSTED SUBSIDIARY
INCOME
Net income before taxes
Adjustment for unconfirmed intercompany
inventory profits:
Increase in inventory
Percent acquired from parent
Increase in intercompany inventory
Gross margin percentage
Unconfirmed intercompany inventory profit
Plus interest paid to parent (= $600,000 x .10)
Revised income base
Less 40% for corporate costs and income taxes
Base for bonus
Bonus
$150,00
0
$380,000
x
.8
$304,000
x .35
(106,400
)
60,000
$103,60
0
(41,440)
$ 62,160
x .15
$ 9,324
P5.5CONSOLIDATED INCOME
STATEMENTCINTERCOMPANY TRANSACTIONS
Requirement 1:
Pow Company and Sow Company
Schedule to Compute the Equity Method Income Accrual
Pow's share of Sow's reported net income (.95 x
$800,000)
Plus Pow's share of Sow's intercompany profit in Pow's
beginning inventory, now assumed confirmed (.95 x
$400,000)
Less Pow's unconfirmed intercompany profit in Sow's
ending inventory
Plus Pow's share of Sow's unconfirmed loss on an
intercompany sale of land (.95 x $100,000)
Less Pow's unconfirmed gain on intercompany sale of
machinery at the beginning of the year [$250,000 $250,000/5)]
Plus Pow's gain on prior year intercompany sale of land
now confirmed through external sale
Net equity method income accrual
$760,000
380,000
(200,000)
95,000
(200,000)
60,000
$895,000
P5.5 (cont=d.)
Requirement 2:
Sales
Other Income
Total Revenue
Cost of Goods sold
Operating Expenses
Other Expenses
Total Expenses
Minority Interest in Net Income
Consolidated Net Income
Consolidated Retained Earnings, January 1
Dividends
Consolidated Retained Earnings, December 31
$32,000,000
(1)
1,510,000 (2)
$33,510,000
$23,400,000(3)
5,850,000(4)
1,000,000(5)
$30,250,000
$ 65,000(6)
$ 3,195,000
15,700,000
(1,000,000)
$17,895,000
P5.6
CALCULATION OF CONSOLIDATED RETAINED
EARNINGS
Requirement 1
Calculation of Consolidated Retained Earnings
Philip's retained earnings from its own operations
Plus 75 percent of Samson's total net income since
acquisition (.75 x $4,000,000)
Less 75 percent of unconfirmed gain on upstream
intercompany sale of land [.75 (%56,000 - $40,000)]
Less original gain on downstream intercompany sale of
patent ($80,000 - $10,000)
Plus portion of intercompany gain on patent assumed
confirmed through amortization [3($80,000 $10,000)/10]
Less unconfirmed intercompany profit in Samson's
ending inventory (downstream)
Less 75 percent of unconfirmed intercompany profit in
Philip's ending inventory (upstream; .75 x $60,000)
Less four years of purchase premium amortization:
Depreciable assets [4(.75 x $120,000/5)]
Goodwill impairment
Consolidated retained earnings, December 31, 20X4
$4,750,000
3,000,000
(12,000)
(70,000)
21,000
(85,000)
(45,000)
(72,000)
(11,000)
$7,476,000
P5.6 (cont=d.)
Requirement 2:
The difference between consolidated retained earnings
and Philip's retained earnings from its own operations equals
the sum of Philip's equity method accruals during 20X1-20X4.
It is the increment to consolidated net income represented by
Philip's share of Samson's earnings, adjusted for purchase
premium amortization and unconfirmed intercompany profits.
Under the equity method, the investment account is reduced
by the parent's share of the subsidiary's dividends. Therefore,
the balance in the investment account at December 31, 20X4,
under the equity method, is $2,826,000 [=$1,900,000 +
($7,476,000 - $4,750,000) - (.75 x $2,400,000)].
P5.7
EQUITY ACCRUAL AND ELIMINATING ENTRIES-INTERCOMPANY ASSET TRANSFERS, SERVICES, AND
RECEIVABLES/PAYABLES
Requirement 1:
Schedule to Compute P's 20X4 Equity Method Income Accrual
P's share of S's net income (.8 X $200,000)
Plus intercompany profits in S's beginning inventory
(downstream sales) (.2 x $25,000)
Less 80% of intercompany profits in P's ending inventory
(upstream sales) (.8 x .2 x $40,000)
Less 80% of unconfirmed gain on upstream intercompany
sale of machinery; .8 [$20,000 - ($20,000/5)]
Purchase premium amortization ($50,000/20)
Equity method income accrual
$160,000
5,000
(6,400)
(12,800)
(2,500)
$143,300
P5.7 (cont=d.)
Requirement 2:
Consolidated Financial Statement Working Paper
Income from S
143,30
0
Dividends - S
(.8 x .4 x $200,000)
Investment in S
64,000
79,300
10,000
Land
10,000
250,00
0
Purchases
250,00
0
5,000
Inventory, 1/1/X4,
I/S
5,000
8,000
Inventory, B/S
8,000
20,000
Machinery
20,000
P5.7 (cont=d.)
Accumulated Depreciation
4,000
Depreciation
Expense
4,000
30,000
Accumulated
Depreciation
30,000
15,000
Computer Service
Expense
15,000
2,000
Accounts
Receivable
2,000
50,000
1,580,00
0
Investment in S
(2)
Accumulated
Depreciation
Minority Interest
in S (3)
1,311,50
0
2,500
316,000
P5.7 (cont=d)
(1)
(2)
$150,000 x 80% =
unconfirmed upstream land profit
unconfirmed downstream profit in ending inventory
purchase premium amortization (depreciation)
Equity in net income of S, 20X3
(3)
$120,000
( 8,000)
( 5,000)
( 2,500)
$104,500
$316,000 = .2 x $1,580,000.
Depreciation Expense
2,500
Accumulated
Depreciation
2,500
35,200
Dividends - S (.2 x .
4 x $200,000)
Minority Interest in
S
16,000
19,200
P5.8
EQUITY ACCRUAL AND ELIMINATING ENTRIES-INTERCOMPANY ASSET TRANSFERS
Requirement 1:
Schedule to Compute P's 20X8 Equity Method Income Accrual
P's share of S's reported net income (.8 x $130,000)
Plus P's share of upstream intercompany profit in
beginning inventory, confirmed during 20X8 (.8 x
$20,000)
Less purchase premium amortization (depreciation) in
20X8 ($200,000/5)
Less unconfirmed downstream intercompany profit in
ending inventory
Less gain on downstream intercompany sale of
machinery
Plus portion of intercompany equipment gain assumed
confirmed via depreciation in 20X8 ($6,000/6)
Equity method income accrual
$104,000
16,000
(40,000)
(12,000)
(6,000)
1,000
$ 63,000
Requirement 2:
Consolidated Financial Statement Working Paper
Income from S (see
above)
63,000
Dividends - S (.8 x
$65,000)
Investment in S
52,000
11,000
20,000
Inventory 1/1/X8, I/S
20,000
P5.8 (cont=d.)
Inventory, 12/31/X8, I/S
12,000
Inventory, B/S
12,000
6,000
Equipment
6,000
1,000
Depreciation Expense
1,000
132,00
0
Purchases
132,00
0
1,030,000
160,000
Investment in S (3)
Minority Interest in S
(4)
984,000
206,000
previously.
P5.8 (cont=d.)
(2)
(3)
(4)
$80,000
( 40,000)
( 16,000)
$24,000
Depreciation Expense
40,00
0
Accumulated Depreciation
40,000
30,00
0
Dividends - S (.2 x .5 x
$130,000)
Minority Interest in S
13,000
17,000
P5.9
COMPREHENSIVE INTERCOMPANY
TRANSACTIONS
Stockholders' equity S
7,000,000
Investment in S
Sales
7,000,000
60,000,00
0
Purchases (cost of
goods sold)
Investment in S
60,000,00
0
2,000,000
Beginning inventory
(cost of goods sold)
Ending inventory
(cost of goods sold)
2,000,000
2,600,000
2,600,000
8,000,000
Franchise fee
expense
Interest revenue
8,000,000
4,000,000
Interest expense
Liabilities
4,000,000
43,000,00
0
43,000,00
0
P5.10
COMPREHENSIVE INTERCOMPANY
TRANSACTIONS
Requirement 1:
(a)
Land
25,000
Loss on sale
25,000
(b)
Ending inventory, I/S
(cost of goods sold)
45,000
Inventory
45,000
(c)
Retained Earnings - S
28,000
Beginning inventory,
I/S (cost of goods
sold)
28,000
(d)
Investment in S
Accumulated
depreciation
56,000
24,000
Equipment
Equipment
80,000
270,000
Accumulated
depreciation
Accumulated
depreciation
270,000
8,000
Depreciation expense
8,000
P5.10 (cont=d.)
Requirement 2:
Increase EMIA by
($ amount)
Transactio
n
a.
b.
c.
d.
Decrease EMIA by
($ amount)
No effect
(check)
25,000
36,000
22,400
8,000
Requirement 3:
Transaction
a.
b.
c.
d.
P5.11
Increase MINI by
($ amount)
Decrease MINI by
($ amount)
No effect
(check)
9,000
5,600
Requirement 1:
The key to this problem lies in calculating the unconfirmed intercompany profit
in ending inventory. Selling companies= per-unit markups in current year sales
are shown below. These amounts are in the buyers= ending inventories; i.e.,
Pin=s $40 markup is in Stick=s ending inventory and Stick=s $8 markup is in
Pin=s ending inventory.
Pin: .2 X $200,000/1,000 =
Stick: [(.2/1.2) X $600,000]/12,500 =
$40
$ 8
Under FIFO, with an inventory turnover of at least one, all units in beginning
inventories are sold and profits confirmed, thereby increasing group income.
Unconfirmed ending inventory profits result entirely from current year sales
and reduce group income.
P5.11 (cont=d.)
In sum:
Increase (Decrease) in
Group Income
Total beginning intercompany profit confirmed ($42,000 +
$17,000)
Intercompany profit in Pin=s ending inventory unconfirmed
($8 X 8,000)
Intercompany profit in Stick=s ending inventory unconfirmed (
$40 X 1,000)
Decrease in group income under FIFO
$ 59,000
(64,000)
(40,000)
$(45,000)
Requirement 2:
Under LIFO, with both inventories remaining constant or increasing, ending
intercompany profits consist of the beginning layer(s) plus, in the case of Pin,
$32,000 in profits on 4,000 units of current year purchases from Stick. Thus
the only effect on group income is a decrease of $32,000:
Increase (Decrease) in
Group Income
Total beginning intercompany profit confirmed ($42,000 +
$17,000)
Intercompany profit in Pin=s ending inventory unconfirmed
($42,000 + $32,000)
Intercompany profit in Stick=s ending inventory unconfirmed
Decrease in group income under FIFO
$ 59,000
(74,000)
(17,000)
$(32,000)
P5.11 (cont=d.)
Requirement 3:
The fact that group income is higher under LIFO by $13,000 (= $45,000 $32,000) is explained by observing that Stick=s per-unit markup decreased to
$8 from $10.50 (= $42,000/4,000) and Pin=s per-unit markup increased to $40
from $17 (= $17,000/1,000). Net of intercompany profit, Stick=s ending
inventory is $23,000 higher under LIFO ($17,000 is eliminated, $23,000 less
than the $40,000 eliminated under FIFO) whereas Pin=s ending inventory is
$10,000 lower under LIFO ($74,000 is eliminated, $10,000 more than the
$64,000 eliminated under FIFO).
LIFO income higher for Pin (based on sales to Stick)
[= ($40 - $17) X 1,000]
LIFO income lower for Stick (based on sales to Pin)
[= ($8 - $10.50) X 4,000]
Group income higher under LIFO than under FIFO
$ 23,000
(10,000)
$ 13,000
P5.12
$61,000,000
7,910,000
$68,910,000
$38,850,000
12,010,000
1,440,000
$52,300,000
$ 1,132,000
$15,478,000