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Chapter 06 - Intercompany Transfers of Services And Noncurrent Assets

CHAPTER 6

INTERCOMPANY TRANSFERS OF SERVICES AND 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 If the purchaser records the services received as an expense, both revenues and
expenses will be overstated in the consolidated income statement in the period in which the
intercorporate services are provided. In the event the services are capitalized by the
purchaser, the cost of the asset will be overstated, depreciation expense and accumulated
depreciation will be overstated if the services are assigned to a depreciable asset, and
service revenue will be overstated.

Q6-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net
income of the seller.

(b) All unrealized profit on current-period intercorporate sales must be excluded from
consolidated net income until realized through resale to a nonaffiliate.

Q6-5 Profits on intercompany sales are included in consolidated net income in the period in
which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one
of the companies at the start of the period and the item is sold to a nonaffiliate during the
current period, the intercompany profit is included in the computation of consolidated net
income for the current period.

Q6-6 The profits continue to be unrealized in this case and therefore must be eliminated
from both the beginning and ending asset and retained earnings balances when consolidated
statements are prepared. There should be no income statement effect for the current period.

Q6-7 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is
not resold before the end of the period, the subsidiary is the company holding the asset at
year-end and any unrealized profits are recorded on the books of the parent company.

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Chapter 06 - Intercompany Transfers of Services And Noncurrent Assets

Q6-8 The entire balance of unrealized profits is eliminated in all cases. While the direction
of the sale will affect the allocation of unrealized profits between companies, it does not
change the total amount of profit eliminated.

Q6-9 Consolidated net income is reduced by the amount of unrealized profits assigned to
the shareholders of the parent company. When a downstream sale occurs, all the profit is on
the parent's books and consolidated net income is reduced by the full amount of any
unrealized profit. On the other hand, when an upstream sale occurs, all the intercorporate
profit is recorded on the books of the subsidiary and the amount of income assigned to both
the parent company shareholders and the noncontrolling shareholders is reduced by a
proportionate amount of any unrealized profit.

Q6-10 The amount of intercorporate profit realized in the current period from prior years'
sales to the parent is added to the reported net income of the subsidiary in computing
income assigned to the noncontrolling interest.

Q6-11 Income assigned to noncontrolling interest for the current period will be less than a
proportionate share of the reported net income of the subsidiary. In determining the amount
of income to be assigned to the noncontrolling interest in the consolidated income statement,
the net income reported by the subsidiary must be adjusted to exclude any unrealized gain
recorded during the period on the sale of depreciable assets to the parent. On the other
hand, if an unrealized loss had been recorded, the basis used in assigning income to the
noncontrolling interest would be greater than the reported net income of the subsidiary.
Such adjustments must be made to assure that the income assigned to noncontrolling
interest is based on the contribution of the subsidiary to consolidated net income rather than
the amount the subsidiary may have reported as net income.

Q6-12 All other factors being equal, the income assigned to noncontrolling interest will be
larger if the sale occurs at the start of the current period. Some part of the gain will be
considered realized in the current period as the parent depreciates the asset if the sale
occurs before year-end. None of the gain will be considered realized in the period of transfer
if the sale occurs at year-end.

Q6-13 As in all other cases, income from the subsidiary recorded on the parent's books
must be eliminated in preparing the consolidated income statement and an appropriate
amount of subsidiary net income must be assigned to the noncontrolling interest if the parent
owns less than 100 percent of the subsidiary's stock. The gain recorded on the parent's
books also must be eliminated.

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Chapter 06 - Intercompany Transfers of Services And Noncurrent Assets

Q6-14 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of
the consolidated entity when the subsidiary pays the parent more than book value for the
asset at the start of the period. As a result, an eliminating entry is needed to reduce
depreciation expense and accumulated depreciation by the amount of excess depreciation
recorded during 20X3.

Q6-15 Following an intercorporate sale of a depreciable asset, the eliminating entries should
adjust the balance in the asset account to reflect the original purchase price to the first owner
and accumulated depreciation should be adjusted to reflect the balance that would be
reported if the asset were still held by the first owner. In the case of an intercorporate sale of
an intangible asset, only the unamortized balance normally is reported and an eliminating
entry is needed to adjust the carrying value to that which would be reported if the asset were
still held by the first owner.

Q6-16 Profit on an intercorporate sale of land is considered realized at the time the
purchaser sells the land to a nonaffiliate. Profit on equipment normally is considered realized
as the asset is used and depreciated on the books of the purchaser. Equipment typically is
considered to be used up in the production process and therefore is charged to expense over
its remaining economic life, while land is not.

Q6-17 A portion of the profit is considered realized each period as the asset is depreciated
by the purchaser. Thus, the net amount considered unrealized decreases each period and a
smaller debit to beginning retained earnings is needed.

Q6-18A The balance in the investment account will depend on which method the parent uses
to account for its investment in the subsidiary. If the parent uses (a) the cost method or (b)
the 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.

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Chapter 06 - Intercompany Transfers of Services And Noncurrent Assets

SOLUTIONS TO CASES

C6-1 Correction of Elimination Procedures

MEMO

To: Controller
Plug Corporation

From: , CPA

Re: Elimination of Intercompany Profit on Equipment

This memo is in response to our review of the elimination procedures used in preparing the
consolidated statements for Plug Corporation at December 31, 20X2. You have correctly
identified the need to eliminate the effects of the intercorporate sale of equipment. In
preparing your consolidated statements, all intercompany balances and transactions should
be eliminated. [ARB 51, Par. 6]

Your eliminating entry recorded at December 31, 20X2, was:

E(1) Equipment 150,000


Loss on Sale of Equipment 150,000

This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the
sale of equipment to Plug and adds $150,000 to the equipment account. By adding back
$150,000 to equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000). This
represents the carrying value of the equipment on Coy’s books at the time of sale but does
not reflect the purchase price paid by Coy ($1,200,000) or the accumulated depreciation at
the time of sale ($200,000). Moreover, eliminating entry E(1) understates depreciation
expense for the year. The correct eliminating entry at December 31, 20X2, is:

E(2) Equipment 350,000


Depreciation Expense 15,000
Accumulated Depreciation 215,000
Loss on Sale of Equipment 150,000

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C6-1 (continued)

A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by
Plug to $1,200,000, the initial purchase price to the consolidated entity. Depreciation
expense must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug
to $100,000 ($1,200,000/12 years) based on the initial purchase price. Accumulated
depreciation must be credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x
1 year] reported by Plug to $300,000 [($1,200,000/12 years) x 3 years]. As previously noted,
the $150,000 loss recorded by Coy must be eliminated. If the amounts included in eliminating
entry E(2) are omitted, consolidated net income for 20X2 and the retained earnings balance
at December 31, 20X2, will be overstated and the balances for equipment and accumulated
depreciation will be understated.

Primary citation:
ARB 51, Par. 6

C6-2 Elimination of Intercorporate Services

MEMO

To: Chief Accountant


Dream Corporation

From: , CPA

Re: Elimination of Legal Services Provided by Parent Company

This memo is in response to our discussion regarding the elimination of intercompany


services in preparing consolidated financial statements for Dream Corporation. It is my
understanding that at present Dream Corporation does not eliminate such services. In
preparing consolidated financial statements all intercompany balances and transactions
should be eliminated. [ARB 51, Par. 6]

The legal services provided by Dream Corporation to Classic Company and Plain
Company are intercompany transactions that should be eliminated. If the revenues
recorded by the parent are equal to the expenses recorded by the subsidiaries and both
are properly recorded, elimination of these transactions will have no impact on reported
net income but will reduce consolidated revenues and expenses by equal amounts.
Financial statement readers will receive a more accurate picture of operations of the
consolidated entity if the appropriate amounts are reported. The legal services provided to
Classic Company in 20X3 should be eliminated with the following entry:

E(1) Legal Services Revenue 80,000


Legal Services Expense 80,000

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

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


additional adjustment is needed in the consolidation process. Although Plain Company
recorded its $150,000 payment to the parent as a legal expense, it should have been
recorded as an investment in land to be used in future development of its strip mine.
This error should be corrected on the books of Plain Company. If it is not, the
eliminating entry prepared at December 31, 20X3, should include an adjustment to
reflect the appropriate investment in land and would be recorded as:

E(2) Legal Services Revenue 150,000


Land 100,000
Legal Services Expense 150,000
Wage and Salary Expense 100,000

Care must be taken to capitalize only the cost of legal services in this case. The
eliminating entry should contain a debit of $100,000 ($150,000/1.50) to land since
Dream Corporation bills its services to the subsidiaries at 150 percent of the cost of
services provided. Had Plain Company debited land for its $150,000 payment to
Dream, the eliminating entry at December 31, 20X3, would have been:

E(3) Legal Services Revenue 150,000


Land 50,000
Wage and Salary Expense 100,000

No eliminating entry would be required at December 31, 20X4, on the legal services
provided to Classic Company in 20X3. The conditions of the intercorporate transfer of
services to Plain Company require an eliminating entry at December 31, 20X4, and in
following years, as long as Plain Company owns the strip mine. The entry at December
31, 20X4, would be:

E(4) Land 100,000


Retained Earnings 100,000

Had Plain Company debited land for its $150,000 payment to Dream in 20X3, the
eliminating entry at December 31, 20X4, would require a $50,000 debit to retained
earnings and a $50,000 credit to land.

Primary citation:
ARB 51, Par. 6

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

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,
adjusted for the noncontrolling interest’s share of any amortization or write-off of
differential.

b. When there are no unrealized profits on the subsidiary's books, the noncontrolling
interest is reported in the consolidated balance sheet at an amount equal to a pro rata
portion of the book value of the net assets of the subsidiary plus the noncontrolling
interest’s share of any remaining differential.

c. The effect of unrealized intercompany profits depends on which company has


recorded the profits. Those recorded on the books of the parent do not affect the
income assigned to the noncontrolling interest. When subsidiary net income includes
unrealized intercompany profits, the portion of consolidated net income assigned to the
noncontrolling interest is reduced by its portion of the unrealized profit in the period of
the intercorporate sale.

(1) On a sale of land, the intercompany profit remains unrealized until the land is sold
to a nonaffiliate. When the land is resold, the profit is added to the reported net income
of the subsidiary in computing the portion of consolidated net income assigned to the
noncontrolling interest.

(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany


profit is considered realized each period as the purchaser depreciates the asset. Thus,
in the period of the intercorporate sale, the adjustment to subsidiary net income for
unrealized profits is based on the gain or loss less any portion considered realized
before the end of the period. Each period thereafter, a portion of the profit or loss is
considered realized and treated as an adjustment to subsidiary income in determining
the portion of consolidated net income assigned to the noncontrolling interest.

d. Noncontrolling shareholders of a subsidiary generally will not gain a great deal of


useful information from the consolidated financial statements. Their primary focus must
continue to be on the income, assets, and liabilities of the subsidiary in which they hold
direct ownership. In the event there are a number of transactions with the parent or
other affiliates, the success of the operations of the entire economic entity may provide
information useful to the noncontrolling shareholders. Debt guarantees or other
assurances by the parent may also lead to an examination of the parent company and
consolidated statements.

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

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. Note that financial statements are often included in the Form 10-K by
reference to the company’s annual report. In such cases, the financial statements are
often shown in a separate exhibit rather than in Item 8 of the Form 10-K.

a. 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 discontinued the


use of regulatory accounting as provided by FASB 71 in 1994 and now no longer
applies the provisions of FASB 71.

c. All of Harley-Davidson’s (www.harleydavidson.com) intercompany transactions are


eliminated except some occurring between the Motorcycles and Financial Services
segments. Some interest and fees recognized as income by Financial Services and
expense by Motorcycles are not eliminated. This leads to higher finance income and
higher expenses, but net income is unaffected.

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

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


by Top Corporation over the remaining 3 years of ownership. As a result, Top
Corporation will debit depreciation expense for $13,000 each year. Gold
Company had charged $16,000 to accumulated depreciation in 2 years, for an
annual rate of $8,000. Depreciation expense therefore must be reduced by
$5,000 ($13,000 - $8,000) in preparing the consolidated statements.

4. a TLK Corporation will record the purchase at $39,000, the amount it paid. Gold
Company had the equipment recorded at $40,000; thus, a debit of $1,000 will
raise the equipment balance back to its original cost from the viewpoint of the
consolidated entity.

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

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. c Operating income reported by Top 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)
Consolidated net income $120,000

E6-3 Elimination Entries for Land Transfer

a. Eliminating entry, December 31, 20X4:

E(1) Gain on Sale of Land 10,000


Land 10,000

Eliminating entry, December 31, 20X5:

E(1) Retained Earnings, January 1 10,000


Land 10,000

b. Eliminating entry, December 31, 20X4:

E(1) Gain on Sale of Land 10,000


Land 10,000

Eliminating entry, December 31, 20X5:

E(1) Retained Earnings, January 1 6,000


Noncontrolling Interest 4,000
Land 10,000

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-4 Intercompany Services

a. Consolidated net income will not change.

b. One hundred percent of the intercompany services must always be eliminated.


Thus, a change in the level of ownership of the subsidiary will not have an impact
on the amount eliminated or on consolidated net income.

c. $38,000 = $70,000 - $32,000

E6-5 Elimination Entries for Intercompany Services

Two eliminating entries are required:

E(1) Delivery Service Revenue 76,000


Delivery Service Expense 76,000

E(2) Accounts Payable 18,000


Accounts Receivable 18,000

E6-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale

a. Eliminating entry, December 31, 20X6

E(1) Truck 5,000


Gain on Sale of Truck 10,000
Accumulated Depreciation 15,000

b. Eliminating entry, December 31, 20X7:

E(1) Truck 5,000


Retained Earnings, January 1 10,000
Depreciation Expense 1,000
Accumulated Depreciation 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

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-7 Transfer of Land

a. Eliminating entry, December 31, 20X2:

E(1) Gain on Sale of Land 45,000


Land 45,000

Eliminating entry, December 31, 20X3:

E(1) Retained Earnings, January 1 31,500


Noncontrolling Interest 13,500
Land 45,000

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

E(1) Retained Earnings, January 1 30,000


Land 30,000

E6-8 Transfer of Depreciable Asset at Year-End

a. Eliminating entry, December 31, 20X5:

E(1) Truck 90,000


Gain on Sale of Truck 30,000
Accumulated Depreciation 120,000

Computation of gain on sale of truck:


Price paid by Minnow $210,000
Cost of truck to Frazer $300,000
Accumulated depreciation
($300,000 / 10 years) x 4 years (120,000) (180,000)
Gain on sale of truck $ 30,000

b. Eliminating entry, December 31, 20X6:

E(1) Truck 90,000


Retained Earnings, January 1 30,000
Depreciation Expense 5,000
Accumulated Depreciation 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

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-9 Transfer of Depreciable Asset at Beginning of Year

a. Eliminating entry, December 31, 20X5:

E(1) Truck 55,000


Gain on Sale of Truck 35,000
Depreciation Expense 5,000
Accumulated Depreciation 85,000

Computation of gain on sale of truck:


Price paid by Minnow $245,000
Cost of truck to Frazer $300,000
Accumulated depreciation
($300,000 / 10 years) x 3 years ( 90,000) (210,000)
Gain on sale of truck $ 35,000

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 55,000


Retained Earnings 30,000
Depreciation Expense 5,000
Accumulated Depreciation 80,000

Accumulated depreciation adjustment:


Required [($300,000 / 10 years) x 5 years] $150,000
Reported [($245,000 / 7 years) x 2 years] (70,000)
Required increase $ 80,000

E6-10 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

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-10 (continued)

b. Journal entry to record purchase:

Equipment 84,000
Cash 84,000

Journal entry to record depreciation expense:

Depreciation Expense 12,000


Accumulated Depreciation 12,000

c. Eliminating entry at December 31, 20X7, to eliminate intercompany sale of


equipment:

E(1) 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

Amount required ($10,000 x 9 years) $ 90,000


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

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


and prepare a consolidated balance sheet only:

E(1) Equipment 66,000


Retained Earnings 12,000
Accumulated Depreciation 78,000
Eliminate unrealized profit on equipment.

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-11 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
Consolidated net income $142,500

b. Consolidated net income for 20X8 would be unchanged.

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E6-11 (continued)

c. Eliminating entry, December 31, 20X8:

E(1) Buildings and Equipment 30,000


Retained Earnings, January 1 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

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-12 Elimination Entries for Midyear Depreciable Asset Transfer

a. Eliminating entry, December 31, 20X3:

E(1) Equipment 2,000


Gain on Sale of Equipment 10,500
Depreciation Expense
Accumulated Depreciation 1,500
11,000

Purchase price paid by parent $30,000


Purchase price paid by subsidiary (28,000)
Required increase $ 2,000

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

Depreciation recorded by subsidiary


($28,000/3 ½ years) x ½ year $4,000
Depreciation recorded by parent ((E30,000/6
years) x ½ year (28,000)
Required decrease $ 1,500

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 2,000


Retained Earnings, January 1 9,000
Depreciation Expense 3,000
Accumulated Depreciation 8,000

Unrealized gain, July 1, 20X3 $10,500


Realized in 20X3 (1,500)
Unrealized balance, January 1, 20X4 $ 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

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Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-13 Consolidated Net Income Computation

a. Downstream sale of land:


20X4 20X5
Verry’s separate operating income $ 90,000 $110,000
Less: Unrealized gain on sale of land (25,000)
Verry’s realized operating income $ 65,000 $110,000
Spawn’s realized net income 60,000 40,000
Consolidated net income $125,000 $150,000
Income to noncontrolling interest:
($60,000 x .25) (15,000)
($40,000 X .25) (10,000)
Income to controlling interest $110,000 $140,000

b. Upstream sale of land:


20X4 20X5
Verry’s separate operating income $ 90,000 $110,000
Spawn’s net income $60,000
Less: Unrealized gain on sale of land (25,000)
Spawn’s realized net income 35,000 40,000
Consolidated net income $125,000 $150,000
Income to noncontrolling interest:
($35,000 x .25) (8,750)
($40,000 x .25) (10,000)
Income to controlling interest $116,250 $140,000

6-18
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-14 Elimination Entries for Intercompany Transfers

a. Operating income of Grand Delivery $65,000


Net income of Acme Real Estate Company $40,000
Less: Unrealized profit on land sale (25,000)
Acme’s realized net income 15,000
Consolidated net income $80,000

b. Journal entries recorded by Speedy Delivery:

(1) Cash 8,000


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

(2) Investment in Acme Real Estate Stock 32,000


Income from Subsidiary 32,000
Record equity-method income:
$40,000 x .80

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 15,000


Delivery Expense 15,000
Eliminate courier services performed by
Speedy Delivery Service.

6-19
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-15 Sale of Building to Parent in Prior Period

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


($300,000 / 12 years).

b. Split would have recorded annual depreciation expense of $20,000


($400,000 / 20 years).

c. Eliminating entry, December 31, 20X9:

E(1) Buildings and Equipment 100,000


Retained Earnings, January 1 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, 20X9

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

Amount required ($20,000 x 9 years) $180,000


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

6-20
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-15 (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
Net income for 20X9 40,000
Dividends paid in 20X9 (15,000)
Unrealized profit on sale of building to Turner Company
($60,000 - $5,000) (55,000)
Realized book value December 31, 20X9 $170,000
Proportion of ownership held by noncontrolling
interest x .30
Amount assigned to noncontrolling interest in
December 31, 20X9, consolidated balance sheet $ 51,000

E6-16 Intercompany Sale at a Loss

a. Consolidated net income for 20X8 will be greater than Parent Company's income
from operations plus Sunway's reported net income. The eliminating entries at
December 31, 20X8, will result in an increase of $16,000 to consolidated net
income.

b. As a result of purchasing the equipment at less than Parent's book value,


depreciation expense reported by Sunway will be $2,000 ($16,000 / 8 years)
below the amount that would have been recorded by Parent. Thus, depreciation
expense must be increased by $2,000 when eliminating entries are prepared at
December 31, 20X9. Consolidated net income will be decreased by the full
amount of the $2,000 increase in depreciation expense.

6-21
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-17 Eliminating Entries Following Intercompany Sale at a Loss

a. Eliminating entry, December 31, 20X7:

E(1) Buildings and Equipment 156,000


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

b. Consolidated net income and income to controlling


interest 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
Consolidated net income $176,000
Income to noncontrolling interest ($51,000 x .30) (15,300)
Income to controlling interest $160,700

c. Eliminating entry, December 31, 20X8:

E(1) Buildings and Equipment 156,000


Depreciation Expense 4,000
Accumulated Depreciation 124,000
Retained Earnings, January 1 25,200
Noncontrolling Interest 10,800
Eliminate unrealized loss 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

6-22
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-17 (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 and income assigned to


controlling interest in 20X8:

Operating income reported by Brown $150,000


Net income reported by Transom $40,000
Adjustment for loss on sale of building (4,000)
Realized net income of Transom 36,000
Consolidated net income $186,000
Income assigned to noncontrolling interest
($36,000 x .30) (10,800)
Income assigned to controlling interest $175,200

6-23
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-18 Multiple Transfers of Asset

a. $145,000

b. No gain or loss should be reported.

c. Swanson Corporation operating income $150,000

Sullivan Corporation net income $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
Income assigned to controlling interest $283,000

Alternate Computation:

Swanson Corporation operating income $150,000


Sullivan Corporation net income 120,000
Kolder Company net income 60,000
Clayton Corporation net income 80,000
Combined income $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 $ 27,000
Kolder Company ($60,000 - $50,000) x .30 3,000
Clayton Corp. ($80,000 - $60,000) x .10 2,000 (32,000)
Income assigned to controlling interest $283,000

d. Eliminating entry:

E(1) Gain on Sale of Land 110,000


Loss on Sale of Land 15,000
Land 95,000
Eliminate gains and loss on land transfer:
$110,000 = $50,000 + $60,000
$95,000 = $110,000 - $15,000

6-24
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-19 Elimination Entry in Period of Transfer

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

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

c. E(1) Trucks 24,000


Retained Earnings, January 1 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)

6-25
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-20 Elimination Entry Computation

a. Eliminating entry, December 31, 20X6:

E(1) Equipment 90,000


Gain on Sale of Equipment 60,000
Depreciation Expense 6,000
Accumulated Depreciation 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 90,000


Retained Earnings, January 1 37,800
Noncontrolling Interest 16,200
Depreciation Expense 6,000
Accumulated Depreciation 138,000

Retained earnings adjustment:


Unrealized profit, January 1, 20X6 $ 60,000
Realized in 20X6 (6,000)
Unrealized profit, January 1, 20X7 $ 54,000
Proportion of stock held by Stern x .70
Share of unrealized profit $ 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

6-26
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-21 Using the Eliminating Entry to Determine Account Balances

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


Corporation.

b. The subsidiary was the owner. The sale was from the subsidiary to the parent, as
evidenced by the debit to noncontrolling interest in the eliminating entry.

c. Intercompany transfer price:

Amount paid by Somber Corporation $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.

6-27
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-21 (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 1,500


Depreciation Expense 1,500
Eliminate excess depreciation.

E6-22 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 and income to controlling


interest for 20X4:

Norgaard's separate operating income $2,342,000


Bline's net income 631,000
Consolidated net income 2,973,000
Income to noncontrolling interest ($631,000 x .25) (157,750)
Income to controlling interest $2,815,250

6-28
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-23A Fully Adjusted Equity Method and Cost Method

a. Fully Adjusted equity-method journal entries, 20X4:

(1) Cash 13,000


Investment in TV Sales Company Stock 13,000
Record dividends from TV Sales Company:
$20,000 x .65

(2) Investment in TV Sales Company Stock 45,500


Income from Subsidiary 45,500
Record equity-method income: $70,000 x .65

(3) Income from Subsidiary 11,000


Investment in TV Sales Company Stock 11,000
Remove unrealized gain on sale of land.

(4) Investment in TV Sales Company Stock 5,200


Income from Subsidiary 5,200
Recognize portion of gain on sale of
equipment: $8,000 x .65

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 26,000


Noncontrolling Interest 14,000
Equipment 40,000
Eliminate unrealized gain on upstream
sale of equipment.

6-29
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

E6-23A (continued)

E(6) Accumulated Depreciation 8,000


Depreciation Expense 8,000
Eliminate excess depreciation.

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 15,750


Noncontrolling Interest 15,750
Assign undistributed prior earnings of
subsidiary to noncontrolling interest:
$45,000 x .35

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
sale of equipment.

E(7) Accumulated Depreciation 8,000


Depreciation Expense 8,000
Eliminate excess depreciation.

6-30
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

SOLUTIONS TO PROBLEMS

P6-24 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
Amortization of differential ($10,000 / 10 years) ( 1,000)
$11,000
Proportion of ownership held by Petime x .90
Income attributable to controlling interest 9,900
Income to controlling interest $43,900

b. Separate operating income of Petime Corporation $34,000


Reported net income by United Grain Company $19,000
Amortization of differential ($10,000 / 10 years) ( 1,000)
$18,000
Proportion of stock held by Petime x .90
Income attributable to controlling interest 16,200
Unrealized profit on sale of land (7,000)
Income to controlling interest $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).

P6-25 Subsidiary Net Income

a. Toll Corporation’s reported net income for 20X4 was $94,400:


Income assigned to noncontrolling shareholders $17,500
Add: Unrealized profit on building ($20,000 x .25) 5,000
Amortization of differential ($4,400 x .25) 1,10
0
Income assigned to noncontrolling interest before $23,600
adjustment
Proportion of stock held by noncontrolling interest ÷ .25
Reported income of Toll $94,400

Computation of annual amortization:


Fair value of consideration given by Bold $348,000
Fair value of noncontrolling interest 116,000
Total fair value $464,000
Book value of Toll’s assets:
Common stock $150,000
Retained earnings 270,000
Total book value (420,000)
Differential paid by Bold $ 44,000
Number of years in amortization period ÷ 10
Annual amortization $4,400

6-31
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-25 (continued)

b. Consolidated net income for 20X4 is $304,000:

Bold Corporation’s operating income $234,000


Toll Corporation’s net income 94,400
Amortization of differential ($44,000 / 10 years) (4,400)
Unrealized profit on building (20,000)
Consolidated net income $304,000

c. Income assigned to controlling interest is $286,500:

Consolidated net income $304,000


Income assigned to noncontrolling interest (17,500)
Income assigned to controlling interest $286,500

Alternate computation:
Operating income of Bold $234,000
Income from Toll:
Net income of Toll $94,400
Unrealized profit on building (20,000)
Amortization of differential (4,400)
Realized income $70,000
Portion of ownership held x .75 52,500
Income to controlling interest $286,500

6-32
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-26 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 --- ---

P6-27 Consolidated Eliminating Entry

a. Master paid Rakel $460,000 ($600,000 - $140,000).

b. Accumulated deprecation at January 1, 20X7, was $168,000, computed as follows:

Purchase price paid by Rakel $600,000


Amount paid by Master $460,000
Gain recorded by Rakel (28,000)
Book value at date of sale (432,000)
Accumulated depreciation at date of sale $168,000

c. Annual depreciation expense recorded by Rakel was $28,000


($168,000/6 years).

d. The estimated residual value was $40,000, computed as follows:

Purchase price paid by Rakel $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 building ($28,000 - $2,000) (26,000)
$ 54,000
Proportion of stock held by noncontrolling interest x .40
Income assigned to noncontrolling interest $ 21,600

g. Reported net income of Rakel $ 65,000


Portion of gain on sale of building realized in 20X8 2,000
$ 67,000
Proportion of stock held by noncontrolling interest x .40
Income assigned to noncontrolling interest $ 26,800

6-33
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-28 Multiple-Choice Questions

1. d

2. c

3. a

4. a

5. d

P6-29 Intercompany Services Provided to Subsidiary

The eliminating entry at December 31, 20X4, would be:

Service Revenue 110,000


Building 30,000
Wage Expense 80,000

The eliminating entries at December 31, 20X5, would be:

Retained Earnings 30,000


Building 30,000

Accumulated Depreciation 1,200


Depreciation Expense 1,200

P6-30 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

6-34
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-30 (continued)

b. 20X7 eliminating entries related to intercorporate transfers:

E(1) Land 60,000


Loss on Sale of Land 60,000
Eliminate unrealized loss on land:
$60,000 = $560,000 - $500,000

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 was $90,000:

Subsidence Mining's income to noncontrolling


shareholders $ 39,000
Noncontrolling interest's share of subsidiary income ÷ .30
Subsidence Mining's income before adjustment $130,000
Add: Amortization of differential:
($200,000 / 10 years) 20,000
Less: Unrealized loss on intercompany sale of land (60,000)
Subsidence Mining's 20X7 net income $ 90,000

d. Bower’s operating income was $826,000:

Consolidated net income $961,000


Less: Income to noncontrolling interest (39,000)
Income assigned to controlling interest $922,000
Income from Subsidence Mining:
Reported net income $ 90,000
Unrealized loss on land 60,000
Amortization of differential ($200,000 / 10 years) (20,000)
Realized income $130,000
Portion of ownership held x .70
Bower’s share $ 91,000
Realized profit on equipment ($30,000 / 6 years) 5,000 (96,000)
Bower’s 20X7 income from its separate operations $826,000

6-35
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-31 Computation of Retained Earnings following Multiple Transfers

Consolidated retained earnings, January 1, 20X8:

Great Company’s 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:

Consolidated retained earnings, January 1 $419,600


Great Company’s operating income for 20X8 $65,000
Less: Dividends paid in 20X8 (45,000)
Increase in retained earnings from Great’s operations 20,000
Meager’s net income for 20X8 $ 30,000
Less: Amortization of differential assigned to equipment:
($325,000 - $290,000) / 10 years (3,500)
Impairment of goodwill (17,500)
Realized income $ 9,000
Proportion of ownership held x .80 7,200
Realization of gain on sale of building
($22,000 / 10 years) 2,200
Consolidated retained earnings $449,000

Alternate computation of retained earnings balance:

Great Company’s 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
Proportionate share of Meager’s reported net income 24,000
Amortization of differential assigned to equipment:
[($325,000 - $290,000) x .80] / 10 years (2,800)
Goodwill impairment loss ($17,500 x .80) (14,000)
Great Company’s 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

6-36
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-32 Preparation of Consolidated Balance Sheet

a. Consolidated balance sheet workpaper:

Lofton Company and Temple Corporation


Consolidated Balance Sheet Workpaper
December 31, 20X6

Lofton Temple Eliminations Consol-


Item Company 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

6-37
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-32 (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

6-38
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-32 (continued)

b. Consolidated balance sheet:

Lofton Company and Subsidiary


Consolidated Balance Sheet
December 31, 20X6

Cash and Accounts Receivable $121,000


Inventory 120,000
Land 250,000
Buildings and Equipment $709,000
Less: Accumulated Depreciation (244,000) 465,000
Total Assets $956,000

Accounts Payable $115,000


Notes Payable 290,000
Stockholders’ Equity:
Controlling Interest:
Common Stock $100,000
Retained Earnings 347,000
Total Controlling Interest $447,000
Noncontrolling interest 104,000
Total Stockholders’ Equity 551,000
Total Liabilities and Stockholders' Equity $956,000

6-39
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-33 Consolidation Workpaper with Intercompany Transfers

a. Eliminating entries:

E(1) Income from Subsidiary 19,500


Dividends Declared 3,250
Investment in Blank Corp. Stock 16,250
Eliminate income from subsidiary:
$19,500 = $30,000 x .65
$3,250 = $5,000 x .65

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 24,000


Other Expenses 24,000
Eliminate intercompany services.

E(5) Gain on Sale of Land 4,000


Land 4,000
Eliminate gain on sale of land to
Blank Corporation.

E(6) Gain on Sale of Building 13,200


Depreciation Expense 1,100
Buildings and Equipment (net) 12,100
Eliminate gain on sale of building to
Mist Company.

6-40
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-33 (continued)
b. Mist Company and Blank Corporation
Consolidation Workpaper
December 31, 20X4

Mist Blank Eliminations Consol-


Item Company 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)
Consolidated Net Income 46,400
Income to Noncon-
trolling Interest (2) 6,265 (6,265)
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


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 (5) 4,000 51,000
Buildings and Equipment
(net) 200,000 125,000 (6) 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 35,000 20,000 55,000


Bonds Payable 180,000 80,000 260,000
Common Stock 100,000 60,000 (3) 60,000 100,000
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

6-41
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-33 (continued)

c. Mist Company and Subsidiary


Consolidated Balance Sheet
December 31, 20X4

Cash $ 54,500
Accounts Receivable 99,000
Inventory 166,000
Land 51,000
Buildings and Equipment (net) 312,900
Total Assets $683,400

Accounts Payable $ 55,000


Bonds Payable 260,000
Stockholders’ Equity:
Controlling Interest:
Common Stock $100,000
Retained Earnings 213,135
Total Controlling Interest $313,135
Noncontrolling Interest 55,265
Total Stockholders’ Equity 368,400
Total Liabilities and Stockholders' Equity $683,400

Mist Company and Subsidiary


Consolidated Income Statement
Year Ended December 31, 20X4

Sales $391,000
Cost of Goods Sold $235,000
Depreciation Expense 39,900
Other Expenses 69,700
Total Expenses (344,600)
Consolidated Net Income $ 46,400
Income to Noncontrolling Interest (6,265)
Income to Controlling Interest $ 40,135

Mist Company and Subsidiary


Consolidated Retained Earnings Statement
Year Ended December 31, 20X4

Retained Earnings, January 1, 20X4 $198,000


Income to Controlling Interest, 20X4 40,135
$238,135
Dividends Declared, 20X4 (25,000)
Retained Earnings, December 31, 20X4 $213,135

6-42
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-34 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 4,400
Dividends Declared 1,000
Noncontrolling Interest 3,400
Assign income to noncontrolling interest:
$4,400 = ($40,000 - $18,000) x .20
E(3) Common Stock — Lane Company 100,000
Retained Earnings, January 1 105,000
Differential 50,000
Investment in Lane Company Stock 204,000
Noncontrolling Interest 51,000
Eliminate beginning investment balance.
E(4) Goodwill 50,000
Differential 50,000
Assign differential to goodwill.
E(5) Goodwill Impairment Loss 18,000
Goodwill 18,000
Recognize impairment of goodwill.
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:
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 7,000
Accounts Receivable 7,000
Eliminate intercorporate
receivable/payable.

6-43
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-34 (continued)
b. Prime Company and Lane Company
Consolidation Workpaper
December 31, 20X6

Prime Lane Eliminations Consol-


Item Company Company Debit Credit 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) 18,000 18,000
Other Expenses 15,000 5,000 20,000
Debits (180,000) (80,000) (276,000)
Consolidated Net Income 84,000
Income to Noncon-
trolling Interest (2) 4,400 (4,400)
Income, carry forward 112,000 40,000 74,400 2,000 79,600

Ret. Earnings, Jan. 1 338,000 105,000 (3)105,000


(6) 8,000 330,000
Income, from above 112,000 40,000 74,400 2,000 79,600
450,000 145,000 409,600
Dividends Declared (30,000) (5,000) (1) 4,000
(2) 1,000 (30,000)
Ret. Earnings, Dec. 31,
carry forward 420,000 140,000 187,400 7,000 379,600

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) 50,000 (4) 50,000
Goodwill (4) 50,000 (5) 18,000 32,000
Debits 1,185,000 355,000 1,328,000

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
Retained Earnings,
from above 420,000 140,000 187,400 7,000 379,600
Noncontrolling Interest (6) 2,000 (2) 3,400
(3) 51,000 52,400
Credits 1,185,000 355,000 401,400 401,400 1,328,000

6-44
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-34 (continued)

c. Prime Company and Subsidiary


Consolidated Balance Sheet
December 31, 20X6

Cash and Receivables $ 141,000


Inventory 350,000
Land 150,000
Buildings and Equipment $655,000
Less: Accumulated Depreciation (273,000) 382,000
Goodwill 32,000
Total Assets $1,055,000

Accounts Payable $ 73,000


Bonds Payable 250,000
Stockholders’ Equity:
Controlling Interest:
Common Stock $300,000
Retained Earnings 379,600
Total Controlling Interest $679,600
Total Noncontrolling Interest 52,400
Total Stockholders’ Equity 732,000
Total Liabilities and Stockholders' Equity $1,055,000

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 18,000
Other Expenses 20,000
Total Expenses (276,000)
Consolidated Net Income $ 84,000
Income to Noncontrolling Interest (4,400)
Income to Controlling Interest $ 79,600

Prime Company and Subsidiary


Consolidated Retained Earnings Statement
Year Ended December 31, 20X6

Retained Earnings, January 1, 20X6 $ 330,000


Income to Controlling Interest, 20X6 79,600
$ 409,600
Dividends Declared, 20X6 (30,000)
Retained Earnings, December 31, 20X6 $ 379,600

6-45
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-35 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 5,250


Dividends Declared 2,000
Noncontrolling Interest 3,250
Assign income to noncontrolling interest:
$5,250 = ($30,000 - $2,500 - $1,250) x .20

E(3) Common Stock — Skate Company 30,000


Additional Paid-In Capital — Skate Company 20,000
Retained Earnings, January 1 150,000
Differential 63,750
Investment in Skate Company Stock 211,000
Noncontrolling Interest 52,750
Eliminate beginning investment balance:
$63,750 = $75,000 – [($50,000 / 20 years)
+ ($25,000 / 20 years)] x 3 years

E(4) Patents 42,500


Buildings and Equipment 25,000
Accumulated Depreciation 3,750
Differential 63,750
Assign differential:
$42,500 = $50,000 - [($50,000 / 20 years)
x 3 years]
$3,750 = ($25,000 / 20 years) x 3 years

E(5) Amortization Expense 2,500


Depreciation Expense 1,250
Patents 2,500
Accumulated Depreciation 1,250
Amortize differential.

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)

6-46
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-35 (continued)

E(7) Retained Earnings, January 1 10,400


Noncontrolling Interest 2,600
Land 13,000
Eliminate unrealized profit on land.

6-47
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-35 (continued)
b. Pond Corporation and Skate Company
Consolidation Workpaper
December 31, 20X8

Pond Skate Eliminations Consol-


Item Corp. Co. Debit Credit idated
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) 1,250 (6) 1,500 58,750
Interest Expense 24,000 10,500 34,500
Miscellaneous Expenses 11,900 9,500 21,400
Amortization Expense (5) 2,500 2,500
Debits (405,900) (220,000) (628,150)
Consolidated Net Income 86,750
Income to Noncon-
trolling Interest (2) 5,250 (5,250)
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) 25,000
(6) 60,000 725,000
Investment in Skate
Company Stock 224,000 (1) 13,000
(3)211,000
Investment in Tin Co.
Bonds 134,000 134,000
Bond Discount 3,000 3,000
Differential (3) 63,750 (4) 63,750
Patents (4) 42,500 (5) 2,500 40,000
Debits 1,191,400 437,000 1,516,400

6-48
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-35 (continued)

Pond Skate Eliminations Consol-


Item Corp. Co. Debit Credit idated

Accum. Depreciation 185,000 94,000 (4) 3,750


(5) 1,250
(6) 73,500 357,500
Accounts Payable 65,000 11,000 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) 3,250
(3) 52,750 53,400
Credits 1,191,400 437,000 449,250 449,250 1,516,400

6-49
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-36 Intercorporate Sale of Land and Depreciable Asset

a. Income assigned to noncontrolling interest:

Net income of Morris $ 30,000


Gain on sale of equipment to parent $9,600
Gain realized prior to 20X5 (1,200) (8,400)
Amortization of differential:
Buildings and equipment ($25,000 / 10 years) (2,500)
Copyright ($17,000 / 5 years) (3,400)
Realized income $15,700
Portion of ownership held x .30
Income to noncontrolling interest $ 4,710

Gain on sale of equipment to parent:


Sale price to Topp $91,600
Purchase price $100,000
Accumulated depreciation
[($100,000 - $10,000)/10 years] x 2 years (18,000) (82,000)
Gain on sale $ 9,600

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
Portion of ownership held by Topp x .70
Net book value of ownership held by Topp $157,500
Unamortized differential:
Buildings and equipment [($25,000 x 7/10 years) x .70] 12,250
Copyright [($17,000 x 2/5 years) x .70] 4,760
Investment in Morris Company stock $174,510

c. Eliminating entries:

E(1) Income from Subsidiary 16,870


Dividends Declared 3,500
Investment in Morris Company Stock 13,370
Eliminate income from subsidiary:
$16,870 = ($30,000 x .70) - $1,750 - $2,380
$3,500 = $5,000 x .70

E(2) Income to Noncontrolling Interest 4,710


Dividends Declared 1,500
Noncontrolling Interest 3,210
Assign income to noncontrolling interest.

6-50
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-36 (continued)

E(3) Common Stock — Morris Company 100,000


Retained Earnings, January 1 100,000
Differential 30,200
Investment in Morris Company Stock 161,140
Noncontrolling Interest 69,060
Eliminate beginning investment balance:
$30,200 = ($25,000 x 8/10) + ($17,000 x 3/5)

E(4) Buildings and Equipment 25,000


Copyright 10,200
Accumulated Depreciation 5,000
Differential 30,200
Assign beginning differential.

E(5) Depreciation Expense 2,500


Amortization Expense 3,400
Accumulated Depreciation 2,500
Copyright 3,400
Amortize differential.

E(6) Retained Earnings, January 1 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)

6-51
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-36 (continued)
d. Topp Corporation and Morris Company
Consolidation Workpaper
December 31, 20X5

Topp Morris Eliminations Consol-


Item Corp. 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 16,870 (1) 16,870
Credits 495,120 200,000 668,650
Cost of Goods Sold 375,000 110,000 485,000
Depreciation Expense 25,000 10,000 (5) 2,500 (7) 1,200 36,300
Interest Expense 24,000 33,000 57,000
Other Expenses 28,000 17,000 45,000
Amortization Expense (5) 3,400 3,400
Debits (452,000) (170,000) (626,700)
Consolidated Net Income 41,950
Income to Noncon-
trolling Interest (2) 4,710 (4,710)
Income, carry forward 43,120 30,000 37,080 1,200 37,240

Ret. Earnings, Jan. 1 176,240 100,000 (3)100,000


(6) 11,000 165,240
Income, from above 43,120 30,000 37,080 1,200 37,240
219,360 130,000 202,480
Dividends Declared (30,000) (5,000) (1) 3,500
(2) 1,500 (30,000)
Ret. Earnings, Dec. 31,
carry forward 189,360 125,000 148,080 6,200 172,480

Cash 15,850 58,000 73,850


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) 25,000
(7) 8,400 588,400
Bond Discount 15,000 15,000
Investment in Morris
Company Stock 174,510 (1) 13,370
(3)161,140
Differential (3) 30,200 (4) 30,200
Copyrights (4) 10,200 (5) 3,400 6,800
Debits 830,360 633,000 1,318,050

6-52
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-36 (continued)

Topp Morris Eliminations Consol-


Item Corp. Co. Debit Credit idated

Accum. Depreciation
Buildings and Equip. 120,000 60,000 (4) 5,000
(5) 2,500
(7) 16,800 204,300
Accounts Payable 61,000 28,000 89,000
Other Payables 30,000 20,000 50,000
Bonds Payable 250,000 300,000 550,000
Common Stock
Topp Corporation 150,000 150,000
Morris Company 100,000 (3)100,000
Additional Paid-In
Capital 30,000 30,000
Retained Earnings,
from above 189,360 125,000 148,080 6,200 172,480
Noncontrolling
Interest (2) 3,210
(3) 69,060 72,270
Credits 830,360 633,000 321,880 321,880 1,318,050

P6-37 Consolidation Workpaper in Year following Intercompany Transfer

a. 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 (50,000 x .80) 40,000
Balance in investment account $240,000

6-53
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-37 (continued)

b. 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 50,000
Investment in Lane Company Stock 232,000
Noncontrolling Interest 58,000
Eliminate beginning investment balance:
$50,000 = ($160,000 + $40,000) – ($50,000 +
$100,000)
$232,000 = $240,000 - $8,000
$58,000 = ($100,000 + $140,000 + $50,000) x .20

E(4) Goodwill 25,000


Retained Earnings, January 1 20,000
Noncontrolling Interest 5,000
Differential 50,000
Assign differential to goodwill.

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 4,000


Accounts Receivable 4,000
Eliminate intercorporate
receivable/payable.

6-54
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-37 (continued)
b. Prime Company and Lane Company
Consolidation Workpaper
December 31, 20X7

Prime Lane Eliminations Consol-


Item 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)
Consolidated Net Income 92,000
Income to Noncon-
trolling Interest (2) 9,000 (9,000)
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) 20,000
(5) 8,000
(6) 18,000 374,000
Income, from above 81,000 45,000 45,000 2,000 83,000
501,000 185,000 457,000
Dividends Declared (60,000) (35,000) (1) 28,000
(2) 7,000 (60,000)
Ret. Earnings, Dec. 31,
carry forward 441,000 150,000 231,000 37,000 397,000

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) 50,000 (4) 50,000
Goodwill (4) 25,000 25,000
Debits 1,231,000 385,000 1,392,000

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 441,000 150,000 231,000 37,000 397,000
Noncontrolling Interest (4) 5,000 (2) 2,000
(5) 2,000 (3) 58,000 53,000
Credits 1,231,000 385,000 422,000 422,000 1,392,000

6-55
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-38 Incomplete Data

(a) $100,000

(b) $140,000

(c) $250,000 = $593,000 - $343,000

(d) $100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000]

(e) $4,500 = [($106,200 + $70,800) - ($50,000 + $70,000 + $30,000)] / 6 years

(f) Investment in Shadow Company Stock:


$106,200 Purchase price, January 1, 20X4
30,000 Undistributed earnings from January 1, 20X4,
to January 1, 20X7 [($80,000 - $30,000) x .60]
6,000 Undistributed income for 20X7 ($10,000 x .60)
(10,800) Amortization of differential
[($27,000 / 6 years) x 4 years] x .60
$131,400 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:


$379,400 Retained earnings reported by Mound Corporation
Mound'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 Mound's proportionate share
(3,600) $3,600 Reduction of Mound’s retained earnings
$375,800 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 equipment to Mound
(4,500) Amortization of differential
$ 28,500 Realized net income
x .40
$ 11,400 Income to noncontrolling shareholders

6-56
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-39 Intercompany Sale of Equipment at a Loss in Prior Period

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

6-57
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-39 (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

6-58
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-39 (continued)

b. Foster Company and Block Corporation


Consolidation Workpaper
December 31, 20X9

Foster Block Eliminations Consol-


Item Co. Corp. Debit Credit idated

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)
Consolidated Net Income 123,000
Income to Noncon-
trolling Interest (2) 5,700 (5,700)
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


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

6-59
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-39 (continued)

Foster Block Eliminations Consol-


Item Co. Corp. Debit Credit idated

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

6-60
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-40 Comprehensive Problem: Intercorporate Transfers

a. Computation of differential as of January 1, 20X8:

Original differential at December 31, 20X1 $ 150,000


Less: Portion written off for sale of inventory (30,000)
Remaining differential, January 1, 20X8 $ 120,000

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)
Net income 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
($120,000 x .75) 90,000
Balance in Investment in Schmid Stock
account, December 31, 20X8 $2,970,000

c. Elimination entries:

E(1) Income from Subsidiary 82,500


Dividends Declared 15,000
Investment in Schmid Stock 67,500
Eliminate income from subsidiary.

E(2) Income to Noncontrolling Interest 36,500


Dividends Declared 5,000
Noncontrolling Interest 31,500
Assign income to noncontrolling interest:
$36,500 = [$110,000 + $40,000
- ($40,000 / 10)] x .25

6-61
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-40 (continued)

E(3) Common Stock — Schmid 1,000,000


Additional Paid-In Capital 1,350,000
Retained Earnings, January 1 1,400,000
Differential 120,000
Investment in Schmid Stock 2,902,500
Noncontrolling Interest 967,500
Eliminate beginning investment balance:
$2,902,500 = $2,970,000 - $67,500
$967,500 = ($1,000,000 + $1,350,000
+ $1,400,000 + $120,000) x .25

E(4) Land 56,000


Goodwill 64,000
Differential 120,000
Assign differential.

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

6-62
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-40 (continued)

d. Rossman Corporation and Schmid Distributors Inc.


Consolidation Workpaper
December 31, 20X8

Eliminations Consol-
Item Rossman Schmid Debit Credit 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)
Consolidated Net Income 1,261,000
Income to Noncon-
trolling Interest (2) 36,500 (36,500)
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
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

6-63
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-40 (continued)

Eliminations Consol-
Item Rossman Schmid Debit Credit 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) 56,000 (5) 23,000 1,633,000
Buildings
and Equipment 2,400,000 2,990,000 (6) 185,000 5,575,000
Goodwill (4) 64,000 64,000
Differential (3) 120,000 (4) 120,000
Debits 6,208,500 4,536,300 8,033,050

Accumulated
Depreciation 1,105,000 420,000 (6) 149,000 1,674,000
Current Payables 86,200 76,300 (8) 20,000
(9) 3,750 138,750
Bonds Payable 1,000,000 200,000 1,200,000
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) 967,500 999,000
Credits 6,208,500 4,536,300 4,424,750 4,424,750 8,033,050

6-64
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-41A Fully Adjusted Equity Method

a. Adjusted trial balance:

Prime Company Lane Company


Item Debit Credit 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) Cash 28,000


Investment in Lane Company Stock 28,000
Record dividend from Lane Company:
$35,000 x .80

(2) Investment in Lane Company Stock 36,000


Income from Subsidiary 36,000
Record equity-method income:
$45,000 x .80

(3) Investment in Lane Company Stock 2,000


Income from Subsidiary 2,000
Recognize portion of gain on sale of
equipment: $20,000 / 10 years

6-65
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-41A (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 50,000
Investment in Lane Company Stock 232,000
Noncontrolling Interest 58,000
Eliminate beginning investment balance:
$50,000 = ($160,000 + $40,000) – ($50,000 +
$100,000)
$232,000 = $240,000 - $8,000
$58,000 = ($100,000 + $140,000 + $50,000) x
.20

E(4) Goodwill 25,000


Retained Earnings, January 1 20,000
Noncontrolling Interest 5,000
Differential 50,000
Assign differential to goodwill.

E(5) Investment in Lane Company Stock 8,000


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

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 4,000


Accounts Receivable 4,000
Eliminate intercorporate
receivable/payable.

6-66
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

6-67
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-41A (continued)
d. Prime Company and Lane Company
Consolidation Workpaper
December 31, 20X7

Prime Lane Eliminations Consol-


Item Company Company Debit Credit 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)
Consolidated Net Income 92,000
Income to Noncon-
trolling Interest (2) 9,000 (9,000)
Income, carry forward 83,000 45,000 47,000 2,000 83,000

Ret. Earnings, Jan. 1 394,000 140,000 (3) 140,000 374,000


(4) 20,000
Income, from above 83,000 45,000 47,000 2,000 83,000
477,000 185,000 457,000
Dividends Declared (60,000) (35,000) (1) 28,000
(2) 7,000 (60,000)
Ret. Earnings, Dec. 31,
carry forward 417,000 150,000 207,000 37,000 397,000

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) 50,000 (4) 50,000
Goodwill (4) 25,000 25,000
Debits 1,207,000 385,000 1,392,000

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 417,000 150,000 207,000 37,000 397,000
Noncontrolling Interest (4) 5,000 (2) 2,000
(5) 2,000 (3) 58,000 53,000
Credits 1,207,000 385,000 424,000 424,000 1,392,000

6-68
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-42A Cost Method

a. Journal entry recorded by Prime Company:

Cash 28,000
Dividend Income 28,000
Record dividend from Lane Company.

b. Eliminating entries, December 31, 20X7:

E(1) Dividend Income 28,000


Dividends Declared 28,000
Eliminate dividend 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 50,000
Differential 50,000
Investment in Lane Company Stock 160,000
Noncontrolling Interest 40,000
Eliminate investment balance at date
of acquisition:
$50,000 = ($160,000 + $40,000) – ($100,000 +
$50,000)
$40,000 = ($100,000 + $50,000 + $50,000) x
.20

E(4) Retained Earnings, January 1 18,000


Noncontrolling Interest 18,000
Assign undistributed prior earnings of
subsidiary to noncontrolling interest:
($140,000 - $50,000) x .20

E(5) Goodwill 25,000


Retained Earnings, January 1 20,000
Noncontrolling Interest 5,000
Differential 50,000
Assign differential at beginning of
period.

6-69
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-42A (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.

6-70
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets

P6-42A (continued)
c. Prime Company and Lane Company
Consolidation Workpaper
December 31, 20X7

Prime Lane Eliminations Consol-


Item Company Company Debit Credit idated
Sales 250,000 150,000 400,000
Dividend Income 28,000 (1) 28,000
Credits 278,000 150,000 400,000
Cost of Goods Sold 160,000 80,000 240,000
Deprec. and Amortization 25,000 15,000 (7) 2,000 38,000
Other Expenses 20,000 10,000 30,000
Debits (205,000) (105,000) (308,000)
Consolidated Net Income 92,000
Income to Noncon-
trolling Interest (2) 9,000 (9,000)
Income, carry forward 73,000 45,000 37,000 2,000 83,000

Ret. Earnings, Jan. 1 348,000 140,000 (3) 50,000


(4) 18,000
(5) 20,000
(6) 8,000
(7) 18,000 374,000
Income, from above 73,000 45,000 37,000 2,000 83,000
421,000 185,000 457,000
Dividends Declared (60,000) (35,000) (1) 28,000
(2) 7,000 (60,000)
Ret. Earnings, Dec. 31,
carry forward 361,000 150,000 151,000 37,000 397,000
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) 50,000 (5) 50,000
Goodwill (5) 25,000 25,000
Debits 1,151,000 385,000 1,392,000
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
Retained Earnings,
from above 361,000 150,000 151,000 37,000 397,000
Noncontrolling Interest (5) 5,000 (2) 2,000
(6) 2,000 (3) 40,000
(4) 18,000 53,000
Credits 1,151,000 385,000 342,000 342,000 1,392,000

6-71