Professional Documents
Culture Documents
The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.
SOLUTIONS TO EXERCISES
Ex. 8–1 1. b ($51,000 – $850 = $50,150) 8. c
2. a 9. d ($120,000 ÷ 0.60 = $200,000)
3. b 10. a
4. b 11. b ($84,115 x 0.07 = $5,888)
5. c 12. b
6. b 13. a
7. b 14. b [$60,000 – ($12,000 x 2) = $36,000]
Ex. 8–2 Computation of Parker Corporation’s debit to Cash, Apr. 12, 2006:
Maturity value of note [$100,000 + ($100,000 x 0.08 x 90/360)] $102,000
Less: Discount ($102,000 x 0.10 x 60/360) 1,700
Debit to Cash $100,300
Ex. 8–3 Payton Corporation’s journal entry, Mar. 31, 2006:
Cash ($10,175 – $153) 10,022
Interest Expense ($153 – $117*) 36
Intercompany Notes Receivable 10,000
Intercompany Interest Revenue ($10,000 x 0.07 x 30/360) 58
To record discounting of 7%, 90-day note receivable from Slagle
Company dated Mar. 1, 2006, at a discount rate of 9%. Cash
proceeds computed as $10,175 maturity value of note, less $153
discount ($10,175 x 0.09 x 60/360 = $153).
*$10,000 x 0.07 x 60/360 = $117
Ex. 8–4 Planke Corporation’s journal entry to record discounting of Scully Company note, Mar. 31,
2006:
Cash 18,118
Interest Expense ($152 – $135) 17
Intercompany Notes Receivable 18,000
Intercompany Interest Revenue 135*
To record discounting of 9%, 60-day note receivable from Scully
Company dated Mar. 1, 2006, at a discount rate of 10%. Cash
proceeds computed as follows:
Maturity value of note [$18,000 + ($18,000 x 0.09
x 60/360)] $18,270
Discount ($18,270 x 0.10 x 30/360) 152
Proceeds $18,118
2006
May 1 Intercompany Dividends Receivable ($80,000 x 0.90) 72,000
Investment in South Gate Company Common Stock 72,000
10 Cash 72,000
Intercompany Dividends Receivable 72,000
31 Investment in South Gate Company Common Stock
($200,000 x 0.90) 180,000
Intercompany Investment Income 180,000
Ex. 8–6 Analysis of Peggy Corporation’s sales to Sally Company for year ended Nov. 30, 2006:
Gross profit
(25% of cost;
20% of selling
Selling price Cost price)
Beginning inventories $ 18,000 $ 14,400 $ 3,600
Add: Sales 120,000 96,000 24,000
Subtotals $138,000 $110,400 $27,600
Less: Ending inventories 24,000 19,200 4,800
Cost of goods sold $114,000 $ 91,200 $22,800
Ex. 8–7 Working paper elimination for Patter Corporation and subsidiary, Feb. 28, 2006:
Retained EarningsPatter 25,000
Intercompany SalesPatter 800,000
Intercompany Cost of Goods SoldPatter 600,000
Cost of Goods SoldSmatter 187,500
InventoriesSmatter 37,500
Ex. 8–8 Working paper elimination for Pele Corporation and subsidiary, July 31, 2006:
Intercompany SalesPele 120,000
Intercompany Cost of Goods SoldPele ($120,000 x
0.83 1/3) 100,000
Cost of Goods SoldShad ($84,000 x 0.16 2/3) 14,000
InventoriesShad ($36,000 x 0.16 2/3) 6,000
To eliminate intercompany sales and cost of goods sold, and
unrealized intercompany profit in inventories. (Income tax effects
are disregarded.)
Ex. 8–9 Working paper elimination for Polydom Corporation and subsidiary, Dec. 31, 2006:
Retained EarningsSpring ($160,000 x 0.25 x 0.75) 30,000
Minority Interest in Net Assets of Spring Company ($160,000 x 10,000
CASES
Case 8–1 The journal entries of Seeley Company to record the acquisition and depreciation of machinery
are adequate and need not be changed. However, the journal entries of Powell Corporation are
incorrect for two reasons:
(1) Idle machinery is accounted for as though it were merchandise. A Sales ledger account is
inappropriate for any asset except merchandise sold to customers.
(2) The first journal entry does not identify the transaction as an intercompany transaction.
Failure to identify intercompany transactions leads to the risk that such transactions,
profits (gains) or losses, and balances will not be eliminated in the preparation of
consolidated financial statements.
The working paper elimination prepared by Powell’s accountant does not remove the
intercompany gain element from the consolidated income statement. In effect, the elimination
accounts for the intercompany gain as though it were a prior period adjustment. This treatment
has no justification.
Powell’s journal entry for the intercompany sale of idle machinery should have been as follows:
Cash 50,000
Idle Machinery 40,000
Intercompany Gain on Sale of Idle Machinery 10,000
To record sales of idle equipment to Seeley Company. (Income tax
effects are disregarded.)
The correct December 31, 2006, working paper elimination (in journal entry format) is as
follows:
Intercompany Gain on Sale of Idle MachineryPowell 10,000
Accumulated Depreciation of MachinerySeeley 1,000
MachinerySeeley 10,000
Depreciation ExpenseSeeley 1,000
To eliminate unrealized intercompany gain in machinery and in
related depreciation. (Income tax effects are disregarded.)
Case 8–2 Shelton Company’s $10,000 debit to a deferred charge ledger account for the excess paid by
Shelton for the trade accounts receivable acquired from Sawhill Company is inappropriate. A
deferred charge is an account established for long-term prepayments for goods or services to be
received in the future. The $10,000 excess payment for the trade accounts receivable does not
fit the concept of a deferred charge. Further, the nature of the expense account debited by
Shelton for the amortization of the deferred charge is not clear. The $10,000 should have been
debited to a loss ledger account, because it represents an outlay by Shelton to a liquidating
affiliated company for which no benefits were received. The $10,000 loss in Shelton’s
accounting records, as recommended above, should be eliminated in the preparation of
consolidated financial statements for Peasley Corporation and subsidiaries for the year ended
The fact that Sawhill is in liquidation and is not consolidated does not change the need for
eliminating all intercompany transactions, balances, and profits (gains) or losses from the
consolidated financial statements.
Case 8–3 Given that both Winston Corporation and Cranston Company use the periodic inventory
system and that markups on Winston’s sales of products to Cranston had varied, it is probably
impossible for the newly hired controller of Winston to prepare any consolidated financial
statements other than a consolidated balance sheet at the end of the first fiscal year of the
controllership. The local CPA firm had prepared separate income tax returns for both Winston
and Cranston; thus, it is unlikely that the CPA firm had any records of intercompany profits in
Winston’s sales to Cranston and in Cranston’s ending inventories.
If the controller is able to obtain accurate quantities and billed prices of Winston-produced
products in Cranston’s ending inventory, and if Winston’s costs of those products are
obtainable from Winston’s production records, the amount of the unrealized intercompany
profit in Cranston’s ending inventory can be determined, thus facilitating preparation of a
consolidated balance sheet. Establishment of appropriate intercompany sales and intercompany
cost of goods sold accounting records for Winston for the following fiscal year (which would
entail Winston’s adoption of the perpetual inventory system) would enable the controller to
prepare consolidated statements of income, retained earnings, and cash flows, as well as
consolidated balance sheets, for future fiscal years.
Case 8–4 The accountant’s position is not supported by accounting theory for consolidated financial
statements. Under that theory, consolidated financial statements should display amounts
resulting from transactions with those outside the consolidated group. Consolidated financial
statements should not be distorted by intercompany transactions, which are not the result of
arm’s-length bargaining between parties with opposing interests. Despite the fact that Aqua
Well Company’s charges for transmission of water to Aqua Water Corporation were at the
customary rate approved by the state’s Public Utilities Commission, these charges in the
aggregate are dependent on the volume of water ordered from the subsidiary by the parent
company. Thus, Aqua Well’s transmission revenue amount must be offset against Aqua Water’s
transmission expense amount if the consolidated income statement for the two companies is to
comply with generally accepted accounting principles for consolidated financial statements.
Case 8–5 The Audit Committee of the
Board of Directors
Padgett Corporation
At your request, I have found the following misstatements in the condensed consolidated
financial statements of Padgett Corporation and subsidiary, Seacoast Company, for the year
ended December 31, 2006:
Income statement:
Net sales overstated $650,000
Cost of goods sold overstated $500,000
Gain on sale of land overstated $200,000
Pre-tax income overstated $350,000
Income tax expense overstated $119,000 ($350,000 x
0.34)
Net income overstated $231,000
Basic earnings per share overstated $3.85 ($231,000 ÷ 60,000
shares)a 70%
overstatement
20 06
Oct 21 Intercompany Notes Receivable 1 0 0 0 0 0
Cash 1 0 0 0 0 0
To record loan to Scopes Company on 90-day, 7 ½%
promissory note.
b. Scopes Company
Journal Entries
20 06
Oct 21 Cash 1 0 0 0 0 0
Intercompany Notes Payable 1 0 0 0 0 0
To record loan from Prentiss Corporation on 90-day,
7 ½% promissory note.
20 06
May 1 Intercompany Notes Receivable 1 5 0 0 0
Cash 1 5 0 0 0
To record 7 ½%, 120-day loan to Sarpy Company.
20 06
May 1 Cash 1 5 0 0 0
Intercompany Notes Payable 1 5 0 0 0
To record 7 ½%, 120-day loan from Pillsbury
Corporation.
31 Cash 2 0 0 0 0
Intercompany Notes Payable 2 0 0 0 0
To record 7 ½%, 120-day loan from Pillsbury
Corporation.
30 Interest Expense 7 5
Intercompany Interest Expense 1 2 5
Interest Payable 7 5
Intercompany Interest Payable 1 2 5
To accrue interest at June 30, 2006, as follows:
$15,000 x 0.075 x 24/360 = $75
$20,000 x 0.075 x 30/360 = $125
(2)
Intercompany Interest Receivable 1 1 1
Intercompany Interest Re eivao
Ðec m
Pittsburgh Corporation (concluded) Pr. 8–3
b. Syracuse Company (subsidiary company)
Correcting Entries
July 31, 2005
(1)
Intercompany Account—Pittsburgh Corporation 5 6 0 0
Intercompany Management Fee Expense 4 2 0 0
Intercompany Interest Expense 2 0 0
Intercompany Accounts Payable 1 0 0 0 0
To close Intercompany Account and transfer balances
to appropriate accounts.
(2)
Cash in Transit 5 0 0 0
Intercompany Accounts Payable 5 0 0 0
To record cash advance in transit from Pittsburgh
Corporation on July 31, 2005.
(3)
Intercompany Interest Expense 1 1 1
Intercompany Interest Payable 1 1 1
To accrue interest on advance from Pittsburgh
Corporation dated June 21, 2005.
(4)
Intercompany Management Fee Expense 2 4 0 0
Intercompany Accounts Payable 2 4 0 0
To accrue management fee due to Pittsburgh
Corporation for July, 2005.
Balance Sheet
Assets
Intercompany receivables
(payables) 1 7 5 1 1 ( 1 7 5 1 1 )
20 05
July 1 Cash 1 6 0 0 0
Accumulated Depreciation of Machinery 1 8 0 0 0
Machinery 3 0 0 0 0
Intercompany Gain on Sale of Machinery 4 0 0 0
To record sale of machinery to Sommer Company.
20 06
June 30 Cash ($400,000 x 0.08) 3 2 0 0 0
Investment in Sommer Company Bonds ($43,389 –
$32,000) 1 1 3 8 9
Intercompany Interest Revenue ($361,571 x
0.12) 4 3 3 8 9
To record receipt of annual interest on Sommer
Company’s 8% bonds.
Computations:
*($500,000 – $24,870) x 0.10 x 4/5 = $38,010
†$24,870 x 4/5 = $19,896
20 08
Feb 28 Accumulation of discount ($32,102 –
$30,000) 2 1 0 2 5 3 7 1 3 6 dr
Aug 31 Accumulation of discount ($32,228 –
$30,000) 2 2 2 8 5 3 9 3 6 4 dr
Silver Company
Ledger Accounts
Intercompany Bonds Payable
Date Explanation Debit Credit Balance
20 07
Aug 31 Bonds acquired by parent company 6 0 0 0 0 0 6 0 0 0 0 0 cr
20 08
Aug 31
(a) Intercompany Interest Revenue—Pollard 6 4 3 3 0
Intercompany Bonds Payable—Silver 6 0 0 0 0 0
Discount on Intercompany Bonds Payable—
Silver 3 1 3 8 8
Investment in Silver Company Bonds—Pollard 5 3 9 3 6 4
Intercompany Interest Expense—Silver 6 2 3 5 1
Retained Earnings—Silver 3 1 2 2 7
To eliminate subsidiary’s bonds owned by parent
company, and related interest revenue and expense;
and to increase subsidiary’s beginning retained
earnings by amount of unamortized realized gain on
the extinguishment of the bonds. (Income tax effects
are disregarded.)
20 07
Dec 31
(a) Intercompany Liability under Capital Lease—Stoffer 2 3 0 5 9
Unearned Intercompany Interest Revenue—Procus 1 9 9
4 1
Retained Earnings—Procus ($60,242 – $32,000) 2 8 2 4 2
Intercompany Lease Receivables—Procus 2 5 0 0 0
Leased Equipment—Capital Lease—Stoffer
($28,242 – $4,707) 2 3 5 3 5
Depreciation Expense—Stoffer ($28,242 ÷ 6) 4 7 0 7
To eliminate intercompany accounts associated with
intercompany lease and to defer unrealized portion of
intercompany gross profit on sales-type lease. (Income
tax effects are disregarded.)
Note to instructor:
Because only a consolidated balance sheet is
prepared on the date of a business combination,
unrealized or realized intercompany profits
(gains) in eliminations (b) and (c) must be
debited or credited to the subsidiary’s retained
earnings.
Notes to Instructor:
(1) Goodwill on July 1, 2005, is computed as follows:
Cost of Power’s investment in Snyder $ 1 5 8 6 0 0
Carrying amount of Snyder’s identifiable net assets
($125,000 + $12,000 + $50,000) $ 1 8 7 0 0 0
Add: Amounts applicable to Snyder’s inventories and equipment
($3,000 + $4,000) 7 0 0 0
Subtotal $ 1 9 4 0 0 0
Percentage ownership acquired by Power 8 0 % 1 5 5 2 0 0
Goodwill $ 3 4 0 0
Spangler Company
Adjusting Entries
December 31, 2005
Intercompany Notes Payable 3 0 0 0
Intercompany Interest Payable 1 8 0
Interest Expense 1 8 0
Notes Payable 3 0 0 0
Interest Payable 1 8 0
Intercompany Interest Expense 1 8 0
To set up accounts for note payable and related
interest discounted with bank by Pritchard Corporation
(the payee).
Interest expense: $3,000 x 0.12 x 6/12 = $180.