Chapter 5-AFA

16. (15 Minutes) (Determine selected consolidated balances; includes inventory

transfers and an outside ownership.)
Customer list amortization = $78,000/4 years = $19,500 per year
Intercompany Gross profit ($180,000 – $130,000) ....................... $50,000
Inventory Remaining at Year's End ............................................... 10%
Unrealized Intercompany Gross profit, 12/31 .............................. $5,000
CONSOLIDATED TOTALS
 Inventory = $795,000 (add the two book values and subtract the ending
unrealized gross profit of $5,000) => 500+300-5
 Sales = $1,620,000 (add the two book values and subtract the $180,000
intercompany transfer) => 1000+800-180
 Cost of Goods Sold = $725,000 (add the two book values and subtract the
intercompany transfer and add [to defer] ending unrealized gross profit) =>500+400-180+5
 Operating Expenses = $549,500 (add the two book values and the
amortization expense for the period) =>230+300-19.5
 Noncontrolling Interest in Subsidiary's Net Income = ??? ko biết

17.
Consideration transferred by Corgan $980,000
Noncontrolling interest fair value 245,000
Smashing’s acquisition-date fair value 1,225,000
Book value of subsidiary 950,000
Excess fair over book value 275,000
Excess assigned to covenants 275,000
Useful life in years ÷ 20
Annual amortization $13,750
2017 Ending Inventory Profit Deferral
 Cost = $100,000 ÷ 1.6 = $62,500
 Intercompany Gross profit = $100,000 – $62,500 = $37,500
 Ending inventory gross profit = $37,500 × 40% = $15,000
2018 Ending Inventory Profit Deferral
 Cost = $120,000 ÷ 1.6 = $75,000
 Intercompany Gross profit = $120,000 – $75,000 = $45,000
 Ending inventory gross profit = $45,000 × 40% = $18,000
a. Investment account:
Consideration transferred, January 1, 2017 $980,000
Smashing’s 2009 income × 80% $120,000
Covenant amortization (13,750 × 80%) (11,000)
Ending inventory profit deferral (100%) (15,000 )
Equity in Smashing’s earnings 94,000
2017 dividends (28,000 )
Investment balance 12/31/17 $1,046,000
Smashing’s 2018 income × 80% $104,000
Covenants amortization (13,750 × 80%) (11,000)
Beginning inventory profit recognition 15,000
Ending inventory profit deferral (100%) (18,000 )
Equity in Smashing’s earnings 90,000
2018 dividends (36,000 )
Investment balance 12/31/18 $1,100,000
b. 12/31/18 Worksheet Adjustments
*G Equity in earnings of Smashing 15,000
COGS 15,000

S Common stock—Smashing 700,000

Retained earnings—Smashing 365,000
Investment in Smashing 852,000
Noncontrolling interest 213,000
A Covenants 261,250
Investment in Smashing 209,000
Noncontrolling interest 52,250

I Equity in earnings of Smashing 75,000

Investment in Smashing 75,000

D Investment in Smashing 36,000

Dividends paid 36,000

E Amortization expense 13,750

Covenants 13,750

TI Sales 120,000
COGS 120,000

G COGS 18,000
Inventory 18,000

19.
a. Conversion from Markup on Cost to Gross Profit Rate
Markup (given as a percentage of cost) .................................. 25%
Convert to gross profit rate [.25 ÷ (1.00 + 0.25)] ...................... 20%
Noncontrolling Interest's Share of Subsidiary’s Income
Reported income of subsidiary—2010 ..................................... $160,000
2017 intercompany gross profit realized in 2018
($250,000 × 30% × 20%) ........................................................ 15,000
2018 intercompany gross profit deferred
($300,000 × 30% × 20%) ........................................................ (18,000 )
Realized income of subsidiary—2018 ................................ $157,000
Outside ownership ................................................................... 40%
Noncontrolling interest's share of subsidiary's income .. $62,800
b. Entry *G
Retained Earnings, Jan. 1 (subsidiary) ......... 15,000
Cost of Goods Sold ................................... 15,000
To remove intercompany gross profit from previous year so that it can be
recognized in current year.
Entry Tl
Sales ................................................................. 300,000
Cost of Goods Sold (purchases) ............. 300,000
To eliminate intercompany inventory sale and purchase.
Entry G
Cost of Goods Sold ........................................ 18,000
Inventory .................................................... 18,000
To remove effects of current year unrealized gross profit.

20.
a. Consolidated Cost of Goods Sold
Protrade’s cost of goods sold .................................................. $410,000
Seacraft’s cost of goods sold ...................................................... 317,000
Elimination of 2018 intercompany transfers .......................... (134,000)
Reduction of beginning Inventory because of
2017 unrealized gross profit ($52,000/1.6 = $32,500
cost; $52,000 transfer price less $32,500
cost = $19,500 unrealized gross profit) ............................... (19,500)
Reduction of ending inventory because of
2018 unrealized gross profit ($66,000/1.6 = $41,250
cost; $66,000 transfer price less $41,250
cost = $24,75 unrealized gross profit) ............................. 24,750
Consolidated cost of goods sold .................................. $598,250

Consolidated Inventory
P book value ............................................................. $370,000
S book value ................................................................. 144,000
Eliminate ending unrealized gross profit (see above) ..... (24,750 )
Consolidated Inventory ....................................................... $489,250
Noncontrolling Interest in Subsidiary’s Net Income
Because all intercompany sales were downstream, the deferrals do not
affect Snow. Thus, the noncontrolling interest is 20% of the $202,000
(revenues minus cost of goods sold and expenses=880+600-410-317-174-129-114-134) reported income
or $40,400.
b. Consolidated Cost of Goods Sold
P book value .................................................................. $410,000
S book value ...................................................................... 317,000
Elimination of 2018 intercompany transfers .......................... (104,000)
Reduction of beginning inventory because of
2017 unrealized gross profit ($45,000/1.6 = $28,125
cost; $45,000 transfer price less $28,125
cost = $16,875 unrealized gross profit) ............................... (16,875)
Reduction of ending inventory because of
2018 unrealized gross profit ($59,000/1.6 = $36,875
cost; $59,000 transfer price less $36,875
cost = $22,125 unrealized gross profit) ............................. 22,125
Consolidated cost of goods sold ............................................ $628,250

Consolidated Inventory
P book value .................................................................. $370,000
S book value ...................................................................... 144,000
Eliminate ending unrealized gross profit (see above) ........... (22,125 )
Consolidated inventory ....................................................... $491,875
Noncontrolling Interest in Subsidiary's Net income
Since all intercompany sales are upstream, the effect on Snow's income
must be reflected in the noncontrolling interest computation:
S reported income ............................................................. $202,000
2017 unrealized gross profit realized in 2018 (above) ........... 16,875
2018 unrealized gross profit to be realized in 2019 (above) . (22,125)
S realized income .............................................................. ko bt
Outside ownership percentage ............................................... 20%
Noncontrolling interest in Snow's income ........................ ko bt