Chapter 06 – Intercompany Inventory Transactions

CHAPTER 6

INTERCOMPANY INVENTORY TRANSACTIONS

ANSWERS TO QUESTIONS

Q6-1 All inventory transfers between related companies must be eliminated to avoid an
overstatement of revenue and cost of goods sold in the consolidated income statement. In
addition, when unrealized profits exist at the end of the period, the eliminations are needed to
avoid overstating inventory and consolidated net income.

Q6-2 An inventory transfer at cost results in an overstatement of sales and cost of goods sold.
While net income is not affected, gross profit ratios and other financial statement analysis may
be substantially in error if appropriate eliminations are not made.

Q6-3 An upstream sale occurs when the parent purchases items from one or more
subsidiaries. A downstream sale occurs when the sale is made by the parent to one or more
subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits so
that the person preparing the consolidation worksheet will know whether to reduce consolidated
net income assigned to the controlling interest by the full amount of the unrealized profit
(downstream) or reduce consolidated income assigned to the controlling and noncontrolling
interests on a proportionate basis (upstream).

Q6-4 As in all cases, the total amount of the unrealized profit must be eliminated in preparing
the consolidated statements. When the profits are on the parent company's books (downstream
sale), consolidated net income and income assigned to the controlling interest are reduced by
the full amount of the unrealized profit.

Q6-5 Consolidated net income is reduced by the full amount of the unrealized profits. In the
upstream sale, the unrealized profits are apportioned between the parent company
shareholders and the noncontrolling shareholders. Thus, consolidated net income assigned to
the controlling and noncontrolling interests is reduced by a pro rata portion (based on ownership
percentage) of the unrealized profits.

Q6-6 The elimination of unrealized intercompany profits on an upstream sale will have a
greater effect on income assigned to the noncontrolling interest. Income assigned to the
noncontrolling interest is affected when unrealized profits are recorded on the subsidiary's
books as a result of an upstream sale. A downstream sale would have no effect on the income
assigned to noncontrolling interest because the profits are on the books of the parent and are,
therefore, eliminated from the consolidated net income assigned to the controlling interest only.

Q6-7 The basic consolidation entry needed when the item is resold before the end of the
period is:

Sales XXXXXX
Cost of Goods Sold XXXXXX

The debit to sales is based on the intercorporate sale price. This means that only the revenue
recorded by the company ultimately selling to the nonaffiliate is to be included in the
consolidated income statement. Cost of goods sold is credited for the amount paid by the
purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded by

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Chapter 06 – Intercompany Inventory Transactions

the initial owner to be reported as cost of goods sold in the consolidated statement.

Q6-8 The consolidation entry needed when one or more of the items are not resold before the
end of the period is:

Sales XXXXXX
Cost of Goods Sold XXXXXX
Inventory XXXXXX

The debit to sales is for the full amount of the transfer price. Inventory is credited for the
unrealized profit at the end of the period and cost of goods sold is credited for the amount
charged to cost of goods sold by the company making the intercompany sale. Additionally, the
basic consolidation entry would need to be adjusted to reflect the deferred gross profit.

Q6-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an
external party. The amount reported as cost of goods sold is based on the amount paid for the
inventory when it was produced or purchased from an external party. If inventory has been
purchased by one company and sold to a related company, the cost of goods sold recorded on
the intercorporate sale must be eliminated.

Q6-10 No adjustment to retained earnings is needed if the intercorporate sales have been
made at cost or if all intercorporate sales have been resold to an external party in the same
accounting period. If all of the intercorporate sales have not been resold by the end of the
period, under the fully adjusted equity method, the parent defers unrealized profits in the
investment in sub and income from sub accounts so no Retained Earnings adjustment would be
needed under the modified equity or cost methods. This adjustment would need to be made to
retained earnings during consolidation. However, regardless of the parent’s method for
accounting for the investment, the amount of the noncontrolling interest is reduced by the NCI’s
proportionate share of the unrealized profit associated with upstream sales.

Q6-11 A proportionate share of the realized retained earnings of the subsidiary are assigned to
the noncontrolling interest. Any unrealized profits on upstream sales are deducted
proportionately from the amount assigned to the noncontrolling interest. Unrealized profits on
downstream sales do not affect the noncontrolling interest.

Q6-12 When inventory profits from a prior period intercompany transfer are realized in the
current period, the profit is added to consolidated net income and to the income assigned to the
shareholders of the company that made the intercompany sale. If the unrealized profits arise
from a downstream sale, income assigned to the controlling interest will increase by the full
amount of profit realized. When the profits arise from an upstream sale, income assigned to the
controlling and noncontrolling interests will be increased proportionately in the period the profit
is realized. Thus, knowledge of whether the profits resulted from an upstream or a downstream
sale is imperative in assigning consolidated net income to the appropriate shareholder group.
However, consolidated net income is not affected by a change in the direction of sale.

Q6-13 Under the fully adjusted equity method, consolidated retained earnings is not affected
directly by unrealized profits. Unrealized profits are deferred in the investment in sub and
income from sub accounts on the parent’s books. Income from sub is closed out to retained
earnings, so the deferral of unrealized profits indirectly affects retained earnings. As a result, the
amount reported for consolidated retained earnings is always equal to the parent’s retained
earnings. Under the modified equity or cost methods, these adjustments to income and
retained earnings would be made during consolidation and the consolidated retained earnings
will be the same under any of the methods.

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Chapter 06 – Intercompany Inventory Transactions

Q6-14 Consolidated retained earnings are always equal to the parent’s retained earnings under
the fully adjusted equity method. Since the parent company defers unrealized profits in the
income from sub and investment in sub accounts and since income from sub is closed out to the
parent’s retained earnings, the ending balance in consolidated retained earnings will reflect the
reduction associated with the deferral of unrealized profits. Under the modified equity or cost
methods, these adjustments to income and retained earnings would be made during
consolidation and the consolidated retained earnings will be the same under any of the
methods.

Q6-15* Sales between subsidiaries are treated in the same manner as upstream sales.
Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the
end of the period are eliminated and consolidated net income and income assigned to the
controlling and noncontrolling interests is reduced.

Q6-16* When a company is acquired in a business combination the transactions occurring

before the combination generally are regarded as transactions with unrelated parties and no
adjustments or eliminations are needed. All transactions between the companies following the
combination must be fully eliminated.

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Chapter 06 – Intercompany Inventory Transactions

SOLUTIONS TO CASES

C6-1 Measuring Cost of Goods Sold

a. While the rule covers only a part of the elimination needed, Charlie is correct in that the cost
of goods sold recorded by the selling company must be eliminated to avoid overstating that
portion of the consolidated income statement.

b. The rules will result in the proper consolidated totals if rule #1 is expanded to include a debit
to sales and a credit to ending inventory for the amount of profit recorded by the company that
sold to its affiliate.

c. The way in which the rule is stated makes it appear to be incorrect, but it is correct. The rule
is appropriate in that the cost of goods sold recorded by the purchasing affiliate is equal to the
cost of goods sold to the first owner plus the profit the first owner recorded on the sale.
Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold. If
an equal amount of sales is eliminated, the rule should result in proper consolidated financial
statement totals.

d. The employee would be forced to look at the books of the selling affiliate and determine the
difference between the intercorporate sale price and the price it paid to acquire or produce the
items. If the items sold to affiliates are routinely produced and/or costs do not fluctuate greatly, it
may be possible to use some form of gross profit ratio to estimate the amount of unrealized
profit.

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Chapter 06 – Intercompany Inventory Transactions

C6-2 Inventory Values and Intercompany Transfers

MEMO

To: President
Water Products Corporation

From: , CPA

Re: Inventory Sale and Purchase of New Inventory

If Water Products holds only a small percent of the ownership of Plumbers Products and
Growinkle Manufacturing, it should have no difficulty in reporting the desired results. This would
not be the case if the two companies are subsidiaries of Water Products (i.e. Water Products
owns a controlling interest in Plumbers Products and Growinkle Manufacturing).

If both Plumbers Products and Growinkle are subsidiaries of Water Products, both the sale of
inventory to Plumbers Supply and the purchase of inventory from Growinkle Manufacturing must
be eliminated. In addition, the unrealized profit on any unsold inventory involved in these
transfers must be eliminated in preparing the financial statements for the current period.

Assuming the companies are consolidated, the consolidated income statement should include
the same amount of income on the inventory sold to Plumbers Supply and resold during the
year as would have been recorded if Water Products had sold the inventory directly to the
purchaser (not through Plumbers Supply). Any income recorded by Water Products on inventory
not resold by Plumbers Supply must be eliminated.

Similarly, the consolidated income statement should include the same amount of income on the
inventory purchased by Water Products and resold during the year as would have been
recorded if Growinkle Manufacturing had sold the inventory directly to the purchaser. Any
income recorded by Growinkle Manufacturing on inventory not resold by Water Products must
be eliminated.

Consolidated net income may increase if Plumbers Supply is able to sell the inventory it
purchased from Water Products at a higher price than would have been received by Water
Products or if it is able to sell a larger number of units. The same can be said for the inventory
purchased by Water Products from Growinkle Manufacturing. It is important to recognize that
the transfer of inventory between Water Products and its subsidiaries does not in itself generate
income for the consolidated entity, nor does it increase the value of the inventory still held by the
consolidated entity.

An additional level of complexity arises in this situation since Water Products uses the LIFO
inventory method. Water Products should carry over its LIFO cost basis on the old inventory
sold to Plumbers Supply to the new inventory purchased from Growinkle Manufacturing since it
was replaced within the same accounting period.

Primary citation:
ASC 810

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Chapter 06 – Intercompany Inventory Transactions

C6-3 Unrealized Inventory Profits

a. When the amount of unrealized inventory profits on the books of the subsidiary at the
beginning of the period is greater than the amount at the end of the period, the income assigned
to the noncontrolling interest for the period will exceed a pro rata portion of the reported net
income of the subsidiary.

b. The subsidiary apparently had less unrealized inventory profit at the end of the period than it
did at the start of the period. In addition, the parent must have had more unrealized profit on its
books at the end of the period than it did at the beginning. The negative effect of the latter
apparently offset the positive effect of the reduction in unrealized profits by the subsidiary.

c. The most likely reason is that a substantial amount of the parent company sales was made to
its subsidiaries and the cost of goods sold on those items was eliminated in preparing the
consolidated statements.

d. A loss was recorded by the seller on an intercompany sale of inventory to an affiliate and the
purchaser continues to hold the inventory.

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Chapter 06 – Intercompany Inventory Transactions

C6-4 Eliminating Inventory Transfers

a. If no intercompany sales are eliminated, the income statement may include overstated sales
revenue and cost of goods sold. The net impact on income will depend upon whether there
were more unrealized profits at the beginning or end of the year. If Ready Building does not hold
total ownership of the subsidiaries, the amount of income assigned to noncontrolling
shareholders is likely to be incorrect as well.

Inventory, current assets and total assets, retained earnings, and stockholders' equity are likely
to be overstated if inventories are sold to affiliates at a profit. If the companies pay income taxes
on their individual earnings, the amount of income tax expense also will be overstated in the
period in which unrealized profits are reported and understated in the period in which the profits
are realized.

b. Because profit margins vary considerably, the amount of unrealized profit may vary
considerably if uneven amounts of product are purchased by affiliates from period to period.
Ready Building needs to establish a formal system to monitor intercompany sales. Perhaps the
best alternative would be to establish a separate series of accounts to be used solely for
intercompany transfers. Alternatively, it may be possible to use unique shipping containers for
intercompany sales or to specifically mark the containers in some way to identify the
intercompany shipments at the time of receipt. The purchaser might then use a different type of
inventory tag or mark these units in some way when the product is received and placed in
inventory. Inventory count teams could then easily identify the product when inventories are
taken.

c. A number of factors might be considered. The most important inventory system is the one
used by the company making the intercompany purchase. When intercompany inventory
purchases are bunched at the end of the year, the amount of unrealized profit included in
ending inventory may be quite different under FIFO versus LIFO. If intercompany purchases are
placed in a LIFO inventory base, inventories may be misstated for a period of years before the
inventory is resold. Consolidation entries must be made each of the years until resale to avoid a
misstatement of assets and equities. In those cases where the intercompany purchases are in
high volume and the inventory turns over very quickly, a small amount of inventory left at the
end of the period may be immaterial and of little concern. Typically, a parent will align inventory
costing methods subsequent to a subsidiary acquisition to avoid problems caused by
differences in accounting for the same items or types of items.

d. It may be necessary to start by looking at intercorporate cash receipts and disbursements to

determine the extent of intercorporate sales. One or more months might be selected and all
vouchers examined to establish the level of intercorporate sales and the profit margins recorded
on the sales. For those products sold throughout the year, it may be possible to estimate for the
year as a whole based on an examination of several months. Once total intercompany sales
and profit margins have been estimated, the amount of unrealized profit at year end should be
estimated. One approach would be to take a physical inventory of the specific product types
which have been identified and attempt to trace back using the product identification numbers or
shipping numbers to determine what portion of the inventory on hand was purchased from
affiliates.

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Chapter 06 – Intercompany Inventory Transactions

C6-5 Intercompany Profits and Transfers of Inventory

a. In its 2020 10-K filing, the company states “All significant intercompany accounts and
transactions have been eliminated” (see Note 1 – Basis of Presentation and Summary of
Significant Accounting Policies). The intercompany transfers of Xerox (www.xerox.com)
between segments are apparently relatively insignificant because they are not reported
in the notes to the consolidated financial statements relating to segment reporting.

b. Exxon Mobil prices intercompany transfers at estimated market prices. The amount of
intercompany transfers is large. In the fiscal year ending December 31, 2020, Exxon
Mobil reported eliminations of $65.8 billion of intersegment revenue, which does not
include intercompany transfers within segments. This amount represents just over one-
third of total reported segment sales. For consolidation purposes, Exxon Mobil
eliminates the effects of intercompany transactions.

c. Ford Motor Company intercompany transfers consist primarily of vehicles, parts, and
components manufactured by the company and its subsidiaries, with a smaller amount
of financial and other services included. The amount of intercompany transfers is
relatively small in relation to sales to unaffiliated customers. The effects of intercompany
transfers are eliminated in consolidation.

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Chapter 06 – Intercompany Inventory Transactions

SOLUTIONS TO EXERCISES

E6-1 Multiple-Choice Questions on Intercompany Inventory Transfers

[AICPA Adapted]

1. a – All intercompany sales and cost of goods sold must be eliminated in consolidation to
prevent double counting.

(b) Incorrect. The entire amount of sales and cost of goods gold must be eliminated.
(c) Incorrect. Net income is not directly reduced with a consolidation entry. Instead, sales
and cost of goods sold are adjusted.
(d) Incorrect. Adjustments to sales and cost of goods sold are required.

2. c – $500,000 = ($400,000 +$350,000 - $250,000)

3. a – $56,000 = ($40,000 *1.4)

4. c – $56,000. The revenue would be overstated by the amount of cost of goods sold that
should have been eliminated.

5 c– Net assets reported $320,000

Profit on intercompany sale $48,000
Proportion of inventory unsold at year end
($60,000 / $240,000) x 0.25
Unrealized profit at year end (12,000)
Amount reported in consolidated statements $308,000

6 c– Inventory reported by Banks ($175,000 + $60,000) $235,000

Inventory reported by Lamm 250,000
Total inventory reported $485,000
Unrealized profit at year end
[$50,000 x ($60,000 / $200,000)] (15,000)
Amount reported in consolidated statements $470,000

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Chapter 06 – Intercompany Inventory Transactions

7. b –
Ending
Total = Re-sold + Inventory
Sales 500,000 400,000 100,000
COGS 200,000 160,000 40,000
Gross Profit 300,000 240,000 60,000
Gross Profit % 60% (based on overall sales info)

Worksheet Entry (not requested in problem)

500,00
Sales 0
Cost of Goods Sold 440,000
Inventory 60,000
The basic entry (not shown) would be adjusted for 60,000 of deferred
profit to complete the elimination process.

Partial Worksheet

Park Small DR CR Consolidated

Sales 2,000,000 1,400,000 500,000 2,900,000
Less: COGS (800,000) (700,000) 440,00 (1,060,000)
0

Note: Answer b in the actual CPA examination question

was $1,100,000, requiring candidates to select
the closest answer.

E6-2 Multiple-Choice Questions on the Effects of Inventory Transfers [AICPA Adapted]

1. d– $32,000 = ($200,000 + $140,000)

– $308,000

2. b– $6,000 = ($26,000 + $19,000) –

$39,000

3. c– $9,000 = Inventory held by Spin $12,000

($32,000 x 0.375)
Unrealized profit on sale
[($30,000 + $25,000) (3,000)
– $52,000]
Carrying cost of
inventory for $ 9,000
Power

4. b– 0.20 = $14,000 / [(Stockholders’ Equity $50,000) +(Patent

$20,000)]

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Chapter 06 – Intercompany Inventory Transactions

5. b– 14 years = ($28,000 / [(28,000 - $20,000) / 4 years]

E6-3 Multiple Choice – Consolidated Income Statement

1. c– The only sales recorded are sales to non-affiliates.

2. b– The amount of cost of goods sold is the cost at

which Blue had produced the inventory.

3. c– Total income ($86,000 - $47,000) $39,000

Income assigned to noncontrolling
interest [0.40($86,000 - $60,000)] (10,400)
Consolidated net income assigned
to controlling interest $28,600

E6-4 Multiple-Choice Questions — Consolidated Balances

1 c– The only sales recorded are sales to non-affiliates.

.

2 a– Amount paid by Lorn Corporation $120,000

.
Unrealized profit (45,000)
Actual cost $ 75,000
Portion sold x 0.80
Cost of goods sold $ 60,000

3 e– Consolidated sales $140,000

.
Cost of goods sold (60,000)
Consolidated net income $ 80,000
Income to Dresser’s noncontrolling
interest:
Sales $120,000
Reported cost of sales (75,000)
Report income $ 45,000
Portion realized x 0.80
Realized net income $ 36,000
Portion to Noncontrolling
Interest x 0.30
Income to noncontrolling
Interest (10,800)
Income to controlling interest $ 69,200

4 a– Inventory reported by Lorn $ 24,000

.
Unrealized profit ($45,000 x .20) (9,000)
Ending inventory reported $ 15,000

E6-5 Multiple-Choice Questions — Consolidated Income Statement

1 a– $20,000 = $30,000 x [($48,000 - $16,000) / $48,000]

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Chapter 06 – Intercompany Inventory Transactions

2 d– Sales reported by Movie Productions Inc. $67,000

.
Cost of goods sold ($30,000 x 2/3) (20,000)
Consolidated net income $47,000

3 a– $7,000 = [($67,000 - $32,000) x 0.20]

.

E6-6 Realized Profit on Intercompany Sale

a. Journal entries recorded by Planet Corporation:

(1) Inventory 960,000

Cash (Accounts Payable) 960,000

(2) Cash (Accounts Receivable) 750,000

Sales 750,000

(3) Cost of Goods Sold 600,000

Inventory 600,000

b. Journal entries recorded by Saturn Company:

(1) Inventory 750,000

Cash (Accounts Payable) 750,000

(2) Cash (Accounts Receivable) 1,125,000

Sales 1,125,000

(3) Cost of Goods Sold 750,000

Inventory 750,000

c. Consolidation entry:

Sales 750,000
Cost of Goods Sold 750,000

The basic entry (not shown) would complete the elimination process. No
adjustment to the basic entry would be needed since there is no deferred profit in
this situation.

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Chapter 06 – Intercompany Inventory Transactions

E6-7 Sale of Inventory to Subsidiary

a. Journal entries recorded by Planet Corporation:

(1) Inventory 960,000

Cash (Accounts Payable) 960,000

(2) Cash (Accounts Receivable) 750,000

Sales 750,000

(3) Cost of Goods Sold 600,000

Inventory 600,000

b. Journal entries recorded by Saturn Company:

(1) Inventory 750,000

Cash (Accounts Payable) 750,000

(2) Cash (Accounts Receivable) 810,000

Sales 810,000

(3) Cost of Goods Sold 540,000

Inventory 540,000

c. Consolidation entry:

Sales 750,000
Cost of Goods Sold 708,000
Inventory 42,000
The basic entry (not shown) would be adjusted by 42,000 of deferred profit to
complete the elimination process.

Calculations
Ending
Re- Inventor
Total = Sold + y
750,00 540,00
Sales 0 0 210,000
600,00 432,00
COGS 0 0 168,000
150,00 108,00
Gross Profit 0 0 42,000
Gross Profit % 20%

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Chapter 06 – Intercompany Inventory Transactions

E6-8 Inventory Transfer between Parent and Subsidiary

a. Planner Corporation reported cost of goods sold of $820,000 ($82 x 10,000

desks) and Schedule Company reported cost of goods sold of $658,000 ($94 x
7,000 desks).

b. Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks).

c. Consolidation entry:

Sales 940,000
Cost of Goods Sold 904,000
Inventory 36,000
The basic entry (not shown) would be adjusted by 36,000 of deferred profit to
complete the elimination process.

Calculations
Ending
Re- Inventor
Total = sold + y
940,00 658,00
Sales 0 0 282,000
820,00 574,00
COGS 0 0 246,000
120,00
Gross Profit 0 84,000 36,000
12.77
Gross Profit % %

d. Consolidation entry:

Investment in Schedule Company 36,000

Cost of Goods Sold 36,000
The basic entry (not shown) would be adjusted by 36,000 to reverse the
gross profit deferral and complete the elimination process.

e. Consolidation entry:

Investment in Schedule Company 21,600

NCI in NA of Schedule Company 14,400
Cost of Goods Sold 36,000
The basic entry (not shown) would be adjusted by 36,000 to reverse the gross
profit deferral and complete the elimination process.

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Chapter 06 – Intercompany Inventory Transactions

E6-9 Income Statement Effects of Unrealized Profit

a. Sale price to Pie Bakery per bag ($900,000 / 100,000) $ 9.00

Profit per bag [$9.00 - ($9.00 / 1.5)] (3.00)
Cost per bag $ 6.00
Bags sold by Pie Bakery (100,000 - 20,000) x 80,000
Consolidated cost of goods sold $480,000

b. Sales 900,000
Cost of Goods Sold 840,000
Inventory ($3.00 x 20,000 bags) 60,000
The basic entry (not shown) would adjusted by 60,000 of deferred profit to
complete the elimination process.

Calculations
Ending
Total = Re-sold + Inventory
Sales 900,000 720,000 180,000
COGS 600,000 480,000 120,000
Gross Profit 300,000 240,000 60,000
Gross Profit
% 33.33%

Required Adjustment to Cost of Goods Sold:

Cost of goods sold — Slice ($900,000 / 1.5) $ 600,000

Cost of goods sold — Pie ($9.00 x 80,000 units) 720,000
$1,320,000
Consolidated cost of goods sold ($6.00 x 80,000 units) (480,000)
Required adjustment $ 840,000

c. Operating income of Pie Bakery $400,000

Net income of Slice Products 150,000
$550,000
Less: Unrealized inventory profits (60,000)
Consolidated net income $490,000
Less: Income assigned to noncontrolling interest
($150,000 - $60,000 unrealized profit) x 0.40 (36,000)
Income assigned to controlling interest $454,000

Alternate computation:
Operating income of Pie Bakery $400,000
Net income of Slice Products $150,000
Unrealized profits ($3.00 x 20,000 units) (60,000)
Realized net income $ 90,000
Ownership held by Pie Bakery x 0.60
54,000
Income assigned to controlling interest $454,000

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Chapter 06 – Intercompany Inventory Transactions

E6-10 Prior-Period Unrealized Inventory Profit

a. Cost per bag of flour ($9.00 / 1.5) $ 6.00

Bags sold x 20,000
Cost of goods sold from inventory held, January 1, 20X9 $120,000

b.
Investment in Slice 36,000
NCI in NA of Slice 24,000
Cost of Goods Sold 60,000
$60,000 = 20,000 bags x $3.00
The basic entry (not shown) would be adjusted by 60,000 to reverse the
gross profit deferral and complete the elimination process.

c. Operating income of Pie Bakery $300,000

Net income of Slice Products 250,000
$550,000
Add: Inventory profits realized in 20X9 60,000
Consolidated net income $610,000
Less: Income assigned to noncontrolling shareholders
($250,000 + $60,000) x 0.40 (124,000)
Income assigned to controlling interest $486,000

Alternate computation:
Operating income of Pie Bakery $300,000
Net income of Slice Products $250,000
Inventory profits realized in 20X9 60,000
Realized net income $310,000
Ownership held by Pie Bakery x 0.60
186,000
Income assigned to controlling interest $486,000

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Chapter 06 – Intercompany Inventory Transactions

E6-11 Computation of Consolidated Income Statement Data

Downstream Transaction Calculations

Ending
Total = Re-sold + Inventory
Sales 30,000 24,000 6,000
COGS 20,000 16,000 4,000
Gross Profit 10,000 8,000 2,000
Gross Profit % 33.33%

Worksheet Entry (not requested in problem)

Sales 30,000
Cost of Goods Sold 28,000
Inventory 2,000
The basic entry (not shown) would be adjusted by 2,000 of deferred
profit to complete the elimination process.

Upstream Transaction Calculations

Ending
Total = Re-sold + Inventory
Sales 80,000 60,000 20,000
COGS 50,000 37,500 12,500
Gross Profit 30,000 22,500 7,500
Gross Profit % 37.50%

Worksheet Entry (not requested in problem)

Sales 80,000
Cost of Goods Sold 72,500
Inventory 7,500
The basic entry (not shown) would be adjusted by 7,500 of deferred
profit to complete the elimination process.

a. Reported sales of Player Company $400,000

Reported sales of Scout Company 200,000
$600,000
Intercompany sales by Player Company in 20X5 $ 30,000
Intercompany sales by Scout Company in 20X5 80,000 (110,000)
Sales reported on consolidated income statement $490,000

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Chapter 06 – Intercompany Inventory Transactions

E6-11 (continued)

b. Cost of goods sold reported by Player Company $250,000

Cost of goods sold reported by Scout Company 120,000
$370,000
Adjustment due to intercompany sales (100,500)
Consolidated cost of goods sold $269,500

Adjustment to cost of goods sold:

CGS charged by Player on sale to Scout $ 20,000

CGS charged by Scout ($30,000 - $6,000) 24,000
Total charged to CGS $ 44,000
CGS for consolidated entity
$20,000 x ($24,000 / $30,000) (16,000)
Required adjustment to CGS $ 28,000

CGS charged by Scout on sale to Player $ 50,000

CGS charged by Player ($80,000 - $20,000) 60,000
Total charged to CGS $110,000
CGS for consolidated entity
$50,000 x ($60,000 / $80,000) (37,500)
Required adjustment to CGS 72,500
Total adjustment required $100,500

c. Reported net income of Scout Company $ 45,000

Unrealized profit on sale to Player Company
$30,000 x ($20,000 / $80,000) (7,500)
Realized net income $ 37,500
Noncontrolling interest's share x 0.40
Income assigned to noncontrolling interest $ 15,000

d. Reported net income of Player Company $100,500

Less: Income from Scout (20,500) $ 80,000
Net income of Scout Company 45,000
Operating income $125,000
Less Unrealized inventory profits of Player
:
Company [$10,000 x ($6,000 / $30,000)] $ 2,000
Unrealized inventory profits of Copper
Company [$30,000 x ($20,000 / $80,000)] 7,500
Income assigned to noncontrolling
interest 15,000 (24,500)
Income assigned to controlling interest $ 100,500

6-18
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Chapter 06 – Intercompany Inventory Transactions

E6-12 Intercompany Sales

20X4 Calculations:
Ending
Total = Re-sold + Inventory
Sales 180,000 135,000 45,000
COGS 120,000 90,000 30,000
Gross Profit 60,000 45,000 15,000
Gross Profit % 33.33%

Worksheet Entry (not required in problem)

Sales 180,000
Cost of Goods Sold 165,000
Inventory 15,000
The basic entry (not shown) would be adjusted by 15,000 of deferred profit to
complete the elimination process.

20X5 Calculations:
20X5 Upstream
Ending
Inventor
Total = Re-sold + y
135,00
Sales 0 105,000 30,000
COGS 90,000 70,000 20,000
45,00
Gross Profit 0 35,000 10,000
Gross Profit % 33.33%

20X5 Downstream
Ending
Total = Re-sold + Inventory
170,00
Sales 280,000 0 110,000
COGS 140,000 85,000 55,000
Gross Profit 140,000 85,000 55,000
Gross Profit % 50.00%

Worksheet Consolidation Entries (not required in problem):

Eliminate Upstream Transactions

Sales 135,000
Cost of Goods Sold 125,000
Inventory 10,000

Eliminate Downstream Transactions

Sales 280,000
Cost of Goods Sold 225,000
Inventory 55,000

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Chapter 06 – Intercompany Inventory Transactions

Reversal of 20X4 Upstream Deferral

Investment in Scope 10,500
NCI in NA of Scope 4,500
Cost of Goods Sold 15,000
E6-12 (continued)

The basic entry (not shown) would be adjusted by 65,000 of deferred

profit and 15,000 to reverse the prior year gross profit deferral to
complete the elimination process.

a. Consolidated net income for 20X4:

Operating income of Pistol Corporation $160,000

Net income of Scope Corporation 90,000
$250,000
Less: Unrealized profit — Scope Corporation (15,000)
Consolidated net income $235,000

b. Inventory balance, December 31, 20X5:

Inventory reported by Pistol Corporation $ 30,000

Unrealized profit on books of Scope
Corporation
($135,000 - $90,000) x ($30,000/$135,000) (10,000) $20,000

Inventory reported by Scope Corporation $110,000

Unrealized profit on books of Pistol
Corporation
($280,000 - $140,000) x ($110,000/$280,000) (55,000) 55,000
Inventory, December 31, 20X5 $75,000

c. Consolidated cost of goods sold for 20X5:

COGS on sale of inventory on hand January 1, 20X5

$45,000 x ($120,000 / $180,000) $ 30,000
COGS on items purchased from Scope in 20X5
($135,000 - $30,000) x ($90,000 / $135,000) 70,000
COGS on items purchased from Pistol in 20X5
($280,000 - $110,000) x ($140,000 / $280,000) 85,000
Total cost of goods sold $185,000

d. Income assigned to controlling interest:

Operating income of Pistol Corporation $220,000

Net income of Scope Corporation 85,000
$305,000
Add: Inventory profit of prior year realized in 20X5 15,000
Less: Unrealized inventory profit — Scope Corporation (10,000)
Unrealized inventory profit — Pistol Corporation (55,000)

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Chapter 06 – Intercompany Inventory Transactions

Income to noncontrolling interest

($85,000 + $15,000 - $10,000) x 0.30 (27,000)
Income assigned to controlling interest $228,000

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Chapter 06 – Intercompany Inventory Transactions

E6-13 Consolidated Balance Sheet Worksheet

a.
Equity Method Entries on Pint Corp.'s Books:
Investment in Saloon Co. 49,000
Income from Saloon Co. 49,000
Record Pint Corp.'s 70% share of Saloon Co.'s 20X8 income

Cash 9,800
Investment in Saloon Co. 9,800
Record Pint Corp.'s 70% share of Saloon Co.'s 20X8 dividend

Income from Saloon Co. 10,000

Investment in Saloon Co. 10,000
Eliminate the deferred gross profit from downstream sales in 20X8

Income from Saloon Co. 28,000

Investment in Saloon Co. 28,000
Eliminate the deferred gross profit from upstream sales in 20X8

Book Value Calculations:

NCI + Pint Corp. = Common + Retained
30% 70% Stock Earnings
Beginning Book Value 103,200 240,800 150,000 194,000
+ Net Income 21,000 49,000 70,000
- Dividends (4,200) (9,800) (14,000)
Ending Book Value 120,000 280,000 150,000 250,000

Adjustment to Basic Consolidation Entry

NCI Pint Corp
Net Income 21,000 49,000
- Gross profit deferral (down) (10,000)
- Gross profit deferral (up) (12,000) (28,000)
Income to be eliminated 9,000 11,000
-------------------------------------------------------------------------------------
Ending Book Value 120,000 280,000
- Gross profit deferral (down) (10,000)
- Gross profit deferral (up) (12,000) (28,000)
Adjusted Book Value 108,000 242,000
108,000 242,000

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Chapter 06 – Intercompany Inventory Transactions

E6-13 (continued)

Basic Consolidation Entry

Common Stock 150,000 ← Common stock balance
Retained Earnings 194,000 ← Beginning balance in retained earnings
Income from Saloon Co. 11,000 ← Pint’s % of NI with adjustment
NCI in NI of Saloon Co. 9,000 ← NCI share of NI with adjustment
Dividends Declared 14,000 ← 100% of Saloon Co.'s dividends declared
242,00
Investment in Saloon Co. 0 ← Net book value with adjustment
108,00
NCI in NA of Saloon Co. 0 ← NCI share of BV with adjustment

Deferral of this year's unrealized profits on inventory transfers

Sales 400,000
Cost of Goods Sold 350,000
Inventory 50,000

20X8 Downstream Transactions

Ending
Total = Re-sold + Inventory
Sales 100,000 75,000 25,000
COGS 60,000 45,000 15,000
Gross Profit 40,000 30,000 10,000
Gross Profit % 40.00%

20X8 Upstream Transactions

Ending
Total = Re-sold + Inventory
Sales 300,000 205,000 95,000
COGS 173,684 118,684 55,000
Gross Profit 126,316 86,316 40,000
Gross Profit % 42.11%

Investment in Income from

Saloon Co. Saloon Co.
Beginning Balance 240,800
70% Net Income 49,000 49,000 70% Net Income
9,800 70% Dividends
38,000 Deferred GP 38,000
Ending Balance 242,000 11,000 Ending Balance
242,000 Basic 11,000
0 0

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Chapter 06 – Intercompany Inventory Transactions

E6-13 (continued)

b.

Consolidation Entries
Pint Consolidate
Corp. Saloon Co. DR CR d
Balance Sheet
Cash and Receivables 98,000 40,000 138,000
Inventory 150,000 100,000 50,000 200,000
Buildings & Equipment
(net) 310,000 280,000 590,000
Investment in Saloon Co. 242,000 242,000 0
Total Assets 800,000 420,000 0 292,000 928,000

Accounts Payable 70,000 20,000 90,000

150,00
Common Stock 200,000 150,000 0 200,000
194,00
Retained Earnings 530,000 250,000 0 14,000 530,000
11,000 350,000
9,000
400,00
0
NCI in NA of Saloon Co. 108,000 108,000
Total Liabilities & 764,00
Equity 800,000 420,000 0 472,000 928,000

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Chapter 06 – Intercompany Inventory Transactions

E6-14* Multiple Transfers between Affiliates

a. Entries recorded by Klon Corporation

Cash (Accounts Receivable) 150,000

Sales 150,000
Sale of inventory to Brant Company.

Cost of Goods Sold 100,000

Inventory 100,000
Record cost of goods sold.

Entries recorded by Brant Company

Inventory 150,000
Cash (Accounts Payable) 150,000
Purchase of inventory from Klon.

Cash (Accounts Receivable) 150,000

Sales 150,000
Sale of inventory to Torkel Company.

Cost of Goods Sold 150,000

Inventory 150,000
Record cost of goods sold.

Entries recorded by Torkel Company

Inventory 150,000
Cash (Accounts Payable) 150,000
Purchase of inventory from Brant.

Cash (Accounts Receivable) 120,000

Sales 120,000
Sale of inventory to nonaffiliates.

Cost of Goods Sold 90,000

Inventory 90,000
Record cost of goods sold.

b. Cost of goods sold for 20X8 should be reported as $60,000

[$90,000 x ($100,000 / $150,000)].

c. Inventory at December 31, 20X8, should be reported at $40,000

[$60,000 x ($100,000 / $150,000)].

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Chapter 06 – Intercompany Inventory Transactions

E6-14* (continued)

d. Consolidation entry for inventory:

Sales 300,000
Cost of Goods Sold 280,000
Inventory 20,000
The basic entry (not shown) would be adjusted by 20,000 of deferred profit
to complete the elimination process.

Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Klon $100,000

Cost of goods sold recorded by Brant 150,000
Cost of goods sold recorded by Torkel 90,000
Total recorded $340,000
Consolidated cost of goods sold (60,000)
Required elimination $280,000

Computation of reduction to carrying value of inventory

Inventory reported by Torkel $60,000

Inventory balance to be reported (40,000)
Required elimination $20,000

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Chapter 06 – Intercompany Inventory Transactions

E6-15 Inventory Sales

a. Journal entries recorded by Slim Company:

(1) Inventory 150,000

Cash (Accounts Payable) 150,000
Record purchases from nonaffiliate.

(2) Cash (Accounts Receivable) 60,000

Sales 60,000
Record sale to Plump Corporation.

(3) Cost of Goods Sold 40,000

Inventory 40,000
Record cost of goods sold to Plump
Corporation.

Journal entries recorded by Plump Corporation:

(1) Inventory 60,000

Cash (Accounts Payable) 60,000
Record purchases from Slim Company.

(2) Cash (Accounts Receivable) 90,000

Sales 90,000
Record sale of items to nonaffiliates.

(3) Cost of Goods Sold 45,000

Inventory 45,000
Record cost of goods sold.

(4) Income from Slim 3,000

Investment in Slim 3,000
Eliminate 60% of unrealized gross profit on inventory purchases from Slim.

b. Consolidation entry:
Ending
Total = Re-sold + Inventory
Sales 60,000 45,000 15,000
COGS 40,000 30,000 10,000
Gross Profit 20,000 15,000 5,000
Gross Profit % 33.33%

Sales 60,000
Cost of Goods Sold 55,000
Inventory 5,000
Eliminate intercompany inventory sales.

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Chapter 06 – Intercompany Inventory Transactions

The basic entry (not shown) would be adjusted by 5,000 of deferred profit to
complete the elimination process.

6-28
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Chapter 06 – Intercompany Inventory Transactions

E6-16 Prior-Period Inventory Profits

a.
20X8 Sale:
Ending
Total = Re-sold + Inventory
Sales 180,000 150,000 30,000
COGS 120,000 100,000 20,000
Gross Profit 60,000 50,000 10,000
Gross Profit % 33.33%

20X9 Sale:
Ending
Total = Re-sold + Inventory
Sales 240,000 90,000 150,000
COGS 160,000 60,000 100,000
Gross Profit 80,000 30,000 50,000
Gross Profit % 33.33%

Investment in Scrub 7,500

NCI in NA of Scrub 2,500
Cost of goods sold 10,000
Reversal of 20X8 gross profit deferral

Sales 240,000
Cost of Goods Sold 190,000
Inventory 50,000
Eliminate 20X9 intercompany sale of inventory.
The basic entry (not shown) would be adjusted by 50,000 of 20X9 deferred
profit and by 10,000 to reverse the 20X8 gross profit deferral to complete the
elimination process.

b. 20X8 20X9
Reported net income of Scrub $350,000 $420,000
Unrealized profit, December 31, 20X8 (10,000) 10,000
Unrealized profit, December 31, 20X9 (50,000)
Realized net income $340,000 $380,000
Noncontrolling interest's share of ownership x 0.25 x 0.25
Income assigned to noncontrolling interest $ 85,000 $ 95,000

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Chapter 06 – Intercompany Inventory Transactions

SOLUTIONS TO PROBLEMS

P6-17 Consolidated Income Statement Data

a. $180,000 = $550,000 + $450,000 - $820,000

b. January 1, 20X2: $25,000 = $75,000 - $50,000

December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000

c. Investment in Stain 15,000

NCI in NA of Stain 10,000
Cost of Goods Sold 25,000
Eliminate beginning inventory profit.

Sales 180,000
Cost of Goods Sold 165,000
Inventory 15,000
Eliminate intercompany sale of inventory.
The basic entry (not shown) would be adjusted by 15,000 of deferred profit
and by 25,000 to reverse the gross profit deferral from the prior year to
complete the elimination process.

d. Reported net income of Stain Company $ 90,000

Prior-period profit realized in 20X2 25,000
Unrealized profit on 20X2 sales (15,000)
Realized income $100,000
Proportion held by noncontrolling interest x 0.40
Income assigned to noncontrolling interest $ 40,000

6-30
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Chapter 06 – Intercompany Inventory Transactions

P6-18 Unrealized Profit on Upstream Sales

20X2
Ending
Total = Re-sold + Inventory
200,00
Sales 0 130,000 70,000
160,00
COGS 0 104,000 56,000
Gross Profit 40,000 26,000 14,000
Gross Profit % 20.00%

20X3
Ending
Total = Re-sold + Inventory
175,00
Sales 0 70,000 105,000
140,00
COGS 0 56,000 84,000
Gross Profit 35,000 14,000 21,000
Gross Profit % 20.00%

20X4
Ending
Total = Re-sold + Inventory
225,00
Sales 0 105,000 120,000
180,00
COGS 0 84,000 96,000
Gross Profit 45,000 21,000 24,000
Gross Profit % 20.00%

20X2 20X3 20X4

Operating income reported by Parade $150,000 $240,000 $300,000

Net income reported by Summer 100,000 90,000 160,000
$250,000 $330,000 $460,000
Inventory profit, December 31, 20X2
$70,000 - ($70,000 / 1.25) (14,000) 14,000
Inventory profit, December 31, 20X3
$105,000 - ($105,000 / 1.25) (21,000) 21,000
Inventory profit, December 31, 20X4
$120,000 - ($120,000 / 1.25) (24,000)
Consolidated net income $236,000 $323,000 $457,000
Income to noncontrolling interest:
($100,000 - $14,000) x 0.40 (34,400)
($90,000 + $14,000 - $21,000) x 0.40 (33,200)
($160,000 + $21,000 - $24,000) x 0.40 (62,800)

6-31
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Chapter 06 – Intercompany Inventory Transactions

Income to controlling interest $201,600 $289,800 $394,200

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Chapter 06 – Intercompany Inventory Transactions

P6-19 Net Income of Consolidated Entity

Operating income of Pawn for 20X5 $118,000

Net income of Shop for 20X5 65,000
$183,000
Add: Prior year profits realized by Pawn 25,000
Prior year profits realized by Shop 40,000
Less: Unrealized profits for 20X5 by Pawn (14,000)
Unrealized profits for 20X5 by Shop (55,000)
Amortization of differential
($45,000 / 15 years) (3,000)
Consolidated net income, 20X5 $176,000
Less: Income to noncontrolling interest
($65,000 + $40,000 - $55,000 - $3,000) x 0.30 (14,100)
Income to controlling interest $161,900

P6-20 Correction of Consolidation Entries

a. Proportion of intercompany inventory purchases resold during 20X5:

Unrealized profit at year end $ 12,000
Intercompany transfer price $140,000
Cost of inventory sold ($140,000 / 1.40) (100,000)
Total Profit ÷ 40,000
Proportion of intercompany sale held by
Pencil at year end 0.30

Proportion of intercompany purchases resold

by Pencil during 20X5 (1.00 - 0.30) 0.70

b. Consolidation entries, December 31, 20X5:

Intercompany Transactions
Ending
Total = Re-sold + Inventory
Sales 140,000 98,000 42,000
COGS 100,000 70,000 30,000
Gross Profit 40,000 28,000 12,000
Gross Profit % 28.57%

Accounts Payable 80,000

Accounts Receivable 80,000
Eliminate intercompany receivable/payable.

Sales 140,000
Cost of Goods Sold 128,000
Inventory 12,000
Eliminate intercompany sale of inventory.
The basic entry (not shown) would be adjusted by 12,000 of deferred profit
to complete the elimination process.

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Chapter 06 – Intercompany Inventory Transactions

P6-21 Incomplete Data

a. Increase in fair value of buildings and equipment:

Consolidated total $ 680,000

Balance reported by Peace (400,000)
Balance reported by Symbol (240,000)
Increase in value $ 40,000

b. Accumulated depreciation for consolidated entity:

Accumulated depreciation reported by Peace $180,000

Accumulated depreciation reported by Symbol 110,000
Cumulative write-off of differential
($5,000 x 6 years) 30,000
Accumulated depreciation for consolidated entity $320,000

c. Amount paid by Peace to acquire ownership in Symbol:

Common stock outstanding $ 60,000

Retained earnings at acquisition 30,000
Total book value at acquisition $ 90,000
Increase in value of buildings and equipment 40,000
Fair value of net assets acquired $130,000
Proportion of ownership acquired x 0.75
Amount paid by Peace $ 97,500

d. Investment in Symbol Company stock reported at December 31, 20X6:

Symbol's common stock outstanding December 31, 20X6 $ 60,000

Symbol's retained earnings reported December 31, 20X6 112,000
Total book value $172,000
Proportion of ownership held by Peace x 0.75
Peace's share of net book value $129,000
Unamortized differential ($5,000 x 2 years) x 0.75 7,500
20X6 Gross Profit Deferral on Upstream Sale * (3,000)
Investment in Symbol Company stock $133,500

* See part f. for Unrealized inventory profit calculation. Total

unrealized is $4,000 and Peace owns 75% of Symbol so the
total gross profit deferral in the investment account would be
$3,000 ($4,000 X 75%).

e. Intercorporate sales of inventory in 20X6:

Sales reported by Peace $420,000

Sales reported by Symbol 260,000
Total sales $680,000
Sales reported in consolidated income statement (650,000)
Intercompany sales during 20X6 $ 30,000

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Chapter 06 – Intercompany Inventory Transactions

P6-21 (continued)

f. Unrealized inventory profit, December 31, 20X6:

Inventory reported by Peace $125,000

Inventory reported by Symbol 90,000
Total inventory $215,000
Inventory reported in consolidated balance sheet (211,000)
Unrealized inventory profit, December 31, 20X6 $ 4,000

g. Consolidation entry to remove the effects of intercompany inventory

sales during 20X6:

Sales 30,000
Cost of Goods Sold 26,000
Inventory 4,000
The basic entry (not shown) would be adjusted by 4,000 of deferred profit
to complete the elimination process.

h. Unrealized inventory profit at January 1, 20X6:

Cost of goods sold reported by Peace $310,000

Cost of goods sold reported by Symbol 170,000
Reduction of cost of goods sold for intercompany
sales during 20X6 (26,000)
Adjusted cost of goods sold $454,000
Cost of goods sold reported in consolidated
income statement (445,000)
Additional adjustment to cost of goods sold
due to unrealized profit in beginning inventory $ 9,000

i. Accounts receivable reported by Peace at December 31, 20X6:

Accounts receivable reported for consolidated entity $145,000

Accounts receivable reported by Symbol (55,000)
Difference $ 90,000
Adjustment for intercompany receivable/payable:
Accounts payable reported by Peace $ 86,000
Accounts payable reported by Symbol 20,000
Total reported accounts payable $106,000
Accounts payable reported for consolidated
entity (89,000)
Adjustment for intercompany receivable/payable 17,000
Accounts receivable reported by Peace $107,000

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Chapter 06 – Intercompany Inventory Transactions

P6-22 Eliminations for Upstream Sales

a.
Equity Method Entries on Plug's Books:
Investment in Spark Filter 32,000
Income from Spark Filter 32,000
Record Plug's 80% share of Spark Filter's 20X8 income

Investment in Spark Filter 16,000

Income from Spark Filter 16,000
Reverse of the deferred gross profit from upstream sales in 20X7

Income from Spark Filter 12,000

Investment in Spark Filter 12,000
Eliminate the deferred gross profit from upstream sales in 20X8

Book Value Calculations:

Commo
NCI + Plug = n + Retained
20% 80% Stock Earnings
Beg. Book Value 62,000 248,000 90,000 220,000
+ Net Income 8,000 32,000 40,000
Ending Book Value 70,000 280,000 90,000 260,000

Adjustment to Basic Consolidation Entry

NCI Plug
Net Income 8,000 32,000
+ Reverse GP deferral (up) 4,000 16,000
- Gross profit deferral (up) (3,000) (12,000)
Income to be eliminated 9,000 36,000
-------------------------------------------------------------------------------------
Ending Book Value 70,000 280,000
+ Reverse GP deferral (up) 4,000 16,000
- Gross profit deferral (up) (3,000) (12,000)
Adjusted book value 71,000 284,000

Basic Consolidation entry:

Common Stock 90,000 ← Common stock balance
Retained Earnings 220,000 ← Beginning balance in RE
Income from Spark Filter 36,000 ← Parent’s % of NI with adjustment
NCI in NI of Spark Filter 9,000 ← NCI share of NI with adjustment
Investment in Spark Filter 284,000 ← Net book value with adjustment
NCI in NA of Spark Filter 71,000 ← NCI share of BV with adjustment

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Chapter 06 – Intercompany Inventory Transactions

P6-22 (continued)

20X7 Upstream Transactions

20X8
Beg.
Inventory
Sales 60,000
COGS 40,000
Gross Profit 20,000
Gross Profit % 33.33%

20X8 Upstream Transactions

Ending
Total = Re-sold + Inventory
105,00
Sales 150,000 0 45,000
COGS 100,000 70,000 30,000
Gross Profit 50,000 35,000 15,000
Gross Profit % 33.33%

Reversal of last year's deferral:

Investment in Spark Filter 16,000
NCI in NA of Spark Filter 4,000
Cost of Goods Sold 20,000

Deferral of this year's unrealized profits on inventory transfers

Sales 150,000
Cost of Goods Sold 135,000
Inventory 15,000

Investment in Income from

Spark Filter Spark Filter
*232,00
Beg. Balance 0
80% Net Income 32,000 32,000 80% Net Income

Last year's reversal 16,000 12,000 Deferred GP 12,000 16,000 Last year's reversal
Ending Balance 268,000 36,000 Ending Balance
284,00
Reversal 16,000 0 Basic 36,000
0 0

*Note that the beginning balance in the Investment in Spark Filter account ($232,000) is NOT equal to
Plug’s 80% share of Spark Filter’s equity accounts ($248,000) as indicated in the first line of the Book
Value Calculations box above because Plug made a $16,000 equity method adjustment for its 80% share
of the unrealized gross profit on upstream inventory transfers last year while Spark Filter makes no

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Chapter 06 – Intercompany Inventory Transactions

adjustment in its accounts. Thus, the basic consolidation entry is modified to account for this difference.

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Chapter 06 – Intercompany Inventory Transactions

P6-22 (continued)

b. Computation of consolidated net income and income assigned

to controlling interest:

Operating income reported by Plug Products

($250,000 - $175,000 - $30,000) $ 45,000
Net income of Spark Filter
($200,000 - $140,000 - $20,000) 40,000
$ 85,000
Inventory profit realized from 20X7 20,000
Unrealized inventory profit for 20X8 (15,000)
Consolidated net income $ 90,000
Income assigned to noncontrolling interest
($40,000 + $20,000 - $15,000) x 0.20 (9,000)
Income assigned to controlling interest $ 81,000

c. Noncontrolling interest, December 31, 20X8:

Common stock $ 90,000

Retained earnings ($220,000 + $40,000) 260,000
Less: Unrealized inventory profit (15,000)
$335,000
Proportion of stock held by noncontrolling interest x 0.20
Noncontrolling interest $ 67,000

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Chapter 06 – Intercompany Inventory Transactions

P6-23 Multiple Inventory Transfers

a. Consolidated net income for 20X8:

Operating income of Ajax Corporation $80,000

Unrealized profit, December 31, 20X8
($35,000 - $15,000) x ($7,000 / $35,000) (4,000) $ 76,000

Net income of Beta Corporation $37,500

Profit realized from 20X7
($30,000 - $24,000) x ($10,000 / $30,000) 2,000
Unrealized profit, December 31, 20X8
($72,000 - $63,000) x ($12,000 / $72,000) (1,500) 38,000

Net income of Cole Corporation $20,000

Profit realized from 20X7
($72,000 - $60,000) x ($18,000 / $72,000) 3,000
Unrealized profit, December 31, 20X8
($45,000 - $27,000) x ($15,000 / $45,000) (6,000) 17,000
Consolidated net income $131,000

b. Inventory balance, December 31, 20X8:

Balance per Beta Corporation $ 7,000

Less: Unrealized profit (4,000) $ 3,000

Balance per Cole Corporation $12,000

Less: Unrealized profit (1,500) 10,500

Balance per Ajax Corporation $15,000

Less: Unrealized profit (6,000) 9,000
Inventory balance per consolidated statement $22,500

c. Income assigned to noncontrolling interest in 20X8:

Realized income of Beta Corporation $38,000

Proportion of stock held by
noncontrolling interest x 0.30 $11,400

Realized income of Cole Corporation $17,000

Proportion of stock held by
noncontrolling interest x 0.10 1,700
Income to noncontrolling interest $13,100

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Chapter 06 – Intercompany Inventory Transactions

P6-24 Consolidation with Inventory Transfers and Other Comprehensive Income

20X4 Downstream Transactions

Ending
Total = Re-sold + Inventory
Sales 108,000 60,000 48,000
COGS 90,000 50,000 40,000
Gross Profit 18,000 10,000 8,000
Gross Profit % 16.67%

20X4 Upstream Transactions

Ending
Total = Re-sold + Inventory
Sales 45,000 27,000 18,000
COGS 30,000 18,000 12,000
Gross Profit 15,000 9,000 6,000
Gross Profit % 33.33%

20X5 Downstream Transactions

Ending
Total = Re-sold + Inventory
Sales 36,000 24,000 12,000
COGS 30,000 20,000 10,000
Gross Profit 6,000 4,000 2,000
Gross Profit % 16.67%

20X5 Upstream Transactions

Ending
Total = Re-sold + Inventory
Sales 90,000 48,000 42,000
COGS 60,000 32,000 28,000
Gross Profit 30,000 16,000 14,000
Gross Profit % 33.33%

Investment in Income from

Sauce Corp. Sauce Corp.
Beg. Balance 1,246,600
90% Net Income 81,000 81,000 90% Net Income
54,000 90% Dividends
90% of OCI
18,000 Gain
20X4 Reversal 13,400 14,600 Deferred GP 14,600 13,400 20X4 Reversal
Ending Balance 1,290,400 79,800 Ending Balance
Reversal 13,400 1,285,800 Basic 79,800
18,000 OCI Entry
0 0

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Chapter 06 – Intercompany Inventory Transactions

P6-24 (continued)

a. Balance in investment account at December 31, 20X5:

Proportionate share of Sauce's net assets,

January 1 ([$1,400,000 x .90] – 8,000 – [6,000 x 0.90]) $1,246,600
Proportionate share of 20X5 net income
($90,000 x 0.90) 81,000
Proportionate share of other comprehensive
income for 20X5 ($20,000 x 0.90) 18,000
Proportionate share of dividends received
($60,000 x 0.90) (54,000)
Reversal of deferred gain from 20X4 downstream transaction 8,000
Reversal of deferred gain from 20X4 upstream transaction 5,400
($6,000 x .090)
Deferred gain from downstream transaction (2,000)
Proportionate share of deferred gain from upstream
transaction ($14,000 x 0.90) (12,600)
Balance in investment account December 31, 20X5 $1,290,400
b. Investment income for 20X5:

Net income reported by Sauce $90,000

Proportion of ownership held by Pesto x 0.90
Pesto’s share of reported income from Sauce 81,000
Reversal of deferred gain from 20X4 downstream transaction 8,000
Reversal of deferred gain from 20X4 upstream transaction 5,400
($6,000 x 0.90)
Deferred gain from downstream transaction (2,000)
Proportionate share of deferred gain from upstream
transaction ($14,000 x 0.90) (12,600)
Investment income for 20X5 $79,800

c. Income to noncontrolling interests for 20X5:

Net income reported by Sauce $90,000

20X4 inventory profits realized in 20X5
($15,000 x 0.40) 6,000
20X5 unrealized inventory profits
$30,000 - [$30,000 x ($48,000 / $90,000)] (14,000)
Realized net income $82,000
Proportion of ownership held by noncontrolling interest x 0.10
Income to noncontrolling interest $ 8,200

P6-24 (continued)

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Chapter 06 – Intercompany Inventory Transactions

d. Balance assigned to noncontrolling interest in consolidated balance sheet:

Net assets reported by Sauce, January 1 $1,400,000

Net income for 20X5 90,000
Dividends paid in 20X5 (60,000)
Net assets reported, December 31, 20X5 $1,430,000
Unrealized inventory profits at
December 31, 20X5 (14,000)
Other comprehensive income in 20X5 20,000
Adjusted net assets, December 31, 20X5 $1,436,000
Proportion of ownership held by noncontrolling
interest x 0.10
Net assets assigned to noncontrolling interest $ 143,600

e. Inventory reported in consolidated balance sheet:

Inventory held by Pesto $120,000

Less: Unrealized profit (14,000) $106,000

Inventory held by Sauce $100,000

Less: Unrealized profit
$6,000 - [$6,000 x ($24,000 / $36,000)] (2,000) 98,000
Inventory $204,000

f. Consolidated net income for 20X5:

Operating income of Pesto $240,000

Net income of Sauce 90,000
Total unadjusted income $330,000
20X4 inventory profits realized in 20X5
($6,000 + $8,000) 14,000
Unrealized inventory profits on 20X5 sales
($14,000 + $2,000) (16,000)
Consolidated net income $328,000

g. Consolidation entries, December 31, 20X5

Book Value Calculations:

Pesto Add.
NCI + Corp. = Comm. + Paid-In + Retained + Acc.
10% 90% Stock Capital Earnings OCI
Beginning book
value 140,000 1,260,000 400,000 200,000 790,000 10,000
+ Net Income 9,000 81,000 90,000
- Dividends (6,000) (54,000) (60,000)
Ending book value 143,000 1,287,000 400,000 200,000 820,000 10,000

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Chapter 06 – Intercompany Inventory Transactions

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Chapter 06 – Intercompany Inventory Transactions

P6-24 (continued)

Adjustment to Basic Consolidation Entry

NCI Pesto
Net Income 9,000 81,000
+Reverse GP deferral (down) 8,000
+Reverse GP deferral (up) 600 5,400
- Gross profit deferral (down) (2,000)
- Gross profit deferral (up) (1,400) (12,600)
Income to be eliminated 8,200 79,800
-------------------------------------------------------------------------------------
Ending Book Value 143,000 1,287,000
+Reverse GP deferral (down) 8,000
+Reverse GP deferral (up) 600 5,400
- Gross profit deferral (down) (2,000)
- Gross profit deferral (up) (1,400) (12,600)
Adjusted Book Value 142,200 1,285,800

Basic Consolidation Entry

Common Stock 400,000 ← Common stock balance
Additional Paid-in Capital 200,000 ← Beginning balance in APIC
Retained Earnings 790,000 ← Beginning balance in RE
Accumulated OCI 10,000 ← Beginning balance in Acc. OCI
Income from Sauce Corp. 79,800 ← PC.’s % of NI with adjustment
NCI in NI of Sauce Corp. 8,200 ← NCI share of NI with adjustment
Dividends 60,000 ← Dividends declared by subsidiary
Investment in Sauce Corp. 1,285,800 ← Net book value with adjustment
NCI in NA of Sauce Corp. 142,200 ← NCI share of BV with adjustment

Other Comprehensive Income Entry:

OCI from Sauce Corp. 18,000
OCI to the NCI 2,000
Investment in Sauce Corp. 18,000
NCI in NA of Sauce Corp. 2,000

Reversal of last year's deferral:

Investment in Sauce Corp. 13,400
NCI in NA of Sauce Corp. 600
Cost of Goods Sold 14,000

Deferral of this year's unrealized profits on inventory transfers

Sales 126,000
Cost of Goods Sold 110,000
Inventory 16,000

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Chapter 06 – Intercompany Inventory Transactions

P6-25 Multiple Inventory Transfers between Parent and Subsidiary

20X5 Downstream
Ending
Inventory,
Total = Re-sold + 20X5
Sales 150,000 90,000 60,000
COGS 100,000 60,000 40,000
Gross Profit 50,000 30,000 20,000
Gross Profit % 33.33%

20X5 Upstream
Ending
Inventory,
Total = Re-sold + 20X5
Sales 100,000 30,000 70,000
COGS 70,000 21,000 49,000
Gross Profit 30,000 9,000 21,000
Gross Profit % 30.00%

Beg Ending
Inventory, Inventory,
20X6 = Re-sold + 20X6
Sales 70,000 50,000 20,000
COGS 49,000 35,000 14,000
Gross Profit 21,000 15,000 6,000
Gross Profit % 30.00%

20X6 Downstream
Ending
Inventory,
Total = Re-sold + 20X6
Sales 60,000 54,000 6,000
COGS 40,000 36,000 4,000
Gross Profit 20,000 18,000 2,000
Gross Profit % 33.33%

20X6 Upstream
Ending
Inventory,
Total = Re-sold + 20X6
Sales 240,000 60,000 180,000
COGS 200,000 50,000 150,000
Gross Profit 40,000 10,000 30,000
Gross Profit % 16.67%

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Chapter 06 – Intercompany Inventory Transactions

a. Consolidation entries:

Investment in Slinky 20,000

Cost of goods sold 20,000
Eliminate beginning inventory profit of Proud Company.

Investment in Slinky 12,600

NCI in NA of Slinky 8,400
Cost of goods sold 15,000
Inventory 6,000
Eliminate beginning inventory profit of Slinky Company.

Sales 60,000
Cost of goods sold 58,000
Inventory 2,000
Eliminate intercompany sale of inventory by Proud Company.

Sales 240,000
Cost of goods sold 210,000
Inventory 30,000
Eliminate intercompany sale of inventory by Slinky Company.
The basic entry (not shown) would be adjusted by 38,000 of deferred
profit and 35,000 to reverse the prior year gross profit deferral and
complete the elimination process.

b. Computation of cost of goods sold for consolidated entity:

Inventory produced by Proud in 20X5

($100,000 x 0.40) $ 40,000
Inventory produced by Slinky in 20X5
($70,000 x 0.50) 35,000
Inventory produced by Proud in 20X6
($40,000 x 0.90) 36,000
Inventory produced by Slinky in 20X6
($200,000 x 0.25) 50,000
Cost of goods sold reported in
consolidated income statement $161,000

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Chapter 06 – Intercompany Inventory Transactions

P6-26 Consolidation following Inventory Transactions

a.
Equity Method Entries on Pirate Co.'s Books:
Investment in Ship Corp. 18,000
Income from Ship Corp. 18,000
Record Pirate Co.'s 60% share of Ship Corp.'s 20X2 income

Cash 6,000
Investment in Ship Corp. 6,000
Record Pirate Co.'s 60% share of Ship Corp.'s 20X2 dividend

Income from Ship Corp. 6,500

Investment in Ship Corp. 6,500
Eliminate the deferred gross profit from downstream sales in 20X2

Investment in Ship Corp. 2,040

Income from Ship Corp. 2,040
Reverse of the deferred gross profit from upstream sales in 20X1

Income from Ship Corp. 2,520

Investment in Ship Corp. 2,520
Eliminate the deferred gross profit from upstream sales in 20X2

b.
Book Value Calculations:
NCI + Pirate Co. = Common + Retained
40% 60% Stock Earnings
Beginning Book
Value 60,000 90,000 100,000 50,000
+ Net Income 12,000 18,000 30,000
- Dividends (4,000) (6,000) (10,000)
Ending Book Value 68,000 102,000 100,000 70,000

Adjustment to Basic Consolidation Entry

NCI Pirate Co.
Net Income 12,000 18,000
+Reverse GP deferral (up) 1,360 2,040
- Gross profit deferral (down) (6,500)
- Gross profit deferral (up) (1,680) (2,520)
Income to be eliminated 11,680 11,020
-------------------------------------------------------------------------------------
Ending Book Value 68,000 102,000
+Reverse GP deferral (up) 1,360 2,040
- Gross profit deferral (down) (6,500)
- Gross profit deferral (up) (1,680) (2,520)
Adjusted Book Value 67,680 95,020

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Chapter 06 – Intercompany Inventory Transactions

P6-26 (continued)

Basic Consolidation Entry

Common Stock 100,000 ← Common stock balance
Retained Earnings 50,000 ← Beginning balance in RE
Income from Ship Corp. 11,020 ← Pirate’s % of NI withadjustment
NCI in NI of Ship Corp. 11,680 ← NCI share of NI with adjustment
Dividends declared 10,000 ← 100% of Ship Corp.'s dividends
Investment in Ship Corp. 95,020 ← Net book value with adjustment
NCI in NA of Ship Corp. 67,680 ← NCI share of BV with adjustment

Excess Value (Differential) Calculations:

NCI Pirate Co.
40% + 60% = Land
Beginning balance 7,200 10,800 18,000
Changes 0 0 0
Ending balance 7,200 10,800 18,000

Excess Value (differential) Reclassification Entry:

Land 18,000
Investment in Ship Corp. 10,800
NCI in NA of Ship Corp. 7,200

Accumulated depreciation consolidation entry

Accumulated Depreciation 45,000
Building & Equipment 45,000

Reversal of last year's deferral:

Investment in Ship Corp. 2,040
NCI in NA of Ship Corp. 1,360
Cost of Goods Sold 3,400

Deferral of this year's unrealized profits on inventory transfers

Sales 63,000
Cost of Goods Sold 52,300
Inventory 10,700

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Chapter 06 – Intercompany Inventory Transactions

P6-26 (continued)
20X2 Downstream
Transactions
Ending
Total = Re-sold + Inventory
Sales 28,000 15,000 13,000
COGS 14,000 7,500 6,500
Gross Profit 14,000 7,500 6,500
Gross Profit % 50.00%

20X1 Upstream Transactions

Ending
Total = Re-sold + Inventory
Sales 42,500 34,000 8,500
COGS 25,500 20,400 5,100
Gross Profit 17,000 13,600 3,400
Gross Profit % 40.00%

20X2 Upstream Transactions

Ending
Total = Re-sold + Inventory
Sales 35,000 24,500 10,500
COGS 21,000 14,700 6,300
Gross Profit 14,000 9,800 4,200
Gross Profit % 40.00%

Investment in Income from

Ship Corp. Ship Corp.
Beginning
Balance 98,760
60% Net Income 18,000 18,000 60% Net Income
6,000 60% Dividends
20X1 Reversal 2,040 9,020 Deferred GP 9,020 2,040 20X1 Reversal
Ending Balance 103,780 11,020 Ending Balance
Reversal 2,040 95,020 Basic 11,020
10,800 Excess Reclass.
0 0

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Chapter 06 – Intercompany Inventory Transactions

P6-26 (continued)
c.
Consolidation
Entries
Pirate Ship Consolidate
Co. Corp. DR CR d
Income Statement
Sales 200,000 120,000 63,000 257,000
Less: COGS (99,800) (61,000) 52,300 (105,100)
3,400
Less: Depreciation Expense (25,000) (15,000) (40,000)
Less: Interest Expense (6,000) (14,000) (20,000)
Income from Ship Corp. 11,020 11,020 0
Consolidated Net Income 80,220 30,000 74,020 55,700 91,900
NCI in Net Income 11,680 (11,680)
Controlling Interest in Net
Income 80,220 30,000 85,700 55,700 80,220

Statement of Retained Earnings

Beginning Balance 227,960 50,000 50,000 227,960
Net Income 80,220 30,000 85,700 55,700 80,220
Less: Dividends Declared (40,000) (10,000) 10,000 (40,000)
Ending Balance 268,180 70,000 135,700 65,700 268,180

Balance Sheet
Cash and Accounts Receivable 69,400 51,200 120,600
Inventory 60,000 55,000 10,700 104,300
Land 40,000 30,000 18,000 88,000
Buildings & Equipment 520,000 350,000 45,000 825,000
Less: Accumulated Depreciation (175,000) (75,000) 45,000 (205,000)
Investment in Ship Corp. 103,780 2,040 95,020 0
10,800
Total Assets 618,180 411,200 65,040 161,520 932,900

Accounts Payable 68,800 41,200 110,000

Bonds Payable 80,000 200,000 280,000
Bonds Premium 1,200 1,200
Common Stock 200,000 100,000 100,000 200,000
Retained Earnings 268,180 70,000 135,700 65,700 268,180
NCI in NA of Ship Corp. 1,360 67,680 73,520
7,200
Total Liabilities & Equity 618,180 411,200 237,060 140,580 932,900

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Chapter 06 – Intercompany Inventory Transactions

P6-27 Consolidation Worksheet

a.
Equity Method Entries on Plaza Corp.'s Books:
Investment in Square Co. 14,000
Income from Square Co. 14,000
Record Plaza Corp.'s 70% share of Square Co.'s 20X9 income

Cash 3,500
Investment in Square Co. 3,500
Record Plaza Corp.'s 70% share of Square Co.'s 20X9 dividend

Investment in Square Co. 15,000

Income from Square Co. 15,000
Reverse of the deferred gross profit from downstream sales in 20X8

Income from Square Co. 8,000

Investment in Square Co. 8,000
Eliminate the deferred gross profit from downstream sales in 20X9

Investment in Square Co. 21,000

Income from Square Co. 21,000
Reverse of the deferred gross profit from upstream sales in 20X8

Income from Square Co. 17,500

Investment in Square Co. 17,500
Eliminate the deferred gross profit from upstream sales in 20X9

Book Value Calculations:

Plaza Commo
NCI + Corp. = n + Retained
30% 70% Stock Earnings
Beginning Book
value 120,000 280,000 150,000 250,000
+ Net Income 6,000 14,000 20,000
- Dividends (1,500) (3,500) (5,000)
Ending Book
Value 124,500 290,500 150,000 265,000

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Chapter 06 – Intercompany Inventory Transactions

P6-27 (continued)

Adjustment to Basic Consolidation Entry

NCI Plaza Corp
Net Income 6,000 14,000
+Reverse GP deferral (down) 15,000
+Reverse GP deferral (up) 9,000 21,000
- Gross profit deferral (down) (8,000)
- Gross profit deferral (up) (7,500) (17,500)
Income to be eliminated 7,500 24,500
-------------------------------------------------------------------------------------
Ending Book Value 124,500 290,500
+Reverse GP deferral (down) 15,000
+Reverse GP deferral (up) 9,000 21,000
- Gross profit deferral (down) (8,000)
- Gross profit deferral (up) (7,500) (17,500)
Adjusted Book Value 126,000 301,000

Basic Consolidation Entry

Common Stock 150,000 ← Common stock balance
Retained Earnings 250,000 ← Beginning balance in RE
Income from Square Co. 24,500 ← Plaza’s % of NI with adjustment
NCI in NI of Square Co. 7,500 ← NCI share of NI with adjustment
Dividends Declared 5,000 ← 100% of Square Co.'s dividends
301,00
Investment in Square Co. 0 ← Net book value with adjustment
126,00
NCI in NA of Square Co. 0 ← NCI share of BV with adjustment

Excess Value (Differential) Calculations:

NCI Plaza
30% + Corp. 70% = Land + Goodwill
Beginning
balance 10,800 25,200 14,000 22,000
Changes 0 0 0 0
Ending balance 10,800 25,200 14,000 22,000

Excess Value (Differential) Reclassification Entry:

Land 14,000
Goodwill 22,000
Investment in Square Co. 25,200
10,80
NCI in NA of Square Co. 0

Reversal of last year's deferral:

Investment in Square Co. 36,000
NCI in NA of Square Co. 9,000
Cost of Goods Sold 45,000

Deferral of this year's unrealized profits on inventory transfers

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Chapter 06 – Intercompany Inventory Transactions

Sales 152,000
Cost of Goods Sold 119,000
Inventory 33,000
P6-27 (continued)

20X9 Downstream Transactions

Ending
Total = Re-sold + Inventory
Sales 90,000 70,000 20,000
COGS 54,000 42,000 12,000
Gross Profit 36,000 28,000 8,000
Gross Profit % 40.00%

20X9 Upstream Transactions

Ending
Total = Re-sold + Inventory
Sales 62,000 0 62,000
COGS 37,000 0 37,000
Gross Profit 25,000 0 25,000
Gross Profit % 40.32%

Investment in Income from

Square Co. Square Co.
Beginning
Balance 269,200
70% Net Income 14,000 14,000 70% Net Income
3,500 70% Dividends
20X8 Reversal 36,000 25,500 Deferred GP 25,500 36,000 20X8 Reversal
Ending Balance 290,200 24,500 Ending Balance
Reversal 36,000 301,000 Basic 24,500
25,200 Excess Reclass.
0 0

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Chapter 06 – Intercompany Inventory Transactions

P6-27 (continued)
b.

Consolidation
Entries
Plaza Square Consolidate
Corp. Co. DR CR d
Income Statement
152,00
Sales 300,000 200,000 0 348,000
(200,000 (150,000 119,00
Less: COGS ) ) 0 (186,000)
45,000
Less: Depreciation Expense (40,000) (30,000) (70,000)
Income from Square Co. 24,500 24,500 0
176,50 164,00
Consolidated Net Income 84,500 20,000 0 0 92,000
NCI in Net Income 7,500 (7,500)
184,00 164,00
Controlling Interest in Net Income 84,500 20,000 0 0 84,500

Statement of Retained Earnings

250,00
Beginning Balance 532,000 250,000 0 532,000
184,00 164,00
Net Income 84,500 20,000 0 0 84,500
Less: Dividends Declared (35,000) (5,000) 5,000 (35,000)
434,00 169,00
Ending Balance 581,500 265,000 0 0 581,500

Balance Sheet
Cash and Receivable 81,300 85,000 166,300
Inventory 200,000 110,000 33,000 277,000
Land, Buildings, and Equipment (net) 270,000 250,000 14,000 534,000
301,00
Investment in Square Co. 290,200 36,000 0 0
25,200
Goodwill 22,000 22,000
359,20
Total Assets 841,500 445,000 72,000 0 999,300

Accounts Payable 60,000 30,000 90,000

150,00
Common Stock 200,000 150,000 0 200,000
434,00 169,00
Retained Earnings 581,500 265,000 0 0 581,500
126,00
NCI in NA of Square Co. 9,000 0 127,800
10,800
593,00 305,80
Total Liabilities & Equity 841,500 445,000 0 0 999,300

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Chapter 06 – Intercompany Inventory Transactions

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Chapter 06 – Intercompany Inventory Transactions

P6-28 Computation of Consolidated Totals

a. Consolidated sales for 20X8:

Phone Smart
Corp. Company Consolidated
Sales reported $660,000 $510,000
Intercorporate sales (140,000) (240,000)
Sales to nonaffiliates $520,000 $270,000 $790,000

b. Consolidated cost of goods sold:

Total sales reported $660,000 $510,000

Ratio of cost to sales price ÷ 1.4 ÷ 1.2
Cost of goods sold $471,429 $425,000
Amount to be eliminated
(see entry) (128,000) (232,000)
Cost of goods sold adjusted $343,429 $193,000 $536,429

Downstream:
Ending
Total = Re-sold + Inventory
140,00
Sales 0 98,000 42,000
100,00
COGS 0 70,000 30,000
Gross Profit 40,000 28,000 12,000
Gross Profit % 28.57%

Upstream:
Ending
Total = Re-sold + Inventory
Sales 240,000 192,000 48,000
COGS 200,000 160,000 40,000
Gross Profit 40,000 32,000 8,000
Gross Profit % 16.67%

Consolidation entries:

Sales 140,000
Cost of Goods Sold 128,000
Inventory 12,000
Elimination of sales by Phone to Smart:

Sales 240,000
Cost of Goods Sold 232,000
Inventory 8,000
Elimination of sales by Smart to Phone:

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Chapter 06 – Intercompany Inventory Transactions

P6-28 (continued)

c. Operating income of Phone Corporation (excluding

income from Smart Company) $70,000
Net income of Smart Company 20,000
$90,000
Less: Unrealized inventory profits of Phone (12,000)
Unrealized inventory profits of Smart (8,000)
Consolidated net income $70,000
Less: Income assigned to noncontrolling interest
($20,000 - $8,000) x 0.20 (2,400)
Income to controlling interest 20X8 $67,600

d. Inventory balance in consolidated balance sheet:

Inventory reported by Phone Corporation $48,000

Unrealized profits (8,000) $40,000

Inventory reported by Smart Company $42,000

Unrealized profits (12,000) 30,000
Inventory balance, December 31, 20X8 $70,000

6-58
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Chapter 06 – Intercompany Inventory Transactions

P6-29 Intercompany Transfer of Inventory

a.
Equity Method Entries on Pop Corp.'s Books:
Investment in Soda Co. 17,500
Income from Soda Co. 17,500
Record Pop Corp.'s 70% share of Soda Co.'s 20X3 income

Cash 10,500
Investment in Soda Co. 10,500
Record Pop Corp.'s 70% share of Soda Co.'s 20X3 dividend

Income from Soda Co. 6,300

Investment in Soda Co. 6,300
Record amortization of excess acquisition price

Income from Soda Co. 3,800

Investment in Soda Co. 3,800
Eliminate the deferred gross profit from downstream sales in 20X3

Investment in Soda Co. 6,300

Income from Soda Co. 6,300
Reverse of the deferred gross profit from upstream sales in 20X2

Income from Soda Co. 5,600

Investment in Soda Co. 5,600
Eliminate the deferred gross profit from upstream sales in 20X3

Book Value Calculations:

Commo
NCI + Pop Corp. = n + Retained
30% 70% Stock Earnings
Beginning book
value 39,000 91,000 70,000 60,000
+ Net Income 7,500 17,500 25,000
- Dividends (4,500) (10,500) (15,000)
Ending book value 42,000 98,000 70,000 70,000

Adjustment to Basic Consolidation Entry

NCI Pop Corp.
Net Income 7,500 17,500
+ Reverse GP deferral (up) 2,700 6,300
- Gross profit deferral (down) (3,800)
- Gross profit deferral (up) (2,400) (5,600)
Income to be eliminated 7,800 14,400
-------------------------------------------------------------------------------------
Ending Book Value 42,000 98,000
+ Reverse GP deferral (up) 2,700 6,300
- Gross profit deferral (down) (3,800)
- Gross profit deferral (up) (2,400) (5,600)
Adjusted Book Value 42,300 94,900

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Chapter 06 – Intercompany Inventory Transactions

108,000 242,000

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Chapter 06 – Intercompany Inventory Transactions

P6-29 (continued)

Basic Consolidation Entry

Common Stock 70,000 ← Common stock balance
Retained Earnings 60,000 ← Beginning balance in RE
Income from Soda Co. 14,400 ← Pop’s % of NI with adjustment
NCI in NI of Soda Co. 7,800 ← NCI share of NI with adjustment
Dividends Declared 15,000 ← 100% of Soda Co.'s dividends
Investment in Soda Co. 94,900 ← Net book value with adjustment
NCI in NA of Soda Co. 42,300 ← NCI share of BV with adjustment

Excess Value (Differential) Calculations:

NCI Pop Corp. Buildings and Patent Acc.
30% + 70% = Equipment + s + Depr.
Beginning
balance 13,800 32,200 20,000 28,000 (2,000)
Changes (2,700) (6,300) (7,000) (2,000)
Ending balance 11,100 25,900 20,000 21,000 (4,000)

Amortized Excess Value Reclassification Entry:

Amortization expense 7,000
Depreciation expense 2,000
Income from Soda Co. 6,300
NCI in NI of Soda Co. 2,700

Excess Value (Differential) Reclassification Entry:

Buildings and Equipment 20,000
Patents 21,000
Accumulated depreciation 4,000
25,90
Investment in Soda Co. 0
11,10
NCI in NA of Soda Co. 0

Accumulated Depreciation Consolidation Entry:

Accumulated Depreciation 50,000
Building & Equipment 50,000

Reversal of last year's deferral:

Investment in Soda Co. 6,300
NCI in NA of Soda Co. 2,700
Cost of Goods Sold 9,000

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Chapter 06 – Intercompany Inventory Transactions

P6-29 (continued)

Deferral of unrealized profits on inventory transfers from 20X2

Investment in Soda Co. 4,900
NCI in NA of Soda Co. 2,100
Inventory 7,000

Deferral of this year's unrealized profits on inventory transfers

Sales 120,000
Cost of Goods Sold 108,200
Inventory 11,800

20X3 Downstream Transactions:

Ending
InvestmentTotal
in = Re-sold + Inventory
Income from
Sales Soda Co. 30,000 22,400 7,600
Soda Co.
COGS
Beg. Balance 112,000 15,000 11,200 3,800
70% Net Income
Gross Profit17,500 15,000 11,200 17,500
3,800 70% Net Income
Gross Profit % 10,500
50.00% 70% Dividends
6,300 Excess Val. Amort. 6,300
20X2 Reversal 6,300 9,400 Deferred GP 9,400 6,300 20X2 Reversal
Ending Balance 109,600
20X2 Upstream Transactions: 8,100 Ending Balance
Reversal 6,300 94,900 Basic 14,400 Ending
20X2 Deferred GP 4,900 Ending
25,900 Excess
Inventory, Reclass.
Re-sold, 6,300
Inventory, Excess Val. Amort.
0 20X2 = 20X3 + 20X3 0
Sales 48,000 27,000 21,000
COGS 32,000 18,000 14,000
Gross Profit 16,000 9,000 7,000
Gross Profit % 33.33%

20X3 Upstream Transactions

Ending
Total = Re-sold + Inventory
Sales 90,000 66,000 24,000
COGS 60,000 44,000 16,000
Gross Profit 30,000 22,000 8,000
Gross Profit % 33.33%

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Chapter 06 – Intercompany Inventory Transactions

P6-29 (continued)

b.
Consolidation
Entries
Pop Soda Consolidate
Corp. Co. DR CR d
Income Statement
120,00
Sales 260,000 125,000 0 265,000
Other Income 13,600 13,600
Less: COGS (186,000) (79,800) 108,200 (148,600)
9,000
Less: Depreciation Expense (20,000) (15,000) 2,000 (37,000)
Less: Interest Expense (16,000) (5,200) (21,200)
Less: Amortization Expense 7,000 (7,000)
Income from Soda Co. 8,100 14,400 6,300 0
143,40
Consolidated Net Income 59,700 25,000 0 123,500 64,800
NCI in Net Income 7,800 2,700 (5,100)
151,20
Controlling Interest in Net Income 59,700 25,000 0 126,200 59,700

Statement of Retained Earnings

Beginning Balance 127,900 60,000 60,000 127,900
151,20
Net Income 59,700 25,000 0 126,200 59,700
Less: Dividends Declared (30,000) (15,000) 15,000 (30,000)
211,20
Ending Balance 157,600 70,000 0 141,200 157,600

Balance Sheet
Cash and Accounts Receivable 15,400 21,600 37,000
Inventory 165,000 35,000 11,800 181,200
7,000
Land 80,000 40,000 120,000
Buildings & Equipment 340,000 260,000 20,000 50,000 570,000
Less: Accumulated Depreciation (140,000) (80,000) 50,000 4,000 (174,000)
Investment in Soda Co. 109,600 6,300 94,900 0
4,900 25,900
Patents 21,000 21,000
102,20
Total Assets 570,000 276,600 0 193,600 755,200

Accounts Payable 92,400 35,000 127,400

Bonds Payable 200,000 100,000 300,000
Bonds Premium 1,600 1,600
Common Stock 120,000 70,000 70,000 120,000
211,20
Retained Earnings 157,600 70,000 0 141,200 157,600
NCI in NA of Soda Co. 2,700 42,300 48,600
2,100 11,100
286,00
Total Liabilities & Equity 570,000 276,600 0 194,600 755,200

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Chapter 06 – Intercompany Inventory Transactions

P6-29 (continued)

Note: Financial statements are not required.

Pop Corporation and Subsidiary

Consolidated Balance Sheet
December 31, 20X3

Cash and Accounts Receivable $ 37,000

Inventory 181,200
Land 120,000
Buildings and Equipment $570,000
Less: Accumulated Depreciation (174,000) 396,000
Patent 21,000
Total Assets $755,200

Accounts Payable $127,400

Bonds Payable $300,000
Bond Premium 1,600 301,600
Stockholders’ Equity:
Controlling Interest:
Common Stock $120,000
Retained Earnings 157,600
Total Controlling Interest $277,600
Noncontrolling Interest 48,600
Total Stockholders’ Equity 326,200
Total Liabilities and Stockholders' Equity $755,200

Pop Corporation and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X3

Sales $265,000
Other Income 13,600
Total Income $278,600
Cost of Goods Sold $148,600
Depreciation Expense 37,000
Interest Expense 21,200
Amortization Expense 7,000
Total Expenses (213,800)
Consolidated Net Income $ 64,800
Income to Noncontrolling Interest (5,100)
Income to Controlling Interest $ 59,700

Pop Corporation and Subsidiary

Consolidated Retained Earnings Statement
Year Ended December 31, 20X3

Retained Earnings, January 1, 20X3 $127,900

Income to Controlling Interest, 20X3 59,700
$187,600
Dividends Declared, 20X3 (30,000)
Retained Earnings, December 31, 20X3 $157,600

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Chapter 06 – Intercompany Inventory Transactions

P6-30 Consolidation Using Financial Statement Data

a.
Equity Method Entries on Point Corp.'s Books:
Investment in Stick Co. 21,000
Income from Stick Co. 21,000
Record Point Corp.'s 60% share of Stick Co.'s 20X6 income

Cash 12,000
Investment in Stick Co. 12,000
Record Point Corp.'s 60% share of Stick Co.'s 20X6 dividend

Income from Stick Co. 6,000

Investment in Stick Co. 6,000
Record goodwill impairment loss

Investment in Stick Co. 4,000

Income from Stick Co. 4,000
Reverse of the deferred gross profit from downstream sales in 20X5

Income from Stick Co. 2,000

Investment in Stick Co. 2,000
Eliminate the deferred gross profit from downstream sales in 20X6

Investment in Stick Co. 4,800

Income from Stick Co. 4,800
Reverse of the deferred gross profit from upstream sales in 20X5

Income from Stick Co. 5,400

Investment in Stick Co. 5,400
Eliminate the deferred gross profit from upstream sales in 20X6

Book Value Calculations:

Point Commo
NCI + Corp. = n + Retained
40% 60% Stock Earnings
Beginning Book
Value 80,000 120,000 50,000 150,000
+ Net Income 14,000 21,000 35,000
- Dividends (8,000) (12,000) (20,000)
Ending Book
Value 86,000 129,000 50,000 165,000

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Chapter 06 – Intercompany Inventory Transactions

P6-30 (continued)

Adjustment to Basic Consolidation Entry

NCI Point Corp.
Net Income 14,000 21,000
+ Reverse GP deferral (down) 4,000
+ Reverse GP deferral (up) 3,200 4,800
- Gross profit deferral (down) (2,000)
- Gross profit deferral (up) (3,600) (5,400)
Income to be eliminated 13,600 22,400
-------------------------------------------------------------------------------------
Ending Book Value 86,000 129,000
+ Reverse GP deferral (down) 4,000
+ Reverse GP deferral (up) 3,200 4,800
- Gross profit deferral (down) (2,000)
- Gross profit deferral (up) (3,600) (5,400)
Adjusted Book Value 85,600 130,400
108,000 242,000

Basic Consolidation Entry

Common Stock 50,000 ← Common stock balance
Retained Earnings 150,000 ← Beginning balance in RE
Income from Stick Co. 22,400 ← Point’s % of NI with adjustment
NCI in NI of Stick Co. 13,600 ← NCI share of NI with adjustment
Dividends Declared 20,000 ← 100% of Stick Co.'s dividends
Investment in Stick Co. 130,400 ← Net book value with adjustment
NCI in NA of Stick Co. 85,600 ← NCI share of BV with adjustment

Excess Value (Differential) Calculations:

NCI Point
40% + Corp. 60% = Goodwill
Beginning balance 16,000 24,000 40,000
Changes (4,000) (6,000) (10,000)
Ending balance 12,000 18,000 30,000

Amortized Excess Value Reclassification Entry:

Goodwill impairment loss 10,000
Income from Stick Co. 6,000
NCI in NI of Stick Co. 4,000

Excess Value (Differential) Reclassification Entry:

Goodwill 30,000
Investment in Stick Co. 18,000
NCI in NA of Stick Co. 12,000

Accumulated Depreciation Consolidation Entry

Accumulated Depreciation 25,000
Building & Equipment 25,000

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Chapter 06 – Intercompany Inventory Transactions

P6-30 (continued)

Reversal of last year's deferral:

Investment in Stick Co. 8,800
NCI in NA of Stick Co. 3,200
Cost of Goods Sold 12,000

Deferral of this year's unrealized profits on inventory transfers

Sales 112,000
Cost of Goods Sold 101,000
Inventory 11,000

20X5 Downstream Transactions:

Ending Inv.
20X5
Sales 14,000
COGS 10,000
Gross Profit 4,000
Gross Profit % 28.57%

20X6 Downstream Transactions:

Ending
Total = Re-sold + Inventory
Sales 22,000 15,000 7,000
COGS 15,714 10,714 5,000
Gross Profit 6,286 4,286 2,000
Gross Profit % 28.57%

20X5 Upstream Transactions:

Ending Inv.
20X5
Sales 48,000
COGS 40,000
Gross Profit 8,000
Gross Profit % 16.67%

20X6 Upstream Transactions:

Ending
Total = Re-sold + Inventory
Sales 90,000 36,000 54,000
COGS 75,000 30,000 45,000
Gross Profit 15,000 6,000 9,000
Gross Profit % 16.67%

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Chapter 06 – Intercompany Inventory Transactions

P6-30 (continued)
Investment in Income from
Stick Co. Stick Co.
Beg. Balance 135,200
60% Net Income 21,000 21,000 60% Net Income
12,000 60% Dividends
6,000 Excess Val. Amort. 6,000
20X5 Reversal 8,800 7,400 Deferred GP 7,400 8,800 20X5 Reversal
Ending Balance 139,600 16,400 Ending Balance
Reversal 8,800 130,400 Basic 22,400
18,000 Excess Reclass. 6,000 Excess Val. Amort.
0 0
b.
Consolidation
Entries
Point Consolidate
Corp. Stick Co. DR CR d
Income Statement
Sales 400,000 200,000 112,000 488,000
Less: COGS (280,000) (120,000) 12,000 (287,000)
101,000
Less: Depreciation & Amort. Expense (25,000) (15,000) (40,000)
Less: Other Expenses (35,000) (30,000) (65,000)
Less: Goodwill Impairment Loss 10,000 (10,000)
Income from Stick Co. 16,400 22,400 6,000 0
Consolidated Net Income 76,400 35,000 144,400 119,000 86,000
NCI in Net Income 13,600 4,000 (9,600)
Controlling Interest in Net Income 76,400 35,000 158,000 123,000 76,400

Statement of Retained Earnings

Beginning Balance 285,000 150,000 150,000 285,000
Net Income 76,400 35,000 158,000 123,000 76,400
Less: Dividends Declared (50,000) (20,000) 20,000 (50,000)
Ending Balance 311,400 165,000 308,000 143,000 311,400

Balance Sheet
Cash 26,800 35,000 61,800
Accounts Receivable 80,000 40,000 120,000
Inventory 120,000 90,000 11,000 199,000
Land 70,000 20,000 90,000
Buildings & Equipment 340,000 200,000 25,000 515,000
Less: Accumulated Depreciation (165,000) (85,000) 25,000 (225,000)
Investment in Stick Co. 139,600 8,800 130,400 0
18,000
Goodwill 30,000 30,000
Total Assets 611,400 300,000 63,800 184,400 790,800

Accounts Payable 80,000 15,000 95,000

Bonds Payable 120,000 70,000 190,000
Common Stock 100,000 50,000 50,000 100,000
Retained Earnings 311,400 165,000 308,000 143,000 311,400
NCI in NA of Stick Co. 3,200 85,600 94,400
12,000
Total Liabilities & Equity 611,400 300,000 361,200 240,600 790,800

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Chapter 06 – Intercompany Inventory Transactions

P6-31 Intercorporate Transfers of Inventory and Equipment

a. Consolidated cost of goods sold for 20X9:

Amount reported by Polka Company $593,000

Amount reported by Song Corporation 270,000
Adjustment for unrealized profit in
beginning inventory sold in 20X9 (15,000)
Adjustment for inventory purchased from
subsidiary and resold during 20X9:
CGS recorded by Polka ($30,000 x 0.60) $18,000
CGS recorded by Song 20,000
Total recorded $38,000
CGS based on Song's cost ($20,000 x 0.60) (12,000)
Required adjustment (26,000)
Cost of goods sold $822,000

b. Consolidated inventory balance:

Amount reported by Polka $137,000

Amount reported by Song 130,000
Total inventory reported $267,000
Unrealized profit in ending inventory held by
Polka [($30,000 - $20,000) x 0.40] (4,000)
Consolidated balance $263,000

c. Income assigned to noncontrolling interest:

Net income reported by Song Corporation $70,000

Adjustment for realization of profit on inventory
sold to Polka in 20X8 15,000
Adjustment for unrealized profit on inventory sold
to Polka in 20X9 (4,000)
Realized net income of Song for 20X9 $81,000
Proportion of ownership held by noncontrolling interest x 0.10
Income assigned to noncontrolling interest $ 8,100

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Chapter 06 – Intercompany Inventory Transactions

P6-31 (continued)

d. Amount assigned to noncontrolling interest in consolidated balance

sheet:

Song Corporation common stock outstanding $ 50,000

Song Corporation retained earnings, January 1, 20X9 165,000
Net income for 20X9 70,000
Dividends paid in 20X9 (20,000)
Book value, December 31, 20X9 $265,000
Adjustment for unrealized profit on inventory
sold to Polka (4,000)
Realized book value of Song Corporation $261,000
Proportion of ownership held by noncontrolling
interest x 0.10
Balance assigned to noncontrolling interest $ 26,100

e. Consolidated retained earnings at December 31, 20X9:

Balance reported by Polka Company, January 1, 20X9 $235,000

Net income for 20X9 180,900
Dividends paid in 20X9 (40,000)
Balance reported by Polka Company, December 31, 20X9 $375,900

f. Consolidation entries:

Book Value Calculations:

Comm
NCI + Polka Co. = on + Retained
10% 90% Stock Earnings
Beginning Book
Value 21,500 193,500 50,000 165,000
+ Net Income 7,000 63,000 70,000
- Dividends (2,000) (18,000) (20,000)
Ending Book Value 26,500 238,500 50,000 215,000

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Chapter 06 – Intercompany Inventory Transactions

P6-31 (continued)

Adjustment to Basic Consolidation Entry

NCI Polka Co.
Net Income 7,000 63,000
+ Reverse GP deferral (up) 1,500 13,500
- Gross profit deferral (up) (400) (3,600)
Income to be eliminated 8,100 72,900
-------------------------------------------------------------------------------------
Ending Book Value 26,500 238,500
+ Reverse GP deferral (up) 1,500 13,500
- Gross profit deferral (up) (400) (3,600)
Adjusted Book Value 27,600 248,400
108,000 242,000

Basic Consolidation Entry

Common Stock 50,000 ← Common Stock balance
Retained Earnings 165,000 ← Beginning balance in RE
Income from Song Corp. 72,900 ← Polka’s % of NI with adjustment
NCI in NI of Song Corp. 8,100 ← NCI share of NI with adjustment
Dividends Declared 20,000 ← 100% of Song Corp.'s dividends
248,40
Investment in Song Corp. 0 ← Net book value with adjustment
NCI in NA of Song Corp. 27,600 ← NCI share of BV with adjustment

Reversal of last year's deferral:

Investment in Song Corp. 13,500
NCI in NA of Song Corp. 1,500
Cost of Goods Sold 15,000

Deferral of this year's unrealized profits on inventory transfers

Sales 30,000
Cost of Goods Sold 26,000
Inventory 4,000

20X8 Upstream Transactions:

Ending
Inventory
Sales 75,000
COGS 60,000
Gross Profit 15,000
Gross Profit % 20.00%

20X9 Upstream Transactions:

Ending
Total = Re-sold + Inventory
Sales 30,000 18,000 12,000
COGS 20,000 12,000 8,000

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Chapter 06 – Intercompany Inventory Transactions

Gross Profit 10,000 6,000 4,000

Gross Profit % 33.33%

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Chapter 06 – Intercompany Inventory Transactions

P6-31 (continued)

Investment in Income from

Song Corp. Song Corp.
180,00
Beg. Balance 0
90% Net Income 63,000 63,000 90% Net Income
18,000 90% Dividends
20X8 Reversal 13,500 3,600 Deferred GP 3,600 13,500 20X8 Reversal
234,90
Ending Balance 0 72,900 Ending Balance
248,40 72,90
Reversal 13,500 0 Basic 0
0 0

g.
Consolidation
Polka Song Entries
Co. Corp. DR CR Consolidated
Income Statement
Sales 815,000 415,000 30,000 1,200,000
Other Income 26,000 15,000 41,000
Less: COGS (593,000) (270,000) 15,000 (822,000)
26,000
Less: Depreciation Expense (45,000) (15,000) (60,000)
Less: Other Expenses (95,000) (75,000) (170,000)
Income from Song Corp. 72,900 72,900 0
102,90
Consolidated Net Income 180,900 70,000 0 41,000 189,000
NCI in Net Income 8,100 (8,100)
Controlling Interest in Net 111,00
Income 180,900 70,000 0 41,000 180,900

Statement of Retained Earnings

165,00
Beginning Balance 235,000 165,000 0 235,000
111,00
Net Income 180,900 70,000 0 41,000 180,900
Less: Dividends Declared (40,000) (20,000) 20,000 (40,000)
276,00
Ending Balance 375,900 215,000 0 61,000 375,900

Balance Sheet
Cash 187,000 57,400 244,400
Accounts Receivable 80,000 90,000 170,000
Other Receivables 40,000 10,000 50,000
Inventory 137,000 130,000 4,000 263,000
Land 80,000 60,000 140,000
Buildings & Equipment 500,000 250,000 750,000
Less: Accumulated Depreciation (155,000) (75,000) (230,000)
Investment in Song Corp. 234,900 13,500 248,400 0
Total Assets 1,103,900 522,400 13,500 252,400 1,387,400

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

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Chapter 06 – Intercompany Inventory Transactions

Common Stock 210,000 50,000 50,000 210,000

Additional Paid-in Capital 110,000 110,000
276,00
Retained Earnings 375,900 215,000 0 61,000 375,900
NCI in NA of Song Corp. 1,500 27,600 26,100
327,50
Total Liabilities & Equity 1,103,900 522,400 0 88,600 1,387,400

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Chapter 06 – Intercompany Inventory Transactions

P6-32 Consolidated Balance Sheet Worksheet [AICPA Adapted]

Book Value Calculations:

Pine Commo
NCI + Corp. = n + Retained
10% 90% Stock Earnings
Beginning book
value 80,000 720,000 200,000 600,000
+ Net Income 10,100 90,900 101,000
- Dividends (100) (900) (1,000)
Ending Book Value 90,000 810,000 200,000 700,000

Adjustment to Basic Consolidation Entry

NCI Pine Corp.
Net Income 10,100 90,900
- Gross profit deferral (down) (3,000)
Income to be eliminated 10,100 87,900
-------------------------------------------------------------------------------------
Ending Book Value 90,000 810,000
- Gross profit deferral (down) (3,000)
Adjusted Book Value 90,000 807,000
108,000 242,000

Basic Consolidation Entry

Common Stock 200,000 ← Common stock balance
Retained Earnings 600,000 ← Beginning balance in RE
Income from Slim Corp. 87,900 ← Pine’s % of NI with adjustment
NCI in NI of Slim Corp. 10,100 ← NCI share of NI with adjustment
Dividends Declared 1,000 ← 100% of Slim Corp.'s dividends
807,00
Investment in Slim Corp. 0 ← Net book value with adjustment
NCI in NA of Slim Corp. 90,000 ← NCI share of BV with adjustment

Excess Value (Differential) Calculations:

NCI Pine Corp. Goodwi
10% + 90% = ll
Beginning
balance 50,000 450,000 500,000
Changes 0 0 0
Ending balance 50,000 450,000 500,000

Excess Value (Differential) Reclassification Entry:

Goodwill 500,000
Investment in Slim Corp. 450,000
NCI in NA of Slim Corp. 50,000

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Chapter 06 – Intercompany Inventory Transactions

6-76
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Chapter 06 – Intercompany Inventory Transactions

P6-32 (continued)

Intercompany Transactions
Dividends Payable 900
Dividends Receivable 900

Accounts Payable 90,000

Accounts Receivable 90,000

Note Payable 100,000

Note Receivable 100,000

Interest Payable 5,000

Interest Receivable 5,000

Deferral of this year's unrealized profits on inventory transfers

Sales 300,000
Cost of Goods Sold 297,000
Inventory 3,000

20X6 Downstream Transactions:

Ending
Total = Re-sold + Inventory
Sales 300,000 285,000 15,000
COGS 240,000 228,000 12,000
Gross Profit 60,000 57,000 3,000
Gross Profit % 20.00%

Investment in Income from

Slim Corp. Slim Corp.
Acquisition
Price 1,170,000
90% Net Income 90,900 90,900 90% Net Income
900 90% Dividends
3,000 Deferred GP 3,000
Ending Balance 1,257,000 87,900 Ending Balance
807,000 Basic 87,900
450,000 Excess Reclass.
0 0

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Chapter 06 – Intercompany Inventory Transactions

P6-32 (continued)

Pine Slim Consolidation Entries

Corp. Corp. DR CR Consolidated
Balance Sheet
Cash 105,000 15,000 120,000
AR & Other Receivables 410,000 120,000 900 334,100
90,000
100,000
5,000
Merchandise Inventory 920,000 670,000 3,000 1,587,000
Plant & Equipment (net) 1,000,000 400,000 1,400,000
Investment in Slim Corp. 1,257,000 807,000 0
450,000
Goodwill 500,000 500,000
Total Assets 3,692,000 1,205,000 500,000 1,455,900 3,941,100

AP & Other Liabilities 140,000 305,000 900 249,100

90,000
100,000
5,000
Common Stock 500,000 200,000 200,000 500,000
Retained Earnings 3,052,000 700,000 600,000 1,000 3,052,000
87,900 297,000
10,100
300,000
NCI in NA of Slim Corp. 90,000 140,000
50,000
Total Liabilities & Equity 3,692,000 1,205,000 1,393,900 438,000 3,941,100

6-78
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Chapter 06 – Intercompany Inventory Transactions

P6-33 Comprehensive Consolidation Worksheet; Fully Adjusted Equity Method [AICPA

Adapted]
Equity Method Entries on Print Corp.'s Books:
Investment in Size Inc. 750,000
500,0
Common 00
Stock 250,0
APIC 00
Record the initial investment in Size Inc.

Investment in Size Inc. 190,000

Income from Size 190,0
Inc. 00
Record Print Corp.'s 100% share of Size Inc.'s 20X9 income

Cash 40,000
Investment in Size 40,00
Inc. 0
Record Print Corp.'s 100% share of Size Inc.'s 20X9 dividend

Income from Size Inc. 44,000

Investment in Size 44,00
Inc. 0
Record amortization of excess acquisition price (loss
on goodwill and equipment depreciation)

Income from Size Inc. 18,000

Investment in Size 18,00
Inc. 0
Eliminate the deferred gross profit from upstream sales in 20X9

Retaine
Print Commo Add. d
= + +
Corp. n Paid-in Earning
100% Stock Capital s
Beginning Book
Value 636,000 400,000 80,000 156,000
+ Net Income 190,000 190,000
(40,000
- Dividends (40,000) )
Ending Book Value 786,000 400,000 80,000 306,000

Adjustment to Basic
Consolidation Entry
Print Corp.
Net Income 190,000
- Gross profit deferral (up) (18,000)
Income to be eliminated 172,000
---------------------------------------- ------------------

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Chapter 06 – Intercompany Inventory Transactions

Ending Book Value 786,000

- Gross profit deferral (up) (18,000)
Adjusted Book Value 768,000

P6-33 (continued)

Basic Consolidation Entry

Common Stock 400,000 ← Common stock balance
Additional Paid-in Capital 80,000 ← Beginning balance in APIC
Retained Earnings 156,000 ← Beginning balance in RE
Income from Size Inc. 172,000 ← Print’s % of NI with adjustment
Dividends Declared 40,000 ← 100% of Size Inc.'s dividends
Investment in Size Inc. 768,000 ← Net book value with adjustment

Print Corp.
100% = Machinery + Acc. Depr. + Goodwill
Beginning balance 114,000 54,000 0 60,000
Changes (44,000) (9,000) (35,000)
Ending balance 70,000 54,000 (9,000) 25,000

Amortized Excess Value Reclassification Entry:

Depreciation Expense 9,000
Goodwill Impairment Loss 35,000
Income from Size Inc. 44,000

Excess Value (Differential) Reclassification Entry:

Machinery 54,000
Goodwill 25,000
Accumulated Depreciation 9,000
Investment in Size Inc. 70,000

Eliminate intercompany Accounts:

Accounts payable 86,000
Accounts receivable 86,000

Deferral of this year's unrealized profits on inventory transfers

Sales 180,000
Cost of Goods Sold 162,000
Inventory 18,000

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Chapter 06 – Intercompany Inventory Transactions

P6-33 (continued)

20X9 Upstream Transactions

Ending
Total = Re-sold + Inventory
Sales 180,000 144,000 36,000
COGS 90,000 72,000 18,000
Gross Profit 90,000 72,000 18,000
Gross Profit % 50.00%

Investment in Income from

Size Inc. Size Inc.
Acquisition Price 750,000
100% Net Income 190,000 190,000 100% Net Income
40,000 100% Dividends
44,000 Excess Val. Amort. 44,000
18,000 Deferred GP 18,000
Ending Balance 838,000 128,000 Ending Balance
768,000 Basic 172,000
70,000 Excess Reclass. 44,000 Excess Val. Amort.
0 0

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Chapter 06 – Intercompany Inventory Transactions

P6-33 (continued)

Consolidation Entries
Print Corp. Size Inc. DR CR Consolidated
Income Statement
Net Sales 3,800,000 1,500,000 180,000 5,120,000
Gain on Sale of Warehouse 30,000 30,000
Less: COGS (2,360,000) (870,000) 162,000 (3,068,000)
Less: Operating Expenses (1,100,000) (440,000) 9,000 (1,549,000)
Less: Goodwill Impairment 35,000 (35,000)
Income from Size Inc. 128,000 172,000 44,000 0
Net Income 498,000 190,000 396,000 206,000 498,000

Statement of Retained
Earnings
Beginning Balance 440,000 156,000 156,000 440,000
Net Income 498,000 190,000 396,000 206,000 498,000
Less: Dividends Declared (40,000) 40,000 0
Ending Balance 938,000 306,000 552,000 246,000 938,000

Balance Sheet
Cash 570,000 150,000 720,000
Accounts Receivable (net) 860,000 350,000 86,000 1,124,000
Inventories 1,060,000 410,000 18,000 1,452,000
Land, Plant, and Equipment 1,320,000 680,000 54,000 2,054,000
Less: Accumulated Depreciation (370,000) (210,000) 9,000 (589,000)
Investment in Size Inc. 838,000 768,000 0
70,000
Goodwill 25,000 25,000
Total Assets 4,278,000 1,380,000 79,000 951,000 4,786,000

Accounts Payable & Accrued

Expenses 1,340,000 594,000 86,000 1,848,000
Common Stock 1,700,000 400,000 400,000 1,700,000
Additional Paid-in Capital 300,000 80,000 80,000 300,000
Retained Earnings 938,000 306,000 552,000 246,000 938,000
Total Liabilities & Equity 4,278,000 1,380,000 1,118,000 246,000 4,786,000

6-82
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Chapter 06 – Intercompany Inventory Transactions

P6-34 Comprehensive Worksheet Problem

a.
Equity Method Entries on Prime Corp.'s Books:

Investment in Steak Co. 32,000

Income from Steak Co. 32,000
Record Prime Corp.'s 80% share of Steak Co.'s 20X7 income

Cash 20,000
Investment in Steak Co. 20,000
Record Prime Corp.'s 80% share of Steak Co.'s 20X7 dividend

Income from Steak Co. 4,000

Investment in Steak Co. 4,000
Record amortization of excess acquisition price

Investment in Steak Co. 2,000

Income from Steak Co. 2,000
Reverse of the deferred gross profit from downstream sales in 20X6

Income from Steak Co. 3,000

Investment in Steak Co. 3,000
Eliminate the deferred gross profit from downstream sales in 20X7

Investment in Steak Co. 6,400

Income from Steak Co. 6,400
Reverse of the deferred gross profit from upstream sales in 20X6

Income from Steak Co. 8,000

Investment in Steak Co. 8,000
Eliminate the deferred gross profit from upstream sales in 20X7

6-83
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Chapter 06 – Intercompany Inventory Transactions

6-34 (continued)
b.
Book Value Calculations:
Prime Retained
NCI + Corp. = Common + Add. Paid- +
20% 80% Stock in Capital Earnings
Beginning book
value 67,000 268,000 100,000 20,000 215,000
+ Net Income 8,000 32,000 40,000
- Dividends (5,000) (20,000) (25,000)
Ending book value 70,000 280,000 100,000 20,000 230,000

Adjustment to Basic
Consolidation Entry
Prime
NCI Corp.
Net Income 8,000 32,000
+ Reverse GP
deferral (down) 2,000
+ Reverse GP
deferral (up) 1,600 6,400
- Gross profit
deferral (down) (3,000)
- Gross profit
deferral (up) (2,000) (8,000)
Income to be
eliminated 7,600 29,400
--------------------------------------------------------
-----------------------------
280,00
Ending Book Value 70,000 0
+ Reverse GP
deferral (down) 2,000
+ Reverse GP
deferral (up) 1,600 6,400
- Gross profit
deferral (down) (3,000)
- Gross profit
deferral (up) (2,000) (8,000)
Adjusted Book 277,40
Value 69,600 0
242,00
108,000 0
Basic
Consolidation Entry
100,0
Common Stock 00 ← Common stock balance
Additional Paid-in 20,00 ← Beginning balance in

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Chapter 06 – Intercompany Inventory Transactions

Capital 0 APIC
Retained 215,0 ← Beginning balance in
Earnings 00 RE
Income from Steak 29,40 ← Prime’s % of NI with
Co. 0 adjustment
NCI in NI of Steak ← NCI share of NI with
Co. 7,600 adjustment
Dividends 25,00 ← 100% of Steak Co.'s
Declared 0 dividends
Investment in 277,4 ← Net book value with
Steak Co. 00 adjustment
NCI in NA of 69,60 ← NCI share of BV with
Steak Co. 0 adjustment

Excess Value (Differential) Calculations:

NCI Prime Buildings &
20% + Corp. 80% = Equipment + Acc. Depr.
Beginning balance 7,000 28,000 50,000 (15,000)
Changes (1,000) (4,000) (5,000)
Ending balance 6,000 24,000 50,000 (20,000)

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Chapter 06 – Intercompany Inventory Transactions

P6-34 (continued)

Amortized Excess Value Reclassification Entry:

Depreciation expense 5,000
Income from Steak Co. 4,000
NCI in NI of Steak Co. 1,000

Excess Value (Differential) Reclassification Entry:

Buildings & equipment 50,000
Accumulated depreciation 20,000
Investment in Steak Co. 24,000
NCI in NA of Steak Co. 6,000

Eliminate intercompany Accounts:

Accounts payable 10,000
Accounts receivable 10,000

Accumulated Depreciation Consolidation Entry

Accumulated depreciation 40,000
Building & equipment 40,000

Reversal of last year's deferral:

Investment in Steak Co. 8,400
NCI in NA of Steak Co. 1,600
Cost of Goods Sold 10,000

Deferral of this year's unrealized profits on inventory transfers

Sales 57,000
Cost of Goods Sold 44,000
Inventory 13,000

20X6 Downstream Transactions:

Ending
Total = Re-sold + Inventory
Sales 26,000 17,333 8,667
COGS 20,000 13,333 6,667
Gross Profit 6,000 4,000 2,000
Gross Profit % 23.08%

20X7 Downstream Transactions:

Ending
Total = Re-sold + Inventory
Sales 12,000 0 12,000
COGS 9,000 0 9,000
Gross Profit 3,000 0 3,000
Gross Profit % 25.00%

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Chapter 06 – Intercompany Inventory Transactions

P6-34 (continued)

20X6 Upstream Transactions:

Ending
Total = Re-sold + Inventory
Sales 60,000 36,000 24,000
COGS 40,000 24,000 16,000
Gross Profit 20,000 12,000 8,000
Gross Profit % 33.33%

20X7 Upstream Transactions:

Ending
Total = Re-sold + Inventory
Sales 45,000 15,000 30,000
COGS 30,000 10,000 20,000
Gross Profit 15,000 5,000 10,000
Gross Profit % 33.33%

Investment in Income from

Steak Co. Steak Co.
Beginning Balance 287,600
80% Net Income 32,000 32,000 80% Net Income
20,000 80% Dividends
Excess Val.
4,000 Amort. 4,000
20X6 Reversal 8,400 11,000 Deferred GP 11,000 8,400 20X6 Reversal
Ending Balance 293,000 25,400 Ending Balance
Reversal 8,400 277,400 Basic 29,400
24,000 Excess Reclass. 4,000 Excess Val. Amort.
0 0

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Chapter 06 – Intercompany Inventory Transactions

P6-34 (continued)

Consolidation
Entries
Prime Steak Consolidate
Corp. Co. DR CR d
Income Statement
Sales 500,000 250,000 57,000 693,000
Other Income 20,400 30,000 50,400
Less: COGS (416,000) (202,000) 10,000 (564,000)
44,000
Less: Depreciation Expense (30,000) (20,000) 5,000 (55,000)
Less: Other Expenses (24,000) (18,000) (42,000)
Income from Steak Co. 25,400 29,400 4,000 0
Consolidated Net Income 75,800 40,000 91,400 58,000 82,400
NCI in Net Income 7,600 1,000 (6,600)
Controlling Interest in Net
Income 75,800 40,000 99,000 59,000 75,800

Statement of Retained Earnings

Beginning Balance 337,500 215,000 215,000 337,500
Net Income 75,800 40,000 99,000 59,000 75,800
Less: Dividends Declared (50,000) (25,000) 25,000 (50,000)
Ending Balance 363,300 230,000 314,000 84,000 363,300

Balance Sheet
Cash 130,300 10,000 140,300
Accounts Receivable 80,000 70,000 10,000 140,000
Inventory 170,000 110,000 13,000 267,000
Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000
Less: Accumulated Depreciation (310,000) (120,000) 40,000 20,000 (410,000)
Investment in Steak Co. 293,000 8,400 277,400 0
24,000
Total Assets 963,300 470,000 98,400 384,400 1,147,300

Accounts Payable 100,000 15,200 10,000 105,200

Bonds Payable 300,000 100,000 400,000
Bond Premium 4,800 4,800
Common Stock 200,000 100,000 100,000 200,000
Additional Paid-in Capital 20,000 20,000 0
Retained Earnings 363,300 230,000 314,000 84,000 363,300
NCI in NA of Steak Co. 1,600 69,600 74,000
6,000
Total Liabilities & Equity 963,300 470,000 445,600 159,600 1,147,300

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Chapter 06 – Intercompany Inventory Transactions

P6-34 (continued)

d Prime Corporation and Subsidiary

. Consolidated Balance Sheet
December 31, 20X7

Cash $ 140,300
Accounts Receivable 140,000
Inventory 267,000
Total Current Assets $ 547,300
Buildings and Equipment $1,010,000
Less: Accumulated Depreciation (410,000) 600,000
Total Assets $1,147,300

Accounts Payable $ 105,200

Bonds Payable $ 400,000
Bond Premium 4,800 404,800
Stockholders’ Equity:
Controlling Interest:
Common Stock $ 200,000
Retained Earnings 363,300
Total Controlling Interest $ 563,300
Noncontrolling Interest 74,000
Total Stockholders’ Equity 637,300
Total Liabilities and Stockholders' Equity $1,147,300

Prime Corporation and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X7

Sales $ 693,000
Other Income 50,400
$ 743,400
Cost of Goods Sold $ 564,000
Depreciation Expense 55,000
Other Expenses 42,000 (661,000)
Consolidated Net Income $ 82,400
Income to Noncontrolling Interest (6,600)
Income to Controlling Interest $ 75,800

Prime Corporation and Subsidiary

Consolidated Statement of Retained Earnings
Year Ended December 31, 20X7

Retained Earnings, January 1, 20X7 $ 337,500

Income to Controlling Interest, 20X7 75,800
$ 413,300
Dividends Declared, 20X7 (50,000)
Retained Earnings, December 31, 20X7 $ 363,300

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Chapter 06 – Intercompany Inventory Transactions

P6-35A Modified Equity Method

a. Adjusted trial balance:

Prime Corporation Steak Company

Item Debit Credit Debit Credit

Cash $ 130,300 $ 10,000

Accounts Receivable 80,000 70,000
Inventory 170,000 110,000
Buildings and Equipment 600,000 400,000
Investment in Steak
Company Stock 304,000
Cost of Goods Sold 416,000 202,000
Depreciation Expense 30,000 20,000
Other Expenses 24,000 18,000
Dividends Declared 50,000 25,000
Accumulated Depreciation $ 310,000 $120,000
Accounts Payable 100,000 15,200
Bonds Payable 300,000 100,000
Bond Premium 4,800
Common Stock 200,000 100,000
Additional Paid-In Capital 20,000
Retained Earnings 345,900 215,000
Sales 500,000 250,000
Other Income 20,400 30,000
Income from Subsidiary 28,000
$1,804,300 $1,804,300 $855,000 $855,000

b.
Equity Method Entries on Prime Corp.'s Books:
Investment in Steak Co. 32,000
Income from Steak Co. 32,000
Record Prime Corp.'s 80% share of Steak Co.'s 20X7 income

Cash 20,000
Investment in Steak Co. 20,000
Record Prime Corp.'s 80% share of Steak Co.'s 20X7 dividend

Income from Steak Co. 4,000

Investment in Steak Co. 4,000
Record amortization of excess acquisition price

6-90
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Chapter 06 – Intercompany Inventory Transactions

P6-35A (continued)
c.
Book Value Calculations:
Prime
NCI + Corp. = Common + Add. Paid- + Retained
20% 80% Stock in Capital Earnings
Beginning Book
Value 67,000 268,000 100,000 20,000 215,000
+ Net Income 8,000 32,000 40,000
- Dividends (5,000) (20,000) (25,000)
Ending Book Value 70,000 280,000 100,000 20,000 230,000

Adjustment to Basic Consolidation Entry

NCI Prime Corp.
Net Income 8,000 32,000
+ Reverse GP deferral (down) 2,000
+ Reverse GP deferral (up) 1,600 6,400
- Gross profit deferral (down) (3,000)
- Gross profit deferral (up) (2,000) (8,000)
Income to be eliminated 7,600 29,400
-----------------------------------------------------------------------------------
Ending Book Value 70,000 280,000
+ Reverse GP deferral (down) 2,000
+ Reverse GP deferral (up) 1,600 6,400
- Gross profit deferral (down) (3,000)
- Gross profit deferral (up) (2,000) (8,000)
Adjusted Book Value 69,600 277,400
108,000 242,000
Basic Consolidation Entry
Common Stock 100,000 ← Common stock balance
Additional Paid-in Capital 20,000 ← Beginning balance in APIC
Retained Earnings 215,000 ← Beginning balance in RE
Income from Steak Co. 32,000 ← Prime Corp.’s % of NI
NCI in NI of Steak Co. 7,600 ← NCI share of NI - Def. GP + Reversal
Dividends Declared 25,000 ← 100% of Steak Co.'s dividends
Investment in Steak Co. 280,000 ← Net book value
NCI in NA of Steak Co. 69,600 ← NCI share of BV - Def. GP + Reversal

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Chapter 06 – Intercompany Inventory Transactions

P6-35A (continued)

Excess Value (Differential) Calculations:

NCI Prime Corp. Buildings &
20% + 80% = equipment + Acc. Depr.
Beginning balance 7,000 28,000 50,000 (15,000)
Changes (1,000) (4,000) (5,000)
Ending balance 6,000 24,000 50,000 (20,000)

Amortized Excess Value Reclassification Entry:

Depreciation Expense 5,000
Income from Steak Co. 4,000
NCI in NI of Steak Co. 1,000

Excess Value (Differential) Reclassification Entry:

Buildings & equipment 50,000
Accumulated 20,00
depreciation 0
Investment in Steak Co. 24,000
NCI in NA of Steak Co. 6,000

Eliminate Intercompany
Accounts:
Accounts Payable 10,000
Accounts Receivable 10,000

Accumulated Depreciation Consolidation Entry

Accumulated Depreciation 40,000
Building & Equipment 40,000

Reversal of last year's deferral:

Retained earnings 8,400
NCI in NA of Steak Co. 1,600
Cost of Goods Sold 10,000

Deferral of this year's unrealized profits on inventory transfers

Sales 57,000
Cost of Goods Sold 44,000
Inventory 13,000

(See Problem 6-34 for unrealized profit calculations.)

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Chapter 06 – Intercompany Inventory Transactions

P6-35A (continued)

d.
Consolidation
Entries
Prime Steak Consolidate
Corp. Co. DR CR d
Income Statement
Sales 500,000 250,000 57,000 693,000
Other Income 20,400 30,000 50,400
(416,000 (202,000
Less: COGS ) ) 44,000 (564,000)
10,000
Less: Depreciation Expense (30,000) (20,000) 5,000 (55,000)
Less: Other Expenses (24,000) (18,000) (42,000)
Income from Steak Co. 28,000 32,000 4,000 0
Consolidated Net Income 78,400 40,000 94,000 58,000 82,400
NCI in Net Income 7,600 1,000 (6,600)
Controlling Interest in Net 101,60
Income 78,400 40,000 0 59,000 75,800

Statement of Retained Earnings

215,00
Beginning Balance 345,900 215,000 0 337,500
8,400
101,60
Net Income 78,400 40,000 0 59,000 75,800
Less: Dividends Declared (50,000) (25,000) 25,000 (50,000)
325,00
Ending Balance 374,300 230,000 0 84,000 363,300

Balance Sheet
Cash 130,300 10,000 140,300
Accounts Receivable 80,000 70,000 10,000 140,000
Inventory 170,000 110,000 13,000 267,000
Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000
(310,000 (120,000
Less: Accumulated Depreciation ) ) 40,000 20,000 (410,000)
280,00
Investment in Steak Co. 304,000 0 0
24,000
387,00
Total Assets 974,300 470,000 90,000 0 1,147,300

Accounts Payable 100,000 15,200 10,000 105,200

Bonds Payable 300,000 100,000 400,000
Bond Premium 4,800 4,800
100,00
Common Stock 200,000 100,000 0 200,000
Additional Paid-in Capital 20,000 20,000 0
325,00
Retained Earnings 374,300 230,000 0 84,000 363,300
NCI in NA of Steak Co. 1,600 69,600 74,000
6,000
456,60 159,60
Total Liabilities & Equity 974,300 470,000 0 0 1,147,300

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Chapter 06 – Intercompany Inventory Transactions

P6-36A Cost Method

a.
Equity Method Entries on Prime Corp.'s Books:
Cash 20,000
Dividend Income 20,000
Record Prime Corp.'s 80% share of Steak Co.'s 20X7 income

b.
Investment Consolidation
Entry:
Common Stock 100,000
Additional Paid-in Capital 20,000
Retained Earnings 180,000
240,00
Investment in Steak Co. 0
NCI in NA of Steak Co. 60,000

Dividend Consolidation Entry:

Dividend Income 20,000
NCI in NI of Steak Co. 5,000
Dividends Declared 25,000

Excess Value (Differential) Reclassification Entry:

Buildings & Equipment 50,000
Investment in Steak Co. 40,000
NCI in NA of Steak Co. 10,000

Amortize Differential from previous years:

Retained Earnings 12,000
NCI in NA of Steak Co. 3,000
Accumulated Depreciation 15,000

Amortize Differential for 20X7

Depreciation Expense 5,000
Accumulated Depreciation 5,000

Assign Steak's undistributed income to NCI

NCI in NI of Steak Co. 1,600
Retained Earnings 7,000
NCI in NA of Steak Co. 8,600

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Chapter 06 – Intercompany Inventory Transactions

P6-36A (continued)

Eliminate Intercompany Accounts:

Accounts Payable 10,000
10,00
Accounts Receivable 0

Accumulated Depreciation Consolidation Entry

Accumulated Depreciation 40,000
Building & Equipment 40,000

Reversal of last year's deferral:

Retained Earnings 8,400
NCI in NA of Steak Co. 1,600
Cost of Goods Sold 10,000

Deferral of this year's unrealized profits on inventory transfers

Sales 57,000
Cost of Goods Sold 44,000
Inventory 13,000

(See Problem 6-34 for unrealized profit calculations.)

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Chapter 06 – Intercompany Inventory Transactions

P6-36A (continued)

Consolidation
Entries
Prime Steak Consolidate
Corp. Co. DR CR d
Income Statement
Sales 500,000 250,000 57,000 693,000
Other Income 20,400 30,000 50,400
Dividend Income 20,000 20,000 0
(416,000 (202,000
Less: COGS ) ) 10,000 (564,000)
44,000
Less: Depreciation Expense (30,000) (20,000) 5,000 (55,000)
Less: Other Expenses (24,000) (18,000) (42,000)
Consolidated Net Income 70,400 40,000 82,000 54,000 82,400
NCI in Net Income of Steak Co. 5,000 (6,600)
1,600
Controlling Interest in Net
Income 70,400 40,000 88,600 54,000 75,800

Statement of Retained
Earnings
180,00
Beginning Balance 329,900 215,000 0 337,500
8,400
12,000
7,000
Net Income 70,400 40,000 88,600 54,000 75,800
Less: Dividends Declared (50,000) (25,000) 25,000 (50,000)
296,00
Ending Balance 350,300 230,000 0 79,000 363,300

Balance Sheet
Cash 130,300 10,000 140,300
Accounts Receivable 80,000 70,000 10,000 140,000
Inventory 170,000 110,000 13,000 267,000
Buildings & Equipment 600,000 400,000 50,000 40,000 1,010,000
(310,000 (120,000
Less: Accumulated Depreciation ) ) 40,000 5,000 (410,000)
15,000
240,00
Investment in Steak Co. 280,000 0 0
40,000
363,00
Total Assets 950,300 470,000 90,000 0 1,147,300

Accounts Payable 100,000 15,200 10,000 105,200

Bonds Payable 300,000 100,000 400,000
Bond Premium 4,800 4,800
100,00
Common Stock 200,000 100,000 0 200,000
Additional Paid-in Capital 20,000 20,000 0
296,00
Retained Earnings 350,300 230,000 0 79,000 363,300
NCI in NA of Steak Co. 1,600 60,000 74,000
3,000 10,000
8,600
430,60 157,60
Total Liabilities & Equity 950,300 470,000 0 0 1,147,300

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Chapter 06 – Intercompany Inventory Transactions

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