Chapter 7 Solution Manual

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

CHAPTER 7

INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS

ANSWERS TO QUESTIONS

Q7-1 Profits on intercorporate sales generally are considered to berealized when the affiliate that has purchased the item sells it to anonaffiliate. For depreciable or amortizable items that are used bythe affiliate in its operations, profits are considered to be realizedas the purchaser depreciates or amortizes the asset.

Q7-2 An upstream sale occurs when a subsidiary sells an item to theparent company. If the asset is not resold before the end of theperiod, the parent is the company holding the asset and any unrealizedprofits are recorded on the books of the subsidiary.

Q7-3 If the purchaser records the services received as an expense,both revenues and expenses will be overstated in the consolidatedincome statement in the period in which the intercorporate servicesare provided. In the event the services are capitalized by thepurchaser, the cost of the asset will be overstated, depreciationexpense and accumulated depreciation will be overstated if theservices are assigned to a depreciable asset, and service revenue willbe overstated.

Q7-4 (a) Unrealized profit on an intercorporate sale generally isincluded in the reported net income of the seller.

(b) All unrealized profit on current-period intercorporate sales mustbe excluded from consolidated net income until realized through resaleto a nonaffiliate.

Q7-5 Profits on intercompany sales are included in consolidated netincome in the period in which the items are sold to a nonaffiliate. Ifthere are unrealized profits on the books of one of the companies atthe start of the period and the item is sold to a nonaffiliate duringthe current period, the intercompany profit is included in thecomputation of consolidated net income for the current period.

Q7-6 The profits continue to be unrealized in this case andtherefore must be eliminated from both the beginning and ending assetand retained earnings balances when consolidated statements areprepared. There should be no income statement effect for the currentperiod.

Q7-7 A downstream sale is a sale from the parent to one of itssubsidiaries. If the asset is not resold before the end of the period,the subsidiary is the company holding the asset at year-end and anyunrealized profits are recorded on the books of the parent company.

Q7-8 The entire balance of unrealized profits is eliminated in allcases. While the direction of the sale will affect the allocation of

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unrealized profits between companies, it does not change the totalamount of profit eliminated.

Q7-9 Consolidated net income is reduced by the amount of unrealizedprofits assigned to the shareholders of the parent company. When adownstream sale occurs, all the profit is on the parent's books andconsolidated net income is reduced by the full amount of anyunrealized profit. On the other hand, when an upstream sale occurs,all the intercorporate profit is recorded on the books of thesubsidiary and the amount of income assigned to both the parentcompany shareholders and the noncontrolling shareholders is reduced bya proportionate amount of any unrealized profit.

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Q7-10 The amount of intercorporate profit realized in the currentperiod from prior years' sales to the parent is added to the reportednet income of the subsidiary in computing income assigned to thenoncontrolling interest.

Q7-11 Income assigned to noncontrolling interest for the currentperiod will be less than a proportionate share of the reported netincome of the subsidiary. In determining the amount of income to beassigned to the noncontrolling interest in the consolidated incomestatement, the net income reported by the subsidiary must be adjustedto exclude any unrealized gain recorded during the period on the saleof depreciable assets to the parent. On the other hand, if anunrealized loss had been recorded, the basis used in assigning incometo the noncontrolling interest would be greater than the reported netincome of the subsidiary. Such adjustments must be made to assure thatthe income assigned to noncontrolling interest is based on thecontribution of the subsidiary to consolidated net income rather thanthe amount the subsidiary may have reported as net income.

Q7-12 All other factors being equal, the income assigned tononcontrolling interest will be larger if the sale occurs at the startof the current period. Some part of the gain will be consideredrealized in the current period as the parent depreciates the asset ifthe sale occurs before year-end. None of the gain will be consideredrealized in the period of transfer if the sale occurs at year-end.

Q7-13 As in all other cases, income from the subsidiary recorded onthe parent's books must be eliminated in preparing the consolidatedincome statement and an appropriate amount of subsidiary net incomemust be assigned to the noncontrolling interest if the parent ownsless than 100 percent of the subsidiary's stock. The gain recorded onthe parent's books also must be eliminated.

Q7-14 Depreciation expense recorded by the subsidiary is overstatedfrom the viewpoint of the consolidated entity when the subsidiary paysthe parent more than book value for the asset at the start of theperiod. As a result, an eliminating entry is needed to reducedepreciation expense and accumulated depreciation by the amount ofexcess depreciation recorded during 20X3.

Q7-15 Following an intercorporate sale of a depreciable asset, theeliminating entries should adjust the balance in the asset account toreflect the original purchase price to the first owner and accumulateddepreciation should be adjusted to reflect the balance that would bereported if the asset were still held by the first owner. In the caseof an intercorporate sale of an intangible asset, only the unamortizedbalance normally is reported and an eliminating entry is needed toadjust the carrying value to that which would be reported if the assetwere still held by the first owner.

Q7-16 Profit on an intercorporate sale of land is considered realizedat the time the purchaser sells the land to a nonaffiliate. Profit onequipment normally is considered realized as the asset is used and

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depreciated on the books of the purchaser. Equipment typically isconsidered to be used up in the production process and therefore ischarged to expense over its remaining economic life, while land isnot.

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Q7-17 A portion of the profit is considered realized each period asthe asset is depreciated by the purchaser. Thus, the net amountconsidered unrealized decreases each period and a smaller debit tobeginning retained earnings is needed.

Q7-18A The balance in the investment account will depend on whichmethod the parent uses to account for its investment in thesubsidiary. If the parent uses (a) the cost method or (b) the modifiedequity method, no adjustments are made on the parent company's booksfor unrealized intercompany profits and the balance in the investmentaccount will be the same as if there were no unrealized profits. Ifthe parent uses (c) the fully-adjusted equity method, the balance inthe investment account will be reduced by the full amount of theunrealized profit when the profit is on the parent's books and by aproportionate share of the unrealized profit when it is on thesubsidiary's books.

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SOLUTIONS TO CASES

C7-1 Correction of Elimination Procedures

MEMO

To: ControllerPlug Corporation

From: , CPA

Re: Elimination of Intercompany Profit on Equipment

This memo is in response to our review of the elimination proceduresused in preparing the consolidated statements for Plug Corporation atDecember 31, 20X2. You have correctly identified the need to eliminatethe effects of the intercorporate sale of equipment. In preparing yourconsolidated statements, all intercompany balances and transactionsshould be eliminated. [ARB 51, Par. 6; ASC 810]

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

Equipment 150,000 Loss on Sale of Equipment 150,000

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

Equipment 350,000Depreciation Expense 15,000 Accumulated Depreciation 215,000 Loss on Sale of Equipment 150,000

A debit of $350,000 to equipment is required to raise the balance from$850,000 recorded by Plug to $1,200,000, the initial purchase price tothe consolidated entity. Depreciation expense must be increased by$15,000 from $85,000 ($850,000/10 years) recorded by Plug to $100,000($1,200,000/12 years) based on the initial purchase price. Accumulateddepreciation must be credited by $215,000 to adjust from the $85,000[($85,000/10 years) x 1 year] reported by Plug to $300,000[($1,200,000/12 years) x 3 years]. As previously noted, the $150,000loss recorded by Coy must be eliminated. If the amounts included insecond eliminating entry are omitted, consolidated net income for 20X2and the retained earnings balance at December 31, 20X2, will beoverstated and the balances for equipment and accumulated depreciation

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will be understated.

Primary citation:ARB 51, Par. 6; ASC 810

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C7-2 Elimination of Intercorporate Services

MEMO

To: Chief AccountantDream Corporation

From: , CPA

Re: Elimination of Legal Services Provided by Parent Company

This memo is in response to our discussion regarding the eliminationof intercompany services in preparing consolidated financialstatements for Dream Corporation. It is my understanding that atpresent Dream Corporation does not eliminate such services. Inpreparing consolidated financial statements all intercompany balancesand transactions should be eliminated. [ARB 51, Par. 6; ASC 810]

The legal services provided by Dream Corporation to Classic Companyand Plain Company are intercompany transactions that should beeliminated. If the revenues recorded by the parent are equal to theexpenses recorded by the subsidiaries and both are properly recorded,elimination of these transactions will have no impact on reported netincome but will reduce consolidated revenues and expenses by equalamounts. Financial statement readers will receive a more accuratepicture of operations of the consolidated entity if the appropriateamounts are reported. The legal services provided to Classic Companyin 20X3 should be eliminated with the following entry:

Legal Services Revenue 80,000 Legal Services Expense 80,000

The information on intercorporate services provided to Plain Companyindicates that an additional adjustment is needed in the consolidationprocess. Although Plain Company recorded its $150,000 payment to theparent as a legal expense, it should have been recorded as aninvestment in land to be used in future development of its strip mine.This error should be corrected on the books of Plain Company. If it isnot, the eliminating entry prepared at December 31, 20X3, shouldinclude an adjustment to reflect the appropriate investment in landand would be recorded as:

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

Care must be taken to capitalize only the cost of legal services inthis case. The eliminating entry should contain a debit of $100,000($150,000/1.50) to land since Dream Corporation bills its services tothe subsidiaries at 150 percent of the cost of services provided. HadPlain Company debited land for its $150,000 payment to Dream, the

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eliminating entry at December 31, 20X3, would have been:

Legal Services Revenue 150,000 Land 50,000 Wage and Salary Expense 100,000

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C7-2 (continued)

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

Land 100,000 Investment in Plain 100,000

Had Plain Company debited land for its $150,000 payment to Dream in20X3, the eliminating entry at December 31, 20X4, would require a$50,000 debit to Investment in Plain and a $50,000 credit to land.

Primary citation:ARB 51, Par. 6; ASC 810

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C7-3 Noncontrolling Interest

a. When there are no unrealized profits on the subsidiary's books, apro rata portion of the reported net income of the subsidiary isassigned to the noncontrolling interest, adjusted for thenoncontrolling interest’s share of any amortization or write-off ofdifferential.

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

c. The effect of unrealized intercompany profits depends on whichcompany has recorded the profits. Those recorded on the books of theparent do not affect the income assigned to the noncontrollinginterest. When subsidiary net income includes unrealized intercompanyprofits, the portion of consolidated net income assigned to thenoncontrolling interest is reduced by its portion of the unrealizedprofit in the period of the intercorporate sale.

(1) On a sale of land, the intercompany profit remains unrealizeduntil the land is sold to a nonaffiliate. When the land is resold, theprofit is added to the reported net income of the subsidiary incomputing the portion of consolidated net income assigned to thenoncontrolling interest.

(2) On an intercorporate sale of a depreciable asset, a portion of theintercompany profit is considered realized each period as thepurchaser depreciates the asset. Thus, in the period of theintercorporate sale, the adjustment to subsidiary net income forunrealized profits is based on the gain or loss less any portionconsidered realized before the end of the period. Each periodthereafter, a portion of the profit or loss is considered realized andtreated as an adjustment to subsidiary income in determining theportion of consolidated net income assigned to the noncontrollinginterest.

d. Noncontrolling shareholders of a subsidiary generally will not gaina great deal of useful information from the consolidated financialstatements. Their primary focus must continue to be on the income,assets, and liabilities of the subsidiary in which they hold directownership. In the event there are a number of transactions with theparent or other affiliates, the success of the operations of theentire economic entity may provide information useful to thenoncontrolling shareholders. Debt guarantees or other assurances bythe parent may also lead to an examination of the parent company andconsolidated statements.

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C7-4 Intercompany Sale of Services

a. When preparing consolidated financial statements, Schwartz'srevenue from the sale of services to Diamond and Diamond's expensesassociated with the services acquired from Schwartz must beeliminated. The expenses related to the janitorial and maintenanceactivities that will be reported in the consolidated income statementwill be the actual salary and associated costs incurred by Schwartz toprovide the services to Diamond. The eliminations have no effect onconsolidated net income because revenues and expenses of equal amountare eliminated in the preparation of the consolidated financialstatements.

b. Intercompany profits from the sale of services to an affiliatenormally are considered realized at the time the services areprovided. Realization of intercompany profits on services normally isconsidered to occur as the services are consumed, and services such asmaintenance and repair services normally are considered to be consumedby the purchasing affiliate at the time received.

C7-5 Intercompany Profits

Answers can be found in the companies' 10-K filings with the SEC andin their annual reports. Note that financial statements are oftenincluded in the Form 10-K by reference to the company’s annual report.In such cases, the financial statements are often shown in a separateexhibit rather than in Item 8 of the Form 10-K.

a. Verizon (www.verizon.com) eliminates all intercompany profits. Itdiscontinued the use of regulatory accounting as provided by FASB 71in 1994 and now no longer applies the provisions of FASB 71.

b. All of Harley-Davidson’s (www.harleydavidson.com) intercompanytransactions are eliminated except some occurring between theMotorcycles and Financial Services segments. Some interest and feesrecognized as income by Financial Services and expense by Motorcyclesare not eliminated. This leads to higher finance income and higherexpenses, but net income is unaffected.

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http://www.harleydavidson.com/

http://www.verizon.com/


SOLUTIONS TO EXERCISES

E7-1 Multiple-Choice Questions on Intercompany Transfers [AICPA Adapted]

1.

c

2.

d

3.

b

4.

a

5.

b Depreciation expense recorded by Pirn $40,000

Depreciation expense recorded by Scroll 10,000 Total depreciation reported $50,000 Adjustment for excess depreciation charged by Scroll as a result of increase in carrying value of equipment due to gain on intercompany sale ($12,000 / 4 years) (3,000 )Depreciation for consolidated statements $47,000

E7-2 Multiple-Choice Questions on Intercompany Transactions

1.

d When only retained earnings is debited, and not thenoncontrolling interest, a gain has been recorded in aprior period on the parent's books.

2.

a The costs incurred by Bottom to develop the equipment areresearch and development costs and must be expensed asthey are incurred (FASB Statement No. 2, par. 12; ASC 730-10-25-1). Transfer to another legal entity does not causea change in accounting treatment within the economicentity.

3.

b The $39,000 paid to Gold Company will be charged todepreciation expense by Top Corporation over the remaining3 years of ownership. As a result, Top Corporation willdebit depreciation expense for $13,000 each year. GoldCompany had charged $16,000 to accumulated depreciation in2 years, for an annual rate of $8,000. Depreciationexpense therefore must be reduced by $5,000 ($13,000 -$8,000) in preparing the consolidated statements.

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4.

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

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E7-2 (continued)

5.

b Reported net income of Gold Company $ 45,000

Reported gain on sale of equipment $15,000 Intercompany profit realized in 20X6 (5,00

0)

(10,000)

Realized net income of Gold Company $ 35,000

Proportion of stock held by noncontrolling interest x

.40 Income assigned to noncontrolling interests $ 14,0

00

6.

c Operating income reported by Top Corporation $ 85,000

Net income reported by Gold Company 45,000 $130,00

0 Less: Unrealized gain on sale of equipment ($15,000 - $5,000) (10,

000)Consolidated net income $120,00

0

E7-3 Elimination Entries for Land Transfer

a.

Eliminating entry, December 31, 20X4:

Gain on Sale of Land 10,000 Land 10,000


Investment in Lowly 10,000 Land 10,000

b.




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Investment in Lowly 6,000 NCI in NA of Lowly 4,000 Land 10,000

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E7-4 Intercompany Services

a. Consolidated net income will not change.

b. One hundred percent of the intercompany services must always beeliminated. Thus, a change in the level of ownership of thesubsidiary will not have an impact on the amount eliminated or onconsolidated net income.

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

E7-5 Elimination Entries for Intercompany Services

Two eliminating entries are required:

Delivery Service Revenue 76,000 Delivery Service Expense 76,000

Accounts Payable 18,000 Accounts Receivable 18,000

E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Salea.

AccumulatedTruck Depreciation

Northern 40,000 Actual 0

5,000 15,000 Pam 45,000 "As If" 15,000

Eliminate the gain on Truck & correct asset's basis:Gain on sale 10,000 Truck 5,000 Accumulated Depreciation 15,000

b.Accumulated

Truck DepreciationNorther

n 40,000 Actual 4,000 5,000 1,000 15,000

Pam 45,000 "As If" 18,000

Eliminate the gain on Truck & correct asset's basis:

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Investment in Northern 10,000 Truck 5,000 Accumulated Depreciation 15,000

Accumulated Depreciation 1,000 Depreciation Expense 1,000

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E7-7 Transfer of Land

a.




Investment in Roan 31,500 NCI in NA of Roan 13,500 Land 45,000

b.

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

Investment in Roan 30,000 Land 30,000

E7-8 Transfer of Depreciable Asset at Year-Enda.

Truck AccumulatedDepreciation

MinnowCorp. 210,000 Actual 0

90,000 120,000 FrazerCorp. 300,000 "As If" 120,000

Eliminate the gain on Truck & correct asset's basis:Gain on sale 30,000 Truck 90,000 Accumulated Depreciation

120,000

Computation of gain on sale of truck:Price paid by Minnow $210,0

00 Cost of truck to Frazer

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$300,000Accumulated depreciation ($300,000 / 10 years) x 4 years (120,000)

(180,000)

Gain on sale of truck $30,000

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E7-8 (continued)

b.


MinnowCorp. 210,000 Actual 35,000

90,000 5,000 120,000 FrazerCorp. 300,000 "As If" 150,000

Eliminate the gain on Truck & correct asset's basis:Investment in Minnow Corp. 30,000 Truck 90,000 Accumulated Depreciation

120,000


E7-9 Transfer of Depreciable Asset at Beginning of Year

a.


MinnowCorp. 245,000 Actual 35,000

55,000 5,000 90,000 FrazerCorp. 300,000 "As If" 120,000

Eliminate the gain on Truck & correct asset's basis:Gain on Sale 35,000 Truck 55,000 Accumulated Depreciation 90,000

Accumulated Depreciation 5,000

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Depreciation Expense 5,000

Computation of gain on sale of truck:Price paid by Minnow $245,00

0 Cost of truck to Frazer $300,000Accumulated depreciation ($300,000 / 10 years) x 3 years ( 90,000)

(210,0 00)

Gain on sale of truck $35,000

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E7-9 (continued)b.


Minnow Corp. 245,000 Actual 70,000

55,000

5,000 85,000

Frazer Corp. 300,000 "As If"150,00

0

Eliminate the gain on Truck & correct asset's basis:Investment in Minnow Corp. 30,000 Truck 55,000 Accumulated Depreciation 85,000


E7-10 Sale of Equipment to Subsidiary in Current Period

a.Cash 84,000 Accumulated Depreciation 80,000 Equipment

150,000

Gain on sale of Equipment 14,000 Record gain on Equipment

b.

Equipment 84,000 Cash 84,000Journal entry to record purchase

Depreciation Expense 12,000 Accumulated Depreciation 12,000Journal entry to record depreciation expense

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E7-10 (continued)c.

Equipment AccumulatedDepreciation

Lance Corp. 84,000 Actual 12,000

66,000

2,000 80,000 Wainwrite

Corp. 150,000 "As If" 90,000

Eliminate the gain on Equipment & correct asset's basis:Gain on sale 14,000 Equipment 66,000 Accumulated Depreciation 80,000


d.

Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment and prepare a consolidated balance sheet only:

Eliminate the gain on Equipment & correct asset's basis:Investment in Lance Corp. 12,000 Equipment 66,000 Accumulated Depreciation 78,000

E7-11 Upstream Sale of Equipment in Prior Period

a.

Consolidated net income for 20X8:

Operating income reported by Baywatch $100,000

Net income reported by Tubberware $40,000Amount of gain realized in 20X8 ($30,000 / 12 years)

2,500Realized net income of Tubberware

42,500Consolidated net income $142,50

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0

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

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E7-11 (continued)c.


Baywatch270,00

0 Actual 67,500

30,000

2,500 55,000 Tubberwar

e300,00

0 "As If"120,00

0

Eliminate the gain on Equipment & correct asset's basis:Investment in Tubberware 20,000 NCI in NA of Tubberware 5,000 Equipment 30,000 Accumulated Depreciation 55,000


E7-12 Elimination Entries for Midyear Depreciable Asset Transfera.


AndrewsCo. 28,000 Actual 4,000

2,000 1,500 12,500

KlineCorp. 30,000 "As If" 15,000

Eliminate the gain on Equipment & correct asset's basis:Investment in Andrews Co. 10,500 Equipment 2,000 Accumulated Depreciation 12,500

Accumulated Depreciation 1,500

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Depreciation Expense 1,500

b.


AndrewsCo. 28,000 Actual 12,000

2,000

3,000 11,000 KlineCorp. 30,000 "As If" 20,000

Eliminate the gain on Equipment & correct asset's basis:Investment in Andrews Co. 9,000 Equipment 2,000 Accumulated Depreciation 11,000


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E7-13 Consolidated Net Income Computation

a.

Downstream sale of land:

20X4 20X5 Verry’s separate operating income $

90,000 $110,00

0 Less: Unrealized gain on sale of land (25,0

00)

Verry’s realized operating income $65,000

$110,000

Spawn’s realized net income 60,0 00

40,0 00

Consolidated net income $125,000 $150,000

Income to noncontrolling interest: ($60,000 x 0.25) (15,000) ($40,000 X 0.25) (10,

000)Income to controlling interest $110,000 $140,00

0

b.

Upstream sale of land:

20X4 20X5 Verry’s separate operating income $

90,000 $110,00

0 Spawn’s net income $60,000 Less: Unrealized gain on sale of land

(25,000)

Spawn’s realized net income 35,0 00

40, 000

Consolidated net income $125,000 $150,000

Income to noncontrolling interest: ($35,000 x 0.25) (8,750) ($40,000 x 0.25) (10,

000)Income to controlling interest $116,250 $140,00

0

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E7-14 Elimination Entries for Intercompany Transfers

a.

Operating income of Grand Delivery $65,000

Net income of Acme Real Estate Company $40,000 Less: Unrealized profit on land sale (25,000

)Acme’s realized net income 15,00

0 Consolidated net income $80,000

b.

Note: the term “basic” equity method in part b of the problemslipped through the editorial process. This should have read “fully adjusted” equity method. The answers given here are based on the fully adjusted equity method.

Journal entries recorded by Speedy Delivery:

Cash 8,000 Investment in Acme Real Estate 8,000 Record dividends from Acme Real Estate: $10,000x 0.80

Investment in Acme Real Estate 32,000 Income from Acme Real Estate 32,000 Record equity-method income: $40,000 x 0.80

Income from Acme Real Estate 20,000 Investment in Acme Real Estate 20,000 Eliminate unrealized gain on sale

E7-14 (continued)c.Book Value Calculations:

NCI20%

+Grand

Delivery80%

= CommonStock

+Retained

Earnings Original book value 80,000 320,000 300,000 100,000 + Net Income 8,000 32,000 40,000

- Dividends(2,000

) (8,000) (10,000)

Ending book value 86,000 344,000 300,000 130,000

Deferred Gain Calculations: Total = Grand + NCI's

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Delivery's share share

Upstream Land 25,000 20,000 5,000 Total 25,000 20,000 5,000

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Basic elimination entryCommon stock 300,000 ← Original amount invested (100%)

Retained earnings 100,000 ← Beginning balance in retained earnings

Income from Acme Real Estate 12,000 ← Grand’s share of NI - Def. GainNCI in NI of Acme Real Estate 3,000 ← NCI share of NI - Def. Gain

Dividends declared 10,000 ← 100% of Acme’s dividends declared

Investment in Acme Real Estate

324,000 ← Grand’s share of BV - Def. Gain

NCI in NA of Acme RealEstate 81,000 ← NCI share of BV - Def. Gain

Eliminate gain on purchase oflandGain on sale of land 25,000 Land 25,000

Eliminate courier servicesService Revenue 15,000 Delivery Expense 15,000

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E7-15 Sale of Building to Parent in Prior Period

a. Turner will record annual depreciation expense of $25,000 ($300,000 / 12 years).

b. Split would have recorded annual depreciation expense of $20,000 ($400,000 / 20 years).

c.

Building AccumulatedDepreciation

Turner Co. 300,000 Actual 25,000

100,000 5,000 160,00

0

Split Co. 400,000 "As If"180,00

0

Eliminate the gain on building and correct asset's basis:Investment in Split Co. 42,000 NCI in NA of Split Co. 18,000 Building 100,000 Accumulated Depreciation

160,000


d.

Income assigned to noncontrolling interest for 20X9:

Net income reported by Split Company $ 40,000 Amount of gain realized in 20X9 ($60,000 / 12 years)

5,000

Realized net income for 20X9 $ 45,000 Proportion of ownership held by noncontrolling interest x

0.30 Income assigned to noncontrolling interest $ 13,500

e.

Amount assigned to noncontrolling interest in 20X9 consolidated balance sheet:

Split Company net assets, January 1, 20X9 ($350,000 - $150,000) $200,000 Net income for 20X9 40,000 Dividends paid in 20X9 (15,000)Unrealized profit on sale of building to Turner Company ($60,000 - $5,000) (55,000

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)Realized book value December 31, 20X9 $170,000 Proportion of ownership held by noncontrolling interest x

0.30 Amount assigned to noncontrolling interest in December 31, 20X9, consolidated balance sheet $ 51,000

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E7-16 Intercompany Sale at a Loss

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

b. As a result of purchasing the equipment at less than Parent's bookvalue, depreciation expense reported by Sunway will be $2,000($16,000 / 8 years) below the amount that would have been recordedby Parent. Thus, depreciation expense must be increased by $2,000when eliminating entries are prepared at December 31, 20X9.Consolidated net income will be decreased by the full amount of the$2,000 increase in depreciation expense.

E7-17 Eliminating Entries Following Intercompany Sale at a Loss

a.


Buildings and Equipment 156,000 Loss on Sale of Building 36,000 Accumulated Depreciation 120,000

Eliminate unrealized loss on building.

b.

Consolidated net income and income to controlling interest for 20X7:

Operating income reported by Brown $125,000

Net income reported by Transom $ 15,000

Add: Loss on sale of building 36,0 00

Realized net income of Transom 51, 000

Consolidated net income $176,000

Income to noncontrolling interest ($51,000x 0.30)

(15, 300)

Income to controlling interest $160,700

c.

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Eliminate the gain on Building and correct asset's basis:Building 156,000 Investment in Transom Co. 25,200 NCI in NA of Transom Co. 10,800 Accumulated Depreciation 120,000

Depreciation Expense 4,000 Accumulated Depreciation 4,000


BrownCorp. 144,000 Actual 16,000

156,000 120,000 4,000

TransomCo. 300,000 "As If" 140,000

7-36


E7-17 (continued)

d.

Consolidated net income and income assigned to controlling interest in 20X8:Operating income reported by Brown $150,00

0 Net income reported by Transom $40,000 Adjustment for loss on sale of building (4,00

0)Realized net income of Transom 36,

000 Consolidated net income $186,00

0 Income assigned to noncontrolling interest ($36,000 x 0.30) (10,8

00)Income assigned to controlling interest $175,20

0

E7-18 Multiple Transfers of Asset

a.

$145,000

b.

No gain or loss should be reported.

c.

Swanson Corporation operating income $150,000

Sullivan Corporation net income $120,000 Loss on sale of land ($145,000 - $130,000)

15,000 Realized net income of Sullivan Corporation

$135,000

Proportion of stock held by Swanson x0.80

108,000

Kolder Company net income $ 60,000

Gain on sale of land ($180,000 - $130,000) (50,0 00)

Realized net income of Kolder Company $ 10,000


7,000

Clayton Corporation net income $ 80,000

Gain on sale of land ($240,000 - $180,000) (60,0 00)

Realized net income of Clayton Corporation $ 20,000

7-37



18,000

Income assigned to controlling interest $283,000

Alternate Computation:Swanson Corporation operating income $150,00

0 Sullivan Corporation net income 120,000 Kolder Company net income 60,000 Clayton Corporation net income

80,000 Combined income $410,00

0

Unrealized loss recorded by Sullivan Corp. $ (15,000)

Unrealized gain recorded by Kolder Company 50,000 Unrealized gain recorded by Clayton Corp.

60,000 (95,0

00)Realized income available to all shareholders

$315,000

Income assigned to noncontrolling interest: Sullivan Corp. ($120,000 + $15,000) x 0.20

$ 27,000

Kolder Company ($60,000 - $50,000) x 0.30

3,000

Clayton Corp. ($80,000 - $60,000) x 0.10

2,000

(32,0 00)


E7-18 (continued)

d.

Eliminating entry:

Gain on Sale of Land 110,000 Loss on Sale of Land 15,000 Land 95,000

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

E7-19 Elimination Entry in Period of Transfer

a.

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

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

7-38


.

c.


BlankCorp. 276,000 Actual 23,000

24,000 3,000 60,000 GrandCorp. 300,000 "As If" 80,000

Eliminate the gain on Truck and correct asset's basis:Investment in Grand Corp. 21,600 NCI in NA of Grand Corp. 14,400 Truck 24,000 Accumulated Depreciation

60,000


7-39


E7-20 Elimination Entry Computation

a.


Stern 360,000 Actual 36,000

90,000

6,000 150,00

0 Subsidia

ry 450,000 "As If"180,00

0

Eliminate the gain on Equipment and correct asset's basis:Gain on sale 60,000 Equipment 90,000 Accumulated Depreciation 150,000


b.


Stern360,00

0 Actual 72,000

90,000

6,000 144,000 Subsidia

ry450,00

0 "As If" 210,000

Eliminate the gain on Equipment and correct asset's basis:Investment in Subsidiary 37,800 NCI in NA of Subsidiary 16,200 Equipment 90,000 Accumulated Depreciation 144,000


7-40


E7-21 Using the Eliminating Entry to Determine Account Balances

a.

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

b.

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

c.

Intercompany transfer price:

Amount paid by Somber Corporation $120,000 Increase to buildings and equipment in eliminating entry

(53,50 0)

Amount paid by Pastel to Somber for equipment

$ 66,50 0

d.

Income assigned to noncontrolling interest for 20X9:

Net income reported by Somber $ 25,000

Amount of gain realized in 20X9 ($10,500 / 7years)

1,5 00

Realized net income for 20X9 $ 26,500

Proportion of ownership held by noncontrolling interest x

0.10 Income assigned to noncontrolling interest $ 2,65

0

e.

Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported by the consolidated entity for 20X9.

f.

Eliminating entries at December 31, 20X9:

Book Value Calculations:

NCI10%

+PastelCorp.90%

= CommonStock

+ Retained Earnings

Original book value 50,000 450,000 300,000 200,000 + Net Income 2,500 22,500 25,000 - Dividends (600) (5,400) (6,000) Ending book value 51,900 467,100 300,000 219,000

7-41


Deferred Gain Calculations:

Total =

PastelCorp.'sshare +

NCI's share

Extra Depreciation 1,500

1,350 150

Basic elimination entry

Common stock 300,000 ← Original amount invested (100%)

Retained earnings 200,000 ← Beginning balance in RE

Income from Somber Corp. 23,850 ← Pastel’s share of NI + Extra Dep.

NCI in NI of Somber Corp. 2,650 ← NCI share of NI + Extra Dep.

Dividends declared 6,000 ← 100% of Somber's dividends Investment in Somber Corp.

468,450

← Pastel 's share of BV + Extra Dep.

NCI in NA of SomberCorp. 52,050

← NCI share of BV + Extra Dep.

7-42


E7-21 (continued)


Pastel Corp. 66,500 Actual 9,500 53,500 1,500 64,000

Somber Corp. 120,000 "As If" 72,000

Eliminate the gain on Equipment and correct asset's basis:Investment in Somber Corp. 9,450 NCI in NA of Somber Corp. 1,050 Equipment 53,500 Accumulated Depreciation

64,000


E7-22 Intercompany Sale of Services

a.

Eliminating entries, 20X4:

Consulting Revenue 138,700 Consulting Fees Expense 138,700 Eliminate intercompany revenue and expense.

Accounts Payable 6,600 Accounts Receivable 6,600 Eliminate intercompany receivable/payable.

b.

Consolidated net income and income to controlling interest for 20X4:

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

Bline's net income 631, 000

Consolidated net income 2,973,000 Income to noncontrolling interest ($631,000 x0.25)

(157, 750)

Income to controlling interest $2,815,250

7-43


7-44


E7-23A Modified Equity Method and Cost Method

a.

(1)Equity Method Entries on Newtime's Books:Investment in TV Sales Co. 45,500 Income from TV Sales Co. 45,500Record Newtime's 65% share of TV Sales Co.'s 20X4 income

Cash 13,000 Investment in TV Sales Co. 13,000 Record Newtime's 65% share of TV Sales Co.'s 20X4 dividend

(2)Book Value Calculations:

NCI35%

+ Newtime65%

= CommonStock

+Retained


- Dividends (7,000) (13,000) (20,000

) Ending book value 173,250 321,750 300,000 195,000



Retained earnings 145,000 ← Beginning balance in REIncome from TV Sales Co. 45,500 ← Newtime’s share of NI

NCI in NI of TV Sales Co. 27,300 ← NCI share of NI + Extra Dep.

Dividends declared 20,000 ← 100% of TV Sales Co.'s dividends

Investment in TV Sales Co. 321,750 ← Newtime's share of BV NCI in NA of TV Sales Co. 176,050


Eliminate gain on purchase of land

7-45


Investment in TV Sales Co. 11,000 Land 11,000

Eliminate the gain on Equipment and correct asset's basis:Investment in TV SalesCo. 26,000 NCI in NA of TV Sales Co. 14,000 Equipment 40,000


7-46


E7-23A (continued)

b.

(1)

Equity Method Entries on Newtime's Books:Cash 13,000 Dividend Income 13,000 Record dividend income from TV Sales Company. (2)Investment elimination entryCommon stock 300,000 Retained earnings 100,000 Investment in TV Sales Co. 260,000 NCI in NA of TV Sales Co. 140,000

Dividend elimination entryDividend Income 13,000 NCI in NI of TV Sales Co. 7,000 Dividends declared 20,000

Assign prior undistributed income to NCINCI in NI of TV Sales Co. 20,300 Retained Earnings 15,750 NCI in NA of TV Sales Co. 36,050

Eliminate gain on purchase of landInvestment in TV Sales Co. 11,000 Land 11,000

Eliminate the gain on Equipment and correct asset's basis:Investment in TV SalesCo. 26,000 NCI in NA of TV Sales 14,000

7-47


Co.

Equipment 40,0

00


7-48


SOLUTIONS TO PROBLEMS

P7-24 Computation of Consolidated Net Income

a.

Separate operating income of Petime Corporation

$34,000

Reported net income of United Grain Company $19,000 Unrealized profit of sale of land (7,00

0)Realized income for 20X4 $12,000 Amortization of differential ($10,000 / 10 years)

( 1,00 0)

$11,000 Proportion of ownership held by Petime x

0.90 Income attributable to controlling interest 9,9

00 Income to controlling interest $43,900

b.

Separate operating income of Petime Corporation

$34,000

Reported net income by United Grain Company $19,000 Amortization of differential ($10,000 / 10 years)

( 1,00 0)

$18,000 Proportion of stock held by Petime x

0.90

Income attributable to controlling interest 16,200 Unrealized profit on sale of land (7,0

00)Income to controlling interest $43,200

Reported income will decrease by $700. In the upstream casethe unrealized profit ($7,000) is apportioned to both majority($6,300) and noncontrolling ($700) shareholders. In thedownstream case, it is apportioned entirely to the majorityshareholders ($7,000).

P7-25 Subsidiary Net Income

a.

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

Income assigned to noncontrolling shareholders

$17,500

Add: Unrealized profit on building ($20,000 x 0.25)

5,000

Amortization of differential ($4,400 x 0.25)

1 ,100

Income assigned to noncontrolling interestbefore adjustment

$23,600

Proportion of stock held by noncontrollinginterest

÷0.25

7-49


Reported income of Toll $94,400

Computation of annual amortization: Fair value of consideration given by Bold

$348,000

Fair value of noncontrolling interest 116,0 00

Total fair value $464,000

Book value of Toll’s assets: Common stock $150,000 Retained earnings 270,00

0 Total book value (420,00

0) Differential paid by Bold $

44,000 Number of years in amortization period ÷

10 Annual amortization $4,4

00

7-50


P7-25 (continued)

b.

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

Bold Corporation’s operating income $234,000

Toll Corporation’s net income 94,400 Amortization of differential ($44,000 / 10 years)

(4,400)

Unrealized profit on building (20,0 00)


c.

Income assigned to controlling interest is $286,500:


Income assigned to noncontrolling interest (17, 500)


Alternate computation:Operating income of Bold $234,00

0 Income from Toll: Net income of Toll $94,400 Unrealized profit on building (20,000) Amortization of differential (4,40

0) Realized income $70,000 Portion of ownership held x

0.75 52,

500 Income to controlling interest $286,50

0

P7-26 Transfer of Asset from One Subsidiary to Another

Bugle CookProducts

Consolidated

Corporation Corporation Entity

Depreciation expense $ ---

$ 3,000 $ 2,000

Fixed assets — Warehouse --- 45,000 40,000

Accumulated depreciation --- 3,000 12,000

7-51


Gain on sale of warehouse 15,000 --- ---

7-52


P7-27 Consolidated Eliminating Entry

a.

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

b.

Accumulated depreciation at January 1, 20X7, was $168,000, computed as follows:

Purchase price paid by Rakel $600,000 Amount paid by Master $460,000 Gain recorded by Rakel (28,00

0) Book value at date of sale (432,00

0) Accumulated depreciation at date of sale $168,000

c.

Annual depreciation expense recorded by Rakel was $28,000($168,000/6 years).

d.

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

Purchase price paid by Rakel $600,000 Amount to be depreciated by Rakel ($28,000 x 20 years)

(560,00 0)

Estimated residual value $ 40,000

e.

Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 - $40,000) / 14 years).

f.

Reported net income of Rakel $ 80,000

Unrealized gain on sale of building ($28,000 - $2,000)

(26,00 0)$

54,000 Proportion of stock held by noncontrolling interest x

0.40 Income assigned to noncontrolling interest $

21,600

g.

Reported net income of Rakel $ 65,000

Portion of gain on sale of building realized in 20X8 2,000

$67,000

Proportion of stock held by noncontrolling interest x 0.40

Income assigned to noncontrolling interest $

7-53


26,800

7-54


P7-28 Multiple-Choice Questions

1. d

2. c

3. a

4. a

5. d

P7-29 Intercompany Services Provided to Subsidiary

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

Service Revenue 110,000 Building 30,000 Wage Expense 80,000

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

Investment in Subsidiary 30,000 Building 30,000


P7-30 Consolidated Net Income with Intercorporate Transfers

a.Cash 240,000 Accumulated Depreciation 140,000 Equipment

350,000

Gain on sale of Equipment 30,000 Record gain on Equipment

b.Eliminate loss on purchase oflandLand 60,000 Loss on sale of land 60,000

Eliminate the gain on Equipment and correct asset's basis:

7-55


Investment in Subsidence 25,000 Equipment 110,000 Accumulated Depreciation

135,000


7-56


P7-30 (continued)

c.

Subsidence Mining's 20X7 net income was $90,000:

Subsidence Mining's income to noncontrolling shareholders $

39,000 Noncontrolling interest's share of subsidiary income

÷ 0.30

Subsidence Mining's income before adjustment

$130,000

Add: Amortization of differential: ($200,000 / 10 years) 20,000 Less: Unrealized loss on intercompany saleof land

(60,00 0)

Subsidence Mining's 20X7 net income $ 90,000

d.

Bower’s operating income was $826,000:

Consolidated net income $961,000 Less: Income to noncontrolling interest (39,000

)Income assigned to controlling interest $922,000 Income from Subsidence Mining: Reported net income $

90,000 Unrealized loss on land 60,000 Amortization of differential ($200,000 / 10 years)

(20,00 0)

Realized income $130,000 Portion of ownership held x

0.70 Bower’s share $

91,000 Realized profit on equipment ($30,000 /6 years)

5, 000

(96,00 0)

Bower’s 20X7 income from its separate operations

$826,000

7-57


P7-31 Preparation of Consolidated Balance Sheet

a. Book Value Calculations:

NCI40%

+LoftonCo.60%

= CommonStock

+Retained

Earnings Ending book value 100,000 150,000 200,000 50,000


Total =

LoftonCo.'sshare +

NCI's share

Extra Depreciation 3,000 3,000 0

Total 3,000 3,000 0




Income from Temple Corp. 3,000 ← Lofton’s share of NI + Extra Dep.

Investment in Temple Corp.

153,000

← Lofton's share of BV + Extra Dep.

NCI in NA of Temple Corp.

100,000

← NCI share of BV of net assets

Eliminate gain on purchase oflandLand 10,000 Investment in Temple Corp. 6,000 NCI in NA of TempleCorp. 4,000


TempleCorp. 91,000 Actual 26,000

9,000 3 27,000

7-58


,000

Lofton Co.100,00

0 "As If" 50,000

Eliminate the gain on Equipment and correct asset's basis:Investment in Temple Corp. 18,000 Equipment 9,000 Accumulated Depreciation

27,000


7-59


P7-31 (continued)

LoftonCo.

TempleCorp.

EliminationEntries

DR CR Consolidate

d Balance Sheet Cash and Receivables 101,000 20,000 121,000 Inventory 80,000 40,000 120,000 Land 150,000 90,000 10,000 250,000

Buildings & Equipment 400,000 300,00

0 9,000 709,000

Less: Accumulated Depr.

(135,000)

(85,000) 3,000 27,000 (244,000)

Investment in Temple Corp. 141,000 18,000

153,000 0

6,000

Total Assets 737,000 365,00

0 40,000 186,00

0 956,000 Accounts Payable 90,000 25,000 115,000 Notes Payable 200,000 90,000 290,000

Common Stock 100,000 200,00

0 200,00

0 100,000 Retained Earnings 347,000 50,000 50,000 3,000 347,000 3,000

NCI in NA of Temple Corp.

100,000 104,000

4,000

Total Liabilities & Equity 737,000

365,000

250,000

107,000 956,000

b.

Lofton Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X6

Cash and Accounts Receivable $121,000 Inventory 120,000 Land 250,000 Buildings and Equipment $709,00

0 Less: Accumulated Depreciation (244,00

0) 465,00

0 Total Assets $956,000

Accounts Payable $115,000 Notes Payable 290,000 Stockholders’ Equity:

7-60


Controlling Interest: Common Stock $100,00

0 Retained Earnings 347,00

0 Total Controlling Interest $447,00

0 Noncontrolling interest 104,0

00 Total Stockholders’ Equity 551,00

0 Total Liabilities and Stockholders' Equity $956,000

7-61


P7-32 Consolidation Worksheet in Year of Intercompany Transfer

Note: In converting this problem from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:

Investment in Lane Company Stock = 191,600Retained Earnings = 322,000

a. These calculations are based on the corrected numbers

Equity Method Entries on Prime Co.'s Books:

Investment in Lane Co. 40,0

00 Income from Lane Co. 40,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6income

Cash 4,

000 Investment in Lane Co. 4,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6dividend

Income from Lane Co. 14,4

00 Investment in Lane Co. 14,400 Record amortization of excess acquisition price

Income from Lane Co. 20,0

00 Investment in Lane Co. 20,000 Defer unrealized gain on Equipment

Investment in Lane Co. 2,

000

7-62


Income from Lane Co. 2,000 Reverse the deferred gain


NCI20%

+PrimeCo.80%

= CommonStock

+Retained


- Dividends(1,000

) (4,000) (5,000) Ending book value 48,000 192,000 100,000 140,000 Deferred Gain Calculations:

Total =

PrimeCo.'sshare +

NCI's share

Downstream Asset (20,000) (20,000) Extra Depreciation 2,000 2,000 0

Total (18,000

) (18,000

) 0

7-63


P7-32 (continued)




Income from Lane Co. 22,000 ← Prime’s share of NI - Def. Gain

NCI in NI of Lane Co. 10,000 ← NCI share of Lane Co.'s NI

Dividends declared 5,000

← 100% of Lane Co.'s dividends

Investment in Lane Co.

174,000

← Prime's share of BV - Def. Gain

NCI in NA of LaneCo. 48,000


Excess Value (Differential) Calculations:

NCI20% +

Prime Co.80% =

Goodwill

Beginning balance 10,000 40,000 50,000

Changes(3,600

) (14,400)(18,000

)Ending balance 6,400 25,600 32,000

Amortized excess value reclassification entry:

Goodwill impairment loss 18,00

0 Income from Lane Co. 14,400 NCI in NI of Lane Co. 3,600

Excess value (differential) reclassification entry:Goodwill 32,000 Investment in Lane Co. 25,600 NCI in NA of LaneCo. 6,400

Eliminate intercompany

7-64


accounts:Accounts Payable 7,000 Cash and Accounts Receivable 7,000

Eliminate gain on purchase of landInvestment in Lane Co. 8,000 NCI in NI of Lane Co. 2,000

Land 10,00

0


Lane Co. 70,000 Actual 7,000

5,000 2

,000 25,000 PrimeCo. 75,000 "As If" 30,000

7-65


Eliminate the gain on Equipment and correct asset's basis:Gain on sale 20,000 Equipment 5,000 Accumulated Depreciation

25,000


P7-32 (continued)

Investment in Income from Lane Co. Lane Co.

BeginningBalance

188,000

80% Net Income 40,000 40,000 80% Net Income

4,000 80% Dividends

14,400 Excess Val. Amort.14,400

Realize Def.Gain 2,000 20,000

Defer EquipmentGain

20,000 2,000

Realize Def. Gain

Ending Balance191,600 7,600 Ending Balance

174,000 Basic

22,000

Land Adjustment 8,000 25,600 Excess Reclass.14,40

0 0 0

b. This worksheet is based on the corrected numbers:

PrimeCo.

LaneCo.

Elimination

Entries

DR CR Consolidat

ed Income Statement Sales 240,000 130,000 370,000

Gain on Sale of Equipment 20,000 20,000 0

Less: COGS (140,000

) (60,000

) (200,000)

7-66


Less: Depr. & Amort. Expense (25,000)

(15,000) 2,000 (38,000)

Less: Other Expenses (15,000) (5,000) (20,000)

Less: Goodwill Impairment Loss 18,000 (18,000)

Income from Lane Co. 7,600 22,000 14,400 0 Consolidated Net Income 87,600 50,000 60,000 16,400 94,000 NCI in Net Income 10,000 3,600 (6,400)

Controlling Interest inNI 87,600 50,000 70,000 20,000 87,600

Statement of Retained Earnings Beginning Balance 322,000 95,000 95,000 322,000 Net Income 87,600 50,000 70,000 20,000 87,600

Less: Dividends Declared (30,000) (5,000) 5,000 (30,000)

Ending Balance 379,600 140,000 165,00

0 25,000 379,600 Balance Sheet

Cash and Accounts Receivable 113,000 35,000 7,000 141,000

Inventory 260,000 90,000 350,000 Land 80,000 80,000 10,000 150,000 Buildings & Equipment 500,000 150,000 5,000 655,000

Less: Accumulated Depreciation

(205,000)

(45,000) 2,000 25,000 (273,000)

Investment in Lane Co. 191,600 8,000 174,00

0 0 25,600 Goodwill 32,000 32,000 Total Assets 939,600 310,000 7,000 42,000 1,055,000 Accounts Payable 60,000 20,000 7,000 73,000 Bonds Payable 200,000 50,000 250,000

Common Stock 300,000 100,000 100,00

0 300,000

Retained Earnings 379,600 140,000 165,00

0 25,000 379,600 NCI in NA of Lane Co. 2,000 48,000 52,400 6,400

Total Liabilities & Equity 939,600 310,000

272,000 73,000 1,055,000

7-67


P7-32 (continued)

These financial statements are based on the corrected numbers:

c.

Prime Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X6

Cash and Receivables $ 141,000

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

000 Total Assets $1,055,00

0

Accounts Payable $ 73,000

Bonds Payable 250,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 379,600 Total Controlling Interest $679,600 Total Noncontrolling Interest 52,40

0Total Stockholders’ Equity 732,0

00 Total Liabilities and Stockholders' Equity $1,055,00

0

Prime Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X6

Sales $ 370,000

Cost of Goods Sold $200,000 Depreciation and Amortization Expense 38,000 Goodwill Impairment Loss 18,000 Other Expenses 20,00

0 Total Expenses

(276,000)Consolidated Net Income $

94,000 Income to Noncontrolling Interest

(6,400)Income to Controlling Interest $

7-68


87,600

Prime Company and SubsidiaryConsolidated Retained Earnings Statement

Year Ended December 31, 20X6

Retained Earnings, January 1, 20X6 $ 322,000

Income to Controlling Interest, 20X6 87,600

$ 409,600

Dividends Declared, 20X6 (30,000)

Retained Earnings, December 31, 20X6 $ 379,600

7-69


P7-32 (continued)

b. This worksheet is based on the uncorrected numbers:

PrimeCo.

LaneCo.

EliminationEntries

DR CR Consolidat

ed Income Statement

Sales 240,000 130,00

0 370,000

Gain on Sale of Equipment 20,000 20,000 0

Less: COGS (140,00

0) (60,00

0) (200,000)

Less: Depr. & Amort. Expense

(25,000)

(15,000) 2,000 (38,000)

Less: Other Expenses (15,000

) (5,000

) (20,000)

Less: Goodwill Impairment Loss 18,000 (18,000)

Income from Lane Co. 7,600 22,000 14,400 0 Consolidated Net Income 87,600 50,000 60,000 16,400 94,000 NCI in Net Income 10,000 3,600 (6,400)

Controlling Interest inNI 87,600 50,000 70,000 20,000 87,600


Less: Dividends Declared

(30,000)

(5,000) 5,000 (30,000)

Ending Balance 387,600 140,00

0 165,00



Inventory 260,000 90,000 350,000 Land 80,000 80,000 10,000 150,000


0 5,000 655,000

Less: Accumulated Depreciation

(205,000)

(45,000) 2,000 25,000 (273,000)


0 8,000 25,600 Goodwill 32,000 32,000


0 7,000 42,000 1,063,000

7-70


Accounts Payable 60,000 20,000 7,000 73,000 Bonds Payable 200,000 50,000 250,000


0 100,00

0 300,000

Retained Earnings 387,600 140,00

0 165,00



310,000

272,000 73,000 1,063,000

7-71


P7-32 (continued)

These financial statements are based on the uncorrected numbers:

c.

Prime Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X6

Cash and Receivables $ 141,000

Inventory 350,000 Land 150,000 Buildings and Equipment $655,000 Less: Accumulated Depreciation (273,000 ) 382,000 Investment in Lane Co. 8,000Goodwill 32,

000 Total Assets $1,063,00

0


Bonds Payable 250,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 387,600 Total Controlling Interest $687,600 Total Noncontrolling Interest 52,40

0Total Stockholders’ Equity 740,0

00 Total Liabilities and Stockholders' Equity $1,063,00

0

Prime Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X6

Sales $ 370,000

Cost of Goods Sold $200,000 Depreciation and Amortization Expense 38,000 Goodwill Impairment Loss 18,000 Other Expenses 20,00

0 Total Expenses

(276,000)

7-72


Consolidated Net Income $ 94,000

Income to Noncontrolling Interest (6,400)

Income to Controlling Interest $ 87,600

Prime Company and SubsidiaryConsolidated Retained Earnings Statement


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


$ 417,600

Dividends Declared, 20X6 (30,000)

Retained Earnings, December 31, 20X6 $ 387,600

P7-33 Consolidation Worksheet in Year following Intercompany Transfer

Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. This error carries over to this problem. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:


These calculations are based on the corrected numbers:

a.

Reconciliation of underlying book value and balance in investment account:

Net book value reported by Lane Company Common stock outstanding $100,00

0 Retained earnings balance, January 1, 20X7

$140,000

Net income for 20X7 45,000 Dividends paid in 20X7 (35,0

00) Retained earnings balance, December 31,20X7

150,0 00

$250,00

7-73


0Proportion of stock held by Prime Company x

.80$200,00

0Minus: Upstream Land Gain (10,000 x 0.80) (8,000)Minus: Downstream Equipment Transfer Gain (20,000

)Add: Reversal of deferred gross profit 20X6 2,000Minus: Reversal of deferred gross profit 20X7

2,000

Add: Goodwill (32,000 x 0.80) 25, 600

Balance in investment account $201,600

These calculations are based on the uncorrected numbers

a.

Reconciliation of underlying book value and balance in investment account:

Net book value reported by Lane Company Common stock outstanding $100,00

0 Retained earnings balance, January 1, 20X7

$140,000

Net income for 20X7 45,000 Dividends paid in 20X7 (35,0

00) Retained earnings balance, December 31,20X7

150,0 00

$250,000

Proportion of stock held by Prime Company x .80

$200,000

Minus: Upstream Land Gain (10,000 x 0.80) (8,000)Minus: Downstream Equipment Transfer Gain (20,000

)Add: Reversal of deferred gross profit 20X6 2,000Add: Goodwill (32,000 x 0.80) 25,

600Add: Incorrect number 10,

000Balance in investment account $209,60

0

7-74


P7-33 (continued)

b. These calculations are based on the corrected numbers

Equity Method Entries on Prime Co.'s Books:


00 Income from Lane Co. 36,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6income

Cash 28,0

00 Investment in Lane Co. 28,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6dividend

Investment in Lane Co. 2,

000 Income from Lane Co. 2,000 Reverse the deferred gain


NCI20%

+PrimeCo.80%

= CommonStock

+Retained


- Dividends(7,000

) (28,000) (35,000

) Ending book value 50,000 200,000 100,000 150,000


Total =

PrimeCo.'sshare +

NCI's share

Extra Depreciation 2,000 2,000 0

Total 2,000 2,000 0

7-75





Income from Lane Co. 38,000 ← Prime’s share of NI + Extra Dep.

NCI in NI of Lane Co. 9,000 ← NCI share of Lane Co.'s NI


← 100% of Lane Co.'s dividends


202,000

← Prime's share of BV + Extra Dep.

NCI in NA of LaneCo. 50,000



NCI20% +

Prime Co.80% =

Goodwill

Beginning balance 6,400 25,600 32,000 Changes 0 0 0 Ending balance 6,400 25,600 32,000

7-76


Excess value (differential) reclassification entry:Goodwill 32,000 Investment in Lane Co. 25,600 NCI in NA of Lane Co. 6,400

P7-33 (continued)

Eliminate gain on purchase of landInvestment in Lane Co. 8,000 NCI in NI of Lane Co. 2,000

Land 10,00

0



5,000 2

,000 23,000 PrimeCo. 75,000 "As If" 35,000

Eliminate the gain on Equipment and correct asset's basis:Investment in Lane Co. 18,000 Equipment 5,000 Accumulated Depreciation 23,000

Accumulated Depreciation 2,000 Depreciation Expense

2,000

Investment in Income from Lane Co. Lane Co.

BeginningBalance

191,600

80% Net Income 36,000 36,00 80% Net

7-77


0 Income 28,000 80% Dividends

Realize Def.Gain 2,000 2,000

Realize Def. Gain

Ending Balance201,60

0 38,00

0 Ending Balance

202,00

0 Basic38,00

0

Land Adjustment 8,000 25,600 Excess

Reclass.18,000

0 0

Eliminate Intercompany receivable/payable

Accounts Payable 4,000 Accounts Receivable 4,000

7-78


P7-33 (continued)


PrimeCo.

LaneCo.

EliminationEntries

DR CR Consolidat

ed Income Statement

Sales 250,000 150,00

0 400,000

Less: COGS (160,00

0) (80,00

0) (240,000)

Less: Depr. & Amort. Expense

(25,000)

(15,000) 2,000 (38,000)


) (10,00

0) (30,000) Income from Lane Co. 38,000 38,000 0

Consolidated Net Income 83,000 45,000 38,000 2,000 92,000

NCI in Net Income 9,000 (9,000)

Controlling Interestin NI 83,000 45,000 47,000 2,000 83,000

Statement of Retained Earnings

Beginning Balance 379,600 140,00

0 140,00

0 379,600 Net Income 83,000 45,000 47,000 2,000 83,000


(60,000)

(35,000) 35,000 (60,000)


0 187,00



Inventory 240,000 100,00

0 340,000 Land 100,000 80,000 10,000 170,000

Buildings & Equipment 500,000

150,000 5,000 655,000


(230,000)

(60,000) 2,000 23,000 (311,000)

Investment in Lane Co. 201,600 8,000

202,000 0

18,000 25,600 Goodwill 32,000 32,000


0 7,000 37,000 1,088,000

7-79




0 100,00

0 300,000


0 187,00

0 37,000 402,600

NCI in NA of Lane Co. 2,000 50,000 54,400

6,400


325,000

291,000 87,000 1,088,000

7-80


P7-33 (continued)


PrimeCo.

LaneCo.

EliminationEntries

DR CR Consolidat

ed Income Statement

Sales 250,000 150,00

0 400,000

Less: COGS (160,00

0) (80,00

0) (240,000)

Less: Depreciation & Amort. Exp.

(25,000)

(15,000) 2,000 (38,000)


) (10,00




Controlling Interest in NI 83,000 45,000 47,000 2,000 83,000



0 140,00

0 387,600 Net Income 83,000 45,000 47,000 2,000 83,000


(60,000)

(35,000) 35,000 (60,000)


0 187,00



Inventory 240,000 100,00

0 340,000 Land 100,000 80,000 10,000 170,000


0 5,000 655,000


(230,000)

(60,000) 2,000 23,000 (311,000)


0 8,000 18,000 25,600 Goodwill 32,000 32,000


0 7,000 37,000 1,096,000

7-81




0 100,00

0 300,000


0 187,00



325,000

291,000 87,000 1,096,000

7-82


P7-34 Intercorporate Sales in Prior Years

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

Investment in Skate Co. 24,0

00 Income from SkateCo. 24,000Record Pond Corp.'s 80% share of Skate Co.'s 20X8 income

Cash 8,

000 Investment in Skate Co. 8,000 Record Pond Corp.'s 80% share of Skate Co.'s 20X8 dividend

Income from Skate Co. 3,

000 Investment in Skate Co. 3,000 Record amortization of excess acquisition price

Investment in Skate Co. 1,

500 Income from SkateCo. 1,500 Reverse a portion of the deferred gain


NCI20%

+ PondCorp.80%

= CommonStock

+ AddPaid-inCapital

+

Retained

Earnings

Original book value 40,000 160,000 20,000 30,000 150,000 + Net Income 6,000 24,000 30,000

- Dividends (2,000) (8,000) (10,00

0) Ending book value 44,000 176,000 20,000 30,000 170,000

7-83



Total =

PondCorp.'sshare +

NCI's share

Extra Depreciation 1,500 1,500 0 Total 1,500 1,500 0



Additional Paid-in Capital 30,000 ← Beginning balance in APICRetained earnings 150,000 ← Beginning balance in RE

Income from Skate Co. 25,500 ← Pond’s share of NI + ExtraDep.

NCI in NI of Skate Co. 6,000 ← NCI share of Skate Co.'s NI

Dividends declared 10,000 ← 100% of Skate’s dividends declared

Investment in Skate Co.

177,500

← Pond's share of BV + ExtraDep.

NCI in NA of SkateCo. 44,000


7-84


P7-34 (continued)


NCI 20%+Pond Corp.

80% = Patent +

Buildings&

Equipment +Acc.Depr.

Beginning balance 12,750 51,000 42,500 25,000 (3,750)Changes (750) (3,000) (2,500) (1,250)Ending balance 12,000 48,000 40,000 25,000 (5,000) Amortized excess value reclassificationentry:Amortization Expense 2,500 Depreciation expense 1,250 Income from Skate Co. 3,000 NCI in NI of Skate Co. 750 Excess value (differential) reclassification entry:Patent 40,000 Buildings & Equipment 25,000 Acc. Depr. 5,000 Investment in SkateCo. 48,000 NCI in NA of Skate Co. 12,000 Eliminate gain on purchase of landInvestment in Skate Co. 10,400 NCI in NI of Skate Co. 2,600 Land 13,000


SkateCo. 65,000 Actual 6,500

60,000

1,500 75,000 Pond 125 "As If" 80,000

7-85


Corp. ,000

Eliminate the gain on Building and correct asset's basis:

Investment in Skate Co. 15,00

0

Building 60,00

0 Accumulated Depreciation 75,000


7-86


P7-34 (continued)Investment in Income from

Skate Co. Skate Co. BeginningBalance

185,600

80% Net Income 24,000 24,00080% Net Income

8,000 80% Dividends

3,000 Excess Val.

Amort. 3,000 Realize Def.

Gain 1,500 1,500 Realize Def. Gain

Ending Balance200,100 22,500

Ending Balance

177,500 Basic

25,500

Land Adjustment 10,400 48,000 ExcessReclass. 3,000

15,000 0 0

7-87


P7-34 (continued)b.

PondCorp.

SkateCo.

EliminationEntries

DR CR Consolidat

ed Income Statement Sales 450,000 250,000 700,000 Interest Income 14,900 14,900

Less: COGS (285,00

0) (136,00

0) (421,000)

Less: Other Operating Exp.

(50,000)

(40,000) (90,000)

Less: Depreciation Exp.

(35,000)

(24,000) 1,250 1,500 (58,750)

Less: Other Amortization Exp. 2,500 (2,500)

Less: Interest Exp. (24,000

) (10,500

) (34,500)

Less: Miscellaneous Exp.

(11,900) (9,500) (21,400)

Income from Skate Co. 22,500 25,500 3,000 0


NCI in Net Income 6,000 750 (5,250)



Beginning Balance 216,000 150,000 150,00

0 216,000 Net Income 81,500 30,000 35,250 5,250 81,500


(30,000)

(10,000) 10,000 (30,000)

Ending Balance 267,500 170,000 185,25

0 15,250 267,500 Balance Sheet Cash 68,400 47,000 115,400 Accounts Receivable 130,000 65,000 195,000

Interest and Other Receivables 45,000 10,000 55,000

Inventory 140,000 50,000 190,000 Land 50,000 22,000 13,000 59,000 Buildings & Equipment 400,000 240,000 60,000 725,000 25,000


(185,000)

(94,000) 1,500 75,000 (357,500)

7-88


5,000

Investment in Skate Co. 200,100 10,400

177,500 0

15,000 48,000

Investment in Tin Co. Bonds 134,000 134,000

Patent 40,000 40,000

Total Assets 982,500 340,000 151,90

0 318,50

0 1,155,900 Accounts Payable 65,000 11,000 76,000

Interest and Other Payables 45,000 12,000 57,000

Bonds Payable 300,000 100,000 400,000 Bond Discount (3,000) (3,000) Common Stock 150,000 30,000 30,000 150,000

Additional Paid-in Capital 155,000 20,000 20,000 155,000


0 15,250 267,500 NCI in NA of Skate Co. 2,600 44,000 53,400 12,000

Total Liabilities & Equity 982,500 340,000

237,850 71,250 1,155,900

7-89


P7-35 Intercorporate Sale of Land and Depreciable Asset

a.

Income assigned to noncontrolling interest:

Net income of Morris $ 30,000 Gain on sale of equipment to parent $9,600 Gain realized prior to 20X5 (1,200

)(8,400)

Amortization of differential: Buildings and equipment ($25,000 / 10 years)

(2,500)

Copyright ($17,000 / 5 years) (3,400 )Realized income $15,700 Portion of ownership held x 0.30 Income to noncontrolling interest $ 4,710

Gain on sale of equipment to parent:Sale price to Topp $91,600 Purchase price $100,00

0 Accumulated depreciation [($100,000 - $10,000)/10 years] x 2 years

(18, 000)

(82,000)

Gain on sale $ 9,600

b.

Reconciliation between book value and investment balance at December31, 20X5:

Underlying book value of Morris Company stock: Common stock outstanding $100,000 Retained earnings, January 1, 20X5 100,000 Net income for 20X5 30,000 Dividends paid in 20X5 ( 5,000 ) Net book value $225,000 Portion of ownership held by Topp x .70 Net book value of ownership held by Topp

$157,500

Unamortized differential: Buildings and equipment [($25,000 x 7/10 years) x 0.70]

12,250

Copyright [($17,000 x 2/5 years) x 0.70]

4,760

Gain on sale of land (11,000)Deferred gross profit on sale of equipment (6,720)Realized deferred gain 840 Investment in Morris Company stock $157,630

b.Book Value Calculations: NCI + Topp = Common + Retained

7-90


30%Corp.70% Stock Earnings

Original book value 60,000 140,000 100,000 100,000 + Net Income 9,000 21,000 30,000

- Dividends(1,500

) (3,500) (5,000) Ending book value 67,500 157,500 100,000 125,000

7-91


P7-35 (continued)


Total =

ToppCorp.'sshare +

NCI's share

Upstream Asset (9,600

) (6,720) (2,88

0) Extra Depreciation 1,200 840 360

Total (8,400

) (5,880) (2,52

0)

Basic elimination entryCommon stock 100,000 ← Original amount invested (100%)Retained earnings 100,000 ← Beginning balance RE

Income from Morris Co. 15,120 ← Topp’s share of NI - Def. Gain + Extra Depr.

NCI in NI of Morris Co. 6,480 ← NCI share of NI - Def. Gain + Extra Depr.

Dividends declared 5,000 ← 100% of Morris Co.'s dividends Investment in Morris Co.

151,620

← Topp's share of BV - Def. Gain + Extra Depr.

NCI in NA of Morris Co. 64,980

← NCI share of BV - Def. Gain + Extra Depr.


NCI30% +

ToppCorp.70% =

Buildings&

Equipment +Copyrig

ht +Acc.Depr.

Beginning balance 9,060 21,140 25,000 10,200

(5,000)

Changes(1,77

0) (4,130) (3,400)(2,50

0)

Ending balance 7,290 17,010 25,000 6,800 (7,50

0)

Amortized excess value reclassificationentry:

Amortization Expense 3,40

0

7-92


Depreciation expense 2,50

0 Income from Morris Co. 4,130 NCI in NI of Morris Co. 1,770

Excess value (differential) reclassification entry:


0 Copyright 6,800 Acc. Depr. 7,500 Investment in Morris Co. 17,010 NCI in NA of Morris Co. 7,290

Eliminate gain on purchase of landInvestment in Morris Co. 11,000 Land 11,000

7-93


P7-35 (continued)


ToppCorp. 91,600 Actual 11,450

8,400

1,200 18,000 Morris

Co. 100,000 "As If" 28,250

Eliminate the gain on Equipment and correct asset'sbasis:Gain on sale 9,600 Equipment 8,400 Accumulated Depreciation 18,000


Investment in Income from Morris Co. Morris Co.

BeginningBalance

150,140

70% Net Income 21,000 21,00

0 70% Net Income

3,500 70% Dividends

4,130 Excess Val.

Amort. 4,130 Realize Def.

Gain 840 6,720 Defer Asset

Gain 6,720 840 Realize Def.Gain


0 10,99

0 Ending Balance

151,62

0 Basic15,12

0 Land Adjustment 11,000 17,010 Excess Reclass. 4,130

0 0

7-94


P7-35 (continued)c.

ToppCorp.

MorrisCo.

Elimination

Entries

DR CR Consolidat

ed Income Statement Sales 450,000 190,400 640,400 Other Income 28,250 28,250

Gain on Sale of Equip. 9,600 9,600 0

Less: COGS (375,00

0) (110,00

0) (485,000)


(25,000)

(10,000) 2,500 1,200 (36,300)

Less: Amortization Exp. 3,400 (3,400)

Less: Interest Expense

(24,000)

(33,000) (57,000)

Less: Other Expenses

(28,000)

(17,000) (45,000)

Income from Morris Co. 10,990 15,120 4,130 0


NCI in Net Income 6,480 1,770 (4,710)




0 165,240 Net Income 37,240 30,000 37,100 7,100 37,240


(30,000) (5,000) 5,000 (30,000)

Ending Balance 172,480 125,000 137,10

0 12,100 172,480 Balance Sheet Cash 15,850 58,000 73,850 Accounts Receivable 65,000 70,000 135,000

Interest and Other Receivables 30,000 10,000 40,000

Inventory 150,000 180,000 330,000 Land 80,000 60,000 11,000 129,000

Buildings & Equipment 315,000 240,000 25,000 588,400

8,400 Less: Accumulated (120,00 (60,000 1,200 7,500 (204,300)

7-95


Depr. 0) ) 18,000

Investment in Morris Co. 157,630 11,000

151,620 0

17,010 Copyright 6,800 6,800

Total Assets 693,480 558,000 52,400 205,13

0 1,098,750 Accounts Payable 61,000 28,000 89,000 Other Payables 30,000 20,000 50,000 Bonds Payable 250,000 300,000 550,000

Bond Discount (15,000

) (15,000)

Common Stock 150,000 100,000 100,00

0 150,000

Additional Paid-in Capital 30,000 30,000


0 12,100 172,480

NCI in NA of MorrisCo. 64,980 72,270

7,290

Total Liabilities &Equity 693,480 558,000

237,100 84,370 1,098,750

7-96


P7-36 Incomplete Data

(a) $100,000

(b) $140,000

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

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

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

(f) Investment in Shadow Company Stock:$106,200 Purchase price, January 1, 20X430,000 Undistributed earnings from January 1, 20X4,

to January 1, 20X7 [($80,000 - $30,000) x 0.60]6,000 Undistributed income for 20X7 ($10,000 x 0.60)

(10,800) Amortization of differential [($27,000 / 6 years)x 4 years] x 0.60

(5,400) Mound’s portion of gain on sale of equipment ($9,000 x 0.60)

3,600 2 years of extra depreciation ($3,000 x 0.60) (7,000) Gain on sale of land

$122,600 Balance in investment account at December 31, 20X7

(g) $7,000 = ($70,000 + $90,000) - $153,000

(h) $-0-

(i) $510,000 = $345,000 + $150,000 + ($60,000 - $45,000)

(j) $278,000 =

$180,000 + $80,000 + [($60,000 / 5 years) x 4 years]- [($45,000 / 3 years) x 2 years)

(k) $375,800 (Same as Mound Corporation’s retained earnings balance.)

(l) Income to noncontrolling shareholders:$

30,000 Shadow's 20X7 net income ($250,000 - $195,000

- $10,000 - $15,000) 3,000 Realized profit on 20X6 sale of equipment to

Mound (4,5

00)Amortization of differential

$28,500

Realized net income

7-97


x0.40

$11,400

Income to noncontrolling shareholders

7-98


P7-37 Intercompany Sale of Equipment at a Loss in Prior Period

Note: In converting this problem from the modified to the fully adjusted equity method, we did not correctly adjust for lower depreciation over the three years since the fixed asset sale at a loss. If you complete the problem based on the numbers given in the trial balance in the text, the investment and income from sub accountswill not be fully eliminated. In order to correct this problem, pleaseuse the following adjusted numbers for Foster Company:

Investment in Block Corporation Stock = 229,500Income from Block Corporation = 51,300Retained Earnings = 251,200

a. These calculations are based on the corrected numbers


NCI10%

+FosterCo.90%

= CommonStock

+Retained

Earnings Original book value 20,000 180,000

50,000 150,000

+ Net Income 6,000 54,000 60,000

- Dividends(2,000

) (18,000) (20,000

) Ending book value 24,000 216,000

50,000 190,000


Total =

FosterCo.'sshare +

NCI's share

Lower Depreciation

(3,000)

(2,700)

(300)

Total (3,000)

(2,700)

(300)



7-99



Income from Block Corp. 51,300 ← Foster’s share of NI + Extra Dep.

NCI in NI of Block Corp. 5,700 ← NCI share of NI + Extra Dep.

Dividends declared 20,000 ← 100% of Block Corp.'s dividends

Investment in Block Corp.

213,300

← Foster's share of BV + Extra Dep.

NCI in NA of BlockCorp. 23,700



Foster Co. 48,000 Actual 18,000 24,000

42,000 3,000 BlockCorp. 90,000 "As If"

45,000

7-100


P7-37 (continued)

Eliminate the gain on Equipment and correct asset's basis:Equipment 42,000 Investment in Block Corp.

16,200

NCI in NA of BlockCorp. 1,800 Accumulated Depreciation

24,000


Investment in Income from Block Corp. Block Corp.

BeginningBalance

196,200

90% Net Income 54,000 54,00

0 90% Net Income

18,000 90% Dividends

2,700 Realize Def.

Gain 2,700


0 51,30

0 Ending Balance

213,30

0 Basic51,30

0 16,200 Equipment Adj.

0 0

7-101


P7-37 (continued)


FosterCo.

BlockCorp.

EliminationEntries

DR CR Consolidat

ed Income Statement Sales 680,000 385,000 1,065,000 Other Income 26,000 15,000 41,000

Less: COGS (500,00

0) (250,00

0) (750,000)


(45,000)

(15,000) 3,000 (63,000)


(95,000)

(75,000) (170,000)

Income from Block Corp. 51,300 51,300 0

Consolidated Net Income 117,300 60,000 54,300 0 123,000


Controlling Interest in NI 117,300 60,000 60,000 0 117,300



0 251,200 Net Income 117,300 60,000 60,000 0 117,300


(40,000)

(20,000) 20,000 (40,000)

Ending Balance 328,500 190,000 210,00

0 20,000 328,500 Balance Sheet Cash 82,000 32,400 114,400 Accounts Receivable 80,000 90,000 170,000 Other Receivables 40,000 10,000 50,000 Inventory 200,000 130,000 330,000 Land 80,000 60,000 140,000



(155,000)

(75,000) 24,000 (257,000)

3,000

Investment in BlockCorp. 229,500

213,300 0

7-102


16,200

Total Assets 1,056,5

00 497,400 42,000 256,50

0 1,339,400 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 Common Stock 210,000 50,000 50,000 210,000



0 20,000 328,500

NCI in NA of Block Corp. 23,700 25,500

1,800

Total Liabilities &Equity

1,056,500 497,400

260,000 45,500 1,339,400

7-103


P7-37 (continued)


FosterCo.

BlockCorp.

EliminationEntries

DR CR Consolidat

ed Income Statement Sales 680,000 385,000 1,065,000 Other Income 26,000 15,000 41,000

Less: COGS (500,00

0) (250,00

0) (750,000)


(45,000)

(15,000) 3,000 (63,000)


) (75,000

) (170,000)

Income from Block Corp. 56,700 51,300 5,400

Consolidated Net Income 122,700 60,000 54,300 0 128,400


Controlling Interestin NI 122,700 60,000 60,000 0 122,700



0 262,000 Net Income 122,700 60,000 60,000 0 122,700


(40,000)

(20,000) 20,000 (40,000)

Ending Balance 344,700 190,000 210,00

0 20,000 344,700 Balance Sheet Cash 82,000 32,400 114,400 Accounts Receivable 80,000 90,000 170,000 Other Receivables 40,000 10,000 50,000 Inventory 200,000 130,000 330,000 Land 80,000 60,000 140,000



(155,000)

(75,000) 24,000 (257,000)

3,000

Investment in Block Corp. 245,700

213,300 16,200

7-104


16,200


00 497,400 42,000 256,50

0 1,355,600 Accounts Payable 63,000 35,000 98,000 Other Payables 95,000 20,000 115,000 Bonds Payable 250,000 200,000 450,000 Bond Premium 2,400 2,400 Common Stock 210,000 50,000 50,000 210,000



0 20,000 344,700

NCI in NA of Block Corp. 23,700 25,500

1,800

Total Liabilities & Equity

1,072,700 497,400

260,000 45,500 1,355,600

7-105


P7-38 Comprehensive Problem: Intercorporate Transfers

Note: In converting this problem from the modified to the fully adjusted equity method, we did not correctly adjust for lower depreciation resulting from the fixed asset sale at a loss. If you complete the problem based on the numbers given in the trial balance in the text, the investment and income from sub accounts will not be fully eliminated. In order to correct this problem, please use the following adjusted numbers for Foster Company:

Investment in Block Corporation Stock = 229,500Income from Block Corporation = 51,300Retained Earnings = 251,200

These calculations are based on the corrected numbers

a.

Computation of differential as of January 1, 20X8:

Original differential at December 31, 20X1

$ 150,000

Less: Portion written off for sale of inventory

(30 ,000)

Remaining differential, January 1, 20X8 $ 120,000

b.

Verification of balance in Investment in Schmid Stock account:

Schmid retained earnings, January 1, 20X8

$1,400,000

Schmid net income, 20X8: 110,000 Schmid dividends, 20X8

(20,000)Schmid retained earnings, December 31, 20X8

$1,490,000

Schmid stockholders' equity: Common stock $1,000,00

0 Additional paid-in capital 1,350,000 Retained earnings, December 31, 20X8

1,490,0 00

Stockholders' equity, December 31, 20X8

$3,840,000

Rossman's ownership share x.75

Book value of shares held by Rossman $2,880,00

7-106


0 Remaining differential at January 1, 20X8: ($120,000 x 0.75)

90,000

Deferred gain on downstream sale of land

(23,000)

Loss on sale of equipment 30,000Reverse part of loss on sale of equipment

(3, 000)

Balance in Investment in Schmid account, December 31, 20X8

$2,974,000

7-107


These calculations are based on the uncorrected numbers

b.

Verification of balance in Investment in Schmid Stock account:

Schmid retained earnings, January 1, 20X8

$1,400,000

Schmid net income, 20X8: 110,000 Schmid dividends, 20X8

(20,000)Schmid retained earnings, December 31, 20X8

$1,490,000

Schmid stockholders' equity: Common stock $1,000,00

0 Additional paid-in capital 1,350,000 Retained earnings, December 31, 20X8

1,490,0 00

Stockholders' equity, December 31, 20X8

$3,840,000

Rossman's ownership share x.75

Book value of shares held by Rossman $2,880,000

Remaining differential at January 1, 20X8: ($120,000 x 0.75)

90,000

Deferred gain on downstream sale of land

(23,000)

Loss on sale of equipment 30,000Reverse part of loss on sale of equipment

(3,000)

Incorrect Number 6,000

Balance in Investment in Schmid account, December 31, 20X8

$2,980,000

7-108


P7-38 (continued)

c. These calculations are based on the corrected numbers


NCI25%

+ RossmanCorp.75%

= CommonStock

+ Add.Paid-inCapital

+

Retained

Earnings

Original book value

937,500

2,812,500

1,000,000

1,350,000

1,400,000

+ Net Income 27,500 82,500 110,000

- Dividends(5,000

)(15,000

) (20,00

0) Ending book value

960,000

2,880,000

1,000,000

1,350,000

1,490,000


Total =

RossmanCorp.'sshare +

NCI's share

Upstream Asset 40,000 30,000 10,000 Extra Depreciation (4,000) (3,000) (1,000) Total 36,000 27,000 9,000

7-109



Common stock 1,000,0

00 ← Original amount invested (100%)

Additional Paid-in Capital 1,350,0

00 ← Beginning balance in APIC

Retained earnings 1,400,0

00 ← Beginning balance in RE

Income from Schmid Dist. 109,500 ← Rossman’s share of NI - Def. Gain

NCI in NI of Schmid Dist. 36,500 ← NCI share of NI - Def. Gain

Dividends declared 20,000 ← 100% of Schmid.'s dividends

Investment in Schmid Dist.

2,907,000

← Rossman's share of BV - Def. Gain

NCI in NA of SchmidDist. 969,000

← NCI share of BV - Def. Gain


NCI 25% +RossmanCorp. 75% = Land + Goodwill

Beginning balance 30,000 90,000 56,000 64,000 Changes 0 0 0 0 Ending balance 30,000 90,000 56,000 64,000

Excess value (differential) reclassification entry:Land 56,000 Goodwill 64,000 Investment in Schmid Dist. 90,000 NCI in NA of Schmid Dist. 30,000

7-110


P7-38 (continued)

Eliminate servicesOther Income 80,000 Other Expenses 80,000 Eliminate intercompany payables/receivablesCurrent payables 20,000 Current receivables 20,000 Eliminate intercompany dividend owedCurrent payables 3,750 Current receivables 3,750

Eliminate gain on purchase of landInvestment in Schmid Dist. 23,000 Land 23,000


Rossman Corp. 250,000 Actual 25,000 145,000

185,000 4,000 Schmid Dist. 435,000 "As If" 174,000

Eliminate the gain on Equipment and correct asset's basis:Equipment 185,000

Loss on Sale 40,00

0 Accumulated Depreciation 145,000


7-111


Investment in Income from Schmid Dist. Schmid Dist.

BeginningBalance

2,879,500

75% Net Income 82,500 82,500 75% Net Income

15,000 75% Dividends Def. Loss on

Equipment 30,000 3,000 Realize Loss

Gain 3,000 30,000 Def. Gain on Equipment

Ending Balance2,974,0

00 109,50

0 Ending Balance

2,907,0

00 Basic109,50

0 Def. Gain on

Land 23,000 90,000 ExcessReclass.

0 0

7-112


P7-38 (continued)

d. This worksheet is based on the corrected numbers:

RossmanCorp.

SchmidDist.

Elimination Entries

DR CR Consolidat

ed Income Statement

Sales 4,801,00

0 985,000 5,786,000

Other Income or Loss 90,000 (35,000

) 80,000 40,000 15,000

Less: COGS (2,193,0

00) (525,00

0) (2,718,000

)

Less: Depreciation & Amort. Expense

(202,000)

(88,000) 4,000 (294,000)

Less: Other Expenses (1,381,0

00) (227,00

0) 80,000 (1,528,000

)

Income from Schmid Dist. 109,500 109,500 0

Consolidated Net Income

1,224,500 110,000 193,500 120,000 1,261,000


Controlling Interestin NI

1,224,500 110,000 230,000 120,000 1,224,500


Beginning Balance 1,474,80

0 1,400,0

00 1,400,0

00 1,474,800

Net Income 1,224,50

0 110,000 230,000 120,000 1,224,500

Less: Dividends Declared (50,000)

(20,000) 20,000 (50,000)

Ending Balance 2,649,30

0 1,490,0

00 1,630,0

00 140,000 2,649,300 Balance Sheet Cash 50,700 38,000 88,700 Current Receivables 101,800 89,400 23,750 167,450 Inventory 286,000 218,900 504,900

Land 400,000 1,200,0

00 56,000 23,000 1,633,000

Buildings & Equipment

2,400,000

2,990,000 185,000 5,575,000


(1,105,000)

(420,000) 145,000

(1,674,000)

4,000

Investment in SchmidDist.

2,974,000 23,000

2,907,000 0

7-113


90,000 Goodwill 64,000 64,000


0 4,116,3

00 328,000 3,192,7

50 6,359,050 Current Payables 86,200 76,300 23,750 138,750

Bonds Payable 1,000,00

0 200,000 1,200,000

Common Stock 100,000 1,000,0

00 1,000,0

00 100,000

Additional Paid-in Capital

1,272,000

1,350,000

1,350,000 1,272,000

Retained Earnings 2,649,30

0 1,490,0

00 1,630,0

00 140,000 2,649,300

NCI in NA of Schmid Dist. 969,000 999,000

30,000


5,107,500

4,116,300

4,003,750

1,109,000 6,359,050

7-114


P7-38 (continued)

d. This worksheet is based on the uncorrected numbers:

RossmanCorp.

SchmidDist.

Elimination Entries

DR CR Consolidat

ed Income Statement

Sales 4,801,00

0 985,000 5,786,000

Other Income or Loss 90,000

(35,000) 80,000 40,000 15,000

Less: COGS (2,193,0

00) (525,00

0) (2,718,000

)


(202,000)

(88,000) 4,000 (294,000)


(1,381,000)

(227,000) 80,000

(1,528,000)

Income from Schmid Dist. 115,500 109,500 6,000

Consolidated Net Income

1,230,500 110,000 193,500 120,000 1,267,000


Controlling Interest in NI

1,230,500 110,000 230,000 120,000 1,230,500


Beginning Balance 1,474,80

0 1,400,0

00 1,400,0

00 1,474,800

Net Income 1,230,50

0 110,000 230,000 120,000 1,230,500

Less: Dividends Declared (50,000)

(20,000) 20,000 (50,000)

Ending Balance 2,655,30

0 1,490,0

00 1,630,0

00 140,000 2,655,300 Balance Sheet Cash 50,700 38,000 88,700 Current Receivables 101,800 89,400 23,750 167,450 Inventory 286,000 218,900 504,900

Land 400,000 1,200,0

00 56,000 23,000 1,633,000

Buildings & Equipment

2,400,000

2,990,000 185,000 5,575,000


(1,105,000)

(420,000) 145,000

(1,674,000)

4,000

Investment in Schmid Dist.

2,980,000 23,000

2,907,000 6,000

7-115


90,000 Goodwill 64,000 64,000


0 4,116,3

00 328,000 3,192,7

50 6,365,050 Current Payables 86,200 76,300 23,750 138,750

Bonds Payable 1,000,00

0 200,000 1,200,000

Common Stock 100,000 1,000,0

00 1,000,0

00 100,000

Additional Paid-in Capital

1,272,000

1,350,000

1,350,000 1,272,000

Retained Earnings 2,655,30

0 1,490,0

00 1,630,0

00 140,000 2,655,300

NCI in NA of SchmidDist. 969,000 999,000

30,000


5,113,500

4,116,300

4,003,750

1,109,000 6,365,050

7-116


P7-39A Computation of Retained Earnings following Multiple Transfers

Consolidated retained earnings, January 1, 20X8:

Great Company’s retained earnings, January 1

$450,000

Unrealized profit on land ($16,000 x 0.80) (12,800)

Unrealized profit on depreciable assets [$22,000 - ($2,200 x 2)] (17,6

00)Consolidated retained earnings $419,60

0

Consolidated retained earnings, December 31, 20X8: Consolidated retained earnings, January 1

$419,600

Great Company’s operating income for 20X8

$65,000

Less: Dividends paid in 20X8 (45,000)

Increase in retained earnings from Great’s operations

20,000

Meager’s net income for 20X8 $30,000

Less: Amortization of differential assigned to equipment: ($325,000 - $290,000) / 10 years

(3,500)

Impairment of goodwill (17,50 0)

Realized income $9,000

Proportion of ownership held x0.80

7,200

Realization of gain on sale of building ($22,000 / 10 years) 2,

200 Consolidated retained earnings $449,00

0

Alternate computation of retained earnings balance:

Great Company’s retained earnings, January 1

$450,000

Operating income for 20X8 65,000 Dividends paid in 20X8 (45,000

7-117


) Investment income from Meager Company for 20X8: Meager's net income $30,000 Proportion of ownership held x

0.80

Proportionate share of Meager’s reported net income

24,000

Amortization of differential assigned to equipment: [($325,000 - $290,000) x 0.80] / 10 years

(2,800)

Goodwill impairment loss ($17,500 x 0.80)

(14,0 00)

Great Company’s retained earnings $477,200

Unrealized profit on land ($16,000 x 0.80) (12,800)

Unrealized profit on depreciable assets [$22,000 - ($2,200 x 3)] (15,4

00)Consolidated retained earnings $449,00

0

7-118


P7-40A Consolidation Worksheet with Intercompany Transfers (Modified Equity Method)


NCI35%

+ MistCo.65%

= CommonStock

+

Retained

Earnings

Original book value

50,750 94,250

60,000

85,000

+ Net Income10,50

0 19,500 30,

000

- Dividends(1,75

0)(3,250

) (5,

000) Ending book value

59,500

110,500 60,000 110,000

Basic elimination entryCommon stock 60,000 ← Original amount invested (100%)

Retained earnings 85,000 ← Beginning balance in retained earnings

Income from Blank Corp. 19,500 ← Mist Co.’s share of NINCI in NI of Blank Corp. 6,265

← NCI share of NI – Def. Gain + Extra Dep.


← 100% of Blank Corp.'s dividendsdeclared

Investment in Blank Corp.

110,500

← Net BV left in the investment account

NCI in NA of Blank Corp. 55,265 ← NCI share of BV + Extra Dep.

Eliminate gain on purchase of landGain on Sale of Land 4,000 Land 4,000

Eliminate the gain on Building and correct asset's basis:Gain on Sale on Building 13,200 Depreciation Expense 1,100 Building and Equipment (net) 12,100

7-119


Eliminate intercompany servicesSales 24,000 Other Expenses

24,000

7-120


P7-40A (continued)b.

MistCo.

BlankCorp.

EliminationEntries

DR CR Consolidat

ed Income Statement

Sales 286,500 128,50

0 24,000 391,000 Gain on Sale of Land 4,000 4,000 0

Gain on Sale of Building 13,200 13,200 0

Less: COGS (160,00

0) (75,00

0) (235,000)


(22,000)

(19,000) 1,100 (39,900)


) (17,70

0) 24,000 (69,700)

Income from Blank Corp. 19,500 19,500 0






(25,000)

(5,000) 5,000 (25,000)


0 151,96

5 30,100 213,135 Balance Sheet Cash 32,500 22,000 54,500 Accounts Receivable 62,000 37,000 99,000 Inventory 95,000 71,000 166,000 Land 40,000 15,000 4,000 51,000

Buildings & Equipment(net) 200,000

125,000 12,100 312,900

Investment in Blank Corp. 110,500

110,500 0


0 0 126,60

0 683,400 Accounts Payable 35,000 20,000 55,000 Bonds Payable 180,000 80,000 260,000 Common Stock 100,000 60,000 60,000 100,000


0 151,96

5 30,100 213,135

7-121


NCI in NA of Blank Corp. 55,265 55,265


540,000 270,000

211,965

85,365 683,400

7-122


P7-40A (continued)

c.

Mist Company and SubsidiaryConsolidated Balance Sheet

December 31, 20X4

Cash $ 54,500

Accounts Receivable 99,000 Inventory 166,000 Land 51,000 Buildings and Equipment (net) 312,90

0 Total Assets $683,400


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

Total Liabilities and Stockholders' Equity $683,400

Mist Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 20X4

Sales $391,000 Cost of Goods Sold $235,000Depreciation Expense 39,900Other Expenses 69,700 Total Expenses (344,600

)Consolidated Net Income $

46,400 Income to Noncontrolling Interest

(6,265)Income to Controlling Interest $

40,135

Mist Company and SubsidiaryConsolidated Retained Earnings Statement


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

7-123



$238,135 Dividends Declared, 20X4 (25,00

0)Retained Earnings, December 31, 20X4 $213,135

7-124


P7-41A Modified Equity Method

Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. This error carries over to this problem. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:


This trial balance is based on the corrected numbers:

a. Adjusted trial balance:

Prime Company

Lane Company

Item

Debi t

Credi t

Debi t

Credi t

Cash and Accounts Receivable

$151,000

$55,000

Inventory 240,000 100,000Land 100,000 80,000Buildings and Equipment 500,000 150,000Investment in Lane Company Stock 240,000Cost of Goods Sold 160,000 80,000Depreciation and Amortization

25,000 15,000

Other Expenses 20,000 10,000Dividends Declared 60,000 35,000Accumulated Depreciation $

230,000$

60,000Accounts Payable 60,000 25,000Bonds Payable 200,000 50,000Common Stock 300,000 100,000Retained Earnings 420,000 140,000Sales 250,000 150,000Income from Subsidiary

36,000

Total $1,496,000

$1,496,000

$525,000

$525,000

7-125


This trial balance is based on the uncorrected numbers:

a. Adjusted trial balance:

Prime Company

Lane Company

Item

Debi t

Credi t

Debi t

Credi t

Cash and Accounts Receivable

$151,000

$55,000

Inventory 240,000 100,000Land 100,000 80,000Buildings and Equipment 500,000 150,000Investment in Lane Company Stock 248,000Cost of Goods Sold 160,000 80,000Depreciation and Amortization

25,000 15,000

Other Expenses 20,000 10,000Dividends Declared 60,000 35,000Accumulated Depreciation $

230,000$

60,000Accounts Payable 60,000 25,000Bonds Payable 200,000 50,000Common Stock 300,000 100,000Retained Earnings 428,000 140,000Sales 250,000 150,000Income from Subsidiary

36,000

Total $1,504,000

$1,504,000

$525,000

$525,000

7-126


P7-41A (continued)

b. These calculations are based on the corrected numbers:

Equity Method Entries on Prime Co.'s Books:Investment in Lane Co. 36,000 Income from Lane Co. 36,000 Record Prime Co.'s 80% share of Lane Co.'s 20X7 income

Cash 28,000 Investment in Lane Co. 28,000 Record Prime Co.'s 80% share of Lane Co.'s 20X7 dividend

c.Basic elimination entryCommon stock 100,000 Retained earnings 140,000 Income from Lane Co. 36,000 NCI in NI of Lane Co. 9,000 Dividends declared 35,000 Investment in Lane Co. 200,000 NCI in NA of Lane Co. 50,000

Excess value (differential) reclassification entry:

Goodwill 32,00

0 ← Remaining goodwill

Retained Earnings 14,40

0 ← Lane's portion of goodwill impairment loss from last year


40,000 ← Remaining balance in investment account

NCI in NA of Lane Co. 6,400

← NCI's share of differential and loss [($50,000 - 18,000) * .2]

Eliminate intercompany accounts:Accounts Payable 4,000 Cash and Accounts Receivable 4,000

Eliminate gain on purchase of land

7-127


Retained Earnings 8,000 NCI in NI of Lane Co. 2,000 Land 10,000

7-128




5,000 2

,000 23,000 PrimeCo. 75,000 "As If" 35,000

Eliminate the gain on Equipment and correct asset's basis:Retained Earnings 18,000 Equipment 5,000 Accumulated Depreciation 23,000


7-129


P7-41A (continued)

d. This worksheet is based on the corrected numbers:

PrimeCo.

LaneCo.

EliminationEntries

DR CR Consolidat

ed Income Statement

Sales 250,000 150,00

0 400,000

Less: COGS (160,00

0) (80,00

0) (240,000)

Less: Depreciation & Amort. Exp.

(25,000)

(15,000) 2,000 (38,000)


) (10,00







0 140,00

0 379,600 14,400 8,000 18,000 Net Income 81,000 45,000 45,000 2,000 83,000


(60,000)

(35,000) 35,000 (60,000)


0 225,40



Inventory 240,000 100,00

0 340,000 Land 100,000 80,000 10,000 170,000


0 5,000 655,000


(230,000)

(60,000) 2,000 23,000 (311,000)

Investment in Lane Co. 240,000 200,00

0 0 40,000 Goodwill 32,000 32,000

7-130



00 325,00

0 39,000 277,00

0 1,088,000 Accounts Payable 60,000 25,000 4,000 81,000 Bonds Payable 200,000 50,000 250,000


0 100,00

0 300,000


0 225,40



1,001,000

325,000

331,400 93,400 1,088,000

7-131


P7-41A (continued)

d. This worksheet is based on the uncorrected numbers:

PrimeCo.

LaneCo.

EliminationEntries

DR CR Consolidat

ed Income Statement

Sales 250,000 150,00

0 400,000

Less: COGS (160,00

0) (80,00

0) (240,000)


(25,000)

(15,000) 2,000 (38,000)


(20,000)

(10,000) (30,000)

Income from Lane Co. 36,000 36,000 0






0 140,00

0 387,600 14,400 8,000 18,000 Net Income 81,000 45,000 45,000 2,000 83,000


(60,000)

(35,000) 35,000 (60,000)


0 225,40


Cash and Accounts Rec. 151,000 55,000 4,000 202,000

Inventory 240,000 100,00

0 340,000 Land 100,000 80,000 10,000 170,000


150,000 5,000 655,000


(230,000)

(60,000) 2,000 23,000 (311,000)


200,000 8,000

40,000

7-132


Goodwill 32,000 32,000


00 325,00

0 39,000 277,00

0 1,096,000 Accounts Payable 60,000 25,000 4,000 81,000 Bonds Payable 200,000 50,000 250,000


0 100,00

0 300,000


0 225,40

0 37,000 410,600

NCI in NA of Lane Co. 2,000 50,000 54,400

6,400


1,009,000

325,000

331,400 93,400 1,096,000

7-133


P6-42A Cost Method

a.

Journal entry recorded by Prime Company:

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

b.Investment elimination entry

Common stock 100,0

00

Retained earnings 70,

000

Goodwill 25,

000 Investment in Lane Co. 160,000 NCI in NA of Lane Co. 35,000

Dividend elimination entryDividend Income 28,000 NCI in NI of Lane Co. 7,000 Dividends Declared 35,000

Assign undistributed income to NCIRetained Earnings 18,000 NCI in NA of Lane Co. 18,000

Eliminate intercompany accounts:Accounts Payable 4,000 Cash and Accounts Receivable 4,000

Eliminate gain on purchase of landRetained Earnings 8,000 NCI in NI of Lane Co. 2,000 Land 10,000

Eliminate the gain on Equipment and correct asset's basis:

7-134


Retained Earnings 18,000 Equipment 5,000 Accumulated Depreciation 23,000


7-135


P6-42A (continued)c.

PrimeCo.

LaneCo.

EliminationEntries

DR CR Consolidat

ed Income Statement

Sales 250,000 150,00

0 400,000

Less: COGS (160,00

0) (80,00

0) (240,000)

Less: Depr. & Amort. Exp.

(25,000)

(15,000) 2,000 (38,000)


(20,000)

(10,000) (30,000)

Dividend Income 28,000 28,000 0


NCI in Net Income 7,000 (9,000) 2,000




0 70,000 374,000 18,000 8,000 18,000 Net Income 73,000 45,000 37,000 2,000 83,000


(60,000)

(35,000) 35,000 (60,000)


0 151,00


Cash and Accounts Rec.e 151,000 55,000 4,000 202,000

Inventory 240,000 100,00

0 340,000 Land 100,000 80,000 10,000 170,000


150,000 5,000 655,000


(230,000)

(60,000) 2,000 23,000 (311,000)


160,000 0

Goodwill 25,000 25,000

7-136



0 7,000 37,000 1,081,000 Accounts Payable 60,000 25,000 4,000 81,000 Bonds Payable 200,000 50,000 250,000


0 100,00

0 300,000


0 151,00

0 37,000 397,000

NCI in NA of Lane Co. 35,000 53,000

18,000

Total Liabilities &Equity 921,000

325,000

255,000 72,000 1,081,000

7-137

Chapter 7 Solution Manual

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