Chapter 5 INTERCOMPANY PROFIT TRANSACTIONS INVENTORIES

Answers to Questions 1 Profits and losses on sales between affiliates are realized for consolidated state ent !"r!oses w#en t#e !"rc#asin$ affiliate resells t#e erc#andise to !arties o"tside of t#e consolidated entit%& If all erc#andise sold to affiliates is resold to o"tside !arties in t#e sa e !eriod' t#ere will be no "nrealized !rofit to eli inate in !re!arin$ t#e consolidated financial state ents& (ross !rofit' rat#er t#an net !rofit' is t#e conce!t t#at s#o"ld be "sed in co !"tin$ "nrealized in)entor% !rofits accordin$ to (AAP. T#e a o"nt of "nrealized !rofit to be eli inated in t#e !re!aration of consolidated financial state ents is not affected b% t#e e*istence of a noncontrollin$ interest& All "nrealized !rofit "st be eli inated& In t#e case of "!strea sales' #owe)er' t#e "nrealized !rofit s#o"ld be allocated between controllin$ and noncontrollin$ interests& T#e eli ination of interco !an% sales and !"rc#ases does not affect consolidated net inco e& T#is is beca"se e+"al a o"nts are ded"cted fro sales and cost of sales and t#e net effect on consolidated net inco e is nil& T#e i !ortance of t#e eli ination lies in a correct state ent of consolidated sales and cost of sales& Consolidated wor,in$ ca!ital is not affected b% t#e eli ination of interco !an% acco"nts recei)able and acco"nts !a%able balances& Since e+"al a o"nts are ded"cted fro c"rrent assets and c"rrent liabilities' t#e effect on t#e co !"tation -c"rrent assets less c"rrent liabilities- is nil& .!strea sales are sales fro s"bsidiar% to !arent& /ownstrea sales are sales fro !arent to s"bsidiar%& T#e i !ortance of t#is desi$nation lies in t#e fact t#at t#e !rofit or loss on s"c# transactions is t#e sellin$ affiliate0s !rofit or loss& In t#e case of "nrealized !rofit or loss on downstrea sales' all t#e !rofit or loss is assi$ned to t#e !arent1seller& 2"t "nrealized !rofit or loss on "!strea sales is !rofit or loss of t#e s"bsidiar%1seller and is assi$ned to t#e !arent and noncontrollin$ interest in relation to t#eir !ro!ortionate #oldin$s& Yes& If "nrealized !rofits are not eli inated at %ear end' consolidated net inco e will be o)erstated in 3455& T#e endin$ in)entor% of one %ear beco es t#e be$innin$ in)entor% of t#e ne*t %ear' and "nrealized !rofits in t#e be$innin$ in)entor% will "nderstate consolidated net inco e in 3453& T#e anal%sis of t#e effect of "nrealized in)entor% !rofits on consolidated net inco e is basicall% t#e sa e as t#e anal%sis for in)entor% errors& 6i,e in)entor% errors' errors in eli inatin$ "nrealized !rofits are self1correctin$ o)er an% two acco"ntin$ !eriods& Consolidated net inco e for 3457 is "naffected& T#e noncontrollin$ interest s#are is affected b% "!strea sales if t#e erc#andise #as not been resold b% t#e !arent to o"tside !arties b% t#e end of t#e acco"ntin$ !eriod& T#is is beca"se t#e noncontrollin$ interest s#are is based on t#e inco e of t#e s"bsidiar%& If t#e s"bsidiar% #as "nrealized !rofit fro interco !an% sales' its realized inco e will be less t#an its re!orted inco e& T#e noncontrollin$ interest s#are s#o"ld be based on t#e realized inco e of t#e s"bsidiar%&

2 3

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5-2

Intercompany Profit Transactions Inventories

A !arent0s in)est ent inco e and in)est ent acco"nts are ad;"sted for "nrealized !rofits on interco !an% sales to s"bsidiaries in accordance wit# t#e one1line consolidation conce!t& T#e !arent red"ces its in)est ent and in)est ent inco e acco"nts for t#e f"ll a o"nt of t#e "nrealized !rofits in t#e %ear of interco !an% sale& <#en t#e $oods are sold to o"tside !arties b% t#e s"bsidiar%' t#e !rofits of t#e !arent are realized and t#e !arent increases its in)est ent and in)est ent inco e acco"nts& Co bined cost of $oods sold is o)erstated w#en t#ere are "nrealized !rofits in t#e be$innin$ in)entor% and "nderstated w#en t#ere are "nrealized !rofits in t#e endin$ in)entor%& T#e eli ination of "nrealized !rofits in t#e be$innin$ in)entor% red"ces =credits> cost of $oods sold and t#e eli ination of "nrealized !rofits in t#e endin$ in)entor% increases =debits> cost of $oods sold& T#e effect of "nrealized !rofits on consolidated cost of $oods sold is not affected eit#er b% a noncontrollin$ interest or b% t#e direction of t#e interco !an% sales& All "nrealized !rofit fro bot# "!strea and downstrea sales is eli inated fro consolidated cost of $oods sold& .nrealized !rofit in t#e be$innin$ in)entor% is reflected in an o)erstate ent of cost of sales and is eli inated b% red"cin$ =creditin$> cost of sales and debitin$ t#e in)est ent acco"nt if a correct e+"it% et#od #as been "sed and t#e interco !an% sales are downstrea & In t#e case of "!strea sales' cost of sales is credited and t#e noncontrollin$ interest and t#e in)est ent acco"nt are debited !ro!ortionatel%& & T#ere are two e+"all% $ood a!!roac#es for co !"tin$ noncontrollin$ interest s#are w#en t#ere are "nrealized !rofits fro "!strea sales in bot# be$innin$ and endin$ in)entories& One a!!roac# is to co !"te realized inco e of t#e s"bsidiar% b% addin$ "nrealized !rofits in t#e be$innin$ in)entor% to re!orted s"bsidiar% net inco e and ded"ctin$ "nrealized !rofits in t#e endin$ in)entor%& T#e noncontrollin$ interest s#are is t#en e+"al to t#e realized inco e of t#e s"bsidiar% "lti!lied b% t#e noncontrollin$ interest !ercenta$e& T#e ot#er a!!roac# is to co !"te t#e noncontrollin$ interest !ercenta$e in re!orted s"bsidiar% net inco e' in "nrealized !rofits in be$innin$ in)entor%' and in "nrealized !rofits in endin$ in)entor%& Noncontrollin$ interest s#are is t#en co !"ted b% addin$ t#e noncontrollin$ interest !ercenta$e in "nrealized !rofits in t#e be$innin$ in)entor% to t#e noncontrollin$ interest s#are of re!orted inco e' and s"btractin$ t#e noncontrollin$ interest !ercenta$e relatin$ to t#e "nrealized !rofits in t#e endin$ in)entor%& T#e ass" !tion t#at "nrealized !rofits in an endin$ in)entor% are realized in t#e s"cceedin$ !eriod is a con)enience' b"t it does not res"lt in incorrect eas"re ents of consolidated net inco e as lon$ as t#e "nrealized !rofits at an% state ent date are correctl% deter ined& T#is is beca"se an% "nrealized !rofits in be$innin$ in)entor% t#at are considered realized are credited to cost of sales& T#e sa e ite s will a!!ear as "nrealized !rofits in t#e endin$ in)entor% if t#e% re ain "nsold' and t#e eli ination of t#ese ite s res"lts in debitin$ cost of sales for t#e sa e a o"nt& T#"s' t#e wor,!a!er effects are offsettin$ as ill"strated in t#e followin$ wor,!a!er entries' w#ic# ass" e ?:'444 "nrealized !rofits fro downstrea sales& In)est ent in s"bsidiar% =retained earnin$s> Cost of sales To eli inate "nrealized !rofit in be$innin$ in)entor%& :'444 :'444

10

11

12

13

14

Cost of sales In)entor% To eli inate "nrealized !rofit in endin$ in)entor%&

:'444 :'444

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Chapter 5

5-3

SOLUTIONS TO EXERCISES Solution E5-1 1 2 3 4 b d a c 5 6 7 8 c a a c

Solution E5-2 [AICPA a a!t" # 1 2 a c Unrealized profits from intercompan sales !ith "en are eliminated from the ending in#entor $ %&'0,000 combined current assets less %(',000 unrealized profit )%1*0,000 20+,. c -ombined cost of sales of %2,2.0,000 less %/.0,000 intercompan sales

Solution 5-3 1 d Pil0s separate income )in thousands, 1dd$ 2hare of 2il0s income )%1,000 100+, 1dd$ 3ealization of profit deferred in 2011 %(,000 4 )%(,00051.0+, 6ess$ Unrealized profit in 2012 in#entor %2,700 4 )%2,70051.0+, -ontrolling share of consolidated net income 2 d -ombined sales 6ess$ Intercompan -onsolidated sales 3 c -ombined cost of sales 6ess$ Intercompan purchases )*00, %(,200 1,000 %2,000 1,000

sales

%2,*00 )100, %2,/00

%1,('0 )100,

6ess$ Unrealized profit in beginning in#entor 1dd$ Unrealized profit in ending in#entor 2011 Pearson Education, Inc. publishing as Prentice Hall

)*, 20

5-4

Intercompany Profit Transactions Inventories

-onsolidated cost of sales

%1,2/2

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Chapter 5

5-5

Solution E5-4 1 b Pid0s share of 2ed0s income )%120,000 *0+, 6ess$ Unrealized profit in ending in#entor )%70,000 .0+ unsold *0+ o!ned, Income from 2ed 2 d -ombined cost of sales 6ess$ Intercompan sales 1dd$ Unrealized profit in ending in#entor -onsolidated cost of sales 3 b 3eported income of 2ed Unrealized profit 2ed0s realized income 8oncontrolling interest percentage 8oncontrolling interest share Solution E5-5 1 c -ombined sales 6ess$ Intercompan -onsolidated sales 2 c Unrealized profit in beginning in#entor %100,000 4 )%100,000512.+, %1,*00,000 )700,000, %1,700,000 % % % % &',000 )1',000, *0,000

&00,000 )200,000, 20,000 /20,000

120,000 )20,000, 100,000 20+ 20,000

sales

20,000

Unrealized profit in ending in#entor %12.,000 4 )%12.,000512.+, 3 b -ombined cost of goods sold 6ess$ Intercompan sales % 2.,000

%1,770,000 )700,000,

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5-6

Intercompany Profit Transactions Inventories

6ess$ Unrealized profit in beginning in#entor %100,000 4 )%100,000512.+, 1dd$ Unrealized profit in ending in#entor %12.,000 4 )%12.,000512.+, -onsolidated cost of goods sold 2.,000 %1,07.,000 )20,000,

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Chapter 5

5-7

Solution E5-6 1 a Pat0s separate income 1dd$ Income from 2ue )belo!, -ontrolling share of consolidated net income 2ue0s reported income 6ess$ Patent amortization 1dd$ Unrealized profit in beginning in#entor 9%112,.00 4 )%112,.0051.0+,: 6ess$ Unrealized profit in ending in#entor 9%((,000 4 )%((,00051.0+,: 2ue;s ad<usted and realized income )11,000, %20',.00 (/,.00 %200,000 177,..0 %(77,..0 %200,000 )20,000,

Pat;s /0+ controlling share of 2ue;s realized income 8oncontrolling interest share )(0+, 2 c Pac0s share of 2lo0s reported net loss )%1.0,000 loss '0+, 1dd$ Unrealized profit in ending in#entor )%200,000 157 unsold, Income from 2lo Pac0s separate income -ontrolling share of consolidated net income 3 b 2an0s reported net income 1dd$ 3ealized profit in beginning in#entor %1.0,000 4 )%1.0,00051.2., 6ess$ =eferred profit in ending in#entor %200,000 4 )%200,00051.2., Income from 2an

%177,..0 % '1,&.0

%)&0,000,

).0,000, )170,000, (00,000 %1'0,000

%(00,000 (0,000

)70,000, %2&0,000

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5-8

Intercompany Profit Transactions Inventories

Par;s /.+ controlling share of 2an;s income 8oncontrolling interest share )2.+, Solution E5-7 )in thousands, Pan0s separate income 1dd$ *0+ of 2he0s reported income 1dd$ 3ealization of profits in beginning in#entor 6ess$ Unrealized profits in ending In#entor -ontrolling share of consolidated 8I )&0, %2,010 )120, %2,7&0 &0 % 2011 &00 1,200 2012 %1,200 1,(20

%21/,.00 % /2,.00

201( %1,0.0 1,170

120

)'0, %2,2.0

8oncontrolling interest share 1,.00 > 20+ 1,'.0 > 20+ 1,72. > 20+ -onsolidated net income

(00 ((0 2*. %2,(10 %2,*20 %2,.(.

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Chapter 5

5-9

Solution E5-8 Pi$ Co%!o%ation an Su&'i ia%( -onsolidated Income 2tatement for the ear ended =ecember (1, 2011 )in thousands, 2ales )%*00 ? %200 4 %*0 intercompan sales, -ost of sales )%7*0 4 %*0 intercompan purchases ? %20 unrealized profit in ending in#entor , @ross profit Ather e>penses )%200 ? %'0, -nsolidated net income 6ess$ 8oncontrolling interest share )%'0 20+, -ontrolling share of consolidated net income Solution E5-) 1 Noncontrolling interest share 2e#0s reported net income 1dd$ Intercompan profit from upstream sales in beginning in#entor 6ess$ Intercompan ending in#entor 2e#;s ad<usted and realized income 8oncontrolling interest share )70+, 2 Consolidated sales -ombined sales 6ess$ Intercompan sales -onsolidated sales Consolidated cost of sales -ombined cost of sales 6ess$ Intercompan sales 1dd$ Intercompan 6ess$ Intercompan profit in ending in#entor profit in beginning in#entor profit from upstream sales in )10,000, % 7.,000 % 1*,000 % .0,000 .,000 %

&20 )720, .00 )2'0, 270 )12, 22*

%1,2.0,000 100,000 %1,1.0,000

'.0,000 )100,000, 10,000 ).,000,

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5-10

Intercompany Profit Transactions Inventories

-onsolidated cost of sales

...,000

Total Consolidated Income -ombined income 6ess$ Intercompan 1dd$ Intercompan profit in ending in#entor profit in beginning in#entor % % (00,000 )10,000, .,000 2&.,000

Botal -onsolidated Income

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Chapter 5

5-11

Solution E5-1* Pa! Co%!o%ation an Su&'i ia%( -onsolidated Income 2tatement =ecember (1, 201( )in thousands, 2ales )%2,000 ? %1,000 4 %1*0 intercompan , -ost of sales )%*00 ? %.00 4 %1*0 intercompan %20 unrealized profit in beginning in#entor unrealized profit in ending in#entor @ross profit =epreciation e>pense Ather e>penses )%1*0 ? %120, Botal consolidated income 6ess$ 8oncontrolling interest share )%(00 ? %20 profit in beginning in#entor 4 %(0 profit in end. in#entor , 20+ % ).*, &&2 %2,*20 4 ? %(0 )1,1(0, 1,'&0 )(70, )(00, 1,0.0

-ontrolling interest share of consolidated net income

Supporting computations -ost of in#estment in 2aC at Danuar 1, 2012 % 1,200 % 1,.00 % )1,700, 100

Implied fair #alue of 2aC )%1,200 5 *0+, EooC #alue of 2aC @ood!ill Solution E5-11 1 b Income as reported 1dd$ 3ealization of profits in beginning in#entor %120,000 4 )%120,00051.2, 6ess$ Unrealized profits in ending in#entor %('0,000 4 )%('0,00051.2, 3ealized income

200,000 20,000

)'0,000, 1'0,000

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5-12

Intercompany Profit Transactions Inventories

Percent o!nership Income from 2ue 2 c 2ue0s eFuit as reported )%(,700,000 ? %2,100,000, 6ess$ Unrealized profit in ending in#entor 3ealized eFuit 8oncontrolling share 8oncontrolling interest =ecember (1, 2011 3 b 3ealized eFuit -ontrolling share In#estment balance =ecember (1, 2011 %

'0+ &',000

%.,.00,000 )'0,000, .,770,000 70+ %2,1/',000

%.,770,000 '0+ %(,2'7,000

8ote$ Bhe e>cess fair #alue o#er booC #alue is full amortized. Bherefore, the in#estment balance of %(,2'7,000 plus the noncontrolling interest of %2,1/',000 is eFual to the %.,770,000 realized eFuit at the balance sheet date.

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Chapter 5

5-13

Solution E5-12 Pul Co%!o%ation an Su&'i ia%( -onsolidated Income 2tatement for the ear ended =ecember (1, 2011 2ales )%2,/'0,000 4 %270,000 intercompan sales, -ost of sales )%1,*70,000 4 %270,000 4 %10,000a ? %27,000b, @ross profit Aperating e>penses Botal consolidated income 6ess$ 8oncontrolling interest share 9%*0,000 4 )%27,000 .2,: -ontrolling share of consolidated net income
a b

%2,.20,000 )1,'17,000, &0',000 )(20,000, .*',000 )/.,200, % .10,*00

Unrealized profit in beginning in#entor )do!nstream, )%('0,000 4 %(20,000, .2. G %10,000 Unrealized profit in ending in#entor )upstream )%270,000 4 %1*0,000, .7 G %27,000

SOLUTIONS TO PRO+LE,S Solution P5-1 Po% Co%!o%ation an Su&'i ia%( -onsolidated 2tatement of Income and 3etained Earnings for the ear ended =ecember (1, 2012 2ales )%',.00,000 ? %(,2.0,000 4 %700,000 intercompan sales, 6ess$ -ost of sales )%7,000,000 ? %1,&.0,000 4 %700,000 inter4 compan in#entor purchases 4 %'0,000 unrealized profit in beginning ? %*0,000 unrealized profit in ending in#entor , ).,./0,000, (,/*0,000 )2,.00,000, 1,2*0,000 )7*,000, 1,2(2,000 1,*7',000 ).00,000, %&,(.0,000

@ross profit Ather e>penses )%1,/00,000 ? %*00,000, -onsolidated net income 8oncontrolling interest share)%.00,000?%'0,000 4 %*0,000, 10+ -ontrolling share of consolidated net income 1dd$ Eeginning consolidated retained earnings 6ess$ =i#idends for the ear

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5-14

Intercompany Profit Transactions Inventories

-onsolidated retained earnings =ecember (1

%2,./*,000

Solution P5-2 1 Consolidated cost of sales 2013 -ombined cost of sales )%'2.,000 ? %(00,000, 6ess$ Intercompan purchases 1dd$ Profit in ending in#entor 6ess$ Profit in beginning in#entor -onsolidated cost of sales 2 Noncontrolling interest share 2013 2am0s net income )%'00,000 4 %(00,000 4 %1.0,000, 1dd$ Profit in beginning in#entor 6ess$ Profit in ending in#entor 2am0s realized income 8oncontrolling interest percentage 8oncontrolling interest share % % % &2.,000 )(00,000, 27,000 )12,000, '(/,000

1.0,000 12,000 )27,000, 1(*,000 10+ 1(,*00

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Chapter 5

5-15

Solution P5-2 )continued, 3 Consolidated Controlling share of NI 2013 -onsolidated sales )%&00,000 ? %'00,000 4 %(00,000, 6ess$ -onsolidated cost of sales 6ess$ -onsolidated e>penses )%22.,000 ? %1.0,000, 6ess$ 8oncontrolling interest share -ontrolling share of consolidated net income Alternatively, Put0s separate income 1dd$ Income from 2am -ontrolling share of consolidated net income 4 Noncontrolling interest at ecem!er 31, 2013 EFuit of 2am =ecember (1, 201( 6ess$ Unrealized profit in ending in#entor 8oncontrolling interest percentage 8oncontrolling interest =ecember (1 Solution P5-3 1 2012 Inventories appearing in consolidated !alance sheet at Eeginning in#entor Pot )%120,000 4 %*,000a, Eeginning in#entor 2an )%//,.00 4 %1.,.00b, Eeginning in#entor Ba )%7*,000 4 0, ecem!er 31, %112,000 '2,000 7*,000 %222,000 % % %1,200,000 )'(/,000, )(/.,000, )1(,*00, 1/7,200

% %

.0,000 127,200 1/7,200

.20,000 )27,000, 10+ 7&,'00

In#entories =ecember (1

Intercompany profit"
a Pot$ In#entor acFuired intercompan )%120,000 70+, -ost of intercompan in#entor )%7*,00051.2, Unrealized profit in Pot0s in#entor b % 7*,000 )70,000 , % *,000

2an$ In#entor acFuired intercompan )%//,.00 100+, -ost of intercompan in#entor )%//,.0051.2.,

% //,.00 )'2,000 ,

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5-16 Unrealized profit in 2an0s in#entor

Intercompany Profit Transactions Inventories % 1.,.00

2 2013

Inventories appearing in consolidated !alance sheet at Ending in#entor Pot )%10*,000 4 %&,000c, Ending in#entor 2an )%'2,.00 4 %12,.00d, Ending in#entor Ba )%/2,000 4 0,

ecem!er 31, % &&,000 .0,000 /2,000 %221,000

In#entories =ecember (1

Intercompany profit"
c Pot$ In#entor acFuired intercompan )%10*,000 .0+, -ost of intercompan in#entor )%.7,00051.2, Unrealized profit in Pot0s in#entor d % .7,000 )7.,000 , % &,000

2an$ In#entor acFuired intercompan )%'2,.00 100+, -ost of intercompan in#entor )%'2,.0051.2., Unrealized profit in 2an0s in#entor

% '2,.00 ).0,000 , % 12,.00

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Chapter 5

5-17

Solution P5-4 1 #li$s income from Stu /.+ of 2tu0s net income Unrealized profit in =ecember (1, 2011 in#entor )do!nstream, )(00,000, (00,000 % 2011 2012 &00,000 %1,012,.00 % 201( /*/,.00

)%'00,000 152, 100+ Unrealized profit in =ecember (1, 2012 in#entor )upstream,

%(00,000 /.+ Pli0s income from 2tu %

)22.,000,

22.,000

'00,000 %1,0*/,.00 %1,012,.00

#li$s net income Pli0s separate income 1dd$ Income from 2tu Pli0s net income %.,700,000 %.,100,000 %',000,000 '00,000 1,0*/,.00 1,012,.00

%',000,000 %',1*/,.00 %/,012,.00

Consolidated net income 2eparate incomes of Pli and 2tu combined Unrealized profit in =ecember (1, 2011 in#entor Unrealized profit in =ecember (1, 2012 in#entor Botal consolidated income 6ess$ 8oncontrolling interest share 2011 %1,200,000 2.+ 2012 )%1,(.0,000 4 %(00,000, 2.+ 2011 )%1,0.0,000 ? %(00,000, 2.+ 2011 Pearson Education, Inc. publishing as Prentice Hall )(00,000, )2'2,.00, )((/,.00, ',(00,000 )(00,000, ',7.0,000 (00,000 /,(.0,000 )(00,000, (00,000 %','00,000 %',7.0,000 %/,0.0,000

5-18

Intercompany Profit Transactions Inventories

-ontrolling share of net income

%',000,000 %',1*/,.00 %/,012,.00

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Chapter 5

5-19

Solution P5-5
Pan Co%!o%ation an Su&'i ia%( -onsolidation HorCpapers for the ear ended =ecember (1, 2012 )in thousands, 1d<ustments and Pan 100+ 2al Eliminations Income Statement 2ales Income from 2al -ost of sales =epreciation e>pense Ather e>penses 8et income % % *00 102 700 I 110 I 1&2 I 200 200 I 70I '0I % 100 f ' % % 700 a 120 d 102 b 12 a 120 c 20 7/2 I 1.0 I 2.* I 200

-onsolidated 2tatements %1,0*0

%etained &arnings 3etained earnings Pan 3etained earnings 2al 8et income =i#idends 3etained earnings =ecember (1

'00 % (*0 200 100 I 100 .0I d .0 e (*0

'00

200 100 I

/00

% 7(0

/00

'alance Sheet -ash 3ecei#ables net In#entories Ather assets 6and Euildings net EFuipment net In#estment in 2al

.7 &0 100 /0 .0 200 .00 /('

(/ '0 *0 &0 .0 1.0 700 c 20 d .2 e /07 g b 1/ 12

&1 1(( 1'* 1'0 100 (.0 &00

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5-20 Patents %1,*00 % *'/ e

Intercompany Profit Transactions Inventories 27 f ' 1* %1,&20

1ccounts pa able Ather liabilities -ommon stocC, %10 par 3etained earnings

1'0 (70 '00 /00

7/ &0 (00 7(0

1/

1&0 7(0

e (00

'00 /00 %1,&20

%1,*00

% *'/

Supporting computations Unrealized profit in beginning in#entor )%70,000 152, G %20,000 Unrealized profit in ending in#entor )%7*,000 157, G %12,000 2al0s income of %100,000 plus %20,000 profit in beginning in#entor , less %12,000 profit in ending in#entor , and less %',000 patent amortization eFuals %102,000 income from 2al.

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Chapter 5

5-21

Solution P5-6
Pa( Co%!o%ation an Su&'i ia%( -onsolidation HorCpapers for the ear ended =ecember (1, 2012 )in thousands, 1d<ustments and Pa 2ue /.+ Eliminations Income Statement 2ales Income from 2ue -ost of sales Aperating e>penses -onsolidated net income 8oncontrolling int.share -ontrolling share of 8I f % ./. % (00 /. % %1,200 20. .70 I 2&0 I 720 I *0I % % *00 a 2'0 d 20. b 70 a 2'0 c 20 /20 I (/0 I '.0 /.I ./.

-onsolidated 2tatements %1,/70

%etained &arnings 3etained earnings Pa 3etained earnings 2ue -ontrolling share of 8I =i#idends 3etained earnings =ecember (1

('. % 1*0 ./. (00 I (00 100 I d f /. 2. e 1*0

('.

./.

(00 I % '70

'70

% (*0

'alance Sheet -ash 1ccounts recei#able =i#idends recei#able In#entories 6and Euildings net EFuipment net In#estment in 2ue

1/0 ((0 (0 120 1'0 7'0 700 //0

'0 200 g h 1'0 100 200 2*0 c 20 d 1(0 e ''0 b (0 (0 70

2(0 .00

270 2'0 ''0 '*0

2011 Pearson Education, Inc. publishing as Prentice Hall

5-22 @ood!ill %2,770 %1,000

Intercompany Profit Transactions Inventories e 700 700 %2,&/0

1ccounts pa able =i#idends pa able Ather liabilities -ommon stocC, %10 par 3etained earnings

7.0 170 (10 &00 '70

% 200 70 *0 (00 (*0 %1,000

g h

(0 (0

'20 1.0 (&0

e (00

&00 '70

%2,770 8oncontrolling interest Danuar 1

e 220 f .0 2/0 %2,&/0

8oncontrolling interest =ecember (1

=educt

Supporting computations In#estment in 2ue at Danuar 1, 2011 Implied fair #alue of 2ue )%'00,000 5 /.+, EooC #alue of 2ue @ood!ill

%'00,000 %*00,000 700,000 %700,000

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Chapter 5

5-23

Solution P5-7 #reliminary computations In#estment cost Implied fair #alue of 2an 6ess$ EooC #alue of 2an Patents #atent amorti(ation )pstream sales Unrealized %2*0,000 Unrealized %720,000 %.00,000510 ears G %.0,000 per (1, 2011 in#entor G %*0,000 (1, 2012 in#entor G %120,000 ear of Pol of Pol %2,/00,000 %(,000,000 % 2,.00,000 .00,000

profit in =ecember 4 )%2*0,000 1.7, profit in =ecember 4 )%720,000 1.7,

Income from San 2an0s reported net income 6ess$ Patent amortization 6ess$ Unrealized profit in ending in#entor 1dd$ Unrealized profit in beginning in#entor 2an;s ad<usted and realized income

%1,000,000 ).0,000, )120,000, *0,000 % &10,000

Pol;s &0+ controlling share of 2an;s income 10+ noncontrolling interest share of 2an;s income Investment !alance Initial in#estment cost Increase in 2an0s net assets from =ecember (1, 2010 to =ecember (1, 2012 )%/00,000 &0+, Patent amortization for 2 ears )&0+,

% *1&,000 % &1,000 %2,/00,000 '(0,000 ) &0,000, )10*,000, %(,1(2,000

Unrealized profit in =ecember (1, 2012 in#entor In#estment balance =ecember (1, 2012

2011 Pearson Education, Inc. publishing as Prentice Hall

5-24

Intercompany Profit Transactions Inventories

Solution P5-7 )continued, Pol Co%!o%ation an Su&'i ia%( -onsolidation HorCpapers for the ear ended =ecember (1, 2012 )in thousands,
Pol Income Statement 2ales Income from 2an -ost of sales Ather e>penses -onsolidated net income 8oncontrolling int.share -ontrolling share of 8I h % 2,00. %1,000 &1 %*,1&0 *1& .,7'0I 1,.77I 7,000I '00I 2an &0+ %.,'00 1d<ustments and Eliminations a .,'00 d b f *1& 120 .0 a .,'00 c *0 (,&00I 2,1&7 I % 2,0&' &1I % 2,00. -onsolidated 2tatements % *,1&0

%etained &arnings 3etained earnings Pol 3etained earnings 2an -ontrolling share of 8I =i#idends 3etained earnings =ecember (1

% 1,200 % 2,00. 1,000I /00 1,000 .00I d h 7.0 .0 e /00

% 1,200

2,00.

1,000I % 2,20.

% 2,20.

%1,200

'alance Sheet -ash In#entor Ather current assets Plant assets net In#estment in 2an Patents

/.( 720 '00 (,000 (,1(2

.00 *00 200 (,000 c e /2 7.0 d ('& e 2,*(. f .0 b g 120 100

% 1,2.( 1,100 /00 ',000

700

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 5 %/,&0. %7,.00 % &,7.(

5-25

-urrent liabilities -apital stocC 3etained earnings

% 1,/00 7,000 2,20. % /,&0.

%1,(00 2,000 1,200 %7,.00

100

% 2,&00 7,000 2,20.

e 2,000

8oncontrolling interest Danuar

e h

(1. 71 (7* % &,7.(

8oncontrolling interest =ecember (1

=educt

2011 Pearson Education, Inc. publishing as Prentice Hall

5-26

Intercompany Profit Transactions Inventories

Solution P5-8 Pan Co%!o%ation an Su&'i ia%( -onsolidation HorCpapers for the ear ended =ecember (1, 2012 )in thousands,
100+ 2al % 700 1d<ustments and Eliminations a 120 d 10* 200 I 70I '0I % 100 % b 12 a 120 c 20 7/2 I 1.0 I 2.2 I 20' -onsolidated 2tatements %1,0*0

Pan Income Statement 2ales Income from 2al -ost of sales =epreciation e>pense Ather e>penses 8et income % % *00 10* 700 I 110 I 1&2 I 20'

%etained &arnings 3etained earnings Pan 3etained earnings 2al 8et income =i#idends 3etained earnings =ecember (1

'0' % 20' 100 I (*0 100 .0I d .0 e (*0

'0'

20' 100 I

/12

7(0

/12

'alance Sheet -ash 3ecei#ables net In#entories Ather assets 6and Euildings net EFuipment net

.7 &0 100 /0 .0 200 .00

(/ '0 *0 &0 .0 1.0 700 f b 1/ 12

&1 1(( 1'* 1'0 100 (.0 &00

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 5 In#estment in 2al @ood!ill %1,*12 % *'/ /7* c e 20 (0 d .* e /10 (0 %1,&(2

5-27

1ccounts pa able Ather liabilities -ommon stocC, %10 par 3etained earnings

1'0 (70 '00 /12

7/ &0 (00 7(0

1/

1&0 7(0

e (00

'00 /12 %1,&(2

%1,*12

*'/

Supporting computations Unrealized profit in beginning in#entor )%70,000 152, G %20,000 Unrealized profit in ending in#entor )%7*,000 157, G %12,000 2al0s income of %100,000 plus %20,000 profit in beginning in#entor less %12,000 profit in ending in#entor eFuals Income from 2al %10*,000.

2011 Pearson Education, Inc. publishing as Prentice Hall

5-28

Intercompany Profit Transactions Inventories

Solution P5-) #reliminary computations In#estment cost Implied fair #alue of 2an )%2,/00,000 5 &0+, 6ess$ EooC #alue of 2an @ood!ill )pstream sales Unrealized %2*0,000 Unrealized %720,000 %2,/00,000 %(,000,000 % 2,.00,000 .00,000

profit in =ecember 4 )%2*0,000 1.7, profit in =ecember 4 )%720,000 1.7,

(1, 201( in#entor G %*0,000 (1, 2017 in#entor G %120,000

of Poe of Poe

Income from San 2an0s reported net income 6ess$ Unrealized profit in ending in#entor 1dd$ Unrealized profit in beginning in#entor 2an;s ad<usted and realized income

%1,000,000 )120,000, *0,000 % &'0,000

Poe;s &0+ controlling interest share of 2an;s income 10+ noncontrolling interest share of 2an;s income Investment !alance Initial in#estment cost Increase in 2an0s net assets from =ecember (1, 2011 to =ecember (1, 2017 )%/00,000 &0+, Unrealized profit in =ecember (1, 2017 in#entor In#estment balance =ecember (1, 2017 )&0+,

% %

*'7,000 &',000

%2,/00,000 '(0,000 )10*,000, %(,222,000

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 5

5-29

Solution P5-1* )continued, Po" Co%!o%ation an Su&'i ia%( -onsolidation HorCpapers for the ear ended =ecember (1, 2017 )in thousands,
Poe Income Statement 2ales Income from 2an -ost of sales Ather e>penses -onsolidated net income 8oncontrolling int.share -ontrolling share of 8I f % 2,0.0 % 1,000 &' % *,1&0 *'7 .,7'0 I 1,.77 I 7,000 I '00 I 2an &0+ % .,'00 1d<ustments and Eliminations a .,'00 d b *'7 120 a .,'00 c *0 (,&00 I 2,177 I % 2,17' &'I % 2,0.0 -onsolidated 2tatements % *,1&0

%etained &arnings 3etained earnings Po 3etained earnings 2an -ontrolling share of 8I =i#idends 3etained earnings =ecember (1

% 1,2.0 % 2,0.0 1,000 I /00 1,000 .00 I d f 7.0 .0 e /00

% 1,2.0

2,0.0 1,000 I

% 2,(00

% 1,200

% 2,(00

'alance Sheet -ash In#entor Ather current assets Plant assets net In#estment in 2an @ood!ill

/.* 720 '00 (,000 (,222

.00 *00 200 (,000 c e /2 .00 d 717 e 2,**0 b g 120 100

% 1,2.* 1,100 /00 ',000

.00 % &,..*

% *,000

% 7,.00

2011 Pearson Education, Inc. publishing as Prentice Hall

5-30

Intercompany Profit Transactions Inventories

-urrent liabilities -apital stocC 3etained earnings

% 1,/00 7,000 2,(00 % *,000

% 1,(00 2,000 1,200 % 7,.00

100

% 2,&00 7,000 2,(00

e 2,000

8oncontrolling interest Danuar

e f

(20 7' (.* % &,..*

8oncontrolling interest =ecember (1

=educt

2011 Pearson Education, Inc. publishing as Prentice Hall

Chapter 5

5-31

2011 Pearson Education, Inc. publishing as Prentice Hall