Chap007

Chapter 07 - Intercompany Inventory Transactions
CHAPTER 7
INTERCOMPANY INVENTORY TRANSACTIONS
ANSWERS TO QUESTIONS
Q7-1 All inventory transfers between related companies must be eliminated to avoid an
overstatement of revenue and cost of goods sold in the consolidated income statement. In
addition, when unrealized profits exist at the end of the period, the eliminations are needed to
avoid overstating inventory and consolidated net income.
Q7-2 An inventory transfer at cost results in an overstatement of sales and cost of goods
sold. While net income is not affected, gross profit ratios and other financial statement
analysis may be substantially in error if appropriate eliminations are not made.
Q7-3 An upstream sale occurs when the parent purchases items from one or more
subsidiaries. A downstream sale occurs when the sale is made by the parent to one or more
subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits
so that the person preparing the consolidation workpaper will know whether to reduce
consolidated net income assigned to the controlling interest by the full amount of the
unrealized profit (downstream) or reduce consolidated income assigned to the controlling
and noncontrolling interests on a proportionate basis (upstream).
Q7-4 As in all cases, the total amount of the unrealized profit must be eliminated in
preparing the consolidated statements. When the profits are on the parent company's books,
consolidated net income and income assigned to the controlling interest are reduced by the
full amount of the unrealized profit.
Q7-5 Consolidated net income is reduced by the full amount of the unrealized profits. In the
upstream sale, the unrealized profits are apportioned between the parent company
shareholders and the noncontrolling shareholders. Thus, consolidated net income assigned
to the controlling and noncontrolling interests is reduced by a pro rata portion of the
unrealized profits.
Q7-6 Income assigned to the noncontrolling interest is affected when unrealized profits are
recorded on the subsidiary's books as a result of an upstream sale. A downstream sale
should have no effect on the income assigned to noncontrolling interest because the profits
are on the books of the parent.
Q7-7 The basic eliminating entry needed when the item is resold before the end of the
period is:
Sales
Cost of Goods Sold
XXXXXX
XXXXXX
The debit to sales is based on the intercorporate sale price. This means that only the
revenue recorded by the company ultimately selling to the nonaffiliate is to be included in the
consolidated income statement. Cost of goods sold is credited for the amount paid by the
purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded
by the initial owner to be reported in the consolidated statement.
7-1
Q7-8 The basic eliminating entry needed when one or more of the items are not resold
before the end of the period is:
Sales
Cost of Goods Sold
Inventory
XXXXXX
XXXXXX
XXXXXX
The debit to sales is for the full amount of the transfer price. Inventory is credited for the
unrealized profit at the end of the period and cost of goods sold is credited for the amount
charged to cost of goods sold by the company making the intercompany sale.
Q7-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an
external party. The amount reported as cost of goods sold is based on the amount paid for
the inventory when it was produced or purchased from an external party. If inventory has
been purchased by one company and sold to a related company, the cost of goods sold
recorded on the intercorporate sale must be eliminated.
Q7-10 No adjustment to retained earnings is needed if the intercorporate sales have been
made at cost or if all intercorporate sales have been resold to an external party in the same
accounting period. If not all of the intercorporate sales have been resold by the end of the
period, consolidated retained earnings must be reduced by the parent's proportionate share
of any unrealized profits.
Q7-11 A proportionate share of the realized retained earnings of the subsidiary are assigned
to the noncontrolling interest. Any unrealized profits on upstream sales are deducted
proportionately from the amount assigned to the noncontrolling interest and consolidated
retained earnings. Unrealized profits on downstream sales are deducted entirely from the
retained earnings assigned to the consolidated entity.
Q7-12 When inventory profits from a prior period intercompany transfer are realized in the
current period, the profit is added to consolidated net income and to the income assigned to
the shareholders of the company that made the intercompany sale. If the unrealized profits
arise from a downstream sale, income assigned to the controlling interest will increase by the
full amount of profit realized. When the profits arise from an upstream sale, income assigned
to the controlling and noncontrolling interests will be increased proportionately in the period
the profit is realized. Thus, knowledge of whether the profits resulted from an upstream or a
downstream sale is imperative in assigning consolidated net income to the appropriate
shareholder group.
Q7-13 Consolidated retained earnings must be reduced by the full amount of any unrealized
profit on the parent company books.
Q7-14 Consolidated retained earnings must be reduced by the parent's proportionate share
of the unrealized profit on the subsidiary's books.
Q7-15* Sales between subsidiaries are treated in the same manner as upstream sales.
Whenever the profits are on the books of one of the subsidiaries, the unrealized profits at the
end of the period are eliminated and consolidated net income and income assigned to the
controlling and noncontrolling interests is reduced.
7-2
Q7-16* When a company is acquired in a business combination the transactions occurring

before the combination generally are regarded as transactions with unrelated parties and no
adjustments or eliminations are needed. All transactions between the companies following
the combination must be fully eliminated.
SOLUTIONS TO CASES
C7-1 Measuring Cost of Goods Sold
a. While the rule covers only a part of the elimination needed, Charlie is correct in that the
cost of goods sold recorded by the selling company must be eliminated to avoid overstating
that caption in the consolidated income statement.
b. The rules will result in the proper consolidated totals if rule #1 is expanded to include a
debit to sales and a credit to ending inventory for the amount of profit recorded by the
company that sold to its affiliate.
c. The way in which the rule is stated makes it appear to be incorrect, but it is correct. The
rule is appropriate in that the cost of goods sold recorded by the purchasing affiliate is equal
to the cost of goods sold to the first owner plus the profit the first owner recorded on the sale.
Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold.
If an equal amount of sales is eliminated, the rule should result in proper consolidated
financial statement totals.
d. The employee would be forced to look at the books of the selling affiliate and determine
the difference between the intercorporate sale price and the price it paid to acquire or
produce the items. If the items sold to affiliates are routinely produced and costs do not
fluctuate greatly, it may be possible to use some form of gross profit ratio to estimate the
amount of unrealized profit.
C7-2 Inventory Values and Intercompany Transfers

MEMO
To:
From:
Re:
President
Water Products Corporation
, CPA
Inventory Sale and Purchase of New Inventory
If Water Products holds only a small percent of the ownership of Plumbers Products and
Growinkle Manufacturing, it should have no difficulty in reporting the desired results. This
would not be the case if the two companies are subsidiaries of Water Products.
If both Plumbers Products and Growinkel are subsidiaries of Water Products, both the sale of
inventory to Plumbers Supply and the purchase of inventory from Growinkle Manufacturing
must be eliminated. In addition, the unrealized profit on any unsold inventory involved in
these transfers must be eliminated in preparing the financial statements for the current
period.
7-3
C7-2 (continued)
The consolidated income statement should include the same amount of income on the
inventory sold to Plumbers Supply and resold during the year as would have been recorded if
Water Products had sold the inventory directly to the purchaser. Any income recorded by
Water Products on inventory not resold by Plumbers Supply must be eliminated.
Similarly, the consolidated income statement should include the same amount of income on
the inventory purchased by Water Products and resold during the year as would have been
recorded if Growinkle Manufacturing had sold the inventory directly to the purchaser. Any
income recorded by Growinkle Manufacturing on inventory not resold by Water Products
must be eliminated.
Consolidated net income may increase if Plumbers Supply is able to sell the inventory it
purchased from Water Products at a higher price than would have been received by Water
Products or if it is able to sell a larger number of units. The same can be said for the
inventory purchased by Water Products from Growinkle Manufacturing. It is important to
recognize that the transfer of inventory between Water Products and its subsidiaries does not
in itself generate income for the consolidated entity.
An additional level of complexity may arise in this situation if Water Products uses the LIFO
inventory method. It might, for example, be forced to carry over its LIFO cost basis on the old
inventory sold to Plumbers Supply to the new inventory purchased from Growinkle
Manufacturing since it was replaced within the accounting period.
Primary citation:
ARB 51, Par. 6
7-4
C7-3 Intercorporate Inventory Transfers

MEMO
To:
Treasurer
Evert Corporation
From:
Re:
, CPA
Inventory Sale to Parent
This memo is prepared in response to your request for information on the appropriate
treatment of intercompany inventory transfers in consolidated financial statements. The
specific eliminating entries required in this case depend on the valuation assigned to the
inventory at December 31, 20X2.
Frankle Company sold inventory with a carrying value of $240,000 to Evert for $180,000 on
December 20, 20X2. Since the exchange price was well below Frankles cost, consideration
should be given to whether the inventory should be reported at $180,000 or $240,000 in the
consolidated statements at December 31, 20X2, under the lower-of-cost-or-market rule.
While the value of the inventory apparently had fallen below Frankles carrying value, the
accounting standards indicate no loss should be recognized when the evidence indicates
that cost will be recovered with an approximately normal profit margin upon sale in the
ordinary course of business. [ARB 43, Chapter 4, Par. 9]
We are told the management of Frankle considered the drop in prices to be temporary and
Evert was able to sell the inventory for $70,000 more than the original amount paid by
Frankle. It therefore seems appropriate for the consolidated entity to report the inventory at
Frankles cost of $240,000 at December 31, 20X2.
In preparing the consolidated statements at December 31, 20X2 and 20X3, the effects of the
intercompany transfer should be eliminated. [ARB 51, Par. 6]
The following eliminating entry is required at December 31, 20X2:
E(1) Sales
Inventory
Cost of Goods Sold
180,000
60,000
240,000
The above entry will increase the carrying value of the inventory to $240,000. Eliminating
sales of $180,000 and cost of goods sold of $240,000 will increase consolidated net income
by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x .10).
These changes will result in an increase in consolidated retained earnings and the amount
assigned to the noncontrolling shareholders in the consolidated balance sheet by $54,000
and $6,000, respectively.
7-5
C7-3 (continued)
The following eliminating entry is required at December 31, 20X3:
E(2) Cost of Goods Sold
Retained Earnings
Noncontrolling interest
60,000
54,000
6,000
The above entry will reduce consolidated net income by $60,000 and income assigned to the
noncontrolling interest by $6,000 ($60,000 x .10). The credits to retained earnings and
noncontrolling interest are needed to bring the beginning balances into agreement with those
reported at December 31, 20X2.
No eliminations are required for balances reported at December 31, 20X3, because the
inventory has been sold to a nonaffiliate prior to year-end.
Primary citations:
ARB 43, CH 4, Par. 9
ARB 51, Par. 6
C7-4 Unrealized Inventory Profits

a. When the amount of unrealized inventory profits on the books of the subsidiary at the
beginning of the period is greater than the amount at the end of the period, the income
assigned to the noncontrolling interest for the period will exceed a pro rata portion of the
reported net income of the subsidiary.
b. The subsidiary apparently had less unrealized inventory profit at the end of the period
than it did at the start of the period. In addition, the parent must have had more unrealized
profit on its books at the end of the period than it did at the beginning. The negative effect of
the latter apparently offset the positive effect of the reduction in unrealized profits by the
subsidiary.
c. The most likely reason is that a substantial amount of the parent company sales was
made to its subsidiaries and the cost of goods sold on those items was eliminated in
preparing the consolidated statements.
d. A loss was recorded by the seller on an intercompany sale of inventory to an affiliate and
the purchaser continues to hold the inventory.
7-6
C7-5 Eliminating Inventory Transfers

a. If no intercompany sales are eliminated, the income statement may include overstated
sales revenue and cost of goods sold. The net impact on income will depend upon whether
there were more unrealized profits at the beginning or end of the year. If Ready Building does
not hold total ownership of the subsidiaries, the amount of income assigned to noncontrolling
shareholders is likely to be incorrect as well.
Inventory, current assets and total assets, retained earnings, and stockholders' equity are
likely to be overstated if inventories are sold to affiliates at a profit. If the companies pay
income taxes on their individual earnings, the amount of income tax expense also will be
overstated in the period in which unrealized profits are reported and understated in the
period in which the profits are realized.
b. Because profit margins vary considerably, the amount of unrealized profit may vary
considerably if uneven amounts of product are purchased by affiliates from period to period.
Ready Building needs to establish a formal system to monitor intercompany sales. Perhaps
the best alternative would be to establish a separate series of accounts to be used solely for
intercompany transfers. Alternatively, it may be possible to use unique shipping containers for
intercompany sales or to specifically mark the containers in some way to identify the
intercompany shipments at the time of receipt. The purchaser might then use a different type
of inventory tag or mark these units in some way when the product is received and placed in
inventory. Inventory count teams could then easily identify the product when inventories are
taken.
c. A number of factors might be considered. The most important inventory system is the one
used by the company making the intercompany purchase. When intercompany inventory
purchases are bunched at the end of the year, the amount of unrealized profit included in
ending inventory may be quite different under FIFO versus LIFO. If intercompany purchases
are placed in a LIFO inventory base, inventories may be misstated for a period of years
before the inventory is resold. Eliminating entries must be made each of the years until
resale to avoid a misstatement of assets and equities. In those cases where the
intercompany purchases are in high volume and the inventory turns over very quickly, a small
amount of inventory left at the end of the period may be immaterial and of little concern.
Typically, a parent will align inventory costing methods subsequent to a subsidiary acquisition
to avoid problems caused by differences in accounting for the same items or types of items.
7-7
C7-5 (continued)
d. It may be necessary to start by looking at intercorporate cash receipts and disbursements
to determine the extent of intercorporate sales. One or more months might be selected and
all vouchers examined to establish the level of intercorporate sales and the profit margins
recorded on the sales. For those products sold throughout the year, it may be possible to
estimate for the year as a whole based on an examination of several months. Once total
intercompany sales and profit margins have been estimated, the amount of unrealized profit
at year end should be estimated. One approach would be to take a physical inventory of the
specific product types which have been identified and attempt to trace back using the product
identification numbers or shipping numbers to determine what portion of the inventory on
hand was purchased from affiliates.
C7-6 Intercompany Profits and Transfers of Inventory

a. The intercompany transfers of Xerox (www.xerox.com) between segments are apparently
relatively insignificant because they are not reported in the notes to the consolidated financial
statements relating to segment reporting. For consolidation purposes, all significant
intercompany accounts and transactions are eliminated.
b. Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated market
prices. The amount of intercompany transfers is large. In the fiscal year ending December
31, 2006, Exxon Mobil reported eliminations of $368 billion of intersegment transfers, which
does not include intercompany transfers within segments. This amount represents nearly 50
percent of total reported segment sales. For consolidation purposes, Exxon Mobil eliminates
the effects of intercompany transactions.
c. Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles,
parts, and components manufactured by the company and its subsidiaries, with a smaller
amount of financial and other services included. The amount of intercompany transfers is
significant, totaling almost $4 billion, but is relatively small in relation to sales to unaffiliated
customers. The amount has been decreasing in recent years. The effects of intercompany
transfers are eliminated in consolidation.
7-8
SOLUTIONS TO EXERCISES
E7-1 Multiple-Choice Questions on Intercompany Inventory Transfers
[AICPA Adapted]
1.
2.
3.
4.
5.
6.
Net assets reported

Profit on intercompany sale
Proportion of inventory unsold at year end
($60,000 / $240,000)
Unrealized profit at year end
Amount reported in consolidated statements
Inventory reported by Banks ($175,000 + $60,000)
Inventory reported by Lamm
Total inventory reported
[$50,000 x ($60,000 / $200,000)]
Amount reported in consolidated statements
7-9
$48,000
x
.25
$320,000
(12,000)
$308,000
$235,000
250,000
$485,000
(15,000)
$470,000
E7-2 Multiple-Choice Questions on the Effects of Inventory Transfers

[AICPA Adapted]
1.
Cost of goods sold reported by Park

Cost of goods sold reported by Small
Total cost of goods sold reported
Cost of goods sold reported by Park on
sale to Small ($500,000 x .40)
Reduction of cost of goods sold reported by
Small for profit on intercompany sale
[($500,000 x 4 / 5) x .60]
Cost of goods sold for consolidated entity
$ 800,000
700,000
$1,500,000
(200,000)
(240,000)
$1,060,000
Note:
Answer b in the actual CPA examination question was

$1,100,000, requiring candidates to select the closest
answer.
2.
$32,000
($200,000 + $140,000) $308,000
3.
$6,000
($26,000 + $19,000) $39,000
4.
$9,000
Inventory held by Spin

($32,000 x .375)
Unrealized profit on sale
[($30,000 + $25,000)
$52,000]
Carrying cost of inventory for
Power
5.
.20 = $14,000 / [(Stockholders Equity $50,000) +

(Patent $20,000)]
6.
14 years = ($28,000 / [(28,000 - $20,000) / 4

years]
$12,000
(3,000)
$ 9,000
E7-3 Multiple Choice Consolidated Income Statement

c
1.
2.
3.
Total income ($86,000 - $47,000)

Income assigned to noncontrolling
interest [.40($86,000 - $60,000)]
Consolidated net income assigned
to controlling interest
7-10
$39,000
(10,400)
$28,600
E7-4 Multiple-Choice Questions Consolidated Balances

1.
2.
Amount paid by Lorn Corporation

Unrealized profit
Actual cost
Portion sold
Cost of goods sold
$120,000
(45,000)
$ 75,000
x
.80
$ 60,000
3.
Consolidated sales
Cost of goods sold
Consolidated net income
Income to Dressers noncontrolling
interest:
Sales
Reported cost of sales
Report income
Portion realized
Realized net income
Portion to Noncontrolling
Interest
Income to noncontrolling
Interest
Income to controlling interest
$140,000
(60,000)
$ 80,000
4.
$120,000
(75,000)
$ 45,000
x
.80
$ 36,000
x
.30
(10,800)
$ 69,200
Inventory reported by Lorn

Unrealized profit ($45,000 x .20)
Ending inventory reported
$ 24,000
(9,000)
$ 15,000
E7-5 Multiple-Choice Questions Consolidated Income Statement

1.
$20,000 = $30,000 x [($48,000 - $16,000) / $48,000]
2.
Sales reported by Movie Productions Inc.

Cost of goods sold ($30,000 x 2/3)
3.
$7,000 = [($67,000 - $32,000) x .20]
7-11
$67,000
(20,000)
$47,000
E7-6 Realized Profit on Intercompany Sale

a.
b.
c.
Journal entries recorded by Nordway Corporation:

(1)
Inventory
Cash (Accounts Payable)
960,000
(2)
Cash (Accounts Receivable)

Sales
750,000
(3)
Cost of Goods Sold

Inventory
600,000
960,000
750,000
600,000
Journal entries recorded by Olman Company:

(1)
Inventory
750,000
(2)

Sales
1,125,000
(3)
Cost of Goods Sold

Inventory
750,000
750,000
1,125,000
750,000
Eliminating entry:
E(1)
Sales
Cost of Goods Sold
750,000
7-12
750,000
E7-7 Sale of Inventory to Subsidiary

a.
b.
c.
Journal entries recorded by Nordway Corporation:

(1)
Inventory
960,000
(2)

Sales
750,000
(3)
Cost of Goods Sold

Inventory
600,000
960,000
750,000
600,000
Journal entries recorded by Olman Company:

(1)
Inventory
750,000
(2)

Sales
810,000
(3)
Cost of Goods Sold

Inventory
540,000
750,000
810,000
540,000
Eliminating entry:
E(1)
Sales
Cost of Goods Sold
Inventory
750,000
7-13
708,000
42,000
E7-8 Inventory Transfer between Parent and Subsidiary

a.
Karlow Corporation reported cost of goods sold of $820,000 ($82 x 10,000 desks)
and Draw Company reported cost of goods sold of $658,000 ($94 x 7,000 desks).
b.
Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks).
c.
Eliminating entry:
E(1)
d.
940,000
904,000
36,000
Eliminating entry:
E(1)
e.
Sales
Cost of Goods Sold
Inventory
Retained Earnings, January 1

Cost of Goods Sold
36,000
36,000
Eliminating entry:
E(1)

Noncontrolling Interest
Cost of Goods Sold
21,600
14,400
7-14
36,000
E7-9 Income Statement Effects of Unrealized Profit

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

Profit per bag [$9.00 - ($9.00 / 1.5)]
Cost per bag
Bags sold by Holiday Bakery (100,000 - 20,000)
Consolidated cost of goods sold
E(1)
Sales
Inventory ($3.00 x 20,000 bags)
Cost of Goods Sold
9.00
(3.00)
$
6.00
x 80,000
$480,000
900,000
60,000
840,000
Required Adjustment to Cost of Goods Sold:

Cost of goods sold Farmco ($900,000 / 1.5)
Cost of goods sold Holiday ($9.00 x 80,000 units)
$ 600,000
720,000
$1,320,000
(480,000)
$ 840,000
Consolidated cost of goods sold ($6.00 x 80,000 units)

Required adjustment
c.
Operating income of Holiday Bakery

Net income of Farmco Products
$400,000
150,000
$550,000
(60,000)
$490,000
Less: Unrealized inventory profits

Less: Income assigned to noncontrolling interest
($150,000 - $60,000 unrealized profit) x .40
Income assigned to controlling interest
(36,000)
$454,000
Alternate computation:
Unrealized profits ($3.00 x 20,000 units)
Realized net income
Ownership held by Holiday Bakery
7-15
$150,000
(60,000)
$ 90,000
x
.60
$400,000
54,000
$454,000
E7-10 Prior-Period Unrealized Inventory Profit

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

Bags sold
Cost of goods sold from inventory held, January 1, 20X9
b.
Assuming the basic equity method is used by Holiday Bakery in

accounting for its investment in Farmco Products, the following
eliminating entry is needed:
E(1)
c.

Cost of Goods Sold
$60,000 = 20,000 bags x $3.00
$
6.00
x 20,000
$120,000
36,000
24,000

60,000
$300,000
250,000
$550,000
60,000
$610,000
Add: Inventory profits realized in 20X9

Less: Income assigned to noncontrolling shareholders
($250,000 + $60,000) x .40
(124,000)
$486,000
Alternate computation:
Inventory profits realized in 20X9
Realized net income
Ownership held by Holiday Bakery
$250,000
60,000
$310,000
x
.60
7-16
$300,000
186,000
$486,000
E7-11 Computation of Consolidated Income Statement Data

a.
Reported sales of Prem Company

Reported sales of Cooper Company
Intercompany sales by Prem Company in 20X5
Intercompany sales by Cooper Company in 20X5
Sales reported on consolidated income statement
b.
$ 30,000
80,000
Cost of goods sold reported by Prem Company

Cost of goods sold reported by Cooper Company
$400,000
200,000
$600,000
(110,000)
$490,000
$250,000
120,000
$370,000
(100,500)
$269,500
Adjustment due to intercompany sales

Adjustment to cost of goods sold:
c.
d.
CGS charged by Prem on sale to Cooper

CGS charged by Cooper ($30,000 - $6,000)
Total charged to CGS
CGS for consolidated entity
$20,000 x ($24,000 / $30,000)
Required adjustment to CGS
$ 20,000
24,000
$ 44,000
CGS charged by Cooper on sale to Prem

CGS charged by Prem ($80,000 - $20,000)
Total charged to CGS
CGS for consolidated entity
$50,000 x ($60,000 / $80,000)
Required adjustment to CGS
Total adjustment required
$ 50,000
60,000
$110,000
(16,000)
(37,500)
Reported net income of Cooper Company

Unrealized profit on sale to Prem Company
$30,000 x ($20,000 / $80,000)
Realized net income
Noncontrolling interest's share
Income assigned to noncontrolling interest
Reported net income of Pem Company
Less: Income from subsidiary
Net income of Cooper Company
Operating income
Less: Unrealized inventory profits of Prem
Company [$10,000 x ($6,000 / $30,000)]
Unrealized inventory profits of Copper
Company [$30,000 x ($20,000 / $80,000)]
Income assigned to noncontrolling
interest
7-17
$ 28,000
72,500
$100,500
$ 45,000
(7,500)
$ 37,500
x
.40
$ 15,000
$107,000
(27,000)
$ 80,000
45,000
$125,000
$ 2,000
7,500
15,000
(24,500)
$ 98,500
E7-12 Sale of Inventory at a Loss

a.
Entries recorded by Trent Company

Inventory
Cash
Purchase inventory.
400,000
Cash
Sales
Sale of inventory to Gord Corporation.
300,000
Cost of Goods Sold

Inventory
Record cost of goods sold.
400,000
400,000
300,000
400,000
Entries recorded by Gord Corporation

Inventory
Cash
Purchase of inventory from Trent.
300,000
Cash
Sales
Sale of inventory to nonaffiliates.
360,000
Cost of Goods Sold

Inventory
Record cost of goods sold:
$180,000 = $300,000 x .60
180,000
b.
Consolidated cost of goods sold for 20X8 should be reported

as $240,000 ($400,000 x .60).
c.
Operating income reported by Gord

Net income reported by Trent
Unrealized loss on intercorporate sale
($400,000 - $300,000) x .40
Income to assigned to noncontrolling interest
($120,000 x .25)
7-18
$ 80,000
40,000
300,000
360,000
180,000
$230,000
120,000
$350,000
(30,000)
$320,000
E7-12 (continued)
d.
Eliminating entry, December 31, 20X8:

E(1)
Sales
Inventory
Cost of Goods Sold
300,000
40,000
340,000
Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Trent
Cost of goods sold recorded by Gord
Total recorded
Required elimination
7-19
$400,000
180,000
$580,000
(240,000)
$340,000
E7-13 Intercompany Sales

a.
Consolidated net income for 20X4:

Operating income of Hollow Corporation
Net income of Surg Corporation
$160,000
90,000
$250,000
(15,000)
$235,000
Less: Unrealized profit Surg Corporation

b.
c.
Inventory balance, December 31, 20X5:

Inventory reported by Hollow Corporation
Unrealized profit on books of Surg
Corporation
($135,000 - $90,000) x ($30,000/$135,000)
$ 30,000
Inventory reported by Surg Corporation

Unrealized profit on books of Hollow
Corporation
($280,000 - $140,000) x ($110,000/$280,000)
Inventory, December 31, 20X5
$110,000
(10,000)
55,000
$75,000
Consolidated cost of goods sold for 20X5:

CGS on sale of inventory on hand January 1, 20X5
$45,000 x ($120,000 / $180,000)
CGS on items purchased from Surg in 20X5
($135,000 - $30,000) x ($90,000 / $135,000)
CGS on items purchased from Hollow in 20X5
($280,000 - $110,000) x ($140,000 / $280,000)
Total cost of goods sold
d.
(55,000)
$20,000
$ 30,000
70,000
85,000
$185,000
Income assigned to controlling interest:

Operating income of Hollow Corporation
Net income of Surg Corporation
Add: Inventory profit of prior year realized in 20X5
Less: Unrealized inventory profit Surg Corporation
Unrealized inventory profit Hollow Corporation
Income to noncontrolling interest
($85,000 + $15,000 - $10,000) x .30
7-20
$220,000
85,000
$305,000
15,000
(10,000)
(55,000)
(27,000)
$228,000
E7-14 Consolidated Balance Sheet Workpaper

a.
Eliminating entries:
E(1)
E(2)
E(3)
Common Stock Hingle Company

Retained Earnings
Investment in Hingle Company Stock
Eliminate investment balance.
150,000
250,000
Retained Earnings
Inventory
Eliminate unrealized inventory profit
of Hingle Company.
28,000
12,000
Retained Earnings
Inventory
Eliminate unrealized inventory profit
of Doorst Corporation.
10,000
b.
280,000
120,000
40,000
10,000
Doorst Corporation and Hingle Company

Consolidated Balance Sheet Workpaper
December 31, 20X8
Item
Cash and Receivables

Inventory
Buildings and Equipment
(net)
Investment in Hingle
Company Stock
Debits
Accounts Payable
Common Stock
Retained Earnings
Credits
Doorst
Corp.
Hingle
Co.
98,000
150,000
40,000
100,000
310,000
280,000
280,000
838,000
420,000
70,000
200,000
568,000
20,000
150,000
250,000
838,000
420,000
7-21
Eliminations
Debit
Credit
(2) 40,000
(3) 10,000
Consolidated
138,000
200,000
590,000
(1)280,000
(1)150,000
(1)250,000
(2) 28,000
(3) 10,000
(2) 12,000
450,000
928,000
90,000
200,000
(1)120,000
450,000
530,000
108,000
928,000
E7-15* Multiple Transfers between Affiliates

a.
Entries recorded by Klon Corporation

Cash
Sales
Sale of inventory to Brant Company.
150,000
Cost of Goods Sold

Inventory
100,000
150,000
100,000
Entries recorded by Brant Company

Inventory
Cash
Purchase of inventory from Klon.
150,000
Cash
Sales
Sale of inventory to Torkel Company.
150,000
Cost of Goods Sold

Inventory
150,000
150,000
150,000
150,000
Entries recorded by Torkel Company

Inventory
Cash
Purchase of inventory from Brant.
150,000
Cash
Sales
Sale of inventory to nonaffiliates.
120,000
Cost of Goods Sold

Inventory
90,000
b.
Cost of goods sold for 20X8 should be reported as $60,000

[$90,000 x ($100,000 / $150,000)].
c.
Inventory at December 31, 20X8, should be reported at $40,000

[$60,000 x ($100,000 / $150,000)].
7-22
150,000
120,000
90,000
E7-15* (continued)
d.
Eliminating entry for inventory:

E(1)
Sales
Cost of Goods Sold
Inventory
300,000
280,000
20,000
Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Klon
Cost of goods sold recorded by Brant
Cost of goods sold recorded by Torkel
Total recorded
$100,000
150,000
90,000
$340,000
(60,000)
$280,000
Computation of reduction to carrying value of inventory

Inventory reported by Torkel
Inventory balance to be reported
7-23
$60,000
(40,000)
$20,000
E7-16 Inventory Sales

a.
Journal entries recorded by Spice Company:

(1)
Inventory
Record purchases from nonaffiliate.
150,000
(2)

Sales
Record sale to Herb Corporation.
60,000
(3)
Cost of Goods Sold

Inventory
Record cost of goods sold to Herb Corporation.
40,000
150,000
60,000
40,000
Journal entries recorded by Herb Corporation:
b.
(1)
Inventory
Record purchases from Spice Company.
60,000
(2)

Sales
Record sale of items to nonaffiliates.
90,000
(3)
Cost of Goods Sold

Inventory
45,000
60,000
90,000
45,000
Eliminating entry:
E(1)
Sales
Cost of Goods Sold
Inventory
Eliminate intercompany sale of inventory.
7-24
60,000
55,000
5,000
E7-17 Prior-Period Inventory Profits

a.
E(1)
E(2)
b.

Cost of goods sold
Eliminate beginning inventory profit:
$10,000 = ($180,000 - $120,000)
x ($30,000 / $180,000)
Sales
Cost of Goods Sold
Inventory
Reported net income of Level Brothers

Unrealized profit, December 31, 20X8
Realized net income
Noncontrolling interest's share of ownership
7-25
7,500
2,500
240,000
20X8
$350,000
(10,000)
$340,000
x
.25
$ 85,000
10,000
190,000
50,000
20X9
$420,000
10,000
(50,000)
$380,000
x
.25
$ 95,000
SOLUTIONS TO PROBLEMS
P7-18 Consolidated Income Statement Data
a.
$180,000 = $550,000 + $450,000 - $820,000
b.
January 1, 20X2: $25,000 = $75,000 - $50,000

December 31, 20X2: $15,000 = $180,000 + $210,000 - $375,000
c.
E(1)
E(2)
d.

Cost of Goods Sold
Eliminate beginning inventory profit.
15,000
10,000
Sales
Cost of Goods Sold
Inventory
180,000
Reported net income of Bitner Company

Prior-period profit realized in 20X2
Unrealized profit on 20X2 sales
Realized income
Proportion held by noncontrolling interest
25,000
165,000
15,000
$ 90,000
25,000
(15,000)
$100,000
x
.40
$ 40,000
P7-19 Unrealized Profit on Upstream Sales
Operating income reported by Pacific

Net income reported by Carroll
Inventory profit, December 31, 20X2
$70,000 - ($70,000 / 1.25)
$105,000 - ($105,000 / 1.25)
$120,000 - ($120,000 / 1.25)
Income to noncontrolling interest:
($100,000 - $14,000) x .40
($90,000 + $14,000 - $21,000) x .40
($160,000 + $21,000 - $24,000) x .40
20X2
20X3
20X4
$150,000
100,000
$250,000
$240,000
90,000
$330,000
$300,000
160,000
$460,000
(14,000)
14,000
$236,000
(34,400)
$201,600
7-26
(21,000)
21,000
$323,000
(24,000)
$457,000
(33,200)
$289,800
(62,800)
$394,200
P7-20 Net Income of Consolidated Entity

Operating income of Master for 20X5
Net income of Crown for 20X5
$118,000
65,000
$183,000
25,000
40,000
(14,000)
(55,000)
Add:
Prior year profits realized by Master

Prior year profits realized by Crown
Less:
Unrealized profits for 20X5 by Master
Unrealized profits for 20X5 by Crown
Amortization of differential
($45,000 / 15 years)
Consolidated net income, 20X5
Less:
($65,000 + $40,000 - $55,000 - $3,000) x .30
(3,000)
$176,000
(14,100)
$161,900
P7-21 Correction of Eliminating Entries

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

Intercompany transfer price
Cost of inventory sold ($140,000 / 1.40)
Total Profit
Proportion of intercompany sale held by
Bolger at year end
$140,000
(100,000)
40,000
.30
Proportion of intercompany purchases resold

by Bolger during 20X5 (1.00 - .30)
b.
$ 12,000
.70
Eliminating entries, December 31, 20X5:

E(1)
Accounts Payable
Accounts Receivable
Eliminate intercompany
receivable/payable.
E(2)
Sales
Inventory
Cost of Goods Sold
7-27
80,000
140,000
80,000
12,000
128,000
P7-22 Incomplete Data

a.
Increase in fair value of buildings and equipment:

Consolidated total
Balance reported by Lever
Balance reported by Tropic
Increase in value
b.
$ 680,000
(400,000)
(240,000)
$ 40,000
Accumulated depreciation for consolidated entity:

Accumulated depreciation reported by Lever
Accumulated depreciation reported by Tropic
Cumulative write-off of differential
($5,000 x 6 years)
Accumulated depreciation for consolidated entity
c.
$ 60,000
30,000
$ 90,000
40,000
$130,000
x
.75
$ 97,500
Investment in Tropic Company stock reported at December 31, 20X6:

Tropic's common stock outstanding December 31, 20X6
Tropic's retained earnings reported December 31, 20X6
Total book value
Proportion of ownership held by Lever
Lever's share of net book value
Unamortized differential ($5,000 x 2 years) x .75
Investment in Tropic Company stock
e.
30,000
$320,000
Amount paid by Lever to acquire ownership in Tropic:

Common stock outstanding
Retained earnings at acquisition
Total book value at acquisition
Increase in value of buildings and equipment
Fair value of net assets acquired
Proportion of ownership acquired
Amount paid by Lever
d.
$180,000
110,000
$ 60,000
112,000
$172,000
x
.75
$129,000
7,500
$136,500
Intercorporate sales of inventory in 20X6:

Sales reported by Lever
Sales reported by Tropic
Total sales
Sales reported in consolidated income statement
Intercompany sales during 20X6
7-28
$420,000
260,000
$680,000
(650,000)
$ 30,000
P7-22 (continued)
f.
Unrealized inventory profit, December 31, 20X6:

Inventory reported by Lever
Inventory reported by Tropic
Total inventory
Inventory reported in consolidated balance sheet
Unrealized inventory profit, December 31, 20X6
g.
Eliminating entry to remove the effects of intercompany inventory

sales during 20X6:
E(1)
h.
$125,000
90,000
$215,000
(211,000)
$ 4,000
Sales
Cost of Goods Sold
Inventory
30,000
Unrealized inventory profit at January 1, 20X6:

Cost of goods sold reported by Lever
Cost of goods sold reported by Tropic
Reduction of cost of goods sold for intercompany
sales during 20X6
Adjusted cost of goods sold
Cost of goods sold reported in consolidated
income statement
Additional adjustment to cost of goods sold
due to unrealized profit in beginning inventory
i.
26,000
4,000
$310,000
170,000
(26,000)
$454,000
(445,000)
$ 9,000
Accounts receivable reported by Lever at December 31, 20X6:

Accounts receivable reported for consolidated entity
Accounts receivable reported by Tropic
Difference
Adjustment for intercompany receivable/payable:
Accounts payable reported by Lever
Accounts payable reported by Tropic
Total reported accounts payable
Accounts payable reported for consolidated
entity
Adjustment for intercompany receivable/payable
Accounts receivable reported by Lever
7-29
$145,000
(55,000)
$ 90,000
$ 86,000
20,000
$106,000
(89,000)
17,000
$107,000
P7-23 Eliminations for Upstream Sales

a.

E(1)
Income from Subsidiary

Investment in Superior Filter Stock
Eliminate income from subsidiary.
E(2)
Income to Noncontrolling Interest

Assign income to noncontrolling interest.
E(3)
Common Stock Superior Filter Company

Investment in Superior Filter Stock
Eliminate beginning investment balance.
E(4)
E(5)

Cost of Goods Sold
Eliminate beginning inventory profit.
32,000
9,000
90,000
220,000
16,000
4,000
32,000
9,000
248,000
62,000
20,000
Sales
150,000
Cost of Goods Sold
135,000
Inventory
15,000
Eliminate unrealized inventory profit:
$15,000
= $ 45,000 - [$45,000 x ($100,000 / $150,000)]
$135,000 = $100,000 CGS recorded by Superior
105,000 CGS recorded by Clean Air
$205,000
(70,000) Consolidated amount:
$100,000 x ($105,000 / $150,000)
$135,000 Required elimination
7-30
P7-23 (continued)
b.
Computation of consolidated net income and income assigned

to controlling interest:
Operating income reported by Clean Air Products
($250,000 - $175,000 - $30,000)
Net income of Superior Filter
($200,000 - $140,000 - $20,000)
Inventory profit realized from 20X7
Unrealized inventory profit for 20X8
($40,000 + $20,000 - $15,000) x .20
c.
$ 45,000
40,000
$ 85,000
20,000
(15,000)
$ 90,000
(9,000)
$ 81,000
Noncontrolling interest, December 31, 20X8:

Common stock
Retained earnings ($220,000 + $40,000)
Less: Unrealized inventory profit
Proportion of stock held by noncontrolling
interest
Noncontrolling interest
7-31
$ 90,000
260,000
(15,000)
$335,000
x
.20
$ 67,000
P7-24 Multiple Inventory Transfers

a.
b.
c.

Operating income of Ajax Corporation
($35,000 - $15,000) x ($7,000 / $35,000)
$80,000
Net income of Beta Corporation

Profit realized from 20X7
($30,000 - $24,000) x ($10,000 / $30,000)
($72,000 - $63,000) x ($12,000 / $72,000)
$37,500
Net income of Cole Corporation

Profit realized from 20X7
($72,000 - $60,000) x ($18,000 / $72,000)
($45,000 - $27,000) x ($15,000 / $45,000)
$20,000
(4,000)
$ 76,000
2,000
(1,500)
38,000
3,000
(6,000)
17,000
$131,000
Inventory balance, December 31, 20X8:

Balance per Beta Corporation
Less: Unrealized profit
$ 7,000
(4,000)
$ 3,000
Balance per Cole Corporation

$12,000
(1,500)
10,500
Balance per Ajax Corporation

Inventory balance per consolidated statement
$15,000
(6,000)
9,000
$22,500
Income assigned to noncontrolling interest in 20X8:

Realized income of Beta Corporation
Proportion of stock held by
noncontrolling interest
$38,000
Realized income of Cole Corporation

$17,000
7-32
.30
.10
$11,400
1,700
$13,100
P7-25
a.
Consolidation with Inventory Transfers and Other Comprehensive Income
Balance in investment account at December 31, 20X5:

Proportionate share of Tall's net assets,
January 1 ($1,400,000 x .90)
Proportionate share of 20X5 net income
($90,000 x .90)
Proportionate share of other comprehensive
income for 20X5 ($20,000 x .90)
Proportionate share of dividends received
($60,000 x .90)
Balance in investment account December 31, 20X5
b.
18,000
(54,000)
$1,305,000
$90,000
x
.90
$81,000
Income to noncontrolling interests for 20X5:

Net income reported by Tall
20X4 inventory profits realized in 20X5
($15,000 x .40)
20X5 unrealized inventory profits
$30,000 - [$30,000 x ($48,000 / $90,000)]
Realized net income
Proportion of ownership held by noncontrolling
interest
d.
81,000
Investment income for 20X5:

Net income reported by Tall
Proportion of ownership held by Priority
Investment income for 20X5
c.
$1,260,000
$90,000
6,000
(14,000)
$82,000
x
.10
$ 8,200
Balance assigned to noncontrolling interest in consolidated balance

sheet:
Net assets reported by Tall, January 1
Net income for 20X5
Dividends paid in 20X5
Net assets reported, December 31, 20X5
Unrealized inventory profits at
December 31, 20X5
Other comprehensive income in 20X5
Adjusted net assets, December 31, 20X5
interest
Net assets assigned to noncontrolling interest
7-33
$1,400,000
90,000
(60,000)
$1,430,000
(14,000)
20,000
$1,436,000
x
.10
$ 143,600
P7-25 (continued)
e.
f.
Inventory reported in consolidated balance sheet:

Inventory held by Priority
$120,000
(14,000)
Inventory held by Tall

$6,000 - [$6,000 x ($24,000 / $36,000)]
Inventory
$100,000
(2,000)
98,000
$204,000

Operating income of Priority
Net income of Tall
Total unadjusted income
20X4 inventory profits realized in 20X5
($6,000 + $8,000)
Unrealized inventory profits on 20X5 sales
($14,000 + $2,000)
g.
$106,000
$240,000
90,000
$330,000
14,000
(16,000)
$328,000
Eliminating entries, December 31, 20X5

E(1)
Income from Investment in Subsidiary

Dividends Declared
Investment in Tall Common Stock
E(2)

Dividends Declared
7-34
81,000
8,200
54,000
27,000
6,000
2,200
P7-25 (continued)
E(3)
E(4)
E(5)
E(6)
Other Comprehensive Income from

Subsidiary (OCI)
Investment in Tall Corporation Stock
Eliminate other comprehensive income
from subsidiary.
Other Comprehensive Income to
Assign other comprehensive income
to noncontrolling interest.
Common Stock Tall Corporation
Additional Paid-In Capital Tall Corporation
Accumulated Other Comprehensive Income
Investment in Tall Common Stock
18,000
2,000
400,000
200,000
790,000
10,000

Cost of Goods Sold
Eliminate beginning inventory profit
of Tall Company.
5,400
600
E(7)

Cost of Goods Sold
of Priority Corporation.
8,000
E(8)
Sales
Inventory
Cost of Goods Sold
Eliminate intercompany sale of inventory
by Priority Corporation.
36,000
E(9)
Sales
Inventory
Cost of Goods Sold
by Tall Company.
90,000
7-35
18,000
2,000
1,260,000
140,000
6,000
8,000
2,000
34,000
14,000
76,000
P7-26 Multiple Inventory Transfers between Parent and Subsidiary

a.
b.
E(1)
Retained earnings, January 1

Cost of goods sold
of Proud Company.
20,000
E(2)
Retained earnings, January 1

Cost of goods sold
Inventory
of Slinky Company.
12,600
8,400
E(3)
Sales
Inventory
Cost of goods sold
by Proud Company.
60,000
E(4)
Sales
Inventory
Cost of goods sold
by Slinky Company.
240,000
20,000
15,000
6,000
2,000
58,000
30,000
210,000
Computation of cost of goods sold for consolidated entity:

Inventory produced by Proud in 20X5
($100,000 x .40)
Inventory produced by Slinky in 20X5
($70,000 x .50)
Inventory produced by Proud in 20X6
($40,000 x .90)
Inventory produced by Slinky in 20X6
($200,000 x .25)
Cost of goods sold reported in
consolidated income statement
$ 40,000
35,000
36,000
50,000
$161,000
7-36
P7-27 Consolidation following Inventory Transactions

a.
Entries recorded by Bell on its investment in Troll:

Cash
Investment in Troll Corporation Stock
Record dividends from Troll: $10,000 x .60
Record equity-method income: $30,000 x .60
b.
6,000
18,000
6,000
18,000

E(1)

Dividends Declared
18,000
E(2)

Dividends Declared
Assign income to noncontrolling interest:
$11,680 = ($30,000 + $3,400 - $4,200) x .40
11,680
E(3)
Common Stock Troll Corporation

100,000
50,000
Land
18,000
Eliminate beginning investment balance:
$18,000 = ($82,800 + $55,200) - ($100,000 + $20,000)
$100,800 = $82,800 + [($50,000 - $20,000) x .60]
$67,200 = ($100,000 + $50,000 + $18,000) x .40
E(4)

Cost of Goods Sold
Eliminate beginning inventory profit of
Troll Corporation:
$3,400 = ($42,500 - $25,500) x .20
2,040
1,360
E(5)
Sales
Cost of Goods Sold
Inventory
Eliminate intercompany upstream sale of
inventory by Troll Corporation:
$4,200 = ($35,000 - $21,000) x .30
35,000
E(6)
Sales
Cost of Goods Sold
Inventory
Eliminate intercompany downstream sale of
inventory by Bell Company:
$6,500 = $13,000 x ($14,000 / $28,000)
28,000
7-37
6,000
12,000
4,000
7,680
100,800
67,200
3,400
30,800
4,200
21,500
6,500
P7-27 (continued)
c.
Bell Company and Troll Corporation

Consolidation Workpaper
December 31, 20X2
Item
Bell
Co.
200,000
Troll
Corp.
120,000

Credits
Cost of Goods Sold
18,000
218,000
99,800
120,000
61,000
25,000
6,000
(130,800)
15,000
14,000
(90,000)
87,200
230,000
30,000
50,000
87,200
317,200
(40,000)
30,000
80,000
(10,000)
Sales
Depreciation Expense
Interest Expense
Debits
Consolidated Net Income
Income, carry forward
Ret. Earnings, Jan. 1
Income, from above
Dividends Declared
Ret. Earnings, Dec. 31,
carry forward
Cash and Accounts
Receivable
Inventory
277,200
70,000
69,400
60,000
51,200
55,000
Land
Investment in Troll
Corporation Stock
40,000
520,000
30,000
350,000
Debits
Accum. Depreciation
Accounts Payable
Bonds Payable
Bond Premium
Common Stock
Bell Company
Troll Corporation
Retained Earnings,
from above
Noncontrolling
Interest
802,200
175,000
68,800
80,000
1,200
Credits
802,200
Eliminations
Debit
Credit
(5) 35,000
(6) 28,000
(1) 18,000
(4) 3,400
(5) 30,800
(6) 21,500
(2) 11,680
92,680
(3) 50,000
(4) 2,040
92,680
277,200
55,700
(1)
(2)
144,720
(3) 18,000
112,800
200,000
55,700
6,000
4,000
65,700
(5)
(6)
4,200
6,500
(1) 12,000
(3)100,800
486,200
75,000
41,200
200,000
Consolidated
257,000
257,000
105,100
40,000
20,000
(165,100
)
91,900
(11,680)
80,220
227,960
80,220
308,180
(40,000)
268,180
120,600
104,300
88,000
870,000
1,182,900
250,000
110,000
280,000
1,200
200,000
100,000
(3)100,000
70,000
144,720
65,700
268,180
1,360
(2) 7,680
(3) 67 200
264,080
73,520
1,182,900
(4)
486,200
7-38
264,080
7-39
P7-28 Consolidation Workpaper

a.
E(1)

Dividends Declared
Investment in West Company Stock
E(2)

Dividends Declared
$7,950 = ($20,000 + $30,000 - $25,000
+ $1,500) x .30
E(3)
Common Stock West Company

Differential
Investment in West Company Stock
$36,000 = $291,200 + $124,800 - $380,000
$305,200 = $315,700 - $10,500
$130,800 = ($250,000 + $150,000
+ $36,000) x .30
E(4)
E(5)
14,000
7,950
150,000
250,000
36,000
Land, Buildings and Equipment (net)

Goodwill
Differential
Assign beginning differential.
14,000
22,000

Cost of Goods and Services
of West Company.
21,000
9,000
7-40
3,500
10,500
1,500
6,450
305,200
130,800
36,000
30,000
P7-28 (continued)
E(6)

of Crow Corporation.
15,000
E(7)
Sales
Inventory
Eliminate intercompany upstream sale of
inventory by West Company:
$25,000 = $62,000 - $37,000
62,000
E(8)
Sales
90,000
82,000
Inventory
8,000
Eliminate intercompany downstream sale of
inventory by Crow Corporation:
$8,000
= ($90,000 - $54,000) x ($20,000 / $90,000)
$82,000
=
$ 54,000 CGS recorded by Crow Corporation
70,000 CGS recorded by West Company
$ 124,000
(42,000) Consolidated amount
[$54,000 x ($70,000 / $90,000)]
$ 82,000 Required elimination
E(9)

Land, Buildings and Equipment (net)
Eliminate unrealized gain on equipment:
$7,350 = [$15,000 - ($1,500 x 3)] x .70
$3,150 = [$15,000 - ($1,500 x 3)] x .30
$1,500 = $9,500 -$8,000
$9,000 = [$95,000 - ($9,500 x 4)] [$120,000 - ($8,000 x 9)]
7-41
7,350
3,150
15,000
37,000
25,000
1,500
9,000
P7-28 (continued)
b.
Crow Corporation and West Company

December 31, 20X9
Crow
West
Item
Sales and Service Revenue
Corp.
300,000
Co.
200,000

Credits
14,000
314,000
200,000
200,000
150,000
Debits
20,000
Retained Earnings, Jan. 1
568,000
250,000
Income, from above

Dividends Declared
74,000
642,000
(35,000)
20,000
270,000
(5,000)
Retained Earnings, Dec. 31,

carry forward
607,000
265,000
Cash and Receivables

Inventory
81,300
200,000
85,000
110,000
270,000
250,000
Differential
Goodwill
Debits
Accounts Payable
Common Stock
Ret. Earnings, from above
Credits
Debit
(7) 62,000
(8) 90,000
(1) 14,000
(2)
445,000
30,000
150,000
265,000
867,000
445,000
7-42
30,000
15,000
37,000
82,000
1,500
165,500
(3)250,000
(5) 21,000
(6) 15,000
(9) 7,350
173,950
165,500
(1)
(2)
467,300
3,500
1,500
170,500
(7) 25,000
(8) 8,000
(4) 14,000
(3) 36,000
(4) 22,000
(3)150,000
467,300
(5) 9,000
(9) 3,150
701,450
idated
348,000
7,950
173,950
315,700
867,000
60,000
200,000
607,000
Consol-
Credit
(5)
(6)
(7)
(8)
(9)
40,000
30,000
(240,000) (180,000)
74,000
Land, Buildings
& Equipment (net)
Investment in West
Company Stock
Eliminations
(9)
9,000
(1) 10,500
(3) 305,200
(4) 36,000
170,500
(2) 6,450
(3)130,800
701,450
348,000
186,000
68,500
(254,500)
93,500
(7,950)
85,550
524,650
85,550
610,200
(35,000)
575,200
166,300
277,000
525,000
22,000
990,300
90,000
200,000
575,200
125,100
990,300
P7-28 (continued)
c.
Retained earnings reconciliation, December 31, 20X9:

Retained earnings, Crow Corporation
Unrealized profits on Crow Corporation's books
($90,000 - $54,000) x ($20,000 / $90,000)
Unrealized profits on West Company's books
($62,000 - $37,000) x .70
Unrealized profit on equipment transfer
[($15,000 - ($1,500 x 4)] x .70
Consolidated retained earnings
$607,000
(8,000)
(17,500)
(6,300)
$575,200
P7-29 Computation of Consolidated Totals

a.
Consolidated sales for 20X8:

Sales reported
Intercorporate sales
Sales to nonaffiliates
b.
Bunker
Corp.
$660,000
(140,000)
$520,000
Harrison
Co.
$510,000
(240,000)
$270,000
$660,000
1.4
$471,429
$510,000
1.2
$425,000
(128,000)
$343,429
(232,000)
$193,000
Consolidated
$790,000
Consolidated cost of goods sold:

Total sales reported
Ratio of cost to sales price
Cost of goods sold
Amount to be eliminated
(see entry)
Cost of goods sold adjusted
$536,429
E(1)
Sales
Inventory
Cost of Goods Sold
Elimination of sales by Bunker to Harrison:
$12,000 = $42,000 - ($42,000 / 1.40)
$128,000 = $140,000 - $12,000
140,000
E(2)
Sales
Inventory
Cost of Goods Sold
Elimination of sales by Harrison to Bunker:
$8,000 = $48,000 - ($48,000 / 1.20)
$232,000 = $240,000 - $8,000
240,000
7-43
12,000
128,000
8,000
232,000
P7-29 (continued)
c.
Operating income of Bunker Corporation (excluding

income from Harrison Company)
Net income of Harrison Company
$70,000
20,000
$90,000
(12,000)
(8,000)
$70,000
Less: Unrealized inventory profits of Bunker

Unrealized inventory profits of Harrison
Less: Income assigned to noncontrolling interest
($20,000 - $8,000) x .20
Income to controlling interest 20X8
d.
(2,400)
$67,600
Inventory balance in consolidated balance sheet:

Inventory reported by Bunker Corporation
Unrealized profits
$48,000
(8,000)
Inventory reported by Harrison Company

Unrealized profits
Inventory balance, December 31, 20X8
$42,000
(12,000)
7-44
$40,000
30,000
$70,000
P7-30 Intercompany Transfer of Inventory and Land

a.
E(1)

Dividends Declared
Investment in Bock Company Stock
Eliminate income from subsidiary:
$11,200 = ($25,000 - $2,000 - $7,000) x .70
$10,500 = $15,000 x .70
11,200
E(2)

Dividends Declared
$5,100 = ($25,000 - $2,000 - $7,000 + $9,000
- $8,000) x .30
$4,500 = $15,000 x .30
5,100
E(3)
Common stock Bock Company

Differential
Investment in Bock Company Stock
$123,200 = ($70,000 +$60,000 + $46,000) x .7
$52,800 = ($70,000 + $60,000 + $46,000) x .3
70,000
60,000
46,000
10,500
700
4,500
600
123,200
52,800
Computation of unamortized differential

Fair value of compensation given by Pine
Fair value of noncontrolling interest
Less: Book value of Spencer's net assets
($70,000 + $30,000)
Differential at acquisition
Amortization of amount assigned to:
Buildings and equipment
[($20,000 / 10 years] x 1 year
Patent ($35,000 / 5 years) x 1 year
Unamortized differential, January 1, 20X7
E(4)

Patent
Accumulated Depreciation
Differential
Assign beginning differential:
$28,000 = $35,000 - $7,000
$2,000 = $20,000 / 10 years
$108,500
46,500
(100,000)
$ 55,000
(2,000)
(7,000)
$46,000
20,000
28,000
7-45
2,000
46,000
P7-30 (continued)
E(5)
E(6)
Amortization Expense
Patent
Amortize differential:
$2,000 = $20,000 / 10 years
$7,000 = $35,000 / 5 years
2,000
7,000

Cost of Goods Sold
Inventory
of Bock Company:
$11,200 = ($48,000 - $32,000) x .70
$4,800 = ($48,000 - $32,000) x .30
$9,000 = $27,000 - ($27,000 x 2/3)
$7,000 = $21,000 - ($21,000 x 2/3)
11,200
4,800
E(7)
Sales
Cost of Goods Sold
Inventory
by Bock Company:
$8,000 = $24,000 - ($24,000 x 2/3)
90,000
E(8)
Sales
Cost of Goods Sold
Inventory
by Pine Corporation:
$3,800 = $7,600 - ($7,600 x 1/2)
30,000
E(9)

Land
Eliminate unrealized profit on land:
$15,000 = $37,000 - $22,000
10,500
4,500
7-46
2,000
7,000
9,000
7,000
82,000
8,000
26,200
3,800
15,000
P7-30 (continued)
b.
Pine Corporation and Bock Company

December 31, 20X3
Pine
Corp.
Bock
Co.
Sales
260,000
125,000
Other Income
Credits
Cost of Goods Sold
13,600
11,200
284,800
186,000
125,000
79,800
20,000
16,000
15,000
5,200
Item
Interest Expense
Debits
(222,000) (100,000)
62,800
25,000
139,100
60,000
Income, from above

Dividends Declared
62,800
201,900
(30,000)
25,000
85,000
(15,000)
Retained Earnings, Dec. 31,

carry forward
171,900
70,000
Cash and Accounts

Receivable
Inventory
15,400
165,000
21,600
35,000
80,000
340,000
40,000
260,000
Land
Investment in Bock
Company Stock
Differential
Patent
Debits
Eliminations
Debit
Credit
(7) 90,000
(8) 30,000
356,600
7-47
(6) 9,000
(7) 82,000
(8) 26,200
(5) 7,000
(2) 5,100
145,300
117,200
(3) 60,000
(6) 11,200
(9) 10,500
145,300
117,200
(1) 10,500
(2) 4,500
227,000
(4) 20,000
123,900
724,300
265,000
13,600
(1) 11,200
(5) 2,000
(3) 46,000
(4) 28,000
Consolidated
132,200
(6) 7,000
(7) 8,000
(8) 3,800
(9) 15,000
(1)
700
(3)123,200
(4) 46,000
(5) 7,000
278,600
148,600
37,000
21,200
7,000
(213,800)
64,800
(5,100)
59,700
117,400
59,700
177,100
(30,000)
147,100
37,000
181,200
105,000
620,000
21,000
964,200
P7-30 (continued)
Item
Pine
Corp.
Bock
Co.
Accum. Depreciation
140,000
80,000
Accounts Payable
Bonds Payable
Bond Premium
Common Stock
Pine Corporation
Bock Company
Retained Earnings,
from above
Noncontrolling
Interest
92,400
200,000
35,000
100,000
1,600
Credits
724,300
120,000
171,900
Eliminations
Debit
Credit
(4) 2,000
(5) 2,000
Consolidated
224,000
127,400
300,000
1,600
120,000
70,000
(3) 70,000
70,000
227,000
132,200
147,100
356,600
(6) 4,800
(9) 4,500
400,300
(2)
600
(3) 52,800
400,300
44,100
964,200
7-48
P7-30 (continued)
Note: Financial statements are not required.
Pine Corporation and Subsidiary
Consolidated Balance Sheet
December 31, 20X3
Cash and Accounts Receivable
Inventory
Land
Less: Accumulated Depreciation
Patent
Total Assets
$620,000
(224,000)
Accounts Payable
Bonds Payable
Bond Premium
Stockholders Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Total Stockholders Equity
Total Liabilities and Stockholders' Equity
$300,000
1,600
$120,000
147,100
$267,100
44,100
$ 37,000
181,200
105,000
396,000
21,000
$740,200
$127,400
301,600
311,200
$740,200

Consolidated Income Statement
Year Ended December 31, 20X3
Sales
Other Income
Total Income
Cost of Goods Sold
Interest Expense
Total Expenses
Income to Controlling Interest
$148,600
37,000
21,200
7,000
7-49
$265,000
13,600
$278,600
(213,800)
$ 64,800
(5,100)
$ 59,700
P7-30 (continued)

Consolidated Retained Earnings Statement
Retained Earnings, January 1, 20X3
Income to Controlling Interest, 20X3
$117,400
59,700
$177,100
(30,000)
$147,100
Dividends Declared, 20X3

Retained Earnings, December 31, 20X3
P7-31 Consolidation Using Financial Statement Data

a.

E(1)

Dividends Declared
Investment in Concerto Company Stock
21,000
E(2)

Dividends Declared
$9,600 = ($35,000 + $8,000 - $9,000
- $10,000) x .40
9,600
E(3)
Common Stock Concerto Company

Differential
Investment in Concerto Company Stock
$40,000 = $24,000 + $16,000
7-50
50,000
150,000
40,000
12,000
9,000
8,000
1,600
144,000
96,000
P7-31 (continued)
E(4)
Goodwill
Differential
Assign differential to goodwill.
40,000
E(5)
Goodwill Impairment Loss

Goodwill
Recognize impairment of goodwill.
10,000
E(6)

Land
Eliminate unrealized gain on land.
6,000
4,000
E(7)

Cost of Goods Sold
Bower: $14,000 - ($14,000 / 1.40)
4,000
E(8)

Cost of Goods Sold
Concerto Company:
$8,000 = $48,000 - ($48,000 / 1.20)
4,800
3,200
E(9)
Sales
Cost of Goods Sold
Inventory
by Bower:
$2,000 = $7,000 - ($7,000 / 1.40)
22,000
E(10)
Sales
Cost of Goods Sold
Inventory
by Concerto Company:
$9,000 = $54,000 - ($54,000 / 1.20)
90,000
7-51
40,000
10,000
10,000
4,000
8,000
20,000
2,000
81,000
9,000
P7-31 (continued)
b.
Bower Corporation and Concerto Company

December 31, 20X6
Bower
Corp.
Concerto
Co.
Sales
400,000
200,000

Credits
Cost of Goods Sold
21,000
421,000
280,000
200,000
120,000
Item
Depreciation and
Amortization
Goodwill Impairment Loss
Other Expenses
Debits
25,000
15,000
35,000
30,000
(340,000) (165,000)
81,000
35,000
293,800
150,000
Income, from above

Dividends Declared
81,000
374,800
(50,000)
35,000
185,000
(20,000)

carry forward
324,800
165,000
7-52
Eliminations
Debit
Credit
(9) 22,000
(10) 90,000
(1) 21,000
488,000
(7) 4,000
(8) 8,000
(9) 20,000
(10)81,000
9,600
152,600
113,000
(3)150,000
(6) 6,000
(7) 4,000
(8) 4,800
152,600
113,000
(1) 12,000
(2) 8,000
317,400
488,000
287,000
40,000
10,000
65,000
(402,000)
86,000
(5) 10,000
(2)
Consolidated
133,000
(9,600)
76,400
279,000
76,400
355,400
(50,000)
305,400
P7-31 (continued)
Item
Bower
Corp.
Concerto
Co.
Cash
Accounts Receivable
Inventory
26,800
80,000
120,000
35,000
40,000
90,000
Land
Investment in Concerto
Company Stock
70,000
340,000
20,000
200,000
Differential
Goodwill
Debits
Eliminations
Debit
Credit
(9) 2,000
(10) 9,000
(6) 10,000
153,000
789,800
385,000
Accounts Payable
Bonds Payable
Common Stock
Retained Earnings,
from above
165,000
80,000
120,000
100,000
85,000
15,000
70,000
50,000
324,800
165,000
Credits
789,800
385,000
7-53
(3) 40,000
(4) 40,000
(1) 9,000
(3)144,000
(4) 40,000
(5) 10,000
61,800
120,000
199,000
80,000
540,000
30,000
1,030,800
250,000
95,000
190,000
100,000
(3) 50,000
317,400
(6) 4,000
(8) 3,200
454,600
Consolidated
133,000
(2) 1,600
(3) 96,000
454,600
305,400
90,400
1,030,800
P7-32 Intercorporate Transfers of Inventory and Equipment

a.
Consolidated cost of goods sold for 20X9:

Amount reported by Foster Company
Amount reported by Block Corporation
Adjustment for unrealized profit in
beginning inventory sold in 20X9
Adjustment for inventory purchased from
subsidiary and resold during 20X9:
CGS recorded by Foster ($30,000 x .60)
CGS recorded by Block
Total recorded
CGS based on Block's cost ($20,000 x .60)
Required adjustment
Cost of goods sold
b.
(15,000)
$18,000
20,000
$38,000
(12,000)
(26,000)
$822,000
Consolidated inventory balance:

Amount reported by Foster
Amount reported by Block
Total inventory reported
Unrealized profit in ending inventory held by
Foster [($30,000 - $20,000) x .40]
Consolidated balance
c.
$593,000
270,000
$137,000
130,000
$267,000
(4,000)
$263,000
Income assigned to noncontrolling interest:

Net income reported by Block Corporation
Adjustment for realization of loss on equipment
sold to Foster in 20X7
Adjustment for realization of profit on inventory
sold to Foster in 20X8
Adjustment for unrealized profit on inventory sold
to Foster in 20X9
Realized net income of Block for 20X9
interest
7-54
$70,000
(3,000)
15,000
(4,000)
$78,000
x
.10
$ 7,800
P7-32 (continued)
d.
Amount assigned to noncontrolling interest in consolidated balance

sheet:
Block Corporation common stock outstanding
Block Corporation retained earnings, January 1, 20X9
Net income for 20X9
Book value, December 31, 20X9
Adjustment for unrealized loss on equipment
$24,000 - [($24,000 / 8 years) x 3 years]
Adjustment for unrealized profit on inventory
sold to Foster
Realized book value of Block Corporation
interest
Balance assigned to noncontrolling interest
e.
$ 50,000
165,000
70,000
(20,000)
$265,000
15,000
(4,000)
$276,000
x
.10
$ 27,600
Consolidated retained earnings at December 31, 20X9:

Balance reported by Foster Company, January 1, 20X9
Net income for 20X9
Balance reported by Foster Company, December 31, 20X9
Adjustment for proportionate share of unrealized
loss on sale of equipment ($15,000 x .90)
Adjustment for proportionate share of unrealized
gain on inventory ($4,000 x .90)
Consolidated retained earnings, December 31, 20X9
f.
$248,500
171,000
(40,000)
$379,500
13,500
(3,600)
$389,400
E(1)

Dividends Declared
Investment in Block Corporation Stock
63,000
E(2)

Dividends Declared
7,800
E(3)
Common Stock Block Corporation

Investment in Block Corporation Stock
50,000
165,000
7-55
18,000
45,000
2,000
5,800
193,500
21,500
P7-32 (continued)
E(4)

Eliminate intercorporate sale of equipment:
$42,000 = $90,000 - $48,000
$3,000 = ($90,000 / 10 years) - ($48,000 / 8 years)
$16,200 = [$24,000 - ($3,000 x 2 years)] x .90
$1,800 = [$24,000 - ($3,000 x 2 years)] x .10
$27,000 = [($90,000 / 10 years) x 5 years]
- [($48,000 / 8 years) x 3 years]
42,000
3,000
E(5)
Sales
Cost of Goods Sold
Inventory
by Block Corporation.
30,000
E(6)

Cost of Goods Sold
of Block Corporation.
13,500
1,500
7-56
16,200
1,800
27,000
26,000
4,000
15,000
P7-32 (continued)
g.
Foster Company and Block Corporation

December 31, 20X9
Item
Sales
Other Income
Credits
Cost of Goods Sold
Other Expenses
Debits
Foster
Co.
815,000
26,000
63,000
904,00
0
593,000
Block
Corp.
415,000
15,000
430,000
45,000
15,000
95,000
75,000
(733,000) (360,000)
70,000
248,500
165,000
Income, from above

Dividends Declared
171,000
419,500
(40,000)
70,000
235,000
(20,000)

carry forward
379,500
215,000
187,000
80,000
40,000
137,000
80,000
500,000
57,400
90,000
10,000
130,000
60,000
250,000
Debits
238,500
1,262,500
(5) 30,000
597,400
7-57
(4)
3,000
(2)
7,800
103,800
(3)165,000
(6) 13,500
103,800
Consolidated
1,200,000
41,000
(1) 63,000
270,000
171,000
Cash
Accounts Receivable
Other Receivables
Inventory
Land
Investment in Block
Corporation Stock
Eliminations
Debit
Credit
1,241,000
(5) 26,000
(6) 15,000
41,000
(4) 16,200
41,000
(1) 18,000
(2) 2,000
282,300
77,200
(5)
4,000
(4) 42,000
(1) 45,000
(3)193,500
822,000
63,000
170,000
(1,055,000)
186,000
(7,800)
178,200
251,200
178,200
429,400
(40,000)
389,400
244,400
170,000
50,000
263,000
140,000
792,000
1,659,400
P7-32 (continued)
Item
Accum. Depreciation
Accounts Payable
Other Payables
Bonds Payable
Bond Premium
Common Stock
Foster Company
Block Corporation
Additional Paid-In
Capital
Retained Earnings,
from above
Noncontrolling
Interest
Credits
Foster
Co.
155,000
63,000
95,000
250,000
210,000
Block
Corp.
Eliminations
Debit
Credit
75,000
35,000
20,000
200,000
2,400
50,000
(4) 27,000
1,262,500
257,000
98,000
115,000
450,000
2,400
210,000
(3) 50,000
110,000
379,500
Consolidated
110,000
215,000
597,400
7-58
282,300
77,200
389,400
(6) 1,500
(2) 5,800
(3) 21,500
(4) 1,800
375,800
27,600
1,659,400
375,800
P7-33 Consolidated Balance Sheet Workpaper [AICPA Adapted]

Pine Corp. and Subsidiary
Consolidated Balance Sheet Workpaper
December 31, 20X6
Cash
Assets
Accounts and Other

Current Receivables
Merchandise Inventory
Pine
Corp.
Slim
Corp.
105,000
15,000
410,000
120,000
920,000
670,000
Plant and
Equipment, net
1,000,000
400,000
Investment in Slim
1,170,000
Liabilities and
Stockholders' Equity
Accounts Payable and
Other Current
Liabilities
Common Stock ($10 par)

Retained Earnings
Debit
Credit
[b]
900
1,205,00
0
140,000
305,000
500,000
200,000
2,965,000
700,000
Noncontrolling
900
5,000
100,000
90,000
335,000
[6]
3,000
1,587,000
1,400,000
90,900
[b]
[1]
[2]
900
450,000
810,000
500,000
3,942,000
[3]
900
[4]
5,000
[5] 100,000
[7] 90,000
249,100
[2] 200,000
500,000
[2] 700,000
[6]
3,000
[a]
90,900
[1]
50,000
7-59
Idated
[3]
[4]
[5]
[7]
[1] 500,000
3,605,000
Consol-
120,000
[a]
Goodwill
Totals
Adjustments
and Eliminations
3,052,900
Interest, 10 percent
Totals
[2]
3,605,000
1,205,00
0
7-60
1,690,700
90,000
140,000
1,690,700
3,942,000
P7-33 (continued)
Explanations of Workpaper Adjustments and Eliminations
[a]
To record net income of Slim Corporation accruing to Pine Corporation:

Slim Corporation's retained earnings at December 31, 20X6
Slim Corporation's retained earnings at January 1, 20X6
Increase in retained earnings after dividend declaration
Add: Dividend declaration
Slim Corporation's net income for year ended December 31, 20X6
Pine Corporation's share, 90 percent
[b]
To record Pine Corporation's share of dividend declared

by Slim Corporation:
90 percent of $1,000
[1]
[2]
To record goodwill:
Fair value of compensation given by Pine
Fair value of nonconctolling interest at acquisition
Slim Corporation's book value at January 1, 20X6:
Common stock
Retained earnings
Total book value
Goodwill
$700,000
(600,000)
$100,000
1,000
$101,000
$ 90,900
$900
$1,170,000
130,000
$200,000
600,000
(800,000)
$ 500,000
To eliminate 90 percent of Slim Corporation's book value

and record noncontrolling interest:
Common stock
Retained earnings at December 31, 20X6
Total
$200,000
700,000
$900,000
Pine Corporation's 90 percent share

Minority interests 10 percent share
Total
$810,000
90,000
$900,000
[3]
To eliminate intercompany dividend receivable and payable:

90 percent of $1,000
[4]
To eliminate intercompany accrued interest:

$100,000 @ 10 percent x year
[5]
To eliminate intercompany loan:
$100,000
[6]
To eliminate intercompany profit in Slim Corporation's

December 31 inventory:
Sales from Pine Corporation to Slim Corporation
5 percent remaining in Slim Corporation's December 31 inventory
Multiply by .20($60,000 / $300,000)
Inventory profit
$ 300,000
$ 15,000
x
.20
$ 3,000
[7]
$900
$5,000
To eliminate intercompany trade account receivable and payable
7-61
$90,000
P7-34 Comprehensive Worksheet Problem

a.
b.
Basic equity-method entries for 20X7:

(1)
Cash
Investment in Sharp Company Stock
Record dividend from Sharp Company:
$25,000 x .80
20,000
(2)

Record equity-method income:
$40,000 x .80
32,000
(3)

$4,000 = ($50,000 / 10 years) x .80
4,000
20,000
32,000
4,000

E(1)

Dividends Declared
Eliminate income from subsidiary:
$28,000 = $32,000 - $4,000
E(2)

Dividends Declared
$6,600 = ($40,000 + $8,000 - $10,000
- $5,000) x .20
6,600
E(3)
Common Stock Sharp Company

Additional Paid-In Capital
Differential
$35,000 = $50,000 [($50,000 / 10) x
3 years]
100,000
20,000
215,000
35,000

Differential
Assign differential:
$20,000 = ($50,000 / 10 years) x 4 years
50,000
5,000
E(4)
7-62
28,000
20,000
8,000
5,000
1,600
296,000
74,000
20,000
35,000
P 7-34 (continued)
E(5)

Cost of Goods Sold
of Sharp Company.
6,400
1,600
E(6)

Cost of Goods Sold
of Randall Corporation.
2,000
E(7)
Sales
Cost of Goods Sold
Inventory
by Sharp Company.
45,000
E(8)
Sales
Cost of Goods Sold
Inventory
by Randall Corporation.
12,000
E(9)

Eliminate intercorporate sale of
equipment.
25,000
17,500
E(10)
Depreciation expense adjustment:

Depreciation recorded ($50,000 / 8 years)
Depreciation required ($75,000 / 20 years)
Required decrease
$ 6,250
(3,750)
$ 2,500
Accumulated depreciation adjustment:

Required balance ($3,750 x 14 years)
Balance recorded ($6,250 x 2 years)
Required increase
$52,500
(12,500)
$40,000
Accounts Payable
Accounts Receivable
Eliminate intercorporate
receivable/payable.
10,000
7-63
8,000
2,000
35,000
10,000
9,000
3,000
2,500
40,000
10,000
P7-34 (continued)
c.
Randall Corporation and Sharp Company

December 31, 20X7
Randall
Corp.
Sharp
Co.
Sales
500,000
250,000
Other Income
Credits
Cost of Goods Sold
20,400
28,000
548,400
416,000
30,000
Item
Deprec. and Amortization

Other Expenses
Debits
280,000
202,000
30,000
20,000
24,000
18,000
(470,000) (240,000)
78,400
40,000
345,900
215,000
Income, from above

Dividends Declared
78,400
424,300
(50,000)
40,000
255,000
(25,000)

carry forward
374,300
230,000
7-64
Eliminations
Debit
Credit
(7) 45,000
(8) 12,000
693,000
50,400
(1) 28,000
(4)
5,000
(5) 8,000
(6) 2,000
(7) 35,000
(8) 9,000
(9) 2,500
(2)
6,600
96,600
56,500
(3)215,000
(5) 6,400
(6) 2,000
(9) 17,500
96,600
56,500
(1) 20,000
(2) 5,000
337,500
Consolidated
81,500
743,400
564,000
52,500
42,000
(658,500)
84,900
(6,600)
78,300
320,000
78,300
398,300
(50,000)
348,300
P7-34 (continued)
Item
Randall
Corp.
Sharp
Co.
Cash
Accounts Receivable
Inventory
130,300
80,000
170,000
10,000
70,000
110,000
600,000
400,000
Investment in Sharp
Company Stock
304,000
Differential
Debits
Eliminations
Debit
Credit
(4) 50,000
(9) 25,000
(3) 35,000
1,284,300
590,000
Accum. Depreciation
310,000
120,000
Accounts Payable
Bonds Payable
Bond Premium
Common Stock
Additional Paid-In
Capital
Retained Earnings,
from above
100,000
300,000
15,200
100,000
4,800
100,000
(10) 10,000
20,000
(3) 20,000
Credits
200,000
374,300
230,000
1,284,300
590,000
7-65
(10) 10,000
(7) 10,000
(8) 3,000
337,500
1,600
579,100
140,300
140,000
267,000
1,075,000
(1) 8,000
(3)296,000
(4) 35,000
(4) 20,000
(9) 40,000
(3)100,000
(5)
Consolidated
81,500
(2) 1,600
(3) 74,000
579,100
1,622,300
490,000
105,200
400,000
4,800
200,000
348,300
74,000
1,622,300
P7-34 (continued)
d.
Randall Corporation and Subsidiary

Consolidated Balance Sheet
December 31, 20X7
Cash
Accounts Receivable
Inventory
Total Current Assets
Less: Accumulated Depreciation
Total Assets
$ 140,300
140,000
267,000
$ 547,300
$1,065,000
(486,000)
Accounts Payable
Bonds Payable
Bond Premium
Stockholders Equity:
Controlling Interest:
Common Stock
Retained Earnings
Total Controlling Interest
Total Stockholders Equity
Total Liabilities and Stockholders' Equity
579,000
$1,126,300
$ 105,200
$ 400,000
4,800
404,800
$ 200,000
348,300
$ 548,300
68,000
616,300
$1,126,300

Consolidated Income Statement
Sales
Other Income
$ 693,000
50,400
$ 743,400
Cost of Goods Sold

Depreciation and Amortization Expense
Other Expenses
Income to Controlling Interest
$ 564,000
52,500
42,000
(658,500)
$ 84,900
(6,600)
$ 78,300

Consolidated Statement of Retained Earnings
Retained Earnings, January 1, 20X7
Income to Controlling Interest, 20X7
$ 320,000
78,300
$ 398,300
7-66
Dividends Declared, 20X7

Retained Earnings, December 31, 20X7
(50,000)
$ 348,300
7-67
P7-35 Comprehensive Consolidation Workpaper; Equity Method [AICPA Adapted]

Fran Corp. and Subsidiary
December 31, 20X9
Fran Corp
Dr. (Cr.)
Income Statement:
Net Sales
Equity in Brey's Income
Gain on Sale of
Warehouse
Cost of Goods Sold
Goodwill Impairment
Loss
Operating Expenses
(including
depreciation)
Brey Inc.
Dr. (Cr.)
(3,800,000 (1,500,000
)
)
(181,000)
(30,000)
2,360,000
870,000
(190,000
)
Retained Earnings
Statement:
Balance, 1/1/X9
(440,000)
(156,000)
Net Income
(551,000)
(190,000)
(991,000
)
40,000
(306,000
)
570,000
150,000
860,000
1,060,000
350,000
410,000
1,320,000
680,000
(370,000)
(210,000)
Dividends Paid
Balance, 12/31/X9
Balance Sheet:
Assets:
Cash
Accounts
Receivable (net)
Inventories
Land, Plant
and Equipment
Accumulated
Depreciation
Investment in Brey
440,000
891,000
Goodwill
Total Assets
[7]
180,000
[1]
181,000
[5]
30,000
4,331,000
1,380,000
7-68
[3]
9,000
[a]
435,000
[2]
156,000
[a]
435,000
[b]
591,000
Adjusted
Balance
(5,120,000)
[7]
162,000
[4]
35,000
1,100,00
0
(551,000
)
Net Income
Adjustments
and Eliminations
Dr.
Cr.
3,068,000
35,000
[6]
2,000
1,547,000
[a]
164,000
(470,000)
(440,000)
[a]
164,000
(470,000)
[1]
[b]
40,000
204,000
(910,000)
720,000
[8]
[7]
86,000
18,000
1,124,000
1,452,000
[2]
54,000
[5]
30,000
2,024,000
[6]
2,000
[3]
9,000
(587,000)
[1]
[2]
[4]
141,000
750,000
35,000
25,000
[2]
60,000
4,758,000
Liabilities and
Stockholders' Equity:
Accounts Payable
and Accrued Expenses
Common Stock
Additional Paid-In
Capital
Retained Earnings
Total Liabilities
and Equity
(1,340,000
)
(1,700,000
)
(594,000)
(300,000)
(80,000)
(991,00
0)
(306,000
)
(400,000)
(4,331,000 (1,380,000
)
)
7-69
[8]
86,000
[2]
400,000
(1,848,000)
[2]
80,000
[b]
591,000
(300,000)
1,273,000
(1,700,000)
[b]
204,000
(910,000)
1,273,000
(4,758,000)
P7-35 (continued)
Explanations of Adjustments and Eliminations:
[1] To eliminate Fran's investment income recognized from Brey, Brey's dividends, and
the change in the investment account during 20X9. Fran's investment is carried at
equity at December 31, 20X9, adjusted for the amortization of the differential assigned to
the machinery.
[2] To eliminate reciprocal elements as of the beginning of the year from the
investment and equity accounts and to assign the differential to machinery and goodwill.
[3] To record amortization of the fair value in excess of book value of Brey's machinery
at date of acquisition ($54,000 / 6).
[4]
To record goodwill impairment loss of $35,000.
[5]
To eliminate intercompany profit on the sale of the warehouse by Fran to Brey.
[6] To eliminate the excess depreciation on the warehouse building sold by Fran to
Brey [($86,000 - $66,000) x 1/5 x ].
[7] To eliminate intercompany sales from Brey to Fran and the inter-company profit in
Fran's ending inventory as follows:
Sales
Gross profit
Cost
Total
$180,000
(90,000)
$ 90,000*
On hand
$36,000
(18,000)
$18,000
Sold
$144,000
(72,000)*
$ 72,000
* Cost of Goods Sold elimination: $162,000 = $90,000 + $72,000

[8] To eliminate Fran's intercompany balance to Brey for the merchandise it
purchased.
7-70
P7-36A Fully Adjusted Equity Method

a. Adjusted trial balance:
Item
Cash
Accounts Receivable
Inventory
Investment in Sharp
Company Stock
Cost of Goods Sold
Depreciation and Amortization
Other Expenses
Dividends Declared
Accounts Payable
Bonds Payable
Bond Premium
Common Stock
Retained Earnings
Sales
Other Income
Randall Corporation
Debit
Credit
Sharp Company
Debit
Credit
$ 130,300
80,000
170,000
600,000
$ 10,000
70,000
110,000
400,000
278,000
416,000
30,000
24,000
50,000
202,000
20,000
18,000
25,000
$ 310,000
100,000
300,000
200,000
$1,778,300
7-71
320,000
500,000
20,400
27,900
$1,778,300
$855,000
$120,000
15,200
100,000
4,800
100,000
20,000
215,000
250,000
30,000
$855,000
P7-36A (continued)
b.
Fully adjusted equity-method entries for 20X7:

(1)
Cash
Record dividends from Sharp Company:
$25,000 x .80
20,000
(2)

Record equity-method income:
$40,000 x .80
32,000
(3)

$4,000 = ($50,000 / 10 years) x .80
4,000
(4)

Recognize deferred profit on upstream
sale of inventory: $8,000 x .80
6,400
(5)

Recognize deferred profit on downstream
sale of inventory.
2,000
(6)

Remove unrealized profit on upstream
sale of inventory: $10,000 x .80
8,000
(7)

Remove unrealized profit on downstream
sale of inventory.
3,000
(8)

Recognize portion of gain on sale of
equipment: $20,000 / 8 years
2,500
7-72
20,000
32,000
4,000
6,400
2,000
8,000
3,000
2,500
P7-36A (continued)
c.

E(1)

Dividends Declared
E(2)

Dividends Declared
$6,600 = ($40,000 + $8,000 - $10,000
- $5,000) x .20
6,600
E(3)

Differential
100,000
20,000
215,000
35,000

Differential
Assign differential:
$20,000 = ($50,000 / 10 years) x 4 years
50,000
5,000
E(4)
E(5)

Cost of Goods Sold
of Sharp Company.
7-73
27,900
6,400
1,600
20,000
7,900
5,000
1,600
296,000
74,000
20,000
35,000
8,000
P7-36A (continued)
E(6)

Cost of Goods Sold
E(7)
Sales
Cost of Goods Sold
Inventory
by Sharp Company.
45,000
E(8)
Sales
Cost of Goods Sold
Inventory
12,000
E(9)

equipment.
25,000
17,500

Required decrease
Required increase
E(10)
Accounts Payable
Accounts Receivable
Eliminate intercorporate receivable/payable.
7-74
2,000
2,000
35,000
10,000
9,000
3,000
2,500
40,000
$6,250
(3,750)
$2,500
$52,500
(12,500)
$40,000
10,000
10,000
P7-36A (continued)
d.

December 31, 20X7
Item
Randall
Corp.
Sharp
Co.
Sales
500,000
250,000
Other Income
Credits
Cost of Goods Sold
20,400
27,900
548,300
416,000
30,000
Deprec. & Amortization

Other Expenses
Debits
280,000
202,000
30,000
20,000
24,000
18,000
(470,000) (240,000)
Eliminations
Debit
Credit
(7) 45,000
(8) 12,000
(4)
5,000
(5) 8,000
(6) 2,000
(7) 35,000
(8) 9,000
(9) 2,500
(2)
6,600
96,500
56,500
56,500
40,000
215,000
40,000
255,000
(25,000)
(3)215,000
96,500
Dividends Declared
320,000
78,300
398,300
(50,000)

carry forward
348,300
230,000
311,500

Income, from above
7-75
693,000
50,400
(1) 27,900
78,300
Consolidated
(1) 20,000
(2) 5,000
81,500
743,400
564,000
52,500
42,000
(658,500)
84,900
(6,600)
78,300
320,000
78,300
398,300
(50,000)
348,300
P7-36A (continued)
Item
Randall
Corp.
Sharp
Co.
Cash
Accounts Receivable
Inventory
130,300
80,000
170,000
10,000
70,000
110,000

Investment in Sharp
Company Stock
600,000
400,000
Differential
Debits
278,000
Eliminations
Debit
Credit
(4)
(9)
(5)
(6)
(9)
(3)
50,000
25,000
6,400
2,000
17,500
35,000
1,258,300
590,000
Accum. Depreciation
310,000
120,000
Accounts Payable
Bonds Payable
Bond Premium
Common Stock
Additional Paid-In
Capital
Retained Earnings,
from above
100,000
300,000
15,200
100,000
4,800
100,000
(10) 10,000
20,000
(3) 20,000
Credits
200,000
348,300
230,000
1,258,300
590,000
7-76
(10) 10,000
(7) 10,000
(8) 3,000
(1) 7,900
(3)296,000
(4) 35,000
(4) 20,000
(9) 40,000
(3)100,000
(5)
311,500
1,600
579,000
81,500
(2) 1,600
(3) 74,000
579,000
Consolidated
140,300
140,000
267,000
1,075,000
1,622,300
490,000
105,200
400,000
4,800
200,000
348,300
74,000
1,622,300
P7-37A Cost Method

a.
Journal entry recorded by Randall Corporation:

Cash
Dividend Income
Record dividend from Sharp Company:
$25,000 x .80
b.
20,000
20,000

E(1)
Dividend Income
Dividends Declared
Eliminate dividend income from
subsidiary.
E(2)

Dividends Declared
$6,600 = ($40,000 + $8,000 - $10,000
- $5,000) x .20
E(3)

Differential
Eliminate investment balance at date
of acquisition:
$180,000 = ($300,000 - $100,000 - $20,000)
E(4)
20,000
100,000
20,000
180,000
50,000

Assign undistributed prior earnings of
subsidiary to noncontrolling interest.
Retained earnings, January 1, 20X7
Net assets of Sharp at
acquisition
$300,000
Common stock
(100,000)
Additional paid-in capital
(20,000)
Retained earnings at acquisition
Net increase
Increase assigned to
E(5)
6,600

Differential
Assign differential at date of
acquisition.
7,000
5,000
1,600
280,000
70,000
7,000
$215,000
(180,000)
$ 35,000
x
.20
7,000
50,000
7-77
20,000
50,000
P7-37A (continued)
E(6)

Amortize differential for prior periods:
($50,000 / 10 years) x 3 years
12,000
3,000
E(7)
Amortize differential.
5,000
E(8)

Cost of Goods Sold
of Sharp Company.
6,400
1,600
E(9)

Cost of Goods Sold
2,000
E(10)
Sales
Cost of Goods Sold
Inventory
by Sharp Company.
45,000
E(11)
Sales
Cost of Goods Sold
Inventory
12,000
E(12)

equipment.
25,000
17,500

Required decrease
$ 6,250
(3,750)
$ 2,500

Required increase
$52,500
(12,500)
$40,000
7-78
15,000
5,000
8,000
2,000
35,000
10,000
9,000
3,000
2,500
40,000
P7-37A (continued)
E(13)
Accounts Payable
Accounts Receivable
Eliminate intercorporate receivable/payable.
c.
10,000
10,000

December 31, 20X7
Item
Randall
Corp.
Sharp
Co.
Sales
500,000
250,000
Other Income
Dividend Income
Credits
Cost of Goods Sold
20,400
20,000
540,400
416,000
30,000
Deprec. & Amortization

Other Expenses
Debits
280,000
202,000
30,000
20,000
24,000
18,000
(470,000) (240,000)
70,400
40,000
329,900
215,000
Income, from above

Dividends Declared
70,400
400,300
(50,000)
40,000
255,000
(25,000)

carry forward
350,300
230,000
7-79
Eliminations
Debit
Credit
(10) 45,000
(11) 12,000
693,000
50,400
(1) 20,000
(7)
5,000
(8) 8,000
(9) 2,000
(10) 35,000
(11) 9,000
(12) 2,500
(2)
6,600
88,600
56,500
(3)180,000
(4) 7,000
(6) 12,000
(8) 6,400
(9) 2,000
(12) 17,500
88,600
56,500
(1) 20,000
(2) 5,000
313,500
Consolidated
81,500
743,400
564,000
52,500
42,000
(658,500)
84,900
(6,600)
78,300
320,000
78,300
398,300
(50,000)
348,300
P7-37A (continued)
Item
Randall
Corp.
Sharp
Co.
Cash
Accounts Receivable
Inventory
130,300
80,000
170,000
10,000
70,000
110,000
600,000
400,000
Investment in Sharp
Company Stock
Differential
Debits
280,000
Eliminations
Debit
Credit
(5) 50,000
(12) 25,000
(3) 50,000
1,260,300
590,000
Accum. Depreciation
310,000
120,000
Accounts Payable
Bonds Payable
Bond Premium
Common Stock
Additional Paid-In
Capital
Retained Earnings,
from above
100,000
300,000
15,200
100,000
4,800
100,000
(13) 10,000
20,000
(3) 20,000
Credits
200,000
350,300
230,000
1,260,300
590,000
(13) 10,000
(10) 10,000
(11) 3,000
313,500
3,000
1,600
573,100
140,300
140,000
267,000
1,075,000
(3)280,000
(5) 50,000
(6) 15,000
(7) 5,000
(12) 40,000
(3)100,000
(6)
(8)
Consolidated
81,500
(2) 1,600
(3) 70,000
(4) 7,000
573,100
1,622,300
490,000
105,200
400,000
4,800
200,000
348,300
74,000
1,622,300

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Chapter 07 - Intercompany Inventory Transactions

Chapter 07 - Intercompany Inventory Transactions

Chapter 07 - Intercompany Inventory Transactions

Q7-16* When a company is acquired in a business combination the transactions occurring

C7-2 Inventory Values and Intercompany Transfers

Chapter 07 - Intercompany Inventory Transactions

Chapter 07 - Intercompany Inventory Transactions

C7-3 Intercorporate Inventory Transfers

Chapter 07 - Intercompany Inventory Transactions

C7-4 Unrealized Inventory Profits

Chapter 07 - Intercompany Inventory Transactions

C7-5 Eliminating Inventory Transfers

Chapter 07 - Intercompany Inventory Transactions

C7-6 Intercompany Profits and Transfers of Inventory

Chapter 07 - Intercompany Inventory Transactions

Net assets reported

Chapter 07 - Intercompany Inventory Transactions

E7-2 Multiple-Choice Questions on the Effects of Inventory Transfers

Cost of goods sold reported by Park

Answer b in the actual CPA examination question was

($200,000 + $140,000) $308,000

($26,000 + $19,000) $39,000

Inventory held by Spin

.20 = $14,000 / [(Stockholders Equity $50,000) +

14 years = ($28,000 / [(28,000 - $20,000) / 4

E7-3 Multiple Choice Consolidated Income Statement

Total income ($86,000 - $47,000)

Chapter 07 - Intercompany Inventory Transactions

E7-4 Multiple-Choice Questions Consolidated Balances

Amount paid by Lorn Corporation

Inventory reported by Lorn

E7-5 Multiple-Choice Questions Consolidated Income Statement

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

Sales reported by Movie Productions Inc.

$7,000 = [($67,000 - $32,000) x .20]

Chapter 07 - Intercompany Inventory Transactions

E7-6 Realized Profit on Intercompany Sale

Journal entries recorded by Nordway Corporation:

Cash (Accounts Receivable)

Cost of Goods Sold

Journal entries recorded by Olman Company:

Cash (Accounts Receivable)

Cost of Goods Sold

Chapter 07 - Intercompany Inventory Transactions

E7-7 Sale of Inventory to Subsidiary

Journal entries recorded by Nordway Corporation:

Cash (Accounts Receivable)

Cost of Goods Sold

Journal entries recorded by Olman Company:

Cash (Accounts Receivable)

Cost of Goods Sold

Chapter 07 - Intercompany Inventory Transactions

E7-8 Inventory Transfer between Parent and Subsidiary

Retained Earnings, January 1

Retained Earnings, January 1

Chapter 07 - Intercompany Inventory Transactions

E7-9 Income Statement Effects of Unrealized Profit

Sale price to Holiday Bakery per bag ($900,000 / 100,000)

Required Adjustment to Cost of Goods Sold:

Consolidated cost of goods sold ($6.00 x 80,000 units)

Operating income of Holiday Bakery

Less: Unrealized inventory profits