5 CHAPTER

Electronic Supplement to Chapter 5

C onsolidation working papers for the parent-company equity method of accounting were
discussed in Chapter 5. Those illustrations are repeated here for an incomplete equity
method and the cost method of parent-company accounting.
As in the supplement to Chapter 4, this supplement departs from the normal numerical
sequenc- ing to make it easier to compare the alternative working paper formats. The exhibits
labeled Exhibits I5-7 and I5-8 are for incomplete equity method accounting, and Exhibit C5-7 is
for cost method accounting with an initial conversion to equity method accounting. Exhibit T5-8
provides an illustration of the traditional cost method accounting approach, without the initial
conversion to the equity method. These exhibits correspond to equity method Exhibits 5-7 and 5-8
in the chapter.

C ON SOL I DAT IO N EX A MPLE IN TER C OM PAN Y P RO FI T FR OM

D OW NST R EA M S AL E S
Say Corporation is a 90%-owned subsidiary of Pak Corporation, acquired for $94,500 cash on
July 1, 2011, when Says net assets consisted of $100,000 capital stock and $5,000 retained earn-
ings. The cost of Paks 90% interest in Say was equal to book value and fair value of the interest
acquired ( $105,000 * 90%) and, accordingly, no allocation to identifiable and
unidentifiable assets was necessary.
Pak sells inventory items to Say on a regular basis, and the intercompany transaction data for
2014 are as follows:

Sales to Say in 2014 (cost $15,000), selling price $20,000

Unrealized profits in Says inventory at December 31, 2013 2,000
Unrealized profits in Says inventory at December 31, 2014 2,500
Says accounts payable to Pak at December 31, 2014 10,000

Incomplete Equity Method

Assume that Pak failed to consider its intercompany transactions in accounting for its investment
LEARNING
OBJECTIVE 6
in Say during 2013 and 2014. In that case, both Paks Investment in Say and its retained earn-
ings account balances at December 31, 2013, would be $2,000 greater than under the equity
method. This $2,000 overstatement is the result of failing to reduce investment and investment

ES47
 Electronic Supplement to Chapter 5 ES1

income amounts for the $2,000 unrealized profit in 2013. The amount of overstatement of
Paks Investment in Say and retained earnings balances would increase by $500 to $2,500 at
December 31, 2014, because the $2,000 unrealized profits deferred in 2013 would not be recog-
nized in Paks 2014 income and the $2,500 unrealized profit at year-end 2014 would not be
excluded from Paks income. The following table summarizes these observations:

Incomplete - Overstated Equity

=
Equity Method + Understated Method

Investment balance at
December 31, 2013 $130,500 - $2,000 $128,500
Income from Say in 2014 27,000 + 2,000 26,500
- 2,500 V
Dividends received in 2014 (9000) (9000)
Investment balance at
December 31, 2014 $148,500 - $2,500 $146,000

The errors of omitting the intercompany inventory profits affect the Investment in Say and
retained earnings accounts of Pak by the same amount.
CONVERSION TO EQUITY METHOD APPROACH We convert the working papers for Pak and Say for 2014 to
the equity method with the following working paper entry to correct for the omissions on Paks
books:

a Income from Say (-R, -SE) 50

Retained earningsPak (beginning) (-SE) Investment in Say (-A) 2,000

After entering this working paper correction, the other working paper entries would be the same as
those illustrated in the consolidation working papers of Exhibit 5-7. Pak could also record this
entry on its separate books before closing in 2014 to correct for all prior errors resulting from the
misapplication of the equity method.
TRADITIONAL WORKING PAPER SOLUTION FOR INCOMPLETE EQUITY METHOD The initial approach to consolidating
Pak and Say financial statements under an incomplete equity method converts the income from
subsidiary, investment in subsidiary, and retained earnings balances to a complete equity basis.
Alternatively, we can adjust the consolidation working paper entries to accommodate an incom-
plete equity method without conversion to the equity basis. Exhibit I5-7 illustrates this alternative
working paper approach.
Only entries b and d differ from those appearing in Exhibit 5-7 under the equity method. We
reproduce these two working paper entries for convenient reference:

b Retained earningsPak January 1 (-SE) 2,000

Cost of goods sold (-E, +SE) 2,000
To adjust cost of goods sold and Paks beginning-of-the-
period retained earnings for unrealized profits in
the beginning inventory.
d Income from Say (-R, -SE) 27,000
Dividends (+SE) 9,000
Investment in Say (-A) 18,000
To eliminate investment income (as recorded by Pak) and
90% of Says dividends and to reduce the investment account
to its beginning-of-the-period balance.
 EXH I BI T I 5 - 7
PEAK CORPORATION AND SUBSIDIARY CONSOLIDATION WORKING
PAPERS FOR THE YEAR ENDED DECEMBER 31, 2014 (IN THOUSANDS) I n te r c o mpa n y Pr of it s
o n D o wns t r eam
Adjustments
Sa le s Inc o mp le t e
and Eliminations
E qu it y Me th o d
90% Consolidated
Pak Say Debits Credits Statements
Income Statement
Net sales $1,000 $300 a 20 $1,280

Income from Say 27 d 27

Cost of goods sold (550) (200) c 2.5 a 20

b 2 (730.5)

Other expenses (350) (70) (420)

Noncontrolling interest share

($30,000 * 10%) a 3 (3)

Controlling share of Net income $ 127 $ 30 $ 126.5

Retained Earnings
Retained earningsPak $ 196 b 2 $ 194

Retained earningsSay $ 45 f 45

Controlling share of Net income 127 30 126.5

Dividends (50) (10) d 9

e 1 (50)

Retained earningsDecember 31 $ 273 $ 65 $ 270.5

Balance Sheet
Cash $ 30 $ 5 $ 35

Accounts receivable 70 20 g 10 80

Inventories 90 45 c 2.5 132.5

Other current assets 64 10 74

Plant and equipment 800 120 920

Investment in Say 148.5 d 18

f 130.5
$1,202.5 $200 $1,241.5

Accounts payable $ 80 $ 15 g 10 $ 85

Other liabilities 49.5 20 69.5

Capital stock 800 100 f 100 800

Retained earnings 273 65 270.5

$1,202.5 $200

Noncontrolling Interest January 1 f 14.5

Noncontrolling Interest December 31 e 2 16.5

$1,241.5
EXH I B I T C5 - 6
Retained
Pak and Subsidiary Earnings Investment Income Dividend
Cost-to-Equit y 12/31/13 in Say from Say Income
Conversion Schedule
Prior Years Effect
90% of Says Increase in undistributed
earnings from July 1, 2011, to December 31,
2013 ($45,000 - $5,000) * 90% $36,000 $36,000
Unrealized profit in Says Inventory
at December 31, 2014 (2,000) (2,000)
Current Years Effect
Reclassify dividend Income as investment
decrease ($10,000 * 90%) (9,000) $(9,000)
Equity in Says Income for 2014
($30,000 * 90%) 27,000 $27,000
Unrealized profit in Says December 31,
2013, inventory 2,000 2,000
Unrealized profit in Says December 31,
2014, inventory (2,500) (2,500)
2014 working paper adjustments to convert
from cost to equity $34,000 $51,500 $26,500 $(9,000)

Beginning parent-company retained earnings are overstated because Pak failed to eliminate the
$2,000 unrealized profits in 2013. The overstatement amount is the difference between the transfer
price and historical cost of the merchandise sold downstream. Entry b decreases Paks beginning
retained earnings and cost of goods sold for realized profits in the beginning inventory. Entry
d eliminates the investment income recognized on Paks books and dividends received from Say.
Entry d also adjusts the investment account to its beginning-of-the-period balance.

Cost Method
If Pak accounts for its investment in Say using the cost method, the investment account and the
December 31, 2014, retained earnings are understated by equal amounts in the parents separate
balance sheet. Also, instead of income from Say, the income statement for 2014 shows dividend
income of $9,000. The Investment in Say account is $94,500the original amount paid by Pak
for its investment.
CONVERSION TO EQUITY METHOD APPROACH The cost-to-equity conversion schedule in Exhibit C5-6 is based
on the same data as under the equity method for Pak and Say, except that Pak maintains its
Investment in Say account using the cost method. The schedule provides information necessary to
adjust the working paper accounts to what they would have been had Pak used the equity method.
We prepare the following consolidation working paper entry from the schedule:

a Dividend income (-R, -SE) 9,000

Investment in Say (+A) 51,500
Retained earningsPak (+SE)
Income from Say (R, +SE)
To eliminate dividend income, enter income from Say, adjust the Investment in Say
account to an equity basis, and convert Paks retained earnings to beginning
consolidated retained earnings.

After we enter this working paper adjustment, the other working paper entries are exactly the
same as those in Exhibit 5-7 under the equity method. The parent company may also record this
entry on its books before closing in 2014 to convert the parent-company records to an equity basis.
TRADITIONAL WORKING PAPER SOLUTION FOR COST METHOD When Pak accounts for its investment in Say
by the cost method, the financial statements of Pak and Say are consolidated without converting
to the equity method. Exhibit C5-7 illustrates consolidation working papers when the parent
 EXH IB I T C5 - 7
PAK CORPORATION AND SUBSIDIARY CONSOLIDATION WORKING PAPERS
FOR THE YEAR ENDED DECEMBER 31, 2014 (IN THOUSANDS) I n te r c o mpa n y Pr of it s
o n D o wns t r eam
Adjustments
Sa les C os t M e th o d
and Eliminations
wit h In it ia l
90% Consolidated Con v er s io n to Eq ui ty
Pak Say Debits Credits Statements
Income Statement
Net sales $1,000 $300 a 20 $1,280

Dividend Income 9 d 9

Cost of goods sold (550) (200) c 2.5 a 20

b 2 (730.5)

Other expenses (350) (70) (420)

Noncontrolling interest share

($30,000 * 10%) e 3 (3)

Controlling share of net income $ 109 $ 30 $ 126.5

Retained Earnings
Retained earningsPak $ 160 b 2 f 36 $ 194

Retained earningsSay $ 45 g 45

Controlling share of net income 109 30 126.5

Dividends (50) (10) d 9

e 1 (50)

Retained earningsDecember 31 $ 219 $ 65 $ 270.5

Balance Sheet
Cash $ 30 $ 5 $ 35

Accounts receivable 70 20 h 10 80

Inventories 90 45 c 2.5 132.5

Other current assets 64 10 74

Plant and equipment 800 120 920

Investment in Say 94.5 f 36 g 130.5

$1,148.5 $200 $1,241.5

Accounts Payable $ 80 $ 15 h 10 $ 85

Other liabilities 49.5 20 69.5

Capital stock 800 100 g 100 800

Retained earnings 219 65 270.5

$1,148.5 $200

Noncontrolling Interest January 1 g 14.5

Noncontrolling Interest December 31 e 2 16.5

$1,241.5
company accounts for its investment under the cost method without a working paper entry for
con- version to the equity method.
Working paper entries from Exhibit C5-7 are reproduced for convenient reference:

a Sales (-R, -SE) 20,000

Cost of goods sold (-E, +SE) 20,000
To eliminate intercompany sales and related cost of goods sold.
b Retained earningsPak January 1 (-SE) 2,000
Cost of goods sold (-E, +SE) 2,000
To adjust cost of goods sold and Paks beginning-of-the-period
retained earnings for unrealized profits in the beginning inventory.
c Cost of goods sold (E, -SE) 2,500
Inventories (-A) 2,500
To eliminate unrealized profits in ending inventory.
d Dividend Income (-R, -SE) 9,000
Dividends (+SE) 9,000
To eliminate dividend income and 90% of Says dividends.
e Noncontrolling interest share (E, -SE) 3,000
DividendsSay (+SE) 1,000
Noncontrolling interest (+SE) 2,000
To enter noncontrolling interest share of subsidiary income and dividends.
f Investment in Say (+A) 36,000
Retained earningsPak January 1 (+SE) 36,000
To increase Paks beginning retained earnings for its share
of Says retained earnings increase between the date of
acquisition and the beginning of the period.
g Capital stockSay (-SE)
Retained earningsSay (-SE)
Investment in Say (-A)
Noncontrolling interest January (+SE)
To eliminate reciprocal investment and equity balances.
b Accounts payable (-L) 10,000
Accounts receivable (-A) 10,000
To eliminate reciprocal receivable and payables.

Entries a, b, and c are the same as those in Exhibit I5-7 under the incomplete equity method.
Under the cost method, the balance of Paks Investment in Say account remains at the $94,500
original cost. Pak recognizes dividend income but does not record its share of Says income or
eliminate intercompany profits.
Entry d eliminates dividend income and 90% of Says dividends. Entry e records noncontrol-
ling interest in Says earnings and dividends. Entry f establishes reciprocity between the
Investment in Say account balance and Says equity balances at the beginning of the period
($145,000 90%). Entries g and h are the same as under the equity method.

C ON SOLI DAT IO N EXA MPL E INT ER COM PAN Y P RO FI T S FR OM

U P STR E A M S AL E S
Sit Corporation is an 80%-owned subsidiary of Poh Corporation, acquired for $480,000 on
January 2, 2011, when Sits stockholders equity consisted of $500,000 capital stock and
$100,000 retained earnings. The investment cost was equal to the book value and fair value of
Sits net assets acquired, so no fair value/book value differential resulted from the business
combination.
Sit Corporation sells inventory items to Poh Corporation on a regular basis. The intercom-
pany transaction data for 2012 are as follows:

Sales to Poh in 2012 $300,000

Unrealized profits in Pohs inventory at December 31, 2011 40,000
Unrealized profits in Pohs inventory at December 31, 2012 30,000
Intercompany accounts receivable and payable at December 31, 2012 10,000

Incomplete Equity Method

Assume that Poh Corporation failed to consider its intercompany transactions in accounting for its
investment in Sit for 2011 and 2012. In that case, both Pohs Investment in Sit and its
retained earnings account balances at December 31, 2011, are $32,000 greater than under the
equity method. This $32,000 overstatement is the result of Pohs failure to reduce investment and
investment income accounts for 80% of the $40,000 unrealized inventory profit in 2011.
By December 31, 2012, the overstatement decreases to $24,000 because the $32,000 deferred
from 2011 is not recognized in Pohs income for 2012, and the $24,000 unrealized profit for 2012
(80% of $30,000 unrealized profit at December 31, 2012) is not excluded from Pohs 2012
income. These observations are summarized by comparison with the equity method example
already illustrated (in thousands):

Equity
Incomplete - Overstated = Method
Equity Method + Understated (see Exhibit 5-8)

Investment balance at
December 31, 2011 $600 - $32 $568
Income from Sit in 2012 80 + 32 88
- 24 V
Dividends received in 2012 (40) (40)
Investment balance at
December 31, 2012 $640 - $2 $616

CONVERSION TO EQUITY METHOD APPROACH The errors from omitting the intercompany profits in 2011 and
2012 affect the Investment in Sit and retained earnings accounts of Poh by equal amounts.
A working paper entry to correct for the omissions on Pohs books in the 2012 consolidation
working papers of Poh and Subsidiary is as follows:

a Retained earningsPoh (-SE) 32,000

Income from Sit (R, +SE) 8,000
Investment in Sit (-A) 24,000

This working paper entry converts the separate accounts of Poh from the incomplete equity to
the equity method for working paper utilization. After entering the conversion in the working
papers, the other working paper entries are the same as those illustrated in the consolidation work-
ing papers of Exhibit 5-8. The conversion entry could also be recorded in Pohs separate records
before closing in 2012 to correct for the 2011 and 2012 errors of omission.
TRADITIONAL WORKING PAPER SOLUTION FOR INCOMPLETE EQUITY METHOD Exhibit I5-8 illustrates the traditional
approach to consolidating the financial statements of Poh and Sit under an incomplete equity
method. Beginning parent-company retained earnings is overstated by Pohs share of the unreal-
ized profits in Pohs December 31, 2011, inventory of goods acquired from Sit. Entry b
eliminates the $40,000 cost-of-goods-sold effect of the intercompany profits in Pohs beginning
inventory and allocates it 80% to Pohs beginning-of-the-period retained earnings and 20%
EXH I B I T I5 - 8
POCH CORPORATION AND SUBSIDIARY CONSOLIDATION WORKING PAPERS
In te r c o mpa n y Pr of it s FOR THE YEAR ENDED DECEMBER 31, 2012 (IN THOUSANDS)
o n U ps t r eam Sa le s
Adjustments
In c om pl et e E qu ity
and Eliminations
M e th o d
80% Consolidated
Poh Sit Debits Credits Statements
Income Statement
Sales $3,000 $1,500 a 300 $4,200

Income from Sit 80 d 80

Cost of goods sold (2,000) (1,000) c 30 a 300 (2,690)

b 40

Other expenses (588) (400) (988)

Noncontrolling interest share* e 22 (22)

Controlling share of net income $ 492 $ 100 $ 500

Retained Earnings
Retained earningsPoh $1,032 b 32 $1,000

Retained earningsSit $ 250 f 250

Controlling share of net income 492 100 500

Deduct: Dividends (400) (50) d 40

e 10 (400)

Retained earningsDecember 31 $1,124 $ 300 $1,100

Balance Sheet
Cash $ 200 $ 50 $ 250

Accounts receivable 700 100 g 50 750

Inventories 1,100 200 c 30 1,270

Other current assets 384 150 534

Plant and equipmentnet 2,000 500 2,500

Investment in Sit 640 d 40

f 600

$5,024 $1,000 $5,304

Accounts payable $ 500 $ 150 g 50 $ 600

Other liabilities 400 50 450

Capital stock 3,000 500 f 500 3,000

Retained earnings 1,124 300 1,100

$5,024 $1,000

Noncontrolling interest January 1 b 8 f 150

Noncontrolling interest December 31 e 12 154

$5,304

*Noncontrolling interest share ($100,000 + $40,000 - $30,000) * 20% = $22,000

 EXH IB I T C5 - 9
Pohs Retained Income
Earnings Investment from Sit Dividend Poh and Subsidiary
12/31/11 in Sit Income Cost-to-Equity
Conversion Schedule
Prior Years Effect
80% of increase in Sits undistributed earnings
from January 2, 2011, to December 31, 2011
($250,000 - $100,000) * 80% $120,000 $120,000
80% of unrealized profit in Pohs December 31,
2011, inventory (40,000 * 80%) (32,000) (32,000)
Current Years Effect
Reclassify dividend income as investment
decrease ($50,000 dividends x 80%) (40,000) $(40,000)
Equity in Sits 2012 income ($100,000 * 80%) 80,000 $80,000
80% of unrealized profit in Pohs December 31,
2011, inventory 32,000 32,000
80% of unrealized profit in Pohs December 31,
2012, inventory ($30,000 * 80%) (24,000) (24,000)
2012 working paper adjustments to convert from
cost to equity $ 88,000 $136,000 $88,000 $(40,000)

to beginning-of-the-period noncontrolling interest. Entry d eliminates income from Sit (as

recorded by Poh) and 80% of Sits dividends and reduces the investment account to its
beginning-of-the-period balance. Other entries in Exhibit I5-8 are the same as those under the
equity method.

Cost Method
If Poh Corporation uses the cost method of accounting for its investment in Sit for 2011 and
2012, its Investment in Sit account remains at $480,000, the original cost of the investment.
Assume the same facts for Poh and Sit as shown in Exhibit 5-8 under the equity method,
except that Poh accounts for the investment in Sit by the cost method.
CONVERSION TO EQUITY METHOD APPROCH Exhibit C5-9 provides data for the working paper entry to
convert Pohs cost-based accounting records to the equity basis. We use the information in the
cost-to-equity conversion schedule to construct a consolidation working paper entry for Poh and
Sit as follows:

a Dividend Income (-R, -SE) 40,000

Investment in Sit (+A) 136,000
Income from Sit (R, +SE) 88,000
Retained earningsPoh (+SE) 88,000
To eliminate Dividend Income, enter Income from Sit, adjust the Investment in
Sit account to an equity basis, and convert Pohs beginning retained earnings
into beginning consolidated retained earnings.

This entry is the first working paper adjustment, after which other working paper entries are the
same as those prepared when using the equity method. The cost-to-equity conversion entry may be
recorded on the parent company books before closing in 2012 to convert the parent-company
records to an equity basis.
TRADITIONAL WORKING PAPER SOLUTION FOR THE COST METHOD Exhibit T5-8 illustrates working paper proce-
dures to consolidate the financial statements of Poh and Sit without converting to the equity
method. Entries a, b, and c under the cost method are identical to those under an incomplete equity
method. Entry d eliminates dividend income and 80% of Sits dividends. Entry e records the
noncontrolling interest in Sits earnings and dividends. Entry f takes up Pohs share of Sits
EXH I BI T T5- 8 POH CORPORATION AND SUBSIDIARY CONSOLIDATION WORKING PAPERS
I n terco mp an y Pro f it s FOR THE YEAR ENDED DECEMBER 31, 2012 (IN THOUSANDS)
o n U ps t re am Sa les
Adjustments
Tra d iti on a l C os t
and Eliminations
M e th o d
80% Consolidated
Poh Sit Debits Credits Statements
Income Statement
Sales $3,000 $1,500 a 300 $4,200

Income from Sit 40 d 40

Cost of goods sold (2,000) (1,000) c 30 a 300 (2,690)

b 40

Other expenses (588) (400) (988)

Noncontrolling interest share* c 22 (22)

Controlling share of net income $ 452 $ 100 $ 500

Retained Earnings
Retained earningsPoh $ 912 b 32 f 120 $1,000

Retained earningsSit $ 250 g 250

Controlling share of net income 452 100 500

Deduct: Dividends (400) (50) d 40

e 10 (400)

Retained earningsDecember 31 $ 964 $ 300 $1,100

Balance Sheet
Cash $ 200 $ 50 $ 250

Accounts receivable 700 100 h 50 750

Inventories 1,100 200 c 30 1,270

Other current assets 384 150 534

Plant and equipmentnet 2,000 500 2,500

Investment in Sit 480 f 120 g 600

$4,864 $1,000 $5,304

Accounts payable $ 500 $ 150 h 50 $ 600

Other liabilities 400 50 450

Capital stock 3,000 500 g 500 3,000

Retained earnings 964 300 1,100

$4,864 $1,000

Noncontrolling interest January 1 b 8 g 150

Noncontrolling interest December 31 e 12 154

$5,304

*Noncontrolling interest share ($100,000 + $40,000 - $30,000) * 20% = $22,000

retained earnings increase between the date of acquisition of the investment and the beginning of
2012, thereby establishing reciprocity between the investment account at the beginning of the
period and 80% of Sits $750,000 equity at the same date. Entries d and f are reproduced for
convenient reference:

d Dividend income (-R, -SE) 40,000

Dividends (+SE) 40,000
To eliminate dividend income and 80% of Sits dividends.
f Investment in Sit (+A) 120,000
Retained earnings Poh January 1 (+SE) 120,000
To establish reciprocity between parents beginning-of-the-period retained
earnings and the investment account at the same date.

Entry g eliminates reciprocal investment and equity balances and enters beginning noncontrol-
ling interest the same as under the equity method. Entry b eliminates reciprocal accounts
receivable and payable.

ASSIGNMENT MA TERIAL

W 5-1
Upstream Sales
Sud Corporation is a 90%-owned subsidiary of Par Corporation, acquired by Par at book value, which was also equal to
its fair value on January 1, 2011. Par uses the equity method of accounting for its investment in Sud but does not adjust
for intercompany profit transactions (an incomplete equity method). Separate income statements for Par and Sud for
2011 and 2012 are as follows (in thousands):

Par Sud

2011 2012 2011 2012

Sales $1,000 $1,200 $500 $700

Income from Sud 90 135
Cost of sales (600) (720) (300) (350)
Other expenses (200) (250) (100) (200)
Net income $ 290 $ 365 $100 $150

Intercompany sales from Sud to Par were $80,000 during 2011 and $120,000 during 2012. Unrealized profits
included in ending inventories from these intercompany sales amounted to $8,000 at December 31, 2011, and $24,000
at December 31, 2012.
1. Consolidated cost of sales for 2012 should be:
a $950,000
b $966,000
c $934,000
d $926,000
2. Noncontrolling interest share for 2012 should be:
a $16,600
b $15,000
c $13,400
d $12,600
3. Controlling share of consolidated net income for 2012 should be:
a $381,000
b $379,400
c $365,000
d $350,600
ES58 CHAPTER 5

W 5-2
Computations and correcting journal entries (downstream)
Pep Corporation recorded $65,000 investment income from Son Corporation, its 80%-owned subsidiary, for
2012, and $70,000 for 2013. This investment income represented 80% of Sons reported income of $81,250 and
$87,500 in 2012 and 2013, respectively. Peps net income (including investment income) for 2012 was $240,000
and for 2012 it was $160,000.
During 2012 Pep sold merchandise to Son for $180,000. This merchandise cost Pep $130,000 and 40%
of it was inventoried by Son at December 31, 2012.
Pep sold merchandise that cost $150,000 to Son for $210,000 during 2013. The December 31, 2013, inventory of
Son included $63,000 of this merchandise.

REQUIRED
1. Compute the following:
a. Peps income from Son on a correct equity basis for 2012 and 2013
b. Consolidated net income for 2012 and 2013
2. Prepare journal entries to correct Peps books at December 31, 2013, assuming that closing entries at
December 31, 2013, have not been made.

W 5-3
Consolidated income statement (upstream sales)
Sap Corporation is an 80%-owned subsidiary of Par Corporation, acquired at book value on January 1, 2011, when
Saps assets and liabilities were equal to their fair values. During 2011, Sap sold $12,000 merchandise to Par at a 25%
gross profit (cost to Sap was $9,000). At December 31, 2011, Par included 40% of this merchandise in its inventory
at its purchase price from Sap.
Income statements for Par and Sap Corporation for 2011 follow (in thousands):

Sales
Income from Sap
Cost of sales
Other expenses
Net income

R E Q U I R E D : Prepare a consolidated statement for Par Corporation and Subsidiary for 2011
 Electronic Supplement to Chapter 5 ES59

W 5-4
Journal entries and computations (upstream sales and incomplete equity method)
Sad is a 75%-owned subsidiary of Pod Corporation, acquired by Pod at book value (also fair value) on January 2,
2012. Comparative income statements for Pod and Sad for 2014 are as follows (in thousands):

Pod Sad

Net sales $500 $200

Cost of goods sold 300 120
Gross profit 200 80
Operating expenses 60 30
Operating income 140 50
Income from Sad 37.5
Net income $177.5 $ 50

ADDITIONAL INFORMA TION

1. Sad made sales to Pod of $60,000 in 2013 and $100,000 in 2014.
2. Pods inventories at December 31, 2013, and December 31, 2014, included merchandise on which
Sad reported profit of $15,000 and $24,000 during 2013, and 2014, respectively.
3. Pod has not eliminated the effect of intercompany profits in accounting for its investment in Sad.

REQUIRED
1. Prepare any entries necessary to adjust Pods Investment in Sad account at December 31, 2014, and
income from Sad for 2014.
2. Determine the following:
a. Consolidated cost of goods sold for 2014.
b. Noncontrolling interest expense for 2014.
c. Consolidated net income for 2014.

W 5-5
Computations (downstream sales, cost method, no noncontrolling Interest)
Pat Corporation paid $2,900,000 for all the outstanding voting common stock of Set Corporation on January 2, 2005,
when Sets stockholders equity consisted of $1,500,000 common stock and $1,000,000 retained earnings. The excess
fair value over book value acquired was assigned to previously unrecorded patents with a 10-year amortization period.
Financial information relating to Sets income, dividends, and retained earnings for 2012 and 2013 follows (in thousands):

2012 2013

Net income as reported $ 400 $ 700

Dividends 200 300
Retained earnings, December 31 1,500 1,900

During 2013 Pat sold inventory items to Set for $120,000, and $20,000 intercompany profit from the sales was
unrealized at December 31. Sets December 31, 2012, inventory included $30,000 unrealized profit on merchandise
acquired from Pat.
Pat used the cost method of accounting for its investment in Set, and accordingly, Pats investment in Set
account balance has remained at $2,900,000 since acquisition.
Pats retained earnings balances at year-end 2012 and 2013 are $4,700,000 and $5,300,000, respectively.

REQUIRED
1. Determine the correct balance of Pats Investment in Set account at December 31, 2012, under the
equity method.
2. Determine Pats income from Set under the equity method for 2013.
3. Prepare a schedule to convert from the cost to the equity method in the consolidation working papers for 2013.
4. Prepare a consolidation working paper entry for 2013 to convert Pats accounts to an equity basis for
consolidation purposes. The entry should be based on the schedule prepared in 3.
ES60 CHAPTER 5

W 5-6
Prepare parent company and consolidated income statements (downstream sales)
Comparative income statements for Par Corporation and its 70%-owned subsidiary, Set Corporation, for 2009
follow (in thousands):

Par Set

Sales $1,000 $600

Cost of sales 480 310
Gross profit 520 290
Operating expenses 300 180
Separate income 220 110
Income from Set 77
Net income $ 297 $110

ADDITIONAL INFORMA TION

1. Par acquired its interest in Set on January 1, 2010, at a price $360,000 in excess of the fair value of the
interest acquired. Par assigns a fair value/book value differential of $100,000 to equipment with a
10-year life.
2. Par sells inventory items to Set on a regular basis, with intercompany sales data as follows:

2010

Pars sales to Set $300,000

Pars cost of sales to Set 200,000
Percent unsold at December 31 40%

REQUIRED
1. Prepare a corrected income statement for Par Corporation for 2011 with Set Corporation being treated as
an equity investee.
2. Prepare a consolidated income statement for Par Corporation and Subsidiary for 2011.

W 5-7
Comparative separate-company and consolidated balance sheets for Pam Corporation and its 80%-owned
subsidiary, Say Corporation, at year-end 2012 are as follows (in thousands):

Pam Say

Assets Cash Inventories

Other current assets $ 180 $ 40
200 160
70 150
Plant assetsnet 500 350
Investment in Say 630
Patents
$1,580 $700
Equities
Accounts payable $ 80 $ 50
Dividends payable 100 50
Capital stock, $10 par 1,000 500
Retained earnings 400 100
Noncontrolling interest
$1,580 $700

Investigation reveals that the consolidated balance sheet is in error because Pam Corporation has not amortized
patents and has not eliminated unrealized inventory profits. The investment in Say was acquired on January 1, 2009,
at a price $150,000 in excess of the book value and fair value. The original plan was to amortize patents over 20 years.
Unrealized profits in Says December 31, 2011 and 2012, inventories of merchandise acquired from Pam were
$30,000 and $50,000, respectively. Other current assets include intercompany receivables of $10,000.
 Electronic Supplement to Chapter 5 ES61

R E Q U I R E D : Prepare consolidated balance sheet working papers on December 31, 2012, for Pam
Corporation and Subsidiary.