Chap007 131230191031 Phpapp01

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 XXXXXX
Cost of Goods Sold XXXXXX
The debit to sales is based on the intercorporate sale price. This means that only the
revenue recorded by the company ultimately selling to the nonaffiliate is to be included in the
consolidated income statement. Cost of goods sold is credited for the amount paid by the
purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded
by 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 XXXXXX
Cost of Goods Sold XXXXXX
Inventory XXXXXX
The debit to sales is for the full amount of the transfer price. Inventory is credited for the
unrealized profit at the end of the period and cost of goods sold is credited for the amount
charged to cost of goods sold by the company making the intercompany sale.
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: President
Water Products Corporation
From: , CPA
Re: Inventory Sale and Purchase of New Inventory
If Water Products holds only a small percent of the ownership of Plumbers Products and
Growinkle Manufacturing, it should have no difficulty in reporting the desired results. This
would not be the case if the two companies are subsidiaries of Water Products.
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: , CPA
Re: 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 180,000

Inventory 60,000
Cost of Goods Sold 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 60,000

Retained Earnings 54,000
Noncontrolling interest 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. a
2. c
3. a
4. c
5. c Net assets reported $320,000

Profit on intercompany sale $48,000
Proportion of inventory unsold at year end
($60,000 / $240,000) x .25
Unrealized profit at year end (12,000)
Amount reported in consolidated statements $308,000
6. c Inventory reported by Banks ($175,000 + $60,000) $235,000

Inventory reported by Lamm 250,000
Total inventory reported $485,000
Unrealized profit at year end
[$50,000 x ($60,000 / $200,000)] (15,000)
Amount reported in consolidated statements $470,000
7-9
E7-2 Multiple-Choice Questions on the Effects of Inventory Transfers

[AICPA Adapted]
1. b Cost of goods sold reported by Park $ 800,000

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

$1,100,000, requiring candidates to select the closest
answer.
2. d $32,000 = ($200,000 + $140,000) $308,000
3. b $6,000 = ($26,000 + $19,000) $39,000
4. c $9,000 = Inventory held by Spin $12,000

($32,000 x .375)
Unrealized profit on sale
[($30,000 + $25,000) (3,000)
$52,000]
Carrying cost of inventory for
Power $ 9,000
5. b .20 = $14,000 / [(Stockholders Equity $50,000) +

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

years]
E7-3 Multiple Choice Consolidated Income Statement

c
1.
2. b
3. c Total income ($86,000 - $47,000) $39,000

Income assigned to noncontrolling
interest [.40($86,000 - $60,000)] (10,400)
Consolidated net income assigned
to controlling interest $28,600
7-10
E7-4 Multiple-Choice Questions Consolidated Balances
1. c
2. a Amount paid by Lorn Corporation $120,000

Unrealized profit (45,000)
Actual cost $ 75,000
Portion sold x .80
Cost of goods sold $ 60,000
3. e Consolidated sales $140,000

Cost of goods sold (60,000)
Consolidated net income $ 80,000
Income to Dressers noncontrolling
interest:
Sales $120,000
Reported cost of sales (75,000)
Report income $ 45,000
Portion realized x .80
Realized net income $ 36,000
Portion to Noncontrolling
Interest x .30
Income to noncontrolling
Interest (10,800)
Income to controlling interest $ 69,200
4. a Inventory reported by Lorn $ 24,000

Unrealized profit ($45,000 x .20) (9,000)
Ending inventory reported $ 15,000
E7-5 Multiple-Choice Questions Consolidated Income Statement
1. a $20,000 = $30,000 x [($48,000 - $16,000) / $48,000]
2. d Sales reported by Movie Productions Inc. $67,000

Cost of goods sold ($30,000 x 2/3) (20,000)
Consolidated net income $47,000
3. a $7,000 = [($67,000 - $32,000) x .20]
7-11
E7-6 Realized Profit on Intercompany Sale
a. Journal entries recorded by Nordway Corporation:
(1) Inventory 960,000

Cash (Accounts Payable) 960,000
(2) Cash (Accounts Receivable) 750,000

Sales 750,000
(3) Cost of Goods Sold 600,000

Inventory 600,000
b. Journal entries recorded by Olman Company:

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

Sales 1,125,000

Inventory 750,000
c. Eliminating entry:
E(1) Sales 750,000

7-12
E7-7 Sale of Inventory to Subsidiary
a. Journal entries recorded by Nordway Corporation:


Sales 750,000

Inventory 600,000
b. Journal entries recorded by Olman Company:


Sales 810,000

Inventory 540,000
E(1) Sales 750,000

Inventory 42,000
7-13
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).
E(1) Sales 940,000

Inventory 36,000
d. Eliminating entry:
E(1) Retained Earnings, January 1 36,000

e. Eliminating entry:

Noncontrolling Interest 14,400
7-14
7-15
E7-9 Income Statement Effects of Unrealized Profit
a. Sale price to Holiday Bakery per bag ($900,000 / 100,000) $ 9.00

Profit per bag [$9.00 - ($9.00 / 1.5)] (3.00)
Cost per bag $ 6.00
Bags sold by Holiday Bakery (100,000 - 20,000) x 80,000
Consolidated cost of goods sold $480,000
b. E(1) Sales 900,000

Inventory ($3.00 x 20,000 bags) 60,000
Required Adjustment to Cost of Goods Sold:
Cost of goods sold Farmco ($900,000 / 1.5) $ 600,000

Cost of goods sold Holiday ($9.00 x 80,000 units) 720,000
$1,320,000
Consolidated cost of goods sold ($6.00 x 80,000 units) (480,000)
Required adjustment $ 840,000
c. Operating income of Holiday Bakery $400,000

Net income of Farmco Products 150,000
$550,000
Less: Unrealized inventory profits (60,000)
Less: Income assigned to noncontrolling interest
($150,000 - $60,000 unrealized profit) x .40 (36,000)
Income assigned to controlling interest $454,000
Alternate computation:
Operating income of Holiday Bakery $400,000

Net income of Farmco Products $150,000
Unrealized profits ($3.00 x 20,000 units) (60,000)
Ownership held by Holiday Bakery x .60
54,000
7-16
E7-10 Prior-Period Unrealized Inventory Profit
a. Cost per bag of flour ($9.00 / 1.5) $ 6.00

Bags sold x 20,000
Cost of goods sold from inventory held, January 1, 20X9 $120,000
b. Assuming the basic equity method is used by Holiday Bakery in

accounting for its investment in Farmco Products, the following
eliminating entry is needed:

$60,000 = 20,000 bags x $3.00
c. Operating income of Holiday Bakery $300,000

Net income of Farmco Products 250,000
$550,000
Add: Inventory profits realized in 20X9 60,000
Less: Income assigned to noncontrolling shareholders
($250,000 + $60,000) x .40 (124,000)
Alternate computation:
Operating income of Holiday Bakery $300,000

Net income of Farmco Products $250,000
Inventory profits realized in 20X9 60,000
Realized net income $310,000
Ownership held by Holiday Bakery x .60
186,000
7-17
E7-11 Computation of Consolidated Income Statement Data
a. Reported sales of Prem Company $400,000

Reported sales of Cooper Company 200,000
$600,000
Intercompany sales by Prem Company in 20X5 $ 30,000
Intercompany sales by Cooper Company in 20X5 80,000 (110,000)
Sales reported on consolidated income statement $490,000
b. Cost of goods sold reported by Prem Company $250,000

Cost of goods sold reported by Cooper Company 120,000
$370,000
Adjustment due to intercompany sales (100,500)
Consolidated cost of goods sold $269,500
Adjustment to cost of goods sold:
CGS charged by Prem on sale to Cooper $ 20,000

CGS charged by Cooper ($30,000 - $6,000) 24,000
Total charged to CGS $ 44,000
CGS for consolidated entity
$20,000 x ($24,000 / $30,000) (16,000)
Required adjustment to CGS $ 28,000
CGS charged by Cooper on sale to Prem $ 50,000

CGS charged by Prem ($80,000 - $20,000) 60,000
Total charged to CGS $110,000
CGS for consolidated entity
$50,000 x ($60,000 / $80,000) (37,500)
Required adjustment to CGS 72,500
Total adjustment required $100,500
c. Reported net income of Cooper Company $ 45,000

Unrealized profit on sale to Prem Company
$30,000 x ($20,000 / $80,000) (7,500)
Noncontrolling interest's share x .40
Income assigned to noncontrolling interest $ 15,000
d. Reported net income of Pem Company $107,000

Less: Income from subsidiary (27,000) $ 80,000
Net income of Cooper Company 45,000
Operating income $125,000
Less: Unrealized inventory profits of Prem
Company [$10,000 x ($6,000 / $30,000)] $ 2,000
Unrealized inventory profits of Copper
Company [$30,000 x ($20,000 / $80,000)] 7,500
Income assigned to noncontrolling
interest 15,000 (24,500)
Income assigned to controlling interest $ 98,500
7-18
7-19
E7-12 Sale of Inventory at a Loss
a. Entries recorded by Trent Company
Inventory 400,000
Cash 400,000
Purchase inventory.
Cash 300,000
Sales 300,000
Sale of inventory to Gord Corporation.

Inventory 400,000
Record cost of goods sold.
Entries recorded by Gord Corporation
Inventory 300,000
Cash 300,000
Purchase of inventory from Trent.
Cash 360,000
Sales 360,000
Sale of inventory to nonaffiliates.

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

as $240,000 ($400,000 x .60).
c. Operating income reported by Gord $230,000

Net income reported by Trent $ 80,000
Unrealized loss on intercorporate sale
($400,000 - $300,000) x .40 40,000 120,000
Income to assigned to noncontrolling interest
($120,000 x .25) (30,000)
7-20
E7-12 (continued)
d. Eliminating entry, December 31, 20X8:
E(1) Sales 300,000

Inventory 40,000
Computation of cost of goods sold to be eliminated
Cost of goods sold recorded by Trent $400,000

Cost of goods sold recorded by Gord 180,000
Total recorded $580,000
Consolidated cost of goods sold (240,000)
Required elimination $340,000
7-21
E7-13 Intercompany Sales
a. Consolidated net income for 20X4:
Operating income of Hollow Corporation $160,000

Net income of Surg Corporation 90,000
$250,000
Less: Unrealized profit Surg Corporation (15,000)
b. Inventory balance, December 31, 20X5:
Inventory reported by Hollow Corporation $ 30,000

Unrealized profit on books of Surg
Corporation
($135,000 - $90,000) x ($30,000/$135,000) (10,000) $20,000
Inventory reported by Surg Corporation $110,000

Unrealized profit on books of Hollow
Corporation
($280,000 - $140,000) x ($110,000/$280,000) (55,000) 55,000
Inventory, December 31, 20X5 $75,000
c. Consolidated cost of goods sold for 20X5:
CGS on sale of inventory on hand January 1, 20X5

$45,000 x ($120,000 / $180,000) $ 30,000
CGS on items purchased from Surg in 20X5
($135,000 - $30,000) x ($90,000 / $135,000) 70,000
CGS on items purchased from Hollow in 20X5
($280,000 - $110,000) x ($140,000 / $280,000) 85,000
Total cost of goods sold $185,000
d. Income assigned to controlling interest:
Operating income of Hollow Corporation $220,000

Net income of Surg Corporation 85,000
$305,000
Add: Inventory profit of prior year realized in 20X5 15,000
Less: Unrealized inventory profit Surg Corporation (10,000)
Unrealized inventory profit Hollow Corporation (55,000)
Income to noncontrolling interest
($85,000 + $15,000 - $10,000) x .30 (27,000)
7-22
E7-14 Consolidated Balance Sheet Workpaper
a. Eliminating entries:
E(1) Common Stock Hingle Company 150,000

Investment in Hingle Company Stock 280,000
Eliminate investment balance.
E(2) Retained Earnings 28,000

Inventory 40,000
Eliminate unrealized inventory profit
of Hingle Company.
E(3) Retained Earnings 10,000

Inventory 10,000
Eliminate unrealized inventory profit
of Doorst Corporation.
b. Doorst Corporation and Hingle Company

Consolidated Balance Sheet Workpaper
December 31, 20X8
Doorst Hingle Eliminations Consol-

Item Corp. Co. Debit Credit idated
Cash and Receivables 98,000 40,000 138,000

Inventory 150,000 100,000 (2) 40,000
(3) 10,000 200,000
Buildings and Equipment
(net) 310,000 280,000 590,000
Investment in Hingle
Company Stock 280,000 (1)280,000
Debits 838,000 420,000 928,000
Accounts Payable 70,000 20,000 90,000

Common Stock 200,000 150,000 (1)150,000 200,000
Retained Earnings 568,000 250,000 (1)250,000
(2) 28,000
(3) 10,000 530,000
Noncontrolling Interest (2) 12,000 (1)120,000 108,000
Credits 838,000 420,000 450,000 450,000 928,000
7-23
E7-15* Multiple Transfers between Affiliates
a. Entries recorded by Klon Corporation
Cash 150,000
Sales 150,000
Sale of inventory to Brant Company.

Inventory 100,000
Entries recorded by Brant Company
Inventory 150,000
Cash 150,000
Purchase of inventory from Klon.
Cash 150,000
Sales 150,000
Sale of inventory to Torkel Company.

Inventory 150,000
Entries recorded by Torkel Company
Inventory 150,000
Cash 150,000
Purchase of inventory from Brant.
Cash 120,000
Sales 120,000
Sale of inventory to nonaffiliates.

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)].
7-24
E7-15* (continued)
d. Eliminating entry for inventory:
E(1) Sales 300,000

Inventory 20,000
Computation of cost of goods sold to be eliminated
Cost of goods sold recorded by Klon $100,000

Cost of goods sold recorded by Brant 150,000
Cost of goods sold recorded by Torkel 90,000
Consolidated cost of goods sold (60,000)
Computation of reduction to carrying value of inventory
Inventory reported by Torkel $60,000

Inventory balance to be reported (40,000)
7-25
E7-16 Inventory Sales
a. Journal entries recorded by Spice Company:

Record purchases from nonaffiliate.

Sales 60,000
Record sale to Herb Corporation.

Inventory 40,000
Record cost of goods sold to Herb Corporation.
Journal entries recorded by Herb Corporation:

Record purchases from Spice Company.

Sales 90,000
Record sale of items to nonaffiliates.

Inventory 45,000
b. Eliminating entry:
E(1) Sales 60,000

Inventory 5,000
Eliminate intercompany sale of inventory.
7-26
E7-17 Prior-Period Inventory Profits

Cost of goods sold 10,000
Eliminate beginning inventory profit:
$10,000 = ($180,000 - $120,000)
x ($30,000 / $180,000)
E(2) Sales 240,000

Inventory 50,000
b. 20X8 20X9
Reported net income of Level Brothers $350,000 $420,000
Unrealized profit, December 31, 20X8 (10,000) 10,000
Unrealized profit, December 31, 20X9 (50,000)
Realized net income $340,000 $380,000
Noncontrolling interest's share of ownership x .25 x .25
Income assigned to noncontrolling interest $ 85,000 $ 95,000
7-27
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) Retained Earnings, January 1 15,000

Eliminate beginning inventory profit.
E(2) Sales 180,000

Inventory 15,000
d. Reported net income of Bitner Company $ 90,000

Prior-period profit realized in 20X2 25,000
Unrealized profit on 20X2 sales (15,000)
Realized income $100,000
Proportion held by noncontrolling interest x .40
P7-19 Unrealized Profit on Upstream Sales
20X2 20X3 20X4
Operating income reported by Pacific $150,000 $240,000 $300,000

Net income reported by Carroll 100,000 90,000 160,000
$250,000 $330,000 $460,000
Inventory profit, December 31, 20X2
$70,000 - ($70,000 / 1.25) (14,000) 14,000
$105,000 - ($105,000 / 1.25) (21,000) 21,000
$120,000 - ($120,000 / 1.25) (24,000)
Consolidated net income $236,000 $323,000 $457,000
Income to noncontrolling interest:
($100,000 - $14,000) x .40 (34,400)
($90,000 + $14,000 - $21,000) x .40 (33,200)
($160,000 + $21,000 - $24,000) x .40 (62,800)
Income to controlling interest $201,600 $289,800 $394,200
7-28
P7-20 Net Income of Consolidated Entity
Operating income of Master for 20X5 $118,000

Net income of Crown for 20X5 65,000
$183,000
Add: Prior year profits realized by Master 25,000
Prior year profits realized by Crown 40,000
Less: Unrealized profits for 20X5 by Master (14,000)
Unrealized profits for 20X5 by Crown (55,000)
Amortization of differential
($45,000 / 15 years) (3,000)
Consolidated net income, 20X5 $176,000
Less: Income to noncontrolling interest
($65,000 + $40,000 - $55,000 - $3,000) x .30 (14,100)
Income to controlling interest $161,900
P7-21 Correction of Eliminating Entries
a. Proportion of intercompany inventory purchases resold during 20X5:
Unrealized profit at year end $ 12,000

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

by Bolger during 20X5 (1.00 - .30) .70
b. Eliminating entries, December 31, 20X5:
E(1) Accounts Payable 80,000

Accounts Receivable 80,000
Eliminate intercompany
receivable/payable.
E(2) Sales 140,000

Inventory 12,000
7-29
P7-22 Incomplete Data
a. Increase in fair value of buildings and equipment:
Consolidated total $ 680,000

Balance reported by Lever (400,000)
Balance reported by Tropic (240,000)
Increase in value $ 40,000
b. Accumulated depreciation for consolidated entity:
Accumulated depreciation reported by Lever $180,000

Accumulated depreciation reported by Tropic 110,000
Cumulative write-off of differential
($5,000 x 6 years) 30,000
Accumulated depreciation for consolidated entity $320,000
c. Amount paid by Lever to acquire ownership in Tropic:
Common stock outstanding $ 60,000

Retained earnings at acquisition 30,000
Total book value at acquisition $ 90,000
Increase in value of buildings and equipment 40,000
Fair value of net assets acquired $130,000
Proportion of ownership acquired x .75
Amount paid by Lever $ 97,500
d. Investment in Tropic Company stock reported at December 31, 20X6:
Tropic's common stock outstanding December 31, 20X6 $ 60,000

Tropic's retained earnings reported December 31, 20X6 112,000
Total book value $172,000
Proportion of ownership held by Lever x .75
Lever's share of net book value $129,000
Unamortized differential ($5,000 x 2 years) x .75 7,500
Investment in Tropic Company stock $136,500
e. Intercorporate sales of inventory in 20X6:
Sales reported by Lever $420,000

Sales reported by Tropic 260,000
Total sales $680,000
Sales reported in consolidated income statement (650,000)
Intercompany sales during 20X6 $ 30,000
7-30
P7-22 (continued)
f. Unrealized inventory profit, December 31, 20X6:
Inventory reported by Lever $125,000

Inventory reported by Tropic 90,000
Total inventory $215,000
Inventory reported in consolidated balance sheet (211,000)
Unrealized inventory profit, December 31, 20X6 $ 4,000
g. Eliminating entry to remove the effects of intercompany inventory

sales during 20X6:
E(1) Sales 30,000

Inventory 4,000
h. Unrealized inventory profit at January 1, 20X6:
Cost of goods sold reported by Lever $310,000

Cost of goods sold reported by Tropic 170,000
Reduction of cost of goods sold for intercompany
sales during 20X6 (26,000)
Adjusted cost of goods sold $454,000
Cost of goods sold reported in consolidated
income statement (445,000)
Additional adjustment to cost of goods sold
due to unrealized profit in beginning inventory $ 9,000
i. Accounts receivable reported by Lever at December 31, 20X6:
Accounts receivable reported for consolidated entity $145,000

Accounts receivable reported by Tropic (55,000)
Difference $ 90,000
Adjustment for intercompany receivable/payable:
Accounts payable reported by Lever $ 86,000
Accounts payable reported by Tropic 20,000
Total reported accounts payable $106,000
Accounts payable reported for consolidated
entity (89,000)
Adjustment for intercompany receivable/payable 17,000
Accounts receivable reported by Lever $107,000
7-31
P7-23 Eliminations for Upstream Sales
a. Eliminating entries, December 31, 20X8:
E(1) Income from Subsidiary 32,000

Investment in Superior Filter Stock 32,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 9,000

Assign income to noncontrolling interest.
E(3) Common Stock Superior Filter Company 90,000

Retained Earnings, January 1 220,000
Investment in Superior Filter Stock 248,000
Eliminate beginning investment balance.

Eliminate beginning inventory profit.
E(5) Sales 150,000

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
7-32
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) $ 45,000
Net income of Superior Filter
($200,000 - $140,000 - $20,000) 40,000
$ 85,000
Inventory profit realized from 20X7 20,000
Unrealized inventory profit for 20X8 (15,000)
Consolidated net income $ 90,000
Income assigned to noncontrolling interest
($40,000 + $20,000 - $15,000) x .20 (9,000)
Income assigned to controlling interest $ 81,000
c. Noncontrolling interest, December 31, 20X8:
Common stock $ 90,000

Retained earnings ($220,000 + $40,000) 260,000
Less: Unrealized inventory profit (15,000)
$335,000
Proportion of stock held by noncontrolling
interest x .20
Noncontrolling interest $ 67,000
7-33
P7-24 Multiple Inventory Transfers
a. Consolidated net income for 20X8:
Operating income of Ajax Corporation $80,000

Unrealized profit, December 31, 20X8
($35,000 - $15,000) x ($7,000 / $35,000) (4,000) $ 76,000
Net income of Beta Corporation $37,500

Profit realized from 20X7
($30,000 - $24,000) x ($10,000 / $30,000) 2,000
($72,000 - $63,000) x ($12,000 / $72,000) (1,500) 38,000
Net income of Cole Corporation $20,000

Profit realized from 20X7
($72,000 - $60,000) x ($18,000 / $72,000) 3,000
($45,000 - $27,000) x ($15,000 / $45,000) (6,000) 17,000
b. Inventory balance, December 31, 20X8:
Balance per Beta Corporation $ 7,000

Less: Unrealized profit (4,000) $ 3,000
Balance per Cole Corporation $12,000

Less: Unrealized profit (1,500) 10,500
Balance per Ajax Corporation $15,000

Less: Unrealized profit (6,000) 9,000
Inventory balance per consolidated statement $22,500
c. Income assigned to noncontrolling interest in 20X8:
Realized income of Beta Corporation $38,000

Proportion of stock held by
noncontrolling interest x .30 $11,400
Realized income of Cole Corporation $17,000

noncontrolling interest x .10 1,700
Income to noncontrolling interest $13,100
7-34
P7-25 Consolidation with Inventory Transfers and Other Comprehensive Income
a. Balance in investment account at December 31, 20X5:
Proportionate share of Tall's net assets,

January 1 ($1,400,000 x .90) $1,260,000
Proportionate share of 20X5 net income
($90,000 x .90) 81,000
Proportionate share of other comprehensive
income for 20X5 ($20,000 x .90) 18,000
Proportionate share of dividends received
($60,000 x .90) (54,000)
Balance in investment account December 31, 20X5 $1,305,000
b. Investment income for 20X5:
Net income reported by Tall $90,000

Proportion of ownership held by Priority x .90
Investment income for 20X5 $81,000
c. Income to noncontrolling interests for 20X5:
Net income reported by Tall $90,000

20X4 inventory profits realized in 20X5
($15,000 x .40) 6,000
20X5 unrealized inventory profits
$30,000 - [$30,000 x ($48,000 / $90,000)] (14,000)
Realized net income $82,000
Proportion of ownership held by noncontrolling
interest x .10
Income to noncontrolling interest $ 8,200
d. Balance assigned to noncontrolling interest in consolidated balance

sheet:
Net assets reported by Tall, January 1 $1,400,000

Net income for 20X5 90,000
Dividends paid in 20X5 (60,000)
Net assets reported, December 31, 20X5 $1,430,000
Unrealized inventory profits at
December 31, 20X5 (14,000)
Other comprehensive income in 20X5 20,000
Adjusted net assets, December 31, 20X5 $1,436,000
interest x .10
Net assets assigned to noncontrolling interest $ 143,600
7-35
P7-25 (continued)
e. Inventory reported in consolidated balance sheet:
Inventory held by Priority $120,000

Less: Unrealized profit (14,000) $106,000
Inventory held by Tall $100,000

Less: Unrealized profit
$6,000 - [$6,000 x ($24,000 / $36,000)] (2,000) 98,000
Inventory $204,000
f. Consolidated net income for 20X5:
Operating income of Priority $240,000

Net income of Tall 90,000
Total unadjusted income $330,000
20X4 inventory profits realized in 20X5
($6,000 + $8,000) 14,000
Unrealized inventory profits on 20X5 sales
($14,000 + $2,000) (16,000)
g. Eliminating entries, December 31, 20X5
E(1) Income from Investment in Subsidiary 81,000

Dividends Declared 54,000
Investment in Tall Common Stock 27,000

7-36
P7-25 (continued)
E(3) Other Comprehensive Income from

Subsidiary (OCI) 18,000
Investment in Tall Corporation Stock 18,000
Eliminate other comprehensive income
from subsidiary.
E(4) Other Comprehensive Income to

Assign other comprehensive income
to noncontrolling interest.
E(5) Common Stock Tall Corporation 400,000

Additional Paid-In Capital Tall Corporation 200,000
Accumulated Other Comprehensive Income 10,000
Investment in Tall Common Stock 1,260,000

Noncontrolling Interest 600
Eliminate beginning inventory profit
of Tall Company.

of Priority Corporation.
E(8) Sales 36,000

Inventory 2,000
Eliminate intercompany sale of inventory
by Priority Corporation.
E(9) Sales 90,000

Inventory 14,000
by Tall Company.
7-37
P7-26 Multiple Inventory Transfers between Parent and Subsidiary
E(1) Retained earnings, January 1 20,000

of Proud Company.
E(2) Retained earnings, January 1 12,600

Inventory 6,000
of Slinky Company.
E(3) Sales 60,000

Inventory 2,000
by Proud Company.
E(4) Sales 240,000

Inventory 30,000
by Slinky Company.
b. Computation of cost of goods sold for consolidated entity:
Inventory produced by Proud in 20X5

($100,000 x .40) $ 40,000
Inventory produced by Slinky in 20X5
($70,000 x .50) 35,000
Inventory produced by Proud in 20X6
($40,000 x .90) 36,000
Inventory produced by Slinky in 20X6
($200,000 x .25) 50,000
Cost of goods sold reported in
consolidated income statement $161,000
7-38
P7-27 Consolidation following Inventory Transactions

a. Entries recorded by Bell on its investment in Troll:
Cash 6,000
Investment in Troll Corporation Stock 6,000
Record dividends from Troll: $10,000 x .60

Income from Subsidiary 18,000
Record equity-method income: $30,000 x .60


Assign income to noncontrolling interest:
$11,680 = ($30,000 + $3,400 - $4,200) x .40
E(3) Common Stock Troll Corporation 100,000

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

Eliminate beginning inventory profit of
Troll Corporation:
$3,400 = ($42,500 - $25,500) x .20
E(5) Sales 35,000

Inventory 4,200
Eliminate intercompany upstream sale of
inventory by Troll Corporation:
$4,200 = ($35,000 - $21,000) x .30
E(6) Sales 28,000

Inventory 6,500
Eliminate intercompany downstream sale of
inventory by Bell Company:
$6,500 = $13,000 x ($14,000 / $28,000)
7-39
P7-27 (continued)
c. Bell Company and Troll Corporation
Consolidation Workpaper
December 31, 20X2
Bell Troll Eliminations Consol-
Item Co. Corp. Debit Credit idated
Sales 200,000 120,000 (5) 35,000
(6) 28,000 257,000
Income from Subsidiary 18,000 (1) 18,000
Credits 218,000 120,000 257,000
Cost of Goods Sold 99,800 61,000 (4) 3,400
(5) 30,800
(6) 21,500 105,100
Depreciation Expense 25,000 15,000 40,000
Interest Expense 6,000 14,000 20,000
Debits (130,800) (90,000) (165,100)
Consolidated Net Income 91,900
Income to Noncon-
trolling Interest (2) 11,680 (11,680)
Income, carry forward 87,200 30,000 92,680 55,700 80,220
Ret. Earnings, Jan. 1 230,000 50,000 (3) 50,000
(4) 2,040 227,960
Income, from above 87,200 30,000 92,680 55,700 80,220
317,200 80,000 308,180
Dividends Declared (40,000) (10,000) (1) 6,000
(2) 4,000 (40,000)
Ret. Earnings, Dec. 31,
carry forward 277,200 70,000 144,720 65,700 268,180
Cash and Accounts
Receivable 69,400 51,200 120,600
Inventory 60,000 55,000 (5) 4,200
(6) 6,500 104,300
Land 40,000 30,000 (3) 18,000 88,000
Buildings and Equipment 520,000 350,000 870,000
Investment in Troll
Corporation Stock 112,800 (1) 12,000
(3)100,800
Debits 802,200 486,200 1,182,900
Accum. Depreciation 175,000 75,000 250,000
Bonds Payable 80,000 200,000 280,000
Bond Premium 1,200 1,200
Common Stock
Bell Company 200,000 200,000
Troll Corporation 100,000 (3)100,000
Retained Earnings,
from above 277,200 70,000 144,720 65,700 268,180
Noncontrolling
Interest (4) 1,360 (2) 7,680
(3) 67 200 73,520
Credits 802,200 486,200 264,080 264,080 1,182,900
P7-28 Consolidation Workpaper

Investment in West Company Stock 10,500

$7,950 = ($20,000 + $30,000 - $25,000
+ $1,500) x .30
E(3) Common Stock West Company 150,000

Differential 36,000
Investment in West Company Stock 305,200
$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) Land, Buildings and Equipment (net) 14,000

Goodwill 22,000
Differential 36,000
Assign beginning differential.

Cost of Goods and Services 30,000
of West Company.
P7-28 (continued)

of Crow Corporation.
E(7) Sales 62,000

Inventory 25,000
Eliminate intercompany upstream sale of
inventory by West Company:
$25,000 = $62,000 - $37,000
E(8) Sales 90,000

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

Depreciation Expense 1,500
Land, Buildings and Equipment (net) 9,000
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)]
P7-28 (continued)
b. Crow Corporation and West Company
December 31, 20X9
Crow West Eliminations Consol-

Sales and Service Revenue 300,000 200,000 (7) 62,000
(8) 90,000 348,000
Credits 314,000 200,000 348,000
Cost of Goods and Services 200,000 150,000 (5) 30,000
(6) 15,000
(7) 37,000
(8) 82,000 186,000
Depreciation Expense 40,000 30,000 (9) 1,500 68,500
Debits (240,000) (180,000) (254,500)
Income to Noncon-
Retained Earnings, Jan. 1 568,000 250,000 (3)250,000

(5) 21,000
(6) 15,000
(9) 7,350 524,650
642,000 270,000 610,200
(2) 1,500 (35,000)
Retained Earnings, Dec. 31,
carry forward 607,000 265,000 467,300 170,500 575,200
Cash and Receivables 81,300 85,000 166,300

Inventory 200,000 110,000 (7) 25,000
(8) 8,000 277,000
Land, Buildings
& Equipment (net) 270,000 250,000 (4) 14,000 (9) 9,000 525,000
Investment in West
Company Stock 315,700 (1) 10,500
(3) 305,200
Differential (3) 36,000 (4) 36,000
Goodwill (4) 22,000 22,000
Debits 867,000 445,000 990,300
Common Stock 200,000 150,000 (3)150,000 200,000
Ret. Earnings, from above 607,000 265,000 467,300 170,500 575,200
Noncontrolling Interest (5) 9,000 (2) 6,450
(9) 3,150 (3)130,800 125,100
Credits 867,000 445,000 701,450 701,450 990,300
P7-28 (continued)
c. Retained earnings reconciliation, December 31, 20X9:
Retained earnings, Crow Corporation $607,000

Unrealized profits on Crow Corporation's books
($90,000 - $54,000) x ($20,000 / $90,000) (8,000)
Unrealized profits on West Company's books
($62,000 - $37,000) x .70 (17,500)
Unrealized profit on equipment transfer
[($15,000 - ($1,500 x 4)] x .70 (6,300)
Consolidated retained earnings $575,200
P7-29 Computation of Consolidated Totals
a. Consolidated sales for 20X8:

Bunker Harrison Consol-
Corp. Co. idated
Sales reported $660,000 $510,000
Intercorporate sales (140,000) (240,000)
Sales to nonaffiliates $520,000 $270,000 $790,000
b. Consolidated cost of goods sold:
Total sales reported $660,000 $510,000

Ratio of cost to sales price 1.4 1.2
Cost of goods sold $471,429 $425,000
Amount to be eliminated
(see entry) (128,000) (232,000)
Cost of goods sold adjusted $343,429 $193,000 $536,429
Eliminating entries:
E(1) Sales 140,000

Inventory 12,000
Elimination of sales by Bunker to Harrison:
$12,000 = $42,000 - ($42,000 / 1.40)
$128,000 = $140,000 - $12,000
E(2) Sales 240,000

Inventory 8,000
Elimination of sales by Harrison to Bunker:
$8,000 = $48,000 - ($48,000 / 1.20)
$232,000 = $240,000 - $8,000
P7-29 (continued)
c. Operating income of Bunker Corporation (excluding

income from Harrison Company) $70,000
Net income of Harrison Company 20,000
$90,000
Less: Unrealized inventory profits of Bunker (12,000)
Unrealized inventory profits of Harrison (8,000)
Less: Income assigned to noncontrolling interest
($20,000 - $8,000) x .20 (2,400)
Income to controlling interest 20X8 $67,600
d. Inventory balance in consolidated balance sheet:
Inventory reported by Bunker Corporation $48,000

Unrealized profits (8,000) $40,000
Inventory reported by Harrison Company $42,000

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

Investment in Bock Company Stock 700
Eliminate income from subsidiary:
$11,200 = ($25,000 - $2,000 - $7,000) x .70
$10,500 = $15,000 x .70

Noncontrolling Interest 600
$5,100 = ($25,000 - $2,000 - $7,000 + $9,000
- $8,000) x .30
$4,500 = $15,000 x .30
E(3) Common stock Bock Company 70,000

Differential 46,000
Investment in Bock Company Stock 123,200
$123,200 = ($70,000 +$60,000 + $46,000) x .7
$52,800 = ($70,000 + $60,000 + $46,000) x .3
Computation of unamortized differential
Fair value of compensation given by Pine $108,500

Fair value of noncontrolling interest 46,500
Less: Book value of Spencer's net assets
($70,000 + $30,000) (100,000)
Differential at acquisition $ 55,000
Amortization of amount assigned to:
Buildings and equipment
[($20,000 / 10 years] x 1 year (2,000)
Patent ($35,000 / 5 years) x 1 year (7,000)
Unamortized differential, January 1, 20X7 $46,000
E(4) Buildings and Equipment 20,000

Patent 28,000
Accumulated Depreciation 2,000
Differential 46,000
Assign beginning differential:
$28,000 = $35,000 - $7,000
$2,000 = $20,000 / 10 years
P7-30 (continued)
E(5) Depreciation Expense 2,000

Amortization Expense 7,000
Patent 7,000
Amortize differential:
$2,000 = $20,000 / 10 years
$7,000 = $35,000 / 5 years

Inventory 7,000
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)
E(7) Sales 90,000

Inventory 8,000
by Bock Company:
$8,000 = $24,000 - ($24,000 x 2/3)
E(8) Sales 30,000

Inventory 3,800
by Pine Corporation:
$3,800 = $7,600 - ($7,600 x 1/2)

Land 15,000
Eliminate unrealized profit on land:
$15,000 = $37,000 - $22,000
P7-30 (continued)
b. Pine Corporation and Bock Company

December 31, 20X3
Pine Bock Eliminations Consol-

Sales 260,000 125,000 (7) 90,000

(8) 30,000 265,000
Other Income 13,600 13,600
Credits 284,800 125,000 278,600
(7) 82,000
(8) 26,200 148,600
Interest Expense 16,000 5,200 21,200
Amortization Expense (5) 7,000 7,000
Debits (222,000) (100,000) (213,800)
Income to Noncon-
Retained Earnings, Jan. 1 139,100 60,000 (3) 60,000

(6) 11,200
(9) 10,500 117,400
201,900 85,000 177,100
(2) 4,500 (30,000)
Retained Earnings, Dec. 31,
carry forward 171,900 70,000 227,000 132,200 147,100
Cash and Accounts

Receivable 15,400 21,600 37,000
Inventory 165,000 35,000 (6) 7,000
(7) 8,000
(8) 3,800 181,200
Land 80,000 40,000 (9) 15,000 105,000
Buildings and Equipment 340,000 260,000 (4) 20,000 620,000
Investment in Bock
Company Stock 123,900 (1) 700
(3)123,200
Differential (3) 46,000 (4) 46,000
Patent (4) 28,000 (5) 7,000 21,000
Debits 724,300 356,600 964,200
P7-30 (continued)
Pine Bock Eliminations Consol-

Accum. Depreciation 140,000 80,000 (4) 2,000

(5) 2,000 224,000
Bonds Payable 200,000 100,000 300,000
Common Stock
Pine Corporation 120,000 120,000
Bock Company 70,000 (3) 70,000
Retained Earnings,
from above 171,900 70,000 227,000 132,200 147,100
Noncontrolling
Interest (6) 4,800 (2) 600
(9) 4,500 (3) 52,800 44,100
Credits 724,300 356,600 400,300 400,300 964,200
P7-30 (continued)
Note: Financial statements are not required.
Pine Corporation and Subsidiary

Consolidated Balance Sheet
December 31, 20X3
Cash and Accounts Receivable $ 37,000

Inventory 181,200
Land 105,000
Buildings and Equipment $620,000
Less: Accumulated Depreciation (224,000) 396,000
Patent 21,000
Total Assets $740,200
Accounts Payable $127,400

Bonds Payable $300,000
Stockholders Equity:
Controlling Interest:
Common Stock $120,000
Total Controlling Interest $267,100
Total Stockholders Equity 311,200
Total Liabilities and Stockholders' Equity $740,200

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

Consolidated Retained Earnings Statement
Retained Earnings, January 1, 20X3 $117,400

Income to Controlling Interest, 20X3 59,700
$177,100
Dividends Declared, 20X3 (30,000)
Retained Earnings, December 31, 20X3 $147,100
P7-31 Consolidation Using Financial Statement Data
a. Eliminating entries, December 31, 20X6:

Investment in Concerto Company Stock 9,000

$9,600 = ($35,000 + $8,000 - $9,000
- $10,000) x .40
E(3) Common Stock Concerto Company 50,000

Differential 40,000
Investment in Concerto Company Stock 144,000
$40,000 = $24,000 + $16,000
P7-31 (continued)
E(4) Goodwill 40,000

Differential 40,000
Assign differential to goodwill.
E(5) Goodwill Impairment Loss 10,000

Goodwill 10,000
Recognize impairment of goodwill.

Land 10,000
Eliminate unrealized gain on land.

Bower: $14,000 - ($14,000 / 1.40)

Concerto Company:
$8,000 = $48,000 - ($48,000 / 1.20)
E(9) Sales 22,000

Inventory 2,000
by Bower:
$2,000 = $7,000 - ($7,000 / 1.40)
E(10) Sales 90,000

Inventory 9,000
by Concerto Company:
$9,000 = $54,000 - ($54,000 / 1.20)
P7-31 (continued)
b. Bower Corporation and Concerto Company

December 31, 20X6
Bower Concerto Eliminations Consol-

Sales 400,000 200,000 (9) 22,000

(10) 90,000 488,000
Credits 421,000 200,000 488,000
(8) 8,000
(9) 20,000
(10)81,000 287,000
Depreciation and
Amortization 25,000 15,000 40,000
Goodwill Impairment Loss (5) 10,000 10,000
Other Expenses 35,000 30,000 65,000
Debits (340,000) (165,000) (402,000)
Income to Noncon-
Retained Earnings, Jan. 1 293,800 150,000 (3)150,000

(6) 6,000
(7) 4,000
(8) 4,800 279,000
374,800 185,000 355,400
(2) 8,000 (50,000)
carry forward 324,800 165,000 317,400 133,000 305,400
P7-31 (continued)
Bower Concerto Eliminations Consol-

Cash 26,800 35,000 61,800

Accounts Receivable 80,000 40,000 120,000
Inventory 120,000 90,000 (9) 2,000
(10) 9,000 199,000
Land 70,000 20,000 (6) 10,000 80,000
Buildings and Equipment 340,000 200,000 540,000
Investment in Concerto
Company Stock 153,000 (1) 9,000
(3)144,000
Differential (3) 40,000 (4) 40,000
Goodwill (4) 40,000 (5) 10,000 30,000
Debits 789,800 385,000 1,030,800
Accumulated Depreciation 165,000 85,000 250,000

Bonds Payable 120,000 70,000 190,000
Common Stock 100,000 50,000 (3) 50,000 100,000
Retained Earnings,
from above 324,800 165,000 317,400 133,000 305,400
(8) 3,200 (3) 96,000 90,400
Credits 789,800 385,000 454,600 454,600 1,030,800
P7-32 Intercorporate Transfers of Inventory and Equipment
a. Consolidated cost of goods sold for 20X9:
Amount reported by Foster Company $593,000

Amount reported by Block Corporation 270,000
Adjustment for unrealized profit in
beginning inventory sold in 20X9 (15,000)
Adjustment for inventory purchased from
subsidiary and resold during 20X9:
CGS recorded by Foster ($30,000 x .60) $18,000
CGS recorded by Block 20,000
CGS based on Block's cost ($20,000 x .60) (12,000)
Required adjustment (26,000)
Cost of goods sold $822,000
b. Consolidated inventory balance:
Amount reported by Foster $137,000

Amount reported by Block 130,000
Total inventory reported $267,000
Unrealized profit in ending inventory held by
Foster [($30,000 - $20,000) x .40] (4,000)
Consolidated balance $263,000
c. Income assigned to noncontrolling interest:
Net income reported by Block Corporation $70,000

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

sheet:
Block Corporation common stock outstanding $ 50,000

Block Corporation retained earnings, January 1, 20X9 165,000
Book value, December 31, 20X9 $265,000
Adjustment for unrealized loss on equipment
$24,000 - [($24,000 / 8 years) x 3 years] 15,000
Adjustment for unrealized profit on inventory
sold to Foster (4,000)
Realized book value of Block Corporation $276,000
interest x .10
Balance assigned to noncontrolling interest $ 27,600
e. Consolidated retained earnings at December 31, 20X9:
Balance reported by Foster Company, January 1, 20X9 $248,500

Balance reported by Foster Company, December 31, 20X9 $379,500
Adjustment for proportionate share of unrealized
loss on sale of equipment ($15,000 x .90) 13,500
Adjustment for proportionate share of unrealized
gain on inventory ($4,000 x .90) (3,600)
Consolidated retained earnings, December 31, 20X9 $389,400
f. Eliminating entries:

Investment in Block Corporation Stock 45,000

E(3) Common Stock Block Corporation 50,000

Investment in Block Corporation Stock 193,500
P7-32 (continued)

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]
E(5) Sales 30,000

Inventory 4,000
by Block Corporation.

of Block Corporation.
P7-32 (continued)
g. Foster Company and Block Corporation

December 31, 20X9
Foster Block Eliminations Consol-

Sales 815,000 415,000 (5) 30,000 1,200,000

Other Income 26,000 15,000 41,000
Credits 904,000 430,000 1,241,000
(6) 15,000 822,000
Other Expenses 95,000 75,000 170,000
Debits (733,000) (360,000) (1,055,000)
Income to Noncon-
Ret. Earnings, Jan. 1 248,500 165,000 (3)165,000 (4) 16,200

(6) 13,500 251,200
419,500 235,000 429,400
(2) 2,000 (40,000)
carry forward 379,500 215,000 282,300 77,200 389,400
Cash 187,000 57,400 244,400

Accounts Receivable 80,000 90,000 170,000
Other Receivables 40,000 10,000 50,000
Inventory 137,000 130,000 (5) 4,000 263,000
Land 80,000 60,000 140,000
Buildings and Equipment 500,000 250,000 (4) 42,000 792,000
Investment in Block
Corporation Stock 238,500 (1) 45,000
(3)193,500
Debits 1,262,500 597,400 1,659,400
P7-32 (continued)
Foster Block Eliminations Consol-

Accum. Depreciation 155,000 75,000 (4) 27,000 257,000

Other Payables 95,000 20,000 115,000
Bonds Payable 250,000 200,000 450,000
Common Stock
Foster Company 210,000 210,000
Block Corporation 50,000 (3) 50,000
Additional Paid-In
Capital 110,000 110,000
Retained Earnings,
from above 379,500 215,000 282,300 77,200 389,400
Noncontrolling
Interest (6) 1,500 (2) 5,800
(3) 21,500
(4) 1,800 27,600
Credits 1,262,500 597,400 375,800 375,800 1,659,400
P7-33 Consolidated Balance Sheet Workpaper [AICPA Adapted]
Pine Corp. and Subsidiary

Consolidated Balance Sheet Workpaper
December 31, 20X6
Adjustments
and Eliminations Consol-
Pine Corp. Slim Corp. Debit Credit Idated
Assets
Cash 105,000 15,000 120,000
Accounts and Other

Current Receivables 410,000 120,000 [b] 900 [3] 900
[4] 5,000
[5] 100,000
[7] 90,000 335,000
Merchandise Inventory 920,000 670,000 [6] 3,000 1,587,000
Plant and
Equipment, net 1,000,000 400,000 1,400,000
Investment in Slim 1,170,000 [a] 90,900 [b] 900

[1] 450,000
[2] 810,000
Goodwill [1] 500,000 500,000

Totals 3,605,000 1,205,000 3,942,000
Liabilities and
Stockholders' Equity
Accounts Payable and
Other Current
Liabilities 140,000 305,000 [3] 900
[4] 5,000
[5] 100,000
[7] 90,000 249,100
Common Stock ($10 par) 500,000 200,000 [2] 200,000 500,000
Retained Earnings 2,965,000 700,000

[2] 700,000
[6] 3,000 [a] 90,900 3,052,900
Noncontrolling [1] 50,000

Interest, 10 percent [2] 90,000 140,000
Totals 3,605,000 1,205,000 1,690,700 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 $700,000
Slim Corporation's retained earnings at January 1, 20X6 (600,000)
Increase in retained earnings after dividend declaration $100,000
Add: Dividend declaration 1,000
Slim Corporation's net income for year ended December 31, 20X6 $101,000
Pine Corporation's share, 90 percent $ 90,900
[b] To record Pine Corporation's share of dividend declared

by Slim Corporation:
90 percent of $1,000 $900
[1] To record goodwill:

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

and record noncontrolling interest:
Common stock $200,000
Retained earnings at December 31, 20X6 700,000
Total $900,000
Pine Corporation's 90 percent share $810,000

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

90 percent of $1,000 $900
[4] To eliminate intercompany accrued interest:

$100,000 @ 10 percent x year $5,000
[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 $ 300,000
5 percent remaining in Slim Corporation's December 31 inventory $ 15,000
Multiply by .20($60,000 / $300,000) x .20
Inventory profit $ 3,000
[7] To eliminate intercompany trade account receivable and payable $90,000

P7-34 Comprehensive Worksheet Problem
a. Basic equity-method entries for 20X7:
(1) Cash 20,000

Investment in Sharp Company Stock 20,000
Record dividend from Sharp Company:
$25,000 x .80
(2) Investment in Sharp Company Stock 32,000

Record equity-method income:
$40,000 x .80
(3) Income from Subsidiary 4,000

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

Eliminate income from subsidiary:
$28,000 = $32,000 - $4,000

$6,600 = ($40,000 + $8,000 - $10,000
- $5,000) x .20
E(3) Common Stock Sharp Company 100,000

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

Differential 35,000
Assign differential:
$20,000 = ($50,000 / 10 years) x 4 years
P 7-34 (continued)

of Sharp Company.

of Randall Corporation.
E(7) Sales 45,000

Inventory 10,000
by Sharp Company.
E(8) Sales 12,000

Inventory 3,000
by Randall Corporation.

Eliminate intercorporate sale of
equipment.
Depreciation expense adjustment:

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

Required balance ($3,750 x 14 years) $52,500
Balance recorded ($6,250 x 2 years) (12,500)
Required increase $40,000

Eliminate intercorporate
receivable/payable.
P7-34 (continued)
c. Randall Corporation and Sharp Company

December 31, 20X7
Randall Sharp Eliminations Consol-

Sales 500,000 250,000 (7) 45,000

(8) 12,000 693,000
Other Income 20,400 30,000 50,400
Credits 548,400 280,000 743,400
(6) 2,000
(7) 35,000
(8) 9,000 564,000
Deprec. and Amortization 30,000 20,000 (4) 5,000 (9) 2,500 52,500
Other Expenses 24,000 18,000 42,000
Debits (470,000) (240,000) (658,500)
Income to Noncon-
Ret. Earnings, Jan. 1 345,900 215,000 (3)215,000

(5) 6,400
(6) 2,000
(9) 17,500 320,000
424,300 255,000 398,300
(2) 5,000 (50,000)
carry forward 374,300 230,000 337,500 81,500 348,300
P7-34 (continued)

Cash 130,300 10,000 140,300

Accounts Receivable 80,000 70,000 (10) 10,000 140,000
Inventory 170,000 110,000 (7) 10,000
(8) 3,000 267,000
Buildings and Equipment 600,000 400,000 (4) 50,000
(9) 25,000 1,075,000
Investment in Sharp
Company Stock 304,000 (1) 8,000
(3)296,000
Differential (3) 35,000 (4) 35,000
Debits 1,284,300 590,000 1,622,300

(9) 40,000 490,000
Accounts Payable 100,000 15,200 (10) 10,000 105,200
Bonds Payable 300,000 100,000 400,000
Common Stock 200,000 100,000 (3)100,000 200,000
Additional Paid-In
Capital 20,000 (3) 20,000
Retained Earnings,
from above 374,300 230,000 337,500 81,500 348,300
(3) 74,000 74,000
Credits 1,284,300 590,000 579,100 579,100 1,622,300
P7-34 (continued)
d. Randall Corporation and Subsidiary

Consolidated Balance Sheet
December 31, 20X7
Cash $ 140,300
Inventory 267,000
Total Current Assets $ 547,300
Buildings and Equipment $1,065,000
Less: Accumulated Depreciation (486,000) 579,000
Total Assets $1,126,300
Accounts Payable $ 105,200

Bonds Payable $ 400,000
Stockholders Equity:
Controlling Interest:
Common Stock $ 200,000
Total Controlling Interest $ 548,300
Total Stockholders Equity 616,300
Total Liabilities and Stockholders' Equity $1,126,300
Randall Corporation and Subsidiary

Consolidated Income Statement
Sales $ 693,000
Other Income 50,400
$ 743,400
Cost of Goods Sold $ 564,000
Depreciation and Amortization Expense 52,500
Other Expenses 42,000 (658,500)
Consolidated Net Income $ 84,900
Income to Noncontrolling Interest (6,600)
Income to Controlling Interest $ 78,300
Randall Corporation and Subsidiary

Consolidated Statement of Retained Earnings
Retained Earnings, January 1, 20X7 $ 320,000

Income to Controlling Interest, 20X7 78,300
$ 398,300
Dividends Declared, 20X7 (50,000)
Retained Earnings, December 31, 20X7 $ 348,300
P7-35 Comprehensive Consolidation Workpaper; Equity Method [AICPA Adapted]
Fran Corp. and Subsidiary

December 31, 20X9
Adjustments
Fran Corp Brey Inc. and Eliminations Adjusted
Dr. (Cr.) Dr. (Cr.) Dr. Cr. Balance
Income Statement:
Net Sales (3,800,000) (1,500,000) [7] 180,000 (5,120,000)
Equity in Brey's Income (181,000) [1] 181,000
Gain on Sale of
Warehouse (30,000) [5] 30,000
Cost of Goods Sold 2,360,000 870,000 [7] 162,000 3,068,000
Goodwill Impairment
Loss [4] 35,000 35,000
Operating Expenses
(including
depreciation) 1,100,000 440,000 [3] 9,000 [6] 2,000 1,547,000
Net Income (551,000) (190,000) [a] 435,000 [a] 164,000 (470,000)
Retained Earnings
Statement:
Balance, 1/1/X9 (440,000) (156,000) [2] 156,000 (440,000)
Net Income (551,000) (190,000) [a] 435,000 [a] 164,000 (470,000)
Dividends Paid 40,000 [1] 40,000
Balance, 12/31/X9 (991,000) (306,000) [b] 591,000 [b] 204,000 (910,000)
Balance Sheet:
Assets:
Cash 570,000 150,000 720,000
Accounts
Receivable (net) 860,000 350,000 [8] 86,000 1,124,000
Inventories 1,060,000 410,000 [7] 18,000 1,452,000
Land, Plant
and Equipment 1,320,000 680,000 [2] 54,000 [5] 30,000 2,024,000
Accumulated
Depreciation (370,000) (210,000) [6] 2,000 [3] 9,000 (587,000)
Investment in Brey 891,000 [1] 141,000
[2] 750,000
Goodwill [2] 60,000 [4] 35,000 25,000
Total Assets 4,331,000 1,380,000 4,758,000
Liabilities and
Stockholders' Equity:
Accounts Payable
and Accrued Expenses (1,340,000) (594,000) [8] 86,000 (1,848,000)
Common Stock (1,700,000) (400,000) [2] 400,000 (1,700,000)
Additional Paid-In
Capital (300,000) (80,000) [2] 80,000 (300,000)
Retained Earnings (991,000) (306,000) [b] 591,000 [b] 204,000 (910,000)
Total Liabilities
and Equity (4,331,000) (1,380,000) 1,273,000 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:
Total On hand Sold

Sales $180,000 $36,000 $144,000
Gross profit (90,000) (18,000) (72,000)*
Cost $ 90,000* $18,000 $ 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.
P7-36A Fully Adjusted Equity Method
a. Adjusted trial balance:
Randall Corporation Sharp Company

Item Debit Credit Debit Credit
Cash $ 130,300 $ 10,000

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

Record dividends from Sharp Company:
$25,000 x .80

Record equity-method income:
$40,000 x .80

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

Recognize deferred profit on upstream
sale of inventory: $8,000 x .80

Recognize deferred profit on downstream
sale of inventory.

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

Remove unrealized profit on downstream
sale of inventory.

Recognize portion of gain on sale of
equipment: $20,000 / 8 years
P7-36A (continued)
c. Eliminating entries, December 31, 20X7:


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

Differential 35,000

Differential 35,000
Assign differential:
$20,000 = ($50,000 / 10 years) x 4 years
E(5) Investment in Sharp Company Stock 6,400

of Sharp Company.
P7-36A (continued)
E(6) Investment in Sharp Company Stock 2,000

E(7) Sales 45,000

Inventory 10,000
by Sharp Company.
E(8) Sales 12,000

Inventory 3,000

equipment.

Depreciation recorded ($50,000 / 8 years) $6,250
Required decrease $2,500


Eliminate intercorporate receivable/payable.
P7-36A (continued)
d. Randall Corporation and Sharp Company

December 31, 20X7

Sales 500,000 250,000 (7) 45,000

(8) 12,000 693,000
Other Income 20,400 30,000 50,400
Credits 548,300 280,000 743,400
(6) 2,000
(7) 35,000
(8) 9,000 564,000
Deprec. & Amortization 30,000 20,000 (4) 5,000 (9) 2,500 52,500
Other Expenses 24,000 18,000 42,000
Debits (470,000) (240,000) (658,500)
Income to Noncon-
Ret. Earnings, Jan. 1 320,000 215,000 (3)215,000 320,000

398,300 255,000 398,300
(2) 5,000 (50,000)
carry forward 348,300 230,000 311,500 81,500 348,300
P7-36A (continued)

Cash 130,300 10,000 140,300

Inventory 170,000 110,000 (7) 10,000
(8) 3,000 267,000
Investment in Sharp (9) 25,000 1,075,000
Company Stock 278,000 (5) 6,400 (1) 7,900
(6) 2,000 (3)296,000
(9) 17,500
Differential (3) 35,000 (4) 35,000
Debits 1,258,300 590,000 1,622,300

(9) 40,000 490,000
Bonds Payable 300,000 100,000 400,000
Common Stock 200,000 100,000 (3)100,000 200,000
Additional Paid-In
Capital 20,000 (3) 20,000
Retained Earnings,
from above 348,300 230,000 311,500 81,500 348,300
(3) 74,000 74,000
Credits 1,258,300 590,000 579,000 579,000 1,622,300
P7-37A Cost Method
a. Journal entry recorded by Randall Corporation:
Cash 20,000
Dividend Income 20,000
Record dividend from Sharp Company:
$25,000 x .80
E(1) Dividend Income 20,000

Eliminate dividend income from
subsidiary.

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

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

Assign undistributed prior earnings of
subsidiary to noncontrolling interest.
Retained earnings, January 1, 20X7 $215,000

Net assets of Sharp at
acquisition $300,000
Common stock (100,000)
Additional paid-in capital (20,000)
Retained earnings at acquisition (180,000)
Net increase $ 35,000
noncontrolling interest x .20
Increase assigned to
noncontrolling interest $ 7,000

Differential 50,000
Assign differential at date of
acquisition.
P7-37A (continued)

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

Amortize differential.

of Sharp Company.

E(10) Sales 45,000

Inventory 10,000
by Sharp Company.
E(11) Sales 12,000

Inventory 3,000

equipment.

Depreciation recorded ($50,000 / 8 years) $ 6,250
Required decrease $ 2,500

P7-37A (continued)

Eliminate intercorporate receivable/payable.
c. Randall Corporation and Sharp Company

December 31, 20X7

Sales 500,000 250,000 (10) 45,000

(11) 12,000 693,000
Other Income 20,400 30,000 50,400
Dividend Income 20,000 (1) 20,000
Credits 540,400 280,000 743,400
(9) 2,000
(10) 35,000
(11) 9,000 564,000
Deprec. & Amortization 30,000 20,000 (7) 5,000 (12) 2,500 52,500
Other Expenses 24,000 18,000 42,000
Debits (470,000) (240,000) (658,500)
Income to Noncon-
Ret. Earnings, Jan. 1 329,900 215,000 (3)180,000

(4) 7,000
(6) 12,000
(8) 6,400
(9) 2,000
(12) 17,500 320,000
400,300 255,000 398,300
(2) 5,000 (50,000)
carry forward 350,300 230,000 313,500 81,500 348,300
P7-37A (continued)

Cash 130,300 10,000 140,300

Inventory 170,000 110,000 (10) 10,000
(11) 3,000 267,000
(12) 25,000 1,075,000
Investment in Sharp
Company Stock 280,000 (3)280,000
Differential (3) 50,000 (5) 50,000
Debits 1,260,300 590,000 1,622,300

(7) 5,000
(12) 40,000 490,000
Bonds Payable 300,000 100,000 400,000
Common Stock 200,000 100,000 (3)100,000 200,000
Additional Paid-In
Capital 20,000 (3) 20,000
Retained Earnings,
from above 350,300 230,000 313,500 81,500 348,300
(8) 1,600 (3) 70,000
(4) 7,000 74,000
Credits 1,260,300 590,000 573,100 573,100 1,622,300

Chap007 131230191031 Phpapp01

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap007 131230191031 Phpapp01

Uploaded by

Copyright:

Available Formats

Chapter 07 - Intercompany Inventory Transactions

INTERCOMPANY INVENTORY TRANSACTIONS

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

C7-1 Measuring Cost of Goods Sold

C7-2 Inventory Values and Intercompany Transfers

Re: Inventory Sale and Purchase of New Inventory

C7-3 Intercorporate Inventory Transfers

Re: Inventory Sale to Parent

The following eliminating entry is required at December 31, 20X2:

E(1) Sales 180,000

The following eliminating entry is required at December 31, 20X3:

E(2) Cost of Goods Sold 60,000

C7-4 Unrealized Inventory Profits

C7-5 Eliminating Inventory Transfers

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

C7-6 Intercompany Profits and Transfers of Inventory

a. The intercompany transfers of Xerox (www.xerox.com) between segments are apparently

b. Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated market

c. Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles,

E7-1 Multiple-Choice Questions on Intercompany Inventory Transfers

5. c Net assets reported $320,000

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

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

1. b Cost of goods sold reported by Park $ 800,000

Note: Answer b in the actual CPA examination question was

2. d $32,000 = ($200,000 + $140,000) $308,000

3. b $6,000 = ($26,000 + $19,000) $39,000

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

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

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

E7-3 Multiple Choice Consolidated Income Statement

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

E7-4 Multiple-Choice Questions Consolidated Balances

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

3. e Consolidated sales $140,000

4. a Inventory reported by Lorn $ 24,000

E7-5 Multiple-Choice Questions Consolidated Income Statement

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

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

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

E7-6 Realized Profit on Intercompany Sale

a. Journal entries recorded by Nordway Corporation:

(1) Inventory 960,000

(2) Cash (Accounts Receivable) 750,000

(3) Cost of Goods Sold 600,000

b. Journal entries recorded by Olman Company:

(1) Inventory 750,000

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

(3) Cost of Goods Sold 750,000

E(1) Sales 750,000

E7-7 Sale of Inventory to Subsidiary

a. Journal entries recorded by Nordway Corporation:

(1) Inventory 960,000

(2) Cash (Accounts Receivable) 750,000

(3) Cost of Goods Sold 600,000

b. Journal entries recorded by Olman Company:

(1) Inventory 750,000

(2) Cash (Accounts Receivable) 810,000

(3) Cost of Goods Sold 540,000

E(1) Sales 750,000

E7-8 Inventory Transfer between Parent and Subsidiary

E(1) Sales 940,000

E(1) Retained Earnings, January 1 36,000