Chap 006

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Chapter 06 - Intercorporate Transfers of Services And Noncurrent Assets
CHAPTER 6
INTERCORPORATE TRANSFERS OF SERVICES AND NONCURRENT ASSETS
ANSWERS TO QUESTIONS
Q6-1 Profits on intercorporate sales generally are considered to be realized when the
affiliate that has purchased the item sells it to a nonaffiliate. For depreciable or amortizable
items that are used by the affiliate in its operations, profits are considered to be realized as
the purchaser depreciates or amortizes the asset.
Q6-2 An upstream sale occurs when a subsidiary sells an item to the parent company. If the
asset is not resold before the end of the period, the parent is the company holding the asset
and any unrealized profits are recorded on the books of the subsidiary.
Q6-3 If the purchaser records the services received as an expense, both revenues and
expenses will be overstated in the consolidated income statement in the period in which the
intercorporate services are provided. In the event the services are capitalized by the
purchaser, the cost of the asset will be overstated, depreciation expense and accumulated
depreciation will be overstated if the services are assigned to a depreciable asset, and
service revenue will be overstated.
Q6-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net
income of the seller.
(b) All unrealized profit on current-period intercorporate sales must be excluded from
consolidated net income until realized through resale to a nonaffiliate.
Q6-5 Profits on intercompany sales are included in consolidated net income in the period in
which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one
of the companies at the start of the period and the item is sold to a nonaffiliate during the
current period, the intercompany profit is included in the computation of consolidated net
income for the current period.
Q6-6 The profits continue to be unrealized in this case and therefore must be eliminated
from both the beginning and ending asset and retained earnings balances when consolidated
statements are prepared. There should be no income statement effect for the current period.
Q6-7 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is
not resold before the end of the period, the subsidiary is the company holding the asset at
year-end and any unrealized profits are recorded on the books of the parent company.
6-1
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Q6-8 The entire balance of unrealized profits is eliminated in all cases. While the direction
of the sale will affect the allocation of unrealized profits between companies, it does not
change the total amount of profit eliminated.
Q6-9 Consolidated net income is reduced by the amount of unrealized profits assigned to
the shareholders of the parent company. When a downstream sale occurs, all the profit is on
the parent's books and consolidated net income is reduced by the full amount of any
unrealized profit. On the other hand, when an upstream sale occurs, all the intercorporate
profit is recorded on the books of the subsidiary and the amount of income assigned to both
the parent company shareholders and the noncontrolling shareholders is reduced by a
proportionate amount of any unrealized profit.
Q6-10 The amount of intercorporate profit realized in the current period from prior years'
sales to the parent is added to the reported net income of the subsidiary in computing
income assigned to the noncontrolling interest.
Q6-11 Income assigned to noncontrolling interest for the current period will be less than a
proportionate share of the reported net income of the subsidiary. In determining the amount
of income to be assigned to the noncontrolling interest in the consolidated income statement,
the net income reported by the subsidiary must be adjusted to exclude any unrealized gain
recorded during the period on the sale of depreciable assets to the parent. On the other
hand, if an unrealized loss had been recorded, the basis used in assigning income to the
noncontrolling interest would be greater than the reported net income of the subsidiary.
Such adjustments must be made to assure that the income assigned to noncontrolling
interest is based on the contribution of the subsidiary to consolidated net income rather than
the amount the subsidiary may have reported as net income.
Q6-12 All other factors being equal, the income assigned to noncontrolling interest will be
larger if the sale occurs at the start of the current period. Some part of the gain will be
considered realized in the current period as the parent depreciates the asset if the sale
occurs before year-end. None of the gain will be considered realized in the period of transfer
if the sale occurs at year-end.
Q6-13 As in all other cases, income from the subsidiary recorded on the parent's books
must be eliminated in preparing the consolidated income statement and an appropriate
amount of subsidiary net income must be assigned to the noncontrolling interest if the parent
owns less than 100 percent of the subsidiary's stock. The gain recorded on the parent's
books also must be eliminated.
6-2
Q6-14 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of
the consolidated entity when the subsidiary pays the parent more than book value for the
asset at the start of the period. As a result, an eliminating entry is needed to reduce
depreciation expense and accumulated depreciation by the amount of excess depreciation
recorded during 20X3.
Q6-15 Following an intercorporate sale of a depreciable asset, the eliminating entries should
adjust the balance in the asset account to reflect the original purchase price to the first owner
and accumulated depreciation should be adjusted to reflect the balance that would be
reported if the asset were still held by the first owner. In the case of an intercorporate sale of
an intangible asset, only the unamortized balance normally is reported and an eliminating
entry is needed to adjust the carrying value to that which would be reported if the asset were
still held by the first owner.
Q6-16 Profit on an intercorporate sale of land is considered realized at the time the
purchaser sells the land to a nonaffiliate. Profit on equipment normally is considered realized
as the asset is used and depreciated on the books of the purchaser. Equipment typically is
considered to be used up in the production process and therefore is charged to expense over
its remaining economic life, while land is not.
Q6-17 A portion of the profit is considered realized each period as the asset is depreciated
by the purchaser. Thus, the net amount considered unrealized decreases each period and a
smaller debit to beginning retained earnings is needed.
Q6-18A The balance in the investment account will depend on which method the parent uses
to account for its investment in the subsidiary. If the parent uses (a) the cost method or (b)
the basic equity method, no adjustments are made on the parent company's books for
unrealized intercompany profits and the balance in the investment account will be the same
as if there were no unrealized profits. If the parent uses (c) the fully-adjusted equity method,
the balance in the investment account will be reduced by the full amount of the unrealized
profit when the profit is on the parent's books and by a proportionate share of the unrealized
profit when it is on the subsidiary's books.
6-3
SOLUTIONS TO CASES
C6-1 Correction of Elimination Procedures
MEMO
To: Controller
Plug Corporation
From: , CPA
Re: Elimination of Intercompany Profit on Equipment
This memo is in response to our review of the elimination procedures used in preparing the
consolidated statements for Plug Corporation at December 31, 20X2. You have correctly
identified the need to eliminate the effects of the intercorporate sale of equipment. In
preparing your consolidated statements, all intercompany balances and transactions should
be eliminated. [ARB 51, Par. 6]
Your eliminating entry recorded at December 31, 20X2, was:
E(1) Equipment 150,000

Loss on Sale of Equipment 150,000
This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the
sale of equipment to Plug and adds $150,000 to the equipment account. By adding back
$150,000 to equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000). This
represents the carrying value of the equipment on Coy’s books at the time of sale but does
not reflect the purchase price paid by Coy ($1,200,000) or the accumulated depreciation at
the time of sale ($200,000). Moreover, eliminating entry E(1) understates depreciation
expense for the year. The correct eliminating entry at December 31, 20X2, is:

Depreciation Expense 15,000
Accumulated Depreciation 215,000
Loss on Sale of Equipment 150,000
6-4
C6-1 (continued)
A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by
Plug to $1,200,000, the initial purchase price to the consolidated entity. Depreciation
expense must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug
to $100,000 ($1,200,000/12 years) based on the initial purchase price. Accumulated
depreciation must be credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x
1 year] reported by Plug to $300,000 [($1,200,000/12 years) x 3 years]. As previously noted,
the $150,000 loss recorded by Coy must be eliminated. If the amounts included in eliminating
entry E(2) are omitted, consolidated net income for 20X2 and the retained earnings balance
at December 31, 20X2, will be overstated and the balances for equipment and accumulated
depreciation will be understated.
Primary citation:
ARB 51, Par. 6
C6-2 Elimination of Intercorporate Services
MEMO
To: Chief Accountant

Dream Corporation
From: , CPA
Re: Elimination of Legal Services Provided by Parent Company
This memo is in response to our discussion regarding the elimination of intercompany

services in preparing consolidated financial statements for Dream Corporation. It is my
understanding that at present Dream Corporation does not eliminate such services. In
preparing consolidated financial statements all intercompany balances and transactions
should be eliminated. [ARB 51, Par. 6]
The legal services provided by Dream Corporation to Classic Company and Plain
Company are intercompany transactions that should be eliminated. If the revenues
recorded by the parent are equal to the expenses recorded by the subsidiaries and both
are properly recorded, elimination of these transactions will have no impact on reported
net income but will reduce consolidated revenues and expenses by equal amounts.
Financial statement readers will receive a more accurate picture of operations of the
consolidated entity if the appropriate amounts are reported. The legal services provided to
Classic Company in 20X3 should be eliminated with the following entry:
E(1) Legal Services Revenue 80,000

Legal Services Expense 80,000
6-5
Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets
The information on intercorporate services provided to Plain Company indicates that an

additional adjustment is needed in the consolidation process. Although Plain Company
recorded its $150,000 payment to the parent as a legal expense, it should have been
recorded as an investment in land to be used in future development of its strip mine. This
error should be corrected on the books of Plain Company. If it is not, the eliminating entry
prepared at December 31, 20X3, should include an adjustment to reflect the appropriate
investment in land and would be recorded as:

Land 100,000
Legal Services Expense 150,000
Wage and Salary Expense 100,000
Care must be taken to capitalize only the cost of legal services in this case. The
eliminating entry should contain a debit of $100,000 ($150,000/1.50) to land since Dream
Corporation bills its services to the subsidiaries at 150 percent of the cost of services
provided. Had Plain Company debited land for its $150,000 payment to Dream, the
eliminating entry at December 31, 20X3, would have been:

Land 50,000
Wage and Salary Expense 100,000
No eliminating entry would be required at December 31, 20X4, on the legal services
provided to Classic Company in 20X3. The conditions of the intercorporate transfer of
services to Plain Company require an eliminating entry at December 31, 20X4, and in
following years, as long as Plain Company owns the strip mine. The entry at December
31, 20X4, would be:
E(4) Land 100,000

Retained Earnings 100,000
Had Plain Company debited land for its $150,000 payment to Dream in 20X3, the
eliminating entry at December 31, 20X4, would require a $50,000 debit to retained
earnings and a $50,000 credit to land.
Primary citation:
ARB 51, Par. 6
6-6
C6-3 Noncontrolling Interest
a. When there are no unrealized profits on the subsidiary's books, a pro rata portion of
the reported net income of the subsidiary is assigned to the noncontrolling interest,
adjusted for the noncontrolling interest’s share of any amortization or write-off of
differential.
b. When there are no unrealized profits on the subsidiary's books, the noncontrolling
interest is reported in the consolidated balance sheet at an amount equal to a pro rata
portion of the book value of the net assets of the subsidiary plus the noncontrolling
interest’s share of any remaining differential.
c. The effect of unrealized intercompany profits depends on which company has recorded
the profits. Those recorded on the books of the parent do not affect the income assigned
to the noncontrolling interest. When subsidiary net income includes unrealized
intercompany profits, the portion of consolidated net income assigned to the
noncontrolling interest is reduced by its portion of the unrealized profit in the period of the
intercorporate sale.
(1) On a sale of land, the intercompany profit remains unrealized until the land is sold to a
nonaffiliate. When the land is resold, the profit is added to the reported net income of the
subsidiary in computing the portion of consolidated net income assigned to the
noncontrolling interest.
(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is

considered realized each period as the purchaser depreciates the asset. Thus, in the
period of the intercorporate sale, the adjustment to subsidiary net income for unrealized
profits is based on the gain or loss less any portion considered realized before the end of
the period. Each period thereafter, a portion of the profit or loss is considered realized and
treated as an adjustment to subsidiary income in determining the portion of consolidated
net income assigned to the noncontrolling interest.
d. Noncontrolling shareholders of a subsidiary generally will not gain a great deal of

useful information from the consolidated financial statements. Their primary focus must
continue to be on the income, assets, and liabilities of the subsidiary in which they hold
direct ownership. In the event there are a number of transactions with the parent or other
affiliates, the success of the operations of the entire economic entity may provide
information useful to the noncontrolling shareholders. Debt guarantees or other
assurances by the parent may also lead to an examination of the parent company and
consolidated statements.
6-7
C6-4 Intercompany Sale of Services
a. When preparing consolidated financial statements, Schwartz's revenue from the sale
of services to Diamond and Diamond's expenses associated with the services acquired
from Schwartz must be eliminated. The expenses related to the janitorial and
maintenance activities that will be reported in the consolidated income statement will be
the actual salary and associated costs incurred by Schwartz to provide the services to
Diamond. The eliminations have no effect on consolidated net income because revenues
and expenses of equal amount are eliminated in the preparation of the consolidated
financial statements.
b. Intercompany profits from the sale of services to an affiliate normally are considered
realized at the time the services are provided. Realization of intercompany profits on
services normally is considered to occur as the services are consumed, and services such
as maintenance and repair services normally are considered to be consumed by the
purchasing affiliate at the time received.
C6-5 Intercompany Profits
Answers can be found in the companies' 10-K filings with the SEC and in their annual
reports. Note that financial statements are often included in the Form 10-K by reference to
the company’s annual report. In such cases, the financial statements are often shown in a
separate exhibit rather than in Item 8 of the Form 10-K.
a. Century Telephone Enterprises, Inc. (www.centurytel.com), and its subsidiaries bill one
another for services and materials provided in such amounts as to provide a reasonable
return on investment. When preparing consolidated financial statements, the company
eliminates intercompany profits on transactions with unregulated subsidiaries, but profits
on transactions with regulated subsidiaries are not eliminated, as permitted by FASB
Statement No. 71. This statement is applicable because phone companies are regulated
as public utilities.
b. Verizon (www.verizon.com) eliminates all intercompany profits. It discontinued the use

of regulatory accounting as provided by FASB 71 in 1994 and now no longer applies the
provisions of FASB 71.
c. All of Harley-Davidson’s (www.harleydavidson.com) intercompany transactions are

eliminated except some occurring between the Motorcycles and Financial Services
segments. Some interest and fees recognized as income by Financial Services and
expense by Motorcycles are not eliminated. This leads to higher finance income and
higher expenses, but net income is unaffected.
6-8
SOLUTIONS TO EXERCISES
E6-1 Multiple-Choice Questions on Intercompany Transfers

[AICPA Adapted]
1. c
2. d
3. b
4. a
5. b Depreciation expense recorded by Pirn $40,000

Depreciation expense recorded by Scroll 10,000
Total depreciation reported $50,000
Adjustment for excess depreciation charged
by Scroll as a result of increase in
carrying value of equipment due to gain
on intercompany sale ($12,000 / 4 years) (3,000)
Depreciation for consolidated statements $47,000
E6-2 Multiple-Choice Questions on Intercompany Transactions
1. d When only retained earnings is debited, and not the noncontrolling interest, a
gain has been recorded in a prior period on the parent's books.
2. a The costs incurred by Bottom to develop the equipment are research and
development costs and must be expensed as they are incurred (FASB
Statement No. 2, par. 12). Transfer to another legal entity does not cause a
change in accounting treatment within the economic entity.
3. b The $39,000 paid to Gold Company will be charged to depreciation expense

by Top Corporation over the remaining 3 years of ownership. As a result, Top
Corporation will debit depreciation expense for $13,000 each year. Gold
Company had charged $16,000 to accumulated depreciation in 2 years, for an
annual rate of $8,000. Depreciation expense therefore must be reduced by
$5,000 ($13,000 - $8,000) in preparing the consolidated statements.
4. a TLK Corporation will record the purchase at $39,000, the amount it paid. Gold
Company had the equipment recorded at $40,000; thus, a debit of $1,000 will
raise the equipment balance back to its original cost from the viewpoint of the
consolidated entity.
6-9
E6-2 (continued)
5. b Reported net income of Gold Company $ 45,000

Reported gain on sale of equipment $15,000
Intercompany profit realized in 20X6 (5,000) (10,000)
Realized net income of Gold Company $ 35,000
Proportion of stock held by
noncontrolling interest x .40
Income assigned to noncontrolling interests $ 14,000
6. c Operating income reported by Top Corporation $ 85,000

Net income reported by Gold Company 45,000
$130,000
Less: Unrealized gain on sale of equipment
($15,000 - $5,000) (10,000)
Consolidated net income $120,000
E6-3 Elimination Entries for Land Transfer
a. Eliminating entry, December 31, 20X4:
E(1) Gain on Sale of Land 10,000

Land 10,000
Eliminating entry, December 31, 20X5:
E(1) Retained Earnings, January 1 10,000

Land 10,000
b. Eliminating entry, December 31, 20X4:

Land 10,000

Noncontrolling Interest 4,000
Land 10,000
6-10
E6-4 Intercompany Services
a. Consolidated net income will not change.
b. One hundred percent of the intercompany services must always be eliminated. Thus, a
change in the level of ownership of the subsidiary will not have an impact on the
amount eliminated or on consolidated net income.
c. $38,000 = $70,000 - $32,000
E6-5 Elimination Entries for Intercompany Services
Two eliminating entries are required:
E(1) Delivery Service Revenue 76,000

Delivery Service Expense 76,000
E(2) Accounts Payable 18,000

Accounts Receivable 18,000
E6-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale
a. Eliminating entry, December 31, 20X6
E(1) Truck 5,000

Gain on Sale of Truck 10,000
E(1) Truck 5,000

Retained Earnings, January 1 10,000
Accumulated depreciation adjustment:

Required [($45,000 / 15 years) x 6 years] $18,000
Recorded [($40,000 / 10 years) x 1 year] (4,000)
Required increase $14,000
6-11
E6-7 Transfer of Land

Land 45,000

Land 45,000
b. Eliminating entries, December 31, 20X3 and 20X4:

Land 30,000
E6-8 Transfer of Depreciable Asset at Year-End
E(1) Truck 90,000

Computation of gain on sale of truck:

Price paid by Minnow $210,000
Cost of truck to Frazer $300,000
Accumulated depreciation
($300,000 / 10 years) x 4 years (120,000) (180,000)
Gain on sale of truck $ 30,000
E(1) Truck 90,000


Recorded [($210,000 / 6 years) x 1 year] (35,000)
6-12
E6-9 Transfer of Depreciable Asset at Beginning of Year
E(1) Truck 55,000

Computation of gain on sale of truck:

Price paid by Minnow $245,000
Cost of truck to Frazer $300,000
($300,000 / 10 years) x 3 years ( 90,000) (210,000)
Gain on sale of truck $ 35,000

Reported [($245,000 / 7 years) x 1 year] (35,000)
Required increase $ 85,000
E(1) Truck 55,000


Reported [($245,000 / 7 years) x 2 years] (70,000)
E6-10 Sale of Equipment to Subsidiary in Current Period
a. Journal entry to record sale:
Cash 84,000
Equipment 150,000
Gain on Sale of Equipment 14,000
Record the sale of equipment:
$84,000 = $150,000 - $80,000 + $14,000
$80,000 = ($150,000 / 15 years) x 8 years
6-13
E6-10 (continued)
b. Journal entry to record purchase:
Equipment 84,000
Cash 84,000
Journal entry to record depreciation expense:

c. Eliminating entry at December 31, 20X7, to eliminate intercompany sale of

equipment:

Eliminate unrealized profit on equipment.
Adjustment to equipment
Amount paid by Wainwrite to acquire building $150,000

Amount paid by Lance on intercompany sale (84,000)
Adjustment to buildings and equipment $ 66,000
Adjustment to depreciation expense
Depreciation expense recorded by Lance

Corporation ($84,000 / 7 years) $ 12,000
Depreciation expense recorded by Wainwrite
Corporation ($150,000 / 15 years) (10,000)
Adjustment to depreciation expense $ 2,000
Adjustment to accumulated depreciation
Amount required ($10,000 x 9 years) $ 90,000

Amount reported by Lance ($12,000 x 1 year) (12,000)
Required adjustment $ 78,000
d. Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment

and prepare a consolidated balance sheet only:

6-14
E6-11 Upstream Sale of Equipment in Prior Period
a. Consolidated net income for 20X8:
Operating income reported by Baywatch $100,000

Net income reported by Tubberware $40,000
Amount of gain realized in 20X8
($30,000 / 12 years) 2,500
Realized net income of Tubberware 42,500
b. Consolidated net income for 20X8 would be unchanged.
6-15
E6-11 (continued)
c. Eliminating entry, December 31, 20X8:
E(1) Buildings and Equipment 30,000

Eliminate unrealized profit on building.
Adjustment to buildings and equipment
Amount paid by Tubberware to acquire building $300,000

Amount paid by Baywatch on intercompany sale (270,000)
Adjustment to buildings and equipment $ 30,000
Adjustment to retained earnings, January 1, 20X8
Unrealized gain recorded January 1, 20X6 $ 30,000

Amount realized following intercompany sale
($2,500 x 2) (5,000)
Unrealized gain, January 1, 20X8 $ 25,000
Proportion of ownership held by Baywatch x .80
Adjustment to Noncontrolling interest, January 1, 20X8
Unrealized gain at January 1, 20X8 $ 25,000

Proportion of ownership held by noncontrolling
interest x .20
Depreciation expense recorded by Baywatch

Industries ($270,000 / 12 years) $ 22,500
Depreciation expense recorded by Tubberware
Amount required ($20,000 x 6 years) $120,000

Amount reported by Baywatch ($22,500 x 3 years) (67,500)
6-16
E6-12 Elimination Entries for Midyear Depreciable Asset Transfer

Depreciation Expense
11,000
Purchase price paid by parent $30,000

Purchase price paid by subsidiary (28,000)
Purchase price paid by subsidiary $28,000

Purchase price paid by parent $30,000
Less: Accumulated Depreciation
($5,000 x 2 1/2 years) (12,500)
Book value at time of sale (17,500)
Gain on sale of equipment $10,500
Depreciation recorded by subsidiary

($28,000/3 ½ years) x ½ year $4,000
Depreciation recorded by parent ((E30,000/6
years) x ½ year (28,000)
Required decrease $ 1,500

Recorded [($28,000 / 3 1/2 years) x 1/2 year] (4,000)

Unrealized gain, July 1, 20X3 $10,500

Realized in 20X3 (1,500)
Unrealized balance, January 1, 20X4 $ 9,000

Recorded [($28,000 / 3 1/2 years) x 1 1/2 years] (12,000)
6-17
E6-13 Consolidated Net Income Computation
a. Downstream sale of land:

20X4 20X5
Verry’s separate operating income $ 90,000 $110,000
Less: Unrealized gain on sale of land (25,000)
Verry’s realized operating income $ 65,000 $110,000
Spawn’s realized net income 60,000 40,000
Consolidated net income $125,000 $150,000
Income to noncontrolling interest:
($60,000 x .25) (15,000)
($40,000 X .25) (10,000)
Income to controlling interest $110,000 $140,000
b. Upstream sale of land:

20X4 20X5
Verry’s separate operating income $ 90,000 $110,000
Spawn’s net income $60,000
Less: Unrealized gain on sale of land (25,000)
Spawn’s realized net income 35,000 40,000
Consolidated net income $125,000 $150,000
Income to noncontrolling interest:
($35,000 x .25) (8,750)
($40,000 x .25) (10,000)
Income to controlling interest $116,250 $140,000
6-18
E6-14 Elimination Entries for Intercompany Transfers
a. Operating income of Grand Delivery $65,000

Net income of Acme Real Estate Company $40,000
Less: Unrealized profit on land sale (25,000)
Acme’s realized net income 15,000
b. Journal entries recorded by Speedy Delivery:
(1) Cash 8,000

Investment in Acme Real Estate Stock 8,000
Record dividends from Acme Real Estate:
$10,000 x .80
(2) Investment in Acme Real Estate Stock 32,000

Income from Subsidiary 32,000
Record equity-method income:
$40,000 x .80
c. Eliminating entries:
E(1) Income from Subsidiary 32,000

Dividends Declared 8,000
Eliminate income from subsidiary.
E(2) Income to Noncontrolling Interest 3,000

Assign income to noncontrolling interest:
$3,000 = ($40,000 - $25,000) x .20
E(3) Common Stock — Acme Real Estate Company 300,000

Eliminate beginning investment balance.

Land 25,000
Eliminate unrealized gain on land.
E(5) Service Revenue 15,000

Delivery Expense 15,000
Eliminate courier services performed by
Speedy Delivery Service.
6-19
E6-15 Sale of Building to Parent in Prior Period
a. Turner will record annual depreciation expense of $25,000

($300,000 / 12 years).
b. Split would have recorded annual depreciation expense of $20,000

($400,000 / 20 years).

Eliminate unrealized profit on building.
Amount paid by Split to acquire building $400,000

Amount paid by Turner on intercompany sale (300,000)
Adjustment to buildings and equipment $100,000
Unrealized gain, December 31, 20X8

[$300,000 - ($400,000 - $160,000)] $ 60,000
Proportion of ownership held by Turner x .70
Unrealized gain, December 31, 20X8 $ 60,000

Proportion of ownership held by
noncontrolling interest x .30
Depreciation expense recorded by Turner

Company ($300,000 / 12 years) $ 25,000
Depreciation expense recorded by Split
Company ($400,000 / 20 years) (20,000)

Amount reported by Turner ($25,000 x 1 year) (25,000)
Required adjustment $155,000
6-20
E6-15 (continued)
d. Income assigned to noncontrolling interest for 20X9:
Net income reported by Split Company $ 40,000

Amount of gain realized in 20X9 ($60,000 / 12 years) 5,000
Realized net income for 20X9 $ 45,000
interest x .30
Income assigned to noncontrolling interest $ 13,500
e. Amount assigned to noncontrolling interest in 20X9 consolidated

balance sheet:
Split Company net assets, January 1, 20X9

($350,000 - $150,000) $200,000
Net income for 20X9 40,000
Dividends paid in 20X9 (15,000)
Unrealized profit on sale of building to Turner Company
($60,000 - $5,000) (55,000)
Realized book value December 31, 20X9 $170,000
interest x .30
Amount assigned to noncontrolling interest in
December 31, 20X9, consolidated balance sheet $ 51,000
E6-16 Intercompany Sale at a Loss
a. Consolidated net income for 20X8 will be greater than Parent Company's income
from operations plus Sunway's reported net income. The eliminating entries at
December 31, 20X8, will result in an increase of $16,000 to consolidated net income.
b. As a result of purchasing the equipment at less than Parent's book value,

depreciation expense reported by Sunway will be $2,000 ($16,000 / 8 years) below
the amount that would have been recorded by Parent. Thus, depreciation expense
must be increased by $2,000 when eliminating entries are prepared at December 31,
20X9. Consolidated net income will be decreased by the full amount of the $2,000
increase in depreciation expense.
6-21
E6-17 Eliminating Entries Following Intercompany Sale at a Loss

Loss on Sale of Building 36,000
Eliminate unrealized loss on building.
b. Consolidated net income and income to controlling

interest for 20X7:
Operating income reported by Brown $125,000

Net income reported by Transom $ 15,000
Add: Loss on sale of building 36,000
Realized net income of Transom 51,000
Income to noncontrolling interest ($51,000 x .30) (15,300)
Income to controlling interest $160,700

Eliminate unrealized loss on building.
Amount paid by Transom to acquire building $300,000

Amount paid by Brown on intercompany sale (144,000)
Adjustment to buildings and equipment $156,000
Depreciation expense recorded by Transom

Company ($300,000 / 15 years) $ 20,000
Depreciation expense recorded by Brown

Amount reported by Brown ($16,000 x 1 year) (16,000)
6-22
E6-17 (continued)
Unrealized loss recorded, December 31, 20X7 $36,000

Proportion of ownership held by Brown x .70
Unrealized loss recorded, December 31, 20X7 $36,000

Interest x .30
d. Consolidated net income and income assigned to

controlling interest in 20X8:
Operating income reported by Brown $150,000

Net income reported by Transom $40,000
Adjustment for loss on sale of building (4,000)
Realized net income of Transom 36,000
Income assigned to noncontrolling interest
($36,000 x .30) (10,800)
Income assigned to controlling interest $175,200
6-23
E6-18 Multiple Transfers of Asset
a. $145,000
b. No gain or loss should be reported.
c. Swanson Corporation operating income $150,000
Sullivan Corporation net income $120,000

Loss on sale of land ($145,000 - $130,000) 15,000
Realized net income of Sullivan Corporation $135,000
Proportion of stock held by Swanson x .80 108,000
Kolder Company net income $ 60,000

Gain on sale of land ($180,000 - $130,000) (50,000)
Realized net income of Kolder Company $ 10,000
Clayton Corporation net income $ 80,000

Gain on sale of land ($240,000 - $180,000) (60,000)
Realized net income of Clayton Corporation $ 20,000
Alternate Computation:
Swanson Corporation operating income $150,000

Sullivan Corporation net income 120,000
Kolder Company net income 60,000
Clayton Corporation net income 80,000
Combined income $410,000
Unrealized loss recorded by Sullivan Corp. $ (15,000)

Unrealized gain recorded by Kolder Company 50,000
Unrealized gain recorded by Clayton Corp. 60,000 (95,000)
Realized income available to all shareholders $315,000
Income assigned to noncontrolling interest:

Sullivan Corp. ($120,000 + $15,000) x .20 $ 27,000
Kolder Company ($60,000 - $50,000) x .30 3,000
Clayton Corp. ($80,000 - $60,000) x .10 2,000 (32,000)
d. Eliminating entry:

Loss on Sale of Land 15,000
Land 95,000
Eliminate gains and loss on land transfer:
$110,000 = $50,000 + $60,000
$95,000 = $110,000 - $15,000
6-24
E6-19 Elimination Entry in Period of Transfer
a. $300,000 = $276,000 + $24,000
b. 15 years = $300,000 / ($60,000 / 3 years)
c. E(1) Trucks 24,000

Eliminate unrealized gain on trucks:
$21,600 = $36,000 x .60
$14,400 = $36,000 x .40
$57,000 = ($20,000 x 4 years) - ($23,000
x 1 year)
6-25
E6-20 Elimination Entry Computation

Depreciation expense adjustment:

Recorded ($360,000 / 10 years) $ 36,000
Required [($450,000 - $150,000) / 10 years] (30,000)

Accumulated depreciation, January 1, 20X6 $150,000
20X6 depreciation required 30,000
Required balance $180,000
20X6 depreciation recorded (36,000)

Retained earnings adjustment:

Unrealized profit, January 1, 20X6 $ 60,000
Realized in 20X6 (6,000)
Unrealized profit, January 1, 20X7 $ 54,000
Proportion of stock held by Stern x .70
Share of unrealized profit $ 37,800

Accumulated depreciation, January 1, 20X6 $150,000
Depreciation based on historical cost
[($300,000 / 10 years) x 2] 60,000
Required balance $210,000
Depreciation recorded [($360,000 / 10) x 2] (72,000)
6-26
E6-21 Using the Eliminating Entry to Determine Account Balances
a. Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber

Corporation.
b. The subsidiary was the owner. The sale was from the subsidiary to the parent, as
evidenced by the debit to noncontrolling interest in the eliminating entry.
c. Intercompany transfer price:
Amount paid by Somber Corporation $120,000

Increase to buildings and equipment
in eliminating entry (53,500)
Amount paid by Pastel to Somber for equipment $ 66,500
d. Income assigned to noncontrolling interest for 20X9:
Net income reported by Somber $ 25,000

Amount of gain realized in 20X9 ($10,500 / 7 years) 1,500
Realized net income for 20X9 $ 26,500
interest x .10
e. Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported

by the consolidated entity for 20X9.
f. Eliminating entries at December 31, 20X9:

Investment in Somber Corporation Stock 17,100
Eliminate income from subsidiary:
$22,500 = $25,000 x .90
$5,400 = $6,000 x .90

Dividends Declared 600
$2,650 = ($25,000 + $1,500) x .10
$600 = $6,000 x .10
E(3) Common Stock — Somber Corporation 300,000

Investment in Somber Corporation Stock 450,000
6-27
E6-21 (continued)

Eliminate unrealized gain on upstream
sale of equipment.
E(5) Accumulated Depreciation 1,500

Eliminate excess depreciation.
E6-22 Intercompany Sale of Services
a. Eliminating entries, 20X4:
E(1) Consulting Revenue 138,700

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

Eliminate intercompany receivable/payable.
b. Consolidated net income and income to controlling

interest for 20X4:
Norgaard's separate operating income $2,342,000

Bline's net income 631,000
Consolidated net income 2,973,000
Income to noncontrolling interest ($631,000 x .25) (157,750)
Income to controlling interest $2,815,250
6-28
E6-23A Fully Adjusted Equity Method and Cost Method
a. Fully Adjusted equity-method journal entries, 20X4:
(1) Cash 13,000

Investment in TV Sales Company Stock 13,000
Record dividends from TV Sales Company:
$20,000 x .65
(2) Investment in TV Sales Company Stock 45,500

Record equity-method income: $70,000 x .65
(3) Income from Subsidiary 11,000

Remove unrealized gain on sale of land.
(4) Investment in TV Sales Company Stock 5,200

Recognize portion of gain on sale of
equipment: $8,000 x .65
Eliminating entries, December 31, 20X4:


$27,300 = ($70,000 + $8,000) x .35
E(3) Common Stock — TV Sales Company 300,000


Land 11,000
E(5) Investment in TV Sales Company Stock 26,000

Equipment 40,000
sale of equipment.
6-29
E6-23A (continued)

b. Cost-method journal entry recorded by Newtime Products:
(1) Cash 13,000

Dividend Income 13,000
Record dividend income from TV Sales
Company.
Cost-method eliminating entries, December 31, 20X4:
E(1) Dividend Income 13,000

Eliminate dividend income from subsidiary.

$27,300 = ($70,000 + $8,000) x .35
E(3) Common Stock — TV Sales Company 300,000

Eliminate investment balance at date of
acquisition.

Assign undistributed prior earnings of
subsidiary to noncontrolling interest:
$45,000 x .35

Land 11,000

Equipment 40,000
sale of equipment.

6-30
SOLUTIONS TO PROBLEMS
P6-24 Computation of Consolidated Net Income
a. Separate operating income of Petime Corporation $34,000

Reported net income of United Grain Company $19,000
Unrealized profit of sale of land (7,000)
Realized income for 20X4 $12,000
Amortization of differential ($10,000 / 10 years) ( 1,000)
$11,000
Proportion of ownership held by Petime x .90
Income attributable to controlling interest 9,900
b. Separate operating income of Petime Corporation $34,000

Reported net income by United Grain Company $19,000
Amortization of differential ($10,000 / 10 years) ( 1,000)
$18,000
Proportion of stock held by Petime x .90
Income attributable to controlling interest 16,200
Unrealized profit on sale of land (7,000)
Reported income will decrease by $700. In the upstream case the unrealized profit
($7,000) is apportioned to both majority ($6,300) and noncontrolling ($700)
shareholders. In the downstream case, it is apportioned entirely to the majority
shareholders ($7,000).
P6-25 Subsidiary Net Income
a. Toll Corporation’s reported net income for 20X4 was $94,400:

Income assigned to noncontrolling shareholders $17,500
Add: Unrealized profit on building ($20,000 x .25) 5,000
Amortization of differential ($4,400 x .25) 1,100
Income assigned to noncontrolling interest before $23,600
adjustment
Proportion of stock held by noncontrolling interest ÷ .25
Reported income of Toll $94,400
Computation of annual amortization:

Fair value of consideration given by Bold $348,000
Fair value of noncontrolling interest 116,000
Total fair value $464,000
Book value of Toll’s assets:
Common stock $150,000
Retained earnings 270,000
Total book value (420,000)
Differential paid by Bold $ 44,000
Number of years in amortization period ÷ 10
Annual amortization $4,400
6-31
P6-25 (continued)
b. Consolidated net income for 20X4 is $304,000:
Bold Corporation’s operating income $234,000

Toll Corporation’s net income 94,400
Amortization of differential ($44,000 / 10 years) (4,400)
Unrealized profit on building (20,000)
c. Income assigned to controlling interest is $286,500:

Income assigned to noncontrolling interest (17,500)
Alternate computation:
Operating income of Bold $234,000
Income from Toll:
Net income of Toll $94,400
Unrealized profit on building (20,000)
Amortization of differential (4,400)
Realized income $70,000
Portion of ownership held x .75 52,500
6-32
P6-26 Transfer of Asset from One Subsidiary to Another
Bugle Cook Products Consolidated

Corporation Corporation Entity
Depreciation expense $ --- $ 3,000 $ 2,000
Fixed assets — Warehouse --- 45,000 40,000
Accumulated depreciation --- 3,000 12,000
Gain on sale of warehouse 15,000 --- ---
P6-27 Consolidated Eliminating Entry
a. Master paid Rakel $460,000 ($600,000 - $140,000).
b. Accumulated deprecation at January 1, 20X7, was $168,000, computed as follows:
Purchase price paid by Rakel $600,000

Amount paid by Master $460,000
Gain recorded by Rakel (28,000)
Book value at date of sale (432,000)
Accumulated depreciation at date of sale $168,000
c. Annual depreciation expense recorded by Rakel was $28,000

($168,000/6 years).
d. The estimated residual value was $40,000, computed as follows:
Purchase price paid by Rakel $600,000

Amount to be depreciated by Rakel ($28,000 x 20 years) (560,000)
Estimated residual value $ 40,000
e. Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 -

$40,000) / 14 years).
f. Reported net income of Rakel $ 80,000

Unrealized gain on sale of building ($28,000 - $2,000) (26,000)
$ 54,000
Proportion of stock held by noncontrolling interest x .40
g. Reported net income of Rakel $ 65,000

Portion of gain on sale of building realized in 20X8 2,000
$ 67,000
Proportion of stock held by noncontrolling interest x .40
6-33
P6-28 Multiple-Choice Questions
1. d
2. c
3. a
4. a
5. d
P6-29 Intercompany Services Provided to Subsidiary
The eliminating entry at December 31, 20X4, would be:
Service Revenue 110,000

Building 30,000
Wage Expense 80,000
The eliminating entries at December 31, 20X5, would be:

Building 30,000

P6-30 Consolidated Net Income with Intercorporate Transfers
a. Entry to record intercompany transfer of equipment, 20X6:
Cash 240,000
Equipment 350,000
Record sale of equipment to Subsidence
Mining:
$140,000 = ($350,000 / 10 years) x 4 years
6-34
P6-30 (continued)
b. 20X7 eliminating entries related to intercorporate transfers:
E(1) Land 60,000

Loss on Sale of Land 60,000
Eliminate unrealized loss on land:
$60,000 = $560,000 - $500,000

Eliminate unrealized profit on equipment:
$110,000 = $350,000 - $240,000
$25,000 = $30,000 - $5,000
$130,000 = ($35,000 x 6) - ($40,000 x 2)
$5,000 = $40,000 - $35,000
c. Subsidence Mining's 20X7 net income was $90,000:
Subsidence Mining's income to noncontrolling

shareholders $ 39,000
Noncontrolling interest's share of subsidiary income ÷ .30
Subsidence Mining's income before adjustment $130,000
Add: Amortization of differential:
($200,000 / 10 years) 20,000
Less: Unrealized loss on intercompany sale of land (60,000)
Subsidence Mining's 20X7 net income $ 90,000
d. Bower’s operating income was $826,000:

Less: Income to noncontrolling interest (39,000)
Income from Subsidence Mining:
Reported net income $ 90,000
Unrealized loss on land 60,000
Amortization of differential ($200,000 / 10 years) (20,000)
Portion of ownership held x .70
Bower’s share $ 91,000
Realized profit on equipment ($30,000 / 6 years) 5,000 (96,000)
Bower’s 20X7 income from its separate operations $826,000
6-35
P6-31 Computation of Retained Earnings following Multiple Transfers
Consolidated retained earnings, January 1, 20X8:
Great Company’s retained earnings, January 1 $450,000

Unrealized profit on land ($16,000 x .80) (12,800)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 2)] (17,600)
Consolidated retained earnings $419,600
Consolidated retained earnings, December 31, 20X8:
Consolidated retained earnings, January 1 $419,600

Great Company’s operating income for 20X8 $65,000
Less: Dividends paid in 20X8 (45,000)
Increase in retained earnings from Great’s operations 20,000
Meager’s net income for 20X8 $ 30,000
Less: Amortization of differential assigned to equipment:
($325,000 - $290,000) / 10 years (3,500)
Impairment of goodwill (17,500)
Realized income $ 9,000
Proportion of ownership held x .80 7,200
Realization of gain on sale of building
($22,000 / 10 years) 2,200
Alternate computation of retained earnings balance:
Great Company’s retained earnings, January 1 $450,000

Operating income for 20X8 65,000
Investment income from Meager Company for 20X8:
Meager's net income $30,000
Proportion of ownership held x .80
Proportionate share of Meager’s reported net income 24,000
Amortization of differential assigned to equipment:
[($325,000 - $290,000) x .80] / 10 years (2,800)
Goodwill impairment loss ($17,500 x .80) (14,000)
Great Company’s retained earnings $477,200
Unrealized profit on land ($16,000 x .80) (12,800)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 3)] (15,400)
6-36
P6-32 Preparation of Consolidated Balance Sheet
a. Consolidated balance sheet workpaper:
Lofton Company and Temple Corporation

Consolidated Balance Sheet Workpaper
December 31, 20X6
Lofton Temple Eliminations Consol-

Item Company Corp. Debit Credit idated
Cash and Accounts

Receivable 101,000 20,000 121,000
Inventory 80,000 40,000 120,000
Land 150,000 90,000 (2) 10,000 250,000
Buildings and Equipment 400,000 300,000 (3) 9,000 709,000
Investment in Temple
Corporation Stock 150,000 (1)150,000
Debits 881,000 450,000 1,200,000
Accum. Depreciation 135,000 85,000 (3) 24,000 244,000

Accounts Payable 90,000 25,000 115,000
Notes Payable 200,000 90,000 290,000
Common Stock 100,000 200,000 (1)200,000 100,000
Retained Earnings, 356,000 50,000 (1) 50,000 (2) 6,000
(3) 15,000 347,000
Noncontrolling Interest (1)100,000
(2) 4,000 104,000
Credits 881,000 450,000 284,000 284,000 1,200,000
6-37
P6-32 (continued)
Eliminating entries:
E(1) Common Stock — Temple Corporation 200,000

Investment in Temple Corporation Stock 150,000
Eliminate investment account balance.
E(2) Land 10,000

Eliminate unrealized loss on sale of land.

Eliminate unrealized gain on sale of
equipment.

Required [($100,000 / 10 years) x 5 years] $ 50,000
Recorded [($91,000 / 7 years) x 2 years] (26,000)
Gain recorded by Temple Corporation,

January 1, 20X5 $ 21,000
Realized in 20X5 and 20X6 ($3,000 x 2 years) (6,000)
Unrealized balance, December 31, 20X6 $ 15,000
6-38
P6-32 (continued)
b. Consolidated balance sheet:
Lofton Company and Subsidiary

Consolidated Balance Sheet
December 31, 20X6
Cash and Accounts Receivable $121,000

Inventory 120,000
Land 250,000
Buildings and Equipment $709,000
Less: Accumulated Depreciation (244,000) 465,000
Total Assets $956,000
Accounts Payable $115,000

Notes Payable 290,000
Stockholders’ Equity:
Controlling Interest:
Common Stock $100,000
Total Controlling Interest $447,000
Noncontrolling interest 104,000
Total Stockholders’ Equity 551,000
Total Liabilities and Stockholders' Equity $956,000
6-39
P6-33 Consolidation Workpaper with Intercompany Transfers
a. Eliminating entries:

Investment in Blank Corp. Stock 16,250
$19,500 = $30,000 x .65
$3,250 = $5,000 x .65

$6,265 = ($30,000 - $13,200 + $1,100) x .35
$1,750 = $5,000 x .35
E(3) Common Stock — Blank Corporation 60,000

Investment in Blank Corp. Stock 94,250
Eliminate beginning investment balance:
$85,000 = $110,000 - ($30,000 - $5,000)
$94,250 = $110,500 - $16,250
$50,750= ($110,000 + $60,000 - $25,000) x .35
E(4) Sales and Service Revenue 24,000

Other Expenses 24,000
Eliminate intercompany services.

Land 4,000
Eliminate gain on sale of land to
Blank Corporation.
E(6) Gain on Sale of Building 13,200

Buildings and Equipment (net) 12,100
Eliminate gain on sale of building to
Mist Company.
6-40
P6-33 (continued)
b. Mist Company and Blank Corporation
Consolidation Workpaper
December 31, 20X4
Mist Blank Eliminations Consol-

Item Company Corp. Debit Credit idated
Sales and Service

Revenue 286,500 128,500 (4) 24,000 391,000
Gain on Sale of Land 4,000 (5) 4,000
Gain on Sale of
Building 13,200 (6) 13,200
Income from Subsidiary 19,500 (1) 19,500
Credits 310,000 141,700 391,000
Cost of Goods Sold 160,000 75,000 235,000
Depreciation Expense 22,000 19,000 (6) 1,100 39,900
Other Expenses 76,000 17,700 (4) 24,000 69,700
Debits (258,000) (111,700) (344,600)
Consolidated Net Income 46,400
Income to Noncon-
trolling Interest (2) 6,265 (6,265)
Income, carry forward 52,000 30,000 66,965 25,100 40,135
Ret. Earnings, Jan. 1 198,000 85,000 (3) 85,000 198,000

Income, from above 52,000 30,000 66,965 25,100 40,135
250,000 115,000 238,135
Dividends Declared (25,000) ( 5,000) (1) 3,250
(2) 1,750 (25,000)
Ret. Earnings, Dec. 31,
carry forward 225,000 110,000 151,965 30,100 213,135
Cash 32,500 22,000 54,500

Accounts Receivable 62,000 37,000 99,000
Inventory 95,000 71,000 166,000
Land 40,000 15,000 (5) 4,000 51,000
Buildings and Equipment
(net) 200,000 125,000 (6) 12,100 312,900
Investment in Blank
Corporation Stock 110,500 (1) 16,250
(3) 94,250
Debits 540,000 270,000 683,400

Bonds Payable 180,000 80,000 260,000
Common Stock 100,000 60,000 (3) 60,000 100,000
Retained Earnings,
from above 225,000 110,000 151,965 30,100 213,135
Noncontrolling Interest (2) 4,515
(3) 50,750 55,265
Credits 540,000 270,000 211,965 211,965 683,400
6-41
P6-33 (continued)
c. Mist Company and Subsidiary

December 31, 20X4
Cash $ 54,500
Inventory 166,000
Land 51,000
Buildings and Equipment (net) 312,900
Total Assets $683,400
Accounts Payable $ 55,000

Bonds Payable 260,000
Total Liabilities and Stockholders' Equity $683,400
Mist Company and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X4
Sales $391,000
Cost of Goods Sold $235,000
Total Expenses (344,600)
Consolidated Net Income $ 46,400
Income to Noncontrolling Interest (6,265)
Income to Controlling Interest $ 40,135
Mist Company and Subsidiary

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

Income to Controlling Interest, 20X4 40,135
$238,135
Dividends Declared, 20X4 (25,000)
Retained Earnings, December 31, 20X4 $213,135
6-42
P6-34 Consolidation Workpaper in Year of Intercompany Transfer
a. Eliminating entries, December 31, 20X6:

Investment in Lane Company Stock 28,000
$4,400 = ($40,000 - $18,000) x .20
E(3) Common Stock — Lane Company 100,000
Differential 50,000
E(4) Goodwill 50,000
Differential 50,000
Assign differential to goodwill.
E(5) Goodwill Impairment Loss 18,000
Goodwill 18,000
Recognize impairment of goodwill.
Land 10,000
Depreciation and Amortization Expense 2,000
Eliminate intercorporate sale
of equipment.
Depreciation expense adjustment:
Depreciation recorded ($70,000 / 10 years) $ 7,000
Depreciation required ($75,000 / 15 years) (5,000)
Required balance ($5,000 x 6 years) $30,000
Balance recorded ($7,000 x 1 year) (7,000)
Eliminate intercorporate
receivable/payable.
6-43
P6-34 (continued)
b. Prime Company and Lane Company
December 31, 20X6
Prime Lane Eliminations Consol-

Item Company Company Debit Credit idated
Sales 240,000 120,000 360,000

Gain on Sale of Equip. 20,000 (7) 20,000
Credits 292,000 120,000 360,000
Deprec. & Amortization 25,000 15,000 (7) 2,000 38,000
Goodwill Impairment Loss (5) 18,000 18,000
Other Expenses 15,000 5,000 20,000
Debits (180,000) (80,000) (276,000)
Income to Noncon-
Ret. Earnings, Jan. 1 338,000 105,000 (3)105,000

(6) 8,000 330,000
450,000 145,000 409,600
Dividends Declared (30,000) (5,000) (1) 4,000
(2) 1,000 (30,000)
carry forward 420,000 140,000 187,400 7,000 379,600
Cash and Receivables 113,000 35,000 (8) 7,000 141,000

Inventory 260,000 90,000 350,000
Land 80,000 80,000 (6) 10,000 150,000
Investment in Lane
Company Stock 232,000 (1) 28,000
(3)204,000
Differential (3) 50,000 (4) 50,000
Goodwill (4) 50,000 (5) 18,000 32,000
Debits 1,185,000 355,000 1,328,000

Accounts Payable 60,000 20,000 (8) 7,000 73,000
Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 (3)100,000 300,000
Retained Earnings,
from above 420,000 140,000 187,400 7,000 379,600
Noncontrolling Interest (6) 2,000 (2) 3,400
(3) 51,000 52,400
Credits 1,185,000 355,000 401,400 401,400 1,328,000
6-44
P6-34 (continued)
c. Prime Company and Subsidiary

December 31, 20X6
Cash and Receivables $ 141,000

Inventory 350,000
Land 150,000
Buildings and Equipment $655,000
Less: Accumulated Depreciation (273,000) 382,000
Goodwill 32,000
Total Assets $1,055,000
Accounts Payable $ 73,000

Bonds Payable 250,000
Total Noncontrolling Interest 52,400
Total Liabilities and Stockholders' Equity $1,055,000
Prime Company and Subsidiary

Consolidated Income Statement
Sales $ 360,000
Cost of Goods Sold $200,000
Goodwill Impairment Loss 18,000
Total Expenses (276,000)
Consolidated Net Income $ 84,000
Income to Noncontrolling Interest (4,400)
Income to Controlling Interest $ 79,600
Prime Company and Subsidiary

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

Income to Controlling Interest, 20X6 79,600
$ 409,600
Dividends Declared, 20X6 (30,000)
Retained Earnings, December 31, 20X6 $ 379,600
6-45
P6-35 Intercorporate Sales in Prior Years
a. Eliminating entries, December 31, 20X8:

Investment in Skate Company Stock 13,000

$5,250 = ($30,000 - $2,500 - $1,250) x .20
E(3) Common Stock — Skate Company 30,000

Additional Paid-In Capital — Skate Company 20,000
Differential 63,750
Investment in Skate Company Stock 211,000
$63,750 = $75,000 – [($50,000 / 20 years)
+ ($25,000 / 20 years)] x 3 years
E(4) Patents 42,500

Buildings and Equipment 25,000
Differential 63,750
Assign differential:
$42,500 = $50,000 - [($50,000 / 20 years)
x 3 years]
$3,750 = ($25,000 / 20 years) x 3 years
E(5) Amortization Expense 2,500

Patents 2,500
Amortize differential.

Eliminate unrealized profit on buildings:
$60,000 = $125,000 - $65,000
$15,000 = $65,000 - ($125,000 - $75,000)
$ 1,500 = ($65,000 / 10 years) -
($125,000 / 25 years)
$73,500 = ($5,000 x 16 years) - ($6,500
x 1 year)
6-46
P6-35 (continued)

Land 13,000
Eliminate unrealized profit on land.
6-47
P6-35 (continued)
b. Pond Corporation and Skate Company
December 31, 20X8
Pond Skate Eliminations Consol-

Item Corp. Co. Debit Credit idated
Sales 450,000 250,000 700,000
Interest Income 14,900 14,900
Credits 485,900 250,000 714,900
Other Operating Expenses 50,000 40,000 90,000
Depreciation Expense 35,000 24,000 (5) 1,250 (6) 1,500 58,750
Interest Expense 24,000 10,500 34,500
Miscellaneous Expenses 11,900 9,500 21,400
Amortization Expense (5) 2,500 2,500
Debits (405,900) (220,000) (628,150)
Income to Noncon-
Ret. Earnings, Jan. 1 241,400 150,000 (3)150,000

(6) 15,000
(7) 10,400 216,000
Net Income, from above 80,000 30,000 30,000 1,500 81,500
321,400 180,000 297,500
(2) 2,000 (30,000)
carry forward 291,400 170,000 205,400 11,500 267,500
Cash 68,400 47,000 115,400

Interest and
Other Receivables 45,000 10,000 55,000
Inventory 140,000 50,000 190,000
Land 50,000 22,000 (7) 13,000 59,000
Buildings and Equipment 400,000 240,000 (4) 25,000
(6) 60,000 725,000
Investment in Skate
Company Stock 224,000 (1) 13,000
(3)211,000
Investment in Tin Co.
Bonds 134,000 134,000
Bond Discount 3,000 3,000
Differential (3) 63,750 (4) 63,750
Patents (4) 42,500 (5) 2,500 40,000
Debits 1,191,400 437,000 1,516,400
6-48
P6-35 (continued)
Pond Skate Eliminations Consol-

Accum. Depreciation 185,000 94,000 (4) 3,750

(5) 1,250
(6) 73,500 357,500
Interest and
Other Payables 45,000 12,000 57,000
Bonds Payable 300,000 100,000 400,000
Common Stock
Pond Corporation 150,000 150,000
Skate Company 30,000 (3) 30,000
Additional Paid-In
Capital 155,000 20,000 (3) 20,000 155,000
Retained Earnings,
from above 291,400 170,000 205,400 11,500 267,500
Noncontrolling
Interest (7) 2,600 (2) 3,250
(3) 52,750 53,400
Credits 1,191,400 437,000 449,250 449,250 1,516,400
6-49
P6-36 Intercorporate Sale of Land and Depreciable Asset
a. Income assigned to noncontrolling interest:
Net income of Morris $ 30,000

Gain on sale of equipment to parent $9,600
Gain realized prior to 20X5 (1,200) (8,400)
Amortization of differential:
Buildings and equipment ($25,000 / 10 years) (2,500)
Copyright ($17,000 / 5 years) (3,400)
Portion of ownership held x .30
Income to noncontrolling interest $ 4,710
Gain on sale of equipment to parent:

Sale price to Topp $91,600
Purchase price $100,000
[($100,000 - $10,000)/10 years] x 2 years (18,000) (82,000)
Gain on sale $ 9,600
b. Reconciliation between book value and investment balance at December

31, 20X5:
Underlying book value of Morris Company stock:

Common stock outstanding $100,000
Retained earnings, January 1, 20X5 100,000
Dividends paid in 20X5 ( 5,000)
Net book value $225,000
Portion of ownership held by Topp x .70
Net book value of ownership held by Topp $157,500
Unamortized differential:
Buildings and equipment [($25,000 x 7/10 years) x .70] 12,250
Copyright [($17,000 x 2/5 years) x .70] 4,760
Investment in Morris Company stock $174,510
c. Eliminating entries:

Investment in Morris Company Stock 13,370
$16,870 = ($30,000 x .70) - $1,750 - $2,380
$3,500 = $5,000 x .70

Assign income to noncontrolling interest.
6-50
P6-36 (continued)
E(3) Common Stock — Morris Company 100,000

Differential 30,200
Investment in Morris Company Stock 161,140
$30,200 = ($25,000 x 8/10) + ($17,000 x 3/5)

Copyright 10,200
Differential 30,200
Assign beginning differential.
E(5) Depreciation Expense 2,500

Amortization Expense 3,400
Copyright 3,400
Amortize differential.

Land 11,000

Eliminate intercorporate sale of equipment:
$8,400 = $100,000 - $91,600
$9,600 = $91,600 - ($100,000 - $18,000)
$1,200 = ($81,600 / 8 years)
- ($90,000 / 10 years)
$16,800 = ($9,000 x 3 years)
- ($10,200 x 1 year)
6-51
P6-36 (continued)
d. Topp Corporation and Morris Company
December 31, 20X5
Topp Morris Eliminations Consol-

Sales 450,000 190,400 640,400

Other Income 28,250 28,250
Gain on Sale of
Equipment 9,600 (7) 9,600
Credits 495,120 200,000 668,650
Depreciation Expense 25,000 10,000 (5) 2,500 (7) 1,200 36,300
Interest Expense 24,000 33,000 57,000
Other Expenses 28,000 17,000 45,000
Amortization Expense (5) 3,400 3,400
Debits (452,000) (170,000) (626,700)
Income to Noncon-
Ret. Earnings, Jan. 1 176,240 100,000 (3)100,000

(6) 11,000 165,240
219,360 130,000 202,480
(2) 1,500 (30,000)
carry forward 189,360 125,000 148,080 6,200 172,480
Cash 15,850 58,000 73,850

Interest and
Inventory 150,000 180,000 330,000
Land 80,000 60,000 (6) 11,000 129,000
Buildings and Equipment 315,000 240,000 (4) 25,000
(7) 8,400 588,400
Bond Discount 15,000 15,000
Investment in Morris
Company Stock 174,510 (1) 13,370
(3)161,140
Differential (3) 30,200 (4) 30,200
Copyrights (4) 10,200 (5) 3,400 6,800
Debits 830,360 633,000 1,318,050
6-52
P6-36 (continued)
Topp Morris Eliminations Consol-

Accum. Depreciation
Buildings and Equip. 120,000 60,000 (4) 5,000
(5) 2,500
(7) 16,800 204,300
Other Payables 30,000 20,000 50,000
Bonds Payable 250,000 300,000 550,000
Common Stock
Topp Corporation 150,000 150,000
Morris Company 100,000 (3)100,000
Additional Paid-In
Capital 30,000 30,000
Retained Earnings,
from above 189,360 125,000 148,080 6,200 172,480
Noncontrolling
Interest (2) 3,210
(3) 69,060 72,270
Credits 830,360 633,000 321,880 321,880 1,318,050
P6-37 Consolidation Workpaper in Year following Intercompany Transfer
a. Reconciliation of underlying book value and balance in investment account:
Net book value reported by Lane Company

Common stock outstanding $100,000
Retained earnings balance, January 1, 20X7 $140,000
Retained earnings balance, December 31, 20X7 150,000
$250,000
Proportion of stock held by Prime Company x .80
$200,000
Add: Goodwill (50,000 x .80) 40,000
Balance in investment account $240,000
6-53
P6-37 (continued)
b. Eliminating entries, December 31, 20X7:


$9,000 = $45,000 x .20

Differential 50,000
$50,000 = ($160,000 + $40,000) – ($50,000 +
$100,000)
$232,000 = $240,000 - $8,000
$58,000 = ($100,000 + $140,000 + $50,000) x .20

Differential 50,000

Land 10,000


Required balance ($5,000 x 7 years) $ 35,000
Balance recorded ($7,000 x 2 years) (14,000)

receivable/payable.
6-54
P6-37 (continued)
b. Prime Company and Lane Company
December 31, 20X7

Sales 250,000 150,000 400,000
Credits 286,000 150,000 400,000
Deprec. and Amortization 25,000 15,000 (6) 2,000 38,000
Other Expenses 20,000 10,000 30,000
Debits (205,000) (105,000) (308,000)
Income to Noncon-
Ret. Earnings, Jan. 1 420,000 140,000 (3) 140,000

(4) 20,000
(5) 8,000
(6) 18,000 374,000
501,000 185,000 457,000
(2) 7,000 (60,000)
carry forward 441,000 150,000 231,000 37,000 397,000

Inventory 240,000 100,000 340,000
Land 100,000 80,000 (5) 10,000 170,000
Investment in Lane
Company Stock 240,000 (1) 8,000
(3)232,000
Differential (3) 50,000 (4) 50,000
Goodwill (4) 25,000 25,000
Debits 1,231,000 385,000 1,392,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 (3)100,000 300,000
Retained Earnings,
from above 441,000 150,000 231,000 37,000 397,000
(5) 2,000 (3) 58,000 53,000
Credits 1,231,000 385,000 422,000 422,000 1,392,000
6-55
P6-38 Incomplete Data
(a) $100,000
(b) $140,000
(c) $250,000 = $593,000 - $343,000
(d) $100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000]
(e) $4,500 = [($106,200 + $70,800) - ($50,000 + $70,000 + $30,000)] / 6 years
(f) Investment in Shadow Company Stock:

$106,200 Purchase price, January 1, 20X4
30,000 Undistributed earnings from January 1, 20X4,
to January 1, 20X7 [($80,000 - $30,000) x .60]
6,000 Undistributed income for 20X7 ($10,000 x .60)
(10,800) Amortization of differential
[($27,000 / 6 years) x 4 years] x .60
$131,400 Balance in investment account at December 31, 20X7
(g) $7,000 = ($70,000 + $90,000) - $153,000
(h) $-0-
(i) $510,000 = $345,000 + $150,000 + ($60,000 - $45,000)
(j) $278,000 = $180,000 + $80,000 + [($60,000 / 5 years) x 4 years]

- [($45,000 / 3 years) x 2 years)
(k) Consolidated retained earnings at January 1, 20X7:

$379,400 Retained earnings reported by Mound Corporation
Mound's share of unrealized profit on sale of
equipment
$9,000 Gain recorded: [$45,000 - ($60,000 x 3 / 5)]
(3,000) Amortized in 20X6: ($9,000 / 3)
$6,000 Unamortized gain
x .60 Mound's proportionate share
(3,600) $3,600 Reduction of Mound’s retained earnings
$375,800 Consolidated retained earnings
(l) Income to noncontrolling shareholders:

$ 30,000 Shadow's 20X7 net income ($250,000 - $195,000
- $10,000 - $15,000)
3,000 Realized profit on 20X6 sale of equipment to Mound
(4,500) Amortization of differential
$ 28,500 Realized net income
x .40
$ 11,400 Income to noncontrolling shareholders
6-56
P6-39 Intercompany Sale of Equipment at a Loss in Prior Period
a. Eliminating entries:

Investment in Block Corporation Stock 36,000

$5,700 = ($60,000 - $3,000) x .10
E(3) Common Stock — Block Corporation 50,000

Investment in Block Corporation Stock 180,000

Eliminate intercorporate sale of equipment.
Depreciation based on original cost

($90,000 / 10 years) $ 9,000
Depreciation based on intercompany sale
price ($48,000 / 8 years) (6,000)
Adjustment to retained earnings
Book value of equipment at time of sale

[$90,000 - ($9,000 x 2 years)] $72,000
Intercompany sale price (48,000)
Loss recorded by Block on sale $24,000
Partial realization of loss
[($9,000 - $6,000) x 2 years] (6,000)
Loss not yet realized for consolidated
statement purposes $18,000
Foster's proportionate share x .90
Adjustment to retained earnings $16,200
6-57
P6-39 (continued)
Adjustment to noncontrolling interest
Loss not yet realized for consolidated

statement purposes $18,000
interest x .10
Adjustment to noncontrolling interest $ 1,800
Accumulated depreciation based on original

cost [($90,000 / 10 years) x 5 years] $45,000
Accumulated depreciation recorded by Foster
[($48,000 / 8 years) x 3 years] (18,000)
Adjustment to accumulated depreciation $27,000
6-58
P6-39 (continued)
b. Foster Company and Block Corporation

December 31, 20X9
Foster Block Eliminations Consol-

Item Co. Corp. Debit Credit idated
Sales 680,000 385,000 1,065,000

Other Income 26,000 15,000 41,000
Credits 760,000 400,000 1,106,000
Depreciation Expense 45,000 15,000 (4) 3,000 63,000
Other Expenses 95,000 75,000 170,000
Debits (640,000) (340,000) (983,000)
Income to Noncon-
Income, carry forward 120,000 60,000 62,700 117,300
Ret. Earnings, Jan. 1 235,000 150,000 (3)150,000 (4) 16,200 251,200

Income, from above 120,000 60,000 62,700 117,300
355,000 210,000 368,500
(2) 2,000 (40,000)
carry forward 315,000 190,000 212,700 36,200 328,500
Cash 82,000 32,400 114,400

Inventory 200,000 130,000 330,000
Land 80,000 60,000 140,000
Investment in Block
Corporation Stock 216,000 (1) 36,000
(3)180,000
Debits 1,198,000 572,400 1,596,400
6-59
P6-39 (continued)
Foster Block Eliminations Consol-

Item Co. Corp. Debit Credit idated

Other Payables 95,000 20,000 115,000
Bonds Payable 250,000 200,000 450,000
Bond Premium 2,400 2,400
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 315,000 190,000 212,700 36,200 328,500
Noncontrolling
Interest (2) 3,700
(3) 20,000
(4) 1,800 25,500
Credits 1,198,000 572,400 304,700 304,700 1,596,400
6-60
P6-40 Comprehensive Problem: Intercorporate Transfers
a. Computation of differential as of January 1, 20X8:
Original differential at December 31, 20X1 $ 150,000

Less: Portion written off for sale of inventory (30,000)
Remaining differential, January 1, 20X8 $ 120,000
b. Verification of balance in Investment in Schmid Stock

account:
Schmid retained earnings, January 1, 20X8 $1,400,000

Schmid net income, 20X8:
Sales $985,000
Cost of goods sold (525,000)
Depreciation and amortization (88,000)
Other expenses (227,000)
Other income (loss) (35,000)
Net income 110,000
Schmid dividends, 20X8 (20,000)
Schmid retained earnings, December 31, 20X8 $1,490,000
Schmid stockholders' equity:

Common stock $1,000,000
Additional paid-in capital 1,350,000
Retained earnings, December 31, 20X8 1,490,000
Stockholders' equity, December 31, 20X8 $3,840,000
Rossman's ownership share x .75
Book value of shares held by Rossman $2,880,000
Remaining differential at January 1, 20X8
($120,000 x .75) 90,000
Balance in Investment in Schmid Stock
account, December 31, 20X8 $2,970,000
c. Elimination entries:

Investment in Schmid Stock 67,500

$36,500 = [$110,000 + $40,000
- ($40,000 / 10)] x .25
6-61
P6-40 (continued)
E(3) Common Stock — Schmid 1,000,000

Additional Paid-In Capital 1,350,000
Retained Earnings, January 1 1,400,000
Differential 120,000
Investment in Schmid Stock 2,902,500
$2,902,500 = $2,970,000 - $67,500
$967,500 = ($1,000,000 + $1,350,000
+ $1,400,000 + $120,000) x .25
E(4) Land 56,000

Goodwill 64,000
Differential 120,000
Assign differential.

Land 23,000

Depreciation and Amortization 4,000
Other Income
(Loss on Sale of Equipment) 40,000
Eliminate unrealized loss on equipment:
$185,000 = $435,000 - $250,000
$4,000 = ($435,000 / 15) - ($250,000 / 10)
$149,000 = [($435,000 / 15) x 5] + $4,000
$40,000 = $290,000 - $250,000
E(7) Other Income 80,000

Eliminate intercompany sale of services.
E(8) Current Payables 20,000

Current Receivables 20,000
Eliminate intercompany receivable/payable.
E(9) Current Payables 3,750

Current Receivables 3,750
Eliminate intercompany dividend owed:
$5,000 x .75
6-62
P6-40 (continued)
d. Rossman Corporation and Schmid Distributors Inc.

December 31, 20X8
Eliminations Consol-
Item Rossman Schmid Debit Credit idated
Sales 4,801,000 985,000 5,786,000

Other Income (Loss) 90,000 (35,000) (7) 80,000 (6) 40,000 15,000
Credits 4,973,500 950,000 5,801,000
Cost of Goods Sold 2,193,000 525,000 2,718,000
Depreciation
and Amortization 202,000 88,000 (6) 4,000 294,000
Other Expenses 1,381,000 227,000 (7) 80,000 1,528,000
Debits (3,776,000) (840,000) (4,540,000)
Consolidated Net Income 1,261,000
Income to Noncon-
Income, carry forward 1,197,500 110,000 203,000 120,000 1,224,500
Retained Earnings,
Jan. 1 1,497,800 1,400,000 (3)1,400,000
(5) 23,000 1,474,800
Income, from above 1,197,500 110,000 203,000 120,000 1,224,500
2,695,300 1,510,000 2,699,300
(2) 5,000 (50,000)
Retained Earnings,
Dec. 31, carry forward 2,645,300 1,490,000 1,626,000 140,000 2,649,300
6-63
P6-40 (continued)
Eliminations Consol-
Item Rossman Schmid Debit Credit idated
Cash 50,700 38,000 88,700

Current Receivables 101,800 89,400 (8) 20,000
(9) 3,750 167,450
Inventory 286,000 218,900 504,900
Investment in Schmid
Stock 2,970,000 (1) 67,500
(3)2,902,500
Land 400,000 1,200,000 (4) 56,000 (5) 23,000 1,633,000
Buildings
and Equipment 2,400,000 2,990,000 (6) 185,000 5,575,000
Goodwill (4) 64,000 64,000
Differential (3) 120,000 (4) 120,000
Debits 6,208,500 4,536,300 8,033,050
Accumulated
Depreciation 1,105,000 420,000 (6) 149,000 1,674,000
Current Payables 86,200 76,300 (8) 20,000
(9) 3,750 138,750
Bonds Payable 1,000,000 200,000 1,200,000
Common Stock
Rossman Corporation 100,000 100,000
Schmid Distributors 1,000,000 (3)1,000,000
Additional Paid-In
Capital 1,272,000 1,350,000 (3)1,350,000 1,272,000
Retained Earnings,
from above 2,645,300 1,490,000 1,626,000 140,000 2,649,300
Noncontrolling Interest (2) 31,500
(3) 967,500 999,000
Credits 6,208,500 4,536,300 4,424,750 4,424,750 8,033,050
6-64
P6-41A Fully Adjusted Equity Method
a. Adjusted trial balance:
Prime Company Lane Company

Item Debit Credit Debit Credit
Cash and Accounts Receivable $ 151,000 $ 55,000

Inventory 240,000 100,000
Land 100,000 80,000
Buildings and Equipment 500,000 150,000
Investment in Lane Company
Stock 216,000
Cost of Goods Sold 160,000 80,000
Depreciation and Amortization 25,000 15,000
Other Expenses 20,000 10,000
Dividends Declared 60,000 35,000
Accumulated Depreciation $ 230,000 $ 60,000
Accounts Payable 60,000 25,000
Bonds Payable 200,000 50,000
Common Stock 300,000 100,000
Retained Earnings 394,000 140,000
Sales 250,000 150,000
Total $1,472,000 $1,472,000 $525,000 $525,000
b. Journal entries recorded by Prime Company:
(1) Cash 28,000

Record dividend from Lane Company:
$35,000 x .80
(2) Investment in Lane Company Stock 36,000

Record equity-method income:
$45,000 x .80
(3) Investment in Lane Company Stock 2,000

Recognize portion of gain on sale of
equipment: $20,000 / 10 years
6-65
P6-41A (continued)
c. Eliminating entries, December 31, 20X7:


$9,000 = $45,000 x .20

Differential 50,000
$50,000 = ($160,000 + $40,000) – ($50,000 +
$100,000)
$232,000 = $240,000 - $8,000
$58,000 = ($100,000 + $140,000 + $50,000) x
.20

Differential 50,000
E(5) Investment in Lane Company Stock 8,000

Land 10,000


Required balance ($5,000 x 7 years) $35,000
Balance recorded ($7,000 x 2 years) (14,000)

receivable/payable.
6-66
P6-41A (continued)
d. Prime Company and Lane Company
December 31, 20X7

Sales 250,000 150,000 400,000

Credits 288,000 150,000 400,000
Other Expenses 20,000 10,000 30,000
Debits (205,000) (105,000) (308,000)
Income to Noncon-
Ret. Earnings, Jan. 1 394,000 140,000 (3) 140,000 374,000

(4) 20,000
477,000 185,000 457,000
(2) 7,000 (60,000)
carry forward 417,000 150,000 207,000 37,000 397,000

Inventory 240,000 100,000 340,000
Land 100,000 80,000 (5) 10,000 170,000
Investment in Lane
Company Stock 216,000 (5) 8,000 (1) 10,000
(6) 18,000 (3) 232,000
Differential (3) 50,000 (4) 50,000
Goodwill (4) 25,000 25,000
Debits 1,207,000 385,000 1,392,000

Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 (3)100,000 300,000
Retained Earnings,
from above 417,000 150,000 207,000 37,000 397,000
(5) 2,000 (3) 58,000 53,000
Credits 1,207,000 385,000 424,000 424,000 1,392,000
6-67
P6-42A Cost Method
a. Journal entry recorded by Prime Company:
Cash 28,000
Dividend Income 28,000
Record dividend from Lane Company.
b. Eliminating entries, December 31, 20X7:
E(1) Dividend Income 28,000

Eliminate dividend income from
subsidiary.

$9,000 = $45,000 x .20

Differential 50,000
Eliminate investment balance at date
of acquisition:
$50,000 = ($160,000 + $40,000) – ($100,000 +
$50,000)
$40,000 = ($100,000 + $50,000 + $50,000) x
.20

Assign undistributed prior earnings of
subsidiary to noncontrolling interest:
($140,000 - $50,000) x .20

Differential 50,000
Assign differential at beginning of
period.
6-68
P6-42A (continued)

Land 10,000


Eliminate intercorporate receivable/payable.
6-69
P6-42A (continued)
c. Prime Company and Lane Company
December 31, 20X7

Sales 250,000 150,000 400,000
Dividend Income 28,000 (1) 28,000
Credits 278,000 150,000 400,000
Other Expenses 20,000 10,000 30,000
Debits (205,000) (105,000) (308,000)
Income to Noncon-
Ret. Earnings, Jan. 1 348,000 140,000 (3) 50,000

(4) 18,000
(5) 20,000
(6) 8,000
(7) 18,000 374,000
421,000 185,000 457,000
(2) 7,000 (60,000)
carry forward 361,000 150,000 151,000 37,000 397,000
Inventory 240,000 100,000 340,000
Land 100,000 80,000 (6) 10,000 170,000
Investment in Lane
Company Stock 160,000 (3)160,000
Differential (3) 50,000 (5) 50,000
Goodwill (5) 25,000 25,000
Debits 1,151,000 385,000 1,392,000
Bonds Payable 200,000 50,000 250,000
Common Stock 300,000 100,000 (3)100,000 300,000
Retained Earnings,
from above 361,000 150,000 151,000 37,000 397,000
(6) 2,000 (3) 40,000
(4) 18,000 53,000
Credits 1,151,000 385,000 342,000 342,000 1,392,000
6-70

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INTERCORPORATE TRANSFERS OF SERVICES AND NONCURRENT ASSETS

C6-1 Correction of Elimination Procedures

Re: Elimination of Intercompany Profit on Equipment

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

E(1) Equipment 150,000

E(2) Equipment 350,000

C6-2 Elimination of Intercorporate Services

To: Chief Accountant

Re: Elimination of Legal Services Provided by Parent Company

This memo is in response to our discussion regarding the elimination of intercompany

E(1) Legal Services Revenue 80,000

The information on intercorporate services provided to Plain Company indicates that an

E(2) Legal Services Revenue 150,000

E(3) Legal Services Revenue 150,000

E(4) Land 100,000

C6-3 Noncontrolling Interest

(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is

d. Noncontrolling shareholders of a subsidiary generally will not gain a great deal of

C6-4 Intercompany Sale of Services

C6-5 Intercompany Profits

b. Verizon (www.verizon.com) eliminates all intercompany profits. It discontinued the use

c. All of Harley-Davidson’s (www.harleydavidson.com) intercompany transactions are

E6-1 Multiple-Choice Questions on Intercompany Transfers

5. b Depreciation expense recorded by Pirn $40,000

E6-2 Multiple-Choice Questions on Intercompany Transactions

3. b The $39,000 paid to Gold Company will be charged to depreciation expense

5. b Reported net income of Gold Company $ 45,000

6. c Operating income reported by Top Corporation $ 85,000

E6-3 Elimination Entries for Land Transfer

a. Eliminating entry, December 31, 20X4:

E(1) Gain on Sale of Land 10,000

Eliminating entry, December 31, 20X5:

E(1) Retained Earnings, January 1 10,000

b. Eliminating entry, December 31, 20X4:

E(1) Gain on Sale of Land 10,000

Eliminating entry, December 31, 20X5:

E(1) Retained Earnings, January 1 6,000

E6-4 Intercompany Services

a. Consolidated net income will not change.

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

E6-5 Elimination Entries for Intercompany Services

Two eliminating entries are required:

E(1) Delivery Service Revenue 76,000

E(2) Accounts Payable 18,000

E6-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale

a. Eliminating entry, December 31, 20X6

E(1) Truck 5,000

b. Eliminating entry, December 31, 20X7:

E(1) Truck 5,000

Accumulated depreciation adjustment:

E6-7 Transfer of Land

a. Eliminating entry, December 31, 20X2:

E(1) Gain on Sale of Land 45,000

Eliminating entry, December 31, 20X3:

E(1) Retained Earnings, January 1 31,500

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

E(1) Retained Earnings, January 1 30,000

E6-8 Transfer of Depreciable Asset at Year-End

a. Eliminating entry, December 31, 20X5:

E(1) Truck 90,000

Computation of gain on sale of truck:

b. Eliminating entry, December 31, 20X6:

E(1) Truck 90,000