Chap 007

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets
CHAPTER 7 INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS ANSWERS TO QUESTIONS Q7-1 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. Q7-2 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. Q7-3 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. Q7-4 (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. Q7-5 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. Q7-6 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. Q7-7 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. Q7-8 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. Q7-9 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.
7-1
Q7-10 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. Q7-11 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. Q7-12 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 yearend. None of the gain will be considered realized in the period of transfer if the sale occurs at year-end. Q7-13 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. Q7-14 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. Q7-15 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. Q7-16 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.
7-2
Q7-17 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. Q7-18A 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 modified 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.
7-3
SOLUTIONS TO CASES C7-1 Correction of Elimination Procedures MEMO To: From: Re: Controller Plug Corporation , CPA 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; ASC 810] Your eliminating entry recorded at December 31, 20X2, was:
Equipment Loss on Sale of Equipment 150,000 150,000
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 Coys 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, the eliminating entry above understates depreciation expense for the year. The correct eliminating entry at December 31, 20X2, is:
Equipment Depreciation Expense Accumulated Depreciation Loss on Sale of Equipment 350,000 15,000 215,000 150,000
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 second eliminating entry 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; ASC 810
7-4
C7-2 Elimination of Intercorporate Services MEMO To: From: Re: Chief Accountant Dream Corporation , CPA 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; ASC 810] 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:
Legal Services Revenue Legal Services Expense 80,000 80,000
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:
Legal Services Revenue Land Legal Services Expense Wage and Salary Expense 150,000 100,000 150,000 100,000
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:
Legal Services Revenue Land Wage and Salary Expense 150,000 50,000 100,000
7-5
C7-2 (continued) 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:
Land Investment in Plain 100,000 100,000
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 Investment in Plain and a $50,000 credit to land. Primary citation: ARB 51, Par. 6; ASC 810
7-6
C7-3 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 interests 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 interests 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.
7-7
C7-4 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. C7-5 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 companys 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. 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. b. All of Harley-Davidsons (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.
7-8
SOLUTIONS TO EXERCISES E7-1 Multiple-Choice Questions on Intercompany Transfers [AICPA Adapted] 1. 2. 3. 4. 5. c d b a b Depreciation expense recorded by Pirn Depreciation expense recorded by Scroll Total depreciation reported 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) Depreciation for consolidated statements $40,000 10,000 $50,000
(3,000) $47,000
E7-2 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. 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; ASC 730-10-25-1). Transfer to another legal entity does not cause a change in accounting treatment within the economic entity. 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. 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.
2.
3.
4.
7-9
E7-2 (continued) 5. b Reported net income of Gold Company Reported gain on sale of equipment Intercompany profit realized in 20X6 Realized net income of Gold Company Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interests Operating income reported by Top Corporation Net income reported by Gold Company Less: Unrealized gain on sale of equipment ($15,000 - $5,000) Consolidated net income $15,000 (5,000) $ 45,000 (10,000) $ 35,000 x .40 $ 14,000 $ 85,000 45,000 $130,000 (10,000) $120,000
6.
E7-3 Elimination Entries for Land Transfer a. Eliminating entry, December 31, 20X4:
Gain on Sale of Land Land 10,000 10,000
Eliminating entry, December 31, 20X5:

Investment in Lowly Land 10,000 10,000
b.

Gain on Sale of Land Land 10,000 10,000

Investment in Lowly NCI in NA of Lowly Land 6,000 4,000 10,000
7-10
E7-4 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 E7-5 Elimination Entries for Intercompany Services Two eliminating entries are required:
Delivery Service Revenue Delivery Service Expense Accounts Payable Accounts Receivable 76,000 76,000 18,000 18,000
E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale a.

Northern Pam Truck 40,000 5,000 45,000 Accumulated Depreciation Actual "As If" 0 15,000 15,000
Eliminate the gain on Truck & correct asset's basis: Gain on sale Truck Accumulated Depreciation b. Northern Pam Truck 40,000 5,000 45,000 Actual "As If"
10,000 5,000 15,000 Accumulated Depreciation 4,000 1,000 15,000 18,000
Eliminate the gain on Truck & correct asset's basis: Investment in Northern 10,000 Truck 5,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 1,000
15,000
1,000
7-11
E7-7 Transfer of Land a. Eliminating entry, December 31, 20X2:

45,000 45,000
Gain on Sale of Land Land

Investment in Roan NCI in NA of Roan Land 31,500 13,500 45,000
b.
Eliminating entries, December 31, 20X3 and 20X4:

30,000 30,000
Investment in Roan Land
E7-8 Transfer of Depreciable Asset at Year-End a.

Truck Minnow Corp. Frazer Corp. 210,000 90,000 300,000 Actual "As If" Accumulated Depreciation 0 120,000 120,000
Eliminate the gain on Truck & correct asset's basis: Gain on sale 30,000 Truck 90,000 Accumulated Depreciation
120,000
Computation of gain on sale of truck: Price paid by Minnow Cost of truck to Frazer Accumulated depreciation ($300,000 / 10 years) x 4 years Gain on sale of truck
$300,000 (120,000)
$210,000 (180,000) $ 30,000
7-12
E7-8 (continued) b.
Minnow Corp. Frazer Corp. Truck 210,000 90,000 300,000 Actual "As If" Accumulated Depreciation 35,000 5,000 120,000 150,000
Eliminate the gain on Truck & correct asset's basis: Investment in Minnow Corp. 30,000 Truck 90,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 5,000
120,000 5,000
E7-9 Transfer of Depreciable Asset at Beginning of Year a.

Truck Minnow Corp. Frazer Corp. 245,000 55,000 300,000 Actual 5,000 "As If" Accumulated Depreciation 35,000 90,000 120,000
Eliminate the gain on Truck & correct asset's basis: Gain on Sale 35,000 Truck 55,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 5,000
90,000
5,000
Computation of gain on sale of truck: Price paid by Minnow Cost of truck to Frazer Accumulated depreciation ($300,000 / 10 years) x 3 years Gain on sale of truck
$300,000 ( 90,000)
$245,000 (210,000) $ 35,000
7-13
E7-9 (continued) b.
Minnow Corp. Frazer Corp. Truck 245,000 55,000 300,000 Actual "As If" Accumulated Depreciation 70,000 5,000 85,000 150,000
Eliminate the gain on Truck & correct asset's basis: Investment in Minnow Corp. 30,000 Truck 55,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 5,000
85,000
5,000
E7-10 Sale of Equipment to Subsidiary in Current Period a.

Cash Accumulated Depreciation Equipment Gain on sale of Equipment Record gain on Equipment 84,000 80,000 150,000 14,000
b.
Equipment Cash Journal entry to record purchase Depreciation Expense Accumulated Depreciation Journal entry to record depreciation expense 84,000 84,000
12,000 12,000
7-14
E7-10 (continued) c.
Lance Corp. Wainwrite Corp. Equipment 84,000 66,000 150,000 Actual "As If" Accumulated Depreciation 12,000 2,000 80,000 90,000
Eliminate the gain on Equipment & correct asset's basis: Gain on sale 14,000 Equipment 66,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 2,000
80,000 2,000
d.
Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment and prepare a consolidated balance sheet only:
Eliminate the gain on Equipment & correct asset's basis: Investment in Lance Corp. 12,000 Equipment 66,000 Accumulated Depreciation
78,000
E7-11 Upstream Sale of Equipment in Prior Period a. Consolidated net income for 20X8: Operating income reported by Baywatch Net income reported by Tubberware Amount of gain realized in 20X8 ($30,000 / 12 years) Realized net income of Tubberware Consolidated net income Consolidated net income for 20X8 would be unchanged. $100,000
$40,000 2,500
42,500 $142,500
b.
7-15
E7-11 (continued) c.
Baywatch Tubberware Equipment 270,000 30,000 300,000 Actual "As If" Accumulated Depreciation 67,500 2,500 55,000 120,000
Eliminate the gain on Equipment & correct asset's basis: Investment in Tubberware 20,000 NCI in NA of Tubberware 5,000 Equipment 30,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 2,500
55,000 2,500
E7-12 Elimination Entries for Midyear Depreciable Asset Transfer a.

Andrews Co. Kline Corp. Equipment 28,000 2,000 30,000 Actual "As If" Accumulated Depreciation 4,000 1,500 12,500 15,000
Eliminate the gain on Equipment & correct asset's basis: Investment in Andrews Co. 10,500 Equipment 2,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 1,500
12,500 1,500
b.
Andrews Co. Kline Corp. Equipment 28,000 2,000 30,000 Actual "As If" Accumulated Depreciation 12,000 3,000 11,000 20,000
Eliminate the gain on Equipment & correct asset's basis: Investment in Andrews Co. 9,000 Equipment 2,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 3,000
11,000
3,000
7-16
E7-13 Consolidated Net Income Computation a. Downstream sale of land: Verrys separate operating income Less: Unrealized gain on sale of land Verrys realized operating income Spawns realized net income Consolidated net income Income to noncontrolling interest: ($60,000 x 0.25) ($40,000 X 0.25) Income to controlling interest b. Upstream sale of land: Verrys separate operating income Spawns net income Less: Unrealized gain on sale of land Spawns realized net income Consolidated net income Income to noncontrolling interest: ($35,000 x 0.25) ($40,000 x 0.25) Income to controlling interest $60,000 (25,000) 20X4 $ 90,000 (25,000) $ 65,000 60,000 $125,000 (15,000) $110,000 20X5 $110,000 $110,000 40,000 $150,000 (10,000) $140,000
20X4 $ 90,000 35,000 $125,000 (8,750) $116,250
20X5 $110,000 40,000 $150,000 (10,000) $140,000
7-17
E7-14 Elimination Entries for Intercompany Transfers a. Operating income of Grand Delivery Net income of Acme Real Estate Company Less: Unrealized profit on land sale Acmes realized net income Consolidated net income $40,000 (25,000) $65,000 15,000 $80,000
b.
Note: the term basic equity method in part b of the problem slipped through the editorial process. This should have read fully adjusted equity method. The answers given here are based on the fully adjusted equity method. Journal entries recorded by Speedy Delivery: Cash 8,000 Investment in Acme Real Estate Record dividends from Acme Real Estate: $10,000 x 0.80 Investment in Acme Real Estate Income from Acme Real Estate Record equity-method income: $40,000 x 0.80 32,000 8,000
32,000
Income from Acme Real Estate Investment in Acme Real Estate Eliminate unrealized gain on sale E7-14 (continued) c.
Book Value Calculations: NCI 20% 80,000 8,000 (2,000) 86,000 + Grand Delivery 80% 320,000 32,000 (8,000) 344,000 = Common Stock 300,000 +
20,000
20,000
Original book value + Net Income - Dividends Ending book value
Retained Earnings 100,000 40,000 (10,000) 130,000
300,000
Deferred Gain Calculations: Total 25,000 25,000 = Grand Delivery's share 20,000 20,000 + NCI's share 5,000 5,000
Upstream Land Total
7-18
Basic elimination entry Common stock Retained earnings Income from Acme Real Estate NCI in NI of Acme Real Estate Dividends declared Investment in Acme Real Estate NCI in NA of Acme Real Estate Eliminate gain on purchase of land Gain on sale of land Land Eliminate courier services Service Revenue Delivery Expense
300,000 100,000 12,000 3,000 10,000 324,000 81,000
Original amount invested (100%) Beginning balance in retained earnings Grands share of NI - Def. Gain NCI share of NI - Def. Gain 100% of Acmes dividends declared Grands share of BV - Def. Gain NCI share of BV - Def. Gain
25,000 25,000
15,000 15,000
7-19
E7-15 Sale of Building to Parent in Prior Period a. b. c.

Turner Co. Split Co. Building 300,000 100,000 400,000 Actual "As If" Accumulated Depreciation 25,000 5,000 160,000 180,000
Turner will record annual depreciation expense of $25,000 ($300,000 / 12 years). Split would have recorded annual depreciation expense of $20,000 ($400,000 / 20 years).
Eliminate the gain on building and correct asset's basis: Investment in Split Co. 42,000 NCI in NA of Split Co. 18,000 Building 100,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 5,000
160,000
5,000
d.
Income assigned to noncontrolling interest for 20X9: Net income reported by Split Company Amount of gain realized in 20X9 ($60,000 / 12 years) Realized net income for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest $ 40,000 5,000 $ 45,000 x 0.30 $ 13,500
e.
Amount assigned to noncontrolling interest in 20X9 consolidated balance sheet: Split Company net assets, January 1, 20X9 ($350,000 - $150,000) Net income for 20X9 Dividends paid in 20X9 Unrealized profit on sale of building to Turner Company ($60,000 - $5,000) Realized book value December 31, 20X9 Proportion of ownership held by noncontrolling interest Amount assigned to noncontrolling interest in December 31, 20X9, consolidated balance sheet $200,000 40,000 (15,000) (55,000) $170,000 x 0.30
$ 51,000
7-20
E7-16 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. 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.
b.
E7-17 Eliminating Entries Following Intercompany Sale at a Loss a. Eliminating entry, December 31, 20X7:
156,000 36,000 120,000
Buildings and Equipment Loss on Sale of Building Accumulated Depreciation
Eliminate unrealized loss on building. b. Consolidated net income and income to controlling interest for 20X7: Operating income reported by Brown Net income reported by Transom Add: Loss on sale of building Realized net income of Transom Consolidated net income Income to noncontrolling interest ($51,000 x 0.30) Income to controlling interest c. $ 15,000 36,000 $125,000 51,000 $176,000 (15,300) $160,700
7-21
Eliminate the gain on Building and correct asset's basis: Building 156,000 Investment in Transom Co. NCI in NA of Transom Co. Accumulated Depreciation Depreciation Expense Accumulated Depreciation Building 144,000 156,000 300,000 4,000
25,200 10,800 120,000
4,000 Accumulated Depreciation 16,000 120,000 4,000 140,000
Brown Corp.
Actual
Transom Co.
"As If"
7-22
E7-17 (continued) 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 Consolidated net income $186,000 Income assigned to noncontrolling interest ($36,000 x 0.30) (10,800) Income assigned to controlling interest $175,200
E7-18 Multiple Transfers of Asset a. b. c. $145,000 No gain or loss should be reported. Swanson Corporation operating income Sullivan Corporation net income Loss on sale of land ($145,000 - $130,000) Realized net income of Sullivan Corporation Proportion of stock held by Swanson Kolder Company net income Gain on sale of land ($180,000 - $130,000) Realized net income of Kolder Company Proportion of stock held by Swanson Clayton Corporation net income Gain on sale of land ($240,000 - $180,000) Realized net income of Clayton Corporation Proportion of stock held by Swanson Income assigned to controlling interest Alternate Computation: Swanson Corporation operating income Sullivan Corporation net income Kolder Company net income Clayton Corporation net income Combined income Unrealized loss recorded by Sullivan Corp. Unrealized gain recorded by Kolder Company Unrealized gain recorded by Clayton Corp. Realized income available to all shareholders Income assigned to noncontrolling interest: Sullivan Corp. ($120,000 + $15,000) x 0.20 Kolder Company ($60,000 - $50,000) x 0.30 Clayton Corp. ($80,000 - $60,000) x 0.10 Income assigned to controlling interest
7-23
$150,000 $120,000 15,000 $135,000 x 0.80 $ 60,000 (50,000) $ 10,000 x 0.70 $ 80,000 (60,000) $ 20,000 x 0.90
108,000
7,000
18,000 $283,000 $150,000 120,000 60,000 80,000 $410,000
$ (15,000) 50,000 60,000
(95,000) $315,000
$ 27,000 3,000 2,000
(32,000) $283,000
E7-18 (continued) d. Eliminating entry:

110,000 15,000 95,000
Gain on Sale of Land Loss on Sale of Land Land
Eliminate gains and loss on land transfer: $110,000 = $50,000 + $60,000 $95,000 = $110,000 - $15,000 E7-19 Elimination Entry in Period of Transfer a. b. c.
Blank Corp. Grand Corp. Truck 276,000 24,000 300,000 Actual "As If" Accumulated Depreciation 23,000 3,000 60,000 80,000
$300,000 = $276,000 + $24,000 15 years = $300,000 / ($60,000 / 3 years)
Eliminate the gain on Truck and correct asset's basis: Investment in Grand Corp. 21,600 NCI in NA of Grand Corp. 14,400 Truck 24,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 3,000
60,000
3,000
7-24
E7-20 Elimination Entry Computation a.

Stern Subsidiary Equipment 360,000 90,000 450,000 Actual "As If" Accumulated Depreciation 36,000 6,000 150,000 180,000
Eliminate the gain on Equipment and correct asset's basis: Gain on sale 60,000 Equipment 90,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 6,000
150,000
6,000 Accumulated Depreciation 72,000 6,00 0 144,000 210,000
b.
Stern Equipment 360,000 90,000 450,000 Actual
Subsidiary
"As If"
Eliminate the gain on Equipment and correct asset's basis: Investment in Subsidiary 37,800 NCI in NA of Subsidiary 16,200 Equipment 90,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 6,000
144,000
6,000
7-25
E7-21 Using the Eliminating Entry to Determine Account Balances a. b. c. Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber Corporation. 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. Intercompany transfer price: Amount paid by Somber Corporation Increase to buildings and equipment in eliminating entry Amount paid by Pastel to Somber for equipment d. Income assigned to noncontrolling interest for 20X9: Net income reported by Somber Amount of gain realized in 20X9 ($10,500 / 7 years) Realized net income for 20X9 Proportion of ownership held by noncontrolling interest Income assigned to noncontrolling interest e. f. $ 25,000 1,500 $ 26,500 x 0.10 $ 2,650 $120,000 (53,500) $ 66,500
Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported by the consolidated entity for 20X9. Eliminating entries at December 31, 20X9:
Pastel Corp. 90% 450,000 22,500 (5,400) 467,100
Book Value Calculations: NCI 10% 50,000 2,500 (600) 51,900 + = Common Stock 300,000 + Retained Earnings 200,000 25,000 (6,000) 219,000
300,000
Deferred Gain Calculations: Extra Depreciation Total 1,500 = Pastel Corp.'s share 1,350 + NCI's share 150
Basic elimination entry Common stock Retained earnings Income from Somber Corp. NCI in NI of Somber Corp. Dividends declared Investment in Somber Corp. NCI in NA of Somber Corp.
300,000 200,000 23,850 2,650 6,000 468,450 52,050
Original amount invested (100%) Beginning balance in RE Pastels share of NI + Extra Dep. NCI share of NI + Extra Dep. 100% of Somber's dividends Pastel 's share of BV + Extra Dep. NCI share of BV + Extra Dep.
7-26
E7-21 (continued)
Pastel Corp. Somber Corp. Equipment 66,500 53,500 120,000 Actual "As If" Accumulated Depreciation 9,500 1,500 64,000 72,000
Eliminate the gain on Equipment and correct asset's basis: Investment in Somber Corp. 9,450 NCI in NA of Somber Corp. 1,050 Equipment 53,500 Accumulated Depreciation 64,000 Accumulated Depreciation Depreciation Expense 1,500 1,500
E7-22 Intercompany Sale of Services a. Eliminating entries, 20X4:

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

Accounts Payable Accounts Receivable 6,600 6,600
Eliminate intercompany receivable/payable. b. Consolidated net income and income to controlling interest for 20X4: Norgaard's separate operating income Bline's net income Consolidated net income Income to noncontrolling interest ($631,000 x 0.25) Income to controlling interest $2,342,000 631,000 2,973,000 (157,750) $2,815,250
7-27
E7-23A Modified Equity Method and Cost Method a. (1)

Equity Method Entries on Newtime's Books: Investment in TV Sales Co. Income from TV Sales Co. Record Newtime's 65% share of TV Sales Co.'s 20X4 income Cash Investment in TV Sales Co. Record Newtime's 65% share of TV Sales Co.'s 20X4 dividend 45,500 45,500
13,000 13,000
(2)
Book Value Calculations: NCI 35% Original book value + Net Income - Dividends Ending book value 155,750 24,500 (7,000) 173,250 + Newtime 65% 289,250 45,500 (13,000) 321,750 = Common Stock 300,000 + Retained Earnings 145,000 70,000 (20,000) 195,000
300,000
Basic elimination entry Common stock Retained earnings Income from TV Sales Co. NCI in NI of TV Sales Co. Dividends declared Investment in TV Sales Co. NCI in NA of TV Sales Co. Eliminate gain on purchase of land Investment in TV Sales Co. Land
300,000 145,000 45,500 27,300 20,000 321,750 176,050
Original amount invested (100%) Beginning balance in RE Newtimes share of NI NCI share of NI + Extra Dep. 100% of TV Sales Co.'s dividends Newtime's share of BV NCI share of BV + Extra Dep.
11,000 11,000
Eliminate the gain on Equipment and correct asset's basis: Investment in TV Sales Co. 26,000 NCI in NA of TV Sales Co. 14,000 Equipment 40,000 Accumulated Depreciation Depreciation Expense 8,000 8,000
7-28
E7-23A (continued) b. (1)

Equity Method Entries on Newtime's Books: Cash Dividend Income Record dividend income from TV Sales Company. 13,000 13,000
(2)
Investment elimination entry Common stock Retained earnings Investment in TV Sales Co. NCI in NA of TV Sales Co. Dividend elimination entry Dividend Income NCI in NI of TV Sales Co. Dividends declared 300,000 100,000 260,000 140,000
13,000 7,000 20,000
Assign prior undistributed income to NCI NCI in NI of TV Sales Co. 20,300 Retained Earnings 15,750 NCI in NA of TV Sales Co. Eliminate gain on purchase of land Investment in TV Sales Co. Land
36,050
11,000 11,000
Eliminate the gain on Equipment and correct asset's basis: Investment in TV Sales Co. 26,000 NCI in NA of TV Sales Co. 14,000 Equipment 40,000 Accumulated Depreciation Depreciation Expense 8,000 8,000
7-29
SOLUTIONS TO PROBLEMS P7-24 Computation of Consolidated Net Income a. Separate operating income of Petime Corporation Reported net income of United Grain Company Unrealized profit of sale of land Realized income for 20X4 Amortization of differential ($10,000 / 10 years) Proportion of ownership held by Petime Income attributable to controlling interest Income to controlling interest b. Separate operating income of Petime Corporation Reported net income by United Grain Company Amortization of differential ($10,000 / 10 years) Proportion of stock held by Petime Income attributable to controlling interest Unrealized profit on sale of land Income to controlling interest $19,000 (7,000) $12,000 ( 1,000) $11,000 x 0.90 $34,000
9,900 $43,900 $34,000
$19,000 ( 1,000) $18,000 x 0.90
16,200 (7,000) $43,200
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). P7-25 Subsidiary Net Income a. Toll Corporations reported net income for 20X4 was $94,400: Income assigned to noncontrolling shareholders Add: Unrealized profit on building ($20,000 x 0.25) Amortization of differential ($4,400 x 0.25) Income assigned to noncontrolling interest before adjustment Proportion of stock held by noncontrolling interest Reported income of Toll Computation of annual amortization: Fair value of consideration given by Bold Fair value of noncontrolling interest Total fair value Book value of Tolls assets: Common stock Retained earnings Total book value Differential paid by Bold Number of years in amortization period Annual amortization $17,500 5,000 1,10 0 $23,600 0.25 $94,400 $348,000 116,00 0 $464,000 $150,000 270,000
(420,000) $ 44,000 10 $4,400
7-30
P7-25 (continued) b. Consolidated net income for 20X4 is $304,000: Bold Corporations operating income Toll Corporations net income Amortization of differential ($44,000 / 10 years) Unrealized profit on building Consolidated net income c. Income assigned to controlling interest is $286,500: Consolidated net income Income assigned to noncontrolling interest Income assigned to controlling interest Alternate computation: Operating income of Bold Income from Toll: Net income of Toll Unrealized profit on building Amortization of differential Realized income Portion of ownership held Income to controlling interest P7-26 Transfer of Asset from One Subsidiary to Another Bugle Corporation Depreciation expense Fixed assets Warehouse Accumulated depreciation Gain on sale of warehouse $ ------15,000 Cook Products Corporation $ 3,000 45,000 3,000 --Consolidated Entity $ 2,000 40,000 12,000 --$304,000 (17,500) $286,500 $234,000 $94,400 (20,000) (4,400) $70,000 x 0.75 $234,000 94,400 (4,400) (20,000) $304,000
52,500 $286,500
7-31
P7-27 Consolidated Eliminating Entry a. b. Master paid Rakel $460,000 ($600,000 - $140,000). Accumulated depreciation at January 1, 20X7, was $168,000, computed as follows: Purchase price paid by Rakel Amount paid by Master Gain recorded by Rakel Book value at date of sale Accumulated depreciation at date of sale c. d. Annual depreciation expense recorded by Rakel was $28,000 ($168,000/6 years). The estimated residual value was $40,000, computed as follows: Purchase price paid by Rakel Amount to be depreciated by Rakel ($28,000 x 20 years) Estimated residual value e. f. $600,000 (560,000) $ 40,000 $460,000 (28,000) $600,000 (432,000) $168,000
Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 $40,000) / 14 years). Reported net income of Rakel Unrealized gain on sale of building ($28,000 - $2,000) Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interest $ 80,000 (26,000) $ 54,000 x 0.40 $ 21,600 $ 65,000 2,000 $ 67,000 x 0.40 $ 26,800
g.
Reported net income of Rakel Portion of gain on sale of building realized in 20X8 Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interest
7-32
P7-28 Multiple-Choice Questions 1. d 2. c 3. a 4. a 5. d P7-29 Intercompany Services Provided to Subsidiary The eliminating entry at December 31, 20X4, would be: Service Revenue Building Wage Expense 110,000 30,000 80,000
The eliminating entries at December 31, 20X5, would be: Investment in Subsidiary Building Accumulated Depreciation Depreciation Expense 30,000 30,000 1,200 1,200
P7-30 Consolidated Net Income with Intercorporate Transfers a.

Cash Accumulated Depreciation Equipment Gain on sale of Equipment Record gain on Equipment 240,000 140,000 350,000 30,000
b.
Eliminate loss on purchase of land Land Loss on sale of land 60,000 60,000
Eliminate the gain on Equipment and correct asset's basis: Investment in Subsidence 25,000 Equipment 110,000 Accumulated Depreciation Accumulated Depreciation 5,000
135,000
7-33
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets Depreciation Expense 5,000
7-34
P7-30 (continued) c. Subsidence Mining's 20X7 net income was $90,000: Subsidence Mining's income to noncontrolling shareholders Noncontrolling interest's share of subsidiary income Subsidence Mining's income before adjustment Add: Amortization of differential: ($200,000 / 10 years) Less: Unrealized loss on intercompany sale of land Subsidence Mining's 20X7 net income d. Bowers operating income was $826,000: Consolidated net income Less: Income to noncontrolling interest Income assigned to controlling interest Income from Subsidence Mining: Reported net income Unrealized loss on land Amortization of differential ($200,000 / 10 years) Realized income Portion of ownership held Bowers share Realized profit on equipment ($30,000 / 6 years) Bowers 20X7 income from its separate operations $961,000 (39,000) $922,000 $ 90,000 60,000 (20,000) $130,000 x 0.70 $ 91,000 5,000 $ 39,000 0.30 $130,000 20,000 (60,000) $ 90,000
(96,000) $826,000
7-35
P7-31 Preparation of Consolidated Balance Sheet a.

Book Value Calculations: NCI 40% 100,000 + Lofton Co. 60% 150,000 = Common Stock 200,000 + Retained Earnings 50,000
Ending book value
Deferred Gain Calculations: Total 3,000 3,000 = Lofton Co.'s share 3,000 3,000 + NCI's share 0 0
Extra Depreciation Total
Basic elimination entry Common stock Retained earnings Income from Temple Corp. Investment in Temple Corp. NCI in NA of Temple Corp. Eliminate gain on purchase of land Land Investment in Temple Corp. NCI in NA of Temple Corp. Equipment 91,000 9,000 100,000
200,000 50,000 3,000 153,000 100,000
Original amount invested (100%) Beginning balance in RE Loftons share of NI + Extra Dep. Lofton's share of BV + Extra Dep. NCI share of BV of net assets
Temple Corp. Lofton Co.
Actual "As If"
Eliminate the gain on Equipment and correct asset's basis: Investment in Temple Corp. 18,000 Equipment 9,000 Accumulated Depreciation 27,000 Accumulated Depreciation Depreciation Expense 3,000 3,000
7-36
P7-31 (continued)
Lofton Co. Balance Sheet Cash and Receivables Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Temple Corp. 101,000 80,000 150,000 400,000 (135,000 ) 141,000 Temple Corp. 20,000 40,000 90,000 300,000 (85,000) Elimination Entries DR CR
Consolidated 121,000 120,000 250,000 709,000
10,000 9,000 3,000 18,000 27,000 153,00 0 6,000 186,00 0
(244,000) 0
Total Assets Accounts Payable Notes Payable Common Stock Retained Earnings
737,000 90,000 200,000 100,000 347,000
365,000 25,000 90,000 200,000 50,000
40,000
956,000 115,000 290,000
200,00 0 50,000 3,000
3,000 100,00 0 4,000 107,00 0
100,000 347,000
NCI in NA of Temple Corp. 250,00 0
104,000
Total Liabilities & Equity
737,000
365,000
956,000
b.
Lofton Company and Subsidiary Consolidated Balance Sheet December 31, 20X6 Cash and Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Total Assets Accounts Payable Notes Payable Stockholders Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling interest Total Stockholders Equity Total Liabilities and Stockholders' Equity $121,000 120,000 250,000 465,000 $956,000 $115,000 290,000 $100,000 347,000 $447,000 104,000
$709,000 (244,000)
551,000 $956,000
7-37
P7-32 Consolidation Worksheet in Year of Intercompany Transfer Note: In converting this problem from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance: Investment in Lane Company Stock = 191,600 Retained Earnings = 322,000 a. These calculations are based on the corrected numbers
Equity Method Entries on Prime Co.'s Books: Investment in Lane Co. 40,000 Income from Lane Co. Record Prime Co.'s 80% share of Lane Co.'s 20X6 income Cash 4,000 Investment in Lane Co. Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend Income from Lane Co. Investment in Lane Co. Record amortization of excess acquisition price Income from Lane Co. Investment in Lane Co. Defer unrealized gain on Equipment Investment in Lane Co. Income from Lane Co. Reverse the deferred gain Book Value Calculations: NCI 20% 39,000 10,000 (1,000) 48,000 + Prime Co. 80% 156,000 40,000 (4,000) 192,000 = Common Stock 100,000 + Retained Earnings 95,000 50,000 (5,000) 140,000 14,400 14,400
40,000
4,000
20,000 20,000
2,000 2,000
100,000
Deferred Gain Calculations: Total (20,000) = Prime Co.'s share (20,000) + NCI's share
Downstream Asset
7-38
2,000 (18,000)
2,000 (18,000)
0 0
7-39
P7-32 (continued)
Basic elimination entry Common stock Retained earnings Income from Lane Co. NCI in NI of Lane Co. Dividends declared Investment in Lane Co. NCI in NA of Lane Co. 100,000 95,000 22,000 10,000 5,000 174,000 48,000 Original amount invested (100%) Beginning balance in RE Primes share of NI - Def. Gain NCI share of Lane Co.'s NI 100% of Lane Co.'s dividends Prime's share of BV - Def. Gain NCI share of BV of net assets
Excess Value (Differential) Calculations: NCI 20% + Prime Co. 80% Beginning balance 10,000 40,000 Changes (3,600) (14,400) Ending balance 6,400 25,600
Goodwill 50,000 (18,000) 32,000
Amortized excess value reclassification entry: Goodwill impairment loss 18,000 Income from Lane Co. NCI in NI of Lane Co.
14,400 3,600
Excess value (differential) reclassification entry: Goodwill 32,000 Investment in Lane Co. NCI in NA of Lane Co.
25,600 6,400
Eliminate intercompany accounts: Accounts Payable Cash and Accounts Receivable
7,000 7,000
Eliminate gain on purchase of land Investment in Lane Co. NCI in NI of Lane Co. Land
8,000 2,000 10,000
Lane Co. Prime Co.
Equipment 70,000 5,000 75,000
Actual "As If"
Accumulated Depreciation 7,000 2,000 25,000 30,000
7-40
Eliminate the gain on Equipment and correct asset's basis: Gain on sale 20,000 Equipment 5,000 Accumulated Depreciation 25,000 Accumulated Depreciation Depreciation Expense 2,000 2,000
P7-32 (continued)
Investment in Lane Co. 188,000 40,000 4,000 14,400 2,000 20,000 191,600 174,000 8,000 25,600 0 Income from Lane Co. 40,000 80% Dividends Excess Val. Amort. Defer Equipment Gain Basic Excess Reclass. 14,400 20,000 22,000 14,400 0 80% Net Income
Beginning Balance 80% Net Income
Realize Def. Gain Ending Balance Land Adjustment
2,000 7,600
Realize Def. Gain Ending Balance
b. This worksheet is based on the corrected numbers:

Prime Co. Income Statement Sales Gain on Sale of Equipment Less: COGS Less: Depr. & Amort. Expense Less: Other Expenses Less: Goodwill Impairment Loss Income from Lane Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated 240,000 20,000 (140,000) (25,000) (15,000) 7,600 87,600 87,600 322,000 87,600 (30,000) 379,600 113,000 260,000 80,000 500,000 (205,000) Lane Co. 130,000 20,000 (60,000) (15,000) (5,000) 18,000 22,000 60,000 10,000 70,000 95,000 70,000 165,00 0 2,000 Elimination Entries DR CR Consolidated 370,000 0 (200,000) (38,000) (20,000) (18,000) 0 94,000 (6,400) 87,600 322,000 87,600 (30,000) 379,600 141,000 350,000 150,000 655,000 (273,000)
50,000 50,000 95,000 50,000 (5,000) 140,000 35,000 90,000 80,000 150,000 (45,000)
14,400 16,400 3,600 20,000
20,000 5,000 25,000 7,000 10,000
5,000 2,000
25,000
7-41

Depreciation Investment in Lane Co. Goodwill Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Lane Co. Total Liabilities & Equity 191,600 939,600 60,000 200,000 300,000 379,600 310,000 20,000 50,000 100,000 140,000 8,000 32,000 7,000 7,000 100,00 0 165,00 0 2,000 272,00 0 174,00 0 25,600 42,000 0 32,000 1,055,000 73,000 250,000 300,000 25,000 48,000 6,400 73,000 379,600 52,400 1,055,000
939,600
310,000
7-42
P7-32 (continued) These financial statements are based on the corrected numbers: c. Prime Company and Subsidiary Consolidated Balance Sheet December 31, 20X6 $ $655,000 (273,000) 141,000 350,000 150,000
Cash and Receivables Inventory Land Buildings and Equipment Less: Accumulated Depreciation Goodwill Total Assets Accounts Payable Bonds Payable Stockholders Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Total Noncontrolling Interest Total Stockholders Equity Total Liabilities and Stockholders' Equity Prime Company and Subsidiary Consolidated Income Statement Year Ended December 31, 20X6 Sales Cost of Goods Sold Depreciation and Amortization Expense Goodwill Impairment Loss Other Expenses Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest
382,000 32,000 $1,055,000 $ 73,000 250,000
$300,000 379,600 $679,600 52,400
732,000 $1,055,000
$200,000 38,000 18,000 20,000
$ 370,000
(276,000) 94,000 (6,400) $ 87,600
Prime Company and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X6 Retained Earnings, January 1, 20X6 Income to Controlling Interest, 20X6 Dividends Declared, 20X6 Retained Earnings, December 31, 20X6 $ 322,000 87,600 $ 409,600 (30,000) $ 379,600
7-43
P7-32 (continued) b. This worksheet is based on the uncorrected numbers:

Prime Co. Income Statement Sales Gain on Sale of Equipment Less: COGS Less: Depr. & Amort. Expense Less: Other Expenses Less: Goodwill Impairment Loss Income from Lane Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation Investment in Lane Co. Goodwill Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Lane Co. Total Liabilities & Equity 240,000 20,000 (140,000 ) (25,000) (15,000) 7,600 87,600 87,600 330,000 87,600 (30,000) 387,600 113,000 260,000 80,000 500,000 (205,000 ) 199,600 947,600 60,000 200,000 300,000 387,600 310,000 20,000 50,000 100,000 140,000 Lane Co. 130,000 20,000 (60,000) (15,000) (5,000) 18,000 22,000 60,000 10,000 70,000 95,000 70,000 165,00 0 2,000 Elimination Entries DR CR Consolidated 370,000 0 (200,000) (38,000) (20,000) (18,000) 0 94,000 (6,400) 87,600 330,000 87,600 (30,000) 387,600 141,000 350,000 150,000 655,000 (273,000) 8,000 32,000 1,063,000 73,000 250,000 300,000 25,000 48,000 6,400 73,000 387,600 52,400 1,063,000
50,000 50,000 95,000 50,000 (5,000) 140,000 35,000 90,000 80,000 150,000 (45,000)
14,400 16,400 3,600 20,000
20,000 5,000 25,000 7,000 10,000
5,000 2,000 8,000 32,000 7,000 7,000 100,00 0 165,00 0 2,000 272,00 0 25,000 174,00 0 25,600 42,000
947,600
310,000
7-44
P7-32 (continued) These financial statements are based on the uncorrected numbers: c. Prime Company and Subsidiary Consolidated Balance Sheet December 31, 20X6 $ $655,000 (273,000) 141,000 350,000 150,000
Cash and Receivables Inventory Land Buildings and Equipment Less: Accumulated Depreciation Investment in Lane Co. Goodwill Total Assets Accounts Payable Bonds Payable Stockholders Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Total Noncontrolling Interest Total Stockholders Equity Total Liabilities and Stockholders' Equity Prime Company and Subsidiary Consolidated Income Statement Year Ended December 31, 20X6 Sales Cost of Goods Sold Depreciation and Amortization Expense Goodwill Impairment Loss Other Expenses Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest
382,000 8,000 32,000 $1,063,000 $ 73,000 250,000
$300,000 387,600 $687,600 52,400
740,000 $1,063,000
$200,000 38,000 18,000 20,000
$ 370,000
(276,000) 94,000 (6,400) $ 87,600
Prime Company and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X6 Retained Earnings, January 1, 20X6 Income to Controlling Interest, 20X6 Dividends Declared, 20X6
7-45
$ 330,000 87,600 $ 417,600 (30,000)
Retained Earnings, December 31, 20X6
$ 387,600
P7-33 Consolidation Worksheet in Year following Intercompany Transfer Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. This error carries over to this problem. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance: Investment in Lane Company Stock = 201,600 Retained Earnings = 379,600 These calculations are based on the corrected numbers: a. Reconciliation of underlying book value and balance in investment account: Net book value reported by Lane Company Common stock outstanding Retained earnings balance, January 1, 20X7 Net income for 20X7 Dividends paid in 20X7 Retained earnings balance, December 31, 20X7 Proportion of stock held by Prime Company Minus: Upstream Land Gain (10,000 x 0.80) Minus: Downstream Equipment Transfer Gain Add: Reversal of deferred gross profit 20X6 Minus: Reversal of deferred gross profit 20X7 Add: Goodwill (32,000 x 0.80) Balance in investment account These calculations are based on the uncorrected numbers a. $100,000
$140,000 45,000 (35,000)
150,000 $250,000 x .80 $200,000 (8,000) (20,000) 2,000 2,000 25,600 $201,600
Reconciliation of underlying book value and balance in investment account: Net book value reported by Lane Company Common stock outstanding Retained earnings balance, January 1, 20X7 Net income for 20X7 Dividends paid in 20X7 Retained earnings balance, December 31, 20X7 Proportion of stock held by Prime Company Minus: Upstream Land Gain (10,000 x 0.80) Minus: Downstream Equipment Transfer Gain Add: Reversal of deferred gross profit 20X6 Add: Goodwill (32,000 x 0.80) Add: Incorrect number Balance in investment account
7-46
$140,000 45,000 (35,000)
$100,000
150,000 $250,000 x .80 $200,000 (8,000) (20,000) 2,000 25,600 10,000 $209,600
P7-33 (continued) b. These calculations are based on the corrected numbers

Equity Method Entries on Prime Co.'s Books: Investment in Lane Co. 36,000 Income from Lane Co. Record Prime Co.'s 80% share of Lane Co.'s 20X6 income Cash 28,000 Investment in Lane Co. Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend Investment in Lane Co. Income from Lane Co. Reverse the deferred gain Book Value Calculations: NCI 20% Original book value 48,000 + Net Income 9,000 - Dividends (7,000) Ending book value 50,000 Prime Co. 80% 192,000 36,000 (28,000) 200,000 2,000 2,000
36,000
28,000
Common Stock 100,000 100,000
Retained Earnings 140,000 45,000 (35,000) 150,000
Deferred Gain Calculations: Total 2,000 2,000 = Prime Co.'s share 2,000 2,000 + NCI's share 0 0
Basic elimination entry Common stock Retained earnings Income from Lane Co. NCI in NI of Lane Co. Dividends declared Investment in Lane Co. NCI in NA of Lane Co.
100,000 140,000 38,000 9,000 35,000 202,000 50,000
Original amount invested (100%) Beginning balance in RE Primes share of NI + Extra Dep. NCI share of Lane Co.'s NI 100% of Lane Co.'s dividends Prime's share of BV + Extra Dep. NCI share of BV of net assets
Excess Value (Differential) Calculations: NCI 20% + Prime Co. 80% Beginning balance 6,400 25,600 Changes 0 0 Ending balance 6,400 25,600
Goodwill 32,000 0 32,000
7-47
Excess value (differential) reclassification entry: Goodwill 32,000 Investment in Lane Co. NCI in NA of Lane Co.
25,600 6,400
P7-33 (continued)
Eliminate gain on purchase of land Investment in Lane Co. NCI in NI of Lane Co. Land
8,000 2,000 10,000
Lane Co. Prime Co.
Equipment 70,000 5,000 75,000
Actual "As If"
Eliminate the gain on Equipment and correct asset's basis: Investment in Lane Co. 18,000 Equipment 5,000 Accumulated Depreciation 23,000 Accumulated Depreciation Depreciation Expense 2,000 2,000
Beginning Balance 80% Net Income Realize Def. Gain Ending Balance Land Adjustment
Investment in Lane Co. 191,600 36,000 28,000 2,000 201,600 202,000 8,000 25,600 18,000 0
Income from Lane Co. 36,000 80% Dividends 2,000 38,000 Basic Excess Reclass. 38,000 Realize Def. Gain Ending Balance 80% Net Income
Eliminate Intercompany receivable/payable

Accounts Payable Accounts Receivable 4,000 4,000
7-48
7-49
P7-33 (continued) b. This worksheet is based on the corrected numbers:

Prime Co. Income Statement Sales Less: COGS Less: Depr. & Amort. Expense Less: Other Expenses Income from Lane Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Lane Co. Goodwill Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Lane Co. Total Liabilities & Equity 379,600 83,000 (60,000) 402,600 140,000 45,000 (35,000) 150,000 140,00 0 47,000 187,00 0 2,000 35,000 37,000 379,600 83,000 (60,000) 402,600 250,000 (160,000 ) (25,000) (20,000) 38,000 83,000 83,000 Lane Co. 150,000 (80,000) (15,000) (10,000) 45,000 45,000 38,000 38,000 9,000 47,000 2,000 2,000 2,000 Elimination Entries DR CR Consolidated 400,000 (240,000) (38,000) (30,000) 0 92,000 (9,000) 83,000
151,000 240,000 100,000 500,000 (230,000 ) 201,600 962,600 60,000 200,000 300,000 402,600
55,000 100,000 80,000 150,000 (60,000)
4,000 10,000 5,000 2,000 8,000 18,000 32,000 7,000 4,000 100,00 0 187,00 0 2,000 291,00 0 23,000 202,00 0 25,600 37,000
202,000 340,000 170,000 655,000 (311,000) 0 32,000 1,088,000 81,000 250,000 300,000
325,000 25,000 50,000 100,000 150,000
37,000 50,000 6,400 87,000
402,600 54,400 1,088,000
962,600
325,000
7-50
P7-33 (continued) b. This worksheet is based on the uncorrected numbers:

Prime Co. Income Statement Sales Less: COGS Less: Depreciation & Amort. Exp. Less: Other Expenses Income from Lane Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Lane Co. Goodwill Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Lane Co. 387,600 83,000 (60,000) 410,600 140,000 45,000 (35,000) 150,000 140,00 0 47,000 187,00 0 387,600 83,000 (60,000) 410,600 250,000 (160,000 ) (25,000) (20,000) 38,000 83,000 83,000 Lane Co. 150,000 (80,000) (15,000) (10,000) 45,000 45,000 38,000 38,000 9,000 47,000 Elimination Entries DR CR
Consolidated 400,000 (240,000) (38,000) (30,000) 0 92,000 (9,000) 83,000
2,000
2,000 2,000
2,000 35,000 37,000
151,000 240,000 100,000 500,000 (230,000 ) 209,600
55,000 100,000 80,000 150,000 (60,000)
4,000 10,000 5,000 2,000 8,000 18,000 32,000 7,000 4,000 100,00 0 187,00 0 2,000 291,00 0 23,000 202,00 0 25,600 37,000
202,000 340,000 170,000 655,000 (311,000) 8,000 32,000 1,096,000 81,000 250,000 300,000
970,600 60,000 200,000 300,000 410,600
325,000 25,000 50,000 100,000 150,000
37,000 50,000 6,400 87,000
410,600 54,400
Total Liabilities & Equity
970,600
325,000
1,096,000
7-51
P7-34 Intercorporate Sales in Prior Years a.

Equity Method Entries on Pond Corp.'s Books: Investment in Skate Co. 24,000 Income from Skate Co. Record Pond Corp.'s 80% share of Skate Co.'s 20X8 income Cash 8,000 Investment in Skate Co. Record Pond Corp.'s 80% share of Skate Co.'s 20X8 dividend Income from Skate Co. Investment in Skate Co. Record amortization of excess acquisition price Investment in Skate Co. Income from Skate Co. Reverse a portion of the deferred gain Book Value Calculations: NCI 20% 40,000 6,000 (2,000) 44,000 + Pond Corp. 80% 160,000 24,000 (8,000) 176,000 = Common Stock 20,000 20,000 + Add Paidin Capital 30,000 30,000 + Retained Earnings 150,000 30,000 (10,000) 170,000 3,000 3,000
24,000
8,000
1,500 1,500
Deferred Gain Calculations: Total Extra Depreciation Total 1,500 1,500 = Pond Corp.'s share 1,500 1,500 + NCI's share 0 0
Basic elimination entry Common stock Additional Paid-in Capital Retained earnings Income from Skate Co. NCI in NI of Skate Co. Dividends declared Investment in Skate Co. NCI in NA of Skate Co.
20,000 30,000 150,000 25,500 6,000 10,000 177,500 44,000
Original amount invested (100%) Beginning balance in APIC Beginning balance in RE Ponds share of NI + Extra Dep. NCI share of Skate Co.'s NI 100% of Skates dividends declared Pond's share of BV + Extra Dep. NCI share of BV of net assets
7-52
P7-34 (continued)
Excess Value (Differential) Calculations: NCI 20% + Pond Corp. 80% = Beginning balance 12,750 51,000 Changes (750) (3,000) Ending balance 12,000 48,000 Amortized excess value reclassification entry: Amortization Expense 2,500 Depreciation expense 1,250 Income from Skate Co. NCI in NI of Skate Co. Excess value (differential) reclassification entry: Patent 40,000 Buildings & Equipment 25,000 Acc. Depr. Investment in Skate Co. NCI in NA of Skate Co. Eliminate gain on purchase of land Investment in Skate Co. NCI in NI of Skate Co. Land Building 65,000 60,000 125,000 Buildings & Patent + Equipment + Acc. Depr. 42,500 25,000 (3,750) (2,500) (1,250) 40,000 25,000 (5,000)
3,000 750
5,000 48,000 12,000
Skate Co. Pond Corp.
Actual "As If"
Eliminate the gain on Building and correct asset's basis: Investment in Skate Co. 15,000 Building 60,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 1,500
75,000
1,500
7-53
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets P7-34 (continued) Beginning Balance 80% Net Income Investment in Skate Co. 185,600 24,000 8,000 3,000 Realize Def. Gain Ending Balance Land Adjustment 1,500 200,100 10,400 15,000 0 177,500 48,000 Basic Excess Reclass. 25,500 3,000 0 Income from Skate Co. 24,000 80% Dividends Excess Val. Amort. 3,000 1,500 22,500 Realize Def. Gain Ending Balance 80% Net Income
7-54
P7-34 (continued) b.
Pond Corp. Income Statement Sales Interest Income Less: COGS Less: Other Operating Exp. Less: Depreciation Exp. Less: Other Amortization Exp. Less: Interest Exp. Less: Miscellaneous Exp. Income from Skate Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Interest and Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Skate Co. Investment in Tin Co. Bonds Patent Total Assets Accounts Payable Interest and Other Payables Bonds Payable Bond Discount Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Skate Co. Total Liabilities & Equity 450,000 14,900 (285,000) (50,000) (35,000) (24,000) (11,900) 22,500 81,500 81,500 216,000 81,500 (30,000) 267,500 68,400 130,000 45,000 140,000 50,000 400,000 (185,000) 200,100 134,000 982,500 65,000 45,000 300,000 150,000 155,000 267,500 982,500 340,000 11,000 12,000 100,000 (3,000) 30,000 20,000 170,000 340,000 40,000 151,900 318,500 Skate Co. 250,000 (136,000) (40,000) (24,000) (10,500) (9,500) 30,000 30,000 150,000 30,000 (10,000) 170,000 47,000 65,000 10,000 50,000 22,000 240,000 (94,000) 25,500 29,250 6,000 35,250 150,000 35,250 185,250 3,000 4,500 750 5,250 Elimination Entries DR CR Consolidated 700,000 14,900 (421,000) (90,000) (58,750) (2,500) (34,500) (21,400) 0 86,750 (5,250) 81,500 216,000 81,500 (30,000) 267,500 115,400 195,000 55,000 190,000 59,000 725,000 (357,500) 0 134,000 40,000 1,155,900 76,000 57,000 400,000 (3,000) 150,000 155,000 267,500 53,400 1,155,900
1,250 2,500
1,500
5,250 10,000 15,250
13,000 60,000 25,000 1,500 10,400 15,000 75,000 5,000 177,500 48,000
30,000 20,000 185,250 2,600 237,850
15,250 44,000 12,000 71,250
7-55
P7-35 Intercorporate Sale of Land and Depreciable Asset a. Income assigned to noncontrolling interest: Net income of Morris Gain on sale of equipment to parent Gain realized prior to 20X5 Amortization of differential: Buildings and equipment ($25,000 / 10 years) Copyright ($17,000 / 5 years) Realized income Portion of ownership held Income to noncontrolling interest Gain on sale of equipment to parent: Sale price to Topp Purchase price Accumulated depreciation [($100,000 - $10,000)/10 years] x 2 years Gain on sale b. $9,600 (1,200) $ 30,000 (8,400) (2,500) (3,400) $15,700 x 0.30 $ 4,710 $91,600 (82,000) $ 9,600
$100,000 (18,000)
Reconciliation between book value and investment balance at December 31, 20X5: Underlying book value of Morris Company stock: Common stock outstanding Retained earnings, January 1, 20X5 Net income for 20X5 Dividends paid in 20X5 Net book value Portion of ownership held by Topp Net book value of ownership held by Topp Unamortized differential: Buildings and equipment [($25,000 x 7/10 years) x 0.70] Copyright [($17,000 x 2/5 years) x 0.70] Gain on sale of land Deferred gross profit on sale of equipment Realized deferred gain Investment in Morris Company stock $100,000 100,000 30,000 ( 5,000) $225,000 x .70 $157,500 12,250 4,760 (11,000) (6,720) 840 $157,630
b.
Book Value Calculations: NCI 30% 60,000 9,000 (1,500) 67,500 + Topp Corp. 70% 140,000 21,000 (3,500) 157,500 = Common Stock 100,000 100,000 + Retained Earnings 100,000 30,000 (5,000) 125,000
7-56
P7-35 (continued)
Deferred Gain Calculations: Total (9,600) 1,200 (8,400) = Topp Corp.'s share (6,720) 840 (5,880) + NCI's share (2,880) 360 (2,520)
Upstream Asset Extra Depreciation Total
Basic elimination entry Common stock Retained earnings Income from Morris Co. NCI in NI of Morris Co. Dividends declared Investment in Morris Co. NCI in NA of Morris Co.
100,000 100,000 15,120 6,480 5,000 151,620 64,980
Original amount invested (100%) Beginning balance RE Topps share of NI - Def. Gain + Extra Depr. NCI share of NI - Def. Gain + Extra Depr. 100% of Morris Co.'s dividends Topp's share of BV - Def. Gain + Extra Depr. NCI share of BV - Def. Gain + Extra Depr.
Excess Value (Differential) Calculations: Topp NCI Corp. 30% + 70% Beginning balance 9,060 21,140 Changes (1,770) (4,130) Ending balance 7,290 17,010 Amortized excess value reclassification entry: Amortization Expense 3,400 Depreciation expense 2,500 Income from Morris Co. NCI in NI of Morris Co.
Buildings & Equipment 25,000 25,000
Copyright 10,200 (3,400) 6,800
Acc. Depr. (5,000) (2,500) (7,500)
4,130 1,770
Excess value (differential) reclassification entry: Buildings & Equipment 25,000 Copyright 6,800 Acc. Depr. Investment in Morris Co. NCI in NA of Morris Co. Eliminate gain on purchase of land Investment in Morris Co. Land
7,500 17,010 7,290
11,000 11,000
7-57
P7-35 (continued)
Equipment 91,600 8,400 100,000 Accumulated Depreciation 11,450 1,200 18,000 28,250
Topp Corp. Morris Co.
Actual "As If"
Eliminate the gain on Equipment and correct asset's basis: Gain on sale 9,600 Equipment 8,400 Accumulated Depreciation 18,000 Accumulated Depreciation Depreciation Expense 1,200 1,200 Income from Morris Co. 21,000 70% Dividends Excess Val. Amort. Defer Asset Gain Basic Excess Reclass. 4,130 6,720 15,120 4,130 0 840 10,990 70% Net Income Realize Def.Gain Ending Balance
Beginning Balance 70% Net Income Realize Def. Gain Ending Balance Land Adjustment
Investment in Morris Co. 150,14 0 21,000 3,500 4,130 840 6,720 157,63 0 151,620 11,000 17,010 0
7-58
P7-35 (continued) c.
Topp Corp. Income Statement Sales Other Income Gain on Sale of Equip. Less: COGS Less: Depreciation Exp. Less: Amortization Exp. Less: Interest Expense Less: Other Expenses Income from Morris Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI 450,000 28,250 (375,000) (25,000) (24,000) (28,000) 10,990 37,240 37,240 Morris Co. 190,400 9,600 (110,000) (10,000) (33,000) (17,000) 30,000 30,000 100,000 30,000 (5,000) 125,000 58,000 70,000 10,000 180,000 60,000 240,000 (60,000) 15,120 30,620 6,480 37,100 100,000 37,100 137,100 4,130 5,330 1,770 7,100 9,600 2,500 3,400 1,200 Elimination Entries DR CR Consolidated 640,400 28,250 0 (485,000) (36,300) (3,400) (57,000) (45,000) 0 41,950 (4,710) 37,240 165,240 37,240 (30,000) 172,480 73,850 135,000 40,000 330,000 129,000 588,400 (204,300) 0 6,800 1,098,750 89,000 50,000 550,000 (15,000) 150,000 30,000 172,480 72,270 1,098,750
Statement of Retained Earnings Beginning Balance 165,240 Net Income 37,240 Less: Dividends Declared (30,000) Ending Balance 172,480 Balance Sheet Cash Accounts Receivable Interest and Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Morris Co. Copyright Total Assets Accounts Payable Other Payables Bonds Payable Bond Discount Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Morris Co. Total Liabilities & Equity 15,850 65,000 30,000 150,000 80,000 315,000 (120,000) 157,630 693,480 61,000 30,000 250,000 150,000 30,000 172,480 693,480
7,100 5,000 12,100
11,000 25,000 8,400 1,200 11,000 7,500 18,000 151,620 17,010 205,130
558,000 28,000 20,000 300,000 (15,000) 100,000 125,000 558,000
6,800 52,400
100,000 137,100 237,100 12,100 64,980 7,290 84,370
7-59
P7-36 Incomplete Data (a) (b) (c) (d) (e) (f) $100,000 $140,000 $250,000 = $593,000 - $343,000 $100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000] $4,500 = [($106,200 + $70,800) - ($50,000 + $70,000 + $30,000)] / 6 years 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 0.60] 6,000 Undistributed income for 20X7 ($10,000 x 0.60) (10,800) Amortization of differential [($27,000 / 6 years) x 4 years] x 0.60 (5,400) Mounds portion of gain on sale of equipment ($9,000 x 0.60) 3,600 2 years of extra depreciation ($3,000 x 0.60) (7,000) Gain on sale of land $122,600 Balance in investment account at December 31, 20X7 $7,000 = ($70,000 + $90,000) - $153,000 $-0$510,000 = $345,000 + $150,000 + ($60,000 - $45,000) $278,000 = $180,000 + $80,000 + [($60,000 / 5 years) x 4 years] - [($45,000 / 3 years) x 2 years)
(g) (h) (i) (j) (k) (l)
$375,800 (Same as Mound Corporations retained earnings balance.) 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 0.40 $ 11,400 Income to noncontrolling shareholders
7-60
P7-37 Intercompany Sale of Equipment at a Loss in Prior Period Note: In converting this problem from the modified to the fully adjusted equity method, we did not correctly adjust for lower depreciation over the three years since the fixed asset sale at a loss. If you complete the problem based on the numbers given in the trial balance in the text, the investment and income from sub accounts will not be fully eliminated. In order to correct this problem, please use the following adjusted numbers for Foster Company: Investment in Block Corporation Stock = 229,500 Income from Block Corporation = 51,300 Retained Earnings = 251,200 a. These calculations are based on the corrected numbers
Book Value Calculations: NCI 10% 20,000 6,000 (2,000) 24,000 + Foster Co. 90% 180,000 54,000 (18,000) 216,000 = Common Stock 50,000 + Retained Earnings 150,000 60,000 (20,000) 190,000
50,000
Deferred Gain Calculations: Total (3,00 0) (3,00 0) = Foster Co.'s share (2,70 0) (2,70 0) + NCI's share (30 0) (30 0)
Lower Depreciation Total
Basic elimination entry Common stock Retained earnings Income from Block Corp. NCI in NI of Block Corp. Dividends declared Investment in Block Corp. NCI in NA of Block Corp.
50,000 150,000 51,300 5,700 20,000 213,300 23,700
Original amount invested (100%) Beginning balance in RE Fosters share of NI + Extra Dep. NCI share of NI + Extra Dep. 100% of Block Corp.'s dividends Foster's share of BV + Extra Dep. NCI share of BV + Extra Dep.
Foster Co.
Equipment 48,000
Actual
Accumulated Depreciation 18,000 24,000
7-61
42,000 Block Corp. 90,000 "As If"
3,000 45,0 00
7-62
P7-37 (continued)
Eliminate the gain on Equipment and correct asset's basis: Equipment 42,000 Investment in Block Corp. 16,200 NCI in NA of Block Corp. 1,800 Accumulated Depreciation 24,000 Depreciation Expense Accumulated Depreciation 3,000 3,000
Beginning Balance 90% Net Income
Ending Balance
Investment in Block Corp. 196,20 0 54,000 18,000 2,700 229,50 0 213,30 0 16,200 0
Income from Block Corp.
54,000 90% Dividends Realize Def. Gain 2,700 51,300 Basic Equipment Adj. 51,30 0 0
90% Net Income
Ending Balance
7-63
P7-37 (continued)
b. This worksheet is based on the corrected numbers:

Foster Co. Income Statement Sales Other Income Less: COGS Less: Depreciation Exp. Less: Other Expenses Income from Block Corp. Consolidated Net Income NCI in Net Income Controlling Interest in NI 680,000 26,000 (500,000) (45,000) (95,000) 51,300 117,300 117,300 Block Corp. 385,000 15,000 (250,000 ) (15,000) (75,000) 60,000 60,000 Elimination Entries DR CR Consolidated 1,065,000 41,000 3,000 51,300 54,300 5,700 60,000 150,00 0 60,000 210,00 0 0 0 (750,000) (63,000) (170,000) 0 123,000 (5,700) 117,300
Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Block Corp. Total Assets Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Block Corp. Total Liabilities & Equity 251,200 117,300 (40,000) 328,500 82,000 80,000 40,000 200,000 80,000 500,000 (155,000) 229,500 1,056,50 0 63,000 95,000 250,000 210,000 110,000 328,500 1,056,50 0 497,400 35,000 20,000 200,000 2,400 50,000 190,000 42,000 150,000 60,000 (20,000) 190,000 32,400 90,000 10,000 130,000 60,000 250,000 (75,000) 0 20,000 20,000 251,200 117,300 (40,000) 328,500 114,400 170,000 50,000 330,000 140,000 792,000 (257,000) 0 1,339,400 98,000 115,000 450,000 2,400 210,000 110,000 20,000 23,700 1,800 45,500 328,500 25,500 1,339,400
42,000 24,000 3,000 213,30 0 16,200 256,50 0
50,000 210,00 0 260,00 0
497,400
7-64
P7-37 (continued)
b. This worksheet is based on the uncorrected numbers:

Foster Co. Income Statement Sales Other Income Less: COGS Less: Depreciation Exp. Less: Other Expenses Income from Block Corp. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Accounts Receivable Other Receivables Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Block Corp. Total Assets Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Block Corp. Total Liabilities & Equity 262,000 122,700 (40,000) 344,700 82,000 80,000 40,000 200,000 80,000 500,000 (155,000) 245,700 1,072,70 0 63,000 95,000 250,000 210,000 110,000 344,700 1,072,70 0 497,400 35,000 20,000 200,000 2,400 50,000 190,000 42,000 150,000 60,000 (20,000) 190,000 32,400 90,000 10,000 130,000 60,000 250,000 (75,000) 150,00 0 60,000 210,00 0 0 20,000 20,000 262,000 122,700 (40,000) 344,700 114,400 170,000 50,000 330,000 140,000 792,000 (257,000) 16,200 1,355,600 98,000 115,000 450,000 2,400 210,000 110,000 20,000 23,700 1,800 45,500 344,700 25,500 1,355,600 680,000 26,000 (500,000) (45,000) (95,000) 56,700 122,700 122,700 Block Corp. 385,000 15,000 (250,000 ) (15,000) (75,000) 60,000 60,000 Elimination Entries DR CR Consolidated 1,065,000 41,000 3,000 51,300 54,300 5,700 60,000 0 0 (750,000) (63,000) (170,000) 5,400 128,400 (5,700) 122,700
42,000 24,000 3,000 213,30 0 16,200 256,50 0
50,000 210,00 0 260,00 0
497,400
7-65
P7-38 Comprehensive Problem: Intercorporate Transfers Note: In converting this problem from the modified to the fully adjusted equity method, we did not correctly adjust for lower depreciation resulting from the fixed asset sale at a loss. If you complete the problem based on the numbers given in the trial balance in the text, the investment and income from sub accounts will not be fully eliminated. In order to correct this problem, please use the following adjusted numbers for Foster Company: Investment in Block Corporation Stock = 229,500 Income from Block Corporation = 51,300 Retained Earnings = 251,200 These calculations are based on the corrected numbers a. Computation of differential as of January 1, 20X8: Original differential at December 31, 20X1 Less: Portion written off for sale of inventory Remaining differential, January 1, 20X8 b. Verification of balance in Investment in Schmid Stock account: Schmid retained earnings, January 1, 20X8 Schmid net income, 20X8: Schmid dividends, 20X8 Schmid retained earnings, December 31, 20X8 Schmid stockholders' equity: Common stock Additional paid-in capital Retained earnings, December 31, 20X8 Stockholders' equity, December 31, 20X8 Rossman's ownership share Book value of shares held by Rossman Remaining differential at January 1, 20X8: ($120,000 x 0.75) Deferred gain on downstream sale of land Loss on sale of equipment Reverse part of loss on sale of equipment Balance in Investment in Schmid account, December 31, 20X8 $1,400,000 110,000 (20,000) $1,490,000 $1,000,000 1,350,000 1,490,000 $3,840,000 x .75 $2,880,000 90,000 (23,000) 30,000 (3,000) $2,974,000 $ 150,000 (30,000) $ 120,000
7-66
These calculations are based on the uncorrected numbers b. Verification of balance in Investment in Schmid Stock account: Schmid retained earnings, January 1, 20X8 Schmid net income, 20X8: Schmid dividends, 20X8 Schmid retained earnings, December 31, 20X8 Schmid stockholders' equity: Common stock Additional paid-in capital Retained earnings, December 31, 20X8 Stockholders' equity, December 31, 20X8 Rossman's ownership share Book value of shares held by Rossman Remaining differential at January 1, 20X8: ($120,000 x 0.75) Deferred gain on downstream sale of land Loss on sale of equipment Reverse part of loss on sale of equipment Incorrect Number Balance in Investment in Schmid account, December 31, 20X8 $1,400,000 110,000 (20,000) $1,490,000 $1,000,000 1,350,000 1,490,000 $3,840,000 x .75 $2,880,000 90,000 (23,000) 30,000 (3,000) 6,000 $2,980,000
7-67
P7-38 (continued)
c. These calculations are based on the corrected numbers

Book Value Calculations: NCI 25% 937,500 27,500 (5,000) 960,000 + Rossman Corp. 75% 2,812,500 82,500 (15,000) 2,880,000 = Common Stock 1,000,000 + Add. Paid-in Capital 1,350,000 Retained + Earnings 1,400,000 110,000 (20,000) 1,490,000
1,000,000
1,350,000
Deferred Gain Calculations: Total 40,000 (4,000) 36,000 = Rossman Corp.'s share 30,000 (3,000) 27,000 + NCI's share 10,000 (1,000) 9,000
Upstream Asset Extra Depreciation Total
7-68
Basic elimination entry Common stock Additional Paid-in Capital Retained earnings Income from Schmid Dist. NCI in NI of Schmid Dist. Dividends declared Investment in Schmid Dist. NCI in NA of Schmid Dist.
1,000,000 1,350,000 1,400,000 109,500 36,500 20,000 2,907,000 969,000
Original amount invested (100%) Beginning balance in APIC Beginning balance in RE Rossmans share of NI - Def. Gain NCI share of NI - Def. Gain 100% of Schmid.'s dividends Rossman's share of BV - Def. Gain NCI share of BV - Def. Gain
Excess Value (Differential) Calculations: NCI 25% 30,000 0 30,000 + Rossman Corp. 75% 90,000 0 90,000 = Land 56,000 0 56,000 + Goodwill 64,000 0 64,000
Beginning balance Changes Ending balance
Excess value (differential) reclassification entry: Land 56,000 Goodwill 64,000 Investment in Schmid Dist. NCI in NA of Schmid Dist.
90,000 30,000
7-69
P7-38 (continued)
Eliminate services Other Income Other Expenses 80,000 80,000
Eliminate intercompany payables/receivables Current payables 20,000 Current receivables Eliminate intercompany dividend owed Current payables Current receivables Eliminate gain on purchase of land Investment in Schmid Dist. Land
20,000
3,750 3,750
23,000 23,000
Rossman Corp. Schmid Dist.
Equipment 250,000 185,000 435,000
Actual "As If"
Eliminate the gain on Equipment and correct asset's basis: Equipment 185,000 Loss on Sale 40,000 Accumulated Depreciation 145,000
Depreciation Expense Accumulated Depreciation
4,000 4,000
Beginning Balance 75% Net Income Def. Loss on Equipment Ending Balance Def. Gain on Land
Investment in Schmid Dist. 2,879,500 82,500 15,000 30,000 2,974,000 23,000 3,000 2,907,000 90,000
Income from Schmid Dist. 82,500 75% Dividends Realize Loss Gain Basic Excess Reclass. 3,000 109,500 30,000 109,500 Def. Gain on Equipment Ending Balance 75% Net Income
7-70
7-71
P7-38 (continued) d. This worksheet is based on the corrected numbers:

Rossman Corp. Income Statement Sales Other Income or Loss Less: COGS Less: Depreciation & Amort. Expense Less: Other Expenses Income from Schmid Dist. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Current Receivables Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Schmid Dist. Goodwill Total Assets Current Payables Bonds Payable Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Schmid Dist. Total Liabilities & Equity 5,107,500 86,200 1,000,000 100,000 1,272,000 2,649,300 4,116,30 0 76,300 200,000 1,000,00 0 1,350,00 0 1,490,00 0 4,116,30 0 1,474,800 1,224,500 (50,000) 2,649,300 50,700 101,800 286,000 400,000 2,400,000 (1,105,000 ) 2,974,000 1,400,00 0 110,000 (20,000) 1,490,00 0 38,000 89,400 218,900 1,200,00 0 2,990,00 0 (420,000) 23,000 64,000 328,000 23,750 1,000,00 0 1,350,00 0 1,630,00 0 4,003,75 0 3,192,75 0 1,400,00 0 230,000 1,630,00 0 120,000 20,000 140,000 1,474,800 1,224,500 (50,000) 2,649,300 88,700 167,450 504,900 1,633,000 5,575,000 145,000 4,000 2,907,00 0 90,000 (1,674,000) 0 64,000 6,359,050 138,750 1,200,000 100,000 1,272,000 140,000 969,000 30,000 1,109,00 0 2,649,300 999,000 6,359,050 4,801,000 90,000 (2,193,000 ) (202,000) (1,381,000 ) 109,500 1,224,500 1,224,500 Schmid Dist. 985,000 (35,000) (525,000) (88,000) (227,000) 110,000 110,000 109,500 193,500 36,500 230,000 4,000 80,000 120,000 120,000 Elimination Entries DR CR 80,000 40,000 Consolidated 5,786,000 15,000 (2,718,000) (294,000) (1,528,000) 0 1,261,000 (36,500) 1,224,500
23,750 56,000 185,000 23,000
5,107,500
7-72
7-73
P7-38 (continued) d. This worksheet is based on the uncorrected numbers:

Rossman Corp. Income Statement Sales Other Income or Loss Less: COGS Less: Depreciation & Amort. Expense Less: Other Expenses Income from Schmid Dist. Consolidated Net Income NCI in Net Income Controlling Interest in NI 4,801,000 90,000 (2,193,000 ) (202,000) (1,381,000 ) 115,500 1,230,500 1,230,500 Schmid Dist. 985,000 (35,000) (525,000) (88,000) (227,000) 110,000 110,000 1,400,00 0 110,000 (20,000) 1,490,00 0 38,000 89,400 218,900 1,200,00 0 2,990,00 0 (420,000) 23,000 64,000 5,113,500 86,200 1,000,000 100,000 1,272,000 2,655,300 4,116,30 0 76,300 200,000 1,000,00 0 1,350,00 0 1,490,00 0 4,116,30 0 328,000 23,750 1,000,00 0 1,350,00 0 1,630,00 0 4,003,75 0 3,192,75 0 109,500 193,500 36,500 230,000 1,400,00 0 230,000 1,630,00 0 4,000 80,000 120,000 120,000 Elimination Entries DR CR 80,000 40,000 Consolidated 5,786,000 15,000 (2,718,000) (294,000) (1,528,000) 6,000 1,267,000 (36,500) 1,230,500
Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash Current Receivables Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Schmid Dist. Goodwill Total Assets Current Payables Bonds Payable Common Stock Additional Paid-in Capital Retained Earnings NCI in NA of Schmid Dist. Total Liabilities & Equity 1,474,800 1,230,500 (50,000) 2,655,300 50,700 101,800 286,000 400,000 2,400,000 (1,105,000 ) 2,980,000 120,000 20,000 140,000 1,474,800 1,230,500 (50,000) 2,655,300 88,700 167,450 504,900 1,633,000 5,575,000 145,000 4,000 2,907,00 0 90,000 (1,674,000) 6,000 64,000 6,365,050 138,750 1,200,000 100,000 1,272,000 140,000 969,000 30,000 1,109,00 0 2,655,300 999,000 6,365,050
23,750 56,000 185,000 23,000
5,113,500
7-74
7-75
P7-39A Computation of Retained Earnings following Multiple Transfers Consolidated retained earnings, January 1, 20X8: Great Companys retained earnings, January 1 Unrealized profit on land ($16,000 x 0.80) Unrealized profit on depreciable assets [$22,000 - ($2,200 x 2)] Consolidated retained earnings Consolidated retained earnings, December 31, 20X8: Consolidated retained earnings, January 1 Great Companys operating income for 20X8 Less: Dividends paid in 20X8 Increase in retained earnings from Greats operations Meagers net income for 20X8 Less: Amortization of differential assigned to equipment: ($325,000 - $290,000) / 10 years Impairment of goodwill Realized income Proportion of ownership held Realization of gain on sale of building ($22,000 / 10 years) Consolidated retained earnings Alternate computation of retained earnings balance: Great Companys retained earnings, January 1 Operating income for 20X8 Dividends paid in 20X8 Investment income from Meager Company for 20X8: Meager's net income Proportion of ownership held Proportionate share of Meagers reported net income Amortization of differential assigned to equipment: [($325,000 - $290,000) x 0.80] / 10 years Goodwill impairment loss ($17,500 x 0.80) Great Companys retained earnings Unrealized profit on land ($16,000 x 0.80) Unrealized profit on depreciable assets [$22,000 - ($2,200 x 3)] Consolidated retained earnings $450,000 65,000 (45,000) $30,000 x 0.80 $65,000 (45,000) $ 30,000 (3,500) (17,500) $ 9,000 x 0.80 $419,600 20,000 $450,000 (12,800) (17,600) $419,600
7,200 2,200 $449,000
24,000 (2,800) (14,000) $477,200 (12,800) (15,400) $449,000
7-76
P7-40A Consolidation Worksheet with Intercompany Transfers (Modified Equity Method)

Book Value Calculations: NCI 35% 50,750 10,500 (1,750) 59,500 + Mist Co. 65% 94,250 19,500 (3,250) 110,500 Retained = Common Stock 60,000 + Earnings 85,000 30,000 (5,000) 110,000
60,000
Basic elimination entry Common stock Retained earnings Income from Blank Corp. NCI in NI of Blank Corp. Dividends declared Investment in Blank Corp. NCI in NA of Blank Corp.
60,000 85,000 19,500 6,265 5,000 110,500 55,265
Original amount invested (100%) Beginning balance in retained earnings Mist Co.s share of NI NCI share of NI Def. Gain + Extra Dep. 100% of Blank Corp.'s dividends declared Net BV left in the investment account NCI share of BV + Extra Dep.
Eliminate gain on purchase of land Gain on Sale of Land 4,000 Land
4,000
Eliminate the gain on Building and correct asset's basis: Gain on Sale on Building 13,200 Depreciation Expense 1,100 Building and Equipment (net) 12,100 Eliminate intercompany services Sales 24,000 Other Expenses
24,000
7-77
P7-40A (continued) b.
Mist Co. Income Statement Sales Gain on Sale of Land Gain on Sale of Building Less: COGS Less: Depreciation Exp. Less: Other Expenses Income from Blank Corp. Consolidated Net Income NCI in Net Income Controlling Interest in NI 286,500 4,000 (160,000 ) (22,000) (76,000) 19,500 52,000 52,000 Blank Corp. 128,500 13,200 (75,000) (19,000) (17,700) 30,000 30,000 85,000 30,000 (5,000) 110,000 22,000 37,000 71,000 15,000 125,000 19,500 60,700 6,265 66,965 85,000 66,965 151,96 5 Elimination Entries DR CR 24,000 4,000 13,200 1,100 24,000 25,100 25,100 Consolidated 391,000 0 0 (235,000) (39,900) (69,700) 0 46,400 (6,265) 40,135 198,000 40,135 (25,000) 213,135 54,500 99,000 166,000 51,000 312,900 0 683,400 55,000 260,000 100,000 30,100 55,265 85,365 213,135 55,265 683,400
Statement of Retained Earnings Beginning Balance 198,000 Net Income 52,000 Less: Dividends Declared (25,000) Ending Balance Balance Sheet Cash Accounts Receivable Inventory Land Buildings & Equipment (net) Investment in Blank Corp. Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Blank Corp. Total Liabilities & Equity 225,000 32,500 62,000 95,000 40,000 200,000 110,500 540,000 35,000 180,000 100,000 225,000 540,000
25,100 5,000 30,100
270,000 20,000 80,000 60,000 110,000 270,000
4,000 12,100 110,50 0 126,60 0
60,000 151,96 5 211,96 5
7-78
P7-40A (continued) c. Mist Company and Subsidiary Consolidated Balance Sheet December 31, 20X4 $ 54,500 99,000 166,000 51,000 312,900 $683,400 $ 55,000 260,000 $100,000 213,135 $313,135 55,265
Cash Accounts Receivable Inventory Land Buildings and Equipment (net) Total Assets Accounts Payable Bonds Payable Stockholders Equity: Controlling Interest: Common Stock Retained Earnings Total Controlling Interest Noncontrolling Interest Total Stockholders Equity Total Liabilities and Stockholders' Equity
368,400 $683,400
Mist Company and Subsidiary Consolidated Income Statement Year Ended December 31, 20X4 Sales Cost of Goods Sold Depreciation Expense Other Expenses Total Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest $235,000 39,900 69,700 $391,000
(344,600) $ 46,400 (6,265) $ 40,135
Mist Company and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X4 Retained Earnings, January 1, 20X4 Income to Controlling Interest, 20X4 Dividends Declared, 20X4 Retained Earnings, December 31, 20X4 $198,000 40,135 $238,135 (25,000) $213,135
7-79
P7-41A Modified Equity Method Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. This error carries over to this problem. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance: Investment in Lane Company Stock = 240,000 Retained Earnings = 420,000 This trial balance is based on the corrected numbers: a. Adjusted trial balance: Item Cash and Accounts Receivable Inventory Land Buildings and Equipment Investment in Lane Company Stock Cost of Goods Sold Depreciation and Amortization Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Income from Subsidiary Total Prime Company Debit Credit $ 151,000 240,000 100,000 500,000 240,000 160,000 25,000 20,000 60,000 Lane Company Debit Credit $ 55,000 100,000 80,000 150,000 80,000 15,000 10,000 35,000
$ 230,000 60,000 200,000 300,000 420,000 250,000 36,000 $1,496,000 $1,496,000
$ 60,000 25,000 50,000 100,000 140,000 150,000 $525,000
$525,000
7-80
This trial balance is based on the uncorrected numbers: a. Adjusted trial balance: Item Cash and Accounts Receivable Inventory Land Buildings and Equipment Investment in Lane Company Stock Cost of Goods Sold Depreciation and Amortization Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Income from Subsidiary Total Prime Company Debit Credit $ 151,000 240,000 100,000 500,000 248,000 160,000 25,000 20,000 60,000 Lane Company Debit Credit $ 55,000 100,000 80,000 150,000 80,000 15,000 10,000 35,000
$ 230,000 60,000 200,000 300,000 428,000 250,000 36,000 $1,504,000 $1,504,000
$ 60,000 25,000 50,000 100,000 140,000 150,000 $525,000
$525,000
7-81
P7-41A (continued) b. These calculations are based on the corrected numbers:

Equity Method Entries on Prime Co.'s Books: Investment in Lane Co. 36,000 Income from Lane Co. Record Prime Co.'s 80% share of Lane Co.'s 20X7 income Cash 28,000 Investment in Lane Co. Record Prime Co.'s 80% share of Lane Co.'s 20X7 dividend
36,000
28,000
c.
Basic elimination entry Common stock Retained earnings Income from Lane Co. NCI in NI of Lane Co. Dividends declared Investment in Lane Co. NCI in NA of Lane Co. 100,000 140,000 36,000 9,000 35,000 200,000 50,000
Excess value (differential) reclassification entry: Goodwill 32,000 Retained Earnings 14,400 Investment in Lane Co. 40,000 NCI in NA of Lane Co. 6,400 Eliminate intercompany accounts: Accounts Payable Cash and Accounts Receivable Eliminate gain on purchase of land Retained Earnings NCI in NI of Lane Co. Land
Remaining goodwill Lane's portion of goodwill impairment loss from last year Remaining balance in investment account NCI's share of differential and loss [($50,000 - 18,000) * .2]
4,000 4,000
8,000 2,000 10,000
7-82
Lane Co. Prime Co.
Equipment 70,000 5,000 75,000
Actual "As If"
Eliminate the gain on Equipment and correct asset's basis: Retained Earnings 18,000 Equipment 5,000 Accumulated Depreciation Accumulated Depreciation Depreciation Expense 2,000
23,000
2,000
7-83
P7-41A (continued) d. This worksheet is based on the corrected numbers:

Prime Co. Income Statement Sales Less: COGS Less: Depreciation & Amort. Exp. Less: Other Expenses Income from Lane Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI Statement of Retained Earnings Beginning Balance 420,000 140,000 140,00 0 14,400 8,000 18,000 45,000 225,40 0 379,600 250,000 (160,000) (25,000) (20,000) 36,000 81,000 81,000 Lane Co. 150,000 (80,000) (15,000) (10,000) 45,000 45,000 36,000 36,000 9,000 45,000 Elimination Entries DR CR
Consolidated 400,000 (240,000) (38,000) (30,000) 0 92,000 (9,000) 83,000
2,000 2,000 2,000
Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Lane Co. Goodwill Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Lane Co. Total Liabilities & Equity
81,000 (60,000) 441,000
45,000 (35,000) 150,000
2,000 35,000 37,000
83,000 (60,000) 402,600
151,000 240,000 100,000 500,000 (230,000) 240,000
55,000 100,000 80,000 150,000 (60,000)
4,000 10,000 5,000 2,000 23,000 200,00 0 40,000 277,00 0
202,000 340,000 170,000 655,000 (311,000) 0 32,000 1,088,000 81,000 250,000 300,000
32,000 1,001,00 0 60,000 200,000 300,000 441,000 1,001,00 0 325,000 25,000 50,000 100,000 150,000 39,000 4,000 100,00 0 225,40 0 2,000 331,40 0
37,000 50,000 6,400 93,400
402,600 54,400 1,088,000
325,000
7-84
P7-41A (continued) d. This worksheet is based on the uncorrected numbers:

Prime Co. Income Statement Sales Less: COGS Less: Depreciation & Amort. Expense Less: Other Expenses Income from Lane Co. Consolidated Net Income NCI in Net Income Controlling Interest in NI 250,000 (160,000) (25,000) (20,000) 36,000 81,000 81,000 Lane Co. 150,000 (80,000) (15,000) (10,000) 45,000 45,000 36,000 36,000 9,000 45,000 140,00 0 14,400 8,000 18,000 45,000 225,40 0 2,000 2,000 2,000 Elimination Entries DR CR Consolidated 400,000 (240,000) (38,000) (30,000) 0 92,000 (9,000) 83,000
Statement of Retained Earnings Beginning Balance 428,000 140,000 387,600
Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Rec. Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Lane Co. Goodwill Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Lane Co. Total Liabilities & Equity
81,000 (60,000) 449,000 151,000 240,000 100,000 500,000 (230,000) 248,000
45,000 (35,000) 150,000 55,000 100,000 80,000 150,000 (60,000)
2,000 35,000 37,000 4,000 10,000
83,000 (60,000) 410,600 202,000 340,000 170,000 655,000 (311,000) 8,000 32,000
5,000 2,000
23,000 200,00 0 40,000 277,00 0
32,000 1,009,00 0 60,000 200,000 300,000 449,000 1,009,00 0 325,000 25,000 50,000 100,000 150,000 39,000 4,000 100,00 0 225,40 0 2,000 331,40 0
1,096,000 81,000 250,000 300,000
37,000 50,000 6,400 93,400
410,600 54,400 1,096,000
325,000
7-85
P6-42A Cost Method a. Journal entry recorded by Prime Company: Cash Dividend Income Record dividend from Lane Company. b.
Investment elimination entry Common stock Retained earnings Goodwill Investment in Lane Co. NCI in NA of Lane Co. Dividend elimination entry Dividend Income NCI in NI of Lane Co. Dividends Declared Assign undistributed income to NCI Retained Earnings NCI in NA of Lane Co. Eliminate intercompany accounts: Accounts Payable Cash and Accounts Receivable Eliminate gain on purchase of land Retained Earnings NCI in NI of Lane Co. Land 100,000 70,000 25,000 160,000 35,000
28,000
28,000
28,000 7,000 35,000
18,000 18,000
4,000 4,000
8,000 2,000 10,000
Eliminate the gain on Equipment and correct asset's basis: Retained Earnings 18,000 Equipment 5,000 Accumulated Depreciation 23,000 Accumulated Depreciation Depreciation Expense 2,000 2,000
7-86
P6-42A (continued) c.
Prime Co. Income Statement Sales Less: COGS Less: Depr. & Amort. Exp. Less: Other Expenses Dividend Income Consolidated Net Income NCI in Net Income Controlling Interest in NI 250,000 (160,000 ) (25,000) (20,000) 28,000 73,000 73,000 Lane Co. 150,000 (80,000) (15,000) (10,000) 45,000 45,000 140,000 28,000 28,000 7,000 2,000 37,000 70,000 18,000 8,000 18,000 37,000 151,00 0 2,000 2,000 2,000 Elimination Entries DR CR Consolidated 400,000 (240,000) (38,000) (30,000) 0 92,000 (9,000) 83,000 374,000
Statement of Retained Earnings Beginning Balance 348,000
Net Income Less: Dividends Declared Ending Balance Balance Sheet Cash and Accounts Rec.e Inventory Land Buildings & Equipment Less: Accumulated Depr. Investment in Lane Co. Goodwill Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings NCI in NA of Lane Co. Total Liabilities & Equity
73,000 (60,000) 361,000 151,000 240,000 100,000 500,000 (230,000 ) 160,000 921,000 60,000 200,000 300,000 361,000
45,000 (35,000) 150,000 55,000 100,000 80,000 150,000 (60,000)
2,000 35,000 37,000 4,000 10,000
83,000 (60,000) 397,000 202,000 340,000 170,000 655,000 (311,000) 0 25,000 1,081,000 81,000 250,000 300,000
5,000 2,000 23,000 160,00 0 37,000
325,000 25,000 50,000 100,000 150,000
25,000 7,000 4,000 100,00 0 151,00 0 255,00 0
37,000 35,000 18,000 72,000
397,000 53,000 1,081,000
921,000
325,000
7-87

Chap 007

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Chap 007

Încărcat de

Drepturi de autor:

Formate disponibile

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Eliminating entry, December 31, 20X5:

Eliminating entry, December 31, 20X4:

Eliminating entry, December 31, 20X5:

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale a.

10,000 5,000 15,000 Accumulated Depreciation 4,000 1,000 15,000 18,000

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-7 Transfer of Land a. Eliminating entry, December 31, 20X2:

Gain on Sale of Land Land

Eliminating entry, December 31, 20X3:

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

Investment in Roan Land

E7-8 Transfer of Depreciable Asset at Year-End a.

$210,000 (180,000) $ 30,000

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-9 Transfer of Depreciable Asset at Beginning of Year a.

$245,000 (210,000) $ 35,000

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-10 Sale of Equipment to Subsidiary in Current Period a.

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-12 Elimination Entries for Midyear Depreciable Asset Transfer a.

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

20X4 $ 90,000 35,000 $125,000 (8,750) $116,250

20X5 $110,000 40,000 $150,000 (10,000) $140,000

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Original book value + Net Income - Dividends Ending book value

Retained Earnings 100,000 40,000 (10,000) 130,000

Upstream Land Total

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

300,000 100,000 12,000 3,000 10,000 324,000 81,000

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-15 Sale of Building to Parent in Prior Period a. b. c.

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Buildings and Equipment Loss on Sale of Building Accumulated Depreciation

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

25,200 10,800 120,000

4,000 Accumulated Depreciation 16,000 120,000 4,000 140,000

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

18,000 $283,000 $150,000 120,000 60,000 80,000 $410,000

$ (15,000) 50,000 60,000

$ 27,000 3,000 2,000

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-18 (continued) d. Eliminating entry:

Gain on Sale of Land Loss on Sale of Land Land

$300,000 = $276,000 + $24,000 15 years = $300,000 / ($60,000 / 3 years)

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-20 Elimination Entry Computation a.

6,000 Accumulated Depreciation 72,000 6,00 0 144,000 210,000

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Original book value + Net Income - Dividends Ending book value

300,000 200,000 23,850 2,650 6,000 468,450 52,050

Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets