Accounting Chpt5 Answers

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

CHAPTER 5
CONSOLIDATED FINANCIAL STATEMENTS - INTRA-ENTITY
ASSET TRANSACTIONS

Answers to Problems
1. D
2. B Inventory remaining $100,000 × 50% = $50,000 unrealized gross profit (based on
Lee's gross profit rate as the seller) $50,000 × 40% = $20,000. The ownership
percentage has no impact on this computation.
3. A
4. C UNREALIZED GROSS PROFIT, 12/31/11
Intra-entity gross profit ($100,000 – $75,000) ..............................
Inventory remaining at year's end ................................................
Unrealized intra-entity gross profit, 12/31/11 ...............................

$25,000
16%
$4,000

UNREALIZED GROSS PROFIT, 12/31/12
Intra-entity gross profit ($120,000 – $96,000) ..............................
Inventory remaining at year's end ................................................
Unrealized intra-entity gross profit, 12/31/12 ...............................

$24,000
35%
$8,400

CONSOLIDATED COST OF GOODS SOLD
Parent balance ..........................................................................
Subsidiary balance ...................................................................
Remove intra-entity transfer ....................................................
Recognize 2011 deferred gross profit .....................................
Defer 2012 unrealized gross profit ..........................................
Cost of goods sold .........................................................................

$380,000
210,000
(120,000)
(4,000)
8,400
$474,400

5. A Intra-entity sales and purchases of $100,000 must be eliminated. Additionally, an
unrealized gross profit of $10,000 must be removed from ending inventory based
on a gross profit rate of 25 percent ($200,000 gross profit ÷ $800,000 sales) which
is multiplied by the $40,000 ending balance. This deferral increases cost of goods
sold because ending inventory is a negative component of that computation.

5-1

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Thus, cost of goods sold for consolidation purposes is $690,000 ($600,000 + $180,000 –
$100,000 + $10,000).
6. C The only change here from Problem 5 is the gross profit rate which would now be
40 percent ($120,000 gross profit ÷ $300,000 sales). Thus, the unrealized gross
profit to be deferred is $16,000 ($40,000 × 40%). Consequently, consolidated cost
of goods sold is $696,000 ($600,000 + $180,000 – $100,000 + $16,000).
7. B UNREALIZED GROSS PROFIT, 12/31/10
Ending inventory .......................................................................
Gross profit rate ($33,000 ÷ $110,000) ....................................
Unrealized intra-entity gross profit, 12/31/10 .........................

$40,000
30%
$12,000

UNREALIZED GROSS PROFIT, 12/31/11
Ending inventory .......................................................................
Gross profit rate ($48,000 ÷ $120,000) ....................................
Unrealized intra-entity gross profit, 12/31/11 .........................

$50,000
40%
$20,000

NONCONTROLLING INTEREST IN SUBSIDIARY'S INCOME
Reported income for 2011 ........................................................
Realized gross profit deferred in 2010 ....................................
Deferral of 2011 unrealized gross profit .................................
Realized income of subsidiary ................................................
Outside ownership ...................................................................
Noncontrolling interest ............................................................

$90,000
12,000
(20,000)
$82,000
10%
$8,200

8. A Individual records after transfer:
12/31/10
Machinery = $40,000
Gain = $10,000
Depreciation expense $8,000 ($40,000 ÷ 5 years)
Net effect on income = $2,000 ($10,000 – $8,000)
12/31/11
Depreciation expense = $8,000
Consolidated figures—historical cost:
12/31/10
Machinery = $30,000
Depreciation expense = $6,000 ($30,000 ÷ 5 years)
12/31/11
Depreciation expense = $6,000

5-2

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Adjustments for consolidation purposes:
2010: $2,000 income is reduced to a $6,000 expense (income is reduced
by $8,000)
2011: $8,000 expense is reduced to a $6,000 expense (income is increased
by $2,000)
9. B UNREALIZED GAIN
Transfer price ............................................................................
Book value (cost after two years of depreciation) .................
Unrealized gain .........................................................................
EXCESS DEPRECIATION
Annual depreciation based on cost ($300,000 ÷ 10 years) .....
Annual depreciation based on transfer price
($280,000 ÷ 8 years) .............................................................
Excess depreciation .................................................................
ADJUSTMENTS TO CONSOLIDATED NET INCOME
Defer rnrealized gain ................................................................
Remove excess depreciation ...................................................
Decrease to consolidated net income ....................................

$280,000
240,000
$40,000

$30,000
35,000
$5,000

$(40,000)
5,000
$(35,000)

10. D Add the two book values and remove $100,000 intra-entity transfers.
11. C Intra-entity gross profit ($100,000 - $80,000) ...............................
Inventory remaining at year's end ................................................
Unrealized intra-entity gross profit ...............................................
CONSOLIDATED COST OF GOODS SOLD
Parent balance ..........................................................................
Subsidiary balance ...................................................................
Remove intra-entity transfer ....................................................
Defer unrealized gross profit (above) .....................................
Cost of goods sold .........................................................................
12. C Consideration transferred ............................
Noncontrolling interest fair value ..................
Suarez total fair value .....................................
Book value of net assets ................................
Excess fair over book value

$20,000
60%
$12,000

$140,000
80,000
(100,000)
12,000
$132,000

$260,000
65,000
$325,000
(250,000)
$75,000
Annual Excess

5-3

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Excess fair value to undervalued assets:
Equipment ..................................................
Secret Formulas ........................................
Total ...............................................................

Life Amortizations
25,000 5 years
$5,000
$50,000 20 years
2,500
-0$7,500

Consolidated expenses = $37,500 (add the two book values and include current
year amortization expense)
13. A 20% of the beginning book value
Excess fair value allocation (20%× $75,000)
20% share of Suarez net income
adjusted for amortization (20% × [110,000 – 7,500])
Ending noncontrolling interest balance

$50,000
15,000
20,500
$85,500

14. C Add the two book values plus the $25,000 original allocation) less one year of
excess amortization expense ($5,000).
15. B Add the two book values less the ending unrealized gross profit of $12,000.
Combined pre-consolidation inventory balances ........................
$260,000
Intra-entity gross profit ($100,000 – $80,000) .................. $20,000
Inventory remaining at year's end ....................................
60%
Unrealized intra-entity gross profit, 12/31 ....................................
12,000
Consolidated total for inventory ....................................................
$248,000
16.

(15 Minutes) (Determine selected consolidated balances; includes inventory
transfers and an outside ownership.)
Customer list amortization = $65,000 ÷ 5 years = $13,000 per year
Intra-entity gross profit ($160,000 – $120,000) ............................
Inventory remaining at year's end .................................................
Unrealized intra-entity gross profit, 12/31 ....................................

$40,000
20%
$8,000

CONSOLIDATED TOTALS


Inventory = $592,000 (add the two book values and subtract the ending
unrealized gross profit of $8,000)



Sales = $1,240,000 (add the two book values and subtract the $160,000 intraentity transfer)



Cost of goods sold = $548,000 (add the two book values and subtract the intraentity transfer and add [to defer] ending unrealized gross profit)



Operating expenses = $443,000 (add the two book values and the amortization
expense for the period)

5-4

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions



17.

Noncontrolling interest in subsidiary's net income = $8,700 (30 percent of the
reported income after subtracting 13,000 excess fair value amortization and
deferring $8,000 ending unrealized gross profit) Gross profit is included in this
computation because the transfer was upstream from Sanchez to Preston.

(60 minutes) (Downstream intra-entity profit adjustments when parent uses equity
method and a noncontrolling interest is present)
Consideration transferred by Corgan
Noncontrolling interest fair value
Smashing’s acquisition-date fair value
Book value of subsidiary
Excess fair over book value
Excess assigned to covenants
Useful life in years
Annual amortization

$980,000
245,000
1,225,000
950,000
275,000
275,000
÷ 20
$13,750

2010 Ending Inventory Profit Deferral




Cost = $100,000 ÷ 1.6 = $62,500
Intra-entity gross profit = $100,000 – $62,500 = $37,500
Ending inventory gross profit = $37,500 × 40% = $15,000

2011 Ending Inventory Profit Deferral




Cost = $120,000 ÷ 1.6 = $75,000
Intra-entity gross profit = $120,000 – $75,000 = $45,000
Ending inventory gross profit = $45,000 × 40% = $18,000

a. Investment account:
Consideration transferred, January 1, 2010
Smashing’s 2010 income × 80%
$120,000
Covenant amortization (13,750 × 80%)
(11,000)
Ending inventory profit deferral (100%)
(15,000)
Equity in Smashing’s earnings
2010 dividends
Investment balance 12/31/10
Smashing’s 2011 income × 80%
Covenants amortization (13,750 × 80%)
Beginning inventory profit recognition
Ending inventory profit deferral (100%)
Equity in Smashing’s earnings
2011 dividends

5-5

$980,000

94,000
(28,000)
$1,046,000

$104,000
(11,000)
15,000
(18,000)
90,000
(36,000)

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Investment balance 12/31/11

$1,100,000

17. (continued)
b. 12/31/11 Worksheet Adjustments
*G Equity in earnings of Smashing
COGS

15,000

S Common stock—Smashing
Retained earnings—Smashing
Investment in Smashing
Noncontrolling interest

700,000
365,000

A Covenants
Investment in Smashing
Noncontrolling interest

261,250

I

852,000
213,000

209,000
52,250

Equity in earnings of Smashing
Investment in Smashing

75,000
75,000

D Investment in Smashing
Dividends paid

36,000

E Amortization expense
Covenants

13,750

36,000

13,750

TI Sales
COGS

120,000
120,000

G COGS
Inventory
18.

15,000

18,000
18,000

(40 Minutes) (Series of independent questions concerning various aspects of the
consolidation process when intra-entity transfers have occurred)
a. 2010 Unrealized gross profit to be recognized in 2011:
Intra-entity gross profit on transfers ($90,000 – $54,000) .....
Inventory retained at end of 2010 ............................................
Unrealized gross profit—12/31/10 ......................................

$36,000
20%
$ 7,200

2011 Unrealized gross profit deferred:
Intra-entity gross profit on transfers ($120,000 – $66,000) ...

5-6

$54,000

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Inventory retained at end of 2011 ............................................
Unrealized gross profit—12/31/11 .......................................
18. a. (continued)
Noncontrolling interest's share of Kane's income
Kane's reported income 2011 ...................................................
Amortization of excess fair value to intangibles .....................
2010 gross profit realized in 2011 (upstream sales) ..............
2011 gross profit deferred (upstream sales) ..........................
Kane's realized income ............................................................
Noncontrolling interest ownership .........................................
Noncontrolling interest's share of Kane's income..................
b. Inventory—Smith book value ...................................................
Inventory—Kane book value ....................................................
Unrealized gross profit, 12/31/11 (see part a) .........................
Consolidated inventory ............................................................
(Direction of transfer has no impact here)

30%
$16,200

$110,000
(5,000)
7,200
(16,200)
$96,000
20%
$19,200
$140,000
90,000
(16,200)
$213,800

c. Downstream transfers do not affect the noncontrolling interest.
Kane's 2011 reported income less excess amortization ......
$105,000
Noncontrolling interest ownership ........................................
20%
Noncontrolling interest's share of Kane's income..................
$ 21,000
d. Smith's reported income 2011 ..................................................
Elimination of intra-entity dividend income recorded
by parent ($40,000 × 80%) ...................................................
Kane's reported income 2011 ..................................................
Amortization expense (given) .................................................
Realization of 2010 intra-entity gross profit (see part a) ......
Deferral of 2011 intra-entity gross profit (see part a) ............
Consolidated net income ..........................................................

$300,000
(32,000)
110,000
(5,000)
7,200
(16,200)
$364,000

e. Because the parent applies the partial equity method, its retained earnings
balance does not reflect the consolidated balance. Excess amortization and the
effect of the unrealized gain at that date must be taken into account to arrive at
a consolidated total.
Smith's retained earnings, December 31, 2011 (given) ........
Excess amortizations 2010–2011 ($5,000 × 2 × 80%) ...........
Deferral of parent's 12/31/11 intra-entity gross profit (part a)
Consolidated retained earnings 12/31/11 ..............................
18. (continued)

5-7

$600,000
(8,000)
(16,200)
$575,800

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

f. Because the parent applies the partial equity method, its retained earnings
balance does not equal the consolidated balance. Excess amortizations must
be taken into account to arrive at a consolidated total. In addition, because the
intra-entity transfer was upstream, the parent's equity accrual did not reflect
the intra-entity profit deferral . Income recognition would have been based on
the subsidiary's reported figures rather than its realized income. The parent
would have included the $16,200 ending unrealized gross profit in the
subsidiary's income in computing the annual equity accrual. Hence, that
portion of the accrual (80% of $16,200 or $12,960) is overstated, causing the
parent's retained earnings to be too high by that amount; reduction is
necessary to arrive at the consolidated balance.
The adjustment caused by the intra-entity transfer can be computed in a
second manner. The entire $16,200 unrealized gross profit will be deferred on
the consolidated statements. However, because the transfer was upstream, the
portion of the subsidiary's income assigned to the outside owners will be
reduced by 20 percent of that deferral or $3,240. The net effect on consolidated
net income (and, hence, on the ending retained earnings balance) is $12,960.
Smith's retained earnings, December 31, 2011 (given) ..........
$600,000
Excess amortizations, 2010–2011 ($5,000 × 2 × 80%) ...........
(8,000)
Reduction of equity accrual because of subsidiary's unrealized
gross profit (explained above) ..............................................
(12,960)
Consolidated retained earnings, 12/31/11 ..............................
$579,040
g. Land—Smith’s book value .......................................................
Land—Kane's book value ........................................................
Elimination of unrealized intra-entity gain on land ................
Consolidated land balance ......................................................

$600,000
200,000
(20,000)
$780,000

18. (continued)
h. The intra-entity transfer was upstream from Kane to Smith. Because the
transfer occurred in 2010, beginning retained earnings of the seller for 2011
contains the remaining portion of the unrealized gain.
Transfer pricing figures:
2010 Equipment
Gain
Depreciation expense
Income effect
Accumulated depreciation
2011 Depreciation expense
Accumulated depreciation

=
=
=
=
=
=
=

5-8

$80,000
$20,000 ($80,000 – $60,000)
$16,000 ($80,000 ÷ 5)
$4,000 ($20,000 – $16,000)
$16,000
$16,000
$32,000

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Historical cost figures:
2010 Equipment
Depreciation expense
Accumulated depreciation
2011 Depreciation expense
Accumulated depreciation

=
=
=
=
=

$100,000
$12,000 ($60,000 ÷ 5 years)
$52,000 ($40,000 + $12,000)
$12,000
$64,000

CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT
ENTRY *TA
Retained earnings, 1/1/11 (Kane) .............................
16,000
Equipment ($100,000 – $80,000) ..............................
20,000
Accumulated depreciation ($52,000 – $16,000) ..
36,000
To change beginning of year figures to historical cost by removing impact of 2010
transactions. Retained earnings reduction removes $4,000 income effect (above)
and replaces it with $12,000 depreciation expense for 2010.
ENTRY ED
Accumulated depreciation .......................................
4,000
Depreciation expense ..........................................
4,000
To reduce depreciation from transfer price figure ($16,000) to historical cost of
$12,000.
This intra-entity transfer was upstream from Kane to Smith. Thus, income effects
are assumed to relate to the original seller (Kane). Because the sale occurred in
2010, the only effect in 2011 relates to depreciation expense. The expense based
on the transfer price is $4,000 higher than the amount based on the historical
cost. As an upstream transfer, this adjustment affects Kane and the
noncontrolling interest computations.
Transfer price depreciation: $80,000 ÷ 5 yrs. = $16,000
Historical cost depreciation (based on book value): $60,000 ÷ 5 yrs. = $12,000
18. (continued)
Noncontrolling Interest in Kane's Income
Kane's reported income less excess amortization .................
$105,000
Reduction of depreciation expense to historical cost figure ..
4,000
Kane's realized income ..............................................................
$109,000
Outside ownership percentage .................................................
20%
Noncontrolling interest in Kane’s income ..........................
$21,800
19.

(20 Minutes) (Consolidation entries and noncontrolling interest balances affected
by inventory transfers.)

5-9

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

a. Conversion from Markup on Cost to Gross Profit Rate
Markup (given as a percentage of cost) ..................................

25%

Convert to gross profit rate [.25 ÷ (1.00 + 0.25)] ......................

20%

Noncontrolling Interest's Share of Subsidiary’s Income
Reported income of subsidiary—2011 .....................................
2010 intra-entity gross profit realized in 2011
($250,000 × 30% × 20%) ........................................................
2011 intra-entity gross profit deferred
($300,000 × 30% × 20%) ........................................................
Realized income of subsidiary—2011 ................................
Outside ownership ...................................................................
Noncontrolling interest's share of subsidiary's income ..

$160,000
15,000
(18,000)
$157,000
40%
$ 62,800

b. Entry *G
Retained Earnings, Jan. 1 (subsidiary) .........
15,000
Cost of Goods Sold ...................................
15,000
To remove intra-entity gross profit from previous year so that it can be
recognized in current year.
Entry Tl
Sales .................................................................
300,000
Cost of Goods Sold (purchases) .............
To eliminate intra-entity inventory sale and purchase.
Entry G
Cost of Goods Sold ........................................
18,000
Inventory ....................................................
To remove effects of current year unrealized gross profit.
20.

300,000

18,000

(30 Minutes) (Compute selected balances based on three different intra-entity
asset transfer scenarios)
a. Consolidated Cost of Goods Sold
Penguin’s cost of goods sold ..................................................
Snow’s cost of goods sold ......................................................
Elimination of 2011 intra-entity transfers ...............................
Reduction of beginning Inventory because of
2010 unrealized gross profit ($28,000 ÷ 1.4 = $20,000
cost; $28,000 transfer price less $20,000
cost = $8,000 unrealized gross profit) ...............................
Reduction of ending inventory because of
2011 unrealized gross profit ($42,000 ÷ 1.4 = $30,000

5-10

$290,000
197,000
(110,000)

(8,000)

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

cost; $42,000 transfer price less $30,000
cost = $12,000 unrealized gross profit) .............................
Consolidated cost of goods sold ..................................
Consolidated Inventory
Penguin book value .............................................................
Snow book value .................................................................
Defer ending unrealized gross profit (see above) ............
Consolidated Inventory .......................................................

12,000
$381,000

$346,000
110,000
(12,000)
$444,000

Noncontrolling Interest in Subsidiary’s Net Income
Because all intra-entity sales were downstream, the deferrals do not affect
Snow. Thus, the noncontrolling interest is 20% of the $58,000 (revenues minus
cost of goods sold and expenses) reported income or $11,600.
b. Consolidated Cost of Goods Sold
Penguin book value ..................................................................
Snow book value ......................................................................
Elimination of 2011 intra-entity transfers ...............................
Reduction of beginning inventory because of
2010 unrealized gross profit ($21,000 ÷ 1.4 = $15,000
cost; $21,000 transfer price less $15,000
cost = $6,000 unrealized gross profit) ...............................
Reduction of ending inventory because of
2011 unrealized gross profit ($35,000 ÷ 1.4 = $25,000
cost; $35,000 transfer price less $25,000
cost = $10,000 unrealized gross profit) .............................
Consolidated cost of goods sold ............................................

$290,000
197,000
(80,000)

(6,000)

10,000
$411,000

20. b. (continued)
Consolidated Inventory
Penguin book value ..................................................................
Snow book value ......................................................................
Defer ending unrealized gross profit (see above) ..................
Consolidated inventory .......................................................

$346,000
110,000
(10,000)
$446,000

Noncontrolling Interest in Subsidiary's Net income
Since all intra-entity sales are upstream, the effect on Snow's income must be
reflected in the noncontrolling interest computation:
Snow reported income .............................................................
2010 unrealized gross profit realized in 2011 (above) ...........
2011 unrealized gross profit to be realized in 2012 (above) .

5-11

$58,000
6,000
(10,000)

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Snow realized income ..............................................................
Outside ownership percentage ...............................................
Noncontrolling interest in Snow's income ........................

$54,000
20%
$10,800

c. Consolidated Buildings (Net)
Penguin’s buildings ...............................................
Snow's buildings ...................................................
Remove write-up created by transfer
($80,000 – $50,000) ...........................................
Remove excess depreciation created by transfer
($30,000 unrealized gain over 5 year life)
(2 years) .............................................................
Consolidated buildings (net) ...........................

$358,000
157,000
$(30,000)

12,000

(18,000)
$497,000

Consolidated Expenses
Penguin’s book value ............................................
Snow's book value .................................................
Remove excess depreciation on transferred building
($30,000) unrealized gain ÷ 5 years) ...............
Consolidated expenses .........................................

$150,000
105,000
(6,000)
$249,000

Noncontrolling Interest in Subsidiary’s Net Income
Because the transfer was made downstream, it has no effect on the
noncontrolling interest. Thus, Snow's reported income ($58,000 computed as
revenues minus cost of goods sold and expenses) is used for this
computation. The 20 percent outside ownership will be allotted income of
$11,600 (20% × $58,000).
21.

(15 Minutes) (Prepare consolidated income statement with a wholly-owned
subsidiary, includes transfers)
a. In this business combination, the direction of the intra-entity transfers (either
upstream or downstream) is not important to the consolidated totals. Because
Akron controls all of Toledo's outstanding stock, no noncontrolling interest
figures are computed. If present, noncontrolling interest balances are affected
by upstream sales but not by downstream.
For purposes of a 2011 consolidation, the following worksheet entries would
affect income statement balances:
Entry *G
Retained Earnings, 1/1/11 (seller) ......
Cost of Goods Sold ........................

5-12

17,500
17,500

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

To remove 2010 unrealized gross profit from beginning account balances.
Gross profit is the 25% gross profit rate ($80,000 ÷ $320,000) multiplied by
remaining inventory ($70,000).
Entry E
Amortization Expense ..........................
15,000
Patented technology ......................
15,000
To recognize excess amortization expense for the current period.
Entry Tl
Sales ......................................................
320,000
Cost of Goods Sold ........................
To eliminate intra-entity transfers of inventory during 2011.

320,000

Entry G
Cost of Goods Sold .............................
12,500
Inventory .........................................
12,500
To remove 2011 unrealized gross profit from ending account balances.
Gross profit is the 25% gross profit rate ($80,000 ÷ $320,000) multiplied by
remaining inventory ($50,000).
b. By including the impact of each of these four consolidation entries, the
following income statement can be created from the individual account
balances:

22.

AKRON, INC. AND CONSOLIDATED SUBSIDIARY
Income Statement
Year Ending December 31, 2011
Sales ..................................................................................... $1,380,000
Cost of goods sold ..............................................................
575,000
Gross profit .....................................................................
805,000
Operating expenses ............................................................
635,000
Consolidated net income ..............................................
$170,000
(60 minutes) (Downstream intra-entity asset transfer when parent uses equity
method and when a noncontrolling interest is present)
a. Investment account:
Consideration paid (fair value) 1/1/10
Netspeed’s reported income for 2010
Database amortization
Netspeed’s adjusted net income
Quickport's ownership percentage
Quickport's share of Netspeed’s income
Gain on equipment transfer deferral
Depreciation adjustment (6 months)
Equity in earnings of Netspeed Company,
Quickport’s share of Netspeed’s dividends (90%)

5-13

$810,000
$80,000
(12,000)
$68,000
90%
$61,200
(3,000)
500
$58,700
(7,200)

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Balance 12/31/10
$861,500
Netspeed’s reported income for 2011
$115,000
Database amortization
(12,000)
Netspeed’s adjusted 2011 net income
$103,000
Quickport's ownership percentage
90%
Quickport's share of Netspeed income
$92,700
Depreciation adjustment
1,000
Equity in earnings of Netspeed Company, 2011
$93,700
Quickport’s share of Netspeed’s dividends, 2011 (90%)
(7,200)
Balance 12/31/11
$948,000
b. 12/31/11 Worksheet Adjustments
*TA

Equipment
6,000
Investment in S
2,500
Accumulated depreciation
8,500
To transfer the unrealized intra-entity equipment reduction (as of Jan. 1, 2011)
from the Investment account to the equipment and A.D. accounts.
S

A

I
D

Common stock—S
RE—S
Investment in S
Noncontrolling interest
Database
Investment in S
Noncontrolling interest

800,000
112,000
820,800
91,200
48,000
43,200
4,800

Equity in earnings of S
Investment in S

93,700
93,700

Investment in S
Dividends paid

7,200
7,200

22. (continued)
E

Amortization expense
Database

12,000

ED Accumulated depreciation
Depreciation expense

1,000

12,000
1,000

Alternative set of equivalent adjustments for part b.
*TA

Equipment
Investment in S
Accumulated Depreciation

5-14

6,000
1,500
7,500

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

To transfer the unrealized intra-entity equipment reduction (as of Dec. 31,
2011) from the investment account to the equipment and A.D. accounts.
*ED

S

A

I

D

E

Equity in earnings of S
1,000
Depreciation expense
1,000
To transfer the current realized portion of the intra-entity equipment gain
from the Equity in Earnings of S account to increase current
consolidated income through a reduction in depreciation expense.
Common stock—S
RE—S
Investment in S
Noncontrolling interest

800,000
112,000

Database
Investment in S
Noncontrolling interest

48,000

Equity in earnings of S
Investment in S

92,700

820,800
91,200

43,200
4,800

92,700

Investment in S
Dividends paid

7,200
7,200

Amortization expense
Database

12,000
12,000

23. (20 Minutes) (Consolidation entries for intra-entity equipment transfer.)
INDIVIDUAL RECORDS BASED ON TRANSFER PRICE
12/31/09
 Equipment = $95,000
 Gain on transfer = $45,000 ($95,000 – $50,000)
 Depreciation expense = $19,000 ($95,000 ÷ 5 years)
 Accumulated depreciation = $19,000
12/31/10
 Depreciation expense $19,000
 Accumulated depreciation = $38,000 (2 years)
12/31/11
 Effect on retained earnings, 1/1/11 = $7,000 credit balance (gain less two
years depreciation)
 Depreciation expense = $19,000

5-15

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions



Accumulated depreciation = $57,000 (3 years)

CONSOLIDATED REPORTING BASED ON HISTORICAL COST
12/31/09
 Equipment = $130,000
 Depreciation expense = $10,000 ($50,000 ÷ 5 years)
 Accumulated depreciation = $90,000 ($80,000 + $10,000)
12/31/10
 Depreciation expense = $10,000
 Accumulated depreciation = $100,000 ($90,000 + $10,000)
12/31/11
 Effect on retained earnings, 1/1/11 = ($20,000) (two years depreciation)
 Depreciation expense = $10,000
 Accumulated depreciation = $110,000 ($100,000 + $10,000)
Entry *TA
Retained earnings, 1/1/11 (Padre) ......................
27,000
Equipment ($130,000 – $95,000) ........................
35,000
Accumulated depreciation ($100,000 – $38,000)
62,000
To adjust beginning-of-year amounts to balances for consolidated entity.
Retained earnings adjustment reduces $7,000 credit balance to $20,000
debit balance as computed above.
Entry ED
Accumulated Depreciation ..................................
9,000
Depreciation Expense ...................................
9,000
To remove excess depreciation for current year to reflect an allocation of
the historical cost ($10,000) rather than the transfer price ($19,000).
24.

(20 Minutes) (Determine consolidated net income when an intra-entity transfer of
equipment occurs. Includes an outside ownership)
a. Income—Slaughter ...................................................................
Income—Bennett .......................................................................
Excess amortization for unpatented technology ....................
Remove unrealized gain on equipment ..................................
($120,000 – $70,000)
Remove excess depreciation created by
inflated transfer price ($50,000 ÷ 5) ...................................
Consolidated net income .........................................................

$220,000
90,000
(8,000)
(50,000)

b. Income calculated in (part a.) ..................................................
Noncontrolling interest in Bennett's income
Income—Bennett ................................................. $90,000

$262,000

5-16

10,000
$262,000

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Excess amortization ............................................
(8,000)
Adjusted net income ........................................... $82,000
Noncontrolling interest in Bennett’s income (10%)...........
Consolidated net income to parent company .........................

(8,200)
$253,800

c. Income calculated in (part a.) ..................................................
$262,000
Noncontrolling interest in Bennett's income (see Schedule 1)
(4,200)
Consolidated net income to parent company .........................
$257,800
Schedule 1: Noncontrolling Interest in Bennett's Income (includes upstream
transfer)

25.

Reported net income of subsidiary .........................................
Excess amortization ..................................................................
Defer unrealized gain on equipment transfer .........................
Eliminate excess depreciation ($50,000 ÷ 5) ..........................
Bennett's realized net income .................................................
Outside ownership ...................................................................
Noncontrolling interest in subsidiary's income ................

$90,000
(8,000)
(50,000)
10,000
$42,000
10%
$ 4,200

d. Net income 2012—Slaughter ...................................................
Net income 2012—Bennett .......................................................
Excess amortization ..................................................................
Eliminate excess depreciation stemming from transfer
($50,000 ÷ 5) (year after transfer) .......................................
Consolidated net income ................................................

240,000
100,000
(8,000)
10,000
$342,000

(35 minutes) (Compute consolidated totals with transfers of both inventory and a
building.)
Excess Amortization Expenses
Equipment $60,000 ÷ 10 years = $6,000 per year
Franchises $80,000 ÷ 20 years = $4,000 per year
Annual excess amortizations $10,000
Unrealized Gross Profit—Inventory, 1/1/11:
Gross profit ($70,000 – $49,000) ..............................................
Gross profit rate ($21,000 ÷ $70,000) ......................................

$21,000
30%

Remaining inventory ................................................................
Gross profit rate ........................................................................
Unrealized gross profit, 1/1/11 ..................................................

$30,000
30%
$9,000

Unrealized Gross Profit—Inventory, 12/31/11:

5-17

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Gross profit ($100,000 – $50,000) ............................................
Gross profit rate ($50,000 ÷ $100,000) ....................................

$50,000
50%

Remaining inventory ................................................................
Gross profit rate .........................................................................
Unrealized gross profit, 12/31/11 .............................................

$40,000
50%
$20,000

Impact of intra-entity Building Transfer:
12/31/10—Transfer price figures
Transfer price ......................................................................
Gain on transfer ($50,000 – $30,000) .................................
Depreciation expense ($50,000 ÷ 5 years) .........................
Accumulated depreciation ..................................................
12/31/11—Transfer price figures
Depreciation expense .........................................................
Accumulated depreciation ..................................................
12/31/10—Historical cost figures
Historical cost ......................................................................
Depreciation expense ($30,000 book value ÷ 5 years) .....
Accumulated depreciation ($40,000 + $6,000) ..................
12/31/11—Historical cost figures
Depreciation expense .........................................................
Accumulated depreciation ..................................................

$50,000
20,000
10,000
10,000
10,000
20,000
$70,000
6,000
46,000
6,000
52,000

25. (continued)
CONSOLIDATED BALANCES


Sales = $1,000,000 (add the two book values and subtract $100,000 in intra-entity
transfers)



Cost of Goods Sold = $571,000 (add the two book values and subtract $100,000 in
intra-entity purchases. Subtract $9,000 because of the previous year unrealized gross
profit and add $20,000 to defer the current year unrealized gross profit.)



Operating Expenses = $206,000 (add the two book values and include the $10,000
excess amortization expenses but remove the $4,000 in excess depreciation expense
[$10,000 – $6,000] created by building transfer)



Investment Income = $0 (the intra-entity balance is removed so that the individual
revenue and expense accounts of the subsidiary can be shown)



Inventory = $280,000 (add the two book values and subtract the $20,000 ending
unrealized gross profit)

5-18

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions



Equipment (net) = $292,000 (add the two book values and include the $60,000
allocation from the acquisition-date fair value less three years of excess
amortizations)



Buildings (net) = $528,000 (add the two book values and subtract the $20,000
unrealized gain on the transfer after two years of excess depreciation [$4,000 per
year])

26.

(35 Minutes) (Prepare consolidation entries for a business combination with intraentity inventory and equipment transfers; includes an outside ownership.)
a. Entry *G
Retained Earnings, 1/1/11 (Sledge) ...............
2,000
Cost of Goods Sold ...................................
2,000
To remove unrealized gross profit from beginning account balances. This is
the 40% gross profit rate ($6,000 ÷ $15,000) multiplied by remaining
inventory ($5,000).
Entry *TA
Equipment ........................................................
4,000
Investment in Sledge ......................................
2,400
Accumulated Depreciation .......................
6,400
To adjust the equipment balance to original cost ($16,000) and to adjust
accumulated depreciation to the correct consolidated January 1, 2011
balance ($7,000 less $600 extra depreciation in 2010). The net reduction to
the reported equipment balance (cost less A.D. = $2,400) equals the amount
of unrealized gain at January 1, 2011. The $2,400 debit to the Investment
account appropriately transfers the reduction in the net book value of the
transferred equipment to the subsidiary’s accounts. The Investment
account was reduced by $3,000 in 2010 for the original intra-entity gain and
increased by $600 in 2010 for the extra depreciation ($3,000 gain ÷ 5 years)
through application of the equity method. Entry ED (below) completes the
adjustment of A.D. and depreciation expense to their correct December 31,
2011 balances.
Entry S
Common Stock (Sledge) .......................................... 120,000
Retained Earnings, 1/1/11 (adjusted) (Sledge) ........ 258,000
Investment in Sledge (80%) ................................
302,400
Noncontrolling interest in Sledge, 1/1/11 (20%)
75,600
To eliminate subsidiary's stockholders' equity accounts (after adjustment
for Entry *G) and recognize noncontrolling interest balance as of January 1,
2011.

5-19

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Entry A
Contracts ($60,000 – $3,000 for 2 years) ................
54,000
Buildings ($20,000 – $2,000 for 2 years) .................
16,000
Investment in Sledge (80%) .................................
56,000
Noncontrolling interest in Sledge, 1/1/11 (20%)
14,000
To recognize acquisition-date fair value allocations adjusted for 2 years of
amortization (2009 and 2010).
26. (continued)
Entry I
Equity Income of Subsidiary ...................................
10,600
Investment in Sledge ..........................................
10,600
To remove intra-entity income accrual recorded by parent using full equity
method (80% of $17,500 realized income [see Part b] less $5,000 in excess
amortizations for the year [see Entry E] plus $600 removal of excess
depreciation from 2010 intra-entity equipment transfer).
Entry E
Depreciation Expense ...............................................
2,000
Amortization Expense ...............................................
3,000
Contracts ($60,000 ÷ 20 years) ...........................
3,000
Buildings ($20,000 ÷ 10 years) ...........................
2,000
To record excess amortizations for 2011 based on allocations and useful
lives.
Entry TI
Sales ...........................................................................
20,000
Cost of Goods Sold .............................................
To eliminate intra-entity inventory transfers during 2011.

20,000

Entry G
Cost of Goods Sold ..................................................
4,500
Inventory ..............................................................
4,500
To remove unrealized gross profit from ending account balances. The gross
profit is the 45% gross profit rate ($9,000 ÷ $20,000) multiplied by remaining
inventory ($10,000).
Entry ED
Accumulated Depreciation ......................................
600
Depreciation Expense .........................................
600
To eliminate excess depreciation on equipment recorded at transfer price.
Expense is being reduced from the recorded amount ($2,400 or $12,000 ÷ 5)
to historical cost figure ($1,800 or $9,000 ÷ 5).

5-20

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

26. (continued)
b. Noncontrolling Interest in the Subsidiary's Income 2011
Revenues ....................................................................................
Cost of goods sold ...................................................................
Other expenses .........................................................................
Excess acquisition-date fair value amortization .....................
Income adjusted for amortization ......................................
Gross profit on 2010 upstream inventory transfer
realized in 2011 (Entry *G) .................................................
Gross profit on 2011 upstream inventory transfer
deferred until 2012 (Entry G) ..............................................
Realized income of subsidiary—2011 ......................................
Outside ownership ...................................................................
Noncontrolling interest in subsidiary's net income .........
27.

$130,000
(70,000)
(40,000)
(5,000)
$15,000
2,000
(4,500)
$12,500
20%
$2,500

(65 Minutes) (Determine consolidation totals after answering a series of questions
about combination and intra-entity inventory transfers)
a. Consideration transferred ....................... $342,000
Noncontrolling interest fair value .............
38,000
Subsidiary fair value at acquisition-date 380,000
Book value .................................................. (326,000)
Fair value in excess of book value .......... $54,000
Annual Excess
Excess fair value assignments
Life
Amortizations
To building ...........................................
18,000
9 yrs.
$2,000
To patented technology ......................
36,000
6 yrs.
6,000
Totals .....................................................
-0$8,000
b. Because Brey sold inventory to Petino, the transfers are upstream.
c. Gross profit on 2010 transfers ($135,000 – $81,000) .............
Gross profit percentage ($54,000 ÷ $135,000) ........................

$54,000
40%

Inventory remaining, 12/31/10 .................................................
Gross profit percentage ...........................................................
Unrealized gross profit, January 1, 2011 ...............................

$37,500
40%
$15,000

d. Gross profit on 2011 transfers ($160,000 – $92,800) ............
Gross profit percentage ($67,200 ÷ $160,000) ........................

$67,200
42%

Inventory remaining, 12/31/11 .................................................
Gross profit percentage ...........................................................
Unrealized gross profit, December 31, 2011 ..........................

$50,000
42%
$21,000

5-21

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

27. (continued)
e. Petino is applying the equity method because the $68,400 equals neither 90% of
Brey's reported Income nor 90% of the dividends paid by Brey.
Brey’s reported income ............................................................
Excess fair value amortization .................................................
Realized gross profit ...............................................................
Deferred gross profit .................................................................
Adjusted subsidiary income .....................................................
Ownership .................................................................................
Investment income—Brey ........................................................

$90,000
(8,000)
15,000
(21,000)
$76,000
90%
$68,400

f. Brey’s adjusted income (see e.) ..............................................
Outside ownership ...................................................................
Noncontrolling interest in subsidiary's net income ...............

$76,000
10%
$7,600

g. Investment in Brey (consideration transferred) .....................
Income of Brey
Reported 2009 .......................................
$64,000
2010 .................................................
80,000
2011 ................................................
90,000
Total ................................................
234,000
Unrealized gross profit, 12/31/11(see d.)
(21,000)
Realized income 2009-2011 ...............
213,000
Petino’s ownership .............................
90%
Excess amortizations ($8,000 × 3 years × 90%)

$342,000

Dividends paid by Brey
2009 .................................................
2010 .................................................
2011 ................................................
Total ................................................
Pitino's ownership ...............................
Investment in Brey, 12/31/11 ...................
h. Entry S
Common Stock (Brey) ..............................
Retained Earnings, 1/1/11 (Brey) (reduced by
1/1/11 unrealized gross profit) .................
Investment in Brey (90%) ....................
Noncontrolling Interest in Brey (10%)
27. (continued) part i.

5-22

$19,000
23,000
27,000
69,000
90%

191,700
(21,600)

(62,100)
$450,000

150,000
263,000
371,700
41,300

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

28.



Sales Revenues = $1,068,000 (total less $160,000 intra-entity sales)



Cost of Goods Sold = $570,000 (add book values less $160,000 in intra-entity
purchases. Also, adjust for 2010 unrealized gross profit [subtract $15,000] and
2011 unrealized gross profit [add $21,000])



Expenses = $260,400 (add book values with $8,000 amortization for excess fair
value allocations)



Investment Income—Brey = $0 (intra-entity balance is eliminated to include
individual revenue and expense accounts of the subsidiary)



Noncontrolling Interest in Subsidiary's Net Income = $7,600 (see f.)



Consolidated net income to parent = $230,000 (consolidated revenues less
consolidated cost of goods sold, expenses, and the noncontrolling interest's
share of the subsidiary's income)



Retained Earnings, 1/1 = $488,000 (parent equity method balance)



Dividends Paid = $136,000 (parent balance only)



Retained Earnings, 12/31 = $582,000 (consolidated beginning balance plus net
income less dividends paid)



Cash and Receivables = $228,000 (total less $16,000 intra-entity balance)



Inventory = $370,000 (total less ending unrealized gross profit)



Investment in Brey = $0 (intra-entity balance is eliminated so that the individual
assets and liabilities of the subsidiary can be reported)



Land, Buildings, and Equipment = $1,304,000 (add book values and include a
$12,000 net allocation after 3 years of amortization)



Patented Technology = $18,000 (original allocation after 3 years of amortization
[$6,000 per year])



Total Assets = $1,920,000 (add consolidated figures)



Liabilities = $773,000 (add book values less $16,000 intra-entity balance)



Noncontrolling Interest in Brey, 12/31 = $50,000 ([10% of subsidiary's book value
at beginning of period plus unamortized excess less beginning unrealized gross
profit] plus 10% of the subsidiary's realized net income less 10% of subsidiary
dividends).



Common Stock = $515,000 (parent balance only)



Retained Earnings, 12/31 = $582,000 (see above)



Total Liabilities and Stockholders' Equity = $1,920,000 (summation)
(20 Minutes) (Computation of selected consolidation balances as affected by
downstream inventory transfers)

5-23

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

UNREALIZED GROSS PROFIT, 12/31/10: (downstream transfer)
Intra-entity gross profit ($120,000 – $72,000) .........................
Inventory remaining at year's end ...........................................
Unrealized intra-entity gross profit, 12/31/10 ...............................

$48,000
30%
$14,400

UNREALIZED GROSS PROFIT, 12/31/11: (downstream transfer)
Intra-entity gross profit ($250,000 – $200,000) .......................
Inventory remaining at year's end ...........................................
Unrealized intra-entity gross profit, 12/31/11 ...............................

$50,000
20%
$10,000

CONSOLIDATED TOTALS
 Sales = $1,150,000 (combine amounts and eliminate intra-entity sales of
$250,000)


29.

Cost of goods sold:
Bennett's book value ................................................................
Zeigler's book value .................................................................
Eliminate intra-entity transfers ................................................
Realized gross profit deferred in 2010 ....................................
Deferral of 2011 unrealized gross profit .................................
Cost of goods sold ..............................................................

$535,000
400,000
(250,000)
(14,400)
10,000
$680,600



Operating expenses = $210,000 (add the two book values and include
intangible amortization for current year)



Dividend income = -0- (intra-entity transfer eliminated in consolidation)



Noncontrolling interest in consolidated income: (impact of transfers is not
included because they were downstream)
Zeigler reported income for 2011 .......................................
$(100,000)
Intangible amortization ........................................................
10,000
Zeigler adjusted income ......................................................
(90,000)
Outside ownership ..............................................................
30%
Noncontrolling interest in Zeigler’s earnings ...............
$(27,000)



Inventory = $980,000 (combine amounts less the $10,000 ending unrealized
gross profit)



Noncontrolling interest in subsidiary
30% beginning $950,000 book value ..................................... $(285,000)
Excess January 1 intangible allocation (30% × $395,000) ... (118,500)
Noncontrolling Interest in Zeigler’s earnings .......................
(27,000)
Dividends (30% × $50,000) ......................................................
15,000
Total noncontrolling interest at 12/31/11 ............................... $(415,500)

(25 Minutes) (Computation of selected consolidation balances as affected by
upstream inventory transfers)

5-24

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

UNREALIZED GROSS PROFIT, 12/31/10: (upstream transfer)

Intra-entity gross profit ($120,000 – $72,000) .........................
Inventory remaining at year's end ...........................................
Unrealized intra-entity gross profit, 12/31/10 ...............................

$48,000
30%
$14,400

UNREALIZED GROSS PROFIT, 12/31/11: (upstream transfer)
Intra-entity gross profit ($250,000 – $200,000) .......................
Inventory remaining at year's end ...........................................
Unrealized intra-entity gross profit, 12/31/11 ...............................

$50,000
20%
$10,000

CONSOLIDATED TOTALS
 Sales = $1,150,000 (combine amounts and eliminate intra-entity transfer)
 Cost of goods sold:
Bennett's COGS book value ....................................................
$535,000
Zeigler's COGS book value ......................................................
400,000
Eliminate intra-entity transfers ................................................
(250,000)
Realized gross profit deferred in 2010 ....................................
(14,400)
Deferral of 2011 unrealized gross profit .................................
10,000
Consolidated cost of goods sold .......................................
$680,600
 Operating expenses = $210,000 (combine amounts and include intangible
amortization for current year)
 Dividend income = -0- (intra-entity transfer eliminated in consolidation)
 Noncontrolling interest in consolidated income: (impact of transfers is included
because they were upstream)
Zeigler reported income for 2011 ............................................
$100,000
Intangible amortization ........................................................
(10,000)
2010 gross profit recognized in 2011 ................................
14,400
2011 gross profit deferred ..................................................
(10,000)
Zeigler realized income for 2011 .........................................
$94,400
Outside ownership ..............................................................
30%
Noncontrolling interest in subsidiary income ........................
$28,320
 Inventory = $980,000 (combine amounts and defer the $10,000 ending
unrealized gross profit)
 Noncontrolling interest in subsidiary, 12/31/11
30% beginning book value less $14,400
unrealized gross profit (30% × $935,600) ........................ $(280,680)
Excess intangible allocation (30% × $395,000) ..................
(118,500)
Noncontrolling Interest in Zeigler’s earnings ....................
(28,320)
Dividends (30% × $50,000) ...................................................
15,000
Total noncontrolling interest at 12/31/11 ............................ $(412,500)
30.

(75 Minutes) (Determine consolidated balances after impact of upstream Inventory
transfers and downstream transfer of building. Parent uses initial value method.)

5-25

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

PRELIMINARY COMPUTATIONS
a. Consideration transferred .......................
Noncontrolling interest fair value .............
Subsidiary fair value at acquisition-date
Book value ..................................................
Fair value in excess of book value ..........
Excess fair value assignments
to equipment .........................................
to liabilities ...........................................
to brand names ....................................
Totals .....................................................

$657,000
73,000
730,000
(620,000)
$110,000
20,000
40,000
50,000
-0-

Annual Excess
Life
Amortizations
4 yrs.
$5,000
5 yrs.
8,000
10 yrs.
5,000
$18,000

Determination of subsidiary book value on 1/1/10
Book value, 1/1/11 (based on stockholders' equity accounts)
Eliminate net income – 2010 ....................................................
Eliminate dividends – 2010 ......................................................
Book value, 1/1/10 ...............................................................

$700,000
(80,000)
-0$620,000

Beginning inventory unrealized gross profit, 12/31/10 (Upstream)
Ending Inventory ($160,000 × 40%) .........................................
Gross profit rate (given) ...........................................................
Unrealized intra-entity gross profit, 12/31/10 .........................

$64,000
20%
$12,800

Ending inventory unrealized gross profit, 12/31/11 (Upstream)
Ending Inventory ($145,000 × 30%) .........................................
Gross profit rate (given) ...........................................................
Unrealized intra-entity gross profit, 12/31/11 .........................

$43,500
20%
$ 8,700

Building unrealized gross profit, 1/2/10 (Downstream)
Transfer price ............................................................................
Book value .................................................................................
Unrealized gross profit .............................................................

$25,000
10,000
$15,000

Annual excess depreciation
Annual depreciation based on book value ($10,000 ÷ 5 years)
Annual depreciation based on transfer price
($25,000 ÷ 5 years) ...............................................................
Excess annual depreciation ....................................................

$2,000
5,000
$3,000

30. (continued)
Adjustment to buildings to return to historical cost at 1/1/11
Transfer Price Historical Cost

5-26

Consolidation
Adjustment

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Buildings
$25,000
Accumulated depreciation
(1/1/10 balance after 1
more year of depreciation) 5,000

$100,000

$75,000

92,000

87,000

Consolidated Totals


Sales and other Income = $1,240,000 (add the two book values and eliminate
the intra-entity transfers)



Cost of goods sold:
Moore's book value ..................................................................
Kirby's book value ....................................................................
Eliminate intra-entity transfers ................................................
Realized gross profit deferred in 2010 .....................................
Deferral of 2011 unrealized gross profit .................................
Cost of goods sold ...................................................................

$500,000
400,000
(160,000)
(8,700)
12,800
$744,100



Operating and interest expenses = $275,000 (add the two book values and
include $18,000 amortization for current year but eliminate $3,000 excess
depreciation from asset transfer)



Noncontrolling interest in subsidiary’s income = $1,790 (impact of inventory
transfers is included because they were upstream but building transfer is
omitted because it was downstream)

Reported income for 2011 .............................................................
Realized gross profit deferred in 2010 ....................................
Deferral of 2011 unrealized gross profit .................................
Realized income of subsidiary ................................................
Excess fair value amortization .................................................
Adjusted subsidiary net income ...............................................
Outside ownership .........................................................................
Noncontrolling interest ............................................................


$40,000
8,700
(12,800)
$35,900
(18,000)
17,900
10%
$ 1,790

Consolidated net income = $220,900 (consolidated sales less consolidated cost
of goods sold, expenses, and noncontrolling interest)
 To noncontrolling interest = $1,790 (above)
 To controlling interest = $219,110

30. (continued)


Retained earnings, 1/1/11 = $1,025,970 (because the parent uses the initial
value method, its retained earnings must be adjusted for changes in
subsidiary's book value, excess amortizations, and the impact of unrealized
gross profits in previous years)

5-27

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Moore's reported balance, 1/1/11 .................................
Impact of building transfer (parent's income was overstated by the $15,000 gain but has been reduced by
one prior year of excess depreciation) ...................
Adjustments to convert initial value to equity method:
Increase in subsidiary's book value during prior
years ....................................................................
Excess fair value amortization .................................
Deferral of 12/31/10 unrealized gross profit
(subsidiary's prior income was overstated) ......
Realized increase in book value .........................
Ownership ..................................................................
Equity accrual ............................................................
Retained Earnings, 1/1/11 ...................................

$990,000

(12,000)

$80,000
(18,000)
(8,700)
53,300
90%
47,970
$1,025,970

Dividends Paid = $130,000 (parent balance only)
Retained Earnings, 12/31/11 = $1,115,080 (the beginning balance plus controlling
interest share of consolidated net income less dividends paid)
Cash and Receivables = $397,000 (add the two book values)
Inventory = $371,200 (add the two book values and defer the $12,800 ending
unrealized gross profit)
Investment in Kirby = -0- (eliminated for consolidation purposes)
Equipment (Net) = $1,030,000 (add the two book values adjusted for excess allocation
and amortization)
Buildings = $1,725,000 (add the two book values and add the $75,000 impact to return
to historical cost as computed above for transfer)
Accumulated Depreciation = $384,000 (add the two book values plus adjustment to
historical cost ($87,000 at beginning of year less $3,000 excess depreciation for
current year)
Other Assets = $300,000 (add the two book values)
Brand Names = $40,000 (the original $50,000 allocation less two years of amortization
at $5,000 per year)
Total Assets = $3,479,200 (summation of the consolidated totals)
Liabilities = $1,684,000 (add the two book values and subtract the original allocation
[$40,000] after two years of amortization [$8,000 per year])
30. (continued)
NCI 12/31/11 = $80,120 (10 percent of $691,300 adjusted beginning book value
[$700,000 less $8,700 deferral of unrealized gross profit] plus $9,200 share of
beginning unamortized excess fair value allocations plus $1,790 income share)
Common Stock = $600,000 (parent balance only)

5-28

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Retained Earnings, 12/31/11 = $1,115,080 (computed above)
Total Liabilities and Equities = $3,479,200 (summation of consolidated balances).
The same consolidation balances can be derived using a worksheet the following
adjusting and eliminating entries:
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/11 (Kirby) .......................
8,700
Cost of Goods Sold ........................................
(To recognize 2010 deferred gross profit as income in 2011)
Entry *TA
Building .................................................................
Retained earnings, 1/1/11 (Moore) ......................
Accumulated Depreciation ............................
(To adjust 1/1/11 balance to historical cost figures)

8,700

75,000
12,000
87,000

Entry *C
Investment in Kirby ..............................................
47,970
Retained Earnings, 1/1/11 (Moore) ................
47,970
(To convert from initial value to equity method based on the following
computation)
Increase in subsidiary's book value during prior years
(income of $80,000) .........................................
Excess amortization for 2010 ..............................
Deferral of 12/31/10 unrealized gross profit .......
Realized increase in subsidiary's book value ....
Ownership ............................................................
Conversion to equity method adjustment ..........

$80,000
(18,000)
(8,700)
$53,300
90%
$47,970

S Common Stock (Kirby) ........................................
150,000
Retained Earnings, 1/1/11 as adjusted (Kirby) ...
541,300
Investment in Kirby (90%) ..............................
622,170
Noncontrolling Interest in Kirby (10%) .........
69,130
(To eliminate subsidiary's beginning stockholders' equity accounts and
recognize beginning noncontrolling interest balance)
30. (continued)
A Liabilities ..............................................................
Equipment ............................................................
Brand Names ........................................................
Investment in Kirby ........................................

5-29

32,000
15,000
45,000
82,800

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Noncontrolling Interest in Kirby (10%) .........
9,200
(To recognize unamortized balance of excess allocations as of 1/1/11. Figures
have been reduced by one year of amortization)
Entry I (the subsidiary paid no dividends so no adjustment needed)
E Operating and interest expense ..........................
18,000
Liabilities .........................................................
Equipment ........................................................
Brand names ...................................................
(To recognize excess amortization expenses for current year)
Tl Sales .....................................................................
Cost of Goods Sold ........................................
(To eliminate intra-entity transfers for 2011)

8,000
5,000
5,000

160,000
160,000

G Cost of Goods Sold .............................................
Inventory .........................................................
(To defer ending unrealized inventory gross profit)

12,800
12,800

ED Accumulated Depreciation ..................................
3,000
Depreciation Expense ....................................
3,000
(To adjust depreciation for current year created by transfer of building)
30. continued: Worksheet (not part of requirements)
Moore and Subsidiary Kirby
Consolidated Worksheet
December 31, 2011
Sales and other income
Cost of goods sold

Moore

Kirby

NCI

(800,000)

(600,000)

(TI) 160,000

500,000

400,000

(G) 12,800

Consolidated
(1,240,000)

(G*)

8,700

744,100

(TI)160,000
Op. and interest expenses

100,000

160,000

Separate company income

(200,000)

(40,000)

(E) 18,000

(E)

3,000

275,000

Consolidated net income

(220,900)

to noncontrolling interest

(1,790)

to controlling interest
Retained earnings, 1/1

(219,110)
(990,000)

(TA*) 12,000
(550,000)

Dividends paid

(*C) 47,970

(1,025,970)

(S) 541,300
(G*)

Net income

1,790

8,700

(200,000)

(40,000)

(219,110)

130,000

0

130,000

5-30

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Retained earnings, 12/31

(1,060,000)

(590,000)

(1,115,080)

Cash and receivables

217,000

180,000

397,000

Inventory

224,000

160,000

Investment in Kirby

657,000

0

(*C) 47,970

(G) 12,800

371,200

(S) 622,170

0

(A) 82,800

Equipment (net)

600,000

420,000

(A) 15,000

Buildings

1,000,000

650,000

(TA*) 75,000

Acc. depreciation—buildings

(100,000)

(200,000)

3,000

(TA*) 87,000

(384,000)

Brand names

0

0

(A) 45,000

(E) 5,000

40,000

Other assets

200,000

100,000

300,000

Total assets

2,798,000

1,310,000

3,479,200

(1,138,000)

(570,000)

(A) 32,000

(600,000)

(150,000)

(S)150,000

Liabilities
Common stock
Noncontrolling interest , 1/1

(E) 5,000

1,725,000

(E) 8,000

(1,684,000)
(600,000)

(S) 69,130
(A) 9,200

Noncontrolling interest,12/31

(78,330)
80,120

Retained earnings, 12/31

(1,060,000)

(590,000)

Total liabilities and equity

(2,798,000)

(1,310,000)

31.

1,030,000

(80,120)
(1,115,080)

1,120,770

1,120,770

(3,479,200)

(55 Minutes) (Investment account balance and consolidated worksheet with
downstream inventory transfers when parent uses equity method)
Acquisition-date fair value allocation and excess amortizations
a. Consideration transferred ..........................
Noncontrolling interest fair value ................
Subsidiary fair value at acquisition-date ...
Acquisition-date book value ........................
Fair value in excess of book value .............
Excess fair value assignments ..............
to patents .................................................
to customer list .......................................
to goodwill ..............................................

$372,000
248,000
$620,000
(320,000)
$300,000

Annual Excess
Life
Amortizations
70,000 10 yrs.
$7,000
45,000 15 yrs.
3,000
$185,000 indefinite
-0$10,000

Determination of Investment in Scott account balance
Consideration transferred ..................................................
Increase in Scott’s retained earnings 1/1/10 to 1/1/11

5-31

$372,000

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

[(280,000 – 220,000) × 60%] ..........................................
Excess fair value amortization × 60%............................
2010 ending inventory profit deferral (100%) ................

$36,000
(6,000)
(10,000)

Wood’s equity earnings in Scott for 2011*....................
Scott 2011 dividends paid to Woods .............................
Investment account balance 12/31/11.................................
* Scott’s 2011 income........................................................
Excess fair value amortization .......................................
Adjusted net income .......................................................
Wood’s percentage ownership ......................................
Wood’s share of Scott’s adjusted net income ..............
2010 intra-entity inventory profit recognized ................
2011 intra-entity inventory profit deferred ....................
Woods’ equity earnings in Scott ....................................

Intra-entity profits (downstream)
Intra-entity transfers remaining in inventory
Gross profit rate**

2010
50,000
20%
$10,000

20,000
28,000
(9,000)
$411,000

$60,000
(10,000)
$50,000
60%
$30,000
10,000
(12,000)
$28,000

2011
40,000
30%
$12,000

**(150,000 – 120,000) ÷ 150,000 = 20%
(160,000 – 112,000) ÷ 160,000 = 30%

31. (continued)

Sales
Cost of goods sold

Woods
(700,000)
460,000

Scott
(335,000)
205,000

Operating expenses
Income of Scott

188,000
(28,000)

70,000

Separate company income
Consolidated net income
to noncontrolling interest
to parent

(80,000)

(60,000)

Retained earnings, 1/1
Net income (above)
Dividends paid
Retained earnings, 12/31
Cash and receivables
Inventory
Investment in Scott

Adj. & Elim.
(TI)160,000
(G) 12,000 (*G) 10,000
(TI) 160,000
(E) 10,000
(I) 18,000
(*G) 10,000

NCI Consolidated
(875,000)
507,000
268,000
-0-

(20,000)

(695,000)
(80,000)
45,000
(730,000)

(280,000)
(60,000)
15,000
(325,000)

248,000
233,000
411,000

148,000
129,000
-0-

(S) 280,000
(D) 9,000

(D) 9,000

5-32

(G) 12,000
(S) 228,000
(A)174,000

6,000

(100,000)
20,000
(80,000)
(695,000)
(80,000)
45,000
(730,000)
396,000
350,000
-0-

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

(I) 18,000
Buildings (net)
Equipment (net)
Patents (net)
Customer list
Goodwill
Total assets
Liabilities
Common stock
Noncontrolling interest 1/1

308,000
220,000
-0-

1,420,000
(390,000)
(300,000)

202,000
86,000
20,000

(A) 63,000
(A) 42,000
(A)185,000

(E) 7,000
(E) 3,000

585,000
(160,000)
(100,000)

(550,000)
(300,000)

(S) 100,000
(S) 152,000
(A)116,000

Noncontrolling interest 12/31
Retained earnings, 12/31
(730,000)
Total liabilities and equities (1,420,000)

510,000
306,000
76,000
39,000
185,000
1,862,000

(325,000)
(585,000)

889,000

(268,000)
282,000

889,000

(282,000)
(730,000)
(1,862,000)

32. Investment balance and worksheet preparation—upstream sales, equity method
a. 2011 income reported by Sander
Excess patent fair value amortization ($350,000 ÷ 5 years)
Deferred gross profit for 12/31/11 intra-entity inventory (160,000 × 25%)
Recognized gross profit for 1/1/11 intra-entity inventory (125,000 × 28%)
Sander’s income adjusted
To controlling interest (80%)
To noncontrolling interest (20%)

Revenues
Cost of goods sold
Depreciation expense
Amortization expense
Interest expense
Equity earnings—Sander
Separate company
income

Plymouth
(1,740,000)
820,000

Sander
(950,000)
500,000

104,000
220,000
20,000
(124,000)

85,000
120,000
15,000

(700,000)

(230,000)

Adjustments
& Eliminations
(TI) 300,000
(G) 40,000 (TI)300,000
(*G) 35,000

$230,000
(70,000)
(40,000)
35,000
$155,000
$124,000
$31,000

NCI

Consolidated
(2,390,000)
1,025,000
189,000
410,000
35,000
0

(E) 70,000
(I) 124,000

Consolidated net income
to noncontrolling
interest
to controlling interest

(731,000)
(31,000)

Retained Earnings 1/1

(2,800,000)

(345,000)

Net income
Dividends paid
Retained earnings 12/31

(700,000)
200,000
(3,300,000)

(230,000)
25,000
(550,000)

5-33

(S) 310,000
(*G) 35,000

31,000
(700,000)
(2,800,000)

(D) 20,000

5,000

(700,000)
200,000
(3,300,000)

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Cash
Accounts receivable
Inventory
Investment in Sander

535,000
575,000
990,000
1,420,000

115,000
215,000
800,000
(D) 20,000

650,000
790,000
1,750,000

(G) 40,000
(S)968,000
(A)348,000
(I) 124,000

0

Buildings and equipment
Patents
Goodwill
Total Assets

1,025,000
950,000

863,000
107,000

5,495,000

2,100,000

1,888,000
1,197,000
225,000
6,500,000

Accounts payable
Notes payable
NCI in Sander 1/1

(450,000)
(545,000)

(200,000)
(450,000)

(650,000)
(995,000)

NCI in Sander 12/31
Common stock
APIC
Retained earnings 12/31
Total liab. and SE

(A) 210,000
(A) 225,000

(E) 70,000

(S)242,000
(A) 87,000
(900,000)
(300,000)
(3,300,000)
(5,495,000)

(800,000)
(100,000)
(550,000)
(2,100,000)

(329,000)
355,000

(S) 800,000
(S) 100,000
2,234,000

2,234,000

(355,000)
(900,000)
(300,000)
(3,300,000)
(6,500,000)

33. (50 Minutes) (Prepare consolidation entries for a combination where upstream
inventory transfers have occurred as well as downstream equipment transfers. Parent
has applied initial value method)
Consideration transferred ...............................
Noncontrolling interest fair value .....................
Subsidiary fair value at acquisition-date .........
Book value ..........................................................
Fair value in excess of book value ..................
Excess fair value assignments ....................
to building .....................................................
to franchise agreements .............................

$665,000
285,000
$950,000
(800,000)
$150,000

Annual Excess
Life
Amortizations
50,000 5 yrs.
$10,000
100,000 10 yrs.
10,000
-0$20,000

Inventory Transfers (Upstream)
2010 gross profit deferred until 2011 ($12,000 × 30%) .................

$3,600

2011 gross profit deferred until 2012 ($18,000 × 30%) .................

$5,400

Equipment Transfer (Downstream)
Unrealized gain as of January 1, 2011:
Unrealized gain on transfer (1/1/10) ........................................
2010 excess depreciation ($36,000 ÷ 6 yrs.) ...........................
Unrealized gain January 1, 2011 ....................................................

$36,000
(6,000)
$30,000

Excess depreciation—2011 ($36,000 ÷ 6 yrs.) .............................

$6,000

5-34

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Entry *G
Retained Earnings, 1/1/11 (Young) .....................
Cost of Goods Sold ........................................

3,600
3,600

To recognize upstream intra-entity inventory gross profit deferred from
previous year.
Entry *TA
Retained Earnings, 1/1/11 (Monica) ...................
Equipment ($50,000 – $36,000) ...........................
Accumulated Depreciation ($50,000 – $6,000)

30,000
14,000
44,000

To return equipment accounts to beginning book value based on historical
cost and to remove unrealized gain from beginning retained earnings.
33. (continued)
Entry *C
Investment in Young ......................................
Retained Earnings, 1/1/11 (Monica) .........

123,480
123,480

Because the parent uses the initial value method, its retained earnings must
be adjusted for the subsidiary's increase in book value less excess
amortizations and upstream profits during 2009–2010 as follows.
Retained earnings of Young, December 31, 2011 (given)
$740,000
Eliminate income and dividends of Young
($160,000 – $50,000) ............................................
(110,000)
Retained earnings of Young, December 31, 2010 ..
630,000
Removal of unrealized gross profit (Entry *G) .......
(3,600)
Realized retained earnings of Young,
December 31, 2010 ...............................................
626,400
Retained earnings at date of acquisition ................
(410,000)
Increase in retained earnings during 2009–2010 ....
216,400
Ownership percentage .............................................
70%
Income accrual to be recognized ............................
151,480
Excess amortization for 2009–2010 ($20,000 × 70%× 2 yrs.) (28,000)
ENTRY *C ADJUSTMENT (above) ...........................
$123,480
Entry S
Common Stock (Young) ......................................
Additional Paid-in Capital (Young) .....................
Retained Earnings, 1/1/11
(Young) (adjusted for *G) ...............................
Investment in Young (70%) ......................
Noncontrolling Interest in Young (30%) ..

5-35

300,000
90,000
626,400
711,480
304,920

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

To eliminate stockholders' equity accounts of subsidiary and recognize
noncontrolling interest; amount of retained earnings was previously reduced to
realized balance by Entry *G. The $626,400 figure is computed above.
Entry A
Franchise Agreement ...........................................
80,000
Buildings ..............................................................
30,000
Investment in Young ......................................
77,000
Noncontrolling Interest in Young (30%) .......
33,000
To recognize amount paid within acquisition price for buildings and the
franchise agreement. Balances have been reduced by two years of excess
amortizations.
33. (continued)
Entry I
Dividend Income ..................................................
35,000
Dividends Paid ................................................
35,000
To eliminate Intra-entity dividend payments recorded by parent as income
since initial value method is used.
Entry E
Depreciation Expense ..........................................
10,000
Amortization Expense .........................................
10,000
Franchise Agreement .....................................
Buildings ..........................................................
To recognize current year excess amortization expense.

10,000
10,000

Entry Tl
Sales .....................................................................
90,000
Cost of Goods Sold (or Purchases) ..............
90,000
To remove intra-entity inventory transfers made during the current year.
Entry G
Cost of Goods Sold (or Ending Inventory) ........
5,400
Inventory ..........................................................
5,400
To defer unrealized gross profit on 2011 intra-entity inventory transfers
(computed above).
Entry ED
Accumulated Depreciation ..................................
6,000
Depreciation Expense ....................................
6,000
To remove current year depreciation on transferred item since its historical
cost has been fully depreciated.
Noncontrolling Interest's Share of Subsidiary's Net Income
Reported income of Young (given) ....................................
$160,000

5-36

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Excess fair value amortization ...........................................
(20,000)
Recognition of 2010 unrealized gross profit (Entry *G) ...
3,600
Deferral of 2011 unrealized gross profit (Entry G) (upstream) (5,400)
Realized income of Young ..................................................
$138,200
Outside ownership percentage ..........................................
30%
Noncontrolling interest in subsidiary’s income ...............
$41,460
34.

(35 Minutes) (Consolidation entries with upstream Inventory transfers and
downstream equipment transfers. Parent uses equity method)
Entry *G (Same as Entry *G in Problem 33.)
Entry *TA
Investment in Young ............................................
30,000
Equipment ............................................................
14,000
Accumulated Depreciation ............................
44,000
To return equipment account to its book value based on historical cost.
Because the parent uses the equity method and the transfer is downstream,
the unrealized gain has already been removed from the parent's retained
earnings. Thus, the remaining gain is eliminated here from the Investment
account rather than from retained earnings.
Entry *C (No Entry *C is needed because equity method has been applied.)
Entry S (Same as Entry S in Problem 33.)
Entry A (Same as Entry A in Problem 33.)
Entry I
Investment Income ..............................................
Investment in Young ......................................
To eliminate intra-entity income accrual.

102,740
102,740

Reported income of Young (given) ............................................ $160,000
Excess fair value amortization ...................................................
(20,000)
Recognition of 2010 unrealized gross profit (Entry *G) ............
3,600
Deferral of 2011 unrealized gross profit (Entry G) (upstream) .
(5,400)
Realized income of Young .......................................................... $138,200
Outside ownership percentage ..................................................
70%
Monica’s share of Young’s realized income .............................. $96,740
Depreciation adjustment for asset transfer gain .......................
6,000
Equity accrual for 2011 ........................................................... $102,740
Entry D
Investment in Young ............................................
Dividends Paid ................................................
To eliminate intra-entity dividend transfers.
Entry E (Same as Entry E in Problem 33.)

5-37

35,000
35,000

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Entry TI (Same as Entry Tl in Problem 33.)
Entry G (Same as Entry G in Problem 33.)
Entry ED (Same as Entry ED in Problem 33.)
Noncontrolling interest in subsidiary’s income (Same as in Problem 33.)
35.

(60 Minutes) (Consolidation worksheet for combination with upstream inventory
transfers and downstream transfer of land. Also asks about transfer of a building.
Parent uses partial equity method.)
Consideration transferred ...............................
Noncontrolling interest fair value .....................
Subsidiary fair value at acquisition-date .........
Book value ..........................................................
Fair value in excess of book value ..................
Excess fair value assignment .....................
to customer list .............................................

$570,000
380,000
$950,000
(850,000)
$100,000

Annual Excess
Life
Amortizations
100,000 20 yrs.
$5,000
-0-

a. CONSOLIDATION ENTRIES
Entry *TL
Retained Earnings, 1/1/11 (Gibson) ..............
40,000
Land ...........................................................
40,000
To remove unrealized gain on Intra-entity downstream transfer of land made
in 2010.
Entry *G
Retained Earnings, 1/1/11 (Keller) .................
10,000
Cost of Goods Sold ...................................
10,000
To defer unrealized upstream Inventory gross profit from 2010 until 2011
computed as the 2010 ending inventory balance of $30,000 (20% × $150,000)
multiplied by 33-1/3% gross profit rate ($50,000 ÷ $150,000).
Entry *C
Retained earnings, 1/1/11 (Gibson) ...............
Investment in Keller ..................................

9,000
9,000

Parent is applying the partial equity method as can be seen by the amount
in the Income of Keller Company account (60 percent of the reported
balance). Thus, the parent’s share of amortization of $3,000 ($100,000
divided by 20 years × 60%) must be recognized for the previous year 2010.
In addition, the equity accrual recorded by the parent has been based on
Keller's reported income. As shown in Entry *G, $10,000 of that reported
income has not actually been realized as of January 1, 2011. Thus, the

5-38

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

previous accrual must be reduced by $6,000 to mirror the parent's 60% ownership.
The total of the two adjustments being made here is $9,000.
35. (continued)
Entry S
Common Stock (Keller) ..................................
320,000
Additional Paid-in Capital ..............................
90,000
Retained earnings, 1/1/11 (Keller) (adjusted
for Entry *G) ...............................................
610,000
Investment in Keller (60%) ..................
612,000
Noncontrolling Interest in Keller, 1/1/11 (40%)
408,000
To remove stockholders' equity accounts of Keller and recognize beginning
noncontrolling interest. Retained earnings balance has been adjusted in
Entry *G.
Entry A
Customer List ..................................................
95,000
Investment in Keller ..................................
Noncontrolling Interest in Keller, 1/1/11 (40%)

57,000
38,000

To recognize amount paid within acquisition price for the customer list.
Original balance is adjusted for previous year’s amortization.
Entry I
Income of Keller .............................................
Investment in Keller ..................................
To eliminate intra-entity income accrual.

84,000
84,000

Entry D
Investment in Keller .......................................
36,000
Dividends Paid ..........................................
36,000
To eliminate intra-entity dividend transfers—60% of subsidiary's payment.
Entry E
Amortization Expense .....................................
5,000
Customer List ............................................
To recognize current period excess amortization expense.
Entry P
Liabilities ..........................................................
Accounts Receivable ................................
To eliminate intra-entity debt.
Entry Tl
Sales .................................................................

5-39

5,000

40,000
40,000

200,000

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Cost of Goods Sold ...................................
To eliminate current year intra-entity inventory transfer.

200,000

Entry G
Cost of Goods Sold ........................................
12,000
Inventory .....................................................
12,000
To defer 2011 unrealized inventory gross profit. Unrealized gain is the
ending inventory of $40,000 (20% of $200,000) multiplied by 30% gross profit
rate ($60,000 ÷ $200,000).
Noncontrolling Interest in Keller's Net Income
Keller reported net income .................................
$140,000
Excess fair value amortization ...........................
(5,000)
2010 Intra-entity gross profit realized in 2011 (inventory) 10,000
2011 Intra-entity gross profit deferred (inventory)
(12,000)
Keller realized income 2011 .................................
$133,000
Outside ownership percentage ..........................
40%
Noncontrolling interest in Keller's net income
$53,200

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Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

35. a. (continued)

Accounts
Sales
Cost of goods sold
Operating expenses
Income of Keller
Separate company net income
Consolidated net income
To noncontrolling interest
To parent
RE, 1/1/11—Gibson

GIBSON AND KELLER
Consolidation Worksheet
Year Ending December 31, 2011
Gibson
(800,000)
500,000
100,000
(84,000)
(284,000)

(53,200)
(1,116,000)

RE, 1/1/11—Keller
Net income (above)
Dividends
Retained earnings, 12/31/11
Cash
Accounts receivable
Inventory
Investment in Keller

Land
Buildings and equipment (net)
Customer List
Total assets
Liabilities
Common stock
Additional paid-in capital
Retained earnings, 12/31/11
NCI in Keller, 1/1/11
NCI In Keller, 12/31/11
Total liabilities and equity

Consolidation Entries Noncontrolling
Keller
Debit
Credit
Interest
(500,000) (TI) 200,000
300,000 (G) 12,000
(*G) 10,000
(TI) 200,000
60,000 (E)
5,000
-0(I)
84,000
(140,000)

(284,000)
115,000
(1,285,000)
177,000
356,000
440,000
726,000

(*TL) 40,000
(*C)
9,000
(620,000) (*G) 10,000
(S) 610,000
(140,000)
60,000
(700,000)
90,000
410,000
320,000
(D) 36,000

180,000
496,000

390,000
300,000

2,375,000
(480,000)
(610,000)

1,510,000
(400,000)
(320,000)
(90,000)
(700,000)

(A)

(1,285,000)

95,000

(D)

36,000

(P) 40,000
(G) 12,000
(*C)
9,000
(S) 612,000
(I)
84,000
(A) 57,000
(*TL) 40,000
(E)

165,000
-0(333,000)
53,200
(279,800)
(1,067,000)

(279,800)
115,000
(1,231,800)
267,000
726,000
748,000
-0-

530,000
796,000
90,000
3,157,000
(840,000)
(610,000)

5,000

(P) 40,000
(S) 320,000
(S) 90,000

(1,231,800)
(S) 408,000
(A) 38,000

(2,375,000)

24,000

Consolidated
Totals
(1,100,000)
602,000

(1,510,000)

5-41

(408,000)
(38,000)
475,200

(475,200)
(3,157,000)

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

35. (continued)
b. If the intra-entity transfer had been a building rather than land, two
adjustments to the consolidation entries would be needed. Entry *TL
would be changed and relabeled as Entry *TA and an Entry ED would be
added to eliminate the overstatement of depreciation expense for 2011.
All other consolidation entries would be the same as shown in Part a.
As a downstream transfer, entries *C and S are not affected.
Entry *TA
Retained Earnings, 1/1/11 (Gibson) ..............
36,000
Buildings ........................................................
40,000
Accumulated Depreciation ......................
76,000
To defer unrealized gain ($40,000 original amount less one year of
excess depreciation at $4,000 per year) as of beginning of year. Entry
also returns Buildings account to historical cost (from $100,000 to
$140,000) and Accumulated Depreciation account to historical cost
(original $80,000 less one year of excess depreciation at $4,000).
Because the Buildings account is shown at net value in the
information given in this problem, the above entry would probably be
made as follows:
Entry *TA (Alternative)
Retained Earnings, 1/1/11 (Gibson) ..............
Buildings (net) ..........................................

36,000
36,000

Entry ED
Accumulated Depreciation ............................
4,000
Operating (or Depreciation) Expense .....
4,000
To remove excess depreciation for current year created by transfer
price. Excess depreciation for each year would be $4,000 based on
allocating the $60,000 historical cost book value over 10 years
($6,000 per year) rather than the $100,000 transfer price ($10,000 per
year).
36.

(40 Minutes) (Prepare consolidation worksheet with intra-entity transfer of
inventory and land. No outside ownership exists)
a. Skyline reported income............................................................
Patented technology amortization ............................................
Beginning inventory gross profit recognized ..........................
Ending inventory gross profit deferred ....................................
Deferral of land gain on sale .....................................................

5-42

$(88,000)
15,000
(14,400)
14,000
18,000

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Equity in Skyline’s earnings ......................................................
b. Acquisition-Date Fair Value Allocation
Consideration transferred (fair value of shares issued) ........
Book value of subsidiary ..........................................................
Fair value in excess of book value ..........................................
Excess fair over book value assigned to:
Trademarks (indefinite life) ...................................................
Patented technology ..............................................................
Life of patented technology ..................................................
Annual amortization ..................................................................

$(55,400)

$450,000
300,000
$150,000
30,000
$120,000
8 years
$15,000

Unrealized Upstream Inventory Gross Profit, 1/1
Inventory being held ($50,000 × 72%) ......................................
Gross profit rate ($20,000 ÷ $50,000) .......................................
Unrealized gross profit, 1/1 ......................................................

$36,000
40%
$14,400

Unrealized Upstream Inventory Gross Profit, 12/31
Inventory being held (given) .....................................................
Gross profit rate ($40,000 ÷ $80,000) .......................................
Unrealized gross profit, 12/31 ...................................................

$28,000
50%
$14,000

CONSOLIDATION ENTRIES
Entry *G
Retained earnings 1/1 (Skyline) .........................
14,400
Cost of goods sold ........................................
14,400
To remove impact of beginning unrealized gross profit. Amount
computed above.
Entry S
Common stock (Skyline) ....................................
120,000
Additional paid-in capital (Skyline) ....................
30,000
Retained earnings 1/1 (Skyline, adjusted) ........
277,600
Investment in Skyline .....................................
427,600
To remove stockholders' equity accounts of subsidiary. Retained
earnings is adjusted for elimination of beginning unrealized gross profit
in Entry *G.
36. (continued)
Entry A
Trademarks ..........................................................
Patented technology ...........................................
Investment in Skyline ....................................

5-43

30,000
105,000
135,000

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

To recognize excess fair value allocations as of 1/1. Patented
technology is adjusted for 4 prior years of amortization at $15,000 per
year.
Entry I
Investment income ..............................................
55,400
Investment in Skyline ....................................
55,400
To remove intra-entity income accrued by parent using the equity
method.
Entry D
Investment in Skyline ..........................................
Dividends distributed ....................................
To eliminate Intra-entity dividend payments.

20,000
20,000

Entry E
Other operating expenses ...................................
15,000
Patented technology ......................................
15,000
To recognize current year amortization expense on patented technology
Entry Tl
Revenues .............................................................
80,000
Cost of goods sold ........................................
To eliminate intra-entity inventory transfer for current year.

80,000

Entry G
Cost of goods sold ..............................................
14,000
Inventory ..........................................................
14,000
To defer unrealized inventory gross profit. Amount is computed above.
Entry TL
Gain on sale of land ............................................
18,000
Land ................................................................
18,000
To remove gain from intra-entity transfer of land during current year.
Entry P
Accounts payable ................................................
Accounts receivable .......................................
To remove intra-entity payable and receivable.

5-44

65,000
65,000

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

36. (continued)

Accounts
Revenues
Cost of goods sold

PARKWAY AND SKYLINE
Consolidation Worksheet
Year Ending December 31, 2011
Parkway
(627,000)
289,000

Skyline
(358,000)
195,000

Other operation expenses
Gain on sale of land
Investment income
Net income

170,000
(18,000)
(55,400)
(241,400)

(88,000)

Retained earnings 1/1

(314,600)

(292,000)

Net income (above)
Dividends distributed
Retained earnings 12/31

(241,400)
70,000
(486,000)

(88,000)
20,000
(360,000)

134,000
281,000
598,000

150,000
112,000

Cash and receivables
Inventory
Investment in Skyline

Trademarks
Patented technology
Land, buildings, and equipment (net)
Total assets
Liabilities
Common stock
Additional paid-in capital
Retained earnings (above)
Total liabilities & stockholders’ equity

75,000

Consolidation Entries
Debit
Credit
(TI) 80,000
(G) 14,000
(TI) 80,000
(*G) 14,400
(E) 15,000
(TL) 18,000
(I) 55,400

(*G) 14,400
(S) 277,600
(D) 20,000

(D)

20,000

(A) 30,000
(A) 105,000

637,000
1,650,000

50,000
130,000
283,000
725,000

(463,000)
(410,000)
(291,000)
(486,000)
(1,650,000)

(215,000)
(120,000)
(30,000)
(360,000)
(725,000)

(P) 65,000
(S) 120,000
(S) 30,000

5-45

(P) 65,000
(G) 14,000
(S) 427,600
(A) 135,000
(I) 55,400
(E) 15,000
(TL) 18,000

Consolidated
Totals
(905,000)
403,600
260,000
-0-0(241,400)
(314,600)
-0(241,400)
70,000
(486,000)
219,000
379,000
-080,000
220,000
902,000
1,800,000
(613,000)
(410,000)
(291,000)
(486,000)
(1,800,000)

Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Chapter 5 Excel Case Solution
Excel Case

Equity in Shawn Co. Earnings
2010
78,000
El profit
(34,200)
Amortization
(12,600)
Equity earnings
31,200

Fair Value Allocation Schedule 1/1/2010
Consideration transferred 1,000,000
C.S.
500,000
R.E.
185,000
685,000 Life Amort. 2011
Tradename
315,000 25 12,600 BI profit
Inventory
El profit
Shawn sells
GPR
remaining
Amortization
to Patrick
60%
30%
Equity earnings
Intra-entity Inventory Transfers (upstream)
Sales
Inventory
Intra. profit
2010
190,000
57,000
34,200
2011
210,000
63,000
37,800

Investment account
Cost
2010
Equity earnings
dividends
12/31/10
2011
12/31/11

Equity earnings
dividends

1,000,000
31,200
(25,000)
1,006,200
68,800
(27,000)
1,048,000

Shawn Co. dividends
2010
25,000
2011
27,000

Consolidation Adjustments
*G RE-Shawn
34,200
COGS
34,200
S Common stock-Shawn
500,000
RE-Shawn
203,800
Investment in Shawn
703,800
A Tradename
302,400
Investment in Shawn
302,400
I

Equity in earnings of Shawn 68,800
Investment in Shawn
68,800

D Investment in Shawn
Dividends paid

27,000

E Amortization expense
Tradename

12,600

IT Sales
COGS
G COGS
Inventory
Investment account goes to zero? 0

5-46

85,000
34,200
(37,800)
(12,600)
68,800

27,000

12,600
210,000
210,000
37,800
37,800

Chapter 05 - Consolidated Financial Statements Intra-Entity Asset Transactions

Analysis and Research—Accounting Information and Salary Negotiations
a. With common control over related enterprises, a consolidated income statement better
portrays economic reality. For example, it is likely that the Stadium’s concession and parking
revenues would have been less if the team did not play there. Additionally, the $1,400,000
rent expense does not represent an arm’s length transaction—given that the $1,400,000 is
the only rent revenue, it appears that the stadium is used exclusively for baseball with its
fortunes intertwined with the team.
Searching SFAS 160 “separate statements” and then “intra-entity” yields the following
relevant support:
There is a presumption that consolidated financial statements are more meaningful
than separate financial statements and that they are usually necessary for a fair
presentation when one of the entities in the consolidated group directly or indirectly
has a controlling financial interest in the other entities. [SFAS 160, ¶1]
In the preparation of consolidated financial statements, intra-entity balances and
transactions shall be removed. This includes intra-entity open account balances,
security holdings, sales and purchases, interest, dividends, etc. As consolidated
financial statements are based on the assumption that they represent the financial
position and operating results of a single economic entity, such statements shall not
include gain or loss on transactions among the entities in the consolidated group.
[SFAS 160, ¶6]
Granger Eagles Team and Stadium
Consolidated Income Statement
Ticket revenues
Concession revenue
Parking revenue

$2,000,000
800,000
100,000

Ticket expense
Promotion
COGS
Depreciation
Player salaries
Staff salaries
Consolidated net income

25,000
35,000
250,000
80,000
400,000
350,000

$2,900,000

1,140,000
$1,760,000

b. Other pertinent factors include
 Any available comparisons for the market values for the players
 The market value of any alternative uses for the stadium
 The amount the owners have invested in the team
 The amount the owners have invested in the stadium
 Fair rates of return for the owners’ investments in the team and the stadium

5-47