Chapter 05 Advanced Accounting Solutions

CHAPTER 5
CONSOLIDATED FINANCIAL STATEMENTS INTERCOMPANY ASSET TRANSACTIONS

Answers to Discussion Questions
Earnings Management
By selling goods to special purpose entities that it controlled but did not consolidate, did Enron
overstate its earnings?
According to the Power’s Report (Report of Investigation by the Special Investigative Committee of
the Board of Directors of Enron Corp.—February 1, 2004)
These partnerships—Chewco, LJM1, and LJM2—were used by Enron Management
to enter into transactions that it could not, or would not, do with unrelated
commercial entities. Many of the most significant transactions apparently were
designed to accomplish favorable financial statement results,
not to achieve bona fide economic objectives or to transfer risk. (page 4)
Assuming Enron controlled LJM2, the transactions that produced the $67 million gain and the $20.3
million agency fee were not arm’s length and thus did not provide a proper basis for recognizing
income.
What effect does consolidation have on the financial reporting for transactions with controlled
entities?
In consolidation, all intercompany profit would have been deferred until the goods were sold to an
outside party. Also the intercompany note receivable and payable would have been eliminated in
consolidation.
As noted by Bala Dahran in his February 6, Congressional Testimony
Despite their potential for economic and business benefits, the use of SPEs has
always raised the question of whether the sponsoring company has some other
accounting motivations, such as hiding of debt, hiding of poor-performing assets, or
earnings management. Additionally, explosive growth in the use of SPEs led to
debates among managers, auditors and accounting standard setters as to whether
and when SPEs should be consolidated. This is because the intended accounting
effects of SPEs can only be achieved if the SPEs are reported as unconsolidated
entities separate from the sponsoring entity.
FASB Activity on Special Purpose Entities
Fortunately the FASB’s Interpretation 46R Consolidation of Variable Interest Entities explains how to
identify an SPE that is not subject to control through voting ownership interests, but is nonetheless
controlled by another enterprise and therefore subject to consolidation. The FASB requires each
enterprise involved with an SPE to determine whether the financial support provided by that
enterprise makes it the primary beneficiary of the SPE’s activities. The primary beneficiary of the
SPE would then be required to include the assets, liabilities, and results of the activities of the SPE
in its consolidated financial statements.
What Price Should We Charge Ourselves?
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Transfer pricing is actually a topic for a managerial accounting discussion. Students, though, need
to be aware that managerial and financial accounting do overlap at times. In this illustration, the
price set by company officials for this component will affect the specific consolidation procedures
needed in the preparation of financial statements for external reporting purposes.
Since Slagle owns 100 percent of Harrison's common stock, consolidated net income will not be
altered by the transfer pricing decision. All intercompany transactions as well as unrealized profits
will be eliminated entirely. However, because the sales are upstream, if a noncontrolling interest had
been present, the portion of the subsidiary's income attributed to these outside owners would be
influenced by the markup. Both the noncontrolling interest figure on the balance sheet and on the
income statement are impacted by the amount of profits that remain unrealized when transactions
are from subsidiary to parent.
To the accountant, the easiest approach is to set the transfer price at the seller's cost ($70.00 in this
case). No intercompany profits are created and the consolidation process is less complicated.
However, as indicated in the narrative, that price may penalize the seller since no profits are
recognized by that profit center. In addition, the buyer will then show artificially inflated income.
Thus, some amount of profit is usually built into transfer pricing decisions. Those students who have
already completed cost/managerial accounting can be asked to describe the various factors that
should influence the establishment of this price. Interaction between accounting courses is beneficial
to the students.

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Answers to Questions
1.

2.

3.

4.

5.

6.

7.

One reason for the significant volume and frequency of intercompany transfers is that many
business combinations are specifically organized so that the companies can provide
products for each other. This design is intended to benefit the business combination as a
whole because of the economies provided by vertical integration. In effect, more profit can
often be generated by the combination if one member is able to buy from another rather than
from an outside party.
The sales between Barker and Walden totaled $100,000. Regardless of the ownership
percentage or the markup, the $100,000 was simply an intercompany asset transfer. Thus,
within the consolidation process, the entire $100,000 should be eliminated from both the
Sales and the Purchases (Inventory) accounts.
Sales price per unit ($900,000 ÷ 3,000 units)
$ 300
Number of units in Safeco’s ending inventory
× 500
Intercompany inventory at transfer price
$150,000
Gross profit rate (.6 ÷ 1.6)
.375
Intercompany profit in ending inventory
$56,250
In intercompany transactions, a transfer price is often established that exceeds the cost of
the inventory. Hence, the seller is recording a gross profit on its books that, from the
perspective of the business combination as a whole, remains unrealized until the asset is
consumed or sold to an outside party. Any unrealized gross profit on merchandise still held
by the buyer must be eliminated whenever consolidated financial statements are produced.
For the year of transfer, this consolidation procedure is carried out by removing the
unrealized gross profit from the inventory account on the balance sheet and from the ending
inventory balance within cost of goods sold. In the year following the transfer (if the goods
are resold or consumed), the unrealized gross profit must again be eliminated within the
consolidation process. This second reduction is made on the worksheet to the beginning
inventory component of cost of goods sold as well as to the beginning retained earnings
balance of the original seller. The gross profit is then moved into the year of realization. If the
transfer was downstream in direction and the parent company has applied the equity
method, the adjustment in the subsequent year must be made to the equity in subsidiary
earnings account rather than to retained earnings.
On the individual financial records of James, Inc., a gross profit is recorded in the year of
transfer. From the viewpoint of the business combination, this gross profit is actually earned
in the period in which the products are sold or consumed by Matthews Co. An initial
consolidation entry must be made in the year of transfer to defer any gross profit that
remains unrealized. A second entry must be made in the following time period to allow the
gross profit to be recognized in the year of its ultimate realization.
Currently, no official accounting pronouncement answers the question as to the relationship
between unrealized intercompany profits and noncontrolling interest values, although the
issue has been under study by the FASB. This textbook reasons that unrealized profits relate
to the seller and to the computation of the seller's income. Therefore, any unrealized profits
created by upstream transfers (from subsidiary to parent) are attributed to the subsidiary.
The effects resulting from the deferral and eventual recognition of these intercompany profits
are considered to have an impact on the calculation of noncontrolling interest balances. In
contrast, unrealized profits from downstream transfers are viewed as relating solely to the
parent (as the seller) and, thus, have no effect on the noncontrolling interest.
The basic consolidation process does not differ between downstream and upstream
transfers. Sales and purchases (Inventory) balances created by the transactions must be

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8.

9.

10.

11.

eliminated in total. Any unrealized gross profits remaining at the end of a fiscal period are
deferred until ultimately earned through sale or consumption of the assets.
The direction of intercompany transfers (upstream versus downstream) does have one effect
on consolidated financial statements. In computing noncontrolling interest balances (if
present), the deferral of unrealized gross profits on upstream sales is taken into account.
Downstream sales, however, are attributed to the parent and are viewed as having no impact
on the outside interest.
The computation of this noncontrolling interest balance is dependent on the direction of the
intercompany transactions that is not indicated in this question. If the unrealized gross profits
were created by downstream sales from King to Pawn, they relate only to King. The
noncontrolling interest in the subsidiary's net income is not affected and would be $11,000
($110,000 × 10%). In contrast, if the transfers were upstream from Pawn to King, the
deferral and recognition of the profits are attributed to Pawn. Pawn's "realized" income would
be $80,000 and the noncontrolling interest's share of the subsidiary's income is reported as
$8,000:
Pawn's reported income ...............................................
$110,000
Recognition of prior year unrealized gross profit ..........
30,000
Deferral of current year unrealized gross profit ............
(60,000)
Pawn's realized income ...............................................
$80,000
Outside ownership percentage ....................................
10%
Noncontrolling interest in subsidiary's income ...............
$ 8,000
The deferral and subsequent recognition of intercompany profits are allocated to the
noncontrolling interest in the same periods as the parent. When one affiliate sells to another
affiliate, ownership does not change and therefore the underlying profit is deferred. When
the purchasing affiliate subsequently sells the inventory to an entity outside the affiliated
group, ownership changes, and the profit may be recognized. Intercompany profits are not
really eliminated, but simply deferred until a sale to an outsider takes place.
Several differences can be cited that exist between the consolidated process applicable to
inventory transfers and that which is appropriate for land transfers. The total intercompany
Sales balance is offset against Purchases (Inventory) when inventory is transferred but no
corresponding entry is needed when land is involved. Furthermore, in the year of the sale,
ending unrealized inventory gross profits are eliminated through an adjustment to cost of
goods sold but a specific gross profit account exists (and must be removed) when land has
been sold. Finally, unrealized inventory gross profits are usually expected to be realized in
the year following the transfer. This effect is mirrored in that period by reduction of the
beginning inventory figure (within cost of goods sold). For land transfers, however, the
unrealized gain must be repeatedly deferred in each fiscal period for as long as the land
continues to be held within the business combination.
As long as the land is held by the parent, its recorded value must be reduced to historical
cost within each consolidated set of financial statements. In the year of the original transfer,
the asset reduction is offset against the subsidiary's recorded gain. For all subsequent years
in which the property is held, the credit to the Land account is made against the beginning
retained earnings balance of the subsidiary (since the unrealized gain will have been closed
into that account).
According to this question, the land is eventually sold to an outside party. The intercompany
gain (which has been deferred in each of the previous years) is realized by the sale and
should be recognized in the consolidated statements of this later period.
Because the transfer was upstream from subsidiary to parent, the above consolidated
entries will also affect any noncontrolling interest balances being reported. Because of the

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12.

13.

deferral of the intercompany gross profit, the realized income balances applicable to the
subsidiary will be less than the reported values. In the year of resale, however, the realized
income for consolidation purposes is higher than reported. All noncontrolling interest totals
are computed on the realized balances rather than the reported figures.
Depreciable assets are often transferred between the members of a business combination at
amounts in excess of book value. The buyer will then compute depreciation expense based
on this inflated transfer price rather than on an historical cost basis. From the perspective of
the business combination, depreciation should be calculated solely on historical cost figures.
Thus, within the consolidation process for each period, adjustment of the depreciation (that is
recorded by the buyer) is necessary to reduce the expense to a cost-based figure.
From the viewpoint of the business combination, an unrealized gain has been created by the
intercompany transfer and must be eliminated whenever consolidated financial statements
are produced. This unrealized gain is closed by the seller into retained earnings
necessitating subsequent reductions to that account. In the individual financial records,
however, another income effect is created which gradually reduces the overstatement of
retained earnings each period. The asset will be depreciated by the buyer based on the
inflated transfer price. The resulting expense will be higher than the amount appropriate to
the historical cost of the item. Because this excess depreciation is closed into retained
earnings annually, the overstatement of the equity account is gradually reduced to a zero
balance over the life of the asset.

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Answers to Problems
1. C
2. B Inventory remaining $100,000 × 50% = $50,000 Unrealized gross profit (based
on Lee's markup as the seller) $50,000 × 40% = $20,000. The ownership
percentage has no impact on this computation.
3. A
4. C UNREALIZED GROSS PROFIT, 12/31/09
Intercompany Gross profit ($100,000 – $75,000) .........................
Inventory Remaining at Year's End ..............................................
Unrealized Intercompany Gross profit, 12/31/09 .........................

$25,000
16%
$4,000

UNREALIZED GROSS PROFIT, 12/31/10
Intercompany Gross profit ($120,000 – $96,000) .........................
Inventory Remaining at Year's End ..............................................
Unrealized Intercompany Gross profit, 12/31/10 .........................

$24,000
35%
$8,400

CONSOLIDATED COST OF GOODS SOLD
Parent balance ..........................................................................
Subsidiary Balance ...................................................................
Remove Intercompany Transfer ..............................................
Recognize 2009 Deferred Gross profit ....................................
Defer 2010 Unrealized Gross profit .........................................
Cost of Goods Sold ........................................................................

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

5. A Intercompany 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 markup 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. 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 markup percentage 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).

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7. B UNREALIZED GROSS PROFIT, 12/31/09
Ending inventory .......................................................................
Markup ($33,000/$110,000) .......................................................
Unrealized intercompany gross profit, 12/31/09 ....................

$40,000
30%
$12,000

UNREALIZED GROSS PROFIT, 12/31/10
Ending inventory .......................................................................
Markup ($48,000/$120,000) .......................................................
Unrealized intercompany gross profit, 12/31/10 ....................

$50,000
40%
$20,000

NONCONTROLLING INTEREST IN SUBSIDIARY'S INCOME
Reported income for 2010 ........................................................
Realized gross profit deferred in 2009 ....................................
Deferral of 2010 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
12/31/09
Machinery—$40,000
Gain—$10,000
Depreciation expense $8,000 ($40,000/5 years)
Income effect net—$2,000 ($10,000 – $8,000)
12/31/10
Depreciation expense—$8,000
Consolidated Figures—Historical Cost
12/31/09
Machinery—$30,000
Depreciation expense—$6,000 ($30,000/5 years)
12/31/10
Depreciation expense--$6,000
Adjustments for Consolidation Purposes:
2009: $2,000 income is reduced to a $6,000 expense (income is reduced
by $8,000)
2010: $8,000 expense is reduced to a $6,000 expense (income is increased
by $2,000)

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9. B UNREALIZED GAIN
Transfer Price ............................................................................
Book Value (cost after two years of depreciation) .................
Unrealized Gain .........................................................................

$280,000
240,000
$40,000

EXCESS DEPRECIATION
Annual Depreciation Based on Cost ($300,000/10 years) ......
Annual Depreciation Based on Transfer Price
($280,000/8 years) ................................................................
Excess Depreciation .................................................................

$30,000
35,000
$5,000

ADJUSTMENTS TO CONSOLIDATED NET INCOME
Defer Unrealized Gain ..............................................................
Remove Excess Depreciation ..................................................
Decrease to Consolidated Net Income ...................................

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

10. D Add the two book values and remove $100,000 intercompany transfers.
11. C Intercompany gross profit ($100,000 - $80,000) ..........................
Inventory remaining at year's end ................................................
Unrealized intercompany gross profit ..........................................

$20,000
60%
$12,000

CONSOLIDATED COST OF GOODS SOLD
Parent balance ..........................................................................
Subsidiary balance ...................................................................
Remove intercompany 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

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

$260,000
65,000
$325,000
(250,000)
$75,000
Life

Annual Excess
Amortizations

Excess fair value assigned to undervalued assets:
Equipment ..................................................
25,000 5 years
Secret Formulas ........................................
$50,000 20 years
Total ...............................................................
-0-

$5,000
2,500
$7,500

Consolidated Expenses = $37,500 (add the two book values and include
current year amortization expense)

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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 original allocation ($25,000) 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.
Intercompany Gross profit ($100,000 – $80,000) .........................
Inventory Remaining at Year's End ..............................................
Unrealized Intercompany Gross profit, 12/31 ..............................
16.

$20,000
60%
$12,000

(15 Minutes) (Determine selected consolidated balances; includes inventory
transfers and an outside ownership.)
Customer list amortization = $65,000/5 years = $13,000 per year
Intercompany Gross profit ($160,000 – $120,000) .......................
Inventory Remaining at Year's End ...............................................
Unrealized Intercompany 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
intercompany transfer)

!

Cost of Goods Sold = $548,000 (add the two book values and subtract the
intercompany 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)

!

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.

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17.

(60 minutes) (Downstream intercompany 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

2009 Ending Inventory Profit Deferral
!
!
!

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

2010 Ending Inventory Profit Deferral
!
!
!

Cost = $120,000 ÷ 1.6 = $75,000
Intercompany Gross profit = $120,000 – $75,000 = $45,000
Ending inventory gross profit = $45,000 × 40% = $18,000

a. Investment account:
Consideration transferred, January 1, 2009
Smashing’s 2009 income × 80%
$120,000
Covenant amortization (13,750 × 80%)
(11,000)
Ending inventory profit deferral (100%)
(15,000)
Equity in Smashing’s earnings
2009 dividends
Investment balance 12/31/09

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

Smashing’s 2010 income × 80%
Covenants amortization (13,750 × 80%)
Beginning inventory profit recognition
Ending inventory profit deferral (100%)
Equity in Smashing’s earnings
2010 dividends
Investment balance 12/31/10

90,000
(36,000)
$1,100,000

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$980,000

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

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17. (continued)
b. 12/31/10 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

Equity in earnings of Smashing
Investment in Smashing

852,000
213,000

209,000
52,250
75,000
75,000

D Investment in Smashing
Dividends paid

36,000

E Amortization expense
Covenants

13,750

TI Sales
COGS
G COGS
Inventory
18.

15,000

36,000

13,750
120,000
120,000
18,000
18,000

(40 Minutes) (Series of independent questions concerning various aspects of
the consolidation process when intercompany transfers have occurred)
a. 2009 Unrealized gross profit to be recognized in 2010
Total interco. gross profit on transfers ($90,000 – $54,000) .
Inventory retained at end of 2009 ............................................
Unrealized gross profit—12/31/09 ......................................

$36,000
20%
$7,200

2010 Unrealized Gross profit Deferred
Total interco. gross profit on transfers ($120,000 – $66,000)
Inventory retained at end of 2010 ............................................
Unrealized gross profit—12/31/10 .......................................

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$54,000
30%
$16,200

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18. a. (continued)
Noncontrolling Interest's Share of Kane's Income
Kane's reported income 2010 ...................................................
Amortization of excess fair value to intangibles .....................
2009 gross profit realized in 2010 (upstream sales) ..............
2010 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, 12/31/10 (see part a) .........................
Consolidated Inventory ............................................................
(Direction of transfer has no impact here)

$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 reported income—2010 ..............................................
$110,000
Noncontrolling interest ownership ........................................
20%
Noncontrolling Interest's Share of Kane's Income .................
$22,000
d. Smith's reported income 2010 ..................................................
Elimination of intercompany dividend income recorded
by parent ($40,000 × 80%) ...................................................
Kane's reported income 2010 ..................................................
Amortization expense (given) .................................................
Realization of 2009 intercompany gross profit (see part a) .
Deferral of 2010 intercompany 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, 2010 (given) ........
Excess amortizations 2009–2010 ($5,000× 2) ........................
Deferral of parent's 12/31/10 interco. gross profit (part a) .....
Consolidated Retained Earnings 12/31/10 .............................

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$600,000
(10,000)
(16,200)
$573,800

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18. (continued)
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 intercompany transfer was upstream, the parent's equity
accrual did not reflect the intercompany 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 intercompany 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, 2010 (given) ..........
$600,000
Excess Amortizations, 2009–2010 ($5,000 × 2) ......................
(10,000)
Reduction of equity accrual because of subsidiary's unrealized
gross profit (explained above) ..............................................
(12,960)
CONSOLIDATED RETAINED EARNINGS, 12/31/10 ................
$577,040
g. Land—Smith’s book value .......................................................
Land—Kane's book value ........................................................
Elimination of unrealized gain on intercompany land ...........
CONSOLIDATED LAND ACCOUNT ..........................................

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

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18. (continued)
h. The intercompany transfer was upstream from Kane to Smith. Because the
transfer occurred in 2009, beginning retained earnings of the seller for 2010
contains the remaining portion of the unrealized gain.
Transfer Pricing Figures
2009 Equipment
Gain
Depreciation expense
Income effect
Accumulated depreciation
2010 Depreciation expense
Accumulated depreciation

=
=
=
=
=
=
=

$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

Historical Cost Figures
2009 Equipment
Depreciation expense
Accumulated depreciation
2010 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, 1/1/10 (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
2009 transactions. Retained earnings reduction removes $4,000 income effect
(above) and replaces it with $12,000 depreciation expense for 2009.
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 intercompany transfer was upstream from Kane to Smith. Thus, income
effects are assumed to relate to the original seller (Kane). Because the sale
occurred in 2009, the only effect in 2010 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
McGraw-Hill/Irwin
5-14

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

18. (continued)
Noncontrolling Interest in Kane's Income
Kane's reported income less excess amortization .................
Reduction of depreciation expense to historical cost figure ..
Kane's realized income ..............................................................
Outside ownership percentage .................................................
Noncontrolling interest in Kane’s income ..........................
19.

$105,000
4,000
$109,000
20%
$21,800

(20 Minutes) (Consolidation entries and noncontrolling interest balances
affected by inventory transfers.)
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—2010 .....................................
2009 intercompany gross profit realized in 2010
($250,000 × 30% × 20%) ........................................................
2010 intercompany gross profit deferred
($300,000 × 30% × 20%) ........................................................
Realized income of subsidiary—2010 ................................
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 intercompany 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 intercompany inventory sale and purchase.
Entry G
Cost of Goods Sold ........................................
18,000
Inventory ....................................................
To remove effects of current year unrealized gross profit.

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

300,000

18,000

© The McGraw-Hill Companies, Inc., 2009
5-15

20.

(30 Minutes) (Compute selected balances based on three different
intercompany asset transfer scenarios)
a. Consolidated Cost of Goods Sold
Penguin’s cost of goods sold ..................................................
Snow’s cost of goods sold ......................................................
Elimination of 2010 intercompany transfers ..........................
Reduction of beginning Inventory because of
2009 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
2010 unrealized gross profit ($42,000/1.4 = $30,000
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 .................................................................
Eliminate ending unrealized gross profit (see above) .....
Consolidated Inventory .......................................................

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

(8,000)

12,000
$381,000

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

Noncontrolling Interest in Subsidiary’s Net Income
Because all intercompany 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 2010 intercompany transfers ..........................
Reduction of beginning inventory because of
2009 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
2010 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 ............................................

McGraw-Hill/Irwin
5-16

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

(6,000)

10,000
$411,000

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

20. b. (continued)
Consolidated Inventory
Penguin book value ..................................................................
Snow book value ......................................................................
Eliminate 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 intercompany sales are upstream, the effect on Snow's income
must be reflected in the noncontrolling interest computation:
Snow reported income .............................................................
2009 unrealized gross profit realized in 2010 (above) ...........
2010 unrealized gross profit to be realized in 2011 (above) .
Snow realized income ..............................................................
Outside ownership percentage ...............................................
Noncontrolling interest in Snow's income ........................

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

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-17

21.

(15 Minutes) (Prepare consolidated income statement with a wholly-owned
subsidiary, includes transfers)
a. In this business combination, the direction of the intercompany 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 2010 consolidation, the following worksheet entries
would affect income statement balances:
Entry *G
Retained Earnings, 1/1/10 (seller) ......
17,500
Cost of Goods Sold ........................
17,500
To remove 2009 unrealized gross profit from beginning account
balances. Gross profit is the 25% markup ($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 ........................
320,000
To eliminate intercompany transfers of inventory during 2010.
Entry G
Cost of Goods Sold .............................
12,500
Inventory .........................................
12,500
To remove 2010 unrealized gross profit from ending account balances.
Gross profit is the 25% markup ($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:
AKRON, INC. AND CONSOLIDATED SUBSIDIARY
Income Statement
Year Ending December 31, 2010
Sales ..................................................................................... $1,380,000
Cost of goods sold ..............................................................
575,000
Gross profit .....................................................................
805,000
Operating expenses ............................................................
635,000
Consolidated net income ..............................................
$170,000

McGraw-Hill/Irwin
5-18

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

22.

(60 minutes) (Downstream intercompany asset transfer when parent uses
equity method and when a noncontrolling interest is present)
a. Investment account:
Consideration paid (fair value) 1/1/09
$810,000
Netspeed’s reported income for 2009
$80,000
Database amortization
(12,000)
Netspeed’s adjusted net income
$68,000
Quickport's ownership percentage
90%
Quickport's share of Netspeed’s income
$61,200
Gain on equipment transfer deferral
(3,000)
Depreciation adjustment (6 months)
500
Equity in earnings of Netspeed Company,
$58,700
Quickport’s share of Netspeed’s dividends (90%)
(7,200)
Balance 12/31/09
$861,500
Netspeed’s reported income for 2010
$115,000
Database amortization
(12,000)
Netspeed’s adjusted 2010 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, 2010
$93,700
Quickport’s share of Netspeed’s dividends, 2010 (90%)
(7,200)
Balance 12/31/10
$948,000
b. 12/31/10 Worksheet Adjustments
*TA

Equipment
6,000
Investment in S
2,500
Accumulated depreciation
8,500
To transfer the unrealized interco. equipment reduction (as of Jan. 1, 2010)
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
Equity in earnings of S
Investment in S
Investment in S
Dividends paid

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

800,000
112,000
820,800
91,200
48,000
43,200
4,800
93,700
93,700
7,200
7,200

© The McGraw-Hill Companies, Inc., 2009
5-19

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
6,000
Investment in S
1,500
Accumulated Depreciation
7,500
To transfer the unrealized intercompany equipment reduction (as of
Dec. 31, 2010) from the investment account to the equipment and A.D.
accounts.

*ED

Equity in earnings of S
1,000
Depreciation expense
1,000
To transfer the current realized portion of the intercompany
equipment gain from the Equity in Earnings of S account to increase
current consolidated income through a reduction in depreciation
expense.

S

A

I

D

E

McGraw-Hill/Irwin
5-20

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

Investment in S
Dividends paid
Amortization expense
Database

820,800
91,200

43,200
4,800

92,700
7,200
7,200
12,000
12,000

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

23. (20 Minutes) (Consolidation entries for intercompany 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
! 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).

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-21

24.

(20 Minutes) (Determine consolidated net income when an intercompany
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
Excess amortization ............................................
(8,000)
Adjusted net income ........................................... $82,000
Noncontrolling interest in Bennett’s income (10%)...........
Consolidated net income to parent company .........................

$262,000

10,000
$262,000

(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)
Reported net income of subsidiary .........................................
Excess amortization ..................................................................
Eliminate 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 2010—Slaughter ...................................................
Net income 2010—Bennett .......................................................
Excess amortization ..................................................................
Eliminate excess depreciation stemming from transfer
($50,000 ÷ 5) (year after transfer) .......................................
Consolidated net income ................................................

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

McGraw-Hill/Irwin
5-22

10,000
$342,000

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

25.

(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
Markup ($70,000 – $49,000) ......................................................
Markup percentage ($21,000 ÷ $70,000) ..................................

$21,000
30%

Remaining inventory ................................................................
Markup percentage ...................................................................
Unrealized gross profit, 1/1/11 ..................................................

$30,000
30%
$9,000

Unrealized Gross profit—Inventory, 12/31/11
Markup ($100,000 – $50,000) ....................................................
Markup percentage ($50,000 ÷ $100,000) ................................

$50,000
50%

Remaining inventory ................................................................
Markup percentage ...................................................................
Unrealized gross profit, 12/31/11 .............................................

$40,000
50%
$20,000

Impact of intercompany Building Transfer
12/31/10—Transfer price figures
Transfer price ......................................................................
Gain on transfer ($50,000 – $30,000) .................................
Depreciation expense ($50,000 ÷ 5) ...................................
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 ..................................................

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

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

© The McGraw-Hill Companies, Inc., 2009
5-23

25. (continued)
CONSOLIDATED BALANCES
!

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

!

Cost of Goods Sold = $571,000 (add the two book values and subtract $100,000 in
intercompany 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 intercompany 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)

!

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])

McGraw-Hill/Irwin
5-24

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

26.

(35 Minutes) (Prepare consolidation entries for a business combination with
intercompany 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% markup ($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
intercompany 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.
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).

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© The McGraw-Hill Companies, Inc., 2009
5-25

26. (continued)
Entry I
Equity Income of Subsidiary ...................................
10,600
Investment in Sledge ..........................................
10,600
To remove intercompany 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 intercompany 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 intercompany 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% markup ($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).

McGraw-Hill/Irwin
5-26

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

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 intercompany inventory transfers)
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 building ...........................................
To patented technology ......................
Totals .....................................................

$342,000
38,000
380,000
(326,000)
$54,000
18,000
36,000
-0-

Annual Excess
Life
Amortizations
9 yrs.
$2,000
6 yrs.
6,000
$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

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-27

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 (initial value) .............................................
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 ...................

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

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%)

McGraw-Hill/Irwin
5-28

191,700
(21,600)

(62,100)
$450,000

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

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

27. (continued) part i.
!

Sales Revenues = $1,068,000 (total less $160,000 intercompany sales)

!

Cost of Goods Sold = $570,000 (add book values less $160,000 in intercompany
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 (intercompany 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 intercompany balance)

!

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

!

Investment in Brey = $0 (intercompany 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 intercompany 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)

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-29

28.

(20 Minutes) (Computation of selected consolidation balances as affected by
downstream inventory transfers)
UNREALIZED GROSS PROFIT, 12/31/09: (downstream transfer)
Intercompany gross profit ($120,000 – $72,000) ....................
Inventory remaining at year's end ...........................................
Unrealized Intercompany Gross profit, 12/31/09 .........................

$48,000
30%
$14,400

UNREALIZED GROSS PROFIT, 12/31/10: (downstream transfer)
Intercompany gross profit ($250,000 – $200,000) ..................
Inventory remaining at year's end ...........................................
Unrealized intercompany gross profit, 12/31/10 ..........................

$50,000
20%
$10,000

CONSOLIDATED TOTALS
! Sales = $1,150,000 (add the two book values and eliminate intercompany
sales of $250,000)
!

Cost of goods sold:
Benson's book value ................................................................
Broadway's book value ............................................................
Eliminate intercompany transfers ...........................................
Realized gross profit deferred in 2009 ....................................
Deferral of 2010 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- (intercompany transfer eliminated in consolidation)

!

Noncontrolling interest in consolidated income: (impact of transfers is not
included because they were downstream)
Broadway reported income for 2010 .................................
$100,000
Intangible amortization ........................................................
(10,000)
Broadway adjusted income .................................................
90,000
Outside ownership ..............................................................
30%
Noncontrolling interest in Broadway’s earnings .........
$27,000

!

Inventory = $988,000 (add the two book values less the $10,000 ending
unrealized gross profit)

!

Noncontrolling interest in subsidiary, 12/31/10 = $385,500
30% beginning $950,000 book value .....................................
Excess January 1 intangible allocation (30% × $295,000) ...
Noncontrolling Interest in Broadway’s earnings ..................
Dividends (30% × $50,000) ......................................................
Total noncontrolling interest at 12/31/10 ...............................

McGraw-Hill/Irwin
5-30

$285,000
88,500
27,000
(15,000)
$385,500

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

29.

(25 Minutes) (Computation of selected consolidation balances as affected by
upstream inventory transfers)
UNREALIZED GROSS PROFIT, 12/31/09: (upstream transfer)
Intercompany gross profit ($120,000 – $72,000) ....................
Inventory remaining at year's end ...........................................
Unrealized intercompany gross profit, 12/31/09 ..........................

$48,000
30%
$14,400

UNREALIZED GROSS PROFIT, 12/31/10: (upstream transfer)
Intercompany gross profit ($250,000 – $200,000) ..................
Inventory remaining at year's end ...........................................
Unrealized intercompany gross profit, 12/31/10 ..........................

$50,000
20%
$10,000

CONSOLIDATED TOTALS
! Sales = $1,150,000 (add the two book values and eliminate the Intercompany
transfer)
! Cost of goods sold:
Benson's COGS book value .....................................................
$535,000
Broadway's COGS book value .................................................
400,000
Eliminate intercompany transfers ...........................................
(250,000)
Realized gross profit deferred in 2009 ....................................
(14,400)
Deferral of 2010 unrealized gross profit .................................
10,000
Consolidated cost of goods sold .......................................
$680,600
! Operating expenses = $210,000 (add the two book values and include
intangible amortization for current year)
! Dividend income = -0- (interco. transfer eliminated in consolidation)
! Noncontrolling interest in consolidated income: (impact of transfers is
included because they were upstream)
Broadway reported income for 2010 .......................................
$100,000
Intangible amortization ........................................................
(10,000)
2009 gross profit recognized in 2010 ................................
14,400
2010 gross profit deferred ..................................................
(10,000)
Broadway realized income for 2010 ....................................
$94,400
Outside ownership ..............................................................
30%
Noncontrolling interest ............................................................
$28,320
! Inventory = $988,000 (add the two book values and defer the $10,000 ending
unrealized gross profit)
! Noncontrolling interest in subsidiary, 12/31/10 = $382,500
30% beginning book value less $14,400
unrealized gross profit (30% × $935,600) ........................
$280,680
Excess intangible allocation (30% × $295,000) ..................
(88,500)
Noncontrolling Interest in Broadway’s earnings ...............
28,320
Dividends (30% × $50,000) ...................................................
(15,000)
Total noncontrolling interest at 12/31/10 ............................
$382,500

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-31

30.

(75 Minutes) (Determine consolidated balances after impact of upstream
Inventory transfers and downstream transfer of building. Parent uses initial
value method.)
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 1/1/09
Book Value, 1/1/10 (based on stockholders' equity accounts)
Eliminate Net Income – 2009 ...................................................
Eliminate Dividends – 2009 ......................................................
Book Value, 1/1/09 ...............................................................

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

Beginning inventory unrealized gross profit, 12/31/09 (Upstream)
Ending Inventory ($200,000 × 25%) .........................................
Markup (given) ..........................................................................
Unrealized Intercompany Gross profit, 12/31/09 ....................

$50,000
20%
$10,000

Ending inventory unrealized gross profit, 12/31/10 (Upstream)
Ending Inventory ($150,000 × 40%) .........................................
Markup (given) ..........................................................................
Unrealized Intercompany Gross profit, 12/31/10 ....................

$60,000
20%
$12,000

McGraw-Hill/Irwin
5-32

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

30. (continued)
Building unrealized gross profit, 1/2/09 (Downstream)
Transfer Price ............................................................................
Book Value ................................................................................
Unrealized Gross profit ............................................................
Annual Excess Depreciation
Annual Depreciation Based on Book Value ($10,000/5 years)
Annual Depreciation Based on Transfer Price
($25,000/ 5 years) .................................................................
Excess Depreciation-Each Year ..............................................

$25,000
10,000
$15,000

$2,000
5,000
$3,000

Adjust to Building to return to historical cost at 1/1/10
Transfer Price Historical Cost
$25,000
$100,000

Buildings
Accumulated Depreciation
(1/1/09 balance after 1
more year of depreciation)

5,000

92,000

Consolidation
Adjustment
$75,000

87,000

Consolidated Totals
!

Sales and Other Income = $1,250,000 (add the two book values and
eliminate the intercompany transfers)

!

Cost of Goods Sold:
Moore's book value ..................................................................
Kirby's book value ....................................................................
Eliminate intercompany transfers ...........................................
Realized gross profit deferred in 2009 .....................................
Deferral of 2010 unrealized gross profit .................................
Cost of goods sold ...................................................................

$500,000
400,000
(150,000)
(10,000)
12,000
$752,000

!

Operating and Interest Expense = $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 = $2,000 (impact of inventory
transfers is included because they were upstream but building transfer is
omitted because it was downstream)

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-33

30. (continued) initial
Reported income for 2010 ..................................................................
Realized gross profit deferred in 2009 ....................................
Deferral of 2010 unrealized gross profit .................................
Realized income of subsidiary ................................................
Excess fair value amortization .................................................
Adjusted subsidiary net income ...............................................
Outside Ownership ........................................................................
Noncontrolling Interest ............................................................

$40,000
10,000
(12,000)
$38,000
(18,000)
20,000
10%
$2,000

!

Consolidated Net Income = $223,000 (consolidated sales less consolidated
cost of goods sold, expenses, and noncontrolling interest)
" To noncontrolling interest = $2,000 (above)
" To controlling interest = $221,000

!

Retained Earnings, 1/1/10 = $1,024,800 (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)

Moore's Reported Balance, 1/1/10 ...............................
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 12/31/09 Unrealized Gross profit
(subsidiary's prior income was overstated) ......
Realized increase in book value .........................
Ownership ..................................................................
Equity Accrual ...........................................................
Retained Earnings, 1/1/10 ...................................

$990,000

(12,000)

$80,000
(18,000)
(10,000)
52,000
90%
46,800
$1,024,800

Dividends Paid = $130,000 (parent balance only)
Retained Earnings, 12/31/10 = $1,115,800 (the beginning balance plus net income
less dividends paid)
Cash and Receivables = $397,000 (add the two book values)
Inventory = $372,000 (add the two book values and defer the $12,000 ending
unrealized gross profit)
Investment in Kirby = -0- (eliminated for consolidation purposes)

McGraw-Hill/Irwin
5-34

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

30. (continued)
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 = $3,480,000 (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])
Noncontrolling Interest, 12/31/10 = $80,200 (10 percent of beginning book value
[$690,000 after deferral of unrealized gross profit] plus $9,200 share of
beginning unamortized excess fair value allocations plus $2,000 income share)
Common Stock = $600,000 (parent balance only)
Retained Earnings, 12/31/10 = $1,115,800 (computed above)
Total Liabilities and Equities = $3,480,000 (summation of consolidated balances).
The same consolidation balances can be derived by setting up a worksheet and
utilizing the following entries:
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/10 (Kirby) .......................
10,000
Cost of Goods Sold ........................................
(To recognize 2009 deferred gross profit as income in 2010)
Entry *TA
Building .................................................................
Retained earnings, 1/1/10 (Moore) ......................
Accumulated Depreciation ............................
(To adjust 1/1/10 balance to historical cost figures)

10,000

75,000
12,000
87,000

Entry *C
Investment in Kirby ..............................................
46,800
Retained Earnings, 1/1/10 (Moore) ................
46,800
(To convert from initial value to equity method based on the following
computation)
McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-35

30. (continued)
Increase in subsidiary's book value during prior years
(income of $80,000) .........................................
Excess amortization for 2009 ..............................
Deferral of 12/31/09 unrealized gross profit .......
Realized increase in subsidiary's book value ....
Ownership ............................................................
Conversion to equity method adjustment ..........

$80,000
(18,000)
(10,000)
$52,000
90%
$46,800

S Common Stock (Kirby) ........................................
150,000
Retained Earnings, 1/1/10 as adjusted (Kirby) ...
540,000
Investment in Kirby (90%) ..............................
621,000
Noncontrolling Interest in Kirby (10%) .........
69,000
(To eliminate subsidiary's beginning stockholders' equity accounts and
recognize beginning noncontrolling interest balance)
A Liabilities ..............................................................
32,000
Equipment ............................................................
15,000
Brand Names ........................................................
45,000
Investment in Kirby ........................................
82,800
Noncontrolling Interest in Kirby (10%) .........
9,200
(To recognize unamortized balance of excess allocations as of 1/1/10.
Figures have been reduced by one year of amortization)
Entry I (the subsidiary paid no dividends so no adjustment needed)
E Interest expense ...................................................
8,000
Depreciation expense ...........................................
5,000
Brand names amortization expense ..................
5,000
Liabilities .........................................................
Equipment ........................................................
Brand names ...................................................
(To recognize excess amortization expenses for current year)
Tl Sales .....................................................................
Cost of Goods Sold ........................................
(To eliminate intercompany transfers for 2010)
G Cost of Goods Sold .............................................
Inventory .........................................................
(To defer ending unrealized inventory gross profit)

8,000
5,000
5,000

150,000
150,000

12,000
12,000

ED Accumulated Depreciation ..................................
3,000
Depreciation Expense ....................................
3,000
(To adjust depreciation for current year created by transfer of building)
McGraw-Hill/Irwin
5-36

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

31.

(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 ...
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 ....................................
Scott’s 2009 reported income .........................
Excess fair value amortization ........................
Scott income adjusted .....................................
Woods’ ownership percentage .......................

$372,000
$70,000
(10,000)
$60,000
60%
$36,000
Ending inventory profit deferral (100%).......... (10,000)
Equity accrual ........................................................
$26,000
2009 dividends to Woods ......................................
(6,000)
Investment balance 12-31-09 ................................
$392,000
Scott’s 2010 reported income .........................
60,000
Excess fair value amortization ........................ (10,000)
Scott income adjusted ..................................... $50,000
Woods’ ownership percentage .......................
60%
$30,000
Ending inventory profit deferral (100%).......... (12,000)
Beginning inventory profit recognized (100%) 10,000
Equity accrual ........................................................
28,000
2010 dividends to Woods ......................................
(9,000)
Investment balance 12-31-10 ................................
$411,000
Intercompany profits (downstream)
Intercompany transfers remaining in inventory
Gross profit rate*

2009
2010
50,000
40,000
20%
30%
$10,000 $12,000

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

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-37

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

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

Cash and receivables
Inventory
Investment in Scott

248,000
233,000
411,000

148,000
129,000
-0-

Buildings (net)
Equipment (net)
Patents (net)
Customer list
Goodwill
Total assets

308,000
220,000
-0-

202,000
86,000
20,000

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

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

McGraw-Hill/Irwin
5-38

NCI Consolidated
(885,000)
517,000
268,000
-0-

(20,000)

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

Liabilities
Common stock
Noncontrolling interest 1/1

Adj. & Elim.
(TI)150,000
(G) 12,000 (*G) 10,000
(TI) 150,000
(E) 10,000
(I) 18,000
(*G) 10,000

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

(D) 9,000

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

6,000

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

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

(550,000)
(300,000)

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

(325,000)
(585,000)

884,000

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

(G) 12,000
(S) 228,000
(A)174,000
(I) 18,000

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

(100,000)
20,000
(80,000)

884,000

(268,000)
282,000

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

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

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 intercompany inventory (160,000 × 25%)
Recognized gross profit for 1/1/11 intercompany inventory (125,000 × 28%)
Sander’s income adjusted
To controlling interest (80%)
To noncontrolling interest (20%)
Adjustments
Plymouth
Sander
& Eliminations
Revenues
(1,740,000)
(950,000) (TI) 300,000
Cost of goods sold
820,000
500,000
(G) 40,000 (TI)300,000
(*G) 35,000
Depreciation expense
104,000
85,000
Amortization expense
220,000
120,000
(E) 70,000
Interest expense
20,000
15,000
Equity earnings—Sander
(124,000)
(I) 124,000
Separate company
income
(700,000)
(230,000)
Consolidated net income
to noncontrolling
interest
to controlling interest

NCI

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

(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)

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

115,000
215,000
800,000

Cash
Accounts receivable
Inventory
Investment in Sander

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

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

(2,800,000)

(D) 20,000

(D) 20,000

31,000
(700,000)

5,000

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

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

(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

© The McGraw-Hill Companies, Inc., 2009
5-39

(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

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

3,600
3,600

To recognize upstream intercompany 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.

McGraw-Hill/Irwin
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© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

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) ......................................
300,000
Additional Paid-in Capital (Young) .....................
90,000
Retained Earnings, 1/1/11
(Young) (adjusted for *G) ...............................
626,400
Investment in Young (70%) ......................
711,480
Noncontrolling Interest in Young (30%) ..
304,920
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.

McGraw-Hill/Irwin
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© The McGraw-Hill Companies, Inc., 2009
5-41

33. (continued)
Entry I
Dividend Income ..................................................
35,000
Dividends Paid ................................................
35,000
To eliminate Intercompany 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 intercompany 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 intercompany 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
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

McGraw-Hill/Irwin
5-42

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

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 intercompany 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 intercompany dividend transfers.

35,000
35,000

Entry E (Same as Entry E in Problem 33.)
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.)

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-43

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, 1/1/10 (Gibson) ..............
40,000
Land ...........................................................
40,000
To remove unrealized gain on Intercompany downstream transfer of land
made in 2009.
Entry *G
Retained Earnings, 1/1/10 (Keller) .................
10,000
Cost of Goods Sold ...................................
10,000
To defer unrealized upstream Inventory gross profit from 2009 until 2010
computed as the 2009 ending inventory balance of $30,000 (20% ×
$150,000) multiplied by 33-1/3% markup ($50,000/$150,000).
Entry *C
Retained earnings, 1/1/10 (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 2009. 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, 2010. Thus, the 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.

McGraw-Hill/Irwin
5-44

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

35. (continued)
Entry S
Common Stock (Keller) ..................................
320,000
Additional Paid-in Capital ..............................
90,000
Retained earnings, 1/1/10 (Keller) (adjusted
for Entry *G) ...............................................
610,000
Investment in Keller (60%) ..................
612,000
Noncontrolling Interest in Keller, 1/1/10 (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, 1/1/10 (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 intercompany income accrual.

84,000
84,000

Entry D
Investment in Keller .......................................
36,000
Dividends Paid ..........................................
36,000
To eliminate intercompany 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 intercompany debt.

40,000

Entry Tl
Sales .................................................................
200,000
Cost of Goods Sold ...................................
To eliminate current year intercompany inventory transfer.

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

5,000

40,000

200,000

© The McGraw-Hill Companies, Inc., 2009
5-45

Entry G
Cost of Goods Sold ........................................
12,000
Inventory .....................................................
12,000
To defer 2010 unrealized inventory gross profit. Unrealized gain is the
ending inventory of $40,000 (20% of $200,000) multiplied by 30% markup
($60,000/$200,000).
Noncontrolling Interest in Keller's Net Income
Keller reported net income .................................
Excess fair value amortization ...........................
2009 Intercompany gross profit realized in 2010 (inventory)
2010 Intercompany gross profit deferred (inventory)
Keller realized income 2010 .................................
Outside ownership percentage ..........................
Noncontrolling interest in Keller's net income

McGraw-Hill/Irwin
5-46

$140,000
(5,000)
10,000
(12,000)
$133,000
40%
$53,200

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

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, 1/1/10—Gibson

GIBSON AND KELLER
Consolidation Worksheet
Year Ending December 31, 2010
Gibson
(800,000)
500,000
100,000
(84,000)
(284,000)

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

RE, 1/1/10—Keller
Net income (above)
Dividends
Retained earnings, 12/31/10
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, 12/31/10
NCI in Keller, 1/1/10
NCI In Keller, 12/31/10
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)

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/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)

© The McGraw-Hill Companies, Inc., 2009
5-47

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

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

35. (continued)
b. If the intercompany 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 2010.
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, 1/1/10 (Gibson) ..............
36,000
Buildings ........................................................
40,000
Accumulated Depreciation ......................
76,000
To eliminate 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, 1/1/10 (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).

McGraw-Hill/Irwin
5-48

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

36.

(40 Minutes) (Prepare consolidation worksheet with intercompany 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 .....................................................
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 ..................................................................

$(88,000)
15,000
(14,400)
14,000
18,000
$(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%) ......................................
Markup ($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) .....................................................
Markup ($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.

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
5-49

36. (continued)
Entry A
Trademarks ..........................................................
30,000
Patented technology ...........................................
105,000
Investment in Skyline ....................................
135,000
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 intercompany income accrued by parent using the equity
method.
Entry D
Investment in Skyline ..........................................
Dividends distributed ....................................
To eliminate Intercompany 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 intercompany 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 intercompany transfer of land during current year.
Entry P
Accounts payable ................................................
Accounts receivable .......................................
To remove intercompany payable and receivable.

McGraw-Hill/Irwin
5-50

65,000
65,000

© The McGraw-Hill Companies, Inc., 2009
Solutions Manual

36. (continued)

Accounts
Revenues
Cost of goods sold

PARKWAY AND SKYLINE
Consolidation Worksheet
Year Ending December 31, 2010
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

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

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

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

© The McGraw-Hill Companies, Inc., 2009
5-51

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 5 Excel Case Solution
Excel Case

Equity in Shawn Co. Earnings
2009
78,000
El profit
-34,200
Amortization
-12,600
Equity earnings
31,200

Fair Value Allocation Schedule 1/1/2009
Consideration transferred 1,000,000
C.S.
500,000
R.E.
185,000
685,000 Life Amort. 2010
Tradename
315,000 25 12,600 BI profit
Inventory
El profit
Shawn sells
GPR
remaining
Amortization
to Patrick
60%
30%
Equity earnings
Intercompany Inventory Transfers (upstream)
Sales
Inventory Interco. profit
2009
190,000
57,000
34,200
2010
210,000
63,000
37,800

Investment account
Cost
2009
Equity earnings
dividends
12/31/09
2010
12/31/10

Equity earnings
dividends

1,000,000
31,200
-25,000
1,006,200
68,800
-27,000
1,048,000

85,000
34,200
-37,800
-12,600
68,800

Shawn Co. dividends
2009
25,000
2010
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

27,000

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

Investment account goes to zero? 0

McGraw-Hill/Irwin
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Solutions Manual

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 “intercompany” 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, intercompany balances and
transactions shall be eliminated. This includes intercompany 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
Ticket expense
Promotion
COGS
Depreciation
Player salaries
Staff salaries
Consolidated net income

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

McGraw-Hill/Irwin
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e

© The McGraw-Hill Companies, Inc., 2009
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