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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
CHAPTER 5
CONSOLIDATED FINANCIAL STATEMENTS—INTRA-ENTITY ASSET TRANSACTIONS
Chapter Outline
I. The transfer of assets between the companies forming a business combination is a common practice. The opportunity for such direct acquisition (especially of inventory) is often the underlying motive for the creation of the combination.
II. Intra-entity inventory transfers
A. The individual accounting systems of the two companies will record the transfer as a sale by one party and as a purchase by the other
B. Because the transaction was not made with an outside, unrelated party, the sales and purchases balances created by the transfer are eliminated in consolidation (Entry Tl)
C. Any transferred inventory retained at the end of the year is recorded at its transfer price which in (many cases) will include an unrealized gross profit
1. For consolidation purposes, this intra-entity gross profit must be deferred by eliminating the amount from the inventory account on the balance sheet and from the ending inventory figure within cost of goods sold (Entry G).
2. Because transfer effects carry over to the subsequent fiscal period, the unrealized gross profit must also be removed a second time: from the beginning inventory component of cost of goods sold and from the beginning retained earnings balance (Entry *G).
a. The retained earnings figure being adjusted is that of the original seller.
b. If the equity method has been applied and the transfer was made downstream (by the parent), the beginning retained earnings account will be correct; therefore, in this one case, the adjustment is to the Investment in Subsidiary account.
3. The consolidation process is designed to shift the profit from the period of transfer into the time period in which the goods are actually sold to unrelated parties or consumed
D. Effect of deferral process on the valuation of a noncontrolling interest
1. Official accounting pronouncements permit but do not require deferral of unrealized profits on the valuation of noncontrolling interest balances
2. This textbook adjusts the noncontrolling interest balances but only if the sale was made upstream from subsidiary to parent. Downstream sales are made by the parent and, thus, are viewed as having no effect on the outside interest.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
III. Intra-entity land transfers
A. Any gain created by intra-entity land transfers is unrealized and will remain so until the land is sold to an outside party
B. For each subsequent consolidation, the recorded value of the land account is reduced to original cost. The unrealized gain recorded by the seller must also be removed and deferred until the land is sold to an outsider.
1. In the year of transfer, an actual gain account exists within the accounting records of the seller and must be removed.
2. In all later time periods, since the unrealized gain has become an element of the seller's beginning retained earnings balance, the reduction is made to this equity account.
3. If the land is ever sold to an outside party, the intra-entity gain is realized and has to be recognized within that time period.
IV. Intra-entity transfer of depreciable assets
A. As with other intra-entity transfers, any unrealized gross profit must be deferred for consolidation purposes to establish appropriate historical cost balances.
B. However, the difference between the transfer-based accounting value and the historical cost of the asset will change each year because of the effects of depreciation. The amount of unrealized gain within retained earnings will also be reduced annually since excess depreciation expense is recognized (and closed into retained earnings) based on the inflated transfer price.
C. Consequently, elimination of the unrealized gain (within retained earnings) and the reduction of the asset value to historical cost will differ from year to year.
D. Also within the consolidation process, the recorded depreciation expense must be decreased every period to an amount appropriately based on the asset's original acquisition price.
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)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 intra-entity profit would have been deferred until the goods were sold to an outside party. Also the intra-entity 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 Variable Interest Entities (VIEs)
Fortunately the FASB’s ASC Topic 810 explains how to identify an SPE (a type of entity that is often a VIE) that is not subject to control through voting ownership interests, but is nonetheless controlled by another enterprise and therefore subject to consolidation. The entity that controls the SPE is then 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?
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 intra-entity transactions as well as unrealized profits will be removed entirely. However, because the sales are upstream, if a noncontrolling interest had been present, the portion of the subsidiary's net income attributed to these outside owners would be influenced by the
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 intra-entity 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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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Answers to Questions
1. One reason for the significant volume and frequency of intra-entity 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.
2. The sales between Barker and Walden totaled $100,000. Regardless of the ownership percentage or the gross profit rate, the $100,000 was simply an intra-entity asset transfer. Thus, within the consolidation process, the entire $100,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts.
3. Sales price per unit ($900,000 ÷ 3,000 units) $ 300
Number of units in Safeco’s ending inventory × 500
Intra-entity inventory at transfer price $150,000
Gross profit rate (0.6 ÷ 1.6) .375
Intra-entity profit in ending inventory $ 56,250
4. In intra-entity 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 deferred whenever consolidated financial statements are prepared. 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 realized gross profit must be recognized within the consolidation process. Reductions are made on the worksheet to the beginning inventory component of cost of goods sold and to the beginning retained earnings balance of the original seller. The gross profit is thus taken out of last year’s earnings (retained earnings) and recognized in the current year through the reduction of cost of goods sold. If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year is made to the Investment in Subsidiary account rather than to retained earnings.
5. 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.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
6. Currently accounting pronouncement allow discretion regarding the effect of unrealized intra-entity profits and noncontrolling interest values. 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 intra-entity profits are considered in 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.
7. Consolidated financial statements are largely unchanged across downstream versus upstream transfers. Sales and purchases (Inventory) balances created by the transactions are eliminated in total. Any unrealized gross profits remaining at the end of a fiscal period get deferred until ultimately earned through sale or consumption of the assets.
The direction of intra-entity 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.
8. The computation of this noncontrolling interest balance depends on the direction of the intra-entity transfers which is not indicated in the question. If the unrealized gross profits were created by downstream sales from King to Pawn, they relate only to King. The net income attributable to
the noncontrolling interest 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" net income would be $80,000 and the noncontrolling interest's share of consolidated net income is reported as $8,000:
Pawn's reported net income .......................................... $110,000
Recognition of prior year unrealized gross profit ........... 30,000
Deferral of current year unrealized gross profit ............. (60,000)
Pawn's realized net income ........................................... $ 80,000
Outside ownership percentage ...................................... 10%
Net income attributable to noncontrolling interest.......... $ 8,000
9. The deferral and subsequent recognition of intra-entity 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. Intra-entity profits are not really eliminated, but simply deferred until a sale to an outsider takes place.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
10. 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 intra-entity 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 deferred 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.
11. 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 intra-entity 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 deferral of the intra-entity gross profit, the realized net income balances applicable to the subsidiary will be less than the reported values. In the year of resale, however, the realized net income for consolidation purposes is higher than reported. All noncontrolling interest totals are computed on the realized balances rather than the reported figures.
12. 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.
13. From the viewpoint of the business combination, an unrealized gain has been created by the intra-entity transfer and must be deferred in the preparation of consolidated financial statements. 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 remaining life of the asset.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Answers to Problems
1. D
2. B Merchandise remaining in James’s inventory $250,000 × 40% = $100,000.
Unrealized gross profit (based on subsidiary's gross profit rate as the seller) $100,000 × 30% = $30,000. James’s ownership percentage of Carl has no impact on this computation.
3. A
4. D UNREALIZED GROSS PROFIT, 12/31/14
Intra-entity gross profit ($200,000 – $160,000) ............................. $40,000
Inventory remaining at year's end ................................................. 18%
Unrealized intra-entity gross profit, 12/31/14 ................................ $ 7,200
UNREALIZED GROSS PROFIT, 12/31/15
Intra-entity gross profit ($350,000 – $297,500) ............................. $52,500
Inventory remaining at year's end ................................................. 30%
Unrealized intra-entity gross profit, 12/31/15 ................................ $15,750
CONSOLIDATED COST OF GOODS SOLD
Parent balance ........................................................................... $607,500
Subsidiary balance .................................................................... 450,000
Remove intra-entity transfer ..................................................... (350,000)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Recognize 2014 deferred gross profit ..................................... (7,200)
Defer 2015 unrealized gross profit ........................................... 15,750
Cost of goods sold .......................................................................... $716,050
5. A Intra-entity sales and purchases of $100,000 must be eliminated. Additionally, an unrealized gross profit of $10,000 must be removed from ending inventory based on a gross profit rate of 25 percent ($200,000 gross profit ÷ $800,000 sales) which is multiplied by the $40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for consolidation purposes is $690,000 ($600,000 + $180,000 – $100,000 + $10,000).
6. C The only change here from Problem 5 is the gross profit rate which would now be 40 percent ($120,000 gross profit $300,000 sales). Thus, the unrealized gross profit to be deferred is $16,000 ($40,000 × 40%). Consequently, consolidated cost of goods sold is $696,000 ($600,000 + $180,000 – $100,000 + $16,000).
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
7. B UNREALIZED GROSS PROFIT, 12/31/14
Ending inventory ....................................................................... $40,000
Gross profit rate ($33,000 ÷ $110,000) ..................................... 30%
Unrealized intra-entity gross profit, 12/31/14 .......................... $12,000
UNREALIZED GROSS PROFIT, 12/31/15
Ending inventory ....................................................................... $50,000
Gross profit rate ($48,000 ÷ $120,000) ..................................... 40 %
Unrealized intra-entity gross profit, 12/31/15 .......................... $20,000
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
Reported net income for 2015 .................................................. $90,000
Realized gross profit deferred in 2014 ..................................... 12,000
Deferral of 2015 unrealized gross profit .................................. (20,000)
Realized net income of subsidiary ........................................... $82,000
Outside ownership .................................................................... 10 %
Noncontrolling interest ............................................................. $ 8,200
8. A Individual records after transfer:
12/31/14
Machinery = $40,000
Gain = $10,000
Depreciation expense $8,000 ($40,000 ÷ 5 years)
Net effect on income = $2,000 ($10,000 – $8,000)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
12/31/15
Depreciation expense = $8,000
Consolidated figures—historical cost:
12/31/14
Machinery = $30,000
Depreciation expense = $6,000 ($30,000 ÷ 5 years)
12/31/15
Depreciation expense = $6,000
Adjustments for consolidation purposes:
2014: $2,000 income is reduced to a $6,000 expense (net income is reduced
by $8,000)
2015: $8,000 expense is reduced to a $6,000 expense (net income is increased
by $2,000)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
9. D UNREALIZED GAIN
Transfer price ............................................................................. $430,400
Book value (original cost less two years depreciation) ......... 368,000
Unrealized gain........................................................................... $ 62,400
EXCESS DEPRECIATION
Annual depreciation based on cost ($460,000 ÷ 10 years).. . . $46,000
Annual depreciation based on transfer price
($430,400 ÷ 8 years) .............................................................. 53,800
Excess depreciation .................................................................. $ 7,800
ADJUSTMENTS TO CONSOLIDATED NET INCOME
Defer unrealized gain ................................................................ $(62,400)
Remove excess depreciation ................................................... 7,800
Net reduction in consolidated net income .............................. $(54,600)
10.D Add the two book values and remove $100,000 intra-entity transfers.
11.C Intra-entity gross profit ($100,000 - $80,000) ................................ $20,000
Inventory remaining at year's end ................................................. 60%
Unrealized intra-entity gross profit ............................................... $12,000
CONSOLIDATED COST OF GOODS SOLD
Parent balance ........................................................................... $140,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Subsidiary balance .................................................................... 80,000
Remove intra-entity transfer ..................................................... (100,000)
Defer unrealized gross profit (above) ...................................... 12,000
Cost of goods sold .......................................................................... $132,000
12.C Consideration transferred ............................. $260,000
Noncontrolling interest fair value................... 65,000
Suarez total fair value...................................... $325,000
Book value of net assets................................. (250,000)
Excess fair over book value $ 75,000
Remaining Annual Excess
Excess fair value to undervalued assets: Life Amortizations
Equipment................................................... $25,000 5 years $5,000
Secret Formulas ........................................ 50,000 20 years 2,500
Total ................................................................ -0- $7,500
Consolidated expenses = $37,500 (add the two book values and include current year amortization expense)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
13. A 20% of the beginning book value $50,000
Excess fair value allocation (20%× $75,000) 15,000
20% share of Suarez net income
adjusted for amortization (20% × [110,000 – 7,500]) 20,500
Ending noncontrolling interest balance $85,500
14. C Add the two book values plus the $25,000 original allocation less one year of excess amortization expense ($5,000).
15. B Add the two book values less the ending unrealized gross profit of $12,000.
Combined pre-consolidation inventory balances......................... $260,000
Intra-entity gross profit ($100,000 – $80,000) ................... $20,000
Inventory remaining at year's end ..................................... 60%
Unrealized intra-entity gross profit, 12/31 .................................... 12,000
Consolidated total for inventory..................................................... $248,000
16. (15 Minutes) (Determine selected consolidated balances; includes inventory transfers and an outside ownership.)
Customer list amortization = $78,000 ÷ 4 years = $19,500 per year
Intra-entity gross profit ($180,000 – $130,000) ............................. $50,000
Inventory remaining at year end..................................................... 10%
Unrealized intra-entity gross profit, 12/31 .................................... $ 5,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
CONSOLIDATED TOTALS
Inventory = $795,000 (add the two book values and subtract the ending unrealized gross profit of $5,000)
Sales = $1,620,000 (add the two book values and subtract the $180,000 intra-entity transfer)
Cost of goods sold = $725,000 (add the two book values and subtract the intra-entity transfer and add [to defer] ending unrealized gross profit)
Operating expenses = $549,500 (add the two book values and the amortization expense for the period)
Barone’s net income............................................................ $100,000
Intra-entity gross profit deferral......................................... (5,000)
Excess fair value amortization............................................ (19,500)
Adjusted subsidiary net income......................................... $75,500
Noncontrolling interest percentage................................... 10%
Net income attributable to noncontrolling interest........ $ 7,550
Gross profit deferral is allocated to the noncontrolling interest because the transfer was upstream from Barone to Allister.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
17. (60 minutes) (Downstream intra-entity profit adjustments when parent uses equity method and a noncontrolling interest is present)
Consideration transferred by Corgan $980,000
Noncontrolling interest fair value 245,000
Smashing’s acquisition-date fair value 1,225,000
Book value of subsidiary 950,000
Excess fair over book value 275,000
Excess assigned to covenants 275,000
Remaining useful life in years ÷ 20
Annual amortization $13,750
2014 Ending Inventory Profit Deferral
Cost = $100,000 ÷ 1.6 = $62,500
Intra-entity gross profit = $100,000 – $62,500 = $37,500
Ending inventory gross profit = $37,500 × 40% = $15,000
2015 Ending Inventory Profit Deferral
Cost = $120,000 ÷ 1.6 = $75,000
Intra-entity gross profit = $120,000 – $75,000 = $45,000
Ending inventory gross profit = $45,000 40% = $18,000
a. Investment account:
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Consideration transferred, January 1, 2014 $980,000
Smashing’s 2014 net income × 80% $120,000
Covenant amortization (13,750 × 80%) (11,000)
Ending inventory profit deferral (100%) (15,000)Equity in Smashing’s earnings 94,0002014 dividends (28,000)
Investment balance 12/31/14 $1,046,000
Smashing’s 2015 net income × 80% $104,000
Covenants amortization (13,750 × 80%) (11,000)
Beginning inventory profit recognition 15,000
Ending inventory profit deferral (100%) (18,000)
Equity in Smashing’s earnings 90,0002015 dividends (36,000)
Investment balance 12/31/15 $1,100,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
17. (continued)
b. 12/31/15 Worksheet Adjustments
*G Investment in Smashing 15,000
Cost of goods sold 15,000
S Common stock—Smashing 700,000
Retained earnings—Smashing 365,000
Investment in Smashing 852,000Noncontrolling interest 213,000
A Covenants 261,250
Investment in Smashing 209,000
Noncontrolling interest 52,250
I Equity in earnings of Smashing 90,000
Investment in Smashing 90,000
D Investment in Smashing 36,000
Dividends declared 36,000
E Amortization expense 13,750
Covenants 13,750
TI Sales 120,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Cost of goods sold 120,000
G Cost of goods sold 18,000
Inventory 18,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
18. (40 Minutes) (Series of independent questions concerning various aspects of the consolidation process when intra-entity transfers have occurred)
a. Placid Lake's 2015 net income before effect from Scenic...... $300,000
Scenic's reported net income 2015 .......................................... 110,000
Amortization expense (given) .................................................. (5,000)
Realization of 2014 intra-entity gross profit (see below) ...... 7,200
Deferral of 2015 intra-entity gross profit (see below) ............. (16,200)
Consolidated net income........................................................... $396,000
2014 Unrealized gross profit to be recognized in 2015:
Intra-entity gross profit on transfers ($90,000 – $54,000) ...... $36,000
Inventory retained at end of 2014 ............................................. 20%
Unrealized gross profit—12/31/14 ....................................... $ 7,200
2015 Unrealized gross profit deferred:
Intra-entity gross profit on transfers ($120,000 – $66,000) .... $54,000
Inventory retained at end of 2015 ............................................. 30%
Unrealized gross profit—12/31/15........................................ $16,200
b. Noncontrolling interest's share of consolidated net income
(upstream sales):
Scenic's reported net income 2015........................................... $110,000
Amortization of excess fair value to intangibles..................... (5,000)
2014 gross profit realized in 2015 (upstream sales) ............... 7,200
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
2015 gross profit deferred (upstream sales) ........................... (16,200)
Scenic's realized net income .................................................... $96,000
Noncontrolling interest ownership .......................................... 20%
Noncontrolling interest share of consolidated net income.... $19,200
Placid Lake’s net income from own operations....................... $300,000
Placid Lake’s share of Scenic’s adjusted NI (80%× $96,000).... 76,800
Placid Lake’s share of consolidated net income .................... $376,800
c. Noncontrolling interest's share of consolidated net income (downstream sales): Downstream transfers do not affect the noncontrolling interest.
Scenic's reported net income 2015 after amortization............ $105,000
Noncontrolling interest ownership .......................................... 20%
Noncontrolling interest share of consolidated net income . . . $21,000
Placid Lake’s net income from own operations....................... $300,000
Placid Lake’s share of Scenic’s adjusted NI (80% × $105,000). 84,000
Realization of 2014 intra-entity gross profit (see part a.) ...... 7,200
Deferral of 2015 intra-entity gross profit (see part a.) ............ (16,200)
Placid Lake’s share of consolidated net income .................... $375,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
18. (continued)
d. Inventory—Placid Lake book value ......................................... $140,000
Inventory—Scenic book value .................................................. 90,000
Unrealized gross profit, 12/31/15 (see part a) .......................... (16,200)
Consolidated inventory ............................................................. $213,800
(Direction of transfer has no impact here)
e. Land—Placid Lake’s book value .............................................. $600,000
Land—Scenic's book value ...................................................... 200,000
Elimination of unrealized intra-entity gain on land ................. (20,000)
Consolidated land balance ....................................................... $780,000
f. The intra-entity transfer was upstream from Scenic to Placid Lake. Because the transfer occurred in 2014, beginning retained earnings of the seller for 2015 contains the remaining portion of the unrealized gain.
Transfer pricing figures:
2014 Equipment = $80,000
Gain = $20,000 ($80,000 – $60,000)
Depreciation expense = $16,000 ($80,000 ÷ 5)
Income effect = $4,000 ($20,000 – $16,000)
Accumulated depreciation = $16,000
2015 Depreciation expense = $16,000
Accumulated depreciation = $32,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Historical cost figures:
2014 Equipment = $100,000
Depreciation expense = $12,000 ($60,000 ÷ 5 years)
Accumulated depreciation = $52,000 ($40,000 + $12,000)
2015 Depreciation expense = $12,000
Accumulated depreciation = $64,000
CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT
ENTRY *TA
Retained earnings, 1/1/15 (Scenic) ........................... 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 2014 transactions. Retained earnings reduction removes $4,000 income effect (above) and replaces it with $12,000 depreciation expense for 2014.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
18. (continued)
ENTRY ED
Accumulated depreciation ........................................ 4,000
Depreciation expense .......................................... 4,000
To reduce depreciation from transfer price ($16,000) to historical cost of $12,000.
This intra-entity transfer was upstream from Scenic to Placid Lake. Thus, income effects are assumed to relate to the original seller (Scenic). Because the sale occurred in 2014, the only effect in 2015 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 Scenic 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
Net income attributable to noncontrolling interest
Scenic's reported net income less excess amortization ......... $105,000
Reduction of depreciation expense to historical cost figure.. 4,000
Scenic's realized net income ..................................................... $109,000
Outside ownership percentage .................................................. 20%
Net income attributable to noncontrolling interest ............ $ 21,800
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
19. (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 Consolidated Net Income
Reported net income of subsidiary—2015............................... $160,000
2014 intra-entity gross profit realized in 2015
($250,000 × 30% × 20%) ......................................................... 15,000
2015 intra-entity gross profit deferred
($300,000 × 30% × 20%) ......................................................... (18,000)
Realized net income of subsidiary—2015 .......................... $157,000
Outside ownership .................................................................... 40%
Noncontrolling interest's share of consolidated net income $ 62,800
b. Entry *G
Retained earnings, Jan. 1 (subsidiary) ......... 15,000
Cost of goods sold .................................... 15,000
To remove intra-entity gross profit from previous year so that it can be recognized in current year.
Entry Tl
Sales................................................................. 300,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Cost of goods sold .................................... 300,000
To eliminate intra-entity inventory sale and purchase.
Entry G
Cost of goods sold ......................................... 18,000
Inventory .................................................... 18,000
To remove effects of current year unrealized gross profit.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
20. (30 Minutes) (Compute selected balances based on three different intra-entity asset transfer scenarios)
a. Consolidated Cost of Goods Sold
Protrade’s cost of goods sold .................................................. $410,000
Seacraft’s cost of goods sold ................................................... 317,000
Elimination of 2015 intra-entity transfers ................................ (134,000)
Realized gross profit deferred in 2014
(2015 beginning inventory)
$52,000 transfer price ÷ 1.6 = $32,500 cost
$52,000 – $32,500 = $19,500 unrealized gross profit....... (19,500)
Deferral of 2015 unrealized gross profit
in ending inventory:
$66,000 transfer price ÷ 1.6 = $41,250 cost
$66,000 – $41,250 = $24,750 unrealized gross profit....... 24,750
Consolidated cost of goods sold ............................................. $598,250
Consolidated Inventory
Protrade book value ............................................................. $370,000
Seacraft book value ............................................................. 144,000
Defer ending unrealized gross profit (see above) ............ (24,750)
Consolidated Inventory ....................................................... $489,250
Net income attributable to noncontrolling interest:
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Because all intra-entity sales were downstream, the deferrals do not affect Seacraft. Thus, the noncontrolling interest share is 20% of the $154,000 reported net income (revenues minus cost of goods sold and expenses) or $30,800.
b. Consolidated Cost of Goods Sold
Protrade book value .................................................................. $410,000
Seacraft book value ................................................................... 317,000
Elimination of 2015 intra-entity transfers ................................ (104,000)
Realized gross profit deferred in 2014
(2015 beginning inventory)
$45,000 transfer price ÷ 1.6 = $28,125 cost
$45,000 – $28,125 = $16,875 unrealized gross profit ......... (16,875)
Deferral of 2015 unrealized gross profit
in ending inventory:
$59,000 transfer price ÷ 1.6 = $36,875 cost
$59,000 – $36,875 = $22,125 unrealized gross profit ......... 22,125
Consolidated cost of goods sold ............................................. $628,250
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
20. b. (continued)
Consolidated inventory
Protrade book value .................................................................. $370,000
Seacraft book value ................................................................... 144,000
Defer ending unrealized gross profit (see above) .................. (22,125)
Consolidated inventory ............................................................. $491,875
Net income attributable to noncontrolling interest
Since all intra-entity sales are upstream, the effect on Seacraft's net income must be reflected in the noncontrolling interest computation:
Seacraft reported net income ................................................... $154,000
2014 unrealized gross profit realized in 2015 (above) ............ 16,875
2015 unrealized gross profit deferred until 2016 (above) ...... (22,125)
Seacraft realized net income .................................................... $148,750
Outside ownership percentage ................................................ 20%
Net income attributable to noncontrolling interest................. $ 29,750
c. Consolidated buildings (net):
Protrade’s buildings ............................................... $382,000
Seacraft's buildings ................................................ 181,000
Remove write-up created by transfer
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
($128,000 – $74,000) .......................................... $(54,000)
Remove excess depreciation created by transfer
($54,000 unrealized gain ÷ 5-year
remaining life × 2 years) ................................... 21,600 (32,400)
Consolidated buildings (net) ................................. $530,600
Consolidated expenses:
Protrade’s book value ............................................ $174,000
Seacraft's book value ............................................. 129,000
Remove excess depreciation on transferred building
($54,000 unrealized gain ÷ 5 year remaining life) (10,800)
Consolidated expenses .......................................... $292,200
Net income attributable to noncontrolling interest:
Because the transfer was made downstream, it has no effect on the noncontrolling interest. Thus, Seacraft's reported net income ($154,000 computed as revenues minus cost of goods sold and expenses) is used for this computation. The 20 percent outside ownership will be allotted consolidated net income of $30,800 (20% × $154,000).
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
21. (15 Minutes) (Prepare consolidated income statement with a wholly-owned subsidiary, includes transfers)
a. In this business combination, the direction of the intra-entity transfers (either upstream or downstream) is not important to the consolidated totals. Because Akron controls all of Toledo's outstanding stock, no noncontrolling interest figures are computed. If present, noncontrolling interest balances are affected by upstream sales but not by downstream.
For purposes of a 2015 consolidation, the following worksheet entries would affect income statement balances:
Entry *G
Retained earnings, 1/1/15 (seller) ....... 17,500
Cost of goods sold ......................... 17,500
To remove 2014 unrealized gross profit from beginning account balances. Gross profit is the 25% gross profit rate ($80,000 ÷ $320,000) multiplied by remaining inventory ($70,000).
Entry E
Amortization expense........................... 15,000
Patented technology ...................... 15,000
To recognize excess amortization expense for the current period.
Entry Tl
Sales....................................................... 320,000
Cost of goods sold ......................... 320,000
To eliminate intra-entity transfers of inventory during 2015.
Entry G
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Cost of goods sold ............................... 12,500
Inventory ......................................... 12,500
To remove 2015 unrealized gross profit from ending account balances. Gross profit is the 25% gross profit rate ($80,000 ÷ $320,000) multiplied by remaining inventory ($50,000).
b. By including the impact of each of these four consolidation entries, the following income statement can be created from the individual account balances:
AKRON, INC. AND CONSOLIDATED SUBSIDIARY
Income Statement
Year Ending December 31, 2015
Sales ..................................................................................... $1,380,000
Cost of goods sold ............................................................... 575,000
Gross profit ..................................................................... 805,000
Operating expenses ............................................................. 635,000
Consolidated net income ............................................... $170,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
22. (60 minutes) (Downstream intra-entity asset transfer when parent uses equity method and when a noncontrolling interest is present)
a. Investment account:Consideration paid (fair value) 1/1/14 $810,000
Netspeed’s reported net income for 2014 $80,000
Database amortization (12,000)
Netspeed’s adjusted net income $68,000
Quickport's ownership percentage 90 %
Quickport's share of Netspeed’s net 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 12/31/14 $861,500
Netspeed’s reported net income for 2015 $115,000
Database amortization (12,000)
Netspeed’s adjusted 2015 net income $103,000
Quickport's ownership percentage 90 %
Quickport's share of Netspeed net income $ 92,700
Depreciation adjustment 1,000
Equity in earnings of Netspeed Company, 2015 $93,700
Quickport’s share of Netspeed’s dividends, 2015 (90%) (7,200)
Balance 12/31/15 $948,000
b. 12/31/15 Worksheet Adjustments
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
*TA Equipment 6,000
Investment in Netspeed 2,500
Accumulated depreciation 8,500
To transfer the unrealized intra-entity equipment reduction (as of Jan. 1, 2015) from the Investment account to the equipment and A.D. accounts.
S Common stock—Netspeed 800,000
Retained earnings—Netspeed 112,000
Investment in Netspeed 820,800
Noncontrolling interest 91,200
A Database 48,000Investment in Netspeed 43,200
Noncontrolling interest 4,800
I Equity in earnings of Netspeed 93,700
Investment in Netspeed 93,700
D Investment in Netspeed 7,200
Dividends declared 7,200
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
22. (continued)
E Amortization expense 12,000
Database 12,000
ED Accumulated depreciation 1,000
Depreciation expense 1,000
23. (20 Minutes) (Consolidation entries for intra-entity equipment transfer.)
INDIVIDUAL RECORDS BASED ON TRANSFER PRICE
12/31/13 Equipment = $95,000
Gain on transfer = $45,000 ($95,000 – $50,000)
Depreciation expense = $19,000 ($95,000 ÷ 5 years)
Accumulated depreciation = $19,000
12/31/14 Depreciation expense $19,000
Accumulated depreciation = $38,000 (2 years)
12/31/15 Effect on retained earnings, 1/1/15 = $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
12/31/13 Equipment = $130,000
Depreciation expense = $10,000 ($50,000 ÷ 5 years)
Accumulated depreciation = $90,000 ($80,000 + $10,000)
12/31/14 Depreciation expense = $10,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Accumulated depreciation = $100,000 ($90,000 + $10,000)
12/31/15 Effect on retained earnings, 1/1/15 = ($20,000) (two years depreciation)
Depreciation expense = $10,000
Accumulated depreciation = $110,000 ($100,000 + $10,000)
Entry *TA Retained earnings, 1/1/15 (Padre) ........................................ 27,000
Equipment ($130,000 – $95,000) ..................................... 35,000
Accumulated depreciation ($100,000 – $38,000) ........... 62,000
To adjust to beginning-of-year balances for consolidated entity. Retained earnings adjustment reduces $7,000 credit balance to $20,000 debit balance as computed above.
Entry ED Accumulated depreciation..................................................... 9,000
Depreciation expense ................................................. 9,000
To remove excess depreciation for current year to reflect an allocation of the historical cost ($10,000) rather than the transfer price ($19,000).
24. (20 Minutes) (Determine consolidated net income when an intra-entity transfer of equipment occurs. Includes an outside ownership)
a. Net income—Ackerman ............................................................ $300,000
Net income—Brannigan............................................................. 98,000
Excess amortization for unpatented technology..................... (4,000)
Remove unrealized gain on equipment ................................... (90,000)
($200,000 – $110,000)
Remove excess depreciation created by
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
inflated transfer price ($90,000 ÷ 5) .................................... 18,000
Consolidated net income .......................................................... $322,000
b. Net income calculated in (part a.) ............................................ $322,000
Net income attributable to noncontrolling interest:
Net income—Brannigan ......................................... $98,000
Excess amortization ............................................... (4,000)
Adjusted net income ............................................... $94,000
NI attributable to the noncontrolling interest ....................... 10% (9,400 )
Consolidated net income to parent company.......................... $312,600
c. Net income calculated in (part a.) ............................................ $322,000
NI attributable to noncontrolling interest (see Schedule 1). (2,200)
Consolidated net income to parent company.......................... $319,800
Schedule 1: Net income attributable to noncontrolling interest (includes upstream transfer)
Reported subsidiary net income............................................... $98,000
Excess amortization................................................................... (4,000)
Defer unrealized gain on equipment transfer .......................... (90,000)
Eliminate excess depreciation ($90,000 ÷ 5) ........................... 18,000
Brannigan's realized net income .............................................. $22,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Outside ownership .................................................................... 10 %
Net income attributable to noncontrolling interest ........... $ 2,200
d. Net income 2016—Ackerman ................................................... 320,000
Net income 2016—Brannigan ................................................... 108,000
Excess amortization................................................................... (4,000)
Eliminate excess depreciation stemming from transfer
($90,000 ÷ 5) (year after transfer) ........................................ 18,000
Consolidated net income ................................................. $442,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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, 1/1/15:
Gross profit ($70,000 – $49,000) ............................................... $21,000
Gross profit rate ($21,000 ÷ $70,000) ....................................... 30%
Remaining inventory ................................................................. $30,000
Gross profit rate ......................................................................... 30%
Unrealized gross profit, 1/1/15................................................... $ 9,000
Unrealized Gross Profit—Inventory, 12/31/15:
Gross profit ($100,000 – $50,000) ............................................. $50,000
Gross profit rate ($50,000 ÷ $100,000) ..................................... 50%
Remaining inventory ................................................................. $40,000
Gross profit rate.......................................................................... 50%
Unrealized gross profit, 12/31/15 .............................................. $20,000
Impact of Intra-Entity Building Transfer:
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
12/31/14—Transfer price figures
Transfer price ....................................................................... $50,000
Gain on transfer ($50,000 – $30,000) .................................. 20,000
Depreciation expense ($50,000 ÷ 5 years) .......................... 10,000
Accumulated depreciation .................................................. 10,000
12/31/15—Transfer price figures
Depreciation expense .......................................................... 10,000
Accumulated depreciation .................................................. 20,000
12/31/14—Historical cost figures
Historical cost ....................................................................... $70,000
Depreciation expense ($30,000 book value ÷ 5 years) ...... 6,000
Accumulated depreciation ($40,000 + $6,000) ................... 46,000
12/31/15—Historical cost figures
Depreciation expense .......................................................... 6,000
Accumulated depreciation .................................................. 52,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
25. (continued)
CONSOLIDATED BALANCES
Sales = $1,000,000 (add the two book values and subtract $100,000 in intra-entity transfers)
Cost of Goods Sold = $571,000 (add the two book values and subtract $100,000 in intra-entity purchases. Subtract $9,000 because of the previous year unrealized gross profit and add $20,000 to defer the current year unrealized gross profit.)
Operating Expenses = $206,000 (add the two book values and include the $10,000 excess amortization expenses but remove the $4,000 in excess depreciation expense [$10,000 – $6,000] created by building transfer)
Investment Income = $0 (the intra-entity balance is removed so that the individual revenue and expense accounts of the subsidiary can be shown)
Inventory = $280,000 (add the two book values and subtract the $20,000 ending unrealized gross profit)
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])
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
26. (35 Minutes) (Prepare consolidation entries for a business combination with intra-entity inventory and equipment transfers; includes an outside ownership.)
a. Entry *G
Retained earnings, 1/1/15 (Sledge) ................ 2,000
Cost of goods sold .................................... 2,000
To remove unrealized gross profit from beginning account balances. This is the 40% gross profit rate ($6,000 ÷ $15,000) multiplied by remaining inventory ($5,000).
Entry *TA
Equipment........................................................ 4,000
Investment in Sledge ...................................... 2,400
Accumulated depreciation ........................ 6,400
To adjust the equipment balance to original cost ($16,000) and to adjust accumulated depreciation to the correct consolidated January 1, 2015 balance ($7,000 less $600 extra depreciation in 2014). The net reduction to the reported equipment balance (cost less A.D. = $2,400) equals the amount of unrealized gain at January 1, 2015. 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 2014 for the original intra-entity gain and increased by $600 in 2014 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, 2015 balances.
Entry S
Common stock (Sledge) ........................................... 120,000
Retained earnings, 1/1/15 (adjusted) (Sledge)........ 258,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Investment in Sledge (80%) ................................. 302,400
Noncontrolling interest in Sledge, 1/1/15 (20%). 75,600
To eliminate subsidiary's stockholders' equity accounts (after adjustment for Entry *G) and recognize noncontrolling interest balance as of January 1, 2015.
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, 1/1/15 (20%). 14,000
To recognize acquisition-date fair value allocations adjusted for 2 years of amortization (2013 and 2014).
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
26. (continued)
Entry I
Equity in income of Sledge ....................................... 10,600
Investment in Sledge ........................................... 10,600
To remove parent’s recognized intra-entity income using equity method.
Subsidiary reported net income.................................................................... $20,000
Realized upstream intra-entity gross profit in beginning inventory ....... 2,000
Deferred upstream intra-entity gross profit in ending inventory........... (4,500)
Excess amortization.................................................................................... (5,000 )
2015 realized subsidiary net income............................................................. $12,500
Parent’s ownership percentage..................................................................... 80%
Parent’s share of subsidiary realized net income........................................ $10,000
Depreciation adjustment from 2014 downstream fixed asset sale.......... 600
Parent’s recorded 2015 equity income from subsidiary.............................. $10,600
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 recognize 2015 excess amortizations.
Entry TI
Sales............................................................................ 20,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Cost of goods sold ............................................... 20,000
To eliminate intra-entity inventory transfers during 2015.
Entry G
Cost of goods sold .................................................... 4,500
Inventory ............................................................... 4,500
To remove unrealized gross profit from ending account balances. The gross profit is the 45% gross profit rate ($9,000 ÷ $20,000) multiplied by remaining inventory ($10,000).
Entry ED
Accumulated depreciation ........................................ 600
Depreciation expense .......................................... 600
To eliminate excess depreciation on equipment recorded at transfer price. Expense is being reduced from the recorded amount ($2,400 or $12,000 ÷ 5) to historical cost figure ($1,800 or $9,000 ÷ 5).
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
26. (continued)
b. Net income attributable to noncontrolling interest (2015)
Revenues..................................................................................... $130,000
Cost of goods sold .................................................................... (70,000)
Other expenses .......................................................................... (40,000)
Excess acquisition-date fair value amortization...................... (5,000 )
Net income adjusted for amortization ................................ $15,000
Gross profit on 2014 upstream inventory transfer
realized in 2015 (Entry *G) .................................................. 2,000
Gross profit on 2015 upstream inventory transfer
deferred until 2016 (Entry G) ............................................... (4,500)
Realized net income of subsidiary—2015................................ $12,500
Outside ownership .................................................................... 20%
Net income attributable to noncontrolling interest ........... $ 2,500
27. (65 Minutes) (Determine consolidation totals after answering a series of questions about combination and intra-entity inventory transfers)
a. Consideration transferred ....................... $342,000
Noncontrolling interest fair value............. 38,000
Subsidiary fair value at acquisition-date . 380,000
Book value.................................................. (326,000)
Fair value in excess of book value .......... $54,000 Remaining Annual Excess
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Excess fair value assignments Life Amortizations
To building ............................................ 18,000 9 yrs. $2,000
To patented technology ....................... 36,000 6 yrs. 6,000
Totals..................................................... -0- $8,000
b. Because Brey sold inventory to Pitino, the transfers are upstream.
c. Gross profit on 2014 transfers ($135,000 – $81,000) .............. $54,000
Gross profit percentage ($54,000 ÷ $135,000) ......................... 40%
Inventory remaining, 12/31/14 ................................................. $37,500
Gross profit percentage ............................................................ 40%
Unrealized gross profit, January 1, 2015 ................................ $15,000
d. Gross profit on 2015 transfers ($160,000 – $92,800) ............. $67,200
Gross profit percentage ($67,200 ÷ $160,000) ......................... 42%
Inventory remaining, 12/31/15 ................................................. $50,000
Gross profit percentage ............................................................ 42%
Unrealized gross profit, December 31, 2015 ........................... $21,000
5-48
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
27. (continued)
e. Pitino is applying the equity method because the $68,400 equals neither 90% of Brey's reported net income nor 90% of the dividends declared by Brey.
Brey’s reported net income ...................................................... $90,000
Excess fair value amortization.................................................. (8,000)
Realized gross profit ................................................................ 15,000
Deferred gross profit.................................................................. (21,000 )
Adjusted subsidiary net income............................................... $76,000
Ownership .................................................................................. 90%
Equity in earnings of Brey ........................................................ $68,400
f. Brey’s adjusted net income (see e.) ......................................... $76,000
Outside ownership .................................................................... 10%
Net income attributable to noncontrolling interest ................ $ 7,600
g. Investment in Brey (consideration transferred) ...................... $342,000
Net income of Brey
Reported 2013....................................... $64,000
2014 .................................................. 80,000
2015 ................................................. 90,000
Total ................................................. 234,000
Unrealized gross profit, 12/31/15(see d.) (21,000)
Realized net income 2013-2015 ......... 213,000
5-49
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Pitino’s ownership ............................... 90% 191,700
Excess amortizations ($8,000 × 3 years × 90%) (21,600)
Dividends declared by Brey
2013 .................................................. $19,000
2014 .................................................. 23,000
2015 ................................................. 27,000
Total ................................................. 69,000
Pitino's ownership ............................... 90% (62,100)
Investment in Brey, 12/31/15 ................... $450,000
h. Entry S
Common stock (Brey) ............................... 150,000
Retained earnings, 1/1/15 (Brey) (reduced by
1/1/15 unrealized gross profit) .................. 263,000
Investment in Brey (90%) .................... 371,700
Noncontrolling interest in Brey (10%) 41,300
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
27. (continued) part i.
Sales Revenues = $1,068,000 (total less $160,000 intra-entity sales)
Cost of Goods Sold = $570,000 (add book values less $160,000 in intra-entity purchases. Also, adjust for 2014 unrealized gross profit [subtract $15,000] and 2015 unrealized gross profit [add $21,000])
Expenses = $260,400 (add book values with $8,000 amortization for excess fair value allocations)
Equity in Earnings of Brey = $0 (intra-entity balance is eliminated to include individual revenue and expense accounts of the subsidiary)
Consolidated Net Income = $237,600 (consolidated revenues less COGS and expenses)
Net Income Attributable to Noncontrolling Interest = $7,600 (see f.)
Net Income to Pitino (parent) = $230,000 (consolidated revenues less consolidated cost of goods sold, expenses, and the noncontrolling interest's share of the subsidiary's net income)
Retained Earnings, 1/1 = $488,000 (parent equity method balance)
Dividends Declared = $136,000 (parent balance only)
Retained Earnings, 12/31 = $582,000 (consolidated beginning balance plus net income less dividends declared)
Cash and Receivables = $228,000 (total less $16,000 intra-entity balance)
Inventory = $370,000 (total less ending unrealized gross profit)
Investment in Brey = $0 (intra-entity balance is eliminated so that the individual assets and liabilities of the subsidiary can be reported)
Land, Buildings, and Equipment = $1,304,000 (add book values and include a $12,000 net allocation after 3 years of amortization)
Patented Technology = $18,000 (original allocation after 3 years of amortization [$6,000 per year])
Total Assets = $1,920,000 (add consolidated figures)5-51
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Liabilities = $773,000 (add book values less $16,000 intra-entity balance)
Noncontrolling Interest in Brey, 12/31 = $50,000 ([10% of subsidiary's book value at beginning of period plus unamortized excess less beginning unrealized gross profit] plus 10% of the subsidiary's realized net income less 10% of subsidiary dividends).
Common Stock = $515,000 (parent balance only)
Retained Earnings, 12/31 = $582,000 (see above)
Total Liabilities and Stockholders' Equity = $1,920,000 (summation)
5-52
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
28. (20 Minutes) (Computation of selected consolidation balances as affected by downstream inventory transfers)
UNREALIZED GROSS PROFIT, 12/31/14: (downstream transfer)
Intra-entity gross profit ($120,000 – $72,000) .......................... $48,000
Inventory remaining at year's end ............................................ 30%
Unrealized intra-entity gross profit, 12/31/14 ................................ $14,400
UNREALIZED GROSS PROFIT, 12/31/15: (downstream transfer)
Intra-entity gross profit ($250,000 – $200,000) ........................ $50,000
Inventory remaining at year's end ............................................ 20%
Unrealized intra-entity gross profit, 12/31/15 ................................ $10,000
CONSOLIDATED TOTALS
Sales = $1,150,000 (combine amounts and eliminate intra-entity sales of $250,000)
Cost of goods sold:
Brannigan's book value ............................................................ $535,000
Zeigler's book value .................................................................. 400,000
Eliminate intra-entity transfers ................................................. (250,000)
Realized gross profit deferred in 2014 ..................................... (14,400)
Deferral of 2015 unrealized gross profit .................................. 10,000
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- (intra-entity transfer eliminated in consolidation)5-53
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Net income attributable to noncontrolling interest: (impact of transfers is not included because they were downstream)
Zeigler reported net income for 2015 ................................. $(100,000)
Intangible amortization......................................................... 10,000
Zeigler adjusted net income................................................. (90,000)
Outside ownership ............................................................... 30 %
Net income attributable to noncontrolling interest....... $(27,000 )
Inventory = $980,000 (combine amounts less the $10,000 ending unrealized gross profit)
Noncontrolling interest in subsidiary
30% beginning $950,000 book value...................................... $(285,000)
Excess January 1 intangible allocation (30% × $395,000).... (118,500)
Net income attributable to noncontrolling interest............... (27,000)
Dividends (30% × $50,000)...................................................... 15,000
Total noncontrolling interest at 12/31/15............................... $(415,500 )
5-54
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
29. (25 Minutes) (Computation of selected consolidation balances as affected by upstream inventory transfers)
UNREALIZED GROSS PROFIT, 12/31/14: (upstream transfer)
Intra-entity gross profit ($120,000 – $72,000) .......................... $48,000
Inventory remaining at year's end ............................................ 30%
Unrealized intra-entity gross profit, 12/31/14 ................................ $14,400
UNREALIZED GROSS PROFIT, 12/31/15: (upstream transfer)
Intra-entity gross profit ($250,000 – $200,000) ........................ $50,000
Inventory remaining at year's end ............................................ 20%
Unrealized intra-entity gross profit, 12/31/15 ................................ $10,000
CONSOLIDATED TOTALS
Sales = $1,150,000 (combine amounts and eliminate intra-entity transfer)
Cost of goods sold:
Brannigan's COGS book value ................................................. $535,000
Zeigler's COGS book value ....................................................... 400,000
Eliminate intra-entity transfers ................................................. (250,000)
Realized gross profit deferred in 2014 ..................................... (14,400)
Deferral of 2015 unrealized gross profit .................................. 10,000
Consolidated cost of goods sold ........................................ $680,600
Operating expenses = $210,000 (combine amounts and include intangible amortization for current year)
Dividend income = -0- (intra-entity transfer eliminated in consolidation)
5-55
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Net income attributable to noncontrolling interest: (impact of transfers is included because they were upstream)
Zeigler reported net income for 2015 ....................................... $100,000
Intangible amortization......................................................... (10,000)
2014 gross profit recognized in 2015 ................................. 14,400
2015 gross profit deferred ................................................... (10,000)
Zeigler realized net income for 2015................................... $94,400
Outside ownership ............................................................... 30%
Net income attributable to noncontrolling interest ................ $28,320
Inventory = $980,000 (combine amounts and defer the $10,000 ending unrealized gross profit)
Noncontrolling interest in subsidiary, 12/31/15
30% beginning book value less $14,400
unrealized gross profit (30% × $935,600)......................... $(280,680)
Excess intangible allocation (30% × $395,000)................... (118,500)
Net income attributable to noncontrolling interest............ (28,320)
Dividends (30% × $50,000).................................................... 15,000
Total noncontrolling interest at 12/31/15............................. $(412,500 )
5-56
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 ....................... $657,000
Noncontrolling interest fair value............. 73,000
Subsidiary fair value at acquisition-date . 730,000
Book value.................................................. (620,000)
Fair value in excess of book value .......... $110,000 Remaining Annual Excess
Excess fair value assignments Life Amortizations
to equipment......................................... 20,000 4 yrs. $5,000
to liabilities ........................................... 40,000 5 yrs. 8,000
to brand names .................................... 50,000 10 yrs. 5,000
Totals..................................................... -0- $18,000
Determination of subsidiary book value on 1/1/14
Book value, 1/1/15 (based on stockholders' equity accounts) $700,000
Eliminate net income – 2014 ..................................................... (80,000)
Eliminate dividends – 2014 ....................................................... -0 -
Book value, 1/1/14 ................................................................ $620,000
Beginning inventory unrealized gross profit, 12/31/14 (Upstream)
Ending Inventory ($145,000 × 30%) .......................................... $43,500
Gross profit rate (given) ............................................................ 20%
Unrealized intra-entity gross profit, 12/31/14 .......................... $ 8,700
5-57
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Ending inventory unrealized gross profit, 12/31/15 (Upstream)
Ending Inventory ($160,000 × 40%) .......................................... $64,000
Gross profit rate (given) ............................................................ 20%
Unrealized intra-entity gross profit, 12/31/15 .......................... $12,800
Building unrealized gross profit, 1/2/14 (Downstream)
Transfer price ............................................................................. $25,000
Book value ................................................................................. 10,000
Unrealized gross profit .............................................................. $15,000
Annual excess depreciation
Annual depreciation based on book value ($10,000 ÷ 5 years) $2,000
Annual depreciation based on transfer price
($25,000 ÷ 5 years) ................................................................ 5,000
Excess annual depreciation ..................................................... $3,000
5-58
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
30. (continued)
Adjustment to buildings to return to historical cost at 1/1/15
Consolidation
Transfer Price Historical Cost Adjustment
Buildings $25,000 $100,000 $75,000
Accumulated depreciation
(1/1/15 balance after 1
more year of depreciation) 5,000 92,000 87,000
Consolidated Totals
Sales and other Income = $1,240,000 (add the two book values and eliminate the intra-entity transfers)
Cost of goods sold:
Moore's book value ................................................................... $500,000
Kirby's book value ..................................................................... 400,000
Eliminate intra-entity transfers ................................................. (160,000)
Realized gross profit deferred in 2014...................................... (8,700)
Deferral of 2015 unrealized gross profit .................................. 12,800
Cost of goods sold .................................................................... $744,100
Operating and interest expenses = $275,000 (add the two book values and include $18,000 amortization for current year but eliminate $3,000 excess depreciation from asset transfer)
5-59
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Net income attributable to noncontrolling interest = $1,790 (impact of inventory transfers is included because they were upstream but building transfer is omitted because it was downstream)
Reported net income for 2015 ........................................................ $40,000
Realized gross profit deferred in 2014 ..................................... 8,700
Deferral of 2015 unrealized gross profit .................................. (12,800)
Realized net income of subsidiary ........................................... $35,900
Excess fair value amortization.................................................. (18,000 )
Adjusted subsidiary net income............................................... 17,900
Outside ownership .......................................................................... 10%
Net income attributable to noncontrolling interest................. $ 1,790
Consolidated net income = $220,900 (consolidated sales less consolidated cost of goods sold, expenses, and noncontrolling interest)
To noncontrolling interest = $1,790 (above)
To controlling interest = $219,110
5-60
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
30. (continued)
Retained earnings, 1/1/15 = $1,025,970 (because the parent uses the initial value method, worksheet entries adjust its retained earnings for changes in subsidiary's book value, excess amortizations, and the impact of unrealized gross profits in previous years)
Moore's reported balance, 1/1/15 ................................. $990,000
Impact of building transfer (parent's income was over-
stated by the $15,000 gain but has been reduced by
one prior year of excess depreciation) .................... (12,000)
Adjustments to convert initial value to equity method:
Increase in subsidiary's book value during prior
years ..................................................................... $80,000
Excess fair value amortization ................................. (18,000)
Deferral of 12/31/14 unrealized gross profit
(subsidiary's prior income was overstated) ...... (8,700)
Realized increase in book value ......................... 53,300
Ownership................................................................... 90%
Equity accrual ............................................................ 47,970
Retained Earnings, 1/1/15 .................................... $1,025,970
Dividends declared = $130,000 (parent balance only)
Retained Earnings, 12/31/15 = $1,115,080 (the beginning balance plus controlling interest share of consolidated net income less dividends declared)
Cash and Receivables = $397,000 (add the two book values)
Inventory = $371,200 (add the two book values and defer the $12,800 ending unrealized gross profit)
5-61
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Investment in Kirby = -0- (eliminated for consolidation purposes)
Equipment (Net) = $1,030,000 (add the two book values adjusted for excess allocation and amortization)
Buildings = $1,725,000 (add the two book values and add the $75,000 impact to return to historical cost as computed above for transfer)
Accumulated Depreciation = $384,000 (add the two book values plus adjustment to historical cost ($87,000 at beginning of year less $3,000 excess depreciation for current year)
Other Assets = $300,000 (add the two book values)
Brand Names = $40,000 (the original $50,000 allocation less two years of amortization at $5,000 per year)
Total Assets = $3,479,200 (summation of the consolidated totals)
Liabilities = $1,684,000 (add the two book values and subtract the original allocation [$40,000] after two years of amortization [$8,000 per year])
5-62
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
30. (continued)
Noncontrolling interest 12/31/15 = $80,120 (10 percent of $691,300 adjusted beginning book value [$700,000 less $8,700 deferral of unrealized gross profit] plus $9,200 share of beginning unamortized excess fair value allocations plus $1,790 net income share)
Common Stock = $600,000 (parent balance only)
Retained Earnings, 12/31/15 = $1,115,080 (computed above)
Total Liabilities and Equities = $3,479,200 (summation of consolidated balances).
The same consolidation balances can be derived using a worksheet and the following adjusting and eliminating entries:
CONSOLIDATION ENTRIES
Entry *G
Retained earnings, 1/1/15 (Kirby) ........................ 8,700
Cost of goods sold ......................................... 8,700
(To recognize 2014 deferred gross profit as income in 2015)
Entry *TA
Building.................................................................. 75,000
Retained earnings, 1/1/15 (Moore) ...................... 12,000
Accumulated depreciation ............................. 87,000
(To adjust 1/1/15 balance to historical cost figures)
Entry *C
Investment in Kirby .............................................. 47,970
5-63
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Retained earnings, 1/1/15 (Moore) ................. 47,970
(To convert from initial value to equity method as follows:)
Increase in subsidiary's book value during prior years
(income of $80,000)........................................................... $80,000
Excess amortization for 2014.................................................. (18,000)
Deferral of 12/31/14 unrealized gross profit........................... (8,700)
Realized increase in subsidiary's book value........................ $53,300
Ownership ................................................................................ 90%
Conversion to equity method (full accrual) adjustment....... $47,970
S Common stock (Kirby) ......................................... 150,000
Retained earnings, 1/1/15 as adjusted (Kirby).... 541,300
Investment in Kirby (90%) .............................. 622,170
Noncontrolling interest in Kirby (10%) ......... 69,130
(To eliminate subsidiary's beginning stockholders' equity accounts and recognize beginning noncontrolling interest balance)
30. (continued)
A Liabilities ............................................................... 32,000
Equipment ............................................................. 15,000
Brand names ........................................................ 45,000
Investment in Kirby ........................................ 82,800
5-64
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Noncontrolling interest in Kirby (10%) ......... 9,200
(To recognize unamortized balance of excess allocations as of 1/1/15. Figures have been reduced by one year of amortization)
Entry I (the subsidiary declared no dividends so no adjustment needed)
E Operating and interest expense........................... 18,000
Liabilities ......................................................... 8,000
Equipment........................................................ 5,000
Brand names ................................................... 5,000
(To recognize excess amortization expenses for current year)
Tl Sales ...................................................................... 160,000
Cost of goods sold ......................................... 160,000
(To eliminate intra-entity transfers for 2015)
G Cost of goods sold ............................................... 12,800
Inventory .......................................................... 12,800
(To defer ending unrealized inventory gross profit)
ED Accumulated depreciation .................................. 3,000
Depreciation expense ..................................... 3,000
(To adjust depreciation for current year created by transfer of building)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
30. continued: Worksheet (not part of requirements)
Moore Company and Subsidiary
Consolidated Worksheet
December 31, 2015
Moore Kirby NCI Consolidated
Sales and other income (800,000) (600,000) (TI) 160,000 (1,240,000)
Cost of goods sold 500,000 400,000 (G) 12,800 (G*) 8,700 744,100
(TI)160,000
Op. and interest expenses 100,000 160,000 (E) 18,000 (ED) 3,000 275,000
Separate company income (200,000) (40,000)
Consolidated net income (220,900)
to noncontrolling interest (1,790) 1,790
to Moore Company (219,110)
Retained earnings, 1/1 (990,000) (TA*) 12,000 (*C) 47,970 (1,025,970)
(550,000) (S) 541,300
(G*) 8,700
Net income (200,000) (40,000) (219,110)
Dividends declared 130,000 0 130,000
Retained earnings, 12/31 (1,060,000) (590,000) (1,115,080)
Cash and receivables 217,000 180,000 397,000
Inventory 224,000 160,000 (G) 12,800 371,200
Investment in Kirby 657,000 0 (*C) 47,970 (S) 622,170 0
(A) 82,800
Equipment (net) 600,000 420,000 (A) 15,000 (E) 5,000 1,030,000
Buildings 1,000,000 650,000 (TA*) 75,000 1,725,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Acc. depreciation—buildings (100,000) (200,000) (ED) 3,000 (TA*) 87,000 (384,000)
Brand names 0 0 (A) 45,000 (E) 5,000 40,000
Other assets 200,000 100,000 300,000
Total assets 2,798,000 1,310,000 3,479,200
Liabilities (1,138,000) (570,000) (A) 32,000 (E) 8,000 (1,684,000)
Common stock (600,000) (150,000) (S)150,000 (600,000)
Noncontrolling interest , 1/1 (S) 69,130
(A) 9,200 (78,330)
Noncontrolling interest,12/31 (80,120) (80,120)
Retained earnings, 12/31 (1,060,000) (590,000) (1,115,080)
Total liabilities and equity (2,798,000) (1,310,000) 1,120,770 1,120,770 (3,479,200)
5-67
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 .......................... $372,000
Noncontrolling interest fair value................ 248,000
Subsidiary fair value at acquisition-date . . . $620,000
Acquisition-date book value........................ (320,000)
Fair value in excess of book value ............. $300,000 Remaining Annual Excess
Excess fair value assignments............... Life Amortizations
to patents.................................................. 70,000 10 yrs. $7,000
to customer list ....................................... 45,000 15 yrs. 3,000
to goodwill ............................................... $185,000 indefinite -0 -
$10,000
Determination of Investment in Stinson account balance
Consideration transferred ................................................... $372,000
Increase in Stinson’s retained earnings 1/1/14 to 1/1/15
[(280,000 – 220,000) × 60%]........................................... $36,000
Excess fair value amortization × 60%............................ (6,000)
2014 ending inventory profit deferral (100%)................ (10,000 ) 20,000
McIlroy’s equity in earnings of Stinson for 2015*......... 28,000
Stinson 2015 dividends declared to McIlroy................. (9,000 )
Investment account balance 12/31/15................................. $411,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
* Stinson’s 2015 net income.............................................. $60,000
Excess fair value amortization....................................... (10,000 )
Adjusted net income........................................................ $50,000
McIlroy’s percentage ownership.................................... 60 %
McIlroy’s share of Stinson’s adjusted net income........ $30,000
2014 intra-entity inventory profit recognized................ 10,000
2015 intra-entity inventory profit deferred..................... (12,000 )
McIlroy’s equity in earnings of Stinson......................... $28,000
Intra-entity profits (downstream) 2014 2015
Intra-entity transfers remaining in inventory $50,000 $40,000
Gross profit rate** 20 % 30%
$10,000 $12,000
**(150,000 – 120,000) ÷ 150,000 = 20%
(160,000 – 112,000) ÷ 160,000 = 30%
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
31. (continued)
b. McIlroy Stinson Adj. & Elim. NCI Consolidated
Sales (700,000) (335,000) (TI)160,000 (875,000)
Cost of goods sold 460,000 205,000 (G) 12,000 (*G) 10,000 507,000
(TI) 160,000
Operating expenses 188,000 70,000 (E) 10,000 268,000
Equity in earnings of Stinson (28,000) (I) 28,000 -0-
Separate company net income (80,000) (60,000)
Consolidated net income (100,000)
to noncontrolling interest (20,000) 20,000
to McIlroy, Inc. (80,000)
Retained earnings, 1/1 (695,000) (280,000) (S) 280,000 (695,000)
Net income (above) (80,000) (60,000) (80,000)
Dividends declared 45,000 15,000 (D) 9,000 6,000 45,000
Retained earnings, 12/31 (730,000) (325,000) (730,000)
Cash and receivables 248,000 148,000 396,000
Inventory 233,000 129,000 (G) 12,000 350,000
Investment in Stinson 411,000 -0- (D) 9,000 (S) 228,000 -0-
(*G) 10,000 (A)174,000
(I) 28,000
Buildings (net) 308,000 202,000 510,000
Equipment (net) 220,000 86,000 306,000
Patents (net) -0- 20,000 (A) 63,000 (E) 7,000 76,000
Customer list (A) 42,000 (E) 3,000 39,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Goodwill (A)185,000 185,000
Total assets 1,420,000 585,000 1,862,000
Liabilities (390,000) (160,000) (550,000)
Common stock (300,000) (100,000) (S) 100,000 (300,000)
Noncontrolling interest 1/1 (S) 152,000
(A)116,000 (268,000)
Noncontrolling interest 12/31 (282,000 ) (282,000)
Retained earnings, 12/31 (730,000 ) (325,000 ) (730,000 )
Total liabilities and equities (1,420,000) (585,000) 899,000 899,000 (1,862,000)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
32. Investment balance and worksheet preparation—upstream sales, equity method
a. 2015 net income reported by Sander $230,000
Excess patent fair value amortization ($350,000 ÷ 5 years) (70,000)
Deferred gross profit for 12/31/15 intra-entity inventory (160,000 × 25%) (40,000)
Recognized gross profit for 1/1/15 intra-entity inventory (125,000 × 28%) 35,000
Sander’s net income adjusted $155,000
To controlling interest (80%) $124,000
To noncontrolling interest (20%) $31,000
Adjustments
b. Plymouth Sander & Eliminations NCI Consolidated
Revenues (1,740,000) (950,000) (TI) 300,000 (2,390,000)
Cost of goods sold 820,000 500,000 (G) 40,000 (TI)300,000 1,025,000
(*G) 35,000
Depreciation expense 104,000 85,000 189,000
Amortization expense 220,000 120,000 (E) 70,000 410,000
Interest expense 20,000 15,000 35,000
Equity in earnings of Sander (124,000) (I) 124,000 0
Separate company net income (700,000) (230,000)
Consolidated net income (731,000)
to noncontrolling
interest (31,000) 31,000
to Plymouth Corp. (700,000)
Retained earnings 1/1 (2,800,000) (345,000) (S) 310,000 (2,800,000)
(*G) 35,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Net income (700,000) (230,000) (700,000)
Dividends declared 200,000 25,000 (D) 20,000 5,000 200,000
Retained earnings 12/31 (3,300,000) (550,000) (3,300,000)
Cash 535,000 115,000 650,000
Accounts receivable 575,000 215,000 790,000
Inventory 990,000 800,000 (G) 40,000 1,750,000
Investment in Sander 1,420,000 (D) 20,000 (S)968,000
(A)348,000 0
(I) 124,000
Buildings and equipment 1,025,000 863,000 1,888,000
Patents 950,000 107,000 (A) 210,000 (E) 70,000 1,197,000
Goodwill (A) 225,000 225,000
Total Assets 5,495,000 2,100,000 6,500,000
Accounts payable (450,000) (200,000) (650,000)
Notes payable (545,000) (450,000) (995,000)
Noncontrolling interest 1/1 (S)242,000
(A) 87,000 (329,000)
Noncontrolling interest 12/31 (355,000) (355,000)
Common stock (900,000) (800,000) (S) 800,000 (900,000)
APIC (300,000) (100,000) (S) 100,000 (300,000)
Retained earnings 12/31 (3,300,000) (550,000) (3,300,000)
Total liab. and SE (5,495,000) (2,100,000) 2,234,000 2,234,000 (6,500,000)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 ............................... $665,000
Noncontrolling interest fair value..................... 285,000
Subsidiary fair value at acquisition-date ......... $950,000
Book value.......................................................... (800,000)
Fair value in excess of book value .................. $150,000 Remaining Annual Excess
Excess fair value assignments.................... Life Amortizations
to building...................................................... 50,000 5 yrs. $10,000
to franchise agreements .............................. 100,000 10 yrs. 10,000
-0- $20,000
Inventory Transfers (Upstream)
2014 gross profit deferred until 2015 ($12,000 × 30%).................. $3,600
2015 gross profit deferred until 2016 ($18,000 × 30%).................. $5,400
Equipment Transfer (Downstream)
Unrealized gain as of January 1, 2015:
Unrealized gain on transfer (1/1/14) ......................................... $36,000
2014 excess depreciation ($36,000 ÷ 6 yrs.) ............................ (6,000)
Unrealized gain January 1, 2015..................................................... $30,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Excess depreciation—2015 ($36,000 ÷ 6 yrs.) .............................. $6,000
Entry *G
Retained earnings, 1/1/15 (Young) ...................... 3,600
Cost of goods sold ......................................... 3,600
To recognize upstream intra-entity inventory gross profit deferred from previous year.
Entry *TA
Retained earnings, 1/1/15 (Monica) ................... 30,000
Equipment ($50,000 – $36,000) ........................... 14,000
Accumulated depreciation ($50,000 – $6,000) 44,000
To return equipment accounts to beginning book value based on historical cost and to remove unrealized gain from beginning retained earnings.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
33. (continued)
Entry *C
Investment in Young ....................................... 123,480
Retained earnings, 1/1/15 (Monica) .......... 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 2013–2014 as follows.
Retained earnings of Young, December 31, 2015 (given) $740,000
Eliminate income and dividends of Young
($160,000 – $50,000) ............................................. (110,000)
Retained earnings of Young, December 31, 2014 ... 630,000
Removal of unrealized gross profit (Entry *G) ........ (3,600)
Realized retained earnings of Young,
December 31, 2014................................................ 626,400
Retained earnings at date of acquisition ................. (410,000)
Increase in retained earnings during 2013–2014..... 216,400
Ownership percentage .............................................. 70 %
Income accrual to be recognized ............................. 151,480
Excess amortization for 2013–2014 ($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
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Retained earnings, 1/1/15
(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.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
33. (continued)
Entry I
Dividend income .................................................. 35,000
Dividends declared ......................................... 35,000
To eliminate Intra-entity dividend declarations recorded by parent as income under the initial value method.
Entry E
Depreciation expense........................................... 10,000
Amortization expense .......................................... 10,000
Franchise agreement ...................................... 10,000
Buildings.......................................................... 10,000
To recognize current year excess amortization expense.
Entry Tl
Sales ..................................................................... 90,000
Cost of goods sold ......................................... 90,000
To remove intra-entity inventory transfers made during the current year.
Entry G
Cost of goods sold ............................................... 5,400
Inventory........................................................... 5,400
To defer unrealized gross profit on 2015 intra-entity inventory transfers (computed above).
Entry ED5-78
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 Consolidated Net Income
Reported net income of Young (given) .............................. $160,000
Excess fair value amortization ............................................ (20,000)
Recognition of 2014 unrealized gross profit (Entry *G) .... 3,600
Deferral of 2015 unrealized gross profit (Entry G) (upstream) (5,400)
Realized net income of Young ............................................ $138,200
Outside ownership percentage ........................................... 30 %
Net income attributable to noncontrolling interest ........... $ 41,460
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 ............................................... 102,740
Investment in Young ....................................... 102,740
To eliminate intra-entity income accrual.
Reported net income of Young (given) ...................................... $160,000
Excess fair value amortization .................................................... (20,000)
Recognition of 2014 unrealized gross profit (Entry *G) ............ 3,600
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Deferral of 2015 unrealized gross profit (Entry G) (upstream) (5,400 )
Realized net income of Young .................................................... $138,200
Outside ownership percentage ................................................... 70 %
Monica’s share of Young’s realized net income......................... $ 96,740
Depreciation adjustment for asset transfer gain........................ 6,000
Equity accrual for 2015............................................................ $102,740
Entry D
Investment in Young ............................................ 35,000
Dividends declared ......................................... 35,000
To eliminate intra-entity dividend transfers.
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.)
Net income attributable to noncontrolling interest (Same as in Problem 33.)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 ............................... $570,000
Noncontrolling interest fair value..................... 380,000
Subsidiary fair value at acquisition-date ......... $950,000
Book value.......................................................... (850,000)
Fair value in excess of book value .................. $100,000 Remaining Annual Excess
Excess fair value assignment ..................... Life Amortization
to customer list............................................. 100,000 20 yrs. $5,000
-0-
a. CONSOLIDATION ENTRIES
Entry *TL
Retained earnings, 1/1/15 (Gibson) ............... 40,000
Land ............................................................ 40,000
To remove unrealized gain on Intra-entity downstream transfer of land made in 2014.
Entry *G
Retained earnings, 1/1/15 (Keller) ................. 10,000
Cost of goods sold .................................... 10,000
To defer unrealized upstream Inventory gross profit from 2014 until 2015 computed as the 2014 ending inventory balance of $30,000 (20% × $150,000) multiplied by 33-1/3% gross profit rate ($50,000 ÷ $150,000).
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Entry *C
Retained earnings, 1/1/15 (Gibson) ............... 9,000
Investment in Keller .................................. 9,000
Parent is applying the partial equity method as can be seen by the amount in the Equity in earnings 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 2014. In addition, the equity accrual recorded by the parent has been based on Keller's reported net income. As shown in Entry *G, $10,000 of that reported net income has not actually been realized as of January 1, 2015. 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.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
35. (continued)
Entry S
Common stock (Keller) ................................... 320,000
Additional paid-in capital ............................... 90,000
Retained earnings, 1/1/15 (Keller) (adjusted
for Entry *G) ............................................... 610,000
Investment in Keller (60%) .................. 612,000
Noncontrolling interest in Keller, 1/1/15 (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 .................................. 57,000
Noncontrolling interest in Keller, 1/1/15 (40%) 38,000
To recognize amount paid within acquisition price for the customer list. Original balance is adjusted for previous year’s amortization.
Entry I
Equity in earnings of Keller ........................... 84,000
Investment in Keller .................................. 84,000
To eliminate intra-entity income accrual.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Entry D
Investment in Keller ........................................ 36,000
Dividends declared .................................... 36,000
To eliminate intra-entity (60%) dividend transfers.
Entry E
Amortization expense...................................... 5,000
Customer list ............................................. 5,000
To recognize current period excess amortization expense.
Entry P
Liabilities.......................................................... 40,000
Accounts receivable .................................. 40,000
To eliminate intra-entity debt.
Entry Tl
Sales................................................................. 200,000
Cost of goods sold .................................... 200,000
To eliminate current year intra-entity inventory transfer.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
35. (continued)
Entry G
Cost of goods sold ......................................... 12,000
Inventory..................................................... 12,000
To defer 2015 unrealized inventory gross profit. Unrealized gain is the ending inventory of $40,000 (20% of $200,000) multiplied by 30% gross profit rate ($60,000 ÷ $200,000).
Net income attributable to noncontrolling interest
Keller reported net income ......................................................... $140,000
Excess fair value amortization ................................................... (5,000)
2014 Intra-entity gross profit realized in 2015 (inventory)........ 10,000
2015 Intra-entity gross profit deferred (inventory) ................... (12,000)
Keller realized net income 2015.................................................. $133,000
Outside ownership percentage .................................................. 40%
Net income attributable to noncontrolling interest ............ $ 53,200
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
35. a. (continued) GIBSON AND KELLER
Consolidation Worksheet
Year Ending December 31, 2015
Consolidation Entries Noncontrolling Consolidated
Accounts Gibson Keller Debit Credit Interest Totals
Sales (800,000) (500,000) (TI) 200,000 (1,100,000)
Cost of goods sold 500,000 300,000 (G) 12,000 (*G) 10,000 602,000
(TI) 200,000
Operating expenses 100,000 60,000 (E) 5,000 165,000
Equity in earnings of Keller (84,000 ) -0- (I) 84,000 -0-
Separate company net net income (284,000 ) (140,000 )
Consolidated net income (333,000)
To noncontrolling interest (53,200) 53,200
To Gibson Company (279,800 )
RE, 1/1—Gibson (1,116,000) (*TL) 40,000 (1,067,000)
(*C) 9,000
RE, 1/1—Keller (620,000) (*G) 10,000
(S) 610,000
Net income (above) (284,000) (140,000) (279,800)
Dividends declared 115,000 60,000 (D) 36,000 24,000 115,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Retained earnings, 12/31 (1,285,000 ) (700,000 ) (1,231,800 )
Cash 177,000 90,000 267,000
Accounts receivable 356,000 410,000 (P) 40,000 726,000
Inventory 440,000 320,000 (G) 12,000 748,000
Investment in Keller 726,000 (D) 36,000 (*C) 9,000 -0-
(S) 612,000
(I) 84,000
(A) 57,000
Land 180,000 390,000 (*TL) 40,000 530,000
Buildings and equipment (net) 496,000 300,000 796,000
Customer list -0- -0- (A) 95,000 (E) 5,000 90,000
Total assets 2,375,000 1,510,000 3,157,000
Liabilities (480,000) (400,000) (P) 40,000 (840,000)
Common stock (610,000) (320,000) (S) 320,000 (610,000)
Additional paid-in capital (90,000) (S) 90,000
Retained earnings, 12/31 (1,285,000) (700,000) (1,231,800)
NCI in Keller, 1/1 (S) 408,000 (408,000)
(A) 38,000 (38,000)
NCI In Keller, 12/31 (475,200 ) (475,200 )
Total liabilities and equity (2,375,000 ) (1,510,000 ) 1,551,000 1,551,000 (3,157,000 )
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
35. (continued)
b. If the intra-entity transfer had been a building rather than land, two adjustments to the consolidation entries would be needed. Entry *TL would be changed and relabeled as Entry *TA and an Entry ED would be added to eliminate the overstatement of depreciation expense for 2015. 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, 1/1/15 (Gibson) ............... 36,000
Buildings ......................................................... 40,000
Accumulated depreciation ........................ 76,000
To defer unrealized gain ($40,000 original amount less one year of excess depreciation at $4,000 per year) as of beginning of year. Entry also returns Buildings account to historical cost (from $100,000 to $140,000) and Accumulated Depreciation account to historical cost (original $80,000 less one year of excess depreciation at $4,000). Because the Buildings account is shown at net value in the information given in this problem, the above entry would probably be made as follows:
Entry *TA (Alternative)
Retained earnings, 1/1/15 (Gibson) ............... 36,000
Buildings (net) ........................................... 36,000
Entry ED
Accumulated depreciation ............................. 4,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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).
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
36. (40 Minutes) (Prepare consolidation worksheet with intra-entity transfer of inventory and land. No outside ownership exists)
a. Skyline reported net income...................................................... $(88,000)
Patented technology amortization............................................ 15,000
Beginning inventory gross profit recognized.......................... (14,400)
Ending inventory gross profit deferred.................................... 14,000
Deferral of land gain on sale..................................................... 18,000
Equity in Skyline’s earnings...................................................... $(55,400)
b. Acquisition-Date Fair Value Allocation
Consideration transferred (fair value of shares issued) ........ $450,000
Book value of subsidiary .......................................................... 300,000
Fair value in excess of book value ........................................... $150,000
Excess fair over book value assigned to:
Trademarks (indefinite life) .................................................... 30,000
Patented technology .............................................................. $120,000
Remaining life of patented technology ................................. 8 years
Annual amortization .................................................................. $ 15,000
Unrealized Upstream Inventory Gross Profit, 1/1
Inventory being held ($50,000 × 72%) ...................................... $36,000
Gross profit rate ($20,000 ÷ $50,000) ....................................... 40%
Unrealized gross profit, 1/1 ....................................................... $14,4005-91
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Unrealized Upstream Inventory Gross Profit, 12/31
Inventory being held (given) ..................................................... $28,000
Gross profit rate ($40,000 ÷ $80,000) ....................................... 50%
Unrealized gross profit, 12/31.................................................... $14,000
CONSOLIDATION ENTRIES
Entry *G
Retained earnings 1/1 (Skyline) .......................... 14,400
Cost of goods sold ......................................... 14,400
To remove impact of beginning unrealized gross profit. Amount computed above.
Entry S
Common stock (Skyline) ..................................... 120,000
Additional paid-in capital (Skyline) ..................... 30,000
Retained earnings 1/1 (Skyline, adjusted) ......... 277,600
Investment in Skyline...................................... 427,600
To remove stockholders' equity accounts of subsidiary. Retained earnings is adjusted for elimination of beginning unrealized gross profit in Entry *G.
36. (continued)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
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 one prior year of amortization at $15,000 per year.
Entry I
Investment income ............................................... 55,400
Investment in Skyline ..................................... 55,400
To remove intra-entity income accrued by parent using the equity method.
Entry D
Investment in Skyline .......................................... 20,000
Dividends declared ......................................... 20,000
To eliminate Intra-entity dividends.
Entry E
Other operating expenses.................................... 15,000
Patented technology ...................................... 15,000
To recognize current year amortization expense on patented technology
Entry Tl
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Revenues .............................................................. 80,000
Cost of goods sold ......................................... 80,000
To eliminate intra-entity inventory transfer for current year.
Entry G
Cost of goods sold ............................................... 14,000
Inventory........................................................... 14,000
To defer unrealized inventory gross profit. Amount is computed above.
Entry TL
Gain on sale of land ............................................. 18,000
Land ................................................................. 18,000
To remove gain from intra-entity transfer of land during current year.
Entry P
Accounts payable ................................................ 65,000
Accounts receivable........................................ 65,000
To remove intra-entity payable and receivable.
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
36. (continued) PARKWAY AND SKYLINE
Consolidation Worksheet
Year Ending December 31, 2015
Consolidation Entries Consolidated
Accounts Parkway Skyline Debit Credit Totals
Revenues (627,000) (358,000) (TI) 80,000 (905,000)
Cost of goods sold 289,000 195,000 (G) 14,000 (TI) 80,000
(*G) 14,400 403,600
Other operating expenses 170,000 75,000 (E) 15,000 260,000
Gain on sale of land (18,000) (TL) 18,000 -0-
Investment income (55,400) (I) 55,400 -0-
Net income (241,400) (88,000) (241,400)
Retained earnings 1/1 (314,600) (292,000) (*G) 14,400 (314,600)
(S) 277,600 -0-
Net income (above) (241,400) (88,000) (241,400)
Dividends declared 70,000 20,000 (D) 20,000 70,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Retained earnings 12/31 (486,000) (360,000) (486,000)
Cash and receivables 134,000 150,000 (P) 65,000 219,000
Inventory 281,000 112,000 (G) 14,000 379,000
Investment in Skyline 598,000 (D) 20,000 (S) 427,600
(A) 135,000 -0-
(I) 55,400
Trademarks 50,000 (A) 30,000 80,000
Patented technology 130,000 (A) 105,000 (E) 15,000 220,000
Land, buildings, and equipment (net) 637,000 283,000 (TL) 18,000 902,000
Total assets 1,650,000 725,000 1,800,000
Liabilities (463,000) (215,000) (P) 65,000 (613,000)
Common stock (410,000) (120,000) (S) 120,000 (410,000)
Additional paid-in capital (291,000) (30,000) (S) 30,000 (291,000)
Retained earnings (above) (486,000) (360,000 ) (486,000 )
Total liabilities & stockholders’ equity (1,650,000) (725,000) 844,400 844,400 (1,800,000)
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Chapter 5 Excel Case Solution
Excel Case Equity in Shawn Co. Earnings
2014 78,000
Fair Value Allocation Schedule 1/1/2014El profit (34,200)
Consideration transferred 1,000,000 Amortization (12,600 )
C.S. 500,000 Equity earnings 31,200
R.E. 185,000
685,000 Life Amort. 2015 85,000
Tradename 315,000 25 12,600 BI profit 34,200
Inventory El profit (37,800)
Shawn sells GPR remaining Amortization (12,600 )
to Patrick 60% 30% Equity earnings 68,800
Intra-entity Inventory Transfers (upstream) Shawn Co. dividends
Sales Inventory Intra. profit 2014 25,000
2014 190,000 57,000 34,200 2015 27,000
2015 210,000 63,000 37,800
Consolidation Adjustments
Investment account *G RE-Shawn 34,200
Cost 1,000,000 COGS 34,200
2014 Equity earnings 31,200
dividends (25,000 ) S Common stock-Shawn 500,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
12/31/14 1,006,200 RE-Shawn 203,800
Investment in Shawn703,800
2015 Equity earnings 68,800
dividends (27,000 ) A Tradename 302,400
12/31/15 1,048,000 Investment in Shawn302,400
I Equity in earnings of Shawn68,800
Investment in Shawn68,800
D Investment in Shawn 27,000
Dividends declared27,000
E Amortization expense 12,600
Tradename12,600
IT Sales 210,000
COGS210,000
G COGS 37,800
Inventory37,800
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Investment account goes to zero? 0
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
Analysis and Research—Accounting Information and Salary Negotiations
a. With common control over related enterprises, a consolidated income statement better portrays economic reality. For example, it is likely that the Stadium’s concession and parking revenues would have been less if the team did not play there. Additionally, the $1,400,000 rent expense does not represent an arm’s length transaction—given that the $1,400,000 is the only rent revenue, it appears that the stadium is used exclusively for baseball with its fortunes intertwined with the team.
Searching the FASB ASC for “separate statements” and then “intra-entity” yields the following relevant support:
There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities. FASB ASC (para. 810-10-10-1).
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 should not include gain or loss on transactions among the entities in the consolidated group. FASB ASC (para. 810-10-45-1).
Granger Eagles Team and Stadium Consolidated Income Statement
Ticket revenues $2,000,000
Concession revenue 800,000
Parking revenue 100,000 $2,900,000
Ticket expense 25,000
Promotion 35,000
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Chapter 05 - Consolidated Financial Statements—Intra-Entity Asset Transactions
COGS 250,000
Depreciation 80,000
Player salaries 400,000
Staff salaries 350,000 1,140,000
Consolidated net income $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
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