33. Selected information from the separate and consolidated balance sheets and income statements of Palo Alto,
Inc. and its subsidiary, Stanford Co., as of December 31, 20X1, and for the year then ended is as follows:
Palo Alto
Stanford
Consolidated
Balance sheet accounts:
Accounts receivable
$ 26,000
$ 19,000
$ 42,000
Inventory
30,000
25,000
50,000
Investment in Stanford
67,000
—
—
Stockholders’ equity
154,000
50,000
154,000
Income statement accounts:
Revenues
$200,000
$140,000
$300,000
Cost of goods sold
150,000
110,000
225,000
Gross profit
50,000
30,000
75,000
Equity in earnings of Stanford
$ 9,000
—
—
Net income
$ 36,000
$ 20,000
$ 36,000
Additional information:
During 20X1, Palo Alto sold goods to Stanford at the same markup on cost that Palo Alto uses for all sales. At December 31, 20X1, Stanford had not
paid for all of these goods and still held 50% of them in inventory.
Palo Alto acquired its interest in Stanford five years earlier (as of December 31, 20X1).
Required:
For each of the following items, calculate the required amount.
a.
The amount of intercompany sales from Palo Alto to Stanford during 20X1.
b.
The amount of Stanford’s payable to Palo Alto for intercompany sales as of December 31, 20X1.
c.
In Palo Alto’s December 31, 20X1, consolidated balance sheet, the carrying amount of the inventory that Stanford purchased from Palo
Alto.
$200,000 + $140,000 – X = $300,000; X = $40,000
b.
$26,000 + $19,000 – X = $42,000; X = $3,000
Intercompany sales = $40,000
50% held as ending intercompany inventory
$20,000
Gross profit (25%) **
(5,000)
Cost of intercompany ending inventory
$15,000
34. On January 1, 20X1, Pinto Company purchased an 80% interest in Sands Inc. for $1,000,000. The equity
balances of Sands at the time of the purchase were as follows:
Common stock ($10 par)
$100,000
Paid-in capital in excess of par
400,000
Retained earnings
500,000
Any excess of cost over book value is attributable to goodwill.
No dividends were paid by either firm during 20X6. The following trial balances were prepared for Pinto Company and its subsidiary, Sands Inc., on
December 31, 20X6:
Pinto
Sands
Cash
120,000
70,000
Accounts receivable
240,000
197,000
Inventory
200,000
176,000
Land
600,000
180,000
Buildings and equipment
1,100,000
800,000
Accumulated depreciation
(180,000)
(120,000)
Investment in Sands
1,000,000
Accounts payable
(110,000)
(50,000)
Common stock, $10 par
(800,000)
(100,000)
Paid-in capital in excess of par
(660,000)
(400,000)
Retained earnings
(1,340,000)
(650,000)
Sales
(600,000)
(300,000)
Other income
(40,000)
(15,000)
Cost of goods sold
320,000
180,000
Other expenses
150,000
32,000
Total
–
–
Sands sold a machine to Pinto Company for $40,000 on January 1, 20X6. The machine cost Sands $50,000, and $25,000 of accumulated depreciation
had been recorded as of the sale date. The machine had a 5-year remaining life and no salvage value. Pinto Company is using straight-line
depreciation.
Since the purchase date, Pinto has sold merchandise for resale to Sands, Inc. at a mark-up on cost of 25%. Sales during 20X6 were $150,000. The
inventory of these goods held by Sands was $15,000 on January 1, 20X6, and $18,000 on December 31, 20X6.
Required:
Prepare a consolidated income statement for 20X6, including income distribution schedules to support your distribution of income to the
noncontrolling and controlling interest interests.
Pinto Company and Subsidiary Sands Inc.
Consolidated Income Statement
For the Year Ended December 31, 20X6
Sales (600,000 300,000 150,000)
Cost of goods sold (320,000 180,000 150,000 3,000 3,600)
Gross profit
$399,400
Other expenses ($150,000 $32,000 $3,000)
Operating income
$220,400
Other income ($40,000 $15,000 $15,000)
Consolidated Net Income
$260,400
Distribution of Consolidated Net Income:
35. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for
$750,000. On this date Subsidiary had total owners’ equity of $540,000.
Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.
During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the simple
equity method.
On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary
sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 20X2.
Subsidiary’s usual gross profit on affiliated sales is 40%.
On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December.
On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of
$20,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a five-year life, assuming
no salvage value and using the straight-line method.
Required:
Prepare the worksheet eliminations that would be made on the 20X2 consolidated worksheet as a result of:
1) the intercompany sale of inventory
2) the intercompany sale of equipment
36. Power Company owns an 70% controlling interest in the Shelton Company. Shelton regularly sells
merchandise to Power, which then sells to outside parties. The gross profit on these sales is the same as sales to
outside parties. On January 1, 20X4, Power sold land and a building to Shelton. Twenty percent of the price
of the real estate was allocated to land and the remaining amount to structures. Additional information for the
companies for 20X4 is summarized as follows:
Power
Shelton
Sales
$2,250,000
$1,500,000
Cost of goods sold
1,850,000
1,050,000
Operating expenses
320,000
240,000
Internally generated net income
$860,000
$435,000
Intercompany merchandise sales
200,000
Intercompany inventory, end of year
50,000
Intercompany inventory, beginning of year
40,000
Book value of real estate sold
150,000
Sales price for real estate
220,000
Depreciable life of building
14 years
Prepare income distribution schedules for 20X4 for Power and Shelton as they would be prepared to distribute income to the noncontrolling and
controlling interests in support of consolidated worksheets.
Calculation of internally generated net income:
Power
Shelton
Sales
$2,250,000
$1,500,000
Cost of goods sold
1,850,000
1,050,000
Gross profit
400,000
450,000
Operating expenses
320,000
240,000
Gain on sale of assets ($220,000 – $150,000)
(70,000)
–
Net income
$ 150,000
$ 210,000
$450,000 / $1,500,000 = 30%
Beginning of year
End of year
Inventory on hand
40,000
50,000
Gross profit @ 30%
12,000
15,000
Gain on real estate
70,000
Portion attributable to buildings
80%
Portion of deferred gain to adjust depreciation
56,000
37. On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for
$750,000. On this date Subsidiary had total owners’ equity of $540,000.
Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.
During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the simple
equity method.
On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary
sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 20X2.
Subsidiary’s usual gross profit on affiliated sales is 40%.
On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December.
On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of
$20,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a five-year life, assuming
no salvage value and using the straight-line method.
Required:
Complete the Figure 4-3 worksheet for consolidated financial statements for the year ended December 31,
20X2.
Figure 4-3
Trial Balance
Eliminations and
Parent
Sub.
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
100,000
80,000
Other Current Assets
139,000
450,000
Investment in Sub. Company
880,000
Other Long-Term Investments
50,000
30,000
Land
140,000
70,000
Buildings and Equipment
315,000
400,000
Accumulated Depreciation
(280,000)
(110,000)
Other Intangibles
60,000
Current Liabilities
(150,000)
(100,000)
Bonds Payable
(100,000)
Premium on Bonds Payable
(5,000)
Other Long-Term Liabilities
(200,000)
(150,000)
Common Stock – P Co.
(200,000)
Other Paid in Capital – P Co.
(100,000)
Retained Earnings – P Co.
(479,000)
Common Stock – S Co.
(100,000)
Other Paid in Capital – S Co.
(200,000)
Retained Earnings – S Co.
(300,000)
Net Sales
(600,000)
(380,000)
Cost of Goods Sold
350,000
180,000
Operating Expenses
140,000
100,000
Subsidiary Income
(100,000)
Gain on Sale of Equipment
(20,000)
Dividends Declared – P Co.
60,000
Dividends Declared – S Co.
30,000
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
(continued)
38. On January 1, 20X1, Parent Company acquired 80% of the common stock of Subsidiary Company for
$560,000. On this date Subsidiary had total owners’ equity of $540,000, including retained earnings of
$240,000. During 20X1, Subsidiary had net income of $60,000 and paid no dividends.
Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.
During 20X1 and 20X2, Parent has appropriately accounted for its investment in Subsidiary using the cost
method.
On January 1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2, Subsidiary
sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 20X2.
Subsidiary’s usual gross profit on affiliated sales is 40%.
On December 31, 20X2, Parent still owes Subsidiary $20,000 for merchandise acquired in December.
On January 1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of
$20,000. The sales price was $40,000. Subsidiary is depreciating the equipment over a five-year life, assuming
no salvage value and using the straight-line method.
Required:
Complete the Figure 4-4 worksheet for consolidated financial statements for the year ended December 31,
20X2.
Figure 4-4
Trial Balance
Eliminations and
Parent
Sub.
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
100,000
80,000
Other Current Assets
253,000
450,000
Investment in Sub. Company
560,000
Other Long-Term Investments
50,000
30,000
Land
140,000
70,000
Buildings and Equipment
315,000
400,000
Accumulated Depreciation
(208,000)
(110,000)
Other Intangibles
60,000
Current Liabilities
(150,000)
(100,000)
Bonds Payable
(100,000)
Premium on Bonds Payable
(5,000)
Other Long-Term Liabilities
(200,000)
(150,000)
Common Stock – P Co.
(200,000)
Other Paid in Capital – P Co.
(100,000)
Retained Earnings – P Co.
(421,000)
Common Stock – S Co.
(100,000)
Other Paid in Capital – S Co.
(200,000)
Retained Earnings – S Co.
(300,000)
Net Sales
(600,000)
(380,000)
Cost of Goods Sold
350,000
180,000
Operating Expenses
140,000
100,000
Dividend Income
(24,000)
Gain on Sale of Equipment
(20,000)
Dividends Declared – P Co.
60,000
Dividends Declared – S Co.
30,000
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company
Other Long-Term Investments
Land
Buildings and Equipment
Accumulated Depreciation
Other Intangibles
Current Liabilities
Bonds Payable
Premium on Bonds Payable
Other Long-Term Liabilities
Common Stock – P Co.
Other Paid in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Dividend Income
Gain on Sale of Equipment
Dividends Declared – P Co.
Dividends Declared – S Co.
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
For the worksheet solution, please refer to Answer 4-4.
