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
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:
b. Noncontrolling interest’s share of consolidated net income
(upstream sales):
Scenic’s realized net income …………….……….………..………….… $96,000
Noncontrolling interest ownership ……………..………..…..…….… 20%
Noncontrolling interest share of consolidated net income.... $19 ,200
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
18. (continued)
d. Inventory—Placid Lake book value …………….……………….……. $140,000
Inventory—Scenic book value …………….……….……..…….……... 90,000
(Direction of transfer has no impact here)
e. Land—Placid Lake’s book value ………..……….………..…………... $600,000
Land—Scenic’s book value ……………..……….……….……..…….… 200,000
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)
Accumulated depreciation = $32,000
Historical cost figures:
2014 Equipment = $100,000
Depreciation expense = $12,000 ($60,000 ÷ 5 years)
CONSOLIDATION ENTRIES FOR TRANSFERRED EQUIPMENT
ENTRY *TA
Retained earnings, 1/1/15 (Scenic) ……………..…….… 16,000
Accumulated depreciation ($52,000 – $16,000). . 36,000
To change beginning of year figures to historical cost by removing impact
18. (continued)
ENTRY ED
Accumulated depreciation ………………….…….……..… 4,000
$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).
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
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
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
To remove effects of current year unrealized gross profit.
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
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
Consolidated Inventory
Protrade book value …………………..……….………..……….…..… $370,000
Net income attributable to noncontrolling interest:
Because all intra-entity sales were downstream, the deferrals do not
b. Consolidated Cost of Goods Sold
Protrade book value …………………..……….………..…..…….……..… $410,000
$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:
20. b. (continued)
Consolidated inventory
Protrade book value …………………..……….………..…..…….……..… $370,000
Seacraft book value …………………….………..……….………..……….. 144,000
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
c. Consolidated buildings (net):
Protrade’s buildings ………………………………..…….... $382,000
Seacraft’s buildings ………….………..……….…………… 181,000
Remove write-up created by transfer
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:
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
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
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).
To eliminate intra-entity transfers of inventory during 2015.
Entry G
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
Consolidated net income ……………..……….……….……..… $170 ,000
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)
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)
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
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
Investment in Netspeed 93,700
D Investment in Netspeed 7,200
Dividends declared 7,200
22. (continued)
E Amortization expense 12,000
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
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)
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 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)
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)
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)
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
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 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%
Impact of Intra-Entity Building Transfer:
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
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
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.)