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
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. =
December 31, 2015 balances.
Entry S
Common stock (Sledge) ………….……………..….…..….. 120,000
Retained earnings, 1/1/15 (adjusted) (Sledge)........ 258,000
Entry A
Contracts ($60,000 – $3,000 for 2 years) ……………… 54,000
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.
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
Entry TI
Sales……….………….………….………….…..…..…..…..…..… 20,000
Cost of goods sold ……………..….…..….…..…..….... 20,000
To eliminate intra-entity inventory transfers during 2015.
Entry G
Cost of goods sold ……………..………….……………….…. 4,500
Entry ED
Accumulated depreciation ………………….….…..…..…. 600
26. (continued)
b. Net income attributable to noncontrolling interest (2015)
Revenues……..………….………….………….………….…………………..… $130,000
Cost of goods sold ……………..………….………….…….….…..…..….. (70,000)
Excess acquisition-date fair value amortization..…..…..…..….. (5 ,000)
Net income adjusted for amortization ………………..…………. $15,000
Gross profit on 2014 upstream inventory transfer
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
Fair value in excess of book value ……….. $54,000
Remaining …………………………..Annual Excess
Excess fair value assignments Life Amortizations
To building ………………….………….………. 18,000
9 yrs………..………..…..…..….…..….$2,000
To patented technology ……..…..….…... 36 ,000
6 yrs….…….….………………………… 6,000
Totals…….………….………….………….……… -0- $8 ,000
b. Because Brey sold inventory to Pitino, the transfers are upstream.
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%
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
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
2015 …………………….…..…..…..….….. 90 ,000
Total …..………….…………………….….... 234,000
Unrealized gross profit, 12/31/15(see d.) (21 ,000)
Realized net income 2013-2015 ………. 213,000
Pitino’s ownership ………………….…..….. 90% 191,700
Excess amortizations ($8,000 × 3 years × 90%) (21,600)
Dividends declared by Brey
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
27. (continued) part i.
Sales Revenues = $1,068,000 (total less $160,000 intra-entity sales)
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)
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)
less 10% of subsidiary dividends).
Common Stock = $515,000 (parent balance only)
Retained Earnings, 12/31 = $582,000 (see above)
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%
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
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)
Net income attributable to noncontrolling interest: (impact of transfers
is not included because they were downstream)
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)
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%
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)
Dividend income = -0- (intra-entity transfer eliminated in consolidation)
Net income attributable to noncontrolling interest: (impact of transfers is
included because they were upstream)
Zeigler reported net income for 2015 …………………..…..…..…... $100,000
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)
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
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
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 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)
Annual excess depreciation
Annual depreciation based on book value ($10,000 ÷ 5 years) $2,000
Annual depreciation based on transfer price
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
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)
Reported net income for 2015 …………….………………..…..…..….…... $40,000
Realized gross profit deferred in 2014 ……………..….…..…..…... 8,700
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)
30. (continued)
Retained earnings, 1/1/15 = $1,025,970 (because the parent uses the
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
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
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)
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)
allocation [$40,000] after two years of amortization [$8,000 per year])
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
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 *C
Investment in Kirby …………………….………….……… 47,970
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)
S Common stock (Kirby) …………………..…..…..…..… 150,000
Retained earnings, 1/1/15 as adjusted (Kirby).... 541,300