Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
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
* Stinson’s 2018 net income ……………………………………… $60,000
Excess fair value amortization ………………………………… (10,000)
Adjusted net income …………………………..………………….. $50,000
Intra-entity profits (downstream) 2017 2018
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%
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32. Investment balance and worksheet preparation—upstream sales, equity method
a. 2018 net income reported by Sander $230,000
Excess patent fair value amortization ($350,000 ÷ 5 years) (70,000)
b.
Plymouth
Sander
Consolidation Entries
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
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)
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
5-42
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
to franchise agreements ……………………….. 100,000 10 yrs. 10,000
-0- $20,000
Inventory Transfers (Upstream)
2017 gross profit deferred until 2018 ($12,000 × 30%) …………….. $3,600
2018 gross profit deferred until 2019 ($18,000 × 30%) …………….. $5,400
Excess depreciation—2018 ($36,000 ÷ 6 yrs.) ………………………… $6,000
Entry *G
Retained earnings, 1/1/18 (Young) ………………… 3,600
Cost of goods sold ………………………………….. 3,600
To recognize upstream intra-entity inventory gross profit deferred from
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
33. (continued)
Entry *C
Investment in Young ……………………………….. 123,480
Retained earnings, 1/1/18 (Monica) ………. 123,480
Because the parent uses the initial value method, its retained earnings must
Retained earnings of Young, December 31, 2017 .. 630,000
Removal of intra-entity gross profit (Entry *G) …… (3,600)
Recognized retained earnings of Young,
December 31, 2017 ……………………………………….. 626,400
Retained earnings at date of acquisition ……………. (410,000)
Entry S
Common stock (Young) ……………………………….. 300,000
Additional paid-in capital (Young) …………………. 90,000
Retained earnings, 1/1/18
(Young) (adjusted for *G) …………………………. 626,400
Entry A
Franchise agreement …………………………………….. 80,000
Buildings …………………………………………………….. 30,000
Investment in Young ……………………………….. 77,000
Noncontrolling interest in Young (30%) ……. 33,000
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
5-44
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
(computed above).
Entry ED
Accumulated depreciation ……………………………. 6,000
Depreciation expense ……………………………… 6,000
To remove current year depreciation on transferred item since its historical
cost has been fully depreciated.
5-45
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
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.)
Excess fair value amortization ……………………………………………. (20,000)
Recognition of 2017 intra-entity gross profit (Entry *G) ……….. 3,600
Equity accrual for 2018 …………………………..……………………… $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.)
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35. a. (continued) GIBSON AND KELLER
Consolidation Worksheet
Year Ending December 31, 2018
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)
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–
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
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
5-50
Education.
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 2018.
Accumulated depreciation ………………….. 76,000
To defer intra-entity 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
Retained earnings, 1/1/18 (Gibson) ………….. 36,000
Buildings (net) …………………………………… 36,000
Entry ED
Accumulated depreciation ………………………. 4,000
Operating (or depreciation) expense …… 4,000
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
5-51
Education.
36. (40 Minutes) (Prepare consolidation worksheet with intra-entity transfer of
inventory and land. No outside ownership exists)
a. Stark reported net income ………………………………………………… $(90,000)
Patented technology amortization …………………………………….. 29,000
b. Acquisition-Date Fair Value Allocation
Consideration transferred (fair value of shares issued) …….. $577,000
Book value of subsidiary …………………………..…………………….. 300,000
Fair value in excess of book value …………………………………… $277,000
Excess fair over book value assigned to:
Gross profit rate ($70,000 ÷ $140,000) ………………………………. 50%
Intra-entity gross profit in inventory, 12/31 ………………………… $19,000
CONSOLIDATION ENTRIES
Entry *G
Retained earnings 1/1 (Stark) ……………………….. 13,000
Cost of goods sold …………………………………. 13,000
*G.
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
Education.
36. (continued)
Entry A
Trademarks …………………………………………………. 45,000
Patented technology ……………………………………. 203,000
Investment in Stark …………………………..…….. 248,000
Investment in Stark …………………………..…….. 39,000
To remove intra-entity income accrued by parent using the equity
method.
Entry D
Investment in Stark ……………………………………… 25,000
To recognize current year amortization expense on patented technology
Entry Tl
Revenues ……………………………………………………. 140,000
Cost of goods sold …………………………………. 140,000
To eliminate intra-entity inventory transfer for current year.
Gain on sale of land …………………………………….. 16,000
Land ………………………………………………………. 16,000
To remove gain from intra-entity transfer of land during current year.
Entry P
Accounts payable ……………………………………….. 62,000
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
5-53
36. (continued) PANTHER AND STARK
Consolidation Worksheet
Year Ending December 31, 2018
Consolidation Entries Consolidated
Accounts Panther Stark Debit Credit Totals
Revenues (710,000) (360,000) (TI) 140,000 (930,000)
Cost of goods sold 305,000 189,000 (G) 19,000 (TI) 140,000
(*G) 13,000 360,000
Other operating expenses 167,000 81,000 (E) 29,000 277,000
Gain on sale of land (16,000) (TL) 16,000 -0-
(I) 39,000
Trademarks 58,000 (A) 45,000 103,000
Land, buildings, and equipment (net) 638,000 280,000 (TL) 16,000 902,000
Patented technology 125,000 (A) 203,000 (E) 29,000 299,000
Total liabilities & stockholders’ equity (1,742,000) (727,000) 1,020,000 1,020,000 (1,900,000)
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
5-54
Education.
Chapter 5 Excel Case Solution—Example below shows solution for a 60% gross profit
rate.
Equity in Nolan Co. Earnings
2017 reported net income 78,000
Fair Value Allocation Schedule 1/1/2017 El 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. 2018 reported net income 85,000
Tradename 315,000 25 12,600 BI profit 34,200
Inventory El profit (37,800)
2018 210,000 63,000 37,800
Consolidation Adjustments
Investment account *G RE–Nolan 34,200
Cost 1,000,000 COGS 34,200
2017 Equity earnings 31,200
12/31/18 1,048,000 Investment in Nolan 302,400
I Equity in earnings of Nolan 68,800
Investment in Nolan 68,800
D Investment in Nolan 27,000
Dividends declared 27,000
Inventory 37,800
Investment account goes to zero? 0
Chapter 05 – Consolidated Financial Statements – Intra-Entity Asset Transactions – Hoyle, Schaefer, Doupnik, 13e
Analysis and Research—Accounting Information and Salary Negotiations
1. 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 (maybe zero) if the team did not play there.
Additionally, the $2,500,000 rent expense does not represent an arm’s length
transaction—Hamilton Hawks Soccer owns 85% of Hawks Stadium. Also given that 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).
Consolidated Income Statement
Ticket revenues $3,500,000
Concession revenue 875,000
Parking revenue 95,000 $4,470,000
Ticket expense $ 30,000
Staff salaries and miscellaneous 465,000 $2,045,000
Consolidated net income $2,425,000
2. Other pertinent factors include
▪ Any available comparisons for the market values for the players
▪ The market value of any alternative uses for the stadium