CHAPTER 4
UNDERSTANDING THE ISSUES
1. The intercompany sale will cause both
sales and costs of goods sold to be over-
stated by $50,000 on the consolidated in-
2. Debit Sales and credit Cost of Goods Sold
for $50,000. Debit Cost of Goods Sold and
credit Inventory for $3,000 (1/4 × $12,000).
3. 2015 2016
NCI $ 0 $ 200 ($1,000 × 20%)
Controlling
4. Company S has realized a $50,000 profit;
however, it is not immediate. The profit will
be realized over the 5-year life of the asset.
5. 2015 2016 2017
Realized gain by
reducing depre-
6. a. Company S is better off borrowing the
funds from Company P since it will re-
ceive a lower interest rate (9.5% in-
est expense and interest revenue are
eliminated during the consolidation
process. Only the $40,000 ($500,000 ×
8%) of external interest expense re-
mains on the consolidated statements.
c. Intercompany interest expense and
interest revenue should not appear on
Ch. 4—Exercises 4–2
EXERCISES
EXERCISE 4-1
Pattern Company and Subsidiary Sorel Company
Consolidated Income Statement
For the Year Ended December 31, 2015
Sales ($250,000 + $500,000 – $120,000) …………………………………………………. $630,000
Cost of goods sold [$150,000 + $310,000 – $120,000 + (40% × $30,000)] …… 352,000
Gross profit ………………………………………………………………………………………….. $278,000
Sorel Income Distribution Schedule
Unrealized profit in ending Internally generated income ………. $55,000
inventory (40% × $30,000) …… $12,000
Pattern Income Distribution Schedule
Internally generated income ………. $ 70,000
80% × Sorel adjusted
Pattern Company and Subsidiary Sorel Company
Consolidated Income Statement
For the Year Ended December 31, 2016
Sales ($350,000 + $540,000 – $150,000) …………………………………………………. $740,000
Cost of goods sold [$210,000 + $360,000 – $150,000 – (40% × $30,000)
+ (40% × $25,000)] ………………………………………………………………………….. 418,000
Gross profit ………………………………………………………………………………………….. $322,000
4–3 Ch. 4—Exercises
Exercise 4-1, Concluded
Sorel Income Distribution Schedule
Unrealized profit in ending Internally generated net
inventory (40% × $25,000) …… $10,000 income ………………………………. $74,000
Realized profit in beginning
Pattern Income Distribution Schedule
Internally generated net
income ………………………………. $ 55,000
EXERCISE 4-2
(1) Gross profit recorded on the separate books:
Gross profit—Hide:
Sales ………………………………………………………………………… $400,000
(2) Consolidated gross profit:
Sales ………………………………………………………………………… $416,000
Cost of goods sold to consolidated group* ……………………… 256,000
4–5 Ch. 4—Exercises
EXERCISE 4-3
Source of income components:
Consolidated
Income
Victory Norco Eliminations Statement
Sales ………………………………………………. (220,000) (150,000) (IS) 90,000 (280,000)
Cost of goods sold ……………………………. 150,000 112,500 (IS) (90,000)
(BI) (5,000)
Eliminations and Adjustments:
(IS) Elimination of $90,000 intercompany sales.
(BI) Elimination of 25% profit from beginning inventory; debit would be to Retained Earnings;
allocated 80% to the controlling interest and 20% to the NCI.
(EI) Elimination of 25% profit from ending inventory; credit would be to inventory account.
Subsidiary Norco Company Income Distribution
Unrealized ending inventory Internally generated net
profit …………………………….. (EI) $7,500 income …………………………… $22,500
Realized beginning inventory
profit ………………………………. (BI) 5,000
+
Parent Victory Corporation Income Distribution
Internally generated net
income ………………………………. $35,000
EXERCISE 4-4
(1) In the year of sale, eliminate the $15,000 gain on the sale of the machine, and adjust the
machine to its net book value on the date of the sale. Reduce depreciation expense and
accumulated depreciation by $3,000 to reflect depreciation based on the consolidated book
(2) Gain on Sale of Machinery ………………………………………………. 15,000
Machinery ………………………………………………………………… 15,000
(3) Retained Earnings—Jungle Company ………………………………. 12,000
Accumulated Depreciation ……………………………………………….. 3,000
4–7 Ch. 4—Exercises
EXERCISE 4-5
(1) Gain on Sale of Land ………………………………………………………. 50,000
Gain on Building …………………………………………………………….. 150,000
(2) Retained Earnings—Sayner* ……………………………………………. 38,500
Retained Earnings—Wavemasters** …………………………………. 154,000
Accumulated Depreciation ($150,000 ÷ 20 years)……………….. 7,500
Building ……………………………………………………………………. 150,000
EXERCISE 4-6
In 2016, only a $4,000 loss can be recognized for the sale of the machinery on the consolidated
income statement. This is the amount of the impairment (FV – BV). The remaining $5,000 loss
must be deferred. This loss is deferred in the year of the intercompany sale. During each follow-
ing year of use, the asset and accumulated depreciation accounts are adjusted to reflect the
$10,000 fair value, with an additional entry for the $1,000 of incremental depreciation.
On December 31, 2016, $5,000 of the $9,000 recorded loss should be eliminated.
Machine………………………………………………………………………….. 5,000
Loss on Sale of Machine ……………………………………………… 5,000
4–9 Ch. 4—Exercises
EXERCISE 4-7
Consolidated
Income
Danner Link Eliminations Statement
Sales ………………………………………………. (650,000) (280,000) (F1) 60,000 (870,000)
Cost of goods sold ……………………………. 400,000 190,000 (F1) (40,000) 550,000
Eliminations and Adjustments:
(F1) Eliminate the gain on the intercompany machine sale. The machine account is credited
for the $20,000 gain.
(F2a) Reduce machine depreciation expense to reflect depreciation based on the consolidated
book value of the asset ($20,000 profit ÷ 5 years = $4,000 per year). The debit is to Ac-
cumulated Depreciation.
Subsidiary Link Company Income Distribution
Unrealized gain on sale Internally generated net
of machine………………….. (F1) $20,000 income ………………………… $20,000
Realized gain through use
of machine …………………… (F2a) 4,000
Parent Danner Company Income Distribution
Internally generated net
income ………………………….. $90,000
Gain realized on use of building
EXERCISE 4-8
2015
Subsidiary Sandbar Company Income Distribution
Unrealized profit in ending Internally generated net
inventory (40% × $15,000) …… $6,000 income ………………………………. $250,000
Parent Peninsula Company Income Distribution
Gain on sale of real Internally generated net
estate ……………………………….. $200,000 income ………………………………. $520,000
Realized gain on use of
sold real estate
2016
Subsidiary Sandbar Company Income Distribution
Unrealized profit in ending Internally generated net
inventory (40% × $20,000) …… $8,000 income ………………………………. $235,000
Realized profit in beginning
inventory ……………………………. 6,000
Parent Peninsula Company Income Distribution
Internally generated net
income ………………………………. $340,000
EXERCISE 4-9
(1) Saratoga Windsor
Notes Receivable……….. 50,000 Cash …………………………….. 50,000
Cash ……………………… 50,000 Notes Payable ……………. 50,000
Accrued Interest Interest Expense ……………. 2,000
Receivable ……………… 2,000* Accrued Interest
(2) Eliminations:
(LN1) Notes Payable ………………………………………………………. 50,000
Accrued Interest Payable ……………………………………….. 2,000
Notes Receivable ………………………………………………. 50,000
Accrued Interest Receivable ……………………………….. 2,000
EXERCISE 4-10
(1) Saratoga
May 1 Notes Receivable ……………………………………………………….. 50,000
Cash ……………………………………………………………………… 50,000
To record receipt of note.
July 1 Accrued Interest Receivable ………………………………………… 500
Interest Revenue …………………………………………………….. 500
Windsor
May 1 Cash …………………………………………………………………………. 50,000
Notes Payable ………………………………………………………… 50,000
Computation of Proceeds
Principal of note ……………………………………………………………… $50,000
Interest due at maturity (6% × $50,000) …………………………….. 3,000
(2) Eliminations:
(LN1) Notes Receivable Discounted …………………………………. 50,000
Notes Receivable ………………………………………………. 50,000
To eliminate intercompany note and reclassify
4–13 Ch. 4—Problems
PROBLEMS
PROBLEM 4-1
Plato Corporation and Subsidiary Solo Company
Worksheet for Consolidated Financial Statements
For Year Ended December 31, 2015
Eliminations Consolidated Controlling Consolidated
Trial Balance
and Adjustments Income Retained Balance
Plato Solo Dr. Cr. Statement Earnings Sheet
Cash ………………………………………………. 735,000 370,000 …………….. …………….. ………..…… …………….. 1,105,000
Accounts Payable ……………………………. (35,000) (100,000) (IA) 30,000 …………….. …………….. .……………. (105,000)
Common Stock ($10 par)—Plato ……….. (1,000,000) …………….. …………….. …………….. ………..…… …………….. (1,000,000)
Paid-In Capital in Excess of Par—Plato . (1,500,000) …………….. …………….. …………….. ………..…… …………….. (1,500,000)
Retained Earnings—Plato …………………. (5,500,000) …………….. …………….. …………….. …..………… (5,500,000) ……………..
Common Stock ($10 par)—Solo ………… …………….. (400,000) (EL) 400,000 …………….. …………….. .……………. ……………..
Paid-In Capital in Excess of Par—Solo .. …………….. (200,000) (EL) 200,000 …………….. …………….. .……………. ……………..
Problem 4-1, Concluded
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (100%) (0%)
Fair value of subsidiary ………………… $3,300,000 $3,300,000 N/A
Less book value of interest acquired:
Adjustment of identifiable accounts:
Worksheet Amorti-
Adjustment Key Periods zation
Equipment ………………………………….. $ 300,000 debit D 10 $30,000
Eliminations and Adjustments:
(CY1) Eliminate the entry recording the parent’s share (100%) of the subsidiary’s net income.
(EL) Eliminate the subsidiary’s equity balances.
(D) Distribute excess to equipment.
PROBLEM 4-2
(1) Benton Corporation and Subsidiary Crandel Company
Worksheet for Consolidated Financial Statements
For Year Ended March 31, 2017
Eliminations Consolidated Controlling Consolidated
Trial Balance
and Adjustments Income Retained Balance
Benton Crandel Dr. Cr. Statement NCI Earnings Sheet
Cash …………………………………………………… 191,200 44,300 …………… …………… …………… …………… ………….. 235,500
Accumulated Depreciation …………………….. (940,000) (210,000) …………… …………… …………… …………… ………….. (1,150,000)
Goodwill ……………………………………………… 60,000 ……………. (D) 162,500 …………… …..………. …………… ………….. 222,500
Accounts Payable ………………………………… (242,200) (106,300) (IAP) 10,000 …………… …………… …………… ………….. ……………
…………… ……………. (IAS) 5,000 …………… …………… …………… ………….. (333,500)
Bonds Payable …………………………………….. (400,000) ……………. …………… …………… …………… …………… ………….. (400,000)
Common Stock—Benton ………………………. (250,000) ……………. …………… …………… ……….….. …………… ………….. (250,000)
Sales ………………………………………………….. (880,000) (630,000) (ISP) 32,000 …………… …….…….. …………… ………….. ……………
…………… ……………. (ISS) 30,000 …………… (1,448,000) …………… ………….. ……….…..
Dividend Income (from Crandel Company) . (24,000) ……………. (CY2) 24,000 …………… …………… …………… ………….. ………..….
Cost of Goods Sold ………………………………. 704,000 504,000 (EIP) 1,200 (BIP) 1,800 …………… ……….….. ………….. ……………
…………… ……………. (EIS) 750 (ISP) 32,000 …………… …………… ………….. …………...
Problem 4-2, Continued
Eliminations and Adjustments:
(CV) Convert to equity method:
Change in equity × 80% = $40,000 × 80% = $32,000.
(CY2) Eliminate intercompany dividends.
Benton, $4,000 × 25% = $1,000.
(ISS) Eliminate sales from Crandel to Benton.
(EIS) Eliminate intercompany profit from ending inventory on sales from Crandel to
Benton, $3,000 × 25% = $750.
(IAS) Eliminate intercompany trade balances on sales from Crandel to Benton.
Company Parent NCI
Implied Price Value
Value Analysis Schedule Fair Value (80%) (20%)
Company fair value ……………………………………. $562,500 $450,000 $112,500
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (80%) (20%)
Fair value of subsidiary ………….. $562,500 $450,000 $112,500
Less book value of interest acquired:
Total equity ……………………….. 400,000 $400,000 $400,000
Adjustment of identifiable accounts:
Worksheet
Adjustment Key
Problem 4-2, Concluded
Subsidiary Crandel Company Income Distribution
Unrealized profit in ending Internally generated net
inventory ……………………… (EIS) $750 income …………………………… $45,000
Realized profit in beginning
inventory ………………………… (BIS) 1,000
Parent Benton Corporation Income Distribution
Unrealized profit in ending Internally generated net
inventory ……………………… (EIP) $1,200 income …………………………… $46,000
Realized profit in beginning
(2) Benton Corporation and Subsidiary Crandel Company
Consolidated Income Statement
For Year Ended March 31, 2017
Sales …………………………………………………………………………….. $1,448,000
Cost of goods sold ………………………………………………………….. 1,145,150
Gross profit ……………………………………………………………………. $ 302,850
PROBLEM 4-3
(1) Company Parent NCI
Implied Price Value
Value Analysis Schedule Fair Value (70%) (30%)
Company fair value ……………………………………. $550,000 $400,000 $150,000*
Determination and Distribution of Excess Schedule
Company Parent NCI
Implied Price Value
Fair Value (70%) (30%)
Price paid for investment ……….. $550,000 $400,000 $150,000
Less book value of interest acquired:
Common stock ………………….. $ 10,000
Adjustment of identifiable accounts:
Worksheet Amorti-
Adjustment Key Periods zation
Buildings ……………………………… $150,000 debit D1 20 $ 7,500
Equipment……………………………. 60,000 debit D2 5 12,000
Problem 4-3, Continued
Amortization Schedule
Account adjustments Annual Current Prior
to be amortized Life Amount Year Years Total Key
Buildings 20 $ 7,500 $ 7,500 $ 7,500 $15,000 A1
Subsidiary Stude Corporation Income Distribution
Unrealized profit in ending Internally generated net
inventory ………………………… $ 1,800 income …………………………… $20,000
Amortizations ……………………….. 19,500 Realized profit in beginning
inventory ………………………… 2,500
Parent Packard Corporation Income Distribution
Internally generated net
income ……………………………. $165,000
Problem 4-3, Continued
(2) Packard Corporation and Subsidiary Stude Corporation
Consolidated Income Statement
For Year Ended December 31, 2016
Eliminations Consolidated Controlling Consolidated
Trial Balance
and Adjustments Income Retained Balance
Packard Stude Dr. Cr. Statement NCI Earnings Sheet
Cash ………………………………………………………. 66,000 132,000 ……….. ……….. ……….. ……….. ……….. 198,000
Accumulated Depreciation ………………………… (220,000) (65,000) ……….. (A1) 15,000 ……….. ……….. ……….. (300,000)
Equipment ………………………………………………. 150,000 72,000 (D2) 60,000 ……….. ……….. ……….. ……….. 282,000
Accumulated Depreciation ………………………… (90,000) (46,000) ……….. (A2) 24,000 ……….. ……….. ……….. (160,000)
Goodwill …………………………………………………. ……….. ………… (D3) 128,000 ……….. .………. ……….. ……….. 128,000
Accounts Payable ……………………………………. (60,000) (102,000) (IA) 11,000 ……….. ……….. ….……. ……….. (151,000)
Bonds Payable ………………………………………… ……….. (100,000) ……….. ……….. ……..… ……….. ……….. (100,000)
Common Stock—Stude ……………………………. ……….. (10,000) (EL) 7,000 ……….. ……….. (3,000) ……….. ………..
……….. ………… ……….. ……….. ……….. ……….. (309,600) ………..
Sales ……………………………………………………… (800,000) (350,000) (IS) 40,000 ……….. (1,110,000) ……….. ……….. ………..
Cost of Goods Sold ………………………………….. 450,000 208,500 ……….. (IS) 40,000 ……….. …….…. ……….. ………..
……….. ………… (EI) 1,800 (BI) 2,500 617,800 ……….. ……….. ………..
Depreciation Expense—Buildings ………………. 30,000 7,500 (A1) 7,500 ……….. 45,000 ……….. ……….. ………..
Depreciation Expense—Equipment ……………. 15,000 8,000 (A2) 12,000 ……….. 35,000 ……….. ……….. ..………