Chapter 06 - Intercorporate Transfers of Services And Noncurrent Assets CHAPTER INTERCORPORATE TRANSFERS OF SERVICES AND NONCURRENT ASSETS ANSWERS TO QUESTIONS Q6-1 Profits on intercorporate sales generally are considered to be realized when the affiliate that has purchased the item sells it to a nonaffiliate For depreciable or amortizable items that are used by the affiliate in its operations, profits are considered to be realized as the purchaser depreciates or amortizes the asset Q6-2 An upstream sale occurs when a subsidiary sells an item to the parent company If the asset is not resold before the end of the period, the parent is the company holding the asset and any unrealized profits are recorded on the books of the subsidiary Q6-3 If the purchaser records the services received as an expense, both revenues and expenses will be overstated in the consolidated income statement in the period in which the intercorporate services are provided In the event the services are capitalized by the purchaser, the cost of the asset will be overstated, depreciation expense and accumulated depreciation will be overstated if the services are assigned to a depreciable asset, and service revenue will be overstated Q6-4 (a) Unrealized profit on an intercorporate sale generally is included in the reported net income of the seller (b) All unrealized profit on current-period intercorporate sales must be excluded from consolidated net income until realized through resale to a nonaffiliate Q6-5 Profits on intercompany sales are included in consolidated net income in the period in which the items are sold to a nonaffiliate If there are unrealized profits on the books of one of the companies at the start of the period and the item is sold to a nonaffiliate during the current period, the intercompany profit is included in the computation of consolidated net income for the current period Q6-6 The profits continue to be unrealized in this case and therefore must be eliminated from both the beginning and ending asset and retained earnings balances when consolidated statements are prepared There should be no income statement effect for the current period Q6-7 A downstream sale is a sale from the parent to one of its subsidiaries If the asset is not resold before the end of the period, the subsidiary is the company holding the asset at year-end and any unrealized profits are recorded on the books of the parent company 6-1 Chapter 06 - Intercorporate Transfers of Services And Noncurrent Assets Q6-8 The entire balance of unrealized profits is eliminated in all cases While the direction of the sale will affect the allocation of unrealized profits between companies, it does not change the total amount of profit eliminated Q6-9 Consolidated net income is reduced by the amount of unrealized profits assigned to the shareholders of the parent company When a downstream sale occurs, all the profit is on the parent's books and consolidated net income is reduced by the full amount of any unrealized profit On the other hand, when an upstream sale occurs, all the intercorporate profit is recorded on the books of the subsidiary and the amount of income assigned to both the parent company shareholders and the noncontrolling shareholders is reduced by a proportionate amount of any unrealized profit Q6-10 The amount of intercorporate profit realized in the current period from prior years' sales to the parent is added to the reported net income of the subsidiary in computing income assigned to the noncontrolling interest Q6-11 Income assigned to noncontrolling interest for the current period will be less than a proportionate share of the reported net income of the subsidiary In determining the amount of income to be assigned to the noncontrolling interest in the consolidated income statement, the net income reported by the subsidiary must be adjusted to exclude any unrealized gain recorded during the period on the sale of depreciable assets to the parent On the other hand, if an unrealized loss had been recorded, the basis used in assigning income to the noncontrolling interest would be greater than the reported net income of the subsidiary Such adjustments must be made to assure that the income assigned to noncontrolling interest is based on the contribution of the subsidiary to consolidated net income rather than the amount the subsidiary may have reported as net income Q6-12 All other factors being equal, the income assigned to noncontrolling interest will be larger if the sale occurs at the start of the current period Some part of the gain will be considered realized in the current period as the parent depreciates the asset if the sale occurs before year-end None of the gain will be considered realized in the period of transfer if the sale occurs at year-end Q6-13 As in all other cases, income from the subsidiary recorded on the parent's books must be eliminated in preparing the consolidated income statement and an appropriate amount of subsidiary net income must be assigned to the noncontrolling interest if the parent owns less than 100 percent of the subsidiary's stock The gain recorded on the parent's books also must be eliminated 6-2 Chapter 06 - Intercorporate Transfers of Services And Noncurrent Assets Q6-14 Depreciation expense recorded by the subsidiary is overstated from the viewpoint of the consolidated entity when the subsidiary pays the parent more than book value for the asset at the start of the period As a result, an eliminating entry is needed to reduce depreciation expense and accumulated depreciation by the amount of excess depreciation recorded during 20X3 Q6-15 Following an intercorporate sale of a depreciable asset, the eliminating entries should adjust the balance in the asset account to reflect the original purchase price to the first owner and accumulated depreciation should be adjusted to reflect the balance that would be reported if the asset were still held by the first owner In the case of an intercorporate sale of an intangible asset, only the unamortized balance normally is reported and an eliminating entry is needed to adjust the carrying value to that which would be reported if the asset were still held by the first owner Q6-16 Profit on an intercorporate sale of land is considered realized at the time the purchaser sells the land to a nonaffiliate Profit on equipment normally is considered realized as the asset is used and depreciated on the books of the purchaser Equipment typically is considered to be used up in the production process and therefore is charged to expense over its remaining economic life, while land is not Q6-17 A portion of the profit is considered realized each period as the asset is depreciated by the purchaser Thus, the net amount considered unrealized decreases each period and a smaller debit to beginning retained earnings is needed Q6-18A The balance in the investment account will depend on which method the parent uses to account for its investment in the subsidiary If the parent uses (a) the cost method or (b) the basic equity method, no adjustments are made on the parent company's books for unrealized intercompany profits and the balance in the investment account will be the same as if there were no unrealized profits If the parent uses (c) the fully-adjusted equity method, the balance in the investment account will be reduced by the full amount of the unrealized profit when the profit is on the parent's books and by a proportionate share of the unrealized profit when it is on the subsidiary's books 6-3 Chapter 06 - Intercorporate Transfers of Services And Noncurrent Assets SOLUTIONS TO CASES C6-1 Correction of Elimination Procedures MEMO To: Controller Plug Corporation From: Re: , CPA Elimination of Intercompany Profit on Equipment This memo is in response to our review of the elimination procedures used in preparing the consolidated statements for Plug Corporation at December 31, 20X2 You have correctly identified the need to eliminate the effects of the intercorporate sale of equipment In preparing your consolidated statements, all intercompany balances and transactions should be eliminated [ARB 51, Par 6] Your eliminating entry recorded at December 31, 20X2, was: E(1) Equipment Loss on Sale of Equipment 150,000 150,000 This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the sale of equipment to Plug and adds $150,000 to the equipment account By adding back $150,000 to equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000) This represents the carrying value of the equipment on Coy’s books at the time of sale but does not reflect the purchase price paid by Coy ($1,200,000) or the accumulated depreciation at the time of sale ($200,000) Moreover, eliminating entry E(1) understates depreciation expense for the year The correct eliminating entry at December 31, 20X2, is: E(2) Equipment Depreciation Expense Accumulated Depreciation Loss on Sale of Equipment 350,000 15,000 6-4 215,000 150,000 Chapter 06 - Intercorporate Transfers of Services And Noncurrent Assets C6-1 (continued) A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by Plug to $1,200,000, the initial purchase price to the consolidated entity Depreciation expense must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug to $100,000 ($1,200,000/12 years) based on the initial purchase price Accumulated depreciation must be credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x year] reported by Plug to $300,000 [($1,200,000/12 years) x years] As previously noted, the $150,000 loss recorded by Coy must be eliminated If the amounts included in eliminating entry E(2) are omitted, consolidated net income for 20X2 and the retained earnings balance at December 31, 20X2, will be overstated and the balances for equipment and accumulated depreciation will be understated Primary citation: ARB 51, Par C6-2 Elimination of Intercorporate Services MEMO To: Chief Accountant Dream Corporation From: Re: , CPA Elimination of Legal Services Provided by Parent Company This memo is in response to our discussion regarding the elimination of intercompany services in preparing consolidated financial statements for Dream Corporation It is my understanding that at present Dream Corporation does not eliminate such services In preparing consolidated financial statements all intercompany balances and transactions should be eliminated [ARB 51, Par 6] The legal services provided by Dream Corporation to Classic Company and Plain Company are intercompany transactions that should be eliminated If the revenues recorded by the parent are equal to the expenses recorded by the subsidiaries and both are properly recorded, elimination of these transactions will have no impact on reported net income but will reduce consolidated revenues and expenses by equal amounts Financial statement readers will receive a more accurate picture of operations of the consolidated entity if the appropriate amounts are reported The legal services provided to Classic Company in 20X3 should be eliminated with the following entry: E(1) Legal Services Revenue Legal Services Expense 80,000 6-5 80,000 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets The information on intercorporate services provided to Plain Company indicates that an additional adjustment is needed in the consolidation process Although Plain Company recorded its $150,000 payment to the parent as a legal expense, it should have been recorded as an investment in land to be used in future development of its strip mine This error should be corrected on the books of Plain Company If it is not, the eliminating entry prepared at December 31, 20X3, should include an adjustment to reflect the appropriate investment in land and would be recorded as: E(2) Legal Services Revenue Land Legal Services Expense Wage and Salary Expense 150,000 100,000 150,000 100,000 Care must be taken to capitalize only the cost of legal services in this case The eliminating entry should contain a debit of $100,000 ($150,000/1.50) to land since Dream Corporation bills its services to the subsidiaries at 150 percent of the cost of services provided Had Plain Company debited land for its $150,000 payment to Dream, the eliminating entry at December 31, 20X3, would have been: E(3) Legal Services Revenue Land Wage and Salary Expense 150,000 50,000 100,000 No eliminating entry would be required at December 31, 20X4, on the legal services provided to Classic Company in 20X3 The conditions of the intercorporate transfer of services to Plain Company require an eliminating entry at December 31, 20X4, and in following years, as long as Plain Company owns the strip mine The entry at December 31, 20X4, would be: E(4) Land Retained Earnings 100,000 100,000 Had Plain Company debited land for its $150,000 payment to Dream in 20X3, the eliminating entry at December 31, 20X4, would require a $50,000 debit to retained earnings and a $50,000 credit to land Primary citation: ARB 51, Par 6-6 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets C6-3 Noncontrolling Interest a When there are no unrealized profits on the subsidiary's books, a pro rata portion of the reported net income of the subsidiary is assigned to the noncontrolling interest, adjusted for the noncontrolling interest’s share of any amortization or write-off of differential b When there are no unrealized profits on the subsidiary's books, the noncontrolling interest is reported in the consolidated balance sheet at an amount equal to a pro rata portion of the book value of the net assets of the subsidiary plus the noncontrolling interest’s share of any remaining differential c The effect of unrealized intercompany profits depends on which company has recorded the profits Those recorded on the books of the parent not affect the income assigned to the noncontrolling interest When subsidiary net income includes unrealized intercompany profits, the portion of consolidated net income assigned to the noncontrolling interest is reduced by its portion of the unrealized profit in the period of the intercorporate sale (1) On a sale of land, the intercompany profit remains unrealized until the land is sold to a nonaffiliate When the land is resold, the profit is added to the reported net income of the subsidiary in computing the portion of consolidated net income assigned to the noncontrolling interest (2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is considered realized each period as the purchaser depreciates the asset Thus, in the period of the intercorporate sale, the adjustment to subsidiary net income for unrealized profits is based on the gain or loss less any portion considered realized before the end of the period Each period thereafter, a portion of the profit or loss is considered realized and treated as an adjustment to subsidiary income in determining the portion of consolidated net income assigned to the noncontrolling interest d Noncontrolling shareholders of a subsidiary generally will not gain a great deal of useful information from the consolidated financial statements Their primary focus must continue to be on the income, assets, and liabilities of the subsidiary in which they hold direct ownership In the event there are a number of transactions with the parent or other affiliates, the success of the operations of the entire economic entity may provide information useful to the noncontrolling shareholders Debt guarantees or other assurances by the parent may also lead to an examination of the parent company and consolidated statements 6-7 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets C6-4 Intercompany Sale of Services a When preparing consolidated financial statements, Schwartz's revenue from the sale of services to Diamond and Diamond's expenses associated with the services acquired from Schwartz must be eliminated The expenses related to the janitorial and maintenance activities that will be reported in the consolidated income statement will be the actual salary and associated costs incurred by Schwartz to provide the services to Diamond The eliminations have no effect on consolidated net income because revenues and expenses of equal amount are eliminated in the preparation of the consolidated financial statements b Intercompany profits from the sale of services to an affiliate normally are considered realized at the time the services are provided Realization of intercompany profits on services normally is considered to occur as the services are consumed, and services such as maintenance and repair services normally are considered to be consumed by the purchasing affiliate at the time received C6-5 Intercompany Profits Answers can be found in the companies' 10-K filings with the SEC and in their annual reports Note that financial statements are often included in the Form 10-K by reference to the company’s annual report In such cases, the financial statements are often shown in a separate exhibit rather than in Item of the Form 10-K a Century Telephone Enterprises, Inc (www.centurytel.com), and its subsidiaries bill one another for services and materials provided in such amounts as to provide a reasonable return on investment When preparing consolidated financial statements, the company eliminates intercompany profits on transactions with unregulated subsidiaries, but profits on transactions with regulated subsidiaries are not eliminated, as permitted by FASB Statement No 71 This statement is applicable because phone companies are regulated as public utilities b Verizon (www.verizon.com) eliminates all intercompany profits It discontinued the use of regulatory accounting as provided by FASB 71 in 1994 and now no longer applies the provisions of FASB 71 c All of Harley-Davidson’s (www.harleydavidson.com) intercompany transactions are eliminated except some occurring between the Motorcycles and Financial Services segments Some interest and fees recognized as income by Financial Services and expense by Motorcycles are not eliminated This leads to higher finance income and higher expenses, but net income is unaffected 6-8 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets SOLUTIONS TO EXERCISES E6-1 Multiple-Choice Questions on Intercompany Transfers [AICPA Adapted] c d b a b Depreciation expense recorded by Pirn Depreciation expense recorded by Scroll Total depreciation reported Adjustment for excess depreciation charged by Scroll as a result of increase in carrying value of equipment due to gain on intercompany sale ($12,000 / years) Depreciation for consolidated statements $40,000 10,000 $50,000 (3,000) $47,000 E6-2 Multiple-Choice Questions on Intercompany Transactions d When only retained earnings is debited, and not the noncontrolling interest, a gain has been recorded in a prior period on the parent's books a The costs incurred by Bottom to develop the equipment are research and development costs and must be expensed as they are incurred (FASB Statement No 2, par 12) Transfer to another legal entity does not cause a change in accounting treatment within the economic entity b The $39,000 paid to Gold Company will be charged to depreciation expense by Top Corporation over the remaining years of ownership As a result, Top Corporation will debit depreciation expense for $13,000 each year Gold Company had charged $16,000 to accumulated depreciation in years, for an annual rate of $8,000 Depreciation expense therefore must be reduced by $5,000 ($13,000 - $8,000) in preparing the consolidated statements a TLK Corporation will record the purchase at $39,000, the amount it paid Gold Company had the equipment recorded at $40,000; thus, a debit of $1,000 will raise the equipment balance back to its original cost from the viewpoint of the consolidated entity 6-9 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets E6-2 (continued) b c Reported net income of Gold Company Reported gain on sale of equipment Intercompany profit realized in 20X6 Realized net income of Gold Company Proportion of stock held by noncontrolling interest Income assigned to noncontrolling interests $15,000 (5,000) $ 45,000 (10,000) $ 35,000 x 40 $ 14,000 Operating income reported by Top Corporation Net income reported by Gold Company $ 85,000 45,000 $130,000 Less: Unrealized gain on sale of equipment ($15,000 - $5,000) Consolidated net income (10,000) $120,000 E6-3 Elimination Entries for Land Transfer a Eliminating entry, December 31, 20X4: E(1) Gain on Sale of Land Land 10,000 10,000 Eliminating entry, December 31, 20X5: E(1) b Retained Earnings, January Land 10,000 10,000 Eliminating entry, December 31, 20X4: E(1) Gain on Sale of Land Land 10,000 10,000 Eliminating entry, December 31, 20X5: E(1) Retained Earnings, January Noncontrolling Interest Land 6,000 4,000 6-10 10,000 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-39 Intercompany Sale of Equipment at a Loss in Prior Period a Eliminating entries: E(1) Income from Subsidiary Dividends Declared Investment in Block Corporation Stock Eliminate income from subsidiary 54,000 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $5,700 = ($60,000 - $3,000) x 10 5,700 E(3) Common Stock — Block Corporation Retained Earnings, January Investment in Block Corporation Stock Noncontrolling Interest Eliminate beginning investment balance 50,000 150,000 E(4) Buildings and Equipment Depreciation Expense Retained Earnings, January Noncontrolling Interest Accumulated Depreciation Eliminate intercorporate sale of equipment 42,000 3,000 18,000 36,000 2,000 3,700 180,000 20,000 16,200 1,800 27,000 Adjustment to depreciation expense Depreciation based on original cost ($90,000 / 10 years) Depreciation based on intercompany sale price ($48,000 / years) Adjustment to depreciation expense $ 9,000 (6,000) $ 3,000 Adjustment to retained earnings Book value of equipment at time of sale [$90,000 - ($9,000 x years)] Intercompany sale price Loss recorded by Block on sale Partial realization of loss [($9,000 - $6,000) x years] Loss not yet realized for consolidated statement purposes Foster's proportionate share Adjustment to retained earnings 6-57 $72,000 (48,000) $24,000 (6,000) $18,000 x 90 $16,200 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-39 (continued) Adjustment to noncontrolling interest Loss not yet realized for consolidated statement purposes Proportion of ownership held by noncontrolling interest Adjustment to noncontrolling interest $18,000 x 10 $ 1,800 Adjustment to accumulated depreciation Accumulated depreciation based on original cost [($90,000 / 10 years) x years] Accumulated depreciation recorded by Foster [($48,000 / years) x years] Adjustment to accumulated depreciation 6-58 $45,000 (18,000) $27,000 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-39 (continued) b Foster Company and Block Corporation Consolidation Workpaper December 31, 20X9 Item Sales Other Income Income from Subsidiary Credits Cost of Goods Sold Depreciation Expense Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Foster Co Block Corp 680,000 26,000 54,000 760,000 500,000 45,000 95,000 (640,000) 400,000 250,000 15,000 75,000 (340,000) 120,000 60,000 150,000 60,000 210,000 (20,000) (3)150,000 62,700 Dividends Declared 235,000 120,000 355,000 (40,000) Ret Earnings, Dec 31, carry forward 315,000 190,000 212,700 82,000 80,000 40,000 200,000 80,000 500,000 32,400 90,000 10,000 130,000 60,000 250,000 Ret Earnings, Jan Income, from above Cash Accounts Receivable Other Receivables Inventory Land Buildings and Equipment Investment in Block Corporation Stock Debits 385,000 15,000 Eliminations Debit Credit 216,000 1,198,000 572,400 6-59 1,065,000 41,000 (1) 54,000 (4) 3,000 (2) 5,700 62,700 Consolidated 1,106,000 750,000 63,000 170,000 (983,000) 123,000 (5,700) 117,300 (4) 16,200 (1) 18,000 (2) 2,000 36,200 251,200 117,300 368,500 (40,000) 328,500 114,400 170,000 50,000 330,000 140,000 792,000 (4) 42,000 (1) 36,000 (3)180,000 1,596,400 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-39 (continued) Item Accum Depreciation Accounts Payable Other Payables Bonds Payable Bond Premium Common Stock Foster Company Block Corporation Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest Credits Foster Co Block Corp 155,000 63,000 95,000 250,000 75,000 35,000 20,000 200,000 2,400 210,000 50,000 Eliminations Debit Credit (4) 27,000 1,198,000 257,000 98,000 115,000 450,000 2,400 210,000 (3) 50,000 110,000 315,000 Consolidated 110,000 190,000 572,400 6-60 212,700 36,200 328,500 304,700 (2) 3,700 (3) 20,000 (4) 1,800 304,700 25,500 1,596,400 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-40 Comprehensive Problem: Intercorporate Transfers a Computation of differential as of January 1, 20X8: Original differential at December 31, 20X1 Less: Portion written off for sale of inventory Remaining differential, January 1, 20X8 b Verification of balance in Investment in Schmid Stock account: Schmid retained earnings, January 1, 20X8 Schmid net income, 20X8: Sales Cost of goods sold Depreciation and amortization Other expenses Other income (loss) Net income Schmid dividends, 20X8 Schmid retained earnings, December 31, 20X8 Schmid stockholders' equity: Common stock Additional paid-in capital Retained earnings, December 31, 20X8 Stockholders' equity, December 31, 20X8 Rossman's ownership share Book value of shares held by Rossman Remaining differential at January 1, 20X8 ($120,000 x 75) Balance in Investment in Schmid Stock account, December 31, 20X8 c $ 150,000 (30,000) $ 120,000 $1,400,000 $985,000 (525,000) (88,000) (227,000) (35,000) 110,000 (20,000) $1,490,000 $1,000,000 1,350,000 1,490,000 $3,840,000 x 75 $2,880,000 90,000 $2,970,000 Elimination entries: E(1) Income from Subsidiary Dividends Declared Investment in Schmid Stock Eliminate income from subsidiary 82,500 E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $36,500 = [$110,000 + $40,000 - ($40,000 / 10)] x 25 36,500 6-61 15,000 67,500 5,000 31,500 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-40 (continued) E(3) E(4) Common Stock — Schmid Additional Paid-In Capital Retained Earnings, January Differential Investment in Schmid Stock Noncontrolling Interest Eliminate beginning investment balance: $2,902,500 = $2,970,000 - $67,500 $967,500 = ($1,000,000 + $1,350,000 + $1,400,000 + $120,000) x 25 1,000,000 1,350,000 1,400,000 120,000 Land Goodwill Differential Assign differential 56,000 64,000 E(5) Retained Earnings, January Land Eliminate unrealized gain on land 23,000 E(6) Buildings and Equipment Depreciation and Amortization Accumulated Depreciation Other Income (Loss on Sale of Equipment) Eliminate unrealized loss on equipment: $185,000 = $435,000 - $250,000 $4,000 = ($435,000 / 15) - ($250,000 / 10) $149,000 = [($435,000 / 15) x 5] + $4,000 $40,000 = $290,000 - $250,000 185,000 4,000 E(7) Other Income Other Expenses Eliminate intercompany sale of services 80,000 E(8) Current Payables Current Receivables Eliminate intercompany receivable/payable 20,000 E(9) Current Payables Current Receivables Eliminate intercompany dividend owed: $5,000 x 75 6-62 2,902,500 967,500 120,000 23,000 149,000 40,000 3,750 80,000 20,000 3,750 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-40 (continued) d Rossman Corporation and Schmid Distributors Inc Consolidation Workpaper December 31, 20X8 Item Sales Income from Subsidiary Other Income (Loss) Credits Cost of Goods Sold Depreciation and Amortization Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Retained Earnings, Jan Income, from above Rossman Schmid 4,801,000 82,500 90,000 4,973,500 2,193,000 985,000 (35,000) 950,000 525,000 202,000 88,000 1,381,000 227,000 (3,776,000) (840,000) 1,197,500 110,000 1,497,800 1,400,000 Dividends Declared 1,197,500 110,000 2,695,300 1,510,000 (50,000) (20,000) Retained Earnings, Dec 31, carry forward 2,645,300 1,490,000 6-63 Eliminations Debit Credit 5,786,000 (1) (7) 82,500 80,000 (6) 4,000 (2) 36,500 203,000 120,000 (3)1,400,000 (5) 23,000 203,000 120,000 (6) 40,000 (7) 80,000 (1) 15,000 (2) 5,000 1,626,000 Consolidated 140,000 15,000 5,801,000 2,718,000 294,000 1,528,000 (4,540,000) 1,261,000 (36,500) 1,224,500 1,474,800 1,224,500 2,699,300 (50,000) 2,649,300 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-40 (continued) Item Rossman Cash Current Receivables 50,700 101,800 38,000 89,400 Inventory Investment in Schmid Stock 286,000 218,900 Land Buildings and Equipment Goodwill Differential Debits Accumulated Depreciation Current Payables Eliminations Debit Credit Schmid (8) (9) 2,970,000 400,000 1,200,000 2,400,000 2,990,000 6,208,500 4,536,300 1,105,000 86,200 420,000 76,300 Bonds Payable Common Stock Rossman Corporation Schmid Distributors Additional Paid-In Capital Retained Earnings, from above Noncontrolling Interest 1,000,000 200,000 Credits 100,000 (4) 56,000 (6) 185,000 (4) 64,000 (3) 120,000 (8) (9) 20,000 3,750 1,000,000 (3)1,000,000 1,272,000 1,350,000 (3)1,350,000 2,645,300 1,490,000 1,626,000 6,208,500 4,536,300 4,424,750 6-64 20,000 3,750 (1) 67,500 (3)2,902,500 (5) 23,000 (4) 120,000 (6) 149,000 Consolidated 88,700 167,450 504,900 1,633,000 5,575,000 64,000 8,033,050 1,674,000 138,750 1,200,000 100,000 1,272,000 140,000 (2) 31,500 (3) 967,500 4,424,750 2,649,300 999,000 8,033,050 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-41A Fully Adjusted Equity Method a Adjusted trial balance: Item Cash and Accounts Receivable Inventory Land Buildings and Equipment Investment in Lane Company Stock Cost of Goods Sold Depreciation and Amortization Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings Sales Income from Subsidiary Total b Prime Company Debit Credit Lane Company Debit Credit $ 151,000 240,000 100,000 500,000 $ 55,000 100,000 80,000 150,000 216,000 160,000 25,000 20,000 60,000 80,000 15,000 10,000 35,000 $ 230,000 60,000 200,000 300,000 394,000 250,000 38,000 $1,472,000 $1,472,000 $525,000 $ 60,000 25,000 50,000 100,000 140,000 150,000 $525,000 Journal entries recorded by Prime Company: (1) Cash Investment in Lane Company Stock Record dividend from Lane Company: $35,000 x 80 28,000 (2) Investment in Lane Company Stock Income from Subsidiary Record equity-method income: $45,000 x 80 36,000 (3) Investment in Lane Company Stock Income from Subsidiary Recognize portion of gain on sale of equipment: $20,000 / 10 years 6-65 2,000 28,000 36,000 2,000 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-41A (continued) c Eliminating entries, December 31, 20X7: E(1) Income from Subsidiary Dividends Declared Investment in Lane Company Stock Eliminate income from subsidiary E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $9,000 = $45,000 x 20 E(3) Common Stock — Lane Company Retained Earnings, January Differential Investment in Lane Company Stock Noncontrolling Interest Eliminate beginning investment balance: $50,000 = ($160,000 + $40,000) – ($50,000 + $100,000) $232,000 = $240,000 - $8,000 $58,000 = ($100,000 + $140,000 + $50,000) x 20 E(4) E(5) E(6) Goodwill Retained Earnings, January Noncontrolling Interest Differential Assign differential to goodwill 9,000 100,000 140,000 50,000 25,000 20,000 5,000 Investment in Lane Company Stock Noncontrolling Interest Land Eliminate unrealized profit on land Buildings and Equipment Investment in Lane Company Stock Depreciation and Amortization Expense Accumulated Depreciation Eliminate unrealized profit on equipment Accumulated depreciation adjustment: Required balance ($5,000 x years) Balance recorded ($7,000 x years) Required increase E(7) 38,000 Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable 8,000 2,000 5,000 18,000 7,000 2,000 232,000 58,000 50,000 10,000 2,000 21,000 $35,000 (14,000) $21,000 4,000 6-66 28,000 10,000 4,000 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets 6-67 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-41A (continued) d Prime Company and Lane Company Consolidation Workpaper December 31, 20X7 Item Sales Income from Subsidiary Credits Cost of Goods Sold Deprec and Amortization Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Prime Company Lane Company 250,000 150,000 38,000 288,000 150,000 160,000 80,000 25,000 15,000 20,000 10,000 (205,000) (105,000) 83,000 45,000 Ret Earnings, Jan 394,000 140,000 Income, from above Dividends Declared 83,000 477,000 (60,000) 45,000 185,000 (35,000) Ret Earnings, Dec 31, carry forward 417,000 150,000 151,000 240,000 100,000 500,000 55,000 100,000 80,000 150,000 Cash and Receivables Inventory Land Buildings and Equipment Investment in Lane Company Stock Differential Goodwill Debits Accum Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest Credits 216,000 1,207,000 385,000 230,000 60,000 200,000 300,000 60,000 25,000 50,000 100,000 417,000 150,000 1,207,000 385,000 6-68 Eliminations Debit Credit 400,000 (1) 38,000 (6) (2) 9,000 47,000 2,000 207,000 (5) 8,000 (6) 18,000 (3) 50,000 (4) 25,000 (7) 4,000 28,000 7,000 207,000 5,000 2,000 424,000 (9,000) 83,000 83,000 457,000 (60,000) 37,000 397,000 (7) 4,000 (5) 10,000 202,000 340,000 170,000 655,000 (1) 10,000 (3) 232,000 (4) 50,000 25,000 1,392,000 (6) 21,000 311,000 81,000 250,000 300,000 37,000 (2) 2,000 (3) 58,000 424,000 397,000 (3)100,000 (4) (5) 400,000 240,000 38,000 30,000 (308,000) 92,000 374,000 (1) (2) 5,000 2,000 2,000 (3) 140,000 (4) 20,000 47,000 (6) Consolidated 53,000 1,392,000 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-42A Cost Method a Journal entry recorded by Prime Company: Cash Dividend Income Record dividend from Lane Company b 28,000 28,000 Eliminating entries, December 31, 20X7: E(1) Dividend Income Dividends Declared Eliminate dividend income from subsidiary E(2) Income to Noncontrolling Interest Dividends Declared Noncontrolling Interest Assign income to noncontrolling interest: $9,000 = $45,000 x 20 E(3) Common Stock — Lane Company Retained Earnings, January Differential Investment in Lane Company Stock Noncontrolling Interest Eliminate investment balance at date of acquisition: $50,000 = ($160,000 + $40,000) – ($100,000 + $50,000) $40,000 = ($100,000 + $50,000 + $50,000) x 20 28,000 9,000 100,000 50,000 50,000 E(4) Retained Earnings, January Noncontrolling Interest Assign undistributed prior earnings of subsidiary to noncontrolling interest: ($140,000 - $50,000) x 20 18,000 E(5) Goodwill Retained Earnings, January Noncontrolling Interest Differential Assign differential at beginning of period 25,000 20,000 5,000 6-69 28,000 7,000 2,000 160,000 40,000 18,000 50,000 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-42A (continued) E(6) E(7) E(8) Retained Earnings, January Noncontrolling Interest Land Eliminate unrealized profit on land Buildings and Equipment Retained Earnings, January Depreciation and Amortization Expense Accumulated Depreciation Eliminate unrealized profit on equipment Accounts Payable Accounts Receivable Eliminate intercorporate receivable/payable 6-70 8,000 2,000 5,000 18,000 4,000 10,000 2,000 21,000 4,000 Chapter 06 - Intercorporate Transfers of Services and Noncurrent Assets P6-42A (continued) c Prime Company and Lane Company Consolidation Workpaper December 31, 20X7 Item Sales Dividend Income Credits Cost of Goods Sold Deprec and Amortization Other Expenses Debits Consolidated Net Income Income to Noncontrolling Interest Income, carry forward Prime Company Lane Company 250,000 150,000 28,000 278,000 150,000 160,000 80,000 25,000 15,000 20,000 10,000 (205,000) (105,000) 73,000 45,000 Ret Earnings, Jan 348,000 140,000 Income, from above Dividends Declared 73,000 421,000 (60,000) 45,000 185,000 (35,000) Ret Earnings, Dec 31, carry forward 361,000 150,000 151,000 240,000 100,000 500,000 55,000 100,000 80,000 150,000 Cash and Receivables Inventory Land Buildings and Equipment Investment in Lane Company Stock Differential Goodwill Debits Accum Depreciation Accounts Payable Bonds Payable Common Stock Retained Earnings, from above Noncontrolling Interest Credits 160,000 1,151,000 385,000 230,000 60,000 200,000 300,000 60,000 25,000 50,000 100,000 361,000 150,000 1,151,000 385,000 6-71 Eliminations Debit Credit 400,000 (1) 28,000 (7) 2,000 (2) 9,000 37,000 2,000 (3) (4) (5) (6) (7) 50,000 18,000 20,000 8,000 18,000 37,000 2,000 (1) 28,000 (2) 7,000 151,000 (8) (7) 5,000 (3) 50,000 (5) 25,000 (8) 4,000 151,000 5,000 2,000 342,000 400,000 240,000 38,000 30,000 (308,000) 92,000 (9,000) 83,000 374,000 83,000 457,000 (60,000) 37,000 397,000 4,000 202,000 340,000 170,000 655,000 (6) 10,000 (3)160,000 (5) 50,000 25,000 1,392,000 (7) 21,000 311,000 81,000 250,000 300,000 37,000 (2) 2,000 (3) 40,000 (4) 18,000 342,000 397,000 (3)100,000 (5) (6) Consolidated 53,000 1,392,000 ... some occurring between the Motorcycles and Financial Services segments Some interest and fees recognized as income by Financial Services and expense by Motorcycles are not eliminated This leads... 11,000 Purchase price paid by parent Purchase price paid by subsidiary Required increase $30,000 (28,000) $ 2,000 Purchase price paid by subsidiary Purchase price paid by parent Less: Accumulated... $850,000 recorded by Plug to $1,200,000, the initial purchase price to the consolidated entity Depreciation expense must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug to