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Exercise 6-7

Part A20 11 (1) Sales 450,000

Purchases (Cost of Goods Sold) 450,000 To eliminate intercompany sales

(2) Ending Inventory – Income Statement (CoGS) 25,000 12/31 Inventory (Balance Sheet) 25,000

To eliminate intercompany profit in ending inventory ($150,000 - )

20 12 (1) Sales 486,000

Purchases (Cost of Goods Sold) 486,000 To eliminate intercompany sales

(2) Beginning Retained Earnings-Perkins 25,000 Beginning Inventory – Income Statement (CoGS) 25,000

To recognize intercompany profit included in beginning inventory and reduce beginningconsolidated retained earnings for unrealized intercompany profit at the beginning of the year


To eliminate intercompany profit in ending inventory ($162,000 - )

Exercise 6-8

20 11 (1) Sales 450,000

Purchases (Cost of Goods Sold) 450,000(2) Ending Inventory – Income Statement (CoGS) 25,000

12/31 Inventory (Balance Sheet) 25,000 To eliminate intercompany profit in ending inventory ($150,000 - $150,000/1.2)

20 12 (1) Sales 486,000

Purchases (Cost of Goods Sold) 486,000To eliminate intercompany sales

(2) 1/1 Retained Earnings-Perkins Company (85%)($25,000) 21,250 1/1 Noncontrolling Interest (15%)($25,000) 3,750

Beginning Inventory – Income Statement (CoGS) 25,000 To recognize intercompany profit in beginning inventory realized during the year and reduce controlling and noncontrolling interests for their share of unrealized intercompany profit at beginning of year.


To eliminate intercompany profit in ending inventory. ($162,000 - $162,000/1.2)

Problem 6-9 PERRY COMPANY AND SUBSIDIARYConsolidated Statements Workpaper

Part A For the Year Ended December 31, 2010

Perry Selby Eliminations Noncontrolling ConsolidatedCompany Company Debit Credit Interest Balances

Income Statement

Sales $1,400,000 $800,000 (2) $310,000 $1,890,000Dividend Income 20,000 (5) 20,000

Total Revenue 1,420,000 800,000 1,890,000Cost of Goods Sold:

Inventory, 1/1 230,000 145,000 (7) 25,000 (4) 12,000 388,000Purchases 900,000 380,000 (2) 310,000 970,000 Cost of Available for Sale 1,130,000 525,000 1,358,000Inventory, 12/31 450,000 200,000 (3) 16,400 633,600

Cost of Goods Sold 680,000 325,000 724,400

Other Expense 250,000 195,000 (8) 15,000 460,000 Total Cost and Expense 930,000 520,000 1,184,400

Net/Consolidated Income 490,000 280,000 705,600Noncontrolling Interest In Consolidated Income 50,400 * (50,400)Net Income to Retained Earnings $490,000 $280,000 $386,400 $322,000 $50,400 $655,200

Retained Earnings Statement1/1 Retained Earnings:

Perry Company $1,500,000 (4) $9,600 (1) $84,000 $1,542,400(7) 20,000

(8) 12,000Selby Company 480,000 (6) 480,000

Net Income from above 490,000 280,000 386,400 322,000 50,400 655,200Dividends Declared

Perry Company (50,000) (50,000)

Selby Company (25,000) (5) 20,000 (5,000)

12/31/ Retained Earnings to Balance Sheet $1,940,000 $735,000 $908,000 $426,000 $45,400 $2,147,600

* Noncontrolling interest in income = .2 ´ ($280,000 + $12,000 – $25,000 – $15,000) = $50,400

Perry Selby Eliminations Noncontrolling ConsolidatedCompany Company Debit Credit Interest Balances

Balance SheetCash $ 95,000 $ 70,000 $ 165,000Accounts Receivable 302,000 90,000 392,000Inventory 450,000 200,000 (3) 16,400 633,600Investment in Selby Comp. 990,000 (1) 84,000 (6) 1,074,000Difference between Implied & Book Value (6) 512,500 (7) 512,500Plant and Equipment 850,000 585,000 (7) 150,000 (8) 30,000 1,555,000Goodwill (7) 312,500 312,500Other Assets 390,000 230,000 620,000

Total Assets $3,077,000 $1,175,000 $3,678,100

Accounts Payable $ 75,000 $ 30,000 $ 105,000Other Liabilities 102,000 60,000 162,000Common stock:

Perry Company 960,000 960,000Selby Company 350,000 (6) 350,000

Retained Earnings from above 1,940,000 735,000 908,000 426,000 45,400 2,147,6001/1 Noncontrolling Interest in Net Assets (4) 2,400 (6) 268,500 258,100

(7) 5,00012/31 Noncontrolling Interest in Net Assets (8) 3,000 $303,500 303,500

Total Liabilities and Equity $3,077,000 $1,175,000 $2,327,400 $2,327,400 $3,678,100

Explanations of workpaper entries are on next page

Problem 6-9 (continued)

Explanations of workpaper entries

Computation and Allocation of Difference ScheduleParent Non- EntireShare Controlling Value

SharePurchase price and implied value $990,000 247,500 1,237,500 *Less: Book value of equity acquired 580,000 145,000 725,000Difference between implied and book value 410,000 102,500 512,500Inventory ($210,000 - $ 160,000) (40,000) (10,000) (50,000)Equipment ($780,000 - $ 630,000) (120,000) (30,000) ( 150,000) Balance 250,000 62,500 312,500Goodwill (250,000) (62,500) (312,500)Balance -0- -0- -0-

*$990,000/.80

(1) Investment in Selby Company (0.80 ´ ($480,000 – $375,000)) 84,000 Beginning Retained Earnings - Perry Co. 84,000

To establish reciprocity/convert to equity as of 1/1/10

(2) Sales 310,000 Purchases (Cost of Goods Sold) 310,000

To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CoGS) 16,400 Ending Inventory (Balance Sheet) 16,400

To eliminate unrealized intercompany profit in ending inventory ($82,000 ´ .2)

(4) Beginning Retained Earnings - Perry Co. ($12,000 ´ .80) 9,600 Noncontrolling Interest ($12,000 ´ .20) 2,400

Beginning Inventory (Income Statement) 12,000 To recognize intercompany profit in beginning inventory realized during the year($60,000 – ($60,000/1.25)) = $12,000

6-5

(5) Dividend Income ($25,000 ´ .80) 20,000 Dividends Declared 20,000

To eliminate intercompany dividends

(6) Beginning Retained Earnings - Selby Co. 480,000 Common Stock - Selby Co. 350,000 Difference between Implied and Book Value 512,500

Investment in Selby Co. ($990,000 + $84,000) 1,074,000 Noncontrolling Interest [$247,500 +.2 x ($480,000 – $375,000)] 268,500

(7) Equipment 150,000

Beginning Inventory (Income Statement) 25,000 Beginning Retained Earnings - Perry Co. 20,000 Noncontrolling Interest 5,000Goodwill 312,500

Difference between Implied and Book value 512,500

(8) Other Expenses (Depreciation) ($150,000/10) 15,000Beginning Retained Earnings - Perry Co. 12,000 Noncontrolling Interest 3,000

Equipment 30,000

Part BPerry Company's Retained Earnings on 12/31/10 $1,940,000Amount of Perry Company Retained Earnings that have not been

realized in transactions with third parties (16,400)Perry Company's Retained Earnings that have been realized in

transactions with third parties 1,923,600 Increase in retained earnings of Selby Company from date of

acquisition to 12/31/10 ($735,000 – $375,000) 360,000 Less: Cumulative effect of adjustments to date relating to amortization of the

difference between implied and book value($50,000 + $30,000) (80,000)

Less:Unrealized profit on sales to Perry in 2010 that has not been realized by sales to third parties 0

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Increase in retained earnings of Selby Company since acquisition that has been realized in transactions with third parties 280,000

Perry Company's share (.80 ´ $280,000) 80% 224,000Consolidated Retained Earnings as of 12/31/10 $2,147,600

Consolidated Retained Earnings

Perry 's Share of unrealized profit on Perry 's Retained Earnings on 12/31/10 $1,940,000 downstream sales to Selby (in Selby's ending inventory), Increase in Selby’s Retained Earnings .2($82,000) 16,400 since acquisition ($735,000 - $375,000) = $360,000

Less: cumulative amortization of difference between implied and book value 80,000 Adjusted Increase $280,000Perry’s share thereof .80 224,000

Consolidated Retained Earnings $2,147,600

6-7

Problem 6-11 PRUITT CORPORATION AND SUBSIDIARY

Part A Consolidated Statement WorkpaperFor the Year Ended December 31, 2013

Pruitt Sedbrook Eliminations Noncontrolling Consolidated Corporation Company Dr. Cr. Interest Balances

Income StatementSales 1,100,000 530,000 (2) 200,000 1,430,000 Equity in subsidiary income 47,250 (1) 47,250

Total revenue 1,147,250 530,000 1,430,000 Cost of goods sold:

Beginning inventory 150,000 110,000 (4) 30,000 230,000 Purchases 850,000 350,000 (2) 200,000 1,000,000 Cost of goods available 1,000,000 460,000 1,230,000 Less ending inventory 200,000 120,000 (3) 10,000 310,000

Cost of goods sold 800,000 340,000 920,000 Other expenses 180,000 137,500 317,500

Total cost & expense 980,000 477,500 1,237,500 Net/consolidated income 167,250 52,500 192,500 Noncontrolling interest in income 5,250 * (5,250)*Net income to retained earnings 167,250 52,500 257,250 230,000 5,250 187,250 Statement of Retained Earnings 1/1 Retained earnings

Pruitt Corporation 562,000 (4) 30,000 532,000 Sedbrook Company 120,000 (5)120,000

Net income from above 167,250 52,500 257,250 230,000 5,250 187,250 Dividends declared

Pruitt Corporation (100,000 (100,000)Sedbrook Company (30,000) (1) 27,000 (3,000)

12/31 Retained earnings to balance sheet 629,250 142,500 407,250 257,000 2,250 619,250 *Noncontrolling interest in income = 0.10 ´ $52,500 = $5,250

6-8

Pruitt Sedbrook Eliminations Noncontrolling Consolidated

Corporation Company Dr. Cr. Interest BalancesBalance SheetCash 83,000 80,000 163,000 Accounts receivable 213,000 112,500 325,500 Inventory 200,000 120,000 (3) 10,000 310,000 Investment in Sedbrook Company 578,250 (5) 558,000

(1) 20,250 Other assets 500,000 400,000 900,000 Total assets 1,574,250 712,500 1,698,500

Accounts payable 70,000 30,000 100,000 Other liabilities 75,000 40,000 115,000 Capital Stock: Pruitt Corporation 800,000 800,000 Sedbrook Company 500,000 (5) 500,000 Retained earnings from above 629,250 142,500 407,250 257,000 2,250 619,250 1/1 Noncontrolling interest (5) 62,000 62,00012/31 Noncontrolling interest 64,250 64,250 Total liabilities & equity 1,574,250 712,500 907,250 907,250 1,698,500 Explanations of workpaper entries are on next page

6-9


Explanation of workpaper entries(1) Equity in Subsidiary Income 47,250

Investment in Sedbrook Company 20,250 Dividends Declared ($30,000 ´.90) 27,000

To reverse the effect of parent company entries during the year for subsidiary dividends and income

(2) Sales 200,000 Purchases (Cost of Goods Sold) 200,000

To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CoGS) 10,000 Ending Inventory (Balance Sheet) 10,000

To eliminate unrealized intercompany profit in ending inventory ($50,000 – ($50,000/1.25))

(4) Beginning Retained Earnings- Pruitt Corporation 30,000 Beginning Inventory(Income Statement) 30,000

To recognize intercompany profit in beginning inventory realized during the year

(5) Beginning Retained Earnings- Sedbrook Co. 120,000 Common Stock - Sedbrook Company 500,000

Investment in Sedbrook Company ($578,250 - $20,250) 558,000 Noncontrolling Interest ($500,000 + $120,000) x .10 62,000

To eliminate investment account and create noncontrolling account

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Part B Pruitt Corporation's retained earnings on 12/31/2013 $ 629,250 Unrealized profit on downstream sales included therein (10,000)Unrealized profit on upstream sales included therein 0 Consolidated retained earnings on 12/31/2013 $ 619,250

Consolidated Retained Earnings

Pruitt’s Retained Earnings on 12/31/13 $629,250

Unrealized profit on downstreamsales to Sedbrook (in Sedbrook's ending Inventory) 10,000

Consolidated Retained Earnings $619,250

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Exercise 7-7

Part A (1) Sales 100,000Cost of Sales (Purchases) 100,000

(2) Accounts Payable 17,500Accounts Receivable 17,500

(3) Cost of Sales (beginning inventory – income statement) 4,000Inventory ($20,000 – ($20,000/1.25)) 4,000

(4) Beginning Retained Earnings – Price ($25,000 – ($25,000/1.25) 5,000Cost of Sales (beginning inventory – income statement) 5,000

(5) Beginning Retained Earnings – Price ($5,500´.8) 4,400Noncontrolling Interest ($5,500´.2) 1,100

Property Plant and Equipment 5,500

(6) Accumulated Depreciation 2,200Depreciation Expense ($5,500/5) 1,100Beginning Retained Earnings – Price ($1,100´.8) 880Noncontrolling Interest ($1,100´.2) 220

Part B Noncontrolling Interest in Consolidated Income .2´($40,000 + $1,100) = $8,220

Exercise 7-11

Part A 20 11 (1) Sales 400,000

Equipment 90,000 Cost of Sales 310,000

Accumulated Depreciation (($90,000/9) 10,000 Depreciation Expense 10,000

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20 12 (2) Cost Method or Partial Equity Method

Beginning Retained Earnings – Pinta Co. 90,000 Equipment 90,000

Accumulated Depreciation 20,000Depreciation Expense 10,000Beginning Retained Earnings – Pinta Co. 10,000

Complete Equity MethodInvestment in Standard Co. 90,000

Equipment 90,000

Accumulated Depreciation 20,000Depreciation Expense 10,000Investment in Standard Co. 10,000

Part B Calculation of Controlling interest in Consolidated Net Income For Year Ended Dec. 31, 2011

Pinta Company’s net income from operations $700,000Less unrealized profit on 2011 sales of equipment to Standard Company (90,000)Plus profit on sales of equipment to Standard Company realized through depreciation in 2011 10,000Pinta Company’s income from its independent operations that

has been realized in transactions with third parties 620,000Income of Standard Company that has been realized in transactions

with third parties $250,000Pinta Company’s share 80% 200,000

Controlling Interest in Consolidated Net Income – 2011 $820,000

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Problem 7-4 PROUT COMPANY AND SUBSIDIARYPart A Consolidated Statements Workpaper

For the Year Ended December 31, 2012

Prout Sexton Eliminations Noncontrolling ConsolidatedCompany Company Debit Credit Interest Balances

INCOME STATEMENTSales 1,475,000 1,110,000 2,585,000 Dividend Income 80,000 (4) 80,000 Total Revenue 1,555,000 1,110,000 2,585,000 Cost of Goods Sold: 942,000 795,000 1,737,000 Income Tax Expense 187,200 90,000 277,200 Other Expenses 145,000 90,000 (3) 8,000 227,000 Total Cost & Expenses 1,274,200 975,000 2,241,200 Net /Consolidated Income 280,800 135,000 343,800 Noncontrolling Interest Income 27,000 * (27,000)Net Income to Retained Earnings 280,800 135,000 80,000 8,000 27,000 316,800

STATEMENT OF RETAINED EARNINGS1/1 Retained Earnings Prout Company 1,300,000 (2) 120,000 (1) 192,000 1,380,000

(3) 8,000 Sexton Company 1,040,000 (5) 1,040,000Net Income from above 280,800 135,000 80,000 8,000 27,000 316,800Dividends Declared Prout Company (120,000) (120,000) Sexton Company (100,000) (4) 80,000 (20,000)12/31 Retained Earnings to Balance Sheet 1,460,800 1,075,000 1,240,000 288,000 7,000 1,576,800

*Noncontrolling interest in consolidated income = .20´$135,000 = $27,000Explanations of workpaper entries are on next page

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Prout Sexton Eliminations Noncontrolling Consolidated

Company Company Debit Credit Interest BalancesBALANCE SHEETCurrent Assets 568,000 271,000 839,000Investment in Sexton Company 1,600,000 (1) 192,000 (5) 1,792,000 Fixed Assets 1,972,000 830,000 (2) 40,000 2,842,000 Accumulated Depreciation (375,000) (290,000 ) (3) 16,000 (2) 160,000 (809,000) Other Assets 1,000,800 1,600,000 2,600,800 Total Assets 4,765,800 2,411,000 5,472,800

Other Liabilities 305,000 136,000 441,000 Capital Stock Prout Company 3,000,000 3,000,000 Sexton Company 1,200,000 (5) 1,200,000 Retained Earnings from above 1,460,800 1,075,000 1,240,000 288,000 7,000 1,576,800Noncontrolling Interest in Net Assets (5) 448,000 448,000

455,000 455,000

Total Liabilities & Equity 4,765,800 2,411,000 2,688,000 2,688,000 5,472,800

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Intercompany Sale of EquipmentAccumulated Remaining

Cost Depreciation Carrying Value Life DepreciationOriginal Cost $400,000 $160,000 $240,000 15 yr $16,000Intercompany Selling Price 360,000 _______ 360,000 15 yr 24,000Difference $ 40,000 $160,000 $120,000 $ 8,000

Explanation to workpaper entries (not required)(1) Investment in Sexton Company 192,000

Retained Earnings - Prout 192,000To establish reciprocity/convert to equity (.80´($1,040,000 - $800,000))

(2) Equipment 40,000 Beginning Retained Earnings - Prout 120,000

Accumulated Depreciation 160,000To reduce beginning consolidated retained earnings by amount of unrealized profit at the beginning of the year, to restate property and equipment to its book value to Prout Company on the date of the intercompany sale.

(3) Accumulated Depreciation 16,000Depreciation Expense 8,000Beginning Retained Earnings - Prout 8,000

To reverse amount of excess depreciation recorded during current year and recognize an equivalent amount of intercompany profit as realized

(4) Dividend Income 80,000Dividends Declared 80,000

To eliminate intercompany dividends

(5) Beginning Retained Earnings – Sexton 1,040,000 Common Stocks – Sexton 1,200,000

Investment in Sexton Company ($1,600,000 + $192,000) 1,792,000Noncontrolling Interest [$400,000 + ($1,040,000 - $800,000) x .20] 448,000

To eliminate investment account and create noncontrolling interest account

Part B (1)Cash 300,000Accumulated Depreciation - Fixed Assets ($360,000/15)(2 ) 48,000Loss on Sale of Equipment 12,000

Plant and Equipment 360,000

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(2)Beginning Retained Earnings - Prout 104,000Loss on Sale of Equipment 12,000Gain on Sale of Equipment 92,000

Cost to the Affiliated Companies $400,000Accumulated Depreciation Based on Original Cost ((12/25)´$400,000) 192,000Book Value to the Affiliated Companies on 1/1/13 208,000Proceeds from Sale to Non-affiliate (300,000 ) Gain to Affiliated Companies on Sale $92,000

(3) No workpaper entries are necessary for 2014 and later years. As of Dec. 31, 2013, the amount of profit recorded by the affiliates on their books ($120,000 - $12,000 = $108,000) is equal to the amount of profit considered realized in the consolidated financial statements ($8,000 + $8,000 + $92,000) = $108,000.

Problem 7-10 PROUT COMPANY AND SUBSIDIARY

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Part A Consolidated Statements WorkpaperFor the Year Ended December 31, 2012


Income StatementSales 1,475,000 1,110,000 2,585,000Equity in Subsidiary Income 108,000 (1) 108,000 Total Revenue 1,583,000 1,110,000 2,585,000Cost of Goods Sold: 942,000 795,000 1,737,000Income Tax Expense 187,200 90,000 277,200Other Expenses 145,000 90,000 (3) 8,000 227,000 Total Cost & Expenses 1,274,200 975,000 2,241,200Net /Consolidated Income 308,800 135,000 343,800Noncontrolling Interest Income* 27,000 * (27,000)Net Income to Retained Earnings 308,800 135,000 108,000 8,000 27,000 316,800

Statement of Retained Earnings1/1 Retained Earnings Prout Company 1,492,000 (2) 120,000 (3) 8,000 1,380,000 Sexton Company 1,040,000 (4) 1,040,000Net Income from above 308,800 135,000 108,000 8,000 27,000 316,800Dividends Declared Prout Company (120,000) (120,000) Sexton Company (100,000) (1) 80,000 (20,000)12/31 Retained Earnings to Balance Sheet 1,680,800 1,075,000 1,268,000 96,000 7,000 1,576,800* Noncontrolling interest in consolidated income = .20 ´ $135,000 = $27,000

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Balance SheetCurrent Assets 568,000 271,000 839,000Investment in Sexton Company 1,820,000 (1) 28,000

(4) 1,792,000Plant and Equipment 1,972,000 830,000 (2) 40,000 2,842,000Accumulated depreciation (375,000) (290,000) (3) 16,000 (2) 160,000 (809,000)Other Assets 1,000,800 1,600,000 2,600,800 Total Assets 4,985,800 2,411,000 5,472,800

Other Liabilities 305,000 136,000 441,000Capital Stock Prout Company 3,000,000 3,000,000 Sexton Company 1,200,000 (4) 1,200,000Retained Earnings from above 1,680,800 1,075,000 1,268,000 96,000 7,000 1,576,8001/1 Noncontrolling Interest (4) 448,000 448,00012/31 Noncontrolling Interest 455,000 455,000

Total Liabilities & Equity 4,985,800 2,411,000 2,524,000 2524,000 5,472,800

Explanations of workpaper entries are on separate page.

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Schedule to calculate intercompany profit

Intercompany Sale of Equipment Accumulated Remaining

Cost Depreciation Carrying Value Life DepreciationOriginal Cost $400,000 $160,000 $240,000 15 yr $16,000Intercompany Selling Price 360,000 _______ 360,000 15 yr 24,000Difference $ 40,000 $160,000 $120,000 $ 8,000

Explanation of workpaper entries (not required)

(1) Equity in Subsidiary Income 108,000 Dividends Declared (.80)($100,000) 80,000

Investment in Sexton Company 28,000To reverse the effect of parent companyentries during the year for subsidiary dividends and income

(2) Property and Equipment ($400,000 - $360,000) 40,000Beginning Retained Earnings - Prout Company 120,000

Accumulated Depreciation 160,000To reduce beginning consolidated retained earnings by amount of unrealized profit at the beginning of the year, and to restore the value of the equipment to its book value on the date of intercompany sale

(3) Accumulated Depreciation 16,000 Depreciation Expense 8,000

Beginning Retained Earnings - Prout Company 8,000To reverse amount of excess depreciation recordedduring current year and recognize an equivalent amountof intercompany profit as realized

(4) Beginning Retained Earnings – Sexton 1,040,000Common Stock – Sexton 1,200,000 Investment in Sexton Company ($1,820,000 - $28,000)1,792,000 Noncontrolling Interest [$400,000 + ($1,040,000 - $800,000) x .20] 448,000To eliminate investment account and create noncontrolling interest account

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Part B

(1) Cash 300,000Accumulated Depreciation - Fixed Assets ($360,000/15 yrs. ´ 2 yrs.) 48,000Loss on Sale of Equipment 12,000

Plant and Equipment 360,000

(2) Beginning Retained Earnings - Prout 104,000Loss on Sale of Equipment 12,000Gain on Sale of Equipment 92,000

Cost to the affiliated companies $ 400,000

Accumulated depreciation based on original cost [(12/25 ´ $400,000)]

192,000Book value to the affiliated companies on 1/1/13 208,000Proceeds from sale to non-affiliate(300,000)Gain to affiliated companies on sale $

92,000

(3) No workpaper entries are necessary for 2014 and later years. As of December 31, 2013, the amount of profit recorded by the affiliates on their books [$120,000 - $12,000 = $108,000] is equal to the amount of profit considered realized in the consolidated financial statements [$8,000 + $8,000 + $92,000 = $108,000].

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