smch06beams

8/12/2019 SMch06Beams

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Chapter 6

INTERCOMPANY PROFIT TRANSACTIONS PLANT ASSETS

Answers to Questions

1 The objective of eliminating the effect of inte!com"an# ale of "lant aet i to !eflect "lant aet an$!elate$ $e"!eciation amo%nt in the conoli$ate$ financial tatement at cot to the conoli$ate$ entit#&

2 Conoli$ation "!oce$%!e fo! eliminating %n!eali'e$ "!ofit on "lant aet a!e affecte$ b# the $i!ection ofthe ale& The f%ll amo%nt of %n!eali'e$ "!ofit o! lo on $o(nt!eam ale )"a!ent to %bi$ia!#* i cha!ge$o! c!e$ite$ to the cont!olling inte!et& In the cae of %"t!eam ale+ ho(eve!+ %n!eali'e$ "!ofit o! lo iallocate$ bet(een cont!olling an$ noncont!olling inte!et& ,eca%e the!e i no allocation tononcont!olling inte!et in the cae of a -.. "e!cent o(ne$ %bi$ia!#+ conoli$ation "!oce$%!e a!e theame fo! %"t!eam ale a fo! $o(nt!eam ale&

3 /n!eali'e$ gain an$ loe f!om inte!com"an# ale of lan$ a!e !eali'e$ f!om the vie("oint of the ellingaffiliate (hen the "%!chaing affiliate !eell the lan$ to "a!tie o%ti$e the conoli$ate$ entit#& Thi ialo the "oint at (hich the conoli$ate$ entit# !ecogni'e gain o! lo on the $iffe!ence bet(een the

elling "!ice to o%ti$e "a!tie an$ the cot to the "%!chaing affiliate&

4 Noncont!olling inte!et ha!e i not affecte$ b# $o(nt!eam ale of lan$ beca%e the !eali'e$ income ofthe %bi$ia!# i not affecte$ b# $o(nt!eam ale& In the cae of %"t!eam ale of lan$+ the !e"o!te$income of the %bi$ia!# i a$j%te$ $o(n(a!$ fo! %n!eali'e$ "!ofit an$ %"(a!$ fo! %n!eali'e$ loe to$ete!mine !eali'e$ income& Since noncont!olling inte!et ha!e i com"%te$ on the bai of !eali'e$%bi$ia!# income+ the com"%tation of noncont!olling inte!et ha!e i affecte$ b# %"t!eam ale of lan$&

5 Conoli$ation "!oce$%!e a!e $eigne$ to eliminate -.. "e!cent of all %n!eali'e$ "!ofit o! lo on allinte!com"an# t!anaction& The i%e i not (hethe! -.. "e!cent of the %n!eali'e$ "!ofit o! lo ieliminate$+ b%t if the amo%nt eliminate$ i allocate$ bet(een cont!olling an$ noncont!olling inte!et& Inthe cae of an %"t!eam ale of lan$+ -.. "e!cent of the %n!eali'e$ "!ofit f!om the ale i eliminate$+ b%tthe amo%nt i allocate$ bet(een cont!olling an$ noncont!olling inte!et in !elation to thei! o(ne!hi"hol$ing&

6 /n!eali'e$ gain an$ loe f!om inte!com"an# ale of $e"!eciable aet a!e !eali'e$ th!o%gh %e if theaet a!e hel$ (ithin the conoli$ate$ entit# an$ th!o%gh ale if the aet a!e ol$ to o%ti$e "a!tie& The

"!oce of !ecogni'ing "!evio%l# %n!eali'e$ gain an$ loe th!o%gh %e i a "iecemeal !ecognition ove!the !emaining %ef%l life of the $e"!eciable aet&

7 The com"%tation of noncont!olling inte!et ha!e in the #ea! of an %"t!eam ale of $e"!eciable "lant aeti a follo(0

Unrealized Unrealized

Gain on Sale Loss on Sale

Income of subsidiary as reported XXX XXX

Deduct: Gain on sale of plant assets - XX

Add: Loss on sale of plant assets +XX

Add: Piecemeal recognition of gain on sale

of plant assets + XDeduct: Piecemeal recognition of loss on

sale of plant assets - X

Realized subsidiary income XXX XXX

Noncont!olling interest percentage X X

Noncont!olling interest s!are XXX XXX

12.-- Pea!on E$%cation+ Inc& "%blihing a P!entice 3all45-


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6-2 Intercompany Profit Transactions Plant Assets

8 The effect of %n!eali'e$ gain on inte!com"an# ale of "lant aet a!e cha!ge$ againt the "a!ent6income f!om %bi$ia!# acco%nt in the #ea! of the inte!com"an# ale+ (ith e7%al amo%nt being $e$%cte$f!om the invetment in %bi$ia!# acco%nt& In %be7%ent #ea!+ the income f!om %bi$ia!# an$invetment in %bi$ia!# acco%nt a!e inc!eae$ fo! $e"!eciation on the %n!eali'e$ gain that i !eco!$e$ onthe %bi$ia!# boo8 fo! $o(nt!eam ale o! fo! the "a!ent6 "!o"o!tionate ha!e fo! %"t!eam ale& If the%n!eali'e$ gain !elate to lan$+ no ent!ie a!e nee$e$ %ntil the lan$ i ol$ to entitie o%ti$e of the

affiliation t!%ct%!e&

9 Acco%nting "!oce$%!e a!e $eigne$ to eliminate the effect of inte!com"an# ale of "lant aet on both"a!ent income an$ conoli$ate$ net income %ntil the gain an$ loe on %ch ale a!e !eali'e$ th!o%gh%e o! th!o%gh ale to o%ti$e "a!tie& In #ea! %be7%ent to inte!com"an# ale of $e"!eciable "lantaet+ the effect on "a!ent income i eliminate$ b# a$j%ting $e"!eciation e9"ene to a cot bai fo! theconoli$ate$ entit#&

10 Conoli$ation (o!8"a"e! ent!ie to eliminate the effect of a gain on ale of $e"!eciable "lant aet f!om a$o(nt!eam ale a!e ill%t!ate$ a follo(0

Year of sale:ain on aleAcc%m%late$ $e"!eciation

;e"!eciation e9"enePlant aet

To !e$%ce "lant aet an$ !elate$ $e"!eciation amo%nt to a cot bai to theconoli$ate$ entit# an$ to eliminate %n!eali'e$ gain on inte!com"an# ale&

Subsequent yearsInvetment in %bi$ia!#Acc%m%late$ $e"!eciation

;e"!eciation e9"enePlant aet

To !e$%ce "lant aet an$ !elate$ $e"!eciation amo%nt to a cot bai to theconoli$ate$ entit# an$ to a$j%t the invetment acco%nt fo! %n!eali'e$ "!ofit at the

beginning of the c%!!ent #ea!&

SOLUTIONS TO EXERCISES

Solution E6-1

1 c

2 a

3 c

4 d

"#$%% Pearson &ducation' Inc( publis!ing as Prentice )all


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Chapter 6 6-3

Solution E6-2

1 Par*s income from am ,ill be decreased by #.'$$$ as a result of t!e

follo,ing entry:

Income from am #.'$$$

In/estment in am #.'$$$0o eliminate unrealized gain on do,nstream sale of land(

Par*s net income for #$%1 ,ill not be affected by t!e sale since t!e

#.'$$$ gain ,ill be offset by a #.'$$$ decrease in income from am(

0!e in/estment in am account at December 2%' #$%1 ,ill be #.'$$$ less

as a result of t!e sale as indicated by t!e abo/e entry( 30!e total

balance s!eet effect is to reduce land to its cost' reduce t!e

in/estment account for t!e profit' and increase cas! or ot!er assets

for t!e proceeds(4

2 0!e consolidated financial statements ,ill not be affected because t!e

gain on t!e sale is eliminated in t!e consolidated income statement and

t!e land is reduced to its cost basis to t!e consolidated entity( A,or5paper ad6ustment ,ould s!o,:

Gain on sale of land #.'$$$

Land #.'$$$

3 7eit!er Par*s income from am or net income for #$%. ,ill be affected

by t!e #$%1 sale of land( 0!e in/estment in am account' !o,e/er' ,ill

still be #.'$$$ less t!an if t!e land !ad not been sold' e/en t!oug!

t!ere are no c!anges in t!e in/estment account during #$%.(

4 0!e sale of t!e land ,ill not affect am*s net income since it is being

sold at am*s cost( )o,e/er' t!e sale triggers recognition of t!e

postponed gain on t!e original sale from Par to am( Income from am

increases #.'$$$(

In/estment in am #.'$$$

Income from am #.'$$$

0o recognize t!e gain deferred in #$%1(

8onsolidated income ,ill also feel t!e same impact of t!e recognition

of t!e deferred gain(

In/estment in am #.'$$$

Gain on sale of land #.'$$$

" #$%% Pearson &ducation' Inc( publis!ing as Prentice )all


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Solution E6-3

1a Controlling Share of Consolidated Net Income

#$%% #$%#

Pit*s separate income 2$$'$$$ 1$$'$$$

Add: &9uity in ir*s income

#$%% $'$$$ ;$ %$ years4 2'$$$Income from al %$'$$$

2 Pig Corporation and Subidiar!

8onsolidated Income tatement

for t!e year ended December 2%' #$%%

ales #'#$$'$$$

8ost of sales 3%'1$$'$$$4

Gross profit $$'$$$



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Chapter 6 6-5

?perating e@penses 311


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Solution E6-"AI8PA adaptedB

1 d

0!e e9uipment must be s!o,n at its %'1$$'$$$ boo5 /alue to t!e

consolidated entity and d is t!e only c!oice t!at pro/ides a %'1$$'$$$

boo5 /alue( ?rdinarily' t!e e9uipment ,ould be s!o,n at %'.$$'$$$' its

boo5 /alue at t!e time of transfer' less t!e %$$'$$$ depreciationafter transfer(

2 c

Reciprocal recei/ables and payables accounts and purc!ases and sales

accounts must al,ays be eliminated( Cut di/idend income 3parent4 and

di/idends paid 3subsidiary4 accounts are reciprocals only ,!en t!e cost

met!od is used(

3 a

Amount to be eliminated from consolidated net income in 2011

Intercompany gain on do,nstream sale of mac!inery %$'$$$

Less: Realized t!roug! depreciation of intercompany

gain on mac!inery 3%$'$$$>. years4 3#'$$$4Decrease in consolidated net income from

intercompany sale

'$$$

Amount to be added to consolidated net income in #$%# for

realization t!roug! depreciation of intercompany gain

on mac!inery #'$$$

4 b

?ne-t!ird of t!e unrealized intercompany profit is recognized t!roug!

depreciation for #$%%(

Solution E6-6

1 a

elling price in #$%; ..'$$$

8ost to consolidated entity %.'$$$

Gain on sale of land 1$'$$$

2 b

Gain on e9uipment 2$'$$$

Less: Depreciation on gain 3%$'$$$4

7et effect on in/estment account #$'$$$

0!e in/estment account ,ill be #$'$$$ less t!an t!e underlying e9uity

interest(

3 b

8ombined e9uipment net $$'$$$

Less: nrealized gain 3#$'$$$4Add: Piecemeal recognition of gain .'$$$

8onsolidated e9uipment net


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Chapter 6 6-7

" c

In/estment income ,ill be decreased by %#'$$$ gain less 2'$$$

piecemeal recognition of t!e gain(

6 c

in*s net income %'$$$'$$$

Less: nrealized gain 3.$'$$$4Add: Piecemeal recognition .'$$$

Realized income ;..'$$$

7oncontrolling interest percentage 1$

7oncontrolling interest s!are 2#'$$$

Solution E6-#

Pod Corporation and Subidiar!

8onsolidated Income tatement


ales 3.$$'$$$ + 2$$'$$$4 $$'$$$

Gain on sale of mac!inerya

#$'$$$0otal re/enue #$'$$$

8ost of sales 3#$$'$$$ + %2$'$$$4 22$'$$$

Depreciation e@pense 3.$'$$$ + 2$'$$$ - .'$$$ from

depreciation on intercompany profit for #$%%4 1$4 #.$'$$$

Coo5 /alue 3#$$'$$$4

&@cess allocated to patents .$'$$$

Annual amortization of patents 3.$'$$$>. years4 %$'$$$

1 Income from Sat 2011

!are of at*s net income 31$'$$$ %># year 1$4 '$$$



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Amortization of patents 3%$'$$$ %># year 1$4 3#'$$$4

nrealized in/entory profit from upstream sale

31'$$$ 1$4 3%'=$$4

nrealized gain from do,nstream sale of land

3#'$$$ %$$4 3#'$$$4

Income from at #'1$$



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Chapter 6 6-9

Solution E6-$ 3continued4

2 Income from Sat 2012

at*s net income =$'$$$

Amortization of patents 3%$'$$$4

nrealized in/entory profits from upstream sales:Recognition of profit in beginning in/entory 1'$$$

Deferral of profit in ending in/entory 3='$$$4

at*s ad6usted and realized income 1'$$$

Income from at 31$ s!are4 %;'#$$

Solution E6-%

1 Income from Si$' net income and consolidated net income

ip*s reported net income %$$'$$$

Less: Amortization of e@cess allocated to buildings

3.$$'$$$ - 1$$'$$$4>#$ years 3.'$$$4

Less: #$'$$$ unrealized profit on e9uipment 3#$'$$$4

ip*s ad6usted and realized income


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Add: #$%2 income less di/idends =$'$$$ - 3.$'$$$ $4B #$'$$$

In/estment in ip December 2%' #$%2 1.1'$$$

Add: #$%1 income less di/idends '$$$ - 3=$'$$$ $4B 1$'$$$

In/estment in ip December 2%' #$%1 1;1'$$$

Solution E6-% 3continued4

Alternati,e solution for chec# at -ecember (1' 201)

!are of ip*s e9uity December 2%' #$%1 3..$'$$$ $4 11$'$$$

Add: $ namortized e@cess on buildings

$?riginal e@cess %$$'$$$ - 3.'$$$ 2(. years4B =='$$$

Less: nrealized profit on e9uipment

3#$'$$$ gain - .'$$$ recognized4 $ 3%#'$$$4

In/estment in ip December 2%' #$%1 1;1'$$$

Solution E6-1&

&reliminar% com$utations

0ransfer price of in/entory to pa 3%$'$$$ #4 2=$'$$$

8ost to consolidated entity 3%$'$$$4

nrealized profit on Fanuary 2 %$'$$$

Amortization of unrealized profit from consolidated /ie,:

%$'$$$>= years 2$'$$$ per year

1 Consolidated balance sheet amounts

2011

&9uipment 3at transfer price4 2=$'$$$

Less: nrealized profit 3%$'$$$4

Less: Depreciation ta5en by pa 32=$'$$$>= years4 3=$'$$$4

Add: Depreciation on unrealized profit 3%$'$$$>= years4 2$'$$$

&9uipment net to be included on consolidated balance s!eet %.$'$$$

Alternati/ely:

&9uipment 3at cost to t!e consolidated entity4 %$'$$$

Less: Depreciation based on cost 3%$'$$$>= years4 32$'$$$4

&9uipment net %.$'$$$

2012 Hear after intercompany sale

&9uipment net beginning of t!e period on cost basis %.$'$$$

Less: Depreciation 3based on cost4 32$'$$$4

&9uipment net %#$'$$$

2 Consolidation "or#$a$er entries

2011

ales 2=$'$$$

8ost of goods sold %$'$$$&9uipment net %.$'$$$

Depreciation e@pense 2$'$$$

0o eliminate intercompany in/entory sale' return e9uipment

to its cost to t!e consolidated entity' and eliminate

depreciation on t!e intercompany profit(

2012

In/estment in pa %.$'$$$



11/39

Chapter 6 6-11

&9uipment net %#$'$$$

Depreciation e@pense 2$'$$$

0o eliminate unrealized profit from t!e e9uipment account

and t!e current year*s depreciation on t!e unrealized

profit and establis! reciprocity bet,een t!e in/estment

account and beginning-of-t!e-period subsidiary e9uity

accounts(



12/39


Solution E6-11

Par Corporation and Subidiar!

c!edule for 8omputation of 8onsolidated 7et Income

#$%% #$%# #$%2 #$%1

8ombined separate incomes #=$'$$$ ##$'$$$ %#$'$$$ #%$'$$$Add: Amortization of negati/e

differential assigned to plant

assets 3.$'$$$>%$ years4 .'$$$ .'$$$ .'$$$ .'$$$

nrealized gain on land 37ote

0!at Par*s .'$$$ gain is

included in Par*s separate

income4 3.'$$$4 .'$$$

nrealized gain on mac!inery 3#.'$$$4

Piecemeal recognition of

Gain on mac!inery .'$$$ .'$$$ .'$$$

nrealized in/entory profits 3'$$$4 '$$$

8onsolidated net income #=$'$$$ #$.'$$$ %##'$$$ #22'$$$

Less: 7oncontrolling interest s!are20113=$'$$$-.'$$$+.'$$$4 #$ 3%#'$$$4

20123


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Chapter 6 6-13

SOLUTIONS TO PRO'LE(S

Solution P6-1

1 Income from Sea 2011

&9uity in ea*s income 3%$$'$$$ ;$4 ;$'$$$

Add: Deferred in/entory profit from #$%$ 31$'$$$ .$4 #$'$$$

Less: nrealized in/entory profit from #$%% 3=$'$$$ 1$4 3#1'$$$4

Less: Intercompany profit on e9uipment 3%$$'$$$ - =$'$$$4 31$'$$$4

Add: Piecemeal recognition of profit on e9uipment

1$'$$$>1 years %$'$$$

Income from ea 3corrected amount4 .='$$$

2 P)a Corporation and Subidiar!8onsolidated Income tatement


ales %'=$$'$$$ combined - %.$'$$$ intercompanyB %'1.$'$$$

8ost of sales %'$$$'$$$ combined - %.$'$$$ inter-

company + #1'$$$ ending in/entory profits - #$'$$$

beginning in/entory profitsB .1'$$$

Gross profit .;='$$$

?t!er e@penses 2$$'$$$ combined - %$'$$$ piecemeal

recognition of profit on e9uipmentB #;$'$$$8onsolidated net income 2$='$$$

Less: 7oncontrolling interest s!are %$'$$$

8ontrolling interest s!are #;='$$$

8!ec5:

eparate income of Pea #1$'$$$

Add: Income from ea .='$$$

8ontrolling interest s!are #;='$$$



14/39


Solution P6-2


7?0&: ince Pal paid a price 1.'$$$ in e@cess of boo5 /alue for its ;$

s!are' t!e implied total e@cess of fair /alue o/er boo5 is .$'$$$ 31.'$$$ >

;$4(

Com$utation of income from Sim

!are of im*s reported income 31$'$$$ (;4 2='$$$

Add: Realization of deferred profits in beginning in/entory .'$$$

Less: nrealized profits in ending in/entory 31'$$$4

Less: nrealized profit on intercompany sale of e9uipment

32$'$$$ - #%'$$$4 3;'$$$4

Add: Piecemeal recognition of deferred profit in e9uipment

3;'$$$>2 years4 2'$$$

Income from im 2%'$$$

Consolidation "or#$a$er entries

A 8as! #'$$$

Accounts recei/able #'$$$

0o record cas! in transit from im on account(

C ales #$'$$$

8ost of sales #$'$$$

0o eliminate intercompany cost of sales and sales(

8 In/estment in im .'$$$

8ost of sales .'$$$

0o recognize pre/iously deferred profit from beginning in/entory(

D 8ost of sales 1'$$$

In/entory 1'$$$

0o defer unrealized profit from ending in/entory(

& In/estment in im 2'$$$

Land 2'$$$

0o reduce land to its cost basis and ad6ust t!e in/estment

account to establis! reciprocity ,it! im*s beginning of t!e

period e9uity accounts(

J Gain on sale of e9uipment ;'$$$

&9uipment net ;'$$$

0o eliminate gain on intercompany sale of e9uipment and reduce

e9uipment to a cost basis(



15/39

Chapter 6 6-15

Solution P6-23continued4

g &9uipment net 2'$$$

?perating e@penses 2'$$$

0o eliminate current year*s depreciation of unrealized gain(

! Income from im 2%'$$$Di/idends im %'$$$

In/estment in im %2'$$$

0o eliminate income and di/idends from im and return in/estment

account to its beginning of t!e period balance(

i Retained earnings im


16/39



Pal Corporation and Subidiar!

8onsolidation Kor5Papers

for t!e year ended December 2%' #$%#

3in t!ousands4

Pal im ;$Ad6ustments and&liminations

8onsolidatedtatements

Income Statement

ales 2$$ %$$ b #$ 2$

Income from im 2% ! 2%

Gain on e9uipment ; f ;

8ost of sales %1$ .$ d 1 b #$

c . %=;

?perating e@penses =$ %$ g 2 =


17/39

Chapter 6 6-17

7oncontrolling interest December 2% 6 # %;

2(. years4 #'$$$

Less: Gain on sale of land 3.'$$$4

Income from or for #$%# 1$'$$$Less: Di/idends 3#$'$$$ ;$4 3%'$$$4

In/estment balance December 2%' #$%# 2$2'$$$



18/39





for t!e Hear &nded December 2%' #$%#

3in t!ousands4

Pal or ;$Ad6ustments and&liminations


Income Statement

ales 1.$ %;$ a


19/39

Chapter 6 6-19

%'.%#



20/39


Solution P6-4




3in t!ousands4

Par ag ;$Ad6ustments and&liminations

8onsolidatedCalance !eet

Income Statement

ales


21/39

Chapter 6 6-21

%'.

Deduct

7?0&: Purc!ase price implies boo5 /alues are e9ual to fair /alues(



22/39


Solution P6-"


8ost Fanuary %' #$%% #%$ years4@ ;$ 3.'1$$4

Less: nrealized in/entory profit 3%$'$$$4

Less: nrealized profit on mac!inery

3selling price 2.'$$$ - boo5 /alue #'$$$4 32(. years (. year4 %'$$$

Income from to for #$%% %1'=$$

Less: Di/idends %$'$$$ ;$ 3;'$$$4

In/estment balance Fanuary %' #$%# #


23/39

Chapter 6 6-23

Solution P6-"3continued4



for t!e Hear &nded December 2%' #$%#

Pal to ;$Ad6ustments and&liminations


Income Statement

ales 1.$'$$$ %;$'$$$ a


24/39


%'.$2'1$$



25/39

Chapter 6 6-25

Solution P6-6


In/estment cost #;$'$$$

Implied fair /alue of an 3#;$'$$$ > $4 2=#'.$$

Coo5 /alue of an 32$$'$$$4

&@cess fair /alue o/er boo5 /alue =#'.$$ - allocated .$ to Patents ,it! a ten-year life 32%'#.$4

- allocated .$ to In/entory sold in #$$; 32%'#.$4

.econciliation of income from San

Pil*s s!are of an*s net income 3.$'$$$ $4 1$'$$$

Less: $ of Patent amortization 32%'#.$>%$ years4 3#'.$$4

Add: Depreciation on deferred gain on e9uipment

3%.'$$$>. years4 $ #'1$$

Less: nrealized profit on upstream sale of land 3%$'$$$ $4 3'$$$4

Income from an 2%';$$

.econciliation of in,estment account

!are of an*s underlying e9uity 31$$'$$$ $4 2#$'$$$

Add: $ of namort( patent 32%'#.$ - 32'%#. 2 years44 @ $ %


26/39



Pil Corporation and Subidiar!



Pil an $Ad6ustments and&liminations


Income Statement

ales #%$'$$$ %2$'$$$ 21$'$$$

Income from an 2%';$$ c 2%';$$

Gain on land %$'$$$ b %$'$$$

Depreciation e@pense 1$'$$$ 2$'$$$ a 2'$$$ =


27/39

Chapter 6 6-27

Solution 6-63continued4


a Accumulated depreciation ='$$$

In/estment in an ;'=$$

7oncontrolling interest #'1$$Depreciation e@pense 2'$$$

Plant assets %.'$$$

0o eliminate unrealized profit on #$%$ sale of plant assets and

reduce plant assets to cost(

b Gain on land %$'$$$

Plant assets %$'$$$

0o eliminate unrealized gain on #$%% upstream sale of land and

reduce plant assets to cost(

c Income from an 2%';$$

In/estment in an 2%';$$

0o eliminate income from an and ad6ust in/estment to beginningof period(

d 8apital stoc5Man 2$$'$$$

Retained earningsMan Fanuary % .$'$$$

Patent #.'$$$

In/estment in an 2$$'$$$

7oncontrolling interest Fanuary %


28/39


Solution P6-#

&reliminar% com$utations amounts in thousands

In/estment cost for %$$ of 5i' April %' #$%% %.'$$$

Coo5 /alue ac9uired 3


29/39

Chapter 6 6-29

Solution P6-#3continued4

Pot Corporation and Subidiar!


for t!e year ended December 2%' #$%.

3in t!ousands4

Pot 5iAd6ustments and&liminations


Income Statement

ales #='$$$ %%'$$$ b %'.$$ 2.'.$$

Gain on land


30/39


Solution P6-$


In/estment cost Fanuary %' #$%% %2='$$$

Implied fair /alue of ic 3%2='$$$ > $4 %


31/39

Chapter 6 6-31

Solution P6-$3continued4

Pi* Corporation and Subidiar!



Pic ic $Ad6ustments and&liminations


Income Statement

ales 1$$'$$$ #$$'$$$ =$$'$$$

Income from ic #1'$$$ c #1'$$$

Gain on plant assets .'$$$ a .'$$$

8ost of sales #.$'$$$ %2$'$$$ 2$'$$$

Depreciation e@pense .$'$$$ #.'$$$ b %'$$$


32/39


Solution P6-$3continued4

Pi* Corporation and Subidiar!


for t!e year ended December 2%' #$%#

Pic ic $Ad6ustments and&liminations


Income Statement

ales 12$'$$$ #2.'$$$ ==.'$$$

Income from ic 2#'$$$ b 2#'$$$

8ost of sales #=$'$$$ %1$'$$$ 1$$'$$$

Depreciation e@pense .$'$$$ #.'$$$ a %'$$$


33/39

Chapter 6 6-33

Solution P6-%


In/estment cost Fanuary %' #$%% %$'$$$

Implied fair /alue of in 3%$'$$$ > $4 %2.'$$$

Coo5 /alue of in 3%%$'$$$4

&@cess fair /alue o/er boo5 /alue allocated to patent #.'$$$

Patent amortization: #.'$$$>%$ years #'.$$

.econciliation of in,estment income

in*s reported income .$'$$$

Less: Patent amortization 3#'.$$4

Less: nrealized profit in ending in/entory 3%'$$$4

Add: nrealized profit in beginning in/entory #'$$$

Add: Piecemeal recognition of deferred profit on plant

assets 3#$'$$$ > . years4 1'$$$

in*s ad6usted income .#'.$$

Par*s $ controlling s!are 1#'$$$

#$ 7oncontrolling interest s!are %$'.$$



34/39


Solution P6-%3continued4



for t!e year ended December 2%' #$%1

Par in $Ad6ustments and&liminations


Income Statement

ales =.$'$$$ %#$'$$$ a '$$$


35/39

Chapter 6 6-35

Solution P6-1&


In/estment cost #;$'$$$

Implied fair /alue of un 3#;$'$$$ > $4 2=#'.$$

Coo5 /alue of un 32$$'$$$4

&@cess fair /alue o/er boo5 /alue =#'.$$&@cess allocated:

In/entories 3.$4- old in #$$; 2%'#.$

Good,ill 2%'#.$

&@cess fair /alue o/er boo5 /alue =#'.$$

.econciliation of income from Sun:

un*s reported net income .$'$$$

Add: Depreciation on deferred gain on e9uipment

3%.'$$$>. years 2'$$$

Less: nrealized profit on upstream sale of land 3%$'$$$4

un*s ad6usted and realized income 12'$$$

Pal*s $ controlling s!are 21'1$$

#$ 7oncontrolling interest s!are '=$$

.econciliation of in,estment account

!are of un*s underlying e9uity 31$$'$$$ $4 2#$'$$$

Add: $ of unamortized good,ill #.'$$$

Less: nrealized gain on e9uipment

%.'$$$ - 32'$$$ # years4B $ 3


36/39


Solution P6-1&3continued4


8onsolidation Kor5Paper


Pal un $Ad6ustments and&liminations


Income Statement

ales #%$'$$$ %2$'$$$ 21$'$$$

Income from un 21'1$$ c 21'1$$

Gain on land %$'$$$ b %$'$$$

Depreciation e@pense 1$'$$$ 2$'$$$ a 2'$$$ =


37/39

Chapter 6 6-37

Solution 6-1&3continued4


a Accumulated depreciation ='$$$

In/estment in un ;'=$$

7oncontrolling interest #'1$$Depreciation e@pense 2'$$$

Plant assets %.'$$$

0o eliminate unrealized profit on #$%$ sale of plant assets(

b Gain on land %$'$$$

Plant assets %$'$$$

0o eliminate unrealized gain on #$%% upstream sale of land(

c Income from un 21'1$$

In/estment in un 21'1$$

0o eliminate income from un against t!e in/estment in un(

d 8apital stoc5Mun 2$$'$$$Retained earningsEun Fanuary % .$'$$$

Good,ill 2%'#.$

In/estment in un 2$.'$$$

7oncontrolling interest Fanuary %


38/39


8ombined in/entories %.$'$$$

8onsolidated in/entories %2='$$$

nrealized in/entory profits %1'$$$


" .econciliation of combined and consolidated cost of sales

8ombined cost of sales 3gi/en4 2.$'$$$

Less: Intercompany sales 3see 2 abo/e4 31'$$$4

Add: nrealized profits in ending in/entory 3see 1 abo/e4 %1'$$$

Less: nrealized profits in beginning in/entory 3sol/e for

t!is4 3.'$$$4

8onsolidated cost of sales 3gi/en4 #


39/39

Chapter 6 6-39

Less: nrealized profit in e9uipment 3%.'$$$4

Add: ;$ of namortized patent #'$$

In/estment in al December 2%' #$%# 2$.'$$

smch06beams

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