Professional Documents
Culture Documents
a.
Consolidation Working Paper
2010
Gain on sale of land
50,000
Land
50,000
To eliminate the unconfirmed gain on the intercompany sale of land and reduce the land account
to original acquisition cost.
2011
Investment in Sagamore
50,000
Land
50,000
To add the prior year unconfirmed gain to the investment account to maintain equivalence with
the retained earnings of Sagamore and reduce the land account to original acquisition cost.
b.
2012
Investment in Sagamore
50,000
Gain on sale of land
50,000
To include the prior year intercompany gain, now confirmed, in current year income and restate
the investment account by offsetting the previous reduction while the gain was unconfirmed.
E6.2
1.
In a prior year, the subsidiary sold land to the parent at a gain of $20,000. The parent still
holds the land.
Current year intercompany sale of land at a loss of $14,000.
In prior year, the parent sold land to its subsidiary at a gain of $30,000. The subsidiary
still holds the land.
In a prior year, the subsidiary sold land to the parent at a gain of $18,000. The parent
sold the land to an outside party this year.
2.
3.
4.
E6.3
840,000
840,000
29,000
Inventory
29,000
To eliminate unconfirmed intercompany profit from ending inventory; $29,000 = ($40,000 x
20% = $8,000) + [91,000 - (91,000/1.3) = $21,000].
E6.4
Under a direct sale of the land by Sawyer to the developer, Sawyer reports a gain of $3,900,000.
The noncontrolling interest in net income is $780,000 (= .2 x $3,900,000) and the distribution to
the noncontrolling shareholder is $390,000 (= .5 x $780,000).
Under the intercompany sale, even though the gain is larger, it is eliminated in consolidation, and
does not enter into the noncontrolling interest in net income. As long as the parent holds the land
(which it plans to do under a long-term lease), the gain is not reflected in noncontrolling interest
in net income. Moreover, the income from the lease is the parents income, so the noncontrolling
interest is unaffected. Under this approach, the noncontrolling stockholder receives nothing.
Hence, the direct sale of the land by Sawyer to the developer generates the most dividends for
the noncontrolling stockholder.
E6.5
a.
2010 Consolidation Working Paper
Gain on sale of equipment
50,000
Equipment
50,000
To eliminate the gain on intercompany sale of equipment; $50,000 = $500,000 ($600,000 $150,000).
Accumulated depreciation
10,000
Depreciation expense
To eliminate the excess depreciation recorded by Spencer in 2010 ($50,000/5).
Equipment
10,000
150,000
Accumulated depreciation
150,000
To restate the equipment and accumulated depreciation accounts to their original acquisition cost
basis.
b.
2011 Consolidation Working Paper
Investment in Spencer
40,000
Accumulated depreciation
10,000
Equipment
50,000
To eliminate the amount of intercompany gain unconfirmed in prior years, remove the excess
depreciation recorded in prior years and reduce the equipment to its net book value at date of
intercompany sale.
Accumulated depreciation
10,000
Depreciation expense
To eliminate the excess depreciation recorded by Spencer in 2011.
Equipment
10,000
150,000
Accumulated depreciation
150,000
To restate the equipment and accumulated depreciation accounts to their original acquisition cost
basis.
E6.6
a.
2,500,000
2,500,000
1,400,000
1,400,000
3,200,000
Inventory
Retained earnings Sand Hill
Accumulated depreciation
3,200,000
800,000
400,000
Equipment
Accumulated depreciation
1,200,000
200,000
Depreciation expense
Equipment
200,000
2,000,000
Accumulated depreciation
b.
2,000,000
2,500,000
Land
2,500,000
1,400,000
1,400,000
3,200,000
Inventory
Investment in Sand Hill
Accumulated depreciation
3,200,000
800,000
400,000
Equipment
Accumulated depreciation
1,200,000
200,000
Depreciation expense
Equipment
200,000
2,000,000
Accumulated depreciation
Cambridge Business Publishers, 2010
138
Edition
2,000,000
E6.7
a.
Salley reported net income
Amortization of identifiable intangibles
Downstream loss on land
Unconfirmed profit in end. inventory - upstream
Confirmed profit in beg. inventory - upstream
Confirmed profit on downstream equipment sale
(= $800,000/10)
b.
Land
Total
$7,000,000
(1,750,000)
300,000
(400,000)
250,000
Equity
in NI
$5,600,000
(1,400,000)
300,000
(320,000)
200,000
Noncontrolling
Interest in NI
$1,400,000
(350,000)
80,000
$5,480,000
80,000
$4,460,000
_______
$1,020,000
(80,000)
50,000
300,000
400,000
Inventory
To eliminate the unconfirmed profit in ending inventory due to upstream sales.
Retained earningsSalley, beg.
250,000
400,000
250,000
560,000
240,000
Equipment
800,000
To eliminate the unconfirmed profit as of the beginning of the year on downstream equipment
sales (=7/10 x $800,000).
Accumulated depreciation
80,000
Depreciation expense
To eliminate intercompany profit from depreciation expense (= $800,000/10).
80,000
E6.8
Item
1.
2.
3.
4.
E6.9
Decrease in noncontrolling
interest in net income
-$ 60,000
-130,000
$190,000
$200,000
(36,000)
(50,000)
(40,000)
$ 74,000
Equity
in NI
$ 150,000
(27,000)
(50,000)
(30,000)
$ 43,000
Noncontrolling
Interest in NI
$ 50,000
(9,000)
(10,000)
$ 31,000
b.
PCO and SCO
Consolidated Income Statement
Sales ($2,000,000 + $1,200,000 - $400,000)
Cost of goods sold ($1,000,000+$700,000-$400,000+$50,000+$40,000)
Other expenses ($600,000 + $300,000 + $36,000)
Consolidated net income
Noncontrolling interest in net income
Consolidated net income to controlling interest
$2,800,000
(1,390,000)
(936,000)
$ 474,000
(31,000)
$ 443,000
Total
$ 900,000
(100,000)
(200,000)
110,000
(60,000)
$ 650,000
Equity
in NI
$ 720,000
(80,000)
(160,000)
88,000
(60,000)
$ 508,000
Noncontrolling
Interest in NI
$ 180,000
(20,000)
(40,000)
22,000
-$ 142,000
b.
Pon and Star
Consolidated Income Statement
Sales ($9,000,000 + $4,000,000 $1,000,000)
Cost of goods sold ($6,000,000+$2,500,000$1,000,000$110,000+
$60,000)
Other expenses ($2,000,000 + $600,000 + $100,000 + $200,000)
Consolidated net income
Less consolidated net income attributed to noncontrolling interest
Consolidated net income attributed to controlling interest
$ 12,000,000
( 7,450,000)
( 2,900,000)
1,650,000
( 142,000)
$ 1,508,000
2.
ROA = ($9,000+$2,000-$8,000-$1,900)/($10,000+$4,000)
= $1,100/$14,000 = .079
ROS = $1,100/($9,000 +$2,000) = .10
2.
Without consolidation (1) Sponsor recognizes the $3,500 cash but not the liability, but in
consolidation (2) the liability is also counted along with Sponsorees assets and liabilities.
Sponsoree is more leveraged than Sponsor; Sponsorees separate TL/TA = $3,600/$4.000
= .9, while Sponsors separate TL/TA = $6,000/$10,000 = .6. Therefore consolidating
Sponsoree causes consolidated TL/TA to be higher than Sponsors separate TL/TA.
c.
1.
2.
Enron apparently used this technique to recognize gains on its own stock as income,
something not permitted by GAAP. Without consolidation (1), Sponsors income
includes 25% of the gain on its stock recognized in Sponsorees income and booked by
Sponsor via the equity method. With consolidation (2) the stock issuance is voided and
neither entity recognizes income on the appreciation of Sponsors stock.
E6.12 Comprehensive Consolidated Net Income
Schedule to determine consolidated net income (amounts in thousands)
Browns net income from its own operations
$ 40,000
Shoes.coms net income from its own operations
25,000
Increase in cost of goods sold from sale of revalued inventory
(700)
Depreciation expense reduction from overvaluation adjustment
200
Increase in fair value of contingent consideration liability
(220)
Amortization of premium on long-term debt (reduction in interest
expense)
90
Impairment loss on capitalized in-process R&D
(800)
Increase in cost of goods sold due to eliminated upstream ending
inventory profit
(330)
Eliminated loss on downstream sale of patent
400
Increase in patent amortization expense on the patent ($400/5)
(80)
Consolidated net income
63,560
Less consolidated net income attributed to noncontrolling interest*
(2,346)
Consolidated net income attributed to controlling interest
$ 61,214
* $2,346 = .1 x ($25,000 $700 + $200 + $90 $800 $330)
PROBLEMS
P6.1 Consolidation Working Paper, Noncontrolling Interest, Intercompany Inventory
Transactions
a.
Calculation of goodwill:
Acquisition cost
Fair value of noncontrolling interest
Total fair value
Book value of Seaport
Previously unrecorded intangibles
Goodwill
$ 3,000,000
275,000
3,275,000
$ 2,000,000
__500,000
2,500,000
$ 775,000
Calculation of 2010 Equity in Net Income and Noncontrolling Interest in Net Income (in
thousands):
Equity in
Noncontrolling
Total
NI
interest in NI
Seaport Company reported net income
($6,000,000 3,170,000 1,930,000)
$ 900,000
$ 810,000
$ 90,000
Upstream markup, beginning inventory
100,000
90,000
10,000
Downstream markup, beg. inventory
60,000
60,000
Upstream markup, ending inventory
(80,000)
(72,000)
(8,000)
Downstream markup, ending inventory
(75,000)
(75,000)
______
$ 905,000
$ 813,000
$ 92,000
c.
Consolidation Working Paper, December 31, 2010 (in millions)
Trial Balances
Taken From Books
Dr (Cr)
Eliminations
Consolidated
Peninsula
Current assets
Investment in Seaport
Property, plant and equipment, net
Intangibles
Goodwill
Liabilities
Capital stock
Retained earnings, Jan. 1
$ 1,950
4,183
Seaport
$
980
--
5,810
4,270
5,120
--
(4,900)
(3,000)
(6,700)
(2,100)
(1,200)
(2,300)
Dr
(I-2) 60
1,000
400
Sales
Equity in net income of Seaport
Cost of goods sold
(15,000)
(813)
9,050
(6,000)
Operating expenses
Noncontrolling interest in net income
4,150
______
$
0
1,930
_____
$
0
3,170
155 (I-3)
453 (C)
3,060 (E)
730 (R)
(E) 1,200
(I-2) 100
(E) 2,200
340
45
52
360
40
(I-1)5,900
(C) 813
(I-3) 155
$ 2,775
-10,930
4,570
475
(7,000)
(3,000)
(6,700)
(R) 300
(R) 475
Noncontrolling interest
Dividends
Balances
Cr
(E)
(R)
(N)
(C)
(N)
160 (I-2)
5,900 (I-1)
(N) 92 ______
$ 11,295 $ 11,295
(437)
1,000
(15,100)
-6,315
6,080
92
$
0
$ 120,000
35,000
$ 155,000
$ 74,000
(15,000)
25,000
(4,000)
80,000
$ 75,000
Equity in
net income
of
Total
Wholesome
$ 5,000
$ 3,750
Noncontrolling
interest in net
income of
Wholesome
$ 1,250
1,500
(2,500)
(1,000)
1,125
(1,875)
(800)
375
(625)
(200)
2,400
(3,000)
$ 2,400
1,800
(2,250)
$ 1,750
600
(750)
$
650
c.
Consolidation Working Paper, December 31, 2010
Trial Balances Taken
From Books
Dr (Cr)
Eliminations
Consolidated
Kelloggs
Wholesome
Current assets
Plant and equipment, net
Investment in Wholesome
$ 35,000
261,900
131,850
$ 20,000
192,000
--
Identifiable intangibles
Goodwill
Current liabilities
Long-term debt
Capital stock
Retained earnings, Jan. 1
100,000
-(30,000)
(350,000)
(80,000)
(60,000)
10,000
-(25,000)
(100,000)
(54,000)
(38,000)
--
--
Noncontrolling interest
Sales revenue
Equity in NI of Wholesome
Cost of goods sold
Operating expenses
Noncontrolling interest in NI
(400,000)
(1,750)
250,000
143,000
_____-$
0
Dr
3,000 (I-3)
9,000 (R)
1,750 (C)
67,200 (E)
62,900 (R)
2,500 (O)
1,000 (O)
(O) 1,500
(R) 15,000
(R) 73,000
(E) 54,000
(I-2) 2,400
(E) 35,600
(I-1) 60,000
(C) 1,750
(I-3) 3,000
(O) 2,000
(N) 650
248,900
Balances
$ 52,000
446,400
-122,500
72,000
(55,000)
(450,000)
(80,000)
(60,000)
22,400 (E)
16,100 (R)
650 (N)
(140,000)
-65,000
70,000
_____-$
0
Cr
2,400 (I-2)
60,000 (I-1)
$
_______
248,900
(39,150)
(480,000)
-255,600
215,000
650
$
0
P6.3
a.
Consolidation Working Paper
Transaction (1)
Investment in Smart (2.5 x ($80,000/8))
25,000
Accumulated depreciation (5.5 x
$80,000/8))
55,000
Plant assets
80,000
To eliminate the intercompany gain unconfirmed in prior years, remove the excess depreciation
recorded in prior years and reduce the asset account to its net book value at date of intercompany
sale.
Accumulated depreciation
10,000
Depreciation expense
To eliminate the excess annual depreciation expense recorded by Smart in 2012.
10,000
Plant assets
20,000
Accumulated depreciation
20,000
To restate the asset and accumulated depreciation accounts to their original acquisition cost basis.
Transaction (2)
Retained earnings-Smart
(6 x ($50,000/10))
Accumulated depreciation (4 x
($50,000/10))
30,000
20,000
Plant assets
50,000
To eliminate the intercompany gain unconfirmed in prior years, remove the excess depreciation
recorded in prior years and reduce the asset account to its net book value at date of intercompany
sale.
Accumulated depreciation
5,000
Depreciation expense
To eliminate the excess depreciation recorded by Pert in 2012.
Plant assets
5,000
300,000
Accumulated
depreciation
300,000
To restate the asset and accumulated depreciation accounts to their original acquisition cost basis.
Transaction (3)
Plant assets
40,000
Investment in Smart
(4 x $40,000/5))
32,000
Accumulated depreciation
($40,000/5)
8,000
To eliminate the intercompany loss unconfirmed in prior years, add back the reduced
depreciation recorded in prior years and increase the asset account to its book value at date of
intercompany sale.
Depreciation expense
8,000
Accumulated depreciation
8,000
To add back the reduced depreciation recorded by the purchasing affiliate (Smart) in 2012.
Plant assets
360,000
Accumulated depreciation
360,000
To restate the asset and accumulated depreciation accounts to their original acquisition cost basis.
b.
Consolidation Working Paper
Retained earnings-Smart
30,000
Gain on sale of plant assets
30,000
To include in current year income the portion of the original intercompany gain of $50,000
which had not been confirmed through depreciation as of the beginning of the year. This
remaining portion, which would have reduced depreciation over the next six years (including
2012), has now been fully confirmed by an external sale in 2012.
NOTE: If there is a noncontrolling interest in Smart, it shares in this $30,000 gain but not in the
gain of $280,000 recorded by Pert on the external sale; $280,000 = $400,000 [$200,000 4 x
($200,000/10)].
P6.4
a.
Total
$ 800,000
Equity in net
income
$ 760,000
Noncontrolling
interest in net
income
$ 40,000
400,000
380,000
20,000
(200,000)
(200,000)
100,000
95,000
(200,000)
(200,000)
60,000
$ 960,000
60,000
$ 895,000
5,000
______
$ 65,000
b.
Pow Company and Sow Company
Consolidated Statement of Income and Retained Earnings
Sales
$ 32,000,000 (1)
Other income
1,510,000 (2)
Total revenue
33,510,000
Cost of goods sold
23,400,000 (3)
Operating expenses
5,850,000 (4)
Other expenses
1,000,000 (5)
Total expenses
30,250,000
Consolidated net income
3,260,000
Noncontrolling interest in net income
65,000
Consolidated net income to parent
3,195,000
Consolidated retained earnings, January 1
15,700,000
Dividends
(1,000,000)
Consolidated retained earnings, December 31
$ 17,895,000
(1) $32,000,000 = $25,000,000 + $10,000,000 - $3,000,000 (intercompany sales).
(2) $1,510,000 = $1,200,000 + $500,000 - $250,000 (unconfirmed gain on machinery) +
$60,000 (prior period gain on land now confirmed).
(3) $23,400,000 = $19,000,000 + $7,600,000 - $3,000,000 (intercompany purchases) - $400,000
(intercompany profit in beginning inventory assumed confirmed) + $200,000
(unconfirmed intercompany profit in ending inventory)
(4) $5,850,000 = $4,100,000 + $1,800,000 - $50,000 (excess depreciation)
(5) $1,000,000 = $800,000 + $300,000 - $100,000 (unconfirmed loss on land)
P6.5
Noncontrolling
interest in net
income
$ 40,000
Total
$ 200,000
Equity in
net income
$ 160,000
5,000
5,000
(8,000)
(6,400)
(1,600)
(16,000)
$ 181,000
(12,800)
$ 145,800
(3,200)
$ 35,200
145,800
Dividends - Singular
(.8 x .4 x $200,000)
Investment in Singular
To eliminate the current year equity method entries made by Peopleserve.
(I-1)
Stockholders equity (RE), 1/1 Singular
64,000
81,800
10,000
Land
10,000
To eliminate the unconfirmed gain from the prior year upstream transfer of land and reduce the
land account to original acquisition cost.
(I-2)
Sales
Cost of goods sold
To eliminate intercompany merchandise sales.
250,000
250,000
(I-3)
Investment in Singular
5,000
8,000
Inventory
8,000
To eliminate unconfirmed intercompany profit on upstream sales from ending inventory.
(I-5)
Gain on sale of machinery
20,000
Machinery
To eliminate the gain on the intercompany sale of machinery.
20,000
(I-6)
Accumulated depreciation
4,000
Depreciation expense
4,000
To eliminate excess depreciation on the machinery acquired from Singular; this is the portion of
the $20,000 gain confirmed to Singular in 2012.
(I-7)
Machinery
30,000
Accumulated depreciation
30,000
To restate the machinery and accumulated depreciation accounts to their original acquisition cost
basis.
(I-8)
Computer service revenue
15,000
15,000
2,000
2,000
(E)
Stockholders equity Singular (1)
1,580,000
Investment in
Singular
1,264,000
Noncontrolling
interest in Singular
316,000
To eliminate the remaining beginning stockholders= equity of Singular against the investment
and establish the book value of noncontrolling interest as of 1/1/12.
(1)
$1,580,000 = $1,500,000 + $150,000 - .4 x $150,000 - $10,000, where $1,500,000 =
$1,250,000 + $300,000 $50,000 Goodwill = Stockholders equitySingular at 1/2/11.
(R)
Goodwill
50,000
Investment in
Singular
To establish goodwill as of the beginning of the year.
50,000
$1,250,000
107,000
(48,000)
1,309,000
145,800
(64,000)
$1,390,800
$ 120,000
(8,000)
(5,000)
$ 107,000
Advanced Accounting, 1st
(N)
Noncontrolling interest in net income
35,200
DividendsSingular (.2
x .4 x $200,000)
Noncontrolling interest
in Singular
To record the change in the noncontrolling interest during 2012.
P6.6
16,000
19,200
$ 20,100
5,900
26,000
$ 10,000
4,000
$ 20,100
10,500
$ 9,600
$ 2,400
14,000
$ 12,000
80%
20%
b.
Calculation of 2012 Equity in Net Income and Noncontrolling Interest in Net Income (in
thousands):
Equity Noncontrolling
Total
in NI
interest in NI
Selenes reported net income ($50,000 35,000
8,000)
$ 7,000
$ 5,250
$ 1,750
Amortization, developed tech ($4,000/5)
(800)
(600)
(200)
Confirmed downstream gain on equipment (excess
depreciation) ($2,000/10)
200
200
Upstream markup, beg. inv. ($1,800 $1,800/1.2)
300
225
75
Upstream markup, end. inv. ($2,400 $2,400/1.2)
(400)
(300)
(100)
Downstream markup, beg. inv. ($3,000 x 20%)
600
600
Downstream markup, end. inv. ($2,800 x 20%)
(560)
(560)
_____
$ 6,340
$ 4,815
$ 1,525
c.
Consolidation Working Paper, December 31, 2012 (in thousands)
Trial Balances
Taken From Books
Dr (Cr)
Eliminations
Consolidated
Pierre
Cash
Receivables
Inventories
Plant and equipment, net
Investment in Selene
Intangibles
Goodwill
Current liabilities
Long-term debt
Capital stock
Retained earnings, January 1
$ 1,000
5,600
70,000
460,000
25,040
Selene
$ 2,500
10,000
30,000
150,000
Dr
$
(I-2) 200
(I-1) 1,600
(I-4) 600
(R) 1,600
(R) 9,000
(4,000)
(2,800)
(489,825) (163,700)
(5,000)
(2,000)
(90,000) (20,000)
Sales revenue
Equity in income of Selene
Cost of sales
40,000
(150,000)
(4,815)
100,000
Operating expenses
Noncontrolling interest in net income
42,000
_____
$
-0-
35,000
8,000
_____
$ -0-
-800
9,000
(6,800)
(653,525)
(5,000)
(E)
(R)
(N)
(C)
(N)
(I-3) 35,000
(C) 4,815
(I-5) 960
35,000 (I-3)
900 (I-4)
(O) 800
200 (I-2)
(N) 1,525
_______
$ 78,100 $ 78,100
(8,400)
40,000
(165,000)
-100,060
50,600
1,525
$
-0-
d.
Consolidated Statement of Income and Retained Earnings For the Year 2012
Sales
$ 165,000
Costs of goods sold
(100,060)
Gross margin
64,940
Operating expenses
(50,600)
Consolidated net income
14,340
Noncontrolling interest in income
(1,525)
Consolidated income to controlling interest
12,815
Retained earnings, January 1
90,000
Dividends
(40,000)
Retained earnings, December 31
$ 62,815
3,500
15,600
99,040
608,600
(90,000)
5,425
2,200
775
2,250
750
3,000
(50,000)
960 (I-5)
1,600 (I-1)
2,565 (C)
16,275 (E)
8,400 (R)
800 (O)
(E) 2,000
(I-4) 300
(E) 19,700
Noncontrolling interest
Dividends
Balances
Cr
3,500
15,600
99,040
118,140
608,600
800
9,000
$ 736,540
$
6,800
653,525
660,325
5,000
62,815
67,815
8,400
76,215
$ 736,540
$ 47,500
60,000
(12,000)
(2,250)
(11,250)
(5,600)
(4,500)
(8,500)
15,900
$ 63,400
b.
Investment in Sahara, January 2, 2007
Plus equity in net income, 2007 - 2010
Less 75% of Saharas dividends, 2007 - 2010
Investment in Sahara, December 31, 2010
P6.8
$ 150,000
15,900
(7,500)
$ 158,400
$150,000
$380,000
x .8
304,000
x .35
(106,400)
60,000
103,600
(41,440)
62,160
x .15
$ 9,324
Bonus
P6.9
a.
Salem reported net income
Confirmed profit in BI-downstream
Unconfirmed profit in EI-upstream
Unconfirmed loss on asset sale-downstream
Confirmed loss on asset sale-downstream
= $360,000/6
Unconfirmed gain on land sale-upstream
Confirmed gain (excess amortization) on
patent sale-upstream = $250,000/5
Unconfirmed gain on prior year patent sale,
as of beg.of year-upstream = $250,000/5 x 2
Total
$6,200,000
650,000
(500,000)
360,000
Equity in
NI
$4,960,000
650,000
(400,000)
360,000
Noncontrolling
Interest in NI
$1,240,000
(60,000)
(190,000)
(60,000)
(152,000)
(38,000)
50,000
40,000
10,000
100,000
$6,610,000
80,000
$5,478,000
20,000
$1,132,000
(100,000)
b.
Portland Company and Salem Company
Consolidated Income Statement
Sales ($40,000,000 + 25,000,000 - 4,000,000)
Other income
($6,000,000 + 2,000,000 - 190,000 + 100,000)
Total revenue
Cost of goods sold ($28,000,000 + 15,000,000 - 4,000,000 650,000 + 500,000)
Operating expenses
($7,000,000 + 5,000,000 + 60,000 - 50,000)
Other expenses ($1,000,000 + 800,000 - 360,000)
Total expenses
Consolidated net income
Noncontrolling interest in net income
Net income to the controlling interest
$61,000,000
7,910,000
68,910,000
38,850,000
12,010,000
1,440,000
52,300,000
16,610,000
1,132,000
$15,478,000
Check: Consolidated net income to the controlling interest must equal Portlands reported net
income, including the equity income accrual. $15,478,000 = $10,000,000 + $5,478,000.
NOTE ON THE PATENT: The patent acquired internally from Salem had a net book value of
$200,000 [= $500,000 - (3/5) X 500,000] when sold by Portland for $420,000. The $220,000 (=
$420,000 - 200,000) external gain reported in other income is fully confirmed and does not affect
the consolidation. This years $50,000 (= $250,000/5) excess amortization is eliminated
increasing incomebecause the patent was held internally for the entire year. Moreover, the
remaining $100,000 upstream intercompany gain is now fully confirmed by the external sale and
is added to this years income. The $100,000 is the original $250,000 intercompany gain
reduced by three years of excess amortization at $50,000 a year.
7,000,000
Investment in MC Shops
Eliminations (I)
Sales
7,000,000
60,000,000
60,000,000
2,000,000
2,000,000
2,600,000
2,600,000
8,000,000
8,000,000
4,000,000
Interest expense
Liabilities
4,000,000
43,000,000
43,000,000
Current assets
Equity investments
Other noncurrent assets
Goodwill
Current liabilities
Noncurrent liabilities
Shareholders equity, beg
Noncontrolling interest
408,591
(2,155,566)
(904,195)
(1,611,479)
(166,386)
(56,807)
(338,243)
Dividends
Eliminations
Consolidated
Dr
(C)
8,721
32,200 (I-2)
172,504 (E)
70,685 (R)
(R) 138,598
(I-2) 32,200
(E) 338,243
129,269
Revenues
Equity method income
Balances
Cr
(9,411,497)
(108,006)
(1,452,949)
(I-1) 107,900
(a) 50,800
(C) 57,206
8,465,558
381,307
________
$
-0-
1,266,790
26,612
________
$
-0-
(a) 57,100
165,739
67,913
14,836
65,927
63,342
107,900
(E)
(R)
(N)
(C)
(N)
(a)
107,900 (I-1)
(N) 78,178
________
$ 868,946 $ 868,946
$ 1,847,410
-3,821,514
138,598
(2,289,752)
(961,002)
(1,611,479)
(248,488)
-(10,864,446)
-9,681,548
407,919
78,178
$
-0-
Eliminating entries:
(a)
Removes equity investeesintercompany revenues and cost of sales from the
equity method income account and assigns them to revenues and cost of sales.
(C)
Removes the remaining equity method income balance, 51% of investee
dividends, and adjusts the investment by the difference.
(I-1)
Removes intercompany revenues generated from investees.
(I-2)
Removes intercompany receivables and payables ($32,200 = $30,600 + $1,600).
(E)
Eliminates investee beginning equity against the investment (51%) and
noncontrolling interest (49%).
(R)
Recognizes the beginning-of-year goodwill balance. The remaining balance in
the investment ($70,685) represents 51% of the total goodwill balance of
$138,598 (= $70,685/.51). The remainder is credited to noncontrolling interest.
(N)
Recognizes $78,178 noncontrolling interest in investee income (= 49% x
$159,547), eliminates the noncontrolling interests dividends and updates the
noncontrolling interest for the current year.
b.
Consolidated amount
Starbucks reported
Increase
Total Assets
$ 5,807,522
5,343,878
$ 463,644
Revenues
$ 10,864,446
9,411,497
$ 1,452,949
8.68%
15.44%
Percentage increase
P6.12 Evaluation of Eliminations Disclosures
a.
Machinery & Engines is the parent company. Its records show an Investment in Financial
Products account. We also observe that the income and stockholders equity of Machinery &
Engines equal the consolidated amounts, a characteristic that is true of parent companies of
wholly-owned subsidiaries that use the complete equity method on their own books.
b.
The fact that no goodwill arises in the consolidation of Machinery & Engines with Financial
Products suggests that Financial Products was formed as a subsidiary company by Machinery &
Engines, rather than acquired in a business combination. Goodwill arises when the acquisition
cost exceeds the fair value of the subsidiarys identifiable net assets. When a parent company
forms a subsidiary, there is no goodwill.
Another possible explanation is that the excess of acquisition cost over the acquisition-date fair
value of identifiable net assets acquired is fully explained by revaluations of identifiable net
assets.
A third explanation is that the acquired goodwill has been completely written off as impairment
loss (or amortization prior to 2002) in previous years.
c.
The goodwill on the books of Machinery & Engines suggests that Machinery & Engines
acquired other companies in the past, and merged them into the parent. Because the other
companies are no longer separate legal entities, Machinery & Engines reports their assets and
liabilities directly on its own books, as discussed in Chapter 2 of this text.
d.
Financial Products earned $400 million in revenue from Machinery & Engines; there was no
intercompany revenue in the other direction.
e.
Eliminating entry (in millions):
Common stock, FP
Profit employed in the business, FP
Accumulated other comprehensive
income, FP
860
2,566
522
Investment in Financial
Products
3,948
f.
The main intercompany activity involves financing of customer receivables. Over $3 billion was
added to current trade receivables and subtracted from current finance receivables, and over $550
million is added to long-term trade receivables and subtracted from long-term finance
receivables, suggesting that Financial Products finances a significant amount of the sales made to
Machinery & Engines customers.