Consolidated Financial Statements - Intercompany Asset Transactions
Consolidated Financial Statements - Intercompany Asset Transactions
Consolidated Financial Statements - Intercompany Asset Transactions
Chapter 5
Consolidated Financial Statements – Intercompany Asset Transactions
Chapter Outline
B. The opportunity for such direct acquisitions (especially of inventory) is often a major
motive for the combination.
1. The selling company’s books will include a gain or loss which has not been
verified by an arm’s length transaction with an external third party.
a. From the perspective of the consolidated entity, the income is not correctly
stated in the year of the sale due to the intercompany gain/loss. The gain/loss
must be eliminated from consolidated income in the period of transfer.
b. In subsequent periods, the gain/loss will reside in the selling company’s
retained earnings and must be eliminated in each of those periods as long as
the asset is still held by the consolidated entity.
c. The buying company will record the asset at its acquisition cost.
d. On the books of the buyer, if the asset acquired is depreciable, the
depreciation expense for each year that the asset is held will need to be
adjusted on the consolidated worksheet to account for the difference between
the original “COST” and the new consolidated “CARRYING VALUE” of
the asset.
2. If the asset is inventory, unrealized intercompany gains/losses must be eliminated
as long as the inventory remains unsold to an outside third party.
1. Red Inc. owns 70% of White Co.'s outstanding common stock. Price Inc. reports cost of goods
sold in 2001 of $850,000 while White Co. reports $520,000. During 2001, Red Inc. sells
inventory costing $100,000 to White Co. for $125,000. 40% of these goods are not resold by
White Co. until the following year. What is consolidated cost of goods sold?
A. $1,395,000
B. $1,255,000
C. $1,360,000
D. $1,235,000
E. $1,345,000
2. Maust Inc. owns 70% of Light Co.'s common stock. On January 2, 2000, Maust sold Light some
equipment for $90,000. The equipment had a carrying amount of $60,000. Light is depreciating
the acquired equipment over a fifteen-year remaining useful life by the straight-line method. The
net adjustments to calculate 2000 and 2001 consolidated net income would be an increase
(decrease) of
2000 2001
A. $ (28,000) $ 2,000
B. $ 2,000 $ -0-
C. $( 24,000) $ –0–
D. $ ( 6,000) $ 24,000
E. $ ( 14,000) $ ( 500)
Presented below are several figures reported for Post Inc. and Mitchell Co. as of December 31, 2003.
Post Inc. acquired 80% of Mitchell Co.'s outstanding common stock on January 1, 2002. Land use rights
valued at $281,250 were owned by Mitchell Co. and should be amortized over twenty years. During
2002, Mitchell sold Post inventory costing $80,000 for $100,000. 30% of this inventory was not sold to
external parties until 2003. During 2003, Mitchell sold inventory costing $l00,000 to Post for $150,000.
Of this inventory, 25 % remained unsold on December 31, 2003.
A. $1,400,000
B. $1,550,000
C. $1,050,000
D. $1,350,000
E. $1,250,000
A. $480,000
B. $336,500
C. $337,000
D. $330,500
E. $370,000
A. $603,500
B. $593,500
C. $619,500
D. $587,500
E. $546,500
A. $320,000
B. $308,750
C. $328,250
D. $322,750
E. $331,250
7. What is the noncontrolling interest's share of Mitchell Co.'s 2003 net income?
A. $37,200
B. $34,700
C. $39,200
D. $35,700
E. $36,700
8. On January 1, 2001, Rogers Inc. sold equipment costing $2,800,000 with accumulated
depreciation of $1,680,000 to Cooper Corp., a wholly owned subsidiary, for $1,500,000. Rogers
had owned the equipment for six years and was depreciating the equipment using the straight-line
method over ten years with no salvage value. Cooper will continue to use the straight-line
method over the remaining four years of the equipment’s economic life. In consolidated
statements at December 31, 2001, the cost and accumulated depreciation, respectively, should be.
2002 2004
A. $ 45,000 gain $ 35,000 gain
B. $ –0– $ 10,000 loss
C. $ 45,000 gain $ 10,000 loss
D. $ –0– $ 35,000 gain
E. $ –0– $ 45,000 gain
10. Marco Towers Inc. owns 80% of Flatbush Condos Co. On January 1, 1998, Park Inc. acquired
equipment with a twenty-year life for $3,600,000. No salvage value was anticipated and the
equipment was to be depreciated on the straight-line basis. On January 1, 2003, Marco Towers
sold the equipment to Flatbush Condos for $3,000,000. At that time, the equipment had a
remaining useful life of fifteen years, but still had no expected salvage value. In preparing
financial statements for 2004, how does this transfer affect the calculation of consolidated net
income?
1. How does the consolidation process for the intercompany transfer of a depreciable asset differ
from that for inventory and land, assuming the depreciable asset is transferred at a gain?
2. On December 4, 2001, Bazley Inc. sold some of its heavy equipment to Cleave Co., its
subsidiary. When will the gain on this sale be earned?
1. Packwell Manufacturing Inc. owns 70% of the outstanding common stock of Silvertone Co.
Silvertone reports net income for 2001 of $220,000. Since being acquired, Silvertone has
regularly supplied inventory to Packwell. Inventory costing $300,000 was sold to Packwell for
$350,000 in 2000. In 2001, Silvertone sold inventory costing $260,000 for $318,000. 15% of the
inventory that Packwell purchases from Silvertone during any one year is not used until the
following year.
Required:
A. What is the noncontrolling interest's share of Silvertone's income in 2001?
Prepare the 2001 consolidation entries that would be required by the above intercompany inventory
transfers.
2. Pumpian Inc. has an 80% interest in Sizemore Co. On January 1, 2000, land having an historical
cost of $40,000 is sold in an intercompany transaction for $50,000.
Required:
A. If Pumpian sold the land to Sizemore, what would be the appropriate consolidation
worksheet entries at the end of 2000 and 2001 as a result of the transaction?
B. If Sizemore sold the land to Pumpian, what would be the appropriate consolidation
worksheet entries at the end of 2000 and 2001 as a result of the transaction?
3. Portland Inc. owns 60% interest in Sherman Co. On January 1, 2000, equipment having a
historical cost of $100,000 and a book value of $70,000 is sold in an intercompany transfer for
$80,000. The equipment has a remaining useful life of four years. Sherman Co. reports net
income of $140,000 in 2000 and $160,000 in 2001.
Required:
A. If Portland Inc. sold the equipment to Sherman Company, what would be the appropriate
consolidation worksheet entries for 2000 and 2001?
B. What effect, if any, would the transaction in part A have on the valuation of the
noncontrolling interest?
C. If Sherman sold the equipment to Portland, what would be the appropriate consolidation
worksheet entries for 2000 and 2001?
D. What effect, if any, would the transaction in part C have on the valuation of the
noncontrolling interest?
Required:
A. Prepare the consolidation worksheet entries required in 2000 and 2001 if forty percent of
the intercompany inventory is still on hand at the end of 2000.
C. Prepare the required consolidation worksheet entries if Stevenson had sold the inventory
to Porter.
2000
Equipment — $90,000
Gain — $30,000
Depreciation expense — $6,000 ($90,000 ÷ 15 years)
Income effect (net) — $24,000 ($30,000 gain – $6,000 depreciation expense)
2001
Depreciation expense — $6,000
2000
Equipment at 1/2/00 — $60,000
Depreciation expense — $4,000 ($60,000 ÷ 15 years)
2001
Depreciation expense — $4,000
9. D In 2002, no sale to an unrelated third party occurred. Thus, no gain is recognized in the
2002 consolidated income statement.
In 2003, a sale to an unrelated third party occurred. For the Consolidated entity, the
historical cost of the land is $80,000. Since Jones Inc. sold the land for $115,000, a
$35,000 gain ($115,000 – $80,000) is reported on the 2003 consolidated income
statement.
10. C The equipment was not sold to an unrelated third party. Thus, from the point of view of
the consolidated entity, depreciation expense must be based on the original historical cost
of the equipment. Since the parent sold the equipment to the subsidiary at a gain, the
subsidiary will record excess depreciation expense that must be eliminated in
consolidation. The elimination of excess depreciation has the effect of increasing
consolidated net income. Excess depreciation is calculated below:
1. Like other intercompany inventory and land transfers, unrealized gains created by intercompany
transfers of depreciable assets must be eliminated along with the overstatement of the asset.
However, because of subsequent depreciation, these adjustments systematically change from
period to period. Following the transfer of the depreciable asset, depreciation expense is
calculated by the buyer based on the new inflated transfer price. Thus, expense is recorded that
reduces the carrying value of the asset at a rate in excess of appropriate depreciation; book value
moves closer to the historical cost figure each time that depreciation is recorded. Additionally,
since the excess depreciation is closed annually to retained earnings, the overstatement of the
equity account resulting from the unrealized gain is constantly reduced. To produce consolidated
figures at any point in time, the remaining inflation in these figures (as well as in the current
depreciation expense) must be determined and removed.
2. The gain is earned over time as Blaze Co. uses the equipment or sells it to an outside party.
Consolidation Entry *G
Retained Earnings 1/1/01 (Silvertone Co.) ……………… 7,500
Cost of Goods Sold ………………………………….. 7,500
To remove intercompany gain from balances carried over from 2000 so that it can be
recognized.
Consolidation Entry TI
Sales ………………………………………………………… 318,000
Cost of Goods Sold (purchases) …………………… 318,000
To eliminate effects of intercompany transfer of inventory.
Consolidation Entry G
Cost of Goods Sold ………………………………………… 8,700
Inventory ………………………………………………. 8,700
To remove intercompany gain from 2001 so that it can be appropriately recognized in
2002.
B. Because the sale is downstream, the minority interest is unaffected by the gain.
C. The consolidation worksheet entries TA, ED, and *TA will be the same as in Solution A.
Note that the direction of the sale does not affect these entries.
D. The minority interest valuation is affected by these entries because only realized income
is allocated.
C. Consolidation worksheet entries would be the same as in Solution A except that the
$4,000 in Consolidation Entry *G would be associated with the Retained Earnings of
Stevenson Co.