AC411 Solution to Problems : INVENTORY Problem 6-1 Part A Part B Part C 6-1

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1 AC411 Solution to Problems : INVENTORY Problem 6-1 Part A 2008 (1) Sales 436,000 Purchases (Cost of Goods Sold) 436,000 (2) 12/31 Inventory (Income Statement) 18,167 Inventory (Balance Sheet) 18,167 $ 109, 000 To eliminate unrealized intercompany profit in ending inventory ($109,000 ) (1) Sales 532,000 Purchases (Cost of Goods Sold) 532,000 (2) Beginning Retained Earnings-Peel Co. (0.9 $18,167) 16,350 Noncontrolling Interest (0.10 $18,167) 1,817 1/1 Inventory (Income Statement) 18,167 To recognize gross profit in beginning inventory realized in 2009 (3) 12/31 Inventory (Income Statement) 22,167 Inventory (Balance Sheet) 22,167 To eliminate unrealized intercompany profit in ending inventory ($133,000 ($133,000/1.2)) Part B Reported subsidiary income $130,000 Add: Realized profit in beginning inventory 18,167 Less: Unrealized profit in ending inventory (22,167) Subsidiary income included in consolidated income 126,000 Noncontrollong interest ownership percentage 0.10 Noncontrolling interest in consolidated income $12,600 Part C Peel Company's net income from independent operations $300,000 Reported income of Seacore Company $130,000 Less: Unrealized profit on intercompany sales of 2009 (22,167) Add: Profit on 2008 sales to Peel realized in transactions with third parties 18,167 Subsidiary income realized in transactions with third parties $126,000 Peel 's share of subsidiary income (0.90 $126,000) 113,400 Controlling interest in consolidated net income $413,

2 Problem 6-2 Part A 2008 (1) Sales 442,500 Purchases (Cost of Goods Sold) 442,500 (2) 12/31 Inventory (Income Statement) 44,250 Inventory (Balance Sheet) 44,250 To eliminate unrealized intercompany profit in ending inventory ($221, ) 2009 (1) Sales 386,250 Purchases (Cost of Goods Sold) 386,250 (2) 12/31 Inventory (Income Statement) 15,450 12/31 Inventory (Balance Sheet) 15,450 To eliminate intercompany profit in ending inventory ($77, ) (3) Beginning Retained Earnings-Plaster Co. (0.85 $44,250) 37,612 Noncontrolling Interest (0.15 $44,250) 6,638 1/1 Inventory (Income Statement) 44,250 To recognize realization of intercompany profit in beginning inventory Part B Reported subsidiary income $335,400 Add: Intercompany profit in beginning inventory 44,250 Deduct Unrealized intercompany profit in ending inventory (15,450) Subsidiary income realized in transactions with third parties and included in consolidated income 364,200 Noncontrolling interest percentage 0.15 Noncontrolling interest in consolidated income $54,630 Part C Plaster's income from independent operations $780,000 Reported income of Shell Company $335,400 Add: Intercompany profit in beginning inventory 44,250 Deduct: Unrealized profit in ending inventory (15,450) Subsidiary Income realized in transactions with third parties $364,200 Plaster's share of subsidiary income ($364, ) 309,570 Controlling interest in consolidated net income $1,089,

3 Problem 6-3 Part A 2008 (1) Sales 265,000 Purchases (Cost of Goods Sold) 265,000 (2) 12/31 Inventory (Income Statement) 25,000 12/31 Inventory (Balance Sheet) 25,000 $ 125, 000 To eliminate unrealized profit in ending inventory ($125,000 ) (1) Sales 475,000 Purchases (Cost of Goods Sold) 475,000 (2) 12/31 Inventory (Income Statement) 34,000 12/31 Inventory (Balance Sheet) 34,000 To eliminate intercompany profit in ending inventory ($170,000 ($170,000/1.25)) Part B (3) Beginning Retained Earnings-Peer Co. 25,000 1/1 Inventory (Income Statement) 25,000 To recognize intercompany profit in beginning inventory realized during the year Reported subsidiary income $225,000 $275,000 Noncontrolling interest ownership percentage 20% 20% Noncontrolling interest in consolidated income $45,000 $55,000 Part C Peer Company's income from independent operations $480,000 Less: Unrealized profit in ending inventory (34,000) Add: Realized profit in beginning inventory 25,000 Peer Company's income realized in transactions with third parties 471,000 Peer Company's share of subsidiary income ($275, ) 220,000 Controlling interest in consolidated net income $691,

4 Problem 6-16 Part A PRUITT CORPORATION AND SUBSIDIARY Consolidated Statement Workpaper For the Year Ended December 31, 2008 Pruitt Sedbrook Eliminations Noncontrolling Consolidated Corporation Company Dr. Cr. Interest Balances Income Statement Sales 1,100, ,000 (2) 200,000 1,430,000 Equity in subsidiary income 67,250 (1) 67,250 Total revenue 1,167, ,000 1,430,000 Cost of goods sold: Beginning inventory 150, ,000 (4) 30, ,000 Purchases 850, ,000 (2) 200,000 1,000,000 Cost of goods available 800, ,000 1,230,000 Less ending inventory 200, ,000 (3) 10, ,000 Cost of goods sold 1,000, , ,000 Other expenses 180, , ,500 Total cost & expense 980, ,500 1,237,500 Net/consolidated income 187,250 52, ,500 Noncontrolling interest in income 5,250 * (5,250)* Net income to retained earnings 187,250 52, , ,000 5, ,250 Statement of Retained Earnings 1/1 Retained earnings Pruitt Corporation 532, ,000 Sedbrook Company 120,000 (5) 120,000 Net income from above 187,250 52, , ,000 5, ,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 619, , , ,000 2, ,

5 Problem 6-16 (continued) Pruitt Sedbrook Eliminations Noncontrolling Consolidated Corporation Company Dr. Cr. Interest Balances Balance Sheet Cash 83,000 80, ,000 Accounts receivable 213, , ,500 Inventory 200, ,000 (3) 10, ,000 Investment in Sedbrook Company 568,250 (4) 30,000 (5) 558,000 (1) 40,250 Other assets 500, , ,000 Total assets 1,564, ,500 1,698,500 Accounts payable 70,000 30, ,000 Other liabilities 75,000 40, ,000 Capital stock: Pruitt Corporation 800, ,000 Sedbrook Company 500,000 (5) 500,000 Retained earnings from above 619, , , ,000 2, ,250 Noncontrolling interest in net assets (5) 62,000 62,000 64,250 64,250 Total liabilities & equity 1,564, , , ,250 1,698,500 *Noncontrolling interest in income = 0.10 $52,500 = $5,250 Explanations of workpaper entries are on next page 6-5

6 Problem 6-16 (continued) Explanation of workpaper entries (1) Equity in Subsidiary Income 67,250* Investment in Sedbrook Company 40,250 Dividends Declared ($30, ) 27,000 To reverse the effect of parent company entries during the year for subsidiary dividends and income * (.90)($52,500) + $30,000 - $10,000 = $67,250 (2) Sales 200,000 Purchases (Cost of Goods Sold) 200,000 (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) Investment in Sedbrook Company 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 ($568,250 - $40,250 + $30,000) 558,000 Noncontrolling Interest ($500,00 + $120,000) x.10 62,000 To eliminate investment account and create noncontrolling interest account Part B Pruitt Corporation's retained earnings on 12/31/2008 $ 619,250 Consolidated retained earnings on 12/31/2008 $ 619,250 Part C The balances are the same as in Problem

7 Problem 6-17 Part A PAQUE CORPORATION AND SUBSIDIARY Consolidated Statement Workpaper For the Year Ended December 31, 2008 Paque Segal Eliminations Noncontrolling Consolidated Corporation Company Dr. Cr. Interest Balances Income Statement Sales 1,650, ,000 (2) 300,000 2,145,000 Equity in subsidiary income 91,125 (1) 91,125 Total revenue 1,741, ,000 2,145,000 Cost of goods sold: Beginning inventory 225, ,000 (4) 45, ,000 Purchases 1,275, ,000 (2) 300,000 1,500,000 Cost of goods available 1,500, ,000 1,845,000 Less ending inventory 210, ,500 (3) 15, ,500 Cost of goods sold 1,290, ,500 1,477,500 Other expenses 310, , ,750 Total cost & expense 1,600, ,750 1,994,250 Net/consolidated income 140,625 71, ,750 Noncontrolling interest in income 10,125 * (10,125) Net income to retained earnings 140,625 71, , ,000 10, ,625 Statement of Retained Earnings 1/1Retained earnings Paque Corporation 798, ,000 Segal Company 180,000 (5) 180,000 Net income from above 140,625 71, , ,000 10, ,625 Dividends declared Paque Corporation (150,000) (150,000) Segal Company (60,000) (1) 54,000 (6,000) 12/31 Retained earnings to balance sheet 788, , , ,000 4, ,

8 Problem 6-17 (continued) Paque Segal Eliminations Noncontrolling Consolidated Corporation Company Dr. Cr. Interest Balances Balance Sheet Cash 93,000 75, ,000 Accounts Receivable 319, , ,250 Inventory 210, ,500 (3) 15, ,500 Investment in Segal Company 833,625 (4) 40,500 (5) 837,000 (1) 37,125 Other Assets 750, ,000 1,380,000 Total assets 2,206,125 1,046,250 2,403,750 Accounts Payable 105,000 45, ,000 Other Current Liabilities 112,500 60, ,500 Capital Stock: Paque Corporation 1,200,000 1,200,000 Segal Company 750,000 (5) 750,000 Retained Earnings from above 788, , , ,000 4, ,625 Noncontrolling Interest in Net Assets (4) 4,500 (5) 93,000 88,500 92,625 92,625 Total liabilities & equity 2,206,125 1,046,250 1,381,125 1,381,125 2,403,750 *Noncontrolling Interest in Consolidated Income = 0.10 ($71,250 + $45,000 $15,000) = $10,125 Explanations of workpaper entries are on next page. 6-8

9 Problem 6-17 (continued) Explanation of workpaper entries (1) Equity in Subsidiary Income 91,125* Investment in Segal Company 37,125 Dividends Declared ($60, ) 54,000 To reverse the effect of parent company entries during the year for subsidiary dividends and income * 0.90 ($71,250 + $45,000 $15,000) = $91,125 (2) Sales 300,000 Purchases (Cost of Goods Sold) 300,000 (3) Ending Inventory - Income Statement (CoGS) 15,000 Ending Inventory (Balance Sheet) 15,000 To eliminate unrealized intercompany profit in ending inventory ($75, ). (4) Investment in Segal Company (.90)($45,000) 40,500 Noncontrolling Interest (.1)($45,000) 4,500 Beginning Inventory -Income Statement (CoGS) 45,000 To recognize intercompany profit realized during the year and to reduce controlling and noncontrolling interests for their share of unrealized profit at beginning of year (5) Beginning Retained Earnings- Segal Co. 180,000 Common Stock - Segal Company 750,000 Investment in Segal Company ($833,625 - $37,125 + $40,500) 837,000 Noncontrolling Interest ($750,000 + $180,000) x.10 93,000 Part B Paque Corporation's Retained Earnings on 12/31/2008 $ 788,625 Consolidated retained earnings on 12/31/2008 $ 788,625 Part C The balances are the same as in Problem 6-7 and Problem