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CHAPTER 8

CONSOLIDATED FINANCIAL STATEMENTS: INTERCOMPANY


TRANSACTIONS

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 8–1 Prentiss Corporation (30 minutes, easy)


Journal entries for intercompany promissory note, including discounting of the note with a
bank, for both parent corporation and subsidiary.
Pr. 8–2 Pillsbury Corporation (30 minutes, medium)
Journal entries for both parent company and subsidiary to record intercompany promissory
note transactions, including discounting of a note.
Pr. 8–3 Pittsburgh Corporation (50 minutes, medium)
Correcting entries for improperly recorded intercompany transactions and balances. Partial
working paper for consolidated financial statements to show presentation of intercompany
transactions and balances.
Pr. 8–4 Parley Corporation (30 minutes, medium)
Working paper eliminations (in journal entry format) for partially owned subsidiary’s sale of
leasehold improvement to parent company and for parent company’s acquisition of
subsidiary’s bonds in the open market.
Pr. 8–5 Peke Corporation (30 minutes, medium)
Working paper eliminations (in journal entry format) for downstream and upstream
intercompany sales of merchandise. Partially owned subsidiary is involved.
Pr. 8–6 Pandua Corporation (45 minutes, medium)
Working paper eliminations (in journal entry format) for intercompany sales of merchandise
and machinery, for parent company’s open-market acquisition of subsidiary’s bonds, and for
minority interest in net income of partially owned subsidiary.
Pr. 8–7 Pacific Corporation (50 minutes, medium)
Journal entries and working paper eliminations (in journal entry format) for intercompany sale
of machinery and for parent company’s acquisition of wholly owned subsidiary’s bonds in the
open market.
Pr. 8–8 Pollard Corporation (50 minutes, medium)
Preparation of three-column ledger accounts for accounts affected by parent company’s open-
market acquisition of wholly owned subsidiary’s bonds. Working paper eliminations (in journal
entry format) for two years.
Pr. 8–9 Procus Corporation (60 minutes, medium)
Preparation of three-column ledger accounts for accounts affected by intercompany sales-
type/capital lease. Working paper eliminations (in journal entry format) for two years.
Pr. 8–10 Patrick Corporation (60 minutes, medium)
Working paper for consolidated balance sheet and related working paper eliminations (in
journal entry format) for parent corporation and wholly owned subsidiary having
merchandising transactions prior to the business combination.

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Solutions Manual, Chapter 8 7
Pr. 8–11 Power Corporation (65 minutes, strong)
Working paper for consolidated financial statements and related working paper eliminations (in
journal entry format) of parent company and partially owned subsidiary having intercompany
transactions for merchandise and equipment.
Pr. 8–12 Pritchard Corporation (65 minutes, strong)
Adjusting entries, working paper eliminations (in journal entry format), and working paper for
consolidated financial statements of parent company and wholly owned subsidiary having
intercompany transactions for notes, merchandise, and equipment.

ANSWERS TO REVIEW QUESTIONS


1. To assure correct elimination of intercompany transactions and balances in consolidated financial
statements, a parent company and subsidiary should set up clearly identified separate ledger
accounts to record the intercompany items.
2. Common intercompany transactions between a parent company and its subsidiary include the
following (only five are required):
(1) Sales of merchandise
(2) Sales of land or depreciable plant assets
(3) Sales of intangible assets
(4) Leases of property under sales-type/capital leases
(5) Loans on promissory notes or open accounts
(6) Leases of property under operating leases
(7) Rendering of services
3. There are no income tax effects associated with the elimination of intercompany rent revenue and
expense under an operating lease. Because the revenue of one affiliate exactly offsets the expense
of the other affiliate, there is no intercompany profit (gain) or loss associated with the operating
lease in a consolidated income statement.
4. A discounted intercompany note receivable is not eliminated in the preparation of a consolidated
balance sheet. Discounting the note in effect makes it payable to an outsiderthe bank that
discounted the note.
5. If unrealized intercompany profits (gains) resulting from transactions between parent company and
subsidiaries are not eliminated, consolidated financial statements will reflect the results of related
party activities within the group, as well as results of transactions with those outside the
consolidated entity. In these circumstances, consolidated net income would be subject to
manipulation by management of the parent company.
6. The following consolidated financial statement categories are affected by intercompany sales of
merchandise at a profit:
Net sales
Cost of goods sold
Net income to parent
Inventories
Total current assets
Total assets
Total stockholders’ equity

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8 Modern Advanced Accounting, 10/e
7. The unrealized intercompany profit in a subsidiary’s beginning inventories resulting from the
parent company’s sales of merchandise to the subsidiary is eliminated from the parent’s beginning
retained earnings. This technique is required because the parent had closed the gross profit on its
sales to the subsidiaryincluding the profit attributable to the subsidiary’s ending inventories of
the preceding accounting periodto its Retained Earnings ledger account.
8. The minority interest in net income of a partially owned subsidiary is affected by working paper
eliminations that involve intercompany profits (gains) attributable to that subsidiary. Examples are
intercompany profits (gains) on upstream or lateral sales of merchandise, plant assets, or intangible
assets, and gains on the open-market acquisition of a partially owned subsidiary’s bonds by the
parent company or by another subsidiary.
9. Eliminations of intercompany profit in the parent company’s inventories only to the extent of the
parent company’s ownership interest in the selling subsidiary results in a portion of intercompany
profit remaining in consolidated net income. This is an undesirable result if the consolidated
financial statements are to present the results of transactions with those outside the consolidated
entity. The minority stockholders of the subsidiary, although they are considered co-owners of the
consolidated entity under the economic unit concept of consolidated financial statements, play no
part whatsoever in the negotiation of intercompany sales. Therefore, all the intercompany profit in
the parent company’s ending inventories should be eliminated in the preparation of consolidated
financial statements.
10. Intercompany sales of plant assets and intangible assets differ from intercompany sales of
merchandise in two respects. First, intercompany sales of plant assets and intangible assets are
infrequent in occurrence, but intercompany sales of merchandise are recurring transactions once a
program for intercompany sales has begun. Second, realization of intercompany gain on sales of
plant assets or intangible assets requires the passage of many accounting periods; intercompany
profits on sales of merchandise generally are realized rapidly, depending on the frequency of
inventories turnover.
11. An intercompany gain on the sale of land is realized only when the land is resold to an outsider.
The gain on sale of land between affiliated companies is unrealized from a consolidated point of
view.
12. The intercompany gain element of Partin Corporation’s annual depreciation expense is $500
($2,000 x 1/4 = $500). In the working paper for consolidated financial statements, depreciation
expense is reduced by the $500 intercompany gain element. The $500 is considered to be an
increase in Sayles Company’s net income, for the computation of the minority interest in net
income of subsidiary.
13. Working paper eliminations (in journal entry format) for intercompany leases of property under
capital/sales-type leases include eliminations of both intercompany sales and cost of goods sold and
the intercompany profit in depreciation expense. Thus, such eliminations have features of both
eliminations for intercompany sales of merchandise and eliminations for intercompany sales of
plant assets.
14. The quoted statement is unsupportable because it implies that intercompany gain or loss results
only from transactions between affiliated companies. When one affiliate acquires another affiliate’s
bonds in the open market, a realized gain or loss is recognized on the transaction. Although in form
no transaction has taken place between the affiliates, in substance the acquiring affiliate acts as an
agent for the issuer of the bonds in the open-market transaction. Thus, the realized gain or loss is
recognized in the consolidated income statement and is attributed to the issuer of the bonds.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 9
15. A subsidiary’s reissuance of parent company bonds acquired in the open market by the subsidiary
interrupts the orderly amortization of the realized gain or loss on the acquisition of the bonds. A
transaction gain or loss on the subsidiary’s reissuance of the parent company’s bonds is not
realized by the consolidated entity. Logically, the transaction gain or loss should be treated in
consolidation as premium or discount on the reissued bonds.
16. The elimination or recognition of intercompany profits (gains) or losses in inventories, plant assets,
intangible assets, or bonds is recorded only in the working paper for consolidated financial
statements. Because the parent company generally does not reflect intercompany profit (gain) or
loss eliminations in its equity-method recording of the subsidiary’s operating results, the parent
company’s net income will differ from consolidated net income.

SOLUTIONS TO EXERCISES
Ex. 8–1 1. b ($51,000 – $850 = $50,150) 8. c
2. a 9. d ($120,000 ÷ 0.60 = $200,000)
3. b 10. a
4. b 11. b ($84,115 x 0.07 = $5,888)
5. c 12. b
6. b 13. a
7. b 14. b [$60,000 – ($12,000 x 2) = $36,000]
Ex. 8–2 Computation of Parker Corporation’s debit to Cash, Apr. 12, 2006:
Maturity value of note [$100,000 + ($100,000 x 0.08 x 90/360)] $102,000
Less: Discount ($102,000 x 0.10 x 60/360) 1,700
Debit to Cash $100,300
Ex. 8–3 Payton Corporation’s journal entry, Mar. 31, 2006:
Cash ($10,175 – $153) 10,022
Interest Expense ($153 – $117*) 36
Intercompany Notes Receivable 10,000
Intercompany Interest Revenue ($10,000 x 0.07 x 30/360) 58
To record discounting of 7%, 90-day note receivable from Slagle
Company dated Mar. 1, 2006, at a discount rate of 9%. Cash
proceeds computed as $10,175 maturity value of note, less $153
discount ($10,175 x 0.09 x 60/360 = $153).
*$10,000 x 0.07 x 60/360 = $117
Ex. 8–4 Planke Corporation’s journal entry to record discounting of Scully Company note, Mar. 31,
2006:
Cash 18,118
Interest Expense ($152 – $135) 17
Intercompany Notes Receivable 18,000
Intercompany Interest Revenue 135*
To record discounting of 9%, 60-day note receivable from Scully
Company dated Mar. 1, 2006, at a discount rate of 10%. Cash
proceeds computed as follows:
Maturity value of note [$18,000 + ($18,000 x 0.09
x 60/360)] $18,270
Discount ($18,270 x 0.10 x 30/360) 152
Proceeds $18,118

*$18,000 x 0.09 x 30/360 = $135

The McGraw-Hill Companies, Inc., 2006


10 Modern Advanced Accounting, 10/e
Ex. 8–5 Journal entries for Palos Verdes Corporation:
2005
June 1 Intercompany Notes Receivable 120,000
Cash 120,000
July 1 Cash ($123,600 – $3,090) 120,510
Interest Expense [$3,090 – ($120,000 x 0.12 x 2/12)] 690
Intercompany Notes Receivable 120,000
Intercompany Interest Revenue ($120,000 x 0.12 x
1/12) 1,200

2006
May 1 Intercompany Dividends Receivable ($80,000 x 0.90) 72,000
Investment in South Gate Company Common Stock 72,000
10 Cash 72,000
Intercompany Dividends Receivable 72,000
31 Investment in South Gate Company Common Stock
($200,000 x 0.90) 180,000
Intercompany Investment Income 180,000
Ex. 8–6 Analysis of Peggy Corporation’s sales to Sally Company for year ended Nov. 30, 2006:
Gross profit
(25% of cost;
20% of selling
Selling price Cost price)
Beginning inventories $ 18,000 $ 14,400 $ 3,600
Add: Sales 120,000 96,000 24,000
Subtotals $138,000 $110,400 $27,600
Less: Ending inventories 24,000 19,200 4,800
Cost of goods sold $114,000 $ 91,200 $22,800
Ex. 8–7 Working paper elimination for Patter Corporation and subsidiary, Feb. 28, 2006:
Retained EarningsPatter 25,000
Intercompany SalesPatter 800,000
Intercompany Cost of Goods SoldPatter 600,000
Cost of Goods SoldSmatter 187,500
InventoriesSmatter 37,500
Ex. 8–8 Working paper elimination for Pele Corporation and subsidiary, July 31, 2006:
Intercompany SalesPele 120,000
Intercompany Cost of Goods SoldPele ($120,000 x
0.83 1/3) 100,000
Cost of Goods SoldShad ($84,000 x 0.16 2/3) 14,000
InventoriesShad ($36,000 x 0.16 2/3) 6,000
To eliminate intercompany sales and cost of goods sold, and
unrealized intercompany profit in inventories. (Income tax effects
are disregarded.)

Ex. 8–9 Working paper elimination for Polydom Corporation and subsidiary, Dec. 31, 2006:
Retained EarningsSpring ($160,000 x 0.25 x 0.75) 30,000
Minority Interest in Net Assets of Spring Company ($160,000 x 10,000

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Solutions Manual, Chapter 8 11
0.25 x 0.25)
Intercompany SalesSpring ($600,000 x 1.33 1/3) 800,000
Intercompany Cost of Goods SoldSpring 600,000
InventoriesSolano ($200,000 x 0.25) 50,000
Cost of Goods SoldSolano ($760,000 x 0.25) 190,000
To eliminate intercompany sales and cost of goods sold and
unrealized intercompany profit in inventories. (Income tax effects
are disregarded.)
Ex. 8–10 Working paper eliminations for Polar Corporation and subsidiaries, Sept. 30, 2006:
Intercompany SalesSolar ($120,000 x 1.25) 150,000
Intercompany Cost of Goods SoldSolar 120,000
Cost of Goods SoldStellar ($110,000 x 0.20) 22,000
InventoriesStellar ($40,000 x 0.20) 8,000
Intercompany SalesStellar ($180,000 x 1.33 1/3) 240,000
Intercompany Cost of Goods SoldStellar 180,000
Cost of Goods SoldSolar ($180,000 x 0.25) 45,000
InventoriesSolar ($60,000 x 0.25) 15,000
Ex. 8–11 a. To eliminate unrealized intercompany gain in machinery and in related depreciation.
(Income tax effects are disregarded.)
b. Two years. ($12,500 ÷ $6,250 = 2)
c. The credit to Depreciation ExpenseParke in effect represents the realization of a portion
of the intercompany gain on Selma’s sale of machinery to Parke two years ago. Thus,
$6,250 is added to Selma’s net income for the year ended December 31, 2006, to compute
the minority interest in net income of Selma. The consolidated net income of Parke
Corporation and subsidiary for the year ended December 31, 2006, is net of the minority
interest in net income of Selma.
Ex. 8–12 Working paper elimination for Patria Corporation and subsidiary, Sept. 30, 2008:
Retained EarningsSelena ($4,500* x 0.90) 4,050
Minority Interest in Net Assets of Subsidiary ($4,500 x 0.10) 450
Accumulated DepreciationPatria [$5,500 x (10/55 + 9/55)] 1,900
EquipmentPatria ($14,500 – $9,000) 5,500
Depreciation ExpensePatria ($5,500 x 9/55) 900
To eliminate unrealized intercompany gain in equipment and in
related depreciation. (Income tax effects are disregarded.)
*$5,500 – ($1,900 – $900) = $4,500
Ex. 8–13 Computation of missing amounts in working paper eliminations for Paulo Corporation and
subsidiary:
(1) $480 ($2,400 x 0.20)
(2) $1,920 ($2,400 x 0.80)
(3) $2,400 ($800 x 3)
(4) $160 ($800 x 0.20)
(5) $640 ($800 x 0.80)
(6) $4,000 ($800 x 5)

The McGraw-Hill Companies, Inc., 2006


12 Modern Advanced Accounting, 10/e
Ex. 8–14 Working paper elimination for Pelion Corporation and subsidiary, Dec. 31, 2007:
Intercompany Liability under Capital LeaseStyron ($15,849 –
$5,000 + $1,585) 12,434
Unearned Intercompany Interest RevenuePelion ($4,151 –
$1,585) 2,566
Retained EarningsPelion ($20,849 – $17,000) 3,849
Intercompany Lease ReceivablesPelion ($20,000 – $5,000) 15,000
Leased EquipmentCapital LeaseStyron ($3,849 – $385) 3,464
Depreciation ExpenseStyron ($3,849 ÷ 10) 385
To eliminate intercompany accounts associated with intercompany
lease and to defer unrealized portion of intercompany gross profit
on sales-type lease. (Income tax effects are disregarded.)
Note to Instructor: Pelion’s intercompany interest revenue [($20,000 – $4,151) x 0.10 =
$1,585] is offset against Styron’s intercompany interest expense ($15,849 x 0.10 = $1,585) on
the same line in the income statement section of the working paper for consolidated financial
statements.
Ex. 8–15 Working paper elimination for Pawley Corporation and subsidiary, Feb. 28, 2007:
Intercompany Gain on Sale of PatentSmart ($80,000 –
$60,000) 20,000
Amortization ExpensePawley ($20,000 ÷ 4) 5,000
PatentPawley ($20,000 – $5,000) 15,000
Ex. 8–16 Computation of amount of cash paid by Polka Corporation, Apr. 30, 2007:
Present value of $40,000 due in four years at 12%, with interest paid annually
($40,000 x 0.635518) $25,421
Add: Present value of $4,000 due each year for four years at 12% ($4,000 x
3.037349) 12,149
Cost of $40,000 face amount of bonds $37,570
Add: Accrued interest purchased ($40,000 x 0.10) 4,000
Amount of cash paid by Polka Corporation $41,570

Computation of gain on extinguishment of bonds:


Carrying amounts of bonds acquired: $100,000 x 0.40 $40,000
Less: Cost of bonds to Polka Corporation (see above) 37,570
Gain on extinguishment of bonds $ 2,430
Ex. 8–17 Computation of missing amounts in working paper elimination:
(1) Intercompany interest revenue: $58,098 x 0.10 $ 5,810
(2) Premium on intercompany bonds payable:
Premium, Oct. 31, 2007: $58,098 + $3,889 – $60,000 $ 1,987
Amortization for year ended Oct. 31, 2008: $5,400 – ($61,987 x 0.08) 441
Premium, Oct. 31, 2008 $ 1,546
(3) Investment in Sinn Company bonds: $58,098 + ($5,810 – $5,400) $58,508
(4) Intercompany interest expense: $61,987 x 0.08 $ 4,959
(5) Retained earnings: $3,889 x 0.90, or $3,889 – $389 $ 3,500

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 13
Ex. 8–18 Computation of minority interest in Sokal Company’s net income:
Year 2006 Year 2007
Net income of subsidiary $80,000 $90,000
Intercompany profit in parent company’s inventories, unrealized in
Year 2006, realized in Year 2007 (2,000) 2,000
Adjusted net income of subsidiary $78,000 $92,000
Minority interest (30%) $23,400 $27,600

CASES
Case 8–1 The journal entries of Seeley Company to record the acquisition and depreciation of machinery
are adequate and need not be changed. However, the journal entries of Powell Corporation are
incorrect for two reasons:
(1) Idle machinery is accounted for as though it were merchandise. A Sales ledger account is
inappropriate for any asset except merchandise sold to customers.
(2) The first journal entry does not identify the transaction as an intercompany transaction.
Failure to identify intercompany transactions leads to the risk that such transactions,
profits (gains) or losses, and balances will not be eliminated in the preparation of
consolidated financial statements.
The working paper elimination prepared by Powell’s accountant does not remove the
intercompany gain element from the consolidated income statement. In effect, the elimination
accounts for the intercompany gain as though it were a prior period adjustment. This treatment
has no justification.
Powell’s journal entry for the intercompany sale of idle machinery should have been as follows:
Cash 50,000
Idle Machinery 40,000
Intercompany Gain on Sale of Idle Machinery 10,000
To record sales of idle equipment to Seeley Company. (Income tax
effects are disregarded.)
The correct December 31, 2006, working paper elimination (in journal entry format) is as
follows:
Intercompany Gain on Sale of Idle MachineryPowell 10,000
Accumulated Depreciation of MachinerySeeley 1,000
MachinerySeeley 10,000
Depreciation ExpenseSeeley 1,000
To eliminate unrealized intercompany gain in machinery and in
related depreciation. (Income tax effects are disregarded.)

Case 8–2 Shelton Company’s $10,000 debit to a deferred charge ledger account for the excess paid by
Shelton for the trade accounts receivable acquired from Sawhill Company is inappropriate. A
deferred charge is an account established for long-term prepayments for goods or services to be
received in the future. The $10,000 excess payment for the trade accounts receivable does not
fit the concept of a deferred charge. Further, the nature of the expense account debited by
Shelton for the amortization of the deferred charge is not clear. The $10,000 should have been
debited to a loss ledger account, because it represents an outlay by Shelton to a liquidating
affiliated company for which no benefits were received. The $10,000 loss in Shelton’s
accounting records, as recommended above, should be eliminated in the preparation of
consolidated financial statements for Peasley Corporation and subsidiaries for the year ended

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14 Modern Advanced Accounting, 10/e
October 31, 2006. The following working paper elimination (in journal entry format) is
required:
Investment Income of Sawhill CompanyPeasley 10,000
Loss on Acquisition of ReceivablesShelton 10,000
To eliminate loss on Shelton Company’s acquisition of trade
accounts receivable from Sawhill Company, an unconsolidated
subsidiary in liquidation.

The fact that Sawhill is in liquidation and is not consolidated does not change the need for
eliminating all intercompany transactions, balances, and profits (gains) or losses from the
consolidated financial statements.
Case 8–3 Given that both Winston Corporation and Cranston Company use the periodic inventory
system and that markups on Winston’s sales of products to Cranston had varied, it is probably
impossible for the newly hired controller of Winston to prepare any consolidated financial
statements other than a consolidated balance sheet at the end of the first fiscal year of the
controllership. The local CPA firm had prepared separate income tax returns for both Winston
and Cranston; thus, it is unlikely that the CPA firm had any records of intercompany profits in
Winston’s sales to Cranston and in Cranston’s ending inventories.
If the controller is able to obtain accurate quantities and billed prices of Winston-produced
products in Cranston’s ending inventory, and if Winston’s costs of those products are
obtainable from Winston’s production records, the amount of the unrealized intercompany
profit in Cranston’s ending inventory can be determined, thus facilitating preparation of a
consolidated balance sheet. Establishment of appropriate intercompany sales and intercompany
cost of goods sold accounting records for Winston for the following fiscal year (which would
entail Winston’s adoption of the perpetual inventory system) would enable the controller to
prepare consolidated statements of income, retained earnings, and cash flows, as well as
consolidated balance sheets, for future fiscal years.
Case 8–4 The accountant’s position is not supported by accounting theory for consolidated financial
statements. Under that theory, consolidated financial statements should display amounts
resulting from transactions with those outside the consolidated group. Consolidated financial
statements should not be distorted by intercompany transactions, which are not the result of
arm’s-length bargaining between parties with opposing interests. Despite the fact that Aqua
Well Company’s charges for transmission of water to Aqua Water Corporation were at the
customary rate approved by the state’s Public Utilities Commission, these charges in the
aggregate are dependent on the volume of water ordered from the subsidiary by the parent
company. Thus, Aqua Well’s transmission revenue amount must be offset against Aqua Water’s
transmission expense amount if the consolidated income statement for the two companies is to
comply with generally accepted accounting principles for consolidated financial statements.
Case 8–5 The Audit Committee of the
Board of Directors
Padgett Corporation
At your request, I have found the following misstatements in the condensed consolidated
financial statements of Padgett Corporation and subsidiary, Seacoast Company, for the year
ended December 31, 2006:

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Solutions Manual, Chapter 8 15
1. The failure to eliminate the intercompany “gain” (actually, because of implicit interest, a
$119,417 loss; the present value of $680,583, at an interest rate of 8%, compared with
Padgett’s $800,000 cost of the land) on the sale of land to Seacoast by Padgett.
Elimination of the “gain” reduces pre-tax consolidated income and consolidated property,
plant, and equipment by $200,000.
2. The failure to eliminate the December 31, 2006, intercompany sale, $650,000, and cost of
goods sold, $500,000, resulting from a shipment by Padgett to Seacoast. Elimination of
the $150,000 intercompany gross margin reduces pre-tax income by that amount.
The net effect of the foregoing errors on the subject consolidated financial statements is as
follows:
Balance sheet:
Current assets (inventories) overstated $150,000
Property, plant, and equipment overstated $200,000
Total assets overstated $350,000
Current liabilities (income taxes payable) overstated $119,000 (see below)
Stockholders’ equity overstated $231,000

Income statement:
Net sales overstated $650,000
Cost of goods sold overstated $500,000
Gain on sale of land overstated $200,000
Pre-tax income overstated $350,000
Income tax expense overstated $119,000 ($350,000 x
0.34)
Net income overstated $231,000
Basic earnings per share overstated $3.85 ($231,000 ÷ 60,000
shares)a 70%
overstatement

Very truly yours,


_____________, CPA

The McGraw-Hill Companies, Inc., 2006


16 Modern Advanced Accounting, 10/e
30 Minutes, Easy
Prentiss Corporation Pr. 8–1
a. Prentiss Corporation
Journal Entries

20 06
Oct 21 Intercompany Notes Receivable 1 0 0 0 0 0
Cash 1 0 0 0 0 0
To record loan to Scopes Company on 90-day, 7 ½%
promissory note.

31 Cash ($101,875 – $2,038) 9 9 8 3 7


Interest Expense ($2,038 – $1,667*) 3 7 1
Intercompany Notes Receivable 1 0 0 0 0 0
Intercompany Interest Revenue ($100,000 x 0.075
x 10/360) 2 0 8
To record discounting of 90-day, 7 ½% note receivable
from Scopes Company dated Oct. 21, 2006, at a
discount rate of 9%. Cash proceeds are computed as
follows:
Maturity value of note [$100,000 + ($100,000 x
0.075 x 90/360)] $101,875
Discount ($101,875 x 0.09 x 80/360) 2,038
Cash proceeds $ 99,837

*100,000 x 0.075 x 80/360 = $1,667

b. Scopes Company
Journal Entries

20 06
Oct 21 Cash 1 0 0 0 0 0
Intercompany Notes Payable 1 0 0 0 0 0
To record loan from Prentiss Corporation on 90-day,
7 ½% promissory note.

31 Intercompany Notes Payable 1 0 0 0 0 0


Intercompany Interest Expense 2 0 8
Notes Payable 1 0 0 0 0 0
Interest Payable 2 0 8
To transfer 90-day, 7 ½% note payable to Prentiss
Corporation dated Oct. 21, 2006, from intercompany
notes to outsider notes. Action is necessary because
Prentiss Corporation discounted the note on this date.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 17
30 Minutes, Medium
Pillsbury Corporation Pr. 8–2
a. Pillsbury Corporation
Journal Entries

20 06
May 1 Intercompany Notes Receivable 1 5 0 0 0
Cash 1 5 0 0 0
To record 7 ½%, 120-day loan to Sarpy Company.

31 Intercompany Notes Receivable 2 0 0 0 0


Cash 2 0 0 0 0
To record 7 ½%, 120-day loan to Sarpy Company.

June 6 Cash ($15,375 – $323) 1 5 0 5 2


Interest Expense ($323 – $262*) 6 1
Intercompany Notes Receivable 1 5 0 0 0
Intercompany Interest Revenue ($15,000 x 0.075
x 36/360) 1 1 3
To record discounting of 7 ½%, 120-day note
receivable from Sarpy Company dated May 1, 2006,
at a discount rate of 9%. Cash proceeds computed as
$15,375 maturity value of note, less $323 discount
($15,375 x 0.09 x 84/360 = $323).

30 Intercompany Interest Receivable 1 2 5


Intercompany Interest Revenue 1 2 5
To accrue interest on June 30, 2006, as follows:
$20,000 x 0.075 x 30/360 = $125.

*$15,000 x 0.075 x 84/360 = $262

The McGraw-Hill Companies, Inc., 2006


18 Modern Advanced Accounting, 10/e
Pillsbury Corporation (concluded) Pr. 8–2
b. Sarpy Company
Journal Entries

20 06
May 1 Cash 1 5 0 0 0
Intercompany Notes Payable 1 5 0 0 0
To record 7 ½%, 120-day loan from Pillsbury
Corporation.

31 Cash 2 0 0 0 0
Intercompany Notes Payable 2 0 0 0 0
To record 7 ½%, 120-day loan from Pillsbury
Corporation.

June 6 Intercompany Notes Payable 1 5 0 0 0


Intercompany Interest Expense 1 1 3
Notes Payable 1 5 0 0 0
Interest Payable 1 1 3
To transfer 7 ½%, 120-day note payable to Pillsbury
Corporation dated May 1, 2006, from intercompany
notes to outsider notes. Action is necessary because
Pillsbury Corporation discounted the note on this date.
Accrued interest computed as $15,000 x 0.075 x
36/360 = $113.

30 Interest Expense 7 5
Intercompany Interest Expense 1 2 5
Interest Payable 7 5
Intercompany Interest Payable 1 2 5
To accrue interest at June 30, 2006, as follows:
$15,000 x 0.075 x 24/360 = $75
$20,000 x 0.075 x 30/360 = $125

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 19
50 Minutes, Medium
Pittsburgh Corporation Pr. 8–3
a. Pittsburgh Corporation (parent company)
Correcting Entries
July 31, 2005
(1)
Intercompany Accounts Receivable ($10,000 +
$5,000) 1 5 0 0 0
Intercompany Management Fee Revenue
($2,000 + $2,200) 4 2 0 0
Intercompany Interest Revenue ($50 + $150) 2 0 0
Intercompany Account—Syracuse Company 1 0 6 0 0
To close Intercompany Account and transfer balances
as follows:
Intercompany Accounts Receivable: Unpaid
advances of June 21, 2005, and July 31, 2005
Intercompany Management Fee Revenue:
$2,000 from June 11, 2005, and $2,200 from
July 11, 2005.
Intercompany Interest Revenue: $50 from
June 12, 2005, and $150 from July 27, 2005.

(2)
Intercompany Interest Receivable 1 1 1
Intercompany Interest Revenue 1 1 1
To accrue interest on advance to Syracuse Company
dated June 21, 2005, as follows: $10,000 x 0.10 x
40/360 = $111.

(3)
Intercompany Accounts Receivable 2 4 0 0
Intercompany Management Fee Revenue 2 4 0 0
To accrue management fee due from Syracuse
Company for July, 2005, as follows:
Syracuse Company net sales for 3 months
ended July 31, 2005 $330,000
Management fee ($330,000 x 0.02) $ 6,600
Less: Total paid for May and June, 2005 4,200
Balance due, July 31, 2005 $ 2,400

The McGraw-Hill Companies, Inc., 2006


20 Modern Advanced Accounting, 10/e
Pittsburgh Corporation (concluded) Pr. 8–3
b. Syracuse Company (subsidiary company)
Correcting Entries
July 31, 2005
(1)
Intercompany Account—Pittsburgh Corporation 5 6 0 0
Intercompany Management Fee Expense 4 2 0 0
Intercompany Interest Expense 2 0 0
Intercompany Accounts Payable 1 0 0 0 0
To close Intercompany Account and transfer balances
to appropriate accounts.

(2)
Cash in Transit 5 0 0 0
Intercompany Accounts Payable 5 0 0 0
To record cash advance in transit from Pittsburgh
Corporation on July 31, 2005.

(3)
Intercompany Interest Expense 1 1 1
Intercompany Interest Payable 1 1 1
To accrue interest on advance from Pittsburgh
Corporation dated June 21, 2005.

(4)
Intercompany Management Fee Expense 2 4 0 0
Intercompany Accounts Payable 2 4 0 0
To accrue management fee due to Pittsburgh
Corporation for July, 2005.

c. Pittsburgh Corporation and Subsidiary


Partial Working Paper for Consolidated Financial Statements
July 31, 2005
Eliminations
Pittsburgh Syracuse Increase
Corporation Company (decrease) Consolidated
Income Statement
Revenue:
Intercompany revenue
(expenses) 6 9 1 1 ( 6 9 1 1 )

Balance Sheet
Assets
Intercompany receivables
(payables) 1 7 5 1 1 ( 1 7 5 1 1 )

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 21
30 Minutes, Medium
Parley Corporation Pr. 8–4
Parley Corporation and Subsidiary
Working Paper Eliminations
February 28, 2008
(a) Retained Earnings—Silton ($18,000 x 0.90) 1 6 2 0 0
Minority Interest in Net Assets of Subsidiary
($18,000 x 0.10) 1 8 0 0
Leasehold Improvements—Parley ($20,000 –
$4,000) 1 6 0 0 0
Amortization Expense—Parley ($20,000 x 1/10) 2 0 0 0
To eliminate unrealized intercompany gain in the
Leasehold Improvements ledger account and in the
related amortization expense. (Income tax effects are
disregarded.)

(b) Intercompany Interest Revenue—Parley ($48,264 x


0.10) 4 8 2 6
Intercompany Bonds Payable—Silton ($100,000 x ½) 5 0 0 0 0
Investment in Silton Company Bonds—Parley
($48,264 + $826*) 4 9 0 9 0
Intercompany Interest Expense—Silton ($50,000 0
x 0.08) 4 0 0 0
Gain on Extinguishment of Bonds—Silton
($50,000 – $48,264) 1 7 3 6
To eliminate subsidiary’s bonds acquired by parent
company, and to recognize gain on the extinquishment
of the bonds. (Income tax effects are disregarded.)

*$4,826 – $4,000 = $826

The McGraw-Hill Companies, Inc., 2006


22 Modern Advanced Accounting, 10/e
30 Minutes, Medium
Peke Corporation Pr. 8–5
Peke Corporation and Subsidiary
Working Paper Eliminations
June 30, 2007
(a) Retained Earnings—Peke ($48,000 x 0.20) 9 6 0 0
Intercompany Sales—Peke 6 0 0 0 0 0
Intercompany Cost of Goods Sold—Peke
($600,000 x 0.80) 4 8 0 0 0 0
Cost of Goods Sold—Stoke ($588,000 x 0.20) 1 1 7 6 0 0
Inventories—Stoke ($60,000 x 0.20) 1 2 0 0 0
To eliminate intercompany sales and cost of goods
sold, and unrealized profit in ending inventories
resulting from Peke Corporation sales to Stoke
Company. (Income tax effects are disregarded.)

(b) Retained Earnings—Stoke ($30,000 x 0.25 x 0.75) 5 6 2 5


Minority Interest in Net Assets of Subsidiary ($30,000
x 0.25 x 0.25) 1 8 7 5
Intercompany Sales—Stoke 8 0 0 0 0 0
Intercompany Cost of Goods Sold—Stoke
($800,000 x 0.75) 6 0 0 0 0 0
Cost of Goods Sold—Peke ($790,000 x 0.25) 1 9 7 5 0 0
Inventories—Peke ($40,000 x 0.25) 1 0 0 0 0
To eliminate intercompany sales and cost of goods
sold, and unrealized profit in ending inventories
resulting from Stoke Company sales to Peke
Corporation . (Income tax effects are disregarded.)

Note to Instructor: A 25% markup on cost equals a


20% markup on selling price.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 23
45 Minutes, Medium
Padua Corporation Pr. 8–6
Padua Corporation and Subsidiary
Working Paper Eliminations
April 30, 2006
(a) Retained Earnings—Padua ($54,000 x 0.16 2/3) 9 0 0 0
Intercompany Sales—Padua 1 8 0 0 0 0
Intercompany Cost of Goods Sold—Padua
($180,000 x 0.83 1/3) 1 5 0 0 0 0
Cost of Goods Sold—Scala ($150,000 x
0.16 2/3) 2 5 0 0 0
Inventories—Scala ($84,000 x 0.16 2/3) 1 4 0 0 0
To eliminate intercompany sales, cost of goods sold,
and unrealized profit in inventories. (Income tax effects
are disregarded.)

(b) Intercompany Gain on Sale of Machinery—Scala


($80,000 – $56,000) 2 4 0 0 0
Accumulated Depreciation—Padua ($24,000 ÷ 8) 3 0 0 0
Machinery—Padua 2 4 0 0 0
Depreciation—Padua 3 0 0 0
To eliminate unrealized intercompany gain in
machinery and in related depreciation. (Income tax
effects are disregarded.)

(c) Intercompany Bonds Payable—Scala 2 0 0 0 0 0


Discount on Intercompany Bonds Payable—Scala
[($45,880 – $1,247*) x ½] 2 2 3 1 7
Investment in Scala Company Bonds—Padua 1 5 8 6 5 8
Gain on Extinguishment of Bonds—Scala 1 9 0 2 5
To eliminate subsidiary’s bonds acquired by parent,
and to recognize gain on the extinguishment of the
bonds. (Income tax effects are disregarded.)

(d) Minority Interest in Net Income of Subsidiary 1 1 8 0 3


Minority Interest in Net Assets of Subsidiary 1 1 8 0 3
To establish minority interest in subsidiary’s adjusted
net income for 2006, as follows:
Net income of subsidiary $120,000
Adjustments in working paper
eliminations:
(b) ($24,000 – $3,000) (21,000)
(c) 19,025
Adjusted net income of subsidiary $118,025
Minority interest share ($118,025 x 0.10) $ 11,803

*($354,120 x 0.12 x ½) – ($400,000 x 0.10 x ½) = $1,247

The McGraw-Hill Companies, Inc., 2006


24 Modern Advanced Accounting, 10/e
50 Minutes, Medium
Pacific Corporation Pr. 8–7
a. Pacific Corporation
Journal Entries

20 05
July 1 Cash 1 6 0 0 0
Accumulated Depreciation of Machinery 1 8 0 0 0
Machinery 3 0 0 0 0
Intercompany Gain on Sale of Machinery 4 0 0 0
To record sale of machinery to Sommer Company.

1 Investment in Sommer Company Bonds 3 6 1 5 7 1


Cash 3 6 1 5 7 1
To record acquisition of $400,000 face amount of
Sommer Company’s 8% bonds due June 30, 2008.

20 06
June 30 Cash ($400,000 x 0.08) 3 2 0 0 0
Investment in Sommer Company Bonds ($43,389 –
$32,000) 1 1 3 8 9
Intercompany Interest Revenue ($361,571 x
0.12) 4 3 3 8 9
To record receipt of annual interest on Sommer
Company’s 8% bonds.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 25
Pacific Corporation (concluded) Pr. 8–7
b. Pacific Corporation and Subsidiary
Working Paper Eliminations
June 30, 2006
(a) Intercompany Gain on Sale of Machinery—Pacific 4 0 0 0
Accumulated Depreciation—Sommer ($4,000 ÷ 8) 5 0 0
Machinery—Sommer 4 0 0 0
Depreciation Expense—Sommer 5 0 0
To eliminate unrealized intercompany gain in
machinery and in related depreciation. (Income tax
effects are disregarded.)

(b) Intercompany Interest Revenue—Pacific 4 3 3 8 9


Intercompany Bonds Payable—Sommer ($500,000 x
4/5) 4 0 0 0 0 0
Discount on Intercompany Bonds Payable—
Sommer [($24,870 x 4/5) – $38,010* + $32,000] 1 3 8 8 6
Investment in Sommer Company Bonds—Pacific
($361,571 + $11,389) 3 7 2 9 6 0
Intercompany Interest Expense—Sommer
[$400,000 – $19,896†) x 0.10] 3 8 0 1 0
Gain on Extinguishment of Bonds—Sommer
[($400,000 – $19,896†) – $361,571] 1 8 5 3 3
To eliminate subsidiary’s bonds acquired by parent,
and related intercompany interest revenue and
expense; and to recognize gain on the extinguishment
of the bonds. (Income tax effects are disregarded.)

Computations:
*($500,000 – $24,870) x 0.10 x 4/5 = $38,010
†$24,870 x 4/5 = $19,896

The McGraw-Hill Companies, Inc., 2006


26 Modern Advanced Accounting, 10/e
50 Minutes, Medium
Pollard Corporation Pr. 8–8
a. Pollard Corporation
Ledger Accounts
Investment in Silver Company Bonds
Date Explanation Debit Credit Balance
20 07
Aug 31 Acquisition of $600,000 face amount
of bonds [($600,000 x 0.350344) +
($30,000 x 10.827603)] 5 3 5 0 3 4 5 3 5 0 3 4 dr

20 08
Feb 28 Accumulation of discount ($32,102 –
$30,000) 2 1 0 2 5 3 7 1 3 6 dr
Aug 31 Accumulation of discount ($32,228 –
$30,000) 2 2 2 8 5 3 9 3 6 4 dr

Intercompany Interest Revenue


Date Explanation Debit Credit Balance
20 08
Feb 28 ($535,034 x 0.06) 3 2 1 0 2 3 2 1 0 2 cr
Aug 31 ($537,136 x 0.06) 3 2 2 2 8 6 4 3 3 0 cr

Silver Company
Ledger Accounts
Intercompany Bonds Payable
Date Explanation Debit Credit Balance
20 07
Aug 31 Bonds acquired by parent company 6 0 0 0 0 0 6 0 0 0 0 0 cr

Discount on Intercompany Bonds Payable


Date Explanation Debit Credit Balance
20 07
Aug 31 Bonds acquired by parent company
($44,985 x 0.75) 3 3 7 3 9 3 3 7 3 9 dr
20 08
Feb 28 Amortization ($31,144 – $30,000) 1 1 4 4 3 2 5 9 5 dr
Aug 31 Amortization ($31,207 – $30,000) 1 2 0 7 3 1 3 8 8 dr

Intercompany Interest Expense


Date Explanation Debit Credit Balance
20 08
Feb 28 ($600,000 – $33,739) x 0.055 3 1 1 4 4 3 1 1 4 4 dr
Aug 31 ($600,000 – $32,595) x 0.055 3 1 2 0 7 6 2 3 5 1 dr

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 27
Pollard Corporation (concluded) Pr. 8–8
b. Pollard Corporation and Subsidiary
Working Paper Eliminations
August 31, 2007 and 2008
20 07
Aug 31
(a) Intercompany Bonds Payable—Silver 6 0 0 0 0 0
Discount on Intercompany Bonds Payable—
Silver 3 3 7 3 9
Investment in Silver Company Bonds—Pollard 5 3 5 0 3 4
Gain on Extinguishment of Bonds—Silver 3 1 2 2 7
To eliminate subsidiary’s bonds acquired by parent,
and to recognize gain on the extinguishment of the
bonds. (Income tax effects are disregarded.)

20 08
Aug 31
(a) Intercompany Interest Revenue—Pollard 6 4 3 3 0
Intercompany Bonds Payable—Silver 6 0 0 0 0 0
Discount on Intercompany Bonds Payable—
Silver 3 1 3 8 8
Investment in Silver Company Bonds—Pollard 5 3 9 3 6 4
Intercompany Interest Expense—Silver 6 2 3 5 1
Retained Earnings—Silver 3 1 2 2 7
To eliminate subsidiary’s bonds owned by parent
company, and related interest revenue and expense;
and to increase subsidiary’s beginning retained
earnings by amount of unamortized realized gain on
the extinguishment of the bonds. (Income tax effects
are disregarded.)

The McGraw-Hill Companies, Inc., 2006


28 Modern Advanced Accounting, 10/e
60 Minutes, Medium
Procus Corporation Pr. 8–9
a. Procus Corporation
Ledger Accounts
Intercompany Lease Receivables
Date Explanation Debit Credit Balance
20 06
Dec 31 Inception of lease [($20,000 x 3) +
$5,000] 6 5 0 0 0 6 5 0 0 0 dr
31 Receipt of first payment 2 0 0 0 0 4 5 0 0 0 dr
20 07
Dec 31 Receipt of second payment 2 0 0 0 0 2 5 0 0 0 dr
20 08
Dec 31 Receipt of third payment 2 0 0 0 0 5 0 0 0 dr
20 09
Dec 31 Receipt of purchase option 5 0 0 0 - 0 -

Unearned Intercompany Interest Revenue


Date Explanation Debit Credit Balance
20 06
Dec 31 Inception of lease ($65,000 –
$60,242) 4 7 5 8 4 7 5 8 cr
20 07
Dec 31 Interest for year [($45,000 – $4,758)
x 0.07] 2 8 1 7 1 9 4 1 cr
20 08
Dec 31 Interest for year [($25,000 – $1,941)
x 0.07] 1 6 1 4 3 2 7 cr
20 09
Dec 31 Interest for year [($5,000 – $327)
x 0.07] 3 2 7 - 0 -

Intercompany Interest Revenue


Date Explanation Debit Credit Balance
20 07
Dec 31 Interest for year 2 8 1 7 2 8 1 7 cr
31 Closing entry 2 8 1 7 - 0 -
20 08
Dec 31 Interest for year 1 6 1 4 1 6 1 4 cr
31 Closing entry 1 6 1 4 - 0 -
20 09
Dec 31 Interest for year 3 2 7 3 2 7 cr
31 Closing entry 3 2 7 - 0 -

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 29
Procus Corporation (continued) Pr. 8–9
Stoffer Company
Ledger Accounts
Leased Equipment—Capital Lease
Date Explanation Debit Credit Balance
20 06
Dec 31 Capital lease at inception 6 0 2 4 2 6 0 2 4 2 dr
20 07
Dec 31 Depreciation for Year 2007
($60,242 ÷ 6) 1 0 0 4 0 5 0 2 0 2 dr
20 08
Dec 31 Depreciation for Year 2008 1 0 0 4 0 4 0 1 6 2 dr
20 09
Dec 31 Depreciation for Year 2009 1 0 0 4 0 3 0 1 2 2 dr
20 10
Dec 31 Depreciation for Year 2010 1 0 0 4 0 2 0 0 8 2 dr
20 11
Dec 31 Depreciation for Year 2011 1 0 0 4 0 1 0 0 4 2 dr
20 12
Dec 31 Depreciation for Year 2012 1 0 0 4 2 * - 0 -

*Difference due to rounding.


Intercompany Liability under Capital Lease
Date Explanation Debit Credit Balance
20 06
Dec 31 Capital lease at inception 6 0 2 4 2 6 0 2 4 2 cr
31 First lease payment 2 0 0 0 0 4 0 2 4 2 cr
20 07
Dec 31 ($20,000 - $2,817 interest) 1 7 1 8 3 2 3 0 5 9 cr
20 08
Dec 31 ($20,000 - $1,614 interest) 1 8 3 8 6 4 6 7 3 cr
20 09
Dec 31 ($5,000 - $327 interest) 4 6 7 3 - 0 -

Intercompany Interest Expense


Date Explanation Debit Credit Balance
20 07
Dec 31 ($40,242 x 0.07) 2 8 1 7 2 8 1 7 dr
31 Closing entry 2 8 1 7 - 0 -
20 08
Dec 31 ($23.059 x 0.07) 1 6 1 4 1 6 1 4 dr
31 Closing entry 1 6 1 4 - 0 -
20 09
Dec 31 ($4,673 x 0.07) 3 2 7 3 2 7 dr
31 Closing entry - 0 -

Procus Corporation (concluded) Pr. 8–9

The McGraw-Hill Companies, Inc., 2006


30 Modern Advanced Accounting, 10/e
b. Procus Corporation and Subsidiary
Working Paper Eliminations
December 31, 2006 and 2007
20 06
Dec 31
(a) Intercompany Liability under Capital Lease—Stoffer 4 0 2 4 2
Unearned Intercompany Interest Revenue—Procus 4 7 5 8
Intercompany Sales—Procus 6 0 2 4 2
Intercompany Cost of Goods Sold—Procus 3 2 0 0 0
Intercompany Lease Receivables—Procus 4 5 0 0 0
Leased Equipment—Capital Lease—Stoffer
($60,242 – $32,000) 2 8 2 4 2
To eliminate intercompany accounts associated with
intercompany lease and to defer unrealized portion of
intercompany gross profit on sales-type lease. (Income
tax effects are disregarded.)

20 07
Dec 31
(a) Intercompany Liability under Capital Lease—Stoffer 2 3 0 5 9
Unearned Intercompany Interest Revenue—Procus 1 9 9
4 1
Retained Earnings—Procus ($60,242 – $32,000) 2 8 2 4 2
Intercompany Lease Receivables—Procus 2 5 0 0 0
Leased Equipment—Capital Lease—Stoffer
($28,242 – $4,707) 2 3 5 3 5
Depreciation Expense—Stoffer ($28,242 ÷ 6) 4 7 0 7
To eliminate intercompany accounts associated with
intercompany lease and to defer unrealized portion of
intercompany gross profit on sales-type lease. (Income
tax effects are disregarded.)

Note to Instructor: Procus’s intercompany interest


revenue and Stoffer’s intercompany interest expense
are placed on the same line of the income statement
section of the working paper for consolidated
financial statements to self-eliminate.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 31
60 Minutes, Medium
Patrick Corporation Pr. 8–10
Patrick Corporation and Subsidiary
Working Paper for Consolidated Balance Sheet
December 31, 2005
Eliminations
Patrick Shannon increase
Corporation Company (decrease) Consolidated
Assets
Cash 7 5 0 0 0 0 3 0 0 0 0 0 1 0 5 0 0 0 0
Trade accounts receivable (net) 1 9 5 0 0 0 0 4 5 0 0 0 0 2 4 0 0 0 0 0
Intercompany receivables
(payables) ( 3 0 0 0 0 0 ) 3 0 0 0 0 0
Inventories 2 1 0 0 0 0 0 9 5 0 0 0 0 (b) ( 6 0 0 0 0 ) 2 9 9 0 0 0 0
Investment in Shannon Company
common stock 2 2 0 5 0 0 0 (a)(2 2 0 5 0 0 0 )
Investment in Shannon Company
bonds 2 2 0 4 2 4 (c)( 2 2 0 4 2 4 )
Plant assets (net) 4 6 6 0 0 0 0 2 0 0 0 0 0 0 6 6 6 0 0 0 0
Other assets 5 6 4 5 7 6 3 5 0 0 0 0 9 1 4 5 7 6
Total assets 12 1 5 0 0 0 0 4 3 5 0 0 0 0 (2 4 8 5 4 2 4 ) 14 0 1 4 5 7 6

Liabilities & Stockholders’ Equity


Other current liabilities 1 4 5 0 0 0 0 9 4 5 0 0 0 2 3 9 5 0 0 0
Bonds payable 1 5 0 0 0 0 0 9 5 0 0 0 0 2 4 5 0 0 0 0
Intercompany bonds payable 2 5 0 0 0 0 (c)( 2 5 0 0 0 0 )
Common stock, $10 par 3 0 0 0 0 0 0 9 0 0 0 0 0 (a)( 9 0 0 0 0 0 ) 3 0 0 0 0 0 0
Additional paid-in capital 1 3 7 0 0 0 0 1 7 5 0 0 0 (a)( 1 7 5 0 0 0 ) 1 3 7 0 0 0 0
Retained earnings 4 8 3 0 0 0 0 1 1 3 0 0 0 0 (a)(1 1 3 0 0 0 0 ) 4 7 9 9 5 7 6
(b) ( 6 0 0 0 0 )
(c) 2 9 5 7 6
Total liabilities & stockholders’
equity 12 1 5 0 0 0 0 4 3 5 0 0 0 0 (2 4 8 5 4 2 4 ) 14 0 1 4 5 7 6

The McGraw-Hill Companies, Inc., 2006


32 Modern Advanced Accounting, 10/e
Patrick Corporation (concluded) Pr. 8–10
Patrick Corporation and Subsidiary
Working Paper Eliminations
December 31, 2005
(a) Common Stock—Shannon 9 0 0 0 0 0
Additional Paid-in Capital—Shannon 1 7 5 0 0 0
Retained Earnings—Shannon 1 1 3 0 0 0 0
Investment in Shannon Company Common
Stock—Patrick 2 2 0 5 0 0 0
To eliminate intercompany investment and related
accounts for stockholders’ equity of subsidiary on date
of business combination.

(b) Retained Earnings—Shannon 6 0 0 0 0


Inventories—Patrick ($300,000 x 0.20) 6 0 0 0 0
To eliminate intercompany sales and profit in
inventories. (Income tax effects are disregarded.)

(c) Intercompany Bonds Payable—Shannon 2 5 0 0 0 0


Investment in Shannon Company Bonds—
Patrick 2 2 0 4 2 4
Retained Earnings—Shannon 2 9 5 7 6
To eliminate subsidiary’s bonds acquired by parent,
and to include gain on the extinguishment of the bonds
in the subsidiary’s retained earnings. (Income tax
effects are disregarded.)

Note to instructor:
Because only a consolidated balance sheet is
prepared on the date of a business combination,
unrealized or realized intercompany profits
(gains) in eliminations (b) and (c) must be
debited or credited to the subsidiary’s retained
earnings.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 33
65 Minutes, Strong
Power Corporation Pr. 8–11
Power Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
For Year Ended December 31, 2005
Eliminations
Power Snyder increase
Corporation Company (decrease) Consolidated
Income Statement
Revenue:
Net sales 9 0 2 0 0 0 4 0 0 0 0 0 1 3 0 2 0 0 0
Intercompany sales 6 0 0 0 0 1 0 5 0 0 0 (c) ( 6 0 0 0 0 )
(d)( 1 0 5 0 0 0 )
Intercompany revenue
(expenses) 1 2 0 0 ( 1 2 0 0 )
Intercompany investment
income 1 3 2 8 0 (a) ( 1 3 2 8 0 )
Intercompany loss on sale
of equipment ( 2 0 0 0 ) (e) ( 2 0 0 0 )*
Total revenue 9 7 4 4 8 0 5 0 3 8 0 0 ( 1 7 6 2 8 0 ) 1 3 0 2 0 0 0
Cost and expenses: (a) 3 0 0 0
Cost of goods sold 7 2 0 0 0 0 3 0 0 0 0 0 (c) ( 7 0 0 0 ) 1 0 0 0 0 0 0
(d) ( 1 6 0 0 0 )
Intercompany cost of goods
sold 5 0 0 0 0 8 4 0 0 0 (c) ( 5 0 0 0 0 )
(d) ( 8 4 0 0 0 )
Operating expenses and
income taxes expense 1 2 4 1 4 0 9 9 8 0 0 (a) 4 0 0 2 2 4 4 4 0
(e) 1 0 0
Minority interest in net income
of subsidiary (f) 2 3 2 0 2 3 2 0
Total costs & expenses and
minority interest 8 9 4 1 4 0 4 8 3 8 0 0 ( 1 5 1 1 8 0 )† 1 2 2 6 7 6 0
Net income 8 0 3 4 0 2 0 0 0 0 ( 2 5 1 0 0 ) 7 5 2 4 0

Statement of Retained Earnings


Retained earnings, beginning of
period 2 2 0 0 0 0 5 0 0 0 0 (a) ( 5 0 0 0 0 ) 2 2 0 0 0 0
Net income 8 0 3 4 0 2 0 0 0 0 ( 2 5 1 0 0 ) 7 5 2 4 0
Subtotal 3 0 0 3 4 0 7 0 0 0 0 ( 7 5 1 0 0 ) 2 9 5 2 4 0
Dividends declared 3 6 0 0 0 9 0 0 0 (a) ( 9 0 0 0 )‡ 3 6 0 0 0
Retained earnings, end of
period 2 6 4 3 4 0 6 1 0 0 0 ( 6 6 1 0 0 ) 2 5 9 2 4 0

* A decrease in intercompany loss on sale of equipment and an increase in total revenue.


† A decrease in costs and expenses and an increase in net income.
‡ A decrease in dividends and an increase in retained earnings.

(Continued on page 291.)

The McGraw-Hill Companies, Inc., 2006


34 Modern Advanced Accounting, 10/e
Power Corporation (continued) Pr. 8–11

Power Corporation and Subsidiary


Working Paper for Consolidated Financial Statements (concluded)
For Year Ended December 31, 2005
Eliminations
Power Snyder increase
Corporation Company (decrease) Consolidated
Balance Sheet
Assets
Intercompany receivables
(payables) 1 0 0 ( 1 0 0 )
Inventories 3 0 0 0 0 0 7 5 0 0 0 (c) ( 3 0 0 0 ) 3 6 7 0 0 0
(d) ( 5 0 0 0 )
Investment in Snyder Company
common stock 1 6 4 6 8 0 (a)( 1 6 4 6 8 0 )
Investment in Snyder Company
bonds 4 0 0 0 0 (b) ( 4 0 0 0 0 )
Plant assets 7 9 4 0 0 0 2 8 0 6 0 0 (a) 4 0 0 0 1 0 8 0 6 0 0
(e) 2 0 0 0
Accumulated depreciation of
plant assets ( 2 6 0 0 0 0 ) ( 3 0 0 0 0 ) (a) 4 0 0 * ( 2 9 0 5 0 0 )
(e) 1 0 0 *
Other assets 6 1 0 9 0 0 7 3 4 0 0 6 8 4 3 0 0
Goodwill (a) 3 4 0 0 3 4 0 0
0
Total assets 1 6 4 9 6 8 0 3 9 8 9 0 0 ( 2 0 3 7 8 0 ) 1 8 4 4 8 0 0

Liabilities & Stockholders’ Equity


Dividends payable 1 6 0 0 1 6 0 0
Bonds payable 6 0 0 0 0 0 4 5 0 0 0 6 4 5 0 0 0
Intercompany bonds payable 4 0 0 0 0 (b) ( 4 0 0 0 0 )
Other liabilities 3 7 6 3 4 0 1 1 4 3 0 0 4 9 0 6 4 0
Common stock, $100 par 3 6 0 0 0 0 1 2 5 0 0 0 (a)( 1 2 5 0 0 0 ) 3 6 0 0 0 0
Additional paid-in capital 4 9 0 0 0 1 2 0 0 0 (a) ( 1 2 0 0 0 ) 4 9 0 0 0
Minority interest in net assets
of subsidiary (a) 3 7 0 0 0 3 9 3 2 0
(f) 2 3 2 0
Retained earnings 2 6 4 3 4 0 6 1 0 0 0 ( 6 6 1 0 0 ) 2 5 9 2 4 0
Total liabilities &
stockholders’ equity 1 6 4 9 6 8 0 3 9 8 9 0 0 ( 2 0 3 7 8 0 ) 1 8 4 4 8 0 0
q

* An increase in accumulated depreciation and a decrease in total assets.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 35
Power Corporation (continued) Pr. 8–11
Power Corporation and Subsidiary
Working Paper Eliminations
December 31, 2005
(a) Common Stock—Snyder 1 2 5 0 0 0
Additional Paid-in Capital—Snyder 1 2 0 0 0
Retained Earnings—Snyder 5 0 0 0 0
Intercompany Investment Income—Power 1 3 2 8 0
Plant Assets—Snyder 4 0 0 0
Goodwill—Power 3 4 0 0
Cost of Goods Sold—Snyder 3 0 0 0
Operating Expenses and Income Tax Expense—
Snyder 4 0 0
Investment in Snyder Company Common
Stock—Power 1 6 4 6 8 0
Accumulated Depreciation of Plant Assets—
Snyder 4 0 0
Dividends Declared—Snyder 9 0 0 0
Minority Interest in Net Assets of Subsidiary
($38,800 – $1,800) 3 7 0 0 0
To carry out the following:
(1) Eliminate intercompany investment and
equity accounts of subsidiary on July 1,
2005, and subsidiary dividend.
(2) Provide for depreciation and amortization
for six months ended Dec 31, 2005, on
differences between combination date
current fair values and carrying amounts
of Snyder’s identifiable net assets, as
follows:
Cost of
Goods Operating
Sold Expenses
Inventories $3,000
Equipment
depreciation $400
Totals $3,000 $400

(3) Allocate unamortized differences between


combination date current fair values and
carrying amounts to appropriate assets.
(4) Establish minority interest in net assets of
subsidiary on July 1, 2005 ($194,000 x 0.20
= $38,800), less minority interest in
dividends declared by subsidiary during six
months ended Dec. 31, 2005 ($9,000 x 0.20
= $1,800).
(Income tax effects are disregarded.)

(Continued on page 293.)

The McGraw-Hill Companies, Inc., 2006


36 Modern Advanced Accounting, 10/e
Power Corporation (concluded) Pr. 8–11
Power Corporation and Subsidiary
Working Paper Eliminations (concluded)
December 31, 2005
(b) Intercompany Bonds Payable—Snyder 4 0 0 0 0
Investment in Snyder Company Bonds—Power 4 0 0 0 0
To eliminate subsidiary’s bonds acquired by parent
company.

(c) Intercompany Sales—Power 6 0 0 0 0


Intercompany Cost of Goods Sold—Power 5 0 0 0 0
Cost of Goods Sold—Snyder ($42,000 x 0.16 2/3) 7 0 0 0
Inventories—Snyder ($18,000 x 0.16 2/3) 3 0 0 0
To eliminate intercompany sales and cost of goods
sold, and unrealized profit in ending inventories
resulting from Power’s sales to Snyder. (Income tax
effects are disregarded.)

(d) Intercompany Sales—Snyder 1 0 5 0 0 0


Intercompany Cost of Goods Sold—Snyder 8 4 0 0 0
Cost of Goods Sold—Power ($80,000 x 0.20) 1 6 0 0 0
Inventories—Power ($25,000 x 0.20) 5 0 0 0
To eliminate intercompany sales and cost of goods
sold, and unrealized profit in ending inventories
resulting from Snyder’s sales to Power. (Income tax
effects are disregarded.)

(e) Plant Assets—Snyder 2 0 0 0


Operating Expenses—Snyder [($2,000 ÷ 5) x 3/12] 1 0 0
Accumulated Depreciation of Plant Assets—Snyder 1 0 0
Intercompany Loss on Sale of Equipment—Power 2 0 0 0
To eliminate unrealized intercompany loss in
equipment and in related depreciation. (Income tax
effects are disregarded.)

(f) Minority Interest in Net Income of Subsidiary 2 3 2 0


Minority Interest in Net Assets of Subsidiary 2 3 2 0
To establish minority interest in subsidiary’s
adjusted net income for six months ended Dec. 31,
2005, as follows:
Net income of subsidiary $20,000
Adjustments in working paper eliminations:
(a) ($3,000 + $400) (3,400)
(b) ($105,000 – $84,000 – $16,000) (5,000)
Adjusted net income of subsidiary $11,600
Minority interest ($11,600 x 0.20) $ 2,320

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 37
Power Corporation (concluded) Pr. 8–11

Notes to Instructor:
(1) Goodwill on July 1, 2005, is computed as follows:
Cost of Power’s investment in Snyder $ 1 5 8 6 0 0
Carrying amount of Snyder’s identifiable net assets
($125,000 + $12,000 + $50,000) $ 1 8 7 0 0 0
Add: Amounts applicable to Snyder’s inventories and equipment
($3,000 + $4,000) 7 0 0 0
Subtotal $ 1 9 4 0 0 0
Percentage ownership acquired by Power 8 0 % 1 5 5 2 0 0
Goodwill $ 3 4 0 0

(2) Intercompany receivables (payables) consist of the following: Power Snyder


Accounts receivable (payable) $ 5 5 0 0 $ ( 5 5 0 0 )
( 1 3 0 0 0 ) 1 3 0 0 0
Interest receivable (payable) 1 2 0 0 ( 1 2 0 0 )
Dividends receivable (payable) 6 4 0 0 ( 6 4 0 0 )
Net intercompany receivables (payables) $ 1 0 0 $ ( 1 0 0 )

(3) The Investment in Snyder Company Common Stock ledger account


balance is reconciled as follows:
Cost of Power’s investment $ 1 5 8 6 0 0
Add: Intercompany investment income [($20,000 – $3,000 – $400) x
0.80] 1 3 2 8 0
Subtotal $ 1 7 1 8 8 0
Less: Dividends ($9,000 x 0.8) 7 2 0 0
Balance, Dec. 31, 2005 $ 1 6 4 6 8 0

The McGraw-Hill Companies, Inc., 2006


38 Modern Advanced Accounting, 10/e
65 Minutes, Strong
Pritchard Corporation Pr. 8–12
a. Pritchard Corporation
Adjusting Entries
December 31, 2005
Inventories (in Transit) 6 0 0 0
Intercompany Accounts Payable 6 0 0 0
To record merchandise in transit from Spangler Co.

Intercompany Dividends Receivable 4 5 0 0


Investment in Spangler Company Common
Stock 4 5 0 0
To record dividend declared by Spangler Company
Dec. 31, 2005, payable Jan. 10, 2006 (3,000 x $1.50 =
$4,500).

Spangler Company
Adjusting Entries
December 31, 2005
Intercompany Notes Payable 3 0 0 0
Intercompany Interest Payable 1 8 0
Interest Expense 1 8 0
Notes Payable 3 0 0 0
Interest Payable 1 8 0
Intercompany Interest Expense 1 8 0
To set up accounts for note payable and related
interest discounted with bank by Pritchard Corporation
(the payee).
Interest expense: $3,000 x 0.12 x 6/12 = $180.

Note to Instructor: After the foregoing adjusting entries


are posted, intercompany receivables (payables) are
as follows:
Pritchard Spangler
Accounts receivable (payable) $ 1 6 0 0 0 $ ( 1 6 0 0 0 )
( 6 0 0 0 ) 6 0 0 0
Notes receivable (payable) 5 0 0 0 ( 5 0 0 0 )
Interest receivable (payable) ($5,000 x 0.12 x 6/12) 3 0 0 ( 3 0 0 )
Dividends receivable (payable) 4 5 0 0 ( 4 5 0 0 )
Net intercompany receivables (payables) $ 1 9 8 0 0 $ ( 1 9 8 0 0 )

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 39
Pritchard Corporation (continued) Pr. 8–12
b. Pritchard Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
For Year Ended December 31, 2005
Eliminations
Pritchard Spangler increase
Corporation Company (decrease) Consolidated
Income Statement
Revenue:
Net sales 4 9 9 8 5 0 2 9 8 2 4 0 7 9 8 0 9 0
Intercompany sales 4 0 0 0 0 6 0 0 0 (b) ( 4 0 0 0 0 )
(c) ( 6 0 0 0 )
Intercompany revenue
(expenses) 3 0 0 ( 3 0 0 )
Intercompany investment
income 1 0 2 0 0 (a) ( 1 0 2 0 0 )
Intercompany gain on sale of
equipment 2 0 0 0 (d) ( 2 0 0 0 )
Total revenue 5 5 0 3 5 0 3 0 5 9 4 0 ( 5 8 2 0 0 ) 7 9 8 0 9 0
Cost and expenses:
Cost of goods sold 4 0 0 0 0 0 2 2 5 0 0 0 (b) ( 7 5 0 0 ) 6 1 7 5 0 0
Intercompany cost of
goods sold 3 0 0 0 0 4 8 0 0 (b) ( 3 0 0 0 0 )
Operating expenses and (c) ( 4 8 0 0 )
income taxes expense 8 8 4 5 0 6 5 9 4 0 (d) ( 1 0 0 ) 1 5 4 2 9 0
Total costs and expenses 5 1 8 4 5 0 2 9 5 7 4 0 ( 4 2 4 0 0 )* 7 7 1 7 9 0
Net income 3 1 9 0 0 1 0 2 0 0 ( 1 5 8 0 0 ) 2 6 3 0 0

Statement of Retained Earnings


Retained earnings, beginning
of year 8 9 1 0 0 2 2 1 0 0 (a) ( 2 2 1 0 0 ) 8 9 1 0 0
Net income 3 1 9 0 0 1 0 2 0 0 ( 1 5 8 0 0 ) 2 6 3 0 0
Subtotal 1 2 1 0 0 0 3 2 3 0 0 ( 3 7 9 0 0 ) 1 1 5 4 0 0
Dividends declared 4 5 0 0 (a) ( 4 5 0 0 )†
Retained earnings, end of year 1 2 1 0 0 0 2 7 8 0 0 ( 3 3 4 0 0 ) 1 1 5 4 0 0

* A decrease in cost and expenses and an increase in net income.


† A decrease in dividends and an increase in retained earnings.

(Continued on page 297.)

The McGraw-Hill Companies, Inc., 2006


40 Modern Advanced Accounting, 10/e
Pritchard Corporation (continued) Pr. 8–12
Pritchard Corporation and Subsidiary
Working Paper for Consolidated Financial Statements (concluded)
For Year Ended December 31, 2005
Eliminations
Pritchard Spangler increase
Corporation Company (decrease) Consolidated
Balance Sheet
Assets
Intercompany receivables
(payables) 1 9 8 0 0 ( 1 9 8 0 0 )
Inventories 8 7 0 5 0 4 9 8 4 0 (b) ( 2 5 0 0 ) 1 3 3 1 9 0
(c) ( 1 2 0 0 )
Investment in Spangler
Company common stock 1 0 7 8 0 0 (a)( 1 0 7 8 0 0 )
Plant assets 8 3 2 0 0 4 3 5 0 0 (d) ( 2 0 0 0 ) 1 2 4 7 0 0
Accumulated depreciation of
plant assets ( 1 2 8 0 0 ) ( 9 3 0 0 ) (d) ( 1 0 0 )* ( 2 2 0 0 0 )
Other assets 7 1 1 5 0 5 6 2 0 0 1 2 7 3 5 0
Total assets 3 5 6 2 0 0 1 2 0 4 4 0 ( 1 1 3 4 0 0 ) 3 6 3 2 4 0

Liabilities & Stockholders’ Equity


Liabilities 5 6 7 0 0 1 2 6 4 0 6 9 3 4 0
Common stock, $10 par 1 2 0 0 0 0 1 2 0 0 0 0
Common stock, $20 par 6 0 0 0 0 (a) ( 6 0 0 0 0 )
Additional paid-in capital 5 8 5 0 0 2 0 0 0 0 (a) ( 2 0 0 0 0 ) 5 8 5 0 0
Retained earnings 1 2 1 0 0 0 2 7 8 0 0 ( 3 3 4 0 0 ) 1 1 5 4 0 0
Total liabilities &
stockholders’ equity 3 5 6 2 0 0 1 2 0 4 4 0 ( 1 1 3 4 0 0 ) 3 6 3 2 4 0

* A decrease in accumulated depreciation and an increase in total assets.

The McGraw-Hill Companies, Inc., 2006


Solutions Manual, Chapter 8 41
Pritchard Corporation (concluded) Pr. 8–12
Pritchard Corporation and Subsidiary
Working Paper Eliminations
December 31, 2005
(a) Common Stock—Spangler 6 0 0 0 0
Additional Paid-in Capital—Spangler 2 0 0 0 0
Retained Earnings—Spangler 2 2 1 0 0
Intercompany Investment Income—Pritchard 1 0 2 0 0
Investment in Spangler Company Common
Stock—Pritchard 1 0 7 8 0 0
Dividends Declared—Spangler 4 5 0 0
To eliminate intercompany investment, related
accounts for stockholders’ equity of subsidiary, and
investment income from subsidiary.

(b) Intercompany Sales—Pritchard 4 0 0 0 0


Intercompany Cost of Goods Sold—Pritchard 3 0 0 0 0
Cost of Goods Sold—Spangler ($30,000 x 0.25) 7 5 0 0
Inventories—Spangler ($10,000 x 0.25) 2 5 0 0
To eliminate intercompany sales and cost of goods
sold, and unrealized profit in ending inventories
resulting from Pritchard’s sales to Spangler. (Income
tax effects are disregarded.)

(c) Intercompany Sales—Spangler 6 0 0 0


Intercompany Cost of Goods Sold—Spangler 4 8 0 0
Inventories—Pritchard ($6,000 x 0.20) 1 2 0 0
To eliminate intercompany sales and cost of goods
sold, and unrealized profit in ending inventories
resulting from Spangler’s sales to Pritchard. (Income
tax effects are disregarded.)

(d) Intercompany Gain on Sale of Equipment—Spangler 2 0 0 0


Accumulated Depreciation of Plant Assets—Pritchard
($2,000 ÷ 10 x 6/12) 1 0 0
Plant Assets—Pritchard 2 0 0 0
Operating Expenses—Pritchard 1 0 0
To eliminate unrealized intercompany gain in
equipment and in related depreciation. (Income tax
effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006


42 Modern Advanced Accounting, 10/e