Solution Manual: (Updated Through November 11, 2013)

Solution Manual
(Updated through November 11, 2013)
Chapter 4 - Consolidated Financial Statements and Intercompany

Transactions
1. For any sale, the sellers sale price of the asset becomes the buyers purchase cost. In the
sale process, the asset sold is written up or down in value from its original cost to its market
value at the time of sale, and that write-up or down in the carrying amount of the asset is
reflected in the income statement as profit or loss (i.e., gross profit or loss on inventory
sales and gain or loss on sales of land and depreciable assets). Since companies within a
controlled group are viewed as one entity under GAAP, the sale is not recognized until the
asset is sold outside of the controlled group. It is only then that profit or loss has been
earned by the controlled group and can be recognized in the income statement.
2. FASB ASC 810-10-45-1 states the following: In the preparation of consolidated financial
statements, intra-entity balances and transactions shall be eliminated. This includes intra-
entity open account balances, security holdings, sales and purchases, interest, dividends,
and so forth. As consolidated financial statements are based on the assumption that they
represent the financial position and operating results of a single economic entity, such
statements shall not include gain or loss on transactions among the entities in the
consolidated group. Accordingly, any intra-entity profit or loss on assets remaining within
the consolidated group shall be eliminated.
3. We need only defer the deferred intercompany profit on the inventories that have not been
resold during the period. The amount of deferred profit to be deferred, then, is equal to the
dollar amount of the deferred profit on the intercompany sale multiplied by the percentage
of inventories that are unsold at the end of the period:
$ Profit to defer = $ Total deferred profit X % unsold inventories
4. Inventories that remain at the end of the accounting period are typically resold in the
following period, while land and depreciable assets are typically held for longer periods of
time. The deferral and recognition sequence for inventories usually involves the recognition
of the deferred profit from the prior period and the deferral of the profit on current period
sales. For land and depreciable assets, the profit is deferred in the period of sale and must
be deferred as well in future periods for as long as the asset is held within the controlled
group.
Cambridge Business Publishers, 2014

Solutions Manual, Chapter 4 4-1
5. In the case of wholly owned subsidiaries, there is no difference in the elimination process
for upstream versus downstream transactions. This is because all deferred profit must be
removed from the combined financial statements, regardless of the direction of the
transaction (the upstream-downstream distinction becomes extremely important in
Chapter 5, however, where we introduce the concept of non-wholly owned subsidiaries and
the resulting non-controlling interest reported in consolidated financial statements).
6. The net effect of these two entries is this:
Sales xxx
Cost of goods sold xxx
Inventories xxx
These two entries reverse the effects of the inventory sale. Sales and Cost of Goods Sold for
the intercompany sale are eliminated and the write-up of inventories as a result of the sale
is reversed.
7. In the period of sale, the gain is reversed and the Land account is reduced to its pre-sale
balance. In subsequent periods, and while the land is held within the controlled group, we
must reduce Retained Earnings to remove the gain from the land sale that remains in that
account from the prior period.
8. The first line of the entry reverses the Gain on Sale so that the profit is not included in the
consolidated income statement. Then, the Equipment account and its related accumulated
depreciation are restored to their pre-sale amounts.
9. The depreciation reported by the purchaser will be different from that which the seller
would have reported had the sale not occurred. This entry adjusts the reported
Depreciation Expense (and the related Accumulated Depreciation) in the consolidated
income statement to the correct pre-sale amount.
10. Answer: d
All of the statements are false except for answer d.

4-2 Advanced Accounting by Halsey & Hopkins, 2nd Edition
11. Answer: b
When the intercompany inventory is sold to an unaffiliated party in 2013, the recorded
revenues is correctly stated in the consolidated financial statements without any need for a
consolidating entry. In contrast, cost of goods sold is dependent on the stated inventory
levels at the beginning of the year and the end of the year. This is illustrated by the
following identity:
Beginning inventory
+ Purchases
- Ending inventory
= Cost of goods sold
Thus, in this case, the 2013 cost of goods sold would be too high without an adjustment
removing the profits that were in beginning inventory.
12. Answer: c
The full amount of the intercompany sale that took place during 2013 must be eliminated
from revenues in preparation of the consolidated financial statements. Thus, consolidated
revenues equal $3,150,000 (i.e., $2,100,000 + $1,450,000 - $400,000).
13. Answer: d
Given that there are no intercompany sales in either beginning or ending inventories, gross
profit is unaffected by the intercompany sales. Consolidated gross profit equals $1,385,000
(i.e., $735,000 + $650,000).
14. Answer: b
The full amount of the intercompany sale that took place during 2013 must be eliminated
from revenues in preparation of the consolidated financial statements. Thus, consolidated
revenues equal $3,987,500 (i.e., $2,625,000 + $1,812,500 - $450,000).

15. Answer: a
Gross profit is affected for profits included in inventories purchased from affiliated
companies and that are included in beginning and/or ending inventories. Intercompany
profits in beginning inventory increase the gross profit of the period in which they are sold.
Intercompany profits in ending inventory decrease the gross profit of the period. In this
case, there is only intercompany profit in ending inventory. The intercompany sales were
from the parent to the subsidiary; thus, the parents gross profit rate is relevant. The
parents gross profit rate is 40% (i.e., $1,050,000 / $2,625,000). Therefore, there is $54,000
(i.e., 40% x $135,000) of intercompany profit in the subsidiarys ending inventory. This
means that consolidated gross profit is $54,000 lower than the unadjusted amount.
Consolidated gross profit equals $1,808,500 (i.e., $1,050,000 + $812,500 - $54,000).
16. Answer: a
Under the full equity method, all intercompany profits (both upstream and downstream)
are eliminated in the determination of the pre-consolidation income from subsidiary and
the investment in subsidiary accounts. For downstream sales, the relevant profit margin is
the profit earned by the parent on the intercompany sales to the subsidiary. In this case,
the profit margin on downstream sales is 35% (i.e., $980,000 / $2,800,000). The
intercompany inventories still held by the subsidiary equals $62,500 (i.e., 25% x $250,000).
The profit that must be deferred equals $21,875 (i.e., 35% x $62,500). Therefore, the
income from subsidiary recognized by the parent under the full equity method should be
$233,125 (i.e., $255,000 - $21,875).
17. Answer: c
Under the full equity method, all intercompany profits (both upstream and downstream)
are eliminated in the determination of the pre-consolidation income from subsidiary and
the investment in subsidiary accounts. For upstream sales, the relevant profit margin is
the profit earned by the subsidiary on the intercompany sales to the parent. In this case,
the profit margin on upstream sales is 40% (i.e., $760,000 / $1,900,000). The intercompany
inventories still held by the parent equal $62,500 (i.e., 25% x $250,000). The profit that
must be deferred equals $25,000 (i.e., 40% x $62,500). Therefore, the income from
subsidiary recognized by the parent under the full equity method should be $230,000 (i.e.,
$255,000 - $25,000).

18. Answer: d
For a 100% owned subsidiary when there is no acquisition accounting premium,

consolidated net income can be determined based on the following incremental
components:
Parents stand alone net income

+ Subsidiarys stand alone net income
+ Profit deferred in prior years on inventory sold in the current year to non-affiliate
- Profit deferred in current year on inventory retained in affiliated group at end of period
= Consolidated net income
This results in the following:
$300,000
+ $160,000
+ $4,500 (i.e., 30% x $15,000)
- $3,600 (i.e., 30% x $12,000)
= $460,900
19. Answer: a
Intercompany sales among an affiliated group are 100% eliminated in the determination of
consolidated revenues. We can infer the amount eliminated by adding the pre-
consolidation parent and subsidiary revenues and subtracting consolidated revenues:
$2,800,000 + $1,900,000 - $4,100,000 = $600,000
20. Answer: b
We can determine the amount of intercompany profit in the ending inventories of the
affiliated companies by adding the pre-consolidation ending inventories of the parent and
subsidiary and then subtracting the consolidated ending inventory: $130,000 + $90,000 -
$204,250 = $15,750

21. Answer: a
This problem uses the answers to the preceding two multiple choice questions as inputs to
the answer. The correct solution can be inferred via comparison of pre-consolidation cost
of goods sold (CGS) for the parent and the subsidiary versus consolidate cost of goods sold.
The net consolidation adjustment of CGS is equal to a decrease of CGS equal to $598,250
(i.e., $1,820,000 + $1,140,000 - $2,361,750). Using the following CGS identity, beginning
inventory is the only unknown:
Consolidation adjustment
Beginning inventory -?
+ Purchases - $600,000 (MC#19: $2,800,000 + $1,900,000 - $4,100,000)
- Ending inventory - $15,750 (MC#20: $130,000 + $90,000 -$204,250)
= Cost of goods sold - $598,250 (i.e., $1,820,000 + $1,140,000 - $2,361,750)
Thus, we know that the adjustment for the recognition of deferred intercompany profits in
beginning inventory (i.e., for intercompany items sold in the current period) must have
been $14,000.
22. Answer: d
All intercompany payables and receivables among an affiliated group are 100% eliminated in
the determination of consolidated balances. We can infer the amount eliminated by adding the
pre-consolidation parent and subsidiary accounts payable and subtracting consolidated
accounts payable: $80,000 + $55,000 - $103,000 = $32,000
23. Answer: d
Under the full equity method, 100% of the profit on the intercompany sale of land would
have been removed from the investment account in the year of the transaction (i.e., 2012).
In 2013, in order to prepare the consolidated financial statements, the parent company will
need to remove the deferred gain from the investment account because the investment
account is always adjusted to zero in the consolidated financial statements. This entry will
also remove the gain from the land account because the gain was not actually removed
from the land account. The adjustment in 2013 would be as follows:
[I] [Igain] Investment in Subsidiary 100

consolidation entry Land 100
in the years after (to defer the gain on sale and to restate the Land
intercompany sale account to its pre-sale reported amount)

24. Answer: b
When affiliated companies transfer depreciable noncurrent assets, the resulting

consolidated financial statements are prepared to look like the intercompany transaction
never happened. In this case, the original cost of the equipment was $180,000 to the
parent and it was depreciated assuming a 12-year useful life. This means the parent
company was recognizing $15,000 per year in depreciation expense prior to the
intercompany transfer. This means, if we assume the intercompany transfer never
occurred, then the parent would have recognized an additional year of depreciation and the
accumulated depreciation account at December 31, 2013 would have equaled $60,000 (i.e.,
$45,000 + $15,000). Thus, the net equipment balance would be $120,000 (i.e., $180,000 -
$60,000), which is the amount that should be reported in the consolidated financial
statements.
25. Answer: b
The equipment had a carrying value on the parents books equal to $144,000 (i.e., $180,000
- $36,000). The parent sold the equipment to the subsidiary; thus, during 2013, the parent
recorded in its pre-consolidation income statement a $24,000 loss on the intercompany
equipment transfer. On December 31, 2013, the equipment will have a carrying value of
$120,000 on the subsidiarys pre-consolidation balance sheet, with no accumulated
depreciation. The consolidating journal entry will need to remove the loss and reestablish
the pre-intercompany-transfer balances. The consolidating entry is as follows:
[I] [Igain] Equipment 60,000

consolidation entry Accum. Deprec. 36,000
in the year of Loss on Equip. Sale 24,000
intercompany sale (to defer the loss on sale and to restate the equip
and A.D. to pre-I-C-sale reported amount)

26. a. If the parent uses the equity method to account for its Equity Investment, the amount of
Equity Income it will report this year is equal to the following (the subsidiary is wholly
owned and there is no AAP, hence no amortization):
Net income of subsidiary $500,000

+ 2012 deferred profit ($50,000x30%x9%) 1,350
- 2013 deferred profit ($75,000x32%x10%) (2,400)
Equity Income 2013 $498,950
Investment in subsidiary @ BOY 1,350
Cost of goods sold 1,350
[Icogs] (Reverses prior year profit elimination from investment in subsidiary
and recognizes deferred profit from inventories in current period
($50,000x30%x9%))
Sales 75,000
[Isales] Cost of goods sold 75,000
(Eliminates current period intercompany Sales and Cost of Goods Sold)
Investment in subsidiary @ BOY 1,350
[Icogs] (Reverses prior year profit elimination from investment in subsidiary
and recognizes deferred profit from inventories in current period
($50,000x30%x9%))
[Icogs] Inventory 2,400
(Defer current period deferred profit on intercompany sale of
inventories ($75,000x32%x10%))
Accounts payable 25,000
[Ipay] Accounts receiable 25,000
(Eliminates intercompany receivable and payable)

27. a. If the parent uses the equity method to account for its Equity Investment, the amount of
Equity Income it will report this year is equal to the following (the subsidiary is wholly
owned and there is no AAP, hence no amortization):
Net income of subsidiary $300,000

+ 2012 deferred profit 13,500
- 2013 deferred profit (18,000)
Equity Income 2013 $295,500
b. (Note to instructors: if the parent company used the partial equity method instead of
the full equity method, consolidating entry [Icogs] would include a debit to retained earnings
of the parent at the BOY, instead of a debit to the Investment at the BOY.)
Investment in subsidiary @BOY 13,500

[Icogs] Cost of goods sold 13,500
(Reverses prior year profit elimination from investment in subsidiary and recognizes
deferred profit from inventories in current period)
Sales 50,000
[Isales]
(Eliminates current period intercompany Sales and Cost of Goods Sold)

[Icogs] Inventory 18,000
(Defer current period deferred profit on intercompany sale of inventories)
Accounts payable 20,000

[Ipay] Accounts receivable 20,000
(Eliminates intercompany receivable and payable)

28. (Note to instructors: if the parent company used the partial equity method instead of the
full equity method, consolidating entries b. and [Igain] in c. would include a debit to retained
earnings of the parent at the BOY, instead of a debit to the Investment at the BOY.)
a. Gain on sale 30,000

Land 30,000
(to defer the gain on sale and to restate the Land
account to its pre-sale reported amount)
b. Investment in subsidiary @BOY 30,000

Land 30,000
(Reverses prior year profit elimination from
investment in subsidiary and to restate the Land
account to its pre-sale reported amount)
c. Cash 190,000
Land 130,000
Gain on sale 60,000
(to record the sale of land to an unaffiliated company)
[Igain] Investment in subsidiary @BOY 30,000

Gain on sale 30,000
(Reverses prior year profit elimination from
investment in subsidiary and shifts the profit into the
year of sale to unaffiliated party)
d. The consolidated income statement will report a Gain on Sale of $90,000, the difference
between the sale price of the land ($190,000) and its original cost ($100,000). This is the
result of the recognition of the gain on sale of $60,000 by the subsidiary and the
recognition of the deferred profit of $30,000.

29. (Note to instructors: if the parent company used the partial equity method instead of the
full equity method, consolidating entries in part b. and [Igain] in part c. would include a debit
to retained earnings of the parent at the BOY, instead of a debit to the Investment at the
BOY.)
a. Gain on sale 40,000

Land 40,000
(to defer the gain on sale and to restate the Land account
to its pre-sale reported amount)
b. Investment in subsidiary @BOY 40,000

Land 40,000
(Reverses prior year profit elimination from investment in
subsidiary and to restate the Land account to its pre-sale
reported amount)
c. Cash 175,000
Land 120,000
Gain on sale 55,000
(to record the sale of land to an unaffiliated company)

Gain on sale 40,000
(Reverses prior year profit elimination from investment
in subsidiary and shifts the profit into the year of sale to
unaffiliated party)
d. The subsidiary will report a Gain on Sale of $55,000 ($175,000 - $120,000). In addition,
the [I] consolidation journal entry in part c recognizes an additional $40,000 of Gain on
Sale. The total Gain on Sale of $95,000 ($55,000 + $40,000) represents the difference
between the ultimate sale price of the land ($175,000) and its original cost ($80,000).

30. Sale of depreciable assets - (Note to instructors: if the parent company used the partial
equity method instead of the full equity method, consolidating entry [Igain] in part d. would
include a debit to retained earnings of the parent at the BOY, instead of a debit to the
Investment at the BOY.)
a. Depreciation expense (subsidiary) = $140,000 / 10 = $14,000 per year.

Depreciation expense (parent) = $120,000 / 6 = $20,000 per year.
b. Net book value on date of sale = $140,000 (4 x $14,000) = $84,000

Gain on sale = $120,000 - $84,000 = $36,000
c. The Equipment (cost) write-down during the sale = $140,000 - $120,000 = $20,000.
Given the Accumulated Depreciation of $56,000 (4 x $14,000) and the Gain on Sale of
$36,000 (part b), the [I] consolidation journal entries in 2011:
[Igain] Gain on sale of equipment 36,000

Equipment 20,000
Accumulated depreciation 56,000
(to adjust Gain, Equipment, and Accumulated Depreciation on the date of the
intercompany transfer of equipment given that the transaction occurred at the
beginning of the year, usage of the equipment for the year must be reflected in a
separate entry)
[Idep] Accumulated depreciation 6,000

Depreciation expense 6,000
(to eliminate the excess depreciation expense recorded by the subsidiary, and to
adjust accumulated depreciation from the BOY amount to the EOY amount)
d. The excess depreciation expense is $6,000 ($20,000 - $14,000) per year. By the
beginning of 2013, the Gain on Sale has been reduced by $12,000 (2 x $6,000). So, the
retained earnings of the subsidiary must be reduced by only $24,000 ($36,000 -
$12,000) of the deferred Gain on Sale. Likewise, only $44,000 ($56,000 2 x $6,000) of
the Accumulated Depreciation on the date of sale must be adjusted. The resulting [Igain]
and [Idep] holding period consolidation journal entries are,

Equipment 20,000
(Reverses prior year unconfirmed profit elimination from investment, and
restates Equipment and Accumulated Depreciation as if intercompany
transaction never occurred)
(to reverse the excess depreciation expense for the period)

d. continued
The [Igain] entry reverses prior year unconfirmed profit elimination from investment,
adjusts the Equipment (at cost) to its pre-sale amount, and adjusts the Accumulated
Depreciation for the difference between the balance that the subsidiary would have
reported had the sale not taken place and the amount that the parent currently reports.
The [Idep] entry reduces the current period depreciation expense, reported by the parent
at $20,000, to the amount that the subsidiary would have reported ($14,000) had the
sale not taken place.
e. We will need to make the [Igain] and [Idep] consolidation journal entries for the remaining
useful life of the equipment. At the end of its 10-year useful life, the equipment will be
fully depreciated. At that point, the Gain on Sale reported by the subsidiary ($36,000)
will have been completely offset by the additional depreciation expense reported by the
parent ($36,000 = 6 x $6,000 per year). The cumulative consolidated net income will be
the same as the combined entity would have reported had the sale not taken place.
However, even after the equipment is fully depreciated, the [I] consolidation journal
entry will continue to gross up the equipment and accumulated depreciation to the
pre-intercompany sale levels until the equipment is retired or disposed.
31. Sale of depreciable assets - (Note to instructors: if the parent company used the partial
equity method instead of the full equity method, consolidating entry [Igain] in part d.
would include a debit to retained earnings of the parent at the BOY, instead of a debit to
the Investment at the BOY.)
a. Depreciation expense (parent) = $80,000 / 10 = $8,000 per year.

Depreciation expense (subsidiary) = $70,000 / 7 = $10,000 per year.
b. Net book value on date of sale = $80,000 (3 x $8,000) = $56,000

Gain on sale = $70,000 - $56,000 = $14,000
c. The Equipment (cost) write-down during the sale = $80,000 - $70,000 = $10,000. Given
the Accumulated Depreciation of $24,000 (3 x $8,000) and the Gain on Sale of $14,000
(part b), the [I] consolidation journal entries in 2009:
[Igain] Gain on sale of equipment 14,000

Equipment 10,000
(to adjust Gain, Equipment, and Accumulated Depreciation on the date of the
intercompany transfer of equipment given that the transaction occurred at the
beginning of the year, usage of the equipment for the year must be reflected in
a separate entry)
(to eliminate the excess depreciation expense recorded by the subsidiary, and to
adjust accumulated depreciation from the BOY amount to the EOY amount)

d. The excess depreciation expense is $2,000 ($10,000 - $8,000) per year. By the beginning
of 2013, the Gain on Sale has been reduced by $8,000 (4 x $2,000). So, the retained
earnings of the subsidiary must be reduced by only $6,000 ($14,000 - $8,000) of the
deferred Gain on Sale. Likewise, only $16,000 ($24,000 4 x $2,000) of the Accumulated
Depreciation on the date of sale must be adjusted. The resulting [Igain] and [Idep] holding
period consolidation journal entries are,

Equipment 10,000
(Reverses prior year unconfirmed profit elimination from investment, and
restates Equipment and Accumulated Depreciation as if intercompany
transaction never occurred)
(to reverse the excess depreciation expense for the period)
The [Igain] entry reverses prior year unconfirmed profit elimination from investment,
adjusts the Equipment (at cost) to its pre-sale amount, and adjusts the Accumulated
Depreciation for the difference between the balance that the subsidiary would have
reported had the sale not taken place and the amount that the parent currently reports.
The [Idep] entry reduces the current period depreciation expense, reported by the parent
at $10,000, to the amount that the subsidiary would have reported ($8,000) had the
sale not taken place.
e. We will need to make the [Igain] and [Idep] consolidation journal entries for the remaining
useful life of the equipment. At the end of its 10-year useful life, the equipment will be
fully depreciated. At that point, the Gain on Sale reported by the subsidiary ($14,000)
will have been completely offset by the additional depreciation expense reported by the
parent ($14,000 = 7 x $2,000 per year). The cumulative consolidated net income will be
the same as the combined entity would have reported had the sale not taken place.
However, even after the equipment is fully depreciated, the [I] consolidation journal
entry will continue to gross up the equipment and accumulated depreciation to the
pre-intercompany sale levels until the equipment is retired or disposed.

32. a. The statement Represents Caterpillar Inc. and its subsidiaries with Financial Products
accounted for on the equity basis means that the parent Caterpillar, Inc., and all of its
subsidiaries other than Financial Products are consolidated in the heading Machinery &
Engines. The Financial Products subsidiary is reported separately and is represented on
the Machinery & Engines consolidated balance sheet (the balance sheet is not
presented with the problem) as an Equity Investment in the same manner in which we
have represented the subsidiary on the parents balance sheet in the text.
b. This adjustment eliminates the intercompany sale of financial products from Financial
Products to Machinery and Engines.
c. If the sale of products or services was made on account, we will expect to see
eliminations for intercompany receivables and payables.
d. The statement Elimination of Financial Products' profit due to equity method of

accounting represents our elimination of Equity Income in the consolidation process.
Both the Equity Investment and the related Equity Income will be eliminated from the
consolidated balance sheet and income statement, respectively, and will be replaced by
the revenues, expenses, assets and liabilities to which they relate. The consolidating
adjustment discussed in footnote #7 is our [C] entry.
33. a. The $908 elimination column relates to sales of products and/or services from the
Financial Services Operations entity to the Motorcycles & Related Products Operations.
These intercompany revenues must be eliminated in the consolidation process.
b. If the sale of products or services were made on account, we would expect to see
eliminations for intercompany receivables and payables.

34.
a. Equity Income
Subsidiary net income $109,620
Recognition of prior year deferral of gross profit 12,597
Deferral of current year gross profit (19,380)
Depreciation of [A] asset (35,000)
Equity Income $67,837
b. Equity Investment
BOY subsidiary retained earnings $404,550
BOY subsidiary common stock 52,200
BOY subsidiary APIC 65,250
BOY Unamortized AAP 395,000*
BOY Deferred profit (12,597)
Equity income 67,837
Dividends (14,251)
Equity investment $957,989
*BOY AAP assets: dep/amort

PPE, net @ BOY 100,000 - 3 x 5,000 = 85,000
Customer list @ BOY 175,000 - 3 x 17,500 = 122,500
Royalty Agreement @ BOY 125,000 - 3 x 12,500 = 87,500
Goodwill 100,000 = 100,000
BOY AAP assets 500,000 35,000 395,000

c.
[C] Equity investment income 67,837
Dividends 14,251
Equity investment 53,586
[E] Common stock (S) - @BOY 52,200

APIC (S) - @BOY 65,250
Retained earnings (S) @BOY 404,550
Equity investment - @BOY 522,000
[A] PPE, net @ BOY 85,000

Customer List @ BOY 122,500
Royalty Agreement @ BOY 87,500
Goodwill 100,000
Equity Investment - @BOY 395,000
[D] Operating expenses 35,000

PPE, net @ BOY 5,000
Customer list @ BOY 17,500
Royalty agreement @ BOY 12,500
[Icogs] Equity investment 12,597

[Isales] Sales 68,000


Inventory 19,380
[Ipay] Accounts payable 27,200

Accounts receivable 27,200

d.
Elimination entries
Parent Sub Dr Cr Consolidated
Income statement:
Sales $4,370,000 $783,000 [Isales] 68,000 $5,085,000
Cost of goods sold (3,059,000) (469,800) [Icogs] 19,380 [Icogs] 12,597 (3,467,583)
[Isales] 68,000
Gross profit 1,311,000 313,200 1,617,417
Equity income 67,837 [C] 67,837 0
Operating expenses (830,300) (203,580) [D] 35,000 (1,068,880)
Net income $ 548,537 $109,620 $ 548,537
Statement of retained earnings:
BOY retained earnings $2,195,488 $404,550 [E] 404,550 $2,195,488
Net income 548,537 109,620 548,537
Dividends (126,164) (14,251) [C] 14,251 (126,164)
Ending retained earnings $2,617,861 $499,919 $2,617,861
Balance sheet:
Assets
Cash $ 650,639 $ 253,087 $ 903,726
Accounts receivable 559,360 181,656 [Ipay] 27,200 713,816
Inventory 847,780 233,334 [Icogs] 19,380 1,061,734
Building, net 4,078,084 431,694 [A] 85,000 [D] 5,000 4,589,778
Customer List @ BOY [A] 122,500 [D] 17,500 105,000
Royalty agreement @ BOY [A] 87,500 [D] 12,500 75,000
Goodwill [A] 100,000 100,000
Equity investment 957,989 [Icogs] 12,597 [C] 53,586 0
[E] 522,000
[A] 395,000
$7,093,852 $1,099,771 $7,549,054
Liabilities and stockholders equity

Accounts Payable $ 327,313 $ 93,459 [Ipay] 27,200 $ 393,572
Other current liabilities 403,228 127,943 531,171
Long-term liabilities 2,500,000 261,000 2,761,000
Common stock 714,495 52,200 [E] 52,200 714,495
APIC 530,955 65,250 [E] 65,250 530,955
Retained earnings 2,617,861 499,919 2,617,861
$7,093,852 $1,099,771 1,147,014 1,147,014 $7,549,054

35.
a. Equity Income
BOY deferred profit (19,137)
Dividends (28,201)
Equity investment $1,314,788

Patent @ BOY 175,000 - 2 x 17,500 = 140,000
BOY AAP assets 175,000 17,500 140,000

c.
[C] Equity income 189,126
Dividends 28,201

APIC (S) - @BOY 129,125
Equity investment - @BOY 1,033,000
[A] Patent @ BOY 140,000

Equity Investment - @BOY 140,000

Patent @ BOY 17,500
[Icogs] Equity Investment @BOY 19,137



Inventory 29,441


d.
Elimination entries
Income statement:
Sales $8,220,000 $1,549,500 [Isales] 103,300 $9,666,200
[Isales] 103,300
Gross profit 2,466,000 619,800 3,075,496
Equity income 189,126 [C] 189,126 0
Operating expenses (1,561,800) (402,870) [D] 17,500 (1,982,170)
Net income $1,093,326 $ 216,930 $1,093,326

Net income 1,093,326 216,930 1,093,326
Dividends (251,465) (28,201) [C] 28,201 (251,465)
Balance sheet:
Assets
Cash $ 555,910 $ 500,842 $ 1,056,752
Accounts receivable 1,052,160 359,484 [Ipay] 41,320 1,370,324
Inventory 1,594,680 461,751 [Icogs] 29,441 2,026,990
Building, net 7,670,904 854,291 8,525,195
Patent [A] 140,000 [D] 17,500 122,500
Equity investment 1,314,788 [Icogs] 19,137 [C] 160,925 0
[E] 1,033,000
[A] 140,000
$12,188,442 $2,176,368 $13,101,761

Accounts payable $ 615,678 $ 184,948 [Ipay] 41,320 $ 759,306
Other current liabilities 758,475 253,191 1,011,666
Common stock 1,343,970 103,300 [E] 103,300 1,343,970
APIC 998,730 129,125 [E] 129,125 998,730
$12,188,442 $2,176,368 1,572,824 1,572,824 $13,101,761

36.
a. Equity Income
Equity income $72,362
Dividends (13,650)

Patent @ BOY 200,000 - 4 x 20,000 = 120,000
Goodwill 100,000 = 100,000
BOY AAP assets 300,000 10,000 220,000

c.
Dividends 13,650

APIC (S) - @BOY 62,500

Goodwill 100,000

Patent @ BOY 20,000
[Icogs] Equity investment @BOY 23,472



Inventory 36,110


d.
Elimination entries
Parent Subsidiary Dr Cr Consolidated
Income statement:
Sales $5,000,000 $750,000 [Isales] 126,700 $5,623,300
[Isales] 126,700
Gross Profit 1,500,000 300,000 1,787,362
Equity Investment income 72,362 [C] 72,362 0
Net income $ 622,362 $105,000 $ 622,362
Net income 622,362 105,000 622,362
Dividends (143,143) (13,650) [C] 13,650 (143,143)
Balance sheet:
Assets
Cash $ 720,839 $ 242,421 $ 963,260
Inventory 970,000 223,500 [Icogs] 36,110 1,157,390
Building, net 4,666,000 413,500 5,079,500
Patent [A] 120,000 [D] 20,000 100,000
Goodwill [A] 100,000 100,000
Equity Investment 755,240 [Icogs] 23,472 [C] 58,712 0
[E] 500,000
[A] 220,000
$7,752,079 $1,053,421 $8,163,470
Liabilities and Stockholders Equity

Accounts Payable $ 374,500 $ 89,520 [Ipay] 50,680 $ 413,340
Other Current Liabilities 461,360 122,551 583,911
Long-term Liabilities 2,500,000 250,000 2,750,000
Common Stock 817,500 50,000 [E] 50,000 817,500
APIC 607,500 62,500 [E] 62,500 607,500
Retained Earnings 2,991,219 478,850 2,991,219
$7,752,079 $1,053,421 1,049,324 1,049,324 $8,163,470

37.
a. Equity Income
Dividends (24,570)

PPE, net 100,000 - 4 x 5,000 = 80,000
Customer list 150,000 - 4 x 15,000 = 90,000
Royalty agreement 250,000 - 4 x 25,000 = 150,000
Goodwill 100,000 = 100,000
BOY AAP assets 600,000 45,000 420,000

c.
Dividends 24,570

APIC (S) - @BOY 112,500
[A] PPE, net 80,000

Customer List 90,000
Royalty agreement 150,000
Goodwill 100,000
[D] Operating Expenses 45,000

PPE, net 5,000
Royalty Agreement 25,000



Inventory 27,446


d.
Elimination entries
Income statement:
Sales $6,670,000 $1,350,000 [Isales] 96,300 $7,923,700
[Isales] 96,300
Gross profit 2,001,000 540,000 2,531,394
Equity income 134,394 [C] 134,394 0
Net income $ 868,094 $ 189,000 $ 868,094
Net income 868,094 189,000 868,094
Dividends (199,662) (24,570) [C] 24,570 (199,662)
Balance sheet:
Assets
Cash $ 251,259 $ 436,358 $ 687,617
Accounts receivable 853,760 313,200 [Ipay] 38,520 1,128,440
Inventory 1,293,980 402,300 [Icogs] 27,446 1,668,834
Building, net 6,224,444 744,300 [A] 80,000 [D] 5,000 7,043,744
Customer list [A] 90,000 [D] 15,000 75,000
Royalty agreement [A] 150,000 [D] 25,000 125,000
Goodwill [A] 100,000 100,000
Equity investment 1,411,984 [Icogs] 17,840 [C] 109,824 0
[E] 900,000
[A] 420,000
$10,035,427 $1,896,158 $10,828,635

Other current liabilities 615,454 220,592 836,046
Common stock 1,090,545 90,000 [E] 90,000 1,090,545
APIC 810,405 112,500 [E] 112,500 810,405
$10,035,427 $1,896,158 1,679,500 1,679,500 $10,828,635

38.
a. Equity Income
Unconfirmed gain on intercompany sale @ BOY (30,000)
Dividends (6,825)

Patent @ BOY 200,000 - 2 x 20,000 = 160,000
Goodwill 100,000 = 100,000
BOY AAP assets 300,000 20,000 260,000
c.
Dividends 6,825

APIC (S) - @BOY 31,250
Goodwill 100,000
[D] Operating Expenses 20,000
Patent @ BOY 20,000
[Igain] Equity investment @BOY 30,000
Land 30,000

d.
Elimination entries
Income statement:
Sales $ 3,000,000 $375,000 $3,375,000
Cost of goods sold (2,100,000) (225,000) (2,325,000)
Gross Profit 900,000 150,000 1,050,000
Equity Investment income (Partial) 32,500 [C] 32,500 0
Operating expenses (570,000) (97,500) [D] 20,000 (687,500)
Net income $ 362,500 $ 52,500 $ 362,500
Net income 362,500 52,500 362,500
Dividends (83,375) (6,825) [C] 6,825 (83,375)
Balance sheet:
Assets
Cash $ 341,566 $121,211 $ 462,777
Accounts receivable 384,000 87,000 471,000
Inventory 582,000 111,750 693,750
PPE, net 2,799,600 206,750 [Igain] 30,000 2,976,350
Patent @ BOY [A] 160,000 [D] 20,000 140,000
Goodwill [A] 100,000 100,000
Equity Investment 505,675 [Igain] 30,000 [C] 25,675 0
[E] 250,000
[A] 260,000
$4,612,841 $526,711 $4,843,877

Accounts Payable $ 224,700 $ 44,760 $ 269,460
Common Stock 490,500 25,000 [E] 25,000 490,500
APIC 364,500 31,250 [E] 31,250 364,500
$4,612,841 $526,711 $592,500 $592,500 $4,843,877

39.
a. Equity Income
Dividends (14,742)

Royalty agreement @ BOY 300,000 - 3 x 30,000 = 210,000
Customer list 200,000 - 3 x 20,000 = 140,000
BOY AAP assets 500,000 50,000 350,000
c.
Dividends 14,742

APIC (S) - @BOY 67,500
[A] Royalty agreement @ BOY 210,000

Customer list 140,000


Land 50,000

d.
Elimination entries
Income statement:
Sales $4,600,000 $810,000 $5,410,000
Gross Profit 1,380,000 324,000 1,704,000
Equity Investment income
(Partial) 63,400 [C] 63,400 0
Net income $ 569,400 $113,400 $ 569,400

Net income 569,400 113,400 569,400

Dividends (130,962) (14,742) [C] 14,742 (130,962)
Balance sheet:
Assets
Cash $ 616,891 $ 261,815 $ 878,706
Inventory 892,400 241,380 1,133,780
PPE, net 4,292,720 446,580 [Igain] 50,000 4,689,300
Royalty Agreement @ BOY [A] 210,000 [D] 30,000 180,000
Customer List [A] 140,000 [D] 20,000 120,000

[E] 540,000
[A] 350,000
$7,279,469 $1,137,695 $7,778,506

Accounts Payable $ 344,540 $ 96,682 $ 441,222
Common Stock 752,100 54,000 [E] 54,000 752,100
APIC 558,900 67,500 [E] 67,500 558,900
$7,279,469 $1,137,695 $1,053,400 $1,053,400 $7,778,506

40.
a. Equity Income
BOY subsidiary retained earnings $1,162,500
Dividends (40,950)

Patent 300,000 - 3 x 30,000 = 210,000
Goodwill 100,000 = 100,000
BOY AAP assets 400,000 30,000 310,000
c.
Dividends 40,950

APIC (S) - @BOY 187,500
Retained earnings (S) @BOY 1,162,500
[A] Patent 210,000

Goodwill 100,000

Patent 30,000

Land 40,000

d.
Elimination entries
Income statement:
Sales 6,000,000 2,250,000 8,250,000
Cost of goods sold (4,200,000) (1,350,000) (5,550,000)
Gross Profit 1,800,000 900,000 2,700,000
Net income 945,000 315,000 945,000

BOY retained earnings 2,974,400 1,162,500 [E] 1,162,500 2,974,400
Net income 945,000 315,000 945,000

Dividends (217,350) (40,950) [C] 40,950 (217,350)
Ending retained earnings 3,702,050 1,436,550 3,702,050
Balance sheet:
Assets
Cash 369,831 727,263 1,097,094
Accounts receivable 768,000 522,000 1,290,000
Inventory 1,164,000 670,500 1,834,500
PPE, net 5,599,200 1,240,500 [Igain] 40,000 6,799,700
Patent [A] 210,000 [D] 30,000 180,000
Goodwill [A] 100,000 100,000
Equity Investment 2,014,050 [Igain] 40,000 [C] 244,050 0
[E] 1,500,000
[A] 310,000
9,915,081 3,160,263 11,301,294

Accounts Payable 449,400 268,560 717,960
Common Stock 981,000 150,000 [E] 150,000 981,000
APIC 729,000 187,500 [E] 187,500 729,000
Retained Earnings 3,702,050 1,436,550 3,702,050
9,915,081 3,160,263 2,165,000 2,165,000 11,301,294

41.
a. Equity Income
BOY subsidiary retained earnings $1,550,000
Dividends (54,600)

Customer list 200,000 -4x 20,000 = 120,000
Patent 100,000 -4x 10,000 = 60,000
Goodwill 100,000 = 100,000
BOY AAP assets 400,000 30,000 280,000
c.
Dividends 54,600

APIC (S) - @BOY 250,000
[A] Customer list 120,000

Patent 60,000
Goodwill 100,000

Patent 10,000

Land 80,000

d.
Elimination entries
Income statement:
Sales 8,000,000 3,000,000 11,000,000
Gross Profit 2,400,000 1,200,000 3,600,000
Equity Investment income 390,000 [C] 390,000 0
Net income 1,270,000 420,000 1,270,000

BOY retained earnings 3,939,200 1,550,000 [E] 1,550,000 3,939,200
Net income 1,270,000 420,000 1,270,000

Dividends (292,100) (54,600) [C] 54,600 (292,100)
Balance sheet:
Assets
Cash 457,475 469,684 927,159
Accounts receivable 1,024,000 696,000 1,720,000
Inventory 1,552,000 894,000 2,446,000
PPE, net 7,465,600 1,654,000 [Igain] 80,000 9,039,600
Customer List [A] 120,000 [D] 20,000 100,000
Patent [A] 60,000 [D] 10,000 50,000
Goodwill [A] 100,000 100,000
[E] 2,000,000
[A] 280,000
13,034,475 3,713,684 14,382,759

Other Current Liabilities 738,175 490,204 1,228,379
Common Stock 1,308,000 200,000 [E] 200,000 1,308,000
APIC 972,000 250,000 [E] 250,000 972,000
13,034,475 3,713,684 2,780,000 2,780,000 14,382,759

42. a.
Cash 120,000
Equipment 140,000
Gain on sale 36,000
(to record the sale of equipment)
Equipment 120,000
Cash 120,000
(to record the purchase of equipment)
[Igain] Gain on sale 36,000

Equipment 20,000
(to adjust Gain, Equipment, and Accumulated Depreciation on
the date of the intercompany transfer of equipment given
that the transaction occurred at the beginning of the year,
usage of the equipment for the year must be reflected in a
separate entry)

(to eliminate the excess depreciation expense recorded by
the subsidiary, and to adjust accumulated depreciation from
the BOY amount to the EOY amount). The excess
depreciation is $6,000 ($120,000 / 6 = $20,000 vs. $140,000 /
10 = $14,000).
b. The excess depreciation is $6,000 ($120,000 / 6 = $20,000 vs. $140,000 / 10 = $14,000).

Since 1 year has passed, at the beginning of the current year, the deferred gain is
$30,000 ($36,000 - $6,000).
c. Equity Income
Confirmed gain intercompany sale 6,000

d. Equity Investment
Dividends (20,000)

Customer List 200,000 - 4 x 20,000 = 120,000
Goodwill 100,000 = 100,000
BOY AAP assets 300,000 20,000 220,000
e.
Dividends 20,000
Equity Investment 106,000

APIC (S) - @BOY 155,000
[A] Customer list 120,000
Goodwill 100,000
[Igain] Equity investment - @BOY 30,000

Equipment 20,000
[Idep] Accumulated Depreciation 6,000

Depreciation Expense 6,000

f.
Elimination entries
Income statement:
Sales 10,000,000 1,000,000 11,000,000
Gross Profit 2,800,000 400,000 3,200,000
Equity Investment
income 126,000 [C] 126,000 0
Operating expenses (1,500,000) (260,000) [D] 20,000 [Idep] 6,000 (1,774,000)
Net income 1,426,000 140,000 1,426,000

BOY retained earnings 5,814,300 225,000 [E] 225,000 5,814,300
Net income 1,426,000 140,000 1,426,000

Dividends (285,200) (20,000) [C] 20,000 (285,200)
Ending retained earnings 6,955,100 345,000 6,955,100
Balance sheet:
Assets
Cash 1,058,100 322,000 1,380,100
Accounts receivable 1,750,000 430,000 2,180,000
Inventory 2,600,000 550,000 3,150,000
PPE, net 10,060,000 1,030,000 [Igain] 20,000 [Igain] 50,000 11,066,000
[Idep] 6,000
Patent [A] 120,000 [D] 20,000 100,000

Goodwill [A] 100,000 100,000

[E] 504,000
[A] 220,000
16,268,100 2,332,000 17,976,100

Accounts Payable 1,010,000 178,000 1,188,000
Other Current Liabilities 1,190,000 230,000 1,420,000
Long-term Liabilities 2,500,000 1,300,000 3,800,000
Common Stock 553,000 124,000 [E] 124,000 553,000
APIC 4,060,000 155,000 [E] 155,000 4,060,000
16,268,100 2,332,000 926,000 926,000 17,976,100

43. a.
Cash 250,000
Equipment 480,000
Gain on sale 58,000
Equipment 250,000
Cash 250,000

Equipment 230,000
(to adjust Gain, Equipment, and Accumulated Depreciation
on the date of the intercompany transfer of equipment
given that the transaction occurred at the beginning of the
year, usage of the equipment for the year must be reflected
in a separate entry)

the subsidiary, and to adjust accumulated depreciation from
the BOY amount to the EOY amount). The excess
depreciation is $14,500 ($250,000 / 4 = $62,500 vs. $480,000
/ 10 = $48,000).
b. The excess depreciation is $14,500 ($250,000 / 4 = $62,500 vs. $480,000 / 10 =

$48,000). Since three years have passed, the deferred gain is now $14,500 ($58,000 3
x $14,500).
c. Equity Income
Confirmed gain on intercompany sale 14,500

BOY subsidiary Retained Earnings $197,100
BOY subsidiary Common Stock 108,624
Dividends (17,520)
Equity Investment $616,624

Royalty Agreement 140,000 - 5 x 20,000 = 40,000
Customer List 350,000 - 5 x 50,000 = 100,000
BOY AAP assets 490,000 70,000 140,000
e.
Dividends 17,520

APIC (S) - @BOY 135,780
[A] Royalty Agreement 40,000


[Igain] Equity investment @ BOY 14,500

Equipment 230,000


f.
Elimination entries
Income statement:
Sales 3,380,000 876,000 4,256,000
Gross Profit 946,400 350,400 1,296,800
Operating expenses (507,000) (227,760) [D] 70,000 [Idep] 14,500 (790,260)
Net income 506,540 122,640 506,540
Net income 506,540 122,640 506,540

Dividends (101,308) (17,520) [C] 17,520 (101,308)
Balance sheet:
Assets
Cash 681,695 243,272 924,967
Inventory 878,800 481,800 1,360,600
PPE, net 3,400,280 902,280 [Igain] 230,000 [Igain] 244,500 4,302,560
[Idep] 14,500
Royalty Agreement [A] 40,000 [D] 20,000 20,000

Customer List [A] 100,000 [D] 50,000 50,000

[E] 441,504
[A] 140,000
6,168,899 2,004,032 7,626,307

Common Stock 186,914 108,624 [E] 108,624 186,914
APIC 1,372,280 135,780 [E] 135,780 1,372,280
6,168,899 2,004,032 977,644 977,644 7,626,307

44. a.
Cash 150,000
Equipment 175,000
Gain on sale 62,500
Equipment 150,000
Cash 150,000

Equipment 25,000
(to adjust Gain, Equipment, and Accumulated Depreciation
on the date of the intercompany transfer of equipment
given that the transaction occurred at the beginning of the
year, usage of the equipment for the year must be reflected
in a separate entry)

(to eliminate the excess depreciation expense recorded by the
subsidiary, and to adjust accumulated depreciation from the
BOY amount to the EOY amount). The excess depreciation is
$12,500 ($150,000 / 5= $30,000 vs. $175,000 / 10 = $17,500).
b. The excess depreciation is $12,500 ($150,000 / 5 = $30,000 vs. $175,000 / 10 =

$17,500). Since one year has passed, the deferred gain is now $50,000 ($62,500 1 x
$12,500).
c. Equity Income

Dividends (50,960)
*BOY AAP assets: amort

Patent 100,000 - 3 x 10,000 = 70,000
Customer List 200,000 - 3 x 40,000 = 80,000
Goodwill 300,000 = 300,000
BOY AAP assets 600,000 50,000 450,000
e.
Dividends 50,960

APIC (S) - @BOY 394,940
[A] Patent 70,000

Goodwill 300,000

Patent 10,000
[Igain] Equity investment @ BOY 50,000

Equipment 25,000


f.
Elimination entries
Income statement:
Sales 8,920,000 2,548,000 11,468,000
Gross Profit 2,497,600 1,019,200 3,516,800
Equity Investment income (Full) 319,220 [C] 319,220 0
Operating expenses (1,338,000) (662,480) [D] 50,000 [Idep] 12,500 (2,037,980)
Net income 1,478,820 356,720 1,478,820

Net income 1,478,820 356,720 1,478,820

Dividends (295,764) (50,960) [C] 50,960 (295,764)
Balance sheet:
Assets
Cash 167,196 508,056 675,252
Accounts receivable 1,561,000 1,095,640 2,656,640
Inventory 2,319,200 1,401,400 3,720,600
[Idep] 12,500
Patent [A] 70,000 [D] 10,000 60,000

Customer List [A] 80,000 [D] 40,000 40,000
Goodwill [A] 300,000 300,000

[E] 1,284,192
[A] 450,000
14,973,368 5,629,536 19,012,952

Accounts Payable 900,920 453,544 1,354,464
Other Current Liabilities 1,061,480 586,040 1,647,520
Common Stock 493,276 315,952 [E] 315,952 493,276
APIC 3,621,520 394,940 [E] 394,940 3,621,520
14,973,368 5,629,536 2,190,912 2,190,912 19,012,952

45. a.
Cash 70,000
Equipment 90,000
Gain on sale 7,000
Equipment 70,000
Cash 70,000

Equipment 20,000
(to adjust Gain, Equipment, and Accumulated
Depreciation on the date of the intercompany transfer of
equipment given that the transaction occurred at the
beginning of the year, usage of the equipment for the year
must be reflected in a separate entry)

the subsidiary, and to adjust accumulated depreciation
from the BOY amount to the EOY amount). The excess
depreciation is $1,000 ($70,000 / 7 = $10,000 vs. $90,000 /
10 = $9,000).
b. The Excess depreciation is $1,000 ($70,000 / 7 = $10,000 vs. $90,000 / 10 = $9,000).

Since 3 years have passed, the deferred gain is now $4,000 ($7,000 3 x $1,000).
c. Equity Income

Unconfirmed gain on intercompany sale @ BOY (4.000)
Dividends (60,220)
*License agreement 400,000 - 6 x 40,000 = 160,000
e.
Dividends 60,220

APIC (S) - @BOY 466,705
[A] License agreement 160,000


License agreement 40,000
[Igain] Equity investment - @BOY 4,000

Equipment 20,000


f.
Elimination entries
Income statement:
Sales 6,540,000 3,011,000 9,551,000
Gross Profit 1,831,200 1,204,400 3,035,600
Equity Investment income (Full) 382,540 [C] 382,540 0
Operating expenses (981,000) (782,860) [D] 40,000 [Idep] 1,000 (1,802,860)
Net income 1,232,740 421,540 1,232,740

Net income 1,232,740 421,540 1,232,740
Dividends (246,548) (60,220) [C] 60,220 (246,548)
Balance sheet:
Assets
Cash 344,062 355,242 699,304
Accounts receivable 1,144,500 1,294,730 2,439,230
Inventory 1,700,400 1,656,050 3,356,450
[Idep] 1,000
License Agreement [A] 160,000 [D] 40,000 120,000
[E] 1,517,544
[A] 160,000
11,764,066 6,407,352 16,292,554

Accounts Payable 660,540 535,958 1,196,498
Other Current Liabilities 778,260 692,530 1,470,790
Common Stock 361,662 373,364 [E] 373,364 361,662
APIC 2,655,240 466,705 [E] 466,705 2,655,240
11,764,066 6,407,352 2,125,084 2,125,084 16,292,554

46.A
a. Since the parent has used the cost method to account for its investment in the
subsidiary, the balance of the Equity Investment account at the end of the period is
reported at the original cost of the investment: $1,700,000. Subsequent to the
acquisition, the parent would have recorded the following changes to the Equity
Investment account if it applied the equity method:
Cumulative understatement of Equity Investment

Increase in Sub Ret Earnings since acquisition 200,000
Cumulative depreciation of [A] assets (80,000)
Deferred profit @ BOY (30,640)
Cumulative understatement of Equity Investment account 89,360
The required [ADJ] consolidation entry is:
[ADJ] Equity investment @ BOY 89,360

Retained Earnings (P) @ BOY 89,360
(to restate the Equity Investment account from cost to
equity method)
As a result of this adjusting entry, the BOY Equity Investment is equal to the balance that
the parent would have reported had it used the equity method rather than the cost
method. The consolidation process can proceed as usual following this initial [ADJ]
entry.

b.
[ADJ] Equity investment @ BOY 89,360
Retained earnings (P) @ BOY 89,360
[C] Dividend income 24,133

Dividends 24,133

APIC (S) - @BOY 125,000
[A] Building, net 80,000


PPE, net 5,000



Inventory 47,139


c.
Elimination entries
Income statement:
Sales $9,640,000 $1,326,000 [Isales] 165,400 $10,800,600
Cost of goods sold (6,748,000) (795,600) [Icogs] 47,139 [Icogs] 30,640
[Isales] 165,400 (7,394,699)
Gross profit 2,892,000 530,400 3,405,901
Dividend income 24,133 [C] 24,133 0
Net income $1,084,533 $ 185,640 $ 1,209,541

BOY retained earnings $4,843,136 $1,425,000 [E] 1,425,000 [ADJ] 89,360 $4,932,496
Net income 1,084,533 185,640 1,209,541
Dividends (249,443) (24,133) [C] 24,133 (249,443)
Ending retained earnings $5,678,226 $1,586,507 $5,892,594
Balance sheet:
Assets
Cash $ 737,035 $ 752,601 $ 1,489,636
Accounts receivable 1,233,920 307,632 [Ipay] 66,160 1,475,392
Inventory 1,870,160 395,148 [Icogs] 47,139 2,218,169
Building, net 8,996,048 731,068 [A] 80,000 [D] 5,000 9,802,116
Customer list [A] 90,000 [D] 15,000 75,000
Equity investment 1,700,000 [ADJ] 89,360 [E] 1,650,000 0

[Icogs] 30,640 [A] 170,000
$14,537,163 $2,186,449 $15,060,313

Other current liabilities 889,501 216,670 1,106,171
Long-term liabilities 4,500,000 0 4,500,000
Common stock 1,576,140 100,000 [E] 100,000 1,576,140
APIC 1,171,260 125,000 [E] 125,000 1,171,260
Retained earnings 5,678,226 1,586,507 5,892,594
$14,537,163 $2,186,449 2,262,832 2,262,832 $15,060,313

47. a. The trial balance information converted to financial statement format is presented,
below. A completed consolidation spreadsheet is included in the solution to part (f) of
this comprehensive review.
Pre-Consolidation Financial Statements for the Year Ended December 31,

2013
Parent Subsidiary
Income Statement
Sales 672,000 252,000
Cost of Goods Sold (336,000) (151,200)
Gross Profit 336,000 100,800
Depreciation & Amortization Expense (16,800) (13,440)
Operating Expenses (218,400) (53,760)
Total expenses (235,200) (67,200)
Equity Income from subsidiary 25,900
Net Income 126,700 33,600
Retained Earnings Statement

Beginning retained earnings 408,520 154,000
Net income 126,700 33,600
Dividends Declared (84,000) (19,600)
Ending Retained Earnings 451,220 168,000
Balance Sheet
Cash 54,208 21,000
Accounts receivable 75,600 67,200
Inventories 182,000 64,400
Property, Plant & Equipment, net 176,400 126,000
Other assets 79,800 140,000
Investment in subsidiary 365,120
Total Assets 933,128 432,600
Accounts Payable 45,108 16,800

Notes Payable 70,000 29,400
Other liabilities 30,800 36,400
Common stock 336,000 182,000
Retained Earnings 451,220 168,000
Total Liabilities and Equity 933,128 432,600

b. Given the five-year time horizon between the acquisition date and the consolidated
financial statement date, the following schedules separately document the annual AAP
amortization and the year-end unamortized AAP balance for each year, 2009 through
2013.
100% AAP:
Year Ended December 31,

100% AAP Amortization Dr (Cr) 2009 2010 2011 2012 2013
Accounts Rec. (5,600) - - - -
Buildings & Equipment, net 4,200 4,200 4,200 4,200 4,200
Customer list 8,400 8,400 8,400 8,400 8,400
Notes payable 2,100 2,100 2,100 2,100 -
Net Amortization 9,100 14,700 14,700 14,700 12,600
December 31,
100% Unamortized AAP Dr (Cr) Jan. 1, 2009 2009 2010 2011 2012 2013
Accounts Rec. (5,600) - - - - -
Buildings & Equipment, net 25,200 21,000 16,800 12,600 8,400 4,200
Customer list 58,800 50,400 42,000 33,600 25,200 16,800
Notes payable 8,400 6,300 4,200 2,100 - -
Goodwill 10,920 10,920 10,920 10,920 10,920 10,920
Unamortized Balance 97,720 88,620 73,920 59,220 44,520 31,920
c. Intercompany depreciable asset sale:

One downstream asset sale.
Intercompany profit recognized on January 1, 2012: $91,000 - $70,500 = $21,000, 6-year
remaining life
Profit confirmed each year: $21,000 / 6 = $3,500
Downstream Upstream
Net intercompany profit deferred at January 1, 2013 $17,500 $0
Less: Deferred intercompany profit recognized during 2013 3,500 0
Net intercompany profit deferred at December 31, 2013 $14,000 $0
Intercompany inventory transactions:

Intercompany inventory sales during 2013: $21,000
Downstream Upstream
(in Subs (in Parents
inventory) inventory)
Intercompany profit in inventory on January 1, 2013 $4,200 $0
Intercompany profit in inventory on December 31, 2013 $0 $2,800
Intercompany accounts receivables and payables at December 31, 2013: $5,600

d. The following is the general formula for computing the equity investment account
(under the full equity method) at any point in time when the parent company owns
100% of a subsidiary:
(1) Book value of the net assets of the subsidiary

Plus: (2) Unamortized AAP
Less: (3) Downstream deferred intercompany profits
Less: (4) Upstream deferred intercompany profits
Full equity method investment account
Equity investment account balance at January 1, 2013:
Jan. 1, 2013
336,000 (1) $182,000 + $154,000
Plus: 44,520 (2) $44,520 (from part b.)
Less: (17,500) (3) $17,500 (from part c.)
Less: (4,200) (3) $16,800 x 25% (from part c.)
$358,820
Equity investment account balance at December 31, 2013:
Dec. 31,
2013
$350,000 (1) $182,000 + $168,000
Plus: 31,920 (2) $313,920 (from part b.)
Less: (14,000) (3) $14,000 (from part c.)
(2,800) (4) $11,200 x 25% (from part c.)
$365,120
e. Full equity method investment accounting includes the following routine adjustments
during any given period: (1) recognition of p% of the subsidiarys income, (2)
amortization of the p% AAP, (3) recognition of p% of the dividends declared by the
subsidiary, (4) recognition of prior period deferred intercompany profits that have been
confirmed though either transactions with unaffiliated parties or
depreciation/amortization, and (5) deferral of intercompany profits newly originating
during the current period. With respect to the deferred intercompany profits, when the
parent company owns 100% of a subsidiary, then 100% of the profit is deferred for
downstream and upstream transactions. Information for items (1) and (2) is available in
the initial information, information for item (3) was summarized in part b, and
information for items (4) and (5) was summarized in part c. These items are all reflected
in the following completed T-account.

e. continued
Equity Investment
January 1, 2013 358,820
(1) p% x net income of Sub. 33,600 19,600 (2) p% x Dividends of Sub.

= 100% x $54,000 = 100% x $31,500
(4) p% x BOY downstream 4,200 12,600 (3) p% AAP amortization
inventory profits recognized (see part b)
during 2013 = 100% x $9,000
(4) 100% x downstream 3,500 2,800 (5) 100% x EOY downstream
equipment profits recognized inventory profits
via depreciation during 2013 deferred until year of
sale to unaffiliated party
December 31, 2013 365,120
f.
[C] Equity Income from Subsidiary 25,900
Dividends - Subsidiary 19,600
Investment in Subsidiary 6,300
[E] Common Stock (S) @ BOY 182,000
Retained Earnings (S) 2 BOY 154,000
Investment in Subsidiary @ BOY 336,000
[A] Buildings & Equipment @ BOY 8,400
Goodwill 10,920
Investment in Subsidiary @ BOY 44,520
[D] Depreciation & Amort Expense 12,600
Property, Plant & Equipment, net 4,200
Customer list 8,400
[Icogs] Investment in Subsidiary @ BOY 4,200
Cost of Goods Sold 4,200
Cost of Goods Sold 21,000
[Icogs] Cost of Goods Sold 2,800
Inventories 2,800
[Ipay] Accounts Payable 5,600
[Iasset] Investment in Subsidiary @ BOY 17,500

Buildings & Equipment, net @ BOY 17,500
[Ideprec] Property, Plant & Equipment, net 3,500

f. continued
Consolidation Spreadsheet for the year ended December 31, 2013

Income Statement
Sales 672,000 252,000 [Isales] 21,000 903,000
Cost of Goods Sold (336,000) (151,200) [Icogs] 2,800 [Icogs] 4,200 (464,800)
[Isales] 21,000
Gross Profit 336,000 100,800 438,200
Depreciation & Amort Expense (16,800) (13,440) [D] 12,600 [Ideprec] 3,500 (39,340)
Operating Expenses (218,400) (53,760) (272,160)
Total expenses (235,200) (67,200) (311,500)
Equity Income from Subsidiary 25,900 - [C] 25,900 -
Consolidated Net Income 126,700 33,600 126,700
Retained Earnings Statement

Beg. Ret. Earn. - Parent 408,520 408,520
Beg. Ret. Earn. - Subsidiary 154,000 [E] 154,000 -
Income attributable to Controlling Int 126,700 33,600 126,700
535,220 187,600 535,220
Dividends Declared
Parent (84,000) (84,000)
Subsidiary (19,600) [C] 19,600 -

Ending Retained Earnings 451,220 168,000 451,220
Balance Sheet
Cash 54,208 21,000 75,208
Inventories 182,000 64,400 [Icogs] 2,800 243,600
Buildings and Equipment, net 176,400 126,000 [A] 8,400 [D] 4,200 292,600
[Ideprec] 3,500 [Iasset] 17,500
Other assets 79,800 140,000 219,800
Customer list 14,000 [A] 25,200 [D] 8,400 30,800
Investment in Subsidiary 365,120 [Icogs] 4,200 [C] 6,300 -
[Iasset] 17,500 [E] 336,000
[A] 44,520
Goodwill [A] 10,920 10,920
Total Assets 933,128 432,600 1,010,128
Accounts Payable 45,108 16,800 [Ipay] 5,600 56,308

Notes Payable 70,000 29,400 99,400
Other liabilities 30,800 36,400 67,200
Common Stock
Parent 336,000 336,000
Subsidiary 182,000 [E] 182,000 -
Retained Earnings 451,220 168,000 451,220
Total Liabilities and Equity 933,128 432,600 473,620 473,620 1,010,128


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Chapter 4 - Consolidated Financial Statements and Intercompany

$ Profit to defer = $ Total deferred profit X % unsold inventories

Cambridge Business Publishers, 2014

6. The net effect of these two entries is this:

All of the statements are false except for answer d.

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

For a 100% owned subsidiary when there is no acquisition accounting premium,

Parents stand alone net income

This results in the following:

Cambridge Business Publishers, 2014

[I] [Igain] Investment in Subsidiary 100

Cambridge Business Publishers, 2014

When affiliated companies transfer depreciable noncurrent assets, the resulting

[I] [Igain] Equipment 60,000

Cambridge Business Publishers, 2014

Net income of subsidiary $500,000

Cambridge Business Publishers, 2014

Net income of subsidiary $300,000

Investment in subsidiary @BOY 13,500

Cost of goods sold 18,000

Accounts payable 20,000

Cambridge Business Publishers, 2014

a. Gain on sale 30,000

b. Investment in subsidiary @BOY 30,000

[Igain] Investment in subsidiary @BOY 30,000

Cambridge Business Publishers, 2014

a. Gain on sale 40,000

b. Investment in subsidiary @BOY 40,000

[Igain] Investment in subsidiary @BOY 40,000

Cambridge Business Publishers, 2014

a. Depreciation expense (subsidiary) = $140,000 / 10 = $14,000 per year.

b. Net book value on date of sale = $140,000 (4 x $14,000) = $84,000

[Igain] Gain on sale of equipment 36,000

[Idep] Accumulated depreciation 6,000

[Igain] Investment in subsidiary @BOY 24,000

Cambridge Business Publishers, 2014

a. Depreciation expense (parent) = $80,000 / 10 = $8,000 per year.

b. Net book value on date of sale = $80,000 (3 x $8,000) = $56,000

[Igain] Gain on sale of equipment 14,000

Cambridge Business Publishers, 2014

[Igain] Investment in subsidiary @BOY 6,000

Cambridge Business Publishers, 2014

d. The statement Elimination of Financial Products' profit due to equity method of

Cambridge Business Publishers, 2014

*BOY AAP assets: dep/amort

Cambridge Business Publishers, 2014

[E] Common stock (S) - @BOY 52,200

[A] PPE, net @ BOY 85,000

[D] Operating expenses 35,000

[Icogs] Equity investment 12,597

[Isales] Sales 68,000

[Icogs] Cost of goods sold 19,380

[Ipay] Accounts payable 27,200

Cambridge Business Publishers, 2014

Liabilities and stockholders equity

Cambridge Business Publishers, 2014

*BOY AAP assets: dep/amort

Cambridge Business Publishers, 2014

[E] Common stock (S) - @BOY 103,300