Exam 5: Intercompany Profit Transactions - Inventories

On January 1,2014,Paar Incorporated paid $38,500 for a 70% interest in Siba Enterprises,at a time when Siba's stockholder's equity consisted of $20,000 in Capital stock and $30,000 in Retained Earnings.The fair values of Siba's assets and liabilities equaled their recorded book values at that time,so any additional amount paid was attributed to goodwill. In 2014,Siba purchased merchandise from Paar at a price of $6,000.The products originally cost Paar $4,000,and 75% of this merchandise remained in inventory at December 31,2014.This inventory was sold in 2015.Siba reported net income of $9,000 and paid dividends of $3,000 during 2014. In 2015,Siba purchased merchandise from Paar at a price of $8,000.The products had a cost to Paar of $7,000,and 50% of this merchandise remained in inventory at December 31,2015.Siba still owed Paar $1,800 for these purchases at December 31,2015. Required: Financial statements of Paar and Siba appear in the first two columns of the partially completed working papers.Complete the consolidation working papers for Paar Corporation and Subsidiary for the year ended December 31,2015.

The elimination entry under the perpetual inventory system for intercompany sales and purchases is a debit to sales and a credit to purchases.

Phast Corporation owns a 80% interest in Stechno Company,acquired several years ago at a cost equal to book value and fair value.Stechno sells merchandise to Phast for the first time in 2014,and some is unsold at December 31,2014.In computing income from the investee for 2014 under the equity method,Phast uses which equation?

Use the following information to answer the question(s) below. Paggle Corporation owns 80% of Spillway Inc.'s common stock that was purchased at its underlying book value. At the time of purchase, the book value and fair value of Spillway's net assets were equal. The two companies report the following information for 2014 and 2015. During 2014, one company sold inventory to the other company for $50,000 which cost the transferor $40,000. As of the end of 2014, 30% of the inventory was unsold. In 2015, the remaining inventory was resold outside the consolidated entity. -For 2014,consolidated net income will be what amount if the intercompany sale was downstream?

Use the following information to answer the question(s) below. Pew Corporation acquired 80% ownership of Sordid Incorporated, at a time when Pew's investment cost was equal to 80% of Sordid's book value. At the time of acquisition, the book values and fair values of Sordid's assets and liabilities were equal. Pew uses the equity method. During 2014, Pew sold goods to Sordid for $160,000 making a gross profit percentage of 20%. Half of these goods remained unsold in Sordid's inventory at the end of the year. Income statement information for Pew and Sordid for 2014 were as follows: -The 2014 consolidated income statement showed noncontrolling interest share of

Pfeifer Corporation acquired an 80% interest in Stern Corporation several years ago when the book values and fair values of Stern's assets and liabilities were equal.At the time of acquisition,the cost of the 80% interest was equal to 80% of the book value of Stern's net assets.Separate company income statements for Pfeifer and Stern for the year ended December 31,2014 are summarized as follows: During 2013,Pfeifer sold merchandise that cost $120,000 to Stern for $180,000.Half of this merchandise remained in Stern's inventory at December 31,2013.During 2014,Pfeifer sold merchandise that cost $150,000 to Stern for $225,000.One-third of this merchandise remained in Stern's December 31,2014 inventory. Required: Prepare a consolidated income statement for Pfeifer Corporation and Subsidiary for 2014.

Penguin Corporation acquired a 60% interest in Squid Corporation on January 1,2014,at a cost equal to 60% of the book value of Squid's net assets.At the time of the acquisition,the book values of Squid's assets and liabilities were equal to the fair values.Squid reports net income of $880,000 for 2014.Penguin regularly sells merchandise to Squid at 120% of Penguin's cost.The intercompany sales information for 2014 is as follows: Required: 1.Determine the unrealized profit in Squid's inventory at December 31,2014.

The ending inventory of the purchasing affiliate reflects the intercompany transfer price.

Consolidated financial statements eliminate unrealized gross profit by increasing consolidated cost of goods sold and reducing merchandise inventory to its cost basis to the consolidated entity.

Presented below are several figures reported for Plate Corporation and Saucer Industries as of December 31,2014.Plate has owned 70% of Saucer for the past five years,and at the time of purchase,the book value of Saucer's assets and liabilities equaled the fair value.The cost of the 70% investment was equal to 70% of the book value of Saucer's net assets.At the time of purchase,the fair values and book values of Saucer's assets and liabilities were equal. In 2013,Saucer sold inventory to Plate which had cost $40,000 for $60,000.25% of this inventory remained on hand at December 31,2013,but was sold in 2014.In 2014,Saucer sold inventory to Plate which had cost $30,000 for $45,000.40% of this inventory remained unsold at December 31,2014. Required: Calculate following balances at December 31,2014. a.Consolidated Sales b.Consolidated Cost of goods sold c.Consolidated Expenses d.Noncontrolling interest share of Saucer's net income e.Consolidated Inventory

If a subsidiary is a 100 percent-owned affiliate and sells to the parent,the parent defers 100 percent of any unrealized profit in the year of the intercompany sale.

PreBuild Manufacturing acquired 100% of Shoding Industries common stock on January 1,2014,for $670,000 when the book values of Shoding's assets and liabilities were equal to their fair values and Shoding's stockholders' equity consisted of $380,000 of Capital Stock and $290,000 of Retained Earnings. PreBuild's separate income (excluding investment income from Shoding)was $870,000,$830,000 and $960,000 in 2014,2015 and 2016,respectively.PreBuild sold inventory to Shoding during 2014 at a gross profit of $50,000 and 50% remained at Shoding at the end of the year.The remaining 50% was sold in 2015.At the end of 2015,PreBuild has $54,000 of inventory received from Shoding from a sale of $180,000 which cost Shoding $150,000.There are no unrealized profits in the inventory of PreBuild or Shoding at the end of 2016.PreBuild uses the equity method in its separate books.Select financial information for Shoding follows: Required: Prepare a schedule to determine PreBuild Manufacturing's Consolidated net income for 2014,2015,and 2016.

Plover Corporation acquired 80% of Sink Inc.equity on January 1,2013,when the book values of Sink's assets and liabilities were equal to their fair values.The cost of the investment was equal to 80% of the book value of Sink's net assets. Plover separate income (excluding Sink)was $1,800,000,$1,700,000 and $1,900,000 in 2013,2014 and 2015 respectively.Plover sold inventory to Sink during 2013 at a gross profit of $48,000 and one quarter remained at Sink at the end of the year.The remaining 25% was sold in 2014.At the end of 2014,Plover has $25,000 of inventory received from Sink from a sale of $100,000 which cost Sink $80,000.There are no unrealized profits in the inventory of Plover or Sink at the end of 2015.Plover uses the equity method in its separate books.Select financial information for Sink follows: Required: Prepare a schedule to determine the controlling interest share of the consolidated net income for 2013,2014,and 2015.

Paulee Corporation paid $24,800 for an 80% interest in Sergio Corporation on January 1,2013,at which time Sergio's stockholders' equity consisted of $15,000 of Common Stock and $6,000 of Retained Earnings.The fair values of Sergio Corporation's assets and liabilities were identical to recorded book values when Paulee acquired its 80% interest. Sergio Corporation reported net income of $4,000 and paid dividends of $2,000 during 2013. Paulee Corporation sold inventory items to Sergio during 2013 and 2014 as follows: At December 31,2014,the accounts payable of Sergio include $1,500 owed to Paulee for inventory purchases. Required: Financial statements of Paulee and Sergio appear in the first two columns of the partially completed working papers.Complete the consolidation working papers for Paulee Corporation and Subsidiary for the year ended December 31,2014.

The elimination entry for unrealized profit is a debit to purchases and a credit to ending inventory.

Proman Manufacturing owns a 90% interest in Sipp Company,purchased at a time when the book values of Sipp's recorded assets and liabilities were equal to fair values.During 2014,Sipp sold merchandise to Proman for $80,000 at a 20% gross profit.At December 31,2014,25% of this merchandise is still in Proman's inventory.Separate incomes for Proman and Sipp are summarized as follows: Required: Prepare a consolidated income statement for 2014 for Proman and subsidiary.

Use the following information to answer the question(s) below. Paggle Corporation owns 80% of Spillway Inc.'s common stock that was purchased at its underlying book value. At the time of purchase, the book value and fair value of Spillway's net assets were equal. The two companies report the following information for 2014 and 2015. During 2014, one company sold inventory to the other company for $50,000 which cost the transferor $40,000. As of the end of 2014, 30% of the inventory was unsold. In 2015, the remaining inventory was resold outside the consolidated entity. -If the intercompany sale mentioned above was an upstream sale,what will be the reported amount of total consolidated sales revenue for 2015?

Plateau Incorporated bought 60% of the common stock of Sachet Company several years ago.At the time of purchase,the fair value and book value of Sachet's net assets were equal.The cost of the 60% investment was equal to 60% of the book value of Sachet's net assets.Plateau sells merchandise to Sachet at 125% above Plateau's cost.Intercompany sales from Plateau to Sachet for 2014 were $60,000.Unrealized profits in Sachet's December 31,2013 inventory and December 31,2014 inventory were $6,000 and $4,500,respectively.Sachet reported net income of $120,000 for 2014. Required: In General Journal format,prepare consolidation working paper entries at December 31,2014 to eliminate the effects of the intercompany inventory sales.

Use the following information to answer the question(s) below. Paggle Corporation owns 80% of Spillway Inc.'s common stock that was purchased at its underlying book value. At the time of purchase, the book value and fair value of Spillway's net assets were equal. The two companies report the following information for 2014 and 2015. During 2014, one company sold inventory to the other company for $50,000 which cost the transferor $40,000. As of the end of 2014, 30% of the inventory was unsold. In 2015, the remaining inventory was resold outside the consolidated entity. -If the sale referred to above was a downstream sale,the total sales revenue reported in the consolidated income statement for 2014 would be

The material sale of inventory items by a parent company to an affiliated company