Adv. Financial Acct. - Ch. 5

Usually referred to as "related party transactions;" Include all intercompany transactions.

Non‐Arm's Length Transactions

In periods subsequent to an asset transfer from a subsidiary to its parent at a gain, what effects continue on the seller's and buyer's books from a consolidated reporting perspective. (2) Retained earnings of the seller are overstated. Retained earnings of the buyer are understated. Retained earnings of the seller are understated. Retained earnings of the buyer are overstated.

Retained earnings of the seller are overstated. Retained earnings of the buyer are understated.

After combining the individually recorded revenues of a parent and subsidiary, what is the effect on consolidated revenues of intra-entity inventory transfers? Consolidated revenues are decreased by intra-entity gross profits in beginning and ending inventories. Consolidated revenues are increased by the entire price of the intra-entity transferred inventory. Revenues from intra-entity transfers are not included in consolidated revenues.

Revenues from intra-entity transfers are not included in consolidated revenues.

In the year of an intra-entity depreciable asset transfer at a price in excess of the asset's carrying amount, consolidation entries are needed to: (3) remove the effect of the intra-entity gain on depreciation expense remove the asset from the consolidated balance sheet. remove the gain on sale from the intra-entity asset transfer. return the asset to its historical cost to the consolidated entity.

remove the effect of the intra-entity gain on depreciation expense remove the gain on sale from the intra-entity asset transfer. return the asset to its historical cost to the consolidated entity.

Will Co. owned 80% of the voting common stock of Carlton Co. During 2020, Carlton made frequent sales of inventory to Will. There was deferred intra-entity gross profit of $50,000 in the beginning inventory and $30,000 of intra-entity gross profit at the end of the year. Carlton reported net income of $173,000 for 2020. Will decided to use the equity method to account for the investment. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what is the net income attributable to the noncontrolling interest for 2020?

$38,600. Subsidiary's Net Income $173,000 + Recognition of prior year Deferred Recognized Gross profit $50,000 − Deferred gross profit at end of the year $30,000 = $193,000 × Noncontrolling Interest 20% = $38,600 Net Income Attributable to the Noncontrolling Interest

When intra-entity gross profits exist in a parent company's beginning inventory, the current year consolidated worksheet should contain an entry to: increase consolidated COGS for the amount of the intra-entity gross profit. eliminate the intra-entity beginning inventory in its entirety. remove the intra-entity gross profit from the seller's beginning retained earnings. remove the intra-entity sale and related COGS.

remove the intra-entity gross profit from the seller's beginning retained earnings.

Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income? TI *G G

*G

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in beginning inventories from downstream sales to an 80% owned affiliate? 20% of the intra-entity gross profits in beginning inventory are recognized. 80% of the intra-entity gross profits in beginning inventory are recognized. 100% of the intra-entity gross profits in beginning inventory are recognized. None of the intra-entity gross profits in beginning inventory are recognized.

100% of the intra-entity gross profits in beginning inventory are recognized.

When the parent employs the initial value method to account internally for its Investment in Subsidiary account, a consolidation conversion entry is typically needed. Consolidation Entry *C converts the parent's beginning retained earnings balance to a full accrual basis. If the subsidiary purchases inventory from the parent and intra-entity gross profits exist in its beginning inventory, what is the effect on the consolidation conversion entry (*C)? Downstream intra-entity beginning inventory gross profits has no effect on Consolidation Entry *C. Intra-entity downstream inventory gross profits will decrease the amount of the Consolidation Entry *C worksheet adjustment. Intra-entity downstream inventory gross profits will increase the amount of the Consolidation Entry *C worksheet adjustment.

Downstream intra-entity beginning inventory gross profits has no effect on Consolidation Entry *C.

When does the intra-entity gross profit in ending inventory transferred across affiliates affect the consolidated net income attributable to the noncontrolling interest? For upstream intra-entity inventory transfers. For all intra-entity inventory transfers. For no intra-entity inventory transfers. For downstream intra-entity inventory transfers.

For upstream intra-entity inventory transfers.

What is the exception to Entry *G?

If the transaction is a downstream transfer AND the parent applies the equity method: Dr. Investment in Sub XXX Cr. COGS (beg. inv. component) XXX

When land is sold at a gain across members of a consolidated group, in years subsequent to the land sale, where does the gain reside? In the buyer's retained earnings account and the seller's land account. In the seller gain on sale account and the buyer's land account. The gain is eliminated in the first year consolidation and thus removed from the individual member's accounts. In the seller's retained earnings account and the buyer's land account.

In the seller's retained earnings account and the buyer's land account.

The presence of ______ ownership does not change the amount of profit or gain to eliminate. The reduction in profit or gain may be allocated between the parent and the NCI according to their percentage of ownership. However, the profit deferral is shared with NCI owners only in ______ transactions.

NCI; upstream

A parent uses the initial value method, sells inventory to the subsidiary, and intra-entity gross profits exist in beginning inventory. What is the effect of Consolidation Entry *G on the consolidated financial statements? Net income is reassigned from the previous year to the current year. Ending inventory is decreased. There is no effect of Consolidation Entry *G on the consolidated financial statements. Net income is reassigned from the current year to the previous year.

Net income is reassigned from the previous year to the current year.

When a parent sells land to its subsidiary at a profit, what is the effect on the noncontrolling interest. The noncontrolling interest's share of consolidated net income increases in the year of the transfer. No effect The noncontrolling interest's share of consolidated net income decreases in the year of the transfer.

No effect

When the parent applies the equity method and routinely transfers inventory downstream to its 80% owned subsidiary, any intra-entity gross profits remaining in the consolidated entity's ending inventory, are allocated 20% to the parent company's share of consolidated net income. are not allocated to the parent company's share of consolidated net income. are allocated 80% to the parent company's share of consolidated net income. are allocated 100% to the parent company's share of consolidated net income.

are allocated 100% to the parent company's share of consolidated net income.

When the parent applies the equity method and routinely transfers inventory downstream, any intra-entity gross profits remaining in the consolidated entity's ending inventory: decreases the noncontrolling interest. increases the noncontrolling interest. does not affect the noncontrolling interest.

does not affect the noncontrolling interest.

When the parent employs the equity method, Consolidation Entry *GL debits the Investment in Subsidiary account for intra-entity gains that resulted from: neither upstream or downstream land transfers. upstream land transfers. downstream land transfers. either upstream or downstream land transfers.

downstream land transfers.

In the consolidated income statement, the net income attributable to the noncontrolling interest is affected by (2) excess acquisition-date fair value amortizations. the parent company's separate net income. intra-entity gross profits from downstream inventory transfers. intra-entity gross profits from upstream inventory transfers.

excess acquisition-date fair value amortizations. intra-entity gross profits from upstream inventory transfers.

Consolidation Entry G credits COGS in the year following transfer because the beginning inventory component of COGS is: absent due to the intra-entity gross profit. overstated by the intra-entity gross profit. understated by the intra-entity gross profit.

overstated by the intra-entity gross profit.

If the land is eventually sold to an outside party, the gain recognition is...

reallocated from the year of transfer into the year in which the land is sold to the unrelated party.

In an upstream transaction, the ______ ______ ______ ______ ______ from the intra‐entity transactions and this profit will be shared between the parent and the NCI.

subsidiary initially recognizes the profit

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G debits COGS because (2) COGS is overstated by the amount of the gross profit on intra-entity inventory transfers remaining at year-end the ending inventory component of COGS is overstated by the intra-entity gross profit remaining at year-end. it increases the gross profit recognized on the sales to outsiders. the debit to COGS reduces consolidated net income by the amount of the intra-entity gross profit.

the ending inventory component of COGS is overstated by the intra-entity gross profit remaining at year-end. the debit to COGS reduces consolidated net income by the amount of the intra-entity gross profit.

Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4, how are the final consolidated totals affected by the investment accounting method choice? The choice of the equity method results in larger consolidated net income and noncontrolling interest. No effect. The choice of the initial value method results in larger consolidated net income and noncontrolling interest.

No effect.

True or false: When intra-entity transferred land is subsequently sold to an outside entity, any remaining deferred gain is recognized in the period of the sale.

True *Reason: Once the land is sold to an outsider, there is no reason to continue any profit deferral.

True or false: The direction of intra-entity sales (upstream or downstream) does not affect the final balance of reported consolidated net income.

True *Reason: The direction of intra-entity transfers affects only the distribution of consolidated net income to the controlling and noncontrolling interest; not the amount of consolidated net income.

True or False: Consolidation Entry TL removes the gain on sale from an intra-entity land sale because the land remains under the control of the consolidated entity.

True * Reason: Only sales to firms outside the consolidated entity qualify for gain recognition in the consolidated financial statement.

How does the direction of intra-entity transfers (resulting in intra-entity gross profit in inventories) affect the computation of the noncontrolling interest's share of consolidated net income? Upstream inventory transfers affect the computation. Downstream inventory transfers affect the computation. Neither upstream nor downstream inventory transfers affect the computation. Both upstream and downstream inventory transfers affect the computation.

Upstream inventory transfers affect the computation.

Pot Co. holds 90% of the common stock of Skillet Co. During 2021, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Pot's sales were Pot's sales of merchandise to Skillet for $140,000. There were no intra-entity transfers from Skillet to Pot. Intra-entity transfers had the same markup as sales to outsiders. Skillet still held 40% of the intra-entity gross profit remaining in ending inventory at the end of 2021. What are consolidated sales and cost of goods sold, respectively for 2021?

$1,400,000 and $966,000 $1,120,000 + $420,000 = $1,540,000 $1,540,000 - $140,000 = $1,400,000 $840,000 + $252,000 - $140,000 + $14,000 (140,000 * 40% * 25%) = $966,000 GP% -- (1,120,000 - 840,000)/1,120,000 = 25%

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in ending inventory from upstream sales to an 80% owned affiliate? 20% of the intra-entity gross profits in ending inventory are deferred. None of the intra-entity gross profits in ending inventory are deferred. 100% of the intra-entity gross profits in ending inventory are deferred. 80% of the intra-entity gross profits in ending inventory are deferred.

80% of the intra-entity gross profits in ending inventory are deferred.

In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following individual affiliate accounts continue to be misstated from a consolidated perspective? (3) Accumulated depreciation. Retained earnings of the selling affiliate. Gain on sale from the intra-entity transfer. Depreciation expense.

Accumulated depreciation. Retained earnings of the selling affiliate. Depreciation expense.

How does the ASC describe the effect of intra-entity gross profit remaining in ending inventory on the noncontrolling interest? Any intra-entity income or loss must be allocated between the parent and noncontrolling interest. Any intra-entity income or loss may be allocated between the parent and noncontrolling interest. Any intra-entity income or loss may not be allocated between the parent and noncontrolling interest.

Any intra-entity income or loss may be allocated between the parent and noncontrolling interest.

Transactions that take place between completely independent parties.

Arm's Length Transactions

What is the effect on consolidated COGS of intra-entity gross profits in beginning and ending inventories? Consolidated COGS is increased by intra-entity gross profits in ending inventory and decreased by intra-entity gross profits in beginning inventory. COGS is decreased by intra-entity gross profits in ending inventory and increased by intra-entity gross profits in beginning inventory. COGS is unaffected by intra-entity gross profits in ending inventory and beginning inventory.

Consolidated COGS is increased by intra-entity gross profits in ending inventory and decreased by intra-entity gross profits in beginning inventory.

Which of the following consolidated balances remain the same regardless of whether intra-entity gross profit in inventory results from upstream or downstream transfers? (2) Consolidated net income. Noncontrolling interest. Inventory. Net income attributable to the controlling interest.

Consolidated net income. Inventory.

Why does Consolidation Entry *G debit the parent's Investment in Subsidiary account instead of its Retained Earnings account for downstream intra-entity gross profits in beginning inventory when the parent employs the equity method? (2) The Investment in Subsidiary account is overstated by the amount of the intra-entity beginning inventory gross profit. The equity method removes intra-entity gross profits from the parent's books causing its RE to properly reflect the consolidated balance. The debit to the Investment account is needed to bring the account to a zero balance in consolidation.

The equity method removes intra-entity gross profits from the parent's books causing its RE to properly reflect the consolidated balance. The debit to the Investment account is needed to bring the account to a zero balance in consolidation.

When intra-entity transferred land is subsequently sold to an outside entity, how is the originally deferred intra-entity gain on sale reported in consolidated financial statements? The intra-entity gain is simply ignored in the period that the land is sold to the outside entity. The intra-entity gain is removed from consolidated net income in the period that the land is sold to the outside entity. The intra-entity gain continues to be deferred indefinitely. The intra-entity gain is recognized as part of consolidated net income in the period that the land is sold to the outside entity.

The intra-entity gain is recognized as part of consolidated net income in the period that the land is sold to the outside entity.

When intra-entity gross profits from upstream sales are present in beginning inventory, which of the following describes the effect on consolidated statements? (2) There is no effect on consolidated net income as a result of intra-entity gross profits in beginning inventory. The net income effect of the intra-entity inventory gross profit is transferred from the prior period to the current period. Consolidation Entry *G credits COGS which increases current period's consolidated net income. The net income effect of the intra-entity inventory gross profit is transferred from the current period to the prior period.

The net income effect of the intra-entity inventory gross profit is transferred from the prior period to the current period. Consolidation Entry *G credits COGS which increases current period's consolidated net income.

Intra-entity gross profits in ending inventory are recognized in consolidated net income though a credit to COGS when the inventory is sold to outsiders. As a intra-entity transferred asset is used in the production process, the intra-entity gain is recognized in consolidated net income by consolidation entries that credit ________ ________

depreciation expense

Compared to intra-entity gross profits in inventory, intra-entity gross profits from land transfers (2) are completely removed in the year of the land transfer and require no adjustment in future consolidations. do not require adjustments in current year or future consolidations. can require consolidation entries to RE indefinitely until the land is sold to outsiders. can require consolidation entries to land indefinitely until the land is sold to outsiders.

can require consolidation entries to RE indefinitely until the land is sold to outsiders. can require consolidation entries to land indefinitely until the land is sold to outsiders.

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with an adjustment to the Investment in Subsidiary account because... (2) the equity method ignores intra-entity gains on transfers of depreciable assets. the equity method has already reduced the parent's retained earnings for the intra-equity gain. the equity method adjusts for any excess accumulated depreciation. the debit to the Investment in Subsidiary account is needed to bring that account to zero in consolidation.

the equity method has already reduced the parent's retained earnings for the intra-equity gain. the debit to the Investment in Subsidiary account is needed to bring that account to zero in consolidation.

Consolidation worksheet entries are not posted to the books of the members of the consolidated group. Therefore, in years subsequent to an upstream intra-entity land sale that records a gain, a consolidation worksheet entry is needed to adjust (2) the retained earnings beginning balance for the company that acquired the land in the intra-entity transfer. the retained earnings beginning balance for the company that originally recorded the gain on sale of the land. the gain on sale account. the land account.

the retained earnings beginning balance for the company that originally recorded the gain on sale of the land. the land account.

In the year of an intra-entity land transfer resulting in the recording of a gain, a consolidation entry is needed to (2) include the gain in the consolidated income statement. write-down the value of the land by the amount of the intra-entity gain. ensure the land is reported at an amount that includes the intra-entity gain. ensure the gain is not reported in the consolidated income statement.

write-down the value of the land by the amount of the intra-entity gain. ensure the gain is not reported in the consolidated income statement.

When an intra-entity sale of a depreciable asset occurs at a price in excess of the asset's carrying amount, which of the following result from a consolidated entity perspective? (3) Depreciation expense becomes overstated. Retained earnings of the selling affiliate become overstated. The carrying amount of the asset becomes overstated by the amount of the intra-entity gain. Retained earnings of the selling affiliate become understated.

Depreciation expense becomes overstated. Retained earnings of the selling affiliate become overstated. The carrying amount of the asset becomes overstated by the amount of the intra-entity gain.

When preparing consolidated statements, undo the transfer (of land) by: (2)

Eliminating unrealized gains (like unrealized gross profit in inventory transfer) Adjusting the value of the transferred land back to old basis

Intra‐Entity Inventory Transfers: Consolidation Entries The two entries in #1 and #2 will result in the same effect as Entry TI and Entry G combined. #1: Dr. Sales 400 Cr. COGS 400 #2: Dr. Sales 300 Cr. COGS 200 Cr. Inventory 100

TI: Dr. Sales 700 Cr. COGS 700 G: Dr. COGS 100 Cr. Inventory 100

Palmer Corp. owned 80% of the outstanding common stock of Creed Inc. On January 1, 2019, Palmer acquired a building with a ten-year life for $450,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2021, Palmer sold this building to Creed for $412,000. At that time, the building had a remaining life of eight years but still no expected salvage value. For consolidation purposes, what is the Excess Depreciation (ED entry) for this building for 2021?

Transfer Cost $412,000 ÷ 8 years = $51,500 Annual Depreciation by Creed Palmer Depreciation: (Cost ($450,000) − salvage value ($0)) divided by useful life (10 years) = $45,000 51,500 - 45,000 = $6,500.

True or false: Upstream and downstream intra-entity depreciable asset transfers require the same TA and ED consolidation entries in the year of the transfer.

True

True or false: Intra-entity inventory profits resulting from upstream transfers affect the consolidated net income allocation to both the controlling and noncontrolling interests.

True *Reason: Intra-entity inventory profits resulting from upstream transfers result from the subsidiary's selling activities thus affecting the noncontrolling owners of the subsidiary.

A parent transfers inventory with a cost of $25,000 to its subsidiary at a transfer price of $40,000. The subsidiary resold 50% of this transferred inventory to outsiders before year-end. For the current year consolidated financial statement, how much gross profit should be deferred by Consolidation Entry G?

$7,500 (40,000 - 25,000) * 50%

reduces the consolidated Inventory account to its original historical cost and eliminates intra‐entity profit.

Entry G (Gross Profit) Note: This entry must be made in the year of transfer when some intra‐entity inventory are not sold to outside parties by the end of the year. Dr. Cost of Goods Sold XXX Cr. Inventory XXX (gross profit deferred)

removes intra‐entity sales figure regardless of whether the transaction was downstream or upstream.

Entry TI (Transferred Inventory) Sales XXX Cost of Goods Sold XXX (At transfer price)

In applying the equity method, why does the parent defer 100% of intra-entity inventory gross profits from downstream transfers even when owning a controlling, but less-than-100% ownership in the subsidiary. Because the ending inventory on the parent's books is overstated by the amount of the intra-entity gross profit. Because the equity method requires 100% deferral of intra-entity gross profits in ending inventory regardless of the investor's percentage ownership. The 100% deferral ensures that none of the intra-entity gross profit will be attributable to the noncontrolling interest.

The 100% deferral ensures that none of the intra-entity gross profit will be attributable to the noncontrolling interest.

What is the reason Consolidation Entry *G credits COGS for the intra-entity gross profit present in beginning inventory? (2) To decrease net income of the consolidated entity in the amount of the intra-entity gross profit. To correct for the overstatement of the beginning inventory component of COGS. To increase COGS for the intra-entity gross profit in beginning inventory. Because the credit to COGS increases the net income of the consolidated entity in the year the inventory is sold to outsiders.

To correct for the overstatement of the beginning inventory component of COGS. Because the credit to COGS increases the net income of the consolidated entity in the year the inventory is sold to outsiders.

The accounting effects of inventory sales across companies within a consolidated entity are removed when preparing consolidated financial statements because: (3) neither the seller nor the buyer records the intra-entity inventory transfer on their separate accounting systems. from a consolidated perspective, neither a sale nor a purchase has occurred. intra-entity inventory transfers create no net change in the financial position of the consolidated reporting entity. consolidated statements reflect only transactions with outside parties.

from a consolidated perspective, neither a sale nor a purchase has occurred. intra-entity inventory transfers create no net change in the financial position of the consolidated reporting entity. consolidated statements reflect only transactions with outside parties.

A parent transfers inventory with a cost of $25,000 to its subsidiary at a transfer price of $40,000. The subsidiary resold the entire purchase to outsiders before year-end. For the current year consolidated financial statement, how much gross profit should be deferred by Consolidation Entry G?

$0 *No inventory on hand at year-end as a result of the sale

Flax Co. acquired 80% percent of the voting common stock of Levinson Corp. on January 1, 2021. During the year, Flax made sales of inventory to Levinson. The inventory cost Flax $275,000 and was sold to Levinson for $420,000. Levinson held $84,000 of the goods in its inventory at the end of the year. The amount of intra-entity gross profit for which recognition is deferred, and should therefore be eliminated in the consolidation process at the end of 2021, is:

$29,000. Intra-Entity Gross Profit ($420,000 − $275,000) $145,000 × Intra-Entity Gross Profit Remaining in Ending Inventory ($84,000 ÷ $420,000) = $29,000

Prescott Inc. owned 80% of the voting common stock of Hutchins Corp. During 2021, Hutchins made several sales of inventory to Prescott. The total selling price was $190,000 and the cost was $105,000. At the end of the year, 30% of the goods were still in Prescott's inventory. Hutchins's reported net income was $320,000. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest in Hutchins?

$58,900. Subsidiary's Net Income ($320,000) − Intra-Entity Gross Profit Deferred [($190,000 − $105,000) × 30% = $25,500] = $294,500 × Noncontrolling Interest (20%) = $58,900 Net Income Attributable to the Noncontrolling Interest

Milton Co. owned all of the voting common stock of Walker Co. On January 3, 2020, Milton sold equipment to Walker for $140,000. The equipment cost Milton $165,000. At the time of the transfer, the balance in accumulated depreciation was $45,000. The equipment had a remaining useful life of five years and a $0 salvage value. Both entities use the straight-line method of depreciation. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2020?

$96,000. The equipment would be reinstated at the asset's historical cost, any gain or loss would be eliminated, and accumulated depreciation and depreciation expense would be returned to the original values. Historical cost $165,000 − Accumulated Depreciation $45,000 = BV $120,000 Depreciation for 2020 = $120,000 ÷ 5 years remaining life = $24,000 Equipment Total Net of Depreciation = $120,000 − $24,000 = $96,000

A parent company transfers inventory to its 80% owned subsidiary. How much of the intra-entity gross profit in the transferred ending inventory serves to reduce the consolidated net income attributable to the noncontrolling interest? 80% 0% 100% 20%

0%

Intra‐Entity Inventory Transactions: Example •Assume Parent Co. owns 100% of Sub Co. •The following intercompany inventory transfers occurred during the year: 1. Parent made a sale to Sub for $400 cash. The inventory had originally cost Parent $250. Sub then sold that same inventory to an outsider for $500. 2. Parent made a sale to Sub for $300 cash. The inventory had originally cost Parent $200. Sub has not yet sold that same inventory to an outsider.

1. Parent's sale to Sub: - Parent: Dr. Cash 400 Cr. Sales 400 Dr. COGS 250 Cr. Inventory 250 *Legitimate arm's length transaction; kept in consolidation process - Sub: Dr. Inventory 400 Cr. Cash 400 *Canceled out Sub's sale to Outsider: Sub: Dr. Cash 500 Cr. Sales 500 *Legitimate arm's length transaction; kept in consolidation process Dr. COGS 400 Cr. Inventory 400 *Canceled out Consolidation entry to eliminate sale from Parent to Sub to Outsider: Dr. Sales (parent to sub) 400 Cr. Cost of Goods Sold (Sub to outsider) 400 2. Parent: Dr. Cash 300 Cr. Sales 300 Dr. COGS 200 Cr. Inventory 200 Sub: Dr. Inventory 300 Cr. Cash 300 Consolidation entry to eliminate sale from Parent to Sub, not yet to Outsider: Dr. Sales (parent to sub) 300 Cr. Cost of Goods Sold (parent to sub) 200 Cr. Inventory (net) 100

Problem: Determining Consolidated Totals with Intra‐Entity Inventory Transfers Protrade Corporation acquired 80 percent of the outstanding voting stock of Seacraft Company on January 1, 2020, for $612,000 in cash and other consideration. At the acquisition date, Protrade assessed Seacraft's identifiable assets and liabilities at a collective net fair value of $765,000 and the fair value of the 20 percent noncontrolling interest was $153,000. No excess fair value over book value amortization accompanied the acquisition. Protrade uses the equity method to maintain the Investment in Seacraft account. The following selected account balances are from the individual financial records of these two companies as of December 31, 2021: (see table in notes) Part A: Assume that Protrade sells Seacraft inventory at a markup equal to 60 percent of cost. Intra‐entity transfers were $114,000 in 2020 and $134,000 in 2021. Of this inventory, Seacraft retained and then sold $52,000 of the 2020 transfers in 2021 and held $66,000 of the 2021 transfers until 2022. Determine balances for the following items that would appear on consolidated financial statements for 2021: •Cost of Goods Sold •Inventory •Net Income Attributable to Noncontrolling Interest Part B: Assume that Seacraft sells inventory to Protrade at a markup equal to 60 percent of cost. Intra‐entity transfers were $74,000 in 2020 and $104,000 in 2021. Of this inventory, $45,000 of the 2020 transfers were retained and then sold by Protrade in 2021, whereas $59,000 of the 2021 transfers were held until 2022. Determine balances for the following items that would appear on consolidated financial statements for 2021: •Cost of Goods Sold •Inventory •Net Income Attributable to Noncontrolling Interest

Acquisition date FV of Sub = FV of Parent + FV of NCI = $ 612,000 + $ 153,000= $ 765,000 FV of net assets = BV + Excess Value= $765,000 Goodwill = 0 No annual amortization of excess value The reported income of Seacraft in 2021 is $154,000 Transfer price/revenue = 160% of cost Gross Profit % = Profit/Revenue = 60%/160% = 37.5% 2020 -- $114,000 Sales/Transfer Price; $52,000 On hand on 12.31 Deferred profit (Inventory on hand * GP%): $52,000 * 37.5% = $19,500 (to 2021) 2021 -- $134,000 Sales/Transfer Price; $66,000 On hand on 12.31 Deferred profit: $66,000 * 37.5% = $24,750 (to 2022) - In 2021, recognize $19,500 (*G) and defer $24,750 (G) Part A: *G: Dr. Investment in Seacraft $19,500 Cr. Cost of Goods Sold $19,500 TI: Dr. Sales Revenue $134,000 Cr. Cost of Goods Sold $134,000 G: Dr. Cost of Goods Sold $24,750 Cr. Inventory $24,750 Consolidated Balances: - Cost of Goods Sold = 410,000 + 317,000 + (19,500) + (134,000) + 24,750= $ 598,250 - Inventory = 370,000 + 144,000 + (24,750) = $ 489,250 - Net Income to NCI: $154,000 Sub's reported net income - $0 annual amortization = $154,000 Sub's adjusted net income Net income to NCI (20% * $154,000) = $30,800 ------------------------------------------------------------ Transfer price/revenue = 160% of cost Gross Profit % = Profit/Revenue = 60%/160% = 37.5% 2020 -- $74,000 Sales/Transfer Price; $45,000 On hand on 12.31 Deferred profit (Inventory on hand * GP%): $45,000 * 37.5% = $16,875 (to 2021) 2021 -- $104,000 Sales/Transfer Price; $59,000 On hand on 12.31 Deferred profit (Inventory on hand * GP%): $59,000 * 37.5% = $22,125 (to 2022) - In 2021, recognize $16,875 (*G) and defer $22,125 (G) Part B: *G: Dr. Retained Earnings, beg (Sub) $16,875 Cr. Cost of Goods Sold $16,875 TI: Dr. Sales Revenue $104,000 Cr. Cost of Goods Sold $104,000 G: Dr. Cost of Goods Sold $22,125 Cr. Inventory $22,125 Consolidated Balances: - Cost of Goods Sold = 410,000 + 317,000 + (16,875) + (104,000) + 22,125= $ 628,250 - Inventory = 370,000 + 144,000 + (22,125) = $ 491,875 Net Income to NCI: $154,000 Sub's reported net income - $0 annual amortization + $16,875 Recognized profit from the 2020 transfer - $22,125 Deferred profit for the 2021 transfer = $148,750 Sub's adjusted net income *Upstream transfer; shared with NCI Net income to NCI (20% * $148,750) = $29,750

must be made to increase consolidated net income (by decreasing COGS) in the year the inventories are sold to outside parties.

Entry *G (Previous Year Gross Profit) Dr. Retained Earnings (beg. balance of seller) XXX Cr. COGS (beg. inv. component) XXX

In the presence of upstream intra-entity inventory transfers, from a consolidated view which of the following accounts becomes overstated in the year following the transfer? The subsidiary's sales revenue. The subsidiary's retained earnings. The parent's retained earnings.

The subsidiary's retained earnings.

Problem: Upstream Inventory Transfer and NCI On January 1, 2020, Doone Corporation acquired 60 percent of the outstanding voting stock of Rockne Company for $300,000 consideration. At the acquisition date, the fair value of the 40 percent noncontrolling interest was $200,000 and Rockne's assets and liabilities had a collective net fair value of $500,000. The annual excess fair value amortization was $10,000. Doone uses the equity method in its internal records to account for its investment in Rockne. Rockne reports net income of $160,000 in 2021. Since being acquired, Rockne has regularly supplied inventory to Doone at 25 percent more than cost. Sales to Doone amounted to $250,000 in 2020 and $300,000 in 2021. Approximately 30 percent of the inventory purchased during any one year is not used until the following year. Q1: Prepare Doone's 2021 consolidation entries required by the intra‐entity inventory transfers. Q2: What is the noncontrolling interest's share of Rockne's 2021 income? Q3: If the inventory transfer is downstream, what is the noncontrolling interest's share of Rockne's 2021 income?

FV of Sub on 1.1.20 = FV of Parent + FV of NCI= 300,000 + 200,000 = 500,000 FV of net assets (BV + Excess Value), no goodwill = 500,000 Annual amortization of excess value = $10,000 2020 -- $250,000 Sales/Transfer Price * 30% = $75,000 on hand on 12/31 2021 -- $300,000 Sales/Transfer Price * 30% = $90,000 on hand on 12/31 Transfer price/revenue = 125% of cost Gross Profit % = Profit/Revenue = 25% of cost/125% of cost Gross Profit % = Profit/Revenue = 20% of revenue 1. Deferred profit on 12/31/20 = 75,000 * 20% = $15,000 Deferred profit on 12/31/21 = 90,000 * 20% = $18,000 Entry *G: Dr. Retained Earnings, beg (Rockne) $15,000 Cr. Cost of Goods Sold $15,000 *Debit to Investment in Sub if the transfer is downstream and Parent uses the equity method Entry TI: Dr. Sales Revenue $300,000 Cr. Cost of Goods Sold $300,000 Entry G: Dr. Cost of Goods Sold $18,000 Cr. Inventory $18,000 2. *Upstream transfer -- these adjustments are shared with the NCI $160,000 Sub's reported income in 2021 - $10,000 Add. depreciation expense for annual amortization of excess value + $15,000 Recognized profit from the 2020 transfer (*G) - $18,000 Deferred profit from the 2021 transfer (G) = $147,000 Sub's adjusted income in 2021 NCI's share of Sub's adjusted income in 2021 (40%) = $58,800 Parent's share of Sub's adjusted income in 2021 (60%) = $88,200 3. $160,000 Sub's reported income in 2021 - $10,000 Add. depreciation expense for annual amortization of excess value = $150,000 Sub's adjusted income in 2021 NCI's share of Sub's adjusted income in 2021 (40%) = $60,000 $90,000 Parent's share (60% * $150,000) + $15,000 Recognized profit from the 2020 transfer (*G) - $18,000 Deferred profit from the 2021 transfer (G) = $87,000 Parent's share after intra‐entity inventory adjustments

On January 1, 2021, Doyle Corp. acquired 75% of the voting common stock of Bressant Inc. During the year, Doyle sold to Bressant for $510,000 goods that cost $380,000. At year-end, Bressant owned 20% of the goods transferred. Bressant reported net income of $215,000, and Doyle's net income was $902,000. Doyle decided to use the equity method to account for this investment. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest?

$53,750. Subsidiary's Net Income $215,000 × 25% (Noncontrolling Interest) = $53,750

Problem: Downstream Depreciable Asset Transfer Padre holds 100 percent of the outstanding shares of Sonora. On January 1, 2020, Padre transferred equipment to Sonora for $95,000. The equipment had cost $130,000 originally but had a $50,000 book value and 5‐year remaining life at the date of transfer. Depreciation expense is computed according to the straight‐line method with no salvage value. Consolidated financial statements for 2022 currently are being prepared. The parent applies the equity method. What consolidation worksheet entries are needed in connection with the consolidation of this asset?

Padre sold equipment to Sonora Original cost = $130,000 Book value = $50,000 6 years remaining life Acc. Dep. = $80,000 (= 130K - 50K) Transfer price = $95,000 Assessed useful life = 5 years Buyer's depreciation expense (2022) = $95,000/5 years = $19,000 Consolidation's depreciation expense (2022) = 50,000/5 years = $10,000 Difference in depreciation expense, adjusted in Entry ED (19K - 10K) = $9,000 Consolidation Entry *TA: Dr. Investment in Subsidiary 27,000 Dr. Equipment 35,000* Cr. Accumulated Deprecation 62,000** Inv. in Sub. -- Plugged in figure; $45,000 gain on sale - 2*$9,000 (2 years of difference in total depreciation expense * Equip. -- 95,000 buyer's records (on 1/1/22) + 35,000 adj = 130,000 single entity's view ** Accumulated Dep. -- 38,000*** buyer's records (on 1/1/22) + 62,000 adj. = 100,000**** single entity's view ***As of 12/31/21 = 2 * $19,000 = $38,000 ****= $80,000 (before transfer) + 2 * $10,000 (2 years after transfer) Entry ED in the 2022 consolidation worksheet: Dr. Accumulated Depreciation 9,000 Cr. Depreciation Expense 9,000

When intra-entity transfers of depreciable assets occur, what are the financial reporting objectives in preparing consolidated financial statements? (3) Recognize appropriate income effects from the sale and use of intra-entity transferred assets. Re-establish historical cost balances for the transferred assets. Defer intra-entity gains from intra-entity depreciable asset sales Value depreciable assets at their intra-entity transfer prices in the consolidated balance sheet.

Recognize appropriate income effects from the sale and use of intra-entity transferred assets. Re-establish historical cost balances for the transferred assets. Defer intra-entity gains from intra-entity depreciable asset sales

Consistent with the textbook treatment of intra-entity inventory profits, all income effects of intra-entity depreciable asset profits are assigned to the original _________ of the asset

seller

Hudson Corp. owned a 85% interest in Martin Co. Martin frequently made sales of inventory to Hudson. The sales, which include a markup over cost of 25%, were $460,000 in 2020 and $520,000 in 2021. At the end of each year, Hudson still owned 40% of the goods. Net income for Martin was $932,000 during 2021. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest for 2021?

$139,080. Gross Profit Rate = Gross Profit ÷ COGS = GPR ÷ (1 − GPR) = 25% ÷ (1 + 25%) = 20%Intra-Entity Gross Profit = Transfer Price × GPR (20%)Gross Profit in 2020 Ending Inventory: ($460,000 × 20%) × Inventory remaining 40% = $36,800Gross Profit in 2021 Ending Inventory: ($520,000 × 20%) × Inventory remaining 40% = $41,600Subsidiary's Net Income ($932,000) + Intra-Entity Gross Profit in Ending Inventory for 2020 ($36,800) − Intra-Entity Gross Profit in 2021 Inventory Deferred ($41,600) = $927,200 × Noncontrolling Interest 15% = $139,080 Net Income Attributable to the Noncontrolling Interest

Timeline of Intra‐Entity Inventory Transfer: 1. During 2020, intra entity inventory transfers were made between the parent seller and the subsidiary buyer. By the end of 2020, the subsidiary still held some and had not resold them to outside parties. If we are preparing a consolidation worksheet for the year ended on 12/31/20, what consolidation entries are made? 2. Next, the inventory at hand on 12/31/20 were sold to outsiders in 2021 and the profit from the intra‐entity transfer could now be recognized. Also, during 2021, new inventory transfers were made. By the end of 2021, the subsidiary still held some inventory from the 2021 transfers. When preparing a consolidation worksheet for 2021, what consolidation entries are made?

1. TI: Eliminate sales revenue from the 2020 transfer G: Eliminate intra-entity profit from the 2020 inventory still on hand 2. *G: Recognize profit deferred from the 2020 inventory sold to outsiders in 2021 TI: Eliminate sales revenue from the 2021 transfer G: Eliminate intra-entity profit from the 2021 inventory still on hand

As part of Consolidation Entry S, the debit to the subsidiary's RE is reduced due to intra-entity gross profits in beginning inventory. What effect does this reduction have on the beginning-of-the-year balance of the noncontrolling interest? There is no effect on the beginning balance of the noncontrolling interest. The beginning balance of the noncontrolling interest is entered as a larger amount. The beginning balance of the noncontrolling interest is entered as a smaller amount.

The beginning balance of the noncontrolling interest is entered as a smaller amount.

Example: UPSTREAM Land Transfer Parker Inc. owned 100% of the common stock of Stubben, Inc. On 3/31/2020, Stubben sold land costing $40,000 to Parker for $100,000. Parker sold the land to an outside party in 2022 for $120,000. Required: Prepare the consolidation entries for the years ended on: •12/31/2020 •12/31/2021 •12/31/2022 --------------------------------------------------------------------------- Also, what if DOWNSTREAM Land Transfer AND Parent uses EQUITY Method? (J/E's)

Fake Gain = $60K (2020) Gain = $20K (2022) Total Gain = $80K (all in 2022) In 2020: Seller (Stubben/Sub): Dr. Cash 100,000 Cr. Land 40,000 Cr. Gain on Sale 60,000 Buyer (Parker/Parent): Dr. Land 100,000 Cr. Cash 100,000 *Cash is canceled *Land, Gain on sale will be eliminated by Entry TL Consolidation Entry TL (Transferred Land) on 12/31/2020 (year of transfer): Dr. Gain on Sale of Land 60,000 Cr. Land 60,000 *To eliminate unrealized gain from the land transfer and adjust the land value to the old basis before transfer. Consolidation Entry *GL on 12/31/2021 (and every year following transfer): Dr. Retained Earnings (beg. balance of seller) 60,000 Cr. Land 60,000 *To eliminate unrealized gain from the beginning RE and adjust the land value to the old basis. In 2022:Seller (Parker/Parent): Dr. Cash 120,000 Cr. Land 100,000 Cr. Gain on Sale 20,000 Consolidation Entry *GL on 12/31/2022 (year of sale to outside party): Dr. Retained Earnings (beg. balance of seller) 60,000 Cr. Gain on Sale of Land 60,000 *To remove intra‐entity gain from the original transfer so that total gain from sale could be recognized in the current period when land is sold to an outside party. *Shift $60,000 from retained earnings to current period; total gain recognized in 2022 = 20,000 + 60,000 = 80,000 ------------------------------------------------------------ If DOWNSTREAM Land Transfer AND Parent uses EQUITY Method Consolidation Entry TL on 12/31/2020: Dr. Gain on Sale of Land 60,000 Cr. Land 60,000 Consolidation Entry *GL on 12/31/2021: Dr. Investment in Stubben 60,000 Cr. Land 60,000 Consolidation Entry *GL on 12/31/2022 (year of sale to an outside party): Dr. Investment in Stubben 60,000 Cr. Gain on Sale of Land 60,000

How do gross profits resulting from upstream inventory transfers affect the computation of consolidated net income attributable to the noncontrolling interest? (2) Ending inventory gross profits decrease the noncontrolling interest's share of consolidated net income. Ending inventory gross profits increase the noncontrolling interest's share of consolidated net income. Beginning inventory gross profits increase the noncontrolling interest's share of consolidated net income. Beginning inventory gross profits decrease the noncontrolling interest's share of consolidated net income.

Ending inventory gross profits decrease the noncontrolling interest's share of consolidated net income. Beginning inventory gross profits increase the noncontrolling interest's share of consolidated net income.

Example: Upstream Depreciable Asset Transfer Padre Corp. owned 100% of the common stock of Sonny Co. Sonny purchased a machine on 1/1/2019 for $100,000 and estimated that the machine would have a useful life of 10 years with no salvage value. After two years, on 1/1/2021, Sonny sold the machine to Padre for $90,000. At the time, Sonny has recorded $20,000 in accumulated depreciation. Padre estimated that the asset had a remaining useful life of five years. Q1: How much depreciation expense will Padre record in 2021? Q2: How much depreciation expense would Sonny have recorded in 2021 if it had retained the machine and simply changed the estimated life to five years? Q3: Prepare the consolidation entries as of 12/31/2021 Q4: Prepare the consolidation entries as of 12/31/2022

Sub purchased machine for $100K, 10 years, $10,000 annual depreciation 2 years; depreciated for $20,000 Sub's book: Machine's book value = $80K Remaining life = 8 years Parent purchased machine from Sub for $90K, 5 years Book of Sonny (Seller), 1.1.21: Dr. Cash 90,000 Dr. Accumulated Depreciation 20,000 Cr. Equipment 100,000 Cr. Gain on Sale 10,000 Book of Padre (Buyer), 1.1.21: Dr. Equipment 90,000 Cr. Cash 90,000 * Cash is cancelled out Q1: Depreciation Expense (Buyer) = 90,000 buyer's purchase cost/5 years = $18,000 Q2: Depreciation Expense (consolidated-base) = *80,000/5 years = $16,000 *Book value that would be reported if the asset had stayed in the seller's book Q3: Consolidation Entry TA (Transferred Asset) on year of transfer: Dr. Gain on Sale of Equipment 10,000 Dr. Equipment 10,000* Cr. Accumulated Deprecation 20,000** - To remove unrealized gain and return equipment accounts to balances based on original cost. * Equipment -- 90,000 buyer's records (on 1/1/21) + 10,000 adj. = 100,000 single entity view ** Accumulated Dep. -- 0 buyer's records (on 1/1/21) + 20,000 adj. = 20,000 single entity view Consolidation Entry ED (Excess Depreciation) on year of transfer: Dr. Accumulated Depreciation 2,000 Cr. Depreciation Expense 2,000 - To eliminate overstatement of depreciation expense caused by inflated transfer price (unrealized gain). Q4: Consolidation Entry *TA on year following transfer: Dr. Retained Earnings (beg balance of seller) 8,000 Dr. Equipment 10,000* Cr. Accumulated Deprecation 18,000** - To return the asset value to its original historical cost and correct the balances in the beginning Retained Earnings and Accumulated Depreciation. Note: Investment in Sub replaces the seller's Retained Earnings if the parent uses the equity method and the transfer is downstream. - The buyer's depreciation expense in 2021 is $2000 higher than the consolidated depreciation expense. The buyer's excess depreciation reduces the original gain, leaving only $8,000 to remove in Entry *TA. * Equipment -- 90,000 buyer's records (on 1/1/22) + 10,000 adj. = 100,000 single entity view ** 18,000 buyer's records (on 1/1/22) + 18,000 adj. = 36,000 single entity view (= 20,000 "1st 2 years" + 16,000 "in 2021") Consolidation Entry ED on year following transfer: Dr. Accumulated Depreciation 2,000 Cr. Depreciation Expense 2,000 - To eliminate excess annual depreciation expense.