CHAPTER 4 UNDERSTANDING THE ISSUES

Debit Sales and credit Cost of Goods Sold

for $50,000. Debit Cost of Goods Sold and credit Inventory for $3,000 (1/4 × $12,000).

2011 2012 NCI

$ 0 $ 200 ($1,000 × 20%) Controlling interest 0 3,800 [$3,000 + ($1,000 × 80%)] Total profit $ 0 $4,000 4. Company S has realized a $50,000 profit; however, it is not immediate. The profit will be realized over the 5-year life of the asset. Company S will realize the profit by reducing consolidated depreciation expense by $10,000 ($50,000 ÷ 5 years) each year for 5 years. The NCI will realize $2,000 (20% × $10,000) each year.

5.

2011 2012 2013 Realized gain by reducing depreciation expense [($60,000 -$50,000)÷ 5 years] $2,000 $2,000 $2,000 Balance of gain at time of sale 4,000 6. 2011 2012 2013 Profit recorded by Company S $40,000* $60,000** $ 0 Profit recorded by consolidated firm 0 0 5,000 ‡ *(40% × $100,000) **(60% × $100,000) ‡ ($100,000 ÷ 20)

7. a. Company S is better off borrowing the funds from Company P since it will receive a lower interest rate (9.5% instead of 10%). Therefore, Company S will have lower annual interest charges. b. During 2012, Company P will record interest revenue and Company S will record interest expense of $47,500 ($500,000 × 9.5%). However, the interest expense and interest revenue are eliminated during the consolidation process. Only the $40,000 ($500,000 × 8%) of external interest expense remains on the consolidated statements. c. Intercompany interest expense and interest revenue should not appear on the 2011 consolidated income statement. Only the external interest expense of $40,000 will appear on the consolidated income statement. Elimination of 25% profit from ending inventory; credit would be to inventory account. (S) Elimination of consulting services transaction.

EXERCISES

Note: The above format and presentation is not to be expected of the student. All that is required is the final consolidated income statement and its distribution to controlling and noncontrolling interests. This format is presented to aid explanation of the exercise as it shows the sources of the numbers that determine the income statement. This form will be used for future exercises and problems to aid the instructor. In 2012, only a $4,000 loss can be recognized for the sale of the machinery on the consolidated income statement. This is the amount of the impairment (FV -BV). The remaining $5,000 loss must be deferred. This loss is deferred in the year of the intercompany sale. During each following year of use, the asset and accumulated depreciation accounts are adjusted to reflect the $10,000 fair value, with an additional entry for the $1,000 of incremental depreciation.

On December 31, 2012, $5,000 of the $9,000 recorded loss should be eliminated. *Added to the subsidiary's recorded loss of $1,000 results in a total loss of $4,000 to the consolidated entity to be recognized in 2013.

EXERCISE 4-6

(1) In the year of sale, eliminate the $15,000 gain on the sale of the machine, and adjust the machine to its net book value on the date of the sale. Reduce depreciation expense and accumulated depreciation by $3,000 to reflect depreciation based on the consolidated book value.

For 2013 to 2016, eliminate unamortized gain as reflected in Jungle's beginning retained earnings. Adjust machinery to reflect book value on the date of the sale. Reduce currentyear depreciation expense and accumulated depreciation by $3,000.

( (2) Essuman defers the $15,000 profit on the completed machine and recognizes the $1,500 realized portion through the use of the machine for one-half year. No profit is recognized on the uncompleted contract.

EXERCISE 4-10

( Eliminate intercompany sales during current period ($60,000 + $40,000 (EL) Eliminate the investment in Sack and the parent's share (80%) of the subsidiary equity balances. (F1S) Eliminate the prior-year intercompany gain ($14,000 -$5,000 = $9,000) less the $3,000 realized gain. Adjust the asset and the accumulated depreciation. (F2S) Adjust current-year depreciation expense and accumulated depreciation for the intercompany truck sale effect ($9,000 ÷ 3 = $3,000). (F1P) Eliminate the current-period intercompany gain on the sale of the equipment and reestablish its net book value by reducing the account by $63,000. (F2P) Adjust current-year depreciation expense and accumulated depreciation for the intercompany sale of equipment effect ($63,000 ÷ 10 = $6,300). Fixed asset profit realized ($5,000 + $4,000).

PROBLEM 4-10

PROBLEM 4-15

( Fixed asset profit realized.