Chapter 5

INTERCOMPANY PROFIT TRANSACTIONS — INVENTORIES

Answers to Questions

1 Profits and losses on intercompany sales between affiliates are realized for consolidated statement purposes when
the purchasing affiliate resells the merchandise to parties outside of the consolidated entity. If all merchandise sold
to affiliates is resold to outside parties in the same period, there will be no unrealized profit to eliminate in preparing
the consolidated financial statements.

2 Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits
according to GAAP.

3 The amount of unrealized profit to be eliminated in the preparation of consolidated financial statements is not
affected by the existence of a noncontrolling interest. All unrealized profit must be eliminated. In the case of
upstream sales, however, the unrealized profit should be allocated between controlling and noncontrolling interests.

4 The elimination of intercompany sales and purchases does not affect consolidated net income. This is because equal
amounts are deducted from sales and cost of sales and the net effect on consolidated net income is nil. The
importance of the elimination lies in a correct statement of consolidated sales and cost of sales.

5 Consolidated working capital is not affected by the elimination of intercompany accounts receivable and accounts
payable balances. Since equal amounts are deducted from current assets and current liabilities, the effect on the
computation "current assets less current liabilities" is nil.

6 Upstream sales are sales from subsidiary to parent. Downstream sales are sales from parent to subsidiary. The
importance of this designation lies in the fact that the profit or loss on such transactions is the selling affiliate's profit
or loss. In the case of unrealized profit or loss on downstream sales, all the profit or loss is assigned to the parent-
seller. But unrealized profit or loss on upstream sales is profit or loss of the subsidiary-seller and is assigned to the
parent and noncontrolling interest in relation to their proportionate holdings.

7 Yes. If unrealized profits are not eliminated at year end, consolidated net income will be overstated in 2016. The
ending inventory of one year becomes the beginning inventory of the next year, and unrealized profits in the
beginning inventory will understate consolidated net income in 2017. The analysis of the effect of unrealized
inventory profits on consolidated net income is basically the same as the analysis for inventory errors. Like
inventory errors, errors in eliminating unrealized profits are self-correcting over any two accounting periods.
Consolidated net income for 2018 is unaffected.

8 The noncontrolling interest share is affected by upstream sales if the merchandise has not been resold by the parent
to outside parties by the end of the accounting period. This is because the noncontrolling interest share is based on
the income of the subsidiary. If the subsidiary has unrealized profit from intercompany sales, its realized income will
be less than its reported income. The noncontrolling interest share should be based on the realized income of the
subsidiary.

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5-1
5-2 Intercompany Profit Transactions — Inventories

9 A parent's investment income and investment accounts are adjusted for unrealized profits on intercompany sales to
subsidiaries in accordance with the one-line consolidation concept. The parent reduces its investment and investment
income accounts for the full amount of the unrealized profits in the year of intercompany sale. When the goods are
sold to outside parties by the subsidiary, the profits of the parent are realized and the parent increases its investment
and investment income accounts.

10 Combined cost of goods sold is overstated when there are unrealized profits in the beginning inventory and
understated when there are unrealized profits in the ending inventory. The elimination of unrealized profits in the
beginning inventory reduces (credits) cost of goods sold and the elimination of unrealized profits in the ending
inventory increases (debits) cost of goods sold.

11 The effect of unrealized profits on consolidated cost of goods sold is not affected either by a noncontrolling interest
or by the direction of the intercompany sales. All unrealized profit from both upstream and downstream sales is
eliminated from consolidated cost of goods sold.

12 Unrealized profit in the beginning inventory is reflected in an overstatement of cost of sales and is eliminated by
reducing (crediting) cost of sales and debiting the investment account if a correct equity method has been used and
the intercompany sales are downstream. In the case of upstream sales, cost of sales is credited and the
noncontrolling interest and the investment account are debited proportionately.

13 There are two equally good approaches for computing noncontrolling interest share when there are unrealized profits
from upstream sales in both beginning and ending inventories. One approach is to compute realized income of the
subsidiary by adding unrealized profits in the beginning inventory to reported subsidiary net income and deducting
unrealized profits in the ending inventory. The noncontrolling interest share is then equal to the realized income of
the subsidiary multiplied by the noncontrolling interest percentage.
The other approach is to compute the noncontrolling interest percentage in reported subsidiary net income,
in unrealized profits in beginning inventory, and in unrealized profits in ending inventory. Noncontrolling interest
share is then computed by adding the noncontrolling interest percentage in unrealized profits in the beginning
inventory to the noncontrolling interest share of reported income, and subtracting the noncontrolling interest
percentage relating to the unrealized profits in the ending inventory.

14 The assumption that unrealized profits in an ending inventory are realized in the succeeding period is a convenience,
but it does not result in incorrect measurements of consolidated net income as long as the unrealized profits at any
statement date are correctly determined. This is because any unrealized profits in beginning inventory that are
considered realized are credited to cost of sales. The same items will appear as unrealized profits in the ending
inventory if they remain unsold, and the elimination of these items results in debiting cost of sales for the same
amount. Thus, the workpaper effects are offsetting as illustrated in the following workpaper entries, which assume
$5,000 unrealized profits from downstream sales.

Investment in subsidiary 5,000

Cost of sales 5,000
To eliminate unrealized profit in beginning inventory.

Cost of sales 5,000

Inventory 5,000
To eliminate unrealized profit in ending inventory.

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Chapter 5 5-3
SOLUTIONS TO EXERCISES

Solution E5-1

1 b 5 c
2 d 6 a
3 a 7 a
4 c 8 c

Solution E5-2 [AICPA adapted]

1 a

2 c
Unrealized profits from intercompany sales are eliminated from the ending
inventory: $960 combined current assets less $36 unrealized profit ($180 ´
20%).

3 c
Combined cost of sales of $2,250 less $750 intercompany sales

Solution 5-3

1 d
Pop's separate income (in thousands) $2,000
Add: Share of Son's income ($1,000 ´ 100%) 1,000
Add: Realization of profit deferred in 2016
$3,000 - ($3,000/150%) 1,000
Less: Unrealized profit in 2017 inventory
$2,400 - ($2,400/150%) (800)
Controlling share of consolidated net income $3,200

2 d
Combined sales $2,800
Less: Intercompany sales (100)
Consolidated sales $2,700

3 c
Combined cost of sales $1,360
Less: Intercompany purchases (100)
Less: Unrealized profit in beginning inventory (8)
Add: Unrealized profit in ending inventory 20
Consolidated cost of sales $1,272

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5-4 Intercompany Profit Transactions — Inventories
Solution E5-4

1 b
Pop's share of Son's income ($120,000 ´ 80%) $ 96,000
Less: Unrealized profit in ending inventory
($40,000 ´ 50% unsold ´ 80% owned) (16,000)
Income from Son $ 80,000

2 d
Combined cost of sales $ 900,000
Less: Intercompany sales (200,000)
Add: Unrealized profit in ending inventory 20,000
Consolidated cost of sales $ 720,000

3 b
Reported income of Son $ 120,000
Unrealized profit (20,000)
Son's realized income 100,000
Noncontrolling interest percentage 20%
Noncontrolling interest share $ 20,000

Solution E5-5

1 c
Combined sales $1,800,000
Less: Intercompany sales (400,000)
Consolidated sales $1,400,000

2 c
Unrealized profit in beginning inventory
$100,000 - ($100,000/125%) $ 20,000

Unrealized profit in ending inventory

$125,000 - ($125,000/125%) $ 25,000

3 b
Combined cost of goods sold $1,440,000
Less: Intercompany sales (400,000)
Less: Unrealized profit in beginning inventory
$100,000 - ($100,000/125%) (20,000)
Add: Unrealized profit in ending inventory
$125,000 - ($125,000/125%) 25,000
Consolidated cost of goods sold $1,045,000

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Chapter 5 5-5
Solution E5-6

1 a
Pam's separate income $200,000
Add: Income from Sun (below) 144,550
Controlling share of consolidated net income $344,550

Sun's reported income $200,000

Less: Patent amortization (20,000)
Add: Unrealized profit in beginning inventory
[$112,500 - ($112,500/150%)] 37,500
Less: Unrealized profit in ending inventory
[$33,000 - ($33,000/150%)] (11,000)
Sun’s adjusted and realized income $206,500

Pam’s 70% controlling share of Sun’s realized income $144,550

Noncontrolling interest share (30%) $ 61,950

2 c
Pop's share of Son’s reported net loss
($150,000 loss ´ 60%) $(90,000)
Add: Unrealized profit in ending inventory
($200,000 ´ 1/4 unsold) (50,000)
Income from Son (140,000)
Pop's separate income 300,000
Controlling share of consolidated net income $160,000

3 b
Sun's reported net income $300,000
Add: Realized profit in beginning inventory
$150,000 - ($150,000/1.25) 30,000
Less: Deferred profit in ending inventory
$200,000 - ($200,000/1.25) (40,000)
Income from Sun $290,000
Pam’s 75% controlling share of Sun’s income $217,500
Noncontrolling interest share (25%) $ 72,500

Solution E5-7

2016 2017 2018

Pam's separate income $1,800 $2,400 $2,100
Add: 80% of Sun's reported income 2,400 2,640 2,280
Add: Realization of profits in
beginning inventory 180 240
Less: Unrealized profits in ending
Inventory (180) (240) (120)
Controlling share of consolidated NI $4,020 $4,980 $4,500
Add: Noncontrolling interest share 600 660 570
Consolidated net income $4,620 $5,640 $5,070

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5-6 Intercompany Profit Transactions — Inventories
Solution E5-8

Pop Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2016
(in thousands)
Sales ($3,200 + $800 - $320 intercompany sales) $3,680
Cost of sales ($1,600 + $320 - $320 intercompany
purchases + $80 unrealized profit in ending inventory) (1,680)
Gross profit 2,000
Other expenses ($800 + $240) (1,040)
Cnsolidated net income 960
Less: Noncontrolling interest share ($240 ´ 20%) (48)
Controlling share of consolidated net income $ 912

Solution E5-9

1 Noncontrolling interest share

Sun's reported net income $ 50,000
Add: Intercompany profit from upstream sales in
beginning inventory 5,000
Less: Intercompany profit from upstream sales in
ending inventory (10,000)
Sun’s adjusted and realized income $ 45,000
Noncontrolling interest share (40%) $ 18,000

2 Consolidated sales
Combined sales $1,250,000
Less: Intercompany sales 100,000
Consolidated sales $1,150,000

Consolidated cost of sales

Combined cost of sales $ 650,000
Less: Intercompany sales (100,000)
Add: Intercompany profit in ending inventory 10,000
Less: Intercompany profit in beginning inventory (5,000)
Consolidated cost of sales $ 555,000

Total Consolidated Income

Combined income $ 300,000
Less: Intercompany profit in ending inventory (10,000)
Add: Intercompany profit in beginning inventory 5,000
Total Consolidated Income $ 295,000

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Chapter 5 5-7
Solution E5-10

Pop Corporation and Subsidiary

Consolidated Income Statement
December 31, 2018
(in thousands)

Sales ($2,000 + $1,000 - $180 intercompany) $2,820

Cost of sales ($800 + $500 - $180 intercompany -
$20 unrealized profit in beginning inventory + $30
unrealized profit in ending inventory (1,130)
Gross profit 1,690
Depreciation expense (340)
Other expenses ($180 + $120) (300)
Total consolidated income 1,050
Less: Noncontrolling interest share ($300 + $20 profit
in beginning inventory - $30 profit in end. inventory) ´ 20% (58)
Controlling interest share of consolidated net income $ 992

Supporting computations
Cost of investment in Son at January 1, 2017 $ 1,200
Implied fair value of Son ($1,200 / 80%) $ 1,500
Book value of Son (1,400)
Goodwill $ 100

Solution E5-11

1 b
Income as reported $ 200,000
Add: Realization of profits in beginning inventory
$120,000 - ($120,000/1.2) 20,000
Less: Unrealized profits in ending inventory
$360,000 - ($360,000/1.2) (60,000)
Realized income 160,000
Percent ownership 60%
Income from Sun $ 96,000

2 c
Sun's equity as reported ($3,400,000 + $2,100,000) $5,500,000
Less: Unrealized profit in ending inventory (60,000)
Realized equity 5,440,000
Noncontrolling share 40%
Noncontrolling interest December 31, 2016 $2,176,000

3 b
Realized equity $5,440,000
Controlling share 60%
Investment balance December 31, 2016 $3,264,000

Note: The excess fair value over book value is fully amortized. Therefore, the
investment balance of $3,264,000 plus the noncontrolling interest of
$2,176,000 is equal to the $5,440,000 realized equity at the balance sheet
date.

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5-8 Intercompany Profit Transactions — Inventories
Solution E5-12

Pop Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2016

Sales ($5,520,000 - $480,000 intercompany sales) $5,040,000

Cost of sales ($3,680,000 - $480,000 - $20,000a + $48,000b) (3,228,000)
Gross profit 1,812,000
Operating expenses (640,000)
Total consolidated income 1,172,000
Less: Noncontrolling interest share [$160,000 - ($48,000 ´ .2)] (150,400)
Controlling share of consolidated net income $1,021,600

aUnrealized profit in beginning inventory (downstream) ($720,000 - $640,000) ´ .25 = $20,000

bUnrealized profit in ending inventory (upstream) ($480,000 - $360,000) ´ .4 = $48,000

SOLUTIONS TO PROBLEMS

Solution P5-1

Pam Corporation and Subsidiary

Consolidated Statement of Income and Retained Earnings
for the year ended December 31, 2017
(in thousands)
Sales ($13,000 + $6,500 - $800 intercompany sales) $18,700
Less: Cost of sales ($8,000 + $3,900 - $800 inter-
company purchases - $120 unrealized profit in beginning
inventory + $160 unrealized profit in ending inventory) (11,140)
Gross profit 7,560
Other expenses ($3,400 + $1,600) (5,000)
Consolidated net income 2,560
Noncontrolling interest share($1,000,000+$120,000-$160,000)´10% (96)
Controlling share of consolidated net income 2,464
Add: Beginning consolidated retained earnings 3,692
Less: Dividends for the year (1,000)
Consolidated retained earnings December 31 $ 5,156

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Chapter 5 5-9
Solution P5-2

1 Consolidated cost of sales — 2018

Combined cost of sales ($625,000 + $300,000) $925,000
Less: Intercompany purchases (300,000)
Add: Profit in ending inventory 24,000
Less: Profit in beginning inventory (12,000)
Consolidated cost of sales $637,000

2 Noncontrolling interest share — 2018

Son's net income ($600,000 - $300,000 - $150,000) $ 150,000
Add: Profit in beginning inventory 12,000
Less: Profit in ending inventory (24,000)
Son's realized income 138,000
Noncontrolling interest percentage 10%
Noncontrolling interest share $ 13,800

3 Consolidated Controlling share of NI— 2018

Consolidated sales ($900,000 + $600,000 - $300,000) $1,200,000
Less: Consolidated cost of sales (637,000)
Less: Consolidated expenses ($225,000 + $150,000) (375,000)
Less: Noncontrolling interest share (13,800)
Controlling share of consolidated net income $ 174,200

Alternatively,
Pop's separate income $ 50,000
Add: Income from Son 124,200
Controlling share of consolidated net income $ 174,200
Add: Noncontrolling interest share 13,800
Consolidated net income $188,000

4 Noncontrolling interest at December 31, 2018

Equity of Son December 31, 2018 $ 520,000
Less: Unrealized profit in ending inventory (24,000)
Noncontrolling interest percentage 10%
Noncontrolling interest December 31 $ 49,600

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5-10 Intercompany Profit Transactions — Inventories
Solution P5-3

1 Inventories for consolidated balance sheet at December 31, 2017

Beginning inventory — Pam ($120,000 - $8,000a) $112,000
Beginning inventory — Sun ($77,500 - $15,500b) 62,000
Beginning inventory — Toy ($48,000 - $0) 48,000
Inventories December 31 $222,000

Intercompany profit:
aPam:
Inventory acquired intercompany ($120,000 ´ 40%) $ 48,000
Cost of intercompany inventory ($48,000/1.2) (40,000)
Unrealized profit in Pam's inventory $ 8,000
bSun:
Inventory acquired intercompany ($77,500 ´ 100%) $ 77,500
Cost of intercompany inventory ($77,500/1.25) (62,000)
Unrealized profit in Sun's inventory $ 15,500

2 Inventories for consolidated balance sheet at December 31, 2018

Ending inventory — Pam ($108,000 - $9,000c) $ 99,000
Ending inventory — Sun ($62,500 - $12,500d) 50,000
Ending inventory — Toy ($72,000 - 0) 72,000
Inventories December 31 $221,000

Intercompany profit:
cPam:
Inventory acquired intercompany ($108,000 ´ 50%) $ 54,000
Cost of intercompany inventory ($54,000/1.2) (45,000)
Unrealized profit in Pam's inventory $ 9,000
dSun:
Inventory acquired intercompany ($62,500 ´ 100%) $ 62,500
Cost of intercompany inventory ($62,500/1.25) (50,000)
Unrealized profit in Sun's inventory $ 12,500

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Chapter 5 5-11
Solution P5-4 (in thousands)

1 Pop's income from Son 2016 2017 2018

75% of Son's net income $3,600 $4,050 $3,150
Unrealized profit in December 31,
2016 inventory (downstream)
($2,400 ´ 1/2) ´ 100% (1,200) 1,200
Unrealized profit in December 31,
2017 inventory (upstream)
$1,200 ´ 75%      (900) 900
Pop's income from Son $2,400 $4,350 $4,050

2 Pop’s net income

Pop’s separate income $21,600 $20,400 $24,000
Add: Income from Son 2,400 4,350 4,050
Pop's net income $24,000 $24,750 $28,050

3 Consolidated net income

Separate incomes of Pop and
Son combined $26,400 $25,800 $28,200
Unrealized profit in December 31,
2016 inventory (1,200) 1,200
Unrealized profit in December 31,
2017 inventory      (1,200) 1,200
Total consolidated income 25,200 25,800 29,400
Less: Noncontrolling interest share
2016 $4,800 ´ 25% (1,200)
2017 ($5,400 - $1,200) ´ 25% (1,050)
2016 ($4,200 + $1,200) ´ 25%        (1,350)
Controlling share of net income $24,000 $24,750 $28,050

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5-12 Intercompany Profit Transactions — Inventories
Solution P5-5
Pam Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2017
(in thousands)
Adjustments and Consolidated
Pam 100% Sun Eliminations Statements
Income Statement
Sales $ 800 $ 400 a 120 $1,080
Income from Sun 102 d 102
Cost of sales 400* 200* b 12 a 120 472*
c 20
Depreciation expense 110* 40* 150*
Other expenses 192* 60* f 6 258*
Net income $ 200 $ 100 $ 200

Retained Earnings
Retained earnings — Pam $ 600 600
Retained earnings — Sun $ 380 e 380
Net income 200ü 100ü 200
Dividends 100* 50* d 50 100*
Retained earnings
December 31 $ 700 $ 430 $ 700

Balance Sheet
Cash $ 54 $ 37 $ 91
Receivables — net 90 60 g 17 133
Inventories 100 80 b 12 168
Other assets 70 90 160
Land 50 50 100
Buildings — net 200 150 350
Equipment — net 500 400 900
Investment in Sun 736 c 20 d 52
e 704
Patents ______ _____ e 24 f 6 18
$1,800 $ 867 $1,920

Accounts payable $ 160 $ 47 g 17 $ 190

Other liabilities 340 90 430
Common stock, $10 par 600 300 e 300 600
Retained earnings 700ü 430ü _________ _________ 700
$1,800 $ 867 981 981 $1,920
*Deduct
Supporting computations
Unrealized profit in beginning inventory ($40,000 ´ 1/2) = $20,000
Unrealized profit in ending inventory ($48,000 ´ 1/4) = $12,000

Sun's income of $100,000 plus $20,000 profit in beginning inventory, less $12,000 profit in
ending inventory, and less $6,000 patent amortization equals $102,000 income from Sun.

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Chapter 5 5-13
Solution P5-6
Pop Corporation and Subsidiary
Consolidation Workpapers
for the year ended December 31, 2017
(in thousands)
Adjustments and Consolidated
Pop Son 75% Eliminations Statements
Income Statement
Sales $1,200 $ 800 a 260 $1,740
Income from Son 205 d 205
Cost of sales 540* 420* b 40 a 260 720*
c 20
Operating expenses 290* 80* 370*
Consolidated net income $ 650
Noncontrolling int.share ______ ______ f 75 75*
Controlling share of NI $ 575ü $ 300ü $ 575
Retained Earnings
Retained earnings — Pop $ 365 $ 365
Retained earnings — Son $ 180 e 180
Controlling share of NI 575ü 300ü 575
Dividends 300* 100* d 75
f 25 300*
Retained earnings
December 31 $ 640 $ 380 $ 640
Balance Sheet
Cash $ 170 $ 60 $ 230
Accounts receivable 330 200 g 30 500
Dividends receivable 30 h 30
Inventories 120 160 b 40 240
Land 160 100 260
Buildings — net 460 200 660
Equipment — net 400 280 680
Investment in Son 770 c 20 d 130
e 660
Goodwill ______ ______ e 400 400
$2,440 $1,000 $2,970

Accounts payable $450 $ 200 g 30 $ 620

Dividends payable 140 40 h 30 150
Other liabilities 310 80 390
Common stock, $10 par 900 300 e 300 900
Retained earnings 640ü 380ü 640
$2,440 $1,000
Noncontrolling interest January 1 e 220
Noncontrolling interest December 31 ______ f 50 270
1,540 1,540 $2,970
*Deduct
Supporting computations
Investment in Son at January 1, 2016 $600
Implied fair value of Son ($600 / 75%) $800
Book value of Son 400
Goodwill $400

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5-14 Intercompany Profit Transactions — Inventories
Solution P5-7

Preliminary computations
Investment cost $2,700,000
Implied fair value of Sun($2,700,000/0.9) $3,000,000
Less: Book value of Sun 2,500,000
Patents $ 500,000

Patent amortization $500,000/10 years = $50,000 per year

Upstream sales
Unrealized profit in December 31, 2016 inventory of Pam
$280,000 - ($280,000 ¸ 1.4) = $80,000
Unrealized profit in December 31, 2017 inventory of Pam
$420,000 - ($420,000 ¸ 1.4) = $120,000

Income from Sun

Sun's reported net income $1,000,000
Less: Patent amortization (50,000)
Less: Unrealized profit in ending inventory (120,000)
Add: Unrealized profit in beginning inventory 80,000
Sun’s adjusted and realized income $ 910,000

Pam’s 90% controlling share of Sun’s income $ 819,000

10% noncontrolling interest share of Sun’s income $ 91,000

Investment balance
Initial investment cost $2,700,000
Increase in Sun's net assets from December 31, 2015
to December 31, 2017 ($700,000 ´ 90%) 630,000
Patent amortization for 2 years (90%) ( 90,000)
Unrealized profit in December 31, 2017 inventory (108,000)
Investment balance December 31, 2017 $3,132,000

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Chapter 5 5-15
Solution P5-7 (continued)

Pam Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2017
(in thousands)

Adjustments and Consolidated

Pam Sun 90% Eliminations Statements
Income Statement
Sales $ 8,190 $5,600 a 5,600 $ 8,190
Income from Sun 819 d 819
Cost of sales 5,460* 4,000* b 120 a 5,600 3,900*
c 80
Other expenses 1,544* 600* f 50 2,194*
Consolidated net income $ 2,096
Noncontrolling int.share h 91 91*
Controlling share of NI $ 2,005 $1,000 $ 2,005

Retained Earnings
Retained earnings — Pam $ 1,200 $ 1,200
Retained earnings — Sun $ 700 e 700
Controlling share of NI 2,005ü 1,000ü 2,005
Dividends 1,000* 500* d 450
h 50 1,000*
Retained earnings
December 31 $ 2,205 $1,200 $ 2,205

Balance Sheet
Cash $ 753 $ 500 $ 1,253
Inventory 420 800 b 120 1,100
Other current assets 600 200 g 100 700
Plant assets — net 3,000 3,000 6,000
Investment in Sun 3,132 c 72 d 369
e 2,835
Patents _______ ______ e 450 f 50 400
$ 7,905 $4,500 $ 9,453

Current liabilities $ 1,700 $1,300 g 100 $ 2,900

Capital stock 4,000 2,000 e 2,000 4,000
Retained earnings 2,205ü 1,200ü 2,205
$ 7,905 $4,500

Noncontrolling interest January 1 c 8 e 315

Noncontrolling interest December 31 _______ h 41 348
10,010 10,010 $ 9,453
*Deduct

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5-16 Intercompany Profit Transactions — Inventories
Solution P5-8

Pop Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2017
(in thousands)

100% Adjustments and Consolidated

Pop Son Eliminations Statements
Income Statement
Sales $ 800 $ 400 a 120 $1,080
Income from Son 108 d 108
Cost of sales 400* 200* b 12 a 120 472*
c 20
Depreciation expense 110* 40* 150*
Other expenses 192* 60* 252*
Net income $ 206 $ 100 $ 206

Retained Earnings
Retained earnings — Pop $ 606 606
Retained earnings — Son $ 380 e 380
Net income 206ü 100ü 206
Dividends 100* 50* d 50 100*
Retained earnings
December 31 $ 712 $ 430 $ 712

Balance Sheet
Cash $ 54 $ 37 $ 91
Receivables — net 90 60 f 17 133
Inventories 100 80 b 12 168
Other assets 70 90 160
Land 50 50 100
Buildings — net 200 150 350
Equipment — net 500 400 900
Investment in Son 748 c 20 d 58
e 710
Goodwill ______ ______ e 30 30
$1,812 $ 867 $1,932

Accounts payable $ 160 $ 47 f 17 $ 190

Other liabilities 340 90 430
Common stock, $10 par 600 300 e 300 600
Retained earnings 712 430 ______ _______ 712
$1,812 $ 867 987 987 $1,932
*Deduct
Supporting computations
Unrealized profit in beginning inventory ($40,000 ´ 1/2) = $20,000
Unrealized profit in ending inventory ($48,000 ´ 1/4) = $12,000

Son's income of $100,000 plus $20,000 profit in beginning inventory less $12,000
profit in ending inventory.

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Chapter 5 5-17
Solution P5-9 (in thousands)

Preliminary computations
Investment cost $5,400
Implied fair value of Son ($5,400 / 90%) $6,000
Less: Book value of Son 5,000
Goodwill $1,000

Upstream sales
Unrealized profit in December 31, 2018 inventory of Pop
$560 - ($560 ¸ 1.4) = $160
Unrealized profit in December 31, 2019 inventory of Pop
$840 - ($840 ¸ 1.4) = $240

Income from Son

Son's reported net income $2,000
Less: Unrealized profit in ending inventory (240)
Add: Unrealized profit in beginning inventory 160
Son’s adjusted and realized income $1,920

Pop’s 90% controlling interest share of Son’s income $1,728

10% noncontrolling interest share of Son’s income $ 192

Investment balance
Initial investment cost $5,400
Increase in Son's net assets from December 31, 2016
to December 31, 2019 ($1,400 ´ 90%) 1,260
Unrealized profit in December 31, 2019 inventory (90%) (216)
Investment balance December 31, 2019 $6,444

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5-18 Intercompany Profit Transactions — Inventories
Solution P5-9 (continued)

Pop Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2019
(in thousands)
Adjustments and Consolidated
Pop Son 90% Eliminations Statements
Income Statement
Sales $16,380 $11,200 a 11,200 $16,380
Income from Son 1,728 d 1,728
Cost of sales 10,920* 8,000* b 240 a 11,200 7,800*
c 160
Other expenses 3,088* 1,200* 4,288*
Consolidated net income $ 4,292
Noncontrolling int.share f 192 192*
Controlling share of NI $ 4,100 $ 2,000 $ 4,100

Retained Earnings
Retained earnings — Pop $ 2,500 $ 2,500
Retained earnings — Son $ 1,400 e 1,400
Controlling share of NI 4,100ü 2,000ü 4,100
Dividends 2,000* 1,000* d 900 2,000*
f 100
Retained earnings
December 31 $ 4,600 $ 2,400 $ 4,600

Balance Sheet
Cash $ 1,516 $ 1,000 $ 2,516
Inventory 840 1,600 b 240 2,200
Other current assets 1,200 400 g 200 1,400
Plant assets — net 6,000 6,000 12,000
Investment in Son 6,444 c 144 d 828
e 5,760
Goodwill _______ _______ e 1,000 1,000
$16,000 $ 9,000 $19,116

Current liabilities $ 3,400 $ 2,600 g 200 $ 5,800

Capital stock 8,000 4,000 e 4,000 8,000
Retained earnings 4,600ü 2,400ü 4,600
$16,000 $ 9,000

Noncontrolling interest January 1 c 16 e 640

Noncontrolling interest December 31 ________ f 92 716
20,120 20,120 $19,116
*Deduct

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Chapter 5 5-19
Solution PR 5-1
No,ASC 810-10-45-2 specifically precludes including the subsidiary retained earnings
at acquisition in consolidated retained earnings.

Solution PR 5-2
Noncontrolling interest should clearly be classified as equity in the consolidated
balance sheet (ASC 810-10-45-16).

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