Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

CHAPTER 7

INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS

ANSWERS TO QUESTIONS

Q7-1   Profits on intercorporate sales generally are considered to be realized when the affiliate
that has purchased the item sells it to a nonaffiliate. For depreciable or amortizable items that
are used by the affiliate in its operations, profits are considered to be realized as the purchaser
depreciates or amortizes the asset.

Q7-2   An upstream sale occurs when a subsidiary sells an item to the parent company. If the
asset is not resold before the end of the period, the parent is the company holding the asset and
any unrealized profits are recorded on the books of the subsidiary.

Q7-3   If the purchaser records the services received as an expense, both revenues and
expenses will be overstated in the consolidated income statement in the period in which the
intercorporate services are provided. In the event the services are capitalized by the purchaser,
the cost of the asset will be overstated, depreciation expense and accumulated depreciation will
be overstated if the services are assigned to a depreciable asset, and service revenue will be
overstated.

Q7-4   (a)  Unrealized profit on an intercorporate sale generally is included in the reported net

income of the seller.

(b)  All unrealized profit on current-period intercorporate sales must be excluded from

consolidated net income until realized through resale to a nonaffiliate.

Q7-5   Profits on intercompany sales are included in consolidated net income in the period in
which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one of
the companies at the start of the period and the item is sold to a nonaffiliate during the current
period, the intercompany profit is included in the computation of consolidated net income for the
current period.

Q7-6   The profits continue to be unrealized in this case and therefore must be eliminated from
both the beginning and ending asset and retained earnings balances when consolidated
statements are prepared. There should be no income statement effect for the current period.

Q7-7   A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is not
resold before the end of the period, the subsidiary is the company holding the asset at year-end
and any unrealized profits are recorded on the books of the parent company.

Q7-8   The entire balance of unrealized profits is eliminated in all cases. While the direction of
the sale will affect the allocation of unrealized profits between companies, it does not change
the total amount of profit eliminated.

Q7-9   Consolidated net income is reduced by the amount of unrealized profits assigned to the
shareholders of the parent company. When a downstream sale occurs, all the profit is on the
parent's books and consolidated net income is reduced by the full amount of any unrealized
profit. On the other hand, when an upstream sale occurs, all the intercorporate profit is recorded
on the books of the subsidiary and the amount of income assigned to both the parent company
shareholders and the noncontrolling shareholders is reduced by a proportionate amount of any
unrealized profit.

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Q7-10  The amount of intercorporate profit realized in the current period from prior years' sales
to the parent is added to the reported net income of the subsidiary in computing income
assigned to the noncontrolling interest.

Q7-11  Income assigned to noncontrolling interest for the current period will be less than a
proportionate share of the reported net income of the subsidiary. In determining the amount of
income to be assigned to the noncontrolling interest in the consolidated income statement, the
net income reported by the subsidiary must be adjusted to exclude any unrealized gain
recorded during the period on the sale of depreciable assets to the parent. On the other hand, if
an unrealized loss had been recorded, the basis used in assigning income to the noncontrolling
interest would be greater than the reported net income of the subsidiary. Such adjustments
must be made to assure that the income assigned to noncontrolling interest is based on the
contribution of the subsidiary to consolidated net income rather than the amount the subsidiary
may have reported as net income.

Q7-12  All other factors being equal, the income assigned to noncontrolling interest will be larger
if the sale occurs at the start of the current period. Some part of the gain will be considered
realized in the current period as the parent depreciates the asset if the sale occurs before year-
end. None of the gain will be considered realized in the period of transfer if the sale occurs at
year-end.

Q7-13  As in all other cases, income from the subsidiary recorded on the parent's books must
be eliminated in preparing the consolidated income statement and an appropriate amount of
subsidiary net income must be assigned to the noncontrolling interest if the parent owns less
than 100 percent of the subsidiary's stock. The gain recorded on the parent's books also must
be eliminated.

Q7-14  Depreciation expense recorded by the subsidiary is overstated from the viewpoint of the
consolidated entity when the subsidiary pays the parent more than book value for the asset at
the start of the period. As a result, an eliminating entry is needed to reduce depreciation
expense and accumulated depreciation by the amount of excess depreciation recorded during
20X3.

Q7-15  Following an intercorporate sale of a depreciable asset, the eliminating entries should

adjust the balance in the asset account to reflect the original purchase price to the first owner
and accumulated depreciation should be adjusted to reflect the balance that would be reported
if the asset were still held by the first owner. In the case of an intercorporate sale of an
intangible asset, only the unamortized balance normally is reported and an eliminating entry is
needed to adjust the carrying value to that which would be reported if the asset were still held by
the first owner.

Q7-16  Profit on an intercorporate sale of land is considered realized at the time the purchaser
sells the land to a nonaffiliate. Profit on equipment normally is considered realized as the asset
is used and depreciated on the books of the purchaser. Equipment typically is considered to be
used up in the production process and therefore is charged to expense over its remaining
economic life, while land is not.

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Q7-17  A portion of the profit is considered realized each period as the asset is depreciated by
the purchaser. Thus, the net amount considered unrealized decreases each period and a
smaller debit to beginning retained earnings is needed.

Q7-18A The balance in the investment account will depend on which method the parent uses to
account for its investment in the subsidiary. If the parent uses (a) the cost method or (b) the
modified equity method, no adjustments are made on the parent company's books for
unrealized intercompany profits and the balance in the investment account will be the same as if
there were no unrealized profits. If the parent uses (c) the fully-adjusted equity method, the
balance in the investment account will be reduced by the full amount of the unrealized profit
when the profit is on the parent's books and by a proportionate share of the unrealized profit
when it is on the subsidiary's books.

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SOLUTIONS TO CASES

C7-1 Correction of Elimination Procedures

MEMO

To: Controller
Plug Corporation

From:                             , CPA

Re: Elimination of Intercompany Profit on Equipment

This memo is in response to our review of the elimination procedures used in preparing the
consolidated statements for Plug Corporation at December 31, 20X2. You have correctly
identified the need to eliminate the effects of the intercorporate sale of equipment. In preparing
your consolidated statements, all intercompany balances and transactions should be eliminated.
[ARB 51, Par. 6; ASC 810]

Your eliminating entry recorded at December 31, 20X2, was:

Equipment 150,000
Loss on Sale of Equipment 150,000

This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the sale
of equipment to Plug and adds $150,000 to the equipment account. By adding back $150,000 to
equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000). This represents the
carrying value of the equipment on Coy’s books at the time of sale but does not reflect the
purchase price paid by Coy ($1,200,000) or the accumulated depreciation at the time of sale
($200,000). Moreover, the eliminating entry above understates depreciation expense for the
year. The correct eliminating entry at December 31, 20X2, is:

Equipment 350,000
Depreciation Expense 15,000
Accumulated Depreciation 215,000
Loss on Sale of Equipment 150,000

A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by
Plug to $1,200,000, the initial purchase price to the consolidated entity. Depreciation expense
must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug to $100,000
($1,200,000/12 years) based on the initial purchase price. Accumulated depreciation must be
credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x 1 year] reported by Plug
to $300,000 [($1,200,000/12 years) x 3 years]. As previously noted, the $150,000 loss recorded
by Coy must be eliminated. If the amounts included in second eliminating entry are omitted,
consolidated net income for 20X2 and the retained earnings balance at December 31, 20X2, will
be overstated and the balances for equipment and accumulated depreciation will be
understated.

Primary citation:
ARB 51, Par. 6; ASC 810

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C7-2 Elimination of Intercorporate Services

MEMO

To: Chief Accountant

Dream Corporation

From:                            , CPA

Re: Elimination of Legal Services Provided by Parent Company

This memo is in response to our discussion regarding the elimination of intercompany services
in preparing consolidated financial statements for Dream Corporation. It is my understanding
that at present Dream Corporation does not eliminate such services. In preparing consolidated
financial statements all intercompany balances and transactions should be eliminated. [ARB 51,
Par. 6; ASC 810]

The legal services provided by Dream Corporation to Classic Company and Plain Company are
intercompany transactions that should be eliminated. If the revenues recorded by the parent are
equal to the expenses recorded by the subsidiaries and both are properly recorded, elimination
of these transactions will have no impact on reported net income but will reduce consolidated
revenues and expenses by equal amounts. Financial statement readers will receive a more
accurate picture of operations of the consolidated entity if the appropriate amounts are reported.
The legal services provided to Classic Company in 20X3 should be eliminated with the following
entry:

Legal Services Revenue 80,000

Legal Services Expense 80,000

The information on intercorporate services provided to Plain Company indicates that an

additional adjustment is needed in the consolidation process. Although Plain Company recorded
its $150,000 payment to the parent as a legal expense, it should have been recorded as an
investment in land to be used in future development of its strip mine. This error should be
corrected on the books of Plain Company. If it is not, the eliminating entry prepared at
December 31, 20X3, should include an adjustment to reflect the appropriate investment in land
and would be recorded as:

Legal Services Revenue 150,000

Land 100,000
Legal Services Expense 150,000
Wage and Salary Expense 100,000

Care must be taken to capitalize only the cost of legal services in this case. The eliminating
entry should contain a debit of $100,000 ($150,000/1.50) to land since Dream Corporation bills
its services to the subsidiaries at 150 percent of the cost of services provided. Had Plain
Company debited land for its $150,000 payment to Dream, the eliminating entry at December
31, 20X3, would have been:

Legal Services Revenue 150,000

Land 50,000
Wage and Salary Expense 100,000

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C7-2 (continued)

No eliminating entry would be required at December 31, 20X4, on the legal services provided to
Classic Company in 20X3. The conditions of the intercorporate transfer of services to Plain
Company require an eliminating entry at December 31, 20X4, and in following years, as long as
Plain Company owns the strip mine. The entry at December 31, 20X4, would be:

Land 100,000
Investment in Plain 100,000

Had Plain Company debited land for its $150,000 payment to Dream in 20X3, the eliminating
entry at December 31, 20X4, would require a $50,000 debit to Investment in Plain and a
$50,000 credit to land.

Primary citation:
ARB 51, Par. 6; ASC 810

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C7-3 Noncontrolling Interest

a. When there are no unrealized profits on the subsidiary's books, a pro rata portion of the
reported net income of the subsidiary is assigned to the noncontrolling interest, adjusted for the
noncontrolling interest’s share of any amortization or write-off of differential.

b. When there are no unrealized profits on the subsidiary's books, the noncontrolling interest is
reported in the consolidated balance sheet at an amount equal to a pro rata portion of the book
value of the net assets of the subsidiary plus the noncontrolling interest’s share of any
remaining differential.

c. The effect of unrealized intercompany profits depends on which company has recorded the
profits. Those recorded on the books of the parent do not affect the income assigned to the
noncontrolling interest. When subsidiary net income includes unrealized intercompany profits,
the portion of consolidated net income assigned to the noncontrolling interest is reduced by its
portion of the unrealized profit in the period of the intercorporate sale.

(1) On a sale of land, the intercompany profit remains unrealized until the land is sold to a
nonaffiliate. When the land is resold, the profit is added to the reported net income of the
subsidiary in computing the portion of consolidated net income assigned to the noncontrolling
interest.

(2) On an intercorporate sale of a depreciable asset, a portion of the intercompany profit is

considered realized each period as the purchaser depreciates the asset. Thus, in the period of
the intercorporate sale, the adjustment to subsidiary net income for unrealized profits is based
on the gain or loss less any portion considered realized before the end of the period. Each
period thereafter, a portion of the profit or loss is considered realized and treated as an
adjustment to subsidiary income in determining the portion of consolidated net income assigned
to the noncontrolling interest.

d. Noncontrolling shareholders of a subsidiary generally will not gain a great deal of useful
information from the consolidated financial statements. Their primary focus must continue to be
on the income, assets, and liabilities of the subsidiary in which they hold direct ownership. In the
event there are a number of transactions with the parent or other affiliates, the success of the
operations of the entire economic entity may provide information useful to the noncontrolling
shareholders. Debt guarantees or other assurances by the parent may also lead to an
examination of the parent company and consolidated statements.

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C7-4 Intercompany Sale of Services

a. When preparing consolidated financial statements, Schwartz's revenue from the sale of
services to Diamond and Diamond's expenses associated with the services acquired from
Schwartz must be eliminated. The expenses related to the janitorial and maintenance activities
that will be reported in the consolidated income statement will be the actual salary and
associated costs incurred by Schwartz to provide the services to Diamond. The eliminations
have no effect on consolidated net income because revenues and expenses of equal amount
are eliminated in the preparation of the consolidated financial statements.

b. Intercompany profits from the sale of services to an affiliate normally are considered realized
at the time the services are provided. Realization of intercompany profits on services normally is
considered to occur as the services are consumed, and services such as maintenance and
repair services normally are considered to be consumed by the purchasing affiliate at the time
received.

C7-5 Intercompany Profits

Answers can be found in the companies' 10-K filings with the SEC and in their annual reports.
Note that financial statements are often included in the Form 10-K by reference to the
company’s annual report. In such cases, the financial statements are often shown in a separate
exhibit rather than in Item 8 of the Form 10-K.

a. Verizon (www.verizon.com) eliminates all intercompany profits. It discontinued the use of

regulatory accounting as provided by FASB 71 in 1994 and now no longer applies the
provisions of FASB 71.

b. All of Harley-Davidson’s (www.harleydavidson.com) intercompany transactions are eliminated

except some occurring between the Motorcycles and Financial Services segments. Some
interest and fees recognized as income by Financial Services and expense by Motorcycles are
not eliminated. This leads to higher finance income and higher expenses, but net income is
unaffected.

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SOLUTIONS TO EXERCISES

E7-1 Multiple-Choice Questions on Intercompany Transfers

[AICPA Adapted]

1. c

2. d

3. b

4. a

5. b Depreciation expense recorded by Pirn $40,000 

Depreciation expense recorded by Scroll   10,000 
Total depreciation reported $50,000 
Adjustment for excess depreciation charged
by Scroll as a result of increase in
carrying value of equipment due to gain
on intercompany sale ($12,000 / 4 years)   (3,000)
Depreciation for consolidated statements $47,000 

E7-2 Multiple-Choice Questions on Intercompany Transactions

1. d When only retained earnings is debited, and not the noncontrolling interest, a
gain has been recorded in a prior period on the parent's books.

2. a The costs incurred by Bottom to develop the equipment are research and
development costs and must be expensed as they are incurred (FASB
Statement No. 2, par. 12; ASC 730-10-25-1). Transfer to another legal entity
does not cause a change in accounting treatment within the economic entity.

3. b The $39,000 paid to Gold Company will be charged to depreciation expense

by Top Corporation over the remaining 3 years of ownership. As a result, Top
Corporation will debit depreciation expense for $13,000 each year. Gold
Company had charged $16,000 to accumulated depreciation in 2 years, for an
annual rate of $8,000. Depreciation expense therefore must be reduced by
$5,000 ($13,000 - $8,000) in preparing the consolidated statements.

4. a TLK Corporation will record the purchase at $39,000, the amount it paid. Gold
Company had the equipment recorded at $40,000; thus, a debit of $1,000 will
raise the equipment balance back to its original cost from the viewpoint of the
consolidated entity.

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-2 (continued)

5. b Reported net income of Gold Company $  45,000 

Reported gain on sale of equipment $15,000 
Intercompany profit realized in 20X6 (5,000)    (10,000)
Realized net income of Gold Company $  35,000 
Proportion of stock held by
noncontrolling interest x       .40 
Income assigned to noncontrolling interests $  14,000 

6. c Operating income reported by Top Corporation $  85,000 

Net income reported by Gold Company      45,000 
$130,000 
Less: Unrealized gain on sale of equipment
($15,000 - $5,000) (10,000)
Consolidated net income $120,000 

E7-3 Elimination Entries for Land Transfer

a. Eliminating entry, December 31, 20X4:

Gain on Sale of Land 10,000 

Land 10,000 

Eliminating entry, December 31, 20X5:

Investment in Lowly 10,000 

Land 10,000 

b. Eliminating entry, December 31, 20X4:

Gain on Sale of Land 10,000 

Land 10,000 

Eliminating entry, December 31, 20X5:

Investment in Lowly 6,000 

NCI in NA of Lowly 4,000 
Land 10,000 

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E7-4 Intercompany Services

a. Consolidated net income will not change.

b. One hundred percent of the intercompany services must always be eliminated. Thus, a
change in the level of ownership of the subsidiary will not have an impact on the amount
eliminated or on consolidated net income.

c. $38,000 = $70,000 - $32,000

E7-5 Elimination Entries for Intercompany Services

Two eliminating entries are required:

Delivery Service Revenue 76,000 

Delivery Service Expense 76,000

Accounts Payable 18,000 

Accounts Receivable 18,000

E7-6 Elimination Entries for Depreciable Asset Transfer: Year-End Sale

a.
Accumulated
Truck   Depreciation
Northern 40,000   Actual   0
5,000   15,000
Pam 45,000   "As If" 15,000

Eliminate the gain on Truck & correct asset's basis:

Gain on sale     10,000    
Truck     5,000    
Accumulated Depreciation       15,000

b.
Accumulated
Truck   Depreciation
Northern 40,000   Actual   4,000
5,000   1,000 15,000
Pam 45,000   "As If" 18,000

Eliminate the gain on Truck & correct asset's basis:

Investment in Northern   10,000    
Truck     5,000    
Accumulated Depreciation       15,000

Accumulated Depreciation   1,000    

Depreciation Expense       1,000

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E7-7 Transfer of Land

a. Eliminating entry, December 31, 20X2:

Gain on Sale of Land 45,000 

Land 45,000

Eliminating entry, December 31, 20X3:

Investment in Roan 31,500 

NCI in NA of Roan 13,500 
Land 45,000

b. Eliminating entries, December 31, 20X3 and 20X4:

Investment in Roan 30,000 

Land 30,000

E7-8 Transfer of Depreciable Asset at Year-End

a.
Accumulated
Truck   Depreciation
Minnow
Corp. 210,000   Actual   0
90,000   120,000
Frazer Corp. 300,000   "As If" 120,000

Eliminate the gain on Truck & correct asset's basis:

Gain on sale     30,000    
Truck     90,000    
Accumulated Depreciation       120,000

Computation of gain on sale of truck:

Price paid by Minnow $210,000 
Cost of truck to Frazer $300,000
Accumulated depreciation
($300,000 / 10 years) x 4 years (120,000) (180,000)
Gain on sale of truck $ 30,000 

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E7-8 (continued)

b.
Accumulated
Truck   Depreciation
Minnow Corp. 210,000   Actual   35,000
90,000   5,000 120,000
Frazer Corp. 300,000   "As If" 150,000

Eliminate the gain on Truck & correct asset's basis:

Investment in Minnow Corp.   30,000    
Truck     90,000    
Accumulated Depreciation       120,000

Accumulated Depreciation   5,000    

Depreciation Expense       5,000

E7-9 Transfer of Depreciable Asset at Beginning of Year

a.
Accumulated
Truck   Depreciation
Minnow
Corp. 245,000   Actual   35,000
55,000   5,000 90,000
Frazer Corp. 300,000   "As If" 120,000

Eliminate the gain on Truck & correct asset's basis:

Gain on Sale   35,000    
Truck     55,000    
Accumulated Depreciation       90,000

Accumulated Depreciation   5,000    

Depreciation Expense       5,000

Computation of gain on sale of truck:

Price paid by Minnow $245,000 
Cost of truck to Frazer $300,000
Accumulated depreciation
($300,000 / 10 years) x 3 years ( 90,000) (210,000)
Gain on sale of truck $ 35,000 

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E7-9 (continued)
b.
Accumulated
Truck   Depreciation
Minnow Corp. 245,000   Actual   70,000
55,000   5,000 85,000
Frazer Corp. 300,000   "As If" 150,000

Eliminate the gain on Truck & correct asset's basis:

Investment in Minnow Corp.   30,000    
Truck     55,000    
Accumulated Depreciation       85,000

Accumulated Depreciation   5,000    

Depreciation Expense       5,000

E7-10 Sale of Equipment to Subsidiary in Current Period

a.
Cash     84,000    
Accumulated Depreciation 80,000  
Equipment 150,000
Gain on sale of Equipment       14,000
Record gain on Equipment

b.

Equipment 84,000 
Cash 84,000
Journal entry to record purchase

Depreciation Expense 12,000 

Accumulated Depreciation 12,000
Journal entry to record depreciation expense

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E7-10 (continued)
c.
Accumulated
Equipment   Depreciation
Lance Corp. 84,000   Actual   12,000
66,000   2,000 80,000
Wainwrite Corp. 150,000   "As If" 90,000

Eliminate the gain on Equipment & correct asset's basis:

Gain on sale   14,000    
Equipment     66,000    
Accumulated Depreciation       80,000

Accumulated Depreciation   2,000    

Depreciation Expense       2,000

d. Eliminating entry at January 1, 20X8, to eliminate intercompany sale of equipment

and prepare a consolidated balance sheet only:

Eliminate the gain on Equipment & correct asset's basis:

Investment in Lance Corp.   12,000    
Equipment     66,000    
Accumulated Depreciation       78,000

E7-11 Upstream Sale of Equipment in Prior Period

a. Consolidated net income for 20X8:

Operating income reported by Baywatch $100,000
Net income reported by Tubberware $40,000
Amount of gain realized in 20X8
($30,000 / 12 years)    2,500
Realized net income of Tubberware    42,500
Consolidated net income $142,500

b. Consolidated net income for 20X8 would be unchanged.

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E7-11 (continued)
c.
Accumulated
Equipment   Depreciation
Baywatch 270,000   Actual   67,500
30,000   2,500 55,000
Tubberware 300,000   "As If" 120,000

Eliminate the gain on Equipment & correct asset's basis:

Investment in Tubberware   20,000    
NCI in NA of Tubberware   5,000    
Equipment     30,000    
Accumulated Depreciation       55,000

Accumulated Depreciation   2,500    

Depreciation Expense       2,500

E7-12 Elimination Entries for Midyear Depreciable Asset Transfer

a.
Accumulated
Equipment   Depreciation
Andrews Co. 28,000   Actual   4,000
2,000   1,500 12,500
Kline Corp. 30,000   "As If" 15,000

Eliminate the gain on Equipment & correct asset's basis:

Investment in Andrews Co.   10,500    
Equipment     2,000    
Accumulated Depreciation       12,500

Accumulated Depreciation   1,500    

Depreciation Expense       1,500

b.
Accumulated
Equipment   Depreciation
Andrews Co. 28,000   Actual   12,000
2,000   3,000 11,000
Kline Corp. 30,000   "As If" 20,000

Eliminate the gain on Equipment & correct asset's basis:

Investment in Andrews Co.   9,000    
Equipment     2,000    
Accumulated Depreciation       11,000

Accumulated Depreciation   3,000    

Depreciation Expense       3,000

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E7-13 Consolidated Net Income Computation

a. Downstream sale of land:

20X4   20X5  
Verry’s separate operating income $ 90,000  $110,000 
Less: Unrealized gain on sale of land (25,000)      
Verry’s realized operating income $ 65,000  $110,000 
Spawn’s realized net income 60,000  40,000 
Consolidated net income $125,000  $150,000 
Income to noncontrolling interest:
($60,000 x 0.25) (15,000)
($40,000 X 0.25)      (10,000)
Income to controlling interest $110,000  $140,000 

b. Upstream sale of land:

20X4   20X5  
Verry’s separate operating income $ 90,000  $110,000 
Spawn’s net income $60,000 
Less: Unrealized gain on sale of land (25,000)
Spawn’s realized net income 35,000  40,000 
Consolidated net income $125,000  $150,000 
Income to noncontrolling interest:
($35,000 x 0.25) (8,750)
($40,000 x 0.25)      (10,000)
Income to controlling interest $116,250  $140,000 

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E7-14 Elimination Entries for Intercompany Transfers

a. Operating income of Grand Delivery $65,000 

Net income of Acme Real Estate Company $40,000 
Less: Unrealized profit on land sale (25,000)
Acme’s realized net income 15,000 
Consolidated net income $80,000 

b. Note: the term “basic” equity method in part b of the problem slipped through the
editorial process. This should have read “fully adjusted” equity method. The
answers given here are based on the fully adjusted equity method.

Journal entries recorded by Speedy Delivery:

Cash 8,000 
Investment in Acme Real Estate 8,000 
Record dividends from Acme Real Estate: $10,000 x 0.80

Investment in Acme Real Estate 32,000 

Income from Acme Real Estate 32,000 
Record equity-method income: $40,000 x 0.80

Income from Acme Real Estate 20,000 

Investment in Acme Real Estate 20,000 
Eliminate unrealized gain on sale
E7-14 (continued)
c.
Book Value Calculations:          
Grand
NCI + Delivery = Common + Retained
  20% 80% Stock Earnings  
Original book value 80,000 320,000 300,000 100,000  
+ Net Income 8,000 32,000 40,000  
- Dividends (2,000) (8,000) (10,000)  
Ending book value 86,000 344,000 300,000 130,000  
                 

Deferred Gain Calculations:

Grand
Delivery's
  Total = share + NCI's share
Upstream Land 25,000 20,000 5,000  
Total 25,000 20,000 5,000  
             

7-18
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Basic elimination entry

Common stock     300,000     ← Original amount invested (100%)
Retained earnings     100,000     ← Beginning balance in retained earnings
Income from Acme Real Estate   12,000     ← Grand’s share of NI - Def. Gain
NCI in NI of Acme Real Estate   3,000     ← NCI share of NI - Def. Gain
Dividends declared       10,000 ← 100% of Acme’s dividends declared
Investment in Acme Real Estate     324,000 ← Grand’s share of BV - Def. Gain
NCI in NA of Acme Real Estate     81,000 ← NCI share of BV - Def. Gain

Eliminate gain on purchase of land

Gain on sale of land     25,000    
Land         25,000

Eliminate courier services

Service Revenue     15,000    
Delivery Expense         15,000

7-19
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-15 Sale of Building to Parent in Prior Period

a. Turner will record annual depreciation expense of $25,000

($300,000 / 12 years).

b. Split would have recorded annual depreciation expense of $20,000

($400,000 / 20 years).

c.
Accumulated
Building   Depreciation
Turner Co. 300,000   Actual   25,000
100,000   5,000 160,000
Split Co. 400,000   "As If" 180,000

Eliminate the gain on building and correct asset's basis:

Investment in Split Co.   42,000    
NCI in NA of Split Co.   18,000    
Building     100,000    
Accumulated Depreciation       160,000

Accumulated Depreciation   5,000    

Depreciation Expense       5,000

d. Income assigned to noncontrolling interest for 20X9:

Net income reported by Split Company $  40,000 

Amount of gain realized in 20X9 ($60,000 / 12 years)      5,000 
Realized net income for 20X9 $  45,000 
Proportion of ownership held by noncontrolling
interest x      0.30 
Income assigned to noncontrolling interest $  13,500 

e. Amount assigned to noncontrolling interest in 20X9 consolidated

balance sheet:

Split Company net assets, January 1, 20X9

($350,000 - $150,000) $200,000 
Net income for 20X9 40,000 
Dividends paid in 20X9 (15,000)
Unrealized profit on sale of building to Turner Company
($60,000 - $5,000)   (55,000)
Realized book value December 31, 20X9 $170,000 
Proportion of ownership held by noncontrolling
interest x    0.30 
Amount assigned to noncontrolling interest in
December 31, 20X9, consolidated balance sheet $ 51,000 

7-20
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-16 Intercompany Sale at a Loss

a. Consolidated net income for 20X8 will be greater than Parent Company's income from
operations plus Sunway's reported net income. The eliminating entries at December 31,
20X8, will result in an increase of $16,000 to consolidated net income.

b. As a result of purchasing the equipment at less than Parent's book value, depreciation
expense reported by Sunway will be $2,000 ($16,000 / 8 years) below the amount that
would have been recorded by Parent. Thus, depreciation expense must be increased by
$2,000 when eliminating entries are prepared at December 31, 20X9. Consolidated net
income will be decreased by the full amount of the $2,000 increase in depreciation
expense.

E7-17 Eliminating Entries Following Intercompany Sale at a Loss

a. Eliminating entry, December 31, 20X7:

Buildings and Equipment 156,000 

Loss on Sale of Building 36,000 
Accumulated Depreciation 120,000 
Eliminate unrealized loss on building.

b. Consolidated net income and income to controlling

interest for 20X7:

Operating income reported by Brown $125,000 

Net income reported by Transom $  15,000 
Add: Loss on sale of building     36,000 
Realized net income of Transom 51,000 
Consolidated net income $176,000 
Income to noncontrolling interest ($51,000 x 0.30) (15,300)
Income to controlling interest $160,700 

c.

7-21
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Eliminate the gain on Building and correct asset's basis:

Building     156,000
Investment in Transom Co. 25,200
NCI in NA of Transom Co.    10,800
Accumulated Depreciation       120,000

Depreciation Expense   4,000    

Accumulated Depreciation       4,000

Accumulated
Building   Depreciation
Brown Corp. 144,000   Actual   16,000
156,000   120,000
4,000
Transom Co. 300,000   "As If" 140,000

7-22
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-17 (continued)

d. Consolidated net income and income assigned to controlling interest in 20X8:

Operating income reported by Brown $150,000 
Net income reported by Transom $40,000 
Adjustment for loss on sale of building    (4,000)
Realized net income of Transom 36,000 
Consolidated net income $186,000 
Income assigned to noncontrolling interest
($36,000 x 0.30) (10,800)
Income assigned to controlling interest $175,200 

E7-18 Multiple Transfers of Asset

a. $145,000

b. No gain or loss should be reported.

c. Swanson Corporation operating income $150,000 

Sullivan Corporation net income $120,000 

Loss on sale of land ($145,000 - $130,000)    15,000 
Realized net income of Sullivan Corporation $135,000 
Proportion of stock held by Swanson x    0.80   108,000 

Kolder Company net income $  60,000 

Gain on sale of land ($180,000 - $130,000)    (50,000)
Realized net income of Kolder Company $  10,000 
Proportion of stock held by Swanson x    0.70   7,000 

Clayton Corporation net income $  80,000 

Gain on sale of land ($240,000 - $180,000)    (60,000)
Realized net income of Clayton Corporation $  20,000 
Proportion of stock held by Swanson x    0.90     18,000 
Income assigned to controlling interest $283,000 

Alternate Computation:
Swanson Corporation operating income $150,000 
Sullivan Corporation net income 120,000 
Kolder Company net income 60,000 
Clayton Corporation net income    80,000 
Combined income $410,000 

Unrealized loss recorded by Sullivan Corp. $ (15,000)

Unrealized gain recorded by Kolder Company 50,000 
Unrealized gain recorded by Clayton Corp.   60,000     (95,000)
Realized income available to all shareholders $315,000 

Income assigned to noncontrolling interest:

Sullivan Corp. ($120,000 + $15,000) x 0.20 $  27,000 
Kolder Company ($60,000 - $50,000) x 0.30 3,000 
Clayton Corp. ($80,000 - $60,000) x 0.10     2,000    (32,000)
Income assigned to controlling interest $283,000 

7-23
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-18 (continued)

d. Eliminating entry:

Gain on Sale of Land 110,000 

Loss on Sale of Land 15,000 
Land 95,000 
Eliminate gains and loss on land transfer:
$110,000 = $50,000 + $60,000
$95,000 = $110,000 - $15,000

E7-19 Elimination Entry in Period of Transfer

a. $300,000 = $276,000 + $24,000

b. 15 years = $300,000 / ($60,000 / 3 years)

c.
Accumulated
Truck   Depreciation
Blank Corp. 276,000   Actual   23,000
24,000   3,000 60,000
Grand Corp. 300,000   "As If" 80,000

Eliminate the gain on Truck and correct asset's basis:

Investment in Grand Corp.   21,600    
NCI in NA of Grand Corp.   14,400    
Truck     24,000    
Accumulated Depreciation       60,000

Accumulated Depreciation   3,000    

Depreciation Expense       3,000

7-24
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-20 Elimination Entry Computation

a.
Accumulated
Equipment   Depreciation
Stern 360,000   Actual   36,000
90,000   6,000 150,000
Subsidiary 450,000   "As If" 180,000

Eliminate the gain on Equipment and correct asset's basis:

Gain on sale     60,000    
Equipment     90,000    
Accumulated Depreciation       150,000

Accumulated Depreciation   6,000    

Depreciation Expense       6,000

b.
Accumulated
Equipment   Depreciation
Stern 360,000   Actual   72,000
6,00
90,000   0 144,000
Subsidiary 450,000   "As If" 210,000

Eliminate the gain on Equipment and correct asset's basis:

Investment in Subsidiary   37,800    
NCI in NA of Subsidiary   16,200    
Equipment     90,000    
Accumulated Depreciation       144,000

Accumulated Depreciation   6,000    

Depreciation Expense       6,000

7-25
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-21 Using the Eliminating Entry to Determine Account Balances

a. Pastel owns 90 percent ($9,450 / ($9,450 + $1,050) of the stock of Somber

Corporation.

b. The subsidiary was the owner. The sale was from the subsidiary to the parent, as
evidenced by the debit to noncontrolling interest in the eliminating entry.

c. Intercompany transfer price:

Amount paid by Somber Corporation $120,000 

Increase to buildings and equipment in eliminating entry   (53,500)
Amount paid by Pastel to Somber for equipment $  66,500 

d. Income assigned to noncontrolling interest for 20X9:

Net income reported by Somber $  25,000 

Amount of gain realized in 20X9 ($10,500 / 7 years)    1,500 
Realized net income for 20X9 $  26,500 
Proportion of ownership held by noncontrolling
interest x     0.10 
Income assigned to noncontrolling interest $   2,650 

e. Total depreciation expense of $22,500 ($15,000 + $9,000 - $1,500) will be reported by

the consolidated entity for 20X9.

f. Eliminating entries at December 31, 20X9:

Book Value Calculations:          

Pastel
NCI + Corp. = Common + Retained
  10% 90% Stock Earnings  
Original book value 50,000 450,000 300,000 200,000  
+ Net Income 2,500 22,500 25,000  
- Dividends (600) (5,400) (6,000)  
Ending book value 51,900 467,100 300,000 219,000  
                 

Deferred Gain Calculations:

Pastel Corp.'s
  Total = share + NCI's share
Extra Depreciation 1,500 1,350 150  
             

Basic elimination entry

Common stock     300,000     ← Original amount invested (100%)
Retained earnings     200,000     ← Beginning balance in RE
Income from Somber Corp.   23,850     ← Pastel’s share of NI + Extra Dep.
NCI in NI of Somber Corp.   2,650     ← NCI share of NI + Extra Dep.
Dividends declared       6,000 ← 100% of Somber's dividends
Investment in Somber Corp.       468,450 ← Pastel 's share of BV + Extra Dep.
NCI in NA of Somber Corp.       52,050 ← NCI share of BV + Extra Dep.

7-26
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-21 (continued)
Accumulated
Equipment   Depreciation
Pastel Corp. 66,500   Actual   9,500
53,500   1,500 64,000
Somber Corp. 120,000   "As If" 72,000

Eliminate the gain on Equipment and correct asset's basis:

Investment in Somber Corp.   9,450    
NCI in NA of Somber Corp.   1,050    
Equipment     53,500    
Accumulated Depreciation       64,000

Accumulated Depreciation   1,500    

Depreciation Expense       1,500

E7-22 Intercompany Sale of Services

a. Eliminating entries, 20X4:

Consulting Revenue 138,700

Consulting Fees Expense 138,700 
Eliminate intercompany revenue and expense.

Accounts Payable 6,600

Accounts Receivable 6,600 
Eliminate intercompany receivable/payable.

b. Consolidated net income and income to controlling

interest for 20X4:

Norgaard's separate operating income $2,342,000 

Bline's net income 631,000 
Consolidated net income 2,973,000 
Income to noncontrolling interest ($631,000 x 0.25) (157,750)
Income to controlling interest $2,815,250 

7-27
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-23A Modified Equity Method and Cost Method

a.

(1)
Equity Method Entries on Newtime's Books:
Investment in TV Sales Co.   45,500    
Income from TV Sales Co.       45,500
Record Newtime's 65% share of TV Sales Co.'s 20X4 income

Cash     13,000    
Investment in TV Sales Co. 13,000
Record Newtime's 65% share of TV Sales Co.'s 20X4 dividend

(2)
Book Value Calculations:          
NCI + Newtime = Common + Retained
  35% 65% Stock Earnings  
Original book
value 155,750 289,250 300,000 145,000  
+ Net Income 24,500 45,500 70,000  
- Dividends (7,000) (13,000) (20,000)  
Ending book value 173,250 321,750 300,000 195,000  
                 

Basic elimination entry

Common stock     300,000     ← Original amount invested (100%)
Retained earnings     145,000     ← Beginning balance in RE
Income from TV Sales Co.   45,500     ← Newtime’s share of NI
NCI in NI of TV Sales Co.   27,300     ← NCI share of NI + Extra Dep.
Dividends declared       20,000 ← 100% of TV Sales Co.'s dividends
Investment in TV Sales Co.       321,750 ← Newtime's share of BV
NCI in NA of TV Sales Co.       176,050 ← NCI share of BV + Extra Dep.

Eliminate gain on purchase of land

Investment in TV Sales Co.   11,000    
Land         11,000

Eliminate the gain on Equipment and correct asset's basis:

Investment in TV Sales Co.   26,000    
NCI in NA of TV Sales Co.   14,000    
Equipment        40,000

Accumulated Depreciation   8,000    

Depreciation Expense       8,000

7-28
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

E7-23A (continued)

b.

(1)

Equity Method Entries on Newtime's Books:

Cash 13,000
Dividend Income 13,000
Record dividend income from TV Sales Company.

(2)
Investment elimination entry
Common stock     300,000    
Retained earnings     100,000    
Investment in TV Sales Co.       260,000
NCI in NA of TV Sales Co.       140,000

Dividend elimination entry

Dividend Income     13,000    
NCI in NI of TV Sales Co.     7,000    
Dividends declared       20,000

Assign prior undistributed income to NCI

NCI in NI of TV Sales Co.   20,300    
Retained Earnings   15,750    
NCI in NA of TV Sales Co.       36,050

Eliminate gain on purchase of land

Investment in TV Sales Co.   11,000    
Land         11,000

Eliminate the gain on Equipment and correct asset's basis:

Investment in TV Sales Co.   26,000    
NCI in NA of TV Sales Co.   14,000    
Equipment        40,000

Accumulated Depreciation   8,000    

Depreciation Expense       8,000

7-29
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

SOLUTIONS TO PROBLEMS

P7-24 Computation of Consolidated Net Income

a. Separate operating income of Petime Corporation $34,000 

Reported net income of United Grain Company $19,000 
Unrealized profit of sale of land    (7,000)
Realized income for 20X4 $12,000 
Amortization of differential ($10,000 / 10 years) ( 1,000)
$11,000 
Proportion of ownership held by Petime x   0.90 
Income attributable to controlling interest   9,900 
Income to controlling interest $43,900 

b. Separate operating income of Petime Corporation $34,000 

Reported net income by United Grain Company $19,000 
Amortization of differential ($10,000 / 10 years) ( 1,000)
$18,000 
Proportion of stock held by Petime x    0.90 
 

Income attributable to controlling interest 16,200 

Unrealized profit on sale of land    (7,000)
Income to controlling interest $43,200 

Reported income will decrease by $700. In the upstream case the unrealized profit
($7,000) is apportioned to both majority ($6,300) and noncontrolling ($700)
shareholders. In the downstream case, it is apportioned entirely to the majority
shareholders ($7,000).

P7-25 Subsidiary Net Income

a. Toll Corporation’s reported net income for 20X4 was $94,400:

Income assigned to noncontrolling shareholders $17,500 
Add: Unrealized profit on building ($20,000 x 0.25) 5,000 
Amortization of differential ($4,400 x 0.25) 1,10
0 
Income assigned to noncontrolling interest before $23,600 
adjustment
Proportion of stock held by noncontrolling interest ÷ 0.25 
Reported income of Toll $94,400 

Computation of annual amortization:

Fair value of consideration given by Bold $348,000 
Fair value of noncontrolling interest 116,000 
Total fair value $464,000 
Book value of Toll’s assets:
Common stock $150,000 
Retained earnings 270,000 
Total book value (420,000)
Differential paid by Bold $ 44,000 
Number of years in amortization period ÷ 10 
Annual amortization $4,400 

7-30
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-25 (continued)

b. Consolidated net income for 20X4 is $304,000:

Bold Corporation’s operating income $234,000 

Toll Corporation’s net income 94,400 
Amortization of differential ($44,000 / 10 years) (4,400)
Unrealized profit on building   (20,000)
Consolidated net income $304,000 

c. Income assigned to controlling interest is $286,500:

Consolidated net income $304,000 

Income assigned to noncontrolling interest (17,500)
Income assigned to controlling interest $286,500 

Alternate computation:
Operating income of Bold $234,000 
Income from Toll:
Net income of Toll $94,400 
Unrealized profit on building (20,000)
Amortization of differential (4,400)
Realized income $70,000 
Portion of ownership held x 0.75  52,500 
Income to controlling interest $286,500 

P7-26 Transfer of Asset from One Subsidiary to Another

Bugle Cook Products Consolidated

Corporation Corporation Entity

Depreciation expense $    ---   $  3,000 $  2,000

Fixed assets — Warehouse ---   45,000 40,000

Accumulated depreciation ---   3,000 12,000

Gain on sale of warehouse 15,000 ---   ---  

7-31
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-27 Consolidated Eliminating Entry

a. Master paid Rakel $460,000 ($600,000 - $140,000).

b. Accumulated depreciation at January 1, 20X7, was $168,000, computed as follows:

Purchase price paid by Rakel $600,000 

Amount paid by Master $460,000 
Gain recorded by Rakel   (28,000)
Book value at date of sale  (432,000)
Accumulated depreciation at date of sale $168,000 

c. Annual depreciation expense recorded by Rakel was $28,000

($168,000/6 years).

d. The estimated residual value was $40,000, computed as follows:

Purchase price paid by Rakel $600,000 

Amount to be depreciated by Rakel ($28,000 x 20 years) (560,000)
Estimated residual value $  40,000 

e. Master Corporation recorded depreciation expense of $30,000 in 20X7 [($460,000 -

$40,000) / 14 years).

f. Reported net income of Rakel $  80,000 

Unrealized gain on sale of building ($28,000 - $2,000)   (26,000)
$  54,000 
Proportion of stock held by noncontrolling interest x      0.40 
Income assigned to noncontrolling interest $  21,600 

g. Reported net income of Rakel $  65,000 

Portion of gain on sale of building realized in 20X8     2,000 
$  67,000 
Proportion of stock held by noncontrolling interest x      0.40 
Income assigned to noncontrolling interest $  26,800 

7-32
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-28 Multiple-Choice Questions

1. d

2. c

3. a

4. a

5. d

P7-29 Intercompany Services Provided to Subsidiary

The eliminating entry at December 31, 20X4, would be:

Service Revenue 110,000

Building 30,000
Wage Expense 80,000

The eliminating entries at December 31, 20X5, would be:

Investment in Subsidiary 30,000

Building 30,000

Accumulated Depreciation 1,200

Depreciation Expense 1,200

P7-30 Consolidated Net Income with Intercorporate Transfers

a.
Cash     240,000    
Accumulated Depreciation 140,000  
Equipment 350,000
Gain on sale of Equipment       30,000
Record gain on Equipment

b.
Eliminate loss on purchase of land
Land     60,000    
Loss on sale of land         60,000

Eliminate the gain on Equipment and correct asset's basis:

Investment in Subsidence   25,000    
Equipment     110,000    
Accumulated Depreciation       135,000

Accumulated Depreciation   5,000    

Depreciation Expense       5,000

7-33
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-30 (continued)

c. Subsidence Mining's 20X7 net income was $90,000:

Subsidence Mining's income to noncontrolling

shareholders $  39,000 
Noncontrolling interest's share of subsidiary income ÷      0.30 
Subsidence Mining's income before adjustment $130,000 
Add: Amortization of differential:
($200,000 / 10 years) 20,000 
Less: Unrealized loss on intercompany sale of land    (60,000)
Subsidence Mining's 20X7 net income $  90,000 

d. Bower’s operating income was $826,000:

Consolidated net income $961,000 

Less: Income to noncontrolling interest (39,000)
Income assigned to controlling interest $922,000 
Income from Subsidence Mining:
Reported net income $ 90,000 
Unrealized loss on land 60,000 
Amortization of differential ($200,000 / 10 years) (20,000)
Realized income $130,000 
Portion of ownership held x 0.70 
Bower’s share $ 91,000 
Realized profit on equipment ($30,000 / 6 years) 5,000  (96,000)
Bower’s 20X7 income from its separate operations $826,000 

7-34
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-31 Preparation of Consolidated Balance Sheet

a.
Book Value Calculations:          
NCI + Lofton Co. = Common + Retained
  40% 60% Stock Earnings  
Ending book value 100,000 150,000 200,000 50,000  
                 

Deferred Gain Calculations:

Lofton
Co.'s
  Total = share + NCI's share
Extra Depreciation 3,000 3,000 0  
Total 3,000 3,000 0  
             

Basic elimination entry

Common stock     200,000     ← Original amount invested (100%)
Retained earnings     50,000     ← Beginning balance in RE
Income from Temple Corp.   3,000     ← Lofton’s share of NI + Extra Dep.
Investment in Temple Corp.       153,000 ← Lofton's share of BV + Extra Dep.
NCI in NA of Temple Corp.       100,000 ← NCI share of BV of net assets

Eliminate gain on purchase of land

Land     10,000    
Investment in Temple Corp.       6,000
NCI in NA of Temple Corp.       4,000

Accumulated
Equipment   Depreciation
Temple Corp. 91,000   Actual   26,000
9,000   3,000 27,000
Lofton Co. 100,000   "As If" 50,000

Eliminate the gain on Equipment and correct asset's basis:

Investment in Temple Corp.   18,000    
Equipment     9,000    
Accumulated Depreciation       27,000

Accumulated Depreciation   3,000    

Depreciation Expense       3,000

7-35
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-31 (continued)

      Lofton   Temple   Elimination Entries      

      Co.   Corp.   DR   CR   Consolidated  
  Balance Sheet                      
  Cash and Receivables   101,000   20,000           121,000  
  Inventory   80,000   40,000           120,000  
  Land   150,000   90,000   10,000       250,000  
  Buildings & Equipment   400,000   300,000   9,000       709,000  
  Less: Accumulated Depr.   (135,000)   (85,000)   3,000   27,000   (244,000)  
  Investment in Temple Corp.   141,000       18,000   153,000   0  
                  6,000      
  Total Assets   737,000   365,000   40,000   186,000   956,000  
                         
  Accounts Payable   90,000   25,000           115,000  
  Notes Payable   200,000   90,000           290,000  
  Common Stock   100,000   200,000   200,000       100,000  
  Retained Earnings   347,000   50,000   50,000   3,000   347,000  
              3,000          
  NCI in NA of Temple Corp.               100,000   104,000  
                  4,000      
  Total Liabilities & Equity   737,000   365,000   250,000   107,000   956,000  
                         

b.

Lofton Company and Subsidiary

Consolidated Balance Sheet
December 31, 20X6

Cash and Accounts Receivable $121,000 

Inventory 120,000 
Land 250,000 
Buildings and Equipment $709,000 
Less: Accumulated Depreciation  (244,000)   465,000 
Total Assets $956,000 

Accounts Payable $115,000 

Notes Payable 290,000 
Stockholders’ Equity:  
Controlling Interest:
Common Stock $100,000 
Retained Earnings   347,000 
Total Controlling Interest $447,000 
Noncontrolling interest   104,000 
Total Stockholders’ Equity   551,000 
Total Liabilities and Stockholders' Equity $956,000 

7-36
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-32 Consolidation Worksheet in Year of Intercompany Transfer

Note: In converting this problem from the modified to the fully adjusted equity method, we failed
to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. If you complete the problem based on the numbers
given in the trial balance in the text, the investment account will not be fully eliminated. In order
to correct this problem, please reduce the Investment in Lane Company Stock and Retained
Earnings of Prime Company by 8,000. Adjusted balances in the trial balance:

Investment in Lane Company Stock = 191,600

Retained Earnings = 322,000

a. These calculations are based on the corrected numbers

Equity Method Entries on Prime Co.'s Books:

Investment in Lane Co.   40,000    
Income from Lane Co.       40,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 income

Cash     4,000    
Investment in Lane Co. 4,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend  
           
Income from Lane Co.     14,400    
Investment in Lane Co. 14,400
Record amortization of excess acquisition price    

Income from Lane Co.     20,000    

Investment in Lane Co.       20,000
Defer unrealized gain on Equipment

Investment in Lane Co.   2,000    

Income from Lane Co.       2,000
Reverse the deferred gain

Book Value Calculations:          

NCI + Prime Co. = Common + Retained
  20% 80% Stock Earnings  
Original book value 39,000 156,000 100,000 95,000  
+ Net Income 10,000 40,000 50,000  
- Dividends (1,000) (4,000) (5,000)  
Ending book value 48,000 192,000 100,000 140,000  
                 
Deferred Gain Calculations:
Prime
Co.'s
  Total = share + NCI's share
Downstream Asset (20,000) (20,000)  
Extra Depreciation 2,000 2,000 0  
Total (18,000) (18,000) 0  
             

7-37
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-32 (continued)

Basic elimination entry

Common stock     100,000     ← Original amount invested (100%)
Retained earnings     95,000     ← Beginning balance in RE
Income from Lane Co.   22,000     ← Prime’s share of NI - Def. Gain
NCI in NI of Lane Co.   10,000     ← NCI share of Lane Co.'s NI
Dividends declared       5,000 ← 100% of Lane Co.'s dividends
Investment in Lane Co.       174,000 ← Prime's share of BV - Def. Gain
NCI in NA of Lane Co.       48,000 ← NCI share of BV of net assets

Excess Value (Differential) Calculations:

NCI
  20% + Prime Co. 80% = Goodwill
Beginning balance 10,000 40,000 50,000
Changes (3,600) (14,400) (18,000)
Ending balance 6,400 25,600 32,000
         

Amortized excess value reclassification entry:

Goodwill impairment loss   18,000  
Income from Lane Co.     14,400
NCI in NI of Lane Co.     3,600

Excess value (differential) reclassification entry:

Goodwill   32,000    
Investment in Lane Co. 25,600
NCI in NA of Lane Co. 6,400

Eliminate intercompany accounts:

Accounts Payable 7,000  
Cash and Accounts Receivable   7,000

Eliminate gain on purchase of land

Investment in Lane Co.   8,000    
NCI in NI of Lane Co.   2,000    
Land         10,000

Accumulated
Equipment   Depreciation
Lane Co. 70,000   Actual   7,000
5,000   2,000 25,000
Prime Co. 75,000   "As If" 30,000

7-38
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Eliminate the gain on Equipment and correct asset's basis:

Gain on sale     20,000    
Equipment     5,000    
Accumulated Depreciation       25,000

Accumulated Depreciation   2,000    

Depreciation Expense       2,000

P7-32 (continued)

Investment in Income from

  Lane Co.   Lane Co.  
Beginning Balance 188,000          
80% Net Income 40,000       40,000 80% Net Income
    4,000 80% Dividends      
14,400 Excess Val. Amort. 14,400  
Realize Def. Gain 2,000 20,000 Defer Equipment Gain 20,000 2,000 Realize Def. Gain
Ending Balance 191,600       7,600 Ending Balance
    174,000 Basic 22,000    
Land Adjustment 8,000 25,600 Excess Reclass. 14,400
0       0

b. This worksheet is based on the corrected numbers:

          Elimination Entries      
      Prime Co.   Lane Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   240,000   130,000           370,000  
  Gain on Sale of Equipment   20,000       20,000       0  
  Less: COGS   (140,000)   (60,000)           (200,000)  
  Less: Depr. & Amort. Expense (25,000)   (15,000)       2,000   (38,000)  
  Less: Other Expenses   (15,000)   (5,000)           (20,000)  
  Less: Goodwill Impairment Loss           18,000       (18,000)  
  Income from Lane Co.   7,600       22,000   14,400   0  
  Consolidated Net Income   87,600   50,000   60,000   16,400   94,000  
  NCI in Net Income           10,000   3,600   (6,400)  
  Controlling Interest in NI   87,600   50,000   70,000   20,000   87,600  
                         
  Statement of Retained Earnings                   
  Beginning Balance   322,000   95,000   95,000       322,000  
  Net Income   87,600   50,000   70,000   20,000   87,600  
  Less: Dividends Declared   (30,000)   (5,000)       5,000   (30,000)  
  Ending Balance   379,600   140,000   165,000   25,000   379,600  
                         
  Balance Sheet                      
  Cash and Accounts Receivable   113,000   35,000       7,000   141,000  
  Inventory   260,000   90,000           350,000  
  Land   80,000   80,000       10,000   150,000  
  Buildings & Equipment   500,000   150,000   5,000       655,000  
Less: Accumulated
  Depreciation   (205,000)   (45,000)   2,000   25,000   (273,000)  

7-39
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

  Investment in Lane Co.   191,600       8,000   174,000   0  

                  25,600      
  Goodwill           32,000       32,000  
  Total Assets   939,600   310,000   7,000   42,000   1,055,000  
                         
  Accounts Payable   60,000   20,000   7,000       73,000  
  Bonds Payable   200,000   50,000           250,000  
  Common Stock   300,000   100,000   100,000       300,000  
  Retained Earnings   379,600   140,000   165,000   25,000   379,600  
  NCI in NA of Lane Co.           2,000   48,000   52,400  
                  6,400      
  Total Liabilities & Equity   939,600   310,000   272,000   73,000   1,055,000  
                         

7-40
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-32 (continued)

These financial statements are based on the corrected numbers:

c. Prime Company and Subsidiary

Consolidated Balance Sheet
December 31, 20X6

Cash and Receivables $    141,000 

Inventory 350,000 
Land 150,000 
Buildings and Equipment $655,000 
Less: Accumulated Depreciation  (273,000) 382,000 
Goodwill   32,000 
Total Assets $1,055,000 

Accounts Payable $    73,000 

Bonds Payable 250,000 
Stockholders’ Equity:
Controlling Interest:
Common Stock $300,000
Retained Earnings 379,600
Total Controlling Interest $679,600
Total Noncontrolling Interest 52,400
Total Stockholders’ Equity 732,000 
Total Liabilities and Stockholders' Equity $1,055,000 

Prime Company and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X6

Sales $  370,000 
Cost of Goods Sold $200,000 
Depreciation and Amortization Expense 38,000 
Goodwill Impairment Loss 18,000 
Other Expenses  20,000 
Total Expenses     (276,000)
Consolidated Net Income $    94,000 
Income to Noncontrolling Interest      (6,400)
Income to Controlling Interest $    87,600 

Prime Company and Subsidiary

Consolidated Retained Earnings Statement
Year Ended December 31, 20X6

Retained Earnings, January 1, 20X6 $   322,000 

Income to Controlling Interest, 20X6    87,600 
$   409,600 
Dividends Declared, 20X6     (30,000)
Retained Earnings, December 31, 20X6 $   379,600 

7-41
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-32 (continued)

b. This worksheet is based on the uncorrected numbers:

      Prime   Lane   Elimination Entries      

      Co.   Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   240,000   130,000           370,000  
  Gain on Sale of Equipment   20,000       20,000       0  
  Less: COGS   (140,000)   (60,000)           (200,000)  
  Less: Depr. & Amort. Expense (25,000)   (15,000)       2,000   (38,000)  
  Less: Other Expenses   (15,000)   (5,000)           (20,000)  
  Less: Goodwill Impairment Loss           18,000       (18,000)  
  Income from Lane Co.   7,600       22,000   14,400   0  
  Consolidated Net Income   87,600   50,000   60,000   16,400   94,000  
  NCI in Net Income           10,000   3,600   (6,400)  
  Controlling Interest in NI   87,600   50,000   70,000   20,000   87,600  
                         
  Statement of Retained Earnings                   
  Beginning Balance   330,000   95,000   95,000       330,000  
  Net Income   87,600   50,000   70,000   20,000   87,600  
  Less: Dividends Declared   (30,000)   (5,000)       5,000   (30,000)  
  Ending Balance   387,600   140,000   165,000   25,000   387,600  
                         
  Balance Sheet                      
  Cash and Accounts Receivable   113,000   35,000       7,000   141,000  
  Inventory   260,000   90,000           350,000  
  Land   80,000   80,000       10,000   150,000  
  Buildings & Equipment   500,000   150,000   5,000       655,000  
Less: Accumulated
  Depreciation   (205,000)   (45,000)   2,000   25,000   (273,000)  
  Investment in Lane Co.   199,600       8,000   174,000   8,000  
                  25,600      
  Goodwill           32,000       32,000  
  Total Assets   947,600   310,000   7,000   42,000   1,063,000  
                         
  Accounts Payable   60,000   20,000   7,000       73,000  
  Bonds Payable   200,000   50,000           250,000  
  Common Stock   300,000   100,000   100,000       300,000  
  Retained Earnings   387,600   140,000   165,000   25,000   387,600  
  NCI in NA of Lane Co.           2,000   48,000   52,400  
                  6,400      
  Total Liabilities & Equity   947,600   310,000   272,000   73,000   1,063,000  
                         

7-42
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-32 (continued)

These financial statements are based on the uncorrected numbers:

c. Prime Company and Subsidiary

Consolidated Balance Sheet
December 31, 20X6

Cash and Receivables $    141,000 

Inventory 350,000 
Land 150,000 
Buildings and Equipment $655,000 
Less: Accumulated Depreciation  (273,000) 382,000 
Investment in Lane Co. 8,000
Goodwill   32,000 
Total Assets $1,063,000 

Accounts Payable $    73,000 

Bonds Payable 250,000 
Stockholders’ Equity:
Controlling Interest:
Common Stock $300,000
Retained Earnings 387,600
Total Controlling Interest $687,600
Total Noncontrolling Interest 52,400
Total Stockholders’ Equity 740,000 
Total Liabilities and Stockholders' Equity $1,063,000 

Prime Company and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X6

Sales $  370,000 
Cost of Goods Sold $200,000 
Depreciation and Amortization Expense 38,000 
Goodwill Impairment Loss 18,000 
Other Expenses  20,000 
Total Expenses     (276,000)
Consolidated Net Income $    94,000 
Income to Noncontrolling Interest      (6,400)
Income to Controlling Interest $    87,600 

Prime Company and Subsidiary

Consolidated Retained Earnings Statement
Year Ended December 31, 20X6

Retained Earnings, January 1, 20X6 $   330,000 

Income to Controlling Interest, 20X6    87,600 
$   417,600 
Dividends Declared, 20X6     (30,000)

7-43
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Retained Earnings, December 31, 20X6 $   387,600 

P7-33 Consolidation Worksheet in Year following Intercompany Transfer

Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to
deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. This error carries over to this problem. If you
complete the problem based on the numbers given in the trial balance in the text, the
investment account will not be fully eliminated. In order to correct this problem, please reduce
the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000.
Adjusted balances in the trial balance:

Investment in Lane Company Stock = 201,600

Retained Earnings = 379,600

These calculations are based on the corrected numbers:

a. Reconciliation of underlying book value and balance in investment account:

Net book value reported by Lane Company

Common stock outstanding $100,000
Retained earnings balance, January 1, 20X7 $140,000 
Net income for 20X7 45,000 
Dividends paid in 20X7   (35,000)
Retained earnings balance, December 31, 20X7   150,000
$250,000
Proportion of stock held by Prime Company x      .80
$200,000
Minus: Upstream Land Gain (10,000 x 0.80) (8,000)
Minus: Downstream Equipment Transfer Gain (20,000)
Add: Reversal of deferred gross profit 20X6 2,000
Minus: Reversal of deferred gross profit 20X7 2,000
Add: Goodwill (32,000 x 0.80)   25,600
Balance in investment account $201,600
These calculations are based on the uncorrected numbers

a. Reconciliation of underlying book value and balance in investment account:

Net book value reported by Lane Company

Common stock outstanding $100,000
Retained earnings balance, January 1, 20X7 $140,000 
Net income for 20X7 45,000 
Dividends paid in 20X7   (35,000)
Retained earnings balance, December 31, 20X7   150,000
$250,000
Proportion of stock held by Prime Company x      .80
$200,000
Minus: Upstream Land Gain (10,000 x 0.80) (8,000)
Minus: Downstream Equipment Transfer Gain (20,000)
Add: Reversal of deferred gross profit 20X6 2,000
Add: Goodwill (32,000 x 0.80)   25,600
Add: Incorrect number 10,000
Balance in investment account $209,600

7-44
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-33 (continued)

b. These calculations are based on the corrected numbers

Equity Method Entries on Prime Co.'s Books:

Investment in Lane Co.   36,000    
Income from Lane Co.       36,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 income

Cash     28,000    
Investment in Lane Co. 28,000
Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend  

Investment in Lane Co.   2,000    

Income from Lane Co.       2,000
Reverse the deferred gain

Book Value Calculations:          

NCI Prime Co. Common Retained
+ = +
  20% 80% Stock Earnings  
Original book value 48,000 192,000 100,000 140,000  
+ Net Income 9,000 36,000 45,000  
- Dividends (7,000) (28,000) (35,000)  
Ending book value 50,000 200,000 100,000 150,000  
                 

Deferred Gain Calculations:

Prime
Co.'s
  Total = share + NCI's share
Extra Depreciation 2,000 2,000 0  
Total 2,000 2,000 0  
             

Basic elimination entry

Common stock     100,000     ← Original amount invested (100%)
Retained earnings     140,000     ← Beginning balance in RE
Income from Lane Co.   38,000     ← Prime’s share of NI + Extra Dep.
NCI in NI of Lane Co.   9,000     ← NCI share of Lane Co.'s NI
Dividends declared       35,000 ← 100% of Lane Co.'s dividends
Investment in Lane Co.       202,000 ← Prime's share of BV + Extra Dep.
NCI in NA of Lane Co.       50,000 ← NCI share of BV of net assets

Excess Value (Differential) Calculations:

NCI
  20% + Prime Co. 80% = Goodwill
Beginning balance 6,400 25,600 32,000
Changes 0 0 0
Ending balance 6,400 25,600 32,000
         

7-45
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Excess value (differential) reclassification entry:

Goodwill   32,000  
Investment in Lane Co. 25,600
NCI in NA of Lane Co. 6,400

P7-33 (continued)

Eliminate gain on purchase of land

Investment in Lane Co.   8,000    
NCI in NI of Lane Co.   2,000    
Land         10,000

Accumulated
Equipment   Depreciation
Lane Co. 70,000   Actual   14,000
5,000   2,000 23,000
Prime Co. 75,000   "As If" 35,000

Eliminate the gain on Equipment and correct asset's basis:

Investment in Lane Co.   18,000    
Equipment     5,000    
Accumulated Depreciation       23,000

Accumulated Depreciation   2,000    

Depreciation Expense       2,000

Investment in Income from

  Lane Co.   Lane Co.  
Beginning Balance 191,600          
80% Net Income 36,000       36,000 80% Net Income
    28,000 80% Dividends      
Realize Def. Gain 2,000 2,000 Realize Def. Gain
Ending Balance 201,600       38,000 Ending Balance
    202,000 Basic 38,000    
Land Adjustment 8,000 25,600 Excess Reclass.
18,000  
0       0

Eliminate Intercompany receivable/payable

Accounts Payable   4,000    

Accounts Receivable       4,000

7-46
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-33 (continued)

b. This worksheet is based on the corrected numbers:

      Prime   Lane   Elimination Entries      

      Co.   Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   250,000   150,000           400,000  
  Less: COGS   (160,000)   (80,000)           (240,000)  
  Less: Depr. & Amort. Expense (25,000)   (15,000)       2,000   (38,000)  
  Less: Other Expenses   (20,000)   (10,000)           (30,000)  
  Income from Lane Co.   38,000       38,000       0  
  Consolidated Net Income   83,000   45,000   38,000   2,000   92,000  
  NCI in Net Income           9,000       (9,000)  
  Controlling Interest in NI   83,000   45,000   47,000   2,000   83,000  
                         
  Statement of Retained Earnings                   
  Beginning Balance   379,600   140,000   140,000       379,600  
  Net Income   83,000   45,000   47,000   2,000   83,000  
  Less: Dividends Declared   (60,000)   (35,000)       35,000   (60,000)  
  Ending Balance   402,600   150,000   187,000   37,000   402,600  
                         
  Balance Sheet                      
Cash and Accounts
  Receivable   151,000   55,000       4,000   202,000  
  Inventory   240,000   100,000           340,000  
  Land   100,000   80,000       10,000   170,000  
  Buildings & Equipment   500,000   150,000   5,000       655,000  
  Less: Accumulated Depr.   (230,000)   (60,000)   2,000   23,000   (311,000)  
  Investment in Lane Co.   201,600       8,000   202,000   0  
              18,000   25,600      
  Goodwill           32,000       32,000  
  Total Assets   962,600   325,000   7,000   37,000   1,088,000  
                         
  Accounts Payable   60,000   25,000   4,000       81,000  
  Bonds Payable   200,000   50,000           250,000  
  Common Stock   300,000   100,000   100,000       300,000  
  Retained Earnings   402,600   150,000   187,000   37,000   402,600  
  NCI in NA of Lane Co.           2,000   50,000   54,400  
                  6,400      
  Total Liabilities & Equity   962,600   325,000   291,000   87,000   1,088,000  
                         

7-47
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-33 (continued)

b. This worksheet is based on the uncorrected numbers:

      Prime   Lane   Elimination Entries      

      Co.   Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   250,000   150,000           400,000  
  Less: COGS   (160,000)   (80,000)           (240,000)  
  Less: Depreciation & Amort. Exp. (25,000)   (15,000)       2,000   (38,000)  
  Less: Other Expenses   (20,000)   (10,000)           (30,000)  
  Income from Lane Co.   38,000       38,000       0  
  Consolidated Net Income   83,000   45,000   38,000   2,000   92,000  
  NCI in Net Income           9,000       (9,000)  
  Controlling Interest in NI   83,000   45,000   47,000   2,000   83,000  
                         
  Statement of Retained Earnings                   
  Beginning Balance   387,600   140,000   140,000       387,600  
  Net Income   83,000   45,000   47,000   2,000   83,000  
  Less: Dividends Declared   (60,000)   (35,000)       35,000   (60,000)  
  Ending Balance   410,600   150,000   187,000   37,000   410,600  
                         
  Balance Sheet                      
Cash and Accounts
  Receivable   151,000   55,000       4,000   202,000  
  Inventory   240,000   100,000           340,000  
  Land   100,000   80,000       10,000   170,000  
  Buildings & Equipment   500,000   150,000   5,000       655,000  
  Less: Accumulated Depr.   (230,000)   (60,000)   2,000   23,000   (311,000)  
  Investment in Lane Co.   209,600       8,000   202,000   8,000  
              18,000   25,600      
  Goodwill           32,000       32,000  
  Total Assets   970,600   325,000   7,000   37,000   1,096,000  
                         
  Accounts Payable   60,000   25,000   4,000       81,000  
  Bonds Payable   200,000   50,000           250,000  
  Common Stock   300,000   100,000   100,000       300,000  
  Retained Earnings   410,600   150,000   187,000   37,000   410,600  
  NCI in NA of Lane Co.           2,000   50,000   54,400  
                  6,400      
  Total Liabilities & Equity   970,600   325,000   291,000   87,000   1,096,000  
                         

7-48
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-34 Intercorporate Sales in Prior Years

a.
Equity Method Entries on Pond Corp.'s Books:
Investment in Skate Co.   24,000    
Income from Skate Co.       24,000
Record Pond Corp.'s 80% share of Skate Co.'s 20X8 income

Cash     8,000    
Investment in Skate Co. 8,000
Record Pond Corp.'s 80% share of Skate Co.'s 20X8 dividend
           
Income from Skate Co.   3,000    
Investment in Skate Co. 3,000
Record amortization of excess acquisition price    

Investment in Skate Co.   1,500    

Income from Skate Co.       1,500
Reverse a portion of the deferred gain

Book Value Calculations:          

Pond
NCI + Corp. = Common + Add Paid- + Retained
  20% 80% Stock in Capital Earnings  
Original book value 40,000 160,000 20,000 30,000 150,000  
+ Net Income 6,000 24,000 30,000  
- Dividends (2,000) (8,000) (10,000)  
Ending book value 44,000 176,000 20,000 30,000 170,000  
                     

Deferred Gain Calculations:

Pond Corp.'s
  Total = share + NCI's share
Extra
Depreciation 1,500 1,500 0  
Total 1,500 1,500 0  
             

Basic elimination entry

Common stock     20,000     ← Original amount invested (100%)
Additional Paid-in Capital   30,000     ← Beginning balance in APIC
Retained earnings     150,000     ← Beginning balance in RE
Income from Skate Co.   25,500     ← Pond’s share of NI + Extra Dep.
NCI in NI of Skate Co.   6,000     ← NCI share of Skate Co.'s NI
Dividends declared       10,000 ← 100% of Skate’s dividends declared
Investment in Skate Co.       177,500 ← Pond's share of BV + Extra Dep.
NCI in NA of Skate Co.       44,000 ← NCI share of BV of net assets

7-49
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-34 (continued)

Excess Value (Differential) Calculations:

Buildings &
  NCI 20% + Pond Corp. 80% = Patent + Equipment + Acc. Depr.
Beginning balance 12,750 51,000 42,500 25,000 (3,750)
Changes (750) (3,000) (2,500) (1,250)
Ending balance 12,000 48,000 40,000 25,000 (5,000)
        

Amortized excess value reclassification entry:

Amortization Expense    2,500 
Depreciation expense    1,250 
Income from Skate Co.     3,000
NCI in NI of Skate Co.     750

Excess value (differential) reclassification entry:

Patent    40,000  
Buildings & Equipment 25,000
Acc. Depr. 5,000
Investment in Skate Co. 48,000
NCI in NA of Skate Co. 12,000

Eliminate gain on purchase of land

Investment in Skate Co.   10,400   
NCI in NI of Skate Co.   2,600   
Land         13,000

Accumulated
Building   Depreciation
Skate Co. 65,000  Actual   6,500
60,000  1,500 75,000
Pond Corp. 125,000  "As If" 80,000

Eliminate the gain on Building and correct asset's basis:

Investment in Skate Co.   15,000   
Building    60,000   
Accumulated Depreciation       75,000

Accumulated Depreciation   1,500   

Depreciation Expense       1,500

7-50
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-34 (continued)
Investment in Income from
  Skate Co.   Skate Co.  
Beginning Balance 185,600          
80% Net Income 24,000       24,000 80% Net Income
    8,000 80% Dividends      
Excess Val.
3,000 Amort. 3,000  
Realize Def.
Realize Def. Gain 1,500 1,500 Gain
Ending Balance 200,100       22,500 Ending Balance
    177,500 Basic 25,500    
Land Adjustment 10,400 48,000 Excess Reclass. 3,000
15,000  
0       0

7-51
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-34 (continued)
b.
      Pond   Skate   Elimination Entries      
      Corp.   Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   450,000   250,000           700,000  
  Interest Income   14,900               14,900  
  Less: COGS   (285,000)   (136,000)           (421,000)  
  Less: Other Operating Exp.   (50,000)   (40,000)         (90,000)  
  Less: Depreciation Exp.   (35,000)   (24,000)   1,250   1,500   (58,750)  
Less: Other Amortization Exp.     2,500       (2,500)
  Less: Interest Exp.   (24,000)   (10,500)           (34,500)  
  Less: Miscellaneous Exp.   (11,900)   (9,500)           (21,400)  
  Income from Skate Co.   22,500       25,500   3,000   0  
  Consolidated Net Income   81,500   30,000   29,250   4,500   86,750  
  NCI in Net Income           6,000   750   (5,250)  
  Controlling Interest in NI   81,500   30,000   35,250   5,250   81,500  
                         
  Statement of Retained Earnings                   
  Beginning Balance   216,000   150,000   150,000       216,000  
  Net Income   81,500   30,000   35,250   5,250   81,500  
  Less: Dividends Declared   (30,000)   (10,000)       10,000   (30,000)  
  Ending Balance   267,500   170,000   185,250   15,250   267,500  
                         
  Balance Sheet                      
  Cash   68,400   47,000           115,400  
  Accounts Receivable   130,000   65,000           195,000  
Interest and Other
  Receivables   45,000   10,000           55,000  
  Inventory   140,000   50,000           190,000  
  Land   50,000   22,000       13,000   59,000  
  Buildings & Equipment   400,000   240,000   60,000       725,000  
              25,000          
  Less: Accumulated Depr.   (185,000)   (94,000)   1,500   75,000   (357,500)  
                  5,000      
  Investment in Skate Co.   200,100       10,400   177,500   0  
              15,000   48,000      
  Investment in Tin Co. Bonds   134,000               134,000  
  Patent           40,000       40,000  
  Total Assets   982,500   340,000   151,900   318,500   1,155,900  
                         
  Accounts Payable   65,000   11,000           76,000  
  Interest and Other Payables   45,000   12,000           57,000  
  Bonds Payable   300,000   100,000           400,000  
  Bond Discount       (3,000)           (3,000)  
  Common Stock   150,000   30,000   30,000       150,000  
  Additional Paid-in Capital   155,000   20,000   20,000       155,000  
  Retained Earnings   267,500   170,000   185,250   15,250   267,500  
  NCI in NA of Skate Co.           2,600   44,000   53,400  
                  12,000      
  Total Liabilities & Equity   982,500   340,000   237,850   71,250   1,155,900  
                         

7-52
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-35 Intercorporate Sale of Land and Depreciable Asset

a. Income assigned to noncontrolling interest:

Net income of Morris $ 30,000 

Gain on sale of equipment to parent $9,600 
Gain realized prior to 20X5  (1,200) (8,400)
Amortization of differential:
Buildings and equipment ($25,000 / 10 years) (2,500)
Copyright ($17,000 / 5 years) (3,400)
Realized income $15,700 
Portion of ownership held x 0.30 
Income to noncontrolling interest $ 4,710 

Gain on sale of equipment to parent:

Sale price to Topp $91,600 
Purchase price $100,000 
Accumulated depreciation
[($100,000 - $10,000)/10 years] x 2 years (18,000) (82,000)
Gain on sale $ 9,600 

b. Reconciliation between book value and investment balance at December

31, 20X5:

Underlying book value of Morris Company stock:

Common stock outstanding $100,000 
Retained earnings, January 1, 20X5 100,000 
Net income for 20X5 30,000 
Dividends paid in 20X5    ( 5,000)
Net book value $225,000 
Portion of ownership held by Topp x .70 
Net book value of ownership held by Topp $157,500 
Unamortized differential:
Buildings and equipment [($25,000 x 7/10 years) x 0.70] 12,250 
Copyright [($17,000 x 2/5 years) x 0.70]     4,760 
Gain on sale of land (11,000)
Deferred gross profit on sale of equipment (6,720)
Realized deferred gain 840
Investment in Morris Company stock $157,630 

b.
Book Value Calculations:          
Topp
NCI + Corp. = Common + Retained
  30% 70% Stock Earnings  
Original book value 60,000 140,000 100,000 100,000  
+ Net Income 9,000 21,000 30,000  
- Dividends (1,500) (3,500) (5,000)  
Ending book value 67,500 157,500 100,000 125,000  
                 

7-53
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-35 (continued)

Deferred Gain Calculations:

Topp
Corp.'s
  Total = share + NCI's share
Upstream Asset (9,600) (6,720) (2,880)  
Extra Depreciation 1,200 840 360  
Total (8,400) (5,880) (2,520)  
             

Basic elimination entry

Common stock     100,000     ← Original amount invested (100%)
Retained earnings   100,000     ← Beginning balance RE
Income from Morris Co.   15,120     ← Topp’s share of NI - Def. Gain + Extra Depr.
NCI in NI of Morris Co.   6,480     ← NCI share of NI - Def. Gain + Extra Depr.
Dividends declared       5,000 ← 100% of Morris Co.'s dividends
Investment in Morris Co.       151,620 ← Topp's share of BV - Def. Gain + Extra Depr.
NCI in NA of Morris Co.       64,980 ← NCI share of BV - Def. Gain + Extra Depr.

Excess Value (Differential) Calculations:

Topp
NCI Corp. Buildings & Acc.
  30% + 70% = Equipment + Copyright + Depr.
Beginning balance 9,060 21,140 25,000 10,200 (5,000)
Changes (1,770) (4,130) (3,400) (2,500)
Ending balance 7,290 17,010 25,000 6,800 (7,500)
         

Amortized excess value reclassification entry:

Amortization Expense     3,400  
Depreciation expense     2,500  
Income from Morris Co.     4,130
NCI in NI of Morris Co.     1,770

Excess value (differential) reclassification entry:

Buildings & Equipment     25,000    
Copyright 6,800
Acc. Depr. 7,500
Investment in Morris Co. 17,010
NCI in NA of Morris Co. 7,290

Eliminate gain on purchase of land

Investment in Morris Co.   11,000    
Land         11,000

7-54
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-35 (continued)
Accumulated
Equipment   Depreciation
Topp Corp. 91,600   Actual   11,450
8,400   1,200 18,000
Morris Co. 100,000   "As If" 28,250

Eliminate the gain on Equipment and correct asset's basis:

Gain on sale     9,600    
Equipment     8,400    
Accumulated Depreciation       18,000

Accumulated Depreciation   1,200    

Depreciation Expense       1,200

Investment in Income from

  Morris Co.   Morris Co.  
150,14
Beginning Balance 0          
70% Net Income 21,000       21,000 70% Net Income
    3,500 70% Dividends      
4,130 Excess Val. Amort. 4,130  
Realize Def. Gain 840 6,720 Defer Asset Gain 6,720 840 Realize Def.Gain
157,63
Ending Balance 0       10,990 Ending Balance
    151,620 Basic 15,120    
Land Adjustment 11,000 17,010 Excess Reclass. 4,130
0       0

7-55
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-35 (continued)
c.
      Topp   Morris   Elimination Entries      
      Corp.   Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   450,000   190,400           640,400  
  Other Income   28,250               28,250  
  Gain on Sale of Equip.       9,600   9,600       0  
  Less: COGS   (375,000)   (110,000)           (485,000)  
  Less: Depreciation Exp.   (25,000)   (10,000)   2,500   1,200   (36,300)  
  Less: Amortization Exp.           3,400       (3,400)  
  Less: Interest Expense   (24,000)   (33,000)           (57,000)  
  Less: Other Expenses   (28,000)   (17,000)           (45,000)  
  Income from Morris Co.   10,990       15,120   4,130   0  
  Consolidated Net Income   37,240   30,000   30,620   5,330   41,950  
  NCI in Net Income           6,480   1,770   (4,710)  
  Controlling Interest in NI   37,240   30,000   37,100   7,100   37,240  
                         
  Statement of Retained Earnings                   
  Beginning Balance   165,240   100,000   100,000       165,240  
  Net Income   37,240   30,000   37,100   7,100   37,240  
  Less: Dividends Declared   (30,000)   (5,000)       5,000   (30,000)  
  Ending Balance   172,480   125,000   137,100   12,100   172,480  
                         
  Balance Sheet                      
  Cash   15,850   58,000           73,850  
  Accounts Receivable   65,000   70,000           135,000  
Interest and Other
  Receivables   30,000   10,000           40,000  
  Inventory   150,000   180,000           330,000  
  Land   80,000   60,000       11,000   129,000  
  Buildings & Equipment   315,000   240,000   25,000       588,400  
              8,400          
  Less: Accumulated Depr.   (120,000)   (60,000)   1,200   7,500   (204,300)  
                  18,000      
  Investment in Morris Co.   157,630       11,000   151,620   0  
                  17,010      
  Copyright           6,800       6,800  
  Total Assets   693,480   558,000   52,400   205,130   1,098,750  
                         
  Accounts Payable   61,000   28,000           89,000  
  Other Payables   30,000   20,000           50,000  
  Bonds Payable   250,000   300,000           550,000  
  Bond Discount       (15,000)           (15,000)  
  Common Stock   150,000   100,000   100,000       150,000  
  Additional Paid-in Capital   30,000               30,000  
  Retained Earnings   172,480   125,000   137,100   12,100   172,480  
  NCI in NA of Morris Co.               64,980   72,270  
                  7,290      
  Total Liabilities & Equity   693,480   558,000   237,100   84,370   1,098,750  
                         

7-56
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-36 Incomplete Data

(a) $100,000

(b) $140,000

(c) $250,000 = $593,000 - $343,000

(d) $100,000 = ($126,000 - $35,000) + [($25,000 + $85,000) - $101,000]

(e) $4,500 = [($106,200 + $70,800) - ($50,000 + $70,000 + $30,000)] / 6 years

(f) Investment in Shadow Company Stock:

$106,200  Purchase price, January 1, 20X4
30,000  Undistributed earnings from January 1, 20X4,
to January 1, 20X7 [($80,000 - $30,000) x 0.60]
6,000  Undistributed income for 20X7 ($10,000 x 0.60)
(10,800) Amortization of differential [($27,000 / 6 years) x 4 years] x 0.60
(5,400) Mound’s portion of gain on sale of equipment ($9,000 x 0.60)
3,600 2 years of extra depreciation ($3,000 x 0.60)
(7,000) Gain on sale of land
$122,600  Balance in investment account at December 31, 20X7

(g) $7,000 = ($70,000 + $90,000) - $153,000

(h) $-0-

(i) $510,000 = $345,000 + $150,000 + ($60,000 - $45,000)

(j) $278,000 = $180,000 + $80,000 + [($60,000 / 5 years) x 4 years]

- [($45,000 / 3 years) x 2 years)

(k) $375,800 (Same as Mound Corporation’s retained earnings balance.)

(l) Income to noncontrolling shareholders:

$ 30,000  Shadow's 20X7 net income ($250,000 - $195,000
- $10,000 - $15,000)
3,000  Realized profit on 20X6 sale of equipment to Mound
(4,500) Amortization of differential
$ 28,500  Realized net income
x 0.40 
$ 11,400  Income to noncontrolling shareholders

7-57
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-37 Intercompany Sale of Equipment at a Loss in Prior Period

Note: In converting this problem from the modified to the fully adjusted equity method, we did
not correctly adjust for lower depreciation over the three years since the fixed asset sale at a
loss. If you complete the problem based on the numbers given in the trial balance in the text,
the investment and income from sub accounts will not be fully eliminated. In order to correct this
problem, please use the following adjusted numbers for Foster Company:

Investment in Block Corporation Stock = 229,500

Income from Block Corporation = 51,300
Retained Earnings = 251,200

a. These calculations are based on the corrected numbers

Book Value Calculations:          

NCI + Foster Co. = Common + Retained
  10% 90% Stock Earnings  
Original book value 20,000 180,000 50,000 150,000  
+ Net Income 6,000 54,000 60,000  
- Dividends (2,000) (18,000) (20,000)  
Ending book value 24,000 216,000 50,000 190,000  
                 

Deferred Gain Calculations:

Foster
Co.'s
  Total = share + NCI's share
(3,00 (2,70 (30
Lower Depreciation 0) 0) 0)  
(3,00 (2,70 (30
Total 0)   0)   0)  
             

Basic elimination entry

Common stock     50,000     ← Original amount invested (100%)
Retained earnings     150,000     ← Beginning balance in RE
Income from Block Corp.   51,300     ← Foster’s share of NI + Extra Dep.
NCI in NI of Block Corp.   5,700     ← NCI share of NI + Extra Dep.
Dividends declared       20,000 ← 100% of Block Corp.'s dividends
Investment in Block Corp.       213,300 ← Foster's share of BV + Extra Dep.
NCI in NA of Block Corp.       23,700 ← NCI share of BV + Extra Dep.

Accumulated
Equipment   Depreciation
Foster Co. 48,000   Actual   18,000
  24,000

7-58
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

42,000     3,000
45,0
Block Corp. 90,000   "As If" 00

7-59
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-37 (continued)

Eliminate the gain on Equipment and correct asset's basis:

Equipment     42,000    
Investment in Block Corp.       16,200
NCI in NA of Block Corp.       1,800
Accumulated Depreciation       24,000

Depreciation Expense   3,000    

Accumulated Depreciation       3,000

Investment in Income from

  Block Corp.   Block Corp.  
196,20
Beginning Balance 0          
90% Net Income 54,000       54,000 90% Net Income
    18,000 90% Dividends      
    2,700 Realize Def. Gain 2,700    
229,50
Ending Balance 0       51,300 Ending Balance
213,30 51,30
    0 Basic 0    
  16,200 Equipment Adj.
0       0

7-60
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-37 (continued)

b. This worksheet is based on the corrected numbers:

      Foster   Block   Elimination Entries      

      Co.   Corp.   DR   CR   Consolidated  
  Income Statement                      
  Sales   680,000   385,000           1,065,000  
  Other Income   26,000   15,000           41,000  
  Less: COGS   (500,000)   (250,000)           (750,000)  
  Less: Depreciation Exp.   (45,000)   (15,000)   3,000       (63,000)  
  Less: Other Expenses   (95,000)   (75,000)           (170,000)  
  Income from Block Corp.   51,300       51,300       0  
  Consolidated Net Income   117,300   60,000   54,300   0   123,000  
  NCI in Net Income           5,700       (5,700)  
  Controlling Interest in NI   117,300   60,000   60,000   0   117,300  
                         
  Statement of Retained Earnings                   
  Beginning Balance   251,200   150,000   150,000       251,200  
  Net Income   117,300   60,000   60,000   0   117,300  
  Less: Dividends Declared   (40,000)   (20,000)       20,000   (40,000)  
  Ending Balance   328,500   190,000   210,000   20,000   328,500  
                         
  Balance Sheet                      
  Cash   82,000   32,400           114,400  
  Accounts Receivable   80,000   90,000           170,000  
  Other Receivables   40,000   10,000           50,000  
  Inventory   200,000   130,000           330,000  
  Land   80,000   60,000           140,000  
  Buildings & Equipment   500,000   250,000   42,000       792,000  
  Less: Accumulated Depr.   (155,000)   (75,000)       24,000   (257,000)  
                  3,000      
  Investment in Block Corp.   229,500           213,300   0  
                  16,200      
1,056,50
  Total Assets   0   497,400   42,000   256,500   1,339,400  
                         
  Accounts Payable   63,000   35,000           98,000  
  Other Payables   95,000   20,000           115,000  
  Bonds Payable   250,000   200,000           450,000  
  Bond Premium       2,400           2,400  
  Common Stock   210,000   50,000   50,000       210,000  
  Additional Paid-in Capital   110,000               110,000  
  Retained Earnings   328,500   190,000   210,000   20,000   328,500  
  NCI in NA of Block Corp.               23,700   25,500  
                  1,800      
1,056,50
  Total Liabilities & Equity   0   497,400   260,000   45,500   1,339,400  
                         

7-61
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-37 (continued)

b. This worksheet is based on the uncorrected numbers:

      Foster   Block   Elimination Entries      

      Co.   Corp.   DR   CR   Consolidated  
  Income Statement                      
  Sales   680,000   385,000           1,065,000  
  Other Income   26,000   15,000           41,000  
  Less: COGS   (500,000)   (250,000)           (750,000)  
  Less: Depreciation Exp.   (45,000)   (15,000)   3,000       (63,000)  
  Less: Other Expenses   (95,000)   (75,000)           (170,000)  
  Income from Block Corp.   56,700       51,300       5,400  
  Consolidated Net Income   122,700   60,000   54,300   0   128,400  
  NCI in Net Income           5,700       (5,700)  
  Controlling Interest in NI   122,700   60,000   60,000   0   122,700  
                         
  Statement of Retained Earnings                   
  Beginning Balance   262,000   150,000   150,000       262,000  
  Net Income   122,700   60,000   60,000   0   122,700  
  Less: Dividends Declared   (40,000)   (20,000)       20,000   (40,000)  
  Ending Balance   344,700   190,000   210,000   20,000   344,700  
                         
  Balance Sheet                      
  Cash   82,000   32,400           114,400  
  Accounts Receivable   80,000   90,000           170,000  
  Other Receivables   40,000   10,000           50,000  
  Inventory   200,000   130,000           330,000  
  Land   80,000   60,000           140,000  
  Buildings & Equipment   500,000   250,000   42,000       792,000  
  Less: Accumulated Depr.   (155,000)   (75,000)       24,000   (257,000)  
                  3,000      
  Investment in Block Corp.   245,700           213,300   16,200  
                  16,200      
1,072,70
  Total Assets   0   497,400   42,000   256,500   1,355,600  
                         
  Accounts Payable   63,000   35,000           98,000  
  Other Payables   95,000   20,000           115,000  
  Bonds Payable   250,000   200,000           450,000  
  Bond Premium       2,400           2,400  
  Common Stock   210,000   50,000   50,000       210,000  
  Additional Paid-in Capital   110,000               110,000  
  Retained Earnings   344,700   190,000   210,000   20,000   344,700  
  NCI in NA of Block Corp.               23,700   25,500  
                  1,800      
1,072,70
  Total Liabilities & Equity   0   497,400   260,000   45,500   1,355,600  
                         

7-62
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-38 Comprehensive Problem: Intercorporate Transfers

Note: In converting this problem from the modified to the fully adjusted equity method, we did
not correctly adjust for lower depreciation resulting from the fixed asset sale at a loss. If you
complete the problem based on the numbers given in the trial balance in the text, the
investment and income from sub accounts will not be fully eliminated. In order to correct this
problem, please use the following adjusted numbers for Foster Company:

Investment in Block Corporation Stock = 229,500

Income from Block Corporation = 51,300
Retained Earnings = 251,200

These calculations are based on the corrected numbers

a. Computation of differential as of January 1, 20X8:

Original differential at December 31, 20X1 $   150,000 

Less: Portion written off for sale of inventory       (30,000)
Remaining differential, January 1, 20X8 $   120,000 

b. Verification of balance in Investment in Schmid Stock account:

Schmid retained earnings, January 1, 20X8 $1,400,000 

Schmid net income, 20X8: 110,000 
Schmid dividends, 20X8      (20,000)
Schmid retained earnings, December 31, 20X8 $1,490,000 

Schmid stockholders' equity:

Common stock $1,000,000 
Additional paid-in capital 1,350,000 
Retained earnings, December 31, 20X8   1,490,000 
Stockholders' equity, December 31, 20X8 $3,840,000 
Rossman's ownership share x       .75 
Book value of shares held by Rossman $2,880,000 
Remaining differential at January 1, 20X8: ($120,000 x 0.75) 90,000 
Deferred gain on downstream sale of land (23,000)
Loss on sale of equipment 30,000
Reverse part of loss on sale of equipment (3,000)
Balance in Investment in Schmid account, December 31, 20X8 $2,974,000 

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

These calculations are based on the uncorrected numbers

b. Verification of balance in Investment in Schmid Stock account:

Schmid retained earnings, January 1, 20X8 $1,400,000 

Schmid net income, 20X8: 110,000 
Schmid dividends, 20X8      (20,000)
Schmid retained earnings, December 31, 20X8 $1,490,000 

Schmid stockholders' equity:

Common stock $1,000,000 
Additional paid-in capital 1,350,000 
Retained earnings, December 31, 20X8   1,490,000 
Stockholders' equity, December 31, 20X8 $3,840,000 
Rossman's ownership share x       .75 
Book value of shares held by Rossman $2,880,000 
Remaining differential at January 1, 20X8: ($120,000 x 0.75) 90,000 
Deferred gain on downstream sale of land (23,000)
Loss on sale of equipment 30,000
Reverse part of loss on sale of equipment (3,000)
Incorrect Number 6,000
Balance in Investment in Schmid account, December 31, 20X8 $2,980,000 

7-64
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-38 (continued)

c. These calculations are based on the corrected numbers

Book Value Calculations:          

Rossman Add. Retained
NCI + Corp. = Common + Paid-in +
  25% 75% Stock Capital Earnings  
Original book value 937,500 2,812,500 1,000,000 1,350,000 1,400,000  
+ Net Income 27,500 82,500 110,000  
- Dividends (5,000) (15,000) (20,000)  
Ending book value 960,000 2,880,000 1,000,000 1,350,000 1,490,000  
                     

Deferred Gain Calculations:

Rossman
Corp.'s
  Total = share + NCI's share  
Upstream Asset 40,000 30,000 10,000  
Extra Depreciation (4,000) (3,000) (1,000)  
Total 36,000 27,000 9,000  
             

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Basic elimination entry

Common stock     1,000,000     ← Original amount invested (100%)
Additional Paid-in Capital   1,350,000     ← Beginning balance in APIC
Retained earnings     1,400,000     ← Beginning balance in RE
Income from Schmid Dist.   109,500     ← Rossman’s share of NI - Def. Gain
NCI in NI of Schmid Dist.   36,500     ← NCI share of NI - Def. Gain
Dividends declared       20,000 ← 100% of Schmid.'s dividends
Investment in Schmid Dist.       2,907,000 ← Rossman's share of BV - Def. Gain
NCI in NA of Schmid Dist.       969,000 ← NCI share of BV - Def. Gain

Excess Value (Differential)

Calculations:
Rossman
  NCI 25% + Corp. 75% = Land + Goodwill
Beginning balance 30,000 90,000 56,000 64,000
Changes 0 0 0 0
Ending balance 30,000 90,000 56,000 64,000
         

Excess value (differential) reclassification entry:

Land     56,000    
Goodwill 64,000
Investment in Schmid Dist. 90,000
NCI in NA of Schmid Dist. 30,000

7-66
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-38 (continued)

Eliminate services
Other Income     80,000    
Other Expenses         80,000
           
Eliminate intercompany payables/receivables
Current payables     20,000    
Current receivables       20,000
           
Eliminate intercompany dividend owed
Current payables     3,750    
Current receivables       3,750

Eliminate gain on purchase of land

Investment in Schmid Dist.   23,000    
Land         23,000

Accumulated
Equipment   Depreciation
Rossman Corp. 250,000   Actual   25,000
  145,000
185,000     4,000
Schmid Dist. 435,000   "As If" 174,000

Eliminate the gain on Equipment and correct asset's basis:

Equipment     185,000    
Loss on Sale         40,000
Accumulated Depreciation       145,000

Depreciation Expense   4,000    

Accumulated Depreciation       4,000

Investment in Income from

  Schmid Dist.   Schmid Dist.  
Beginning Balance 2,879,500          
75% Net Income 82,500       82,500 75% Net Income
    15,000 75% Dividends      
Def. Loss on Def. Gain on
Equipment 30,000 3,000 Realize Loss Gain 3,000 30,000 Equipment
Ending Balance 2,974,000       109,500 Ending Balance
    2,907,000 Basic 109,500    
Def. Gain on Land 23,000 90,000 Excess Reclass.
0       0

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-38 (continued)

d. This worksheet is based on the corrected numbers:

      Rossman   Schmid   Elimination Entries      

      Corp.   Dist.   DR   CR   Consolidated  
  Income Statement                      
  Sales   4,801,000   985,000           5,786,000  
  Other Income or Loss   90,000   (35,000)   80,000   40,000   15,000  
(2,193,000
  Less: COGS   )   (525,000)           (2,718,000)  
Less: Depreciation & Amort.
  Expense (202,000)   (88,000)   4,000       (294,000)  
(1,381,000
  Less: Other Expenses   )   (227,000)       80,000   (1,528,000)  
  Income from Schmid Dist.   109,500       109,500       0  
  Consolidated Net Income   1,224,500   110,000   193,500   120,000   1,261,000  
  NCI in Net Income           36,500       (36,500)  
  Controlling Interest in NI   1,224,500   110,000   230,000   120,000   1,224,500  
                         
  Statement of Retained Earnings                   
1,400,00 1,400,00
  Beginning Balance   1,474,800   0   0       1,474,800  
  Net Income   1,224,500   110,000   230,000   120,000   1,224,500  
  Less: Dividends Declared   (50,000)   (20,000)       20,000   (50,000)  
1,490,00 1,630,00
  Ending Balance   2,649,300   0   0   140,000   2,649,300  
                         
  Balance Sheet                      
  Cash   50,700   38,000           88,700  
  Current Receivables   101,800   89,400       23,750   167,450  
  Inventory   286,000   218,900           504,900  
1,200,00
  Land   400,000   0   56,000   23,000   1,633,000  
2,990,00
  Buildings & Equipment   2,400,000   0   185,000       5,575,000  
(1,105,000
  Less: Accumulated Depr.   )   (420,000)       145,000   (1,674,000)  
                  4,000      
2,907,00
  Investment in Schmid Dist.   2,974,000       23,000   0   0  
                  90,000      
  Goodwill           64,000       64,000  
4,116,30 3,192,75
  Total Assets   5,107,500   0   328,000   0   6,359,050  
                         
  Current Payables   86,200   76,300   23,750       138,750  
  Bonds Payable   1,000,000   200,000           1,200,000  
1,000,00 1,000,00
  Common Stock   100,000   0   0       100,000  
1,350,00 1,350,00
  Additional Paid-in Capital   1,272,000   0   0       1,272,000  
1,490,00 1,630,00
  Retained Earnings   2,649,300   0   0   140,000   2,649,300  
  NCI in NA of Schmid Dist.               969,000   999,000  
                  30,000      
4,116,30 4,003,75 1,109,00
  Total Liabilities & Equity   5,107,500   0   0   0   6,359,050  

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

                         

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-38 (continued)

d. This worksheet is based on the uncorrected numbers:

      Rossman   Schmid   Elimination Entries      

      Corp.   Dist.   DR   CR   Consolidated  
  Income Statement                      
  Sales   4,801,000   985,000           5,786,000  
  Other Income or Loss   90,000   (35,000)   80,000   40,000   15,000  
(2,193,000
  Less: COGS   )   (525,000)           (2,718,000)  
Less: Depreciation & Amort.
  Expense (202,000)   (88,000)   4,000       (294,000)  
(1,381,000
  Less: Other Expenses   )   (227,000)       80,000   (1,528,000)  
  Income from Schmid Dist.   115,500       109,500       6,000  
  Consolidated Net Income   1,230,500   110,000   193,500   120,000   1,267,000  
  NCI in Net Income           36,500       (36,500)  
  Controlling Interest in NI   1,230,500   110,000   230,000   120,000   1,230,500  
                         
  Statement of Retained Earnings                   
1,400,00 1,400,00
  Beginning Balance   1,474,800   0   0       1,474,800  
  Net Income   1,230,500   110,000   230,000   120,000   1,230,500  
  Less: Dividends Declared   (50,000)   (20,000)       20,000   (50,000)  
1,490,00 1,630,00
  Ending Balance   2,655,300   0   0   140,000   2,655,300  
                         
  Balance Sheet                      
  Cash   50,700   38,000           88,700  
  Current Receivables   101,800   89,400       23,750   167,450  
  Inventory   286,000   218,900           504,900  
1,200,00
  Land   400,000   0   56,000   23,000   1,633,000  
2,990,00
  Buildings & Equipment   2,400,000   0   185,000       5,575,000  
(1,105,000
  Less: Accumulated Depr.   )   (420,000)       145,000   (1,674,000)  
                  4,000      
2,907,00
  Investment in Schmid Dist.   2,980,000       23,000   0   6,000  
                  90,000      
  Goodwill           64,000       64,000  
4,116,30 3,192,75
  Total Assets   5,113,500   0   328,000   0   6,365,050  
                         
  Current Payables   86,200   76,300   23,750       138,750  
  Bonds Payable   1,000,000   200,000           1,200,000  
1,000,00 1,000,00
  Common Stock   100,000   0   0       100,000  
1,350,00 1,350,00
  Additional Paid-in Capital   1,272,000   0   0       1,272,000  
1,490,00 1,630,00
  Retained Earnings   2,655,300   0   0   140,000   2,655,300  
  NCI in NA of Schmid Dist.               969,000   999,000  
                  30,000      
4,116,30 4,003,75 1,109,00
  Total Liabilities & Equity   5,113,500   0   0   0   6,365,050  

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

                         

7-71
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-39A Computation of Retained Earnings following Multiple Transfers

Consolidated retained earnings, January 1, 20X8:

Great Company’s retained earnings, January 1 $450,000 

Unrealized profit on land ($16,000 x 0.80) (12,800)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 2)]    (17,600)
Consolidated retained earnings $419,600 

Consolidated retained earnings, December 31, 20X8:

Consolidated retained earnings, January 1 $419,600 

Great Company’s operating income for 20X8 $65,000 
Less: Dividends paid in 20X8 (45,000)
Increase in retained earnings from Great’s operations 20,000 
Meager’s net income for 20X8 $ 30,000 
Less: Amortization of differential assigned to equipment:
($325,000 - $290,000) / 10 years (3,500)
Impairment of goodwill (17,500)
Realized income $ 9,000 
Proportion of ownership held x 0.80  7,200 
Realization of gain on sale of building
($22,000 / 10 years) 2,200 
Consolidated retained earnings $449,000 

Alternate computation of retained earnings balance:

Great Company’s retained earnings, January 1 $450,000 

Operating income for 20X8 65,000 
Dividends paid in 20X8 (45,000)
Investment income from Meager Company for 20X8:
Meager's net income $30,000 
Proportion of ownership held x   0.80 
 

Proportionate share of Meager’s reported net income 24,000 

Amortization of differential assigned to equipment:
[($325,000 - $290,000) x 0.80] / 10 years (2,800)
Goodwill impairment loss ($17,500 x 0.80)    (14,000)
Great Company’s retained earnings $477,200 
Unrealized profit on land ($16,000 x 0.80) (12,800)
Unrealized profit on depreciable assets
[$22,000 - ($2,200 x 3)]    (15,400)
Consolidated retained earnings $449,000 

7-72
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-40A Consolidation Worksheet with Intercompany Transfers (Modified Equity Method)

Book Value Calculations:        

Mist Retained
NCI + Co. = Common +
  35% 65% Stock Earnings  
Original book value 50,750 94,250 60,000 85,000  
+ Net Income 10,500 19,500 30,000  
- Dividends (1,750) (3,250) (5,000)  
Ending book value 59,500 110,500 60,000 110,000  
                 

Basic elimination entry

Common stock   60,000   ← Original amount invested (100%)
Retained earnings   85,000   ← Beginning balance in retained earnings
Income from Blank Corp. 19,500   ← Mist Co.’s share of NI
NCI in NI of Blank Corp. 6,265   ← NCI share of NI – Def. Gain + Extra Dep.
Dividends declared   5,000 ← 100% of Blank Corp.'s dividends declared
Investment in Blank Corp. 110,500 ← Net BV left in the investment account
NCI in NA of Blank Corp.   55,265 ← NCI share of BV + Extra Dep.

Eliminate gain on purchase of land

Gain on Sale of Land 4,000  
Land     4,000

Eliminate the gain on Building and correct asset's basis:

Gain on Sale on Building 13,200  
Depreciation Expense   1,100
Building and Equipment (net) 12,100

Eliminate intercompany services

Sales 24,000  
Other Expenses   24,000

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-40A (continued)
b.
        Blank   Elimination Entries      
      Mist Co.   Corp.   DR   CR   Consolidated  
  Income Statement                      
  Sales   286,500   128,500   24,000       391,000  
  Gain on Sale of Land   4,000       4,000       0  
  Gain on Sale of Building       13,200   13,200       0  
  Less: COGS   (160,000)   (75,000)           (235,000)  
  Less: Depreciation Exp.   (22,000)   (19,000)       1,100   (39,900)  
  Less: Other Expenses   (76,000)   (17,700)       24,000   (69,700)  
  Income from Blank Corp.   19,500       19,500       0  
  Consolidated Net Income   52,000   30,000   60,700   25,100   46,400  
  NCI in Net Income           6,265       (6,265)  
  Controlling Interest in NI   52,000   30,000   66,965   25,100   40,135  
                         
  Statement of Retained Earnings                   
  Beginning Balance   198,000   85,000   85,000       198,000  
  Net Income   52,000   30,000   66,965   25,100   40,135  
  Less: Dividends Declared   (25,000)   (5,000)       5,000   (25,000)  
  Ending Balance   225,000   110,000   151,965   30,100   213,135  
                         
  Balance Sheet                      
  Cash   32,500   22,000           54,500  
  Accounts Receivable   62,000   37,000           99,000  
  Inventory   95,000   71,000           166,000  
  Land   40,000   15,000       4,000   51,000  
  Buildings & Equipment (net)   200,000   125,000       12,100   312,900  
  Investment in Blank Corp.   110,500           110,500   0  
  Total Assets   540,000   270,000   0   126,600   683,400  
                         
  Accounts Payable   35,000   20,000           55,000  
  Bonds Payable   180,000   80,000           260,000  
  Common Stock   100,000   60,000   60,000       100,000  
  Retained Earnings   225,000   110,000   151,965   30,100   213,135  
  NCI in NA of Blank Corp.               55,265   55,265  
  Total Liabilities & Equity   540,000   270,000   211,965   85,365   683,400  
                         

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-40A (continued)

c. Mist Company and Subsidiary

Consolidated Balance Sheet
December 31, 20X4

Cash $  54,500 
Accounts Receivable 99,000 
Inventory 166,000 
Land 51,000 
Buildings and Equipment (net)  312,900 
Total Assets $683,400 

Accounts Payable $  55,000 

Bonds Payable   260,000 
Stockholders’ Equity:
Controlling Interest:
Common Stock $100,000
Retained Earnings  213,135
Total Controlling Interest $313,135
Noncontrolling Interest 55,265
Total Stockholders’ Equity   368,400 
Total Liabilities and Stockholders' Equity $683,400 

Mist Company and Subsidiary

Consolidated Income Statement
Year Ended December 31, 20X4

Sales $391,000 
Cost of Goods Sold $235,000
Depreciation Expense   39,900
Other Expenses   69,700
Total Expenses  (344,600)
Consolidated Net Income $  46,400 
Income to Noncontrolling Interest     (6,265)
Income to Controlling Interest $  40,135 

Mist Company and Subsidiary

Consolidated Retained Earnings Statement
Year Ended December 31, 20X4

Retained Earnings, January 1, 20X4 $198,000 

Income to Controlling Interest, 20X4    40,135 
$238,135 
Dividends Declared, 20X4    (25,000)
Retained Earnings, December 31, 20X4 $213,135 

7-75
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-41A Modified Equity Method

Note: In converting P7-32 from the modified to the fully adjusted equity method, we failed to
deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the
investment and retained earnings accounts. This error carries over to this problem. If you
complete the problem based on the numbers given in the trial balance in the text, the
investment account will not be fully eliminated. In order to correct this problem, please reduce
the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000.
Adjusted balances in the trial balance:

Investment in Lane Company Stock = 240,000

Retained Earnings = 420,000

This trial balance is based on the corrected numbers:

a. Adjusted trial balance:

      Prime Company            Lane Company     

            Item                   Debit        Credit        Debit      Credit   

Cash and Accounts Receivable $ 151,000 $ 55,000

Inventory 240,000 100,000
Land 100,000 80,000
Buildings and Equipment 500,000 150,000
Investment in Lane Company
Stock 240,000
Cost of Goods Sold 160,000 80,000
Depreciation and Amortization 25,000 15,000
Other Expenses 20,000 10,000
Dividends Declared 60,000 35,000
Accumulated Depreciation $ 230,000 $ 60,000
Accounts Payable 60,000 25,000
Bonds Payable 200,000 50,000
Common Stock 300,000 100,000
Retained Earnings 420,000 140,000
Sales 250,000 150,000
Income from Subsidiary                                 36,000                                      
Total $1,496,000 $1,496,000 $525,000 $525,000

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

This trial balance is based on the uncorrected numbers:

a. Adjusted trial balance:

      Prime Company            Lane Company     

            Item                   Debit        Credit        Debit      Credit   

Cash and Accounts Receivable $ 151,000 $ 55,000

Inventory 240,000 100,000
Land 100,000 80,000
Buildings and Equipment 500,000 150,000
Investment in Lane Company
Stock 248,000
Cost of Goods Sold 160,000 80,000
Depreciation and Amortization 25,000 15,000
Other Expenses 20,000 10,000
Dividends Declared 60,000 35,000
Accumulated Depreciation $ 230,000 $ 60,000
Accounts Payable 60,000 25,000
Bonds Payable 200,000 50,000
Common Stock 300,000 100,000
Retained Earnings 428,000 140,000
Sales 250,000 150,000
Income from Subsidiary                                 36,000                                      
Total $1,504,000 $1,504,000 $525,000 $525,000

7-77
Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-41A (continued)

b. These calculations are based on the corrected numbers:

Equity Method Entries on Prime Co.'s Books:

Investment in Lane Co.   36,000    
Income from Lane Co.       36,000
Record Prime Co.'s 80% share of Lane Co.'s 20X7 income

Cash     28,000    
Investment in Lane Co. 28,000
Record Prime Co.'s 80% share of Lane Co.'s 20X7 dividend  

c.
Basic elimination entry
Common stock     100,000    
Retained earnings     140,000    
Income from Lane Co.   36,000    
NCI in NI of Lane Co.   9,000    
Dividends declared       35,000
Investment in Lane Co.       200,000
NCI in NA of Lane Co.       50,000

Excess value (differential) reclassification entry:

Goodwill   32,000   ← Remaining goodwill
Retained Earnings   14,400   ← Lane's portion of goodwill impairment loss from last year
Investment in Lane Co.   40,000 ← Remaining balance in investment account
NCI in NA of Lane Co.   6,400 ← NCI's share of differential and loss [($50,000 - 18,000) * .2]

Eliminate intercompany accounts:

Accounts Payable     4,000    
Cash and Accounts Receivable     4,000

Eliminate gain on purchase of land

Retained Earnings     8,000    
NCI in NI of Lane Co.   2,000    
Land         10,000

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

Accumulated
Equipment   Depreciation
Lane Co. 70,000   Actual   14,000
5,000   2,000 23,000
Prime Co. 75,000   "As If" 35,000

Eliminate the gain on Equipment and correct asset's basis:

Retained Earnings     18,000    
Equipment     5,000    
Accumulated Depreciation       23,000

Accumulated Depreciation   2,000    

Depreciation Expense       2,000

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-41A (continued)

d. This worksheet is based on the corrected numbers:

      Prime   Lane   Elimination Entries      

      Co.   Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   250,000   150,000           400,000  
  Less: COGS   (160,000)   (80,000)           (240,000)  
  Less: Depreciation & Amort. Exp. (25,000)   (15,000)       2,000   (38,000)  
  Less: Other Expenses   (20,000)   (10,000)           (30,000)  
  Income from Lane Co.   36,000       36,000       0  
  Consolidated Net Income   81,000   45,000   36,000   2,000   92,000  
  NCI in Net Income           9,000       (9,000)  
  Controlling Interest in NI   81,000   45,000   45,000   2,000   83,000  
                         
  Statement of Retained Earnings                   
  Beginning Balance   420,000   140,000   140,000       379,600  
              14,400          
              8,000          
              18,000          
  Net Income   81,000   45,000   45,000   2,000   83,000  
  Less: Dividends Declared   (60,000)   (35,000)       35,000   (60,000)  
  Ending Balance   441,000   150,000   225,400   37,000   402,600  
                         
  Balance Sheet                      
Cash and Accounts
  Receivable   151,000   55,000       4,000   202,000  
  Inventory   240,000   100,000           340,000  
  Land   100,000   80,000       10,000   170,000  
  Buildings & Equipment   500,000   150,000   5,000       655,000  
  Less: Accumulated Depr.   (230,000)   (60,000)   2,000   23,000   (311,000)  
  Investment in Lane Co.   240,000           200,000   0  
                  40,000      
  Goodwill           32,000       32,000  
1,001,00
  Total Assets   0   325,000   39,000   277,000   1,088,000  
                         
  Accounts Payable   60,000   25,000   4,000       81,000  
  Bonds Payable   200,000   50,000           250,000  
  Common Stock   300,000   100,000   100,000       300,000  
  Retained Earnings   441,000   150,000   225,400   37,000   402,600  
  NCI in NA of Lane Co.           2,000   50,000   54,400  
                  6,400      
1,001,00
  Total Liabilities & Equity   0   325,000   331,400   93,400   1,088,000  
                         

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P7-41A (continued)

d. This worksheet is based on the uncorrected numbers:

      Prime   Lane   Elimination Entries      

      Co.   Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   250,000   150,000           400,000  
  Less: COGS   (160,000)   (80,000)           (240,000)  
Less: Depreciation & Amort.
  Expense (25,000)   (15,000)       2,000   (38,000)  
  Less: Other Expenses   (20,000)   (10,000)           (30,000)  
  Income from Lane Co.   36,000       36,000       0  
  Consolidated Net Income   81,000   45,000   36,000   2,000   92,000  
  NCI in Net Income           9,000       (9,000)  
  Controlling Interest in NI   81,000   45,000   45,000   2,000   83,000  
                         
  Statement of Retained Earnings                   
  Beginning Balance   428,000   140,000   140,000       387,600  
              14,400          
              8,000          
              18,000          
  Net Income   81,000   45,000   45,000   2,000   83,000  
  Less: Dividends Declared   (60,000)   (35,000)       35,000   (60,000)  
  Ending Balance   449,000   150,000   225,400   37,000   410,600  
                         
  Balance Sheet                      
  Cash and Accounts Rec.   151,000   55,000       4,000   202,000  
  Inventory   240,000   100,000           340,000  
  Land   100,000   80,000       10,000   170,000  
  Buildings & Equipment   500,000   150,000   5,000       655,000  
  Less: Accumulated Depr.   (230,000)   (60,000)   2,000   23,000   (311,000)  
  Investment in Lane Co.   248,000           200,000   8,000  
                  40,000      
  Goodwill           32,000       32,000  
1,009,00
  Total Assets   0   325,000   39,000   277,000   1,096,000  
                         
  Accounts Payable   60,000   25,000   4,000       81,000  
  Bonds Payable   200,000   50,000           250,000  
  Common Stock   300,000   100,000   100,000       300,000  
  Retained Earnings   449,000   150,000   225,400   37,000   410,600  
  NCI in NA of Lane Co.           2,000   50,000   54,400  
                  6,400      
1,009,00
  Total Liabilities & Equity   0   325,000   331,400   93,400   1,096,000  
                         

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P6-42A Cost Method

a. Journal entry recorded by Prime Company:

Cash 28,000
Dividend Income 28,000
Record dividend from Lane Company.

b.
Investment elimination entry
Common stock   100,000  
Retained earnings   70,000  
Goodwill     25,000  
Investment in Lane Co.   160,000
NCI in NA of Lane Co.   35,000

Dividend elimination entry

Dividend Income   28,000  
NCI in NI of Lane Co. 7,000  
Dividends Declared   35,000

Assign undistributed income to NCI

Retained Earnings   18,000  
NCI in NA of Lane Co.   18,000

Eliminate intercompany accounts:

Accounts Payable   4,000  
Cash and Accounts Receivable 4,000

Eliminate gain on purchase of land

Retained Earnings   8,000  
NCI in NI of Lane Co. 2,000  
Land     10,000

Eliminate the gain on Equipment and correct asset's basis:

Retained Earnings   18,000  
Equipment   5,000  
Accumulated Depreciation 23,000

Accumulated Depreciation 2,000  

Depreciation Expense   2,000

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Chapter 07 - Intercompany Transfers of Services and Noncurrent Assets

P6-42A (continued)
c.

      Prime   Lane   Elimination Entries      

      Co.   Co.   DR   CR   Consolidated  
  Income Statement                      
  Sales   250,000   150,000           400,000  
  Less: COGS   (160,000)   (80,000)           (240,000)  
  Less: Depr. & Amort. Exp. (25,000)   (15,000)       2,000   (38,000)  
  Less: Other Expenses   (20,000)   (10,000)           (30,000)  
  Dividend Income   28,000       28,000       0  
  Consolidated Net Income   73,000   45,000   28,000   2,000   92,000  
  NCI in Net Income           7,000       (9,000)  
              2,000          
  Controlling Interest in NI   73,000   45,000   37,000   2,000   83,000  
                         
  Statement of Retained Earnings                   
  Beginning Balance   348,000   140,000   70,000       374,000  
              18,000          
              8,000          
              18,000          
  Net Income   73,000   45,000   37,000   2,000   83,000  
  Less: Dividends Declared   (60,000)   (35,000)       35,000   (60,000)  
  Ending Balance   361,000   150,000   151,000   37,000   397,000  
                         
  Balance Sheet                      
  Cash and Accounts Rec.e   151,000   55,000       4,000   202,000  
  Inventory   240,000   100,000           340,000  
  Land   100,000   80,000       10,000   170,000  
  Buildings & Equipment   500,000   150,000   5,000       655,000  
  Less: Accumulated Depr.   (230,000)   (60,000)   2,000   23,000   (311,000)  
  Investment in Lane Co.   160,000           160,000   0  
                         
  Goodwill           25,000       25,000  
  Total Assets   921,000   325,000   7,000   37,000   1,081,000  
                         
  Accounts Payable   60,000   25,000   4,000       81,000  
  Bonds Payable   200,000   50,000           250,000  
  Common Stock   300,000   100,000   100,000       300,000  
  Retained Earnings   361,000   150,000   151,000   37,000   397,000  
  NCI in NA of Lane Co.               35,000   53,000  
                  18,000      
  Total Liabilities & Equity   921,000   325,000   255,000   72,000   1,081,000  
                         

7-83