Essay Questions

Explain how the computation of non controling interest share effected by downstream and
upstream sale of inventory ?
There is no effect on the non cotrolling profit share of the down stream as the claculation
of income of the non cotrolling share will be the percentage of ownership * net income of
the subsidiary.
While on the other hand in the upstream transaction the non controlling calculation
differs as the net income of the non controling will be claculated base on ( net income –
unrealized profit) * % of ownership

Assume that an Italian corporation exports electronic equipment to USA in a transaction

denominated in euro.
- Determine if this is a foreign currency transaction or a foreign transaction for each
company, and
- Explain the difference between these two concepts and their application here.

Foreign transactions are transactions between countries or between enterprises in different

countries.
Foreign currency transactions are transactions whose terms are stated (denominated) in a
currency other than an entity’s functional currency. Thus, a foreign transaction may or may not be
a foreign currency transaction.
The transaction is a foreign transaction because it involves import/export activities.
But it is not a foreign currency transaction for the Italian firm because it is denominated in local
currency.
It is a foreign currency transaction for the American firm because it is not denominated in local
currency.

The unrealized gains and losses from intercompany transactions involving plant assets might be
eventually realized. Does it make any difference if these assets are depreciable or non-depreciable?
Explain.
Unrealized gains and losses from intercompany sales of depreciable assets are realized through use
if the assets are held within the consolidated entity and through sale if the assets are sold to outside
parties. The process of recognizing previously unrealized gains and losses through use is a
piecemeal recognition over the remaining useful life of the depreciable asset.

Unrealized gains and losses from intercompany sales of land are realized from the viewpoint of
the selling affiliate when the purchasing affiliate resells the land to parties outside the consolidated
entity. This is also the point at which the consolidated entity recognizes gain or loss on the
difference between the selling price to outside parties and the cost to the purchasing affiliate.

1
The reciprocal ledger account balances of Youssef Company’s branch and home office are not in
agreement at year-end. What factors might have caused this? Give examples.
The factors that would cause the reciprocal ledger accounts to be out of balance may be classified
into the following groups:
(1) Intracompany transactions between home office and branch, such as shipments of
merchandise or cash transfers by the home office to the branch, recorded by the home office but
not recorded by the branch.
(2) Intracompany transactions between branch and home office, such as transfers of cash by
the branch to the home office, recorded by the branch but not recorded by the home office.
(3) Errors made by the home office or the branch (or both) in recording intracompany
transactions.
Exchange losses arise from foreign import activities, and exchange gains arise from foreign export
activities.”. Discuss the accuracy of this statement and support your answer with a numerical
example.
 The statement is erroneous.
 Exchange gains and losses occur because of changes in the exchange rates between the
transaction date and the date of settlement
 Both exchange gains and exchange losses can occur in either foreign import activities or
foreign export activities
 marks for a correct numerical example.
Discuss four basic types of hedging contract.
Forward contract:
Forward contract are negotiated contract between two parties for the delivery or purchase
of a commodity or foreign currency at a pre-agreed price, quantity and delivery date. The
agreement may require actual physical delivery of goods or may allow net settlement.
Net settlement allows the payment of money so that the parties are I the same economic
conditions as they would have been if delivery has acquired. The payment of settlement is
calculated as follows:
(Market price – Contract price)* quantity

Future contract
Forward contract and future contract have essentially the same contracting characteristics,
except futures differ from forward contracts in ways that allow them to be traded easily in
the market.
Future contract are very standardized. futures exchanged not the trading parties,
determines the contract termination dates the exact quantity and quality of goods to be
delivered and delivery location.

Option
There are two type of option either call or put option. A call option gives the holder the
right to buy an asset and a put gives them the right to sell the asset. The holder of the option

2
 has the right but not the obligation to carry out the transaction, at a stick price and pre-
determined amount.
Option is traded on equities, commodities foreign currency and interest rates.
Option prices can be determined by using a variety of option pricing models.
The common is the black-SC-holes option pricing model
Swaps
they are contract to exchange an ongoing stream of cash flows the most common swap is
interest rate swaps, but swaps can be designed around any corresponding price or rate a
common use of swap is to look fixed rate on liabilities.

Under the functional currency concept, the consolidation of the financials may require translation
or remeasurement or both . berifly explain the two methods Translation:
a. When the foreign entity books are maintained in its functional currency, the statement are
translated into reporting entity currency
b. Translation involves expressing functional currency measurement in the reporting currency
c. All elements in the financial statement except for shareholder equity account are translated
using a current exchange rate.
d. Current rate method
e. The effect of the exchange rate change is reported as shareholder equity adjustment in other
comprehensive income
f. The equity adjustments from translating are accumulated in the other comprehensive
income until sale or liquidation of the foreign entity investment at which time they are
reported as adjustment of the gain or loss on sale
Remeasurement:
a. When foreign entity's books are not maintained in its functional currency, the foreign
currency financial statement must be remeasured into the functional currency.
b. If the foreign currency financial statement are remeasured into a US dollar functional
currency no translation is necessary because the reporting currency of the parent investor
is the US dollar
c. The objective is to produce the same financial statement as if the books has been
maintained in the functional currency.
d. temporal method
e. Both current and historical exchange rate are used in the process of remeasuring
f. Monetary asset and liabilities are remeasured using the current exchange rate, while other
asset and equity are remeasured using the historical exchange rate
g. The remeasurement produce exchange rate adjustments that are included in income
because a direct impact in the enterprise cash flow is expected

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GAAP has identified six factors management should consider when determining the functional
currency , please elaborate.
1. if the cash flow related to the foreign entity's assets and liabilities are denominated and
settled in the foreign currency rather than parent's currency then foreign entity local
currency may be the functional currency.
2. if the sale process of the foreign entity products are determined by local competition or
local government regulation rather than by short run exchange rate changes or
worldwide market then the foreign entity local currency may be the functional currency
3. a sales market that is primarily in the parent company's country or sales contracts that
are normally denominated in the parents currency may indicate that the parent s currency
is the functional currency
4. expense such as labor and materials that are primarily local costs provide some evidence
that the foreign entity's local currency is the functional currency.
5. If financing is denominated primarily in the foreign entity local currency and funds
generated by its operations are sufficient to service existing and expected debt then
foreign entity local currency is likely to be the functional currency
A high volume of intercompany transaction and arrangement indicate that the parent's currency
is to be the functional currency.

Define the following:

Fixed exchange rates - Floating exchange rates - Spot rate - Current rate -Historical rate.
Fixed exchange rates
Are set by a government and do not change as a result of changes in world currency markets. When
exchange rates are fixed, the issuing government is able to set (fix) different rates for different
kinds of transactions.
Floating exchange rates
Are those that reflect fluctuating market prices for a currency based on supply and demand and
other factors in the world currency markets.
Spot rate
The exchange rate for immediate delivery of currencies exchanged
Current rate
The rate at which one unit of currency can be exchanged for another currency at the balance sheet
date or the transaction date.
Historical rate
The rate in effect at the date a specific transaction or event occurred.

Define the functional currency concept.

An entity functional currency is the currency of the primary economic enviroment in which
it operates. Normally a forieng entuty functional currency is the currency it received from
customer and spend to pay its liabiliies.

4
 Practical Questions on
Chapters 4 & 5
Penn has owned 70% of Sylvania for the past five years, and at the time of purchase, the book
value of Sylvania's assets and liabilities equaled the fair value. In 2020, Sylvania sold inventory to
Penn which had cost $200,000 for $300,000. 40% of this inventory remained on hand at December
31, 2020, but was sold in 2021. In 2021, Sylvania sold inventory to Penn which had cost $150,000
for $225,000 and 25% of this inventory remained unsold at December 31, 2021. Sylvania’s
dividends in 2021 was $20,000. On December 31, 2021, Penn owed Sylvania $9,000 on account
for merchandise purchases.
Presented below are several figures reported for Penn Corporation and Sylvania Industries as of
December 31, 2021.
Penn Sylvania
Inventory $600,000 $300,000
Sales 1,000,000 700,000
Cost of Goods Sold 650,000 400,000
Expenses 200,000 150,000
Required:
1- Calculate the following:
A. Parent’s share of subsidiary net income in 2021
B. Non-controlling interest share of subsidiary net income in 2021.
2- Prepare the required elimination entries in 2021. (Parent entries are not required)
3- Prepare the working paper for consolidated Income Statement for 2021.
4- Calculate Inventory amount that appears on the consolidated balance sheet at December 31, 2021.
5- If the elimination entry of unrealized profit in inventories at the end of 2020 was not prepared,
what will be the effect on the consolidated net income in 2020, 2021, and 2022?

Answer
1-
Unrealized profit in ending Inventory 2020 = [300,000 – 200,000] * 40% = 40,000
Unrealized profit in ending Inventory 2021 = [225,000 – 150,000] * 25% = 18,750
Income from subsidiary -Parent share = [150,000 – 18,750 + 40,000] * 70% = 119,875
Income from subsidiary – NCI share = [150,000 – 18,750 + 40,000] * 30% = 51,375
2- Elimination entries
1. Eliminate intercompany sales
Dr Cr
Sale revenue 225,000
Cost of goods sold 225,000
Defer unrealized profit in ending inventory
Dr Cr
Cost of goods sold 18,750
Inventory 18,750

5
 Record previously deferred profit (realized profit) from Beginning inventory
Dr Cr
Investments in subsidiary 40000 * 70% 28,000
NCI – equity 40000 * 30% 12,000
Cost of goods sold 40,000
2. Eliminate income from Subsidiary – parent
Dr Cr
Income from subsidiary 119,875
Dividends 20,000 * 70% 14,000
Investment in subsidiary 105,875
3. Adjust income from subsidiary – NCI
Dr Cr
NCI- income 51,375
Dividends 20,000 * 30% 6,000
NCI – equity 45,375
5.
Dr Cr
AP 9,000
AR 9,000
3- Working paper for consolidated Income Statement for 2021:
Parent Subsidiary Elimination Consolidated
Income statement
Dr. Cr.
Sales 1,000,000 700,000 225,000 1,475,000
Income from sub 119,875 119,875 0
C.O.G.S 650,000 400,000 18,750 225,000 (803,750)
40,000
Expenses 200,000 150,000 (350,000)
Consolidated Net 269,875 321,250
Income
NCI -Income 51,375 (51,375)
Controlling Interest 269,875

4- Consolidated Inventory:
= [600,000 + $300,000] - 18,750 = 881,250
5- If unrealized profits are not eliminated at the end of 2020, consolidated net income will be
overstated (1 mark). $40,000 in 2020 (.5 mark). The ending inventory of one year becomes the
beginning inventory of the next year, and unrealized profits in the beginning inventory will
understate consolidated net income in 2021 (1 mark) by $40,000 (.5 mark). The analysis of the
effect of unrealized inventory profits on consolidated net income is basically the same as the
analysis for inventory errors. Like inventory errors, errors in eliminating unrealized profits are
self-correcting over any two accounting periods. Consolidated net income for 2022 is unaffected.
(1 mark)
6
Park Corporation paid $24,800 for an 80% interest in Stay Corporation on January 1, 2019, at
which time Stay's stockholders' equity consisted of $15,000 of Common Stock and $6,000 of
Retained Earnings. The fair values of Stay Corporation's assets and liabilities were identical to
recorded book values when Park acquired its 80% interest.
Stay Corporation reported net income of $9,000 and paid dividends of $5,000 during 2019.
Park Corporation sold inventory items to Stay during 2019 and 2020 as follows:
2019 2020
Park's sales to Stay $5,000 $6,000
Park's cost of sales to Stay 3,000 3,500
Unrealized profit at year-end 1,000 1,500

At December 31, 2020, the accounts payable of Stay include $1,500 owed to Park for inventory purchases.
Required:
1) Prepare all elimination entries in 2020 (Including the entries not affecting the consolidated Income
statement). Show all your calculations.
2) Complete the working papers to consolidate the financial statements of Park Corporation and subsidiary
for the year ended December 31, 2020.

Park Stay Eliminations Consolidated

Debit Credit
INCOME STATEMENT
Sales $43,000 $20,000
income from Stay 6,700
Cost of Sales (22,000) (8,000)
Other Expenses (12,200) (3,000)
Noncontrolling interest share
Net income $15,500 $9,000
Retained Earnings 1/1 $ 9,000 $8,000
Add: Net income 15,500 9,000
Dividends (10,000) (5,000)
Retained Earnings 12/31 $ 14,500 $12,000
BALANCE SHEET
Cash $5,400 $ 3,000
Net Receivables 14,000 10,000
Dividends Receivable 2,000
Inventories 18,000 8,000
Goodwill
Plant assets-net 24,000 31,000
Investment in Stay 28,100
TOTAL ASSETS $91,500 $52,000
LIAB. & EQUITY
Accounts
Dividendspayable
payable $17,500
7,000 $2,500
12,500

Other Debt 12,500 10,000

7
Capital Stock 40,000 15,000
Retained Earnings 14,500 12,000
1/1 Noncntrl. Interest
12/31 Noncntrl. Interest
TOTAL LIAB. & EQUITIES $91,500 $52,000

Answer
1-
Investment in Stay at January 1, 2019 $24,800
Implied fair value of Stay ($24,800 / 80%) $31,000
Book value of Stay 15,000+6,000 21,000
Goodwill $ 10,000

Unrealized profit in ending Inventory 2019= $1,000

Unrealized profit in ending Inventory 2020= $1,500
Income from subsidiary-Parent share= [9,000*80% ]–1,500 + 1,000 = $6,700
Income from subsidiary-NCI share = 9,00020% = $1,800

1- Elimination Entries: 50
1. Eliminate intercompany sales
Dr Cr
Sale revenue 6,000
Cost of Sales 6,000
2. Defer unrealized profit in ending inventory
Dr Cr
Cost of Sales 1,500
Inventory 1,500
3. Record previously deferred profit (realized profit) from Beginning inventory
Dr Cr
Investments in subsidiary 1,000

Cost of sales 1,000

4. Eliminate income from Subsidiary – parent
Dr Cr
Income from subsidiary 6,700
Dividends 5,000* 80% 4,000
Investment in subsidiary 2,700
5. Adjust income from subsidiary – NCI
Dr Cr
NCI- income 1,800
Dividends 5000*20% 1,000
NCI – equity 800

8
 6. Eliminating investment and equity balance
Dr Cr
Capital Stock 15,000
Retained Earnings (Beginning) 8,000
Goodwill 10,000
Investment in subsidiary-Beg. 33,000*80% 26,400
NCI-Equity –Beg. 33,000*20% 6,600
7. Reciprocal accounts
Dr Cr
Accounts Payable 1,500
Accounts Receivable 1,500
8. Reciprocal accounts
Dr Cr
Dividends Payable 2,500 *.80% 2,000
Dividends Receivable 2,000

2- Working paper for consolidated financial statements: 47

Park Stay Eliminations Consolidated
Debit Credit
INCOME STATEMENT
Sales $43,000 $20,000 6,000 57,000
income from Stay 6,700 6,700
Cost of Sales (22,000) (8,000) 1,500 6,000
1,000 (24,500)
Other Expenses (12,200) (3,000) (15,200)
Noncontrolling interest share 1,800 (1,800)
Net income $15,500 $9,000 15,500
Retained Earnings 1/1 $ 9,000 $8,000 8,000 9,000
Add: Net income 15,500 9,000 15,500
Dividends (10,000) (5,000) 1,000
4,000 (10,000)
Retained Earnings 12/31 $ 14,500 $12,000 14,500
BALANCE SHEET
Cash $5,400 $ 3,000 8,400
Net Receivables 14,000 10,000 1,500 22,500
Dividends Receivable 2,000 2,000
Inventories 18,000 8,000 1,500 24,500
Goodwill 10,000 10,000
Plant assets-net 24,000 31,000 55,000
Investment in Stay 28,100 1,000 2,700
26,400
TOTAL ASSETS $91,500 $52,000 120,400

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LIAB. & EQUITY
Accounts payable $17,500 $ 12,500 1,500 28,500
Dividends payable 7,000 2,500 2,000 7,500

Other Debt 12,500 10,000 22,500

Capital Stock 40,000 15,000 15,000 40,000

Retained Earnings 14,500 12,000 14,500
1/1 Noncntrl. Interest 6,600
12/31 Noncntrl. Interest 800 7,400
TOTAL LIAB. & EQUITIES $91,500 $52,000 120,400

On January 1, 2020 Portland Corporation acquired 90% in Sol Corporation’s common stock for
$360,000. The stockholders’ equity of Sol on this date consisted of $200,000 capital stock and
$50,000 retained earnings. On that date, the book value of Sol’s assets and liabilities was equal to
the fair value, except for inventories that were undervalued by $10,000 and sold in 2020, land that
were undervalued by $40,000, and buildings that were overvalued $30,000 and had a remaining
useful life of 20 years. Any remaining differences between book value and fair value of Sol’s net
assets should be assigned to goodwill.
Sol reported $60,000 net income for 2020 and distributed dividends of $20,000. During 2020, Sol
borrowed $15,000 from Portland on a non-interest-bearing note. Sol repaid the note on December
30, but the repayment check to Portland was in transit and was not reflected in Portland’s separate
balance sheet at December 31, 2020.

Required: using equity method

1- Prepare the required elimination entries for the year ended December 31, 2020. Show your
computations.
2-In your answer, some items should be amortized and others should not. State these assets and
provide your explanation.
Answer
Fair value of the net asset= acquisition price / parent ownership %
= 360,000/90% = 400,000
Book value of net asset = 200,000+50,000 = 250,000

Unamortized excess = fair value of net asset – Book value of net asset
= 400,000- (200,000+50,000) = 150,000

Allocation of excess of fair value over book value:

Inventory $10,000
Land $40,000
Building $(30,000)
Goodwill 130,000
Excess of fair value over book value $150,000

10
 Amortization
s Balance 1/1/2020 Amortization
Inventory 10,000 (10,000)
Land 40,000 -
Building (30,000) 50,000/20= 1,500
Goodwill 130,000 -
Total 150,000 (8,500)

Adjusted net income = 60,000-8,500 = 51,500

Elimination entries
Adjusting the error: cash in transit from Sol to Pat for the note receivable.
Dr. Cr.
Cash 15,000
Notes receivable 15,000
Eliminate income & dividends from subsidiary, and bring Investment account to its beginning balance
Dr. Cr.
income from subsidiary (60,000-8,500)*90% 46,350
Dividends (20,000 * 90%) 18,000
Investment in subsidiary (remaining) 28,350
Record non-controlling interest in subsidiaries’ Net Income & dividends
Dr. Cr.
NCI- income (60,000-8,500)*10% 5,150
Dividends (20,000 * 10%) 2,000
NCI – equity (remaining) 3,150
Eliminate reciprocal Investment & subsidiary's equity balances
Dr. Cr.
Capital stock- subsidiary 200,000
Retained earnings (beginning ) 50,000
Unamortized excess 150,000
Investment in subsidiary 360,000
NCI-Equity 40,000
Allocate the unamortized excess
Dr. Cr.
Inventory 10,000
Land 40,000
Goodwill 130,000
Buildings 30,000
Unamortized excess 150,000
Amortize fair value/book value differentials: Amortization entries
a. Inventory
Dr. Cr.
Cost of goods sold 10,000
inventory 10,000

11
 b. Buildings
Dr. Cr.
Buildings 1,500
Depreciation exp. 1,500

2- Inventory had been amortized as it was sold in 2022. Building had been depreciated because
it has a definite useful life, While land and goodwill has indefinite useful life, so it is not subject
to depreciation (amortization).

Below are the income statement information for 2012 of Pug and its 60% owned subsidiary
"Sub".
Pug Sub
Sales 900,000 350,000
Cost of goods sold 400,000 250,000
Gross profit 500,000 100,000
Operating expense 250,000 50,000
Net income 250,000 50,000
Intercompany sales for 2012 are upstream and total $100,000. Pug's December 31,
2011 and December 31, 2012 inventories contain unrealized profit of $5,000 and $10,000
respectively. Required
• Compute non-controlling interest share of profit for 2012
Non controlling net income share 50,000
Add: unrealized profit deferral 5000
Less: unamortized profit end (10,000)
= 45,000 * 40% = 18,000
Compute consolidated sales, cost of sale and total income for 2012.
Eliminating the reciprocal sales
Dr. sales 100,000
Cr. Cost of goods sold 100,000

1. eliminating unrealized profit ending

Dr. Cost of goods sold 10,000
Cr. Inventory 10,000

2. Adjusting for unrealized beg

Dr. investment in subsidiary 3,000
Dr. non -controlling interest - equity 2,000
Cr. Cost of goods sold 5,000

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 3. Eliminating net income investment of subsidiary Dr. income from subsidiary 27,000
Cr. Investment from subsidiary 27,000
Net income share 50,000 * 60% = 30,000
Add: unrealized profit deferral 5000 * 60% = 3,000
Less: unamortized profit end (10,000) * 60% = (6,000)
=27,000
4. Eliminating non controlling share
Dr. non controlling – income 18,000
Cr. Non controlling – equity 18,000
Pug Sub Dr Cr Consolidated
Sales 900,000 350,000 100,000 1,150,000
Income form subsidiary 27,000 27,000 -
Cost of goods sold 400,000 250,000 10,000 100,000 555,000
5,000
Gross profit 527,000 100,000 595,000
Operating expense 250,000 50,000 300,000
Net income 277,000 50,000 295,000
Non controlling 18,000 (18,000)
Controlling share 277,000

Below are the income statement information for 2012 of Pug and its 80% owned subsidiary "Sub".
Pug Sub
Sales 1,000,000 600,000
Cost of goods sold 500,000 400,000
Gross profit 500,000 200,000
Operating expense 250,000 80,000
Net income 250,000 120,000
During 2012, Pug sold to its subsidiary inventory for $200,000 at a gross profit $40,000.
The remaining inventory on the hand of subsidiary is 40%. Required

• Compute the unrealized profit – ending

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 Cost of goods sold = sale – profit

= 200,000 – 40,000 = 160,000

Remaining end inventory at cost = 160,000 * 40% = 64,000
Remaining inventory at transfer price= 200,000 * 40% = 80,000
Unrealized profit ending= 80,000 – 64,000 = 16,000

• Compute profit for 2012 for the o Non-controlling interest o Parent profit
Non- controlling profit o Net income share 120,000* 20% = 24,000
Parent profit o net income share 120,000 * 80% = 96,000 o Less:
unamortized profit end = (16,000)
=80,000
• Compute consolidated income statement for 2012, show the elimination entries.
Eliminating the reciprocal sales
Dr. sales 200,000
Cr. Cost of goods sold 200,000
Eliminating unrealized profit ending
Dr. cost of goods sold 16,000
Cr. Inventory 16,000
Eliminating net income investment of subsidiary
Dr. income from subsidiary 80,000
Cr. Investment from subsidiary 80,000

Eliminating non controlling share

Dr. non controlling – income 24,000
Cr. Non controlling – equity 24,000
Pug Sub Dr Cr Consolidated
Sales 1,000,000 600,000 200,000 1,400,000
Income form subsidiary 80,000 80,000 -
Cost of goods sold 500,000 400,000 16,000 200,000 716,000
Gross profit 580,000 200,000 684,000
Operating expense 250,000 80,000 330,000
Net income 330,000 1200,000 354,000
Non controlling 24,000 (24,000)
Controlling share 330,000

14
A. Below are the income statement information for 2015 of Orange and its 75% owned subsidiary “Gold”.
Parent Subsidiary
Sales 6,000,000 3,600,000
Cost of goods sold 3,000,000 2,400,000
Gross profit 3,000,000 1,200,000
Operating expense 1,500,000 480,000
Net income 1,500,000 720,000
During 2015, Parent sold to its subsidiary inventory for $ 1,200,000 with a gross profit $300,000.
The remaining inventory on the hand of subsidiary is 45%. Required
• Compute the unrealized profit – ending
• Compute profit for 2015 for the o Non-controlling interest o Parent profit
• Prepare the consolidated income statement for 2015, show the elimination entries.

Unrealized GP = 300,000 * 45% = 135,000

Net Income 720,000
• Parent 75% = 540,000
• NCI 25% = 180.000
Parent’ NI = 540,000 -135,000 = $ 405,000

Eliminate intercompany profits and losses

Sales 1,200,000
Cogs 1,200,000
Cogs 135,000
Inventory 135,000

Income from gold 405,000

Investment in gold 405,000

NCI – Income 180,000
NCI-Share 180,000

Parent Subsidiary Adj. Consolidated

Sales 6,000,000 3,600,000 1,200,000 8,400,000
Cost of goods sold 3,000,000 2,400,000 135,000 1,200,000 4,335,000
Gross profit 3,000,000 1,200,000 4,065,000
Operating expense 1,500,000 480,000 1,980,000
Net income 1,500,000 720,000 2,085,000
Income from sub. 405,000 405,000 0
NCI share 180,000 180,000
Controlling Income 1,905,000

15
 Chapter 6
Polo corporation, acquired 90% of Solo Company at book value several years ago. Compartive
separate compay income statements for 2021 is shown below:
Polo Solo
Sales 300,000 140,000
Gain on Sale of Truck ??? -
Cost of goods sold 200,000 80,000
Operating expenses 60,000 20,000
On January 1, 2021 Polo sold a truck with a 10 year remaining useful life to Solo for $26,000 cash.
Cost of the truck was $30,000 and its accumulated depreciation $10,000.
Required:
1. Calculate the gain on sale of the truck.
2. Record journal entries prepared by the parent during 2021
3. Prepare the required elimination entries for the year ended December 31, 2021. Show your
computations.
ANSWER

1- 26,000 – (30,000 - 10,000) = $6,000

2- Parent Entries 24
1. Sale of asset
Dr. Cr.
cash 26,000
Accumulated depreciation 10,000
Building 30,000
Gain on sale 6,000
Subsidiary net Income = 140,000 – [80,000+20,000] = 40,000

2. Income from subsidiary

Dr. Cr.
Investment in subsidiary 40,000 * 90% 36,000
Income from subsidiary 36,000
3. Adjusting income from subsidiary by unrealized profit – end and amortization
Dr. Cr.
Income from subsidiary 5,400
Investment in subsidiary 5,400
* Unrealized profit end - Amortization of unrealized profit end

6,000 - 6,000/10
6,000 - 600 = 5,400

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The previous 2 entries can be merged into ONE entry

Dr Cr
Investment in subsidiary 30,600
Income from subsidiary 30,600

[subsidiary income * % of ownership] - unrealized profit end + Amortization of unrealized profit

end
40,000 *90% - 6,000 + 600
= 36,000 – 6,000 + 600
= 30,600

2- Elimination entries
1. Gain on sale
Dr. Cr.
Gain on sale 6,000
Truck 6,000
2. Excess Depreciation
Dr Cr
Accumulated depreciation 600
Depreciation expense 600
3. Eliminating income from subsidiary – parent
Dr Cr
Income from subsidiary 30,600
Investment in subsidiary 30,600
Eliminating income – NCI
NCI-Income = 40,000 * 10%
Dr. Cr.
NCI- income 4,000
NCI – equity 4,000

17
Secam is a 80% owned subsidairy of Pal corporation, acquired at book value several years ago.
Compartive separate compay income statements items for 2020 is shown below:
Pal Secam
Sales 30,000,000 12,800,000
Gain on sale of truck - 800,000
Cost of goods sold 20,000,000 8,000,000
Operating expenses 4,000,000 2,600,000
On January 1, 2020 Secam sold a truck with a 10 year remaining useful life to Pal for $1,800,000
cash . Cost of the truck was $1,400,000 and accumulated depreciation $400,000. At year-end 2020,
Pal owed S $1,500.
Required:
1- Record journal entries prepared by "parent" during 2020
2- Prepare elimination/adjusting entries for the year 2020.
ANSWER
1- Parent Entries
1. Purchase of the asset
Description Dr. Cr.
Truck 1,800,000
Cash 1,800,000
2. the depreciation expense
Dr Cr.
Depreciation expense 1,800,000 / 10 years 180,000
Accumulated depreciation 180,000
3. Income from subsidiary
Description Dr. Cr.
Investment in subsidiary 3,000,000* 80% 2,400,000
Income from subsidiary 2,400,000
4. Adjusting income from subsidiary by unrealized profit – end and amortization
Description Dr. Cr.
Income from subsidiary 576,000
Investment in subsidiary 576,000
* Unrealized profit end - Amortization of unrealized profit end
800,000*80% - 640,000/10
640,000 - 64,000 = 576,000
The previous 2 entries can be merged into ONE entry
Description Dr Cr
Investment in subsidiary 1,824,000
Income from subsidiary 1,824,000
[Subsidiary income * % of ownership] - Unrealized profit end + Amortization of unrealized
profit end
3,000,000 *80% - 800,000*80% + 640,000/10

18
= 2,400,000 – 640,000 + 64,000
1,824,000

2- Elimination entries
4. Gain on sale
Description Dr. Cr.
Gain on sale 800,000
Truck 800,000
5. Eliminate Excess Depreciation

Description Dr Cr
Accumulated depreciation 800,000/10 80,000
Depreciation expense 80,000

6. Eliminating income from subsidiary – parent

Description Dr Cr
income from subsidiary 1,824,000
Investment in subsidiary 1,824,000
[Subsidiary income * % of ownership] - Unrealized profit end + Amortization of unrealized
profit end
3,000,000 *80% - 800,000*80% + 640,000/10
= 2,400,000 – 640,000 + 64,000
1,824,000

7. Adjust income from subsidiary – NCI

Description Dr. Cr.

NCI- income 456,000
NCI – equity 456,000

Calculation of NCI
Subsidary net income (3,000,000* 20%) 600,000
Less: unrealized gain on truck (800,000*20%) (160,000)
Add: recognized gain ((800,000/10)*20%) 16,000
=NCI 456,000

5. Reciprocal accounts
Dr Cr
Accounts Payable 1,500
Accounts Receivable 1,500

19
Panda Corporation has an 80% ownership stake in Smile Inc. when the book values were equal
to the fair values. Separate income statements of Panda Corporation and its subsidiary, Smile
Inc., for 2019 were as follows:
Panda Smile
Sales Revenue $2,200,000 $1,000,000
Cost of sales (1,400,000) (600,000)
Other expenses (400,000) (200,000)
Gain on sale- equipment 100,000
Income from Smile 131,000
Net income $631,000 $200,000
Additional information:
- Panda had sold inventory that cost $160,000 to Smile for $300,000 in 2018, 50% of that
inventory remained unsold at year-end. Panda had sold inventory that cost $140,000 to
Smile for $200,000 in 2019, 40% of that inventory remained unsold at year-end. The 2018
ending inventory is sold in 2019.
- Panda sold equipment with a book value of $120,000 and a 4-year remaining useful life to
Smile for $220,000 on January 2, 2019. The equipment has no salvage value. The straight-
line depreciation method is used.
- Smile did not declare or pay dividends in 2018 and 2019.
Required:
1. Prepare adjusting/eliminating entries for the consolidation worksheet at December 31, 2019.
2. Prepare a consolidated income statement for Panda Corporation and Subsidiary for the year
ended December 31, 2019. Show all your calculations.
Answer:
Gain on sale – Equipment = 100,000
Unrealized profit in ending inventory 2018 = (300,000 -160,000) *50% = 70,000
Unrealized profit in ending inventory 2019 = (200,000 -140,000) *40% = 24,000
Requirement 1
12/31/2019
Gain on sale of equipment 100,000
Equipment 100,000
Accumulated depreciation 25,000
Depreciation expense 25,000
= 100,000 /4 = 25,000
Sales 200,000
Cost of sales 200,000
Cost of sales 24,000
Inventory 24,000
Investment in Subsidiary 70,000
Cost of sales 70,000

Income from subsidiary 131,000

Investment in subsidiary 131,000
= 200,000*80% - 24,000+ 70,000- 75,000
Also given in the information
20
NCI-Income [200,000*20%] 40,000
NCI-Equity 40,000

Requirement 2
Panda Corporation and Subsidiary
Consolidated Income Statement
For the Year Ended December 31, 2019
Sales ($2,200,000 + $1,000,000 - $200,000 ) $3,000,000
Cost of sales (1,400,000 + $600,000 - $200,000 - $70,000 + $24,000 ) 1,754,000)
Other expenses ($400,000 + $200,000 - $25,000 ) (575,000)
Consolidated net income 671,000
Noncontrolling interest share ($200,000 × 20%) (40,000)
Controlling interest share $ 631,000

B- The income statement of Penton Corporation showed a net income of $1,400,000 for the year
ended December 31, 2020, before recording any income from its 75% owned subsidiary; Salgado.
The income statement of Salgado for 2020 showed a net income of $280,000. During 2020, an
intercompany sale of welding machine resulted in a gain of $14,000, and the machine was assumed
to have a four-year remaining useful life with no residual value. The machine is depreciated on a
Straight-line basis.
Required:
1. Calculate Penton's consolidated net income for 20209, and controlling share of consolidated net
income for 2020, assuming it was a downstream sale,
2. Calculate Penton's consolidated net income for 2020, and controlling share of consolidated net
income for 2020, assuming it was an upstream sale
3. Comment on the results, to indicate the difference between downstream sale and upstream sale.
Answer:
1. Downstream sale:
Penton's separate net income $1,400,000
Salgado's separate net income 280,000
Less: Unrealized gain on vehicle (14,000)
Plus: Excess depreciation 3,500
Consolidated Net income $1,669,500
Noncontrolling interest share
($280,000 × 25%) (70,000)
Controlling share of consolidated net income1,599,500
2. Upstream sale:
Penton's separate net income $1,400,000
Salgado's separate net income 280,000
Less: Unrealized gain on vehicle (14,000)
Plus: Excess depreciation 3,500
Consolidated Net income $1,669,500
Noncontrolling interest share
($280,000 - 14,000 + 3,500) × 25% (67,375)
Controlling share of consolidated net income1,602,125

21
 3- Comment: The results indicate that. (4.2 Marks)
 The Consolidated net income is the same in both cases: $1,669,500 (1 mark)
 The difference between upstream case and downstream case will be in the controlling
interest share and the non-controlling interest as numbers indicated.
(1 mark)
 In downstream sale: The full amount of unrealized profit or loss is charged or credited to
the controlling interest. (1 mark)
 In the case of upstream sales, however, unrealized profit or loss is allocated between
controlling and noncontrolling interests. (1.2 mark)

Sal is a 90% owned subsidiary of Pal corporation, acquired at book value several years
ago. Comparative separate compay income statements for 2012 is shown below:
Pal Sal
Sales 1,500,000 700,000
Income from Sal 108,000 -
Gain on building 30,000 -
Total income 1,638,000 700,000
Cost of goods sold 1,000,000 400,000
Operating expenses 300,000 150,000
Total expense 1,300,000 550,000
Net income 338,000 150,000
On January 5, 2012 Pal sold a building with a 10 year remaining useful life to Sal at a gain of
30,000. Sal paid dividends of $100,000 during 2012. Required:
• Prepare journal entries prepared by Pal during 2012 to account for its investment in Sal (equity methd).
1. recording income from subsidiary
Dr. investment in subsidairy 135,000
Cr. Income from subsidiary 135,000
2. recording of dividends
Dr. cash 90,000
Cr. Investment from subsidiary 90,000
3. Ellimination of unrealized profit
Dr. income from subsidiray 30,000
Cr. Investment from subsidiary 30,000
4. Recording unrealized profit
Dr. investment in subsidiary 3,000
Cr. Income form subsidiary 3,000
30,000/10 = 3,000
• Prepare a consolidated income statement for Pig and Sal for 2012.
Dr. Gain from sale 30,000
Cr. Building 30,000

22
 Dr. Accumulated depreciation 3,000
Cr. Depreciation expense 3,000
Dr. income from subsidairy 108,000
Cr. Investment from subsidiary 108,000
Pal Sal Dr Cr Consolidated
Sales 1,500,000 700,000 2,200,000
Income from Sal 108,000 - 108,000 -
Gain on building 30,000 - 30,000 -
Total income 1,638,000 700,000 2,200,000
Cost of goods sold 1,000,000 400,000 1,400,000
Operating expenses 300,000 150,000 3,000 420,000
Total expense 1,300,000 550,000 1,820,000
Net income 338,000 150,000 380,000

Sal is a 75% owned subsidiary of Pal corporation, acquired at book value several years
ago. Comparative separate company income statements for 2013 is shown below:
Pal Sal
Sales 1,500,000 640,000
Gain on sale of building - 40,000
Cost of goods sold 1,000,000 400,000
Operating expenses 200,000 150,000
Total expense 1,200,000 550,000
Net income 300,000 150,000
On January 1, 2013 Sal "subsidary" sold a building for 90,000 (cost of builing 70,000 and
accumulated depreciation 20,000) with a 10 year remaining useful life to pal "parent" at a gain of
40,000. Required:

• Prepare journal entries prepared by Pal "parent" during 2013 to account for its
investment in Sal( equity methd).

1. Recoding the purchase

Dr. Building 90,000
Cr. Cash 90,000
2. Recording the depreciation expense
Dr. depreciation expense 9,000
Cr. Accumulated depreciation 9,000

23
 3. recording income from subsidiary
Dr. investment in subsidairy 85,500
Cr. Income from subsidiary 85,500

Share of subsidary net income (150,000* 75%) 112,500

Less: unrealized gain on building ( 40,000*75%) (30,000)
Add: recognized gain ((40,000/10)*75%) 3,000
=Investment income 85,500

Prepare a consolidated income statement for Pig and Sal for 2013.
Dr. Gain from sale 40,000
Cr. Building 40,000
Dr. Accumulated depreciation 4,000
Cr. Depreciation expense 4,000
((40,000/10)
Dr. income from subsidairy 85,500
Cr. Investment from subsidiary 85,500
Dr. non controling interest income 28,500
Cr. Non- controling interest – equity 28,500
Share of subsidary net income (150,000* 25%) 37,500
Less: unrealized gain on building ( 40,000*25%) (10,000)
Add: recognized gain ((40,000/10)*25%) 1,000
=NCI income 28,500

Pal Sal Dr Cr Consolidated

Sales 1,500,000 660,000 2,160,000
Income from Sal 85,500 - 85,500 -
Gain on building 40,000 40,000 -
Total income 1,585,500 700,000 2,160,000
Cost of goods sold 1,000,000 400,000 1,400,000
Operating expenses 200,000 150,000 4,000 346,000
Total expense 1,200,000 550,000 1,748,000
Net income 385,500 150,000 414,000
NCI income 28,500 28,500
385,500

24
 A Question that includes
Chapters 4, 5 & 6

On January 1, 2018 Philly Corporation paid $40,500 for a 90% interest in Skelly Corporation. On
that date Skelly capital stock was $25,000 and its Retained Earnings was $7,500. Any excess will
be assigned to goodwill.
Further information:
1. During 2018, Philly's sales to Skelly were $12,000, Skelly managed to sell 50% of this
merchandise. (The other half was sold in 2019.)
2. During 2019, Philly's sales to Skelly were $15,000 of which Skelly managed to sell 40% of this
merchandise. At year-end 2019, Skelly owed Philly $3,750 for the inventory purchased during
2019. Philly sells merchandise to Skelly at 120% of Philly's cost.
3. On January 1, 2019, Philly sold equipment with a book value of $5,000 and a remaining useful
life of four years and no salvage value to Skelly for $7,000. Straight-line depreciation is used.
4. Skelly's income for 2018 was $15,000 and Skelly's dividends received by Philly was $5,000
5. Separate company financial statements for Philly Corporation and Subsidiary at December 31,
2019 are summarized in the first two columns of the consolidation working papers.

Required:
1) Prepare all elimination entries in 2019 (Including the entries not affecting the consolidated
Income statement). Show all your calculations.
2) Complete the working papers to consolidate the financial statements of Philly Corporation and
subsidiary for the year ended December 31, 2019.
Philly Skelly Eliminations Consolidated
Debit Credit
INCOME STATEMENT
Sales S 150,000 $35,000
Income from Skelly 11,500
Gain on equipment sale 2,000
Cost of Sales ( 65,000) (11,000)
Other Expenses ( 70,000) (9,000)
Noncontrolling interest share
Net income $ 28,500 S 15,000
Retained Earnings 1/1 S 23,750 S 12,500
Add: Net income 28,500 15,000
Dividends ( 17,500) ( 5,000)
Retained Earnings 12/31 $ 34,750 S 22,500
BALANCE SHEET
Cash S 13,750 $ 7,500
Receivables 17,500 10,000

25
Inventories 25,000 11,250
Equipment-net 60,000 22,500
Land 10,000 8,750
Investment in Skelly 51,000
Goodwill
TOTAL ASSETS S 177,250 $60,000
LIAB. & EQUITY
Accounts payable $ 17,500 $ 12,500
Capital Stock 125,000 25,000
Retained Earnings 34,750 22,500
1/1 Noncntrl. Interest
12/31 Noncntrl. Interest
TOTAL LIAB.& EQUITIES $ 177,250 $60,000
Answer

1- Each  = .2 mark (120 * .2 = 24 marks)

Investment in Skelly at January 1, 2018 $40,500

Implied fair value of Scan ($40,500 / 90%) $45,000
Book value of Skelly 32,500
Goodwill $ 12,500

Unrealized profit in ending Inventory 2018 = 12,000*20/120 = 2,000 *.50 = $1,000 

Unrealized profit in ending Inventory 2019 = 15,000*20/120 = 2,500 *.60 = $1,500
Gain on sale = 7000 – 5000 = 2000
Excess Depreciation = 2000/4 = 500
Income from subsidiary-Parent share= [15,000*90%]–1,500+1,000-2,000+500= 11,500
Income from subsidiary-NCI share = 15,00010%= 1,500

1- Elimination Entries:
1. Eliminate intercompany sales
Dr Cr
Sale revenue 15,000
Cost of Sales 15,000
Defer unrealized profit in ending inventory
Dr Cr
Cost of Sales  1,500
Inventory 1,500
Record previously deferred profit (realized profit) from Beginning inventory
Dr Cr
Investments in subsidiary  1,000
Cost of sales  1,000

26
2. Eliminate gain on sale
Dr Cr
Gain on sale of equipment  2,000
Equipment  2,000
3. Eliminate Excess Depreciation
Dr Cr
Accumulated depreciation  2000/4 500
Depreciation expense  500
4. Eliminate income from Subsidiary – parent
Dr Cr
Income from subsidiary  11,500
Dividends 5,000* 90% 4,500
Investment in subsidiary  7,000
5. Adjust income from subsidiary – NCI
Dr Cr
NCI- income  1,500
Dividends 5000*10% 500
NCI – equity  1,000
7. Eliminating investment and equity balance
Dr Cr
Capital Stock  25,000
Retained Earnings (Beginning )  12,500
Goodwill 12,500
Investment in subsidiary-Beg. 50,000*90% 45,000
NCI-Equity –Beg. 50,000*10% 5,000
9. Reciprocal accounts
Dr Cr
Accounts Payable 3,750
Accounts Receivable 3,750

27
2- Working paper for consolidated financial statements
Philly Skelly Eliminations Consolidated
Debit Credit
INCOME STATEMENT
Sales S 150,000 $35,000 $ 15,000 $ 170,000

income from Skelly 11,500 11,500 

Gain on equipment 2,000 2,000 

sale
Cost of Sales ( 65,000) (11,000) 1,500 $ 15,000 (61,500) 
1,000
Other Expenses ( 70,000) (9,000) 500 (78,500) 
Noneontroiling interest 1,500 (1,500) 
Controlling
share interest $ 28,500 S 15,000 $ 28,500
Retained
share Earnings 1/1 S 23,750 S 12,500 12,500 23,750
Add: Controlling 28,500 15,000 28,500
Dividends
interest share ( 17,500) ( 5,000) 4,500 500 ( 17,500) 
Retained Earnings $ 34,750 S 22,500 $ 34,750
BALANCE
12/31 SHEET
Receivables 17,500 10,000 3,750 23,750
Cash
Inventories S 13,750
25,000 $11,250
7,500 1,500 $ 34,750 
21,250
Equipment—net 60,000 22,500 500 2,000 81,000
Land 10,000 8,750 18,750
Investment in Skelly 51,000 1,000 7,000 
Goodwill 12,500 45,000 12,500
TOTAL ASSETS S 177,250 $60,000 $ 192,000
LIAB. & EQUITY 3,750 $ 26,250
Capital
AccountsStock
payable 125,000 25,000 25,000 125,000
Retained Earnings $34,750
17,500 $22,500
12,500 34,750
1/1 Noncntrl. Interest 5,000
12/31 Noncntrl. 1,000 6,000
TOTAL
Interest LIAB. & $ 177,250 $60,000 $ 192,000
EQUITIES

28
 Chapter 12
On October 1, 2020, Penton Corporation, a UK company sold a truck to XYZ Corporation, a US
company, for $20,000 and XYZ agreed to pay in pounds on March 1, 2021. The spot rates for the
British pound on October 1, 2020, December 31, 2020, and March 1, 2021, are $1.60, $1.64, and
$1.58, respectively.
Required:
1- Record these transactions in the accounting records of XYZ Corporation and Penton
Corporation.
2- Did the U.S. dollar strengthen or weaken from October to March and what are the implications
for XYZ business? Prove your answer.
Answer:
1-
The cost of the machine in Pounds = $20,000 / 1.60 = 12,500 Pounds
XYZ's General Journal

Date Account Name Debit Credit

01/10/20 Machinery (£12,500 × $1.60) 20,000
Accounts Payable 20,000
31/12/20 Exchange Loss 500
Accounts Payable 500
(£12,500 × ($1.60- 1.64))
01/03/21 Accounts Payable 20,500

Cash (£12,500 × $1.58) 19,750

Exchange Gain 750
Penton' General Journal
01/10/20 Accounts Receivable 12,500
Sales Revenue 12,500

31/12/20 No entry

01/03/21 Cash 12,500

Accounts Receivable 12,500
2. - The U.S. dollar strengthened.
- as it requires less dollars [$19,750 instead of $20,000] to pay the same required amount
of pounds (£12,500).
- which makes buying goods by XYZ Company, from the UK, Profitable.

29
Johnson Corporation (a U.S. company) had the following import and export transactions with
unaffiliated Mexican companies:
December 12, 2019 Bought inventory for 150,000 pesos on account .Invoice denominated in pesos.
December 15, 2019 Sold 60% of inventory acquired on 12/12/19 for 120,000 pesos on account.
Invoice denominated in pesos.
January 1, 2020 Acquired and paid the 150,000 pesos owed to the Mexican supplier.
January 15, 2020 Collected the 120,000 pesos from the Mexican customer and immediately
converted them into U.S. dollars.
The following exchange rates apply:
Date Rate Date ate
December 12 $.11 = 1 peso January 1 $.14 = 1 peso
December 15 $.12 = 1 peso January 15 $.15 = 1 peso
December 31 $.13 = 1 peso
Required:
1- Prepare the journal entries for the previous transactions in the accounting records of Johnson Corporation.
2- Did the U.S. dollar strengthen or weaken from December 12 to January 15 and what are the
implications for Johnson business?
Answer
1.
Dr Cr
Dec,12 Inventory 16,500
2019 Accounts Payable 150,000$.11 16,500
Dec,15 AR 120,000 $.12 14,400
2019 Sales Revenue 14,400
Dec ,31 Exchange Loss 150,000 ($.13-$.11) 3,000
2015 Accounts Payable 3,000
Dec ,31 AR 120,000 ($.13-$.11) 2,400
2019 Exchange Gain 2,400
Jan,1 Accounts Payable 16,500+3,000 19,500
2020 Exchange Loss 1,500
Cash 150,000 $.14 21,000
Jan,15 Cash 120,000  $.15 18,000
2020 AR 14,400+2,400 16,800
Exchange Gain 1,200

2- The U.S. dollar weakened (1 marks), which makes buying goods from Mexican suppliers
expensive (1.5 marks). While it makes selling goods to Mexican customers profitable (1.5
marks)

On October 1, 2020, Penton Corporation, a UK company sold a truck to XYZ Corporation, a US

company, for $20,000 and XYZ agreed to pay in pounds on March 1, 2021. The spot rates for the
British pound on October 1, 2020, December 31, 2020, and March 1, 2021, are $1.60, $1.64, and
$1.58, respectively.
Required:
1- Record these transactions in the accounting records of XYZ Corporation and Penton Corporation.

30
2- Did the U.S. dollar strengthen or weaken from October to March and what are the implications
for XYZ business? Prove your answer.
Answer:
1-
The cost of the machine in Pounds = $20,000 / 1.60 = 12,500 Pounds 
XYZ's General Journal
Date Account Name Debit Credit
01/10/20 Machinery (£12,500 × $1.60)  20,000
Accounts Payable 20,000
31/12/20 Exchange Loss  500
Accounts Payable  500
(£12,500 × ($1.60- 1.64))
01/03/21 Accounts Payable 20,500
Cash (£12,500 × $1.58)  19,750
Exchange Gain  750
Penton' General Journal
01/10/20 Accounts Receivable 12,500
Sales Revenue 12,500
31/12/20 No entry 
01/03/21 Cash  12,500
Accounts Receivable  12,500
2. - The U.S. dollar strengthened. (1 mark)
- as it requires less dollars [$19,750 instead of $20,000] to pay the same required amount
of pounds (£12,500). (1 mark)
- which makes buying goods by XYZ Company, from the UK, Profitable. (2 marks)

XYZ company is a U.S company which purchased inventory item from ABC company a
UK company for £240,000 on May 1, 2012 when the spot rate was 0.600 US dollar. The
invoice was paid to ABC company on 31 July 2012 when the spot rate was 0.605 US dollar.
Required
• Did the dollar weaken or strengthening against the pound between May to July 2012? Explain.
It had weakened, because a dollar needs a more unit of the weakening to purchase
one unit of the other
• At what amount XYZ company recorded the account payable to ABC company
Account payable is (240,000* .6) = 144,000
• Prepare journal entries that XYZ recorded for the purchase from ABC company on 1 May
and the payment of £240,000 on July 31.
Dr. inventory 144,000
Cr. Account payable 144,000

31
 Dr. account payable 144,000
Dr. exchange loss 1,200
Cr. Cash 145,200

XYZ company is a U.S company, sold inventory items to ABC a UK company for 200,000
pound on May 1, 2012, when the spot rate as 0.600 US dollar. The invoice was paid by ABC
on May 30, 2012, when the spot rate was .6050 US dollar.
Required
• Prepare journal entries that XYZ recorded for the sale to ABC company on 1 May
and the payment of 200,000 pound on May 31.
Dr. AR 120,000
Cr. Sale revenue 120,000
Dr. cash 121,000
Cr. exchange gain 1,000

Cr. AR 120, 00

B. Peper company is a U.S company, sold inventory items to Pill Inc. a UK company for 400,000
pound on October 1,2014, when the spot rate as 0.530 US dollar.
The invoice was paid by pill on January 15, 2015, when the spot rate was 0.580 US dollar.
On December 31,2014 spot rate was 0.520 US dollar. Required:

Prepare journal entries of Paper that relate to the sale, end of the year and the receipt of the
cash.
October 1,2014 :
Dr. AR 212,000
Cr. Sale revenue 212,000 (400,000 * 0.530)

December 31,2014 :
Dr. Exchange loss 4,000
Cr. AR 4,000
(400,000 * (0.530-0.520))

January 15, 2015:

Dr. Cash (400,000 * 0.580) 232,000
Cr. AR 208,000
(400,000 * 0.520)
Cr. Exchange Gain 24,000
Did the dollar weakened or strengthened against the pound between February to January
2015? Explain.

32
 Accounting for Branches
Q1 A-The following transactions occurred between the home office and the Mason Branch of Smaldino
Company:
1. Merchandise with a home office cost of $60,000 was shipped by the home office to
Mason Branch.
2. Equipment was acquired by Mason Branch for $500, to be carried in the home office
accounting records.
3. Credit sales by Mason Branch amounted to $80,000; the branch’s cost of the merchandise
sold was $45,000.
4. Collections of trade accounts receivable by Mason Branch amounted to $62,000.
5. Operating expenses incurred by the home office and charged to Mason Branch totaled
$3,000.
6. Cash of $37,500 was remitted by Mason Branch to the home office.
Required:
Prepare journal entries for these transactions in the accounting records of the Home office and
the Mason Branch.
ANSWER
. Home office Branch
1. Investment in Branch 60,000 Inventories 60,000
Inventories 60,000 Home Office 60,000

1. Equipment: Mason Branch 500 Home Office 500

Investment in Branch 500 Cash 500

3. None Accounts receivable 80,000

(Student will lose these Marks
if he/she wrote an entry) Sales 80,000

Cost of goods sold 45,000

Inventories 45,000

4. None Cash 62,000

(Student will lose these Marks AR 62,000
if he/she wrote an entry)

5. Investment in Branch 3,000 Operating Expenses 3,000

Operating Expenses 3,000 Home Office 3,000

6. Cash 37,500 Home Office 37,500

Investment in Branch 37,500 Cash 37,500

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Q1 B-The home office of Farah Company, bills its only branch at a markup of 20% above home
office cost for all merchandise shipped to Habiba branch. During 2021 the home office shipped
merchandise to the branch at a billed price of $ 30,000. Habiba branch net Income for 2021 was
$ 35,000. Habiba branch inventories for 2021 were as follows:

Jan.1 Dec .31

From home office (at billed price) 15,000 19,500
Purchased from outsiders 6,800 8,670
Required:
1. Prepare a working paper to analyze the flow of merchandise to Habiba Branch. Assuming a
uniform markup on all shipments to the branch, and compute realized gross profit
2. Prepare journal entries (including adjusting entries) for the home office of Farah Company for 2021.
ANSWER
1.
Cost Markup Bill Price
% 100 20 120
Beginning inventories 12,500 2,500 15,000
Shipments from H.O 25,000 5,000 30,000
Ending inventory (16,250) (3,250) (19,500)
Goods Sold 21,250 4,250 25,500

Realized gross profit = 4,250 (.5 Mark)

2-
Investment in Habiba Branch 30,000
Inventories 25,000
Allowance for overvaluation of inventory 5,000
Investment in Habiba Branch 35,000
Income: Habiba Branch 35,000
Allowance for overvaluation of inventory 4,250
Realized gross profit 4,250
Income: Habiba Branch 35,000
Realized Gross Profit 4,250
Income Summary 39,250

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Q2 A-- On December 31, 2019, the unadjusted credit balance of the Allowance for Overvaluation
of Inventories: Hope Branch ledger account in the accounting records of the home office of
Farah Company was $60,000. The home office of Farah ships merchandise to the branch at a
markup of 20% on billed price. For the fiscal year ended December 31, 2019, the branch had
reported a net loss (based on billed prices of merchandise shipped from home office) of
$18,400 and ending inventories (all received from home office) of $132,000 at billed prices.
Required:
Prepare journal entries for the home office of Farah Company on December 31, 2019, to record
the foregoing information.
Answer:
2019
Dec. 31 Income: Hope Branch 18,400
Investment in Hope Branch 18,400
To record net loss reported by branch.

31 Allowance for Overvaluation of Inventories:

Hope Branch 33,600
Realized Gross Profit: Hope Branch 33,600
To recognize as realized the markup on merchandise
applicable to good sold by branch [$60,000 –
($132,000 x 20/100) = $33,600 ].

31 Realized Gross Profit: Hope Branch 33,600

Income: Hope Branch 18,400
Income Summary 15,200
To close branch net loss and realized gross
profit to Income Summary ledger account.

Q2 B- The following ledger account was in the accounting records of the Habiba Branch of ABC
Company on December 31, 2019:
Home Office
Date Explanation Debit Credit Balance
2019
Jan. 1 Balance 40,000 cr
Mar. 10 Cash remitted to home office 10,000 30,000 cr
31 Merchandise returned to home office 2,650 27,350 cr
June 6 Merchandise received from home office 14,400 41,750 cr
Oct. 10 Cash received from home office 2,600 44,350 cr
Dec. 20 Acquisition of fixtures 9,250 35,100 cr
31 Net income 7,770 42,870 cr

The home office of ABC Company used the perpetual inventory system, and billed the branch
for merchandise shipments at 20% above home office cost.
Required:
Prepare journal entries to record the above indicated transactions and events in the accounting
records of the home office of ABC Company.

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 Answer:
2019
Mar. 10 Cash 10,000
Investment in Habiba Branch 10,000
To record cash remitted by branch.

31 Inventories 2208.33
Allowance for Overvaluation of Inventories:
Habiba Branch 441.67
Investment in Habiba Branch 2,650
To record merchandise returned by branch. Cost of
merchandise: $2,650 x 100/120 = $2,208.33

June 6 Investment in Habiba Branch 14,400

Allowance for Overvaluation of Inventories:
Habiba Branch 2,400
Inventories 12,000
To record shipment of merchandise to branch. Cost of
merchandise: $14,400 x 100/120 = $12,000.

Oct. 10 Investment in Habiba Branch 2,600

Cash 2,600
To record cash sent to branch.

Dec. 20 Fixtures: Habiba Branch 9,250

Investment in Habiba Branch 9,250
To record acquisition of fixtures by branch.

31 Investment in Habiba Branch 7,770

Income: Habiba Branch 7,770
To record net income reported by branch.

Q3 B- The home office of Farah Company ships merchandise to the Nour branch at a billed price
that includes a markup 25% on the billed price. The inventories ledger account of the branch,
showed a December 31,2019 debit balance,$ 120,000 ;a debit for a shipment received January
16,2020 $ 500,000 , total credits for goods sold during January 2020 $ 520,000 and January
31,2020 debit balance $ 100,000 (all amounts are home office billed price). On January 31, 2020,
Nour branch prepared an income statement indicating a net loss of $ 90,000.
(12 marks)
Required:
1. Prepare a working paper for the home office to analyze the flow of merchandise to Nour branch
during January 2020
2. Reconstruct a three column ledger account Allowance for overvaluation of inventories: Nour
branch

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 3. Prepare journal entries for the home office of Farah Company for on January 31, 2020.

Answer:

(1)

Cost Markup Billed price

(2)
% 75 25 100
Beginning inventories 90,000 30,000 120,000
Add: Shipments from H.O 375,000 125,000 500,000
Less: Ending inventory 75,000) (25,000) (100,000)
Goods sold 390,000 130,000 520,000
Allowance for overvaluation of inventory

Date Explanation Debit Credit balance

Jan.1 30,000 Cr
Jan.16 Merchandise shipped to 125,000 155,000 Cr
branch
Jan.31 Realized gross profit 130,000 25,000 Cr

(3)

Jan .31 Income: Nour Branch  90,000

Investment in Nour Branch  90,000
Jan .31 allowance for overvaluation of inventory  130,000
realized gross profit 130,000

Jan .31 Realized Gross Profit  130,000

Income: Nour Branch  90,000
Income Summary 40,000

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