A F 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
H a n d o u t 1 : M o d u le 5 : I n t e r c o m p a n y t r a n s a c t io n s
P art 1:
The impact of intercompany revenues and expenses on consolidated net income:
The purpose of consolidated financial statements is to present the financial position of
the parent and subsidiary as if they were combined as a single economic entity.
Intercompany transactions do not impact the overall wealth of the economic entity as
they offset each other resulting in the net income (NI) remaining unchanged.
Therefore, intercompany revenues and expenses must be eliminated and not reflected
as transactions on the consolidated financial statements to avoid overstating the
account balances on the consolidated statements.
Exs: management fees, interest, sales and purchases and rental income/expense.
Upstream and downstream sales:
Intercompany transactions are defined as either upstream or downstream depending
on who is the seller.
Recall that the parent controls the subsidiary and so the subsidiary looks up to the
parent and the parent looks down to the subsidiary.
Downstream transactions are when a parent sells to the subsidiary (looks down). The
parents NI and/or retained earnings (RE) are adjusted as they recorded the profit/gain
or loss (P/G/L). 100% of any unrealized profit/gain or realized losses is removed (add
back any unrealized losses or realized profits and gains) for consolidated NI and RE.
Since the noncontrolling interest (NCI) has no interest in the parent, the NCI is not
affected by downstream transactions.
Upstream transactions are when the subsidiary sells up to the parent (looks up). NCI
is only affected by upstream transactions as they have interest in the subsidiarys NI
and RE. The subsidiarys NI and/or RE are adjusted as they recorded the P/G/L. The
subsidiarys NI and/or RE is reduced by any unrealized profit or gains or realized
losses (add back any unrealized losses or realized profits and gains).
NCI IS = % (subsidiarys net income after it has been adjusted for current year PD
amortization/loss and +/- current year impact of upstream P/G/L net of tax)
NCI BS = % (NBV of subsidiarys net assets after it has been adjusted for
remaining unamortized or unimpaired PD and +/- cumulative impact of upstream
P/G/L net of tax)
Gross profit on sales and markup on cost:
The markup on sales/gross profit percentage.
Ex: Sub sold goods to parent at a 25% gross profit. Price was $4,000. What is the profit to
the sub? Profit = 25% of selling price of $4,000 = $1,000
1
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
The markup on cost.
Ex: Sub sold goods to parent at a 25% mark-up on cost. Price was $3,750. What is the
profit and cost to the sub? 1. 25% /(100% + 25%) = 25/125 = 20%
Or 1/4 = 1/(1+4) = 1/5 = 20%.
Profit = 20% of sales of $3,750 = $750; Cost = $3,000
2. Formula: Cost (C) + Profit (%C) = Selling Price (SP).
C + .25C = SP, 1.25C = 3,750 = $3,000. Profit = $750.
P art 2:
Consolidated financial statements in the year when unrealized profit remains in
either the parents or the subsidiarys ENDING inventory:
The gross profit on inventory is recognized when inventory is sold to outsiders.
When the subsidiary sells to the parent (or vice versa), the profit has not yet been
realized from a consolidated viewpoint (as if this intercompany transaction never
occurred).
Prepare a schedule of unrealized intercompany profits to determine the adjustments to
eliminate unrealized profits in ending inventory.
The profit on the intercompany sale is multiplied by the percentage that is unsold and
remaining in ending inventory. For downstream and upstream sales respectively,
first, the before-tax unrealized profit amount is listed; next, the related tax on this
amount is calculated; and then, the after-tax unrealized profit is determined.
The GROSS amount of both upstream and downstream intercompany sales is
removed from the sales and purchases is adjusted thru the cost of goods sold (CGS)
account (or purchases if use periodic inventory system) when preparing the
consolidated statements. Thus only the sales and CGS with outsiders of the economic
unit are included (eliminating journal entry: Dr Sales, Cr CGS).
The before-tax amount of unrealized profit is removed from ending inventory (EI) on
the consolidated balance sheet (cons. B/S) and added to cost of goods sold on the
consolidated income statement (cons. I/S). Note: BI + net P EI = CGS. If inventory
is overstated at the end of the year, CGS too low as subtracted too much EI (see
formula).
The tax effect is removed from income tax expense on Cons. I/S and deferred charge
is set up on the Cons. B/S. Income taxes must be adjusted to maintain the matching
principle.
Note: only the realized after-tax profits are reported.
2
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
Example: Total intercompany sales = $1,000. Profit margin = 10%. Tax rate 30%
Thus ending inventory profit = $100 (1,000 x .10).
Working paper approach eliminating journal entries:
Sales
1,000
Cost of goods sold
1,000
Cost of goods sold
Inventory
100
100
Deferred charge - income taxes
Income tax expense
30
30
Schedule:
End. Inv. profit
Before tax
100
tax (20%)
30
After tax
70
Equity method journal entries necessary when unrealized profit exists at year-end
The equity method incorporates the net effect of all consolidation adjustments.
Parent takes their percentage of the subsidiarys net income (loss) for the year
For downstream transactions, the parent records a journal entry to eliminate the full
amount of the downstream, unrealized profit, net of tax.
Investment income (100%)
70
Investment in subsidiary
70
For upstream transactions, the parent records a journal entry to eliminate their
percentage of the upstream, unrealized profit, net of tax. Example: own 80%:
Investment income (.80 x 70)
56
Investment in subsidiary
56
Consolidated financial statements in the year where profit in either the parents or
the subsidiarys BEGINNING inventory is realized:
The gross profit on inventory is recognized when inventory is sold to outsiders.
When the subsidiary sells to the parent (or vice versa), the profit has not yet been
realized from a consolidated viewpoint. However, when the parent resells the
inventory to outsiders, a profit is then realized.
Since inventory is typically sold within a year of purchase (i.e. use FIFO inventory
method), intercompany profits are typically eliminated in one year and then realized
and added to the consolidated income in the next year.
3
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
The timing for recognition of profits is different between the separate entity books
and the consolidated statements. However, over several years, cumulative profits are
the same for consolidated financial statements and for the separate entity financial
statements of the parent and subsidiary.
When preparing consolidated statements, the intercompany profit schedule will
include the unrealized profit in beginning inventory. The after-tax profit from last
years ending inventory, once realized, is added back to income. For downstream
profits, adjust the parents income, and for upstream profits, adjust the subsidiarys
income.
NCI is calculated on the subsidiarys income after it has been adjusted for upstream
realized profits.
On the consolidated income statement, the before-tax unrealized profits from last
years inventory are removed from the current years cost of goods sold, which
increases income and thus recognizes these realized beginning inventory profits in the
current year. Since the related tax effects on last years unrealized profits were
removed last year, they should be added to income tax expense in the year the profits
are realized (matching principle).
If the parent used the cost method, need to remove after-tax profit from last year
when calculating opening consolidated RE (as the profit was recognized last year so it
was closed to retained earnings). For downstream, adjust to Parents opening RE, for
upstream - adjust Subs opening RE.
Example: Beginning inventory profit = $100. Tax rate 30%
Working paper approach eliminating journal entries:
Retained Earnings (after-tax)
Income tax expense
Cost of goods sold
70
30
100
Schedule:
Beg. Inv. profit
Before tax
100
Equity JE:
Downstream:
Investment in Sub
Investment income
Upstream:
Investment in Sub
Investment income
tax (20%)
30
After tax
70
70
70
56
56
4
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
P art 3:
Consolidated financial statements in the year where an intercompany transaction in
LAND has resulted in unrealized profit or loss and in the year when it is realized:
When an intercompany land sale occurs, land must be restated on the consolidated
financial statements to the original cost when it was first purchased from an outsider.
Each year, the land value is restated until it is resold outside the consolidated entity.
Any gain or loss on the intercompany transaction, including the tax effects, must be
eliminated from income in the year of the intercompany sale, and from retained
earnings thereafter until the land is sold to an outsider. Cons B/S is adjusted for
related deferred charge/credit.
The NCI is only affected if the sale is upstream.
In the year the land is sold to outsiders, the original gain or loss and related income
taxes that were held back are realized and reported in the consolidated income
statement.
Working paper approach eliminating journal entries:
Example: Parent sells land to Sub for $10,600 (cost 10,000). Gain = $600. Tax rate 40%
Year of sale:
Gain
600
Land
600
Deferred charge - income taxes
Income tax expense
240
240
Subsequent years:
Retained Earnings (after-tax)
Deferred charge - income taxes
Land
360
240
Year of sale to an outsider:
Retained Earnings (after-tax)
Income tax expense
Gain
360
240
600
600
Schedule:
Land Gain
Before tax
600
tax (20%)
240
Equity JEs: Assuming downstream
Year of sale
Investment income (600-240)
360
Investment in Sub
Year of sale to an outsider
Investment in Sub
360
Investment income
After tax
360
360
360
5
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
P art 4:
Intercompany sale of an amortizable asset has resulted in an unrealized gain or loss,
and in subsequent years when the gain or loss is realized:
The amortizable asset must be restated on the consolidated financial statements to the
net book value based on the cost when it was purchased from outsiders.
Any gain or loss on the intercompany transaction must be eliminated from income in
the year of the sale and opening Cons. retained earnings for the net amount until the
amortizable asset is sold to an outsider.
The amortization expense on the consolidated income statement must be adjusted to
what it would have been had the intercompany transaction not taken place and adjust
the related tax impact.
It is helpful to set up an intercompany profit/loss schedule with the original before-tax
amount of the gain or loss on sale of the amortizable asset, the tax effect, and the
after-tax amounts. From these amounts, the annual amortization adjustment and
related taxes are deducted or added. The amortization adjustment recognizes the
profit or loss on the intercompany sale in proportion to the use of the asset. That is, it
corrects the amortization expense to what it should have been if this intercompany
sale never took place. Adjust the income tax expense.
The consolidation adjustment to get to the desired account balances is
charged/credited to the original seller.
Example: Parent owns 80% of Subs common shares. January 1, Yr 1, the parent sold an
amortizable asset, a machine, for $1,000 with a cost of $800, a gain of $200 results. The
unrealized gain of $200 on the sale is eliminated on Cons. IS and the gain is removed
from the cost of the asset on the Cons. BS. If there was 4 years left, amortization would
have been $200 (800/4) before the intercompany sale but now the subsidiary will
amortize $250 (1,000/4). The excess amortization expense of $50 taken by the subsidiary
is subtracted on the Cons. IS and the excess accumulated amortization to date is adjusted
on the Cons. BS. If tax rate is 20%, the income tax expense must be adjusted for the net
effect and creates a differed charge on the Cons. BS. If parent uses cost method for
recording, the after-tax effect must be adjusted on the Cons. Opening retained earnings
until the asset is sold to an outsider or fully amortized (after one year, $120 subtracted).
Working paper eliminating entries for the first year:
Adjust consolidated balances as if intercompany sale never occurred
Gain on sale of machine
Machine
Accumulated amortization
Amortization expense
200
200
50
Deferred charge income taxes
30
Income tax expense (150 x .2)
50
30
6
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
Subsequent year:
Retained Earnings (after-tax)
Deferred charge - income taxes
Accumulated amortization
Machine
120
30
50
Accumulated amortization
Amortization expense
50
200
50
Income tax expense (50 x .2)
10
Deferred charge - income taxes
10
Schedule:
Gain
Amort. Yr. 1 (200/4)
Dec 31 Yr 1
Amort. Yr. 2
Dec 31 Yr 2
Amort. Yr. 3
Dec 31 Yr 3
Amort. Yr. 4
Dec 31 Yr 4
Before tax
200
50
150
50
100
50
50
50
0
tax (20%)
40
10
30
10
20
10
10
10
0
After tax
160
40
120
40
80
40
40
40
0
If parent uses the equity method for recording:
Journal entry for the first year:
Assuming downstream: adjust for the after-tax net impact: $200 gain less excess
amortization expense of $50 = $150. After tax = $150 x (1-.2) = $120
Investment income
Investment in Sub
120
120
Note: For upstream: 120 x 80% = 96
Investment income
Investment in Sub
96
96
Subsequent 3 years assuming downstream:
Investment in Sub
Investment income
40
40
Amortization expense decreases, income increases [50 x (1-.2)]
Note: For Upstream = 40 x 80% = 32
7
F A 4 C la s s n o te s
B a r b a r a W y tje n s , C G A , M B A , B .S c .
P art 5:
Class example 1:
On Jan. 1, 2012, Par Co. purchased 80% of Sub Co. for $86,900 and uses the equity
method to account for its investment. On Jan. 1, 2012, Sub Cos capital stock and
retained earnings totalled $100,000. In 2012 and 2013, the goodwill arising from this
business combination was tested for any impairment losses and a loss of $1,437.50 was
found for each year. The following intercompany asset transfers took place: Jan. 1, 2012,
sale of asset to Par at a gain of $45,000; April 30, 2013, sale of asset to Sub at a gain of
$60,000. Both assets purchased are being depreciated over 5 years. In 2012, Sub reported
NI of $125,000 and dividends paid of $70,000, while 2013 its NI and dividends were
$104,000 and $70,000 respectively.
Calculate the Dec 31, 2013 balance in the account Investment in Sub. Tax rate = 40%.
Calculation and allocation of purchase discrepancy
Cost of investment
Implied value (86,900/.80)
Net book value of Sub
Purchase discrepancy goodwill
$ 86,900
108,625
100,000
$ 8,625
Purchase discrepancy amortization and impairment schedule
Balance
Jan. 1
2012
Goodwill
Intercompany profits
$
8,625
Amortization/impairment
Year 2012
Year 2013
$
1,437.5
Before tax
$
1,437.5
Balance
Dec. 31
2013
$
5,750
40% tax
After tax
Asset gain Sub Company selling (upstream)
January 1, 2012 sale
$ 45,000
Amortization 2012
9,000
Balance December 31, 2012
36,000
Amortization 2013
9,000
Balance December 31, 2013
$ 27,000
$ 18,000
3,600
14,400
3,600
$ 10,800
$ 27,000
5,400
21,600 (a)
5,400 (b)
$ 16,200
Asset gain Par Company selling (downstream)
April 30, 2013 sale
$ 60,000
Amortization 2013 (12,000 8/12)
8,000
Balance December 31, 2013
$ 52,000
$ 24,000
3,200
$ 20,800
$ 36,000
4,800
$ 31,200 (c)
Note: On Cons. BS: Deferred charge income taxes of $31,600 (10,800 + 20,800)
8
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
Journal entries under equity method:
2012:
Investment in Sub
86,900
Cash
86,900
Record investment
Investment in Sub
100,000
Investment income
100,000
Record share of NI (125,000 x .80)
Cash
56,000
Investment in Sub
Dividends (70,000 x .80)
56,000
Investment income
1,150
Investment in Sub
1,150
Adjust for PD: goodwill loss (1,437.50 x .80)
Investment income
17,280
Investment in Sub
17,280
Remove upstream net gain, net of tax: (21,600 x .80)
2013:
Investment in Sub
83,200
Investment income
83,200
Record share of NI (104,000 x .80)
Cash
Investment in Sub
Dividends (70,000 x .80)
56,000
56,000
Investment income
1,150
Investment in Sub
1,150
Adjust for PD: goodwill loss (1,437.50 x .80)
Investment income
31,200
Investment in Sub
31,200
Remove 100% downstream net gain, net of tax
Investment in Sub
4,320
Investment income
4,320
Record realized upstream gain, net of tax (5,400 x .80) (i.e. amortization expense
decreases, income goes up)
On-line consolidation:
Parents BS: Investment in Subsidiary
Parents IS: Investment income
9
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
Investment in Sub Company
Balance January 1, 2012
Less: Dividends ($70,000 x 80%)
Net income of Sub
Less: Goodwill impairment loss
Less: Unrealized upstream sale of asset (net)
Adjusted net income
Pars ownership
Balance December 31, 2012
$ 86,900
56,000
30,900
$125,000
1,437.5
21,600
101,962.5
80%
(a)
Less: Dividends ($70,000 x 80%)
Unrealized downstream sale
Net income of Sub
Less: Goodwill impairment loss
Add: Realization of upstream sale (net)
Adjusted net income
Pars ownership
Balance December 31, 2013
81,570
112,470
56,000
31,200
25,270
(c)
104,000
1,437.5
(b)
5,400
107,962.5
80%
86,370
$ 111,640
Short-cut method of Investment income:
Parents % (subsidiarys NBV after adjusted for PD remaining and upstream P/G/L, net
of tax) then +/- 100% downstream P/G/Ls, net of tax:
Subsidiarys NBV at January 1, 2012
Net increase to Dec. 31, 2013: NI 125,000 + 104,000
: Dividends 70,000 x 2 yrs
NBV at Dec. 31, 2013
PD remaining
Less Upstream unrealized gain remaining, net of tax
Parents %
Less downstream unrealized gain remaining, net of tax
Investment account balance December 31, 2013
100,000
229,000
(140,000)
189,000
5,750
(16,200)
178,550
x .80
142,840
(31,200)
$111,640
10
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
P art 6:
NOTE the starting point when adding line by line the separate legal financial statements of the
parent and subsidiary. Both are at book value and since legally they are outsiders to each other,
they must report gains, losses, profits, revenues, expenses, payables, receivables, sales and
purchases between them. This is why we have to adjust:
1: FVIs as if legal title transferred at acquisition and thus the assets and liabilities of the
subsidiary would have been recorded in the books at FMV. Then amortization would have
been based on FMV, goodwill would have been recorded on the balance sheet and any
goodwill impairment loss on the income statement
2: For all intercompany transactions because if you were one legal company, you would not
report intercompany sales, purchases, receivables, payables, revenues, expenses, profits, gains
and losses.
Cost method to the equity basis for a parents Net Income:
Start with the parents net income under the cost basis. Then:
o Remove current year dividends received from the subsidiary under the cost
method (recorded as dividend income).
o Adjust for any current year downstream intercompany transactions: profits,
gains or losses, net of tax.
o Add the parents share of the subsidiarys NI, which has been adjusted for the
current years PD amortization, impairment losses and upstream intercompany
transactions: profits, gains or losses, net of tax.
Template for convert NI from the cost basis to equity basis:
Net income of parent (cost basis)
Less: dividends from subsidiary
Add/less downstream intercompany P/G/L (net of tax)
XXXX
XXX
XXX
XXXX
Parent's ownership
%
Consolidated net income attributable to parent (equity basis)
XXXX
XXX
XXX
XXXX
Net income of subsidiary
Add/less: purchase discrepancy (PD) amortization/loss
Add/less upstream intercompany P/G/L (net of tax)
XXXX
XXXX
Equity basis NI = Consolidated NI attributable to parent
11
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
Cost method to the equity basis for a parents investment in subsidiary account:
The equity method incorporates the cumulative effect of all consolidation adjustments
through one line on the parents balance sheet (investment in subsidiary) and one line
on their income statement (investment income).
The investment in subsidiary, at any reporting date, should consist of the following:
o The original cost of the investment
o Less any unrealized profits or gains or realized losses (net of tax) at the end
of the reporting period (Downstream).
o Add back any realized profits or gains or unrealized losses (net of tax) for the
reporting period (Downstream).
o Plus/minus the parents share of the subsidiarys adjusted post-acquisition
retained earnings (adjusted for total purchase discrepancy amortizations and
impairment losses to date and upstream P/G/L to date, net of tax).
Template: Short-cut to determine Investment in Subs. under equity method:
Subsidiarys NBV at date
PD remaining at the date
+/- Upstream P/G/L to date, net of tax
Parents %
+/- Downstream P/G/L to date, net of tax
Investment in Subsidiary balance at date
XXXX
XX
XX
XXXX
x%
XXXX
XXX
$XXXX
Logic: This is what we do when we consolidate and replace the investment in Sub
account. We start with 100% of the book value of the assets and liabilities of the sub (i.e.
NBV). Then we adjust line by line the last column of the PD amortization/impairment
schedule for unamortized and unimpaired balances. Then we adjust for 100% upstream
and downstream P/G/L and their related income tax expense (i.e. net of tax). Since the
investment in sub account only represents the parents %, we remove the NCI % and
show the NCI as a separate line under equity on the Cons. B/S.
Cost method to the equity basis for a parents retained earnings:
The parents separate entity ending retained earnings under the cost method will
require the following adjustments to equal the equity basis retained earnings:
o Add/subtract the cumulative adjustments for downstream intercompany
transactions: profits, gains or losses (net of tax).
o Add/subtract the parents share of the subsidiarys post-acquisition retained
earnings that has been adjusted for cumulative PD amortization, impairment
losses and upstream intercompany profits, gains or losses (net of tax).
Equity basis RE = Consolidated RE
12
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
P art 7:
Class example 2: Chapter 8, Problem 16, pages 396 to 397 in text.
Calculation and allocation of purchase discrepancy
Cost of 80% investment, Dec. 31, Year 1
Implied value of 100%
Carrying amounts of Orange's net assets:
Common stock
Retained earnings
Total shareholders' equity
Purchase discrepancy
Allocation
FV BV
Receivables
-25,000
Plant and equipment
300,000
Long-term liabilities
-16,850
Goodwill
964,000
1,205,000
500,000
200,000
700,000
505,000
258,150
246,850
Purchase discrepancy amortization and goodwill impairment schedule
Balance
Amortization
Dec. 31/1
Years 2 to 4
Year 5
Receivables
*Plant and equipment
Long-term liabilities
Goodwill
- 25,000
300,000
- 16,850
246,850
505,000
- 25,000
90,000
- 10,110
33,600
88,490
30,000
- 3,370
11,200
37,830
Balance
Dec. 31/5
180,000
- 3,370
202,050
378,680
(a)
(b)
(c)
(d)
*Gross method for Plant & Equipment: (See Computer Illustrations 4.11-1 and 5.10-1)
The FVI of $300,000 for Plant & Equip. would be debited (increase it) to the Plant &
Equipment account each year (Working Paper (WP) JE: allocate $300,000 FVI when
allocate the PD). Annual amortization of the FVI will affect (CR) accumulated
amortization account - Bldg & Equip. An additional WP JE to eliminate Oranges
accumulated amortization at acquisition of $100,000:
Accumulated amortization
100,000
Plant & Equip
100,000
Intercompany revenues and expenses
Sales and purchases Orange selling
Peach selling
Management fees
300,000)
280,000)
580,000) (e)
25,000) (f)
13
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
Intercompany profits, gains and losses
Before tax
Warehouse - Orange selling
Selling price
Cost
Acc. Depr. (2 5,000)
40% tax
(36,000)
(2,000)
(34,000)
(14,400)
(800)
(13,600)
After tax
54,000)
(100,000)
10,000)
Loss on sale Dec. 31, Year 4
Depreciation, Year 5 (36,000 / 18)
Balance, Dec. 31, Year 5
(21,600) (g)
(1,200) (h)
(20,400)
Note: On Cons. BS: $13,600 deferred credit income taxes (liability)
Before tax
40% tax
130,000)
52,000)
78,000) (i)
140,000)
56,000)
84,000) (j)
80,000)
220,000)
32,000)
88,000)
48,000) (k)
132,000) (l)
Gain sale, Jan. 1, Year 5
18,000
Depreciation, Year 5 (18,000 / 2 yrs remaining) 9,000
Balance, Dec. 31, Year 5
9,000
7,200
3,600
3,600
10,800 (m)
5,400 (n)
5,400 (o)
Opening inventory Orange selling
(250,000 120,000)
Ending inventory Orange selling
(300,000 160,000)
Peach selling
(1/2 160,000)
Machine Peach selling
Selling price
Cost
Acc. Depr. (6 5,000)
After tax
28,000)
(40,000)
30,000)
Note: On Cons. BS: $91,600 (88,000 + 3,600) Deferred charge income taxes (asset).
But also have a $13,600 deferred credit income taxes (liability). Thus the net of
$78,000 Deferred charge income taxes (asset)
14
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
P art 8:
Calculation of consolidated net income Year 5
Income of Peach (cost basis)
1,500,000
Less: Dividends from Orange (50,000 80%)
(p)
40,000
Profit in ending inventory
(k)
48,000
Gain on sale of machine (net)
(o)
5,400
Adjusted net income
1,406,600
Income of Orange
Less: Amortization of the PD
93,400
330,000
(d)
37,830
Profit in ending inventory
(j)
84,000
Loss realized on sale of warehouse
(h)
1,200
123,030
206,970
Add: profit in opening inventory
Consolidated net income
(i)
78,000
284,970*
1,691,570
Attributable to
Equity holders of the company (equity basis)
Noncontrolling interest (*284,970 x .20)
Consolidated net income, Year 5
1,634,576
56,994
$1,691,570
15
F A 4 C la s s n o te s
(a)
B a r b a r a W y n tje s , C G A , M B A , B .S c .
Peach Company
Consolidated Income Statement
For the year ended December 31, Year 5
Sales (6,000,000 + 1,000,000 (e) 580,000)
$6,420,000
Other revenues (200,000 + 20,000 (f) 25,000 (m) 18,000 (p) 40,000)
137,000
Total revenues
6,557,000
Cost of goods sold
(2,500,000 + 400,000 (e) 580,000 (i) 130,000 + (l) 220,000)
2,410,000
Depreciation expense
(500,000 + 80,000 + (a) 30,000 + (h) 2,000 (n) 9,000)
603,000
Interest expense (400,000 + 16,000 (b) 3,370)
Goodwill impairment loss
412,630
(c)
11,200
Other expenses (including income taxes)
(1,300,000 + 194,000 - (h) 800 + (i) 52,000 (l) 88,000
(o) 3,600 (f) 25,000)
1,428,600
Total expenses
4,865,430
Consolidated net income
1,691,570
Attributable to
Equity holders of the company
Noncontrolling interest
Consolidated Net income
1,634,576
56,994
$1,691,570
16
F A 4 C la s s n o te s
B a r b a r a W y n tje s , C G A , M B A , B .S c .
Calculation of consolidated retained earnings Jan. 1, Year 5
Retained earnings of Peach, Jan. 1, Year 5
4,200,000
Retained earnings of Orange, Jan. 1, Year 5
300,000
Retained earnings of Orange at acquisition
200,000
Increase
100,000
Add: loss on sale of warehouse
(g)
21,600
121,600
Less: Amortization of the purchase discrepancy
Profit in opening inventory (last years EI)
Adjusted increase
(d)
88,490
(i)
78,000
- 44,890
Peach's ownership %
80%
Consolidated retained earnings, Jan. 1, Year 5
(b)
- 35,912
$4,164,088
Peach Company
Consolidated Retained Earnings Statement
For the year ended December 31, Year 5
Retained earnings, Jan. 1, Year 5
Add: net income attributable to parent
$ 4,164,088
1,634,576
5,798,664
200,000
$5,598,664
Less: dividends
Retained earnings, Dec. 31, Year 5
THE END
17