Fsols04 - CHAPTER 4 UNDERSTANDING THE ISSUES 1. The...

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Unformatted text preview: CHAPTER 4 UNDERSTANDING THE ISSUES 1. The intercompany sale will cause both sales and costs of goods sold to be overstated by $40,000 on the consolidated income statement. The amount remaining in ending inventory will cause cost of goods sold to be understated by $2,500 (1/4 $10,000) on the consolidated income statement and inventory to be overstated by $2,500 (1/4 $10,000) on the consolidated balance sheet. 2. Debit sales and credit cost of goods sold for $40,000. Debit cost of goods sold and credit invent- ory for $2,500 (1/4 $10,000). 3. 20 X1 20 X2 NCI $ $ 400 ($2,000 20%) Controlling Interest 5,600 [$4,000 + ($2,000 80%)] Total Profit $ $6,000 4. Company S has realized a $50,000 profit; however, it is not immediate. The profit will be real- ized over the 5-year life of the asset. Company S will realize the profit by reducing consolidated depreci- ation expense by $10,000 ($50,000 5 years) each year for 5 years. NCI will realize $2,000 (20% $10,000) each year. 5. 20 X1 20 X2 20 X3 Realized gain by reducing depreciation expense [($60,000 $40,000 5 years] $4,000 $4,000 $4,000 Balance of gain at time of sale $8,000 6. 20X1 20X2 20X3 Profit recorded by Company S $40,000* 60,000** $ 0 Profit recorded by consolidated firm 0 0 5,000*** * (40% $100,000) ** (60% $100,000) *** ($100,000 20) 7. (a) Company S is better off borrowing the funds from Company P since it will receive a lower interest rate (9.5% instead of 10%). Therefore, Company S will have lower an- nual interest charges. (b) During 20X2, Company P will record in- terest revenue and Company S will record interest expense of $47,500 ($500,000 9.5%). However, this interest expense and interest revenue is eliminated during the consolidation process. Only the $40,000 of external interest expense remains on the consolidated statements. (c) Intercompany interest expense and interest revenue should not appear in the 20X1 consolidated income statement. Only the external interest expense of $40,000 will appear in the consolidated income state- ment. 4-1 EXERCISES 1. Painter Company and Subsidiary Solvent Company Consolidated Income Statement For the Year Ended December 31, 20X1 Sales ($250,000 + $500,000 $100,000)................................................... $650,000 Cost of Goods Sold [$150,000 + $310,000 $100,000 + (40% $20,000)].................................................................................... 368,000 Gross Profit................................................................................................. $282,000 Expenses ($45,000 + $120,000)................................................................. 165,000 Consolidated Net Income............................................................................ $117,000 Distributed to NCI........................................................................................ $ 9,400 Distributed to Controlling Interest................................................................Distributed to Controlling Interest....
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Fsols04 - CHAPTER 4 UNDERSTANDING THE ISSUES 1. The...

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