Ch5 Solutions

Ch5 Solutions - Chapter 05 - Consolidated Financial...

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Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions 5-1 CHAPTER 5 CONSOLIDATED FINANCIAL STATEMENTS - INTRA-ENTITY ASSET TRANSACTIONS Answers to Problems 1. D 2. B Inventory remaining $100,000 × 50% = $50,000 unrealized gross profit (based on Lee's gross profit rate as the seller) $50,000 × 40% = $20,000. The ownership percentage has no impact on this computation. 3. A 4. C UNREALIZED GROSS PROFIT, 12/31/11 Intra-entity gross profit ($100,000 $75,000) . ............................. $25,000 Inventory remaining at year's end . ............................................... 16% Unrealized intra-entity gross profit, 12/31/11 . .............................. $4,000 UNREALIZED GROSS PROFIT, 12/31/12 Intra-entity gross profit ($120,000 – $96,000) . ............................. $24,000 Inventory remaining at year's end . ............................................... 35% Unrealized intra-entity gross profit, 12/31/12 . .............................. $8,400 CONSOLIDATED COST OF GOODS SOLD Parent balance . ......................................................................... $380,000 Subsidiary balance . .................................................................. 210,000 Remove intra-entity transfer . ................................................... (120,000) Recognize 2011 deferred gross profit . .................................... (4,000) Defer 2012 unrealized gross profit . ......................................... 8,400 Cost of goods sold . ........................................................................ $474,400 5. A Intra-entity sales and purchases of $100,000 must be eliminated. Additionally, an unrealized gross profit of $10,000 must be removed from ending inventory based on a gross profit rate of 25 percent ($200,000 gross profit ÷ $800,000 sales) which is multiplied by the $40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation.
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Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions 5-2 Thus, cost of goods sold for consolidation purposes is $690,000 ($600,000 + $180,000 – $100,000 + $10,000). 6. C The only change here from Problem 5 is the gross profit rate which would now be 40 percent ($120,000 gross profit ÷ $300,000 sales). Thus, the unrealized gross profit to be deferred is $16,000 ($40,000 × 40%). Consequently, consolidated cost of goods sold is $696,000 ($600,000 + $180,000 – $100,000 + $16,000). 7. B UNREALIZED GROSS PROFIT, 12/31/10 Ending inventory . ...................................................................... $40,000 Gross profit rate ($33,000 ÷ $110,000) . ................................... 30% Unrealized intra-entity gross profit, 12/31/10 . ........................ $12,000 UNREALIZED GROSS PROFIT, 12/31/11 Ending inventory . ...................................................................... $50,000 Gross profit rate ($48,000 ÷ $120,000) . ................................... 40%
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Ch5 Solutions - Chapter 05 - Consolidated Financial...

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