04 - CHAPTER 4 UNDERSTANDING THE ISSUES 1. The intercompany...

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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 in- come 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 Inventory for $2,500 (1/4 × $10,000). 3. 20X1 20X2 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 realized over the five-year life of the asset. Company S will realize the profit by reducing consolidated depreciation expense by $10,000 ($50,000 ÷ 5 years) each year for five years. NCI will realize $2,000 (20% × $10,000) each year. 5. 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, the interest expense and interest revenue are 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. 187 EXERCISES EXERCISE 4-1 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......................................................................... $107,600 Solvent Income Distribution Schedule Unrealized profit in ending Internally generated income........... $55,000 inventory (40% × $20,000)....... $8,000 Adjusted income............................. $47,000 NCI share....................................... × 20% NCI.................................................. $ 9,400 Painter Income Distribution Schedule...
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This note was uploaded on 12/17/2011 for the course ACC 400 STBSBA73 taught by Professor Gilbertrodriguez during the Spring '09 term at University of Phoenix.

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04 - CHAPTER 4 UNDERSTANDING THE ISSUES 1. The intercompany...

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