Chapter 5 Test Bank

INTERCOMPANY PROFIT TRANSACTIONS – INVENTORIES

Multiple Choice Questions

LO1
1. The material sale of inventory items by a parent company to an
affiliated company

a. enters the consolidated revenue computation only if the

transfer was the result of arm’s length bargaining.
b. affects consolidated net income under a periodic inventory
system but not under a perpetual inventory system.
c. does not result in consolidated income until the
merchandise is sold to outside parties.
d. does not require a working paper adjustment if the
merchandise was transferred at cost.
LO1
2. Honeyeater Corporation owns a 40% interest in Nectar Company,
acquired several years ago at a cost equal to book value and
fair value. Nectar sells merchandise to Honeyeater for the
first time in 2005. In computing income from the investee for
2005 under the equity method, Honeyeater uses which equation?

a. 40% of Nectar’s income less 100% of the unrealized profit

in Honeyeater's ending inventory.
b. 40% of Nectar’s income plus 100% of the unrealized profit
in Honeyeater's ending inventory.
c. 40% of Nectar’s income less 40% of the unrealized profit in
Honeyeater’s ending inventory.
d. 40% of Nectar’s income plus 40% of the unrealized profit in
Honeyeater’s ending inventory.
LO1
3. In situations where there are routine inventory sales between
parent companies and subsidiaries, when preparing the
consolidation statements, which of the following line items is
indifferent to the sales being either upstream or downstream?

a. Consolidated retained earnings.

b. Consolidated gross profit.
c. Noncontrolling interest expense.
d. Consolidated net income.

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LO2
4. The consolidation procedures for intercompany sales are
similar for upstream and downstream sales

a. if the merchandise is transferred at cost.

b. under a periodic inventory system but not under a perpetual
inventory system.
c. if the merchandise is immediately sold to outside parties.
d. when the subsidiary is 100% owned.

Use the following information to answer questions 5 through 9.

Eagle Corporation owns 80% of Flyway Inc.’s common stock that

was purchased at its underlying book value. The two companies
report the following information for 2004 and 2005.

During 2004, one company sold inventory to the other company

for $50,000 which cost the transferor $40,000. As of the end of
2004, 30% of the inventory was unsold. In 2005, the remaining
inventory was resold outside the consolidated entity.

2004 Selected Data: Eagle Flyway

Sales Revenue $ 600,000 $ 320,000
Cost of Goods Sold 320,000 155,000
Other Expenses 100,000 89,000
Net Income $ 1800,000 $ 76,000

Dividends Paid 19,000 0

2005 Selected Data: Eagle Flyway

Sales Revenue $ 580,000 $ 445,000
Cost of Goods Sold 300,000 180,000
Other Expenses 130,000 171,000
Net Income $ 150,000 $ 94,000

Dividends Paid 16,000 5,000

LO2
5. If the sale referred to above was a downstream sale, the total
sales revenue reported in the consolidated income statement for
2004 would be?

a. $870,000.
b. $880,000.
c. $920,000.
d. $970,000.
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LO2
6. If the sale referred to above was a downstream sale, by what
amount must Inventory be reduced to reflect the correct balance
as of the end of 2004?

a. $ 3,000.
b. $10,000.
c. $14,000.
d. $20,000.
LO2
7. For 2004, consolidated net income will be what amount if the
intercompany sale was downstream?

a. $475,600.
b. $476,800.
c. $486,400.
d. $506,000.
LO2
8. If the intercompany sale mentioned above was an upstream sale,
what will be the reported amount of total sales revenue for
2005?

a. $1,025,000.
b. $1,900,000.
c. $1,950,000.
d. $2,000,000.
LO2
9. If the intercompany sale was an upstream sale, the total amount
of consolidated cost of goods sold for 2005 will be?

a. $300,000.
b. $430,000.
c. $470,000.
d. $477,000.

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 Use the following information to answer questions 9 and 10.

Duck Corporation acquired a 70% interest in Whistle Corporation

on January 1, 2005, when Whistle’s book values were equal to
their fair values. During 2005, Duck sold merchandise that cost
$75,000 to Whistle for $110,000. On December 31, 2005, three-
fourths of the merchandise acquired from Duck remained in
Whistle’s inventory. Separate incomes (investment income not
included) of Duck and Whistle are as follows:

Duck Whistle

Sales Revenue $ 150,000 $ 200,000

Cost of Goods Sold 90,000 70,000
Operating Expenses 12,000 15,000
Separate incomes $ 48,000 $ 115,000

LO3
10. The consolidated income statement for Duck Corporation and
subsidiary for the year ended December 31, 2005 will show
consolidated cost of sales of?

a. $ 50,000.
b. $ 76,250.
c. $133,750.
d. $160,000.
LO3
11. Duck’s income from Whistle for 2005 is?

a. $54,250.
b. $56,000.
c. $62,125.
d. $80,500.

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LO3
12. Pond Co. a 55%-owned subsidiary of Goose Inc. made the
following entry to record a sale of merchandise to Goose:

Accounts Receivable 60,000

Sales Revenue 60,000

All Pond sales are at 125% of cost. One-third of this

merchandise remained in the Goose’s inventory at year-end. A
working paper entry to eliminate unrealized profits from
consolidated inventory would include a credit to Inventory in
the amount of

a. $ 4,000.
b. $ 5,000.
c. $ 8,000.
d. $10,000.

Use the following information to answer questions 13, 14, and

15.

Wren Corporation acquired 80% ownership of Arid Incorporated,

at a time when Wren’s investment (using the equity method) and
Arid’s book values were equal. During 2005, Wren sold goods to
Arid for $200,000 making a gross profit percentage of 20%.
Half of these goods remained unsold in Arid’s inventory at the
end of the year. Income statement information for Wren and
Arid for 2005 were as follows:

Wren Arid
Sales Revenue $ 1,000,000 $ 600,000
Cost of Goods Sold 500,000 400,000
Operating Expenses 500,000 80,000
Separate incomes $ 250,000 $ 120,000

LO3
13. The 2005 consolidated income statement showed cost of goods
sold of

a. $720,000.
b. $880,000.
c. $900,000.
d. $920,000.

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LO3
14. The 2005 consolidated income statement showed income from Arid
of

a. $56,000.
b. $76,000.
c. $80,000.
d. $96,000.
LO3
15. The 2005 consolidated income statement showed noncontrolling
income of

a. $ 2,000.
b. $ 8,000.
c. $20,000.
d. $24,000.
LO4
16. On January 1, 2004, Darter Industries acquired an 80% interest
in Thermal Company to insure a steady supply of Thermal’s
inventory that Darter uses in its own manufacturing businesses.
Thermal sold 100% of its output to Darter during 2004 and 2005
at a markup of 120% of Thermal’s cost. Darter had $9,600 of
these items remaining in its January 1, 2005 inventory and no
items on December 31, 2005. If Darter neglected to eliminate
unrealized profits from all intercompany sales from Thermal,
consolidated net income for 2005 was

a. overstated by $320.
b. understated by $400.
c. overstated by $2,400.
d. unaffected because Darter buys 100% of Thermal’s output.

Use the following information for questions 17 and 18:

Grebe Company routinely receives goods from its 80%-owned subsidiary,

Swamp Corporation. In 2004, Swamp sold merchandise that cost $80,000
to Grebe for $100,000. Half of this merchandise remained in Grebe’s
December 31, 2004 inventory. During 2005, Swamp sold merchandise that
cost $160,000 to Grebe for $200,000. $62,500 of the 2005 merchandise
inventory remained in Grebe’s December 31, 2005 inventory. Selected
income statement information for the two affiliates for the year 2005
was as follows:
Grebe Swamp
Sales Revenue $500,000 $400,000
Cost of Goods Sold 400,000 320,000
Gross profit $100,000 $ 80,000

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LO4
17. Consolidated cost of goods sold for Grebe and Subsidiary for
2005 were

a. $512,000.
b. $526,000.
c. $522,500.
d. $528,000.
LO4
18. What amount of unrealized profit did Grebe Company have at the
end of 2004?

a. $10,000.
b. $12,500.
c. $50,000.
d. $62,500.
LO5
19. A parent company regularly sells merchandise to its 70%-owned
3. subsidiary. Which of the following statements describes the
computation of minority interest income?

a. The subsidiary’s net income times 30%.

b. (The subsidiary’s net income x 30%) + unrealized profits in
the beginning inventory – unrealized profits in the ending
inventory.
c. (The subsidiary’s net income + unrealized profits in the
beginning inventory – unrealized profits in the ending
inventory) x 30%.
d. (The subsidiary’s net income + unrealized profits in the
ending inventory – unrealized profits in the beginning
inventory) x 30%.
LO5
20. Squid Corporation, a 90%-owned subsidiary of Penguin
Corporation, sold inventory items to its parent at a $24,000
profit in 2005. Penguin resold one-third of this inventory to
outside entities. Squid reported net income of $100,000 for
2005. Minority interest income that will appear in the
consolidated income statement for 2005 is

a. $ 8,400.
b. $ 9,200.
c. $10,000.
c. $10,800.

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LO3
Exercise 1

Petrel Corporation acquired a 60% interest in Salt Corporation on

January 1, 2005, at a cost equal to book value and fair value. Salt
reports net income of $880,000 for 2005. Petrel regularly sells
merchandise to Salt at 120% of Petrel’s cost. The intercompany sales
information for 2004 is as follows:

Intercompany sales at selling price $ 672,000

Value of merchandise remaining
unsold by Salt 132,000

Required:

1. Determine the unrealized profit in Salt’s inventory at December

31, 2004.

2. Compute Petrel’s income from Salt for 2005.

LO3&4
Exercise 2

Frigatebird Co. bought 75% of the outstanding voting stock of Cliff

Corporation at book value several years ago. Frigatebird sells
merchandise to Cliff at 125% above Frigatebird’s cost. Intercompany
sales from Frigatebird to Cliff for 2005 were $650,000. Unrealized
profits in Cliff’s December 31, 2004 inventory and December 31, 2005
inventory were $27,000 and $38,000, respectively. Cliff reported net
income of $900,000 for 2005.

Required:

1. Determine Frigatebird’s income from Cliff for 2005.

2. In General Journal format, prepare consolidation working paper

entries to eliminate the effects of the intercompany inventory
sales assuming the perpetual inventory method is used.

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LO3&4
Exercise 3

Tern Corporation acquired an 80% interest in Harbor Corporation

several years ago when Harbor’s book values and fair values were
equal. Separate company income statements for Tern and Harbor for the
year ended December 31, 2005 are summarized as follows:

Tern Harbor
Sales Revenue $ 1,000,000 $ 600,000
Income from Harbor 80,000
Cost of Goods Sold ( 600,000 )( 300,000 )
Expenses ( 200,000 )( 200,000 )
Net Income $ 280,000 $ 100,000

During 2004 Tern sold merchandise that cost $120,000 to Harbor for
$180,000. Half of this merchandise remained in Harbor’s inventory at
December 31, 2004. During 2005, Tern sold merchandise that cost
$150,000 to Harbor for $225,000. One-third of this merchandise
remained in Harbor’s December 31, 2005 inventory.

Required:
Prepare a consolidated income statement for Tern Corporation and
Subsidiary for 2005.

LO3&4
Exercise 4

Egret Corporation acquired an 80% interest in Tick Corporation at

book value in 2004. During 2005, Egret sold $148,000 of merchandise
to Tick at 160% of Egret’s cost. Tick’s beginning and ending
inventories for 2005 were $38,000 and $44,000, respectively. Income
statement information for both companies for 2005 is as follows:

Egret Tick
Sales Revenue $ 330,000 $ 180,000
Income from Tick 30,400
Cost of Goods Sold ( 190,000 )( 112,000 )
Expenses ( 65,000 )( 30,000 )
Net Income $ 105,400 $ 38,000

Required:
Prepare a consolidated income statement for Egret Corporation and
Subsidiary for 2005.

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LO4
Exercise 5

Ibis Corporation acquired 100% of Lake Co. common stock on January 1,

2003, for $550,000 when the book values of Lake’s assets and
liabilities were equal to their fair values and Lake’s stockholders’
equity consisted of $280,000 of Capital Stock and $270,000 of
Retained Earnings.

Ibis’ separate income (excluding Lake) was $900,000, 850,000 and

950,000 in 2003, 2004 and 2005 respectively. Ibis sold inventory to
Lake during 2003 at a gross profit of $40,000 and 30 percent remained
at Lake at the end of the year. The remaining 30 percent was sold in
2004. At the end of 2004, Ibis has $25,000 of inventory received
from Lake from a sale of $200,000 which cost Lake $160,000. There are
no unrealized profits in the inventory of Ibis or Lake at the end of
2005. Ibis uses the equity method in its separate books. Select
financial information for Lake follows:

2003 2004 2005

Sales $ 800,000 $ 850,000 $ 950,000
Cost of Sales 420,000 440,000 500,000
Gross Profit 380,000 410,000 450,000
Operating Expenses 300,000 320,000 380,000
Net Income 80,000 90,000 70,000

Required:

Prepare a schedule to determine Ibis Corporation’s net income for 2003,

2004, and 2005.

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LO3&4
Exercise 6

Bittern Corporation acquired a 70% interest in Reed Corporation at

book value several years ago. Reed purchases its entire inventory
from Bittern at 140% of Bittern’s cost. During 2005, Bittern sold
$160,000 of merchandise to Reed. Reed’s beginning and ending
inventories for 2005 were $49,000 and $33,600, respectively. Income
statement information for both companies for 2005 is as follows:

Bittern Reed
Sales Revenue $ 400,000 $ 220,000
Income from Reed 75,600
Cost of Goods Sold ( 210,000 )( 72,000 )
Expenses ( 85,000 )( 40,000 )
Net Income $ 180,600 $ 108,000

Required:
Prepare a consolidated income statement for Bittern Corporation and
Subsidiary for 2005.

LO 3&4
Exercise 7

Egret Corporation paid $24,800 for an 80% interest in Plume

Corporation on January 1, 2004, at which time Plume’s stockholders’
equity consisted of $15,000 of Common Stock and $6,000 of Retained
Earnings. The fair values of Plume Corporation’s assets and
liabilities were identical to recorded book values when Egret
acquired its 80% interest.

Plume Corporation reported net income of $4,000 and paid dividends of

$2,000 during 2004.

Egret Corporation sold inventory items to Plume during 2004 and 2005
as follows:

2004 2005
Egret’s sales to Plume $ 5,000 $ 6,000
Egret’s cost of sales to Plume 3,000 3,500
Unrealized profit at year-end 1,000 1,500

The accounts payable of Plume include $1,500 owed to Egret for

inventory purchases.

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The following conversion to equity schedule provides information that
may be helpful in completing the consolidation working papers for the
year ended December 31, 2005.

Retained Investment Income

Earnings in Plume from
Plume
Prior years:

Inventory profit $ ( 1,000 ) $( 1,000 )

Current year:

Inventory profit-2004 $ $ 1,000 $ 1,000

Inventory profit-2005 $ $( 1,500 ) $(1,500 )
Totals $ ( 1,000 ) $( 1,500 ) $( 500 )

Required:

Financial statements of Egret and Plume appear in the first two

columns of the partially completed working papers. Complete the
consolidation working papers for Egret Corporation and Subsidiary for
the year ended December 31, 2005.

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 Egret Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2005
Eliminations Balance
Egret Plume Debit Credit Sheet
INCOME STATEMENT
Sales $ 43,000 $20,000
Income from
Plume 7,200

Cost of Sales ( 22,000) ( 8,000)

Other expenses ( 12,200) ( 3,000)

Net income 16,000 9,000

Retained
Earnings 1/1 10,000 8,000
Add:
Net income 16,000 9,000
Less:
Dividends ( 10,000) ( 5,000)
Retained
Earnings 12/31 $ 16,000 $12,000
BALANCE SHEET
Cash 5,400 3,000
Accounts
Receivable-net 14,000 10,000
Dividend
Receivable 2,000

Inventories 18,000 8,000

Goodwill
Equipment and
Buildings-net 24,000 31,000
Investment in
Plume 29,600
TOTAL ASSETS $ 93,000 $52,000
LIAB. & EQUITY
Accounts payable 17,500 12,500
Dividend payable 7,000 2,500
Other debt 12,500 10,000
Capital stock 40,000 15,000
Retained
Earnings 16,000 12,000
1/1 Noncontrl.
Interest
12/31 Noncontrl.
Interest
LIAB. & EQUITY $ 93,000 $52,000

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LO4
Exercise 8

Cardinal Corporation acquired a 90% interest in Robin Corporation at

book value in 2004. During 2005, Cardinal sold $220,000 of
merchandise to Robin at a gross profit rate of 30%. Robin’s beginning
and ending inventories for 2005 were $30,000 and $40,000,
respectively. Income statement information for both companies for
2005 is as follows:

Cardinal Robin
Sales Revenue $ 830,000 $ 290,000
Income from Robin 36,900
Cost of Goods Sold ( 530,000 )( 197,000 )
Expenses ( 179,000 )( 52,000 )
Net Income $ 157,900 $ 41,000

Required:
Prepare a consolidated income statement for Cardinal Corporation and
Subsidiary for 2005.

LO5
Exercise 9

Plover Corporation acquired 80% of Artic Inc. equity on January 1,

2003, when the book values of Artic’s assets and liabilities were
equal to their fair values.

Plover separate income (excluding Artic) was $1,800,000, 1,700,000

and 1,900,000 in 2003, 2004 and 2005 respectively. Plover sold
inventory to Artic during 2003 at a gross profit of $48,000 and one
quarter remained at Artic at the end of the year. The remaining 25
percent was sold in 2004. At the end of 2004, Plover has $25,000 of
inventory received from Artic from a sale of $100,000 which cost
Artic $80,000. There are no unrealized profits in the inventory of
Plover or Artic at the end of 2005. Plover a uses the equity method
in its separate books. Select financial information for Artic
follows:

2003 2004 2005

Sales $ 790,000 $ 840,000 $ 940,000
Cost of Sales 420,000 440,000 500,000
Gross Profit 370,000 400,000 440,000
Operating Expenses 300,000 320,000 350,000
Net Income 70,000 80,000 90,000

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Required:

Prepare a schedule to determine Plover Corporation’s net income for

2003, 2004, and 2005.

LO5
Exercise 10

On January 1, 2004, Lapwing Corporation purchased 70% of the common

stock of Forage Corporation for $320,000 when Forage had Common Stock
outstanding of $100,000 and Retained Earnings of $200,000. Any excess
differential was attributed to goodwill.

At the end of 2004, Lapwing and Forage had unrealized inventory

profits from intercompany sales of $6,000 and $8,000, respectively.
These year-end profit amounts were realized in 2005. At the end of
2005 Lapwing held inventory acquired from Forage with a $10,000
unrealized profit. Lapwing reported separate income of $100,000 for
2005 and paid dividends of $30,000. Forage reported separate income
of $70,000 for 2005 and paid dividends of $20,000.

Required:

Compute the amount of consolidated net income for 2005.

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SOLUTIONS

Multiple Choice Questions

1. c

2. c

3. b

4. d

5. a 2004 combined sales $920,000

Less: 2004 intercompany
sales ( 50,000 )
Consolidated sales $870,000

6. a Selling price $ 50,000

Less: Cost of sales 40,000
Original unrealized profit 10,000
Unsold percentage 30%
Unrealized profit $ 3,000

7. b

8. a Combined 2005 sales $ 1,025,000

Less: 2005 intercompany
sales 0
Consolidated sales $ 1,025,000

9. d Combined cost of sales $ 480,000

Less: 2005 intercompany
sales 0
Less: Unrealized profit in
the 2005 beginning inven-
tory from 2004 ( 3,000 )
Plus: Unrealized profit in
2005 ending inventory 0
Consolidated cost of sales $ 477,000

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10. b Combined cost of sales $ 160,000
Less: Intercompany sales revenue ( 110,000 )
Plus: Unrealized profit taken out
of inventory (75%)x(35,000) = 26,250
Consolidated cost of sales $ 76,250

11. a ($115,000 x 70%) - $26,250 = $ 54,250

12. a Selling price $ 60,000

Less: Cost of sales ( 48,000 )
Unrealized profit 12,000
Unsold fraction 1/3
Credit to Inventory $ 4,000

13. a 500,000+400,000-
200,000+20,000

14. b 120,000*.8-200,000*.2*.5

15. d Downstream situation

16. a It will be overstated by the

amount of the minority interests’
share of the $1,600 of profit
margin in the $9,600 of materials
carried over to 2005 = (20% x
$1,600) = $ 320

17. c Grebe plus Swamp’s separate cost

of goods sold = $400,000
+ $320,000 = $ 720,000
Less: Intercompany sales = ( 200,000 )
Adjust: Profit +12,500-10,000 = 2,500
Consolidated COGS = $ 522,500 )

18. b

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19. a

20. a Minority interest income:

Squid’s reported income $ 100,000
Less: Unrealized profits in the
ending inventory ( 16,000 )
Squid’s adjusted income $ 84,000
Minority interest percentage 10%
Minority interest income $ 8,400

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Exercise 1

Requirement 1

Unrealized profit in inventory:

$132,000 – ($132,000/1.2) = $ 22,000

Requirement 2

Income from Salt for 2005:

Share of Salt’s income ($880,000 x 60%) $ 528,000
Less: Unrealized profit in ending inventory ( 22,000 )
Income from Salt $ 506,000

Exercise 2

Requirement 1

Income from Cliff:

Share of Cliff’s reported net income
$900,000 x 75% = $ 675,000
Add: Unrealized profit in beginning inventory 27,000
Less: Unrealized profit in ending inventory ( 38,000 )
Income from Cliff $ 664,000 )

Requirement 2

Debit Credit
Sales Revenue 650,000
Cost of Goods Sold 650,000

To eliminate intercompany sales and purchases

Investment in Cliff 27,000

Cost of Goods Sold 27,000

To recognize previously deferred unrealized profits from the

beginning inventory

Cost of Goods Sold 38,000

Inventory 38,000

To eliminate intercompany profit in the ending inventory from cost of

goods sold and inventory

Exercise 3
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 Tern Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2005

Sales (combined $1,600,000 - $225,000 intercompany $ 1,375,000

Cost of Goods Sold (see below) ( 670,000)
Expenses ( 400,000)
Minority Interest ( 20,000)
Consolidated net income $ 285,000

Consolidated cost of goods sold computation:

Combined cost of sales ($600,000 + $300,000) $ 900,000
Less: Intercompany sales ( 225,000)
Less: Unrealized profit in beginning inventory
($180,000 - $120,000) x 1/2 ( 30,000)
Add: Unrealized profit in ending inventory
($225,000 - $150,000) x 1/3 25,000
Consolidated Cost of Goods Sold $ 670,000

Exercise 4

Egret Corporation and Subsidiary

Consolidated Income Statement
for the year ended December 31, 2005

Sales (combined $330,000 + $180,000 - $148,000) $ 362,000

Cost of Goods Sold (see below) ( 156,250)
Expenses ( 95,000)
Minority Interest ( 7,600)
Consolidated net income $ 103,150

Consolidated cost of goods sold computation:

Combined cost of sales ($190,000 + $112,000) $ 302,000
Less: Intercompany sales ( 148,000)
Less: Unrealized profit in beginning inventory
($38,000 – ($38,000/1.6) ( 14,250)
Add: Unrealized profit in ending inventory
($44,000 – ($44,000/1.6) 16,500
Consolidated Cost of Goods Sold $ 156,250

Exercise 5

2003 2004 2005

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Exercise 6

Preliminary computations:
Unrealized profit in beginning inventory equals:
$49,000 – ($49,000/1.4) = $ 14,000

Unrealized profit in ending inventory:

$33,600 – ($33,600/1.4) = $ 9,600

Consolidated net income:

Sales (combined $620,000 - $160,000 intercompany $ 460,000
Cost of Goods Sold (see below) ( 117,600)
Expenses ( 125,000)
Minority Interest ( 32,400)
Consolidated net income $ 185,000

Consolidated cost of goods sold computation:

Combined cost of sales ($210,000 + $72,000) $ 282,000
Less: Intercompany sales ( 160,000)
Less: Unrealized profit in beginning inventory ( 14,000)
Add: Unrealized profit in ending inventory 9,600
Consolidated Cost of Goods Sold $ 117,600

Exercise 7

Egret Corporation and Subsidiary

Consolidation Working Papers
for the year ended December 31, 2005
Eliminations Non- Balance
Egret Plume Debit Credit Cntrl. Sheet
INCOME STATEMENT
Sales $ 43,000 $20,000 b $6,000 $57,000
Income from a 500
Plume 7,200 e 6,700

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 d 1,500 b 6,000
Cost of Sales ( 22,000) ( 8,000) c 1,000 ( 24,500)
Other expenses ( 12,200) ( 3,000) ( 15,200)
Minority income 1,800 ( 1,800)
Net income 16,000 9,000 15,500
Retained a 1,000
Earnings 1/1 10,000 8,000 f 8,000 9,000
Add: Net income 16,000 9,000 15,500
Less: Dividends ( 10,000) ( 5,000) e 4,000 (1,000) ( 10,000)
Retained
Earnings 12/31 $ 16,000 $12,000 $14,500
BALANCE SHEET
Cash 5,400 3,000 8,400
Net Receivables 14,000 10,000 h 1,500 22,500
Dividend
Receivable 2,000 g 2,000
Inventories 18,000 8,000 d 1,500 24,500
Goodwill f 8,000 8,000
Plant assets-net 24,000 31,000 55,000
Investment in c 1,000 a 1,500
Plume 29,600 e 2,700
f 26,400
TOTAL ASSETS $ 93,000 $52,000 $118,400
LIAB. & EQUITY
Accounts payable 17,500 12,500 h 1,500 28,500
Dividend payable 7,000 2,500 g 2,000 7,500
Other debt 12,500 10,000 22,500
Capital stock 40,000 15,000 f 15,000 40,000
Retained
Earnings 16,000 12,000 14,500
1/1 Noncntrl. f 4,600 4,600
Interest
12/31 Noncntrl.
Interest 5,400 5,400
TOTAL LIAB. & $93,000 $52,000 $118,400
EQUITY

Exercise 8
Cardinal Corporation and Subsidiary
Consolidated Income Statement
for the year ended December 31, 2005

Sales (combined $830,000 + $290,000 - $220,000) $ 900,000

Cost of Goods Sold (see below) ( 510,000)
Expenses ( 231,000)
Minority Interest ( 4,100)
Consolidated net income $ 154,900

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Consolidated cost of goods sold computation:
Combined cost of sales ($530,000 + $197,000) $ 727,000
Less: Intercompany sales ( 220,000)
Less: Unrealized profit in beginning inventory
($30,000 x .30) ( 9,000)
Add: Unrealized profit in ending inventory
($40,000 x .30) 12,000
Consolidated Cost of Goods Sold $ 510,000

Exercise 9

2003 2004 2005

Plover’s separate income $ 1,800,000 $ 1,700,000 $ 1,900,000
Add: Artic’s net income 70,000 80,000 90,000
Unrealized profit in 2003 ( 12,000 ) 12,000
income
Unrealized profit in 2004 ( 5,000 ) 5,000
income
Subtract: Noncontrolling ( 14,000 ) ( 15,000 ) ( 17,000 )
Interest
Consolidated net income $ 1,844,000 $ 1,772,000 $ 1,978,000

2004 Noncontrolling Interest

=(80,000-5,000)*.2
2005 Noncontrolling Interest
=(90,000+5,000)*.2

Exercise 10

Lapwing separate income: $ 100,000

Add: Realized profit in beginning
inventory (given) 6,000
Less: Unrealized profit in ending
inventory (given) ( 10,000 )

Lapwing adjusted separate income $ 96,000

Forage separate income:

Separate income as reported $ 70,000
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Add: Realized beginning inventory profit 8,000
Equals: Adjusted Forage income 78,000
Majority percentage 70%
Income from Forage 54,600 54,600
Consolidated net income $ 150,600

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