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Exam 6: Elimination of Unrealized Profit on Intercompany Sales of Inventory

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Question 21

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Use the following information for Questions 24 & 25: P Company owns an 80% interest in S Company.During 2014, S sells merchandise to P for $150,000 at a profit of $30,000.On December 31, 2014, 50% of this merchandise is included in P's inventory.Income statements for P and S are summarized below: -Noncontrolling interest in income for 2014 is:

A) $3,000.
B) $14,400.
C) $15,000.
D) $18,000.

E) C) and D)
F) A) and C)

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Question 22

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Why is the gross profit on intercompany sales, rather than profit after deducting selling and administrative expenses, ordinarily eliminated from consolidated inventory balances?

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The effect of eliminating profit on inte...

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Puma Company owns 80% of the common stock of Smarte Company.Puma sells merchandise to Smarte at 20% above cost.During 2014 and 2015, intercompany sales amounted to $1,080,000 and $1,200,000 respectively.At the end of 2014, Smarte had one-fifth of the goods purchased that year from Puma in its ending inventory.Smarte's 2015 ending inventory contained one-fourth of that year's purchases from Puma.There were no intercompany sales prior to 2014. Puma reported net income from its own operations of $720,000 in 2014 and $760,000 in 2015.Smarte reported net income of $400,000 in 2014 and $460,000 in 2015.Neither company declared dividends in either year. Required: A.Prepare in general journal form all entries necessary on the consolidated statements workpapers to eliminate the effects of the intercompany sales for both 2014 and 2015. B.Calculate controlling interest in consolidated net income for 2015.

Use the following information for Questions 22 & 23: P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation.In 2013, P sold merchandise that cost $192,000 to S for $240,000.Half of this merchandise remained in S's December 31, 2013 inventory.During 2014, P sold merchandise that cost $300,000 to S for $375,000.Forty percent of this merchandise inventory remained in S's December 31, 2014 inventory.Selected income statement information for the two affiliates for the year 2014 is as follows: -Consolidated sales revenue for P and Subsidiary for 2014 are:

Determination of the noncontrolling interest in consolidated net income differs depending on whether intercompany sales are downstream or upstream.Explain the difference in calculating noncontrolling interest for downstream and upstream sales. Questions from the Textbook

Past and proposed GAAP agree that unrealized intercompany profit should not be included in consolidated net income or assets.Briefly explain the preferred approach of eliminating intercompany profit.

A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2013.Under the partial equity method, the workpaper entry in 2014 to recognize the intercompany profit in beginning inventory realized during 2014 includes a debit to

Why are adjustments made to the calculation of the noncontrolling interest for the effects of intercompany profit in upstream but not in down-stream sales?

P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000.At the end of the current year, one-third of the merchandise remains in S Company's inventory.Applying the lower-of- cost-or-market rule, S Company wrote this inventory down to $92,000.What amount of intercompany profit should be eliminated on the consolidated statements workpaper?

The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory includes a

P Company sells inventory costing $100,000 to its subsidiary, S Company, for $150,000.At the end of the current year, one-half of the goods re-mainsremains in S Company's inventory.Applying the lower of cost or market rule, S Company writes down this inventory to $60,000.What amount of intercompany profit should be eliminated on the consolidated statements workpaper?

Use the following information for Questions 17 & 18: P Company owns an 80% interest in S Company.During 2014, S sells merchandise to P for $200,000 at a profit of $40,000.On December 31, 2014, 50% of this merchandise is included in P's inventory.Income statements for P and S are summarized below: -Noncontrolling interest in income for 2014 is:

Use the following information for Questions 24 & 25: P Company owns an 80% interest in S Company.During 2014, S sells merchandise to P for $150,000 at a profit of $30,000.On December 31, 2014, 50% of this merchandise is included in P's inventory.Income statements for P and S are summarized below: -Controlling interest in consolidated net income for 2014 is:

Petunia Company acquired an 80% interest in Shaman Company in 201320132013 just once.In 2014 and 2015, Sutton reported net income of $400,000 and $480,000, respectively.During 2014, Shaman sold $80,000 of merchandise to Petunia for a $20,000 profit.Petunia sold the merchandise to outsiders during 2015 for $140,000.For consolidation purposes, what is the noncontrolling interest's share of Shaman's 2014 and 2015 net income?

Failure to eliminate intercompany sales would result in an overstatement of consolidated

Pinta Company owns 90% of the common stock of Simplex Company.Simplex Company sells merchandise to Pinta Company at 25% above cost.During 2013 and 2014 such sales amounted to $800,000 and $1,020,000, respectively.At the end of each year, Pinta Company had in its inventory one-fourth of the amount of goods purchased from Simplex Company during that year.Pinta Company reported income of $1,500,000 from its independent operations in 2013 and $1,720,000 in 2014.Simplex Company reported net income of $600,000 in each year and did not declare any dividends in either year.There were no intercompany sales prior to 2013. Required: A.Prepare, in general journal form, all entries necessary on the 2014 consolidated statements workpaper to eliminate the effects of intercompany sales. B.Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2014. C.Calculate controlling interest in consolidated net income for 2014.

The material sale of inventory items by a parent company to an affiliated company:

Pine Company owns an 80% interest in Salad Company and a 90% interest in Tuna Company.During 2013 and 2014, intercompany sales of merchandise were made by all three companies.Total sales amounted to $2,400,000 in 2013, and $2,700,000 in 2014.The companies sold their merchandise at the following percentages above cost. Pine 15% Salad 20% Tuna 25% The amount of merchandise remaining in the 2014 beginning and ending inventories of the companies from these intercompany sales is shown below. Reported net incomes (from independent operations including sales to affiliates) of Pine, Salad, and Tuna for 2014 were $3,600,000, $1,500,000, and $2,400,000, respectively. Required: A.Calculate the amount noncontrolling interest to be deducted from consolidated income in the consolidated income statement for 2014. B.Calculate the controlling interest in consolidated net income for 2014.

The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the noncontrolling minoritydelete minority ownership percentage by the subsidiary's reported net income

Pruitt Company owns 80% of Stoney Company's common stock.During 2014, Stoney sold $400,000 of merchandise to Pruitt.At December 31, 2014, one-fourth of the merchandise remained in Pruitt's inventory.In 2014, gross profit percentages were 25% for Pruitt and 30% for Stoney.The amount of unrealized intercompany profit that should be eliminated in the consolidated statements is