Problems
Problem#1) Downstream
Salli Corporation regularly purchases merchandise from their 90%-owner, Playtime Corporation. Playtime purchased the 90% interest at a cost equal to 90% of the book value of Salli's net assets. At the time of acquisition, the book values and fair values of Salli's assets and liabilities were equal. Playtime makes their sales to Salli at 120% of cost. In 2012, Salli reported net income of $460,000, and made purchases totaling $172,000 from Playtime. Although Salli had no inventory on hand at the beginning of 2012 that they had purchased from Playtime, at year end, they had $51,600 of this merchandise in inventory.
Required:
1. Determine the unrealized profit in Salli's inventory at December 31, 2012.
2. Compute Playtime's income from Salli for 2012.
Problem#2) Upstream
Psalm Enterprises owns 90% of the outstanding voting stock of Solomon Siding, which was purchased at a cost equal to 90% of the book value of Solomon's net assets many years ago. (At the time of purchase, the fair value and book value of Solomon's net assets were equal.) Psalm purchases merchandise from Solomon at 110% above Solomon's cost. In 2012, intercompany sales from Solomon to Psalm amounted to $362,000. Unrealized profits in Psalm's December 31, 2011 inventory and December 31, 2012 inventory were $82,000 and $26,000, respectively. Solomon reported net income of $980,000 for 2012.
Required:
1. Determine Psalm's income from Solomon for 2012.
2. In General Journal format, prepare consolidation working paper entries at December 31, 2012 to eliminate the effects of the intercompany inventory sales assuming the perpetual inventory method is used.
Problem#3) Downstream
Papal Corporation acquired an 80% interest in Sandman Corporation at a cost equal to 80% of the book value of Sandman's net assets in 2010. At the time of the acquisition, the book values and fair values of Sandman's assets and liabilities were equal. During 2011, Papal recorded sales of $440,000 of merchandise to Sandman at a gross profit rate of 30%. Sandman's beginning and ending inventories for 2011 were $60,000 and $80,000, respectively. Income statement information for both companies for 2011 is as follows:
Papal Sandman
Sales Revenue $1,660,000 $580,000
Invest.income from Sandman 59,600
Cost of Goods Sold (1,060,000) (394,000)
Expenses (358,000) (104,000)
Net Income $301,600 $82,000
Required:
Prepare a consolidated income statement for Papal Corporation and Subsidiary for 2011.
Problem#4)
On January 1, 2011, Paar Incorporated paid $38,500 for a 70% interest in Siba Enterprises, at a time when Siba's stockholder's equity consisted of $20,000 in Capital stock and $30,000 in Retained Earnings. The fair values of Siba's assets and liabilities equaled their recorded book values at that time, so any additional amount paid was attributed to goodwill.
In 2011, Siba purchased merchandise from Paar at a price of $6,000. The products originally cost Paar $4,000, and 75% of this merchandise remained in inventory at December 31, 2011. This inventory was sold in 2012. Siba reported net income of $9,000 and paid dividends of $3,000 during 2011.
In 2012, Siba purchased merchandise from Paar at a price of $8,000. The products had a cost to Paar of $7,000, and 50% of this merchandise remained in inventory at December 31, 2012. Siba still owed Paar $1,800 for these purchases at December 31, 2012.
Required:
Financial statements of Paar and Siba appear in the first two columns of the partially completed working papers below.
A. Complete the consolidation working papers for Paar Corporation and Subsidiary for the year ended December 31, 2012. OR
B. Prepare all necessary working paper eliminating entries
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Paar Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2012
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Paar
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Siba
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Eliminations
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Consolidated
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Debit
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Credit
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INCOME STATEMENT Sales
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$ 81,000
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$ 24,000
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Invest. income from Siba
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8,700
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Cost of Sales
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(38,000)
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(9,500)
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Other expenses
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(12,700)
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(3,500)
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Non-controlling interest share
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Net income
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39,000
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11,000
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Retained Earnings 1/1
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59,500
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36,000
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Add: Net income
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39,000
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11,000
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Less: Dividends
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(9,000)
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(4,000)
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Retained Earnings 12/31
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$ 89,500
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$43,000
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BALANCE SHEET Cash
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23,000
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5,000
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Net Receivables
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34,000
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10,000
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Dividend Receivable
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1,400
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Inventories
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27,000
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9,000
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Goodwill
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Plant assets-net
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37,000
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62,000
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Investment in Siba
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47,100
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TOTAL ASSETS
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$169,500
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$ 86,000
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LIAB. & EQUITY Accounts payable
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7,000
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11,000
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Dividend payable
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10,000
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2,000
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Other debt
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23,000
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10,000
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Capital stock
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40,000
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20,000
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Retained Earnings
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89,500
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43,000
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1/1 Noncntrl. Interest
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12/31 Noncntrl. Interest
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TOTAL LIAB. & EQUITY
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$169,500
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$ 86,000
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