ACG$5205$ Chap$\mathrm{.}6$: Inter$-$Co Inventory Transfer Student Name:

Handout Exercise Summer$-2024($Text: Christensen et al$.13$e$.)$

Total: $100\%($Extra credit points: $5$ if $>=95\%$; $4$ if $>=85\%$; $3$ if $>=75\%$; and none if $<75\%).$

Due date: See Canvas. No late assignment will be accepted.

The following data applies to Questions $1-4$:

Binary Company acquired $75\%$ ownership of Fordham Corporation in $20$X$5,$ at underlying book value. On that date, the fair value of the non$-$controlling interest was equal to $25\%$ of the book value of Fordham Corporation. Binary purchased inventory from Fordham for $$150,000$ on July $24,20$X$6,$ and resold $90\%$ of the inventory to unaffiliated companies on November $11,20$X$6,$ for $$160,000.$ Fordham produced the inventory sold to Binary at a total cost of $$120,000.$ The companies had no other transactions during $20$X$6.$ Use MS Word or similar software to type your answers with your name at the top of page $1$; no picture or scan image will be accepted. Please include your last name and first name initial at the end of file name. Must show computations or brief explanations $($if no computation needed$)$ wherever applicable; otherwise, no credit will be given.

$1.$ Based on the information given above, what amount of sales will be reported in the $20$X$6$ consolidated income statement? $(10\%)$

ANSWER: COMPUTATION$/$Explanation:

$$47,500$ $$150,000*\mathrm{.}75(75\%)=$ $$112,500$

$$160,000-$ $$112,500=$ $$47,500$

$2.$ Based on the information given above, what amount of cost of goods sold will be reported in the $20$X$6$ consolidated income statement? $(10\%)$

ANSWER: COMPUTATION:

$$30,000$ $$120,000*\mathrm{.}75(75\%)=$ $$90,000$

$$120,000-$ $$90,000=$ $$30,000$

$3.$ Based on the information given above, what amount of consolidated net income will be assigned to the controlling interest for $20$X$6?(10\%)$

ANSWER: COMPUTATION:

Cost of producing $90\%$ of Inventory. $$120,000*\mathrm{.}9(90\%)=$ $$108,000$

$90\%$ of $150,000$ $$150,000*\mathrm{.}9(90\%)=$ $$135,000$

Profit $$135,000-$$$108,000=$ $$27,000$

Profit Related to controlling interest $$27,000*\mathrm{.}75(75\%)=$ $$20,250$

Profit gained by reselling to unaffiliated co$.$ $$160,000-$ $$135,000=$ $$25,000$

Consolidated net income for controlling interest $$25,000+$ $$20,250=$ $$45,250$

Answer: $$45,250$

$4.$ Based on the information given above, what amount of ending inventory balance will be reported by the consolidated entity on December $31,20$X$6?(10\%)$

ANSWER: COMPUTATION:

$$12,000$ $$120,000*\mathrm{.}1(10\%)=$ $$12,000$

Continued on next page $...$

ACG$5205$ Chap$\mathrm{.}6$: Inter$-$Co Inventory Transfer Student Name:

Handout Exercise $($Text: Christensen et al$.12$e$)$

The following data applies to Questions $5-8$:

Hunter Company and Moss Company both produce and purchase fabric for resale each period and frequently sell to each other. Since Hunter Company holds $80\%$ ownership of Moss Company, Hunter's controller compiled the following information with regard to intercompany transactions between the two companies in $20$X$7$ and $20$X$8.$ Must show computations wherever applicable; otherwise, no credit will be given.

Required:$$Give the consolidation elimination entries required at $12/31/20$X$8$ to eliminate the effects of the inventory transfers in preparing a full set of consolidated financial statements.$$

$5.$ Reversal of gross profit deferral on the $20$x$7$ Downstream transfer: $(15\%)$

Dr$.$ Retained Earnings. $30,000-$ Hunter Co$.$ COMPUTATION:

$$170,000-$ $$20,000=$ $$150,000*\mathrm{.}8(80\%)=$ $$30,000$

$$

Cr$.$ Inventory $300,000$

$6.$ Reversal of gross profit deferral on the $20$x$7$ Upstream transfer: $(15\%)$

Dr$.$ Retained Earnings $20,000-$ Moss Co$.$ COMPUTATION:

$$150,000-$ $$130,000=$ $$20,000$

$$

Cr$.$ Inventory $20,000$

$7.$ Eliminate effects of the $20$X$8$ Downstream transfer: $(15\%)$

Dr$.$ Retained Earnings $50,000=$ Hunter Co$.$ COMPUTATION:

$$280,000-$ $$230,000=$ $$50,000$

$$

Cr$.$ Inventory $50,000$

$8.$Eliminate effect of the $20$X$8$ Upstream transfer: $(15\%)$

Dr$.$ Retained Earnings $20,000-$ Moss Co$.$ COMPUTATION:

$$150,000-$ $$130,000=$ $$20,000$

$$

Cr$.$ Inventory $20,000$