Advanced Accounting

Intercompany profit transactions Inventories

Intercompany profit transactions Inventories

-Apply the concepts of upstream versus downstream inventory transfers.

-Recognize realized, previously deferred inventory profits in the beginning inventory.

- Adjust noncontrolling interest amounts in the presence of intercompany inventory profits.

Exercise 1 Par Corporation acquired a 70 percent interest in Sol Corporation's outstanding voting common stock on January 1, 2011, for $490,000 cash. The stockholders' equity of Sol on this date consisted of $500,000 capital stock and $100,000 retained eamings. The difference between the fair value of Sol and the underlying equity acquired in Sol was assigned $5,000 to Sol's undervalued inventory, $14,000 to undervalued buildings, $21,000 to undervalued equipment, and S60,000 to goodwill. The undervalued inventory items were sold during 20111, and the undervalued buildings and equipment had remaining useful lives of seven years and three years, respectively. Depreciation is straight line. At December 31, 2011, Sol's accounts payable include $10,000 owed to Par. This $10,000 account payable is due on January 15, 2012. Par sold equipment with a book value of $15,000 for $25,000 on June 1, 2011. This is not an intercompany sale transaction. Separate financial statements for Par and Sol for 2011 are summarized as follows (in thousands): Par Sol Combined Income and Retained Earnings Statements for the Year Ended December 31 Sales $ 800 $700 Income from Sol Gain on equipment Cost of sales Depreciation expense Other expenses Net income Add: Retained earnings January Deduct: Dividends 60.2 10 (300) (155) (160) (400) (60) (140) 255.2 100 300 100 (200) (50) Retained earnings December 31 S 355.2 $150 Balance Sheet at December 31 Cash S 60 70 96 Accounts receivable-net 100 Dividends receivable 14 Inventories 150 100 Other current assets 70 30 Land Buildings-net Equipment-net Investment in Sol 100 50 140 160 570 330 515.2 Total assets $850 S1.705.2 S200 100 85 Accounts payable Dividends payable Other liabilities Capital stock, S10 par Retained earnings Total equities 20 50 95 500 1,000 355.2 150 S1.705.2 $850 REQUIRED Prepare consolidation workpapers for Par Corporation and Sol for the year ended December 31 2011. Use an unamortized excess account. You must show all adjusting and eliminating entries and the required calculations. Instructions: Cover page and question should be printed. Answer must be hand written on A4 printing papers. Exercise 1 Par Corporation acquired a 70 percent interest in Sol Corporation's outstanding voting common stock on January 1, 2011, for $490,000 cash. The stockholders' equity of Sol on this date consisted of $500,000 capital stock and $100,000 retained eamings. The difference between the fair value of Sol and the underlying equity acquired in Sol was assigned $5,000 to Sol's undervalued inventory, $14,000 to undervalued buildings, $21,000 to undervalued equipment, and S60,000 to goodwill. The undervalued inventory items were sold during 20111, and the undervalued buildings and equipment had remaining useful lives of seven years and three years, respectively. Depreciation is straight line. At December 31, 2011, Sol's accounts payable include $10,000 owed to Par. This $10,000 account payable is due on January 15, 2012. Par sold equipment with a book value of $15,000 for $25,000 on June 1, 2011. This is not an intercompany sale transaction. Separate financial statements for Par and Sol for 2011 are summarized as follows (in thousands): Par Sol Combined Income and Retained Earnings Statements for the Year Ended December 31 Sales $ 800 $700 Income from Sol Gain on equipment Cost of sales Depreciation expense Other expenses Net income Add: Retained earnings January Deduct: Dividends 60.2 10 (300) (155) (160) (400) (60) (140) 255.2 100 300 100 (200) (50) Retained earnings December 31 S 355.2 $150 Balance Sheet at December 31 Cash S 60 70 96 Accounts receivable-net 100 Dividends receivable 14 Inventories 150 100 Other current assets 70 30 Land Buildings-net Equipment-net Investment in Sol 100 50 140 160 570 330 515.2 Total assets $850 S1.705.2 S200 100 85 Accounts payable Dividends payable Other liabilities Capital stock, S10 par Retained earnings Total equities 20 50 95 500 1,000 355.2 150 S1.705.2 $850 REQUIRED Prepare consolidation workpapers for Par Corporation and Sol for the year ended December 31 2011. Use an unamortized excess account. You must show all adjusting and eliminating entries and the required calculations. Instructions: Cover page and question should be printed. Answer must be hand written on A4 printing papers