Consolidation Working Paper Eliminations, Intercompany Merchandise Sales

Prance Athleticwear Company owns all of the voting stock of Stallion Shoes. Acquisition cost was $7 million in excess of Stallions book value of $3 million, and the excess was attributed entirely to goodwill. As of the beginning of the current year, goodwill is impaired by $500,000. Goodwill is not impaired in the current year. Following is information on intercompany merchandise transactions between Prance and Stallion for the current year:

Intercompany profit in Prances beginning inventory, purchased from Stallion, is $300,000.

Intercompany profit in Stallions beginning inventory, purchased from Prance, is $400,000.

Intercompany profit in Prances ending inventory, purchased from Stallion, is $200,000.

Intercompany profit in Stallions ending inventory, purchased from Prance, is $250,000.

Total sales from Stallion to Prance, at the price charged to Prance, were $7 million.

Total sales from Prance to Stallion, at the price charged to Stallion, were $5 million.

Prance uses the complete equity method to account for its investment in Stallion on its own books. The separate trial balances for Prance and Stallion at the end of the current year are below.

a. Prepare a schedule calculating equity in net income for the current year, appearing on Prances separate books ($1,250,000) and the end-of-year balance for Investment in Stallion, appearing on Prances separate books ($12,050,000).

b. Prepare a working paper to consolidate the trial balances of Prance and Stallion. Label your eliminating entries (C), (I), (E), and (R).

• Enter answers in thousands ($400,000 equals $400 in thousands).
• Use negative signs with Cr (credit) answers in the Consolidated Balances Dr (Cr) column.
• 

Stallion Prance (in thousands) Dr (Cr) Dr (Cr) $2,500 $1,500 Current assets Plant and equipment, net 350,000 250,000 Investment in Stallion 12,050 Liabilities (353,300) (245,500) |(2,000) Capital stock (1,000) Retained earnings, beginning (6,000) (4,000) Sales revenue (275,000) 150,000) Equity in net income (1,250) Cost of sales 200,000 90,000 Operating expenses 73,000 59,000 $0 $0 Total Required Enter answers in thousands ($400,000 equals $400 in thousands). Use negative signs with answers that reduce net income and the investment balance. (in thousands) Stallion's reported income $ 350,000 Confirmed profit in beginning inventory 350 Unconfirmed profit in ending inventory 350 $1,250 Equity in net income (in thousands) $ Acquisition cost 0 X Change in book value to the beginning of the year Goodwill write-off to the beginning of the year Unconfirmed profit in last year's ending inventory Investment balance, beginning of year 0 X Equity in net income, current year Investment balance, end of year $12,050 Consolidation Working Paper Trial Balances Consolidated Taken From Books Eliminations Balances Stallion Prance (in thousands) Dr (Cr) Credit Dr (Cr) Dr (Cr) Debit 40 (-3) $ $2,500 $1,500 Current assets 40 Plant and equipment, net 250,000 350,000 |(I-2) 0 x 0 x 12,050 Investment in Stallion (C) 0 X (E) 0 x (R) Goodwill 0 X (R) 0 X Liabilities (353,300) (245,500) Capital stock Retained earnings, beg. 0 x (2,000) (1,000) (E) 0 x (4,000) (-1) (6,000) 0 x (E) |(275,000) (150,000) (I-4) Sales revenue 0 x 0 x Equity in net income of Stallion (1,250) (C) $ 0 x(I-1) 0 x Cost of sales 0 X 200,000 90,000 (I-3) 0x (I-2) 0X (I-4) Operating expenses 73,000 59,000 0 X $ 0 $- $ Stallion Prance (in thousands) Dr (Cr) Dr (Cr) $2,500 $1,500 Current assets Plant and equipment, net 350,000 250,000 Investment in Stallion 12,050 Liabilities (353,300) (245,500) |(2,000) Capital stock (1,000) Retained earnings, beginning (6,000) (4,000) Sales revenue (275,000) 150,000) Equity in net income (1,250) Cost of sales 200,000 90,000 Operating expenses 73,000 59,000 $0 $0 Total Required Enter answers in thousands ($400,000 equals $400 in thousands). Use negative signs with answers that reduce net income and the investment balance. (in thousands) Stallion's reported income $ 350,000 Confirmed profit in beginning inventory 350 Unconfirmed profit in ending inventory 350 $1,250 Equity in net income (in thousands) $ Acquisition cost 0 X Change in book value to the beginning of the year Goodwill write-off to the beginning of the year Unconfirmed profit in last year's ending inventory Investment balance, beginning of year 0 X Equity in net income, current year Investment balance, end of year $12,050 Consolidation Working Paper Trial Balances Consolidated Taken From Books Eliminations Balances Stallion Prance (in thousands) Dr (Cr) Credit Dr (Cr) Dr (Cr) Debit 40 (-3) $ $2,500 $1,500 Current assets 40 Plant and equipment, net 250,000 350,000 |(I-2) 0 x 0 x 12,050 Investment in Stallion (C) 0 X (E) 0 x (R) Goodwill 0 X (R) 0 X Liabilities (353,300) (245,500) Capital stock Retained earnings, beg. 0 x (2,000) (1,000) (E) 0 x (4,000) (-1) (6,000) 0 x (E) |(275,000) (150,000) (I-4) Sales revenue 0 x 0 x Equity in net income of Stallion (1,250) (C) $ 0 x(I-1) 0 x Cost of sales 0 X 200,000 90,000 (I-3) 0x (I-2) 0X (I-4) Operating expenses 73,000 59,000 0 X $ 0 $- $