Consolidation Working Paper Eliminations, Intercompany Merchandise Sales

Prance Athleticwear Company owns all of the voting stock of Stallion Shoes. Acquisition cost was $6 million in excess of Stallions book value of $3.5 million, and the excess was attributed entirely to goodwill. As of the beginning of the current year, goodwill is impaired by $800,000. 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 $200,000.

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

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

Intercompany profit in Stallions ending inventory, purchased from Prance, is $175,000.

Total sales from Stallion to Prance, at the price charged to Prance, were $8 million.

Total sales from Prance to Stallion, at the price charged to Stallion, were $6 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.

(in thousands)	Prance Dr (Cr)	Stallion Dr (Cr)
Current assets	$2,500	$1,000
Plant and equipment, net	350,000	275,000
Investment in Stallion	12,725	--
Liabilities	(353,250)	(268,000)
Capital stock	(2,000)	(1,000)
Retained earnings, beginning	(6,000)	(5,000)
Sales revenue	(275,000)	(160,000)
Equity in net income	(1,975)	--
Cost of sales	200,000	110,000
Operating expenses	73,000	48,000
Total	$0	$0

Required

a. Prepare a schedule calculating equity in net income for the current year, appearing on Prances separate books ($1,975,000) and the end-of-year balance for Investment in Stallion, appearing on Prances separate books ($12,725,000).

• 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)
Stallions reported income		Answer
Confirmed profit in beginning inventory		Answer
Unconfirmed profit in ending inventory		Answer
Equity in net income		$1,975

(in thousands)
Acquisition cost		Answer
Change in book value to the beginning of the year		Answer
Goodwill write-off to the beginning of the year		Answer
Unconfirmed profit in last years ending inventory		Answer
Investment balance, beginning of year		Answer
Equity in net income, current year		Answer
Investment balance, end of year		$12,725

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.

Consolidation Working Paper
		Trial Balances Taken From Books			Eliminations			Consolidated Balances
(in thousands)		Prance Dr (Cr)	Stallion Dr (Cr)		Debit	Credit		Dr (Cr)
Current assets		$2,500	$1,000			Answer	(I-3)	Answer
Plant and equipment, net		350,000	275,000					Answer
Investment in Stallion		12,725	--	(I-2)	Answer	Answer	(C)	Answer
						Answer	(E)
						Answer	(R)
Goodwill		--	--	(R)	Answer			Answer
Liabilities		(353,250)	(268,000)					Answer
Capital stock		(2,000)	(1,000)	(E)	Answer			Answer
Retained earnings, beg.		(6,000)	(5,000)	(I-1)	Answer			Answer
				(E)	Answer
Sales revenue		(275,000)	(160,000)	(I-4)	Answer			Answer
Equity in net income of Stallion		(1,975)	--	(C)	Answer			Answer
Cost of sales		200,000	110,000	(I-3)	Answer	Answer	(I-1)	Answer
						Answer	(I-2)
						Answer	(I-4)
Operating expenses		73,000	48,000					Answer
		$--	$--		Answer	Answer		Answer