McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-1 Intercorporate Transfers: Noncurrent Assets 6 Electronic Presentation by Douglas Cloud Pepperdine University Baker / Lembke / King

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-2 Transactions of Affiliated Companies Parent Company Parent Company Subsidiary A Subsidiary A Subsidiary B Subsidiary B Consolidated Entity

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-3 Intercorporate Sales Subsidiary Corporation Subsidiary Corporation Consolidated Entity Parent Company Parent Company Purchase of $10,000 T1 T1–Purchase of land from outsider for $10,000.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-4 Intercorporate Sales Subsidiary Corporation Subsidiary Corporation Consolidated Entity Sale/Purchase of $15,000 Gain of $5,000 Parent Company Parent Company Purchase of $10,000 T1 T2–Land sale from Parent Company to Subsidiary Corporation for $15,000. T2

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-5 Intercorporate Sales Subsidiary Corporation Subsidiary Corporation Consolidated Entity Sale/Purchase of $15,000 Gain of $5,000 Gain of $10,000 Sale of $25,000 Parent Company Parent Company Purchase of $10,000 T1 T3–Land sale from Subsidiary Corporation to outsider for $25,000. T2T3

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-6 Parent Company Parent Company Subsidiary Corporation Subsidiary Corporation Consolidated Entity Purchase of $10,000 Sale/Purchase of $15,000 Sale of $25,000 Gain of $5,000 Gain of $10,000 If all three transactions are completed in the same accounting period, the parent records a gain of $5,000, the subsidiary $10,000, and the consolidated entity reports a gain of $15,000. If all three transactions are completed in the same accounting period, the parent records a gain of $5,000, the subsidiary $10,000, and the consolidated entity reports a gain of $15,000. Intercorporate Sales--Case A

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-7 All three transactions are completed in the same accounting period. Parent Company$ 5,000 ($15,000 - $10,000) Subsidiary Corporation10,000 ($25,000 - $15,000) Consolidated Entity15,000 ($25,000 - $10,000) Gain The gain reported by each of the entities is considered to be realized because the land is resold to an unrelated party during the same period. Intercorporate Sales--Case A

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-8 Only transaction T1 is completed during the current period. Parent Company$ -0- Subsidiary Corporation-0- Consolidated Entity-0- No sale has been made by either of the affiliated companies, and no gains are reported or realized. Intercorporate Sales--Case B

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-9 Only transactions T1 and T2 are completed during the current period. Parent Company$5,000($15,000 - $10,000) Subsidiary Corporation-0- Consolidated Entity-0- Intercorporate Sales--Case C Gain The gain reported by Parent Company is considered unrealized from a consolidated point of view and is not reported in the consolidated income statement.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Only transaction T3 is completed during the current period. Parent Company$ -0- Subsidiary Corporation 10,000($25,000 - $15,000) Consolidated Entity15,000($25,000 – $10,000) Intercorporate Sales--Case D Gain Subsidiary Corporation recognizes a gain equal to the difference between its selling price of $25,000 and cost of $15,000, while the consolidated entity reports a gain equal to the difference between the selling price and the parent’s original cost.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Special Foods Special Foods Peerless Products Peerless Products Consolidated Entity January 1, 20X1 Purchased land for $20,000 Overview of the Profit Elimination Process Peerless Products (Entry 1) Jan. 1 Land20,000 Cash20,000 Record purchase of land. Jan. 1 Land20,000 Cash20,000 Record purchase of land.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Overview of the Profit Elimination Process Peerless Products Peerless Products Special Foods Special Foods Consolidated Entity July 1, 20X1 Intercorporate transfer of land $35,000 Peerless Products (Entry 2) July 1 Cash35,000 Land20,000 Gain on Sale of Land15,000 Record sale of land to Special Foods. July 1 Cash35,000 Land20,000 Gain on Sale of Land15,000 Record sale of land to Special Foods.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Products Peerless Products Special Foods Special Foods Consolidated Entity July 1, 20X1 Intercorporate transfer of land $35,000 Special Foods (Entry 3) July 1 Land35,000 Cash35,000 Record purchase of land from Peerless. July 1 Land35,000 Cash35,000 Record purchase of land from Peerless. Overview of the Profit Elimination Process

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Overview of the Profit Elimination Process Because the land has not been sold to a party outside the consolidated entity, the land must be reported at its original cost ($20,000) and the gain ($15,000) must be eliminated. The following entry is required in the consolidated workpaper prepared at the end of 20X1. E(4) Gain on Sale of Land15,000 Land15,000 Eliminate unrealized gain on the sale of land.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Assignment of Unrealized Profit Elimination When a sale is from a parent to a subsidiary, referred to as a downstream sale, any gain or loss on the transfer accrues to the stockholders of the parent company. When the sale is from a subsidiary to its parent, an upstream sale, any gain or loss accrues to the stockholders of the subsidiary.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Assignment of Unrealized Profit Elimination Any unrealized intercompany gain or loss must be eliminated from the specific ownership interest (controlling or noncontrolling) that originally recognized the gain or loss.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Assignment of Unrealized Profit Elimination Purity Company owns 75 percent of the common stock of Southern Corporation. Purity reports operating income of $100,000, and Southern reports net income of $60,000. Included in the income of the selling affiliate is an unrealized gain of $10,000 on the intercompany transfer of assets.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Assignment of Unrealized Profit Elimination If the intercompany transfer involves a sale from the parent to the subsidiary, the unrealized profit on the downstream sale is eliminated entirely from the controlling interest (consolidated net income). Purity’s separate income$100,000 Less: Unrealized intercompany profit -10,000 Purity’s separate realized income$ 90,000 Purity’s share of Southern’s income: Southern’s net income$60,000 Purity’s proportionate sharex.75 45,000 Consolidated net income$135,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Assignment of Unrealized Profit Elimination If the intercompany transfer is from subsidiary to parent, the unrealized profit on the upstream sale is eliminated proportionately. Purity’s separate income$100,000 Purity’s share of Southern’s realized income: Southern’s net income$60,000 Less: Unrealized intercompany profit-10,000 Southern’s realized income$50,000 Purity’s proportionate sharex.75 37,500 Consolidated net income$137,500

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Downstream Sale 1.Peerless purchases 80 percent of the stock of Special Foods on December 31, 20X1, at the stock’s book value of $240, On July 1, 20X1, Peerless sells land to Special Foods for $35,000. The land originally cost Peerless $20, During 20X1, Special Foods reports net income of $50,000 and declares dividends of $30, Peerless accounts for its investment in Special Foods using the basic equity method.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Basic Equity Method Downstream Sale (5) Investment in Special Foods Stock40,000 Income from Subsidiary40,000 Record equity-method income (6) Cash24,000 Investment in Special Foods Stock24,000 Record dividend from Special Foods. $50,000 x.80 $30,000 x.80

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary40,000 Dividends Declared(60,000(30,000) Investment in Special Foods256,000 An entry is needed to eliminate the changes in Peerless’s investment account for the year, the income from Special Foods recognized by Peerless, and Peerless’s share of Special Foods’ dividends. Consolidation Workpaper--20X1 )

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary40,000 (7) 40,000 Dividends Declared(60,000(30,000) (7) 24,000 Investment in Special Foods256,000 (7) 16,000 Consolidation Workpaper--20X1 An entry is needed to eliminate the changes in Peerless’s investment account for the year, the income from Special Foods recognized by Peerless, and Peerless’s share of Special Foods’ dividends. )

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is necessary to assign a share of Special Foods’ income to the noncontrolling stockholders and eliminate their share of Special Foods’ dividends. An entry is necessary to assign a share of Special Foods’ income to the noncontrolling stockholders and eliminate their share of Special Foods’ dividends. Income to Noncontrolling Interest Dividends Declared(60,000)(30,000) (7) 24,000 Noncontrolling Interest Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest (8) 10,000(10,000) Dividends Declared(60,000)(30,000) (7) 24,000 (8) 6,000(60,000) Noncontrolling Interest (8) 4,000 Consolidation Workpaper--20X1 An entry is necessary to assign a share of Special Foods’ income to the noncontrolling stockholders and eliminate their share of Special Foods’ dividends. An entry is necessary to assign a share of Special Foods’ income to the noncontrolling stockholders and eliminate their share of Special Foods’ dividends.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, Jan. 1300,000100,000 Investment in Special Foods256,000 (7) 16,000 Common Stock-- Special Foods500,000200,000 Noncontrolling Interest (8) 4,000 An entry is required to eliminate the beginning investment balance. Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, Jan. 1300,000100,000 (9) 100,000300,000 Investment in Special Foods256,000 (7) 16,000 (9) 240,000 Common Stock-- Special Foods500,000200,000 (9) 200,000500,000 Noncontrolling Interest (8) 4,000 (9) 60,00064,000 Consolidation Workpaper--20X1 An entry is required to eliminate the beginning investment balance.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Basic Equity Method Entries—20X1 (11) Investment in Special Foods Stock52,000 Income from Subsidiary52,000 Record equity-method income (12) Cash24,000 Investment in Special Foods Stock24,000 Record dividend from Special Foods. $65,000 x.80 $30,000 x.80

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to eliminate the income from the subsidiary. Income from Subsidiary 52,000 Dividends Declared (60,000)(30,000) Investments in Special Foods Stock268,000 Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to eliminate the income from the subsidiary. Income from Subsidiary 52,000 (13) 52,000 Dividends Declared (60,000)(30,000) (13) 24,000 Investments in Special Foods Stock268,000 (13) 28,000 Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest Dividends Declared (60,000)(30,000) (13) 24,000 Noncontrolling Interest Consolidation Workpaper--20X1 An entry is required to assign income to the noncontrolling interest.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to assign income to the noncontrolling interest. Income to Noncontrolling Interest (14) 10,000(10,000) Dividends Declared (60,000)(30,000) (13) 24,000 (14) 6,000 Noncontrolling Interest (14) 4,000 Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to eliminate the beginning investment balance. Retained Earnings (1/1)300,000100,000 Investment in Special Foods Stock268,000 (13) 28,000 Common Stock500,000200,000 Noncontrolling Interest (14) 4,000 Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to eliminate the beginning investment balance. Retained Earnings (1/1)300,000100,000 (15) 100,000300,000 Investment in Special Foods Stock268,000 (13) 28,000 (15) 240,000 Common Stock500,000200,000 (15) 200,000 Noncontrolling Interest (14) 4,000 (15) 60,00064,000 Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to eliminate the unrealized gain on the intercompany sale of the land. An entry is needed to eliminate the unrealized gain on the intercompany sale of the land. Consolidation Workpaper--20X1 Gain on Sale of Land15,000 Land155,00075,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Gain on Sale of Land15,000 (16) 15,000 Land155,00075,000 (16) 15,000215,000 Consolidation Workpaper--20X1 An entry is needed to eliminate the unrealized gain on the intercompany sale of the land. An entry is needed to eliminate the unrealized gain on the intercompany sale of the land.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidated Net Income--20X1 Peerless’s separate income$155,000 Less: Unrealized intercompany profit on downstream land sale -15,000 Peerless’s separate realized income$140,000 Peerless’s share of Special Food’s income: Special Foods’ net income$50,000 Peerless’s proportionate sharex.80 40,000 Consolidated net income, 20X1$180,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Downstream Sale Peerless Products Peerless Products Consolidated Entity December 31, 20W8 Purchase equipment for $9,000 Special Foods Special Foods

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidated Entity Peerless Products Peerless Products Special Foods Special Foods December 31, 20X1 Intercorporate transfer of equipment $7,000 Special Foods (Entry 20) Dec. 31 Equipment7,000 Cash7,000 Record purchase of equipment. Dec. 31 Equipment7,000 Cash7,000 Record purchase of equipment. Downstream Sale Peerless Products (Entry 21) Dec. 31 Depreciation Expense900 Accumulated Depreciation 900 Record 20X1 depreciation expense on equipment sold. Dec. 31 Depreciation Expense900 Accumulated Depreciation 900 Record 20X1 depreciation expense on equipment sold.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Downstream Sale Peerless records the sale of the equipment at the end of 20X1 and recognizes the gain on the sale: Peerless Products (Entry 22) Dec. 31 Cash7,000 Accumulated Depreciation 2,700 Equipment9,000 Gain on Sale of Equipment700 Record sale of equipment. Dec. 31 Cash7,000 Accumulated Depreciation 2,700 Equipment9,000 Gain on Sale of Equipment700 Record sale of equipment.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Downstream Sale Peerless records the normal basic equity-method entries to recognize it share of Special Foods’ income and dividends for 20X1: Peerless Products (Entry 23) Dec. 31 Investment in Special Foods Stock40,000 Income from Subsidiary40,000 Record equity-method income. Dec. 31 Investment in Special Foods Stock40,000 Income from Subsidiary40,000 Record equity-method income. $50,000 x.80 Peerless Products (Entry 24) Dec. 31 Cash24,000 Invest. in Special Foods Stock 24,000 Record dividends from Special Foods. Dec. 31 Cash24,000 Invest. in Special Foods Stock 24,000 Record dividends from Special Foods. $30,000 x.80

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary40,000 Dividends Declared(60,000(30,000) Investment in Special Foods256,000 An entry is needed to eliminate the income and dividends from Special Foods recognized by Peerless and the change in the investment account for the year. An entry is needed to eliminate the income and dividends from Special Foods recognized by Peerless and the change in the investment account for the year. Consolidation Workpaper--20X1 )

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary40,000 (25) 40,000 Dividends Declared(60,000(30,000) (25) 24,000 Investment in Special Foods256,000 (25) 16,000 Consolidation Workpaper--20X1 An entry is needed to eliminate the income and dividends from Special Foods recognized by Peerless and the change in the investment account for the year. An entry is needed to eliminate the income and dividends from Special Foods recognized by Peerless and the change in the investment account for the year. )

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Non- controlling Interest Dividends Declared(60,000)(30,000) (25) 24,000 Noncontrolling Interest An entry is required to assign income to the noncontrolling interest. An entry is required to assign income to the noncontrolling interest. Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Non- controlling Interest (26) 10,000(10,000) Dividends Declared(60,000)(30,000) (25) 24,000 (26) 6,000(60,000) Noncontrolling Interest (26) 4,000 Consolidation Workpaper--20X1 An entry is required to assign income to the noncontrolling interest. An entry is required to assign income to the noncontrolling interest.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings (1/1)300,000100,000 Investment in Special Foods Stock256,000 (25) 16,000 Common Stock500,000200,000 Noncontrolling Interest (26) 4,000 Consolidation Workpaper--20X1 The stockholders’ equity accounts of Special Foods and the investment account as of the beginning of the year need eliminating.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings (1/1)300,000100,000 (27) 100,000300,000 Investment in Special Foods Stock256,000 (25) 16,000 (27) 240,000 Common Stock500,000200,000 (27) 200,000500,000 Noncontrolling Interest (26) 4,000 (27) 60,00064,000 Consolidation Workpaper--20X1 The stockholders’ equity accounts of Special Foods and the investment account as of the beginning of the year need eliminating.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating. Gain on Sale of Equipment700 Buildings and Equipment791,000607,000 Accumulated Depreciation447,300320,000 Consolidation Workpaper--20X1

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Gain on Sale of Equipment700 (28) 700 Buildings and Equipment791,000607,000 (28) 2,0001,400,000 Accumulated Depreciation447,300320,000 (28) 2,700770,000 Consolidation Workpaper--20X1 The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to eliminate income form the subsidiary. Consolidation Workpaper--20X2 Income from Subsidiary 59,200 Dividends Declared (60,000)(40,000) Investments in Special Foods Stock283,200

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is needed to eliminate income form the subsidiary. Consolidation Workpaper--20X2 Income from Subsidiary 59,200 (32) 59,200 Dividends Declared (60,000)(40,000) (32) 32,000 Investments in Special Foods Stock283,200 (32) 27,200

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to assign income to the noncontrolling interest. Income to Noncontrolling Interest Dividends Declared (60,000)(40,000) (32) 32,000 Noncontrolling Interest

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to assign income to the noncontrolling interest. Income to Noncontrolling Interest (33) 14,800(14,800) Dividends Declared (60,000)(40,000) (32) 32,000 (33) 8,000(60,000) Noncontrolling Interest (33) 6,800

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings (1/1)420,700120,000 Investment in Special Foods Stock283,200 (32) 27,200 Common Stock500,000200,000 Noncontrolling Interest (33) 6,800 The stockholders’ equity accounts of Special Foods and the investment account as of the beginning of the year need eliminating.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings (1/1)420,700120,000 (34) 120,000 Investment in Special Foods Stock283,200 (32) 27,200 (34) 256,000 Common Stock500,000200,000 (34) 200,000500,000 Noncontrolling Interest (33) 6,800 (34) 4,00070,800 The stockholders’ equity accounts of Special Foods and the investment account as of the beginning of the year need eliminating.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating. Retained Earnings (1/1)420,700120,000 (34) 120,000 Buildings and Equipment791,000607,000 Accumulated Depreciation496,400341,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating. Retained Earnings (1/1)420,700120,000 (34) 120,000 (35) ,000 Buildings and Equipment791,000607,000 (35) 2,000 Accumulated Depreciation496,400341,000 (35) 2,700

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to adjust depreciation for realization of the intercompany gain. Depreciation and Amortization49,10021,000 Accumulated Depreciation496,400341,000 (35) 2,700

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated An entry is required to adjust depreciation for realization of the intercompany gain. Depreciation and Amortization49,10021,000 (36) 10070,000 Accumulated Depreciation496,400341,000 (36) 100 (35) 2,700840,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Consolidated Net Income--20X2 Peerless’s separate income$160,900 Partial realization of intercompany gain on downstream sale of equipment 100 Peerless’s separate realized income$161,000 Peerless’s share of Special Food’s income: Special Foods’ net income$74,000 Peerless’s proportionate sharex.80 59,200 Consolidated net income, 20X2$220,200

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Chapter Six The End