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Upstream and Downstream Sales & Multiple Stock Purchases

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Upstream and Downstream Sales

Pace Company owns 85% of the outstanding common stock of Sand Company and all the outstanding common stock of Star Company. During 2012, the affiliates engaged in intercompany sales as follows (see attached Excel file).

Please show all work for the following:

A. Prepare in general journal form the workpaper entries necessary to eliminate intercompany sales and intercompany profit in the December 31, 2012, consolidated financial statements workpaper.

B. Calculate the balance to be reported in the consolidated income statement for the following line items:

1. Consolidated income
2. Non-controlling interest in consolidated income
3. Controlling interest in consolidated income

Problem 7-1

Workpaper Journal Entries and Income Statement Balances

Powell Company owns 80% of the outstanding common stock of Sullivan Company. On June 30, 2011, Sullivan Company sold equipment to Powell Company for $500,000. The equipment cost Sullivan Company $780,000 and had accumulated depreciation of $400,000 on the date of the sale. The management of Powell Company estimated that the equipment had a remaining useful life of four years from June 30, 2011. In 2012, Powell Company reported $300,000 and Sullivan Company reported $200,000 in net income from their independent operations (including sales to affiliates but excluding dividend or equity income from subsidiary).

Please show all work for the following:

A. Prepare in general journal form the workpaper entries necessary because of the intercompany sale of equipment in:

(1) The consolidated financial statements workpaper for the year ended December 31, 2011.

(2) The consolidated financial statements workpaper for the year ended December 31, 2012.

B. Calculate the balances to be reported in the consolidated income statement for the year ended December 31, 2012, for the following items:
(1) Consolidated income.
(2) Non-controlling interest in consolidated income.
(3) Controlling interest in consolidated income.

Problem 8-1

Multiple Stock Purchases

Sarko Company had 300,000 shares of $10 par value common stock outstanding at all times, and retained earnings balances as indicated here (see attached Excel file).

Pelzer Company acquired Sarko Company stock through open-market purchases as follows (see attached Excel file):

Sarko Company declared no dividends during this period. The fair values of Sarko Company's assets and liabilities were approximately equal to their book values throughout this period (2010 through 2012). Pelzer Company uses the cost method.

Please show all work for the following:

A. Prepare a schedule to compare investment cost with the book value of equity acquired.

B. Prepare elimination entries for the preparation of a consolidated statements workpaper on December 31, 2012.

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Solution Summary

This solution is comprised of a detailed step-by-step explanation of three advanced accounting concepts: elimination of unrealized profit on intercompany sales of inventory, elimination of unrealized gains or losses on intercompany sales of property and equipment, and changes in ownership interest.

The first problem illustrates how to determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. It also helps to understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position.

The second problem shows how to compare the eliminating entries when the selling affiliate is a subsidiary versus when the selling affiliate is the parent company. It illustrates how to compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. In addition, it shows how to compute consolidated net income considering the effects of intercompany sales of depreciable assets.

The third problem demonstrates the process needed when the parent acquires subsidiary shares through multiple open market purchases.

This solution includes definitions and attached MS Word documents include journal entries, schedules, financial statements, and required calculations.

Solution Preview

The following information that follows will briefly explain the three topics. Also attached are three documents which show how each of the problems are solved. The documents attached are in MS Word titled: Pace Co Problem 6-4, Powell Co Problem 7-1 and Sarko Co Problem 8-1. Thank you for using BrainMass.com. Have a great day!


Downstream sales: Sales from a parent company to one or more of its subsidiaries.
Upstream sales: Sales from subsidiaries to the parent company.

The objective of eliminating the effects of intercompany sales of merchandise is to present consolidated balances for sales, cost of sales, and inventory as if the intercompany sale had never occurred. As a result, the recognition of income or loss on the intercompany transaction, including its allocation between the non-controlling and controlling interests, is deferred until the profit or loss is confirmed by sales of the merchandise to non-affiliates.

In order to concentrate on intercompany profit eliminations and adjustments, reporting complications relating to accounting for the difference between implied and book value are avoided in all illustrations by assuming that all acquisitions are made at the book value of the acquired interest in net assets and that the book value of the subsidiary company's net assets equals their fair value on the date the parent company's interest is acquired. It is also assumed that the affiliates file consolidated income tax returns. If the affiliates file separate tax returns, deferred tax ...

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