Chapter 8 Consolidated Financial statements: Intercompany Transactions Objectives of the Chapter



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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • The following is the working paper for consolidated financial statements for year 2002 of Post and its 95%-partially owned subsidiary:

Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Income Statement
  • Post Corporation
  • Sage Company
  • Eliminations Inc.(Dec.)
  • Consolidated
  • Revenue:
  • Net Sales
  • 5,900,000
  • 1,400,000
  • 7,300,000
  • 150,000
  • (b)(150,000)
  • Intercompany
  • interest revenue
  • 38,576
  • (e) (38,576)
  • Intercompany
  • investment income
  • 91,200
  • (a) (91,200)
  • Intercompany
  • revenue(expenses)
  • 14,000
  • (14,000)
  • 6,043,776
  • 1,536,000
  • (279,776)
  • 7,300,000

Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Contd.
  • Income Statement
  • (contd.)
  • Post
  • Corporation
  • Sage Company
  • Eliminations Inc.(Dec.)
  • Consolidated
  • Costs and expenses:
  • (a) 17,000
  • (b) (26,000)
  • Cost of goods sold
  • 4,300,000
  • 950,000
  • (d) (4,760)
  • 5,236,240
  • Intercompany cost of
  • goods sold
  • 120,000
  • (b)(120,000)
  • Operating expenses
  • 986,058
  • 217,978
  • (a) 2,000
  • 1,206,036
  • 33,813
  • (e) (33,813)
  • Interest expense
  • 51,518
  • 22,542
  • 74,060
  • Income taxes expense
  • 246,000
  • 76,667
  • 322,667
  • Minority interest in net
  • income of subsidiary
  • (f) 4,600
  • 4,600
  • Total costs and expenses
  • 5,583,576
  • 1,421,000
  • *(160,973)
  • 6,843,603
  • Net income
  • 460,200
  • 115,000
  • (118,803)
  • 456,397

Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Contd.
  • Post Corporation
  • Sage Company
  • Eliminations Inc.(Dec.)
  • Consolidated
  • Retained earnings,
  • beginning of year
  • 1,508,350
  • 439,000
  • (a) (400,050)
  • (b) (7,600)
  • (c) (50,000)
  • (d) (22,610)
  • (e) 23,371
  • 1,490,461
  • Net income
  • 460,200
  • 115,000
  • (118,803)
  • 456,397
  • Subtotal
  • 1,968,550
  • 554,000
  • (575,692)
  • 1,946,858
  • 158,550
  • 60,000
  • (a) (60,000)*
  • 158,550
  • Retained earnings,
  • end of year
  • 1,810,000
  • 494,000
  • (515,692)
  • 1,788,308
  • * A decrease in dividends and an increase in retained earnings.

Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Contd.
  • Balance Sheet/Assets
  • Post Corporation
  • Sage Company
  • Eliminations Inc.(Dec.)
  • Consolidated
  • Intercomapny receivables (payables)
  • (3,500)
  • 3,500
  • Inventories
  • 950,000
  • 500,000
  • (b) (12,000)
  • 1,438,000
  • Other current assets
  • 760,000
  • 428,992
  • 1,188,992
  • 1,262,550
  • (a)(1,262,550)
  • 265,751
  • (e) (265,751) (a) 148,000
  • Plant assets (net)
  • 3,700,000
  • 1,300,000
  • (d) (19,040)
  • 5,128,960
  • Land(for building site)
  • 175,000
  • (c) (50,000)
  • 125,000
  • Leasehold (net)
  • (a) 15,000
  • 15,000
  • Goodwill (net)
  • 85,000
  • (a) 35,150
  • 120,150
  • Total assets
  • 7,019,801
  • 2,407,492
  • (1,411,191)
  • 8,016,102

Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Contd.
  • Balance Sheet/Assets
  • Post Corporation
  • Sage Company
  • Eliminations Inc.(Dec.)
  • Consolidated
  • Intercomapny receivables (payables)
  • (3,500)
  • 3,500
  • Inventories
  • 950,000
  • 500,000
  • (b) (12,000)
  • 1,438,000
  • Other current assets
  • 760,000
  • 428,992
  • 1,188,992
  • Investment in Sage
  • Company stock
  • 1,262,550
  • (a)(1,262,550)
  • Investment in Sage
  • Company bonds
  • 265,751
  • (e) (265,751) (a) 148,000
  • Plant assets (net)
  • 3,700,000
  • 1,300,000
  • (d) (19,040)
  • 5,128,960
  • Land(for building site)
  • 175,000
  • (c) (50,000)
  • 125,000
  • Leasehold (net)
  • (a) 15,000
  • 15,000
  • Goodwill (net)
  • 85,000
  • (a) 35,150
  • 120,150
  • Total assets
  • 7,019,801
  • 2,407,492
  • (1,411,191)
  • 8,016,102

Working Paper Elimination (for year 2002)

  • POST CORPORATION AND SUBSIDIARY
  • Working Paper Eliminations
  • December 31, 2002
  • (a)Common Stock-Sage
  • 400,000
  • 235,000
  • Retained Earnings-Sage($439,000-$38,950)
  • 400,050
  • Retained Earnings of Subsidiary-Post
  • 38,950
  • Intercompany Investment Income-Post
  • 91,200
  • Plant Assets(net)-Sage($162,000-$14,000)
  • 148,000
  • Leasehold(net)-Sage ($20,000-$5,000)
  • 15,000
  • Goodwill (net)-Post($36,100-$950)
  • 35,150
  • Cost of Goods Sold-Sage
  • 17,000
  • Operating Expenses-Sage
  • 2,000

Working Paper Elimination (for year 2002) (contd.)

  • Contd.
  • 1,262,550
  • Dividends Declared-Sage
  • 60,000
  • Minority Interest in Net Assets of
  • Subsidiary
  • 59,800

Working Paper Elimination (for year 2002) (contd.)

  • The above elimination is to carry out the following:
  • (1) Eliminate intercompany investment and equity accounts of subsidiary at beginning of year,and subsidiary dividends.
  • (2) Provide for Year 2002 depreciation and amortization on differences between current fair values and carrying amounts of Sage's identifiable net assets as follows:

Working Paper Elimination (for year 2002) (contd.)

  • Cost of Goods Sold
  • Operating Expenses
  • $ 2,000
  • $ 2,000
  • Machinery depreciation
  • 10,000
  • Leasehold amortization
  • 5,000
  • $ 2,000
  • Totals
  • $ 17,000
  • $ 2,000

Working Paper Elimination (for year 2002) (contd.)

  • (3) Allocate unamortized differences between combination date current fair values and carrying amounts to appropriate assets.
  • (4) Establish minority interest in net assets of subsidiary at beginning of year,excluding intercompany profits effects ($62,800), less minority interest in dividends declared by subsidiary during year ($60,000 x 0.05 = $3,000).
  • (Income tax effects are disregarded.)

Working Paper Elimination (for year 2002) (contd.)

  • (b) Retained earnings-Sage
  • 76,000
  • 400
  • Intercompany Sales-Sage
  • 150,000
  • Intercompany Cost
  • of Goods Sold-Sage
  • 120,000
  • Cost of Goods Sold-
  • Post
  • 26,000
  • 12,000
  • To eliminate intercompany sales, cost of goods sold, and unrealized profit in inventories.(Income tax effects are disregarded.)

Working Paper Elimination (for year 2002) (contd.)

  • (c)Retained Earnings- Post
  • 50,000
  • Land-Sage
  • 50,000
  • To eliminate unrealized intercompany gain in land.(Income tax effects are disregarded.)
  • 22,610
  • Minority Interest in Net Assets of
  • Subsidiary
  • 1,190
  • Accumulated Depreciation-Post
  • 4,760
  • Machinery- Post
  • 23,800
  • 4,760
  • To eliminate unrealized intercompany gain in machinery and in related depreciation (Income tax effects are disregarded.)

Working Paper Elimination (for year 2002) (contd.)

  • (e)Intercompany Interest Revenue- Post
  • 38,576
  • Intercompany Bonds Payable- Sage
  • 300,000
  • Discount on Intercompany
  • Bonds Payable-Sage
  • 14,411
  • Investment in Sage
  • Company Bonds-Post
  • 265,715
  • Intercompany Interest
  • Expense-Sage
  • 33,813
  • Retained Earnings- Sage
  • 23,371
  • Minority Interest in Net
  • Assets of Subsidiary
  • 1,230
  • To eliminate subsidiary’s bonds owned by parent company, and related interest revenue and expense; and to increase subsidiary’s beginning retained earnings by amount of unamortized realized gain on the extinguishments of the bonds.(Income tax effects are disregarded.)

Working Paper Elimination (for year 2002) (contd.)

  • 4,600
  • Minority Interest in Net
  • Assets of Subsidiary
  • 4,600
  • To establish minority interest in subsidiary’s adjusted net income for Year 2002 as follows:
  • Net income of subsidiary
  • $ 115,000
  • Adjustments for working paper
  • eliminations:
  • (a) ($17,000+$2,000)
  • (19,000)
  • (b) ($150,000-$120,000-$26,000)
  • (4,000)
  • 4,760
  • (e) ($38,576-$33,813)
  • (4,763)
  • Adjusted net income of subsidiary
  • $ 91,997
  • Minority interest share ($91,997 x 0.05)
  • $ 4,600
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