CH 06

Slide 6-1
6
Elimination of Unrealized Profit on Intercompany Sales of Inventory
Advanced Accounting, Fourth Edition

Slide 6-2
Learning Objectives
1. 2. 3. Describe the financial reporting objectives for intercompany sales of inventory. Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Distinguish between upstream and downstream sales of inventory.
4.
5.
Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders.
Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Discuss the treatment of intercompany profit earned prior to the parent subsidiary affiliation.
6.
7.
Slide 6-3
Upstream and Downstream Sales of Inventory

Company P
P sells inventory Downstream S2 sells inventory Upstream
Company S1
S1 sells inventory Horizontal Consolidated Entity
Company S2
Profit (loss) that has not been realized through subsequent sales to third parties must be eliminated in the preparation of consolidated financial statements.
Slide 6-4
LO 4 Upstream and downstream sales.
Effects of Intercompany Sales of Merchandise on the Determination of Consolidated Balances

The financial reporting objectives are:
Consolidated sales include only sales with parties outside the affiliated group. Consolidated cost of sales includes only the cost to the affiliated group of goods that have been sold to parties outside the affiliated group. Consolidated inventory on the balance sheet is recorded at its cost to the affiliated group.
Objective is to eliminate the effects of intercompany sales as if they had never occurred.
Slide 6-5
LO 1 Financial reporting objectives for intercompany sales.
Intercompany Sales of Merchandise
Downstream Sales
Determination of Consolidated Sales, Cost of Sales, and Inventory Balances Assuming Downstream Sales
E6-7: (Downstream Sales-variation) Perkins Company owns 85% of Sheraton Company. Perkins Company sells merchandise to
Sheraton Company at 20% above cost. During 2011 and 2012, such sales amounted to $450,000 and $486,000, respectively. At the end of each year, Sheraton Company had sold all of inventory purchased from Perkins to third parties. Required: Prepare the workpaper entries necessary to eliminate the effects of the intercompany sales for 2011.
Slide 6-6
LO 6 Consolidated workpapers for downstream sales.

E6-7: Summary of 2011 Intercompany Sales
Total 450,000 375,000 75,000 (COGS) Resold $ 450,000 375,000 $ 75,000
Downstream Sales
Intercompany Sales Intercompany COGS Gross profit
$ $
(Inventory) On Hand $ $ -
1. The Total column represents the Sales and COGS booked by
Perkins to record the sale to Sheraton. The Sales amount also represents the cost of the inventory recorded by Sheraton.
2. The Resold column represents intercompany inventory that was
resold to third parties. Portions resold are recorded in COGS.

affiliate group.
3. On Hand represents intercompany inventory still on hand in the

Slide 6-7

Total 450,000 375,000 75,000 (COGS) Resold $ 450,000 375,000 $ 75,000
Downstream Sales
Intercompany Sales Intercompany COGS Gross profit
$ $
(Inventory) On Hand $ $ -
Prepare the workpaper entry to eliminate intercompany sales for 2011.

Sales Cost of Goods Sold (Purchases) 450,000 450,000
To eliminate intercompany sales of merchandise
Slide 6-8
Downstream Sales
Determination of Consolidated Sales, Cost of Sales, and Inventory Balances Assuming Downstream Sales
E6-7: (Downstream Sales) Perkins Company owns 85% of Sheraton Company. Perkins Company sells merchandise to Sheraton Company at 20% above cost. During 2011 and 2012, such sales amounted to $450,000 and $486,000, respectively. At the end of each year, Sheraton Company had in its inventory one-third of the amount of goods purchased from Perkins during that year.
Required: Prepare the workpaper entries necessary to eliminate the effects of the intercompany sales for 2011 and 2012.
Slide 6-9

2011 Intercompany Sales Intercompany COGS Gross profit $ $ (COGS) Total Resold 450,000 $ 300,000 375,000 250,000 75,000 $ 50,000
Downstream Sales
(Inventory) On Hand $ 150,000 125,000 $ 25,000
Prepare the workpaper entry to eliminate intercompany sales for 2011.

Sales Cost of Goods Sold (purchases) Cost of Goods Sold (ending inventory) Inventory
Slide 6-10
450,000 450,000
25,000
25,000
To eliminate intercompany sales and defer unrealized profit


E6-7:
2011 Intercompany Sales Intercompany COGS Gross profit $ $ Total 450,000 375,000 75,000 (COGS) Resold $ 300,000 250,000 $ 50,000
Downstream Sales
(Inventory) On Hand $ 150,000 125,000 $ 25,000
Alternate View
Workpaper entry to eliminate intercompany sales for 2008.

Sales 1 Cost of Goods Sold 1 Cost of Goods Sold 2 Inventory 3
1. 2. 3.
Slide 6-11
450,000
375,000 50,000 25,000
Original Sales and COGS recorded by Perkins (parent) is reversed. COGS overstated by Sheraton on resale of goods to third parties. Inventory on hand is overstated on Sheratons books by $25,000 unrealized profit.
Downstream Sales
E6-7: Prepare the workpaper entry to eliminate intercompany sales for 2012.
2011 Unrealized Profit in Inventory
Total Intercompany Sales Intercompany COGS Gross profit (COGS) Resold $ 150,000 125,000 $ 25,000 (Inventory) On Hand
Cost or Partial Equity Method * Retained earnings Cost of Goods Sold (beg. inventory)
25,000
25,000
To realize the gross profit in inventory deferred in the prior period.

* If the complete equity method is used, the debit is to the Investment account.
Slide 6-12
Downstream Sales
E6-7: Prepare the workpaper entry to eliminate intercompany sales for 2012.
2012 Intercompany Sales
Intercompany Sales Intercompany COGS Gross profit $ $ Total 486,000 405,000 81,000 (COGS) Resold $ 324,000 270,000 $ 54,000 (Inventory) On Hand $ 162,000 135,000 $ 27,000
Sales Cost of Goods Sold (purchases) Cost of Goods Sold (ending inventory) Inventory
Slide 6-13
486,000 486,000
27,000
27,000


Determination of Amount of Intercompany Profit
Gross profit may be stated either as a percentage of sales or as a percentage of cost.
Inventory Pricing Adjustments

The amount of intercompany profit subject to elimination should be reduced to the extent that the related goods have been written down by the purchasing affiliate.
Slide 6-14
LO 2 Determining the amount of intercompany profit.

Determination of Proportion of Intercompany Profit to Be Eliminated
The amount of intercompany profit or loss to be eliminated . . . is not affected by the existence of a minority [noncontrolling] interest.
The complete elimination of the intercompany profit or loss is consistent with the underlying assumption that consolidated statements represent the financial position and operating results of a single business enterprise. [Accounting Research Bulletin (ARB) No. 51, paragraph 14] [ASC 810-10-45-6]
Slide 6-15
LO 3 Eliminating 100% of intercompany profit.
Cost Method: Consolidated Statements WorkpaperUpstream Sales

Determination of the Noncontrolling Interest in Combined IncomeUpstream or Horizontal Sales
Modification of the calculation of the noncontrolling interest is applicable only when the subsidiary is the selling affiliate (upstream or horizontal sales). Where the parent company is the selling affiliate (downstream sale), no adjustment is necessary in the calculation of the noncontrolling interest in consolidated net income.
Slide 6-16
LO 5 Noncontrolling interest (NCI) for upstream sales.
Cost Method: Consolidated Workpaper
Upstream Sales
P6-7: Paque Corporation owns 90% of the common stock of Segal Company. The stock was purchased for $810,000 on January 1, 2009, when Segal Companys retained earnings were $150,000. The January 1, 2013, inventory of Paque Corporation includes $45,000 of profit recorded by Segal Company on 2012 sales. During 2013, Segal Company made intercompany sales of $300,000 with a markup of 20% of selling price. The ending inventory of Paque Corporation includes goods purchased in 2013 from Segal Company for $75,000.
Required: Prepare the worksheet entries and the consolidated statements workpaper for the year ended December 31, 2013.
Slide 6-17
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
Upstream Sales
P6-7: Prepare the worksheet entries for Dec. 31, 2013.
Acquisition date retained earnings - Segal Retained earnings 1/1/13 - Segal Increase Ownership percentage
$ 150,000 180,000 30,000 90% $ 27,000
1. Investment in Segal Beg. Retained Earnings - Pague Co.
27,000 27,000
To establish reciprocity/convert to equity as of 1/1/2013.
Slide 6-18
Upstream Sales

Intercompany Sales Intercompany COGS Gross profit $ $ (COGS) (Inventory) Total Resold On Hand 300,000 $ 225,000 $ 75,000 240,000 180,000 60,000 60,000 $ 45,000 $ 15,000
2. Sales Cost of Goods Sold (purchases) 3. Cost of Good Sold (ending inventory) Inventory
300,000 300,000
15,000
15,000

Slide 6-19
Upstream Sales

Total Intercompany Sales Intercompany COGS Gross profit (COGS) Resold (Inventory) On Hand
45,000
4. Retained Earnings ($45,000 x 90%) Noncontrolling Interest ($45,000 x 10%) Cost of Goods Sold (beg. inventory)
40,500 4,500 45,000

Slide 6-20
Upstream Sales
P6-7: Prepare the worksheet entries for Dec. 31, 2013. 5. Dividend Income
($60,000 x 80%)
54,000 54,000
Dividends Declared
To eliminate intercompany dividends
6. Beg. Retained Earnings - Segal Common Stock - Segal
180,000 750,000
Investment in Segal
Noncontrolling Interest
To eliminate investment account and create NCI account
Slide 6-21
837,000
93,000

P6-7:
Income Statement Sales Dividend income Total revenue Cost of goods sold Other expenses Total cost and expense Net income Noncontrolling interest Net income Paque $ 1,650,000 54,000 1,704,000 1,290,000 310,500 1,600,500 103,500 $ 103,500 $ Segal $ 795,000 795,000 517,500 206,250 723,750 71,250 71,250 $ 369,000 $ 345,000 $ Eliminations Debit Credit (2) 300,000 54,000 (5) 15,000
(3)
Upstream Sales
Consolidated Balances $ 2,145,000 2,145,000 1,477,500 516,750 1,994,250 150,750 (10,125) 140,625
NCI
300,000 45,000
(2) (4)
10,125 10,125
Retained Earnings Statement Retained earnings, 1/1 Paque Segal Net income Dividends declared Retained earnings, 12/31 $
811,500
180,000 103,500 71,250 (150,000) (60,000) 765,000 $ 191,250 $ 589,500
40,500 180,000 369,000
(4) (6)
27,000
(1)
345,000 54,000 $ 426,000
(5)
10,125 (6,000) 4,125 $
798,000 140,625 (150,000) 788,625
NCI in Consolidated Income = 10% ($71,250 + $45,000 $15,000) = $10,125

Slide 6-22

P6-7:
Balance Sheet Cash Accounts receivable Inventory Investment in Segal Other assets Total assets Paque $ 93,000 319,500 210,000 810,000 750,000 $ 2,182,500 105,000 112,500 1,200,000 765,000 $ Segal 75,000 168,750 172,500 630,000 1,046,250 45,000 60,000 750,000 191,250 Eliminations Debit Credit NCI
Upstream Sales
27,000 $ $
(1)
15,000 837,000
(3) (6)
Accounts payable $ Other current liabilities Common stock Retained earnings NCI in net assets Total liab. & equity $
750,000 589,500 4,500 $ 1,371,000
(6) (4)
426,000 93,000
(6)
4,125 88,500 92,625
Consolidated Balances $ 168,000 488,250 367,500 1,380,000 $ 2,403,750 $ 150,000 172,500 1,200,000 788,625 92,625 2,403,750
2,182,500
1,046,250
$ 1,371,000
Slide 6-23
Cost MethodAnalysis of Consolidated Net Income and Consolidated Retained Earnings

Consolidated Net Income
Consolidated net income is the parent companys income from its independent operations that has been realized in transactions with third parties
plus (minus) subsidiary income (loss) that has been realized in transactions with third parties plus or minus adjustments for the period relating to the depreciation, amortization, and impairment of differences between implied and book values.
Slide 6-24
Cost Method: Consolidated Net Income
Upstream Sales
P6-7: Prepare a calculation of Paques share of Segals income.

Reported income of Segal Less: amortization of difference between implied and book value Less: unrealized profit on 2013 sales to Paque 0 (15,000) 45,000 $ 101,250 $ 71,250
Plus: profit on prior year's sales to Paque realized

in transactions with third parties in 2013 Subsidiary income included in consolidated income
Paque's share of Segals income ($101,250 x 90%)

NCI share of Segals income ($101,250 x 10%) Subsidiary income included in consolidated income
Slide 6-25
$ 91,125
10,125 $ 101,250
Cost Method: Consolidated Net Income
Upstream Sales
P6-7: Prepare a calculation of CI in Consolidated Income.

Paque's net income Less: subsidiary dividend income Paque's net income from its independent operations Less: unrealized profit on 2013 sales to Segal $103,500 (54,000) 49,500 0 0 49,500 91,125 $140,625
Plus: profit on prior year's sales to Segal realized

in transactions with third parties in 2013 Paque's income from independent operations that has been realized in transactions with third parties Paque's share of Segals income (previous slide) Controlling interest in Consolidated net income
Slide 6-26
Cost MethodAnalysis of Consolidated Net Income and Consolidated Retained Earnings

Consolidated Retained Earnings
Consolidated Consolidated retained earnings is the parents cost basis retained earnings that has been realized in transactions with third parties
plus (minus) the parents share of the increase (decrease) in subsidiary retained earnings that has been realized in transactions with third parties from the date of acquisition to the current date plus (minus) the cumulative effect of adjustments to date relating to the amortization, depreciation, and impairment of differences between implied and book values.
Slide 6-27
Consolidated Statements Workpaper Partial Equity Method

Reminder:
The balances reported by the parent company in income,
retained earnings, and the investment account differ depending on the method used by the parent company to
record its investment.

However, the method used by the parent company to record its investment has no effect on the consolidated
balances.
Slide 6-28
LO 6 Consolidated workpapers partial equity method.
Partial Equity Method: Workpaper
Upstream Sales
P6-13: (Note: This is the same problem as Problem 6-7, but assuming the use of the partial equity method.) Paque Corporation owns 90% of the common stock of Segal Company. The stock was purchased for $810,000 on January 1, 2009, when Segal Companys retained earnings were $150,000. The January 1, 2013, inventory of Paque Corporation includes $45,000 of profit recorded by Segal Company on 2012 sales. During 2013, Segal Company made intercompany sales of $300,000 with a markup of 20% of selling price. The ending inventory of Paque Corporation includes goods purchased in 2013 from Segal Company for $75,000. Paque Corporation uses the partial equity method to record its investment in Segal Company.
Slide 6-29
Upstream Sales
P6-13: Prepare the worksheet entries for Dec. 31, 2013. 1. Equity in Subsidiary Income Investment in Segal Company Dividends declared ($60,000
x 90%)
64,125 10,125 54,000
To reverse the effect of parent entries for subsidiary dividends and income
Slide 6-30
Upstream Sales

2. Sales Cost of Goods Sold (purchases) 3. Cost of Goods Sold (end. inventory) Inventory
300,000 300,000
15,000
15,000

Slide 6-31
Upstream Sales

45,000
4. Retained Earnings ($45,000 x 90%) Noncontrolling Interest ($45,000 x 10%) Cost of Goods Sold (beg. inventory)
40,500 4,500 45,000

Slide 6-32
Upstream Sales

Investment in Segal Noncontrolling Interest
180,000 750,000 837,000 93,000
Slide 6-33

P6-13:
Income Statement Sales Equity in Segal income Total revenue Cost of goods sold Other expenses Total cost and expense Net income Noncontrolling interest Net income Paque $ 1,650,000 64,125 1,714,125 1,290,000 310,500 1,600,500 113,625 $ 113,625 $ Segal $ 795,000 795,000 517,500 206,250 723,750 71,250 71,250 $ 379,125 $ 345,000 $ Eliminations Debit Credit (2) 300,000 64,125 (1) 15,000
(3)
Upstream Sales
NCI
300,000 45,000
(2) (4)
10,125 10,125
838,500
180,000 113,625 71,250 (150,000) (60,000) 802,125 $ 191,250 $ 599,625
40,500 180,000 379,125
(4) (5)
345,000 54,000 $ 399,000
(1)
10,125 (6,000) 4,125 $
798,000 140,625 (150,000) 788,625

Slide 6-34

P6-13:
Balance Sheet Cash Accounts receivable Inventory Investment in Segal Other assets Total assets Paque $ 93,000 319,500 210,000 847,125 750,000 2,219,625 105,000 112,500 1,200,000 802,125 $ Segal 75,000 168,750 172,500 Eliminations Debit Credit
(3) (5) (1)
Upstream Sales
NCI
15,000 837,000 10,125
Consolidated Balances $ 168,000 488,250 367,500 1,380,000 2,403,750 150,000 172,500 1,200,000 788,625 92,625 2,403,750
$ $
630,000 1,046,250 45,000 60,000 750,000 191,250
$ $ 750,000 599,625 4,500 $ 1,354,125

(5) (4)
399,000 93,000
(5)
4,125 88,500 92,625 $
2,219,625
1,046,250
$ 1,354,125
Slide 6-35
Partial Equity MethodAnalysis of Consolidated Net Income and Consolidated Retained Earnings
Consolidated Net Income
Same as Cost Method
Consolidated net income is the parents income from its independent operations that has been realized in transactions with third parties
plus (minus) subsidiary income (loss) that has been realized in transactions with third parties plus or minus adjustments for the period relating to the depreciation, amortization, and impairment of differences between implied and book values.
Slide 6-36
Partial Equity MethodAnalysis of Consolidated Net Income and Consolidated Retained Earnings
When the parent uses the partial equity method, the parents share of subsidiary income since acquisition is already included in the parents reported retained earnings.
Consequently, consolidated retained earnings is calculated as the parents recorded partial equity basis retained earnings that has been realized in transactions with third parties plus or minus the cumulative effect of the adjustments to date relating to the depreciation, amortization, and impairment of differences between implied and book values.
Slide 6-37
Partial Equity
P6-13: Calculate consolidated retained earnings on Dec. 31, 2013.

Paque's Retained Earnings on 12/31/13 $ 802,125
Unrealized profit on downstream sales

Unrealized profit on upstream sales ($15,000 x 90%) Consolidated retained earnings on 12/31/2013
0
(13,500) $ 788,625
Slide 6-38
Complete Equity Method: Workpaper
Upstream Sales
P6-17: (Note: This is the same problem as Problem 6-7 and 6-13, but assuming the use of the complete equity method.) Paque Corporation owns 90% of the common stock of Segal Company. The stock was purchased for $810,000 on January 1, 2009, when Segal Companys retained earnings were $150,000. The January 1, 2013, inventory of Paque Corporation includes $45,000 of profit recorded by Segal Company on 2012 sales. During 2013, Segal Company made intercompany sales of $300,000 with a markup of 20% of selling price. The ending inventory of Paque Corporation includes goods purchased in 2013 from Segal Company for $75,000. Paque Corporation uses the complete equity method to record its investment in Segal Company.
Slide 6-39
LO 6 Consolidated workpapers complete equity method.
Upstream Sales
P6-17: Prepare the worksheet entries for Dec. 31, 2013. 1. Equity in Subsidiary Income Investment in Segal Company Dividends declared ($60,000 x 90%)
To reverse the effect of parent company entries for subsidiary dividends and income
91,125 37,125 54,000
Slide 6-40
Upstream Sales

2. Sales Cost of Goods Sold (purchases) 3. Cost of Goods Sold (end. inventory) Inventory
300,000 300,000
15,000
15,000

Slide 6-41
Upstream Sales

45,000
4. Retained earnings ($45,000 x 90%) Noncontrolling Interest ($45,000 x 10%) Cost of Goods Sold (beg. inventory)
40,500 4,500 45,000
To realize the gross profit in inventory deferred in the prior period

Slide 6-42
Upstream Sales

Investment in Segal Noncontrolling Interest
180,000 750,000 837,000 93,000
Slide 6-43

P6-17:
Income Statement Sales Equity in Segal income Total revenue Cost of goods sold Other expenses Total cost and expense Net income Noncontrolling interest Net income Paque $ 1,650,000 91,125 1,741,125 1,290,000 310,500 1,600,500 140,625 $ 140,625 $ Segal $ 795,000 795,000 517,500 206,250 723,750 71,250 71,250 $ 406,125 $ 345,000 $ Eliminations Debit Credit (2) 300,000 91,125 (1) 15,000
(3)
Upstream Sales
NCI
300,000 45,000
(2) (4)
10,125 10,125
798,000 180,000 180,000 140,625 71,250 406,125 (150,000) (60,000) 788,625 $ 191,250 $ 586,125
(5)
345,000 54,000 $ 399,000
(1)
10,125 (6,000) 4,125 $
798,000 140,625 (150,000) 788,625

Slide 6-44

P6-17:
Balance Sheet Cash Accounts receivable Inventory Investment in Segal Other assets Total assets Paque $ 93,000 319,500 210,000 833,625 750,000 2,206,125 105,000 112,500 1,200,000 788,625 $ Segal 75,000 168,750 172,500 Eliminations Debit Credit NCI
Upstream Sales
Consolidated Balances $ 168,000 488,250 367,500 1,380,000 2,403,750 150,000 172,500 1,200,000 788,625 92,625 2,403,750
40,500 630,000 1,046,250 45,000 60,000 750,000 191,250
(4)
15,000 837,000 37,125
(3) (5) (1)
$ $
$ $ 750,000 586,125 4,500 $ 1,381,125

(5) (4)
399,000 93,000
(5)
4,125 88,500 92,625 $
2,206,125
1,046,250
$ 1,381,125
Slide 6-45
Complete Equity MethodAnalysis of Consolidated Net Income and Consolidated Retained Earnings
Under the complete equity method:
Consolidated net income equals the parent companys recorded income.
Consolidated retained earnings equals the parent companys recorded retained earnings.
Slide 6-46
Summary of Workpaper Entries

To eliminate intercompany sales:
All Methods Sales Cost of Sales (purchases)
Illustration 6-21
Parent Selling (Downstream)

X X X X
To eliminate intercompany profit in ending inventory:

All Methods Cost of Sales (ending inventory) Inventory
To recognize intercompany profit in beginning inventory realized during the year:

Cost or Partial Equity Methods Complete Equity Method
Slide 6-47
Beg. Retained EarningsParent Cost of Sales (beg. inventory) Investment in S Company Cost of Sales (beg. inventory)
X X X X
Summary of Workpaper Entries

To eliminate intercompany sales:
All Methods Sales Cost of Sales (purchases)
Illustration 6-21
Subsidiary Selling (Upstream)

X X X X
To eliminate intercompany profit in ending inventory:

All Methods Cost of Sales (ending inventory) Inventory
To recognize intercompany profit in beginning inventory realized during the year:

Cost or Partial Equity Methods Beg. Retained EarningsParent NCI in Equity Cost of Sales (beg. inventory) Investment in S Company NCI in Equity Cost of Sales (beg. inventory) X X X X X X
Complete Equity Method

Slide 6-48
Intercompany Profit Prior To Parent Subsidiary Affiliation

Generally accepted accounting standards are silent as to the appropriate treatment of unrealized profit on assets that result from sales between companies prior to affiliation (preaffiliation profit).
Slide 6-49
LO 7 Intercompany profit prior to affiliation.
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Slide 6-1

Advanced Accounting, Fourth Edition

Upstream and Downstream Sales of Inventory

S1 sells inventory Horizontal Consolidated Entity

LO 4 Upstream and downstream sales.

Effects of Intercompany Sales of Merchandise on the Determination of Consolidated Balances

LO 1 Financial reporting objectives for intercompany sales.

Intercompany Sales of Merchandise

LO 6 Consolidated workpapers for downstream sales.

Intercompany Sales of Merchandise

Intercompany Sales Intercompany COGS Gross profit

1. The Total column represents the Sales and COGS booked by

2. The Resold column represents intercompany inventory that was

resold to third parties. Portions resold are recorded in COGS.

3. On Hand represents intercompany inventory still on hand in the

LO 6 Consolidated workpapers for downstream sales.

Intercompany Sales of Merchandise

Intercompany Sales Intercompany COGS Gross profit

Prepare the workpaper entry to eliminate intercompany sales for 2011.

To eliminate intercompany sales of merchandise

LO 6 Consolidated workpapers for downstream sales.

Intercompany Sales of Merchandise

LO 6 Consolidated workpapers for downstream sales.

Intercompany Sales of Merchandise

(Inventory) On Hand $ 150,000 125,000 $ 25,000

Prepare the workpaper entry to eliminate intercompany sales for 2011.

To eliminate intercompany sales and defer unrealized profit

Intercompany Sales of Merchandise

Workpaper entry to eliminate intercompany sales for 2008.

LO 6 Consolidated workpapers for downstream sales.

Intercompany Sales of Merchandise

To realize the gross profit in inventory deferred in the prior period.

LO 6 Consolidated workpapers for downstream sales.

Intercompany Sales of Merchandise

To eliminate intercompany sales and defer unrealized profit

Intercompany Sales of Merchandise

Inventory Pricing Adjustments

LO 2 Determining the amount of intercompany profit.

Intercompany Sales of Merchandise

LO 3 Eliminating 100% of intercompany profit.

Cost Method: Consolidated Statements WorkpaperUpstream Sales

LO 5 Noncontrolling interest (NCI) for upstream sales.

Cost Method: Consolidated Workpaper

LO 6 Consolidated workpapers for upstream Sales- Cost Method.

Cost Method: Consolidated Workpaper

P6-7: Prepare the worksheet entries for Dec. 31, 2013.

$ 150,000 180,000 30,000 90% $ 27,000

1. Investment in Segal Beg. Retained Earnings - Pague Co.

To establish reciprocity/convert to equity as of 1/1/2013.

LO 6 Consolidated workpapers for upstream Sales- Cost Method.

Cost Method: Consolidated Workpaper

P6-7: Prepare the worksheet entries for Dec. 31, 2013.

To eliminate intercompany sales and defer unrealized profit

LO 6 Consolidated workpapers for upstream Sales- Cost Method.

Cost Method: Consolidated Workpaper

P6-7: Prepare the worksheet entries for Dec. 31, 2013.

40,500 4,500 45,000

To realize the gross profit in inventory deferred in the prior period.

LO 6 Consolidated workpapers for upstream Sales- Cost Method.

Cost Method: Consolidated Workpaper

6. Beg. Retained Earnings - Segal Common Stock - Segal

LO 6 Consolidated workpapers for upstream Sales- Cost Method.