consolidation process with intercompany transaction

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Part 1

“Karlow Corporation owns 60 percent of Draw Company’s voting shares. During 20X3, Karlow produced 25,000 computer desks at a cost of $82 each and sold 10,000 of them to Draw for $94 each. Draw sold 7,000 of the desks to unaffiliated companies for $130 each prior to December 31, 20X3, and sold the remainder in early 20X4 for $140 each. Both companies use perpetual inventory systems. Chapter 6 Intercompany Inventory Transactions 285

Required

a. What amounts of cost of goods sold did Karlow and Draw record in 20X3?

b. What amount of cost of goods sold must be reported in the consolidated income statement for 20X3?

c. Give the worksheet consolidation entry or entries needed in preparing consolidated financial statements at December 31, 20X3, relating to the intercorporate sale of inventory.

d. Give the worksheet consolidation entry or entries needed in preparing consolidated financial LO 6-4 statements at December 31, 20X4, relating to the intercorporate sale of inventory.

e. Give the worksheet consolidation entry or entries needed in preparing consolidated financial statements at December 31, 20X4, relating to the intercorporate sale of inventory if the sales were upstream. Assume that Draw produced the computer desks at a cost of $82 each and sold 10,000 desks to Karlow for $94 each in 20X3, with Karlow selling 7,000 desks to unaffiliated companies in 20X3 and the remaining 3,000 in 20X4.”

Part 2

“Grand Delivery Service acquired at book value 80 percent of the voting shares of Acme Real Estate Company. On that date, the fair value of the noncontrolling interest was equal to 20 percent of Acme’s book value. Acme Real Estate reported common stock of $300,000 and retained earnings of $100,000. During 20X3 Grand Delivery provided courier services for Acme Real Estate in the amount of $15,000. Also during 20X3, Acme Real Estate purchased land for $1,000. It sold the land to Grand Delivery Service for $26,000 so that Grand Delivery could build a new transportation center. Grand Delivery reported $65,000 of operating income from its delivery operations in 20X3. Acme Real Estate reported net income of $40,000 and paid divi-dends of $10,000 in 20X3.

Required

a. Compute consolidated net income for 20X3.

b. Give all journal entries recorded by Grand Delivery Service related to its investment in Acme Real Estate assuming Grand uses the fully adjusted equity method in accounting for the investment. LO 7-6

c. Give all consolidation entries required in preparing a consolidation worksheet as of December 31,20X3″

Part 3 (a)

” Determining the Amount of Retirement Gain or Loss (Effective Apple CorporationInterest Method) Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1, Downlink issued $200,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannu-ally on January 1 and July 1. Online purchased $100,000 of the bonds on July 1, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:”

Online Enterprises

Downlink Corporation

Investments in Downlink Corp Bonds

100,000

Interest Income

6,000

Interest Payable

6,000

Bonds Payable

200,000

Bond Premium

13,475

Interest Expense

18,039

Interest Payable

12,000

  • Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3
  • Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement
  • Prepare the consolidation worksheet consolidation entry or entries as of DEC 31,20X3 to remove the effects of the intercorporate bond ownership

Part 3 (b)

“Online Enterprises owns 95 percent of Downlink Corporation. On January 1, 20X1, Downlink issued $200,000 of five-year bonds at 115. Annual interest of 12 percent is paid semiannually on January 1 and July 1. Online purchased $100,000 of the bonds on August 31, 20X3, at par value. The following balances are taken from the separate 20X3 financial statements of the two companies:”

Online Enterprises

Downlink Corporation

Investments in Downlink Corp Bonds

105,700

Interest Income

4,000

Interest Payable

6,000

Bonds Payable

200,000

Bond Premium

12,000

Interest Expense

18,000

Interest Payable

12,000

  • Compute the amount of interest expense that should be reported in the consolidated income statement for 20X3
  • Compute the gain or loss on constructive bond retirement that should be reported in the 20X3 consolidated income statement
  • Prepare the consolidation worksheet consolidation entry or entries as of Dec 31,20X3 to remove the effects of the intercorporate bond ownership

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