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Solutions - Chapter 6

The document contains 3 problems related to consolidating financial statements for intercompany transactions. Problem 1 summarizes a transaction where Garcia sells inventory to Cornwall, recording $500 in sales and $300 in cost of sales. On consolidation, intercompany sales and inventory profits of $30 are eliminated. Closing inventory held by Cornwall from Garcia is $140. Problem 2 summarizes a transaction where Shawinigan sells inventory to Nowak. Consolidation adjustments eliminate $600 in intercompany sales and inventory profits of $72. Problem 3 has two parts: a) Ivanova sells $250 of inventory to Halifax, b) Halifax then sells $300 of the inventory to an outsider. Consolid

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73 views4 pages

Solutions - Chapter 6

The document contains 3 problems related to consolidating financial statements for intercompany transactions. Problem 1 summarizes a transaction where Garcia sells inventory to Cornwall, recording $500 in sales and $300 in cost of sales. On consolidation, intercompany sales and inventory profits of $30 are eliminated. Closing inventory held by Cornwall from Garcia is $140. Problem 2 summarizes a transaction where Shawinigan sells inventory to Nowak. Consolidation adjustments eliminate $600 in intercompany sales and inventory profits of $72. Problem 3 has two parts: a) Ivanova sells $250 of inventory to Halifax, b) Halifax then sells $300 of the inventory to an outsider. Consolid

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haida
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Solutions – Chapter 6

Problem 6-1
(a)
Garcia would record sales of $500, cost of sales of $300 and income tax of $60 (a)
Cornwall would record a purchase of inventory for cash of $500 (b)
NC = No change

From a consolidated point of view,


Sales and purchases for new transaction 500 (c)
Intercompany inventory profits Before 30% After
tax tax tax
Closing inventory – Parent selling (downstream)
(500 x 0.4) $200 $60 $140 (d)

Garcia Cornwall Consolidated


Cash 160 +(a) 500; 690 – (a) 500; Sum 660 190 850
Inventory 640-(a) 300; 350 +(b) 500; Sum –(d) 200 340 850 990
Deferred tax NC; NC; Sum +(d) 60 100 70 230
Sales8,000 + (a) 500; NC; Sum –(c) 500= NC 8,500 5,600 13,600
Cost of sales4,800 + (a) 300; NC; 5,100 4,000
Sum –(c) 500 + (d) 200 8,800
Income tax expense800 + (a) 60; NC; 860 540
Sum –(d) 60 = NC 1,340
Problem 6-2
(a)
New transaction for Shawinigan is sales of $520, cost of sales of $400 and income tax of $48.
(a)
NC = No change

Consolidation adjustments
Intercompany sales and purchases for previous transaction 600 (b)
Intercompany inventory profits Before 40% After
tax tax tax
Opening inventory – parent selling (downstream)
([b] 600 x 0.3) $180 $72 $108 (c)
Closing inventory – parent selling (downstream)
([b] 600 – (a) 400] x 0.3) $60 $24 $36 (d)

Nowak Shawinigan Consolidated


CashNC; 180 + (a) 520; Sum 570 700 1,270
InventoryNC;1,740 –(a) 400; Sum –(d) 60 750 1,340 2,030
Deferred tax NC; NC; Sum + (d) 24 210 90 324
SalesNC; 5,200 + (a) 520; Sum –(b) 600 9,100 5,720 14,220
Cost of sales NC; 4,000 + (a) 400; 6,370 4,400
Sum – (b) 600– (c) 180 + (d) 60 10,050
Income tax expense NC;450+(a) 48; 910 498
Sum + (c) 72– (d) 24 1,456
Problem 6-3
(a)
Ivanova would record sales of $250 and cost of sales of $200
= gross profit of $50 = 20% of selling price (a)
Halifax would record a purchase of inventory for cash of $250 (b)
NC = No change

From a consolidated point of view,


Sales and purchases for new transaction must be eliminated 250 (c)

Ivanova Halifax Consolidated


Cash 750 + (a) 250; 810 – (a) 250; Sum = NC 1,000 560 1,560
Sales 2,570 + (a) 250; NC; Sum – (c) 250= NC 2,820 1,440 4,010
Beginning inventory NC; NC; Sum = NC 420 390 810
Purchases NC; 960 + (b) 250; Sum - (c) 250 = NC 1,890 1,210 2,850
Ending inventory 254 – (a) 200; 270 + (b) 250; 54 520
Sum – (a) 50 = NC 524
Cost of goods sold = NC for consolidated 2,256 1080 3,136
Gross margin = NC for consolidated 564 360 874

(b)
Halifax would record sales of $300 and cost of sales of $250 (a)
= gross profit of $50 which is equal to 20% of cost
NC = No change from previous statement in part a)

From a consolidated point of view,


Sales and purchases for the first transaction must be eliminated 250 (b)
Ivanova Halifax Consolidated
Cash NC; 560 + (a) 300; Sum 1,000 860 1,860
Sales NC; 1,440 + (a) 300; Sum – (b) 250 2,820 1,740 4,310
Beginning inventory NC; NC; Sum = NC 420 390 810
Purchases NC; NC; Sum - (b) 250 = NC 1,890 1,210 2,850
Ending inventory NC; 520 – (a) 250; SUM 54 270 324
Cost of goods sold 2,256 1080 3,336
Gross margin 564 360 974

(c)
From a consolidated perspective the sale was reported when Halifax sold the goods to an
outsider. The sale amount of $300 was the selling price to the outside customer and the cost of
goods sold was the purchase price incurred by Ivanova when it purchased the goods from
outsiders. The intercompany transactions were eliminated and not reflected on the consolidated
statements.

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