Akron, Inc., owns all outstanding stock of Toledo Corporation. Amortization expe
ID: 2472511 • Letter: A
Question
Akron, Inc., owns all outstanding stock of Toledo Corporation. Amortization expense of $15,000 per year for patented technology resulted from the original acquisition. For 2015, the companies had the following account balances:
Akron
Akron
Toledo
Sales
1100000
600000
Cost of Goods Sold
500000
400000
Operating Expense
400000
220000
Investments Income
Not Given
0
Dividends Declared
80000
30000
Intra-entity sales of $320,000 occurred during 2014 and again in 2015. This merchandise cost $240,000 each year. Of the total transfers, $70,000 was still held on December 31, 2014, with $50,000 unsold on December 31, 2015.
a. For consolidation purposes, does the direction of the transfers (upstream or downstream) affect the balances to be reported here?
b. Prepare a consolidated income statement for the year ending December 31, 2015.
Akron
Akron
Toledo
Sales
1100000
600000
Cost of Goods Sold
500000
400000
Operating Expense
400000
220000
Investments Income
Not Given
0
Dividends Declared
80000
30000
Explanation / Answer
Answer: a)
In this business combination, the direction of the intercompany transfers (either upstream or downstream) is not important to the consolidated totals. Because Akron controls all of Toledo's outstanding stock, no noncontrolling interest figures are computed. If present, noncontrolling interest balances are affected by upstream sales but not by downstream.
For the purpose of a 2015 consolidation, the following worksheet entries would affect income statement balances:
Entry G:
Retained earnings, 1/1/15 (seller) Dr............17500
To COGS.............................................................17500
(To remove 2014 unrealized gross profit from beginning account balances.Gross profit is 25% of the markup (80000/320000) multiplied by remaining inventory (70000)).
Entry E:
Amortisation expense Dr............15000
To patented technology......................15000
(To recognise excess amortisation expense for the current period.)
Entry TI:
Sales Dr..........320000
To COGS...................320000
(To eliminate intercompany transfers of inventory during 2015.)
Entry G:
COGS Dr.........12500
To inventory..................12500
(To remove 2015 unrealized gross profit from ending account balances. Gross profit is 25% of the markup (80000/320000) multiplied by remaining inventory (50000).
Answer: b)
By including the impact of each of these four consolidation entries, the following income statement can be created from individual account balances:
AKRON, INC. AND CONSOLIDATED SUBSIDIARY
Income Statement
Year ending December 31, 2015
Sales(1100000+600000-320000)............................................1380000
COGS (500000+400000+12500-320000-17500).......................575000
Gross profit..........................................................................805000
Operating expense(400000+220000+15000)........................... 635000
Consolidated net income...............,......................................170000
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