Akron, Inc., owns all outstanding stock of Toledo Corporation. Amortization expe

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 2018, the companies had the following account balances:

Intra-entity sales of $320,000 occurred during 2017 and again in 2018. This merchandise cost $240,000 each year. Of the total transfers, $70,000 was still held on December 31, 2017, with $50,000 unsold on December 31, 2018.

1. Prepare the consolidation entries required by Akron in 2018.

(a) Prepare Entry *G to remove the 2017 intra-entity gross profit from the beginning account balances.

(b) Prepare Entry E to recognize the excess amortization expense for the current period.

(c) Prepare Entry TI to eliminiate the intra-entity transfers of inventory during 2018.

(d) Prepare Entry G to remove the 2018 intra-entity gross profit from the ending account balances.

2. Prepare a consolidated income statement for the year ending December 31, 2018.

Akron Sales Cost of goods sold Operating expenses Investment income Dividends declared Toledo 1,100,000 600,000 500,000 400,000 400,000 220,000 Not given 80,000 30,000

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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