Chapter 6, Problem 6.21P

(a)

To determine

Introduction: Buildings and equipment are the fixed assets of the company. They are purchased for long-term use and are not likely to be converted into cash in the near future. An increment or decrement in its value is to be recorded in the financial statements.

The increase in fair value of buildings and equipment

Answer to Problem 6.21P

The increase in fair value of buildings and equipment is $40,000

Explanation of Solution

Particulars	Amount (in $)
Consolidated total	680,000
Balance reported by L	(400,000)
Balance reported by T	(240,000)
Increase in value	40,000

(b)

To determine

Introduction: Depreciation refers to the physical wear and tear of the fixed assets. The company creates a depreciation account to collect the replacement cost of the fixed assets so that it could be replaced at the end of its useful life.

The accumulated depreciation for the consolidated entity

Answer to Problem 6.21P

Accumulated depreciation for the consolidated entity is $320,000

Explanation of Solution

Particulars	Amount (in $)
Accumulated depreciation reported by L	180,000
Accumulated depreciation reported by T	110,000
Cumulative write off depreciation $\left(5,000\times 6\right)$	30,000
Accumulated depreciation	320,000

(c)

To determine

Introduction: Ownership of a subsidiary is acquired by either purchase of the majority of shares or acquisition of the entire share capital. The parent company owns a controlling interest of the subsidiary company, meaning thereby it has control over more than half of its stock.

The amount paid by L to acquire the ownership of T.

Answer to Problem 6.21P

The amount paid by L is $97,500

Explanation of Solution

Particulars	Amount (in $)
Common stock outstanding	60,000
Retained earnings at acquisition	30,000
Total book value at acquisition	90,000
Increase in value of buildings and equipment	40,000
Fair value of net assets acquired	130,000
Proportion of ownership acquired	0.75
Amount paid by L	97,500

(d)

To determine

Introduction: Investment refers to an asset that is purchased with the hope that it will generate some income or interest over and above the initial purchase value. To invest is to allocate money with the hope of some benefit to arise in the future.

The amount reported by L as investment in T

Answer to Problem 6.21P

The amount reported by L as investment is $136,500

Explanation of Solution

Particulars	Amount (in $)
T’s common stock outstanding on December 31,20X6	60,000
T’s retained earnings as on December 31, 20X6	112,000
Total book value at acquisition	172,000
Proportion of ownership held by L	0.75
L’s share of net book value	129,000
Unamortized differential $\left(5,000\times 2year\right)\times 0.75$	7,500
Investment in T	136,500

(e)

To determine

Introduction: Sales refer to a transaction between two parties in which one party sells a product or a service and another party purchases those goods and services in exchange for a consideration, usually monetary in nature. In inter-corporate sales, products are sold between two companies.

The amount of inter-corporate sales of inventory

Answer to Problem 6.21P

The amount of inter-corporate sales in 20X6 is $30,000

Explanation of Solution

Particulars	Amount (in $)
Sales reported by L	420,000
Sale reported by T	260,000
Total sales	680,000
Sales reported in consolidated income statement	(650,000)
Intercompany sales	30,000

(f)

To determine

Introduction: Unrealized inventory profits arise when one company usually a parent company sells products to another company, subsidiary and the products so sold could not be sold externally into the market by the end of the year.

The amount of unrealized inventory profit

Answer to Problem 6.21P

The amount of unrealized inventory profit is $4,000

Explanation of Solution

Particulars	Amount (in $)
Inventory reported by L	125,000
Inventory reported by T	90,000
Total inventory	215,000
Inventory reported in consolidated income statement	(211,000)
Unrealized inventory profit	4,000

(g)

To determine

Introduction: Journal entries are a systematic method of recording transactions as and when they occur. It is a summary of transactions divided into the debit and credit items that are recorded chronologically. It is an act of keeping and recording all the transactions occurring in the business.

Eliminating entry to remove the effects of intercompany inventory sale.

Explanation of Solution

Eliminating entry

S.no	Date	Particulars	Debit (in $)	Credit (in$)
1		Sales	30,000
		Cost of goods sold		26,000
		Inventory		4,000
		(Elimination of inter-company inventory sale)

(h)

To determine

Introduction: Unrealized inventory profits arise when one company usually a parent company sells products to another company, subsidiary and the products so sold could not be sold externally into the market by the end of the year.

The amount of unrealized inventory profit

Answer to Problem 6.21P

The amount of unrealized inventory profit is $9,000

Explanation of Solution

Particulars	Amount (in $)
Cost of goods sold reported by L	310,000
Cost of goods sold reported by T	170,000
Reduction of cost of goods sold for intercompany sales during 20X6	(26,000)
Adjusted cost of goods sold	454,000
Cost of goods sold reported in consolidated income statement	(445,000)
Additional adjustment to cost of goods sold due to unrealized profit in beginning inventory	9,000

(i)

To determine

Introduction: Accounts receivable refers to the claim that a company holds against its debtors, the persons who owe the company money. Accounts receivable are the current assets for the company and are mostly converted into cash within a span of one year.

The amount of accounts receivable realized by L at December 31, 20X6

Answer to Problem 6.21P

The amount of accounts receivable reported by L is $107,000

Explanation of Solution

Particulars	Amount (in $)	Amount (in $)
Accounts receivable reported for consolidated entity		145,000
Accounts receivable reported by T		(55,000)
Difference		90,000
Adjustment for intercompany receivable/ payable:
Accounts payable reported by L	86,000
Accounts payable reported by T	20,000
Total reported accounts payable	106,000
Accounts payable reported on consolidated entity	(89,000)
Adjustment for intercompany receivable/ payable		17,000
Accounts receivable reported by L		107,000