Intercompany Transactions

Name: _______________________ ID No.: _______Score: _______ Rating: _______

Swallow Corporation paid $62,000 to acquire 100% of Gully Corporation’s outstanding voting common Common stock 60,000 40,000
stock at book value on May 1, 2006. The stockholders’ equity of Gully on January 1, 2006 consisted of Retained Earnings 75,000 29,000
$40,000 Capital Stock and $20,000 Retained Earnings. Gully’s total dividends for 2006 were $6,000, paid Noncontrolling Interest
equally on April 1 and October 1. Gully’s net income was earned uniformly throughout 2006. TOTAL LIAB. & EQUITY $ 170,000 $80,000
During 2006, Swallow made sales of $10,000 to Gully at a gross profit of $3,000. One-half of this
merchandise was inventoried by Gully at year-end, and one-half of the 2006 intercompany sales were Cassowary Corporation acquired a 70% interest in Fruit Corporation in 1999 at a time when Fruit’s book
unpaid at year-end 2006. values and fair values were equal. In 2003, Fruit sold land to Cassowary for $82,000 that cost $72,000.
Swallow sold equipment with a ten-year remaining useful life to Gully at a $2,000 gain on December 31, The land remained in Cassowary’s possession until 2005 when Cassowary sold it outside the combined
2006. The straight-line depreciation method is used. entity for $102,000.
Financial statements of Swallow and Gully Corporations for 2006 appear in the first two columns of the After the books were closed in 2005, it was discovered that Cassowary had not considered the unrealized
partially completed consolidation working papers. gain from its intercompany purchase of land in preparing the consolidated financial statements. The only
Required: entry on Cassowary’s books was a debit to Land and a credit to Cash in 2003 for $82,000, and, in 2005, a
Complete the working papers for Swallow Corporation and Subsidiary for the year 2006. debit to Cash for $102,000 and credits to Land for $82,000 and Gain on sale of land for $20,000.
Swallow Corporation and Subsidiary Before the discovery of the error, the consolidated financial statements disclosed the following amounts:
Consolidation Working Papers 2003 2004 2005
for the year ended December 31, 2006 Consolidated net income $ 750,000 $ 600,000 $ 910,000
Eliminations Consol- Land 200,000 240,000 300,000
Swallow Gully idated Required:
Debit Credit 1. Determine the correct amounts of consolidated net income for 2003, 2004, and 2005.
INCOME STATEMENT 2. Determine the correct amounts for Land in 2003, 2004, and 2005.
Net Sales $ 80,000 $40,000 3. Calculate the amount at which the gain on the sale of land should have been reported in 2005.
Income from Gully 6,500
Gain on sale of Equipment 2,000 Buzzard Corporation acquired 70% of the outstanding voting common stock of Tool Inc. in 1998. On
Cost of sales ( 40,000) ( 15,000) January 1, 1999, Tool Inc. purchased a depreciable machine for $120,000 cash with an estimated useful
Depreciation ( 11,000) ( 4,000) life of 10 years that was depreciated on a straight-line basis. Tool used the machine until the end of 2004.
Other expenses ( 12,500) ( 6,000) On January 2, 2005, Tool sold the machine to Buzzard who continued to use the same estimated life and
Preacquisition Income depreciation method that was used by Tool.
Net income 25,000 15,000 At the end of 2005, Buzzard made the following elimination entry in the consolidation working papers.
Retained Earnings 60,000 20,000 Machine 22,000
Add: Net income 25,000 15,000 Gain on Sale of Machine 14,000
Dividends ( 10,000) ( 6,000) Depreciation Expense 2,000
Retained Earnings 12/31 $ 75,000 $29,000 Accumulated Depreciation 34,000
BALANCE SHEET Required:
Receivables-net 19,000 16,000 Answer the following questions concerning Buzzard and Tool.
Inventories 10,000 8,000 1. How much depreciation expense did Buzzard record in 2005?
Other assets 10,500 14,000 2. What amounts were reported for the Machine and the Accumulated Depreciation in the consolidated
Land 5,000 5,000 balance sheet on December 31, 2005?
Buildings-net 20,000 15,000 3. If Tool reported $60,000 of net income for 2005, what amount was assigned to the non-controlling
Investment in Gully 65,500 interest?

Equipment-net 40,000 22,000

TOTAL ASSETS $ 170,000 $80,000
LIAB & EQUITY
Accounts payable 16,000 10,000
Other debt 19,000 1,000
IAC ADV 1 len