# Expert Solutions

E6-9  Income Statement Effects of Unrealized Profit The problem asks:

Holiday Bakery owns 60% of Farmco Products Company’s stock.
During 20×8, Farmco produced 100,000 bags of flour, which it sold to Holiday Bakery for \$900,000.
On 12/31/x8, Holiday had 20,000 bags of flour purchased from Farmco Products on hand.
Farmco prices its sales at cost plus 50% of cost for profit.
Holiday, which purchased all its flour from Farmco in 20×8, had no inventory on 01/01/x8
Holiday Bakery reported income from its baking operations of \$400,000
Farmco Products reported net income of \$150,000 for 20×8

Question:
1) Compute the amount reported as cost of goods sold in 20×8 consolidated income statement – is it 720,000?
2) Give the workpaper eliminating entry or entries required to remove the effects of the intercompany sale in preparing consolidated statements at the end of 20×8
3) Compute the amount reported as consolidated net income for 20×8

E6-10  Prior-Period Unrealized Inventory Profit
Prior-period Unrealized Inventory Profit
Holiday Bakery owns 60  percent of Farmco Products Company’s stock. On January 1, 20X9, inventory reported by holiday include 20,000 bags of flour purchased from Farmco at \$9 per bag. By December 31, 20X9, all the beginning inventory purchased from Farmco products had been baked into products and sold to customers by holiday. There were no transactions between Holiday and Farmco during 20X9.

Both Holiday Bakery and Farmco Products price their sales at cost plus 50 percent markup for profit. Holiday reported income from its baking operations of \$300,000, and Farmco reported net income of \$250,000 for 20X9.

Required:
a. Compute the amount reported as cost of goods sold in the 20X9 consolidated income statement for the flour purchased from Farmco in 20X8.
b. Give the eliminating entry or entries to remove the effect of the unrealized profit in beginning inventory in preparing the consolidation worksheet as of December 31, 20X9.
c. Compute the amounts reported as consolidated net income and income assigned to the controlling interest in the 20X9 consolidated income statement.