Chapter 4

Intercompany Inventory Transactions

Multiple Choice Questions

1. Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 2007, at underlying book value.
On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge
Corporation. Pilfer purchased inventory from Scrooge for P90,000 on August 20, 2008, and resold 70
percent of the inventory to unaffiliated companies on December 1, 2008, for P100,000. Scrooge produced
the inventory sold to Pilfer for P 67,000. The companies had no other transactions during 2008.

a. Based on the information given above, what amount of sales will be reported in the 2008 consolidated
income statement?
b. Based on the information given above, what amount of cost of goods sold will be reported in the 2008
consolidated income statement?
c. Based on the information given above, what amount of consolidated net income will be assigned to the
controlling interest for 2008?
d. Based on the information given above, what inventory balance will be reported by the consolidated
entity on December 31, 2008?

2. Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2
Company's stock. During 2008, Parent sold inventory purchased in 2007 for P48,000 to Subsidiary 1 for
P60,000. Subsidiary 1 then sold the inventory at its cost of P60,000 to Subsidiary 2. Prior to December 31,
2008, Subsidiary 2 sold P45,000 of inventory to a non-affiliate for P67,000 and held P15,000 in inventory at
December 31, 2008.

a. Based on the information given above, what amount should be reported in the 2008 consolidated income
statement as cost of goods sold?
b. Based on the information given above, what amount should be reported in the December 31, 2008,
consolidated balance sheet as inventory?
c. Based on the information given above, what amount of cost of goods sold must be eliminated from the
consolidated income statement for 2008? \
d. Based on the information given above, what amount of sales must be eliminated from the consolidated
income statement for 2008?
e. Based on the information given above, what amount of inventory must be eliminated from the
consolidated balance sheet for 2008?

7-1
3. Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases all its inventory
from Sub. The incomes reported by the companies over the past three years are as follows:

Year Subsidiary Net Income Parents Net income

2006 150,000 225,000

2007 153,000 360,000

2008 240,000 450,000

Sub Company sold inventory for P 300,000, P 262,500 and P 337,500 in the years 2006, 2007, and 2008
respectively. Par Company reported ending inventory of P 105,000, P 157,500 and P 180,000 for 2006,
2007, and 2008 respectively. Par acquired 70 percent of the ownership of Sub on January 1, 2006, at
underlying book value. The fair value of the non-controlling interest at the date of acquisition was equal to
30 percent of the book value of Sub Company.

a. Based on the information given above, what will be the consolidated net income for 2006?

b. Based on the information given above, what will be the consolidated net income for 2007?

c. Based on the information given above, what will be the income assigned to controlling interest for
2007?

d. Based on the information given above, what will be the income to non-controlling interest for 2008?

e. Based on the information given above, what will be the income to controlling interest for 2008?

7-2
7-3
4. Perth Corporation acquired 90% of Dundee Company's stock on May 1, 2006. During this date Perth paid
450,000 to acquire control but an inventory was overvalued by P 34,000 and a machine with a remaining
useful life of 5 years was understated by 50,000. At the end of 2008, Perth and Dundee reported the
following partial operating results and inventory balances:

Perth regularly prices its products at cost plus a 30 percent markup for profit. While Dundee prices its sales
at cost plus a 10 percent markup. The total sales reported by Perth and Dundee include both intercompany
sales and sales to non-affiliates. Perth held 40% of the inventory from Dundee while Dundee held 20% of
the inventory from Perth at the year end of 2008.

a. Based on the information given above, what amount of sales will be reported in the consolidated income
statement for 2008?

b. Based on the information given above, what balance will be reported for inventory in the consolidated
balance sheet for December 31, 2008?

c. Based on the information given above, what is the consolidated income?

7-4
5. On January 5, 2006 ABC Corporation owns 75 percent of XYZ Company's voting shares through a business
combination . During the date of acquisition ABC paid 850,000 for the 75% ownership. During date the
Ordinary stock and Retained Earnings of XYZ was 900,000 and 500,000 respectively. A machine was noted
with P 45,000 undervaluation with a remaining life of 9 years. Current

Parent Subsidiary

Retained Earnings, Beg 2008 760,000 650,000

Net income 1, 240,000 990,000
Dividends 190,000 80,000

During 2008, ABC produced 50,000 chairs at a cost of P79 each and sold 35,000 chairs to XYZ for P90
each. XYZ sold 18,000 of the chairs to unaffiliated companies for P117 each prior to December 31, 2008,
and sold the remainder in early 2009 for P130 each. Both companies use perpetual inventory systems.

a. How much will be the adjustment form the cost of sales account of the date of consolidation?

b. Compute the adjustment to convert form cost to equity.

c. Compute the NCI at he year end

7-5