CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN
INTERCOMPANY SALE OF FIXED ASSETS

Part I: Theory of Accounts

1. Which of the following statements regarding the intercompany sale of fixed assets is TRUE?
a. If the intercompany sale of fixed assets is made at the beginning or any date before end of the
year, as a working paper procedure, any realize intercompany gain/loss affects the computation of
consolidated operating expense.
b. In the working paper, unrealized intercompany gain or loss on sale of fixed assets during the year
must be eliminated in full, regardless of the date of sale per books.
c. Credit Accumulated Depreciation in the working paper to recognize the realized gain on
intercompany sale of depreciable fixed assets.
d. Debit Loss on sale of equipment in the working paper, representing the realized loss on
intercompany sale of equipment based on the remaining useful life of the depreciable asset.

Part II: Problem Solving

Problem 1. On January 1, 2021, Entity ABC acquired 80% of outstanding ordinary shares of Entity
XYZ at a goodwill of P7,200,000. On January 1, 2021, there was an upstream sale of land with a cost of
P40,000,000 at a selling price of P44,000,000. The land was eventually sold by the buying affiliate to
Entity LMN the following year. On January 1, 2021, there was a downstream sale of equipment with a
cost of P8,000,000 and accumulated depreciation of P1,600,000 at a selling price of P7,200,000. The
equipment was already 4 years old at the date of sale.

On June 30, 2022, there was an upstream sale of machinery with a cost of P10,800,000 and accumulated
depreciation of P7,200,000 at a selling price of P2,400,000. The machinery was already 6 years old at the
date of sale. For the year ended December 31, 2022, Entity ABC reported net income of P32,000,000
while Entity XYZ reported net income of P20,000,000 and distributed dividends of P6,000,000. Entity
ABC accounted for its investment in Entity XYZ using cost method in its separate financial statements.

Compute for the following in the Consolidated Financial Statements in 2022:

1. Depreciation Expense
a. 1,600,000
b. 2,466,680
c. 2,200,000
d. 1,693,320

2. Carrying amount of the depreciable fixed assets

a. 9,000,000
b. 8,400,000
c. 8,000,000
d. 8,600,000

3. Non-controlling interest in profit

a. 4,160,000
b. 4,960,000
c. 5,000,000
d. 4,200,000

4. Net income attributable to controlling interest

a. 43,950,000
b. 47,250,000
c. 48,250,000
d. 53,050,000
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Problem 2. A summary of the separate income statement of JKL Corporation and its 75% owned
subsidiary, QRS Company, for 2022 were as follows:
JKL QRS

Sales P18,000,000 P10,800,000

Gain on sale of equipment 360,000 ------------
Cost of goods sold (7,200,000) (4,680,000)
Depreciation expense (1,800,000) (1,080,000)
Other expenses (2,880,000) (1,440,000)
Income from operations P6,480,000 P3,600,000
QRS sold an equipment to JKL with a book value of P1,440,000 for P2,340,000 on January 2, 2020. At
the time of the intercompany sale, the equipment had a remaining useful life of five years. The buying
affiliate uses straight-line depreciation. JKL used the equipment until December 31, 2022, at which time
it was sold to TUV for P1,296,000.
Compute the amount of net profit attributable to non-controlling interests for 2022.
a. 1,125,000
b. 900,000
c. 1,035,000
d. 945,000

Problem 3. On July 1, 2021, DEF Company purchased 80% of the outstanding shares of NOP Company
at a cost of P64,000,000. On that date, the acquired company had P40,000,000 of ordinary shares and
P56,000,000 of retained earnings. For 2021, DEF had income of P22,400,000 from its separate
operations and paid dividends of P12,000,000. For 2021, the acquired company reported income of
P5,200,000 and paid dividends of P2,400,000. All the assets and liabilities of NOP have book values
equal to their respective fair market values. On October 1, 2021, NOP sold a machinery to DEF for
P8,000,000. The book value of the machinery on that date was P9,600,000. The machinery is expected to
have a useful life of 5 years from the date of sale.

In the December 31, 2021 Consolidated Statement of Comprehensive Income, compute the consolidated
net income attributable to controlling interest.
a. 37,856,000
b. 37,216,000
c. 25,696,000
d. 38,496,000

Problem 4. HIJ Corp. owns 80% of RST Corp.’s ordinary shares. On June 1, 2020, there was a
downstream sale for P1,350,000 delivery equipment with a carrying amount of P900,000. The buying
affiliate is to depreciate the acquired equipment over a five-year life by the straight-line method. On the
other hand, on September 30, 2021, there was an upstream sale of a slightly used computer for P255,000
with carrying value of P300,000 and remaining life of 3 years. On December 31, 2022, the buying
affiliate was able to sell the above delivery equipment to a non-affiliated company for P1,050,000. The
net adjustments to compute 2020, 2021 and 2022 consolidated income before income tax would be an
increase (decrease) of:

2020 2021 2022

a. (450,000) 438,750 150,000
b. (405,000) 382,500 292,500
c. (397,500) 131,250 75,000
d. (397,500) 131,250 292,500

-end of handouts-

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