BADVAC1X – ACCOUNTING FOR BUSINESS COMBINATIONS

MODULE 4: INTERCOMPANY TRANSACTIONS – INVENTORY

Problem 1: Palma Company had 90% ownership interest acquired several years ago in Small Company. The amortization
of allocated excess (identifiable assets) arising from this acquisition amounted to P2,000 per year (based on 100% or full
fair value of identifiable assets). The inventories acquired from the affiliates are:

Beginning inventory P10,000 x 25% = 2,500 RGP in BI

Ending inventory P16,000 x 25% = 4,000 UGP in EI

An inter-company sale of merchandise was made during the year amounting to P40,000 at a gross profit rate of 25%
based on sales (the same rate consistently applied on previous years intercompany sales of merchandise) of which 60%
are sold to outsiders at P35,000.

The net income from own operations and dividends for 2019 were as follows:

Company Net income Dividends paid

Palma P120,000 P8,000 Small 70,000 6,000

Required:

Assuming that Palma Company is the seller (downstream sale), in the books of Palma Company

Using cost method, assuming the investment balance on January 1, 2019 amounted to P800,000

1. The investment account on December 31, 2019. 800,000

2. The dividend (investment) account on December 31, 2019 5,400

Using equity method, assuming the investment balance on January 1, 2019 amounted to P810,000

3. The investment account on December 31, 2019 864,300

4. The equity in subsidiary income or net earnings account on December 31, 2019 59,700

Assuming that Palma Company is the seller (downstream sale), in the consolidated financial statements of Palma
Company and Small Company

5. The investment account on December 31, 2019 800,000

6. The dividend income account on December 31, 2019 if cost method is used 5,400
7. The equity in subsidiary income or net earnings account on December 31, 2019 if equity method is used 59,700
8. The profit attributable to equity holders of parent/controlling interest in consolidated net income for 2019 179,700
9. The noncontrolling interest in net income for 2019 6,800
10. Consolidated/group net income for 2019 186,500

Assuming that Small Company is the seller (upstream sale), in the books of Palma Company

Using cost method, assuming the investment balance on January 1, 2019 amounted to P800,000

11. The investment account on December 31, 2019. 800,000

12. The dividend account on December 31, 2019 5,400

Using equity method, assuming the investment balance on January 1, 2019 amounted to P810,000
 13. The investment account on December 31, 2019 864,450
14. The equity in subsidiary income or net earnings account on December 31, 2019 59,850

Assuming that Small Company is the seller (upstream sale), in the consolidated financial statements of Palma Company
and Small Company

15. The investment account on December 31, 2019

16. The dividend income account on December 31, 2019, if cost method is used
17. The equity in subsidiary income or net earnings account on December 31, 2019, if equity method is used
18. The profit attributable to equity holders of parent/controlling interest in consolidated net income for 2019 179,850
19. The noncontrolling interest in net income for 2019 6,650
20. Consolidated/group net income for 2019 186,500

Problem 2: On January 1, 2017, Par Company purchased 80% of the outstanding shares of Sub Company by paying
P340,000, the Sub Company’s common stock and retained earnings on this date amounted to P150,000 and P230,000
respectively. Also on this date, an equipment is undervalued by P20,000 with remaining life of 10 years. 2,000 amort

On January 1, 2019, Sub Company had P150,000 of capital stock and P300,000 of retained earnings. Also on the same
date, Par Company had P1,000,000 of capital stock and P700,000 (cost method) and P750,950 (equity method) of
retained earnings.

During the year, Par Company sold merchandise to Sub for P60,000 and in turn, purchased P40,000 from Sub Company.
Inter-company sales of merchandise were made at the following gross profit rates:

Sales made by parent 25% based on cost

Sales made by subsidiary 20% based on sales

On December 31, 2019, 30% of all intercompany sales remain in the ending inventory of the purchasing affiliate.

The beginning inventory of Par Company includes P2,500 worth of merchandise acquired from Sub Company on which
Sub Company reported a profit of P1,000. While the beginning inventory of Sub also includes P3,000 of merchandise
acquired from Par Company at 35% mark up.

The following selected results of operations were as follows:

Particulars Par Company Sub Company
Dividends paid P60,000 P10,000
Sales P1,100,000 P900,000
Cost of sales 880,000 720,000
Gross profit P220,000 P180,000
Net income from own operations P100,000 P30,000

Determine the following:

1. The dividend income under cost method for 2019 should be
a. P18,730 b. P10,000 c. P8,000 d. P8,200
2. The balance of Investment as of December 31, 2019 under cost method should be
a. P354,600 b. P351,960 c. P401,690 d. P340,000
3. The equity in subsidiary income or net earnings/income from subsidiary under equity method for 2019 should be:
a. P18,730 b. P10,000 c. P8,000 d. P8,200
4. The balance of Investment as of December 31, 2019 under equity method assuming the investment balance on
 January 1, 2019 amounted to P390,950 should be
a. P354,600 b. P351,960 c. P401,680 d. P340,000
5. The non-controlling interest in net income for 2019 should be
a. P6,280 b. P6,120 c. P5,720 d. P5,320
6. The profit attributable to equity holders of Parent/Controlling interest in net income for 2019 should be
a. P122,600 b. P118,730 c. P118,570 d. P118,330
7. The consolidated net income for 2019 should be
a. P124,050 b. P122,600 c. P118,570 d. P118,330
8. The stockholders’ equity of subsidiary on December 31, 2019 should be
a. P450,000 b. P470,000 c. P481,600 d. P484,000
9. The non-controlling interest (in net assets) on December 31, 2019 using proportionate basis should be
a. P97,120 b. P96,920 c. P96,320 d. P73,520
10. The non-controlling interest (in net assets) on December 31, 2019 using fair value basis should be:
a. P101,320 b. P96,920 c. P96,320 d. P73,520
11. The parent’s portion of consolidated retained (or controlling interest / equity holders of parent – retained
earnings) on December 31, 2019
a. P700,000 b. P752,000 c. P753,600 d. P809,680
12. The consolidated retained earnings on December 31, 2019
a. P700,000 b. P752,000 c. P753,600 d. P809,680
13. The consolidated stockholders’ equity on December 31, 2019 using proportionate basis
a. P1,911,000 b. P1,906,000 c. P1,905,920 d. P1,740,000
14. The consolidated stockholders’ equity on December 31, 2019 using fair value basis
a. P1,911,000 b. P1,906,000 c. P1,905,920 d. P1,740,000
15. The consolidated sales for 2019 should be
a. P2,000,000 b. P1,900,000 c. P1,960,000 d. P1,940,000
16. The consolidated cost of sales for 2019 should be
a. P1,503,950 b. P1,598,600 c. P1,597,450 d. P1,596,050

Problem 3: Lorn Corporation purchased inventory from Dresser Corporation for P120,000 on September 20, 2019 and
resold 80% of the purchased inventory to unaffiliated companies prior to December 31, 2019, for P140,000. Dresser
produced the inventory sold to Lorn for P75,000. Lorn owns 70% of Dresser’s voting common stock. The companies had
no other transactions during 2019.

1. What amount of sales will be reported in the 2019 consolidated income statement?
a. P98,000 b. P120,000 c. P140,000 d. P260,000
2. What amount of cost of goods sold will be reported in the 2019 consolidated income statement
a. P60,000 b. P75,000 c. P96,000 d. P120,000
3. What amount of consolidated net income will be assigned to the controlling interest for 2019?
a. P44,000 b. P45,000 c. P69,200 d. P80,000
4. What inventory balances will be provided by the consolidated entity on December 31, 2019?
a. P15,000 b. P16,800 c. P24,000 d. P39,000
ASSIGNMENT
Problem 4: Pepper Company acquired 80% of the voting stock of Salt Company on January 1, 2016, when Salt
Company’s retained earnings amounted to P150,000. The difference between the implied and book value on the date of
acquisition was allocated as follows:
Land P50,000
Equipment (10-year) 20,000
Goodwill 40,000
Salt Company reported retained earnings of P260,000 on January 1, 2019, and P320,000 on December 31, 2019. Salt
Company reported net income of P90,000 and declared dividends of P30,000 in 2019. Also, pepper reported net income
using cost method in 2019 in the amount of P724,000 with a dividends paid of P25,000 and retained earnings on
December 31, 2019 of P3,500,000.
The sales, cost of sales and intercompany sales made during 2019 are as follows:
Particulars Pepper Co Salt Co
Sales P2,500,000 P1,200,000
Cost of sales 1,250,000 875,000
Intercompany sales
Pepper to Salt 320,000
Salt to Pepper 290,000
There were no intercompany sales prior to 2018 and unrealized profits on January 1 and on December 31, 2019, resulting
from intercompany sales are as summarized below:
Particulars Unrealized Intercompany profit on
Resulting from 1/1/19 12/31/19
Sales by Salt to Pepper P10,000 P5,000
Sales by Pepper to Salt 15,000 20,000
Required: Determine the following:
1. The profit attributable to equity holders of parent/controlling interest (parent’s interests) in consolidated net
income for 2019 –
2. The non-controlling interest in net income for 2019 –
3. The consolidated/group net income for 2019 –
4. The consolidated retained earnings, December 31, 2019 –
5. The consolidated sales for 2019 – 6. The consolidated cost of sales for 2019 –
7. The consolidated gross profit for 2019 –