UNIT II – CONSOLIDATED FINANCIAL STATEMENTS

C. INTERCOMPANY PROFITS TRANSACTIONS – Inventories and

Plant Assets
Intercompany transactions –
 Transactions between a parent and a subsidiary.
 The effects of these transactions are eliminated when preparing the consolidated financial
statements
 Common intercompany transactions:
a. intercompany sale of inventory
b. intercompany sale of property and equipment
c. intercompany dividends
d. intercompany bond transactions

Intercompany sale of Inventory

 Downstream sale
 parent sells to subsidiary
 the parent recognizes the profit. NCI is not affected because profit pertains solely to the
owners of the parent.
 for consolidation purposes, profits recorded on an intercompany sale are realized in the
period in which the inventory is resold to outsiders.

 Upstream sale
 subsidiary sells to parent
 the subsidiary recognizes the profit. NCI is affected because the profit pertains to both
the parent and the NCI.

 until the point of resale, all intercompany profits must be deferred.

 unrealized profit on ending inventory and realized profit on beginning inventory must be
eliminated
 Comparison of Downstream and Upstream Sale of Inventory.

Problem:
On July 1, 2020, A Company sold merchandise for cash costing P 10,000 to B Company for
P 12,500. On December 20, 2020 B Company sold 50% of the merchandise purchased from
A Company for P 8,000. Assume A Company purchases 80% of the outstanding stocks of B
Company on January 1, 2020.

Downstream Sale -

Downstream Sale
( Assume A Company – (Parent Co.) purchases 80% of the outstanding stocks of B Company)
Books of A Company (Parent) Books of B Company (subsidiary)
2020
July 1 Cash 12,500 Inventory 12,500
Sales 12,500 Cash 12,500
Sales Purchases

Cost of sales 10,000 2020

Inventory 10,000 Dec. 20 Cash 8,000
Cost of sales Sales 8,000
Sales

Cost of sales 6,250

 Inventory 6,250
Cost of sales

Analysis:
a. On December 31, 2020, end of accounting period:
 there is an unrealized profit on ending inventory of P 1,250 ( ½ of gross profit 2,500),
because ½ of the merchandise purchased (intercompany sale) is unsold, which
should be eliminated.

 NCI is not affected because it is a downstream sale – parent to subsidiary.

 WP elimination entries:

1) Sales 12,500
Cost of sales 12,500
To eliminate intercompany sale of inventory

2) Cost of sale 1,250

Inventory 1,250
To eliminate unrealized profit on
ending inventory.

 In the computation of Consolidated Comprehensive (net) Income, the unrealized profit

on ending inventory (downstream sale) should be deducted from A Co’s (parent)
income from own operation

Assume that on February 1, 2021, B Company sold the remaining merchandise

(intercompany sale) to outsiders for P 7,500.

Books of B Company (subsidiary)

2021
Feb. 1 Cash 7,500
Sales 7,500
Sales

Cost of sales 6,250

Inventory 6,250
Cost of sales

 In 2021, the working paper elimination entries will include elimination of the realized profit on
beginning inventory:

2) Retained Earnings Jan. 1, 2021– A Co. 1,250

Cost of sales 1,250
To eliminate unrealized profit on
ending inventory.

 In the computation of Consolidated Comprehensive (net) Income for 2021, the realized profit on
beginning inventory (downstream sale) should be added to A Co’s (parent) income from own
operation
Upstream Sale
On July 1, 2020, B Company (subsidiary) sold merchandise for cash costing P 10,000 to A
Company for P 12,500. On December 20,2020 A Company sold 50% of the merchandise
purchased from B Company for P 8,000. Assume A Company purchases 80% of the
outstanding stocks of B Company on January 1, 2020.

Upstream Sale
Books of A Company (Parent) Books of B Company (subsidiary)
2020
Inventory 12,500 July 1 Cash 12,500
Cash 12,500 Sales 12,500
Purchases Sales

Cost of sales 10,000

Inventory 10,000
Cost of sales
2020
Dec. 20 Cash 8,000
Sales 8,000
Sales

Cost of sales 6,250

Inventory 6,250
Cost of sales

Analysis:
 On, December 31, 2020, end of accounting period, there is an unrealized profit on
ending inventory of P 1,250 ( ½ of gross profit 2,500), because ½ of the merchandise
purchased (intercompany sale) is unsold, which should be eliminated.

 NCI is affected because it is a upstream sale – subsidiary to parent

 WP elimination entries on December 31, 2020 are the same with those of the
downstream sale

1) Sales 12,500
Cost of sales 12,500
To eliminate intercompany sale of inventory

2) Cost of sale 1,250

Inventory 1,250
To eliminate unrealized profit on
ending inventory.

 In the computation of Consolidated Comprehensive (net) Income, the unrealized profit

on ending inventory (upstream sale) should be deducted from B Co’s (subsidiary)
income from own operation

Assume that on February 1, 2021, B Company sold the remaining merchandise purchased from A
Company on July 1, 2020 to outsiders for P 7,500.

Books of A Company (parent)

2021
 Feb. 1 Cash 7,500
Sales 7,500
Sales

Cost of sales 6,250

Inventory 6,250
Cost of sales

 In 2021, the working paper elimination entries will include elimination of the realized profit on
beginning inventory:

2) Retained Earnings Jan. 1, 2021– A Co. 1,000

NCI 250
Cost of sales 1,250
To eliminate unrealized profit on
ending inventory.

 In the computation of Consolidated Comprehensive (net) Income for 2021, the realized profit on
beginning inventory (upstream sale) should be added to B Co’s (subsidiary) income from own
operation

CFS – Subsequent to Date of acquisition/inter-company profit on inventories

Problem: On January 1, 2020 Penpen Company purchased 80% of the outstanding stock of Sera
Company for P 850,000 cash. On that date, the assets and liabilities of Penpen company and
Sun Company are shown below:
Penpen Company Sera Company
Book values Fair values
Cash P 1,280,000 P 150,000 P 150,000
Accounts Receivable 500,000 200,000 200,000
Inventories 450,000 160,000 210,000
Land 500,000 70,000 270,000
Furniture and Equipment (net) 600,000 370,000 250,000
Building (net) 1,200,000 __________
P 4,530,000 P 950,000

Accounts Payable P 500,000 P 50,000

Common Stock 2,000,000 300,000
Additional paid-in capital 500,000 100,000
Retained Earnings 1,530,000 500,000
Total liabilities and stockholders’ equity P 4,530,000 P 950,000

On January 1, 2020, the furniture and equipment had a remaining useful life of 5 years. FIFO
inventory costing is used. . Relevant data for 2020 and 2021 are as follows:

2020 2021
Net Income:
Penpen Company (including dividend income) P 250,000 P 400,000
Sera Company 120,000 250,000
Dividends declared and paid:
Penpen Company 60,000 120,000
Sera Company 40,000 100,000
Merchandise from intercompany sale:
In penpen’s inventory, December 31, 40,000 60,000
In Sera’s inventory, December 31 55,000 70,000
 Billing price on intercompany sales:
Penpen Company 125% of cost
Sera Company 120% of cost

REQUIRED:
1. Prepare working paper elimination entries for 2020 and 2021.

2. Determine the following account balances as of December 31, 2020 and December 31, 2021
a) Consolidated Net Income
b) NCI in net income of the subsidiary
c) NCI
d) Investment in Sera Company ( Penpen’s individual records)
e) Consolidated Retained Earnings
f) Consolidated Stockholder’s Equity

Solution:
Determination and Allocation of Excess Schedule:

Total Parent NCI at FV

(80%) (20%
Fair value of Subsidiary 1,062,500 850,000 212,500
Less: Book value of net assets acquired:
Common stock 300,000
APIC 100,000
Retained Earnings 500,000
Total 900,000 720,000 180,000
Excess: 162,500 130,000 32,500
Allocations:
Inventory ( 50,000)
Land (200,000)
Furniture and Equipment 120,000
Total (130,000) (104,000) ( 26,000)
Goodwill 32,500 26,000 6,500

Working Paper Elimination Entries on:

December 31, 2020; December 31, 2021:

1) Dividend Income 32,000 1) Dividend Income 80,000
NCI 8,000 NCI 20,000
Dividend declared 40,000 Dividend declared 100,000
To eliminate intercompany To eliminate intercompany
dividend & NCI share of dividend & NCI share of dividends
dividends

2) Common Stock – Sera 300,000 2) Common Stock – Sera 300,000

APIC- Sera 100,000 APIC- Sissy Company 100,000
Retained Earnings – Sera 500,000 Retained Earnings – Sera 500,000
Investment in Sera 720,000 Investment in Sera 720,000
NCI 180,000 NCI 180,000
To eliminate equity accounts To eliminate equity accounts
against Investment and NCI against Investment & NCI

3) Inventory 50,000 3) Inventory 50,000

Land 200,000 Land 200,000
Goodwill 32,500 Goodwill 32,500
Furniture & Equipment 120,000 Furniture & Equipment 120,000
 Investment in Sera Co. 130,000 Investment in Sera Co. 130,000
NCI 32,500 NCI 32,500
To allocate excess. To allocate excess.

4) Cost of Goods Sold 50,000 4) RE – Sera 1/1/2021 10,800

Furniture & Equipment 24,000 NCI 10,800
Inventory 50,000 To assign to the NCI their share
on
Operating Expenses 24,000 the adjusted undistributed
earnings of Sera
to amortize allocated excess to RE – Sera 1/1/21 580,000
Identifiable asses RE – Sera 1/1/20 500,000
Undistributed earnings 80,000
5) Cost of goods sold 17,667 Less: amortization 26,000
Inventory 17,667 Adjusted undistributed 54,000
earnings
To eliminate unrealized profit NCI ( 20%) 10,800
In ending inventory of Penpen &
Sera

6) NCI in CI of Sera 17,467 5) RE Sera- 1/1/21 26,000

NCI 17,467 Furniture & Equipment 48,000
To recognize NCI share in Inventory 50,000
Sera’s adjusted CI for 2020. Operating Expenses 24,000
To provide 2020 & 2021
To compute: Amortization of allocated excess
Net income of Sera 120,000
Less: amortization 26,000 6) Cost of goods sold 24,000
Unrealized gain on 6,667 32,667 Inventory 24,000
inventory
Adjusted net income 87,333 To eliminate unrealized profit in
NCI share 17,467 ending inventory of Penpen & Sera

7) RE Penpen 1/1/21 16,334

NCI 1,333
Cost of goods sold 17,667
To eliminate unrealized profit on
Beg. Inventory .
(RE = 11,000 + 5,334 (6,667 x
80%)

8) NCI in CI of Sera 54,133

NCI 54,133
To recognize NCI share in
Seras adjusted CI for 2014.
( 250,000 + 24,000 + 6,667 – 10,000) x 20% 54.133
270,667 x 20%

Req. 2:
a) Consolidated Net Income 2020 2) Consolidated Net Income 2021
Penpen,s net income 218,000 Penpen,s net income 320,000
Less: unrealied gain (DS) 11,000 Realized gain BI (DS) 11,000
Penpen’s realized income 207,000 Unrealized gain invty end (DS) (14,000)
Sera’s net income 120,000 Penpen’s realized income 317,000
Amortization (26,000) Sera’s net income 250,000
Unrealized gain (US) (6,667) Amortization 24,000
Adjusted net income of S 87,333 Realized gain beg. invty 6,667
CNI 294,333 Unrealized gain invty end (10,000)
Attributable to: Adjusted net income of S 270,667
 NCI 17,467 CNI 587,667
Parent 276,866 Attributable to:
NCI 54,133
Parent 533,534

Consolidated RE: 3) Consolidated Retained Earnings:

RE – P Co. 1/1/20 1,530,000 RE – P Co. 1/1/21 1,720,000
Add: CNI attributable to parent 276,866 Less: unrealized gain end invty(PS) 11,000)
Total 1,806,866 RE – Penpen Co. 1/1/21 adjusted 1,709,000
Less dividend paid 60,000 Add: Penpen’s in Sera’s adjusted
Consolidated Retained Earnings 1,746,866 Increase in retained earnings
( 80,000 – 26,000 – 6,667) 37,866
=47,333 x 80%
CNI attributabel to parent -2021 533,534 571,400
Total 2,280,400
Less dividend paid 120,000
Consolidated RE 12/31/21 2,160,400

Consolidated Stockholders’ equity: Consolidated Stockholders’ equity:

Common Stock 2,000,000 Common Stock 2,000,000
APIC 500,000 APIC 500,000
Retained Earnings 1,746,866 Retained Earnings 2,160,400
NCI 221,967 NCI 256,100
CSHE 4,468,833 CSHE 4,916,500

4: Net Assets of Sera – 1/1/20 bv 900,000 4: Net Assets of S – 1/1/21 b.v 973,333
Undistributed earnings 2020 80,000 Undistributed earnings 2015 150,000
Unrealized gain (6,667) 73,333 Realized gain 6,667
NA at BV 12/31/20 – Sera Co. 973,333 Unrealized gain (10,000)
Unamortized excess (162,500- 26,000) 136,500 Adjusted 146,667
NA S Co. @ FV 12/31/20 1109,833 NA at BV 12/31/21 – S Co. 1,120,000
Unamortized excess ( 162,500 – 26,00 + 24,000) 160,500
NCI ( 20%) 221,967 NA S Co. @ FV 12/31/21 1,280,500

NCI ( 20%) 256,100

NCI NCI
8,000 180,000 20,000 180,000
32,500 1,333 32,500
17,467 10,800
.
8,000 229, 967 ______ 54,133
221,967 21,333 277,433
256,100

Intercompany sale of Plant, Property and Equipment

 May either be downstream or upstream
 Accounting procedure:
1. any gain or loss is deferred and
a. amortized over the asset’s remaining life, if the asset is depreciable,
b. not amortized, if the asset is non-depreciable.
2. If the asset is subsequently sold to an unrelated party, the unamortized balance of the
deferred gain or loss is recognized in profit or loss.
 3. In a downstream sale, the gain or loss is adjusted to the controlling interest only (parent).
NCI is not affected.
4. In an upstream sale, the adjustment for the gain or loss are shared by the parent and NCI.
5. The unamortized balance of the deferred gain or loss is eliminated when the consolidated
financial statements are prepared.
Problem: Non-depreciable asset

Below are the relevant data for First and Second Companies for year 2020 and 2021:

Journal entry to record intercompany sale of land:

Books of Seller
Cash 700,000
Land 500,000
Gain on sale of land 200,000

Books of Purchaser:
Land 700,000
Cash 700,000

First owns 80% of Second, acquired several years ago at book value. The land sold
Intercompany in year 2020 and was not sold to outsiders

A. Downstream Sales:
Assume that the land was sold by First (parent) to Second, the working papers elimination entries
would be:

2020:
Gain on sale of land 200,000
Land 200,000
To eliminated unrealized gain on sale of land

2021:
Retained Earnings Jan. 1, 2021, First 200,000
Land 200,000
To adjust the previously unrealized gain
on sale of land.

D. Upstream Sales:
Assume that the land was sold by Second (subsidiary) to First, the working papers elimination
entries would be:

2020:
Gain on sale of land 200,000
Land 200,000
To eliminated unrealized gain on sale of land

2021:
Retained Earnings Jan. 1, 2021, First 160,000
NCI 40,000
Land 200,000
To adjust the previously unrealized gain
on sale of land.

Note: In the consolidated Statement of Financial Position, the property plant equipment
 (intercompany sale) should be stated at their original carrying amount.

Problem:

A. Depreciable asset -Downstream Sale

On January 1, 2019, Pop Corp. acquired 70% of Son Company at book value. On January. 1, 2020
Pop sold a used equipment to Son for P 50,000. Pop acquired the equipment at a cost of P 60,000., had
an accumulated depreciation of P 30,000 to the date of intercompany sale. Both companies use a straight
line method of depreciation for their depreciable assets. The equipment had a 10-year life, no salvage
value when purchased by Pop.

The journal entry to record intercompany sale:

Books of Pop Company (Parent) Books of Son Company (subsidiary)
2020 2020
Jan. 1 Cash 50,000 Jan. 1 Equipment 50,000
Accum. Dep – Equipt. 30,000 Cash 50,000
Equipment 60,000 Sales
Gain on sale of Equipt. 20,000 2020
Dec. 31
Dep. Exp. 10,000
Accum. Dep 10,000
Provision for dep.

2021
Dec. 31 Dep. Exp 10,000
Accum. Dep 10,000

WP Elimination Entries :
2020
Gain on sale of Equipment 20,000
Equipment 10,000
Accum. Dep - Equipment 30,000
To eliminated unrealized gain on sale of
Equipment .

Accu. Dep. – E 4,000

Depreciation Expense - E 4,000
To eliminate excess depreciation

2021:
Retained Earnings Jan. 1, 2021, Pop 20,000
Equipment 10,000
Accum. Dep 20,000
To adjust the previously unrealized gain
on sale of land.

Acum. Dep 8,000

Depreciation expense 4,000
Retained Ernings Jan. 2021 – Pop 4,000
To eliminate excess depreciation

B. Depreciable asset - Upstream Sale

On January 1, 2019, Pop Corp. acquired 70% of Son Company at book value. On January. 1, 2020
Son (subsidiary) sold a used equipment to Pop for P 50,000. Son acquired the equipment at a cost of
P 60,000., had an accumulated depreciation of P 30,000 to the date of intercompany sale. Both
companies use a straight line method of depreciation for their depreciable assets. The equipment had a
10-year life, no salvage value when purchased by Son.

The journal entry to record intercompany sale:

Books of Pop Company (Parent) Books of Son Company (subsidiary)

2020 2020
Jan. 1 Equipment 50,000 Jan. 1 Cash 50,000
Cash 50,000 Accum. Dep – Equipt. 30,000
Sales Equipment 60,000
2020 Gain on sale Equipt. 20,000
Dec. 31
Dep. Exp. 10,000
Accum. Dep 10,000
Provision for dep.

2021
Dec. 31 Dep. Exp 10,000
Accum. Dep 10,000

WP Elimination Entries :
2020
Gain on sale of Equipment 20,000
Equipment 10,000
Accum. Dep - Equipment 30,000
To eliminated unrealized gain on sale of
Equipment .

Accu. Dep. – E 4,000

Depreciation Expense - E 4,000
To eliminate excess depreciation

2021:
Retained Earnings Jan. 1, 2021, Son 14,000
NCI 6,000
Equipment 10,000
Accum. Dep 20,000
To adjust the previously unrealized gain
on sale of land.

Acum. Dep 8,000

Depreciation expense 4,000
Retained Ernings Jan. 2021 – Son 2,800
NCI 1,200
To eliminate excess depreciation

Intercompany bond transaction

 When the parent or a subsidiary acquires bonds issued by the other. Both the Investment in
bonds and Bonds payable are eliminated in the consolidated financial statements

 The bonds payable are considered extinguished from the view point of the parent and
subsidiary.

 The difference between acquisition cost of the investment in bonds and the carrying amount of
the bonds payable is recognized as gain or loss in the consolidated profit or loss statement.
  Any interest expense and interest income recognized after the intercompany transaction are
eliminated in the consolidated statements.

 Please refer to the illustration given pp 219 to 224 of Accounting for Business Combination
(2019) by Zeus Vernon B. Millan.

INTERCOMPANY PROFITS TRANSACTIONS – Inventories and

Plant Assets
Activity 1 – Problem

On January 1, 2020 Popsy Company purchased 80% of the outstanding stock of Sissy Company for
P 850,000 cash. On that date, the assets and liabilities of Popsy company and Sissy Company are
shown below:

Popsy Company Sissy Company

Book values Fair values
Cash P 1,280,000 P 150,000 P 150,000
Accounts Receivable 500,000 200,000 200,000
Inventories 450,000 160,000 210,000
Land 500,000 70,000 270,000
Furniture and Equipment (net) 600,000 370,000 250,000
Building (net) 1,200,000 ___________
P 4,530,000 P 950,000
Accounts Payable P 500,000 P 50,000
Common Stock 2,000,000 300,000
Additional paid-in capital 500,000 100,000
Retained Earnings 1,530,000 500,000
Total liabilities and stockholders’ equity P 4,530,000 P 950,000

On January 1, 2020, the furniture and equipment had a remaining useful life of 5 years. FIFO
inventory costing is used. NCI is measured at its fair value on the date of acquisition. Relevant data for 2020
and 2021 are as follows:
2020 2021
Net Income:
Popsy Company (including dividend income) P 250,000 P 400,000
Sissy Company 120,000 250,000
Dividends declared and paid:
Popsy Company 60,000 120,000
Sissy Company 40,000 100,000
Merchandise from intercompany sale:
In popsy’s inventory, December 31, 40,000 60,000
In Sissy’s inventory, Decmber 31 55,000 70,000
Billing price on intercompany sales:
Popsy Company 125% of cost
Sissy Company 120% of cost

Additional information:
1. On December 31, 2020 Popsy Company sold equipment to Sissy Company that it has purchased
for P 120,000 on January 1, 2016. The equipment had an economic life of 10 years and was sold
to Sissy Company for P 56,000.
2. On February 1, 2020, Sissy Company sold land that had a cost of P 40,000 to Popsy Company for
P 55,000.
3. Both companies use the straight line depreciation.

REQUIRED:
2. Prepare working paper elimination entries for 2016 and 2017.
3. Determine the following account balances as of December 31, 2016 and December 31, 2017.
 a) Consolidated Net Income
b) NCI in net income of subsidiary
c) NCI
d) Investment in Sissy Company
e) Consolidated Retained Earnings

Activity 2: Multiple Choice Problems:

For items 1 – 10:
On January 1, 2019, Puppy Company purchased 80% stocks of Sissy Company for P 820,000. The fair
value of the non-controlling interest is assessed at P 220,000 while the proportionate share basis
amounted to P 200,000. The excess of total value of subsidiary over its book value of P 950,000 is
attributable to goodwill and equipment with 5 year remaining life.

On March 3, 2019, Puppy sold merchandise costing P 500,000 to Trope company for P 750,000. On
the same day, Puppy sold merchandise to Sissy costing P 280,000 for P 350,000 .

On the other hand, Puppy company paid P 400,000 for the purchase of merchandise from Sissy on
June 30, 2019 with the latter imposing mark up of 25%.

In the perspective of Puppy company, the remaining inventory from intercompany transaction as of
year-end amounted to ¾ due to safor le of such merchandise to outside party for P 150,000. While the
records of Sissy company shows that ½ of the inventory from intercompany transaction were sold to
unrelated party for P 250,000.

The following shows the net income and dividends declares by both company in 2019:
Puppy Company Sissy Company
Net income P 386,000 P 175,000
Dividends 50,000 20,000

The shareholders’ equity of Puppy is composed of common stock, APIC and Retained earnings of
P 1,750,000, P 250,000 and P 2,000,000, respectively.

1. How much is the fair value net assets of the subsidiary?

a) P 500,000 b) P 950,000 c) P 1,000,000 d) P 1,200,000

2. How much is the amount of goodwill and amortization of equipment?

a) P 10,000 and (P40,000) c) P 40,000 and (P10,000)
b) P 50,000 and P (40,000) d) P 10,000 and ( P50,000)

3. How much is the net income of Puppy company from its own operations?
a) P 360,000 b) P 365,000 c) P 370,000 d) P 386,000

4. What is the downstream and upstream mark up on sales?

a) 20% and 25% c) 20% and 20%
b 25% and 25% d) 25% and 20%

5. How much is the downstream unrealized profit in ending inventory?

a) (P350,000) b) (P175,000) c) (P70,000) d) (P 35,000)

6. How much is the upstream unrealized profit in ending inventory?

a) (P 150,000) b) (P75,000) c) (P70,000) d) (P 35,000)

7. How much is the consolidated net income?

a) P 90,000 b) P 335,000 c) 425,000 d) 450,000

8. How much is the net income attributable to parent?

a) P 335,000 b) P 407,000 c) P 425,000 d) P 450,000

9. How much is the NCI in the net assets of the subsidiary on December 31, 2019?
 a) P 220,000 b) P 238,000 c) P 234,000 d) P 407,000

10. How much is the consolidated retained earnings?

a) P 2,000,000 b) P 2350,000 c) P 2,357,000 d) P 2,407,000

For items 11 – 12:

On January 1, 2019, Papa acquired 90% ownership of Son company at underlying book value. The fair
value of non-controlling interest at the date of acquisition was equal to 10% of the book value of Son
company. On March 1, 2019, Son purchased inventory from Papa for P90,000. Son company sold the
entire inventory to an unaffiliated company for P 120,000 on November 15, 2019. Papa had produced
the inventory sold to Son for P 62,000. The companies had no other transactions for 2019.

11. the amount of sales that will be reported in 2019 consolidated income statement is:
a) P 62,000 b) P 120,000 c) P 140,000 d) P 182,000

12. the cost of goods sold that will be reported in 2019 consolidated income statement is:
a) P 62,000 b) P 58,000 c) P 90,000 d) 120,000

13. King Corporation owns 80% of Lee Corporation’s common stock . During October 1, Lee sold
merchandise to King for P 100,000. At December 31, 50% of this merchandise remains in King’s
inventory. Gross profit percentages were 30% for King and 40% for Lee. The amount of unrealized
intercompany profit in ending inventory at December 31 that should be eliminated in the
consolidation process is:

a) P 40,000 b) P 20,000 c) P 16,000 d) P 15,0000

14. Top Company holds 90% of Bottom Company’s common stock. In the current year, Top company
has Sales of P 800,000 and costs of goods sold of P 600,000. For the same period, Bottom has
sales of P 300,000 and cost of goods sold of P 180,000. During the current year , Top sold
merchandise to Bottom for P 100,000. The subsidiary still possesses 40% of this inventory at
the current year-end. What are the consolidated sales and cost of goods sold?

a) P 1,000,000 and P 690,000 c) P 1,000,000 and P 696,000

b) P 1,000,000 and P 705,000 d) P 970,000 and P 696,000

15. Using the same information in no. 14, except that the transfers were from Bottom to Top company.
What are the consolidated sales and cost of goods sold?

a) P 1,000,000 and P 720,000 c) P 1,000,000 and P 696,000

b) P 1,000,000 and P 690,000 d) P 970,000 and P 712,000

PART Corporation acquired 80% in STAR Company on January 2, 2019 for P 10,080,000. On this date,
the share capital and retained earnings of the two companies follow:

PART Corporation STAR Company

Share Capital P 24,000,000 P 9,000,000
Retained Earnings 12,000,000 1,800,000

On January 2, 2019 , the assets and liabilities of Star Company were stated at their fair values except for
machinery which is undervalued by P 900,000 (remaining life is 3 years). On September 30, 2019, Star
sold merchandise to Part at an intercompany profit of P 600,000; ¼ was still unsold at year end. Likewise
on October 1, 2019, Star purchased merchandise from Part for P 14,400,000. The selling affiliate
included a 20% mark-up on cost on this sale. On ¾ of these purchases had been sold to unrelated parties
as of December 31, 2019. As of December 31, 2019, goodwill was determined to be impaired by P
240,000.

The following is the summary of the 2019 transactions of the affiliated companies:
 PART Corporation STAR Company
Net income P 6,000,000 P 2,400,000
Dividends declared and paid 2,400,000 720,000

16. What is the net income attributable to parent stockholders’ equity in the 2019 consolidated financial
statements?
a) P 6,834,000 b) P 6,744,000 c) P 6,552,000 d) P 6,432,000

17. What is the non-controlling interest in net income in the 2019 consolidated financial statements?
a) P 402,000 b) P 342,000 c) P 330,000 d) P 282,000

18 . The DD Company holds an 85% interest in EE Company. At the current year end, DD holds an
inventory purchased from EE for P 330,000 at cost plus 10%. The group’s consolidated statement
of financial position has been drafted without any adjustments in relation to this holding of
inventory. What adjustments should be made to the draft consolidated
statement of financial position figures for non-controlling interest and retained earnings?

Non-controlling interest Retained Earnings

a) No change Reduce by P 30,000
b) No change Reduce by P 33,000
c) Reduce by P 4,500 Reduce by P 25,500
d) Reduce by P 4,950 Reduce by P 28,050

19. The ZZ Company owns 95% of the YY Company . On the last day of the accounting period YY sold
to ZZ a non-current asset for P 230,000. The asset originally cost P 480,000 and at the end of the
reporting period its carrying amount in YY’s books was P 175,000. The group’s consolidated
statement of financial position has been drafter without any adjustments in relation to this non-
current asset. What adjustments should be made to the consolidated statement of
financial position figures for non-current assets and retained earnings?

Non-current assets Retained Earnings

a) Increase by P 250,000 Increase by P 237,500
b) Reduce by P 55,000 Reduce by P 55,000
c. Reduce by P 55,000 Reduce by P 52,500
d) Increase by P 250,000 Increase by P 250,000

For items 20 – 22:

On July 1, 2020, BB Company purchased 80% of the outstanding shares of CC Company at a cost of
P 4,000,000. On that date, CC had P 2,500,000 of capital stock and P 3,500,000 of retained
earnings. For 2020, BB had income of P 1,400,000 from its separate operations and paid
dividends of P 750,000. For 2020, CC reported income of P 325,000 and paid dividends of P 150,000.
All the assets and liabilities of CC have book values equal to their respective fair market values.
Assume all income was earned evenly throughout the year except for the intercompany transaction
on October 1. On October 1, 2020, BB purchased a machinery from CC for P 500,000. The book
value of the machinery on that date was P 600,000. The loss of P 100,000 is reflected in the income
of CC indicated above. The machinery is expected to have a useful life of 5 years from the date of
sales.

20. In December 31, 2020 consolidated statement of financial position, how much is the consolidated net
income attributable to the Parent company?
a) P 2,406,000 b) P 2,366,000 c) P 2,326,000 d) P 1,606,000

21. The working paper elimination entry on December 31, 2020 to eliminate unrealized loss on sale of
machinery:
Date Particulars PR Debit Credit
22. The working paper elimination entry on December 31, 2021 to eliminate unrealized loss on sale of
machinery:
Date Particulars PR Debit Credit

23. Selected information from the separate and consolidated income statements of Pepe Corporation
and its subsidiary, Sinta Company for the year ended December 31, 2020 are as follows:

Pepe Company Sinta Company Consolidated

Sales P 600,000 P 420,000 P 924,000
Cost of goods sold 450,000 330,000 693,000
Gross Profit P 150,000 P 90,000 P 231,000

During 2015, Pepe Corporation sold goods to Sinta Company at the same mark-up on cost that
Pepe uses for all sales. At December 31, 2020, Sinta had not paid all of these goods and still held
37.5% of them in inventory.

What is the original cost of goods in Sinta’s inventory acquired from Pepe Corporation?
a) P 36,000 b) P 27,000 c) P 18,000 d) P 9,000

24. Dream Company owns 75% interest in Hope Company. The following transactions occurred during
the year:
a. Dream Company sold goods costing P 20,000 to Hope Company for P 38,000. Hope Company
held 9,500 of these goods in its ending inventory.
b. Hope Company sold goods to Dream Company for P 40,000. The goods were marked up at 20%
on selling price. Dream Company sold one-fourth of the goods to unrelated parties during the
year.

The individual statements of profit or loss of the entities during the year show the following information:
Dream Company Hope Company
Sales 1,000,000 700,000
Cost of sales (400,000) (350,000)
Gross profit 600,000 350,000

The entities held the following inventories at year end:

Dream Company Hope Company
Ending inventory 300,000 80,000

The consolidated ending inventory ________________________

25. PP Company owns 80% of SS, Inc.’s common stock . During 2020, PP sold to SS P 550,000 of
inventory on the same terms as sales made to third parties. SS sold all of the inventory purchased
from PP in 2018. The following information pertains to SS and PP’s sales for 2020:
PP SS
Sales P 2,000,000 P 1, 700,000
Cost of sales __1,100,000 950,000
Gross Profit P 900,000 P 750,000
 What amount PP report as cost of sales in 2018 consolidated income statement?
a) P 2,050,000 b) P 1, 640,000 c) P 1, 500,000 d) P 1,200,000

For 26 – 27:
Sun Company owns an 80% controlling interest in the Moon Company. Moon Company regularly sells
merchandise to Sun Company, which then sold to outside parties. The gross profit on all such sales is
40%. On January 1, 2020, Sun sold land and building to Moon . The value of the parcel is 20% to
land and 80% to structures. The pertinent data are the following:

Sun Company Moon Company

Internally generated net income, 2020 P 1,560,000 P 750,000
Internally generated net income, 2021 10,320,000 705,000
Intercompany merchandise sales, 2020 300,000
Intercompany merchandise sales, 2021 360,000
Intercompany inventory, December 31, 2020 45,000
Intercompany inventory, December 31, 2021 60,000
Cost of real estate sold on January 1, 2020 1,800,000
Sales price of real estate on January 1, 2020 2,400,000
Depreciable life of building 20 years

26. For, 2020, what is the consolidated comprehensive income attributable to controlling interest?
a) P 1,875,000 b) P 1,597,500 c) P 1,575,000 d) P 1,569,600

27. For 2021, what is consolidated comprehensive income attributable to controlling interest?
a) P 1,630,200 b) P 1,629,000 c) P 1,603,200 d) P 1,360,000

On June 30, 2019, PTR, Inc. purchased 70% of common stock of SRP Company for P 700,000. At that
date, SRP had P 650,000 common stock outstanding and retained earnings of P 250,000. All of the
purchase difference was related to equipment with a book value of P 125,000 and a remaining life of 5
years. PTR’s retained earnings balance at December 31, 2018 was P 750,000. The income and dividend
figures for both PTR and SRP for 2019 and 2020 are as follows:

2019 2020
Net Income:
PTR Inc. (excluding dividend income) P 475,000 P 550,000
SRP Company
January 1, to June 30 80,000 Jan. 1 to
July 1 to December 31 100,000 Dec. 31
310,000
Dividends declared and paid:
PTR Inc. 200,000 250,000
SRP Company 60,000 100,000
Merchandise from intercompany sale:
In PTR’s inventory, December 31, 36,000 48,000
In SRP’s inventory, December 31 44,000 60,000
Billing price on intercompany sales:
PTR Company 125% of cost
SRP Company 120% of cost

Additional information:
1. On December 31, 2019, PTR Inc. sold Land that had a cost of P 250,000 to SRP Company for
P 380,000.
2. On December 31, 2020, SRP Company sold an equipment that it had purchased for P 400,000 on
 January 1, 2016. The equipment had an economic life of 10 years and was sold to PTR Inc. for
P 225,000. PTR estimated the remaining life of the equipment at 5 years.
3. Both companies use the straight-line depreciation.

Compute:

28. NCI as of December 31, 2019 ____________________________________

29 NCI as of December 31, 2020_________________________________________________

30. Consolidated Retained Earnings as of December 31, 2020 _______________________________

31. The working paper elimination entry on December 31, 2020 to eliminate unrealized gain (loss) on
sale of equipment:
Date Particulars PR Debit Credit

32. The working paper elimination entry on December 31, 2020 to eliminate unrealized gain on sale of
land:
Date Particulars PR Debit Credit

End