Intercompany Transactions

Part 1: Inventories
1. Working paper entries for consolidation purpose
2. Computation of consolidated sales and cost of sales, CNI, NCI in NI, NI to
parent, and NCI balance.

a. To eliminate intercompany sales (upstream and downstream):

Sales xx
COS xx

b. To eliminate the unrealized gross profit in ending intercompany

inventories (upstream and downstream):
COS xx
Inventory xx

c. To eliminate realized gross profit in beginning intercompany

inventories:
Upstream Downstream
Retained earnings 1/1 – P xx R.E 1/1 – P xx
Retained earnings 1/1 – S xx COS xx
COS xx

d. Computations:
i. Total sales (P + S) xx
Intercompany sales (xx)
Consolidated sales xx

ii. Total cost of sales (P + S) xx

Intercompany sales @ Sales price (xx)
UGP xx
RGP (xx)
Consolidated COS xx

iii. Parent, Net income xx

Dividend income from Subsidiary (xx)
Parent, Net income from own operations xx
UGP (Downstream) (xx)
RGP ( Downstream) xx
Adjusted Parent, NI from own operations xx

Subsidiary, net income xx

Amortization of excess (xx)
Xx
Goodwill impairment (xx)
RGP (Upstream) xx
UGP (Upstream) (xx) xx
Consolidated Net Income xx
NCI in Net income of subsidiary (xx)
Net income attributable to parent xx
 iv. FV of NCI xx
NCI in dividends declared by S (xx)
NCI in net income xx
NCI balance xx

Notes:

1. Determine if there is an excess to be amortized.

2. Determine first whether the intercompany transaction is downstream or
upstream.
3. At year end, the party who holds the intercompany merchandise is the
buyer.
4. In computing for the RGP or UGP, use the seller’s gross profit rate.
5. The net income affected by the RGP and UGP is the seller’s net
income.

Problems:
1. P Company owns 80% of the stock of S Company, which was acquired
at underlying book value on August 30, 2011. Summarized Trial
Balance data for the two companies as of December 31, 2011 are as
follows:
P Company S Company
Cash and Accounts Receivable P161,000 P90,000
Inventory 220,000 110,000
Buildings and Equipment (net) 270,000 180,000
Investment in S Company 248,000
Cost of Goods Sold 175,000 140,000
Depreciation expense 30,000 20,000
Current liabilities P150,000 P30,000
Common stock 200,000 90,000
Retained earnings 472,000 220,000
Sales 250,000 200,000
Dividend income _______ 32,000 _______ _______
Total P1,104,000 P1,104,000 P540,000 P540,000

On January 1, 2011, the inventory held by P Company contained

merchandise purchased from S Company. S Company had purchased
the merchandise for 40,000. In 2011, S Company spent 100,000 to
purchase additional merchandise which it sold to P Company for
150,000. By December 31, 2011 P Company had sold all the
merchandise that had been on hand on January 1, 2011, but continued
to hold in inventory 30% of the 2011 purchase from S Company.

Required:
• Elimination entries
• Consolidated sales and cost of sales
• CNI, NCI in NI, NI to parent
• NCI balance
2. Papa Corporation owns 75% of the outstanding stock of San Company,
acquired at book value during 2009. Selected information from the
accounts of Papa and San for 2011 are as follows:

Papa San
Sales 900,00 500,00
0 0
Cost of goods sold 490,00 190,00
0 0

During 2011, Papa sold merchandise to San for 50,000 at a gross profit
of 20,000. Half of this merchandise remained in San’s inventory at
December 31, 2011. San’s December 31, 2010 inventory included
unrealized profit of 4,000 on goods acquired from Papa.

Required: Consolidated sales and cost of sales

3. Pidro Corporation owns an 80% interest in Sisa Company, and at

December 31, 2010, Pidro’s investment in Sisa under the cost method
was equal to 80% of Sisa’s stockholders equity. During 2011, Sisa
sells merchandise to Pidro for 100,000 at a gross profit to Sisa of
20,000. At December 31, 2011 half of this merchandise is included in
Pidro’s inventory. Separate incomes for Pidro and Sisa for 2011 are
summarized as follows:
Pidro Sisa
Sales P500,000 P300,000
Cost of sales (250,000 (200,000)
)
Operating expenses (125,000 (40,000)
)
Net income from own operations P125,000 P60,000

Required: CNI, NCI in NI, NI to parent.

4. Pat Corporation owns 70% of Susan Company’s stocks acquired on

January 1, 2010. Susan regularly sells merchandise to Pat at 150% of
Susan’s cost. Pat’s December 31, 2010 and 2011 inventories include
goods purchased intercompany of 112,500 and 33,000 respectively,
The separate income (excluding dividend income) of Pat and Susan
for 2011 are summarized below:

Pat Susan
Sales P1,200,000 P800,000
Cost of goods sold (600,000) (500,000)
Operating expenses (400,000) (100,000)
Net income from own operations 200,000 200,000

Required: CNI, NCI in NI, Net income to parent

 5. Patton Corporation acquired 60% interest in Solis Company on
January 1, 2011 for 360,000 at book value. During 2011, Patton sold
inventory items that cost 600,000 to Solis for 800,000, and Solis’
inventory at December 31, 2011 includes one-fourth of this
merchandise. Patton reported income from own operations of 300,000
and Solis reported a net income of 150,000.

Required: CNI, NCI in NI and NI to parent

6. On December 31, 2010, P Company purchased 70% interest in S

Company at book value.

For 2011, P Company had income of 200,000 from its own operations
and paid dividends of P100,000, For 2011, S Company reported
income of P30,000 and paid dividends of P20,000.

The beginning inventory of P Company includes 6,000 of merchandise

purchased from S Company on December 31, 2010 at 150% of cost.
Ending inventory of P Company includes 9,000 of merchandise
purchased from S Company at the same mark-up.

Required: CNI, NCI in NI, NI to parent, NCI balance.

Part 2: Plant assets

1. Intercompany sale of non-depreciable assets – computation of CNI, NCI in NI,
NI to parent and NCI balance.
2. Intercompany sale of depreciable assets – computation of CNI, NCI in NI, NI
to parent and NCI balance.

a. Non-depreciable assets (land):

Year of intercompany sale
Parent Net income xx
Dividend income from S (xx)
Parent Net income from own xx
Unrealized gain on sale of land (xx)
Unrealized loss on sale of land xx
Adjusted net income of parent xx

Subsidiary net income xx

Amortization of excess xx
Unrealized gain on sale of land (xx)
Unrealized loss on sale of land xx xx
CNI xx
NCI in NI of subsidiary (xx)
NI to parent xx
 Subsequent to year of sale

Parent Net income xx

Dividend income from S (xx)
Parent net income from own xx
Realized gain on sale of land xx
Realized loss on sale of land (xx)
Adjusted net income of parent xx

Subsidiary Net income xx

Amortization of excess xx
(xx)
Realized gain on sale of land xx
Realized loss on sale of land (xx) xx
CNI xx
NCI in NI of Subsidiary (xx)
NI to parent xx
Notes:
1. The total gain/loss on sale of land is eliminated from the selling
party’s net income from own operations only in the year of
intercompany sale.
2. The gain/loss on the sale should only be realized in the year the land is
ultimately sold to outsiders. As long as the land remains unsold, the
gain or loss on the sale remains unrealized.

b. Depreciable assets:
Same computations as in sale of non-depreciable assets, except that the
gain/loss on sale is realized based on the useful life of the asset sold and
the method of depreciation used.

c. Computation of NCI
Same as in the previous topics.

Problems:
1. On January 1, 2011, Pete Company sold equipment to Sison Company, its
wholly-owned subsidiary, for 400,000. The equipment had cost Pete 500,000;
the accumulated depreciation at the time of the sale was 250,000. Pete used a
10-year life, no salvage value, and straight-line depreciation. On the
consolidated balance sheet, what is the cost and accumulated depreciation of
the equipment?

2. In 2010, Primo sold a land to Second at a gain of 30,000. In 2011, the land
remains to be unsold. However, in 2012, the land was sold to outside parties.
The following are the relevant data regarding Primo and Second:

Net income from own operations 2010 2011 2012

 Primo 200,00 250,00 300,000
0 0
Second 100,00 150,00 200,000
0 0

Required: CNI for 2010, 2011, and 2012.

3. Several years ago, Parent Corporation acquired 80% of Sub co. Analysis of
data relative to this purchase indicates that goodwill of 60,000 was acquired in
this purchase.

On October 1, 2010, Sub sold to Parent a used car for 32,000 in cash. Sub
originally paid 55,000 for the car; on the day of sale, the car had a book value
of 23,000. Parent estimated the remaining life of the car at 3 years.

Parent’s net income from own was 100,000 in 2010 and 120,000 in 2011.
Sub’s net income was 60,000 in 2010 and 75,000 in 2011.

Compute for the consolidated net income attributable to parent for each year.