ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Problem 1

Red Company owns 80% of the stock of Velvet Company, which was acquired at underlying book value on August
30, 2022. Summarized trial balance data for the two companies as of December 31, 2022 are as follows:

Red Company Velvet Company

Debit Credit Debit Credit
Cash and Receivables 161,000 90,000
Inventories 220,000 110,000
Building and Equipment 270,000 180,000
Investment in Velvet Company 248,000
Cost of Goods Sold 175,000 140,000
Depreciation Expense 30,000 20,000
Current Liabilities 150,000 30,000
Ordinary Shares 200,000 90,000
Retained Earnings, 1/1 472,000 220,000
Sales 250,000 200,000
Dividend Income 32,000
1,104,000 1,104,000 540,000 540,000

On January 1, 2023, the inventory held by Red Company contained merchandise purchased for P60,000 from Velvet
Company. Velvet Company had purchased the merchandise for P40,000. In 2023, Velvet Company spent P100,000
to purchase additional merchandise, which is sold to Red Company for P150,000. By December 31, 2023, Red
Company has sold all merchandise that had been on hand January 1, 2023 but continued to hold in inventory P45,000
of the 2023 purchased from Velvet Company.

Required:
a. Prepare the working paper elimination entries.
b. Compute for the consolidated net income.
c. Compute for the amount of Noncontrolling interest in the net assets of subsidiary.

Working Paper Elimination Entries – December 31, 2023

At Date of Acquisition:
August 30, 2022:

? ?
? ?
? ?
? ?
#to eliminate equity accounts of Velvet at Date of Acq.

At Year-End:
December 31, 2023

? ?
NCI 8,000
? ?
#to eliminate intercompany dividends

? ?
Retained Earnings, 1/1 16,000
? ?
#to eliminate realized gross profit in the beg. Inv.

? ?
? ?
Inventory, 12/31 15,000
#to eliminate intercompany sales and unrealized profit in ending inventory

NCI in the Comprehensive Income of Subsidiary ?

Noncontrolling Interest 9,000
#to establish noncontrolling interest in the net income of Velvet Co.

ABC301| RCA CPA 2023 – Accounting for Consolidated Financial Statements – Intercompany Transactions (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Computation of NCI in the CI of Subsidiary:

Sales ?
Cost and Expenses ?
Net Income ?
Realized Profit in the Beginning Inventory – Upstream ?
Unrealized Profit in the Ending Inventory – Upstream (15,000)
Adjusted Net Income ?
Multiplied by: Percentage of NCI ?
NCI in the CI of Subsidiary 9,000

Consolidated Net Income

Net Income from own operations ?

Velvet Company adjusted net income 45,000
Consolidated Net Income ?

Noncontrolling Interest in the Net Assets of Subsidiary (NINAS):

Shareholders’ Equity, December 31, 2023 – Velvet ?

Adjusted Net Income – 2023 ?
Adjusted Net Assets, December 31, 2023 – Velvet ?
Multiplied by: Percentage of NCI ?
NCI in the Net Assets of Subsidiary 71,000

Problem 2

Super Company acquired 80% of Junior on December 31, 2022. Based on the purchase price, goodwill of P300,000
was recognized. The 2023 financial statements are as follows:

Super Company and Junior Company

Statement of Comprehensive Income
For the period ended December 31, 2023

Super Junior
Sales 800,000 600,000
Costs of Goods Sold (535,000) (400,000)
Gross Margin ? ?
Operating Expenses (100,000) (100,000)
Net Income ? ?
Dividend Income 35,000 -
Comprehensive Income 200,000 100,000

Super Company and Junior Company

Statement of Retained Earnings
For the period ended December 31, 2023

Super Junior
Retained Earnings, 1/1 1,300,000 850,000
Comprehensive Income 200,000 100,000
Total ? ?
Dividends Paid (100,000) (50,000)
Retained Earnings, 12/31 1,400,000 900,000

ABC301| RCA CPA 2023 – Accounting for Consolidated Financial Statements – Intercompany Transactions (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Super Company and Junior Company

Statement of Financial Position
For the period ended December 31, 2023

Super Junior
Cash and Receivables 400,000 300,000
Inventory 298,000 700,000
Investment in Junior Company 902,000
Fixed Assets 1,000,000 600,000
Accumulated Depreciation (300,000) (200,000)
Total Assets 2,300,000 1,400,000

Liabilities 600,000 400,000

Ordinary Shares 300,000 100,000
Retained Earnings 1,400,000 900,000
Total Liabilities and Equity 2,300,000 1,400,000

Super sells inventory costing P72,000 to Junior during 2022 for P120,000. At years’ end, 30% is left. Super sells
inventory costing P200,000 to Junior during 2023 for P250,000. At year’s end, 20% is left. Under these
circumstances, compute for the following:

Required:
a. Consolidated Sales
b. Consolidated Costs of Goods Sold
c. Consolidated Operating Expenses
d. Noncontrolling Interest in the Net Income of Subsidiary
e. Consolidated Inventory
f. Noncontrolling Interest in the Net Assets of Subsidiary

Consolidated Sales

Super Company ?
Junior Company ?
Intercompany Sales - 2023 (250,000)
Consolidated Net Income 1,150,000

Consolidated Cost of Goods Sold

Super Company ?
Junior Company ?
Intercompany Sales - 2023 (250,000)
Realized Profit in beginning inventory – 2023 ?
Unrealized Profit in ending inventory – 2023 ?
Consolidated Cost of Goods Sold 680,600

Consolidated Operating Expenses

Super Company ?
Junior Company ?
Consolidated Operating Expenses 200,000

NCI in the CI of Subsidiary

Sales ?
Cost and Expenses ?
Net Income ?
Multiplied by: Percentage of NCI ?
NCI in the CI of Subsidiary 20,000

ABC301| RCA CPA 2023 – Accounting for Consolidated Financial Statements – Intercompany Transactions (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Consolidated Inventory

Super Company ?
Junior Company ?
Unrealized Profit in ending inventory – 2023 ?
Consolidated Cost of Goods Sold 988,000

NCI in the Net Assets of Subsidiary

Shareholders’ Equity, 1/1 ?

Increase in Retained Earnings in 2023 ?
Shareholders’ Equity, 12/31 ?
Percentage of NCI ?
Noncontrolling Interest 200,000

Problem 3

Mama Company holds 80% of the shares of Moo Company, acquired on January 1, 2022 for P160,000. On the date
of acquisition, Moo Company reported retained earnings of P50,000 and had P100,000 ordinary shares outstanding.
Mama use the cost method in accounting for its investment in Moo Company.

Trial Balance data for the two companies on December 31, 2023 are as follows:

Mama Moo
Debit Credit Debit Credit
Cash and Receivables 100,000 20,000
Accounts Receivables 13,000 15,000
Inventory 260,000 90,000
Land 80,000 80,000
Property, Plant and Equipment 500,000 150,000
Investment in Moo Company 160,000
Cost of Goods Sold 140,000 60,000
Depreciation and Amortization 25,000 15,000
Other Expenses 15,000 5,000
Dividends Declared 30,000 5,000
Accumulated Depreciation 205,000 45,000
Accounts Payable 60,000 20,000
Bonds Payable 200,000 50,000
Ordinary Shares 300,000 100,000
Retained Earnings 294,000 105,000
Sales 240,000 120,000
Gain on Sale of Equipment 20,000
Dividend Income 4,000
1,323,000 1,323,000 440,000 440,000

Additional Information:
- At the date of combination, the book values and fair values of all separable identifiable assets of Moo were
the same.
- On January 1, 2022, Moo Company sold land that cost P8,000 to Mama Company for P18,000.
- On January 1, 2023, Mama Company sold to Moo equipment that it had purchased for P75,000, 5 years
ago. The equipment has a total economic life of 15 years and was sold to Moo for P70,000. Both companies
use straight-line depreciation.
- There was P7,000 intercompany receivables and payables on December 31, 2023.

Required:

a. Prepare the working paper elimination entries.

b. Prepare the working paper for consolidated financial statement for Mama Company for the period ended
December 31, 2023.

ABC301| RCA CPA 2023 – Accounting for Consolidated Financial Statements – Intercompany Transactions (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Working Paper Elimination Entries – December 31, 2023

At Date of Acquisition:
January 1, 2022

? ?
? ?
?. ?
? ?
#to eliminate equity accounts of Moo at Date of Acq.

At Year-End:
December 31, 2023

? ?
? ?
? ?
#to eliminate intercompany dividends

? ?
? ?
#to allocate BCVR to Goodwill

Gain on Sale of Equipment 20,000

Property and Equipment 5,000
Accumulated Depreciation 25,000
#to eliminate unrealized gain on sale of land

Accumulated Depreciation 2,000

Depreciation 2,000
#to amortize BCVR allocated to depreciable assets

Accounts Payable 7,000

Accounts Receivable 7,000
#to eliminate intercompany transactions

? ?
? ?
#to establish noncontrolling interest in the net income of Moo Co.

ABC301| RCA CPA 2023 – Accounting for Consolidated Financial Statements – Intercompany Transactions (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Mama Co and Subsidiary

Working Paper for Consolidated Financial Statements
December 31, 2023

Eliminations and Adjustments

Mama Co. Moo Co. Consolidated
Debit Credit
Income Statement:
Sales ? ? ?
Gain on Sale of Equipment ? ? -
Dividend Income ? ? -
Total Revenue ? ? ?
Cost of Goods Sold ? ? ?
Depreciation Expense ? ? ? ?
Other Expenses ? ? ?
Total Cost and Expenses ? ? ?
Net Consolidated Income ? ? ?
NCI in CI of Subsidiary ? ?
Net Income Carried forward: ? ? 96,000

Statement of Retained Earnings:

Retained Earnings, 1/1 ? ? ? ?
?
Net Income from above ? ? ?
Total ? ? ?
Dividends Declared ? ? ? ?
Retained Earnings, 12/31 ? ? 407,000

Statement of Financial Position:

Cash and Cash Equivalents ? ? ?
Accounts Receivable ? ? ? ?
Inventory ? ? ?
Land ? ? ? ?
Property, Plant and Equipment ? ? ? ?
Investment in Subsidiary – Moo Co. ? ? -
?
Goodwill ? ?
Total ? ? ?

Accumulated Depreciation ? ? ? ? ?
Accounts Payable ? ? ? ?
Bonds Payable ? ? ?
Ordinary Shares ? ? ? ?
Retained Earnings from above ? ? ?
Noncontrolling Interest ? ? ?
? ?
Total ? ? ? ? 1,336,000

ABC301| RCA CPA 2023 – Accounting for Consolidated Financial Statements – Intercompany Transactions (Practice Problems)
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