BSA 310:

Consolidation with Intercompany Transactions

 Intercompany Dividends and Bond Transactions
Intercompany sale of Inventory

Unrealized gross profit in ending inventory

ACCOUNTING FOR BUSINESS COMBINATIONS (ADVANCED ACCOUNTING 2) - (BY: MILLAN)

Intercompany sale of Inventory

Consolidated Sales

ACCOUNTING FOR BUSINESS COMBINATIONS (ADVANCED ACCOUNTING 2) - (BY: MILLAN)

Intercompany sale of Inventory

Consolidated Cost of Sales

ACCOUNTING FOR BUSINESS COMBINATIONS (ADVANCED ACCOUNTING 2) - (BY: MILLAN)

Intercompany sale of Inventory

Consolidated Ending Inventory

ACCOUNTING FOR BUSINESS COMBINATIONS (ADVANCED ACCOUNTING 2) - (BY: MILLAN)

 Intercompany Sale of Inventory
1. Dream Co. owns 75% interest in Theater Co. The following transactions occurred during the year:
A. Dream Co. sold goods costing P20,000 to Theater Co for P38,000. Theater Co. held P9,500 of these goods in its ending
inventory.
B. Theater Co. sold goods to Dream Co. for P40,000. The gross profit rate is 20% based on sales price. Dream Co. sold ¼ 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 Co.Theater Co.
Sales 1,000,000 700,000
Cost of Sales (400,000) (350,000)
Gross profit 600,000 350,000
Ending inventory 300,000 80,000
Requirements:
A. Consolidated sales
B. Consolidated Cost of sales
C. Consolidated Ending inventory
Intercompany Sale of Inventory
Intercompany sale of PPE

Consolidated PPE

ACCOUNTING FOR BUSINESS COMBINATIONS (ADVANCED ACCOUNTING 2) - (BY: MILLAN)

Intercompany sale of PPE

Consolidated Depreciation Expense

ACCOUNTING FOR BUSINESS COMBINATIONS (ADVANCED ACCOUNTING 2) - (BY: MILLAN)

 Intercompany Sale of PPE
2. On January 1, 20x1, Bright Co. acquired 75% interest in Dull Co. for P180,000. On this date, the carrying amount of Dull’s net
identifiable assets was P160,000, equal to fair value. Non-controlling interest was measured using the proportionate share
method.
The financial statements of entities on December 31, 20x2 show the following information:
Bright Company Dull Company
ASSETS
Investment in subsidiary at cost 180,000 -
Equipment-net 400,000 190,000
Other assets 200,000 45,000
TOTAL ASSETS 780,000 235,000
LIABILITIES AND EQUITY
Liabilities 70,000 25,000
Share capital 600,000 100,000
Retained earnings 110,000 110,000
Total equity 710,000 210,000
TOTAL LIABILITIES AND EQUITY 780,000 235,000
 Intercompany Sale
BRIGHT CO.
of
DULL CO.
PPE
Revenues 300,000 80,000
Depreciation expense (40,000) (12,000)
Other expense (32,000) (18,000)
Gain on sale of equipment 12,000 -_________
Profit for the year 240,000 50,000
Additional information:
- No dividends were declared by either entity during 20x1. There is also no impairment of goodwill.
- However, on January 1, 20x1, right after the business combination, Bright Co. sold the equipment
with historical cost of P120,000 and accumulated depreciation of P72,000 to Dull Co. for P60,000.
Bright Co. has been depreciating this equipment over a useful life of 10 years using the straight line
method. Dull Co. decided to continue this accounting policy and depreciate the equipment over its
remaining useful life of 4 years.
 Intercompany Sale of PPE
Requirement:
A. What is the carrying amount of the equipment sold by Bright Co. to Dull Co. in the consolidated
financial statement?
B. How much is the consolidated Equipment-net?
C. How much is the consolidated Depreciation expense?
Intercompany Sale of PPE
Intercompany Sale of PPE
 Intercompany Dividends
The dividends must be eliminated when the consolidated
financial statements are prepared. It is as if the parent never
received the dividends. Therefore:
• If the dividends were recognized in profit or loss (if the
investment is measured at cost or at fair value), eliminate the
dividend income in the consolidated statement of profit or
loss.
• If the dividends were recognized as reduction to the
investment account (if the investment is measured using the
equity method), add back the dividends to the investment
account.
 Intercompany Bond transaction
• When a parent or a subsidiary acquires bonds issued by the
other, both the investment in bonds and the bonds payable are
eliminated in the consolidated financial statements.
• The bonds payable are considered extinguished from the
group’s point of view.
• Any interest expense/interest income recognized by the parent
and the subsidiary on each other is eliminated in the
consolidated financial statements.
THANK YOU!