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UM Tagum College

Arellano Street, Tagum City, 8100 Philippines

Business Combination; Consolidated & Separate FS PROF. JON D. INOCENTES,CPA


LECTURE

Intercompany Inventory Transactions


PROBLEM 1
Percy Company owns 80% of the common stock of Smyth Company. Percy sells merchandise to Smyth at 20% above cost.
During 2018 and 2019, intercompany sales amounted to P1,080,000 and P1,200,000 respectively. At the end of 2018,
Smyth had one-fifth of the goods purchased that year from Percy in its ending inventory. Smyth’s 2019 ending inventory
contained one-fourth of that year’s purchases from Percy. There were no intercompany sales prior to 2018.

Percy reported net income from its own operations of P720, 000 in 2018 and P760,000 in 2019. Smyth reported net income
of P400,000 in 2018 and P460,000 in 2019. Neither company declared dividends in either year.
Required:
A. Prepare in general journal form all entries necessary on the consolidated statements workpapers to eliminate the effects
of the intercompany sales for both 2018 and 2019.
B. Calculate controlling interest in consolidated net income for 2019.

PROBLEM 2
Colton Company acquired 80 percent ownership of Mota Company's voting shares on January 1, 2018, at underlying book
value. The fair value of the noncontrolling interest on that date was equal to 20 percent of the book value of Mota Company.
During 2018, Colton purchased inventory for P30,000 and sold the full amount to Mota Company for P50,000. On December
31, 2018, Mota's ending inventory included P10,000 of items purchased from Colton. Also in 2018, Mota purchased inventory
for P80,000 and sold the units to Colton for P100,000. Colton included P30,000 of its purchase from Mota in ending inventory
on December 31, 2018. Summary income statement data for the two companies revealed the following:

Colton Company Mota Company


Sales P 300,000 P 172,000
Income Subsidiary 39,000
P 339,000 P 172,000
Cost of goods sold 190,000 110,000
Other Expenses 45,000 29,000
Net Income P 104,000 P 33,000
Required:
a.Compute the amount to be reported as sales in the 2018 consolidated income statement.
b. Compute the amount to be reported as cost of goods sold in the 2018 consolidated income statement.
c. What amount of income will be assigned to the noncontrolling shareholders in the 2018 consolidated income statement?
d. What amount of income will be assigned to the controlling interest in the 2018 consolidated income statement?

Intercompany Sales of Property and Equipment


PROBLEM 1
Pike Company owns 90% of the outstanding common stock of Sanka Company. On January 1, 2018, Sanka Company sold
equipment to Pike Company for $300,000. Sanka Company had purchased the equipment for $450,000 on January 1,
2006 and has been depreciating it over a 10 year life by the straight-line method. The management of Pike Company
estimated that the equipment had a remaining life of 5 years on January 1, 2018. In 2018, Pike Company reported
$225,000 and Sanka Company reported $150,000 in net income from their independent operations.
Required:
A. Prepare in general journal form the workpaper entries relating to the intercompany sale of equipment that are
necessary in the December 31, 2018 and 2019 consolidated statements workpapers. Pike Company uses the cost method
to record its investment in Sanka Company.
B. Calculate equity in subsidiary income for 2018 and noncontrolling interest in net income for 2018.

PROBLEM 2
Spiniflex Pigeon Company owns 90% of the outstanding stock of Waterhole Corporation. This interest was purchased on
January 1, 2019, when Waterhole’s book values were equal to its fair values. The amount paid by Spiniflex Pigeon
included $10,000 for goodwill.
On January 1, 2013, Spiniflex Pigeon purchased equipment for $100,000 which had no salvage value with a useful life of 8
years. on a straight-line basis. On January 1, 2018, Spiniflex Pigeon sold the truck to Waterhole Corporation for $30,000. .
All affiliates use the straight-line depreciation method.
Required:
Prepare all relevant entries with respect to the truck.
1. Record the journal entries on Spiniflex Pigeon’s books for 2018.
2. Record the journal entries on Waterhole’s books for 2018.
3. Give all eliminating entries needed to prepare a consolidation workpaper for 2018

COMPREHENSIVE PROBLEM
PROBLEM 1
Separate income statements of Nightjar Corporation and its 90%-owned subsidiary, Branch Inc., for
2019 were as follows:

Nightjar Branch
Sales Revenue $ 2,000,000 $ 1,200,000
Cost of sales ( 1,200,000 ) ( 800,000 )
Other expenses ( 400,000 ) ( 200,000 )
Gain on equipment 80,000
Income from Branch 180,000
Net income $ 660,000 $ 200,000

Additional information:
1. Nightjar acquired its 90% interest in Branch Inc. when the book values were equal to the fair
values.
2. The gain on equipment relates to equipment with a book value of $120,000 and a 4-year
remaining useful life that Branch sold to Nightjar for $200,000 on January 2, 2019. The
straight-line depreciation method is used.
3. In 2018 Nightjar sold inventory to Branch of which the remainder was sold in 2019.
2018 2019
Intercompany sales $ 300,000 200,000
Cost of intercompany sales 180,000 120,000
Percentage unsold at year-end 40 50
Required:
Prepare a consolidated income statement for Nightjar Corporation and Subsidiary for the year ended December 31, 2019.

PROBLEM 2
On January 2, 2021, PLDT acquired 60% of outstanding shares of Smart Inc. with gain on bargain purchase amounting to
P 1M. The following data are provided.
 On January 2, 2021. PLDT sold a black equipment to Smart with cost of P 1M and accumulated depreciation of P
400,000 at a selling price of P 900,000. The black equipment has original life of 5 years.
 On July 1, 2022, Smart sold a white equipment to PLDT with cost of P 500,000 and accumulated depreciation of P
300,000 at a selling price of P 150,000. The white equipment has original life of 10 years.
 On year 2022, PLDT reported net income of P 5M and declare dividends of P 2M while Smart reported net income of
P 1M and declared dividends of P 500,000.
1. What is the consolidated net income attributable to parent’s shareholders for the year ended December 31, 2022?
a. P 5,426,250 b. P 5,626,250 c. P 6,422,500 d. P 6,622,500
2. Using the same data in number 32, what is the consolidated depreciation expense of the equipment for the year
ended December 31, 2022?
a. 250,000 b. 225,000 c. 125,000 d. 112,500
3. Using the same data in number 32, what is the consolidated book value of the equipment on December 31, 2022?
a. P 375,000 b. P 412,500 c. P 350,000 d. P 425,000

PROBLEM 3
On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. At this time, Piglet's net identifiable assets have a carrying
amount of ₱720,000 which approximates fair value.
During the last month of the year, Piglet sold goods to Pig for ₱324,000. Piglet had marked up these goods by 50% on cost.
One-third of these goods remain unsold at year-end. The group assessed that there is no impairment loss on goodwill for
the current year.
The individual statements of profit or loss of the entities for the year ended December 31, 20x1 are shown below:

Pig Co. Piglet Co.


Revenue 4,000,000 2,880,000
Cost of sales (1,600,000) (1,200,000)
Gross profit 2,400,000 1,680,000
Distribution costs (800,000)
Administrative costs (320,000) (180,000)
Profit before tax 1,280,000 1,100,000
Income tax expense (384,000) (380,000)
Profit after tax 896,000 720,000
All of Piglet’s income and expenses (including profit from inter-company sale) were earned and incurred evenly during the
year.
1. How much is the consolidated sales?
a. 6,556,000 b. 4,852,000 c. 4,786,000 d. 4,636,000
2. How much is the consolidated cost of sales?
a. 1,712,000 b. 2,530,000 c. 1,730,000 d. 1,876,000
3. How much is the consolidated profit?
a. 1,100,000 b. 1,580,000 c. 1,360,000 d. 1,420,000
4. How much is the profit attributable to owners of the parent and NCI, respectively?
Owners of Parent NCI
a. 1,040,000 60,000
b. 1,049,000 51,000
c. 1,036,000 544,000
d. 1,049,000 311,000

PROBLEM 4
Pair Corporation acquired an 80% interest in Size Company on January 2, 2012 for P2,520,000. On this date, the share
capital and retained earnings of the two companies follow:
Pair Corp. Size Co.
Share Capital P6,000,000 P2,250,000
Retained Earnings 3,000,000 450,000
On January 2, 2012, the assets and liabilities of Size Co. were stated at their fair values except for machinery which is
undervalued by P225,000 (remaining life is 3 years). On September 30, 2012, Size sold merchandise to Pair at an inter-
company profit of P150,000; 25% was still unsold at year-end.
Likewise, on October 1, 2013, Size purchased merchandise from Pair for P3,600,000. The selling
affiliate included a 20% mark-up on cost on this sale. Only 75% of these purchases had been sold to unrelated parties as
of December 31, 2013. As of December 31, 2013, goodwill was determined to be impaired by P60,000.

The following is the summary of the 2013 transactions of the affiliated companies:

Pair Corp. Size Co.


Net Income P1,500,000 P600,000
Dividends declared and paid 600,000 180,000

On the 2013 consolidated financial statements, how much would be the:

7. Net income attributable to Parent


A. P1,638,000
B. P1,708,500
C. Pl, 608,000
D. P1,686,000

8. Non-controlling interest in net income


A. P70,500
B. P100,500
C. P82,500
D. P85,500

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