Classroom Exercises on Consolidation with IntercompanyTransactions

MODADV2 Term 3 AY 2019-2020

Problem 1

Blaziken Corporation owns 80% of Torchic Inc.’s common stock. During 2020, Blaziken sold to
Torchic P500,000 of inventory on the same terms as sales made to third parties. Torchic sold all
of the inventory purchased from Blaziken in 2020. The following information pertains to Torchic
and Blaziken’s sales for 2020:
Blaziken Torchic
Sales P2,000,000 P1,400,000
Cost of Sales 800,000 700,000
Gross Profit P1,200,000 P700,000

1. What amount should Blaziken report as Cost of Sales in its 2020 consolidated
income statement? P1,000,000

Problem 2

The Swampert Corporation owns 60% of the voting share of Mudkip Company. During 2020,
Mudkip Company sold merchandise costing P117,600 to Swampert Corporation for P168,000.
Swampert received P240,000 when it resold 75% of the merchandise to outsiders before the
end of 2020. The remaining 25% was held as inventory by Swampert on December 31, 2020.
The companies had no other transactions during 2020.

Required:
2. What amount of consolidated net income will be reported in the consolidated
financial statements on December 31, 2020? P151,800
3. What amount of inventory balance will be reported in the consolidated financial
statements on December 31, 2020?P29,400

Problem 3

Sceptile Corporation holds 80% of the stock of Treecko Company. During 2020, Sceptile
purchased merchandise for P240,000 and resold P180,000 to Treecko for P288,000. Treecko
Company reported sales of P402,000 in 2020 and had inventory of P96,000 on December 31,
2020. The companies had no beginning inventory and had no other transactions in 2020.

Required:
4. What amount of cost of goods sold will be reported in 2020 consolidated
statement of comprehensive income?P120,000
5. What amount of consolidated comprehensive income will be reported in 2020
consolidated statement of comprehensive income?P282,000

Page 1 of 7
Problem 4

Typhlosion Corporation purchased 80% interest in Cyndaquil for P3,600,000 on January 1,

2020, at which time Cyndaquil’s stockholders’ equity amounts to P4,200,000. The excess cost
over book value was assigned to goodwill which is not amortized. Statements of comprehensive
income of the two companies for 2021 are as follows:

Typhlosion Cyndaquil
Sales P6,000,000 P3,000,000
Income from subsidiary – Cyndaquil 672,000
Cost of sales (2,400,000) (1,500,000)
Operating expenses (1,320,000) (600,000)
Comprehensive income P2,952,000 P900,000

During 2020, Cyndaquil sold inventory items to Typhlosion for P480,000. This merchandise cost
Cyndaquil P300,000 and one-fourth of it remained in Typhlosion’s December 31, 2020 inventory.
During 2021, Cyndaquil’s sales to Typhlosion amounted to P540,000. This merchandise cost
Cyndaquil P378,000 and one-half of it remained in Typhlosion’s December 31, 2021 inventory.

6. How much is the consolidated comprehensive income attributable to parent on

December 31, 2019?P2,971,200

Page 2 of 7
Problem 5

Below are relevant data for Feraligatr and Totodile companies for 2020 and 2021:
2020 2021
Intercompany sales by Totodile to Feraligatr P600,000 P720,000
Intercompany cost of sales 240,000 360,000
Intercompany merchandise in Feraligatr:
Inventory at December 31 at billed prices 120,000 180,000
Comprehensive income from its own
operations:
Feraligatr Company 1,200,000 1,500,000
Totodile Company 480,000 720,000

At January 1, 2020, Feraligatr owned 80% of the outstanding voting Ordinary shares of Totodile
Company, acquired several years ago at book value.

7. How much is the consolidated comprehensive income attributable to parent for

2021? P2,061,600

INTERCOMPANY SALE OF NONCASH ASSET

Problem 6

Meganium Corporation acquired an 80% interest in Chikorita Company on January 2, 2020 for
P5,040,000. On this date, the share capital and retained earnings of the two companies follow:
Meganium Corporation Chikorita Company
Share capital P12,000,000 P4,500,000
Retained earnings 6,000,000 900,000

On January 2, 2020, the assets and liabilities of Chikorita Co. were stated at their fair values
except for machinery which is undervalued by P450,000 (remaining life is 3 years). On
September 30, 2020, Chikorita sold merchandise to Meganium at an inter-company profit of
P300,000. It was discovered that 25% was still unsold at year-end. Likewise, on October 1,
2021, Chikorita purchased merchandise from Meganium for P7,200,000. 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, 2021. As of December 31, 2021, goodwill was determined
to be impaired by P120,000. The following is the summary of the 2021 transactions of the
affiliated companies:
Meganium Corporation Chikorita Company
Net income P3,000,000 P1,200,000
Dividends declared and paid 1,200,000 360,000

Required:
8. How much is the consolidated net income attributable to parent to be reported in
the 2021 consolidated financial statements? P3,216,000

Page 3 of 7
 9. How much is the non-controlling interest in net income to be reported in the 2021
consolidated financial statements? P201,000

Problem 7

On January 2, 2020, Dragonite Company acquired 90% of the outstanding shares of Dratini Inc.
at book value. During 2020 and 2021, intercompany sales amounted to P4,000,000 and
P8,000,000, respectively. Dragonite Company consistently recognized a 25% mark-up based on
cost while Dratini Inc. had a 25% gross profit on sales. The inventories of the buying affiliate,
which all came from inter-company transactions show:

December 31, 2020 December 31, 2021

Dragonite P480,000 P320,000
Dratini 200,000 80,000

On October 1, 2020, Dratini Inc., purchased a piece of land costing P2,000,000 from Dragonite
Company for P3,000,000. On December 1, 2021, Dratini Inc., sold this land to unrelated party
for P3,100,000. On the other hand, on July 1, 2021, Dratini Inc., sold a used photo-copier with a
carrying value of P120,000 and remaining life of 3 years to Dragonite Company for P84,000.
Separate Statements of Comprehensive Income for the two companies for the year 2021 follow:
Dragonite Company Dratini Inc.
Sales P50,000,000 P28,000,000
Cost of sales (30,000,000) (16,800,000)
Gross profit P20,000,000 P11,200,000
Operating expenses (12,000,000) (7,600,000)
Operating profit P8,000,000 P3,600,000
Loss on sale of office equipment (36,000)
Dividend revenue 80,000
Net income P8,000,000 P3,644,000

Required:
10. How much is the consolidated gross profit to be presented in the consolidated
financial statements on December 31, 2021? P31,624,000
11. How much is the consolidated net income attributable to parent to be presented in
the consolidated financial statements on December 31, 2021? P12,366,600
12. How much is the non-controlling interest in net income to be presented in the
consolidated financial statements on December 31, 2021? P371,400
13. How much is the consolidated operating expenses to be presented in the
consolidated financial statements on December 31, 2021? P19,606,000

Page 4 of 7
Problem 8

On January 2, 2020, Salamence Company acquired 60% of the outstanding shares of Bagon
Inc. resulting to an income from acquisition in the amount of P660,000. During 2020 and 2021,
intercompany sales amounted to P13,600,000 and P18,800,000, respectively. Salamence
Company consistently recognized a 30% gross profit on sales while Bagon Inc. had a 40%
gross profit on sales. The inventories of the buying affiliate were as follows: 3/4of the beginning
inventory came from inter-company transactions and 1/3 of the ending inventory came from
outsiders. The December 31, 2020 inventory of Salamence and Bagon amount to P1,680,000
and P700,000, respectively. The December 31, 2021 inventory of Salamence and Bagon
amount to P1,140,000 and P300,000, respectively.

On September 1, 2020, Bagon Inc., purchased a piece of land costing P7,000,000 from
Salamence Company for P10,500,000. On November 2, 2021, the buying affiliate sold this land
to Shelgon Co. for P15,000,000. On the other hand, on May 1, 2021, Bagon Inc., sold a
machinery with a carrying value of P860,000 and remaining life of 4 years to Salamence
Company for P380,000. Bagon Inc. declared dividends in 2021 in the amount of P1,200,000.
Separate Statements of Comprehensive Income for the two companies for the year 2020 follow:
Salamence Company Bagon Inc.
Sales P43,000,000 P20,000,000
Cost of sales (27,000,000) (12,400,000)
Gross profit P16,000,000 P7,600,000
Operating expenses (6,480,000) (2,200,000)
Operating profit P9,520,000 P5,400,000
Gain on sale of land 4,500,000
Loss on sale of machinery (480,000)
Dividend revenue 900,000 220,000
Net income P10,420,000 P9,640,000

Required:
14. How much is the consolidated gross profit to be presented in the consolidated
financial statements on December 31, 2021? P23,897,500
15. How much is the consolidated net income attributable to parent to be presented in
the consolidated financial statements on December 31, 2021? P19,441,500
16. How much is the consolidated operating expenses to be presented in the
consolidated financial statements on December 31, 2021? P8,760,000

Page 5 of 7
Problem 9

On July 1, 2020, Flygon Company purchased 80% of the outstanding shares of Trapinch
Company at a cost of P8,000,000. On that date, Trapinch had P5,000,000 of ordinary share
capital and P7,000,000 of retained earnings. For 2020, Flygon had income of P2,800,000 from
its separate operations and paid dividends of P1,500,000. For 2020, Trapinch reported income
of P650,000 and paid dividends of P300,000. All the assets and liabilities of Trapinch have book
values equal to their respective fair market values. On October 1, 2020, there was an upstream
sale of machinery for P1,000,000. The book value of the machinery on that date was
P1,200,000. The machinery is expected to have a useful life of 5 years from the date of sale.

17. In the December 31, 2020 consolidated statement of financial position, how much
is the consolidated net income attributable to the controlling interest? P4,732,000

Problem 10

Snorlax Corporation acquired 75% of the outstanding shares of Munchlax Company on January
2, 2020 for a consideration transferred of P8,640,000. The price paid includes a control
premium amounting to P240,000. On the date of acquisition, the related cost of business
combination amounted to P160,000. On January 2, 2020, Munchlax Company’s stockholders’
equity accounts were: Ordinary share capital – P11,400,000 and Retained earnings –
P3,720,000. An examination of the acquired company’s assets and liabilities on the date of
acquisition revealed that there were assets with book values different from their fair values. The
merchandise inventory of Munchlaxis overstated by P360,000; Land was undervalued by
P1,800,000; Equipment was overvalued by P1,440,000; and Copyright was undervalued by
P1,080,000.

Inventories were all sold in 2020. The equipment had a remaining life of 8 years while copyright
had a remaining life of 5 years. During 2020, intercompany sales of merchandise on account
amounted to P3,960,000, of which P252,000 is from upstream sales. Likewise, the December
31, 2020 inventory includes P288,000 from downstream sales. The Snorlax Corporation’s mark-
up was 20% of sales while Munchlax Company’s selling price is at 120% of cost.

On the first day of the second month of the second quarter of 2021, there was an upstream sale
of land for P5,400,000. On this date the land was carried on the selling company’s books at
P4,680,000, an amount which is equal to fair value on the date of acquisition. On the first day of
the last month of the third quarter of 2021, there was a downstream sale of furniture for
P600,000. On this date the furniture was carried on selling company’s books, net of
accumulated depreciation at P420,000. The furniture was estimated to have a remaining life of 5
years on the date of sale. On the first day of the last month of the year 2021, there was an
upstream sale of building for P13,440,000. On this date, the building was carried on selling
company’s books, net of accumulated depreciation at P16,320,000. The building was estimated
to have a remaining life of 8 years on the date of sale.

During 2021, intercompany sales of merchandise on account amounted to P6,480,000, of which

P720,000 is from upstream sales. Likewise, the December 31, 2021 inventory includes
P540,000 from downstream sales. Unconsolidated Statement of Financial Position as of
December 31, 2021 show:
Snorlax Corporation Munchlax Company

Page 6 of 7
Cash P6,480,000 P3,600,000
Trade receivable 2,040,000 1,920,000
Merchandise inventory 5,280,000 3,480,000
Furniture, net 1,440,000 1,080,000
Equipment, net 2,280,000 1,320,000
Building, net 18,120,000 13,080,000
Machinery, net 960,000 720,000
Land 11,760,000 6,000,000
Copyright, net 1,320,000 480,000
Investment in Munchlax Co. 8,640,000
Cost of goods sold 13,800,000 4,800,000
Loss on sale of machinery 120,000 360,000
Loss on sale of building 720,000 2,880,000
Expenses 7,680,000 3,240,000
Dividends declared 4,560,000 3,840,000
Total P85,200,000 P46,800,000

Liabilities P7,860,000 P5,400,000

Ordinary share capital 22,800,000 11,400,000
Retained earnings, 01/01/2021 14,400,000 8,400,000
Sales 33,600,000 19,200,000
Gain on sale of furniture 180,000 240,000
Gain on sale of land 2,400,000 720,000
Dividend revenue 3,960,000 1,440,000
Total P85,200,000 P46,800,000

The acquirer corporation accounts for its investment account in subsidiary using the cost
method.

Required:
For 2021, compute for the following items in the consolidated financial statements:
18. Expenses P10,974,000
19. Non-controlling interest in profit P3,084,000
20. Non-controlling interest on net assets P7,414,500

Page 7 of 7