Chapter 5 ners Intercompany sale of property, plant and equipment an The unamortized deferred gain or loss is eliminated whe, consolidated financial statements are prepared. Intercompany dividend it ; If the parent recognized the dividend as dividend income, the dividend income is eliminated from the consolidated profit or loss, Intercompany bond transaction ; ; The bonds are considered extinguished. A gain or loss is recognized in the consolidated financial statements. PROBLEMS: PROBLEM 1; MULTIPLE CHOICE - THEORY 1. Perez, Inc. owns 80% of Senior, Inc. During 1992, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in 1992, For 1992 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted? a. Sales and cost of goods sold should be reduced by the intercompany sales. b. Sales and cost of goods sold should be reduced by 80% 0! the intercompany sales. e Net income should be reduced by 80% of the gross proft on intercompany sales, d. No adjustment is necessary. (Adapted) 2. Water Co. owns 80% of the out: Co. On December 31, 1989, Fis Price in excess of standing common stock of Fi te sold equipment to Watet #? Fire's carrying amount, but less tha?" original cost. On a consolidated balance sheet at Decembe! iB 1989, the carrying amount of the (cost less accumula! depreciation) equipment should be reported at: a. Water's original cost.yr Consolidated Financial Statements (Part 2) 227 p. Fire's original cost. c. Water's original cost less Fire's recorded gain. d. Water's original cost less 80% of Fire's recorded gain. (Adapted) 3, P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be: a. Included as a decrease to the consolidated profit or loss and retained earnings. b. Included as an increase to the consolidated profit or loss and retained earnings. c. Reported as a deferred debit to be amortized over the remaining life of the bonds. d. Reported as a deferred credit to be amortized over the remaining life of the bonds. (Adapted) 4. In its financial statements, Pare, Inc. uses the fair value method of accounting for its 15% ownership of Sabe Co. At December 31, 1993, Pare has a receivable from Sabe. How should the receivable be reported in Pare's December 31, 1993, balance sheet? a. The total receivable should be reported separately. b. The total receivable should be included as part of the investment in Sabe, without separate disclosure. © Eighty-five percent of the receivable should be reported separately, with the balance offset against da. Sabe's payable to Pare. © The total receivable should be offset against Sabe's payable to Pare, without separate disclosure. (Adapted)Chapter 5 5, A 70%-owned subsidiary company declares and pays a cay, ; dividend. What effect does the dividend have on the retaingy earnings and non-controlling interest balances in the paren, company’s consolidated balance sheet? a. No effect on either retained earnings or non-controlling interest. ; b. No effect on retained earnings and a decrease in non. controlling interest. c. Decreases in both retained earnings and non-controlling interest, d. A decrease in retained earnings and no effect on non- controlling interest. (Adapted) 6. Port, Inc. owns 100% of Salem Inc. On January 1, 1992, Port sold Salem delivery equipment at a gain. Port had owned the equipment for two years and used a five-year straight-line depreciation rate with no residual value. Salem is using a three-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem's recorded depreciation expense on the equipment for 1992 will be decreased by: a. 20% of the gain on sale. b. 33 1/3%.of the gain on sale. ©. 50% of the gain on sale, d. 100% of the gain on sale, (Adapted) 7. Sun Co. is a wholly owned companies have separate Seneral ledgers, and prepa “Beare financial statements. Sun, Tequires stand-alone imancial statements. Which of 0 i s — of the following statements subsidiary of Star Co. Both a. Consolidated financial s both Star and Sun, b. Consolidated financial statements should only © Prepared by Star and not by Sun. tatements should be prepared byyr consi ated Financial Statements (Part 2) 229 Atter consolidation, the accounts of both Star and Sun should be changed to reflect the consolidated totals for future ease in reporting, After consolidation, the accounts of both Star and Sun should be combined together into one general ledger accounting system for future ease in reporting. (Adapted) Use the, following information for the next three questions: Basketball Co. wholly owns Volleyball Co, During the year, Basketball purchased inventory from Volleyball. Volleyball has marked-up the goods at 20% above cost. 8. How should the group compute for the consolidated sales? a. b. Sales of Basketball plus sales of Volleyball Sales of Basketball plus sales of Volleyball minus the intercompany sale Sales of Basketball plus sales of Volleyball plus the intercompany sale Sales of Basketball plus sales of Volleyball minus the s profit from intercompany sale unrealized gro 9. How should the group compute for the consolidated cost of sal a. b. les? Cost of sales of Basketball plus cost of sales of Volleyball Cost of sales of Basketball plus cost of sales of Volleyball minus intercompany sales Cost of sales of Basketball plus cost of sales of Volleyball minus intercompany sales plus unrealized profit in ending inventory and minus realized profit in beginning inventory Cost of sales of Basketball plus cost of minus intercompany sales minus unreali: ending inventory and plus realized profit inventory sales of Volleyball zed profit in in beginningY 230 Chapters | ee as SO yd 10. How should the group compute for the consolidated ending inventory? a, Ending inventory of Basketball plus ending inventory of Volleyball minus unrealized profit in ending inventory b. Ending inventory of Basketball plus ending inventory g Volleyball plus unrealized profit in ending inventory c. Ending inventory of Basketball plus ending inventory of Volleyball minus intercompany sales minus untealizeg profit in ending inventory and plus realized profit in beginning inventory d. Ending inventory of Basketball plus ending inventory of Volleyball minus intercompany sales plus unrealized profit in ending inventory and minus realized profit in beginning inventory PROBLEM 2: FOR CLASSROOM DISCUSSION 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 40,000. The gros Profit rate is 20% based on sale price. Dream Co. sold o* fourth of the goods to unrelated parties during the year. The individual statements of profit or loss of the entities du" _the year show th following information: 0 1,000,000 700,000 000) __ (400,000 350) ( ) ( 700 350, The entities held the following inventories at year-end:- consolidated Financial Statements (Part 2) ‘ 21 E— Dream Co. __ Theater Co. ew ee 800000 | 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 the entities on December 31, 20x1 show the following information: Bright Co. Dull Co. ASSETS Investment in subsidiary (at cost) 180,000 - Equipment - net 400,000 190,000 Other assets 200,000 TOTAL ASSETS 780,000 LIABILITIES AND EQUITY bilities 70,000 25,000 Share capital ce {00,000 100,000 Retained earnings 110,000 110,000, otal equity 710,000 210,000 IOTAL LIABILITIES AND EQUITY 780,000 735,000 Bright Co. Dull Co. Revenues 300,000 80,000 lati (12,000) Preciation expense (40,000) Other ees (32,000) (18,000)===" 4 i Chapter 5 ee 12,000 Gain on sale of equipment - Profit for the year 240,000 50,000 Additional information: * No dividends were declared by either entity during 294 There is also no impairment of goodwill. * However, on January 1, 20x, right after the business combination, Bright Co. sold equipment with historical cost of P 120,000 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 years. | Requirement: a. What is the carrying amount of the equipment sold by Bright Co. to Dull Co. in the consolidated financial statements? - How much is the consolidated ‘Equipment net’? How much is the consolidated ‘Depreciation expense’? d. Prepare a draft of the December 31, 20x1 consolidated Statements of financial position and consolidated statement of profit or loss. ° Intercompany dividends 3. Ice Co. owns 75% interest in Fire Co, On acquisition date, the carrying amount of Fire Co.’s net identifiable assets ¥® 240,000; equal to fair value. Non-controlling interest ¥% measured using the Proportionate share method, In 20x1, Fire Co. I declared 100,000 dividends. Selec? information on the enti ties on December 31, 20x1 is shown belo™’ . IceCo,> __ Fire C Statement of financial position accounts: Share capital 800,000 200,000 Retained earnings 280,000° 120,008 Total equity 7,080,000 320,004Consolidated Financial Statements (Part 2) 233 Ice Co. Fire Co. Statement of profit or loss accounts Revenues 640,000 260,000 Expenses (240,000) (128,000) Dividend income 75,000 - Profit or loss 475,000 132,000 Requirements: Compute for the following: a. Non-controlling interest in the net assets of the subsidiary as of year-end. b. Consolidated retained earnings at year-end Consolidated profit for the year broken down into amounts attributable to the owners of the parent and attributable to non-controlling interests. Intercompany bond transaction 4. On January 1, 20x1, Sing Co. acquired 75% interest in Dance Co. On this date, Sing Co.’s net identifiable assets have a carrying amount of P200,000, equal to fair value. Non- controlling interest was measured using the proportionate share method. On December 31, 20x1, Dance, Inc. purchased all of the outstanding bonds of Sing Co. from the open market for P250,000. There were no other intercompany transactions during the year. The year-end individual financial statements show the following information: Sing Co. Dance Co. ASSETS Investment in subsidiary (at cost) 180,000 : Investment in bonds - 250,000 Other assets 500,000 50,000 TOTAL ASSETS 680,000 300,000 nl UABILITIES AND EQUITY Accounts payable 40,000 30,000234 Chapter 5 wa Total liabilities 340,000 30,009 Share capital 200,000 100,009 Retained earnings ~_ 140,000 170,000 Total equity 340,000 270,009 TOTAL LIABILITIES AND EQUITY 680,000 __ 300,000 Sing Co. Dance Co 300,000 120,000 Revenues Operating expenses (217,000) (100,000) Interest expense (3,000) - Profit for the year 80,000 20,000 Requirements: a. Compute for the gain (loss) on extinguishment of bonds to be recognized in the 20x1 consolidated statement of profit or loss. b. Compute for the consolidated total bonds payable. ¢. Prepare a draft of the 20x1 consolidated statement of financial position and statement of profit or loss. PROBLEM 3: EXERCISES 1, Orion Co. owns 75% interest in Sanitarium Co. The following transactions occurred during the year: a. Orion Co. sold goods costing P12,000 to Sanitarium C° The goods were marked-up at 25% on selling pit Sanitarium Co. held half of these goods in its endif inventory. Sanitarium Co. sold goods to Orion Co, for P60,000. T goods were marked-up at 20% on cost. Orion Co. $4 three-fourths of the goods to unrelated parties during the year. The individual statements of profit or loss of the entities dul"? the year show the following information;ancial Statements (Part 2) 235 canslidated Fi Orion Co. Sanitarium Co. Sales 1,000,000 700,000 Cost of sales (400,000) (350,000) ees pit 600,000 350,000 The entities held the following inventories at year-end: Orion Co. Sanitarium Co. Ending inventory 300,000 80,000 Requirements: Compute for the following: a. Consolidated sales b. Consolidated cost of sales c. Consolidated ending inventory 2. On January 1, 20x1, Day Co. acquired 75% interest'in Night Co. for P216,000. On this date, the carrying amount of Night’s net identifiable assets was 192,000, equal to fair value. Non- controlling interest was measured using the proportionate share method. The financial statements of the entities on December 31, 20x1 show the following information: DayCo. ‘Night Co. ASSETS Investment in subsidiary (at cost) 216,000 Equipment - net 480,000 228,000 Other assets 240,000 54,000 TOTAL ASSETS 936,000 282,000, aLOTALASSETS OE LIABILITIES AND EQUITY Liabilities 84,000 30,000 Share capital 720,000 120,000 Total equit 852,000. 252,000 ano eaiett ie em TOTAL LIABILITIES AND EQUITY 936,000 282,000236 Chapter 5 PRO Day Co. Night Co, Revenues 360,000 96,000 Depreciation expense (48,000) (14,400) Other expenses (38,400) (21,600) Gain on sale of equipment 14,400 - Gain on sale of equipment Profit for the year 288,000 60,000 Additional information: * No dividends were declared by either entity during 20x. There is also no impairment of goodwill. * However, on January 1, 20x1, right after the business combination, Day Co. sold equipment with historical cost of 144,000 and accumulated depreciation of P86,400 to Night Co. for P72,000. Day Co. has been depreciating this equipment over a useful life of 10 years using the straight-line method Night Co. decided to continue this accounting policy and depreciate the equipment over its remaining useful life of 4 years. Requirement a. What is the carrying amount of the equipment sold by Da¥ Co. to Night Co. in the consolidated financial statements? How much is the consolidated ‘Equipment —net’? How much is the consolidate a d ‘Depreciation expense’? d. Prepare a draft of the December 31, 20x1 consolidate! statements of financial position and consolidated statement “ profit or loss. 3. Loud Co. owns 75% interest in Soft Co. On acquisition 43" the carrying amount of Soft Co.’s net identifiable assets “” P240,000, equal to fair value. Non-controlling interest measured using the proportionate share method. In 20x1, Soft Co. declared 150,000 dividends, Sele” information on the entities on December 31, 20x1 is shown bel™os carats _ Loud Co, Soft Co. Gatement of financ ial position accounts. $ share capital . 1,200,000 300,000 Retained earning: ___ 420,000 180,000 000 Total equity. al Statements (Part 2) 27 Loud Co. __ Soft Co. Statement of profit or loss accounts Revenues 960,000 200,000 Expenses (360,000) (192,000) Dividend income 112,500 2 Profit or loss 712,500 198,000 Requirements: Compute for the following: a. Non-controlling interest in the net assets of the subsidiary as of year-end. b. Consolidated retained earnings at year-end «. Consolidated profit for the year broken down into amounts attributable to the owners of the parent and attributable to non-controlling interests. 4 On January 1, 20x1, Walk Co. acquired 75% interest in Run Co. On this date, Sing Co.’s net identifiable assets have a carrying amount of P208,000, equal to fair value. Non-controlling interest was measured using the proportionate share method. On December 31, 20x1, Dance, Inc. purchased all of the outstanding bonds of Sing Co. from the open market for P320,000. There were no other intercompany transactions during the year. The year-end individual financial statements show the following 'nformation: Walk Co. Run Co. ASSETS Investment in subsidiary (at cost) 234,000 : 'vestment in bonds a 320,000 her assets 650,000 64,000 TC otissets 850,000 OTAL ASSETS 884,000 384,000Chapter 5 | (ee ee UITY LIABILITIES AND EQ! a tent Accounts payable i 300,000 : Bonds payable (at face amount . 000 150,000 > Total liabilities = 7 ee | Sharé capital , } Retained earnings a - Saute TOTAL LIABILITIES AND EQUITY ___ 884,000 384,000 Walk Co. Run Co, Revenues 390,000 156,000 Operating expenses (282,100) (130,000) Interest expense (3,000) : Profit for the year 104,900 26,000 Requirements: a, Compute for the gain (loss) on extinguishment of bonds tobe recognized in the 20x1 consolidated statement of profit or loss. b. Compute for the consolidated total bonds payable. c. Prepare a draft of the 20x1 consolidated statement of financil Position and statement of profit or loss. PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL Use the following information ‘for the next tivo questions: Selected information from the separate and consolidated balan sheets and income statements of Pare, Inc. and its subsidiary, 9 Co, as of December 31, 1994, and for the year then ended follows: Pare Shet___consolids Balance sheet accounts: Accounts receivable 52,000 38,000 78,000 Inventory 60,000 50.000 104,000Ge Consolidated Financial Statements (Part 2) 239 Income statement accounts: © Revenues 400,000 280,000 616,000 Cost of goods sold 300,000 _ 220,000 462,000 Gross profit 100,000 __ 60,000 154,000 Additional information: During 1994, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales. 1. What was the amount of intercompany sales from Pare to Shel during 1994? a 6,000 ¢. 58,000 b. 12,000 d. 64,000 (Adapted) 2. In the consolidation worksheet, what amount of unrealized intercompany profit was eliminated? a. 6,000 cc. 58,000 b. 12,000 d. 64,000 (Adapted) 3. Parker Corp. owns 80% of Smith Inc.'s common stock. During 1991, Parker sold Smith 250,000 of inventory on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in 1991, The following information pertains to Smith and Parker's sales for 1991: Parker Smith Sales 1,000,000 700,000 Cost of sales 400,000 350,000 Gross profit 600,000 350,000 What amount should Parker report as cost of sales in its 1991 | onsolidated income statement? a. 750,000 . 500,000 b. 680,000 d. 430,000 (Adapted)Chapter 5 240 ~ 4. Selected data for two subsidiaries of Dunn Corp. taken fog | December 31, 1988 pre-closiny trial balances are as follows | : Banks | Lamm Co. Co, Debit Credit ; é 150,000 | s to Banks ood Shipments to Ban 200,000 oe Shipments from Lamm Intercompany inventory profit on total a 50,000 shipments Additional data relating to the December 31, 1988 inventory are as follows: : Banks Co. _ Lamm Co. Inventory acquired from outside parties 175,000 250,000 Inventory acquired from Lamm 60,000 - The inventory to be included in the December 31, 198 consolidated financial statements is: a. P425,000 c. P470,000 b. P435,000 dl. P485,000 (Adapted) : Use the following information for the next three questions: On January 2 2, 1994, Pare Co. acquired 75% of Kidd © outstanding common stock. On the acquisition date, the boo value of Kidd's assets and liabilities equaled their fair vali Non-controlling interest was measured using the proportion share method. Selected balance sheet data at December 31, 1994" as follows: idd ha re Total assets 720,000 730,000, Liabilities 120,000 60,000 Common stock 100,000 50,000 Retained earnings ’ roo E - 200,000 p Total liabilities and equit eyconsolidated Financial Statements (Part 2) 241 During 1994, Pare and Kidd paid cash dividends of P25,000 and 5,000, respectively, to their shareholders. There were no other intercompany transactions. In the December 31, 1994 consolidated balance sheet, what amount should be reported as non-controlling interest in net assets? a 0 c. 45,000 b. 30,000 d. 105,000 (Adapted) 6. In the December 31, 1994 consolidated balance sheet, what amount should reported as common stock? a. 50,000 ¢. 137,500 b. 100,000 d. 150,000 (Adapted) 7. In the December 31, 1994 consolidated statement of retained earnings, what amount should be reported as dividends paid? a. 5,000 c. 26,250 b. 25,000 d.. 30,000 (Adapted) 8. On January 1, 20X9, Paul Corporation acquired 80% of Saul Corporation's 200,000 shares of the outstanding common stock of for P5,000,000. Paul did not pay a control premium in the acquisition. On the date of acquisition, the P6,000,000 book value of Saul's net assets equaled fair value. Non-controlling interest was measured at fair value. During 20X9, Saul Teported net income of 550,000 and paid dividends of 165,000. What is the non-controlling interest that will be teported on Paul Corporation's December 31, 20X9 Consolidated balance sheet? a. 1,200,000 ©. 1,277,000 >. 1,250,000 d. 1,327,000 (AdaptegyChapter 5 Fane 2a 9, Clark Co. had the following transactions with affiliated partie, during 1992: : - Sales of P60,000 to Dean, Inc, with 20,000 gross profi, Dean had P15,000 of inventory on hand at year-end. Clay, owns a 15% interest in Dean and does not exert significant influence. © Purchases of raw materials totaling P240,000 from Kent Corp., a wholly-owned subsidiary. Kent's gross profit on the sale was P48,000. Clark had P60,000 of this inventory remaining on December 31,1992. Before eliminating entries, Clark had consolidated current assets ‘of P320,000. What amount should Clark report in its December 31, 1992, consolidated balance sheet for current assets? a. 320,000 ¢. 308,000 b. 317,000 d. 303,000 (Adapted) 10. Wagner, a holder of a P1,000,000 Palmer, Inc. bond, collected the interest due on March 31, 1992, and then sold the bond to Seal, Inc. for P975,000. On that date, Palmer, a 75% owner of Seal, had a P1,075,000 carrying amount for this bond. What was the effect. of Seal's purchase of Palmer's bond on the retained earings and non-controlling interest amounts reported in Palmer's March 31, 1992, consolidated balan? sheet? Retained earnings Non-controlling ii ling interest a. P100,000 increase PO eee b. 75,000 increase 25,000 increase 4 P25,000 increase . 100,000 increase (Adapted)