184 Chapter 5

Chapter 5
Consolidated Financial Statements (Part 2)

Learning Objective
Prepare consolidated financial statements after eliminating the
effects of intercompany transactions.

Intercompany transactions
Intercompany transactions are transactions between a parent and
asubsidiary. The effects of these transactions are eliminated when
preparing consolidated financial statements because the parent
and the subsidiary are viewed as a single reporting entity. This is
like the statement "You cannot transact with your own self." To
exemplify, let me tell you a story.

Story: The Bear Group

During 20x1, Papa Bear buys a pair of sandals for P100 from
Goldilocks, an unrelated party. The sandals don't fit.Papa Bear's
enormous feet so Papa Bear sells the sandals to Mama Bear for
P150.

Question: point of view of the Bear Family, how much

From the
"household profit" is realized from the sale?

Answer: Obviously, none. The family can't get rich even if the Papa
and the Mama sells to each other all day long!

The entries in the separate books of Papa and Mama are as

follows:
Books of Papa Bear Books of Mama Bear
20x1 .100
Inventory.
Cash. .100
to record the purchase of inventory
20x1 Cash. .150 Inventory..........150
Sales. ..150 Cash................150
to record the sale to Mama Bear to record the purchase from Papa Bear
 Consolidated Financial Statements (Part 2) 199

ABC Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (41,000+67,750) P108,750
Accounts receivable (75,000+ 22,000) 97,000
Inventory (şee previous computation using formula) 104,600
Equipment, net (140,000 + 30,000 + 10,000 FVA net, Step 1A) 180,000
Goodwill (Step 2) 3,000
TOTAL ASSETS P493,350

LIABILITIES AND EQUITY

Accounts payable (73,000 + 30,000) P103,000
Total liabilities 103,000
Share capital (Parent only) 170,000
Share premium (Parent only) 65,000
Retained earnings (Parent only - Step 4) 133,480

Owners of parent 368,480

Non-controlling interest (Step 3) 21,870

Total equity 390,350

TOTAL LIABILITIES AND EQUITY P493,350

ABC Group
Consolidated statement of profit or loss
For the year ended December 31, 20x1

Sales (see previous computation ising formula) P448,750

Cost of goods sold (see previous computation using formula) (256,400)

Gross profit 192,350
Depreciation expense (40K + 10K + 2K dep'n. of FVA on equipt.) (52,000)
Distribution costs (35,000 + 18,000) (53,000)
Profit for the year P87,350

Profit attributable to:

Owners of the parent (Step 5) P83,480

Non-controlling interests (Step 5) 3,870
P87,350
226 Chapter 5

LIABILITIES AND EQUITY

Accounts payable 40,000 30,000
Bonds payable (at face amount) 300,000
Total liabilities 340,000 30,000
Share capital 200,000 100,000
Retained earnings 140,000 170,000
Total equity 340,000 270,000
TOTAL LIABILITIES AND EQUITY 680,000 300,000

Sing Co. Dance Co.

Revenues 300,000 120,000
Operating expenses (217,000) (100,000)
Interest expense on bonds payable (3,000)
Profit for the year 80,000 20,000

Requirement: Prepare the December 31, 20x1 consolidated financial

statements.

PROBLEM 3: MULTIPLE CHOICE - COMPUTATIONAL

1. Earnėst Co. owns 80% interest in Australia Co. In 20х1,
Earnest sold goods, costing P120,000, to Australia for P180,000.
Half of the goods remained in Australia's inventory as of
December 31, 20x1. The remaining half was sold in 20x2. In

20x2, Earnest sold additional goods, costing P200,000 to

Australia for P300,000. One-fourth of the goods remained in

Australia's inventory as of December 31, 20x2. The entities
reported the following in 20x2:
Eanest Co. Australia Co.
Inventories, end. 2,400,000 1,900,000
Sales 28,000,000 5,400,000
Cost of sales 18,500,000 2,100,000

How much are the consolidated amounts for the following?

Inventories Gross profit Inventories Gross profit
a. 4,305,000 12,835,000 c. 4,275,000 12,835,000
b. 4,305,000 12,805,000 d, 4,275,000 12,805,000
 Consolidated Financial Statements,(Part 2) 227

Use the following information for the next two questions:

On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co.
The carrying amount of Piglet's net identifiable assets was equal
to the acquisition-date fair value. In December 20x1, Piglet sold

inventories to Pig for P81,000. Piglet had marked up the goods at

50% based on cost. The goods were marked-up at 50% based on
cost. One-third of the goods remain unsold at year-end.
Information on December 31, 20x1 is as follows:

Pig Co. Piglet Co.

Revenue 1,000,000 720,000
Cost of sales (400,000). (300,000)
Gross profit 600,000 420,000
Operating expenses (376,000) (240,000)
Profit for the year 224,000 180,000

2. How much are the consolidated sales and cost of sales?

Sales Cost of sales Sales Cost of sales
a. 1,639,000 628,000 c. 1,159,000 572,000
b. 1,639,000 772,000 d. 1,159,000 428,000

3.. How much of the consolidated profit is attributed to each of

the following?
Owners of parent NCI Owners of parent NCI

a. 262,250 21,750 с. 325,750 42,250

b. 262,250 12,750 d. 352,250 42,750

Use the followinginformation for the next five questions:

On January 1, 20x1, Summer Co. acquired 80% interest in Rain Co.
for P75,000. On acquisition date, Rain's net identifiable assets had
a carrying amount of P74,000 and a fair value of P90,000. The
difference was due to inventories which were undervalued by
14,000 and equipment with a remaining useful life of 6 years
which was undervalued by P12,000. The NCI was measured at
'proportionate share'.
238 Chapter 5

Statements of profit or loss and other comprehensive incoте

For the year ended December 31, 20x1

Roger Co. Sadowsky Co.

Revenues 1,200,000 220,000
Operating expenses (500,000) (80,000)
Interest expense on bonds payable (12,000)
Interest income on bonds 1,300
Profit for the year 701,300 128,000
Other comprehensive income 60,000 15,000

Total comprehensive income 761,300 143,000

Requirement: Requirement: Prepare the consolidated financial

statements on December 31, 20x1.