QUIZ ON INTERCOMPANY PROFITS Quiz 3

THEORY- The first four numbers should be answered using the following:
a. Only the first statement is correct.
b. Only the second statement is correct.
c. Both statements are correct.
d. Both statements are incorrect.
1. The intragroup sales and purchases of merchandise when preparing
consolidated income statement must be eliminated 100% when it is a downstream sale but only at
percent of
ownership of parent when an upstream sale.
If merchandise sold in an intercompany sale results into an unrealized profit, parent should
recognize only its percent of ownership over it if it is the buying affiliate.
2. Cost of sales of selling affiliate should be eliminated 100% whether downstream or upstream sale.
Total NCI is computed based on share of NCI over subsidiary interest at fair value plus its share
over subsidiary’ adjusted net income less share in dividends – share in unrealized profit on
intercompany sale if subsidiary is the selling affiliate.
3. The parent purchased goods from its 80% owned subsidiary for P48,000. Billing rate is 25% of
cost. The following statements regarding the intercompany sale follow:
1. If all the goods are sold before year end, consolidated gross profit will be
of the same amount as the sum of the gross profits reported by the affiliates.
2. If all the goods are still in the ending inventory of the parent,
consolidated gross profit should decrease by P9,600.
4. In the consolidation process, the cost of sales of buying affiliate will be retained but adjusted for
the mark-up of the sold mdse.
The material sale of inventory items by a parent company to an affiliated company does not
require a working paper adjustment if the merchandise transferred was at cost.
5. In situations where there are routine inventory sales between parent companies and
subsidiaries, when preparing the consolidation statements, which of the following
line items is indifferent to the sales being either upstream or downstream?
a. Consolidated retained earnings
b. Consolidated net income.
c. Noncontrolling interest.
d. Income from subsidiary.

6. Pax holds 75% of Esprit outstanding voting stocks. Esprit owes Pax P400,000 for merchandise
acquired over the past few months, the cost of which is half of the billed price. In preparing
consolidated reports, how much of this debt should be eliminated?
a. P400,000 b. P200,000 c. P300,000 d. P150,000
7. Refer to no. 6. All the goods bought by Esprit were sold for P500,000. The accounting procedures
will include the following except
a. A profit of P200,000 recognised by Pax in its books.
b. A profit of P300,000 recognized by Esprit in its books.
c. Intracompany sales and cost of sales for P400,000 will be eliminated.
d. Consolidated gross profit will still be the sum total of the gross profit reported by the
affiliates.
8. Seller affiliate recognized a gain of P50,000 when it sold on June 1 one of its non-depreciable
asset for P200,000. As a result of this, at year end the land was reported in the trial balance as
follows: P1,500,000 for Parent and P1,050,000 for Subsidiary which is 80% owned by the parent.
If it is an upstream sale, how much will be the consolidated land amount?
a. P2,500,000 b. P2,600,000 c. P2,550,000 d. P2,510,000
9. The parent’s ending inventory includes 1/6 of the P48,000, all coming from merchandise
purchased from its 80% owned subsidiary whose gross profit rate is 25%. Unrealized profit is
a. P8,000 b. P2,000 c. P1,600 d. P6,400
10. Book value of the machine was P240,000 (half depreciated) when it was sold for P285,000 in a
downstream sale. It has a remaining life of 5 years from the date of the sale which was Sept 1,
2018.In the consolidated financial statements of 2018, how much will be shown as accumulated
depreciation and depreciation?
a. 136,000 and 16,000
b. 139,000 and 19,000
c. 259,000 and 19,000
d. 256,000 and 16,000
Problem: Pane Company purchased a controlling interest over Shane Company on March 1, 2017.Assets
are at fair value except for the only machine of Salt which fair value was P400,000 based on a remaining
life of five years. Selected accounts for three succeeding periods follow:
12/31/17 12/31/18 12/31/19
Pane Shane Pane Shane Pane Shane
Liabilities P1,010,000 P 515,000 P 935,000 P410,000 P710,000 P280,000
Share Capital, Par100 2,000,000 500,000 2,000,000 500,000 2,000,000 500,000
Retained Earnings,1/1 900,000 300,000 ? ? ? ?
Sales 3,500,000 2,200,000 4,000,000 2,500,000 4,200,000 2,800,000
Cost of Sales 2,450,000 1,450,000 2,600,000 1,750,000 2,940,000 2,100,000
Expenses 850,000 450,000 1,200,000 500,000 860,000 500,000
Gain on sale of Land 30,000 ?
Dividends,8/1 100,000 50,000 150,000 100,000 200,000 100,000
Dividend Income 40,000 80,000 80,000
Cash and other assets 60,000 50,000 70,000 80,000 50,000 60,000
Inventory 440,000 240,000 500,000 180,000 480,000 220,000
Investment in Shane 600,000 600,000 600,000
Land 2,000,000 800,000 1,930,000 900,000 1,930,000 800,000
Machines, net 950,000 475,000 925,000 450,000 850,000 400,000
Additional information:
 Shane Co sold goods to Pane costing P112,000 for P140,000 on Oct 1, 2017, out of which 40%
was reported unsold on Dec 31, 2017.
 The land was sold by Pane Co to Shane for P100,000 on May 30, 2018.
 The unsold goods purchased by Pane in 2017 were sold to the customers in 2018.
 Pane sold goods to Shane on Oct 1, 2018 at a mark up rate of 25% above cost. Goods worth
P54,000 representing 75% of the goods purchased by Shane were sold before Dec 31.
 The land was sold by Shane Co to Cybell Co on May 1, 2019 for P120,000.
 P6,000 of the goods purchased by Shane in 2018 were sold before the end of 2019.

Requirements: 2017 on the left side of work sheet, 2018 on the right side and 2019 at the back. You
may omit thousands in your computations(‘000)
2017: 1. Prepare a table for determination and allocation of excess.
2. Prepare a working paper.
3. Determine the Income from Subsidiary and the Investment account had parent used the
equity method. Use the following table format.
Investment in S Co NCI
January 1 P 600,000 P
Shanes net income post acqn P xx
Unrealized profit xx
Depreciation xx
Income over Salt Xx xx xx

Share in dividends ( 40,000) (10,000)

Dec 31, 2017 P P

2018: 1. Update again the Investment account and the NCI had Pane used the equity method.
2. Prepare working paper entries
3. Prepare a) consolidated income statement showing share of NCI and Parent, b)
consolidated retained earnings, c) consolidated balance sheet but showing only
inventories, land, machines, and stockholders’ equity.
2019 Same requirements as in 2019.
 2017 Adjustment and
Elimination Entries
Income Statement Pane Co ShaneCo Debit Credit NCI Consolidated
Sales
Cost of Sales
Gross Profit
Expenses
Net Operating Income
Dividend Income

Net Income carried

forward
Retained Earnings
Statement
Jan 1
Net Income
Dividends
Dec 31
Financial Position Statement
Assets
Cash and other assets
Inventories
Investment in Stocks of S
Land
Machines, net

Liabilities
Share Capital, Pep
Share Capital, Salt
Retained Earnings, Pep
Retained Earnings, Salt
Share of NCI in AR
NCI, 12/31

SOLUTION FOR INTERCOMPANY PROFITS

Theory:

2017 1. Table for determination and allocation of excess:

100% 80% 20%
Fair Value of subsidiary P755,000 P 600,000 P155,000
Subsidiary Interest:
Capital Stock (500,000)
Retained Earnings ( 300,000)
Pre Acquisition Earnings ( 50,000) (680,000) (170,000)
Excess ( 95,000 ) ( 80,000) ( 15,000)
Revaluation of machine 75,000 60,000 15,000
Gain (P20,000) (P 20,000) P 0

Investment in S Co Non Controlling Int

January 1 P 600,000 P155,000
Shanes net income post acqn (300-50 ) P250
Unrealized profit (140 -112 x .4) (11.2)
Depreciation (75/5=15 x 10/12) 12.5
Income over Salt P251.3 201,040* 50,260
Gain on Bargain Purchase 20,000
Share in dividends (50,000 x .8) ( 40,000) (10,000)
Dec 31, 2017 P 781.040 P195,260

*if you add 221,040 to Pane’s operating income of P200,000, share of Parent will be 421,040 + NCI share
of P50,260= CNI. Check it against the first section of the working paper on the next page
Working paper entries, not really needed outside of the working paper:
3. 1) Dividend Income 40
Divdends, S Co 40

2) Share Capital, Subsidiary Co 400

Retained Earnings, Subsidiary Co 240
Pre Acquisition Earnings 50
Share of NCI in AR and PAE 5
Gain 20
Machine 75
Share Capital, Subsidiary Co 100
Retained Earnings, Subsidiary Co 60
Share of NCI in GW, AR and PAE 5
NCI 155
3) Accumulated Depn 12.5
Depreciation 12.5

4) Sales 140
Cost of Sales 128.8
Merchandise Inventory 11.2

2017 Adjustment and

Elimination Entries
Income Statement P Co S Co Debit Credit NCI Consolidated
Sales 3,500 2,200 4) 140 5,560.0
Cost of Sales (2,450) (1,450) 4)128.8 (3,771.2)
Gross Profit 1,050 750 1,788.8
Expenses (850) (450) 3) 12.5 (1,287.5)
Net Operating Income 200 300 501.3
Dividend Income 40 1) 40
PAE 2) 50 (50.0)
Gain 2) 20.0 20.0
CNI 471.3
Share of NCI 50.26 (50.26
Net Income 240 300 50.26 421.04

Retained Earnings
Jan 1 900 300 2) 240 60.00 900.00
Net Income 240 300 50.26 421.04
Dividends (100) (50) 1) 40 (10.00) (100.00)
Dec 31 1,040 550 100.26 1,221.04

Financial Position
Cash and other assets 60 50 110
Inventories 440 240 4) 11.2 668.8
Investment in Stocks of S Co 600 2) 600 0
Land 2,000 800 2,800.0
Machines 950 475 3) 12.5 2) 75 1,362.5
4,050 1,565 4,941.3

Liabilities 1,010 515 1,525.0

Share Capital 2,000 500 2) 400 100.00 2,000.0
Retained Earnings 1,040 550 100.26 1,221.04
Share of NCI in AR/PAE 2) 5 ( 5.00)
NCI 195.26 195.26
Total 4,170 1,565 4,941.3

2018
1) Investment in S Co NCI
January 1 P 781,040 P195,260
Share In net income of Shane 250.0
Realized profit 11.2
Depreciation (75/5=15) 15.0
Shanes adjusted net income 276.2 220,960 55,240
Unrealized profit (54/.75= 72 x .25= 8/1.25 x .25) ( 3,600)
Unrealized gain on land ( 30,000)
Income over Shane 187,360

Share in dividends (100,000 x .8) (80,000) (20,000)

Dec 31, 2018 P888,400 P 230,500

2). 1) Dividend Income 80,000

Dividends, S Co 80,000

2) Investment in S Co 181,040
Ret Earnings, Beg P Co 181,040
2) Share Capital, S Co 400,000
Retained Earnings, S Co (550 x .8) 440,000
Share of NCI in AR 12,500
Machine 62,500
Investment in S Co 790,000
Share Capital, S Co 100,000
Retained Earnings, S Co 110,000
Share of NCI in AR 12,500
NCI 197,500
3) Investment in Stocks 8,960
RE S Co Beg (NCI) 2,240
Cost of Sales 11,200
Prove investment 600+181.04-790 +8.96 = 0
Prove NCI 197.5 – 2.24 = 195.26 as of 12/31/17
4) Gain on sale of land 30,000
Land 30,000
5) Machine 15,000
Depreciation 15,000
6) Sales 72,000
Cost of Sales 68,400
Merchandise Inventory 3,600

Sales 4,000 + 2,500 – 72 6,428,000

Cost of Sales 2,600 + 1,750-11.2 – 68.4 (4,270,400)
Gross Profit 2,157,600
Expenses 1,200 + 500 – 15 (1,685.0)
Net Operating Income 4,726,000
Dividend Income 80-80 -
Gain on sale of land 30-30 -
CNI 4,726,000
Share of NCI 55,240
Share of P 417,360
To prove: NOI of Pane P 230 + 187.36 income from Shane = P417,360
Retained Earnings, Beg 1,040 + 181.04 P1,221,040
Share in CNI 417,360
Dividends of P (150,000)
Retained Earnings, End P1,488,400
Inventories 500 + 180 – 3.6 676,400
Land 1,930 + 900 -30 2,800.0
Machines 925 + 450 – 75 +12.5 +15 1,327,500
Share Capital 2,000,000
Retained Earnings 1,488,400
NCI 230,500
SHE P3,718,900
2019
1) Investment in S Co Non Controlling Int
January 1 888,400 230,500
Net income of Shane 220.0
Depreciation 15.0
Salt adjusted net income 235.0 188,000 47,000
Realized profit (6/18 x 3,600) 1,200
Gain on previous sale of land 30,000
219,200
Share in dividends (80,000) (20,000)
Dec 31, 2019 1,027,600 257,500

2. 1) Dividend Income 80,000

Dividends, S Co 80,000
2) Investment in S Co (888.4 -600) 288,400
Retained Earnings, P Co 288,400
3) Share Capital, S Co 400,000
Retained Earnings, S Co (550+250-100).8 560,000
Share of NCI in Asset Rev 9,500
Machine 47,500
Investment in Subsidiary Co 922,000

4)Share Capital, Subsidiary Co 100,000

Retained Earnings, Subsidiary Co 140,000
Share of NCI in AR 9,500
NCI 230,500
5) Investment in Stocks 30,000
Gain on Sale of Land 30,000
6) Investment in Stocks 3,600
Merchandise Inventory 2,400
Cost of Sales 1,200
7) Accumulated Depreciation 15,000
Depreciation Expense 15,000
Investment should be a zero balance at this point:600 +288.4 – 922 + 30 + 3.6 = 0
NCI should have a balance equal to end of last year: 230.5
CONSOLIDATED INCOME STATEMENT:
Sales 4,200 + 2,800 P7,000,0000
Cost of Sales 2,940 + 2,100 – 1.2 (5,038,800)
Expenses 8600 + 500 – 15 (1,345,000)
Net Operating Income 616,200
Dividend Income 80-80 -
Gain on sale of land 20 + 30 50,000
CNI 666,200
Share of NCI (table 1) 47,000
Share of Pep 619,200
To prove: Income from Shane in first table 219,200
Net operating income of Pane 400,000
Net income of Pane under equity method 619,200
CRE:
RE of of Pane under cost method as of Jan 1, 2018 P1,200,000
Add WPE 2 288,400
CRE from Dec 31, 2018 1,488,400
Add Consolidated Net income share 619,200
Less Dividends of Pane (200,000)
CRE, 12/31/19 P1,907,600
Machines 850 + 400 – 75 +12.5 + 15+ 15= 1,217,500
Inventories 480 + 220 – 2.4 697,600
Share Capital P2,000,000
Retained Earnings (CRE) 1,907,600
NCI Table 1 257,500
Total Consolidated SHE P4,165,100
SHORT CUT TO COMPUTE FOR CNI using net income and the working paper entries:
Net income of Pane and Shane (480 + 220) 700,000
WPE 1 (80,000)
WPE 3 30,000
WPE 4 1,200
WPE 5 15,000
CNI 666,200
TEST 2 Downstream Sale
 Parent Subsidiary Debit Credit Consolidated
Sales 268,000 230,000 1)48,000 450,000
Cost of Sales 90,000 100,000 1)46,000
2)1,000 (143,000)
Operating Expenses 54,000 55,000 (109,000)
Operating Income 124,000
Dividend Income 16,000 3)16,000
Net Income 140,000 75,000 198,000
Share of NCI (15,000)
Share of Parent 183,000

Ret Earnings Jan 1 500,000

Net Income 140,000 183,000
Dividends (200,000) (200,000)
Ret Earnings Dec31 440,000

Merchandise Invty 120,000 135,000 1)2,000 253,000

UPSTREAM SALE
Parent Subsidiary Debit Credit Consolidated
Sales 268,000 230,000 1)48,000 450,000
Cost of Sales 90,000 100,000 1)46,000
2)1,000 (143,000)
Operating Expenses 54,000 55,000 (109,000)
Operating Income 124,000
Dividend Income 16,000 3)16,000
Net Income 140,000 75,000 198,000
Share of NCI (14,800)
Share of Parent 183,200

Ret Earnings Jan 1 500,000

Net Income 140,000 183,200
Dividends (200,000) (200,000)
Ret Earnings Dec31 440,000 483,200

If Acquisition date is current year: Downstream Sale

Parent Subsidiary Debit Credit Consolidated
Sales 268,000 230,000 1)48,000 450,000
Cost of Sales 90,000 100,000 1)46,000 (144,000)

Operating Expenses 54,000 55,000 (109,000)

Operating Income 124,000
Divdend Income 16,000 3)16,000
Net Income 140,000 75,000 197,000
Share of NCI (15,000)
Share of Parent 182,000

Ret Earnings Jan1 500,000 500,000

Net Income 140,000 182,000
Dividends (200,000) (200,000)
Ret EarningsDec31 440,000 482,000

Merchandise Invty 110,000 135,000 1)2,000 253,000

Upstream Sale
Parent Subsidiary Debit Credit Consolidated
Sales 268,000 230,000 1)48,000 450,000
Cost of Sales 90,000 100,000 1)46,000 (144,000)

Operating Expenses 54,000 55,000 (109,000)

Operating Income 124,000
Divdend Income 16,000 3)16,000
Net Income 140,000 75,000 197,000
Share of NCI (14,600)
Share of Parent 182,400
Ret Earnings Jan1 500,000 500,000
Net Income 140,000 182,400
Dividends (200,000) (200,000)
Ret EarningsDec31 440,000 482,400

Merchandise Invty 110,000 135,000 1)2,000 253,000

QUIZ ON INTERCOMPANY PROFITS

1. The material sale of inventory items by a parent company to an

affiliated company
a. is considered in computing consolidated revenue only if the
transfer was the result of arm’s length bargaining.
b. affects CNI only under a periodic inventory system.
c. results in consolidated income when sold to outside
parties.
d. does not require a working paper adjustment if the
merchandise was transferred at cost.
2. Honey Corporation owns a 40% interest in Nectar Company,
acquired several years ago at a cost equal to book value and
fair value. Nectar sells merchandise to Honey for the first
time in 2015. In computing income from the investee for 2015
under the equity method, Honey uses which equation?
a. 40% of Nectar’s income less 100% of the unrealized profit
in Honeyeater's ending inventory.
b. 40% of Nectar’s income plus 100% of the unrealized profit
in Honeyeater's ending inventory.
c. Nectar’s income less unrealized profit in Honeyeater’s
ending inventory multiplied by 40%.
d. 40% of Nectar’s income plus 40% of the unrealized profit in
Honeyeater’s ending inventory.
3. In situations where there are routine inventory sales between
parent companies and subsidiaries, when preparing the
consolidation statements, which of the following line items is
indifferent to the sales being either upstream or downstream?
a. Consolidated retained earnings.
b. Consolidated gross profit.
c. Noncontrolling interest.
d. Consolidated net income.
4. The consolidation procedures for intercompany sales are
similar for upstream and downstream sales
a. if the merchandise is transferred at cost.
b. under a periodic inventory system but not under a perpetual
inventory system.
c. if the merchandise is immediately sold to outside parties.
d. when the subsidiary is 100% owned.
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