Palma Company had 90% ownership interest acquired several years ago in Small
Company. The amortization of allocated excess (identifiable assets) arising from this
acquisition amounted to P2,000 per year (based on 100% or full fair value of identifiable
assets). The inventories acquired from the affiliates are:
Beginning inventory P10,000
Ending inventory P16,000
An inter-company sale of merchandise was made during the year amounting to P40,000
at a gross profit rate of 25% based on sales (the same rate consistently applied on
previous years intercompany sales of merchandise) of which 60% are sold to outsiders
at P35,000.
The net income from own operations and dividends for 2019 were as follows:
Company Net income Dividends paid
Palma P120,000 P8,000
Small 70,000 6,000
Required:
Assuming that Palma Company is the seller (downstream sale), in the books of Palma
Company
Using cost method, assuming the investment balance on January 1, 2019 amounted to
P800,000, determine the following:
1. Investment in subsidiary
2. Investment income
3. Consolidated net income for 2019
4. The profit attributable to equity holders of parent/controlling interest in
consolidated net income for 2019
5. The noncontrolling interest in net income for 2019
Suggested Answer:
1. The investment balance is still at P800,000 because it remains at its original cost
under cost method.
2. P6,000 x 90% = P5,400. The investment income under cost method consist of
dividend income.
3. The consolidated income is determined as follows:
Both realized and unrealized gross profit are deducted from net income of parent
company because it is the parent company who records gross profit under downstream
sales.
Assuming that Small Company is the seller (upstream sale), in the books of Palma
Company
Using cost method, assuming the investment balance on January 1, 2019 amounted to
P800,000, determine the following:
1. Investment in subsidiary
2. Investment income
3. Consolidated net income for 2019
4. The profit attributable to equity holders of parent/controlling interest in
consolidated net income for 2019
5. The noncontrolling interest in net income for 2019
Suggested Answer:
1. The investment balance is still at P800,000 because it remains at its original cost
under cost method.
2. P6,000 x 90% = P5,400. The investment income under cost method consist of
dividend income.
3. The consolidated income is determined as follows:
Using equity method, assuming the investment balance on January 1, 2019 amounted
to P800,000, determine the following:
1. Investment in subsidiary
2. Investment income
3. Consolidated net income for 2019
4. The profit attributable to equity holders of parent/controlling interest in
consolidated net income for 2019
The noncontrolling interest in net income for 2019
