QUIZ ON INTERCOMPANY PROFITS

Parent Company purchased 4,000 of the outstanding shares of Subsidiary Company on Jan 1,
2011 which difference in the investment cost and subsidiary interest at fair value resulted to
a non-identifiable asset of P75,000. Selected accounts for three succeeding periods follow :
12/31/11

12/31/13

12/31/12

S Co
P500,00
0
300,000

P Co
P1,000,00
0
?

S Co
P500,00
0
?

P Co
P1,000,0
00
?

S Co
P500,000

Retained Earnings,
1/1
Sales

P Co
P1,000,00
0
900,000
3,500,000

4,000,000

Cost of Sales

2,450,000

2,200,0
00
1,450,0
00
450,00
0

2,500,0
00
1,750,0
00
500,00
0

4,200,00
0
2,940,00
0
860,00
0
20,000

2,800,00
0
2,100,00
0
500,00
0

Share Capital, Par100

Expenses

850,000

Gain on sale of
machine
Gain on sale of land
Income from
Subsidiary
Dividends,8/1
Inventory
Land

100,000
440,000
2,000,000

Machines
Accumulated Depn

2,600,000
1,200,000

30,000
?

150,000
500,000
2,100,000

100,000
180,000
930,000

1,500,000

50,000
240,000
1,000,0
00
750,000

1,500,000

750,000

550,000

275,000

575,000

300,000

200,000
480,000
2,100,00
0
1,450,00
0
600,000

100,000
220,000
930,000
810,000
350,000

Additional information:
Parent Co sold goods to Subsidiary Co costing P104,000 for P130,000 on June 1,
2011, out of which P48,000 was reported unsold by Subsidiary Co on Dec 31, 2011.
The land was sold by Subsidiary Co to Parent Co for P100,000 on May 30, 2012.
The machine was sold by Parent Co to Subsidiary Co on Oct 1, 2013 with a cost of
P50,000 for P60,000. It has a remaining life of 4 years as of Oct 1, 2013.
Subsidiary Co on Oct 15, 2013 sold goods to Parent Co for P180,000 when its cost
was P140,000. One fourth of these remain in Parents inventory as at the end of the
year.
Requirements:
1. What was the cost of the controlling interest and the NCI as at acquisition date?
2011:
2. Parent uses the one line consolidation. Update the investment account. Show the
Income
from Subsidiary alongside the Investment account.
3. Prepare adjusting and eliminating entries.
4. Prepare : a) consolidated income statement
b) consolidated retained earnings
c) NCI, Dec 31
d) consolidated inventories

2012 Same requirements 2 to 4 as in 2011 but add 4. e) consolidated land

2013 Same requirements 2 to 4 as in 2012 but add 4. f) consolidated machines and
g) consolidated accumulated depreciation
2014: Give the adjusting and eliminating entry for the intercompany sale of machine

SOLUTION FOR INTERCOMPANY PROFITS

1. Table for determination and allocation of excess:
100%
80%
Fair Value of subsidiary
P875,000
P 700,000
Fair Value of Subsidiary Co:
Capital Stock
(500,000)
(400,000)
Retained Earnings
( 300,000)
(240,000)
Goodwill
P 75,000
P 60,000
2.

Investment in S Co
January 1
Share In net income (300,000 x
.8)
Unrealized profit (48,000 x .2)
Share in dividends (50,000 x .
8)

3.

P 700,000
240,000

20%
P175,000
(100,000)
( 60,000)
P 15,000
Income over
Subsidiary
P 240,000

( 9,600)
(40,000)

( 9,600)

P 890,400

P230,400

1) Subsidiary Income
Dividends, Subsidiary Co
Investment in Subsidiary Co
2) Sales
Cost of Sales
Merchandise Inventory

230,400

3) Share Capital, Subsidiary Co

Retained Earnings, Subsidiary Co
Goodwill
Share of NCI in Goodwill
Investment in Subsidiary Co

400,000
240,000
75,000

4)Share Capital, Subsidiary Co

Retained Earnings, Subsidiary Co
Share of NCI in Goodwill
NCI

100,000
60,000
15,000

40,000
190,400
130,000

120,400
9,600

15,000
700,000

175,000

4. a) Consolidated Income Statement (thousands omitted):

Sales
3,500 +
-130
5,570
2,200
Cost of Sales
2,450 +1,45 -102.3
(3,379.6)
0
Expenses
850 +450
(1,300)
Net Operating Income
200
300
Income from Subsidiary
230.4
____ -230.4
CNI
490.4
Share of NCI (300 x .2)
(60)

Net Income

430.4

300

430.4

b)

Non-Controlling Interest, Jan 1

Share in consolidated net income
Share in Dividends
NCI, Dec 31

175,000
60,000
(10,000)
P225,000

c)

Retained Earnings, Parent Co Jan 1

Share in Consolidated Net Income
Dividends, Parent Co
Retained Earnings, Parent Co Dec 31

P 900,000
430,400
(100,000)
P1,230,400

d) Consolidated Inventories 440,000 + 240,000 9,600 = P670,400

2012
2.
Investment in S Co Income over
Subsidiary
January 1
P 890,400
Share In net income (280,000 x
224,000
P 224,000
.8)
Unrealized gain on land (30,000 x .8)
( 24,000)
(24,000)
Realized gain on sale of mdse
9,600
9,600
Share in dividends (100,000 x .
(80,000)
8)
P1,020,000
P209,600
3.

1) Subsidiary Income
Dividends, Subsidiary Co
Investment in Subsidiary Co

209,600

2) Investment in Stocks
Cost of Sales
3) Gain on sale of land
Land

9,600
30,000

3) Share Capital, Subsidiary Co

Retained Earnings, Subsidiary Co
Goodwill
Share of NCI in Goodwill
Investment in Subsidiary Co

4,000

Cost of Sales

2,600

Expenses

1,200

Net Operating Income

Income from Subsidiary

200
209.6

Gain
CNI
Share of NCI (280-30) x
.2
Net Income

9,600
30,000

400,000
440,000
75,000
15,000
900,000

Share Capital, Subsidiary Co

Retained Earnings, Subsidiary Co
Share of NCI in Goodwill
NCI
Sales

80,000
129,600

100,000
110,000
15,000

+
2,500
+
1,750
+
500
250
30

225,000
6,500

- 9.6

(4,340.4)
(1,700)

209.6
30

9,600

459.6
(50)
409.6

280

409.6

4. a)

b)

Non-Controlling Interest, Jan 1

Share in consolidated net income
Share in Dividends
NCI, Dec 31

c)

Retained Earnings, Parent Co Jan 1

Share in Consolidated Net Income
Dividends, Parent Co
Retained Earnings, Parent Co Dec 31

225,000
50,000
(20,000)
P255,000
P 1,230,400
409,600
(150,000)
P1,490,000

d) Consolidated Inventories 500,000 + 180,000 = P680,000

e) Consolidated land 2,100,000 + 930,000 -30,000= P3,000,000
201
Investment in S Co
3
2. January 1
P 1,020,000
Share In net income (200,000 x .
160,000
8)
Net Unrealized gain on mach(20,000(18,750)
1,250)
( 8,000)
Net unrealized profit on mdse (10,000
x .8)
Share in dividends (100,000 x .
(80,000)
8)
P 1.073,250
3.

1) Subsidiary Income
Dividends, Subsidiary Co
Investment in Subsidiary Co
2) Investment in Stocks
Ret Earnings, S Co Beg (NCI)
Land
Share Capital, Subsidiary Co
Retained Earnings, Subsidiary Co
Goodwill
Share of NCI in Goodwill
Investment in Subsidiary Co
Share Capital, Subsidiary Co
Retained Earnings, Subsidiary Co
Share of NCI in Goodwill
NCI
4) Gain on sale
Accumulated Depreciation
Depreciation Expense
Machine
5) Sales
Cost of Sales

Income over
Subsidiary
P 160,000
( 18,750)
( 8,000)

P 133,250

133,250
80,000
53,250
24,000
6,000

30,000

400,000
584,000
75,000
15,000
1,044,000
100,000
140,000
15,000

255,000

20,000
8,750
1.250
10,000
180,000

170,000

Merchandise Inventory

10,000

Analysis of sale of machine:

machine cost of P50,000 sold and recorded for P60,000

effect:
over by P10,000

depreciation recorded as P3,750 should be P2,500

over by P1,250

accum depn shoud be P12,500 (2,500 + 10,000) recorded

as P3,750
under by P8,7505
Analysis of Unrealized gross profit 180,000 x .25 against 140,000 x .25= 45,000-35,000=
10,000

4. a)
Sales

4,200

Cost of Sales
Expenses
Net Operating Income
Income from Subsidiary
Gain from sale of
machine
CNI
Share of NCI (200-10) x .
2
Net Income

2,940
860
400
133.25

+
2,800
+2,10
0
+ 500
200

20

6,820
-180
-17
0
-1.2
5
133.25
- 20

(4,870)
(1,358.75
)
591.25

591.25
(38)
553.25

200

b)

Non-Controlling Interest, Jan 1

Share in consolidated net income
Share in Dividends
NCI, Dec 31

c)

Retained Earnings, Parent Co Jan 1

Share in Consolidated Net Income
Dividends, Parent Co
Retained Earnings, Parent Co Dec 31

553.25
255,000
38,000
(20,000)
P273,000
P1,490,000
553,250
(200,000)

d) Consolidated Inventories

P1,843,250
480,000 + 220,000- 10,000 = P690,000

e) Consolidated land

2,100,000 + 930,000 -30,000= P3,000,000

f) Consolidated Machines

1,450,000 + 810,000 -10,000=P2,250,000

g) Accumulated Depn

300,000 + 600,000 + 8,750 = P958,750

2014:
Analysis of sale of machine:
machine cost of P50,000 sold and recorded for P60,000
depreciation recorded as P7,500 should be P5,000

effects
over by P10,000
over by P2,500

accum depn shoud be P17,500 (10,000+2,500+ 5,000) recorded

as P11,250 (3,750 + 7,500)
under by P6,250
Working Paper Entry:
Investment In Subsidiary (20,000-1,250)
Machine
Depreciation
Accum Depreciation

18,750
10,000

2,500
6,250

Quiz on Intercompany Profits

Theory True or False
1. The material sale of inventory item by a affiliated company to another affiliated
company does not affect consolidated net income until the transfer is made to the
buyer-affiliates customer.
2. Intercompany sale affects consolidated net income at 100% only if it is an upstream
sale.
3. The intercompany sale affects consolidated inventory only when transfer is not 100%
to an affiliated outside customer.
4. NCI is not affected by the intercompany sale unless it is an upstream sale.
5. Honey owns 60% of Bees shares. Bee sells merchandise to Honey. 60% of the
unrealized profit in Bees ending inventory was deducted from Honeys Income from
Subsidiary.
6. Consolidated income is indifferent to intercompany sale of merchandise whether
upstream or downstream.
7. In the year of the intercompany sale of land, the gain on sale of land is totally
eliminated in the consolidated working paper whether upstream or downstream sale.
8. While the land is held by the buyer affiliate, in subsequent years, it is required that
the value of the land be adjusted for the gain when consolidating the land of the
buyer affiliate.
9. For intercompany sale of depreciable assets, for consolidation purposes, the
intercompany gain must be deferred totally in the year of sale and in subsequent
years, whether upstream or downstream sale.
10. In intercompany sale of depreciable assets, adjust the depreciation and accumulated
depreciation to what must have been as if no sale took place, when preparing the
consolidated working paper.

King owns 80% of Prince voting shares when an intercompany sale of merchandise
took place during the year. The 2011 sale was for P50,000 and the cost was for
P40,000. Half of this was not sold in 2011. You are given the following additional
data:
2011
Sales
Cost of Sales
Operating Expenses
Net Income

King
P600,000
400,000
100,000
P100,000

Eagle
P350,000
200,000
75,000
P 75,000

2012
Sales
Cost of Sales
Operating Expenses
Net Income

King
P700,000
450,000
120,000
P130,000

Eagle
P450,000
250,000
100,000
P100,000

11. It is a downstream sale. Give the consolidated sales in 2011.

12. By what amount will inventory be reduced to show the correct balance.
13. What will be the consolidated net income?
14. If the sale in 2011 was an upstream sale, what will be the consolidated cost of sales
in 2012?
15. What will be the consolidated sales in 2012?
16. If an upstream sale, give the share of the NCI in the CNI for 2011.
17. If a downstream sale, give the share of the NCI in the CNI for 2011.