QUIZ 2 ON INTERCOMPANY PROFITS-SBC

Parent Company purchased majority of the outstanding shares of Subsidiary Company for P750,000 on
March 31, 2013. Any excess should be treated as an adjustment to a warehouse which has a remaining life
of 5 years as of March 31. Selected accounts for 2013 and succeeding periods follow (all in thousands):

1/1 to 7/1/13
P Co S Co
Liabilities
Share CaptalParP100
Share Premium
Retained Earnings,1/1
Sales
Cost of Sales
Expenses
Gain-sale of machine
Dividends, 8/1
Dividend Income
Cash
Accounts Receivables
Inventories
Land
Machines
Accumulated Depn
Warehouse
Accum Depreciation

P250
1,000
200
700
2,500
1,500
750

P110
500
300
1,200
900
200

105
145
380
2,000
1,500

60
50
250
1,000
750

1,000

200
30

1/1 to 12/31/13
12/31/14
P Co S Co
P Co S Co
P300
1,000
200
1.700
3,500
2,450
850
100
37.5
120
180
440
2,000
1,500
550
1,000
352.5

P885
500
300
2,200
1,450
450
40
50
70
20
240
1,000
750
275
200
30

P330
P1,000
200
1,837.5
4,000
2,600
1,200
150
75
130
150
500
2,000
1,560
582
1,000
375.5

P580
P500
590
2,500
1,750
500
100
65
55
180
1,000
700
300
200
80

12/31/15
P Co S Co
?
P1,000
200
?
4,200
2,940
860
(10)
200
75
100
50
480
2,130
1,500
600
1,000
398.5

?
P500
?
2,800
2,100
500
100
35
45
220
900
700
325
200
130

Additional information:
The machine was sold by Subsidiary Co to Parent on July 1, 2013 with a cost of P50 for P60. It
has a remaining life of 4 years. .
Parent Co sold goods to Subsidiary Co costing P120 for P150 on Oct 1, 2014, out of which P50
was reported unsold by Subsidiary Co on Dec 31, 2014.
The machine was sold by Parent Company on June 30, 2015.
Requirements:
1. Prepare a table for determination and allocation of excess showing both controlling interest and
non-controlling interest.
2013:
2. Update the investment account assuming the parent uses the equity method. Use T Account
properly labelled.
3. Prepare adjusting and eliminating entries.
4. Prepare a consolidated income statement and consolidated retained earnings
5. Prepare the consolidated stockholders equity.
6. Compute for consolidated inventory and
7. Consolidated plant, property and equipment as at Dec 31.
2014 same requirements in 2013 nos. 2 to 7.
2015
1. Update the investment account assuming equity method. Use T Account
2. Prepare adjusting and eliminating entries

3. Prepare a working paper.

2015
Income Statement

Sales
Cost of Sales
Expenses
Net Operating Income
Dividend Income
Gain on sale of machine
Loss on sale of machine
Share of NCI
Net Income
Retained Earnings
Jan 1
Net Income
Dividends
Dec 31
Financial Position
Assets
Cash
Receivables
Inventories
Land
Machines
Accumulated Depreciation
Warehouse
Accumulated Depreciation
Investment in Stocks
Total Assets
Liabilities
Capital Stock
Retained Earnings
Share of NCI
NCI
Total Liabilities and SHE

P Co

Adjustment and
Elimination Entries
S Co
Debit
Credit

NCI

Consolidated

SOLUTION FOR INTERCOMPANY PROFITS

1. Table for determination and allocation of excess:
Fair Value of investment
Fair Value of Subsidiary Co:
Capital Stock
Retained Earnings
Pre-Acqn Earnings:
Revaluation of Plant Assets

100%
P1,000,000

Controlling Interest
75%
P 750,000

Non-Cont Int
25%
P250,000

(500,000)
( 300,000)
(50,000)
P150,000

(400,000)
(200,000)
(37,500)
P112,500

(100,000)
( 60,000)
(20,000)
P 37,500

2.
July 1
Share In net income (340- PAE50) 290
Adjustment for depn of WH
(150/5 x 9/12)
(22.5)
Unrealized gain on machine
40 5 (40/4 x 1/2)
(35 )
Share in dividends
(50 )
3.

4.

Investment in S
P 750,000

Dividend Income
Dividends, Subsidiary Co

174,375 =Income over S Co

(37,500)
P886,875
37,500
37,500

Common Stock, Subsidiary Co

Retained Earings, Subsidiary Co
Warehouse
Pre Acquisition Earnings
Share of NCI
Investment in Subsidiary Co

375,000
225,000
150,000
50,000

Common Stock, Subsidiary Co

Retained Earings, Subsidiary Co
Share of NCI
NCI

125,000
75,000
50,000

Deprreciation
Accumulated Depn-warehouse

22,500

Gain on sale
Machine
Accum Depn (30+2.5 against 7.5)
Depreciation (2.5 against 7.5) or 40/4 x.5

40,000

50,000
750,000

250,000
22,500

Sales (3,500,\ + 2,200)

Cost of Sales (2,450 + 1,450)
Expenses (850 +450 +3,750 +22.5-5))
Pre Acquisition Earnings
Consolidated Net Income
Share of non-controlling interest (232.5) x .25
Share of Parent Company
To Prove: Net operating income of Parent Company

10,000
25,000
5,000
P 5,700,000
(3,900,000)
(1,317,500)
(50,000)
432,500
( 58,125)
P 374,375
P200,000

Equity over Subsidiary Company

174,375
P374,375

Retained Earnings, Jan 1

Share in CNI
Dividends
Retained Earinings, Subsidiary Dec 31
5.

P1,700,000
374,375
( 100,000)
P1,974,375

Non-Controlling Interest, Jan 1

Share in Net Income
Share in Dividends
NCI Dec 31
Share Capital
Share Premium
Retained Earnings
Consolidated SHE

P250,000
58,125
( 12,500)
P295,625
1,000,000
200,000
1.974,375
3,470,000

6.

Consolidated Inventory

P680,000

7.

PPE
Land
Machine
Accum Depn
Warehouse
Accum Depn

P3,000,000
2,240,00
( 830,000)
1,350,000
(405,000)
P5,355,000

2014
Jan 1
Share In net income
Adjustment for depn of WH
Realized gain on machine
Unrealized Gain on Mdse
Share in dividends
3.

Investment in S
P 886,875
250
( 30)
10

Dividend Income
Dividends, Subsidiary Co

230 x .75

172,500
(10,000) 162,500 Income Over S
(75,000)
P974,375
75,000
75,000

Investment in Stocks of Subsidiary

RE , Parent

136,875

Common Stock, Subsidiary Co

Retained EarNings, Subsidiary Co
Warehouse (150-22.5)
Share of Non-Controlling Interest
Investment in Subsidiary Co

375,000
442,500
127,500

136,875

31,875
913,125

Common Stock, Subsidiary Co

Retained Earings, Subsidiary Co
Share of NCI
NCI

304,375

Investment in Stocks (40-5 x .75)

Ret Earnings, S co (Share of NCI
Machine
Accumulated Depreciation (25 10)
Depreciation Expense

26,250
8,750

Deprreciation
Accumulated Depn-warehouse

30,000

Sales
Cost of Sales
Inventory
4.

125,000
147,500
31,875

10,000
15,000
10,000
30,000
150,000

Sales (4,000,000 + 2,500,000-150,000)

Cost of Sales (2,600,000 + 1,750,000 140,000)
Expenses (1,200,000 +500,000 + 30,000-10,000)
Consolidated Net Income
Share of non-controlling interest (230 x .25)
Share of Parent Company
To Prove: Net Operating income of Parent Company
Equity over Subsidiary Company
Retained Earnings, Parent Co Jan 1
Share in Consolidated Net Income
Dividends, Parent Co
Retained Earnings, Parent Co Dec 31

Non-Controlling Interest, Jan 1

Share in consolidated net income
Share in Dividends
NCI Dec 31
Share Capital
Share Premium
Retained Earnings
Consolidated SHE
6.

Inventory (500 + 180 10)

7.

Consolidated PPE

140,000
10,000
P 6,350,000
(4,210,000)
(1,720,000)
420,000
( 57,500)
P 362,500
P200,000
162,500
P362,500
P1,974,375
362,500
(150,000)
P2,186,875

P295,625
57,500
(25,000)
P328,125
1,000,000
200,000
2,186,875
P3,175,000
P670,000

Land
Machine
Accum Depn
Warehouse
Accum Depn

less 10,000
add 15,000
add 127,500
add 30,000

P3,000,000
2,250,000
(897,000)
1,327,500
(485,500)

P5,195,500

2015
2.

Investment in S Co
January 1
P1,974,375
Share In net income
200,000
Adjustment for depn of WH (30,000)
Piecemeal realization
5,000
Gain on sale
20,000
Realized gain on invty
Share in dividends (100,000 x .75)

3.

195 x .75 146,250

10,000
(75,000)
P1,055,625

Dividend Income
Dividends, Subsidiary Co

P156,250 is Income over S

75,000
75,000

Investment in Stocks of Subsidiary

RE , Parent

224,375

Common Stock, Subsidiary Co

Retained Earings, Subsidiary Co
Plant Assets (150-22.5-30))
Share of Non-Controlling Interest
Investment in Subsidiary Co

375,000
555,000
97,500

Common Stock, Subsidiary Co

Retained Earings, Subsidiary Co
Share of NCI
NCI

125,000
185,000
24,375

224,375

24,375
1,003,125

334,375

Investment in Stocks (40-5 -10 x .75)

Ret Earnings, S co (Share of NCI
Gain on sale (40-5-10-5)
Depreciation Expense (10 x )

18,750
6,250

Deprreciation
Accumulated Depn-warehouse

30,000

Investment in Stocks
Cost of Sales

10,000

20,000
5,000
30,000
10,000

Analysis of sale of machine in 2013:

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

effects
over by P10,000

depreciation recorded as P7,500 should be P2,500

over by P5,000

accum depn shoud be P32,500 - 7,500) recorded

under by P25,000

in 2015: depreciation recorded as P7,500 should be P2,500

no need to analyze accumulated

over by P5,000

2015
Income Statement

P Co

Sales
Cost of Sales
Expenses
Net Operating Income
Dividend Income
Gain on sale of machine
Loss on sale of machine
CNI
Share of NCI
Net Income

4,200
(2,940)
(860)
400
75

Retained Earnings
Jan 1

S Co

Adjustment and
Elimination Entries
Debit
Credit

2,800
(2,100)
(500)
200

f) 30

NCI

7,000
(5,030)
(1,385)

g) 10
e) 5

a) 75
e) 20

(10)
48.75
465

Consolidated

200

1,962.5

b)224.375
740

Net Income
Dividends
Dec 31

465
(200)
2,227.5

200
(100)
840

Financial Position
Assets
Cash
Receivables
Inventories
Land
Machines
Accumulated Depreciation
Warehouse
Accumulated Depreciation
Investment in Stocks

100
50
480
2,130
1,500
(600)
1,000
(398.5)
750

35
45
220
900
700
(325)
200
(130)

Total Assets

5,011.5

1,645

Liabilities
Capital Stock
Retained Earnings
Share Premium
Share of NCI
NCI

1,584
1,000
2,227.5
200

305
500
840

c) 555
e) 6.25
a)75

20
(10)
595
(48.75)
546.25
2,186.875

178.75
48.75
(25)
202.5

546.25
(200)
2,533.25

135
95
700
3,030
2,200
(925)
1,297.5
(558.5)
-

c) 97.5
f) 30
b)224.375 c)1,003.125
e)18,750
g) 10,000

5,974
c) 375

125
202.5
c) 24.375

24.375
351.875

1,889
1,000
2,533.125
200
351.875

Total Liabilities and SHE

5,011.5
QUIZ ON INTERCOMPANY PROFITS

1,645

5,974

Parent Company purchased 4,000 of the outstanding shares of Subsidiary Company for P700 on Jan 1,
2013.ly Assets are at fair value except for the machine which should be only P730 based on a remaining
life of 4 years. Any excess should be treated as an adjustment to a non-identifiable asset. Selected
accounts for three succeeding periods follow (thousands omitted including investment described in the
first statement):

Share Capital, Par100

Retained Earnings, 1/1
Sales
Cost of Sales
Expenses
Gain on sale of Land
Dividends,8/1
Inventory
Land
Machines
Accumulated Depreciation

12/31/13
P Co
S Co
P1,000
P500
900
300
3,500
2,200
2,450
1,450
850
450
100
440
2,000
1,500
550

50
240
800
750
275

12/31/14
P Co
S Co
P1,000
P500
?
?
4,000
2,500
2,600
1,750
1,200
500
30
150
100
500
180
1,930
900
1,500
750
575
300

12/31/15
P Co
S Co
P1,000
P500
?
?
4,200 2,800
2,940 2,100
860
500
20
200
100
480
220
1,930
800
1,450
750
600
350

Additional information:
Subsidiary Co sold goods to Parent costing P104 for P130 on Oct 1, 2013, out of which P48 was
reported unsold by Parent Co on Dec 31, 2013.
The land was sold by Parent Co to Subsidiary for P100 on May 30, 2014.
The land was sold by Subsidiary Co to Cybell Co on Oct 1, 2015.
Requirements:
1. Prepare a table for determination and allocation of excess showing both controlling
interest and non-controlling interest.
2013:
2. Update the investment account assuming the parent uses the equity method. Use T Account.
3. Determine the Income from Subsidiary. Use T Account.
4. Prepare adjusting and eliminating entries.
5. Prepare a consolidated income statement, consolidated retained earnings, consolidated balance
Sheet showing inventories, land, machines, goodwill (if any), stockholders equity.
2014 Same requirements as 2013 nos. 2 to 5
2015 Same requirements as 2013 but only nos. 2 to 4
5. Prepare a working paper to show:
consolidated income statement
consolidated retained earnings
inventories, land, machines, investment, goodwill ,if any, stockholders equity.
SOLUTION FOR INTERCOMPANY PROFITS

1. Table for determination and allocation of excess:

100%
Fair Value of subsidiary
P875,000
Fair Value of Subsidiary Co:
Capital Stock
(500,000)
Retained Earnings
( 300,000)
Goodwill
P 75,000
2.
January 1
Share In net income (300,000 x .8)
Unrealized profit on intercompany
sales (48,000 x .2)
Share in dividends (50,000 x .8)
3.

80%
P 700,000

20%
P175,000

(400,000)
(240,000)
P 60,000

(100,000)
( 60,000)
P 15,000

Investment in S Co
P 700,000
240,000
( 9,600)
(40,000)
P 890,400

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

230,400

2) Share Capital, Subsidiary Co

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

400,000
240,000
75,000

Share Capital, Subsidiary Co

Retained Earnings, Subsidiary Co
Share of NCI in Goodwill
NCI

100,000
60,000
15,000

3) Sales
Cost of Sales
Merchandise Inventory

Income over Subsidiary

P 240,000
( 9,600)
P230,400
40,000
190,400

15,000
700,000

175,000
130,000
120,400
9,600

2014
2.
January 1
Share In net income (280,000 x .8)
Unrealized gain on land (30,000 x .8)
Realized gain on sale of mdse
Share in dividends (100,000 x .8)
3.

Investment in S Co
P 890,400
224,000
( 24,000)
9,600
(80,000)
P1,020,000

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

209,600

2) Share Capital, Subsidiary Co

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

400,000
440,000
75,000

Income over Subsidiary

P 224,000
(24,000)
9,600
P209,600
80,000
129,600

15,000
900,000

Share Capital, Subsidiary Co

Retained Earnings, Subsidiary Co
Share of NCI in Goodwill
NCI

100,000
110,000
15,000
225,000

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

9,600
9,600
30,000
30,000

2015
2
.

Investment in S Co
January 1
Share In net income (200,000 x .8)
Net Unrealized gain on machine (20,0001,250)
Share in dividends (100,000 x .8)

3.

P 1,020,000
160,000
(18,750)
(80,000)
P 1.081,250

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

141,250

2) Share Capital, Subsidiary Co

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

400,000
584,000
75,000

Share Capital, Subsidiary Co

Retained Earnings, Subsidiary Co
Share of NCI in Goodwill
NCI
3) Investment in Stocks
Ret Earnings, S Co Beg (NCI)
Land

100,000
140,000
15,000

4) Gain on sale
Accumulated Depreciation
Depreciation Expense
Machine

Income over Subsidiary

P 160,000
( 18,750)
P 141,250
80,000
61,250

15,000
1,044,000

255,000
24,000
6,000
30,000
20,000
8,750
1.250
10,000

Analysis of sale of machine in 2015:

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

effects
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 P8,750

2013
Income Statement

Sales
Cost of Sales
Expenses
Net Operating Income
Income from Subsidiary
CNI
Share of NCI
Net Income

Adjustment and
Elimination Entries
P Co

S Co

3,500
(2,450)
(850)
200
230.4

2,200
(1,450)
(450)
300
____

430.4

300

900
430.4
(100)
1,230.4

300
300
(50)
550

Debit

Credit

NCI

130

Consolidated

5,570
(3,379.6)
(1,300)

120.4
1)230.4
60
60

490.4
(60)
430.4

60
60
(10)
110

900
430.4
(100)
1,230.4

Retained Earnings

Jan 1
Net Income
Dividends
Dec 31

2) 240
1) 40

Financial Position

Inventories
Land
Machines
Accumulated Depreciation
Investment in Stocks of S Co
Goodwill
Equity
Share Capital
Retained Earnings
Share of NCI in Goodwill
NCI
2014
Income Statement

440
2,000
1,500
(550)
890.4

240
1,000
750
(275)

670.4
3,000
2,250
(825)

1)190.
4
2) 700
2) 75

1,000
1,230

500
550

75

2)400
2) 15

P Co

Adjustment and
Elimination Entries
S Co
Debit
Credit

Sales
Cost of Sales

4,000
(2,600)

2,500
(1,750)

Expenses
Net Operating Income
Income from Subsidiary

(1,200)
200
209.6

(500)
250

Gain
CNI
Share of NCI
Net Income

3) 9.6

30

409.6

280

1,230.4
409.6
(150)

550
280
(100)

100
110
15
225

NCI

225

Consolidated

6,500
(4,340.4)

3)9,60
0

(1,700)
9,600
1)209.
6
4)
30
50
50

459.6
(50)
409.6

110
50
(20)

1,230.44
409.6
(150z0

Retained Earnings

Jan 1
Net Income
Dividends

2) 440
1) 80

Dec 31

1,490

730

500
2,130
1,500
575
1,020

180
900
750
300

140

1,490

Financial Position

Inventories
Land
Machines
Accumulated Depreciation
Investment in Stocks
Goodwill
Equity
Share Capital
Retained Earnings
Share of NCI in GW
NCI

1,000
1,490

500
730

P Co

4,200
(2,940)
(86)

2,800
(2,100)
(500)

Net Operating Income

Income from Subsidiary

400
141.25

200

Financial Position
Assets
Inventories
Land
Machines
Accumulated Depreciation
Investment in Stocks

75

2) 400
2) 15

Sales
Cost of Sales
Expenses

Net Income
Dividends
Dec 31

1)129.
6
2) 900

2) 75

Income Statement

Retained Earnings
Jan 1

4) 30
3)9,60
0

2015

Gain
CNI
Share of NCI
Net Income

680
3,000
2,250
(875)

S Co

100
140
15
255

Adjustment and
Elimination Entries
Debit
Credit
NCI

1,000
1,490
255

Consolidated

7,000
(5,040)
(584.75)

4)1,25
0

601.25
1)141.2
5
4) 20

20
561.25

200

1,490

730

561.25
(200)
1,851.2
5

200
(100)
830

480
2,130
1,450
(600)
1,081.2
5

220
900
810
(350)

40
40
2) 584
3) 6

1,460
1) 80

3) 24

601.25
(40)
561.25

3) 30
4) 10
4) 8.75
1)61.2
5
2)1,04
4

561.25
(200)
1.851.25

700
3,000
2,250
(958.75)

Goodwill
Equity
Share Capital
Retained Earnings
Share of NCI in GW
NCI

2) 75
1,000
1,851.2
5

500
830

2) 400
2) 15

75
100
160

1,000
1.851.25

15

275