Intercompany Transactions Part 1: Inventories 1. Working paper entries for consolidation purpose 2. Computation of consolidated sales and cost of sales, CNI, NCI in NI, NI to parent, and NCI balance. a. To eliminate intercompany sales (upstream and downstream): Sales xx COS xx b. To eliminate the unrealized gross profit in ending intercompany inventories (upstream and downstream): COS xx Inventory xx c. To eliminate realized gross profit in beginning intercompany inventories: Upstream Downstream Retained earnings 1/1 – P xx R.E 1/1 – P xx Retained earnings 1/1 – S xx COS xx COS xx d. Computations: i. Total sales (P + S) Intercompany sales Consolidated sales ii. Total cost of sales (P + S) Intercompany sales @ Sales price UGP RGP Consolidated COS
xx (xx) xx xx (xx) xx (xx) xx
iii. Parent, Net income Dividend income from Subsidiary Parent, Net income from own operations UGP (Downstream) RGP ( Downstream) Adjusted Parent, NI from own operations Subsidiary, net income Amortization of excess Goodwill impairment RGP (Upstream) UGP (Upstream) Consolidated Net Income NCI in Net income of subsidiary Net income attributable to parent
xx (xx) xx (xx) xx xx xx (xx) Xx (xx) xx (xx)
xx xx (xx) xx
iv. FV of NCI NCI in dividends declared by S NCI in net income NCI balance
xx (xx) xx xx
Notes: 1. Determine if there is an excess to be amortized. 2. Determine first whether the intercompany transaction is downstream or upstream. 3. At year end, the party who holds the intercompany merchandise is the buyer. 4. In computing for the RGP or UGP, use the seller’s gross profit rate. 5. The net income affected by the RGP and UGP is the seller’s net income. Problems: 1. P Company owns 80% of the stock of S Company, which was acquired at underlying book value on August 30, 2011. Summarized Trial Balance data for the two companies as of December 31, 2011 are as follows: P Company S Company Cash and Accounts Receivable P161,000 P90,000 Inventory 220,000 110,000 Buildings and Equipment (net) 270,000 180,000 Investment in S Company 248,000 Cost of Goods Sold 175,000 140,000 Depreciation expense 30,000 20,000 Current liabilities P150,000 P30,000 Common stock 200,000 90,000 Retained earnings 472,000 220,000 Sales 250,000 200,000 Dividend income _______ 32,000 _______ _______ Total P1,104,000 P1,104,000 P540,000 P540,000 On January 1, 2011, the inventory held by P Company contained merchandise purchased from S Company. S Company had purchased the merchandise for 40,000. In 2011, S Company spent 100,000 to purchase additional merchandise which it sold to P Company for 150,000. By December 31, 2011 P Company had sold all the merchandise that had been on hand on January 1, 2011, but continued to hold in inventory 30% of the 2011 purchase from S Company. Required: • • • •
Elimination entries Consolidated sales and cost of sales CNI, NCI in NI, NI to parent NCI balance
2. Papa Corporation owns 75% of the outstanding stock of San Company, acquired at book value during 2009. Selected information from the accounts of Papa and San for 2011 are as follows: Papa Sales 900,00 0 Cost of goods sold 490,00 0
San 500,00 0 190,00 0
During 2011, Papa sold merchandise to San for 50,000 at a gross profit of 20,000. Half of this merchandise remained in San’s inventory at December 31, 2011. San’s December 31, 2010 inventory included unrealized profit of 4,000 on goods acquired from Papa. Required: Consolidated sales and cost of sales 3. Pidro Corporation owns an 80% interest in Sisa Company, and at December 31, 2010, Pidro’s investment in Sisa under the cost method was equal to 80% of Sisa’s stockholders equity. During 2011, Sisa sells merchandise to Pidro for 100,000 at a gross profit to Sisa of 20,000. At December 31, 2011 half of this merchandise is included in Pidro’s inventory. Separate incomes for Pidro and Sisa for 2011 are summarized as follows: Pidro Sisa Sales P500,000 P300,000 Cost of sales (250,000 (200,000) ) Operating expenses (125,000 (40,000) ) Net income from own operations P125,000 P60,000 Required: CNI, NCI in NI, NI to parent. 4. Pat Corporation owns 70% of Susan Company’s stocks acquired on January 1, 2010. Susan regularly sells merchandise to Pat at 150% of Susan’s cost. Pat’s December 31, 2010 and 2011 inventories include goods purchased intercompany of 112,500 and 33,000 respectively, The separate income (excluding dividend income) of Pat and Susan for 2011 are summarized below: Sales Cost of goods sold Operating expenses Net income from own operations
Pat P1,200,000 (600,000) (400,000) 200,000
Susan P800,000 (500,000) (100,000) 200,000
Required: CNI, NCI in NI, Net income to parent
5. Patton Corporation acquired 60% interest in Solis Company on January 1, 2011 for 360,000 at book value. During 2011, Patton sold inventory items that cost 600,000 to Solis for 800,000, and Solis’ inventory at December 31, 2011 includes one-fourth of this merchandise. Patton reported income from own operations of 300,000 and Solis reported a net income of 150,000. Required: CNI, NCI in NI and NI to parent 6. On December 31, 2010, P Company purchased 70% interest in S Company at book value. For 2011, P Company had income of 200,000 from its own operations and paid dividends of P100,000, For 2011, S Company reported income of P30,000 and paid dividends of P20,000. The beginning inventory of P Company includes 6,000 of merchandise purchased from S Company on December 31, 2010 at 150% of cost. Ending inventory of P Company includes 9,000 of merchandise purchased from S Company at the same mark-up. Required: CNI, NCI in NI, NI to parent, NCI balance. Part 2: Plant assets 1. Intercompany sale of non-depreciable assets – computation of CNI, NCI in NI, NI to parent and NCI balance. 2. Intercompany sale of depreciable assets – computation of CNI, NCI in NI, NI to parent and NCI balance. a. Non-depreciable assets (land): Year of intercompany sale Parent Net income xx Dividend income from S (xx) Parent Net income from own xx Unrealized gain on sale of land (xx) Unrealized loss on sale of land xx Adjusted net income of parent xx Subsidiary net income Amortization of excess Unrealized gain on sale of land Unrealized loss on sale of land CNI NCI in NI of subsidiary NI to parent
xx xx (xx) xx
xx xx (xx) xx
Subsequent to year of sale Parent Net income Dividend income from S Parent net income from own Realized gain on sale of land Realized loss on sale of land Adjusted net income of parent Subsidiary Net income Amortization of excess
xx (xx) xx xx (xx) xx
xx xx (xx) xx (xx)
Realized gain on sale of land Realized loss on sale of land xx CNI xx NCI in NI of Subsidiary (xx) NI to parent xx Notes: 1. The total gain/loss on sale of land is eliminated from the selling party’s net income from own operations only in the year of intercompany sale. 2. The gain/loss on the sale should only be realized in the year the land is ultimately sold to outsiders. As long as the land remains unsold, the gain or loss on the sale remains unrealized. b. Depreciable assets: Same computations as in sale of non-depreciable assets, except that the gain/loss on sale is realized based on the useful life of the asset sold and the method of depreciation used. c. Computation of NCI Same as in the previous topics. Problems: 1. On January 1, 2011, Pete Company sold equipment to Sison Company, its wholly-owned subsidiary, for 400,000. The equipment had cost Pete 500,000; the accumulated depreciation at the time of the sale was 250,000. Pete used a 10-year life, no salvage value, and straight-line depreciation. On the consolidated balance sheet, what is the cost and accumulated depreciation of the equipment? 2. In 2010, Primo sold a land to Second at a gain of 30,000. In 2011, the land remains to be unsold. However, in 2012, the land was sold to outside parties. The following are the relevant data regarding Primo and Second: Net income from own operations 2010
2011
2012
Primo Second
200,00 0 100,00 0
250,00 0 150,00 0
300,000 200,000
Required: CNI for 2010, 2011, and 2012. 3. Several years ago, Parent Corporation acquired 80% of Sub co. Analysis of data relative to this purchase indicates that goodwill of 60,000 was acquired in this purchase. On October 1, 2010, Sub sold to Parent a used car for 32,000 in cash. Sub originally paid 55,000 for the car; on the day of sale, the car had a book value of 23,000. Parent estimated the remaining life of the car at 3 years. Parent’s net income from own was 100,000 in 2010 and 120,000 in 2011. Sub’s net income was 60,000 in 2010 and 75,000 in 2011. Compute for the consolidated net income attributable to parent for each year.
