THEORIES

1. It is important to identify whether an intercompany sale is downstream or upstream because –

a. Only downstream sales affect non-controlling interest
b. Only upstream sales affect non-controlling interest
c. The profit pertains solely to the owners of the parent in upstream sale
d. The profit pertains both to the owners of the parent and NCI in a downstream sale

2. Intercompany sales of merchandise create three problems, which is not:

a. The sale and CGS are recorded twice
b. When one company sells merchandise to its affiliate at a price above cost, the ending inventory of the buyer
contains an element of unrealized gross profit.
c. The sale, however, may not be recognized until after the goods have been sold to an outside buyer.
d. Complications result from the fact that the buyer of the asset will record it in its books at the agreed upon
purchase price; subsequent depreciation charges will be based upon this purchase price, thus requiring
adjustment.

3. Statement 1: Receivables and payables originate from intercompany transactions such as the sale of inventory and
fixed assets or the rendering of services must not be eliminated. FALSE
Statement 2: Intercompany loans These must also be eliminated from consolidated statements, in a manner similar to
that used for receivables and payables above. In addition, interest income and expense and interest accruals must be
eliminated. TRUE
a. Only statement 1 is true
b. Only statement 2 is true
c. Both statements are true
d. Both statements are false

4. These financial statements are often prepared for a group of related companies or a group of commonly controlled
companies. These are prepared by combining the individual companies' financial statement classifications into one
set of financial statements.
a. Consolidated financial statements
b. Separate financial statements
c. Combined financial statements
d. Comparative financial statements

5. An interaffiliate sale of fixed assets involves the following except:

a. In the year of safe, restore the carrying amount of the asset to its original BV and eliminate the gain (loss)
recorded by the seller.
b. Account the changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control as
an equity transaction.
c. For each period, adjust depreciation expense and accumulated depreciation to reflect the original BV of the
asset.
d. For periods subsequent to the year of sale. Investment in Subsidiary or Retained Earnings – Parent Company
must be adjusted, to eliminate the gain (loss) contained therein.

PROBLEMS

Use the following information for the next three questions:

Black Corporation owns 70% of Pink Corporation. Their separate incomes (excluding investment income) for 2016 were
determined as follows:

Black Pink
Sales P 500,000 P 200,000
Less: Cost of sales 300,000 70,000
Gross Profit P 200,000 P 130,000
Other Expense 100,000 20,000
Separate Incomes P 100,000 P 110,000
During 2016 Black sold merchandise costing P30,000 to Pink for P50,000. On December 31, 2016, one fourth of these
inventories remain unsold by Pink.

6. The consolidated cost of sales for 2016:

a. P 316,500
b. P 336,500
c. P 327,500
d. P 318,000

7. The Profit attributable to Equity Holders of Parent of CNI Contributable to controlling interests for 2016:
a. P 177,000
b. P 127,500
c. P 116,000
d. P 128,500

8. The consolidated sales for 2016:

a. P 650,000
b. P 450,000
c. P 240,000
d. P 850,000

9. Cassy Corporation acquired 75 percent of the outstanding shares of Marga Corporation at a cost of P750,000 on
December 31, 2014. On that date, Marga had P400,000 of capital stock and P700,000 of retained earnings.

The results of operations of Cassie and Marga's operations are:

Cassie Marga
Net income from own operations P 600,000 P 400,000
Dividends paid 80,000 60,000

The book values of Marga's assets and liabilities approximate their respective market values. The beginning inventory
of Cassie Corporation includes P14,000 merchandise purchased from Marga Company on December 31, 2014 at
125% of cost. The ending inventory of Cassie Corporation includes P25,000 of merchandise purchased from Marga
Company at the same prices. Cassie Corporation uses the equity to account for its investment in Marga Corporation.

The noncontrolling interest at December 31, 2015 is:

a. P 358,750
b. P 143,500
c. P 125,750
d. P 362,725

10. Pepper Corporation owns a 60% interest in Spice Corporation. Spice regularly sells merchandise to its parent at
125% of Spice's costs. Gross profit data of Pepper and Spice for the year 2016 are as follows:

Pepper Spice
Sales P 2,000,000 P 750,000
Cost of goods sold 1,200,000 525,000
Gross profit P 800,000 P 225,000

During 2016, Pepper purchased inventory items from Spice at a transfer price of P750,000. Pepper's December 31,
2015 and 2016 inventories included goods acquired from Spice at P300,000 and P425,000, respectively. The
unrealized profits in the year and 2015 and 2016 inventories were:
a. P 72,000 and P85,000, respectively
b. P 90,000 and P127,500, respectively
c. P 252,000 and P297,500, respectively
d. P 20,000 and P25,000, respectively
11. On January 1, 2014, Mon Corporation acquired an 80% interest in Dragon Corporation for P800,000. During this time
Dragon's stockholder’s equity consisted of P650,000 common stock and P300,000 retained earnings. The excess cost
over book value was assigned to patent with a 10-year amortization period. Comparative income statements for the
two corporations for 2015 are as follows:

MON DRAGON
Sales P2,000,000 P800,000
Income from Dragon 142,500
Cost of sales (600,000) (220,000)
Depreciation expense (150,000) (50,000)
Other expenses (120,000) (65,000)
Net income P1,272,500 P465,000

Dividends of Mon and Dragon for all of 2017 were P260,000 and P150,000 respectively. During 2014 Dragon sold
inventory items to Mon for P95,000. This merchandise cost Dragon P40,000 and one-fourth of it remained in Mon's
December 31, 2015 inventory. During 2015 Dragon's sales to Mon amounted to P120,000. This merchandise cost
Dragon P60,000 and one-half of it remained in Mon's December 31, 2015 inventory.

Calculate the non-controlling interest in net income for 2015 and the controlling interest consolidated net income for
2015:
a. P 72,750 and P1,285,000, respectively
b. P 92,750 and P1,327,500, respectively
c. P 88,750 and P1,485,000, respectively
d. P 86,750 and P1,465,000, respectively

Use the following information for the next three questions:

Phil Corporation owns 65% of Amer Corporation. Income Statement for the year 2016 is as follows:

Phil Amer
Sales P 1,000,000 P 450,000
Less: Cost of sales 500,000 250,000
Gross Profit P 500,000 P 200,000
Other Expense 350,000 60,000
Separate Incomes P 150,000 P 140,000

There is an intercompany sales totaling P250,000 from Phil to Amer. Phil’s December 31, 2015 and December 31, 2016
inventories contain unrealized profits of P10,000 and P15,000, respectively.

12. The consolidated cost of sales for 2016:

a. P 555,500
b. P 505,000
c. P 550,000
d. P 505,500

13. The Profit attributable to Equity Holders of Parent of CNI Contributable to controlling interests for 2016:
a. P 177,000
b. P 127,500
c. P 237,250
d. P 237,750

14. The consolidated sales for 2016:

a. P 1,400,000
b. P 1,200,000
c. P 1,500,000
d. P 1,300,000
15. VHVR Inc. acquired 90% of Leviste Corp. several years ago at book value equal to fair value. For the years 2015 and
2016, VHVR and Leviste report the following

2015 2016
VHVR’s separate income P 400,000 P 500,000
Leviste’s net income 90,000 70,000

The only intercompany transaction between VHVR and Leviste during 2015 and 2016 was the January 1, 2015 sale of
land. The land had a book value of P50,000 and was sold intercompany for P60,000, its appraised value at the time of
sale. If the land was sold by VHVR to Leviste (downstream sales) and that Leviste still owns the land at December 31,
2016, compute the profit attributable to equity holders of parent for 2015 and 2016:
2015 2016
a. P 481,000 and P 563,000
b. P 471,000 and P 570,000
c. P 471,000 and P 563,000
d. P 480,000 and P 570,000

ANSWER KEYS

1. B
It is important to identify whether an intercompany sale is downstream or upstream because only upstream sales
affect non-controlling interest. The entity that recognizes profit from a sale transaction is the seller. In a downstream
sale, the profit pertains solely to the owners of the parent while in upstream sale, it pertains to both the owners of the
parent and the NCI.

2. D
The sale and CGS are recorded twice: first, the seller records a sale and related CGS as the merchandise is "sold" to
the affiliated buyer: secondly, the buyer resells the goods to outsiders, also recording a sale and CGS For
consolidated purposes, however, it is obvious that only one sale has occurred.
When one company sells merchandise to its affiliate at a price above cost, the ending inventory of the buyer contains
an element of unrealized gross profit. The gross profit is not realized to the economic entity until it is sold to outsiders.
The preparation of consolidated financial statements requires that unrealized gross profit be eliminated.

Interest in the subsidiary's must be based on the sales and CGS originally reported by the subsidiary. As it was the
case in interaffiliate interest income and expense, the non-controlling income should reflect the expense incurred (or
revenues obtained] in intercompany transactions. The sale, however, may not be recognized until after the goods
have been sold to an outside buyer

3. B
The effects of intercompany transactions are eliminated when preparing consolidated financial statements because
the parent and subsidiary are viewed as a single reporting entity. Thus, receivables and payables originate from
intercompany transactions such as the sale of inventory and fixed assets or the rendering of services must be
eliminated. Elimination of the receivable/payable simply involves a "worksheet entry" reversing the original recording.

Intercompany loans. These must also be eliminated from consolidated statements, in a manner similar to that used for
receivables and payables above. In addition, interest income and expense and interest accruals must be eliminated.

4. C
There are circumstances where combined financial statements (as distinguished from consolidated statements) of
commonly controlled companies are likely to be more meaningful than their separate statements. Combined financial
statements are often prepared for a group of related companies (e.g a group of unconsolidated subsidiaries) or a
group of commonly controlled companies (e.g.. one individual owns a controlling interest in several corporations which
are related in their operations) Consolidated statements are not appropriate if there is no investment by one affiliate in
another to eliminate.
 Combined financial statements are prepared by combining the individual companies' financial statement
classifications into one set of financial statements. Intercompany transactions, balances, and profits or losses are
eliminated in the same manner as in consolidated statements. If there are problems in connection with such matters
as minority interests, foreign operations, different fiscal periods, or income taxes, they are treated in the same manner
as in consolidated statements.

5. B
Sales of fixed assets between members of an affiliated group may result in the recognition of gain or loss by the
seller, if the selling price differs from the carrying amount of the asset. No gain or loss has taken place for the
consolidated entity: assets have merely been transferred from one set of books to another. Additional complications
result from the fact that the buyer of the asset will record it in its books at the agreed upon purchase price; subsequent
depreciation charges will be based upon this purchase price, thus requiring adjustment.

XItem No. 6 – C
Combined cost of sales [P300,000 + P70,000] P 370,000
Less: Intercompany purchases 50,000
Add: Unrealized profit in ending inventory to Pink:
[P50,000 x 1/4 = P12,500 x P30,000/P50,000] 7,500
Consolidated cost of sales P 327,500

Item No. 7 – A
Consolidated sales [P500,000 + P200,000] P 700,000
Less: Consolidated cost of sales [P300,000 + P70,000] 370,000
Consolidated gross profit 330,000
Less: Consolidated other expenses [P100,000 + P20,000] 120,000
Less: Non-controlling interest in net income [P110,000 x 30%] 33,000
Profit attributable to Equity Holders of Parent Net Income P 177,000

Item No. 8 – A
Consolidated sales [P500,000 + P200,000] P 700,000
Less: Intercompany sales 50,000
Consolidated sales P 650,000

Item No. 9 – A
Capital Stock - Marga, 12/31/2015 P 400,000
Retained Earnings - Marga, 12/31/2015
Retained Earnings - Marga, 1/1/2015 700,000.00
Add: Net income, 2015 400,000.00
Less: Dividends paid, 2015 60,000.00 1,040,000
Stockholders' Equity - Marga, 12/31/2015 1,440,000
Adjustment to reflect FV (over/under) valuation of asset -
Amortization of allocated excess -
FV of stockholders' equity - Marga, 12/31/2015 1,440,000
Less: Unrealized profit in ending inventory of Cassie [P25,000 x 25/125] 5,000
Realized stockholders' equity - Marga, 12/31/2015 1,435,000
Multiplied by: Non-controlling interest % 25%
Non-controlling interest, 12/31/2015 P 358,750

Item No. 10 – B
Inventories acquired from Spice, December 31, 2015 P 300,000
Gross Profit Ratio of Spice [P225,000/P750,000] 30%
Realized profit in beginning inventory of Pepper (Upstream) P 90,000

Inventories acquired from Spice, December 31, 2016 P 425,000

Gross Profit Ratio of Spice [P225,000/P750,000] 30%
Unrealized Profit in Ending Inventory of Pepper (Upstream) P 127,500
XItem No. 11 – C      
Dragon's net income from own operations P 465,000  
Add: Realized profit in beginning inventory of Mon      
[P95,000 x 1/4 = P23,750 x (P95,000-P40,000)/P95,000]   13,750  
Total P 478,750  
Less: Unrealized profit in ending inventory of Mon      
[P120,000 x 1/2 = P60,000 x (P120,000-P60,000)/P120,000]   30,000  
Less: Amortization   5,000  
Total P 443,750  
Multiplied by: Non-controlling interest %   20%  
Non-controlling interest in net income P 88,750  
       

Net income from Mon's operations [P2M - 600k - 150k - 120k] P 1,130,000  
Net income from Dragon's operations   465,000  
Consolidated net income P 1,595,000  
Add: Realized profit in beginning inventory of Mon   13,750  
Total P 1,608,750  
Less: Unrealized profit in ending inventory of Mon   30,000  
Total P 1,578,750  
Less: Non-controlling interest in net income   88,750  
Less: Amortization*   5,000  
Controlling interest in consolidated net income P 1,485,000  
       

*Amortization of allocated excess:   Partial Full

Cost of investment, 1/1/2014      
Partial P 800,000  
Full [P800,000/80%]     1,000,000
Less: Book value of interest acquired, 1/1/2014:      
Partial [(P650,000 + P300,000) x 80%]   760,000  
Full [P650,000 + P300,000]     950,000
Allocated excess   40,000 50,000
Less: Over/Under valuation of assets and liabilities   - -
Patent   40,000 50,000
Useful life   10 10
Amortization P 4,000 5,000
       

Item No. 12 – B      
Combined cost of sales [P500,000 + P250,000] P 750,000  
Less: Intercompany purchases   250,000  
Add: Unrealized profit in ending inventory   15,000  
Less:Unrealized profit in beginning inventory   10,000  
Consolidated cost of sales P 505,000  
       

Item No. 13 – D      
Net income from Phil's operations P 150,000  
Net income from Amer's operations   140,000  
Consolidated profit from own operations   290,000  
Add: Realized profit in beginning inventory of Phil   10,000  
Less: Unrealized profit in ending inventory of Phil   15,000  
Less: Amortization of allocated excess   -  
Less: Non-controlling interest in net income [(P140,000 + P10,000 - P15,000) x 35%]   47,250  
Profit attributable to Equity Holders of Parent Net Income P 237,750  

XItem No. 14 – B
1,450,00
Consolidated sales [P1,000,000 + P450,000] P
0
Less: Intercompany sales 250,000
1,200,00
Consolidated sales P
0

XItem No. 15 – C
2015 2016
Net income of VHVR Inc. P 400,000 500,000
Net income of Leviste Corp. 90,000 70,000
Total 490,000 570,000
Less: Unrealized gain on sale of land 10,000 -
Total 480,000 570,000
Add: Realized gain from depreciation - -
Total 480,000 570,000
Less: Controlling interest in net income 9,000 7,000
Less: Amortization/Goodwill impairment - -
Profit Attributable to Equity Holders of Parent P 471,000 563,000

Sales price P 60,000

Less: Book value 50,000
Unrealized gain on sale of land P 10,000

Non-controlling interest in net income 2015 2016

Leviste Corp's net income from own operations P 90,000 70000
Multiplied by: Non-controlling interest % 10% 10%
Non-controlling interest in net income P 9,000 7,000