DEPARTMENT OF ACCOUNTANCY

CONSOLIDATION – INTERCOMPANY TRANSACTIONS – SITUATIONAL PROBLEMS

INTERCOMPANY TRANSACTIONS – INVENTORY

Case 1: Popo Corporation owns 75% of the outstanding stock of San Company, acquired at book value during
2017. Selected information from the accounts of Popo and San for 2019 are as follows:

` Popo San
Sales P900,000 P500,000
Cost of Sales 490,000 190,000

During 2019, Popo sold merchandise to San for P50,000 at a gross profit of P20,000. Half of this merchandise
in San’s inventory at December 31, 2019. San’s December 31, 2018 inventory included unrealized profit of
P4,000 on goods acquired from Popo.

Consolidated Sales:

Step 1: Combine the individual sales of Popo and San.

Step 2: Deduct the intercompany sale at selling price.

Sales of Popo 900,000

Sales of San 500,000
Intercompany sale – Downstream (50,000)
Consolidated Sales 1,350,000

Consolidated Cost of Sales:

Step 1: Combine the individual cost of sales of Popo and San.

Step 2: Deduct the intercompany sale at selling price.

Step 3: If unrealized profit ending inventory – add; If unrealized profit beginning inventory – deduct

Cost of Sales of Popo 490,000

Cost of Sales of San 190,000
Intercompany sale – Downstream (50,000)
Unrealized profit from unsold merchandise – ending inventory 10,000
Unrealized profit – beginning inventory (4,000)
Consolidated Cost of Sales 636,000

Case 2: On January 1, 2019 Pit Company purchased 90% of Sit Company for P400,000. On that day, Sit
Company’s equity consisted of P100,000 of capital stock and P300,000 of retained earnings. Assets and
liabilities were fairly valued.

In 2019, Sit had sales of P500,000 and cost of sales of P300,000. One half of the sales were to Pit. Sit’s
pricing policy has not changed for several years.

At January 1, 2019, Pit’s inventory contained P40,000 of Sit’s merchandise purchased in 2018. Pit’s December
31, 2014, inventory included P25,000 of Sit’s merchandise. Both companies use FIFO.

For 2019, Pit had net income from its own operations of P200,000 and paid dividends of P80,000. Sit’s net
income for 2019 was P75,000; it paid P30,000 dividends during the year.

Consolidated Net Income:

Note 1: If adjustment will be made through net income, first thing to do is identify the seller because the
unrealized profit in beginning and ending inventory will be made in the income of the seller.

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In this problem, the seller is Sit Company, the subsidiary, this is likewise an upstream intercompany
transaction. Therefore, the unrealized profit in beginning and ending inventory will be adjusted in the net
income of Sit Company. Then, take note of the gross profit of Sit Company, the seller, which is equal to 40%
(P200,000 / P500,000).

Step 1: Adjust the net income of the subsidiary (Sit Company)

Unadjusted Net Income of Sit Company 75,000
Unrealized profit beginning inventory (P40,000 x 40%) 16,000
Unrealized profit ending inventory (P25,000 x 40%) (10,000)
Adjusted Net Income of Sit Company 81,000
Shared by:
Controlling Interest – 90% 72,900
Non-Controlling Interest – 10% 8,100

Step 2: Divide the dividends of the subsidiary (Sit Company) to Controlling and Non-Controlling Interest
Dividends paid by Sit Company 30,000
Shared by:
Controlling Interest – 90% 27,000
Non-Controlling Interest – 10% 3,000
Step 3: Adjust the net income of the Parent (Pearl Company)

Unadjusted Net Income 200,000

Less: Dividend received from Sit Company 27,000
Adjusted Net Income of Pearl Company 173,000

Consolidated net income = Adjusted net income of the Parent + Adjusted net income of the Subsidiary;
P173,000 + P81,000 = P254,000. OR;

Consolidated net income = Consolidated net income attributable to Controlling Interest + Consolidated net
income attributable to Non-Controlling Interest; 245,900 (173,000 + 72,900) + 8,100 = P254,000.

INTERCOMPANY TRANSACTIONS – DEPRECIABLE ASSETS

Case 1: Several years ago Parent Corporation acquired 80% of Sub Co. Analysis of data relative to this
purchase indicates that goodwill of P60,000 was acquired in this purchase. On October 1, 2019, Sub sold to
Parent a used care for P32,000 in cash. Sub had originally paid P55,000 for the car; on the day of the sale, the
car had a book value of P23,000. Parent estimated the remaining life of the car at 3 years. Parent’s net income
from its own operations was P100,000 in 2019 and P120,000 in 2020. Sub’s net income was P60,000 in 2019
and P75,000 in 2020.

2019:

Step 1: Adjust the net income of the seller in the intercompany transaction, in this case, Sub. This is an
upstream transaction since Sub, the subsidiary, sold an asset to Parent, the parent.

Unadjusted Net income of Sub 60,000

Gain on sale of car (9,000)
Amortization of Gain 750
Adjusted Net Income of Sub 51,750
Shared by:
Controlling Interest – 80% 41,400
Non-Controlling Interest – 20% 10,350

Note 1: Gain on sale = Selling Price of P32,000 minus Book Value of P23,000 = P9,000

Note 2: Amortization of Gain = P9,000 / remaining useful life of 3 years = P3,000 annual amortization of Gain
then prorate in 3 months (October to December).

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Consolidated net income = Adjusted net income of the Parent + Adjusted net income of the Subsidiary;
P100,000 + P51,750 = P151,750. OR;

Consolidated net income = Consolidated net income attributable to Controlling Interest + Consolidated net
income attributable to Non-Controlling Interest; 141,400 (100,000 + 41,400) + 10,350 = P151,750.

2020:

Step 1: Adjust the net income of the seller in the intercompany transaction, in this case, Sub. This is an
upstream transaction since Sub, the subsidiary, sold an asset to Parent, the parent.

Unadjusted Net income of Sub 75,000

Amortization of Gain 3,000
Adjusted Net Income of Sub 78,000
Shared by:
Controlling Interest – 80% 62,400
Non-Controlling Interest – 20% 15,600

Note 2: Amortization of Gain = P9,000 / remaining useful life of 3 years = P3,000 annual amortization of gain.

Consolidated net income = Adjusted net income of the Parent + Adjusted net income of the Subsidiary;
P120,000 + P78,000 = P198,000. OR;

Consolidated net income = Consolidated net income attributable to Controlling Interest + Consolidated net
income attributable to Non-Controlling Interest; 182,400 (120,000 + 62,400) + 15,600 = P198,000.

Case 2: Paw, Inc. owns 75% of Saw Company, purchased several years ago at book value. On July 1, 2019,
Saw sell to Paw a used computer at a loss of P12,000. The computer has a 5-year life from the date of the
intercompany sale, straight-line depreciation will be used, and it has no salvage value. In year 2019, Saw had
net income of P100,000 and paid dividends of P60,000.

2019:

Step 1: Adjust the net income of the seller in the intercompany transaction, in this case, Saw. This is an
upstream transaction since Saw, the subsidiary, sold an asset to Paw, the parent.

Unadjusted Net income of Sub 100,000

Loss on sale of computer 12,000
Amortization of loss (1,200)
Adjusted Net Income of Sub 110,800
Shared by:
Controlling Interest – 75% 83,100
Non-Controlling Interest – 25% 27,700

Note 1: Amortization of Loss = P12,000 / remaining useful life of 5 years = P2,400 annual amortization of loss
then prorate in 6 months (July to December).

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