Comprehensive Problem On Intercompany Transactions [PDF]

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CA 51024 – ACCOUNTING FOR BUSINESS COMBINATIONS CONSOLIDATED FINANCIAL STATEMENTS –INTERCOMPANY SALE OF INVENTORIES AND PLANT ASSETS COMPREHENSIVE PROBLEM: INTERCOMPANY TRANSACTIONS UST Corp. acquired on January 1, 2020, 80% of the outstanding common stock of AMV Corp. for P1,250,000. At the date of acquisition, AMV has one of its several buildings which will be fully depreciated by December 31, 2024 was understated by P50,000; as well as its trademark was overstated by P45,000 with a remaining life of 3 more years. A total of P250,000 is attributable to full goodwill. Impairment loss on goodwill in 2020- P75,000; in 2021- P50,000, for consolidation purposes these losses are included in operating expense line items. The fair value of NCI on the date of acquisition is measured at P312,500. In 2020, there was an upstream sale of inventories amounting to P320,000, 40% of these inventories were on hand at the end of 2020 while in 2021 downstream sales of inventories was P600,000, of which 30% were unsold as at year end. UST’s mark-up rate was 30% based on sales; AMV- 25% based on cost and companies are using FIFO. On June 30, 2020, UST acquired machinery from AMV with a book value and cost respectively of P90,000 and P120,000 for P60,000. The machinery had a remaining life of 3 years; likewise, in 2021, AMV sold land to UST at a gain of P50,000, the land had carrying values of P250,000. UST sold this land at a loss in 2022 by P30,000. UST’s dividend revenue came from AMV. There were no other share capital transactions to both entities during 20202021. The following was the selected accounts of the two affiliates in their respective separate financial statements on 2021:

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UST CO.

AMV CO.

Sales Cost of sales Gross Profit Dividend Revenue Gain on sale of Land Operating Expense Net income Dividends paid Merchandise Inventory, end Building Net Trademark Net Machinery Net Land Retained Earnings, Beg 2021 Retained Earnings, End 2021 Ordinary Shares APIC

7,500,000 6,000,000 1,500,000 120,000 80,000 520,000 1,180,000 400,000 300,000 1,350,000 185,000 550,000 860,000 5,200,000 ??? 5,200,000 700,000

4,500,000 3,150,000 1,350,000   60,000 480,000 930,000 150,000 250,000 875,000 72,000 322,000 685,000 ??? 1,700,000 850,000 80,000

Required: Prepare working paper for the 2021 Consolidated Financial Statements, and compute the following: 1. Consolidated sales 2. Consolidated cost of sales 3. Consolidated net income 4. Consolidated net income attributable to parent 5. Non-controlling interest in net income 6. Consolidated operating expenses 7. Consolidated merchandise inventory 8. Consolidated dividend revenue 9. Consolidated Retained Earnings Beginning 2021 10. Consolidated Retained Earnings Ending 2021 11. Non-controlling Interest in Net Assets Beginning 2021 12. Non-controlling Interest in Net Assets Ending 2021 13. Consolidated Building Net 14. Consolidated Trademark Net 15. Consolidated Building Net 16. Consolidated Land

TO ELIMINATE BV OF NA OF SUB ON THE DATE OF ACQUISITION 3 | Page

ORDINARY SHARES APIC RETAINED EARNINGS INVESTMENT IN SUB NCI

850,000.00 80,000.00 377,500.00 1,046,000.00 261,500.00

TO RECOGNIZE EXCESS OF FV-BV ACCUM DEP-BLDG ACCUM-AMORT-TRADEMARK INVESTMENT IN SUB NCI

50,000.00 45,000.00 4,000.00 1,000.00

TO RECOGNIZE GOODWILL GOODWILL INVESTMENT IN SUB NCI

250,000.00 200,000.00 50,000.00

TO RECOGNIZE UNDISTRIBUTED EARNINGS FROM DOA TO BEG OF 2021 RETAINED EARNINGS-SUB RETAINED EARNINGS-PARENT NCI

542,500.00 434,000.00 108,500.00

TO RECOGNIZE AMORTIZATION OF EXCESS 2020-2021 DEP-EXP-BLDG ACCUM-AMORT-TRADEMARK ACCUM DEP-BLDG AMORT EXP-TRADEMARK RETAINED EARNINGS-PARENT NCI

10,000.00 30,000.00 20,000.00 15,000.00 4,000.00 1,000.00

TO RECOGNIZE GOODWILL IMPAIRMENT 2020-2021 RETAINED EARNINGS-PARENT NCI IMPAIRMENT LOSS GOODWILL

60,000.00 15,000.00 50,000.00 125,000.00

TO RECOGNIZE REALIZED GROSS PROFIT ON BEGINNING INVENTORY RETAINED EARNINGS-PARENT

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20,480.00

NCI

5,120.00 COST OF SALES

25,600.00

TO ELIMINATE INTERCOMPANY SALES OF INVENTORY 2021 SALES

600,000.00 COST OF SALES

600,000.00

TO RECOGNIZE UNREALIZED GROSS PROFIT ON ENDING INVENTORY COST OF SALES MERCHANDISE INVENTORY-END

54,000.00 54,000.00

TO ELIMINATE INTERCOMPANY GAIN ON SALE OF LAND GAIN ON SALE OF LAND LAND

50,000.00 50,000.00

TO ADJUST BEGINNING RETAINED EARNINGS FOR THE NET UNREALIZED LOSS ON SALE OF MACHINERY 2020 MACHINERY ACCUM-DEPRECIATION-MACHINERY RETAINED EARNINGS-PARENT NCI

60,000.00 35,000.00 20,000.00 5,000.00

TO RECOGNIZE REALIZED LOSS ON SALE OF MACHINERY 2021 DEPRECIATION EXPENSE ACCUM-DEPRECIATION-MACHINERY

10,000.00 10,000.00

TO ELIMINATE INTERCOMPANY DIVIDEND DIVIDEND INCOME NCI-BS DIVIDEND

120,000.00 30,000.00 150,000.00

TO RECOGNIZE NCI-NET INCOME NCI-IS

170,120.00 NCI-BS

170,120.00

COMPUTATION OF GOODWILL: 100% 5 | Page

80%

20%

COST OF INVESTMENT LESS:FV OF NET ASSETS GOODWILL/(GAIN)

1,562,500.00 1,312,500.00 250,000.00

1,250,000.00 1,050,000.00 200,000.00

312,500.00 262,500.00 50,000.00

COMPUTATION OF FV OF NET ASSETS-SUBSIDIARY OS 850,000.00 APIC 80,000.00 RE-DOA 377,500.00 BV NA 1,307,500.00 BLDG-UNDER 50,000.00 TRADEMARK-OVER (45,000.00) FV NA 1,312,500.00

AMORTIZATION OF EXCESS 2020 BUILDING (10,000.00) TRADEMARK 15,000.00 5,000.00

  Sales Less: Cost of sales Gross Profit Dividend Revenue Gain on sale of Land Less: Operating Expense Net income

ALLOCATION OF GW IMPAIRMENT 2020 IMP LOSS CI% NCI% 75,000.00 60,000.00 15,000.00 2021 IMP LOSS 50,000.00 40,000.00 10,000.00

2021 (10,000.00) 15,000.00 5,000.00

UST CO. 7,500,000.00 6,000,000.00 1,500,000.00 120,000.00 80,000.00

AMV CO. 4,500,000.00 3,150,000.00 1,350,000.00   60,000.00

ELIMINATION (600,000.00)

520,000.00

480,000.00

+1000015000+10000+50000

1,055,000.00

1,180,000.00

930,000.00

 

1,856,600.00

-600000-25600+54,000

  (120,000.00) (50,000.00)

ALLOCATION OF CONSOLIDATED NET INCOME PNI-2021 DIV INCOME UGP-EI-2021 PNI-OWN ADJ 6 | Page

1,180,000.00 (120,000.00) (54,000.00) 1,006,000.00

CI% 1,006,000.00

NCI%

CONSOLIDATED 11,400,000.00 8,578,400.00 2,821,600.00 0.00 90,000.00

SNI-2020 AMORT-2021 RGP-BI RLOSSMACHINE UGAIN-LAND SNI-ADJ GW IMP CONSO NI

930,000.00 5,000.00 25,600.00 (10,000.00) (50,000.00) 900,600.00 (50,000.00) 1,856,600.00

720,480.00 (40,000.00) 1,686,480.00

180,120.00 (10,000.00) 170,120.00

CONSOLIDATED RETAINED EARNINGS 2021 RE-P BEG 2021 *CI% UNDISTRIBUTED EARNINGS 2020 CI% CUMU GW IMP 2020 CONSO RE-BEG 2021 CNI-PARENT 2021 DIV PAID CONSO RE-END 2021

5,200,000.00 437,520.00 (60,000.00) 5,577,520.00 1,686,480.00 (400,000.00) 6,864,000.00

*UNDISTRIBUTED EARNINGS 2020 RE-SUB BEG 2021 RE-SUB DOA INC IN RE UGP-EI 2020 NET ULOSS-Machinery CUMU AMORT UNDISTRIBUTED EARNINGS 2020

920,000.00 (377,500.00) 542,500.00 (25,600.00) 25,000.00 5,000.00 546,900.00

ALTERNATIVE COMPUTATION OF CONSOLIDATED R/E, 12/31/21 RE-P END 2021 **CI% UNDISTRIBUTED EARNINGS 2021 UGP-EI-2021 CI% CUMU GW IMP 2021 7 | Page

5,980,000.00 1,038,000.00 (54,000.00) (100,000.00)

CONSO RE-END 2021

6,864,000.00

**UNDISTRIBUTED EARNINGS 2021 RE-SUB END 2021 RE-SUB DOA INC IN RE UGAIN-LAND NET ULOSS-Machinery CUMU AMORT UNDISTRIBUTED EARNINGS 2021

1,700,000.00 (377,500.00) 1,322,500.00 (50,000.00) 15,000.00 10,000.00 1,297,500.00

NON-CONTROLLING INTEREST 2021 NCI-DOA NCI% UNDISTRIBUTED EARNINGS 2020 NCI% CUMU GW IMP 2020 NCI BEG 2021 NCI-NI NCI-DIV NCI-END 2021

312,500.00 109,380.00 (15,000.00) 406,880.00 170,120.00 (30,000.00) 547,000.00

ALTERNATIVE COMPUTATION OF NCI: NON-CONTROLLING INTEREST 2021 NCI-DOA NCI% UNDISTRIBUTED EARNINGS 2021 NCI% CUMU GW IMP 2021 NCI END 2021

312,500.00 259,500.00 (25,000.00) 547,000.00

CONSOLIDATED MERCHANDISE INVENTORY 2021

rchandise Inventory-PARENT rchandise Inventory-SUB GP-EI-2021

300,000.00 250,000.00 (54,000.00) 496,000.00 CONSOLIDATED BUILDING NET 2021

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ilding Net-Parent ilding Net-Sub amortized Excess

1,350,000.00 875,000.00 30,000.00 2,255,000.00 CONSOLIDATED TRADEMARK NET 2021

ADEMARK NET-PARENT ADEMARK NET-SUB amortized Excess

185,000.00 72,000.00 (15,000.00) 242,000.00 CONSOLIDATED MACHINERY NET 2021

ACHINERY NET-PARENT ACHINERY NET-SUB T U.LOSS

550,000.00 322,000.00 15,000.00 887,000.00 CONSOLIDATED LAND 2021

ND-PARENT ND-SUB T U.GAIN

860,000.00 685,000.00 (50,000.00) 1,495,000.00

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