Elimination of Unrealized Profit On Intercompany Sales of Inventory [PDF]

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Elimination of Unrealized Profit on Intercompany Sales of Inventory Problems #1 The following balances were taken from the records of S Company:

Common stock Retained earnings, 1/1/20 Net income for 2020 Dividends declared in 2020 Retained earnings, 12/31/20 Total stockholders’ equity, 12/31/20

Php2,500,000 Php1,450,000 3,000,000 (1,550,000) 2,900,000 Php5,400,000

P Company owns 80% of the common stock of S Company. During 2020, P Company purchased merchandise from S Company for Php4,000,000. S Company sells merchandise to P Company at cost plus 25% of cost. On December 31, 2020, merchandise purchased from S Company for Php1,250,000 remains in the inventory of P Company. On January 1, 2020, P Company’s inventory contained merchandise purchased from S Company for Php525,000. The affiliated companies file a consolidated income tax return. There was no difference between the implied value and the book value of net assets acquired. Required: A. Prepare all workpaper entries necessitated by the intercompany sales of merchandise. B. Compute noncontrolling interest in consolidated income for 2020. C. Compute noncontrolling interest in consolidated net assets on December 31, 2020. A. Sales

4,000,000 Cost of Goods Sold

Cost of Goods Sold Ending Inventory (Balance Sheet) [Php1,250,000 - (Php1,250,000/1.25)]

4,000,000 250,000

1/1 Retained Earnings – P Company (1) 84,000 Noncontrolling intrest (2) 21,000 Cost of Goods Sold (Beginning Inventory) [Php525,000 – (Php525,000/1.25)] = Php105,000

250,000

105,000

(1.) 80% (Php105,000) (2.) 20% (Php105,000) B. Php3,000,000 × 20% = Php600,000 noncontrolling interest in consolidated income. C. [(20% × Php5,400,000) - 20%(Php1,250,000 – Php1,250,000/1.25)] = Php1,030,000 noncontrolling interest in consolidated net assets on December 31, 2020.

Problems #2

Payton Company owns 90% of the common stock of Sanders Company. Sanders Company sells merchandise to Payton Company at 25% above cost. During 2019 and 2020 such sales amounted to Php800,000 and Php1,020,000, respectively. At the end of each year, Payton Company had in its inventory one-fourth of the amount of goods purchased from Sanders Company during that year. Payton Company reported income of Php1,500,000 from its independent operations in 2019 and Php1,720,000 in 2020. Sanders Company reported net income of Php600,000 in each year and did not declare any dividends in either year. There were no intercompany sales prior to 2019. Required: A. Prepare, in general journal form, all entries necessary on the 2020 consolidated statements workpaper to eliminate the effects of intercompany sales. B. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2020. C. Calculate controlling interest in consolidated net income for 2020. A. Sales

Purchases (Cost of Sales) To eliminate intercompany sales.

1,020,000

1,020,000

12/31 Inventory (Income Statement) 51,000 Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory.

51,000

Beginning Retained Earnings – Payton (90% × Php40,000) 36,000 Noncontrolling interest 4,000 1/1 Inventory (Balance Sheet) 40,000 To recognize unrealized profit in beginning inventory realized during the year. B. Noncontrolling Interest

Sanders Company reported net income Less: Unrealized profit in ending inventory Add: Realized profit in beginning inventory Subsidiary income included in consolidated income Noncontrolling interest ownership percentage Noncontrolling interest in consolidated income

Php600,000 (51,000) 40,000 589,000 x 10% Php 58,900

C. Controlling Interest in Consolidated Net Income: Payton Company’s net income from independent operations Reported net income of Sanders Company Less: Unrealized profit on sales of 2011 Add: Profit on intercompany sales to Payton realized in transactions with third parties Subsidiary income realized in transactions with third parties Payton Company’s share of subsidiary income (589,000 × 90%) Controlling interest in consolidated net income

Php1,720,000 600,000 (51,000) 40,000 Php589,00 0 530,100 Php2,250,100