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 2020-
2021.

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.

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 Sales 7,500,000 4,500,000
Cost of sales 6,000,000 3,150,000
Gross Profit 1,500,000 1,350,000
Dividend Revenue 120,000  
Gain on sale of Land 80,000 60,000
Operating Expense 520,000 480,000
Net income 1,180,000 930,000
Dividends paid 400,000 150,000
Merchandise Inventory, end 300,000 250,000
Building Net 1,350,000 875,000
Trademark Net 185,000 72,000
Machinery Net 550,000 322,000
Land 860,000 685,000
Retained Earnings, Beg 2021 5,200,000 ???
Retained Earnings, End 2021 ??? 1,700,000
Ordinary Shares 5,200,000 850,000
APIC 700,000 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

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 ORDINARY SHARES 850,000.00
APIC 80,000.00
RETAINED EARNINGS 377,500.00
INVESTMENT IN SUB 1,046,000.00
NCI 261,500.00

TO RECOGNIZE EXCESS OF FV-BV

ACCUM DEP-BLDG 50,000.00

ACCUM-AMORT-TRADEMARK 45,000.00
INVESTMENT IN SUB 4,000.00
NCI 1,000.00

TO RECOGNIZE GOODWILL

GOODWILL 250,000.00
INVESTMENT IN SUB 200,000.00
NCI 50,000.00

TO RECOGNIZE UNDISTRIBUTED EARNINGS FROM DOA TO

BEG OF 2021

RETAINED EARNINGS-SUB 542,500.00

RETAINED EARNINGS-PARENT 434,000.00
NCI 108,500.00

TO RECOGNIZE AMORTIZATION OF EXCESS 2020-2021

DEP-EXP-BLDG 10,000.00
ACCUM-AMORT-TRADEMARK 30,000.00
ACCUM DEP-BLDG 20,000.00
AMORT EXP-TRADEMARK 15,000.00
RETAINED EARNINGS-PARENT 4,000.00
NCI 1,000.00

TO RECOGNIZE GOODWILL IMPAIRMENT 2020-2021

RETAINED EARNINGS-PARENT 60,000.00

NCI 15,000.00
IMPAIRMENT LOSS 50,000.00
GOODWILL 125,000.00

TO RECOGNIZE REALIZED GROSS PROFIT ON BEGINNING

INVENTORY

RETAINED EARNINGS-PARENT 20,480.00

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 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 54,000.00

MERCHANDISE INVENTORY-END 54,000.00

TO ELIMINATE INTERCOMPANY GAIN ON SALE OF LAND

GAIN ON SALE OF LAND 50,000.00

LAND 50,000.00

TO ADJUST BEGINNING RETAINED EARNINGS FOR THE NET

UNREALIZED LOSS ON SALE OF MACHINERY 2020
MACHINERY 60,000.00
ACCUM-DEPRECIATION-MACHINERY 35,000.00
RETAINED EARNINGS-PARENT 20,000.00
NCI 5,000.00

TO RECOGNIZE REALIZED LOSS ON SALE OF MACHINERY 2021

DEPRECIATION EXPENSE 10,000.00

ACCUM-DEPRECIATION-MACHINERY 10,000.00

TO ELIMINATE INTERCOMPANY DIVIDEND

DIVIDEND INCOME 120,000.00

NCI-BS 30,000.00
DIVIDEND 150,000.00

TO RECOGNIZE NCI-NET INCOME

NCI-IS 170,120.00
NCI-BS 170,120.00

COMPUTATION OF GOODWILL:
100% 80% 20%
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 COST OF INVESTMENT 1,562,500.00 1,250,000.00 312,500.00
LESS:FV OF NET ASSETS 1,312,500.00 1,050,000.00 262,500.00
GOODWILL/(GAIN) 250,000.00 200,000.00 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 ALLOCATION OF GW IMPAIRMENT

2020 2021 2020 IMP LOSS CI% NCI%
BUILDING (10,000.00) (10,000.00) 75,000.00 60,000.00 15,000.00
TRADEMARK 15,000.00 15,000.00 2021 IMP LOSS
5,000.00 5,000.00 50,000.00 40,000.00 10,000.00

  UST CO. AMV CO. ELIMINATION CONSOLIDATED

Sales 7,500,000.00 4,500,000.00 (600,000.00) 11,400,000.00
Less: Cost of sales 6,000,000.00 3,150,000.00 -600000-25600+54,000 8,578,400.00
Gross Profit 1,500,000.00 1,350,000.00   2,821,600.00
Dividend Revenue 120,000.00   (120,000.00) 0.00
Gain on sale of Land 80,000.00 60,000.00 (50,000.00) 90,000.00
+10000-
Less: Operating Expense 520,000.00 480,000.00 15000+10000+50000 1,055,000.00
Net income 1,180,000.00 930,000.00   1,856,600.00

ALLOCATION OF CONSOLIDATED NET INCOME

PNI-2021 1,180,000.00
DIV INCOME (120,000.00)
UGP-EI-2021 (54,000.00) CI% NCI%
PNI-OWN ADJ 1,006,000.00 1,006,000.00
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 SNI-2020 930,000.00
AMORT-2021 5,000.00
RGP-BI 25,600.00
RLOSS-
MACHINE (10,000.00)
UGAIN-LAND (50,000.00)
SNI-ADJ 900,600.00 720,480.00 180,120.00
GW IMP (50,000.00) (40,000.00) (10,000.00)
CONSO NI 1,856,600.00 1,686,480.00 170,120.00

CONSOLIDATED RETAINED EARNINGS 2021

RE-P BEG 2021 5,200,000.00

*CI% UNDISTRIBUTED EARNINGS 2020 437,520.00
CI% CUMU GW IMP 2020 (60,000.00)
CONSO RE-BEG 2021 5,577,520.00
CNI-PARENT 2021 1,686,480.00
DIV PAID (400,000.00)
CONSO RE-END 2021 6,864,000.00

*UNDISTRIBUTED EARNINGS 2020

RE-SUB BEG 2021 920,000.00

RE-SUB DOA (377,500.00)
INC IN RE 542,500.00
UGP-EI 2020 (25,600.00)
NET ULOSS-Machinery 25,000.00
CUMU AMORT 5,000.00
UNDISTRIBUTED EARNINGS 2020 546,900.00

ALTERNATIVE COMPUTATION OF CONSOLIDATED R/E, 12/31/21

RE-P END 2021 5,980,000.00

**CI% UNDISTRIBUTED EARNINGS 2021 1,038,000.00
UGP-EI-2021 (54,000.00)
CI% CUMU GW IMP 2021 (100,000.00)
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 CONSO RE-END 2021 6,864,000.00

**UNDISTRIBUTED EARNINGS 2021

RE-SUB END 2021 1,700,000.00
RE-SUB DOA (377,500.00)
INC IN RE 1,322,500.00
UGAIN-LAND (50,000.00)
NET ULOSS-Machinery 15,000.00
CUMU AMORT 10,000.00
UNDISTRIBUTED EARNINGS
2021 1,297,500.00

NON-CONTROLLING INTEREST 2021

NCI-DOA 312,500.00
NCI% UNDISTRIBUTED EARNINGS 2020 109,380.00
NCI% CUMU GW IMP 2020 (15,000.00)
NCI BEG 2021 406,880.00
NCI-NI 170,120.00
NCI-DIV (30,000.00)
NCI-END 2021 547,000.00

ALTERNATIVE COMPUTATION OF NCI:

NON-CONTROLLING INTEREST 2021

NCI-DOA 312,500.00
NCI% UNDISTRIBUTED EARNINGS 2021 259,500.00
NCI% CUMU GW IMP 2021 (25,000.00)
NCI END 2021 547,000.00

CONSOLIDATED MERCHANDISE INVENTORY 2021

rchandise Inventory-PARENT 300,000.00
rchandise Inventory-SUB 250,000.00
GP-EI-2021 (54,000.00)
496,000.00

CONSOLIDATED BUILDING NET 2021

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ilding Net-Parent 1,350,000.00
ilding Net-Sub 875,000.00
amortized Excess 30,000.00
2,255,000.00

CONSOLIDATED TRADEMARK NET 2021

ADEMARK NET-PARENT 185,000.00
ADEMARK NET-SUB 72,000.00
amortized Excess (15,000.00)
242,000.00

CONSOLIDATED MACHINERY NET 2021

ACHINERY NET-PARENT 550,000.00
ACHINERY NET-SUB 322,000.00
T U.LOSS 15,000.00
887,000.00

CONSOLIDATED LAND 2021

ND-PARENT 860,000.00
ND-SUB 685,000.00
T U.GAIN (50,000.00)
1,495,000.00

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