BADVAC1X – ACCOUNTING FOR BUSINESS COMBINATIONS

MODULE 5: INTERCOMPANY TRANSACTIONS – FIXED ASSETS

Problem 1: On January 1, 2014, Padre Company purchased 90% of the outstanding shares of Salve Company by paying
P693,000. On that date, Salve Company had P300,000 of capital stock and P400,000 of retained earnings. Excess, if any,
is attributable to undervalued machinery with a remaining life of 20 years. All other assets and liabilities of Salve
Company had book value approximated their fair market values.
On January 2, 2014, there is an intercompany sale of equipment for P42,000. The cost and accumulated depreciation are
P70,000 and P40,000, respectively. The equipment has a remaining life of six (6) years.
The net income from own operations and dividends paid of Padre Company and its subsidiary are as follows (fiscal year
ends December 31)

Company Net income 14 Net income 15 Dividends 14 Dividends 15

Padre P160,000 P120,000 P10,000 P7,000
Salve P70,000 P40,000 P12,000 P8,000
Required:

Assuming that Padre Company is the seller (downstream sale), in the books of Padre Company

Using cost method,

1. The investment account on December 31, 2014 and 2015. P693,000; P693,000
2. The dividend account on December 31, 2014 and 2015. P10,800; P7,200

Using equity method, assuming the investment balance on January 1, 2019 amounted to P810,000

3. The investment account on December 31, 2014 and 2015

4. The equity in subsidiary income or net earnings account on December 31, 2014 and 2015

Assuming that Padre Company is the seller (downstream sale), in the consolidated financial statements of Padre Company
and Salve Company

5. The investment account on December 31, 2014 and 2015

6. The dividend income account on December 31, 2014 and 2015 if cost method is used
7. The equity in subsidiary income or net earnings account on December 31, 2014 and 2015 if equity method is
used
8. The profit attributable to equity holders of parent/controlling interest in consolidated net income for 2014 and
2015
9. The noncontrolling interest in net income for 2014 and 2015
10. Consolidated/group net income for 2014 and 2015

Assuming that Salve Company is the seller (upstream sale), in the books of Padre Company

Using cost method,

1. The investment account on December 31, 2014 and 2015. P693,000; P693,000
2. The dividend account on December 31, 2014 and 2015. P10,800; P7,200

Using equity method, assuming the investment balance on January 1, 2019 amounted to P810,000

3. The investment account on December 31, 2014 and 2015

 4. The equity in subsidiary income or net earnings account on December 31, 2014 and 2015

Assuming that Salve Company is the seller (upstream sale), in the consolidated financial statements of Padre Company
and Salve Company

5. The investment account on December 31, 2014 and 2015

6. The dividend income account on December 31, 2014 and 2015 if cost method is used
7. The equity in subsidiary income or net earnings account on December 31, 2014 and 2015 if equity method is
used
8. The profit attributable to equity holders of parent/controlling interest in consolidated net income for 2014 and
2015
9. The noncontrolling interest in net income for 2014 and 2015
10. Consolidated/group net income for 2014 and 2015

Problem 2: On January 1, 2014, P Company purchased 80 percent of the outstanding shares of S Company by paying
P700,000. On that date, S Company had P300,000 capital stock and P500,000 of retained earnings. An undervalued asset
attributable to building amounted to P75,000 with a remaining life of 25 years. All other assets and liabilities of S
Company had book value approximated their fair market value.
On January 1, 2015, P’s common stock of P1,000,000 and retained earnings amounted to P800,000 (cost method) and
P877,600 (equity method) of retained earnings, while S Company’s retained earnings is P600,000.
The 2015 separate net income from operations were as follows:
Net Income Dividends
P Company P300,000 P100,000
S Company P150,000 P50,000
On April 1, 2015, S Company sold equipment with a book value of P30,000 to P Company for P60,000. The gain on sale is
included in the net income of S Company indicated above. The equipment is expected to have a remaining useful life of
five years from the date of sale. Upstream
On September 30, 2015, P Company sold machinery with a book value of P40,000 to S Company for P75,000. The gain
on sale is also included in the net income of P Company indicated above. The machinery is expected to last for 10 years
from the date of sale. Downstream
1. The investment in subsidiary account under cost model on December 31, 2015
a. P748,500 b. P725,000 c. P721,600 d. P700,000
2. The dividend income/investment income under cost model for 2015
a. P88,500 b. P65,000 c. P61,600 d. P40,000
3. The balance of investment as of December 31, 2015 under equity method assuming the investment balance on
January 1, 2015 amounted to P777,600 should be
a. P800,675 b. P675,000 c. P401,680 d. P340,000
4. The equity in subsidiary loss or net loss/loss from subsidiary under equity method for 2015 should be
a. (P57,725) b. (P54,525) c. P63,075 d. P21,925
5. The non-controlling interest in net income for 2015
a. P30,000 b. P25,500 c. P24,900 d. P24,300
6. The profit attributable to equity holders of parent (Parent’s Interest/Controlling interest in profit) for 2015:
a. P356,500 b. P362,200 c. P363,075 d. P386,500
7. The consolidated/group net income for 2015
a. P356,500 b. P362,200 c. P363,075 d. P387,375
8. The non-controlling interest on December 31, 2015
a. P208,700 b. P189,300 c. P174,900 d. P173,100
 9. The non-controlling interest (in net assets) on December 31, 2016 assuming that the net income and dividends of
subsidiary amounted to P200,000 and P70,000, respectively
a. P208,000 b. P209,200 c. P235,300 d. P222,400
10. Using the same information on #7 and #8, determine the stockholders’ equity of subsidiary as of December 31
2015 2016 2015 2016
a. P1,000,000 P1,000,000 c. P1,069,000 P1,196,000
b. P1,000,000 P1,130,000 d. P1,043,500 P1,176,500
11. The controlling (parent’s) interest – retained earnings or the consolidated retained earnings on December 31,
2015
a. P1,040,000 b. P1,063,075 c. P1,123,075 d. P1,140,675
12. The consolidated stockholders’ equity on December 31, 2015
a. P2,040,000 b. P2,349,375 c. P2,358,375 d. P2,375,975

Scroll Inc., a wholly-owned subsidiary of Pirn, Inc. began operations on January 1, 2012. The following information is
from the condensed 2012 income statement of Prin and Scroll
Particulars Pirn Scroll
Sales P500,000 P300,000
Cost of goods sold (350,000) (270,000)
Gross profit P150,000 P30,000
Depreciation (40,000) (10,000)
Other expenses (60,000) (15,000)
Income from operations P50,000 P5,000
Gain from sale of equipment to Scroll 12,000
Income before income taxes P62,000 P5,000
Equipment purchased by Scroll from Pirn for P36,000 on January 1, 2012, is depreciated using the straight line method
over four years.
13. What amount should be reported as depreciation expense in Pirn’s consolidated income statements?
a. P50,000 b. P47,000 c. P44,000 d. P41,000

14. Upper holds 60 percent of Lower Company’s voting shares. During the preparation of consolidated financial
statements for 2012, the following eliminating entry was made:
Retained earnings, Jan 1 P10,000
Land P10,000
Which of the following statements is correct?
a. Upper Company purchased land from Lower Company during 2012
b. Upper Company purchased land from Lower Company before January 1, 2012
c. Lower Company purchased land from Upper Company during 2012
d. Lower Company purchased land from Upper Company before January 1, 2012

15. Middle Company holds 60 percent of Bottom Corporations’s voting shares. Bottom has developed a new type of
production equipment that appears to be quite marketable. It spent P40,000 in developing the equipment;
however, Middle agreed to purchase the production right for the machine for P100,000. If the intercompany sale
occurred on January 1, 2012, and the production rights are expected to have value for five years, at what amount
should the rights be reported in the consolidated balance sheet for December 31, 2012?
a. P 0 b. P32,000 c. P80,000 d. P100,000
On January 1, 2012, Gold Company purchased a computer with an expected economic life of five years. On January 1,
2014, Gold sold the computer to TLK Corporation and recorded the following entry:
Cash P39,000
Accumualted depreciation 16,000
Computer equipment P40,000
Gain on sale of equipment 15,000
TLK Corporation holds 60 percent of Gold’s voting shares. Gold reported net income of P45,000, and TLK reported income
from its own operations of P85,000 for 2014. There is no change in the estimated useful life of the equipment as a result
of the inter-corporate transfer.
16. In the preparation of the 2014 consolidated income statement, depreciation expense will be
a. Debited for P5,000 in the eliminating entries
b. Credited for P5,000 in the eliminating entries
c. Debited for P13,000 in the eliminating entries
d. Credited for P13,000 in the eliminating entries
17. In the preparation of the 2014 consolidated balance sheet, the computer equipment will be
a. Debited for P1,000 c. Credited for P24,000
b. Debited for P15,000 d. Debited for P40,000
18. The income assigned to the non-controlling interest in the 2014 consolidated income statement will be
a. P12,000 b. P14,000 c. P18,000 d. P52,000
19. The consolidated net income for 2014 will be
a. P106,000 b. P112,000 c. P120,000 d. P130,000