Quiz #3. Business Combination III PDF

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QUIZ #3. BUSINESS COMBINATION IIIThe sale of equipment from the subsidiary to the parent is called what type of transaction?Downstream intercompany transactionUpstream intercompany transactionLateral intercompany transactionRealized intercompany transactionWhen there is an intercompany transaction, ...

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QUIZ #3. BUSINESS COMBINATION III

The sale of equipment from the subsidiary to the parent is called what type of transaction? Downstream intercompany transaction Upstream intercompany transaction Lateral intercompany transaction Realized intercompany transaction

When there is an intercompany transaction, how much of any profit or loss created as a result of the transaction is eliminated during the consolidation process? None of the profit or loss is eliminated All of the profit or loss is eliminated The parent’s ownership interest in the profit or loss is eliminated It is not possible to determine how much of the profit or loss is eliminated without knowing whether the transaction is upstream or downstream

In the period of an intercompany asset transaction, the consolidated balance sheet will present what amount in the asset account? The purchase price by the new owner The purchase price by the original owner The purchase price by the original owner plus the parent’s ownership percentage of the gain or loss on the sale recognized at the time of the intercompany transaction The purchase price by the original owner plus the noncontrolling interests’ percentage of the gain or loss on the sale recognized at the time of the intercompany transaction

What amount of gain or loss from the intercompany sale of plant assets is included in the consolidated income statement? The entire gain or loss is recognized The parent’s ownership interest in the gain or loss is recognized The seller’s portion of the gain or loss is recognized

There is no gain or loss recognized

Over time, what will happen to the peso amount of the discount or premium included in a worksheet elimination of an indirect intercompany debt transaction? The discount or premium worksheet elimination amount will not change in value over time The discount or premium worksheet elimination amount will get larger in value over time The discount or premium worksheet elimination amount will get smaller over time It is not possible to determine what will happen to the dollar amount of the discount or premium worksheet elimination amount

A subsidiary sold its parent some land at a profit in 20x2. The parent still holds the land. On a working paper prepared to consolidate the financial statements of the parent and its subsidiary in 20x4, the eliminating entry connected with this land affects which account? Investment in subsidiary Beginning retained earnings Gains on sales of land No effect – elimination entry is not required

In the measurement of minority interest in net income of a partially owned subsidiary, the credit for Depreciation Expense - Parent in the working paper elimination (in journal entry format) for intercompany gain in a depreciable plant asset is attributed to net income of: The parent company The subsidiary The consolidated entity None of the foregoing

Which of the following is not an effect of a working paper elimination for intercompany sales of merchandise by a parent company to a subsidiary?

It eliminates the overstatement of the subsidiary's Sales ledger account balance. It removes the intercompany profit portion of the subsidiary's Cost of Goods Sold ledger account balance. It reduces consolidated inventories to the cost incurred by the consolidated entity. It eliminates the parent's Intercompany Sales and Intercompany Cost of Goods Sold ledger accounts balances. None of the foregoing

Use the following information for next five questions: The 80 percent subsidiary (SIT) acquires a building from its parent (PAN) on October 1, 20x5 for P640,000. At that date, the building has a cost and accumulated depreciation on PAN’s books of P500,000 and P350,000, respectively. The building had a remaining life of six years on PAN’s books and was assigned a life of ten years by SIT. (Give only the amount.) What is the worksheet elimination to the building account (debit or credit) if consolidated financial statements are prepared on December 31, 20x5? What is the worksheet elimination to the gain or loss on sale of building account (debit or credit) if consolidated financial statements are prepared on December 31, 20x5? What is the worksheet elimination to the depreciation expense account (debit or credit) if consolidated financial statements are prepared December 31, 20x5? What is the worksheet elimination to the accumulated depreciation account (debit or credit) if consolidated financial statements are prepared on December 31, 20x5? What is the worksheet elimination to the retained earnings account if consolidated financial statements are prepared on December 31, 20x6? 1. P640,000 - P500,000 = P 140,000 credit 2. P640,000 - (P500,000 - P350,000) = P 490,000 gain (debit) 3. (P640,000/10)(3/12) - [(P500,000 - P350,000)/10](3/12) = P 12,250 credit 4. P350,000 - {(P640,000/10)(3/12) - [(P500,000 - P350,000)/10](3/12)} = P 337,750 credit 5. P640,000 - (P500,000 - P350,000) = P 490,000 gain (debit) (P640,000/10)(3/12) - [(P500,000 - P350,000)/10](3/12) = P 12,250 credit

Use the following information for the next three questions: On January 1, 20x1, P Company acquired a 90% interest in S Company. During 20x2, S Company sold merchandise to P Company at 25% above cost in the amount (selling price) of P225,000. At the end of the year, P Company had in its inventory one-third of the amount of good purchased from S Company. On January 1, 20x2, P Company sold equipment that had a book value of P80,000 to S Company for P120,000. The equipment had an estimated remaining life of four years. S Company reported net income of P120,000, and P Company reported net income of P300,000 from their independent operations (including sales to affiliates) for the year ended December 31,20x2. Calculate non-controlling interest in consolidated net income for the year ended December 31,20x2. Calculate controlling interest in consolidated net income for the year ended December 31,20x2. Calculate consolidated net income for the year ended December 31,20x2.

1. P10,500 **Non-controlling Interest in Net Income (NCINI) for 20x2 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales)

P 120,000 0

Unrealized profit in ending inventory of P Company (upstream sales) [P225,000 x 1/3 = P75,000 x 25/125] S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

( 15,000) P 105,000 0 P 105,000

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) - partial goodwill Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . .

2. P364,500 Consolidated Net Income for 20x2

10% P 10,500 0 P 10,500

P 300,000

P Company’s net income from own/separate operations…………. Net unrealized gain on sale of equipment (downstream sales) through depreciation [(P120,000 – P80,000 = P40,000 – (P40,000/4 years)]

(

30,000)

P 270,000

P Company’s realized net income from separate operations*…….….. P 120,000

S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P225,000 x 1/3 = P75,000 x 25/125]

(

15,000) P 105,000

S Company’s realized net income from separate operations*…….…..

105,000

Total

P375,000 0

Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x2

P375,000

Less: Non-controlling Interest in Net Income* * (refer to No. 22)

10,500

Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x2…………..

P364,500

Or, alternatively Consolidated Net Income for 20x2 P 300,000

P Company’s net income from own/separate operations…………. Net unrealized gain on sale of equipment (downstream sales) through depreciation [(P120,000 – P80,000 = P40,000 – (P40,000/4 years)]

(

30,000)

P 270,000

P Company’s realized net income from separate operations*…….….. P 120,000

S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P225,000 x 1/3 = P75,000 x 25/125] S Company’s realized net income from separate operations*…….…..

(

15,000) P 105,000

Total Less: Non-controlling Interest in Net Income* * (refer to No. 22) Amortization of allocated excess……………………

105,000 P375,000

P 10,500 ____0

10,500

Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent…………..

P364,500

Add: Non-controlling Interest in Net Income (NCINI)

_ 10,500

Consolidated Net Income for 20x2

P375,000

*that has been realized in transactions with third parties.

3. P 375,000 – refer to No. 2

P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 20x4, S sold equipment with a five-year remaining life to P for a gain of P120,000. S reports net income of P600,000 for 20x4 and pays dividends of P200,000. P’s Equity from Subsidiary Income for 20x4 is: P 403,200 The requirement “equity from subsidiary income” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows: 20x4 Share in subsidiary net income (600,000 x 80%) Unrealized gain on sale of equipment (upstream sales): 120,000 x 80%

480,000 ( 96,000)

Realized gain on sale of equipment (upstream sales) through depreciation P120,000 / 5 years = P24,000 x 80% Net

___19,200 403,200

Squid Corporation, a 90%-owned subsidiary of Penguin Corporation, sold inventory items to its parent at a P24,000 profit in 20x5. Penguin resold one-third of this inventory to outside entities. Squid reported net income of P100,000 for 20x5. Non-controlling interest in income that will appear in the consolidated income statement for 20x5 is: P 8,400 Squid’s reported income

P

100,000

Less: Unrealized profits in the ending inventory

_____16,000

Squid’s adjusted income

P

NCI percentage

_______10%

NCI-CNI

P

84,000

8,400

HW Inc., holds a 90 percent interest in PP Company. During 20x4, PP sold inventory costing P77,000 to HW for P110,000. Of this inventory, P40.000 worth was not sold to outsiders until 20x5. During 20x5,PP sold inventory costing P72,000 to HW for P120,000. A total of P50,000 of this inventory was not sold to outsiders

until 20x6. In 20x5, HW reported net income of P150,000 while PP reported P90,000. What is the non-controlling interest in the 20x5 income of the subsidiary? P 8,200 UNREALIZED GROSS PROFIT, 12/31/x4 Ending inventory ................................................................................................. ..........P 40,000 Markup (P33,000/P110,000) ............................................................................... ........

__ 30%

Unrealized intercompany gross profit, 12/31/x4 ........................................... ..........P 12,000

UNREALIZED GROSS PROFIT, 12/31/x5 Ending inventory ................................................................................................. ..........P 50,000 Markup (P48,000/P120,000) ...............................................................................

40%

Unrealized intercompany gross profit, 12/31/x5 ........................................... ..........P 20,000

Cattle Company sold inventory with a cost of P40,000 to its 90%-owned subsidiary, Range Corp., for P100,000 in 20X4. Range resold P75,000 of this inventory for P100,000 in 20X4. Based on this information, the amount of inventory reported on the consolidated financial statements at the end of 20X4 is ____. P 10,000 = [P100,000 x (25/100) = P25,000 x 40/100

Perez Inc. owns 80 percent of Senior Inc. During 20x4, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 20x4. For 20x4 consolidated financial statement, how should the summation of Perez and Senior income statement items be adjusted? a.

Sales and cost of goods sold should be reduced by the intercompany sales.

b.

Sales and cost of goods sold should be reduced by 80 percent of the intercompany sales.

c.

Net income should be reduce by 80% of the gross profit on intercompany sales.

d.

No adjustment is necessary.

Parker Corporation owns 80 percent of Smith Inc.’s common stock. During 20x4, Parker sold inventory to Smith for P250,000 on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in 20x4. The following pertains to Smith and Parker’s sales for 20x4. Parker

Smith

P1,000,000

P700,000

Cost of sales . . . . . . . . . . . . . . . . . .

(400,000)

(350,000)

Gross Profit . . . . . . . . . . . . . . . . . . . .

P 600,000

P350,000

Sales . . . . . . . . . . . . . . . . . . . . . . . . . .

What amount should Parker report as cost of sales in its 20x4 consolidated income statement? P 500,000

Cost of Sales P Company

400,000

S Company

_350,000

Total

750,000

Less: Intercompany sales

250,000

Consolidated

500,000

During 20x4, Park Corporation recorded sales of inventory costing P500,000 to Small Company, its wholly owned subsidiary, on the same terms as sales made to third parties. At December 31,20x4, Small held one-fifth of this goods inventory. The following information pertains to Park and Small’s sales for 20x4: Park

Small

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 2,000,000

P1,400,000

Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(800,000)

(700,000)

Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 1,200,000

P 700,000

In its 20x4 consolidated income statement, what amount should Park report as cost of sales?

P 1,060,000

Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported

P 800,000 700,000 P1,500,000

Cost of goods sold reported by Park on sale to Small (P500,000 x .40)

(200,000)

Reduction of cost of goods sold reported by Small for profit on intercompany sale [(P500,000 x 4 / 5) x .60] Cost of goods sold for consolidated entity

(240,000) P1,060,000

Use the following information for the next three questions: Amber Corporation holds 80 percent of the stock of Movie Production Inc. During 20x4, Amber purchased an inventory of snack bar items for P40,000 and resold P30,000 to Movie Productions for P48,000. Movie Productions Inc. reported sales of P67,000 in 20x4 and had inventory of P16,000 on December 31, 20x4. The companies held no beginning inventory and had no other transactions in 20x4. What amount of cost of goods sold will be reported in the 20x4 consolidated income statement? What amount of net income will be reported in the 20x4 consolidated income statement? What amount of income will be assigned to the non-controlling interest in the 20x4 consolidated net income statement? P 20,000 = P30,000 x [(P48,000 - P16,000) / P48,000] P 47,000 Sales reported by Movie Productions Inc.

P67,000

Cost of goods sold (P30,000 x 2/3)

(20,000)

Consolidated net income

P47,000

P 7,000 = [(P67,000 - $32,000) x .20]

Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were P420,000 in 20x3 and P500,000 in 20x4. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was P912,000 during 20x4. What was the non-controlling interest's share of Sparis' net income for 20x4?

P 90,720 Parent

Subsidiary

Net Income from own operations: Gibson (Parent): Sparis(subsidiary), 90%:10%

820,800

91,200

22,680

2,520

(27,000)

( 3,000)

RPBI of Parent (upstream: 420,000 x 30% = 126,000; 126,000 x 25/125 = 25,200; 90%:10% UPEI of Parent (upstream): 500,000 x 30% = 150,000; 150,000 x 25/125 = 30,000; 90%:10% Non-controlling Interest in Kent’s Net Income

90,720

Prince Corp. owned 80% of Kile Corp.'s common stock. During October 20x4, Kile sold merchandise to Prince for P140,000. At December 31, 20x4, 50% of this merchandise remained in Prince's inventory. For 20x4, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 20x4 that should be eliminated in the consolidation process is P28,000 – P140,000 x 50% = P70,000 x 40% = P 28,000 The Roel Company acquired equipment on January 1, 2019 at a cost of P800,000 depreciating it over 8 years with a nil residual value. On January 1, 2022 The Muldon Company acquired 100% of Roel and estimated the fair value of the equipment at P460,000 with a remaining life of 5 years. This fair value was not incorporated into Roel’s books and the depreciation expense continued to be calculated by reference to original cost. What adjustment should be made to the depreciation expense for the year and the statement of financial position carrying amount in preparing the consolidated financial statements for the year ended December 31, 2023? (Determine the depreciation and carrying amount respectively. Depreciation

Carrying Amount

Increase by P8,000 Increase by P8,000 Decrease by P8,000 Decrease by P8,000

Increase by P24,000 Decrease by P24,000 Increase by P24,000 Decrease by P24,000

On January 1, 2011, Harry Inc. reports net assets of P880,000 although a patent (with a 10-year life) having a book value of P330,000 is now worth P400,000. Newt Corporation pays P840,000 on that date for an 80 percent ownership in Newt. On December 31, 2012, Harry reports total expenses of P621,000 while Newt reports expenses of P714,000. What is the consolidated total expense balance on December 31,2012? P1,197,800 P1,342,000 P1,335,000 P1,349,000 King Corporation owns 80 percent of Lee Corporation’s common stock. During October 1, Lee sold merchandise to King for P100,000. At December 31, 50 percent of this merchandise remains in King’s inventory. Gross profit percentages were 30 percent for King and 40 percent for Lee. The amount of unrealized inter-company profit in ending inventory at December 31 that should be eliminated in the consolidated process is: P 40,000 P 16,000 P 20,000 P 15,000

Which statement in relation to an acquisition date of a business combination is incorrect? The acquisition date is the dat...