MODADV2 – Classroom Exercises

Intercompany Transactions

Problem 1

Eren Company acquired 95% interest from Jaeger Company on January 5, 2014. The inventories acquired from
affiliate in 2015 are: Beginning inventory, P84,375; Ending inventory, P168,750. Intercompany sale of
merchandise during the year amounts to P337,500 at a gross profit rate of 30%. In 2015, the data relating to the
operations of Eren Company and Jaeger Company are as follows:

Eren Jaeger
Sales P2,325,000 1,275,000
Cost of sales 1,087,500 667,500
Ending inventory 230,000 210,000
Net income 843,750 506,250
Dividends paid 337,500 168,750

1. Assuming a downstream sale, what is the consolidated net income attributable to parent shareholders?
2. Assuming an upstream sale, what is the consolidated net income attributable to parent shareholders?
3. What is the consolidated sales for the year 2015?
4. What is the consolidated cost of sales for the year 2015?
5. How much is the consolidated ending inventory for the year 2015?

Problem 2

Mikasa Company acquired 60% of the outstanding common stock of Ackerman Company on January 5, 2014.
Mikasa Company acquired it at carrying value which is the same as its fair market value at the date of acquisition.
profit or loss statements of Mikasa Company and Ackerman Company are as follows:

Mikasa Ackerman
Net sales P218,750 P87,500
Cost of sales 131,250 52,500
Gross profit P87,500 P35,000
Operating expenses 26,250 13,125
Operating income P61,250 P21,875
Dividend income 14,000
Net income P75,250 P21,875

Ackerman Company made sales to Mikasa Company of P28,000 in 2014 and P42,000 in 2015. Mikasa Company
reported inventory on December 31, 2014 amounting to P17,500 of which 20% comes from Ackerman Company
and inventory on December 31, 2015 amounting to P21,000 of which 30% comes from Ackerman Company.
Mikasa Company uses 30% mark up on cost and Ackerman Company uses 25% mark up on cost for their selling
prices. Mikasa Company and Ackerman Company declared and paid dividends in 2015 amounting to P21,000 and
P17,500, respectively. On January 1, 2015, Ackerman Company has ordinary share capital of P80,000; share
premium of P30,000 and retained earnings of P40,000.
1. How much is the consolidated net income attributable to parent shareholders’ equity for the year 2015?
2. How much is the non-controlling interest in net assets?

Problem 3

On January 3, 2015, Erwin Company purchased 80% of the outstanding common stock of Smith Company at a cost
of P8,800,000. On that date, Smith Company had P5,000,000 of ordinary share capital and P5,000,000 of retained
earnings. Erwin Company used the proportionate share in the identifiable net assets at acquisition date in valuing
NCI. For 2015, Erwin Company had income of P2,800,000 from its own operation (excluding its share of income
from Smith Company) and paid dividends of P1,500,000. Smith Company reported net income of P650,000 and
paid dividends of P300,000. All assets and liabilities of Smith Company have carrying value equal to their fair
market values.

On January 4, 2015, Erwin sold equipment to Smith for P1,000,000. The carrying amount of the equipment on that
date was P1,200,000. The loss of P200,000 is reflected in the income of Erwin indicated above. The equipment is
expected to have a useful life of five years from the date of the sale.

In the December 31, 2015 consolidated statement of financial position, what amount of NCI should be presented?

Problem 4

On January 2, 2015, Armin Corporation purchased 80% of Arlert Corporation’s outstanding common stocks for
P387,500. At that date, all of Arlert’s assets and liabilities had fair values approximately equal to their carrying
values and no goodwill was included in the purchase price.

The following set of information was available for 2015: Income from own operations of Armin Corporation,
P93,750; net loss of Arlert Corporation, P12,500; Dividends paid in 2015 by Armin Corporation, P46,875; by
Arlert Corporation, P9,375. On July 1, 2015, Armin Corporation sold an equipment to Arlert Corporation at a gain
of P15,625. The equipment is expected to have a remaining life of ten years from the date of sale. Also, on January
4, 2015, Arlert Corporation sold a furniture to Armin Corporation at a loss of P4,687.50. The furniture is expected
to have a remaining useful life of five years from the date of sale. NCI is measured at fair value.

1. How much is the consolidated net income attributable to parent shareholders’ equity for the year 2015?
2. How much is the non-controlling interest in net assets?
Problem 5

On January 3, 2014, Jean Company acquired 90% of the outstanding stocks of Kirstein Company at carrying value.
During 2014 and 2015, intercompany sales amounted to P2,000,000 and P4,000,000, respectively. Jean consistently
recognized a 25% mark-up based on cost while Kirstein had a 25% gross profit on sales. The inventories of the
buying affiliate, which all came from inter-company transactions show:

December December
31, 2014 31, 2015
Jean P240,000 P160,000
Kirstein 100,000 40,000

On October 3, 2014, Kirstein Company purchased a piece of land costing P1,000,000 from Jean Company for
P1,500,000. On December 2, 2015, Kirstein Company sold this land to unrelated party for P1,500,000. On the other
hand, on July 2, 2015, Kirstein Company sold a used printer with a book value of P60,000 and remaining useful life
of 3 years to Jean Company for P42,000.

Separate profit or loss statements for the two companies for the 2015 are as follow:

Jean Kirstein
Sales P25,000,000 P14,000,000
Cost of Sales 15,000,000 8,400,000
Gross Profit 10,000,000 5,600,000
Operating Expenses 6,000,000 3,800,000
Operating Profit 4,000,000 1,800,000
Loss on Sale 18,000
Dividend Revenue 40,000
Net Income 4,000,000 P1,822,000

1. Compute for Consolidated Cost of Sales

2. Compute for Consolidated Gross Profit
3. Compute for Consolidated Net Income Attributable to Parent
4. Compute for Non-controlling Interest in Net Income
5. Compute for Consolidated Operating Expenses