TEJIENDO RELACIONES

Owners

of parent NCI Sheep's profit before FVA 866,000 N/A

Share in Lamb’s profit before FVA 525,000 ^b 175,000 squeeze Depreciation of FVA ( - ) ( - )

Share in impairment of goodwill (24,000) (8,000) ^a

Totals 1,367,000 167,000 start

aShares in impairment of goodwill: (₱8,000 x 75%); (₱8,000 x 25%)

b (₱175,000 ÷ 25%) = ₱700,000 Lamb’s separate profit x 75% = ₱525,000.

32. B (1,367,000 + 167,000 ‘see computations above’) = 1,534,000 33. A (See solution above)

34. B (See Step 1.ii below) Solutions:

Step 1: Analysis of effects of intercompany transaction The following are the intercompany transactions during the period:

i. In-transit item (Transaction ‘a’)

ii. Intercompany sale of inventory (Transactions ‘b’ and ‘c’) iii. Intercompany sale of equipment (Transaction ‘d’) iv. Intercompany bond transaction (Transactions ‘e’)

v. Intercompany dividend transaction (Transactions ‘f’) i. In-transit item

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The ₱4,000 check deposited to Peter’s account is a valid payment for Simon’s account. Therefore, Simon’s ₱8,000 account payable to Peter need not be adjusted.

However, since Peter failed to record the payment, Peter’s ₱12,000 accounts receivable from Simon must be adjusted. As to Peter, the deposit is a bank credit memo.

The adjusting journal entry (AJE) in Peter’s books is as follows:

Dec.

31, 20x1

Cash in bank

Accounts receivable 4,000

4,000 Unlike CJE’s, AJE’s are recorded in the separate books. The remaining balance of ₱8,000 in the intercompany account receivable/account payable shall be eliminated through CJE.

Summary of effects on the consolidated financial statements:

• Cash: increased by ₱4,000.

• Accounts receivable: decreased by ₱12,000 (₱3,000 AJE + ₱8,000 CJE).

• Accounts payable: decreased by ₱8,000 ii. Intercompany sale of inventory

Transaction (b) is downstream while transaction (c) is upstream.

The unrealized profits in ending inventory are determined as follows:

Downstream Upstream Total

Sale price of intercompany sale 128,000 60,000 Cost of intercompany sale (80,000) (40,000) Profit from intercompany sale 48,000 20,000 Multiply by: Unsold portion as of yr.-end 1/3 1/2

Unrealized gross profit 16,000 10,000 26,000 The related consolidated accounts are computed as follows:

Ending inventory of Peter Co. 440,000

Ending inventory of Simon Co. 268,000

Less: Unrealized profit in ending inventory (26,000)

Consolidated ending inventory 682,000

Sales by Peter Co. 3,728,000

Sales by Simon Co. 1,020,000

Less: Intercompany sales during 20x1 (128,000 + 60,000) (188,000)

Consolidated sales 4,560,000

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Before we can compute for the consolidated cost of sales, we need to determine first the depreciation of FVA in 20x1.

FVA on inventory 24,000

FVA on equipment, net (20,000 ÷ 5 years) 16,000

FVA on patent (20,000 ÷ 8 years) 10,000

Depreciation of FVA in 20x1 50,000

The consolidated cost of sales is computed as follows:

Cost of sales of Peter Co. 1,700,000

Cost of sales of Simon Co. 472,000

Less: Intercompany sales during 20x1 (188,000) Add: Unrealized profit in ending inventory 26,000 Add: Depreciation of FVA on inventory (see computation

above) 24,000

Consolidated cost of sales 2,034,000

iii. Intercompany sale of property, plant and equipment

Transaction (d) is upstream. The effects of this transaction are analyzed as follows:

a) Unamortized balance of deferred gain (loss) on December 31, 20x1:

Sale price 20,000

Carrying amount of equipment on Jan. 1, 20x1 (24,000) Loss on sale of equipment – Jan. 1, 20x1 (4,000) Multiply by: Ratio of useful life at beg. and end of yr. 4/5 Unamortized balance of deferred loss – Dec. 31, 20x1 (3,200) b) Effect on the 20x1 depreciation:

Because of the sale Had there been no sale Effect on combined FS Peter recognized understated by ₱800.

The related consolidated accounts are computed as follows:

Equipment, net – Parent 2,576,000

Equipment, net – Subsidiary 108,800

Unamortized balance of deferred loss* 3,200 FVA on equipment, net(80,000 beg. - 16,000 dep'n of FVA) 64,000

Consolidated equipment – net 2,752,000

*The deferred loss is added because both “loss” and “equipment” have a normal debit balance. Debit and debit results to addition.

Depreciation – Peter 644,000

Depreciation – Simon 27,200

Understatement in depreciation 800

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Depreciation of FVA on equipment (see computation above 16,000

Consolidated depreciation 688,000

The ₱4,000 loss on sale recognized by Simon shall be eliminated in the consolidated statement of profit or loss.

We need to recognize also the unrecorded patent net of accumulated amortization.

Patent (unrecognized) (see given) 80,000

Less: Amortization of FVA on patent (see computation above) (10,000)

Consolidated patent – net 70,000

A patent amortization expense of ₱10,000 shall be recognized in the consolidated financial statements

iv. Intercompany bond transaction

The effects Transaction (e) are analyzed as follows:

a) Gain or loss on extinguishment of bonds:

Carrying amount of bonds payable acquired (400,000 x 50%) 200,000 Acquisition cost of bonds (assumed retirement price) (240,000) Loss on extinguishment of bonds (40,000) b) Intercompany interest expense and interest income:

Peter paid Simon interest of ₱10,000 (400K x 50% x 10% x 6/12).

However, Simon’s interest income is only ₱8,000 (see Statement of profit or loss above). The ₱2,000 difference must be an amortization of the premium on the investment in bonds. Nonetheless, both Peter’s interest expense of ₱10,000 and Simon’s interest income of ₱8,000 shall be eliminated in the consolidated financial statements together with the related bonds payable and investment in bonds.

Summary of effects on the consolidated financial statements:

• Loss on extinguishment of bonds: recognize ₱40,000.

• Interest expense: decreased by ₱10,000.

• Interest income: eliminated

• Investment in bonds: eliminated

• Bonds payable: decreased by ₱200,000

v. Intercompany dividend transaction – Transaction (f) The dividends declared by Simon are allocated as follows:

Total dividends declared ₱80,000 Allocation:

Owners of the parent (80,000 x 90%) 72,000 Non-controlling interest (80,000 x 10%) 8,000

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As allocated ₱80,000 Peter’s ₱72,000 dividend income shall be eliminated in the consolidated financial statements.

No consolidation adjustment is needed for the dividends declared by Peter because the dividends pertain solely to the owners of the parent.

Step 2: Analysis of net assets

Simon Co. Acquisition

date

Consolidation date

Net change Net assets at carrying amounts 336,000 636,800 Fair value adjustments at acquisition date 184,000 184,000 Subsequent depreciation of FVA ^a NIL (50,000) Unrealized profit (Upstream) - (Step 1.ii) NIL (10,000) Unamortized def. loss(Upstream) - (Step

1.ii) 3,200

Interest income (Step 1.iv) (8,000)

Subsidiary's net assets at fair value 520,000 756,000 236,000

aSee computation in Step 1.ii.

The unrealized profit on upstream sale on inventory, unamortized deferred loss on upstream sale of equipment and interest income on investment in bonds were closed to Simon’s retained earnings by year-end. These are eliminated through addition or subtraction, as appropriate.