6 PAD & SAD COMPANY Downstream sale

On January 1, YEAR 1, Pad Company purchased 40,000 shares of Sad Company's P 20 par ordinary shares in the open
market for P 1,480,000.

On that date, the net assets of Sad Company amounted to P 1,600,000. and had book values that approximated their
market values.

The excess is due to an equipment with a market value P 250,000 higher than its book value. It has a useful life of
10 years from the acquisition date. Pad Company uses the cost method to account for its investment

On December 31, YEAR 3, Sad Company owed Pad Company P 140,000 on open account from purchases made during 2008.

The amount of the sales to Sad Company during YEAR 3 is P 1,000,000. Pad Company shipped merchandise to Sad Co.
at its normal shipping price and had a cost of P 400,000. The entire ending inventory of Sad Co. was purchased from
Pad Co. The beginning inventory of Sad Company included P 200,000 of inventory acquired from Pad Company at the
same rate of profit.

Financial statement for the two companies for the year ended December 31, YEAR 3 are as follows:

A BALANCE SHEET PAD CO. SAD CO.

Cash 600,000 400,000
Accounts receivable 520,000 400,000
Inventories 800,000 400,000
Land 1,200,000
Building-net 800,000
Equipment-net 2,606,000 2,000,000
Investment in SAD Company 1,480,000 0
Total assets 8,006,000 3,200,000

Accounts payable 604,000 360,000

Bonds payable 196,000
Ordinary shares 1,000,000 1,000,000
Share premium 600,000
Retained earnings 5,606,000 1,840,000
Total liabilities & equity 8,006,000 3,200,000

B INCOME STATEMENT
Sales 4,000,000 2,000,000
Cost of sales 1,600,000 1,200,000

Gross income 2,400,000 800,000

Dividend income 96,000 0

Total income 2,496,000 800,000

Operating expenses 1,560,000 560,000

NET INCOME 936,000 240,000

C RETAINED EARNINGS STATEMENT

Retained earnings, Jan 1, YEAR 3 5,470,000 1,720,000
Add: Net income 936,000 240,000
6,406,000 1,960,000
Less Dividends 800,000 120,000

Retained earnings, Dec 31, YEAR 3 5,606,000 1,840,000

REQUIRED:
1. COMPUTATION OF COST/BOOK VALUE DIFFERENTIAL

2. CONSOLIDATED NET INCOME

 3. ELIMINATION ENTRIES:

4. WORKING PAPER

ELIMINATIONS CONSOLI
BALANCE SHEET PAD SAD DEBIT CREDIT BS
Cash 600,000 400,000
Accounts receivable 520,000 400,000
Inventories 800,000 400,000
Land 1,200,000
Building 800,000
Equipment 2,606,000 2,000,000
INVESTMENT IN SAD 1,480,000 0

Total assets 8,006,000 3,200,000

Accounts payable 604,000 360,000

Bonds payable 196,000
Ordinary shares 1,000,000 1,000,000
Share premium 600,000

Retained earnings 5,606,000 1,840,000

MINORITY INTEREST (MINAS)

Total liabilities & equity 8,006,000 3,200,000

INCOME STATEMENT
Sales 4,000,000 2,000,000
Cost of sales 1,600,000 1,200,000

Gross income 2,400,000 800,000

Dividend income 96,000 0

Total income 2,496,000 800,000

Operating expenses 1,560,000 560,000

NET INCOME 936,000 240,000

Minority Interest Net Income

Consolidated Net Income

RETAINED EARNINGS STATEMENT

Retained earnings, Jan 1, Yr. 3 5,470,000 1,720,000
Add: Net income 936,000 240,000
6,406,000 1,960,000
Less Dividends 800,000 120,000

Retained earnings, Dec 31, Yr. 3 5,606,000 1,840,000