Elimination of Unrealized Profit on Intercompany Sales of

Inventory
Problems #1
The following balances were taken from the records of S Company:

Common stock Php2,500,000

Retained earnings, 1/1/20 Php1,450,000
Net income for 2020 3,000,000
Dividends declared in 2020 (1,550,000)
Retained earnings, 12/31/20 2,900,000
Total stockholders’ equity, Php5,400,000
12/31/20

P Company owns 80% of the common stock of S Company. During 2020, P Company
purchased merchandise from S Company for Php4,000,000. S Company sells merchandise to P
Company at cost plus 25% of cost. On December 31, 2020, merchandise purchased from S
Company for Php1,250,000 remains in the inventory of P Company. On January 1, 2020, P
Company’s inventory contained merchandise purchased from S Company for Php525,000. The
affiliated companies file a consolidated income tax return. There was no difference between the
implied value and the book value of net assets acquired.

Required:
A. Prepare all workpaper entries necessitated by the intercompany sales of merchandise.

B. Compute noncontrolling interest in consolidated income for 2020.

C. Compute noncontrolling interest in consolidated net assets on December 31, 2020.

A. Sales 4,000,000
Cost of Goods Sold 4,000,000

Cost of Goods Sold 250,000

Ending Inventory (Balance Sheet) 250,000
[Php1,250,000 - (Php1,250,000/1.25)]

1/1 Retained Earnings – P Company (1) 84,000

Noncontrolling intrest (2) 21,000
Cost of Goods Sold (Beginning Inventory) 105,000
[Php525,000 – (Php525,000/1.25)] = Php105,000

(1.) 80% (Php105,000)

(2.) 20% (Php105,000)

B. Php3,000,000 × 20% = Php600,000 noncontrolling interest in consolidated income.

C. [(20% × Php5,400,000) - 20%(Php1,250,000 – Php1,250,000/1.25)] = Php1,030,000

noncontrolling interest in consolidated net assets on December 31, 2020.
Problems #2
Payton Company owns 90% of the common stock of Sanders Company. Sanders Company sells
merchandise to Payton Company at 25% above cost. During 2019 and 2020 such sales amounted to
Php800,000 and Php1,020,000, respectively. At the end of each year, Payton Company had in its
inventory one-fourth of the amount of goods purchased from Sanders Company during that year.
Payton Company reported income of Php1,500,000 from its independent operations in 2019 and
Php1,720,000 in 2020. Sanders Company reported net income of Php600,000 in each year and did not
declare any dividends in either year. There were no intercompany sales prior to 2019.

Required:
A. Prepare, in general journal form, all entries necessary on the 2020 consolidated statements
workpaper to eliminate the effects of intercompany sales.

B. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the
consolidated income statement in 2020.

C. Calculate controlling interest in consolidated net income for 2020.

A. Sales 1,020,000
Purchases (Cost of Sales) 1,020,000
To eliminate intercompany sales.

12/31 Inventory (Income Statement) 51,000

Inventory (Balance Sheet) 51,000
To eliminate unrealized intercompany profit in ending inventory.

Beginning Retained Earnings – Payton

(90% × Php40,000) 36,000
Noncontrolling interest 4,000
1/1 Inventory (Balance Sheet) 40,000
To recognize unrealized profit in beginning inventory realized during the year.

B.
Noncontrolling Interest
Sanders Company reported net income Php600,000
Less: Unrealized profit in ending inventory (51,000)
Add: Realized profit in beginning inventory 40,000
Subsidiary income included in consolidated 589,000
income
Noncontrolling interest ownership percentage x 10%
Noncontrolling interest in consolidated income Php 58,900
C.
Controlling Interest in Consolidated Net Income:
Payton Company’s net income from Php1,720,000
independent operations
Reported net income of Sanders Company 600,000
Less: Unrealized profit on sales of 2011 (51,000)
Add: Profit on intercompany sales to Payton realized in transactions 40,000
with third parties
Subsidiary income realized in Php589,00
transactions with third parties 0
Payton Company’s share of subsidiary income
530,100
(589,000 × 90%)
Controlling interest in consolidated net income Php2,250,100