8 PAW & SAW COMPANY Downstream sale

On January 1, 2008, Paw Company purchased 40,000 shares of Saw Company in the open market for P 700,000.
ON that date, the net assets of Saw Company amounted to P 800,000 and had book values that approximated
their fair market values, except for inventory and equipment, which have market values P 10,000 and P 40,000
higher than book values. The inventory was sold in 2008, and the equipment has a remaining life of 8 years
from 2005.

Paw Company uses the cost method of accounting for its investment

On January 1, 2011, Paw Company sold equipment to Saw Company at a gain of P 50,000. Paw Company made
the following entry on its books.

Cash 150,000
Equipment 100,000
Gain on sale of equipment 50,000

The equipment is estimated to have a remaining useful life of five year from the date of the sale.

Financial statement for the two companies for the year ended December 31, 2011 are as follows:

A BALANCE SHEET PAW CO. SAW CO,

Cash 240,000 200,000
Accounts receivable 260,000 200,000
Inventories 400,000 200,000
Land 600,000
Building-net 360,000
Equipment-net 1,245,000 840,000
Investment in SAW Company 700,000 0
Total assets 3,805,000 1,440,000

Accounts payable 302,000 20,000

Ordinary shares 500,000 500,000
Share premium 300,000
Retained earnings 2,703,000 920,000
Total liabilities & equity 3,805,000 1,440,000

B INCOME STATEMENT
Sales 2,000,000 1,000,000
Cost of sales 800,000 600,000

Gross income 1,200,000 400,000

Dividend income 48,000
Gain on sale of equipment 50,000 0

Total income 1,298,000 400,000

Operating expenses 800,000 280,000

NET INCOME 498,000 120,000

C RETAINED EARNINGS STATEMENT

Retained earnings, Jan 1, 2011 2,605,000 860,000
Add: Net income 498,000 120,000
3,103,000 980,000
Less Dividends 400,000 60,000

Retained earnings, Dec 31, 2011 2,703,000 920,000

REQUIRED: From the data given above, prepare a consolidated working paper.

SOLUTION: 80% 20%

 8 PAW & SAW COMPANY Downstream sale
A COMPUTATION OF COST/BOOK VALUE DIFFERENTIAL 100% AMOUNT PARENT MINORITY
Acquisition cost 700,000 700,000
Less: Book value acquired 800,000 640,000 640,000 160,000

DIFFERENCE (due to) 60,000

Increase in inventory 10,000 (8,000) (2,000)
Increase in equipment 40,000 (32,000) (8,000)

GOODWILL/SHARE OF MINORITY 20,000 150,000

B CONSOLIDATED NET INCOME ESI MINI

Share in subsidiary income 120,000 96,000 24,000
Increase in depreciation 40,000 / 8 5,000 (4,000) (1,000)
Unrealized Gain on sale DOWNSTREAM (50,000)
RG on sale (depn of sold eqpt) DOWNSTREAM 50,000 /5 10,000 10,000

Adjusted income from subsidiary/Minority interest net income 52,000 23,000

Add: PARENT's separate net income 498,000 - 48,000 450,000

CONSOLIDATED NET INCOME 502,000

C ELIMINATION ENTRIES: CONSOLIDATED NET INCOME - SUBSEQUENT YEARS DEBIT CREDIT

1 c Retained earnings, Jan 1 Subsidiary 860,000
Ordinary share Subsidiary 500,000
Investment in Saw 826,000 x 80% 1,088,000 1,088,000
Minority interest 826,000 x 20% 272,000
1,360,000 1,360,000

2d Equipment-net Parent's 40,000 - 5,000 1 25,000

Goodwill 5,000 2 20,000
Investment in Saw 5,000 3 40,000 40,000
Minority interest 5,000
45,000 45,000 1,128,000

3a Investment in Saw Parent 428,000 (700,000)

Retained earnings, Jan 1 Subsidiary 428,000 428,000

4b Dividend income Parent 80% 48,000

Minority interest MINAS 20% 12,000
Dividends 60,000
5e Expenses 4 5,000
Equipment-net Depreciation 5,000

6f Minority interest income 23,000

Minority interest 23,000
downstream
7 g Gain on sale of equipment DS Sale of eqpt to sub 4 50,000
Equipment 50,000

8h Equipment DS 50,000/5 10,000 10,000

Expenses 10,000

D WORKING PAPER
ELIMINATIONS CONSOLI
BALANCE SHEET PAD SAD DEBIT CREDIT BS
8 PAW & SAW COMPANY Downstream sale
Cash 240,000 200,000 440,000
Accounts receivable 260,000 200,000 460,000
Inventories 400,000 200,000 600,000
Land 600,000 600,000
Building 360,000 360,000
Equipment 1,245,000 840,000 D 25,000 E 5,000
H 10,000 G 50,000 2,065,000
INVESTMENT IN SAD 700,000 0 A 428,000 C 1,088,000 0
0 D 40,000
GOODWILL 0 0 D 20,000 20,000

Total assets 3,805,000 1,440,000 4,545,000

Accounts payable 302,000 20,000 322,000

Ordinary shares 500,000 500,000 C 500,000 500,000
Share premium 300,000 300,000

Retained earnings 2,703,000 920,000 3,135,000

MINORITY INTEREST (MINAS) B 12,000 C 272,000

D 5,000
F 23,000 288,000

Total liabilities & equity 3,805,000 1,440,000 4,545,000

INCOME STATEMENT
Sales 2,000,000 1,000,000 3,000,000
Cost of sales 800,000 600,000 1,400,000

Gross income 1,200,000 400,000 1,600,000

Dividend income 48,000 0 B 48,000 -
Gain on sale of equipment 50,000 0 G 50,000 -

Total income 1,298,000 400,000 1,600,000

Operating expenses 800,000 280,000 E 5,000 H 10,000 1,075,000

NET INCOME 498,000 120,000 525,000

Minority Interest Net Income F 23,000 (23,000)

Consolidated Net Income 502,000

RETAINED EARNINGS STATEMENT

Retained earnings, Jan 1, 2011 2,605,000 860,000 C 860,000 A 428,000 3,033,000
Add: Net income 498,000 120,000 502,000
3,103,000 980,000 3,535,000
Less Dividends 400,000 60,000 B 60,000 400,000

Retained earnings, Dec 31, 2011 2,703,000 920,000 1,981,000 1,981,000 3,135,000