P 9-3

Financial statement workpaper (goodwill and unrealized profits)

Comparative financial statements for Pen Corporation and its subsidiaries, Sir and Tip
Corporations, for the year ended December 31, 2011, are as follows (in thousands):

Income Statement
Pen Sir Tip
Sales ₱500 ₱300 ₱100
Cost of sales (240) (150) (60)
Operating expenses (160) (70) (15)
Dividend income from Sir 32
Dividend income from Tip 5 4
Net income ₱137 ₱84 ₱25

Statement of Changes in Equity (Excerpt)

Pen Sir Tip
Retained earnings, beginning ₱92 ₱164 ₱45
Add: Net income 137 84 25
Deduct: Dividends (80) (40) (10)
Retained earnings, end ₱149 ₱208 ₱ 60

Statement of Financial Position

Pen Sir Tip
Cash ₱ 104 ₱ 40 ₱ 10
Accounts receivable—net 70 50 20
Inventories 110 75 35
Plant and equipment—net 140 425 115
Investment in Sir (80%) 420
Investment in Tip (50%) 75
Investment in Tip (40%) 68
Total assets ₱919 ₱658 ₱180

Accounts payable ₱ 70 ₱ 40 ₱ 15
Other liabilities 100 10 5
Capital stock 600 400 100
Retained earnings 149 208 60
Total equities ₱919 ₱658 ₱180

ADDITIONAL INFORMATION
1. Pen acquired its 80 percent interest in Sir Corporation for ₱420,000 on January 2, 2009,
when Sir had capital stock of ₱400,000 and retained earnings of ₱100,000. A fair value
adjustment of ₱9,000 pertains to excess of fair value over book value of plant and
equipment that had a remaining useful life of four years from January 1, 2009.
2. Pen acquired its 50 percent interest in Tip Corporation for ₱75,000 on July 1, 2009, when
Tip’s equity consisted of ₱100,000 capital stock and ₱20,000 retained earnings. Sir acquired
its 40 percent interest in Tip on the same date for ₱68,000. A fair value adjustment of
₱10,000 pertains to excess of fair value over book value of plant and equipment that had a
remaining useful life of four years from July 1, 2009.
3. The group’s policy is to value non-controlling interest at its proportionate share of the fair
value of the identifiable assets on date of acquisition.
4. Sales from Pen:
a. At December 31, 2010, the inventory of Sir included inventory items acquired from Pen at
a profit of ₱8,000. This merchandise was sold during 2011.
b. At December 31, 2011, Pen sold merchandise that had cost ₱15,000 to Tip for ₱20,000.
Of this, merchandise held by Tip at December 31, 2011 is carried in Tip’s books at
₱4,000.
5. Sales from Tip:
a. Tip sold merchandise that had cost ₱15,000 to Pen for ₱25,000 during 2011. 80% were
sold to third party customers as of end of 2011.
b. Tip sold merchandise that had cost ₱30,000 to Sir for ₱50,000 during 2011. All of this
merchandise is held by Sir at December 31, 2011. Sir owes Tip ₱10,000 on this
merchandise.
6. Sales from Sir:
a. The 2010 ending inventory of Pen includes intercompany profit of ₱5,000. This was sold
in 2011.
b. Sales to Tip in 2011 amounted to ₱15,000 which costs Sir ₱8,000. 40% remains in Tip’s
inventory at the end of 2011.