BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 1

EXERCISES

Multiple Choice:

Problem 1: D

Problem 2: B

Problem 3: C

Selling Price 100,000

Book Value (120K - 38K) (82,000)
Gain on sale 18,000

120,000/60 mos x 19 mos = 38,000

Year 20x6
Equipment 20,000
Gain on sale 18,000
Accumulated Depreciation 38,000

Accumulated Depreciation 2,195

Depreciation expense 2,195
(18,000/41mos. x 5 mos.)

Year 20x7
Equipment 20,000
Retained earnings 18,000
Accumulated Depreciation 38,000

Accumulated Depreciation 7,463

Retained Earnings (20x6) 2,195
Depreciation expense (20x7) 5,268

Problem 4: C

Problem 5: B

Problem 6: A

Problem 7: B

Problem 8: D

Problem 9: D

Problem 10: D

Problem 11: D

Problem 12: D/D

Problem 13: D

Problem 14: C

Problem 15: B
Accumulated Depreciation 500,000 + 100K (remaining BV 1.7M – SV 200K = 1.5M/15 years)

Problem 16: D

Problem 17: B

Problem 18: A
Selling Price 1,080,000
Book Value 1,260,000
Loss on sale (180,000)
Realized loss (180K / 8 yrs x 7/12) (13,125)
Net effect - increase (166,875)

Problem 19: B

Problem 20: C

Problem 21: A

Problem 22: C
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 2
Problem 23: D

Problem 24: B

Problem 25: C

Problem 26: D

Problem 27: C

Problem 28: C
Selling price – unrelated party 14,000
Less: Original Book value, 12/31/20x5
Book value, 1/1/20x4 20,000
Less: Depreciation for 20x4 and 20x5: P20,000/4 years x 2 yrs 10,000
10,000
Gain 4,000

Problem 29: A/C/D

Req. 1:

Answer use the original cost of P600,000

Req. 2:

Beg. Balance of Accumulated Depreciation (600K / 6) 100,000

BV of Machine 500,000/5 yrs 100,000
Consolidated Accumulated Depreciation 200,000

Req. 3:

Selling price 550,000

Book Value (600,000 - 100,000) (500,000)
Unrealized Gain on sale 50,000
Less: Realized Gain (50,000/5) (10,000)
Total 40,000

Problem 30: B/A

Req. 1:

Parker 2,000,000
MJ 950,000
Intercompany gain on sale (100,000)
Consolidated Equipment 2,850,000

Req. 2:

Parker 400,000
MJ 95,000
Realized gain on sale (100,000 / 5yrs) (20,000)
Consolidated accumulated depreciation 475,000

Problem 31: B/C/D

NCI, January 1, 2021 (P10,000,000 x 20%) P 2,000,000

NCI in dividends paid by subsidiary (P300,000 x 20%) ( 60,000)
NCI in net income of subsidiary (P650,000 x 20%) 130,000
NCI, Dec ember 31, 2021 P 2,070,000

Req. 2:

Adjusted Net Income - Subsidiary 650,000

x Controlling Interest 80%
Total 520,000.00
Add: Loss on Sale (Downstream) 200,000
Less: Realized loss - Dep./Sale(Downstream) (40,000)
Investment Income 680,000
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 3
2021
Investment in Sine Jan. 1 8,000,000
Investment Income 680,000
Share in Dividend (300K x 80%) (240,000)
Investment in Sine Dec. 31 8,4 40,000

Req. 3:

Parent Net Income 2,800,000

Loss on sale (downstream) 200,000
Realized loss (downstream) (40,000)
Subsidiary Net Income 650,000
x Controlling Interest 80% 520,000
Consolidated Net Income - Parent 3,480,000

Problem 32: C/B

Req. 1:
Answer the original cost of P700,000

Req.2:

Beg. Balance 140,000

Book Value 560,000/4 yrs 140,000
Total Accumulated Dep. 12/31/30 280,000

Cost 700K / 5 years = P140,000/yr. Depreciation

Problem 33: D/D

.
Req. 1
Cost 340,000
Accumulated Depreciation (340,000 /10yrs x 4 yrs) 136,000
Book Value 204,000

Selling Price 300,000

Book Value 204,000
Gain on Sale 96,000

Parent Net Income 500,000

Share in Dividend from Subsidiary (37,500)
Subsidiary Net Income 280,000
Gain on Sale (upstream) (96,000)
Realized gain by depreciation (upstream) (96/6) 16,000
Adjusted net income of subsidiary 200,000
x Controlling interest % 75% 150,000
Consolidated net income attributable - Parent 612,500

Req. 2
Selling price of Shadow P300,000 / 6 = 50,000.

Problem 34: A/C/A/B

Req. 1:

Selling Price 250,000

Book Value (300K - 150K) (150,000)
Gain (loss) on sale 100,000
Divide by remaining useful life 5
x No of months 9/12
Realized gain on sale 15,000

Net Income of Subsidiary 400,000

Gain on sale (100,000)
Realized Gain on sale 15,000
Adjusted Net Income of Subsidiary 315,000
x NCI% 25%
NCINIS 78,750
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 4
Req. 2:
Parent Net Income 1,650,000
Dividend Income from Subsidiary (225,000)
Subsidiary Net Income 400,000
Gain on sale (upstream) (100,000)
Realized gain (upstream) 15,000
Adjusted Net Income 315,000
x Controlling Interest 75% 236,250
Consolidated Net Income - Parent 1,661,250

Req. 3:
Cost of Machinery 300,000
Accumulated Depreciation
4 years (300,000/8 x 4 yrs) 150,000
2030: BV 150,000/5 yrs x 9/12 22,500 (172,500)
Book Value on December 31, 2030 127,500

Req. 4:
Subsidiary Net Income 400,000
Less: Gain on Sales (Upstream) (100,000)
Add: Realized Gain - Dep./Sale (Upstream) 15,000
Adjusted Net Income - Subsidiary 315,000
x Controlling Interest 75%
Investment Income 236,250

Problem 35: D/A/B

Req. 1:
DS
Selling Price 100,000
Book Value (150K - 30K) (120,000)
Gain (loss) on sale (20,000)
Divide by remaining useful life 4
x No of months 9/12
Realized gain (loss) on sale (3,750)

US
Selling Price 240,000
Book Value () (200,000)
Gain (loss) on sale 40,000
Divide by remaining useful life 5
x No of months 3/12
Realized gain on sale 2,000

Net Income of Subsidiary 600,000

Gain on sale (upstream) (40,000)
Realized Gain on sale (upstream) 2,000
Adjusted Net Income of Subsidiary 562,000
x NCI% 10%
NCINIS 56,200

Req. 2:
Parent Net Income 1,000,000
Loss on sale (downstream) 20,000
Realized loss (downstream) (3,750)
Subsidiary Net Income 600,000
Gain on sale (upstream) (40,000)
Realized gain (upstream) 2,000
Adjusted Net Income 562,000
x Controlling Interest 90% 505,800
Consolidated Net Income - Parent 1,522,050

Req. 3:

Subsidiary Net Income 600,000

Less: Gain on Sales (Upstream) (40,000)
Add: Realized Gain - Dep./Sale (Upstream) 2,000
Adjusted Net Income - Subsidiary 562,000
x Controlling Interest 90%
Total 505,800
Add: Loss on Sale (Downstream) 20,000
Less: Realized loss - Dep./Sale(Downstream) (3,750)
Investment Income 522,050
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 5
Problem 36: C

Problem 37: C/A/B

Req. 1:

Net Income of Subsidiary 300,000

x NCI% 20%
NCINIS 60,000

Req.2:

Parent Net Income 400,000

Gain on sale (downstream) (90,000)
Realized gain (downstream) 15,000
Subsidiary Net Income 300,000
Consolidated Net Income - Parent 625,000

Req. 3:

Book Value of Machine - Jan 1, 2031 270,000

Depreciation - 2031 (270,000 / 6) (45,000)
Book Value - Dec. 31, 2031 225,000

Problem 38: B/A

Estimated useful life 1/1/2031 10

Used 2
Remaining useful life 8

Req. 1
Parent Net Income 950,000
Share in Dividend from Subsidiary (300,000 x 70%) (210,000)
Subsidiary Net Income 500,000
Gain on Sale (upstream) (250,000)
Realized gain by depreciation (upstream) (250/8) 31,250
Adjusted net income of subsidiary 281,250
x Controlling interest % 70% 196,875
Consolidated net income attributable - Parent 936,875
Req. 2
Purchase price of Prof Company 890,000 / 8 yrs remaining useful life = 111,250

Problem 39: D/A/B/A/C/A/

Consolidation Working Paper

Ordinary share- Shell 500,000
Retained Earnings-Shell 900,000
Investment in Shell 1,120,000
NCI 280,000

Goodwill 100,000
Investment in Shell 80,000
NCI 20,000

Dividend Income 120,000

NCI 30,000
Dividend-Shell 150,000

Retained earnings-Piston 30,000

Machine 50,000
Accumulated Depreciation 80,000

Accumulated Depreciation-Machine 15,000

Retained earnings-Piston 7,500
Depreciation expense-Machine 7,500

Equipment 90,000
Gain on Sale of equipment 10,000
Accumulated Depreciation 100,000

Accumulated Depreciation-Equip 2,500

Depreciation expense (10K/4) 2,500
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 6

Investment in Shell 80,000

Retained earnings-Piston 80,000
To establish reciprocity at the beginning of the
year

Retained earnings 1/1/20x6 900,000

Retained earnings 1/1/20x5 800,000
Increase in Retained earnings 100,000
x Controlling Interest % 80%
Adjustments 80,000

NCINIS 36,500
NCI 36,500

Net Income of Subsidiary 190,000

Gain on sale of equipment (US) (10,000)
Realized gain on sale- Depreciation (US) 2,500
Adjusted Net Income of Subsidiary 182,500
x NCI% 20%
NCINIS 36,500

Adjustments &
Eliminations Consolidated
P iston Shell Dr. Cr. Amounts
Sales 1,200,000 600,000 1,800,000
Dividend Income 120,000 - 120,000 -
Gain on Sale of Equipment 10,000 10,000 -
T otal 1,320,000 610,000 1,800,000
Cost of Sales 700,000 250,000 950,000
Depreciation expenses-Machine 100,000 100,000 7,500 192,500
Depreciation expenses-Equip 80,000 50,000 2,500 127,500
Other expenses 50,000 20,000 70,000
T otal 930,000 420,000 1,340,000
Net Income 390,000 190,000 460,000
NCINIS 36,500 36,500
Net Income to Retained Earnings 423,500

Retained earnings beg. 800,000 900,000 900,000 80,000 857,500

30,000 7,500

Net Income 390,000 190,000 423,500

Dividend 200,000 150,000 150,000 200,000
Retained earnings end 990,000 940,000 1,081,000

Cash 2,400,000 1,170,000 3,570,000

Accounts receivables 130,000 100,000 230,000
Inventory 120,000 120,000 240,000
Investment in Shell 1,120,000 - 80,000 1,120,000 -
80,000
Machine 900,000 400,000 50,000 1,350,000
Equipment 600,000 300,000 90,000 990,000
Goodw ill 100,000 100,000
T otal 5,270,000 2,090,000 6,480,000

Accumulated Depreciation-Machine 180,000 150,000 15,000 80,000 395,000

Accumulated Depreciation-Equip 120,000 100,000 2,500 100,000 317,500

Accounts Payable 980,000 400,000 1,380,000

Ordinary shares 3,000,000 500,000 500,000 3,000,000
Retained earnings 990,000 940,000 1,081,000
NCI 30,000 280,000 306,500
20,000
36,500
T otal 5,270,000 2,090,000 1,964,000 1,964,000 6,480,000
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 7
Problem 40: B/D/B/C/A/B/B/D/A/C
Req. 1&2:
Acquisition Cost 1/1/20x1
Cash 2,400,000
NCI 800,000
Total 3,200,000
Book Value of Net Assets of Sine (3,000,000) Amortization
Excess 200,000 20x1 20x2
Inventory (30,000) (30,000) -
Equipment (50,000) (10,000) (10,000)
Goodwill 120,000 (40,000) (10,000)

US - Oct. 1, 20x1
Selling Price 200,000
Book Value (300K - 120K) (180,000)
Gain (loss) on sale 20,000
Divide by remaining useful life 4
x No of months 3/12
Realized gain (loss) on sale 1,250.00

DS - 20x2
Selling Price 300,000
Book Value (500K - 100K) (400,000)
Gain (loss) on sale (100,000)
Divide by remaining useful life 5
x No of months 3/4
Realized gain (loss) on sale (15,000)

20x1 20x2
Net Income of Subsidiary 350,000 500,000
Amortization of assets - undervalued (40,000) (10,000)
Loss on Sale (upstream) 100,000
Realized loss on sale (upstream) (15,000)
Gain on sale (upstream) (20,000)
Realized Gain on sale (upstream) 1,250 1,250
Adjusted Net Income of Subsidiary 291,250 576,250
x NCI% 25% 25%
NCI share in Net Income of Subsidiary 72,812.50 144,062.50
NCI share in Impairment loss of GW (5,000 x 25%) (1,250)
NCINIS 71,562.50 144,062.50
Req. 3 & 4:
20x1 20x2
NCINAS January 1 800,000 834,062.50
NCINIS 71,562.50 144,062.50
Share in Dividends (37,500) (87,500.00)
NCINAS December 31 834,062.50 890,625

Req. 5 & 6:
20x1 20x2 20x2
Parent Net Income 800,000 1,000,000
Dividend Income from Subsidiary (112,500) (262,500)
Loss on sale (downstream) 100,000
Realized loss (downstream) (15,000)
Realized Profit - Beg. Inventory (downstream)
Unrealized Profit - End. Inventory
(downstream)
Share of Parent in impairment loss of
Goodwill (3,750)
Subsidiary Net Income 350,000 500,000
Amortization of undervalued assets (40,000) (10,000)
Realized Profit - Beg. Inventory (upstream)
Unrealized Profit - End. Inventory (upstream)
Gain on sale (upstream) (20,000) -
Realized gain (upstream) 1,250 1,250
Loss on sale (upstream)
Realized loss (upstream)
Adjusted Net Income 291,250 491,250
x Controlling Interest 75% 218,437.50 75% 368,438
Consolidated Net Income - Parent 902,187.50 1,190,937.50
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 8
Req. 7 & 8:
Equity Method 20x1 20x2
Subsidiary Net Income 350,000 500,000
Less: Amortization of undervalued assets (40,000) (10,000)
Add: Realized Profit - Beg, Inventory (Upstream)
Less: Unrealized Profit - End. Inventory (upstream)
Less: Gain on Sales (Upstream) (20,000)
Add: Realized Gain - Dep./Sale (Upstream) 1,250 1,250
Add: Loss on Sale (Upstream)
Less: Realized loss - Dep./Sale (Upstream)
Adjusted Net Income - Subsidiary 291,250 491,250
x Controlling Interest 75% 75%
Total 218,437.50 368,437.50
Add: Realized Profit - Beg, Inventory (Downstream)
Less: Unrealized Profit - End. Inventory (Downstream)
Less: Gain on Sales (Downstream)
Add: Realized Gain - Dep./Sale (Downstream) 100,000
Add: Loss on Sale (Downstream) (15,000)
Less: Realized loss - Dep./Sale(Downstream)
Less: Share of Parent in Impairment loss of Goodwill (3,750)
Investment Income 214,687.50 453,437.50

Req. 9 & 10:

20x1 20x2
Investment in Sine Jan. 1 2,400,000 2,502,187.50
Investment Income 214,687.50 453,437.50
Share in Dividend (112,500) (262,500)
Investment in Sine Dec. 31 2,502,187.50 2,693,125

Problem 41: B/D/C/A/B/D/D/C/A/C/D

Req. 1 - 3
NCINIS - downstream 20x1 20x2 20x3
Net Income of subsidiary 850,000 1,000,000 900,000
Gain on sale
Realized Gain on sale
Adjusted Net Income 850,000 1,000,000 900,000
x NCI % 20% 20% 20%
NCINIS 170,000 200,000 180,000

Controlling Interest - downstream 20x1 20x2 20x3

Net Income of subsidiary 850,000 1,000,000 900,000
Gain on sale
Realized Gain on sale
Adjusted Net Income 850,000 1,000,000 900,000
x Controlling % 80% 80% 80%
NCINIS 680,000 800,000 720,000

Req. 7 - 9
NCINIS - upstream 20x1 20x2 20x3
Net Income of subsidiary 850,000 1,000,000 900,000
Gain on sale (200,000)
Realized Gain on sale 200,000
Adjusted Net Income 650,000 1,000,000 1,100,000
x NCI % 20% 20% 20%
NCINIS 130,000 200,000 220,000

Controlling Interest - upstream 20x1 20x2 20x3

Net Income of subsidiary 850,000 1,000,000 900,000
Gain on sale (200,000)
Realized Gain on sale 200,000
Adjusted Net Income 650,000 1,000,000 1,100,000
x Controlling % 80% 80% 80%
NCINIS 520,000 800,000 880,000
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 9

STRAIGHT PROBLEMS

Problem 1:
A. DOW NSTREAM SALE
Books of Selling Affiliate (P arent) Books of Buying Affiliate (Subsidiary)
Cash 150,000 Equipment 150,000
Accum. Dep. 80,000 Cash 150,000
Equipment 200,000 T o record the purchase of equipment
Gain on sale 30,000
T o record the sale of equipment
No entry Dep. expense 30,000
Accum. Dep. 30,000
T o record the depreciation expense
(150,000/5)

Consolidation working paper – Downstream

Year of Sale – 2031
A Equipment 50,000
Gain on sale 30,000
Accumulated Depreciation 80,000
To eliminate the unrealized gain

B Accumulated Depreciation 6,000

Depreciation expense 6,000
To recognized realized gain on sale

Gain on sale P30,000/5 yrs = 6,000

Subsequent Year – 2032

A Equipment 50,000
Retained Earnings - Peter 30,000
Accumulated Depreciation 80,000
To eliminate the unrealized gain

B Accumulated Depreciation 12,000

Retained Earnings – Peter (20X3) 6,000
Depreciation expense (20X4) 6,000
To recognized realized gain on sale

B. UPSTREAM SALE
Books of Selling Affiliate (Subsidiary) Books of Buying Affiliate (P arent)
Cash 150,000 Equipment 150,000
Accum. Dep. 80,000 Cash 150,000
Equipment 200,000 T o record the purchase of equipment
Gain on sale 30,000
T o record the sale of equipment
No entry Dep. expense 30,000
Accum. Dep. 30,000
T o record the depreciation expense
(150,000/5)

Consolidation working paper – Upstream

Year of Sale – 20x3
A Equipment 50,000
Gain on sale 30,000
Accumulated Depreciation 80,000
To eliminate the unrealized gain

B Accumulated Depreciation 6,000

Depreciation expense 6,000
To recognized realized gain on sale

Subsequent Year – 20x4

A Equipment 50,000
Retained Earnings – Peter 60% 18,000
NCI – 40% 12,000
Accumulated Depreciation 80,000
To eliminate the unrealized gain
B Accumulated Depreciation 12,000
Retained Earnings – Peter (2031) – 60% 3,600
NCI (2032) – 40% 2,400
Depreciation expense (20X4) 6,000
To recognized realized gain on sale
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 10
Problem 2:

Books of Parent
Cost M ethod Equity M ethod
Investment in SC 720,000 Investment in SC 720,000
Cash 720,000 Cash 720,000

Cash (40,000 x 80%) 32,000 Cash 32,000

Dividend Income 32,000 Investment in SC 32,000

Investment in SC 68,000
Investment Income 68,000
(85,000 x 80%)

Investment in SC 25,000
Investment Income 25,000
T o record the unrealized loss
SP 75K - BV 100 = (25K) x 100%

Investment Income 5,000

Investment in SC 5,000
T o record the realized loss
(25,000/5)

Investment Income 4,800

Investment in SC 4,800
UP EI: 20K x 30% = 6K x 80%

Intercompany Transactions

PJ Books SC Books
Downstream
Cash 75,000 Equipment 75,000
Loss on sale 25,000 Cash 75,000
Equipment 100,000

Depreciation exp 15,000

Accum. Dep 15,000
(75K / 5 years)
Upstream
Inventory 80,000 Cash 80,000
Cash 80,000 Sales 80,000

COGS 60,000
Inventory 60,000

Consolidation working paper

Cost Method Equity Method

Ordinary share - SC 400,000 Ordinary share - SC 400,000
Retained earnings - SC 500,000 Retained earnings - SC 500,000
Investment in SC 720,000 Investment in SC 720,000
NCI 180,000 NCI 180,000

Dividend Income 32,000 Investment Income 83,200

NCI 8,000 NCI 8,000
Dividend - SC 40,000 Dividend - SC 40,000
Investment in SC 51,200

Equipment 25,000 Equipment 25,000

Loss on sale 25,000 Loss on sale 25,000
To eliminate the loss on To eliminate the loss on
sale sale

Depreciation expense 5,000 Depreciation expense 5,000

Accum Depreciation 5,000 Accum. Depreciation 5,000
to record the realized to record the realized
loss on sale loss on sale

Cost of Goods Sold 6,000 Cost of Goods Sold 6,000

Inventory 6,000 Inventory 6,000

NCINIS 15,800 NCINIS 15,800

NCINAS 15,800 NCINAS 15,800
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 11

Net income of subsidiary 85,000

Unrealized profit - ending inventory (20K x 30%) (6,000)
Adjusted net income 79,000
x 20%
NCINIS 15,800

Parent Net Income own operation 320,000

Share in Dividend form subsidiary (40,000 x 80%) (32,000)
Loss on sale (downstream) 25,000
Realized loss on sale (downstream) 25K /5 (5,000)

Net income of subsidiary 85,000

Unrealized profit - ending inventory (20K x 30%) (6,000)
Adjusted net income 79,000
x Controlling interest % 80% 63,200
371,200
Consolidated Retained Earnings

RE -P 600,000
CNI -P 371,200
Dividend _ P (150,000)
Consolidated RE 821,200

Problem 3:

Acquisition Cost 1/1/20x1

Cash 2,500,000
NCI 625,000
Total 3,125,000
Book Value of Net Assets of Sine (3,000,000) Amortization
Excess 125,000 20x1 20x2
Inventory (50,000) (50,000) -
Equipment 100,000 20,000 20,000
Goodwill 175,000 (30,000) 20,000

DS - May 1, 20x1
Selling Price 285,000
Book Value (500K - 200K) (300,000)
Gain (loss) on sale (15,000)
Divide by remaining useful life 5
x No of months 8/12
Realized gain (loss) on sale (2,000)

US - Aug. 30, 20x2

Selling Price 245,000
Book Value (250K - 50K) (200,000)
Gain (loss) on sale 45,000
Divide by remaining useful life 6
x No of months 4/12
Realized gain (loss) on sale 2,500

Req. A

20x1 20x2
Net Income of Subsidiary 520,000 680,000
Amortization of assets - undervalued (50,000)
Amortization of assets - overvalued 20,000 20,000
Gain on sale (upstream) (45,000)
Realized Gain on sale (upstream) 2,500
Adjusted Net Income of Subsidiary 490,000 657,500
x NCI% 20% 20%
NCI share in Net Income of Subsidiary 98,000 131,500.00
NCI share in Impairment loss of GW (10,000 x 20%) (2,000)
NCINIS 96,000 131,500
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 12
Req. B

20x1 20x2
NCINAS January 1 625,000 633,500
NCINIS 96,000 131,500
Share in Dividends (87,500) (105,000.00)
NCINAS December 31 633,500 660,000

Req. C

20x1 20x2
Parent Net Income 900,000 1,200,000
Dividend Income from Subsidiary (280,000) (336,000)
Loss on sale (downstream) 15,000
Realized loss (downstream) (2,000) (2,000)
Share of Parent in impairment loss of Goodwill (8,000)
Subsidiary Net Income 520,000 680,000
Amortization of undervalued assets (50,000)
Amortization of overvalued assets 20,000 20,000
Gain on sale (upstream) - (45,000)
Realized gain (upstream) - 2,500
Adjusted Net Income 490,000 657,500
x Controlling Interest 80% 392,000 80% 526,000
Consolidated Net Income - Parent 1,017,000 1,388,000.00

Req. D

Equity Method 20x1 20x2

Subsidiary Net Income 520,000 680,000
Less: Amortization of undervalued assets (50,000) -
Add: Amortization of overvalued assets 20,000 20,000
Less: Gain on Sales (Upstream) - (45,000)
Add: Realized Gain - Dep./Sale (Upstream) - 2,500
Adjusted Net Income - Subsidiary 490,000 657,500
x Controlling Interest 80% 80%
Total 392,000 526,000
Add: Loss on Sale (Upstream) 15,000
Less: Realized loss - Dep./Sale(Downstream) (2,000) (2,000)
Less: Share of Parent in Impairment loss of Goodwill (8,000)
Investment Income 397,000 524,000

Req. E

20x1 20x2
Investment in Sine Jan. 1 2,500,000 2,617,000
Investment Income 397,000 524,000
Share in Dividend (280,000) (336,000)
Investment in Sine Dec. 31 2,617,000 2,805,000

Problem 4:
Parent Net Income 800,000
Share in Dividend from Subsidiary (250,000 x 80%) (200,000)
Subsidiary Net Income 350,000
Loss on Sale (upstream) 100,000
Realized loss by depreciation (upstream) (100/4) (25,000)
Adjusted net income of subsidiary 425,000
x Controlling interest % 80% 340,000
Consolidated net income attributable - Parent 940,000

Estimated useful life 1/1/2031 6

Used 2
Remaining useful life 4

Problem 5:
Acquisition Costs
Cash 600,000
NCI 150,000
Total 750,000
Fair Value of Net Assets 650,000
Goodwill 100,000
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 13

Consolidation Working Paper

a. Ordinary share- Sol 500,000
Retained Earnings-Sol 600,000
Investment in Sol 880,000
NCI 220,000

b. Goodwill 175,000
Investment in Sol 140,000
NCI 35,000

c. Dividend Income 80,000

NCI 20,000
Dividend-Sol 100,000

d. Retained earnings-Vel 50,000

Land 50,000

e. Equipment 20,000
Gain on Sale of equipment 20,000
Accumulated Depreciation 40,000

f. Accumulated Depreciation - Equi 5,000

Depreciation expense - Equip (20K/4) 5,000

g. Accounts Payable 10,000

Accounts Receivable 10,000

h. Investment in Sol 120,000

Retained earnings-Vel 120,000
To establish reciprocity at the beginning of the
year
Retained earnings 1/1/2031 600,000
Retained earnings 1/1/2030 450,000
Increase in Retained earnings 150,000
x Controlling Interest % 80%
Adjustments 120,000

i. NCINIS 28,000
NCI 28,000
Net Income of Subsidiary 155,000
Gain on sale of equipment (US) (20,000)
Realized gain on sale- Depreciation (US) 5,000
Adjusted Net Income of Subsidiary 140,000
x NCI% 20%
NCINIS 28,000
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 14
Req. C
Adjustments &
Eliminations Consolidated
Vel Sol Dr. Cr. Amounts
Sales 850,000 550,000 1,400,000
Dividend Income 80,000 - 80,000 -
Gain on Sale of Equipment - 20,000 20,000 -
Total 930,000 570,000 1,400,000
Cost of Sales 450,000 300,000 750,000
Depreciation expenses-Bldg 80,000 25,000 105,000
Depreciation expenses-Equip 100,000 40,000 5,000 135,000
Other expenses 70,000 50,000 120,000
Total 700,000 415,000 1,110,000
Net Income 230,000 155,000 290,000
NCINIS 28,000 28,000
Net Income to Retained
Earnings 262,000

Retained earnings beg. 1,500,000 600,000 600,000 120,000 1,570,000

50,000
Net Income 230,000 155,000 262,000
Dividend 200,000 100,000 100,000 200,000
Retained earnings end 1,530,000 655,000 1,632,000

Cash 310,000 275,000 585,000

Accounts receivables 120,000 80,000 10,000 190,000
Inventory 80,000 120,000 200,000
Investment in Sol 900,000 120,000 880,000 -
140,000
Land 1,000,000 550,000 50,000 1,500,000
Building 800,000 500,000 1,300,000
Equipment 500,000 400,000 20,000 920,000
Goodwill 175,000 175,000
Total 3,710,000 1,925,000 4,870,000

Accum Depreciation-Bldg 80,000 50,000 130,000

Accum Depreciation-Equip 200,000 80,000 5,000 40,000 315,000
-
Accounts Payable 600,000 640,000 10,000 1,230,000
Ordinary shares 1,300,000 500,000 500,000 1,300,000
Retained earnings 1,530,000 655,000 1,632,000
NCI 20,000 220,000 263,000
35,000
28,000
Total 3,710,000 1,925,000 1,628,000 1,628,000 4,870,000

Problem 6:

CNI-P NCI - DEF NCI - GHI

Parent Net Income 1,000,000
Share in Dividend – URC (300K x 90%) (270,000)
Share in Dividend – ROB (200K x 80%) (160,000)
Loss on Sale – downstream 240,000
Realized Loss on sale – downstream
(240K/2 x 4/12) (40,000)
Realized gain on sale - upstream GHI (80%)
[300K /5 x 3/12] 15,000 12,000 3,000
UPEI - URC (90%) (10,000) (9,000) (1,000)

URC - January 1, 2020 600,000

Rent expense 60,000
Adjusted Net Income per book of URC 660,000 594,000 66,000

ROB - July 11, 2020 500,000

Gain on Sale (300,000)
Rent Income (60,000)
Adjusted Net Income per book of ROB 140,000 56,000 14,000
1,423,000 65,000 17,000
 BUSINESS COMBINATION – INTERCOMPANY SALE OF PLANT ASSETS 15
Problem 7:
Acquisition Cost
Cash 4,000,000
NCI 1,200,000
Total 5,200,000
Book Value of Net Assets 6,000,000
Gain on bargain purchase (800,000)

Upstream
Selling Price 500,000
Book value 600,000
Loss on sale (100,000)

Parent Net Income own operation 1,400,000

Gain on bargain purchase 800,000
Net income of Subsidiary per book 325,000
Add: Loss on Sale 100,000
Net Income of subsidiary excluding intercompany loss 425,000
x July 1 – Dec. 31 1/2
Net income of subsidiary to be shared to Parent 212,500
Realized loss on Sale (upstream) (5,000)
Adjusted Net Income of Subsidiary 207,500
x NCI % 80% 166,000
CNI - Parent 2,366,000

B.
Adjusted Net Income of subsidiary 207,500
x 20%
NCINIS 41,500

C.
NCINAS beg 1,200,000
NCINIS 41,500
Share in Dividend (150,000 x 20%) (30,000)
NCINAS end 1,211,500

Problem 8:

Answer
Acquisition Cost
Cash 2,000,000
NCI (2.6M x 20%) 520,000
Total 2,520,000
Book Value of Net Assets (2,600,000)
Gain on bargain purchase (80,000)

Net Income - Parent 1,500,000

Share in Dividend (540,000 x 80%) (432,000)
Gain on bargain purchase 80,000
Net Income - Subsidiary 750,000
Gain on sale (US) (63,000)
Realized Gain sale - Depreciation (US) 50K/7 x 4/12 3,000
Adjusted Net Income 690,000
x Controlling interest % 80% 552,000
Consolidated Net Income Attributable to Parent 1,700,000

Net Income - Subsidiary 750,000

Gain on sale (US) (63,000)
Realized Gain sale - Depreciation (US) 50K/7 x 4/12 3,000
Adjusted Net Income 690,000
x NCI % 20%
NCINIS 138,000

Req. 2
NCINAS beg 520,000
NCINIS 138,000
NCI share in Dividends (540K x 20%) (108,000)
NCINAS end 550,000