Drill number 2: Group Seatwork Intercompany Transactions

Instructions: Write your name at the back. Encircle your answer here. Use separate
sheets as necessary to write your solutions in good form.
Parent Corporation acquired 75% of the outstanding shares of Subsidiary Company on
January 1, 2024 for a consideration transferred of P4,320,000. The price paid includes a
control premium amounting to P120,000. On the date of acquisition, the related cost of
business combination amount to P80,000. On January 2, 2024, Subsidiary Company’s
stockholders’ equity accounts were: Ordinary Shares-P5,700,000 and Retained Earnings-
P1,860,000. An examination of the acquired company’s assets and liabilities on the date
of acquisition, revealed that there were assets with book values different from their fair
values. The merchandise inventory of Subsidiary is overstated by P180,000; land, which
was undervalued by P900,000; equipment, which was overvalued by P720,000 and
copyright was undervalued by P540,000. Inventories were all sold in 2024. The
equipment had a remaining life of 8 years while copyright had a remaining life of 5 years.
During 2024, intercompany cash sales of merchandise amount to P1,980,000 and the
December 31, 2024 inventory includes P126,000 from upstream sales and P144,000 from
downstream sales. The Parent Corporation’s mark-up was 20% of sales while Subsidiary
Company’s selling price is at 120% of cost.

During 2025, intercompany cash sales of merchandise amount to P3,240,000 and the
December 31, 2025 inventory includes P360,000 from upstream sales and P270,000 from
downstream sales. The acquirer corporation accounts for its investment account in
subsidiary using the cost method.

On May 1, 2025, there was an upstream sale of land for P2,700,000. On this date the
land was carried on the selling company’s books at P2,340,000, an amount which is equal
to fair value on the date of acquisition. On September 1, 2025, there was a downstream
sale of furniture for P300,000. On this date the furniture was carried on selling company’s
books, net of accumulated depreciation at P210,000. The furniture was estimated to have
a remaining life of 5 years on the date of sale. December 1, 2025, there was an upstream
sale of building for P6,720,000. On this date the building was carried on selling company’s
books, net of accumulated depreciation at P8,160,000. The building was estimated to
have a remaining life of 8 years on the date of sale.

The following were ascertained for the year 2025:

PARENT SUBSIDIARY
Corporation Company
Sales 16,800,000 9,600,000
Cost of goods sold (6,900,000) (2,400,000)
Gross profit 9,900,000 7,200,000
Expenses (3,840,000) (1,620,000)
Gain on sale of furniture 90,000 120,000
Gain on sale of land 1,200,000 360,000
Loss on sale of machinery (60,000) (180,000)
Loss on sale of building (360,000) (1,440,000)
Dividend revenue 1,980,000 720,000
Net income 8,910,000 5,160,000

Retained earnings (01/01/2025) 7,200,000 4,200,000

Dividends declared (12/31/2025) 2,280,000 1,920,000

For 2025 compute for the following items in the consolidated financial statements:
1. Gross Profit
A. 17,164,200
B. 20,275,800
C. 17,035,800
D. 17,100,000

2. Expenses
A. 5,460,000
B. 5,487,000
C. 5,433,000
D. 5,469,000

3. Non-controlling Interest in Profit

A. 1,542,000
B. 1,582,500
C. 1,546,500
D. 1,536,750

4. Net Income
A. 11,986,800
B. 14,968,800
C. 12,988,800
D. 13,528,800

5. Non-controlling Interest on Net Assets

A. 3,626,250
B. 3,707,250
C. 3,712,500
D. 3,716,250

6. Retained Earnings Attributable to Parent’s Shareholders Equity

A. 16,906,800
B. 18,767,550
C. 20,493,750
D. 18,738,750
January 1 , 2024
75 %
May 1, 2025
Parent Corporation Subsidiary Company Upstream sale of Land
consideration Transferred 4320
, 000
selling price ,
2700 000
-
=

inclusive of control premium Cost (2340

, 000)
=
120
, 000
-

.
9 Sale
360
, 000 Gain on

Subsidiary Company
Ordinary Shares =
5700
, 000
September 1 ,
2025

Retained Earnings =
1860
, 000 Downstream sale of furniture
+ 560000 Selling Price
-

, 000
300 remaining useful life =
5
yrs .

cost #2000)
i
Fair value Adjustments 90 000 Gain on Sale

Inventory Coverstated) (180, 000

-

4/12
C
sold in 90
000/5
=

all x 6 000
2024 , ,

1 and (understated) -

900
, 000

Equipment Coverstated)
-
-

(720, 000)
overstatement C .

useful life = 8
years >90 000,
of dep .
exp .

/yr .

December 1 ,
2025

Copyright (understated) 540

, 000
Upstream sale of Building
-

understatement d
.

useful life =
5 years- 108
, 000 of dep .
exp .

/yr .

sellingPrice -
6720
, 000 remaining useful life =
8 yrs

F INA (160
000
-

=
,
8100 000 NC1 =
2025 000 cost
n
Gain on BP 000 (1440 000)
,

1755 , Loss on Sale

=

000%
1440
,
000/ x 12 = 15
,

For the year 2024

Intercompany sales 1980, 000
-

Ending Inventory (December 31. 2024)

includes :
cost Unrealized Profit

Upstream Sale
al
126000 126 000 /1 2
, .
=
105 000
,

21000

Downstream
Sale
a2
144000 144 000X0 8
,
.
= 115200 28 800
a
49800

Details on pricing :
Parent Corporation :
markup
=
20 % of sales
subsidiary company
Selling Price =
120 % of cost

For the 2025

year
Intercompany Sales 3240
, 000
-

Ending Inventory (December 31 . 2025)

includes :
cost Unrealized Profit

Upstream Sale
bl
360000
360 ,
000/1 .
2 =
300
, 00060
, 000

Downstream
Sale
32
270000 270000X0 8 .
=
21600054, 000
b .

114 000
Requirements
:

① consolidated Gross Profit ⑤ NCI on net assets

Parent per book 9900 008 Ordinary shares (date of acquisition) 5700
, 000

subsidiary per book 7200000 Retained Earnings (Year 2 beg ) . 4200000

A
Realized profit (beg. inventory) 49800 9900
, 000
b

profit (end inventory) 000) Net Income (year 2) 000

.

Unrealized .
(114, - 5160
,

17035800 Dividends Declared (1920000)

SHE of subsidiary Dend of Yr 2 .

per books 13140

, 000

Consolidated Expenses
② 1 and (understated) 900 008

Parent 3840
, 000 Equipment Coverstated) (720000)
subsidiary 1620008 2 years 90000
C .
amortization
equipment 190000) 90 000

Copyright (understated)
d.
copyright 108 000 , 540
, 000
e
furniture (6 ,
000) 2 years (108 000)
f amortization
building 15 000 ,
(108 000
bl
5487000 Unrealized profit (end. inventory (60000
9 .

land (unrealized gain) (360000)

N
③ NCI Furniture (Unrealized Loss) 1440008
profit
in
+
Net Income C subsidiary) 5160008 Furniture (Realized Loss] (15000)
C

equipment 90000
d
14829 000

copyright
.

(108, 000)
Intercompany transactions
:
*
37072525
Cupstream only)
Notes :
al
Realized profit (beg. inventory) 21008
ignore-RPBI
bl
Unrealized profit (end. inventory (60000
9
(unrealized gain)
-

land (360000)
N
Furniture (Unrealized Loss) 1440008
+
Furniture (Realized Loss] (15000)
6168000
X 0 25
.

1542000

① Consolidated Net Income

Parent 8910 000

60000
subsidiary

Realized profit (beg ·

inventory) 49800"
"
Unrealized profit (end. inventory) (114, 000)
C
90000
equipment d .

copyright (108, 000)

9
gain)
-

land (unrealized (360000)

"
Furniture (Unrealized Loss) , 000
1440
+
Furniture (Realized Loss] (15000)
Building (unrealized Gain) (90 ,
000):
e
Building (Realized Gain) 6 000.

Intercompany Dividend Revenue 1440

, 000

13528800
③ Retained turnings Attributable to the Owners of Parent

Retained Earnings (date of acquisition) 1860000

Retained Earnings (beg .

Yr 2) 4200000

Increase in RE 2340008

Net Income (Subsidiary 5160

, 000

Dividends Declared (1920 000)

5580008
Equipment Coverstated) 2 years 90000
amortization
90 000

Copyright (understated) 2 years (108 000)

amortization
(108 000)
5724008
bl
Unrealized profit (end. inventory (60000
9 -

land (unrealized gain) (360000)

Furniture (Unrealized Loss) 1440000"
+
Furniture (Realized Loss] (15000)
6729008

X 0 75
.

5046750
Net Income (parent) 8910
, 000

Retained Earnings (Parent) 7200000

Dividends declared (Pareni) (2280 000)

adjustments : 18876758
Gain on BP 1755000

Unrealized Profit (Ending Inventory) downstream (54000)

Downstream Sale (Furniture) unrealized (40000)
Downstream Sale (Furniture) realized 6000

20493758
Visualization of Intercompany Sales of Inventory

2025

RBBI UPEI

Downstream upstream Downstream upstream

, 000
144 126 000 270000 360000

28800 21000 54008 60 000

(December 2024) Ending Inventory (December 31 2025)

Ending Inventory 31. .

includes : includes :
cost Unrealized Profit cost Unrealized Profit

Upstream Sale Upstream Sale

al bl
126000 126 000 /1 2
, .
=
105 000
,

21000 360,000
360 ,
000/1.2 = , 000
300 60000

Downstream
Sale Downstream
Sale
a2 32
14000144 ,
000X0 8 = 11520028800
. 270000 270000X0 8 .
=
21600054, 000

498009 114, 000%