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    ABUSCOM Lecture 15

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    Mark Lyndon Ymata
    The document discusses intercompany transactions that must be eliminated when preparing consolidated financial statements. It provides an example of Precy Company purchasing inventory from its subsidiary Mercy for resale, realizing a $500,000 profit. However, this profit must be eliminated for consolidated statements, as the transaction is just moving money between the parent and subsidiary. It then provides a multi-part business combination problem and the journal entries required to consolidate the financial statements of the parent and subsidiary, including eliminating unrealized profits from intercompany inventory transactions.

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    ABUSCOM Lecture 15

    Uploaded by

    Mark Lyndon Ymata
    36 views2 pages
    The document discusses intercompany transactions that must be eliminated when preparing consolidated financial statements. It provides an example of Precy Company purchasing inventory from its subsidiary Mercy for resale, realizing a $500,000 profit. However, this profit must be eliminated for consolidated statements, as the transaction is just moving money between the parent and subsidiary. It then provides a multi-part business combination problem and the journal entries required to consolidate the financial statements of the parent and subsidiary, including eliminating unrealized profits from intercompany inventory transactions.

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    ABUSCOM-Lecture-15

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    The document discusses intercompany transactions that must be eliminated when preparing consolidated financial statements. It provides an example of Precy Company purchasing inventory from its subsidiary Mercy for resale, realizing a $500,000 profit. However, this profit must be eliminated for consolidated statements, as the transaction is just moving money between the parent and subsidiary. It then provides a multi-part business combination problem and the journal entries required to consolidate the financial statements of the parent and subsidiary, including eliminating unrealized profits from intercompany inventory transactions.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    36 views2 pages

    ABUSCOM Lecture 15

    Uploaded by

    Mark Lyndon Ymata
    The document discusses intercompany transactions that must be eliminated when preparing consolidated financial statements. It provides an example of Precy Company purchasing inventory from its subsidiary Mercy for resale, realizing a $500,000 profit. However, this profit must be eliminated for consolidated statements, as the transaction is just moving money between the parent and subsidiary. It then provides a multi-part business combination problem and the journal entries required to consolidate the financial statements of the parent and subsidiary, including eliminating unrealized profits from intercompany inventory transactions.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    ACCOUNTING FOR BUSINESS COMBINATION: Lecture 15 – INTERCOMPANY TRANSACTIONS

    UNDERSTANDING INTERCOMPANY TRANSACTIONS

    The parent may enter into transactions with its subsidiary. These intercompany transactions must be eliminated when preparing consolidated
    financial statements because the parent and its subsidiary are viewed as a single reporting entity. This can be simplified by the statement, “You
    cannot transact with your own self.”

    The proponents of the accounting standards would like to ensure that then readers of the consolidated financial statements will not be confused,
    and may always think that the financial information that they are reading is coming from a single entity.

    PROBLEM: ABUSCOM 15-01, PRECY COMPANY & MERCY CORPORATION

    Precy Company and Mercy Corporation are related entities because Precy is the mother company while Mercy is the subsidiary. Precy purchased
    merchandise worth P1,000,000 and sells them to Mercy for P1,500,000 realizing a gross profit of P500,000.

    The gross profit shall be realized in the books of Precy.

    If consolidated financial statements will be prepared, how much gross profit shall be reported? (AFI)

    SOLUTION TO PROBLEM: ABUSCOM 15-01, PRECY COMPANY & MERCY CORPORATION

    The answer is none. Because the group of companies cannot be benefited even if Precy Company continuously sold its products to Mercy. It is
    simply transferring the money from one pocket to another pocket of the same person.

    This is the logic why intercompany transactions should be eliminated in preparing consolidated financial statements. It is the same as if, nothing
    happened. (AFI)

    PROBLEM: ABUSCOM 15-02, ALYANNA COMPANY & XAIKY CORPORATION

    On January 1, 2023, Alyanna Company acquired 80% interest in Xaiky Corporation. The business combination resulted to goodwill of P3,000.
    On this date, Xaiky’s equity comprised of P50,000 share capital and P24,000 retained earnings. NCI was measured at its proportionate share in
    Xaiky’s net identifiable assets.

    Xaiky’s assets and liabilities on January 1, 2023 approximate their fair values except for the following:

    Carry. Amt. Fair Value FVA¹


    Inventory P23,000 P31,000 P8,000
    Equipment² 50,000 60,000 10,000
    Accum. Dep. (10,000) (12,000) (2,000)
    Totals P63,000 P79,000 P16,000

    ¹Fair Value Adjustment

    ²Remaining life is four years

    During 2023, the following intercompany transactions occurred:

    a. Alyanna Company sold goods costing P12,000 to Xaiky Corporation for cash at a mark-up of 40% on selling price. A quarter of these
    goods are held in inventory by Xaiky by year-end.
    b. Alyanna Company acquired inventory from Xaiky Corporation for P12,000 cash. Xaiky uses a normal mark-up of 25% above its cost.
    Alyanna’s ending inventory included P4,000 from this purchase.

    The year-end individual financial statements are shown below.

    STATEMENT OF FINANCIAL POSITION 12/31/23 Alyanna Xaiky


    Assets:
    Cash P41,000 P67,750
    Accounts receivable 75,000 22,000
    Inventory 97,000 10,400
    Investment in subsidiary at cost 75,000
    Equipment 200,000 50,000
    Accumulated depreciation (60,000) (20,000)
    Total assets P428,000 P130,150

    Liabilities and equity: Alyanna Xaiky


    Accounts payable P43,000 P30,000
    Bonds payable 30,000 -0-
    Total liabilities P73,000 P30,000
    Share capital P170,000 P50,000
    Share premium 65,000 -0-
    Retained earnings 120,000 50,150
    Total equity P355,000 P100,150
    Total liabilities and shareholders’ equity P428,000 P130,150

    INCOME STATEMENT 12/31/23 Alyanna Xaiky


    Sales P330,000 P150,750
    Cost of goods sold (185,000) (96,600)
    Gross profit P145,000 P54,150
    Depreciation expense (40,000) (10,000)
    Distribution costs (32,000) (18,000)
    Interest expense (3,000)
    Net income P70,000 P26,150

    Prepare consolidated financial statements for December 31, 2023

    SOLUTION TO PROBLEM: ABUSCOM 15-02, ALYANNA COMPANY & XAIKY CORPORATION

    Step 1: Analysis of effects of intercompany transactions

     Transaction “a” is downstream because the seller is the parent.


     Transaction “b” is upstream because the seller is the subsidiary.

    The unrealized profits in ending inventory are determined and presented below.

    Downstream Upstream Total


    Sales price of intercompany sale P20,000ᵃ P12,000
    Cost of intercompany sale (12,000) (9,600)ᵇ
    Profit from intercompany sale P8,000 P2,400
    Multiply by unsold portion at year-end 1/4ᶜ 4/12ᵈ
    Unrealized gross profit P2,000 P800 P2,800

    ᵃP12,000 cost ÷ (100% - 40% profit on selling price) = P20,000

    ᵇP12,000 selling price ÷ (100% + 25% profit on cost) = P9,600

    ᶜGiven in the problem, a quarter of these goods are held in inventory

    ᵈP4,000 unsold out of P12,000 purchased

    Journal entries for the consolidation of financial statements:

    12/31/23 Sales (P20,000 + P12,000) P32,000


    Cost of goods sold P32,000
    To eliminate intercompany sales

    12/31/23 Cost of goods sold (P2,000 + P800) P2,800


    Inventory P2,800
    To eliminate unrealized profits in inventory

    12/31/23 Retained earnings – Alyanna (Downstream) P2,000


    Retained earnings – Xaiky (Upstream) 800
    Income summary P2,800

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