3rd Examination

Inter-Company Transactions

Problem 1:

Porras Corporation, a 75% owned subsidiary of Recto Corporation, sells inventory

items to its parent at 125% of cost. Inventories of the two affiliated companies for
2009 are as follows:

Porras Recto
Beg. Inv. P 400,000 P 300,000
End. Inv. 500,000 250,000

Recto’s beginning and ending inventories include merchandise acquired from Porras
of P 150,000 and P 200,000, respectively. Porras and Recto have reported net earnings
of P 300,000 and P 280,000 for 2009. (FIFO method has been used)

Required:
1. Compute the consolidated net income of Recto and Porras Corporation as of
December 31, 2009._______________________
2. Compute the consolidated net income attributable to parent
shareholders._________________
3. Compute the non-controlling interest of net income of
subsidiary.__________________
4. Compute the unrealized profit in beg. Inventory of Recto
Corporation.______________
5. The ending inventory of Recto Corporation includes of unrealized profit of
how much?______________

In the same problem above, if we change Recto Corporation as the Subsidiary instead
of Parent and assuming the 75% ownership and 125% of cost scenario has not change
and as well as the following given.

Compute now the following items.

6. Consolidated net income.__________________

7. Non-controlling interest in net income of subsidiary._______________
8. Consolidated net income attributable to parent._____________
9. Realized profit in beginning inventory.______________
10. Realized profit in ending inventory.___________________
Test II: Identification of entries.

11. Sales 100,000

Cost of goods sold 100,000 _____________________
12. Cost of goods sold 10,000
Inventory 10,000 _____________________
13. Retained earnings-Beg 8,000
Cost of goods sold 8,000 ______________________
14. Retained earnings-Beg 6,400
NCI 1,600
 Cost of goods sold 8,000_______________________

15. Cost of goods sold 8,000

Inventory 8,000______________________
16. Gain on sale of land 79,000
Land 79,000______________________
17. Retained earnings, beg. 79,000
Gain on sale of land 79,000_____________________
18. Cash 70,000
Accumulated depreciation 27,000
Equipment 90,000
Gain on sale of equipment 7,000_____________________
19. Equipment 20,000
Gain on sale of equipment 7,000
Accumulated depreciation 27,000_____________________
20. Accumulated depreciation 1,000
Depreciation 1,000____________________
True or False
21. Unrealized inter-company gains on depreciable asset are viewed as being
realized gradually over the remaining life of the asset as it is used by the purchasing
affiliate.
22. A gain or loss on an inter-company sale is recognized by the buying the
affiliate and ultimately accrues to the stockholders of that affiliate.
23. Generally, gains and losses are not considered realized by the consolidated
entity until sale is made to outsiders.
24. In downstream sale, any gain or loss on the sale accrues to the subsidiary
company’s shareholders.
25. In consolidation, PAS 27 requires the use of cost method, however another
method like equity method may also be used in practice.

POSITIVE THINGS HAPPEN TO POSITIVE PEOPLE.

_____________________________________DUP, CPA