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University of Nueva Caceres

College of Business and Accountancy


J. Hernandez Avenue, Naga City
Advanced Financial Accounting and Reporting II

Consolidation-Subsequent to Acquisition

Points to Remember:
 Downstream sale – sale from parent to subsidiary
Upstream sale – sale from subsidiary to parent
 Profits are only recognized when the plant asset is sold to outsiders (adjustment to unrealized gain or loss).
 Piecemeal realization of the unrealized gain or loss – realized over the remaining life of the asset.
 The entire unrealized gain / loss on sale is included in the computation or elimination in the year of sale
 The effect of the piecemeal realization is charged against depreciation expense
 The consolidated PPE is reported at its original cost

Upstream Sale (Subsidiary to Parent)


Consolidated Net Income
Parent’s NI from own operations XX
Parent-NIS* XX
NCI-NIS* XX

* NIS XX
Excess:
Amortization XX
Impairment XX (XX)
Piecemeal Realization-gain XX
Piecemeal Realization-loss (XX)
Attributable to Parent XX
Attributable to NCI XX

Downstream Sale (Parent to Subsidiary)


Consolidated Net Income
Parent’s NI from own operations * XX
Parent-NIS XX
NCI-NIS XX

*Adjusted for piecemeal realization.


-Done-

Multiple Choice Problems


Income information for 2012 taken from the separate company financial statements of Pia Corporation and its
75% owned subsidiary, Ruth Corporation is presented as follows:.

Pia Ruth
Sales P 500,000 P230,000
Gain on sale of building 10,000
Dividend income 37,500
Cost of goods sold ( 250,000) ( 130,000)
Depreciation expense ( 50,000) ( 30,000)
Other expenses ( 100,000) ( 20,000)
Net income P 147,500 P 50,000

Pia’s gain on sale of building relates to a building with a book value of P 20,000 and a ten-year
remaining useful life that was sold to Ruth for P30,000 on January 1, 2012.

1.) At what amount will the gain on sale of building appear on the consolidated/group income statement of Pia and
Ruth for the year 2012 should be:
A. Zero C. P7,500
B. P2,500 D. P10,000
2.) The Consolidated/group depreciation expense for 2012 should be:
A. P79,000 C. P81,000
B. P80,000 D. P90,000
3.) The Profit attributable to Equity Holders of Parent or CNI Contributable to Controlling Interests for 2012 should be:
A. P147,500 C. P137,500
B. P138,500 D. P110,000
University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City
Advanced Financial Accounting and Reporting II

Marc Corporation is a 90% owned subsidiary of Francis Corporation acquired several years ago at book value
equal to fair value. For the years 2011 and 2012, Francis and Mark report the following:

2011 2012
Francis separate income P600,000 P800,000
Marc’s net income 160,000 120,000

The only intercompany transaction between Francis and Marc during 2011 and 2012 was the January 1, 2011
sale of land. The land had a book value of P40,000 and was sold intercompany for P60,000, its appraised value
at the time of sale.

4.) If the land was sold by Francis to Marc (downstream sales) and that Marc still owns the land at December 31,
2012, compute the Profit Attributable to Equity Holders of Parent for 2011 and 2012:
2011 2012 2011 2012
A. P726,000 P908,000 C. P744,000 P920,000
B. P724,000 P908,000 D. P724,000 P920,000
5.) Using the same information above, the Consolidated/group net income for 2011 and 2012:
2011 2012 2011 2012
A. P724,000 P908,000 C. P740,000 P920,000
B. P760,000 P920,000 D. P744,000 P920,000

6.) Using the same information above, except that the land was sold by Marc to Francis (upstream sales) and Francis
still owns the land at December 31, 2012, compute the Profit Attributable to Equity Holders Of Parent or CNI
Attributable to Controlling Interests for 2011 and 2012:

2011 2012 2011 2012


A. P726,000 P908,000 C. P744,000 P920,000
B. P724,000 P908,000 D. P724,000 P920,000

7.) Panga Corp. owns 100% of Sinan Corp.’s common stock. On January 2, 2011, Panga sold to Sinan for P70,000
machinery with a carrying amount of P60,000. Sinan is depreciating the acquired machinery over a five year life
by the straight-line method. The net adjustments to compute 2011 and 2012 Profit Attributable to Equity Holders
of Parent or CNI Attributable to Controlling Interests before income tax would be an increase (decrease) of:
2011 2012
A. P( 8,000) P2,000
B. P( 8,000) P 0
C. P(10,000) P2,000
D. P(10,000) P 0

8.) On January 1, 2012, Pine Corp. sold machine for P1,800,000 to Shine Corp., its wholly owned subsidiary. Pine
paid P2,200,000 for this machine, which had accumulated depreciation of P500,000. Pine estimated a P200,000
salvage value and depreciated the machine on the straight-line method over 20 years, a policy which Shine
continued. In Pine’s December 31, 2012, consolidated balance sheet, this machine should be included in cost and
accumulated depreciation as:
Cost Accumulated depreciation
A. P2,200,000 P600,000
B. P2,200,000 P580,000
C. P1,800,000 P 80,000
D. P1,700,000 P 85,000

On January 1, 2012, Jhon Company purchased 90% equity of Joy Company. On January 3, 2012. Joy sold
equipment (with original cost of P1,500,000 and carrying cost of P750,000) to Jhon for P1,080,000. The
equipment have a remaining life of three (3) years and was depreciated using the straight-line method by both
companies. In Jhon consolidated balance sheet as of December 31, 2012

9.) Cost should be reported at:


A. P1,500,000 C. P 750,000
B. P1,080,000 D. P1,350,000

10.) Accumulated depreciation should be reported at:


A. P1,000,000 C. P 750,000
B. P1,500,000 D. P1,000,000
University of Nueva Caceres
College of Business and Accountancy
J. Hernandez Avenue, Naga City
Advanced Financial Accounting and Reporting II

11.) Net Book Value should be reported at:


A. P750,000 C. P 0
B. P735,000 D. P500,000

12.) On January 1, 2012, Josh Corporation sold equipment with a three-year remaining useful life and a book value of
P50,000 to its 70%-owned subsidiary for a price of P57,500. In the consolidation working papers for the year
ended December 31, 2012, the elimination entry concerning this transaction will include:
A. A debit to equipment for P7,500.
B. A debit to gain on equipment for P7,500.
C. A credit to depreciation expense for P7,500.
D. A credit to gain on equipment for P5,000.

13.) On January 1, 2012, Pam Corp. sold a warehouse with a book value of P160,000 and a 20-year remaining useful
life to its wholly-owned subsidiary, Spam Corporation, for P240,000. Both Pamand Spam use the straight-line
depreciation method. On December 31, 2012, the separate company financial statements contained the following
balances connected with the warehouse:
Pam Spam
Gain on sale of warehouse P80,000
Depreciation expense P 12,000
Warehouse 240,000
Accumulated depreciation 12,000

A working paper entry to consolidate the financial statements of Pam and Spam on December 31, 2012 will
include:
A. A debit to gain on sale of warehouse for P76,000.
B. A credit to gain on sale of warehouse for P80,000.
C. A debit to accumulated depreciation for P4,000.
D. A credit to depreciation expense for P12,000.

14.) Sophie Corporation is an 80% owned subsidiary of Pat Corporation. In 2011, Sophie sold land net cost P15,000
to Pat for 25,000. Pat held the land for eight years before reselling it in 2012 to Eden Company, an unrelated
entity, for P55,000. The consolidated income statement for Pat and its subsidiary in 2012, Sophie, will show a
gain on the sale of land of:.
A. P40,000 C. P30,000
B. P32,000 D. P24,000

15.) Marc Co. owned 80% of Francis Corp. during 2011, Marc sold to Francis land with a book value of P48,000. The
selling price was P70,000. In its accounting records, Marc should:
A. Not recognize a gain on the sale of the land since it was made to a related party.
B. Recognize a gain of P17,600.
C. Defer recognition of the gain until Francis sells the land to a third party.
D. Recognize a gain of P22,000.

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